MTD quarterly submissions

All unincorporated businesses and individual landlords are due to enter the MTD for income tax (MTD ITSA) regime on 6 April 2023. This single start date for everyone is due to the switch from the current year basis to the tax year basis as we explained on 5 August 2021.

There is a chance that MTD ITSA will be delayed, or deferred for some taxpayers, as many issues relating to landlords and partnerships have not been bottomed out, but don’t count on that.

Those mandated into MTD ITSA will have to make quarterly submissions of the totals digitally recorded during the quarter by the accounting system of:

  • sales income for each trade
  • purchases/expenses for each category

The categories of expenses are expected to be those currently required in the self-employment section (form SA105) and property section (form SA103F) of the SA tax return. When the final MTD ITSA regulations are released (expected next month) we will know exactly what those expense categories are.

The quarterly submission is essentially a rough and ready profit and loss account. The taxpayer (or their tax agent) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business, as the submission does not contain an accuracy statement.

Thus, the quarterly submission is not a 3-month set of accounts, it is a data dump to prove to HMRC that the business is keeping some near-to-real-time digital records.

The HMRC computer will take the figures reported in the quarterly statement and reflect back to the taxpayer an estimate of the tax they will need to pay for the year. This may be a completely nonsense figure as the quarterly submission could be full of mistakes and won’t include any capital allowances or other tax reliefs.

Any errors or mistakes included in the quarterly submissions should be corrected in the end of period statement (EOPS), which will include a declaration of accuracy, just like the SA tax return.


Reporting SEISS grants

HMRC has finally produced some guidance on how to report the first three SEISS grants on SA tax returns for 2020/21. But this guidance only directs you to the notes to the SA returns, so you need to dig through several documents to find all the answers you need.

The SEISS grants are reported for the tax year in which they are received, and must be included in these boxes on the various different SA returns:Except in the rare case where a partnership received the SEISS grants directly rather than the partners, the SEISS grants should be excluded from the turnover of the business.

The taxpayer must report the total amount of SEISS grants received in the tax year, less any amounts which have been repaid to HMRC.

Some tax software pre-populates the tax return with the amounts of SEISS grant paid to the taxpayer. These figures are apparently provided automatically by the SEISS API which connects the tax software to HMRC’s systems.

If your tax software claims to pre-populated the tax return with the SEISS totals, you need to treat those figures with utmost caution. Many SEISS amounts have been out be a factor of 100, and in some cases the SEISS grant is reported as zero when the taxpayer has in fact received some grant.

It may be easier to ask your client directly for proof of the SEISS grants they received during the tax year.


Selling services into the EU

UK businesses who sell digital or broadcasting services to non-business customers in the EU will be used to completing an EU VAT MOSS return by 20th of the month following the end of the calendar quarter. Those with small volumes of cross-border digital sales could avoid VAT MOSS returns altogether if their annual sales fell under the de-minimis threshold of £8,818.

Now that the UK is no longer treated as a member of the EU, as the Brexit transition period has ended, UK businesses are not eligible to use the EU VAT MOSS system. Those UK businesses who continue to sell digital services to non-businesses customers in the EU must use the non-EU VAT MOSS scheme, for which there is no de-minimis sales threshold.

To register for non-EU VAT MOSS the trader must first have an EU VAT number, and UK VAT numbers don’t qualify. The trader must register for VAT in an EU country, and this may require appointing a local tax agent.

The UK trader should register for non-EU VAT MOSS by 10th of the month following the month in which the first digital services sale is made to a non-business customer within the EU. If such a sale is made in January 2021 the UK trader needs to register for non-EU VAT MOSS by 10 February 2021.

The alternative to registering for non-EU VAT MOSS in one EU country, is to register for VAT in each EU country where the business supplies broadcasting or digital services.


Late filing penalties

“No fine for late taxes” was the misleading front page headline In The Sunday Times on 10 January 2021.

The report doesn’t include a source but it would seem to be a letter that was sent by Jim Harra, CEO of HMRC, to 6 accounting bodies on 18 December 2020. We featured this is our weekly topical tax tips on 7 January.

That letter includes caveats clearly intended to avoid exactly the type of headline that appears in The Sunday Times. Specifically it says: “We do not want to complicate this message by sending a blanket signal that it’s OK to file late”.

The Sunday Times article also seems to confuse penalties for late filed tax returns and late paid taxes.

Our advice to accountants last week, before the ST article appeared:

The 2019/20 tax return filing deadline remains at midnight on Sunday 31 January, and automatic £100 late filing penalties will be issued by the HMRC computer for any tax returns received after that point.

However, all penalties can be appealed. HMRC has confirmed, in a letter to the professional accounting bodies, that the period in which an appeal will be accepted has been extended to 90 days. That appeal period runs from the date the penalty notice is issued, not from the date it arrives with the taxpayer.

All taxpayers who have accessed their online Personal Tax Account (PTA) will have consented to receiving all communications about self-assessment from HMRC in digital form, so don’t expect a paper penalty notice to always arrive in the post. You will need to prompt your client to look for penalty notices from HMRC on their PTA.

Taxpayers can appeal against a penalty notice using the online service, by logging into their Government gateway, but tax agents need to appeal using the paper form (SA 370).

In order to appeal successfully you need to include a reasonable excuse to why the tax return was late. This reasonable excuse needs to be in place for the period in which return should have been submitted and the delay after the submission deadline. HMRC expect the return to be submitted as soon as the factors that contributed to the delay have dissipated.

HMRC is prepared to accept covid-related personal or business disruption as a reasonable excuse, and this will include disruption to the tax agent’s work as a result of the pandemic.

 


Christmas party exemptions

Office parties will have to be online this year because of the coronavirus restrictions that apply across most of the country. But employers can still say “thank you” to their employees with a physical gift.

HMRC has confirmed that the cost of online staff parties will be an “annual event” for employers qualifying for the tax-free limit of £150 per person. Remember this is an absolute cap not an allowance, and if the cap is breached the whole amount is taxable and subject to NIC.

The £150 per head limit applies to all those attending the event, not just employees. It should cover the cost (including VAT) of food, drink and any entertainment provided. The employer could send a food hamper to every employee to enjoy while attending the online party, and provide a form of entertainment such as a live comedian, music or a quiz, all delivered online of-course.

In addition to, or instead of the online staff party, the employer can give a physical gift worth no more than £50 to any or all of the employees. These trivial benefits must not be provided in return for the employee’s normal service, and must not be a contractual entitlement. Also, the gift must not be cash or a cash voucher.

For employees who are not the company’s directors or their family members, there is no limit to the number of trivial benefits the employer can give during the year. A gift-card that is topped up at intervals with £50 each time would fail this test as the total value given in the year would be counted as one gift.

Directors have an annual cap of £300 for trivial benefits, which also applies to members of their family or household.


Autumn tax announcements

There will be no Autumn Budget this year, but that doesn’t mean tax policy has paused, changes are still being made in the following areas:

MTD for corporation tax
We have been waiting for an indication of when the MTD rules will apply to companies, and now we know those rules won’t be compulsory until 2026 at the earliest.

However, the MTD regime will apply to all organisations that pay corporation tax; there will be no minimum turnover threshold as applies for income tax. There will be quarterly reporting of income and expenses, and a pilot to test the software will commence in 2024. HMRC will not provide free software for filing the corporation tax returns required under MTD.

Capital allowances
The annual investment allowance (AIA) cap is currently £1 million, and was due to reduce to £200,000 on 1 January 2021. This £1 million cap will now be extended to 31 December 2021.

R&D tax credits
There is currently no cap on the amount of R&D payable tax credit a small company can receive if their company has made a loss after deduction of their R&D claim. This will change for claim periods starting on and after 1 April 2021. The payable tax credit will be capped at three times the PAYE and NIC payable for the period plus £20,000. You need to factor this into cash flow forecasts for your clients.

CIS changes
The construction industry is facing a triple whammy of tax changes in 2021: VAT domestic reverse charge on 1 March, off-payroll and CIS reforms on 6 April.

The later changes may affect sub-contractor companies who claim their tax refund through RTI, and large businesses who could be classified as deemed contractors as they undertake more than £3 million of construction expenditure within 12 months.

There will also be new penalties for supplying false information to HMRC when applying for gross payment status or CIS registered status. This penalty will have a wide scope as it can be applied to any person who influences another to provide false information.


Nudging the taxpayer

HMRC uses data from many sources to cross check information reported on self- assessment tax returns. It could open an enquiry every time a mis-match is found, but this is expensive in terms of person-hours, and the time it takes to collect any additional tax.

Instead HMRC is experimenting with sending a standard letter to the taxpayer where a mis-match in data is found. The letter doesn’t state exactly what is missing from the return, but it is designed to nudge the taxpayer to review and correct the return where necessary. HMRC call these “one to many” letters.

This approach is light on manpower as the letter is generated automatically by the computer and the onus is on the taxpayer and their agent to investigate the issue and take any action required.

HMRC is currently comparing the 2018/19 SA tax returns to various data sets and is sending out nudge letters covering the following issues:

  • Deemed domicile
  • Statutory residence
  • Discrepancies with employer reported pay and benefits
  • Disposal of residential property which was not the main home
  • Investment income from financial institutions
  • Deferred consideration on sale of private company shares
  • Income of persons with significant control of a company

It is important to note that the nudge letter does not amount to a formal opening of an enquiry, but it does require action as HMRC may follow-up if the tax return is not amended.


Tax deferrals and VAT rate

Income tax and VAT payments due in the summer of 2020 were both deferred automatically until 2021, with no interest or late payment penalties due. In both cases the taxpayer could pay the tax or VAT by the original due date if they wished to.

As a result of this deferral individual taxpayers will have the following amounts of tax due for payment by 31 January 2021:

  • a) Second payment on account 2019/20
  • b) Balancing payment 2019/20
  • c) Capital gains tax 2019/20 (if not paid under 30-day rule)
  • d) First payment on account 2020/21

It appears from the Chancellor’s statement that the taxpayer will be able to apply to defer items a) and d) in this list by spreading the payments over 12 monthly instalments to January 2022.

Where the total tax due doesn’t exceed £30,000 the application to spread these tax payments will be agreed automatically when the taxpayer applies using an online form. If the total tax due exceeds £30,000, or the taxpayer needs longer to pay, the taxpayer will be able to call HMRC to agree a bespoke payment plan.

Where a business deferred VAT due in the period from 20 March to 30 June 2020, that VAT will be payable by 31 March 2021. The business will now be able apply to spread the deferred VAT payment over 11 equal instalments payable between April 2021 and March 2022. This deferred VAT will not be subject to interest if the payments are made as agreed.

Finally, the reduced 5% rate of VAT for the hospitality and tourist sector was due to revert to 20% on 13 January 2021. The Chancellor has decided to extend this period of 5% VAT up to and including 31 March 2021. This will make accounting for the reduced rate far easier as the VAT rate will change at the beginning of a month.


Costs of paused R&D projects

Research and development (R&D) projects have been paused during the COVID-19 crisis alongside other business activities. However, the employer may still incur costs such as the top-up of wages for furloughed staff, and more recently employer’s NI and pension contributions for those employees.

HMRC has now clarified which costs relating to furloughed staff can be considered to be directly related to the R&D project, and thus can form part of an R&D tax relief claim.

The good news is that holiday pay and sick pay paid to employees who normally work on R&D projects may be counted as relevant costs, even if that holiday or sick leave is taken while the R&D project is paused. The bad news is that redundancy costs, and payments in lieu of notice (PILON) can never be treated as relevant R&D expenditure.

Where the employee has been fully furloughed, none of the employment costs can be allocated to the R&D project, as the employee won’t have worked during that period. Where employee has been flexi-furloughed from 1 July onwards the cost of their time spent working can be treated as qualifying R&D costs, but not the costs associated with furloughed hours.

For any part of the employment costs to be allocated to the R&D project, the particular employee has to be directly involved in the R&D activities. It is not permissible to include in the R&D claim a proportion of costs of a wider pool of employees who are not involved at all in the R&D project.

It is also essential to correctly identify the R&D project using the guidelines on the meaning of R&D, and to accurately record the costs that directly relate to the project.

A number of specialist firms will approach companies asserting that they can get a tax refund for the company on the basis that R&D is carried out. The specialist adviser will take a significant proportion of the tax saved as their fee, and in some cases continue to charge a fee for some years after the R&D project has finished.

If your client is approached by such a specialist R&D adviser, tell them about the AHK Recruitment Ltd case. A claim was submitted on behalf of the company but when challenged by HMRC the company couldn’t produce any evidence to support that claim. The case report doesn’t mention penalties for an incorrect return, but they were certainly applied.


VAT on contract cancellation fees

Some of your clients may be restructuring their businesses in response to Covid-19 pressures. This may involve terminating supplier service contracts for power, telecoms, or security. Early termination of those contracts can trigger a cancellation fee.

In the past such cancellation fees were regarded as outside the scope of VAT as no goods or service were being provided for the consideration. However, two European Court of Justice cases involving telecoms companies have determined that cancellation fees are part of the agreement to supply the services, so they should be subject to VAT in the same manner as the service provided.

HMRC has set out its revised view on cancellation and termination fees in Revenue and Customs Brief 12/2020 published on 2 September. However, this doesn’t just affect cancellation fees paid from that day forward, the change in VAT treatment is retrospective.

Where your client has charged any cancellation fees in the last four years, they need to check whether they accounted for VAT on that fee, and what rate of VAT applied to underlying service. For example, venues frequently charge a cancellation fee if a booking is cancelled within a set period. There are special rules for tour operators who use TOMS, as explained in Revenue & Customs Brief 9/2019.

If VAT should have been charged the supplier needs to issue a corrected VAT invoice to the former customer. The supplier will also have to correct the error which has understated VAT due in earlier returns.

Where the understated VAT is no more than £10,000, or is less than £50,000 and doesn’t exceed more than 1% of net outputs (box 6), that error can be corrected on the current VAT return. Where the understated VAT is more than £50,000 the correction must be made using form VAT652.

Clients who have paid cancellation fees during the last four years, should contact the supplier for a corrected VAT invoice. The supplier should not charge additional VAT on top of what has been paid as the cancellation fee, the VAT should be treated as part of the fee already paid.

Once the corrected invoice has been received, the customer can reclaim the VAT, using the same error correction limits above.

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