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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Trust Registration Service

We summarised the debacle of the Trust Registration Service (TRS) on 7 December 2017, and there have been continuing problems with the TRS ever since.

For example, until April 2020 it was not possible for agents to update the details of the trustees, settlors and beneficiaries on the TRS. However, the trust SA tax return asked, at question 20, to confirm whether the TRS had been updated with any changes.

Agents can now truthfully answer question 20 on the trust’s 2019/20 tax return, but had to ignore that question on the 2017/18 and 2018/19 returns. Any trust changes which occurred in the two years to 5 April 2019 should be reported on the TRS by 31 January 2021.

Note the TRS is not linked to the self-assessment service. A trustee can’t gain access to the TRS by logging into their Business Tax Account.

To allow an agent to access the TRS and update details the trustee and the agent must follow these steps:

  1. Trustee sets up a government gateway ID for the trust asking for an “organisation” account.
  2. Trustee logs into the government gateway for the trust and “claims” the trust. This requires the trustee to answer a number of questions about the trust, such as NI number name of lead trustee.
  3. Agent logs into to their Agent Services Account (ASA)
  4. Agent selects option to be authorised to maintain a trust, and enters the trust’s UTR number. The system generates a link which agent must send to the client.
  5. Trustee clicks on the link received from the agent and signs into the government gateway.
  6. Trustee chooses option to authorise agent to act to maintain the trust.
  7. Agent logs in with their ASA credentials to update the trust.

Imaginary NIC debts

Another group of small employers have received letters and calls from HMRC’s debt management department this month, accusing them of deliberately underpaying the PAYE and NIC due for April to June. Those employers are certain that they have paid the correct amount of tax and NI for the period.

On closer inspection the amount that HMRC say is due equals the employer’s NIC for the months concerned. Where the employer has claimed the Employment Allowance, this should cover up to £4,000 of employer’s class 1 NIC for 2020/21 and the allowance should be set against the NIC liability for the month in which the claim is made and the following months until it is fully utilised.

The root of this problem is HMRC’s computer, specifically the National Insurance and PAYE System (NPS). For some reason the NPS is not picking up the employer’s claim for the Employment Allowance made in the first quarter of 2020/21. It is a known problem, which HMRC hope to solve with its IT business partners by 19 August.

In the meantime, the debt management letters may continue to arrive with your clients, but at least you know how the payment difference may have arisen. The employer can confirm whether their Employment Allowance claim has been accepted by checking their business tax account (BTA), unfortunately you can’t access the BTA on behalf of your clients.

Where your client has had their entire workforce on furlough for April to July, their full payroll costs, including employer’s NIC and pension contributions should have been covered by the CJRS grant. In such cases it made sense not to claim the Employment Allowance in the first quarter.

If the Employment Allowance was claimed, the CJRS claims for April to July should not include the costs of the employer’s class 1 N1C, if the total class 1 NIC liabiities are less than £4,000.

From 1 August 2020 the CJRS grant does not cover the employer’s class 1 NIC, or the employer’s contributions to the workplace pension, for employees on furlough. It thus makes sense to now make a claim for the Employment Allowance so it can be set against the employer’s NIC for August and later periods.

Remember there are additional conditions for claiming the Employment Allowance for 2020/21; the class 1 NIC liability for 2019/20 must have been less than £100,000 and the state aid threshold must not be exceeded.


CGT 30-day reporting

From 6 April 2015 non-resident taxpayers who sell UK residential property have been required to report the gain and pay the Non-Resident CGT due with 30 days of the completion date.

From 6 April 2019 the range of assets that NRCGT applied to was extended to all UK property or land held directly or indirectly by a non-resident. All disposals within the NRCGT regime that completed before 6 April 2020 had to be reported on a simple online NRCGT form within 30 days.

From 6 April 2020 a 30-day reporting regime applies to all UK residential property disposed of by any individual taxpayer or trustee. Non-residents must report the disposal of any type of UK property, not just residential property. However, both UK resident taxpayers and non-residents must now use the new CGT on UK property service, which requires a government gateway ID and password to access it.

Non-residents may have difficulty setting up a government gateway ID as they may not have the necessary ID documents such as a UK passport, driving licence, NI number or a UTR number. If your client falls into this category, they can still create a UK property account by ignoring the boxes asking for the government gateway ID and password. Instead click on “create sign in details” below green box marked “Sign in”. The client needs to enter an email address and the address of the UK property.

Where your client is digitially excluded and doesn’t have an email address, you need to contact HMRC on 0300 200 3300, and ask for a paper form. Unfortunately, HMRC will only send this form to the taxpayer. So by the time it arrives, if it ever does, the 30-day period for reporting the gain may have expired.

Penalties apply for late filing of the NRCGT return and the UK property CGT return. These penalties were suspended for disposals completed before 1 July 2020, but all those disposals need to be reported by 31 July 2020, if there is CGT to pay.


Is a company car ‘available’ for private use?

A benefit in kind tax charge arises where a company car is available for an employee’s use. Once a car has been made available to an employee, the charge is reduced proportionately for period of unavailability of at least 30 days. This period can span two tax years.

The legislation (ITEPA 2003, s. 118) provides that a car is treated as being available for private use unless the terms on which it is made available prohibit such use and it is not so used.

During the Covid-19 pandemic, employees with company cars may have been furloughed or shielding. In guidance published on how to treat expenses and benefits provided to employees during the pandemic, HMRC address the issue of company car availability.

In the guidance they state that:

`You should treat a car as being made ‘’available for private use’’ during this period even if your employee is:

  • instructed to not use the car
  • asked to take and keep a photographic image of the mileage both before and after a period of furlough
  • unable to physically return the car or the car cannot be collected from the employee’.

However, HMRC concede that where restriction on movement applied because of coronavirus which prevent the car from being handed back, they will accept that a car is unavailable where the contract is terminated from the date that the keys, including tabs or fobs, are returned. Where the contract is not terminated, HMRC will regard the car as being unavailable 30 days after the returns of the keys, tabs or fobs.

HMRC’s test of availability goes beyond that set by the legislation. If an employee is instructed not to use the car and does not do so (for example, as shown by photographic evidence), under the terms of the legislation, the car is not ‘available’ for the employee’s private use, and where the period of unavailability exceeds 30 days a reduction in the tax charge should be forthcoming. Attempts by HMRC to impose a stricter test than that required by the legislation (e.g. the return of keys) should be challenged.

It should be noted, however, the test is whether the car is unavailable for the employee’s private use, not whether the employee is able to use it. Thus, an employee who is shielding may be unable to leave the house and drive a company car. However, unless private use is prohibited, the car remains available for private use and there is no reduction in the tax charge, despite the fact there is no actual private use.


Corporate losses

If a company has made a loss in the current accounting period it will want to set-off that loss as soon as possible, in order to obtain a refund of corporation tax paid for the current period or the immediate prior period.

Any trading loss first needs to be set against any profits in the current period from other trades or from non-trading activities. Only after these current period profits have been covered may any surplus losses be carried back against profits of the same trade in the 12 months immediately prior to the current year. You need to be clear that the loss-making activities arise from the same trade as the earlier profitable activities.

HMRC has provided some guidance on the question of whether the nature of the trade may have changed during the coronavirus crisis, such that it amounts to a different trade (see BIM48000). It is worth reading this before applying to carry back a loss.

Generally, you can only submit a loss claim once the current accounting period has ended and the full extent of the profits and losses for that period are realised. HMRC will accept draft accounts for the completed current accounting period as evidence that a loss is available to carry back to the previous period, in order to support a loss claim.

In exceptional circumstances HMRC is prepared to make a repayment of corporation tax paid in respect of the previous accounting period, before the current period CT return and carry-back claim are submitted. Companies will be required to provide HMRC with evidence to support these claims, such as management accounts, forward-looking reports to the board of directors, and relevant public statements. HMRC will consider each such loss claim on a case-by-case basis (see CTM92090).

Where the company has made quarterly payments on account those amounts may be repaid, if a revised calculation for the current period shows an expected loss or much reduced profits (see CTM92650).