To July's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
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HMRC have released guidance on changes to their policy for businesses who supply goods by way of hire purchase agreements.
Brief 8 (2020) explains HMRC's suggested method for apportionment of VAT incurred on overheads following judgment in Revenue and Customs Commissioners v Volkswagen Financial Services (UK) Ltd (Case C-153/17) (VWFS) for businesses who supply goods by way of hire purchase agreements.
VWFS, a finance house, provided credit to customers who wanted to purchase a vehicle. It operated by purchasing the car from the dealer at the same time as providing the car with finance to the customer, making all its profit from the exempt supply of credit.
There was no disagreement that VWFS made a mixed supply, but what was disputed was the extent to which the VAT incurred on VWFS's overheads could be recovered.
The Supreme Court referred the case to the CJEU. The CJEU held that:
- VWFS's overhead costs were a component of the overall supply of goods - by way of a hire purchase agreement;
- there is a right to recovery even when the overheads are only set against the exempt element for costing purposes;
- a member state cannot exclude the value of the goods in a values-based apportionment method, as that method would be less accurate than the standard method.
HMRC's view is that a business supplying goods on hire purchase should be allowed input tax recovery on its overheads where the recovery is fair and reasonable. It does not follow that the recovery will simply be fifty-fifty.
Where a business can evidence the use of its overheads in transferring the asset as well as making the supply of credit there is an entitlement to recover a proportion of the VAT incurred on overheads. There is no fixed rate which can apply to this, as HMRC recognise that this proportion will vary according to the type of hire purchase agreement being provided and the specific arrangements in place.
The CJEU has ruled that an output values-based apportionment calculation cannot ignore the value of the asset if there is more than negligible use of the input tax in making that taxable supply. Case C-511/10 Baumarkt indicates that an apportionment calculation should only use an allocation other than output values if it provides for a more precise determination of the deductible proportion. It has not been possible to identify any alternative allocation method which achieves this.
An output values-based method of apportionment therefore needs to be applied which includes the value of the asset in order to reach a proper apportionment of the residual input tax. HMRC's position is that the calculation should be as set out as:
Value of the asset plus any taxable additional charges or fees received, multiplied by 100, divided by value of the asset plus value of the credit granted - that is the value of the asset, plus consideration for the credit as per the credit agreement and any additional charges, related commission or other fees received.
HMRC have confirmed that this partial exemption method will be the preferred method for the industry. However, it will not be compulsory, and businesses can continue to apply any fair and reasonable partial exemption method already agreed with HMRC.
The First-tier Tribunal (FTT) has published a practice statement setting out its practice in appeals against HMRC decisions where the parties wish to engage in Alternative Dispute Resolution (ADR) after an appeal has been made to the Tribunal.
What is ADR?
ADR aims to provide an alternative way of resolving tax disputes by using an independent facilitator, who mediates discussions between the taxpayer and the HMRC caseworker in an attempt to resolve the dispute.
ADR can be used before and after HMRC have issued a decision that can be appealed against, and at any stage of an enquiry, including:
- during a compliance check when the taxpayer has been unable to reach an agreement with HMRC, or where progress in the enquiry has stalled; and
- at the end of a compliance check, when a decision has been made that can be appealed against.
ADR does not affect the taxpayer's right to appeal, or to ask for a statutory review.
Each application is considered on a case by case basis. ADR is not a statutory process and HMRC reserve the right to reject applications that they do not consider appropriate for ADR.
The ADR service may be particularly useful where the facts of a case need to be firmly established, but where communications have broken down between the taxpayer and HMRC.
An application to use the service must be made to HMRC using the application form on the Gov.uk website. The ADR team will advise within 30 days of receiving an application if ADR is right for resolving a particular dispute.
If a case is accepted into the process, the taxpayer must follow the principles that are agreed in the online form. If these terms are broken at any time, HMRC can remove the dispute from the ADR process.
All ADR applications that are recommended for rejection must follow strict governance procedures. Any decision to reject an application must be agreed by a panel made up of independent tax professionals.
If a case is accepted for ADR, HMRC will contact the taxpayer, or their representatives, and introduce them to their facilitator who will explain their role in more detail.
The facilitator will be an HMRC member of staff who has undergone training in facilitation and has had no prior involvement with the dispute.
Benefits of using ADR
ADR has the potential to speed things up. HMRC's original aim in introducing ADR was to provide a means of settling disputes more efficiently - both in terms of time and cost for both the taxpayer and their agent. ADR is now very much an accepted part of HMRC's overall Litigation Settlement Strategy (LSS).
A specially trained HMRC mediator is assigned to any accepted ADR case who effectively acts as a third party. The 'umpire' acts as a go-between taxpayer and HMRC to try to work out an agreement.
Having a new, impartial third party can help highlight the areas causing an impasse. If communications with HMRC have become acrimonious, the presence of a mediator can often get things up and running again.
ADR also offers potential cost savings for individuals and SMEs who can gain access to the facility free of charge. For large, complex cases, there is usually an external mediator. Here costs would generally be split between client and HMRC.
If HMRC accept an application for ADR after an appeal has been made to the Tribunal, the Tribunal should be informed as soon as possible. The Tribunal will usually be willing to stay proceedings in order to facilitate the use of ADR at any stage of the proceedings, including after HMRC have served their Statement of Case or the parties have exchanged lists of documents or witness statements. A stay means that the proceedings are temporarily put on hold. The Tribunal will normally allow a stay of 150 days where an appeal has been accepted for ADR. If more time is needed to complete the ADR process, the taxpayer must ask the Tribunal to grant the parties further time.
Where parties wish to use ADR after a hearing date has been set, the Tribunal will only be willing to stay proceedings if satisfied that the hearing will be able to go ahead on the date set if ADR does not resolve the dispute.
At the end of the ADR process, the taxpayer should inform the Tribunal whether the dispute has been resolved. If the dispute is not resolved, the Tribunal will still hear the appeal as normal. The taxpayer may also wish to ask the Tribunal for further case management directions, for example, permission to amend the grounds of appeal or to submit further evidence.
Further guidance from HMRC on the ADR procedure and when a case is appropriate for ADR can be found at https://www.gov.uk/guidance/tax-disputes-alternative-dispute-resolution-adr
The Spring Budget 2020 announced a significant restriction on future availability of entrepreneur's relief (ER) for individuals who dispose of all or part of their business, individuals who dispose of shares in their personal company, and trustees who dispose of business assets.
Broadly, the changes will increase the amount of tax payable by a business sold at a profit of over £1m. For potential sale profits at or around this limit, careful planning may be needed to extract value from the business prior to sale, for example through increased employer pension provision, to bring the chargeable gain within the revised limit.
The Spring Budget also announced that ER is to change its name to business asset disposal relief (BADR).
When an individual disposes of an asset at a gain, capital gains tax may be due. Ordinarily, for gains falling above the higher-rate threshold (£50,000 in 2020/21), this will be charged at a rate of 20%. However, if certain conditions are met, BADR may be available and the chargeable rate be reduced to 10%. Broadly, the lifetime limit of £10m is reduced to £1m for disposals on or after 11 March 2020. The measure also provides that the lifetime limit must take into account the value of ER claimed in respect of qualifying gains in the past. For disposals between 6 April 2011 and 10 March 2020, the lifetime limit on gains qualifying for ER is £10 million.
The £10 million limit is a lifetime threshold and claims may be made against it on more than one occasion.
Selling all or part of a business
To qualify for BADR, both of the following conditions must apply:
- the individual must be a sole trader or business partner; and
- the individual must have owned the business for at least two years before the date they sell it.
The same conditions apply if the business is closing rather than being sold. The business assets must be disposed of within three years to qualify for relief.
Selling shares or securities
To qualify, both of the following conditions must apply for at least two years before the shares are sold:
- the individual is an employee or office holder of the company (or one in the same group); and
- the company's main activities are in trading (rather than non-trading activities like investment) or it's the holding company of a trading group.
There are other rules depending on whether or not the shares are from an Enterprise Management Incentive scheme (EMI).
Selling assets previously lent to the business
To qualify, both of the following must apply:
- the investor sold at least 5% of their part of a business partnership or their shares in a personal company and
- they owned the assets but let their business partnership or personal company use them for at least one year up to the date they sold the business or shares - or the date that the business closed.
HMRC publish rates that can be used by employers wishing to pay their employees the cost of fuel for business journeys in company cars (or, where the employer initially pays for all fuel, for reimbursement of private mileage by company car drivers to their employers). Hybrid cars are treated as petrol or diesel cars for this purpose.
HMRC's guidance on fuel-only mileage rates for company cars confirms that employers are not obliged to use advisory fuel rates. Where an employer wishes to use them, they only apply where the employer:
- reimburses employees for business travel in their company cars; or
- requires employees to repay the cost of fuel used for private travel in those company cars.
If the employer pays more than the relevant advisory fuels rates and the payments are not an actual reimbursement, the excess is taxed (and subject to employees' and employers' National Insurance Contributions).
Rates applying from 1 June 2020 are as follows:
|1400cc or less||10p||-||6p|
|1600cc or less||-||8p||-|
|1401cc to 2000cc||12p||-||8p|
|1601cc to 2000cc||-||9p||-|
An Advisory Electricity Rate has been introduced for electric cars. The current rate is 4p per mile, though it should be noted that electricity is not a fuel for car fuel benefit purposes.
For employees using company cars, an employer may agree to refund the fuel costs using the advisory fuel rates, of employees carrying out volunteer work related to coronavirus, for example, delivering medical supplies including PPE. These refunds are a benefit and the employer may settle any tax and National Insurance contributions on the employee's behalf by reporting through a PAYE Settlement Agreement.
The employer may also agree to fund the cost of fuel for volunteer mileage related to coronavirus. HMRC have advised that volunteer mileage should not be taken into account for the purposes of the car fuel benefit charge for company cars.
Any tax and National Insurance contributions due should be reported through a PAYE Settlement Agreement as a coronavirus related benefit based on the appropriate advisory fuel rate for the volunteer mileage.
Q. I have been contacted by coronavirus (COVID-19) Test and Trace. Am I eligible for statutory sick pay (SSP) from my employer?
A. Under the test and trace system that launched on 28 May, a person who has been notified that they have had contact with a person with coronavirus is requested to self-isolate for 14 days. The rules relating to SSP have been amended to include employees who are self-isolating in these circumstances.
If you have been working from home and are not furloughed, you may be able to continue working and should receive full pay, as normal. If this does not apply and your employer does not have a company sick pay scheme, then under new laws from 28 May 2020, you may be entitled to receive SSP for every day you are in isolation - from the first day - as long as you meet the eligibility conditions. This is the case whether or not you go on to develop symptoms.
If you were already on furlough when you were contacted by the test and trace service, you should discuss with your employer whether it is best for you to be kept on furlough or moved over to SSP - although there seems to be some flexibility, you cannot receive both at the same time. One consideration is that employers are required to pay?SSP?themselves, although may qualify for a rebate for up to two weeks of?SSP. If employers keep a 'sick' furloughed employee on furlough, they remain eligible to claim at least a proportion for these costs through the furlough scheme.
Q. I have owned and rented out a residential property for the last ten years, which I am now considering selling. I will use the proceeds to purchase another rental property. Will I have to pay capital gains tax on the proceeds from the sale even if all the money is reinvested in another property that is also let?
A. Yes, you will be liable to capital gains tax on the gain arising on the sale, even though you will be reinvesting the money in another property that is also let. Rollover relief is available for residential investment property only in relation to qualifying furnished holiday lettings, and for compulsory purchases.
Q. My business is struggling financially due to the impact of the coronavirus (COVID-19) and I am considering applying for a grant being made available by the government via local authorities. Would this income be subject to VAT?
A. Whilst HMRC have not confirmed the VAT implications in any of their announcements, the basic principles of supply and consideration can be expected to apply. VAT is a tax on supplies for consideration, so where a grant is made, and nothing is expected to be done in return it will not be subject to VAT.
Grant funding can be a complex area in some circumstances as it is common for funding bodies to use the term 'grant' when, in reality, it is payment for a contractual obligation. However, the business support funding being made available to mitigate the impact of Covid-19 does not fall into this category and will be outside the scope of VAT.
Details of various Government support measures available for business can be found online at https://www.gov.uk/government/publications/coronavirus-covid-19-business-support-grant-funding-guidance-for-businesses
5 - Deadline for PAYE settlement agreement for 2019/20
6 - Deadline for 2019/20 forms P11D and P11D(b) to be submitted and copies of P11D to be issued to relevant employees
Deadline for employers to report share incentives for 2019/20
14 - Return and Payment of CT61 tax due for quarter to 30 June 2020
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/7/2020 or quarter 1 of 2019/20 for small employers
Class 1A NIC due in respect of the tax year 2019/20