To February'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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· Latest news round up
· Deregistering from VAT
· Self-assessment - DIY time-to-pay options
· Leaving the UK: a look at split-year treatment
· February questions and answers
· February key tax dates
Latest news round up
Covid-19 - business support
Unsurprisingly, Christmas 2020 was dampened by the ongoing Covid-19 measures. The Prime Minister revised his plans to permit "Christmas bubbles" to be formed for up to five days between multiple households. In the end, such bubbles were only permitted on Christmas day, and then only for areas that weren't in tier 4.
The New Year brought further bad news with the announcement of a third national lockdown for England starting on 6 January, lasting until at least mid-February before review. Scotland and Wales had announced similar restrictions.
Inevitably, there were further announcements of support. In addition to the extension of the furlough and business loan schemes already announced, on 5 January the Chancellor announced that there would be further support worth £4.6 billion for businesses in the retail, hospitality and leisure sector that have been forced to close. This comes in the form of a new one-off grant, based on the rateable value of their non-domestic premises as follows:
These grants follow substantially the same mechanics as the previous rates-based grants and will again be claimed via the Local Authority (LA) rather than Central Government. Businesses in Scotland, Wales and Northern Ireland will be eligible. Details of the eligibility criteria for England can be found here. At the time of writing, many council websites simply contain a brief statement confirming the 5 January announcement, but with no facility to apply as yet. Potentially eligible businesses should check with their LA and ask how to be kept up to date as to when they will be able to apply.
Following the emergence of yet another variant of the virus, the UK's travel corridors were suspended from 4am on 18 January 2021. Now, anyone arriving into England or Scotland from outside the UK, Ireland, Isle of Man or Channel Islands will need to self-isolate for 10 days and have a valid negative Covid-19 test taken in the three days prior to the travel commencing. Failure to provide proof of a valid negative test could mean a fine of £500 is imposed.
In Wales, the position appears to be less stringent. A negative test is required to travel to Wales, but it appears from the Welsh Government's published guidance that travellers coming from the countries listed on the exempt list do not need to self-isolate if they have a valid negative test, as they do for England and Scotland. You can view the Welsh guidance here.
In other Covid-19 related news, HMRC has started writing to participants in the "eat out to help out" scheme that operated in August 2020 to check that claims were correct. Initially, this is an informal check but failure to respond to the letter within 60 days will probably lead to a formal compliance check, with penalties and interest charged where a claim is subsequently found to have been excessive.
The other key announcement from late-December was the Trade and Cooperation Agreement reached by the EU and the UK, announced on 24 December. The main benefit of this deal is the welcome confirmation of zero tariffs or quotas on movements of goods between the UK and the EU. However, beyond that there was very little content that will impact businesses. The transitional period ended at 11pm on 31 December 2020, and the UK is now officially a "third country". The changes to required VAT and customs procedures for ongoing EU trade should be adhered to.
HMRC has a handy "Brexit checker" that can help businesses narrow down exactly what new requirements need to followed. It is possible to use a customs agent to handle matters, and a list of these is available here.
Deregistering from VAT
As a result of the Covid-19 crisis, many businesses are currently experiencing reduced turnover. In many cases, the business is VAT-registered, and some owners are asking whether they can now deregister. What are the rules here, and is it always advisable to do so?
There can be a number of motives for VAT deregistration. For example, if the majority of sales are B2C sales, i.e. not to other VAT-registered businesses, the VAT charge is a real cost to the customer. On the face of it, deregistering can possibly offer a competitive edge as there is no longer a need to charge VAT. This may help the business recover once restrictions are lifted. It can also simplify reporting, and therefore reduce administration costs.
An obvious downside is the loss of ability to reclaim input tax on future purchases, which increases the cost to the business.
A business must deregister if it stops trading or stops making taxable supplies. It must also deregister if it joins a VAT group.
However, what we are concerned with is voluntary deregistration, i.e. where a business is still eligible to be registered but chooses not to continue to be. In order to deregister in this way, the business must expect its taxable sales in the next 12 months to be less than the deregistration threshold (currently £83,000).
In either case, deregistration can be requested online, or by completing Form VAT7.
Suspension of trade
With reduced profits due to Covid-19 there may be a problem. Paragraph 3.2 of VAT Notice 700/11 states that "HMRC will not allow you to cancel your registration if the reduction in your turnover is the result of your intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months."
Broadly, this means that if the only reason the business expects its taxable turnover to fall beneath £83,000 is due to being forced to close, HMRC will refuse the request to deregister. If the business can overcome this hurdle, there are further potential problems to address.
Accounting for output tax on deregistration
Where the business is holding stock and/or fixed assets at the time it deregisters, output tax must be accounted for on the final VAT return - calculated by reference to the market value of the assets in their condition at the time - as if the items in question had been sold. The only exception to this is where the output tax payable would be less than £1,000.
The output tax should be calculated at the appropriate VAT rate.
This rule includes any property that the business has opted to tax, which can lead to a very large output tax liability.
There may be further issues with commercial property covered by the capital goods scheme where the deregistration is requested within 10 years of purchase. Again, this can lead to a large output tax liability on the final return.
Cons outweigh pros?
If any of these issues are relevant, it is likely that the downsides to deregistration will outweigh the benefits - particularly if the downturn in sales is likely to be temporary anyway. A business should not deregister without considering all of the potential consequences.
Self-assessment - DIY time-to-pay options
The tax return filing deadline for 2019/20 has now passed. However, where taxpayers have struggled to pay any tax they owed by the 31 January deadline, it is still possible to set up an instalment plan - or "time-to-pay" - arrangement. In the right circumstances, this can be done online with no need to contact HMRC by phone.
An online plan can be set up if the taxpayer:
This plan can include the second payment on account that was originally due in July 2020 where this was deferred.
Further information is available here.
Leaving the UK: a look at split-year treatment
According to reports, the number of people leaving the UK during 2020 was "unprecedented". The Economic Statistics Centre of Excellence reported that as many as 700,000 left London alone in the 15-month period to September 2020. This brings the question of tax residence into sharp focus.
For any given tax year, an individual is either UK-resident or non-UK resident for tax purposes as determined by the statutory residence test (SRT) set out in Finance Act 2013, Sch. 45. However, if they move out of (or indeed into) the UK part-way through a tax year, it is possible that the tax year will be split into a UK and overseas part. The personal allowance is available for the full year, irrespective of whether it will be available in subsequent years.
Income tax and CGT
The consequences of this are that non-UK income will only be subject to UK tax if it is received during the UK part of the year, and foreign gains will only be charged to CGT if they arise in the UK part of the year. For UK gains, only gains on immovable UK property will be taxable in the overseas part - subject to the rules for temporary non-residents if UK residence is resumed within five years.
This is highly useful for avoiding double taxation. Additionally, considerable savings may be made by timing income and gains to coincide with the overseas part of the year where the country the individual is becoming resident in has more favourable tax rates than the UK. However, split year treatment does not apply in all cases (though where it does it is automatic and not optional), so it is crucial to understand the rules and be certain of the date the overseas period commences to avoid mistakes. The tax position in the new country of residence will need to be considered, so advice will need to be taken accordingly. The relevant double tax treaty (if one exists) should also be consulted.
Note that the split year rules only need to be considered if the individual is resident in the UK under the SRT. If the test provides a non-resident result for the year, non-UK income and gains will not be subject to UK tax anyway - even if they are received or arise before the departure date. Taxable UK gains are restricted to those arising on immovable UK property. Remember that if a gain on UK property does arise, it needs to be reported using the UK property gains reporting service within 30 days of completion. There is no longer an option for non-residents who complete self-assessment returns to delay reporting the gain until the return is filed - the change was made for disposals made on or after 6 April 2020.
It should also be noted that the split year treatment does not affect actual residence under any double tax treaty.
Split year treatment - the Cases
In order for split year treatment to apply to the year of departure, there must be an actual or deemed departure from the UK. We are not considering the position for those coming to the UK ("arrivers") here.
Part 3 of Sch. 45 then sets out eight "Cases" where split year treatment will apply. Only the first three apply to leavers, so we do not consider Cases four to eight here. In each of the three Cases, there is a common requirement that the taxpayer must have been UK-resident in the previous tax year (including where the year was a split year).
Case 1 - Starting full-time work overseas
In order to meet the first Case, the individual must be non-resident under the SRT in the subsequent year by way of meeting the third automatic overseas test (concerned with working sufficient hours overseas and minimal work in the UK).
They must also satisfy the relevant overseas work criteria during a "relevant period". A relevant period is any period consisting of 1 or more days that:
The overseas work criteria is that the individual:
The permitted limit of days tests referred to here depend on when the individual leaves the UK. If the individual leaves relatively early in the tax year, say June, they will be able to spend more days in the UK than if they leave shortly before the tax year end. The way the limits are calculated are set out in RDRM12070.
Where case 1 applies, the overseas part of the split year begins on the first day of the relevant period discussed above. That is, the first day they undertake more than 3 hours work overseas - assuming the overseas work criteria is then met until the end of the tax year. This is usually later than the actual date of departure, so if an individual is waiting to trigger gains they should wait until after they commence work to do so, and ensure that they meet the overseas work criteria for the remainder of the tax year.
Case 2 - Partner of someone starting full-time work overseas
Split year treatment can also apply to the "partner" of someone who meets the Case 1 criteria, which is useful where a couple or family move overseas together. In addition to the requirement for the partner to meet the Case 1 criteria, the individual must:
"Partner" has a wider meaning than spouse or civil partner here. Unmarried partners can qualify if they are living together, in much the same way as they are considered as "living together" for tax credits/universal credit purposes, i.e. there is a stable partnership based on more than just economic convenience.
Where Case 2 applies, the deemed departure day (and first day of the overseas part of the split year) is the later of:
Case 3 - ceasing to have a home in the UK
For Case 3 to apply, the individual must again be resident in the previous year and non-resident in the subsequent year to the year of departure. They must also have at least one "home" in the UK at the start of the tax year, and cease to have any home in the UK at some point in (and for the rest of) the tax year in question.
Once they cease to have a UK home, the individual must:
For these purposes a property does not need to be owned (or even a building, e.g. it could be a houseboat etc.) in order to be a "home". In contrast, ownership of a property does not necessarily mean that a home is available - for example where the individual lets it out, or has it marketed for sale. The key thing to consider is how easy it is for the individual could occupy it quickly with a degree of permanence or stability. The legislation also states that something used only periodically, e.g. a holiday home will not count as a "home". Each case will need to be assessed on it's merits.
The overseas part of the year starts on the date that the individual ceases to have any UK home on.
Priority of Cases
It should be intuitively obvious that, in the right circumstances, all three Cases might be relevant. For example, if A and B are married, and both commence overseas work at slightly different times, and cease to have a UK home in the same tax year, there could be three different potential start dates for the overseas part of the year. To avoid manipulation of these rules, the legislation stipulates that Case 2 has priority over Case 3, and Case 1 has priority over both Case 2 and Case 3.
February questions and answers
Q. My director's loan account is overdrawn as we approach our year end. Usually, a dividend is credited to cover the shortfall, but my accountant says that there are not enough reserves to do that this time. We've looked at writing off the loan to avoid a s.455 charge as a cheaper option than an additional salary payment. Are there any problems with this?
A: Writing off a director's loan means that you will be taxed on the amount written off as if it were a dividend. On the face of it, this is cheaper than a salary payment. However, HMRC will usually argue that the write off is really a payment "derived from an employment", meaning National Insurance also needs to be paid. The only way around this is to convince HMRC that the write-off arose due to your position as a shareholder. Expect a strong rebuff.
A better option would be to wait to see if you might be able to pay a dividend before the repayment deadline of nine months after the year end, as this will avoid the problem and the s.455 charge.
Q. I usually make regular pension contributions of approximately £10,000 per year net of relief. However, in 2017/18 I made a large one-off contribution following a capital gain. I've just realised that I omitted this from my tax return and, as a result, overpaid tax by nearly £8,000. Is there anyway I can amend the return?
A: The deadline for amending your 2017/18 has passed, but all is not lost. You should be able to reclaim the tax using overpayment relief as long as you do this by 5 April 2022. You need to make a claim in writing, and include the information required - set out in SACM12150.
Q. I made an investment into a promising fledgling company several years ago. Due to Covid-19, the company has struggled over the last 12 months, and has just entered administration. What is the best way to secure relief as soon as possible?
A: As the shares are likely to be worthless, you can explore the possibility of making a negligible value claim. If the conditions are met, this crystallises the loss on the shares now, rather than needing to wait until the shares are formally cancelled. The advantage of this is that it should secure a loss that can be offset against your general income (assuming the company is an unquoted trading company meeting the requirements), and you can carry this back to the previous tax year. For example, if you make the claim in March 2021, you will be able to amend your 2019/20 return to include the loss claim. You can read more about negligible value claims and income losses on Helpsheet 286.
February key tax dates
1 - Due date for payment of Corporation Tax for accounting periods ending 30 April 2020
1 - Deadline to file P46(car) for the quarter ended 5 January 2021
7 - Electronic VAT return and payment due for quarter ended 31 December 2020
15 - Claim deadline for employers for furlough days in January.
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/2/2021