To April'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
· Loss relief extension
· Dealing with an overdrawn Directors Loan Account
· Tax relief for loans used for businesses
· April questions and answers
· April key tax dates
Latest News Round Up
The Budget finally took place on 3 March 2021. None of the speculated tax changes, e.g. raising CGT came to pass, although the main rate of corporation tax will increase in 2023. Several allowances, such as the personal allowance and CGT annual exempt amount have been frozen until April 2026. Further detail of the Budget announcements were included in our Budget newsletter.
In terms of Covid-19 measures, details of the fourth SEISS grant have now been published. Additionally, a fifth tranche for the period from May to September will be available in the summer.
The fifth grant will be worth:
HMRC lost their appeal in the high-profile Upper Tribunal IR35 case of TV presenter Kaye Adams. This was perhaps slightly unexpected as a number of established hallmarks that would have suggested an employment relationship, such as mutuality of obligation and the degree of control the BBC exercised, were present. The decisive factor was that Ms. Adams successfully argued that she carried on other business as an independent contractor, and that business was undertaken on a broadly similar basis to her work for the BBC.
Interestingly, the extent of her work with other clients seems to have been persuasive. The Tribunal commented that "the conclusion that we have reached is that, in an uncertain profession, Ms Adams had succeeded in those tax years for the time being at least in securing a reasonably stable revenue stream that was material in amount…if, over time, Ms Adams's other revenue streams had diminished so that the BBC work represented a greater percentage of her gross income, she might have tipped over into employment. However, HMRC accepted that in the tax years 2013/14 and 2014/15, the hypothetical contract was not of employment."
A new SME Brexit Support Fund is now open for applications. The scheme provides a grant of up to £2,000 to help with the costs of the additional administration required in respect of post-Brexit goods movement.
A business can apply:
More information and details of how to apply for the grant is available here.
The Welsh government announced that it will extend the Land Transaction Tax holiday until the end of June. The 0% rate will remain at £250,000 for an additional three months, before returning to £180,000 for completions on or after 1 July 2021.
Loss Relief Extension
The Budget saw an announcement that the loss relief provisions available to both unincorporated business and companies are to be temporarily extended. There are differences in the way this will operate between the two types of business vehicle.
The affected rules are those in ITA 2007, s. 64, i.e. "sideways" loss relief. This permits a trader to set off losses suffered in a tax year against general income of the same year, the preceding year, or both years. This is not automatic, and must be claimed or the loss will carry forward to offset future profits. There are variations on this relief in the early or final years of trading. It is also possible to set off losses that cannot be utilised under a s. 64 claim against capital gains.
The current rules are subject to the general restriction on uncapped income tax reliefs. Where they are offset against income other than profits from the same trade (e.g. in the preceding tax year), the maximum that can be used in any tax year is the higher of £50,000 or 25% of adjusted total income.
The extension provides a restricted enhancement to s. 64 for losses realised in 2020-21 and 2021-22. This means that the individual must first make a claim under s. 64, or be eligible to make one but has not done so as there is no other income to relieve. The extension then permits the trader to offset profits of the same trade in the three preceding tax years. The most recent year is to be relieved first.
Note that this does not extend to offsetting general income. There will be a cap of £2 million applying to each of the tax years included in the extension.
The published guidance gives the following example:
An individual trader's profits, losses and other income are:
2017 to 2018 - Trade Profit £1,200,000 - Employment Income £50,000
2018 to 2019 - Trade Profit £1,200,000 - Employment Income £50,000
2019 to 2020 - Trade Profit £500,000 - Employment Income £50,000
2020 to 2021 - Trade Loss £3,000,000 - Employment Income £50,000
The trader makes a claim under section 64 of ITA07 to set the 2020 to 2021 loss against general income of both the year of loss (£50,000) and the previous year 2019 to 2020 (£550,000).
The remaining part of the 2020 to 2021 loss, up to a maximum of £2,000,000, is available to carry back to set against trading profits of 2018 to 2019 and 2017 to 2018 (in that order), and the trader makes a claim under the new provision.
Loss set against:
1) £50,000 general income of 2020 to 2021
2) £550,000 general income of 2019 to 2020
3) £1,200,000 trade profit of 2018 to 2019
4) £800,000 trade profit of 2017 to 2018 (cap applied)
£400,000 of the loss remains available to be claimed to carry forward and set against trade profits in future years.
The affected rules are those in CTA 2010, s. 37. Currently, where a company makes a trading loss in an accounting period it may be relieved by claiming loss relief against total profits in the accounting period in which the loss is made. Unrelieved losses may then be set off against profits of the preceding 12-month period. The temporary extension increases the carry back period to three years for losses arising in accounting periods ending between 1 April 2020 and 31 March 2022. There is a £2 million cap on losses made in accounting periods ending between 1 April 2020 and 31 March 2021, with a separate £2 million cap in place for trading losses incurred in relevant accounting periods ending between 1 April 2021 and 31 March 2022. This cap will apply at group level where relevant.
However, as the Budget announced the forthcoming increase in the main rate of corporation tax to 25% in 2023, it may be more efficient for a loss-making company to carry its losses forward to utilise against profits that would be chargeable at the increased rate. This will of course depend on current cash flow.
Dealing with an overdrawn Directors Loan Account
Many companies use 31 March as the accounting reference date. As such, now is a good time to review the position of directors' current accounts for close companies.
It is a common misunderstanding that if the company charges a commercial rate of interest on any loan made to the participators or employees there are no tax consequences. In fact, whilst doing this does protect against a benefit in kind arising, there is a further consideration for the company.
A charge arises under CTA 2010, s. 455 where amounts are owing at the accounting year end and these are not repaid within nine months. The charge is made at 32.5% of the amount outstanding, but it is temporary and is repaid once the owed monies are repaid to the company.
However, the charge does apply to overdrawn directors' current accounts. The £15,000 exception doesn't apply if the director is also a shareholder with a material interest - there is no de minimis on the size of the loan that will trigger a charge.
The nine-month grace period does give the director an opportunity to pay the loan back. However, many may struggle to do that from private funds this year due to the Covid-19 crisis.
Fortunately, as participators in close companies tend to have a high degree of control over their remuneration, there are some other options to help.
Vote a bonus
Voting an additional payment of salary and crediting this to the overdrawn account is one method. The advantage of doing this is that it attracts a deduction from the company's taxable profits. The drawback is that it must be processed via the payroll, and have tax and NI deducted.
Vote a dividend
This is similar method but involves crediting a dividend instead of a salary. There is no deduction for corporation tax, but there is no NI to pay either. The dividend will be taxable in the hands of the participator, but at lower rates that apply to bonuses. It will also be payable via self-assessment rather than PAYE so there is a timing advantage.
This will only be an option if there are distributable profits to pay dividends from. This may be affected by Covid-19, so a company must exercise additional caution to ensure a clear picture is obtained before voting the dividend.
Write off the loan
If the loan is formally written off, the participator is treated as receiving a distribution equal to the amount released. There is a risk that HMRC will try to treat this as "earnings" for NI purposes, so if available the dividend option is usually better. The write-off should be made formally in writing, or there is a further risk that the debt would be pursued in the event of a liquidation.
Tax relief for loans used for businesses
There has been an unprecedented amount of support for businesses struggling due to Covid-19. However, back at the start of the crisis there were delays in the various schemes being set up. Additionally, a high number of newer businesses were completely ineligible. Many company owners used personal borrowings to help keep the business afloat and pay employees, as banks pulled credit products from the market.
Let's take a simple case study of a company owner who has two employees. She and her husband (not involved with the company) remortgaged their house to raise funds. She loaned this to the company, enabling her to keep trading and paying one of her employees. The other employee was furloughed, and some of the funds were used to top up their salary to 100% of its usual rate.
The owner will be able to claim tax relief for the interest paid on the remortgage. This will be proportionate to the amount loaned to the company compared to the overall borrowing level. For example, if the interest on the whole mortgage for a tax year was £12,000, the average balance £400,000 and the average balance of the loan to her company was £100,000, the owner can claim tax relief on £3,000 of interest (100,000/400,000 x £12,000).
The fact that the loan is in joint names would appear to introduce a complication, i.e. that relief may be restricted to 50% of the relevant interest. However, HMRC's guidance confirms that this is not the case in SAIM 10030:
"Where a husband and wife take out a joint loan but only one spouse uses the loan in a form that meets the qualifying conditions, that spouse would be entitled to full relief on the relevant amount of interest paid, even if the joint liability is satisfied out of a joint account."
April questions and answers
Q. Our company uses the cash accounting scheme. We've lost a lot of trade as a result of Brexit and Covid-19 and we're looking to sublet part of our warehouse. We have opted to tax this. We want to raise a single invoice at the end of each financial year (31 March) for the year ahead. However, we're happy for the tenant to pay the rent (and VAT) in monthly instalments. Is this permitted under the cash accounting scheme?
A: Under the scheme, where an invoice is raised in advance of a supply the transaction is excluded from the scheme. This means you would need to account for VAT based on the sales invoice date, not the date your tenant pays you, which is obviously a cash flow drawback.
If you don't want to issue monthly invoices, you could issue a "request for payment" at the start of the year instead of a VAT invoice. This wouldn't create a tax point. You may also wish to issue an advance sales invoice showing twelve monthly tax points coinciding with the requested payment dates.
Q. I am 60 but still working. I have therefore avoided touching my various pension pots (which I still contribute regularly to) until recently. Last year, my son's business was struggling with the effect of lockdown so I withdrew £9,500 - intending to stay within the "small pot" rules. However, my accountant is now saying I can only contribute £4,000 each year to my pension. This could seriously affect my aim of retiring in two years as I have been paying in £25,000 each year. Is he correct?
A: There is a chance he is correct. You will however need to check exactly how you have accessed your savings with the scheme provider. Where a pension has been accessed "flexibly", a special cap on the annual allowance does indeed apply to restrict tax relieved future contributions to just £4,000. But this doesn't apply if you took the amount as a pension commencement lump sum (i.e. as part of your 25% tax free entitlement). It also won't apply if your withdrawal qualified under the small pot rules. The problem with these rules is that the pot in question must have been withdrawn in full. So, if you simply withdrew the money from a larger pot this won't be the case. Talk to your pension scheme provider before you make any further contributions. It might also be worth asking your accountant to join the call.
Q. My company bought a retail premises 18 months ago and I am VAT registered. I now want to let the flat upstairs to a residential tenant. Do I need to charge her VAT?
A: No, as letting residential accommodation is an exempt supply. However, your business will be partially exempt going forward and so you will need to apportion your input VAT between the taxable and exempt parts accordingly, only claiming the amounts that relate to your taxable business. This will generally be easy, but there will be a need to apportion VAT in cases where costs relate to both parts, e.g. repairs to the roof etc. You should familiarise yourself with the rules set out in VAT Notice 706 to ensure you are confident with your VAT reporting obligations.
April Key Tax Dates
1 - Due date for payment of Corporation Tax for accounting periods ending 30 June 2020
5 - Last day of 2020-21. Also a bank holiday (Easter Monday), so keep in mind if looking to utilise tax planning that is date sensitive, e.g. transfers into ISAs, Lifetime ISAs, pension plans etc.
5 - Deadline for employers to agree payrolled benefits for 2021/22 with HMRC
6 - Large and medium sized businesses in private sector become responsible for applying IR35 rules
7 - Electronic VAT return and payment due for quarter ended 28 February 2020
14 - CT61 quarterly deadline for Q/E 31 March 2021
15 - Claim deadline for employers for furlough days in March.
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/4/2021
30 - ATED returns due