Welcome to May's Tax Tips & News, our newsletter is designed to bring you tax tips and news to keep you one step ahead of the taxman.
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The extension of the off-payroll working rules to medium-sized and large organisations finally took effect on 6 April. The responsibility for making an employment status determination for each engagement where the worker's services are provided through an intermediary now rests with the client receiving the services, i.e. the engager/hirer for affected entities.
The rules now apply to all public sector clients and, from 6 April, private sector companies that meet 2 or more of the following conditions:
- the annual turnover of more than £10.2 million;
- the company has a balance sheet total of more than £5.1 million;
- the company has more than 50 employees
There is a simplified turnover test for non-company entities - the rules apply if the annual turnover exceeds £10.2 million. The tests are made by reference to the financial period ending in the previous tax year, e.g. for a company with a year-end of 31 March, it will be the period ending 31 March 2021 that determines the company's size for 2021-22.
Upon reviewing an engagement, the client must issue a Status Determination Statement to the worker (as well as the agency, or other person or agency the contract is with) informing them of the decision as well as the reasoning for it. The worker may disagree, in which case the client must review the decision and respond within 45 days, informing them whether the original determination has changed or not. The rules are complex, and reference should be made to the published guidance.
Note that small businesses are unaffected and do not have to assess their workers' employment status, though they will need to monitor their size regularly if they are growing. Once they meet the criteria for a medium-sized organisation, they will need to comply with the rules from the start of the tax year following the end of the calendar year when they met the conditions.
The portal for making a claim for the fourth coronavirus SEISS grant opened toward the end of April. Eligible businesses should have been contacted by HMRC to inform them of their personal claim date - if a business is not contacted by 30 April, they should contact HMRC using the SEISS helpline - 0800 024 1222.
The personal claim date is the earliest date the business can make a claim. These have been staggered to help reduce a bottleneck on the system. The portal will remain open until 1 June. The claimant will need to confirm they meet the criteria for the grant, which means that they:
- traded in the tax years 2019-20 and 2020-21;
- are currently trading but are impacted by reduced demand due to coronavirus, or have been trading but are temporarily unable to do so due to the pandemic;
- intend to continue to trade; and
- reasonably believe there will be a significant reduction in their trading profits.
They must also have submitted their tax return for 2019-20 no later than 2 March - even if HMRC accepts they have a reasonable excuse for the late filing. If the 2019-20 tax return is subsequently amended, the claimant must notify HMRC if the change means that the entitlement to SEISS grant 4 is reduced by more than £100.
In addition to the support measures, April saw the easing of a number of lockdown restrictions. Non-essential retailers are now permitted to open. Other businesses, such as pubs, hotels, gyms, etc. are subject to different rules depending on which part of the UK they are located in. Links to information specific to each country can be found here.
HMRC also announced that, due to the anticipated increase in appeals against late filing penalties for 2019-20 returns, authorised agents can use a time-limited bulk appeals service, allowing them to submit appeals for up to 25 clients on a single form. The service will be open for 6 months. However, clients that are dealt with by the High Net Worth unit cannot be included, and must appeal on an individual basis in the usual way.
Call For Evidence On EMI
The enterprise management incentive (EMI) is a tax-advantaged share option scheme that allows companies to grant options over shares to key employees. The main advantage of the scheme is that the employee will pay an exercise price set at the date of the option (usually the market value), with the hope that the shares will have increased in value by the time the option is actually exercised. Usually, where less than market value is paid for employment related securities, the difference is subject to income tax. However, if the options are exercised correctly under EMI no income tax arises, and instead any growth in the share value above the exercise price is taxed to CGT when the shares are eventually sold.
The government has now issued a call for evidence from organisations and individuals, seeking answers to a number of questions to establish how the scheme is working, and whether (and how) it should be expanded so that more companies can use it. The closing date is 26 May 2021. Responses to the queries raised need to be sent to firstname.lastname@example.org.
HMRC was due to upgrade the Trust Registration Service by March 2021 in order to allow non-taxable trusts to register. This is necessary due to the UK's implementation of the EU Fifth Anti-Money Laundering Directive. The deadline for registration following the update was due to be 12 months later, i.e. 10 March 2022. However, the redesign completion will now not take place until the summer. HMRC have therefore issued a statement saying that the requirement to register will be moved back to the first anniversary of the delivery date of the updated service.
Many accountants make use of the templates and guidance on engagement letters from their professional body. The ICAEW has updated its guidance on tax-related matters in a number of areas, but most notably on VAT following the introduction of the Northern Ireland protocol. There have been amendments to other areas as well. Practitioners that use the ICAEW's templates and guidance should refer to the engagement letter section on the website accordingly.
Starting from 6 April 2021, there is a new type of undergraduate student loan that employers need to be aware of when operating payroll - the Plan 4 loan (SLP4). The new plan type has been necessary due to the Scottish government amending certain details regarding repayment, including the increase of the earnings threshold. SLP4 will apply to all new and existing Scottish borrowers. This means that Scottish borrowers that were in repayment before 6 April 2021 using the Plan 1 (SLP1) arrangements will need to be moved across to SLP4.
The new plan is applicable to any individual that received a loan from the Student Award Agency for Scotland. Whether they live in Scotland or not is irrelevant.
The Student Loans Company will inform HMRC about individuals that need to be moved from SLP1 to SLP4, and HMRC will contact employers. However, it is also possible for the employee to prompt the employer to change the plan type being used for repayment. This is important as the repayment thresholds are different across the different loan types. For 2021-22, the appropriate thresholds and repayment rates are as follows:
|Plan type||Plan 1||Plan 2||Plan 4||Postgraduate|
|Rate of deduction applied to excess||9%||9%||9%||6%|
An employer should not operate student loan deductions for off-payroll workers, even if the status determination is that they are a deemed employees. Instead, the worker will make good the appropriate deductions via their self-assessment tax return.
The earnings that are subject to deductions is the NIable pay. This can be different from the taxable pay, for example where there is an optional remuneration arrangement in place. Additional earnings from commission, overtime, or bonuses increase the deductions accordingly.
Due to the coronavirus, many businesses are experiencing cash flow issues as their customers struggle to make payments in good time. A range of banks offer debt factoring as a way of improving the cash flow position. However, there are VAT considerations that should not be overlooked.
Debt factoring is the term used for any one of a number of arrangements that involve transferring the right to payment of invoices to a third party, e.g. a bank. The business invoices its customer in the usual way, the bank then purchases the right to collect the money from the business for an agreed amount and collects the debt directly. Naturally, the bank will pay less than the face value of the invoice, but this may be acceptable to a business that is having cash flow difficulties as the bank will issue an advance up front. Any outstanding amount owed to the business is then transferred upon payment by the customer.
Using debt factoring has consequences for VAT. Exactly how the VAT reporting will be affected depends on the type of factoring arrangement used.
Recourse agreements. Under a recourse agreement, the bank will reassign the debt to the business in the event that the customer doesn't pay.
Non-recourse agreements. With a non-recourse agreement, the bank actually purchases the debt from the business for a percentage of the amount owing. The risk of non-payment then falls upon the bank, and for this reason, non-recourse agreements are less common and more expensive.
Under either type of arrangement, the normal VAT tax point rules apply, so generally, VAT must be accounted for based on the earlier of the date the business makes the supply, issues the invoice (unless this is more than 15 days after the supply date), and the date the customer pays the invoice. However, if the business is using the cash accounting scheme the VAT point is the date that the customer pays the bank, not the date the bank transfers money. The initial amount advanced by the bank is not a payment, merely a loan.
Debt factoring also has an effect on bad debt relief. Ordinarily, a business can claim bad debt relief for VAT purposes where an invoice has not been paid within 6 months, reclaiming VAT accounted for to HMRC. Where debt factoring using a recourse agreement is used, the bank can transfer the debt back to the business in the event of non-payment. It is still possible for the business to claim bad debt relief in these circumstances, but not until the debt has been reassigned. Bad debt relief cannot be claimed if a non-recourse agreement is used.
From 1 April 2021, all compulsorily VAT-registered businesses that submit electronic VAT returns are required to digitally link the business records to their VAT returns. This must be done by using HMRC approved bookkeeping software. This can include spreadsheets prepared in Microsoft Excel, or similar software, but the key point is that the data must flow automatically from the initial manual input to the VAT return. HMRC does not accept that the use of cut-and-paste or copy-and-paste to move information between software programs, or within different parts of a software program, to be a digital link.
Initially, there was a soft-landing period where these rules were not being enforced, e.g. cut-and-paste techniques were still being permitted, though HMRC were encouraging businesses to follow them as closely as possible. From 1 April 2021, HMRC will enforce the rules and penalties will be charged for non-compliance.
Businesses should refer to the information contained in VAT notice 700/22 for further information regarding the Making Tax Digital for VAT initiative and their corresponding responsibilities.
Q. I am newly VAT-registered (voluntarily). I believe that I will usually need to pay VAT to HMRC each quarter, rather than receiving a refund. However, I have some concerns about running up arrears in case I experience cash flow problems. Can I ask to complete monthly returns and pay monthly instead?
A: There is no statutory right to make monthly, rather than quarterly, returns. The legislation simply permits HMRC to allow a business to do so. The problem is that HMRC generally won't allow you to use monthly filing where you have VAT to pay - it's for businesses that usually receive repayments. You have a couple of options in order to avoid building up arrears. You can simply make a monthly payment of the estimated net VAT position to your account and sort the difference out when you complete the VAT return. Alternatively, you could consider using the annual accounting scheme. You would only be required to file one return, but you would make nine payments on account during the year. Information about the scheme is available here.
Q. I am looking to raise some funds by selling some personal possessions, some of which have appreciated in value quite considerably. I've heard there is a special exemption that might mean I don't need to pay CGT on any gains. Is that correct?
A: One of the unfortunate consequences of the coronavirus pandemic is that many individuals are selling personal possessions to help raise funds, either for themselves or for family members. There are actually two exemptions that may be of use to you.
The first is the wasting assets exemption. This applies to assets that have an expected useful life of 50 years or less (based on the nature of the asset and its intended use when it was acquired), and completely exempts the asset from CGT. Machinery is always treated as having an expected useful life of less than 50 years, so things like cars or clocks always qualify. Things are less clear cut when it comes to things like fine wine collections, and you should seek advice from a specialist. Note that the exemption doesn't apply to assets used in a business if you claimed, or could have claimed, capital allowances in respect of them.
If the asset you sell has an expected useful life of more than 50 years, there is a limited chattels exemption. The exemption is calculated as follows:
- if you receive £6,000 or less from the sale, it is wholly exempt from CGT
- if you receive more than £6,000, the amount chargeable to CGT will be the lower of the actual gain, or 5/3rds of the difference between £6,000 and the amount received for the sale.
As a result, the chattels exemption will only be of use where the proceeds received are less than £15,000.
Q. I have recently granted a lease to a tenant in respect of a building out of my freehold interest. They have paid a large premium for this and will not be required to pay rent. However, an associate of mine has said that this might be charged as income. I thought it was a capital receipt?
A: It will depend on how long the lease you have granted is to run for. If it is for more than 50 years, you are treated as having made a part-disposal of your interest, and the premium will all be treated as a capital receipt for this. However, if the lease is for less than 50 years, some of it will be treated as property income. The shorter the lease, the higher the proportion of it taxed as income will be. Speak to your accountant about the correct way to report the gain, or refer to Helpsheet 292.
1 - Due date for payment of Corporation Tax for accounting periods ending 31 July 2020
5 - Quarterly employment intermediaries report required for quarter ended 5 April 2021 for organisations that pay people but do not operate PAYE for, e.g. recruitment agencies
7 - Electronic VAT return and payment due for quarter ended 31 March 2021
14 - Claim deadline for employers for furlough days in April.
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/5/2021
31 - Deadline to issue P60s, either electronically or by paper, to employees