To June'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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Finance Bill Amendments
Following the Budget in early March, the current Finance Bill was published on 11 March 2021. Since that date, a number of amendments have been made. Of the most significant, the following stand out in particular.
A clause in Schedule 2 that explicitly included FHLs in the provisions for the temporary extension to loss relief has been deleted. When the bill was first published, some commentators pointed out that further changes to the law would be required because FHL businesses are not eligible to use s. 64 ITA 2007, which is one of the conditions to use the extension.
The section on the new super deduction has also been amended to ensure that the 130% deduction and 50% deduction can apply to "background" plant and machinery in leased buildings. The ICAEW had raised concerns that the rules as originally drafted would cause issues where buildings are purchased or constructed and parts of them are fitted and leased out, for example office blocks. The amendment ensures that fixtures and other assets in all parts of such buildings will be able to enjoy the new temporary enhanced deductions.
Full details are available at GOV.UK.
The long-running stand-off between Mr Raymond Tooth and HMRC came to a conclusion last month after it was considered in the Supreme Court. The case concerned the question of whether HMRC were out of time to raise a discovery assessment in respect of tax due in relation to a failed avoidance scheme. Mr Tooth has used an avoidance scheme that involved an employment loss. However, the tax software his advisers use did not have the facility to include such losses. Instead, the loss was entered on the partnership pages using a dummy partnership UTR with a full explanation in the additional information pages.
The case came down to which deadline was the appropriate one. For a discovery assessment to be valid it must be raised within four years of the end of the relevant tax year. This is extended to six years where there is careless behaviour. Where the loss of tax is brought about deliberately, the time limit is 20 years.
Part of HMRC's argument was that, in their opinion, the inclusion of the employment loss on the partnership pages constituted a deliberate error, meaning the 20-year time limit was the appropriate one. This was crucial because the assessment had been raised after the expiration of the six-year anniversary of the relevant tax year. The Court of Appeal had previously agreed with HMRC on this but had dismissed the department's appeal on the grounds that there had been no valid discovery. The Supreme Court found that, in fact, the discovery had been valid, but the way the loss had been reported did not constitute a deliberate mistake. The six-year time limit applied, and therefore HMRC's appeal was dismissed.
In other litigation news, it appears Gary Lineker is the latest presenter on HMRC's employment status review list, following high-profile cases involving Eamon Holmes, Lorraine Kelly, and Kaye Adams. The disputed amount of tax and NI is reportedly in the region of £5 million. For his part, Mr Lineker strongly refutes the suggestion that he was an employee in all but name.
There is a little-known deadline approaching in relation to the VAT deferral scheme. Any business that took advantage of the scheme in 2020 that has not repaid the deferred amount will need to indicate to HMRC how they are planning to make repayment or risk receiving a penalty of 5% of the outstanding amount on 30 June. Businesses may seek to take advantage of the new repayment scheme. If they wish to do this, they will need to register for the scheme by 21 June. This will allow them to make repayment in eight equal instalments.
Information regarding eligibility is available here.
The government has also grown concerned that some companies are being dissolved with a view to avoiding repayment of government-backed loans that were made available to support businesses affected by Covid-19.
In response, the government has published a Bill that aims to prevent this by preventing directors of dissolved companies from setting up a highly similar business following the dissolution. The Bill also contains significant sanctioning powers. Read more here.
Umbrella companies are currently high on HMRC's fraud investigation radar. In particular, the department's specialist unit is taking aim at mini umbrella companies, and new guidance has been published to help engagers spot potential criminal activity.
Since 1 April 2021, any non-UK resident purchasing UK residential property is liable to a 2% surcharge where the property is located in England or Northern Ireland, and cost more than £40,000. This applies to both individuals and companies.
The definition of "non-UK resident" for the purposes of the surcharge has a different meaning than for income tax and CGT, both of which are determined by the statutory residence test (SRT). For SDLT purposes, an individual will be non-UK resident if they were not present in the UK for at least 183 days in the 12 months prior to the purchase. It is therefore a relatively simple test compared to the SRT, but the discrepancy between the two definitions could mean that an individual that is UK resident under the SRT is treated as non-UK resident for the purposes of SDLT.
Example. Clive has lived in South Africa all his life. On 1 May 2021 he moved to the UK to take up an offer of employment. He purchases a house and the transaction completes on 1 July 2021. Clive will clearly be UK resident for 2021/22. However, because he has only been in the UK for two months in the 12 months prior to the purchase he will have to pay the SDLT surcharge.
The good news for people in Clive's position is that they will be able to claim a refund of the surcharge if they are present in the UK for at least 183 days in any continuous 365-day period starting one year before the purchase and ending one year after. In Clive's example, he will be able to claim a refund in November 2021.
Companies will be non-UK resident (or deemed non-UK resident) if either of the following two conditions are met at the date of purchase:
- the company is non-UK resident for the purposes of the Corporation Tax Acts, i.e. not subject to UK corporation tax; or
- the company is resident in the UK, e.g. because it was incorporated here, but: - it is a close company; and
- it meets the non-UK control test (see below); and
- the transaction is not an excluded transaction, e.g. by an OEIC.
The non-UK control test will be met if a participator controls the company, or is attributed with controlling the company, and they personally meet the non-UK resident test for individuals, i.e. they are not present in the UK on at least 183 days in the 12 months prior to the purchase.
It is important to note that the surcharge is in addition to any of the normal rates of SDLT. If the purchase is of a second (or subsequent) residential property, the 3% surcharge will be payable as well as the new 2% surcharge. The top rate of SDLT may therefore be 17% in some circumstances.
There is a break for married couples and civil partners. If the property is held jointly, the new surcharge will not apply as long as one buyer relationship meets the UK resident criteria.
Most people give to charity in one form or another at some point. This could be by donating unwanted clothes, books, and so on to the local charity shop. There can also be a donation via a site like Just Giving, or there may be ongoing payments by direct debit - commonly for qualifying memberships such as the National Trust, or English Heritage etc.
In light of the impact of Covid-19 on finances it is a good idea to review these arrangements now in order to avoid any unwanted tax consequences relating to the gift aid rules. When making a donation or signing up for a membership there will usually be a form asking for confirmation that the individual is a UK taxpayer. If this is the case, the charity can claim the equivalent of basic rate tax on the donation from HMRC. For example, if an individual pays £80 for admission to an estate looked after by a qualifying charity, the charity can reclaim an additional £20 from HMRC if the individual completes the gift aid declaration.
In order for this to have no consequences for the individual, there must be enough tax for the year to cover the additional amount. If there isn't, the additional amount is payable to HMRC. This may be affecting many people at the moment, particularly if they have been furloughed or made redundant.
There isn't anything that can be done to "undeclare" taxpayer status on historic one-off gifts, but it's possible to contact the recipient of recurring payments and ask that the gift aid declaration be cancelled going forward.
At the other end of the scale, higher and additional rate taxpayers should be vigilant as things that they pay for that might attract additional tax relief. It has been reported that the additional relief available to such individuals is often overlooked. This may partially be down to a lack of knowledge about the types of things that can qualify, such as entrance fees or membership fees. Records should be kept supporting claims, so it is a good idea to review this on an ongoing basis rather than after the year end. Reviewing bank statements is a good place to start, as well as checking emails - most places are currently requiring advanced booking which helps create supporting documents.
Reference is usually made to a VAT-registered business. However, this is not quite correct as it is the person, either real or legal, that is actually registered. For example, where sole trader has a number of different business activities it is not possible to register them separately. Is the sole trader themselves that the VAT number relates to.
In the case of companies, all activities carried out by the company will come under the company's VAT registration number. However, where there are a number of companies, they will usually have their own registrations even if they are under common ownership.
Generally, where companies in the circumstances make supplies to one another the supplies must be treated as normal sales and purchases. This can lead to cash flow issues, particularly where the companies have different VAT return periods.
A potential solution to this is to register the companies as a single VAT group. Transactions between group members are then not generally subject to VAT which alleviates the cash flow issue discussed above. Additionally, only one VAT return is needed for the group as a whole which can cut down on administration. The main disadvantage of using a group is that group members are jointly and severally liable for any VAT debts. It is however possible to cherry pick which companies become group members.
Since November 2019, partnerships sole traders and trusts can join a VAT group as well as companies. The requirements of group registration are set out in VAT Notice 700/2.
Q. I've been going over some old tax returns to try to track down some capital losses. However, whilst doing this I've noticed that I missed including my considerable pension contributions off the 2018/19 return. From what I can see online, I've just missed the deadline to amend it. Is there any way to claim the extra relief? It's worth around £2,000 which would be very helpful at the moment.
A: You should make a claim under the provisions for Overpayment Relief. This permits a claim to be made up to four years after the end of the tax year in question where there are no other means to recover the overpaid tax. You need to be very careful when drafting the claim, as it must contain specified information (see HMRC's guidance here). It must also be signed by you personally an advisor can't sign it on your behalf (though they could help you draft the letter).
Q. We make a relatively high number of B2C sales to EU-based customers - usually over the summer months. We also use the flat rate scheme, and I've heard that Brexit may cause issues for us. Is that the case and if so can we leave the scheme for the summer months?
A: Yes - the problem arises because all sales to EU customers are now zero rated, so you aren't collecting input tax. However, you still have to apply the flat rate percentage to these sales. If a lot of your sales are zero rated, it will probably make sense to leave the scheme. You can do this at any time, just make sure you inform HMRC of your chosen leaving date. However, once you leave you cannot rejoin for at least 12 months, so you can't just leave for a few months then come back to it after the summer.
Q. Following the Covid-19 pandemic, I've decided to change my year end to 31 March (from 31 December) in order to utilise overlap relief that I've been carrying forward. However, I'm not sure exactly what profits to include on my return.
A: This will depend on exactly how you enact the change. If you prepare accounts for the 15 months to 31 March 2021, your return for 2020/21 will include the results for the full 15 months, less the overlap relief. If you prepare accounts for the three months to 31 March 2021, you will have two accounting periods (one 12 months and one three months) in the basis period for 2020/21 and you will include the results from both, again deducting the overlap relief. Of course, it's possible that you are referring to your current year, i.e. you will prepare accounts to 31 March 2022. In that case, the change won't take place until the 2021/22 year and you should just report your results to 31 December 2020 on the 2020/21 return in the usual way.
1 - Due date for payment of Corporation Tax for accounting periods ending 31 August 2020
7 - Electronic VAT return and payment due for quarter ended 30 April 2021
14 - Claim deadline for employers for furlough days in May.
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/6/2021
30 - Tax credit recipients should have received a renewal pack