To August'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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From 1 August the government contribution will fall to 60%, meaning the employer will need to pay 20% to ensure the employee receives their entitlement of 80% (subject to a £2,400 per month). This will remain in place until the end of September when the scheme is set to close.
HMRC published new guidance for those who have received SEISS grant payments last month. The guidance covers situations where the SEISS income may not have been correctly reported on the self-assessment return. The income needs to be reported in specific boxes on the return, and HMRC are automatically correcting returns where the amounts in these boxes do not match the taxpayers' SEISS record. This can lead to the grant income being double counted, e.g. if it has been included as "other" income etc.
19 July saw the lifting of most COVID-19 restrictions in England, though Scotland and Wales have kept stricter measures for the time being.
Property 30-day reporting issues
April 2020 saw the introduction of 30-day capital gains tax reporting and payment for disposals of UK residential property where the gain is not covered by the annual exemption, private residence relief, or losses arising before the date of disposal. The payment on account of the CGT due is by nature a best estimate at the payment date, as the applicable rate charged depends on the level of income in the tax year. In many cases, the actual level of income will not be known until after the tax year and so the gain is still reported on the self-assessment tax return with credit given for the payment made under the 30-day reporting regime.
However, where the initial payment was excessive it transpires that HMRC's self-assessment system will not offset the overpayment automatically. Affected taxpayers are advised to correct the initial 30-day return where this is possible before submitting a self-assessment tax return. This avoids the need for an offset in the first place. If a return has already been submitted, or if it is not possible to amend the 30-day return, the taxpayer (or their agent) will need to call HMRC to request that the overpayment is offset manually.
The ATT have published an FAQ document with responses from HMRC which can be read here that advisers should find useful. This document makes clear that, unless the initial payment was made using a card, a refund will have to be requested manually in almost all circumstances:
"No, the refund will not happen automatically. If the overpaid tax is the result of an amendment or due to a further UK Property Disposal return there is a section on the UK Property Disposal online return to request a repayment if one is due, this will prompt HMRC to review your client's record and repay any tax overpaid.
If the last payment on the UK Property Disposal return is made by card, then this will be how the refund is repaid. HMRC are currently reviewing the UK Property Disposal online service to add the option of notifying HMRC of bank details for repayment cases.
If a repayment is not requested, then any tax overpaid will remain as a credit on your clients UK Property Disposal account until you or your client contacts HMRC."
Finance Bill published
20 July saw the publication of the draft clauses of Finance Bill 2022. Whilst there will inevitably be more announcements made at the autumn budget, there are two clauses in particular that stand out.
Firstly, the confirmation that the minimum age for accessing a pension plan is to increase from 55 to 57 in 2028. There will be exemptions for certain types of employee, including police officers and members of the fire service.
Secondly, to prepare for MTD for income tax the concept of basis periods is to be abolished in 2022/23. For that year and all subsequent years, trading profits and losses will be reported on a tax year basis. According to HMRC, the majority of sole traders already prepare accounts to 31 March or 5 April, but roughly a third of partnerships do not, and so these are likely to be affected most.
Unincorporated businesses will still be able to draw up accounts to any date they want, but they will need to make the appropriate adjustments in order to report on the tax year basis. 2022/23 is the transitional year when the basis period will change to the tax year end and overlap relief (where applicable) will be able to be utilised.
The proposed mechanism for transition is to extend what would be the current year basis period under the old rules in 2022/23 with an additional transition period starting the next day and ending on 5 April 2023. This could adversely affect businesses that have an accounting period ending early in the tax year e.g. 30 April or 30 June unless they have a significant amount of overlap relief, or are loss-making. To assist with this, the policy document states that the government is considering making an election available to spread any additional profits over a period of up to 5 years. The change will render the opening and closing year rules, as well as the rules surrounding accounting date changes obsolete, and no overlap profits will arise going forward.
The consultation is open until the end of August, and can be responded to here.
Investors' Relief (IR) was introduced in April 2016 to complement what was then called entrepreneurs' relief. IR is intended to encourage outside investment into smaller entrepreneurial companies by those investors who may not wish to get involved with the day-to-day running of the business. Entrepreneurs' relief, now called Business Asset Disposal Relief (BADR), requires the shareholder to be a director or employee of the issuing company. In contrast, IR prohibits the shareholder from being a "relevant employee " (with some exceptions) during the minimum shareholding period - referred to as the relevant period in the legislation.
As IR does not attract any upfront income tax relief, like EIS investments do for example, making a claim can be easy to overlook - and may apply to more disposals than taxpayers or their advisers realise.
Basic requirement recap
In order to qualify for IR, the shareholder must subscribe for new shares on or after 17 March 2016. Any shares acquired between 17 March 2016 and 5 April 2016 are treated as being acquired on 6 April 2016. Shares acquired before 17 March 2016 cannot qualify, even if all the other conditions are met. It is therefore necessary to split shareholdings into a qualifying and excluded part upon a disposal.
The company must be an unquoted trading company, or the parent company of a trading group. The relevant definition is the same as the gift holdover relief under s. 165 TCGA 1992. The company will be unquoted for these purposes if it is not listed on a recognised stock exchange at the date of the investment. If it later becomes listed on such an exchange, this will not disqualify relief unless there were arrangements in place for the listing to take place at the time of the investment.
Once subscribed for, the shares must be held for a minimum of three years before disposal in order to secure relief. The shareholder must not become a relevant employee during this time. However, there is an exception where the shareholder becomes an employee after at least 180 days following the subscription, as long as there was no reasonable prospect that they would become an employee at the start of the relevant period and they do not become a director of the issuing company, or a connected company.
There is also an exception for unpaid directors, as long as they have never been involved in carrying on any part of the trade carried on by the issuing company. This is similar to the EIS provisions.
Where the conditions are met, qualifying gains attract a lower CGT rate of 10% up to a lifetime limit of £10 million. The lifetime limit remains unchanged despite the BADR equivalent being reduced to just £1 million.
Because IR can apply to any unquoted trading company shares issued on or after 17 March 2016, taxpayers with managed portfolios - particularly those which have specialised interests within these - such as AIM shares etc. - may have qualifying disposals they are unaware of. Additionally, care should be taken to identify shares that may have been unquoted at the time of the investment that became quoted later on - remember that a listing after the investment does not necessarily disqualify the shareholder from claiming IR. HMRC's guidance on IR can be found on Help Sheet 308 - available here.
One of the fundamental requirements for re-claiming input tax on a VAT return is the need to have a valid VAT invoice. A valid invoice must include certain requisite information, such details of the goods or services procured, the VAT registration number of the supplier, their address, and show the amount of VAT on a separate line to the cost of the expense.
HMRC routinely carry out VAT inspections for compliance purposes. If they find invoices that don't meet these requirements there will be classed as invalid VAT invoices. If this happens there are a number of ways things can go. The worst-case scenario is the denial of the input tax claim, which could also lead to further problems if HMRC feel it's likely that invalid invoices have been issued previously. However, there are strategies that can prevent things getting that far.
Firstly, the supplier should be contacted immediately. If they are a legitimate VAT-registered business, they should have no problem replacing the invoices with versions that meet the requirements. However, with many businesses closing due to COVID-19 over the last 18 months, it's possible that there is no supplier available to contact.
If this is the case, it may still be possible to claim the input tax if alternative evidence can be provided. The claimant will also need to demonstrate to HMRC that they attempted contact the supplier to obtain valid invoices in the first instance. It's worth obtaining evidence of the business' closure, for example a screen-print of the website stating that is no longer trading or similar.
Essentially, HMRC will want evidence that shows that supply has actually been made to the person making the claim, and that this was subject to VAT at the appropriate rate. They will also want the claimant to show that payment was made, which could be done by matching bank statements to PO details etc.
HMRC's guidance at VIT31200 details the questions the compliance officer will be asking themselves when checking alternative evidence. It's another reminder that sound internal business records are a vital part of securing the correct tax deductions, including those for VAT input tax.
HMRC has issued a reminder to working parents that Tax-Free Childcare (TFC), the scheme the government phased in between 2017 and 2018, is not just for "traditional" childcare costs, such as regular hours after school during term time. It's also possible to use the account to pay for things like accredited clubs or sports activities over the summer.
TFC is available for children aged up to 11 generally and takes the form of a top-up scheme - parents pay into the account and HMRC tops it up with an additional £2 for every £8 deposited, subject to a three-monthly cap of £500.
If a family is not yet registered for the scheme, the eligibility and details can be found here.
Q1. My partner has been suffering with "long COVID" for several months, and unfortunately has had to leave her job as a result. As our son is in his second year of university, we can't really afford the drop in income, and so I am taking a second job. The hours will vary, but I am certain that the additional income will push me into the higher rate tax band for 2021/22. I have heard that the NI contributions I pay should be capped as a result, but I'm not sure how to go about securing this. Do I need to make a claim?
A: You are correct that the amount of NI you pay at the main rate, i.e. 12%, is restricted to your earnings up to the higher rate threshold. For earnings above that, the charge is 2%. The problem is that the NI system is completely separate from the tax system so this won't automatically be sorted out by your PAYE code or self-assessment tax return (if you file one).
One option would be to contact the NI office to request a deferment on your second employment which will restrict the NI charge to 2%. The problem with this is that if your earnings from your main job are below the higher rate threshold, some of the earnings from the second job should actually be subject to the 12% rate so you may need to make an additional payment after the end of the tax year. If you want to follow this route fill out the application form CA72A and send it back to the address on the form.
If you would prefer not to have a bill later down the line, you can allow the overpayment to occur initially and claim a refund after the year-end by writing to:
Personal Tax Operations
North East England
You will need to explain the circumstances that led to the overpayment, and preferably include a calculation of the estimated refund due.
Q2. I am very keen on investing in entrepreneurial companies, and over the years have made several investments that qualified for the EIS. Two years ago, I made such an investment, and three months later gifted half of the shares to my wife. Unfortunately, we have recently separated (amicably) and are managing our own straightforward divorce. She has mentioned the possibility of selling the shares I gifted to her, but the minimum holding period has not expired. Will I be subject to income tax relief clawback?
A:Once shares qualifying for EIS relief have been gifted to a spouse or civil partner, in this case your wife, she is treated as subscribing for them in the first place, rather than you. If she subsequently sells them before the termination date, it will be her who must pay any income tax relief clawback. It would obviously be better if she could wait until the termination date has passed before selling the shares, but if she needs the money this may not be an option. Depending on when you separated, it may be possible to effectively swap assets with no CGT consequences, e.g. she transfers the EIS shares back to you in exchange for other shares of a similar value. However, this will only be effective if the transfers take place in the same tax year that the permanent separation occurred. So, if the marriage broke down in a way that was likely to be permanent before 6 April 2021 this won’t be an option. It is suggested that you speak with your accountant or tax adviser about this before making any transfers.
Q3. I am a builder who is registered for the CIS. The vast majority of my work is as a subcontractor for a number of large companies. I am VAT registered and so have been subject to the new reverse charge rules since 1 March 2021. However, the changes combined with a downturn in work due to COVID-19 has seriously affected my finances. Could I use the Cash Accounting Scheme to help with this?
A:Unfortunately, you can’t use the scheme for services which are subject to the domestic reverse charge so signing up to the scheme wouldn’t help you there. However, if you now find that you are submitting repayment VAT returns each quarter you can ask HMRC to allow you to submit monthly returns which will obviously speed up your input tax claims and improve your position. The downside is that you will have to submit 12 VAT returns a year instead of four so you will have to weigh up the benefit against the additional administration.
1 - Due date for payment of Corporation Tax for accounting periods ending 31 October 2020
2 - P46 (Car) deadline for the quarter to 5 July 2021
7 - Electronic VAT return and payment due for the quarter ended 31 June 2021
16 - Claim deadline for employers for furlough days in July
19/22 - PAYE/NIC, student loan and CIS deductions due for the month to 5/8/2021
31 - The last date to submit PSA figures to HMRC in order to be advised of the payable amount by payment deadline in October