To September'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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We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.
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September is the final month of the furlough scheme, subject to any last-minute extension. Employers will need to top up the government's contribution, which is now 60% of wages (up to a maximum cap of £1,875) to ensure the employee receives the requisite 80% (up to £2,500). The deadline for claiming the government contribution for this final month will be 14 October.
HMRC's guidance on the fifth SEISS grant was revised on 20 August to clarify that claimants that became partners during 2020/21 should work out their share of the partnership's turnover based on the effective percentage of profit they received for 2020/21.
Making Tax Digital
Following the announcement on basis period reform (see August newsletter for more detail), several professional bodies have voiced concern that the staging date for Making Tax Digital for Income Tax Self-Assessment will fall one year earlier than businesses may have been preparing for. The proposals are currently that MTD for Income Tax will be compulsory from the first period starting on or after 6 April 2023. The basis period reform proposals as drafted will force all basis periods after 2022/23 to start on 6 April, and so by definition all self-employed businesses will be mandated into MTD from 2023/24 at the latest, instead of 2024/25 as may have applied otherwise. The professional bodies have written to the Financial Secretary of the Treasury to ask that the timing of the changes be reconsidered so that they are not simultaneous.
Following the December 2019 review of the loan charge, a number of schemes were confirmed to be outside its remit. In particular, loans taken before 9 December 2010 and loans taken after that, but before April 2016 (as long as a sufficient disclosure was made and HMRC took no action) became outside the scope of the charge. This meant that anyone who had made payments under the 2017 Settlement Scheme may request a refund.
In order to do this, a repayment claim must be made by 30 September. Further information and contact details are available here.
Temporary Hospitality VAT Rate
Currently, there is a temporarily reduced VAT rate of 5% applicable to hospitality supplies (excluding alcohol). This was introduced in response to COVID19 last year. From 1 October, this rate will rise to 12.5% until 31 March 2022 before returning to the standard 20% rate. Affected supplies are food and drink, overnight accommodation and admission fees to most attractions.
The normal tax point rules (i.e. the earlier of the invoice date or payment date) will apply to supplies paid for on or before 30 September but consumed later on, and so VAT savings could be enjoyed by prepaying for things like Christmas parties (though as mentioned previously, alcohol is still subject to 20% VAT in any case) before the change takes place.
The Trust Registration Service will open for all UK non-taxable trusts, save for those that are specifically excluded, from 1 September. Further information on which trusts are affected is available here.
Companies are able to relieve losses for tax purposes, subject to certain restrictions. These restrictions have been relaxed slightly in recent years, e.g. allowing companies to claim trading losses against other profits for future trading years.
However, COVID19 has seen many businesses, including companies, closing down. It is also anticipated that further insolvencies will occur once government assistance, such as furlough, ends, and companies are required to start making repayments on the various loan programmes introduced during the pandemic. As a result, terminal loss relief may prove more important over the next year.
Where a company ceases trading, terminal loss relief allows it to carry back trading losses that arise in the final 12 months of the trade and set them against profits from the same trade made in any or all of the three years up to the end of the period immediately prior to the period the loss was made in.
Note that the current temporary extension to sideways loss relief also extends the offset period to three years for losses incurred in financial years 2020 and 2021. However, terminal loss relief is not subject to a cap. Further detail regarding the extension is available here.
Since April 2017, a company can also include unused carried forward losses in a terminal loss relief claim, which can enhance relief. However, the three-year period for carried forward losses ends with the date the trade ceases.
A Ltd's final accounting period (and final trading period) begins on 1 January 2023 and ends on 31 December 2023. Losses incurred in the final 12 months of trading can be relieved in the three years ending 31 December 2022. Any carried forward losses can be relieved in the three years to 31 December 2023.
The time limit for claiming losses also varies slightly depending on whether the loss is a "final 12-month" loss or a carried forward loss. If the claim is for a loss arising in the final 12 months of a trade, the deadline is two years from the end of the accounting period the loss is made in. If the claim is for unused carried forward losses, the deadline is two years from the end of the accounting period in which the trade ceased. These can, but will not always, be the same date.
The self-assessment system includes the right for HMRC to make enquiries to ensure the correct amount of tax is collected. However, these rights and the underlying time limits etc. are often a source of confusion. They have changed since self-assessment was introduced in the 1990s, which some taxpayers are completely unaware of.
Previously, HMRC had one year from the filing deadline to open an enquiry if the return was filed on time. It didn't matter if the return was filed early. The problem with this was that it provided an incentive to file the return as late as possible to keep the enquiry window short. For example, filing a return at the end of May would mean an enquiry window of 20 months, whereas waiting right up until the deadline would shorten this to twelve months.
If the return is filed after the normal filing date, the enquiry window is twelve months from the end of the quarter in the return was submitted. The quarter days are 31 January, 30 April and so on. For example, if you submitted your 2019/20 tax return on 1 May 2021, HMRC has until 31 July 2022 in which to start an enquiry.
The rules changed in 2008, and now HMRC has twelve months from the date the return was submitted - again this is dependent on the return being filed on time. The quarter day rules still apply for late returns. This means that there is no longer an incentive to file returns close to the deadline in order to shorten the enquiry window.
An important point is that the deadline relates to when the taxpayer is informed about the enquiry, not the date HMRC decides to open it. If a letter notifying an enquiry is sent close to the deadline, it may be out of time if it does not arrive until after the deadline has passed. HMRC has guidance that it uses to benchmark when notices are likely to have been delivered, in particular saying:
"Unless the contrary is proved, the notice is taken to be delivered as it would have been through the ordinary course of post. Royal Mail's published position is that second class post takes up to 3 working days to be delivered and first class post takes 1 working day. Working days include Saturdays but not Sundays or Bank Holidays. You should consider how long the post takes to leave the office when considering. If you are ever in doubt as to whether a notice will be sent in time using Royal Mail, send it via tracked delivery instead so we have proof of receipt."
The notice must be made in writing. An HMRC officer cannot open an enquiry via a phone call, for example by contacting the taxpayer on the deadline day saying that a letter will be coming out.
Where an amended return is filed, HMRC has a further twelve months from the date of that filing. However, any additional time beyond the normal enquiry deadline only applies to the part of the return that was subject to the amendment.
Once the enquiry deadline is passed, HMRC can no longer open an enquiry. However, they can raise an assessment if it "discovers" that tax has been underpaid due to omitted or incorrect information. The right to make a discovery assessment should not be confused with an extended enquiry window. The legislation permits HMRC to recover the underpaid tax only, and the onus is on HMRC to prove the loss of tax. The deadline for raising this type of assessment depends on whether the loss arose from a simple mistake, careless behaviour or deliberate action, and will be 4, 6 or 20 years respectively.
It is good practice to check the deadlines for enquiries and assessments where they are received. Taxpayers can (and have) ask the Tribunals to cancel assessments that have been issued late.
In most cases, it doesn't make sense to simply give away money to save tax during a person's lifetime. For example, a higher rate taxpayer can claim tax relief to offset their income tax bill on qualifying donations made via the gift aid scheme. However, the cost of the donation will always exceed the relief, so it doesn't make sense to make additional donations purely from a tax perspective, though they can be useful for helping to avoid things like the high-income child benefit charge.
However, when it comes to the interaction with wills and charitable bequests, there can be circumstances where increasing the amount given away can actually mean there is more money left over for the beneficiaries.
Since 2012, a reduced rate of inheritance tax (IHT) of 36% applies where at least 10% of an estate is left to a qualifying charity. On the face of it, this is simplistic, but as is often the case there are complications once the details are examined.
For one thing, it is not always necessary to bequeath 10% of everything owned. The estate is split into three components:
- Survivorship assets. Property owned jointly with others and which automatically passes to them upon death.
- Settled property. This refers to the part of the estate, if any, that is held in trust.
- Everything else. Charitable bequests are treated as coming from this first.
The 36% tax applies to any of these where 10% or more of it (after taking into account a proportion of the nil-rate band and other reliefs) is donated, i.e. so that the reduced rate may apply to some assets, but the full rate applies to others.
However, it is also possible to make an election to merge components and compare the charitable gifts to their aggregate value. If the gifts exceed 10% of the aggregated value, the reduced rate can apply to more than one component. Let's illustrate this with a straightforward case study.
Mark's estate is worth £1.2 million. This consists of family company shares worth £500,000, a joint share in the home worth £450,000 and chattels worth £250,000. Mark dies in 2021, leaving the company shares to his two children, £35,000 to a charity, and the remainder to his wife Karen.
There is no settled property, so we only need to look at the survivorship and general components.
This consists of the interest in the property of £450,000, less the proportion of the nil rate band, i.e. £325,000 x (450,000/(450,000 + 250,000 - 35,000) = £219,925. So, the baseline survivorship component is £230,075. Note that the residence NRB is not deducted.
This consists of the family shares, less 100% BPR, i.e. £nil, as well as the chattels worth £250,000. The donation is treated as coming from this component for the purposes of calculating the baseline so the chargeable value is £215,000, less the remaining nil rate band of £105,075, i.e. £144,925.
The donation is, therefore, more than the 10% baseline for either component in isolation, for example, the assets in the general component could be taxed at 36%, but the merging election wouldn't work here because the aggregated baseline is £375,000, so £35,000 is less than 10%.
However, the beneficiaries could make a deed of variation to increase the contributions. This could actually mean that they end up with more money.
Charlie dies in 2021. There are no survivorship assets or settled property in the estate, which is worth a total of £1,325,000. Charlie left £80,000 to a cancer charity. The baseline here is £1,325,000 less the nil rate band, i.e. £1 million. As the donation is not at least 10% of this, the £920,000 net estate is charged at 40%, i.e. a bill of £368,000. The beneficiaries will receive £877,000. However, if the donation was increased to £100,000, the 10% test would be met. The IHT bill would be £324,000. The beneficiaries would receive £901,000, i.e. the additional £20,000 donation has actually saved them money due to the reduction in IHT of £44,000.
While it won't always pay to make additional donations, this should be kept in mind when drafting wills, or when looking at death estates where some charitable donations have already been made.
Q1. I am an IT consultant that has just returned from Jersey where I was undertaking some work for the government. I want to raise my invoice now, but don't know whether to add VAT or not following Brexit?
A: You don't need to add VAT here as the Channel Islands are not part of the UK for VAT purposes, and your professional services are of a qualifying type specified in VAT Notice 741A. This is unaffected by Brexit as the Islands are also outside the EU. The good news is that you can still claim input tax on any UK costs relating to the consultancy work!
Q2. I am in the very fortunate position of being promoted this year, despite the effects of COVID19 on our company's trade. Now that we are starting to recover from the lockdown restrictions, I have been told I can choose a company car, subject to an overall spending threshold (including optional extras). Am I right in thinking that as long as the emissions do not exceed a certain threshold, there is no taxable benefit?
A: Firstly, congratulations on your promotion. Whilst low emission vehicles have always attracted relatively favourable tax treatment for income tax purposes, I'm afraid there is no longer any possibility of a zero benefit in kind treatment for any vehicle provided by an employer available for private use. The most tax-efficient option is to choose a wholly electric vehicle, but even this will attract a charge of at least 1% of the list price.
Q3. I own the freehold interest in a building that has recently been leased to a tenant for 23 years. We have received a premium for this and will also receive an annual rent payment. Is the premium a capital sum?
A: As the lease duration is less than 50 years, part of the premium will be treated as an income receipt. Generally, the shorter the lease, the more "income-like" it is in nature in HMRC's eyes. You will need to use the formula Premium x [50-Y/50] to work out how much should be declared as income, and how much as a capital gain. Y in the formula is the number of complete years other than the first in the term of the lease, i.e. you will use 22 here.
1 - Due date for payment of Corporation Tax for accounting periods ending 31 November 2020
7 - Electronic VAT return and payment due for the quarter ended 31 July 2021
14 - Claim deadline for employers for furlough days in August
19/22 - PAYE/NIC, student loan and CIS deductions due for the month to 5/9/2021
30 - Deadline to claim a refund of loan charge payments already paid where the scheme has been deemed outside the scope of the charge following December 2019 review
30 - last day of temporary hospitality VAT rate at 5%, rising to 12.5% from 1 October