To November’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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Latest News Round Up
The 2021 Autumn Budget was relatively quiet in terms of tax-related announcements, and the Finance Bill 2021/22 published on 4 November was similarly thin on new changes, consisting to some extent of measures that had already been announced, e.g. the abolition of basis periods.
Part 2 of the Bill introduces the draft legislation for the new Residential Property Developer Tax (RPDT). Businesses falling within the remit of the new tax will pay 4% on relevant profits, subject to an allowance of £25 million (or a pro-rated amount where the accounting period is less than 12 months long. The tax will commence for accounting periods ending on or after 1 April 2022, with periods straddling that date being apportioned.
RPDT will only apply to companies. The legislation is perhaps most useful for the key definitions, and exceptions and it is worth reviewing the explanatory notes accompanying the Bill.
Self-Employment Support Scheme (SEISS) and cryptocurrency
HMRC are writing to some businesses that claimed the first three rounds of the SEISS grants in 2020/21, requiring urgent action to be taken. The affected businesses are those that have received payments under the scheme, but have:
– not filed a return for 2019/20; or
– filed a return with no self-employment or partnership pages included.
Being self-employed during the previous tax year was a prerequisite for claiming under SEISS. HMRC are requesting that the missing information is filed within 30 days of the letter, or the amounts will need to be repaid, with penalties applicable.
A “nudge” letter is also being sent to individuals that own crypto assets, such as Bitcoin. The letter advises such individuals that such assets may trigger CGT liability if disposed of, and directs the recipient to further online guidance to help review the position.
HMRC’s accounts audit for 2020/21 yielded a qualified opinion from the National Audit Office and revealed that tax revenues for the year fell by 4.4%, or £27.9 billion. The fall was partly attributed to lower business revenues having a knock-on effect on the tax take – however, it’s also clear that the easing of enforcement action during the pandemic also contributed.
The Department for Work and Pensions has launched a new online service for applying for an NI number. However, demand is currently high, with current wait times estimated at almost four months. Employees with the right to work in the UK can be set up on a payroll system in the interim with their name and two lines of their home address.
Partial exemption And B2B Services From Overseas
When a supply of services is from one business to another, i.e. a B2B supply, the general rule is that supply is treated as taking place wherever the customer is located, rather than the supplier. As an example, if a website design business is located in Belgium and they provide services to a VAT-registered business in the UK, it does not charge Belgian VAT as the supply takes place in the UK. This has always been the case, so the situation has not changed following Brexit, but some businesses may be making errors due to uncertainty – for example, ignoring imported supplies altogether when it comes to the VAT returns.
The correct treatment for such supplies is for the UK business to account for VAT in Boxes 1 and 4 of the VAT return, i.e. making a reverse charge entry. This is a straightforward mechanism, and there is no net cost to a business that can fully recover input tax.
Certain services are subject to a different place of supply rules, and these can be found in section 6.4 of VAT Notice 741a.
There can be further complications where the UK business is partially exempt. If the service imported relates to both taxable and exempt activities, the box 1 entry will include output tax at the standard rate, but the corresponding input tax entry in Box 4 will need to be restricted. If the service is wholly used for taxable activities, no restriction will be required.
The value of the imported services should be excluded from the apportionment calculation for the residual input tax where the standard, or another output-based method, is being used.
As it is approaching one year since the end of the Brexit transition agreement, it is worth checking the reporting of imported services now, with errors corrected in the usual way, i.e. on the next return or by written disclosure as appropriate.
Discovery Assessments: Time Limits, The Staleness Concept, And Finance Bill Changes
The discovery assessment provisions in s. 29 of TMA 1970 permits HMRC to make an assessment for underpaid tax in certain situations. The time limit for raising the assessment depends on the behaviour that led to the underpayment. The standard time limit is four years from the end of the relevant tax year, but this increases to six years in cases of carelessness. Where there has been deliberate behaviour leading to an underassessment, the time limit is 20 years.
A discovery assessment is a valuable tool in HMRC’s arsenal, as these time windows are considerably longer than those for raising enquiries. However, it is important to understand that s. 29 only gives HMRC the power to raise an assessment, not to open an enquiry outside the window.
In the case of Raymond Tooth (R), a number of aspects of the legislation were considered that are important to understand in practice. A discovery assessment can only be made if there is a genuine “discovery” of an inaccuracy leading to an underpayment of tax (this can include an omission of income). R had entered into a tax planning arrangement that involved employment losses. A disclosure was made in the additional information pages, and the losses were recorded in the partnership pages of the return due to limitations with the software used.
HMRC opened an enquiry, but were later informed that they had done so under the wrong statutory provision. Being out of time to open a valid enquiry, a discovery assessment was raised. Due to the length of time that had elapsed since the end of the relevant tax year, HMRC needed to show there was a deliberate inaccuracy in order for the s. 29 assessment to be valid.
The case progressed all the way to the Supreme Court, via both tax tribunals and the Court of Appeal. All four courts found in favour of R, but for slightly different reasons on each occasion.
On the matter of whether there was a deliberate inaccuracy, the Supreme Court stated that a “deliberate inaccuracy” means one that is deliberately inaccurate, rather than a deliberate statement which transpires to be inaccurate. The difference is subtle, but important. The Court held that for a statement to be deliberately inaccurate “there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so”.
The Court decided that there was no inaccuracy, due to the quantum of the figures being correct when looking at the return as a whole – albeit some were in the wrong place. Had R simply included the figures on the partnership pages with no explanation, the decision may have gone the other way – which underlines the importance of making a disclosure in the white space whenever there is any potential for confusion. In any case, the judges also said that even if the use of the “fudge” did constitute an inaccuracy, they were not convinced it would have been deliberate, meaning the shorter time limit applied and HMRC would have been out of time with the assessment anyway.
The Upper Tribunal had found that there was no valid discovery because HMRC had taken the view that there was an inaccuracy five years prior to raising the assessment (for the reasons explained above). The discovery was therefore “stale” due to the time that elapsed. This view was upheld by the Court of Appeal. The Supreme Court dismissed the concept of staleness, pointing out that there is no mention of it in the statutory provisions or in previous case law. The judges’ view was that there is no need for such a concept, as the taxpayer is already protected by the statutory deadlines.
It is important to understand that this represents the opinion of the judges, but as it was not essential to the crucial facts of the case in hand, it is merely an observation made “in passing”, so it does not set a legal precedent. However, it does indicate the likely way that a case that did rely on an argument of staleness would go if heard.
Finance Bill changes
The Finance Bill 2021/22 contains clauses to bring the High-Income Child Benefit Charge (and certain other charges that are collected via self-assessment but are not directly attributed to income or gains) firmly within the remit of s. 29. This follows the Upper Tribunal decision of Jason Wilkes, which held that there was no legal right under s. 29 to collect these charges.
Controversially, the provisions will be retroactive – a move which is very rarely popular, though HMRC’s argument is that the change is merely a clarification of the law. The forthcoming Court of Appeal decision will consider the matter in detail based on the existing law.
The legislation will not apply retrospectively to those individuals who previously received a discovery assessment and:
– who submitted an appeal to HMRC, on the basis of the arguments considered by the upper tribunal, on or before 30 June 2021(the date at which the Upper Tribunal handed down its decision in the relevant case.); or
– whose appeal, made on or before 30 June 2021, has been stood over by the Tribunal pending the final outcome of the relevant litigation.
Avoiding Wasted Capital Losses
There were rumours that CGT rates were going to be increased at the Budget. These eventually proved to be incorrect, but there are still commentators that feel it is only a matter of time before changes are made with the huge COVID-19 related borrowing to finance for years to come.
As a result, many individuals may be contemplating selling assets to lock in the existing rates. Some may have already done this ahead of 27 October without seeking advice. As a result, a refresher on the way relief for capital losses operates is timely.
The first thing to note is that capital losses cannot be carried back to earlier tax years, unless they relate to earn out rights or are realised in the year the taxpayer dies. So, if there were considerable gains in 2020/21, triggering losses in 2021/22 won’t reduce the CGT payable.
Instead, capital losses are first offset against gains arising in the same tax year. This is automatic – there is no scope to restrict the amount of loss used to preserve the annual exempt amount, which is deducted from net gains after losses are offset.
If there are no gains, or if there are excess losses that can’t be relieved in the same year, the amount carries forward to offset gains in future years. However, the annual exemption is then applied first, so the losses will only be used if there are gains that exceed this (currently £12,300). There are a few planning points that result from these rules.
In terms of maximising tax relief, it will only be worth selling assets standing at a loss in the same year as there are capital gains if those gains exceed the annual exempt amount. If an individual has already sold assets at a loss, and the in-year gains are not sufficient to exceed £12,300, they could look to realise further gains ahead of 5 April. Alternatively, they can wait until the next tax year to realise any gains so the loss is secured to carry forward.
Example. Alan sold some shares at a loss of £8,000 ahead of the Autumn Budget. Earlier in the year he had realised a £10,000 gain on cryptocurrency. As things stand, the loss will reduce the gains to £2,000, which will be covered by the annual exemption. This is inefficient, as offsetting the loss won’t save any tax. Alan could look to trigger a further £10,300 of gains. If he manages to do this the loss would reduce the gain to the level of the annual exemption. There would be no CGT bill in either case, but Alan will have additional tax-free money in his bank account.
Where there are losses that carry forward, the planning changes slightly. There is no time limit on capital losses, so they do not “run out”, though as time goes on there can be a risk of forgetting about them, meaning they go unutilised. The main planning point in these circumstances is to remember that gains of up to the annual exemption can be made before the loss starts to offset them. Many individuals will have a managed portfolio set up to just use up the annual exemption (which is wasted if it isn’t used each year). These individuals can look to realise additional gains with no CGT charge due to the losses. The gains can then be reinvested into the portfolio, or otherwise used as the individual sees fit.
November Questions and Answers
Q1. My company has issued a new class of shares to my adult children. However, these have been issued unpaid – with the amount available to be called at any time, though more likely to be paid in increments over the next few years. Both children work for the company full time. Is there an issue with a potential s. 455 charge?
A: HMRC’s view used to be that where shares had been issued but remained wholly or partly unpaid, s. 455 should apply to the outstanding amount. However, following the judgment in a First-tier Tribunal hearing in 2014 it changed this stance. The situation now is that s. 455 won’t usually apply to these arrangements.
However, there is anti-avoidance legislation in s. 464A of CTA 2010 that can mean a charge arises in some circumstances, but this would only be the case where the shareholder uses the unpaid share capital to extract profits or assets from the company with no tax charge. It’s unlikely that this will apply to the simple family company situation you describe. There is of course no harm in familiarising yourself with the guidance though.
Q2. Earlier this year, one of our employees was permitted to take one of the company-owned projectors we use for seminars home for a couple of months to use for films and sports screenings. The company didn’t need this as we were prohibited from organising in-person events at the time. I happened to mention this to our accountant who is adamant that there will be a tax charge, but as the employee only had the equipment for six weeks, I was under the impression that private use was minor (i.e. only six weeks out of 52, and then only for a few hours a day). Who is correct?
A: Your accountant is right, the amount of time the equipment was used for is irrelevant, it’s the fact that it was available for the employee’s personal benefit that is the key factor. However, the charge is likely to be relatively low due to the short duration. Assuming the asset is owned rather than leased, to work out the reportable amount, you need to make a reasonable estimate of the value of the asset at the time it was first made available to the employee. You multiply this by 20%, and then pro-rate to ensure that the charge is restricted to the six-week loan period. So, if the equipment was worth £1,000, the chargeable amount would be £1,000 x 20% x 42/365 = £23. A higher rate taxpayer would therefore pay just £9 in tax on this, which seems like a reasonable price to pay compared to, say, leasing similar equipment. Of course, if the value of the equipment is considerably more, the charge will increase.
The other thing to note is that there will also be a Class 1A NI charge on the company, and the £23 benefit will need to be reported on the P11D.
Q3. I am in the process of selling a buy-to-let property. My conveyancer has warned me that I need to complete a “30-day CGT return”. However, I’m sure I read that I can just wait and include the sale on my tax return instead. Is this correct?
A: You need to do both. A UK property return is required, though the window has now been increased to 60 days after completion following the Budget last month. You need to make a best estimate of any tax due on the disposal, taking into account any losses that have arisen prior to the completion date, as well as any private residence relief and available annual exemption. You will then report the gain on your self-assessment return, claiming a deduction for the advance payment.
November Key Tax Dates
1 – Due date for payment of Corporation Tax for accounting periods ending 31 January 2021
7 – Electronic VAT return and payment due for quarter ended 30 September 2021
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/11/2021