Welcome to December’s Tax Tips & News, our newsletter 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 pays 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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Latest News Round Up
The first tax sites in the Freeports announced at the Spring Budget have now been designated, meaning that businesses operating within them can now access some of the reliefs.
The sites are located in three of the eight Freeport sites; namely Humber, Thames and Teeside as follows:
– Humber – Hull East and AMEP
– Teeside – Teesworks East and West, and Wilton International
– Thames – Dagenham, Tilbury and London Gateway
As a brief reminder, the tax breaks now available will include 100% first year allowances for plant and machinery, as well as an enhanced 10% allowance for buildings and structures, business rates relief and SDLT relief. From April 2022, a 0% rate of secondary Class 1 NI will also apply to certain qualifying workers. For further information, view the statement on the government website.
The Autumn Budget was silent on the next phase of Making Tax Digital for VAT (MTDfV), which means that, unless there is an 11th hour delay, the extension of the rules to businesses that are voluntarily registered will go ahead from April 2022. It’s estimated that this will affect 750,000 businesses. MTDfV will become a requirement from the first VAT period beginning on or after 1 April 2022. VAT Notice 700/22 details the requirements of MTDfV. Some businesses may look to deregister ahead of being mandated in; however, these will need to carefully weigh up the potential compliance savings with the additional cost of not being able to recover input tax – as well as possibly needing to account for VAT on stock and assets. A limited number of businesses may qualify for a digital exclusion exemption and can now apply for this.
Recent concerns with a backlog of self-assessment registrations being processed appear to have been assuaged, with HMRC making a statement saying that this would be cleared by the end of December, meaning that all taxpayers should have a UTR number with which to make an electronic payment by the 31 January deadline. In the unlikely event that this does not happen, it is possible to make a payment by cheque by generating a payment slip using the NI number and posting it to HMRC.
HMRC will no longer pay tax credits, child benefit or guardian allowance into accounts with the Post Office. If claimants did not provide new banking details by 30 November, payments will cease until they do so.
The tax return filing season is always busy and, as a result, taxpayers may be more susceptible to scams or phishing emails purporting to be from HMRC, i.e. where they have recently submitted a return. HMRC’s warning includes the following sound advice points:
“Never let yourself be rushed. If someone contacts you saying they’re from HMRC, wanting you to urgently transfer money or give personal information, be on your guard.
HMRC will also never ring up threatening arrest. Only criminals do that.
Scams come in many forms. Some threaten immediate arrest for tax evasion, others offer a tax rebate. Contacts like these should set alarm bells ringing, so if you are in any doubt whether the email, phone call or text is genuine, you can check the HMRC scams advice on GOV.UK and find out how to report them.”
Suspicious emails can be forwarded to email@example.com and texts to 60599.
Taxpayers who have not yet filed their returns for 2020/21 will need to do so by 30 December if they want to have any liability included in their tax code. If this date is missed, the liability will need to be paid in full by 31 January 2022, or a payment plan agreed with HMRC by that date.
Using The Import One-Stop-Shop For Low Value Sales
The old low-value import VAT threshold of €22 was abolished in June 2021. All exports (which now include sales of goods to the EU) are subject to VAT. Where the total value of the shipment doesn’t exceed €150, the seller can opt to charge VAT at the point of sale in order to avoid the customer needing to pay import VAT in their member state, which can lead to delays.
The new Import One-Stop-Shop (IOSS) can be used for these sales, which can simplify reporting. If a business registers for the IOSS, it will account for VAT on a monthly return in the country it chooses to register for the scheme in. This means the business can benefit from a single VAT registration to trade with all 27 EU member states for low-value sales. This avoids the need to either have customers deal with import VAT or have multiple VAT registrations.
Upon registration, an IOSS registration number will be issued. This will need to be used for all eligible shipments, and the invoice should also be used as evidence that the shipment does not exceed the €150 limit. HMRC must also be informed of the registration and IOSS number.
A potential problem with the scheme is that non-EU businesses normally need to appoint an EU-based representative who will be responsible for filing the IOSS returns and accounting for the VAT. This is not required where a mutual assistance agreement exists, but to date, there is no accepted agreement between the UK and the EU, so appointing an intermediary is compulsory. This will involve additional costs, and so the overall costs and benefits of using the scheme should be carefully weighed up.
EIS – FTT Considers Risk To Capital Condition
The enterprise investment scheme (EIS) is a collection of tax incentives aimed at encouraging private investment into younger trading companies. EIS is well established; however, the rules have been subject to various changes and additions over the years.
In summary, the reliefs available on a qualifying investment are:
– income tax relief of 30%;
– capital gains tax reinvestment relief;
– capital gains tax exemption for the EIS shares themselves;
– automatic share loss relief against income (subject to adjustment for income tax relief given).
Of course, as the reliefs are very generous there are myriad conditions to be met before HMRC will approve an investment as qualifying. Some of these relate to the underlying company, some to the investor, and some to the mechanics of the investment itself.
The nature of the various reliefs has seen EIS become a target for promoters designing investment opportunities into companies that just about meet the qualifying conditions but, in reality, are aimed at capital preservation, i.e. securing the relief with a high probability of returning the capital to the investors after the minimum holding period ends. HMRC was concerned that the scheme was not operating as intended and was, for example, allowing projects, where the money raised, was being used to buy property.
To combat this, a “risk to capital” condition was introduced in 2017. All prospective investments must meet this condition before HMRC will issue a positive advance assurance opinion or an EIS3 form.
The condition has two legs, both of which must be met.
The first leg is that the company must have objectives to grow and develop in the long term and that the prospective investment will assist with this. Neither the term “grow and develop” or “long term” are defined statutorily, and so are open to interpretation.
The second leg is that there must be a significant risk that investors will lose money by making the investment. Any arrangements which are aimed at reducing risk, or at capital preservation, will fall foul of this.
Taking both legs together, the risk to capital condition is considerably more subjective than other conditions for EIS relief. It is therefore inevitable that case law will eventually be required to examine the two legs.
The First-tier Tribunal in CHF PIP! PLC v HMRC looked at the first leg of the test. In this case, the issuing company had acquired intellectual property rights relating to animated programs and merchandise. This IP was exploited by outsourcing the production and licensing to companies under common control with CHF PIP! PLC.
A number of shares were issued in tranches in 2018, and the company submitted a compliance statement under the EIS provisions. HMRC refused relief on the basis that, in their view, the company was not carrying on a qualifying trade, and in any case did not meet the risk to capital condition.
In order for the issuing company to meet the condition relating to carrying on a qualifying trade, it must be undertaking activities that are not excluded under the legislation, and this must be done on a commercial basis with a view to realising profits. In the first instance, the tribunal looked at whether the receipt of royalties and licence fees was an excluded activity. However, this was not the case because there is an exception from being excluded if this type of receipt relates to the exploitation of relevant intangible assets.
The tribunal considered that the issuing company was indeed trading, despite the outsourced activity. However, in part due to steadily decreasing turnover and losses made for six successive years, the tribunal decided that the trade was not being undertaken on a commercial basis with a view to a realistic profit at the time the shares were issued – despite the fact that a new steering committee had been appointed. In particular, the tribunal pointed to the fact that the appetite for the content of the sort the company produced was significantly declining.
Failing the qualifying trade test was enough to ensure that no EIS relief could apply. However, as HMRC had raised the question of the risk to the capital condition as part of its argument, the tribunal went on to consider the first leg, i.e. whether the company had objectives to grow and develop in the long term.
The commentary extends to just a single paragraph:
“Secondly, as regards the risk to capital condition, I find that at the relevant time it is not reasonable to conclude that Pip had objectives to grow and develop its trade in the long-term. I say this for the same reasons as I have given for coming to the conclusion that Pip was not trading on a commercial basis with a view to profit. The risk to capital condition has an objective element and it is my objective view that Pip did not have the objectives of growing and developing its trade in the long term. The aspirations of the steering group which Miss Brown has given as evidence of that long-term objective are wholly unrealistic when tested against the trading history and financial performance of Pip between 2011 and 2018.”
Possibly the most interesting part of this appears to be the judge’s willingness to look back in order to look forward, i.e. to look at the recent trading history to determine whether long-term growth and development was a realistic objective. Whilst the decision may be appealed, it appears to indicate that merely having an intention for growth and development will not be enough – that intention needs to be realistic and realisable as well.
Let Property: Improvement v Repair
The tax rules property for businesses has changed considerably since 2010, for example, the restriction of relief for financing costs to the equivalent of a basic rate tax reducer (at best). Almost all these changes have been made with the aim of making property letting less attractive. This makes it all the more important to ensure legitimate deductions are correctly identified and claimed.
One area where there is often confusion is the issue of whether work done on the property constitutes a repair, in which case the cost is allowable as a deduction against income (i.e. a revenue cost), or an improvement which is capital in nature and can only be deducted against the proceeds of the eventual sale.
The problem is that it’s not always a clear distinction. As an example, it should be fairly clear that building a new extension is a capital cost. However, would this still be the case if the extended part became damaged and had to be replaced?
HMRC’s guidance in the property income manual is a helpful starting point. Their approach is that where there is significant capital improvement the cost is likely to be capital in nature. However, where the capital improvement is incidental, the whole cost can be included as a revenue expense.
Of particular interest is the point where a repair or replacement of part of a building leads to an element of capital improvement, but this is due to the use of modern materials, the cost remains revenue in nature. The examples given are:
– wooden beams with steel girders, and
– lead pipes with copper or plastic pipes.
As a general rule, the landlord should therefore be able to offset anything that involves a replacement with broadly equivalent materials.
Where there is both capital expenditure and revenue expenditure, a reasonable apportionment may be made if, for example, a single invoice has been issued.
December Questions And Answers
Q1. I recently made an investment of £100,000 under the Seed EIS scheme. However, as I don’t have much income in the current tax year, I am going to make a carryback claim. I have also read that there is a 50% CGT exemption available. Should I sell some of my listed share portfolios to take advantage of this?
A: Unlike the main EIS, the Seed EIS exemption you are talking about can only be matched to gains made in the year that the shares are acquired or treated as acquired – i.e. the year the income tax relief will be effective. If you make a carryback claim you will only be able to match the investment to gains made in 2020/21, so selling shares to generate gains won’t work. You’ll need to compare the overall relief using a carryback claim against not doing so and triggering gains to utilise the exemption.
Q2. Our company is selling some fixed assets that are used for the trade. As a result of downscaling, we need to purchase some new equipment. Around half of the sales proceeds will be used to fund this. Is there a way to put off the corporation tax charge on any gain?
A: Gains on fixed assets are most likely to arise on trading premises, rather than say plant and machinery. Where again arises, the company can look to claim rollover relief, or partial relief, where some or all of the proceeds are used to purchase replacement assets. The new assets do not need to be of the same type as the old assets, so for example you could sell a building and use the proceeds to purchase a new plant and machinery. To qualify, the new assets must be purchased in the period starting one year before and ending three years following the date of disposal of the old assets. As you are only going to be using half the proceeds, you will be looking at a partial relief claim. HMRC’s Helpsheet 290 contains guidance on how to calculate this once you know the figures.
Q3. We operate in the hospitality sector. I am preparing our VAT return for the quarter ended 30 November 2021 and am confused about which rate to use, as the temporary rate of 5% changed to 12.5% on 1 October. Should we have applied the new rate as it was changed partway through the quarter?
A: No, there was no pre-emptive legislation regarding this, so the usual tax point rules apply. Anything that had a tax point on or before 30 September should have been subject to 5%. As long as you have correctly applied the 12.5% rate from 1 October onward, you will be fine. Don’t forget that the rate will revert to 20% from 1 April 2022.
December Key Tax Dates
1 – Due date for payment of Corporation Tax for accounting periods ending 28 February 2021
7 – Electronic VAT return and payment due for the quarter ended 31 October 2021
19/22 – PAYE/NIC, student loan and CIS deductions due for the month to 5/12/2021
30 – The last date to file a tax return for 2020/21 if the liability is to be coded out
31 – Corporation tax return deadline for the year ended 31/12/2020