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Welcome...
To March's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
If you need further assistance just let us know or you can send us a question for our Question and Answer Section.
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.
Please contact us for advice in your own specific circumstances. We're here to help!
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Covid-19
There have been relatively few announcements related to Covid-19 support this month. The only real announcement of note was an amendment to the terms of the Pay As You Grow scheme for repaying Bounce Back loans. Under the revised rules, a borrower will be able to take a six-month repayment holiday without needing to have made any previous instalments. Before the amendment, they would have needed to have made at least six payments before this was an option. Full details are available here.
Self-assessment
A welcome announcement in February confirmed that there would be a relaxation of the self-assessment filing penalties for the 2019-20 round of tax returns. Usually, a 5% tax-geared penalty applies where the tax owed under self-assessment remains unpaid 30 days after the 31 January due date. This year, no penalty will be charged as long as the taxpayer has either:
- Paid the tax due; or
- Agree a time-to-pay plan
by the end of the day on 1 April 2021. However, interest will still apply from 1 February at 2.6%.
This follows on from the earlier announcement that late filing penalties would be waived if returns were filed no later than 28 February.
Budget and 2021-22 tax data
The delayed budget will take place on 3 March 2021. The lack of publication of the 2021-22 rates and thresholds has frustrated accountants and tax advisers (and their software providers) across the country. However, there have been at least some confirmations to allow preparation for the new fiscal year. These are all subject to parliamentary approval at the time of writing.
Tax rates and thresholds
The personal allowance will increase in line with CPI inflation - to £12,570. The basic rate band will increase from £37,500 to £37,700 for taxpayers in England, Wales and Northern Ireland. This means the higher rate kicks in at £50,270 accordingly. The personal allowance abatement threshold and additional rate threshold both remain unchanged.
For Scottish taxpayers, there are no significant changes to the tax rates or bands - merely a slight uplift to reflect inflation.
The rates and bands for 2021-22 for Scottish taxpayers are as follows:
Scottish starter tax rate
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19% on annual earnings above the PAYE tax threshold and up to £2,097
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Scottish basic tax rate
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20% on annual earnings from £2,098 to £12,726
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Scottish intermediate tax rate
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21% on annual earnings from £12,727 to £31,092
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Scottish higher tax rate
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41% on annual earnings from £31,093 to £150,000
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Scottish top tax rate
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46% on annual earnings above £150,000
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National Insurance
The government has confirmed that the Class 1 National Insurance thresholds will also change. The relevant figures for 2021-22 will be as follows:
Lower earnings limit
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£120 per week
£520 per month
£6,240 per year
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Primary threshold
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£184 per week
£797 per month
£9,568 per year
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Secondary threshold
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£170 per week
£737 per month
£8,840 per year
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Upper secondary threshold (under 21)
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£967 per week
£4,189 per month
£50,270 per year
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Apprentice upper secondary threshold (apprentice under 25)
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£967 per week
£4,189 per month
£50,270 per year
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Upper earnings limit
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£967 per week
£4,189 per month
£50,270 per year
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Further information relevant to employers, for example for payments made under Statutory Sick/Maternity/Paternity Pay rules can be found here.
Self-employed and voluntary NI
The draft regulations governing NI also confirm the proposed rates and thresholds for Classes 2, 3 and 4 NI.
Class 2 will remain at £3.05 per week, but the small profits threshold will increase to £6,515 (up by £40).
Class 3 voluntary contributions will increase to £15.40 (an increase of 10p).
For Class 4, there is no change to the applicable rates. However, the lower and upper profit limits will increase - to £9,568 and £50,270 respectively.
Taxable benefits
The fixed multipliers for company vans and fuel provided for company vans, as well as the fixed multiplier for fuel provided for company cars have also been confirmed as follows:
Company van benefit
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£3,500
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Company van fuel benefit
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£669
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Company car fuel multiplier
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£24,600
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One of the consequences of Brexit is that exports of goods from GB to customers based in the EU are now zero-rated as far as UK VAT is concerned. However, if the consignment is valued at more than £22 there will be an import VAT liability at the other end. This isn't too much of a problem for B2B sales where the customer is VAT registered - they can simply claim back the VAT according to the particular process relevant to that country. However, for unregistered businesses and B2C customers, there are issues.
One problem is that customers who are used to paying UK VAT at 20% may now be faced with higher rates, for example a customer in Sweden will need to pay 25% on standard-rated goods. There are reports of EU customers abandoning UK businesses due to the complications and extra costs.
There are further, more complicated, rules to consider where the goods were originally imported to GB from outside the EU. Customs duties, such as dumping duty, may be payable depending on the country of origin.
Becoming the importer
Some customers simply don't want to be responsible for the customs procedures in their home country. A freight forwarder may be able to handle this for the seller, paying the import VAT due over to the VAT authorities directly (usually on a monthly basis). This will smooth the process for the customer but will incur fees for the selling business. There have also been reports of the system breaking down, for example where insufficient import VAT is paid meaning the goods are held up at customs, despite the seller assuring the customer that this would be avoided.
A further potential solution is for an exporting business to register for VAT in the customer's country and import the goods themselves. In this way, they become responsible for the customs declarations and import VAT - which they can then reclaim via their overseas VAT returns, charging their customer sales VAT. The problem with this is that it requires registration in every individual country that the seller exports into. There are legal requirements in some countries that mean a local fiscal representative must be appointed, i.e. the seller can't use their UK-based accountant. The local representative may be required to accept joint responsibility for any unpaid VAT, which can make this avenue prohibitively expensive due to the (understandably) high fees.
However, there is some good news in this regard with the introduction of the Import One-Stop-Shop (IOSS) - due to launch in July 2021.
IOSS - July 2021
From 1 July 2021, the £22 low consignment exemption will be scrapped. All EU imports will then be subject to VAT in the relevant country of import. However, for consignments with a total aggregate value of less than £150 the VAT will be charged at the point of sale, rather than at the point of arrival in the customer country. UK-based businesses can register for the IOSS as "non-Union sellers". This should help small traders selling goods directly to consumers, as the result is more akin to the pre-Brexit position for the customer. However, the reporting requirement will be different.
In order to report the VAT, the seller can use the new IOSS. This will require VAT registration in just one EU member state, rather than each individual country sales are made in. A business registering for the IOSS will receive a unique number that must be quoted on all shipments to the EU. A single IOSS VAT return will then be filed monthly to declare all import VAT due. A single cash payment will then be made to the tax authority in the chosen country of IOSS registration. UK input tax related to those sales will of course continue to be included on the domestic UK VAT return, so a payment will still be required - even if the UK return shows a refund is due. Any VAT paid on expenses in the EU will not be claimed on either a UK VAT return or an IOSS return. A separate claim must be made in a paper format to the tax authority where the VAT was paid, known as a 13th Directive claim. See the EU published guidance for information on how to do this.
The IOSS is optional and a business can opt to follow the overseas registration route to pay and reclaim the import VAT, or use the Special Arrangements (e.g. a freight forwarder or customs agent) to have the import VAT collected from the customer instead.
Further information about the IOSS should be published later in the year.
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Reporting Covid-19 support payments
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A business receiving support payments for Covid-19 needs to ensure the receipt is correctly recorded as taxable income for corporation tax purposes. For unincorporated businesses using the cash basis, this is straightforward enough. However, where the accounts are prepared using GAAP, more care is needed.
Section 106 of Finance Act 2020 that payments received under the following schemes are within the scope of this:
- the coronavirus job retention scheme;
- the self-employment income support scheme;
- any other scheme that is the subject of a direction given under section 76 of the Coronavirus Act 2020 (functions of Her Majesty's Revenue and Customs in relation to coronavirus or coronavirus disease);
- the coronavirus statutory sick pay rebate scheme;
- a coronavirus business support grant scheme;
- any scheme specified or described in regulations made under this section by the Treasury.
Schedule 16 then deals with the tax treatment of the income, as well as exemptions for charities, charitable companies and community amateur sports clubs.
In a nutshell
The basic rule is that the payments are taxable when they are recognised using GAAP. This means that they should be reported in the period they relate to, rather than when they are received. This is based on the date that the business becomes entitled to the payment, not the date it is paid. As an example, the first tranche of LA grants based on the business premises' rateable value were approved on 11 March 2020, and based on the RV at that date, as long as the business was still trading. There were no performance conditions, so an eligible business became entitled to the grant on 11 March 2020, and this is the correct date to use for recognising the income.
However, there are some important exceptions to this general rule.
Firstly, receipts under the Self-Employed Income Support Scheme (SEISS) are taxable in 2020-21, even if part of this is attributable to the period before 6 April 2020.
Secondly, if a business ceases trading but subsequently receives a coronavirus support payment, the income is included for the year it is received, even if this gives a different result than under GAAP.
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Venture Capital Trusts - are the dividends exempt?
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When preparing a tax returns, it is easy to look at a dividend statement from a VCT and think "It"s exempt” and simply file it away. Of course, in most cases this is probably sufficient. However, sometimes a little more care is needed.
Dividend exemption
Where an individual aged 18 or over acquires qualifying shares up to the permitted annual maximum of £200,000, any dividends paid on the shares whilst the VCT remains approved are exempt from tax. In addition, if the VCT shares are newly issued, the individual may qualify for income tax relief in a similar way to EIS shares.
The individual does not have to subscribe for new shares. VCT shares are traded on regulated markets and so it is relatively easy to acquire second-hand shares. The second-hand shares cannot attract income tax relief, which can only be claimed once in respect of the same shares, but the dividend tax exemption is available, provided the shares were bought for genuine commercial purposes. Exempt dividends do not need to be reported on a tax return.
VCT shares often form a substantial part of a managed investment portfolio. The investment manager will send a consolidated income certificate, and it is common practice to include the consolidated figures on the tax return It is important when preparing the income tax return to check whether qualifying VCT dividends have been accounted for properly, that is to say they have been left out of the consolidated income statement which is produced for tax purposes. If not, then a manual adjustment will need to be made.
Restriction: limit exceeded
In cases where shares with more than £200,000 are acquired in a tax year, the dividend exemption is restricted to the first £200,000 of shares bought. For example, if £300,000 shares were purchased, only 2/3rds of the dividends will be exempt.
Restriction: VCT approval withdrawn
Dividends are only exempt if the VCT retains its approved status. If this is lost, the treatment of dividends depends on the type of approval the VCT had:
- If the VCT had received full approval, but this is subsequently withdrawn, any dividends paid after the withdrawal date will be fully taxable.
- If the VCT approval was only provisional, and this is removed because (for example) some condition of the provisional approval was not met, the VCT is treated as never having been approved. In these circumstances, therefore, any dividends paid during the period of provisional approval will need to be taxed.
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March questions and answers
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Q. I am looking at buying a rundown pub/restaurant ready for this summer, assuming it will be allowed to open. I need to spend approximately £100,000 on building works. Can I register for VAT straightaway or do I need to wait until I open?
A: Yes, you can register for VAT as long as you are intending to make taxable sales at some point in the future. As the building has already been used in a trade, check whether there is an option to tax it in force. If so, see if the seller would be prepared to revoke it if possible. This should save you some SDLT, and you won"t need to pay the VAT up front, meaning there is a cash flow advantage too.
Q. Two years ago, I sold my business to a company for £200,000 cash up front. There was also an earn-out deal that would see me receive a percentage of sales above a certain hurdle. This was valued (and taxed) at £100,000 at the time. Due to the coronavirus, I have actually only received £30,000. Can I offset the £70,000 shortfall against my income? I have no other capital gains and am very unlikely to have any going forward.
A: A shortfall on an earn-out right is a capital loss and, unlike certain other capital losses, cannot be offset against general income. However, you can elect to carry the loss back to the year the original disposal took place in to reduce your capital gain. You need to make this election in writing and include a calculation showing how you have worked out the loss.
Q. I have been subject to a drawn-out enquiry by a HMRC officer for nearly two years. I have acted in good faith and provided everything that I have been asked to send in, but the officer keeps asking for more and more paperwork. I"m confident that no errors have been made and have written to her to ask for a closure notice, but this has been refused. Is there a way I can force the issue?
A: You can apply to the Tribunal to ask it to direct HMRC to close the enquiry using form T245, which you can obtain here. It may be worth contacting the officer to inform them of your intentions. It might just give them the nudge needed to close it down of their own accord.
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1 - Due date for payment of Corporation Tax for accounting periods ending 30 May 2020.
1 - New rules on domestic reverse charge for the construction industry take effect.
7 - Electronic VAT return and payment due for quarter ended 31 January 2020.
15 - Claim deadline for employers for furlough days in February.
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/3/2021.
31 - Last date for expenditure on Energy Saving Plant & Machinery to qualify for enhanced capital allowances at 100%.
31 - Due date for any payments delayed under the VAT Deferral Scheme in 2020, unless the new payment scheme is opted into - see here.
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Whether you are a large limited company or just starting out we can help you manage all your financial matters from book keeping and wages to annual accounts and raising finance. Visit our website https://www.morganhemp.co.uk for more information.
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Disclaimer
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.
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103-104 Walter Road, Swansea, SA1 5QF
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