Archive April 2020

Tax Question of the Week – Duty to Deduct Tax

I have a company client and they have taken a number of loans in recent years that remain outstanding, business is improving and the company is going to start paying interest on those loans. They have a mixture of loans; one from the director, one from a UK company and one from a company abroad.

My question is: Does the company have to deduct tax before making the interest payments?

The duty to deduct tax in respect of interest payments will differ in each of the 3 scenarios so let’s have a look at each in turn.

The relevant legislation is contained within the Income Tax Act of 2007 (“ITA 2007”).

The duty to deduct basic rate (20%) income tax is set out in Section 874 ITA 2007 and imposes the duty to deduct income tax on ‘yearly’ interest paid in certain circumstances. There is no statutory definition of the term ‘yearly’ however, a useful discussion of the term can be found in various HMRC manuals. Please see INTM413210 and SAIM9075.

In our first scenario, where the company is paying interest to an individual. The company will have to deduct basic rate tax and it will also have to complete and submit form CT61 within 14 days of the end of the quarter return period. Further guidance can be found here.

In the second scenario where the company is paying another UK resident company, the payment can be made gross of tax as prescribed by Section 933 ITA 2007. Further guidance can be found here, CTM47540. It is worth noting that the guidance sets out an exception to this rule, for example when the person receiving the interest is only acting in the capacity of a nominee.

The third scenario involves a payment to a non-resident company. The basic position is that tax would need to be deducted at the basic rate. However, it is possible for a double taxation agreement (DTA) to override this basic position. That is to say that the obligation can be changed or removed where both a claim is made and the DTA allows for this. Often a DTA will allow for a reduced rate of tax to applied. The actual rate will vary country to country.

There is a requirement to make a claim, the treaty rate cannot simply be applied automatically. As the recipient is a non-resident company the claim is made via a form; ‘DT Company” which can be found here.

Alternatively, It is possible for a non-resident company to register for the Double Taxation Treaty Passport (DTTP) Scheme and then it would then be possible for the UK company to apply the treaty rate without the need to make an application.

Each DTA will bring its own peculiarities and the situation is a little more complex in respect of royalties. As such, we would ask that you call us to discuss these aspects further.

Finally, it is worth noting that the UK does not withhold tax in respect of dividends.

VAT Question Of The Week – Retained Deposits Following the Cancellation of Supplies

My client is a limited company running a soft play centre and amongst many other things, is worried about the impact of Coronavirus on their VAT obligations. Several customers have already decided to forego their deposits and cancel birthday parties, and the book-keeper has had to self-isolate for 14 days. What does the client need to do about the VAT already paid over to HMRC for the deposits, and what should they do if they are concerned that they may not be able to submit their VAT return, or make the payment on time?

Until 1 March 2019, HMRC allowed businesses to treat retained deposits for cancelled supplies as compensation and therefore outside the scope of VAT, as long as the customer hadn’t used the service, or collected the goods.

However in 2018 HMRC reviewed its policy following judgements by the Court of Justice of the European Union (CJEU), and issued Revenue and Customs Brief 13 (2018) confirming that the policy was to change with effect from 1 March 2019.

This means that where a deposit is paid towards the balance of supply, and the supply is subsequently cancelled, the deposit paid cannot later be reclassified as compensation, and remains payment for a supply, albeit that supply is now unfulfilled. This means my client cannot make any VAT adjustments on deposits for unfulfilled supplies unless the deposit itself is refunded to the customer.

Regarding my client’s worry about their ability to file returns and pay on time, The Chancellor recently announced that HMRC has set up a dedicated helpline serviced by an extra 2,000 staff, for businesses who may be struggling to submit returns on time because of isolation issues, or struggling to pay because of a downturn in business. You should contact HMRC as soon as you become aware of a potential issue on their dedicated helpline which is 0800 0159 559.

Tax Question of the Week – Relief for Losses on Loans to Traders

My client, an individual, recently made me aware of a loan he had made to a trading company which has since ceased to trade and become insolvent. As a result there is a substantial sum left owing to him that he will never recover. I am aware that capital loss relief may be available in such circumstances and that the relief may be claimed in an earlier tax year. Can you please remind me of the conditions and limits in terms of how far the relief may be carried-back?

Section 253 of TCGA 1992 provides relief for irrecoverable amounts of loans made to traders in the form of a deemed capital loss, which can be relieved in the same way as an actual capital loss. Relief may therefore be claimed against capital gains of the year of claim or carried-forward to the first available gain(s) of subsequent tax years.

However, the legislation also permits a claim to specify an earlier date, not more than two years before the tax tear of the actual claim, provided that the amount was also irrecoverable at that earlier date. On this basis, my client could make a claim for the current tax year, but also for either of the two preceding tax years 2017/18 or 2018/19 if this were more beneficial, providing that it can be shown that the loan was irrecoverable in the earlier years.

The relief is claimed on the capital gains pages of the self-assessment tax return in the same way as an actual loss would be claimed.

HMRC’s view is that claims cannot be made for part-only of the amount outstanding at the time of claim, except in the following circumstances:

 “…a claim that a part of an outstanding amount of a loan has become irrecoverable may be admitted where:

  • the debtor has been placed in bankruptcy, receivership or liquidation: and
  • the receiver or liquidator has announced an anticipated dividend in respect of unsecured debts and has indicated that no further dividends are likely.’

(HMRC Capital Gains Manual, CG65956).

Relief under these provisions is also available to companies, but only where relief cannot be obtained under the Loan Relationships legislation (s.253(3) TCGA 1992).

Please note that for loans made before 24 January 2019 the borrower is required to be resident in the UK.  However, a proposed amendment in the 2019/20 Finance Bill is due to remove this condition so that claims can be made regardless of the borrower’s tax residency –  https://www.gov.uk/government/publications/capital-gains-tax-relief-on-loans-to-traders/capital-gains-tax-relief-on-loans-to-traders

Tax Question of the Week – Pension Annual Allowance

I have several Self-Assessment clients for whom I am concerned that the annual allowance charge (‘AAC’) is applicable but they have not received any statements from their pension schemes alerting them to the issue. What approach may I take to ensure that I’m correctly reporting the charge on the client’s tax return?

When we get calls to the advice line about the annual allowance charge, it often emerges that we can’t progress to discuss how the charge is calculated because the caller doesn’t have sufficient information from their client about pension inputs in the year.

The circumstances under which a pension scheme administrator must issue a statement to a scheme member are quite limited: broadly, that will only be where the member’s pension input amount for the tax year exceeds the annual allowance (reg. 14A SI 2006/567 – see HMRC’s Pensions Tax Manual PTM167100). However, the scheme administrator is looking at one particular pension arrangement in isolation but the AAC applies when pension inputs across all registered pension schemes exceeds the available annual allowance. Also, since 2016/17 there has been a possibility that the full annual allowance is tapered down to as little as £10,000 if the taxpayer’s income is sufficiently high. Therefore, for either or both of these reasons, it is perfectly possible that someone’s total pension input amount has exceeded the available annual allowance without triggering an automatic issue of a pension input statement from any of the schemes of which she is a member.

Where someone is contributing a to ‘Relief at Source’ arrangement (where their contribution is treated as being made net of Basic Rate tax that is then claimed from HMRC by the scheme) information on those contributions will usually be handed over to the accountant as part of the process of preparing the Self-Assessment Tax Return because that will be needed to claim relief from higher rate tax. The information can then be used very easily to establish the pension input to those schemes as a result of the individual member’s contributions. However, where the pension scheme is set up differently (for example NHS superannuation or an employer’s defined benefit scheme) the pension input amount cannot be calculated based on the contributions made by the member into the scheme.

As a matter of good practice, you could build into your procedures for gathering information for the return, a request that your client puts in a request to the administrator (as provided for by Reg. 14B SI 2006/567 – see PTM167300) for each of their scheme to produce a statement of pension inputs annually so that all of the information is available before work on drafting the SATR begins, even if the conditions for an automatic issue of the statement have not been triggered.

VAT Question of the Week – Exception from Registration

My client has been trading as a contract cleaning company since July 2018. The company breached the VAT registration limit early this month, September 2019, under the “backward” rolling 12 month rule. However, the director has been experiencing ill health and is looking to sell the business at the beginning of 2020. Does the company still need to VAT register, knowing that the turnover will be below the deregistration limit in the next 12 months? I seem to recall that HMRC will accept this as a basis for not registering.

The policy you are thinking about is known as exception from registration. HMRC have discretion to except a business from registration where they have gone over the VAT limit under the backward (but not forward) look and crucially, can demonstrate at the time of exceeding, that there are reasons why the turnover will drop below the deregistration limit (currently 83K) in the next 12 months. Further information can be found regarding exception from registration and the application process at https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg19000.

This should not be confused with the forward look for deregistration, where a business still trading can apply for deregistration if it can satisfy HMRC that the taxable turnover in the next 12 months will not exceed the deregistration limit.

The legislation underpinning this is contained in paragraph 4(1) Schedule 1 VAT Act 1994:

4(1) Subject to sub-paragraph (2) below, a person who has become liable to be registered under this Schedule shall cease to be so liable at any time after being registered if the Commissioners are satisfied that the value of his taxable supplies in the period of one year then beginning will not exceed £83,000.

However paragraph 4(2) goes on to say:

4(2) A person shall not cease to be liable to be registered under this Schedule by virtue of sub-paragraph (1) above if the Commissioners are satisfied that the reason the value of his taxable supplies will not exceed £83,000 is that in the period in question he will cease making taxable supplies, or will suspend making them for a period of 30 days or more.

Although, on the face of it, paragraph 4(2) appears to apply specifically to deregistration cases, HMRC’s policy is to apply it equally to decisions in respect of exception from registration. This policy has been tested and upheld in the First Tier Tribunal (Lane [2016] TC 04815) and in the High Court (Gray v C & E Commrs [2000] BVC 396). Therefore, it is highly unlikely HMRC will accept my client being excepted from registration solely on the basis that they intend to sell the business, unless they can demonstrate a palpable downturn in turnover due to perhaps the director’s ill-health.

COVID-19 Latest summary

UK Government financial support

The following provides a summary of the UK Government financial support packages that may apply to you.

Small Company Director

For these individuals, they normally pay themselves through a mix of PAYE and Dividends.

It is important to note that, at the current time, Dividends are not covered by any UK Governments financial support packages.

Coronavirus Job Retention Scheme

  • You will be able to contact HMRC for a grant to cover most of the wages of your PAYE part of your income if you decide to furlough yourself.
  • This will cover 80% of your usual monthly PAYE costs up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.
  • Grants are backdated to 1 March 2020 and the scheme is expected to be up and running by the end of April 2020.
  • If you furlough yourself, you are not able to provide services to or generate revenue for, or on behalf of your company. This could include tweeting from an official account or on behalf of the company. Also, you cannot make phone calls or discuss the firm or its business.
  • However, you will be able to perform your statutory directorial duties while furloughed. For example, relating to filing documents to Companies House at the correct time.

Coronavirus Business Interruption Loan Scheme

  • Launched Monday 23 March 2020
  • Eligible for UK based SMEs with turnover of no more than £45 million per annum (although all lending decisions delegated to the lending partners)
  • The business must have a borrowing proposal which the lender:
    • would consider viable, were it not for the COVID-19 pandemic
    • believes will enable you to trade out of any short-term to medium-term difficulty
  • It will be interest free for 12 months
  • Further details included in the separate Coronavirus Business Interruption Loan Scheme document

VAT payments

  • If you’re a UK VAT registered business and have a VAT payment due between 20 March 2020 and 30 June 2020, you have the option to:
    • defer the payment until a later date
    • pay the VAT due as normal
  • HMRC will not charge interest or penalties on any amount deferred as a result of this change.
  • You will still need to submit your VAT returns to HMRC on time.
  • HMRC will continue to process VAT reclaims an refunds as normal during this time.
  • If you choose to defer your VAT payment, you must pay the VAT due on or before 31 March 2021.
  • You do not need to tell HMRC that you are deferring your VAT payment.
  • If you normally pay by Direct Debit you should contact your bank to cancel your Direct Debit as soon as you can, or you can cancel online if you’re registered for online banking.
  • VAT payments due following the end of the deferral period will have to be paid as normal.
  • Further information about how to repay the VAT you’ve deferred will be available soon. Income tax payments
  • If you’re due to pay a self-assessment payment on account by 31 July 2020, then you may defer payment until January 2021.
  • You are eligible if you are due to pay your second self-assessment payment on account on 31 July. You do not need to be self-employed to be eligible for the deferment.
  • The deferment is optional. If you are still able to pay your second payment on account on 31 July, you should do so.
  • This is an automatic offer with no applications required. No penalties or interest for late payment will be charged if you defer payment until 31 January 2021.
  • During the deferral period you can set up a budget payment plan to help you pay the deferred payment on account when it comes due.

Income tax payments

  • If you’re due to pay a self-assessment payment on account by 31 July 2020, then you may defer payment until January 2021.
  • You are eligible if you are due to pay your second self-assessment payment on account on 31 July. You do not need to be self-employed to be eligible for the deferment.
  • The deferment is optional. If you are still able to pay your second payment on account on 31 July, you should do so.
  • This is an automatic offer with no applications required. No penalties or interest for late payment will be charged if you defer payment until 31 January 2021.
  • During the deferral period, you can set up a budget payment plan to help you pay the deferred payment on account when it comes due.

Universal Credit

  • You may be able to get Universal Credit if:
    • you’re on a low income or out of work
    • you’re 18 or over (there are some exceptions if you’re 16 to 17)
    • you’re under State Pension age (or your partner is)
    • you and your partner have £16,000 or less in savings between you o you live in the UK.
  • You can apply for Universal Credit online. If you are eligible you will need to make an appointment for your new claim interview. This interview will take place by telephone with a work coach. You will be given the number to call to book this appointment when you have submitted your claim.
  • The Universal Credit standard allowance and working tax credit basic element will be increased for the next 12 months by £1,000 a year.
  • This means that for a single Universal Credit claimant (aged 25 or over), the standard allowance will increase from £323.22 to about £406 per month.

 

Statutory Sick Pay (SSP)

  • For your PAYE element, you can get £94.25 per week Statutory Sick Pay (SSP) if you’re too ill to work. It’s paid by your company/employer for up to 28 weeks.
  • If you are staying at home because of COVID-19 you can now claim SSP. This includes individuals who are caring for people in the same household and therefore have been advised to do a household quarantine.
  • The Government is legislating for SSP to be paid from day 1, rather than day 4, of your absence from work if you are absent from work due to sickness or need to stay at home due to COVID- 19. Once the legislation has been passed, this will apply retrospectively from 13 March.
  • If you have COVID-19 or are advised to stay at home, you can get an “isolation note” by visiting NHS 111 online, rather than visiting a doctor.
  • For COVID-19 cases this replaces the usual need to provide a “fit note” (sometimes called a “sick note”) after 7 days of sickness absence.

Small business rates grant

  • The government will provide additional Small Business Grant Scheme funding for local authorities to support small businesses that already pay little or no business rates because of small business rate relief (SBRR), rural rate relief (RRR) and tapered relief.
  • This will provide a one-off grant of £10,000 to eligible businesses to help meet their ongoing business costs.
  • You are eligible if:
    • your business is based in England
    • you are a business that occupies property
    • you are receiving small business rate relief or rural rate relief as of 11 March
  • You do not need to do anything. Your local authority will write to you if you are eligible for this grant. Any enquiries on eligibility for, or provision of, the reliefs and grants should be directed to the relevant local authority.

Scottish Government support for business

  • £10,000 grants for small businesses in receipt of the Small Business Bonus Scheme or Rural Relief.
  • 1.6% relief for all properties, effectively freezing the poundage rate next year.

 

Northern Ireland Executive support for business

  • COVID Small Business Grant – small business grant of £10,000 to be issued immediately. This is for all businesses with a NAV up to £15,000. Landlords and renters

 

Landlords and renters

  • From 26 March 2020, landlords will have to give all renters 3 months’ notice if they intend to seek possession (i.e. serve notice that they want to end the tenancy) – this means the landlord can’t apply to start the court process until after this period.
  • This extended buffer period will apply in law until 30 September 2020 and both the end point, and the 3-month notice period can be extended if needed.
  • This protection covers most tenants in the private and social rented sectors in England and Wales, and all grounds of evictions. This includes possession of tenancies in the Rent Act 1977, the Housing Act 1985, the Housing Act 1996 and the Housing Act 1988. After 3 months if the tenant has not moved a landlord needs to apply to court in order to proceed.
  • Tenants are still liable for their rent and should pay this as usual.
  • Landlords will be protected by a 3-month mortgage payment holiday where they have a Buy to Let mortgage.
  • Landlords remain legally obligated to ensure properties meet the required standard – urgent, essential health and safety repairs should be made.

Personal Credit

  • If you need additional financial support because of coronavirus with an existing arranged overdraft, you will be able to request from your provider that up to £500, on your main personal current account, is provided at 0% for up to three months.
  • You can ask for a three-month payment freeze or to pay a nominal payment on credit cards, store cards and catalogue credit.
  • If you have a personal loan, you can ask for a three-month freeze if needed.
  • Further details included in the separate Regulatory support for individuals with consumer credit document.

 

Tax Question Of The Week – Entertainment & Promotional Costs

Last year my client launched a new product and arranged a marketing event to publicise it. The expenditure was a mixture of food, drink, and promotional gifts and the hire of a conference center. I am preparing the tax computation for the company and so would any of this expenditure be disallowable?

When preparing the tax computation, you should adjust the trading profits by adding back disallowable items, such as any element of client entertaining as explained below.

Statutory background

The general rule is that no tax deduction is allowed in calculating the profits of a trade for expenses incurred in providing entertainment or gifts in connection with the trade (s1298 CTA 2009)

The term ‘entertainment’ is defined to include ‘hospitality of any kind’ and the expenses incurred in providing entertainment or a gift are defined to include ‘expenses incurred in providing anything incidental to the provision of entertainment or a gift’.

Establishing whether the costs are promotional or entertainment

HMRC’s view is that the food and drink costs are hospitality and so always disallowable under s1298 CTA 2009 – unless the hospitality provided is “minimal” (BIM45050).

In the case of Netlogic Consulting Ltd v HMRC (2005) SpC 477, the costs were split between food and drink provided and the cost of hiring the room. The courts found that the room hire was an allowable tax deduction because based on the facts of the case it was established that ‘the entertainment was incidental to the promotional purpose of the meeting, rather than the hire of the room being incidental to the provision of the entertainment’.

Check that the costs of advertising and marketing do not fall within the definition of entertaining. HMRC’s view at BIM45050 sets out to clarify the matter:

An example of allowable expenditure is an event arranged by a car manufacturer to allow potential customers to test drive new cars. However, if the manufacturer arranges a golf day at which test drives are available then only the direct costs of the test drives and of any publicity material provided are not disallowed by the legislation.

Similarly, the costs of a book launch at which food and wine are provided and where the author and invited guests are entertained together with journalists and booksellers is disallowable under the legislation. However, where any hospitality provided is minimal no disallowance need be made.’

Gifts provided at the event

If gifts were provided at the event there are four sets of circumstances within s1300 CTA 2009 (see BIM45065) which will not deny a tax deduction and relief will be due. These are:

  • Case A is where the gift is of an item which it is the trader’s trade to provide, and the item is given away in the ordinary course of the trade in order to advertise to the public generally.
  • Case B is where the gift incorporates a conspicuous advertisement for the donor.

However, this relaxation does not apply if:

  1. the item consists of food, drink, tobacco or of any token or voucher exchangeable for goods; or
  2. the cost of the gift to the donor, taken together with the cost to him of any other such articles given by him to that person in the same ‘basis period’, exceeds £50. In calculating this total, the cost of such items as are referred to in (a) above (food, etc.) are ignored;
  • Case C is where gifts are provided for the trader’s employees unless gifts are also provided for others and the provision for employees is incidental to the provision for others; and
  • Case D covers gifts given to a charity, to the Historic Buildings and Monuments Commission for England, and to the Trustees of the National Heritage Memorial Fund

Exceptions

S1299 CTA 2009 provides an exception to the business entertaining rule that concerns the entertainment of employees. Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers (see BIM45033 and BIM45034) This includes a staff Christmas party or other event open to all employees provided by the employer.

There may, of course, be other tax repercussions involving VAT input tax recovery and BIK issues for employees.

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