Archive September 2020

VAT Question of the Week: LIABILITY OF COMMISSION ON THE SALE OF A SITED CARAVAN

My client operates a holiday caravan park, so the sources of income they receive are pitch fees and commission. The commission the client receives is for selling sited caravans on behalf of the owners.

A caravan was sold on a customer’s behalf on the 16th July 2020 and the customer is saying the commission invoice raised by the caravan park should be at the reduced rate of 5% is this correct?

The government announced on the 8th July 2020 the introduction of a temporary reduced rate of VAT on certain supplies of hospitality, hotel and holiday accommodation and admission to certain attractions. The temporary reduced rate will have effect from 15th July 2020 to 12th January 2021. Included in this temporary reduced rate are pitch fees for caravans and tents.

The supply of a caravan pitch is the grant of a licence to occupy land and the liability will depend on the nature of the pitch. Pitch fees and rents received for granting caravan owners the right to keep their caravans on the pitches is either exempt or standard rated.

My client operates as a holiday caravan park and the provision of pitches for holiday or leisure sites is standard rated, therefore the liability of the commission received will also be standard rated.

However, as the temporary reduced rate allows the pitch fee to be at the reduced rate of VAT, the commission that my client has received will follow the same liability and will be reduced rate.

My client must meet the condition that the entitlement to commission falls under the Mobile Homes Act 1983, Caravan Act (Northern Ireland) or the terms of the licence agreement (contract).

VAT Notice 701/20 section 3.4

A caravan owner may sell a caravan ‘on site’ at your park to which you’re entitled to commission under the Mobile Homes Act 1983 (as amended), Caravan Act (Northern Ireland) 2011 or the terms of the licence agreement (contract). The commission you receive is to be treated as additional payment for the pitch and follows the liability of the pitch fee or rent.

This provision is applicable from 15th July 2020 to 12th January 2021 and as the client’s supply was within this period the commission is at the reduced rate.

If there are additional charges made to the seller which are over and above the commission allowed by the pitch agreement, these are standard rated.

Tax Question of the Week: R&D

My client company is undertaking a research and development project and I have capitalised the costs incurred during the period as an intangible fixed asset in the accounts. These costs are predominately staff costs and sub-contractor payments and would qualify for R&D tax relief under the SME scheme. Does the fact that this revenue expenditure is not shown in the profit and loss account for the period mean that it cannot be included in the companies R&D claim?

To qualify for corporation tax relief under the SME scheme s1044(5) CTA 2009 states that the qualifying R&D expenditure must be allowable as a deduction in calculating the profits of the trade for the period.

Subject to restrictions for certain business-related intangible assets (goodwill, etc.) the general rule for corporation tax relief for the costs of intangible assets is that the tax treatment follows the accounting treatment. It would therefore appear that the company can only receive tax relief for these costs and benefit from the additional R&D deduction when they are amortised.

However, in these circumstance s1308 CTA 2009 provides that R&D expenditure that is not of a capital nature and is brought into account in determining the value of an intangible asset is not prevented from being allowable as a deduction in calculating the company’s profits for corporation tax purposes.

This will therefore work to allow a tax deduction for 100% of the qualifying expenditure incurred in the accounting period which in turn would then qualify for the additional 130% deduction calculated in accordance with the R&D rules in Part 13 of CTA 2009 being the total staff costs and 65% of sub-contractor payments. In turn, s1308 CTA 09 also states that any amortisation shown in the accounts for these costs will not be an allowable deduction for corporation tax purposes.

VAT Question on the Week: VAT IMPLICATIONS OF A SUCCESSFUL HOBBY

My client is a young snooker player whose reputation is growing in the professional game. What started as a hobby many years ago, has now morphed into a commercial prospect of realising profits for income tax purposes. Since the start of 2020 he has been winning competition prize money, is receiving appearance/participation fees from UK tournament organisers and has recently signed a sponsorship agreement with a British sports brand to use his image and name within their business. Would there be any VAT implications for income earned relating to a hobby? 

When considering if a hobby has become a business, unusually for VAT purposes, HMRC’s manual VBNB27000, recommends considering the income tax implications and states:

‘When judging whether a hobby should be seen as a business activity you should consider whether the activity is taxable for income tax purposes. The Income Tax (Trading and Other Income) Act 2005, Part 2, Chapter 2, Section 5 states that: Income tax is charged on the profits of a trade, profession, or vocation. This is a similar provision to the VAT definition of business in VAT Act 1994 Section 94(1) which includes “any trade, profession or vocation”.

If it is treated as business for income tax, the high likelihood is it will be business for VAT as well. For completeness, the VAT Business Test can be found here.

However any prize money my client receives would be outside the scope of VAT. It is not consideration for any supply and is regarded as a gift to the winner as it not a guaranteed payment.

Payments which are made as appearance and participation fees, do constitute consideration for supplies and are standard rated where the place of supply is the UK. There is a consideration because my client would have to take part in a competition in return for payment.

Furthermore, VAT Notice 701/41 confirms ‘allowing the sponsor to use your name or logo’ is a standard rated supply. It is deemed the sponsor will benefit from this arrangement, for example, using my clients name or image for advertising/marketing campaigns.

In summary, sponsorship, appearance, and participation fees are taxable supplies and attract the standard rate of VAT once registered. If supplying these services to overseas business customers, then please refer to the Place of Supply of Services VAT Notice 741A. If the recipient is established for business purposes outside the UK, the services will be outside the scope of UK VAT. Prize money received is outside the scope and this would not form part of his taxable turnover when considering the need to register for VAT.

HR EXPERT: NMW ’EMERGENCY BREAK’

A client is concerned about how they will cope financially next year with the annual National Minimum Wage increases. Is it likely that the Government will introduce further measures to help businesses meet the rising costs? Or are there any other updates regarding this which can help the client?

It is unlikely that the Government will introduce measures to assist businesses in meeting rising cost or costs which are already in place with regards to the National Minimum Wage (NMW) and National Living Wage (NLW). However, a report by the Sunday Telegraph suggests that the Government may be considering scrapping the annual increase of the NMW and NLW next year – being referred to as an ‘emergency break’.

This is usually increased in April of every year with the year 2020 seeing the biggest increase thus far.

This news comes as the coronavirus’ impact on the financial stability of many businesses raises questions as to whether these businesses, such as my client’s, will be able to afford wage increases. It is likely, according to the newspaper, that Chancellor Rishi Sunak will be making the announcement in the upcoming Budget this Autumn.

In the fourth quarter of 2019, the Government pledged that it would increase the national wage to reach “60% of median earnings in the next four years.” However, the Low Pay Commission – an organisation which gives the Government advice on minimum wage uprating – has stated that the Government may have to withdraw from this plan in order to help businesses economically recover.

The Chair for the Low Pay Commission, Bryan Sanderson, has said that: “There are not many winners in today’s uncertain world. Our contribution to help steer a path through the complexity will be to provide a recommendation founded on rigorous research and competent analysis which has the support of academics and both sides of industry.”

On the other hand, the Trade Union Congress (TUC) has raised the point that an ‘emergency break’ would be the wrong move, especially for key workers who have not stopped working, even during the peak of the pandemic. Frances O’Grady, General Secretary of the TUC went further to say that rates should be increased to reflect the ‘real living wage’ – £10.75 per hour for those working in London, only being paid on a voluntary basis by approximately 6,000 organisations.

There is no doubt that my client’s business would be positively impacted if the Government were to implement this ‘emergency break’, as it will mean that compulsory pay rises will be less likely and organisations in financial difficulty will have less things to worry about and can focus on getting over the coronavirus hump. However, the TUC’s argument may be persuasive enough to dissuade the Government.

Despite this news, my client should keep in mind that, whilst many organisations have spoken on this issue since the news story broke on the morning of 7th September, the information has not come directly from the Government, or any of the Ministers within Parliament, so they need not rely on it. However, they can, and should, prepare for any possible outcome.

Tax Question of the Week: CLASS 1 NIC BILL FROM HMRC

My client has had a bill from HMRC for the Class 1 NIC (National Insurance Contributions) under deducted from their employee for the current and last 6 tax years.

Can my client recover any of the primary (employee) Class 1 NIC from their employee?

A limited recovery may be possible.

Social Security (Contributions) Regulations Schedule 4, paras 6 and 7 (SI 2001/1004)

This legislation only allows the employer to recover some underpayments of primary Class 1 NIC from their employee where the “the under-deduction occurred by reason of an error made by the employer in good faith” (paragraph 7(4)(a)).

The employer is then permitted by statute to double the employee’s primary Class 1 NIC until the end of the year following the year of assessment in which the error arose.

So:

  • the employer can only make extra deductions to recover the primary Class 1 NIC from the employee in the remainder of the tax year that they made the mistake and the year after.
  • the employer cannot recover more than the amount of primary Class 1 NIC the employee owes in a month (so the employee pays no more than double their normal contribution).

For example, the employee is due to pay primary Class 1 NIC of £20 on their pay for this month. So, the maximum extra deduction the employer can make is £20.

This would be achieved by deducting the employee’s actual primary Class 1 NIC due for the month of e.g. £20.00. You would then deduct a further £20.00 from the employee’s net pay. The further £20.00 would be payment towards the Class 1 NIC recovery.

If the error was made on 30 April 2020. The employer would be able to make the extra deductions during the period from 1 May 2020 to 5 April 2022, or until the underpayment is recovered, whichever comes first.

Any remaining Class 1 NIC under deduction cannot be recovered from the employee and would be at the employer’s own expense.

The HMRC guidance can be found within the National Insurance Manual at NIM11534 and in paragraph 1.18.1 of the Employer Further Guide to PAYE & NIC (CWG2).

VAT relief for charity digital advertising

HMRC have recently published Revenue and Customs Brief 13(2020) entitledVAT charity digital advertising relief”.
The brief clarifies the position of advertisements supplied by digital methods when provided to charities.

There has been a longstanding zero-rate relief for advertising supplied to charities which is placed in purchased or donated time or space. Items 8, 8A, 8B & 8C Group 15 Schedule 8 refer.
Traditionally this has in the main, meant advertisements in the print and television media. However increasingly such advertising is now provided via various digital formats. As Note 10A Group 15 excludes advertising services from zero-rating if an individual member of the public has been selected on behalf of the charity to receive the advertisingHMRC have recognised the need for clarification when this is in the context of digital advertising.
 

The brief gives details and examples of the type of online advertisements which HMRC accept as qualifying for zero-rating.

Those affected are strongly recommended to read the Brief in detail but to illustrate, examples include; placing an advertisement on a third party website without any decisions involving the actual recipients or content targeting which involves the selection of specific content for advertisements to appear alongside. Whereas excluded from zero-rating and therefore still standard-rated are advertisements sent to an individual’s email address.

Furthermoreas long as the advertisement qualifies for zero-rating, the design and production services will also qualify.
The main guidance on charity advertising can be found in VAT Notice 701/58 .

This has a section on eligibility declarations and also makes the point that advertisements on a charity’s own website have never been zero-rated. “Information, whether or not in the form of advertising, placed in, on or through a charity’s own internet site, does not qualify for zero rating. This is because it is not a supply of someone else’s time or space whether or not the website is owned, rented or loaned to the charity. Since the information on the website is left out of the relief, it follows that the associated design costs are also left out.”

HR EXPERT: KICKSTART SCHEME

A client wants to take advantage of the Kickstart Scheme because they heard in July that the Government would pay them to take on 16-24-year-old “Kickstarters”. Is this correct, and what are the other details the client needs to know – including the number of participants they can hire?

The Kickstart Scheme was indeed announced by the Chancellor in July 2020 as part of his “Plan for Jobs” initiative. It is aimed at creating new high-quality jobs to help 16-24-year-old unemployed people on Universal Credit who are at risk of long-term unemployment. Applications opened on 2nd September 2020 and will be open until December 2021, with the option of it being extended. The first placements are likely to be available from November 2020.

If my client is to take on participants, they will receive funding from the Government to cover some employment costs, including wages.

The Government will pay employers £1,500 towards setting up support and training for those on the Kickstart placement. This payment can also be used to pay for uniforms and other necessary start-up costs. The scheme will also cover 100% of the relevant National Minimum Wage (NMW) for 25 hours’ work per week, as well as employer National Insurance contributions and employer minimum auto-enrolment pension contributions.

Currently, the hourly NMW rates are:

  • Ages 16 – 17: £4.55
  • Ages 18 – 20: £6.45
  • Ages 21 – 24: £8.20

Employers will be able to top up the payment, but the excess will not be covered by the funding.

With regards to the number of “Kickstarters” my client can hire, the published list of minimum requirements stipulates that at least 30 placements must be offered, which should be new and not a replacement of an existing job or cause current staff to have a reduced workload. Other minimum requirements include:

  • being an existing company/organisation with a track record of fiscal competence
  • being prepared to offer at least 25 hours a week to participants, for at least 6 months, who are paid at the appropriate NMW for their age group
  • demonstrating at application stage what employability support employers will provide to
  • participants to give them the transferable skills needed to continue into gainful employment, training, or education
  • demonstrating that the jobs they are offering are quality placements – both “meaningful” and “suitable” – that will benefit the participant in future
  • showing how they plan to monitor the progress of participants to the satisfaction of the compliance and quality requirements for the scheme
  • showing how publicity activities, such as branding, will comply with the DWP publicity requirements

If my client is unable to offer 30 job placements, they can partner with other organisations to reach the minimum placement requirement. A representative of the group must then be nominated, who will check that all job placements are eligible for the scheme and submit the application on the group’s behalf. Applications can be made via the government website.

Tax Question of the Week: INTEREST RELIEF

My client has for many years personally owned a portfolio of residential rental properties. During 2019/20, she mortgaged one of the properties in order to finance significant refurbishment of the portfolio. As a result of scaling down her refurbishment plans, she has borrowed significantly more than she needs for her own portfolio. She also owns a limited company that has its own modest portfolio of properties. She has used the part of the mortgage that is not needed in her personal portfolio to make a loan to the company to enable it to carry out maintenance and alterations to its properties. What relief is available in respect of the loan?

There should be no difficulty with referring to the personal property portfolio a loan that has been taken out for the upkeep of the properties in it. As well as interest on the loan, there is also provision for relieving the mortgage arrangement fee as an incidental cost of obtaining finance (Section 58 ITTOIA 2005). However, both the interest and the incidental costs are subject to the removal of relief from higher rates of tax, so in 2019/20, 25% of those costs are treated as an expense in the personal property business. The remaining costs might form the basis of an income tax reducer at Basic Rate (depending on the overall result for the property business and the availability of any property losses brought forward into the year).

Interest payable to the bank in respect of the money that was lent to the company is eligible for relief under Chapter 1 Part 8 Income Tax Act 2007 (“qualifying interest”) as long as the company has a qualifying business. We can be sure that the company’s business qualifies if it is letting properties on commercial terms to unconnected parties. This relief is not given as an expense of any business the taxpayer has but as a reduction of her taxable income for the year (S.383(4) ITA). The relief is only for the interest; that is, there is no relief for the costs associated with obtaining the finance.

In light of the higher rate restriction in the personal property business and the availability of relief for interest being paid on the money lent to the company, the possibility of getting some relief for the money left in the personal business as well as some relief for the money lent to the company, might look very attractive. The proposition also seems very reasonable and doesn’t appear to conflict with the comments by HMRC (SAIM10020) which say that the legislation “prevents relief being given twice”. However, the legislation they are commenting on makes it clear if there is any relief claimed in a property business for interest on a loan, then no interest on the same loan may be relieved as qualifying interest in the same tax year (S.387(3)&(4) ITA 2007).

So, this client has the freedom to choose whether or not to claim relief for qualifying interest in respect of the mortgage proceeds used to fund her company but, if she does, none of the interest on that loan may be relieved in her own property business.

VAT Question of the Week: TEMPORARY REDUCED RATING FOR THE HIRE OF BOATS AND MOTORHOMES

My client’s limited company owns various holiday cottages and they are applying the temporary reduced rate to this income from 15th July 2020 to 12th January 2021. They also own several narrow boats, camper vans and motorhomes which have become very popular this year with more families wanting to holiday in the UK in their own personal space. They have read various articles online and they are a little confused as to whether the reduced rate can be applied to the rental income received from narrow boats, camper vans and motorhomes?

From 15th July 2020 a temporary reduced rate was introduced for supplies of holiday accommodation up until 12th January 2021. Holiday accommodation includes:

  • any house
  • flat
  • chalet
  • villa
  • beach hut
  • tent
  • caravan
  • houseboat

This list is not exhaustive.

HMRC had initially appeared to exclude accommodation in motor homes and narrowboats altogether from the temporary reduced rate, referring to them as means of transport rather than holiday accommodation. However, following a challenge by British Marine, HMRC quickly updated their guidance to allow the temporary reduced rate for boats held out as holiday accommodation.

HMRC have said that the hire of a boat can qualify for the temporary reduced rate, so long as it is suitable for holiday accommodation and is being held out for use as holiday accommodation. A boat that is hired out for a day for someone to enjoy the activity of sailing will not qualify for the temporary reduced rate.

The same principal applies to the hire of motorhomes and camper vans – where the hire is held out as holiday accommodation, the hire charge can be reduced rated. The reduced rate however would not apply to the outright sale of a motorhome.

HR EXPERT: SEPTEMBER FURLOUGH CHANGES

My client is expecting that there will be changes to the Coronavirus Job Retention Scheme come September but is unsure exactly how this will impact their business. What are the changes coming in September, how much will my client be able to claim from the Government and are there any changes in October?

For many employers, August would have been the start of a very important period of post-coronavirus economic recovery. However, as we step into September, employers like my client need to be aware of the details pertaining to some upcoming changes to the Job Retention Scheme.

The Coronavirus Job Retention Scheme (furlough scheme) was put in place to support employers who were not able to operate as normal due to the pandemic. Since 20th March 2020 when the furlough scheme came into effect, 1.16 million employers have furloughed all, or part, of their workforce and claimed 80% of employee wage costs, to a maximum of £2,500 per employee per month.

Until 1st August, employers had been able to claim the portion of the employee’s wages, together with employee National Insurance Contributions and employer pension contributions. Even though the furlough scheme does not end until 31st October 2020, firms have begun contributing to furloughed workers’ wages, which will continue in stages till the scheme ends.

The first phase of contributions, which began on 1st August 2020, has required employers to pay employee National Insurance Contributions and employer’s pension contributions of furloughed workers’ wage costs in relation to the hours that the worker does not work.

My client should be aware that further contributions from employers will be needed from September. Although the 80% grant paid by the Government has continued at a cap of £2,500 until the end of August, since 1st September, the Government’s grant has decreased to only cover 70% of furloughed employees’ wages at a decreased cap of £2,187.50.

Further changes will occur in October when the Government will only cover 60% of furloughed employee wages at a cap of £1,875.

With this in mind, my client will need to be aware that now that government grants have begun to decrease, they must top this up to ensure that furloughed employees still receive 80% of their wages up to £2,500. For example, a 70% grant up to £2,187.50 will attract a 10% top up from your client to a maximum of £312.50.

Furthermore, another important detail that my client should keep note of is that they will need to continue paying employee National Insurance and employer pension contributions for not only August but September and October as well.

Lastly, the furlough scheme may be coming to an end on 31 October, but my client still needs to make sure that they are keeping up to date with its changing structure and ensuring that the pay that their furloughed staff receive accurately reflect the intentions of the scheme, as explored above.

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