Archive 2021

National Insurance Increases from 6/4/22

A client has inquired about the Prime Minister’s proposals to raise National Insurance Contributions (NIC) to fund health and social care. They would like to know how it would affect them and what the HR considerations they should have are.

The proposal emphasises that 70% of the money raised from businesses will come from the largest 1% of businesses, while 40% of all businesses will pay nothing extra. The NIC increase will, the Government calculates, cost £255 a year for someone earning £30,000 and £505 a year for someone on £50,000.

Following this announcement, employers like my client will have to prepare their payroll teams for the adjustment from next April, to ensure they are meeting their legal obligations and making the correct deductions from employee wages. It may also be of benefit to send a reminder email to your staff, or update them through normal business channels, so they are aware in advance that there will be a decrease in their take-home pay, due to the increase in national insurance payments.

Some employees will be understandably upset about this but there is no obligation on the client to provide additional benefits or pay increases to cover the difference in net pay. The client can make their staff aware that this was not a business decision, but a necessary step mandated by the Government.

All other contractual entitlements should remain the same. The client will have to assess the financial impact this might have on their business and make adjustments where necessary to ensure its long-term viability. If redundancies or changes to existing terms and conditions are needed, the client must make sure they are following fair processes and fully consulting with staff before taking any action.

The client might be more inclined to hire individuals on a self-employed basis to avoid contributing towards higher NI payments. However, doing so may cause more problems if it is seen that there is an employment relationship in place and the individual is working under the wrong employment status. This could not only lead to a breach of employment laws and tribunal claims but also costly back-payments to the employee and HMRC.

Further changes are expected from April 2023, including recording the increased national insurance rate on employee payslips as a separate “levy” deduction and making this deduction from working pensioners’ wages. Your client should use this time to prepare themselves for the upcoming changes, so they don’t get caught out.

SELF-BILLING & TAX POINTS

My client is a sub-contractor to the main contractor supplying construction services on a continuous basis and receiving monthly payments with a self-billing agreement in place.Supplies made in January 2021 and February 2021 have not been self-billed or paid until May 2021. The client has raised internal invoices to account for the supplies on the VAT return in the 03/2021 VAT quarters.

How do we deal with the Self Billed invoices received?

 

Self-billing is a commercial agreement between a VAT registered supplier and a customer where the customer prepares the supplier’s VAT invoice and sends a copy to the supplier with the payment.

Self-Billed invoices can only be issued when:

  • Both parties have agreed to this method of accounting
  • A self-billing agreement is in place and
  • The rules set out in VAT notice 700/62 are followed

The time of supply rules are often referred to as the ‘tax point’ for goods and services. The time of supply fixes the time which a supply is treated as taking place for VAT. When a tax point occurs is when the supplier becomes liable to account for the VAT.

There are basic and actual tax points to consider when looking at the time of supply, VAT Notice 700 Section 14.2 sets out Tax Point rules.  For construction services with stage payments, there is no completion tax point; it is either issue of a VAT invoice or receipt of payment.

Self-billing agreements are common in the construction industry. However, the issue of a self-billed invoice does not create a tax point; the issue of a VAT invoice only creates a tax point when it is issued by a supplier.

VATTOS9130 confirms the tax point for the supply is the date of receipt of the payment by the supplier. On receiving the invoice and payment, the sub-contractor must add the date of receipt, which becomes the tax point for output tax purposes.

My client should not be raising VAT invoices internally to account for the VAT on the supplies made.

The client was paid in May 2021 therefore that is the tax point.

Further information on tax points and self-billing can be found in HMRC’s Time of Supply Manual https://www.gov.uk/hmrc-internal-manuals/vat-time-of-supply

Chargeable event gains in a trust

My client died a few years ago with a UK capital redemption bond held in a UK discretionary trust that has a chargeable event gain certificate that was triggered after my client’s death. Who pays the tax on this gain? 

It would seem that the trustees are chargeable to income tax on the chargeable event gain.

In most cases when a chargeable event gain arises to a UK resident individual, the gain is taxed on that individual as the beneficial owner of the policy under Condition A of s465 ITTOIA 2005. If the policy is insured on the life of the policyholder, the death of the assured normally extinguishes the policy rights and the gain is taxed on the deceased as part of their final, personal income.

The tax treatment is different when we are looking at policies held in trust. Where the rights are held on trust, the trust gain is taxed on a UK resident settlor under Condition B of s465 ITTOIA 2005 where gains arise in the settlor’s lifetime including at any time in the tax year of death. As the settlor here died a few years ago, it would seem that Condition B also does not apply.

HMRC’s guidance on the above is at IPTM3240.

A policy can be insured on an individual’s life or several individuals’ lives or, as here, under a capital redemption policy where there is no life assured.

As the trustees appear to be UK resident, they are liable for income tax on the chargeable event gain under s467 ITTOIA 2005. Note the exception for policies taken out before 17th March 1998 as mentioned in IPTM3240.

As the trustees are a body of persons, rather than an individual, they will not be entitled to top slicing relief under s535 ITTOIA 2005 and will be chargeable to income tax at the trust rates of tax of s479 ITA 2007. If this is a UK policy, the trustees will be entitled to a notional basic rate tax credit under s530 ITTOIA 2005.

If the trustees have not already done so, they will need to register under the Trust Registration Service enabling them to file a self-assessment tax return to disclose the gain and pay income tax accordingly.

It is also important to note that even though the trustees will pay income tax on this chargeable event gain this remains capital under trust law and so is not available income for distribution to beneficiaries – see TSEM3210.

Any distribution to the trust beneficiaries of the policy proceeds would be a capital distribution and so an exit charge for IHT purposes under s65 IHTA 1984. Therefore, a form IHT100 may be required to be submitted as may payment of an IHT liability.

It would seem the remaining trustees may have decided to encash the policy without considering the tax repercussions. It is often more tax efficient to appoint the policy to the beneficiaries (still an exit charge for IHT) which would allow the individual beneficiaries to personally encash the policy resulting in personal income tax charges with access to their (usually lower) rates of income tax and access to top slicing relief.

A client wants to know how to deal with burnout in the workplace. They also want a brief explanation of what it means and how to spot the signs.

The term ‘burnout’ has become more prevalent in recent times as employers try to manage the impact that increasing workplace demands have on employees’ health. This has only become more apparent during 2020, when many employees may have faced increased workloads, uncertainty and general pressure due to the outbreak of COVID-19.

According to the World Health Organisation (WHO), common symptoms of burnout include:

  • feelings of energy depletion or mental exhaustion
  • increased mental distance from one’s job
  • feelings of negativism or cynicism related to one’s job
  • reduced professional efficacy.

A key aspect of the WHO’s definition is that burnout only relates to work-related stress, which means that clients are taking the right steps by wanting to know more and acknowledging that they play an important role in prevention. One of the key stumbling blocks is that burnout, and by association work-related stress, can be viewed as ‘part of the job’ in many industries, or a necessity due to the challenges posed by the pandemic.

As burnout is recognised as an occupational phenomenon, it is obvious that it exists and is contributed to by employment, especially in a year where employees have faced the fears, uncertainty and stresses associated with working through a global pandemic.

Not all staff were furloughed, and for those who have worked throughout the pandemic, an increase in workload may have caused signs of burnout to start to show, and impact their performance overall. Clients are therefore best placed to interject and seek to prevent burnout occurring, or to support those who are burnt out.

Clients can do this by:

  • Assessing working hours and workloads for any imbalance and ensure employees have the support they need to meet targets
  • Ensuring employees have the training they need to be able to efficiently carry out their tasks
  • Avoiding creating a situation where staff are pressured into working long hours or taking work home with them
  • Encouraging employees to take their rest breaks and annual leave
  • Ensuring availability of cover during an employee’s annual leave so they don’t feel like they need to “log in” to avoid a pile-up of work then they return
  • Offering flexible working, or working from home
  • Keeping an ‘open door’ policy where employees can discuss any concerns they have.

While some may think that this is a personal syndrome and something for an individual to deal with, this is an attitude that can lead to burnout becoming prevalent in their business and having a significant negative impact on factors such as retention, productivity, and growth.

LOAN TO SHAREHOLDER (NON-EMPLOYEE)

I have a client who owns 25% of the ordinary voting shares of a close company, but she is not a director or employee nor is she connected to a director or employee of the company. The company has lent her father £25,000 interest-free. As neither her father nor the client is an employee or connected to one, is there still a benefit in kind on the loan? 

What is the charge?

Part 3, Chapter 7 ITEPA 2003 sets out the provisions that deal with taxable cheap loans to employees. In order for chapter 7 to apply, the loan needs to be an ‘employment-related loan’ which is defined in section 174 ITEPA 2003. It requires that the loan is made to an employee or a relative of an employee (s174(1) ITEPA 2003). As to whether the client or her father is an employee, one should also consider whether there is any scope that either of them could arguably be a director as defined under s67 ITEPA 2003 (see also HMRC Manual EIM20200). If the criteria in s174 ITEPA 2003 is not met, then there would be no benefit in kind charge under Chapter 7.

However, although not chargeable as a benefit in kind on the employment front, we need to consider whether s1064 CTA 2010 would be in point to trigger a distribution charge.

S1064 CTA 2010 deems the close company as having made a distribution to a participator if the company incurs expenditure in the provision of certain benefits for them. Benefits in this case would include the interest-free loan that the company has made.

Firstly, we should look to see whether the client’s father would fall within the definition of ‘participator’. S1069 CTA 2010 extends the meaning of participator to include associates of the participator for the purposes of s1064 CTA 2010. The client, owning 25% of the shares in the close company will be a participator under s454 CTA 2010 and as her father will fall within the meaning of ‘relative’ (s448(2)(b) CTA 2010), he will be an associate of a participator. Therefore, there will be a distribution deemed to have been made by the company.

Who is charged?

The company is treated as making a distribution to the participator (s1064(2) CTA 2010) and any references to a participator in s1064 also include an associate of a participator (s1069(1)). This would suggest that the distribution is treated as if it was made to the father.  We need to keep in mind that this is from the company’s perspective and for the purposes of the Corporation Tax Acts.

For the charge to income tax on distributions, s385 ITTOIA 2005 sets out the person liable to the charge as any person whom any distribution is made or treated as made, or the person receiving or entitled to the distribution. This indicates that the income tax charge is likely to be levied on the father as the recipient. HMRC manual page SAIM5020 also suggests that HMRC are of this view as well.

How much is charged?

The quantum of the deemed distribution is determined using the same method we would use to ascertain the beneficial loan charge amount for an employee/director under Chapter 7, Part 3 ITEPA 2003. This is not the loan amount that has been advanced to the father, but the cash equivalent of the benefit that is charged to tax.

Of course, should the participator make good the full amount of the cash equivalent as determined above, then there would be no amount treated as a distribution to the participator.

In summary, there is no benefit in kind charge applicable to the client, however, to the extent the expense is not made good, there is a deemed distribution charge on the father. As an aside, although not part of the query, I should mention that the company should consider any liability under s455 CTA 2010 if not already done so.

Camper van hire

My client runs a camper van hire business and with the increase in “staycations” bookings are through the roof. She hires the vans out for holidays or day trips, and they are also popular as wedding transport. She has also started selling face value vouchers at daily or weekly hire rates. Please could you advise on the VAT treatment given that there is currently a reduced rate for holiday accommodation.

 

HMRC have confirmed in VAT Notice 709/3 that the hire of what they describe as a “motorhome” will qualify for the temporary reduced rate provided it is specifically for holiday accommodation.  https://www.gov.uk/guidance/hotels-holiday-accommodation-and-vat-notice-7093#section5.  The temporary reduced rate is currently 5% until 30th September 2021, when it will increase to 12.5% from 1.10.21- 31.3.22. After the end of March 2022, it is expected the rate will revert to 20%, unless HMRC extend the temporary rate.

However, daily hires, whether for day trips or wedding transport (whether with or without a driver), will be standard rated as the vans are not being provided as holiday accommodation.

Usually, the sale of a voucher for this type of supply would qualify as a single purpose face value voucher, where the place of supply and liability of the redemption supply is known at the time of issue. However, in this scenario, if the vouchers could be redeemed for standard rated wedding or daily hire, or holiday accommodation at either 5%, 12.5% or 20%, then the vouchers would be treated as multi-purpose face value vouchers. As such they would be outside the scope of VAT when issued and VAT at the appropriate rate brought to account when redeemed.

It is also worth mentioning deposits. If a deposit is taken as a pre-payment to secure a booking, then it creates an actual tax point to the extent of the deposit value. If the booking is cancelled and the deposit retained, then it remains consideration and cannot be treated as compensation. https://www.gov.uk/government/publications/revenue-and-customs-brief-13-2018-change-to-the-vat-treatment-of-retained-payments-and-deposits

However, a deposit taken as a security against damage to the van is outside the scope at the time it is taken and if it is retained to cover the cost of repairing damage, then it remains outside the scope as compensation for the loss or damage incurred.

Supply of land or supply of services

My client has a field where he allows people to walk their dogs. He charges them for the use of the field as a safe and secure dog-walking area and is promoting it as such. Should he be accounting for VAT on that charge?He is considering adding a refreshment area to supply drinks etc to the walkers. He is also thinking of building ramps and other facilities akin to ‘dog agility’ structures, (to make it more interesting for the dogs) and providing agility and basic behaviour training sessions.

 

The question here is whether there is a granting of a licence to occupy land or the provision of services. The former would be exempt from VAT (subject to an option to tax being exercised), whilst the latter will be taxable.

It is necessary to consider more detail as to the exact nature of, ‘admittance to the field to walk a dog’. In this instance, the dog-walker is given a time slot to enter the field and have exclusive use. There are free ‘poo-bags’ provided and there is a tap where water bowls can be filled. There are no other services provided; the landowner offers nothing else other than the key to the gate. The dog walker has exclusive use of the field for an hour.

A ‘licence to occupy’ may fall short of a formal interest or right over land (e.g. a tenancy agreement) but may still have the characteristics of ‘leasing or letting of immoveable property’ – VATLP05700 refers here

In order for a supply of land to be considered a ‘licence to occupy’, there must be no more than a ‘passive act’ of supplying ‘exclusive use of immoveable property’.  In the circumstances above, the dog walker only gets access to the space but has exclusive access for the time period they are there. The provision of a water supply and the bags would not be seen as removing the passivity of the landowner’s actions; they are factors providing for ‘better enjoyment’ of the use of the field. There is no additional charge and no additional human involvement. The supply as it stands would therefore indeed be a ‘licence to occupy’ and exempt from VAT as per VAT Act 1994 Schedule 9 Group 1.

Changes being considered

If these additional elements were included in a single admission charge, this would change the character of the supply. It would no longer be a passive supply of land. The admission would be to a ‘dog exercising, agility and training facility’. There is potentially additional human involvement as well as the provision of services akin to a designated park or play area. The admission fee is for more than a use of land; it is to use the services available therein. The additional services provided alter the nature of the supply making it a standard rated supply of services to which the use of ‘space’ is incidental.

The key in establishing the liability to VAT of land supplies is to consider

  • Exclusive use
  • Designated area of land/space
  • Passivity of actions by supplier.

The land exemption is currently the subject of review by HMRC and submissions from industry have already been made in response to HMRCs questions regarding the complexity of the exemption and the related Option to Tax regulations. There may be changes in the pipeline, but land remains a very common subject of query.

Building Upwards

My client is adding extra floors to an existing block of flats.  What is the liability of the construction services for carrying out this work?

This seems to be an increasingly common question of late, no doubt sparked by the recent change in planning rules allowing developers to add two extra floors to detached blocks of flats.  The new permitted development right came into force on the 1 August 2020 and is set out as Class A, Part 20, Schedule 2 of the General Permitted Development Order (the GPDO).

The VAT liability will very much depend on the nature of the development and whether the enlargement creates additional new residential dwellings.

For new residential dwellings VAT zero rating for the construction services is by virtue of Schedule 8, Group 5 of the VAT Act 1994.  The rules around zero rating the construction are all contained within VAT Notice 708 ( https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708#section3) and in particular paragraph 3.2.5 deals with enlargements and extensions that create additional dwellings.  The Notice states you can zero rate the enlargement of, or extension to, an existing building to the extent that the extension or enlargement contains an additional dwelling provided both the following conditions are met:

the new dwelling is wholly within the enlargement or extension;

the dwelling is ‘designed as a dwelling’ – see definition in paragraph 14.2 of Notice 708.

However, if the new dwelling is partly or wholly contained within the existing building, you cannot zero rate the work under the rules in this section; although you may be able to reduced rate (5%) the charge as a ‘changed number of dwellings conversion’ (s.7 N.708).

This has a been a contentious area for VAT in the past and further guidance can be found in the HMRC VAT Construction Manual – specifically VCONST02300.

VATA 1994 Schedule 8 Group 5 Note 16(b) states that the enlargement or extension of an existing building is ‘the construction of a building’ to the extent that the enlargement or extension creates an additional dwelling. HMRC state “In the clearest case, this relief applies to the construction of a new storey of flats on top of an existing block of flats.”

HMRC’s view is that it is important that the new dwelling is contained entirely within the enlargement or extension. If any of the original building is incorporated into the new dwelling the works are not zero-rated. Tribunals have not always agreed.

In the case of Michael, Gillian and Norman Smith (VTD 17035), works that involved the creation of a second dwelling, appeared to form a semi-detached house next to an existing one but in fact included a part of the original building within the new one. The Tribunal decided that where an enlargement or extension contained part of a new dwelling (the remainder of the new dwelling being formed within the original building) the words ‘to the extent that’ in Note 16(b) allowed zero-rating for the enlargement or extension containing part of that dwelling but not the other works.

Similarly in Jahansouz (TC00637) which was a DIY case, a pitched roof was removed and a flat was constructed under a new roof. The new flat incorporated nothing of the pre-existing building but was partly in the previous roof space. HMRC saw only the additional roof space as an extension although the Tribunal disagreed.

HMRC consider both cases were wrongly decided. HMRC remain of the view that the zero-rating provision at Item 2 is limited to dwellings and not parts of dwellings. It does beg the question do HMRC only ever consider zero-rating can apply to new dwellings on top of flat roofs?

As ever with VAT and building projects, each case will turn on its own particular facts and appropriate advice should be sought.

Pingdemic

As you may know, the easing of restrictions in England has led to thousands of people being notified by the NHS test and trace app to self-isolate for 10 days. This has had adverse effects on a client’s business due to staff shortages. The client would like to know what their options are for dealing with this issue.

Managing an unexpected period of self-isolation can be gruelling but your client may be able to get around this by allowing staff, even though government guidance in England has changed, to work from home during this period if possible. Another option is to consider hiring temporary workers or asking the remaining workforce to split their colleagues’ workload between them. They may also wish to consider whether their staff are eligible to be exempt from self-isolation under the Government’s new rules.

The new rules highlight that “…a limited number of named workers may be able to leave self-isolation under specific controls for the purpose of undertaking critical work only.”

This process is only intended to run until 16 August 2021, when fully vaccinated close contacts will be exempt from self-isolation. Where your client believes the self-isolation of certain key employees would result in serious disruption to critical services, they should contact the relevant government department.

The sectors to which the new rules apply are:

  • energy
  • civil nuclear
  • digital infrastructure
  • food production and supply
  • waste
  • water
  • veterinary medicines
  • essential chemicals
  • essential transport
  • medicines
  • medical devices
  • clinical consumable supplies
  • emergency services
  • border control
  • essential defence outputs; and
  • local government.

In some exceptional cases, there may be critical roles in sectors not listed above which meet the criteria. These will be agreed on a case-by-case basis. Where your client thinks this applies, they should contact the government department with responsibility for their sector.

The Government makes it clear that this policy applies to named workers in specifically approved workplaces who are fully vaccinated (defined as someone who is 14 days post-final dose) and who have been identified as close contacts.

Permission to attend work is, it emphasises, contingent on following certain controls, agreed by the Department of Health and Social Care (DHSC), to mitigate the risk of increased infection.

SDLT Additional Rate

My client owns several residential properties in her sole name.  Her spouse wishes to buy a buy-to-let property in their own name.  Will Stamp Duty Land Tax higher rates for additional dwellings apply? 

Yes, the additional 3% charge will apply here for the reasons outlined below.

In order to determine whether the SDLT higher rates will apply to the spouse purchasing alone, the conditions set out para 3(1) Sch. 4ZA FA 2003 will apply to both spouses, on the assumption that the other spouse was a purchaser, provided both spouses or civil partners are living together at the date of completion(Para 9 Sch. 4ZA FA 2003).

The transaction is to be treated as being subject to SDLT higher rates and para 9 of Sch. 4ZA effectively deems the purchaser’s spouse as party to the transaction provided the following:

  • the purchaser (or one of them) is married or in a civil partnership on the effective date,
  • the purchaser and the purchaser’s spouse or civil partner are living together on that date, and
  • the purchaser’s spouse or civil partner is not a purchaser in relation to the transaction.

Persons who are married to, or are civil partners of each other, are treated as living together for the purposes of Schedule 4ZA, if they are so treated for the purposes of section 1011 of the Income Tax Act 2007 – see SDLTM09820.

Para 9(2) requires the following conditions of Para 3 to be applied to each spouse and if either spouse meets all the conditions A to D, the purchase will be subject to the higher rates of SDLT.

A purchase of a major interest in a single dwelling by an individual will be a “higher rates transaction” and the higher rates of SDLT will apply to the purchase, if at the end of the day of purchase each of conditions A to D:

  • Condition A – the chargeable consideration is £40,000 or more
  • Condition B – the major interest purchased is not subject to a lease which has more than 21 years to run on the date of purchase
  • Condition C – the purchaser owns a major interest (with a market value of £40,000 or more) in another dwelling which is not subject to a lease which has more than 21 years to run at the date of purchase of the new dwelling, and
  • Condition D – the dwelling being purchased is not replacing the purchaser’s only or main residence.

In contrast, if the spouse with the property portfolio decided to transfer a residential property to the other spouse, and on the effective date of the transaction the two of them are married to, or civil partners, of each other, and living together, then the transaction is not a SDLT higher rates transaction (Para 9A Sch. 4ZA FA 2003).

Call Now ButtonChat With The Team