Archive September 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.

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