HR Question of the Week – Probationary Dismissal

My client has an employee who is on a probationary period, however they have had a lot of absences during this time and my client wants to dismiss them. What are the rules around this?

Probationary periods are commonly used to give employers a reasonable amount of time to decide whether new starters are able to perform at an adequate level. Rules around contractual provisions such as notice periods, enhanced sick pay and other benefits are also typically reduced during this time.

Generally speaking, my client would be free to dismiss the employee if they are unhappy with their attendance and feel that the repeated absences are having an impact on business operations. Employers often adopt a more flexible approach to managing disciplinary matters and dismissal decisions during a probation period and set this out in the employee’s contract of employment. In these circumstances, they will be free to proceed with a dismissal fairly easily in these circumstances.

Although my client may reduce the amount of contractual notice during probation periods statutory notice will still apply. This means if the individual has been employed for a month or more but less than two years, your client is required to provide them with at least 1 weeks’ notice of dismissal.

However, before doing so our client should consider the reason for these absences, especially if they relate to a disability or the employee exercising their right to time off for dependants, for example. This is where return to work interviews and accurate absence management records are vital in allowing my client to determine the exact reason for any unauthorised time off.

If, for example, my client proceeded to dismiss the employee due to a number of sickness related absences then they could potentially face claims for disability discrimination. This may be also be the case if the employee required time off to attend to a disabled child or family member, which could be classed as associative discrimination.

Therefore, in situations like this it always advisable for our client to sit down with the employee and explain any concerns regarding their attendance. This will present an opportunity for the individual to disclose any underlying issues, to give our client a better understanding of the situation and whether reasonable adjustments would be required at work.

Even if the absences are not disability related your client could opt to extend the probation further to give the employee an opportunity to improve, especially if they have performed well when present at work.

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 – Renovation of an Empty Dwelling

My client recently purchased an empty 3 bedroom bungalow that hasn’t been lived in for 4 years. He intends to spend £30k extending and refurbishing the property into a 4 bedroom house, which he and his family will move in to. He has the skillset to do some of the work himself, so will be buying in some of the materials and will also be acquiring the services of various contractors. I am assuming that because the property has been empty for more than 2 years the contractors will be able to charge my client the reduced rate 5% and that my client can claim this back together with VAT incurred on materials he purchases himself, via the DIY scheme?

Firstly considering the reduced rate, you are correct that the contractors will be able to charge this to my client for their work refurbishing and extending the property. However, it’s important to note that the scope of services included in the reduced-rating is much narrower than that for zero-rating the construction of a new dwellings.

The reduced-rated services are limited to work carried out to the fabric of the dwelling, and include installing goods that are building materials (notably not white goods, carpets or fitted furniture), repairs (such as redecoration), or improvement (such as the construction of an extension or the installation of double -glazing).

You can also reduce rate works within the immediate site of the dwelling that are in connection with the:

  • means of providing water, power, heat or access
  • means of providing drainage or security
  • provision of means of waste disposal.

In order for a contractor to charge the reduced-rate, our client must provide suitable evidence that one of the two empty dwelling rules have been satisfied. Those rules are:

  • the first empty home condition applies to suppliers whose work starts before occupation (following a period of the building not being lived in for two years);
  • the second empty home condition applies to suppliers whose work starts after occupation. This rule applies where the following conditions are met:
  1. The 2 years immediately before the occupier acquired the dwelling it had not been lived in.
  2. No renovation or alteration had been carried out in the 2 years before the occupier acquired the dwelling (you can ignore minor works that were necessary to keep the dwelling dry and secure).
  3. Your services are supplied to the occupier – so if you are a subcontractor you must standard rate your work.
  4. Your services take place within 1 year of the occupier acquiring the dwelling.

Acceptable evidence of a dwelling being empty can be obtained from Electoral Roll or Council Tax records, utility companies, Empty Property Officers in local authorities, or any other third party corroboration that can be considered reliable.

It should be noted that the reduced-rate only applies to the supply and fit of building materials. Materials purchased on their own will be charged at the standard-rate of 20%.

With respect to the DIY scheme, a claim for VAT refund under the DIY scheme can be made by persons (individuals, partnerships or companies) who build a brand new dwelling or convert a non-residential premises into a dwelling, where they intend to occupy the dwelling themselves, or build on behalf of another, but the activity has not been carried out in the course or furtherance of business.

Clearly we are not building a new build dwelling in your client’s scenario. Therefore the question is whether or not it is subject to a non-residential conversion. A property is subject to a non-residential conversion, where the property is not designed as a dwelling, or where it is designed as a dwelling, has not been lived in for 10 or more years.

This is a separate test to the 2 year rule for the empty dwelling reduced-rate, and can often be confused with it.

Therefore, whilst your client can be charged the reduced-rate on the work to the dwelling, it will not qualify for a DIY scheme refund, because the property has only been empty for 4 of the 10 years required to be classed as a non-residential conversion.

You can read more on the reduced-rate and empty dwelling rules in VCONST07000, and more on the rules for a DIY refund claim in VCONST24000.

HMRC Launches IR35 Attack on GSK Contractors

“HMRC has written to approximately 1,500 personal service companies that provided services to GlaxoSmithKline in the 2018/19 tax year. A UK accountant unpacked the contents and explored what advisers should do if their clients have received such a letter.

The letters to 1,500 contractors using personal service companies (PSCs) are classic HMRC scaremongering: sent on a mass scale with no detail and no appreciation for the law on employment status. As well as being unsigned, the letters are not even sent from a named person.

The only grounds for HMRC’s belief that each and every PSC it has written to is caught by IR35 is the following statement:

“After looking at the information we have for the 2018 to 2019 tax year, our view is that the contract between your PSC and GlaxoSmithKline (GSK) comes under the off-payroll working rules ‘IR35’.”

Clearly HMRC has put no effort into ascertaining the facts of a particular engagement to give a firm opinion before writing to 1,500 contractors. Even worse, the passage above references the contract between your PSC and GSK.

Those PSCs that contacted us are all providing services via an intermediary such as an agency and therefore do not have a contract directly with GSK. So, the only crumb of substance to this letter is fundamentally flawed.

Wrong advice

Worryingly, the letter states that a PSC that is caught by IR35 must operate PAYE every month. This is simply not how IR35 works in the private sector. The application of IR35 involves a ‘deemed payment calculation’ at the end of each tax year, not monthly PAYE deductions.

We called the number on the letter to discuss this with the Employment Status and Intermediaries Team, but there was nobody technical from HMRC to speak to on the number given, only an offer to pass on enquiries to the ‘Project Team’. At the time of writing we are still waiting for the ‘Project Team’ to get back to us.

What makes HMRC’s actions even more nonsensical is that it has already pursued a PSC providing services to GSK all the way to the first tier tax tribunal. Of course, the facts of every case can be different (although HMRC seem to believe all 1,500 PSCs are the same) but you would have thought that the resounding defeat HMRC received in the FTT (delivered by Chartergates’ Matt Boddington) in the case of Primary Path, would have given them pause for thought.

Alas, it appears not – so how should PSCs or their accountants respond to HMRC?

HMRC’s intention 

The letters are riddled with errors, short on detail and light on facts. However, these shortcomings have not prevented HMRC from drafting them in a threatening and scaremongering tone.

The letters will likely cause concern for those that have received them and make no mistake, that is by HMRC’s design.

HMRC has, for many years now, followed a simple but effective method:

  1. Select a target group
  2. Send target group threatening but vague letter
  3. Wait for the majority of recipients to innocently believe HMRC’s unsubstantiated claims
  4. Collect additional taxes from those that innocently believe HMRC’s unsubstantiated claims – unchallenged and with minimal effort
  5. Potentially enquire into those that do not take HMRC at face value

The tactics employed by HMRC achieve maximum gains for minimal effort. That does not make it right, but it is important to recognise the tactics so that we can scrutinise the current letter in the correct light.

What should you do?

The letters from HMRC are a common tactic from what is known as the “nudge unit”. That does not mean that they should be ignored. The Primary Path case was decided on its facts and the contracts in place at the time, so agents for the PSCs should review the facts and contracts of their particular case as well.

HMRC’s letter may be light on detail, but PSCs should be exploring and embracing the detail so that they are able to adequately defend their position should HMRC follow up on its threat.

The letters we have seen fall short of a full enquiry letter or a formal information request (although you could treat it as one and put the ball back in HMRC’s court), and therefore there is, in our opinion, no compulsion to respond.

What PSCs should be doing as a matter of priority is getting their ducks in a row and assessing their contract and facts for IR35.”

— UK Accountant Source

Tax Question of the Week – Structures and Building Allowances

My client has undertaken some development work and has queried whether he can claim the Structures and Buildings Allowances (“SBA”). Please could you outline the rules for the relief to apply?

My client may be entitled to claim SBA on the expenditure that they have incurred but, like all reliefs, there are a number of conditions to be met. A general outline of the rules has been published by HMRC at:

https://www.gov.uk/guidance/claiming-capital-allowances-for-structures-and-buildings

Broadly, SBA is available to any person who holds a relevant interest in a building or structure and has incurred qualifying expenditure on it after 28 October 2018. The allowance provides for relief at an annual rate of 2% on the total qualifying expenditure over a 50-year period. The legislation was finally enacted on 4th July 2019 by SI 20019/1087 which inserts new CAA 2001, Part 2AA, consisting of sections 270AA to 270IH.

Relevant Interest

Relevant interest includes a freehold interest as well as a lease of 35 years or more on the building and where the lessee pays a substantial premium, equivalent to two-thirds or more of the value of the property. Where the lease is for less than 35 years, the existing allowances remain with the lessor, but relief would still be available for any qualifying expenditure incurred by the lessee on new building works.

Qualifying/non-qualifying expenditure

Qualifying expenditure, provided all relevant construction contracts are signed for on or after 28 October 2018, is limited to the cost of physically constructing the building, including the costs of demolition or land alterations necessary for construction, as well as the direct costs required to bring the asset into existence. Foreign structures and buildings will also qualify where the business is within the charge to UK tax.

Please note SBA expenditure does not qualify for the AIA.

Non-qualifying expenditure includes the costs or rights over the land itself, landscaping or land reclamation, any financing costs or any costs that would continue to qualify for plant and machinery allowances.

Qualifying activities

The first use of the building or structure must also be for a qualifying activity in order to make the allowance available.

Qualifying activities are:

  • any trade, profession and vocation;
  • a UK or overseas property business (except for residential and furnished holiday lettings);
  • managing the investments of a company; and
  • mining, quarrying, fishing and other land-based trades such as running railways and toll roads.

Disposal of Assets

Sale of the asset will not result in a balancing adjustment and instead the purchaser, who undertakes a qualifying activity, will take over the remainder of the allowances written down over the remaining part of the 50-year period.

When determining the gain chargeable on sale of the asset, the seller’s allowable costs will be reduced by the SBA claimed. This will happen regardless of whether there is a gain or loss. This differs from the existing rules where there is no requirement to bring capital allowances into account in a capital gains computation unless there is a loss.

Claiming the SBA

Unlike other capital allowances, relief will be lost if it is not claimed. It will not be possible to carry forward relief to a later period and nor will expenditure qualify for SBA if it was incurred more than seven years before the commencement of the qualifying activity.

SBA is claimed on a tax return, but can only be claimed if you have an ‘allowance statement’. The first person to use the structure must create a written allowance statement that must include:

  • information to identify the structure, such as address and description;
  • the date of the earliest written contract for construction;
  • the total qualifying costs; and
  • the date the structure started to be used for a non-residential activity.

The buyer of a used structure will only be able to claim allowances if they get a copy of the allowance statement from the previous owner, before the claim for SBA is made.

It will be important for a tax-exempt buyer e.g. a charity, to make sure a written allowance statement is created, even though they will not be able to claim SBA. This will enable it to pass the benefit of the allowances to a future buyer of the building.

Tax Question of the Week – HP Contract & Capital Allowances

My client bought a commercial vehicle under an HP agreement but has not made the final payment and so did not acquire ownership of the vehicle. AIA has already been claimed from the outset. How is this dealt with for capital allowances purposes?

 

The normal assumption is that a vehicle bought under a hire purchase agreement will become the property of the hirer once the final payment is made at the end of the lease period. S67 CAA 2001 allows the capitalisation of the entire expenditure on the vehicle from delivery providing the asset was in business use at the end of the chargeable period.

However, if a payment is not made and the vehicle is not acquired then it is treated as having been disposed of by s67(4).

The disposal value is determined by s68 CA 2001. Where, as in this case, the asset has been brought into use, the disposal value is the total of any capital sums received/receivable (if any) by your client plus the amounts yet to be incurred under the contract – in this case this would be the value of the final instalment not paid.

The principle is to charge sums on which allowances have already been claimed but which have not actually been paid plus charging any additional sums received. An example illustrating such additional sums is contained in HMRC’s Capital Allowances Manual on page CA23330.

 

VAT Question of the Week – Careless Behaviour or Not?

We act for a VAT registered company. While its main trade is that of an architect, the company also owns a number of residential properties, and receives exempt rental income. The company is therefore partially exempt. We prepare and submit the VAT return as agent, carrying out the partial exemption calculations, including attribution of input tax, turnover calculation and the deminimis test. Unfortunately, the deminimis test was not correctly applied when the last VAT return was prepared, and exempt related input tax of £5,000 was recovered in error.  The reclaim resulted in a VAT compliance check by HMRC. They are suggesting this is a careless error and are looking to apply (and admittedly suspend) a 15% penalty. Has our client really demonstrated careless behaviour when he relied on us to prepare the return on his behalf?

HMRC’s internal guidance in relation to the penalty behaviours is contained within the Compliance Handbook. Section CH81130 is titled: Penalties for Inaccuracies: Types of inaccuracy: Inaccuracy despite taking reasonable care.

The guidance in this section states “Where an inaccuracy in a document has been made despite the person having taken reasonable care to get things right, no penalty will be due”. The guidance goes on to provide examples of situations where a penalty would not be due. These include “acting on advice from a competent adviser which proves to be wrong despite the fact that the adviser was given a full set of accurate facts”, and a link is provided to section CH84530

Section CH84530 advises that in cases where an agent such as a tax accountant is acting on a person’s behalf, the officer should focus on the behaviours of the persons whose return or document is inaccurate. The implication here is that the behaviours under review are those of the taxpayer (our client) not us, the agent, acting on their behalf.

On the basis that our client gave us all of the information required to prepare the VAT return and partial exemption calculation,  their behaviour in this case, requesting their competent adviser to prepare their VAT return, does not demonstrate careless behaviour, and the HMRC penalty assessment should be challenged.

VAT Question – Properties on hand at Deregistation

One of my clients deregistered recently and has now received a letter from HMRC asking about a property that he bought four years ago for £150,000 and opted to tax. Although there was no VAT chargeable on the purchase, the property was empty at the time and in quite a poor condition as the seller was reluctant to spend money on it, so my client also spent £100,000 doing it up ready to let out. He opted to tax so that he would be able to recover the VAT on this refurbishment, and until deregistering has charged VAT on the rent. What does he need to do? As he has already cancelled his registration is he going to receive a huge assessment? The property is now worth around £300,000.

Property on hand at deregistration should be considered in the same way as other stock and assets on hand at the time. However, because property could have been acquired with or without VAT; could have subsequently been subject to capital expenditure and may or may not have been opted to tax, it can be difficult to determine whether a deemed supply is created and if so, whether output tax is due on it (a deemed supply can also be exempt). Also there can be capital goods scheme (CGS) implications.

Because the implications of having property on hand are dependent on precise details, when we get these calls our poor callers can feel that they are under interrogation! The facts that we are trying to establish are:

  • What is the client’s interest in the property – leasehold or freehold?
  • The age of the building – is it less than three years old?
  • What was the purchase price?
  • Was VAT charged on the purchase/lease premium?
  • Did the client acquire the property as part of the transfer of a going concern?
  • Has the client spent more than £250,000 on a single capital project since purchase, or, if the expenditure was incurred after purchase to make it suitable for its intended use, was the combined VAT bearing cost of purchase and capital works £250,000 or more?
  • Did the client buy land and then develop the building?
  • Has the client opted to tax the property?

Although our client has opted to tax, which would make a deemed supply standard rated, there is no VAT due on the current value of the property in these circumstances. This is because they did not buy the property as part of a TOGC, and no VAT was charged on the purchase because the seller had not opted to tax.

Although our client bought the property for £150,000 and then spent a further £100,000 immediately refurbishing it, spending £250,000 in total, only £100,000 had VAT on it; the purchase being exempt. This means that we don’t need to consider the CGS.

On a final note, when a business deregisters, the option to tax remains in place indefinitely unless the client revokes it after 20 years have elapsed. If our client’s taxable supplies including future rent go over the VAT threshold, they will need to re-register. They would also need to re-register (on the forward look) and charge VAT if they sold the property, unless it were to be sold as a TOGC. Unless revoked under the 20 year rule, an option also remains in effect for six years after the client no longer holds any interest in the property, so that in the event of them re-acquiring that property within that time-frame the property would still be opted.

VAT Question – Exempt Medical Supplies

My client is a modern multi-GP practice. They are about to enter into a new contract to provide locum services to the local NHS hospital and they are presuming this would be an exempt supply of medical/healthcare. My client is not VAT registered as their services mainly fall under the exemption for medical services. Are they safe to assume this will all be exempt?

The provision of medical care to individuals is exempt for VAT purposes, but does this exemption extend to the provision of services of a locum GP, or other doctors supplied through an agency or similar structure?

As an example, a doctor seeing private patients at a private hospital and charging them directly for the treatment or consultation is an exempt supply, as are most services of an NHS GP practice to its patients.

However, if a medical professional is supplying services to a hospital as a GP or Locum, normally their supply is made to the hospital (the practice will invoice the hospital and not the patient), and it is the hospital entity that will then provide the medical care to the patient. The supply, therefore, is one of staff, which is standard rated for VAT purposes.

Where an agency supplies medical professionals (other than staff eligible for the nursing agencies’ concession), where the medical professional is working under the control and guidance of the hospital, it too is making a taxable supply of staff to that entity; not an exempt supply of healthcare.

HMRC Public Notice 701/57 provides the guidance on medical exemption and in particular, section 6, which explains the subtle nuances of supplying medically trained staff.

It is possible for a practice or agency to supply medical services under a contract where the medical professionals remain under the control of the practice or agency, not under the control of the hospital, and therefore to be making an exempt supply. For example, an agency might be responsible for providing the out-of-hours service and its people have autonomy to run that service. But this is very much dependent upon the contractual and actual position.

The takeaway here is that medical exemption is designed around protecting, maintaining and restoring a person’s health, but the contractual nature of how that is delivered means that the VAT position is not necessarily as simple as it may, at first, seem.

HR Expert – Paid Bereavement Leave

My client wants to know if they have to offer their employees paid bereavement leave by law?

Many employers offer paid bereavement leave to staff in recognition that the days immediately following a personal loss can be particularly sensitive time. Allowing staff sufficient time away from work in these situations is often seen as an integral part of the grieving process, however this is not actually a legal requirement.

Therefore, from our client’s perspective there is no need to offer staff paid bereavement leave unless they choose to do so. Whilst employees will have the statutory right for unpaid time off to tend to a dependant in an emergency situation, this will usually last no more than two days per instance. As such, if your client decides to offer extended bereavement leave then they will be free to set their own rules on how much time is allowed and whether individuals will be entitled to full pay during this time.

Our client may be concerned about the impact that allowing bereavement leave will have on their organisation, as the thought of staff taking a considerable amount of time off may cause concerns over productivity. However, failing to allow sufficient time off for bereavement leave may encourage the development of depression or other mental health issues, which could have a more substantial long-term impact on workplace performance.

If our client is set against offering bereavement leave then they could perhaps allow a degree of flexibility when it comes to booking annual leave in these situations. They should consider that a bereavement can occur suddenly and take this into consideration if staff submit short-notice requests for extended time off. Enabling annual leave in these situations will ensure individuals are given sufficient time off to recover, without affecting our client’s annual budget.

Having said this, our client should understand that the law around bereavement leave is changing and from April 2020 the specific right to parental bereavement leave will be introduced. As a result, employees will be granted a 2-week period of statutory bereavement leave if they lose a child under the age of 18. Whilst the period of leave is considered a day one right, parents will need to have 26 weeks’ continuous service to be eligible for statutory parental bereavement pay during this time.

With the above in mind our client is advised to consider whether offering paid bereavement leave is a viable option for their organisation. Although there is no requirement to do so yet, making this available to employees could be a great way to foster a positive company culture and provide staff with much needed support in difficult circumstances.

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