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: Exception from Registration

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

 

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

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

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

However paragraph 4(2) goes on to say:

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

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

VAT Question of the Week – Margin Scheme

My client is a car dealer and operates the margin scheme. He has purchased a classic car which is a collectors’ item and has imported the car into the UK from the US. I understand that the car was involved in some historic event in the US. My client has been told that he can sell the car at the reduced rate of 5%. Is this correct?

Not quite. There is a 5% effective VAT rate on the importation of collectors’ items, where the VAT is calculated on a reduced valuation (see VAT notice 702, paragraphs 3.4 and 3.5). Normally the sale in the UK would take the standard rate of 20%; the exception to this is use of the margin scheme.

Where goods have been acquired which have had VAT charged on their purchase, they are not normally eligible for the margin scheme.
However, VAT notice 718 states that “you may opt to use the margin scheme for:

  • Works of art, antiques and collectors’ items which you have imported from countries outside the EU and
  • Works or art you have obtained (which were supplied in the UK or acquired from another member state) from creators or their heirs, whether or not VAT was charged on their purchase or acquisition.”

In order to use the Margin Scheme in the above circumstances, my client needs to meet the following conditions:

  • Write to the written enquiries team at HMRC to inform them that he will take up the option and specify the date from which he will be applying the option;
  • The option must be exercised for a period of at least two years, after which he must inform HMRC in writing as and when he wishes to stop using the scheme;
  • The scheme must be used for ALL transactions and goods listed above and not just in respect of certain categories of goods, and
  • If, having opted to use the scheme, he decides to sell any goods covered by the option outside the scheme, then he is not entitled to recover any input tax on those goods until the period in which he accounts for VAT on their sale.

Assuming the car was entered under the procedure for collectors’ items, the import VAT charged will have been at the rate of 5%. Our client can therefore opt to use the margin scheme and account for standard rate VAT out of the margin. The purchase price for the purpose of the scheme will be the value for VAT at import, plus the 5% import VAT. An example calculation is set out in VAT Notice 718 paragraph 10.3.1.

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.

Tax Questin of the Week: Off-Payroll Working Rules

Q- My Client is working for a Public Sector Body through their own personal service company. They are caught under the Off-Payroll Working Rules and need to have an operation in the near future, will the Fee-Payer be responsible for the payment of any Statutory Sick Pay my client is entitled to?

A- No, while the Off-Payroll Working Rules introduced a requirement on the Fee-Payer to deduct PAYE and National Insurance from the deemed direct earnings the legislation doesn’t make the Fee-Payer liable to statutory payments. Therefore, any liability to statutory payments would remain with the individuals Personal Service Company (PSC). Read More

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