Freeports usher in a new dawn for the UK to regenerate as a global exporting power.

A welcome announcement in the Budget to approve eight new Freeports in England in regeneration regions.  Although Freeports will benefit the whole of the UK, businesses in these areas will benefit from more generous tax reliefs, simplified customs procedures and wider government support, bringing with it investment, trade and jobs.

The intention is to have Freeports in Wales, Scotland and Northern Ireland and these locations will be announced in the near future.

Today the following areas were announced as sites for the first eight UK Freeports:

  • East Midlands Airport
  • Felixstowe and Harwich (Freeport East)
  • Humber
  • Liverpool City Region
  • Plymouth and South Devon
  • Solent
  • Thames
  • Teeside

 It is expected that these Freeports will begin operations from late 2021.

What is a Freeport?

Freeports are an approved port (air or sea) where normal tax and customs rules do not apply.  On receipt at a freeport, imports can enter with simplified customs documentation and without paying customs tariffs.  Companies who operate inside the designated freeport area can store or manufacture using the imported goods before exporting again without ever being subject to customs tariffs or import procedures in the UK.

It is only if the imported goods move out of the freeport zone and into another part of the UK that they will be subject to full import declarations and payment of any customs duties.

Usually, a freeport is designed specifically to encourage companies in high-tariff jurisdictions, that import, process and then re-export goods, rather than more general business support or regeneration objectives.  The UK appears to have assigned the Freeports with regeneration as a factor, as per the Chancellor’s overview of Teeside Freeport’s possibilities. 

This will benefit those areas as it is expected there will be movement of manufacturing and warehousing into these zones to minimise their customs obligations and take advantage of UK tax reliefs that have been announced in the Budget.

What are the benefits for Businesses?

One of the benefits of operating within a Freeport is that a company can store goods without the need for a customs warehouse authorisation.  This reduces costs and administrative burden but would likely require links to the Freeport’s inventory system.

The benefits of a Freeport are normally in high-tariff jurisdictions.  As the UK has already made significant alterations to the UK’s Customs Tariff, by liberalising over 2000 commodity codes to 0%, and the introduction of Postponed Import VAT Accounting (PVA), the benefits of operating within a freeport are somewhat reduced. 

Therefore, Freeports will be particularly attractive to those businesses that import goods which attract a high Customs tariff, for example, textiles and footwear as well as food products and which are processed in some minor way before being sold on to the EU as it will avoid the Double Customs Duty hit without having to use expensive Customs Warehousing regimes.

This is where the addition of a Tax Site within the Freeport creates other attractive benefits which will allow businesses to benefit from:

  • An enhanced 10% rate of Structures and Buildings Allowance
  • An enhanced capital allowance of 100%
  • Full relief from Stamp Duty Land Tax
  • Full Business Rates relief
  • The government also intends to allow an employer National Insurance contributions relief

To discuss the content in this blog please get in touch with our Indirect Tax Partner Jonathan Main at jonathan.main@mooreandsmalley.co.uk

For further information on Budget 2021 please visit our dedicated Budget Hub. 

Budget 2021: Shot in the arm for UK economy

Tony Medcalf, tax partner at MHA Moore and Smalley, said: “Today’s budget will provide a much-needed shot in the arm for the UK economy through a range of measures aimed at getting firms in all sectors back on their feet quickly and promoting economic recovery through business growth.

“The extension of the furlough scheme will provide a safety net to employers over the coming months, particularly those in the hospitality industry who will be unable to trade fully before May 17 at the earliest. This, along with the £5 billion restart grants and continued reductions to VAT, will help retail, hospitality and personal care firms to recover as the lockdown is eased.

“There is a strong signal from Government that in the short-term, it will look to raise tax revenues by incentivising business growth rather than through any immediate tightening of the purse strings.

“While corporation tax will be increased to 25 per cent for many businesses, this higher rate remains relatively low among G7 countries and will not take effect until 2023.  This allows us to remain competitive globally. The Chancellor however will retain a lower rate for smaller businesses.  The super deduction to reduce taxable profits for productivity investments will also provide a significant incentive for UK firms to invest in their own long-term growth.

“The Government has also signalled its intention to the levelling up agenda through its creation of a series of freeports, including in the Liverpool City Region, and it will be interesting to see to what extent this will create jobs and growth opportunities across Liverpool and the wider North West region over the coming years.”

Employee Ownership Trusts – A new route for selling your business

The Government brought in legislation in 2014 allowing a business owner to give or sell their business to an employee trust completely free of capital gains tax and inheritance tax. Many business owners are considering taking advantage of this tax relief.

Employee trusts have been used by employers for a number of purposes to benefit their employees. Such trusts (employee benefit trusts being one example) have been around for a number of years. The UK tax legislation has always given employee trusts tax advantages where they are implemented to genuinely benefit a company’s wider employee base.

In 2014, in pursuit of a Government initiative, legislation was introduced to incentivise “indirect” employee ownership of companies through new qualifying trusts – Employee Ownership Trusts or EOTs (indirect employee ownership, by the way, is the ownership of the company via a trust benefiting employees as opposed to the company’s shares being owned directly by employees). Initially there was scepticism about the likelihood that these new reliefs would be taken up. It all seemed a little too altruistic – “am I going to give my company away to my employees? Probably not”. But business owners have started to realise the advantages of EOTs when it comes to selling their businesses.

It started to become clear that the tax reliefs that were given by the new legislation were available not just for gifts of businesses to an EOT, but for sales of businesses to EOTs at full value. So not only does an EOT allow a business owner to pass on their business to their employees as a legacy of future employment, it also (and this is what is attracting people) allows the business owner to sell their business to a newly set-up EOT for full value completely free of Capital Gains Tax (CGT) and Inheritance Tax (IHT). That’s 0% CGT, no tax whatsoever.

Sale of shares to an EOT – what are the tax reliefs

Capital gains tax exemption

From 6 April 2014 an individual (or trust but not a company, note) who gives or sells their shares to an EOT, leading to the EOT having a controlling interest in that company by the end of the tax year which it did not have at the start of the tax year, will have a complete exemption from CGT on the sale/gift of their shares to the EOT. The shares benefiting from this CGT exemption have to be sold to the EOT in the tax year in which the EOT first acquires a controlling interest. A controlling interest for these purposes means the EOT holds more than 50% of the ordinary share capital and the voting rights and must be entitled to more than 50% of the company’s profits and assets if it is wound up.

Other conditions that need to be satisfied to qualify are:-

The controlling interest requirement: The shares must be in a trading company or holding company of a trading group.

The all-employee benefit requirement: The EOT must be established for the benefit of all employees of the company (excluding, broadly, individuals who hold or have previously held 5% of the shares).

The participating and equality requirements: All eligible employees must be able to benefit from the EOT (the “participation requirement”) and they should do so on the same terms if there is ever a distribution from the EOT (the “equality requirement”). In this latter requirement, the company can, to an extent, differentiate on the grounds of salary, length of service or hours worked.

The limited participating requirement: The number of continuing shareholders who are directors and employees must not exceed 40% of the total number of employees of the company or group.

Employee annual bonus exemption

A company owned by an EOT can pay bonuses of up to £3,600 per employee per tax year completely free of income tax (but not NIC strangely) if these bonuses are paid to all qualifying employees on a “same terms” basis.

Potential structure and benefits

There are several ways of taking advantage of the reliefs:-

The trustee of the EOT can borrow money from a bank to finance the purchase of the shares;

The company can borrow the money and lend it to the EOT;

The company can borrow the money and contribute this to the EOT;

The seller can sell their shares to the EOT on a deferred payment basis with the sale proceeds due in instalments.

Tax analysis of the structure

1. Loan from Bank to EOTNo tax event
2. Purchase price of £10m (on deferred payment terms)No tax payable on purchase price of £10m (ordinarily £2m CGT or £1m with entrepreneurs relief)
3. More than 50% of shares transferred to EOTNo tax other than 0.5% stamp duty
4. Contributions to the EOT from profit to cover interest and repayment of capitalTax relief where related to interest payments but not for repayment
5. Additional payments from profitsTax deductible if distributed to employees by way of bonus payments
6. Bonus payments to employeesNo tax payable on bonuses to employees of up to £3,600 pa (saving income tax but not NICs)
7. Repayment of loanNo tax event

Summary

The CGT benefits for the seller plus the IHT exemption mean that EOTs must be considered by anyone planning on selling their business. Most businesses when sold will currently be able to benefit from the 10% entrepreneurs relief 10% tax rate. But that’s still £1m tax on a £10m gain sale. Using an EOT would mean the seller would have no tax on a gain of £10m on selling their shares to an EOT.

To add to the CGT benefit is the benefit to the employees of tax-free bonuses and the chance for a business owner to bequeath the gift of long-term employment to his employees.

Who might be interested in an EOT?

Any owner managed business whose owners are thinking of selling their business. This will also be of interest to owners who want to realise some of their capital value from a sale into their EOT. Because of the nature of their businesses, we think this might be of most interest to knowledge-based companies where the pyramid structure between employees, management and owners is fairly flat. Such businesses as architects, those in advertising, design, publishing, fashion or music, quantity surveyors, management consultancies, healthcare companies, we think will be particularly interested. But no company should rule it out. We know of printing companies that have used it, manufacturing companies and retail companies.

Contact Us

For further information please speak to your usual MHA Moore and Smalley tax contact or contact your local office.
info@mooreandsmalley.co.uk

VAT registration delays

The Chartered Institute of Taxation (CIOT) has recently published an update from The Business Delivery Team at HMRC on VAT registration delays.  It reads:

“We’re currently dealing with a high volume of VAT Registration applications. As a result, we’re processing around 70% of these applications within 30 days and the majority of those cases within 5 working days. We’re prioritising this work and expect to be processing 95% of VAT Registrations within 30 days by the end of March 2021. We are sorry for any delays.

“To speed things up we’re contacting some customers where we need additional information to complete their registration and asking them to call us or ask their agent to contact us. We’re also encouraging Agents and Traders to check that all information requested at https://www.gov.uk/guidance/register-for-vat#what-happens-next is included with their application to avoid any further delays. Applications from Agents and customers are all subject to the same checks.

“Please use the online VAT Registration service wherever possible. It is generally quicker than applying by paper and can be considerably quicker if the application can be fully processed straightaway.

“When submitting your application please check the following to avoid common errors that cause delays:

  • Addresses provided on the application must match the business’s principal place of business;
  • Notification of a trade classification must match up with the work that the business itself carries out;
  • The VAT liability of trading should be correctly identified;
  • Invalid signatory for the application – e.g. for a corporate body it must be a director, company secretary or authorised signatory or an authorised agent;
  • Invalid dates on the application – e.g. does the effective date of registration requested match up to the circumstances that have been outlined for requesting registration elsewhere in the application?;
  • The bank account details provided must be in the name of the taxable person

“We are also considering how we can improve the registration process by resolving more cases in real time by telephone and engaging with customers in a different way to gather any further required information. We’ll tell you more about this shortly.”

We are here to help

If you would like further information about this topic, please contact Jonathan Main, Indirect Tax Partner on 01772 821 021 or email jonathan.main@mooreandsmalley.co.uk

Focus On – Covid-19 VAT Deferral

New Payment Scheme Details announced

If you took advantage of the opportunity to defer VAT payments in the period from 20 March to 30 June 2020, the deadline of 31st March 2021 for paying the deferred VAT is fast approaching.

“There is however a choice – you can pay all amounts owedby 31 March 2021 or opt to pay the amount owed over a maximum 11 month period interest free.”

The “VAT deferral new payment scheme” opened on 23 February 2021 and will remain open until 21 June 2021. The link to join the scheme can be found at https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19

Take action now!

To take advantage of the VAT deferral, you will need to set up a direct debit and must therefore be the authorised account holder. For this reason, if we are your agent, unfortunately we cannot opt in on your behalf. You will need to use your own Government Gateway account.

To opt in, all your VAT returns for the last four years must also be up to date.

The first instalment is paid on joining the scheme, with subsequent payments made by direct debit.  You will of course need to make sure you have the capacity to make these payments.  If this will be difficult, it may be possible to agree a separate time to pay arrangement with HMRC.

Existing time to pay arrangements can continue to run alongside the VAT payment scheme.

Instalment options

You can join at any point between 23 February and 21 June 2021. 

When you opt in will determine the number of instalment payments that will need to be made:

Opt in byInstalment payments
19 March 202111
21 April 202110
19 May 20219
21 June 20218

Therefore, the earlier you join the scheme, the higher the number of instalment payments you can choose, but the sooner you start paying the deferred VAT.

If you would like further information about this topic, please contact Jonathan Main, Indirect Tax Partner on 01772 821 021 or email jonathan.main@mooreandsmalley.co.uk

Domestic Reverse Charge Webinar

The Domestic Reverse Charge (DRC) is being introduced from 1 March 2021. The new reverse charge is the latest initiative to combat missing trader or carousel fraud that first appeared in relation to precious metals, computer chips and mobile phones. Due to both the Covid pandemic and preparations relating to Brexit, the introduction has been delayed twice but it appears that it will not be delayed a third time.

The DRC will affect businesses that:

  • Buy or sell services that are ‘specified services’ that are reported within the Construction Industry Scheme (CIS)
  • The supplier and the recipient are both registered for VAT in the UK
  • The supply is standard rated or reduced rated.
  • The supply is not to the end user or an intermediary

Jonathan Main, Head of Indirect Tax and VAT at MHA Moore and Smalley explains how the new system will be operated and what those in the construction sector need to do to comply.

VAT and solicitors’ disbursements

In June 2020, HMRC released their Revenue & Customs Brief 6 (2020) in respect of the VAT treatment of property search fees charged by solicitors and conveyancers.

This confirmed the withdrawal of the ‘postal concession’ from 1 December 2020. This concession allowed solicitors and conveyancers not to charge VAT on fees for property searches conducted by post, even where the disbursement conditions were not met. This is a further consequence of the VAT tribunal decision in Brabners LLP, where it was confirmed that electronic (online) search fees were not disbursements. This was because the searches in question were supplied to the law firm which then used them as part of its own overall supply of legal services to the client. In this situation the costs could not be treated as disbursements for VAT purposes.

You may find it helpful to have a reminder of the conditions for disbursements, as detailed in the VAT Notice 700.

You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:

  • you acted as the agent of your client when you paid the third party
  • your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
  • your client was responsible for paying the third party (examples include estate duty and Stamp Duty payable by your client on a contract to be made by the client)
  • your client authorised you to make the payment on their behalf
  • your client knew that the goods or services you paid for would be provided by a third party
  • your outlay will be separately itemised when you invoice your client
  • you recover only the exact amount which you paid to the third party
  • the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account

The difficulty for solicitors is that they may meet the cost of statutory charges on behalf of clients, act as co-ordinators in relation to client transactions or even incur costs themselves that they can attribute and recharge to clients. It is therefore important that solicitors carefully consider whether the disbursement conditions are met in each situation, should they wish to treat costs as disbursements when charging clients. Getting it wrong could prove costly.

Contact Us

If you would like further information about this topic, please contact Steve Forster, Indirect Tax Senior Manager on 01772 821 021 or email steve.forster@mooreandsmalley.co.uk

Grow economy by encouraging firms to invest, says tax expert

Tony Medcalf, tax partner at MHA Moore and Smalley, looks ahead to the budget on March 3 and the measures the Chancellor could put in place to support business recovery from the Covid-19 pandemic.

If I could ask one thing of the chancellor for the upcoming budget it would be a focus on tax relief schemes which encourage businesses to expand by investing in their own productivity. I believe the government should prioritise putting measures in place to help the UK economy grow out of the current financial situation, which will in turn help generate more tax revenue.

Prompting companies to invest in their own productivity could be done through extending capital allowances, such as the Annual Investment Allowance, or giving businesses better access to money to help them make these investments.

This could be through government-backed funding initiatives but also by better incentivising shareholders to invest money into their business.

I would also like to see targeted tax relief for business investment into certain areas. There is a lot of speculation about how the government will support the creation of a series of freeports across the UK which it is likely to link to the ‘levelling up’ agenda.

We may also see further government support for Enterprise Zones, which benefit from enhanced capital allowances.

This year’s budget could see an increase in capital gains tax. We could also see new taxes based around how long an asset is owned.

Speculation is also circulating about increases to corporation tax. While I believe it is currently more important to introduce measures which prompt business growth, if raising corporation tax is firmly on the government’s agenda it may be sensible to do this now, rather than avoid raising taxes during an election year.

Fuel duty is often a point of discussion when the budget comes around, and an increase in fuel duty would not be unreasonable this year. With less people currently using their cars, the government may see this as an opportunity to raise rates without much immediate impact.

For more analysis and comment visit our Budget Hub.