Protect yourself/business now with our Tax Investigation Service

With a budget deficit of over £300 billion, we fully expect HMRC to raise more enquiries this year  and next to increase tax revenue to plug the hole left in the Government’s finances by the economic damage caused by Covid-19.

For those who have relied on a Covid-19 support scheme such as the CJRS (furlough scheme) and the SEISS (self-employed scheme), it is likely that HMRC will be looking a lot more closely at tax returns, payments and compliance history. Tax and VAT repayments will also be checked more rigorously alongside the usual full tax investigations.

Last year, HMRC collected £34.1 billion through tax investigations and enquiries. What’s more, HMRC can target anyone who submits a tax return and their highly efficient ‘Connect’ software is accessing and trawling through financial information right now. 83% of tax investigations are triggered by the ‘Connect’ system.

Better safeguarding for you and your business

With this increased activity and higher numbers of tax investigations, it’s never been more important to protect yourself and/or business with our tax investigation service. For a small yearly fee, we will:

  • Defend you if you are selected for a HMRC tax investigation
  • Cover all costs included in the service so that you know where you stand
  • Support you through the process and minimise any hassle and stress.

What happens if I don’t protect myself/business?

HMRC can investigate anyone at random at any time. If you’re not protected, the costs of a tax investigation can go into thousands of pounds and last months.

Dealing with a tax investigation isn’t included in our normal costs, so it pays to act now and safeguard yourself/business against the cost and stress of a tax investigation.

Act now to protect yourself/business

As your accountants, we want to make sure you’re safe, secure and protected in every possible way. That’s why we strongly recommend you take advantage of our Tax Investigation Service.

Please visit our website  for more information – then sign up online to subscribe.  It’s one small thing you can do today that could make a big difference to your future.

VAT Return Submissions – Voluntarily Registered Businesses Changes from April 2021

VAT registered businesses with turnover above the VAT threshold were mandated into the MTD regime in April 2019, with these businesses now submitting quarterly updates, keeping digital records and using MTD compatible software.  In a recent, not widely publicised, update from HMRC, there will be a change in how VAT returns are submitted for those under the VAT threshold who are voluntarily registered, from April 2021.

The change sees the end of the current VAT mainframe for VAT return submissions.  Businesses who are not yet signed up to MTD will be required to make the following choice:

  1. Submit your VAT returns yourself through your Business Tax Account or,
  2. For an agent to continue filing your returns from April 2021, you will be required to sign up to MTD and comply with all the MTD rules in place.

For any customers using XML to file VAT returns this will also no longer be compatible and a change will be required from April 2021.

Whilst there is no legal requirement for voluntarily registered businesses to sign up to MTD until 1 April 2022, this change will likely push many businesses to make the transition sooner than planned.

Initially, changing software for keeping records and filing returns may require financial investment and it will take time to learn and adjust business practices.  Once the initial settling period is over, the use of MTD compliant software can provide a number of benefits, such as:

  • A reduction in input errors
  • Faster bookkeeping
  • Automatic upload of information
  • Quick and easy tax position
  • Using the software to assess business performance and create forecasts

At MHA Moore and Smalley we have assisted a large number of our clients to become MTD compliant and also understand the potential benefits.  For those looking to make the change now, please contact a member of our team and we will be happy to assist.

Further information on the full requirements for MTD can be found here:

https://www.gov.uk/guidance/making-tax-digital-for-vat

The full publication from HMRC can be read here:

https://www.tax.org.uk/sites/default/files/Final%20version%20sent%207%20Oct%202020.pdf

If you are interested in discussing any of the content discussed in this blog further, please get in touch with Tax Planning Consultant Andy Purcell on 01772 821 021 or andy.purcell@mooreandsmalley.co.uk

Small companies to be subject to cap on R&D Tax Credit Repayments

Companies in receipt of repayable Research and Development (“R&D”) tax credits under the small companies (SME) scheme might be impacted by a new cap on the amount of repayment receivable, coming into effect for accounting periods beginning on or after 1 April 2021.

This provision had been scheduled to come into effect on 1 April 2020, but due to the uncertainty caused by the Covid pandemic, was shelved for a year.

The detail has now been unveiled in next year’s finance bill.

Companies will be limited to receiving £20,000, plus 300% of its PAYE and NIC liabilities (and potentially 300% of the PAYE and NIC liabilities of connected companies).

The inclusion of a £20,000 threshold protects those with small claims, which will be a welcome relief for a lot of businesses.

Whilst this will come as a blow for some claimants, it targets those who subcontract large amounts of their R&D to third parties so a lot of companies should be unaffected by the cap.

There is also an exemption to the cap, for companies who meet two conditions:

Condition A

Condition A requires the company to be creating, preparing to create or managing intellectual property. These activities must be undertaken largely by employees of the company, and the company must have the right to exploit the intellectual property (IP).

This is a similar requirement to the patent box regime, but this test is focussed on the management activities around the exploitation and development of IP rather than ownership. This means formulating plans and making decisions in relation to the development or exploitation of the rights, to include activities such as:

  • Being involved in planning or decision-making activities associated with developing and exploiting the IP;
  • Deciding whether to grant licences, expand research activities or product analysis, and development from their IP;
  • Deciding on maintaining and extending protection in other jurisdictions.

Condition B

Condition B requires that the total of the company’s qualifying expenditure with connected persons (on externally provided workers and subcontracting R&D) is no more than 15% of its qualifying expenditure.

These provisions are designed to exempt companies with low PAYE and NIC, but which are nevertheless themselves engaged in genuine, substantial R&D.

Contact us

If you want to understand whether this will affect your claim, please contact our tax team.

This update originally appeared on the website of our colleagues at MHA Tait Walker

Changes to the Annual Investment Allowance

The temporary increase in the Annual Investment Allowance (AIA) limit to £1,000,000 has been extended to 31 December 2021.

What is the AIA?

The AIA is a 100% upfront allowance which enables a business to write off expenditure on qualifying plant and machinery up to a specified amount each year. It is intended to encourage greater levels of investment in the economy by providing an increased incentive for businesses to invest in plant and machinery.

Most assets that qualify as plant and machinery for capital allowances will qualify for AIA. Some common examples are computers, office furniture and equipment, vans and lorries, machines used for business purposes, certain fixtures such as air conditioning, and certain parts of a building referred to as ‘integral features’.

Assets that are excluded from AIA include buildings, cars and assets used solely for business entertainment. For sole traders and partnerships, there is a restriction on AIA entitlement for assets that are used partly for private purposes.

Although cars do not qualify for AIA, expenditure incurred before 1 April 2021 on electric cars or cars which have CO2 emissions not exceeding 50g/km will qualify for 100% first year allowances, provided that the cars are acquired new and unused.

The maximum amount

The AIA limit has changed a number of times since it was first introduced in The Finance Act 2008. The amount was temporarily increased to £1,000,000 from 1 January 2019 and was due to revert back to the permanent limit of £200,000 from 1 January 2021. In a statement made on 12 November 2020, the government announced that the increased limit will remain in place for another year and will revert back to £200,000 on 1 January 2022.

The change is intended to stimulate investment by supporting businesses with 100% up-front tax relief during the continuing uncertainty caused by COVID-19.

The AIA limit applies to a 12-month accounting period and transitional rules will apply where a business has a chargeable period that spans 1 January 2022.

Expenditure in excess of the available AIA will be dealt with under the standard rules for capital allowances and will qualify for writing down allowances in the general pool or special rate pool.

Contact us

If you would like to discuss how the extension of the increase in Annual Investment Allowance could affect your business please get in touch with our tax team.

EMI Share Option schemes in times of COVID-19

When Coronavirus turned the entire world upside down, nearly every business owner focused on protection of their business, its income, and its employees. In many cases protecting the economic wellbeing of the business resulted in pay cuts, furloughing staff, and cutting performance incentives such as bonuses.

Although the pandemic is far from over, it is important to consider the need to retain key value-generating employees that are critical to the survival and future success of a company. Granting EMI share options could be used to offset the downside of furlough  or a salary reduction without the need for an immediate cash injection, allowing an employee to feel part of the company’s future irrespective of the short term challenges.  

The Enterprise Management Incentives Scheme (EMI) is an approved employee share scheme that is available to most trading businesses. The main requirements are:

  • The business is independent with a permanent establishment in the United Kingdom, has gross assets of less than £30 million and less than 250 full time equivalent employees
  • The trade is not one of the excluded activities like dealing in land, banking, property development, farming, operating, and managing hotels, nursing homes or residential care homes

One of the main qualifying requirements of the scheme is that the employee works no fewer than 25 hours a week at the business or, if less, at least 75% of their working time. However, for options granted prior to 20 March 2020, employees will now remain qualified if they were placed on furlough, unpaid leave or were required to work reduced hours as a result of Covid-19.

The EMI scheme allows the employers to grant tax efficient share options to key employees. The main tax advantage is that any uplift in share value is not subject to income tax but is instead chargeable to capital gains tax, which can be as low as 10%.

Share options can be designed to suit the needs of the business. For example, the exercise of options can depend on meeting certain performance conditions and there can be exit only options which can only be exercised on a sale of the company.

In summary EMI schemes offer flexibility and for key employees, a great alternative to a bonus or a pay rise. Additionally, given the economic climate, it may be possible to agree lower share valuations with HMRC.

Contact us

If you would like to discuss how an EMI scheme could benefit your business please get in touch with our tax team.

Capital Gains Tax Review – Forward to the past

The Office of Tax Simplification (OTS) recently released the first report of the Capital Gains Tax (CGT) review.

The Chancellor asked the OTS to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. The report details areas in which CGT is counter-intuitive and creates odd incentives. The report draws on a range of economic perspectives with almost 100 written responses and analysis of taxpayer data. There will be a second report early next year which will explore key technical and administrative issues.

The report suggests changes to the CGT regime that would bring it back to be similar to the regime in the 1990s.

Rates and boundaries

It is believed the disparity in rates between CGT and Income Tax (IT) can distort business and family decision making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.

Possible amendments suggested by the OTS are:

  • Align IT and CGT rates. Income tax rates in the UK (not Scotland) are 20%, 40% and 45% with CGT rates being 10%, 18%, 20% and 28% depending on the asset sold and the individuals income levels i.e. if an individual disposes of listed shares in an investment portfolio and pays higher rates of IT, they will pay CGT at a rate of 20% on the gain made on sale. The change could mean the individual will pay CGT at 40% instead of 20%
  • Ensure CGT can be calculated without the need for knowing taxable income
  • Possible relief for inflationary gains, meaning an indexation allowance would apply
  • Making owner managed business owners rewards for employment duties more consistent

Annual exempt amount

The OTS have said that the relatively high level of the Annual Exempt Amount can distort investment decisions. In the tax year 2017-18, around 50,000 people reported net gains just below the threshold. If the government’s policy is that the Annual Exempt Amount is intended mainly to operate as an administrative de minimis, it should consider reducing the level.

Possible amendments suggested are:

  • Reducing the Annual Exempt Amount to an admin de minimis
  • Looking at the chattels rules and amending the limits
  • Formalising the administration of real time gain reporting and aligning it with the Personal Tax Account
  • Introducing a requirement for fund managers to report capital gains direct to taxpayers and HMRC directly, to make compliance easier

Interaction with lifetime gifts and Inheritance Tax (IHT)

CGT incentivises owners to transfer business and personal assets to others on death rather than during their lifetime. This may not be best for business, the individuals or families involved, or to the wider economy.

The OTS’s second IHT report recommended that where a relief or exemption from IHT applies, the government should consider removing the capital gains uplift on death, and instead provide that the recipient is treated as acquiring the asset at the original base cost. This would not affect taxpayers who retain assets, but would affect those who sell recently inherited assets.

The suggested amendments are:

  • As mentioned above, an option to remove the uplift value on an assets received on death to instead ensure the recipient takes on the original base costs of the asset. Currently, the base cost acquired is the probate value.
  • Widening the gift hold over conditions to make the relief apply to more assets. Currently, gift hold over is only allowable on qualifying business assets and shares.
  • Rebasing asset values to a more recent year. Currently, if an asset was acquired after March 1982 the base cost is the initial value at acquisition. If the asset was acquired prior to March 1982 the value is rebased to the March 1982 value, meaning only the uplift in value since that date was chargeable to CGT. An option would be to rebase asset values to a date more recent than March 1982, to say ten years ago.

Business reliefs

There is a policy judgement for government to make about the extent to which CGT reliefs should be used to seek to stimulate business investment and risk taking.

Possible changes could be:

  • Changing Business Asset Disposal Relief (formerly Entrepreneurs Relief) to focus more on business owners retiring, possibly introducing a holding requirement period of longer than the current 24 months. A suggestion of ten years is made.
  • Abolish Investors Relief (relief for selling unlisted shares in a trading company that you are not connected to).

Our view

The initial report suggests a reform of the CGT regime to similar to how it was in the 1990s, when CGT rates were aligned to IT rates and indexation relief was available. The suggestions are very much that, suggestions, and we don’t expect every area to be affected, but this will become clearer when the second report is released early next year.

Some proposed changes imply that the administrative burden may be less, but some taxpayers would also suffer less CGT for example if gift relief is widened to non business gifts.

A small change of simply reducing the Annual Exempt Amount could mean hundreds of thousands of additional tax returns being filed each year, which may not result in a lot of tax but may have an administrative burden on HMRC

It would be sensible to assume business owners will be targeted to make business relief conditions tighter e.g. being based more on retirement, and the IT and CGT rates to be aligned.

The 2020 pandemic has had a huge impact on the economy and finances and we all know the government will seek to recoup as much additional taxes as they feasibly can, whilst considering the impact on business and entrepreneurial risk taking.

What should you do?

As ever, nothing is certain, but if you are considering selling an asset, gifting a business asset, making a gift to a trust or carrying out IHT planning in the near future, it may be worth completing transactions sooner rather than later.

We would hope that changes to the regime will be clear, with advance notice, to give taxpayers and our clients time to consider how it impacts them and to make decisions in advance, but this is not clear at the moment.

Contact us

If you would like to discuss the report with us, or have any concerns regarding your current capital assets, please get in touch with our tax team.

This update originally appeared on the website of our colleagues MHA Tait Walker.

VAT – Change to the treatment of early termination payments

HMRC recently issued a Revenue and Customs Brief (RCB) setting out changes to the VAT treatment of early termination payments. The guidance was given in the context of European Court decisions relating to the early termination of contracts for the provision of telecommunications services.  The RCB makes it clear that HMRC have changed their policy for all early termination payments.

  • This will be the case whether the payment is characterised as ‘compensation’ or ‘liquidated damages’.
  • The payment will be subject to VAT whether the payment was envisaged in the contract first signed for the provision of goods or services.
  • HMRC maintain that a payment made to a lessor for breach of contract will be subject to VAT.

A payment made in compensation for breach of contract will only be subject to VAT if the contract is terminated early as a result of the breach.

What does this mean for me?

Are you the supplier?

If you provide goods or services with payments due periodically over the life of a contract, you need to revisit existing agreements with your customers. If those contracts contain terms for early termination, liquidated damages or breach, those payments should be characterised as excluding VAT. This will protect the payment due on the basis that it excludes, rather than includes VAT. Similarly, any negotiated settlement not within the terms of your original agreement should exclude VAT.

This treatment will also apply to landlord and tenant relationships if you receive payment to break a lease early. However, it will not impact dilapidation payments, as these are not paid as a consequence of early termination.

Are you the customer?

If you are the customer, tenant, or lessee, you should ensure you understand the reason for making the payment. These changes only cover early termination, which is particularly relevant for payments due for breach of contract. If the contract is not terminated early as a result of the breach, the payment is not subject to VAT.

If VAT is due, make sure your supplier provides you with a valid VAT invoice, so that you can recover VAT on your next VAT return.

What about the historical position?

HMRC have stated that they expect businesses to review the position taken over the last four years and adjust the position if payments have been received and VAT has not been paid to HMRC. They have stated a ruling from HMRC is not sufficient defence against the need to pay VAT on amounts previously received by the business. This is an unwelcome, but not unprecedented position taken by HMRC.

If this is an issue for you as a supplier, please speak to us as there may well be a defence available on the grounds of the legitimate expectation of following clear and unambiguous guidance from HMRC.

If you would like to discuss this further please get in touch with indirect tax partner Jonathan Main on 01772 821 021 or jonathan.main@mooreandsmalley.co.uk

Brexit Update for the Motor Sector

As Brexit talk deadlines extend, the position of the UK Motor sector remains a cause for concern. At OEM level the prospect of a 10% tariff on cars moving in and out of the UK from the EU now seems increasingly inevitable. As well as these Motor specific topics, we are talking to clients about the following Brexit related issues.

We know that manufacturers have differing approaches to the issue with Ford having taken the most radical step in the market with plans to make their dealers the ‘importer of record’. Ford are seeking to minimise the disruption and added bureaucracy this will entail, but there is an inevitable impact on cash flow. Dealers will no longer benefit from the cash flow advantage of reclaiming VAT from HMRC on stock purchases before paying that VAT to Ford. Other manufacturers will no doubt monitor the practical impact of this approach and we may see it spread more widely in the sector.

In the meantime, most dealers will continue to buy from UK distribution arms and will notice no change other than an inevitable upward pressure on price due to the impact of tariffs. This may create some market shifts as the tariff change will only affect imports of cars manufactured in the EU – the market price of those cars will therefore rise relative to cars imported from further afield. For example, cars imported from South Korea benefit from a zero tariff and this is expected to continue post-Brexit.

Some dealers buy stock directly from manufacturers or distributors in Europe and they will need to understand the impact of the UK’s exit from the EU Single Market and Customs Union on the cost and practicalities of importing prestige sports cars, mainly from Italy.

Dealers who export cars must anticipate the end of the New Means of Transport Scheme (NMT) which allows EU nationals to buy cars VAT-free in the UK where the vehicle is ultimately destined for an EU address. The Personal Export Scheme (PES) will replace it, but the conditions are tighter and dealers need to ensure they are familiar with them.

As well as these Motor specific topics, we are talking to clients about the following Brexit related issues.

Customs Warehousing

This will be really important in a No-Deal situation. Our info sheet is here and clients in a manufacturing setting will be particularly affected. We can provide detailed project based advice.

Commercial terms

All businesses with intra-EU trade will need to have revised paperwork to deal with the changes, we can advise on what they need. In particular businesses who have commercial terms to deliver to their customer will need to review their contracts to see what implications this has. We can also introduce Customs agents to undertake accurate declarations.

EU VAT registrations

A side effect of importing into the EU will be the requirement to be registered for VAT and potentially appoint a fiscal representative. Without it a business will not be able to claim back their import VAT or trade within the EU. We can handle all aspects of these obligations.

Get in contact to find out how we can help your dealership with its planning for Brexit.

Contact us

If you have any questions in regards to the above content, please contact Jonathan Main on 01772 821 021 orjonathan.main@mooreandsmalley.co.uk.

Off-Payroll Working from April 2021

The Off-Payroll working legislation is designed to counteract the tax and national insurance advantages for workers inserting a company between themselves and their end client. This personal service company – (PSC) contracts with end clients in order to provide the worker’s services. The PSC would then pay dividends, as opposed to salaries, resulting in National Insurance (NIC) savings.

This type of transaction is already subject to legislation to try and counteract it, known as IR35 which was introduced in April 2000.  Where IR35 rules applied, then the worker would be required to operate payroll on payments deemed to be paid by the personal service company.

In 2017, MP Mel Stride was quoted “The cost of non-compliance with IR35 in the private sector is projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23.”.  A government consultation paper stated ““HMRC estimates that around a third of people working through their own company should fall within the rules and be taxed as employees. However, currently, only 10% of this group actually determine they should be taxed in this way.”  It is because of this perceived lack of compliance in operating the rules, that the government decided to introduce the off payroll working rules.

The rules work by switching the requirement to determine whether the off payroll working rules apply from the worker’s PSC to the end client.  With this, the potential liability for underpaid income tax and NI also switches from the PSC to the end client.

The rules were originally due to begin on 6 April 2020, however at the last minute the government announced a one year delay to the rules as a consequence of the Covid-19 pandemic.  The rules are therefore due to commence from 6 April 2021.

The rules will only apply to medium/large businesses. Small companies are exempt from the new rules. A small company is one which can satisfy two of the following three conditions:

  • Turnover for the year not more £10.2m
  • Total assets on the balance sheet not more than £5.1m
  • Average number of employees in the year not more than 50

Where the company is part of a group or there are companies under the same control, these companies must be taken into account. Unincorporated businesses are treated as small if their turnover is less than £10.2 million.

Businesses should be taking action now to ensure there is sufficient time to review their contractor’s positions and fully engage with them.  Early and regular communications with contractors explaining the upcoming changes and the process, will reduce the risk of status decision challenges.

Please get in touch with our tax team if you require advice on Off-Payroll working