What are Employee Ownership Trusts (EOT)?

Most people know that John Lewis led the way on employee ownership in the UK, and in 2014, specific tax reliefs were introduced to incentivise “indirect” employee ownership of companies. 

Indirect employee ownership is ownership of the company via a trust benefiting employees as opposed to the company’s shares being owned directly by employees.

This occurred through a new type of tax-advantaged trust known as an EOT (Employee Ownership Trust). 

Initially, there was limited take-up of the EOT tax reliefs, but business owners have started to realise the advantages of EOTs when it comes to selling their businesses as the tax reliefs are available not just for gifts of companies to an EOT, but for sales of companies 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, but it also allows the business owner to sell their company to a newly set-up EOT for full value completely free of Capital Gains Tax (CGT) and Inheritance Tax.

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) 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 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 trading 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 free of income tax (but not NIC) if these bonuses are paid to all qualifying employees on a “same terms” basis.

Who might be interested in an EOT?

Any owner-managed company whose owners are thinking of selling their company or who want to realise some of their capital value from a sale of a controlling interest to an EOT. 

Because of the nature of their businesses, we think this might be of most interest to companies where the pyramid structure between employees, management and owners is fairly flat, such as those in advertising, design, publishing, fashion or music, architects, quantity surveyors, management consultancies or healthcare companies. 

However,  no company should rule it out, as we know of printing companies, manufacturing companies and retail companies that have successfully transitioned to employee ownership using an EOT.

Would you like to know more about Employee Ownership Trusts?

If you require any advice regarding Employee Ownership Trusts, please get in touch below and one of our experts will be in touch.

This insight first appeared in our employee share scheme hub.

What are the rules for claiming VAT on charging electric vehicles?

Following the publication of Revenue & Customs Brief 7(2021), HMRC have received a number of representations about the limited options for reclaiming VAT on the cost of charging electric vehicles.

The latest Brief (1/2022) explains that HMRC is now reviewing the situation where an employee is reimbursed by the employer for the actual cost of electricity used in charging an electric vehicle for business purposes.  

This is to determine what evidence can be provided to allow the employer to claim the related VAT, subject to the normal rules.

Are there any changes for VAT when the vehicle is used for private use? 

HMRC is also considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use of electric vehicles. 

Once the review is complete, HMRC will publish guidance to confirm its policy and provide information to businesses. 

What are the current rules on charging electric cars?

HMRC have updated section 8 of VAT Notice 700/64 (Motoring Expenses) covering the recovery of input tax incurred by businesses regarding the charging of electric cars.

In summary, the current rules relating to charging electric vehicles and claiming input tax are as follows:

VAT can be claimed as input tax when charging at a public or at work

Where businesses charge electric vehicles at work or a public charging place and the electricity is put to business use, the VAT can be claimed as input tax.

Sole traders & partnerships can recover VAT if charged at home

Sole traders and partners are able to recover the VAT incurred on the cost of charging an electric vehicle if the vehicle is charged at home.

Public charging points can be used to recover input tax if used by an employee

If an employee charges an electric vehicle at a public charging point, the supply is treated as made to the employer and the VAT can be recovered as input tax subject to the normal rules.

Working from home means that there is no VAT recovery

Currently, there is no VAT recovery for employees charging electric vehicles at home. 

Mileage records need to be updated regularly

Mileage records should be kept to calculate the business and private use.

Contracted SME R&D Relief tested in First Tier Tribunal (FTT)

Quinn (London) Limited v HMRC, 27 October 2021

The FTT sought to address, inter alia, a specific requirement that needs to be met for a company to claim the much more generous SME (Small or medium enterprise) research and development relief instead of the RDEC relief.

The case tested the interpretation of the subsidised rules (CTA2009, s 1138) i.e., in essence, if the R&D project is subsidised by a third party, SME R&D relief is not available.

In many cases this is easily identifiable if companies are in receipt of state aid/subsidies etc.

In this case and for many SME companies who undertake development projects, funds are required to operate (trade), and so the funds can only be derived by undertaking contracts that require the development of new and technologically advanced products, systems and services.

HMRC argued that if a client contracted a company to provide such products, services etc, this should be treated as a subsidised development as the client is paying for the development and hence SME R&D relief would not be available. This appeared to be a continuation and extension of the Haddee Engineering Co Limited v HMRC case, in which HMRC successfully argued that contracting client met the claimed expenditure of the company who they had contracted to provide the product, service etc.

In the Quinn case, HMRC considered that expenditure was indirectly met by the contracting business as a fee would ultimately be paid for the product, service etc, albeit not directly as in the Haddee v HMRC case.
Quinn, however, argued that this was not the case, as the client had paid solely for a finished service, product etc under a commercial agreement, and it was for Quinn themselves to determine how the service, product etc was provided whilst also baring the cost of developing and providing the service, product etc.

The commercial agreement between the client and Quinn was not dependent on the actual cost Quinn would incur in developing and providing the product, service, albeit when determining the cost of the contract Quinn as a commercial entity would need to attempt to price the contract at a rate which would cover its costs.

The FTT found that there was no clear link between the R&D expenditure incurred by Quinn and the price paid by the contracting business, so the development could not be considered as being subsidised and hence the more beneficial SME R&D relief was available to Quinn.

The FTT found that the contracts between Quinn and its client were not an agreement to pay for R&D costs and expenditures. Quinn did not carry out the R&D for payment but simply used R&D to meet the requirements of the contract agreed.

If HMRC had successfully argued that developments that were driven by a contract to provide a product, service etc were subsidised, the R&D SME scheme would be limited to blue sky thinking companies only and so be out of kilter with the aims of the scheme.

MSS Data and Customs Declaration Checks Overview

If your business imports goods into the UK it will be, in most cases, recorded as the importer on the UK Customs Declaration. 

This creates a responsibility on the business to ensure that the declaration is accurate, otherwise there is a potential for further duties and penalties.

One way to manage this obligation is to obtain MSS Import Data from HMRC.  This will provide a monthly Excel spreadsheet that can be used as an analysis tool to identify and investigate potential errors and is especially useful where there are large numbers of imports in a period.  The application for the MSS Data can be obtained here.

Our document provides an overview of this data, along with simple tools that a business can employ to use the MSS Data effectively so that it can complete the necessary checks expected by HMRC and maintain compliance with UK customs legislation.

If you would like further assistance in obtaining, or analysing, the import data, please get in touch today to find out more by contacting indirecttax@mooreandsmalley.co.uk or by filling in the form below.

This update originally appeared on the MHA Macintyre Hudson website

Rules of Origin – Post-Brexit trading rules

How and why it is important to navigate the complex rules

2022 is the year that UK businesses need to understand how to determine the “origin” of the goods that they export from the UK and to understand the impact of the rules for imported goods.

Why is this important?

The rules around the paperwork relating to origin are tightening up.

They are a key part of the trade agreement and UK businesses have been allowed a soft landing during the first year.

This has now ended.

There are potential penalties and impact to commercial relationships by assuming that your goods are UK origin if they meet one set of criteria. Under the FTA, goods exported to the EU as UK origin must meet specific rules. Getting it wrong can result in goods being rejected at the border and penalties for incorrectly applying zero-tariff arrangements.

The transitional period, for ensuring satisfactory supporting evidence of origin, allowed under the trade agreement expired on the 31st December 2021. UK companies who have exported goods to the EU under cover of a Statement on Origin must have all the required evidence, that covers 1st January 2021 onwards, in place by the 31st December 2021 otherwise there could be a liability for civil penalties and customers being subjected to back-dated duty assessments.

Our team can assist your business in ensuring it has the full supporting evidence to meet its obligations under the trade agreement.

UK/EU Trade Cooperation Agreement (TCA)

  • This agreement provides the basis for trading between the UK and EU as of the 1st January 2021. Contained within the agreement are the terms with which UK and EU importers can benefit from zero customs duty tariffs on ‘originating’ goods.
  • UK importers and exporters who trade with EU businesses must have an understanding of how these rules affect the duty impact in their supply chains. We have seen many instances where assumptions are made which could cause significant risk of noncompliance and hefty customs duty bills.
  • The risks differ depending on whether you are an importer or exporter so it is important to understand the impact that a lack of understanding may have.

Exporting

UK businesses who export goods must specify the origin of its products on any commercial invoices issued for shipping goods to the EU. To support this, the UK business must retain evidence for HMRC to be satisfied that the goods have the correct origin stated.

The UK exporter must use the correct declaration to allow the goods to be imported under the TCA’s zero-tariff arrangements.

Importing

Qualifying goods can be imported into the UK under zero-tariff arrangements, and, in most cases, must be supported by a valid invoice declaration as shown in Annex ORIG-4 of the TCA.

Registered Exporter (REX) – One of the differences between the UK and EU policies for operating the invoice declarations is that EU companies have to have a REX authorisation to export consignments of EU originating goods valued in excess of €6,000. By holding a REX authorisation, the EU company has to be able to provide satisfactory evidence that the EU goods qualify as “originating” under the trade agreement. UK-established companies cannot apply for a REX authorisation as approval is only granted to companies who meet the EU Customs establishment rules. This will cause issues with exporting goods from the EU as the reduced-tariff cannot be claimed in the importing country.

Common Problems

A key part of the trade agreement that has been misunderstood is that zero-tariff arrangements will, if complex customs procedures are not applied, only apply once. Basically, if you import finished goods from the EU, any onward supply back into the EU will be liable to the full rate of customs duty as the goods will have lost their EU preferential status.

Supplier’s Declaration

From the 1st January 2022, all UK exporters sending goods under cover of a Statement on Origin must have the required supporting evidence to confirm the goods meet the rules of origin.

Where finished goods are purchased from UK businesses, the exporter will be required to obtain a Supplier’s Declaration (in the format as set out in ANNEX ORIG-3 of the TCA) from its supplier to confirm the rule of origin has been met for the supplied goods. Without this evidence HMRC will reject the originating status claim which could impact the EU customer as they will be liable to pay backdated customs duties.

Where the Value Added (MAXNom) rule of origin is used to confirm the origin of the finished good, the exporter will need to obtain Supplier’s Declarations for all components/materials sourced from within the UK which are considered to be of UK origin.

There may also be a need to obtain a Supplier’s Declaration where a qualifying process is completed in the EU (e.g. Spinning of Yarn).

Again, without this evidence HMRC will reject the originating status claim which could impact the EU customer as they will be liable to pay backdated customs duties.

We are seeing instances where manufacturers and resellers are not willing to complete the required action and therefore, the preferential status cannot be confirmed. If you are experiencing difficulties with suppliers then let us know as we can assist those supplier’s with managing this administrative burden efficiently.

Checklist

To confirm whether rules of origin need to be considered a business must complete the following initial steps:

  1. Confirm the commodity code for the finished product
  2. Check the Europa TARIC to confirm if an EU tariff applies for the commodity code.
  3. If an EU tariff (e.g. 4.7%) applies, then check the Rule of Origin in the TCA (TCA Annex ORIG-2: Product Specific Rules of Origin)to confirm rule applicable to the finished product.
  4. If an EU tariff does not apply (e.g. 0% Duty) then non-preferential rules apply. 

Advance Origin Ruling (AOR)

A UK company can apply for an AOR for a product it intends to import or export. This is particularly useful

where the origin is unclear. The ruling will provide confirmation of the origin, which is recognised by the EU if an application is made against the TCA.

Rules of origin can be very complex and differ greatly depending on the area of the customs tariff the goods fall under.

Our experienced team can navigate the TCA and assist your company in confirming the origin of your goods.

If you would like to discuss the Rules of Origin and how this will impact on your business, please get in touch today to find out more by contacting indirecttax@mooreandsmalley.co.uk or by filling in the form below.

This update originally appeared on the MHA Macintyre Hudson website

VAT registration delays – how to ensure applications are processed promptly

HMRC have updated the VAT registration process, which will now require businesses to submit applications via the new VAT Registration Service (VRS).  HMRC will now automatically register businesses for MTD during the VAT registration process, thus removing the need for businesses to take this extra step themselves.

HMRC have stated that VAT registration numbers will be sent by post within 30 days of the application. However, if HMRC wish to conduct checks or request further information, the process could take up to 8 weeks, which can result in practical issues for businesses.

To process VAT registrations, HMRC will now require the following information for the director/sole proprietor/lead partner:

  • Name
  • Date of birth
  • National Insurance number
  • Self-Assessment UTR (for individuals and partnerships which have been supplied one)
  • Details of turnover and nature of business
  • Bank account details
  • Company Registration Number (limited companies only)
  • Corporation Tax Unique Taxpayer Reference (limited companies only)
  • Details of associated businesses including VAT registration (if applicable) and UTR

A business that has not been allocated a VAT registration number can be disadvantaged – it cannot issue VAT invoices to customers and often a VAT number is a proof of being in business. As such, it is important that the information listed above is given and accurate to try to reduce delays.

Below are some of the most common reasons that cause online VAT registration applications to require manual intervention and increase processing time.

Addresses do not match on the application

Addresses provided on the application do not match the business’s principal place of business.

Trade classification does not match

Notification of a trade classification does not match up with the work that the business itself carries out.

VAT liability is not identified

The VAT liability of trading is not correctly identified.

Invalid signatory

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.

Incorrect dates

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?

Wrong bank account details

The bank account details provided are not in the name of the taxable person.

Missing Supplementary forms

Supplementary forms are missing, for example applications involving land and property require form VAT 5L and form VAT 1614A should be attached to notify an option to tax on land and buildings. 

Can MHA Moore & Smalley help me with my VAT registration?

MHA Moore and Smalley can advise and help you with ensuring the VAT registration process is as quick and seamless as possible. Get in touch today to find out more by contacting indirecttax@mooreandsmalley.co.uk or by filling in the form below.