This short video looks at the Covid support schemes, corporation tax, super-deductions and freeports. Also included in the debate were matters not covered in the budget and a look at what might be next?
Rebuilding the economy and support for the Hospitality sector was very much a focus for the Chancellors’ Budget. VAT Partner Sue Rathmell, and Leisure and Tourism sector lead Colin Johnson, look at the key policies announced, and assess if and how they will benefit businesses
MHA Construction & Real Estate Partners, Brendan Sharkey & Robert Dowling deliver an update on how the sector faired in the latest Budget and what concerns they have for some of the announced initiatives.
The Chancellor has announced an extension to the Furlough scheme until 30 September 2021. Partner Adam Parton and Tax Director Nigel Morris from MHA, explain the key changes to look out for in this phase of the scheme. They also discuss the potential lessons that both employers and employees can take from the last 12 months, and whether the Government should be looking for longer term solutions in planning for future scenarios.
HCA and Employment Tax Partner, Richard Maitland delivers a quick overview of all the key announcements from the Budget 2021 relating to financial incentives for recruit apprentices and developing skills for workers.
This discussion between Tax partners Tony Medcalf, Patrick King & Nigel May, provides a general overview of the announcements, focused on the outcomes around Government spending, the economy and revenues.
Additionally, they continued their discussion’s focusing on the Covid Support schemes, Corporation Tax, Super-deductions, Freeports, and also what wasn’t covered and what can we expect next?
A welcome announcement in the Budget was to approve eight new Freeports in England in regeneration regions. Although Freeports will benefit the whole of the UK, businesses in these areas should see an increase in investment, trade and jobs as a result.
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)
Liverpool City Region
Plymouth and South Devon
It is expected that these Freeports will begin operations from late 2021.
Andrew Matthews, Partner at our Liverpool office, said: “It is great news that the Liverpool City Region is one of the 8 Freeport locations. This will ensure the region benefits from more generous tax reliefs, simplified customs procedures and wider government support.”
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
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.”
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 EOT
No 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 EOT
No tax other than 0.5% stamp duty
4. Contributions to the EOT from profit to cover interest and repayment of capital
Tax relief where related to interest payments but not for repayment
5. Additional payments from profits
Tax deductible if distributed to employees by way of bonus payments
6. Bonus payments to employees
No tax payable on bonuses to employees of up to £3,600 pa (saving income tax but not NICs)
7. Repayment of loan
No tax event
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.
For further information please speak to your usual MHA Moore and Smalley tax contact or contact your local office. firstname.lastname@example.org
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.”
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.
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 by
19 March 2021
21 April 2021
19 May 2021
21 June 2021
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.