Finance Bill 2021 and other changes
Although there is no official Budget statement this Autumn, HMRC have published details of a series of measures affecting tax. Some of the changes will take place straight away or from April 2021, others are to be consulted on and included in draft Finance Bill 2021. The key announcements are summarised in the following paragraphs.
Capital allowances AIA extended
The Government has announced that it is extending the current temporary level of the Annual Investment Allowance (AIA) of £1,000,000 by one year covering 1 January to 31 December 2021.
This extension gives enhanced tax relief and simplifies taxes on plant and machinery expenditure, as well as providing businesses with upfront cashflow support during continuing Covid-related uncertainty.
It is expected that from 1 January 2022, the AIA will revert to £200,000 per annum.
HMRC have published a Summary of Responses received on the recent consultation on raising standards in the tax advice market. Broadly, HMRC have recognised that standards in the tax advice market need to be raised, ensuring people have access to good quality advice.
Next steps have been published, and include a consultation on the requirement for all tax advisers to possess appropriate levels of professional indemnity insurance. The consultation, expected next year, will also seek feedback on the definition of tax advice and the type of activities that should be included.
Off-Payroll working rules
The Government has announced its intention to make a technical change to the legislation relating to the off-payroll working (OPW) rules in the next Finance Bill. This corrects an unintended widening of the definition of an intermediary for the purposes of the rules. It will ensure that the legislation operates as intended from 6 April 2021 for engagements where an intermediary is a company.
Taxpayers who are a medium or large-sized non-public sector organisation, or a contractor, need to start to prepare for the changes to the OPW rules, which will come into effect on 6 April 2021. HMRC recently published technical guidance about how it will apply the legislation in practice.
Consultation on the design of MTD for CT
In July, the Government published Building a trusted, modern tax administration system, and indicated its intention to extend the Making Tax Digital (MTD) system to corporation.
A consultation on the design of MTD for corporation tax has subsequently been launched and will run until 5 March 2021.
The Government has confirmed that MTD for corporation tax will not become compulsory for companies until at least 2026.
Tackling promoters of tax avoidance
HMRC are taking further action to tackle promoters of tax avoidance schemes by introducing a new package of measures. These are designed to disrupt the business model of offshore promoters, directly tackle the secrecy on which promoters rely, disrupt the economics of tax avoidance by ensuring that promoters face financial consequences and give HMRC additional powers to act against companies that continue to promote schemes.
In spring 2021 the Government will consult on:
– making UK partners equally responsible for the anti-avoidance regime penalties incurred by offshore promoters;
– giving taxpayers more information on the products sold to them by promoters;
– ensuring promoters face quick and significant financial consequences for promoting tax avoidance so they do not continue to profit while HMRC investigates them; and
– providing HMRC with additional powers to shut down promoters that continue to promote schemes and to stop them from setting up similar businesses.
Tackling CIS abuse
The Government announced at Spring Budget 2020 a consultation to tackle abuse of the Construction Industry Scheme (CIS). A consultation document was published 19 March 2020 setting out proposals.
HMRC have published a policy paper covering a number of amendments to the CIS, which will take effect from 6 April 2021.
The amendments provide a power to allow HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns. This power will be used to correct errors or omissions relating to the claims, to remove claims, and to prevent certain employers from making further similar claims, where employers do not provide evidence of eligibility and/or evidence of the sums deducted, and do not correct their EPS at HMRC’s request.
The changes cover:
– Cost of materials – The measure makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.
– Deemed contractors – The measure changes the rules for determining which entities operating outside the construction sector need to operate the CIS (‘deemed contractors’). Rather than looking back at each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply the CIS when construction expenditure exceeds £3 million within the previous 12 months.
– CIS registration penalty – The measure expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS. Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, and either encourages that person to make a false statement or supply a false document in support of that application; or where they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.
Preventing abuse of R&D tax relief for SMEs
HMRC have published a policy paper covering a change to the research and development (R&D) tax relief rules for small and medium-sized enterprises which will take effect from 1 April 2021.
From 1 April 2021, the amount of payable small or medium sized enterprise (SME) R&D tax credit which a company can claim in a period will be limited to £20,000 plus 300% of its total PAYE and National Insurance contributions liability for the period.
Further information can be found in the policy paper Preventing abuse of Research and Development tax relief for small and medium-sized enterprises.
HMRC have published a policy paper covering a series of amendments to the hybrid and other mismatches regime. These changes are intended to ensure that the UK’s hybrids rules are appropriately targeted and proportionate, with the benefit of three years of UK experience since the rules came into effect; and taking into account the international landscape as other jurisdictions implement the relevant recommendations from the OECD’s Base Erosion and Profit Shifting (BEPS) project.
The outcome of the recent consultation on hybrid and other mismatches can be found at https://www.gov.uk/government/consultations/hybrid-and-other-mismatches.
The Government welcomes comments on the draft legislation by 7 January 2021.
Plastic packaging tax
HMRC have published a policy paper covering the introduction of a new plastic packaging tax, which is expected to take effect from April 2022.
The tax will apply to plastic packaging produced in, or imported into, the UK, that does not contain at least 30% recycled plastic. Plastic packaging is packaging that is predominantly plastic by weight. It will not apply to any plastic packaging which contains at least 30% recycled plastic, or any packaging which is not predominantly plastic by weight. Imported plastic packaging will be liable to the tax, whether the packaging is unfilled or filled.
The outcome of the recent consultation on the plastic packaging tax can be found at https://www.gov.uk/government/consultations/plastic-packaging-tax-policy-design.
Tobacco Uprate Duty
Tobacco duties increased with effect from 16 November 2020.
All tobacco products will increase by 2% above Retail Price Index. Hand-rolling tobacco will rise by an additional 4%, to 6% and the Minimum Excise Tax by an additional 2%, to 4% above Retail Price Index inflation this year.
Tax implications of the withdrawal of the London Inter-Bank Offered Rate (LIBOR)
HMRC have published a policy paper covering a measure to ensure that the leasing provisions continue to function as intended once LIBOR is discontinued.
The measure also introduces a power to allow any unintended tax consequences arising from the transition away from LIBOR and other benchmark rates by businesses and individuals to be addressed in secondary legislation.
The measure will have effect from the date of Royal Assent to Finance Bill 2021.
The outcome of the recent consultation on the taxation impacts arising from the withdrawal of LIBOR can be found at https://www.gov.uk/government/consultations/consultation-on-the-taxation-impacts-arising-from-the-withdrawal-of-libor
Notification of uncertain tax treatment by large businesses
To give affected businesses time to prepare, the Government is delaying, until April 2022, the implementation of a new requirement for large businesses to notify HMRC where they have adopted an uncertain tax treatment. Further consultation will ensure the final design tackles the tax gap in a proportionate and effective manner whilst keeping administrative burdens to a minimum.
Timely Tax Payments and Review of Tax Administration Framework
On 21 July 2020, the Government committed to publishing calls for evidence on Timely Tax Payments and a Review of the Tax Administration Framework. Given the continued pressures of the Covid-19 outbreak, and with other consultations in progress, the Government has confirmed that it will now publish these documents in Spring 2021.
HMRC encourage businesses to register for the Trader Support Service
The Government is urging businesses to sign up to the Trader Support Service (TSS) before the end of the Brexit transition period.
The new service provides a free-to-use digital platform to help businesses and traders of all sizes navigate the upcoming changes to the way goods moved under the Northern Ireland Protocol from 1 January 2021.
The service launched at the end of September and by the middle of November more than 7,000 businesses had signed up. HMRC are however, encouraging more businesses to follow suit.
The TSS contact centre, which is now open and providing guidance and training to help businesses prepare for 1 January, is designed to:
– enable traders to complete declarations without needing to purchase specialist software;
– save traders significant time in completing declarations;
– reduce traders’ declaration costs as the service is free-to-use.
From 1 January 2021 traders will need an Economic Operators Registration and Identification (EORI) number that starts with XI to:
– move goods between Northern Ireland and non-EU countries;
– move goods from Northern Ireland to Great Britain;
– make a customs declaration or get a customs decision in Northern Ireland.
Traders who signed up to the service before 23 November will automatically receive a unique XI EORI identifying number that will be required from January 2021. Those who register later may need to apply separately to be issued with this number.
Further information regarding the TSS and how to sign up can be found on the Government UK Transition website at https://www.tradersupportservice.co.uk/tss.
Directors’ loans – a reminder of the tax charge
Cash transactions between a director and a personal or family company are recorded through the director’s account. At the end of an accounting period, if the director owes the company money (ie the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators)), there will be tax consequences to consider.
The s 455 charge
A tax charge will arise under the Corporation Tax Act 2009, s 455 where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge is the liability of the company and is calculated as 32.5% of the amount of the loan. The rate of the charge is equivalent to the higher dividend rate.
Lisa the sole director of her personal company L Ltd. The company’s financial year end is 31 March.
On 31 March 2021, Lisa’s loan account is overdrawn by £20,000 and it remains overdrawn by this amount on 1 January 2022 (the date on which corporation tax for the period is due). The company must pay a tax charge under s 455 of £6,500 (£20,000 @ 32.5%).
Avoid the charge
Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:
– the director can pay funds into the company to clear the loan;
– the company can declare a dividend to clear the loan balance;
– the director’s salary can be credited to the account to clear the loan balance; or
– the company can pay a bonus to clear the loan balance.
It should be noted however, that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.
Two further points are also worth highlighting here:
– Clearing the loan may not always be beneficial and paying the s 455 charge may be preferable. For example, if the tax on a dividend or bonus credited to clear the loan is more than the section 455 charge.
– Once the loan is cleared, the s 455 tax is repayable. This happens nine months and one day after the end of the tax year in which the loan is cleared.
It should also be noted that anti-avoidance rules apply to prevent the director clearing a loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.
Gift Aid tax relief
This year, many charities have been heavily impacted by the coronavirus pandemic and have struggled to raise funds. Highlighting the prospects of tax reliefs on donations is one way to encourage gifts.
Broadly, the government’s Gift Aid scheme is designed to help maximise the value of a gift made to a charity by allowing most UK taxpayers to claim tax relief on the gift.
Under the Gift Aid scheme, individuals can claim tax relief on making one-off or regular gifts to charity. No lower or upper limit applies on donations upon which tax relief may be claimed. The payment is treated as paid net (that is, as if basic rate income tax had been deducted at source). The basic rate tax deemed to have been deducted by the donor is clawed back by HMRC if the donor’s income tax and/or capital gains tax (CGT) liability for the year is insufficient to match the tax retained. Higher and additional rate taxpayers can claim additional relief against their income tax or CGT liability, as appropriate.
The person making a donation doesn’t necessarily have to be working to be paying tax. This means, for example, someone receiving a state and/or other pension net of tax deductions, may also be able to benefit from tax relief on Gift Aid donations.
If you make a donation of £100 under the Gift Aid scheme and you’re a basic rate taxpayer, the charity is able to claim back tax of £25 from the government, which means the charity receives £125, but it costs you only £100. A higher rate taxpayer can claim 20% (the difference between the higher rate of tax at 40% cent and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of the donation. So, on a gift of £100, a higher rate taxpayer can reclaim £25 (20% of the gross donation of £125). The claim is usually made via the individual’s self-assessment tax return.
It is possible to elect for a donation to be treated as paid in the previous tax year. The election must be made to HMRC by the date on which the individual’s tax return was submitted for the previous tax year and, in any event, no later than 31 January following that tax year. An election can only be made if the gift can be paid out of taxed income or gains of the previous tax year.
The election provisions may be particularly useful to someone who’s income for a particular tax year nudges just over the higher rate income tax threshold. It may be possible to make a gift under Gift Aid, which in turn will reduce liability to tax at the higher rate, and mean that the taxpayer could potentially avoid paying tax at marginal tax rates of up to 64.75%.
Claiming tax relief
Under Self-Assessment, Gift Aid donations made in the previous tax year will be recorded on each year’s return, which would mean that for higher and additional rate taxpayers, there will be a delay in receiving the additional Gift Aid tax relief. However, the Gift Aid rules allow an individual to claim tax relief on donations made in the current tax year, up to the date their SA return is submitted, if they either:
– want tax relief sooner; or
– will not pay higher rate tax in current year, but did so in the previous year
This claim cannot be made this if:
– the filing deadline has been missed (31 January for online filing); or
– the donations do not qualify for Gift Aid – donations from both tax years together must not be more than four times what was paid in tax in the previous year.
The end of the tax year is a good time to review charitable donations to ensure that all tax relief due has been claimed, and, where relevant, to ensure that timely elections are made to relate payments back to the previous tax year.
December questions and answers
Q. I am currently in the process of purchasing a property which includes a separate granny annex. Since there is only one title number for the whole property, can I apply for stamp duty land tax multiple dwelling relief (MDR)?
A: Since 1 April 2018 SDLT applies to land transactions in England and Northern Ireland only. Property transactions in Scotland are subject to Land and Buildings Transaction Tax. Land Transaction Tax (LTT) applies to land transactions in Wales.
Broadly, if the granny annex is an independent dwelling, then it will count for MDR. If it cannot exist independently of the main house, then MDR will not be available.
The HMRC Stamp Duty Land Tax Manual states (SDLTM29955):
‘For the purposes of the relief a ‘dwelling’ means a building or part of a building which is suitable for use as a single dwelling or is in the process of being constructed or adapted for such use.’
Special rules apply to certain types of dwellings, including halls of residence and ‘off plan’ transactions. See the HMRC Stamp Duty Land Tax Manual for further information.
Q. Ten years ago my husband inherited a share of his father’s property when he died as a joint owner with his partner. My father-in-law’s Will specified that his surviving partner could continue living in the property for as long as she wanted. Both my husband and my deceased father-in-law’s partner are on the deeds for the property. The partner has recently died and the property is empty. Will my husband have to pay capital gains tax on his share when it is sold, even though he could not live there because the partner was in residence?
A: It is assumed that your husband is now in possession of the whole property, even though originally the partner owned half of it. If so, she must have transferred her half to him. When your husband sells the property, for capital gains tax purposes he will effectively be making two sales, namely the half which he inherited on his father’s death and the half he has recently acquired from the deceased partner. He will be liable to capital gains tax on the half he has owned for the last ten years, even though the partner was still living there. He will also be liable to capital gains tax on the recently acquired half. However, the base cost for the second half will be the market value of that half at the date the partner transferred it to him. The higher base cost should help is should help reduce the chargeable gain on that part.
Q. I have a new employee who has only been with me for two weeks. Yesterday the employee called in sick. Do I have to pay statutory sick pay (SSP)?
A: There are conditions that an employee must meet to be eligible for the payment of SSP, which are broadly as follows;
– the individual must be classed as an employee and have done some work for their employer;
– the employee must have average weekly earnings (AWE) of at least £120 per week (NIC Lower Earnings Limit for 2020/21 tax year);
– The employee must have been sick from work for at least four days in a row including non-working days. This period is known as a Period of Incapacity for Work. (PIW)
An employee’s AWE is generally calculated by reference to the eight weeks of earnings prior to the employee being sick from work. In this case, the employee has not worked for you for eight weeks so these rules do not apply. The Regulations state that AWE will be calculated using the earnings the employee is entitled to under their contract for:
– a week’s work;
– a calendar month of work multiplied by 12 and then divided into 52; or
– an annual salary divided into 52.
If the employee has received less than eight week’s pay prior to their PIW starting, then the relevant period is calculated by using all the earnings paid before the PIW and the period those earnings relate to. So if an employee has received two weeks of earnings, then those earnings are added up and divided by two. This gives the AWE figure to determine whether the employee has earned enough to qualify for a SSP payment.
SSP is payable from day four of a sickness absence if the above conditions have been met and a PIW has been formed. The SSP rate is currently £95.85 per week for the tax year 2020/21.
Note that if the employee is away from work due to a Covid-19 related absence, both the eligibility conditions still need to be met and the PIW still needs to be formed, but the requirement for three waiting days has been suspended for these types of absences and SSP would be payable from day one of the absence.
December key tax dates
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/12/2020
30 – Deadline for 2019/20 self assessment online returns to be filed if you are an employee and want tax underpaid to be collected by adjustment to your 2020/21 PAYE code (for underpayments of up to £3,000 only)