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Happy New Year to all our clients and associates. Let’s hope this year brings good things for all of us.
Although HMRC have extended the deadline for the self-assessments we are still working towards 31st January as being the deadline, so if your tax return still has not been submitted, please could you bring your records to our office at your very earliest convenience.
· Latest news round up
· Christmas: how does hospitality and gifts affect the VAT return?
· Inheritance Tax (IHT) – a problem with taper relief
· Home working and Capital Gains Tax (CGT)
· January Questions and Answers
· January Key tax dates
A number of suggested reforms to the CGT have been accepted by the government. In May 2021, the Office of Tax Simplification published a report that included 14 recommendations. The government’s response was published on 30 November. While any major changes, such as aligning CGT rates with income tax were ruled out, five of the OTS recommendations have been accepted. Some of these are concerned with improvements to guidance or access to the CGT service, but some technical changes will also be made.
Firstly, the window for spouses making a no gain no loss transfer following a permanent separation or divorce is to be extended. Currently, the exemption only lasts until the end of the tax year the separation occurs in. As a result, couples that split up towards the end of the tax year only have a very short time period in which to transfer assets between themselves with no CGT implications. This window will be extended to the end of the tax year that follows the year of separation, meaning all couples that permanently separate will have at least twelve months to rationalise their assets.
Secondly, as previously announced in the October budget, the time limit for UK property returns and the associated payment has already been extended from 30 days to 60 days.
Thirdly, there will be an extension to rollover relief in circumstances where certain land has been sold under a compulsory purchase order. The current rules allow relief to be claimed if new land is purchased. The OTS recommended that the rule should be amended to permit relief to be claimed if the proceeds from the disposal are instead utilised to develop or improve remaining land, i.e. extending the asset reinvestment classes. The recommendation in the report appears to specifically look at agricultural businesses but does also go on to say that the government should consider whether or not the recommendation should be applied to other business sectors as well. This won’t be clear until there is a further announcement regarding the policy, or draft legislation.
The government response also indicated it would consider a number of the other recommendations further.
30 November was also the designated Tax Administration and Maintenance Day for 2021. Traditionally, the day is used to announce a number of tax policy and consultation updates. Perhaps the highlight of the announcements was some further detail regarding the reforms to research and development (R&D) tax relief that were initially announced at the autumn budget.
Among the numerous concerns with the existing system is that almost half of qualifying expenditure is currently used to fund activity that doesn’t take place in the UK, e.g. via the use of outsourced workers. In order to combat this, the rules will be changed so that expenditure on outsourced workers will only be qualifying expenditure where the underlying R&D activity takes place in the UK. The revised legislation will apply from April 2023.
In order to modernise the relief, two new categories of expenditure will be brought into the scope of the relief from April 2023:
– licence payments for datasets; and
– cloud computing costs that can be attributed to computation, data processing and software.
There will also be changes to the administration of the relief, including a requirement to make all claims digital and contain far more detail than is currently required. Companies intending to make a claim will need to make this intention known to HMRC in advance and include details of any agents or other third party that is involved with advising the company regarding the claim.
January is always the busiest month the tax return filing. HMRC have issued a timely reminder to the estimated 2.7 million taxpayers that claimed at least one self-employment income support scheme grant that these need to be declared on the 2020-21 tax return. It is essential that these are reported in the specific boxes in the self-employment, or partnership, pages. There have been a number of instances where uncertainty has led to taxpayers including the grants elsewhere, e.g. as “other” income. As this will cause a discrepancy with HMRC’s system, the return will be auto corrected and there is a risk that the taxpayer will be assessed on the grant income twice – once under the correct category, and once under the erroneous one.
The Scottish Budget was delivered on 9 December 2021. There were no major changes to the devolved taxes. In relation to income tax, there are no changes to rates, but the starter and basic rate bands will increase with inflation. The other thresholds remain unchanged. There are no changes to the rates or bands for land and buildings transaction tax.
The Omicron variant of Covid-19 saw new guidelines issued by the government in December. However, at the time of writing no lockdown, circuit breaker or otherwise, has been announced. As a result, many businesses will be going ahead with plans for hosting parties for staff and clients. Some may choose not to due to concerns, but may still give festive gifts, for example to the biggest spending customers during the previous year. All these things have VAT implications.
Starting with entertainment, the input tax incurred on any hospitality can only be reclaimed to the extent that it is provided to current staff of the business. Where non-staff members attend, an apportionment must be made. So, for example if a company has 30 employees, and all of them are permitted to bring a partner or other family member, only half of the input tax would be available to recover – assuming everyone brings a guest.
Note that section 3 of VAT notice 700/65 precludes recovery of input tax where the entertainment is provided solely to the directors (or partners) of the business. However, there is no problem recovering input tax in situations where directors attend staff parties that are open to all employees.
As the bill for a Christmas party, particularly for large businesses, is likely to be substantial, the position regarding service charges should also be considered. If the venue adds a compulsory service charge, this is simply an additional charge for the service and so the input tax treatment follows that of the charge for the hospitality, i.e. it can be claimed in the proportion of staff v non-staff. However, a service charge paid voluntarily is outside the scope of VAT and so the venue should not charge input tax on it. This is the case even if the venue adds the charge to the bill in the first instance, as long as the business is permitted to request that it is taken off or reduced.
If there are a substantial number of non-staff guests, for example where customers are in attendance, the business could make substantial savings if it requires the guests to make the payment for attendance. There is no minimum amount for this so it can be a token amount. The input tax block then does not apply because the business is no longer providing free hospitality. To illustrate, suppose the cost of the function is £100 per guest. The VAT will be £12.50 at the current reduced rate for hospitality. Let’s suppose there are 50 non-staff guests, so the VAT in respect of them is £625. If the business charged each guest say £5 for a ticket it could reclaim all of this. It would need to account for output tax on £5 x 50 but it is still a significant saving.
Some businesses may wish to reward loyal customers, for example a business might choose to make a gift of fine wine or champagne to the five customers that have spent the most with the business during the previous year. The VAT rules for business gifts work to permit a business to make gifts without needing to account for output tax as long as the VAT exclusive cost does not exceed £50. The input tax can be recovered in full. This £50 limit is per person, it is not a cumulative total of all gifts. However, if gifts with a total cost of more than £50 excluding VAT are made to the same person in any 12-month period, output tax must be accounted for – not only on the gift that exceed the limit, but to all gifts made in that 12-month period.
For this reason, it is sensible for a business to do a look-back test shortly before the date intends to make the gifts to ensure the same people haven’t already been given goods that would cause the limit to be exceeded.
Making gifts of value during an individual’s lifetime is a tried and trusted way of reducing the exposure to IHT. Many people are aware of the so-called “seven-year rule”, which provides that a potentially exempt transfer (PET) becomes fully exempt as long as the person making the gift is still alive on the seventh anniversary of the date the gift was made. Of these people, some will be aware that there is a partial relief where the person making the gift dies before the seventh anniversary, but after the third anniversary. As a result, many make large gifts later in life without taking professional advice in the belief that, if they survive at least three years, there will at least get some IHT relief. However, in practice the rules are not that simple.
The partial relief is of course taper relief. This provides that where IHT is payable on a failed PET, the tax is reduced by 20% after three complete years have passed, and by further 20% increments for each subsequent year up to the seventh – when of course the PET becomes fully exempt.
There are a few misconceptions about the relief. Firstly, it is important to note that the relief applies to the tax charge and not the value of the gift. A failed PET is brought into the IHT account at its full value. This of course has a knock-on effect on how much the estate exceeds the nil rate band (NRB) by. When individuals are trying to do DIY planning, this misunderstanding can mean the estimated exposure to IHT is understated.
A further misconception stems from a lack of understanding of the underlying legislation behind the relief. This is perhaps best illustrated using a simple case study.
John passed away recently. He was never married but had three children. He owned no property but had a reasonably-sized investment portfolio including listed shares and cash. Just over six years ago, John made a gift of £250,000 to his eldest child. The reason for doing so was partially IHT motivated and was done on the understanding that this represented one third of John’s estate. Essentially, John’s eldest child was getting their inheritance in John’s lifetime. The remaining amounts would be split between the other two children upon John’s death. John made no other gifts during his lifetime.
As John died before the seventh anniversary of the gift date, the PET failed. However, the beneficiaries are broadly aware of the taper relief provisions and expect there to be an 80% reduction in the IHT bill, i.e. 80% of £250,000 x 40%. Unfortunately, this is not correct. In order for there to be a taper relief deduction, there has to be a tax charge on the failed PET in the first place. Because the rules specify that failed PETs are subjected to IHT before the rest of the estate, there is no IHT charge as the value of the failed PET is below the NRB of £325,000. There is therefore no IHT charge to reduce.
Of course, purely from an IHT perspective an easy answer to the problem would have been for John to give more value away to ensure that the gift exceeded the nil rate band. The problem is that this may not be practical in real life situations; particularly with modest-sized estates like John’s.
A potential solution would have been for John to take out a fixed term insurance policy to cover the potential IHT charge if the PET were to fail. At least that way the beneficiaries would have the insurance pay out to cover the tax charge.
This serves to show how what is a relatively simple aspect of IHT legislation can still be far more complicated than it appears on the surface and taking advice prior to acting is essential.
Working from home was slowly becoming more common before the Covid-19 pandemic; however, the various lockdowns restrictions meant that it increased exponentially in 2020 and 2021. Many employees have indicated that they do not wish to return to the office full-time, and employers appear to be willing to acquiesce to requests hybrid working patterns. As a result, working from home is likely to be here to stay. Much of the tax related guidance surrounding homeworking that has come to the fore in the wake of the pandemic relates to what deductions can be made for income tax purposes, and what can employers pay to employees in respect of working from home without triggering a tax bill. However, is far less well-known that there can be CGT considerations as well.
A house is a chargeable asset for CGT purposes. If it is sold for more than it was bought for a chargeable gain can arise. Where the house has been the only home of the owner throughout the period of ownership, principal private residence relief (PPR) will usually be available to offset the gain completely. As a result, most people don’t even think about CGT when selling their home. However, a problem can arise where part of the house has been used otherwise than as a home, including in the course of an employment.
Where this is the case, HMRC may reduce the available PPR on a just and reasonable basis. Where this reduction leaves a taxable gain in excess of the available annual exempt amount (or if the annual exempt amount has already been used by other gains in the year) there will be a tax bill on the gain. Additionally, because the gain is not fully covered by PPR the seller will need to complete a UK property reporting service return and make a payment on account of the tax within 60 days of completion. Furthermore, as residential property is subject to higher rates of tax than other gains an unexpected bill can come as a nasty shock.
There is a relatively simple way to avoid the loss of relief – which is to avoid using any part of the house exclusively for work purposes. So, if the employee uses a particular room to work in, the loss of relief can be avoided if the rest of the family has access to it for their own use, e.g. as a study or reading room. If the employee lives alone, the same protection can be secured by ensuring the room chosen is a multi-use room, or by setting up the workstation in a room that already has other use, e.g. the living room.
A: The answer is “possibly”. Building work, and the underlying materials, can be subject to VAT at 5% if the building is a dwelling that has been empty for at least two years. However, any professional fees – such as designers or architects – will be subject to VAT at the standard rate. In order to qualify for the 5% rate, you will need to give the contractor third-party evidence to confirm the empty period. This must be from a source HMRC considers to be “reliable”, so a signed statement from the man across the road won’t do. Instead, you should look to things like council tax information, electoral register entries, etc. You may also be able to acquire a letter from an empty property officer – in which case you will have an acceptable form of evidence without needing to secure any other paperwork.
A: The super-deduction is actually a red herring as it is only available to companies. As a partnership, you wouldn’t be able to claim it unless you incorporated prior to incurring the expenditure. Whilst this may make commercial sense, there is some good news that means you don’t have to do this. The increased annual investment allowance of £1 million has been extended to 31 March 2023, so you haven’t missed the cut-off. Of course, you may wish to go down the incorporation route to secure relief at 130%, so it is worth doing some sums before making any decisions.
A: In practice the main purpose of your trip is for private rather than business reasons, so there will be no relief available for the cost of the holiday. However, any additional costs that can be easily identified and separated, e.g. travel costs from your location to visit your clients, can be deducted. Just ensure you segregate these out carefully in case you’re asked to produce evidence later on.
1 – Due date for payment of Corporation Tax for accounting periods ending 31 March 2021
7 – Electronic VAT return and payment due for quarter ended 30 November 2021
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/1/2022
31 – Deadline for electronic filing of self-assessment returns for individuals, partnerships and trusts
31 – Payment deadline of balancing payment for 2020/21 and first payment on account for 2021/22
31 – Last date to file 2019/20 return or face further 5%/£300 penalty
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.
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