EIS excluded activities – royalties and licence fees

This post is part of our Entrepreneurial team’s regular series of blogs.

When considering whether EIS funding might be an option for your company, one of the first questions to ask is whether your company is carrying on any ‘excluded activities’.

In most cases this means a quick Google search and ticking off the checklist. There are a considerable number of activities which are excluded, such as property development, shipbuilding and energy generating activities (a full list can be found here).

One important point to remember is that, despite the name, excluded activities don’t necessarily exclude you from EIS. Instead, you have to consider whether excluded activities amount to ‘a substantial part’ of your trade. As the meaning of ‘substantial’ is not provided anywhere in the EIS legislation, HMRC considers such cases individually.

The rule of thumb to keep in mind is that as long as the excluded activity accounts for less than 20% of the whole trade, then usually such activities will not be ‘substantial’. When HMRC is considering the activities of a company as a whole, they may look at such aspects as turnover, assets used in the business, or the time spent by management/employees on different activities, although again this will very much depend on the particular situation of a company.

Many companies seeking EIS funding will likely not be carrying on or planning to carry on any excluded activities, with the notable exception of receipt of royalty and licence fees. If a company is creating IP or developing a service which it plans to licence to its customers, the receipt of licence fees or royalties may naturally be a large part of their (future) business.

There is an important waiver to this general exclusion, which applies where a company has created the whole or the greater part of the value of the “Relevant Intangible Asset” (“RIA”) from which licence or royalty fees are derived. This allows companies to acquire IP at an early stage, for example, and develop it significantly to where they have created the greater part of it in terms of cost (even if it’s only £1 more!), and the receipt of any licence or royalty fees stemming from this would not be considered as an excluded activity. The exclusion would automatically apply where a company has developed all of the IP themselves.

It’s important to note that such an RIA does not have to exist on the company’s balance sheet; there need only be the possibility that you could put the asset on your balance sheet in line with IFRS. As a result, companies would not need to worry about capitalising this intangible asset (unless they wish to) and could instead provide HMRC with details of their development costs incurred or any patents that have been applied for or granted.

HMRC looks closely at the (potential) receipt of royalties and licence fees, as it is a part of the trade of many EIS companies and a frequent area of concern. As a result, it’s always best to provide HMRC with as much information as possible on the nature of any royalties and licence fees, such as clearly explaining in a business plan that licence fees are generated from IP that the company has developed on its own or created the majority of.

If you are considering EIS funding for your company, you should try to be mindful of whether there are any pitfalls you could fall into, although some can be much harder to spot than others!

If you have any queries on EIS please contact our team.

The importance of Unrestricted and Actual Market Value for S.431 elections

This post is part of our Entrepreneurial team’s regular series of blogs.

In the world of entrepreneurial tax, abbreviations are much-loved and you may have noticed two that often pop-up: AMV and UMV. These stand for actual market value (AMV) and unrestricted market value (UMV), and understanding these two terms is extremely important if you are considering issuing shares in your Company to your employees.

First, Unrestricted Market Value. HMRC defines this as the market value of securities immediately after a chargeable event assuming that they had no restrictions. Actual Market Value, however, is the value of the shares with restrictions. But what exactly are restrictions and how do you know whether your shares have any?

The legislation splits restrictions into three main categories:

  • risk of forfeiture (where the disposal will be less than for the full market value)
  • restriction on freedom to retain or dispose of securities (for example if Directors are not allowed to sell their shares if they leave the Company)
  • potential disadvantage in respect of the securities (such as if the shareholder does not receive dividends from the shareholding)

Restrictions are set out in the Company’s Articles of Association but can also be found in separate agreements such as subscription agreements and employee share scheme rules. Shares in most private companies are not completely freely transferable, i.e., they are not freely able to be sold. These restrictions decrease their marketability and, therefore, their market value. For this reason, we deduct a percentage (usually 10% according to HMRC accepted practice but this can vary depending on the extent of these restrictions) from the UMV to account for these restrictions and reach the AMV.

AMV and UMV are particularly relevant when issuing shares in your Company to employees if you are also considering whether to enter an S.431 election. Entering this election means that the restrictions are ignored on the shares and so the shares are treated as having been acquired at the UMV. The election must be entered into within 14 days of the employee acquiring the shares.

But why would your employees want to elect for the UMV and possibly pay a higher price or have a greater tax charge when acquiring their shares? Well, by signing a s.431 election and electing to be deemed to have acquired the shares at this higher amount, when it comes to selling the shares any growth in the value will be taxed as a capital gain at the lower rates of 10% or 20% and no amount will be subject to income tax on sale. Any unused annual exempt amount can also be offset against this gain, further reducing the tax due.

Therefore, signing a S.431 election is usually what we would recommend if the shares are expected to grow in value but, of course, this does carry a risk because the shares could fall in value. If you choose not to enter into a s.431 election, you will acquire your shares at the AMV or below, i.e. you will acquire them at a discount. This discount on the UMV will then be subject to income tax at the basic, higher or additional rates (at 20%, 40% and 45% in England and 19%, 20%, 21%, 41% and 46% in Scotland), and the percentage ‘discount’ between AMV and UMV will be taxed as capital on sale. This means a potentially significant income tax charge on that percentage rather than capital gains tax on the whole gain.

Finally, the above transactions will also need to be included upon your Company’s annual ERS return (due 6th July: an important date to note in your calendar.) These forms report events such as employees being granted shares or options, options being exercised, or options lapsing, and you may need to note if an s.431 election has been entered into. When filling out these forms, the AMV and UMV are often also required at grant and/or at exercise. It may be that another valuation is needed to work out the values.

Unrestricted and Actual Market Value are two numbers that you will need to keep in mind when issuing shares in your company. Make sure you are calculating and using them correctly by checking with a member of our team – contact us with any questions.

VAT changes for UK businesses selling to EU consumers from 1 July

As of 1 July 2021, new EU VAT rules for business to consumer (B2C) sales will be introduced. These new rules will affect UK suppliers selling goods to EU consumers online.

Why are new rules being introduced?

The new rules are being introduced to facilitate with EU cross-border trade, to ensure a fair competition for EU suppliers and to ensure that VAT is charged based on where the customer is located. The changes are also designed to combat VAT fraud.

What’s new?

The major changes from 1 July 2021 include:

  1. Withdrawal of distance selling rules and new single return for ecommerce sales;
  2. Removing import VAT exemption and new VAT scheme for imported goods – IOSS; and
  3. Online market places responsible for EU VAT.

1. Withdrawal of distance selling rules & new single return for ecommerce sales

Firstly, the existing ‘Distance Selling Thresholds’ for EU sales will be withdrawn from 1 July 2021.

Instead, cross-border sellers will have to charge the VAT rate of the customer’s country of residence at point of sale. This is to be accompanied by the roll-out of a single One Stop Shop (OSS) EU Return. This new OSS return will avoid the requirement to register for VAT in each applicable EU country. This is an extension of the MOSS which is currently used for accounting for VAT for digital supplies. Local businesses will be registered in their home country, and non-EU businesses can choose any member state to act as their VAT identification country. All pan-EU sales will then be included in a single OSS return.

The Union scheme which applies to EU businesses will extend to include the supplies of all types of B2C services, intra-EU online sales of goods and specific domestic supplies sold through digital marketplaces.

2. Removing import VAT exemption and new VAT scheme for imported goods – IOSS

This VAT change also affects imported goods into the EU so will have an impact on businesses who wish to sell goods to EU consumers that are based outside the EU, including the UK.

The EU is introducing a new imports scheme called Import OSS (IOSS) for goods worth less than €150. Non-EU businesses will have the option to register for this scheme in a member state of the EU.

In addition, from 1 July 2021, the VAT exemption for goods imported into the EU in small consignment of a value of up to €22 will be withdrawn. This is intended to level the playing field for EU businesses that are always charged VAT.

The options for non-EU UK sellers are therefore:

a) Use the new IOSS scheme

If using the IOSS, businesses will be required to register for the scheme in one EU country, and charge and collect VAT at the point of sale on products below €150 when selling to EU customers.  The applicable VAT rate will be the customer’s local rate. Each month, the business must then declare and remit the total applicable EU VAT through an IOSS return. These sales will then benefit from a VAT exemption upon importation, allowing a fast release at Customs. Businesses will also have to consider their pricing structure as rates of VAT vary in the EU from 17% to 27%.

b) Alternative to IOSS

Where the Import OSS is not used, a second simplification mechanism will be available for sales to EU consumers worth less than €150. Import VAT will be collected from customers by the customs declarant (e.g. postal operator, courier firm, customs agents) which will pay it to the customs authorities via a monthly payment. This means that the customer will have to pay a fee to accept their package.

3. Online marketplaces responsible for EU VAT

After July 2021, online marketplaces will become responsible for charging and collecting VAT on deemed supplier transactions. For imports not exceeding €150, instead of import VAT the marketplace will charge the customer VAT at the point of sale and declare it instead of the seller. Both EU and non-EU sellers will benefit from reduced VAT obligations and may be able to deregister in some EU states.

How can we help?

At Chiene + Tait we are in a unique position to help you navigate these changes and help you to understand how the above changes will impact you and your business on a day-to-day practical level.

If you are concerned about expanding your business into EU markets, or how your current business with the EU might be affected, we can assist you by undertaking a review into your business and recommending to you the best course of action. Whether it be sales to EU consumers and businesses, importing goods from the UK, exporting goods to the EU and further afield, Customs Duties & Tariffs, we will help you find the ideal solution for you and your business.

Chiene + Tait is also part of a worldwide association of firms, including members in the EU, with whom we can communicate on your behalf or put you in touch with directly so that you can understand from professionals across the EU how the rule changes will affect you from start to finish.

Grant Funding Available

The UK government has confirmed that that there will be grant funding available of up to £2,000 for SMEs to receive advice and training on how changes brought about because of Brexit can affect your business. We can guide you through the grant funding process to ensure you get the best value and piece of mind.

We would recommend that any business that wishes to sell goods to EU consumers acts now to be in a position to be ready for these changes.

Contact our VAT and Indirect Taxes team at vat@chiene.co.uk, or 0131 558 5800 for help, advice or to arrange a review.

R&D tax and the impact of loans: what to look out for

In the past year we’ve seen a marked increase in the availability of loans for start-ups that focus on technical innovation. These provide favourable rates and have high acceptance levels, particularly for companies that are pre-revenue. There are also a number of “COVID loans” available, such as the Bounce Back Loan (BBL) and Coronavirus Business Interruption Loan Scheme (CBILS), which has provided some vital cash to keep the lights on during the pandemic.

In most instances, these favourably-termed loans are notified state aid, meaning that there are significant complexities with how they interact with R&D Tax relief. If the loan is deemed to be notified state aid, the same rules apply as if they had received a notified state aid grant. EU regulations require that a single project cannot receive more than one form of notified state aid meaning that, if it is determined that a project has been funded via a notified state aid loan, the project would be ineligible under the SME scheme.

Most of these loans are designed to support working capital commitments rather than specific R&D projects. However, we have seen companies inadvertently impact their R&D tax claim due to how they have allocated the loan. The devil is very much in the detail here and it is important to understand the terms of the loan agreement fully.

Firstly, you need to check to see whether the loan is indeed a notified state aid – something that the loan provider should be able to confirm. If it is, the activities and costs relating to the R&D project should be excluded from the loan application, protecting any tax benefit that would be available under the SME scheme. Instead, check the terms to see if the loan funds can be used for non-R&D expenditure such as marketing or rent, and keep records so that there’s an audit trail to show that there is no-cross over in funding.

Whilst these loans are on favourable terms, they still need to be repaid. It would foolish to restrict the ability to utilise all available relief due to lack of planning, particularly when most of these loans are designed to support the day-to-day running of a business rather than specific R&D projects. With a bit of tax planning it is possible to maximise the overall relief available and get the benefit of both.

If you need any support, or have any questions, contact us and we’ll help.

This post is part of our Entrepreneurial team’s regular series of blogs.

VAT refund opportunity for partially exempt organisations affected by COVID-19

HMRC has provided some additional flexibility that partially exempt organisations may well wish to take advantage of for their VAT accounting. This is because COVID-19 restrictions over the last 12 months may have had an adverse impact on partially exempt organisations.

HMRC has released a Business Brief which might offer assistance to partially exempt organisations impacted by COVID-19. In short, businesses/organisations that have not been able to operate as normal due to COVID-19, and have experienced lower than normal partially exemption recovery rates, can apply to HMRC for a retrospective special method using previous year % to receive a VAT refund from HMRC and a better result.

Normally, PESMs are often difficult to get approved but HMRC has set up a new unit with an accelerated process and will look more favourably on businesses that can demonstrate they have been affected over the past year. These will be temporary alterations to business’ partial exemption methods with proposals based on representative income streams from the previous tax year to get a fair and reasonable recovery rate.

Whilst there is not an automatic approval scheme in place, we would hope that HMRC will process these applications with little fuss.

There will also be an impact on organisations within a capital goods scheme (CGS) adjustment period. The same accelerated process will also be available to businesses who use the CGS to calculate input tax recoverable on capital items they use for taxable and exempt purposes.

We have been asked by some charity clients whether this also covers organisations that have Business/Non Business Methods (“BNB”), as the Brief does not mention this. This may be because BNB methods are not heavily regulated in the legislation. We would recommend that charities that have had a reduction in their taxable commercial activities due to COVID-19 get in touch as there may be an opportunity to address this with HMRC.

If you think your business or organisation may be able to benefit from this development please contact our VAT team.

Grants: the benefits to your business

This post is part of our Entrepreneurial team’s regular series of blogs.

Grants are available on a wide range of business activities, providing funding that can enhance research and development, regional assistance, environmental aid and much more. Grants provide financial support to an entity to cover a percentage of eligible expenditure incurred on a project.

The percentage and nature of the eligible expenditure will be determined on a grant-by-grant basis and will be set out in an offer letter. Two of the most common grant-giving bodies for Scottish businesses are UK Research and Innovation (UKRI – commonly seen as Innovate UK) and Scottish Enterprise.

The incentive

Grants are a great way to reduce the net outgoings on research and development projects of a business. Grants aren’t limited to businesses with a primary function of research and innovation or businesses at early / pre-revenue stages, so they can be used by more mature businesses undertaking projects which meet relevant criteria from grant-giving bodies.

The considerations

Grant funding is generally set at a percentage of eligible expenditure up to a maximum amount, but may also include a minimum eligible cost expenditure. Consideration should be given to the cashflow impact on the business of seeking and accepting grant funding. Whilst a percentage of costs will be covered under the grant funding it is rarely 100% of the expenditure. Receipt of grant funding is likely to occur following a quarterly submission and expenditure has to be defrayed in the period, creating a cashflow timing difference that will need to be managed.

If the business is claiming R&D Tax Credits these could be impacted depending on the nature of the grant. It is always worth speaking to your tax advisor at an early stage of the process as the financial impact to the business may be more complex than the expenditure on the project less the total grant receipts.

The reporting requirements

Typically claims are submitted on a quarterly basis to the grant-giving body. As mentioned above, the terms of what qualifies as eligible expenditure is set out in an offer letter along with total expected eligible expenditure. The total value of the grant will determine how often an Independent Accountant’s Report needs to be submitted to the grant-giver. Frequency of reports can range from each quarterly grant claim to only being required for the final claim. It’s important to check what the requirements for Independent Accountants Reports are to avoid a delay in receiving funds.

The help

Our audit team have extensive experience providing Independent Accountant’s Reports on grant claims to meet your obligation under the grant terms.

Maybe your business has recently received grant funding for the first time and you would like support to create systems to monitor the spend on the project, which feeds into the submission to the grant-giving body. We’re adept at being able to provide solutions to reduce the administrative burden on businesses of record keeping in a tailored and logistical manner.

If you have any questions, please contact our Entrepreneurial team.

HMRC announces new Brexit Support Fund for SMEs involved in imports or exports

HMRC has recently announced an SME Brexit Support Fund which can provide funds of up to £2,000 to assist with professional advice and/or training for the business.

To qualify for this grant the business must:

  • Have up to 500 employees
  • Have no more than £100 million in annual turnover
  • Be established in the UK
  • Have been established in the UK for at least 12 months, or hold a valid AEO status
  • Be involved in imports and/or exports between UK and the EU or Northern Ireland.

The potential VAT and Customs issues surrounding Brexit, particularly following the trade agreement announced in December 2020, is having an impact on many businesses and it is not too late to seek advice to get to grips with this.

If you would be interested in learning more about the grant funding available to you, and having a review undertaken of the potential VAT & Customs implications on your businesses, we would be happy to provide you with a quote for this work and discuss this further with you.

Please contact our VAT Department for more information.

How older companies can qualify for EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

This week I’m looking at the ways that companies can qualify for EIS despite being outside of the ‘initial investing period’. There are a few ways to do this, but there are also a number of areas to watch out for where mistakes that prevent EIS qualification can be made.

What is the initial investing period?

Broadly, the initial investing period is the seven years following a company’s first commercial sale. (Knowledge Intensive Companies (“KICs”) have more generous rules which allow them a longer initial investing period and several other relaxations: for more information see the blog my colleague Ryan wrote.)

The first commercial sale can sometimes be tricky to pin down. It’s defined in the European Commission’s Guidelines on State Aid as “the first sale by an undertaking on a product or service market, excluding limited sales to test the market”. The key point to bear in mind is the “limited sales to test the market” point, as the first time a company makes a sale (for example of a prototype) does not necessarily mean that the seven year clock to receive EIS will immediately start ticking after this.

Receiving EIS investment after the initial investing period

There are three conditions that allow companies to access EIS investments after the initial investing period – conditions A, B and C. Your company only has to meet one of these.

Condition A – past S/EIS received

Funding under condition A is available if a company has already received past S/EIS investment before the end of the initial investing period and:

  • the new EIS funding is used for the same qualifying business activities as the first S/EIS funding was; and
  • the company’s business plan at the time of the initial funding foresaw the need for follow-on funding.

It is the second condition that is a frequent issue. Where companies suspect that they will require further funding, this should always be specified in the business plan – even if the quantum of future funding required is not specifically known at that time.

(NB: where the initial S/EIS was received before 18 November 2015, the business plan does not have to show the need for follow-on funding.)

Condition B – new product or geographic market

Condition B allows companies to receive EIS funding where:

  • the amount of the EIS funding, together with any other EIS, SEIS, VCT, SITR or other Notified State Aid funding (e.g. Innovate UK or SMART Grant) within a 30-day period, is at least 50% of the company’s average annual turnover (calculated by averaging the company’s turnover for the past five years); and
  • the money raised by the EIS funding must be used for entering a new product market or geographic market).

The first test is often overlooked as companies focus on the second. It is important to note that non-EIS investment does not qualify. Scottish Investment Bank match equity funding, for example, is not a Notified State Aid and does not qualify.

As the EIS funding needs to be spent entirely on the new product or geographic activity (and companies need to show how the money will be spent), companies should not try to raise more money than they need for the new activity, as spending money on other business activities would cause them to fail the condition. On the other hand, the first part of the test may mean that companies need to raise a large investment if they have succeeded in generating significant turnover over the past few years – so it is important that companies carefully consider exactly how much EIS funding they require.

To be considered to be entering a new product market, a company must show that it is targeting a new customer base, and not just releasing a new product which its existing customers would use.

In terms of entering a new geographic market, companies need to show that the conditions of competition are appreciably different in this new area. Expanding to a new city is not likely to meet this test, but expanding to a new continent likely is.

The key point for a company to prove with relation to condition B is that it would not be possible to use its previous track record to assess the potential of success for its new activity. Companies should aim to demonstrate to HMRC that they are effectively setting up a new business, not just slowly expanding.

Condition C – past EIS funding under condition B

Condition C is, luckily, a lot simpler, and is simply for companies that have raised EIS funding under condition B and now wish to raise follow-on funding. The rules are the same as for condition A – remember the importance of specifying the need for follow-on funding in the business plan!

In Summary

Securing EIS investment after the initial investing period of 7 years may look like a daunting process, so if you think that this might apply to your company it’s best to start thinking about it sooner rather than later. That way, parts of the tests are less likely to catch you out in the future.

If you would like further advice regarding the availability of EIS relief, please get in touch with us.

New anti-avoidance R&D tax relief measures come into force

This post is part of our Entrepreneurial team’s regular series of blogs.

A new PAYE/NIC cap on SME tax credits is coming into force for accounting periods beginning on or after 1st April 2021. The cap is designed to target fraud and abuse of SME tax relief schemes.

This measure has been a long time coming, having gone through a number of consultations. Whilst the cap is not designed to affect genuine and authentic SME tax relief claims, anyone making a claim should be aware of its impact – a business may inadvertently fall foul of the new rules, jeopardising its access to tax credits.

The measure limits the amount of payable Research & Development (R&D) tax credit which an SME can claim to £20,000 plus 300% of its total PAYE and NIC liability for the period. There is an exemption from the cap if:

  • its employees are creating, preparing to create or managing Intellectual Property (IP) and
  • it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

For these purposes, IP includes: any patent, trademark, registered design, copyright, design right, performer’s right or plant breeder’s right. As announced at the Budget 2021, the definition of IP has, happily, also been widened to include ‘know-how’ and ‘trade secrets’.

There is, however, still a risk that companies may inadvertently be affected by the cap – for example where the company has low payroll expenditure compared to other eligible costs and doesn’t meet the above exemption.

In most instances, particularly where the company is an early start-up, the tax credit can provide a vital lifeline. The PAYE/NIC cap adds another layer of complexity to the tax claim processes which – whilst not impacting the majority of claims – requires companies to plan now rather than wait to the end of their accounting period, to ensure that there is no unintentional impact to this critical source of funding.

If you have any questions, contact me at david.philp@chiene.co.uk or 131 558 5800.

Tax yourself: a Friday tax quiz ahead of the Tax Day

This post is part of our Entrepreneurial team’s regular series of blogs.

In anticipation of UK’s first “Tax Day” on 23 March, which will see Rishi Sunak outline upcoming consultations and medium-long term strategies, we thought that this week we’d offer a tax-themed pop quiz for a Friday afternoon…

    1. Who said: “The nation should have a tax system that looks like someone designed it on purpose.”?
    2. Who said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”?
    3. Who said that taxation should follow the four design principles of ability to pay, certainty, convenience and efficiency?
    4. What is referred to as the £20bn “stealth tax” announced in the Budget?
    5. Which tax is most widely expected to be targeted on Tax Day for a rates rise or simplification that results in further tax being raised?
    6. Prior to income tax, which tax was designed to impose tax relative to the prosperity of the payer?
    7. The excess profits tax, introduced to fund the First World War and on profits above the normal pre-war level, was initially at what rate?
    8. In the first budget after Margaret Thatcher’s election victory in 1979, the top rate of income tax was reduced from 83% to what?
    9. What is the proposed rate of a currently proposed online sales tax?

Tricky? Well, here are the possible answers – see if you can match them up: (Note that there are more answers than questions, so some are red herrings.)

    1. Barack Obama, former US president
    2. Denis Healey, UK Chancellor of the Exchequer 1974 -1979
    3. William Simon, US Treasury Secretary 1974 – 1977
    4. 2%
    5. 60%
    6. Capital gains tax
    7. 50%
    8. A freeze on income tax, capital gains and IHT thresholds/allowances
    9. The poor tax
    10. 5%
    11. The window tax
    12. Inheritance tax
    13. Adam Smith, Scottish economist

Got them? Answers below…

The answers…

 

    1. Who said: “The nation should have a tax system that looks like someone designed it on purpose.”? C – William Simon, US Treasury Secretary 1974-1977 
    2. Who said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”? B – Denis Healey, UK Chancellor of the Exchequer 1974 – 1979
    3. Who said that taxation should follow the four design principles of ability to pay, certainty, convenience and efficiency? M – Adam Smith, Scottish economist
    4. What is referred to as the £20bn “stealth tax” announced in the Budget? H – A freeze on income tax, capital gains and IHT thresholds/allowances
    5. Which tax is most widely expected to be targeted on Tax Day for a rates rise or simplification that results in further tax being raised? F – Capital gains tax
    6. Prior to income tax, which tax was designed to impose tax relative to the prosperity of the payer? K – The window tax
    7. The excess profits tax, introduced to fund the First World War and on profits above the normal pre-war level, was initially at what rate? G – 50%
    8. In the first budget after Margaret Thatcher’s election victory in 1979, the top rate of income tax was reduced from 83% to what? E – 60%
    9. What is the proposed rate of a currently proposed online sales tax? D – 2%

 

We hope you enjoyed the quiz. Check back with us for analysis and information about the Tax Day on 23 March.

EMI consultation: share your views on possible expansion

This post is part of our Entrepreneurial team’s regular series of blogs.

One of the somewhat unexpected outcomes of the Budget on 3 March was the announcement of a consultation into the Enterprise Management Incentive (“EMI”) scheme. The EMI scheme, as noted in previous blogs, is a key tool for high-growth companies in recruiting and retaining employees.

Although there were many calls from industry bodies and professionals for a consultation on the scope of the Enterprise Investment Scheme (“EIS”), the Chancellor chose instead to focus on EMI, seeking evidence on whether the scheme should be expanded and how it could be expanded to best support high-growth companies.

The consultation is open and is seeking evidence on the following points:

  • Whether the scheme currently meets it policy objective of helping companies to recruit and retain employees.
  • Whether the scheme is meeting its objective of helping SMEs grow and develop.
  • Evidence on which aspect of the scheme is most valuable in helping SMEs with their recruitment and retention objectives.

The ways in which the scheme could be expanded could result in an extension of the qualifying trade criteria regarding the type of trade undertaken by a company, or perhaps the limits relating to the value of options a company can issue or an individual can hold, or less likely, an extension of the tax advantages, for example in relation to Business Asset Disposal Relief. Currently the limit of Business Asset Disposal Relief is £1 million, in line with the reduction from £10 million to £1 million for all eligible capital gains. It appears from the consultation document that one of the key areas for potential expansion would be regarding the limits imposed.

Further, the document asks whether the other tax-advantaged share schemes offer sufficient support to high-growth companies where they no longer qualify for EMI. We have recently commented on the use of CSOP as an effective tool, however, whether this is of much use once the EMI limits have been breached is questionable. The flexibility of EMI certainly makes it the most advantageous scheme and many companies will go on to use a form of growth share scheme once the EMI limits are reached, in order to ensure the highest growth opportunity for employees.

We will, of course, be responding to the consultation and encourage businesses who have used the scheme to either respond directly with evidence or get in touch with us if they wish to feed into our response.

If you have any questions on the consultation or how to provide evidence, please contact me as I will be collating our response.

Museums and Galleries Tax Relief: extending and widening this relief will boost the UK cultural ecosystem

Museum and Galleries Tax Relief came into effect from 1 April 2017, aiming to encourage the development of new exhibitions and incentivise their touring to a wide audience. Unusually, the legislation includes a ‘sunset clause’, which allows the relief to expire in April 2022 if it is not extended by the UK Parliament. We are around a year away from April 2022, so perhaps now is a good time to consider how well the relief is currently being used.

Whilst the relief was modelled on existing creative industry tax reliefs, there are some striking differences. As mentioned above, unless the relief is extended, it will expire next April. Claims are also subject to a cap of £100,000 (for touring exhibitions) and £80,000 (for non-touring exhibitions). This means the value of claims are substantially lower than in other creative industries’ tax reliefs, where no such cap exists.

Despite these caps, take-up of the relief has grown substantially over the years. Figures from HM Revenue & Customs (HMRC) show:

  • For 2018/19 £4 million was paid, covering 300 exhibitions included within 50 claims.
  • In 2019/20 £16 million was paid, covering 1,045 exhibitions included within 170 claims.

This is obviously an impressive increase in both the value and number of claims, especially for a 1-year period. So how does this compare to other creative industry tax reliefs? For 2019/20, the number of claims for Museum and Galleries Tax Relief is comparable to Theatre Tax Relief claims and is almost double the number of Orchestra Tax Relief Claims. The fact that there is a cap on the amount that can be claimed through Museum and Galleries Tax Relief has an impact on the total value of claims, but it does appear promising that the number of claims is comparable to the more established Theatre Tax Relief, which was introduced  3 years earlier.

All of this points to the fact that the relief is well used in the sector.  Many will undoubtedly have been disappointed to note no mention of an extension at the 2021 Budget. There is another chance for the Government to announce an extension; more tax policy details will be announced on 23 March and I hope that the UK Government will take the opportunity to not just approve the extension of the scheme but also to widen its scope. Currently many exhibitions which include live performances are not eligible for relief, nor are exhibitions that include objects which are for sale, and many organisations lose out on a cash injection as a result.

The Government could also consider widening access to the scheme. Currently, those organisations that provide public benefit, but are not charities, are not eligible.

Most museums and galleries are open to the public free of charge, so the money received from these tax relief claims boosts cash flow, giving a welcome boost of funding to these institutions so they can continue developing further exhibitions. An extension to the relief will be especially welcome in the coming years when, no doubt, we will continue to see the financial impact of the COVID pandemic on charity finances.

If you have any questions about Museums and Galleries Tax Relief, or any other creative industry tax relief, contact Catriona Finnie.

Corporation tax: Budget 2021 updates

The Chancellor said that this would be a Budget that “meets the moment” and, as most commentators predicted, it included corporation tax rises designed to start bringing down the debt the Government has incurred during the pandemic.

However, it was not all bad news for companies as some tax giveaways were also announced.

Corporation tax loss extension

Currently, companies can only carry back losses against profits arising in the previous year subject to certain restrictions in some cases. This first give-away applies to trade losses only arising in accounting periods ending between 1 April 2020 and 31 March 2021. These trade losses can be carried back three years, and will benefit those trading companies, that previously had healthy taxable profits but struggled with heavy losses during the pandemic.

Losses will be carried back to the latest accounting periods first, so for companies with a 31 May 2020 year end, losses are first carried back to 31 May 2019 and then any surplus trade losses can be carried back to the years ended 31 May 2018, and then 31 May 2017.

As you would expect, there are some restrictions:

  • There will be unlimited carry back to the preceding year. There will be a cap of £2 million on the total losses that can be carried back to the earlier periods. This cap applies to each accounting period within the extended carry back period.
  • There will be a requirement for groups that have companies with losses exceeding a de minimis of £200,000 trading losses to apportion the £2 million cap between companies.
  • Any repayment claims exceeding £200,000 will need to be made through an amended corporation tax return.

Tax Planning:

If your company has trade losses for this period, and has previously had taxable profits, consider whether you can increase the amount of tax you are repaid by utilising this relaxation to the loss carry back rules.

Capital allowance super deductions

This second give-away will benefit companies that plan to purchase certain types assets between 1 April 2021 and 31 March 2023.

Currently companies that incur capital expenditure may be able to obtain a tax deduction for these costs through the capital allowance scheme. The super deductions scheme adds a new first year allowance on certain types of new plant and machinery. The amount of the super deduction will be either 130% or 50% of the cost of the new asset, depending on the type of asset purchased. The 130% rate will apply to main pool additions, while the 50% to special rate pool additions.

Exclusions will apply to claims for super deductions, including:

  • Those already existing for increased allowances, including permanently discontinuing business activities, cars or plant or machinery used for leasing.
  • Expenditure on used and second-hand assets.
  • Expenditure on contracts entered into prior to Budget Day, 3 March 2021.

These super deductions can be claimed through your corporation tax return and will be available to reduce your taxable profits for the year in which they are claimed, and therefore will reduce the amount you need to pay to HMRC (see the corporation tax rates section for more information on why this might be great news!) Alternatively, they can be used to increase tax losses, which can be carried back to the previous accounting period (resulting in a tax repayment) or carried forward and utilised against future profits.

Tax Planning:

There will be additional rules concerning acquisitions on hire purchase contracts, disposals, accounting periods straddling 31 March 2023, among others. The Chiene + Tait capital allowance specialists are on hand to guide you through the process of claiming these new super deductions, as well as discussing your expenditure with you to ensure all claims are maximised.

Corporation tax rate rise

From 1 April 2023, companies with profits over £250,000, as well as ‘close investment holding companies’, will see their corporation tax rate rise from the current rate of 19% to 25%. There will also be the re-introduction of marginal relief for corporation tax, which will see the corporation tax rate of companies with profits between £50,000 and £250,000 rise to a hybrid rate between 25% and 19%. The tax rate will depend on these companies’ circumstances and HM Revenue & Customs have yet to announce full details on how these rates will be calculated.

The ‘profit thresholds’ for each corporation tax rate will be adjusted for shorter accounting periods, as well as for the number of associated companies. Whilst we do not yet have full details, these two caveats are likely to see the corporation tax rates rise hit a wider range of companies.

Tax Planning:

Companies paying their corporation tax liabilities in instalments will need to consider these rate changes early. The rules will be complex, and likely even more so for groups of companies.

Speak to our tax experts who are on hand to answer any questions you may have on the new corporation tax rates. We can help ensure that your company is claiming all tax reliefs it is eligible for, as well as advising on tax planning opportunities arising from your future plans.

New consultation on R&D tax relief: this looks to be far-reaching

This post is part of our Entrepreneurial team’s regular series of blogs.

The R&D consultation announced at the budget is far-reaching and goes much further than last year’s, in which the Government consulted on bringing data and cloud computing costs into the scope of the reliefs as well as new SME anti-avoidance measures.

This time, the consultation will look to explore further with stakeholders the nature of private-sector R&D investment in the UK and nothing seems to be off the table: it will look at definitions, eligibility and scope of the reliefs to ensure they are up-to date and competitive, while providing targeted support to maximise the beneficial R&D activity for the UK economy.

There is an emphasis into how well the reliefs are operating for businesses and HMRC, and whether this could be improved points to a positive change in the legislation. “RDEC for all” has been suggested again, potentially with a higher rate for SME’S to simplify the process.

Over-claiming is again on the Government’s radar, however, as there have been growing concerns over the past few years that this system does not provide adequate controls over the allocation of increasingly large sums of tax reliefs being given for R&D. Noting that the current 28 day turnaround gives HMRC very little time to consider every case in detail, the Government is looking to explore how the integrity of the relief process can be enhanced. This, along with the increase in the number of HMRC Inspectors being hired – as well as the HMRC taskforce announced today – points to a clampdown on fraudulent claims.

The good news is that the Government has recognised the case for widening the scope of expenditure which attracts relief, such as plant and machinery costs, which has again been brought up as an area to improve. While covered by the Research & Development Allowance, the tax benefit can be negligible in some instances, particularly when the costs fall under the scope of other available Capital Allowances. Hopefully the consultation will result in the revisit of this relief.

Overall, the announced consultation is positive news and I look forward to feeding back into this. Genuinely innovative companies shouldn’t be worried about change as the ultimate goal is to update and target the reliefs, whilst helping attract and retain key businesses in the UK.

The Budget: key points from today’s Budget speech

Much of the content of today’s Budget was trailed in advance, so there were few surprises. Indeed, the shift in news consumption (not to mention the demands of the pandemic) may mean that we say goodbye to the traditional big announcements on one day in favour of smaller piecemeal policies.

We also need to consider the impact of the ‘Tax Day’ due on 23 March. This is expected to see the publication of tax consultations which would traditionally have been published alongside the Budget. It remains to be seen how much of government tax strategy and policy will be laid down then, and how the Tax Day and Budget Day interplay.

We’ve summarised key points from today’s Budget speech below – but, as ever, the devil is in the detail so do contact us for clarification, or if you have any questions.

Corporation tax rates

  • Corporation tax to rise from 19% to 25% in April 2023
  • Rate to be kept at 19% for about 1.5 million smaller companies with profits of less than £50,000
  • Companies with profits between £50,000 and £250,000 will be subject to tapered rates

Personal tax rates

  • Personal income tax allowance frozen at £12,570 from April 2021 until 2026
  • Higher rate income tax threshold frozen from 2021 until 2026
  • No changes to inheritance tax nil rate band, lifetime pension allowance or capital gains tax annual exemptions until 2026
  • No mention of any increases to capital gains tax rates or inheritance tax reliefs despite much discussion on these prior to the Budget

VAT and duty

  • No changes to the main VAT rate
  • The VAT rate reduction to 5% for the hospitality industry has been extended until 30 September; thereafter, an interim rate of 12.5% will apply until April 2022
  • No change to the VAT registration threshold of £85,000 until April 2024
  • Planned increased to alcohol and fuel duties cancelled

EIS and R&D tax

  • The EIS system will be reviewed this year to enhance the benefit it brings
  • A consultation on R&D tax relief to ensure its is up-to-date and competitive

Tax reliefs in investment

  • A new ‘super-deduction’ form of capital allowances which will allow incorporated businesses to deduct 130% of expenditure that would normally qualify for main writing down allowances

Loss relief

  • Enhanced loss reliefs for businesses, both incorporated and unincorporated, to allow carry back of losses against earlier years’ profits

Brexit

  • Eight freeports to be established in England

COVID funding

  • Multiple initiatives relating to COVID in the Budget, from an extension of the furlough scheme to new grants for non-essential businesses
  • Sector-specific funding packages announced for the arts and sports
  • Business rates in England will continue their holiday until June, with a 75% discount thereafter
  • Access to grants for self-employed people is to be widened

Employment benefits: reporting window is just around the corner

This post is part of our Entrepreneurial team’s regular series of blogs.

With the end of the tax year just over one month away, it’s time for employers to consider how they’ll be reporting employment benefits.

There are three options when it comes to reporting and paying the income tax and National Insurance (“NI”) due to HM Revenue & Customs (“HMRC”).

What are employment benefits?

Employers can provide their employees and office holders with a variety of benefits to incentivise new talent and give them that extra sweetener on top of basic salary. Common examples are medical insurance, gym memberships, company cars and interest-free loans. A checklist summarising common benefits provided to employees, which may need to be reported to HMRC, is available on our website – if you are unsure if you have taxable benefits to report, you can use the checklist which is available here.

P11D Forms

P11D forms are the most common way to report non-cash benefits provided to employees. Separate P11D forms for each employee receiving benefits and a P11D(B) form to declare the total Class 1A NI due by the employer must be submitted to HMRC. There is only a short window for the preparation and submission of these forms, as P11D forms for the tax year ended 5 April 2021 need to be submitted by 6 July.

The employees will be subject to income tax at their marginal tax rate on the “cash equivalent” value of the taxable benefit. The income tax due will either be collected via the employee’s PAYE tax code or their tax return if they submit one. The employer will be due to pay Class 1A NI at 13.8% by 19 July (or 22 July if paid electronically).

PAYE Settlement Agreement (PSA)

Alternatively, an employer can enter into a PAYE Settlement Agreement (PSA) with HMRC to report certain types of benefits. These allow the employer to settle the tax liability on ‘minor or irregular’ benefits on behalf of the employee. Under the PSA, the income tax liability is payable by the employer on behalf of the employee and it is calculated on a ‘grossed up’ basis. This can prove to be expensive as the total of the income tax and NI due (Class 1B NI at 13.8%) can be as much as the cost of the benefit itself (in the case of higher rate and additional rate tax payers). However, this is the best method for reporting minor benefits like staff entertaining, where an employer does not wish to burden their employees with any tax due.

HMRC must be notified before the 6 July after the tax year end for which you first wish the PSA to be in place. The PSA calculations detailing the income tax and NI due should be submitted by this date. The income tax and Class 1B NI liability is then payable by 19 October (or 22 October if paid electronically).

Payrolling benefits

It is possible to opt for ‘payrolling benefits in kind’, with the income tax due collected via the payroll in monthly instalments. A P11D(B) submission is still required with regard to the payment of the Class 1A NI but individual P11Ds are not required. As above, the P11D(B) will be due to be submitted to HMRC by 6 July with the Class 1A NI due for payment by 19 July (or 22 July if paid electronically).

The payrolling of benefits does require a registration to be in place before the start of the tax year you wish to start using the scheme. If you wish to payroll benefits for the tax year ending 5 April 2022 you should act to put this in place before 5 April 2021.

If you require any assistance with regard to the reporting of taxable employment benefits, bearing in mind the 6 July deadline, please contact us at Chiene + Tait as soon as possible.

EMI for start-ups: no time like the present to start-up your scheme

This post is part of our Entrepreneurial team’s regular series of blogs.

With each passing year it seems that start-ups become ever more prevalent.

Although the economy has been disrupted by the Covid-19 pandemic, the technology industry has experienced considerable growth. Entrepreneurs are seeing the opportunities that remote working brings and are looking to take advantage of gaps in the market. With the technology sector not looking like it is going to slow down anytime soon, how can your start-up find the difference that will ensure that it succeeds against all of the competition?

Although there is not one ultimate answer to success, having the right team is crucial. In fact, not having the right team has been found to be one of the top reasons for failure among many start-ups.

This is why the Enterprise Management Incentive (“EMI”) option scheme is such a valuable tool for young, growing businesses. With a work environment that often requires substantial commitment and hours, but with limited funds to reward employees for their efforts, granting tax advantageous EMI options can be a way for companies to attract and keep that team that will lead them to success.

So, when is the best time to start thinking about granting EMI options? Arguably the sooner the better. EMI options are granted following a valuation of the company’s shares which is agreed with HMRC. With unapproved (e.g. non-EMI) share options, the employee is subject to income tax and national insurance contributions on the difference between the value of the shares when the option is exercised and the option exercise price they pay, but with EMI options there is no income tax and national insurance charge due on this gain (as long as the exercise price is equal to or higher than the pre-agreed market value) – i.e. the gain made between the dates the options are granted and exercised is free of income tax and NICs (but it will be subject to the, lower, capital gains tax  charge – see below).

There will be capital gains tax on the eventual sale of the shares obtained through the options, but if 2 years have passed between the date of the grant of the options and the disposal then the EMI option holders may, if they qualify, be able to claim Business Asset Disposal Relief (previously Entrepreneurs’ Relief), providing an effective tax rate on the gain of only 10% on the first £1m of gain per individual.

So, with your employees having the prospect of reaping these rewards further down the line, EMI options are a valuable tool for incentivising staff and driving growth in your company.

If you are a very new start-up and, therefore, pre-revenue and yet to raise external investment (other than perhaps from friends and family) there really is no time like the present for incentivising and rewarding your current employees or encouraging others to join your team. In these circumstances, this can lead to a very low valuation of the shares for the purpose of granting EMI options; possibly the nominal value of the shares (usually 0.01p depending on what your share capital is divided into).

EMI option schemes are also worth considering at a later stage after initial investment has already been raised. In many cases, a company might issue options every year as a recruitment and retention tool. EMI schemes are a cost-effective and tax-friendly way for SMEs to incentivise employees, where the value of the company is expected to increase dramatically as the company grows.

If you are a start-up and have already started thinking about the best ways to incentivise and build your team or if you are further along in the process and want to grow your company even further, EMI options should always be considered. If you would like to pursue the possibility of this, please contact us in the Entrepreneurial Tax team here at C+T and we would be very happy to help.

EIS: alive and KICing for companies that innovate

This post is part of our Entrepreneurial team’s regular series of blogs.

There have been many tweaks made to the Enterprise Investment Scheme (“EIS”) since its inception in 1993. Mostly, these have toughened qualifying conditions. However, seeking to advance its use in certain companies, HMRC introduced significant relaxation of several EIS limits. This relaxation of the rules was only made available to Knowledge-Intensive Companies (“KICs”), which are the types of companies in which the majority of Scottish EIS investment funds are placed. This blog will explore the benefits and qualifying requirements of being a KIC.

The benefits of being a KIC

  • A company can raise £10m EIS investment per year and £20m EIS investment over the company’s lifetime (in comparison to £5m and £12m limits, respectively, for non-KICs).
    In addition, investors can claim tax relief on up to £2m worth of EIS investment, if at least £1m of this is invested in KICs.
  • A company can receive its first EIS investment up to 10 years from the end of the accounting period in which its turnover first exceeded £200,000 (the time limit being only 7 years from first commercial sale for non-KICs).
  • A company may have a maximum of 500 full-time employees (with the maximum for non-KICs being limited to 250).

How to qualify as a KIC

To qualify as a KIC, a company must meet two conditions: the operating costs condition and either the innovation condition or the skilled employee test:

Operating costs condition

  • The company must have spent:
    • at least 15% of its operating costs on research and development or innovation in one or more of the previous three years (or in the three years following investment for a new company); OR
    • at least 10% of its operating costs on research and development or innovation in each of the previous three years (or in the three years following investment for a new company).

Innovation condition

  • the company must be carrying out work to create intellectual property and expect the majority of its income to come from this within 10 years.

Skilled employee test

  • the company must have 20% or more of its employees carrying out research for at least 3 years from the date of investment, and these employees must be in a role that requires a relevant Master’s degree or higher.

In Summary

For most technology-based or R&D companies, the KIC conditions will be relatively easy to meet. However, HMRC will only provide pre-investment assurance of KIC status through its Advance Assurance regime if a company actually requires this status in order for the investment that it receives to be EIS qualifying i.e. to get within one of the higher limits that are permitted for KICs. If the limit in question is the investor one (i.e. if any investors are relying on the company being a KIC for their own personal EIS annual investment limit), the company must provide HMRC with the investor’s details and notify them of the investor’s requirement for their investment to be in a KIC.

These rules provide hope for companies that might, due to their age, have disregarded the possibility of receiving EIS investment. If you are interested in exploring the availability of EIS, please get in touch and we can discuss further.

HMRC announces grant support for SMEs requiring VAT & customs assistance

HMRC has announced that it has set up an SME Brexit Support Fund which can fund up to £2,000 to help with training or professional advice, if your business has up to 500 employees and no more than £100 million annual turnover.

The grant can be used for training on:

  • How to complete customs declarations
  • how to manage customs processes and use customs software and systems
  • specific import and export related aspects including VAT, excise and rules of origin

It can be used to help you get professional advice so businesses can meet customs, excise, import VAT or safety and security declaration requirements.

In order to qualify the business must:

  • be established in the UK
  • have been established in the UK for at least 12 months before submitting the application, or currently hold Authorised Economic Operator status
  • not have previously failed to meet its tax or customs obligations
  • have no more than 500 employees
  • have no more than £100 million turnover
  • import or export goods between Great Britain and the EU, or move goods between Great Britain and Northern Ireland

The business must also either:

  • complete (or intend to complete) import or export declarations internally for its own goods
  • use someone else to complete import or export declarations but requires additional capability internally to effectively import or export (such as advice on rules of origin or advice on dealing with a supply chain)

If you are interested in obtaining VAT and Customs advice in relation to Brexit and qualify based on the above conditions, please contact VAT Director Iain Masterton via email or 0131 558 5800.

New HMRC VAT Deferral Scheme – Update

If your business deferred VAT payments for the February, March or April 2020 VAT returns, HMRC has issued updated guidance in relation to the repayment of these outstanding amounts.

If the business has outstanding VAT to pay, the business can either:

  • Pay the deferred VAT in full, on or before 31 March 2021; or
  • Join the VAT deferral new payment scheme.

The opt-in process for the VAT deferral new payment scheme will be open from 23 February to 21 June 2021 (inclusive).

If your business is on the VAT Annual Accounting Scheme or the VAT Payment on Account Scheme, the business will be invited to join the new payment scheme later in March 2021.

The new deferral scheme allows businesses to:

  • Pay any applicable deferred VAT in equal instalments, interest free; and
  • Choose the number of instalments, from 2 to 11 (depending on when it joins).

To use the online service, the business must:

  • Join the scheme itself. Agents cannot sign up on the business’ behalf;
  • Still have deferred VAT to pay;
  • Be up to date with its VAT returns;
  • Join by 21 June 2021;
  • Pay the first instalment when it joins;
  • Pay its instalments by Direct Debit (if you want to use the scheme but cannot pay by Direct Debit, there’s an alternative entry route).

If your business joins the scheme, it can still have a Time to Pay arrangement for other HMRC debts and outstanding tax.

Instalment options available to you

The month the business decides to join the scheme will determine the maximum number of instalments that are available. If you join the scheme in March, you’ll be able to pay your deferred VAT in up to 11 instalments.

The table below sets out the monthly joining deadlines (to allow for Direct Debit processing) and the corresponding number of maximum instalments (including the first payment):

If you join by:Number of instalments available:
18 March 202111
21 April 202110
19 May 20219
21 June 20218

Before joining, the business must:

  • Create its own Government Gateway account (if it does not already have one)
  • Submit any outstanding VAT returns from the last 4 years – otherwise the business will not be able to join the scheme
  • Correct errors on any VAT returns as soon as possible
  • Make sure you know how much the business owes, including the amount you originally deferred and how much you may have already paid (if any).

Interest & Penalties

You may be charged interest or a penalty if you do not:

  • Pay the deferred VAT in full by 31 March 2021.
  • Opt into the new payment scheme by 21 June 2021.
  • Agree extra help to pay with HMRC by 30 June 2021.

Key points from a recent case about Research and Development tax relief

This post is part of our Entrepreneurial team’s regular series of blogs.

First Tier Tribunal cases and their decisions can provide useful clarification about R&D tax relief and how HMRC expects the guidance and legislation to be applied.

In this blog, I’ve summarised the facts of the Hadee Engineering Co Ltd v HMRC case from October 2020, looking at why the taxpayer lost and the key points to take away so you don’t fall foul of the same mistakes.

Costs

The court found that the taxpayer had, incorrectly, overstated salary costs and claimed for bonuses that were actually in the accounts for a previous period.

It was also found that there was a lack of evidence in relation to payments for materials and subcontractors. The taxpayer could not provide any evidence that these costs were incurred by the company or within the time period of the claim.

In addition, time and expenditure incurred on non-qualifying, routine activities were being claimed for, and the apportionments applied could not be justified.

Key points to take away:

  • It is important to remember that costs are only eligible for R&D tax relief if they are deductible for corporation tax purposes within the accounting period of the relevant R&D claim. Including costs from a different period or costs that are not deductible in calculating the profit of the trade is a breach of the rules (HMRC guidance CIRD81450).
  • While HMRC don’t require companies to keep detailed records, at a minimum a claimant company should be able to produce invoices and bank statements to confirm that these costs were incurred and within the relevant period. The “competent professionals” involved in the projects must understand what activities qualify for R&D tax relief, so they can arrive at ‘just and reasonable’ percentages to be applied to costs, that reflect the extent to which they were involved in the qualifying activities. If they are ever asked, they can then justify the approach taken to HMRC.

What is a competent professional?

Only one individual was provided by the company as a competent professional, but was unable to provide the relevant technical detail to allow HMRC to assess the qualifying nature of the projects. This meant that HMRC was unable to confirm that the projects included in the claim did actually qualify as R&D for tax purposes.

Key points to take away:

  • We often refer to competent professionals in the course of preparing an R&D claim, because HMRC sets this as the test for assessing whether an activity meets the criteria of qualifying R&D. Although the term ‘competent professional’ is not explicitly defined, they are qualified or time-experienced members of staff within the area of science or technology of which the advance is being sought.
  • These individuals need to be involved in the R&D claim process to some extent as they are required to provide the necessary supporting technical detail to enable HMRC to assess the eligibility of the projects. They are also required to provide the qualifying percentages that are applied to costs.

Supporting evidence

The case raised issues with the level of evidence provided by the appellant in support of their claim. HMRC argued that it was inconsistent, incomplete and did not address the key criteria which need to exist for activities to qualify for R&D tax relief.

Key point to take away:

  • While there is currently no standard format or template in which supporting evidence for a claim should be submitted to HMRC, it is pushing for more consistency. As such, HMRC has recently provided guidance for the type of information that should be included and clarified how many projects evidence needs to be submitted for.

Existence of a project

One of the requirements for qualifying R&D activities to be taking place is for the existence of a project. HMRC argued that there was no evidence that any projects existed within the claimant company. They stated that, for a project to exist, companies should have detailed evidence and records in-house that substantiate the plans and activities carried out.

Key points to take away:

  • Again, there is no specific definition of what constitutes a project in the R&D guidance or legislation. The judge in this case referenced the dictionary, stating that a project was a “plan or scheme; a planned undertaking” and agreed with HMRC that a formulation of a plan is required for a project to exist.
  • Companies claiming, or planning to claim, R&D tax relief should be aware that some form of record or documentary evidence is expected and, if that’s not possible, a competent professional is required to provide a detailed explanation. This again highlights the need for technically-detailed and structured supporting evidence to be submitted in support of a claim.

What constitutes subcontracted R&D?

A number of the taxpayer’s projects were undertaken in conjunction with customers. HMRC argued that the projects would be considered to be subcontracted because the company was commissioned to design bespoke products for customers. This meant that, if the projects did involve qualifying activities, they would be only eligible for relief under the RDEC scheme. (The RDEC scheme is open to large company and SMEs which do not qualify for the more lucrative SME R&D Tax Credit scheme. It is notably less lucrative, but still worth considering submitting a claim for.)

The judge referred to the contracts in place between the two parties and primarily focused on the economic risk, where in this case the claimant company was paid on an hourly basis for the work undertaken. As the taxpayer did not bear any economic risk, it was ruled that the projects were subcontracted. To further support the ruling, the customer on one project had successfully filed a patent for the design work carried out by the claimant company.

Key points to take away:

  • There is limited guidance available to assist in determining whether a project is subcontracted or in-house for R&D purposes. The three main points that should be considered are:
    • The ownership of the arising intellectual property;
    • Who bears the economic risk; and
    • The degree of autonomy enjoyed.
  • These points should always be considered when drawing up a contract with a customer when you will be undertaking qualifying R&D activities. If, for example, the contract supports that you retain any arising IP, you bear the cost of any project overrun and you have autonomy over how the work is conducted, then the project will still be eligible for relief under the more generous SME scheme.

Final thoughts

Ultimately, the court found that only one of the projects was eligible for R&D tax relief (though the amount of qualifying expenditure on that project is still in dispute).

In light of the coronavirus pandemic, HMRC is dedicating more staff to process R&D claims. While this means that we are generally seeing HMRC pay out claims quicker, it also means that HMRC has more resources to look into, and potentially enquire into, claims.

Here at C+T, our report format is designed to give HMRC all of the information it requires to assess the eligibility of a claim, to prevent an enquiry being opened to request more details. We also have experience in dealing with all of the complex factors that need to be considered when preparing an R&D tax relief claim, including contractual arrangements, which HMRC specifically scrutinised in this case.

Our team of experts are on hand to help you through the claim process, to give you peace of mind that all of the relevant factors have been considered and the risk of enquiry is significantly reduced. If you have any questions, get in touch and we can advise.

EIS: case update regarding dividend rights

This post is part of our Entrepreneurial team’s regular series of blogs.

To be (a preference) or not to be (a preference): that is the question. More accurately, that was the question before the Upper Tier Tribunal (UTT) last week regarding Foojit, a company whose EIS compliance statement was rejected by HMRC.

The court had to decide whether to uphold a decision made by the First Tier Tribunal (FTT) in 2019 that the right to receive 44% of dividends payable up to a limit, presumably aligned to investment delta, constituted “a preferential right to dividends” and therefore agree with HMRC. It did.

The case was intricate. Essentially, the UTT agreed with the premise of the FTT’s findings that there needed to be some deliberate action or decision on the part of the company to enable or initiate the dividend declaration. This, coupled with the clear position – accepted by both sides – that the quantum of the dividend was a preference, meant that the shares requirement for EIS compliance was not met. Interestingly, the UTT corrected the focus of all parties (including the FTT without so naming it) that it is not enough to consider the updated Articles. Rather, where there are model Articles in place, it is incumbent on the reader to consider both documents.

There is a disparity in the EIS legislation regarding preferences: the test looks at both assets and dividends and, whilst prescriptive regarding the latter, leaves the former undefined. This, coupled with HMRC’s long established, if counter-intuitive, position that rights to assets are only “preferential” if they enable one share class to receive before another share class irrespective of quantum, means that it is commonplace to award 99.99% of assets up to a hurdle to the EIS share class, so long as dividends are equal between all share classes. Note, all share classes. Users of deferred and growth share classes beware.

The UTT did provide some offer some hints at what it would have found acceptable, such as had the dividends been predetermined to be payable and then crystallise as a debt if unpaid, but I think that it would be a brave company that relies on that as offering a binding precedent.

In reality, the overwhelming majority of EIS companies will never get to be dividend paying whilst owned by the investors; successful companies will create IP and resultant large negative reserves before turning the corner and being acquired, or the less successful will fail. As such, my advice would be to lean toward pragmatism; leave dividends well alone. Don’t try to be too clever over rights that are not likely to be effective in practice. Focus on asset rights, which will make a difference to the investors rather than risk suffering the slings and arrows of outrageous fortune.

Employment Related Securities: a reminder in advance of the tax year end

This post is part of our Entrepreneurial team’s regular series of blogs.

This week I thought it would be a good idea to provide a very broad overview of the Employment Related Securities (ERS) regime, which rears its head following the end of the tax year (5 April 2021). This has (often confusing) annual reporting requirements to HMRC, which can frequently catch companies off guard.

What falls under the ERS regime?

ERS can be broadly defined as securities (usually shares) in a company which are acquired as a consequence of employment or directorship. Shares in a company where the person is an employee or director will very likely be deemed to be ERS even if, in fact, they are not acquired as a consequence of employment. The simplest rule of thumb is to let your accountant or tax advisor know if any employees or directors have acquired shares or options in your company during the year, as they will be able to advise you on what needs to be reported to HMRC.

As noted above, most times shares acquired by an employee or director will be deemed to be ERS. It’s worth bearing in mind there are only a few notable cases which the legislation will accept are not related to their employment – i.e. they are for another specific reason. The most common is the ‘family and friends’ exception, where the opportunity to acquire securities is made in the normal course of domestic, family or personal relations.

As an example, let’s take a director who is offering shares in the family company to his children. The children are also employees of the company, but are only being offered shares as he would like to pass on his shares to them for family reasons. On its own, this would qualify under the family and friends exception. But, if the same director offered all his employees (including his children) a bonus at the end of the year in the form of shares, then it would likely be the case that his children were receiving the shares by virtue of their employment, rather than because they are family.

What needs to be reported to HMRC?

Where ERS events have occurred during the year, companies need to report these to HMRC between 6 April and 6 July following the end of the tax year. Companies will need to set up a scheme on HMRC’s portal to do so, and it’s important to remember that, once a scheme is opened, a return will need to submitted each year for each open scheme even if nothing has happened.

The most common events reported are employees being granted shares or options, options being exercised, or options lapsing (usually when an employee leaves the company). Where companies grant EMI options, the grant is not reported as part of the annual return, but instead is notified separately within 92 days of grant. However, companies with EMI schemes would still need to prepare and submit an EMI annual return for any exercises or lapses during the year, and an ERS return for any unapproved options granted (or exercised or lapsed) e.g. options granted to directors who did not qualify for EMI.

It’s also worth emphasising that although not all ERS events will give rise to a tax charge, they will still need to be reported to HMRC to avoid penalties.

If you have any queries at all about ERS, please contact us at Chiene + Tait.

Company Share Option Plans: the alternative to EMI?

This post is part of our Entrepreneurial team’s regular series of blogs.

Over the past few months, as companies have been seeking alternative methods of employee incentivisation with less impact on short-term cashflow, we have seen a considerable increase in requests for share schemes and incentives.

The obvious port of call is the Enterprise Management Incentive scheme, being the most tax advantageous available. However, certain trading activities do not qualify for EMI, and employees must meet a working time requirement to qualify, so we have been increasingly looking to other tax-advantaged ways of providing share incentives.

The Company Share Option Plan has become more prominent as an alternative – particularly where a low valuation can be agreed with HMRC, as there is a low cap on the value of shares an employee can be granted under a CSOP at £30,000. (As mentioned by my colleague Thomas in his recent blog, this happens to be a good time to be agreeing low valuations with HMRC due to the impact of the pandemic on many small companies.)

A CSOP is fairly inexpensive to implement, has no tax implications for the recipient on grant and can result in only a 10% or 20% Capital Gains tax charge on sale of the acquired shares, if the option has been held for at least 3 years. Additionally, the company can avail itself of a corporation tax deduction on exercise, equal to the difference between the market value at exercise and the price paid by the employee.

The common understanding is that share schemes are used in high-growth companies or large established businesses seeking to incentivise senior management as part of a remuneration package. The CSOP, however, provides an opportunity for many small businesses to give employees an additional incentive to push growth in the company leading to a sale or acquire a shareholding to provide a dividend stream or starting point for a management buy-out.

It may not be talked about as often, but the CSOP provides obvious benefits to companies and individuals who would fall foul of the EMI qualifying criteria. The tax implications are certainly more advantageous than simply issuing shares to employees, as discussed by my colleague Sarah recently.

Our team are experts in advising companies on the best share scheme and how to structure to ensure the maximum benefit for the company and employees. In the case of a CSOP, a valuation must be agreed with HMRC in advance of granting options. Talk to us to find out more about how this could benefit your business.

Brexit is done, so roll on amendments to EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

Many within the investment industry have been frustrated at the restrictions placed on SEIS and EIS by virtue of compliance with EU legislation.

Whatever your political persuasion – this article is deliberately apolitical – it is clear that Brexit offers an opportunity for HM Treasury to make amendments to the SEIS and EIS schemes, without breaching EU law. It would appear that with this in mind, the EIS Association (EISA) has written to the Chancellor and laid out proposals to improve these schemes.

SEIS is de minimis state aid, meaning that there were limits around the quantum of investment that could be received and also that EIS is a Notified State Aid, providing the EU with influence over its rules and application.

Such influence was most notably exercised in 2015 when HM Treasury instigated changes to EIS because it needed EU reapproval of the scheme. These changes included a termination date for the EIS scheme; a maximum age of the company requirement and restrictions on which investors qualified, how money was to be spent, and which companies qualified; and the promotion of “Knowledge Intensive Companies”. With the exception of the last point, these changes were not welcomed by most and fundamentally changed the investment landscape. In my opinion, for the worse.

The EISA’s letter, timeously issued in advance of the March Budget, sets out its recommendations for changes to these schemes. I applaud their actions, having written several articles in the past stating my desire for positive and progressive post-Brexit changes to the EIS scheme. Their recommendations, together with my own thoughts, are listed below:

Immediate change – i.e. from 3 March 2020

1. Increase the maximum level of SEIS investment from £150,000 to £250,000.

The majority of start-up companies we see seeking investment look for around £250,000 in their first investment round. As the rules currently stand, investors need to seek the first £150,000 to be SEIS and the remaining £100,000 to be EIS. The effect of which, to be compliant with the SEIS rules, is that the investment must be tranched over two days. This added complexity requires more detailed and correspondingly expensive investment agreements to be drawn up, as a result of which I have seen investments falling through.

Autumn Budget changes – likely to be around mid-November

2. Replace the Age Restriction with a more appropriate threshold

5 years on, the maximum age restriction is still the EIS change that prompts the most questions to our @LINC Scotland EIS Helpdesk from investors. In a nutshell, older companies do not qualify unless

  • i) they have previously taken EIS investment and are seeking to further fund that activity; or
  • ii) are trying to do something very different and are raising a significant sum to finance it.

I see half a dozen good companies every year which need investment and cannot get through these rules. They are left out to dry. The EISA do not advocate simply throwing open the doors to all companies, but replacing this (unfair) test with a (fairer) test that reflects the size, not the age, of the business.

3. Ministerial assurances that EIS will continue beyond 2025

If we are to succeed as a country, investment in innovation is critically important. Banks simply will not lend to most early stage businesses, so these businesses need to turn to investors to get going, fund their growth and fund their expansion. The EIS scheme is a significant job creator, with 4 new jobs created for each £1m invested according to the EISA. When the 10-year scheme limit was enacted, much consternation was expressed. We are now over half way through that window and need to have assurances that the scheme will continue.

4. Reducing the admin burden

We live in a digital age in which all PAYE information is instantly known to HMRC; all VAT information is reported instantly to HMRC; and all accounts and tax returns will soon be instantly reported to HMRC.

By comparison, EIS is reported through a combination of a manually-completed document that prompts HMRC to issue a PDF certificate, authorising the company to prepare and issue forms to the investors who then can manually complete it and submit in the tax returns or directly to HMRC. This is archaic. It should be possible for the post-EIS investment form to be digitally uploaded and, once accepted by HMRC, each investor’s tax recorded updated to record the investment.

Final thoughts

In addition to the above, EISA also recommends HM Treasury investigates how money held in pension funds can be used to fund EIS and SEIS qualifying companies and how to raise the profiles of EIS and SEIS investments.

The EISA letter is first class. It is a well researched, well presented and well thought-through request for support. Support that the government can provide without massive cost to the exchequer, and that will enable the economy to grow.

The cost of COVID: tax rises in the Budget?

This post is part of our Entrepreneurial team’s regular series of blogs.

In seven weeks, the Chancellor will deliver a Budget to the House of Commons that is widely expected to contain tax rises. There is, as there always is, excitement as to which taxes and by how much. The majority of commentators over the last few months – me included in December – seem to align with the theory that Covid support must be paid for and that the two taxes most likely to face increases are Capital Gains Tax (CGT) and Corporation Tax (CT).

CGT is divisive. Politically troublesome at least. Some people believe that it should never have been introduced (as it was in 1965) because investments can only be made using income on which tax has already been paid – so CGT provides a second bite of the cherry for HM Treasury.

Others think that it is a legitimate tax, but is rightly assessed at lower rates than Income Tax.

Still others believe that it should be increased to align with Income Tax rates. At present, there is a considerable difference between these rates, with the majority of gains taxed at 10%-20% while Income Tax is charged at 20%-45% in most of the UK and 19%-46% in Scotland.

The Office of Tax Simplification recommended in November to move the CGT rates to 20%-40%, whilst simultaneously reducing the annual exemption from CGT from around £12,000 to around £3,000. Taxpayers paid £9.5bn in CGT in 2018/19, so, in theory at least, there is around £10bn a year in extra tax up for grabs, should the government choose to move on these recommendations.

CT is also divisive, but for different reasons. It provides an opportunity for governments to make their country a destination of choice for companies to base themselves – companies that then hire staff, who pay income tax, national insurance and VAT when they buy things, stimulating the economy. The net receipts from these taxes dwarf those from CT, thus, perhaps counter-intuitively, lower rates of CT are more commonly seen as progressive and opportunistic. Kind of a loss leader. Ireland, with its 12.5% CT rate, is the most relevant example of this as it has firmly established itself as a competitor, albeit a friendly one, to the UK.

So, that is the theory, but what about the practice?

Fact: the UK is going to need money. Lots of it. COVID support is running the UK – and the global economy – into a borrowing spree the likes of which has not occurred in my lifetime.

Ask ‘the man on the street’ what they’d prefer – owners of assets and companies paying more tax, or a penny on Income Tax? – and I will bet all the money in my pockets that they would say the former. So when tax rates need to move, it seems likely it will be CGT and CT.

But we find ourselves again in a national lockdown. Officially this will run until the end of January in Scotland, with the option to extend, and in England the Prime Minister hinted yesterday that maybe this would be closer to Spring. Millions are furloughed. Is 3 March, when there is every chance the country will still be locked down, really the time when Mr Sunak will make his move? I am not so sure.

I am sure, however, that the only way to guarantee the current CGT rates will apply is for assets to be disposed of before 3 March. It is, at least in part, for this reason that we are currently seeing unprecedented levels of corporate restructuring activity – Mergers and acquisitions, Management Buy Outs, Share Repurchases and Employee Ownership Trusts being established. It makes sense to move now, all things being equal. But seven weeks is not much time to get a transaction through. There is much to be done.

Paying your fees by direct debit

Direct debit is one of the easiest, quickest and most secure payment methods available, and all transactions are covered by the Direct Debit Guarantee. If you would like to reduce your admin time and settle your fees by direct debit, please complete, sign and return a Direct Debit mandate.

You can submit the signed form by email to accounts@chiene.co.uk or by post to Accounts, 61 Dublin Street, Edinburgh EH3 6NL. If using email, please put ‘Direct Debit’ in the subject line. Please advise if you have a preference for the collection date (mid/end of month).

Once the completed form has been returned to us, we will advise you when the direct debit instruction has been set up and confirm the date of the first collection.

If you sign up to pay fees this way you will continue to receive fee invoices but payment for monthly fees will be on or just after the 15th or the 28th of each month. For other invoices the payment date will be at least 10 working days from the date of the invoice.

For more information, please contact accounts@chiene.co.uk

Top tech in 2020: gadgets that have kept me smiling

This post is part of our Entrepreneurial team’s regular series of blogs.

For the Entrepreneurial Tax blog this week I’ve decided to throw a curve ball. Rather than write an informative tax piece, I want to highlight some of the technology that has kept me sane over the past year.

I’ve always been interested in tech and the nature of my job allows me to play with some seriously cool pieces of kit now and again. Below are some of my favourites gizmos in what has been a very “meh” year. Don’t worry, our informative tax pieces on EIS relief, EMI share valuations and R&D Tax will continue in the new year.

(None of the below are sponsored in anyway and if there are any cool pieces of technology that you recommend, drop me a message!)

Ooni Koda Pizza oven – This portable pizza oven allows you to cook authentic, Neapolitan-style pizza in 60 seconds right in your back garden. With its patented design, it can reach 500°c in 10 mins and is a real game changer when it comes to homemade pizzas, making even the most incompetent chef look good.

Höfats Spin – A bioethanol table fire that provides a 500% boost to the mesmerising flame due to its rotating and clear-glass chimney effect. This year we have spent as much time outside as possible, and this light and heat source continues to be used well into the winter months. At the forefront of innovative German design, it’s a win-win in the Philp-Heidl household.

Hoverboard Go Kart – My best friend’s son received this as a Christmas present and to say that I was disappointed that I’m outwith the suggested age and size requirements is an understatement. This adaptation to last year’s Christmas craze converts the hoverboard into a Go-Kart with a unique petal design and auto-balance features. Its two powerful motors can reach up to a speed of 15km/h!

Xbox Series X – Sadly my claim for this on the grounds that it was required for “work” to review Video Game Tax relief claims was, unsurprisingly, unsuccessful. The fastest console ever developed delivers true 4k gaming and still plays some of my 20-year-old video games.

From the Entrepreneurial Tax team we hope that you all have a happy new year!

New Trade Agreement reached between the EU and UK: VAT and imports

A new “Trade and Cooperation Agreement” was reached in principle between the UK and EU on 24 December 2020. The deal will cover the future UK-EU relationship, with the two parties aiming to implement it in time for the end of the Brexit transition period on 31 December.

What impact does this have on the previously foreseen changes from a VAT perspective?

The UK will still leave the EU Single Market and Customs Union on 1 January 2021. This will end the free movement of persons, goods, services and capital with the EU. From a VAT perspective the intracommunity rules for supplies of goods and services will no longer apply and all previously foreseen changes will still apply.

The free movement of goods will end, and customs checks and controls will apply to all UK exports entering the EU and vice versa. A key feature of the agreement includes a free trade agreement ensuring no tariffs or quotas on trade in goods between the UK and EU. It provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin.

The UK and EU have agreed a rules of origin Chapter which contains modern and appropriate rules of origin ensuring that only ‘originating’ goods are able to benefit from free trade agreement. This means that goods must not only be produced in the EU but also consist in majority of raw materials that originate in the EU or the UK to benefit from zero tariffs and quotas. For goods imported into the UK/EU on which duties have been paid, the onward sale to the EU/UK may trigger customs duties again, as these imported goods do not meet the rules of origin.

It is important to remember that regardless of the trade deal, the UK will still be a non-EU member and therefore additional import/export paperwork will still be required to move goods between the UK and EU. It is therefore important to be aware of the new rules that will apply from 1 January 2021. Also, it is important to note that there are proposed new EU rules for online B2C trade which are planned to come into force from 1 July 2021 which will change the VAT rules significantly.

Will 2021 see HMRC pursue promoters of tax avoidance, as well as higher taxes?

This post is part of our Entrepreneurial team’s regular series of blogs.

“A cardinal principle”. A flash of red, the sweep of a cardinal’s cassock across the page; the invocation of churches, religion, a sense of immutable, unchanging and unquestionably ‘right’ things. It was a pleasant surprise to find some colour in the HMRC document on tax avoidance[1], which was otherwise written in ‘plain English’.

Interestingly, usage of “cardinal” peaked in the 1760s and has now slumped to 1/20th of that peak, with a particularly strong decline in the last hundred years. Because things do change, have changed, and are changing. Tax avoidance was once largely seen as socially acceptable, as opposed to tax evasion. Think about the Duke of Westminster and his gardener in the 1930s, carefully stepping across the schedules of the income tax Act by seeing only clear and crossable cliff edges drawn by the wording (and having the court – the House of Lords – bless the resulting reduction of the Duke’s surtax bill). Now, think about Amazon or Google – or any big enterprise – having to heed not only the explicit wording of the tax legislation, but also its purpose, as well as the “keep off the grass” (no matter how careful each step) signs of public outcry and HMRC’s (and the courts’) direction of travel, along with a host of anti-avoidance (or, more evocatively, “anti-abuse”) rules. There’s a choppy sea now between the cliff edges.

That’s not all that’s changed. Tax avoidance has filtered down. No longer the preserve of dukes and others able to afford bespoke tax advice, tax saving schemes are now often targeted at the mass-market – one very 2020 example being the targeting of NHS staff (many returning to work in the wake of COVID), with the promise by scheme promoters that they can pay less tax on their employment income. In a way that is legal, promoters promise – it’s not tax evasion. “Look”, they say, “here’s a QC opinion saying it works, and it’s got an HMRC number – it’s registered with HMRC.” HMRC states it wants to educate these taxpayers on the risks of becoming involved with such schemes – risks of HMRC challenge: tax costs, penalties, legal costs. But public anger is directed more at the promoters. They are seen as taking advantage of low paid groups: clap for carers, not chase them for tax, not charge them scheme fees and disappear with the profits when HMRC comes knocking.

HMRC has benefitted greatly from the change in attitudes that has seen tax avoidance become less and less acceptable. For many people, avoidance now blurs into evasion; both are ways of paying less than “your fair share” of tax, with the distinction just depending on whether or not you can afford tax advice to find a technical way to step around the rules rather than get caught up in them. HMRC must now take the next step of taking on promoters, especially repeat offenders. Pursuing taxpayers who are dependent on employment income is relatively easy – they generally aren’t going far. Pursuing promoters who take large profits from selling tax avoidance schemes will be more difficult. HMRC is consulting on proposed new legislation that will give it additional information and prosecution powers to deal with promoters. Logically, the lost tax, or the profits of the scheme, could be sought from the promoters.

A change in mindset may also be required by HMRC. The “cardinal” principle that HMRC referred to in the consultation document was that taxpayers alone are responsible for their own tax affairs – hence HMRC wanting to educate them to avoid promoters, and hence HMRC pursuing them and not promoters. However, given the complexity of the tax system today, that cardinal principle has to be under serious strain. Even very many of the most business-savvy individuals struggle to understand its complexities or rationale, and their involvement in their own tax affairs is limited to passing information to their tax advisor. Given that, it is understandable that those who are not involved in business (or in interpreting voluminous and complex tax legislation) in their day job would wish to do the same, and so be attracted by promoters claiming to understand the system and be able to save them tax.

The complexity and rationale of the tax system is a subject for another day (and another HMRC consultation or two!). For now, HMRC is analysing the feedback to its consultation document. Let us hope that HMRC recognises that, just as has happened to date with the evolution of opinion on avoidance, public perceptions of fairness and responsibility in relation to tax continue to change.  If new powers to deal with promoters do come into being, HMRC will have new tools to enable it to adapt and take a stronger stance in actively pursuing promoters and their profits, rather than clinging too firmly to a cardinal principle that may no longer be as hallowed as it once was. 2021 may then herald a pursuit by HMRC of both further tax revenues (due to widely anticipated tax rate rises) and of serial promoters of tax avoidance.

[1]https://www.gov.uk/government/consultations/tackling-promoters-of-tax-avoidance

Giving an employee shares? Make sure you understand the tax implications

This post is part of our Entrepreneurial team’s regular series of blogs.

Gifting an employee shares in a company is often used to incentivise and reward key employees within a business. However, doing so may result in the employee being liable to pay income tax on the award.

This is because where shares are simply issued or transferred to employees for no consideration, or for less than their market value, the employee will be subject to income tax on the market value of the shares less what they paid for them.

There could also be capital gains tax or inheritance tax implications for you as the person making the gift.

Consider whether there is a more tax efficient way to do it…

There are lots of different mechanisms through which you can get shares into the hands of your employees. These include through tax-advantaged schemes such as EMI and HMRC-approved CSOP schemes, as well as through unapproved option schemes which, while less tax efficient, provide more flexibility. Bear in mind that EMI options can be granted by individuals who hold shares (as well as by the companies), and that – wherever possible – EMI tax benefits mean it is worthwhile trying to use this route if you can.

Ultimately, a simple, outright gift of shares may be the best route for you, but before you jump into gifting shares you should be aware of the tax consequences for both parties and consider whether there might be a better way to achieve your aims. We recommend speaking to a tax advisor to create a solution that’s right for your company and your employees.

Know what your shares are worth

We would recommend that you have a share valuation undertaken in order to determine what the market value of your shares are so that you know what the tax charges will be in advance of transferring the shares. We can assist with this.

Consider a section 431 election

If you do go down the route of the employee immediately acquiring shares (as opposed to an option), consider s.431 elections – these are very often desirable to save on income tax. Often private companies’ shares are ‘restricted securities’ for tax purposes due to restrictions on their disposal, within the company’s Articles, which affect the value of the shares. Where these restrictions exist an election, known as a s.431 election, can be entered into jointly by the employer and employee within 14 days of the acquisition.

This election opts the recipient of the shares out of the restricted securities taxing regime. As a result, the employee will have a higher income tax charge on the acquisition as it is calculated on the higher unrestricted market value of the shares (which ignores the restrictions that apply to the shares) BUT on the eventual disposal of the shares the employee will only be subject to capital gains tax – no further income tax under the restricted securities regime will arise.

Where no s.431 election is entered into, a further income tax charge will arise on a “chargeable event” – such as where restrictions are lifted or the shares are sold on to a third party. Usually it is in the individual’s favour to enter a s 431 election to avoid such further income tax charges. It can also save the company the cost of employer’s NICs, as explained below.

Does the income tax need to be paid via PAYE?

If your shares are considered to be a readily convertible asset (RCA), either by being capable of being sold on a market (such as the London Stock Exchange) or through other trading arrangements being in existence (such as an exit being about to happen), income tax due will be charged via PAYE with Class 1 employers and employees National Insurance contributions also being due. Class 1 NIC is currently paid by employers at 13.8% (on top of the employee contribution). This can, therefore, add up to a significant additional tax charge; assuming the employee is a higher rate tax payer this would result in an overall tax charge of over 55%. Further, the employer’s NIC may be an unexpected cost to the company.

Where the shares are not considered to be RCAs then income tax is payable via the individual’s self-assessment tax return, and NICs are not relevant.

Be aware that whilst the shares may not be an RCA at the time of acquisition (gifting), they could be RCAs when the individual comes to sell them e.g. if they are sold on an exit where there is a buyer in place for the company’s entire share capital. This would mean that if a section 431 election had not been entered into, the further income tax charge arising on disposal of the shares would be payable via PAYE and the employer’s NICs would represent a cost to the company.

Know your annual reporting obligations

Where an employee (or director) has acquired shares in the company it has an obligation to report this acquisition to HMRC via an annual Employment Related Securities (ERS) return. This should be submitted to HMRC by 6 July following the end of the tax year. We can assist with this.

What if the employee leaves?

We would recommend speaking to your lawyer to make sure you’ve got the right provisions in place in your Articles of Association to deal with what should happen to the employee’s shares if they leave the company. Would you want an obligation on the individual to sell the shares back or not and, if so, at what price?

To gift or not to gift?

Ultimately, whilst gifting shares to employees is often viewed as a simple matter, doing so can give rise to tax liabilities as well as reporting obligations. While this blog provides general advice on some points to be aware of, you should always seek tax advice specific to your own circumstances before gifting shares.

We would be happy to assist you with this. If you are considering gifting shares to your employees or granting them options over shares, please contact us.

Tour Operator Margin Scheme (TOMS) VAT update

We understand that HMRC has confirmed that once the Brexit transition period ends on 1 January 2021, the VAT charged on package tours and holidays through the Tour Operator Margin Scheme (TOMS) on travel outside of the UK will be zero rated.

The announcement comes after discussions between ABTA and HMRC and removes a crucial area of uncertainty for many travel businesses.

Through TOMS, UK tour operators only account for VAT on their profit margin (ie the difference between the amount they receive from customers and the amount they pay suppliers).

It has been agreed by HMRC on the assumption of a possible no deal with the EU on TOMS. In the event of a no deal Brexit scenario, a new UK TOMS scheme will be introduced which will require payment of TOMS VAT only on UK holidays but not on package holidays outside the UK.

EIS: don’t go chasing waterfalls?

This post is part of our Entrepreneurial team’s regular series of blogs.

What is a waterfall?

A liquidation preference, often termed a ‘waterfall’ provision, is usually put in place by third-party equity investors to minimise their downside risk. The preference works to ensure that the third-party investors receive their investment back first in the event of a sale, winding up, or liquidation, in priority to the other shareholder groups.

Although this is quite common, particular care must be taken if the investors participating in the waterfall include any Enterprise Investment Scheme (“EIS”) or Venture Capital Trust (“VCT”) funds or individuals hoping to claim (or who have claimed), to ensure that their ability to claim these relief is not prejudiced. The rules regarding EIS and VCT relief prohibit shares from qualifying if they carry “any present or future preferential rights to a company’s assets on winding up”.

This rule is in place to ensure that EIS and VCT investments remain ‘risky’. Investment through these methods must genuinely be ‘at risk’ and, therefore, should not be protected by any preference rights.

Although you may think that these rules remove the possibility of including a waterfall provision in the articles of a company, they are still very prevalent in high-growth companies… but how do they get around this?

How to implement a waterfall and remain qualifying

There are two main ways to ensure compliance with this while still delivering the protections desired by the investors.

  • The first option looks at the different types of exit that a company can make. The EIS rule specifically prohibits there being any present or future preferential right to a company’s assets on winding up. Importantly, the rule only specifies winding ups, meaning the use of a preference waterfall in the event of a sale of the company is permitted.
  • The second option looks to distinguish between the priority of when the assets are received, rather than the amounts received. It is widely accepted that HMRC only pay specific attention to the timing of when there is a right to receive assets, not the amounts to be received. This means that as long as each group of shareholder receives ‘something’ at each stage of the preference waterfall, there is no preferential right to the return of assets. This is usually executed by giving one group of shareholders the right to receive 99.999% of their issue price at the same time as the others receive 0.001% of theirs. The subsequent level of the waterfall would then reverse this. This mechanism provides the desired level of protection to the first group of investors.

These methods are generally understood to be accepted by HMRC, as they have not challenged it to date. However, with the way the legislation is currently written, it is still open to HMRC to change their view on what it means.

Much ado about nothing?

Although there are ways to implement preference waterfall provisions into return of capital provisions, the legislation is complex and there is always a real risk of prejudicing an investor’s EIS or VCT relief if care is not taken.  We suggest you get specialist tax advice before implementing such provisions.

Do you import goods? Do you need to sign up for CDS?

It has recently been announced by the UK Government that businesses importing goods into the UK from anywhere outside of the UK from 1 January 2021 will have to register for access to the new Customs Declaration Service (CDS).

The CD, initially introduced in 2018, is due to be the long-term replacement for the current Customs Handling Imports and Export Freight (CHIEF) system.

You will need to request access to use the CDS so that your business can:

  • Make Customs declarations (for which you will also need compatible software for the CDS).
  • Get Import VAT statements and certificates to assist you in completing your VAT returns.
  • Get Duty Deferment Statements.

Access to the CDS can be requested through your existing government gateway account using your user ID and password that you already use for your business or organisation, using the following link: https://www.gov.uk/guidance/get-access-to-the-customs-declaration-service.

You will also need to provide HMRC with the following:

  • Your business’ EORI number (if you do not have one already – please get in touch).
  • Organisation’s Unique Tax Reference Number (UTR).
  • Registered business address for Customs records
  • National Insurance number (if you are registering as an individual).
  • The date on which you started your business.

We understand that the application process will take 5-10 minutes and you can receive access either immediately, or within 5 working days.

We recommend that you get access now to make sure you are ready to get your first import VAT statement when applicable.

Never knowingly undersold: employee ownership tax breaks work

This post is part of our Entrepreneurial team’s regular series of blogs.

Employee Ownership works. It works for the employees; it works for the previous owners; and it works for the customers.

The premise is straightforward – if all employees participate in ownership, they will work harder, be more productive and share in the benefits.

The model on which Employee Ownership Trusts (EOT) were based is the John Lewis Partnership. Admittedly, John Lewis appears to be struggling recently, but for over a century has been at the forefront of customer service and employee ownership. I have more insight than most in this assessment, having spent 5 years working in their Edinburgh branch in my youth. I recall, with more than a little guilt, being told off – not by my managers, but by my peers – for not pulling my weight. “That’s my bonus you’re wasting” was a regular put-down. This sense of collective responsibility resulted in better staff who provided (in my opinion) better levels of customer service than competitor shops and, in turn, earned a greater level of customer loyalty.

It works. Plain and simple, it works.

“So what?” you may ask. Which brings me to my point… I fear that EOTs may not survive a spring tax hike.

When EOTs were introduced in 2014, a coalition government was in power. It was the Liberal Democrats, Vince Cable specifically, who heralded their use. I worry that, in a time when commentators are unanimous in their belief that taxes will rise next year, their removal might be an easy grab.

EOTs offer exceptionally generous tax breaks:

  • a Capital Gains Tax (CGT) exemption for the owners of the business who sell their shares into an EOT; and
  • annual bonuses of up to £3,600 tax free for the employees.

We have seen a notable increase in clients asking about EOTs recently. Underpinning this is a common desire to enable their long-serving staff to benefit in their succession planning. In many cases, it is the tax benefits offered through EOTs which are making this opportunity, as opposed to a more traditional MBO, highly attractive. There are also a range of ways the business can fund the EOT to acquire the shares, so it doesn’t require employees to put their hands in their pockets to buy the shares off departing shareholders.

I might be wrong. They might continue indefinitely. But I might be right and, if so, the tax differential for owners could be huge. If the government follows the advice of The Office of Tax Simplification in their report of November 2020 – and pushes CGT rates to 40% in March and at the same time removes the EOT tax breaks – then an individual selling a business for £10m in April could pay £4m in CGT, as opposed to nil on a sale into an EOT right now.

If you are thinking about succession; if you are thinking about selling your business; if you are thinking about your employees, then now might be the right time to explore Employee Ownership. We are here ready to support you in this.

EMI – A great time to agree a share valuation with HMRC

This post is part of our Entrepreneurial team’s regular series of blogs.

This year, with the significant ongoing impact of Covid-19, many companies may find themselves unable to offer their employees a pay rise or bonus, instead looking for alternative means to reward and retain their workers.

One excellent method of incentivising employees to stay with the company and participate in its growth is through a share scheme, which can offer generous tax advantages if it is a tax-favoured scheme. Enterprise Management Incentive (EMI) schemes are by far the most popular such scheme.

For companies with an existing (EMI) scheme, or those looking to set up a new share scheme, the current economic uncertainty means this is a great time to agree a share valuation with HMRC. A share valuation, agreed by HMRC, is key to ensuring the EMI option recipients have certainty of taxation consequences.

The normal starting point which HMRC considers when valuing a company is the price paid by any recent (within the last 12 months) third-party investors. This third-party price can then be discounted significantly to account for the minority shareholdings that EMI options are usually granted over, and the enhanced rights that may be given to other shareholders (generally investors) through the Articles of Association or Investment Agreement. Even with a significant discount on the value of the shares from the third-party price, employees can still end up needing to pay a hefty price when the time comes to exercise their options, reducing their eventual gain when their shares are sold.

Companies that had received investment before lockdown and have seen their business falter due to lockdown may be able to argue that the price paid by investors is no longer a fair representation of their share value, with investors having relied on forecasts and business plans which are no longer achievable. This opens the door to using another method of valuation – the earnings basis, for example, which for early-stage companies with significant development costs often allows for much lower valuations than using the last third-party price paid.

Currently, HMRC is also offering companies an extended time frame to grant options once a valuation is agreed.  This has increased from the usual 90 days to 120 days. This has helped ease the administrative burden that comes with granting EMI options, as companies and their lawyers have longer to draft option agreements and have their employees sign them, which is currently more difficult than normal with so many working from home.

These factors make this an ideal time to offer employees EMI options. Doing so helps to incentivise key employees who recognise a business’ growth potential to remain in their roles and work to maximise their potential future gains on shares in their employer.

To get a share valuation prepared, and agreed with HMRC, please contact us.

Can a director qualify for EIS relief?

This post is part of our Entrepreneurial team’s regular series of blogs.

This is a frequently asked question for the Entrepreneurial team. The short answer is “yes”, provided certain conditions are met.

  • If you are an unpaid director, then you will qualify.
  • If you are going to become a paid director, you can still qualify if you get the timing right…
    • You must subscribe for (and be issued) shares in the company before you become a paid director (and before you became entitled to any pay);
    • Those initial shares will then qualify for EIS and will also buy you a “grace period” of 3 years to make further EIS qualifying subscriptions.
    • After that 3 year grace period is up, you will no longer qualify.
    • Your pay must be “reasonable” i.e. not excessive for the role

Many exec and non-exec directors will meet these conditions and qualify for the key EIS tax reliefs (a deduction of 30% of the amount invested against their income tax and a CGT-free exit provided the shares are held for at least 3 years).

For those who don’t, it is worth noting that there is one other form of EIS tax relief available which can be claimed despite not meeting the above test and so not qualifying for those tax reliefs noted above – this is CGT deferral relief, a.k.a. reinvestment relief. This often-overlooked relief allows you to defer paying CGT on other gains you have made to the extent that you reinvest those proceeds into shares in an EIS qualifying company. The CGT that would otherwise be due is deferred until sale of those shares.

Of course, even if being a director does not prevent you qualifying for EIS, there are many other EIS conditions you could fall foul which could prevent you being able to claim income tax and CGT-free disposal reliefs. Ones to watch out for include: your children or spouse becoming an employee of the company or your shareholding, together with theirs, exceeding 30% during your 3-year holding period.

Chiene + Tait Statement: Neil Cameron

It is with great sadness that we share the devastating news of the sudden passing of our friend and highly respected colleague Neil Cameron. Throughout his 13 years of service with the firm, Neil led our payroll department with passion and professionalism and was held in the highest regard by all who knew him. He was dedicated to providing the highest standards of service to our clients and supporting his fellow team members, encouraging them to develop and grow. In this spirit, he was determined to develop the payroll profession and was a founding member of the Payroll Bureau Association, helping others in the payroll sector to come together for a common purpose and to drive forward standards in the industry.

We have created an online book of remembrance for friends to share their memories and messages, which will be passed to his family in due course.

Neil’s loss is felt by all his friends at the firm and he will be missed beyond words. All our thoughts are with Neil’s family and friends.

The online book of remembrance is here: http://www.remembr.com/neil.cameron

Extension to Annual Investment Allowance announced

The UK Government has announced that planned reduction to the amount of relief available under the Annual Investment Allowance (AIA) will be delayed.  The AIA is a tax incentive for businesses to promote investment. Generally, it can be claimed against most types of plant and machinery (but not cars), including fixtures and fittings. The relief enables businesses to claim a 100% tax deduction for eligible expenditure.

The current amount of relief, set at £1,000,000, is a temporary measure which was scheduled to revert back to £200,000 from 1 January 2021. This has now been delayed until 1 January 2022, to encourage investment following the COVID pandemic.  Businesses can therefore continue to claim up to £1 million in immediate tax relief for capital investments (such as for plant and machinery).

This extension will be welcome to businesses that are looking to invest in plant and equipment.

New draft legislation affecting R&D tax credit claims

HMRC has published draft legislation that introduces a PAYE/NIC cap on the payable tax credit available for R&D claims under the SME scheme.

A cap has been discussed for a number of years in order to help prevent abuse of the SME scheme and there is already a similar cap under the RDEC scheme.  There was, however, some worry that any new legislation would inadvertently impact genuine innovative businesses. Following extensive consultation, the draft legislation has been published with the following caveats.

  • A company making a small claim for payable credit below £20,000 will not be affected by the cap.
  • A company will be able to include related party PAYE and NIC liabilities attributable to the R&D project when calculating the cap, and these will be subject to the 300% multiplier.
  • A company’s claim, of any size, will be uncapped if it meets two tests. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure.

The above changes are due to form part of the Finance Bill 2021, so will have effect for accounting periods beginning on or after 1 April 2021.

Dave Philp, Head of R&D Tax at Chiene + Tait, said: “Overall this is good news. There were worries that the initial draft would impact genuine claims rather than the rouge ones that are the target of this anti-avoidance measure.

“The changes made following the consultation should mitigate all impact on authentic claims.”

If you have any questions, please contact our R&D Tax team at rdtax@chiene.co.uk.

Trustees’ Week 2020

This year’s Trustees’ Week runs from 2-6 November 2020.

Each year, Trustees’ Week highlights the work that trustees do for their charities; and shares and promotes the role that trustees play. If you are thinking of becoming a trustee, find our more here.

Read more here: http://trusteesweek.org/

Follow on Twitter here: https://twitter.com/trusteesweek

Chiene + Tait publishes lots of guidance for Trustees – see some below, and watch out for more posts throughout the week.

See also The Informed Trustee: an online course for current and prospective trustees to help promote best-practice and equip people with the skills it takes to govern a charity. Euan Morrison, our Head of Charities, contributed to the course.

 

Auditing remotely: how we delivered audits during lockdown

In this post, Stuart Beattie looks at auditing remotely. But, while this post is specific to audits, we have used similar tools and processes for all of our client work done remotely this year.

October heralds the end of the busiest time for the audit department. Looking back on a busy season that has been quite unusual, I am happy to note that the vast majority of our audits have continued.

Despite not being able to work onsite with our clients we have still been able to access all the required information, data and evidence that we normally require as part of the audit process. This is down to effective planning and communication with our clients.

The keys to success

Generally, there are three key points to auditing remotely:

  • The normal planning and audit completion meetings take place through video calls
  • All our staff have the hardware and software to carry out audit at a distance – they all have laptops, and all have access to our secure portal for sharing files
  • We communicate regularly, and proactively: we get in touch with finance teams regarding forthcoming audit bookings to put plans in place for how the work can be delivered, and we continue to liaise with clients through the audit process via phone or video conferencing.

Useful tools

Before lockdown started at the end of March, we were already using software that allowed our audit files to be accessed remotely and securely, plus we had a variety of ways for clients to get in touch and send us information. So, when we were no longer permitted to work onsite (or indeed from our offices), we had the core tools in place to ensure we could continue to deliver an excellent service.

Our secure client portal allowed clients to send through back-ups of their accounting system, Excel documents and various other material that we required. We also use screen-sharing facilities and video calls to assist with fieldwork.

All of our clients worked extremely hard to provide the relevant information and we would like to thank them for this.

New challenges and new support

Being in contact with each of our clients to discuss their systems, their access to documents and more importantly, how else can we assist them during the lockdown was very important at a time of new challenges. The pandemic and lockdown shone a new light on the concept of ‘going concern’ – that is, is the organisation in shape to survive? Some organisations thrived in lockdown; others faced a cessation to their activities like never before, and we were able to support by testing the underlying strengths of our clients.

Additionally, some of our clients were not sure initially how to access COVID funding or the furlough scheme. We were able to put them in touch with our payroll and corporate finance departments who assisted them with the preparations of forecasts or in their applications for assistance.

New perspectives

It has also been fantastic to speak to our clients remotely through video calls and see the variety of backgrounds and homeworking set ups that have been adopted during the lockdown. Gone are the meetings in an office – this has been a chance for our clients to see a slightly different side to us. The auditor is a human and one who is dealing with all the same lockdown issues. I hope also that my clients have enjoyed seeing my own home working space and can forgive the interruptions by young children and dogs!

At present we are likely to be working remotely for at least the reminder of the calendar year and therefore we would like to continue to let both our current and new clients know that we are here and are ready.

Contacting us

You can email or call your audit manager and partner in the usual way. Our switchboard will continue as normal.

You can also contact us by email at mail@chiene.co.uk

Receiving updates

We will keep our website updated with relevant sector news and continue to email out updates (unless you have opted not to receive these).

You can also follow us on LinkedIn (here) and Twitter (here), where we post our updates.

What qualifies as ‘Research & Development’ in the eyes of HMRC?

In this blog, Head of Research & Development Tax at Chiene + Tait David Philp uses specific sector examples to outline what does and does not qualify for tax purposes.

Research and Development (R&D) has a specific statutory definition for tax purposes, but what does this mean for companies that wish to apply for tax relief? To qualify for R&D Tax Relief, a company must be carrying out research and development in the field of science or technology. This can include creating new processes or products, make appreciable improvements to existing ones, or use technology or science to duplicate existing processes in a new way.

If you are:

  • Working on something that hasn’t been attempted before,
  • Making an existing product faster, cheaper and more reliable; or,
  • You have found a more-efficient way to work

You will likely qualify for relief; the question is how much. It can be difficult to identify where a project starts and ends as determined by HMRC’s requirements. Below are some sector-specific examples of what elements of a project will and won’t qualify for the relief.

The Construction Company

Rows of yellow hard hats

The company created cladding which looked like ‘normal’ brickwork, but incorporated the capacity for offsite fabrication.

What qualified?

The cladding improved fire protection and suitability to fast-track production. Mechanical fixing, rather than wet mortar, provided strength and durability, which together with the all-weather construction made for significant cost savings.

The uncertainty of which materials should be used in the cladding system and the technological uncertainties surrounding the mechanical fixing were the qualifying R&D element.

What didn’t?

The time spent pulling together information to patent the design was ineligible as the technological uncertainty had already been resolved. If the cladding system had been based on factory builds, and the company simply applied the technology to house builds, the project would have been ineligible as the advance in technology had already been achieved.

The IT Company

A row of colourful network cables plugged into a serverThe company developed a software platform that integrated with various 3rd parties.

What qualified?

Each object on their platform had to be programmed to interact with all the surrounding objects. As the platform became more complex, more objects were introduced, and the amount of code required rose exponentially. The solution was to programme the properties of each object so that interaction was built-in to the functionality.

When the objects interacted, a separate code wasn’t needed because the inherent properties produced the outcomes. The qualifying expenditure on developing this innovative code qualified for R&D relief.

What didn’t?

Whilst significant time was spent testing the code, testing that did not feed back into the design or development stages of R&D did not qualify for relief. In addition, time spent developing generic/simple code (improving the UI for example) is not eligible.

The Manufacturing Company

The company sought to build a lighter and cheaper engine than what was available off-the-shelf.

What qualified?

The work involved making the new engine substantially lighter, cheaper, and faster to produce than any currently available. As the project looked to make an appreciable improvement to an existing process, this qualified as R&D. It’s useful to note that, even if a secretive competitor had already built a new engine and made the same intended improvements, the project would still have qualified because the details of how this was achieved aren’t in the public domain.

What didn’t?

Researching the baseline knowledge and capability in the field, and identifying a gap in the market for the company to exploit did not qualify, as this is prior to the R&D project for tax purposes. Minor and routine adjustments, such as incorporating slightly better spark plugs, already designed and used in another vehicle, did not qualify.

The Life Science Company

The company sought to develop a drug that reduced the risk of a stroke.

What qualified?

Creating a new drug, up to and including Phase III trials, was a qualifying project as it was attempting to overcome scientific uncertainties. The salaries of the scientists and their laboratory assistants doing this hands-on R&D qualified, along with consumable items used and transformed in the R&D process.

What didn’t?

Time spent achieving important regulatory FDA approvals did not qualify, because any uncertainty in achieving these is part of the regulatory requirements, not science or technology.

The Food & Drink Company

Colourful cupcakes

The company sought to create a new recipe that reduced the level of sugar in a drink, whilst maintaining the same taste.

What qualified?

Time spent trialling and testing ingredients that feed into the development stage qualified for R&D relief. Ingredients wasted during this process also qualified as they were used and transformed in the R&D process, as well as time spent re-calibrating the machinery to successfully produce the new drink.

What didn’t?

Market research to determine whether people preferred the new taste was ineligible as did not overcome a scientific or technological uncertainty, and did not feed back into the development of the product.

If you have a query about what does or doesn’t qualify for Research & Development Tax Relief contact David today at david.philp@chiene.co.uk or call 0131 558 5800.

Transferable skills: how an elite sporting career helped me to succeed at C+T

In this blog, Sian Morgan in the C+T Audit Department considers how her early successful sporting career helped her to build her career and thrive in the workplace.

Ten years ago, I was juggling GCSEs with qualifying for the Commonwealth Games. Fast forward a decade, and, having recently passed my final exam to become a Chartered Accountant, I realise how transferable the skills I acquired from my time as an international swimming athlete are to my career outside of elite sport.

Athletes are known for the gold medals they win, the records they break and the time they achieve in a specific event. These are the pinnacle goals which athletes work towards for most of their career. When these goals are achieved (or in some cases not achieved), this is how an athlete is ‘valued’. However, what really defines an athlete are the life skills they learn along the way. Anyone who has participated in elite sport possesses valuable skills that can be applied to any aspect of life. The commitment and dedication required from a very young age helps to mould athletes to become very successful in their future careers.

I have considered several key traits which athletes acquire throughout their sporting career that translate to essential skills in the workplace, and how these skills have enabled me to succeed in my career so far.

Time Management

Balancing a demanding training schedule alongside school or work means athletes become experts in managing their time. Swimming has one of the most intense training schedules of any sport. An average week would include ten sessions in the pool combined with at least three sessions in the gym, with 4.30am starts nearly every day. This leaves very little time for other activities, especially school or university, and forces athletes to become extremely organised. This ability to effectively manage your time to complete all required tasks is a valued skill in the workplace. This skill particularly helped me when I was studying for my Chartered Accountancy exams whilst working full-time.

Strong Work Ethic

The training required to compete at an elite level in sport is  physically demanding, and is incredibly challenging mentally too. Athletes possess extreme mental toughness and are always striving to improve and to be the best. Swimmers train incredibly hard for years to improve by only fractions of a second. This requires a tremendous work ethic and exceptional motivation for very little reward in return. Athletes can transfer these traits into a work environment and continue to be driven to succeed in their future careers. After retiring from swimming, I transferred my drive to succeed to set new goals outside of swimming, including running a marathon and becoming a Chartered Accountant. This ability to set goals and remain focussed and motivated towards these goals are essential to succeed in the workplace.

Overcome Adversity

Every athlete has faced adversity and failure at some point in their career; it is a huge aspect of being a sportsperson. A lot of athletes have likely failed more often than they’ve won, but they have always got back up and kept on going. The aim  is not only learning to cope with failure, but learning how to come back stronger and ensure future success. Athletes are exceptional learners as they analyse their weaknesses and learn from their mistakes to help drive them to be successful next time. From my own experience, some of my greatest achievements in my swimming career stemmed from my biggest failures, as I was more motivated and determined to achieve my goals. This ability to deal with failure is just as important in the workplace and is a skill that is easily transferred to any career. Failure is inevitable at some point but having the resilience to bounce back and keep on going will result in a future positive outcome.

Coping Under Pressure

Athletes must learn to cope with a huge amount of pressure throughout their careers, in order to be successful. The athletic environment is high-pressured, competitive and extremely tough. Athletes can train for years for an event and one slight mistake could result in a lost medal, or missing a place on an international team. I placed a large amount of pressure on myself from a very young age, particularly when I was 15 to qualify for my first Commonwealth Games. Learning to handle pressure early on in life has helped me to stay calm and succeed in challenging high-pressured situations, particularly when sitting my ICAS examinations. The ability to deal with pressure is important in any line of work; unexpected problems and challenges can often occur.

Team Players

Although swimming is known as an individual sport, swimmers train in a team which becomes a huge part of their career. Athletes understand the importance of working together and how to maximise the strengths of each member to result in team success. Inspiring other team members and maintaining a positive atmosphere can have a huge impact, not only on an individual but the whole team. This was a massive part of my time training with the University of Edinburgh Performance Swim Team: we would constantly push each other to reach our full potential and support each other during more challenging periods. Team players are critical to a productive and enjoyable workplace. Athletes naturally bring their teamwork skills into the workplace, and this can help employees work together towards company goals allowing organisations to thrive.

Athletes often struggle with the transition out of elite sport, particularly with the loss of identity and uncertainty over the future direction of their lives. Greater awareness and knowledge of the unique traits that athletes possess will help businesses with this transition, and enable former athletes to become valuable employees and succeed in their professional life after elite sport.

Three things in corporate tax this week

What do all these have in common?

They are three things we’ve been thinking about this month as we’ve been:

  • Advising on when HMRC can be bound to act as promised – the starting point to establish a “legitimate expectation” being that the taxpayer has put all their cards “face upwards on the table” and sought a fully considered ruling from HMRC (per the statement in the classic case of MFK Underwriting);
  • Considering the upcoming changes that will impact personal service companies (“PSCs”) – putting the obligation to make the employee/ contractor distinction (and possibly to account for the PAYE and NICs liabilities) on to the end-users (the clients) of PSCs. We liked a description we recently heard by an advocate of the employment test as being difficult to apply as it is “open, textured and diffuse”. And this being due to it being derived from centuries of case law, which uses terms “redolent of a bygone era” e.g. “master and servant”; and
  • Assisting an American law firm with ensuring their client pays the correct amount of stamp duty on a transaction.  This was a complex case, so we recommended they go through HMRC’s adjudication process, because (as was said in the Caledonian Railway Company case over a century ago) if a person gets an adjudication stamp then “the mouth of the Inland Revenue is shut forever”.

If you’d like to discuss any concerns around HMRC resiling on an agreement, changes to PSC taxation, stamp taxes adjudication or any other tax queries (or share any interesting tax-related quotes) we would like to hear from you.

Contact:

Nicola.williams@chiene.co.uk

0131 558 5800

European VAT ‘Quick Fixes’ for EU Cross-Border Trade from 2020

The UK’s departure date from the EU is still to be decided and it is likely that there will be a transition period for at least 12 months once this is finalised.

It is therefore important to highlight the fact that EU VAT laws will still apply to UK businesses trading with the EU during this process.

Simplification procedures will be introduced for EU sales of goods from 1 January 2020 which will apply to UK and EU businesses from this date.

The EU has created a selection of VAT simplification measures, or ‘Quick Fixes’, with the aim of simplifying and harmonising EU VAT rules regarding intra-EU supplies of goods. Over the years different Member States applied some provisions differently so these changes have the effect of making the provisions more uniform across the EU.

The Quick Fixes can be summarised as:

  • Call Off Stock Simplification
  • Chain Transactions
  • Proof of Intra-EU Supplies
  • VAT Number (EORI) Requirement

Call Off Stock Simplification

Current

This simplification measure will have an impact on situations in which one EU supplier supplies goods to a warehouse or storage facility in another EU member state. Under current EU VAT rules, if the goods are sent to a warehouse or storage facility that is under the control of the EU-based customer, then it is considered that the supplier has made a deemed intra-community supply in its own member state and a deemed intra-community acquisition in the EU member state of destination. When the customer takes the goods out of the call-off stock, the supplier would be considered to perform a domestic supply in the EU member state, and this will likely trigger a VAT registration for the UK-based supplier in the EU member state of destination. There is also the possibility that the seller will have to start completing Intrastat reports.

The change

The purpose of the new Call-Off stock Quick Fix is to harmonise the legislation across the EU Member States. Under the new rules, the transfer of goods to a warehouse or premises controlled by a customer in an EU member state will no longer qualify as a deemed-intra community supply and a deemed intra-community acquisition. Call-Off stock arrangements do not generally require the seller to VAT register in the EU member state as a non-resident trader.

For EU VAT purposes, any eventual sale is treated as an intra-community VAT supply. This means the sale is recorded under the seller’s domestic VAT number and return, and there is nil VAT charged. The customer only has to register the sale as an acquisition in its local VAT return. Reporting under Intrastat and EC Sales Listing may still be required and both supplier and customer will be required to keep a ‘call off’ stock register.

Chain Transactions

Intra-EU chain transactions refer to a situation where:

  • The same goods are supplied successively; and
  • Those goods are dispatched or transported from one Member State to another Member State directly from the first supplier to the last customer in the chain

Current

Currently the VAT treatment of intra-EU chain transactions is based on case law established by the CJEU. However, where a middle party in the chain arranges for transportation, there is still uncertainty and a lack of harmonization as to which supply the cross-border movement of the goods should be allocated to.

The change

The revised VAT Directive will include a specific regulation for chain transactions. Notably, the Quick Fix will only deal with the scenario of a middle party in the chain arranging for the transportation (referred to as “intermediary operator”):

  • As a rule, the dispatch or transport shall be ascribed only to the supply made to the intermediary operator
  • By way of derogation from the above, the dispatch or transport shall be ascribed only to the supply of goods by the intermediary operator where he has communicated to his supplier the VAT identification number issued to him by the Member State from which the goods are dispatched or transported

Proof of Intra-EU supplies

Current

Generally, under EU VAT rules, to apply the 0% VAT rate on an intra-EU supply a supplier should be able to provide suitable evidence that the goods were dispatched from one EU member state to another. However, currently there are no specific rules at EU level on what pieces of evidence qualify as suitable proof of intra-EU transport of goods. This has led to some uncertainty and inconsistency within the EU as there have been different requirements across the member states. This in turn has led to uncertainty for businesses who often trade across the EU.

The change

Under the new VAT rules from 1 January 2020, for VAT purposes it will be presumed that goods were imported to another EU member state from another if the supplier can readily provide at least two independent, non-contradictory documents that show evidence of the transport of the goods. Examples of types of evidence that can be used for this purpose across the EU are outlined in the table below.

Nature of documentParticulars / examples
Documents relating to transport or dispatch of the goodsSigned CMR document or note/Bill of lading/airfreight invoice/carrier invoice
Insurance policyWith regard to the dispatch or transport of goods
Bank documentsBank documents proving payment for dispatch or transport of goods
Official documents issued by public authority e.g. notaryConfirming the arrival of the goods in the EU member state of destination
Receipt confirming the storage of goodsIssued by a warehouse keeper in the Member State of destination, confirming the storage of the goods in that Member state
Written statement from the buyerRequired where the buyer arranges the transport

VAT Number (EORI) Requirement

Current

Obtaining a customer’s valid VAT number is a formal requirement for applying the 0% VAT rate to intra-EU supplies of goods. However, recent European case law provides that a taxable person only has to comply with the material conditions in order to apply the 0% VAT rate. Therefore, the 0% VAT rate cannot formally be refused due to the fact that a taxable person did not receive a valid VAT number from its customer.

The change

Under the new rules, obtaining a valid VAT number that the customer provides to the supplier will be regarded as a material requirement for applying the 0% VAT rate. If the supplier fails to include the customer’s VAT number on invoices, it should not be possible to apply the 0 % VAT rate.

Zero rating will also be dependent on the supply of the goods being included in the supplier’s EC Sales List.

What Can C+T Do for You?

If you are interested in finding out more about the above EU Quick Fixes and feel that either one of these, or a combination, would be of benefit to you and your business, get in touch with our specialist VAT Team to find out more at 0131 558 5800.

Lena Wilson appointed as Chiene + Tait’s new Chair

Dr Lena Wilson CBE, one of Scotland’s most prolific and experienced business leaders, has been appointed as the new Chair at Chiene + Tait.

Dr Wilson has over 30 years’ business experience across more than 40 countries. She spent eight years as the highly-regarded CEO of Scottish Enterprise before stepping down in 2017. She is currently a non-executive director for a number of high-profile companies including FTSE 50 companies the Royal Bank of Scotland plc and Intertek Group plc.

She also serves a number of organisations in an advisory and ambassadorial capacity, including The Prince and Princess of Wales Hospice, Edinburgh Royal Military Tattoo and Beatson Cancer Charity, and is a Visiting Professor at the University of Strathclyde Business School.

As Chair, Dr Wilson will work with C + T’s 13 partners to support them in the firm’s continued growth and development. She takes over the role on 2 December from Gavin Morton, who joined C+T in 1985 as its first dedicated Tax Partner.

Carol Flockhart, C+T’s Managing Partner, said: “Lena’s appointment as Chair is a welcome one. It highlights our firm’s ambition, and reflects the significant success and growth we’ve seen in recent years. Lena will play an important role in supporting us in the delivery of our ambitions over the next few years. As one of the most respected and accomplished business figures in Scotland, she has a wealth of experience across the global community as well as immense insight into the UK economy. We are absolutely delighted to welcome her to the firm and I look forward to working closely with her as we continue growing our business.”

Dr Wilson said: “I relish the opportunity to be joining Chiene + Tait, an independent firm that mixes a strong legacy with an energetic and intelligent focus on the future. C + T is a successful and dynamic firm which is supporting the economy through excellent advisory services to the individuals and businesses who create growth. I’m very pleased to be coming on board for this next phase of the journey where we will focus on further growth and development of the firm’s business and its people.”

MTD for VAT: Deferred Business – Act Now

As most will now be aware, MTD for VAT came into effect for most UK VAT registered businesses trading above the VAT threshold of £85,000 per annum from 1 April 2019.

This meant that for the first quarter starting after this date (30 June 2019, 31 July 2019, 31 August 2019), these affected businesses were required to register for MTDfV with HMRC and submit their VAT returns directly to HMRC using functionally compatible software (e.g. Xero, Quickbooks, Sage L50 etc.).

We are pleased to report that we have now successfully been able to assist our affected clients during this transition and all those clients affected by MTDfV have now been fully signed up for the scheme and have submitted at least one MTDfV return successfully. We can report no major issues.

As part of this process, the government announced in 2018 that there was to be a deferred start date for MTDfV that would apply to a small group of complex businesses and these entities were not obliged to register for MTDfV until their first quarter end that started after 1 October 2019 (31 December 2019, 31 January 2020, 28 February 2020). The affected businesses included:

  • Trusts
  • ‘Not for profit’ organisations that are not companies (this includes some charities)
  • VAT divisions
  • VAT groups (the deferral applies to the group registration only and not to any group companies that are not covered by the group registration)
  • Public sector entities that are required to provide additional information alongside their VAT return (such as Government departments and NHS Trusts)
  • Local authorities and public corporations
  • Traders based overseas
  • Those required to make payments on account
  • Annual accounting scheme users.

We are aware that all deferred businesses should have received a letter from HMRC stating that its requirement to register for MTD was deferred until 1 October 2019.

As we are now near the end of November, it is time for these businesses to sign up for MTDfV with HMRC and ensure that they have the appropriate accounting software package or subscription to enable them to be fully MTD-complaint.

If you are part of a complex business that falls under one of the above categories, please get in touch with our specialist digital team that would be more than happy to have a discussion about your requirements for MTDfV and what steps you will need to take.  Our experienced advisers can also recommend the right accounting software for your business and assist you with the signing up process with HMRC.

UK VAT-registered traders based overseas

We are aware of issues where HMRC’s system will not recognise a non-UK based trading entity’s company registration number and therefore are not yet able to sign up for MTDfV. HMRC are currently in the process of fixing this error, but at the time of writing this issue is still ongoing and so for the time being any overseas UK VAT-registered business should continue to submit VAT returns the normal way.

If you are an overseas UK VAT registered trader and will be required to become MTD-complaint, please contact us and we can discuss with you any updates and what you should do in the meantime.

If you would like to discuss MTDfV with one of our experienced advisers please contact us on 0131 558 5800 or email us at MTD@chiene.co.uk.