The taxing question of carbon credits

Carbon offsetting is a positive measure to safeguard the environment but taking up grassland and good stock hill farmland to offset carbon could be detrimental to our ability to be self-sustaining in food production.

This position is supported by Scottish Land & Estates in their Route #2050 Report which calls for Government policies that recognise the potential of an integrated land management approach on sustainable food, sequestering carbon and improving biodiversity, for the benefit of all in Scotland.

Amongst the suggestions are calls to set out a clear minimum standard for carbon audit tools, which will give farmers and land managers confidence in the carbon audit and soil sampling process, and for the biodiversity assessment tool to be brought forward. This will help landowners to understand their own carbon footprint, and in turn, help increase biodiversity, maximising Scotland’s natural capital.

Once the decision is made to create woodland and the landowner has gone through the complex process of registering, assessing and validating the project, Pending Issuance Units (PIUs) are issued and, after verification, commuted to Woodland Carbon Units (WCUs), representing the amount of carbon sequestrated. A PIU is a promise to deliver a Woodland Carbon Unit (WCU) and can provide the owner with a useful source of upfront funding. For the purchaser, a PIU can help to facilitate forward planning as part of the transition to ‘net zero’ emissions.

But with carbon credits now being traded, the question of taxation looms, and without specific guidance from HMRC, we can only apply general tax principles.

Income that arises from a commercial woodland occupied with a view to the realisation of profits, is exempt from a charge to income tax (or corporation tax). When amounts received are linked to a farming trade (or the commercial management of land), they will form part of the taxable trade profits. The sale of standing timber is exempt from a charge to capital gains tax.

It would clearly be beneficial for the woodland owner to have income from the sale of carbon credits falling within the tax exemption available to a commercial woodland. However, in the absence of specific tax treatment guidance from HMRC, there is a risk that a woodland owner could be subject to either income tax (at a rate of up to 46% in Scotland), or corporation tax (currently 19% and potentially rising to 25%) on proceeds received from the sale of WCUs or PIUs.

A single sale of a carbon credit would fall within the charge to capital gains tax.

A woodland owner who is registered for VAT is required to charge VAT on amounts received from the sale of timber from the woodland. Receipts from the sale of WCUs will also be subject to VAT at the standard rate, as a WCU is considered a supply of services. As for other forms of carbon credit transactions, such as the sale of PIUs, we recommend getting specialist VAT advice on the treatment of this income.

Inheritance tax reliefs may be available in the form of Agricultural Property Relief (APR), Business Property Relief (BPR), or Woodlands Relief. A woodland owner will want to make sure that inheritance tax reliefs are available. Professional advice should be sought where additional value is held in the form of carbon credits.

If you need any advice, or have any questions, please contact the Chiene + Tait Rural Team at mail@chiene.co.uk or call 01463 575400.

From Gaugin to governance, my journey to become an auditor

I joined Chiene + Tait’s audit team as a trainee in May, after following a rather atypical path.

I came to the field of accountancy following almost a decade in London working in the creative industries; after studying Art History and English at University, I went on to complete a master’s degree in Modern and Contemporary Art. With my background in research and a reputation for attention to detail, I found myself a job at an auction house and later a gallery, where I became a market expert.

There were certainly things I loved about working in auction houses and galleries. The art world is a vibrant and exciting industry, and I found that there was always something more to learn—from my colleagues, from the collectors we worked with, and of course from the artists themselves. But it wasn’t long before I started to feel like the skills I had weren’t best suited to the jobs that were available to me.

It was actually the experience of a friend that first made me consider retraining as an auditor. He had worked for several years as an opera singer but had recently completed his accounting qualifications. Whenever we spoke, it was clear that he was thriving in his new industry, and I was curious— could it be a good fit for me too? After researching the qualification process and speaking to every accountant I knew, I decided to make a change.

My first months in audit have confirmed exactly what I hoped. While I don’t have a typical finance background, the business and client experience I’ve developed in my previous roles have proven to be great assets. Everyone at Chiene + Tait has been so welcoming— I’ve loved being part of the team and helping to deliver a high standard of service to our clients.

While I know I still have a long way to go with my qualifications, I love that I get to learn from my colleagues and from our clients every day, and I hope that my experience shows that there is more than one path into this industry.

Moving out of my comfort zone – a post-lockdown accountancy internship experience

My name is Jan Harrison. I am seventeen years old, and I was born in London but moved to California when I was four. I currently go to a tiny public school next to Lake Tahoe and enjoy skiing during the winter, water sports by the lake in summer, and traveling back to the UK whenever I can.

When my dad mentioned to me the possibility of doing an internship at an accountancy firm in Scotland, I was a little apprehensive. Prior to my internship at Chiene + Tait, I was not only completely unaware of anything to do with accounting, but also scared to work in an office with such accomplished, wise people. However, my dad reassured me that I would be in good hands, so I set off to Edinburgh. On my first day of work, I showed up in heels and my nicest trousers – expecting suits and ties and dress shoes. It was something of a relief to see everyone wearing jeans and converse! I was welcomed with open arms and invited to a group lunch where a monstrous portion of penne arrabiata was placed in front of me – I knew it would be a good few weeks.

During the first week of my internship, I was working in Personal Tax. I had vaguely heard about the tasks I’d be doing from my brothers, Scott and Ben (who had also done internships at C+T), but I didn’t truly know what to expect. I was first put to work filling out tax packs (thankfully Aga was patient with me and my slow typing), and I had extensive conversations about what Personal Tax is and what jobs the team is expected to do. It was so exciting to be working on something that felt so important. I had no idea I would be trusted to work with real client Information! Within an hour of being in personal tax I had seen pictures of everyone’s pets and felt utterly at home. I found my first week incredibly insightful and exciting. I was learning so much!

I had heard so many good things about the Marketing Department at C+T, so when it was finally time to venture to the second floor, I was thrilled. I first joined a zoom call where I met all the members of the Marketing Team. I was amazed at how efficient they all were at communicating and how well everyone worked together. I really enjoyed learning about internal and external communications at C+T. I got to work on the internal newsletter, and I even got to look at blogs that were being posted onto their website for all of C+T’s clients to see. I learned that marketing is more than just posting on social media – in fact, it is the glue that helps everything and everyone at C+T stay together. I am so thankful to experience what a real marketing department is like!

At the end of my second week, I went to the Royal Highland Show. I had been told to expect cows and food but beyond that I really didn’t know much else about the event. I met our group and we started exploring. Our day was packed with delicious food, funny looking animals, enormous cows and lots of laughs. We eventually stumbled upon a carnival tent and set our sights on a large stuffed duck. After shooting (and missing) about thirty throws of a softball, we began to lose hope. We left the tent, but luckily ended up back there mere moments later. I don’t think any of us are proud of how much time we spent trying to throw a ball in a jug for our prize, but Alistair Grant became a hero when he made the shot on our last go. We collected our duck and proudly strutted away. I was gifted the duck and went on to name him Lennox. Lennox travelled back to London with me on the train, and although we got some funny looks, I couldn’t have asked for a better travel companion. . (My dad, however, informed me that Lennox is in fact a goose, not a duck. I guess I learned less about wildlife from the Highland Show than one would have hoped!)  Going to the Highland Show was one of the more memorable days of my life thus far and I cannot thank Chiene + Tait enough for letting me tag along.

I spent my last week working with the VAT Team. Before this week, I confess I had absolutely no idea what VAT was (I live in America, so I suppose it’s like the sales tax added to our purchases). Every time I mentioned to someone at C+T that I would be working in VAT, I got the same resounding comment: “20%!” I was itching to figure out why 20% was the only thing anyone ever mentioned about VAT, and that I did. I filled out VAT return information for a quirky client and found the work quite interesting. I am excited to extend my knowledge about this topic in the future.

Before I spent time at Chiene + Tait, I never really thought about accounting as a profession. Now that I have seen many of the different aspects of it, I would be interested in learning more about it in the future, and potentially studying accounting when I go to university. I am beyond thankful to Chiene + Tait for taking me under their wing and teaching me about their individual work. I have never felt so welcome and included in any environment before. This has been a life-changing experience and I am so sad it is coming to an end.

New Plastic Packaging Tax: what you need to know

On 1 April 2022, the UK introduced a Plastic Packaging Tax (“PPT”), becoming one of the first countries in the world to introduce a tax on virgin plastic packaging. The aim of the tax is to incentivise importers and manufacturers of plastic packaging to use recycled materials in their products.

PPT applies at a rate of £200 per tonne on plastic packaging that has less than 30% recycled content – whether it is manufactured or imported into the UK. It also includes packaging on imported goods.

PPT applies in addition to the existing Packaging Waste Regulations and will usually require additional analysis.

Who needs to pay PPT?

  • Any business that imports plastic packaging or products containing it into the UK, where the amount imported exceeds a threshold of 10 tonnes within a 12-month period, or
  • Any business manufacturing plastic packaging where the amount manufactured exceeds 10 tonnes within a 12-month period.

What is plastic?

Plastic for the purposes of PPT means a polymer material to which substances may have been added, and includes all biodegradable, compostable and oxo-degradable polymers.

Two types of plastic packaging are subject to PPT:

  • Packaging designed for use in the supply chain; and
  • Single-use plastics for end use by the consumer.

Packaging is classified as plastic when the main component, by weight, is plastic.

Plastic packaging containing more than 30% recycled plastic still counts towards the 10-tonne threshold. Returns must include this material, but tax will not be charged on this component.

Are there any exceptions?

Certain types of plastic packaging are not subject to PPT, including those that are:

  • Designed to perform a storage function for the end user;
  • Integral to the goods;
  • Designed to be reused in a display function;

As well as:

  • Plastic containers imported or manufactured to contain human medicine; and
  • Tertiary packaging used in transport e.g. shrink wrap on pallets.

What do you need to do?

  • Determine whether you need to register for PPT. Registration is required within 30 days of meeting or anticipating meeting the 10-tonne threshold. HMRC have produced a handy guide to help businesses understand their responsibilities in relation to PPT: https://www.fdf.org.uk/globalassets/resources/public/general/ptf-060-21-a2.pdf
  • Where applicable, submit quarterly returns to HMRC detailing the quantity and components of packaging used, and pay any tax due.
  • Understand your packaging use: can you accurately quantify all the components in your packaging and how will you collect this data?
  • Understand your supply chain and how suppliers propose to address the new requirements.
  • Determine how you will meet the information requirements for customers in future.
  • Implement any required changes to systems to facilitate data collection and reporting.

If you have a query about Plastic Packaging Tax, contact us today at mail@chiene.co.uk.

National Insurance Primary Threshold increase: what it means for you

In the Spring Statement Rishi Sunak announced that from July 2022 the National Insurance Primary Threshold would increase from £9,880 to £12,570 per annum, to match the income tax personal allowance.

In this blog, I’ll explore National Insurance and impending increase.

A brief history of National Insurance

National Insurance was introduced by the National Insurance Act 1911, which provided health and unemployment insurance. In 1948 the Labour government expanded the National Insurance system, and it has been subject to changes throughout the years. Now National Insurance provides state pensions, certain allowances, and bereavement support payments.

There are a few thresholds within the NI system – here, I’m mainly concentrating on the Primary Threshold. The Primary Threshold is the amount an employee can earn before having National Insurance Contributions (NICs) deducted from their gross pay.

We should briefly consider the Lower Earnings Limit and its relationship to the Primary Threshold. Employees who earn between the LEL (£533/month) and the PT (£1048/month) do not pay NICs, but do receive the benefits of paying.

July’s increase and effect on employees

30 million working people are set to benefit from the PT increase: employees will be able to earn £1048/month (£242/week) before being subject to NICs. In terms of working hours, this is 25 hours per week at the National Living Wage (£9.50/hr).

For some working people, the increase gives them an extra 27% of gross income that is not subject to NICs. Even considering the health and social care levy uplift of 1.25%, about 70% of NIC payers will see a reduction in their NICs payable.  From July an average worker will pay £330 less in NICs over the course of the year.

July’s increase and payroll providers

National Insurance thresholds are typically increased at the start of a tax year. However, in this instance, July was the earliest date that this increase could be applied. This gave all payroll software developers and employers sufficient time to update their systems.

July’s increase and effect on directors

In my last blog post Directors National Insurance we explored director’s NICs and their calculations. (As a refresher, a director can be either cumulative or non-cumulative. A cumulative director earns an annual amount before paying NICs; a non-cumulative director is calculated the same way as an employee but has a cumulative calculation completed at the end of the tax year to ensure correct NIC deductions.)

As the Primary Threshold is being increased during the tax year, the annual PT for company directors needs to be pro-rated. Company directors can earn £11,908 per annum before paying NICs.

If a director stepped down before July 2022 and paid any NICs, a calculation should be performed to ensure that the PT used was £11,908 and not £9880.

Help and questions

If you have any questions related to National Insurance or the July increase, please get touch with our Payroll Department at payroll@chiene.co.uk.

How to Fix Mistakes in Your Tax Return and Claim a Refund

Everybody makes mistakes — it’s what you do afterwards that counts.

So, what can you do when a mistake leads to an overpayment of tax in a given tax year? Maybe you have not claimed tax relief on pension contributions made, or perhaps you forgot to offset an allowable expense in relation to your rental or self-employment business. Whatever the mistake may be, how do you go about fixing it? The answer all depends on which tax year the error relates to.

Submitting an Amended Tax Return

If you need to correct a mistake on your Self-Assessment Tax Return, an amendment can be made, providing it’s still within the relevant time limit. The deadline for an amendment is the first anniversary of the tax return submission deadline – 31 January following the end of the tax year. As an example, for the 2020/21 tax year an amended return can be submitted to HMRC up until 31 January 2023.

Submitting an Overpayment Relief Claim

But what can you do if the tax return amendment window has passed?

Where an error has been made resulting in tax relief not being claimed and the amended tax return submission deadline has passed, you may still be in time to submit what is called an Overpayment Relief Claim.

An Overpayment Relief Claim is made by writing a letter to HMRC to advise them of a past error that has been made. You need to note the tax year(s) the claim is in relation to and state the refund that you believe you are due.

You do not need to have submitted tax returns year-on-year to make a successful Overpayment Relief Claim. For example, if a higher-rate taxpayer has made pension contributions over the last four years, but not claimed the higher-rate tax relief, regardless of whether they have submitted returns previously, an Overpayment Relief Claim would be possible.

However, as with amending your Self-Assessment Tax Return, there are deadlines for submitting an Overpayment Relief Claim. For a given tax year, a claim must be made within four years of the end of the tax year in question. For example, for the 2018/19 tax year, the latest you can submit a claim is 5 April 2023.

Summary

At the time of this blog, if you have made a mistake on a Self-Assessment Tax Return submitted for the 2018/19 tax year or later, and believe that you are due a refund, you are still in time to make a claim for it, and an Overpayment Relief Claim can be submitted. In contrast, for the 2020/21 tax year, a refund can be claimed by an amendment to your tax return for that year.

If you need of any assistance with either amending a tax return you have previously submitted or preparing an Overpayment Relief Claim, please contact us at: mail@chiene.co.uk.

How to Claim Tax Relief on Self-employed Trading Losses

When tax adjusted trading losses arise, the default method is to carry forward these losses and offset them against future trading profits of the same trade. However, it is possible to make a claim to offset any losses against total taxable income in the year the losses arise and/or the previous tax year.

A claim to relieve losses against other income may result in a repayment of tax. This will be of benefit to business owners who have seen a fall in their income as a result of Coronavirus. The losses available to offset in each tax year will be restricted to the greater of:

  • £50,000; or
  • 25% of total taxable income in the relevant tax year.

(There is an exception to this rule for non-active partners whose losses are restricted to £25,000.)

In the same way that losses are offset to reduce income tax liabilities, losses will also be offset against any other trading profits in the tax year, to reduce the liability to Class 4 National Insurance Contributions (NICs).

Any unused losses will follow the default method. These losses will be carried forward for both income tax and Class 4 NIC purposes and offset against future trading profits of the same trade.

Special Rules

For losses arising in the first four tax years of trade

In addition to rules we’ve highlighted, there are special rules that are available where losses arise in the first four tax years of trading. Where the accounting period does not end on either 31 March or 5 April, there are special opening year rules that need to be considered in determining the level of trading losses, which are assessable in each tax year.

Unlike the rules mentioned above, it is possible to offset losses arising in each of these first four tax years against total taxable income in the previous three years. Any losses will be offset against the earliest year. The same restrictions apply as mentioned above.

For losses arising in 2020/21 and 2021/22

For businesses that previously made a profit, but then made a loss in either the 2020/21 or 2021/22 tax years, the loss can be carried back and set against profits from the same trade in the previous three tax years – applying to the latest years first.

There is no cap on the amount of loss that can be carried back for one year. However, this is subject to a cap:

  • for a loss for 2020-21, £2,000,000 for 2018-19 and 2017-18; and
  • for a loss for 2021-22, £2,000,000 for 2019-20 and 2018-19.

If your business has made any losses and you would like to discuss how to claim tax relief on these, please get in touch with our team at: mail@chiene.co.uk.

How are LLP Partners sometimes taxed twice on their profits?

You may be aware of a new reform to the way in which partnership profits are taxed. Currently, partnership profits are typically taxed in line with the accounting period. However, the Government has revised this method so that profits are now to align with the tax year. This update has been covered by Personal Tax Partner, Lisa Travers, in a blog that you can find here. As Lisa mentioned, the one-year transitional period was expected to apply in 2022/23, but this has now been postponed to the 2023/24 tax year. In this blog, I will cover the guidance as it currently stands.

Limited Liability Partnerships (LLPs) are able to draw their accounts up to any date in the year.  The simplest route for most LLPs is to align with the end of the tax year and adopt a 31 March (5 April) year-end. The accounting year-end date will not only impact the accounting for the LLP, it will also affect the partners’ liabilities too. It’s important to leave enough time for partners and their advisers to assess any personal tax obligations.

So how is partnership income taxed? Let’s take a look at how a partner will be taxed in the opening years of joining a partnership.

When do I pay tax on my partnership income?

This will depend on the year-end date of the partnership. Individuals will be taxed on their allocation of partnership income in the tax year in which the accounting period ends.

For example: ‘Partnership A’ has an accounting period ending on 30 June 2021. As 30 June 2021 falls into the 2021/22 tax year (6 April 2021 – 5 April 2022), the relevant partner’s share of profits from 1 July 2020 to 30 June 2021 will be taxable in the 2020/21 tax year.

However, there are some exceptions to this. They are:

  • When a new partner has entered an existing partnership; and
  • When there is a change of accounting date or when a partner exits a partnership.

For this example, Partner ‘Y’ will be joining ‘Partnership A’ (above). Partner Y joins the partnership on 1 October 2019.

YEAR 1 – 2019/20

In the year of commencement, Partner Y will be taxed on their profits from the date of commencement to the following 5 April. In this example, Partner Y will be taxed on their share of profits from 1 October 2019 to 5 April 2020. This is the case, regardless of how short or long the period to 5 April may be.

YEAR 2 – 2020/21

In the second tax year, Partner Y will be taxed on their profits for a 12-month period. The 12-month period begins from the date they entered the partnership. Therefore, the partner will be taxed on their profits from 1 October 2019 to 30 September 2020.

YEAR 3 – 2021/22

By the third tax year, Partner Y will be taxed in line with the accounting period (i.e. their full share of profits allocated by ‘Partnership A’ for the year from 1 July 2020 to 30 June 2021).

Why is tax paid twice on the same profits?

‘Overlap profits’ arise when the accounting date does not align with the tax year. You may have noticed from the example that Partner Y has paid tax twice on their profits, on two separate occasions. Overlap profits have arisen in the following periods:

–        01/10/19 to 05/04/20, and

–        01/07/20 to 30/09/20.

 

Once these profits have been pro-rated for the overlap period, they are carried forward and offset against future profits when:

1.      ‘Partnership A’ changes its accounting date; or

2.      Partner Y exits the partnership.

Summary

Although you may pay tax on the same profits twice, relief is available for the overlap at a later date. Be aware that this is just one example of how a partner is taxed upon entering an LLP. Different dates may result in different outcomes. So, if you’re looking for any advice in this area, please get in touch with the Chiene + Tait Personal Tax Team at: mail@chiene.co.uk.

The Myth of ‘Emergency Tax’

The term ’emergency tax’ may sound a bit scary, but in simple terms, it just means the tax code HMRC will operate against your employment or pension income until they have the information they need to calculate the correct code.

In reality, the tax code issued by HMRC against your income is little more than a best guess by them to deduct income tax at source, as close to the actual liability for the year.

What Does Emergency Tax Mean?

There are two ways HMRC can operate a tax code against income. Either on:

  • A cumulative basis – your tax is calculated on your overall year-to-date earnings. The tax due on each payment is determined after taking into account any tax you’ve already paid this year and how much of your accumulated tax-free personal allowance has been used; or
  • An emergency basis – also known as a week one/month one basis. You’ll pay tax on all your income above the basic personal allowance. For the 2022/23 tax year, this is £12,570.

It is easy to tell if your income is being taxed on a cumulative basis or an emergency basis; if it is emergency, your code will either have an X, M1 or W1 suffix.

When Does Emergency Tax Apply?

The most common scenario for emergency tax is when you begin:

  • New employment;
  • Accessing a pension; or
  • Start to receive employment benefits.

Of course, if you begin to receive employment benefits, HMRC may opt not to apply an emergency code – instead, they might calculate the tax they predict you’ll be due and include this as a deduction in your tax code!

Before Real Time Information came into effect (where employers had to send pay details to HMRC on or before the time they paid their employees on a real basis), HMRC needed a P45 from your previous employer before your new tax code could be calculated.

What Can I Do About This?

If you have started new employment, the chances are, HMRC will receive the correct details and issue the correct tax code fairly quickly. Any tax overpaid will be refunded through your monthly/weekly salary. And of course, you may be able to speed things up by contacting HMRC and advising them of the position.

On the other hand, if you have received a ‘one-off’ payment in the year, for example a withdrawal from a Self-Invested Personal Pension (SIPP), you will need to wait until the end of the tax year to make any claim for any overpaid tax.

If you already have a tax adviser, please note that they will not automatically receive a copy of the notice of coding. If you would like codes checked by your adviser, you will need to forward onto them a copy. If you have a query about this blog, feel free to contact our team at: mail@chiene.co.uk.

Changes to UK’s Customs Systems

Full customs controls were introduced between the EU and the UK on 1 January 2022.  HMRC are now highlighting the changes to the UK’s customs systems, including the steps that affected businesses will need to take to prepare for the transition.

The UK is preparing to move all customs declarations from the current system, Customs Handling Import and Export Freight (CHIEF), to the new Customs Declaration Service (CDS).

The CDS will become the UK’s single customs platform after 31 March 2023, replacing the CHIEF system.  After the changeover, all businesses will need to declare all imported and exported goods through the CDS.

Ahead of the complete closure of CHIEF on 31 March, services will be withdrawn in two stages:

Phase 1                 After 30 September 2022, all import declarations will end.

Phase 2                After 31 March 2023, all export declarations will end.

The CDS has been developed over several years in consultation with the border industry. It will provide a more secure and stable platform that has the capacity and capability to grow in line with the government’s ambitious trade plans.  HMRC points out that the CDS has seen over 2.5 million consignments successfully processed already.

HMRC stated that businesses should work with their software developers to initiate the move over to the CDS and to ensure their systems are compatible to allow declarations to be made directly through the new system.

Businesses that use customs agents will need those agents to submit their completed declarations to the CDS in future.

For more information on these matters, contact our VAT team at VAT@chiene.co.uk.

 

Zero-Rate on Energy-Saving Materials

In the Spring Statement, the Chancellor announced that VAT on Energy-Saving Materials (“ESM”) – including solar panels, heat pumps and roof insulation – will be cut from 5% to 0%.  This follows on from our article in November 2021 (found here), outlining the extent of the reduced rate on energy-saving products, which at the time was 5% VAT.

The zero-rate will be available for five years, beginning 1 April 2022 and will revert to the 5% reduced VAT rate from 1 April 2027.

 

Revised relief

This change expands the VAT relief available for ESM for domestic installations and reverses a previous ruling from the EU Court of Justice 2019, which required the UK to restrict the eligibility and application of the relief.  Following the UK’s departure from the EU, the government has been able to widen the scope of relief for installations in domestic properties and relevant residential purpose buildings, such as care homes.

The new measure permanently removes the previous ‘social policy conditions’ and the 60% test, for which businesses were required to consider the VAT liability of ESM installations.

It was also announced that the Government will bring wind and water turbines back into the scope of the relief.

 

Purpose of revision

The measure is intended to incentivise the take-up of ESM in line with the Government’s net zero objectives.  Unless the government introduces further legislation to extend the period of the zero-rate, the installation of ESM will revert back to the 5% reduced rate from 1 April 2027.

If you are considering installing any energy-saving materials and want advice on how to plan your project to reduce any VAT charges, get in touch with our VAT team at VAT@chiene.co.uk.

How the upcoming income tax cut will affect charities claiming Gift Aid

At his recent Spring Statement on 23 March 2022, Chancellor Rishi Sunak revealed plans for the basic rate of income tax to be reduced from 20% to 19%, starting from April 2024. Aside from the obvious effect on individuals, a further impact which may not be immediately clear, is that on charities.

Currently, charities and Community Amateur Sports Clubs (CASCs) can claim an extra 25p from HMRC, for every £1 of qualifying donation income that they receive. This is done by treating the donation made by an individual as having been made after deduction of basic rate tax. As long as the taxpayer has paid sufficient tax and makes a valid declaration, the charity is then able to claim back the 20% tax from HMRC, effectively grossing up the donation.

As one component of the Gift Aid calculation involves the income basic tax rate, this begs the question: will reducing the basic rate of income tax also reduce the amount that charities may claim back from HMRC?

The answer to the question is found in the full Spring Statement document published on the Government’s website, which states: “A three-year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027”.

Whilst no further details have been made available at this stage, this means that charities will not immediately feel the effect of the rate change, but it is intended that by April 2027 the rates will again be synchronised. To illustrate, a £100 Gift Aid donation today would result in the charity receiving £125. After April 2027 we can expect the same £100 donation to amount to a £123.46 receipt.

The reduction may seem small on paper and a long way off, but charities that rely heavily on donations may feel the impact on their books nonetheless. It will be important for such charities to factor the rate change into their forecasts and start planning sooner rather than later.

A few things you may wish to consider are:

  • Are you already maximising donations as much as possible? For example, do you use the Gift Aid Small Donations Scheme for donations that do not include a corresponding Gift Aid declaration? You can find further information and tips on this in this related article.
  • Have you already considered any other reliefs applicable to your organisation? This may be tax reliefs, such as the Creative Industry Tax Reliefs available to certain charities operating within the creative sector.
  • Could you benefit from some additional guidance or other support? The charity may be able to somewhat diversify its income streams by making investments, however you will need to be aware of any governance implications. There are also certain tax conditions that investments need to meet in order to be qualifying. If this is not followed the charity may lose some of its tax exemptions.

If you have any queries about this article, or would like some additional advice and support, please get in contact with our charity team at charities@chiene.co.uk.

Post Tax Year-End Spring Clean

The dawn of the tax year is often seen as a good time to get under the financial bonnet to give your tax affairs a service and make sure that the 2022/23 tax year runs smoothly. We have summarised below some of the key areas that you may wish to consider:

  • Inheritance Tax (IHT) – If you are considering a cash gift to your family or friends this year, or in the future, each individual has a £3,000 annual IHT exemption available to utilise. Gifts of more than £3,000 could be made if there is an unused part of your 2021/22 IHT exemption.  This will be lost if unused by 5 April 2023. With the start of the tax year looming, it may be a good time to take stock of your financial position. You may have surplus income and be in a position to start a pattern of regular gifting.  This would allow you to take advantage of the ‘normal expenditure out of income’ exemption.
  • Capital Gains Tax (CGT) – The annual exemption for 2022/23 is £12,300 and capital gains of up to £12,300 can be realised without triggering a CGT liability.
  • Pension Annual Allowance – Contributions to your personal pension plan attract income tax relief. The new tax year brings a new annual allowance for you to utilise. The maximum contribution that may be made for 2022/2023 is £40,000. You may be able to make additional contributions if you have not used your allowances for the previous three tax years. Contributions must be made prior to the end of the tax year, if tax relief is to be claimed. Please note that tapering applies to higher earners, which may affect your annual allowance. If your income is over £240,000, your annual allowance for the year will be reduced. For every £2 your income exceeds £240,000 your annual allowance is reduced by £1 to a minimum of £4,000.
  • Maximise your Investment Allowances – The new tax year brings with it a fresh set of allowances for you to utilise. We have summarised in the table below the investment allowances for various tax-efficient investments. These annual exemptions are ‘use it or lose it’ exemptions. Therefore, if they are not utilised, any unused allowance cannot be carried forward to use in the new tax year.
Investment Annual Allowance (£)
ISA £20,000
Junior ISA £9,000

Lifetime ISA

Please note that your £4,000 limit counts towards £20,000 annual ISA limit

£4,000
EIS £1,000,000
Seed EIS £100,000
VCT £200,000

Whilst such investments may help to reduce your overall tax liabilities, you should be aware that the value of your investments may go down as well as up and you may not get back the full amount invested. You should seek appropriate professional advice before making such investments.

  • Forward planning – With the end of the 2021/22 tax year, whilst things are still fresh and current, start to pull together your paperwork for your tax return.  If you can provide your tax adviser with your paperwork nice and early, and well in advance of the 31 January filing deadline, this will allow them to make a start on your 2021/22 tax return. This helps to plan for your upcoming tax liabilities (where applicable). It also enables your tax adviser to review your July tax payment and reduce the payment if your income was down for the year (if applicable).

If you have a query about how to make the most of the opportunities arising for the new tax year, or would like to discuss any parts of this blog, please don’t hesitate to get in touch with myself or a member of the Chiene + Tait Personal Tax Team.

Health and Social Care Levy: The impact on you and your business

It is fair to say that the last few months have been confusing for many with the new Health and Social Care Levy due to come into force from April 2022, and an increase in the primary threshold from July 2022.

It’s a big move from the Government. Increasing the point at which people start paying National Insurance has inevitably caused uncertainty and misunderstandings. This blog aims to clarify who is impacted by the changes, when and how.

What is changing, when and what is the Health and Social Care Levy?

From April 2022 National Insurance will increase by 1.25 percentage points to help fund health and social care and aid the NHS, to help it recover after the pandemic. The Chancellor also announced that from July 2022, the primary threshold – amount people will have to earn before paying National Insurance is also increasing.

Everyone from employees, employers and the self-employed will, from April 2022, have their contributions increased by 1.25 percentage points. So for example, employees at the moment pay 12% on earnings between £9,568 and £50,270, but from April 2022 this will increase to 13.25%.

This won’t be a permanent arrangement, as from April 2023 a brand new and separate levy will be introduced, called Health and Social Care Levy. At this point National Insurance contributions will revert to current rates i.e. 12%, in the above example.

Until recently the HM Revenue & Customs (HMRC) website stated that from April 2022 National Insurance contributions would increase by 1.25%. This caused some confusion among employees and employers with some thinking their current contribution would increase by 1.25% in money terms. Unfortunately, it’s a lot more. Using an example of someone who received a gross salary of £1,500 per month, their current National Insurance contribution would be approximately £84.48, and from April 2022 this would increase to £93.28. That is actually an increase of over 10% in NI contributions.

To clarify this confusion, HMRC clarified the change by re-wording its guidance to “an increase of 1.25 percentage points”.

Interestingly, a lot of employers also misinterpreted the guidance with some budgeting for 2022 by calculating 1.25% of their current employers NI bill as the increase, this not accurate.

What will this cost me as an employee?

From April 2022, anyone earning more than £9,880 per year will pay 1.25p more to the pound on National Insurance.

With the latest changes announced, from July 2022 it will mean people will have to earn £12,570 before they start paying any National Insurance at all.

Looking at all of these changes combined, we can see that any employees earning less than around £34,000 per annum will pay less National Insurance than they did in the 2021/22 tax year, any employees earning more will pay more National Insurance.

As an example, an employee earning £20,000 per annum would be paying around £178 less National Insurance in 2022/23 than they were in 2021/22.

What is the impact on employers?

Similarly, employers are also affected by the increase from April 2022, with employer National Insurance contributions rising from 13.8% to 15.05% on employee earnings above £9,100 per annum.

Somewhat controversially, from July 2022 employers will continue to pay the increased contributions but will not benefit from the same threshold increase that employees will. This means that employer contributions will still be paid on annual earnings over £9,100. Again, this is a small detail that a lot of employers may not yet realise the effects of.

If you have any questions about the new levy or the increases in National Insurance, our payroll team would be pleased to answer any questions. Similarly, to get an idea of what the financial impact of this increase means for your business, please contact us to discuss.

payroll@chiene.co.uk

Directors National Insurance

The Office of National Statistics reported that in 2021, there were 2.05 million companies and public corporations registered for PAYE and/or VAT. Even with modest estimations, that’s a lot of company directors being processed through PAYE – but how are directors wages calculated through PAYE?  Directors wages are calculated similarly to employees. However, the National Insurance (NI) calculation differs. In this blog, we explore the different methods of calculating National Insurance for directors.

Cumulative Directors

HMRC recommends that directors NI calculations are processed cumulatively due to possible intermittent and varying payments throughout the tax year. This is because calculating on a cumulative basis ensures that the director has paid the correct National Insurance at the end of the tax year.

A cumulative calculation takes into consideration the year-to-date figures of the director and the annual Primary and Secondary Threshold (the amount set each year by the Government that triggers liability for an employee to pay National insurance contributions (NICs)). Depending on the directors gross pay, National Insurance contributions may not start until near the end of the tax year.

Non-cumulative Directors

Some company directors may opt to have their NI calculated on a non-cumulative basis. Employees are calculated in the same way. This method is suitable if the director is paid regularly throughout the year. Calculating NI on a non-cumulative basis takes into consideration the earnings from that pay period, and the relevant Primary and Secondary threshold.

A cumulative NI calculation must still be done at the end of the tax year, to ensure the correct National Insurance contributions have been deducted and paid. If a director steps down part way through a tax year, they are still deemed to be a director for NI purposes for the remainder of the tax year.

Directors of Multiple Companies

A director may be involved with multiple companies rather than just one. If the businesses are deemed connected, the calculation will be affected. For connected businesses, National Insurance should be calculated on aggregated earnings and National Insurance contributions. Businesses are connected when:

  • There is a significant sharing of effects such as accommodation, employees, equipment, or customers.
  • The businesses serve a common purpose.

Aggregated earnings are the combined earnings from all the connected businesses. The annual Primary and Secondary threshold would be deducted from this figure to give the amount subject to National Insurance.

2022/23 Primary and Secondary Thresholds

In 2022/23, the annual employee (primary) threshold is £9,880.00, and the annual employer (secondary) threshold is £9,100.00. If a director earns over the primary threshold, National Insurance will be deducted from their gross pay; if a director earns over the secondary threshold, then the company may owe employer’s National Insurance.

If a company is in receipt of Employment Allowance, employer’s National Insurance may not be due.

If you have any questions regarding the calculation of director’s National Insurance, contact me today or get in touch with our Payroll Department at payroll@chiene.co.uk

Bitcoin to the moon? Key crypto corporation tax treatments to consider

Towards the end of 2021, the value of Bitcoin rocketed to a new record. The cryptocurrency’s upward trajectory was mainly fuelled by the launch of the first U.S. exchange-traded fund, which saw its value soar by 120% during 2021, reaching an all-time high of almost $66,000. Given the increase in popularity surrounding cryptocurrencies, it makes sense to understand their tax treatment for business tax purposes.

On 1 November 2019, HMRC issued a policy paper informing its position on taxing both company and business transactions that include ‘exchange tokens’ (ET). ETs are defined as crypto assets used as a method of payment, encompassing all ‘cryptocurrencies’ much like Bitcoin. Their value derives from their use as a means of investment or exchange.

Corporation Tax

Any company that comes within the scope of UK corporation tax and holds or makes transactions in ETs may have to recognise ET transactions in the calculation of its taxable profits. It should be noted that because HMRC does not classify ETs as forms of money or currency, corporation tax legislation such as the foreign currency rules do not apply.

It is imperative for companies to understand whether ET transactions fall within their existing trade activities or constitute a financial trade in their own right. Crucial factors to consider are the frequency of activity of the transactions, the level of organisation, and the subsequent commercial use of any profits arising from the transactions. If a transaction involving ETs occurs only as part of an existing trade, the profits will be included as a revenue receipt in respect of that trade. If, however, the activities are not deemed to be part of the existing trade activities nor a financial trade, then other areas of legislation such as chargeable gains, intangible fixed assets and the loan relationship rules should be taken into consideration to ascertain the correct treatment for corporation tax purposes.

Chargeable gains

ETs held as investments, are subject to corporation tax on any realised gains on their disposal.

A ‘disposal’ is an extensive area and includes selling tokens for capital, exchanging tokens for other tokens, and using tokens to pay for goods or services. When a business makes a disposal of an ET, they must calculate the market value of the asset disposed of and use this as the proceeds for the chargeable gain calculation. No disposal occurs if the company holds beneficial ownership of the tokens throughout the transaction, such as moving tokens between public addresses (generally referred to as moving ETs between wallets). Certain allowable costs are deductible when arriving at the final gain/loss on the disposal. Such costs include the original cost of the ET, transaction fees and professional expenses surrounding the acquisition/disposal of said ETs. Disposals of ETs for less than their allowable costs will generate a taxable loss which can then be utilised per the existing corporation tax loss rules.

Loan relationships

HMRC does not deem ETs a form of money, therefore such assets seldom fall into the loan relationship category. Similarly, the acquisition of ETs will not generally constitute a loan relationship transaction. This is because there is typically no counterparty for the ET and therefore no money debt arises. If, however, ETs have been offered as collateral/ security for an ordinary loan, then a loan relationship may arise, at which point the loan relationship rules should be considered.

Summary

HMRC’s policy paper provides a practical foundation to support such businesses holding ETs to understand the tax treatments of using such assets. However, as the area matures and develops further, careful consideration of the tax treatments should be given to any such transactions. Contact us with any questions at mail@chiene.co.uk.

Non-Resident Capital Gains Tax Returns on Property Disposal

Since 6 April 2015, disposals of UK situated residential properties held by non-UK resident individuals have been subject to UK Capital Gains Tax (CGT). These rules were extended on 6 April 2019 to include the disposals of UK situated commercial properties, UK situated land, and assets which derive at least 75% of their value from UK land. This can include shares in companies holding UK property.

These rules apply to non-resident individuals, the personal representatives of a non-resident individual who has died, a non-resident individual who is a member of a partnership, as well as non-resident trustees.

This will apply to outright sales, gifts and transfers (even where no consideration is received). Most other disposals of UK based assets are not within the scope of UK CGT.

There are separate rules with respect to UK resident property disposals, as detailed here.

Calculating the Gain / Tax on Disposal

The gain on disposal is calculated by deducting acquisition costs and any enhancement expenditure (e.g. installation of a conservatory) from the net proceeds received on sale.

If the property was once your home, Private Principal Residence (PPR) relief may also be available for deduction.

There are different methods available to determine the acquisition cost for non-resident disposals, dependent on the type of property sold.

Once the gain has been determined, the annual exemption can be deducted to calculate the taxable gain. Dependent on if you have any UK source income, CGT will be payable at 10/20% on commercial property and land sales or 18/28% on residential property sales.

How to Disclose the Disposal

Where a chargeable disposal occurs, the disposal must be reported to HM Revenue & Customs (HMRC) regardless of whether any CGT is payable.

Where the disposal occurred up to 5 April 2020, a non-resident CGT (NRCGT) return was required to be submitted. For all disposals on or after 6 April 2020, the disposal is reported to HMRC via the online digital disclosure service.

If the property is jointly owned, a disclosure will be required by all owners of the property via separate accounts. For each disposal, a separate disclosure must be made to HMRC unless one or more properties conclude on the same day.

If you are registered for self-assessment, the disposal will be also be required to be reported on your tax return in the tax year of disposal.

Deadlines for Disclosing the Gain and Paying Any Tax Due

Where the disposal occurred up to 26 October 2021, the disclosure was required to be reported to HMRC within 30 days of completion of sale and any CGT payable was required to be paid within 30 days of completion. The completion date for CGT purposes is the date of conclusion of missives.

It was announced in the Chancellor’s Autumn Budget on 27 October 2021 that the deadline for reporting these gains and paying any CGT due has been extended from within 30 days of completion of sale to 60 days of completion of sale. This new deadline will apply to all disposals where the conclusion of missives is completed on or after 27 October 2021.

Please note that if the return is not submitted within the deadline, late filing penalties will apply, unless it can be shown a reasonable excuse applies.

There is a very tight deadline to report and pay the Capital Gains Tax on the disposal, therefore if you require any assistance regarding Non-Resident Capital Gains Tax Returns, or would any like further information, please contact our Personal Tax team on 0131 558 5800 or email: mail@chiene.co.uk.

Digital Boost Grant Tax Implications

Opportunities for any business-related costs to paid for by the Government are hard to come by. However, with working from home or using a hybrid model, likely to be a prominent feature of our economy post-Covid, it was little wonder the Scottish Government’s Digital Boost Grant was so popular. However, one area that probably didn’t immediately spring to mind for recipients may be tax.

Those businesses that were quick off the mark and received a grant need to think carefully about the tax implications, which depends on how the grant was used.

If a business opted to use the money for digital consultancy or staff training, then it will be a revenue grant, meaning the grant income is taxable in the year of receipt and the consultancy or training costs are allowable as a deduction from taxable profits.

However, capital grants can be more complex. If the money was spent on new computer equipment, for example, then the grant will usually be included in creditors on the balance sheet and released to the profit and loss account over the life of the asset. The income recognised on these releases will not be taxable, which will be good news! However, the usual relief including capital allowances that businesses benefit from in respect of such investment, will also be restricted.

If we take a £1,000 computer as an example, the grant will have paid for 50% of this cost, subsequently, £500 of this will be ineligible for allowances, but £500 of income will not be taxed. The other 50% continues to be eligible for allowances as normal, so the business will benefit from £500 of capital allowances if it operates as an unincorporated business. If it operates as a company, it will benefit from £650 of capital allowances due to the ‘super-deduction’ in place until April 2023.

In most cases, it will be clear from the application what the grant was for, so identifying which method to use should be clear-cut. In some instances, the grant will be split into a capital element and a revenue element, with both of the above methods used in tandem.

For those that missed out on the recent wave of grant funding, the Scottish Government may re-open the fund and you can register your interest on the website now. If you are considering making further digital improvements in your business, we have a dedicated C+T Evolve Team that provide tailored solutions.

This blog is intended to highlight the general tax implications of grants, however, there are some variations to these rules for certain special types of expenditure. If you are unsure of the tax implication of a grant, please contact us today for advice.

It’s National Apprenticeship Week!

Apprenticeships provide invaluable support, experience and skillsets for young individuals, assisting them on their career journey. With a wealth of funding support and incentives, the Government has made apprenticeship programmes an attractive option for employers. In this blog, we consider the incentives for employing an apprentice and how to make sure they are paid the correct wage.

Adopt an Apprentice

In Scotland, if you recruit a Modern or Graduate Apprentice previously made redundant you could receive up to £5,000 to help cover wage and recruitment costs.

Kickstart Scheme

Creating new jobs for 16 – 24-year-olds on Universal Credit at risk of long-term unemployment, the kickstart scheme will cover:

  • 100% of the employees’ wage (at the rate of National Minimum wage or National Living Wage) for 25 hours per week for a total of 6 months.
  • Cover associated Employers National Insurance costs.
  • Cover automatic enrolment pension contributions at the minimum rate.

In addition to this, employers received £1,500 funding support for each employee that can be used for training and employability support.

Although this scheme is no longer open for applications, where employers were successful in their application, they can spread the apprentices’ start dates up until 31st March 2022.

Incentive payments for hiring a new apprentice

Employers in England have until 15 May 2022 to apply to the Government for a £3,000 payment when taking on new apprentices. The £3,000 payment can be used to cover costs related to the apprentice for example salary, uniform or travel expenses.

To be eligible, an apprentice must have commenced employment between 01 October 2021 and 31 January 2022 and have started their apprenticeship between 01 October 2021 and 31 March 2022.

The apprentice must complete 90 days of their apprenticeship for the first payment instalment and 365 for the second payment instalment.

Employers will get a further £1,000 when taking on an apprentice who is aged between 16 – 18 years old or under 25 and has an education, health and care plan or has been in the care of their local authority.

Apprenticeship minimum wage

The minimum wage for apprentices aged 16 – 18 or aged 19+ and in their first year increases from £4.30 to £4.81 per hour from 01 April 2022, which will align with the same minimum wage rate as those employees aged under 18 years old. It’s important that businesses increase apprentices’ wages in line with the new minimum wage from April.

Employer National Insurance Costs for Apprentices

To ensure you pay National Insurance at the correct rate for an apprentice use the correct National Insurance category letter:

H – Apprentices under the age of 25 on an approved apprenticeship standard or framework
G – If an apprentice is a foreign-going mariner and is under 25

When the statutory apprenticeship stops, or an apprentice turns 25 a business will need to use a new category letter. Additionally, employers are liable to Secondary Class 1 National Insurance Contributions on earnings above the Apprentice Upper Secondary Threshold (£50,270 p/a) at a rate of 13.8%.

If you have a query about hiring an apprentice or the correct earning rate, contact me today or get in touch with our Payroll Department at payroll@chiene.co.uk.

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 2022 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 2023 you should act to put this in place before 5 April 2022.

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.

Tax of the future – Metaverse and how it may shape tax legislation

The recent and much publicised rebrand by Facebook to Meta could be viewed, perhaps cynically, as an attempt to distance itself from the deluge of bad PR that the company has experienced in the past few years. But, more importantly, what the rebrand tells us is where one of the most influential tech organizations is headed in the medium to long term, and what it views as the next technological, social, and commercial revolution. Whatever you may think of Meta and Mark Zuckerberg, a change such as this should make us sit up and take notice.

The Metaverse and the advent of Web 3.0 are going to change much of online life as we know it. Broadly speaking, the Metaverse can be defined as a virtual reality, where individuals and organisations will be able to interact, transact and carry out all sorts of activities in the virtual sphere. The ongoing development of virtual reality and augmented reality technologies will feed into this and lead to a gradual merging of physical reality with the Metaverse. Coming alongside the Metaverse as one of the major developments in 2022 is Web 3.0. This is the term given to describe the new generation of the internet, manifested by decentralisation of control, data storage on the blockchain, and power returning to the individual.

Add to this the breakthrough year of NFTs (non-fungible tokens) in 2021, and it becomes clear that these new technologies are bringing about a vast amount of change. As with any major changes to the way we live our lives and conduct business, the tax system itself is likely to see some big changes in order to keep pace and bring any new types of business or transactions within the scope to tax.

The BEPS Pillar II rules* agreed by the G20 at the end of 2021 are certainly one step to catch up, with the new rules ensuring the technology giants make at least minimum rate tax payments in each jurisdiction they are active in. And the US is leading the way in legislating for greater access to data on cryptocurrency holdings to enable wider tax collection.

But what are some of the other hypotheticals that the tax authorities may have to consider as this new technology comes to prominence?

  • Virtual real estate: How will the rent or sale of virtual real estate be taxed? How will the tax system adjust to deal with ownership authenticated by the blockchain?
  • Sale of personal data: One prediction of Web 3.0 is that it will bring about personal ownership of our online data. How will the sale of personal data be taxed? What will be the accounting and tax implications for a company purchasing personal data?
  • VAT on virtual transactions: How will transactions in the Metaverse or through the Metaverse be treated for VAT purposes? How will be the place of supply be defined for a service sold by an avatar within the Metaverse?
  • Jurisdiction: How does a virtual Metaverse fit within legislation built around physical jurisdictions? Will there be a ‘UK Metaverse’ for tax residency purposes or will the Metaverse itself constitute an ‘overseas’ jurisdiction?
  • Virtual income: Where an individual provides services within the Metaverse under contract, how will payments to that individual be taxed? What about payments made in credits or crypto-tokens that are never withdrawn out of the Metaverse?

These are just a few of the potential tax predicaments that are on their way. The technologies discussed are so removed from anything that has gone before; there will most definitely be use cases or developments that we cannot foresee at the present time, and which will present further issues for the tax authorities to grapple with.

For ourselves as tax advisors, the Metaverse, Web 3.0, NFTs and the like will no doubt present many interesting and complex changes for us to keep up with and advise on. But as with any technology shift of this magnitude, there will be opportunities also to develop our offering to you as clients and perhaps even change how we conduct business. Though no plans are in the offing, the future may even see Chiene + Tait opening an office in the Metaverse, allowing clients to drop in for advice or meetings.

If you are providing services within these spheres, we would be interested to hear from you and support you with any accounting services or tax advice that you require. And if you are developing technology for the Metaverse or with Web 3.0 applications, then it is likely you are undertaking qualifying Research & Development (R&D) activities and again we would be delighted to speak with you and assist you with claiming R&D Tax Credits.

 

* On 1 July 2021, in an historic agreement, 130 countries approved a statement providing a framework for reform of the international tax rules. These countries are members of the OECD/G20 Inclusive Framework on BEPS (“IF”), comprising 139 countries. The statement sets forth the key terms for an agreement of a two-pillar approach to reforms and calls for a comprehensive agreement by the October 2021 G20 Finance Ministers and Central Bank Governors meeting, with changes coming into effect in 2023. Pillar One of the agreement is a significant departure from the standard international tax rules of the last 100 years, which largely require a physical presence in a country before that country has a right to tax. Pillar Two secures an unprecedented agreement on a global minimum level of taxation which has the effect of stipulating a floor for tax competition amongst jurisdictions.

Tax relief for your festive production? Oh yes there is!

Did production work for your Christmas orchestral concert or theatrical production start post October 2021? If it did, your production company will be entitled to higher tax repayment rates for your creative industry tax claim this year – an extra special gift from HMRC, which could well be much appreciated as we seem to move toward another tough time for the industry.

The UK Government operates a number of schemes intended to recognise, encourage and help the UK’s creative industries. These tax reliefs are part of Corporation Tax legislation, which means that an organisation needs to be within the scope of Corporation Tax to be eligible – this could be a trading subsidiary of an arts charity, or a subsidiary of a local authority, or a private company (among others).

Current creative industry tax reliefs include:

  • Orchestra Tax Relief
  • Film Tax Relief
  • Theatre Tax Relief
  • Animation Tax Relief
  • High-end Television Tax Relief
  • Video Games Tax Relief
  • Children’s Television Tax Relief
  • Museums and galleries Tax Relief

If you have a production this winter…

Theatre tax relief

The relief is available against Corporation Tax for companies involved in theatrical productions and applies to expenditure incurred on or after 1 September 2014. This relief supports the production of plays, musicals, opera, ballet and dance. It’s given by way of a super additional deduction (up to 100% of qualifying core expenditure) and a payable tax credit (worth up to 25% of losses surrendered).

Orchestra tax relief

The relief is available against Corporation Tax for qualifying orchestra production companies putting on a qualifying orchestral concert. Relief is available for qualifying expenditure. Relief is given by way of a super additional deduction (up to 100% of qualifying expenditure) and a payable tax credit (worth up to 25% of losses surrendered).

Details on the qualifying criteria

If your production company is producing and running a theatre or orchestral production, it is this that qualifies for the tax relief – not the theatre itself (though sometimes these can be the same company in the case of small local theatres putting on their own productions). The production company must be actively engaged in decision making during the production, making effective creative, technical and artistic contributions, and it must be directly paying and negotiating contracts for goods and services related to the production.

 

We advise arts organisations to see if they are eligible for tax reliefs, and complete application forms and liaise with HMRC to apply for the relief. If your production company may quality, get in touch today to see how we can help you get your claim in to HMRC early and reap the festive tax rewards.

Customs changes from 1 January 2022: what you need to know

For many businesses that import and export goods to and from the UK on a regular basis it will have been a hectic 12 months requiring adjustment to the new customs procedures implemented following the UK’s withdrawal from the EU at the start of 2021. One of the biggest changes that came about at the start the year was that those businesses that regularly trade with the EU had to make customs declarations for goods entering the UK or they had the option of delaying their customs declarations if relevant procedures were not in place following the UK’s departure from the EU.

Now as we steam towards 2022, HMRC has recently updated its Border Operating Model (BOM) to set out new customs and border requirements and procedures for goods imported from or exported to the EU from 1 January 2022 onwards.

Upcoming changes

The next set of big changes will be introduced from 1 January 2022, with further updates in the summer. These are the key requirements you need to look out for from the start of 2022:

1. Customs declarations

From 1 January 2022, customs declarations will be required upfront in addition to the payment of any applicable tariffs (although VAT-registered businesses will still be able to use postponed VAT accounting (‘PVA’) to avoid having to pay import VAT at this stage). This means that the option to delay customs declarations for up to 175 days, without an authorisation from HMRC, is coming to an end on 31 December 2021.

There is also likely to be a higher level of physical checks (currently these are limited to high-risk live animals and plants).

2. Border controls

New Border Requirements on EU Imports and Exports are coming in from 1 January 2022. Ports and other border locations will be required to control goods moving between Great Britain and the EU.

This means that unless goods have a valid declaration and have received customs clearance, they will not be able to be released into circulation, and in most cases will not be able to leave the port.

From 1 January 2022, goods may be directed to an Inland Border Facility for documentary or physical checks if these checks cannot be done at the border.

It will be important that those involved in transporting goods are ready and understand how businesses intend to operate from January 2022.

3. Rules of origin – for imports and exports

The UK-EU deal called the Trade and Cooperation Agreement (TCA) means that goods imported or exported may benefit from a reduced rate of Customs Duty (tariff preference).

These preferential rates depend on whether the goods meet the ‘Rules of Origin’ required in the agreement to qualify as ‘local’. Businesses are required to identify the full origin of their goods as well as provide additional paperwork in order to qualify.

From 1 January 2022 businesses who export goods to the EU will have to provide a supplier declaration at the time of export to confirm the origin of the goods when the manufacture alone is not enough to meet the product specific rules of origin.

4. Commodity codes

Commodity codes are used worldwide to classify goods that are imported and exported. They are standardised up to six digits and reviewed by the World Customs Organisation every five years.  Following the end of the latest review, we understand that the UK commodity codes will be changing on 1 January 2022. HMRC has guidance on how to use the Trade Tariff tool and how to classify goods, to ensure businesses pay the right Customs Duty and import VAT.

5. Postponed VAT Accounting

A VAT-registered importer can continue to use Postponed VAT Accounting (PVA) on all customs declarations, including supplementary declarations. This therefore allows importers to avoid paying VAT at the border and instead allows the required import VAT to be accounted for on the importer’s VAT return.

Further changes from 1 July 2022

Further changes will be introduced from July 2022, as follows:

  • Requirements for full safety and security declarations for all imports
  • New requirements for Export Health Certificates
  • Requirements for Phytosanitary Certificates
  • Physical checks on sanitary and phytosanitary goods at Border Control Posts

How can this affect your business?

As these new regulations are being implemented from 1 January 2022, care must be taken for any imports and exports to/from the UK from this date.

If you use a service such as a courier or freight forwarder to move your goods, you need to check their terms and conditions about who will make the declarations, and what other information they need from you to do this.

A failure to provide the correct paperwork from 1 January 2022 will mean that goods cannot clear customs and enter the UK market.  It also remains to be seen how well UK customs IT systems and other border-related infrastructure will cope with the change.

How C+T can help your business prepare

At C+T we have a dedicated VAT & Customs team that can assist your business in ensuring that it is ready to comply with new border processes. We can also help your business consider how to submit your customs declarations moving forward (self-declaration or customs agent). We can also provide you with all the relevant information & paperwork needed to secure clearance of goods through UK customs.

For further guidance on how to be prepare for these changes, please contact our VAT team at VAT@chiene.co.uk.

Investment companies to be taxed at 25%

The Finance Act 2021 (FA 2021) outlined the largest single increase in corporation tax rates since the 1970s, increasing the main corporation tax rate from 1 April 2023 by around a third from 19% to 25%. FA 2021 also reintroduced a ‘small profits rate’ for companies with profits below £50,000, and a marginal rate for profits between £50,000 and £250,000. However, the small and marginal rates provide no shelter for investment companies that, from 1 April 2023, will pay corporation tax at the top 25% rate irrespective of their profits.

Should your company’s accounting period straddle the effective date of 1 April 2023, the corporation tax rate will be a blended rate for that year. For example, 23.5% for a company with a 31 December 2023 year end. This blended rate is the rate at which all profits of the accounting period will be taxed, including investment disposals, regardless of when in the year they are sold.

There are some exceptions: if your company invests in property the small and marginal rates will still apply, as long as you are letting property on a commercial basis to unconnected parties. There is also respite for holding companies of trading groups, although the small and marginal profits limits noted above will be proportionally reduced by the number of associated companies.

What if my company doesn’t exist solely to hold investments?

If the main purpose of your company is to undertake a trade, but it also holds investments, then it is likely that it will still benefit from the small and marginal company rates on all profits, whether derived from the trade or from investments. To qualify for these reduced rates the purpose of the company must be ‘wholly or mainly’ to trade, with the investments incidental to the main trade(s).

Corporation tax is self-assessed so the company or, more likely, its tax advisers will seek to determine its main purpose in order to apply the correct corporation tax rate in the company’s tax return. There is little definitive guidance from HMRC on what constitutes ‘wholly or mainly’, but in establishing the company’s main purpose consideration will be given to the proportion of income from trading, the level of assets invested in investments versus trade, and the board’s time spent on the trade versus investments.

Do I need to do anything now?

Whilst the company’s investment strategy will involve much wider considerations than tax, from a corporation tax perspective, it is worth seeking investment advice as to whether to dispose of investments with large unrealised gains before the company’s accounting period in which the rate increases. Consideration should also be given to any capital losses carried forward in the company such that these are optimally utilised.

What other changes will I see in my accounts?

The rate change is effective from 1 April 2023 and will only be reflected in tax payable after that date.

However, more immediately, you are likely to see tax disclosures in the notes to the accounts with an explanation of the upcoming rate increase and the new rate reflected in the deferred tax provision (where applicable). Deferred tax is an estimate of tax likely to be paid in the future and is provided for at the rate it is likely to unwind at. Therefore, your tax advisers may start providing now for deferred tax at the 25% rate. Whilst this may not be of a great significance to those portfolios that are in their early stages, a company with significant unrealised gains will notice the change on its net asset position.

This blog was first published as a Comment On – click here to download the pdf.

Changes to Inheritance Tax and Capital Gains Tax shelved

Following lengthy delays and talk of major reform, the Office of Tax Simplification (OTS) review into Inheritance Tax (IHT) and Capital Gains Tax (CGT) has finally ended with the Government concluding that no major changes to either tax will take place.

For those that fancy some light reading, the full report is here – but I’ve provided below an overview of the key milestones and recommendations previously discussed.

Let’s have a look at what we could have won/lost

The OTS made several recommendations to simplify the current IHT regime back in 2018 and 2019, and then further relating to the CGT regime last year and earlier this year. If implemented, they could have had a significant impact on many family-run businesses and taxpayers. In particular, the OTS recommended:

  • Raising CGT rates to bring them more in line with income tax rates, which could have seen CGT rates of potentially 40% for higher rate taxpayers. At the same time, they also recommended decreasing the CGT annual exemption for individuals – perhaps to just £3,000 per annum, down from the current level of £12,300.
  • Removing the capital gains uplift on death for assets which qualify for IHT reliefs, such as agricultural property relief (APR) and business property relief (BPR).
  • Reviewing and reducing the IHT nil rate band (currently £325,000) and some of the IHT exemptions relating to gifts.
  • Aligning the “trading” test for BPR to those used for CGT reliefs. At present, a business can qualify for BPR if they pass the 50% trading test – that is at least 50% of their activities must consist of trading activities to qualify for BPR. Under the OTS recommendation, the business would need to consist of at least 80% trading activities to qualify for BPR.
  • If implemented, succession planning for family businesses (when looking to pass on their business, both during lifetime and on death) would have been complicated by the additional tax burden which could have applied. This could have had a significant impact on the viability of family businesses for the next generation.

The outcome

The Treasury has declined to take forward the closer alignment of CGT rates with that of income tax, or any of the more significant CGT changes.  Some recommendations on more detailed changes and administrative matters are to be made or considered further. They will also not make any changes to IHT regime, for now.

This is very welcome news for taxpayers; some may go as far to say it’s a nice early Christmas present. Knowing that there shouldn’t be many significant changes to the CGT and IHT regimes over the next couple of years allows taxpayers to plan with a greater level of certainty.

If you have a query about Inheritance Tax or Capital Gains Tax, contact me or one of the Chiene + Tait team at mail@chiene.co.uk or call 0131 558 5800.

Top five tax tips for the festive season

It isn’t long now until Christmas, so we thought that we’d share some tips from our team for the festive season. We originally thought that this year would be much more open than last year, with the likelihood of Christmas parties and family gatherings increasing, but that appears to be uncertain.

Whether or not they are able to happen, here are our five top tax tips:

  1. Watch out for those phishing emails from HMRC: don’t be clicking on the phishing emails and letting it ruin your Christmas. See our blog for further insight on phishing.
  2. Christmas is traditionally known as the season of giving. Make sure that you claim gift aid on any charitable donations that you make, as there are benefits for both and the charity. See our blog for details of the tax benefits of the gift aid scheme. Also, remember your IHT exemptions when making your Christmas gifts – each individual has a £3,000 annual exemption which can be gifted away in a tax year, and remember there is also the £250 small gift allowance too.
  3. For employers who may wish to thank their staff this year for their hard work and efforts with a wee Christmas gift such as hamper, turkey or bottle of fizz. Provided that the value of the Christmas gift is less than £50, then no additional tax charge should arise for you and you can enjoy your Christmas treat. See our detailed blog for more information.
  4. For those office Christmas parties still going ahead, do enjoy the party! There is an exemption for employee entertaining such as Christmas parties if it is open to all employees (or all employees based at one location) and the cost does not exceed £150 per head. Take note, if you decide to be extra generous this year to make up for last year, if you get a bit carried away and overspend by even just £10 then you can no longer claim the tax exemption. See our blog for further details.
  5. According to HMRC, over 2,700 tax returns were filed on Christmas Day last year. So why not enjoy your Christmas day and make sure that your tax return is filed before Christmas?

If you’d like any more information about the above, please email us and we’ll be delighted to help.

No matter your situation, we hope that your Christmas is the best it can be, and we wish you the best of ends to 2021.

Movies that put me in the Christmas spirit (every time)

Christmas has always been my favourite holiday of the year. Cities transform into magical places with decorations and lights, markets that bring people together and some mulled wine to warm you on cold nights. However, due to the ongoing pandemic, I have lost my Christmas spirit for the second year (hopefully it’s just me). So, I decided to share my list of movies that help me restore my Christmas spirit:

Love Actually: Would it be Christmas without Love Actually? A wonderful romantic comedy, hugely entertaining and heart-warming. The way the story delved into different aspects of love as shown through ten separate stories, all intertwined in some way that culminates in love being all around!

Harry Potter: The ultimate Christmas movie, according to every Potterhead (like me). It is a little tradition of mine to watch 1 movie each night in the lead up to Christmas. Such a beautiful story not only about friendship and bravery but also about hard work, loyalty and dedication. And the beauty of snowy Hogwarts and the Great Hall with its 12 Christmas trees.

Doctor Who Christmas episodes: Who doesn’t like a little sci-fi action and time travel? The Christmas episodes are always a long-anticipated adventure with the Tardis. And saving the North Pole in some cases with Santa Claus alongside our favourite Doctor Who.

If you are thinking of producing the next Christmas movie that families and friends are going to watch together, feel the spirit of Christmas and become a must-watch, then here is my present to you: Film Tax Relief & High-End Television Tax Relief!

What are Film Tax Relief and High-End Television Tax Relief?

Film Tax Relief (FTR) and High-End Television Tax Relief (HETV) are available to British qualifying tv productions with an expenditure of £1 million per hour, and all films (no limit to expenditure levels). You can claim a deduction to reduce your profits, or to increase a loss. This will reduce the amount of any Corporation Tax you will need to pay. If you make a loss, some or all of this loss can be surrendered for a payable tax credit at a rate of 25%.

The additional deduction will be the lower of either:

  • 80% of total core expenditure, or
  • The amount of UK core expenditure.

In order for a company to qualify it needs to pass the Cultural Test.

What is the Cultural Test?

The Cultural Test is to make sure that the film claiming a relief satisfies the following criteria:

  • It is a British film.
  • It’s intended for theatrical release.
  • At least 10% of core costs relate to activities in the UK.

For the High-End Television Tax Relief, additional criteria that includes the above has to be met:

  • The programme is intended for broadcast to the general public – this includes streaming online.
  • The programme is a drama, comedy or documentary.
  • The average core expenditure is at least £1 million per hour of slot length.
  • The slot length in relation to the programme must be greater than 30 minutes.

A certificate from the British Film Institute (BFI) will need to be issued and attached to the tax return.

Update from Budget 2021

Film productions qualifying for Film Tax Relief (FTR) that change during production to instead meet the criteria for High-End Television Tax Relief (HETV) will be able to continue claiming FTR without losing their right to access tax relief, which will benefit film productions in the longer term. The measure will take effect from 1 April 2022. Would you like to know more about the Budget 2021 update? Head over to this page and read all about it!

If you think your company qualifies for the Film Tax Relief or the High-End Television Tax Relief and you require assistance in claiming it, do not hesitate to contract our picture-perfect team on mail@chiene.co.uk.

Relaxation of Film Tax Relief Rules

The film industry has been one of the hardest hit sectors during the Covid-19 pandemic; with all UK cinemas temporarily forced to close their doors, enduring months without being able to welcome customers.

There was however welcome news for the industry as the Chancellor announced a relaxation of the conditions for Film Tax Relief (FTR). Where a theatrical release was intended for a film but instead was broadcast on television, the production company will still be eligible for FTR provided the conditions for High-end television relief (TVR) were met.

One of the conditions for High-End Television Relief is that the budget per hour of screen time is £1m. In the year to March 2020 there were 367 films made in the UK that met the cultural test to be eligible for FTR. Of these films, the median budget at final certification was £220,000. If we consider a typical film of 90mins long, then the minimum budget to qualify for this extension of the relief is almost 7 times the median budget at £1.5m!

For those films which do not qualify for the above extension, FTR does of course remain available however, as part of the eligibility criteria, there must have been an intention to have a theatrical release at the end of the accounting period in which a claim is being made.

For example, a company produces a film in the financial year to 31 March 2021 but decides in August 2021 to broadcast the film on television or release on streaming platforms. Provided there was an intention in March to release in cinemas then FTR would still be available. But be aware, HMRC would likely seek evidence of the intention via board minutes or discussions with cinemas.

Whilst the extension of FTR to TV releases will be welcomed by many, it evidently overlooks the smaller film producers that will not meet the £1m threshold and are, arguably, more likely to be in need of the tax relief.

If you have any queries about Film Tax Relief or any other cultural tax reliefs, contact our team today at mail@chiene.co.uk.

Changes to Quarterly Instalment Payments

We all know by now that the Spring budget held some unexpected surprises for companies, the biggest being the main rate of corporation tax increasing from 19% to 25% from 1 April 2023. Alongside that, the small profits rate and marginal relief legislation – which was repealed in 2015 – was re-enacted almost unchanged.

But one thing that may not have been immediately obvious was the changes to the quarterly instalment payments (QIPs) rules.

With most businesses financial forecasting for the next, say, 2- 5 years, companies should now factor changes in the timing of corporation tax payments, where the new rules apply, into their plans.

First things first – what are the current rules?

A company that is deemed ‘large’ or ‘very large’ is required to pay their corporation tax liability in quarterly instalments (in contrast, other companies are generally required to pay their corporation tax liability 9 months and 1 day after the company’s period end). The deadlines for QIPs payments are slightly different depending on whether the company is large or very large.

Large companies: Typically (although this will be different for shorter accounting periods (AP), for large companies the deadline for the first QIP will be 6 months and 14 days after the start of the chargeable period and then every 3 months, meaning the last QIP is due 3 months and 14 days after the end of the chargeable period.

Very large companies: the first QIP is due 2 months and 13 days after the start of the chargeable period then every 3 months until the final QIP, which is due 11 months and 13 days after the start of the chargeable period (but how can they pay tax before the end of the AP? – in a nutshell: all payments are based on the estimated total corporation tax liability for the AP).

But what makes a company large or very large?

A company is deemed to be large where its augmented profits are more than £1.5m (pro-rated if shorter AP). This £1.5m limit is also divided by the total number of group companies. For reference, augmented profits for these purposes are profits chargeable to corporation tax plus dividends received from UK companies, but excluding group companies. There is a one year period of grace: a company will be subject to QIPS in the year following that in which it first exceeds the £1.5m threshold, unless its profits exceed £10m (this £10m limit is also divided by the total number of group companies).

For very large companies, the augmented profits are to be more than £20m (again pro-rated for shorter AP).  This £20m limit is also divided by the total number of group companies. Companies exceeding this threshold will be subject to QIPs in the year the threshold is first exceeded – which means careful planning is required at the outset of the AP.

However, as only one threshold is available per group, it must be divided by the number of companies within the group. This can mean that companies with relatively modest profits can be subject to QIPS where they are part of a large group.

Currently, a group for QIPS purposes is a company and its “51% related group companies”. This includes the following situations:

  • Company A is a 51% subsidiary or Company B;
  • Company B is a 51% subsidiary of Company A; and
  • Company A and Company B are both subsidiaries of the same company.

A company is deemed a 51% subsidiary where more than 50% of the ordinary share capital is owned directly or indirectly.

This is where the changes come in…

New rules for associated companies

As included in the Finance Act 2021, from 1 April 2023, a group for QIPS purposes will no longer be a company and its 51% related group companies, but instead its 51% associated companies.  This one small word change can have a huge impact on the timing of tax payments.  These rules were in legislation before they were repealed in 1 April 2015, so may not be entirely new to everyone.

A company will be associated with another (including overseas companies) where:

  • One of them has control of the other; or
  • Both are under the control of the same person or persons.

Control for these purposes means having the greater part (i.e. 51% and over) of the share capital, voting power and/ or distribution rights.

Say, for example, Mr X owns 100% of the share capital of 5 unrelated companies. Under the current rules, the QIPs threshold would be £1.5m per company as they are unrelated for these purposes. However, when the rules change from 1 April 2023, these companies will be related as they are under common control and the QIPs threshold will be pro-rated amongst them. This means that the QIPs threshold falls from £1.5m per company to only £300k per company.

Not only this, there may be cases where companies that were not previously included in a group are now related for QIPs purposes. For example, under the current rules, a company limited by guarantee could never be part of a group on the basis that there is no ordinary share capital. However, fast forward to 1 April 2023, it might just find itself part of a QIPs group by way of voting power.

Avoid nasty surprises and check your position now

Consideration of these rules should form part of a company’s tax planning activities, and be done well in advance of 1 April 2023.  Although there are some cases where companies will be exempt from paying corporation tax via QIPs, we would strongly recommend that you seek advice on this.

If you have any queries, please contact us.

Super-deductions: too good to be true?

The Finance Act 2021 introduced a new 130% first-year allowance (super-deduction) for certain types of capital purchases, made between 1 April 2021 and 1 April 2023. Companies looking to benefit from this tax relief should be aware of the types of assets that qualify, as well as some of the potential pitfalls.

What is the super-deduction?

The super-deduction is a new tax relief measure designed to incentivise companies to invest in capital assets. It offers an increased deduction from taxable profits.

For example, a company investing £100,000 in new machinery after 1 April 2021 can save £24,700 of corporation tax with the super-deduction; with the Annual Investment Allowance (AIA), the saving is just £19,000.

The super-deduction is only available to entities subject to corporation tax, so sole traders and partnerships are excluded. Unlike the AIA, there are no limits on super-deduction claims in any given year.

What qualifies?

In most cases, anything that would otherwise qualify for capital allowances (such as main pool plant & machinery) will be eligible for the super-deduction. Common examples of main pool plant and machinery include computer equipment, CCTV, production machinery or tools purchased for use in a trade.

However, there are few exclusions to keep in mind, including expenditure on:

  • used or second-hand assets
  • contracts entered into prior to 3 March 2021
  • assets used for leasing (although there are exceptions to this)
  • motor vehicles – for the first-year allowances available for electric company cars, see our Tax Summary

What about special rate pool expenditure?

While special rate pool additions do not qualify for the super-deduction, there is a new relief known as the ‘SR Allowance’ available for these purchases. The SR Allowance is a 50% first-year allowance.

Examples of assets qualifying as special rate pool include electrical systems, hot and cold-water systems, lifts, and thermal insulation for buildings. Special rate pool items would usually qualify for the AIA at 100%, so it would likely be more beneficial to continue claiming the AIA as long as the expenditure is within the limit (currently £1 million per annum).

Are there any potential drawbacks to claiming the super-deduction?

The short answer is yes: the super-deduction may not always be the most tax-efficient option. The new legislation contains provisions for claw-back of the relief when the capital asset is subsequently sold, as the disposal proceeds must be added back to taxable profits rather than deducted from the main pool brought forward balance.

The effective corporation tax saving from the super-deduction is at 24.7% – however, if the asset is sold following 1 April 2023 the proceeds will effectively be taxed at 25% unless the small-profits rate applies. If the company disposes of the asset prior to 1 April 2023, the disposal proceeds also need to be multiplied by 1.3.

The rules operate similarly for the SR allowance, where a proportion of the proceeds must be calculated and treated as taxable income. Companies anticipating that they will only retain an asset for a short time, therefore, may wish to opt for the AIA instead.

If you have any questions about the super-deduction, or need help with any other capital allowance queries, please don’t hesitate to contact our team for advice at mail@chiene.co.uk.

Reduced VAT rate for the hospitality sector: managing its end

Hospitality businesses have been hit hard by the pandemic, with the risk of forced closures, staff shortages, decreased footfall, and supply issues. To assist the sector the government introduced a support measure of a temporary reduced VAT rate.

This was very welcome, but the sector is now experiencing a ratcheting up of the rate: it started as 5%, went up to 12.5% on 1 October, and will revert to the usual 20% once the temporary reduction ends on 31 March. There are, at least for now, opportunities for hospitality businesses to use the reduced rate.

Background

In the summer of 2020, to support businesses and jobs in the hospitality sector due to the Covid pandemic, the government announced a temporary reduction of VAT to 5% on supplies relating to:

  • Sales of Food and non-alcoholic drink in restaurants, pubs, bars, cafes and similar premises
  • Hot takeaway food and non-alcoholic beverages
  • Sleeping accommodation in hotels, B&B and similar accommodation including holiday accommodation, pitch fees for caravans and tents and associated facilities
  • Admissions to tourist attractions such as theatres, concerts, amusement parks etc

Reduced VAT Rate Scope

The temporary reduced VAT rate originally applied to supplies that were made between 15 July 2020 and 12 January 2021. Support for the hospitality sector was continued when Chancellor Rishi Sunak announced in the 2021 Budget that the 5% reduced rate would be extended until 30 September 2021.

The Government also announced that a 12.5% VAT rate would apply for the subsequent six months from 1 October 2021 until 31 March 2022 to help businesses manage the transition back to the standard 20% rate.

The 20% normal standard VAT rate will then be reinstated from 1 April 2022. The table below summarises the applicable VAT rate and timeline for the sectors:

Period VAT rate
To 30 September 2021 5%
From 1 October 2021 to 31 March 2022 12.5%
From 1 April 2022 20%

VAT savings for suppliers

During the period for which the reduced rate applies, there are opportunities for businesses to maximise the benefit of the temporary reduced rates by bringing forward the “tax point” of supplies to gain the benefit of the lower VAT rate (i.e. 12.5% after 1 October 2021 rather than 20%).

This means that VAT savings can be achieved in one of two ways:

  • Receive payment for a supply during the reduced VAT period which will be undertaken after the rate increase;
  • Issue a VAT invoice before the rate change increases to 20% (i.e. on or before 31 March).

For example…

Early payment

A holiday resort is offering campsite fees for the 2022 summer season – a point at which the VAT rate will be back at 20%. If the holiday resort received a deposit and/or full payment from the customer before 1 April 2022, they can account for VAT on the amount received at 12.5%. Any balancing payment received after 31 March 2022 will be subject to VAT at 20%.

Suppliers may consider offering an early payment discount to customer to encourage them to pay before 31 March 2022. This will provide a cash saving for the customer and a VAT saving and cash flow benefit for the supplier.

Early invoice

Any operator of holiday accommodation etc can issue a valid VAT invoice to their customer on or before 31 March 2022 for a stay which is due to take place after 31 March 2022.

For example, the supplier raises an invoice on 31 March 2022 for a stay in August 2021. The issue of the invoice creates a tax point for VAT of 31 March 2022, when the VAT rate for holiday accommodation is 12.5%. Even if the customer does not pay all or some of the invoice until after 31 March 2022, the VAT rate can remain at 12.5%.

Help and advice

For further guidance on how to maximise VAT efficiencies in hospitality sector before the VAT rate reverts back to 20%, please contact our VAT department via vat@chiene.co.uk.

HMRC widens scope of Common Reporting Standard due diligence investigations

The Common Reporting Standard (CRS) is a reporting requirement designed to increase tax transparency. Though it was initially targeted at international financial institutions like banks, many other different and smaller types of organisations fall under its scope.

It has been in place in the UK for several years now, but we are starting to see an increase in the policing of it. HMRC may have previously had a ‘softer touch’, but there has recently been an increase in enquiries asking affected organisations to demonstrate their due diligence procedures and compliance with CRS.

Given this, we recommend that organisations should review their due diligence to understand if CRS applies to them to ensure they comply with the reporting and record-keeping requirements.

What is CRS?

CRS is an international regime for facilitating information exchange between countries. As part of the regime, HMRC introduced regulations which create due diligence and reporting obligations for entities which fall within its rules.

When HMRC receives information from a reporting entity about a foreign account, they will send this information over to the relevant overseas tax authorities, and vice versa. This allows the authorities to obtain information more easily on offshore financial interests and reduce tax non-compliance. There are currently over one hundred countries signed up for CRS and the list is set to grow each year.

Who can fall within the regime?

Different entities, including charities, can all be subject to the rules if they fall within any of the following categories:

  • Custodial institutions
  • Depository institutions
  • Specified insurance companies
  • Investment entities

If an entity finds itself within one of the categories (most commonly this is investment entities), it will be deemed to be a financial institution (FI).

Further details on these categories and how they apply to companies, partnerships, charities, and trusts can be found in our Comment Ons.

What obligations does CRS impose?

FIs must perform certain due diligence checks to see if they contain any foreign reportable accounts and, if applicable, submit the relevant information to HMRC. No tax becomes payable due to CRS, but tax authorities may issue penalties for non-compliance with the reporting and/or due diligence requirements.

An FI must review all accounts it maintains to identify any Reportable Accounts. These are financial accounts (for example, shares held in a company) which are held by a non-UK resident individual who is resident in one of the other jurisdictions signed up for CRS.

While an FI is not required to submit nil returns for CRS if there is no information to report, it must be able to demonstrate that it has the necessary checks in place and that it performs sufficient due diligence each calendar year on all financial accounts it contains. It must also maintain the due diligence information for at least 6 years, irrespective of whether the account is reportable for that period.

When there is information to report for a financial account, this must be done by 31 May following the calendar year.

What is the risk?

Certain entities may not realise that they are a deemed to be an FI under the CRS rules, and so they may not be complying with CRS – conducting due diligence, reporting, or not maintaining proper records and documentation required for long enough.

This is now becoming more important. If found to be a non-compliant FI, entities risk being issued with penalties. Additionally, since this would not be in relation to a tax return, the FI would not be able to benefit from fee protection insurance to cover the costs associated with defending the enquiry.

The regulations imposed by CRS are onerous and complex. If you have any further questions on this topic or would like assistance with your CRS due diligence process, please do not hesitate to contact our CRS team at crs@chiene.co.uk.

Gift aid: the most tax efficient way to give to charity

The most common way people in the UK give to charity is by donating money to their cause of choice. However, only 52% of those who donate money to charity are taking advantage of the Gift Aid scheme. In this blog we run through the most tax efficient ways a UK taxpayer can donate to charity.

Giving through Gift Aid is a very popular and tax-efficient way of making gifts or donations to UK registered charities and also to local, community amateur sports clubs (CASCs). Gift Aid can only be claimed on donations made by UK taxpayers: this is because Gift Aid is a repayment of the UK basic rate Income Tax (20%) a UK taxpayer paid on their gift. Instead of the tax being repaid to the taxpayer, it’s repaid to the charity.

This means that charities can claim an extra 25p for every £1 donated. For example, if you donated £100 to your charity, you could claim Gift Aid and the charity will receive a gross donation of £125.

Anyone who wishes to add Gift Aid to their donation must fill out a Gift Aid declaration form for each charity they want to donate to. If you have not paid at least equal the amount of tax that the charity will claim, you will be charged the difference in income tax.

But what about other ways a higher-rate taxpayer can donate to charity?

Gift Aid: relief for higher & 45% taxpayers

Using the Gift Aid scheme is particularly beneficial to higher and 45% taxpayers. Additional relief is given by extending the basic rate band by the amount of the gross donation. Let’s look at an example:

Joe is a 40% taxpayer and donates £1,000 to his chosen charity. The charity will claim the Gift Aid of £250 (20%) which will result in a gross donation £1,250. Joe’s basic rate band will be extended by £1,250 which will result in a tax saving at 20% of £250.

In addition to receiving relief for extending the basic rate band, the gross Gift Aid donation is deducted when looking at the level of your income for personal allowances purposes.

It is possible for an individual to carry back Gift Aid donations made in the current tax year to the previous tax year. However, once the tax return is submitted for that year it cannot be amended! This can be helpful if you were a higher rate taxpayer in the previous year but a basic rate taxpayer in the current year; or if perhaps it would allow for your personal allowance to be reinstated in one year but not the other.

Gift of qualifying investment to charity

Another tax effective way of donating to charities is by gifting qualifying investments. Individuals can claim a deduction against their taxable income when gifting qualifying investments to charity, which includes certain types of shares, securities and land. This can also apply to an individual who sells the qualifying investments to a charity for less than the market value. In addition to the relief, the gift is also exempt from Capital Gains Tax.

Let’s look at another example. Mary is an additional rate taxpayer and has shares that cost £6,000 with a market value of £10,000. She gifts the shares to charity ABC giving them a total donation of £10,000. The tax saving on this would be £5,300. This includes the 20% capital gains tax on the £4,000 gain (£800) and the 45% income tax relief on the total gift (£4,500). So, the net cost for Mary’s £10,000 gift would be £4,700.

HMRC has implemented special rules to prevent this relief being used for tax avoidance purposes, which can sometimes result in relief being restricted or withdrawn. It is not possible to carry back relief to the previous tax year.

If you are thinking of giving shares or a large amount to charity and require further information, please do not hesitate to get in touch with myself, or another member of our Personal Tax Team at mail@chiene.co.uk.

Research & Development Tax Relief qualifying expenditure update – Data and Cloud Computing Costs

Following the most recent consultation into research and development (R&D) tax incentives earlier this year, the Chancellor announced several changes that will be made with effect from 1 April 2023 (a Christmas present many have had on their list for a while!).

One of the major updates being made to Research and Development Expenditure Credit (RDEC) and Small and Medium Enterprises (SME) relief schemes centres on the modernisation of what is classed as qualifying expenditure. A consistent point raised through previous HMRC consultations focuses on data and cloud computing costs, as these costs were previously not classified as qualifying expenditure. Therefore, any funds spent on these activities over the course of an R&D project could not be claimed through either scheme.

In many cases of cutting-edge R&D being carried out it is absolutely vital to have large datasets and analytical methods to analyse said data (I doubt even Santa will be going through his list of data by eye now). Furthermore, cloud computing has continued its rise to prominence even faster than expected due to the necessity of remote working methods throughout the Covid-19 pandemic. Below are the key areas of change.

Dataset Licence Payments

As datasets can be as important to R&D as the classic raw material it is refreshing to see that detailed guidance has already been provided in determining what specific dataset costs will be qualifying.

  • Expenditure spent on datasets via licenses which are used directly for R&D in a qualifying R&D project will qualify for relief. Where an access agreement covers multiple datasets, of which, some are used for non-R&D purposes the claimant will be required to apportion the costs.
  • However, company’s will not be able to claim relief on the cost of datasets that can be either resold or have a lasting value to the business beyond the scope of the project. Specifically, costs relating to a licence agreement which grants the following will not qualify;
    • Any rights of resale over the data.
    • The claimant the right to publish, share or otherwise communicate the raw data within the dataset to a third party.
    • Any ongoing rights of use, beyond the expected term of the R&D project being undertaken by the claimant.

Staffing Costs for The Creation of Datasets

Where companies need to conduct their own fieldwork to develop a dataset, they are already able to claim relief for the relevant staffing costs. If the data is not collected for sale or other commercial purposes and directly contributes to the advance in science or technology being sought by the project. Some examples of these qualifying costs can contain collecting, cleansing, and analysing data. The government intends to publish fresh guidance to make this position clearer.

Cloud Computing Costs

A further area, which as of April 2023 will be classed as qualifying expenditure will be cloud computing services and packages used directly for R&D. One point to note regarding the inclusion of these costs as qualifying expenditure is that the government intends to apply the current principle that applies to general overheads such as rental costs. HMRC will therefore likely intend to exclude similar costs incurred as part of a cloud computing package. Draft legislation is due to be published for this in Summer 2022.

If you need assistance with your R&D relief claim please don’t hesitate to talk to our specialist team for advice – contact us at mail@chiene.co.uk.

Loss Alchemy: turning tax losses into cash

The ongoing pandemic has had a tremendous impact on many prosperous businesses, with some previously profitable companies have now become loss-making.

Chancellor Rishi Sunak recognised this in his Spring Budget by announcing measures (subsequently introduced by the Finance Act 2021) that allow eligible companies to carry back trading losses three years. In this way, companies can reclaim tax paid in previous years to boost their current cashflow.

These extended loss carry-back provisions should be welcome news to companies that suffered atypical losses due to the COVID-19 pandemic. By carrying tax losses back against previous years’ taxable profits, companies can seek tax repayments from the Government now to assist with future cashflow.

The background: general rule of trading losses

The general rule for when companies make trading losses for tax purposes is as follows:

  • If a company makes a trading loss, this can be carried back only to the previous accounting period. It can be offset against any profits chargeable to corporation tax on which tax was paid in that year, thereby generating a repayment.
  • Any unused loss balances can be carried forward to offset future taxable profits.

New measures from the Budget 2021: extended loss carry-back

These temporary rules can be applied for trading losses incurred between 1 April 2020 and 31 March 2022 for carry back up to 3 years. The losses need to be set against the most recent year before carrying them back to the earlier years.

The rules for the one-year general loss carry-back remain the same – there is no limit to the amount of losses which can be carried back against prior year profits. However, the extended 3-year loss carry-back has a cap which permits losses of up to £2 million per relevant accounting period to be carried back to previous years.

It is important to note that companies cannot make a partial loss relief claim: all losses must be carried back where there is capacity to do so. Furthermore, carried back losses are offset against profits chargeable to corporate tax after group deduction but before charitable donations.

De minimis limit

The de minimis limit refers to small losses that do not exceed £200,000. A company, whether in a group or not, can make claims up to £200,00 prior to submitting the tax return. Claiming is done via a form on the HMRC Portal and can be done in advance of preparing the annual accounts or tax return, as long as sufficiently detailed management information is available to support the claim. This will mean a quicker repayment. However, if the company doesn’t require cash immediately it may be administratively simpler – and cheaper, by saving on fees – to submit a claim at the same time as the annual accounts and tax return are being prepared.

Group cap

Companies that are in a group have a total cap of £2million for each relevant period to be allocated across the Group. A nominated company must submit a Group Allocation Statement to HMRC showing the allocation of the £2million between the companies within the group. Non de minimis claims need to be made via a tax return.

How long will it take?

HMRC aims to process repayment claims on receipt but we are seeing some claims take up to 4 months to process.

We can help

If you need assistance with the extended loss carry-back please don’t hesitate to talk to our team for advice – contact us at mail@chiene.co.uk.

‘Tis the season for a tax exemption: staff events

Christmas party season is upon us and – even more excitingly for employers – there is a tax relief which applies. It can exempt these events from becoming a taxable benefit on employees!

Hosting an annual staff event, such as a Christmas party or Summer BBQ, will be an exempt benefit under the ‘Annual Event’ Exemption provided it meets the following conditions:

  • The total cost of the event does not exceed £150 per employee;
  • The event occurs annually or is intended to be held annually;
  • It must be open to all employees, or all employees based at a particular location.

The total cost of the event will include all food, drink, taxi fares, incidental accommodation, related gifts and, most importantly, the VAT thereon. This is regardless of whether the employer is VAT registered.

The exemption is all-or-nothing and so if the total cost per head exceeds £150 then the whole cost is subject to tax and National Insurance (NI), not just the excess. If spouses, partners or guests of employees also attend, their per head cost is ignored for the purposes of the exemption and is not aggregated in with that of the respective employee.

Two events can be covered

It is possible for the exemption to cover two events if the combined total of these does not exceed £150 per head (eg. One at £60 per head and the other at £80 per head). However, if an employer hosts two events which combine to more than £150 per head, they must choose a ‘best fit’ in order to offset the exemption against one of the events. The other event will be taxable unless it is covered by the Trivial Benefit exemption. More information on this can be found in our blog article on the exemption.

Virtual events are a reality

It is worth noting that, in light of the pandemic, HM Revenue & Customs has confirmed that an Annual Event can be a virtual party, such as a Zoom call or similar. Again, the total cost of providing the event (food, entertainment, etc), must not exceed £150 per employee and the event must be open to all staff.

If your event doesn’t qualify

If an event does not meet the conditions for the Annual Event or Trivial Benefit exemption then the whole value would be taxable on the employees attending. It is common practice for employers to meet the income tax and NI obligations by including such benefits on a PAYE Settlement Agreement (PSA). If a PSA is not completed, the amounts must be included on employees individual P11D forms and they must pay income tax on the benefit. More information on PSAs and P11D forms can be found in our blog article on the subject.

Further help

Note that staff entertaining is an allowable expense for business/corporation tax purposes and so the cost of a party can be deducted from taxable profits. A nice Christmas present from the tax man!

For more information on reporting benefits please contact myself or David Smith at mail@chiene.co.uk.

The Pensions Regulator issues over 75,000 penalties in 6 months for non-compliance

On Thursday 9 September The Pensions Regulator (TPR) issued their most recent compliance and enforcement bulletin, which indicates that their powers of enforcement are back at pre-pandemic levels.

TPR has used this opportunity to warn employers that, even though the pandemic has had a serious effect on businesses, they must still comply with their pension duties accurately and on time.

The bulletin shows that in the six-month period from January to June 2021, TPR issued:

  • 35,087 Compliance Notices
  • 11,921 Unpaid Contributions Notices
  • 22,542 Fixed Penalty Notices
  • 7,407 Escalating Penalty Notices

The bulletin also confirmed that there has been an increase in frontline regulation powers (i.e. TPR’s own statutory powers, used in the first instance before legal action) used by TPR. In total there were 288 statutory powers used between January and June, compared to 268 in the previous 6-month period.

Ensuring compliance with pension regulations is vitally important, not only because of the various powers TPR can use against non-compliant employers, but also because ensuring employees are correctly assessed and enrolled into a pension scheme has a direct impact on their future retirement pot.

If you have any questions about your Auto Enrolment duties or would like to discuss how Chiene + Tait can help you stay compliant please do not hesitate to contact John.Kirkpatrick@chiene.co.uk.

 

National Insurance and dividend tax increases on the way

The Prime Minister recently announced rises in National Insurance, in the form of a new Health and Social Care Levy, and dividend tax rates. The COVID pandemic has hit the economy hard and as we see the after-effects, these may be the first of many tax rises to come over the next few years.

What is the new Health and Social Care Levy?

The Health and Social Care Levy will come into effect from April 2022 and be an additional charge of National Insurance for employees and employers, paid directly to the National Health Service and social care. Once HM Revenue & Customs have their systems in place to manage this, this will change to a new and separate ‘levy’, with NI rates reverting to current levels.

What increase will arise with the Levy and who will pay it?

The increase is 1.25% and will apply to Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions.  However, it wasn’t originally made clear that the levy will also affect employers, meaning their contribution rate of 13.80% will increase to 15.05%.

This increase will only apply to earnings over the current NI thresholds, so for example anyone earning below £9,568 still won’t be paying any National Insurance contributions.

In addition to employees, the levy will apply to all workers whether self-employed or employed, and also anyone over state pension age who is still working.

What will be the effect on me?

This levy will affect everyone who works and earns over the threshold.

From April 2022 the 1.25% will be added to your National Insurance contributions. This will change, likely from April 2023, and be treated as a new levy and should show as a separate entry on your payslips or tax returns.

This news has worried a lot of employers of all sizes, but particularly small employers. I hasten to use the words ‘the good news is’, but a lot of ‘small’ employers don’t actually pay employers National Insurance because they claim the Employment Allowance. This is a £4,000 annual allowance that eligible employers can offset against their National Insurance contributions. Therefore, for the employers who claim this, and have some levy spare, they likely won’t physically pay the additional 1.25% levy.

And what about the dividend tax increase and what impact will this have?

There will be an increase in all dividend tax rates of, again, 1.25% from April 2022. All individuals currently have an entitlement to a £2,000 dividend allowance so the change will only impact those who have dividend income in excess of this during the tax year.

The impacts are more likely to be felt by those with high value investments or owners of small companies who draw regular dividends which make up a significant part of their income. Such business owners may consider the possibility of bringing forward dividend payments to the current tax year before the new rates kick in.

The rate will increase from 7.5% to 8.75% for a basic rate taxpayer. The higher and additional rates will rise to 33.75% and 39.35% respectively.

Questions and support

If you have any questions or concerns about how the new levy or increased dividend rates will impact you as an individual or business owner, please do not hesitate to get in touch to talk through some worked examples to ensure you are prepared for April 2022.

An intern’s view: joining C+T’s entrepreneurial tax team

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

As my pandemic-affected third year of university entered the spring of 2021, I was delighted to receive an offer from Chiene and Tait (C+T) to take up an intern role in the Entrepreneurial Tax team over the summer. It had been an extremely strange year and it was refreshing to have such an exciting opportunity to look forward to.

While studying for my accountancy and finance degree at the University of Glasgow, I first came across the subject of tax in second year and was intrigued at the widespread implications this sector of accountancy has for virtually every company. However, I had no idea the depth and variety the tax sector had to offer.

My time at university studying taxation, and accountancy and finance in general, helped prepare me to some extent for my time at C+T. However, one of the most enjoyable aspects of my internship has been learning the various niche complexities and applications of entrepreneurial tax that I had no exposure to in my studies at university. From the very first team meeting on my first day, I was introduced to schemes such as the Enterprise Investment Scheme (EIS) and Enterprise Management Incentives (EMI).

It was exciting to get involved immediately in schemes and concepts I had little knowledge of beforehand and a good portion of the work I completed at C+T has revolved around these schemes, particularly EIS. I have become familiar with the entire EIS process and have enjoyed working through this process from advance assurance, a way of confirming with HMRC that a company and the proposed investment would likely meet the EIS conditions, all the way to sending out the EIS3s, the forms which allow investors to actually claim relief.

The nature of both of the aforementioned schemes are designed to give young, exciting companies aid in achieving their goals and working with these companies has definitely been another highlight of my internship. Many of our clients at C+T are growing companies that have ambitious visions and it is exciting to be able to support these companies as they make significant steps along their journey.

As an intern, I had a unique point of view of the team and, as someone who has never experienced full time work in an office, it was incredibly insightful learning how all the different teams function and the differing qualities required to flourish in each team. Despite working from home, I was blown away by the supportiveness and friendliness within our entrepreneurial team. Any time I needed help or support from anyone it was readily accessible and this has made what was initially a daunting experience – starting an internship from my make-shift bedroom/office – an extremely enjoyable experience and allowed me to absorb as much as I possibly could during the last few months.

I was able to get involved in a good portion of the work from my first day with the team and this allowed me to learn the best way – on the job. This was perhaps the most enjoyable aspect of my time at C+T as I was able to get stuck into the work and learn as much as possible in my time here. I learned a lot about the dynamics of working in a team and the importance of a positive culture and strong working relationships; all of this is present at C+T and is one of the main reasons why I enjoyed my time at the firm so much.

I am looking forward to spending more time consolidating my knowledge of the work I have already done and continue learning regarding other aspects of work here at C+T. My time here has given me a fantastic insight into working in a high-functioning team and whetted my appetite to learn more and work in this kind of environment in the future.

Interested in joining our team? See our vacancies here.

Home Working Expenses for the Self-Employed

Working for yourself can be a great option for the modern professional and comes with a variety of perks, such as a flexible approach to work and a sky’s the limit attitude to earning money however you see fit. But, despite the benefits, it’s not just positives when it comes to the elephant in the room. We are of course talking about tax.

Whilst there are some great tax incentives to make you consider striking out alone in the big wide world, some additional incentives are sometimes unclear or may seem confusing. That’s where we come in.

One such relief comes in the form of the “use of home”.

Self-employed individuals working from home can claim a deduction for “use of home”. The following two methods are used to calculate the level of relief available:

  • Flat Rate Deduction
  • Proportion of Actual Costs

We’re going to break these down for you so you can see whether you might be able to get a little something back, and how much you could be entitled to.

What is the flat rate deduction?

The flat rate deduction is based on the number of hours an individual spends ‘wholly and exclusively’ working on core business activities from home. The level of relief available is as follows:

  • 25 hours or more @ £10 per month
  • 51 hours or more @ £18 per month
  • 101 hours or more @ £26 per month

In addition to the flat rate deduction, it is also possible to claim a deduction for certain fixed and variable costs.

What proportion of actual costs can I claim?

Rather than claiming a flat rate deduction, self-employed individuals can claim a proportion of actual fixed and running costs of their home.

Fixed Costs:
Fixed costs include council tax, home insurance and mortgage interest. To calculate the amount allowable, it is necessary to calculate a reasonable adjustment to the costs based on the time spent working from home and the area in the house this relates to.

Variable Costs:
A proportion of telephone, broadband, heat and light costs are also an allowable deduction for tax purposes. An adjustment will need to be made to these costs for any private use.

Can I claim relief for anything else?

It is possible to claim relief in respect of the purchase of some furniture and equipment. The costs will need to be reviewed to determine whether capital allowances should be claimed. If any items are also used for non-business purposes, an adjustment will be required to account for any private use.

What other factors should I consider?

Capital Gains Tax Implications:

When an individual disposes of their main home Principal Private Residence (PPR) relief is available to claim against the gain. If their home is used exclusively for business purposes i.e. the office does not have any private use, PPR relief will be restricted and part of the gain will be chargeable to capital gains tax.

We understand that tax can be confusing, but whether you’re just starting out in your trade or a budding entrepreneur, it’s easy to recognise that every little helps when it comes to these incentives.

If you would like to discuss the relief options available to you, or need help with any aspect of self-employment tax implications, please don’t hesitate to talk to our team for advice, they can be contacted at mail@chiene.co.uk

A Graduate Journey: From Lockdown Graduation to Entrepreneurial Tax

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

Looking back to the 26th of March last year, I was a quarter of the way through my third year at university when the country was plunged into its first lockdown. The beginning of the pandemic changed many things in my life, as it did for everyone else. Daytime outings turned into zoom quizzes (which I’m sure everyone is fed up with now), and university completely changed in a matter of days. Long gone were the days of going to a lecture in a theatre; instead you could tune in from the comfort of your own home. Then came the news that exams would take place online (to every student’s delight). Completing exams in my bedroom was a surreal experience considering that, for the previous five years, I’d been doing them in large halls with invigilators watching my every move. Instead, the only concern I had – other than the paper itself – was making sure that I didn’t get unwanted visitors whilst trying to complete it.

Heading into my fourth year, I began to think about what my career after university would look like. The pandemic created uncertainty for every student in their final year. Graduating in what would become one of the worst economic periods in history presented me with anxiety, as I started to wonder whether the four years of university I was about to complete had even been worth it. After hearing the news that graduate jobs would be in short supply for the remainder of 2020, I began to assume the worst…

Flash forward to early 2021, and I began actively looking for what would be my graduate job. At the time, I was unsure about my career path, but I had a couple areas of interest from my studies and identified tax as being the predominant one. After scouring site after site and speaking to careers advisers, I finally came across an advert for C+T’s Entrepreneurial Tax Team. As I had only seen personal and corporate tax roles, this immediately stood out to me as it was such a unique role! After researching the sort of work the team did, I knew that it was exactly what I was interested in and would love to learn more about. After an extremely well-handled interview process, I was offered the role and couldn’t have been more delighted to start. From then on, I was counting down the days until I started.

Heading towards the end of May my start date began approaching. I’d just finished my final university exams a couple of weeks prior and was glad to get started right away. To begin with, I wasn’t sure how working from home was going to go, especially as I would be starting fresh in a brand-new environment. The typical questions rushed through my head: would I be able to get to know everyone, and would training from home be difficult?

At my first meeting a range of terms went flying over my head and I was worried I’d never understand what they meant or get to grips with what was going on. I expected a very steep learning curve and whilst I have felt the work is challenging, I am finally starting to get to grips with much of the work that we carry out here: from EMI valuations to preparing EIS applications. Without thinking, I’m now using the same acronyms that seemed so foreign to me only a couple of months ago.

The process of integrating into the team has been seamless, mainly thanks to just one thing: just how welcoming and supportive the Entrepreneurial Tax department is here at C+T. I would never have imagined how easy it would be to get to know a group of people through a screen, and it shows that there was absolutely no reason at all to be concerned about starting in a remote environment, especially here at C+T.

Interested in joining our team? See our vacancies here.

There’s Something Phishy Going on Here…

We’ve seen it before. The classic email with words so exciting they wrote them into Monopoly: ‘Tax Refund’. Everyone dreams of getting a little something back from the tax man. But not all of us are so lucky.

Many of these communications from Her Majesty’s Revenue and Customs (HMRC), will be genuine – for example, you may have received a letter with details of your latest tax code, or for some of you in the Self-Assessment regime, a letter which contains a statement and instructions on how to pay your latest tax liability.

However, you may also receive communication from HMRC in other formats – perhaps an email or text which promises large sums of money via a tax repayment. Or maybe even a threatening phone call in which the caller demands immediate payment of sums under the threat of legal action.

But please don’t be fooled.

Any form of communication that uses threatening or coercive language, or that asks for sensitive or personal information, is likely a baited attempt to ‘Phish’ these details from you.

What is Phishing?

Phishing is an attempt by cyber criminals to acquire sensitive information by pretending to be a genuine organisation, such as HMRC, through communications like emails and texts.

Mobile numbers and weblinks in these messages often lead victims to resources that mimic the organisation. These sites or ‘representatives’ then ask for personal details that are collected by the criminals, not the organisation.

What Does Phishing Have to do With Tax?

Cyber criminals posing as HMRC officers prey on people’s emotions – particularly the excitement over potential tax repayments (because let’s be honest – who wouldn’t want that?), and fear of prosecution if confronted with a fake tax liability. These emotions often make us jump without thinking, falling straight onto the hook of the scam.

For a lot of people, tax can be a complicated subject under normal circumstances, but pandemic vulnerabilities have also made scams in relation to SEISS grants and VAT deferral schemes common.

Since the first lockdown in March 2020, cyber criminals impersonating HMRC has increased considerably, according to HMRC’s own data (see chart).

HMRC Phishing Chart

It is important to note that whatever your situation, HMRC will never inform you of a tax repayment, penalty or liability via text or email, and will never use these forms of communication to ask for your private information or payment details.

What Does HMRC Say?

HMRC have useful information on their website that shows how to spot and report scams to their investigators.

To stay safe, HMRC suggest doing the following:

  • If you receive a text or email from HMRC and you are unsure whether it is genuine, you should never open any attachments or click on any links.  Instead, report the fraudulent email to HMRC and then delete the message.
  • If you receive a phone call, HMRC stresses that you should not provide the caller with any sensitive data if it is asked for. Instead, they request that you keep a note of the number and the time and date of the call and report to their investigators.
  • HMRC suggest that everyone remains alert for any indicators that would suggest the communication is fraudulent.  These may include:

 

  • Spelling errors and poor grammar.
  • The use of a generic address such as ‘Dear Customer’ or ‘Dear email address’.
  • The use of non-legitimate HMRC email addresses: such as an email being sent from a Hotmail or Gmail account.
  • Aggressive wording that pressures the receiver into believing urgent action is required.

Genuine communications from HMRC will always have the following information:

  • They will greet you using the name that you have already provided to HMRC e.g. the name you used when signing up for HMRC services.
  • Communications will include information and instructions on how to report phishing emails or texts.
  • They will never include a personal email address for you to reply to and the email will come from a genuine HMRC account (always double check the sender address in full rather than depend on the title name provided!).
  • The communications should never ask for specific figures or calculations or have any attachments unless you have agreed to this previously with HMRC and have formally accepted the risks.
  • HMRC will never provide you with a link to use to log onto your Government Gateway.  Instead, they will request that you log-in by using the normal processes.

It is important to take some time to read through any communications from HMRC and ensure that the email, text or phone call you have received is genuine before proceeding.

What Can Chiene + Tait Do?

If you have concerns regarding any communications that you have received from HMRC, please get in touch with us at mail@chiene.co.uk. We would be more than happy to review the communication to check if it’s genuine.

Remember: if in doubt, give us a shout!

R&D tax: key points in the recent consultation

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

Research & Development Tax reliefs (R&D) play a key role in promoting UK investment by reducing the costs of innovation, so it’s unsurprising that the Government wants the reliefs to remain up-to-date, competitive and well-targeted.

A consultation on the future of R&D Tax relief recently closed, exploring how this is supported and whether changes may be appropriate. Below are some of my thoughts on the key points brought up.

The case for consolidating the two schemes into one

In some instances, the R&D Tax legislation can be overly complex. Having two schemes means having two overlapping sets of rules instead of a single coherent system. Simplifying and consolidating the schemes makes sense, provided SMEs continue to receive preferential rates.

The RDEC model provides a step-by-step methodology for the calculation, and it would therefore make sense for the SME scheme to mirror this by standardising the process. Ultimately this should help HMRC review the claims effectively, improving turnaround times.

R&D compliance

There have been growing concerns over the past few years that the system does not provide adequate controls for the allocation of tax credits. HMRC aim to process claims within 28 days. However, due to their sheer number, there isn’t a lot of time for them to consider every case in detail. Whilst HMRC have the power to enquire into claims after they have been “accepted”, we should look to develop the incentive so that it provides as much certainty as possible in the first instance. After all, getting it right first time should be good for everyone and improve consistency throughout the process.

The new CT600L form helps this to a certain degree, but new regulations are required. Currently, there is limited regulation covering who can provide advice and the supporting documentation required. R&D Tax can have a significant impact on a company’s tax position and strategy, so it’s important that companies get the right professional advice on the matter.

Comparatively, other business advisory professionals (such as accountants and lawyers) must rightly conform to regulation and governance from their respective industry bodies. There is no such body to regulate R&D specialists. New regulation in this area would help to improve consistency and ensure companies are not put at risk of making an illegitimate claim.

Qualifying expenditure and new R&D definition

The world is ever-changing and, as such, incentives should adapt accordingly. Modernising the ‘software costs’ category to accurately reflect how data and hosting costs contribute to R&D processes is welcomed, and I hopefully look forward to this being reflected in both updated legislation and guidance once the consultation is complete.

It is also good to see the Government considering whether the R&D definition needs updating. This is especially necessary in terms of clarity, or to widen the kinds of research covered by reliefs. The UK definition of R&D was set out last in 2004, therefore it is definitely due a revisit. There’s a particular opportunity to identify better ways to address R&D practices and fields, which have changed significantly since then.

Overall, change is definitely coming. However, I view it as a positive modernisation. 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.

If you have any questions about R&D tax relief, get in touch with our team.

Restricted activities: EMI can see clearly now with advance assurance

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

Despite the name, legislation regarding the Enterprise Management Incentive (“EMI”) scheme, is relatively lightweight; if you are a genuine SME there are few real pinch points for qualification. However, the main stumbling block for companies is often the qualifying trading activity requirement.

HMRC have set out a list of activities that are deemed to be excluded and undertaking any of these activities could lead to the company being disqualified for the purpose of EMI. A number of these activities are relatively straightforward and self-explanatory; take property development, farming, market gardening, and the provision of legal or accountancy services for example. Unfortunately, participation in any of these activities makes your company closer to winning an Emmy than an EMI.

For a full list of excluded activities, see HMRC’s guidance.

However, there are a few of these activities that exist in a somewhat grey area that companies need to be aware of before undertaking.

Receiving royalties and license fees

For many software companies, the receipt of royalties or license fees is the key revenue stream in their business model. Importantly, this does not encompass subscription fees being generated using a Software as a Service (“SaaS”) model.

So, if my business is generating income through the receipt of royalties and license fees, I’m disqualified, right? Not necessarily.

HMRC understand that this exclusion will negatively impact the genuine start-up companies that the scheme is designed to help. As such, they have implemented an important ‘carve out’ from this exclusion.

Where the receipt of royalties and license fees are generated from the exploitation of an intangible asset, for which the greater part has been created by the company continuing its trade, the company will not be disqualified from EMI. This bit of HMRC magic allows start-up companies to develop their product from scratch and to receive royalties and license fees from it, all while still qualifying for EMI. After all, don’t all unicorns need a running start?

Leasing

Another disqualified activity is leasing. Where a company generates its income from leasing its assets, regardless of whether they developed it from scratch or not, they will be disqualified from EMI.

However, what constitutes leasing is another grey area. The main indicator of leasing is that the customer is free to use the asset for the purpose for which it is intended. The example provided by HMRC revolves around what may be constituted as car hire: using the contrast between hiring a taxi, as opposed to say, a chauffeur. Here we must determine which can be described as a service and which can be considered a facility. In the eyes of HMRC, taxi hire can be viewed as the provision of a service and be qualifying for EMI, whereas chauffeured car hire is not.

When considering whether your company is generating income from leasing and, therefore, disqualified from EMI, it is vital to understand whether you are providing the asset to the customer for use by the customer, or if you are using your asset to provide a service to the customer.

Advance Assurance

Fortunately, HMRC operate a non-statutory clearance service that allows companies to write to them and ask for assurance that they will qualify if eligibility is a concern. This allows you to gain HMRC’s opinion before you jump the gun and issue EMI options to employees like wanted posters for Billy the Kid.

Additionally, if your company is being purchased, advisors will often look for evidence that HMRC has provided Advance Assurance marking your company as EMI qualifying. This is normally part of their due diligence procedures and makes it important in order to quell potential purchaser’s fears.

Should you have any queries on EMI, please contact the team and we will be happy to offer our expertise.

Three interesting EIS elements to learn about

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

After being in corporation tax compliance for almost 5 years, I felt it was about time I gave my wings a little stretch…so here I am, a Senior Tax Associate in the entrepreneurial tax team at Chiene + Tait (C+T).

With the backdrop of a global pandemic, it was strange starting a new job. I returned my laptop from my previous job and that evening I received my new laptop from C+T.

During my first team meeting at C+T, there were many acronyms flying around and grappling with these was initially rather tricky; the pace here is fast and efficiency is important, so the many acronyms are a necessity.

I anticipated my new role would involve a steep learning curve and, I can now say after four weeks, it most definitely has lived up to that. At this meeting I was already being assigned client work which was really exciting. I was expecting my first week to mainly involve lots of health and safety training and suchlike but even though there was a lot of training on those areas, it was balanced by the client work I was involved in and the training I received on EMI and EIS.

In my first two weeks, I was already involved in EMI valuations, preparation for an EIS report and research for various ad-hoc advisory pieces of work. I had also attended R&D technical meetings with clients and have now started drafting one of those R&D reports.

After these couple of weeks, the acronyms started to fall out of my mouth and the jargon started to get a little easier to understand. However, it is important to always be on guard as new terminology still crops up. My depleting stash of sticky notes are proof of this.

Anyway, enough about me. Now to delve into some of the interesting insights I have learned from my EIS work so far – here are three which show how complicated the subject can be, and the benefits of learning about it.

The Single Company Test versus the Substantial Test

If a single company wants to enter into a joint venture with another party, it should first consider either setting up or acquiring a subsidiary company (i.e. hold at least 51% of the shares in another company) before it does so.

The reason this is important for EIS is because it determines whether the company will be required to meet either the single company test or the substantial test. The substantial test applies when the company is part of a group and it is less difficult to meet than the single company test.

One of the requirements of EIS is that a company/group must either carry out a trading activity or exist wholly for the purposes to carry out a trading activity. Under the single company test, the legislation only permits an insignificant amount of the company’s activities to involve non-qualifying activities. The substantial test is that the group’s activities should consist of no more than 20% of non-qualifying activities. Therefore, by comparison, the substantial test has more flexibility.

The holding of investments is an example of a non-qualifying activity, and an example of an investment would be holding less than 51% shares in a company (for example, a joint venture). It is more difficult to prove, under the single company test, that holding such an investment is insignificant to the company’s overall activities than it is to prove that it is less than 20% of the group’s overall activities. As such, a company should therefore consider being part of a group (for example, by setting up its own dormant subsidiary) before it decides to enter into a joint venture, as it will be easier for it to preserve its EIS qualifying status.

If the single company test or substantial test is breached, the company would lose its EIS qualifying status.

The Control Condition

Continuing on from the above scenario involving an EIS company with a joint venture, it is also important that the ‘Control’ test is considered here. The ‘Control’ test requires that EIS companies can only have qualifying subsidiaries. This means that the EIS company can only control companies where it holds at least 51% of the shares.

Joint ventures tend to not be qualifying subsidiaries for the purposes of EIS, as the company will not usually hold more than 50% of the shares in that company. Therefore, it is important that the EIS company (in its own right or with a connected person) does not have control over the joint venture, and care should therefore be taken when drawing up joint venture/ shareholder agreements to ensure that this is so. If it does have control, the joint venture would be a subsidiary but not a qualifying subsidiary for the purposes of EIS.

If this requirement is breached, the company would lose its EIS qualifying status.

What to watch out for when spending money raised through EIS

A company is required to use the money raised from EIS wholly for the purposes of the qualifying business activity. The qualifying business activity must be carried out either by the company issuing the EIS shares or by a 90% qualifying subsidiary. The money raised should be employed within 2 years of the share issue (or, if it is later, 2 years from when the company begins its trade).

The legislation states that employing anything more than an insignificant amount of the money raised through EIS on a purpose which is not for a qualifying business activity will result in that round of investment being disqualified from EIS. For example, spending EIS money on a <90% qualifying subsidiary. A failure to meet the requirement does not itself result in the company losing its EIS status. The legislation allows for an insignificant amount of money raised to be employed for other purposes but does not specify what is meant by ‘not significant’.

If an investment round is disqualified from EIS, this can have a devastating effect for the investors in that round. The investors would lose their EIS relief for that disqualified investment round; and because of the ‘independent investor’ requirement under EIS, the investor would no longer be able to participate in future EIS rounds. This is because the investor would now hold shares which do not qualify for S(EIS) relief. It is therefore critical that a company takes care when spending money raised from EIS.

 

I hope you enjoyed reading about a few of the interesting insights I have picked up in EIS so far, and that it’s a useful guide to the kind of things you learn when you delve deeper into the subject.

If you have any queries on EIS, contact our team and we’ll be happy to help.

Joining the team: beginning my career in C+T’s Entrepreneurial Tax Team

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

Ever since I discovered Tax as a subject during my undergraduate degree, it has been my goal to pursue it as a career. In my 4 years at university, Taxation was my favourite course and it was the first time during my degree that I felt confident in what I wanted to do after graduating. Although it has felt like quite a journey to reach that goal, it has been well worth it.

Starting my role as a graduate trainee with Chiene + Tait almost a year on from finishing my university exams has been a big change, especially as I spent the last year working as a self-employed artist. When the first lockdown was announced back in March 2020, I felt as though there was suddenly an extra hurdle in front of me, blocking my path to beginning my career. However, looking back now, I feel as though it was an important part of the journey. I had the chance to try a completely different career path from the one I had planned, and it was nice to be able to stretch my creative muscles. I spent a lot of the year painting animal portraits and creating illustrations, and I had the opportunity to try running my own little business. The experience taught me a lot, but it also gave me the time to reflect and really think about what I wanted to do with my future, and it ultimately confirmed to me that what I really wanted was to pursue a career in tax.

I have now been in my role as Entrepreneurial Tax Trainee with Chiene + Tait for just over 2 months, and, despite joining from my make-shift home office in my dining room, I feel as though I have already begun to settle in as part of the team. After a couple of months as trainee, I am confident I am exactly where I need to be. I am really enjoying learning about the entrepreneurial side of tax, as it was an area I never got to explore while I was at university. I have been lucky enough to have had the opportunity to be involved in calls and interactions with clients, which has been great. Having spent a lot of time working in customer service, it is something I have developed a passion for, and I like that our firm combines a focus on customer service with technical advisory in a professional environment. The diversity in the clients we work with in the entrepreneurial team and getting to see the fascinating work they are doing makes the job even more enjoyable.

It is a little strange to start a new job working from my own home, and while it has its perks – particularly the 10 second commute to my desk – I am really excited for the days when we can get back in the office and have the chance to meet and get to know the team and others within the firm better.

Overall, I have been completely blown away by how friendly and supportive everyone has been since I joined, as well as by how much I have already had the chance to learn from the team. It makes all the work – the 4 years of university, the months spent gaining work experience, and the many hours spent completing job applications – feel worthwhile.

Interested in joining the C+T team? Find more information and our vacancies here.

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.

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.