Corporation tax: Budget 2021 updates

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

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

Corporation tax loss extension

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

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

As you would expect, there are some restrictions:

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

Tax Planning:

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

Capital allowance super deductions

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

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

Exclusions will apply to claims for super deductions, including:

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

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

Tax Planning:

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

Corporation tax rate rise

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

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

Tax Planning:

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

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

Employment benefits: reporting window is just around the corner

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

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

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

What are employment benefits?

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

P11D Forms

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

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

PAYE Settlement Agreement (PSA)

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

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

Payrolling benefits

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

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

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

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

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

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

What falls under the ERS regime?

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

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

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

What needs to be reported to HMRC?

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

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

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

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

The cost of COVID: tax rises in the Budget?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Never knowingly undersold: employee ownership tax breaks work

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

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

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

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

It works. Plain and simple, it works.

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

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

EOTs offer exceptionally generous tax breaks:

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

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

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

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

Extension to Annual Investment Allowance announced

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

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

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

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

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

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

If you are:

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

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

The Construction Company

Rows of yellow hard hats

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

What qualified?

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

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

What didn’t?

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

The IT Company

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

What qualified?

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

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

What didn’t?

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

The Manufacturing Company

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

What qualified?

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

What didn’t?

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

The Life Science Company

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

What qualified?

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

What didn’t?

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

The Food & Drink Company

Colourful cupcakes

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

What qualified?

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

What didn’t?

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

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

COVID-19 – Ways charities can use tax to ease cash flow

Whilst the UK Government announced a package of support for the third sector to assist it through the current crisis, many in the sector have still been left disappointed by the support offered. However, charities can look to established tax benefits to help ease their cash flows and assist them through the current crisis.

1. Consider reclaiming Gift Aid on cancelled events

Charities have seen numerous events cancelled due to Coronavirus (COVID-19) and many have seen their supporters donate money instead of taking a refund for these cancelled events. HM Revenue & Customs (HMRC) has clarified that in these situations, your charity may claim Gift Aid on the donation, provided the usual Gift Aid conditions are met; in particular:

  • The donor does not receive a benefit as a result of their donation;
  • The donor agrees that the cost of their event ticket becomes their donation;
  • The donor completes a Gift Aid declaration form; and
  • The charity keeps an audit trail including the donor’s confirmation that the cost of the event tickets becomes their donation.

Any event which has been postponed, instead of being cancelled, will not be eligible to exploit these relaxations in the Gift Aid rules.

2. Reclaim Gift Aid under the Retail Gift Aid as normal, but ensure all administration is up to date on returning to the office

HMRC has clarified that charities that operate the Retail Gift Aid Scheme can continue to make Gift Aid reclaims, even if they have not yet sent oral confirmation letters. Those charities should send their oral confirmation letters at a later date and adjust any future Gift Aid reclaims if any consent is withdrawn by donors.

Similarly, where charities are temporarily unable to access their mail, they can continue to reclaim Gift Aid where they have no knowledge of returned notifications. These charities should ensure that, when offices are open and mail is being opened, that appropriate action is taken with regards to their returned notifications.

3. Consider reclaiming Gift Aid on Membership Subscriptions

HMRC are aware that some charities are temporarily suspending collections of membership subscriptions during the current crisis. Despite this, members continue to make voluntary contributions to support their charity or Community Amateur Sports Club. Any voluntary donations made by members, or any voluntary donations made over and above their membership subscription, may be eligible for Gift Aid provided the usual Gift Aid rules apply.

4. Make use of Gift Aid Small Donations Scheme (GASDS)

A significant minority of charities, such as churches, will receive regular small donations of less than £30 from donors. These charities may not be receiving these regular small donations and HMRC have now clarified that, where a donor has been ‘saving up’ their usual donation and makes a single large donation of more than £30 once the current crisis is over, then this will still apply for the GASDS. This is provided that the charity is happy that this would have been separate ‘small donations’

5. Consider Whether Gift Aid Payments from Trading Subsidiaries are appropriate

Many charities that operate trading subsidiaries receive Gift Aid donations equal to the subsidiary’s taxable profits. This tax efficient mechanism allows charities to undertake non-charitable trading in a way that protects their own charitable status, and allows the trading subsidiary to reduce its taxable profits to £nil, ensuring a £nil corporation tax liability across both entities.

In recent years legal advice was obtained to confirm that Gift Aid donations from a trading subsidiary are a distribution, and trading subsidiaries need to ensure they have sufficient distributable reserves before making a Gift Aid donation. Many trading subsidiaries will now find that they do not have sufficient distributable reserves to Gift Aid taxable profits to their charity payment, but it is worthwhile bearing in mind:

  • Any interim Gift Aid payments made to the charity during the year will continue to be tax deductible for the trading subsidiary, provided the subsidiary can demonstrate that it had sufficient distributable reserves to make the donation at the time the donation was made;
  • If your subsidiary is planning to continue to make Gift Aid donations during the current crisis, the directors of the subsidiary should ensure that accounts are drawn up to evidence that there are sufficient distributable reserves to make the donation;
  • Remember the subsidiary has 9 months after its accounting year end to make a Gift Aid donation to its charity parent. If your subsidiary does not currently have distributable reserves to make a Gift Aid payment, it will be worthwhile checking the reserves position further down the line;
  • Even if your subsidiary cannot make its usual Gift Aid donation and must make a corporation tax payment, the company can agree a payment plan with HMRC if it is unable to pay its corporation tax liability in full within 9 months of its accounting year end;
  • Check if your subsidiary has a deed of covenant with the charity legally requiring a Gift Aid distribution. If this is the case, the covenant should stipulate that this is provided that there is sufficient distributable reserves. If there is a deed of covenant in place and sufficient distributable reserves, your subsidiary may be legally required to make a Gift Aid payment to its charity parent.

And remember, any donation paid by a trading subsidiary to its charity parent must be physically paid in order for the subsidiary to receive a tax deduction. Many trading subsidiaries themselves may also be strapped for cash, so consider whether it is worthwhile incurring a corporation tax liability in the subsidiary rather than making the usual Gift Aid donation. This may be a better use of the subsidiaries resources, and leave valuable cash reserves in your subsidiary.

6. Consider the tax treatment of income from the furlough scheme to avoid any unexpected tax liabilities

Many charities will have staff on furlough and be receiving 80% of furloughed staff wages from the UK Government. In these cases, the charity is receiving these wage costs as income, but is this income exempt in the hands of the charity? Provided that furloughed staff undertake work that is in furtherance of the charities’ primary objectives, all of this income will be exempt. Where this is not the case, and staff perhaps work on non-charitable activities which the charity claims exemption under the small trade exemption, this income may be taxable.

If you have a question about charity and tax, please contact Catriona Finnie today at charities@chiene.co.uk

A guide to the Construction Industry Scheme

Companies and individuals that operate in the construction industry must be compliant with the requirements of HMRC’s Construction Industry Scheme (CIS). In this detailed guide, Neill McKillop runs through the parameters of the CIS and outlines the definitions used by HMRC to enforce the rules.

What is CIS?

CIS was introduced to reduce tax fraud by subcontractors not declaring income on their tax returns. It obligates contractors to deduct money from a subcontractor’s payments and pass it to HMRC. CIS applies to construction work to a permanent/temporary building or structure and includes most construction activities, but also has various exceptions (see table below):

CIS Applies CIS Exceptions
Preparing a site e.g. foundations and access works Architecture and surveying
Demolition and dismantling Scaffolding hire (without labour)
Building work Carpet fitting
Alterations, repairs and decorating Making materials used in construction
Installing systems for heating, lighting, power, water and ventilation Delivering materials
Cleaning inside of buildings after construction work Work on site that is clearly not construction e.g. running a canteen or site facilities

 

Commonly Used Definitions

Contractors, subcontractors and the self-employed

A contractor is a business that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be government departments, local authorities and many others. Other businesses can be included as a contractor if their annual average expenditure (over a period of 3 years) on construction operations is +£1m.

Private householders are not counted as contractors so are not covered by the scheme.

The contractor must decide on the individual’s employment status when the subcontractor is first engaged. The fact that the subcontractor has worked in a self-employed capacity before is irrelevant in deciding on their employment status – it’s the terms of the engagement that matter. For a contract to be used within the scheme, it must not be ‘a contract of employment’. This means that the scheme applies to workers who are self-employed under the terms of the contract, and who are not employees subject to Pay As You Earn (PAYE).

Registration and verification of Contractors

All contractors must register with HMRC for CIS. Subcontractors can choose whether to register or not, and this will affect the level of deductions that are taken from their payments.

Before a contractor makes a payment to a subcontractor, they must contact HMRC to check the payment status of the subcontractor, to ensure the correct deduction is made. This process is usually only required for new subcontractors in the last 3 tax years.

The process will establish the level of deduction to be made in accordance with the subcontractor’s payment status:

  • 0% Gross payment
  • 20% Net of standard deduction payment
  • 30% Net of higher deduction, usually if the subcontractor is not registered with HMRC, or cannot provide accurate details

The verification process is completed online, and it is important that details provided are accurate to ensure correct deductions are made.

Monthly returns and deductions

Each month, contractors must send HMRC a complete return of all the payments they have made within the scheme. The return will include:

  • Details of the subcontractors
  • Details of the payments made, and any deductions withheld
  • A declaration that the employment status of all subcontractors has been considered
  • Declaration that all subcontractors that need to be verified have been verified

Where no payments have been made to a subcontractor in a tax month it is advisable (though not mandatory) to make a nil return to avoid HMRC issuing penalties for failure to make a return. All contractors are obliged to complete returns monthly, even if they are entitled to pay their PAYE quarterly.

Once the payment status has been established it is not always necessary to deduct tax on the whole payment made to the subcontractor. The following items should be deducted from the gross payment when calculating what deduction should be made:

  • VAT
  • The cost to the subcontractor for materials (including VAT if not registered for VAT)
  • Fuel (but not for travelling)
  • Plant hire used in construction operations
  • Cost of manufacture of materials used in construction operations.

Payment of deductions must be made to HMRC either by the 19th or 22nd (if paid electronically) of the following tax month they relate to.

Types of subcontractors – Individuals or limited companies

Subject to certain qualifying conditions, subcontractors who are individuals can apply to be paid gross (with no deductions from their payments). Subcontractors who make a return of their profits each year and their respective tax liability will be driven by this return. Where a subcontractor has already suffered deductions from their payments given to them by contractors, and the amount deducted is greater than the amount due, HMRC will repay the excess. If there is a shortfall, the subcontractor must make a balancing payment.

Subcontractors that are limited companies should offset deductions on their receipts against the following sums payable to HRMC:

  • PAYE tax due from employees
  • Employer and employee NIC
  • Student Loan repayments from employees
  • CIS deductions made from subcontractors

The company will need to reduce the sums payable on the above by the amount of CIS deductions made from the company’s own income. This should be done monthly (or quarterly, as appropriate) and the calculation should be shown on the company’s Employer Payment Summary (EPS).

If for any period the company’s own CIS deductions are greater than the sums payable above, the company should offset the excess against future payments in the same tax year. At the end of the tax year, once HMRC has received the Full Payment Submission (FPS) and final EPS, any excess CIS deductions will either be refunded or set against Corporation Tax due.

Penalties

The penalty system under CIS can be severe and directly impact operations should a business fall foul. There are a variety of penalties which cover an incorrect monthly return that is filed negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declaration in respect of employment status. Late monthly returns also generate penalties as follows:

  • £100 fixed penalty (if one day late)
  • £200 fixed penalty (if 2 months late)
  •  Tax-geared penalty, which is the greater of £300 or 5% of any deductions shown in the return (if 6 months late)
  • Second tax-geared penalty, which is the greater of £300 or 5% of any deductions shown in the return (if 12 months late). Where HMRC believe information is deliberately withheld, the penalty will be higher.

If a contractor fails to produce records relating to payments made under the scheme when asked to do so, HMRC may charge up to £3,000.

Please note contractors are no longer charged penalties in respect of any months for which a return is not due, however HMRC should be notified in this situation.

Future changes to be aware of – VAT Reverse charge

The UK Government recently postponed a new measure designed to reduce VAT fraud in the construction industry.  The ‘reverse charge’ will now be introduced from 1 October 2020 and will have an impact on businesses in the construction industry.

From this date it will be necessary for subcontractors to ensure their invoices provide for ‘domestic reverse charges’. This will make it clear that the VAT responsibility is with the contractor and that the subcontractor will not take any cash.

Iain Masterton – Director of VAT at Chiene + Tait previously published an article on the VAT Reverse Charge that can be found here – https://www.chiene.co.uk/vat-reverse-charge-construction/

How we can help

Chiene + Tait helps businesses comply with the arduous requirements of the Scheme. If you have any issues or queries surrounding CIS or are looking for a supplier to administrate the scheme on your behalf, please do not hesitate to get in touch with our team.

 

Neil Norman appointed to board of international accountancy body

Neil Norman, the head of Chiene + Tait’s (C+T) Entrepreneurial Tax Team, has been appointed to the board of the global accountancy association AGN.

Representing 200 separate and independent accounting and advisory businesses in over 80 countries, AGN promotes worldwide expertise, best practice and new developments to improve the quality of accountancy services and support international operations for its clients.

As a member of the AGN board, Neil will support the organisation in its aims of increasing cross-border collaboration and further raising the standards of client service amongst its member firms. His appointment in this new role follows ongoing growth in C+T’s work with other AGN members, supporting both international and UK-based firms on advisory projects.

This appointment coincides with Neil and his fellow C+T Tax Partner John Rodger being jointly named as the firm’s new Heads of Taxation.

Carol Flockhart, C+T’s Managing Partner said: “We’re delighted for Neil on his appointment to AGN’s board. This is a strategically influential role which will promote both the firm and AGN’s Scottish membership at an international level. The appointment reflects the energy and expertise that Neil has brought to his work with the organisation.

“I’m also pleased to announce Neil and John Rodger being appointed as the new Heads of Taxation at Chiene + Tait. The joint appointment of an entrepreneurial tax expert and a property sector specialist brings a new and dynamic perspective to this role.”

Malcolm Ward, CEO of AGN International said: “We’re very pleased to welcome Neil to our board. He is an experienced and passionate professional with a proven track record as a business adviser. Neil is also a well-known figure within the UK entrepreneurial and start-up community whose involvement will further support our aim of enhancing AGN’s reputation across the world.”

Three things in corporate tax this week

What do all these have in common?

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

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

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

Contact:

Nicola.williams@chiene.co.uk

0131 558 5800

Becoming a tax expert without a finance background

I joined the entrepreneurial tax team as a trainee around six weeks ago, after graduating with a degree in History. I thought it might be interesting to give the perspective of someone starting a career in tax without any kind of background in finance.

I was initially nervous coming into this job. I hadn’t done any kind of maths beyond counting change for 5 years, and in my mind I associated tax with an awful lot of maths and spreadsheets. There are indeed quite a few big spreadsheets, but after a crash course in accounts, I at least understand most of the data I have to work with (depreciation and amortisation are still somewhat mysterious concepts).

Since I started in mid-April, most of my time has been spent working on EMI and ERS returns (the details of which are too complicated to go into in this blog). Most of them are very simple to decide what needs to be done: either submitting a nil return, a return, or no return at all. Checking Companies House for any issue of shares is usually enough to see if anything reportable has gone on, but the more challenging decisions are when it’s not so simple.

Following the (sometimes virtual) paper trail to determine who was issued shares, whether they were employment-related, and so on, is very similar to carrying out research for an essay. You usually have an idea of what you’re looking for, and the hope is to find something somewhere to confirm your thesis, whether that’s an option agreement dating back several years, or finding that it’s a family-owned business and so the transfer of shares probably isn’t reportable.

The skills of analysis and reasoning are very important here, and a basic knowledge of the legislation surrounding employment-related securities is obviously required, but a lot of it is common sense, being able to pick out relevant information, and not being afraid to ask more experienced colleagues what they think about a given scenario.

I have also recently started dipping my toes into the murky waters of EIS and SEIS advance assurance, and even entrusted with writing the first draft of an EMI share valuation, where again being able to quickly scan a long business plan or similar document helps save a lot of time.

Outside of the work I’ve been doing, joining the corporate world is a profound but fascinating change from university, and it’s really interesting to see how the various departments of Chiene + Tait mesh together and interact. Events such as a biannual breakfast briefing and staff lunches help build stronger ties with colleagues that you might otherwise not regularly speak to, though exactly what goes on in audit or corporate finance is still something of a mystery to me.

The work is challenging, but rarely overwhelming, and it’s always possible to ask for clarification about something I’m finding confusing (which happens a lot, but is very slowly starting to happen less). Anyone considering a career in tax that might be put off by a preconceived notion of what tax is would probably find entrepreneurial tax to be very different to what they expected, as I have, even though at some point I suspect I will have to figure out to calculate percentage increase and decrease properly.

M&A transactions: 10 problems when you don’t get tax advice

Tax directly – and significantly – changes the price and return from M&A transactions, so it’s surprising that often it isn’t given earlier expert consideration. We often get called to fix a problem with a deal, but retrospective action can be too late. If you want a smooth no-surprises transaction, it’s best to get the right advice early on. Here are some of the things we’ve seen at a late stage recently.

Missing out on Entrepreneurs’ Relief

Many individual sellers hope to benefit from Entrepreneurs’ Relief (ER), so that the rate of their Capital Gains Tax (CGT) is halved from 20% to 10%. The conditions to get this relief can seem straightforward, but we’ve seen instances where:

1. A selling shareholder resigned as company secretary / director in anticipation of a sale (reasonably concluding that this was appropriate as he would not continue in this role after the sale). Unfortunately, this meant the conditions for ER ceased to be satisfied and he was taxed at the 20% rate on the sale of his shares.

2. The sellers of a business assumed they would get ER and signed a letter of intent with the purchaser. However, the price mechanism in the letter of intent was such that no cash in the company would be paid for by the purchaser; this meant they had to take dividends of the cash and pay tax at the dividend rate of 38.1%, rather than at the ER CGT rate of 10% they had expected.

3. A client had been assured by legal advisors that ER would be available, but this was incorrect due to earn-out rights. The further cash consideration paid, above the amount estimated when the Share Purchase Agreement (“SPA”) was signed, was not covered by ER and so the client was taxed at the higher CGT rate of 20%. The client was also not made aware of the need to go through a valuation process with HMRC as part of filing their self-assessment tax return. It is important that sellers consider the tax position carefully before accepting a cash earn-out right. Well-advised sellers might want to negotiate to structure the deal as a ‘reverse earn-out’ right.

Getting the tax covenant wrong

A tax covenant is a mechanism for the seller to pay to the buyer, pound for pound, an amount equal to any (usually unexpected) tax due by the Company sold (in respect of the period before the sale is completed). The tax covenant is, in effect, a price-adjustment mechanism, so it is well worth getting it right. But we’ve seen cases where:

4. The notice provisions (due to the way they interacted with provisions of the tax deed) were so unclear it wasn’t obvious how a buyer would give notice to the seller under the tax covenant. This risked the process used being open to legal challenge, and the buyer then not being able to claim potentially significant amounts of tax.

5. A seller’s accountants, who were responsible for reviewing the tax covenant before it was included in the SPA, made no amendments to the documents – despite these being based on significantly out-of-date styles with now incorrect legislative references.

6. A seller disclosed nothing against the tax warranties when it was clear there were disclosures to be made; the seller thought his lawyers would do this (as they had for the other warranties), and the lawyers believed they could rely on their engagement letter stating they were not responsible for tax matters. While the law firm had protected their own position, the client perception was not that they had received the assistance they expected to protect their interests.

7. A buyer’s lawyer stated he was happy to use his “usual form” of tax covenant despite the fact this did not tie up with the price mechanism set out in the heads of terms and SPA.

8. Sellers realised (after a claim had been made against them by the buyer) that the (buyer-favourable) drafting in the tax covenant gave them no rights to require any defence be made by the company they had sold against the HMRC claim for tax; which the sellers were on the hook for under the tax covenant.

Risks from lack of knowledge and clarity

No-one can be an expert on everything, so it seems sensible to consult with the right people at the right time. But we’ve seen:

9. Buyers and sellers arguing at the Completion Accounts preparation stage over the types, and amounts, of tax to be included in Completion Accounts. This was because the drafting in the SPA and tax deed (which had to be read together) was unclear on what was to be provided for in, and excluded from, those accounts.

10. Incorrect references to, and confusion over, which of “accounts”, “consolidated accounts”, and “completion accounts” should be referenced in the tax covenant, tax warranties and SPA.

The risks arising where tax-related elements of a transaction are incorrectly dealt with in the SPA are considerable. The usual period for claims to be brought under a tax covenant (or for breach of tax warranties) is seven years. This significantly exceeds other usual warranty and indemnity claim periods, which are commonly 18 or 24 months. This long period can even be even longer (say, to 20 years) if a tax authority brings an assessment under certain provisions. This is a significant period for a document to be potentially open to scrutiny from clients and other advisors if/ when tax-related claims come to be made under it.

So…talk to tax experts early in the M&A process

There is no substitute for engaging early with tax advisors on a proposed M&A deal. If this is done at the letter of intent / heads of terms stage, mistakes like the above can be avoided. The parties, together with their respective legal advisors, can clarify who will be responsible for the tax-related elements of the transaction and get expert insight from someone who understands the tax covenant and tax warranties and how they interact with the price and with the rest of the SPA.

Chiene + Tait has a team with extensive experience in dealing with tax on M&A transactions, including team members who have experience working in law firms. We would be happy to discuss how we could assist law firms, other professional advisers or their clients to ensure the tax-related aspects of a deal are appropriately dealt with and the transaction achieves the tax expectations of the parties.

Contact us to discuss:

Nicola Williams, Entrepreneurial Tax Senior Manager

Neil Norman, Entrepreneurial Tax Partner

The top four misconceptions on R&D tax relief

There are several big misconceptions surrounding R&D tax relief – we come across them on a near-daily basis. Despite it being one of the most generous corporation tax breaks available, many people rule themselves out without looking into it in greater detail. But if you do look into it, you might be surprised at what qualifies for R&D tax relief.

So Dave Philp, Assistant Manager in the Entrepreneurial Tax team at Chiene + Tait, looks at the misconceptions you might have heard.

“We haven’t created anything new so we aren’t eligible”

This simply isn’t true: you don’t need to be breaking new scientific ground to qualify. R&D tax relief covers any project that seeks an advance in science or technology. As well as creating an innovative, state-of-the-art product, this can also mean simply improving upon existing processes. If you have:

  • Been working on something that has never before been attempted;
  • Tried to improve their existing products through technological change; or
  • Looked to find a more efficient way to work,

then you will likely have scope for an R&D claim.

“We have received grant funding so can’t make a claim”

Not correct. However, receipt of a grant does throw a spanner into the works. You can still make a claim, albeit the grant may limit the total tax credit/deduction that you will get back. The legislation around grants and how they interact with R&D tax relief is extremely complex, so I always recommend speaking to a specialist to ensure that you maximise your claim.

“But we aren’t scientists in lab coats”

R&D tax relief is available to all companies that attempt to overcome technological or scientific uncertainties through the use of untried and untested techniques. That means that companies from a range of different sectors could qualify for relief.  In the past 12 months, Chiene + Tait has worked with (but not limited to) companies in the following sectors:

  • Agriculture, forestry and fishing
  • Construction
  • Electricity and Gas
  • Manufacturing
  • Financial & Insurance

R&D tax relief really is available for all!

“It’s not worth the time to make an R&D tax relief claim”

But it is! Companies can receive a tax credit up to 33% of the total eligible expenditure incurred. So, if you spent £100k on eligible staff costs, you could receive up to £33k tax credit, cash in hand!

Granted, the rules and application process is complex and can seem daunting, but you can remove that hurdle by using a good adviser.

Here at Chiene + Tait, we make the process of claiming pain-free, preparing the report and claim for you so that you can focus on the important things. From the initial meeting to submission, our expert team will look to finish the report and claim within 6 weeks, meaning that, once approved by HMRC, the cash is in your bank account sooner!

If you’d like a discussion about whether you can claim R&D tax relief, or if you have any questions about it, get in touch with me at david.philp@chiene.co.uk.

Understanding the tax treatment of Bitcoin

Cryptocurrencies are currently something that everyone is talking about. In this blog, Richard Clarke in the Personal Tax team looks at the tax treatment of virtual currency Bitcoin.

What is Bitcoin?

For many, cryptocurrencies are simply a volatile bubble that will burst in the next few years but for others, it is the currency of the future.

The virtual currencies have a finite supply unlike traditional money and have no physical presence. The best-known cryptocurrency is Bitcoin. Its popularity has grown in recent years and is traded on ‘peer to peer exchanges.’ It has been described as a currency without a State to underwrite it and likened to banking without a bank.

Bitcoin can be used at participating businesses to buy goods or services online. In 2017, a property was put on the market in London and the owner indicated that he would be willing to accept Bitcoin rather than cash. This was thought to be a first for the UK. More recently, a Turkish football team purchased a player using Bitcoin.

Like normal currencies, Bitcoin can increase or decrease in value. Anyone who invests in or trades in Bitcoin should be aware that when a profit (or loss) arises this may have tax consequences.

Tax treatment of Bitcoin

VAT Treatment

Different VAT treatment applies to the production and exchange of Bitcoin in exchange for another currency. However, HMRC guidance makes it clear that neither activity will give rise to a VAT charge.

If a VAT registered person provides goods or services and is paid in Bitcoin, the value of Bitcoin at the point of transaction needs to be determined as this amount will be liable to VAT.
However, the following are exempt from VAT.

• The production of Bitcoin called ‘mining’ will generally be outside the scope of VAT.
• Activities such as the provision of verification services or the arrangement of transactions.
• When Bitcoin is exchanged for sterling or another currency.

Income Tax Treatment

When an individual actively engages in Bitcoin mining or trading, they fall within the scope of income tax. When a profit or loss arises on a Bitcoin transaction this must be reflected in their business accounts.

This profit or loss will be taxable under the normal income tax rules.

The income tax rates for UK taxpayers are 20%, 40% and 45% respectively. From April 2018, the income tax rates for Scottish taxpayers are 19%, 20%, 21%, 41% and 46%.

When deciding whether an individual is actively engaged in trading, HMRC apply a test and this is known as the ‘badges of trade.’ The weight given to each badge of trade will depend on the following factors:

• Profit-seeking motive – a transaction entered into with the intention of earning a profit is more likely to be a trade.
• The greater the frequency and number of similar transactions, the more likely there is of there being a trade.
• Length of ownership- the shorter the period of ownership, the stronger the evidence of a trade taking place.
• Method of acquisition – if Bitcoin was inherited rather than purchased it is unlikely that a trade was taking place.

Capital Gains Tax Treatment

An individual may hold Bitcoin as an investment but may not be actively trading. Any gain or loss realised on the exchange of Bitcoin for another currency would be chargeable or allowable for capital gains tax purposes.

• It is only the gains in excess of the annual exemption that are chargeable to capital gains tax.
• The annual exemption is currently £11,300 but other gains and losses for the year must be taken into account.
• Capital gains tax is payable at a rate of 10% up to the level of the basic rate band.
• The remaining gains are taxed at a rate of 20%.

It could be argued that a holding of Bitcoin that is intended to be used to buy goods or services overseas should be outside the scope of capital gains tax. This is because there is a capital gains tax exemption relating to the disposal of foreign currency acquired by individuals with the intention of it being used for personal means.

However, a Bitcoin ‘wallet’ is not a foreign currency bank account and so it seems unlikely that HMRC would allow this exemption to apply.

Corporation Tax Treatment

When a company is actively engaging in Bitcoin mining or trading, the profits and losses of the company should be reflected in the company accounts and will be taxable under normal corporation tax rules.

Profits or losses on exchange rate movements between currencies are taxable under the general rules on foreign currencies and loan relationships.

The rate of corporation tax from April 2018 is 19%.

If you have a query about the tax treatment of Bitcoin, please contact Richard at richard.clarke@chiene.co.uk or call 0131 558 5800.

News Corp v HMRC

In this blog, VAT Director Iain Masterton looks at the history of the tax treatment of newspapers and books and how VAT legislation hasn’t moved with the times.

A recent VAT case has highlighted how VAT legislation drafted in the 1970s and 1990s has not easily translated into the modern age.

VAT zero rating is available for the supply of “printed matter” which includes newspapers, books and magazines.  Critically the legislation describes these items as “goods”.

News Corp, the company who own the Times and Sunday Times, tried to argue at the VAT Tribunal digital versions of their newspaper should qualify for the same VAT treatment as its printed counterparts.

The decision in the case revealed the fascinating history of the tax treatment of newspapers and books going back to 1940 when the VAT treatment of these items was exempt under the then named ‘purchase tax.’ This was replaced in 1973 by VAT as the UK joined what is now the EU.

The Tribunal conceded that the digital version of The Times was 95% similar to the paper version of the newspaper and despite the fact that the digital version of the paper was issued periodically under the same title and contained current affairs news, the VAT Tribunal could not look past the fact that the zero-rating provisions for printed matter refers to goods, not services.

The Tribunal also noted that zero rating provisions needed to have a social component and when Parliament originally decided to zero rate newspapers, the purpose of this was to increase literacy amongst the population and to encourage debate. Despite this “purposive” construction, the Tribunal could not look beyond what Parliament originally intended and drafted in the legislation. As a result, the legislation considers digital newspapers to be more suitable to a supply of services than of goods.

Clearly there is a huge change in how the UK public read newspapers, magazines and books in 2018 compared to the 1970s and 1990s when the last version of the VAT Act was drafted.  The zero rating provisions which were introduced with VAT cannot be revised at present. They can only be removed.

With the UK’s impending move away from the EU there may be scope for the UK Government to change this in the future, however it would have to consider the amount of revenue it could potentially lose from removing VAT from all online publications.

If you have a query about VAT, please contact Iain.Masterton@chiene.co.uk or call 0131 558 5800.

Creative industries tax reliefs

Museums and galleries tax relief became the latest addition to the Government’s suite of incentives for the creative industries, which can make arts and media projects affordable. Catriona Finnie, who heads up our Creative Industries Tax Relief offering, looks at a selection of reliefs most relevant to our clients. (This article first appeared in the Winter 2017/18 edition of our Connect newsletter.)

The UK has a package of tax reliefs designed to encourage investment in certain arts and media projects. Broadly, they all work in the same manner: eligible organisations can claim an additional deduction on qualifying costs and may be able to surrender some of their loss for cash from HMRC, equating to 20% or 25% of the core cost.

Museums and galleries tax relief can be claimed on costs incurred on temporary or touring exhibitions, but does not include general day-to-day running costs. The relief is open to charities, trading subsidiaries of charities, or subsidiary companies under the control of local authorities. Commercial organisations that run museums or galleries will not be eligible. Exhibitions must be open to the public to qualify, so exhibitions that are solely for selling purposes will not be able to claim.

Theatre tax relief, in general terms, is available for productions of a play, an opera, a musical, a ballet or other dramatic piece. Theatre tax relief is applied to each qualifying production, giving  potential tax relief for every theatrical production undertaken during the financial year. Tax relief is given according to qualifying expenditure which is, broadly speaking, the production and closing costs.

Video games tax relief allows companies to claim on qualifying UK expenditure, including those involved in the designing, production and testing of the game.

Film tax relief is a tax incentive for film production companies operating in the UK: limited budget films can claim a cash repayment worth 20% of qualifying expenditure, which usually encompasses costs related to principal photography and pre- and post-production.

Orchestra tax relief is available to orchestras comprising at least 12 instrumentalists who perform to live audiences. Eligible organisations can claim a cash repayment from HMRC of up to 25% of the costs incurred in producing the concert.

There are also tax reliefs available for:

  • High-end television production
  • Children’s television production
  • Animation

As you can see, each creative industries tax relief has specific eligibility criteria so get in touch to see if you qualify, or if you’d like more information on 0131 558 5800 or email catriona.finnie@chiene.co.uk.

The Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is a new initiative designed to increase tax transparency. Though primarily aimed at financial institutions such as banks, it has ramifications for many types of organisations.

The regulations imposed by CRS are onerous and complex. We have produced Comment On factsheets showing the impact CRS will have on:

Additional Common Reporting Standard resources

You can also see Euan Morrison, our Head of Charities, present a webinar about the implications for Charities from CRS. Euan has also published a piece on why charities need to think about CRS in Third Force News.

What is Theatre Tax Relief and who qualifies?

Theatre Tax Relief (TTR) is a generous relief, which was introduced on 1 September 2014 to recognise the cultural and economic significance of theatres in the UK. The Government hopes the relief will encourage and support UK theatre producers.

TTR is available to any business within the charge to corporation tax, including not for profit organisations such as charities. To qualify, the business must carry on a qualifying theatrical production. In general terms, productions of a play, an opera, a musical, a ballet or other dramatic piece would qualify for TTR.

You can download our Comment On Theatre Tax Relief here (pdf).

How does Theatre Tax Relief work?

TTR is applied to each qualifying production, giving businesses potential tax relief for every theatrical production undertaken during the financial year. Tax relief is given according to the productions’ qualifying expenditure which is, broadly speaking, the production and closing costs.

Tax relief comes in the following forms:

  • An additional deduction for corporation tax purposes amounting in most cases to 80% of all qualifying expenditure.
  • If there is a loss on production after the additional deduction has been taken, the business has the opportunity to surrender this loss for a tax credit equal to 20% of the surrenderable loss for a non-touring production or 25% of the surrenderable loss for a touring production.

Example

Income £400,000
Expenditure (£450,000)
Loss before relief £50,000
Enhanced expenditure (80% x £200,000) £160,000
Loss after relief £210,000

Loss available for surrender

Lower of:

Available loss of £210,000 and

Enhanced expenditure of £160,000

 

 

£160,000

Tax credit payable at 20% £32,000

If you would like to find out how you can make a TTR claim, please contact Catriona Finnie at charities@chiene.co.uk

We are also able to help with other creative sector tax reliefs: orchestra, computer games, films,  certain television and animation productions, and (from 2017) museums and galleries all qualify for tax relief. Contact us for advice and support.