April Tax Tips & News

Latest news round-up

Penalty reprieve ends and interest rate hike

Any taxpayer that was relying on the relaxation of the late payment penalty rules must have either paid their tax bill or agreed a time to pay arrangement before 1 April. Unless there is a reasonable excuse, a 5% penalty will shortly be levied.

Additionally, from 5 April the penalty interest rate on late payments of tax will increase to 3.25%, following the latest rise in the Bank of England base rate. This applies even where a payment arrangement is agreed.

The official rate of interest (used to work out the taxable benefit in kind on cheap employer loans) remains at 2%. The repayment rate is unchanged at 0.5%.

Clarification on VAT treatment of termination payments

From 1 April, HMRC’s new interpretation of the rules for early termination fees and compensation payments take effect. Broadly, the effect is that the VAT treatment of such payments will follow that of the underlying supply. So, if a business pays an early termination fee to cancel a mobile phone contract, VAT will apply to the fee because the payments under the original contract would have been taxable.

HMRC’s Brief (available here) makes clear that it is the substance of the payment that is important, not the legal form. So, receiving an invoice described as a “bill for damages” for example would not take the payment outside the scope of VAT.

Following the original decision to change practice following two CJEU cases, it was initially thought that dilapidation payments for damages to property would be included. However, that has now been abandoned so landlords should not apply VAT to bills for damages at the end of a lease.

Removal of option for employment expense claims

From 6 May, it will no longer be possible to make a claim for employment expenses via writing a letter or using a makeshift claim form, e.g. by preparing something in a spreadsheet. Instead, HMRC will insist on the use of a tax return, form P87, a claim via the personal tax account, or (in limited cases) a phone call. The P87 has been improved to permit claims for multiple years to be made on a single form.

Spring Statement brief summary

The Chancellor cut Fuel Duty by 5p per litre until March 2023. The cut was effective from 6pm on 23 March. There was also a reclassification of certain energy saving materials for VAT purposes, from the reduced rate to the zero rate, for a period of five years.

The Health and Social Care Levy was not abolished, as some had called for. However, as had been rumoured, the Primary Class 1 NI threshold was increased – to £12,570. This doesn’t take place until July, so the previously announced £9,880 applies until then. For company directors, this gives an effective threshold of £11,908 for 2022/23. This level also applies for both Class 2 and Class 4 NI contributions.

The Employment Allowance for Secondary Class 1 NI was also increased, from £4,000 to £5,000 from April 2022.

The Chancellor’s traditional trump card (usually the last announcement) was that the basic rate of income tax will be cut from 20% to 19% from 2024.

Transitional rules for Capital Allowances

The annual investment allowance (AIA) has been at a temporary increased amount of £1 million since January 2019. This was supposed to revert to £200,000 after 31 December 2021 but has been extended for various reasons until 31 March 2023. As we are now in the final twelve months of the increase (subject to any further extension), it’s a good time to look at how the transitional rules work for accounting periods that straddle 31 March 2023.

The super deduction is also available until 31 March 2023, however this is only available to companies, and even then there are reasons why using the AIA may be preferable in any case.

Where the accounting period straddles 31 March 2023, the total AIA available is calculated by applying the following formula:

(a/12 x £1,000,000) + (b/12 x £200,000)

So, if a business has an accounting date of 30 June, the maximum AIA will be £600,000. However, things are not that simple. Where the expenditure is incurred after 31 March 2023, the AIA is restricted to the part applicable to that period, i.e. (b/12 x £200,000). For a business with a 30 June year end, this would mean the cap would be £100,000 – even though the AIA for the whole year is £600,000.

Forward planning is now required. If there is to be significant expenditure that is to be relieved using the AIA, it should be incurred prior to 31 March 2023 to ensure that maximum relief is available.

It is worth remembering that the date that expenditure is incurred is the date that the contract is signed, not necessarily the date payment is physically made, as long as there is a binding obligation to pay the relevant amount within four months. So, a contract signed in March 2023 but paid in May 2023 will avoid the problem described above.

Election to be treated as UK-domiciled for IHT purposes

Inheritance tax is possibly the least popular of the main taxes. However, in most cases, no IHT is payable on transfers made to a spouse or civil partner – regardless of whether this takes place during the lifetime of the person making the gift, or via the will following death.

However, this exemption is restricted if the person receiving the gift is not UK-domiciled. There is good reason for this. Non-domiciled individuals are not subject to UK IHT on their worldwide estate, instead it only the value of UK-situs assets that are accountable. In the absence of specific rules, value transferred to a non-dom spouse or civil partner could escape the UK IHT net altogether if that person never becomes UK-domiciled or deemed domiciled.

In order to avoid this, the spouse exemption is restricted to £325,000 in such cases.

However, it is possible to access the unlimited intra-spouse exemption by making an irrevocable (if the individual remains UK resident) election to be treated as UK-domiciled for IHT purposes.

The election can be backdated for up to seven years and can be made at any time during the UK-domiciled spouse’s lifetime. It must be made within two years of death, unless HMRC permits a late election.

The downside is that it immediately brings all of the non-domiciled spouse’s non-UK situs assets within the charge to UK IHT. This may not be an issue if there are no significant assets, or if the individual is likely to become domiciled/deemed domiciled in the UK prior to their death anyway. The election does not affect the domicile status for income tax or CGT purposes, so the remittance basis can still be used.

Once made, the status continues to apply unless the individual becomes non-UK resident for four consecutive years.

For further information, refer to IHTM13040.

Is the QCB deferral worthwhile?

When a company is sold, it is often partly for consideration which is deferred in one way or another. Sometimes this will take the form of a debt, such as loan notes. Effectively, the vendor is lending the purchaser the balance of the consideration. If certain conditions (set out in s.117 TGCA 1992) are met, the loan notes will be “qualifying corporate bonds”. There are specific considerations that need to be made in such cases.

Where shares are exchanged for QCBs s.116(10) TCGA 1992 applies automatically such that, any CGT on the gain attributable to the QCB is deferred until the QCB is redeemed. On the face of things, this seems attractive as the consideration represented by QCBs has value that cannot be accessed until redemption. However, this can cause issues with business asset disposal relief, as it is unlikely that the vendor will hold enough shares in the acquiring company in the year the QCB is redeemed. A solution may be to negotiate to retain a minimal (but more than 5%) shareholding, but this may not be realistic in practice. Where BADR doesn’t apply, the gain coming into charge will be taxed at the main rates of CGT, i.e. it could be subject to tax at 20% instead of the BADR rate of 10%. If rates increase in future, the problem may be exacerbated.

However, the vendor has the option of making an election to disapply s. 116(10). If they do this, the gain will be fully assessed in the year the disposal is made, the advantage being that BADR should be available. The election needs to be made by the first anniversary of 31 January following the end of the tax year the disposal takes place.

Whether this is worthwhile will depend on a number of factors, not least whether the individual has, or is able to obtain, funds to pay CGT in respect of proceeds whose value cannot be accessed. But if it’s possible to be flexible about the dates of redeeming the notes, and the annual exemption is not otherwise extinguished a “best of both worlds” position could be obtained.

Example. A (a higher rate taxpayer) is a shareholder in A Ltd. A competitor, B Ltd makes an offer to acquire A Ltd, which is accepted. The terms of the sale mean that A will receive £40,000 in 2022/23 for their shares. They will also receive redeemable loan notes which qualify as QCBs worth £60,000. These will be available to redeem after two years. A Ltd is a qualifying company for BADR, and is A’s personal company.

By default, A will pay CGT at 10% on £27,700 (£40,000 – £12,300) in 2022/23, then at 20% on £47,700 in 2024/25, for a total CGT bill of £12,310. A could disapply the deferral and just pay 10% on £87,700, saving £3,540.

However, if A were able to redeem the loan notes in tranches, say over four tax years, multiple annual exemptions could be used to minimise the tax, which would then be £2,770 + £160 (i.e. 20% x 4 x (£12,500-£12,300)) = £2,930. That is a significant saving.

Obviously, this strategy would be impractical for large deferred gains, e.g. if A’s deferred gain was £500,000, it would take 41 years to implement! But for more modest gains, it is worth considering.

April Questions and Answers

Q1. Our long-term landlord has offered us the opportunity to purchase the freehold in the office building we work from, which we are keen to do. However, they have opted to tax the building. I’m aware we could recover the input tax but it will still have a short-term negative impact on our funds. Is there any way to avoid incurring it in the first place?

A:The most obvious way to avoid the input tax hit is to ask your landlord to revoke the option. This will be possible if it was made more than 20 years ago. This will definitely be worth doing, because you will have to pay SDLT on the VAT-inclusive purchase price, and so this will mean an additional cost for you.

If this isn’t possible, another option would be to structure the purchase as a transfer of a going concern. You would need to create a new legal entity, e.g. another company to do this, and meet the conditions set out in VAT Notice 700/9. There are specific requirements in relation to land and property, so pay particular attention to paragraph 2.3.

If you feel this approach is heavy handed, you could try to agree that under the sale contract, an amount of consideration equal to the VAT payable will be deferred until it can be recovered. Of course, this leaves you with the SDLT problem, so consider the other options first.

Q2. I am a shareholder in a family-run trading company. Last year I purchased a hybrid car via the company. The relevant BIK percentage is 14%. With the recent increase in fuel prices, I am considering having the company purchase the fuel for the car and reimburse it for the private fuel without incurring a benefit in kind? Currently I don’t claim anything as business journeys tend to be covered by the battery range.

A: In theory yes, but if you don’t reimburse every last penny you will incur a taxable benefit of 14% x £25,300 = £3,542. You will pay tax on this, and the company will have to pay Class 1A NI. You would have to keep meticulous records to precisely determine your private mileage. This may be difficult to do in practice.

Instead, consider having the company pay you at the approved mileage rates for your business mileage. As your car isn’t fully electric, you will be able to claim at the appropriate rate for petrol or diesel cars accordingly, and as you say the business mileage is generally covered by the electric range, this would be very efficient. The latest rates are available here and are updated quarterly.

Q3. We have an employee currently seconded from our EU-based parent company. Initially, she was due to be with us for 18 months, of which twelve have already passed. We are paying for a flat for her on the basis that it is a temporary workplace, so not taxable on her. We are considering extending her stay for a further 18 months, as she has had a very positive impact. Are we able to continue paying the rent on the flat tax free until two years has elapsed?

A: A workplace is only “temporary” as far as the expectation is that it will the workplace for less than two years. If you decide that you are going to extend the secondment beyond two years, the trigger date for the rent payments becoming a taxable benefit is the date that decision is made, because it can no longer be said that the expectation is that your site will be the workplace for less than two years.

April Key tax dates

• 1 – Due date for payment of Corporation Tax for accounting periods ending 30 June 2021
• 5 – Last day of 2021/22 tax year, deadline to use any allowances, e.g. ISAs, CGT annual exemption etc.
• 5 – Deadline for registration for payrolling of benefits in kind for 2022/23
• 7 – Electronic VAT return and payment due for quarter ended 28 February 2022
• 14 – Deadline to file CT61 for Q/E 31 March 2022
• 19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/4/2022
• 30 – ATED return and payment for 2022/23 due
• 30 – Last date to pay self-assessment liability for 2020/21 without incurring daily penalties (note that the daily, and 6 and 12 month penalties were not affected by the reprieve for automatic £100 penalties)