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CIS: When are contractual arrangements caught?

Whether certain contractual arrangements are caught for construction industry scheme (CIS) purposes can lead to confusion and potentially non-compliance.

The question of whether or not CIS applies and who is responsible for operating CIS will be determined by:

  • Whether or not the contract is within the meaning of a construction contract; and
  • the parties to the contract.

Whilst the CIS will be in point depending on whether or not the contract falls within the meaning of a construction contract, CIS need only be operated at the point of payment.

Construction contracts

A construction contract is defined as any contract (whether written or verbal) which relates to construction operations and where one party is a contractor (FA 2004 s 59) and the other party is a subcontractor (FA 2004 s 58).

The key part of the legislation is the word ‘relates’. A contract only needs to relate to works/services that fall within the meaning of construction operations for that contract to be within CIS. This would be the case even if those works/services are not actually undertaken.

Maintenance contracts

There are various types of contracts under which maintenance services can be provide, for example facilities management contracts or planned, preventive maintenance (PPM) contracts etc.  These types of contracts can cover all manner of works, some of which might be within CIS and some outside.

As a consequence, it is vitally important to understand what types of works could be undertaken under this type of contract and having considered the position, if any part of those works would be within the meaning of construction operation, then all of the works or services provided under that contract will be within CIS.

The difficulty is that under maintenance contracts, the majority of the works might well be outside the scope of CIS. However, when carrying out those works if remedial works or making good is required then the remedial works or making good will drag the whole contract into CIS.

Example

Generally, the installation of a domestic heating boiler would be regarded as being outside CIS on the basis that the central heating boiler is part of a system of heating. However, the installation of a new boiler may require changes to the building in which it is to be located, for example boring a new hole for the flue if the existing flue cannot be used.

The boring of a new hole through the wall and the making good of the existing hole left by the former flue, will drag the whole of the installation into the CIS. As a consequence, all of the works under that contract will be caught for CIS purposes from day one, even where a new boiler may never be installed or might be installed at some point in the future.

Private home refurbishments

There is a misconception that CIS does not apply to works carried out to private homes. As with all things CIS, this is not quite correct.

A private householder is not regarded to be a contractor for the purposes of the CIS and this only applies where the private householder has contracted for works to be undertaken to their own home and not properties that they may own and let/rent out.

As such, where a private householder has engaged a builder to carry out work to their own home, CIS does not apply. However, if that builder then subcontracts work out to other companies or tradesmen (eg bricklayers, electricians, plumbers etc), then that builder must operate CIS regardless of the fact that the works are being undertaken on a private home.

This is because the builder is a contractor and the contract between the builder and the other tradesmen will be a construction contract.

Letting agencies and maintenance contracts

Many letting agencies will provide property management services to its landlord clients. The management services can cover the collection of rents as well as ensuring the properties are maintained.

Whether or not the letting agency could be regarded a contractor for the purposes of the CIS, will depend on the contractual arrangements, which could be arranged in two ways:

  1. The landlord contracts directly with the subcontractor and the letting agency’s role might be to oversee the works to ensure the works are undertaken in accordance with the contract and may also involve making payments to the subcontractor, or
  2. Under the landlord/agency contract, the agency, as a part of its management services, also provides maintenance services and it will contract with the subcontractor for any necessary works to the landlord’s property.

Under 1), the letting agent would not be regarded a contractor for the purposes of the CIS but under 2) it could be if the letting agency meets the definition of a deemed contractor (ie its cumulative expenditure on construction operations exceeds £3m over the previous rolling 12 months). The question of whether or not the deemed contractor rules apply is also open to challenge, particularly if the landlord is regarded a contractor themselves.

Where the agency sets up a subsidiary property maintenance company, the same principles will apply. The only difference will be that the rules relating to deemed contractors will not apply to the property maintenance company and therefore it will be a contractor from day one irrespective of the level of its expenditure on construction operations.

Conclusion

When deciding whether CIS is in point, the starting point is establishing the contractual arrangements and what works could be undertaken or services that could be provided under that contract. If, having considered the position, the contract can be said to be within the meaning of a construction contract, then CIS must be operated on any payments made under that contract regardless of what the payment relates to.

MTD ITSA delayed to 2024

The government has delayed the start of MTD ITSA to 6 April 2024, with MTD for general partnerships postponed to 2025. The change to the tax year basis has also been delayed until at least April 2024.

In a written statement to the House of Commons on 23 September 2021, it was announced that MTD for income tax self assessment (MTD ITSA) would be postponed yet again to April 2024.

“We recognise that, as we emerge from the pandemic, it’s critical that everyone has enough time to prepare for the change, which is why we’re giving people an extra year to do so. We remain firmly committed to Making Tax Digital and building a tax system fit for the 21st Century” announced the new financial secretary Lucy Frazer.

Long time coming

This is the latest in a series of delays and deferrals in the MTD programme, which was proposed by Chancellor George Osborne in late 2015. The MTD start date for small businesses was first planned to be in April 2018, then the focus switched to MTD for VAT. The MTD for income tax programme was to be delayed until lessons had been learnt from the VAT roll-out.

MTD for VAT commenced on time for most VAT registered businesses for VAT periods starting on and after 1 April 2019 but a number of “complex” entities had a deferred start date to 1 October 2019. A similar deferral is now in place for general partnerships (ie not LLPs, mixed or corporate partnerships), with those “ordinary partnerships” due to enter MTD ITSA from April 2025.

What is the base year?

The turnover for mandation into the MTD ITSA regime remains at only £10,000 per year, much to disappointment of many who were lobbying for a much higher entry threshold.

As the turnover threshold must take into account the taxpayer’s income from all of their sole-trader businesses, plus their rental income, HMRC needs to pull together several figures from the taxpayer’s self assessment tax returns. Only when the tax return totals reach the £10,000 threshold will HMRC issue a notice to file under the MTD regulations.

If MTD ITSA was mandated from 6 April 2023, the turnover test would need to apply to the figures reported in the 2021/22 tax return, submitted by 31 January 2023, and possibly turnover reported in the 2021/22. Both of those years were affected by the pandemic which reduced turnover and rental income for many businesses and landlords.

Local authority grants for businesses liable for business rates would also increase business turnover for those periods. The SEISS grants should not have been included in business turnover, but some taxpayers have reported them as such, leading to HMRC having to make many corrections taxpayers’ self-assessments for 2020/21, and possibly also for 2021/22.

As MTD ITSA will now start in April 2024 the base year for testing the MTD turnover threshold will be the tax year 2022/23. The turnover figures for that year should not be distorted by Covid-related grants, and hopefully will reflect normal trading beyond the pandemic for most businesses.

Tax year basis

When the consultation on changing to the tax year basis of assessment was released in July 2021, doubts were raised on whether there was sufficient time to introduce such a fundamental change to tax law before the mandation of MTD ITSA.

It was apparent that HMRC wanted all unincorporated businesses to switch to the tax year basis before the introduction of MTD ITSA in 2023, but this would make 2022/23 the difficult transitional year.

For businesses with an accounting year end that doesn’t approximate to the tax year, more than 12 months of profits would be assessed in 2022/23. This would have a knock-on effect for a wide range of allowances and charges, including NIC, student loan repayments and capital allowances, to name a few. There was just not enough time to write amendments to regulations in all the areas affected before April 2022.

What’s more using the tax year basis would bring forward the start of MTD ITSA for businesses with a 31 March year end, from 1 April 2024 to 6 April 2023 – which came as a big shock for many accountants and businesses.

The written statement from the new financial secretary to the Treasury, confirmed the change to the tax year basis will not come into effect before April 2024, with a transition year no earlier than 2023. The government will respond to the consultation on reforming basis periods “in due course” but the wording of this statement makes the change to the tax year basis look uncertain.

Get ready for 12.5% VAT

Some businesses will have to deal with four rates of VAT in their accounting systems from 1 October 2021.

This has not happened since 1979 and will hopefully not happen again after 31 March 2022 when the temporary 12.5% rate for most sales made by the hospitality industry will end and the 20% rate will resume on 1 April 2022. We will then be back to three VAT rates: 0%, 5% and 20%.

Affected supplies

In a nutshell, the supplies made by the hospitality industry that have been subject to 5% VAT since July 2020 will become liable to 12.5% VAT for the period between 1 October 2021 and 31 March 2022. For most hospitality suppliers, it will be a case of just changing the VAT code from 5% to 12.5% on their software – job done.

There is no anti-forestalling legislation in place for either the rate increase on 1 October 2021 or 1 April 2022.

VAT fraction

There is an easy VAT fraction of 1/9 with the 12.5% rate. So, for example, if you pay £90 including VAT for a night’s accommodation in a hotel, and the hotelier has not itemised the VAT as a separate figure, you know that your potential input tax claim is £10.

Credit notes

If you raise a sales invoice or receive an advance payment at the 5% rate of VAT before 1 October 2021, and then it is adjusted after this date, perhaps because of an order cancellation or price adjustment, the VAT rate for the credit note will be based on the rate originally charged. This is helpfully confirmed by HMRC’s guidance: VAT Notice 700, para 18.2.5

Flat rate scheme (FRS) – new percentage rates

From 1 October, the FRS rates will increase for the following three categories:

  • Catering services including restaurants and takeaways: 4.5% will increase to 8.5%
  • Hotel or accommodation: 0% will increase to 5.5%
  • Pubs: 1% will increase to 4%

There will be a further challenge for businesses that do not complete calendar quarter VAT returns; therefore, there will be two FRS rates for VAT returns ending at the end of October or November.

Example

A restaurant completing a VAT return for the three months to 31 October, which uses the FRS will account for 4.5% VAT on its August and September gross takings and 8.5% for receipts in October.

Rejoin the scheme?

Depending on the mix of sales between 0%, 5% and 20%, some businesses that left the FRS in July 2020, due to potential increased VAT payments, might want to rejoin on 1 October 2021 or possibly 1 April 2022. This is fine because a business can rejoin the scheme at any time if it has been out of the scheme for at least 12 months.

Adaptabe accounting systems

The 12.5% rate should be easy to deal with if accounting systems are flexible. With the UK now able to make more VAT changes post-Brexit, no longer having to comply with EU law, there might be temporary VAT rate movements in other sectors in the years ahead.

It is worth checking that VAT rates can be easily adjusted if you change your accounting system.

To quote VAT Notice 700, section 30, “When a VAT rate or liability is changed, it may have to be introduced at short notice. HMRC recommends that your accounting system – whether or not you use a computer – is designed to allow you to adjust to the change without difficulty.”

MTD ITSA: Questions answered

What are the basic requirements for MTD ITSA?

There are four requirements for MTD ITSA (draft reg 3):

  1. record business transactions in a digital manner

  2. preserve those records for the defined period

  3. provide a quarterly update to HMRC

  4. provide an end of period statement (EOPS) to HMRC

The records in 1) and 2) comprise data needed to populate the reports required for points 3) and 4), which in turn must be submitted using MTD-compatible software.

The digital means for recording the data does not have to be the same software that submits the data. However, there should be a digital link between the recording software and the submission software.

What exactly must be recorded?

Each transaction must have these data points recorded digitally:

  • the date of the transaction – the exact time is not required

  • for expenses – the category out of the specified list of expenses (see below)

  • for income – the trade or property business the income relates to

  • the amount or value.

Retail businesses will be able to elect to record daily gross takings rather than every single transaction (draft reg 17), but only if it would be unreasonable for the business to keep digital records of every individual sale.

In addition, the business will have to record the following permanent information as part of its digital records:

∙ the business name

∙ the address of the principal place of business

∙ whether it uses cash accounting or accruals accounting

Can the client give their accountant paper records to enter into software?

The taxpayer does not have to record the business data digitally themselves. They can pass this task over to a bookkeeper or to their accountant to make the entries into accounting software, or a spreadsheet.

Although the aim of MTD is to encourage businesses to record their business transactions in real-time, as they occur, there is nothing in the draft regulations that stipulates exactly when the data must be committed into the digital record. As long as the data for the quarter is recorded before the quarterly submission is compiled and sent to HMRC, there is nothing to prevent a bulk recording of transactions every few weeks or months.

However, the longer the delay between the transaction and being recorded digitally, the greater the risk of loss or corruption of data – which is the whole point of MTD (as HMRC would argue).

Can a spreadsheet be the first entry for digital records?

A spreadsheet can be the entry point for transactional data into the accounting system. However, once that data has been recorded, the MTD regulations stipulate that there should be “digital links” that move the data around the accounting system. This means the data should not be retyped or copied by human hand once it has entered the system.

Think about where the accounting system starts. That is the point the transaction (sale or purchase) is recorded. It may be convenient to capture transactions using optical character readers, or bank feeds, but that doesn’t have to be the entry point of all the data.

A business can still issue paper invoices if the information from that invoice is digitally recorded in the accounting system.

What information is required to be submitted quarterly?

The quarterly submissions will be the totals for the quarter of:

  • sales income for each trade

  • purchases/expenses for each category

The categories of expenses are expected to be the same as those currently required in the self-employment section (form SA105) and property section (form SA103F) of the self-assessment tax return. More detail will be set out in the final MTD ITSA regulations.

In essence, the quarterly submission is a rough profit and loss account, no balance sheet figures are required. The data for individual transactions are not required.

Can the accountant make changes in the final submission?

This quarterly data dump does not have to be accurate, any misallocation between expense categories can be adjusted at the end of the period statement (EOPS).

It is in the EOPS that the accountant can make any adjustments for capital allowances, losses, reliefs, disallowable expenses, transactions that have been missed or double-counted.

One EOPS will be required of each trade or property business by 31 January following the end of the tax year.

Can the taxpayer submit estimated figures on the quarterly submissions?

Yes, if the taxpayer wishes to submit estimated expense figures, or even only the income amounts, in the quarterly submissions, that would be acceptable within the current draft MTD regulations.

To avoid the risk of a penalty for late filing some form of data needs to be submitted each quarter.

The quarterly submissions do not contain an accuracy statement. The taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business.

The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.

What will HMRC do with the quarterly data?

The quarterly submission will be used by HMRC to calculate an estimate of the business’s tax liability throughout the year, and that figure will be reflected back to the taxpayer. This is likely to confuse rather than assist the taxpayer as the current timing of tax payments will not be changed (for now).

Will tax payments change to quarterly?

Earlier this year there was a Call for evidence: timely payment, which asked for ideas on how the payment of income tax under self assessment, and corporation tax for small companies, could move to more frequent payment dates based on in-year calculations.

This article is based on the very limited guidance produced so far by HMRC. The final regulations for MTD ITSA are expected to be published in October 2021.

SEISS 5 grant applications have opened

Self-employed taxpayers can now apply for the fifth SEISS grant, but they may need to provide two different turnover figures from their business as part of their application.

The portal to apply for the fifth self-employed income support scheme (SEISS) grant opened on 29 July, but not everyone can apply at once.

HMRC has contacted every self-employed taxpayer (by email or letter) who it believes may be eligible to apply for the fifth and last SEISS grant, giving them a personal start date from which they can apply. Taxpayers should not attempt to apply before their personal start date as their claim will not be processed.

This staggered start is to prevent every eligible taxpayer applying on the same day and crashing the system, and to give HMRC time to process all the grant payments due.

Taxpayers don’t have to apply for the SEISS grant on the first possible day, as the portal will remain open until 30 September 2021, but the sooner they apply, the quicker the money will arrive.

Who is eligible?

HMRC has checked basic eligibility of taxpayers in advance of opening the claims portal for them, such as whether the 2019/20 tax return was submitted by 2 March 2021.

The taxpayer must make a declaration in the application that they intend to keep trading in 2021/22. Also, that their trade profits will suffer a ‘significant reduction’ due to the impact of covid-19 in the period between 1 May 2021 and 30 September 2021.

There is no definition of “significant reduction” and HMRC is not planning to provide one.   However, the taxpayer is only required to look forward to estimate their profits in the period ending 30 September 2021. They are not required to re-examine their claim with hindsight after the event.

As long as they keep all evidence of why they believed profits have reduced (ignoring any covid-related grants received), they will be able to show that their reasonable belief at the time of application was that profits would be reduced.

If the taxpayer was eligible for the SEISS-4 grant (or earlier grants), but failed to apply on time they can still apply for the SEISS-5 grant, if they meet the other conditions.

Turnover test

To complete the grant application the most taxpayers need to submit two different turnover figures. HMRC has improved its guidance and tweaked the law set out in the HMRC Direction slightly in respect of partnerships.

New traders, who started trading in 2019/20 and didn’t have a (different) self-employed trade in any of the years 2016/17 to 2018/19, don’t need to provide a turnover figure at all, as HMRC already has a figure for 2019/20 from their tax return. These new traders will get the 80% level of the grant.

Most taxpayers will need some help from their accountant to find the required turnover figures. HMRC has created a YouTube video for tax agents to show what clients will see during the SEISS-5 grant application process, and what other information the taxpayer will need to apply.

Tax agents should not attempt to complete the SEISS grant application on behalf of clients. If a tax agent uses their client’s government gateway’s ID and password to apply for the SEISS grant this will likely result in the application being blocked.

Finding the figures

The turnover figure is gross sales for all concurrent trades, not profit. It should exclude all Covid-related grants received: SEISS, CJRS, business rates support, and ‘eat out to help out’. These figures are only used to determine which level of grant the taxpayer qualifies for (30% or 80% of average monthly profits), they do not feed into the actual calculation of the grant to be paid.

The two turnover figures required are:

  1. Pandemic period

This will be approximately the same for everyone. Irrespective of the date the accounts are drawn-up to the taxpayer must report their turnover for the 12 months ending between 31 March and 5 April 2021, eg 12 months from 1 April 2020 to 31 March 2021

2.Reference period

This is the turnover for the accounts reported on the 2019/20 tax return or the 2018/19 return if 2019/20 was unusual. Unless the taxpayer uses an accounting period ending between 31 March and 5 April, it will not cover the same months as correspond to the turnover reported for the pandemic period.

Example 

Jane draws up accounts for her self-employed business to 30 September each year. She will report turnover for the following periods as part of her application for SEISS-5 grant:

  1. Pandemic: 1 April 2020 to 31 March 2021, excluding SEISS grants 1, 2 and 3 received in that year.
  2. Reference: 1 October 2018 to 30 September 2019, as reported on her 2019/20 tax return.

Partnership tweaks

It is the partnership turnover as a whole that HMRC wants to compare for the pandemic to reference period, which is why a partner is required to report the turnover for the whole partnership business.

Only where the individual partner also has another concurrent self-employed business (sole-trader or another partnership) in 2019/20 should he report just his share of the partnership turnover.

What will the taxpayer get?

If the comparison of figures from reference period to pandemic period shows that turnover has decreased by 30% or more, HMRC will calculate the SEISS grant based on 80% of the taxpayer’s average monthly profits for three months capped at £7,500.

If the turnover between the reference and pandemic periods has decreased by less than 30%, the taxpayer will get a SEISS grant calculated at 30% of average monthly profits for three months capped at £2,850.

Where turnover has not fallen at all no SEISS grant is payable. It is thus important to enter the correct turnover figures relating to the pandemic period and reference period  in the right places in the application (see HMRC YouTube video).

Basis periods to be abolished in 2022

Some unincorporated businesses will have bumper tax bills for 2022/23 as their accounts reporting is adjusted to fit exactly to the tax year from 6 April 2023, in preparation for MTD.

Draft legislation will be included in Finance Bill 2022 to abolish basis periods for businesses that pay income tax on profits calculated on a current year basis.

From 2022/23 those taxpayers will have to report to HMRC the income and expenses that arise precisely in the tax year – ie on an ‘tax year basis’. Losses will be those arising in the tax year.

Tax advisers with long memories will recall that on the introduction of self assessment in 1995/96, the basis for assessing income tax from unincorporated businesses was changed from the prior year basis (reporting accounts from periods ending in the previous tax year) to the current year basis (reporting accounts for periods ending in the current tax year).

MTD forces change

With the introduction of MTD for income tax from April 2023 (MTD ITSA), the reporting of accounting data is to be aligned exactly with the tax year.

Businesses which already draw up accounts to 31 March or 5 April will see no practical difference from 2022/23. Property letting businesses already have to report to the tax year, but in practice many draw up their accounts to 31 March, which by concession, is treated as a period ending on 5 April.

Why now?

Without this change to reporting periods taxpayers with several sources of income would need to file MTD reports for differing quarterly periods in the tax year, leading to up to 13 MTD filings required per year, plus VAT returns.

Under the tax-year basis the self-employed taxpayer will file MTD reports for all their sources of income by the same date each quarter, with a possible deviation for VAT if their VAT returns are not in the stagger one group (March, June, September and December quarter ends).

The estimated tax liabilities, based on those quarterly MTD reports, will also make more sense to the taxpayer, as the income reported in the quarter will be what drives the tax due for the year. HMRC has also recently consulted on accelerating tax payment dates for both companies and unincorporated businesses.

Who does this affect?

According to HMRC 93% of sole traders and 67% of trading partnerships already draw up accounts to the tax year or to 31 March. However, one third of partnerships do not, and it’s suspected this includes many very large and long-established partnerships such as law firms, accountants, doctors, dentists, and some farming businesses.

Businesses with a 30 April year end will be particularly hit in the transitional year (2022/23) as they will have to report profits for the period from 1 May 2021 to 5 April 2023 in that year. There will be a transitional relief to spread the extra income falling in 2022/23 over five years to 2026/27, but that could push people into higher tax bands for those years (see examples in annex B).

Where the business has over-lap relief arising from when it started trading that over-lap relief will be off-set against profits in 2022/23.

Accounting periods

HMRC is not asking businesses to change their accounting date. Unincorporated businesses will still be able to draw up accounts to any accounting date that suits them. However, an apportionment of profit or loss from different periods of account would be needed to fit to the tax year.

Example

A partnership with an accounting period ending on 31 December would have to prepare the accounts for both 2025 and 2026 in order to file the partnership tax return for 2025/26. That tax return would need to be filed by 31 January 2027, giving the partnership just one month to either finalise the profit figures for 2026 or provide estimates for the tax return.

In practice businesses will tend to change their accounting period to align with the tax year.

Implications for accountants

According to the draft MTD ITSA regulations, the quarterly updates will have to be submitted within one month after the end of that quarterly period. Regulation 11 allows the business to submit a quarterly update early, up to 10 days in advance of the end of the quarter. So there will be an approximate 40 day window to submit the quarterly figures.

The first quarterly period for a business must start on the digital start date that applies to that business (regulation 9). As all unincorporated businesses will now have a digital start date as 6 April 2023, all businesses will be reporting under MTD to the same quarters.

This will create a significant bunching of workload for accountants who deal predominately with unincorporated businesses, in order to meet the quarterly filing deadlines on 5 May, 5 August, 5 November and 5 February, plus of course 31 January.

Businesses might also wish to change their VAT stagger group to fit with the calendar quarters for income tax and their accounting period. Accountants may discourage this in order to spread their workload.

Have your say

The government is determined to make this change. The HMRC consultation on basis period reform only asks for suggestions of how this can be done, what the costs will be for businesses, and if there are any knock-on effects for other tax rules that need to be changed.

You can respond to the consultation by email to: businessprofits.admin@hmrc.gov.uk. The consultation closes on 31 August 2021.

Budget 2021: 3 year loss carry back extension for companies

A range of new grants and loans are being made available for companies as we start to emerge from the disruption of Covid-19. These are complemented by a newly extended 3 year period during which trading losses can be carried back for tax relief purposes. This article explains how this extension works and offers considerations to mitigate the forthcoming corporation tax increase. Note slightly different rules apply to the loss carry back extension for unincorporated businesses.

Understanding the extended loss carry back rules for companies

If a company makes losses in an accounting year, it is able to either carry those losses forward to offset against future trading profits or carry the losses back to offset against profits made in the previous accounting year, thus obtaining a repayment of corporation tax suffered in that year. Company directors will generally choose the ‘carry-back’ option because it provides a cash injection to a currently loss-making company.

A temporary extension was announced in Budget 2021 to the period for which a trading loss can be carried back – for accounting periods ending between 1 April 2020 and 31 March 2022, this carry back period is extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.

This extension is said to acknowledge existing and continuing trading difficulties and provide companies with an opportunity to receive a cash injection by way of a refund of corporation tax paid in previously profitable years.

Rules for incorporated businesses utilising extended loss carry back

The amount of trading losses that can be carried back to the preceding year remains unlimited as before.

The extended loss carry back is available for all companies and groups carrying on trades, professions or vocations.

Where the extended loss relief facility is utilised, the maximum amount that can be carried back each year for each relevant accounting period in which a loss is made is £2,000,000. This £2,000,000 limit applies separately to the unused losses of each 12 month period within the duration of the extension with groups of companies having a group cap of this amount.

Example

The Black Sheep Inn Ltd makes a loss in the year to 31 December 2020 but has previously been profitable. Normally the loss could only be carried back to offset against profits made during the year ended 31 December 2019.

Under the new rules, once 2019 profits have been fully offset, up to £2m of such losses can be carried back against profits arising in the years ended 31 December 2018 and, if necessary, 2017.

The extended tax relief available must always be offset against profits from the most recent years first. For example, a loss from 2020 is to be carried back to 2019 before 2018, and then to 2018 before 2017.

Claims must be made within two years of the end of the accounting period in which the loss being carried back arises.

All claims must be made in a corporation tax return however if the claim is £200,000 or lower, it can be submitted before the tax return is due.

Implications for mitigating the corporation tax increase

Also announced in the budget, corporation tax for all companies with profits in excess of £50,000 will increase to 25% from 1 April 2023. The existing rate of 19% will continue to apply to all small companies and a tapered rate will apply to those companies with profits between £50,000 and £250,000. The legislation to ratify this will be in the Finance Bill 2021.

Companies who may be impacted by the new 25% rate and who wish to utilise the extended loss carry back opportunity should evaluate the respective benefits of either claiming a tax refund now through relieving earlier year profits at a rate of 19% or carrying forward losses into the new regime where they may be offset at 25%.  Often company directors prefer to claim a refund of corporation tax already paid rather than wait for an offset against future corporation tax liabilities. However it will be worth bearing in mind the difference in rates before making a final decision.

SEISS: When and how to notify tax return amendments

HMRC has now provided more details on which amendments need to be reported and how to do this.

For the fourth SEISS grant (SEISS 4) HMRC worked out both eligibility and the amount of grant based on submitted tax returns, and any amendments made to those returns, which were received by 2 March 2021.

If an amendment is made on or after 3 March 2021 to tax returns for any of tax years 2016/17 to 2019/20, the taxpayer must consider whether that amendment has an impact on the amount of the SEISS 4 grant they should have received:

  • If, once the amendment is taken into account, the taxpayer would no longer be eligible for the grant, they will need to pay it back in full.
  • If the amendment means the taxpayer would have received a lower grant, the taxpayer will need to repay the excess.

In both cases, the taxpayer needs to notify HMRC to make arrangements for payment.

Unfortunately, this treatment of amendments is very much a one-way street – whilst taxpayers need to tell HMRC if an amendment would mean the taxpayer should receive no, or a lower, grant, there is no scope to claim a higher SEISS grant as a result of an amendment submitted on or after 3 March 2021.

For the purposes of the SEISS 4 Direction, an ‘amendment to a tax return’ has a fairly wide definition. HMRC says that anything which has the effect of modifying a person’s tax return is a relevant amendment for SEISS purposes.

This means that a requirement to notify and repay can arise where the taxpayer or HMRC amends the tax return. HMRC amendments include those made following a tax enquiry, or corrections of returns made under s9ZB TMA 1970.

By contrast, HMRC have confirmed that where a person’s tax position is instead amended via contract settlements, revenue assessment, raising a charge etc. (such that their tax return is not modified) there won’t be an impact on their SEISS grant.

Which amendments need to be notified to HMRC?

Only SEISS 4 and SEISS 5 grants are affected. There is no requirement to pay back any amounts of grant received under earlier rounds of SEISS, where the rules any tax return amendment made after 26 March 2020 is effectively ignored.

In addition, only certain amendments made to tax returns on or after 3 March 2021 need to be notified to HMRC. You need to check what the impact of that amendment on the SEISS grant will be.

No notification or repayment of the SEISS-4 is needed if:

  • the excess SEISS  grant to be repaid is £100 or less; or
  • the initial amount of the SEISS 4 grant received was £100 or less.

We understand that similar rules will apply for the upcoming fifth SEISS grant (SEISS 5), though that is yet to be confirmed.

Where a taxpayer is genuinely unsure as to whether the amendment needs to be notified, they can fill out the online notification anyway and HMRC will confirm the position.

How to notify

There is a special online form for notifying amendments accessed from this guidance page: telling HMRC and paying back SEISS grants.

This guidance contains links to two separate notification systems, one for telling HMRC about amended returns, and the other for telling HMRC about grants claimed where the taxpayer was ineligible or for making voluntary repayments. In order to ensure that the notification is processed correctly, taxpayers need to ensure they pick the correct link.

No agents allowed

As the notification form is behind the government gateway log-in it must be completed by the taxpayer themselves, and cannot be completed by their tax agent. However, the form is fairly simple. It only requires information such as the grant claim reference(s) and the years for which amendments have been submitted. There is no need to calculate the amount of repayment or provide any figures from the amended return.

After the form has been completed, HMRC will send the taxpayer a letter confirming the amount of SEISS grant that needs to be repaid and how to pay it back.

If a taxpayer files paper returns, then the same rules on notifying amendments apply. However, where they would struggle with using the online notification form, they can call the SEISS helpline for assistance.

Notification deadlines

The deadline for notifying HMRC of an amendment depends upon when that amendment was made:

  • If a return has been amended before claiming a grant, HMRC must be notified within 90 days of receiving the grant.
  • If a return has been amended after receiving a grant, HMRC must be notified within 90 days of making the amendment.

If HMRC is not notified, it will write to the taxpayer and look to raise an assessment. Penalties and interest may also apply.

Penalty position

More information on the potential penalties for not notifying an amendment can be found in HMRC’s factsheet CC/FS47. Whilst the position is not entirely clear, this indicates that penalties could be up to 100% of the amount the taxpayer should have paid back where they knew they were not entitled to it.

However, if the taxpayer genuinely didn’t know they had an amount to repay, HMRC will only charge a penalty if they the grant amount has not been repaid by 31 January 2023.

What to do now

There are concerns that the requirement to notify could slip the minds of busy taxpayers. There is no time limit beyond which tax return amendments no longer need to be considered. Changes to returns made some time after claiming a SEISS 4 grant could require a recalculation.

As a tax agent you should ask about SEISS grants whenever you amend a tax return on behalf of a client. Although you may not be able to make the notification on their behalf, clients may need support in working out whether they need to notify and the practicalities of doing so.

Where a taxpayer concludes they don’t need to repay any SEISS grant, perhaps because the impact on their grant would be below £100, it is advisable to keep a record of how they reached that conclusion should HMRC ever come knocking.

VAT: IOSS isn’t that simple for small parcels

The Import One Stop Shop (IOSS) aims to simplify cross-border VAT for consumers. The scheme goes live on 1 July 2021, but already some GB based taxpayers are finding some unexpected complications.

The import one stop shop is an EU wide scheme; the aim is to simplify the movement of goods not exceeding €150 (£135) to consumers (B2C). Without IOSS, non-EU sellers who ship goods into the EU will see the consumer incur import VAT which the consumer must pay to receive their goods.

To improve the customer’s experience, the seller can register for IOSS, then the seller charges VAT to the EU consumer, using the EU consumers local VAT rate. The goods are then shipped clearly showing that VAT has been charged and are delivered with nothing else for the consumer to pay.  The seller submits an IOSS return and pays over the various VAT amounts they have collected from their EU customers at point of sale.

Registration

An EU based business can register for IOSS with their local tax authority. For businesses based outside of the EU, such as in Great Britain (GB), the received wisdom has been to register for IOSS in Republic of Ireland, mainly because of the use of the English language.

The Republic of Ireland recently published its IOSS guidance and the surprise is that a non-EU business cannot directly register for IOSS, registration can only take place via an intermediary.

IOSS guidance

If a non-EU established supplier wishes to register for the IOSS, they can only do so directly if they are established in a country that the EU has a VAT mutual assistance agreement in place with and the goods are supplied from that country to the EU. In those cases, the supplier can register directly in the Member State of their choosing.In all other cases, a non-EU established supplier must register for the IOSS indirectly through the appointment of an intermediary. The registration of the supplier will be done through the intermediary they have appointed to represent them, and the Member State of registration will be the Member State where the intermediary has established their business.

IOSS guidance

The wording suggests that there are two conditions for directly registering for IOSS:

  • there is a VAT mutual assistance agreement in place; and
  • the goods are originating from GB.

The reference to VAT mutual assistance agreement is unclear. The EU law does not require a fiscal representative or intermediary for companies not established in the EU but where there is a mutual assistance agreement in place.

What do EU member states say?

The EU/UK Trade Agreement does include a tax and VAT mutual assistance agreement, but experience so far indicates confusion between EU member states on its application.

Some countries like France have accepted there is mutual agreement and fiscal representatives are not required, but Portugal has stated the opposite, not recognising the mutual agreement. The Republic of Ireland is saying it does not recognise the mutual assistance agreement, at this stage, and so an intermediary is required. Other EU member states are still to decide.

Alternative strategy

The trader could consider setting up a legal entity in Ireland. Perhaps it could attempt to register for VAT in France, or engage a French accountant to do the registration, but leave the filing of returns to the business. There is inevitably a cost to registering for IOSS, as even without the intermediary requirement, it would be wise to seek professional assistance to ensure registration and returns are submitted correctly.

Whilst the uncertainty on legal interpretation will resolve itself in time, if you are a business contemplating using IOSS, then do not wait until July. The window for applications is now open and the time is now to start this journey.

Northern Ireland

HMRC has stated that it aims to open registrations for One Stop Shop (OSS) for Northern Ireland based traders, who are treated as being still within the EU for certain VAT purposes. This suggests there is a mutual assistance agreement in place, even if some member states don’t agree.

An HMRC spokesperson said: “The Import One Stop Shop scheme (IOSS) is an EU system, with use and access governed by EU law. IOSS is an optional system for businesses to use, and where a business opts to use IOSS they will need to follow the EU guidance. Businesses that choose not to opt for IOSS will still be able to continue to export goods to the EU, with any import VAT due continuing to be collected from the recipient.”

HMRC to abolish repayment supplement for 0.5% interest payment

HMRC will pay 0.5% annual interest on delayed VAT claims from April 2022. But the end of the repayment supplement scheme will be a bigger loss.

Most advisers are aware that if HMRC delays repaying a VAT return claim by more than 30 days (plus additional days to give it a reasonable length of time to make enquiries) it will pay a repayment supplement equal to 5% of the repayment amount or £50, whichever is greater.

There is no supplement paid, however, if the claim is significantly adjusted because of errors made on the return. The government’s intention is that the repayment supplement scheme will be scrapped for VAT periods beginning on or after 1 April 2022. But that is not the end of the story.

Interest concession

A recent amendment to Finance Bill 2021 (Amendment 19) means that HMRC will pay interest if it delays a repayment VAT return to check the figures – effective for periods beginning on or after 1 April 2022.

This is great news, you might think, but what is the bottom-line benefit to a business? And is this a fair trade-in for the loss of the repayment supplement scheme?

Widgets Ltd has purchased a big piece of equipment and submitted a repayment VAT return for £100,000 mainly due to input tax claimed on the equipment.

The return was submitted on time but due to inefficient delays caused by the HMRC reviewing officer, it was not repaid for four months. With the repayment supplement regime, the company will currently get £5,000 (£100,000 x 5%) but only £125 interest after April 2022.

The annual interest rate paid by HMRC under the new regime will be 0.5%, assuming the existing rate is unchanged. (£100,000 x 0.5% x 3months/12months).

Interest on errors

So, to move the story forward, what would be the situation if the directors of Widgets Ltd forgot to claim input tax on the new equipment, and spotted the error 12 months later when preparing year-end accounts?

A voluntary disclosure will be submitted to HMRC to correct the error but it will not benefit from any interest payment from HMRC at the moment, even though the taxpayer has supported the government’s working capital for a year.

But that will change from April 2022 as part of the government’s ‘interest harmonisation’ strategy, bringing VAT into line with other taxes. But the annual rate will still be 0.5%.

Official error

The only other time that HMRC will currently pay interest to a business is if a claim or refund has been delayed due to official error on the part of HMRC (s78, VATA1994).

For example, if an officer ruled in writing that ‘product X’ sold by a particular business was standard rated, and it was later found to be zero-rated, leading to a large VAT refund to the taxpayer, then HMRC would pay interest. This will be simple rather than compound interest.

Commercial restitution

The legislation aims to give ‘commercial restitution’ to a business that has suffered a delay getting its VAT refund.

A useful definition of ‘commercial restitution’ in the HMRC VAT manual VSIM1000: “compensation to the party deprived of the use of the money it is owed.”

It’s not clear this is achieved if a business has to pay 7% annual interest on a bank overdraft while waiting for a VAT refund – only getting 0.5% interest back from HMRC!

Conclusion

The proposed abolition of the repayment supplement scheme next year will be a big blow to taxpayers who suffer from unnecessary HMRC delays.

As well as the financial cost of a delayed VAT repayment, which an interest refund is designed to compensate, there are many other costs incurred by a business chasing a repayment, as we all know: professional fees, the cost of time delays waiting for HMRC to answer the phone, telephone bills etc.

HMRC officers have a bigger incentive to get cracking with an enquiry if a big 5% repayment supplement will be paid from the treasury coffers (a black mark against the officer), compared to a miserly 0.5% interest.