The 2020 budget was released on 11th March, as always, it was filled with many tax policies and changes to public spending.
We have tried out best to compile the most important parts of it onto 2 pages, highlighted in our PDF below
Tax
Your company needs an injection of money. The bank will charge a stiff interest rate even if it agrees to a loan. How might you be able to use your pension fund to provide cash and increase tax relief?
Off limits
As a rule, your pension fund is off limits until the scheme or government rules allow you to access it. Even then it isn’t allowed to give or lend money direct to your company. Loans are possible with some types of occupational pension scheme but not in any circumstances from your personal pension. However, indirect arrangements are OK.
Accessing and reinvesting
If you’re 55 (or younger if your scheme allows) you’re entitled to take a lump sum from your pension savings. Once in your hands it’s entirely up to you what you do with it, which means you can give or lend it to your company if you want. To repay you in a tax-efficient way it can pay into your pension fund rather than you direct.
Trap. Taking money from your pension and reinvesting it (even via your company) is called “pension recycling”. HMRC places limits on how much you can recycle and there are tough penalties for breaking these. But, provided you stay within the rules recycling can be worthwhile.
Example. Terry’s company, Acom Ltd, requires £20,000 for repairs to its premises. The bank will lend the money at an APR of 12%. The repayments would be £391 per month, that’s £28,152 in total. Acom can claim a tax deduction for the interest element, which will reduce the cost by £1,549, making the net repayments £26,603.
Instead, to pay for the repairs Terry could draw a tax-free lump sum of £20,000 from his pension fund. To ensure his pension fund is worth no less as a result, Acom must pay £321 per month into Terry’s fund. The total cost to Acom is £23,112 (£18,720 after 19% corporation tax relief). That’s a saving of almost £3,500 over a bank loan. It also produces some extra tax saving for Terry (see The next step ) and is more flexible.
Tip. If Acom can’t afford to pay the pension contributions (or make the loan repayments), but must have the new equipment, using Terry’s pension fund as the source of capital can still work. He could take the £20,000 pension tax-free lump sum and lend it to Acom and allow it to pay pension contributions into his fund as and when it can.
No loss of tax-free cash
If Acom doesn’t recompense Terry by paying into his pension it might seem that it rather than Terry has benefited from his tax-free lump sum entitlement, but actually that’s not the case.
Power tip. The money from Terry’s pension fund can be credited to his director’s loan account. This means that if and when it repays him there’s no tax or NI for Terry to pay. Or, if Acom doesn’t repay Terry and he eventually sells the company or winds it up instead, £20,000 of whatever he receives out of the arrangement won’t be taxable. Therefore, Terry won’t lose his tax-free lump sum, only delay the personal advantage from it.
While your personal pension fund can’t lend direct to your company, if you’re 55 or over you can take a tax-free lump sum and make a personal loan to it. It can repay the loan by making contributions to your pension fund on which it can claim a tax deduction. This can also increase your overall entitlement to tax-free cash.
The Chancellor has announced the date for the first post-Brexit Budget. What can we expect?
Announcement. Sajid Javid said “This will be the first Budget after leaving the EU. I will be setting out our plan to shape the economy for the future and triggering the start of our infrastructure revolution”.
What happens in the event of “no deal”? If Britain leaves the EU on 31 October without a deal, emergency measures will be announced but the full Budget will be delayed by a number of weeks.
What tax adjustments can we expect? The Chancellor is committed to increasing public spending and stimulating the economy, so tax changes are on the cards. Corporation tax rates are already set to reduce to 17% from April 2020. The Office of Tax Simplification published two reports on inheritance tax this year, at the request of the previous Chancellor, Phillip Hammond. The reports made some practical recommendations, such as bringing reliefs for businesses in line with capital gains tax reliefs and reducing the period for gifts to escape inheritance tax from seven years to five. However, at the Conservative party conference earlier this month, Sajid Javid expressed that he is against inheritance tax and said that changes are on his mind. This has led the press to speculate about radical changes to the inheritance tax system, such as scrapping the tax altogether.
HMRC’s deadline for reporting disguised remuneration involving loans was April 2019. However, the government has ordered a new review. How might this affect you and your business?
Loan charge recap. The aim of so-called loan schemes was to defer, possibly indefinitely, tax on earnings by lending money to workers rather than paying salary. Because loans are not income there was no tax (or NI) to pay. HMRC always considered that such arrangements didn’t work and persuaded the government to pass anti-avoidance rules in 2016 to ensure there was no escape. If you used a loan scheme to pay yourself or your workers you were required to report the details to HMRC and pay the corresponding tax and NI no later than 5 April 2019.
Doubts and questions. Despite the anti-avoidance rules and the April deadline, objections to the loan charge have continued. These have been so vigorous that in September 2019 the government announced an independent review to take place in November 2019 (see The next step ).
What next? Pending the outcome, if you’ve used a loan scheme here’s what you need to do:
- if you’ve declared the scheme and paid the tax and NI you don’t need to do anything. HMRC will contact you after the review.
Tip. If you’re paying the tax and NI by instalments continue with this arrangement, at least until the outcome of the review is known.
- if you’ve notified HMRC that you’ve been involved in a loan scheme but are yet to provide full details, you can defer doing so at least until after the review. Note. If you settled the tax and NI bill by 30 September HMRC will charge you less interest and penalties
- if you haven’t reported that you used a loan scheme you may need to do so depending on the outcome of the review. HMRC wants you to notify it now but in our view there’s little to be gained from this. Be prepared to act quickly in line with recommendations of the review.
You’re selling your business and as part of the deal you’ll stay on in a managerial role for three years. You’ll then be paid an additional sum based on the profits made over that period. How should you structure the payment to avoid tax traps?
Earn outs
If you sell a business in which you’ve played a key role it’s quite common for the buyer to want to keep you on board for at least for a short while. The buyer may partly link the amount they’ll pay for the business to its future performance to encourage your commitment. The wording of this type of type agreement, known as an earn out, requires careful drafting to avoid tax traps.
What are the proceeds of sale?
The capital gain or loss from the sale of an asset, say your business, is the difference between what it cost you and the proceeds you’ll receive. However, calculating the capital gains tax (CGT) position for an earn out is not as straightforward because the final proceeds aren’t known until after the earn out period. To work out the gain the amount payable at the later date must be estimated.
Example. In 2000 Ben started a business from scratch. In March 2019 he signed a contract to sell the business. He’ll stay with the business as an employed manager. Ben receives £500,000 on completion of the sale plus an amount equal to 25% of the average annual profits, to the extent they exceed a base figure, in the three years to 31 March 2022, but not to exceed £400,000.
Trap. In our example the terms of the contract have triggered a trap. Because it specifies a maximum there’s no need to estimate the future profits to work out the proceeds, instead the maximum is used. This means Ben’s gain will be worked out assuming he will receive £900,000. A trap also applies if a minimum is specified (see The next step ).
Tip 1. Where possible, avoid including a maximum or minimum figure in a contract in relation to earn out proceeds.
Tip 2. To the extent that any part of the proceeds are payable more than 18 months after the contract date, you can elect to pay any corresponding tax by instalments.
Capital gains or income tax
While tackling the CGT position of an earn out is tricky, there is a more fundamental trap to avoid when wording a contract.
Trap. If the value of the earn out amount is expressed or implied to depend on the individual’s performance during the earn out period, HMRC can argue that the additional payment is earnings rather than a capital payment. The risk is potentially high as the maximum CGT rate payable on an earn out is 20% whereas income tax is up to 45%. Further, if the earn out is taxed as employment income it will be liable to Class 1 NI employers’ and employees’ contributions.
Tip. Make sure the contract doesn’t indicate in any way that the earn out payment relates to the seller’s future role in the business. Make it clear that it relates only to the value of the business being sold/bought.
The first big test for Making Tax Digital for VAT (MTDfV) is history. There was a fairly high failure rate but not as bad as originally feared. What lessons were learned and how might they help you overcome future MTDfV problems?
First test for businesses and MTD
The deadline for the first mandatory filing of quarterly VAT returns using HMRC’s Making Tax Digital for VAT (MTDfV) service was 7 August 2019. It applied to businesses in the so-called “stagger one group”, that’s those whose VAT quarter ended on 30 June 2019. Two hurdles needed to be cleared to comply with MTDfV: registration and using software compatible with HMRC’s new system to submit the VAT figures.
How did businesses fair?
HMRC’s statistics show that only 76% of businesses registered for MTDfV in time. This meant that at least 24% stood no chance of meeting the 7 August deadline. There were over 60,000 VAT filings per day and over 900,000 VAT returns were filed by the 7 August deadline. As this figure included businesses which file their figures monthly we don’t know, or HMRC isn’t saying, how many of the 76% that registered on time also managed to submit their figures before the deadline. HMRC acknowledged that many businesses experienced issues with the registration and filing processes.
Registration issues
Some businesses overlooked the tighter registration window because they paid their VAT bill by direct debit. This is something to remember if you still need to register for MDTfV, especially businesses whose last VAT quarter ended on 31 August. Another issue was that some businesses weren’t sure if they had successfully registered. This was because HMRC was slow in sending confirmatory e-mails. These were supposed to arrive within 72 hours. Tip. HMRC’s advice is that if confirmation of registration doesn’t arrive when expected don’t attempt registration again. Also, don’t try filing your VAT return until confirmation does arrive as HMRC’s system won’t recognise your details.
No filing confirmation
Don’t expect an e-mail from HMRC to say your VAT return has been received. It’s not sending any. This change from the old system caused considerable concern for some businesses and accountants. The good news is that some software will let you know when your VAT return is accepted. Tip. If you haven’t bought MTDfV software yet, confirmation of submission of your VAT figures is worth looking for when you do. Lack of confirmation could spell problems down the line if you need to prove to HMRC that you genuinely thought you had filed your VAT figures on time.
Other problems
Another bugbear is that HMRC’s system doesn’t make clear if the cause of any filing problems is at its end or yours. For example, before starting the transfer of VAT data your software “shakes hands” with HMRC’s computer and sets up the obligation to file. In August this didn’t always go smoothly which left businesses not knowing how to proceed. Tip. Use HMRC’s service availability and MTD error codes to identify where the problem is (see The next step ).
HMRC’s guidance on the new IR35 regime for the private sector is light on information for contractors. If you’re a contractor personally providing services, what steps should you take before the new regime applies?
New guidance. HMRC has published new guidance regarding the major changes to the IR35 regime for private sector contracts which take effect on 6 April 2020 (see The next step ). Unfortunately, it doesn’t clearly explain what will happen on 6 April if you’re the one providing services personally through your limited company, an agency, etc.
Understanding the guidance. HMRC’s guidance refers to you as a “worker” if you’re the person actually doing the job. Your company, partnership or other organisation that bills for the work you do is an “intermediary” and the business etc. you’re working for is the “client”. From 6 April clients must decide if the new regime applies to them. If it does they must review the terms and conditions on which you provide your services and decide whether, if you worked direct rather than through your company, you would be an employee instead of a freelance contractor.
Employee status. If the client decides you would be an employee it will deduct tax and NI for all future payments it makes to the intermediary, e.g. your company. While it must inform you of its decision to do this, it doesn’t have to until it pays you. This means the first you might know about it is when you are paid less than your company billed.
Tip. For current and new contracts that will run until 6 April 2020 or later, ask the client to carry out a review well before that date. HMRC has a “check employment status for tax” (CEST) online tool (see The next step ). However, it’s being overhauled as the current version can produce the wrong answer. You can challenge the client’s assessment. It then has 45 days to explain how it arrived at its decision. This will give you an opportunity to persuade HMRC that it’s wrong (see The next step ).
What is the reverse VAT charge?
The reverse charge is a transformation to the way VAT is collected within the building and construction industry. Once implemented, the end customer receiving services from a contractor (or a chain of contractors) will have to pay the VAT due directly to HMRC instead of their supplier. Affected businesses will need to check whether they are responsible for the VAT payment on each individual transaction, update accounting systems and consider the impact on cash flow. The new scheme aims to tackle VAT fraud within the industry.
Why has it been delayed by twelve months?
Industry representatives requested a delay amid concerns that most businesses were not aware of or prepared for the reverse charge, which would lead to confusion and disputes. As a result, HMRC has changed the start date to 1 October 2020 to give businesses more time to prepare and avoid radical changes coinciding with Brexit.
How does this affect businesses now?
HMRC recognises that some businesses will have already changed their invoices in anticipation of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC will take the change in start date into account.
HMRC guidance on the reverse VAT charge can be found here https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services.
HMRC has recently published new guidance on the structures and buildings allowance (SBA) following changes to the rules. This includes important information about how to claim it. What’s involved?
SBA recap. The 2018 Budget announced that businesses would be entitled to a new tax relief – the structures and buildings allowance (SBA) – where they spent money on or after 29 October 2018 on buying or improving their business premises. However, there was uncertainty over certain aspects, including how to claim it. The good news is that the wrinkles have been ironed out and HMRC has published new guidance (see The next step ).
How much tax relief? One thing that hasn’t changed from the original proposal is the amount of deduction your business can claim, which is 2% per year of the costs you incur. In its latest guidance HMRC has set out the requirements for claiming it.
Making a claim. Like other types of capital expenditure, e.g. the cost of machinery, the SBA must be claimed in the capital allowances section of your tax return or, if you run your business though a company, its return. Tip. If you have already submitted a tax return for the period in which you incurred costs which qualify for the SBA, you can make an amendment within the time allowed (see The next step ).
Record keeping requirement. As part of the SBA claim process you create an allowance statement (see The next step ). Although it doesn’t need to be provided to HMRC unless requested, it must include: (1) details that identify the structure, e.g. address and description; (2) the date of the written contract for construction; (3) the expenditure qualifying for the SBA; and (4) the date that you started using the structure for your business. The statement is important because the claim period is up to 50 years and if ownership changes the buyer can only claim the SBA if they have a copy of the statement.
August deadline. Businesses required to be registered which had a VAT quarter ended on 30 June 2019 should have submitted their figures to HMRC by 7 August using software compatible with Making Tax Digital (MTD). HMRC says that around 120,000 businesses didn’t comply risking a fine of up to £400.
No penalty. The good news is that HMRC doesn’t intend to fine those not using MTD when they should. An HMRC representative commented that in the short term “Our ambition is to help businesses moving to MTD to get it right, not to penalise them.” Therefore, initially HMRC will send letters to businesses which didn’t follow the MTD rules.
Tip. If you receive a letter related to the August deadline, don’t bury your head in the sand. If you don’t have the right software to tackle MTD, speak to an accountant for advice or to HMRC. The same goes if you’re required to submit your first MTD return by 7 September.