Tax e-News June/July 2021

HMRC are urging businesses to look out for the use of mini-umbrella companies (MUCs) to pay contractors supplying their labour via agencies and other intermediaries. Businesses need to be aware of the financial and reputational risks of such entities in their labour supply chain and carry out due diligence to minimise those risks.

You may have heard a BBC File on Four radio programme that highlighted the abuse of the £4,000 employment allowance by 48,000 companies set up to take advantage of the allowance to save employers national insurance. Such structures are also being used to avoid VAT and are currently being marketed as a means of side-stepping the “off payroll” working rules.

HMRC have identified criminals creating a series of MUCs that appear unconnected and claiming the NIC employment allowance of £4,000 for each company. The company is then struck off after about 18 months allowing the criminals to potentially avoid paying thousands of pounds of employers’ NICs.

The risks to end user organisation include becoming liable for unpaid taxes and national insurance contributions including the overclaimed employment allowance.

The business may also be denied the right to claim input tax if the trader should have known their transactions were connected with VAT fraud.

They may also be penalised for criminal offences relating to national minimum wage and national living wage. The business may also face fines for failure to prevent the criminal facilitation of tax evasion.

Please contact us if you would like us to assist you in carrying out due diligence into your labour supply chain to minimise these risks.

P11d forms reporting benefits in kind provided to employees and directors need to be submitted to HMRC by 6 July. Where a company car is “unavailable” for private use for 30 or more consecutive days the benefit is proportionately reduced.

During the various lockdown periods many employees and directors have not been using their company cars and it may have been sitting on their driveway. Unfortunately, that does not count as being unavailable.

HMRC have confirmed that they would continue to regard the car as available to the employee unless the keys or fobs are returned to the employer or to a third party such as the leasing or disposal company as instructed by the employer.

Note that where the employee is provided with a motor car with zero CO2 emissions there is no taxable benefit in kind for 2020/21 although the charge increases to 1% of original list price for 2021/22.

Another consequence of the lockdown periods is that employees may have driven fewer private miles in their company cars, particularly where they have not been driving to the office.

If they are to avoid being taxed on the provision of private fuel they need to fully reimburse their employer for the cost of private fuel by 6 July 2021 for the 2020/21 tax year.

Note that the CO2 emissions percentage for the car is multiplied by the £24,500 notional list price used to calculate the benefit. For example, a director driving a Mercedes Benz E200 saloon company car (CO2 emissions 169g per km) would be assessed on 37% = £9065 for 2020/21. If they are a higher rate taxpayer then that means £3,626 tax. That would be an awful lot of private fuel!

In addition to the tax payable by the director on the provision of private fuel there would be £1,251 Class 1A national insurance contributions payable by the employer. Note that the private fuel benefit is an all or nothing benefit. There must be full reimbursement by 6 July to eliminate the benefit. The simplest method would be to multiply private miles by the HMRC advisory fuel rate for the vehicle -see below.

These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 June 2021. Where there has been a change the previous rate is shown in brackets.

Note that for hybrid cars you must use the petrol or diesel rate. You can continue to use the previous rates for up to 1 month from the date the new rates apply.

Despite the coronavirus lockdowns HMRC still expect P11d forms reporting expenses and benefits to be submitted by the normal 6 July deadline.

Remember that reimbursed expenses no longer need to be reported where they are incurred wholly, exclusively and necessarily in the performance of the employee’s duties. Dispensations from reporting are no longer required, although HMRC would expect internal controls to be in place. Note also that trivial benefits of no more than £50 provided to employees need not be reported. This typically covers gifts to employees at Christmas and on their birthdays.

A recent case before the tax tribunal has confirmed that all of a company’s shares are ordinary shares except those that carry a fixed rate of return.

This is crucial as CGT business asset disposal (BAD) relief requires a shareholder to be entitled to at least 5% of a company’s ordinary share capital in addition to being an officer or employee of the company, and for the company to be a trading company or the holding company of a trading group.

These conditions need to be satisfied throughout the 24 months prior to the disposal of the shares. This two-year rule is important if you are considering transferring some of your shares to other family members now that only the first £1 million qualifies for CGT BADR.

There are a number of further conditions that need to be satisfied by the shareholding in addition to the 5% ordinary share capital test. The shareholder must have 5% or more voting control and be entitled to 5% or more of the company’s distributable profits, and of its assets should be company be wound up. Those final two conditions do not need to be satisfied where the shareholder would be entitled to receive at least 5% of the proceeds on the hypothetical sale of the whole company.

This tends to be a problem area where a company has a number of different classes of shares.

If that is the case please contact us so that we can check the eligibility of different shareholders.

For the month of July the CJRS Furlough grant support from the government via HMRC reduces to 70% of the employee’s usual pay for hours not worked. This is despite the fact that “Freedom Day” in England has been delayed four weeks to 19 July 2021, and now called “Terminus Day”. The government support to employers will then reduce to 60% in August and September.

The numerous changes in the method of calculating CJRS furlough grants will no doubt have resulted in errors by some employers.

Remember that you are required to tell HMRC about overclaimed CJRS grants as part of your next claim. You will be asked when making your claim whether you need to adjust the amount down to take account of a previous overclaim. Your new claim amount will be reduced to reflect this. You should keep a record of this adjustment for 6 years.

You should also be aware that HMRC may levy a penalty even if the error is careless or due to a misinterpretation of the rules.

You might therefore like us to check any previous claims that you have made. If you have made an error that has resulted in an underclaimed amount, you should contact HMRC to amend your claim. As you are increasing the amount of your claim HMRC will need to conduct additional checks.

The fifth (and final) SEISS grant will be available for the self-employed to claim towards the end of July.

The eligibility criteria remain broadly the same as the fourth grant. Self-employed profits in 2019/20 must not exceed £50,000 and must be more than 50% of your total income. If that test is not met, then the same £50,000 and 50% tests are applied to average profits and total income over the four fiscal years to 2019/20.

Self-employed traders need not have claimed grants under the previous scheme to qualify for the July payment and will be required to confirm that their business continues to be adversely affected by Covid-19. The amount that traders will be able to claim will depend on how much their turnover has reduced by. If the reduction is more than 30% the grant will be 80% of average profits capped at £7,500 but if less than 30% only 30% of average profits, capped at £2,850.

We are still waiting for more details from HMRC on the basis for the turnover comparison.

As you are probably aware tax agents were not able to claim SEISS grants on their client’s behalf, and we do not currently have access to the amounts you have claimed.

If you are self-employed and have received any SEISS grants in 2020/21 can you please let us have details of the amounts received so that we can include the correct amounts in your return. The amounts received are taxable.

If you have children under 12 who attend a nursery, after school club, playscheme, childminder or you are considering sending them to a summer camp you should think about setting up a tax-free childcare account. The government adds 25% to the amounts that you save in the account up to £2,000 for each child so £8,000 is topped up to £10,000 (a higher amount applies for disabled children). The account is then used to pay Ofsted registered childcare providers.

Note that it doesn’t need to be the child’s parents paying into the account, uncles, aunts, grandparents and others can also make payments.

Note also that you are not eligible if you or your partner have adjusted net income in excess of £100,000 for the current tax year.

This scheme will gradually replace childcare vouchers which many employers continue to provide to employees. These are free from tax and national insurance (there are limits) and can be used to pay for childcare until the child is 16. Childcare voucher schemes can no longer be set up but employees already eligible can continue to benefit.

Pension contributions to approved pension funds on behalf of employees and directors continue to be a tax-free benefit provided the annual input limit is not breached. The contributions are also deductible for the employer provided they are incurred wholly and exclusively for the purposes of the trade and paid before the end of the accounting period of the business.

For most taxpayers the annual input limit is £40,000 and this overall limit applies to contributions by the employee plus contributions made by the employer on the employee’s behalf. It is also possible to take advantage of unused relief from the previous three fiscal years.

Payments into the pension fund by the employing business will be deductible against business profits. Currently this will only save 19% corporation tax but from 1 April 2023 will save 25% where profits exceed £250,000 and 26.5% where profits are between £50,000 and £250,000.

Note that these limits are divided by the number of associated companies, i.e. under common control.

Although the contribution on behalf of the employee or director may be tax-free they are generally not able to access the fund until age 55.

If you would like to discuss pensions further then please do not hesitate to contact us or Pacific Financial Planning.

HMRC are currently attacking a marketed tax avoidance scheme using unfunded pension arrangements to avoid Corporation Tax, Income Tax and National Insurance contributions.

HMRC strongly believes these arrangements do not work and will seek to challenge anyone promoting or using these arrangements and make sure the correct tax is paid.

Users of these arrangements may pay considerable fees to use them yet may still have to repay the tax claimed to be avoided, as well as interest and a penalty. Contact us if you are approached to use such a scheme.

1 July 2021 – Corporation tax payment for the year to 30 September 2020 (unless quarterly installments apply)

5 July 2021 – Last date for agreeing PAYE settlement agreements for 2020/21 employee benefits

5 July 2021 – Deadline for agents and tenants to submit returns of rent paid to non-resident landlords and tax deducted for 2020/21

6 July 2021 – Deadline for forms P11D and P11D(b) for 2020/21 tax year. Also, deadline for notifying HMRC of shares and options awarded to employees

19 July 2021 – PAYE & NIC deductions, and CIS return and tax, for month to 5 July 2021 (due 22 July if you pay electronically)

31 July 2021 – 50% payment on account of 2021/22 tax liability due

1 August 2021 – Corporation tax payment for the year to 31 October 2020 (unless quarterly installments apply)

19 August 2021 – PAYE & NIC deductions, and CIS return and tax, for month to 5 August 2021 (due 22 August if you pay electronically)