Reminder: Tax Changes from April 2020
1. Making Tax Digital for VAT (MTDfV)
We start with that old favourite, Making Tax Digital (or difficult!) for VAT. We covered MTDfV in previous blog posts when it became compulsory from 1 April 2019. However, we wanted to remind businesses, particularly SMEs, that from your first VAT quarter beginning on or after 1 April 2020, the HMRC’s so-called ‘soft approach’ to filing VAT returns under MTDfV will cease. After this date, HMRC will level penalties for VAT records not kept digitally by VAT registered businesses.
HMRC will be looking for evidence in the form of a digital trail to your VAT return from your accounting software or accounting support spreadsheet (i.e. in the form of linked cells). Good old ‘cut and paste’ of accounting records will no longer be accepted by HMRC as digital records.
HaesCooper advises that you ensure your business has computerised accounting software that deals with MTDfV. The cost of such a system will prove to be well worth the money as compared to the time and hassle of dealing with the HMRC hell bent on issuing financial penalties to non-compliant VAT businesses.
2. Employment Allowance
Employment allowance is another subject we have covered in previous blog posts, but again, we wanted to remind you that as from 6 April 2020, the employment allowance (worth up to £3,000) will be restricted to employers with a Class 1 Secondary NIC liability (i.e., only the employer’s Class 1 NIC liability) below £100,00 for the tax year preceding the tax year for which the Employment Allowance is claimed.
The Employment Allowance is not granted automatically, and, as from 6 April 2020, it has to be claimed ‘every tax year.’ Previously it had been necessary to make just a ‘once and for all’ claim to HMRC.
We recommend you refer to the HMRC website for guidance as to whether your business is eligible for Employment Allowance, and if so, how to make an Employment Allowance claim. This can usually be done via a payroll software, by ticking the Employment Allowance ‘yes’ indicator when filing to HMRC the employment payment. Alternatively, don’t hesitate to contact us for payroll support services.
3. Tax Trap on UK Property Sales
Another topic we have mentioned in previous blog posts is Capital Gains Tax (CGT) and that rules for the disposals of UK properties have been changed and are due to change again from 6 April 2020.
The new rules mean that the CGT on the disposals of properties needs to be filed and paid to the HMRC within 30 days of the sale completion date, a lot earlier than the current CGT filing and payment rules!
However, there is a ‘tax trap’ relating to the differing CT rates. For residential property, the CGT rates are 18% (for the gains falling within the unused amount of the basic income threshold of £50k) and 28% (for the gains above the unused basic rate income threshold). For non-residential property, the comparable CGT rates are 10% and 18%.
The CGT higher rate tax trap can be sprung if you dispose of land adjoining your residential property, which is classed by HMRC as ‘being land that has at any time during the period of your ownership consisted of or included a dwelling.’ The CGT higher rate (maximum 28%) tax trap applies if the land has been used as the dwelling’s garden or to access the dwelling – even if the land is disposed of separately to the dwelling.
HMRC is active on this matter. They look for the sales of standalone land, adjoining the property dwelling owned by the taxpayer where the dwelling is let. If the evidence is that the sold land has been used at any time during the ownership period, as the let dwelling’s garden or access land, then any gain from the sale of the land will be taxed at the higher CGT rates of 18% and 28% for residential property, rather than the lower rates for non-residential properties.
If you have land adjoining a let dwelling that you bought after the CGT rules governing the different rates, introduced from 6 April 2016 – then ensure the land is seen to be not used as the let dwelling’s garden or access land by fencing off the land in question.
If you own a dwelling, and it’s your principal private residence (PPR & CGT exempt), and you have land adjoining the PPR dwelling and have no plans to sell this separately – make sure you have evidence (pictorial evidence) that there is no fencing separating this land. This will show that the land is used as a garden or access land to the PPR dwelling, so PPR CGT exemptions apply.
There are, of course, limits to the size of the adjoining land to a PPR dwelling that qualifies for CGT exemption. The land area adjoining the PPR dwelling area that qualifies for CGT exemption must be no larger than 5,000 meters squared (just over an acre) – and must include all the area of the PPR dwelling and buildings.
However, sometimes a larger land area can still qualify for the PPR CGT exemption, provided HMRC is satisfied that the adjoining land is used as a garden or access land to the PPR dwelling for the ‘reasonable enjoyment’ of the PPR dwelling.
If you’re considering selling the dwelling adjoining land, contact us. We are able to provide professional advice to your likely CGT position.
4. Tax Changes for Foreign Companies Who Own UK Properties
This is a ‘heads up’ to companies who are non-resident for UK tax purposes, but own UK property – directly or via a transparent collective investment vehicle and receive a rental income.
Currently, for non-resident corporate landlords (NRL), the UK properties’ rental income and related expenses should be returned to the HMRC for UK income tax purposes, unless the NRL is operating via a permanent establishment in the UK, in which case UK corporation tax already applies.
The change from 6 April 2020 is that all corporate NRLs are to be taxed in the UK, under UK corporation tax rules, so as to equalise the UK tax treatment with UK resident corporate landlords. If the NRL’s annual accounting reference date is not the 5 April, then the corporation tax will apply to the period from 6 April 2020 to the relevant accounting reference date (a straddling accounting period with Income Tax to 5 April 2020 and Corporation Tax for the period from 6 April 2020).
Losses as of 5 April 2020 under the UK income tax regime are ‘grandfathered’ and, therefore, can be brought forward and offset against future UK rental profits, taxable under UK Corporation Tax rules. Losses as of 5 April 2020 cannot be relieved against the NRL’s other income or made available for group relief, where the NRL is a member of a UK group of companies.
Rental income losses arising from 6 April 2020 can be carried forward, but under UK Corporation Tax rules, there are restrictions if the losses exceed £5m.These loss restriction rules do not currently apply for UK Income Tax. Losses from 6 April 2020 can also be relieved under the group relief provisions provided the UK Group conditions apply.
The other area that is different under UK Corporation Tax as compared to UK Income Tax is in the form of what financing costs are allowable for tax relief. From 6 April 2020, the corporate NRL’s finance costs and interest will no longer obtain tax relief as an expense against the rental income. In its place, the corporate interest restrictions rules (CIR) will be applied.
The CIR rules are complex and will need to be considered even if at the ‘end of the day’ the finance and interest costs do not need to be restricted. Basically, the CIR restricts the Corporation Tax relief for the annual finance and interest costs of above the current de minis level of £2m to a percentage of the corporate NRL’s taxable profit.
Also, there will be provisions ensuring that the transition from Income Tax to Corporation Tax rules will not give rise to disposal for capital allowances, namely the tax written down values as at 5 April 2020 will be carried over into the Corporation Tax regime.
‘All in all,’ the main concerns for the corporate NRL are to ensure that they understand what needs to be done before 6 April 2020 which is primarily the review of their administrative procedures to ensure that they are able to deal with the new UK Corporation Tax rules.
The main administration that needs to be reviewed and completed by 5 April 2020 includes those issues as listed below.
- Corporate NRLs affected by the change will need to register for UK Corporation Tax with HMRC. Corporate NRLs already registered with HMRC for UK Income Tax should make contact with HMRC although HMRC has stated their intention to issue new UTRs to all corporate NRLs on their records prior to the April 2020 deadline.
- If the corporate NRL’s annual finance & interest costs exceed £2m-seek professional advice as to the UK Corporation Tax relief position.
- The corporate NRL should review its financial forecasts as if losses are forecasted; then, professional advice should be obtained as to the UK Corporation Tax relief available for UK rental property losses.
- Corporate NRLs will need to complete a UK Income Tax Return as normal and file it to HMRC to report UK rental income profit for the period to 5 April 2020. This will be followed by a Corporation Tax Return to be filed to HMRC to report the UK rental income profit for the period commencing 6 April 2020 and for subsequent annual accounting periods.
- There are also complex UK Corporation Tax rules for corporate NRLs that have entered into financing arrangements involving derivative contract and hedge financing, if these circumstances apply then again; the corporate NRL should seek professional advice in order to understand their UK Corporation Tax position.
We are able to assist corporate NRLs in managing the complex new UK tax proposals, so please don’t hesitate to contact us if you require professional advice.
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