Tax Update provides you with a round-up of the latest tax developments. Covering matters relevant to individuals, trusts, estates and businesses, it keeps you up-to-date with tax issues that may impact you or your business. If you would like to discuss any aspect in more detail, please speak to your usual Smith & Williamson contact. Alternatively, Ami Jack can introduce you to relevant specialist tax advisors within our firm.
1.1 Scottish Budget date announced
The 2022-23 Scottish Budget will be published on Thursday 9 December 2021.
The announcement notes that this Budget will ‘focus on delivering the new Programme for Government, reflecting the challenges facing households, communities and businesses as a result of the coronavirus (COVID-19) pandemic’.
2. Private client
2.1 HMRC ‘nudge’ letters: payroll and tax return mismatches
HMRC has announced a new campaign of ‘nudge’ letters, sent to taxpayers that HMRC believes may have omitted to report an event, as a way of encouraging them to get their affairs in order without starting a formal enquiry. This batch is targeted to those whose salary and benefits reported by their employers do not match that on their 2019/20 tax returns.
These letters will be sent to self-assessment taxpayers for whom an employer or pension provider has reported details of payments to HMRC that do not match those shown on their 2019/20 tax returns. This could be information on taxable benefits, salary, or pension income that is missing from their return, or does not match the payroll figures submitted to HMRC. The letter will specify whether it is benefits or pay that does not match. They will be asked to check that their 2019/20 tax return is correct, and inform HMRC if an amendment is needed.
2.2 One year delay to Making Tax Digital for income tax
The introduction of Making Tax Digital (MTD) for income tax is being pushed back to April 2024. The delay is to account for the impact of the pandemic on individuals and businesses, so that they have more time to prepare. The legislation for the measures has also been published.
MTD for IT will require taxpayers with business and/or property income over £10,000 to keep digital records and make quarterly reports to HMRC. It will affect landlords, sole traders, and partnerships.
The measure was due to be introduced in April 2023, but due to the impact of the pandemic a year’s delay has been granted, to April 2024 for most affected taxpayers. General partnerships will have longer, with the requirement applying from April 2025. The date for other types of partnership to join MTD has not yet been announced.
Legislation for MTD for IT, and a tax information and impact note, has also been published. The legislation also clarifies that income from a trade carried on outside the UK and overseas property income of non-UK domiciled individuals will not be taken into account.
The planned changes to late filing and late payment penalties for income tax self-assessment will also be delayed. They will come in from April 2024 for those who are mandated to report under MTD from that date, and from April 2025 for all other taxpayers in self-assessment.
2.3 One year delay to proposed basis period reform
If the proposed switch to tax self-employed profits on a tax year basis rather than an accounting year basis is made, the Treasury has confirmed that this will come in no earlier than Making Tax Digital (MTD) for IT. This would mean a transition year in 2023/24, and a full introduction from April 2024. This is a one year delay to the previous plan..
In line with the planned one year delay to MTD for IT, the Treasury has announced that the proposed dates for a reform to basis periods for the self-employed and partners have been pushed back a year. The transition year will not come in before 6 April 2023, with the reform applying in full from April 2024 at the earliest.
The proposed change is to tax profits for the tax year in which they arise, the ‘tax year basis’, rather than the ‘current year basis’ now used, which taxes profits based on accounting periods. A final decision on basis period reform and whether or not it will be introduced has yet to be made, but the results of the consultation may be published on 27 October alongside the Autumn Budget.
3. Business tax
3.1 Draft legislation on the Residential Property Developer Tax
HMRC has launched a technical consultation on the draft legislation for the proposed residential property developer tax (RPDT). The draft legislation does not specify the rate of tax, or the threshold for profits that will be subject to the tax.
As announced in February 2021, a new tax will be introduced to help fund cladding remediation. It will apply to accounting periods ending on or after 1 April 2022. The RPDT will apply to companies and groups undertaking UK residential property development activities within the charge to CT. These include the following activities in relation to the qualifying land interest which forms part of trading stock of a trade: dealing, designing, seeking planning permission, constructing, adapting, marketing and managing.
According to the earlier consultation on the policy design of RPDT, an annual allowance of £25m will be given, such that companies and groups with profits below this amount will not pay the RPDT. This threshold, however, is not specified in the draft legislation, nor is the rate of tax. The consultation confirmed that the RPDT is a temporary measure, but neither the draft legislation nor the consultation indicate when it might be withdrawn. As part of the Autumn Budget on 27 October, the Chancellor will set out the final details, and this is to be included in the 2021-2022 Finance Bill.
3.2 Payment made from a UK company to former shareholder held as non-tax deductible
The FTT has ruled that a payment made by a company to a former shareholder in relation to a gain on residential property sold by the company was not tax deductible. The payment was not properly recognised in determining the company’s profits in accordance with GAAP, so it was not a deductible non-trading loan relationship deficit (NTLRD).
A UK company sold a property and made a payment equal to the gain to a non-UK former director and controlling shareholder. The company did not bring any chargeable gain into account for the period on the basis that the individual beneficially owned the property. Before the FTT, however, the company had accepted that it owned the property but claimed that the payment constituted a NTLRD which fully offset the taxable gain.
As the payment discharged a liability rather than depleted the company’s assets, the FTT rejected HMRC’s argument that the payment was a distribution. The FTT, however, did not agree that the payment was a deductible NTLRD as it was not recognised in determining the company’s profit or loss for the period in accordance with GAAP. Although the company’s accounts included a related party disclosure and balance sheet adjustments in respect of the payment, that did not amount to the payment being recognised in determining the profit or loss for the period. Notwithstanding this, the agreement to pay the gain to the individual could not be said to be an expense in bringing the loan into existence, nor was it a fair representation of any costs of the loan to the company.
The appeal was therefore dismissed. Although it did not change the outcome, the FTT also found that the company’s late claim to use the NTLRD was valid. HMRC rejected the proposition that a NTLRD existed, but it failed to reject the claim explicitly on the basis that it was made late.
Shinelock Limited v HMRC  UKFTT 320 (TC)
3.3 CT returns reporting coronavirus support grants
HMRC will accept CT returns that do not include the requisite COVID support scheme figures if all overclaims have been repaid or assessed by HMRC before the return is filed. This only applies to CT returns already filed; future CT returns must include all necessary information.
CT returns filed since 1 April 2021 should have included information on COVID support received by companies and any overclaims. HMRC has confirmed to the ICAEW that if this information is missing, the CT return will still be accepted if all COVID support overclaims have been repaid or assessed by HMRC before filing. There is no need to submit an amended return unless there is an outstanding overpayment now due.
From now on, however, HMRC expects that all CT returns will be competed in full.
4.1 Forthcoming changes to the hospitality temporary reduced rate of VAT
The temporary reduced rate of VAT for supplies in the hospitality sector will increase from 5% to 12.5% with effect from 1 October 2021
In July last year, the government announced a temporary reduced rate of VAT at 5% would apply to certain goods and services supplied in the hospitality sector as a measure to help businesses affected by Covid-19. The measure applied to supplies of hospitality, hotel and holiday accommodation and admissions to events, and came into force for supplies made between 15 July 2020 and 31 March 2021.
The reduced rate was subsequently extended to 30 September 2021. At the same time, the government announced that from 1 October 2021, the reduced rate will continue to apply at an increased rate of 12.5%. The measure is due to end on 31 March 2022, before reverting back to the standard rate.
5. Tax publications and webinars
5.1 Tax publications
The following Tax publications have been published.
6. And finally
6.1 Teasing the Revenue
What excitement there must have been in HMRC as the news spread: a new Jaffa cake product is out – the Jaffa doughnut. Was this finally their chance for a VAT win, officers may have whispered?
Well, ever dedicated, And finally dashed to the shops, got the dissection kit out, and discovered: this is just a sponge. In the shape of a ring. With a bit of chocolate. Not noticeably different in substance from a Jaffa cake, and still in the biscuit aisle. Possibly developed purely to tease HMRC, and unlikely to trouble the courts.
What a disappointment, though of course this is only our informal opinion. We are sure that readers will form their own views on this ever-stimulating topic for teatime conversation.