COVID-19 pushes the government to gift time, lend money and provide clarity
Over the last six weeks, the government has announced unprecedented measures in order to attempt to ease the financial burden faced by both businesses and individuals at this extraordinary time in response to the COVID-19 outbreak. The measures have gifted time by deferring deadlines for tax payments, sought to lend – and grant – significant sums of money to businesses, and in an increasing number of areas the measures have provided some welcome clarity.
We take a brief look at what has been put in place, where the gaps still are, and the impact that Covid-19 has had on the tax regimes in the UK.
UK registered businesses with VAT payments due between 20 March 2020 and 30 June 2020 have been given the option to defer payment until a later date with no penalties or interest applied for doing so. Any deferred payment must be paid on or before 31 March 2021. Although this measure does not cover payments for VAT MOSS or import VAT, it will be provide some breathing room for countless businesses across the UK.
Although no application is required to benefit from this deferral, if a business normally pays VAT by direct debit, it is the responsibility of the business to cancel this. In addition, businesses must continue to submit VAT returns as normal and businesses are of course still open to make their VAT payments when they are due if they wish to do so.
As well as deferring VAT payments for the vast majority of businesses, HMRC has also extended the deadline for businesses participating in “Making Tax Digital” to have “digital links” within their recordkeeping to 1 April 2021.
Businesses struggling to file their accounts in the current circumstances are being granted a three-month extension with Companies House. Although an application must be made for the extension, it will be granted automatically and immediately [see further here ].
Taxpayers who pay income tax based on self-assessment with a payment on account due on 31 July 2020 can defer payment until 31 January 2021 if they wish to do so. Any taxpayer who intends to defer payment needs to cancel any direct debit set up for this payment on account.
The private sector off-payroll working tax reforms (commonly known as “IR35”) were confirmed in the Budget on 11 March 2020 [further background on this reform is available here]. However, less than a week later, it was announced that the reforms would now not come into effect until 6 April 2021.
Time to pay
HMRC has long had mechanisms in place for taxpayers to make arrangements for “time to pay” if they are struggling financially. Taxpayers can now speak to HMRC to arrange specific “time to pay” arrangements that are needed as a result of the impact of Covid-19 via a dedicated Covid-19 helpline. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities [see further here].
Lending and granting money
Coronavirus Job Retention Scheme
Undoubtedly one of the most significant schemes put in place in response to COVID-19 is the Coronavirus Job Retention Schemes (“CJRS”). Under the CJRS, in certain circumstances the government will cover 80% of the salary of retained workers who are not working as a result of COVID-19 up to a total of £2,500 per month and any employer will be eligible to benefit under the scheme [see further here].
As extraordinary as this measure is, the full impact of the scheme is yet to become clear. One area of uncertainty is around the impact that the CJRS will have on enterprise management incentive (“EMI”) option schemes. This is due to requirements in relation to the “commitment of working time” that must be satisfied by an employee in order to qualify to be granted an EMI option and to prevent a “disqualifying event” occurring once the option has been granted. We understand that HMRC is aware of the uncertainty in this area, and intends to address it in a bulletin shortly.
Support for the self-employed
As well as the CJRS, in certain circumstances the government will pay self-employed people who have been adversely affected by Covid-19 a taxable grant worth 80% of their average monthly profits over the last three years, up to a cap of £2,500 per month. This scheme will be open for at least three months. To be eligible for such a grant, the individual’s self-employed trading profits must be no more than £50,000 and more than half of the individual’s total income for either the tax year 2018 – 2019 or the average of the tax years 2016 – 2017, 2017 – 2018, and 2018 – 2019.
As mentioned above, the self-employed will also benefit from their income tax not being due until 31 January 2021.
Business Interruption Loan
A new Coronavirus Business Interruption Loan Scheme, delivered by the British Business Bank, will enable businesses with a turnover of up to £45m to apply for a loan of up to £5 million, with the government covering up to 80% of any losses with no fees. Businesses can access the first 12 months of that finance interest free, as the government will cover the interest payments during that period.
“Future Fund” scheme
The government has also just announced the “Future Fund” scheme, which involves the making of convertible loans between £125,000 and £5 million to innovative UK-based unlisted companies that are currently facing financial difficulties. Launching in May 2020, the Fund will provide government loans that matches funding from private investors. Along with being UK-based and having the ability to attract the equivalent funding from third-party private investors, the only other eligibility criteria that has been announced thus far is that the company must have previously raised at least £250,000 in equity investment from third-party investors in the last 5 years [see further here].
Businesses in the retail, hospitality and leisure sector will benefit from 100% relief from business rates for 2020 – 2021. Unlike VAT, business rates for this sector have not been deferred, but instead placed on “holiday” for the current financial year so will not fall due in the future.
On 19 March, the Bank of England reduced the base rate for the second time in a week, reducing it to 0.1%. In response, HMRC decreased the interest charge on underpaid quarterly corporation tax instalment payments to 1.25% from 1.75%.
In addition, any elections made in relation to corporation tax can now be made by email when they cannot be posted.
Company tax residence and permanent establishments
On 7 April 2020, HMRC added new pages to their International Manual containing its approach to company tax residence and permanent establishments in response to the pandemic. In relation to the unintentional and unplanned presence of individuals in the UK, HMRC believes that the existing legislation and guidance on these topics provides flexibility to deal with changes in business activities necessitated by the response to the pandemic. Therefore, a company will not necessarily become UK resident as a result of a few board meetings being held in the UK, or decisions being made in the UK for a short period of time. Similarly, a non-UK resident company will not automatically have a permanent establishment in the UK after a short period time spent here in the current circumstances.
Statutory residence test for individuals
If an individual is quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus, advised by official Government advice not to travel from the UK as a result of the virus, unable to leave the UK as a result of the closure of international borders, or asked by their employer to return to the UK temporarily as a result of the virus, the circumstances are considered as exceptional in the context of the statutory residence test [see further here]. The government also intends to amend the statutory residence test such that any period between 1 March and 1 June 2020 spent in the UK by individuals working on Covid-19 related activities will not count towards the application of the test.
Dealing with the practicalities
Working from home
Under normal circumstances, employers can make certain tax and NIC free payments to an employee in respect of reasonable additional costs incurred for working at home. As Covid-19 has forced a large part of the workforce to work from home, HMRC has published guidance to help employers navigate the rules that HMRC is applying during the current circumstances.
Interim procedures have been put in place by HMRC to deal with matters that cannot currently be dealt with as normal. One such matter is the stamping of documents for Stamp Duty purposes. The interim procedure allows HMRC to deal with stock transfer forms electronically, applying an electronic stamp rather than a physical one. In addition, Stamp Duty must now be paid electronically. Similarly, non-statutory clearance applications for stamp duty should now be made using the relevant email address which can be found on the gov.uk website.
Physical tax hearings before the First-tier Tribunal and Upper Tribunal have been postponed during the current circumstances. The Tax Chamber Tribunal President has said that “All applications and substantive appeals will be dealt with on papers/email as far as possible and decided by a judge sitting alone. If a matter cannot be dealt with on papers, a hearing by telephone will be arranged as soon as possible”. For the time being, all proceedings are stayed for a period of 28 days from 24 March 2020 and all time limits in any current proceedings are extended by the same period. Appellants should continue to comply with the relevant time limits for lodging an appeal. Where they are unable to submit their notice of appeal within the prescribed time limit, they should submit it as soon as possible with an application for permission to appeal late explaining why the notice of appeal was not provided in time [see further here]
These extraordinary measures have provided some reassurance to businesses and individuals around the country for the time being, but their effectiveness in holding up the UK economy remains to be seen.
Given the pace at which things are changing, individuals and businesses are advised to access the government website for the most recent and up to date guidance in relation to the above measures.
This article was written by Robert Birchall, James Carter and Lauren Spark. For more information please contact Robert at firstname.lastname@example.org, James at email@example.com or Lauren at firstname.lastname@example.org.
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