Joint and several liability notices for tax by HMRC

How HMRC deals with customers who are involved in tax avoidance, tax evasion or repeated insolvency who receive a joint and several liability notice, including how notices interact with penalties and safeguards.

HMRC has preferred status in terms of their debts in Insolvencies. The Finance Act of 2020 which received Royal Assent in July 2020, confirmed this was to be the case going forward.

As the Act has now passed into Statute, the headline was on the preferential treatment but on 7th October 2021, the full ramifications of the other provisions within the Act became apparent.

The key one to keep an eye out for is Schedule 13, which looks to deal with ‘serial offenders’ in terms of:

- Number of company Insolvencies,

- Non-payment cases, and

- The removal of the corporate ‘veil’ in such instances.

HMRC, undoubtedly the Official Receiver, and Liquidators are on the lookout for any Phoenix situations. Whilst HMRC state this relates only to a small minority of companies, who conduct themselves like this, it will potentially leave Directors exposed.

Schedule 13 The Finance Act of 2020 which received Royal Assent in July 2020, states that “HMRC will issue Joint and Several Liability Notices to individuals, who have been involved with companies which have become Insolvent and have a tax liability with HMRC” – that is all encompassing, potentially.

If HMRC believe Directors ‘are at their work’ they will issue a Joint and Several Liability Notice to the individual, and ‘tie in’ the new Phoenix Company.

The following can potentially be included in any Joint and Several Liability Notice:

- Unpaid tax liability in Newco,

- Any tax liability in Newco for 5 years, from the date of the Joint and Several Liability Notice, and

- Any old company liabilities.

The Notice will be aimed at any non-compliers here and not innocent ‘connected parties’ i.e. those with little influence in the day to day running of companies e.g. people who are shareholders only.

Coronavirus and the suspension of Court proceedings etc, have given the legislators time to think and catch up, in terms of the loopholes that exist.

These provisions of the Finance Act 2020, along with the treatment of fraudulent and, or misappropriate BBLs and CBILs Loans, and tidying up in the Statute surrounding Dissolved Companies, ensures there is going to be a lot more scrutiny in terms of failing businesses.

See HMRC guidance at: 

https://www.gov.uk/guidance/overview-of-joint-and-several-liability-notices-for-tax-avoidance-tax-evasion-and-repeated-insolvency

COVID-19: Support for Businesses

The Chancellor has set out a package of measures to support businesses who have been affected by the current COVID-19 outbreak.

The current guidance can be found at:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

Capital Gains Tax on Residential Property

The current self assessment system means that, depending on timing, CGT is due anywhere from 22 months to 10 months after the disposal. HMRC first announced in April 2015 that they intended to expedite payment of CGT in the case of disposals of residential property, and having delayed implementation once already, they are now pressing ahead with change.

From 6 April 2020, where CGT is due on a residential property disposal:
• a return will need to be filed (for the sake of brevity, I refer to this as a ‘UK land return’ although this is not the wording adopted in the legislation; and
• the ‘notional CGT’ due must be paid within 30 days of the date of completion (FA 2019 s 14 and Sch 2).
This is a major change to the administration of CGT for UK residents and some non-residents. Although the policy intention may be simple in outline, as ever the detailed position is much more complex.

The relevant legislation is in TCGA 1992 Sch 2. ‘Residential property’ is as defined in TCGA 1992 Sch 1B and therefore has the same definition as applied under the non-resident CGT regime. Where a property comprises residential and commercial parts, the gain arising must be apportioned on a just and reasonable basis. Only the residential element will be subject to the new reporting and payment requirements. There are other exclusions; for example, where the disposal is under a no gain/no loss transaction, or where the person making the disposal is a charity or pension fund (Sch 2 para 1(2)).
Schedule 2 deals with both UK resident individuals and non-resident persons, but there are differences between the two categories of taxpayer and it is helpful to consider them separately.

UK residents 
For UK resident individuals and trustees (the changes don’t apply to UK companies), a UK land return will need to be filed with HMRC where a disposal of residential property gives rise to a chargeable gain or an allowable loss (Sch 2 para 4). Where a gain is fully covered by a relief (such as private residence relief), there will be no requirement to file a UK land return. A return will also not be required where the gain is covered by the annual exemption, or a brought forward capital loss. Where there is no requirement to file a return, there is similarly no requirement to make a payment on account of CGT.

In any other case, the UK resident individual must complete a return, and pay any CGT due within 30 days of the completion date of the disposal. In the uncommon event that two disposals complete on the same day, a single return is required (Sch 2 para 3). No UK land return is required where the filing date for that return is after the individual’s self assessment tax return has been or is due to be submitted (Sch 2 para 5). This will be relatively rare, but is feasible where there is a long delay between contracts being exchanged and the disposal being completed.

The UK land return requires the taxpayer to make ‘reasonable estimates’ of the tax payable on the disposal as if the tax year ended on the date of disposal (Sch 2 paras 7 and 14). The taxpayer will therefore need to estimate his/her income for the year so that the correct CGT rate of 18% or 28% may be applied, and also take into account any disposals of UK residential property which have already taken place. Gains on other assets are ignored in calculating the notional CGT due. Where an estimate changes, a further return may be filed correcting the estimate and, if appropriate, generating a repayment of tax (Sch 2 para 15).

Where a UK land return is submitted, there is no separate requirement for the taxpayer to notify HRMC of his chargeability to CGT (Sch 2 para 18).

Losses
A UK land return is not required where the disposal gives rise to a capital loss. However, if a return would have been required if a gain had arisen, the individual may make a return and make a repayment claim in respect of any notional CGT already paid in the tax year on an earlier disposal of UK land (Sch 2 para 9).

Realised capital losses, whether on UK residential property or other assets and whether brought forward or realised earlier in the tax year, may be taken into account when computing the notional CGT due. However, a loss arising later in the same tax year on another asset can only be taken into account in the individual’s self assessment tax return for the year, unless there is another UK residential property disposal which takes place after the loss has arisen. It is this aspect of the rules which creates the most distortions and potentially leads to the greatest unfairness in cash flow for the taxpayer.

The timing of disposals is therefore crucial. These rules seem unnecessarily harsh and HMRC’s response that any overpayment will carry repayment supplement somewhat inadequate, particularly where the disposal is by way of gift and there are no cash proceeds from which to pay the tax.

Claims and elections
In computing the notional CGT due, claims and elections are taken into account where it is reasonable to suppose that these will be made or given (Sch 2 para 14) but this does not remove the requirement to formally make the claim or election in a tax return, etc.
Reliefs (such as CGT deferral relief under EIS or SEIS) may be claimed in computing the notional CGT due where the conditions for the relief are met at the time payment is required. Otherwise, an amendment to the return will need to be made when the relevant conditions are met. Relief will, of course, also need to be claimed in the individual’s self assessment tax return, if one is required to be filed.

Non UK residents
Non-UK resident individuals, trustees and companies have been liable for CGT on disposals of UK residential property since April 2015. The non-resident is required to file a return and pay any CGT due within 30 days of completion, unless the disposal is by a taxpayer already within the scope of self assessment (for example, a non-resident landlord) or is subject to ATED charges.
From 6 April 2019, the scope of the non-resident CGT rules is expanded to apply to any disposal of UK land by a non-resident person, whether residential or commercial, and irrespective of whether the disposal is a direct disposal of UK land or an ‘indirect’ disposal of a ‘property rich entity’, i.e. one deriving 75% or more of its value from UK land (defined in TCGA 1992 Sch 1A). Certain exemptions, such as that for disposals by ‘non-close’ overseas companies, were also removed. But whilst the scope of the charge has changed, the exception from the requirement to file a return within 30 days and pay the CGT due in respect of residential property disposals remained for taxpayers within self assessment or liable to ATED charges. This exception will be removed from April 2020 and the position aligned with that applying to UK resident individuals, but with UK land returns and CGT payment being required for any direct disposal of UK land or indirect disposal of land-rich assets.

Unlike the position for UK residents, there is also no let out from the reporting requirements where no gain arises on the disposal or the gain is covered by reliefs or exemptions. This has been one of the more controversial aspects of the non-resident CGT regime and frequently gives rise to the imposition of late filing penalties, despite there being no tax liability. It is difficult to discern HMRC’s rationale for insisting upon returns where no tax is due but they appear immovable
From April 2019, non-resident companies have been required to register for corporation tax within three months of a disposal of UK land. For a one-off disposal, this will mean filing a corporation tax return for an accounting period of a single day. Corporation tax is payable within normal corporation tax time limits, generally nine months and one day from the end of the accounting period, although the quarterly instalment payment (QIP) regime may also apply.

Compliance
Broadly, a UK land return will be subject to the same provisions regarding amendments, enquiries, amendments during an enquiry and determinations as apply to a self assessment tax return (Sch 2 paras 19 to 22). An amendment to a UK land return relating to a disposal included in a tax return may only be made up to the earlier of the filing date for the tax return and the date it is filed. If no tax return is due to be filed, a UK land return may be amended up to one year after the 31 January following the tax year.

By Jacquelyn Kimber Tax Adviser Magazine

VAT: Domestic Reverse Charge for building and construction services

With effect from 1 October 2019, the VAT position will change as far as transactions concerning certain supplies of construction services is concerned.
From this date, the customer will account for the VAT by doing the reverse charge on his own VAT return. This means that the supplier neither charges VAT to nor collects VAT from his customer. The reverse charge will apply to the following transactions:

• The legislation refers to ‘specified services’ but these do not apply to services supplied to non-construction businesses, such as a high street retailer having his premises improved or any other end user customer or building owner;
• The reverse charge will also apply to any goods supplied by the builder as part of his work;
• Supplies between landlords and tenants are excluded from the reverse charge as well as supplies involving connected parties. In such cases, the supplier will continue to charge VAT as happens now;
• The reverse charge will be based on the VAT rate applying for the work in question, but only supplies subject to either 5% or 20% VAT i.e. excluding zero-rated sales.

Further and full information is available on HMRC website:
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services

Making Tax Digital for VAT

From April 2019 HMRC is introducing Making Tax Digital (MTD) for VAT as follows:

-  Only businesses with turnover above £85,000 will be required to take part but will not be permitted to withdraw later on turnover grounds while they remain registered.
-  VAT-registered businesses with turnover up to £85,000 and insolvent businesses will be able to opt in and out.
-  There will be special exemption rules in case of TOGCs, otherwise exemptions will apply on religious grounds, in insolvency and if, as currently, HMRC is satisfied that electronic submission is impossible due to disability, age, remoteness of location or any other reason.
-  Businesses will be required to keep the same records as at present and retain them for 6 years after deregistration. Penalties for failure to keep and preserve records will not change. What will change are the method of submission and the scope of information to be submitted.
-  Non-quarterly return periods can be maintained under MTD.
-  Error correction will not be reported via MTD. The current procedures will continue.
-  Businesses in MTD will make their returns using “functional compatible software”. This means “a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)”. This also means that all such businesses will need to use software such as Sage, Xero, Quickbooks or some other compatible software. No more manual VAT record keeping.
The functions of the compatible software must include:
a. keeping and preserving records in a digital form as required by the regulations;
b. creating a VAT return from the digital records and providing HMRC with this information;
c. digitally providing HMRC with additional data (summary totals of information required to be kept) on a voluntary basis; and
d. receiving information from HMRC via the API platform in relation to a relevant entity's compliance with obligations under the regulations.
-  The information a business must keep and preserve digitally will include:
a. business name;
b. principal place of business;
c. VAT registration number;
d. VAT accounting schemes in use;
e. the VAT account;
f. each input and output split between standard-rated, reduced-rated, zero-rated, exempt and outside the scope;
g. dates of each supply made and received;
h. dates of payments made and received; and
i. more limited information for those using retail schemes and those on the flat rate scheme.

New Dividend Tax

The government will abolish the dividend tax credit from April 2016 and introduce a new dividend tax allowance of £5,000 a year. 

The new rates of tax on dividend income above the allowance will be:

7.5% for basic rate taxpayers

32.5% for higher rate taxpayers

38.1% for additional rate taxpayers

What else do we know? Well, we don’t know the full story given that the details will be included in Finance Bill 2016. In the meantime, HMRC issued a Dividend Allowance factsheet on 17 August.

This includes some simple worked examples, and contains the following snippets of information.

The allowance is available to anyone who has dividend income.

Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an ISA will continue to be tax free.

The dividend allowance will not reduce an individual's total income for tax purposes (but it will mean that the individual does not have to pay any tax on the first £5,000 of dividend income received).

Dividends within the allowance will still count towards an individual's basic or higher rate band and may therefore affect the rate of tax paid on dividends in excess of the £5,000 allowance.

Change in taxation of Buy-to-let profits

On the 8 July 2015, George Osborne announced a number of changes to the taxation of property businesses. The important is the loss of higher rate tax relief for finance charges, which includes mortgage interest. Also many landlords, who were previously basic rate tax payers, will be pushed into the higher rate tax band.

Consider Mr Patel who has built his property rental business by maximising the use of low interest rate mortgages.

He has built up his rental business profits (after deducting costs excluding mortgage interest) to £120,000 a year. All his mortgages are interest only and the annual interest charges are £100,000. He is content to manage on the modest £20,000 income that this provides as he is in the business for the long term – waiting for long term growth in the capital value of his properties.

Up to the tax year 2016-17 he can deduct the £100,000 from the £120,000 and pay tax on the difference. For 2016-17 this will amount to just £1,800.

After 5 April 2017, new legislation will disallow an increasing percentage of the mortgage interest as a business expense, until by 2020-21 none of the £100,000 will be allowed as a deduction when computing tax payable. At a stroke, and with no change in property income and outgoings, Mr Patel’s taxable profits from his property business will increase from £20,000 to £120,000.

Mr Patel will become a higher rate tax payer and lose much of his personal tax allowance as his income exceeds £100,000.

Relief for his mortgage interest payments will be given by a basic rate tax credit. For 2020-21 this will amount to £20,000 (£100,000 x 20%).

Unfortunately, even with this tax credit taken into account, Mr Patel’s Income Tax liability for 2020-21 will rise to £19,500 (based on current information available). This is a massive increase and it will consume most of his property business cash flow.