To February's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
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· Loan charge repayments deferred
· CGT on cryptoassets
· Increased NMW rates from April 2020
· VAT and Brexit
· February questions and answers
· February key tax dates
Loan charge repayments deferred
In September 2019, the government commissioned Sir Amyas Morse to conduct an independent review of the loan charge (the review). The review was published on 20 December 2019 along with the government's response, which confirmed that it would accept all but one of the review's recommendations.
The main change is that the government has agreed to defer the loan charge repayment date to September 2020.
Broadly, the 'loan charge' is a charge to tax on employees and traders who were paid via disguised remuneration loan arrangements in order to minimise liability to tax and NICs. In general terms, any individual who received a disguised remuneration loan or credit on or after a specified date, which was still outstanding on 5 April 2019, will be liable to the charge, unless they or their employer have previously accounted for any tax due on the loan.
When the provisions were first announced the professional bodies generally supported the underlying policy of countering tax avoidance, but also expressed concern about the potential hardship this measure would cause in certain cases, particularly at the lower end, including some people who were misled into using these schemes. This prompted the government to request an independent review, led by Sir Amyas Morse, who subsequently recommended certain changes to the provisions. The government accepted all but one of the recommendations in the review.
In December 2019, the Treasury agreed to limit the loan charge cut-off date to 9 December 2010 instead of 1999, and waive charges for those who disclosed loan scheme issues to HMRC, in instances where the tax authority failed to take action, for loan charges raised between 9 December 2010 and 5 April 2016. To qualify, taxpayers would have had to fully disclose their schemes on their tax return over this period. If HMRC took no action, then their cases will be deemed to have been resolved.
In addition, the Treasury said it would bring forward alternative action to tackle use of the tax avoidance schemes before 2010, along with new action against promoters of disguised remuneration schemes. Details of the crackdown are expected to be announced at the time of the Budget on 11 March 2020.
Scheme users will be able to defer filing their returns and paying their loan charge liability until September 2020. Taxpayers will be allowed to split the loan balance over three tax years (between 2018/19 and 2020/21) to make bills more affordable.
However, the government rejected a recommendation to introduce a write-off of tax due on the loan charge after 10 years for individuals whose time to pay arrangement is longer than 10 years. That would allow those who have avoided tax through use of disguised remuneration tax avoidance schemes more favourable terms than taxpayers with other debts, including tax credit claimants.
The changes are set to reduce bills for more than 30,000 people subject to the loan charge, which means that some 60% of the total number of people affected by the loan charge will obtain some respite from the retrospective legislation. Moreover, it is estimated that some 11,000 taxpayers will be taken out of the charge altogether as a result of the Amyas review recommendations.
Once legislation has been passed HMRC will repay parts of some settlements reached with taxpayers where they had voluntarily paid amounts due for earlier years.
HMRC have published revised guidance (https://www.gov.uk/government/publications/disguised-remuneration-independent-loan-charge-review/guidance) to help users of the schemes understand what they have to do and extra time will be provided so that users of schemes can defer sending their return, and paying the tax for 2018-19, until the end of September 2020.
CGT on cryptoassets
Cryptoassets are a relatively new type of asset that have become more prevalent in recent years. New technology has led to cryptoassets being created in a wide range of forms and for various different uses.
Cryptoassets (or 'cryptocurrency' as they are also known) are cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically
While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.
HMRC do not consider cryptoassets to be currency or money. They have identified three types of cryptoassets:
- exchange tokens
- utility tokens
- security tokens
However the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.
In most cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay capital gains tax when they dispose of their cryptoassets.
Individuals will be liable to pay income tax and National Insurance Contributions (NICs) on cryptoassets which they receive from:
- an employer as a form of non-cash payment;
- mining, transaction confirmation or airdrops.
There may be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits. This is likely to be unusual, but in such cases income tax would take priority over the capital gains tax rules.
Companies are subject to corporation tax on their profits and gains. Corporation tax also applies to companies that are members of a partnership or a limited liability partnership in respect of their share of the partnership profits and gains.
Capital gains tax treatment
HMRC generally treat the buying and selling of cryptoassets by an individual as an investment activity rather than a trade. This means that if an individual invests in cryptoassets they will typically have to pay capital gains tax on any gains they realise.
Cryptoassets count as a 'chargeable asset' for capital gains tax if they are:
- capable of being owned; and
- have a value that can be realised.
Individuals need to calculate their gain or loss when they dispose of their cryptoassets.
A 'disposal' is a broad concept and includes:
- selling cryptoassets for money
- exchanging cryptoassets for a different type of cryptoasset
- using cryptoassets to pay for goods or services
- giving away cryptoassets to another person
If cryptoassets are given away to another person who is not a spouse or civil partner, the individual must work out the pound sterling value of what has been given away. For CGT purposes the individual is treated as having received that amount of pound sterling even if they did not actually receive anything.
Certain costs can be allowed as a deduction when calculating if there's a gain or loss, which include:
- the consideration (in pound sterling) originally paid for the asset
- transaction fees paid before the transaction is added to a blockchain
- advertising for a purchaser or a vendor
- professional costs to draw up a contract for the acquisition or disposal of the cryptoassets
- costs of making a valuation or apportionment to be able to calculate gains or losses
The following do not constitute allowable costs for CGT purposes:
- any costs deducted against profits for income tax
- costs for mining activities (for example equipment and electricity)
Costs for mining activities do not count toward allowable costs because they're not wholly and exclusively to acquire the cryptoassets, and so cannot satisfy the requirements of TCGA 1992, s 38(1)(a) (but it is possible to deduct some of these costs against profits for income tax or on a disposal of the mining equipment itself).
Pooling allows for simpler CGT calculations.
Pooling applies to shares and securities of companies and also 'any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired'.
HMRC believe cryptoassets fall within this description, meaning they must be pooled.
Instead of tracking the gain or loss for each transaction individually, each type of cryptoasset is kept in a 'pool'. The consideration (in pound sterling) originally paid for the tokens goes into the pool to create the 'pooled allowable cost'.
For example, if a person owns bitcoin, ether and litecoin they would have three pools and each one would have its own 'pooled allowable cost' associated with it. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.
If some of the tokens from a pool are sold, this is considered a 'part-disposal'. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss.
Individuals must still keep a record of the amount spent on each type of cryptoasset, as well as the pooled allowable cost of each pool.
Further information on cryptoassets tax for individuals can be found on the gov.uk website at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals.
Information on cryptoassets tax for businesses can be found on the gov.uk website at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-tax-for-businesses.
Increased NMW rates from April 2020
Some three million workers are set to benefit from increases to the National Living Wage (NLW) and minimum wage rates for younger workers from 1 April 2020.
The compulsory NLW is the national rate set for people aged 25 and over. The NLW is enforced by HMRC alongside the national minimum wage (NMW), which they have enforced since its introduction in 1999.
Generally all those who are covered by the NMW, and are 25 years old and over, will be covered by the NLW. These include:
- most workers and agency workers;
- casual labourers;
- agricultural workers; and
- apprentices who are aged 25 and over.
From 1 April 2020, the NLW rate (for 25 and overs) and the NMW rates (for other categories) will increase as follows:
- from £8.21 to £8.72 for over 25 year olds;
- from £7.70 to £8.20 for 21-24 year olds;
- from £6.15 to £6.45 for 18-20 year olds;
- from £4.35 to £4.55 for under 18s; and
- from £3.90 to £4.15 for apprentices.
The new rates should mean a pay rise of some £930 over the course of the year for a full-time worker on the NLW. Younger workers who receive the National Minimum Wage (NMW) will also see their pay boosted with increases of between 4.6% and 6.5%, dependant on their age, with 21-24 year olds seeing a 6.5% increase from £7.70 to £8.20 an hour.
Employers need to make sure they are ready for the new rates.
For further information, see the guidance Calculating the minimum wage at https://www.gov.uk/government/publications/calculating-the-minimum-wage/calculating-the-minimum-wage.
VAT and Brexit
HMRC have not yet issued any guidance as to how imports and exports to the EU and out with the EU should be recorded for VAT return purposes after 31 January 2021, what happens with the reverse charge, and what should be recorded in boxes 8 & 9 of the VAT return. The last guidance given was in the case of a no deal Brexit and we are monitoring any new advice as it is issued.
HMRC have said:
- There will be NO requirement to complete an EC sales list for sales after 1 January 2021.
- Intrastat returns WILL continue to be required.
Any changes in reporting and claiming will affect all invoices raised to non-UK customers and any duty or VAT on imports after 1 February 2021 will be affected. Businesses need to be ready to make changes to how these invoices are recorded once guidance is available.
Accounting software is likely to require updating once the reporting requirements are clarified.
Current HMRC guidance on Brexit can be found on the Gov.uk website at https://www.gov.uk/topic/business-tax/vat.
February questions and answers
Q. What items can be excluded from ‘taxable turnover’ for VAT registration purposes?
A. When the 'taxable turnover' of a business reaches the VAT registration threshold, currently £85,000 per annum, it must register for VAT. Income that is not counted as 'taxable turnover' is excluded from the £85,000 turnover figure.
There are several items that can be ignored when calculating 'taxable turnover' for VAT registration purposes. Any income that is 'exempt' from VAT is ignored. This commonly includes insurance, postage stamps or services; and health services provided by doctors or dentists.
- Some goods and services are outside the VAT tax system so VAT is neither charged nor reclaimed on them. Such items include: goods or services you buy and use outside of the EU;
- statutory fees - like the London congestion charge;
- goods you sell as part of a hobby - like stamps from a collection;
- donations to a charity - if given without receiving anything in return.
Supplies of services to business customers in another EU member state or any customer outside the EU are treated as outside the scope of UK VAT and do not count towards turnover for VAT registration purposes (for example: supplying consultancy services to a business customer in Spain).
Other non-business income that may be excluded includes disbursements incurred on behalf of a client, grants, or any income from employment.
Finally, it is worth noting that you can ignore any 'one-off' sales of capital assets. This means that if, for example, you sell a van and the income received puts the business turnover over the registration limit, the sales proceeds can be ignored.
Q. I bought a vehicle under a hire purchase (HP) agreement for use in my business. I did not make the final payment under the agreement, so did not take ownership of the vehicle. What happens regarding the capital allowance annual investment allowances which were claimed at the start of the contract?
A. Vehicles bought under HP agreements usually become the property of the hirer once the final payment is made at the end of the lease period. For capital allowances purposes, relief for the whole cost of the vehicle is generally allowable from the date of delivery, providing the asset was still in business use at the end of the chargeable period.
However, where the final payment is made, and subsequently the vehicle is not acquired by the hirer, then it is treated as having been disposed of. Where, as in this case, the asset has been brought into use, the disposal value is the total of any capital sums received/receivable (if any) plus the amounts yet to be incurred under the contract - in this case this would be the amount of the final instalment.
HMRC's Capital Allowances Manual, paragraph CA23330, explains this in further detail and provides a worked example.
Q. I have recently sold my main residence and bought a smaller property. Unfortunately I sold the house for £30,000 less than I originally paid for it. Can I offset this loss against income from my business and reduce my income tax liability for this year?
A. There are strict rules governing the set off of losses against other income and the tax law does not permit you to do this. Losses on the sale of a principal private residence are generally not allowable losses for tax purposes.
If the property had been an investment asset, the loss on the sale may be treated as a 'capital loss', which could be offset against other capital gains you make, but it cannot be offset against other income. For further information on this, see the HMRC Capital Gains Manual at paragraph CG65080.