Taxation and trusts; Job Retention Scheme; Latest update on the bounce back loan scheme and more.

• The spending review: Date confirmed
• Radical tax proposals
• ISAs and authorised open-ended property funds: New consultation
• Private residence relief allowed for a property with a large garden
• Estimated cost of tax reliefs
• The bounce back loan scheme – Latest update
• Job Retention Scheme

 

The spending review: Date confirmed

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3, RO4, RO5, RO7, RO8)

On Wednesday 21 October, the Treasury announced that this year’s Spending Review would cover only the coming financial year, 2021/22. The Treasury has now added that the date of this Spending Review will be Wednesday 25 November.

Source: HM Treasury News story: Spending Review to conclude late November – dated 21 October 2020.

Radical tax proposals

(AF1, AF2, JO3, RO3) 

The Centre for Policy Studies has issued a paper proposing a radical reform of the UK tax system

The Centre for Policy Studies (CPS) describes itself as ‘Britain’s leading centre-right think tank’. Unsurprisingly it has close links to the Conservatives, having been established by Sir Keith Joseph and Margaret Thatcher. The CPS can claim to be the inspiration of several Government policies over the last decade, including pension freedoms, LISAs and above-inflation increases to the personal allowance.

At a time when a Conservative Chancellor is widely seen as having adopted what would once have been considered distinctly unConservative policies, such as running a Budget deficit of around 20% of GDP, the influence of the CPS may seem less important. However, the latest parliamentary survey found that the CPS is considered by Conservative MPs to be the country’s most influential think tank. While that may as much reflect those MPs’ views of other think tanks as the importance of the CPS, it still means that what emerges from the CPS carries weight.

Thus its latest tax proposals, published in a paper entitled ‘A Framework for the Future Reforming: Reforming the UK Tax System’, cannot be ignored, even if they do seem far more radical than the current Government would introduce. In summary, the paper suggests:

• Abolition of the additional income tax rate, bringing the top rate of tax on earnings to 42% (40% income tax + 2% National Insurance (NICs)). The CPS reckons this would have a one-year cost of around £600m, which is less than 1% of the amount of HMRC’s March 2020 projection for revenue raised by the additional rate.

• Adjust dividend tax rates to reflect corporation tax, which with the disappearance of the additional rate band would mean no tax on dividends for basic rate taxpayers and 26% for higher rate taxpayers (against a current 32.5%). The one-year cost is put ‘in normal times…between £3.8 billion and £6 billion’, with the lower figure in line with HMRC’s ready reckoner.

• Address effective tax cliffs. By this, the CPS means dealing with the spikes in marginal tax rates from such revenue-raising tweaks as the tapering of the personal allowance and high-income child benefit charge. Such Budget inventions tend to attract scorn from all think tanks.

• Base business rates on underlying site values. As the CPS notes, promises of business rate reform have been both commonplace and unrealised for many years. In proposing a land value tax based on permitted use value, the CPS is aligning itself with some left-of-center think tanks, such as the Institute for Public Policy Research. The CPS says that their assumption is that the policy would be cost neutral. However, it also suggests a £6.7bn tax cutting simple alternative, which would involve stripping everything except permitted-use site value out of the current business rates base while leaving the rest of the tax, including the existing multipliers, unchanged.

• Abolish Stamp Duty Land Tax, which the CPS believes would increase housing transactions by 46%. The knock-on effects of this, in terms of other taxes associated with property sales and a stimulus to new builds, would raise about £7bn on CPS estimates, implying a net cost of about £5bn a year in England.

• Abolish Stamp Duty on shares, which the CPS views as ‘particularly perverse’. It sights research from the economics consultancy, Oxera, that abolishing stamp taxes would increase share prices by 7.2%, reduce the cost of equity by 7%-8.5% and cut the cost of capital by 5.4%-6.5%, all for a loss of £3.6bn of revenue (based on 2020/21 projections).

• Update Council Tax Bands, which in England are still based on April 1991 valuations. Subsequent revaluations would take place regularly thereafter. What the CPS would do once the new base is established is less clear. The CPS appears to favour an idea of the Institute for Fiscal Studies of a proportionate tax, based on value. While this would cut average bills by more than 20% in the North and Midlands, the corollary is higher bills for better off families in London and the South East.

• Abolish inheritance tax, which the CPS describes as ‘deeply unpopular, cumbersome and expensive to operate, and generates only a small fraction [£5.4bn] of overall revenues’. The quid pro quo would be the replacement of the capital gains tax exemption on death with holdover relief. If that approach is too radical, the CPS alternative is to raise the nil rate band to £1m per person and scrap the residence nil rate band.

• Reform corporation tax. There are two elements to this overhaul. The first is to scrap the limit on the use of carried forward losses to £5m + 50% of current year’s taxable income. The CPS describes such a change as ‘building a countercyclical corporation tax’. It would mean a company moving from loss to profit would gain immediate maximum benefit from its losses to aid its recovery. In a similar vein, the CPS would like to see 100% allowances for all business investments, but accepts that in the short run this would be very costly – perhaps £30bn initially and £20bn a year in the longer run. As an alternative, the CPS suggests two options which rely on ‘neutral cost recovery’. Under this approach, allowances would still be spread, but they would be adjusted each year so that their net present value matched the original investment.

At this stage, you may be wondering how the CPS expects to fund this wish list. The answer is three letters: VAT.  As many others have observed, the CPS notes that the UK has a narrow VAT base. We're the UK’s VAT base to be broadened from its current 46% of total consumption at the full VAT rate to the OECD average of 56%, this would raise an extra £35bn in revenue in 2020/21.

Such extra tax income would cover ‘the most affordable version’ of the CPS reforms outlined above and pay each adult a VAT ‘prebate’ of up to £400 a year. However, it would also mean that ‘broad categories of goods and services like food, transport, and domestic fuel would almost certainly have to be taxed at the standard rate going forward’, a brave decision for any Government.

The CPS paper is an interestingly different view on how to restructure taxes. How far it will be converted into Conservative Government policy is a moot point under current conditions.

Source: CPS: A Framework for the Future Reforming: Reforming the UK Tax System – dated 28 October 2020. 

ISAs and authorised open-ended property funds: new consultation
(FA5)

The Government is looking for views on the viability of retaining existing open-ended property funds in ISAs in the event that such property funds no longer meet the eligibility criteria.

The Financial Conduct Authority (FCA) is currently consulting on a proposal to introduce a requirement that investors must provide up to 180 days’ notice before investments in open-ended property funds can be redeemed.

The FCA is seeking to reduce the potential for investor harm which comes about because the terms for dealing in units of some property funds are not aligned with the time that it takes to buy or sell the buildings that the funds invest in. This type of property fund needs to hold a significant cash balance otherwise it might not have time to sell properties to pay investors who can request their money back at short notice. If a fund runs out of cash, this can cause it to suspend dealing. As a result, this can cause investors to request their cash in anticipation of such suspensions, potentially increasing the problem further.

To address this, the FCA proposes a notice period of between 90 and 180 days.

However, this runs contrary to the ISA legislation which requires account holders to be able to access the funds or transfer them to another ISA within 30 days of making an instruction to their account manager. Under current ISA legislation, such property funds would no longer be eligible investments.

In order to mitigate the impact on ISA account holders and ISA managers, if the change is introduced, the Government is considering whether to allow existing investments in open-ended property funds to remain within the ISA while prohibiting ‘new’ investments in such funds.

The aim of this consultation is to seek views on the potential implications for ISA managers of the FCA proposal and on the Government’s possible alternative for retaining certain current investments within an ISA.

You can read the full consultation here. It closes at 11:45pm on 13 December 2020, after which the Government will consider all responses and publish a ‘summary of responses’ document. This will review the responses received and set out the Government’s decisions in response.

Source: HMRC Open consultation: ISAs and authorised open-ended property funds – dated 28 October 2020. 

Private residence relief allowed for a property with a large garden

(AF1, AF4, FA7, LP2, RO2, RO3)

The First-tier Tribunal has voided HMRC’s discovery assessments imposed on a couple on the sale of their home.

Private residence relief is a valuable relief for those who occupy their main home throughout the period of ownership as, in most cases, any capital gain on subsequent sale is exempt from capital gains tax. However, there are some restrictions. For example, as the area of garden and grounds of a person's residence that qualifies for private residence relief is restricted and referred to in the legislation as the 'permitted area'.

The relevant provision is set out in section 222(3) of the Taxation of Chargeable Gains Act 1992 (TCGA) which states:

'Where the area required for the reasonable enjoyment of the dwelling-house...as a residence, having regard to the size and character of the dwelling-house is larger than 0.5 of a hectare that larger area shall be the permitted area'.

This broadly means that if the garden and grounds of the residence exceed 0.5 of a hectare then relief may be available for a larger area depending on the circumstances.

In the recent case of Leslie and Catherine Phillips v HMRC TC7859, at the time the couple bought their home it included five bedrooms, three bathrooms, a garage for three cars, a one-bedroom cottage and a swimming pool, with grounds which extended to 0.94 of a hectare. The couple decided to sell the property to a housing developer and claimed private residence relief.

HMRC decided that the property was not of a size and character that required gardens or grounds of more than 0.5 hectare. As a result, HMRC issued discovery assessments to both Mr and Mrs Phillips for £162,820 which represented the capital gains tax on the part of the purchase price attributable to the unrelieved 0.44 of a hectare.

Mr and Mrs Phillips appealed against the assessments on the basis that the whole 0.94 of a hectare was, having regard to the size and character of the property, required for the reasonable enjoyment of the property and therefore formed part of the permitted area to which private residence relief applies.

The expert witness for the taxpayers said that similar houses in the neighbourhood all had large gardens too and their house was proportionally bigger and so required more grounds.

The First-tier Tribunal (FTT) judges took all the relevant facts and evidence into account. This involved considering the size and value of the house and buildings themselves, and the nature of the property's location. The fact that the house was large and was set in a rural area implied that the property would more likely appeal to someone looking for a larger house with more space around it, for example, for privacy. As a result, the FTT agreed that the large garden was required for the reasonable enjoyment of the property and voided HMRC’s discovery assessments which reduced the capital gains tax bill to nil.

Source: STEP News: UK FTT quashes CGT bill on home with large garden – dated 22 October 2020.

https://www.step.org/industry-news/uk-ftt-quashes-cgt-bill-home-large-garden

https://www.bailii.org/uk/cases/UKFTT/TC/2020/TC07859.html 

Estimated cost of tax reliefs

(AF1, AF2, JO3, RO3)

Each year, around this time, HMRC issues its estimates for the costs of various tax reliefs. Following a substantial revamp in 2019, this year’s publication has been divided into two parts:

• ‘Structural’ tax reliefs, which HMRC defines as being ‘largely integral parts of the tax structure’. The category covers reliefs which have various purposes within the tax system, e.g. to define the scope of the tax, calculate income or profits correctly, make the tax progressive or to simplify. For instance, the personal allowance and the National Insurance (NIC) primary and secondary thresholds count as structural.

• ‘Non-structural’ tax reliefs are, by contrast, reliefs that HMRC says are designed ‘to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives’. Examples include the reliefs given for ISAs and pensions.

HMRC accepts that ‘the split between ‘structural tax reliefs’ and ‘non-structural tax reliefs’ is not always straightforward’ and says categorisations remain under continuous review. One obvious example of the vagaries of classification is that the dividend allowance falls into the structural category while the personal savings allowance remains (as last year) treated as non-structural.

Unfortunately, while the layout for the reliefs has been revised this year, HMRC has not updated any of the costs, which remain based on 2019/20 figures. It says that the absence of revised numbers is ‘due to the exceptional uncertainty caused by the pandemic’ and promises 2020/21 figures will be published ‘in 2021’.

The table of the most expensive tax reliefs for the Exchequer is therefore the same as last year, which we have reproduced below. Grey shading indicates a structural relief. Note that some of these figures are already known to be wrong for 2020/21, e.g.:

• the replacement of the £10m entrepreneurs’ relief ceiling with a £1m business assets disposal relief was projected to save £215m in 2020/21 and £1,120m in the following year, more than halving the cost to the Treasury; and

• the tweaks to the pension annual allowance tapering rules will add £180m to the cost of pension income tax reliefs in 2020/21 and £315m in 2021/21 – admittedly relatively small beer against the £21,200m total.

Relief	2019/20 and 2020/21 Cost £bn
Personal allowance	113.00
NICs - secondary threshold	31.50
NICs - primary threshold	27.40
Main residence CGT exemption	26.50
Pensions income tax reliefs	21.20
NICs - employer pension contributions	18.70
Capital allowances - Income and corporation tax	17.12
Inheritance tax - nil rate band	13.00
NICs - effective discount for self-employed	5.60
Corporation tax - double taxation relief	4.54
Annual Investment Allowance	4.00
Income/corporation tax exemption for non-resident gilt owners	3.80
ISAs	3.30
R&D relief small companies	2.46
NICs - lower profit threshold	2.44
R&D relief: large companies	2.33
Income tax and CGT - double taxation relief	2.20
NICs - Employment Allowance	2.20
Entrepreneurs' relief	2.10

When looking at the chart of relief costs, remember that, in its Green Budget, the Institute for Fiscal Studies said that in the medium term the Government would need to raise an extra £43bn a year in revenue to deal with the deficit.

Source: HMRC Official Statistics: Structural tax reliefs / Non-structural tax reliefs – dated 30 October 2020.

The bounce-back loan scheme – Latest update
(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3, RO4, RO5, RO7, RO8)

The Government has announced plans to allow top-ups to Bounce Back Loans

On 2 November, the Government announced that it would extend the application deadline for each of the temporary loan schemes – that is, the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme, Future Fund, and Coronavirus Large Business Interruption Loan Scheme – to the end of January 2021. This will give businesses two extra months to make loan applications (relative to the current deadline of 30 November). 

The Government has now also announced that it will adjust the Bounce Back Loan Scheme rules to allow those businesses who have borrowed less than their maximum (i.e. the lower of £50,000 and less than 25% of their turnover) to top-up their existing loan. Businesses will be able to take-up this option from 9 November, and they can make use of this option once.

The Bounce Back Loan Scheme in summary:

• the Scheme provides a 100% Government guaranteed loan for businesses for 25% of their turnover, with a minimum loan of £2,000, up to a maximum of £50,000;

• the Government will fund interest and fees for the first 12 months of the loan;

• no repayments will be due during the first 12 months;

• to be eligible, a business must be based in the UK and have been negatively affected by coronavirus; and

• if the business is a “business in difficulty” as of 31 December 2019 then businesses in agriculture, aquaculture or fisheries may not qualify for the full amount; and the loan cannot be used for export-related activities.

Originally, loan terms were to be up to six years. However, under Pay as you Grow options, announced on 24 September, borrowers will have the option to repay their loan over a period of up to ten years (instead of six) - reducing their average monthly repayments by almost half. They will also have the option to move temporarily to interest-only payments for periods of up to six months (an option which they can use up to three times), or to pause their repayments entirely for up to six months (an option they can use once and only after having made six payments).

Sources: BEIS guidance re extensions to the four loan schemes– dated 2 November 2020.

HMRC News story: Government extends Furlough to March and increases self-employed support – dated 5 November 2020. 

Job Retention Scheme 

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3, RO4, RO5, RO7, RO8)

The Job Retention Scheme (furlough) “CJRS” was recently extended to run through until the end of March 2021.  Essentially, the rules for the period from 1 November until 31 March are those that existed as for August.  The key terms of the extended Job Retention Scheme are as follows: 

Who can be furloughed?

To be eligible for the extended CJRS from November, the employee must have been on their employer’s PAYE payroll on 30 October 2020. The employer must also have made a PAYE Real Time Information (RTI) submission to HMRC between 20 March 2020 and 30 October 2020, notifying a payment of earnings. The employee can be on any type of contract, including a zero-hours, fixed-term or temporary contract.

Employees who were made redundant or stopped working after 23 September can also qualify for the scheme if the employer re-employs them.
Originally it was necessary for an employee to do no work for the employer during a period for which a CJRS grant was claimed. From 1 July, though, the CJRS included an added level of flexibility to allow employers to bring employees back to work on a part-time basis, if it is safe to do so. So, if an employee were to go back to work for two days a week, for example, their employer would pay them for the hours they’ve worked, and the furlough scheme would continue to pay them for the remaining three days a week when they’re on furlough. Employees must have completed the minimum furlough period of three weeks before being able to go on ‘flexible furlough’. The one exception is parents returning from maternity or paternity leave. They will still be able to be furloughed after this date if the firm they work for has other employees on furlough.
How about directors and officeholders? 

If you’re an officeholder

An officeholder who is remunerated by PAYE can be furloughed and receive support through this scheme. The furlough, and any ongoing payment during the furlough, will need to be agreed between the officeholder and the party who operates PAYE on the income they receive for holding their office. Where the officeholder is a company director or member of a Limited Liability Partnership (LLP), the furlough arrangements should be adopted formally as a decision of the company or LLP.

If you’re a company director

As office holders, salaried company directors are eligible to be furloughed and receive support through this scheme. Company directors owe duties to their company which are set out in the Companies Act 2006. Where a company (acting through its board of directors) considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, the board can decide that such directors should be furloughed.

Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would be judged reasonably necessary for the purpose, i.e. they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.

This also applies to salaried individuals who are directors of their own personal service company (PSC).

How much will the CJRS provide?

The Government will pay a grant to employers of 80% of a furloughed worker’s wages in relation to the hours not worked. The amount of the grant paid will be subject to a maximum per employee of £2,500. Employers will need to pay National Insurance and pension contributions. The amount of the grant may change when the scheme is reassessed at the end of January 2021.

As a result, furloughed workers will continue to receive 80% of their salary in relation to hours not worked throughout this time. Employers may choose to top up their employees’ salaries to 100%, but they’re under no obligation to do so.

If the employee carries out any work for the employer (as they can) then the employer will (of course) pay the employee for the work carried out.
What will the furlough pay be based on?

For employees who were previously eligible for CJRS, the calculation rules will remain the same. If the employee is full-time or part-time on a fixed salary, then the amount their employer will claim will be based on 80% of their salary.

If their pay varies and they’ve been employed (or engaged by an employment business in the case of agency workers) for a full year, employers will calculate the claim based on the higher of either:

• the amount they earned in the same pay period (e.g. month) last year;
• an average of their earnings from tax year 2019/20.

If their pay varies and they’ve been employed for less than a year, employers will claim for an average of their regular monthly wages since they started work.

If an employee was not previously eligible for CJRS, for those on a fixed salary the claim will be based on 80% of the wages payable in the last pay period ending on or before 30 October 2020.

If their pay varies employers will calculate the claim based on 80% of the average payable between (these dates are inclusive) the start date of their employment or 6 April 2020 (whichever is later) and the day before their CJRS extension furlough periods begins.

In working out the amount on which to base the 80% CJRS grant claim the employer should include: regular wages; overtime that’s already been worked; non-discretionary fees; compulsory commission payments; and piece-rate payments. An employer won’t be allowed to include: payments made at the discretion of the employer or a client including payments such as tips or discretionary bonuses; discretionary commission payments; non-cash payments; non-monetary benefits, such as benefits in kind (a company car, for example) and salary sacrifice schemes (including pension contributions) that reduce an employee’s taxable pay. The 80% salary calculation will be worked out differently depending on the way the employee is paid. 

When will the CJRS payments be available?

The CJRS applications for November open on 11 November at 8am and will close on 14 December. Employers can apply online, and will need their Government Gateway user ID and password. The Government has provided details online of what you’ll need before you start a claim, along with a link to begin the process.

The Government has also announced that the following temporary loan schemes would be extended to 31 January 2021 for new applications: Bounce Back loan; CBILS; CLBILS; and the Future Fund. And those businesses who have borrowed less than their maximum Bounce Back loan (i.e. the lower of £50,000 and less than 25% of their turnover) will have one opportunity to top-up their existing loan. But it’s important to note that these are loans that must be repaid with interest, whereas furloughed pay won’t need to be paid back.

An important reminder on how payments reach the employee

The employer claims the CJRS grant and it’s treated as taxable income of the employer. It will be offset though by the deductible payment to the employee. So, the tax effect for the employer of receiving the CJRS is neutral.

The payment of the furlough pay is subject to income tax and National Insurance contributions and will be taken automatically from the pay by the employer – as for any payment of salary. That it has a CJRS grant as its source makes no difference.

Of course, any amounts paid by the employer for work actually carried out by an employee will be deductible for the employer and taxable on the employee.

More information on the CJRS can be found here and here.

Source: HMRC News story: Government extends Furlough to March and increases self-employed support – dated 5 November 2020.