Taxation and Trusts; The new 130% super-deduction: How it will work and more.

• FCA confirms increased contactless payments limit
• The new 130% super-deduction: How will it work
• EMI tax relief is being reviewed again
• R&D tax relief: New government consultation
• Updated guidance on property subject to the ATED 
• The trust registration deadline is to be extended 
• IHT receipts to fall

 

 

FCA confirms increased contactless payments limit

In January, the FCA said it would be seeking views on amending its rules to allow for a possible increase in the contactless payments limit to £100. After a short consultation, the FCA has now confirmed that this change will go ahead.

However, the FCA will also now expect firms to require Chip and PIN when a customer exceeds the new £300 cumulative transaction value threshold. Previously, to support consumers and merchants during coronavirus, the FCA had confirmed that they were very unlikely to take enforcement action where a customer was allowed to exceed the cumulative transaction value threshold.

This means that firms will be required to comply with the new thresholds and that the FCA may take appropriate measures, including enforcement action, where breaches of the limits set in the new rules are identified.

For more information see ‘PS21/2: Amendments to single and cumulative transaction thresholds for contactless payments’

The FCA does not believe this change will impact consumers’ (and in particular vulnerable consumers) ability to access cash.

Source: FCA News: FCA confirms the increase in thresholds for contactless payments – dated 3 March 2021.

 

 

The new 130% super-deduction: How will it work

 (AF2, JO3)

The Government has published new guidance on the 130% super-deduction capital allowance, the 50% first-year allowance for qualifying special rate assets, and the new Enhanced Capital Allowances for Freeports. It includes a table showing how these compare to the existing £1 million Annual Investment Allowance

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:

• a 130% super-deduction capital allowance on qualifying main rate plant and machinery investments; and
• a 50% first-year allowance (FYA) for qualifying special rate (including long-life)

The 130% super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest.

Within Freeport tax sites, companies can also access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026.

Last November, the Government also announced that the temporary increase in the Annual Investment Allowance (AIA) to £1 million, providing 100% relief for qualifying plant and machinery investments, would be extended until 31 December 2021. From 1 January 2022, the AIA cap reverts to £200,000. Note that, unlike the super-deduction, the AIA is available to incorporated and unincorporated businesses.

Examples of the super-deduction in practice

Example 1

Teign Ltd incurs £1 million of qualifying expenditure on 1 May 2021 and decides to claim the super-deduction.

Spending £1 million on qualifying investments will mean the company can deduct £1.3 million (130% of the initial investment) in computing its taxable profits.

Deducting £1.3 million from its taxable profits will save the company up to 19% of that – or £247,000 – on its corporation tax bill, i.e. 24.7p in the pound.

If Teign Ltd had instead claimed AIA, it would have only been able to deduct £1 million (100% of the initial investment) in computing its taxable profits, i.e. a saving of £190,000 – 19p in the pound.

So, the introduction of the super-deduction will have saved Teign Ltd an extra 5.7p in the pound.

And, of course, as the intention of the new super-deduction is to encourage firms to invest now, Teign Ltd may have only decided to make this investment when it did so as to benefit from the new deduction.

Example 2

Quay Ltd incurs £10 million of qualifying expenditure on 1 May 2021 and decides to claim the super-deduction.

Previous system	With super-deduction
Deducts £1 million using the AIA in year 1, leaving £9 million	Deducts £13 million using the super-deduction in year 1
Deducts £1.62 million using writing down allowances (WDAs) at 18% in year 1
Deductions in year 1 total £2.62 million – and Quay Ltd receives a tax saving of 19% x £2.62 million = £497,800	Deductions in year 1 total £13 million – and Quay Ltd receives a tax saving of 19% x £13 million = £2.47 million
Quay Ltd receives deductions year on year using WDAs at 18% on the reduced balance of the cost, and receives a tax-saving year on year at its corporation tax rate, until that balance is exhausted.

So, the introduction of the 130% super-deduction will have saved Quay Ltd £1,972,200 in year 1. Over time, the combination of AIA and WDA would provide the company with a 100% deduction, and some of that deduction will be at a higher rate of corporation tax than 19%, bearing in mind that the main rate will be 25% from 1 April 2023. Of course, that requires waiting very many years, as the WDA is calculated on the reduced balance of the cost each year. 

More information about capital allowances

Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. Businesses deduct capital allowances when computing their taxable profits.

In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation, but can instead deduct capital allowances. For example, a company with accounting profits of £1,000, depreciation expense of £200 and total capital allowance claims of £300 would make the following adjustment:

 

• Add £200 (depreciation expense) to £1,000 (accounting profits) = £1,200;
• Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits);
• Apply the appropriate tax rate, e.g. corporation tax at 19%: £900 x 19% = £171 tax due.

 

The two main types of capital allowance are:

 

• WDAs for plant & machinery - covering most capital equipment used in a trade – which are deducted on a reducing balance basis; and
• Structures and Buildings Allowances (SBAs) - covering the construction and renovation of non-residential structures and buildings – which are deducted on a straight line basis, i.e the same amount is deducted each year.

 

Plant and machinery

Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances. There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for either the super-deduction or the 50% FYA include, but are not limited to:

 

• Solar panels;
• Computer equipment and servers;
• Tractors, lorries, vans;
• Ladders, drills, cranes;
• Office chairs and desks;
• Electric vehicle charge points;
• Refrigeration units;
• Compressors;
• Foundry equipment.

 

More detail on the eligibility of different types of investment for different types of capital allowance is set out in the table below:

	Plant & Machinery						Structures & buildings
	Bought new	Bought 2nd-hand	Assets held for leasing	Main rate assets	Special rate assets	New disposal rules
Super-deduction (130% FYA)	Yes			Yes		Yes	N/A
Special Rate FYA (50% FYA)	Yes				Yes	Yes	N/A
AIA (100% up to £1m)	Yes	Yes	Yes	Yes	Yes		N/A
WDA (18%)	Yes	Yes	Yes	Yes			N/A
WDA (6%)	Yes	Yes	Yes		Yes		N/A
Freeports (100% ECA, uncapped)	Yes			Yes	Yes		N/A
SBA (3% p.a.)	N/A	N/A	N/A	N/A	N/A	N/A	Yes
Freeports (SBA 10% p.a.)	N/A	N/A	N/A	N/A	N/A	N/A	Yes

More information can be found in a tax information and impact note for the policy, and draft legislation, here. 

Full technical guidance will be published in due course.

Source: HM Treasury Guidance: Super-deduction – dated 5 March 2021.

 

 

EMI Tax Relief is being reviewed again

(AF2, JO3)      

The Government has published a call for evidence looking at how well the Enterprise Management Incentives (EMI) scheme is supporting high-growth companies to recruit and retain the best talent so they can scale up effectively, and examining whether more companies should be able to access the scheme.

Small, high-growth companies are at a disadvantage compared to larger firms in terms of their ability to offer competitive remuneration packages, often due to having limited capital available. EMIs are a type of tax-advantaged share option arrangement that is targeted at small and medium-sized enterprise (SME), higher risk, businesses in qualifying industries, with total assets under £30 million and fewer than 250 workers. Employees must dedicate at least 25 hours, or 75% of their time, to the enterprise. (However, please see below HMRC’s position on the required working time commitment during the pandemic.)

An employer may grant qualifying share options up to a value of £250,000 per employee in a three-year period. There’s no tax (or National Insurance) charge for the employee on the exercise of an EMI option provided it was granted at market value. If the company’s share price has increased in value between the time of grant and exercise the uplift is not charged to income tax. However, there will be a capital gains tax charge when the employee disposes of their shares, based on the difference between the disposal proceeds and their market value at the date of the grant of the option. However, some employees may be eligible for a reduced capital gains tax rate through Business Asset Disposal Relief (BADR), if there is a period of two years between the date an option was granted and the date of disposal of the shares.

Back in 2018, HMRC published the results of research into how the EMI scheme was then working for businesses. That was the third such review since EMIs were first made available in 2000. Then, at Budget 2020, the Government announced yet another review, resulting in this latest call for evidence.

The Government is seeking views on whether, and how, the scheme should be expanded to include more companies. In particular:

• whether the current scheme is fulfilling its policy objectives of helping SMEs recruit and retain employees;
• whether companies that are ineligible for the EMI scheme because they have grown beyond the current qualification limits are experiencing structural difficulties (i.e. in the labour market) when recruiting and retaining employees;
• whether the Government should expand the EMI scheme to support high-growth companies, and how; and
• whether other forms of remunerations could provide similar benefits for retention and recruitment as EMI for high-growth companies.

For full details of this call for evidence see here.

The Government would like responses (by email to: emiconsultation@hmtreasury.gov.uk) by 26 May 2021. 

 

Working time commitment

To receive the full tax benefits under an EMI plan, participants have to meet a working time commitment. The working time commitment is based on the average working time of an employee, so it can apply to an employee on flexi-time whose hours vary, but whose average working time meets the requirements.

To check if an employee meets the 75% requirement, the total working time needs to be established. The employee’s working time should take into account all remunerative work, including employment and self-employment.

In calculating “working time,” time is treated as working time if it is time that an employee would have been working but for injury, ill-health, disability, pregnancy, childbirth, parental leave, reasonable holiday entitlement or not being required to work during a period of notice of termination of employment.

From 19 March 2020 until 5 April 2022, employees who would otherwise have met the working time requirements but were unable to do so for reasons connected to the coronavirus (COVID-19) pandemic, will be able to use the time which they would have spent on the business of the company in calculating their “working time”.

Reasons connected to the coronavirus (COVID-19) pandemic may include employees who are:

• On furlough;
• Working reduced hours;
• On unpaid leave.

The reasons must be attributable to the coronavirus (COVID-19) pandemic. Employers and employees should retain documentation to demonstrate this.

For more information on HMRC’s views on this, please see here.

Source: HM Treasury Policy paper: Enterprise Management Incentives: call for evidence – dated 3 March 2021.

 

 

R&D Tax Relief: New government consultation

(AF2, JO3)

The Government is exploring the nature of private-sector R&D investment in the UK, how that is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate.

Research and Development (R&D) tax reliefs, including the small or medium-sized enterprise (SME) scheme, are intended to support businesses to invest.

The two principal tax reliefs available to companies undertaking R&D in the UK are as follows:

• Research and Development Expenditure Credit (RDEC): an ’above the line’ credit equal to 13% of qualifying R&D costs; and
• Research and Development tax relief for SMEs (SME scheme): an additional deduction of 130% of qualifying costs from a SME’s profits on top of the normal 100% deduction and, if lossmaking, a tax credit worth 14.5% of the surrenderable element of that loss.

In some circumstances, an SME company may be allowed to claim only the RDEC in respect of particular expenditure (for example, for work subcontracted to it or that is otherwise subsidised).

To qualify for relief, expenditure on R&D must be incurred on particular types of activity, currently limited to staffing costs (employees and agency workers), consumable or transformable materials (such as water, fuel and power of any kind), certain types of software, payments to clinical trials volunteers and, depending on the relief, some subcontracting costs.

According to HMRC, these reliefs (combined) provided £5.1 billion of support to nearly 60,000 businesses in 2017/18.

Last year, the Government consulted on bringing data and cloud computing costs into the scope of the reliefs – please see here.

This latest consultation looks at: 

• how the two R&D relief schemes support R&D in the UK, including how they operate, how they interact with the way modern R&D is done, and the main differences in design between them;
• whether the schemes should be amended to remain internationally competitive and keep the UK at the cutting edge of innovation;
• whether the definition of R&D and the scope of what qualifies for relief remain fit for purpose; and
• whether current rates of relief, and the difference in rates between RDEC and the SME scheme, remain appropriate.

It doesn’t cover:

• other Government R&D interventions, for example, direct R&D investment and research grants; or
• the R&D SME Tax Credit PAYE/NICs cap (this was the subject of a separate consultation, published on 19 March 2020 – please see here).

This consultation will run to 2 June 2021, and responses should be sent by email to: RDTaxReliefs@hmtreasury.gov.uk.

Source: HM Treasury Open consultation: R&D Tax Reliefs: consultation – dated 3 March 2029.

 

 

Updated guidance on property subject to the ATED

(AF4, FA7, LP2, RO2) 

The annual tax on enveloped dwellings (ATED) is payable mainly by companies that own UK residential property valued at more than £500,000. The dwelling is said to be 'enveloped' because the ownership sits within a corporate wrapper or envelope. The ATED is charged in respect of chargeable periods running from 1 April to 31 March each year.

The Government has issued updated ATED guidance confirming the annual tax charges for the 2021/22 tax year (please see the last column).

Property value	Annual tax 2016/17	Annual tax 2017/18	Annual tax 2018/19	Annual tax 2019/20	Annual tax 2020/21	Annual tax 2021/22
£500,000 to £1,000,000	£3,500	£3,500	£3,600	£3,650	£3,700	£3,700
£1,000,001 to £2,000,000	£7,000	£7,050	£7,250	£7,400	£7,500	£7,500
£2,000,001 to £5,000,000	£23,350	£23,550	£24,250	£24,800	£25,200	£25,300
£5,000,001 to £10,000,000	£54,450	£54,950	£56,550	£57,900	£58,850	£59,100
£10,000,001 to £20,000,000	£109,050	£110,100	£113,400	£116,100	£118,050	£118,600
£20,000,001 and over	£218,200	£220,350	£226,950	£232,350	£236,250	£237,400

Fixed revaluation dates

There are fixed revaluation dates for all properties regardless of when the property was acquired. These are every five years after 1 April 2012, for example at 1 April 2017, 1 April 2022 and so on.

A valuation is necessary when the property is purchased, and this value will normally apply until the next fixed valuation date. This means that:

• For those properties owned on or before 1 April 2012, they will have had an initial value at 1 April 2012 and the property will have had to be revalued on 1 April 2017;
• For those properties acquired after 1 April 2012, but on or before 1 April 2017, they will have had an initial value at the date the property was acquired, and the property will have had to be revalued on 1 April 2017;
• For those properties acquired after 1 April 2017, but on or before 1 April 2022, they will have had an initial value at the date the property was acquired, and the property will have to be revalued on 1 April 2022.

Note that the 1 April valuation applies for the following ATED year and the next four ATED years. So, for example, the 1 April 2017 valuation will apply for the 2018/19 ATED year and all ATED years up to and including the 2022/23 ATED year. 

Other events that require a revaluation to be made:

- Part disposals - if part of a property is disposed of (for example, a small parcel of land, or by the grant of a lease) the property must be revalued based on the property’s market value on the date of disposal. This valuation applies until a revaluation date of 1 April is reached.
- New builds or reconstructed properties - if a property is newly constructed or has been altered to become a new dwelling it should be valued on the earlier of the date:

• it was first occupied;
• it was treated as coming into existence for Council Tax or, in Northern Ireland, domestic rating purposes.

Note that it is only an acquisition of a right in or over land which is relevant and so millions could be spent developing a property without triggering a new valuation at that point. However, obviously, the expenditure could result in the property moving into a higher ATED band on the next 1 April valuation (or earlier valuation event, such as a part disposal.)

Clearly, care needs to be taken to ensure that the correct valuation date is used when assessing if the ATED applies and, if so, at what level.

In addition, many buy-to-let investors will now be buying buy-to-let properties via companies in order to obtain full tax relief for interest paid on loans used to purchase the property. And there is a particular exemption which means that no tax charge will arise if the property is let on market terms to a person who is not connected with the company.

However, if the value of the property for ATED returns purposes is £500,000 or more, an ATED (Relief Declaration) tax return must be made and the exemption claimed. Otherwise, penalties may be incurred.

Source: HMRC Guidance: Annual Tax on Enveloped Dwellings - Chargeable amounts for the period 1 April 2021 to 31 March 2022 have been updated / Find out when and how to submit an Annual Tax on an Enveloped Dwellings (ATED) return– dated 4 March 2021.

 

 

The Trust Registration deadline is to be extended

(AF1, JO2, RO3) 

As have mentioned previously, even if there is no tax liability, almost all trusts set up during lifetime before 9 February 2022 (with some exceptions), as well as certain Will trusts, are due to be registered not later than 10 March 2022 which is the current deadline set in legislation.

Unfortunately, the new IT system to upgrade the Trust Registration Service (TRS) for non-taxpaying trusts is not yet ready (it was due to be ready by the Spring but is now not expected to be ready until the Summer) and so trustees cannot yet register non-taxpaying trusts under the new rules.

HMRC has now issued a statement recognising that this delay will cause concern, with some trustees and agents potentially unable to register before 10 March 2022. Accordingly, HMRC intends to defer the deadline until twelve months after the date of actual delivery of the expanded TRS, so as to give trustees and agents of existing trusts enough time to register.

The announcement was made following a meeting between HMRC and the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) representatives. The extension of the deadline is welcome given the number of trusts that will have to register. Further updates and clarification are to be issued by HMRC in due course.

Source: STEP News: UK trust registration deadline to be extended / CIOT News: Delay in implementation of TRS under 5MLD – dated 15 March 2021.

 

 

IHT receipts to fall

(AF1, RO3)

The freeze of IHT thresholds does not mean IHT receipts are on an upward path.

Source: HMRC (historic) OBR (projected)

The inheritance tax (IHT) nil-rate band (NRB) was originally set at £325,000 for 2009/10 in the Finance Act 2006 by the then Chancellor, Gordon Brown. By fixing the band for several years ahead, Brown was hoping to keep the issue of IHT out of the spotlight until after the next Election. In the following year’s Finance Act, for good measure, he raised the band to £350,000 for 2010/11. The Finance Act 2010 reversed that planned rise and started a freeze at £325,000 which has been maintained ever since and will now run on until the end of 2025/26.

Had the NRB been CPI index-linked since 2009, it would be starting 2021/22 at around £417,000. Use the Office for Budget Responsibility (OBR) inflation projections and by 2025/26 the NRB should be around £450,000. That figure indirectly highlights one point about the NRB which can be overlooked when considering the long-term freeze; the other NRB, the residence nil rate band (RNRB). Add that in at its frozen £175,000 level and, subject to eligibility, the NRBs total £500,000 now and in 2025/26 – more than indexation of the NRB alone would provide.

The impact of the RNRB, which took effect from 2017/18, can be seen in the graph with the slowing of receipts’ growth in 2018/19, a dip in 2019/20 and gentle rise in 2020/21. As the Office of Tax Simplification noted in its second IHT report, the arrival of the RNRB had a much greater impact on the number of estates liable to IHT than actual tax receipts. Its projections for 2020/21 were that the RNRB reduced liable estates by 41%, but receipts (based on a counterfactual of no RNRB) by 15%.

For 2021/22, the OBR projects 15% growth in IHT receipts from £5.2bn in 2020/21 to £6bn. The OBR suggests that pandemic deaths have had only a small effect on this figure – in March 2020 it was projecting receipts of £5.9bn for 2021/22. Looking further out, the OBR says in its latest Economic and Fiscal Outlook (EFO):

“Inheritance tax receipts have also been revised down substantially relative to our pre-pandemic forecast thanks to lower equity prices and lower house prices. The effect of these on growth in the value of estates more than offsets the small lift to receipts due to the increase in deaths this year.”

The OBR’s March 2020 EFO was projecting £7.1bn in IHT receipts in 2024/25, after allowing for indexation of the bands which had been due to start in April 2021. Now the OBR figure is £6.1bn for 2024/25 and £6.6bn for the following year.

The NRB stands out as one of the most egregious examples of fiscal drag alongside some other aspects of IHT, such as the annual exemption (frozen since 1981). 

Source: OBR EFO 3/3/21