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    HMRC decision stresses importance of ‘ownership’ for import VAT reclaim

    A recent tribunal decision has emphasised the issue of the ‘ownership of goods’ and the eligibility to reclaim import VAT.

    In the case of Piramal Healthcare UK Limited, HMRC raised assessments totalling £196,254 to be repaid in respect of import VAT incorrectly claimed.

    The pharmaceutical company (who imported goods into the UK for packaging and paid associated import VAT) was named as the importer of record and thus believed it was eligible to recover the import VAT paid.

    It came to light that Piramal was only involved in the packaging process on the goods, and its client remained the owner throughout the process. As a result, HMRC argued that as Piramal didn’t purchase the imported goods, they had no right to reclaim the import VAT incurred, of which the Tribunal agreed.

    What does this ruling mean?

    This case highlights the importance of HMRC’s policy on ‘ownership’, which is crucial when seeking the recovery of Import VAT. Businesses need to consider who should be recorded as importer as without a proactive approach, the financial risk could be substantial.

    The case of ‘ownership’ becomes an issue in UK-EU supply chains especially, due to regular use of the Delivered Duty Paid (DDP) Incoterm. Sellers currently trading under the DDP term may not fully understand the implications this could cause from a VAT perspective, a problem intensified by the lack of understanding within the freight sector where buyers are more likely to be readily declared as the importer.

    This area is now being investigated in greater detail by HMRC, and importers are incurring significant assessments where errors are found.

    The ‘ownership’ issue also affects importers who receive goods on loan, or provide a repair or ‘value added’ service, as these businesses do not take title to the goods. Therefore, any import VAT paid, or postponed, by these importers cannot be reclaimed.

    To avoid any unnecessary complications, businesses need to ensure their eligibility to reclaim import VAT before importing goods in their name.

    Get in touch

    If you think you may be affected by the ‘ownership of goods’ ruling, and the eligibility to reclaim import VAT, speak to our corporate and indirect tax expert, Andy Kirkaldy, by clicking the button below.

    HMRC update: U-turn on benefit in kind on double cab pick-ups

    In a surprising turn of events, the Government has reversed its decision regarding the taxation treatment of double cab pick-ups, just a week after making the announcement.

    On Monday, February 12, HMRC made updates to its guidelines regarding the tax implications of double cab pick-ups (see our blog here), prompted by a 2020 Court of Appeal ruling. The updated guidance outlined a significant change: starting from July 1, 2024, all double cabs with a payload of one tonne or more would be categorised as cars instead of goods vehicles, affecting both capital allowances and benefit-in-kind (BIK) considerations.

    Originally, it was going to affect all double-cab pick-ups ordered after July 1, the policy would have left many businesses grappling with unforeseen tax implications. However, vehicles already in use or ordered prior to this date were to maintain their current classification until April 2028.

    Yesterday (19 February), HMRC announced that this new guidance will not come into force. The U-turn in full:

    • The tax on the benefit-in-kind will now not increase when employers provide these vehicles to their employees; and the capital allowances available in the first year of use will now not be reduced when a business purchases this vehicle for use in their trade.
    • This will ensure a continued and consistent treatment of double cab pick-ups for capital allowances, benefit in kind, and VAT purposes, maintaining simplicity in the tax system.
    • HMRC will withdraw its updated guidance during the afternoon of Monday 19 February 2024
    • This update is only with reference to DCPUs with a payload of one tonne or more. DCPUs with a payload of less than one tonne continue to be treated as cars

    Please note that the government are consulting on the treatment of commercial vehicles and there may be a further announcement later in the year, so if you are planning to purchase any type of commercial vehicle, please seek advice.

    If you would like to discuss your situation in more detail, or would like further clarification on HMRC’s U-turn, please get in touch with tax manager, Julie Walsh, by clicking the button below.

    HMRC announce huge change to benefit in kind (BIK) charge for double cab pickups

    The PM+M tax team are regularly asked whether a van that carries passengers could be classed as a car for benefit in kind (BIK) purposes.

    Currently, HMRC interprets the legislation that defines a car and van for tax purposes in line with the definitions used for VAT purposes which are based on payload, i.e., anything under one tonne is classified as a car, and anything a tonne and over classified as a van. This rule was replicated as a pragmatic way of resolving the matter.

    However, HMRC have recently announced that, from 1 July 2024, they will no longer use this classification method.

    Going forward, classification of double cab pickups will be determined by assessing the vehicle as a whole at the point that it is made available to determine whether the vehicle construction has a primary suitability of conveying passengers or goods, as per the two-part test used to determine the van or car.

    From 1 July 2024, most if not all, double cab pickups will be classified as cars when calculating the benefit charge. This is because, typically, these vehicles are equally suited to convey passengers and goods and have no predominant suitability.

    Transitional arrangements 

    Where a vehicle is purchased prior to 1 July 2024, the tax remains unchanged until the earlier of the expiry of the lease or 5 April 2028.

    Transitional arrangements will apply for employers that have purchased, leased, or ordered a double cab pickup before 1 July 2024, whereby they will be able to rely upon the previous treatment until the earlier of disposal, lease expiry, or 5 April 2028.

    Where, for example, an order for a double cab pickup has been made on 5 January 2024, but this was not available to the employer until 2 September 2024, as the agreement was entered into before 1 July 2024, the previous rules continue to apply for the employer until the earlier of disposal, lease expiry, or 5 April 2028.

    Capital allowances

    For expenditure incurred before 1 July 2024 a double cab pick-up, with a payload of one tonne or more, will continue to be treated as a van until the earlier of disposal lease expiry, or 5 April 2028.

    For expenditure incurred on or after 1 July 2024 HMRC will no longer interpret the legislation that defines a car for capital allowances purposes as excluding double cab pick-ups with a payload of one tonne or more. Therefore ,the valuable annual investment allowance will not be available when the van is purchased and allowance’s will be restricted to the lower rates available for cars.

    Transitional arrangements will apply when an amount of expenditure is incurred on a double cab pick-up as a result of a contract entered into before 1 July 2024 and the expenditure is incurred on or after that date but before 1 January 2025. In these circumstances a double cab pick-up with a payload of one tonne or more will continue not to be treated as a car.

    Get in touch

    If you have any questions about double pickups and the updated guidance released from HMRC, please do not hesitate to get in touch by emailing at enquiries@pmm.co.uk.

    HMRC issue ‘side hustle’ tax warning for sellers on sites like Etsy, Vinted and eBay

    The second-hand online clothing market has boomed in recent years, with the likes of Vinted, eBay, Gumtree and Etsy giving users their own ‘shop window’ in which they can display and sell their wares to others, with just the click of a few buttons on their phones.

    Recent press reports may have caused some concern for many who use these platforms to sell their old or unwanted items, warning that those sellers may now have an obligation to the taxman.

    It should be understood that there have been no changes to the tax rules in relation to the sale of second-hand items – the only change has been that of HMRC announcing that the resale platforms will now have to share information of certain sellers with them.

    The sellers who will have their details passed on to HMRC will be those who have sold 30 or more items on any given platform, where those proceeds have generated proceeds of 2,000 Euros (around £1,700) or more in a 12-month period on a single platform.

    Even if their details are passed on to HMRC, it will by no means result in those individuals owing the taxman.

    As to whether those sellers will have a tax liability, that will depend on whether they are deemed to be undertaking an activity which is ‘trading’ in nature – and, even then, for a tax liability to arise, the individual needs to be generating a profit (meaning selling items for more than they have bought them for) before any tax might be due.

    Provided the taxpayer can show that they weren’t undertaking a trading activity, that should be the end of the matter.

    To determine whether someone is trading, HMRC will look to the so called ‘badges of trade’, which consider a number of tests, including whether somebody has bought items with a view to selling them and realising a profit. They will also consider the number of individual sales (i.e. repetition) that a seller makes in any given year and whether or not the item has had personal use.

    Even if someone is trading, and generating profits, there are still allowances which might reduce or even eliminate any tax liability (including the £12,570 personal allowance and the £1,000 annual ‘trading allowance’).

    Typically, clothes will not appreciate in value and therefore it’s unlikely if the items have been bought new, worn for a few years, and then sold, that they will have gone up in value and generated a profit. However, it is possible that certain one off, high value items, (for example a luxury watch or a luxury handbag), could go up in value, generating a profit. A single transaction might not generate a trading receipt; however the gain could potentially be subject to capital gains tax in the sellers hands. However, there are exemptions that might cover any gain, and there are special rules relating to moveable items called ‘chattels’ which might exempt them from CGT altogether in any event.

    Get in touch

    If you are worried that you might be trading and therefore have an obligation to report, or if you are worried that you might have to pay tax to HMRC on an item that has gone up in value, please get in touch by emailing enquiries@pmm.co.uk.

    HMRC nudge letters to ‘Persons of Significant Control’

    HMRC are currently in the process of sending out nudge letters to ‘Persons of Significant Control’ (PSC) who have either not completed a tax return, or who have completed a tax return in 2021/22, but whose income is ‘lower compared to most in a similar position’.

    HMRC’s Wealthy External Forum have begun posting ‘One to Many’ letters to PSCs listed at Companies House, with the PSC classified as someone who owns or controls the company. According to HMRC, a PSC is a person who:

    • Owns more than 25 per cent of shares in the company;
    • Owns more than 25 per cent of voting rights in the company;
    • Has the right to appoint or remove the majority of the board of directors;
    • Can exercise significant influence over the company

    HMRC’s ‘One to Many’ approach allows them to target a wide range of taxpayers regarding a specific issue where the data suggests there may be a reason for non-compliance. The letters are urging recipients to check, and where necessary, correct their tax returns.

    Those who have not completed a return will be directed to an online checker to determine whether they should be completing returns. Those whose disclosed income is thought to be incorrect will be invited to amend their 2021/22 tax return, and ensure their 2022/23 return includes the additional income.

    Recipients of HMRC’s ‘One to Many’ letters have until 18 August 2023 to respond.

    If you have received a HMRC letter, we recommend speaking to your adviser to obtain immediate professional advice before responding particularly if you currently hold fee pro cover.

    Get in touch

    Contact a member of the PM+M tax team by emailing enquiries@pmm.co.uk to discuss your situation in more detail.

    HMRC’s changing attitude to R&D claims

    HMRC’s changing attitude to R&D tax credit enquiries

    HMRC have begun to implement their new approach to investigating Research and Development (R&D) tax credit claims to eliminate ‘erroneous submission filed by unscrupulous advisers’. According to research, investigations into R&D claims have risen 900% from levels seen in 2019, with an estimated 1 in 25 R&D submissions currently being targeted.

    Following HMRC’s annual report from December 2022, it was estimated that £469 million was lost through fraud and error in its two R&D schemes in the 2021/22 tax year – the equivalent of 4.9% of corporate tax R&D relief.

    The government responded to the data by increasing resources for HMRC to improve compliance, with the specialist R&D team focused on compliance against SMEs doubling in size in recent months.

    What does a HMRC R&D review involve? 

    HMRC are taking a hard stance on the review of R&D claims and are looking for strong evidence of advancements in technology in the claimant’s industry and detailed information on the competent professionals involved in the Research & Development project.

    A HMRC review will initially look at the businesses specific projects and whether they believe these qualify for R&D tax credits.  If HMRC are satisfied that the projects qualify, they then move on to check the costings.

    Should HMRC issue a pre-decision letter stating that they do not believe the claim qualifies, then it can be very difficult to shift them from this stance, and it is unlikely that the claim would go on to be agreed.  If you decide to withdraw the claim at this point, penalties may be issued.

    What do I need to do to ensure an R&D claim is successful?

    Ultimately, you need to be very confident that an R&D project meets the BEIS definitions of R&D as set out in the HMRC guidance before the claim is submitted. Given the hard stance HMRC are taking on the review of R&D claims, we would recommend speaking to a specialist R&D tax credit adviser to guide you through the process and ensure you clearly understand the criteria and the quality of information that will need to be supplied.

    Get in touch

    If you would like to discuss your R&D tax credit claim in more detail, or have any questions about a claim you’ve made in the past five years which may not perform well against HMRC scrutiny, get in touch with one of our expert R&D tax advisers by emailing enquiries@pmm.co.uk.

    HMRC to reform Self Assessment penalty system

    From 2026, the current standard £100 fine for late filing of Self Assessment tax returns is due to be changed to a points-based system for self-employed individuals and landlords with a turnover above £50,000.

    HMRC have confirmed that the penalty system will be reformed in order to curb the abuse of the Self Assessment system and support taxpayers who genuinely make an occasional mistake.

    The proposed penalty reforms for paying tax late will be based on the length of time the tax is outstanding, meaning the earlier the overdue payment is made, the lower the penalty charge will be.

    The points-based system will be beneficial for those who only occasionally miss deadlines. For example, if an individual misses a self assessment deadline, they will initially be given one point, with a financial penalty only being charged once a set number of points has been reached. This approach recognises that taxpayers who infrequently miss deadlines should be encouraged to comply with filing obligations, rather than immediately being charged a penalty. Instead, the new penalty regime will penalise the minority who persistently miss filing and payment deadlines.

    Although the reforms already apply for VAT, following the government decision in December 2022 to give businesses more time to prepare for Making Tax Digital (MTD) for Income Tax, the changes are now due to come in from April 2026.

    Get in touch

    If you would like to discuss the Self Assessment penalty system changes in more detail, please speak to your usual PM+M adviser or email us at enquiries@pmm.co.uk.

    Tax Basis Period Reform and the transitional rules for 2023/24

    HMRC’s reform of the basis of taxation for self employed individuals and partners is set to take effect from April 2024, with a 2023/24 transition year.

    The changes will affect all sole traders, unincorporated partnerships and LLPs who do not currently prepare their annual accounts to a reference date ending between 31 March and 5 April.

    What are the current basis period rules?

    Currently, established sole traders and partners/members in ongoing businesses pay tax for a tax year based on the financial performance of the business in the 12 month accounting period which ends in that tax year. If a business prepares accounts for the 12 months ending 30 April 2022, then the profits from this period, after adjustments, would be taxed in the individual’s tax return for the 2022/23 tax year, with payments of tax in January and July 2023 and a balancing payment in January 2024.

    This is known as the ‘current year basis’ and the period being taxed is the ‘basis period’.

    What are the proposed new rules?

    From 2024/25, all unincorporated businesses will be taxed on the profits generated during the actual tax year, regardless of the year end that the business chooses to prepare its account to. HMRC do, however, allow a year end that falls between 31 March and 5 April to be treated as if it falls at the end of the tax year.

    If a business has an accounting year end of 31 December, it will have to apportion profits from two accounting periods to fit the 6 April to 5 April timeline. If the accounts have not been finalised before the tax return filing deadline, then estimated profits will need to be included, which will then need to be revised on the return once the actual figures for the later accounting period are known.

    HMRC recognises the additional administrative burden this will cause and are reportedly exploring ways to ease this.

    In practical terms, it is likely that most businesses will choose to move to a 31 March or 5 April year end if they can, in order to avoid such complications.  If so, it is important that this is done in the transition year 2023/24.

    2023/24 – the transition year  

    2023/24 will be a key tax year for the proposed new rules, as the transition year, and individuals will be taxed on a long period of account ending 5 April 2024. This period will therefore pick up all untaxed accounting profits generated up to this date and relief will be given for any overlap profits generated under the current basis period rules.

    For a business with a 30 April year end, this means that the profits of the 23 month period from 1 May 2022 to 5 April 2024 will be taxed in that year, less the overlap profits which arose in each partner’s first year of business.

    Transitional profit spreading

    HMRC have published rules that allow the payment of the tax liability generated from transitional period profits to be spread over five tax years, beginning with the year of the transition – a decision that should help to ease cashflow by ensuring the tax due on these profits is not paid entirely in 2023/24.

    To benefit from this, it is vital that businesses changing their year end do so within the transitional period.  If the change was done beforehand, for example to 31 March 2023, tax would be accelerated but no spreading would be possible.

    What are the possible complications?

    The acceleration of profits for five years could create some complications depending on the individual’s level on income. For example, the £100,000 limit for the personal allowance or the £50,000 limit for High Income Child Benefit Charge.

    The proposed reform to the basis period method includes provisions to mitigate the impact of the changes by removing the transitional profits from the main tax computation and creating a stand alone income tax charge. Although this provision will prevent some anomalies, such as the High Income Child Benefit Charge, the personal allowance taper anomaly remains and there could also be complications with income limits for pension contribution purposes.

    What should I be thinking about now?

    • Make sure you understand the cashflow implications of the changes and how you will manage them; and
    • Determine whether changing your year end to 31 March will make the calculation of taxable profits from 2024/25 clearer. If so, there will be various practical implications of that to consider for the business.

    Get in touch

    If you would like further clarification on how the basis period reform and transitional rules will affect you and your business, get in touch with our tax experts who can help ensure you are prepared for the changes. Speak to your usual adviser, or email enquiries@pmm.co.uk for more information.

    600,000 people miss Self Assessment tax return deadline

    According to HMRC, 600,000 taxpayers missed the submission deadline for 2021/22 income tax Self Assessment on 31 January.

    If you are one those who is yet to submit their tax return, don’t delay! We recommend submitting your income tax Self Assessment as soon as possible. Although you will still incur the initial £100 fixed penalty, if you delay until the end of February, an automatic 5% penalty will be applied after 30 days (effectively by midnight on 2 March 2023) on any outstanding tax which remains unpaid. Additional 5% penalties can be applied on any tax which is still owed after 6 months and again after 12 months.

    Latest statistics from HMRC show that in the period from April 2022 to December 2022, penalty revenues of £529 million were raised across all taxes and duties. A 27% increase from the same period a year prior, and a 72% increase in penalty revenues from the same period two years previous.

    The ongoing cost of living crisis and rising interest rates to tackle inflation mean that HMRC may see penalty revenues grow even further over the coming months, with late payment interest due to rise from 6% to 6.5% on 21 February 2023.

    If you are unable to pay your tax bill, engaging with HMRC and a trusted tax adviser as early as possible is beneficial and offers the best chance of mitigating financial penalties.  There are options available for taxpayers to explore including ‘time to pay’ arrangements to avoid accruing additional penalties, however, late payment interest will still be charged.

    Get in touch

    If you haven’t submitted your tax return for 2021/22, and need help or advice to avoid incurring further penalties, please speak to your usual PM+M adviser or get in touch by emailing enquiries@pmm.co.uk.

    Rising interest rates and the impact on Corporation Tax payable

    As you may be aware, from April 2023, the main rate of Corporation Tax (CT) will rise from 19% to 25%. This, paired with ever-increasing interest rates, could have a big impact on cash flow.

    The Bank of England base rate has been rising for some time and currently stands at 3.5%. This in turn leads to HMRC increasing interest charged on the late payment of tax.

    For a business that doesn’t pay within one of the large company instalment regimes, tax owed is due 9 months and 1 day after the year end. If tax is paid late, interest will be charged at base rate plus 2.5% per annum on the outstanding balance. The current late payment interest rate is 6%, a rise of 3.25% since January 2022

    It’s also worth mentioning that the repayment interest receivable on amounts overpaid has also increased. This is currently set at base rate less 1%. For a large company that falls into the instalment regime, the rate of interest on under paid instalments of CT is set at base rate plus 1%. The current instalment debit interest rate is, therefore, 4.5%, a rise of 3% since February 2022.

    Credit interest received on overpaid quarterly instalments or early payments of CT has increased to base rate less 0.25%, currently standing at 3.25%. If you are business owner who pays CT via the large scheme (annual taxable profits between £1.5 million and £20 million) or the very large scheme (annual taxable profits over £20 million), and you therefore pay tax in quarterly instalments, the rising interest rates, which we expect to rise further to control inflation in the coming months, could significantly increase the cost of your payments.

    Following the tax rate change in April 2023, large companies making instalment payments based on their expected tax liability for straddle periods should consider increasing their payments if they wish to avoid interest charges.

    For further information on the upcoming CT rate increases, read our recent blog by clicking here.

    Get in touch

    If you would like further advice based on your specific circumstances, please contact corporate tax assistant manager, Andy Kirkaldy, by clicking the button below.

    5.7 million people still to file their tax return – have you filed yours?

    HMRC have recently reported that of 12 million taxpayers who have to file a tax return for the 2021/22 tax year, just under half still need to do so before the 31 January deadline.

    Now the festive period is over, and we begin a new year – time is running out to meet the deadline, as unlike previous years, HMRC is not likely to waive late-filing penalties, and the late payment interest is set to rise too.

    Your annual Self Assessment tax return can seem daunting, especially if it is your first one, however, by reading our basic tips and pointers below to help you prepare the return and avoid mistakes, it can be a simple process.

    WHAT IS SELF ASSESSMENT?

    Self Assessment is the process of informing HMRC about your taxable income and gains for a tax year by completing a tax return. Tax is usually deducted automatically from wages, pensions, and some savings income, however, people and businesses with other income (including pension payments, property letting and Capital Gains Tax on the sale of assets like shares or a second home) must complete a Self Assessment tax return.

    DO I NEED TO COMPLETE A SELF ASSESSMENT TAX RETURN?

    You must submit a tax return if, in the last tax year (6 April 2021 to 5 April 2022), you were:

    • Self employed as a ‘sole trader’ and earned more than £1,000 (before deducting anything on which you can claim tax relief)
    • A partner in a business partnership
    • You earned £100,000 or more

    Usually, you will not need to submit a return if your only income is from your wages or pension. However, you may need to complete one if you have other untaxed income such as:

    • Some COVID-19 grant or support payments
    • Property rental income
    • Tips and commission
    • Income from savings, investments and dividends
    • Foreign income

    If you are still not sure, click here to visit the Gov.uk website and answer a few questions to check if you need to submit a Self Assessment tax return.

    SELF ASSESSMENT TAX RETURN DEADLINES

    • Paper tax returns should have been submitted by midnight 31 October 2022
    • Online tax returns are due by midnight 31 January 2022
    • Pay the tax you owe by midnight 31 January 2022

    WHAT INFORMATION DO I NEED TO COMPLETE MY TAX RETURN?

    • Ten-digit Unique Taxpayer Reference (UTR) – this will have been sent to you when you registered for Self Assessment  – if you haven’t got one, you need to register ASAP online by clicking here
    • National insurance number
    • Details of self-employment income and expenses
    • Details of property income and expenses
    • Employment and pensions income information, including forms P60, P11D and P45 from any jobs you have had
    • Interest certificates from banks/building societies
    • Details of pension and/or charity Gift Aid contributions which may be eligible for tax relief
    • Details of dividends and other income
    • Details of any chargeable capital gains made in the year

    HMRC will calculate what you owe in tax based on the information which you report – remember, you must pay your bill by 31 January 2022.

    GET IN TOUCH

    Hopefully you are already on with or have completed your tax return for 2021/22.  If you haven’t, or if you aren’t sure whether you need to submit a tax return, get in touch straight away to avoid missing the deadline and incurring penalties.  Please speak to you usual PM+M adviser or get in touch by emailing enquiries@pmm.co.uk.

     

    HMRC publish draft R&D guidance

    Earlier today, HMRC published draft guidance in relation to the changes coming into the Research & Development (R&D) scheme from 1 April 2023.

    The guidance covers various topics which have previously been flagged, such as the exclusion of overseas R&D work and an extension of the relief to include data and cloud computing costs.

    However, one key change detailed in the guidance is the requirement to submit a Claim Notification form within 6 months of the end of the relevant accounting period for any new claimants i.e. any companies who haven’t made an R&D claim for at least 3 years. If the form isn’t submitted within that deadline, you won’t be able to make the claim.

    The guidance also details a new Additional Information form containing substantial information about the claim (for accounting periods beginning on or after 1 April 2023), including details of a person at the company taking responsibility for the claim and the agents who helped to prepare the claim.

    The legislation will not be finalised until the Finance Bill 2023 and the final form of that legislation may differ from the draft published in July 2022, this means that the guidance issued could also change and no action should yet be taken based on it.

    You can view the full guidance here.

    Get in touch

    If you wish to discuss any areas of the guidance in more detail, please get in touch with your usual PM+M adviser or email enquiries@pmm.co.uk