Chancellor Rishi Sunak has confirmed that the government will implement some of the recommendations for simplifying Capital Gains Tax (CGT) put forward by the Office of Tax Simplification (OTS)
However, the OTS’ more radical proposals, such as aligning capital gains and income tax rates, will not be pursued.
As well as directing HMRC to improve its CGT guidance to taxpayers, the Chancellor has tasked HMRC with implementing reforms to:
Increase the filing deadline for the standalone CGT return on residential property gains from 30 days to 60 days (announced in the Autumn Budget 2021).
Extend the time window for no gain/no loss transfers of assets between separating/divorcing individuals by a year (there will be a consultation on this).
Expand CGT Rollover Relief to cover reinvestment in the form of enhancing land already owned (there will be a consultation on this).
Consider integrating the different ways of reporting and paying CGT into the ‘Single Customer Account’ that HMRC is developing.
In addition to accepting these recommendations from the OTS, HM Treasury is still considering:
The idea of a standalone CGT return system online (rather than the current combined income tax and CGT Self-Assessment return).
Treating individuals holding the same share or unit trust unit in more than one portfolio as holding them in separate share pools for CGT purposes (which would make calculations simpler and potentially facilitate automated online filing).
A review of the practical operation of Private Residence Relief nominations by taxpayers, and raising awareness of how the rules operate.
The way CGT exemptions for corporate bonds work.
The rules for Enterprise Investment Schemes to remove procedural or administrative issues that prevent their practical operation (the Treasury may carry out a much wider review of these reliefs).
However, there is to be no change to the CGT treatment of a disposal where proceeds are deferred, nor any change to the complex way that gains on foreign assets are calculated (converting values to sterling at each relevant date will continue).
The treatment of housing developments in a taxpayer’s garden will not change, nor will the treatment of a freeholder extending a lease.
These answers are based on the guidance produced so far by the professional bodies and HMRC, the draft legislation and consultation documents. The final regulations for MTD for income tax (MTD ITSA) will be published in the Autumn (probably in October), so we can’t be confident of how the rules will work exactly until we see those regs.
When must a business join MTD?
It is now apparent that there will be a big bang joining date for MTD ITSA on 6 April 2023 for all unincorporated businesses, whatever their current accounting period end.
Changing to a tax year basis from 2023/24 will mean that all businesses will have to report income and expenses that fall exactly into the tax year. Also, the draft legislation to bring about this change deems an accounting period ending on 31 March to be treated as ending on 5 April for tax purposes.
This combination of basis period and deeming provision means that unincorporated businesses will need to enter the MTD ITSA regime from the next accounting period starting on or after 1 April 2023. Thus businesses which draw up accounts to 31 March 2023 will join MTD ISA from 1 April 2023 not 1 April 2024.
It is possible that Treasury Ministers will be persuaded that having all unincorporated businesses joining MTD ITSA at exactly the same time, and reporting to the same quarterly deadlines, will put an impossible strain on HMRC’s systems and resources. We will have to wait and see what the final MTD regulations say when they are released.
Will the turnover threshold change?
We do not expect the turnover threshold to change in the final MTD ITSA regulations. HMRC has made it clear that all unincorporated businesses with an annual turnover exceeding £10,000 will be required to report income and expenses under MTD ITSA.
This turnover threshold takes into account income from all businesses, trades and property. A person with £6,000 of trading income and £6,000 of rental income will be required to report under MTD ITSA as their total turnover exceeds £10,000.
Will there be any deferral of start date?
Partnerships which only have individuals as partners will have to join MTD ITSA from April 2023.
However, there will be a deferral (for an undefined period) for MTD ITSA mandation for the following categories of partnership:
In addition, some individuals may be able to claim exemption from MTD ITSA on the basis that they are digitally excluded.
We do not have the HMRC guidance for MTD ITSA at this point yet, but VAT Notice 700/22 indicates that if the taxpayer can get any internet access at their home, business or to another location they will not be exempt on the basis of digital exclusion. This takes no account of the speed or reliability of the internet access.
Any easement?
HMRC has confirmed that there will be no easement for taxpayers attempting to comply with the MTD ITSA regulations in the first year, but a late filing penalty will not apply until four quarterly submissions have been filed late.
There is no information yet on whether penalties will apply for inaccurate quarterly submissions under MTD ITSA.
The whole system of penalties for late filing and late payment of income tax and VAT is to be revised as set out in FA 2021 ss116-118, schs 24, 25, 26. The changes impose a complex system of points that build up to a financial penalty. It is expected that this new system will be brought in alongside MTD ITSA.
What are the filing deadlines?
HMRC has confirmed that the quarterly filing deadlines for all unincorporated businesses filing under MTD ITSA will be: 5 August, 5 November, 5 February, and 5 May. Those businesses with accounting dates of 31 March or 1, 2, 3, 4 April, will also file by these deadlines, so a business with a 31 March accounting date will have 5 extra days to file.
The first mandated MTD submission for the first quarter to 5 July 2023 will have to reach HMRC by 5 August 2023, which is a Saturday in the Summer Bank Holiday weekend in Scotland.
What exactly will be submitted?
The quarterly MTD ITSA submission will consist of total sales income in the period and totals of expenses in defined categories. It is expected that those categories will be aligned with expense totals currently required for the self-employed section of the self-assessment tax return. Quarterly balance sheet statements will not be required.
Any accounting adjustments, for say capital allowances or losses, will be made on the final submission for the year – known as the end of period statement (EOPS).
How will the tax position be finalised?
The EOPS will have to be submitted by 31 January following the end of the tax year. HMRC hope that tax software providers will incorporate the EOPS into the tax software which also compiles and submits the finalisation statement.
It is the finalisation statement, that calculates the tax liability for the year, which effectively replaces the SA tax return. Any sources of income which have not been reported on the quarterly MTD submissions or EOPS is included in the finalisation statement.
Taxpayers who are not within MTD ITSA, but are currently required to submit an SA return (eg to report gains or taxable interest) will continue to submit a SA tax return.
The Coronavirus Job Retention Scheme has been extended until 30 September 2021 and the level of grant available to employers under the scheme will stay the same until 30 June 2021.
1. Changes to the level of grant from 1 July 2021
From 1 July 2021, the level of grant will be reduced and you will be asked to contribute towards the cost of your furloughed employees’ wages. To be eligible for the grant you must continue to pay your furloughed employees 80% of their wages, up to a cap of £2,500 per month for the time they spend on furlough.
The table below shows the level of government contribution available in the coming months, the required employer contribution and the amount that the employee receives per month where the employee is furloughed 100% of the time.
Wage caps are proportional to the hours not worked.
May
June
July
August
September
Government contribution: wages for hours not worked
80% up to £2,500
80% up to £2,500
70% up to £2,187.50
60% up to £1,875
60% up to £1,875
Employer contribution: employer National Insurance contributions and pension contributions
Yes
Yes
Yes
Yes
Yes
Employer contribution wages for hours not worked
No
No
10% up to £312.50
20% up to £625
20% up to £625
For hours not worked employee receives
80% up to £2,500 per month
80% up to £2,500 per month
80% up to £2,500 per month
80% up to £2,500 per month
80% up to £2,500 per month
You can continue to choose to top up your employees’ wages above the 80% total and £2,500 cap for the hours not worked at your own expense.
Almost five months after the last round of the Self-Employment Income Support Scheme (SEISS), HMRC is now sending emails, letters or messages within its online service advising those whose tax returns show they may be entitled to claim the fourth SEISS grant when their April when their personal claims window opens.
The window will open in “late April” according to HMRC and will close for all SEISS 4 claims on 1 June 2021.
SEISS has evolved
Coronavirus isn’t alone in having spawned variants. The newest SEISS variant, SEISS 4, covers the period from 1 February 2021 to 30 April 2021 and brings 2019/20 tax returns into account, both for eligibility and in calculation of the amount of the grant. This will open the scheme to some new applicants who started up in 2019/20; it excludes not only those who are no longer trading but also some who had little or no profit relative to other income in 2019/20.
Eligibility is determined by HMRC and only applies to those whose 2019/20 tax returns were submitted before 3 March 2021.
HMRC will test eligibility for 2019/20 in isolation to see if profits are under £50,000 and at least half the relevant income. For those who don’t qualify based on 2019/20 alone, HMRC will then evaluate the four tax years 2016/17, 2017/18, 2018/19 and 2019/20 combined to test if average profits across the four years are under £50,000 and at least half of relevant income.
If trading hasn’t continued through all four tax years, only the most recent continuous two or three tax years with trading income are used in determining both eligibility and amount.
Amount is also determined by HMRC, and SEISS 4 will again be 80% of three months’ average profits, but it is likely to be different to SEISS 3. The amount of SEISS 4 could be higher or lower than SEISS 3 because 2019/20 profits will be included for the first time in working out average profits.
There is no mechanism to claim a smaller amount – the only option would be to make the claim and voluntarily repay part of it.
Entitlement
Just because HMRC’s historical records may show eligibility does not mean that someone is necessarily entitled to claim. There are two important declarations required:
Traded as self-employed in 2020/2021 and intending to continue to trade in 2021/2022
Must have reasonable belief there will be a significant reduction in trading profits due to reduced self-employed income (not just increased costs) because of reduced business activity, capacity, demand or inability to trade due to coronavirus. There are several key terms in this declaration which will be discussed in more detail in a follow-on article next week.
Having a new child affected the 2019/20 tax year?
It may be possible in some limited circumstances for someone to make a claim even if having a new child means they do not meet the eligibility tests based on their 2019/20 tax return. They must have submitted a 2018/19 tax return and meet all other eligibility and entitlement criteria. HMRC advises: “Before making a claim, you must contact us to verify that having a new child has affected your eligibility.”
For these purposes “having a new child” includes being pregnant, giving birth (including a stillbirth after more than 24 weeks of pregnancy) and relates to the six months after giving birth, and caring for a child within 12 months of birth or adoption placement for a claimant who has parental responsibility.
Tax on SEISS payments
All SEISS variants are taxable and class 4 NICable and for SEISS 4 this will be in 2021/22, the year in which the grant is made, even though most of the qualifying three months are not in 2021/22.
SEISS grants received must be declared on self-assessment returns separately from normal business turnover.
Be prepared for HMRC checks
HMRC has repeatedly said all SEISS claims will be checked. The focus of checks will principally be the entitlement declarations claimants make, since HMRC itself is determining eligibility and amount. HMRC can be expected to automate checks to some extent by comparing SEISS claims with turnover and profits on self-assessment tax returns for 2020/21 and eventually with 2021/22 tax returns.
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