On 5th November, the government announced a further extension to the furlough scheme. At the start of the month, the government had extended of furlough through the month of November. However, in this more recent announcement furloughing at 80% of pay will continue right to 31 March 2021. On 17th December, the furlough was extended again to 30th April 2021. This means that the government has committed to covering up to 80% of the cost of those hours not worked by an employee due to lockdown. The grant will be subject to a limit of £2,500 per month. The government has set 3rd March 2021 as the date for the Spring Budget.
Flexible furlough arrangements will continue, which means that employees can continue to work when they are able, with the government grant supplementing those hours not worked. Hours not worked are based on the normal working hours of the employee.
A claim for furlough must be made by 14th day of the month following the month to which the furlough relates, so 14 December for November claims.
Any employee who was on payroll on 30 October 2020 will be eligible to join the new grant scheme, and it is not a requirement that the furloughed staff member has previously been on furlough.
Provided an employee was made redundant not before 23 September 2020, it is possible for that employee to be re-employed and placed back on furlough. This could suit certain employers who could have made redundancies in anticipation of furlough ending on 31 October.
The previously announced Job Support Scheme has been shelved. Since this was due to run until 31 March 2021, there has not been a clear indication about whether the Job Support Scheme will be re-introduced.
Employees can accrue holiday while furloughed but are unlikely to take holiday. On the end of furlough, it is possible that an employee would have accrued substantial holiday entitlement.
In a previous announcement, the government revealed a Job Retention Bonus which would be available for employers who brought staff back and kept them employed until 31 January 2021. The Bonus will not be paid as previously scheduled. A further announcement about this bonus is awaited.
Increase in Self-Employment Income Support Scheme grant
The Self-Employment Income Support Scheme (SEISS) will also be increased. In a previous announcement the government pledged to supplement income for the self-employed with a grant equal to 55% of profits. However, the grant which covers the period from 1 November 2020 to 31 January 2021 will now be 80% of profits. More specifically, the grant will be based on an average three months of profit for the year to 5 April 2019. The amount will be paid in a lump sum and subject to a cap of £7,500. As with the previous two grants, it will only be available to businesses that have been adversely affected by lockdown.
Applications for the grant will open on 30 November 2020 and will require an online declaration by the applicant. The amount of the grant is automatically calculated by reference to 2018/19 profits record held by HMRC.
A fourth grant covering the three months from 1 February to 30 April 2021 is also scheduled, but details of the amount of the grant and eligibility of applicants have not yet been released.
Economic outlook following lockdown
Evidence of the first lockdown has shown that the affected parts of the economy did not bounce back straight back with the easing of restrictions. The latest extension is in recognition of that extra support businesses will need through the post-covid recovery phase. The announcement included further grants for businesses that have been forced to closed and additional backing for loans to help adversely affected business to bounce back.
The current furlough scheme is due to be reviewed by the government in January next year.
Extension of Coronavirus Business Loan Scheme
On 17th December, following Tier 3 lockdowns, business loan scheme will be available until the end of March 2021.
With the reintroduction of tighter lockdown announced on Saturday, furlough at 80% of wages will be extended for the entire month of November 2020. This means that the government will subsidise up to 80% of wages for hours not worked, subject to a cap of £2,500 per person. Employers will have to settle National Insurance and employer pension contributions related to pay. The furlough effective from 1 November to 30 November will be identical to the support provided for August.
Flexible furlough, which started on 1 July 2020, will also be available. The scheme enables employers to decide the hours that employees work, with the state providing furlough provision only for those hours that are not worked. Flexible furlough was also scheduled to end on 31 October.
The employee must have been on the payroll on 30 October to be eligible for the November furlough. However, it is not a requirement for an employee to have claimed furlough before to be eligible for the new grant.
AirBnB UK Ltd have made a statement in their accounts for the year to 31 December 2019 that they will share data about their hosts with HMRC. It is a known practice that HMRC has the power to obtain tenant details from estate agents. A great leap of imagination is not required to expect tax enquiries to follow from a simple matching exercise between the taxpayers’ history already available to HMRC and AirBnB host data. The tax penalty is lower when a disclosure is made voluntarily than when it has been prompted. There is an opportunity for AirBnB hosts to bring their tax affairs up to date without suffering increased penalty.
The sections below address some of the commonly asked queries that are likely to result from this.
Rishi Sunak announced a new raft of support measures in the Commons this afternoon. The package is designed to avert an economic crisis triggered by tougher lockdown restrictions. A recent spike in Coronavirus cases has resulted in a 10pm curfew effective today. Social gathering restraints are expected to last six months. The Winter Economy Plan included mostly extensions to previously announced funding. The Chancellor also reference future tax rises to pay for the support, however any such announcment would no longer form part of the 2020 Autumn Budget. The Autumn Budget has been cancelled.
Jobs supported by the state must be viable. To prove long-term viability, the employee is required to work a third of their usual hours. The hours worked must be paid via payroll with income tax, national insurance and occupation pension scheme deductions calculated accordingly on that pay.
For the two thirds of the hours not worked, the government will pay one third. To clarify, the government will cover one third of 66% or 22%. The employer will also be required to pay a third of the hours not worked, or 22%. Therefore, the employer will be liable for one third, plus one third of two thirds, or 55%. The employee will receive 77% of their pay which is 22% from the government and 55% from their employer.
Reduction in working hours will differ, and the scheme is flexible to cover two thirds of the hours that are not worked. However, the government element of the support will be capped at £697.92 a month.
The employee will need to be on the payroll on or before 23 September 2020 to be eligible.
An employee can join, leave and, if necessary, re-join the scheme any number of times during the six-month period during which it will run. Unlike the previous furlough extension, the scheme is available to all UK employers. The scheme is open to employees even if they have not previously claimed furlough.
A larger business will only be eligible for the scheme if turnover has fallen resulting from Covid19.
The scheme is designed to encourage business to retain staff rather than make people redundant and thereby avert mass unemployment over winter when the current furlough scheme expires.
Employers would still be able to claim the previously announced Job Retention Bonus in addition to the job support scheme. The Job Retention Bonus is an award of £1,000 for retaining staff.
An employee cannot be made redundant or placed on redundancy notice for any period during which the employer is claiming the Job Support Scheme grant.
Self-employed income support scheme to be extended
As with previous Covid19 support measures, the government aims to be even handed with the self-employed and employed sectors of the economy. A further self-employment grant will be available to sole traders and partners in an unincorporated business from February 2021 until the end of April 2021. Businesses previously eligible for the self-employed income support scheme will be eligible for the new scheme.
It will be a requirement for business to demonstrate that they are actively trading but have experienced reduced demand because of Covid19. The new grant will cover the period from 1 November to 31 January. The grant will pay 20% of profits for an average month subject to a cap of £1,875 for the three months.
A second grant will be available to cover the period from 1 February to the 30 April 2021. Further information about the amount and nature of this grant have not yet been published.
Taxpayers with a liability arising in 2019/20 will have a further 12 months to settle this with HMRC. The usual payment deadline for tax arising for the year to 5 April 2020 is 31 January 2021. However, this liability can be paid over 12 months in equal monthly instalments. Provided the monthly payment plan is kept to there would be no late payment penalty or interest arising on the tax paid later than usual. The “Time to Pay” arrangement is a matter of negotiation between each taxpayer and HMRC.
Pay as you grow
Applications for the business bounce back loan will remain open until the end of November. The deadline had previously been set at 4 November 2020.
The loans which are intended to keep businesses cash positive through the era of depressed demand have been dubbed “pay as you grow.” Terms will be extended from 6 to 10 years, offering a facility for borrowers to cut their monthly repayment by almost one half.
During the term of the loan, it will be possible pause repayments for up to six months. The loan holiday will be available only once and provided at least six repayments have been made. It will be possible to enter three interest only payment periods. Each period would last six months.
The interest element of a loan can be deducted from taxable profits, whereas the repayment element is not tax deductible. As such, interest-only repayment periods provide both tax and cash benefit.
Reduced rate VAT for hospitality sector to be lengthened
The reduction in VAT rate from 20% to 5% for the hospitality sectors are to be extended to the end of March. Reduced rate VAT was due to expire on 31 January 2021.
A payment for services, which is also known as remuneration, can be disguised as a different sort of payment, such as a loan. The purpose of the disguise is tax avoidance. The practice is facilitated by an intermediary, usually mascaraing as an umbrella company.
Disguised remuneration schemes were prevalent since about the 1990s. However, successive anti-avoidance legislation and HMRC enforcement has ‘put out the fire’ at least to the extent that the practice is overt. It is estimated that about 50,000 people were handed correspondence from HMRC to settle tax on loans as old as 20 years. The loans were treated as being received on 5 April 2019. It is possible to spread the loan if the appropriate election is received by HMRC on or before 30 September 2020.
An employer can effectively outsource their human resource and payroll operation using an umbrella company. It is a third party to both employee and employer often closely linked to the recruiter.
Self-employed individuals pay less than an employee on the same income. The widespread practice of accountants facilitating companies for the self-employed, has provided cover for sham organisations to promise tax savings that seem above board. Furthermore, the prevalence of umbrella companies enables the sham to pay its clients via PAYE and thereby avoid explanation about the calculation of tax liability. The recent clampdown is welcomed by both HM Treasury and the tax profession.
The abundance of both contractor and umbrella companies in the open market has complicated the apportionment of culpability by the regulator between facilitator and end-user.
Tax justifications for a contractor company over unincorporated business was removed with the abolition of tax credit on dividends since 6 April 2016. A spate of sham umbrella companies followed to satisfy an entrenched expectation that companies could be used to save tax. Disguised remuneration campaign has subsequently deterred promoters of tax avoidance using loan payments as a substitute for employment earnings.
Recruiters often prefer to deal with contractors via a company. Where a contractor has been asked to provide services via a company, an intermediary offers to take on the administrate burden and tax dealings. That intermediary is commonly known as an umbrella company. It saves contractors hassle as compared to having their own company. The contractor is handed take home pay and a payslip, in much the same way as an employee. However, the tax paid by an employee using an umbrella company is higher than the for a self-employed contractor running their operation through a company.
Contractors working through an umbrella are usually taxed more than contractors using their own company. IR35 legislation, introduced in 1999, sought to tax as an employee any person who would be an employee but for a company. IR35 was an attempt to prevent the illegitimate avoidance of PAYE.
The 2007 intermediaries legislation introduced the term Managed Service Company. A managed service company is the legal definition of what are often marketed as Umbrella Companies. The regulation taxed workers of an umbrella company in much the same way as an employee. In 2016, the Supervision, Direction and Control (SDC) removed other tax incentives of using an umbrella company over being a direct employee, such as any tax deduction for commuting expenses.
Loan charge 2019
Introduced by the Finance Bill of 2016, an anti-avoidance provision was announced to redefine as income amounts previously defined as loan. It is referred to as the 2019 loan charge.
Many individuals who were identified as receiving loans were presented with a loan charge notice from HMRC by 5 April 2019. The disguised remuneration is treated as income of the payee. It can be treated as income of the employee on 5 April 2019. It is possible for the taxpayer to elect for the income to be spread over three years, 2018/19, 2019/20 and 2020/21. Usually a spreading election will be beneficial. A spike in income will likely cause a higher marginal rate of tax in the year of receipt. However, a scenario test of liability with and then without the election will determine the optimal outcome.
Employee’s and employer’s national insurance is usually deducted at source from employment earnings via PAYE. As previously discussed, the widespread use of companies and outsourced arrangements complicates the determination of complicity of end user with the disguised remuneration facilitator.
HMRC will attempt to recover NI from the employer or umbrella company. Effectively, the employer is required to account for the loan as PAYE earnings. An amount of loan that has effectively been treated as reclassified as employment earnings, and subject to PAYE, is not also assessed as loan charge via self-assessment. The aim of the government is to detect and prevent promoters of disguised remuneration.
Payment for services rendered will continue to be regarded as income for tax purposes. The spreading provision explained above applies to loans from a ‘November 2017’ settlement. The prevalence of contractor loan promoters and employers prepared to engage in schemes has declined significantly over the past decades resulting from HMRC enforcement.
Accelerated payment notices
Any cash flow incentive of the tax avoidance scheme is deterred via an accelerated payment notice. An accelerated payment notice is a mechanism whereby HMRC can request advanced payment where the tax liability of an organisation can be established by case law. It prevents tax avoiders from delaying tax through the appeals and tribunal process.
Individuals who are liable to tax on loan charges can also receive accelerated payment notices. Once the actual tax liability has been established it is possible to offset advances to HMRC from actual liability.
Purpose of disguised remuneration enforcement
The following remain valuable components of the UK economy:
The use of companies to limit liability in business transaction.
Accountancy service as a facility for business owners, freelancers and contactors operating via a company.
Payroll and human resource outsourcing via the umbrella company.
The use of legitimate business loans.
A tax incentive for people to chose self-employment over employment, to promote innovation and enterprise.
Enforcement directed towards promoters of disguised remuneration schemes will serve to protect credit within the tax profession. In turn, this preserves a market through which the consumer can plan their finances via tax efficient and legal manners.
The target of the government is to tackle disguised remuneration promoters.
Response to the call for evidence
In response to the call for evidence, legislators should recognise that there is an incentive within the tax profession to discourage the use of disguised remuneration. Eliminating rogue traders helps to preserve the credibility of tax advisers. That credibility has market value. Furthermore, removal of the tax avoidance market directs behaviour of people who are seeking to reduce their tax burden towards genuine self-employment for which the business of an accountant is often sought.
Enforcement can also be channelled through the professional bodies. However, this would be effective through reservation of the term accountant and tax adviser to those individuals usitable qualified. There has long been a call for the accountant title to be afforded similar protection for accounting work as to the title solicitor is for legal work. The term umbrella and accountant can be protected names by Companies House in much the same way as names such as: architect or charity. Umbrella company activities could require regulation.
It is beyond the scope of Coman & Co Ltd to advise on enforcement issues. Notwithstanding, protecting the word accountant and tax adviser would help to reduce non-compliance. Qualified accountants and tax advisers can be monitored by their respective professional bodies and peer reviewed by competitors. The terms accountant and tax adviser are used in ordinary parlance throughout the supply chain in which a disguised remuneration promoter could operate. It refers to that person who is experienced to advise on the credibility of a tax plan.