Companies House has confirmed that the automatic extensions granted by the Corporate Insolvency and Governance Act 2020 has ended for filing deadlines falling after 5 April 2021.
The Act granted automatic extensions for filing deadlines between 27 June 2020 and 5 April 2021 to relieve the burden on companies during the coronavirus (Covid-19) pandemic and allow them to focus all their efforts on continuing to operate. Automatic extensions were granted for accounts, confirmation statements, event-driven filings and mortgage charges.
Companies house has confirmed that there will be no further automatic extensions for confirmation statement filings, accounts filings and event-driven filings after 5 April 2021.
Further information can be found at www.gov.uk/government/news/automatic-filing-extensions-granted-by-the-corporate-insolvency-and-governance-act-due-to-come-to-an-end.
Overview: SEISS 4As stated in the Treasury Direction, the purpose of SEISS 4 is to provide grants where to persons ‘carrying on a trade the business activity or capacity of which, or demand for which, has been reduced, or cannot be carried on’ because of the pandemic, in the period 1 February 2021 to 30 April 2021.
Grants under SEISS 4 are calculated at 80% of three month’s average trading profits. Like earlier grants, there is a single instalment payment. This is capped at £7,500.
The online claims service is available from late April 2021 to 1 June 2021. HMRC will contact clients it believes are eligible to provide individual claim dates, either by email, letter or within the online service, from mid-April. It will also contact clients who are no longer eligible because the 2019/20 tax return hasn’t been filed by the 2 March 2021 deadline, or where they no longer meet the eligibility criteria when the 2019–20 tax return data has been taken into account.
Overview: SEISS 5SEISS 5 covers the period May to September 2021. The key difference from earlier SEISS grants is that the level of grant is to depend on how much turnover has fallen in the year April 2020 to April 2021. The grant will be:
•80% of three months’ average trading profits, capped at £7,500 for those whose turnover has fallen by 30% or more;
•30% of three months’ average trading profits, capped at £2,850, for those whose turnover has fallen by less than 30%.
Claims should be accepted from late July 2021.
Eligibility: SEISS 4Many of the criteria for SEISS 4 are broadly the same as for SEISS 1 to 3. The main shift relates to the years that HMRC is using to determine eligibility, calculate income and average profits.
Earlier grants were based on 2018–19 profits and non-trading income, and failing that, the average of the three previous years. SEISS 4 uses 2019–20 profits and non-trading income, and failing that, the average of the four years to 2019–20.
Eligibility: 2019–20 tax return submissionCritically, to be eligible for SEISS 4 or 5, the 2019–20 tax return must have been submitted by 23.59 hours on 2 March 2021. Any client who claimed earlier SEISS grants, but didn’t submit the 2019–20 return within this window, is therefore ruled out, unless there are exceptional circumstances.
Tax return amendmentsIf an amendment to the tax return, on or after 3 March 2021, reduces the amount of grant a claimant is eligible for, or renders them ineligible, HMRC should be notified within 90 days. Some or all of the grant may need to be repaid. There are however de minimis rules:
Eligibility: basis of HMRC calculationsHMRC looks at the 2019–20 figures to determine eligibility. After that it turns to the four years 2016–17 to 2019–20. The 80% of trading profits figure thus represents 80% from a different period, meaning calculations for SEISS 4 and 5 are based on different figures.
As the Budget promised, this may all mean that some clients get an opportunity to claim for the first time. It also means that some amended returns for earlier years which had been submitted earlier, but not taken into SEISS calculations, may now come into play. Potentially this could also open the door to claimants who did not qualify for SEISS 1 to 3.
But on the other hand, the outlook also changes for clients who have already used the scheme, and not necessarily to their advantage. Their entitlement is likely to change, in all probability downwards. In some cases, it could be extinguished completely.
SEISS 4 eligibility: other conditionsClients must have traded in the tax years:
•be currently trading but impacted by reduced activity, capacity or demand due to Covid-19; or
•have been trading but be temporarily unable to do so because of Covid-19 (having to quarantine or self-isolate because someone has been abroad does not count for this purpose).
And declare that they:
•intend to continue to trade; and
•reasonably believe there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Covid-19.
•have trading profits of no more than £50,000 and at least equal to their non-trading income, based on their 2019–20 tax return or an average of relevant tax years between 2016–17 and 2019–20.
ComplianceThe detail of the rules has changed significantly over the course of time, and it is important that clients are aware of this. Unlike the furlough scheme, where the most likely risk is from client errors in the calculations, the position for SEISS, where HMRC has done the number-crunching, is different. Here the potential challenge is being able to prove that trade is continuing, and that the business has suffered a direct financial knock as a result of the pandemic.
As the various phases of eligibility have unfolded, the nuance has subtly changed. The emphasis was on being ‘adversely affected’ in SEISS 1 and 2. This phase also saw the permitted inclusion of additional costs, such as installing perspex screens, etc. For SEISS 3 and 4, the emphasis is on a reasonable belief that there will be ‘significant reduction’ in trading profits. Claims based solely on additional costs, such as for face masks and cleaning supplies, are excluded. In due course, there will be details on the turnover test for SEISS 5.
For each of these various phases, clients need supporting evidence. HMRC examples of what reduction in activity etc may look like is here www.gov.uk/guidance/how-your-trading-conditions-affect-your-eligibility-for-the-self-employment-income-support-scheme#impactedbyrd.
Reasonable belief and significant reductionThese are the two key criteria for SEISS 3 and 4. For SEISS 4, Claimants must reasonably believe they will suffer a significant reduction in trading profits due to reduced business activity, capacity, demand or inability to trade due to Covid-19 between 1 February and 30 April 2021. HMRC expects them to make an ‘honest assessment’ here. There is no definition of significant reduction: it’s a judgment call the client needs to make for themselves.
Before making a claim, clients must decide ‘if the impact on your business between 1 February 2021 and 30 April 2021 will cause a significant reduction in your trading profits for the tax year you report them in.’
This essentially means two tests: one looking at impact on demand etc during the three months to 30 April 2021, and the other on reported taxable profits for the accounting period of which these months form a part.
‘HMRC cannot make this decision for you because your individual and wider business circumstances will need to be considered when deciding whether the reduction is significant. You should wait until you have a reasonable belief that your trading profits are going to be significantly reduced before you make your claim.’
On the other hand, if a business recovers after the claim, ‘eligibility will not be affected’ as it is based on the reasonable belief that trading profits would have been significantly reduced at the time the claim was made.
Evidence must be kept to show how the business has been impacted by Covid-19, resulting in less business activity than otherwise expected. HMRC suggests, for example, business accounts showing ‘reduction in activity compared to previous years’, records of reduced or cancelled contracts or appointments, a record of dates where there was reduced demand or capacity due to government restrictions, dates of closure because of government restrictions, and communications from a child’s school with information on closures or reduced hours.
HMRC compliance activity is likely to be a fact of life for some years to come. Clients should be reminded to keep an audit trail to back up their claims even when Covid-19 support schemes are only a distant memory.
Key advantages enjoyed by the companyThe company enjoys a number of advantages over the other business vehicles, as summarised below.
Lower rates of tax
For many traders, the attraction in using a limited company will be perceived tax savings. Companies pay corporation tax on their profits at the rate of 19%. Compare this with the unincorporated business where the sole trader or partner pays income tax at up to 45% and Class 4 NICs at up to 9%.
Access to tax reliefs
A number of reliefs are restricted to companies; for example, Research and Development (R&D) tax relief. Where a small or medium-sized company carries on qualifying R&D, they are entitled to an additional deduction of 130% of qualifying expenditure in calculating their profits. Further, where the company is loss-making, they have the option of surrendering the loss for a payable tax credit from HMRC.
Using a company means that an individual’s risk is limited to the amount invested in the company, giving the business owners valuable peace of mind. Compare this with the sole trader whose liability is unlimited, and with the partner who is jointly and severally liable for the debts of the partnership. In recent studies on why traders incorporate, limited liability was found to be a key factor –
Flexibility - ownership
Using a limited company may make it easier to involve family members or others in the ownership of the business as shares in the company can be issued.
Flexibility – payment of tax
Using a company can give some flexibility as to when amounts are taxed. For example, a shareholder in an owner-managed business may wish to restrict the amount they extract from the company in order to avoid paying income tax at the higher or additional rate; to avoid the high income child benefit charge or to avoid the high-income restriction to the personal allowance.
Although there is unlikely to be any significant difference between a limited company and a sole trader/partnership when it comes to access to normal sources of funding, such as from a bank, trading through a company can have advantages when individual investors are sought. For example, the Enterprise Investment Scheme (EIS) is designed to encourage new equity investment in trading companies and provides the investor with generous tax reliefs.
Many successful businesses depend on a small number of key employees. To ensure that those employees remain with the business, and continue to perform at the current level, it may be necessary to involve them in the ownership of the business. For the unincorporated business, this can be difficult to achieve as the employees would need to be admitted as partners. For incorporated businesses, shares can be given to employees over a period of time as targets are met. In addition, different classes of shares can be created to give or protect rights over certain income flows and assets.
Like it or not, many people prefer to deal with a limited company as opposed to an individual, believing that the limited company is more likely to be an established business with more resources. It may also be the case that the trader sees value in being a director of a limited company.
Lower taxes on profitsA company’s income is subject to two levels of tax, as follows:
It is common for the business owner(s) to be paid a small salary – ie above the limit for securing access to the state pension and below the amount at which a liability to Class 1 NICs arises - and for additional funds to be taken as dividends. The starting point is to establish how much in after-tax funds the business owner requires as the tax savings are maximised where more profits are retained in the company.
Other factors to consider include the following:
Utilise tax-free allowances
Are all available tax-free allowances being utilised? For example, the £2,000 dividend allowance and the personal savings allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers).
Avoid higher rates of tax
Can total taxable income be restricted to avoid a liability at the higher or additional rates of income tax?
Be aware of how different areas of tax interact
Can adjusted net income be reduced so that it doesn’t exceed £50,000, to avoid the high-income child benefit charge, or £100,000, so that the full benefit of the personal allowance is maintained?
Cash flow considerations
Could action be taken to delay tax payment dates; for example, by paying a dividend shortly after 5 April, rather than before, the payment date for the tax could be pushed back 1 year.
There is renewed interest in Capital Allowances (CAs) following the Budget announcement of new temporary first-year allowances (FYAs), including the headline-grabbing ‘super-deduction’. The purpose of this article is to provide a summary of recent changes and announcements relating to CAs, including measures in Finance Bill 2021. At the time of writing, FB 2021 has yet to become law and so is subject to change.
New temporary FYAs (the super-deduction)Legislation included in FB 2021 (cl. 9–14) introduces the following new temporary FYAs:
•the super-deduction. This gives a 130% FYA for expenditure on plant and machinery (P&M) falling within the main pool;
•the SR allowance. This gives a 50% FYA for expenditure on P&M that is special-rate expenditure (eg integral features); and
•a 100% FYA for expenditure on P&M used partly for the purposes of a ring fence trade.
The purpose of the new FYAs is to encourage companies to invest in P&M now, rather than wait until April 2023 when the tax saving will be at 25% rather than 19%.
A company incurs expenditure of £100,000 which qualifies for the super-deduction. The super-deduction is £130,000 (£100,000 at 130%), reducing the company’s corporation tax liability by £24,700 (£130,000 at 19%). The tax saving is just short of 25% (£24,700 / £100,000 = 24.7%).
Detailed conditions apply for each new FYA. The key conditions for the super-deduction and the SR allowance are as follows:
•the expenditure must be incurred in the period from 1 April 2021 to 1 April 2023 under a contract entered into on or after 3 March 2021;
•the expenditure must be incurred by a company – the temporary FYAs are not available to sole traders and partners;
•the P&M must be unused and not second-hand; and
•it must be the case that none of the general exclusions from FYAs apply. These include:
–cars (including electric cars, see below);
–long-life assets; and
–assets used for leasing.
Special rules apply:
•in the case of the super-deduction, where the company’s accounting period spans 1 April 2023. Briefly, the allowance is given at a hybrid rate between 100% and 130% calculated by reference to the number of days in the period falling before 1 April 2023; and
•in the case of the super-deduction and the SR allowance, when the asset is disposed of. The general rule applying on the disposal of an asset qualifying for a FYA is that the disposal value is taken to the relevant pool; here, it gives rise to a balancing charge. For the super-deduction, the charge is equal to 130% of the disposal value where the asset is disposed of in a period that ends before 1 April 2023, and at a rate between 100% and 130% where the period spans 1 April 2023.
Although the new FYAs are welcomed, they may be challenging to apply in some circumstances. Before advice is given to a client, it is important that the qualifying conditions are considered in detail and that thought is given to how and when the allowances will be clawed-back once the asset is disposed of. As appealing as the super-deduction may be, another form of relief – for example, the annual investment allowance (AIA) – may give a better result in some circumstances.
Peter Rayney’s article for Accountancy Daily Super deduction capital allowance – take it to the limit highlights some of the pitfalls to watch out for.
Extension of period for increase in annual investment allowance (AIA)Legislation included in Finance Bill 2021 (clause 15) provides that the AIA will continue at its current rate of £1,000,000 up to 1 January 2022, at which point it will revert back to £200,000.
Unfortunately, the Government has resisted calls to modify the impact of the rules that apply where an accounting period spans the date of the change in the amount of the AIA. Briefly, and using the 12-month accounting period ending 31 March 2022 as an example, the AIA is:
•£750,000 (9/12th of £1m) for the nine months to 31 December 2021; and
•£50,000 (3/12th of £200k) for the three months to 31 March 2022.
This could catch-out the business where capital expenditure for the year is held back until the end of the period; however, it may be that the super-deduction provides some comfort.
CAs for carsThe following changes have been made in order to encourage business to choose more environmentally-friendly vehicles:
•the 100% FYAs for qualifying cars and qualifying zero-emission goods vehicles have been extended to spring 2025;
•with effect for expenditure incurred on or after 1 April 2021, the emissions threshold for the FYA for qualifying cars has been reduced to zero emissions (previously 50g/km); and
•with effect for expenditure incurred on or after 1 April 2021 (6 April 2021 for income tax purposes), the emissions threshold for the main pool is reduced to 50g/km (previously 110g/km)
(CAA 2001, s. 45D, 45DA and 104AA as amended by SI 2021/120).
Between 1g/km and 50g/km18% WDA in the main pool
Above 50g/km6% WDA in the special rate poolTax reliefs for freeportsLegislation included in Finance Bill 2021 (clause 110; Sch. 21):
•introduces a new 100% FYA for qualifying expenditure incurred by a company on new P&M for use in a freeport tax site; and
•increases the rate of the structures and buildings allowance to 10% for qualifying expenditure on the construction of a building or structure in a freeport tax site.
In a recent consultation, the Government described freeports as: ‘secure customs zones located at ports where business can be carried out inside a country’s land border, but where different customs rules apply’. The purpose of freeports is ‘to reduce administrative burdens and tariff controls, provide relief from duties and import taxes, and ease tax and planning regulations’.
At the Budget in March 2021, the Government announced that the following areas had been successful in the freeports bidding process and are expected to begin operations in late 2021: East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames.
Legislation included in Finance Bill 2021 (clause 109) gives HM Treasury the power to designate an area in a freeport as a freeport tax site. A business in a freeport tax site may benefit from certain tax reliefs, including the FYAs and enhanced structures and buildings allowances described above.
Other measuresThe 100% FYA for gas refuelling stations has been extended to 31 March 2025 (CAA 2001, s. 45E(1)(a) as amended by SI 2021/120).
Finance Bill 2021 includes legislation that:
•treats certain types of expenditure incurred before the formal approval of an abandonment programme as qualifying decommissioning expenditure for the purposes of decommissioning expenditure relief (cl. 16); and
•introduces an easement for plant or machinery leases caught by anti-avoidance legislation when extended due to coronavirus (cl. 17).
Concluding commentsLegislative changes can be a doubled-edged sword for the adviser, creating tax planning opportunities and laying traps in equal measure. As always, knowledge is key and it is important that all options open to the business are considered.