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Practical points - company tax

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in practice, policy and legislation related to UK company tax.

   Practical points
178 Amounts credited to a director’s loan account liable to PAYE and NIC
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The FTT has found in favour of HMRC that amounts credited to a director’s loan account were receipts of money earnings and that PAYE and national insurance contributions (NIC) were due (Ventura UK Ltd v HMRC TC06028).

In 2015, HMRC issued the appellant employer company Ventura UK Limited (Ventura) with two determinations for PAYE and a notice for NIC, in relation to amounts credited annually to a director’s loan account.

Ventura had four equal shareholder-directors. One director loaned a substantial amount to the company, and it was agreed that a fee of £16,000 would be credited to this loan account annually. No service contract between the director and Ventura nor any loan agreement documentation was presented to the tribunal to provide any further supporting details. It was explained that Ventura’s business was conducted informally.

Subject to an annual vote, £16,000 was duly credited to the director’s loan account each year. No amount of PAYE or NIC related to this was paid to HMRC. Ventura’s justification was that these accrued amounts were very unlikely ever to be paid and were described as an aide memoire should the company have enough cash to first settle the loan. Ventura claimed this was evidenced by the prior year adjustment in the 2013 accounts, which reversed eight years’ worth of annual accruals.

The FTT found in favour of HMRC that these amounts constituted earnings and were liable to PAYE and NIC. The FTT dismissed the appellant’s argument, citing specific rules applicable to directors that the receipt of earnings is at the time the amounts are credited in the company’s accounts and not when they are paid.

Further, in the FTT’s view, in the 2013 accounts the accruals were simply reversed when it was decided that the amounts were no longer payable, rather than a correction being made. This reversal documented that the director had absolved the company of its liability to him; however, it did not clear the company’s liability to HMRC.

From the weekly Tax update published by Smith & Williamson LLP

177 PAYE late filing penalties in 2017/18
 

HMRC has made a statement regarding how it will assess PAYE penalties for 2017/18.

The full payment submission (FPS) report is supposed to be filed on or before the day which is the earlier of:

  • the day on which the employee actually gets paid; and
  • the date on which the employee becomes entitled to his or her pay.

For example, an employee becomes entitled to his pay on the 28th of each month, but in August the payroll was run and payment was made on 29 August because 28 August was a bank holiday. In that case the FPS sent on 29 August is deemed to be late as it was submitted after the day on which the employee became entitled to his pay. This rule applies even if the employee was actually paid late, ie, on 29 August.

In 2016/17 HMRC introduced a three-day grace period for filing the FPS, and in Employer Bulletin 67 it explains that this three-day grace period will continue to be applied for the whole of 2017/18 where returns are filed late but within three days of the payment date and there is no pattern of persistent late filing. This is not an extension of the filing period. The ‘on or before’ deadline remains as described above. It represents HMRC turning a concessional blind eye to marginal and occasional lateness by the employer.

If the employer persistently files the FPS late but within three days of the due date, they will receive an online penalty warning from HMRC and be considered for a penalty.

It is worth reminding clients that late filing penalties start at £100 per month for the smallest payrolls, and rise to £400 per month for payrolls with 250 or more employees. One late filing within the tax year is permitted before any penalty is assessed.

The first PAYE penalties for 2017/18 will be issued in September 2017 for the PAYE periods ended in the quarter to 5 July 2017. Penalties are sent to employers by letter, not by email or GNS message (the electronic messaging service within PAYE online). However, an appeal against the penalty can be submitted through PAYE online, or by letter. You can appeal on behalf of your client, but don’t forget to take a screen print of the appeal including the reasons given, as there is no print function in the online appeals mechanism.

From the weekly newsletter of the Tax Advice Network

176 Dynamic PAYE coding: feedback so far?

Dynamic PAYE coding is now up and running, and enables HMRC to make quicker use of RTI data to update tax codes.

Dynamic coding will mean more tax code changes to reduce the number of over- and under-payments at the end of the tax year, to be refunded/collected either in a code number or as a lump sum payment. Taxpayers who experience hardship as a result of having underpayments collected more quickly should contact HMRC to discuss spreading collection of the underpayment.

The Tax Faculty is keen to hear how dynamic coding is affecting you, your employees and your clients. Are you receiving more frequent code number updates and, most importantly, are code numbers accurate? Contact Peter Bickley.

175 R&D claims and disclosure
 

The enhanced tax relief for expenditure on research and development (R&D) projects is very attractive for small companies. Unfortunately, the rules are not that simple and HMRC keeps changing its guidance, which is contained in the Corporate Intangibles Research and Development Manual (CIRD).

In October 2014 HMRC changed its practice on expenses reimbursed to staff, saying that those amounts could not be included in the staff costs related to an R&D project. In October 2016 this guidance was reversed practically back to the position before October 2014 – see the definition of staff costs and revised claims at CIRD83200.

Companies who had already submitted their R&D claims based on the HMRC guidance which existed in this two-year period may have understated their staff costs in their claim. HMRC is now giving those companies a chance to revise their R&D claims for accounting periods which ended between 9 October 2014 and 31 January 2016. The revised claim must be received by HMRC by 31 January 2018.

From the weekly newsletter of the Tax Advice Network

 

152 Tribunal case: what is UK GAAP?
 

The recent case of Ball UK Holdings Ltd v HMRC TC05920 highlights (or exposes) what may be an uncomfortable truth – that accounting standards are matters to be determined by lawyers and not by accountants. The case concerned whether the company’s accounts were in accordance with generally accepted accounting practice (GAAP).

The details do not really matter – at least not here. However, the principle is important because this is a statutory requirement for tax purposes under s46, Corporation Tax Act 2009. FRS 23 was the appropriate accounting standard and the company believed that their accounts were prepared in accordance of FRS 23 and therefore complied with UK GAAP. HMRC said they did not. The company had good grounds for their belief. PwC said so, Deloitte prepared a report which supported that view and there were two expert witnesses from KPMG on their side.

You would have thought they were on pretty safe ground. The tribunal did not agree with any of these accountants. They said that “no accountant could reasonably have read FRS 23 in that manner” which was an interesting point of view having regard to the wealth of highly experienced accountants who clearly did so. The tribunal went on to say that although a number of expert accountants had read FRS 23 in that way(!), that did not mean it was in accordance with UK GAAP; they were all wrong. It is difficult not to have sympathy for the taxpayer.

They got some of the most prestigious accountants in the land to confirm that their accounts were prepared in accordance with UK GAAP, but their expert knowledge and experience was rejected by HMRC – and by the tribunal. It is of course right that when a dispute occurs, even on matters of accountancy, it is the courts which are the ultimate forum for adjudication.

However, it is quite something when professional expertise on this scale is dismissed so comprehensively.

Contributed by Peter Vaines, Field Court Tax Chambers

 

151 Pre-sale demergers: has HMRC changed its mind?
 

One of the more common transactions I get asked about involves a privately owned trading company which also has a valuable property, very often the trade headquarters. The owners want to separate the property and the trade into separate companies so that, in due course, they will be able to sell the trading company, paying CGT at 10%, while retaining a company containing the business property to provide them with some income into their retirement.

In the past, if the sale of the business is imminent, HMRC has suggested that the main purpose of the transactions is not commercial but is to obtain this optimal tax outcome, so that the conditions for tax relief for the demerger are not satisfied. More recently, I believe that there are signs that HMRC’s view has evolved in a favourable direction, as I have been able to obtain clearance in cases where the owners wish to retire and demerge a property letting business from the trading company in order to allow a management buy-out or other sale of the trading company. All cases will, of course, depend on the full facts and circumstances involved, so it will always be important to emphasise the commercial drivers, to demonstrate that the favourable tax outcome is not one of the main purposes of the transactions.

But it does appear that HMRC is now recognising that it can be a commercial decision to retain the business property and carry on a property letting business in retirement while allowing the trade to be sold to a management team or other successor. This would also be in line with the government’s policy of encouraging small businesses. Contributed by Pete Miller, The Miller Partnership

150 Removal of signature boxes in the CT600
 

The current version of the company tax return (form CT600 Version 3) and its supplementary forms (such as group and consortium relief) includes a particularly noticeable change from the old version, by removing the signature boxes from the declarations.

Although these forms have been in place for a while (for accounting periods started on or after 1 April 2015) there is still some uncertainty as to how an agent should document their client’s approval for submission to HMRC.

Looking back to 2010, at the time preparations were being made for compulsory electronic filing, HMRC published Directions under regs 3 and 10 of the Income and Corporation Taxes (Electronic Communications) Regulations 2003, SI 2003/282.

These included requirements for an agent to authenticate a tax return before it is submitted. The directions state that before submission an agent must obtain confirmation from the proper officer, or other person authorised to act for the company in this regard, that the information is correct and complete to the best of that person’s knowledge and belief.

HMRC specifically states that this confirmation must be in writing, but may be given in electronic or non-electronic form. It could therefore be in the form of an email or a scanned copy of the declaration page of the CT600, with the person’s signature at the foot. While the tax return continued to contain a signature box for another five years after 2010, the requirement for signature approval for the tax return has not been needed for some time. Contributed by Smith & Williamson LLP

133  Determination of functional currency in line with GAAP
 

In the FTT case of Ball UK Holdings Ltd v HMRC TC05920, the tribunal has considered whether the accounts of the UK taxpayer company were prepared in accordance with UK generally accepted accounting principles (UK GAAP) in showing the company’s functional currency as US dollars. The case also included some useful comments on interpreting accounting standards and GAAP.

The taxpayer was a UK investment-holding subsidiary of a listed US manufacturing group. The taxpayer did not carry on any manufacturing activities itself but served as the holding company for the UK activities. At the end of 2006, as part of a disclosed tax arrangement under which it expected to change its functional currency to dollars, it entered into a derivative contract effectively triggering the right to move from accounting under SSAP 20 to FRS 23 The effects of changes in foreign exchange rates.

The tribunal accepted that the taxpayer’s motive was irrelevant in deciding whether its accounts were in accordance with UK GAAP. In considering the wording of FRS 23, the tribunal highlighted the meaning to be attributed to paragraph 11(a) as the crux of the case under consideration. The rule in that paragraph considers “whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy”.

Evidence for the taxpayer was that paragraph 11(a) looked solely at whether or not the entity was controlled by its ultimate parent and here the taxpayer did not have autonomy in the sense of the ability to make its own decisions. Evidence given for HMRC argued that, in the context in which it is used in FRS 23, autonomy had a wider meaning, more akin to economic or functional independence from the company’s parent. The tribunal rejected the taxpayer’s argument, holding that it had taken the word “autonomy” out of the context in which it was used. Furthermore, there was no basis in the standard for ignoring all the other relevant tests on the ground that paragraph 11(a) trumped all other tests. In reaching this conclusion, the tribunal considered a number of sources including the Basis of Conclusions within IA S21, which is incorporated into FRS 23.

The tribunal considered that where the meaning of an aspect of an FRS is unclear, the generally accepted interpretation of that part of the FRS may be apparent from the Big Four firms’ manuals, particularly if they are consistent with each other on the point. Nevertheless, where the FRS is clear, the Big Four manuals will not override it. By contrast, the tribunal noted that HMRC’s views of accounting standards do not amount to generally accepted accounting practice. The tribunal also took the view that the fact a number of accountants have misapplied an accounting standard does not mean that the accounts are in accordance with UK generally accepted accounting practice, because generally accepted accounting practice is to apply the standard.

From the weekly Tax update published by Smith & Williamson LLP

132 Filing deadline extended for employment-related securities returns

Members have reported that the online service for employment-related securities (ERS) annual returns has experienced some problems. In view of this, HMRC has extended the filing deadline for 2016/17 returns.

We understand that the service is now working and Output Delivery System templates and CSV files can be uploaded when submitting annual returns for 2016/17.

The usual deadline for filing ERS annual returns is 6 July following the end of the tax year, so for 2016/17 it is 6 July 2017. HMRC has extended the deadline to 24 August 2017 for 2016/2017 returns. This was announced in the Employment-Related Securities Bulletin issued by HMRC on 24 June 2017, which contains more information about filing returns.