Tax advice as lockdown eases
Angela Clegg of the Tax Faculty provides pointers on the tax measures that businesses should consider following the COVID-19 lockdown. She covers cash flow, employment issues, working from home and tax governance, among other things.
Cash flow
There are a variety of measures businesses can adopt to improve cash flow using the tax system. One of the most widely publicised is that VAT payments due between 20 March 2020 and 30 June 2020 can be deferred without application until 31 March 2021. No interest or penalties will be due on this amount.
Companies can also reduce their current-year quarterly instalment payments (QIPs) and request repayment of those already made in respect of the current year. This is on the basis that companies can substantiate falling profits with appropriate evidence such as management information and forecasting.
At the time of writing this article, ICAEW is seeking clarification of the position in respect of repayment of QIPs of the prior year on the basis that current year losses are large enough to not only remove current year profits but also reduce those of the prior year.
We understand that HMRC is considering this point but at present prior year repayments of QIPs are not being made until HMRC’s position is confirmed. We will keep members updated as this issue develops.
Time to pay HMRC is another crucial area of support for businesses. Typically, businesses are able to achieve short time-to-pay deferrals of three months or less (in particular where the debts are less than £750,000) without in-depth investigation. HMRC recognises that businesses need some short-term breathing space to assess the impact of COVID-19 on the business. However, HMRC expects that if further support is required, the business will approach HMRC to agree a formal time-to-pay arrangement. Much of the usual information will be required such as:
- what other support has been considered? HMRC will want to understand that it is the lender of last resort;
- what is the recovery plan for the business?
- cash flow forecasts;
- viable repayment plan.
HMRC will ordinarily seek the maximum payment up front and the shortest possible payment plan – three to six months is typical. Payment plans of 12 months or more will be by exception. However, we understand that HMRC appreciates the need for flexibility as there could be a significant degree of uncertainty over when and how quickly certain revenue streams will return.
It is anticipated that the number of businesses requiring long-term payment plans might increase as the full effect of the COVID-19 crisis is felt and short-term agreements with HMRC conclude. Therefore, we would advise those businesses which know that they will need a further payment plan to consider their applications as early as possible and approach HMRC ahead of when any short-term arrangements might conclude. Similarly, they should ensure that management information is prepared ready to support any proposals.
We have received feedback that there has been some inconsistency around whether interest will be due on payment arrangements. We would advise businesses to discuss and agree this with HMRC.
Loss relief could also open up cash flow advantages. It is important to be able to quantify losses with a reasonable degree of accuracy to manage forecasting. The possibility of an early loss carry-back claim might also be open to achieve a repayment of tax as quickly as possible.
It is important to maintain good management information, which could be used to provide evidence for such a claim. Similarly, the routine tax-saving reliefs such as capital allowances and research and development relief should not be overlooked. They may offer valuable cash flow advantages.
While not discussed in detail here, it is important to consider the tax implications of any refinancing and treasury arrangements that might be undertaken, including the restructuring of intra-group debt. Falling income levels could affect the corporate interest restriction calculation. Work may need to be undertaken to ensure arrangements can be implemented in a tax-neutral way.
Employment issues
The importance of tax governance is covered later. This applies across all taxes. One area where it will be important to demonstrate appropriate oversight of the decision-making process will be around the use of the furlough scheme. It is important that such issues are considered at board level and are appropriately documented. These systems should also ensure any associated changes to salary and terms and conditions are managed from a legal, HR and tax perspective.
The furlough scheme, like all the fiscal grants schemes, is taxable. Businesses need to ensure these future tax costs are considered in forecasting.
It is also important to understand what is available to employees as part of their package and publicise this.
For example, many private health schemes offer access to online medical help such as GP and physiotherapy appointments as well as care in respect of mental wellbeing. During lockdown these benefits could prove vital to staff, but they may not be aware of their eligibility. There could be other offerings that could provide essential support to employees during lockdown. It is important that businesses scrutinise their employee benefits packages and communicate these effectively.
It will also be worth considering how decisions during lockdown may affect the cost of providing such benefits. For example, many private hospitals were shut to provide capacity to the NHS. We are aware some providers are giving a rebate on premiums to compensate participants for such measures. Similarly, if salaries have been reduced even temporarily, this will reduce the cost of many benefits such as pensions. It is important that this is factored in and that providers are contacted to discuss this. Businesses should also consider the use of salary sacrifice measures to manage the cost effectiveness of benefits packages in the medium term if this has not already been implemented.
It is our understanding that where the car keys of company cars are posted back to the employer this could count as a period of ‘unavailability’ in respect of the car benefit charge. Usually the car would have to be returned to the employer but HMRC by exception has recognised the difficulties of this in light of COVID-19. The car would need to be unavailable for a period of at least 30 consecutive days to qualify. This could save costs for both the employer and employee at a time when the use of the car is not essential to the employee.
Working from home
COVID-19 is having a huge impact on the way we work. Many employees are now based at home. Many businesses are working on the basis that these arrangements will be in place for some time. The tax implications require some thought.
An article by Sarah Bradford in the October 2019 issue of TAXline provides more detail, but some key issuesare summarised here.
Employer payments towards additional household costs
Where arrangements exist between the employee and employer such that the employee must work regularly from home an employer can make a tax-free payment to an employee of £6 per week towards the additional costs of working from home. This will cover items such as heating and lighting in the work area. The requirements to be met are contained within s316A, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
Although the £6 per week is likely to be sufficient to cover the incremental cost of working at home, greater amounts can be paid where the employee provides evidence to justify increased costs and the employer agrees to pay that amount. To qualify under s316A, the costs must be reasonable additional costs. Where a broadband line already exists, this would not qualify to be reimbursed tax free. However, where broadband was installed to enable an employee to work remotely, this could qualify provided all the other conditions were met.
Employees' unreimbursed costs of working from home
Some employers may choose not to reimburse the costs of working from home – maybe even arguing the financial benefit to the employee of not incurring commuting costs. However, home-working costs may still be deducted from earnings where certain conditions are met including that they are incurred wholly, exclusively and necessarily in the performance of the duties of the employment and that the employee was obliged to incur and pay these costs as a holder of the employment.
These conditions can be onerous to meet. HMRC’s Employment Income Manual (EIM32760) provides more detail on this. There is a harsh line between those that ‘choose’ to work from home rather than those that are ‘required’ to. Clearly in light of COVID-19, the latter is often much easier to demonstrate. An online tool is also available, which can be used to check if expenses incurred at home will qualify for the relief.
Provision of equipment
Generally, employers can provide equipment to employees that is needed to perform their duties. For this to be tax exempt under s316, ITEPA 2003, any private use of the asset must not be ‘significant’. There is no statutory definition of significant but HMRC has provided guidance in its Employment Income Manual at EIM21613. Policies can be drafted that prohibit certain activities to support limited private use.
Ordinarily, where equipment is purchased by the employee (rather than by the employer) and the employee seeks reimbursement from the employer this should be included on a PAYE settlement agreement. However, in a written ministerial statement it was confirmed that as a temporary measure (from 16 March 2020 to 5 April 2021), tax and NICs will not be collected on reimbursement of office equipment purchases. The following conditions must be met:
- That equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak; and
- The provision of the equipment would have been exempt from income tax if it had been provided directly to the employee by or on behalf of the employer (under s316, ITEPA 2003).
Tax governance
As mentioned above, considering the appropriateness of the businesses’ tax governance framework in the new normal will be important. HMRC will still expect teams to have appropriate controls in place which are adapted to manage remote working, as appropriate.
It will be important to be able to articulate the systems and processes in place and consider any changes required. For example, updated tax forecasting models and revised tax risk registers may be needed. It is important that these risks are tracked and tested as appropriate.
Consider a desk-based review of systems and controls. The use of questionnaires and surveys can help identify any gaps in processes in the new working environment and also provide support in articulating the measures in place to manage tax risks.
Reflect on whether any adaptations are required – for example, electronic review rather than wet signatures.
Those subject to the senior accounting officer (SAO) provisions will need to take further care here and consider whether their existing SAO documentation needs updating.
There is also likely to be an increased fraud risk, at least initially, so this will require management and consideration. Any risk assessment regarding the corporate criminal offence (CCO) should be revisited and updated accordingly.
Tax should also be partnering with other relevant parts of the business such as any internal audit function. Evaluation of business continuity plans will be appropriate to businesses of all sizes, especially in light of the changing environment.
It is important not to forget the significant compliance issues which may be deferred but will continue to develop in the background. Measures such as off-payroll working and DAC 6 will still need to be managed. It will also be essential to secure any in-house resource which might be required to implement such projects such as IT, HR and legal teams.
The danger is that these colleagues may drift into other projects. Without keeping topical tax matters on their agenda, re-igniting compliance work as deadlines approach might prove difficult.
Moving forward
Clearly this article cannot provide an exhaustive list of all measures. The challenges faced by businesses will evolve. However, it highlights the key points to consider as businesses navigate COVID-19 and make the slow recovery out of lockdown.
About the author
Angela Clegg is Technical Manager at the Tax Faculty