A helping hand from Revenue and Customs: Article by Neil Owen, Director of VAT Services, James & Cowper, Louise Pinfold and Robin Williamson, Senior Technical Editors with Croner.CCH which appeared in the July 2001 issue of "Tax Adviser". As the foot and mouth epidemic subsides (at any rate from the main news headlines), the financial difficulties for those affected by it are only just beginning. For once, businesses in trouble may find that the Revenue departments are on their side, to judge from the tenor of recent announcements from them and from Treasury ministers. In a special edition of their bi-monthly publication Tax Bulletin devoted to the crisis, the Revenue say:
"We recognise that many businesses are facing acute problems as a result of foot and mouth and that people who are adversely affected by the disease should not face any additional worries because of tax, NICs and VAT related issues."
Hitherto, there have been some concessions specific to those whose businesses are suffering the effects of foot and mouth, but the official guidance has also highlighted existing mechanisms from which such businesses may benefit. This article summarises the main points in the guidance so far, drawing on various press releases, Parliamentary answers, the special edition of Tax Bulletin, and s107 of the Finance Act 2001 which was added as a new clause on the last day of Committee stage.
The Tax Bulletin article is pretty comprehensive and is available on the Revenue's website at HMRC.
Revenue and Customs have since almost the start of the epidemic been running a joint telephone helpline for farmers and others affected. The number is 0845 300 0157 and it is open from 8am to midnight seven days a week. Callers receive information about the support offered by the Revenue and Customs, and may be referred to other parts of the two departments for more detailed advice. Taxpayers can also telephone the helpline to discuss deferring payment of tax and VAT.
Deferral of tax, NICs and interest
The Revenue have said that they will agree to defer payment of Revenue taxes including NICs, both old and new liabilities, where people are in financial difficulties as a result of foot and mouth. The test is 'whether people can pay their tax and NICs at the moment'. The Revenue will 'accept a taxpayer's claim that he or she is having difficulty paying because of the effects of foot and mouth, unless we have good reason to believe the claim is not genuine'. They will generally agree to defer payment for three or six months, but will consider longer periods, and the initially agreed period can be extended. At the end of the initial period, the Revenue will contact the taxpayer to review the situation.
Where the Revenue defer tax as a result of foot and mouth hardship, no interest is chargeable on that tax until the end of the agreed period of deferral, or any renewal or extension of that period (FA 2001, s107, hereafter 's107'). Equally, no surcharge will arise in respect of deferred tax during the period. Section 107 has effect until it ceases to do so by Treasury order, and will then continue as regards any agreement concluded before the date of the order.
But beware where payment is agreed to be made by instalments, because s107 contains a trap. If any instalment is not paid by the agreed date and the initial period of deferral has not been extended, the whole agreement is treated as ceasing to have effect on that date (s107(3)). There is, however, some comfort in the discretion given to the commissioners by s107(7):
'If in any case the Commissioners are satisfied that, although no agreement for deferred payments ... was made, such an agreement could have been made, this section shall apply as if such an agreement had been made.'
The terms of such a 'notional agreement' will reflect what the commissioners decide would have been the terms of an actual agreement.
Local decision making
In an early announcement, the Revenue announced that they had:
'reminded all their offices that interest on tax debts can be waived in cases of extreme hardship. To help streamline decisions on businesses facing extreme hardship as a result of the foot and mouth outbreak, the Revenue has authorised its offices to exercise this discretion themselves.'
Of course, the exercise of an administrative discretion might not go as far as many affected businesses would wish in some districts, while in others it might even go further than many would expect. Some consistency between offices should be expected, however, in view of the assurance (see above) to give credence to a taxpayer's claim that they cannot pay their tax because of foot and mouth, unless there are reasons to believe otherwise. It is also interesting to note the gradually diminishing use of superlatives in official pronouncements, with the 'serious financial difficulties' and 'severe hardship' of the earlier press releases (10 and 14 April) giving way to simple 'financial difficulties' in the Tax Bulletin article a month later.
A further area of uncertainty will be how the effect of the foot and mouth outbreak on various businesses will be assessed. Presumably, most farmers and people in the tourist trade in the affected areas should qualify for the concessions on offer. However, in the case of some businesses, there may in retrospect be disagreements about the extent to which the outbreak is responsible for any apparent decline in profits or in trading activity.
Payments on account
If a trader anticipates a loss or a diminution of profits in 2000-01, the second payment on account due on 31 July 2001 may be reduced or cancelled.
Value added tax
Businesses experiencing difficulties meeting their VAT liabilities on account of foot and mouth are urged to contact the helpline (see above). Alternatively, they may speak to their local debt management unit. In either event, they are assured of a sympathetic response.
In a similar concession to that offered by the Revenue, where negotiation results in a time-to-pay arrangement to discharge outstanding VAT liabilities, there will be no interest charged during the term of the agreement. Although Customs' own pronouncements are silent on the issue, it has also been confirmed in a Commons written answer that no default surcharges will be imposed during the course of such an agreement.
Furthermore, if affected farmers wish to accelerate repayments of VAT due to them, they are invited to fax their VAT returns to 01702 366085, rather than posting them in the normal way.
End-of-year returns, enquiries etc
Businesses 'seriously affected by foot and mouth' can ask for extra time to send in their end-of-year employer or contractor returns. It is important to ask, however, otherwise the usual penalties may be charged if a return is late (though they may be cancelled on appeal). The Revenue will not normally commence employer compliance reviews, national minimum wage reviews or enquiries into returns where businesses are 'significantly' affected by foot and mouth, unless there are exceptional reasons for doing so.
Early claims to loss relief
The Revenue will not insist upon precise loss claims from traders; a 'best estimate' claim will suffice until the accounts are drawn up and the final figure can be submitted.
Where there has been a spate of losses in recent years, there is already a temporary relaxation of the rule which prevents loss relief from being set off against other income and gains where there has been an unbroken run of farming losses for more than five years. It is contained in extra-statutory concession B55, published in Tax Bulletin, Issue 50, December 2000:
'For unincorporated farmers for the tax years 2000-2001 and 2001-2002 only, if a farmer incurs six or, in 2001-2002 six or seven, consecutive years of income tax farming losses, relief will continue to be available against other income and capital gains provided that the six or seven year period is immediately preceded by one year of profit, and there was at least one other year of profit in the three years immediately preceding that one year of profit.'
Tax on compensation payments
Animals used in a farming trade are part of a farmer's trading stock so that any compensation for their loss forms part of the farmer's trading income. If compensation is paid for their compulsory slaughter, the tax treatment is the same as if the animals had been sold. If the herd basis applies, the profit from disposal of production animals is deferred until they are replaced, and if they are not replaced the profit is exempt. Where the herd basis does not apply, profits deriving from compensation may be spread over the three tax years - or accounting periods - following that in which the slaughter takes place (Extra-statutory Concession B11). The annex to the article in the Tax Bulletin special edition goes into this in some detail and is worth consulting.
Business rate and stocktaking valuations
In answer to a written Parliamentary question on whether applications for temporary reductions in business rates arising from the foot and mouth crisis were being given priority by the Valuation Office, the Paymaster General Dawn Primarolo MP had this to say:
'It will be a Valuation Office Agency's policy to prioritise dealing with such applications. The Valuation Office Agency has recently introduced a system for the structured programming of appeals against rating assessments. As a matter of urgency it is considering how, within this system, to prioritise appeals resulting from the foot and mouth epidemic.'
Hansard, 6 April 2001, col. 302W
If it is not possible for valuers to visit clients to value stock at the usual dates, provisional figures will be accepted. Where stocktaking valuations are based upon deemed cost, but markets are closed because of foot and mouth, market values may not be readily available. In such cases, valuations should take into account market values prevailing before the onset of the disease, levels of compensation being paid for slaughtered animals, and prices being offered to farmers who are unable to deliver their animals to abattoirs.
Furnished holiday lettings
For businesses running furnished holiday lettings, the normal tests about occupation, letting and availability for letting are being relaxed for 2000-2001 and 2001-2002, as follows:
'For tax years 2000/01 and 2001/02 the tests are being relaxed as follows. If the FHL business satisfied the tests in 1999/2000 or 2000/01 but is prevented from doing so, by foot and mouth, in 2000/01 or 20001/02 then the failure will be disregarded and the FHL rules will be deemed to be satisfied. This concession will enable losses to be offset against other income.'
Waivers of rent
If landlords waive rents in order to assist their tenants, and the waiver was made as a direct result of foot and mouth, the Revenue will not argue that the property is let uncommercially. But where collection of rent is simply delayed, the full amount should be included in the accounts in accordance with normal accountancy practice. If the debt becomes bad or doubtful, a trading deduction will be allowed under ICTA 1988, s74. Landlords who waive rent should include a note in the box for additional information on their SA return.
Working families' tax credit
The Revenue can put employers with cash-flow problems into funds to pay working families' tax credit (WFTC) due to an employee. If an employer does not have enough PAYE tax, NI contributions or student loan deductions out of which to pay WFTC due they should telephone the Inland Revenue Accounts Office to ask for additional funding.
The far-reaching effects
It is good to see that the Revenue have recognised that those affected by foot and mouth disease may face financial difficulties and have not only brought to the attention of the public existing mechanisms which may benefit such businesses, but have brought in new measures specifically designed to help businesses who are suffering.
But to what extent do the Revenue recognise the far-reaching effects of the current outbreak? The Tax Bulletin does indeed make reference to businesses other than farming, eg furnished holiday lettings and conditionally IHT/CGT exempt buildings, although, probably of necessity, advice is rather concentrated on specific aspects of farming following the slaughter of animals, eg the treatment of compensation received and the implications of this for such matters as herd basis elections.
Businesses other than farming
It goes without saying that many farmers have suffered devastating losses and it is likely that many farming businesses will not survive. However, it must not be forgotten that there has also been massive financial impact on the British tourist industry and businesses in rural areas, losses from which are widely reported to have overtaken losses in the farming industry. Repercussions have been felt by tourist attractions, hoteliers and publicans, large and small, whilst the closure of footpaths, even in areas unaffected by the disease, has had its effect, for example, on retailers who specialise in walking clothing and equipment, as well as holiday companies specialising in walking holidays.
The nearer a business is to farming (eg a farm supplier) or to the tourist industry (as outlined above), or the more it is situated in one of the geographical hotspots (Cumbria, Devon, Essex, for example), the more likely are the Revenue to accept that it has been adversely affected. But take the following scenario:
A landowner who normally rents out land for shows/craft fairs - easy to accept that his income will be reduced due to the cancellation of such shows. Equally, the trader who makes some or all of his living from selling goods at such shows can be seen to be affected, as will the caterer. But moving one step away from those whose livelihoods can be seen to be directly affected, what about the caterer's suppliers? The hirer of the marquee and, perhaps not so obviously, the cash and carry, situated in the middle of a large town, which would normally supply large quantities of disposable goods such as cutlery, paper plates, cups and napkins? His business too, whilst not suffering the direct effects of the disease, will be indirectly affected, the effect being that of a reduction in turnover.
As foot and mouth disease is unfortunately still with us and therefore uppermost in many people's thoughts, it is relatively easy to accept that its effects stretch far beyond the farming and rural communities. However, once the crisis is past, it will be all too easy for those who have been lucky enough to be unaffected to forget, and the Revenue will undoubtedly fall into this category.
The adverse financial effects suffered will be reflected in returns for either 2000-01, 2001-02, or even 2002-03. Taking the middle of these three years, the deadline for submission of these returns is 31 January 2003. The Revenue have the power to enquire into that return within, broadly, 12 months of the filing date, ie in this case 30 January 2004. Assuming that an enquiry is issued in, say, December 2003, and that the examination of books and records and subsequent correspondence on matters arising take the best part of the next three months, it is going to be spring/early summer 2004 before a meeting is held between the Revenue and the taxpayer.
Let us assume that the subject of the enquiry is the cash and carry business mentioned above, located in the middle of a large town. How easy is it going to be to convince the inspector that the turnover has been adversely affected by foot and mouth disease? One can imagine a rather world-weary inspector saying that he has heard it all before. The amount of time and effort needed by the taxpayer, some three years on from the event, to produce sufficient evidence to convince the inspector of the bona fides of his argument, will be considerable.
Indeed, it may be that the taxpayer himself cannot remember the precise reasons for the downturn and is then under pressure to come up with a convincing argument, again some years after the event. Advisers will surely recognise the situation where the inspector has demonstrated an apparent shortfall in profits which the taxpayer is unable to explain or quantify. Although it is strongly suspected that this is due to genuine commercial reasons, the taxpayer is unable to put forward any evidence in support of his claim and additions to profits are therefore accepted.
It is well known and widely accepted, by advisers if not by some of their clients, that one of the keys to a successful outcome to an enquiry is good record keeping. Keeping good records of the business's financial transactions is essential (as well as a legal requirement under TMA 1970 s12B), and inspectors set great store by 'contemporaneous records', believing, not unreasonably, that records kept at the time are more accurate than those which are reconstructed at a later stage.
However, non-financial records can be of great assistance in proving to an inspector the commercial reasons for a particular set of business results and into this category falls foot and mouth related information. It is recommended that a diary note be made - and retained with the business records - of the ways in which the business has been affected (generally by reduced turnover), for example:
1. cancelled client bookings, eg in a hotel/guest house;
2. wastage of stocks of perishable goods;
3. reduced takings from a particular customer who has himself been affected;
4. cancelled opportunities for selling goods, eg craft shows.
Any documentary evidence should also be retained, together with notes of telephone conversations.
Although the Revenue are giving a welcome hand now, when it is needed most, they may not be so helpful in a few years' time when inspectors are trying to meet the newly-published target of achieving additions to profits in 76 per cent of the cases they select for enquiry. A little effort now on keeping relevant records, which need not be extensive, at a time when events are fresh in the taxpayer's memory, will repay dividends in the event of a subsequent enquiry, and will help ensure that foot and mouth disease does not give rise to a further, unintended burden - the payment of additional tax.
020 7235 9381
July 2001 by