Business tax

16 Mar 2021

Repayment of business rates relief

HM Treasury has published arrangements for repaying COVID-19 business rates reliefs provided by each of the four jurisdictions: England, Wales, Scotland, and Northern Ireland. The details are on GOV.UK. The update also confirms the government’s intention to legislate to provide clarity that the repayments of business rates relief should be treated as if they were business rates payments and so should be deductible for tax purposes. The government also intends to specify the timing of the deduction as being the same period as the original payment.

Non-resident company landlords (NRCLs) brought within the scope of Corporation Tax – outstanding CT UTRs

We have received an update from HMRC in relation to the non-receipt of a HMRC letter advising the NRCL of their CT UTR, and the impacts caused by COVID-19.

Corporation tax quarterly instalment payments

HMRC has reviewed and updated its guidance at CTM92650. This guidance covers early repayments of corporation tax quarterly instalment payments in response to receipt of a number of claims and requests from taxpayers, agents and professional bodies. 

This means that companies can, in exceptional circumstances, make earlier claims for repayment of their instalment payments for an accounting period. Regulation 6 of the Corporation Tax (Instalment Payment) Regulations (SI1998/3175) allows for companies to make a claim where, due to a change in circumstances, they believe their liability is likely to be less than previously calculated. A revised calculation of that liability may take into account anticipated losses of the current accounting period that has not yet ended. Companies will need to provide full evidence to support these claims.

The updated guidance provides examples of the supporting evidence that would be required to make a claim. The evidential requirements will depend on the particular facts of the claimant companies.

Coronavirus crisis-driven changes to trading activities

On 3 June 2020 HMRC update their Business Income Manual to add guidance on the implications of crisis-driven changes to trading activities and how HMRC will apply legislation and case law to the changes in business activities - see BIM48000.

R&D Tax Relief

During 2020 HMRC provided clarification on some questions arising as a result of the pandemic in relation to R&D tax relief.

Set off of R&D claims against other taxes

Deferred liabilities - Where Ministers have agreed that tax can be deferred for a specific regime to support businesses in the COVID-19 period, i.e. the VAT quarterly payment deferrals, RDEC or payable tax credit will not be set against any of those amounts before the revised due date for payment of the VAT.

Time to pay arrangement (TTP)s - Where tax has been deferred as part of a Time to Pay (TTP) arrangement, HMRC will follow existing policy and set any R&D tax credit off against any TTP liability, not just the amount owing at the point in time the credit is paid. This would include informal deferrals offered in advance of TTP arrangements being put in place.

TTP is an agreement by HMRC to delay enforcement proceedings for a given debt to a specified future date. It does not alter the fact that the debt is owed to HMRC or change the due date.

When HMRC agrees to set up a TTP they ask the taxpayer about their current and future financial position. TTP is a payment plan based on their ability to pay. If they are expecting an R&D tax credit, then it is built into the TTP.  When HMRC set up a TTP arrangement they will explain that the TTP is subject to the taxpayer providing full information and notifying HMRC if their financial position changes. It is therefore important that taxpayers are open about any R&D claims they have made when they set up a TTP and notify HMRC if they make an R&D claim after it has been set up. Any credits will normally be taken into account at the time the TTP is agreed or when the taxpayer notifies HMRC of a credit if it was not expected and notified when the TTP was agreed.

Research and Development Expenditure Credit set offs at s104N (2) step 6 - It is a legislative requirement that any RDEC remaining at Step 6 (CTA 2009 section 104N(2)) is set-off against any liability owed to the Commissioners for HMRC. HMRC does not have the power to provide for a temporary relaxation of this rule and there are no plans at present to legislate to provide a temporary relaxation of this rule. 

Credits under FA 2008 section 130 - Credits under FA 2008 section 130, including credits under the R&D SME scheme, will continue to can be applied on a discretionary basis. HMRC has a duty to protect public revenue and therefore would always look to offset any credit against tax liabilities before paying a credit. See Corporate Intangibles Research and Development (CIRD) Manual paragraph CIRD90600 and Debt Management and Banking Manual at paragraph DMBM700010. HMRC will consider the particular circumstances of a customer on a case by case basis if they have objections to the credit being set off against other liabilities.

Going concern requirement 

HMRC have said that this condition is a statutory requirement so it cannot be overlooked. The condition requires the claimant company to have been a going concern according to the last published accounts, which will in many cases have been prepared before the effects of COVID-19. This means that there should not be any issue caused by the going concern requirement. HMRC will continue to monitor the impact of COVID-19 on customers’ ability to meet this and other requirements. Taxpayers should approach HMRC if this requirement is causing genuine operational difficulty.

Government support schemes and  state aid – SME scheme

Many of the COVID-19 support schemes have been notified as a State aid under the European Commission’s Temporary Framework for COVID-19. Notified schemes include the Coronavirus business interruption loan scheme (CBILS), Bounce Back Loans (BBL) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).

This means that the restriction on receipt of State aid (CTA 2009 section 1138(1)(a)) could potentially prevent a claim for R&D SME relief. HMRC has confirmed that they would only expect this to happen where the loan relates specifically to the company’s expenditure incurred on an R&D project, rather than providing general support for the company. This will depend on the facts, and HMRC notes that, for example, a loan used entirely for R&D might lead to section 1138(1)(a) applying. HMRC are monitoring the application of this rule.

HMRC also notes that with regard to other loans and grants and other support measures that may be developed or introduced, if these are provided through the Temporary Framework or through the Grant Block Exemption Regulations, these will be State aid, and CTA 2009 section 1138(1)(a) may apply.

HMRC has confirmed, however, that the Future Fund (launched in May 2020), which provides convertible loans that are commercial, is not State aid.  Therefore, loans under this scheme are not caught by CTA 2009 section 1138 and need not be considered when looking at the State aid cumulation rules.

Subsidy rules (s1138 CTA 2009) – SME R&D scheme

The Coronavirus Job Retention Scheme (CJRS) is not a notified State aid, so when furlough payments are met by the government through the CJRS the specific notified State aid rule at section 1138(1)(a) is not in point.

However, HMRC also notes that to the extent that furlough payments are met through the CJRS, the general subsidy rules at section 1138(1) do apply, meaning that the expenditure has to be treated as having been subsidised and will therefore not qualify in the SME scheme. The only area where this is likely not to be the case is if annual leave or sick leave is taken during furlough. Such leave, unlike time spent solely on furlough, is included in the staffing cost calculation.

The staffing cost rules (s1123 and s1124 CTA 2009)

Under the CJRS one of the key conditions for an employee to be furloughed is that they have been instructed by their employer to cease all work in relation to their employment. From 1 July 2020 it has been possible to be a flexibly-furloughed employee, which allows businesses to bring back employees part-time, but requires the employee to do no work in relation to their employment during a CJRS claim period. Furloughed staff are permitted to undertake study and training. Under the CJRS as the furloughed employees have ceased all work during the CJRS claim period HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development during those times. This means that during those times the conditions in CTA 2009 section 1124(2) are not been met in respect of their costs. HMRC therefore expect to see these costs excluded from R&D SME and RDEC claims. This applies equally to furlough payments met under the CJRS and to any ‘top-up’ from the company itself.  

With regard to furlough payments made to staff where none of those payments have been met by the government through the CJRS scheme, as with payments within the CJRS scheme, where furloughed employees have ceased all work HMRC consider that those employees cannot be regarded as being directly or actively engaged in relevant research and development. If some qualifying activity has been carried out then HMRC would expect companies to claim in the usual way and draw their attention to the appropriate proportion rules found in CTA 2009 section 1124(3) and (4).

HMRC’s CIRD manual covers this at paragraph CIRD83200.

Absence from work for sickness or annual leave

HMRC consider that paying holiday pay and sick pay is a necessary cost of the employees undertaking R&D work and is, in effect, part of the cost of their working time. This means that HMRC allows claimants to apply the same apportionment between qualifying and non-qualifying activities to holidays and sickness as they do to working time. HMRC consider that any period during furlough that is taken as annual leave or is recorded as sick leave can be included in the staffing cost calculation. However, for the reasons outlined above, the staffing costs incurred on leave and sickness during furlough are subsidised to the extent that they are met under the CJRS. Whilst this will not affect companies that only claim RDEC it will prevent this element of the staffing cost from qualifying where a company is making a claim in the SME scheme. The company would however be able to include these staffing costs in a claim for RDEC.

HMRC confirms they will accept a fair and reasonable apportionment when calculating the element of subsidised staffing costs in these circumstances.

R&D Returns & Payments 

Early in the pandemic HMRC confirmed that their priority was to maintain their published aim of clearing 95% of SME tax credit claims within 28 days and have continued to strive to meet this aim.

HMRC also confirmed that they would be sympathetic to those facing difficulties in meeting filing or amendment dates and appreciate the operational difficulties customers are facing. If a taxpayer is unable to meet the statutory time limit, HMRC said that they should submit the claim as soon as possible and they may be able to accept a late claim. Statement of Practice 5/01 explains how HMRC will decide whether each claim will be accepted.

Company Residence and Permanent Establishments

HMRC has issued some guidance in relation to HMRC’s approach to company residence and permanent establishments in response to COVID-19 Pandemic. This guidance is incorporated in HMRC’s International Manual (paragraphs INTM261010 and INTM120185), with the addition of one paragraph at the bottom of INTM261010 and two paragraphs at the bottom of INTM120185. The key points in the guidance from HMRC are:

Overview

HMRC consider that the existing legislation and guidance in relation to company residence and permanent establishments, already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic.

Company Residence 

HMRC does not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time. The existing HMRC guidance makes it clear that HMRC will take a holistic view of the facts and circumstances of each case.

Permanent Establishments

With regard to permanent establishments, we do not consider that a non-resident company will automatically have a taxable presence by way of permanent establishment after a short period of time. Similarly, whilst the habitual conclusion of contracts in the UK would also create a taxable presence in the UK, it is a matter of fact and degree as to whether that habitual condition is met. Furthermore, the existence of a UK PE does not in itself mean that a significant element of the profits of the non-resident company would be taxable in the UK.