The impact of the Coronavirus pandemic has been unprecedented, certainly for anyone born after the Second World War, and it would be fair to argue that the Government’s financial response to that impact has been just as unprecedented.
It is understandable that the tax implications of the measures which have been introduced have not been at the forefront of anyone’s mind in the last four months, but nevertheless it is worth reminding ourselves of some key points which will be of increasing relevance in the months ahead.
Coronavirus Job Retention Scheme
Probably the most high-profile of all of the measures introduced in recent months is the Coronavirus Job Retention Scheme (“CJRS”), which has been available to employers as a grant to cover up to 80% of their employees’ wages (up to a maximum of £2,500 per month), plus relevant employer’s National Insurance Contributions (“NICs”) and auto-enrolment pension contributions. The CJRS will be amended over the course of the next few months (to allow the employer to bring back employees on a part-time basis, and to reduce the percentage of wages covered by the scheme on a phased basis), and is currently scheduled to end on 31 October 2020.
From an employer’s perspective, the tax treatment of any CJRS grant received is quite straightforward – it will be taxable income, subject to income tax or corporation tax as appropriate. The payments made to employees (for which the grants have been claimed) should continue to be deductible as a business expense.
Grants made under the Self Employed Income Support Scheme are similarly subject to income tax and self-employed NICs, and should be reported on an individual’s self-assessment tax return.
One of the first measures to be introduced to assist individuals and businesses was a deferral of VAT and income tax payments, as follows:
- VAT – any VAT payments due between 20 March and 30 June 2020 could be deferred until 31 March 2021. Effectively, this allowed a business to defer one quarter’s VAT payments. However, any VAT payments due on or after 1 July 2020 remain payable by the normal due date.
- Income tax – the second payment on account for the 2019/20 tax year, which would otherwise be due on 31 July 2020, can be deferred until 31 January 2021. There is no requirement to tell HMRC about any intention to defer, and interest and penalties will not arise provided payment is made by 31 January 2021.
While both of these measures look attractive and from the perspective of immediate business requirements, it should be emphasised that they are deferral measures only, and not a write-off by HMRC of a tax liability. They will therefore lead to (potentially significantly) higher tax payments required in the first quarter of 2021, and should thus be properly factored into future cash flow planning.
Utilisation of losses
The economic downturn brought about by COVID-19 will undoubtedly lead to some businesses incurring trading losses in the current period. Such losses can be used to shelter other profits and gains arising in the same period, and can then be carried back to set against income and gains (subject to certain restrictions) arising in the immediately prior year, thus leading to repayments of income or corporation tax.
In the worst case scenario, a business might be forced into a cessation of trade by current economic conditions. In those circumstances, trading losses can be carried back up to three years before the period of cessation (as opposed to the one year carry-back for ‘standard’ trading loss relief claims), thus potentially giving rise additional tax repayments.
Company wind-up – Members’ Voluntary Liquidation
Where a company’s trade ceases and there is no likelihood of it starting up another business in the short to medium term, the shareholders might also decide that the company itself should be wound up. In such a case, where there are still reserves that might be returned to shareholders, the most tax-efficient method of extraction is likely to be a Members’ Voluntary Liquidation (“MVL”). The funds distributed to shareholders should be subject to capital gains tax rather than income tax and, where Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) is also available, the tax rate would be reduced from 20% to 10% (subject to a lifetime limit of £1m of gains).
It should be borne in mind that there are certain anti-avoidance provisions which can apply when carrying out an MVL, particularly around the area of ‘phoenixism’. This is the situation whereby an individual receiving the liquidation distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years of the date of distribution. If the legislation applies, it can give rise to the distribution being taxed as income at up to 38% rather than capital being taxed at 10%. Specialist advice should always be sought before any MVL process is commenced.
Finally, it is worth reminding ourselves that nothing about the future is certain and it is very possible – even very likely – that the Government will introduce further changes to extend and bolster the relief available to individuals and businesses alike, whether this be by extending the time period for existing schemes and programmes, or introducing brand new measures. With that in mind, the Chancellor’s financial statement, due to be delivered on Wednesday 8 July, is being keenly anticipated, and we will summarise the key measures following their announcement.
On the flip side, the Government is likely to introduce new tax-raising measures to start to pay the Coronavirus bill. It will be very important to pay heed to the tax consequences of these measures, even if the ‘cash’ tax impact may not arise for some time to come.