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Latest news & blogs…
The forthcoming Finance Bill 2020 proposes to give HMRC wide powers to make directors personally liable for a company’s tax liability. Under the new proposals, HMRC plans to penalise company directors who intentionally breach the rules of the furlough scheme – the so called “furlough fraud”.
What does this mean for company directors and what should you do to minimise your risk? We outline the issues below.
Identifying abuse of the furlough scheme
With the Coronavirus Job Retention Scheme (“CJRS”) in the process of being wound down towards the end of October, the government is now focussing their attention to identifying those companies who have made fraudulent grant claims for reimbursement of staff wages in this period.
Abuse of the system includes:
- forcing employees to continue to work on a part-time or ad hoc basis despite being declared as furloughed
- where employees not told that their employer was claiming reimbursement of their wages under the CJRS.
- companies claiming furlough for ‘ghost’ employees who may not actually work for the company at all.
Furlough fraud is manifestly an exploitation of employees, as well as a blatant abuse of a system set up to help companies through this period of unparalleled business turmoil. With billions of pounds paid out through this scheme, HMRC are now looking to seriously penalise those who have flouted the scheme for profit.
Joint and Several Liability of Directors – the new proposals
Legislation is currently being rushed through Parliament and is likely to become law in early July as part of the Finance Bill 2020.
The Bill proposes a new regime which will give HMRC the power to make directors and co-directors jointly liable and severally liable for the company’s tax liabilities if:
- the liability arises from tax avoidance arrangements or tax evasive conduct, repeated insolvency, penalty for facilitating avoidance or evasion; and
- where the company begins insolvency proceedings or is expected to begin insolvency proceedings so that some or all of the tax liability will be lost.
Of particular concern – and potentially worrying for some – is that these proposals include circumstances where a director did not know about a co-director’s fraudulent conduct – hence the “joint and several” liability. HMRC will seek to apply these provisions for penalties raised in relation to fraudulent furlough payments. It is understood that the penalties will apply in cases of deliberate fraud but could also catch directors who unintentionally breached the rules or who did not know that their fellow directors had made a claim under the scheme.
Penalties for those found guilty are likely to include fines for companies, while directors of companies which have subsequently been liquidated could face personal liability for the falsely claimed furlough costs. Imprisonment for convicted fraudsters is also a possibility as exploitation of the CJRS amounts to defrauding the Treasury. The end result is directors potentially being personally liable even in circumstances where they did not personally benefit from the CJRS grants.
HMRC’s tougher approach
These new powers – indicating HMRC’s intention to take a strong approach to recovering any payments made as a result of fraud – looks to be just the start of a new wave of anti-fraud HMRC enforcement and enquiries arising out of COVID-19 crisis.
It remains to be seen exactly what form these measures will take, however directors are well advised to check whether any CJRS claims have been made on behalf of companies of which they are officers, ensure that any such claims were made in accordance with the rules and confirm that any payments received were then applied properly.
If you need help with the issues above, please call us on 0114 272 4984 or email email@example.com – we are ready to assist.
As lockdown slowly eases across the UK, we look at some of the practical issues faced by individuals already impacted by COVID-19. One issue we are being asked about is the impact of buy-to-let landlords who have decided to take a mortgage payment holiday. We outline the impact of this and how this can affect your tax payment for the year.
In March, the Government announced that homeowners struggling to pay their mortgages due to Coronavirus would be able to take a three-month mortgage payment holiday. They confirmed that this option would also be available to buy-to-let landlords, who may suffer cashflow difficulties if, as a result of the virus, their tenants were unable to meet their rent in full when it is due. In May, the Government announced that those struggling to pay their mortgages because of the impact of Coronavirus would be able to extent their mortgage payment holiday by up to three months.
Where a landlord opts to take a mortgage payment holiday, what impact does this have on tax relief for interest payments and, in turn, their tax payments?
Interest continues to accrue
The first point to note is that interest continues to accrue during the period of the mortgage holiday, although the landlord will not be required to make any payments during this time. This is important and will impact on the timing of the associated interest relief, which will depend on whether accounts are prepared on a cash basis or on the accruals basis.
At the end of the holiday, the missed payments and interest may be recovered by extending the term of the mortgage or by making higher payments once payments restart.
Relief as a basic rate tax reduction
From 2020/21 onwards, tax relief for finance costs (such as mortgage interest) on residential properties is given only as a tax reduction at the basic rate. This means that 20% of the allowable finance costs are deducted from the tax that is due.
Impact of a mortgage holiday – Cash basis
Most landlords whose rental receipts are £150,000 a year or less will prepare the accounts for their property rental business under the cash basis. As expenditure under the cash basis is recognised when paid, if the landlord does not make a payment, there will be no relief for that expense until the payment is made.
Where the landlord takes a mortgage, no interest will be paid during the period of that holiday. As a result, a landlord may pay less in interest in 2020/21 than in 2019/20. The interest rate reduction is calculated by reference to the interest paid in the year.
Ali has a buy-to-let property on which he has buy-to-let mortgage, the interest on is £500 per month. As a result of the Covid-19 pandemic, his tenant struggles to pay his rent on time. Ali takes a three-month mortgage payment holiday. The mortgage term is effectively extended as a result.
In 2020/21, Ali only makes nine mortgage payments instead of the usual 12, paying interest of £4,500 rather than £6,000. The tax reduction for 2020/21 is £900 (£4,500 @ 20%) rather than £1,200 (£6,000 @ 20%).
Tax reduction – accruals basis
Under the accruals basis relief is given for the period in which the expense arises rather than when payment is made. As interest continues to accrue throughout a mortgage holiday, the landlord will be able to claim the full tax reduction on the interest accruing in the 2020/21 tax year, even if the interest was not paid in full in the year because the landlord took advantage of a mortgage payment holiday.
So if, in the above example, Ali prepared his accounts for 2020/21 on an accruals basis, he would be able to claim a tax reduction of £1,200, whereas under the cash basis his deduction will only £900, the higher deduction will of course reduce any rental profits (or increase a loss) subject to tax and thereby reduce any tax payable in the year.
If you need advice regarding your rental properties please call us on 0114 272 4984 or email firstname.lastname@example.org.
Under the dreadful cloud of COVID-19 some major tax changes are seemingly going under the radar. One such change is lettings relief, a previously valuable tax break available to those selling their home which was rented out at some stage. This tax mitigation opportunity has now been abolished and has been replaced with a much less attractive tax break which severely restricts the circumstances in which relief is available. We explain the changes here.
Lettings relief provided additional relief for tax where a property that has been occupied as a main residence is let out. For disposals prior to 6 April 2020, a substantial tax relief was available where a property was let as long as that property had at some time been the owner’s only or main residence.
However, availability of the relief is now seriously curtailed in relation to disposals on or after 6 April 2020. Under the new rules, lettings relief will only be available where the homeowner and their tenant are in occupation of the property at the same time – shared occupation. So from 6 April 2020, relief is only available where the owner shares the property with the tenant, a move which seriously narrows any claim that could have been made under the previous rules.
The new-style (narrow) relief
For disposals on or after 6 April 2020, the new lettings relief is available where:
- part of the property is the individual’s only or main residence and
- another part of that property is let out by the individual, otherwise than in the course of a trade or a business.
The gain relating to the let part is only chargeable to capital gains tax to the extent that it exceeds the lesser of:
- the amount of private residence relief; and
Spouses and civil partners can take advantage of the no gain/no loss rules to transfer the property or a share in it to each other without a loss of lettings relief. Where lettings relief would be available to a transferring spouse or civil partner for the period prior to the transfer, it remains available to the recipient.
Let’s look at how this works in a real life scenario.
Idris brought a three-bedroom house in 2015. He lived in the property for five years until it was sold in May 2020, realising a gain of £90,000. Throughout the time that he lived in the property, he let out two rooms. The let rooms comprised one-third of the property by floor area.
Two-third of the property was occupied as Henry’s main residence, and thus two-thirds of the gain qualifies for private residence relief. This equates to £60,000 (2/3 x £90,000). The remaining gain of £30,000 is attributable to “letting”.
As Idris occupied the property with the tenants, he can claim lettings relief. Previously, Idris would have been able to claim the relief irrespective of whether he lived with the tenants at the same time.
Thus, in Idris’ example, the gain attributable to the letting is only chargeable to capital gains tax if, and to the extent, that it is greater than the lower of:
- 60,000 (the amount of the private residence relief); and
As the gain attributable to the letting is less than £40,000, lettings relief is available to shelter the full amount of the gain. As such no capital gains tax arises.
Although in this example the entire gain is free from tax, the circumstances in which the relief can be claimed is much narrower than before and will definitely bring more people into the tax net.
In addition, the requirement for shared occupation will apply not only to future lettings but also any let periods before 6 April 2020.
This means that people who have let properties after they moved out will lose the relief that they would have been entitled to for those letting periods. In effect, the change is retroactive and, as such, will have a massive impact on unwary homeowners.
This change to how selling your home is taxed is harsh, both because of the retroactive impact and because of the sudden impact of the change. There are no transitional measures are in place and, considering letting relief has been around for 40 years, this has been criticised by tax advisory sector.
If you need tax advice in selling your home please call us on 0114 272 4984 or email email@example.com.