COVID-19 Tax Update
The big question on many minds is 'How will the government pay for COVID-19?' With unprecedented government spending, revenue could be raised through taxation, borrowing or both.
Possible tax changes and timescales are always very difficult to second-guess. We do not envisage significant tax changes before a Budget in the Autumn but remain vigilant to announcements.
A recent question on the future of inheritance tax reliefs came up in the House of Lords. It was confirmed, on behalf of the government, that agricultural and business property relief still serve an important aim of preventing family farms and businesses from being broken up to pay tax. The government is looking very closely at the results of the two IHT reports of the Office of Tax Simplification but the more radical proposals of the All Party Parliamentary Group are not, apparently, being actively considered.
In addition, the Institute for Fiscal Studies (IFS) has just launched a research project into a possible future wealth tax for the UK. This is not formal policy for any political party and does not involve the Treasury or HMRC, so is entirely unofficial and at very early stages. It emphasises the difficulties and complexities involved and is not to be seen as supporting such a tax at the outset.
Meanwhile, the government continues to address some areas of the tax code affected by these challenging times. Here are some of the more recent measures:
CGT: residential property
Capital gains tax is generally payable by 31 January after the end of the tax year. However, the rules changed on 6 April, requiring a CGT payment ‘on account’ within 30 days of a disposal of residential property that is not fully covered by main residence relief. (In fact, this shorter payment window was already in force for non-UK residents).
Following criticism that the new regime has not been well publicised and in light of current events, HMRC are allowing a brief period of adjustment. For UK residents, transactions completed between 6 April and 30 June 2020 can be reported up to 31 July 2020. Those completed from 1 July 2020 not reported within 30 days will receive a late payment penalty and interest will accrue on unpaid tax.
HMRC will also be flexible where payment is difficult due to COVID-19. Many sellers would be expected to pay the tax from the sale proceeds but HMRC acknowledge there may be situations where payment is difficult, for instance where the disposal was a gift or if the vendor needs money for their business. There is general advice about help available and the message seems to be that if you contact HMRC, they may be able to help.
SDLT: second homes
An additional 3% stamp duty land tax is levied on buying a second home. This is refundable if the property replaces your main residence which is sold within 3 years after the second home purchase. HMRC have clarified that a refund may still be obtained if the second property was purchased on or after 1 January 2017 and the previous home could not be sold within 3 years due to exceptional circumstances outside the seller’s control. These include the impact of COVID-19. However, once the reason has ended, the previous home must be sold and at that stage the purchaser should contact HMRC with an explanation of the delay and apply for the refund. Each application will be considered on its own facts and merits. This is potentially good news for anyone prevented from selling their former home in time because of restrictions imposed at the height of the pandemic. But as the decision will be at HMRC’s discretion, the availability of the refund should not be taken for granted, particularly where there were significant delays in marketing the property before the pandemic or in selling it after the restrictions have eased. A mere change of intention of any party to the transaction at a late stage, a shortage of funds, or deciding not to sell the property during a downturn in the market will not be regarded as exceptional circumstances.
DAC6: reporting extension
The EU-wide disclosure regime for certain cross-border tax arrangements became operative on 1 July with the first reports originally due by the end of August. In view of the pandemic, these will not now need to be delivered until the end of February next year. This has superseded an earlier deferral to November and is welcome news given the government has only just finalised its general guidance on the measure. Advisers should now work on completing internal procedures to identify and deal with reportable arrangements in accordance with the following revised deadlines:
- 28 February 2021 for past arrangements (where the first step in implementation took place between 25 June 2018 and 30 June 2020);
- 31 January 2021 for arrangements made available or ready for implementation or where the first step takes place between 1 July and 31 December 2020; and
- The ‘normal’ 30 days for arrangements which become reportable on or after 1 January 2021;30 April 2021 for the first periodic report of marketable arrangements.
Directors in the UK
In light of current travel/quarantine restrictions, an area of concern for some offshore companies is that directors may have to act whilst stranded in the UK, which could result in the company becoming UK resident because it is being centrally managed and controlled in the UK.
In light of these concerns, HMRC has updated its guidance. No specific measures/changes will be introduced because HMRC feel their approach is flexible enough as it stands. HMRC say they take a sympathetic, holistic view of the facts and circumstances of each case. HMRC do 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. Whilst this clarification is welcomed, it falls short of providing specific concessions and any offshore companies in this position should review their processes and keep good records of any meetings or decisions taken and the surrounding circumstances.