7 Covid-19 tax tips

RG’s Covid-19 tax tips- file your self-assessment income tax return as early as you can

Generally, as long as you have fully disclosed your affairs within your tax return, HMRC will have 12 months from the date you file your tax return to open an enquiry and start asking questions about the entries you’ve included, or to challenge any claims you’ve made.

At the Government’s direction, HMRC is being exceptionally helpful and lenient at present, but at some point, they will almost certainly start to focus on compliance with a view to increasing tax revenue using a combination of enquiry, collection and recovery.

We would encourage you to get your 2019/20 tax return prepared and filed as soon as possible in the hope of avoiding enquiries down the line, when HMRC will have greater resources and appetite to squeeze as much tax as possible from every taxpayer.

RG’s Covid-19 tax tips – check that you haven’t overpaid tax if you’ve sold land or a business with deferred consideration or an earnout

When land is sold, particularly for development, it is very common for the consideration to be paid out over a number of years. Despite this, the full agreed sale proceeds will usually be subject to tax upfront.

Where land was sold before 6 April 2019, you may well have paid a significant amount of capital gains tax, but will you still receive the full deferred consideration?  If not, you may be able to recover some capital gains tax from HM Revenue & Customs.

Similarly, many business sales have an element of earnout consideration, often based on the anticipated future profitability of the business.  For transactions entered into before the pandemic, profit forecasts may now be unrealistic and earnout consideration may turn out to be less than the amount originally reported to HMRC on which capital gains tax has already been paid.

In the circumstances above, we can help you approach HMRC to secure a repayment of any excess capital gains tax paid.

RG’s Covid-19 tax tips – are any of your unquoted investments standing at a loss?

Coronavirus has had a pretty sharp effect on the stock markets and some private companies will invariably fail with investors losing out to varying extents.

From a tax point of view, it is worth considering whether you can crystallise the resulting tax losses to shelter other taxable income and gains.

For example, if you invested £100,000 to subscribe for shares in a friend’s company whose future now looks to be compromised and there is a significant risk you will get no return, a negligible value claim could be made to crystallise a tax loss, which could generate a refund of income tax, or save you from paying income tax, of up to £45,000.

If, instead of subscribing for shares, you had made a loan to the business in the example above, and that loan has now become irrecoverable, a capital loss could be claimed and used to save capital gains tax of up to £28,000 elsewhere, either by way of a tax refund or by reducing tax payable in the future.

RG’s Covid-19 tax tips – reviewing your company’s borrowing position whilst avoiding tax liabilities

On the back of Covid-19 disruption, many business owners will be looking at their company’s borrowings, perhaps seeking to vacate loans by having them written down or waived altogether, or by swapping debt for equity, which is common with private equity backed businesses.

It is important to be aware that the release or writing down of a loan can generate taxable income for the borrowing company and, in the absence of available exemptions, this trap can result in the company being hit with an unwanted tax charge. However, these can usually be avoided with planning in advance; before embarking on a debt restructuring exercise, please speak with us first.

RG’s Covid-19 tax tips – executors and personal representatives of deceased estates should check the inheritance tax valuations

Inheritance tax is generally payable on the value of the deceased’s assets as calculated at the date of death but there is an opportunity to save inheritance tax where the proceeds achieved on the subsequent sale of certain assets (typically shares and land) are lower than the date of death valuation.

The tax relief in question can be claimed provided the sale occurs within specific time frames, generally twelve months after the death when it comes to shares and four years in the case of land. 

This presents a very real opportunity given the current economic climate, but you must take advice as the timing and the order in which assets are realised can influence the eventual tax liability.

RG’s Covid-19 tax tips – are you still trading through the most appropriate entity?

It’s always sensible, from time to time, for business owners to check that they are trading in the most efficient way, which typically means choosing between a partnership, LLP, a company or some combination thereof.

For those who have chosen to trade as a partnership or LLP, now might be the time to check that the rationale leading to that decision remains correct and to consider how your position might change if you were to form a company through which to operate your business.

Partnership businesses tend to pay tax on their profits as they arise, which contrasts with companies who generally pay less tax until profits are enjoyed by the business owners, at which point the position often evens itself out.

As a result of Covid-19, trading profits over the next few years could well be lower, but there may be increasing demands on working capital, meaning partners’ drawings are likely to be reduced even though they continue to pay high levels of tax.  Effectively, partners may face paying tax on profits they cannot draw from their businesses for several years.

This could lessen the appeal of the partnership and LLP business model from a tax point of view, although their flexibility remains attractive: it is worth running the numbers to see whether the tax benefits outweigh some loss of flexibility.

RG’s Covid-19 tax tips – uncertainty regarding Enterprise Management Incentive (EMI) schemes

We have seen some comments stating that, if an EMI option holder is furloughed, their options could lapse because they no longer meet the working time requirements associated with the scheme.

We would hope HMRC will not interpret the relevant legislation so narrowly in current circumstances and, in addition, the EMI legislation offers averaging provisions and relaxations where an option holder would have been working but for certain specified circumstances which the government could extend to include furlough.

In the meantime:

  • It might be sensible for employers to review the terms of their EMI schemes so as to understand what happens if an option holder ceases to be an eligible employee; and
  • It might also be sensible for employers to consider whether existing EMI schemes are still fit for purpose, for example in terms of valuations and performance hurdles, and do they still sufficiently incentivise option holders?
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