The Covid-19 crisis and the resulting restrictions on the ability to trade and move freely have had a negative impact on businesses within the UK and worldwide.
This Alert sets out a number of UK tax aspects that companies should consider when reviewing the operation of their business through the current crisis.
Relevant previous alerts include:
- Impact of COVID-19 for Listed Companies, 16 April 2020
- The Impact of COVID-19 on the Private Equity Sector, 15 April 2020
- UK Government Response to COVID-19 - CJRS (Coronavirus Job Retention Scheme), 14 April 2020
UK Corporation Tax Assistance
HMRC have indicated that they can offer tailored help for companies struggling to pay their corporation and other tax liabilities. This may include agreeing instalment arrangements, suspending debt collection and cancelling payments and interest. There is a dedicated HMRC helpline for businesses to discuss the options that may be available to them – 0800 024 1222.
Under current rules, trading losses incurred by companies may be set against profits in the current period or carried back against profits of the prior 12 months. This could result in a cash refund of corporation tax already paid for some companies or a reduction in instalments falling due.
It is hoped that the UK Government may extend the ability of a UK company to carry back losses. The US has already introduced measures enabling US companies to carry back operating losses for up 5 years and there is precedent for this being done in the UK – during the financial crisis of 2008/2009, the rules were changed so that losses arising in those years could be carried back for 3 years.
R&D Tax Credits
A UK company may claim enhanced tax deductions for qualifying R&D expenditure, either reducing the company’s tax bill or in some cases enabling the company to claim a tax credit payment. Under current rules a company can only make an R&D claim as part its tax return for an accounting period and so tax credit cannot be processed until that return is finalised and filed.
It is understood that HMRC are considering whether the ability to make R&D credit claims could be accelerated. Companies with material R&D expenditure should consider collating the information for R&D claims now so as to be able to take advantage if a concession should materialise. Companies should also bear in mind that R&D claims are subject to the requirement that the company remains a going concern.
VAT that would otherwise have been payable in the period from 20 March to 30 June 2020 has been deferred and can be paid at any time up to 31 March 2021. This deferral will occur automatically and no claim needs to be made. No interest or penalties will be charged on the amount deferred. VAT returns should still be filed however. Currently, VAT payments should be made as normal after 30 June but it is possible that the Government may extend the deferral period as the crisis continues.
Note that this VAT deferral does not apply to VAT due under the MOSS scheme (mini one stop shop) that applies for sales of digital services to customers in the EU.
Coronavirus Job Retention Scheme
Under this scheme, employers may receive payments to meet salary and PAYE costs for furloughed workers. Companies should include the amounts received as taxable income in their accounts and claim the amounts paid on to employees or HMRC as a tax deductible expense. The operation of the scheme should be tax neutral for employers as any taxable income received will be matched by tax deductions when payments are made to employees / to settle PAYE costs. See one of our previous alerts produced on this subject: CJRS.
The proposed extension of IR35 obligations to large and medium sized private sector businesses that was due to come into effect from April 2020 has been postponed until April 2021. Under these rules, the responsibility will shift to businesses to ensure that any contractors that fall within HMRC guidance as ‘employees’ are taxed as such and PAYE deductions applied appropriately.
Given businesses now have additional time to prepare for the changes, it is likely that HMRC will apply them strictly when they do come into force and so businesses should examine carefully the arrangements currently in place and any new engagements over the next year.
Issues for International Companies and Groups
Company Tax Residence
Under UK domestic law, companies are tax resident where their ‘central management and control is based’ and, similarly, many tax treaties treat a company as resident in the ‘place of its effective management’. Difficulties can arise under both of these tests if company directors or managers are restricted in their ability to travel and decisions are required to be taken away from the company’s anticipated place of tax residence. A non-UK company, for example, runs the risk of being treated as UK tax resident (and so subject to UK tax) if members of its board of directors are based in and taking decisions from the UK.
HMRC have indicated they are sympathetic to this problem. They have reconfirmed that they do not consider a non-UK company will ‘necessarily become resident in the UK because a few board meetings are here or because some decisions are taken in the UK over a short period of time’ and that they will adopt a holistic approach.
However, there has been no actual change to the UK rules (unlike Jersey or Australia where specific measures have been introduced). Companies will become increasingly at risk if travel remains restricted for more than a ‘short period’ and should be particularly careful at any time when major decisions are required (such as the sale or purchase of a major asset). Ultimately it is a question of examining the facts in each case.
Whilst holding virtual meetings may be a practical solution to continuing to do business during the crisis, this can create tax issues if proper attention is not given to where those attending are physically present.
If officers or employees of non-UK companies are stuck in the UK and continue business from here, that can also raise the question of whether a UK permanent establishment exists. If so, UK tax may arise on profits attributable to such permanent establishment.
As with company residence, HMRC have said they are sympathetic and confirmed they would not generally regard a taxable presence as arising after only a short period of time. Particular care should be taken regardless, however, if any person in the UK is habitually concluding contracts on behalf of a non-UK employer.
Individual Statutory Residence Test
The UK statutory residence test comprises a number of different criteria to determine whether an individual should be treated as UK tax resident in any tax year.
HMRC has issued guidance confirming that the following Covid-19 related circumstances can be treated as 'exceptional’ such that days spent in the UK as a consequence may be ignored:
- being quarantined or advised by a health professional or public health guidance to self-isolate in the UK;
- being advised under official Government advice not to travel from the UK;
- being unable to leave the UK as a result of the closure of international borders; or
- if asked by your employer to return to the UK because of the virus.
This is helpful but care needs to be taken. In particular, the days that can be ignored due to 'exceptional circumstances' are limited to 60 per year. Also for some parts of the test (such as those which take account of the number of days an individual is actually working in the UK) no deduction for days spent in the UK in 'exceptional circumstances' is available.
Impact on Incentives and Reliefs
Many UK tax incentives or reliefs have as one of their conditions that a company or group is trading – entrepreneurs relief, substantial shareholding exemption, availability of trading losses are a few examples. Care should be taken, if aspects of a business are shut down temporarily, that this does not result in the company (or group) activities being non-trading to a substantial extent (being essentially 20% or more).
Furloughing an employee with an EMI option could pose a tax risk for that employee as he would technically no longer meet the ‘working time’ condition. It is hoped that HMRC will confirm that a concession should apply to this situation but in the meantime care should be taken.
SEIS / EIS
Bear in mind that, given the crisis and likely reduced staffing at HMRC, the turnaround time for EIS advance assurance may be longer than usual. Whilst the receipt of advance assurance is not essential for investments to qualify for EIS, it can often be a condition to the investment for some EIS investors. Companies seeking to attract investment may be better, for the time being, to ensure that the "books" are not EIS heavy.
Companies that have received or are due to receive investments which are anticipated to attract SEIS tax relief should consider whether any emergency Government support received by them will reduce the amount of SEIS investment available. In many cases emergency support may fall with permitted 'de minimis' grant limits but the position should be monitored.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.