Coronavirus (COVID-19) ― updated to 26 March 2020
Produced by Tolley
The escalation of the coronavirus (COVID-19) outbreak and the global response of all governments to the crisis has caused significant turbulence in recent days. Travel restrictions, social distancing measures and large-scale quarantines are all having significant impact.
This note details the main tax issues that may be relevant to your clients during these difficult times, discussing relevant employment tax, personal tax, business tax and VAT issues. As would also be expected, there are also a wide range of short-term Government support initiatives now available to access and these are also detailed in this note. For Government guidance on tax issues, loans, and grants for businesses, employers and employees, see the GOV.UK website.
Matters are developing daily and this note will be kept up-to-date with all relevant events as they unfold.
This guidance note has been updated on 26 March 2020 with further clarification we have received from HMRC regarding what VAT payments can be delayed.
Employment taxes
Coronavirus job retention scheme
On 20 March 2020, the Government announced that it will step in and help pay people’s wages with the introduction of a ‘coronavirus job retention scheme’.
In a bid to encourage employees to ‘furlough’ staff rather than lay them off, HMRC will provide grants which the Chancellor said will cover 80% of the salary of retained furloughed workers, up to a cap of £2,500 per employee per month. We understand that the furloughed employee must undertake no work for their employer, and the 80% reimbursement would be based on previous pay.
The Government has placed no limit on the funding available for the scheme and it is open to any employer in the UK, regardless of size or sector, and covers the cost of wages backdated to 1 March 2020.
To access the scheme, all UK employers need to designate affected employees as ‘furloughed workers,’ and notify their employees of this change. Changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation.
Employers also need to submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal. HMRC will set out further details on the information required.
The Chancellor said the Government was aiming for the scheme to be up and running before the end of April 2020, with the first grants to be paid within weeks. The scheme will be in place for at least three months, but will be extended as needed.
HMRC is working urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers.
The Chancellor was silent on the tax and NIC consequences of the grant, particularly for the employer. It is expected that HMRC will publish detailed guidance shortly on how these arrangements will work to avoid any unexpected costs.
Off payroll working (IR35) in the private sector
As part of a broad package of measures to protect the economy from the coronavirus outbreak, the planned introduction of off payroll working in the private sector is postponed for one year from 6 April 2020 to 6 April 2021. It was stressed that this is simply a deferral and not a cancellation of the regime, but this pause will bring welcome relief to many during these uncertain times. See the Off payroll working (IR35) in the private sector ― overview guidance note.
Statutory sick pay
Following Spring Budget 2020, statutory sick pay (SSP) rules are to be changed temporarily to help workers affected by the coronavirus outbreak. The Chancellor confirmed the Prime Minister’s previous announcement that SSP will be paid from day 1 rather than day 4, before announcing the following new measures:
• SSP is extended on a temporary basis to cover individuals who are unable to work because they have been advised to self-isolate, as well as people caring for those within the same household who display coronavirus symptoms and have been told to self-isolate
• self-isolating employees are able to obtain a notification via NHS111, which they can use as evidence for absence from work ― this is intended to take pressure away from GPs
Spring Budget 2020, paras 1.94, 1.95
Self-employed individuals and employees below the lower earnings limit who are not eligible for SSP can more easily make a claim for universal credit or contributory employment and support allowance:
• for the duration of the outbreak, the requirements of the universal credit minimum income floor are temporarily relaxed for those who have coronavirus or are self-isolating according to Government advice, ensuring self-employed claimants will receive support
• people are able to claim universal credit and access advance payments up front without the current requirement to attend a jobcentre if they are advised to self-isolate
• contributory employment and support allowance is payable, at a rate of £73.10 a week if the individual is over 25, for eligible people affected by coronavirus or those self-isolating in line with advice from day 1 of sickness, rather than day 8
Spring Budget 2020, para 1.96
HMRC has confirmed that if an employee has already exhausted their 28 weeks SSP then they will not be entitled to any more, even under coronavirus, and should be served the SSP1 form and advised to claim universal credit or employment support allowance.
See the Statutory sick pay (SSP) guidance note for further information generally on SSP and details of the legislation expanding the definition of a person unable to work due to sickness and therefore subject to SSP.
Repayment of SSP
In addition, to help insulate businesses against the impact of coronavirus, small and medium-sized businesses (with less than 250 employees) will have the costs of SSP for any employee off work because of coronavirus for up to 14 days refunded by the Government in full.
The full eligibility criteria for the scheme is as follows:
• this refund will cover up to two weeks’ SSP per eligible employee who has been off work because of coronavirus
• employers with fewer than 250 employees are eligible ― the size of an employer is determined by the number of people they employed as of 28 February 2020
• employers are able to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of coronavirus
• employers should maintain records of staff absences, but employees do not need to provide a GP fit note
• eligible period for the scheme commences the day after the regulations on the extension of SSP to self-isolators come into force
• while existing systems are not designed to facilitate employer refunds for SSP, the Government will work with employers over the coming months to set up the repayment mechanism for employers as soon as possible
Spring Budget 2020, para 1.99
The exact legislative and / or other mechanisms whereby these changes are to be introduced have yet to be announced. The Coronavirus Bill makes provision for HMRC to make the necessary changes via regulations.
Statutory maternity pay
HMRC has confirmed that where a pregnant woman stays at home following Government guidance on coronavirus, it is not classed as a pregnancy-related illness. Normal rules will apply, in that SSP covers this and the woman does not have to bring her maternity pay period forward. See the Maternity pay guidance note.
Homeworking
Currently, employers may make contributions towards an employee’s home expenses under ITEPA 2003, s 316A. Amounts can be paid in respect of the reasonable additional costs that an employee incurs. This exemption only applies to amounts reimbursed by the employer and not to costs borne by the employee.
In order for the exemption to apply, there must be ‘homeworking arrangements’ in place (see the Homeworking guidance note for the meaning of ‘homeworking arrangements’).
The exemption is designed to cover the additional costs of things such as increased heating, lighting or electricity costs. It does not cover expenses that the employee incurred in order to allow them to work at home. For example, mortgage interest payments, building alterations or the cost of additional equipment that the employee has to provide to work at home.
The employer may choose to reimburse the full amount of the employee’s extra costs. In which case, the employee and the employer must keep records to substantiate the reimbursement. This may prove difficult as the increased amount needs to be proven.
Alternatively, the employer may choose to reimburse based on HMRC-approved scale rates without the employer having to justify the amount paid. For tax years from 2012/13 to 2019/20, these amounts are £4 per week or £18 per month.
The Government announced that from 6 April 2020, the tax and NIC exempt amount that can be paid towards the additional costs of working from home is increased from £4 to £6 per week (£26 per month), where the employees work at home under ‘homeworking arrangements’. As a result, employers can pay eligible employees an additional £2 per week to cover business costs when working from home. OOTLAR, para 2.11
It is however unclear whether this proposed increase applies to temporary arrangements, such as those put in place in response to coronavirus. According to the Association of Taxation Technicians (ATT), the inclusion in the legislation of the word ‘regularly’ creates some uncertainty as to whether the exemption can apply where the arrangement is temporary. In the uncertain situation created by coronavirus, it may not be clear whether an employee’s homeworking will be frequent or follow any particular pattern. Hence, the ATT has asked the Government for more clarification in this respect. ATT press release, 12 March 2020
Employers need to think ahead and plan for the potential disruption to their workforce. They may now see employees having trouble getting to their normal place of work, notably because of illness but also because of self-isolation and other unexpected events (such as the closure of schools). Employers should assess their employees’ ability to work remotely, taking into consideration their IT setup and equipment at home, and review their ‘working from home’ policies if these are already in place.
For detailed technical commentary on ‘homeworking’, see the Homeworking guidance note.
Personal taxes
Deferral of second self assessment income tax payment on account for 2019/20
The second self assessment payment on account for the 2019/20 tax year is deferred from 31 July 2020 to 31 January 2021. In effect, this means that the 2019/20 balancing payment due by 31 January 2021 will be the total income tax, capital gains tax, Class 2 and Class 4 NIC due for the tax year less the first payment on account. No interest will be applied for the period between 31 July 2020 and 31 January 2021.
This applies to all those required to make payments on account under self assessment. Initially, the Government guidance stated that only the self-employed were eligible for this deferral, but Tolley received confirmation from the HMRC Press Office that this was to be widened to all taxpayers, and the official guidance was updated on 25 March 2020.
The deferment applies automatically without the need to make an application. Note that although the deferment applies to all, the Government asks that anyone who is able to make the second payment on account by 31 July 2020 does so, for the sake of the public finances.
Any individual wishing to take advantage of the deferral that pays their self assessment liability via direct debit (which is possible where the taxpayer uses the HMRC free software to submit a tax return) should cancel the direct debit payments. See the Payment of tax due under self assessment guidance note.
Individuals may wish to contact their advisers to see whether the impact of coronavirus may reduce their 2019/20 taxable income such that a claim can be made to reduce the 2019/20 payments on account. This would then generate a partial refund of the first payment on account.
For more details, see the Self assessment ― payments on account guidance note.
Impact on UK tax residence
Under the UK statutory residence test (SRT), individuals prevented from leaving the UK may be able to discount days of presence for determining tax residency if they qualify as ‘exceptional circumstances’. Examples of ‘exceptional circumstances’ include national or local emergencies, such as war, civil unrest or natural disasters, and a sudden or life-threatening illness or injury.
HMRC has confirmed that the following days will be regarded as exceptional circumstances due to coronavirus:
• the individual is quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus
• the individual is advised by official Government advice not to travel from the UK as a result of the virus
• the individual is unable to leave the UK as a result of the closure of international borders, or
• the individual is asked by the employer to return to the UK temporarily as a result of the virus
RDRM11005
It is important to note that there is a 60-day cap for days disregarded through exceptional circumstances. RDRM13230 states:
“The maximum number of days spent in the UK in any tax year that may be ignored due to exceptional circumstances is 60. This is a limit, not an allowance or entitlement. It applies whether there is one event or several events in the same tax year. Days spent in the UK over the 60-day limit count as a day of presence for the purposes of the SRT.”
For more details of the SRT, see the Determining residence status (2013/14 onwards) and Determining residence status (2013/14 onwards) ― important definitions guidance notes.
Other ways to ease cash flow during the coronavirus crisis
Individuals who have made an election to stop receiving child benefit due to the high income child benefit charge (HICBC) may wish to consider revoking the election in order to restart their claim. The child benefit may need to be ultimately paid back via the self assessment tax return, but it can help a little towards easing immediate cash flow concerns. The election can be revoked by completing a form online via the GOV.UK website (a Government Gateway account is necessary) or by contacting the Child Benefit Office by telephone on 0300 200 3100. The election must be revoked by the person who originally made it, which is the person who is to receive the child benefit. Child benefit will start to be paid again from the Monday following the call or receipt of the form. However, if neither partners’ adjusted net income is expected to exceed £60,000, the revocation can be backdated to the start of the tax year. See the High income child benefit tax charge ― advising the taxpayer guidance note for more details.
A lot of companies are owned and operated by their directors, who extract profits through a small salary and dividend. Such companies may have been classed as ‘non-employers’ for workplace pension purposes, and they will therefore be avoiding auto-enrolment obligations. This is on the basis of having made a declaration to the Pensions Regulator that there is no written or implied contract of employment. With SSP being funded by the Government (see above under the ‘Repayment of SSP’ heading), it may be tempting for the directors to claim SSP for themselves to help towards their cash flow concerns. However, by doing so, the directors may run the risk of creating an implied contract of employment, which could leave them in breach of their auto-enrolment obligations. The position is not currently clear and given that SSP is only being funded for 14 days, a director in this position may wish to consider whether it is worth taking the risk. For more on auto-enrolment, see the Automatic enrolment ― overview guidance note.
Business taxes
Company residence
While most UK incorporated companies are resident in the UK regardless of the location of central management and control, a few companies that are usually UK resident (for example, those incorporated outside the UK but managed in the UK) still fall under the case law test for residence. CTA 2009, s 14
This, or the effective management test, may also be of relevance for any company that may be dual resident and so needs to apply any tiebreaker provision in the relevant double tax treaty in order to determine residence. CTA 2009, s 18
With directors of companies potentially stranded abroad due to coronavirus, but business still needing to continue, board meetings may be held with directors joining remotely. This could potentially impact on where the central management and control (or effective management) of those companies is located. It should be considered on a case-by-case basis whether a director not situated in the UK at the time of the meeting should join a particular board meeting and ensure that the chair of the meeting is in the UK. Similar considerations but in reverse should take place for a company that is not UK resident but has directors in the UK.
This is a complex area that will not be relevant to many companies. For companies that may be affected, this issue should be considered for each board meeting, and contemporaneous minutes evidencing the location of directors attending meetings should be kept. It is unlikely that a single meeting will tip the balance regarding residency, but as travel disruptions are likely to continue for several months, this concern may become more relevant over time. For further details on the residence of companies, see the Residence of companies guidance note and Simon’s Taxes D4.104.
Companies may also need to consider whether directors are permitted to attend board meetings virtually, or from particular locations, under their articles of association. There may be specific provisions (in the articles or elsewhere) that provide for exceptional circumstances, but this needs to be considered on a case-by-case basis.
Insurance cover
Some businesses may have insurance cover for pandemics and / or Government-ordered closures. The Government confirmed on 17 March 2020 that its advice to avoid pubs, theatres, etc is sufficient to make a claim under such a policy. However, most businesses are unlikely to be covered, as standard business interruption insurance policies are dependent on damage to property and exclude pandemics, so businesses should check the terms and conditions of their specific policy and contact their providers.
VAT
Many businesses have experienced a rapid and unexpected decrease in their revenue streams as a result of coronavirus. As a result, they may be suffering cash flow problems that could impact their ability to pay any VAT due in respect of their VAT return period ending 31 March 2020 and later, depending on the severity of the ongoing situation.
As a result of these ongoing concerns, the Chancellor has announced a delay in the requirement to remit VAT payments that applies from 20 March 2020 until 30 June 2020. All UK businesses are entitled to delay payment of any VAT due automatically with no requirement to formally apply for the extension. Businesses are not required to make a VAT payment during this period.
Businesses will be given until the end of the 2020/21 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by the Government as normal.
HMRC has confirmed that businesses who pay via direct debit need to cancel that direct debit if they cannot afford to pay the VAT due. HMRC has requested that businesses cancel the direct debit as soon as possible so HMRC does not attempt to take the payment when it becomes due.
We have obtained clarification from HMRC regarding what payments can be deferred. HMRC provided the following statement:
‘For those customers who are unable to pay VAT due between 20 March and end June 2020, you have the option to defer that payment until 31 March 2021. You will not need to apply for deferral as eligibility is automatic. Customers who normally pay by direct debit should cancel their direct debit with their bank if they are unable to pay. Please do this in sufficient time.’
As the above did not specify whether this includes other payments as well as the VAT return payment, we requested further clarification from HMRC. HMRC has confirmed that the VAT deferral also includes payments on account and interim payments under the annual accounting scheme, which becomes due for payment between 20 March and end June 2020 at the latest.
We understand that HMRC may provide official updated guidance on the scope of the deferral period in due course.
Cancelling a VAT registration
Smaller businesses who consider that they will now be trading under the VAT deregistration threshold may wish to consider cancelling their VAT registration number if they believe that they will meet any of the following criteria.
According to Notice 700/11, businesses can voluntarily cancel their VAT registration number when any of the following occurs:
• the business can satisfy HMRC that its taxable turnover in the next 12 months will not exceed the VAT registration cancellation limit which is currently £83,000
• a decision is made to close down part of the business and satisfactory evidence can be provided to HMRC that the taxable turnover for the remainder will not exceed the VAT registration cancellation threshold
• the turnover exceeds the registration limit but the taxable supplies are wholly or mainly zero-rated ― if the business makes any standard-rated supplies, it can only cancel its VAT registration voluntarily if its input tax normally exceeds its output tax ― if these circumstances apply then the business should write to the VAT Registration Service explaining why it thinks it should be exempt from registration
If the business is requesting voluntary VAT registration cancellation on turnover grounds, it will need to tell HMRC why it thinks its turnover is going to fall below the VAT registration cancellation limit; for example, reduced opening times, lost contracts or changes to the business practices. HMRC should also be advised regarding what the business expects its turnover will be in the following 12 months. When calculating the turnover, it should be done on a VAT-exclusive basis.
HMRC will not allow a business to cancel its registration if the reduction in its turnover is the result of an intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months.
Businesses who meet any of the above conditions can use the online service to notify HMRC that they wish to cancel their VAT registration number. Businesses can also complete a form VAT7: application to cancel your VAT registration and send it to HMRC through the post. Businesses may have to account for VAT on any stocks and assets on hand at the time of deregistration.
Monthly VAT returns
If the business now finds itself in a VAT repayment situation (ie its input tax is greater than its output tax) then it may wish to consider moving onto monthly VAT returns as this will speed up the repayments from HMRC. Businesses should ensure that their monthly VAT return is filed as quickly as possible after the month-end to speed up receipt of the repayment. Businesses can change onto monthly VAT returns using their VAT online account.
Ensuring all input tax is claimed
Businesses may have historically only recovered input tax on invoices that had been processed up to the end of the accounting period. It may be worthwhile undertaking an exercise to identify any invoices that have an invoice date in the VAT return period that have not been processed, and manually include these invoices on the VAT return, in order to get the VAT repaid as quickly as possible. Businesses will need to ensure that they make an adjustment for this input VAT on the next VAT return in order to ensure that VAT is not recovered twice.
Tour operators margin scheme
The travel industry is another business sector that will be significantly affected by the crisis and for any businesses using Method 2, it may be worthwhile considering using Method 1. Method 1 could be more beneficial as the tax point is determined by the date the customer departs rather than the date of payment and if the holiday is cancelled, no tax point arises so it is not necessary to account for VAT on any deposits received.
Consider issuing requests for payment or proforma invoices
Where possible, businesses may wish to start issuing proforma invoices or requests for payment rather than a tax invoice as no tax point is created at this time. Businesses will obviously need to account for VAT when a tax point is created but issuing one of these documents at the relevant time may delay the requirement to account for VAT which could aid cash flow.
Other Government assistance for businesses and individuals
Individuals and businesses can access financial help through several Government measures, including:
• agreeing a time to pay arrangement to settle self assessed tax after the due date
• applying for universal credit for income support
• applying for Government grants or Government-backed loans
Advisers may be asked to assist clients in accessing the Government assistance being offered. It appears that the current measures are being offered with little or no checks undertaken to verify if coronavirus is actually causing the financial difficulty. However, advisers should nonetheless advise clients to keep full records to prove how they have been directly impacted by coronavirus in case of a later challenge. A subsequent compliance check or enquiry could lead HMRC to a taxpayer’s social media accounts, and contradictory evidence would cause problems. See Simon’s Taxes A6.409 for more on the type of information used by HMRC.
Advisers may wish to check their professional indemnity insurance as they may be asked to make representations on behalf of clients that they were ill or otherwise impacted. In the absence of definitive coronavirus testing, advisers could find themselves inadvertently put in the position of making a false representation, or giving advice based on incomplete facts.
Time to pay arrangements
Time to pay arrangements are negotiated agreements with HMRC that allow for the payment of self assessed tax after its due date. In response to the coronavirus crisis, businesses and individuals are being assured that time to pay can be used as a way of easing cash flow concerns by paying tax in instalments.
For more on the details of negotiating these arrangements, see the Time to pay arrangements for tax due under self assessment guidance note.
Universal credit, working tax credit and housing benefit
Universal credit is a tax-free state benefit that is available for individuals and the self-employed on low incomes. Measures taken by the Government to enable faster access to universal credit during the coronavirus outbreak include dispensing with the usual requirement for a minimum income floor. For more details, see the Universal credit guidance note.
The standard allowance for universal credit and the basic element of working tax credit are to be increased by £20 per week from 6 April 2020. This is in addition to the 2020/21 uprating announced at Spring Budget 2020. See the Computing the working tax credit guidance note.
From April 2020, local housing allowance rates are increased to the 30th percentile of market rents. This applies to all private renters who are new or existing universal credit housing element claimants and to existing housing benefit claimants.
It should be noted that an application for universal credit usually means that HMRC is released from any existing time to pay arrangement and the tax debt is transferred to the Department of Work and Pensions. The tax debt will be repaid through a reduction in the universal credit payments. A taxpayer may therefore have to choose between seeking assistance through universal credit or through a time to pay arrangement.
Government grants and loans
A number of measures to support businesses were announced at Spring Budget 2020 and subsequently extended by the Chancellor.
These include:
• an automatic 12-month business rate holiday for all retail, hospitality, leisure and child nursery businesses in England
• small business grant funding of £10,000 for all businesses in receipt of small business rate relief or rural rate relief grants
• grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000
• the coronavirus business interruption loan scheme to support small and medium sized enterprises (SME) with cash flow pressures by providing access to bank lending and overdrafts
• a new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge coronavirus disruption to their cash flows through loans
Business rates and the grant funding are administered by local authorities. The business rates holiday is applied automatically and local authorities should write to eligible businesses with a restated 2020/21 bill. Similarly, local authorities should write to businesses that are eligible for the £25,000 grant with further details. Any questions as to the eligibility for the business rates holiday or provision of the grant should be directed to the local authority. Any businesses that are unsure of their local authority can find this via the tool on the GOV.UK website.
The coronavirus business interruption loan scheme will be delivered by the British Business Bank. The Government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims) and will not charge businesses or banks for this guarantee. The scheme will support loans of up to £5 million in value. Businesses can access the first 12 months of that finance interest-free, as the Government will cover the first 12 months of interest payments. The intention behind this scheme is to give lenders confidence to continue to lend to SME. The scheme is available from 23 March 2020.