Taxation of Covid-19 support payments
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Draft legislation (the "draft legislation") that addresses the Check Later stage and the taxation of the Grants has been published. A consultation on the draft legislation closed on 12 June 2020; and we have commented on the draft legislation. It is intended that Finance Act 2020 will implement the relevant provisions.
Taxation of the Grants
In broad terms, the Grants are intended to be fiscally neutral. Addressing CJRS payments as an example, the monies received by the employer are revenue receipts for income tax or corporation tax purposes and the monies paid by the employer to its employees are a deductible expense. As the employer will operate PAYE in respect of the payment of Grant sourced monies to its employees, the employees will receive net amounts.
The income tax charge
The draft legislation enables HMRC to recover a sum equivalent to the Grant where the person is or was not entitled to it. It operates by imposing an income tax charge of 100% of the Grant to which the recipient was not entitled and which has not been repaid. Liability is not limited to fraudulent claims. The income tax liability applies regardless of whether the erroneous claim was made innocently, carelessly or deliberately.
The circumstances when a person is "not entitled" to a Grant is drafted widely. It includes when the Grant was not used "within a reasonable period" to "reimburse the costs which it was intended to reimburse".
If HMRC consider that a person has received a Grant to which he is not entitled, it may raise an income tax assessment on that person. This includes on companies.
To whom should repayment be made?
There is, in our view, an issue as to whom repayment is to be made in the event that an error is discovered. There is a mismatch in this regard between the draft legislation and the Explanatory Notes. According to the former, repayment is to "the person who made" the payment. In the case of CJRS, that would seem to mean that, if the employer or employee recognise that the latter is not entitled to the payment, he should repay his employer. The Explanatory Notes indicate, wrongly, that the draft legislation includes the wording "less any amount repaid to HMRC", not less any amount repaid to "the person who made" the payment.
In the event that the employee receives a CJRS payment to which he was not entitled and repays that sum to his employer, but that employer retains the monies, there is, in our view, no longer an income tax charge to the value of the payment on the employee (albeit that it is noted that the Explanatory Notes provide a different interpretation). This is a scenario that could arise particularly by reason of the intervening insolvency of the employing company. We consider that the intent of the draft legislation is to ensure that, in this scenario, the income tax liability is, in effect, moved onto the employer company, but whether that intent is met is moot.
Insolvent companies
The draft legislation enables HMRC to issue "joint liability notices" to company directors making them jointly and severally liable for any income tax charge imposed on the company by reference to Grants received in error. It is intended that Finance Act 2020 will introduce a provision that enables company directors who were responsible for a company that is subject to an insolvency procedure having entered into a tax avoidance arrangement jointly and severally liable for the company's tax. The draft legislation extends the ambit of that provision to the Grants.
What are the time limits?
The draft legislation applies the existing assessment provisions under the Taxes Management Act 1970. This means that HMRC has up to 20 years to pursue any deliberate non-compliance, 6 years to pursue any careless non-compliance and, in all other circumstances, 4 years.
What about penalties?
The primary penalty that is imposed under the draft legislation is a "failure to notify" penalty. The draft legislation provides that if a person fails to notify HMRC that he has received a Grant to which he was not entitled, the failure to notify provisions (Schedule 41, Finance Act 2008) apply and the failure will be treated as "deliberate and concealed." The consequence of that is that the penalty may be 100% of the income tax charge.
Concomitant inaccuracies in the returns of the employees and employers may also lead to the imposition of further penalties (under the applicable regimes that apply generally to inaccuracies in returns).
How we can help
Although the CJRS Guidance that has been published recently provides substantially more detail than previous commentary, there remain ambiguities and areas of uncertainty. Many businesses will face unique challenges that require expert support. We have been working with many businesses, across various sectors, in relation to whether or not they could, and should, take advantage of the Covid-19 support payments that were made available by the Government. As lockdown measures are gradually eased, the focus of HMRC will be on seeking to recoup monies that it considers may have been paid in error. We can assist businesses with this process also.
Please call or email any member of the team, who will be able to provide further information on the CJRS and our CJRS Audit.