Reduced rate of VAT
Reduced rate of VAT
To help the hospitality and leisure industry recover from the impact of the first national lockdown, a reduced rate of VAT of 5% was introduced for a limited period from 15 July 2020. The reduced rate of VAT was originally to apply until 12 January 2021. However, in September last year, the Chancellor announced that it would remain at 5% until 30 March 2021.
By the time of the Spring 2021 Budget on 3 March 2021, the hospitality and leisure sectors were suffering the effects of further lockdowns. To provide more help to this sector, the period for which the reduced the temporary 5% rate of VAT will apply has been further extended until 30 September 2021. From 1 October 2021, a new reduced rate of VAT of 12.5% will apply until 31 March 2022. The rate will revert to the standard rate of 20% from 1 April 2022.
Affected supplies
The following supplies will benefit from the reduced rate of 5% until 30 September 2021 and the new reduced rate of 12.5% from 1 October 2021 to 31 March 2022.
- Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
- Hot takeaway food and hot takeaway non-alcoholic beverages.
- Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
- Admission to cultural attractions that do not already benefit from the cultural VAT exemption, such as theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and other similar cultural events and facilities.
Where an admission to an attraction is within the existing cultural VAT exemption, this takes precedence over the reduced rate.
Further grants for the self-employed
Further grants for the self-employed
The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021.
Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.
Fourth grant
The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.
To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.
To qualify for the grant, the trader must either:
- be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
- have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.
The trader must also declare that:
- they intend to continue trading; and
- they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.
Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.
Fifth grant
The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.
Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.
Newly self-employed When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions.
Grants are taxable
Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.
Business interruption insurance – Are pay-outs taxable?
Business interruption insurance provides cover for losses as a result of events that close or severely disrupt the business. Policies may cover a loss of profits that arise as a result of the ‘interruption’. They may also meet fixed costs that the business has to continue to meet despite being closed.
Many businesses who had been forced to close as a result of the Covid-19 pandemic and associated lockdown measures and who attempted to make a claim on policies that they believed provided cover for the associated loss of profits found that their insurers did not agree. The sticking point was the wording of the policy where this excluded diseases unless specifically named.
To provide clarification for policyholder and insurers, the Financial Conduct Authority (FCA) took a test case. The high court found mostly in favour of the policyholders. On appeal, the Supreme Court ruling in January furthered strengthened the policyholders’ position. As a result of the Supreme Court ruling, around 370,000 small businesses may receive a pay-out.
Tax implications
HMRC’s general stance is that if the premium was tax deductible, any insurance receipts are taxable. Businesses would have been able to deduct the cost of business interruption insurance premiums as long as the cost was incurred wholly and exclusively for the purposes of the business.
Where a policy pays out an amount to cover the loss of profits during the period when the business was shut, the receipt is treated as trading income. Payments to cover costs are also taxable if a deduction is allowable for the cost.
Where accounts are prepared on the cash basis, the insurance receipt is taken into account in the accounting period in which it is received.
However, if the accounts are prepared on the accruals basis (as would be the case for a company), the receipt should be matched to the period to which it relates, for example, the accounting period in which the lockdown giving rise to claim fell. However, where there was doubt as to whether a payment would be made, as was often the case in relation to Covid-19 claims, the critical time would be the time when it became clear that a payment would be made. This may be the period in which the date of the Supreme Court ruling occurred.
When to tell HMRC about your new business
Lockdown restrictions have forced many businesses to close temporarily. Selling goods or clothes on sites such as eBay and Depop offers the opportunity to raise some much needed cash in these difficult times.
What are the associated tax implications and do you need to tell HMRC about it?
Badges of trade
There is a difference between occasionally selling an unwanted item and running an online business. When selling items online, it is necessary to consider whether you are actually trading. The courts have looked to the ‘badges of trade’ to answer this question. These are indicators that taken together provide an overall impression as to whether a trade exists.
The badges of trade are as follows:
- profit-seeking motive — an intention to make a profit indicates trading;
- the number of transactions – systematic and repeated transactions indicate trading;
- the nature of the asset – an asset that it can only be turned to an advantage by sale suggest trading;
- existence of similar trading transactions or interests – transactions that are similar to those of an existing trade may themselves be trading;
- changes to the asset –repairing, modifying or improving the asset to make it more easily saleable or saleable at a greater profit indicates trading;
- the way the sale was carried out – selling the asset in a way typical of trading organisations suggests trading;
- source of finance – selling the asset to repay funds borrowed to purchase it may indicate trading;
- interval of time between purchase and sale – a short interval of time between purchase and sale may indicate trading;
- method of acquisition – assets acquired by inheritance or as a gift are less likely to suggest trading.
There is no single overriding factor that provides conclusive proof that a person is trading; rather it is a question of forming an overall impression by considering the badges of trade.
Trading allowance
Even if the sale of goods amounts to a trade, it not always necessary to tell HMRC about it, or pay tax on any profits.
The trading income allowance removes the need to tell HMRC about trading income where the gross annual income from one or more trades is £1,000 or less for the tax year. If you are self-employed and sell goods on eBay as a side line, it is not possible to use the trading allowance for the side line if income from your main trade is more than £1,000 – you must report both to HMRC.
What to tell HMRC
If your gross income from all trades that you carry out is more than £1,000, you must tell HMRC about your income and expenses on your self-assessment tax return (registering for self-assessment first if you are not already registered).
In working out your profit you can either deduct expenses wholly and exclusively incurred in connection with the trade or, if more beneficial, the £1,000 trading allowance. Deducting the allowance will generally be more beneficial if expenses are less than £1,000. However, as the deduction of the allowance cannot create a loss, if after deducting actual expenses there is a loss, it is better to deduct the actual expenses rather than the allowance so you can benefit from the associated loss relief.
If your profits are high enough, you may also need to pay Class 2 and Class 4 National Insurance contributions. For 2020/21, you will need to pay Class 2 National Insurance if you profits from self-employment are more than £6,475 and Class 4 if your profits are more than £9,500.