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The risk of paying illegal dividends

Directors need to be careful to avoid paying illegal dividends or they could become personally liable for company liabilities.

Many directors of owner managed businesses, including ourselves, pay a portion of their income as dividends and the end of the tax year is a time when dividend will often be considered, even if it is just to use up the £2000 nil rate band for dividends.

Basically, a dividend can only lawfully be paid out of profits of the current or previous years. So, if you are making losses, beware. You may have sufficient reserved to cover the dividend from earlier years, but you need to check. Give us a call if you are unsure.

A shareholder is required to repay an unlawful dividend if they know or have reasonable grounds for knowing that it was made unlawfully at the time of payment. A dividend can only be made where distributable profits exist and that is irrespective of the level of surplus cash in the business. Cash is often the criteria used to determine the level of dividends but it is not the only criteria you need to review.

£65bn in unpaid taxes due to HMRC

The amount of debt owed to HMRC from UK businesses and taxpayers has now trebled from £19.3bn in 2019 to £65.5bn, as businesses and taxpayers fall behind on payments during lockdown.

About a third of the current balance is now the subject of immediate recovery debt proceedings.

£35bn of the total outstanding debt is in relation to emergency coronavirus support policies such as deferred VAT payments and £3.9bn of the debt has been deferred through Time to Pay arrangements made with HMRC.

There is presently a moratorium on HMRC started winding up proceedings against companies but inevitable at some point this will come to an end and HMRC will go into debt recovery mode as they come under increased pressure to help improve public finances in order to help pay for coronavirus support, such as the furlough scheme.

From 1 December 2020 HMRC is now treated as a preferential creditor in any insolvency, meaning it is entitled to be paid ahead of unsecured creditors and floating charge lenders. Will this give HMRC a greater appetite to put extreme pressure on businesses including petitioning to wind up a business, and appoint a liquidator who could sell the assets of the business, with only HMRC being paid and leaving no other money to pay the other creditors, such as suppliers and banks.

HMRC will not want to be seen to be driving businesses to the wall just now, but the time will come when the rhetoric changes. If you have Revenue debt, this could be a good time to get something organised so that you are not on the HMRC naughty list when the time comes.

Do you want to pay tax earlier?

HMRC is seeking views on bringing the payment of income tax and corporation tax closer to the point when the income arises. They like PAYE because the tax is paid as the money is earned. Ideally, they would like PAYE for the self-employed and small companies. They know they will not get that, but they want to get as close as they can.

HMRC has launched a call for evidence on the impact of requiring payment of income and corporation tax more quickly.

MTD started with VAT, next is income tax and corporation tax, along with quarterly reporting. The government has always denied that the quarterly upload of accounting data for MTD is being introduced with a view to facilitating earlier tax payments.

No doubt we will hear more of these proposals as time goes on but the direction of travel seems set and this bus is likely to be unstoppable.

The call for evidence mentions that those not within MTD for self assessment may have to provide information to HMRC more frequently or accept that payments be made on whatever estimates are in HMRC’s system – this seems to extend MTD obligations to more taxpayers by default.

No doubt we will hear more of these proposals as time goes on, but the direction of travel seems set and this bus is likely to be unstoppable.

Temporary Workplaces – A quick Overview

There is no deduction from earnings for travel expenses incurred in ‘ordinary commuting’, which is travel between: your home and a permanent workplace.

A permanent workplace is defined as a place you regularly attend in the performance of the duties of the employment and which is not a temporary workplace.

A temporary workplace is a place you attend to perform a task of limited duration or for some other temporary purpose. A workplace is not regarded as temporary if your attendance is during a period of continuous work of a significant extent (being at least 40% of working time) lasting:

· More than 24 months; or

· Comprising all, or almost all (i.e. at least 80%) of the period for which the employee is likely to hold the employment.

It becomes permanent at the time that it is reasonable to assume one of the above is true. This could be at the start of the work, or during it (for example, if an existing 18-month secondment is extended by another 12 months).

Where travel is deductible, any reasonable subsistence costs (for example hotels and evening meals) will also be deductible.

COVID-19 and the 5% late payment penalty

The payment deadline for Self-Assessment is 31 January, with interest charged from 1 February where any amounts are outstanding on that date. This has not changed.

Normally, a 5% late payment penalty is also charged on any unpaid tax that is still outstanding on 3 March.

However, on 22 February, HMRC announced that Self-Assessment taxpayers will not be charged a 5% late payment penalty provided they pay their tax or set up a monthly payment plan by 1 April 2021.

Off-payroll working rules for private sector

From 6 April 2021 off-payroll working rules will apply to:

· public sector authorities engaging contractors who work through their own limited company or other intermediary;

· medium and large-sized private sector organisations engaging contractors who work through their own limited company or other intermediary;

· employment agencies and third parties which supply contractors.

This is the new IR35 compliance strategy from HMRC.

HMRC has confirmed it will adopt a light touch approach to penalties. Consequently, there will be no penalties for inaccuracies relating to the off payroll working rules in the first 12 months, unless there is evidence of deliberate non-compliance.

However, where HMRC believe contractors are adopting artificial, contrived arrangements claiming to avoid the application of the off payroll working rules or result in customers paying less tax than should be the case, HMRC will take action.

HMRC has also confirmed that they will not use information acquired as a result of the changes to the off payroll working rules to open a new compliance enquiry into returns for tax years before 2021/22, unless there is reason to suspect fraud or criminal behaviour.

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