Draft legislation has been published (which will form part of the Finance Bill 2020) to bring grants made under coronavirus business support schemes, such as the coronavirus job retention scheme (JRS), into the charge to income tax or corporation tax (see bit.ly/3h2jPU1). The rules also enable HMRC to recover, by way of a ring-fenced 100% tax, any grants paid under the schemes where the recipient was not entitled to the grant or where a JRS payment has not been used to pay employees, make pensions contributions, pay PAYE or NICs. If a charge to the 100% tax arises, the grant is not brought into the charge to income or corporation tax (para 8(5) of the schedule to the draft legislation).
When does the 100% tax charge arise?
The 100% tax arises ‘if the recipient is not entitled to the amount in accordance with the scheme under which the payment was made’.
The ‘scheme’ under which the payment was made is, in the case of JRS payments, the Treasury Direction under Coronavirus Act 2020 s 76 and the accompanying guidance. The guidance is not comprehensive and leaves many unresolved questions (for example, in relation to whether the employer been ‘severely affected’ by Covid-19 and to what extent this has left the employer unable to maintain its current workforce). There are also numerous areas of uncertainty over who is eligible and for which elements of their pay. There is therefore plenty of scope for legitimate differences of opinion in this area, and these questions are likely to form the battleground of many appeals against the tax.
Liability to the tax is not limited to abusive or fraudulent claims, so if a taxpayer takes a view on entitlement that later transpires to be wrong, it is required to repay the grant despite having spent the money on retaining employees it may otherwise have made redundant. It is somewhat troubling that an employer, acting in good faith when accessing the scheme in order to retain employees, could be faced with a retrospective charge to 100% tax on the amounts received. Repayment of the full grant could cripple some businesses. Had the regime not been introduced, HMRC would have had to use common law rights to recovery, including unjust enrichment, which would have had defences for businesses that will not now apply. A fairer option would be to include a ‘reasonable excuse’ defence for those who have tried to do the right thing, or to limit the 100% tax to fraudulent or abusive claims.
The 100% tax will become chargeable (i) at the time the incorrectly claimed grant is received or (ii) if the taxpayer was entitled to the grant initially but then ceased to be entitled (for instance, if a furloughed employee in fact works during the furlough period), when the entitlement ceased.
How is the tax assessed?
Paragraph 12 of the schedule imposes a tight notification deadline of the later of 30 days from the enactment of the legislation or 30 days from the date at which the charge arose. Regardless of whether they have so notified, recipients must include the grant in their self-assessment for the tax year in which the charge arises. If a recipient does not self-assess, HMRC can amend the return at the conclusion of an enquiry into the relevant tax return.
Alternatively, HMRC may make an assessment under para 9(1). This provision looks similar to the discovery assessment provisions (in TMA 1970 s 29 and FA 1998 Sch 18 para 41), and indeed the same time limits are imported (four years but extended to six years if careless and 20 years if deliberate). However, it is arguably wider than that: HMRC need only ‘consider’ that an amount of the 100% tax is due, so the requirement for it to ‘newly appear’ does not feature as it would for a discovery assessment. This would therefore leave no space for the developing doctrine of ‘staleness’, which requires that discovery assessments be made within a reasonable time (see Beagles v HMRC [2018] UKUT 380).
A further issue arises on the current wording of the draft legislation if HMRC makes an assessment after the one-year window has closed for the taxpayer to amend its return. HMRC can assess the 100% tax on the grant, but the taxpayer will presumably have brought the receipt into account in the tax computation and it will now be too late to amend the return. An overpayment relief claim by the taxpayer might not always be available. In order to prevent a potential double charge to tax arising in these circumstances, an express right to recover any tax mistakenly paid on the same amount, or an extension to the time limit for amending returns to enable the taxpayer to remove the receipt from its standard tax computations, would be desirable.
Paragraph 9(3) confirms that the appeals and enforcement provisions in TMA 1970 Parts 4–6 will apply. To the extent that a taxpayer disagrees with an assessment, they can challenge it in the First-tier Tribunal.
HMRC will also be able to charge a penalty in cases of deliberate non-compliance. HMRC has said that further provisions may be included in the final new clause and schedule when tabled.
What now?
The consultation period closes on 12 June 2020. We expect that the rules will be enacted broadly as drafted, but it is hoped that some of the issues raised above will be addressed as a result of the consultation. In the meantime, recipients of grants should document the basis for seeking the grants, including keeping evidence of eligibility and any professional advice relied on.
Draft legislation has been published (which will form part of the Finance Bill 2020) to bring grants made under coronavirus business support schemes, such as the coronavirus job retention scheme (JRS), into the charge to income tax or corporation tax (see bit.ly/3h2jPU1). The rules also enable HMRC to recover, by way of a ring-fenced 100% tax, any grants paid under the schemes where the recipient was not entitled to the grant or where a JRS payment has not been used to pay employees, make pensions contributions, pay PAYE or NICs. If a charge to the 100% tax arises, the grant is not brought into the charge to income or corporation tax (para 8(5) of the schedule to the draft legislation).
When does the 100% tax charge arise?
The 100% tax arises ‘if the recipient is not entitled to the amount in accordance with the scheme under which the payment was made’.
The ‘scheme’ under which the payment was made is, in the case of JRS payments, the Treasury Direction under Coronavirus Act 2020 s 76 and the accompanying guidance. The guidance is not comprehensive and leaves many unresolved questions (for example, in relation to whether the employer been ‘severely affected’ by Covid-19 and to what extent this has left the employer unable to maintain its current workforce). There are also numerous areas of uncertainty over who is eligible and for which elements of their pay. There is therefore plenty of scope for legitimate differences of opinion in this area, and these questions are likely to form the battleground of many appeals against the tax.
Liability to the tax is not limited to abusive or fraudulent claims, so if a taxpayer takes a view on entitlement that later transpires to be wrong, it is required to repay the grant despite having spent the money on retaining employees it may otherwise have made redundant. It is somewhat troubling that an employer, acting in good faith when accessing the scheme in order to retain employees, could be faced with a retrospective charge to 100% tax on the amounts received. Repayment of the full grant could cripple some businesses. Had the regime not been introduced, HMRC would have had to use common law rights to recovery, including unjust enrichment, which would have had defences for businesses that will not now apply. A fairer option would be to include a ‘reasonable excuse’ defence for those who have tried to do the right thing, or to limit the 100% tax to fraudulent or abusive claims.
The 100% tax will become chargeable (i) at the time the incorrectly claimed grant is received or (ii) if the taxpayer was entitled to the grant initially but then ceased to be entitled (for instance, if a furloughed employee in fact works during the furlough period), when the entitlement ceased.
How is the tax assessed?
Paragraph 12 of the schedule imposes a tight notification deadline of the later of 30 days from the enactment of the legislation or 30 days from the date at which the charge arose. Regardless of whether they have so notified, recipients must include the grant in their self-assessment for the tax year in which the charge arises. If a recipient does not self-assess, HMRC can amend the return at the conclusion of an enquiry into the relevant tax return.
Alternatively, HMRC may make an assessment under para 9(1). This provision looks similar to the discovery assessment provisions (in TMA 1970 s 29 and FA 1998 Sch 18 para 41), and indeed the same time limits are imported (four years but extended to six years if careless and 20 years if deliberate). However, it is arguably wider than that: HMRC need only ‘consider’ that an amount of the 100% tax is due, so the requirement for it to ‘newly appear’ does not feature as it would for a discovery assessment. This would therefore leave no space for the developing doctrine of ‘staleness’, which requires that discovery assessments be made within a reasonable time (see Beagles v HMRC [2018] UKUT 380).
A further issue arises on the current wording of the draft legislation if HMRC makes an assessment after the one-year window has closed for the taxpayer to amend its return. HMRC can assess the 100% tax on the grant, but the taxpayer will presumably have brought the receipt into account in the tax computation and it will now be too late to amend the return. An overpayment relief claim by the taxpayer might not always be available. In order to prevent a potential double charge to tax arising in these circumstances, an express right to recover any tax mistakenly paid on the same amount, or an extension to the time limit for amending returns to enable the taxpayer to remove the receipt from its standard tax computations, would be desirable.
Paragraph 9(3) confirms that the appeals and enforcement provisions in TMA 1970 Parts 4–6 will apply. To the extent that a taxpayer disagrees with an assessment, they can challenge it in the First-tier Tribunal.
HMRC will also be able to charge a penalty in cases of deliberate non-compliance. HMRC has said that further provisions may be included in the final new clause and schedule when tabled.
What now?
The consultation period closes on 12 June 2020. We expect that the rules will be enacted broadly as drafted, but it is hoped that some of the issues raised above will be addressed as a result of the consultation. In the meantime, recipients of grants should document the basis for seeking the grants, including keeping evidence of eligibility and any professional advice relied on.
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