Update on the tax status of Double Cab Pick Ups

HMRC have reversed a previous decision (originally published 12 February 2024) on the tax status of Double Cab Pick Ups (DCPUs), following an earlier 2020 Court of Appeal judgment. The earlier decision, now reversed, had announced that effective from 1 July 2024, DCPUs with a payload of one tonne or more would be treated as cars rather than goods vehicles for both capital allowances and benefit-in-kind purposes.

The February announcement caused a significant backlash from farmers and the motoring industry on the potential impacts of the change in tax-treatment. In their surprising U-turn, just over one week after the initial announcement, the government has now retracted its decision to class DCPUs as cars. This move will ensure that businesses and individuals can continue to benefit from the historic tax treatment of DCPUs.

The Financial Secretary to the Treasury, said:

“We will change the law at the next available Finance Bill in order to avoid tax outcomes that could inadvertently harm farmers, van drivers and the UK’s economy.”

DCPUs with a payload of less than one tonne will continue to be classed as cars as has historically been the case.

Source:HM Treasury| 24-02-2024

Exempt company purchase of own shares

Most payments a company makes to its shareholders, in respect of their shares, will be qualifying distributions (usually described as dividends) and may be subject to Income Tax.

If certain conditions are met, the payment can be treated as an exempt distribution. An exempt distribution is a payment that is not treated as a distribution. It is treated as consideration for the disposal of shares and is subject to CGT.

When a company makes a purchase of its own shares, any excess paid over the amount of capital originally subscribed for the shares is usually treated as a distribution. However, there are special provisions that enable an unquoted trading company or an unquoted holding company of a trading group to undertake a purchase of its own shares without making a distribution.

In order to do this a clearance application may be made. Under this procedure a company wishing to make a purchase of its own shares can obtain advance confirmation from HMRC that the distribution arising will be an exempt distribution.

If the application is approved, the payment is treated as consideration for the disposal of the shares in the hands of the seller and subject to CGT. Where Business Asset Disposal Relief is available CGT of 10% is payable in place of the standard rate. There are a number of conditions that must be met in order to qualify for the relief.

When the necessary conditions are met a company purchase of own shares can be a tax efficient way of exiting a business.

Source:HM Revenue & Customs| 17-07-2023

Company share buy-backs

Company share buy-backs are also commonly known as a company purchase of own shares. A company may decide to buy back their shares for a number of reasons including to return cash to shareholders or to provide for a shareholder exit.

The relevant legislation allows a company to purchase its own shares if its Articles of Association authorise it to do so. HMRC’s guidance is clear that to be valid, the terms of the purchase must provide for immediate payment. There are two parties to the transaction, the company making the purchase and the shareholder whose shares are purchased.

A private company limited by shares can purchase its own shares by passing an ordinary resolution with statements by a directors and auditor’s report confirming solvency. The company would be able to provide financial assistance for purchases of its own shares assuming it does not result in an unlawful reduction of capital.

A public limited company needs to apply for court approval for capital reduction and they are prohibited by CA06 from providing financial assistance for purchases of own shares.

Source:HM Revenue & Customs| 27-03-2023

Scotland’s non-domestic rates reliefs

Business rates is the commonly used term for non-domestic property rates. Business rates are charged on most non-domestic premises, including most commercial properties such as shops, offices, pubs, warehouses and factories. Some properties are eligible for discounts from the local council on their business rates. This is called non-domestic property rates relief or business rates relief. 

In Scotland, there are a number of reliefs available including Small Business Bonus Scheme, reliefs for empty or newly re-occupied properties and charitable rate relief. Businesses need to apply to their local council for relief. 

Business rates relief through the Small Business Bonus Scheme (SBBS) scheme is available if the combined rateable value of all business premises is £35,000 or less, if the rateable value of individual premises is £18,000 or less and the property is actively occupied.

Empty properties in Scotland can receive 50% rates relief for the first 3 months they are empty. They can then claim a further 10% discount.

Empty industrial properties can qualify for 100% relief from non-domestic rates for the first 6 months that they are empty. They can then claim a further 10% discount. It is also possible, under certain circumstances, to receive 100% relief for the time a property is unoccupied, for example, if it is a listed building. 

Registered charities in Scotland can apply for 80% rates relief. This only applies if their property is mostly used for charitable purposes. Certain councils may also offer up to 20% additional relief on top of the 80%, meaning that no rates would be payable. There are similar provisions for registered Community Amateur Sports Clubs.

Rates reliefs are handled differently in England, Wales and Northern Ireland.

Source:The Scottish Government| 13-02-2023

Post-cessation receipts and expenses

Tax relief may be available for post-cessation expenses of a trade. In order to be an allowable post-cessation expense, the trade must have ceased, and the expense must have been deductible in calculating the trading profits.

This means that the expense still has to meet the wholly and exclusively test and be revenue, not capital, expenditure. The expenditure can be apportioned if necessary. The way in which post-cessation expenses can be relieved depends on the person incurring the expenditure and the type of expenditure incurred.

The following are examples of expenses that would likely be categorised as post-cessation expenses:

  • remedying defective work done, goods supplied, or services rendered while the business was continuing or as damages in respect of such defective work, goods or services whether awarded by a Court or agreed during negotiations on a claim;
  • paying legal or other professional expenses incurred in connection with the costs above;
  • insuring against liabilities arising out of any such claim or against the incurring of such expenses; and
  • collecting, or seeking to collect, debts which were considered in computing the profits of the trade before discontinuance.

An expense specifically relating to the cessation itself is not an allowable expense.

Source:HM Revenue & Customs| 12-12-2022

Basis of assessment changing

Forthcoming 'basis of assessment' reforms will change the way trading income is allocated to tax years for the self-employed. The changes will affect sole traders and partnerships that use an accounting date between 6 April and 30 March. There is no change to the rule for companies.

The reforms will change the basis period from a ‘current year basis’ to a ‘tax year basis’. Under the current rules there can be overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. The new method of using a ‘tax year basis’ will remove the basis period rules and prevents the creation of further overlap relief.

The new rules will come into effect in the 2024-25 tax year with 2023-24 being a transitional year. During the transitional year, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief can be used against profits for that tax year.

Affected businesses in 2023-24 will be assessed on the tax for profits for the:

  • 12-month accounting period they have previously been using; and
  • for the rest of the 2023-24 tax year — minus any overlap relief that may be due — spread over the next 5 tax years.

The changes do not affect sole traders and partnerships who already draw up annual accounts to a date between 31 March and 5 April.

Affected businesses should ensure they are prepared for the changes as there may be cashflow implications. 

Source:HM Revenue & Customs| 14-11-2022

Farming – using the herd basis

There are special rules which can apply to farmers and market gardeners that prepare their accounts on accruals basis. This includes special rules for farmers’ averaging relief, dealing with losses and the treatment of compensation for compulsory slaughter.

The special rules also refer to the use of the herd basis. The herd basis is a special method of calculating profits or losses which may be used by farmers who keep production livestock. Usually, farm animals are treated as trading stock. However, under the herd basis a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset.

Any farmer that wishes to use the herd basis must elect to do so. Where a herd basis election is in force, the treatment for calculating farming profits of the herd or herds covered by the election is governed by special rules. The herd basis rule can also apply where animals are jointly owned, for example, in some share-farming arrangements.

From the farmer’s point of view, the main benefits are likely to be that:

  • the cost of maintaining the herd can be charged against tax; and
  • any profit on its eventual disposal will be tax-free.

Note, that these special rules do not apply to farmers and market gardeners who calculate their profits using the cash basis.

Source:HM Revenue & Customs| 30-08-2022

Scope of Trade

There is no statutory definition of ‘trade’. The only statutory reference to the term is that ‘trade’ includes a ‘venture in the nature of trade’. This absence of a formal definition decides if an activity is a trade more difficult. However, over time the courts have set some established guidance. 

It is clear from the significant amount of case law on this subject that a decision on whether there is a trade is a grey area. However, even having established that a trade, or a venture in the nature of trade, exists, the next question to consider is the scope of that trade.

HMRC’s internal guidance on this matter states as follows:

In many cases the nature and extent of a particular trade is never explicitly considered. This is particularly the case where there is no dispute about the nature of the trade, whose scope is implicitly understood and accepted.

However, the scope of a particular trade is fundamental when questions arise concerning:

  • whether particular receipts are income of the trade,
  • whether expenditure is incurred wholly and exclusively for the purposes of the trade, or
  • whether expenditure is capital or revenue for tax purposes.

One trader’s sale, or purchase, of a fixed capital asset may be another trader’s sale, or purchase, of trading stock.

Source:HM Revenue & Customs| 01-08-2022

Demergers

There are special statutory demerger provisions that are designed to make it easier to divide and place into separate corporate ownership the trading activities of a company or group of companies. Using these provisions, an exempt demerger will be deemed to take place and the distribution will normally be exempt for Income Tax purposes and usually not give rise to any CGT as the gains are effectively rolled over.

The provisions do not apply where a trading activity is to be sold or becomes owned by a person other than the existing member of the original company.

The provisions allow the removal of the distribution charge in appropriate circumstances, making the distribution an ‘exempt distribution’. This applies to trading activities only. Companies that make use of the demerger provisions range from small private companies to some of the UK’s largest public companies.

The legislation also provides for a clearance procedure. Using this a company that wants to demerge trading activities can obtain advance confirmation from HMRC that the distribution that will arise will be an exempt distribution.

The use of these demerger provisions, when available, can be beneficial and help companies avoid adverse consequences of other more complex demerger options.

Source:HM Revenue & Customs| 18-04-2022

Points to consider when valuing goodwill

Valuing goodwill is a complex process and there are many different methods which can be used and that vary from industry to industry. Goodwill is a way of placing a monetary value on the business's reputation and customer relationships. Or as HMRC say in their guidance, in accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired.

HMRC’s approach to valuation of goodwill suggests that there should be no expectation of a synergy-based value on an open market value basis unless synergy in a particular market is common place.

HMRC’s manuals state that when valuing the goodwill of a business the valuer should have regard to the following:

  • the full sale and purchase documentation relating to the transfer of both tangible and intangible assets
  • succession arrangements
  • the valuation approach used – e.g., capitalisation of profits, super profits or a trade specific method
  • the activities of the business and role of the owners within it
  • the financial statements/accounts (including the detailed trading and profit and loss account) for the 3 years before valuation
  • any other relevant financial information
  • appropriate yield and multiples of comparable companies and sectors
  • the commercial and economic background at valuation date
  • how the personal goodwill of the owner has been reflected in the valuation
  • any other relevant factors.
Source:HM Revenue & Customs| 03-01-2022