25 July 2018 by Russell Cockburn
An M&S meal deal trips up over VAT, a guide to reporting on corporate interest restriction rules, and advice around paying family members for work
Marks and Spencer (M&S) has been in front of the tax tribunal recently on what, at first, sight seems a minor matter, but in fact deals with an important VAT liability principle, regarding items apparently given away for free as part of a promotion.
In this case, the tribunal found the wine supplied by M&S as part of a promotion was not supplied for a nil consideration, so the total £10 price charged for the promotion had to be apportioned in a manner that included the wine, rather than excluding it as M&S contended.
The promotional offer, known as ‘dine in for £10 with free wine’, offered customers three specified food items for £10, for which they could then receive a ‘free’ bottle of wine. HMRC argued the wine was supplied a part of the overall cost of the promotion and therefore was not free of charge for VAT purposes.
This is an area of VAT law that is by no means free from doubt and is historically unclear to say the least. The tribunal concluded it is necessary to closely examine the underlying commercial reality of the transaction. On this basis, the ‘dine in’ offer was a single sale offer and the receipt of the wine was conditional on payment of the total of £10, as well as the purchase of the other food items.
As such, it decided the customers who availed themselves of this offer paid the £10 for both the food and the wine, so the price had to be allocated between the four items not just the three food items.
Additionally, the tribunal pointed out the wine was clearly the most expensive item in the promotional deal and, as such, this meant an apportionment across the four items was the logical conclusion to recognise the commercial reality of the promotion.
HMRC has recently confirmed that groups of companies within the scope of the corporate interest restriction rules introduced from 1 April 2017 are required to designate a group reporting company for the purposes of these rules.
The designated company must then submit an Interest Restriction Return form (IRR) to report the details of the restriction it is subject to and how it has been calculated.
The deadline set for appointing a reporting company is six months after the end of the company’s period of account. Groups missing this deadline are asked by HMRC to get in touch with their normal customer compliance manager or where the group does not have one, to contact HMRC via email.
A designated group reporting company is obliged to submit a full IRR if an interest restriction arises. If there is no restriction, the designated company has the option of sending an abbreviated return that simply identifies the group members but does not include calculations.
It is important to note an IRR is not strictly regarded as valid by HMRC unless the reporting company has indeed been properly designated by the group or appointed by HMRC.
The normal time limit for filing these returns is set by statute at 12 months after the end of the period of account, or if later, three months after the designation or appointment of the reporting company.
“Wages are acceptable when commensurate with real work undertaken and are physically paid”
There was an extended filing deadline for the commencement of these new rules so that any IRR submitted by 30 June 2018 was regarded as submitted on time. It is important to also note there can be penalties imposed for the late submission of these return forms.
HMRC’s website now offers a digital return form for electronic submission and various templates are also available on the same webpage for computations, which can be attached to the digital form when submitted.
As an advisor to owner-managed company clients, I am not infrequently asked if it is ‘still acceptable these days’ to pay younger members of the family a wage for working for the company. My answer is always the same: wages are acceptable provided they are commensurate with real work actually undertaken for the company and are indeed physically paid.
These are the principles long established in case law over many years, so it is perhaps surprising the question still crops up and real cases still come before the tax tribunals.
In A Nicholson v HMRC (TC6293), a taxpayer appealed against HMRC’s disallowance of wages paid to their son while the son was at university. The claim was for a deduction of £7,400 and HMRC’s refusal of the claim was based on it identifying there were no records available to evidence the wages actually being paid. This meant they could not be justified as an allowable deduction against the business’s taxable profits.
Mr Nicholson argued the wage deduction was based on an amount of 15 hours per week at a rate of £10 per hour, which he contended was wholly reasonable. The work he claimed his son did for him was promotional work via the internet or via distributing leaflets and some other computer-based work. It was accepted by Mr Nicholson the money paid to the son enabled him to carry on his studies at university.
The tax tribunal acknowledged the payments to the son had been made on a time basis and some records had been supplied that showed how the payments had been calculated by reference to the hours apparently worked. Therefore the tribunal accepted it could be argued the statutory record keeping requirements had been met – that is, there were records to evidence payment had been made and work had probably been done.
However, the tribunal concluded the wages paid to the son were not tax deductible, because the normal ‘wholly and exclusively’ rule for the deduction of business expenses could not be satisfied. It was decided there was a dual purposes in the payment of the moneys to the son, because they were chiefly paid to enable him to carry on his university studies and as a means of supporting the son, so the disallowance by HRMC was correct in law.
One area of the current UK capital allowances regime that can often be overlooked is the availability of a tax credit where a company makes any investment in plant and machinery that qualifies for ‘enhanced’ capital allowances under the ‘energy savings’ or ‘environmentally beneficial’ tax regime.
Plant and machinery designated as energy saving by the Treasury qualifies for a 100% tax deduction. These allowances can be valuable to a business as they are in addition to the Annual Investment Allowance Regime, which currently limits the amount of 100% first-year tax relief for general plant items available to a business to only £200,000 of qualifying expenditures.
Where a company makes a tax loss for an accounting period and this loss includes tax relief on these types of qualifying expenditures, then they are able to claim a payable tax credit from HRMC to the extent that the loss includes relief for such expenditures. These tax credit loss reliefs were due to expire on 31 March 2018 but have been helpfully extended to 31 March 2023 now.
The amount of relief available to a company via this route is subject to overriding limits and from April 2018, the applicable percentage relief limit, relating to the amount of the tax loss surrendered to obtain this relief, has been restricted to two-thirds of the applicable corporation tax rate. This effectively means that the tax relief is now reduced from 19% to 12.67% relief on the loss surrendered.