HMRC notices

The UK’s Digital Services Tax (DST) came into operation on 1 April 2020. This tax is designed to ensure that the major social media, search engine and online retailers are subject to a 2% tax on revenues generated from the participation of UK users of their services.

Businesses are liable to the DST when the group’s businesses worldwide revenues from the specified digital activities are more than £500 million and more than £25 million of these revenues are derived from UK users. There is an allowance of £25 million, which means a group’s first £25 million of revenues derived from UK users will not be subject to Digital Services Tax.

The following three services are considered digital services activities for the purposes of DST:

• a social media service,
• an internet search engine; or
• an online marketplace.

A group can make a voluntary election to calculate the liability to DST using an alternative basis of charge provision. The alternative basis of charge will benefit groups making a loss or operating at a low margin on their UK digital services activity.

There will be a review of DST by HM Treasury before the end of 2025 which will be laid before Parliament.

The settlement legislation seeks to ensure that where a settlor has retained an interest in property in a settlement that the income arising is treated as the settlor’s income for tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner. In general, the settlements legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved. 

However, in most everyday situations involving gifts, dividends, shares, partnerships, etc. the settlements legislation will not apply. For example, if there is no “bounty” or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income.

HMRC’s manuals provide the following two indicative examples of when the settlement legislation does not apply:

Outright gift to a spouse
Mrs L owns 10,000 ordinary shares in a FTSE 100 company. Those shares are worth £40,000. Mrs L gives those shares to her husband. Mr L is now entitled to all the dividends from the shares and can sell the shares if he wants and keep the proceeds. This is an outright gift of shares that are not wholly, or substantially, a right to income since they have a capital value and can be traded, so the settlements legislation does not apply.

Subscribed shares
Mr M is the sole director and owns all the 100 ordinary shares in M Limited, a small manufacturing company. The company employs 10 people and owns a small factory, a high street shop, tools fixtures and fittings, and three delivery vehicles. Mr M draws a salary of £30,000 each year and receives dividends of £20,000. Mr M then gifts 50 shares to his wife who plays no part in the business. Mr and Mrs M then each receive dividends of £10,000.

HMRC would not seek to apply the settlements legislation to the dividends received by Mrs M. This is because the outright gift of the shares cannot be regarded as wholly or substantially a right to income. The shares have capital rights, and the company has substantial assets so on the winding up or sale of the business the shares would have more than an insubstantial value.

HMRC uses a number of different measures to help determine whether an activity is a trade irrespective of whether the activity leads to a profit or a loss. This includes looking at whether an activity is a hobby or artificial trade.

HMRC manuals implore inspectors to critically examine claims that a trade exists where that claim may have been made to get relief:

• that is only available to traders, such as loss relief, or
• for the costs of a hobby, or
• for investment losses, or
• for capital expenses, particularly in group situations, by transmuting them into revenue deductions using an artificial trading company.

In particular, HMRC will consider whether a profit is an isolated event. A taxpayer who wants tax relief for losses, which are not, in truth, trading losses, may point to a profit in a particular year to support the trading assertion. HMRC is clear that this factor would normally carry little weight if that profit was an isolated event in an overall picture of continuing losses. For example, taxpayers using an artificial trade disguised as commercial activity in order to create losses and claim various loss reliefs.

The Charity Commission requires that charities registered in England or Wales must send an annual return to report their income and expenditure. The deadline for charities with a standard 12-month accounting period ending on 31 December 2021 is 31 October 2022.

Not filing on time means that the charity will go into default with the information being displayed to the public on the charity register. The annual return is separate from the charity’s annual accounts and the charity tax return sent to HMRC.

A full annual return is required if either:

• the charity’s income is more than £10,000
• the charity is a charitable incorporated organisation

If the charities income is over £25,000 then further documents including a trustee annual report, accounts and independent examiner’s report will also need to be submitted. A full audit is required if the charity has income over £1 million or gross assets over £3.26 million and income over £250,000.

There are different rules if the charity is registered in Scotland or Northern Ireland.

The new Plastic Packaging Tax will come into effect from 1 April 2022. The tax will not apply to any plastic packaging which contains at least 30% recycled plastic, or any packaging which is not predominantly plastic by weight. The tax will be charged at a rate of £200 per metric tonne and will apply to packaging with less than 30% recycled plastic. 

The online service to register and pay will be made available on 1 April 2022 when the tax takes effect. Businesses that have manufactured or imported 10 or more tonnes of plastic packaging within the last 12 months, or plan to do so in the next 30 days are required to register. 

The 12-month check is usually a rolling check looking back over the last 12 months. However, as the tax starts on 1 April 2022, this test works differently between 1 April 2022 and 30 March 2023 meaning businesses only need to look back to 1 April 2022.

The requirement includes non-resident taxpayers who import finished plastic packaging into the UK on their own behalf, or manufacture finished plastic packaging in the UK.

Businesses must register for the new tax within 30 days of becoming liable to do so and will need to pay the tax on all components on which it is due, from the day that they become liable to register.

The replacement of domestic items relief has been in place since April 2016. The relief allows landlords to claim tax relief when they replace movable furniture, furnishings, household appliances and kitchenware in a rental property. The allowance is available for the cost of domestic items such as free-standing wardrobes, curtains, carpets, televisions, fridges and crockery.

The amount of the deduction is based on:

• the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
• the incidental costs of disposing of the old item or acquiring the replacement;
• less any amounts received on disposal of the old item.

There is an important distinction between deciding whether or not a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s internal guidance provides an example highlighting when a brand-new budget washing machine costing circa £200 is not an improvement over a 5-year-old washing machine that cost around £200 at the time of purchase (or slightly less, considering inflation).

However, if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.