The Fizz! Blog

The OnlyFans creator tax case actually shows that part of our tax system *is* fit for the 21st century

We were listening recently to a podcast discussing, amongst other things, the tax relief claimed by an OnlyFans creator on costs of cosmetic surgery.  The assertion was made that it’s an example of our tax system not being fit for the 21st century - those who drafted the legislation couldn't possibly have even imagined some of our modern-day sources of income, and it’s in need of overhaul.

Actually, the system of figuring out if costs are tax-deductible is beautifully designed for new and innovative businesses, because it’s principles-based rather than rules-based.  The central principle has always been - “is the cost incurred wholly and exclusively for the purpose of the trade?”.  That trade could be anything - it could be the trade of a blacksmith, but it could be the trade of a fitness influencer.  From time to time there are grey areas, in which case it may go to a tax tribunal (a “tax court”, basically), and there’ll be a verdict that will either be binding or persuasive in similar situations in the future.  Or, in a grey area, a taxpayer and their advisers might just take a view, understanding that HMRC might have a different one if they looked at it (“would you be able to look a tax inspector in the eye and defend your treatment?” is often a good benchmark).  From time to time a government may actually impose rules if they want to encourage or discourage particular behaviours, but in general deductibility is driven by that first principle, which can be applied to absolutely any business.

There are definitely areas where the modern tax system has not kept up!  20th century legislation and international tax treaties were created for a world where global mobility was generally imagined to be fairly rare - nowadays migration and digital nomads are perfectly normal.  Arguably the treatment of cryptocurrencies (in the UK at least) is based on long-used principles, but does seem counterintuitive to many minds.  And our National Insurance system was designed for an era where most people were in salaried work, with both them and their employer paying into the system.  The subsequent proliferation of freelancers and personal service companies has broken that model.  But the framework for figuring out whether a cost is tax-deductible or not is elegant and foolproof!

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NFTs and Tax

One of the hottest financial topics at the moment is NFTs - Non Fungible Tokens.  Leaving aside questions of the degree to which they could be considered a bubble or environmentally wasteful, we’re starting to get questions about how trade in them might be taxed.

The good news is, there’s not really anything special about them in that regard.  If you’re in business making and selling NFTs, then that’s a trade and you’re going to pay tax on the profits.  You’ll have identical considerations around structure and tax planning to any other business (one interesting one might be - if your main business is VAT registered, might you want to keep this sideline out of the VAT net by keeping it separate?).

One thing that might be a bit different is that you’re probably much more likely than most businesses to get paid in cryptocurrency.  That’s fine - as with any other business, that’s just taxed the same as if you’d been paid in real money.  If you get paid one ETH (say) today, that’s about £1,200.  That’s your income, whatever you're going to do with the ETH subsequently - you can't defer the tax by keeping the revenue in crypto. 

If you convert the ETH into real money at that point, we’re done.  If you don’t, and hang on to it, then you need to retain an awareness of the potential Capital Gains Tax consequences of buying and selling crypto.  That’s taxed in more or less the same way as buying and selling shares.  We wrote more about the traps people might not realise they’re falling into here.

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Excel problems that aren't Excel problems

As an accountant, you do most accounting jobs using accounting software, and a few using Excel.  It's usually the smaller ones where you'd use Excel; maybe a sole trader who doesn't need to track debtors and creditors and doesn't have a dedicated business bank account, say.

Sometimes a reluctant business owner might be resistant to using accounting software, and the classic objection is "why do I have to pay for a glorified spreadsheet?".  It's not a glorified spreadsheet, that's why.  It's a database, and a database has built-in checks on the integrity of the data (in the case of accounting software, thanks to the beauty of double entry bookkeeping).

If you're not careful, then those little Excel jobs that seem the most straightforward can actually be the riskiest ones, where you can make expensive or embarrassing blunders.  When we do accounts in Excel, we always build in some kind of proof that all the transactions feeding into the accounts have been captured once, and only once, and that any adjustments are complete and transparent.  If you don't do that, all you've got is some numbers that may or may not be right.  Generally, when staff join us from another firm, they've not come across this kind of check before.  But  the extra minute or two spent proving that the output is consistent with the inputs are vital if you want the output to be reliable and credible.

Whenever we read about a big error involving the numbers in the accounts of some listed company - say an enormous error in a stock valuation - we always speculate that it will be a problem that's arisen in Excel, outside of the core accounting software.  A SUM formula that hasn't been stretched to pick up some extra rows, for example.  We're *always* right.  And often the company will try to explain it away as a problem with Excel.  It's not, of course.  It's a problem with Excel being used for an inappropriate purpose, or Excel being used for an appropriate purpose but without some kind of integrity check in place.

So, when you're using Excel for accounting, it's important to think "we need to have some sort of proof in place that the data is complete".  You also need that if you're using it to track a deadly infectious disease.

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Do you have teenage kids with forgotten Child Trust Funds?

Back in his Chancellor of the Exchequer days, Gordon Brown announced that all children born from 1 September 2002 onwards would qualify for a “Child Trust Fund”.  HMRC sent vouchers for £250 to parents (or £500 for lower income households) for them to deposit into a Child Trust Fund, either to be saved as cash or invested in shares.  If that wasn’t done within a year, then HMRC automatically set up an account for the child themselves.  The scheme continued for all children born until 1 January 2011.  Until August 2010, children received an additional £250 (or £500) on their 7th birthday.  Families were also able to top up the accounts themselves if they wanted to.  Once the child turns 18, they have full access to their savings.

So, from this month, the first batch of CTFs are maturing, for those children born in September 2002.  It’s quite likely that parents will have forgotten all about their kids’ CTFs – 18 years is a long time, and you might not have given it a thought since then!  The CTF provider should be writing to your child to set out their options now that the account has matured, but if you’ve moved house since, they might not know where to find you.  Usefully, the government have provided an online tool that children and parents can use to track down their CTFs:

https://www.gov.uk/child-trust-funds/find-a-child-trust-fund

There could be a useful little nest egg there to help your kids kick-start their savings, pay for driving lessons, or whatever else they might need!

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Applications for the second and final Self Employed Income Support Scheme grant open next week - here's what you need to know

Sole traders and partners in partnerships who were eligible to apply for the last SEISS grant in May are going to be eligible to apply for another, with applications open from Monday 17 August.  If you didn't meet the basic income eligibility criteria for the first grant, you won't meet them for the second one either.  They're exactly the same.  This second grant isn't going to help anyone whose income meant that they were not eligible for the first one.

 

This time the payment will be at a slightly lower level; the first one was at 80% of three months of average profits (quantified on a basis that we won’t go over yet again), capped at £7,500.  The second one is at 70% of the exact same average profits figure, meaning that the grant will be 7/8ths of the previous one, and the cap is £6,570.

 

You can only apply if you've been affected by Coronavirus, and they're clear what that means for this second grant.  You can claim this grant if "your business has been adversely affected on or after 14 July 2020".  Although HMRC have produced some guidance around how you might judge whether that applies, that's guidance not law.  The legislation is clear - your business simply has to have been adversely affected in some way since then.

 

That means it'd be quite possible for it to be appropriate to claim one grant and not the other.  For those who meet the basic income condition, there are four possible permutations:

1. Claiming both grants.  Most claimants will probably have been legitimately adversely affected over both periods so will claim both payments.
2. Claiming neither grant.  Some industries have done well over this period, and for many people there's no claim to legitimately make.
3. Claiming the first grant but not the second.  You may have suffered over the first few months of the crisis, but as of July you'd got back to normal and are expecting similar income in these summer months as you’d usually have, in which case it’ll be appropriate to have claimed the first grant but not the second.
4. Claiming the second grant but not the first.  If your income was unaffected over the early months of Coronavirus then you won’t have claimed the first grant, but perhaps now the jobs you were working on are finishing up and not being fully replaced because of the crisis, in which case it’ll be appropriate to claim the second grant.

As before, you 'll have to certify that your income has been affected, and it’s always possible HMRC will one day check up on that – a self-employed-person who winds up with similar income as usual in 2020-21 AND a grant may have some questions to answer.  There's nothing in that basic scenario that indicates there's definitely a problem - your income this year may be bigger than last year, but if it would have been bigger still were it not for Coronavirus then you've been adversely affected nonetheless, and you absolutely qualify.  But the question could be eventually asked.  And you have to certify that you are still operating your self-employed business – which won’t be the case if, for example, you moved your business into a limited company since 5 April 2019, or you’ve left the UK and don’t meet the criteria for reporting self-employed income here on an eventual 2020-21 tax return.

 

And don't forget - it's taxable.  It'll go on your eventual 2020-21 Self Assessment Tax Return and be taxed as part of your income.  If you're in the sensible habit of putting aside some of your income for the eventual tax on it, don't leave this payment out!

 

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Made any big donations since 6 April?

We've written before about the Gift Aid box when you make a donation, what it means, and - amongst other things - why anyone with income that takes them into higher rates of tax should include the donation on their tax return.

Ordinarily, you'd just include donations made in the year in question on your tax return. In fact, there's an alternative option, which is to "carry them back" and include them on your tax return for the previous year, if you've not yet submitted it. Generally, it's not worth the hassle - if you're donating on a regular basis and your income doesn't vary wildly year-by-year, who cares if a £10 a month donation saves you tax this year or next year? It's not worth the hassle of keeping track of what's been carried back and making sure that you don't claim it again next time, and waiting to file your return at the last minute so as to carry back as many donations as possible.

However, this year there are likely to be a lot of people who made unusually large donations in the early part of the tax year, for obvious reasons. If you donated a one-off £1,000 in mid-April, say, as a higher-rate taxpayer you're going to get £250 knocked off your tax bill. So the amounts involved start to become a bit more interesting, and you might well consider carrying the donation back and sticking it on your 2019-20 return to save the tax early.

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How do I get my hands on my Business Rates grant?

As part of the government's package of business support, a lot of businesses that are the ratepayer for commercial premises but pay little or no Business Rates are getting cash grants.

Initially the government said that the payment of grants to businesses that claim Small Business Rates Relief (who should get £10,000) and retail, hospitality and leisure businesses (who should get more if their property has a rateable value between £15,000 and £51,000) would be dished out automatically by local authorities, and that businesses should sit tight and wait to be contacted.  But in practice, that's not what all councils are doing.

We've already seen some councils contacting relevant businesses and paying the grants out right away where they hold bank details for the ratepayer.  That's how the system was expected to work.

However, it turns out that other local authorities are making business apply.  That's what our local council, South Oxfordshire District Council, for example, are doing:

http://www.southoxon.gov.uk/business/business-rates

Moral of the story, if you're waiting to be contacted, it'd be worth looking at the website of your council.  And don't forget that you should be eligible for the £10,000 grant, even if you pay no Business Rates at all because your premises qualify for Small Business Rates Relief.  But if you don't occupy commercial premises, or you do but you're not the ratepayer yourself, there's no grant available.

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A round-up of help available to sole traders and partners in partnerships

Now that new announcements have dried up (for a little at least), we’ve put together a round-up of the help available for sole traders and partners in partnerships (you can see our equivalent for limited company owners – the same in many respects – here). 

Self-Employment Income Support Scheme

We’ve emailed clients about this scheme in detail already, but in short anyone who was a sole trader or partner in a partnership in 2018-19, got most of their income that way, and had profits of less than £50,000 will be eligible for a grant.  That’s as long as they’re still a sole trader or partner, and as long as their business has been affected by coronavirus.  The grant will be based on 80% of average profits, capped at £2,500 a month, initially paid for three months.  It'll be taxable, just as the profit would have been.

Even if you do qualify, HMRC's aim is to start to get money to people at the end of June, and the process will involve *them* contacting *you* on the basis of the information they hold about your income, not the other way round.  So there's a cashflow gap to bridge, and there's nothing you can do to speed the process along.

VAT and Tax deferrals

The vast majority of our clients are great at saving for VAT and personal tax as they go, and the tax payment deferral measures should mean that you can safely dip into your tax savings for a while if you need to.  If you want to do that, then:

• VAT payments for the quarters ending in February, March or April can be delayed until early 2021 (though if you’ve a direct debit in place with HMRC for your VAT it’s important that you cancel it – they’ll take the VAT on time otherwise).
• You can delay your July 2020 personal self-assessment payment until January 2021.

Deferring PAYE payments if you have employees

The VAT and self-assessment deferments above are automatic and you don’t have to apply for them.  There aren’t any formal general agreements that PAYE can be delayed.  But HMRC have set up a special helpline for businesses that need to discuss deferring other payments.

It might take a long time to get through, although a client called them one day last week at 8.15am and she was through within five minutes, so aiming for the start or end of the day is probably sensible.  It sounds as if generally HMRC are very open to agreeing more generous payment terms.

Grants

• Rates-related grants - If you formally rent premises subject to Business Rates, you should be eligible for a grant if either (a) you currently benefit from Small Business Rate Relief (remembering that you will qualify even if SBRR means you pay no business rates all), or (b) you’re in the retail, hospitality, nursery or leisure sectors.
• Job Retention Scheme - If you employ staff but don’t currently have work for them, you can use the JRS to claim a grant to cover 80% of their wages.
• Statutory Sick Pay – some years ago HMRC stopped reimbursing employers for SSP they paid to staff – but they will now reimburse it if it’s coronavirus-related. Not right away, though, there’s no mechanism for doing so right now, so you’ll need to fund the (modest) cashflow to begin with.
• A self-employed person can’t get SSP, but if you’re unable to work because of coronavirus, or you’re having to self-isolate and cannot work from home, you may be able to claim ESA, albeit it’s not a lot of money and has similar conditions as Universal Credit.

Other things to consider

• Check your business insurance policy, in case you have Business Interruption cover.
• Speak to your landlord (for both your home if you rent, and your business premises) to see if you can delay payments, get a discount, or a rent-free period. Some landlords are open to this.
• Consider talking to your lender to arrange a mortgage payment holiday.
• Talk to your bank to see if you can arrange a business or personal overdraft facility.
• If a loan would be more appropriate, consider asking your bank about the government-backed Business Interruption Loan Scheme.
• If you want to take another job during this period, that’s absolutely fine – there’s nothing to stop you from having a job as well as being self-employed.
• Universal Credit may be available to you – you’ll need to check online to see whether you meet the criteria, but it’s potentially worth a look.
• Some clients are finding opportunities to use their skills to provide different services, or to deliver their services in new ways, or to find new customers to target. It could be worth asking yourself whether you can adapt your business model to find opportunities in the current circumstances – we’re seeing a number of clients doing this successfully.
• Remember also that it’s fine to dip into your savings. While it’s natural to want to preserve them, one of the great benefits of having savings is to help you survive an unexpected loss of income.  With interest rates on cash savings being low, it’s unlikely to cost much in terms of lost interest, and you can look to rebuild savings once things return to normal.  You’ll need to check the rules for withdrawals from your particular account, but even some ISAs now allow you to withdraw cash and replace it later in the same tax year.

Hopefully there are some helpful pointers here, and we’ll of course let you know as and when any new measures are announced.

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A Fizz March update - further business measures (including IR35)

We send out an email update to all our clients each month; we don't usually post it here, but this is an update to this month's news that we sent out this morning...

We thought we’d be following up our Budget email with some further updates pretty soon, and here we are.  There were some more announcements last night.  On the lending and Business Rates items, there’s no detail yet about how things will work in practice, but we wanted to let you know about them as soon as we could.  If you’ve got immediate concerns about payment of tax due to coronavirus, HMRC have set up a helpline for businesses to call them (although we imagine you can expect a lengthy queue):

https://www.gov.uk/government/news/tax-helpline-to-support-businesses-affected-by-coronavirus-covid-19

At the moment, the people who don't really have much in the way of specific support are the self-employed, consultants, freelancers and the like, especially if IR35 wasn't a problem for you and you rent your home.  The Chancellor did say in the Budget that the government would make claiming Universal Credit "quicker and easier" (from which one would logically conclude that if and when things settle down they'll revert to making it slow and hard), but that's about it.  Supposedly there will be more announcements soon though, in which case we'll be emailing you yet again.

So, last night’s news.  The first thing is that the IR35 changes due to come in from 6 April have been postponed for a year.  This will not be of any help to contractors who’ve already switched to PAYE status in anticipation of the change, or end users like HSBC and Vodafone that had already stopped using contractors entirely.  But there are still plenty of contractors and freelancers wrangling over status and day rates with clients and agencies, so it’s one fewer thing to worry about for them.  Of course, IR35 still exists, and contractors remain responsible for determining their own status and paying employment taxes if they consider it appropriate.  But the compulsion for medium and large customers to make the call, which in practice they’ve largely been dealing with by forcing contractors on to PAYE or into umbrella companies (which is also PAYE) has been put back until 2021.

Next, the reduction in Business Rates for retail and leisure business was extended.  None of them will have to pay Business Rates at all in 2020-21.  Local authorities are supposed to get guidance from that from the government on Friday, probably you’ll hear from them some time after that.  Plus, the £3,000 cash grants that were to be given to similar businesses occupying commercial premises but not paying business rates to begin with have been increased – up to £25,000 in some cases.  And businesses in other sectors who similarly have premises but pay little or nothing in rates will also now get (smaller) grants.  Funding for that is supposed to be provided from some time in April, so don’t expect any money to appear in your bank account right now.

The announcement with a big number in front of it was £330bn of loans and loan guarantees to be made to businesses.  It’s said that these loans will be on attractive terms, but there’s no definition of what that represents right now.  This funding will supposedly start to become available next week.  Big companies will get money from the Bank of England, but you can expect most businesses to be getting such loans through more usual lenders.   Of course, a loan isn’t a grant, and in the long-term it won’t save a business that has been fatally compromised by the outbreak.  But for sound businesses that will be able to get back on their feet, but in the meantime need help to bridge a gap and cover wages and overheads, this is likely to be an attractive route to take.

And, on the domestic front, homeowners who are struggling to pay their mortgage will be eligible for a three-month payment holiday.  Note, though, that this isn’t a cost saving – interest will still be building up on the amount you owe, and you’ll still have to pay it all back in the end.  So it’s a cashflow break, but in fact you’ll wind up paying a bit more over the life of the mortgage as a bit more interest will be building up.  You wouldn’t just automatically take the holiday if you’ve got the ability to pay.

There’s some more info – and a recap on the things we’ve already told you about on Statutory Sick Pay and the like – here:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

We hope that’s of some help and interest.  We’re happy to hear from you if you’ve any questions about it – but, again, do bear in mind that nobody can answer the question “how exactly will this work?” at this point, because that information isn’t available yet!

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Cryptocurrencies and tax problems

Over the last few years, with the rise of Bitcoin and the like, there's been some doubt about the tax consequences of making and losing money by buying and selling cryptocurrencies.  HMRC have published guidance about it now - and essentially it says what most accountants have been saying all along.

For almost all people, cryptocurrency profits and losses will be a Capital Gains Tax thing, not an Income Tax thing.  That might be good or bad depending on your circumstances.  It'd only be an Income Tax thing if you were considered to actually have a trade in buying and selling crypto, and that's going to be vanishingly rare.

Since it's a Capital Gains Tax thing, that means that buying and selling cryptocurrency will generate capital gains and losses as a result of each transaction, in the same way that buying and selling shares does, even if you choose to reinvest the proceeds in another cryptocurrency so haven't seen any real money hit your bank account.

Importantly, you can't just lump together all your cryptocurrencies or accounts/exchanges for the purpose of figuring out what the tax consequences are, it's on a transaction by transaction basis.  So if you buy some Bitcoin, sell it to buy some Etherium, sell that to buy some Bitcoin again, and then sell some of that to buy some Litecoin, you've got three separate transactions to work out the gain or loss on.  You can't aggregate all your Bitcoin trading for the year, or aggregate all the transactions in one account.  If you accumulate a lot of transactions, you might want to look into third party software that can interrogate your accounts and figure it out - some people are trading through a bunch of different accounts, and a sale in one will more than likely need to be matched with a purchase in another for tax purposes.

Also, consider this.  Someone buys £10,000-worth of Bitcoin early in the tax year.  They exchange it for £40,000-worth of Litecoin halfway through the tax year.  Litecoin later crashes and is worth little by the time the person's tax return is done after the end of the year.  That person has a capital gain of £30,000 on which to pay Capital Gains Tax.  The fact that they kept the money in crypto isn't relevant; there's a disposal for £40,000 of something that cost £10,000.  They may now sell the Litecoin for next to nothing, and that will create a capital loss now - but you can't carry that back to set off against the previous year's profit.  The point is, there will be a whole lot of people who don't realise that they've got a very complicated tax issue - because they've not "cashed out", they don't realise that something has happened to create a taxable transaction (or hundreds of them!).  And there will be plenty of people who have made no money at all, but since they made some profits THEN some losses they might be sitting on a tax liability all the same...

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