Covid-19 – the currently announced tax and fiscal changes
We thought it would be helpful to summarise the recently announced Government tax measures of most relevance to the UK upstream oil industry. In addition, we highlight some tax issues that we think businesses should be considering in light of the much-changed business environment.
PAYE, Corporation Tax and other taxes – Time to Pay scheme
The Government signalled that businesses that are suffering financial hardship due to Covid-19 may be eligible for the existing Time to Pay scheme. When a taxpayer cannot pay its tax liabilities in full on the due date for payment, HMRC may use its discretion to allow a company to pay over a period of time. These arrangements are agreed on a case-by-case basis. The Time to Pay scheme can apply to all taxes.
The key elements that a business needs to be able to show for a deferral to be agreed are that the business cannot pay HMRC now and that in future it will be able to pay the deferred tax and any other tax liabilities that become due in the deferral period. The guidance notes that businesses who cannot pay HMRC should be able to demonstrate that other creditors are also being asked to accept deferred payment terms.
Interest on underpaid tax will accrue as normal.
We understand that HMRC is asking for evidence that circumstances that have caused the financial difficulty are Covid-19 related. That may indicate that internally HMRC has been instructed to treat Covid-19 cases sympathetically. Whilst it seems clear that it is a combination of the supply side and Covid-19 demand-side factors which have led to the collapse of oil prices, the Time to Pay scheme should still be available.
The general guidance provided by HMRC remains that the taxpayer needs to be able to show that it has difficulty paying now (not just it would prefer not to pay HMRC) but that it will have the ability to pay the tax-deferred. We would suggest that reference to the forward oil price curve should provide good evidence to HMRC that any financial duress is temporary.
CT refunds and overpayments
Many businesses may find that they are owed money from HMRC either due to tax instalment payments being in excess of self-assessed liabilities, group relief claims being finalised, or loss carryback claims.
Submission of tax returns should, in theory, generate automatic refunds. However, refunds can often be delayed as they may need approval by individual Inspectors or require the resubmission of earlier tax computations.
We recommend all businesses review their refund position by accessing the Government Gateway and ensuring all tax owed is refunded. We have found Inspectors can usually expedite refunds or alternatively are happy to tell companies what further needs to be done to accelerate payment.
CT instalment payments
Most upstream oil companies pay corporation tax through instalments with payments based on profit estimates for the full year. For December year ends, instalments are due on 14 July, 14 October and 14 January of the next year.
There is some discretion within the instalment regime as to the amount and timing of payments although there are potential penalties to be considered.
If companies believe they have paid too much tax in their instalment payments as profits have been overestimated, while any overpayment of tax should be refunded automatically on the filing of the relevant tax return, it is possible to seek repayment of tax under the instalment payment legislation where the tax return has not yet been submitted. An application needs to be made to HMRC setting out the grounds for the claim and the amount of tax overpaid.
We would not expect there to be any material changes to the estimates which would have been made prior to making the 14 January instalment for 2019 for December year-end companies. However, many companies may now be predicting making a loss in 2020, but have paid tax in respect of 2019 with a loss carryback claim expected. We would hope HMRC will be flexible in allowing repayments of 2019 instalments in such circumstances, but companies in this situation should consider the relevant rules carefully. We have experience of securing repayments in these circumstances and would be happy to discuss this issue further.
VAT payment deferral
The Government has announced that all UK businesses may defer VAT payments. Any UK business that was due to pay VAT between 20 March 2020 and 30 June 2020 are allowed to defer that payment without interest or other penalties. No prior approval is required. Any VAT deferred must be paid on or before 31 March 2021.
HMRC have confirmed that companies in a repayment position, or are due a refund, will have payments processed in the usual way.
VAT returns should be prepared and submitted as usual.
UK upstream oil companies are usually in a net repayment position and hence this deferral does not provide any cash flow advantage for most.
Making tax digital for VAT
HMRC announced on 30 March 2020 that the requirement for the implementation of digital links between the VAT return and underlying financial records is to be deferred. The new requirements were due to be implemented by affected businesses for the first VAT return submitted after 31 March 2020. The new requirements will now be required for the first VAT return submitted after 31 March 2021.
With the current pressure on all businesses, the relaxation of this requirement is welcome.
EU Mandatory Disclosure Rules
The UK introduced new rules requiring taxpayers and intermediaries to disclose details of certain types of cross-border arrangement to HMRC. The regulations come into force on 1 July 2020. Reports for arrangements entered into from 25 June 2018 to 30 June 2020 will be due by 31 August 2020.
Guidance from HMRC on what transactions they expect to be reported is still expected to be published before the regulation comes in to force in July.
It is understood that while HM Government may have wished to delay the implementation of these rules this has not been sanctioned by the EU and therefore we are currently expecting the rules to come in to force as planned.
While many may have been awaiting the HMRC guidance to understand the rules in more detail it seems clear that work will need to be started (if not already) on identifying transactions that may be affected. With current working practices meaning many do not have access to historic documents this will prove harder to achieve.
Companies House – 3-month filing extension
Companies House has announced that companies can ask for a three-month extension of their accounts filing deadline if the accounts are going to be filed late due to Covid-19. This applies to both private and public companies. The application to extend must be made before the due date for filing the accounts. The statement from Companies House states that the extension is “automatic and immediate”. The online form asks companies to include the reasons why more time is required and where the reason given is Covid-19 the extension should be granted without delay.
An extension will allow private limited companies up to 12 months to file their accounts after the year-end. An extension to file tax returns late has not been granted so tax computations and returns will still need to be filed 12 months after the year-end.
This may put considerable time pressure on the preparation of tax returns if the full extended period for filing the company’s accounts is needed. Tax return preparation procedures and timetable may, therefore, need to be reconsidered.
Financial accounts – deferral for listed company accounts and guidance
Separately to the Companies House exemption, the Financial Reporting Council, Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) made a joint statement on 26 March 2020.
The FCA is permitting a delay in the publication of audited annual financial reports for listed entities from four to six months from the end of the financial year. The FRC statement “urge[d] all those companies that feel it appropriate to utilise the additional 2 months”.
The FRC issued guidance to auditors and companies.
It is clear that most companies will need time to work through what the economic effects of Covid-19 will mean for financial statements. The implications for carrying values of assets and recognition of deferred tax assets will not be the only area of focus.
We, therefore, would expect considerable delays in the finalisation of some financial statements.