June 2021. Cambridge Colleges newsletter
Welcome to the latest edition of our updates for Colleges. The aim is to keep Colleges abreast of developments which specifically affect them and is in addition to our regular Charities and Not For Profit bimonthly newsletter. In this edition we look at College’s investing in property investment and property development LLPs as well as changes to the auditing standard that covers going concern. We also have some articles on employment tax topics including supervisions, job retention scheme and working from home internationally. Finally we have articles on Covid related VAT issues and the update to the Charity Governance Code. Our tax experts at PEM are always on hand to help with any related queries. If there are any topics you would like us to cover in further editions, please let us know. Please look out for our third benchmarking report for Cambridge Colleges Operating Financial Review (Trustees Reports) that we will be circulating later this month. We look forward to working with you over the next twelve months.
Kelly Bretherick Jayne Rowe Partner, Audit Partner, Audit e. kbretherick@pem.co.uk e. jrowe@pem.co.uk
James Burrett Partner, Audit e. jburrett@pem.co.uk
Working from “home” internationally - Tax and Social Security
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Working from ‘home’ internationally Tax & social security International moves by academics and other employees used to be undertaken primarily for business reasons, whether commercial or academic. However, both Brexit and COVID have brought about huge changes to how organisations employ their staff and where they provide their services from. Cambridge Colleges have not been immune from this, with changes driven by personal choice and unforeseen circumstances. Brexit resulted in the movement of many employees to and from the UK ahead of Britain’s departure from the EU on 31 December 2020. Meanwhile, COVID has continued to upend the traditional approach to workplace location, enabling or forcing many employees, both UK and foreign nationals, to work from the UK or overseas during the pandemic when they would usually be based elsewhere. Many, who would otherwise be cut off from family members during the pandemic, decided to “work from home” with family members outside the UK, rather than stay and work alone during UK lockdowns.
thought were working from home in the UK during the pandemic have actually been working overseas for significant periods. Other employees may have requested that they are able to work remotely overseas temporarily or permanently. Action 2 If academics and other employees are working overseas, Colleges should ensure that their employees are being treated correctly for payroll, tax and social security in the UK and overseas territories. There may even be corporate tax implications of an internationally spread workforce, especially if the College’s tax status in the UK does not apply if it is deemed to be operating overseas. In limited circumstances some double tax agreements between the UK and other countries, provide protection for academics working overseas who are still employed and paid from the UK.
Employers, including Colleges, are just beginning to realise that these choices have tax, legal, administration and cost implications for them and for the employees, particularly as the period for which the employee has worked elsewhere extends.
In addition, some, but not all, countries have relaxed their “normal” tax rules because of the pandemic. However, the key message is that each country is different, and it should not be assumed that no tax consequences will arise from College employees working overseas.
Action points for employers – tax and social security
At PEM, we work with clients and contacts within our international network, Kreston International, to ensure that the UK and overseas tax, social security and payroll issues arising from employees working internationally, whether for work reasons or through personal choice, are dealt with correctly and as simply as possible. If you need advice, please get in touch.
Action 1 Colleges need to ensure that they know where their academics and other employees are working. Some employers have found that employees they
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Property investment & development LLPs
Property investment & development LLPs The Colleges have wide ranging investment portfolios and over recent years we have seen more instances of Colleges making investments in Limited Liability Partnerships (LLPs). It is important to consider the nature of the activities undertaken by these LLPs as in some circumstances these can have negative tax consequences for LLP members who are charities.
Tax transparency LLPs (and partnerships) are transparent for tax purposes, except where an LLP is not carrying out a trade or business (business generally includes a property investment business). This means that the LLP members themselves are subject to tax on their share of the profits. Where the LLP’s business generates only rental income, the member College, as a charity, qualifies for an exemption from corporation tax on this profit. However, where the LLP is undertaking a trade e.g. a property development trade, then this will in effect be treated as being a trade undertaken by the LLP member and therefore subject to corporation tax. Colleges have an exemption from corporation tax for their primary purpose trading activities but clearly property development for resale is not within their charitable objects. This activity is therefore a non-primary purpose (NPP) trade and any profits will be taxable within the College. In some cases even a NPP trading loss can give rise to tax issues in a charity. If a College intends to invest in a property development LLP, or indeed any LLP undertaking a trade, then it should ensure this investment is made via a subsidiary company.
Cambridge Colleges newsletter | June 2021
This route allows taxable profits to be sheltered by using the usual deed of covenant mechanism, although full tax protection may not always be achievable, as explained in more detail below. It is of course important to consider the usual matters when making an investment via a subsidiary, for example how should the investment be funded by the College (equity or loan) and does the investment in the subsidiary meet the conditions to be an approved charitable investment or loan.
Property investment & development LLPs
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Example Share of accounting profit
£100,000 (creates distributable reserves)
Taxable profit per the LLP return
£105,000
Donation restricted to
£100,000 (in the absence of historic distributable reserves)
Remaining taxable profit £5,000 Another factor to consider is when the LLP intends to distribute cash to its members. In order to obtain tax relief on donations to its parent College, the subsidiary must make this payment in cash. If the LLP does not pay out its profits until the end of a project then even if the subsidiary has sufficient distributable reserves, there may not be enough cash to make the donation in time to secure tax relief. Further complications can arise where the accounting year end of the LLP differs from the LLP member’s year end. In this case it is necessary to apportion the profits from two of the LLPs accounting periods to the member’s year end.
Example College subsidiary with a year end of 30 June 2021 invests in an LLP with a year end of 31 March 2021. The LLP profits to be attributed to the subsidiary include part of the year ended 31 March 2021 and part of the year ended 31 March 2022. The tax return for the subsidiary must be filed by 30 June 2022 and it is highly unlikely that the final tax figures for the LLP’s year ended 31 March 2022 figures will be available in time to meet the subsidiary’s deadline.
Accounting and tax The accounting profit share from an LLP which is shown within the subsidiary’s accounts may not be equal to the taxable profit share, as disclosed on the LLP’s partnership tax return. For example, there may be expenses which are not allowable for tax purposes. This difference can lead to there being insufficient distributable reserves with which to make a large enough deed of covenant payment, leaving some of the taxable profits subject to corporation tax.
In this case estimates must be used and an amendment to the return can then be made within 12 months, when hopefully the final figures are available. This gives rise to further uncertainty when determining the figure required for the donation under the deed of covenant. As a reminder, a donation must be made within 9 months of the year end to secure tax relief for the year just passed. In summary, it is important to understand the accounting, tax and cash implications of investing in LLPs, to ensure any corporation tax exposure is kept to a minimum.
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Charities & Making Tax Digital for Corporation Tax
Charities & Making Tax Digital for Corporation Tax As the Colleges are corporate bodies, being formed under Royal Charter, they fall within the scope of corporation tax. On 12 November 2020 HMRC launched a consultation paper on the design of a new Making Tax Digital system for corporation tax. The government started its journey towards Making Tax Digital in 2016 when it published the consultation “Bringing business tax into the digital age.’ The Finance Act (no2) Act 2017 provided the framework for Making Tax Digital for Income Tax and VAT and Making Tax Digital for VAT was made mandatory for most registered businesses with a taxable turnover above the threshold of £85,000 from 1 April 2019. Since then HMRC has set out a road map to ensure that Making Tax Digital will apply to all VAT registered businesses from April 2022, and to businesses and landlords, liable to income tax, with property income over £10,000 per annum from April 2023. Corporation tax is the next step in its roll out of Making Tax Digital. The application of Making Tax Digital to entities within the charge to corporation tax means that they would have to: ▪ ▪ ▪
Maintain their accounting records digitally; Use Making Tax Digital compatible software to provide regular (quarterly) summary updates of income and expenditure to HMRC; and Provide an annual corporation tax return using their Making Tax Digital compatible software.
Cambridge Colleges newsletter | June 2021
The paper confirms that Making Tax Digital for corporation tax will not become mandatory before April 2026 with a proposed voluntary pilot period from April 2024. It sought views on extending the scope of Making Tax Digital for corporation tax to all charities, Community Amateur Sports Clubs and other not for profit organisations that are within the scope of corporation tax and are required to file a company tax return; it also invited comments on how the Making Tax Digital requirements might best be tailored to work for them. The consultation closed on 5 March 2021 and several bodies representing charities have fed back on the challenges Making Tax Digital would bring to charities. Making Tax Digital would bring an additional compliance and cost burden to charities who fall within the corporation tax net so it is hoped that there will be some concessions for these entities. A full copy of the consultation can be found on the government website.
Going Concern auditing standards update
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Going concern auditing standards update Auditors are required to obtain sufficient appropriate audit evidence to access the appropriateness of management’s use of the going concern assumption in the preparation and presentation of the financial statements, to conclude whether there is a material uncertainty about the College’s ability to continue as a going concern, and whether appropriate disclosures are made in the financial statements. The Financial Reporting Council (FRC) has issued revised ISA (UK) 570 Going Concern with new rules on how auditors should review the going concern assumption which will apply to Colleges 2021 year- ends. The audit report should alert readers to potential going concern risk. Recent corporate failures have led to questions being asked as to how thoroughly this is being challenged by the auditor, hence the revised rules. As part of the revisions, the responsibilities of the auditor change such that there is now a specific requirement to obtain sufficient appropriate audit evidence regarding, and conclude on, whether a material uncertainty related to going concern exists. In addition to more prescriptive requirements, the revisions also include a need to more robustly
challenge management’s assessment of going concern and a ‘stand back’ requirement to consider all evidence obtained (whether corroborative or contradictory) when drawing conclusions about going concern. The new guidance emphasises that it remains the responsibility of the trustees to make the assumptions on going concern and it also highlights that this should be part of an organisation’s regular processes. The College’s Auditors are required to review budgets and forecasts for a period of at least twelve months from the date the financial statements are due to be signed. The forecasting also needs to look at cashflow, and consideration should be given to the free reserves of the College. The College should also provide evidence to the Auditor showing how they have considered the sensitivity of their budgets to changes in assumptions and how they would deal with the financial impact. The scenario planning carried out last year by Colleges addresses the Auditors requirements most thoroughly.
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Supervision by HMRC
Supervision by HMRC One of HMRC’s key areas of inspection during any Employer Compliance review is that of Employment Status. This is in part due to the increase in individuals working personally as a consultant or via a personal service company or via another intermediary. It also reflects the fact that employment status is an area where employers are often required to make a judgement call based on the balance of a number of factors which, when taken together, determine an individual’s tax status. HMRC’s own Check of Employment Status for Tax (CEST) Tool, which is designed to help employers assess employment status, often provides the “helpful” result that the status cannot be determined, and employers should seek advice. Therefore, HMRC will often challenge status determinations made by employers and its status inspectors will doggedly argue HMRC’s position. We have recently seen HMRC’s focus regarding employment status turn to the Supervisions system under which supervision payments are made to individuals not on the payroll by Cambridge Colleges. HMRC have reviewed supervisions paid by at least one Cambridge College, with a view to determining that such payments ought to be made via the payroll with appropriate deductions for PAYE income tax and National Insurance. Based on the relationship between the College in question and the recipients of the supervision payments, HMRC begrudgingly backed down in their pursuit of this matter. However, the Inspector concerned described the position as “borderline” and “finely balanced”, so it is imperative that all Cambridge Colleges keep this matter, together with the relationship and practical arrangements they have with those individuals not on the payroll who are paid by the College under review.
Cambridge Colleges newsletter | June 2021
Employment status will continue to be a hot topic with HMRC. There has been much recent press coverage of the off-payroll working rules introduced in the private sector from 6 April 2021. It should be noted that these rules have been in place in the public sector, including Cambridge Colleges, since 6 April 2017. The rules move the responsibility and risk of determining the employment status of an individual engaged via an intermediary up the engagement chain from the intermediary (often a personal service company) to the primary engager for services. Although, Colleges should already have procedures in place to determine situations where this is relevant and act accordingly since 2017, additional burdens for public sector engagers were introduced with the new private sector rules from 6 April 2021. These include the requirement to issue a Status Determine Statement and the appeal process for individuals. We recommend that College procedures around employment status are regularly reviewed and updated. If you need advice on employment status, please do get in touch.
Charity Governance Code
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Charity Governance Code The Charity Governance Code received a refresh in December 2020 following a consultation process with the charity sector that received over 800 responses. Respondents to the consultation commented that diversity has moved on significantly since 2017 and therefore Principle 6: Diversity has been replaced by a new Equality, Diversity and Inclusion (EDI) Principle. The new principle is framed around the potential journey that a charity board could make to meet its diversity challenges: ▪ Assessing understanding, systems and culture; ▪ Setting context-specific and realistic plans and targets; ▪ Taking action and monitoring EDI performance; and ▪ Publishing performance information and learning. The code highlights a number of practical steps that charities can take to embed the EDI principle within their governance structures. Principle 3: Integrity has also been updated to emphasise the importance of a charity’s values, ethics and culture, with reference to the National Council for Voluntary Organisations (NCVO) Charity Ethical Principles. The new Integrity principle includes the right to feel safe and ask trustees to: ▪ Understand their safeguarding responsibilities; ▪ Establish and review appropriate safeguarding policies and procedures; and ▪ Ensure that anyone working with the charity knows how to speak up and feel comfortable raising concerns.
Although not updated in the recent refresh, principle 5: Board effectiveness is key when assessing the size of your board of trustees. This principle considers how the board of trustees can work as an effective team by using the appropriate balance of skills, experience, backgrounds, and knowledge to make informed decisions. It is recommended that Colleges review the board of trustee’s composition regularly ensuring that the board is big enough that the College’s work can be carried out effectively but not too big so that efficient decision making cannot take place. It is considered good practice to have a board of trustees of at least 5 but no more than 12. Virtually all Colleges have more than 12 trustees with the highest number being 89 and the average 32. Too many Trustees can make decision making cumbersome, although in Colleges where there are a larger number of Trustees, there is often a College Council of a much smaller size that makes the decisions. Colleges should consider whether the board of Trustees is effective with its current membership and where there are large numbers of Trustees in addition to a Council, then consideration should be given whether the members of the Council should be the only Trustees. The Charity Code of Governance is recognised by the Charity Commission as the standard for effective charity governance and boards of larger charities are expected to review their own performance annually and have an external evaluation every three years. Full details of the updated Charity Code of Governance can be found here.
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COVID-19 related VAT issues
COVID-19 related VAT issues The current pandemic has inevitably resulted in VAT relaxations and changes over the last year.
Deferred VAT payments At the beginning of the crisis, the Chancellor provided all taxpayers with the opportunity to defer VAT payments otherwise due between 20 March 2020 and 30 June 2020. Many taxpayers took advantage of this interest free offer. The original plan was for taxpayers to pay any deferred VAT by 31 March 2021. Now, though, any deferred VAT remaining due can be paid in instalments over the course of the 2021/22 financial year under the New Payment Scheme.
Temporary reduced VAT rate A temporary reduced VAT rate of 5% for taxable supplies of hospitality, holiday accommodation and admission to certain attractions was introduced last summer. The change took affect from 15 July 2020 and was originally due to end on 12 January 2021. The end date has now been extended to 30 September 2021. The temporary rate of 5% will then be replaced by one of 12½% for a further six months before affected supplies are taxed once more at 20% from 1 April 2022.
Cambridge Colleges newsletter | June 2021
COVID-19 related VAT issues
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The provision of education and related services by Colleges, such as accommodation and catering for students, is unaffected by any positive VAT rate changes as exemption prevails. However, the temporary reduced rate applies to the following taxable supplies commonly made by Colleges: ▪ ▪ ▪ ▪
food and non-alcoholic drinks sold to visitors for consumption on College premises; hot takeaway food and hot takeaway nonalcoholic drinks; sleeping accommodation to visitors and guests; and admission fees to college precincts
Partial exemption methods Colleges are unable to recover much of the VAT incurred on costs as most of their income is exempt from VAT. Academic fees from students and related residential and catering income all qualify for exemption. Many colleges also provide conference and event facilities to non-students. Conference related income can also qualify for exemption but often the nature of the event and/or the status of the customer means that the standard rate of VAT applies instead. Although subject to VAT, this secondary taxable source of income is useful in that it enables increased VAT recovery. Those Colleges with conference arms have seen a marked drop in taxable income over the last year because of the pandemic. This is likely to continue for at least a few more months. With VAT recovery on general costs used for both taxable and exempt income often determined by reference to respective income values, the greater loss of taxable income (when compared to exempt income) has had a negative impact on overall VAT recovery. In recognition of this, HMRC has recently confirmed that affected organisations can use a different method of recovery for periods where recovery has been adversely affected as a direct result of COVID-19.
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HMRC invest in Job Retention Scheme reviews
HMRC invest in in Job Retention Scheme reviews Many employers, including Cambridge Colleges, have used the Job Retention Scheme (JRS) as one of the measures of Government support during the COVID-19 pandemic. Affected employers may still use the scheme until 30 September, subject to certain conditions. One of the announcements during the March 2021 Budget, was of a major investment into investigations of possible fraudulent or incorrect JRS claims. As such it is important that employers who have used the scheme, check their claims for potential errors and collate the documentation in support of the reasons for using the furlough arrangements. HMRC’s JRS guidance has been updated many times since it was first issued and, whilst most claims will have been made accurately and in good faith, due to the urgency with which many claims were made, unintended errors may have been made in some claims. HMRC are encouraging employers to review their JRS claims and voluntarily disclose any mistakes or overclaims to correct matters. HMRC has confirmed it is not targeting simple errors, but if significant issues are found during an HMRC review, employers may face penalties of up to 100% of the inaccurate claim, as well as having to repay the amount claimed. In addition, there could be reputational risk if HMRC publish the details of the employers who made such claims. If you claimed under JRS, we recommend that you review the claims made and ensure that all aspects of the scheme and decision-making is well documented.
Cambridge Colleges newsletter | June 2021
Your team
Kelly Bretherick
James Burrett
Jayne Rowe
Judith Pederzolli
Rob Plumbly
Kate Millard
kbretherick@pem.co.uk
jrowe@pem.co.uk
rplumbly@pem.co.uk
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jburrett@pem.co.uk
jpederzolli@pem.co.uk
cmillard@pem.co.uk
Charlotte Young cyoung@pem.co.uk
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