The tax landscape for sports organisations continues to change; organisations that are not familiar with the new requirements may miss opportunities to claim valuable reliefs. In this article, Senior Tax Manager Jamie Whale covers some of the key changes and how your organisation can benefit from new reliefs.
Increase in CT rate from 2023
The Chancellor announced at Budget 2021 that the Corporation Tax (CT) rate will increase from 19 per cent to 25 per cent with effect from 1 April 2023. All tax-paying companies, associations and clubs will be impacted by this increase, which is the first increase in the main rate of CT for almost 50 years. The existing rate of 19 per cent will remain for profits up to £50,000 so small income streams in entities that are otherwise tax exempt will be unaffected.
Although the increase is effective in 2023, deferred tax disclosures will need to reflect the future tax rate from the date of substantive enactment of the Finance Bill, expected in July 2021. Therefore periods ending after this date will disclose deferred tax at the future rate.
Super capital allowances
The Chancellor also announced that super-deductions will be available for qualifying capital expenditures for tax-paying businesses. Qualifying plant and machinery, such as fixtures and fittings or computer equipment, will be entitled to a 130 per cent tax deduction during the acquisition period. Integral features and other assets that ordinarily qualify for the ’special rate pool‘, such as expenditure on air conditioning systems and water systems of a building, will be entitled to a 50 per cent 'first year allowance' tax deduction, with the remaining balance pooled to receive tax relief in future years as normal. The latter is of use to entities that already use their full Annual Investment Allowance – £1 million of expenditure per group per annum, until 1 January 2022 when it is scheduled to decrease to £200,000 per annum. The enhanced rates apply for two years from 1 April 2021, the end of each change coinciding with the increase in CT rate – this removes any incentive to delay expenditure to obtain 25 per cent relief in future.
Companies, associations and clubs that partly conduct taxable trading activity are required to reduce the level of all capital allowances claims to only make a percentage of the claim that is ’just and reasonable‘ – this means that assets used in both taxable and exempt trading activities only receive a deduction based on the proportion used in its taxable trading activities. This means the benefit of these reliefs is reduced accordingly, though it is nevertheless a higher rate of relief than was previously available.
Structures and buildings allowances (SBAs)
SBAs can be claimed for expenditure on structures and buildings used for qualifying business purposes. SBA-qualifying expenditure is expenditure on construction of new buildings, renovation or conversion of existing commercial buildings (and any incidental repairs), and any associated fees. It does not include expenditure on land, nor on residential buildings. The structure or building must be used in a qualifying trade ie trading activity conducted with a view to a profit, that would be taxable in the event of any profit arising. As for other capital allowances (see above) this means a further reduction is required wherever the building is only used partly in a taxable trade. This expenditure would not previously have been eligible for capital allowances. The rate of relief was increased to 3 per cent of expenditure per annum from 1 April 2020, having been initially set at 2 per cent, per annum.
Many sports clubs consider their trading activities with members to be exempt from CT on the basis that the organisation is conducting mutual trading – that is trading transactions with your own members. This exemption is a valuable relief for clubs in reducing their corporation tax exposure, provided that they meet the necessary conditions.
The concept of mutual trading has derived from case law and is a complicated area; there are a number of requirements that a sports body must meet for the mutual trading principle to apply including:
The contributors to the club’s surplus, and the participators in the surplus (ie those who own it and can benefit from it) must be identical – notwithstanding the fact that the make up of the membership may change over time
Members must control the common fund by being voting members of the organisation
The surplus must be returned to contributors and no one else upon the club being wound up (ie ceasing to operate and being dissolved) with a reasonable relationship between amounts contributed and amounts returned to members.
An organisation that conducts a mutual trade with its own members and also trades with third parties is conducting partly trading activity within the scope of mutual trading, and partly normal trading activity. Only the former is exempt from CT, meaning that as above, CT is charged as usual on trading activity with third parties.
In order for members to be considered to ‘control the common fund’, upon a winding up of the organisation, any surplus must be returned to members. HMRC’s view is that there must be no possibility of it being distributed to another association or another third party unless with the express consent of members.
Many not for profit organisations have Articles of Association or Constitutions stipulating that upon a winding up any surplus is donated to another similar organisation or to a charity. HMRC’s view of case law is that they cannot be conducting mutual trading activity.
HMRC are known to have taken an increasing level of interest in this area recently and have won cases against prominent organisations where constitutions were not correctly drafted to ensure that members control the mutual fund and would receive any surplus upon a winding up. If an organisation has not reviewed this position for some time, it is sensible to conduct a review prior to any HMRC challenge.
It is worth noting that any activity that does not amount to trading activity – because it does not meet the definition of commercial trading, outlined by ’badges of trade‘ – can be treated as non-taxable without the need to consider the requirements for the mutual trading exemption.
The Budget also included a repeal of the UK’s domestic legislation implementing the EU Interest and Royalties Directive (IRD), effective from 1 June 2021. This impacts sports organisations that make intra-group payments from EU-based companies in respect of interest or royalties – withholding taxes must now be applied to such payments, generally at 20 per cent, the exact rate is confirmed by the double taxation agreement (DTA) between the UK and the country in which the recipient is tax resident. Taxes deducted should be reported to HMRC on a quarterly basis, using form CT61.
Most payments from EU companies to UK companies have been impacted since 1 January 2021. Again the relevant DTA confirms whether any withholding taxes are due [If a higher rate has already been applied to certain payments than provided for in the double tax agreement, or if withholding tax has been levied with a 0 per cent rate, relief must be claimed from the overseas authority by the payee – no credit can be claimed against UK Corporation Tax or Income Tax for any excess].
For more information on the above tax changes, please contact Jamie Whale at email@example.com