Author Archives: Aidan Roberson - Tax Manager

About Aidan Roberson - Tax Manager

T +44 (0)20 7874 8845

Aidan helps company directors, partners and private individuals and families with their personal tax with an emphasis on inheritance tax. He enjoys bringing clarity to the complex problems which arise in these areas, providing people with clear, actionable advice.

What’s a PAYE settlement agreement?

PAYE settlement agreements (PSAs) are optional arrangements that allow employers to pay the tax and National Insurance contributions (NICs) for benefits-in-kind on behalf of their employees. They’re also useful when declaring benefits on P11D forms would be administratively burdensome.

PSAs have therefore proved popular with employers, even if they can be expensive; if you’re paying the tax and NICs on behalf of your employees, this is itself subject to tax and NIC.

However, this popularity is proving to be a headache for HMRC. Although it up to the employer (or their agent) to calculate that tax and NIC payable each year, PSAs are not strictly a self-assessment system. Each calculation needs to be approved by HMRC before the payment deadline of 19 October (22nd if paying electronically).

Processing delays

Over the past few years, HMRC have been getting further and further behind in approving PSA calculations sent to them by employers. For 2018/19 the situation has reached a new low. Less than two weeks before the payment deadline we have been informed by HMRC that they have not even started to process PSA calculations.

This means that employers won’t have a letter from HMRC confirming the amount to pay, where to pay it and, crucially, the payment reference to use. This reference is specific to each employer and tax year.

What to do

HMRC have told us that employers should not wait to receive confirmation of their PSA calculations. Instead, you should pay over the tax and NIC liability that you have calculated using the usual payment methods, detailed on HMRC’s website by the payment deadline above.

You must still use a payment reference, even though HMRC won’t have sent you a confirmation letter. Fortunately, a payment reference can be found in the letter from HMRC enclosing your countersigned P626 – the letter that put the agreement in place. Although it is not tax-year specific, it is unique to each employer and therefore HMRC have confirmed to us that it can be used in this situation. This is in the format XX0000123456789.

What next?

If you are in any doubt, we suggest that you contact the HMRC employer helpline on 0300 200 3200 to confirm your PSA payment reference as soon as possible, making sure that you have your PAYE reference number to hand.

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If there is one idea that everyone across the political spectrum agrees upon, it is that having a more skilled workforce is a good thing. However, at present our tax system is very inconsistent in incentivising work-related training.

The existing rules

Consider these three scenarios:

1) The good employer

Gemma works at a reputable accountancy firm, who value their employees and wish to train them up for the benefit of both the employees and the firm. Gemma wishes to move into a specialist area and therefore wants to study for a new qualification. Her employer is happy to pay her course fees and reimburse her travel costs. They receive tax relief on these expenses, and Gemma is not taxed on the cost.

2) The bad employer

Daniel works for a miserly accountancy firm. Like Gemma, he wishes to gain a new qualification but he must pay for it out of his own pocket. However, as he is not on a training contract he cannot claim tax relief for his costs.

3) The self-employed

Jordan is a self-employed accountant, and so pays for all his own training. He can get tax relief for his costs of continuous professional development. However, if he wants to join Gemma and Daniel in studying for a new qualification then tax relief for these costs is denied.

A new approach

As part of the Government’s 2018 Spring Statement, they have released a consultation on how to redress this imbalance. They are considering harmonising the tax treatment of work-related training, so that in all the above scenarios tax relief would be available. Although as a firm we of course fall into the first scenario, we would welcome this change as being both fair and good for the UK economy.

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For the vast majority of people the best tax planning is not complicated. A few simple steps carried out by the end of the tax year on 5 April can yield great results. We look at 5 of the most effective things you can do to reduce your tax bill.

1.  ISAs

ISAs have been around for nearly 20 years and remain one of the simplest and best ways to shield your investments from tax. The annual contributions limits have jumped up in the past few years, and there are now many types of ISA to choose from:

• Cash ISA
• Stocks and shares ISA
• Innovative Finance ISA
• Help to Buy ISA
• Lifetime ISA
• Junior ISA

Cash ISAs are simply savings accounts in which you do not pay tax on interest. Stocks and shares ISAs can contain shares, unit trusts, corporate bonds and gilts. Innovative Finance ISAs can contain new peer-to-peer loans and crowdfunding investments (debt only, no equity).

Help to Buy ISAs are aimed at first-time home buyers, and offer a 25% bonus up to £3,000 from the Government to be put towards buying a property worth up to £250,000 (£450,000 in London). They are being phased out in favour of Lifetime ISAs (LISAs), which are geared both towards first-time buyers and those looking to save for their retirement. You can put up to £4,000 into a LISA each year, and again you will receive a 25% bonus.

Thanks to the change from Help to Buy to Lifetime ISAs, there is a one-off opportunity in the current tax year. If you have a Help to Buy ISA and transfer the funds into a LISA before 6 April 2018 this will not count towards the LISA limit, allowing you to get a bonus twice.

You can contribute a total of £20,000 into a combination of these ISAs before 6 April 2018. There are various quirks and restrictions, especially around Help to Buy and Lifetime ISAs, so it is recommended that you seek professional advice.

2.  Pensions

In contrast to ISAs, the level of pension contributions which attract tax relief has been falling, particularly for high earners. However, they are still a useful tax planning tool, and with the increased options on how to take out funds they have become a more flexible investment vehicle.

Both ISAs and pensions provide a tax-free wrapper for investments, but pensions provide upfront tax relief. However, they are taxable when funds are withdrawn, unlike an ISA. This makes them useful for year-end tax planning, so long as you know what your income will be for the year. For example, extra pension contributions can be used to bring your effective taxable income down to £100,000 to preserve your personal allowance. The restriction of the personal allowance results in an effective marginal tax rate of 60%, so this can save a significant amount of tax.

However, there are restrictions on both how much you can contribute to a pension annually and over your lifetime. The annual allowance is £40,000 gross in 2017/18, including contributions made by employers. This tapers down to £10,000 for higher earners, typically those with income over £150,000. Fortunately you can utilise unused allowances from the three previous years. This is particularly valuable for those caught by the tapered annual allowance, as this was not introduced until the 2016/17 tax year. This means that the unused portion of the full annual allowance of £40,000 from 2014/15 and 2015/16 can be brought forward to 2017/18, even for higher earners.

Finally, those with no income can benefit from a 20% uplift on pension contributions. You can make a contribution of up to £2,880 and the Government will top this up to £3,600. For example, if you have a spouse/civil partner who has no earnings, or a child/grandchild at university, this is a useful free top-up.

3.  Inheritance tax gifts

The “7 year rule” for inheritance tax is widely known – if you gift money or assets then you need to survive 7 years for it to be free of inheritance tax. However, up to £3,000 can be given away each year which is immediately free of inheritance tax. If you have not gifted anything in the previous tax year then this can be brought forward, allowing £6,000 of gifts before 6 April 2018. This is per person, so a couple can give away up to £12,000 in a year. If one spouse/civil partner does not have sufficient funds to make their gift, the other can gift it to them first as a transfer between spouses is generally exempt from inheritance tax.

4.  Capital Gains Tax planning

Each person can make capital gains of £11,300 in 2017/18 before paying capital gains tax. If your investments have done well then it can be advantageous to sell some of these to crystallise a gain of up to £11,300 without paying tax.

There are rules which prevent you from selling shares on 5 April and buying them back the next day (so-called “bed and breakfasting”). However, although selling shares and buying back the same shares ones back is caught, buying shares of a similar company in the same industry is not. It is also possible for your spouse/civil partner to buy shares in the same company (but not your shares), although care must be taken where you gift them money to do so.

You should ensure that you and your spouse/civil partner both hold assets so that you do not waste the annual CGT allowance.

5.  VCT, EIS and Seed EIS investments

The Government encourages investment in riskier companies by giving tax advantages through the VCT, EIS and Seed EIS schemes. Such investments get income tax relief at 30% for VCT and EIS, and 50% for start-ups under Seed EIS. For example, if you subscribe for £10,000 of shares in an EIS-qualifying company before 6 April 2018 you should get £3,000 off your income tax liability in January 2019. Even better, you may be able to carry the relief back to the previous tax year and get a £3,000 refund from HMRC now.

If you have made a capital gain within the past 3 years, EIS and Seed EIS schemes can be used to provide relief from capital gains tax. For EIS schemes this is a deferral relief, delaying the payment of tax. Seed EIS schemes are more generous, exempting gain up to the value of 50% of the investment made.

The bigger picture

With all of these tips one must look beyond the tax advantages and ask if it is the right decision for you. VCT, EIS and Seed EIS investments can be risky. Equally, there’s no point in making a pension contribution or gifting money if you need the funds now.

If any of the above are right for you, we recommend that you seek professional advice to ensure that traps are avoided.

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There is a common misconception that the first £30,000 of termination payments are tax free. From April 2018 the rules are changing, and yet again a misconception may come to dominate – that the £30,000 exemption has been abolished. As this article will reveal neither is true, but from 6 April 2018 its availability will be severely restricted. This is to the detriment of both employees being made redundant and employers who need to let staff go.

Parting company

If an employee works in a sensitive area of a business, or there are concerns that they may try and take clients with them, an employer may not want them to work out their notice period. This can be achieved by continuing the employment and paying them their salary (gardening leave), or by paying them in lieu of their notice period (PILON).

As it is the continuing payment of salary, unsurprisingly gardening leave is taxed. However, the situation with PILONs is much less clear. There is a common misconception that the first £30,000 of termination payments are always tax free, but technically this doesn’t include PILONs.

The current rules

Like gardening leave, PILONs are fully taxable. But there is a loophole: if an employment contract doesn’t specifically state that a payment could be made instead of giving a notice period, then it can be argued that the payment is for breach of contract. The first £30,000 is then free of tax. This is valuable to employers, who also save NIC at 13.8% on the full amount.

Naturally the response of many employers has been to strip PILONs from contracts. However, this has led to a farcical situation where one employee faces a hefty tax bill because of a few words in their contract, whilst another employee enjoys £30,000 of tax free cash.

This loophole was partly closed by deeming that if a PILON is expected then it should be read into the contract of employment. Therefore it can’t be a breach of contract and the £30,000 exemption doesn’t apply. However, when a series of terminations is made the first employee out of the door might pay no tax on their first £30,000, but the third or fourth employee might find their PILON being taxed because an expectation that they will receive one has been created.

PILONs are out, “post-employment notice pay” is in

The Government has responded to this with new rules which sidestep the argument about whether a payment is for breach of contract or a PILON. This may lead to a misconception that the £30,000 exemption is being abolished. This is not true, but it will no longer apply as widely, meaning many employees will pay more tax and their employers will pay more NIC.

From 6 April 2018, when a payment is made but notice is not served, the employer must calculate the pay the employee would have received in their notice period had they carried on in employment. This “post-employment notice pay” is excluded from the £30,000 exemption.

How it works

In a nutshell, the “basic pay” in the employee’s final pay period is extrapolated over their notice period to give a notional “post-employment notice pay”. This amount cannot qualify for the £30,000 exemption. If the termination payment exceeds the post-employment notice pay, the excess may qualify for the exemption. Whilst this sounds simple in theory, in practice it is a potentially complex calculation.

“Basic pay” – potential trap or planning opportunity?

Confusingly, “basic pay” goes far beyond what would normally be considered basic pay, and includes benefits, bonuses, overtime and commission. Worse still, it also includes payments made in connection with the termination, and amounts treated as employment income in relation to shares and options. This creates a potential trap, but also a planning opportunity. By moving bonuses into the penultimate pay period and delaying payments related to the termination until after notice is given, the basic pay could be reduced thereby increasing the proportion of the termination payment which is tax free.

Into the fire

The uncertainty surrounding the treatment of PILONs has gone, only to be replaced with confusing new concepts and convoluted calculations. From 6 April 2018 the costs to both employees and employers will rise in the majority of cases, with traps for the unwary and poorly advised. If unfortunately it becomes necessary to part company with an employee, doing it sooner rather than later could be to the benefit of both parties.

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Driven by ever-increasing tax transparency, HMRC began a campaign to crack down on undeclared offshore assets back in September 2016, covered in an article by my colleague Michael Goldstein. He highlighted that HMRC is now receiving information about UK taxpayers from tax authorities all over the world, which started with the UK-linked islands such as Jersey, Isle of Man, Bermuda, British Virgin Islands and the Cayman Islands. Since September 2017 this list has ballooned to over 100 countries. And these aren’t the only ways HMRC have of finding out about offshore assets: the Paradise Papers leak is a topical example.

Going in for the kill

Perhaps unsurprisingly, we have seen a growing number of enquiries from people whom HMRC have written to, stating that they “may have” offshore assets and asking them to disclose details under their Worldwide Disclosure Facility. HMRC aren’t offering much in the way of carrots – the WDF carries normal penalties and no immunity from criminal prosecution – but plenty of sticks. There is a legal “Requirement to Correct” by September 2018, and anyone who does not do so will face penalties for “Failure to Correct” of between 100% and 200% of the tax at stake. In the worst cases there are additional penalties of 10% of the value of the offshore asset and naming and shaming on HMRC’s website.

Severe penalties: example

Tom has an investment portfolio based in Jersey worth £200,000, which yields £10,000 income each year. As a top rate taxpayer, Tom should have been paying tax on this at 45% but failed to declare it on his tax returns.

If HMRC deem his behaviour careless, they can go back 6 years, being £27,000 of tax. If Tom fails to declare this by September 2018 this he will face Failure to Correct penalties of up to 200%, or £54,000. However, if he volunteers this information to HMRC his penalty could be 0%. If HMRC prompt him with a letter as we’ve been seeing, the penalty will be between 15% and 30%, i.e. up to £9,100.

If HMRC believe Tom has acted deliberately, they can go back 20 years. Penalties could top £160,000, plus 10% of the value of the portfolio, giving total penalties over £180,000. By the time tax and interest are included, the total Tom has to pay may be north of £300,000. Tom’s name and address are published on HMRC’s website.

What to do

If you have received a letter from HMRC it is important to act. It may not necessarily be obvious what information HMRC have: we had a client recently whose grandmother passed away many years ago and left him an offshore account, which he did not realise he now owned.

It is also possible that structures put in place years ago are no longer effective for tax purposes – non-doms and UK residential property held in offshore companies spring to mind – and will now need reporting.

Even if you haven’t received a letter from HMRC, it is beneficial to get ahead of the game as this will reduce the penalties involved. Not only is the deadline of September 2018 closer than you might think, but international tax transparency will only increase.

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As part of a wider drive against tax evasion, on 26 June 2017 the UK implemented the EU’s 4th Anti-Money Laundering directive. Amongst other things, this took aim at trusts in the form of a compulsory register administered by HMRC. All trusts, no matter where they are in the world, must considering whether they are obliged to register, whether or not they already report under an existing regime. This includes pension funds and charitable trusts.

What do the new rules entail?

The new anti-money laundering rules create two overlapping obligations:

1. Trustees must report information to HMRC on all trusts worldwide for any tax year in which there is a “UK tax consequence”; and
2. Trustees must retain up-to-date records of beneficial ownership, whether or not there is a UK tax consequence.

This article will concentrate on the first obligation: the trusts register.

How does the trust register work?

The reporting is done online, via HMRC’s trusts registration service. Information must be reported each year, with deadlines akin to tax return filing. A good rule of thumb is that if a trust requires a UK tax return it will require a report under the trust register by the same 31 January deadline, although the definition of “UK tax consequence” is wider than this (see below). Trusts which do not have a UK tax consequence do not need to report, but if they have done so in a previous tax year a nil return will be required.

Which trusts have to report?

All trusts (both onshore and offshore) will have to report if there is a “UK tax consequence”, being where the trustees have a liability to UK tax. This will usually be where a UK trust tax return must be filed, but it also applies to inheritance tax and stamp duty on land and shares.

Bare trusts and interest in possession trusts where all income is mandated to the beneficiaries escape the reporting requirement as the trustees do not have a liability to UK tax. However, HMRC have confirmed to us that charitable trusts and pension funds fall within the rules as they are governed by trust deeds, insofar as the trustees are liable to tax.

What needs to be reported?

The information required is extensive, including:

• Details of the settlors, trustees and named beneficiaries (including full names, dates of birth and tax reference numbers or, where not available, their residential address).
• The name of the trust and the date it was established.
• Where the trust is treated as tax resident and where it is administered.
• The name of any advisers being paid to provide legal, financial, or tax advice to the trustees.

HMRC guidance has confirmed that the declaration of assets is not as onerous as originally feared.  For new trusts it will be whatever is settled when the trust is established, but for existing trusts only a nominal sum needs to be reported.

Who needs to report it?

The obligation is with the trustees, although agents can file on their behalf. Failure to report can result in up to two years in jail.

When is the first deadline?

HMRC’s trusts registration service performs two functions:

1. To fulfil the Anti-Money Laundering directive; and
2. As a replacement for the old form 41G for registering for tax reporting.

Therefore, two initial deadlines apply:

1. For trusts already registered with HMRC using old form 41G, with a UK tax consequence in 2016/17 (even if subsequently liquidated) the deadline is 31 January 2018.  However, due to issues with HMRC’s systems,  no penalties will be incurred for reports filed by 5 March 2018.
2. For trusts settled in 2016/17 or which first became liable to tax in that year, the usual registration deadline of 5 October 2017 has been extended to 5 January 2018.

What does all this mean?

The trust register represents unprecedented exposure for all of those involved with trusts, be they settlors, beneficiaries or even professional advisers. In particular, it places a heavy burden on trustees and will increase the costs of administering trusts.

 

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Although David Cameron will be remembered for inadvertently leading the UK out of Europe, in early 2016 he hit the headlines over revelations about his family’s connections to offshore trusts. He was criticised for having lobbied against tightening anti-money laundering rules for trusts, but this fell on deaf ears in the EU, which has issued its 4th Anti-Money Laundering directive. On 26 June 2017 the UK implemented this, primarily in the form of a compulsory trusts register administered by HMRC.

What is the trusts register?

The trusts register is an annual reporting requirement for all trusts, anywhere in the world, in a year when the trustees are liable to tax. Generally this is where a UK trust tax return should be filed, but it also if inheritance tax or stamp duty arises.

What needs to be reported?

Trustees must report annually on the assets held in the trust, and details of the settlors, trustees and beneficiaries. This includes full names, dates of birth, tax reference numbers and in some cases home addresses.

Who can see the information?

Any UK law enforcement authority, including HMRC, the FCA, the Serious Fraud Office and the police, can see the register. However, there are proposals to make it public in the future.

How does this affect me?

Settlors and beneficiaries are being put in the spotlight, but the obligation falls on trustees and failure to report can result in two years in jail. In seeking to shine a light on murkier areas, the EU has placed a heavy burden on them.

 

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