Author Archives: Graeme Blair - Partner

About Graeme Blair - Partner

T +44 (0)20 7874 8835

Graeme helps guide businesses through the corporate tax world. He is particularly expert at issues that property companies and professional practices have to navigate and therefore often manages large and complex assignments, many of which have an international element.

As a client of Graeme's wrote "I am increasingly impressed that when I pick up the phone to Graeme I receive robust and appropriate advice."

Any changes are not likely to be immediate. I would anticipate that Budget 2018 would prepare the country for any changes in our domestic taxation.

Initial thoughts on Taxation after Brexit

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 24th June 2016

Categories:

Although the Brexit process is anticipated to take at least two years it is worth considering the possible tax consequences of leaving the EU.

Indirect Tax

The UK is part of the EU Customs Union and therefore goods can be moved to and from other member states without duties (either customs duties or import VAT). There are reduced compliance obligations on intra-EU transfers.

Unless the UK negotiates otherwise then goods brought into the UK from the EU will be subject to import VAT and import duty. Conversely goods exported out of the UK and into the EU will be subject to EU import VAT/duty.

The EU has negotiated favourable terms of export to third countries and the UK may lose the benefit of these rights. However the UK will no longer be bound to EU rates and tariffs and therefore may be able to reduce costs of importation or negotiate separate (even more favourable) terms of exports to third country.

The rate of VAT in the UK is controlled by Brussels. On leaving the EU these restrictions will be lost and therefore the standard rate of VAT may change and/or the items to which the zero rate applies extended.

At present there is a process allowing the UK to recover VAT incurred in other EU countries. This involves access to a single portal on the HMRC website. Although recovery will still be possible after Brexit the administrative process is likely to change and therefore there may be delays in future recovery of EU VAT.

Direct Tax

Direct taxes are broadly determined by member states without direction from Brussels and therefore there should be little impact on direct tax rates. Irrespective of this independence there are UK rules which have been specifically designed to be compatible with EU law and EU freedoms. Those rules can be repealed or varied.

Some tax reliefs are subject to EU state aid considerations and cannot be implemented without EU approval. Theoretically those reliefs could be expanded considerably. However the UK will remain a member of the OECD and therefore subject to OECD harmful tax practice considerations. These considerations are likely to restrict the introduction of very generous tax reliefs.

Withholding Taxes

There are exemptions from domestic withholding taxes for payments to EU members. After Brexit those exemptions would not necessarily continue and the rate of withholding tax would be determined by the tax treaty between the UK and its European neighbours. In the absence of any other agreements this would suggest an increase in withholding taxes on both inbound and outbound payments. Arrangements with gross up clauses (i.e. the recipient receives a certain sum and any withholding tax is a cost to the payer) would need to be managed carefully.

The UK does not have any outbound dividend withholding tax and therefore dividend payments out of the UK would remain unaffected.

Social Security

There are specific rules which apply to EU residents who work in another member state. They are designed to restrict the social security contribution to one state and determine which state that is. These rules may not apply after Brexit and this could lead to double taxation for some internationally mobile workers.

Timings for change

Any changes are not likely to be immediate. I would anticipate that Budget 2018 would prepare the country for any changes in our domestic taxation.

The reality is that no-one really knows the taxation impact of Brexit and the extent that some, or all, of the above occur can only be determined with the fullness of time.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Share options can be used which are granted on a selective basis and exit-only. This can be used to bridge the conflicting desires of management incentivisation with perceived loss of family ownership.

Share Options and the Family Business

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 31st May 2016

Categories:

Shares or share options are well known ways to incentivise employees and care is needed to review the tax considerations for these. However, this is far from the only consideration needed when looking at the best way forward for a family business.

It is quite common for the main shareholders of a private business to have conflicting emotions when incentivising key staff. On the one hand they understand the benefits of long term incentivising by offering equity in a company. However it is common for key management not to be members of the family which own the business and therefore there can be resistance to allowing shares to be offered to “outsiders”.

The psychological dilemma can be partially overcome by issuing phantom shares or share options. Phantom shares are bonus arrangements (subject to PAYE and National Insurance) which provide management with the same level of income as if they owned shares but without actually issuing them with shares. This allows management to feel that their efforts are rewarded without the owners giving away any of the business. Our clients have used these arrangements however, as payments are through the PAYE system they can be expensive for the employer.

Share options can be used to overcome the dilemma about loss of control by the family. We have had clients who have not been keen on issuing options for this reason. Their concerns have been alleviated when we point out that options can be granted which only vest on certain criteria eg on sale. This therefore allows the family shareholders to retain control until such time as there is an exit event. At that point the management participate and their hard efforts leading up to the sale can be rewarded.

Enterprise Management Incentive (EMI) options are the gold standard of option as they allow the option holder Business Asset Disposal Relief in most cases and most of our work is aimed at issuing EMI options where they are possible. There are various criteria attached to EMI options which need to be considered, including that the option must be capable of being exercised within ten years of grant. Occasionally there are discussions between shareholders and management about quantum of options offered to management. If it is over a fixed number of shares then management may have concerns that subsequent share issues would dilute their entitlement.

If the conditions attached to EMI cannot be met then a Company Share Option Plan (CSOP) may be appropriate. This can be used by any company regardless of its type of trade or size. This type of approved option has a £30,000 monetary limit on the value of equity per employee with the requirement for the options to be exercised within three and ten years of grant. These conditions are less attractive than EMI and make it more difficult to use them for exit planning.

Given the restrictive conditions and the lack of immediate entitlement to Business Asset Disposal Relief, CSOP is considerably less popular than EMI. However in the right circumstances they can be used to attract key personnel as options can be granted on a selective basis and provide golden handcuffs to existing key personnel.

In conclusion many Entrepreneurs understand the benefit of providing equity incentives to key management. Some individuals do not wish to offer shares to management as it can dilute the family’s interest in a business. Share options can be used which are granted on a selective basis and exit-only. This can be used to bridge the conflicting desires of management incentivisation with perceived loss of family ownership.

If you´d like to get future articles to your inbox:

We occasionally write on practical issues within family businesses including succession planning.

Request content

Guardar

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

the differential of rates between trading business and non-trading businesses has led to an increase in demerger activity.

Tax Efficient Separation – When is a Demerger the best solution?

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 25th April 2016

Categories:

Demerger

Structuring your business to make the most of the tax reliefs available

Trading businesses attract valuable tax reliefs such as Entrepreneurs’ Relief on sale and Business Property Relief on death. Investment activities within a business can put these tax reliefs in jeopardy and it is often desirable to remove investment activities from the trading business. This separation can be structured as a demerger.

Demergers can also be advantageous to allow shareholders to separate a business with certain shareholders gaining sole control of some parts of a business and other shareholders gaining sole control of other parts. Each can take their part forward as they see fit.

If shareholders do wish to obtain sole interest in part of a larger business there are certain demerger processes which are enshrined in legislation to make the separation tax efficient. However, they do not work if the business has investment income or there is a share sale on the horizon. In these cases the demerger requires the liquidation of a company and transfer of its assets to new companies. Commercially it is often felt disadvantageous to liquidate an active business and therefore a newly incorporated company would often be inserted above the active company and it is that newly incorporated parent which is liquidated. The use of a Newco prevents the practical difficulties of liquidating an active company and the negative perception associated with active companies being put into liquidation.

One of the disadvantages of an insolvency demerger is the Stamp Duty Land Tax costs associated with the transfer of property. With SDLT rates rising this is becoming more of a drawback to the insolvency based demerger.

The Companies Act 2006 made the process for private companies wishing to reduce their share capital much more straightforward. This has led to an increase in the popularity of a capital reduction demerger.

A liquidation demerger requires the liquidation of a company and its assets (typically shares in subsidiaries and property) to be transferred to new companies with stamp duty/stamp duty land tax charges payable. A capital reduction demerger also involves insertion of a new company above the existing active business. That company then has its capital reduced and only some of its assets are transferred to a new business. The other assets remain within the existing group with each business under different ownership. This process can reduce the stamp duty/stamp duty land tax charges which would be payable on an insolvency as fewer assets are leaving the group. It can save considerable SDLT as assets subject to the tax would normally be retained in the existing group and it is assets subject to (the lower rates of) stamp duty which are transferred to the new ownership at the time of the capital reduction.

In order to be tax efficient the transaction should be for commercial purposes and certainly not part of a scheme of tax avoidance. It is in order to ensure that HMRC feel that the matter is commercial that tax clearance should be obtained before implementing the demerger.

In conclusion, the differential of rates between trading business and non-trading businesses has led to an increase in demerger activity. This is not the only reason for a demerger with separation of shareholder ties another common reason. Demergers can be free of direct taxes when appropriate clearances are obtained. Stamp duty and stamp duty land tax is often payable on demergers. By application of a capital reduction demerger fewer assets are transferred out of the existing business and therefore lower stamp duty/stamp duty land tax is payable. By careful consideration of the assets being transferred it is possible to dramatically reduce these costs by transferring assets subject to stamp duty out of the group and retaining properties (which would otherwise attract the higher rates of stamp duty land tax) within the current structure.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Hotly debated and potentially dramatic changes to pensions, new inheritance tax limits, dubious financial selling and an increasingly long-lived generation at greater risk of dementia, all means the challenge has just become all the more important.

Family Matters Event: Snakes & ladders of the new pensions landscape – the impact for elderly relatives

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 19th November 2015

Categories:

The newspapers are full of horror stories about families, and particularly the elderly generation, getting caught out by making decisions with financial consequences that hadn’t been foreseen or understood. Hotly debated and potentially dramatic changes to pensions, new inheritance tax limits, dubious financial selling and an increasingly long-lived generation at greater risk of dementia, all means the challenge has just become all the more important.

We are putting on a series of talks to help arm you with the information needed to ensure that you not only avoid those shocks, but have the knowledge to do what’s best for your family. They are aimed at those of us who are increasingly getting involved with supporting our ageing parents and elderly relatives, whether that is under the powers of a Lasting Power of Attorney, assisting with Tax Returns or simply as a sounding board.

The first event will look at the changing pension rules, knowing the facts and understanding the impact of the options available. We will aim to help you answer the key questions:

Will my parents’ pension fund last as long as they need it to? (Current US figures indicate that 40% of pensioners are running out of funds in retirement).
What is pension freedom and what are the implications for Inheritance Tax?
What can I do? (There is an expectation that the UK pensions regulator will need to provide guidance regarding representation of the over 75s).

It will follow the Autumn Statement that is widely expected to include some significant new changes to the rules.

Anyone else in your family would be welcome to attend too, please just let us know. Space is limited so we will allocate places on a first come, first served basis. If there is demand we will re-run.

Date:     Thursday 3rd December 2015
Time:    12 – 2:30pm. (A light lunch will be included)
Venue: Goodman Jones, 29-30 Fitzroy Square, W1T 6LQ
RSVP:    Angela.Summerfield@goodmanjones.com

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Those who are responsible for managing professional practices should also be mindful of the implications. Intended or otherwise.

Unintended Consequences of Partnership Tax Legislation

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 21st October 2015

Categories:

One is never sure of the extent the changes in legislation are deliberately widely drawn or the consequential impact is wider than anticipated. Take professional practices as an example.

Traditionally professional practices were partnerships and the introduction of limited liability partnerships often resulted in a transfer from one partnership structure to another. HMRC’s legislation and practical applications made this a straightforward process.

In recent years professional practices have transferred activities into subsidiaries of the partnership e.g. as a staff employment company or to isolate high risk ventures or non-core service streams. Typically these are risk mitigation strategies or for employee incentivisation reasons. I have no doubt that some partnerships did this for tax planning as HMRC’s legislation could require the subsidiary to transact with the parent in ways which were tax efficient. HMRC prevented this tax planning for all relationships even those where there was no tax planning motive.

Some partnerships have partners who are corporates. This could be tax efficient and was acknowledged as such by HMRC for many, many, years. Often these corporate partners were introduced for commercial reasons. A typical example would be a partnership which found raising debt finance difficult and therefore used a corporate partner to accumulate profits which were then lent to the partnership as a cheaper form of finance than partners paying income tax on profits and lending the net sum back to the partnership. I have no doubt that some parties use this for tax planning purposes. HMRC closed this opportunity down for all partnerships even those which had corporate partners for reasons which did not involve tax planning.

The unintended consequences of both those structures are broad. What I do not understand is how those changes in tax law apply to the commercial world. For example, the ability for investors to invest in law firms is available and has been well publicised by the law society. Investors invariably want to invest in a company. This suggests that they would want to invest in a company in which the partnership has transferred its trade. However, the changes outlined above would have to be considered and treated with care. Alternatively, they could invest in a company which is a partner in the partnership. Again the changes above would need to be treated with care.

An alternative would be to ditch the partnership and incorporate it into a company which the partners and the investor both are shareholders. Until recently incorporation could be done tax efficiently. That has now been stopped, even if the incorporation is for commercial reasons.

I am the first to advocate legislation which prevents parties using tax ideas for non-commercial matters. However I would urge those who further consider tax legislation to understand the wider ramifications for genuine business structures.

Those who are responsible for managing professional practices should also be mindful of the implications. Intended or otherwise.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

What is certain is that the consultation has led to higher earners considering their pension position in more detail with a view to maximise contributions before 5 April 2016.

Tax Relief on Pension Contributions

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 24th September 2015

Categories:

I have noticed an increase in the numbers of clients who are seeking advice about pension contributions and the tax relief they provide. Of course, not being an IFA, I can’t advise on the pension planning side of their questions. I leave that to my appropriately qualified colleagues.

Being a tax advisor I can advise on the nuts and bolts of the tax relief. I can also make forecasts about how I believe that tax relief may change in the future.

In July the Chancellor issued a consultation document on revisions to the tax relief. The smart money is on change from April 2016 and some commentators are suggesting that the 25 November autumn statement may announce what the future holds.

I, like many of my colleagues in the profession, expect that the change will be no more than a £1 reduction in contribution limits for every £2 of income above £150,000 with everyone being able to make at least £10,000 of contributions. I suspect that the tax relief will remain at the individual’s marginal rate and therefore a 45% taxpayer will receive 45% tax relief on contributions above £150,000. When calculating the restriction the contribution made will be added to income and therefore, in reality, this will hit individuals with incomes of less than £150,000. Others believe that there will be a flat rate of tax relief on all contributions at 20% or 33%. A further suggestion has been the reversal of the tax profile so that contributions are made out of taxed income but extraction out of the pension pot is tax free, i.e. a sort of savings plan.

What is certain is that the consultation has led to higher earners considering their pension position in more detail with a view to maximise contributions before 5 April 2016.

There is the ability to carry forward unused pension relief capacity from the previous three years. 2015/16 has a further boost to the permitted pension contribution levels arising from the Pension Input Period (PIP) changes. In simple terms the PIP is the pension’s year end. Various pension schemes have different year ends. The impact of the year end was not well understood and, for those who understood it, led to both opportunities and difficulties. HMRC have, quite rightly, decided to do away with this complexity and are aligning the year end of all pensions with the tax year end. In order to ensure that no-one could be disadvantaged by this move there is the ability to claim up to two years pension tax relief in 2015/16. This is relevant for individuals who made contributions before 9 July 2015 and potentially adds an extra £40,000 of contribution capacity before 5 April 2016.

In theory, the interaction of carry forward rules and changes to PIPs mean that an individual could make contributions in excess of £200,000 in 2015/16 and get almost £100,000 of tax relief. If pension changes are to restrict the capacity for future contributions then it may not be such a bad thing to build up a pot whilst there is the possibility to do so.

Interest rates are low and some individuals are considering taking out loans to finance the enhanced contribution they will be making in 2015/16. Loans would be paid back by the surplus cash which the individual has in future years when they are restricted on their ability to finance future pension contributions.

There are a myriad of possibilities and each should be tailored for the individual, their risk profile and needs. Professional advice, both tax and financial, should be sought before binding commitments are made.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Capital allowances are permitted on solar installation to the extent that there is an installation cost to the business.

Tax Relief on Solar Installations

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 10th September 2015

Categories:

If you keep your eyes peeled you may notice more and more offices and farms are subtly adding solar electricity installations. If you look carefully at some carport roofs you may realise they are also solar installations. Possibly London’s most famous installation is the Blackfriars railway station roof which spans The Thames.

Often the electricity is used by the business operating out of the property with excess electricity bring sold to the National Grid. Any receipt from such a sale is taxable. Tax relief is available on the cost of production including the capital costs of installing solar systems.

The typical installation has a reasonable set up cost and then generates income which has low cost of production. Once set up, and other than routine maintenance, there is very little follow on cost associated with the generation of solar electricity. Income from excess electricity is therefore almost all pure profit.

The tax relief on installation of the equipment is broadly aligned to the installation costs. On modest installations this matches the costs. However. the larger the installation the less the matching correlates. The matching is through the capital allowance legislation.

Capital allowances are permitted on solar installation to the extent that there is an installation cost to the business. If a grant is received which contributes to that cost then the capital allowance is claimed on the net cost to the business.

Since 2012 solar photovoltaic systems have been classified as items which attract an 8% annual writing down allowance tax relief. Also since 2012 the rate on which allowances can be claimed for any asset generated income under the feed in tariff is 8%. This compares to rates of up to 18% for tax relief on assets in other industries.

The 8% restriction is not as damaging for smaller installations. The Annual Investment Allowance of (presently) £500,000 (and to reduce to £200,000 on 1 January 2016) can be used to offset against the costs of installation. This gives immediate tax relief for costs up to £500,000/£200,000. The logic being that the smaller sites are likely to be for the benefit of the operation of the business and not built solely to generate feed in tariffs. Once the installation is sufficiently large that feed in tariffs are earned then the annual investment allowance is no longer available. If the business foregoes the tariff payment then first year allowances can be claimed.

For the small scale business wishing to use its environment to reduce electricity costs and possibly generate extra revenue there is capital allowance planning to consider. Large dedicated installations have fewer options in their capital allowance planning. This landscape may change with the recently proposed reduction to feed in tariffs. From 1 January 2016 it may be beneficial to disclaim the tariff to access the immediate tax relief.

Given the reasonable costs of set up another factor is financing any debt used to set up the installation. The lender may wish to see evidence that electricity will be generated in sufficient quantities to realise revenue streams. Part of the revenue stream may be used to repay the lender. Capital allowance planning and the consequential tax relief will impact on cash flows and may help shape the overall viability of the installation for the owner and its stakeholders. The financier would be a key stakeholder and would be interested in forecast cash flow, including tax flows.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Assuming the corporation tax cut equals the dividend tax rise this leaves an increased wage bill as the cost for the entrepreneur.

The Summer Budget – The impact on entrepreneurial businesses

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 9th July 2015

Categories:

There has been a suggestion that the Tories won the recent election due to the numbers of votes cast by the country’s entrepreneurs, more specifically the estimated 5 million owner-manager businessmen and women of the country. If that is the case then they may have been disappointed by the “big and bold” announcements of yesterday. The announcements had the aim of making the UK a high wage, low tax, economy with little reliance on the welfare state. These were election manifesto promises delivered. Although there is to be a cut in the corporation tax rate and permanence to the tax relief on purchase of plant and machinery, the small business owner may feel that the welfare bill has been privatised. This is to the detriment of the entrepreneur.

The announcements about an increase in minimum wage should offset some of the cuts in welfare benefits offered to working families. As it is the employer and not the state who pays salary, the shift in burden moves to the entrepreneur. Although a £1,000 increase in employment allowance will help the employer mitigate the increased costs of employment, the costs of rising wages will fall on the shoulders of employers. This is in addition to any apprentice levy the employer may have to pay.

The government would point to the cut in corporation tax rate as also helping contribute to the costs of employment. What the entrepreneur would reply is the increased tax cost of paying company dividends negates any corporation tax reduction. Assuming the corporation tax cut equals the dividend tax rise this leaves an increased wage bill as the cost for the entrepreneur.

The extent that the government’s view or that of the entrepreneurs is correct will depend on the size of the workforce, the profit made by the business and the wages paid to employees. In simple terms it will depend on facts and circumstances.

Facts and circumstances are key in giving tax advice. For example, given the correct facts and circumstances it is suggested that there are at least seven different salary levels which lead to detailed tax considerations. This reinforces the statistic that the UK has the longest tax code in the world. A recent press article indicated that the UK’s code is about sixty two times longer than the most efficiently drafted tax code and has trebled in size since 1997. It seems perverse that the existence of an Office for Tax Simplification is being put on a statutory basis at the same time that the tax code is growing at an alarming rate.

An area in which the tax code is mercifully brief is the tax treatment of non-domiciles. With the announcement that longer term residents of foreign extraction will be taxed as if they are UK citizens together with changes to the tax structures they often use will, no doubt, expand Britain’s lengthy tax code. I recently had the opportunity to hear an MP describe the budget process and he described George Osborne as “a tinkerer” in the context of making subtle changes to tax breaks and charges. If the description is true then I can assume Britain will retain its gold medal position in the tax code size challenge.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Even while the matters were under discussion, HMRC’s computer automatically referred the disputed sum to external debt collectors.

Will automatic penalties be a thing of the past?

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 17th June 2015

Categories:

I understand that just under 900,000 people missed the most recent income tax filing deadline of 31 January 2015. HMRC have announced that it is too costly to investigate reasons for missing Self-Assessment deadlines and that the £100 fine should therefore be cancelled if a reasonable excuse is given for cases under appeal. HMRC have indicated that this move is to allow them to focus more of their resources on tax avoidance and evasion rather than penalising large numbers of “ordinary people who are trying to do the right thing”.

HMRC then go on to point out that this is “part of our planned, proportionate approach to penalty appeals, particularly for small businesses and individuals”. Going forward HMRC intend to amend their systems so that they will be able to track patterns of behaviour and focus on those who persistently fail to pay or send their tax returns on time.

According to The Daily Telegraph, those people who fail to file their tax returns on time will escape a fine providing they have a reasonable excuse for being late which shows mitigating circumstances. There is suggestion that a reasonable excuse is one which is outside the control of the taxpayer and which stops them meeting a tax obligation. It is reasonable to assume that these excuses would include death of a loved one, an unexpected medical condition or a fire.

This announcement is welcome. A recent article in the tax professional press re-enforces the frustrations that tax practitioners face when dealing with the Revenue administrative machinery. In the case the article covered HMRC were seeking to penalise a community amateur sports club with a penalty of £1,278 and were not willing to back down. At the last minute they finally acknowledged that the club’s advice had been correct and the penalty was invalid. This was 3 days before a case management hearing.

I have also had the experience of HMRC’s bureaucracy machine being unwilling to back down. My client’s affairs were always up-to-date and he did not owe any tax. Due to a computer failing HMRC’s computer repaid almost £4k to my client which was not due to him. He immediately, and voluntarily, repaid it. This led to the Revenue issuing penalties and interest on the taxpayer. Initially HMRC would not back down about those charges. After many months and different individuals at HMRC being involved, they accepted their error and revoked all but a small part of the penalty. Even while the matters were under discussion, HMRC’s computer automatically referred the disputed sum to external debt collectors. HMRC informed us that this was standard practice and also informed us that they could not dis-instruct the debt collectors until such time as the Revenue’s computer showed the amounts being paid or waived. We finally got the agreement of all amounts to be waived with the exception of a very small sum which would have to be argued with a different team. That small sum was paid. This was not because it was necessarily due but rather to close the case. You can imagine that it was stressful for the client and a waste of both mine and HMRC’s time.

One would like to think that HMRC’s review of the automatic penalty regime would be expanded into other penalty provisions to help prevent the repeat of cases like those above. However given the importance of patterns of behaviour I shall still be encouraging my clients to meet all their deadlines.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

The Finance Act 2015 has made the use of a feeder company more difficult and has restricted the ability to extract profits out of development vehicles at a 10% rate of tax.

The Finance Act 2015 – the impact on property developers

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 7th May 2015

Categories:

A round up of current tax issues for property developers.

london property The Finance Act 2015 may hold the record for the shortest period taken to debate a Finance Bill. Depending who you ask the general consensus is that the debate lasted somewhere between one and three days. This was to ensure that Parliament could be dissolved in advance of the election. Despite the brevity of the debate there were significant changes which have an impact on the property development sector.

New 20% flat rate

Although not strictly part of the Finance Bill the new flat rate of 20% for company’s profits took effect from 1 April 2015. This may lead to property development within a corporate vehicle more often. The thinking being that lower tax rates lead to greater sums to reinvest or to be subject to extraction techniques.

Late Interest Rules

Property development groups of companies which receive finance from shareholders often use the late interest rules to plan for the timing of tax deductions on interest payments. This is to match the tax deduction with a period of taxable profits. It also allows companies to manage their cashflow with withholding taxes being payable in a period in which sales income can finance the withholding tax. It had been announced that these rules were to change. Finance Bill 2015 confirmed this. The impact being that the tax deductions are now more aligned to accounting accruals. For pre-existing loans there is a grandfathering period allowing a limited scope for existing planning to continue. If it is appropriate it is possible to prevent the impact of the grandfathering rules and structure affairs so that the new regime is immediately relevant to existing loans. Either way developers should revisit their connected party structuring arrangements.

Feeder Companies

Property development SPVs are almost invariably trading entities for direct tax purposes. This means that shareholders who are individuals can extract development profits out of the SPV tax efficiently by liquidating the SPV and applying Entrepreneurs’ Relief to the liquidation proceeds. The extraction costs could therefore be at a tax rate of 10%. Entrepreneurs’ Relief only applies to individuals who own at least 5% of the share capital of the SPV. In larger developments this may preclude certain individuals, often management, from benefitting from the opportunity. In order to overcome this, the individual would typically incorporate a feeder company in which they owned 100% of the shares. The feeder company could own less than 5% of the shares of the SPV. Based on the joint venture rules, as applied to Entrepreneurs’ Relief, the feeder company was deemed to be a trading company in its own right and SPV development profits could be transferred to the feeder company (free of tax) with the feeder company then being liquidated. Entrepreneurs’ Relief would be available to the individual.

The same basics applied if the development was within a partnership with a corporate partner as a feeder company. Development partnerships were common due to SDLT advantages which were closed in past Finance Acts.

The Finance Act 2015 has made the use of a feeder company more difficult and has restricted the ability to extract profits out of development vehicles at a 10% rate of tax. Although the changes have not closed this opportunity in its entirety the instances where Entrepreneurs’ Relief will be available has been severely reduced. Developers should therefore be revisiting the entities they use for their trades and the investor/shareholders should revisit the entities which hold their interests in the venture.

The Terrace Hill case

Matters such as Entrepreneurs’ Relief rely on the development SPV’s being trading companies. Sometimes it is not clear if a transaction is property trading or sale of an investment. The Terrace Hill (Berkeley) Ltd case demonstrates this.

Terrace Hill, the development group, bought a site in Mayfair and demolished it. An office building was build and by May 2015 fully let. Two months later the site was sold. Was this an investment which was sold in a short timeframe or a property development typical of the general group strategy?

It mattered to Terrace Hill as they had capital losses and the risk of a considerably penalty if they had submitted a tax return on an incorrect basis.

The tax appeal process confirmed Terrace Hills’ understanding that it was the sale of an investment. Contemporaneous notes demonstrated this and the persons put in the witness box were felt to be credible. The sale was not foreseen, being an unsolicited approach, which was accepted as rental income was lower than originally forecast.

The above is relevant for developers as it demonstrates the importance of contemporaneous notes, profit and cashflow forecasts, and the availability of senior staff for Revenue enquiry and meetings.

Be Wary

Bear traps which developers face include:

bear trap istock

Ensuring that financing structures or unconnected shareholder groupings with different profit shares may represent a collective investment scheme for financial services purposes. Specialist advice should be taken.
The passport treaty scheme makes negotiating the terms of debt finance from overseas parties easier. Theoretically it should also reduce the need for debate about the appropriateness of gross-up clauses within a loan document. However developers should be aware that syndicated loans can cause difficulties in obtaining a passport treaty reference number.
Recent case law and The Pension Regulators response has led to uncertainty about the treatment of partners in partnerships for auto-enrolment purposes. This leads to the risk that partners may be subject to mandatory pension contributions on their profit share. Care should be taken when negotiating profit shares attributable to individuals.
The Annual Tax on Enveloped Dwellings (ATED) is the annual tax on holding residential property within structures. The value of properties subject to this tax has fallen to those whose value is at least £1m. It will fall further to those of £500k from April 2016. There is an election out of the regime for developers with the normal deadline for election being 30 April annually. However, HMRC have recently acknowledged that the form to elect out is not available and therefore there is an extension for developers. Although this may seem a trivial matter the issue for developers is the extent that missing a deadline and therefore being charged a penalty could affect their gross status (or the status of group companies) for Construction Industry Scheme purposes.

Property developers should review their set up against these new changes and the sometimes unseen impact they may have.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

Who we help

Our services

About us

Our Insights

Author Archives: Graeme Blair - Partner

About Graeme Blair - Partner

the differential of rates between trading business and non-trading businesses has led to an increase in demerger activity.

Tax Efficient Separation – When is a Demerger the best solution?

Structuring your business to make the most of the tax reliefs available

Hotly debated and potentially dramatic changes to pensions, new inheritance tax limits, dubious financial selling and an increasingly long-lived generation at greater risk of dementia, all means the challenge has just become all the more important.

Family Matters Event: Snakes & ladders of the new pensions landscape – the impact for elderly relatives

Those who are responsible for managing professional practices should also be mindful of the implications. Intended or otherwise.

Unintended Consequences of Partnership Tax Legislation

What is certain is that the consultation has led to higher earners considering their pension position in more detail with a view to maximise contributions before 5 April 2016.

Tax Relief on Pension Contributions

Capital allowances are permitted on solar installation to the extent that there is an installation cost to the business.

Tax Relief on Solar Installations

Assuming the corporation tax cut equals the dividend tax rise this leaves an increased wage bill as the cost for the entrepreneur.

The Summer Budget – The impact on entrepreneurial businesses

Even while the matters were under discussion, HMRC’s computer automatically referred the disputed sum to external debt collectors.

Will automatic penalties be a thing of the past?

The Finance Act 2015 has made the use of a feeder company more difficult and has restricted the ability to extract profits out of development vehicles at a 10% rate of tax.

The Finance Act 2015 – the impact on property developers