Author Archives: Graeme Blair - Partner

About Graeme Blair - Partner

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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."

Although this is a worthwhile project, it had the knock on effect that the UK had to consider its own patent box regulations.

Be Careful of What You Wish For

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 2nd March 2015

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I recently overheard someone use the expression “be careful of what you wish for”.

From a tax practitioner’s perspective it reminded me of the recent kafuffle about the extent that the public should keep receipts for all cash payments. We had the Labour Shadow Business Secretary, David Gauke, Ed Balls, David Cameron and a host of others wading in with their views. It all died a death as quickly as it arose. The sting in the tail was that of course certain MPs have claimed reimbursement of expenses without receipts.

The above isn’t the only recent situation where the powers that be could have been careful of what they wished for.

In the international tax arena the UK Government has been championing the Base Erosion and Profit Shifting project (BEPS). This seeks to provide consistency amongst countries as to the tax treatment of international profits and costs. Its aim is to prevent artificial diversion of profit into, typically, low tax jurisdictions. Broadly it does so by seeking to correlate the profits received by a country with the commercial effort that country puts towards generating them. Although this is a worthwhile project, it had the knock on effect that the UK had to consider its own patent box regulations. Patent box is the legislation which provides a lower rate of corporation tax on certain profits. It is created in a way that acts as an incentive for research and development to be undertaken. It targets highly mobile capital and provides an incentive for that capital to be attracted to the UK. The logic being that the capital results in highly skilled employment in the UK and therefore creates jobs here. Patent box is not a concept unique to the UK as many of our European neighbours have similar legislation. Each countries’ implementation differs.

In the eyes of some of our competitors the difficulty that they had with the UK patent box was the relatively loose correlation between the tax breaks and work being done in the UK. Reverting back to BEPS it could be argued that the correlation was not sufficiently strong to meet the basis on which BEPS is based.

After discussions with other jurisdictions, notably Germany, the UK Government have confirmed that the existing regime will continue in its current form until 2016 and be abolished by 2021. Depending on the view you take this is either a U-turn or the normal life cycle of a tax incentive. The cynic would suggest the former.

For those undertaking R&D in the UK, the proposals are unlikely to change their ability to claim the patent box incentives. For those who undertake their research outside the UK, either under UK management or sub-contracting all work to third parties, they may find themselves at a disadvantage after 2016. The conclusion is therefore one needs to maximise claims under the current regime and consider the future structure of their research function once details of the changes are announced. Even though we have a Budget in the next few weeks we must be cognitive that an election is coming up and therefore it may well be that announcements of any variations do not occur until we have certainty of the composition of a future Government.

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.

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I have come across cases of clients accepting that they are undertaking R&D, but not appreciating that the tax relief extends outside the traditional pharma industries

Consultation on R&D Tax Credits

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 11th February 2015

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HMRC are presently consulting on improving access to R&D tax credits for the SME Sector.

Although over 80% of all R&D claims made in 2012/13 were made by SMEs, that statistic arose because there are considerably more SME businesses than large businesses. The vast majority of the benefit of R&D credits accrued to larger companies.

HMRC’s consultation concentrates on the process by which claims are made rather than the definition of R&D for the purposes of the credits. HMRC’s consultation therefore covers the following aspects of the claim.

Mechanisms to increase awareness of the credit and therefore better engage businesses in order to increase take up of it.
The key features of the credit and the extent which they could be simplified to help smaller businesses.
HMRC’s guidance as to qualification requirements.
The administration process to make a claim.

The consultation is welcome. I have come across cases of clients accepting that they are undertaking R&D, but not appreciating that the tax relief extends outside the traditional pharma industries. This has resulted in a number of clients, in a broad range of sectors, claiming credits in situations that may not be immediately obvious as falling within the tax definition of R&D.

One of the proposals which HMRC announced in the most recent Autumn Statement is a formal process whereby advance assurance is available to small companies claiming R&D relief for the first time. The aim is to provide certainty as to the availability of the claim and therefore enable businesses to plan their finances more effectively. This takes away the uncertainty experienced by the smaller business about their eligibility for the credits and should allow the business to manage its cash flows more effectively and, hopefully, provide an incentive to undertake even greater levels of R&D.

Advance clearances in the SME sector are not unusual. For example the Enterprise Investment Scheme manages an excellent advance clearance service which is felt to generate greater levels of third party investment in smaller businesses. I hope that the outcome of the consultation is an advance assurance run along the same lines as that of EIS.

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.

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The OECD put it quite succinctly when they stated that “in an increasingly inter-connected world, national tax laws have not kept pace with global corporations, fluid capital and the digital economy, leaving gaps that could be exploited by companies to avoid tax in their home countries by pushing activities abroad to low or no tax jurisdictions.”

Transfer Pricing – Coming out of the OECD

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 20th October 2014

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The OECD put it quite succinctly when they stated that “in an increasingly inter-connected world, national tax laws have not kept pace with global corporations, fluid capital and the digital economy, leaving gaps that could be exploited by companies to avoid tax in their home countries by pushing activities abroad to low or no tax jurisdictions.” This undermines the fairness and integrity of tax systems. The project, which quickly became known as BEPS (Base Erosion and Profit Shifting), looks at whether or not the current rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place, and what can be done to change this, if they do.

The project, driven by the G20 nations, commenced in July 2013 with an Action Plan identifying 15 Actions which would help governments address this challenge. The Action Plan is provided for implementation in three phases between September 2014 and December 2015.

In respect of the SME market, whether an inbound investor into the UK or a UK headed outbound group, Action 8 (changes to transfer pricing rules in respect of intangibles) and Action 13 (changes to the transfer pricing rules in relation to documentation requirements) are the most relevant. The intangibles Action will be re-enforced by further detail to be released in the next 15 months. As such there is uncertainty about parts of the intangibles report which may be clarified in due course. This Action acknowledges that intangibles can be hard to value and there is emphasis on detailed function analysis, application of databases and the assumptions around risk profiles.

Action 8 suggests that the arms-length principles may not be relevant for intangibles. There may be measures to eliminate cash box entities which often transact at arms-length rates. The OECD is considering treating these as lenders in a group structure.

Action 13 covers transfer pricing documentation and country by country reporting.

The OECD accept that transfer pricing requirements can differ between jurisdictions. Standardisation of approaches and documentation is therefore beneficial to both tax authorities and international business

The three objectives of this Action are to ensure that taxpayers consider appropriate costs, provide tax administrations with sufficient information to perform risk assessments and provide tax administrations with sufficient information to conduct initial enquiries. This tries to balance the tax authorities’ needs for relevant, reliable, data whilst managing compliance costs for the MNE.

The conclusion is a single master file and a number of local files. The master file will provide a summary of the entirety of the organisation; from organisational structure to intra-group activities and international tax profiles.

This will be supplemented by a local file which meets local tax jurisdictions requirements and provides local tax authorities with evidence to substantiate charges affecting the local country. A country by country report then allows local jurisdictions to understand the impact of transfer pricing within the cumulative results of the group.

Although these proposals may not change the transfer price adopted by a country it may require greater background evidence to be retained by local jurisdictions. The OECD have not given a feel for the process to phase in Action 13.

In conclusion; intangibles have always been a difficult area and it is not surprising that the OECD’s response still requires clarification. The use of a master file, with local variations, is welcome as a start to international harmonisation of compliance requirements.

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.

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The Sale Season

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 2nd October 2014

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There are a couple of certainties in British life. These include night following day, sales in July and January and tax being prominent in the party conferences preceding a general election. True to historic form, the Labour party announced proposals which will increase taxes on the perceived wealthy and those who are felt to be able to pay to avoid it. These promises were most relevant for the Mansion Tax and the Umbrella Company Regulations. The Conservatives hit the headlines with ideas about reducing income tax for all. This would be effected by increasing the tax free sums which can be earned and extending the 40p tax threshold. They estimate these at a cost to the Exchequer of £7.2bn by 2020. Even UKIP, not a party traditionally associated with conference headlines, managed to make suggestions about higher rates of VAT for certain goods. In the tradition of politics they then managed to perform a partial U-turn on this idea.

Assuming the election is a straight fight between Labour and the Conservatives then Labour will be elected with a manifesto of tax increases. They won’t have any reason to delay their implementation. The Conservatives, however, have not been specific about the date for implementation of their proposals. I can’t help noticing that their forecasting is to 2020 which, as luck would have it, is likely to be the following election. The cynics are already suggesting that tax cuts will be stalled until immediately prior to a 2020 election and therefore, returning to the sales analogy, there is a buy one, get one free, election promise. One announces a proposal prior to the 2015 election and then implements it prior to the 2020 election. This generates votes in 2015 on anticipation of a change and votes in 2020 as the feel good factor of the implementation change is felt. To prevent the Conservatives being subject to the cynics challenges they should announce the timing of their policy decisions.

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.

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A Possible HMRC Attack on Misstated Profits

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 26th September 2014

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The revelation that Tesco had overstated profits by £250m will, no doubt, have consequences for the group’s share price and for some of its senior staff.

The general consensus is that the issue was recognition and interpretation of accounting rules regarding discounts and incentives from suppliers. I can’t help but notice that quoted plc’s appear to have accounting issues which lead to overstated profits whilst private companies appear to be subject to HMRC enquiries into the extent that accounting interpretations could understate profits. Usually this would be most relevant to aspects of judgement in accounts; for example provisions.

Let us say that a company acknowledges that an accounting interpretation has understated past profits. You would expect the next accounts to correct the matter, perhaps by prior year adjustment if the extent of the error is fundamental. This would lead to the correct tax being paid.

UK corporation tax is paid on accounts which comply with UK GAAP or, if accounts don’t comply with UK GAAP, the numbers which should have been reported had they agreed with UK GAAP. I can’t help but feel that HMRC could run an argument that materially understated profits represent previously reported profits which don’t comply with UK GAAP. The tax computation of the errant period (and not the correcting period) should therefore be revised. This may lead to interest on late payment of tax, companies falling into quarterly instalments who would otherwise not do so and penalties. It is not an argument that I have seen HMRC actively run. With tax deficits to recover and government debt to repay it may be an agreement that HMRC may closely pursue more frequently.

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.

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Service Company Subsidiaries, A Sting in the Tail?

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 17th September 2014

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The vast majority of professional practices that operate through the medium of a partnership have at least one service company subsidiary. This might be a legacy from the days of profit related pay or more recent structuring, perhaps coming out of the transfer pricing compensation adjustments legislation. Whatever the reason many professional practices have their staff employed by a legal entity other than the main partnership. Although tax efficiency could accrue (that is until Finance Act 2014!) the structuring came at a compliance cost. Most firms found the compliance cost was a trifle compared to the benefits received. The VAT side of HMRC may be found to be a further cost, for both the present and the past.

Presently Customs are routinely reviewing cases where the input VAT on staff entertaining has been recovered by the main partnership. The logic being that staff entertaining is recoverable. HMRC are countering this by considering the legal form and highlighting where the main partnership doesn’t have any staff and therefore can’t recover staff entertaining. For the present this is a simple matter to correct. Either the supplier can invoice the service company or the main partnership recharge down to the service company. However it is not so easy to get these things done retrospectively. With HMRC able to review back a number a years therein lies the possible additional compliance cost.

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.

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The Demise of the LLP?

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 14th November 2013

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Over recent weeks I have heard increasing noises about the death of the Limited Liability Partnership (LLP). The commentators highlight factors such as the higher rates of income tax and the frequency by which partnerships have converted to companies. The legal profession is often cited as a further reason for the demise of LLPs. The alternative business structures (ABS) in which lawyers can now operate, permit legal firms to transact through the medium of a company. This has aided the expansion of quoted law firms and has facilitated incorporation of law firms which previously were partnerships.

Even as recently as 25 October 2013, HMRC issued tax legislation that detracts from professional practices operating as partnerships. Prior to that there has been discussion about HMRC taxing partners in partnerships as if they are employees. All of this suggests that the direction of travel is away from LLPs and into companies. Incorporation of partnerships can lead to tax planning where the partners extract value out of the partnership at a rate of 10%. There have been many tax-driven incorporations which use this technology.

Despite this I am not so pessimistic about the demise of LLPs. They are well understood and commonly used vehicles in areas other than professional practices. Even in professional practices they have one very substantial tax advantage over private companies. When it comes to succession, partners can be brought through the ranks without a tax cost. Bringing in the next generation of shareholder in a company can be very difficult to implement unless the individual included is willing to suffer a tax cost. Another benefit of partnerships is that Partnership Agreements can allocate partners rights to income and rights to asset ownership in different proportions. This flexibility is difficult to match in a company.

Finally, a non-tax reason which suggests the continued existence of an LLP is the partnership ethos. The thought that “we are all in it together” helps prevent dysfunctional behaviour that can be found in more structured, corporate, environments.

As a tax practitioner with a client base including many partnerships I do not see the demise of the LLP and am looking forward to a long and fruitful career advising them.

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.

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Seed EIS extension

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 26th April 2013

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The 2013 Budget included an extension of the tax breaks for investment in start-up companies. This announcement has made the Seed Enterprise Investment Scheme (SEIS) even more accessible and attractive to both entrepreneurs and investors.

SEIS is the higher risk alternative to the Enterprise Investment Scheme. The objective is to help the development of smaller, riskier, early stage UK companies, which may face barriers in raising external finance. As a result of the risks in investing in these companies, the tax breaks are more generous, with income tax relief given at 50% of the cost of the investment, up to a maximum annual investment of £100k. The relief is given by way of a reduction to the tax liability, providing there is sufficient tax against which to set it. The requirement for a sufficient tax liability to absorb the SEIS benefit is important given that the highest rate of income tax is now 45% and yet the income tax relief is at 50%.

There was also a capital gains tax relief, which applied to capital gains made before 5 April 2013. The relief meant that capital gains on assets sold before 5 April 2013 would be free of tax if the sales proceeds were invested in a SEIS qualifying company before 5 April 2013. There has been a less generous extension to this relief for capital gains generated in the year ended 5 April 2014 where there is an investment in a SEIS company before 5 April 2014. This extends the total tax relief on SEIS investments to more than half of the cost of the investment.

The tax breaks do not stop at the time of the investment. If the SEIS company is successful and the shares are eventually sold at a profit, any gain will be free from capital gains tax provided the shares have been held for three years. If the company is not successful, further tax relief is available.

The SEIS reliefs are generous due to the high risk nature of the investments. Qualifying investments are shares in unquoted companies with fewer than 25 employees and less than £200k in gross assets. The test of the value of the company’s assets and staff numbers is at a time the qualifying shares are issued. The maximum that the company can raise under the scheme is £150k and the company’s trade, to the extent that the company has started trading, must be less than two years old at the date of issue of the shares. The company must not have carried on any other trade before the present trade. As the relief is for high risk ventures some trades are excluded from qualifying for SEIS status.

The twin benefits of immediate income tax relief and elimination of other gains make SEIS an attractive proposition. However, as the investments are high risk it has to be assumed that there is a strong likelihood that they will fail. They should always be appraised on their investment opportunity rather than as a mechanism to access tax breaks.

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.

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Tax on high value residential property

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 8th February 2013

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On 31 January 2013 the long expected draft legislation on the taxation of high value residential property was released. Properties are high value if they are worth more than £2 million.

The draft legislation covers the 15% stamp duty land tax charge that has applied to the acquisition of high value residential property since Spring 2012 and it confirms proposals for the Annual Residential Property Tax (ARPT) that will apply from 6 April 2013. In addition there are changes to the capital gains tax regime from 6 April 2013.

The legislation applies to “non-natural persons” which includes companies and partnerships (if one or more of the partners is a company). Trusts are excluded from this legislation. Also excluded are genuine businesses carrying on a genuine commercial activity such as property rental or development and properties owned by charities for charitable purposes.
Stamp Duty Land Tax

Non-natural persons who purchase high value residential property have been subject to a 15% SDLT rate since March 2012. Although the draft legislation confirms this proposal it also provides relief against the charge for genuine businesses carrying on a genuine commercial activity. Those entities would be subject to a 7% rate of SDLT.
Annual Residential Property Tax (ARPT)

Non-natural persons who hold UK residential property valued at more than £2m on certain specified dates will pay ARPT of between £15,000 and £140,000, depending on the value of the property. The £15,000 charge applies to properties whose value is between £2m and £5m. The measure takes effect from 1 April 2013 and the annual tax is payable on 31 October 2013 for 2013/14 and on 30 April for each subsequent year.

The amount of the ARPT will increase every year on an index-linked basis. The value bands will not be adjusted for inflation. Residential properties within the charge will need to be revalued every five years.
Capital Gains Tax

Capital Gains Tax will be chargeable on both UK and non-UK non-natural persons when they dispose of interest in high value residential property that is subject to ARPT. Capital Gains Tax will apply to disposals on or after 6 April 2013 at a rate of 28%. The tax will only apply to increases in value of the property from 6 April 2013. This therefore rebases the property values to that date. Current indications are that the 28% will be subject to a form of taper relief where the property is just over the £2m mark. This is to prevent distortion in the property market for properties worth marginally more than £2m.

Taxation at a 28% rate is higher than the standard corporation tax rate for UK companies. It is felt that very few UK companies will fall into the ARPT charge and therefore the impact of this tax anomaly is believed to be minimal.

The draft proposals permit the sale of offshore companies which hold high value residential property to remain free of UK Capital Gains Tax. However the purchaser of the company shares will inherit the Capital Gains Tax base cost of the property which is owned by the company. This may lead to considerable Capital Gains Tax at a future time if the property was sold by the company.

Conclusion

The impact of the proposals is to provide a disincentive for future purchases of high value residential property to be made using a wrapper such as an offshore company. The disincentive is the 15% rate of stamp duty land tax and the ARPT, whose minimum annual charge is £15,000.

Non UK owners of existing structures will need to weigh up the cost of the ARPT compared to the possible saving of capital gains tax by sale of the wrapper free of CGT. There is also protection against UK Inheritance (Death) Tax by holding high value property in offshore structures. Owning properties in these wrappers is not just for tax reasons. For example, some individuals hold them in offshore companies for privacy reasons.

If an existing structure is going to be caught be the new provisions then consideration should be given to restructuring the way property is owned before 1 April 2013.

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.

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Mileage Allowances – Total People Tax Case

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 10th December 2012

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The Court of Appeal judgement of 6 November is the latest in this long running tax case. The case is strictly known as Cheshire Employer and Skills Development Limited, but commonly known as Total People as that is a previous name of the business. The Court of Appeal has found in favour of the taxpayer. Whether HMRC will appeal this most recent decision is not known at this time.

Total People employed approximately 150 training advisors whose role was to visit business premises of certain employers. They therefore spent most of their time away from Total People’s offices and were required to undertake a significant amount of travel which was only practical if undertaken by car. The advisors were expected to use their own cars and were given an allowance for doing so. The allowance was to cover the wear and tear and depreciation as a result of using a car for business purposes.

For administrative convenience, and to approximately equate with anticipated mileage, some advisors were provided with a monthly car allowance and a modest mileage allowance. As well as administrative convenience this also had the benefit that it was a disincentive for staff to potentially maximise their business travel and therefore their mileage claims.

Total People argued that the car allowance was therefore no different from a tax free mileage allowance. The Court of Appeal accepted the Total People’s position and therefore, to the limit of the recognised mileage rates, the car allowance can be received free of income tax and national insurance.

Total People’s approach to mileage claims is not unique. There are many businesses that have the same, or similar, policies. Based on the recent judgement it should be possible for those businesses to make a claim to recover national insurance overpayments and for individuals to submit tax returns to recover income tax previously paid. These claims will be under the error or mistake provisions of the tax administration legislation.

National insurance claims should be made by the end of the tax year. Due to the administrative process accompanying income tax claims it may be necessary for the employees to resubmit income tax returns before 31 January 2013.

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.

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