Author Archives: Richard Verge - Tax Director

About Richard Verge - Tax Director

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Richard is a personal tax expert and is able to advise high net worth individuals on either immediate tax concerns or a long term plan to ensure that their affairs are structured to take advantage of the tax reliefs available.

His experience from working with HMRC ensures that he is more than adept at understanding the view from the other side, to the benefit of his clients. Richard advises entrepreneurs, owners of family businesses and partners in professional practices and provides advice on planning from both a personal and worklife perspective.

Make sure you correctly determine the employment status of your contractors and consultants. New OTS report on employment status suggests possible substantial tax risks.

Are you employed or self-employed? Construction sector, contractors and consultants – Take Care

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Amongst the hubbub of election promises, the Office of Tax Simplification (OTS) has issued its report on employment status. This quietly announced document may in the long term have a far wider impact on the work force than anything that is currently being proposed in any of the major parties election manifestoes, but has had little if any coverage outside of the technical journals of the accounting profession.

Who will be affected?

We generally consider these issues to be most pertinent to the construction industry and IT, but anyone working as or seeking to hire a self-employed consultant has to consider the substantial tax risks of incorrectly determining the employment status of their workers and will potentially be affected by the OTS proposals.

New view

The OTS point out that the old fashioned view of people being either employed “firmly on the payroll” or self-employed “with the traditional jobbing plumber in mind” is no longer sufficient for the modern world with the huge growth in freelancing work. Up to now HMRC’s approach has been to weigh up all of the facts in order to determine status in any case of doubt, but this is very time consuming and needs to be considered on a contract by contract basis. In my experience this has led to inconsistent results for apparently similar situations.

HMRC have a barely disguised bias towards treating as many people as possible as employed. This is perhaps understandable as the tax yield from employment is significantly greater than from self-employment (approximately 25% more National Insurance an addition £1,200 for someone earning £35,000 per year). However, the higher National Insurance costs are not the only problem employers have with establishing employment status. Many businesses reported concerns over uncertainty in connection with employment rights as their main problem area rather than tax issues.

Possible solutions

It is uncertain what action will be taken following this report and over what time frame, but possible solutions offered by the OTS include:

  1. Setting a de minimis limit, based on amount paid or time spent, for someone carrying out activities for a business which will be treated as not employment income
  2. A statutory employments test. (HMRC are quite pleased with the introduction of the statutory residence test and may see this as a blue print for a statutory employment status test)
  3. A withholding tax similar to the current construction industry scheme extended to cover instances where employment status may be in doubt
  4. A third employment status (something between employment and self- employment) to cover the middle ground
  5. Levelling the playing field by taking steps to reduce the difference in NIC for the employed and self-employed (which will almost certainly lead to higher self-employed contributions rather than reduced employer contributions)

A further recommendation from the OTS report was for greater transparency in connection with the difference in the cost of national insurance for the self-employed and employed taking into account employers contributions. It will however be politically very difficult for any government to admit that the true basic tax rate for employees is actually 40.2% and 29% for the self-employed once the full cost of national insurance is factored in, but this would at least be a starting point for a more balanced conversation.

Whatever happens as a consequence of this report, my hope is that we will see of move towards a future of greater certainty over employment status and a reducing of the gap between the tax cost of employment and self-employment.

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It came as no surprise that George Osborne’s final budget of this Parliament before the May general election included a number of voter pleasing messages.  Many of the proposals will not take effect until later in 2015/16 or the following tax years and if there is a change of government, some of them won’t survive.

As is usually the case, it is necessary to look to the detail of the announcements to uncover their real impact. Read our 2015 Budget Guide for more information or use our digital tax card for reference.

If you have any queries regarding any matters raised in the Budget Statement then please don’t hesitate to speak to your usual contact or email us.

For regular commentary on tax and other issues follow us on Twitter and LinkedIn.

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Download the Goodman Jones 2014 Autumn Statement Review

George Osborne’s Autumn Statement, the last before next year’s general election, included a number of important changes. Our report on the key elements gives further details, but particular items which caught our attention include:

  • Stamp Duty Land Tax – will now be payable in graduated bands rather than at a single rate, dependent on the value of the property
  • Entrepreneurs’ Relief – will no longer be available to individuals on incorporation of a business
  • The remittance basis – UK resident but non-domiciled individuals who have been in the UK for 17 or more of the last 20 years will now have to pay £90,000 per year (up from £50,000) if they wish to continue sheltering non-UK income and gains from UK tax under the remittance basis.
  • Multinationals diverting profits out of the UK – will have to pay a 25% tax charge on any such profits
  • Research and Development – Research and development tax credits have been further enhanced to help small and medium sized businesses

If you have any queries regarding any matters raised in the Autumn Statement then please don’t hesitate to speak to your usual contact or email us.

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HM Revenue & Customs have issued their revised proposals following responses to the consultation on implementing a Capital Gains Tax charge on non-residents owning residential property in the UK.  The key points arising are as follows:-

The new charge

  1. The government has confirmed that a Capital Gains Tax charge on non-residents owning UK residential property will be introduced with effect from April 2015. It will however be restricted to gains arising from April 2015 only.
  2. Two methods will be allowed for calculating the proportion of gain arising from April 2015 for properties already owned prior to that date. The methods are:
    1. rebasing to market value April 2015 or
    2. time apportionment over the whole period of ownership.

Principal Private Residence (PPR) election

  1. One area of the original consultation which was seen to be controversial was the proposal to remove the option to elect for which of more than one property was the individuals PPR. This was seen as controversial partly because the proposal was to remove the right to elect from everyone and not just non-residents. The new proposals retain the election in place but introduce a new restriction. It will no longer be possible for an individual to elect for a property to be their main residence unless
    1. Either the person making the disposal was resident in the same country as the property for that tax year, or
    2. The person spent at least 90 nights in that property (or across all the persons properties where they have multiple properties in a country in which they are not tax resident) in that year – this is referred to as “the 90 day rule”.

The 90 day rule will apply to existing PPR elections as well as new ones. A property where the election has been made but which doesn’t meet the 90day rule in any year will not qualify as the PPR for that tax year.

Companies

  1. The government has confirmed that non-resident companies will be brought within the scope of this charge. The rate of tax applying will be the standard Corporation Tax rate of 20%. There is an exclusion for widely controlled companies and the introduction of a new narrowly controlled company test.
  2. The existing Capital Gains Tax (CGT) charge related to the annual tax on enveloped dwellings (ATED) will remain in place and will take precedence over the new charge. To the extent that properties fall within the ATED related CGT charge regime, tax will be charged at 28%. Properties not falling within that regime will instead be taxed at the Corporation Tax rate of 20%.

Reporting and paying

  1. Reporting and Paying – any person currently within the self-assessment regime will be able to report any such disposal through their existing self-assessment returns. Anyone else outside of the self-assessment regime will need to report separately within 30 days of the property being conveyed.

For full details please see HMRC website.

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A recently reported court case (Loring & Others v The Woodland Trust) has highlighted the fact that overly aggressive behaviour by some charities in pursuit of monies left to them in wills is putting people off leaving legacies to charities.

Having assisted many executors in settling estates I have found that charities representatives can be difficult to deal with and can cause problems for the executors. The larger charities have departments set up to deal with legacies and perhaps understandably try to maximise their share of any monies left to them in people’s estates, but rather than being grateful, as most people expect them to be, for whatever they receive from an estate, charities can often be aggressive in pursuing what they think they are entitled to.

The above case is a good example of this. The individual left an amount to their family which was stated in their Will to be a sum equivalent to the nil inheritance tax (IHT) band, with the balance of the estate to be left The Woodland Trust. In this case the nil IHT band available to the estate was calculated to be £650,000 but The Woodland Trust thought that it should only be £325,000. They took the case to the High Court in pursuit of the additional £325,000 and lost. Rather than accepting defeat gracefully, they appealed to the Court of Appeal and lost again.

No doubt The Woodland Trust thought it had good justification for this course of action, but it must have caused significant anxiety to the family of the deceased and significant extra cost and inconvenience for the both the executors and the charity. Had the deceased realised what would happen they would surely have thought twice before leaving any of their money to charity at all.

My own experience has led me to the point where I will actively discourage clients form leaving money to charities in their Wills unless they specify precisely the sums that they are leaving. Given that charities receive a significant amount of their income from legacies I think they could do more to reassure potential donors that they will behave fairly (and nicely) when dealing with their estates.

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Are the latest changes to  pensions announced last week the first step towards the widely anticipated abolition of the 25% tax-free lump sum. The “opportunity” to take each draw down with 25% tax free instead of a one off lump sum has been introduced as an additional flexibility, but is also a further incentive for those who can afford to do so to leave funds invested rather than taking a pension.

These new rules added to the recently announced option to gift away pension funds on death tax free to the next generation make the of the one-off tax free lump sum appear increasingly over generous and potentially more vulnerable to abolition.

The new rules are to be introduced from 6thApril 2015. What we end up with is an effective lower rate of tax on sums drawn from a pension of 15% for a basic rate tax payer and 30% for a higher rate tax payer.

My own view is that anyone who is able to do so should be considering whether it is appropriate for them to take their 25% tax free lump sum before 5th April 2015. As always please take proper advice first before making any significant financial decisions.

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It is comforting to hear that many of the great philosophical questions of our time are being answered by VAT tribunals on a regular basis! I give as an example the important issue of the nature of a cake!  In a recent case the First-tier Tribunal was presented with a plate full of assorted cakes and asked to consider whether one of the items, a snow ball, was a cake or confectionary (yes it matters for VAT purposes).  The judges’ comments are entertaining enough without further comment from me so here they are.

“A snowball looks like a cake. It is not out of place on a plate full of cakes.  A snowball has the mouth feel of a cake.  Most people would want to enjoy a beverage of some sort while consuming it.  It would often be eaten in a similar way on similar occasions to cakes; for example, to celebrate a birthday in the office.  We are wholly agreed that a snowball is a confection to be savoured but not while walking around or, for example, in the street.  Most people would prefer to be sitting when eating a snowball and possibly, or preferably, depending on the background, age, sex etc with a plate, napkin or a piece of paper or even just a bare table so that the pieces of coconut which fly off do not create a great deal of mess.  Although by no means everyone considers a snowball to be a cake we find that these facts, in particular, mean that a snowball has sufficient characteristics to be characterised as a cake.”

This just leaves one of life’s big questions to answer – how do I get to sit on a VAT tribunal?!

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There has been much anxiety in the press in recent months over proposals to give HMRC powers to collect money owed directly from people’s bank accounts. The major concern is that HMRC are seen to be appointing themselves as judge, jury and executioner with little if any access to an appeals procedure.

No right thinking person should doubt that HMRC need robust powers to stop bad people avoiding paying their fair share of tax, but in my experience the vast majority of people who rely the rights of appeal are not bad people. They are far more likely to be ordinary people like you and me with busy lives doing their best to comply with a very complex tax system. My own statistics show that of the small percentage of cases which have led to a formal HMRC enquiry, the majority have been settled without any penalty meaning that HMRC have accepted they are entirely innocent.  Rarely have I come across a case where penalties have been imposed for behaviour considered to be worse than simply careless.

For further information, visit Taxation magazine who are running a campaign to try to stop these powers being introduced.

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Over the summer the Tax Tribunal decision in the McLaren Formula One cheating fine case has been overturned in HM Revenue & Customs favour. It appears odd that this has been little reported in the press given the heavy reporting of the original decision, but to quickly remind you of the facts, McLaren were handed out a hefty £32 million penalty for breaking the motorsport governing bodies rules when it was found that one of their employees had used questionable methods to obtain technical information relating to another teams car.

McLaren’s team accountants had claimed the penalty as a deductible expense against tax. Originally the first tier tax tribunal decided that the penalty was an allowable expense, the argument being essentially that unlike a civil or criminal penalty which must be paid in order for the individual to avoid personal consequences, this penalty was paid to enable McLaren to continue to compete in Formula One thereby protecting the ongoing trade.

Worryingly, the recent about-face by the upper tier tribunal appears at face value to be a moral decision rather than a factual one, based largely on the principle that cheating isn’t right and therefore shouldn’t be condoned through use of tax allowances.

Whilst generally speaking I would applaud anything that encourages good moral behaviour in all walks of life, I am concerned that in this instance the comparison between a penalty within the tight confines of a sporting framework and a civil or criminal penalty is inappropriate and may be leading to a dangerous precedent.

Rules and penalties in sport are all part of the game being played and not part of our criminal or civil code. If we accept that a sport can be a taxable activity then the costs of playing that sport should be taken into account in arriving at the taxable profits. McLaren were not prosecuted for criminal behaviour, they just broke the rules of their sport and were dealt with appropriately within the confines of that sport. For the taxman to wade into the argument is just wrong no matter how unsporting they may think McLaren have been. I wonder how many people would think it appropriate for a police officer to walk onto a rugby pitch to arrest a player for throwing a punch in a scrum?

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An inherent problem with P11d completion is that the individuals who know the business sufficiently well to have access to all necessary information may not have the technical knowledge to know what is relevant for the completion of the forms. Furthermore, the range of possible entries required on a P11D is so wide that without a detailed knowledge of a business it can be difficult for your accountant to identify all of the potential P11d items without undergoing a full inspection of the business records. For this reason items frequently get missed from P11d’s and examination of P11d’s is a major focus of attention for HMRC PAYE compliance visit.

Below are five examples of things that I often see missed from P11d’s.

1. Directors loan accounts and expenses

The information required to establish whether there are any relevant director expenses or indeed if directors have been borrowing money from the company won’t necessarily be apparent from the day to day records of the company. Often only the directors themselves will have that knowledge yet the individuals responsible for preparing the P11d information may not know what questions to ask or feel they have the authority to interrogate their bosses regarding the detail of their expenses. This can be a particular issue for the smaller owner managed business which won’t have the more extensive accounting functions available to larger firms. The extent and nature of the directors’ loan accounts and expenses may not be established until the year end accounts are prepared which may be some months after the P11d filing deadline.

2. Assets Transferred to Employees

The transfer of assets to an employee is a taxable benefit equal to the market value of the asset at the time of transfer. Company cars and laptops are assets which I frequently see being transferred, but putting a value on those assets is a more difficult task than simply taking the written down book value. Second had car value can vary widely depending on the condition of the vehicle and hence it is advisable to keep evidence of the state of the vehicle to support any valuation in the event of an HMRC compliance visit which may take place months or even in some cases years after the vehicle has been sold. With regard to laptops, arguably a second hand laptop has little, if any, value but again you should keep contemporary evidence to support any values used.

3. Employees Phones

Employers frequently provide mobile phones for their employees. The provision of a single mobile phone is not a taxable benefit regardless of whether there is any private use. This is one of the very few tax exempt perks that an employee can receive, but the exemption only applies to phones which are owned by the employer or where the contract is in the name of the employer. If the employee is reimbursed for using their own phone then a different tax treatment will apply and only identifiable business calls will be exempt. Frequently there will be no identifiable business calls at all as all calls will be covered under the monthly line rental. In this case HMRC will treat the whole expense as taxable in the hands of the employee.

4. Staff Entertaining

Most employers and employees are aware that staff entertaining is tax free up to £150 her head per year. However, this exemption only applies to annual functions such as Christmas parties or summer outings where all staff are invited. If, say, a manager takes his team out for a drink and is reimbursed the expense then that reimbursement is a taxable expense item to be included on the manager’s P11d!

5. Personal use of Employer’s Assets

Any asset made available to an employee for their personal use gives rise to a benefit in kind charge. The basic charge is 20% of the market value of the asset when it is first made available. Company laptops are probably the most common example of this but there is exemption from the charge where private use is merely incidental to the business use. The main problem here is less the calculation of the benefit but more a case of establishing when a benefit may have arisen. The bookkeeper will be looking primarily at transactions going through the bank statements and may have no idea that one or more employees may be allowed to use company assets.

In conclusion, the completion of forms P11d is a thankless task and will inevitably be prone to difficulties. If you are preparing the forms then please don’t be afraid to ask the awkward questions of the directors. If you are director responsible for signing off the P11ds then remember anything of any value received by an employee (which includes you) from their employer, regardless of whether it is in cash or in kind, then unless it has already been taxed through PAYE, the chances are it will need to go on a form P11d.

 

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