Tag Archives: hmrc

Pre-Planning for ATED

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My Blog of 31 August ran through the recent history of property taxation in the UK. It identified that ATED (the Annual Tax on Enveloped Dwellings) was introduced a number of years ago with a consequential impact for Capital Gains Tax and Stamp Duty Land Tax.

ATED is a tax charged on non-natural persons (for example companies or partnerships with at least one company member) which hold an interest in one or more UK residential dwellings. The tax is applicable to both non-natural persons incorporated in the UK and incorporated overseas. You will also appreciate that there is a difference between a charging return and a relieving return with only a charging return leading to a tax liability and therefore valuation considerations.

The ATED charge is a fixed sum depending into which band of value the property falls. The valuation date is the later of 1 April 2012 and the date that a property is first subject to ATED. When a property is newly acquired the valuation date is the acquisition date. Should a property come into existence for the first time then the determining date is the date that it is first recognised for Council Tax purposes.

The filing date for an ATED Return is 30 days from the date the property first falls into the ATED charge. There are extensions to 90 days in prescribed situations such as the creation of a new dwelling. All enveloped properties held on each 1 April need to be subject to an ATED filing. The deadline for these filings remains 30 days later, being the end of April.

When ATED was first introduced in 2013 the first charge was for properties worth more than £2m on 1 April 2012. Since 2013 ATED has applied to properties of lower value and now ATED applies to properties worth more than £500,000.

Valuations

When ATED was first introduced in April 2013 the first valuation date was 1 April 2012. This was helpful as it gave taxpayers the opportunity to obtain valuations and determine if their properties were worth more than £2m more than twelve months prior to the introduction date for ATED. Accordingly taxpayers had time to obtain valuations and plan for the impact of ATED.

The ATED regulations state that the valuation would be revised every five years and therefore properties will need to be revalued on 1 April 2017 to determine into which band they fall. As ATED applies to properties worth more than £500,000 there will be many properties which fall into the ATED regulations for the first time on 1 April 2017. Although there is no statutory requirement to appoint property valuation professionals to revalue the property, this is the safest course of action as it demonstrates a greater level of HMRC compliance than using a director’s valuation.

As there are going to be considerable numbers of properties subject to ATED from April 2017 and therefore considerable numbers of valuations to be determined we believe that there is going to be a shortage of access to valuation professionals in April 2017. In order to allow our clients the best possible access to valuation services we are in discussion with them about either having valuations undertaken between now and April (with a desktop review at 1 April 2017) or making bookings with valuers for six months hence. We have a number of surveyor clients who we can recommend with our recommendation being based on factors such as the type of property, the location of the property and any special features of the property.

In conclusion there is an understood benefit of employing a valuation professional for ATED purposes and we can foresee a shortage of these services next spring. We are presently speaking to our clients about pre-planning for this future requirement.

What’s in store for the non UK domiciles – Autumn 2015?

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Now that the summer is behind us, we await the promised consultations on the wide ranging and far reaching proposals for non UK domiciled individuals announced at the Summer Budget 2015.

It has always been difficult for the Government to ensure that the non-domiciled community are encouraged to continue to come to the UK, where they undoubtedly can bring investment, skills and spending power, without the general public perceiving that the tax breaks for non UK domiciles are too great. The phrase “not looked fair” was actually used in the official announcement.

So what could we be facing?

Resident non UK domiciles

  • A deemed domicile rule for all UK taxes (income tax, capital gains tax, inheritance tax etc.) once an individual is UK resident for 15/20 tax years from 6 April 2017 with no “grandfathering rules” (also includes taxes on employment related securities). So full UK taxation on a worldwide basis from 6 April 2017.
  • Extension of the time residency required abroad to lose UK deemed domicile from potentially 3 or 4 years to an overall 5 year period (including those who wish to emigrate permanently).
  • The taxation of overseas trusts is to be fundamentally overhauled and non UK domiciles will find the tax planning and usefulness of these structures severely curtailed.

Returning UK domiciles

An individual who has a UK domicile of origin will automatically revive his UK domicile for taxation purposes on returning to the UK after 5 April 2017 regardless of their domicile under general law.

  • Crucially, any overseas trusts set up whilst that individual has been non UK domiciled will be treated as though set up by a UK domiciliary and taxed accordingly when the settlor is UK resident (this includes UK IHT).

UK residential property

  • Further changes have been announced from 6 April 2017 to bring all UK residential property, whether held directly or indirectly, within the net of UK IHT. This is intended to be the final piece in the jigsaw to remove any tax benefits whatsoever from holding a UK residential property within a structure.
  • The IHT charge will be on the full market value of the residential property net of any borrowings to purchase it, on the usual chargeable events, such as death, certain gifts, exit and 10 year anniversary charges etc.
  • Although to be based on the Annual Tax on Enveloped Dwellings definitions, there will be no de minimus limit and no reliefs, such as letting, will be available.
  • The government will also look at enabling the “de-enveloping” of current structures without a tax cost.

The limited guidance issued after the Summer Budget, just on these measures, mentioned consultations more than 12 times, so it is to be hoped that HMRC will take their time and listen to the responses they receive when looking to implement the Government’s wishes.

These proposals will involve amending existing legislation across the statute books as well as new legislation. The last time such wholesale changes were implemented, was pretty quickly followed by a relaxation of some of the changes. It is to be hoped that HMRC will consider carefully the responses that the interested bodies will furnish them with.

Anyone potentially affected by these changes must take advice in good time to allow for a measured response to their own personal position.

Will automatic penalties be a thing of the past?

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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.

What are the changes to Annual Tax on Enveloped Dwellings (ATED)?

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Following a greater than expected tax yield from the introduction of the ATED (Annual Tax on Enveloped Dwellings), HMRC have decided to widen the net over the next two years. Originally, the ATED charge for holding UK residential property within a corporate structure was aimed at those individuals sheltering properties worth in excess of £2,000,000 from Stamp Duty Land Tax. However, HMRC have decided to introduce the following new bandings (with annual charges adjacent):-

Value of Property Charge
£1,000,000 to £2,000,000 £7,000
£500,000 to £1,000,000 £3,500

The higher banding is operative for the ATED period 1 April 2015 to 31 March 2016, whilst the lower banding will start for the ATED period 1 April 2016 to 31 March 2017.

For both new bandings there will be transitional rules, as HMRC accepts that there may be some delay due to a lack of awareness of the changes. The usual and transitional submission/payment dates for the period 1 April 2015 to 31 March 2016 are shown below:-

Properties in Excess of £2,000,000 (Usual):-
Submission Deadline 30 April 2015
Payment Deadline 30 April 2015

Properties valued between £1,000,000 and £2,000,000 (Transitional):-
Submission Deadline 1 October 2015
Payment Deadline 31 October 2015

Whilst the changes noted above will clearly result in many additional properties being caught, further bad news has come in the form of inflation busting tax increases of around 50%.

For example, a corporate owning a property worth £2,100,000 can now expect to pay a charge of £23,350, an increase of £7,950 on the previous year. The greater the value of the property, the bigger the tax increase. From 1 April 2014, the annual chargeable amounts are being increased in line with the CPI (Consumer Prices Index).

One saving grace is the opportunity to claim relief in certain circumstances. Probably the most common reliefs are where the property is let on a commercial basis or held for development purposes. However, the relief still needs to be claimed through an ATED Return due by 30 April 2015 (or 1 October 2015 for the new banding). Failure to submit a Return and claim relief can result in penalties of at least £1,300 by the time the Return is six months overdue. The penalties are set out below:-

Initial Late Filing Penalty – £100
After 3 Months – £10 Per Day (up to a maximum of £900)
After 6 Months – £300 or 5% of the tax due (higher of)
After 12 Months – £300 or 5% of the tax due (higher of)

Whilst on the subject of relief, where a property is let to a connected party (spouse, child or lineal descendant of the corporate shareholder), no relief can be granted.

Although HMRC do allow taxpayers to Self-Assess the value of their properties for ATED purposes, it should be noted that if HMRC challenge and the value proves to be incorrect, penalties can be levied. The penalty regime is the same as that used for Self-Assessment and other taxes (Schedule 24 FA 2007 & Schedule 55 FA 2009).

For existing ATED payers, a value should have been ascribed as at 1 April 2012. For properties purchased after that date, the value used is the purchase price. HMRC have stipulated that the values need to be reassessed every five years so 1 April 2017 will be the next applicable valuation date. If a property has been purchased during the period between valuation dates, there will still be a requirement to reassess the value at the next main revaluation date. For example, a property bought on 1 April 2015 will need to be revalued on 1 April 2017 and not five years after the date of purchase.

You may also like to refer to Cetin Suleyman’s blog, which touched on many of the issues raised above.

PAYE Coding Notices – Checking the Chaos

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Many people do not realise the importance of checking PAYE coding notices; however you could be paying too much tax if your tax code is wrong.

At this time of year HMRC start issuing PAYE coding notices for the coming year. These are based on the recent 12-13 tax return submissions. If your circumstances or income have changed since then it is likely that the tax return will be inaccurate.

To help tax payers get their tax codes corrected HMRC has recently introduced a new email service which you can use to let them know that your PAYE code is wrong. This could save you a lot of time trying to contact them by phone.

Introduced into post war society, Pay As You Earn has led to employers acting as a tax collector for income tax, national insurance and even student loans. Bearing in mind the effect a tax code can have on an individual’s earnings, the importance of checking these is paramount – especially after the problems HMRC had back in 2010 with their PAYE computer systems and the ensuing mess that has followed for several years. As agents we no longer automatically receive PAYE coding notices from HMRC and we are therefore relying on well informed clients to forward these on to us to check.

Some of the more common adjustments you might find in a PAYE code are as follows: –

Car/Fuel Benefit
Medical Insurance
Child Benefit
Outstanding HMRC debts
State Pension
Gift Aid Relief
Pension Relief

For higher earners there are further problems. If you earn over £100k you will start to lose your personal allowances by £1 for every £2 of adjusted net income over the income limit. Therefore if your earnings hover around this threshold, or your salary fluctuates year on year, you may find that the allowances in your PAYE code fluctuate too. This could lead to a nasty shock at the end of the tax year, if you find out you have underpaid tax.

With the seemingly limitless amount of restrictions that can be included in tax codes it is imperative that these are checked by either the taxpayer or an agent. If you believe your PAYE code may be incorrect, or you require further information, please do not hesitate to contact one of the team here at Goodman Jones.

Buy-to-let Landlords and Second Homeowners

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HM Revenue and Customs are now entering stage two of their campaign to target second homeowners. True to their word, they are starting to chase landlords who have a second property and have failed to declare rental income and capital gains on sales.

The disclosure opportunity that I referred to in my April blog closed on 8 August and already we are seeing a marked increase in HMRC investigations targeting those who ignored this opportunity to bring their tax affairs up to date.

A question I often get asked as a tax practitioner is “How will the Tax Inspector find out about undeclared income?” The answer is that there are many different sources of information available to the Tax Inspector to help identify potentially undisclosed rental income. These include Land Registry records, information requests to letting agents and tenant deposit registers, to name but a few. Information sharing with overseas authorities is becoming increasingly common and we have also seen that HMRC Inspectors are increasingly making use of technology to help them, from the relatively low tech searching of the internet for property adverts to the higher tech use of demographic profiling to track likely areas and candidates for investigation.

My experience has been that a lot of individuals who are now finding themselves on the wrong end of an HMRC enquiry have got into trouble due to a head-in-the-sand approach to their tax obligations rather than a deliberate attempt to avoid paying their dues. However, HMRCs view is very much that, having given taxpayers an opportunity to disclose, they will now take a tough line with anyone who hasn’t come forward voluntarily.

If you find yourself receiving an enquiry letter from your local Tax Inspector or if you know you have income to declare, but don’t know what to do, then I encourage you to speak to your accountant as soon as possible. It is always better, as you will pay lower penalties, to disclose before HMRC comes calling. We have a great deal of experience in dealing with tax enquiries and investigations. If you need our help then please contact a member of our tax department.

The Demise of the LLP?

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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.

High Income Child Benefit Charge

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Over the last month, HM Revenue and Customs (HMRC) have been writing to higher rate taxpayers to remind them that if their income is over £50,000 and they or their partner received Child Benefit in 2012/13 they will need to complete a tax return for the 2012/13 year. With the 31 January 2014 deadline looming we are all now becoming acutely aware of the problems and pitfalls in reporting Child Benefit.

The High Income Child Benefit  Charge (HICBC) starts to kick in on income over £50,000 and it effectively ‘claws back’ 1% of the child benefit for every 100 your income exceeds this threshold. So if you earn over £60,000 the charge becomes equal to the amount of child benefit received. The charge is disclosed on your self assessment tax return – which means anyone not issued with a return had to register by 5 October this year. The option to opt out of receiving child benefit was available however many inevitably missed this deadline and now find themselves caught in the cycle of self assessment.

This has been a popular issue for commentators since its introduction on 7 January 2013, with many describing the unfairness with the example of a couple both earning £49,950 keeping their Child Benefit, whilst a single earner on £50,500 starting to lose it.

However, it is not just the monetary charge itself that is causing issues; there are also more practical concerns to consider:

Because the child benefit charge needs to be declared on the tax return of the higher earner, the ethos of ‘self-assessment’ comes into question. For couples who do not readily share their financial details there is a problem in accurately completing their tax returns. This will be particularly noticeable if the income of one partner fluctuates year on year.

HMRC defines a ‘partner’ as a person you are married to and living with or a person you are living with as if you are married. Therefore, you may be liable to the child benefit charge for a child who is not your own.
After weighing up all the facts you may just decide to cancel the payments to avoid the extra administrative burden. However even in this scenario there are consequences. If you cancel your child benefit payments but your partner does not work they could lose their entitlement to state pension benefits.

If there are any issues above that you wish to discuss further, please do not hesitate to contact one of the tax team at Goodman Jones.

Seed EIS extension

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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.

Five good reasons why you shouldn’t delay submitting your tax return….

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A press release issued by HM Revenue & Customs (HMRC) has confirmed that over half a million taxpayers submitted their 2011/12 tax returns online on the 31 January 2013, making the 31 January filing deadline the busiest day for the submission of returns.

As the 2012/13 tax year ends, HMRC will shortly start issuing tax returns to those within Self-Assessment.  HMRC’s statistics indicate that for many the completion of their return will be a low priority at this time, but there are genuine advantages to completing your tax return early.

1.    Receive your repayment as early as possible

Where a tax return shows a repayment is due, the repayment will only be issued once the return has been processed.  Therefore, any delay in the submission of the return will result in a delay in receiving the repayment.

2.    Make a reduced payment on account in July

In some cases a repayment is due where too much tax has been paid on account in the year.  One option is to complete your tax return before the second payment on account falls due on 31 July 2013.  This may enable you to make a reduced payment at that time.

3.    Spread collection of your tax liability over the next tax year, avoiding a lump sum payment in January

Where a return shows a tax liability of £3,000 or less, it may be possible for payment to be collected via your PAYE code.  Collection is spread over the course of a tax year, and no payment is required by 31 January.  However, the return must be filed online by Christmas for the liability to be ‘coded out’.

4.    Budget for any tax liabilities

The main danger in delaying the submission of your return is that you may face an unexpected tax liability.  If this happens, it is possible to agree a payment plan with HMRC, but the plan needs to be agreed before the 31 January payment deadline.  Leaving the completion of your return until the last minute gives you little scope to put an agreement in place.

5.    Avoid penalties and interest

With increased penalties for late returns, and surcharges and interest charged where tax is paid late, any delay in the submission of your tax return can also prove expensive.

All in all, there are real benefits to submitting your tax return early – not least the sense of satisfaction in knowing it’s done for another year!