Tag Archives: hmrc

Tax on high value residential property

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.

Mileage Allowances – Total People Tax Case

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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.

Seed EIS

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I have noticed a marked increase in questions about the Seed EIS scheme. Perhaps the forthcoming 31 January tax payment date is leading people to consider tax efficiency more closely!

The scheme is for companies which are seeking early stage funding in the first two years of their trade. There is a 50% income tax relief available for qualifying investments. Shares held for three years can be sold without capital gains tax. Capital gains made in 2012/13 and reinvested in this tax year into Seed EIS companies can be eliminated entirely. Other gains are deferred until the year that the Seed EIS company’s shares are sold.

The tax breaks are generous. This is a reflection of the high risk nature of such businesses. There are many conditions about the size of the business which also need to be satisfied in order for Seed EIS to be relevant. There are also practical considerations that need to be considered. The practical considerations include:-

A Seed EIS qualifying company cannot be under the control of another company. This sometimes leads to difficulties if a company is bought off the shelf from a company incorporator. HMRC have confirmed that companies set up by incorporating agents ( in situations where the incorporator is itself a company) will lead to loss of Seed EIS. This is because the incorporating agent controls the trader and therefore there is a time when the trader is under the control of another company.

Similarly there are certain steps which a subscriber should follow if they are also to be seeking Seed EIS relief. This is to prevent them accidentally tripping one of the conditions surrounding share ownership levels.

The conclusion is that Seed EIS, for qualifying activities, is a valuable and generous relief. However, it needs to be treated with care and the detail of the legislation understood and followed.

Employee Shares

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The Government recently confirmed its intention to introduce a new type of employment contract in which it would be lawful for employees to waive certain statutory employment protections.

In exchange for reduced employment rights, employees would be offered shares in their employer with a value between £2,000 and £50,000. Although the acquisition of the shares would be subject to income tax (and national insurance, if relevant) the eventual sale of those shares, by the employee, would be exempt from capital gains tax.

Details released to date suggest that the legislation is principally intended for small and medium sized companies, but companies of any size will be able to use this opportunity. Rights which may be forfeited include unfair dismissal, flexible working, maternity leave and redundancy payments.

There will be flexibility in the legislation which permits the opportunity to be offered to employees recruited after the legislation is enacted or both future employees and current employees.

Some beneficial share option schemes, such as Enterprise Management Incentive, have restrictions as to their use if employees already hold shares in their employer. Current proposals imply that these existing share option schemes will not be adversely affected by the new legislation.

It has been suggested that legislation will be enacted from April 2013 and the Government will consult with Industry as to the practical implications of the proposals before then. Obvious practical considerations which need to be ironed out include the impact of numerous employees having an influence on the strategic direction of a private company and the alternatives should an employee leave the company whilst holding shares in their employer.

International Secondments of Staff

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As businesses grow and expand into the UK it is quite common to send employees into the UK to oversee the expansion. There are various strategies to ensure that employees coming to the UK can do so tax efficiently.

Detached duty relief

An assignment to the UK may be a short term secondment. The UK allows those on short term assignments to receive certain benefits free of tax. If correctly structured the assignment can permit the individual to receive accommodation without a tax charge and permit flights back to their home country, for them and their family, to be provided free of tax. These make the UK an attractive destination for internationally mobile workers. The social security consequences of the secondment should not be overlooked and will be subject to separate considerations.

Dual contracts

If the individual is to be in the UK for a longer period of time then a split contract arrangement may be appropriate. These are suitable if the duties performed by the individual can be clearly separated between those undertaken in the UK for the benefit of the UK business and those the individual may undertake in other countries for other parts of the international group. Due to certain legislation it is only the UK element of the employment which will be taxed in the UK. Split contracts are a well understood technique which need appropriate circumstances to implement. To be effective they need to be correctly documented and have on-going recording obligations. As with secondment planning we have a number of clients who use this opportunity.

Tax equalisation

Tax equalisation is becoming more popular in the international market. Equalisation seeks to promote mobility amongst the staff by ensuring that they are not disadvantaged by going to another country whose tax rate may be higher than that of the home state. At a basic level equalisation ensures that the post-tax salary of the employee remains unchanged irrespective of the country in which they operate. There are variations on this theme. For example, one way tax equalisation (sometime known as tax protection) is for the sole benefit of the employee. If the tax rate in the overseas country is less than that of the home state, the employee keeps the benefit of the differential whilst the employee is protected should the overseas tax rates be higher than that of the home state.

Cost of living equalisation

Tax is only one aspect of the costs incurred by internationally mobile workers. Different countries have different cost of living and different governments provide different services to their residents. This is leading to the developing concept of cost of living equalisation. This form of equalisation looks at the total cost of living in a country compared to that of the home state and seeks to equalise the two. For example, state sponsored health care is free in the UK whilst some countries require the individual to take out a mandatory insurance plan. Moving to the UK would negate the costs of the insurance plan and therefore the cost of living in the UK would be different from that of another country. Conversely property rental in the UK is higher than many other parts of the world. Cost of living equalisation attempts to take account of these variations.

RTI – another nightmare for the Employer?

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For UK employers, Real Time Information (RTI) represents a significant change to the way payroll deductions, including PAYE and national insurance (NI), are being reported to HM Revenue & Customs (HMRC).

The current system has not changed since the 1940s when employees rarely moved jobs and only had one main source of employment. Fast forward to the present day, the work place is very different with increasing job mobility and a greater casual labour work-force.

HMRC argue that the current system of reporting payroll deductions six weeks after the end of the tax year, through the submission of end of year P35 and P14 forms, is no longer fit for purpose and they’re probably right.

Under RTI, employers will be informing HMRC of tax, national insurance, pension and other deductions on or before an employee is actually paid.

HMRC claim that over time the benefit of receiving this information sooner will enable the right amount of tax and NI to be collected from individuals and will remove the need for time consuming end of year reconciliations. In addition, the administrative burden of preparing and submitting the end of year forms P35 and P14 will no longer be required.

Furthermore, RTI’s introduction also supports the “universal credit” benefits initiated by the Department of Work and Pensions, which is due to commence in October 2013. This will ensure that claimants receive the correct amounts and on a timely basis.

Although HMRC state that RTI will mean cost savings to employers, the cynics will point out that RTI’s main objective is to improve HMRC’s own cash flow and by knowing exactly how much tax and NI is due to them each time a payroll report is run, HMRC can immediately start issuing demands following non-payment.

For all employers, RTI will mean an upgrade to their present payroll software and a “data cleansing exercise” to ensure that employee information, including full names, dates of birth and national insurance numbers, are accurate and match the records held by HMRC -HMRC have commented on the large number of inaccurate employee details held by employers who joined their RTI pilot. This will represent yet another cost and administrative burden on the poor employer.

There are also some significant difficulties in operating RTI under the current guidelines. For example, are payroll staff expected to work weekends to ensure an RTI submission can be made before casual bar staff working on a Saturday night can be paid? We wait with bated breath for some practical guidance to be issued over the coming months.

Interesting, the UK is one of the first of the OECD countries to implement a Real Time reporting process with the other members looking on with intrigue to see how it all unfolds.

One thing that is certain, is that employers should start the process of planning now.

HMRC are intending that most employers will join RTI by April 2013 and by October 2013 all employers will be operating their PAYE system under RTI.

If you have any further questions regarding RTI or need further clarification as to what is required please contact a member of the Goodman Jones payroll department or e-mail paye@goodmanjones.com.

Flat Conversion Allowances – Get ‘em while they’re hot!

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In May 2012, HM Treasury released its consultation paper relating to the “enveloping” of high value residential property.

Much has been written about it already, so I won’t bore with another summary – but it made me want to revisit what had resulted from a previous consultation issued in May 2011. If you missed that one, it was entitled “Consultation on the removal of 36 tax reliefs” – I can’t deny that the title is snappy and to the point.

Using the Government’s words, that consultation was issued so as “to simplify the tax system through the removal of reliefs”.

So let’s pick one of the 36 at random – Flat Conversion Allowances – and see what happened to that relief?

Well, no prizes for guessing that in December 2011, Flat Conversion Allowances (sometimes called Flats Above Shops relief) were repealed and they will be withdrawn for expenditure incurred after March 2013.

It strikes me as odd, that when there is a shortage of affordable property in parts of the UK, and when the smaller end of the construction industry is on its knees, the relief is repealed. Or, perhaps there is greater wisdom involved in that by giving advance notice of the repeal, it will accelerate property owners’ decisions to convert and give a much needed boost to the construction sector (I’ll leave the funding issues as a matter for another day!)

All I know is that anyone thinking about converting under-used space above commercial premises may want to revisit this relief and reconsider the timing of their plans if they want to claim the currently available 100% capital allowances.

Record Keeping for Business – Mobile Apps

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HMRC have been encouraging the software development industry to provide mobile phone apps to assist small businesses and the self-employed (who are under the VAT threshold) with their basic accounts record keeping. These basic apps can be used on smartphones to record transactions in real time, including taking a photo of receipts.

A list of the currently available apps can be found on HMRCs website http://www.hmrc.gov.uk/softwaredevelopers/mobile-apps/record-keeping.htm
They are proving popular as HMRC say that, at the last count, there had been more than 5,600 apps downloads.

Which app you chose will depend on you mobile phone type but we have tried out a couple of the iphone apps to see how they work.

Free Agent Central – Earnest

Sage – Sage record keeper mobile

Both of these apps have basic functions for recording items of income and expenditure. They both have a facility for taking a photo of the relevant receipt and storing it against the invoice entry. We were hoping that that there would be intelligent analysis of the photo to transfer data directly into the record but alas for the time being this functionality is not yet available.

The apps add the income and expense invoices to give you a running profit total for the tax year to date and allow for simple analysis by expense type. Earnest attempts an estimate of tax liability but disappointingly Sage record keeper only directs you to HMRCs online tax calculator.

The collected data can be simply emailed to your computer as a spread sheet where further analysis and printing can be done. The downloaded information will still need to be analysed before it can be entered on your tax return. The apps also include handy diary reminders for key dates and links to useful pages on the HMRC web site.

We think these apps are an excellent idea and the ones we have tried are simple to use. They will be most useful for people who are out and about and need a practical method of recording details on the move with an easy way to send data back to the office. We can see the biggest user of this type of app being reps completing their expenses claims rather than the intended target of the small business, but they are well worth a try.

Inward investment in the UK – tax certainty and fairness

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One of the difficulties that Government have is to strike the three way balance between tax certainty, tax simplicity and tax fairness. The recent headlines around Barclays Bank’s tax structuring brings this dilemma into focus.

The UK is seen as having a tax regime which is stable (i.e. certain) and businesses are treated fairly by the taxing authorities. Despite this we have one of the, if not the, longest tax codes in the world. This does not imply simplicity.

The UK is often held as an example of a fair tax system. Many non-British nationals find it hard to believe that we have a self-assessment regime for individuals and corporate which effectively require the taxpayer to self-determine their liabilities. The tax calculation is not necessarily subject to any form of review by HMRC. Compare that with for example the recent European convention on human rights case where a shopkeeper in the Ukraine claimed that their human rights had been violated by the actions of a tax police squad who, during a premises visit, allegedly, assaulted a business employee. Even the concept of a tax police is alien to a UK national.

The UK enhances its reputation for certainty by consulting with the taxpayers before implementing wide ranging legislation and by avoiding retrospective legislation.

Fairness and certainty are two of the many reasons that the UK is an attractive place for inward investment. Our tax code attracts investment with incentives such as tax free perks for immigrating staff, the non-domicile regime, a wide network of tax treaties, the lack of dividend withholding tax and the substantial shareholding exemption. Some of these incentives have been varied in a way which reduces their impact. An example being the introduction of the remittance base user charge. Even when they are varied the changes have been well trailed by HMRC which demonstrates that it is possible to change legislation whilst still retaining the certain nature of the UK’s tax code.

Recent actions to retrospectively close down Barclays tax structuring may be understandable in the context of the tax at stake and the perceived artificiality of the arrangements. My concern is that this retrospective legislation will have a long term disadvantage of reducing the UK’s standing in the area of certainty. Only time will tell.

Overseas holiday homes purchased through a company

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It is quite common for overseas holiday homes to be purchased in companies. Typically this is to circumvent overseas inheritance rules. Historically the use of a company has lead to a UK income tax and national insurance liability which was treated as a “cost” of the structure.

Pressure was placed on the Government to eliminate this cost, and in 2008, they revoked the income tax liability but not the national insurance liability. The national insurance liability has now been retrospectively revoked and reclaims of national insurance can be made for any prior year, even those earlier than 2008. Any refund must be claimed before 2015.