Tag Archives: property

Research and Development (R&D) tax relief for the construction sector

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Many construction business owners are missing out on valuable tax breaks because they are under the misapprehension that Research & Development (R&D) tax relief only applies to those conducting formal research, such as pharmaceutical companies.

Any construction company undertaking some form of innovation may qualify for R&D relief.  This is much more common than is often thought, with construction companies often coming across a problem and developing a new or unique solution to overcome it.  If you have an employee who is a problem solver, for example, one would expect to have a claim and the cost of an employee can be considerable.

Is it worth it?

If you are an SME  (Small and Medium-sized Enterprise – fewer than 500 employees and either turnover of  up to €100m, or gross assets of  up to €86m) you benefit from an enhanced rate of R&D relief. A profit-making SME can claim an additional deduction of 130 per cent of the R&D spend.

For year ending 31 March 2016 – the effective tax saving is 26% of R&D spend

Graphic 1

There are separate rules for larger companies.  They are restricted to claiming an additional deduction of 30 per cent of the R&D spend.

For year ending 31 March 2016 – the effective tax saving is 6% of R&D spend

Graphic Large

What if we’re not making a profit?

Even loss-making companies may be able to access cash back, which will be particularly welcome by start-ups or those needing cash to fund development.

SMEs can convert 230 per cent of R&D spend into tax credits at a rate of 14.5 per cent and receive cash.

For year ending 31 March 2016 – the effective tax saving is up to 33.35% of R&D spend

Graphic SME Loss

For a large company using the R&D Expenditure Credit scheme, a taxable receipt of 11 per cent of the R&D spend is granted.

For year ending 31 March 2016 – the effective tax saving is up to 8.80% of R&D spend

gj-large-companies-loss-making

Red tape?

There are time restrictions, so businesses should not delay in finding out whether they might qualify for R&D relief.

Claims must be made within two years of the end of an accounting period but it is possible to go back and amend a tax return to include a claim.  So if you submitted a tax return for the year ended 31 December 2014, you have until 31 December 2016 to go back and make a claim.

The claim is a relatively straightforward process, involving explaining what you did in writing and putting the costs against it before the claim figures are included in the computations.

Well worth it

We have guided a number of our clients in the property and construction sector through this and we were all delighted when we saw how quickly HMRC accepted the claims and in certain instances repaid substantial amounts of tax.

 

 

 

It’s not just World Cup games that end in penalties – The Annual Tax on Enveloped Dwellings (ATED) Returns could lead to a few too!

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So another World Cup match ends in penalties with the Netherlands suffering the curse of the English in last night’s game against Argentina, and I suppose it was almost inevitable that both teams would play a cat and mouse game after seeing what Joachim Low’s men did to both Brazil’s national team and its national pride the previous night.

And I can’t help thinking that penalties (of the fiscal kind) will be another inevitability for the future given the UK Government’s recent announcements to “Low”er (Sorry, I couldn’t resist that) the threshold for reporting Enveloped Dwellings from £2,000,000 to £500,000.  This is part of the relatively new Annual Tax on Enveloped Dwellings regime (“ATED”)

In outline terms, the ATED rules require that high value residential property held within a corporate (or non-natural person) structure will be subject to a number of measures to combat anti-avoidance.  These range from a higher rate of Stamp Duty Land Tax (SDLT) (15%) to the Annual Tax itself, assessed by reference to the valuation band in which the property sits.

In fact, “assessed” is the wrong word to use here because the ATED tax is actually based on self-assessment.  It is up to the taxpayer, in this case most likely the property owner, to assess their liability and submit a return accordingly.  Now the vast majority of my clients will be eligible for one of the various reliefs on the basis that they are either letting the property or developing it for resale, so does that get them off the hook?

Well, yes and no.  Whilst they’ll have no tax liability they still have an obligation to file the return and that’s where penalties could come into play.  Furthermore, the return appears at first glance to be an annual return but there is in fact an additional obligation to submit an ATED return 30 days after acquiring an eligible property, or 90 days after the creation of a new property.  It’s worth adding at this point that a separate ATED Return must be completed for each individual Enveloped Property.

So back to penalties.  The ATED penalty regime is heavy – a £100 fixed penalty for being late by a day, followed by a £10 per day fine for each of the next 90 days and then a further £300 once 6 months have passed and so on.

But let’s be practical, Enveloped Properties valued at over £2m are not that common and so one could say that at present the non-compliance risk for developers and investors, who let’s face it have a myriad of other things to contend with when acquiring properties or completing developments, is not so great.

However, next year the £2m threshold falls to £1m, and the year after it falls to £500,000.  This gives an exponential increase in the number of ATED returns required, and inevitably an increase in the number of property owners falling foul of their filing obligations

And, just like all World Cup games that end up in penalties, it will seem very unfair to those on the receiving end.

 

Capital gains tax to apply to non-residents from April 2015

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HM Revenue and Customs have issued a consultation document introducing the capital gains tax charge on non residents owning residential property in the UK which was proposed in the Autumn Statement.

Currently non-residents are not subject to capital gains tax. From April 2015 a new charge will apply to non-residents on gains arising on UK residential property after that date.

Tax will be charged at the same capital gains tax rates as for UK individuals of 18% or 28% depending on their level of income. Principal private residence relief will be available in limited circumstances, but as part of the proposals HMRC are considering removing the option to make a main residence election, not just for non-residents, but for all individuals.

The charge will apply to capital gains regardless of whether the property is rented out. This is different from the current Annual Tax on Enveloped Dwellings (ATED) charge which applies mainly to companies who own UK residential property, where relief from the charge is available for let properties.

The charge will not apply to UK residential properties held through a UK REIT or other collective investments scheme. This will be subject to a genuine diversity of ownership test to avoid small groups buying property jointly to avoid the charge.

To ensure compliance it is proposed that solicitors, accountants or other agents dealing with relevant sales will be required to withhold tax from the sales proceeds.

This is a major change for all non-residents owning UK residential property. Everyone falling into this category should be reviewing their tax position in advance of next April.

The Gift that Keeps on Giving [Charitable Donations]

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You only need to watch programmes such as Children in Need and Comic Relief to realise what a wonderfully charitable lot we are in this country. From Lands End to John O’Groats, our incredible generosity knows no bounds.

Whether it be donating to the local Church, paying your National Trust subscription, signing up for a regular direct debit to a charity close to your heart or via payroll giving, most of us have made, to some extent, charitable donations.

Understanding the best way to donate is important in order to maximise relief for the charity and/or yourself. There really is the option of ‘having your cake and eating it’ as far as ensuring that the charity receives value, whilst you receive tax relief at your marginal rate of tax.

Perhaps the most recognised way to donate is through simple cash, which would include telephone payments through a debit or credit card and cheques. For every £100 that you donate, the charity is able to reclaim a further £25 from HMRC. This assumes that you have paid sufficient tax in the year to cover the reclaim. If it subsequently transpires that you do not have sufficient tax for the reclaim, you will have to pay HMRC the £25 in order for them to honour your pledge. This is because a gift aid declaration guarantees the charity the right to the tax from HMRC.

The scenario described above can be alleviated by basic planning. There is a carry back facility available so if you anticipate having no income in 2014/15 but have made a donation on 20 April 2014, a claim may be made within your Tax Return for 2013/14 (when you paid sufficient tax), which is due to be submitted to HMRC by 31 January 2015. The ability to carry back can also be efficient if in the previous year you paid tax at the additional rate (45%) but for the current year your income will be taxed at basic rate (20%). That way, you stand to receive £31.25 tax back on the £100 in the form of additional rate relief, as opposed to nil at basic rate. Once your Return has been submitted, the ability to claim a carry back of relief is lost, as no amendments to that particular section of the form can be filed thereafter.

For those of you out there who happen to be high net worth and philanthropic, there is one particular scenario that could have a huge benefit all round. Imagine that the first of your UK rental business portfolio properties is now worth £200,000 but was bought back in the 1980’s when property could be snapped up for the current price of a sports car, particularly outside London and the South East. The gain is £160,000 after deducting the original cost, costs of sale and the Capital Gains Tax Annual Exempt Amount, meaning that the tax liability as a higher or additional rate taxpayer would be £44,800. If you are feeling particularly generous, you may decide to convey the property to your favourite charity, which will have the following benefits:-

  • It will be a no gain/no loss transaction meaning that the charity receives the property without any capital gains tax ever being paid. This saves £44,800 in tax that you would otherwise have paid on sale.
  • The value of the property (less any consideration paid by the charity) is deductible from your taxable income, which means that in the example shown above, you would receive tax relief of an incredible £90,000.
  • The charity has a property worth £200,000 and the transaction is exempt from SDLT.

The same opportunity exists for quoted shares. If you wanted to recoup your original investment, there is nothing to prevent the payment of consideration by the charity but that would, of course, mean that this is deducted from the deemed disposal proceeds.

Revisions to the mainstream Inheritance Tax legislation are less commonplace than many of the other taxes acts. However, one beneficial change that was recently made drops the rate of IHT to 36% payable on a deceased person’s free-estate where 10% of that estate is left to charity. The 10% calculation is made after reducing the amount exposed to tax through relief, exemptions and the nil rate band.

At one stage it appeared that the current government were going to limit the amount of tax relief that could be received through charitable giving to £50,000. Whilst there have been limits imposed for certain loss relief and pension contributions, common sense prevailed and charitable donations were not affected by new legislation.

Particularly in times of austerity, charities are keener than ever to receive gifts from the Great British public so if you do have the odd spare house sitting around collecting dust and you are feeling particularly generous, there may just be a way that you can help whilst mitigating the financial loss through tax relief.

Property owned in Corporate Structures – the net widens following 2014 Budget announcements

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I previously wrote on this blog a post suggesting that HMRC were keen to widen the net to bring more properties into the tax rules concerning residential property owned within a Limited company, or other “non-natural person” wrapper.

I did some research at that time and concluded that with property price inflation, even if the rules were not changed, the day wouldn’t be too far away before many “modestly” priced London properties were worth over £2m and therefore liable to the full range of tax measures.

I needn’t have bothered! Whilst not completely out of the blue, one of the announcements made in yesterday’s budget was the reduction of the £2m threshold to £500k for:

– the 15% Stamp Duty Land Tax on acquisitions,
– the Annual Tax on Enveloped Dwellings (ATED) charge, and
– the liability to Capital Gains Tax at 28% on gains.

The Stamp Duty Land Tax change is effective immediately, with the other two aspects following from 1 April 2016 onwards for properties worth between £500k and £2m. An interim provision will bring properties worth between £1m and £2m into the ATED regime from 1 April 2015. Current proposals are for the ATED to be set at £7,000 per annum for properties worth £1m to £2m, and £3,500 per annum for those worth between £500k and £1m.

HMRC state that these new measures are designed to tackle tax avoidance and not damage commercial enterprises. The Chancellor also states an intention to bring back into use large numbers of property currently sitting empty, and I can’t argue that that isn’t a good idea. For these reasons I would expect reliefs will be available in the same way as the current reliefs for property businesses. We’ll know more when the Finance Bill is released.

However, even though there may not be an actual tax impact on genuine property businesses, one cannot escape the fact that for many situations a Limited company is an attractive structure in which to acquire property. The regime as it currently operates is geared so that such property owners are presumed guilty of using their company for tax avoidance and liable for the taxes until they declare their innocence by submitting the annual ATED return, and claim one of the available reliefs. So that’s yet a further piece of annual compliance for the diary (together with a requirement to make various disclosures regarding values etc) and it comes with the usual threat of penalties for non-compliance.

Now, given that one-bedroomed flats are commanding over £500k in parts of London, and according to thisismoney.co.uk, 50% of London homes are worth more than £1m, this is not simply a “widening of the net” but more akin to sending a super-trawler up the Thames – and as Eric Cantona of Manchester United fame once said – “the seagulls follow the trawler because they think sardines will be thrown into the sea”!

“Home is where the heart is” – but HM Revenue and Customs may not agree with you [Principle Private Residence Relief]

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HMRC’s attitude to capital gains tax and residential property is changing and this change could potentially affect many home owners.

Currently an individual’s main residence is exempt from capital gains tax due to the generous main residence exemption commonly referred to as Principle Private Residence relief (PPR).

In most domestic property sales the relief will cover the entire capital gain on sale. If you own only one property which you have lived in throughout the period you have owned it then you will almost certainly qualify in full for PPR.

If you own more than one property or expect your period of ownership to be short or there have been periods of non-occupation then the situation is more complicated. PPR may only be partially available or in some cases not at all and you will need to plan carefully to maximise your chances of making a successful claim.

In the past HMRC has taken a light touch in deciding what constitutes a main residence for the purpose of PPR, often accepting that a property has been the main residence even when the actual periods of occupation or ownership have been short or where an intention to develop was apparent.

A number of recent tax cases have challenged the status quo with HMRC successfully seeking to deny PPR. The cases have generally focused on the intention to occupy as a main residence and the quality of occupation. Deciding factors have included property being actively marketed for sale throughout the period of occupation and living on site during development not being a sufficient quality of occupation.

I am often asked how long it is necessary to live in a property for it to qualify for main residence exemption, but it is clear from HMRC guidance and the case law that, as with many things in life, quality of occupation rather than quantity is the most important factor. Taking steps to ensure that post is directed to your property, that you appear on the electoral register, registering with a local doctor and actually moving your furniture in are more likely to lead to a successful claim than physically camping out at the property for any length of time.

Where PPR is due in full on a sale then it applies automatically and does not need to be claimed. This leads to most sales of domestic property not being declared at all on a self-assessment tax return. However, problems will arise for anyone failing to declare a sale in the mistaken belief that PPR will cover the whole of their gain when it is only partially due or not due at all.

HMRC can and do obtain details of all property sales in the UK from the Land Registry and are on the look out for undeclared gains. Should HMRC successfully challenge a claim to PPR then tax, interest and penalties will all become payable. It is therefore important that if you are in any doubt over the validity or quantum of your claim then full disclosure of the facts should be made.

Growing pains – A fly in the ointment when deciding on UK property ownership structure?

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Property investors generally look for growth in the value of their assets, so how could that growth bring them into a charge to tax that they did not expect?

Well, first some context – according to the UK Land Registry, the average house price in the Royal Borough of Kensington & Chelsea increased from £490,000 in 2003 to £1,078,000 in 2013.  That’s an increase of more than double in a 10 year period.  If that rate of growth continued, it would mean that a property currently worth around £900,000 in that Borough would be worth £2m in 2023.

No doubt, this is one of the reasons why there is a well-trodden path towards UK property investment, and it would look like this trend is set to continue.  Savills, for example, have recently issued their forecast for house prices Savills 5-year house price forecast.  They forecast growth of up to 25% in the next 5 years across the UK as a whole, so parts of the country could be far in excess of that.

Now to ownership structures.  The options for the structure in which property is owned are numerous and there are a variety of tax and non-tax issues to consider.  The relative importance of each will be different to each individual investor.

It is essential to consider the ownership structure from the outset as Stamp Duty Land Tax rates of up to 15% make it costly to change afterwards.  The need to take advice is clear, but what if that advice suggests ownership in a corporate vehicle?

Much has already been written about the tax rules which apply to properties worth more than £2m, and owned in a corporate vehicle (enveloped dwellings).  In a nutshell, the rules include a headline Stamp Duty Land Tax rate of 15%, Capital Gains Tax charges for properties sold using such vehicles and an Annual Tax charge dependent upon value.

Properties costing less than £2m are currently outside of this regime, and many investors are buying such properties – so what does the “anti-avoidance” legislation hold in store for them?

Well, HMRC have launched a consultation to explore the possibility of extending the capital gains tax aspects of the “over £2m” rules, so that they apply to lower value properties held in corporate vehicles.

The outcome of this consultation cannot be predicted, but my view is that HMRC are looking to squeeze as many properties into this taxation regime as possible.  Time will tell if they do, but even if HMRC don’t pass new legislation, we can be reasonably confident that, growth in property values will at some point push many more properties into the “over £2m” rules.

Given that investors in property invariably seek capital gains, this may in time prove to be a fly in the ointment for many.  However, until then it just adds one more factor to consider when deciding upon property ownership structures; whether you are a UK taxpayer or not.

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.

Latest HMRC campaign targets sales of second homes

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HMRC suspect that many sales of second homes are not being reported for tax purposes. They have used their extensive powers to obtain details of property sales both in the UK and abroad and are now inviting people to come forward to voluntarily disclose previously undeclared sales.

Most people are aware that they don’t have to pay any capital gains tax when they sell their home, but this is only due to a specific capital gains tax exemption for the main residence. If you sell a property which is not your main residence then tax will be payable on any increase in value over its original purchase cost.

The “Property Sales Campaign” is an opportunity to tell HMRC about previously undisclosed sales and to pay a lower rate of penalty than would otherwise apply if HMRC were to discover the undeclared amount themselves.

To take advantage of the campaign it is necessary to make a notification to HMRC by 8 August 2013 and then to submit a completed disclosure form along with the tax, interest and penalties due by 9 September.

If you think this may affect you and you would like further information or assistance in making a disclosure then please contact me.

Capital Allowance Claims for Fixtures in Second Hand Properties

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April 2012 and April 2014 changes to tax law have considerable impact on property transactions which, if ignored, can lead to wasted tax relief.

Since 1996 the extent that a purchaser of commercial property can claim capital allowances on assets within a property has been limited to the disposal value brought into the tax computation by the vendor, or by a previous owner. Purchasers have therefore had to make enquiries into the property’s capital allowance history.

The above led to the introduction of a joint election between the purchaser and seller that state the amount of the sales price that is apportioned to fixtures. The amount specified in the election cannot be greater than the vendor’s costs of the fixtures. Typically purchasers would wish the sum to be high and vendors wish it to be low. The election is often one of the more emotional aspects of purchase negotiations.

The election only covers assets subject to claims from 1996 onwards. This does not prevent purchasers of older buildings identifying assets on which a claim has never been made and making a “late” claim on those assets installed within the building before 1996.

The Finance Act 2012 changes the administrative processes and scope for tax planning.

At present, the joint election is good practice. From April 2012 it is mandatory for the value of fixtures being transferred to be identified. If a joint election is not used then the only alternative is that the Tax Tribunal process determines it for the parties. From April 2012 it has been important that there is certainty as to the transfer value as, unless the value of fixtures is determined, the purchaser (nor any future purchaser) is prevented from making a capital allowances claim on those fixtures.

From April 2014 capital allowance claims will only be possible to the extent that assets have been subject to an earlier claim. This will lead to owners having increased documentation requirements to substantiate claims and purchasers seeking sight of that evidence during the commercial negotiations. A further impact is that it will prevent late claims for pre-1996 expenditure. Taxpayers therefore have until March 2014 to make the first ever claim on pre-1996 property expenditure.