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Making Tax Digital

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Making Tax Digital

HMRC have recently issued 6 consultation documents outlining their proposals for a fundamental change to way they want individuals and business to submit their tax return information. If implemented as planned this will be the biggest change to the tax system since the introduction of Self-Assessment 20 years ago.

Quarterly basis

The proposals are to move to a more electronic based system where as much information as possible is automatically gathered directly from third parties. The taxpayer will then only be required to update information which cannot be obtained automatically from elsewhere.   However, these updates will have to be made on a quarterly basis instead of the current system of providing information after the year end on the annual tax return.

By embracing the technology now available, HMRC hope to improve the tax system by:

  • reducing the costs of assessing and collecting tax
  • cutting out duplication of work for the taxpayer by avoiding the need to provide information already held by HMRC
  • reducing the time delay between the receipt of income and the payment of tax

HMRC are eager to point out the benefits of the new system to the taxpayer, but if the proposals are introduced as planned the reality will be that many people will pay tax much earlier than they do now and their compliance burden will increase.

What do you think?

We will be responding to HMRC’s consultation and making representations on our clients behalf and invite you to let us have your views.

See our summaries of each of the consultations:

Please email us on MTD@goodmanjones.com with your views.

Initial thoughts on Taxation after Brexit

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Although the Brexit process is anticipated to take at least two years it is worth considering the possible tax consequences of leaving the EU.

Indirect Tax

The UK is part of the EU Customs Union and therefore goods can be moved to and from other member states without duties (either customs duties or import VAT). There are reduced compliance obligations on intra-EU transfers.

Unless the UK negotiates otherwise then goods brought into the UK from the EU will be subject to import VAT and import duty. Conversely goods exported out of the UK and into the EU will be subject to EU import VAT/duty.

The EU has negotiated favourable terms of export to third countries and the UK may lose the benefit of these rights. However the UK will no longer be bound to EU rates and tariffs and therefore may be able to reduce costs of importation or negotiate separate (even more favourable) terms of exports to third country.

The rate of VAT in the UK is controlled by Brussels. On leaving the EU these restrictions will be lost and therefore the standard rate of VAT may change and/or the items to which the zero rate applies extended.

At present there is a process allowing the UK to recover VAT incurred in other EU countries. This involves access to a single portal on the HMRC website.  Although recovery will still be possible after Brexit the administrative process is likely to change and therefore there may be delays in future recovery of EU VAT.

Direct Tax

Direct taxes are broadly determined by member states without direction from Brussels and therefore there should be little impact on direct tax rates. Irrespective of this independence there are UK rules which have been specifically designed to be compatible with EU law and EU freedoms. Those rules can be repealed or varied.

Some tax reliefs are subject to EU state aid considerations and cannot be implemented without EU approval. Theoretically those reliefs could be expanded considerably.  However the UK will remain a member of the OECD and therefore subject to OECD harmful tax practice considerations.  These considerations are likely to restrict the introduction of very generous tax reliefs.

Withholding Taxes

There are exemptions from domestic withholding taxes for payments to EU members. After Brexit those exemptions would not necessarily continue and the rate of withholding tax would be determined by the tax treaty between the UK and its European neighbours.  In the absence of any other agreements this would suggest an increase in withholding taxes on both inbound and outbound payments.  Arrangements with gross up clauses (i.e. the recipient receives a certain sum and any withholding tax is a cost to the payer) would need to be managed carefully.

The UK does not have any outbound dividend withholding tax and therefore dividend payments out of the UK would remain unaffected.

Social Security

There are specific rules which apply to EU residents who work in another member state. They are designed to restrict the social security contribution to one state and determine which state that is.  These rules may not apply after Brexit and this could lead to double taxation for some internationally mobile workers.

Timings for change

Any changes are not likely to be immediate. I would anticipate that Budget 2018 would prepare the country for any changes in our domestic taxation.

The reality is that no-one really knows the taxation impact of Brexit and the extent that some, or all, of the above occur can only be determined with the fullness of time.

Staff Party time. Don’t make it taxing.

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goodmanjones-staff-party-hmrc-allowance

Are your thoughts turning to those lazy hazy summer days and organising a social event for your staff? Or perhaps you are super organised and already thinking about the office Christmas party. Whichever it may be, don’t forget the tax man will have something to say about it. I’m not sure who the summer equivalent of Scrooge is, but there is a limit to HMRC’s generosity in allowing businesses to lavish hospitality on their staff.

That limit is £150 per head per tax year and hasn’t changed in 14 years so is worth approximately £75 less than it was in 2002.

Provided the cost of an annual staff function is less than £150 per head there is no tax consequence, but exceed the limit then the whole of the cost per head of the function is a taxable benefit in kind for each employee attending.

It should be noted that the £150 limit is the cost per head and not per member of staff attending so other guests can be included in the head count. The limit can be applied to more than one function so can cover both a summer and a Christmas party.

The exemption does not apply to all staff entertaining. For a function to fall within the exemption it needs to be an annual event open to all staff to attend. Strictly an annual event should be one that is held annually, but in my experience HMRC interpret this fairly loosely and will allow events for special one off occasions as well.  If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt. You can also put on separate parties for different departments, as long as all of your employees can attend one of them.

Where the limit is exceeded or there are staff entertaining costs which are not covered by the exemption it is common for businesses to arrange a PSA (PAYE settlement agreement) with HMRC to pay any tax which would otherwise be payable by the individual staff members. A PSA is fairly easy to arrange and the tax won’t be payable until 6 months after the end of the tax year so you can enjoy your party and worry about the tax bill a lot later!

When to pay dividends this year in light of the new dividend regime or What a difference a day makes – tax on dividends paid on 5th April v. tax on dividends paid on 6th April 2016.

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Many will be feeling a lot lighter following the tax payment deadline; with the start of the fiscal year soon to follow those with their own personal companies really must consider the impact of the dividend regime and how it is going to affect their tax liabilities.

The tax consequences between paying a dividend before and after the end of the tax year are laid out below:

New dividend regime – from 6 April 2016               Current dividend regime – to 5 April 2016

Dividend payment Tax due Dividend payment Tax due
£5,000 £nil £5,000 £nil
£10,000 £375 £10,000 £nil
£30,000 £1,875 £30,000 £348
£50,000 £7,875 £50,000 £5,348
£100,000 £26,600 £100,000 £22,353
£150,000 £45,941 £150,000 £36,217
£200,000 £64,991 £200,000 £51,494

Note: The table is based on an assumption that the personal allowance has been utilised by non-savings income earned in the year. It also assumes that the individual has no other taxable income or any reliefs available.

Of course paying a dividend in an earlier tax year will bring forward the tax due date by 12 months so the negative cash flow implications will need to be taken into account as well as the tax savings when considering whether to take dividends early.

The new regime comes into effect on 6 April 2016, to avoid falling within the new regime dividends must be paid before then.

Should I Incorporate my Buy-to-Let Business?

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The introduction of three specifically targeted rule changes aimed at cooling the buy-to-let market have led many landlords to ask whether they should be incorporating their buy-to-let businesses. But have the goal posts really moved in favour of incorporation for rental businesses?

My own view is that for most people the pendulum has swung against incorporation due to the new dividend rules and the changes to the taxation of rental income do not alter this. There is no doubt that incorporation could be beneficial in some circumstances but there is no “one size fits all” answer and for some, incorporation could make them significantly worse off.

The changes particularly aimed at the buy-to-let market are in connection with:

  1. A restriction on the tax relief for interest payments
  2. The availability of wear and tear allowances on furnished lettings
  3. Stamp duty land tax increase for second properties

Interest relief

Commencing in April 2017, interest relief will be restricted to 20% basic rate only. This restriction is being phased in gradually over 4 years so that by the 2020/21 tax year all interest relief will be at 20% only.  There are important implications arising from this change that are examined in a previous blog.

Wear and tear allowance

With effect from April 2016, the 10% wear and tear allowance for furnished lettings is abolished. This is replaced with an allowance for renewals instead. This essentially means that the first purchase of an item of furniture or furnishings is not an allowable expense, but the subsequent replacement of such items will be an allowable expense against the property income. This wear and tear allowance has however been available to both individuals and corporates letting residential accommodation and hence its abolition affects both. Landlords have previously been able to claim renewals but it is generally accepted that the old 10% wear and tear allowance was beneficial in many cases.

Stamp duty land tax increase

The Autumn Statement announced a new additional 3% rate of stamp duty land tax (SDLT) to be applied to all purchase of second properties. We have yet to see draft legislation on this but it is going to apply to both individuals and corporates but with an exception proposed for corporates owning 16 or more properties.

Of the above three rules changes only the first does not apply to companies and it is this which is largely the reason why people are questioning whether a corporate structure would be appropriate. However, it should be noted that companies only pay corporation tax at 20% (soon to reduce to 18%) so this exclusion is of little consequence to a company.

I conclude from the above that the announced changes are not going to make a significant change to the decision that we already face over whether it is beneficial to run a letting business as an individual or company. The major factors that it is necessary to consider therefore remain largely the same as they have always been and there is no one size fits all solution:

Some people will find it advantageous to incorporate, but the reasons for this have largely not been affected by the above rule changes. The questions to consider include:

  1. Will you be able to borrow on similar terms through a corporate or as an individual?
  2. Will you need to extract profits from the company? If you do then you will be exposed to the higher rates of income tax on extraction, whereas if you are able to retain profits in the company they will suffer tax at the lower corporate rates only.
  3. Selling a property within a company gives rise to a potential double tax charge as the company will pay corporation tax on the gain on sale and the individual will suffer further tax on profit extraction.
  4. For existing buy-to-let businesses there is also the issue of capital gains tax and SDLT charges to consider on transferring property into the company on incorporation. Don’t forget that whilst there is no SDLT on gifts for no consideration, if there are loans outstanding that will be transferred to the company with the property then they will treated as consideration for SDLT purposes.
  5. The additional compliance costs of running a company also need to be factored in as they will in some instances outweigh any tax benefit.

A further point to consider is interest relief which is available on borrowing personally to lend to a company. Under current proposals the restrictions to interest relief on buy-to-lets does not apply on loans taken out by individuals to lend on to their buy-to-let companies. This would at first sight appear to be loophole. However, in most circumstances it would be necessary to fund the interest payments by charging interest to the company and hence for the individual the interest paid and received would be self-cancelling leading to no benefit. There is also a question-mark over whether banks would be prepared to lend to the individual when the property was in a company.

So, incorporation is most likely to suit a business which has low borrowing requirements, low turnover of properties and can afford to roll up profits within the company to take advantage of the low corporation tax rate. This is not your typical buy-to-let Landlord

The above gives only a brief overview of some of the issues involving the incorporation of a buy-to-let business. Each person’s circumstances will be different and you should take proper advice before taking any action.

 

 

The 2015 Autumn Statement

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Download the Goodman Jones 2015 Autumn Statement Review

Our report on the key elements gives further details, but particular items which caught our attention include:

  • The Chancellor side-stepped the expected dramatic cuts in public spending thanks, in part, to the OBR’s improved forecast for the economy, and through significant additional tax costs to business. The largest money raiser is a new tax on employers to support apprenticeships, but the property sector was not left unscathed.
  • The excitement of the leaked plans to build 400,000 new homes by 2020 was dampened somewhat by the announcement of a new 3% stamp duty levy on the purchase of second homes both for personal and buy-to-let use. At present this is not planned to affect companies with significant investment in residential property which has added an additional complication for buy-to-let landlords considering whether to incorporate.
  • As always there are a few surprises hidden in the detail including a planned reduction in the time allowed to pay stamp duty, reduced from 30 to 14 days and also a new requirement to pay capital gains tax on the sale of residential property sales within 30 days of completion.

There were announcements that affected other areas such as partnerships and charities however these appear to be more of a tidying up exercise rather than mainstream changes.

For more information on these and all of the announcements made in the Autumn statement please see our summary PDF.

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.

High Income Child Benefit Charge – Check HMRC’s assumptions

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It is good for tax professionals to receive letters from HM Revenue and Customs from time to time relating to our own tax affairs as it helps to remind us of the emotional impact our clients feel on receiving such letters. I was “lucky” enough to be reminded of this over the weekend when a letter landed on my doormat from HMRC telling me that I had made “an obvious error” on my own tax return! As you might imagine, given that I spend a good deal of my time making sure my clients’ tax returns are correctly completed, I was more than a little put out at the suggestion that I had made an obvious error on my own return! I am pleased to say that a quick check assured me that I had not made an error, but rather frustratingly it was the Inspector of Taxes who had jumped to a conclusion which was basically wrong.

The matter concerned the High Income Child Benefit Charge (HICBC) which seeks to clawback child benefit from anyone with income in excess of £50,000. HMRC helpfully pointed out in their letter that the law allows them to correct tax returns where they consider an “obvious error” has been made and that I had not made the appropriate adjustment to my tax return for the HICBC.  The problem however is that the child benefit should be recovered from whichever of a couple living together has the higher income.  I had correctly excluded the HICBC on my own tax return for the simple reason that my wife earns more than I do. Had the Inspector checked my wife’s tax record they would have seen that she had suffered the adjustment in the previous year’s tax return and an adjustment had already been made to her PAYE tax code to recover the child benefit for the year in question!

I telephoned the phone number on the letter and explained their mistake. I also asked what they had done to check which one of us was the higher earner. It turned out that they had not checked at all, but had just assumed that I was the higher earner. Tempting as it is to see this as systemic sexism, I think the reality is that HMRC have adopted a “don’t check, just demand the money and let the taxpayer object” approach. I have heard of instances of both partners receiving demands for the same amount.

Putting aside my emotional response, the real problem highlighted here is the difficulty of having an income tax system which purports to assess couples independently and a benefit system which takes into account couples joint income. If you try to mix the two together as in the case of the high income child benefit charge then there are bound to be problems.  From an income tax perspective my wife is under no obligation whatsoever to inform me of her income.  Had I not been experienced in dealing with HMRC it might have been reasonable for me to assume that the Inspector had properly checked my wife’s income for the year in question and that the HICBC was correctly assessable on me.

HMRC do have an online form which you can complete to ask whether your partner has the higher income to which they will answer only yes or no, but my experience does not give me a great deal of confidence in the accuracy of their answer. Fortunately for me, my wife and I do exchange information about our finances, but there must be many couples who don’t and may be getting incorrectly charged.

Non UK domiciles – still with us?

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The promised consultations on the proposed non domiciled changes were issued last week, and the “excitement” of seeing the link come through was definitely tempered by the puzzlement experienced when seeing it was only 17 pages in total. This bemusement increased after the first read through, as the various consultations promised have all been included in the one document which made the size of it even more surprising.

It appears that HMRC have engaged with certain “stakeholders” already, pre-consultation, to discuss these measures. We will never know whether they took account of any of the stated current concerns or suggestions. Certainly, there have been some changes although at first glance they look potentially worse for the affected tax payers, not better. So, what has changed since my earlier summary?

 

Resident Non-UK Domiciles

The original suggestion regarding the new deemed domicile for all taxes was that it would extend from a three or four year period to an overall five year period. That has now increased even further to needing to be non-resident for a continuous period of six years (tax years of arrival and departure will count towards this) to lose the deemed domicile.

Years spent resident in the UK whilst under the age of 18 will also count towards the 15 out of 20 years calculation. This means an individual born in UK could become deemed domiciled before they even turn 18.

It is not clear whether the Government is going to accept that a double taxation treaty can override the UK residency or not. Usually, if someone is resident in two countries at the same time under the countries’ own domestic laws, the double taxation treaty gives primary tax rights to one jurisdiction and deems an individual as “treaty resident” in only one country.

 

Offshore Trusts

The changes announced in the taxation treatment for offshore trusts are potentially going to be a minefield. The government are trying to effectively tax only “taxable benefits” received by individuals, regardless of the trust’s own income and gains and regardless of what distributions of either income or capital have been made. In particular, anyone who has been keeping records of capital payments and trust gains must review the trust and beneficiaries’ positions well before the new rules begin in April 2017. The Government is also suggesting that these new rules could apply to all non-domiciled individuals and not just those who become deemed domiciled.

The government is still considering these proposals and there should be a further announcement with draft legislation in due course.

 

Returning UK Domiciles

The consultation confirms that whilst UK resident, the UK domicile of origin will revive. Some of the detail will be quite confusing. For example, if there is a split year of residency this will count for income tax and capital gains not for IHT. The Government may consider a “grace period” if an individual falls of this, but doesn’t remain in the UK for an extended period. In summary, the advice has to be don’t die whilst UK resident or be UK resident when a potential IHT charge is due to arise.

 

Other Potential Changes

The increase to a six year period of non UK residency is also to apply to the IHT spousal election. This increases the amount of time by two years that a spouse who has elected to be deemed domiciled for IHT purposes has to be non-resident to lose it.

At present a UK domiciled individual can acquire a domicile of choice after a potential minimum of three years out of the UK. This will effectively be increased to six years as well.

A non domiciled individual with less than £2,000 of unremitted foreign income and/or gains effectively received the remittance basis automatically and did not have to file a return. This £2,000 de minimus rule may be removed for individuals who become deemed domiciled in the UK under these proposals to align their tax treatment with UK domiciled taxpayers.

 

Conclusion

It’s hard to be positive about these announcements. Respondents to consultations usually take their time to be constructive and to use their knowledge and experience to influence new tax legislation. Even the word “consultation” denotes collaboration, but these 17 pages of pronouncements don’t really focus on the true problems and the questions asked are not the right ones. Responses have to be in by 11 November and this is a shorter than normal period.

As before, anyone potentially affected by these changes must take advice in good time to allow for a measured response to their own position.

Follow https://uk.linkedin.com/in/janetpilborough GJ LINK to continue to be alerted to developments.

Tax Relief on Solar Installations

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If you keep your eyes peeled you may notice more and more offices and farms are subtly adding solar electricity installations. If you look carefully at some carport roofs you may realise they are also solar installations. Possibly London’s most famous installation is the Blackfriars railway station roof which spans The Thames.

Often the electricity is used by the business operating out of the property with excess electricity bring sold to the National Grid. Any receipt from such a sale is taxable. Tax relief is available on the cost of production including the capital costs of installing solar systems.

The typical installation has a reasonable set up cost and then generates income which has low cost of production. Once set up, and other than routine maintenance, there is very little follow on cost associated with the generation of solar electricity. Income from excess electricity is therefore almost all pure profit.

The tax relief on installation of the equipment is broadly aligned to the installation costs. On modest installations this matches the costs. However. the larger the installation the less the matching correlates. The matching is through the capital allowance legislation.

Capital allowances are permitted on solar installation to the extent that there is an installation cost to the business. If a grant is received which contributes to that cost then the capital allowance is claimed on the net cost to the business.

Since 2012 solar photovoltaic systems have been classified as items which attract an 8% annual writing down allowance tax relief. Also since 2012 the rate on which allowances can be claimed for any asset generated income under the feed in tariff is 8%. This compares to rates of up to 18% for tax relief on assets in other industries.

The 8% restriction is not as damaging for smaller installations. The Annual Investment Allowance of (presently) £500,000 (and to reduce to £200,000 on 1 January 2016) can be used to offset against the costs of installation. This gives immediate tax relief for costs up to £500,000/£200,000. The logic being that the smaller sites are likely to be for the benefit of the operation of the business and not built solely to generate feed in tariffs. Once the installation is sufficiently large that feed in tariffs are earned then the annual investment allowance is no longer available. If the business foregoes the tariff payment then first year allowances can be claimed.

For the small scale business wishing to use its environment to reduce electricity costs and possibly generate extra revenue there is capital allowance planning to consider. Large dedicated installations have fewer options in their capital allowance planning. This landscape may change with the recently proposed reduction to feed in tariffs. From 1 January 2016 it may be beneficial to disclaim the tariff to access the immediate tax relief.

Given the reasonable costs of set up another factor is financing any debt used to set up the installation. The lender may wish to see evidence that electricity will be generated in sufficient quantities to realise revenue streams. Part of the revenue stream may be used to repay the lender. Capital allowance planning and the consequential tax relief will impact on cash flows and may help shape the overall viability of the installation for the owner and its stakeholders. The financier would be a key stakeholder and would be interested in forecast cash flow, including tax flows.

The Summer Budget – The impact on entrepreneurial businesses

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There has been a suggestion that the Tories won the recent election due to the numbers of votes cast by the country’s entrepreneurs, more specifically the estimated 5 million owner-manager businessmen and women of the country. If that is the case then they may have been disappointed by the “big and bold” announcements of yesterday. The announcements had the aim of making the UK a high wage, low tax, economy with little reliance on the welfare state. These were election manifesto promises delivered. Although there is to be a cut in the corporation tax rate and permanence to the tax relief on purchase of plant and machinery, the small business owner may feel that the welfare bill has been privatised. This is to the detriment of the entrepreneur.

The announcements about an increase in minimum wage should offset some of the cuts in welfare benefits offered to working families. As it is the employer and not the state who pays salary, the shift in burden moves to the entrepreneur. Although a £1,000 increase in employment allowance will help the employer mitigate the increased costs of employment, the costs of rising wages will fall on the shoulders of employers. This is in addition to any apprentice levy the employer may have to pay.

The government would point to the cut in corporation tax rate as also helping contribute to the costs of employment. What the entrepreneur would reply is the increased tax cost of paying company dividends negates any corporation tax reduction. Assuming the corporation tax cut equals the dividend tax rise this leaves an increased wage bill as the cost for the entrepreneur.

The extent that the government’s view or that of the entrepreneurs is correct will depend on the size of the workforce, the profit made by the business and the wages paid to employees. In simple terms it will depend on facts and circumstances.

Facts and circumstances are key in giving tax advice. For example, given the correct facts and circumstances it is suggested that there are at least seven different salary levels which lead to detailed tax considerations. This reinforces the statistic that the UK has the longest tax code in the world. A recent press article indicated that the UK’s code is about sixty two times longer than the most efficiently drafted tax code and has trebled in size since 1997. It seems perverse that the existence of an Office for Tax Simplification is being put on a statutory basis at the same time that the tax code is growing at an alarming rate.

An area in which the tax code is mercifully brief is the tax treatment of non-domiciles. With the announcement that longer term residents of foreign extraction will be taxed as if they are UK citizens together with changes to the tax structures they often use will, no doubt, expand Britain’s lengthy tax code. I recently had the opportunity to hear an MP describe the budget process and he described George Osborne as “a tinkerer” in the context of making subtle changes to tax breaks and charges. If the description is true then I can assume Britain will retain its gold medal position in the tax code size challenge.