Tag Archives: tax

Student Loans – Do you need a degree to understand the rules?

With A-level results released over the summer in England, Wales and Northern Ireland, you may be one of the thousands of students who have recently headed off to university. It is likely that you will have received a loan from the Student Loan Company (SLC) to help finance your studies and associated living costs.
If you are taking out a loan in 2013, the loan repayment provisions will be a low priority until after graduation, but the rules are surprisingly complicated and it can be easy to get caught out.

Types of loan

The first thing to appreciate is that there is more than one type of student loan, and the repayment rules vary accordingly.

Income contingent loans are the most common type of loans but even then the repayment plan varies according to where and when you began your studies. From 1 September 2012, those studying in England and Wales will be on repayment plan 2; students in England and Wales with older loans, and all students in Northern Ireland and Scotland will be on repayment plan 1. The main difference between the two plans is the point at which the requirement to start repaying the loan begins: an individual on plan 1 will start repaying their student loan when they earn over £16,365 before tax in the year, the annual threshold for plan 2 is set slightly higher, at £21,000 before tax.

How does the repayment system work?

The requirement to repay a student loan starts from the April following the date you either graduate or decide to leave your course.

If you are employed, HM Revenue & Customs (HMRC) will notify your employer that you have an outstanding student loan and will confirm the repayment plan that applies. At the end of the tax year, your employer will notify HMRC of the total deductions they have made from your salary, who in turn will notify the SLC. The SLC will apply these repayments to your account.

What do I do if I have overpaid my student loan?

In most cases, loan repayments will be worked out by reference to a monthly earnings period. This means that if your monthly salary fluctuates, the amounts you repay will vary across the year, and you could end up repaying more of your loan than is required. In this situation you can request a repayment, but you may wish to do nothing. After all, the overpayment will mean your student loan is repaid more quickly and you pay less interest!

What do I do if I have nearly paid off my loan?

The SLC recognise the possibility that repayments will be made in excess of the original student loan. Accordingly, they write to all employees with outstanding loans where they believe the loan will be repaid in full within the next two years, offering them the opportunity to instead make monthly direct debits.

This option is only available to employees: if you are not employed, but are making student loan repayments you should monitor the outstanding balance on your student loan, and immediately request a repayment if you end up overpaying.

The SLC will only issue a repayment upon request, there is no facility for repayments to be issued automatically.

In conclusion, the repayment of your student loan is a two-step process: starting with establishing the type of plan you are on, and when your obligation to make repayments begins, followed by carefully monitoring the balance on your loan to ensure you do not overpay in error.

Employee Shareholder Shares

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This year’s Finance Act, which received royal assent in July, introduced a new employee shareholder status. As of 1 September 2013, employee shareholder contracts can be offered when shares with a value of at least £2,000 are awarded in the employer or parent company.
Independent advice

Employee shareholder status offers tax-privileged treatment of the shares in exchange for reduced employment rights. Given the element of sacrifice this entails for the employee, independent advice is required before an individual decides whether employee shareholder status is right for them.

Tax breaks for the employee

Tax advantages for the employee shareholder include no income tax or National Insurance Contributions payable on the first £2,000 of share value received and a Capital Gains Tax exemption for gains on the disposal of up to £50,000 worth of shares.

Tax breaks for the employer

Employers get full corporation tax relief on the value of shares awarded to and on the cost of the independent advice provided to employee shareholders. There is no requirement for businesses wishing to offer an employee shareholder contract to obtain HM Revenue & Customs approval or agreement.

Employment rights

All employee shareholders retain entitlement to key benefits such as statutory sick pay, maternity or paternity leave, minimum wage and paid annual leave, but they forgo unfair dismissal rights, statutory redundancy pay, the right to request flexible working and certain statutory rights to request time off to train.

The government’s rationale

The government expects employee shareholder contracts to appeal to companies looking to attract ambitious and high calibre staff in a competitive labour market, with the hope that employee shareholders increase productivity through a feeling of greater involvement in their employers’ businesses. The status is likely to appeal to those working in fast-growing firms who see potential for the shares to increase in value through their efforts, with the ultimate aim of being able to realise tax-free capital gains on eventual sale of up to £50,000 worth of shares.

Criticism

Despite the government’s hopes, take-up is expected to be slow and the legislation was heavily criticised as the Finance Bill went through parliament. It was opposed by a number of ex-ministers in the House of Lords, including former chancellor Lord Lawson, whilst shadow business secretary Chuka Umunna said the government had produced no evidence to show how the measure would boost growth.

The Trade Unions Congress has dismissed the new legislation as an ‘expensive gimmick’, fearing that employees will be forced into accepting roles where they lose basic rights in return for shares that could prove to be worthless, whilst British Chambers of Commerce had received no enquiries from interested businesses ahead of the 1 September launch date.

It is early days for employee shareholder contracts but the political and business consensus at outset appears to be that uptake will be embarrassingly small.

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.

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.

Tax on high value residential property

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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.

Is tax fair?

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When I was at primary school I recall clearly one teacher. He had a catchphrase. A pupil would run up to him with a grievance and invariably end up saying, “Sir, it is not fair.” Those around knew the answer coming, mouthing the words in time with the teacher. His words predictable and solidly spoken – in a deep voice he would say, “Life is not fair.” To small children it never seemed a satisfactory answer – we expected fair. As adults we appreciate the irregularities in life and its imperfections. Is life always fair? Certainly not.

The recent ethical and moral debate on the UK tax system is a fascinating one. There has been an explosion of interest in tax avoidance. There certainly does appear to be an expectation that the tax system should be fair. Especially as emotions tend to run high in times of economic hardship and when personal finances tighten.

Does a fair UK tax system exist? Our ancestors certainly never managed one. Is the current UK tax system fair for everyone? Absolutely not. Is there an expectation that it should be? Perhaps.

Let us think what it would take to produce a fair tax system. Taking the definition of the word “fair” it would require a tax system that:

“Treats people equally without favouritism or discrimination.”

Do you think that is possible? Of course not! Fair is an opinion, it is subjective and your opinion may be completely different to mine. As an individual you probably pay higher rates of income tax than a small company pays for corporation tax – quite possibly nearly double. Does that seem fair to you? Perhaps it does, perhaps it doesn’t – your view of fair on an issue may be different to mine.

More accurately as Peter in his post noted:

“There’s nothing “fair” about tax. It’s whatever each government wants it to be. A revenue-collecting device.”

So when you listen and read the stories on tax avoidance first keep in mind that the UK tax system will never be fair. The real question is not is tax fair – it isn’t for everyone – but how can our UK tax system be changed? So ask yourself what would you do?

Christmas Gifts to your Employees

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Many employers like to give Christmas gifts to their employees to reward them for their effort throughout the year. Unfortunately HM Revenue and Customs will generally view such gifts as taxable in the hands of the employee.

The only instance where a gift is not taxable is if the Tax Inspector agrees that the benefit is of a trivial amount. HMRC’s manuals point out that there is no set monthly limit below which a benefit is deemed to be trivial. The manuals give examples of the sorts of items which they will not seek to tax. Examples given include “seasonal gifts such as a turkey, an ordinary bottle of wine or a box of chocolates”.

In deciding whether the gift is a trivial benefit or not it is necessary to consider the individual employee rather than the total cost. For example an employer with a large workforce could spend a lot of money giving small gifts to each employee. This would not alter the fact that the benefit might be trivial.

If the gift extends beyond one of the small items mentioned above, for example a case of wine or a Christmas hamper, then the Inspector will consider the cost and contents of the gift in deciding whether to agree the benefit is trivial.

You should also be aware that gifts of cash or items which can be readily converted into cash such as retail vouchers will not be considered a trivial benefit irrespective of their value.

If you want to give larger gifts to your employees but don’t want them to suffer a tax charge you can enter into a PAYE Settlement Agreement with HMRC to pay the tax on the employees behalf.

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.

Formula 1 McLaren Team Cheating Fine is Tax Deductible!

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There are times when tax law appears to lead to strange results and at first glance that might appear to be so in the McLaren cheating fine case which was in the papers recently.

When I first heard that McLaren were to receive tax relief on their fine I thought that can’t be true, but having taken a closer look at the facts of the matter I have to accept that there is a good case to argue why this should be correct.

In many sporting arenas, pushing boundaries in order to win is all part of the sport. The line between acceptable innovation and cheating is a fine one especially in a technologically advance sport such as Formula 1.

McLaren’s accountants have argued that the penalty incurred by their team was a natural consequence of pursuing their business of winning Formula 1 races. Whilst they had been found to have broken the rules of the sport, they stress that the penalty was not imposed for breaking any of society’s laws.

Tax law states that in order for expenditure to be tax deductible in a business it needs to be incurred wholly and exclusively for the purpose of the trade. I am not sure of the detailed rules of Formula 1 but my assumption is that had McLaren not paid this fine they would have been excluded from continuing in the sport. Unlike a civil or criminal penalty which must be paid in order for the individual to avoid personal consequences, the argument goes that the only reason for McLaren to have paid this penalty was to continue to compete in formula 1. The expenditure would therefore be incurred wholly and exclusively for the purpose of the trade rather than any other purpose. As counter intuitive as it seems, I think they probably have a point.