Tag Archives: tax

Child benefit – to claim or not to claim?

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HM Revenue and Customs are currently sending out letters to all high income claimants of child benefit advising them of changes which come into effect from 7 January 2013. As already discussed in an earlier blog, those affected will be couples where the higher earner has income in excess of £50,000 per year.

If you fall into this category then your entitlement to some or all of the benefit will be removed and you will be given the choice of either not claiming the benefit at all or claiming the benefit and then paying back any overpaid amount through your self-assessment tax return.

It is clear from recent press coverage that this subject has caused a lot emotional response. Views expressed range from those who think it morally wrong that wealthy individuals should be receiving any benefits to those who see child benefit as a just recognition of the contribution to society of bringing up children?

Whatever your view, the practical question is whether to forgo the benefit completely or to claim and pay back any overpayment?

If you know your income is going to exceed £60,000 there seems little point in claiming only to have to pay back the whole lot later. If you are in the middle ground with income between £50,000 and £60,000 you will remain entitled to some benefit, or your income may be not ascertainable until after the end of the tax year. Unlike income tax which can generally be sorted out after the year end, claims for benefits general can only be backdated three months. Waiting until after the end of the year will therefore be too late.

Leaving aside the moral arguments it would seem sensible to claim if you know your income will be less than £60,000 or are uncertain but think it may be. There may be circumstances where claiming is not the best approach. If for example you do not already submit a self-assessment tax return you will be required to complete one to declare any amount overclaimed and if you need the help of a tax agent then costs are likely to significantly eat into any benefit entitlement. Or, if you are the sort of person who spends the money you have then it may be difficult to find the funds to pay back any overpaid amount at later date.

One thing I can be certain of and that is as a recipient of child benefit myself, I have got used to the cheque landing in my bank account every month and I am not looking forward to losing it!

As always, if you have any queries regarding the above matter or are uncertain how it will affect you then please contact your usual client partner or a member of our tax team.

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.

Do you need to register for Self-Assessment?

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It’s almost that time of year again; Christmas parties, the X Factor and Strictly Come Dancing on the TV, and those television and radio adverts featuring Moira Stuart reminding us of the deadlines for submitting our tax returns.

If you have already been issued with a notice to complete a 2011/12 tax return you are probably already aware that you have until 31 October 2012 to submit a paper copy to HM Revenue & Customs (HMRC), and until the 31 January 2013 to file online.  But what do you do if you haven’t received a notice to complete a tax return, and you suspect that you should be preparing tax returns?

HMRC only issue tax returns to those already within the Self-Assessment system. This puts the onus on the individual to notify HMRC of any changes in their circumstances that require them to complete a tax return, and to register for Self-Assessment.

The deadline for registering for Self-Assessment is 5 October.  With this deadline less than a week away, it’s more important than ever that you check whether or not you should be within the Self-Assessment regime.

How do you determine whether or not you should complete a 2011/12 tax return?

HMRC have issued guidance on the reasons that an individual would be required to complete a tax return, and a detailed list can be obtained from the HMRC website.  However, some of the more common reasons include the following:

  • You were self-employed in the year (including members of partnerships)
  • You receive £10,000 or more from savings and investments
  • You receive £2,500 or more from untaxed savings and investments
  • You receive either £10,000 or more from property before the deduction of any expenses, or at least £2,500 after the deduction of expenses
  • You receive foreign income
  • Your annual income exceeds £100,000
  • You have a capital gains tax liability in the year

If you satisfy any of these criteria in 2011/12 and have not already been issued with a tax return, it’s more than likely that you will be required to register for Self-Assessment.

How do you register for Self-Assessment?

Once you have determined that you need to complete a 2011/12 tax return, the next step is to register for Self-Assessment.  This can be done in one of two ways:

The first method is to complete either form CWF1 (self-employed individuals) or SA1 (all other cases).  These forms can be downloaded from HMRC’s website by following the below links:

SA1 – http://www.hmrc.gov.uk/sa/forms/sa1.pdf

CWF1 – http://www.hmrc.gov.uk/forms/cwf1.pdf

Alternatively, you can contact the Self-Assessment Helpline on 0845 900 0444.  You will be asked to provide your National Insurance number and to explain why you believe you should be issued with a tax return.

If you have previously been within the Self-Assessment regime, you will have previously been assigned a Unique Taxpayer Reference (UTR).  This is a 10-digit reference number and can be found on correspondence received from HMRC.  It’s not necessary to have a note of your UTR to re-register for Self-Assessment, but locating this information may speed up the registration process and avoid the duplication of Self-Assessment records.

The normal deadline for the online submission of a 2011/12 tax return and the payment of any tax owing is the 31 January 2013, although a paper tax return can be submitted at any point up to the 31 October 2012.  However, where you have been issued with a tax return after 31 October 2012, you have three months from the date you received the notification from HMRC to submit your tax return (either on paper or online) without incurring late filing penalties.

What happens if you miss the 5 October deadline?

With effect from 2011/12, a new penalty regime is in place if you fail to register on time.

This penalty regime is based on late returns and potential lost revenue’ i.e. the amount of tax outstanding at the normal due date (31 January 2013). Therefore, if you miss the 5 October 2012 registration deadline, but still manage to submit a 2011/12 tax return and pay your tax liability by 31 January 2013, HMRC will not impose a penalty for late registration.

If you have any queries regarding any of the above, or require assistance with the registration process, please contact us.

Can I avoid paying stamp duty on my house purchase?

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Avoid stamp duty land tax on your house purchase and you may end up having to pay not only the tax, but penalties, interest and the scheme promoter’s charges on top. new house property

There are currently a lot of stamp duty land tax (SDLT) avoidance schemes being promoted on the internet. These are of sufficient concern to the Law Society for it to have has written to all of its members warning them of the potential dangers of getting involved in the provision of such schemes. The schemes are mostly targeted at property purchases in excess of £500k, and claim a 100% success rate. Promoters claim that they can legitimately arrange a property purchase in such a way as to result in a nil rate SDLT charge and they will typically charge a fee equivalent to half of the SDLT allegedly saved.

Most of these schemes seek to take advantage of SDLT sub-sale exemption. This is a legitimate exemption which avoids a double charge to tax where there are more than one transfers of property in what is essentially a single sale. A sub-sale may occur for example where a purchaser acquires a large plot of land but does not need it all. The purchaser will arrange to sell the surplus to a third party and direct the vendor to convey that surplus direct to the third party. The scheme promoters believe that by artificially introducing a sub-sale they can achieve a nil rate of SDLT.

What the scheme promoters may not highlight in full is that there is anti-avoidance legislation which applies to many SDLT schemes. Also many of these schemes are already being investigated by HM Revenue and Customs and leading Tax Chambers tell us that they have cases on their books which are queued up waiting for hearing dates. If a scheme is found to be ineffective, HMRC will seek the tax, interest and penalties from those who have used them.

It is telling that the schemes are usually marketed as only being suitable for purchases in excess of £500k. There is no technical reason for this other than the level of fee to the scheme promoter as in theory, if the scheme works, it will work for any level of purchase.

Our advice to you if you are considering using an SDLT avoidance scheme is to treat it with a healthy degree of scepticism.

Contaminated Land Remediation Relief – have you made your claim?

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Any tax relief given by HM Revenue & Customs should be jumped on at the first opportunity – you just don’t know how long they will be around.  Contaminated Land Remediation Relief was introduced in 2009 to provide an incentive to UK property development companies to develop derelict or contaminated land.  Given the tough economic times at the moment, especially for the property sector, it is surprising how often this relief is overlooked!

Here are the answers to 4 frequently asked questions:

1. How much relief can you claim? 

A company can claim an extra 50% of the costs of cleaning up the contaminated land against their taxable profits.

2. What is Contaminated Land?

Land is in a contaminated state if it has something in, or under it that is causing harm or is likely to cause harm and arose as a result of industrial activity.  Some common examples are land contaminated with asbestos, arsenic, radon and, although it doesn’t strictly fall within the definition, there is specific guidance to deal with claims to remove Japanese Knotweed!

3. What costs qualify?

The principle is additional costs incurred as a result of the contamination.  For example, materials, subcontractors and even internal staff time costs.

4. When can the relief be claimed?

The relief is available when the costs are charged to the company’s profit and loss account.  In the most common example, in property development companies where costs are carried forward as work in progress on the balance sheet, the relief is claimed when the developed properties are sold.

The advice is simple!  Any costs you believe are related to land remediation should be grouped together as they are spent to be reviewed when the tax computations are prepared.  Remember – it is much easier to ensure all costs are collected if this is done throughout the year rather than looking back in hindsight when the year-end has long passed.

15% SDLT – “Stop the world, I want to get off – well at least until the 2012 Finance Act is passed”

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We’re well aware of the recent budget announcement for a 15% SDLT charge on certain property acquisitions, but this created a hiatus period between the budget being announced and the likely passing of the Finance Act in June/July 2012.

Let’s summarise below what the Finance Bill currently states:

  • A punitive SDLT rate of 15% will apply where a residential property costing over £2m is purchased by anything other than a person, eg, a Limited Company. The SDLT rate for a “person” making that same purchase would be 7% so clearly, this has a big impact – even on a £2m acquisition the difference in SDLT is £160,000.
  • When drafting the 2012 Finance Bill, the Government have clearly listened to property developers and so have included a very narrow exclusion for them. The current draft therefore allows those developers who buy the property in the course of a bona fide property development business and for the sole purpose of “developing and reselling the LAND” to pay 7%, and not 15% SDLT.

Furthermore, the property development company must have carried on that business for at least two years before the transaction to qualify.

  • Note the inference that the company must make the purchase with a view to development and resale – not holding for investment purposes. There is no indication as to how any change of intention will be taxed.

There are therefore TWO particular risks for anyone currently making a relevant acquisition:

    1. That there is some change to the drafting of the Finance Bill before it is finally passed that makes the criteria more strict for example, the 2 years standing is increased – this is remote, but a risk nevertheless.

 

  1. That the get out for property developers is narrower than my reading of it would infer. Of specific interest is the word LAND that I have written in capital letters above.

The legislation refers specifically to “reselling the land” but does the re-development of a building count as “land”. I’m sure there is case law around to support one view or the other, and the chances are that this is not as significant as feared – but hey, when we’re talking about £160,000 in SDLT even on a £2m purchase, it would be unwise to ignore this risk.

So until the Finance Act is passed as law, uncertainty reigns supreme and leaves two obvious questions:

– what exactly are corporate developers supposed to do, and

– what does this do to the high end residential property market?

 

Tax Avoidance – the next target for banker bashers?

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The media found a new target. This time it was people whose tax bills are reduced as a consequence of totally legitimate and laudable behaviour.

Let’s deal with “laudable” first. The country apparently approves of philanthropy. There is widespread support for charitable causes, from the arts to medical research, from help for the aged to charities for kids, good causes command respect.

The country also apparently approves of risk-takers establishing businesses that provide people with employment opportunities that might otherwise not exist.

Given these are perceived “good things”, governments of different hues have sought to create structures over the years to promote them. And because these good things involve individuals spending money, the structures have of necessity been money-related – which inevitably involves use of the tax system.

The Gift-Aid system is designed so that when a person gives money to charity, the charity can claim from the Treasury the basic rate tax deemed to relate to the donation. £10 donated becomes £12.50 to the charity. And a higher-rate tax payer is entitled to recover by way of tax relief the difference between his higher-rate, be it 40% or 50%, and the basic rate of 20% imputed into the donation. So a £400K charitable donation is worth £500K to the charity – and the donor gets a deduction for tax, if he’s a 50% tax payer, of £150K (50% – 20% times £500K).

Shock, horror! £150K tax saved! UK Uncut will have a field day!

But it’s cost him £400K to get it.

Don’t know about you, but personally, I’d rather not blow £400K simply to save myself £150K of tax. I’d grit my teeth, suffer the tax, and party on the net £250K I’d saved myself.

Similarly, the risk-taker might be making substantial losses in the business he’s set up. Horror of horrors!- he might get a tax break!

But the value of the tax break will only ever be a percentage of the losses that caused it.

The Chancellor now wants to cap unlimited tax reliefs at £50K or 25% of income, whichever is the higher.

Let’s look at an example. Let’s assume the person who gave £400K to charity had gross income of £1 million. Under the present regime, the charity gets £500K, a net £250K from the donor, and £250K from the Treasury.

Going forward, the individual can of course maintain his level of donation at £400K, but as his tax break will cease at £250K, he’ll more than likely cap his contribution at that level. In which case the charity will get £312.5K and the donor’s tax break will fall by £56,250. The charity will be £187,500 worse off, the Treasury £93,750 better off (£56,250 from the donor’s tax bill, £37,500 from the reduced top-up it pays the charity). The difference between the charity’s loss and the Treasury’s gain (£93,750) sits in the donor’s pocket.

Maybe he’ll give the extra away without a tax break – anything’s possible, however unlikely.

The same applies to establishing new businesses. The tax consequences of risk-taking are very much a part of the decision-making process as to whether or not to take the risk. Remove the tax break, you increase downside risk, making the risk-taker much more averse in the first place.

The media initially got this one completely wrong. Not surprising, given all it did is following the claptrap spouted by UK Uncut. And the Chancellor simply bought into this populist message, because frankly, it suited him – the less that goes to charities, the less business risks people take, the more tax revenues go to the Treasury. It’s just those “good things” that suffer.

The squeezed middle

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Many of the commentators on this week’s budget have used the term “the squeezed middle”. In recent years it has become a rallying call of the middle classes and intended to suggest that they are bearing the worst of the budget rises. I believe that there are many squeezed middles, and some of them are not even in the middle.

At the bottom end of the income scale the nation has many families whose financial security is reliant on tax credits and similar payments. With wholesale reform of welfare benefits, some of the families will have their incomes reduced and therefore may feel squeezed. Families are not the only groupings who will be feeling the pinch. Pensioners have received the news that their age related personal allowances will be frozen and eventually phased out. This is a tax cost to the elderly and therefore they are also being squeezed.

Personal allowances are due to rise, which is commendable. Unfortunately, the rate at which the 40% tax band starts is due to fall from £35,000 down to £34,370. Not only does this increase the tax liabilities of many hundreds of thousand middle earners, it also increases their tax administration burdens; a double whammy of increased taxes and increased administration. Is the correct term a “double squeeze” or a” tight squeeze”?

The middle are most effected by the taxation of child benefit for incomes over £50,000. Although this increase in tax is tapered to prevent a cliff edge effect, it does represent a considerable cost to the family whose income level is starting to be sufficiently high that they may pay for private education or private medical insurance. Those families may revert back to reliance on the state system. Could this taxation increase the budgetary requirements of the NHS and Department of Education?

In my mind the most heavily squeezed are those earning between £100k and £116k. Their marginal rate of tax is in excess of 60%. That hurts them, and it should be priority of the government to eliminate this distortion.

Those earning more than £150k will be feeling the opposite of squeezed. Their tax burdens are falling, unless of course they are thinking of buying a property for more than £2million in a company.

If a wealth tax is imposed in a future budget the highly remunerated may suffer. The inequality of a wealth tax is that it is not necessarily backed by money with which to pay the tax bill.

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.