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Tax Credit Deadline – Renew Online

Author: Aisha Azim

Tax Credit Deadline – Renew Online

HMRC is urging anyone who needs to renew their tax credits claim to use its digital services rather than phone of post which you must do before 31 July 2017.  Failure to register on time could mean that you permanently lose the right to some credits.  If you don’t receive your pack before 27 June 2017, you’ll need to call the tax credits helpline on 0345 300 3900 for a duplicate.

So, what are you options?

Online Option

HMRC are piling on the pressure for tax payers to manage their affairs online.  It is a natural reaction to resist any changes by HMRC but in this instance, we would recommend it.  Renewing your tax credits online is pretty quick, even if you have to report any changes to your circumstances.  If you try by phone or post, there is the potential for delays or not even getting through.

This year, online renewal can be done via the Gov.uk “Your Account” service which HMRC claims makes the process even easier.  You will need to register for an account if not already able to do so.  Should a new account be required, you will need to allow extra time for PIN codes to arrive and complete the registration process but once through this barrier, the services are pretty good.  For example, as well as using the tax credits service, you can also request pension forecasts, manage self assessment and other taxes.  It’s worth a look and will speed up any claims.

Is your building project zero or standard rated

Rebuilding a residential property and naturally want to keep the costs down.  If you’re a private customer, VAT is a significant factor in the costings so can you zero rate the supply?

Different Rates

When you make supplies to a private customer, or a business that is wholly or partly exempt (e.g. a charity), VAT is a significant part of the cost.  Even for businesses that can reclaim the VAT charged it can make a significant dent in the cashflow and borrowing requirements, especially if it’s a large project.  It’s therefore to your advantage to zero rate your supplies if you can.

Build or rebuild

An example of where VAT is a significant factor is when a building has or will be demolished and a new one constructed.

Trap – subject to conditions, constructing a new residential building is a zero rated supply but rebuilding one is standard rated.  You shouldn’t apply the standard rate as the easy option you must zero rate as the easy option; you must zero rate whenever the rules say so.

What the law says

HMRC in it’s usual way tends to be economic with its general guidance on zero rating.  It says that a new building only applies to a rebuild where “any existing buildings on the site have been demolished completely to ground level”.  However, the legislation explains that a building counts as demolished where “the part remaining above ground level consists of no more than a facade or where a corner site, a double facade, the retention of which is a condition or requirement of statutory planning consent”.

Tip – when considering the VAT rate to apply, check the planning permission for the work.  If it only requires one or two facades to be retained then it is probably that zero rating can apply.

Tribunal Case

Just to reinforce the point about HMRC’s somewhat narrow approach to zero-rating, the First Tier Tribunal (FTT) made an interesting ruling in May 2016.  J3 Building Solutions Ltd had virtually demolished an existing residential property but kept two walls, which wasn’t a requirement of the planning consent.  Naturally, HMRC decided that the building that took its place was a “reconstruction” (rebuild) which didn’t meet the zero rating conditions.  However, the FTT decided that the building wasn’t a reconstruction at all, but actually a completely new building and therefore zero rating applied.

Revisiting the past

This was the second similar ruling in three years, which throws into doubt over HMRC’s ability to objectively consider how the law applies based on the facts.  It’s approach is often to see the position as it wants rather than starting with an open mind.

Tip – you can ask HMRC for an opinion in advance regarding whether a build should be zero or standard rated.  Where you think zero rating applies, emphasise to HMRC the facts that point to this.  If you can persuade it on zero rating, it might giv you the edge when quoting for work.

Pension Scheme Members

There are limits on how much can be invested in a pension scheme before a tax charge is payable. To qualify for tax relief, a contribution must be a relievable pension contribution made by or on behalf of a relevant UK individual.

A relevant UK individual is someone who:

– has relevant UK earnings chargeable to income tax for that tax year

– is resident in the UK at some time during the tax year

– was resident in the UK at some time during the immediately preceding five tax years and also when joining the pension scheme.

The maximum amount of contributions on which a member can claim relief is the lower of 100% of annual earnings or £40,000 (this is referred to as the annual allowance). 

The annual allowance reduces where income, including company pension contributions exceeds £150,000. The allowance of £40,000 is tapered at a rate of £1 for each £2 of income over the limit, to a minimum of £10,000.

Individuals who do not earn or earn less than £2,880 a year can contribute to certain types of pension and receive basic rate income tax relief. 

Individuals who don’t pay income tax can get tax relief on at the basic rate of 20% on the first £2,880 they pay into a pension each tax year. This relief is only given if the pension scheme claims relief at source (RAS).

A registered pension scheme must operate RAS unless the scheme rules specifically provide that it can operate net pay arrangements or accept contributions gross from members. Under RAS, premiums are paid net of basic rate tax, which is claimed back by the scheme administrator. 

Higher rate relief can be claimed through the member’s self assessment tax return.

With net pay arrangements, the employer deducts the relievable pension contribution from employment taxable income before operating PAYE (so tax relief is obtained by paying the contribution out of pre-tax income). A member making payments in full (that is, out of after-tax income) has to claim the tax relief from HMRC, generally through self assessment or PAYE code.

Employers

Any employer of a member of a registered pension scheme, including all schemes established under auto-enrolment, may make contributions to that registered pension scheme. 

Unlike scheme members, there is no set limit on the amount of tax relief that an employer may receive in respect of its contributions, although the amounts contributed still count towards the annual allowance for the year.

Other persons

A person other than a scheme member or employer may make a contribution to a registered pension scheme on behalf of someone else. 

The scheme member will automatically get 20% tax relief if the contribution is paid under PAS. The member can claim higher rate relief in the normal way.

To discuss your pension requirements or any questions on your current provisions, talk to a member of our Wealth Management team today 

Tax Aspects of your Home

One of the most popular subjects we’re asked concerns the tax apsects of your home so we address many of the queries that have been put forward recently.

MORTGAGE INTEREST

Tax relief is not available on interest for loans used to buy your home.

LETTING PART OF YOUR HOME

Under the ‘rent a room’ scheme, income from letting furnished rooms in your home will be exempt from tax if the gross annual rent does not exceed £7,500 (£3,750 if you share the income).

If you are letting to lodgers who live as part of the family, there will be no loss of capital gains exemption. Otherwise, there may be some restriction.

CAPITAL GAINS

Your main residence is exempt from capital gains tax when you sell it. Please seek our advice if you have not occupied the house as main residence throughout the period of ownership.

Various rules allow periods of temporary absence to be disregarded.

If you have more than one house

– You may elect which house is to be your main residence (i.e. exempt for capital gains tax) within two years of acquiring the additional residence. Otherwise the question must be decided on the facts at the time of disposal. Once made, the election can be varied at will.

– So long as a house has at some time been your main residence for capital gains tax, the last 18 months of ownership are counted as owner-occupied.

– It may be beneficial for a married couple to own the non-exempt residence jointly as each will be entitled to the annual capital gains tax exemption.

Partial use for business

– If you use part of your home exclusively for business, interest on the relevant portion of the borrowing will be allowed as a business expense.

– In these circumstances, a similar proportion of the capital gains exemption will be lost. However, if you use no rooms exclusively for business purposes, the full exemption will normally be preserved.

Selling adjoining land

The capital gains exemption extends to grounds not exceeding half a hectare (about 1.2 acres). A larger area may be exempted if it is appropriate to the size and character of the house. Exemption is lost if the house is sold first and the land later.

INHERITANCE TAX

Unfortunately, the favourable concessions for income tax and capital gains tax do not extend to inheritance tax.

The main problem is that it is very difficult for a person to give away property but still continue to occupy it.

You could consider moving to a smaller home, creating a tax free gain that can be given away, or to reduce the value of the home by increasing the mortgage and giving away the proceeds.

Clearly these are drastic steps, and underline the fact that inheritance tax planning is better directed at assets other than the family home.

In the future there will be additional Inheritance tax nil rate band available to cover part of the value of the family home, or the proceeds of sale if the deceased had sold the property to “downsize”. The home or funds must be left to direct descendants (including step- and adopted children).

Please contact us if you would like more help or advice in this area.

What HMRC’s latest raid means for contractors

You don’t have to be one of the “UK individuals” to have their name contained in materials seized last week by the taxman to be thinking about recourse if you’ve used an offshore trust.

Concern about schemes that make use of such trusts (and loan arrangements) actually goes much wider. But it’s fair to say that those exposed in the HMRC raid – three “advisers” and their UK clients whose details are on the seized computers – will be the most concerned.

To the unaffected however, the HMRC raid will appear like just another offshore scheme being picked off. The unscrupulous characters sentenced in court, and contractors footing the bill in long term.

The unsympathetic might point out that HMRC have advised for a long time that they intend to hit these schemes; the exchequer needs it and the political spectrum widely signs off on it. But the potential for users to take legal action against the promoters if they advised them that such schemes were ‘fit for purpose’ has not diminished. The fallout from the collapse of this scheme, and its variants, therefore has far-reaching possibilities for bringing a large number parties to account.

With the debt transfer provisions in force, such scheme implosions could have an impact on advisers, promoters, intermediaries and engagers. In addition, although the incentive for former disguised remuneration scheme users to come clean has been extended to March 2017, recruitment agencies too aren’t sheltered, and are turning more and more risk averse.

Unfortunately for scheme users though; HMRC won’t necessarily go directly for the advisers/promoters/engagers of the scheme – ‘the big fish’ perhaps, because their officials will want the maximum return with the minimum effort. So they’re likely to pursue the scheme itself in the first instance, before targeting contractors among its other users. Whether that then results in a criminal investigation into the scheme is a separate issue and likely to depend on the findings of the initial HMRC enquiry.

Remember, the taxman’s view is that each taxpayer (or each company) is responsible for their own tax affairs and he will pursue on that basis, only subsequently looking at other options (e.g. via debt transfer provisions) once the initial option is exhausted. As even the unsympathetic will admit, the fallout from using this type of scheme is potentially life-changing for contractors, who in some circumstances will have simply fallen foul of bad advice.

If that’s you, then as a scheme user (whether it was an offshore trust and/or loan arrangement) you may have the right of recourse to the promoter/engager who sold you the scheme in the first place. Ultimately, this question of recourse is one to pose to a solicitor, although the likes of compliance specialist Qdos and contractor body IPSE can help too.

In a nutshell and oversimplified, the guidance from these parties will likely be that:

– if a contractor has been advised that such a scheme is compliant, AND

– the advice is documented; AND

– it can be demonstrated that the contractor has relied on this advice,

…then the contractor (and any other user who meets all of the above conditions) may have a case for recourse, assuming that they could not reasonably have expected to know that their scheme was potentially unlawful.

If you’re struggling to meet the above conditions, but are still affected by such schemes or have received an APN, it is imperative that you strongly consider professional, tailored advice at the earliest opportunity. Ignoring any notices or paperwork received from HMRC when in these waters could have perilous consequences.

An Introduction to Tax Planning

Tax planning is the legal process of arranging your affairs to minimise a tax liability. There is a wide range of reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather more challenging area known as tax avoidance.

Examples range from simply choosing a year-end date early in the tax year to maximise the period from earning profit to paying tax, to arrangements to shelter an appreciating asset from inheritance tax.

Tax evasion is different, it is illegally reducing your tax, such as falsifying figures or not disclosing income. This carries serious penalties which can include a criminal prosecution.

A problem arises when the law is unclear, so it is not obvious whether a tax planning scheme is within the law or not. For this reason, there have been several significant developments.

1. We have seen an ongoing approach to artificial tax avoidance which stands between avoidance and evasion. This was probably most accurately defined by one Paymaster General who said that: “Artificial avoidance schemes are those where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair or arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament”.

These must be disclosed and are closely examined to see if they are legal. Even if they are, it is likely they will be closed in the next Finance Act, sometimes with retrospective effect.

2. A list of ‘hallmarks’ of tax avoidance schemes has been published. If any of the following are found in a scheme, it is likely to be challenged as artificial tax avoidance:

– It sounds too good to be true

– Artificial or contrived arrangements are involved

– It seems very complex for what you want to do

– There are guaranteed returns for apparently no risk

– There are secrecy or confidentiality agreements

– Upfront fees are payable or the arrangement is on a no win/no fee basis

– The scheme is said to be verified by a top lawyer or accountant but no details of their opinion(s) are provided

– The scheme is said to be approved by HMRC (it does not follow that this is true)

– Tax benefits are disproportionate to the commercial activity

– Offshore companies or trusts are involved for no sound commercial reason

– A tax haven or banking secrecy country is involved without any sound commercial reason

– Tax exempt entities, such as pension funds, are involved inappropriately

– It contains exit arrangements designed to sidestep tax consequences

– It involves money going in a circle back to where it started

– Low risk loans to be paid off by future earnings are involved

– The scheme promoter lends the funding needed.

Businesses promoting schemes with these “hallmarks” must notify HMRC about the scheme and register it, obtaining a “DOTAS” number for the scheme. They must then notify those who have used the scheme at their suggestion, who must then disclose this on their tax return. There are some very onerous obligations on promoters of tax avoidance schemes, including providing HMRC with a regular list of their clients and customers.

3. There is a General Anti Abuse Rule (GAAR)which enables HMRC to take action to counter any abusive avoidance activities without making specific legislation to close the schemes down individually. Where HMRC wish to challenge an arrangement under the GAAR, the detail will be considered by a GAAR panel of tax professionals to advise whether the arrangements are abusive or not.

4. Where a taxpayer has participated in a scheme which reduces or defers their tax liability, once HMRC are notified of the scheme they will issue an accelerated payment notice. Essentially this undoes the cash effect of the scheme until the case goes to court which may be many years later, so the benefit of using the scheme is significantly delayed.

Please ensure that you seek our advice with regard to all aspects of tax planning.

Making shares a tax-efficient reward for employees

There are various types of employee share scheme which offer tax advantages. Among these, company share ownership plans (CSOP) are sometimes overlooked. What advantages do they have over some of the other schemes?

Why use a share scheme?

Different employers have various reasons for wanting to give shares to employees as incentives. Two popular ones are that it encourages workers’ commitment to the business and that it is more tax efficient than a simple increase in salary. Company share ownership plans (CSOPs) are one of the HMRC-approved schemes.

Why CSOPs?

There are share schemes which allow you to offer a greater value of shares to your employees than CSOPs, e.g. enterprise management schemes, but they carry more restrictions on when they can be used, such as the size of your company and the nature of its trade.

Which employees?

Another advantage of CSOPs over some types of scheme is that you can include all your full or part-time employees, including directors, as long as they don’t own more than 25% of the company’s shares.

Tip. There are no restrictions on which employees are entitled to join your scheme.

How does it work?

There are two key dates for CSOPs; the date of grant, i.e. when you grant an employee the right (option) to acquire shares; and the exercise date, i.e. when an employee takes up (exercises) their entitlement. When the employee exercises their option they are allowed to buy the shares at the value of the date of grant. So as long as the company has grown in value the employee gains. If the value hasn’t increased, the employee doesn’t have to exercise their option.

Tax and NI incentive

The tax advantage of a CSOP is that no income tax or NI is payable at the time you grant an option, nor when the employee exercises it. This is providing, as a general rule, that it’s exercised between the third and tenth anniversaries of the date it was granted. Your company receives a corporation tax deduction equal to the increase in share value between the date of grant and exercise.

Maximum value

To qualify for the tax incentive employees can’t hold CSOP options with a value, at the time of grant, totalling more than £30,000.

Tip. CSOP rules allow you to set conditions to determine if and when employees can exercise options. You can, therefore, set performance targets to help get the most out of your employees. You’ll need to discuss the conditions you want to impose with whoever sets up the scheme for you.

How’s it done?

HMRC provides model documents for employers who want to use a CSOP (see The next step ). However, it’s probably one of those jobs to get your accountant involved in.

While CSOPs allow similar tax advantages to other share schemes, there are no restrictions on the types of business that can use them. Full and part-time employees (including directors) can be included and you can set conditions, such as targets, to encourage your employees’ performance.

Termination Payments – New Rules

Following consultation, the government has published draft new rules on employee termination payments. As an employer, how and when might they affect you?

More tax please! The government has made no secret about needing to tighten its purse strings, but it’s more cagey about the other side of the coin: raising extra tax. It prefers to dress that up as simplifications or removing unfairness from the system. Such is its reasoning for the new rules for tax on lump sum payments to employees.

Current rules. To be fair, the current rules can be confusing, which is why many disputes with HMRC end up in court. So clarification is a good thing for employers. For example, one of the trickiest issues for employers is whether or not to tax a payment to a departing employee where it’s made for the period of notice they aren’t required to work: a payment in lieu of notice (PILON). What’s more, the treatment for NI purposes may differ.

New rules. While HMRC released details of the new legislation in August 2016, it isn’t scheduled to take effect until 6 April 2018, so you must continue to apply the existing rules until then.

What’s changing? When the new rules come in, the main changes you need to be aware of are that:-

– all PILONs will be subject to tax and NI (employers’ and employees’), in the same way as regular salary

– all other post-employment payments you make to an employee, which would have been treated as earnings if the employee had worked their notice period, will be liable to tax and Class 1 NI (employees’ and employers’); and

– payments relating directly to the termination of the employment will be tax and NI free up to £30,000 (as they are now), but any amount paid in excess will be liable to tax and employers’ NI, but you won’t have to deduct employees’ NI.

The new rules apply from 6 April 2018. Payments in lieu of notice and other earnings-related sums will be liable to tax and NI. The £30,000 exemption for sums directly linked to termination of employment will continue.

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