The Employment Appeals Tribunal recently ruled in HM Revenue & Customs’ favour by supporting current National Minimum Wage legislation relating to tips.
This means that employers have to pay their staff at least the National Minimum Wage regardless of any tips, gratuities, service or cover charge unless the tips are paid directly through the employer’s payroll.
Just to confirm that the amount payable tax free to employees working from home, without the need to keep receipts, had risen from £2 to £3 from 6 April 2008.
The Revenue have recently issued a number of documents regarding their procedures and rights on PAYE inspections, together with some details on their obligations, what you can do, etc. You can find full details at www.hmrc.gov.uk/leaflets/c6.htm.
The changes in the Finance Bill will preclude many companies that currently qualify for EMI from benefiting in the future. This will not apply to options granted prior to the date of Royal Assent. As this change is likely to take effect from mid-July, this is a one-off opportunity that should not be missed.
After Royal Assent, companies (or groups) will not be able to grant options unless, on the date of grant, they have fewer than 250 employees.
Companies affected by this change who want an EMI scheme, or want to issue further options under an existing scheme, must take speedy action to ensure that they are not too late.
It is probably fair to say that one of the best known parts of our tax legislation allows employees being made redundant to receive up to £30,000 compensation, free of both tax and national insurance.
It is equally fair to say that the Revenue are far from keen on this and will find any legitimate reason they can to charge income tax on the payment. One of their main weapons in this is the so-called pay in lieu of notice (“PILON”) clause in an employment contract; if an employee is entitled to receive pay in lieu of notice, this payment is contractual (and hence taxable) rather than compensation (which would be exempt from tax up to £30,000).
Unlike the rest of us, MPs have been entitled to receive termination payments free of tax, even if the payments are made in accordance with a PILON clause in their contract, for some years.
This year’s Budget has extended this exemption to the Mayor of London and members of the Greater London Assembly.
So, when Ken Livingstone handed over the keys to City Hall to Boris Johnson at least he had the consolation of knowing that his pay off would not suffer tax.
The latest Finance Bill aims to counteract the use of “artificial” arrangements on trade losses by restricting loss relief to £25,000 if an individual “trades” in a non-active capacity (i.e. spends an average of under 10 hours a week on the commercial activities of that trade). It therefore seems a good time to look at what other loss relief is allowable.
Commerciality test
As a basic test, a tax loss is not available for relief unless the trade is carried on on a commercial basis, with a view to the realisation of profit, and the trader must now prove that he is active on the trade for 10 hours a week. The following assumes this is the case.
Losses in early years
Losses incurred in the early years of a trade (i.e. the year in which the trade started, or in the next three years) may be carried back against total income for the preceding three years (earlier years first).
Pre-trading expenditure is relieved as if it has been incurred on first day of trading.
Offset trading loss against capital gain
Any trading loss that is potentially allowable against total income can also be offset against a capital gain where the loss exceeds your total income for the year.
Property losses
An excess of property expenses over rents creates property losses. These losses can be offset against current or future property income.
Capital losses
Capital losses can be used against capital gains of the same year or carried forward.
Losses can only be carried back on death, when a three-year carry back is allowed.
Disposal to a connected person
Where a capital tax loss arises on such a disposal, it can only be offset against gains on disposals to the same connected person.
Negligible value
If an asset has become negligible in value, a claim can be made such that the asset is treated as having been sold and immediately reacquired thus generating a loss. “Negligible” is not defined by statute but HMRC’s view is that the term means “worth next to nothing”.
In her blog on 14 April 2008 Cathy Corns highlighted the risk that some businesses could lose their gross payment status if they are not fully up to date with all their tax compliance. We are now starting to see the results of HMRC’s review of the first 12 months of the new CIS and they appear be applying their rules quite ruthlessly.
HMRC said they would not impose penalties for late returns provided all returns for the first 6 months of the new scheme were submitted by 19 October 2007. Some people may have interpreted this to mean that there was a general amnesty for this first 6 month period and, provided businesses kept up to date after that, they would not risk losing their gross payment status. This is not the case. Our understanding is that HMRC’s amnesty (if it can be called that) applied only to the first 3 months and any late returns made after June 2007 will result in the business being transferred to a net payment status. This could have a disastrous effect on cash flow, especially if the tax deducted cannot be recovered in full until after the end of the tax year.
Under the old rules, where an individual acquired shares on more than one date, the legislation specified which shares were treated as sold for CGT purposes on a part disposal. Shares were generally matched on a ‘last in, first out’ basis, (with exceptions for “bed and breakfasting” within 30 days).
As part of the simplification of CGT, the rules for disposals after 5 April 2008 have changed and could produce some unfortunate results. From that date the cost of all shares in any one company will be averaged.
Assuming an increasing share price over the period in which shares have been acquired, the taxable gain on the first disposals made after 5 April 2008 could be considerably higher than would have been the case under the previous legislation.
HMRC has recently increased the guideline rate for tax and NIC free payments to employees who work at home. This is the amount the employers can pay without the employees keeping records. From 6 April 2008 the rate is increased from £2 to £3 per week.
HMRC has published new guidance on the new penalty provisions that will apply from April 2008.
HMRC states that it has designed the new penalties so that:
The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.
Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm
HMRC has stated that businesses that can demonstrate good management and accounting systems will be viewed as low risk, giving them more time to spend on higher risk businesses.
Family businesses are often regarded by HMRC as a higher risk because of the overlap between business and family.
So what can you do to reduce the risk of an investigation?
HMRC is carrying out a full review of tax systems and processes for companies which it considers to be high risk; especially where there is a history of mis-declaration. Some time spent now to tidy things up could save a lot of problems later.
The shortage of skilled staff is encouraging businesses to incentivise their workforce by giving greater control over the make-up of their remuneration package – “flexible benefits”.
The employees’ participation in a flexible benefits scheme is usually funded by agreeing to reduce salary in return for a non-cash benefit.
Savings can be realised where the benefit provided to staff is tax and/or NIC free. Typical examples include employer’s pension contributions; employer-provided childcare arrangements; and ‘bikes for work’, as well as alternative options, such as a reduction of pay in return for increased holiday entitlement, All of these need to be implemented correctly for the sacrifice to be effective.
Generally, salary sacrifice arrangements are effective where the contractual right to cash is reduced, and the employee is not freely able to revert to their original higher salary in place of the benefit being provided. It is important that the employee’s contractual entitlement to future pay must be relinquished before the point at which it is treated as received for both income tax and NIC purposes. The revised contractual arrangement must also genuinely entitle the employee to a reduced cash payment, in exchange for the provision of a benefit by the employer.
Usually, HMRC’s approach will be that in cases where there is a variation to the contract, lasting for a minimum period of a year, it will accept the position. However, if the agreed period is less than twelve months, the risk of HMRC challenging the arrangement is considerably higher. In a worst case the sacrifice is ineffective and tax and NIC is charged on the gross amount.
It is worth taking time to get this right but done correctly both employer and employees can be winners.
The way the new rules work it is likely that a number of businesses may be moved from gross to net under CIS. There is a reason to be worried.
One of the key aims of the new CIS scheme was to improve compliance in the construction industry.
Under the new scheme, HMRC may raise a determination transferring a subcontractor from gross to net payment status at any time if HMRC believes that were the subcontractor to apply for registration for gross payment at that time this would be refused.
From last year HMRC has a programme for businesses to review their tax compliance over the previous 12 months. If there are unacceptable breaches the businesses receive a determination moving them to net status and notice of right of appeal. This is a rolling programme to ensure every business is checked once a year.
To pass the compliance test, the trader and any business partners (or the company and each of its directors) must, during the 12 months up to the date of the application, have done all of the following subject to some small margins for error.
This is likely to be a real problem for businesses.
The CBI recently published a paper setting out their view on why the UK corporate tax system is uncompetitive.
Basically the CBI has four areas of concern:
In the CBI’s opinion the key principles for a corporate tax system are:
In their view the rapid legislative change coupled with inadequate scrutiny and consultation has added to uncertainty for all taxpayers. At present, looking at the position for individuals on capital gains tax and on the changes for those not domiciled in the UK, it is hard to argue with their view.
If you would like to read more, you can find the full document at http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/c9f94d05d0d0975b80257403003c66a6?OpenDocument.
Under the draft legislation there appears to be a problem for shareholders in companies or groups participating in joint ventures. Activity carried on with a view to acquiring an interest of 10% or more in a joint venture company is trading activity under the legislation but actually holding shares in a joint venture company appears not to be. This means that a company or group can fail the trading tests if the shareholding in the joint venture is substantial in relation to the overall activity.
If this were to be the case, entrepreneurs relief would not be available.
Historically, the government’s response to an avoidance “scheme” has been to block it (and then block scheme mark 2, et seq). Look at national insurance (NIC). I am (sadly) old enough to remember when employees were paid bonuses in gold coins to save NIC. Gold coins were of course blocked, so the market moved on to platinum sponge, fine wine and, as I recall, carpets. It took a long time to introduce legislation to stop all similar schemes.
From the Treasury’s perspective principles-based avoidance legislation makes perfect sense.
There has been a lot of sophisticated planning around interest income and HMRC and the Treasury are seeking to change the rules of the tax planning “game” with the introduction of a principle. The consultative document states: ‘A return designed to be economically equivalent to interest is to be taxed in the same way as interest.’ (Regrettably the ensuing draft legislation is nowhere near as succinct).
If this principle based approach is successful in this area, we have to ask – what will be the next step?
This is a perennial question – should I take additional income from my private company in the form of a bonus or a dividend? From 1 April 2008 the answer to this question may have changed for some people.
Prior to 1 April 2008 it was preferable to declare a dividend if the company was paying tax at the small company rate or at the full rate of corporation tax. If profits fell into the marginal rate band then a bonus was more cost effective. On 1 April the marginal rate fell to 29.75% and so, from a tax perspective alone, dividends will now be preferred regardless of the level of company profits. There may of course be other factors to consider, such as pension contributions and minimum wage legislation but, provided these are factored in, paying dividends is likely to give a lower overall tax bill.
Companies with accounting periods straddling 1 April will have to calculate their own marginal tax rate for that period but, as a general rule of thumb, if the rate is 30% or lower then dividends will be the answer.
For most self-employed people there is usually some use of their home for business purposes. You are then entitled to a tax deduction for the proportion of household expenditure relevant to the business use.
The Revenue has recently issued guidance to “clarify” the calculation of deductions. This suggests that the costs should be apportioned on the bases of:
However, where this will not work the Revenue should accept claims made on any reasonable basis.
So how do you apportion home costs?
The Revenue gives several examples of the approach it recommends.
Mortgage interest: The interest may be split where there is a substantial use of part of the property for business purposes.
Insurance: An apportionment of the total premium calculated for usage and area, etc.
Repairs and maintenance: General household repairs are allowable in line with the proportion of business use.Telecoms/internet broadband, etc: The Revenue’s previous view was that line rental was not allowable. This has now changed, and a proportion of rental and calls is allowed on a reasonable basis; this should be supported by itemised bills.
The guidance includes a number of specific examples, which can be found by clicking here.
One thing to remember is that an individual’s main residence is exempt from capital gains tax on disposal provided it has been used as the main residence throughout ownership. Provided that no room is used exclusively for business purposes, there should be no restriction on the availability of the main residence exemption from CGT.
HM Revenue & Customs’ campaign of compliance checks into property income, announced last month, appears to have begun in earnest. We have been told of a number of people who have received letters from the Revenue.
At first glance the letters look innocuous; a straight forward enquiry, asking whether tax returns might have omitted rental income in error.
It would be wrong to underestimate the gravity of these letters on a number of grounds, including:
Finding information relating to rental income, interest payments and other expenditure from a number of years ago will be a difficult task; without it – and the goodwill of the Revenue – the amounts payable could escalate.
If this is an issue potentially of concern to you, please contact Cathy Corns or me. We have helped a large number of clients in dealing with Revenue enquiries and might be able to provide practical and timely advice and assistance.
Over the last 24 hours there have been a number of blogs posted in relation to the 2008 Budget announcement – on both SME Plus blog and our sister blog Tax Plus blog.
For your reference and convenience please find below a list of the respective blogs posted:
SME Plus
Budget 2008 - Pension Tax Relief
Budget 2008 - Capital Allowances
Budget 2008 - Enterprise management incentives ("EMI") share options
Budget 2008 - VAT
Budget 2008 - Trade losses for individuals...
Budget 2008 - Pensions
Budget 2008 - Associated companies
Budget 2008 - ISAs
Budget 2008 - Income shifting
Budget 2008 - Corporation tax simplification...
Budget 2008 - Enterprise Investment Scheme
Budget 2008 - Previously announced
Tax Plus
Budget 2008 - All Settled Offshore?
Budget 2008 - The Remittance Basis - Offshore Mortgages
Budget 2008 - Non Doms and Capital Losses
Budget 2008 - Personal allowances and the remittance basis
Budget 2008 - Non Doms and the £30,000 charge for the remittance basis
Budget 2008 - VAT
Budget 2008 - Changes to taxation of foreign dividends
Budget 2008 - Relaxation on Residence Test and Day Counting Rules
The previously announced reduction in basic rate income tax from 22% to 20% from 6th April created concerns for 2 sectors.
Firstly, charities were concerned that they would lose out because Gift Aid donations would only benefit from 20% income tax relief with a resulting reduction in the gross donation.
Secondly individuals making personal pension contributions would only benefit from 20% tax relief at source instead of 22%. For instance a personal pension contribution of £78 would be worth £100 after basic rate tax relief in 2007/08. After 6th April the same £78 contribution becomes £97.50 after basic rate tax relief. This represents a small but significant reduction in your pension fund. Higher rate tax payers can claim back a further 20% through self assessment, increased from the previous 18% but the gross pension premium is still reduced for the same initial investment.
It was pleasing to see the Chancellor act on the concerns of charities and add 2% relief to Gift Aid donations for a transitional period.
It was a shame that the same generosity was not extended to the millions of us trying to save for our retirement.
Although most of the changes on capital allowances have been known about for several months, there are a couple of minor tweaks announced today.
In addition, there is confirmation of new rules to allow companies (not unincorporated businesses) to surrender losses in return for a cash repayment from HMRC. This will apply to losses created by claims to 100% first year allowances on certain energy-saving or environmentally-beneficial plant & machinery, It will not be available where those losses could be used in some other way, for example against other taxable income or surrendered as group relief.
Companies thinking of offering EMI share options to employees will have three new factors to consider:
The last of these is unlikely to affect most companies (as shipbuilding, coal and steel production tend not to be that prevalent in the SME market) but the first two are potentially of greater relevance.
The main VAT changes announced in the Budget today are;
... are being restricted for tax purposes. At present an individual who carries on a trade, on however part-time a basis, can, subject to certain detailed restrictions, set this loss off against other income and gains. Anti-avoidance legislation introduced in the 2007 Finance Act restricted the offset of tax losses for non-active or limited partners. In the Revenue’s view this merely resulted in individuals entering into loss-making trades on a sole trader basis purely for the tax relief on the losses. As a result this legislation is being introduced with effect from 12 March 2008 for individuals who spend less than ten hours a week on a sole trader activity; for existing trades the loss relief is restricted to £25,000 pa and for new trades, where tax avoidance is a motive, offset relief is abolished.
This is clearly designed to counter the sale of certain investment products that relied on tax losses as part-funding. However, they may well affect other genuine arrangements that “just happen” to meet the tests.
When looking at whether companies are “associated”, the Revenue has historically been able to include the rights of people in partnership. This has meant that two companies, controlled by people in partnership – but with no other link to one another – could be treated as associated and find that their tax bills rose as a result.
With effect from 1 April 2008, the definition of common control will be revised, so that business partners will only be taken into account where “relevant tax planning arrangements” (put in place to reduce tax liabilities) are in place.
Further detail is awaited, but this presumably means that individuals in “genuine” partnerships will no longer have to include companies owned by their fellow partners when counting the number of associates for their own companies if there is no other commercial connection. If this proves to be the case, it will be a very welcome change.
The budget confirmed previously announced increases to ISA allowances for 2008/09. From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.
Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.
Legislation and consequently its introduction is being delayed for 12 months – party time!
…but don’t hold your breath; the proposals, when formulated, will only apply to companies with less than 10 employees and turnover under £750,000. This may not be quite what most SMEs were hoping for.
The Chancellor has today announced an increase in the individual investor limit from £400,000 to £500,000 – subject to EU State Aid approval. The detailed tests for companies and investors otherwise appear to remain unchanged.
Whilst this is good news for companies seeking to raise funds – one word of warning. State Aid approval can take a long time to come through.
Much of what will be included in this year’s Finance Bill was known long before the Chancellor stood up to make his Budget speech. The main items of relevance to businesses are summarised here, with links to earlier postings:-
Companies tend to take out life policies for one of three main reasons:-
On key man policies the rules are generally quite straight forward; the company can obtain relief on the premiums paid and, if it does so, will be taxed on the proceeds. An alterative, possible treatment is to disallow the premiums and seek to agree with the Revenue that on this basis the proceeds will not taxed.
On the other policies, the key question with regard to deductibility of premiums is whether or not the policies are “trading”. For policies taken out to provide security for loans to buy business premises, historically there has been a special treatment in that premiums were allowed for tax purposes but, where the proceeds were used wholly to repay the loan, those proceeds were not taxable. In practice the Revenue tended to tax only the excess over the debt repayment.
For other policies the final payment on the “investment” tended to be treated as a chargeable gain.
However, the pre-budget report changed this. Under the new rules the key changes will be:-
If you do have such a policy it is important to contact someone for detailed advice on the implications for you.
... is expected to take effect for periods starting after 31 March 2008 where the return is filed after 31 March 2009.
The new system distinguishes between different types of tax “offence” for example, heavy penalties for evasion, but an acknowledgement that genuine errors happen.
HMRC appears to want to encourage compliance and sees penalties as an essential element in enforcement.
The result is that the new penalties will apply to returns for income tax, corporation tax, pay as you earn, national insurance contributions and VAT.
The new regime seeks to grade the penalty to match the ‘offence’. There are effectively four categories:
Innocent mistakes will no longer attract a penalty. The penalties for the other three conducts are laid down with prescribed reductions for disclosure (differentiating between prompted and unprompted). The proposed penalties range from 15% to 30%, for a prompted disclosure for ‘failure to take reasonable care’, to 100% of the tax due for a ‘deliberate understatement with concealment’.
It will be “interesting” to see how HMRC will distinguish between innocent mistakes and a ‘failure to take reasonable care’. This is likely to be an area for debate, dispute and potential litigation.
You should be aware that unprompted disclosures will reduce penalties to nil for potentially minor offences.
Additionally, in cases of ‘failure to take reasonable care’, HMRC has the discretion to apply a suspended penalty. If the correct procedure is implemented and adhered to, the penalty could be cancelled.
One thing that is clear is that a lot of businesses and individuals will be affected.
As you are only too well aware by now, the Chancellor announced a major reform of the capital gains tax (CGT) regime by setting a single flat rate of 18% from April 2008. Following a major outcry, the new entrepreneurs’ relief has been announced; this relief will reduce gains liable to CGT by 4/9ths, resulting in an effective rate of 10% on gains of up to £1m on disposals of a business by an individual.
But while business owners may be relieved by the introduction of a 10% rate of CGT on the first £1m of gain, their employees are likely to be far less happy as holdings of less than 5% will not qualify for relief.
The Government have encouraged companies to reward and motivate employees with shares but now exclude such employees from the new entrepreneurs’ relief.
There must be some logic – my problem is I just can’t see it!
The Government has recently published its response to consultations on changes to the way in which relief will be given for expenditure on plant and machinery.
This is just a brief reminder of the anomalies in 2008 of the new ‘annual investment allowance’ (AIA). This will be introduced in April to provide for a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars) and replace the existing first-year allowances for small and medium-sized enterprises.
There was a very interesting tax case (T M Collins and the Commissioner of HMRC) recently. Very briefly, two individuals sold their shares; one for cash and one partly for cash and partly for a contribution to his pension fund. HMRC argued that the contribution was taxable as part of the consideration – and lost.
This opens up some interesting possibilities going forward.
HM Revenue & Customs released findings from research on the tax advantaged “EMI” share option schemes, earlier this month (more details are available at http://www.hmrc.gov.uk/research/report41-summary.pdf).
The research followed discussions with employers and employees where EMI schemes have been introduced and it is no great surprise that the majority of people questioned were aware of some of the benefits of offering EMI options to key employees. Or that nearly all of them regarded EMI options as a key element in keeping their most valuable employees.
Even with the proposed abolition of taper relief, EMI options remain an important means of recruiting, rewarding and retaining key members of staff. We have spoken with a number of new clients who, with the benefit of hindsight, would have offered senior staff the opportunity of a relatively small stake in their companies but who had lost those employees – and with them a substantial part of their business.
If you could be in a similar position and your company is one for which EMI might be possible, EMI share options are well worth considering. Please contact us to discuss whether they might be the right option for you.
Please find below Lisa Spearman's latest blog on the Non-Doms issues, highlighted in our sister blog Tax Plus...
Following my blog of yesterday it now appears that the Chancellor has retreated on some of his proposals for the taxation of Non-Doms. Dave Hartnett, the Acting Chairman of HM Revenue and Customs has posted a letter on the Revenue website to clarify the Government’s intention in four areas where concerns have been raised.
According to the letter Hartnett wants….
“to make clear that the Government’s intention – which will be set out in legislation to be brought forward – has always been to ensure that:
