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.
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.
Further to my colleague Roger’s comments in his blog of 30 April 2007, the High Court has recently overturned the Tribunal’s decision in part. The decision of the High Court was that the “enrolment fee” paid by members at the first meeting could be apportioned to reflect the printed matter element (zero rated leaflet/books etc). However, the fees paid for the subsequent weekly meetings were consideration for a single supply of “weight loss management services” which is standard rated.
The taxpayer appealed the decision in relation to subsequent meetings and HMRC cross appealed in relation to the first meetings. The Court of Appeal has recently issued its judgement which confirms that all fees paid by members are standard rated as a single supply.
This case demonstrates that it is becoming increasingly difficult to apportion income in cases of “apparent” mixed supplies.
A proposed change in tax law in this year’s Finance Bill could leave many taxpayers disadvantaged.
Currently when HM Revenue & Customs (HMRC) makes an error or mistake in an individual’s tax affairs he can claim back taxes (with interest added) for the last 6 years. HMRC now wants to cut the time limit so it is only liable for repayments for the previous 4 years. This cannot be good news - not when HMRC can go back to collect tax for up to 20 years.
Loan accounts are increasingly being looked at by HMRC with a view to collecting national insurance contributions (NIC).
Often a director operates his loan account such that regular amounts are debited to the accounts to meet his mortgage, school fees or other living expenses; the amount overdrawn is subsequently cleared by voting a bonus to bring the account back into balance. In HMRC’s view in this situation the director is receiving an advance of his remuneration and so there is a payment of earnings.
HMRC’s view is that NIC liabilities for company directors arise at the earlier of payment or entitlement. This should not increase the NIC due but requires the payment to HMRC to be made earlier.
There are also occasions where a director operates a loan account but on the understanding that he will clear the overdrawn amount by either introducing some of his own income or he will give up or repay a dividend. These overdrawn amounts are not in anticipation of future remuneration and NIC liabilities will only arise if the amount overdrawn is not cleared in full and the balance is written off. Such written off amounts attract liability.
Remember also to Class 1A NIC liability which will arise on the benefit of the loan.
Many employers reimburse subsistence expenses by way of scale rate payments.
HMRC has now agreed that employers may use the benchmark rates published by the Foreign and Commonwealth Office when paying accommodation and subsistence expenses to employees who travel abroad on business without the need for the employees to produce expenses receipts. The rates can be found at http://www.hmrc.gov.uk/employers/wwsr-april08-revisions.pdf.
Accommodation and subsistence payments at or below the published rates will not be liable for Income Tax or National Insurance contributions and employers need not include them on forms P11D. However, if an employer decides to pay less than the published rates its employees are not automatically entitled to tax relief for the shortfall. They can only claim expenses supported by receipts, less any amounts paid by their employer.
These tax/NIC free amounts are in addition to the incidental overnight expenses that employers may reimburse tax/NIC free (http://www.hmrc.gov.uk/manuals/eimanual/EIM02710.htm).
It is a fairly common misconception that charities are relieved from paying VAT. In reality, charities are subject to the same VAT rules as any commercial organisation, although there are a number of specific reliefs for certain supplies made to and by charities. For many years, charities and associated groups have made representations to the government to allow charities to reclaim the irrecoverable VAT which they incur. This has so far been unsuccessful. Therefore, if a charity’s taxable business income breaches the VAT registration threshold, it has to register and account for VAT in the normal way.
Charities will normally have a complex VAT position as they will be receiving a mixture of business income (taxable and exempt) and non business income. They may also set up a trading subsidiary to carry out any significant trading activity. This can lead to a complicated VAT recovery position, as VAT incurred on costs has to be attributed to the relevant income stream and will either be fully recoverable, irrecoverable or partly recoverable. There are a number of different ways of undertaking the VAT recovery calculations, with scope for improving VAT recovery rates by adopting the most advantageous method. However, the benefit of implementing a “special method” has to be weighed against the cost of implementing and undertaking the calculations for such a method. The use of a special method also has to be agreed in advance with HMRC. Methods have to produce a fair result and be easily checked.
Charities do benefit from certain VAT reliefs, including advertising, donated goods, aids for the disabled/handicapped and certain types of buildings. The charity will have to certify that zero rating applies. Again the conditions/rules are very precise and advice should be always be sought in cases of doubt.
Charities are increasingly finding new ways to raise funds and as a result, it is more likely that they will enter into activities/transactions which may have VAT consequences. For example, two charities working together in “partnership” may inadvertently create a VAT cost when recharging each other for services. Advice should always be taken when entering into new contracts or amending existing contracts. Unfortunately HMRC do not take a lenient approach to charities which make errors in their VAT returns and penalties/interest may be imposed.
When commercial property is acquired, capital allowances may be claimed on the part of the purchase price attributable to plant and machinery, whether fixtures or moveable chattels.
Historically the way of ascertaining the amount to be allocated to plant, a “just and reasonable apportionment”, involved a specialist valuation of the various components of a purchase (land, building and plant) relating the results to the actual price paid.
The amount claimable on this basis is generally higher than buyers expectation.
However, in 1997 an alternative procedure was introduced under which the buyer and seller could jointly elect to set a figure to be treated by both parties as the disposal sale proceeds and purchase price for the fixtures. This figure is binding on HMRC and any subsequent purchaser of the property.
The main problem with the election is that it tends to benefit one party over the other.
It is generally better for the seller to put a low value in the contract – the historical allowances over this figure are then retained by him. This means that the buyer then has minimal allowances. Conversely, the buyer wants as high a figure as possible while this may have tax implications for the seller. The only answer is to negotiate – and probably compromise.
The key thing though is to understand what you are being asked to sign and to know what previous owners have signed too.
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.
We reported in our blog of 16 April that there was likely to be further litigation in relation to whether pension funds should benefit from VAT exemption in relation to investment management services.
It has now been announced that the National Association of Pension Funds (“NAPF”) and Wheels Common Investment Fund (Ford/Jaguar/Land Rover group pension fund) will bring a joint challenge against HMRC at the tribunal. If this challenge succeeds, pension funds could submit VAT refund claims for the past 3 years and also for the period 1990 to 1996 in the light of the recent House of Lords Judgement in the Fleming and Conde Nast cases. The main beneficiaries will be private sector defined benefit pension schemes with segregated investments.
As previously advised, these pension funds should be discussing this issue with their fund managers and submitting protective claims as appropriate. Any rejected claims should be re-submitted to stand behind this appeal.
The European Court decision in Securenta has again cast doubt on the recovery of VAT on share issues and focused attention on the VAT position of holding companies.
Securenta was a German investment company dealing in land, acquiring financial holdings in other businesses and managing various other investments. It raised the necessary capital partly by means of an issue of shares. The ECJ ruled that VAT on the costs connected with the issue of shares was allowed only to the extent that the expenditure was attributable to economic activities. Non-economic activities where there was no right to deduct presumably included much of the investment activity undertaken such as acquiring, holding and selling shares and bonds.
Guidance on how HMRC will apply this decision is still awaited. Holding companies often incur significant legal and accountancy costs when issuing new shares and this case may make it more difficult to recover all of the VAT involved. Wherever possible holding companies should be part of a VAT group with their trading subsidiaries as this hopefully should minimise the impact of the decision.
Apparently, such arrangements do not meet the new requirements that are being introduced from 6 April 2008.
HMRC is aware that over the years some employers have reached agreements with their local tax office, for example with regard to:
These local agreements are now being ended and may lead to the rejection of the information submitted.
HMRC is reviewing all local arrangements with a view to terminating them and any affected business should urgently conduct a similar review to avoid having your data rejected.
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 ECJ has recently ruled that M & S should get its long awaited £3.5 million VAT refund. For those of you not familiar with this case, M & S have been litigating for many years to obtain a full refund of VAT charged in error on chocolate teacakes between 1973 and 1994. The UK tax authorities had refused to repay this VAT on the grounds that M & S would be “unjustly enriched” as it had passed 90% of the VAT overpaid on to its customers.
M & S was in a VAT payment position (that is, it owed HMRC money after deducting the VAT it paid from the VAT it charged). Prior to 2005, the UK tax authorities treated “payment” and “repayment” businesses differently in relation to unjust enrichment. This was found to be discriminatory and contrary to the EU principles of fiscal neutrality and equal treatment.
The European Court has referred the case back to the House of Lords in the UK for a final judgement.
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.
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?
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.
An employer is obliged to deduct tax and insurance from any payments made to their employees. But what happens if they get this wrong – perhaps because they mistakenly thought the “employee” was self-employed?
This was the point decided in a 2005 tax case, Demibourne Limited v Revenue & Customs Commissioners. The individual (an odd-job man called Mr Bone) had paid tax on the basis that he was self-employed. However, having concluded that Mr Bone was in fact an employee of the company, the Special Commissioner required the company to “gross up” all the payments they had made to Mr Bone and to pay PAYE and national insurance on this gross amount, without any allowance for the income tax he had already paid. In effect tax was being paid twice on the same income.
This will seem to many to be an most unfair outcome, but one that, in our experience, the Revenue have applied consistently following the Demibourne case. Fortunately, in recent months the Revenue have tried to find a way to avoid double taxation in this type of situation and draft proposals were issued on 28 February 2008.
If these proposals become law, it will become possible – in specified circumstances – for some of the PAYE liability to be transferred to the employee. The liability transferred will not exceed the tax assessed on, or paid by, the employee, leaving him no worse (or better) off.
The new rules would effectively take us back to where we thought we were, before the Demibourne case.
What they do demonstrate, though, is that the Revenue can – and will – work to remove iniquities, even where doing so might leave them worse off.
In order for an employee or director of a company to benefit from the new Entrepreneurs’ Relief after 5 April 2008, he or she must have held more than 5% of the company’s ordinary shares for at least twelve months. But it will not be necessary to have held all of the shares being sold throughout the period, as one of the Revenue’s FAQs makes clear:
Q - I already hold over 10% of the shares in the company. If I acquire another 4% of the shares and sell the whole 14% 6 months later, can I get entrepreneur’s relief on the whole 14%, or only on the 10% I held for the whole of the one year qualifying period?
A - Relief will be available in respect of the whole 14% holding if the qualifying conditions are met. The requirement is that a 5% stake is held throughout the qualifying period. The particular shares or securities disposed of do not have to be held throughout that period.
My colleague Cathy Corns recently outlined the new penalty regime for both direct and indirect taxes to be introduced next year. This new regime will potentially mean that businesses will face higher penalties for errors in VAT return periods with a due date after 1 April 2009.
Under the current VAT rules, if a business discovers an error before HMRC has begun to make enquiries, it can either make a voluntary disclosure or where the VAT is less than £2,000, it can adjust the amount on the VAT return. By doing so, the 15% misdeclaration penalty (triggered when an error breaches certain thresholds) will automatically be waived. Also, a penalty will not apply where a business can convince HMRC that it has a “reasonable excuse” for the error. Under the new regime, the concept of “reasonable excuse” will no longer be grounds for waiving a penalty.
Instead, HMRC will determine the quantum of a penalty by reference to the amount of VAT at stake, the nature and behaviour of the offence that lead to an understatement of VAT and the extent of the disclosure by the business.
There has been no confirmation so far that VAT errors below £2,000 cannot continue to be adjusted on the VAT return, under the new regime. However, it may prove necessary to write to HMRC to disclose any error, regardless of the size and reason, even when the error can be put on the VAT return. This would avoid the potential for a 30% penalty for making “careless” errors.
Hopefully HMRC will confirm this point nearer the time. Watch this space….
There has been a great deal of concern, since Alistair Darling’s announcement that taper relief would be abolished from 6 April 2008, that people holding loan notes after selling their business would face an 18% tax rate, rather than the 10% they had expected at the time they sold the business.
The Revenue have just released draft legislation on the proposed Entrepreneurs’ Relief, together with answers to a number of frequently asked questions. Within the latter, they have confirmed that, if the original disposal would have met the conditions for Entrepreneurs’ Relief (e.g. 5% ordinary shareholding, carrying 5% of the votes, owned by a director or employee, or a business interest held for at least one year prior to the sale), the encashment of the loan notes will do, too.
This applies only if the loan notes are “Qualifying Corporate Bonds” (which most are) but will be a welcome relief to many former business owners.
If you would like to discuss whether you might be affected, please contact Cathy Corns or me.
Anyone who has exchanged shares for non-qualifying corporate bonds (or non-QCBs, for short) needs to review their position carefully – before 5 April 2008.
Unless, in addition to the non-QCBs, they meet the criteria for the new Entrepreneurs’ Relief (e.g. they have been employed by the company that issued the loan notes and have owned at least 5% of the company’s ordinary shares throughout the twelve months prior to encashing the loan notes) they will face an 18% capital gains tax bill, rather than the 10% they might have expected when exchanging their shares.
It may be possible to benefit from the lower rate – but only by acting well in advance of the change.
If you think you might be affected by this and would like to discuss what you can do to keep your tax bill down, please contact Cathy Corns or me.
Someone “selling” their company by taking shares in the acquiring company may be in for a nasty surprise after 5 April 2008.
The new Entrepreneurs’ Relief, which comes into effect on 6 April, will reduce the capital gains tax due on selling shares from 18% to 10% only if the vendor:
Our experience is that these two criteria are often not met, either because the vendor does not work for the new company or because he holds less than 5% of its ordinary shares.
If you are likely to be affected by the new rules (including situations where the exchange has already happened) and would like to discuss what might be done to improve your position, please contact Cathy Corns or me.
The Revenue have confirmed that the £1 million “lifetime limit” for capital gains qualifying for the new Entrepreneurs’ Relief will apply only to gains made after 5 April 2008.
Official confirmation to anyone born in April 1968 that life really does begin at forty.
The new Entrepreneurs’ Relief, which comes into play from 6 April 2008, will (subject to certain criteria) reduce the capital gains tax due when shares in trading companies – or business interests – are sold.
It will not, however, be available where business assets are sold in isolation, rather than as part of the disposal of a business. This would include, for example, the sale of land owned and used by a farmer, unless the sale could be argued to be of a distinct business.
This is likely to be an area of debate with the Revenue and, in many cases, might only be settled by the Courts.
If you would like to discuss how this might affect you – and whether there is anything you can do to avoid this hike in the tax likely to be due – please contact Cathy Corns or me.
In his quieter and more introspective moments, Alistair Darling must wonder if he has the Midas touch in reverse; and if he doesn’t, many others are probably doing it for him.
Fresh from the Revenue’s “clarification” of his proposals for non-doms, which effectively reversed much of what he and they had said previously, the Chancellor now faces criticism from business leaders that his new plans favour non-doms over British-born entrepreneurs.
Under the new proposals, non-doms will be able to elect for a “deemed sale” of their British and overseas assets at 6 April 2008, meaning that they will pay UK capital gains tax only on the growth in value from that date.
In contrast, UK-born entrepreneurs have no such option and will not only lose the benefit of indexation allowance for assets held between 1982 and 1998, but also see the standard rate of capital gains tax on some assets rise by 80%.
We are aware of one example where the post-5 April 2008 tax bill will be nearly four times the liability before, and are sure this will be repeated many times over, sometimes with even more extreme results.
The Chancellor and Revenue are, we understand, adamant that their current proposals will not alter, and in many cases there is, frankly, little that can be done to improve matters.
That does not mean you should not try.
Please contact Cathy Corns or me if you would like to discuss this in more detail.
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.
HMRC has the power to arrest, and as of this month is now also able to intercept phone calls, emails and letters, and “bug” residential premises and private vehicles.
The powers were granted to HMRC in the Serious Crime Act, which gained Royal Assent in October, but did not come into force until the relevant statutory instrument was issued earlier this month.
Basically Customs officers had these powers because of their criminal investigations into drugs and smuggling, but now they have been granted across the board for HMRC.
The question is – what will happen in practice?
The Times online had a somewhat worrying story ; it appears that HMRC have allegedly paid a substantial sum of money to an ex-employee for stolen information on UK residents with foreign bank accounts. I do feel this raises some interesting ethical questions about ways of obtaining information but also sets a bench mark for potential informants in terms of price for value! It may well be of course that a number of the individuals with the bank accounts have nothing to hide and have made proper returns. What is certain though is that they are now going to have to prove it. This will almost certainly be a case of guilty until proven innocent.
It does raise another question for people on how much information to share; disgruntled employees or ex-partners can (anonymously if they so wish) lodge allegations with HMRC that are likely to be investigated. Even if there turns out to be no real issue you will still have had to spend your and your advisers' time in replying to HMRC queries and demonstrating the correctness of returns to their satisfaction; this can be a lengthy and time-consuming process. Deciding on what information can and should be shared could take on a whole new meaning. So nowadays -who can you trust?
HMRC have now issued Business Brief 07/2008 inviting businesses to submit claims for both input tax accrued before 1 May 1997 and also output tax claims for accounting periods prior to 4 December 1996.
There is no time limit for submission of these claims but if you have a claim, prompt action should be taken.
Further announcements are expected.
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.
The AIA will apply to expenditure incurred on or after 1 April 2008 for corporation tax (6 April 2008 for income tax). The same dates see the abolition of first year allowances. Where an accounting period overlaps the implementation dates the maximum AIA will be restricted according to the proportion of the period falling after the relevant date. This will give some strange results in the coming months.
As an example:
A business with a 30 April year end plans to buy plant costing £50,000. If it buys in March it will qualify for a first year allowance (FYA) of 50% = £25,000. The same acquisition in May (the first month of the next accounting period) will attract the full AIA = £50,000. The real problem is if the same acquisition were to be made in April when it would attract no FYA, the AIA will be restricted to one twelfth of the annual amount (£4,167) and the excess will attract a reduced writing down allowance of 24.58%, giving a total deduction of only £15,433.
Identical transactions will be taxed differently according to the date expenditure is incurred and the accounting date chosen!
Careful planning is very important.
A recent decision in the case of Livewire Telecom LON/06/1365 has demonstrated the complexity of VAT fraud cases involving carousel fraud.
The appellant was a wholesale broker (exporter) of mainly new mobile phones. In the course of selling such phones, the company made the relevant checks on both suppliers and customers and the unique phone reference numbers “IMEI”. However, in 2006, HMRC refused to make a significant repayment of input tax on the basis that it suspected that the business was knowingly involved in “contra trading” in respect of 14 transactions. “Contra Trading” involves two separate supply chains, one “clean”, the other “dirty”. The dirty chain will include a “missing trader”. In this case, the appellant was part of the clean chain but HMRC claimed that it was knowingly involved in a carousel fraud.
The tribunal decided, on the evidence available, that the due diligence process of the business appeared to be flawed. However, the appellant could not have (nor ought to have) known of the fraud at the time the transactions took place. Interestingly the tribunal was also critical of the way HMRC presented its evidence and made suggestions as to how this could be improved for future cases.
Other businesses which have had input tax claims refused may now seek millions of pounds of VAT refunds.
HMRC are considering whether to appeal the decision.
Last week, the Chancellor announced details of his so called “Entrepreneurs’ Relief”, the replacement for taper relief, for business owners facing an increase of more than 80% from 6 April 2008.
It would be easy, given all the hype surrounding this new relief, to forget the position for people holding assets that would never have qualified as “business assets” and the 10% capital gains tax rate. By this, I mean assets such as shares in investment companies, residential “buy to let” properties and others not used in trading businesses.
In some respects, their position is more complicated, as the reduction in capital gains tax rates will be offset by the abolition of indexation allowance (the effect of inflation before 1998) and the decision as to the best time to sell may not be so obvious. It is certainly not as simple as saying that the headline rate falls to 18% so matters are automatically better after the changes come into force.
You may think it is now too late to sell before 6 April 2008 – but this is not necessarily the question that needs to be answered.
If you would like to discuss how the new rules might affect you and what you might be able to do to ameliorate any negative effects, please contact Cathy Corns or me.
HMRC has recently confirmed one very important point on assets that have been owned for a number of years. Such assets will have accrued a substantial amount of indexation relief (over 100% to date on assets held on 31 March 1982). Where an individual owns such assets on 5 April 2008 the indexation relief is irretrievably lost.
However HMRC have now confirmed (http://www.hmrc.gov.uk/cgt/faqs-cgt-reform.htm) that where an asset is transferred to a spouse or civil partner on a no-gain no-loss transfer the indexation relief is captured as part of the new owner’s base cost for tax purposes. This is an important planning possibility.
Regrettably though life in tax is never 100% straightforward – if the original owner would qualify for the new entrepreneurs relief and the new owner would not then the value of the historic indexation has to be compared with the value of the new relief before any transfer is made.
The Chancellor’s announcement of the new “Entrepreneurs’ Relief” from 6 April 2008 appears to herald a marked change in the tax position of owners of commercial property.
Though the details have yet to be formalised, it seems that unless the property is let to the owner’s business – or to a company in which the owner has at least a 5% shareholding – the minimum tax rate on selling that property will increase to 18%.
Since 2000, anyone owning a commercial property used by an unquoted trading company would qualify for the higher rate of taper relief and could potentially pay only 10% capital gains tax on selling the property after two years.
It seems unlikely that this change will create a false market in such property before 6 April 2008 but there may be steps that can be taken to negate some of the impact of this effective tax increase in the time available.
If you would like to discuss what might be possible, please contact Cathy Corns or me.
