Technical and Insight
Myths and truths about HMRC’s tax investigation powers
Guidance for accountants – and clients – on HMRC’s investigative powers.

Guidance for accountants – and clients – on HMRC’s investigative powers. 

One of HMRC’s responsibilities is to check that the correct amounts of tax have been paid at the right time. To do this, HMRC may need to: 

  • gather information and examine documents
  • inspect business premises and inspect business documents on those premises.


There are safeguards to ensure that HMRC acts reasonably and that any action it takes is appropriate to the circumstances, and to ensure that HMRC does not unreasonably interfere with a person’s rights under the Human Rights Act. 

The information and documents that an HMRC officer can request must be reasonably required in order to check a person’s tax position. Information can only be reasonably required where it could affect a person’s tax position. If the information could not affect a person’s current or future tax position, it is not reasonably required.

The restrictions on the types of documents and information that HMRC can require or inspect include the following: 

Old documents: these are usually documents created more than six years ago. However, HMRC can request documents older than that if they affect the current tax position (such as a purchase agreement, in order to determine the chargeable gain on a capital disposal). HMRC may also need to see an old document where they have reasonable grounds to suspect that there may have been a deliberate error, which means that the assessment time limit could be extended to 20 years.

Appeal material: these are documents that ‘relate to the conduct of a pending appeal’. Such documents are usually brought into existence as part of the preparation for the presentation of a tax appeal.

Personal records: these are records concerning any individual’s physical, mental, spiritual or personal welfare. Any document containing welfare information is very sensitive. It follows that there is a strong presumption in favour of personal privacy, and so there are restrictions on HMRC’s power to request information containing personal information. 

Journalistic material: these are materials acquired or created for the purposes of journalism. Material is journalistic material only if it is in the possession of a person who acquired or created it for the purposes of journalism, that is a journalist, or unsolicited material sent to a person with the intention of it being used for journalism.

Legally privileged information or documents: legal professional privilege is a very important common law rule that protects from disclosure certain communications between a legal professional and the person who is their client. This applies whether the communications are held by the legal professional or the client. Information is privileged if a claim to legal professional privilege could be maintained in legal proceedings. 

Auditors’ statutory audit papers: as a general rule, an auditor cannot be required to provide information or produce documents that belong to the auditor if they were created for the purpose of carrying out the audit. Audit papers in the hands of anyone other than the auditor who created them are within the scope of HMRC’s information and inspection powers.

Tax advisers’ papers giving advice: HMRC cannot require a tax adviser to provide information or produce documents that belong to the adviser if the purpose of the information or documents was to give or get advice about another person’s tax affairs. This protection only applies when the notice is given to a tax adviser. It does not apply when the notice is given to the person whose tax position is being checked.

Formal and informal enquiry: an HMRC officer has the power to either correct a return informally or open a formal enquiry (by issuing a formal enquiry notice), and each of these processes is discussed below.

Correcting a return - informal enquiries: an HMRC officer can, within nine months of receiving a self-assessment tax return, amend the return, without opening an enquiry, in order to correct an obvious error or omission. ‘Obvious’ means that there can be no doubt what the correct entry should be. This could include correcting arithmetical errors, transposition of incorrect figures and errors of principle. 

An HMRC officer can also amend the return if he has reason to believe it is incorrect based on information already held and where no more information is needed.

The taxpayer has no right of appeal against a correction, but does have the right to reject it by giving notice in writing within 30 days of the date it was issued by HMRC. If an appeal is made, it means that the correction has no effect and the self-assessment is put back to the original figures.

Even if the taxpayer does not reject the correction in the time allowed, he may be in time to amend the return. In such circumstances, an officer can only dispute the amendment by means of a formal enquiry into the amended return.

An informal request for information is not the same as formal enquiry. Not recognising the informal approach as an enquiry leaves the door open for the same or another inspector to open a formal enquiry later. Don’t forget that if the matter has been concluded under a formal enquiry it would prevent HMRC opening a new enquiry into the same matter. Essentially an HMRC officer is bound by the decision of the first officer and HMRC cannot change their minds on information previously available to them. This has been successfully argued by the taxpayer in Scorer V Olin Energy Systems Ltd.


Opening an enquiry
An HMRC officer can enquire into a return by giving written notice to the individual, sole trader, partnership or company concerned. For an enquiry to be valid, it should:

  • be given in writing
  • set out whether the whole of the return is under enquiry or just one or a few specific entries
  • explain what information and documents are required
  • contain a time deadline by which the information and documents must be submitted or made available.


HMRC should state the specific concerns identified in the case in question rather than asking for general papers.

The vast majority of enquiries are launched after a risk assessment has been undertaken, although some random enquiries also take place. Previously, when HMRC wanted to check one item in a tax return this was called an ‘aspect’ enquiry and when HMRC wanted to open an in-depth enquiry, this was called a ‘full’ enquiry. Now, however, HMRC no longer differentiates between full and aspect enquiries and both are referred to as a ‘compliance check’.

While the names have changed, the enquiry powers have not. Enquiries into self-assessment tax returns or amendments are launched under TMA 1970, s9A, within 12 months of the submission of the return.

The taxpayer should consider carefully how to respond to an enquiry because if there is an error, the way in which they co-operate with HMRC can affect the penalty that may be payable. For guidance about penalties and how they can be mitigated, please see our article Tax penalty regime - mitigation and suspension

SORP updated to reflect LLP regulations
Guidance on the latest changes to the SORP.

Guidance on the latest changes to the SORP. 

The SORP has now been updated to reflect the LLP regulations that were issued in May 2016 and has also been updated to reflect earlier changes that have been made to FRS 102 and 1a. It can be used now as it applies for all periods commencing on or after 1 January 2016. This is the date from when the regulations applied. The changes mainly affect small LLPs and provide them with the opportunity to use similar reporting relaxations to those that have been available to limited companies. 

The SORP also contains ‘a number of minor clarifications … including amending the existing guidance to address diversity in practice on how "automatic divisions" of profits are accounted for’. 

The SORP does not apply to LLPs that choose to apply the micro-entities regime and the LLP SORP states that ‘such LLPs should apply FRS 105 only’. It is stated in the SORP that ‘where a micro-LLP enters into a transaction that is not covered by FRS 105, it is required to refer to the concepts and principles set out in Section 2 Concepts and Pervasive Principles of that standard when determining its accounting policies’.

Making tax digital - distilled
Read our digest of the key points of HMRC’s consultation responses – then let us know what you think.

Read our digest of the key points of HMRC’s consultation responses – and then let us know what you think. 

On 31 January, as practitioners were finalising tax returns to meet the self assessment deadline, HMRC published consultation responses indicating the government’s conclusions on making tax digital (MTD) – together with the first batch of draft legislation. 

Businesses, self-employed people and landlords will be required to start using the new digital service from: 

  • April 2018: if they have profits chargeable to income tax and pay Class 4 national insurance contributions (NICs)
  • April 2019: if they are registered for and pay VAT
  • April 2020: if they pay corporation tax (CT).


HMRC has said that ‘individuals in employment and pensioners will not have to use the digital service unless they have secondary incomes of more than £10,000 per year from self-employment or property’ and that ‘it was considering exempting more of the smallest unincorporated businesses from the requirement to keep digital records and make regular updates to HMRC’. 

It was also considering ‘deferring the mandatory start date of Making Tax Digital for Business (MTDfB) by one year for the next tier of small unincorporated businesses and landlords with annual incomes of above £10,000, but below a threshold to be determined.’

Unfortunately, a large number of businesses will be unclear if the timetable applies to them and the HMRC response states that ‘given the range of views expressed on this matter from respondents to the consultation the government will take more time to consider these issues alongside the fiscal impacts. Final decisions will be made before legislation is laid later this year.’

At the bottom of this summary we are asking you to highlight your opinion on the yet to be determined threshold.

Disappointment expressed
Business organisations, professional bodies and a number of software suppliers, in the main, were disappointed with the documents published by HMRC. These concerns continue to be around: 

  • the pace of change
  • the capability of the smallest businesses and those who struggle with digital technology to adapt
  • burdens on business
  • agents’ ability to access digital services to support their clients
  • data security when using third party software.


HMRC has summarised the key decisions as follows:

  • ‘businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business – this is likely to involve combining the spreadsheet with software
  • businesses eligible to use “three line accounts” will be able to submit a quarterly update with only three lines of data (income, expenses and profit)
  • free software will be available to businesses with the most straightforward affairs
  • the requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally
  • activity at the end of the year must be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner
  • charities (but not their trading subsidiaries) will not need to keep digital records
  • for partnerships with a turnover above £10m, Making Tax Digital for Business is deferred until 2020’.


In each of the consultation responses key points are highlighted. These include the following: 

Simplified cash basis

  • the threshold for the cash basis is £150,000
  • there has been simplification of the rules on capital and revenue expenditure within the cash basis
  • the government is considering reforming basis period rules and measures to simplify period end reporting requirements. 

Voluntary payments

  • responding to concerns over the proposal that voluntary payments would be allocated against tax liabilities as they arose by HMRC instead of by the customer, and whether HMRC systems would ensure this was carried out in the customer’s interest, the consultation response is that HMRC will proceed with its proposal on payment allocation. It ‘believes this will reduce the need for customers to have to access their digital tax account to tell HMRC where payments should go’. It is also noted that it will ‘ensure that robust allocation rules are in place and publicly available’. 

Penalties

  • it is proposed that HMRC’s existing compliance powers be replicated and legislation will be included in Finance Bill 2017
  • HMRC has stated that ‘customers will be given at least 12 months before they are charged any late submission penalties’ and ‘HMRC will consult further on specific proposals for late payment penalty interest and the alignment of interest rules in 2017’.
    • for the new tax year HMRC will ‘use PAYE information during the tax year to calculate whether the right tax is being paid’. It also states that for now ‘customers will still receive letters directing them to their digital tax account to check this, but in future, customers will be prompted digitally to check their tax account’.

VAT

  • quarterly updates will effectively replace the VAT return.


As well as publishing the consultation responses, HMRC has issued draft primary legislation covering the areas below:

a)    ‘scope – details of which businesses (including sole traders and landlords) will be in scope of the new requirements
b)    entity and activity-specific exemptions – details of exclusions and exemptions for specified businesses and business activities
c)    periodic updates: regulation-making power – powers for the government to lay regulations requiring specified persons to provide specified information about their income and expenditure to HMRC
d)    end of period statement: regulation-making power – powers for the government to lay regulations requiring specified persons to provide specified information in relation to specified periods relating to the calculation of profits or losses for those periods
e)    digital record-keeping: regulation-making power – powers for the government to lay regulations requiring specified persons to keep specified records relating to their business in electronic form
f)     electronic communications: supplementary powers – further details of the provision which regulations laid under these powers should be able to make in respect of electronic communications
g)    digitally excluded exemption – details of who will be able to opt out of the new requirements because they are unable to engage digitally.’


It has been stated that the Finance Bill 2017 will include the final versions of the draft primary legislation. It has also been stated that the Bill will contain ‘additional clauses covering the following areas: 

a)    compliance powers – HMRC has a range of powers which allow it to check and investigate a person’s tax position. Consequential amendments are required to make HMRC’s existing compliance powers fit with the new processes described in Bringing Business Tax into the Digital Age
b)    low income exemption – details of the initial exemption to the new requirements previously announced by the government for those with incomes below a defined level
c)    insolvent businesses exemption – details of an exemption for those businesses (including sole traders and landlords) which are subject to insolvency proceedings
d)    deferral for the largest partnerships – details of the deferral until 2020 for those partnerships which have a turnover above £10m
e)    consequential amendments – consequential amendments required to existing tax legislation in order to implement the policies set out in Bringing Business Tax into the Digital Age.’


The detail will be contained in yet to be issued regulations. As a guide some of the proposed content and areas to be covered are detailed within the information issued by HMRC. It states within this information that the primary legislation will be supplemented by draft regulations for ‘implementation of the Bringing Business Tax into the Digital Age requirements’. It goes on to state that the ‘regulations will apply to persons and partnerships who fall within scope of draft Schedule A1 of TMA 1970’.

The regulations will provide that these businesses (including sole traders and landlords) must use compatible software to meet the new requirements. The regulations will also allow ‘the Commissioners of HM Revenue and Customs to set out details of compatible software in a published notice. This will enable the definition of software to be updated from time to time, for example, to keep up with changes in technology’.

It is also highlighted that the ‘regulations will provide details of businesses’ obligations to keep and preserve records digitally. Businesses (including sole traders and landlords) will need to keep digital records in software compatible with HMRC’s systems. The regulations will also set out the period for which the records must be preserved’.

Regulations will also be issued that set out the information, including categories of income and expenditure, which will need to be kept and preserved digitally. For a non-property businesses, the following is an example of the required information:
 

Income:

  • turnover, takings, fees, sales or money earned
  • any other business incom

Expenses:

  • cost of goods bought for resale or goods used
  • construction industry – payments to subcontractors
  • wages, salaries and other staff costs
  • car, van and travel expenses
  • rent, rates, power and insurance costs
  • repairs and renewals of property and equipment
  • phone, fax, stationary and other office costs
  • advertising and business entertaining costs
  • interest on bank and other charges
  • bank, credit card and other financial charges
  • irrecoverable debts written off
  • accountancy, legal and other professional fees
  • depreciation and loss/profit on sale of assets
  • other business expenses
  • goods and services for your own use
  • income, receipts and other profits included in business income or expenses but not taxable as business profits
  • disallowable element for each category.


It has said that ‘these categories may differ depending on whether or not a business (including a sole trader or landlord) operates on the cash basis and depending on whether it is a property business or a partnership. Businesses which are retailers may record their daily gross takings instead of recording every transaction. The regulations will set out the process by which retailers may elect for these different record-keeping requirements to apply and how and when that election may be brought to an end’. 

Quarterly reporting remains unchanged from the original consultation and it is stated that the ‘regulations will require businesses (including sole traders and landlords) to provide HMRC with periodic updates of specified information every three months. For most businesses there will be four updates for each relevant period’. 

It goes on to state that ‘businesses (including sole traders and landlords) will also be required to provide corrected or updated information with their next update if the information submitted in a previous update has changed or is found by the business to be incorrect’.

An additional report to HMRC will be required in many cases. HMRC states that the ‘regulations will impose an obligation on businesses (including sole traders and landlords) to provide an end of period statement for a relevant period in order to finalise their taxable business profits or losses. The statement will need to be provided using compatible software by the earlier of: 

  • 10 months after the end of the period to which the statement relates, or
  • the 31 January following the tax year in which the relevant period ends.’


The information issued by HMRC indicated that the following would be required as part of the end of period statement: 

Tax adjustments and elections:

  • adjustment required where the basis period is not the same as the accounting period under section 203 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
  • averaging adjustment applied to taxable profits where an election has been made for averaging under section 222 or 222A of ITTOIA 2005
  • adjustment required as a result of a change in basis under Chapter 17 of Part 2 of ITTOIA 2005
  • total of any construction industry scheme deductions taken from payments made to subcontractors under section 61 of Finance Act 2004
  • any other tax deducted from trading income (excluding deductions made by contractors on account of tax)
  • sums due to be charged under sections 277 to 285 of ITTOIA 2005
  • adjustments required under Chapter 7 of Part 3 of ITTOIA 2005
  • claims for loss relief under Chapter 2 of Part 4 of the Income Tax Act 2007 (Chapter 4 for property businesses)
  • disallowable expenditure
  • foreign tax deducted
  • any other tax adjustment
  • adjustment on change of basis
  • foreign tax deducted.


Capital allowances – claims and balancing charges:

  • annual investment allowance
  • capital allowances at 18%
  • capital allowances at 8%
  • restricted capital allowances on cars costing more than £12,000 where bought before 6 April 2009
  • business premises renovation allowance
  • enhanced capital allowances: energy-saving relief
  • enhanced capital allowances: environmentally-beneficial relief
  • enhanced capital allowanced: electric charge-points
  • enhanced capital allowances: gas refueling equipment
  • allowances on sale or cessation of businesses use (where an asset has been disposed of for less than its tax written down value)
  • total capital allowances
  • balancing charge on sale or cessation of business use (where business renovation allowance has been claimed)
  • balancing charge on sales of other assets or on the cessation of business use (where an asset has been disposed of for less than its tax written down value).


HMRC has revised the MTD impact assessment with the cost of MTDfB to each business being estimated at only £280 in the year of transition with benefits to follow.

Many of you have previously supplied information on costs which we have highlighted to HMRC. If you have time we would like to know your views on transitional costs – the one off costs to your business and also to clients businesses.

Share your feedback with ACCA
Please send ACCA your comments on HMRC’s responses to the consultations, in particular focusing on the following: 

  • What is your estimate of the transitional costs to your business (software, training, communications)?
  • What is your estimate of the transitional costs to your average clients business (software, training, fees)?


HMRC proposes to introduce a new business threshold which will have simplified reporting. It is for annual incomes of above £10,000, but below a threshold to be determined. What in your opinion should the threshold be?

The following are options that could be used, but there are others:

Vat limit: £150,000 – cash accounting limit
Audit limit: MTD reporting should be voluntary and not mandatory.
It should not be based on turnover but on businesses’ resources (employees).


You can send your views to advisory@accaglobal.com with the heading MTD

You can find the MTD responses and draft legislation on gov.uk 


MTD events
ACCA is holding a number of events across the country focusing on MTD:  

Tax goes digital

Exeter | 6 April

 

Transforming tax by 2020

Cardiff | 25 April

 

Transforming tax by 2020

Swansea | 23 May

 

 

Duty to report on payment practices and performance
New rules require medium and large companies and LLPs to publish reports on their payment practices.

New rules requiring medium and large companies and LLPs to publish reports on their payment practices come into force on 6 April. 

Many of these businesses will need to ensure their systems are changed so they can recover the required information. 

The Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 and The Reporting on Payment Practices and Performance Regulation 2017 come into effect on 6 April and apply for financial years beginning on or after that date. Businesses are required to report the information every six months on a website that will be on gov.uk. BEIS have said that this will be available from April 2017.

The guidance issued by BEIS Business payment practices and performance: reporting requirements highlights the following reporting timeframes. The earliest reports will appear for businesses with periods beginning from 6 April. The first significant volume will be from those with a 30 June year end:

First year reports

Financial year beginning

What is the first reporting period?

When must the first report be published on the web service?

1 January

1 January 2018 to 30 June 2018

On or before 30 July 2018

1 April

1 April 2018 to 30 September 2018

On or before 30 October 2018

5 April

5 April 2018 to 4 October 2018

On or before 3 November 2018

6 April

6 April to 5 October 2017

On or before 4 November 2017

After 6 April

First six months of the business’s 2017-18 financial year

Within 30 days starting on the day after the end of the business’s first reporting period.


The new reporting requirements are placed on a business that exceeds two or more of the following on their last two balance sheet dates: 

  • £36m annual turnover
  • £18m balance sheet total
  • 250 employees.


Group limits also apply as do rules for new companies. These are required, if within scope (a single year balance sheet date rule applies), to report in their second financial year. 

The reporting requirement applies to companies that have been formed and registered under the Companies Act 2006 (or previous legislation) and LLPs registered under the Limited Liability Partnerships Act 2000. Businesses incorporated outside the UK, including overseas companies registered under the Companies Act but not formed under the Companies Act, are not required to report.

The reporting business will need to report on qualifying contracts. A qualifying contract is one which satisfies all of the following:

i.        It is between two (or more) businesses
ii.       It has a significant connection with the United Kingdom
iii.      It is for goods, services or intangible property, including intellectual property
iv.      It is not for financial services.


For each reporting period businesses are then required to report on the following, in relation to qualifying contracts: 

Narrative descriptions of:

i.        the business’s standard payment terms, which must include - the standard contractual length of time for payment of invoices, maximum contractual payment period and any changes to the standard payment terms in the reporting period, and how suppliers have been notified or consulted on these changes
ii.        the business’s process for resolving disputes related to payment.


Statistics on:

i.        the average number of days taken to make payments in the reporting period, from the date of receipt of invoice or other notice
ii.       the percentage of payments made within the reporting period which were paid in 30 days or fewer, between 31 and 60 days, and in 61 days or longer
iii.      the percentage of payments due within the reporting period which were not paid within agreed terms.


Statements (ie a tick box) about:

i.        whether suppliers are offered e-invoicing
ii.       whether supply chain finance is available to suppliers
iii.      whether the business’s practices and policies cover deducting sums from payments as a charge for remaining on a supplier’s list, and whether they have done this in the reporting period
iv.      whether the business is a member of a payment code, and the name of the code.


The sanction for non-reporting is that failure to meet the reporting requirement is a criminal offence by the business, and by every director of the company or designated member of an LLP.

Getting to grips with LISA
LISA is potentially a valuable savings option. But how does it work and who is it aimed at?

LISA is potentially a valuable savings option. But how does it work and who is it aimed at? 

From April 2017 a new savings product called LISA (Lifetime ISA) is available. It is designed to help young people save flexibly for the long-term throughout their lives. However, as with most financial ideas, the devil is in the detail.

The main benefits of the LISA are: 

  • it is designed to work with existing ISA products and will be simple for savers to use
  • as with existing ISAs investment growth on savings and future withdrawals are tax-free
  • savers will be able to make LISA contributions (up to £4,000 in each tax year) and receive a bonus from the age of 18 up to the age of 50. Where the maximum is saved, this could mean a  £1,000 bonus each year from the government
  • there is a one-off 2017/18 bonus for those who also use the help to buy ISA – see below for more details.


Who is it aimed at?
To use the LISA the saver must be aged 18 or over but under 40. 

How does the LISA differ from existing ISAs?
The Lifetime ISA is designed for two specific purposes: 

  • for first-time buyers to use towards a residential property situated in the UK. This can be done at any time, provided the Lifetime ISA has been held for 12 months or more. However, it needs to be emphasised that the tax-free funds, including the government bonus, can only be used to buy a first home worth up to £450,000 at any time
  • to take out and use in retirement once the saver is aged 60. Once that age is reached the tax free funds can be used for ‘any other purpose’.


So the government is stressing the long term nature of the savings.

So far so good? Now for the complicated bit
As mentioned above, the devil is in the detail. Perhaps unsurprisingly the government has surrounded the LISA with rules and restrictions. These are important and need to be considered before an application is made: 

  1. Any contributions to a Lifetime ISA will sit within the overall £20,000 ISA contribution limit. However the government bonus will only be paid on contributions of up to £4,000 per tax year.
  2. Individuals will be able to transfer savings from other ISAs as one way of funding their Lifetime ISA. In line with existing rules, transfers from previous years’ ISA contributions do not affect that year’s £20,000 overall ISA limit.
  3. Savers will be able to contribute to one Lifetime ISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA, within the new overall ISA limit of £20,000 from April 2017.
  4. Saving into a Lifetime ISA will be similar to saving into any other ISA. Qualifying investments in a Lifetime ISA will be the same as for a cash or stocks and shares ISA. Individuals will be able to transfer their Lifetime ISA within 30 days between providers to get the best deal, in line with the existing ISA rules.


Withdrawing money for a first time purchase – how does it work?
In addition to the details above, there are also some interesting points to note when the funds are withdrawn: 

  • If the saver is buying their first home with someone else they can each use a Lifetime ISA and each benefit from their government bonus.
  • The detailed rules are based on those for the Help to Buy ISA. This includes that the withdrawal must be for a deposit on a property for the first time buyer to live in as their only residence and not buy-to-let.
  • The saver has to inform their ISA manager of the house purchase, who will claim any additional bonus due from HMRC, and then the withdrawal will be paid direct to the conveyancer. If a purchase falls through after a withdrawal has been made then the funds will be returned to the same ISA manager by the conveyancer and will not count against the annual contribution limit.


Interaction with the existing help to buy ISA
The existing help to buy ISA will be open for new savers until 30 November 2019, and open to new contributions until 2029. However, they are not stand-alone and can be used alongside the LISA.

Savers will be able to save into both a Help to Buy ISA and a LISA, but will only be able to use the government bonus from one of their accounts to buy their first home. This gets complicated but is worth exploring. For example:

If an individual holds a Help to Buy ISA and a LISA they may:

  • use their Help to Buy ISA with its government bonus to purchase their first home, and save their LISA with its government bonus for retirement
  • use their LISA with its government bonus to purchase their first home, and withdraw the funds held in their Help to Buy ISA to put towards this purchase without the government bonus
  • use their Help to Buy ISA, including its government bonus, to purchase their first home and withdraw funds from their LISA to put towards the purchase. In this instance the government bonus on the LISA savings would be returned to government and the individual would be required to pay a charge


One off bonus for 2017/18
During the 2017-18 tax year only, those who already have a Help to Buy ISA will be able to transfer these funds into a LISA and receive the government bonus on those savings.

What is the overall impact of the LISA for savings?
The LISA is potentially a very valuable savings tool, mainly due to the government bonus. However, for a long-term saver the LISA would need to be compared to a normal pension to see which is best for them.

The comparison of the two products is a complex issue beyond the scope of this article and has different outcomes depending on things like self-employment, auto-enrolment etc. So we strongly advise that members should recommend to their clients that they visit an Independent Financial Adviser for more guidance.

Increase in Individual Savings Accounts (ISA) limits
From 6 April 2017, the annual ISA allowance will increase from £15,240 to £20,000.

From 6 April 2017, the annual ISA allowance will increase from £15,240 to £20,000. 

Introduction
Individual Savings Accounts (ISAs) are tax-free funds in which UK residents can hold a range of different investments. Originally, these were cash or stocks and shares products held by those over 16 years of age. However, in November 2011 the junior ISA was launched which allows tax-free cash accounts to be set up for the benefit of those under 16.

The main benefits of ISAs are:

  • no tax on income or gains within the ISA
  • no tax on capital gains arising on the encashment of an ISA
  • no minimum holding period: withdrawals can be made at any time.


There are three types of ISA:

  • stocks and shares ISA (previously known as a maxi ISA)
  • cash ISA (previously known as a mini ISA)
  • innovative ISA.


Who can invest in an ISA?
To make an investment in an ISA, the qualifying individual must be: 

  • resident in the UK
  • 16 or over for a cash ISA
  • 18 or over for a stocks and shares ISA
  • a Crown servant (eg diplomatic or overseas civil service) or their spouse or civil partner.


If an individual moves abroad and becomes non-resident, he can keep his ISA(s) and retain the tax benefits, but no contributions can be made during the period of non-residence.

Cash ISAs can include: 

  • savings in bank and building society accounts
  • some National Savings and Investments products


Stocks and shares ISAs can include: 

  • shares in companies
  • unit trusts and investment funds
  • corporate bonds
  • government bonds


Innovative finance ISAs can include peer-to-peer loans, which are loans given to other people or businesses without using a bank.

You cannot transfer any peer-to-peer loans already made into an innovative finance ISA.

Repayment of funds in same tax year
From 6 April 2016, individuals are able to withdraw funds from their ISA and subsequently replace the money without it counting towards their annual ISA subscription limit, and while retaining the tax-free status of the account. However, the funds must be replaced in the same tax year as they were withdrawn.

Help to buy ISAs
‘Help to buy’ ISAs were introduced in 2015 to help first-time buyers to save for a deposit on a home in the UK. They are only available to individuals who are 16 years of age and over.

The individual must open the account with an initial deposit of up to £1,000. There is no minimum monthly deposit, but a person can save up to £200 a month. Accounts are limited to one per person rather than one per home – so those buying together can both receive a bonus.

The bonus is available to first time buyers purchasing UK properties. The minimum bonus size per person is £400 and the maximum bonus size is £3,000. The bonus will be available on home purchases of up to £450,000 in London and up to £250,000 outside London.

Junior ISAs
Junior ISAs, introduced in November 2011, were designed to be an alternative to the child trust fund but without the government contribution to the fund. Junior ISAs are available to a child living in the UK, who is under 18 years of age and does not have a child trust fund account.

As with adult ISAs, there are two types of junior ISA accounts: cash ISAs and stocks and shares ISAs. Junior ISAs funds are owned by the child and are locked in until the child reaches 18 years of age. The child is able to hold only one junior cash ISA account and one junior stocks and shares ISA account at any one time (although transfers between accounts are possible).

All income and gains within the account(s) are tax-free and losses will not be allowable for tax purposes. Annual contributions are capped, with the 2017/18 junior ISA allowance being £4,128.

As the income from the junior ISA account is not taxable, the current anti-avoidance mechanism of assessing the income (once it exceeds £100) on the parent would not produce a tax liability. This means that a parent can fund their child's junior ISA as well as their own ISA without attracting a tax liability on the interest / gains. This makes the junior ISA an excellent way of providing for the child's future in a tax efficient way.

There are two instances where withdrawals are possible before the child reaches 18 years old. These are where the child is terminally ill, or upon death. 

Legal title to all of the investments passes to the child on their 18th birthday and the account ceases to be a junior ISA. The most likely outcome is that the investments will be rolled into an adult ISA. This may require the 18 year old to complete an application to open an adult ISA. 

Giving investment advice
The usual health warning applies here: You cannot give investment advice unless you are authorised to do so by the Financial Services Authority. You can tell your client about tax efficient investments, but you must not recommend any based on their circumstances.

Pensions: new employers and auto-enrolment
Re-enrolment has started for many businesses and the final group of micro-businesses will be enrolled.

Re-enrolment has started for many businesses and the final group of micro-businesses will be enrolled. 

The Pension Regulator has highlighted that compliance remains positive; over 370,000 employers have enrolled workers and over 300,000 workers have been re-enrolled, but it did issue a reminder that businesses need to ensure they submit their declaration of compliance on time. Failure to comply may result in fines and that these will be pursued. One of the results could be a county court judgement for failing to pay automatic enrolment fines.

A few cases were mentioned in the last Quarterly Compliance and Enforcement Bulletin issued by the Pensions Regulator. It has also been highlighted that pubs, clubs and restaurants were businesses with higher risk of non-compliance.

New employers also are required to enroll workers into a suitable scheme. The basic rule is that all new employers between 1 April 2012 up to and including 30 September 2017 will have staging dates between 1 May 2017 and 1 February 2018.

Many have already received communication from the Pensions Regulator. The change that practitioners and your clients need to know is that from October 2017 new employers will have an instantaneous duty to enroll workers. More in future issues of In Practice.

Protecting pension lifetime allowances
Deadline for applying for individual protection 2014 is 5 April 2017.

Deadline for applying for individual protection 2014 is 5 April 2017. 

The standard pension lifetime allowance was £1.5m until it was reduced to: 

  • £1.25m on 6 April 2014
  • £1m on 6 April 2016.


Individuals may be able to protect their pensions from these reductions. There are three protections available, although the individual protection 2014 is only available to claim until 5 April 2017.

Individual protection 2014 achieves the following:

  • Protects your lifetime allowance to the lower of:
    (a)  The value of your pension(s) at 5 April 2014
    (b)  £1.5m
  • After claiming individual protection 2014, contributions can still be made into the individual’s pension(s). However, tax will be due on money taken from the pension(s) that exceed the individual’s protected lifetime allowance.


Individual protection 2014 can be applied for if the person’s pension(s) was worth more than £1.25m at 5 April 2014. 

This guidance from HMRC provides further information on this together with instructions about how to apply.

Government introduces pension advice allowance
From April, an individual can claim a £500 allowance from their DC pension scheme for advice.

From April, an individual can claim a £500 allowance from their DC pension scheme for advice.

The government is to introduce an allowance for advice in relation to defined contribution pension savings from April 2017. This will allow individual members of a defined contribution pension scheme to withdraw up to £500 tax-free from their pension schemes on up to three occasions during their lifetime, but only once in a tax year, to pay for retirement advice.

The allowance will be available in addition to the exemption for employer-arranged pensions’ advice to be introduced in Finance Bill 2017.

In summary: 

  • the allowance will be available at any age
  • the allowance will be up to £500 on each occasion
  • the allowance will be restricted to three occasions in the person’s lifetime
  • the allowance will be restricted to one occasion for each tax year
  • the allowance can be withdrawn from defined contribution pension schemes and hybrid pension schemes with a money purchase or cash balance element
  • the payment of the allowance can only be made directly from the pension scheme to the adviser
  • the adviser must be a regulated financial adviser
  • the allowance can be used alongside the proposed tax exemption for employer-arranged pension advice.
Restrictions to relief for finance costs on residential properties
New measures from HMRC will see interest payable on loans relating to income from residential properties.

New measures from HMRC will see interest payable on loans relating to income from residential properties. 

This measure will restrict relief for finance costs on residential properties to the basic rate of income tax and will be introduced over four years from 6 April 2017. 

The measure will not affect companies renting out property.

The measure will not affect individuals renting out commercial property or furnished holiday letting.

The measure will affect residential property in the UK and elsewhere.

The measure will affect mortgage interest, interest on loans to buy furnishings and fees incurred taking out or repaying mortgages or loans.

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:
Finance cost allowed in full                                    Finance cost allowed at basic rate

Year to 5 April 2016                   100%                                                 0%
Year to 5 April 2017                   100%                                                 0%
Year to 5 April 2018                   75%                                                   25%
Year to 5 April 2019                   50%                                                   50%
Year to 5 April 2020                   25%                                                   75%
Year to 5 April 2021                   0%                                                     100%


The tax reduction is the basic rate value (20% for 2017/18) of the lower of: 

  1. Finance costs: costs not deducted from rental income in the tax year (this will be a proportion of finance costs for the transitional years) plus any finance costs brought forward
  2. Property profits: the profits of the property business in the tax year (after using any brought forward losses)
  3. Adjusted total income: the income (after losses and reliefs, and excluding savings and dividends income) that exceeds your personal allowance.


The tax reduction can’t be used to create a tax refund.

If the basic rate tax reduction is calculated using the ‘property profits’ or ‘adjusted total income’ then the difference between that figure and ‘finance costs’ is carried forward to calculate the basic rate tax reduction in the following years.

These changes were made by the Finance (No2) Act 2015 section 24 which effectively made amendments to: 

  • Income Tax (Trading and Other Income) Act 2005 sections 272A and 272B introduced
  • Income Tax Act 2007 sections 399A and 399B introduced (relating to property partnerships).


No changes were made to corporation tax legislation relating to this matter.

HMRC has produced a guide including worked examples


We will return to this area with further information and worked examples following next month’s Budget.

 

Landlords under MTD
How will landlords be affected by making tax digital?

How will landlords be affected by making tax digital?

Below are extracts from the options for landlords under MTD which impact the 2017/18 tax year.

Landlords with under £150,000 turnover will use the cash basis rather than generally accepted accounting practice (GAAP) as the default method of calculation, ‘unless a landlord opts out or has rental receipts for the business in excess of the threshold in which case they will continue to use GAAP’. It is stated that the measure will have effect for the ‘tax year starting 2017 to 2018 onwards’.

The taxable profits for property business income is calculated in accordance with GAAP and is adjusted for income tax purposes. The proposed change will see the cash basis being the default option where the cash basis receipts of that business don’t exceed £150,000. HMRC’s notes highlight that landlords ‘will continue to be able to opt to use GAAP to prepare their profits for tax purposes’.

Landlords with more than one property business will be able to choose the ‘cash basis or GAAP for each of their property businesses’. It is also highlighted that landlords who have ‘overseas property businesses alongside a UK property business will be able to make the decision about whether using GAAP is more appropriate for either’. It is also stated that landlords ‘other than spouses or civil partners who jointly own a rental property will be able to decide individually’.

The note also highlights that: 

  • capital allowances are not available
  • landlords will be able to claim the upfront cost of capital items used in the business
  • interest expense will be treated consistently between those using the cash basis and those using GAAP.
A letter to HMRC
The Secret Accountant shares some feedback with HMRC.

Dear Sir or Madam, 

We thank you for your recent visit to our offices as part of the enquiry into our clients’ affairs. In this regard we have some concerns as well as suggestions as follows: 

While we appreciate your corporate policy not to ‘suck in all the marrows’ of those who can’t afford it, your insistence that one of our clients sell his dog shed to pay off the £5.20 self-assessment tax owed appears have been objected to by the inhabitants. Being German Shepherds, they are not up to speed with the UK tax laws, particularly the enforcement part, and they have their own way of enforcing it anyway. 

In relation to the outstanding PAYE tax at source debt owed by our milkman client he, given the acute cash flow struggle, wondered if you would accept milk at source. The cow may be willing to visit the HMRC debt management offices early mornings as soon as an agreement in this regard has been reached. 

The remarkable archaeological skills demonstrated by the officer enquiring into the staff welfare spend have been quite impressive. In particular, the officer searching the kitchen and taking away a few breakfast biscuits to ensure that indeed they were ‘wholly and exclusively’ meant for breakfast meetings simply demonstrates how real the inspection has become. In case the inspector hasn’t yet consumed them, it turned out later the biscuits were bought for the director’s pets; the dogs do not appear to have any particular problem with the loss though. 

Meanwhile we note with a sense of pride that HMRC have made spectacular improvements in the customer services department. The NAO report now confirms that the average waiting time for calls made to HMRC is now just 118 minutes compared to 120 minutes last year. Their survey of taxpayers now rates the service as 'terrible' as compared to what was 'disgusting' last year. Quite an achievement there. 

We would disagree if the costs incurred by us on yoga therapy for our staff were to be disallowed, as indicated by you. Over the years we have discovered that the following poses are directly relevant to our trade while dealing with HMRC: 

  • Kapalbhati – skull cleaning breathing technique to be practised five minutes before and after a phone call to HMRC
  • Savasana – corpse pose that rejuvenates the mind and body to be practised immediately after engaging with the debt management team at HMRC.


We’re happy to share the full manual with HMRC which should convince you how ‘wholly and exclusively’ relevant is this particular spend for the trade.

Yours faithfully,

The Secret Accountant 

Employed or self-employed?
Keep on top of the changing landscape around self-employed individuals.

Keep on top of the changing landscape around self-employed individuals.

The independent review into the labour market has started to gather evidence in its fact finding tour of Britain. Its mandate is to investigate whether employment practices are keeping pace with the changing world of work. It will publish its findings in the summer but it seems likely that they will comment on the ability of workers to challenge companies who treat workers as self-employed.

We also have had the judgement published in Pimlico Plumbers Ltd v Gary Smith. It found that Mr Smith had rights as a worker. The case and decision were concerned with the following:

66. In the context of the legislation relevant to this appeal, a distinction is to be drawn between (1) persons employed under a contract of service; (2) persons who are self- employed, carrying on a profession or a business undertaking on their own account, and who enter into contracts with clients or customers to provide work or services for them; and (3) persons who are self-employed and provide their services as part of a profession or business undertaking carried on by someone else: cf. Lady Hale in the Bates van Winkelhof case at [25] and [31]. The persons in (3) fall within section 230(3)(b) of the ERA and regulation 2 of the WTR and their employment falls within the definition of ‘employment’ in section 83(2)(a) of the EA. I shall for convenience refer to them as a ‘limb (b) worker’. The question on this appeal is whether the ET was wrong to decide that Mr Smith was a limb (b) worker rather than falling within category (2).

The case highlights the importance of effective substitution clauses. The agreement had no express term allowing for substitution but plumbers could swap jobs. This was highlighted as allowing for ‘swapping a shift between workers’.

Mr Smith had a contract stating he was in business, could choose when he worked, provided his own tools and equipment but had to use a company logoed van and wear a company logoed uniform and should account for his own tax, which he had.

It was at the tribunal, upheld by the Employment Appeal Tribunal where it was stated that he could claim disability discrimination as a ‘worker’. As highlighted in Para 66 above the worker being a person who undertakes to do or perform work or services for another party to the contract.

If a person is classified as a worker, they have rights that include pension, minimum wage and paid annual leave. Businesses who have individuals working under similar arrangements may wish to assess their current contracts.

Scottish tax rates set to differ
The Scottish government plans to introduce tax thresholds and rates that are different from those used in England and Wales.

The Scottish government has previously revealed plans to introduce tax thresholds and rates that are different from those used in England and Wales. 

HMRC has, as you would expect, been issuing P9X, containing rates, thresholds and tax code increases required by employers and payroll providers, enabling them to prepare their payroll records and tax codes for the tax year commencing 6 April 2017.  

The P9X were those Scottish income tax rates and thresholds announced in the draft Scottish Budget in December 2016. HMRC has said ‘until they are confirmed by the Scottish Parliament, HMRC will not know the correct tax rates and thresholds for Scottish taxpayers for the tax year commencing 6 April 2017’.

The P9X notices issued need to be applied by employers and HMRC has said it ‘will advise you of the correct Scottish income tax rates and thresholds for 2017 to 2018 as soon as they are ratified by Scottish Parliament. In turn, the Scottish government has advised that it expects Parliament to agree these as early as during this week (w/c 20 February 2017).'

Read more here and here 

Relief from business rates
Summarising the changes coming into effect in April.

Summarising the changes coming into effect in April. 

In 2015 the government launched a wide-ranging review of national business rates which was designed to pave the way for changes to how businesses across England pay the tax. The outcome of this review was to implement changes for businesses, particularly smaller ones. The following are the changes and reliefs for smaller business which come into effect from April 2017. 

Overview of business rates
Business rates are charged on most non-domestic properties, like: 

  • shops
  • offices
  • pubs
  • warehouses
  • factories.


Business rates are worked out based on the property’s ‘rateable value’. This is currently the open market rental value on 1 April 2008, based on an estimate by the Valuation Office Agency (VOA). This value is then multiplied by a figure (multiplier) which is set by central government and this calculation shows what the rates liability will be.

The rates bill can be reduced if your property is eligible for business rates relief. 

Business rates calculations prior to April 2017

  • Business rates are not payable on properties with a rateable value of £6,000 or less.
  • Where the rateable value of the property is below £12,000 business rates relief can be applied and goes down gradually from 100% to 0% for properties with a rateable value between £6,001 and £12,000.
  • Even if the business does qualify for small business rate relief, the business rates will be calculated using a small business multiplier instead of the standard one. This is the case even if the business uses more than one property. The multipliers (set by the government):

Year

2015/16

2016/17

Small business multiplier

48.0p

48.4p

Higher multiplier

49.3p

49.7p


Changes from April 2017
Small Business Rate Relief will be doubled (from 50% to 100%). This means that businesses with a property with a rateable value of £12,000 and below will receive 100% relief.

Businesses with a property with a rateable value between £12,000 – £15,000 will receive tapered relief. By raising the relief threshold to £15,000, the then Chancellor George Osborne said it would take 600,000 small businesses out of paying business rates entirely: ‘This is significant and is very, very welcome, given that SMEs account for some 50% of private sector value added in the economy and business rates are often a large outlay’.

The new rates for the small and higher multipliers is set at: 

Year

2017/18

Small business multiplier

46.6p

Higher multiplier

47.9p


The threshold for the standard business rates multiplier will be increased to a rateable value of £51,000. Therefore, businesses with properties with a rateable value below £51,000 will pay lower rates.

The Valuation Office Agency (VOA) sets the rateable values of all business properties. The new rateable values, released on 30 September 2016, are based on the rental value of properties on 1 April 2015. These will be used to calculate business rate bills from 1 April 2017.

Full guidance from the government including details of how to check the rateable value and how to appeal against a rates liability can be found here. There are also other reliefs for entities such as charities and rural businesses which are featured in this guide.

ACCA also issued the following press release yesterday (16 February):

Business rates regime needs to carefully consider the competitiveness of UK plc 

The Chancellor has an opportunity at the Spring Budget to reshape the future of the business rates system in England in order to prevent the catastrophic consequences for UK businesses of the planned revaluation measures due to come in to effect this April. 

Chas Roy-Chowdhury, head of tax at ACCA, says: ‘Linking the business rates regime to current property valuations—as outlined in the government’s Business tax road map — may seem at first glance to be a sensible proposition but actually requires careful consideration particularly given that ratable values have not been adjusted in almost a decade. The government should ensure that this is not introduced at the expense of the competitiveness of UK plc as a place to work and to locate a business.

‘The system also needs to take account of fairness when some high-street shops will be hit by hikes of over 400% on current rates, while online retailers will see rates cut in many instances.

‘For many of the productivity-boosting SMEs up and down the country, increases will eat into disposable income which could better be spent on investment, recruitment or research and development. This is particularly important given the low levels of confidence following the result of the referendum on the UK’s membership of the European Union and looking ahead to the longer term effect of the devaluation of sterling in increasing supplier costs.

‘The government should revisit these proposals and carefully consider if the revaluation is the best way to raise revenue from the UK’s thriving small and medium sized businesses in an era of high uncertainty for the future.’ 

Wear and tear allowance – a reminder
The wear and tear allowance for fully furnished residential properties was abolished from April 2016.

The wear and tear allowance for fully furnished residential properties was abolished from April 2016. 

This affected companies from 1 April 2016 and individuals and others (such as trusts and other unincorporated entities) from 6 April 2016.

Instead, for the current tax year all landlords of residential properties can deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property. For individuals this is domestic items relief. 

The relief available will be: 

  • the cost of a like-for-like (or nearest modern equivalent) replacement asset
  • plus any costs incurred in disposing of that asset
  • less any proceeds received for the asset being replaced.


The above deduction is not available for furnished holiday lettings because capital allowances continue to be available for these businesses. 

The above deduction is also not available if the person has rent-a-room receipts in respect of the property for the tax year and rent-a-room relief applies in relation to those receipts.

If the replacement asset is substantially better or different to the asset being replaced then the deduction available is so much of the expenditure incurred on the new item as does not exceed the expenditure which would have been incurred on an item which is the same or substantially the same as the old item.

The deduction relates to the replacement of furnishings, appliances and kitchenware and does not include anything that is a fixture. Fixture means:

(a)  any plant or machinery that is so installed or otherwise fixed in or to a dwelling-house as to become part of that dwelling-house, and
(b)  any boiler or water-filled radiator installed in a dwelling-house as part of a space or water heating system.

However, replacement of fixtures such as windows, doors, roofs etc. may still be allowable expenditure if they do not represent capital expenditure.

These changes were made by the Finance Act 2016 sections 73 and 74 which effectively made amendments to: 

  • Income Tax (Trading and Other Income) Act 2005 sections 311A introduced and repealed sections 308A to 308C [ITTOIA 2005] for Income Tax
  • Corporation Tax Act 2009 section 250A introduced and repealed sections 248A to 248C [CTA 2009] for Corporation Tax.
The common reporting standard and charities
From May, the CRS may require charities to make reports to HMRC. Will your charity clients be affected?

From May, the CRS may require charities to make reports to HMRC. Will your charity clients be affected? 

The Common Reporting Standard (CRS) is a global network of legislation which aims to prevent individuals and entities using offshore structures to evade tax. Unlike the USA’s Foreign Account Tax Compliance Act (FATCA) – under which charities are exempt from reporting requirements – the CRS may require charities to make reports to HMRC. The CRS is the result of the drive by the G20 nations to develop a global standard for the automatic exchange of financial account information. 

The immediate assumption on reading the above is that this only affects large charities; however, the new rules could affect many smaller or less complex charities. 

We recommend any member involved with charities review whether or not they are affected as the first reports under the CRS are due in May 2017.

How might CRS affect smaller charities?
The CRS divides all entities into two broad categories – ‘financial institutions’ (FIs) and ‘non-financial entities’ (NFEs). If a charity is considered to be an NFE, it will not have its own reporting requirements under the CRS. So for instance a charity won’t need to provide its financial account information if its income is mostly from: 

  • gifts
  • donations
  • grants
  • legacies.


The issue for smaller charities is that most of them do not provide financial services, and so would not expect to be classed as an FI. The definition of FI under the CRS, however, is very broad and some charities – particularly endowed charities and those that receive a large proportion of their income from investments – may be categorised in this way.

So a smaller charity might be deemed to be an FI if it is managed by an FI and its gross income is at least 50% attributable to investing, reinvesting, or trading in financial assets. Note that ‘managed’ is also subject to a broad definition. It could be that a charity merely has to appoint a professional investment manager to manage all or part of its assets on a discretionary basis to make it ‘managed’.

An entity is not regarded as managed by a financial institution if that financial institution does not have discretionary authority to manage the entity’s assets either in whole or in part. If this is the case, charities should consider whether they are required to make relevant reports.

What needs to be reported?
This is where it gets even more complicated! 

Where the charity is deemed to be an FI it must collect data on ‘financial accounts’ for the calendar year to 31 December 2016 and report it to HMRC by 31 May 2017. For these purposes financial accounts are not the standard reports for each year-end but relate to charities where equity interests, bonds or other debt instruments are involved.  It also may include charities set up as trusts which make grants to beneficiaries. It would appear that many charities which are deemed to be FIs will not in fact have ‘financial accounts’ but it is not clear whether HMRC will require these charities to submit nil returns.

Where a report does need to be made, the charity must use the Automatic Exchange of Information Online Service. A full analysis of the report contents is beyond the scope of this article but basically it involves information on payments made to beneficiaries.

The CRS refers to these beneficiaries as account holders of an equity interest. This includes anyone who may receive a distribution, directly or indirectly. These account holders are reportable where they are tax resident outside the UK, in a reportable jurisdiction. Note that payments to suppliers for the provision of services are not included.

Further information
HMRC has published specific guidance for charities with AEOI reporting obligations, please see IEIM404700+

 

Small income annual allowances
2017 sees the introduction of two new tax allowances that have so far gone ‘under the radar’.

2017 sees the introduction of two new tax allowances that have so far gone ‘under the radar’. 

From April 2017 the government is introducing two new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. These were announced in the 2016 Budget but have largely gone ‘under the radar’.

Overview
The allowances cover individuals with small amounts of income from providing goods, services, property or other assets. The government sees this as ‘providing simplicity and certainty regarding income tax obligations on small amounts of income’.

When it was announced commentators initially assumed this was largely aimed at regularising the taxation of small income where the recipients habitually did not declare it. It was also dubbed ‘the eBay allowance’ as it was designed to ‘reduce the complexity for some individuals who will no longer have to decide if the activity amounts to a trade or not.’

However, the measures also introduce a new way of taxing income which is over the £1,000 limit.

The trading allowance – how does it work?
The basics are that if the allowance covers all of an individual’s relevant income (note this is before any relevant expenses) then they will no longer have to declare or pay tax on this income. Therefore this provides for full relief where the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year are up to £1,000. The effect of the relief will be that the profits from the trade will be nil. 

There will be an equivalent rule for certain miscellaneous income, chargeable under Chapter 8 of Part 5, of the Act. This will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.

Receipts of over £1,000 potentially have a new profits calculation basis
Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes. 

Note that this is instead of the usual rules that would otherwise apply in calculating the profit of a trade or of a property business or miscellaneous income. The election for the trading allowance is made independently and applies for each particular tax year.

The election will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000, where the individual has both sources of income.

Does the trading allowance apply to all businesses?
The quick answer is no! The new allowances will apply to all types of trading income of an individual but not to partnership income from carrying on a trade or profession where special rules in Part 9 of ITTOIA 2005 apply. 

How does the property allowance work?
This operates in a very similar manner to the trading allowance. This will provide for full relief where the income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses will not be brought into account when calculating profits of a property business. 

There will be also be an optional alternative method for calculating profits where the deductible receipts of a property business are more than £1,000. This will take the form of an election which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought into account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought into account. In calculating the profit a deduction is allowed for the £1,000 property allowance.

Does the property allowance apply to all income?
As above, the new allowance does not apply to partnership income. In addition, it does not apply to relief given under the Rent-a-Room Relief legislation.

When is a car not a car?
Examining the rules around cars and capital allowances.

Examining the rules around cars and capital allowances. 

Members often ask questions on ACCA’s Technical Advisory helpline regarding what is/is not a car for capital allowances and other purposes. Here’s a timely recap on the rules and how they are applied.

Basics
A business can claim capital allowances on cars bought and used in the business. However, the first issue is – what is deemed to be a car?

Members are often approached by their clients who want to buy, for instance, a double cab pick-up and they have been assured by the salesman that it ticks all the tax boxes and so is deemed to be a van. So full allowances and VAT can be claimed? Unfortunately it is not always that straightforward:

HMRC’s basic guidance states the following:

For capital allowances a car is a type of vehicle that: 

  • is suitable for private use - this includes motorhomes
  • most people use privately
  • was not built for transporting goods.


However, HMRC’s instructions to its own staff in the capital allowances manual are much more detailed:

For PMA purposes a car is a mechanically propelled vehicle except a vehicle: 

  1. constructed in such a way that it is primarily suited for transporting goods of any sort, or
  2. of a type which is not commonly used as a private vehicle and is not suitable for use as a private vehicle.


Note that this uses somewhat subjective words – ‘primarily’, ‘commonly’ and ‘suitable’.

So perhaps to add some clarification, the manual has further very interesting guidance:

‘Treat a car that is capable of being used as a private vehicle as a car for PMA purposes no matter how the taxpayer actually uses it (Roberts v Granada TV Rental Ltd 46TC295).’

So clearly the word ‘capable’ is meant to override the above subjective issues?

Conversely. the manual continues:

‘Do not treat the following vehicles as cars for PMA purposes: 

  • a car that it is illegal for a taxpayer to use as a private vehicle even if the taxpayer sometimes uses it as a private vehicle (Gurney v Richards 62TC87)
  • cars used by a driving school and fitted with dual control mechanisms (Bourne v Auto School of Motoring (Norwich) Ltd 42TC217)
  • emergency vehicles. A vehicle equipped with a fixed blue flashing light on the roof which can only be used on the road by a fire officer or police officer is an emergency vehicle
  • hackney carriages ( traditional ‘London black cab’ type vehicles)
  • double cab pick-ups with a payload of one tonne or more. (Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight.)’


The final point will be of interest to many. Many of these pickups are capable of being used as, and suitable/commonly used as, cars but according to the guidance they will not be treated as cars.

Capital allowances for cars
For expenditure after April 2009 the Finance Act 2009 introduced new rules that were designed to both encourage businesses to purchase cars with lower carbon dioxide emissions and reduce their administration costs. 

The capital allowances treatment of expenditure on a car depends on the carbon dioxide emissions of the car rather than its cost. Expenditure after 2009 will be treated in different pools.

A summary of the current treatment dependent of the CO2 figure is: 

Cars bought from April 2015

Description of car

What you can claim

New and unused, CO2 emissions are 75g/km or less (or car is electric)

First year allowances

New and unused, CO2 emissions are between 75g/km and 130g/km

Main rate allowances

Second hand, CO2 emissions are 130g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions are above 130g/km

Special rate allowances


Cars bought between April 2013 and April 2015

Description of car

What you can claim

 

New and unused, CO2 emissions are 95g/km or less (or car is electric)

First year allowances

 

New and unused, CO2 emissions are between 95g/km and 130g/km

Main rate allowances

 

Second hand, CO2 emissions are 130g/km or less (or car is electric)

Main rate allowances

 

New or second hand, CO2 emissions are above 130g/km

Special rate allowances

 

New and unused, CO2 emissions are between 110g/km and 160g/km

Main rate allowances

Second hand, CO2 emissions are 160g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions above 160g/km

Special rate allowances


Things to remember: 

  • if there is an element of non-business use of the car then the expenditure will still need to be allocated to a single asset pool (see HMRC manual CA27005) but the rate at which WDA are given will depend on the car’s CO2 emissions
  • the old rules relating to ‘expensive’ cars are only applicable to expenditure pre 2009 – see HMRC manual CA23520
  • certain cars with low CO2 emissions (see above) will still qualify for 100% FYA as described in CA23153
  • if your business provides a car for an employee, capital allowances can normally be claimed on the full cost. However, this may need to be reported as a benefit if they use it personally.


Further information
Watch this recent HMRC webinar on this subject now. 

 

Agent update and ATED
HMRC's new digital service for ATED.

In HMRC's Agent Update 58 it lighlights how it has been designing a new digital service for the ATED. The update says that agents and their clients can now register to use this new service, to give you/them time to complete the registration steps in readiness for the April 2017 filing period. 

As a reminder ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000. An ATED return is required if the property:

  • is a dwelling
  • is in the UK
  • was valued at more than:
    • £2 million on 1 April 2012, or at acquisition if later, for returns from 2013 to 2014 onwards
    • £1 million on 1 April 2012, or at acquisition if later, for returns from 2015 to 2016 onwards
    • £500,000 on 1 April 2012, or at acquisition if later, for returns from 2016 to 2017 onwards
  • is owned completely or partly by a:
    • company
    • partnership where one of the partners is a company
    • ­collective investment scheme - for example a unit trust or an open ended investment vehicle.
The UK's future economic relationship with the EU
We submitted comments to Treasury consultation on behalf of our members.
ACCA submitted comments to the Treasury Select Committee's inquiry on the UK's future economic relationship with the EU. Find out what we - and others - had to say in the published report.
NEWS
Event: Public trust in tax
Join us as we unveil research findings on the views and attitudes of taxpayers across the G20 to tax avoidance and international tax policy.

IFAC and ACCA are proud to launch the conclusion of their research assessing the views and attitudes of taxpayers across the G20 to tax avoidance and international tax policy.

Title: Public Trust in Tax
Date: Monday 27 March (09:00-13:30)
Location: ACCA HQ, The Adelphi, London
Fee: £24
Book online now  

Event overview
Our joint ACCA/IFAC expert panel will share their insights on the survey's findings, and how policymakers should respond to differing public attitudes as they pursue a course of greater cooperation in tax policy in the brave new post BEPS world.

Our research
The research, conducted in early 2017, represents a unique survey of taxpayer attitudes and trust to facing tax authorities and the profession worldwide – multinational tax, tax competitiveness and cooperation, fairness, trust and beyond. Understanding the concerns of stakeholders is vital to earning and keeping public confidence in tax systems and cooperative compliance. 

Our event will showcase the key findings from the G20 countries, and in the run up to the July G20 summit enable stakeholders to place their discussions on a sound footing. The morning will be an excellent opportunity for senior tax, and policy leaders to meet and discuss the way forward for both domestic measures and international cooperation, confident that they can set decisions in the context of accurate and up to date understanding of taxpayer attitudes. 

To attend
Places are limited to 80 guests, so please book today

VAT and property development webinars
Catch our series of three webinars on VAT and Property Development.

Today (21 February) sees the third and final webinar in our series on VAT and Property Development. 

VAT and property development – self-builds, residential conversions and non-residential conversions
Tuesday 21 February 2017, 12:30
In this webinar, Robert Warne (Head of VAT at Crowe Clark Whitehill) discusses the rules governing VAT refunds for DIY house builders on self-build new homes or non-residential conversions. He also considers conversions of buildings - particularly converting formerly commercial or previously unused buildings into residential properties or into a number of units and where the reduced rate of 5% may apply.

Missed either of the first two webinars in the series (details below)? You can register now for any of these three webinars and watch them on demand. Each webinar lasts for an hour and constitutes one unit of CPD where the content is relevant to your current or future role.

Introduction to VAT and property development
In this webinar, Robert provided an introduction to the different VAT implications when building privately or commercially. He also provided an overview of the other two webinars in the series which will cover commercial development (with an emphasis on the need for VAT planning and guidance), the rules governing VAT refunds for DIY house builders on self-build new homes or non-residential conversions, and conversions of buildings.

VAT and commercial property development
In this webinar, Robert discussed commercial development with emphasis on the need for VAT planning and guidance. Robert considered situations where a property developer wants to do brownfield rather than greenfield development; the implications for demolishing existing buildings completely versus extending an existing building; and where a developer wants to keep a property rather than sell it on.


 


 

Improve your engagement letters
Have you used our updated ACCA Engagement Letters Tool product yet?.

Purchase your copy of our updated product now. 

There are times when problems can arise in practitioner-client relationships. By setting out terms of engagement which clearly state the exact terms of agreement, you can avoid legal disputes later. 

ACCA in partnership with VS Consultancy has produced engagement letter templates which can form the basis of a contract between practitioner and client for a variety of different scenarios. These are available for ACCA members to purchase for £30 + VAT. 

This time-saving tool consists of self-loading Microsoft Word engagement letter files, which you can then tailor to your needs. The product consists of standard letters of engagement for a series of different business types and services. 

It also offers guidance on the following: 

  • what an engagement letter should cover to clarify the scope of your services
  • how to confirm the agreement with the client
  • writing a framework for how the work will be performed
  • establishing an appropriate working relationship
  • how the engagement letter should address fee arrangements.


This product will run on systems using Windows XP and subsequent versions. 

The product can be purchased online

 

 

 

Accountex 2017 – join the digital revolution
Accountex is a terrific show for practitioners. Will we see you there?

The accountancy world is changing, and with the transformation of our tax system, from the old tax returns to digital tax accounts, 2017 promises to be one of the most important year’s in the history of the profession. And the best place to see what’s happening and how your practice can benefit from the changes is at Accountex 2017.

Returning to ExCeL on 10–11 May, Accountex is the largest, independent, cross sector supported event in the UK’s accountancy profession. As the only event that brings all individuals from the industry together, from senior partners, practice managers and accountants to financial directors and managers across all enterprises, the show is a ‘must attend’ for everyone in the accountancy world.  

200 leading suppliers
Accountex features leading industry vendors ready to showcase the latest accounting innovations – transforming the way you do business with your client and allowing you to become more time efficient. 

180 CPD accredited seminars and keynote theatre
With a dedicated and unrivalled education programme, covering tax, technology, cloud, pensions, pricing, and every other subject relevant to the modern accountant, you can gain CPD accreditation from over 180 sessions in 14 dedicated theatres.

ACCA theatre and stand
In 2016 it was standing-room only outside our theatre for many popular sessions. We will be back this year with another programme addressing the issues that really matter to you. We also look forward to talking with many of you on our stand across both days.

Secure your free place now

 

 

 

 

 

 

 

CPD
CPD webinars with 2020 Innovation
High quality webinars - with a 50% saving.

Our partnership with 2020 Innovation allows practitioners to benefit from the suite of CPD webinars listed below at a 50% discount. 

2017 Webinar Programme
2017 CPD webinars 

2017 FCA webinars 

2017 Tax update webinars 

2017 Practice management and development webinars

 

2016 Webinars (Recordings) 
2016 CPD webinar recordings 

2016 FCA webinar recordings

2016 Tax update webinar recordings

2016 Practice management and development webinar recordings

 

Dedicated 2020 Innovation/ACCA webpages

Saturday CPD conferences
Secure your place at our popular 2017 Saturday CPD conferences now.

Saturday CPD conferences for practitioners 2017

These conferences are the ideal way to keep your professional knowledge up-to-date and get your CPD without disrupting your working week. The conferences consist of four sessions, which makes it a cost-effective way of staying informed about the latest technical issues.

These events are always in demand from practitioners; click on the conference titles below to find the location closest to you and book your next conference(s) now.

Saturday CPD conference one

  • Tax pitfalls and how to avoid them
  • Employment taxes
  • Digital tax accounts
  • Pension planning

Saturday CPD conference two

  • Corporate taxes for owner-managed businesses
  • Business and employment law update
  • Finance Bill/Act 2017 
  • VAT update 

Saturday CPD conference three

  • Accounting standards update
  • Autumn tax planning

CPD units

You can gain 7 CPD units per conference, or attend all three to gain a massive 21 units.

Fees:

1 conference £155
2 conferences £143 per conference/delegate
3 or more conferences £129 per conference/delegate

Online CPD - special offers for ACCA members
Check out our latest online offers for ACCA members.

Free CPD skills webinar: Better results in less time with less stress 
14 March 2017 10.00 – 11.00 GMT 

Sort your CPD for the year with accountingcpd.net annual licence 
Over 500+ hours of CPD currently on offer Special offer  until 28 February 2017.              

Date for your diary: BPP is having a flash sale for one day only on 1 March.
Receive 25% off any of the courses on the BPP online CPD centre using code ACCA25 at the checkout.

CAREERS
Probate and the legal services market
Survey reveals strong appetite from members to offer probate and legal services to clients.

Survey reveals strong appetite from members to offer probate and legal services to clients. 

In a world where audit is declining and compliance work is becoming increasingly automated, ACCA is exploring new activities and opportunities for practising members. We are currently looking at the options to invest in licensing and regulating our members for legal services. 

The ability to offer legal services complements the professional services that firms already provide to clients, such as inheritance tax, estate management and wealth management. As qualified accountants, ACCA members have relevant expertise and experience to undertake work in this area, and your knowledge of clients’ financial and taxation affairs allows you to provide effective and efficient continuity of service to your personal clients.

Furthermore, ACCA can establish a proportionate and sustainable framework for legal services regulation and oversight by the Legal Services Board (LSB) through our existing regulatory and disciplinary systems, without the need to develop bespoke arrangements for legal services which would add complexity and cost. This contrasts with the work of insolvency which requires far greater specialism and a high degree of standardisation in the regulation and discipline of insolvency practitioners.

In November 2016, ACCA invited members in practice to help determine which legal services authorisations we should invest in licensing and regulating for our members. The online questionnaire about Reserved Legal Activities and Alternative Business Structures attracted 448 responses and we would like to thank all members who took the time to respond. The findings from the survey show there is a definite appetite for ACCA applying to the LSB to regulate legal services, and towards members in practice being able to participate in the legal services market in England and Wales.

Demand for probate
The survey shows a clear demand for probate, with 81% of respondents indicating that ACCA should apply to regulate probate activities. ACCA has been an approved regulator for the reserved legal activity of probate since 2009 and we will now progress an application to the LSB to gain approval for our regulatory arrangements in respect of probate activities. Subject to the successful outcome of this application, we expect to be in a position to authorise individuals and firms for probate services in 2018. 

Members seeking to become probate practitioners will be required to achieve and maintain competence to undertake probate activities. ACCA, or another training provider, will provide relevant skills training and CPD update courses, as well as guidance and information. We will start to provide support and guidance during 2017. Many of the Professional Courses offering in 2017 on IHT will also reference probate services.

Oaths and notarial activities
The survey also shows a positive response to the administration of oaths and significant interest in notarial activities, with 68% of respondents indicating ACCA should regulate the administration of oaths and 64% notarial activities. These legal services are also compatible with the work of an accountant in practice and reflect the trust placed in accountants.

There is also some interest in ACCA regulating the exercise of rights of audience, the conduct of litigation and reserved instrument activities; however, there is less demand for these areas. As a result, ACCA will look at the impact on our regulatory procedures and resources of an application for approved regulator status for further reserved legal activities, in particular the administration of oaths and notarial activities.

The findings from the survey suggest there is currently little interest among ACCA members in practice in becoming an Alternative Business Structure (ABS). While ACCA will continue to monitor developments in this area, we do not intend at this stage to apply to the LSB to become a licensing authority for ABS.


CPD events - inheritance tax
You may be interested in these two regional network events:

Driving forward Britain’s industrial strategy
What should the government focus on to develop the economy in your region in the future?

What should the government focus on to develop the economy in your region in the future? 

The government’s Industrial Strategy Green Paper is a discussion document that asks contributors to highlight what they would like to see both nationally and locally in terms of developing the country’s industrial strategy. 

ACCA will be responding on behalf of our members before the 17 April deadline and we welcome your thoughts and input into our response. Some areas are very important to all businesses, while others are niche. If you have a strong view on what you need for your business – or the businesses you represent – we want to hear from you!

In the paper the government’s position rests on ten pillars which it states ‘are important to drive forward our industrial strategy across the entire economy: 

  • science
  • research and innovation skills
  • infrastructure
  • business growth and investment
  • procurement
  • trade and investment
  • affordable energy
  • sectoral policies
  • driving growth across the whole country
  • creating the right institutions to bring together sectors and places.’


Below are examples taken from the document highlighting the identified pillars and some related comments or questions: 

Pillar: Research and innovation skills
Comment: 
‘We have launched a review of the tax environment for R&D to examine whether there is more we should do to stimulate private sector investment and make the UK an even more competitive place to do R&D.’ 

Pillar: Procurement
Questions:
23. Are there further steps that the government can take to support innovation through public procurement?
24. What further steps can be taken to use public procurement to drive the industrial strategy in areas where government is the main client, such as healthcare and defence? Do we have the right institutions and policies in place in these sectors to exploit government’s purchasing power to drive economic growth?

Pillar: Trade and investment
Question:
25. What can the government do to improve our support for firms wanting to start exporting? What can the government do to improve support for firms in increasing their exports?
26. What can we learn from other countries to improve our support for inward investment and how we measure its success? Should we put more emphasis on measuring the impact of Foreign Direct Investment (FDI) on growth?

Pillar: Local
Questions:
36. Recognising the need for local initiative and leadership, how should we best work with local areas to create and strengthen key local institutions?
37. What are the most important institutions which we need to upgrade or support to back growth in particular areas?
38. Are there institutions missing in certain areas which we could help create or strengthen to support local growth?

Your comments
Please send your comments on what you would like to see in your region – or comments on the tax environment that would help you and your clients' businesses – to advisory@accaglobal.com with a header Industrial Strategy (your region).

New opportunities for training accountancy apprentices
New opportunities for your practice to offer apprenticeships.

Apprenticeship funding is available to the majority of employers – whether you are paying the new Apprenticeship Levy or not.  

Apprenticeships offer employers huge gains, enabling you to grow your team and increase productivity while minimising the financial risk associated with recruiting staff.

A new system for funding apprenticeships in England – the Apprenticeship Levy – will become active from 1 May 2017 (levy payments apply from April). All apprenticeships that commence after this date will be funded according to the new rules (this applies to both employers who are paying the levy and those who are not).

In its guidance, the government has stated that ‘if an employer has not paid the levy and would like to train an apprentice, they will need to co-invest 10% and will benefit from government funding to cover the remaining 90% of the cost. This will also apply to any levy-paying employer who wants to invest more in apprenticeship training than they hold in their digital account. In this case, if in any single month a levy-paying employer has insufficient funds available in their digital account to meet the full costs of training and assessment, they will need to co-invest 10% of the remaining balance, with government paying the remainder. All employers will need to meet, in full, any costs above the funding band limit for any particular apprenticeship.’

The system will see digital accounts established for employers but co-investment in the first year will need to be paid directly to the provider rather than via a digital account.

The definition of workplace has also been clarified as ‘the physical place of work, designated by the employer, where the apprentice is expected to spend the majority of their time during their apprenticeship (50% or more) ... Employers will be required to confirm the workplace location as part of their written agreement with the main training provider in the evidence pack for each apprentice.’

ACCA has been heavily involved in the development of the new employer-led Trailblazer apprenticeship standard. We are excited to be among the first to train apprentices under the new ACCA Accounting Technician Apprenticeship (Level 4 Trailblazer) and have been accepted onto the Register of Apprenticeship Assessment Organisations. 

If you are an employer in Wales or Scotland you will continue with the current access to apprenticeship training.

If you are thinking about taking on an apprentice and want to know more about the ACCA apprenticeship, please email Apprenticeships@accaglobal.com 

To get involved in helping us to promote apprenticeships to schools in your local area, please email advocacy@accaglobal.com