Technical and Insight
Analysing the Autumn Statement
What the Autumn Statement means for ACCA and our members.

Infrastructure and digital economy
The Chancellor provided the National Infrastructure Commission with a fiscal remit that the government intends to spend 1.2% of GDP on economic (physical and digital) infrastructure to 2020.

There was also a significant comitment to spend £23bn on a new National Productivity Investment Fund for the purposes of furthering innovation and infrastructure over the next five years and to address the lingering productivity gap. Additionally there was a commitment for the UK to become a world leader in 5G, and to back that with a £1bn investment in digital infrastructure.

In terms of local funding, there were commitments to £1.1bn extra investment in English local transport networks, £220m for the strategic road network and £1.8bn from the Local Growth Fund to the English regions which will filter through to Local Enterprise Partnerships.

ACCA members will have a role in shaping the delivery of this through public-private-partnerships and similar financial and procurement arrangements. ACCA has a key role in ensuring that the public sector in particular has access to the right skills to manage the development of large scale capital infrastructure projects over the long term.

There is also an opportunity here for ACCA to further promote the relevance of the qualification offer through an added focus on digital skills and capabilities which are increasingly in demand by government and businesses alike.

Skills and devolution
English regions are set to grow in relevance particularly with the elections for City Region Mayors on the horizon in May 2017 for the cities of Manchester, Liverpool and Birmingham among others. This will have implications for local fiscal policy as fiscal devolution is rolled out in the years following the elections.

Local businesses will also be affected by changes to business rates, particularly in rural areas where Rural Rate Relief is to be increased to 100%, giving small businesses in the areas covered a tax break worth up to £2,900 per annum.

ACCA members can add value here providing support and expert knowledge of both their local markets and investor needs as cities and regions gain greater fiscal freedoms to raise and retain the taxes that are raised locally.

For ACCA, the changes outlined herein offer an opportunity to ensure that the qualification is offering the business-relevant skills required by the private and public sectors in the years ahead. The recent re-launch of the qualification is key in this regard, modernising future members to face professional ethical and governance challenges of the future.

Taxes and wages
Headline figures on taxation were around the income tax threshold which is to be raised to £11,500 in April, from £11,000 now, and a higher rate income tax threshold rising to £50,000 by the end of this Parliament. 

Tax savings on salary sacrifice and benefits in kind are to be stopped and the National Living Wage is to rise to £7.50 in April next year from a current rate of £7.20. Also, employee and employer National Insurance thresholds are to be equalised at £157 per week from April 2017 and insurance premium tax is to rise from 10% to 12% next June. 

There was also a commitment to end the abuse of the flat rate VAT scheme with penalties for tax avoidance schemes to increase. 

ACCA and ACCA members will be well placed to ensure these changes are successfully implemented in the years ahead. Keeping members informed of these policy developments and adjusting accordingly is an important part of the ACCA offering. It is also key to ensuring a sustainable talent pipeline for those studying for the qualification and to boosting the recognition of the profession worldwide.

Autumn statement: Restrictions coming on salary sacrifice regime
Chancellor announces plans to restrict salary sacrifice benefits.

Chancellor announces plans to restrict salary sacrifice benefits. 

In 2015 the government embarked on an evidence gathering exercise on the cost to the Exchequer of salary sacrifice schemes. In a consultation document which closed on 19 October 2016, the government revealed some concerns, including: 

  • the growth in popularity of schemes partly because of potential overall tax savings by employers. It quoted an increase of a third in PAYE clearance requests from employers for salary sacrifice arrangements between 2009/10 and 2014/15
  • specific marketing of schemes as tax and NIC saving vehicles
  • employees using such schemes being unaware of ‘side effects’ such as the potential reduction in  the level of contributory benefits such as statutory maternity pay and Jobseeker’s Allowance, or in  the level of occupational pensions which can be referenced to post salary sacrifice levels of remuneration
  • salary sacrifice schemes might artificially increase the entitlement to tax credits or universal credit.


What has been announced?
In his Autumn Statement, the Chancellor said that the majority of employees were taxed on a cash salary, but that some who sacrificed part of their salary for benefits in kind paid less tax and national insurance, and the Treasury wanted to reduce the difference between the two. 

This means that employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their post-tax net salary.

The government estimated the savings achieved by this measure would depend on the behavioural response by employers and employees – and whether or not employees decide to stop using salary sacrifice or employers decide to cease to operate salary sacrifice. 

There seems to have been limited research on the impact and any subsequent increase in costs on the public purse from employees ceasing the arrangements. Given these uncertainties, the government still calculated it would save £85m in 2017/18 through the restriction of salary sacrifice followed by savings of £235m per annum in the tax years from 2018/19 to 2020/21 and a saving of £260m in 2021/22 – a total saving of over £1bn by April 2022. 

It is not clear just how many employees would be affected. Some estimates put the figure potentially in the millions.

Further detail
Before panic sets in, general arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021. 

The original HMRC consultation closed on 19 October 2016. This stated certain benefits would be unaffected by the proposals as the government ‘wishes to encourage employers to provide these to employees’. These were: 

  • employer pension contributions
  • employer-provided pension advice
  • employer-supported childcare and provision of workplace nurseries
  • cycles and cyclists' safety equipment provided under the cycle to work scheme.


However, HMRC has now confirmed that the new rules will also not apply to salary sacrifice for low emission cars, defined as those with CO2 emissions of up to 75g/km.

What other benefits are likely to be affected?
Apart from the above details, the announcement did not give a clear list of all benefits which were affected. However, in the consultation there were references to other payments such as: 

  • medical insurance
  • workplace car parking
  • mobile phone contracts.


The government’s Autumn Statement summary  refers to the measures covering ‘most’ schemes so we can only assume until clarification that there will be few benefits (apart from those listed earlier) that will escape the restrictions.

Related announcements
The Chancellor also announced that the government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017.

Autumn Statement: Shareholder agreements
Details of when income tax and CGT reliefs will no longer be available.

Details of when income tax and CGT reliefs will no longer be available. 

The Chancellor announced that income tax and CGT reliefs are no longer available for companies making new employee shareholder agreements and individuals who have been offered – but have not accepted – employee shareholder status. 

The announcement states that:

The measure removes the income tax reliefs on the receipt or buy-back of shares issued to an employee under an employee shareholder agreement made on or after 1 December 2016. It also removes the Capital Gains Tax (CGT) exemption relating to shares received as consideration for entering into an employee shareholder agreement on or after the same date. Shares received under agreements made before that date are not affected. Corporation tax reliefs for the employer company are not affected.

It is stated that the changes will only apply to shares acquired in connection with employee shareholder agreements made on or after 1 December 2016. The announcement highlights the likely areas of legislative change, making it clear that only the tax legislation is affected. The announcement says: 

Legislation will be introduced in Finance Bill 2017 to amend Chapter 12 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 so that the full value of shares received as consideration for entering into an employee shareholder agreement constitutes earnings of the recipient. Section 226A(3) and sections 226B to 226D will be omitted. Consequential changes will be made to the Corporation Tax Act 2009. 

The Taxation of Chargeable Gains Act 1992 will be amended so that CGT will be chargeable on all gains accruing on disposals of shares received as consideration for entering into an employee shareholder agreement. Losses on such disposals will be allowable losses. Sections 236B to 236F will be omitted and consequential changes will be made to sections 58 (spouses and civil partners) and 149AA (restricted and convertible employment-related securities and employee shareholder shares). 

Section 385A of the Income Tax (Trading and Other Income) Act 2005 will be omitted so that if an issuing company buys-back from an employee shares which were issued to that employee as consideration for entering into an employee shareholder agreement, the payment given by the company may be taxed as a distribution in respect of those shares. 

For more details see the draft clause for the Finance Act 2017.

Autumn Statement: Changes to the VAT flat rate scheme
Find out who is affected by these changes.

The VAT Flat Rate Scheme (FRS) is designed as a simplified accounting scheme for small businesses with a turnover no more than £150,000 a year, excluding VAT. Businesses determine which flat rate percentage to use by reference to their trade sector. Therefore they have to determine their own category. So far so good! 

Changes announced in the Autumn Statement
From 1 April 2017, businesses using the scheme must also determine whether they meet the definition of a limited cost trader. The point of this change is that if affected, these businesses will need to apply a new, higher flat rate percentage. This could potentially make the FRS much more expensive and may even mean a switch to another method of VAT calculation. The Chancellor sees these changes as ‘tackling aggressive abuse of the VAT Flat Rate Scheme’. 

What is a limited cost trader (LCT)?
The exact definition will be included in new legislation but a limited cost trader is deemed as one that spends less than 2% of its VAT inclusive turnover on goods (not services) in an accounting period. 

When working out the amount spent on goods, it cannot include purchases of: 

  • capital goods (such as new equipment used in a business)
  • food and drink (such as lunches for staff)
  • vehicles or parts for vehicles (unless running a vehicle hiring business).


A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm's turnover, on goods. If the accounting period is not one year, the figure is the relevant proportion of £1000.

What is the new LCT flat rate scheme percentage?
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. So if they sell £120 of work, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%).

Who will this affect?
The 16.5% rate may be quite a rise on the existing one used by many businesses.  An obvious example is the accountant in practice who may traditionally spend very little on ‘goods’ and currently uses a 14.5% rate. Labour intensive businesses may also include categories such as IT contractors, consultants, hairdressers and solicitors who all are currently using HMRC rates that are lower.

To complicate things further – there are transitional measures!
HMRC's explanation of these measures is: 

  • Anti-forestalling provisions
    Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016 and should be read alongside this guidance. This can be found in sections 8.2 and 9.7 of VAT Notice 733: Flat rate scheme for small businesses. It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.
    This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.


Therefore the cut-off of the VAT calculations for any business affected needs to be considered carefully. For instance problems might occur where an invoice or payment that covers continuous supplies of services crosses this date and therefore must be apportioned.

Time to recap the FRS percentage you or your clients are using
The flat rate used depends on the business sector. The correct sector is the one that most closely describes what the business will be doing in the coming year. HMRC expects those concerned to use VAT Regulations 1995, Regulation 55K to ascertain what category best describes the business. There is full guidance at FRS7200 and FRS7300 of the Flat Rate Scheme Manual where HMRC has offered an interpretation of each sector. 

When do the changes officially commence?
Draft secondary legislation will be published on legislation day 5 December 2016 and businesses will be able to comment on the draft legislation. HMRC has said that ‘To support businesses, we will introduce an easy-to-use online tool that will help determine whether they should use the new rate’.

Auto enrolment and seasonal workers
Guidance for clients employing seasonal staff.

Guidance for clients employing seasonal staff. 

The Pensions Regulator has highlighted a note of warning with regards to this question: 

  • Does your client employ seasonal or temporary staff? Automatic enrolment duties will apply…


If your client employs seasonal staff over the Christmas period, or has staff whose pay and hours fluctuate, then they will have automatic enrolment duties. They will need to take into account: 

  • their varying earnings and hours
  • that they may join and leave in the middle of pay periods.


For more information on dealing with seasonal workers, including checking software and using postponement, go to The Pensions Regulator website.

 

Changes to agent’s authorisation – confusion abounds!
While practitioners wait with bated breath for the outcome of the ‘making tax digital’ consultations, one of HMRC’s projects is already with us and causing confusion.

While practitioners wait with bated breath for the outcome of the ‘making tax digital’ consultations, one of HMRC’s projects is already with us and causing confusion.  

This is the Personal Tax Account. The issue is how the existing agent’s authorisation process will be used going forward in terms of access to the client’s tax details. 

Recap on the current authorisation position
This in itself is not always straightforward! As a tax agent or adviser, you must be formally authorised by an individual or business to deal with HMRC on their behalf. HMRC is not able to send information or talk to you about your client without this formal authorisation. So the traditional method of acting for a client is:

First get a code: 
You must have an agent code before you can set up agent authorisation for:


If you need to arrange authorisations for more than one of these, you’ll need to apply for separate codes for each type. The code is needed for both online and paper authorisations. Then get authorisation from your client: 

The easiest way to arrange formal authorisation is to use HMRC Online Services. This saves you and your client from having to complete paper forms and makes it easier for you to manage authorisations for all your clients online. 

If you choose not to use HMRC Online Services, you can ask your client to complete the appropriate paper authorisation forms

To use the Self Assessment for Agents online service you’ll need to: 

  • have an agent code
  • be registered with HMRC’s online services
  • add the Self Assessment for Agents service to your portfolio
  • set up agent authorisation for each of your clients.


You must register for the Self Assessment for Agents online service whether you plan to use HMRC Online Services or commercial software to send your clients’ tax returns.

You can’t set up authorisation online for: 

  • tax credits clients
  • individuals who aren’t within self assessment
  • self assessment clients who have a British Forces Post Office address.


You’ll need to use HMRC’s paper authorisation forms for these clients.

So where does the confusion come from?
So far so good. This ‘traditional method’ of authorisation works fairly well and most members are comfortable with its operation. However, at the end of 2015 HMRC introduced a new method of access to tax details for the client personally. 

Personal tax accounts (PTA)
These were designed to give easier access for clients to a complete picture of their tax details/related services and this would complement the MTD proposals. HMRC thus encourages the taxpayer to register for this service – either via a Government Gateway account  or by sign in with GOV.UK Verify.  If they haven’t used GOV.UK Verify before, HMRC say it should take about 10 minutes to set up. 

The personal tax account can then be used to:

  • check income tax estimates and tax code
  • fill in, send and view a personal tax return
  • claim a tax refund
  • check and manage tax credits
  • check state pension
  • track tax forms submitted online
  • check or update the marriage allowance
  • tell HMRC about a change of address
  • check or update benefits from work, eg company car details and medical insurance.


More services are scheduled to be added in the future. 

The confusing areas
There are three key areas which are causing confusion: 

Which service should be used for managing a client’s tax affairs and returns?

Please note that Professional Conduct in Relation to Taxation 1 March 2017 states: 

3.36 Ideally a member will explicitly file in his capacity as agent. In some cases HMRC will issue a pin code to the client for the agent to use. A member is advised to use the facilities provided for agents and to avoid knowing or using the client’s personal access credentials wherever possible 

Therefore the introduction of the PTA simply causes confusion to the client as their agent will be using their own authorisation as normal. 

Can the accountant use the PTA as well?
The short answer is no. HMRC has always advised agents not to use a client’s credentials to log in. One of the reasons given is that it is concerned that this may create security alerts. So we now have two systems attempting to perform many of the same functions. Many members are concerned that the PTA is a means of driving a wedge between the client and their agent in order to reduce the level of agent’s advice. 

Further moves from HMRC
HMRC’s Talking Points webinar for agents on 14 September 2016 contained some important information about yet more services aimed at agents. The complexity of the details can be extremely confusing and the interaction with existing/other planned developments is unclear.
 

  • Private beta web-based PAYE service for agents
    HMRC has developed this service by adding additional data on PAYE payments history, including payments by the employer and how they have been allocated. This includes a webchat service. In a recent ‘talking points’ webinar, HMRC said that around 7000 agents are using the PAYE service.  However, only agents with limited numbers of client registrations are being invited to take up this service at the moment and there is a daily cap on the level of new invitations. If the quota is full the agent will be invited again at the next opportunity.

    HMRC does not intend to include larger agents in this service but is instead developing yet another separate service (Application Program Interface) which will populate commercial software with their client’s information. The API service is expected to be made available to commercial software providers before April 2017.  

    To confuse matters even more, HMRC appears to be saying that when the API software is developed it will effectively halt the work on the smaller agents’ service, presumably to eventually switch everyone to API. However, the slides from the webinar were not clear as to how long this would take and that ‘the web-based service will be retained until the number of users drops’. 
  • Agent registration
    HMRC is developing a new authorisation/registration process for agents which appears to affect all agents large or small. HMRC is expected to be launching a beta version of this service in December 2016. Again it is not clear how this will affect the existing service that most accountants will currently use.


Conclusion
You should continue to use your current agent authorisation process and not use the client’s PTA log in. ACCA will keep you informed of any on-going developments as soon as we get new information. 

Further information
Another talking points webinar from HMRC on the subject of agents’ services will take place on 7 December.

Income and expenses helpful hints for tax return
Taxable and non-taxable receipts.

Taxable and non-taxable receipts

Income tax is charged on the profit of a trade, profession or vocation. In order to be taxable the receipt must represent 'the profits of' the trade under S5 ITTOIA 2005.

An incoming payment is not necessarily a trade receipt solely because nothing would have been received had the trade not been carried on. This was highlighted in the case Murray v Goodhews. The receipt of compensation (ex-gratia payment) by a pub landlord as a result of the cancellation of his pub tenancy was held as not being taxable.

Also, if receipts are unsolicited and totally unexpected, they will not be taxable. In Simpson v John Reynolds & Co, an insurance broker who received a “consolation” when a long-standing client ceased the business relationship after being taken over by a company which used a different supplier, was held not to be taxable. The courts held that a voluntary payment after the end of a business relationship, with no prospect of further services, was not taxable income.

However, if the amounts are expected, they will be taxable.

In Rolfe v Nagel a voluntary payment by one diamond broker to another under an arrangement that had no legal force was held to be a trading (taxable) receipt. The courts indicated that a decision in such case should have regard to the character of the receipt in the hands of the recipient, rather than to the motives of the payer.

Similarly, in McGowan v Brown & Cousins compensation received by an estate agent following the cessation of the business connection was taxed as trading income as it related to trade, and was solicited and expected by the estate agent.

Common adjustments in tax returns

Adjustments may arise in connection with the tax treatment of the following expenses:

1. Pre-trading expenses:
Expenditure of a revenue nature incurred in the 7 years preceding the commencement of a trade, profession or vocation is deducted from profits in the first accounting period, provided that the expenditure would have been allowable if incurred after the trade had commenced.

2. Expenditure on food or drink for consumption by the trader:
The cost of food and drink consumed, and accommodation used, by a trader is not, in general, an expense incurred wholly and exclusively for the purposes of the trade since everyone must eat in order to live, and such costs are therefore usually disallowed.

However, expenses incurred by a trader on food and drink whilst travelling on business will be allowable where the business travel is, itself, allowable and the trade is, by its nature, itinerant or involves travel to a place only occasionally visited and not as part of the trader’s normal pattern of travel for the trade. Where a business trip by a trader necessitates one or more nights away from home, the hotel accommodation and reasonable costs of overnight subsistence are deductible.

3. Travel expenses connected with foreign trades:
If an individual carries on a trade wholly outside the UK (a foreign trade), a deduction is allowable in calculating the profits of the trade for certain expenditure on travel, board and lodging incurred in connection with that trade, and which would not otherwise be allowable solely due to its failing to meet the 'wholly and exclusively' test.

If the trader's continuous absence from the UK lasts 60 days or more, the expense of a journey made by his/her spouse or civil partner or by any child of his/hers between a UK location and the location of any of the trades in question, where that journey is made in order to accompany the trader, is also allowed. The deduction is limited to the expenses of two such outward journeys and two return journeys per person per tax year.

4. Incidental cost of loan finance:
A statutory deduction in computing the profits of a trade applies to the incidental costs of raising loan finance which would otherwise not be an allowable deduction. There are special rules regarding the incidental costs of raising loan finance for businesses using the cash basis. Interest payments on a loan taken out for a business purposes are allowable for tax purposes. This includes overdraft interest, providing the related bank account is a genuine business account and is not used to fund personal expenses. No deduction is allowed for the repayment of the capital part of the loan. No deduction is allowed for interest on overdue tax.

5. Premiums payable by a trader for business premises where the premium is treated as a property business receipt by the landlord:
Where land used in connection with a trade is subject to a taxed lease, the tenant under the lease is treated as incurring a revenue expense. ITTOIA05/S277(4) expresses the amount of the premium to be treated as rent in the formula: P x (50-Y)/50. Where P = the premium and Y = the number of complete years in the term of the lease apart from the first. The amount of the expense for each day is equal to the amount of the taxed receipt divided by the number of days in the receipt period.

6. Expenditure on qualifying courses for retraining past or present employees for future employment elsewhere:
Under S34(1) ITTOIA 2005 expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the business in question. However, the existence of some non-business benefit arising out of expenditure does not cause it to be disallowed if, in fact, the expenditure is incurred exclusively for business purposes. So, expenditure on the training and development of staff whose relationship with their employer is limited to the employment itself is allowable. This remains the case where the expenditure is on the development of an employee's skills and attributes which may not be directly related to his or her current job with the employer. Where, on the other hand, an employee on whom the expenditure is incurred has a significant proprietary stake in the business, or is a relative of those who do, there is obviously a much greater chance that expenditure may have been incurred not, or not wholly, for business purposes, but to provide the employee with some personal benefit. If that is the case, then the expenditure is not deductible – the business purpose has to be the exclusive purpose. To take an extreme example, there could be no allowance for the educational costs of the business proprietor's son who is employed in the business during university holidays. In such cases, you need to assess whether the expenditure would have been incurred on an otherwise unconnected employee doing the same job.

7. Training costs of the taxpayer:
Costs incurred in maintaining, updating and developing existing skills while qualified are allowable, because there is a direct link between the expense incurred and income received. The cost incurred in the acquisition of new expertise is not allowed.

8. Fees and subscriptions:
An annual subscription to a body shown in the list, as approved by HMRC, is allowable.

9. Accountancy fees:
HMRC will not allow a deduction for the cost of preparing an individual’s personal tax return. However, accountancy fees for the preparation of business accounts are allowable expenses.

10. Website cost:
A website that will directly generate sales, subscriptions, advertising or other income will normally be regarded as creating an enduring asset and consideration should be given to treating the costs of developing, designing and publishing the website as capital expenditure. Whilst a revenue deduction would not therefore be allowable, this capital expenditure will generally qualify as expenditure on plant and machinery for capital allowances purposes. Expenditure on initial research and planning, prior to deciding to proceed with the development of a website, is normally allowable as revenue expenditure. The regular update costs of the website are likely to be revenue expenses and so allowable for tax purposes.

11. Relocation expenses:
If the business is not moving to a larger premises such expenses are allowed. However, if the business is moving to a significantly larger location, such that removal costs will be an ‘enduring benefit’ to the trade, the expenses are capital in nature and not allowed.

12. Fines and penalties:
Penalties/fines for a breach of regulations, or as the result of a prosecution for a trader’s breach of regulations, will not be an allowable expense. However, payments for damages that are compensatory rather than punitive are tax deductible. That includes, for example, damages for defamation payable by a newspaper company, where such claims are ‘a regular and almost unavoidable incident of publishing’. Also, where an employer pays fines that are the liability of an employee, so that the employee is taxable on the payment as employment income, the cost to the employer of paying the fines is allowable in computing his/her trading profits.

13. Entertaining and gifts:
Expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of the trade or business. However, if the total cost of all assets gifted to the same person in the same basis period is not more than £50, and the gift bears the business name, logo or a clear advertisement, and the gift does not include food, drink, or tobacco, it is allowed. The cost of staff entertaining is specifically allowed (ITTOIA 2005 S.46).

14. Pension contributions:
A pension contribution by an employer to a registered pension scheme in respect of any employee will be an allowable expense unless there is a non-trade purpose for the payment.
One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade, is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer, or the contribution is linked to the cessation of a trade. The deduction is for the period of account in which contributions are paid by the employer, and for no other period, unless either the deduction is required to be spread over a number of periods, or the deduction is allowed for an earlier period.

15. Gift aid:
Gift Aid payments are made net of 20% basic rate tax, if the taxpayer is a basic rate taxpayer no further adjustment needs to be made. If the taxpayer is a higher rate taxpayer, then an additional relief is given by extending the basic rate band by the gross amount of the contribution made. A person can use gift aid claim only if the amount of income tax and/or capital gains tax he paid for the tax year in which he makes the donation is at least equal to the amount of basic rate tax the charity will reclaim on that gift. If the person does not pay enough tax he will need to pay any shortfall in tax to HMRC via the self-assessment.

16. High Income Child Benefit Charge:
If a taxpayer has an individual income over £50,000 and either he or his partner get child benefit some of the child credit received would be clawed back via the self-assessment.

17. Student loan repayment:
The earliest a repayment of a student loan will start on the 6 April after the person leaves the course.

Plan 1 is for:
-English and Welsh students who started before 1 September 2012, all Scottish and Northern Irish students, repayment will start when the person earns over £17,495. This amount changes on 6 April every year.

Plan 2 is for
-English and Welsh students who started on or after 1 September 2012, repayment will start when the person earns over £21,000.
The repayment is 9% of the income over the minimum amount of: £17,495 for Plan 1 and £21,000 for Plan 2

Finalising clients’ tax returns
Browse our ‘aide memoire’ of common and quirky issues/errors/omissions as you enter the busy tax return season.

Browse our ‘aide memoire’ of common and quirky issues/errors/omissions as you enter the busy tax return season. 

Tax return season is in full swing and many of you are beginning to burn the midnight oil to finalise your clients’ tax position. 

Before you press the ‘file online’ button and heave a sigh of relief, it is well worth taking a quick step back and reviewing the information on the returns for completeness. To help with this we are setting out an ‘aide memoire’ containing some of the common and quirky issues/errors/omissions that we come across. They might seem obvious but have you dealt with all of them where relevant? 

Avoid problems by using HMRC agents' ITR toolkits
These toolkits provide guidance on errors that HMRC frequently sees in returns and sets out steps to reduce these. They are designed to: 

  • ensure that returns are completed correctly, minimising errors
  • focus on the areas of possible error that HMRC consider key
  • demonstrate reasonable care.


There are toolkits for all of the main areas of the return such as capital gains, what expenses can be claimed, rental income etc. 

New clients – remember that filing is not possible without a UTR
Sounds very obvious but to file the return online a UTR is needed – which is fine if the client has come from another accountant. But if the client is a start up and has not registered as self-employed, HMRC’s quoted delivery for the UTR of 10 working days can be delayed around this time of year due to demand. So make sure that this simple procedure is requested in good time. 

Have you checked if your client is claiming child benefit?
Where a client has income over £50,000 there is a specific tax charge (basically a repayment of the benefit), including where: 

  • the client or their partner get child benefit
  • someone else gets child benefit for a child living with them and they contribute at least an equal amount towards the child’s upkeep
  • it doesn’t matter if the child is living with the client or in fact is not their own child.


The relevant income is the total taxable income before any personal allowances and less things like Gift Aid. 

Some tax software includes a ‘nudge’ warning where the income entered exceeds the above but always make sure you confirm the situation where the issue may be relevant. Remember that some clients may need to specifically register for a tax return simply to pay the charge even if they are not self-employed or ordinarily need to fill in a tax return. 

Is your client’s tax code wrong?
Many clients use the annual tax return to get a tax refund – or make a payment of tax liabilities – because they have multiple sources of income and the tax codes issued do not properly address the correct tax. Admittedly HMRC is using the information from pensions schemes etc much more efficiently these days but where a code is incorrect it may be better to advise your client to  get it corrected directly and not wait for the return to be submitted. The accountant can do this for them using this online form 

Alternatively the client might wish to set up their own personal tax account 

Has your client claimed the correct deductions from rental income?
Many members have clients with one or more rental properties. The rules regarding what can/can’t be claimed are changing fast so here’s a quick re-cap to make sure your client has got things right. 

Back to basics: the expenses must be wholly and exclusively for the purposes of renting out the property. However, generally where a definite part or proportion of an expense is incurred wholly and exclusively for the purposes of the property business, you can deduct that part or proportion. 

Common types of expenses that can be deducted (if paid by the client) are: 

  • water rates, council tax, gas and electricity
  • insurance – landlords’ policies for buildings, contents and public liability
  • interest on a mortgage to buy the property
  • costs of services, including the wages of gardeners and cleaners
  • letting agent fees and management fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountants’ fees
  • rents (if you’re sub-letting), ground rents and service charges
  • direct costs such as phone calls, stationery and advertising for new tenants
  • vehicle running costs (only the proportion used for your rental business) 
  • general maintenance and repairs to the property, but not improvements
    Examples of typical maintenance and repair costs.

    If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs which the insurance pay-out did not cover.

    If the property you let out is fully furnished, you can elect to claim a wear and tear allowance. A fully furnished property is one let with enough furniture, furnishings and equipment for normal residential use. (BUT in terms of advice to the client, remember that from 6 April 2016 these rules are changing and the client may instead be able to claim Replacement Domestic Item relief).


Remember that the full amount of the mortgage payment cannot be claimed – only the interest element of the payment can be offset so make sure the client has given you the correct figures. 

If your client has increased their mortgage on the buy-to-let property they can also treat interest on the additional loan as a revenue expense but only up to the capital value of the property when it was brought into the letting business. Interest on any additional borrowing above the capital value of the property when it was brought into the letting business is not tax deductible. Example of increasing the mortgage 

Disclosures and calculations relating to capital gains
Use of reliefs
One area that you need to be very careful about is ensuring that the client is aware of/has claimed relevant capital gains tax reliefs. There have been a number of changes recently so it’s important to refresh your knowledge on the main reliefs available both for the 2015/16 tax return and for future years. Some of them have some devil in the detail so please use the following links to the full guidance:  


Business asset roll over relief

Chattels

Trusts

Gift relief

Principal private residence relief

Entrepreneurs' relief

Incorporation relief


Allowances and losses
Remember to ensure that the CGT allowance is utilised and also losses brought forward are claimed where applicable. 

Disclosures
Remember that the capital gains pages need to be completed merely because the client sold or disposed of chargeable assets which were worth more than £44,400. 

Student loans
Where a client has self-employed income as well as taxed salary income, the student loans repayment is based on both (subject to thresholds). Clients may think that because deductions are taken from their salary this is all that needs to be done. So be careful that the student loans box is completed on the tax return and that the calculations include all relevant income. 

Charity donations
Clients that make charitable donations may be unaware of the tax relief and simply might not inform you of their donations. The main tax advantage is for higher rate taxpayers. They can claim the difference between the rate paid and basic rate on the donation, either: 

  • through the self assessment tax return
  • by asking HMRC to amend the tax code.


Remember that for Gift Aid, the client can also claim tax relief on donations made in the current tax year (up to the date of sending the return) if they either: 

  • want tax relief sooner than waiting for the end of the tax year
  • won’t pay higher rate tax in the current year, but did in the previous year.


Taxable benefits
These can be easily left off the tax return as clients assume that because their code has been altered then their disclosure responsibilities are complied with. Make sure salaried clients (especially directors) are aware that P11D benefits need to be included on the tax return in most cases.

Transfer of personal allowances
Although not strictly a tax return issue, this is a good opportunity to enquire about the income of your client’s spouse or civil partner. They can transfer £1,100 of their personal allowance to the husband, wife or civil partner. This can reduce their tax by up to £220 every tax year. To benefit as a couple, the transferor needs to earn less than their partner and have an income of £11,000 or less. HMRC currently has a media campaign highlighting this so you may well be asked about it.

ACCA has produced various guides and summaries on the 2015 Budget which affect the 2015/16 tax return.

Banking on a level of service
The Secret Accountant highlights the different approaches banks seemingly take to customer care.

The Secret Accountant highlights the different approaches banks seemingly take to customer care. 

When Simon and Garfunkel performed their live concert in Central Park many years ago they inserted lyrics in to the song ‘The Boxer’ which declared ‘After changes upon changes, we are more or less the same’. 

If we were to write a song about the changing profession and the world around us would we consider such a line?

Being good with numbers we would include the previous line ‘I am older than I once was, but younger than I’ll be’.

However, I think clients like the fact that we bring an element of consistency and normality to their business support systems. I was asked by a client recently which bank I would recommend they open an account with for their new company. This was a client who has been in business for some years and couldn’t get any joy from his own bank.

He asked who we bank with. Could I give him our manager’s number? Truth is, despite running a £4m turnover practice, we don’t know his name, let alone his number. What is more, we rang the branch with a problem last year and they didn’t know either. Never mind, we have only banked with them for 47 years so still time for them to get to know us.

I have recently set up another business for a client who was formerly at director level with another one of the ‘big 4’. He left taking a package because in his words ‘I couldn’t reconcile the message the chairman was giving to the public with the actual things going on inside the bank. We can never deliver on the service we promise whilst making continued sweeping cuts to both personnel and services available to our customers.'

However, it is not all bad news for the world of banking. There are some smaller banks who now offer excellent service. They have real people on the end of a real telephone number, not one of those 0845 numbers that takes you to a suburb of Mumbai. They make decisions in less than six weeks and you can actually talk to the person who makes the decision – imagine that!

And so, in a world of helplines and office closures, rationalisation and cost cutting, while we must all compete, just being open and answering the telephone and, better still, phoning people back when they leave a message is now a competitive advantage!

We had a publican client who, after four years of fines and penalties, eventually won his tribunal to allow him to submit paper VAT returns because he doesn’t have a computer and it infringed his civil rights.

In a world of internet and call systems and email and many other impersonal inventions, never forget that people do business with people. Today more than ever clients want to feel that they have someone in their corner who is prepared to talk to them and listen to their issues. Build that in to your practice and you will do well for many years to come.

The Secret Accountant runs a practice in the heart of England

Notification obligations for clients with overseas assets
Understanding your obligations for UK tax resident clients with overseas income and assets.

Understanding your obligations for UK tax resident clients with overseas income and assets.  

The International Tax Compliance (Client Notification) Regulations 2016 (SI 2016/899) amend the previous 2015 regulations and require certain financial institutions and professional advisers to contact their UK tax resident clients who have overseas income and assets.  

HMRC has said in its guidance that financial institutions and advisers falling under the obligations should: 

  • notify clients about information HMRC will receive under automatic exchange of financial information agreements with more than 100 jurisdictions
  • remind clients of their tax obligations
  • highlight how clients can make a disclosure
  • warn clients about the increasing penalties and possible criminal prosecution if they fail to declare offshore assets.


The obligation is placed on financial institutions and also individuals and companies who provide advice or services to individuals relating to offshore accounts, income or assets. They are within the legislation and guidance referred as Specified Financial Institution and Specified Relevant Person

Tax advisers are clearly referenced within the guidance material. The ‘specified’ firms and individuals are required to identify those clients falling within the legislation and send notifications in the form prescribed by the regulations to them on or before 31 August 2017.

The explanatory note of the SI states the following regarding Specified Relevant Person adviser obligations:

Other advisers are required to use either the ‘general approach’ or the ‘specific approach’ to identify individuals to whom the prescribed notifications described must be sent.

The general approach identifies individuals who were provided with any advice or services relating to their personal tax affairs by the adviser in the relevant period.

The specific approach identifies individuals who, in that period, were provided with offshore advice or services relating to such tax matters or were referred by the adviser to a connected person outside the United Kingdom for the provision of such advice or services.

Both approaches exclude individuals the adviser reasonably believes were not (or will not be) resident in the United Kingdom for the tax years 2015-16 and 2016-17 or for whom, on 30th September 2016, the adviser has no reasonable expectation of advising further or providing more services. The specific approach similarly excludes individuals for whom the adviser has prepared and delivered (or expects to do so) a personal tax return disclosing the effect of the advice or services provided. An individual identified using the general approach may be similarly excluded if the adviser so chooses.

This is what HMRC issued as guidance for those advisers who are a Specified Relevant Person: 

To find the clients you need to notify, you can choose between the:

  • specific approach – identify individual clients you’ve provided with offshore advice or services, or referred overseas for this
  • general approach – identify all clients you’ve provided with advice or services for their personal tax affairs (between 1 October 2015 to 30 September 2016).


You only need to use one of these approaches. If you don’t find any clients to notify from an approach, you don’t need to do anything else. 

If you’ve referred a client for offshore advice or services

You still need to send the notification letter to clients if you’ve referred them for: 

  • an overseas account
  • advice or services overseas


You must notify the client even if you didn’t offer advice, products or services directly.

The guidance also includes the text to be used and information that needs to be sent to the client. 

Finally the Regulations also provide a penalty of £3,000 for failing to comply with the obligations. The Explanatory Note to the regulations states that ‘this penalty must be assessed within the period of 12 months beginning with the date on which the failure first came to the attention of an officer of Revenue and Customs or, in any event, within six years. Penalties for other breaches of the International Tax Compliance Regulations 2015 are unchanged.’

Making Tax Digital – wide ranging response submitted
Making Tax Digital (MTD) received the smallest of mentions in the Chancellor’s Autumn Statement, but it is a concerning one.

Making Tax Digital (MTD) received the smallest of mentions in the Chancellor’s Autumn Statement, but it is a concerning one. 

The Office for Budget Responsibility Economic and Fiscal Outlook Report highlighted that HMRC has reported progress in delivering MTD and it is ‘broadly on track’. You can see the paragraph in full at A.32 in the report. 

ACCA’s consultation response
We submitted a wide ranging response to the initial consultation, with valuable input from many of our members. 

Throughout the consultation period we undertook a wide range of activity, including: 

  • conversations with government departments including HMRC at various levels (including at chief executive level) 
  • ACCA’s chief executive Helen Brand met with Edward Troup from HMRC (Executive Chair and Permanent Secretary)
  • submitted evidence to the Treasury Select Committee
  • raised concerns at the Conservative and Labour Party conferences
  • consulted with members of ACCA’s sector network panels and our Global Tax Forum
  • sent joint letters with ICAEW and FSB to the Chief Secretary of the Treasury
  • spoke about MTD at many ACCA events, Accountex and IRIS World
  • raised the profile of the issue across the media, including in:
    - AccountingWeb – 28/9/2016
    - 21 different trade journals (including hairdressers, vets, electrician, optometrists) between February and September 2016.


Letter to ministers and MPs
We sent a letter on your behalf to ministers and a large number of MPs. Here is what it contained: 

Consultations on Making Tax Digital
ACCA has today responded to the six HMRC ‘Making Tax Digital’ (MTD) consultation documents. As we pointed out in our written evidence to the Treasury Select Committee in January 2016, MTD affects every aspect of UK system: ‘the legislation that imposes the charge, the forms and mechanisms that enable assessment and communication of the charge, and finally the payment processes that facilitate collection of the charge.’  


ACCA has engaged with HM Treasury and HMRC from an early stage on the Making Tax Digital proposals, and we have significant concerns that the transition to quarterly reporting, and potentially payment, of taxes will create difficulties for many sectors, transactions and tax rules. 

MTD is the most far reaching reform to the UK tax system in this parliament and indeed for generations. The proposed changes will affect all UK businesses and a significant proportion of taxpayers. We have received an unprecedented level of input from our membership and concerns about the potential impact of mandatory integrated accounting software designed to HMRC specification for every business taxpayer have been universal. Given the impact of the project, it is vital that enough time is allowed to understand the implications and properly develop the legislation and systems required. The burdens placed on taxpayers must be proportionate to the rewards delivered to/for society, and we believe HMRC have not demonstrated a proportionate benefit to the wider UK economy. We would urge that the adoption of interim reporting for business be voluntary. 

We support government efforts to improve UK rankings in international “ease of doing business” tables, both for the domestic advantages which accrue and the incentivising of international investment into the UK. But the UK economy as a target for long term domestic and international investment faces plenty of unavoidable challenges. However resilient economic indicators have been up to now there is still an uncertainty about the future, and the risk of potential additional administrative costs and uncertainties will only exacerbate those concerns. 

Even if the ‘steady state’ of MTD represents an improvement, the learning time and disruption of adoption will impact business. The opportunity cost of administrative time in a large business is profits spent on support staff time instead of being reinvested. The opportunity cost of admin time in a smaller business is trading foregone, decisions not taken and management time absorbed. Without a dedicated finance team, any burden of MTD will fall upon the profit makers of business; a direct double cost to business and the wider economy. Figures from surveys undertaken over the summer suggest that the annual cost to business will be of the order of billions of pounds per year. We are very surprised and extremely disappointed that HMRC are not proposing to undertake their own impact assessment of the economic cost of MTD until the draft legislation is published. Tax systems exist for the benefit of society, not vice versa, and the business case for any change to the tax system should be based on the total economic impact, not just the HMRC aspects.

We will continue to keep you informed and once again we thank all of you who continue to keep us informed of your views on MTD.

Averaging profits for farmers
Farmers and market gardeners in the UK may obtain relief by averaging the profits of consecutive years.

Farmers and market gardeners in the UK may obtain relief by averaging the profits of consecutive years.

Averaging can be claimed where the difference between the profits for the two years is 30% or between 25% and 30% (marginal relief). It can’t be claimed where profit differences are below 25%. 

The rules relating to the averaging profits of farmers and creative artists are in Income Tax (Trading and Other Income) Act 2005 (ITOIA 2005), Part 2 Chapter 16 s.221 to s.225.

They are claimed in the tax return for: 


You can see more on the return rules including worked examples and a look at the rules relating to the averaging profits of farmers on our technical advisory webpages 

The changes from 1 April 2016

Finance Act 2016 extends the ability for profit averaging to five years and removes the marginal relief. Section 222A Circumstances in which claim for five-year averaging may be made in the Act states: 

  1. An averaging claim may be made under this section in relation to five consecutive tax years in which a taxpayer is or has been carrying on the qualifying trade, profession or vocation if the volatility condition in subsection (2) is met.
  2. The volatility condition is that:
    (a) one of the following is less than 75% of the other:
    (i) the average of the relevant profits of the first four tax years to which the claim relates
    (ii) the relevant profits of the last of the tax years to which the claim relates; or
    (b) the relevant profits of one or more (but not all) of the five tax years to which the claim relates are nil.

    It is also important to note that:
  3. Any of the first four tax years to which an averaging claim under this section relates may be a tax year in relation to which an averaging claim under this section or section 222 has already been made.
  4. An averaging claim (‘the subsequent claim’) may not be made under this section if an averaging claim in respect of the trade, profession or vocation has already been made under this section or section 222 in relation to a tax year which is later than the last of the tax years to which the subsequent claim relates.
  5. An averaging claim may not be made under this section in relation to the tax year in which the taxpayer starts, or permanently ceases, to carry on the trade, profession or vocation.
  6. An averaging claim under this section must be made on or before the first anniversary of the normal self-assessment filing date for the last of the tax years to which the claim relates.
Personal income tax – interest on qualifying loans
Under Income Tax Act 2007 (ITA) s383, interest paid on ‘qualifying loans’ is deductible in the tax computation.

Under Income Tax Act 2007 (ITA) s383, interest paid on ‘qualifying loans’ is deductible in the tax computation. 

Interest is deducted first from non-savings income, then from interest income and the remaining amount will be set against any dividend income. 

Relief is not given for interest paid on an overdrawn account or on a credit card, or at a rate that is higher than a reasonable commercial rate of interest. 

For a ‘mixed loan’, the interest relief is given only to the ‘qualifying part’ of the loan (ITA07/S386). Any repayments of a mixed loan are apportioned between the qualifying and non-qualifying parts. A different rule applies, however, where capital has been recovered from an investment funded from the qualifying part of the loan. So if the taxpayer takes a loan to buy shares in a close company and then he sells those shares, he is deemed to have repaid the loan with the proceeds of sale. 

Loans that qualify for tax relief are:

  1. Loan taken out to buy plant or machinery for partnerships or employment use. The interest is allowed in the year of the loan and the next three years. The plant or machinery must be such that the partnership (in the case of the partner) or the individual (in the case of the employee) is entitled to capital allowances on it. Where the plant or machinery is used partly for private purposes, only a percentage part of the interest will qualify for relief, which is the same percentage as the restriction for capital allowances claim.
  2. Loan taken out to buy into a partnership or in providing a partnership with a loan. Such interest is a liability of the individual and not of the partnership and therefore is not allowable as an expense in computing the partnership’s profits.
  3. Loan taken out by an individual to purchase shares in a close company or in lending money to a company, which then uses the loan wholly and exclusively for the purposes of its business.  A close company is a UK company controlled by five or fewer shareholders. The person claiming relief must either work for the company or hold more than 5% of the company’s share capital. Relief is not due where the individual or his spouse makes a claim for relief under the Enterprise Investment Scheme.
  4. Loan taken out to pay inheritance tax. The personal representatives of someone who has died may obtain relief on interest on a loan taken out to pay inheritance tax. The loan interest is eligible for relief only for the first 12 months of the loan being made.
  5. Loan taken out to acquire any part of the ordinary share capital of an employee-controlled company. The shares must be acquired by the individuals either before the company became employee-controlled, or no later than 12 months after it became employee-controlled. A loan to invest in a co-operative also qualifies for relief.


The limit on income tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’. 

For more information about the limit on Income Tax reliefs, see HMRC Helpsheet 204

Rental expenses
Guidance on revenue and capital expenditure on rental income.

Guidance on revenue and capital expenditure on rental income. 

Generally, when calculating the rental business profits, expenses will be treated as revenue expenditure provided they are incurred wholly and exclusively for the purposes of the business and are not of a capital nature. 

Capital expenditure cannot be deducted against the rental income if it forms the base cost of the property and is used in the capital gains tax computation. Capital expenditure includes the cost of land and property as well as the costs of any capital improvements. 

Expenditure incurred before a property is first let out
The tax deductibility of expenditure incurred before a property is first let out depends on whether it is capital or revenue in nature. Repairs to reinstate a worn asset will usually qualify as revenue expenditure, but where a property is purchased and is not in a fit state for use in the business until the repairs have been undertaken; that expenditure is likely to be capital. Guidance on whether the cost of repairing an asset acquired in poor repair is capital or revenue can be found in the contrasting cases of The Law Shipping Co Ltd v CIR [1923] 12TC621 and Odeon Associated Theatres Ltd v Jones [1971] 48TC257. 

Although both companies purchased assets in poor condition, there were key differences between the two cases. In Law Shipping, the company acquired a ship in poor condition that they would have to have repaired before they could use it. This was capital expenditure and as a result not allowable in calculating the trading profit. In Odeon, the company was able to operate the cinemas for a number of years before they carried out the repairs and also the price paid was not reduced to reflect the state of repair. 

The expenditure was found to be allowable revenue expense. 

Expenditure for water rates, council tax etc paid by the landlord before tenants moved in is treated as pre-letting expenditure and as a result allowable. 

Wear and tear allowance
If the property is let furnished, the landlord is able to claim a wear and tear allowance. This is 10% of the ‘net’ rent and covers plant and machinery that a landlord would normally provide in a furnished accommodation, such as furniture, fridges, carpets and curtains. ‘Net’ rent is the total rent for the year, less any expenses paid by the landlord that would normally be borne by the tenant, for example utility bills. 

Changes to wear and tear allowance
It is all change for the current tax year as from 1 April 2016 for corporation taxpayers and 6 April 2016 for income taxpayers the wear and tear allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property. 

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced. 

Wholly and exclusively - cost of travel to visit the property
Revenue expenses are an allowable deduction against rental income only if they are incurred wholly and exclusively for the purpose of letting. Where expenditure has a dual private and business purpose – unless the business element can be clearly distinguished – then the whole of the expenditure will be disallowed for tax purposes. 

While reasonable costs for inspection visits are usually allowable, if the trip is mainly for private purposes and it is not possible to separate this private element from the business portion, then none of the cost is deductible. 

Legal fees
Solicitors fees incurred to evict tenants or to recover rental income are treated as incurred wholly and exclusively for the purpose of the rental business and as a result are allowable. Management fees/agents’ fees will be fully tax deductible. If the landlord chooses to advertise his property privately, this cost is also allowable. 

Redecoration costs 
Ordinarily, the cost of redecorating would be an allowable revenue expense. However, if the work is undertaken as part of an improvement, the entire cost is treated as being capital, including the redecoration.

Finance cost
Finance interest payable on loans (including incidental cost of financing) used to buy land or property which is used in the rental business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of the rental business regardless of the security given for borrowed funds.   

If a property is let for short periods in a tax year, or only part of it is let throughout a tax year (or both), the interest charged on a qualifying loan on that property has to be split between the rental business use and the private or non-business use. The split is done in whatever way produces a fair and reasonable business deduction, taking account of both the proportion of business use and the length of business use. The interest does not have to be split if the landlord is genuinely trying to let the property but it is empty because they have not been able to find a tenant. In this case, the interest will meet the 'wholly and exclusively' test. 

Accountancy fees
The cost for preparing rental accounts is an allowable expense; however, the cost of completing the landlord tax return is not allowed as it is a private expense. 

Changes to interest and other finance charges
From 6 April 2017, tax relief on interest paid by landlords of residential properties will be restricted gradually (by 1/4 for each tax year) so that from 6 April 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. An example on how the changes will affect a basic and higher rate taxpayer can be found here

Money purchase annual allowance
Consultation open on proposal to set allowance at £4,000.

Consultation open on proposal to set allowance at £4,000. 

Reducing the money purchase annual allowance: consultation has been issued and is open for comment until 15 February 2017. 

It proposes to reduce the money purchase annual allowance from April 2017.

The consultation states that ‘once a person has accessed pension savings flexibly, if they wish to make any further contributions to a defined contribution (DC) pension, tax-relieved contributions are restricted to a special money purchase annual allowance (MPAA)’.

The consultation also states:

Since April 2015, on reaching normal minimum pension age, currently 55, a person can access their pension flexibly and continue to save into a pension. However, the risk of acting against the spirit of the system remains and the MPAA was introduced and set at £10,000.

While the MPAA reduces this risk, it does not eliminate it. An individual still in work can invest up to £10,000 of their earnings, tax-free, into a pension whilst also drawing out their existing DC pension savings. Although against the spirit of the tax system, acting in this way reduces an individual’s tax bill by 25% and, at the level of £10,000, this means £1,125 for an additional rate taxpayer.

The proposal is that from Aril 2017 the MPAA would be set at £4,000.

Eight things you should know about pensions
Guidance on eight key areas you can share with clients prior to completing their self assessment tax returns.

Guidance on eight key areas you can share with clients prior to completing their self assessment tax returns. 

Types of pension (1)
The basic state pension is currently available to most UK individuals when they reach state pension age. The basic state pension depends on the number of years an individual has paid National Insurance or got National Insurance credits, eg while unemployed or claiming certain benefits. In order to receive the full basic state pension, an individual needs 30 years’ worth of National Insurance contributions or credits. See further guidance with regard to National Insurance contributions and the state pension.  

Don’t forget that the State Pension Top Up is available until April 2017. It is for individuals who have already reached state pension age, or are reaching state pension age before 6 April 2016. They can secure an index-linked top up, increasing the weekly state pension for life by paying a lump-sum contribution.

Personal pension schemes provide a retirement fund for individuals, whether they are employees or self-employed. They are offered by financial organisations such as banks or insurance companies.

Occupational pension schemes are provided by employers to their employees. Where a pension scheme is registered with HMRC, there are tax advantages for the individual and the employer, where the employer also contributes to the scheme. Starting from 1 October 2012, a new requirement was introduced upon employers to provide eligible employees with automatic enrolment with a workplace pension plan. Further guidance on auto enrolment is available here

Type of pension schemes (2)
Money purchase schemes
With a money purchase scheme, the money invested by an individual is used to purchase units in the fund, and the value of those units is dependent on the underlying investments made by the fund manager. There is no guarantee of pension benefits.

Defined contribution schemes
With a defined contribution scheme, the benefits that an employee can take from the scheme are based on the employee’s salary and length of service.

Maximum contribution and ‘relevant earnings’ (3)
Anybody (under the age of 75) can pay up to £3,600 per year into a pension scheme, regardless of the level of his earnings. The maximum contribution which can be made to a pension fund in any one tax year is 100% of an individual’s ‘relevant earnings’ for that year. ‘Relevant earnings’ include employment income (including benefits), trading income, furnished holiday lettings and patent income in relation to inventions.

Tax relief for pension contributions (4)
Relief at source
Applies to payments made into a pension scheme that are net of 20% basic rate tax. So, if an individual pays £800 into a pension scheme, HMRC will contribute £200 to bring the total contribution to £1,000. In contrast to Net Pay, contributions paid under Relief at Source do not reduce the individual's earnings before tax is calculated. The individual's earnings will be subject to deduction of tax in full. 

If the individual is a higher rate taxpayer, extra tax relief is given by extending the basic rate band by the gross amount of the pension contribution. So, the new basic rate limit would be the current basic rate limit plus pension contribution times 100 divided by 80.

Net pay arrangements
Applies to contributions to occupational pension schemes. Employees making contributions to an employer pension scheme will obtain tax relief via a net pay arrangement. Effectively, pay as you earn tax will be payable in respect of the gross pay less employee’s pension contribution. An employer’s contribution to an employee’s pension scheme is a tax-free benefit. However, if an employer pays pension contributions into the registered pension scheme of an employee’s family member, those contributions are a taxable benefit. 

Annual allowance (5)
The annual allowance represents the maximum amount of pension savings that can benefit from tax relief each year. It applies to both money purchase and defined contribution pension schemes, and it takes into account both the employee’s and employer’s pension contributions in the tax year. 

The annual allowance for 2015/16 is £40,000. Any unused annual allowance can be carried forward and used to increase the annual allowance for that year by the unused annual allowance of the previous three tax years. Any unused annual allowance from previous years is utilised on a first in-first out basis. HMRC pension annual allowance calculator can be accessed here. The government have issued a consultation document Reducing the money purchase annual allowance  

Unused annual allowance can be carried forward from a tax year only if the individual was a member of a registered pension scheme in that year, even if no contributions were made in that year.

Annual allowance charge (6)
Annual allowance charge is the tax charged on the amount above the annual allowance. The rate of tax depends on the level of an individual’s taxable income and whether the excess contribution falls below the basic rate or higher rate band. 

If the amount of the tax charge exceeds £2,000, an election can be made by 31 July following the anniversary of the end of the tax year to have the charge paid from the pension scheme.

There are three other situations where part or all of an individual’s pension savings will not be liable to the annual allowance charge for the tax year. These are: if the member dies, retires due to severe ill-health, or is a deferred member whose benefits do not increase beyond certain levels. Further guidance can be accessed here

Lifetime allowance (7)
Lifetime allowance charge is the tax charged on the capital value of the fund that exceeds the lifetime allowance. The lifetime allowance for 2016/17 is £1m. The tax charge is triggered when payments are made from the retirement fund (payment of a pension or a lump sum). 

Where the payment from the fund exceeds the lifetime allowance (at the time of crystallisation) then the excess is charged at either 25% (if the fund is used to buy a pension), or 55% where the fund is used to make a lump sum payment.

The tax liability is on both the individual and the scheme administrator. However, in practice, the scheme administrator will deduct the tax and pay it to HMRC.

Lifetime allowance protection (8)
If total pension savings exceed £1m on 5 April 2016, a taxpayer may be able to apply for protection under the Individual Protection 2016 and Fixed Protection 2016 schemes. 

For those who had a total pension savings that exceeded £1.25m on 5 April 2014 (before the threshold reduced), they may be able to apply for protection under the Individual Protection 2014 and Fixed Protection 2014. The application has to be submitted by 5 April 2017. 

 

 

 

 

   

 

 

 

ACCA Rulebook - changes for 2017
The main changes to the ACCA Rulebook, which take effect on 1 January 2017.

This article provides an explanation of the main changes to the ACCA Rulebook, which take effect on 1 January 2017. The Rulebook is divided into three sections: 

  • Section 1 carries the Royal Charter and Bye-laws
  • Section 2 carries the Regulations
  • Section 3 carries the Code of Ethics and Conduct.


Changes to the Rulebook arise largely from policy decisions, legislative and lead regulator requirements, or changes to the IESBA[1] Code which must be replicated in Section 3. 


SECTION 2 - REGULATIONS

Replacing Practising Certificates with registration
Changes to the Membership Regulations and Global Practising Regulations (GPRs) will give effect to a new policy in respect of ACCA practising certificates. This removes the need for a member in practice to hold an ACCA practising certificate unless he or she is practising in the UK, Ireland or a designated territory, or is otherwise required by local legislative and/or regulatory requirements to hold an ACCA practising certificate. Members not requiring (or otherwise electing to hold) an ACCA practising certificate will nevertheless be required to notify ACCA if they are carrying on public practice, and such practitioners will be placed on a register of ACCA practitioners.

Insolvency Regulations
ACCA has entered into a collaborative arrangement with the Insolvency Practitioners Association (IPA) in respect of the future regulation of insolvency practitioners licensed by ACCA. The changes to Annex 1 of the GPRs include moving the regulations relating to insolvency practice to a new Appendix 4, and reflecting the nature of the collaboration, in which IPA may perform certain regulatory functions in respect of ACCA insolvency practitioners.

Membership Regulations
In addition to the changes made to the Regulations in respect of practising certificates, changes include:

  • more principles-based regulations concerning subscriptions for affiliates
  • clarification of what is meant by a ‘registered student’, and that all students are bound by the requirements of the ACCA Rulebook.


Global Practising Regulations – Annex 2
Amendments have been made to Annex 2 of the GPRs (in respect of the Republic of Ireland) in order to: 

  • simplify the requirements concerning the signing of audit reports
  • amend the professional indemnity insurance requirements for liquidators, in accordance with the requirements of the Companies Act 2014 (Professional Indemnity Insurance) (Liquidators) Regulations 2016.


Irish Investment Business Regulations
The changes to these regulations resolve a problem with the current regulation 3(3). The amendment will allow spouses (and others who might meet the definition of ‘controller’) who take no part in the business of a firm that holds an investment business certificate (Ireland) to hold shares in that firm. 

Appeal Regulations
Changes have been made to ensure consistency with the notice provisions across the regulatory and disciplinary regulations.


SECTION 3 – CODE OF ETHICS AND CONDUCT
A change to section B4 replicates the change to Annex 2 of the GPRs regarding the signing of audit reports in the Republic of Ireland. A further change to section B4 updates the provisions concerning the use of the ACCA logo. 

However, most of the changes to the Code arise from the recent pronouncement by IESBA concerning Responding to Non-Compliance with Laws and Regulations. The most significant change is the addition of sections 225 and 360, although there are other changes, for consistency, particularly to section 210.

Section 225 sets out the provisions for accountants in public practice, and places higher demands on those engaged in the audit of financial statements than on those providing other services. Similarly, a senior accountant in business (section 360) has responsibilities beyond those of other accountants in business. There are situations in which external auditors and senior accountants in business are required to determine whether to disclose a particular matter to an appropriate authority.

View the Rulebook online now



[1] International Ethics Standards Board for Accountants

Tax scheme claims
How big a problem do they pose for the profession?

How big a problem do they pose for the profession? 

Tax is in the news. There has been a naming and shaming of companies and individuals involved in tax avoidance, from Facebook and Starbucks to politicians and others in the media spotlight.   

The Treasury has also upped the ante by proposing to introduce fines for accountants or other advisers who assist clients to ‘bend the rules’ to unfairly reduce their tax liability.

Currently, about 20% of claims against accountants are attributable to tax consultancy work – a high percentage of which will relate to failed tax avoidance schemes.  And we expect this to rise.

While the average cost of a claim against an accountant is in the region of £43,000 currently (according to Lockton’s statistics), tax scheme claims tend to be more expensive, when they do occur. We have seen one claim in excess of £750,000 arising from a failed film finance arrangement. 

We have also seen a number of ‘block notifications’. These arise where an accountant has introduced several clients to the same scheme which subsequently fails. And remember, where a scheme fails, it is rare for the entity behind the scheme itself to still be in existence or solvent – so the risk can lie with the accountant as introducer.

It should come as no surprise that tax consultancy work is therefore a high priority issue for insurers. They are looking increasingly closely at the risk profile of firms that undertake a high percentage of tax consultancy work. Insurers that will consider underwriting this type of work at all will expect a detailed additional tax questionnaire to be completed as part of your insurance application. Premium loadings and higher excesses will apply in most instances.

The ‘defence’ that you have merely acted as an introducer, and given no advice on the schemes, is not proving to be much of a defence in reality. Much of the work now giving rise to claims is historic, and we are finding that firms’ engagement letters are frequently not sufficiently robust, where one is in place at all. Clearly, if you are providing ongoing advice in this area of practice, it is essential that you review your engagement processes and scoping letters very carefully.

You should also ensure that you follow carefully the advice that ACCA provides on tax scheme work. In fact, ACCA will shortly issue revised guidance on significant changes to ethical guidelines for members in respect of tax planning.

In summary – if you are undertaking tax scheme work, consider the following action points: 

  • Your letter of engagement – does it have a good third party advice exclusion? Was it in place for all the introductions that you have made? Please send us a copy as this may work in your favour.
  • Have your clients got separate letters of engagement with the promoters?
  • Are any of the schemes under a Spotlight, or DOTAS registered?
  • Are any of the schemes being investigated or been reviewed under GAAR?
  • Have any clients received an APN? If so, how have they reacted?
  • What commissions have you received from introductions?
  • What is your stance on schemes now – are you actively introducing, not at all, or just on request?
  • Do you comply with the ACCA’s professional guidance and technical releases?
  • How did/ do you explain the risks to your clients? If in writing, send us a copy of what you gave to the client.
  • Who is the promoter? What is your relationship with them? What stance are they taking on the most recent changes? Insurers do differentiate between promoters and their schemes as to how much risk they present.
  • How exactly does the scheme work? Is money being invested, or is it a way of structuring assets to shelter a profit? If amounts were invested, please advise us what the figure was. If profit is sheltered, please advise us of the amount, plus the fee the client paid to the promoter.


And speak to Lockton early, to assist usto  present the best possible insurance submission to the market.  We can then obtain the best possible terms for your Professional Indemnity renewal. 

Catherine Davis – vice president, Lockton Companies LLP

Please note that the purpose of this article is to provide a summary of our thoughts on this matter. It does not contain a full analysis of the law nor does it constitute an opinion by Lockton Companies LLP. The contents of this article should not be relied upon and you must take specific legal advice on any matter that relates to this. Lockton Companies LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of the material contained in this article. No part of this article may be used, reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Lockton Companies LLP.

NEWS
Money laundering survey
Short survey seeks to address the threat to business posed by money-laundering.

Short survey seeks to address the threat to business posed by money-laundering.

The research is being conducted by Ipsos MORI, the independent market research organisation, on behalf of the Home Office, the National Crime Agency and the Accountancy Affinity Group, and the results will be used to inform protective communications to reduce the risk to the accountancy sector.

The survey should only take 5-10 minutes to complete.

Please complete the survey by 17 December.

 

Success for ACCA members at British Accountancy Awards
ACCA members were well represented amongst the winners at this year’s awards.

ACCA members were well represented amongst the winners at this year’s British Accountancy Awards, held in London on 29 November. 

Norfolk-based Farnell Clarke had more reasons than anyone to celebrate, walking off with an unprecedented hat trick of awards: 

  • most innovative practice – overall (credited for a ‘trendy’ feel that stands out from other practices)
  • most innovative practice – independent (credited for actually undertaking innovation, rather than just paying lip service)
  • independent firm of the year – East, England (credited for combining both tremendous growth with a strong focus on people and management).


Cumbrian accountants JF Hornby also stood out, impressively retaining both titles won in 2015 - ‘independent firm of the year – North of England’ and the overall ‘independent firm of the year’ title. Commenting on their win, Paul Hornby FCCA (managing director) says: ‘We are in dreamland being named as best independent firm of the year for successive years. I think the achievement is unprecedented and really highlights the “x factor” we have in our firm. More than most we stick to our family-friendly roots which just sums us up!’

Meanwhile, Salhan Accountants , whose managing director is Madan Salhan FCCA, were named ‘independent firm of the year – Midlands’.

Wirral-based practice Woods Squared picked up two ‘highly commended’ awards, in the categories for ‘independent firm of the year, North England’ and ‘most innovative practice – independent’.

In the individual awards, all five on the short-list for ‘new practitioner of the year’ were ACCA members, with the award presented by ACCA’s head of technical advisory, Glenn Collins, to a worthy winner in Chris Barnard from Crunch Accounting. The judges commented ‘Chris showed impressive responsibility for dealing with technical issues, and in leading the responses to them. He has played a strong role in expanding Crunch and its technical training.’

The Infinity Partnership’s Greg Houston ran Chris close, picking up a ‘highly commended’.









Prize-winning member
Meet the winner of the 'Best All New Cloud Practice 2016'

Congratulations to ACCA member @alexmfalcon on winning 'Best All New Cloud Practice 2016' at the 2020 Innovation Group awards last month.

The awards ceremony followed a conference which focused on the changing face of accountancy and how to manage this change.


CPD
VAT and property development webinars
Register now for a series of three webinars on VAT and Property Development in February 2017.

ACCA UK's Practitioners’ Network is running a series of three webinars on VAT and Property Development in February 2017. 

Robert Warne – Head of VAT at Crowe Clark Whitehill – will present all three webinars in the series. Robert is a partner in the specialist VAT Group of Crowe Clark Whitehill. He has been with the firm since 1988, joining directly from HMRC where he was a VAT inspector. His professional VAT qualifications include ATII and IIT. He is responsible for coordinating the firm's VAT training seminars, both externally as well as in-house, and he is a regular speaker on the VAT charity circuit. 

The series will cover:

Introduction to VAT and property development
Tuesday 7 February 2017, 12:30
In this webinar, Robert will provide an introduction to the different VAT implications when building privately or commercially. He will also provide 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
Tuesday 14 February 2017, 12:30
In this webinar, Robert will discuss commercial development with emphasis on the need for VAT planning and guidance. Robert will consider 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.


VAT and property development – self-builds, residential conversions and non-residential conversions
Tuesday 21 February 2017, 12:30
In this webinar, Robert will discuss the rules governing VAT refunds for DIY house builders on self-build new homes or non-residential conversions. He will also consider 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. 

Each webinar lasts for an hour and constitutes one unit of CPD where the content is relevant to your current or future role. You can register now for any of these webinars and then add them to your calendar.

 

Access over 150 high quality courses
Gain access to over 150 courses from BPP.
CAREERS
Professional conduct in relation to taxation
Significant changes made to ethical guidelines for members in respect of tax planning.

Significant changes made to ethical guidelines for members in respect of tax planning. 

The PCRT bodies – ACCA, Association of Accounting Technicians, Association of Taxation Technicians, Chartered Institute of Taxation, Institute of Chartered Accountants in England and Wales, Institute of Chartered Accountants of Scotland and Society of Trust and Estate Practitioners – have issued revised Professional Conduct in Relation to Taxation guidance.

Significant changes are being made to ethical guidelines for all members of PCRT bodies in respect of tax planning.

In particular the seven professional bodies which jointly issue Professional Conduct in Relation to Taxation (PCRT) have agreed that the factsheet (which will come into effect on 1 March 2017) will make clear that our members ‘must not create, encourage or promote tax planning arrangements or structures that (i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation,  and/or (ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation'.

This is a significant development. PCRT has long set out professional and ethical standards which require more of our members than the letter of the law demands, and rightly so. We should be proud that we apply these higher standards to ourselves.

But this latest addition to our ethical guidelines goes further than previously, recognising that what it means to behave with integrity and professionalism in the context of tax planning has changed over time and that we must take account of this or else risk falling out of step with what is expected of us by the public and consequently forfeiting trust and respect.

We have also been asked to act in this area by the government. On 19 March 2015 Treasury ministers challenged the professional bodies to ‘take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance to protect the reputation of the tax and accountancy profession and to act for the greater public good’.

This was not a challenge we could lightly ignore even had we wished to.

The factsheet will replace Technical Factsheet 166 and is part of a regular update which incorporates legislative changes, case law and current views on conduct.

ACCA – legal services in England and Wales
Please take our short survey about reserved legal activities.

ACCA needs to consider the future needs of its SMPs and how its regulatory framework can best support the sector by exploring new forms of authorisation in legal services. We are therefore looking at the options to invest in licensing and regulating legal services for our members. This may provide you with the opportunity to participate in the legal services market in England and Wales and extend your service offerings. Increasing competition and access to legal services is positive for the accountancy profession and in the public interest. 

The legal services sector in England and Wales underwent significant regulatory change in 2007 with the implementation of the Legal Services Act 2007 (the Act). The Act sets out six Reserved Legal Activities that can only be carried on by persons authorised by an Approved Regulator under the oversight of the Legal Services Board (LSB). The Act also allows lawyers and non-lawyers to offer services covering multi-disciplines (including Reserved Legal Activities) through Alternative Business Structures (ABS), and non-lawyers (eg accountants, family members, managers) to take financial interests in such firms. 

ACCA has been an Approved Regulator for the Reserved Legal Activity of probate since 2009. However, it does not currently authorise members for probate activities. ACCA is not an Approved Regulator for the other five Reserved Legal Activities or a Licensing Authority for ABS. 

In September 2014, ICAEW started authorising its members (and others) to provide probate services and licensing firms as ABS. ICAEW has recently applied to the LSB to regulate the remaining five Reserved Legal Activities (although in the case of conduct of litigation, rights of audience and reserved instrument activities its remit would be restricted to taxation). 

ACCA did not put in place the necessary regulations and procedures to authorise members for probate activities due to perceived risks and costs concerning oversight by the LSB and also uncertainties relating to changes in legal services regulation. However, circumstances have changed and ACCA is currently engaging with the LSB in order to establish a proportionate framework for probate regulation and LSB oversight. We are also considering applying to the LSB for Approved Regulator status in respect of other Reserved Legal Activities.

Request for feedback
In order to help us to deliver ongoing member value and gauge the demand for further legal services accreditation, we invite you to complete this short survey about reserved legal activities. Your feedback will assist ACCA with proposed applications to the LSB to regulate reserved legal activities. 

It should take around 10 minutes to complete and the questionnaire will be open until 12 December 2016. 

Your responses will remain completely anonymous and only aggregate data will be shared with the LSB and/or published.

Audit continuity partners
Will your firm join our new register of continuity partners?

As part of ACCA’s monitoring reviews, we are coming across a number of firms that are struggling to find a continuity partner – particularly those firms that are registered auditors. 

To help firms with this process, ACCA intends to create a register of members with audit registration that are willing to act as continuity partners for other ACCA registered auditors.

If you would be willing to be such a continuity partner, please email supportingpractitioners@accaglobal.com with your membership number and confirm that you are willing to be on the register.

Any member seeking a continuity partner can also look on ACCA’s online directory of firms for a suitable continuity partner or post on ACCA’s Practice Sector LinkedIn group 

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