Technical and Insight
Tax allowances available when working from home

Employees and self-employed can claim certain reliefs when they work from home.


This is the first of two articles on this subject area. Also see Business expenses when working from home

 

The reliefs employees and those who are self-employed can claim when they work from home will depend on a number of conditions.

 

Employees working from home

It is a condition for tax relief under section 336 ITEPA 2003 that the expenses must be incurred ‘wholly and exclusively’ in the performance of the employee’s duties. In practice that means that tax relief can only be allowed for:

  • the additional unit costs of gas and electricity consumed while a room is being used for work
  • the metered cost of water used ‘in the performance of the duties’ (if any). As regards water rates no tax relief would be available
  • the unit costs of business telephone calls (including ‘dial up’ internet access).

 

From 6 April 2012 HMRC will normally accept that employees who satisfy the conditions for relief are entitled to a deduction of £4 per week (or £18 per month) for each week/month that they are required to work at home, without having to justify that figure.

 

Employees who wish to deduct more than £4 per week (or £18 per month) will be expected to keep records and to be able to show how their figure has been calculated.

 

Before 6 April 2012 lower weekly figures were allowed as above; these amounts were £2 per week for 2006/07 and 2007/08 and £3 per week for 2008/09 to 2011/12.

 

For 2006/07 the following expenses are not treated as allowable for employee tax purposes, because the employee will be required to make the payments whether or not they are working from home:

  • council tax (rates)
  • rent
  • water rates
  • mortgage interest/endowment premiums
  • insurance for the property or its contents

 

HMRC will usually accept that an employee is entitled to claim allowable expenses under section 336 ITEPA 2003 if all of the following conditions apply:

  • the duties that the employee performs at home are substantive duties of the employment (these are duties that an employee has to carry out and that represent all or part of the central duties of the employment)
  • those duties cannot be performed without the use of appropriate facilities
  • no such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect him or her to travel to those premises on a daily basis)
  • at no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

 

Self-employed working from home – simplified expenses

Self-employed can calculate their allowable expenses using a flat rate based on the number of hours they worked from home each month. This simplified method can only be used if the person works for 25 hours or more a month from home. The allowance is a flat rate based on the number of hours worked from home each month as follows:

 

Hours worked at home per month                         Flat rate allowed per month

25 to 50 hours                                                          £10

51 to 100 hours                                                        £18

101 hours or more                                                   £26

 

If the flat rate allowance is used, this is instead of taking the proportion of expenses relating to the home. Although even if the flat rate is used the self-employed person can also claim telephone and internet costs which relate to the business.

 

The flat rate allowance may vary throughout the year if the self-employed person works for different hours in his/her home from month to month.

 

For example a self-employed person may work from home for 20 hours per month for three months, for 30 hours per month for four months and for 55 hours per month for five months. The total flat rate allowances which can be claimed would be £0 x 3 plus £10 x 4 plus £18 x 5 being £130 in total for the year.

 

Simplified expenses (if living at your business premises)

Some self-employed people use the business premises as their home (eg a guest-house, bed and breakfast, care home etc.). There is a simplified method of determining the business expenses based on the number of people living in the household of the self-employed person.

 

The total costs of running the premises are determined then a flat rate is deducted for ‘personal use’ and the balance can be claimed as a business expense. The flat rate deduction is based on the following table:

 

Number of people in household                Flat rate per month

1                                                                      £350

2                                                                      £500

3 or more                                                       £650

 

Example

Mr X is self-employed and his business is running a care home. He lives in the care home with his wife and son for 10 months of the year, and he lives in the care home for the other two months of the year without his wife and son.

 

The total costs of running the premises (such as light and heat, insurance, repairs, security etc.) for the year is £25,000. The personal use based on the flat rate system is £650 x 10 plus £350 x 2 which is £7,200 for the year. Therefore the business use which can be claimed by Mr X is £25,000 less £7,200 = £17,800.

 

General rule, apportioning the expenditure

The general tax rule is that an expense is only allowable as a deduction for self-employed purposes if it is incurred ‘wholly and exclusively for the purposes of the trade’.

 

Wholly and exclusively does not mean that:

  • trade expenditure must be separately billed, or
  • part of the home must be permanently used for trade purposes and not used for any other purpose at any other time.

 

Wholly and exclusively does mean that when part of the home is being used for the trade then that is the sole use for that part at that time.

 

In many cases there is more than one method of arriving at a reasonable apportionment, although some methods may be more appropriate for a particular type of expense. The following are some examples of expenditure and methods of apportioning those costs.

 

In general, fixed costs relating to the home can normally be apportioned based on area and time; these would include insurance, council tax, mortgage interest, rent, repairs and maintenance. Also consider:

  • insurance can usually be apportioned on an area and time basis. However, if the trade is covered by a separate policy that cost is allowed in full
  • council tax or business rates can be apportioned between business element and non-business element on an appropriate basis
  • mortgage interest can be claimed if part of the home is used solely for the trade, then it could be apportioned on an area and time basis. Repayment of capital is not allowed. If profit is computed using cash basis, the maximum that can be claimed each year is £500 for interest and costs of obtaining finance
  • rent can be claimed when the home is rented from a landlord and part is used solely for trade purposes. This would usually be on an area and time basis. An individual cannot charge rent to his/her own self-employment business
  • repairs and maintenance that relate solely to part of the house that is not used for the trade are not allowable. Although if a room is used solely for trade purposes, then the cost of redecorating that room could be wholly allowable. General repairs and maintenance (such as repairs to the roof) could be apportioned on an area and time basis
  • cleaning may have an apportionment based on the facts. For example a trader may ask the cleaner not to clean the office area of his/her home in which case none of the costs would be allowable. Alternatively, the trade may require specific cleaning requirements in which case a higher proportion of the costs may be claimed, if justifiable
  • heat, light and power can be apportioned on a reasonable basis. The apportionment should reflect the actual usage. If a room is used partly to write up records then an area and time basis may be appropriate, whereas if specialist equipment is used which requires more electricity a higher proportion may be allowed
  • metered water charges may be allowed in cases of heavy usage for the trade, whereas for minor trade use, such as writing up books, none of the water charge would normally be allowable
  • telephone costs for business calls are allowable. A proportion of the line rental (based on the ratio of trade use to total use). Some packages are all inclusive of telephone, broadband and possibly television in which case a reasonable apportionment should be allowable for the business use of telephone and broadband; in most cases the costs relating to the television will not be allowable
  • broadband/internet connection costs are allowable to the extent that the service will be used for business purposes. An apportionment similar to the telephone usage basis should be used. 

 

Possible effect on CGT private residence relief

If part of the home (property or grounds) is used exclusively for the purposes of a trade or exclusively for the purposes of employment this would reduce the capital gains tax private residence exemption when the property is sold. The reduction in the private residence exemption would not be required if the part of the home which is mainly used for business purposes is also used for non-business purposes from time to time.

 

For example, an accountant may have an office at his/her home which is used for business purposes. The office has a telephone (either landline or a mobile device) and the accountant makes both business calls and non-business calls from the office. In this example it could be argued that the office is not used exclusively for business purposes and therefore there would be no need to reduce the private residence exemption for capital gains tax purposes.

 

HMRC has information on this subject in its manuals as follows:

 

Specific deductions: use of home: contents

 

Simplified expenses: use of home for business purposes

 

Simplified expenses: private use of business premises

 

Deductions: expenses other than travel: table of contents: expenses from F to Z

 

 

This is the first of two articles on this subject area. Also see Business expenses when working from home

Nothing exotic about this dancer’s tax return

We revisit the court case that revealed what can – and cannot – be deducted as expenses.


We revisit the court case that revealed what can – and cannot – be deducted as expenses. 

 

Always look at the facts of any deductibility of expenditure and fully explore the reasons for any claim as in Daniels v HMRC where deductibility of an exotic dancer's clothing and underwear and other items, including cosmetics and hair extensions, was under scrutiny.

 

Essentially, the issues in dispute concerned the deductibility of travelling expenses incurred by Ms Daniels (a self-employed exotic dancer) between her home and Stringfellows (a nightclub in central London) and of certain other items including clothing, lingerie, dry-cleaning, make-up, beauty treatments. These costs were claimed as allowable in Ms Daniels’ tax returns for the years in dispute.

 

Travelling expenses

Normally the cost of travel between the business base and other places where work is carried out is an allowable expense, while the cost of travel between the taxpayer’s home and the business base is not allowable. Let’s look at these two contrasting cases:

 

Horton v Young [1971] 47 TC 60

In this case Mr Horton, a subcontracting bricklayer, claimed travel from work to site as an expense. Mr Horton’s tools were kept at home and his books were written up at home. In addition, he held meetings at his house with contractors to establish fees. The travel included daily travel to building sites, picking up other bricklayers and inter-site travel. The daily travel varied between five and 55 miles. Each project would take no more than three weeks. There was no office at the sites.

 

The Court of Appeal held that Mr Horton’s home was his ‘business base’ and as a result the whole expense was allowable as it satisfied the wholly and exclusively rule. In conclusion, travel expenses in relation to itinerant work or for journeys between places of business for purely business purpose are deductible.

 

Samad Samadian v Revenue & Customs [2013] UKFTT 115

In this case Dr Samadian was a self-employed consultant geriatrician who was also a full-time consultant working for two NHS hospitals. Dr Samadian claimed the costs of travelling between private clinics and NHS hospitals and between private clinics and his home.

 

Although the judge accepted that Dr Samadian did have a place of business at home, there was a ‘mixed object’ in the travelling between home and the private hospitals. Because the office was also Dr Samadian’s home, part of the object of the journey was to allow him to maintain a home in a location separate from his place of employment. So the judge decided that the cost of these journeys was non-deductible.

 

The journeys between the NHS hospitals and the private hospitals were also regarded as non-deductible on the grounds that the travel was not an integral part of the business itself.

 

In conclusion, travel expenses for journeys between home (even if the home is used as place of business) and places of business are treated as non-deductible (other than in very exceptional circumstances).

 

In the case of Ms Daniels, the first-tier tribunal followed the upper tribunal’s decision in Samadian and ruled that her travelling expenses were not allowable because they had a dual purpose. They were incurred to travel from home to work and back again, as well as from her home office location to her place of work at the club in London.

 

Items including clothing, lingerie, dry-cleaning, make-up, beauty treatments and hairdressing (including hair extensions)
Normal everyday clothing is not allowable because of the duality of purpose as established in Mallalieu v Drummond HMRC. In this case the judge concluded that even though Ms Mallalieu's sole conscious motive was to comply with professional rules, this was not the relevant test. The clothes were also used for ‘warmth and decency’ and therefore no apportionment was possible.

 

By contrast, uniforms, theatrical costumes etc that can only be used on stage are allowable and not deemed to be normal everyday clothing [BIM 37910]. Ms Daniels’ evidence was that her appearance was a very important part of her role at Stringfellows. The costumes and dresses that she wore were not the type of clothing that would be suitable to be worn outside the club. Her dresses were long, see-through and skimpy. They were frequently decorated with sequins so that they dazzled under the lights. In addition, her costumes would include nurses' and schoolgirls' uniforms for ‘fancy dress’ evenings. Her shoes had six to ten inch stiletto heels and were made so that it was possible to hang upside down from a pole when her performance included pole dancing. Her high-heeled shoes tended to wear out quickly.

 

The tribunal accepted Ms Daniels’ evidence that the clothes she bought to perform at the club could not be worn outside, and concluded that these items were solely for the purposes of her business and therefore deductible.

 

As regards the cost of cosmetics, these had to be heavily applied in a theatrical (over the top) manner in order to last the whole evening of Ms Daniels’ performances. She did not wear that make-up outside her work.

 

In respect of perfume, Ms Daniels said that she did not wear perfume other than for her performances. Her performances involved ‘getting naked in front of drunken men’ and she did not want perfume to feature in her everyday life to remind her of her dancing job.

 

It was held that while most women (irrespective of what work they do or whether they work at all) wear make-up of some sort, a stage performer has to wear a different level of make-up and so stage make-up is therefore allowable as part of a performer’s costume. In the judgement the court stated that ‘the fact that Ms Daniels could have worn make-up and the perfume outside her work is not the correct test. Her evidence was that she did not do so and that she bought those items solely for her performances. We consider that she incurred the expenditure wholly and exclusively for the purposes of her performances and that it was therefore deductible.’

 

As regards the cost of hairdressing, hair extensions and various beauty treatments (eg manicures, fake tanning and waxing), HMRC’s own practice as outlined in its own Manuals (BIM50160) states ‘where a performer claims a deduction for the cost of cosmetic surgery to correct some perceived inadequacy in their appearance then you need to examine whether one of the purposes in incurring those costs was to gratify their private wish to improve/change their appearance. If it was, no deduction will be due. Some performers may, however, be able to show that expenditure on cosmetic surgery has been incurred solely for professional purposes. Such expenditure may be allowed.'

 

The court considered that the purpose of Ms Daniel’s expenditure was to enhance her appearance for the purposes of her performances. The effect may have been that her appearance in her everyday life was also enhanced, but that was not the purpose in incurring the expenditure. As a result, the expenditure for hairdressing and other beauty treatments was deductible.

 

Receipts or other primary records

Although a cashbook was provided showing expenses totalling £8,629.48 and which were claimed as an allowable deduction, receipts and invoices were provided which substantiated less than 10% of the amount claimed.

 

Ms Daniels stated that it was not possible to collect and retain receipts for all expenses as in many cases her purchases were made from market stalls, whose stallholders did not provide receipts.

 

The judge decided that while Ms Daniels should have kept better records, he had no reason to believe that she had not incurred the expenditure and, as a result, the claims should be accepted regardless of the lack of invoices. 

 

The validity of a penalty assessment under Schedule 24 for ‘carelessness’

On penalties, the court agreed that HMRC was justified in charging penalties for the incorrectly claimed travelling expenses. The argument that Ms Daniels relied on her accountant to prepare and submit the tax returns was not accepted. However, the penalties were reduced on the basis of one HMRC officer’s ‘unreasonable approach’, which had ‘soured the relationship’ with the taxpayer and her adviser.

Reimbursement or disbursement

Knowing the difference is important in getting the right VAT treatment.


Knowing the difference is important in getting the right VAT treatment.

 

The difference between reimbursement and disbursement is significant from the VAT point of view as reimbursements are subject to VAT, while disbursements are outside the scope of VAT. 

 

If a business is trading very close to the VAT registration threshold, an incorrect classification of expenses could mean that the VAT registration threshold is breached sooner than anticipated.

 

HMRC defines ‘disbursements’ as ‘a payment made to suppliers on behalf of your customers’.

 

‘To treat a payment as a disbursement all of the following must apply:

  • you paid the supplier on your client’s behalf and acted as the agent of your client
  • your client received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your client’s responsibility to pay for the goods or services, not yours
  • you had permission from your client to make the payment
  • your client knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your client when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services.’

 

An example of disbursement would be a solicitor paying the stamp duty land tax (SDLT) on behalf of his client. This is clearly a client’s expense, as SDLT is the buyer’s responsibility not the solicitor’s. This is undoubtedly a disbursement.

An example of reimbursement would be the cost of travel, stationery or other ‘out of pocket expenses’ added by a consultant on top of his ‘hourly consultancy fee charge’. From HMRC’s point of view, those extra costs are reimbursements and as a result VAT should be added to them as they represent costs that the business incurs itself and are not disbursements.

The key consideration is whether the expense belongs to the supplier’s customer, rather than the supplier.

 

Court cases

In Brabners LLP v The Commissioners for Her Majesty’s Revenue & Customs [2017] UKFTT 666 (TC), the First-tier Tribunal considered whether electronic property search fees should be treated as part of overall client bills (and thus subject to VAT), or represented disbursements (outside the scope of VAT).

 

It was found that because the solicitors were using the information as ‘part and parcel’ of its overall service, the search fees should not be treated as disbursements.

 

The solicitors were not simply acting as a middle man to collect the search fee from the client; they used the results as part of their advice to clients. HMRC has confirmed that VAT would not be chargeable by either the search company or the solicitor if they passed it on 'without analysis or comment'. However, if the firm provides advice or makes a report on the basis of the search, HMRC’s view is that the fee will form part of the charges for its services.

 

However, a distinction should be drawn between this case and Barratt, Goff and Tomlinson (A firm) v HMRC (Law Society Intervening  [2011] UKFTT 71 (TC), a case which was referred to in the Brabners judgement above. In Barratt, the obtaining of medical records was a disbursement because the solicitor could only obtain the documents with the client’s consent, and the client was considered as the ‘owner’ of the information within the document. The solicitor was ‘merely an intermediary used to facilitate payment'. 

 

In the case of Ellon Car Clinic Ltd [2017] (TC5813)  the First-tier Tribunal considered whether a garage which had subcontracted MOT tests to an MOT approved centre had acted as agent for the car owners, or whether output tax was due on the full fee charged by the garage to their clients.

 

Facts of the case

The company was not licensed to carry out MOT tests on customers’ vehicles, so subcontracted these tests to other garages, paying between £40 and £54.95 per test. It charged its customers a standard fee of £49.95 (no VAT), which HMRC assessed as being subject to 20% VAT. The company did not itemise the test fees as a separate entry on its sales invoices.

 

HMRC assessed output tax on the full fee, on the basis that the invoices did not meet the conditions of a disbursement.

 

However, the judge found that every customer knew that the company could not supply an MOT test. Even if the terms of the invoice did not show the involvement of the second garage, an agency arrangement was evident and the supply was clearly between the testing garage and the customer.

 

This was a partial victory for the company, as it was found that the only taxable element of the supply in relation to the MOT tests was the element which exceeded the amount actually paid. No output tax was due on deals where the company made a loss.

 

Please note that HMRC has now updated their guidance in order for garages to understand how to avoid the trap of being treated as principals.

 

Making tax digital (MTD) and disbursements

No changes have been made to the VAT rules other than those that relate to record keeping and filing.

 

The information submitted to HMRC contains the same nine boxes as before.

 

The current filing and payment deadlines for VAT are the same as before.

Self assessment and tax returns from directors

Not all directors now have an obligation to file a tax return.


Not all directors now have an obligation to file a tax return.

 

As we highlighted in July, HMRC has made changes to its guidance on the requirement to file tax returns by directors. The guidance removed the previous statements suggesting all directors have an obligation to file tax returns.

 

The amendments to HMRC’s guidance followed the conclusion of Mohammed Salem Kadhem v HMRC [2017] TC05929in which the tribunal ruled that the ‘guidance notice [did] not accurately reflect what the law says’.

 

HMRC will stop automatic self-assessment notices for directors. HMRC has stated that ‘if an individual has received a notice to file and has no other taxable income to report, they can ask for the notice to file to be withdrawn. However, HMRC may decide that it still requires a return and if so, the return must be submitted, otherwise penalties may be incurred.’

 

We suggested in July that tax checklists are amended so directors are asked – where their income is under £50,000 – if they would wish for a request to be sent to HMRC asking for the notice to file to be withdrawn.

 

Benefits in kind: employee-used assets

There’s a lot to consider when it comes to employees using assets for private use.


There’s a lot to consider when it comes to employees using assets other than a car or van for private use.

 

What is the taxable benefit in kind to an employee or director when the employer allows the employee to use an asset for private use? The employee will have a taxable benefit in kind of the 'cash equivalent of the benefit' which is:

  • The annual value (or if higher the rent or hire charge paid by those providing the benefit)
    Plus
  • Any expenses related to the asset’s provision (excluding the cost of acquiring or producing it and excluding also any rent or hire charge payable for the asset by those providing the benefit)
    Less
  • Any part made good by the employee to those providing the benefit.

HMRC will treat an asset as being available for private use unless private use of the asset is specifically prohibited and no private use is, in fact, made of it. 

 

The annual value of the use of an asset is:

  1. For land, its 'annual rental value' under ITEPA 2003 section 207
  2. For assets other than land, cars and vans, 20% of market value at time the asset was first provided as a benefit.

 

Making good is where an employee gives something (usually a cash payment) to the person providing the benefit-in-kind in return for it. With effect for all benefits provided in 2017/18 or subsequent years, a general deadline of 6 July following the tax year in which the benefit is provided is introduced by which employees need to make good any part of the cost of the benefit if a deduction is to be allowed for that tax year. Voluntary payrolled benefits have their own deadlines for making good.

 

Also from 2017/18, the taxable value and the value on which Class 1A NICs are payable is reduced only if the benefit is made good by 6 July following the end of the tax year in which the benefit in kind is provided. If the employee wants to make good by waiver of remuneration the 'making good' payment will need to be made from net earnings after deduction of PAYE and NI in the normal way.

 

What happens when an employer, who sells goods or services in the course of their business, also provides the benefit of those goods and services to their employees free or at a lower price than they are normally sold?

 

General case

The expense to be included in the calculation of the cash equivalent of an in-house benefit is the marginal additional expense of providing the benefit. This is the expense that the employer would have saved if the benefit had not been provided to the employee. This was established in the case of Pepper v Hart in 1992.

 

School fees

HMRC will normally accept that no additional benefit arises where teachers pay 15% or more of normal school fees if their child or children attend the school in which they teach. 

 

HMRC has indicated that nil or negligible cost arises in the following cases:

  • rail or bus travel by employees (provided fare-payers are not displaced);
  • goods sold to employees for less than the wholesale price; and
  • provision of professional services not requiring additional staffing (excluding disbursements).
  •  

 

Transfer of a used asset

Where the benefit is the transfer of an asset after it has been used or has depreciated since the transferor acquired it, the cost of the benefit is the market value at the time of the transfer.

 

If the asset (other than a car or van) was first applied for the provision of any benefit for a person or for members of his family or household by reason of his employment after 5 April 1980 – and a person (whether or not the present transferee) has been chargeable to tax on its use – the cost of the benefit (unless a higher benefit is obtained by taking market value at the time of transfer) is its market value when it was first applied less the total cost of the benefit of the use of the asset in the years up to and including the year of transfer. This alternative does not apply to computer equipment or cycles for which different rules apply.

 

Apportionment of the cash equivalent of the benefit

For 2017/18 onwards, if the asset is unavailable for private use for part of the year, then the cost of the benefit (computed as above) is time-apportioned by reference to the number of days in the tax year on which the asset is available for private use.

Also for 2017/18 onwards, if an asset is available for more than one employee’s private use at the same time, the cost of the benefit for each employee is reduced on a just and reasonable basis, with the proviso that the aggregate for all such employees cannot exceed the total cost of the benefit (before any apportionment).

 

Typical example

On 5 April 2019  employer A Ltd sold some furniture to their employee Mr B for £200. A Ltd had previously leased the furniture to Mr B for £10 per month from 6 April 2017 when the market value was £2,000. At 5 April 2019 the market value of the furniture was £500. A Ltd bought the furniture on 5 April 2017; its business is not connected with the manufacture of furniture.

 

View this worked example for further insight

 

 

 

 

 

Payrolling benefits - the positives and the negatives

Do your clients payroll taxable benefits for clients? A quick examination of the positives and negatives.


Do your clients payroll taxable benefits for clients? A quick examination of the positives and negatives of doing so.

 

In April 2016 HMRC introduced the facility for employers to payroll the taxable benefits provided to their employees. This is voluntary for employers to apply for if they so choose. If an employer wants to use this they must register with HMRC before the start of the tax year, therefore if they want to use it for the tax year starting on 6 April 2020 they need to register by 5 April 2020.

 

During the registration process the employer will tell HMRC which benefits they want to payroll.

 

The main benefit of this facility is that the employer will not have to submit a form P11D. Also the tax codes for the employees supplied by HMRC to the employer using the Notice of Coding should not change as often. Employers will only need to complete forms P11D for the benefits that have not been payrolled.

 

The main disadvantage is that the employer needs to calculate the ‘cash equivalent’ of the benefit and then spread this over the year so that the correct amount is shown in each payroll.

 

The employers’ class 1A National Insurance will still be due on the normal due date for payrolled benefits and any other benefits, using the usual form P11D(b) procedure.

 

The employer can payroll all benefits except employer-provided living accommodation and interest free and low interest (beneficial) loans and can register online for these payrolling benefits.

 

HMRC has issued guidance on payrolling benefits.

 

 

 

 

Taxing times for children?

A detailed look at taxation and children.


A detailed look at taxation and children.

 

Subject to some exemptions, a child may have taxable income which is chargeable; however, the child will have full entitlement to personal allowances and reliefs.

 

The rights and obligations of a child with taxable income rest with the child, although his/her representatives are able to act on the child’s behalf under general law.

 

A child is less than 18 years old.

 

In England and Wales the testamentary age is 18, whereas in Scotland it is 12. This is the minimum age people are legally allowed to make a will. There are two exceptions which are:

  • soldier on active duty
  • sailor at sea.

 

In these limited circumstances the child can be any age. These exceptions have been in place since 1918, the year World War 1 came to an end. It was realised that young people can be placed in dangerous situations during the course of active duty, or whilst working at sea, and should have the opportunity to record their wishes.

 

The youngest age a child can work part-time is 13, except children involved in areas such as television, theatre and modelling. A performance licence is required in these circumstances.

 

Children can start full-time work only when they have reached the minimum school leaving age. The specific dates are different for England, Northern Ireland, Scotland and Wales, although the child has to be over 16 years of age.

 

Children and companies

There is no statutory provision prohibiting a child from owning shares. However, some companies will not accept shareholders under the age of 18 years by provision in their articles or terms of issue.

 

The issue to children of shares in the family company was held to be a settlement with the result that dividends were taxable as the parents’ income (Bird v HMRC [Sp C 720]).

 

Subject to very limited exceptions, a child under the age of 16 cannot be appointed as director of a company (CA 2006 s157).

 

Gifts to children

If a parent gives an asset to their child then the income arising on that asset (subject to certain exceptions) will be treated as income of the parent and not the child for tax purposes. This would cover assets such as money (earning interest), shares (receiving dividends) and property (receiving rental income). The initial transfer would be subject to capital gains tax as the transfer would be to a connected party and therefore would be deemed to occur at market value, then the income would be treated as the parent’s income until the child reached the age of 18, after which the income would be treated as that of the newly adult son/daughter. However, if the aggregate amount that would otherwise be treated as the parent’s income for that year in relation to any particular child does not exceed £100, then that income is not treated as the parent’s income but is treated as the child’s income.

 

Children can earn up to £100 per annum in interest on money given to them by a parent and that income will be treated as income of the child for tax purposes. If the child gets more than £100 in interest from money given by a parent then the parent will have to pay tax on all the interest if it is above their own Personal Savings Allowance and that parent will need to put the entry on their individual self-assessment tax return.

 

This only applies for transfers between parents and children, so if a grandparent gifts an asset to a grandchild the future income from that asset would be treated as that of the grandchild for tax purposes.

 

Child Trust Funds

A Child Trust Fund (CTF) is a long-term tax-free savings account for children. There is no tax on the income or gains of a CTF. Similarly, there are no tax charges when the fund matures on the child’s 18th birthday. No CTFs can be opened for children born after 2 January 2011. With effect on and after 6 April 2015, all the savings in a CTF can be transferred to a junior ISA for the child in question, with the CTF then being closed.

 

Anyone (including the child) may make payments into the CTF, although there is a limit of £4,368 (£4,260 before 6 April 2019) for any one year (the subscription year). A subscription year is the period from the opening of the account to the child’s next birthday, and each succeeding period of 12 months.

 

Withdrawals from the account are not permitted before the child reaches the age of 18 except in three circumstances as follows:

  • the account provider is allowed to make deductions in respect of management charges and incidental expenses.
  • where the child is terminally ill.
  • where the child dies before reaching 18.

 

Junior ISA (Individual Savings Accounts)

There are two types of Junior ISA:

  • cash Junior ISA
  • stocks and shares Junior ISA.

 

The child can have one or both types of Junior ISA. All income and gains are tax-free.

 

The Junior ISA belongs to the child; the parents or guardians will usually manage the account, although the child can manage the Junior ISA if over 16 years old.  

 

Children and contracts

For a contract to be valid all parties must have the ability to understand the terms and any obligations of that contract. In general children under 18 lack the capacity to enter into a contract unless the contract is for necessities (food and clothing) or education (eg apprenticeship or schooling) or employment and the terms are fair and benefit the child.

 

The law presumes that children under seven years of age do not have the power to enter into a contract. Although a minor between seven and 18 can enter into a contract there is a presumption that they do not understand the implications of entering into the contract. This means that the minor is able to cancel a contract at any time before reaching the age of 18, and for a reasonable period afterwards without valid reason.

Don’t be caught out by the December self assessment deadline!

Are your clients aware of the SA filing deadline this month?


Are your clients aware of the SA filing deadline this month?

 

Self-assessment deadlines are looming fast. Although the tax returns filing date is 31 January 2020 for 2018/19 returns, do not forget the 30 December for clients who are eligible to pay their tax through PAYE.

 

This means the clients do not need to pay any tax in January. They can pay their tax through PAYE if they meet all the following three conditions:

  • they owe less than £3,000 on their tax bill
  • they already pay tax through PAYE, for example they’re an employee or they get a company pension
  • they submitted their paper tax return by 31 October or their online tax return online by 30 December.

 

How HMRC does collect tax?

If all the above conditions are met, HMRC will automatically collect what they owe through their tax code, unless they’ve specifically asked them not to (on their tax return). Nevertheless HMRC will not be able collect the tax through PAYE tax code if:

  • they do not have enough PAYE income for HMRC to collect it
  • they would pay more than 50% of their PAYE income in tax
  • they would end up paying more than twice as much tax as they normally do.

 

Additionally self-employed clients cannot pay their Class 2 National Insurance through their tax code, unless it’s been due since before 6 April 2015.

 

How deductions are made?

The tax due is taken from salary or pension in equal instalments over 12 months, along with other usual tax deductions. The majority of clients rely on their accountant to make sure that their tax code is correctly set up for the next tax year for these deductions – it is good practice to ensure your clients are informed.

 

Useful links:

HMRC Self-Assessment tax returns deadline 2018/19

 

Mergers and acquisitions – the risks for M&A accountants

At the heart of any M&A transaction will be an accountant, but what does the M&A accountant do?


The corporate world is awash with merger and acquisition (M&A) activity as companies look to expand into new areas, diversify their product offerings, extend their territorial reach and use economies of scale to improve their bottom line. At the heart of any M&A transaction will be an accountant, but what does the M&A accountant do?

 

First, there is a significant amount of preparation, documentation and due diligence that goes into the merger and acquisition process. At the forefront of this will be the report and accounts – companies contemplating a potential purchase will want to know exactly how healthy the financial position of their future partner or target is. This initial overview will help establish whether the merger or acquisition is worthwhile, financially secure and ultimately, a productive move.

 

From the acquirer’s point of view, the M&A accountant effectively acts as financial translator, interpreting and explaining the accounts information of a target company to help them understand the financial position of their potential acquisition. A working knowledge of the corporate sector, relevant industry and territory in which the acquirer and target operate is essential. Furthermore, if a transaction is taking place across jurisdictions, a comprehensive understanding of the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) in other jurisdictions is required.

 

From the target’s perspective, the M&A accountant can assist in the preparation of the report and accounts, the presentation of financial explanations and the collation of any requisite information. Mergers and acquisitions can be highly complex and involve a variety of methods of accounting, all of which require specialist expertise.

 

Given the high values at stake how does the professional indemnity insurance (PII) market view this activity?

It is well known that the PII marketplace is undergoing significant change at the moment with decreased appetite for risk, increased premiums and some insurers withdrawing from the market altogether. With this change comes increased scrutiny as underwriters look to fully evaluate the exposures they are underwriting. Certainly the spotlight has focused somewhat on those accountants carrying out M&A activity in recent months. This is primarily driven by claims data which has identified M&A advice as a high risk area and vulnerable to litigation.

 

Particular areas of concern include the following:

  • transaction values/deal sizes
  • whether M&A advice is typical for the practice or whether advice has been given as a one off. If a one off, it is important to detail why this was and the extra stages of risk management the practice went through
  • names of the clients and the fees that were charged
  • whether the practice specialises in a certain sector. If so, what this is and why. If not, what procedures are in place to ensure that the relevant experience/expertise is available?
  • what advice is actually being given ie does this relate to due diligence or to simple forecasting and change management. It is important to demonstrate this precisely to an underwriter rather than just disclosing ‘M&A’ work
  • how the M&A advice is managed internally. What risk management procedures are in place, how are these monitored and updated? Who is responsible for the sign off of the advice and what experience/qualifications do they have?
  • whether there are any referral agreements in place, formal or informal. How are these managed and what is the volume of enquiry?

 

In light of the above, we typically see underwriters asking further questions and it is therefore important for a practice with any involvement in this type of work to fully articulate it when completing a renewal presentation. A proposal form alone is unlikely to be enough.

 

What are the common areas of claim and what are red flags for under-writers?

Like any accounting activity (eg audit, payroll, bookkeeping, etc.) there are certain areas where claims are more likely to occur. These in turn present red flags to insurers. Areas that readily re-occur with regard to M&A activity include:

  • failure to identify financial problems within a target company
  • negligent due diligence which causes a ripple effect through the transaction
  • over/under valuation of shares based on the financial position of the target
  • hidden liabilities becoming apparent after the transaction has completed
  • the merger not bringing about the anticipated cost savings originally identified
  • timing – if the deal does not go through on time this can have a knock-on effect and tax advantages may be lost.

 

Acquiring companies are most likely to be substantial organisations with deep pockets, and so the cost of a claim for insurers tends to be expensive. Moreover, it is not always the claim payment that insurers are nervous about; defence costs can also spiral quickly out of control.

 

If you would like any assistance with how to present your risk to insurers, or if you have any questions regarding this article, please contact Ian Saxelby – Producer on 0117 906 5057 or ACCAaccountants@uk.lockton.com

 

Five quick and easy SEO wins

Getting your firm’s website to rank consistently high for key search terms takes hard work, patience and care, whatever you might hear from quick-fix SEO merchants.


Getting your firm’s website to rank consistently high for key search terms takes hard work, patience and care, whatever you might hear from quick-fix SEO merchants.

 

But there are some tweaks you can make without huge amounts of effort that, if not decisive in their own right, can give your search performance a bump.

 

In general, all of these fixes contribute to keeping things tidy, consistent and complete – something accountants, of all people, ought to appreciate.

 

Use keywords, titles and headings

This might seem obvious but if you’re hoping to rank for, say, ‘accountants for farmers’, you’ll want to use that phrase and near matches in page titles, headings and sub-headings.

 

You’d be amazed how many webpages on practices’ websites don’t use the word ‘accountants’ anywhere in the copy, never mind the headings. It’s so easy to do because you know what the subject is, and perhaps you’re even sick of typing the word over and over again.

 

It can also be tempting to go for something witty or oblique because, well, it's fun to write, isn’t it? But Google, clever as it is, hasn’t yet got the hang of interpreting puns or pop culture references.

 

If you want to generate leads via search engines, squash that creative impulse, resist the urge to be coy or subtle, and state clearly what you mean.

 

Link key pages from the main navigation

The navigation bar, or ‘navbar’, usually appears at the top or side of your website and provides users with an easy way to get to the most important pages with a click or two.

 

Google knows that the most important pages are typically linked from the homepage and so a link from the navbar means the content it points to is more likely to rank in search results.

 

So (sticking with the same example) if accountancy services for farmers are a key part of your business model, make sure you’ve got a ‘accountancy for farmers’ page that’s linked from the navbar.

 

Fix your Google My Business listing

If your business goals include targeting local clients and you don’t have an up-to-date Google My Business (GMB) listing, you’re missing a trick.

 

Some people find it a bit fiddly. Others are wary – ‘what if I start getting bad reviews?’ But the fact is that Google reviews, like it or not, is one of the few third-party review sites that people trust. What’s more, its results are now so tightly integrated into Google search results, and Google Maps, that businesses which are listed gain an immediate advantage over those that aren’t.

 

All you need to do in the first instance is claim ownership of your listing and make sure that the information is accurate. Make sure the postal address, web address, phone number and office hours are all correct. At the same time, also ensure they’re consistent with how they’re displayed on your website and anywhere else. Google likes consistency and this may well give you a little boost in terms of credibility.

 

People expect HTTPS

Look in the address bar in your browser and you’ll see a web address beginning with either ‘http’ or ‘https’. HTTP stands for Hypertext Transfer Protocol and the additional S in the latter case stands for ‘secure’. And these days, if your site doesn’t use HTTPS, Google may down-rank it.

 

HTTPS promises a secure connection between a user’s browser and your website’s server.

 

Your in-house IT team or external website provider should be able to handle setting this up for you, if they haven’t already.

 

There might be a slight dip in ranking immediately after the change but it usually bounces back quite promptly.

 

Optimise your homepage

The single most valuable bit of real estate on your website is the homepage – the hub around which everything else revolves and the entry point for most users. With that in mind, you should prioritise the sectors you most want to engage, and the services you’re most keen to push, in the content and layout of your homepage. In practice, that might mean placing information about these sectors or services higher up the page, using headings and subheadings to give them prominence.

 

People are sometimes reluctant to do this because they worry it might suggest to clients that they only offer those services or work with those sectors. As long as all your sectors and services are linked from the navbar, though, this shouldn’t be a concern.

 

One bad habit to avoid

Keyword stuffing – repetitively cramming in key search terms even if it makes the copy confusing or ugly – no longer works.

 

It’s not only a turn-off for users and a signal of amateurism – it’s also ineffectual because Google is too clever these days to fall for it.

 

There’s even a risk that you’ll incur a penalty and see your website disappear from the rankings altogether.

 

In summary

Keep things tidy, keep them consistent and state yourself clearly. If your users can find what they need and understand what’s on offer then the chances are you’ll keep Google sweet too.

 

Get in touch with us if you would like more information at hello@practiceweb.co.uk or call 0117 915 0420.

 

Simple ways to reduce inheritance tax (IHT)

Seven top tips to share with clients.


Seven top tips to share with clients.

 

IHT is a tax on the value of the estate at death but also on chargeable transfers made with various reliefs available. When discussing matters with clients, care is required both during the lifetime and after death. Consider using these six tips.

 

Be clear on the assets in an estate – some are exempt from inheritance tax

For example, Mr A has net assets of £1m when he dies on 30 June 2019. If all these assets are subject to inheritance tax then the inheritance tax due will be as follows:                                                                                                                                                £

 

Value of estate at date of death of Mr A                           1,000,000

Less exempt amount                                                             325,000

Value of estate subject to IHT                                              675,000  

Tax due at 40%                                                                      270,000

 

However, if included in the estate of Mr A, there are some exempt assets which would not be included in the value of the estate when IHT was calculated (for example Mr A has exempt assets of £200,000 and other assets of £800,000 when he dies on 30 June 2019) then:

 

                                                                                                    £

Value of estate at date of death of Mr A                           1,000,000

Less exempt assets                                                                200,000

                                                                                                  800,000

Less exempt amount                                                             325,000

Value of estate subject to IHT                                              475,000  

Tax due at 40%                                                                     190,000

 

Therefore, by holding these exempt assets the inheritance tax payable has been reduced by £80,000. For assets to qualify for this exemption two conditions need to be satisfied:

  • the exemption only applies for certain types of assets
  • these assets need to be held for a minimum period before date of death.

 

Some of these exempt assets are as follows:

  • shares quoted on the Alternative Investment Market (min period: two years)
  • shares in other unquoted trading companies (min period: two years)
  • agricultural land farmed by the owner (min period: two years)
  • agricultural land if let under a farm business tenancy (min period: seven years).

 

Consider options that are available for gifts, for example equity release

The home owner may take out a commercially available equity release loan and make a cash gift which would be treated as a potentially exempt transfer. The loan does not have to be with an external commercial organisation - if there is a wealthy family member, it may be that the loan could be arranged with that person, provided the borrower has not previously made substantial gifts to him or her. The potentially exempt transfer would become exempt if the transferor survives seven years and the loan would be a liability which reduces the value of the estate of the transferor.

 

Make pension contributions to a qualifying non-UK pension scheme

A qualifying non-UK pension scheme (QNUPS) is an overseas pension scheme. The main features of a QNUPS are as follows:

  • contributions into the scheme do not attract tax relief
  • there is no maximum level of contributions, although HMRC may see large contributions as tax avoidance if they affected the individual’s standard of living
  • the member can make withdrawals during his/her lifetime (although these withdrawals would be taxable in the UK as normal pension income) with the remaining balance being passed to their chosen heirs on the member’s death
  • income and gains made by the QNUPS would be subject to tax in the local country where the QNUPS is located
  • the funds in a QNUPS will not be subject to UK inheritance tax unless there is evidence of deliberate tax avoidance
  • QNUPS need to meet the conditions in Statutory Instrument 2010/0051 (Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010).

 

Consider property transfer options

If children live with their parents – and where this is likely to continue for some time – the parents would gift a share of the property to the children. For capital gains this would be a gift to connected parties and so would be deemed to occur at market value for capital gains tax purposes; it may be exempt if covered by the private residence relief of the parents. The children’s acquisition cost would be deemed as the market value at the date of transfer. For inheritance tax purposes this would be a potentially exempt transfer made by the parents.

 

It would give rise to the potential reservation of benefits provisions, which would occur if the parents receive any benefits, other than a negligible one, which is provided by or at the expense of the children connected with the gift. The risk of reservation of benefits provisions can be minimised if the children do not bear more than a fair share of the running costs of the home (for example the parents could continue to meet all the running costs). The risks can also be reduced by not giving too large a share of the home to the children: to this end an equal ownership by all involved may be advisable.

 

Payment by instalments

Payment of inheritance tax by instalments is possible if an IHT liability arises on the transfer of land and buildings; this applies to any kind of land and property wherever it is situated. An election in writing to the board of HMRC may be made to pay the tax due by ten equal yearly instalments where the first instalment is payable on the due date on which the whole tax would otherwise be due. Where the transfer is on death, the first instalment is due six months after the end of the month in which death occurs, even if the personal representatives must otherwise pay tax before that date.

 

Substitution for the value of death

Where land or buildings in a deceased person’s estate is sold within three years (sometimes within four years) after death a claim (on Form 38) may be made for the sale value to be substituted for the value on death. Various conditions are required for this relief to be available as explained in Inheritance Tax Act 1984 sections 190 to 198. The claim should be made not more than four years from the date of death.

 

Transfer to nominated beneficiaries

Funds held in a Self-Investment Pension Plan (SIPP) on the death of the member may be transferred to the 'nominated beneficiaries'. The member should complete an 'expression of wish' form for each pension plan to state to whom they wish the benefit to be paid. The pension plan trustees will usually follow the instructions unless there are exceptional circumstances. An expression of wish form guides the scheme administrators/trustees to exercise at their discretion the stated wishes in the way that the policyholder would have wished. They refer to the most recent form when making a decision.

 

If a policyholder dies before the age of 75, either before or after they start to withdraw benefits, the funds held in the SIPP can be transferred to any nominated beneficiary tax free (before April 2015 this was only possible before the member started to make withdrawals).

 

If death occurs after the age of 75, either before or after they start to withdraw benefits, beneficiaries will be taxed at their marginal rate of tax if funds are taken as a lump sum or income (although it can be transferred to their own SIPP instead).

 

Irrespective of whether the policyholder dies before or after the age of 75 the funds in the pension plan will not form part of the estate for inheritance tax purposes therefore there should be no inheritance tax to pay on the funds in the SIPP.

 

Get more on IHT

In our free series of webinars for practitioners, Paul Soper highlights IHT planning options that cover aspects of IHT planning such as business/agricultural relief, gifts, will variations and other areas. Listen to this webinar now

 

PPR when property is transferred between spouses

Examining - with worked examples - private residence relief when property is transferred between spouses.


Examining - with worked examples - private residence relief when property is transferred between spouses.

 

If a residence is transferred between spouses or between civil partners, of each other and who are living together, whether by sale or by gift, the period of ownership of the transferee is treated by TCGA 1992 s222(7)(a) as beginning at the beginning of the period of ownership of the transferor. This also applies where the residence is transferred from one to the other on death.

 

This provision only applies for the purpose of computing private residence relief. It has no effect on the computation of the gain which arises on any disposal by the transferee spouse or by the transferee civil partner.

 

The following conditions must be fulfilled:

  • the spouse or the civil partners must be living together and the residence must be their only or main residence at the date of the transfer. If the residence passes from one to the other on the death of either of them they must have been living together and the residence must have been their only or main residence before the death of the transferring spouse or civil partner
  • the extended period of ownership is subject to the limit of TCGA 1992 s223(7) for the purpose of computing the relief due on any subsequent disposal.

 

In some situations the extended ownership period will not be to the advantage of the transferee.

 

Example 1

Ann and Andrew were a married couple and lived together in a house which Ann purchased in March 1990, although for the first five years of her ownership the house was rented to tenants. When Ann died the house passed to Andrew, who continued to occupy it as his only residence until he sold it.

 

If Andrew was able to account for the period he owned the house, then private residence relief would be available for this whole period. However, he needs to consider the ‘extended ownership period’ from March 1990 to the date he sold the house. During this extended ownership period the house was rented to tenants which means that the private residence relief will be restricted.

 

Example 2

Bob and Brenda each owned a house when they married on 1 March 1995. After they married they nominated Brenda’s house to be their main residence as from 1 March 1995. Brenda originally purchased the house on 1 September 1990.

 

Brenda died on 1 February 2015 and her house was transferred to Bob at a probate value of £400,000. Bob moved out of the house on 1 February 2015 and moved into his other house which he still owned and this other house became his main residence. The former main residence remained empty until it was sold on 1 January 2019 for £380,000.

 

Bob’s loss on the sale of the house is as follows

Sale proceeds                                  £380,000

Less cost (probate value)               £400,000

Loss                                                      £20,000

 

As private residence relief is available on the property only part of the loss will be an allowable loss. Bob would take over his wife’s period of ownership of the property.

 

Period of ownership 01.09.90 to 01.01.19                     = 339 months

Period of only or main residence 01.03.95 to 01.12.15 = 238 months

Final period allowed                                                      = 18 months

 

The loss is restricted by £20,000 x (238 + 18)/321         = £15,103

The allowable loss is reduced to £4,897

 

The above is explained in HMRC Capital Gains

 

The legislation which deals with ‘private residence relief’ often referred to as ‘principal private residence’ relief (or PPR relief) is Taxation of Chargeable Gains Act 1992 sections 222 to 226. In particular section 222(7) states the following in relation to the period of ownership when there is a transfer between spouses:

 

In this section and sections 222 to 226, ‘the period of ownership’ where the individual has had different interests at different times shall be taken to begin from the first acquisition taken into account in arriving at the expenditure which under Chapter III of Part II is allowable as a deduction in the computation of the gain to which this section applies, and in the case of an individual living with his spouse or civil partner:

 

(a) if the one disposes of, or of his or her interest in, the dwelling-house or part of a dwelling-house which is their only or main residence to the other, and in particular if it passes on death to the other as legatee, the other’s period of ownership shall begin with the beginning of the period of ownership of the one making the disposal, and

(b) if paragraph (a) above applies, but the dwelling-house or part of a dwelling-house was not the only or main residence of both throughout the period of ownership of the one making the disposal, account shall be taken of any part of that period during which it was his only or main residence as if it was also that of the other.

 

Also see Taxation of Chargeable Gains Act 1992

 

Taxation of shares transferred to a director or employee

A quick look at the scope of the employment-related securities regime.


A quick look at the scope of the employment-related securities regime.

 

Shares in companies are commonly used by employers to remunerate directors and employees. These are sometimes transferred under a formal plan which may have written rules which specify when and how many shares will be transferred and sometimes the shares or options are transferred as ‘one-off’ awards.

 

Where employees receive shares or other securities from their employer as a reward for their employment, then the money’s worth of the shares less any payment made by the employee will normally be taxed as earnings.

 

All shares and securities acquired in connection with an employment come within the scope of the employment-related securities regime. The rules also extend to rights or opportunities to acquire securities, and to benefits in connection with shares and securities that are not otherwise chargeable to tax. They cover cases where the securities, or rights to acquire securities, are provided by an entity other than the employer, and where the securities are not directly received by the employee.

 

See these HMRC manuals for more information:

 

Employment Related Securities Manual

 

Employee Tax Advantaged Share Scheme User Manual

 

Protect yourself and your clients

A timely reminder to ensure that communications from HMRC are genuine.


A quick reminder that there has been a rise in phishing emails and texts purporting to be from HMRC. 

 

Do ensure clients continue to check that any communications received from HMRC are genuine. You could share this handy guidance with them.

 

 

Tax cases and CEST

A recent tax case could prove key when using CEST.


A recent tax case could prove key when using CEST.

 

Check Employment Status for Tax (CEST) is a tool from HMRC to determine if an individual, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.

 

Documentation will be key as businesses continue to assess services provided to them by self-employed individuals. In addition, when taking clients through CEST, you may, when talking with individuals providing services through a PSC, remind them of the case of George Mantides Ltd v HMRC [2019] TC07202.

 

Similar services were supplied to Royal Berkshire Hospital (RBH) and Medway Maritime Hospital (MMH) with only one being regarded as self-employment. The case highlights the importance of mutuality, substitution and control and how agreements, correspondence and actions are important when considering if the ‘balance lies on the side of self-employment’.

 

It is worthwhile looking at the judgement, where the following conclusions were stated:

 

‘In my judgement the hypothetical contract between MMH and Mr Mantides would have contained the following terms:

  1. it would have been for a fixed term
  2. it would be terminable early on one day's notice on either side
  3. it would be for the personal services of Mr Mantides to work as a urologist grade SpR, but permit a substitute to undertake the work if the agency, after consultation with the hospital (in which consultation the hospital had no veto) considered that the substitute was suitable on the basis of the hospital’s usual criteria. (I do not consider that the warranty in clause 13.7 of the agreement between MMH and GML that the substitute be a director of the company can be reflected in the notional contract)
  4. it would require Mr Mantides (or the substitute) to conduct the services notified to him by the weekly rota in the facilities provided by the hospital
  5. it would require Mr Mantides (or the substitute) to be available for 10 half day sessions in each week
  6. MMH would have no obligation to provide, or try to provide, any sessions in a week. The contract between MMH and GML contained no such obligation and its absence in that formal written contract indicates to me that it should be absent from the notional contract
  7. MMH would pay Mr Mantides the agreed rates per hour worked
  8. Mr Mantides would attend the morbidity and mortality meetings. I so conclude for the same reasons as I gave in relation to the RBH contract
  9. There would be no entitlement to holiday pay, sickness pay or pension benefits
  10. Travelling time between the hospital’s sites would be paid by MMH. Other travel and accommodation expenses would not be paid.

Had Mr Mantides worked under such a contract would he, in the circumstances, have been an employee?

 

The circumstances of Mr Mantides's work for MMH differ in three material respects from those of his work for RBH:

 

  1. under the notional contract with MMH Mantides would have a right to send a substitute if that substitute was approved by the agency. This right would not in my view be illusory: it could have been exercised and taken effect, and although its counterpart in reality was not exercised its existence would be a relevant pointer away from employment. The qualified nature of the right, and the fact that Mr Best's evidence indicated that the hospital might have resisted its exercise convinced me that the contract could, just, be described as one for Mr Mantides's personal service, but the existence of the right points away from employment
  2. the notional contract with MMH could be terminated on one day's notice. Whereas I found that at least a week’s notice that had to be given under the RBH contract, one day's notice is almost illusory and does not point to employment
  3. the notional contract with MMH would have contained no obligation on MMH to try to provide either 371⁄2 hours or 10 half day sessions in a week. There would not have been even a qualified obligation to provide work. That points away from employment.

 

In other respects, the circumstances of the MMH engagement would be the same as those of the RBH engagement, and I reach the same conclusion as to the import of the other relevant factors as I do in relation to RBH. But standing back and looking at those factors together with the three noted above I find that the balance lies on the side of self-employment (both as regards the income tax and the NI tests).’

 

The revised and enhanced CEST tool allows for workers’ details not to be entered. The tool states:

 

‘If you do not know who the worker is, the tool will not ask questions about the worker’s circumstances. You will still get a determination that HMRC will stand by.’

 

Alongside the CEST tool, HMRC has also published specific guidance which provides users with greater clarity on the factors used to make determinations.

 

Business expenses in the public sector

What happens when clients in the public sector fall under IR35?


What happens when clients in the public sector fall under IR35?

 

Expenses incurred wholly, necessarily and exclusively for the purposes of the business are deductible in the normal way. If the IR35 company does not have any other income than the income caught under IR35, this will create a loss. The loss is available for tax in the normal way if any profits do become available in future – usually tax relief will be obtained by carrying the loss forward.

 

Let’s consider the following example:

 

John is a top BBC presenter. He works through his company John Ltd. He has 80% of the shares. His wife has 20%. She does his bookkeeping and admin. John Ltd billed the BBC £160,000 in 2017/18.

 

BBC deducts the following taxes at source:

  • PAYE at 20% £32,000
  • NIC 1% £1,600
  • net received is therefore £126,400.

 

The company also received £40,000 gross (no tax deducted) from personal appearances for 2017/18 (not caught by IR35).

 

The tax calculation is as follows:

 

Income

 

166,400

Less

   

General admin costs

12,000

 

Travel relating to BBC work

8,000

 

Travel re private appearances

2,000

 

Accountancy fees

1,500

 

Company filing and other expenses

800

 

Postage and stationery

1,400

 

Computer expenses

2,000

 

Sundry expenses

1,800

 
   

29,500

Net profit

 

136,900

 

Travel expenses are to a permanent workplace (BBC) and would not be an allowable employee expense.

 

Individual’s tax return

Income received by John Ltd from BBC would be taxed on John as a deemed direct payment. On his personal SA Tax return John will have to show £160,000 employment income and PAYE of £32,000 as already deducted at source.

 

Company’s tax return

S139 CTA 2009 allows a deduction of the deemed director payment from income of the company.

 

The tax calculation of the company will look like this:

 

Income

 

166,400

Less

   

Deemed direct payment

126,400

 

General admin costs

12,000

 

Travel relating to BBC work

8,000

 

Travel re private appearances

2,000

 

Accountancy fees

1,500

 

Company filing and other expenses

800

 

Postage and stationery

1,400

 

Computer expenses

2,000

 

Sundry expenses

1,800

 
   

155,900

Net profit

 

10,500

 

If the company did not provide any services for private appearances, there would be a loss of £29,500. This would be allowable under the normal company trading loss regime rules.

 

S139 CTA 2009 says:

 

139     Deduction for deemed employment payment

  1. This section applies for the purpose of calculating the profits of a trade carried on by an intermediary which is treated as making a deemed employment payment in connection with the trade.
  2. A deduction is allowed for—
  1. the amount of the deemed employment payment, and
  2. the amount of any employer's national insurance contributions paid by the intermediary in respect of it.
  1. The deduction is allowed for the period of account in which the deemed employment payment is treated as made.
  2. No deduction in respect of—
  1. the deemed employment payment, or
  2. any employer's national insurance contributions paid by the intermediary in respect of it, may be made except in accordance with this section.
  1. In this section 'deemed employment payment' and 'intermediary' have the same meaning as in Chapter 8 of Part 2 of ITEPA 2003 (see sections 49 and 50 of that Act).
Property development and property development trade

Analysis of an important First Tier Tribunal outcome.


Analysis of an important First Tier Tribunal outcome.

 

In Hopscotch Limited v HMRC [2019] TC07127 the First Tier Tribunal (FTT) has ruled that a property development did not amount to a property development trade. Relief for the Annual Tax on Enveloped Dwellings (ATED) was denied.

 

The ATED was introduced from 1 April 2013 and is an annual charge payable mainly by companies that own UK dwellings with a value of £500,000. Its purpose was to discourage wealthy foreigners from holding high value properties through offshore companies, and thus avoiding CGT, IHT and possibly SDLT.


Finance Act 2013 ss 132-150 provides reliefs from ATED for property rental businesses, dwellings opened to the public, property developers, property traders, financial institutions acquiring dwellings in the course of lending, farmhouses, providers of social houses.

 

Hopscotch Limited was a BVI company which purchased a residential property in 1993 for £1.25m. In 2011 the property was placed on the market at an asking price of £13.5m.

 

In the absence of anyone willing to buy the property at the asking price, in 2014, the directors decided to redevelop it with the aim of maximising the value. The aim was to make the property an attractive ‘near new build’. In October 2017 the property was put back on the market.

 

ATED returns were submitted and tax was paid for the three years up to 31 March 2016. For the two years to 31 March 2018, relief was claimed on the basis that the company was carrying on a property development trade. Following enquiry, HMRC denied relief and Hopscotch appealed.

 

According to the legislation (section 138 to the FA 2013) reliefs apply where property is being redeveloped or held as stock within a property development trade, where the interest is held exclusively for the purpose of developing and reselling the land in the course of the trade.

 

‘Property development trade’ means a trade that consists of buying and developing for resale residential or non-residential property and is run on a commercial basis and with a view to profit.

 

The parties did agree that a redevelopment of the property had taken place but while Hopscotch argued that since 1 April 2016 it had carried out a trade, HMRC was of the view that it did no more than any other owner wishing to maximise the sale of an asset.

 

Hopscotch’s position

Hopscotch argued that, with effect from 1 April 2016, when the redevelopment work commenced, it was carrying on a ‘property development trade’ and therefore the property, which had hitherto been held as an investment on capital account, should be regarded as having become trading stock on that date. Hopscotch argued that from that date, it held the property exclusively for the purposes of redeveloping and selling the property in the course of that trade.

The decision to take the property off the market, seek consultancy advice and incur redevelopment expenditure should be seen as a ‘scheme for profit-making’.

 

HMRC’s position

HMRC stated that while they accepted that the work carried out at the property between April 2016 and September 2017 was so substantial that it amounted to ‘redevelopment’, that ‘redevelopment’ did not take place in the course of a ‘property development trade’.

 

The company was doing no more than any other owner of an investment held on capital account who wished to sell the investment and to maximise the value of the investment before doing so.

 

In any event, in order to satisfy the definition of ‘property development trade’, the company would need to have had the intention to develop and resell the property at the time when it first bought the property. The company did not have that intention in 1993, when it first acquired the property.

 

FTT’s verdict

The FTT looked first at the various badges of trade. However, these turned out to be inconclusive as while some factors might be taken to suggest that the company carried on a trade (such as it borrowing money to carry out the development, and work being done for the purpose of resale), other factors (such as the redevelopment and proposed sale of the property being a one-off transaction, and the subject matter being capable of being held as investment as well as stock) suggested that this was not the case.

 

The judge stated that, in certain circumstances, it is perfectly possible for the redevelopment of a single property to amount to a venture in the nature of trade and for a person holding a property as an investment on capital account to resolve, at a particular point in time, that it will henceforth hold the property for a trading purpose and thereby appropriate the property from capital account into trading account.

 

However, because:

  • no mention is made in the minutes of the board meetings of the company about the expected cost of the redevelopment or the amount of profit to which the redevelopment was expected to give rise
  • there is no evidence that either before the commencement of the redevelopment work, or during the course of that work, the company produced any trading accounts or business plan which showed the level of profit to which the redevelopment activity was expected to give rise
  • the company has never registered for UK corporation tax and has never filed company tax returns

 

…it was concluded that the company was not ‘carrying out a scheme for profit-making’.

 

Instead, the company, having failed to realise the sum which it desired for the property in the course of its marketing of the property between 2011 and 2013, simply resolved that, in order to obtain an acceptable offer for the property, it would need to carry out substantial work before putting it on the market again. 

 

In the FTT’s view, the property did not, as a result of the company’s implementing that decision, cease to be the investment held on capital account which it had always been for the company since it first acquired the property in 1993 and the company did not, as a result of implementing that decision, start to carry on a trade.

 

Part disposal of land and capital gain tax

An overview with examples together with consideration of when a s242 can apply.


An overview with examples together with consideration of when a s242 can apply.

 

The first consideration is: has a disposal occurred? There is no statutory definition of ‘disposal’, so the word must be given its normal meaning. HMRC’s capital gains tax manual CG 10240 defines a disposal as ‘an occasion when a person sells an asset or gives it away. Tax may also be charged if the legislation specifically provides for a transaction to be treated as though it were a disposal.'

 

For capital gains tax purposes, the most common way for a person to dispose of an asset is to sell it to another person. However, a gift or an exchange of assets may also constitute a disposal for capital gains tax purposes. The disposal proceeds will be the actual consideration received unless the disposal is not a ‘bargain at arm’s length’, in which case the disposal is deemed to take place at open market value (TCGA 1992, s17(1)(a)).

 

Part-disposals

TCGA 1992 s21 (2) provides that a taxpayer makes a part-disposal when he sells part of an asset or where he disposes of a right or interest in an asset.

 

To calculate the chargeable gain on a part-disposal, we deduct from the sale proceeds the part of the original cost of the asset by using the fraction:


A/(A+B),

 

Where A is the gross disposal proceeds and B is the value of the part retained.

A part-disposal includes a disposal of a physical part of an asset, eg a ten-acre section of a much larger holding of land. It also includes the disposal of a right or interest in an asset, for example where a lease is granted by the freeholder of land.

 

Please see Capital gain tax and leases.

 

Example:

Paul bought 50 acres of land in 2000 for £100,000. In 2016 he sold 10 acres of the land for £50,000. The value of the remaining land was £350,000.

 

The capital gain on the part-disposal is calculates as follows:

 

Proceeds £50,000
Less: cost £100,000/(£50,000+£350,000) ie £25,000

Capital gain is £25,000

 

The base cost of the remaining area of land is the difference between original cost (£100,000) and the amount used as part-disposal (£25,000), ie £75,000

 

Small part-disposal of land, not chargeable to capital gains

Where the consideration for a part-disposal of land is ‘small’, the taxpayer may claim that a chargeable gain does not arise and instead treat the proceeds as reducing the original cost of the land (TCGA 1992 s242).

 

Conditions of s242 claim:

  1. The proceeds must be less than or equal to 20% of the value of the land at the date of disposal.
  2. The proceeds of all land sales in the year must not exceed £20,000.
  3. The transfer is not between spouses/civil partners, or between companies of the same group.
  4. A claim should be made by 31 January following the tax year of the part-disposal.

 

Effect of s242 claim:

  1. The proceeds received are ignored when considering the capital gains tax for that year; and
  2. The proceeds received reduce the base cost of the land on a future disposal. That means that the taxpayer will have a lower base cost when he sells the rest of the land and a higher capital gain on the subsequent disposal.
New solicitors’ accounts reports regime goes live

What you need to know about the new SRA reporting regime, effective from 25 November.


What you need to know following the new SRA reporting regime becoming effective from 25 November.

 

The new SRA reporting regime became effective from 25 November and the SRA have brought its revised guidance into one area and has supplemented the rules with a Q&A to assist its firms.

 

It has also updated its guidance on ‘the prescribed circumstances in which you can withdraw client money from client account to pay to a charity of your choice’.

 

It allows withdrawals of residual client account balances of less than £500 on any one client matter provided the balance is paid to a charity of the solicitor’s choice.

 

It also highlights that where balances are over this limit additional conditions apply and for these the solicitor should note that evidence will be required and the solicitor should expect that the ‘reporting accountant …. will look at whether you have followed these prescribed circumstances’.

 

The circumstances are:

 

‘We [SRA] expect you [solicitor] to make more intensive efforts to locate the rightful owner for larger or more recent residual balances or for balances where more details are held about the client.

 

You record the steps taken to return the money to the rightful owner and retain those records, together with all relevant documentation for at least six years.

 

You keep appropriate accounting records, including:

    1. a central register which records the name of the rightful owner on whose behalf the money was held, the amount, name of the recipient charity (and their charity number) and the date of the payment; and
    2. all receipts from the charity and confirmation of any indemnity provided against any legitimate claim subsequently made for the sum they have received.’

 

It is also highlighted that ‘for amounts over £500 you [the solicitor] will need our [SRA] authority before removing this money from the client account.’

 

 

Corporation tax loss relief changes

A handy comparison table following the 2017 reforms.


A handy comparison table following the 2017 reforms.

 

The legislation

Reform was introduced in schedule 4 of the Finance (No.2) Act 2017. It applies from 1 April 2017. Accounting periods that begin before and end after 1 April 2017 follow commencement provisions. It applies for corporation tax, not income tax.

 

Companies and associations within the charge to corporation tax are affected.

 

Difference between pre and post 1 April 2017 losses rules

The following table summarises how a company can offset or utilise its losses against other incomes for pre- and post- 1 April 2017 periods.

 

Difference in

Pre-1 April 2017 rules

 

Post-1 April 2017 rules

 

Carried forward losses

Some carried-forward losses are set only against profits of a particular type:

a)   Trading losses carried forward are set only against profits of the same trade.

b)   Non-trading loan relationship deficits carried forward are set only against non-trading profits.

 

The reform of Corporation Tax loss relief affects the following carried-forward losses:

  1. Trading losses
  2. Non-trading loan relationship deficits (NTLRDs)
  3. Management expenses
  4. UK property business losses
  5. Non-trading losses on intangible fixed assets.

Capital losses are not affected.

Group relief

No group relief for carried-forward losses.

Relaxation:

  1. Applies only to losses that a company makes on or after 1 April 2017 and carries forward to later accounting periods.
  2. Relief against total profits for most carried-forward trading losses and NTLRDs, if they arose on or after 1 April 2017.
  3. A new kind of group relief for carried-forward losses of any of the five affected types, if they arose on or after 1 April 2017.

Relief restriction

Even companies with very large profits could potentially reduce those profits to nil using carried-forward losses

Restriction:

  1. Applies to relief against profits arising from 1 April 2017.
  2. Only restricts relief where companies or groups have profits over a certain level (broadly £5 million). Above the £5 million allowance, there will be a 50% restriction in the profits that can be covered by carried-forward losses whether from pre or post 1 April 2017.

Loss buying – anti avoidance

 

For loss buying, new rules apply when a company changes ownership from 1 April 2017. Any carried-forward losses that arose before the company or group’s acquisition will not be available to the purchaser’s group for five years. CTM 06700

Timeline

Accounting periods ending before 1 April 2017 are unaffected.

 

Accounting periods that begin before and end after 1 April 2017 follow commencement provisions.

Terminal losses

Losses carried forward to the period of cessation under s45 or s45B, against profits of the same trade, can likewise only be relieved against profits of the same trade under s45F.

 

Losses carried forward to the period of cessation under s45A, against total profits, can be relieved against total profits under s45F of CTA10

Losses that expire cannot be carried forward to any future periods.

Flexibility

 

Pre April 2017 trade losses could only be offset against the profit of the same trade.

There is greater flexibility over the types of profit that can be relieved by post 1 April 2017 carried forward losses. Most post-1 April 2017 trading losses and non-trade deficits on loan relationships can now be set against total profits.

  1. From 1 April 2017, companies can use claims to choose whether to relieve carried-forward losses in part or in full, for each of the five affected types of loss.
  2. This applies regardless of when the loss arose.
  3. Companies can claim to use all or part of a loss carried forward for relief against total profits.
  4. Or claim not to use all or part of a loss carried forward against a particular type of profit only.
  5. Claims must be made within 2 years of the end of the accounting period in which relief would be given.

 

 

The above relaxation will be removed in the following circumstances:

  • the relaxation is removed for trading losses where the trade becomes non-commercial, or the trade becomes small or negligible
  • the relaxation is removed for non-trading loan relationship deficits, management expenses, UK property business losses and non-trading losses on intangible fixed assets where an investment business becomes small or negligible.

 

Examples

HMRC produced the following examples to explain the changes in loss relief:

 

Example 1

  • a company has an accounting period from 1 April 2017 to 31 March 2018
  • any losses the company has carried forward from previous periods must have arisen before 1 April 2017, so can’t benefit from the relaxation
  • the profits of this period are all post-1 April 2017, so this period could be affected by the restriction
  • any losses the company makes in this period are post-1 April 2017 losses. If the company carries any of these losses forward to later accounting periods, the relaxation may increase the ways it can use them.

 

Example 2

• Company A Ltd

 

31 March 2017

31 March 2018

31 March 2019

 

Trade Loss

 

(£50,000)

 

Trade Loss

 

(£30,000)

 

Trade Loss

 

(£30,000)

UK Property Income

 

£25,000

 

UK Property Income

 

£20,000

 

UK Property Income

 

£75,000

(£25,000)

(£10,000)
(moving to right hand column)

£45,000

£0

£0

 

(£10,000)

£35,000

(£25,000) pre-1 April 2017 losses may be carried forward to later periods for relief against profits of the same trade.

 

 

Record keeping

The relaxation means different relief is available for carried-forward losses incurred pre- and post-1 April 2017. Companies’ records need to track these losses separately so that they can:

  • know which amounts might benefit from the relaxation
  • avoid deducting reliefs that are still not allowable.

 

Companies also still need to track different types of loss separately, for example property business losses, NTLRDs, management expenses and losses of different trades.

 

Useful links

ACCA technical article for group loss relief

 

HMRC guidance

Dividend treatment in the accounts – a FAQ special

Commonly asked questions around dividend and its disclosures in the accounts.


Commonly asked questions around dividend and its disclosures in the accounts.

 

A dividend is a payment made by the company to its shareholders, usually as a distribution of profits. Part 23 The Companies Act 2006 (section 829 to 853) details all the provisions for distributions made by the company. A dividend or distribution to shareholders may only be made out of profits available for the distribution.

 

What is an illegal dividend?

If the requirements of the Companies Act are not met a dividend is unlawful (section 836(4) of CA 2006). Furthermore a dividend may be deemed illegal if:

  • it is not authorised correctly through board minutes. Prior to the meeting, directors have to assess whether the company has enough distributable reserves to declare any dividend to the shareholders. HMRC requires keeping these minutes for the justification of the dividend declared
  • a dividend voucher has not been completed: this is a ‘receipt’ for tax purposes. It should show the dividend rate per share, dividend figure, and the amount of tax credit if there is any.

 

Illegal dividend is also termed as ‘ultra vires’. Dividends deemed illegal by HMRC may be classified as salary, on which national insurance and tax becomes due. Directors who are normally also shareholders in a small company need to be careful if they are taking regular dividend out of the company. They need to make sure that they have last annual accounts or interim accounts which support the distribution.

 

What are ‘profits available for distribution’?

A company’s ‘profits available for distribution’ are its accumulated, realised profits, so long as it is not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so long as it’s not previously written off in a reduction or reorganisation of capital duly made (s847 of CA2006).

 

Further restrictions are placed on public limited companies.

 

What is the shareholders’ liability if the dividend declared is ‘illegal’?

A shareholder is only required to repay an unlawful distribution if they know or have reasonable grounds for knowing that it was made unlawfully at the time of the payment.

 

What are disclosure requirements for illegal dividend?

In the accounts of private companies the directors may include an explanation within the dividend note that either:

  • the dividend was not illegal as it was based on interim accounts which showed there were sufficient profits available for distribution at the time the dividend was paid, or
  • contains an explanation of the illegal dividend payment and reasons why the event occurred. For example 'The directors acknowledge illegal dividends were declared and paid. No further distributions have been made and the directors are seeking to recover monies from the shareholders'. Another example is 'At the time the dividend was paid the directors were not aware that there were insufficient profits available for distribution and the directors acknowledge that no further distributions can be made until there are sufficient profits available for that purpose'. 

 

The note should explain the situation to readers of the accounts and therefore should be appropriately tailored to fit the circumstances.

 

If the accounts are audited and there is a material uncertainty or disagreement of disclosure the auditor will need to consider the impact on the audit report.

 

In the accounts of public limited companies there are additional requirements both in relation to the accounts and the auditors.

 

When is a dividend paid or deemed to be paid?

For Corporation Tax Act, CTA10/S1168 (1) says ‘for the purposes of the Corporation Tax Acts dividends shall be treated as paid on the date when they become due and payable’.

 

Companies’ Articles often provide that:

  • interim dividends may be paid by directors from time to time; and
  • final dividends may be declared by the company in general meeting.

 

An interim dividend may be varied or rescinded at any time before payment and may therefore only be regarded as ‘due and payable’ when it is actually paid (see Potel v CIR (1971)).

 

A properly declared final dividend is an immediately enforceable debt unless a payment date is specified.

 

Can a dividend be back-dated?

No, the dividend obligation is only created on the date of declaration. Therefore, any dividend declared after the year end for previous year accounts would only be deemed to be paid in the year of declaration. It will be fraudulent to back-date any dividend.

 

Does a dividend waiver need to be disclosed in the financial statements?

Under UK GAAP FRS 102, dividend disclosure is an encouraged note in Appendix E of section 1A for small entities. Encouraged notes may nevertheless be necessary in order to give a true and fair view and meet the requirements of section 393 of CA 2006.

 

A dividend waiver should typically be used only for genuine commercial reasons, and not purely to avoid tax. A long-term waiver could be deemed to be a transfer of value for inheritance tax purposes (s98 of IHTA 1984) and even 'value-shifting’ for capital gains tax purposes (s269 of TCGA 1992). When planning dividend waivers, settlements legislation must be considered (s619-620 of ITTOIA 2005)

 

One can argue that generally a dividend waiver transaction has not been concluded under normal market conditions; hence a disclosure would be required irrespective of the amount involved under related party note.

 

Can a shareholder force the company to pay dividend?

No, a shareholder cannot insist on the company declaring a dividend. Directors can declare and pay a dividend or propose a dividend to be approved by the shareholders in general meeting.

 

The shareholders in general meeting may confirm a dividend already paid out or declare a dividend to be paid out, the directors having set the amount. The Articles may put in place additional restrictions in addition to those in the Companies Acts.

 

 

Useful links:

HMRC manual CTM15205

Template dividend vouchers, minutes and waivers

CA 2006 Part 23 ‘Distributions’

Personal allowance tips/traps for non-residents

Ensure any clients who are non-residents pay the right amount of tax next month.


Ensure any clients who are non-residents pay the right amount of tax next month.

 

January, here we are again! It is one of the busiest times of the year for the majority of practitioners due to tax return deadlines looming, and it means constantly scratching our heads over lots of unexpected client questions.

 

Normally, our tax software prompts and calculates available tax allowances but it may not be as simple as it sounds. One of the simplest yet most tricky questions can be whether a non-resident can claim personal allowance.

 

Non-resident tax position

All non-residents have to pay tax on their UK income. Normally your income includes things like:

  • pension
  • rental income
  • savings interest
  • wages.

 

If you’re eligible for a personal allowance you pay income tax on your income above that amount. Otherwise, you pay tax on all of your income.

 

The country where you live might tax you on your UK income. If it has a ‘double-taxation agreement’ with the UK, you can claim tax relief in the UK to avoid being taxed twice.

 

You do not normally pay tax when you sell an asset apart from on UK property or land. Non-residents who have sold UK land or property must tell HM Revenue and Customs (HMRC) within 30 days, even if there is no tax to pay.

 

Who is eligible?

You’ll get a personal allowance of tax-free UK income each year if either:

  • you’re a citizen of a European Economic Area (EEA) country - including British passport-holders
  • you’ve worked for the UK government at any time during that tax year.

 

You might also get it if it’s included in the double-taxation agreement between the UK and the country you live in.

 

HMRC international manual INTM334580 clarifies it further as below:

 

An individual may claim UK tax allowances if they are any one of the following:

  • a national of a state within the European Economic Area (EEA), including UK citizens, that is Austria, Belgium, Bulgaria, Croatia*,Cyprus, Czech Republic,  Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom (*Croatia joined EEA 2013, but entitled to PA if National and Resident prior to new treaty)
  • is or has been employed in the service of the British Crown
  • is employed in the service of any UK missionary society
  • is employed in the service of any state under the protection of Her Majesty
  • is resident in the Isle of Man or the Channel Islands
  • has previously resided in the UK and is resident abroad for the sake of his/her health or the health of a member of his/her family living with him/her
  • is a widow, widower or surviving civil partner whose late spouse or civil partner was employed in the service of the British Crown
  • is a national of Israel and Jamaica
  • is a national who is also a resident of Argentina, (no relief for 2002-03 and later years), Australia, Azerbaijan, Bangladesh, Belarus, Bolivia, Bosnia and Herzegovina, Botswana, Canada, Côte d’Ivoire (Ivory Coast), Egypt, Gambia, India, Indonesia, Japan, Jordan, Kazakhstan, Korea (no relief for 2002-03 and later years), Lesotho, Malaysia, Montenegro, Morocco, New Zealand, Nigeria, Oman, Pakistan, Papua New Guinea, Philippines, Russian Federation, Serbia, South Africa, Sri Lanka, Sudan, Switzerland, Taiwan, Thailand, Trinidad & Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, Uzbekistan, Venezuela, Vietnam, Federal Republic of Yugoslavia, Zimbabwe or
  • is a resident of Austria, Barbados, Belgium, Fiji, Greece, Ireland, Kenya, Luxembourg, Mauritius, Myanmar (Burma), Namibia, Netherlands, Portugal, Swaziland, Switzerland, Sweden (up to April 2016 only) and Zambia.

 

If the individual is a resident but not a national of Austria, Belgium, Kenya, Luxembourg, Mauritius, Netherlands, Portugal, Sweden (up to April 2016 only), or Zambia they are not entitled to allowances if his/her income consists solely of dividends, interest and royalties (or any combination of them).

 

Claim the personal allowance

Non-residents have to claim the personal allowance at the end of each tax year in which they have UK income. Send form R43 to HMRC.

 

Useful Links:

 

Double taxation treaties

Top tips when using provisional figures in self-assessment tax returns

Guidance on when a tax return containing provisional figures can be submitted.


A tax return containing provisional figures should only be submitted if it becomes clear that a more accurate figure will not be available before the filing date.

 

HMRC will not accept a return containing estimated or provisional figures when the client did not provide any information at all (figures are missing from the return), little or no effort is made to obtain and submit figures, the accountant did not request that information on time or was under pressure due to the complexity of the taxpayer’s affairs.

 

Is the figure estimated or provisional?

Provisional figures are the best estimates available at the time the return is submitted. These figures will be revised, so an amended return always follows as soon as final figures become available.

 

Provisional figures should not be confused with estimated figures, which are final and will be the only ones ever available. Figures may be estimated when records are lost or in case of inherently judgemental transactions, for example a valuation figure.

 

How to notify HMRC

Sole traders do not need to mark figures are provisional, provided the accounts are prepared following GAAP rules, unless the trader has elected to opt for the simplified cash basis.

 

If notifying, notification in the full tax return is made by:

  • ticking box 20 (page TR8) and
  • including a note in the white space explaining which figures are provisional or estimated and for provisional figures indicating when final figure is expected or, for estimated figures, the basis on which the figure has been calculated and the reason why the figure has to be estimated.

 

When submitting a short tax return, provisional figures can be included without notifying HMRC (there is no equivalent of box 20).

 

There is no guidance on how to notify HMRC when estimated figures are reported in the short tax return, and so a full tax return is likely to have to be submitted.

 

Tax repayments

HMRC is likely to withhold any tax repayments due, until final tax return is submitted following the filing of a provisional tax return.

 

If estimated figures were submitted, HMRC is likely to withhold any tax repayments until it is satisfied the estimates are reasonable, following the conclusion of its enquiry.

 

How to submit an amended return

Submit new return with box 20 tick removed and comments in the white space removed, with the same figures if there is no change, or figures changed as appropriate. Returns can be amended within 12 months of filing deadline.

 

Penalties

Any provisional tax return not yet revised within the deadline is likely to be selected for enquiry and a penalty for filing an incorrect return issued.

 

A penalty for a careless or deliberate inaccuracy in a tax return could be charged if HMRC find there was no good reason for using a provisional figure or the amount was not estimated reasonably.

 

Top tip

When using estimated figures, to avoid penalties, always be clear on how the figure was calculated and any assumptions made are robust and reasonable.

 

To avoid penalties when submitting provisional figures, always ensure there is a valid reason for not providing the final figures in time, and submit amended return on time.

HMRC update on ATED and capital allowances

Read HMRC's Agent Update: issue 75 now, with updates on ATED and capital allowances.


 

Agent Update: issue 75 is now available, featuring articles on how to prepare for sending clients' 2020-21 Annual Tax on Enveloped Dwellings return online and what to expect from a statutory review.

Other highlights include articles about:

  • non-resident company landlords and corporation tax
  • how we tax offshore investment funds
  • information on a new capital allowance – structures and buildings allowances.
NEWS
BBC1's Fake Britain - is your accountant qualified and regulated?
 

ACCA's chief executive Helen Brand appeared on BBC1's Fake Britain recently to highlight the importance of choosing a qualified accountant. Watch via iPlayer now (28 mins in).


BBC 1 – Fake Britain - 2 December - Is your accountant qualified and regulated? BBC1's Fake Britain featured a fake accountant - David Price - who scammed clients out of thousands of pounds.

 

These people sadly had no recourse. In the show, Helen Brand highlights why everyone needs a qualified accountant. Watch now (see 28 minutes in).

 

 

WATCH: Our latest top tip from successful accountants
 

Carl Reader FCCA talks about how much he has achieved professionally since qualifying first with AAT and then ACCA and how he has benefited so much from his membership.


Carl Reader FCCA talks about how much he has achieved professionally since qualifying first with AAT and then ACCA and how he has benefited so much from his membership.

 

Carl Reader's Top Tip

 

 

 

 

 

 

Party manifestos at a glance

A roundup of the key taxation and business issue pledges from the main political parties ahead of yesterday's General Election.


Following yesterday's General Election, here is a reminder of the key taxation and business issue pledges from the main political parties: 

 

Download this guide now

 

Do keep an eye out for the IR35 and Entrepreneur's Relief reviews. We will highlight these to you when available.

Technical webinars for practitioners - free and on-demand

Good news! 11 new webinars from across 2019 to support you are now available to watch for free on demand.


We’ve wrapped up our autumn series of free technical webinars for practitioners – but the good news is there are now 11 webinars from across 2019 available to watch for free on demand. A perfect way to complete your 2019 CPD! Remember, each webinar will count for one unit of verifiable CPD where it is relevant to the work that you do.

 

Key changes to entrepreneurs' relief

Speaker: Dr Ros Martin, consultant and lecturer

 

Making Tax Digital

Speaker: Dean Wootten, Wootten Consultants Limited

 

Audits of charities and independent examinations update

Speaker: Don Bawtree, Business Assurance Partner, BDO

 

Risk and mitigation for the accountant – some key lessons from 2018

Speaker: Louise Dunford, LD Consultancy Limited

 

Inheritance tax planning

Speaker: Paul Soper FCCA, tax lecturer and consultant

 

What’s new in FRS 102? 

Speaker: Steve Collings, audit and technical partner at Leavitt Walmsley Associates Ltd

 

VAT & duties 

Speaker: Gwen Ryder, independent consultant

 

The 20 most common errors when dealing with VAT and property

Speaker: Robert Warne, Partner and Head of VAT at Crowe UK LLP

 

Stamp Duty Land Tax (SDLT)

Speakers: Rachel Pearce (MHA Carpenter Box) and Dominic Carter (MHA Larking Gowen)

 

Topical issues with residential property portfolios

Speaker: Dean Wootten, Wootten Consultants Limited

 

Where are we with Making Tax Digital?

Speaker: Dean Wootten, Wootten Consultants Limited

 

 

Register now for any or all of these sessions

 

 

Unfortunately the planned webinar on The extension of IR35 to the private sector had to be rescheduled and Louise Dunford will now present it on 7 February 2020 at 12.30; register now and receive a reminder nearer the time.

 

 

 

 

Volunteering changes lives

Highlighting how practitioners can make a real difference via volunteering.


Highlighting how practitioners can make a real difference via volunteering.

 

We know that many of our practitioners undertake voluntary work. Gary Millner – CEO of Tax Help for Older People and TaxAid – highlights some of the excellent work these charities undertake. We firmly encourage you to consider getting involved as a volunteer.

 

Have you ever thought of volunteering using your professional tax skills? Over 35 ACCA members volunteer for TaxAid and Tax Help for Older People, two tax charities which provide tax advice to people on low incomes – people who are in crisis with their tax, and with nowhere else to turn.

 

Who do they help?

Receiving an unexpected tax bill is a nightmare for anyone, but if you can’t afford professional advice because you’re on a very low income, where do you go? The people who the tax charities see have nowhere else to turn. Let’s meet George.

 

George is 96 and a widower. He was distressed and confused when he came to Tax Help for Older People – he had a tax bill of £2,500 and couldn’t understand how it had arisen. The case was passed to a local volunteer who visited George and found that he had been given the married couples allowance for several years after his wife had died and he was no longer eligible for the allowance. On looking further, he found that HMRC had been told of the death of his wife at the correct time, but HMRC had not used the information that had been correctly and timeously provided. Therefore an ESC A19 claim was submitted and HMRC accepted it had not made proper use of the information at the right time. The assessments and penalties were cancelled and George was enormously relieved.

 

Advice changes lives

Tax Help for Older People and its sister charity TaxAid helped 21,000 people last year – people like George who desperately needed tax advice but couldn’t afford to pay for it. They provide advice, where needed acting for the client, and put people back on their feet. In effect they provide the profession’s safety net for vulnerable people in crisis with their tax.

 

Tax Help for Older People assists the over 60s; TaxAid focuses on working age people. The two charities work closely together.

 

Both help their clients by using a mixture of permanent staff and volunteers. Helping people like George can be very rewarding – our clients are almost always in great distress when they find us and many are in crisis. The help we give makes a huge difference, resolving the tax issue and allowing them to get on with their lives.

 

Volunteering opportunities

There are three types of volunteering opportunities:

  • volunteers for Tax Help for Older People are spread around the country. They help mainly retired people, through face-to-face interviews either in the client’s home or at an Age Concern office or similar. The work load varies depending on local need
  • TaxAid volunteers may meet clients for interviews in their London office. Volunteers usually do a minimum of seven hours a month
  • alternatively, TaxAid volunteers work on TaxAid’s telephone helpline, acting as the client’s first point of contact and trying to either solve their problem or arrange for follow up action. These volunteers usually do a minimum of two three-hour sessions a month.

 

All volunteers need to have two years’ practical experience. The charities provide training – both in the specialised tax knowledge needed and in handling vulnerable clients - and periodic updates.

 

Case studies – could these be you?

  • Sheila Heron of Quantum Accountancy Services Ltd is an ACCA member who says: ‘I really enjoy volunteering with Tax Help for Older People. I have visited the clients in their homes and also at the local Age Concern offices. They tend to be quite vulnerable and are always very worried about their tax. After looking through their paperwork I can usually see the problem and identify the best way to solve it. This puts their minds at rest and generally the issue can be sorted quickly. Those I have helped have always been very grateful and I find being able to help vulnerable people in this way is very rewarding.’
  • David McCauley, now retired, was a member of ACCA and has been a Tax Help volunteer since 2008. As well as helping with clients, he also helps in arranging events such as the Over-55s roadshows, where people can be alerted to the help available. He says: ‘Over the years, I have helped many clients, including widows suddenly having to cope with a tax system they often find very difficult. It’s given me a lot of satisfaction to help resolve their problems and bring relief to their worries. I’ve recently dealt with several worldwide disclosure clients and this has caused a lot of anxieties which we are alleviating. It’s important to highlight the stalwart support of Head Office, both personal and technical, which enables us to operate as true professionals.’

 

Get involved!

If this article has inspired you to find out more, it’s simple:

 

They will be delighted to hear from you!