Technical and Insight
Self assessment hints, tips and articles
With the self assessment filing deadline approaching, the first six articles in this issue will help you and your clients negotiate this hectic time of year.

In the run-up to the self assessment filing deadline dip into our Technical Advisory website for a wide selection of hints and tips. 

Visit the Technical Advisory webpages now for easy access to hints and tips on:

Income tax

  • income and expenses
  • trading losses and how to utilise them
  • limit on personal income tax reliefs
  • collecting underpaid tax through tax codes
  • rental expenses
  • legal and court fees
  • ACCA guide to the annual investment allowance
  • travel costs
  • jointly owned property and Form 17
  • residence and domicile
  • fees and subscriptions
  • example of farmers' averaging.

 

Capital gains tax

  • private residence relief
  • share matching rules.

HMRC website

  • quick links to former links from HMRC's website now on GOV.UK.
Ten common tax elections and claims
How to make claims under common tax elections.

How to make claims under common tax elections. 

Main residence nomination s222 (5a) Taxation of Chargeable Gains Act 1992 (TCGA 1992) 
Taxpayers with two or more residences may choose which property is to be treated as their main residence for capital gains tax purposes by lodging an election under TCGA 1992, s 222(5). The election must be made within two years of acquiring a second (or subsequent) residence unless there is a delay in occupation, in which case the date of moving into residence is the trigger event. Once an election has been made it can be varied at any time and so even where the facts would suggest that a nomination is not necessary, it is prudent to make one to leave the door open for a variation at a later date. 

Claim to reduce income tax payments on account - SA303 
A claim to reduce tax payments on account can be made by a  taxpayer at any time up to 31 January after the end of the tax year concerned if he believes that his tax liability will be lower than the previous year. The taxpayer must make the claim by notice, giving reasons why the payments on account should be reduced. If a taxpayer deliberately makes a claim to reduce the payment on account for the benefit of obtaining a cash flow advantage when he knows that his tax liability for the year would be higher than the amount paid then HMRC reserves the right to charge a penalty. 

Deed of variation s142 Inheritance Tax Act 1984 (IHTA 1984) and s62 (7) TCGA 1992 
If the variation includes a statement that the parties to the variation intend that the provisions of section 142(1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 are to take effect for inheritance tax, capital gains tax or both, the variation is treated as if the deceased had made it. In other words, the changes are treated as having been made by the deceased and as having taken effect from the date of death. For a variation to take effect for inheritance tax, capital gains tax or both, it must be made within two years after the death, be in writing and signed by all the beneficiaries who would lose out because of it. 

Negligible value claim S24 (2) TCGA 1992 
Under this legislation a taxpayer who holds an asset which has become of negligible value may make a claim to be treated as though the asset had been sold and then immediately reacquired for an amount equal to its value. When a negligible value claim is made the taxpayer may wish to specify an earlier time, falling in the two previous tax years, at which to treat the deemed disposal as occurring. The taxpayer has to meet all the necessary conditions for the claim at that earlier time as well as at the time of the claim. The effect of crystallising such a 'paper' loss, without actually selling the asset, can often be useful for reducing income tax, corporation tax or capital gains tax. 

Form 17 (Declaration of beneficial interests in joint property & income) 
Income and gains from jointly owned properties are usually taxed equally on spouses (or civil partners) regardless of the actual ownership of the property. Completion and submission of this form specifies a different apportionment for tax purposes (based on actual proportion of ownership), which can be useful where owners are subject to different rates of income tax. 

Capital losses set off against income tax s131 ITA 2007 
Under this section a taxpayer may be able to reduce his income tax liability by making a claim to offset losses on disposal of shares acquired by subscription in a qualifying trading company (or following a negligible value claim for such shares) against other income in the current or previous year. 

Holdover relief claim S165 TCGA and S260 TCGA 
Hold-over relief is available under s165 TCGA 1992. The gift must be of ‘business assets’. The transferor and the transferee must claim jointly within five years from transfer. The time limit for claiming gift hold-over relief is five years and 10 months from the end of the tax year of disposal. Hold-over relief is also available under s 260 TCGA 1994 where the disposal is a chargeable transfer for inheritance tax purposes, but not a potentially exempt transfer. Cases where there is no liability to inheritance tax, because the value transferred is within the zero-rate band, qualify for hold-over relief. 

Payment of capital gain tax by instalments s 281 TCGA 1992 
Where hold-over relief is not available, or only partial relief is available, and the asset is:  

  • land and building
  • shares in unquoted companies
  • shares in a quoted company on which the donor had a controlling interest before the gift… 

… the taxpayer can make a claim under s. 281 TCGA 1992 to pay tax in instalments. If any of the consideration is payable more than 18 months after the date of the disposal the tax due may be paid in instalments. The period over which the instalments are paid would be agreed with HMRC but cannot exceed the lesser of eight years and the point when all of the consideration is paid. The unpaid instalments carry interest. 

Short-life asset election S85-S86 Capital Allowance Act 2001 (CA 2001) 
An asset that is expected to be used in the business for a period of eight years or less, and have a nil or low disposal value, can be elected (under s85-s86 CA 2001) to be treated as a short life asset. De-pooling these items into a separate short-life asset pool will accelerate the tax relief. 

Election by non-UK domiciled spouse or civil partner to be treated as UK domiciled for inheritance tax purposes IHTA84/S267ZA(3) 
From 6 April 2013, a person can make an election to be treated as UK domiciled for IHT provided that during the period of seven years ending with the date on which the election is made, the person had a spouse or civil partner who was domiciled in the UK. Any transfers between spouses or civil partners made after that date qualify for full spouse or civil partner exemption. HMRC guidance can be accessed here

Accrued income scheme
Understanding accrued income schemes.

Understanding accrued income schemes. 

The accrued income scheme was originally introduced to counteract a practice known as bondwashing – converting income into capital gains by disposing of securities when the price obtained reflects a significant element of accrued interest. 

‘Securities’ include any loan stock or similar security of any government or public or local authority, or any company, or other body, whether or not secured or carrying a right to interest of a fixed amount or at a fixed rate per cent and whether or not in bearer form. 

Accrued income (or allowances) is entered in boxes 1 to 3 of the additional information pages of the self-assessment return. 

When securities are transferred, interest is effectively apportioned between the old and new owners so that the former is charged to income tax on the interest accrued up to the date of transfer while the latter is similarly charged on the interest accruing from that date.  

Helpsheet 343 example 

8% Treasury Stock 2015 pays interest on 7 June and 7 December. Sophia buys £10,000 nominal value of this gilt on 7 May and knows that she will receive £400 interest on 7 June. The total time between the last interest payment on 7  December and the next one on 7 June is 182 days. On 7 May, 152 days have gone by since the last interest payment was made. So the amount of accrued interest is £400 x 152/182 = £334. 

Where the security is transferred after the ex-date but before the payment date, the old holder will receive part of the interest to which the new owner is actually entitled and so the reverse of the above is applied. 

All income and allowances under the accrued income scheme for a tax year are pooled to give an overall income profit or loss. If the figure is positive, the amount is taxable, generally with no credit due for any tax deducted.  If the figure is negative, the loss may be relieved as follows: 

  • against interest received from securities of the same kind in the same tax year
  • if there are unrelieved losses, these may be carried forward and set off against interest received from securities of the same kind.
     

It should be noted that if the transfer takes place in tax year X but the next interest payment date is not until year Y the accrued income event is treated as having taken place in tax year Y.  

The accrued income scheme does not apply where the nominal value of securities in question does not exceed £5,000 on any day in the tax year in which the interest period ends or in the preceding tax year. 

The broker’s contract note or investment reports will normally clearly indicate the amounts of any accrued income/allowance. If the gain arising on the disposal of the securities is a chargeable gain, the proceeds need to be adjusted to reflect the accrued income/allowance.

High income child benefit charge
The high income child benefit tax charge is a unique tax, in that it seeks to claw back a state benefit, namely child benefit, through the self-assessment tax system.

The high income child benefit tax charge is a unique tax, in that it seeks to claw back a state benefit, namely child benefit through the self-assessment tax system.  

This tax applies where one of the parents/guardians has income in a tax year of more than £50,000. The charge has proved controversial and unpopular, mainly for two reasons:  

  • it has been perceived as unfair against single parent families
  • it has had the effect of bringing many taxpayers into self-assessment who would not otherwise need to fall within the regime.
     

The high income child benefit charge applies where: 

  • the individual or their partner were entitled to receive child benefit
  • one member of the household has income of more than £50,000 per annum. It should be noted that the rule only considers the level of income of the higher earner and not total income of the household. Therefore, if a couple earn £49,999 each, the charge will not arise.
     

Income for these purposes is ‘adjusted net income’, ie income from all sources less losses, pension contributions and gift aid contributions but before personal allowances. 

The amount of the charge will be 1% of the amount of child benefit received for every £100 of your income above £50,000. If the individual’s income is more than £60,000, the amount of the charge will be the same as the amount of child benefit the household gets. 

As an alternative to paying the charge, individuals may instead choose to disclaim the child benefit.

Example
Simon and Katherine are a couple with two children aged 14 and 16. Simon earns £54,000 a year. They get £1,752.40 child benefit a year (£20.30 for the eldest child plus £13.40 for the second child = £33.70 x 52 = £1,752.40) 

As Simon earns £4,000 over the £50,000 threshold, his extra tax will be equivalent to 40% of the total child benefit they get (£54,000- £50,000 = 4,000 divided by 100 = 40%). 

This means that while they will continue to get child benefit of £1,752, Simon will need to complete a tax return and have to pay extra tax of £700 for that tax year. This is 40% of £1,752.

Tax return white space
The tax return white space is the innocuous looking ‘any other information’ space at box 19 of the main SA100 tax return. It is more important than it looks, as the case of Charlton and Others v HMRC illustrates.

The tax return white space is the innocuous looking ‘any other information’ space at box 19 of the main SA100 tax return. It is more important than it looks, as the case of Charlton and Others v HMRC illustrates. 

In the case of Charlton and Others v HMRC the taxpayers entered into a tax avoidance scheme in 2006/07, which had been ruled invalid in a previous tax case. Comprehensive disclosure, drafted by counsel, was made in the white space box of the taxpayers’ self assessment returns.  

In July 2009, HMRC issued a discovery assessment under TMA 1970, s29. The taxpayer appealed, contending that the assessment had been issued outside the statutory time limit for raising an inquiry. 

The taxpayers’ appeal was allowed. The tribunal accepted that there had been a discovery assessment but on the evidence, the information provided with the taxpayers’ returns was sufficient to show that ‘no officer could have missed the point that an artificial tax avoidance scheme had been implemented’. Any officer reviewing the return should then have proceeded to seek guidance and an inquiry should have begun before the closure of the inquiry window on 31 January 2009. Discovery should not be used to make up for administrative inadequacy on the part of HMRC. 

Subsequent tax cases have thrown some uncertainty over the matter; notably, that of Robert Smith v HMRC. In this case, the circumstances were fairly similar. However, in this case, the HMRC officer dealing with the case had gone on sick leave for a period which straddled the enquiry window. The decision in this case went in favour of HMRC and the First Tier Tribunal ruled that HMRC were entitled to make a discovery assessment, even though a full disclosure had been made. This decision has, however, been appealed and the case will be heard before the Upper Tax Tribunal shortly. 

Although the two cases above relate specifically to tax avoidance schemes, the white space can be used to include additional information relating to any aspect of the self assessment tax return. The white space should, in particular, be used whenever there is some doubt regarding a particular aspect of the return and an element of judgement is been applied. This may apply where the legislation is not particularly clear in a certain area. Provided that the situation has been explained sufficiently in the white space notes, this will make it considerably more difficult, if not impossible, for HMRC to issue a discovery assessment once the normal enquiry window has expired.

Annual allowance of pension contributions
A tax charge may arise if the amount saved in an individual’s various pension schemes exceeds the annual allowance for that year.

A tax charge may arise if the amount saved in an individual’s various pension schemes exceeds the annual allowance for that year. 

If there is such a tax charge the individual must disclose it on their self assessment tax return on the additional information pages (for the year to 5 April 2014 this was Box 10 under other information on page Ai4). 

The amount of the annual allowances in recent years is as follows:
 

2009/10                          £245,000
2010/11                          £255,000
2011/12                            £50,000
2012/13                            £50,000
2013/14                            £50,000
2014/15                            £40,000

Carry-forward of annual allowance 
The current year’s annual allowance is deemed to be used first. If this is insufficient to avoid an annual allowance charge, any unused annual allowance from the three previous years can then be used. The earliest year’s unused allowance is used first then the next earliest and so on. The carry forward is automatic so it does not have to be claimed. 

Unused annual allowance arises for a year if the amount of the annual allowance exceeds the total pension input amount for that year. Unused annual allowance is only available for carry-forward if it arises during a tax year in which the individual is a member of a registered pension scheme. However, even if the pension input amount for the year is nil, carry forward would be available (if nil then the whole of the annual allowance would be carried forward). 

Amount saved towards the individual’s pension benefits 
The amount saved towards the individual’s pension benefits includes the following: 

  1. Individuals’ contributions into money purchase pension schemes.
  2. Employers’ contributions into money purchase schemes.
  3. Any third parties contributions into the individual’s money purchase scheme. This would include contributions made by friends and relatives.
  4. Capital value of the increase in the amount of any defined benefits during the year. The benefits at the start of the year are adjusted by a consumer prices index increase, then the adjusted figure is taken away from the amount of the benefits at the end of the year. The increase is multiplied by 16 to give the capital value (for 2010/11 or earlier years a factor of 10 rather than 16 was used). These calculations can be complicated but the pension scheme administrator should be able to provide these.
  5. For cash balance pension schemes the increase in the amount that would have been available for provision of benefits if the individual had become entitled to the benefits at that time (opening rights adjusted in line with the consumer prices index). Again these calculations can be complicated but the pension scheme administrator should be able to provide these.
  6. For hybrid pension schemes the amount is the higher amount of total contributions and any increase in the amount that would be available for provision of benefits. Again the pension scheme administrator should be able to provide these. 

Pension input period
To see if an individual’s pension savings is more than the annual allowance they would need to look at the pension savings for PIPs that end in the tax year. 

The pension input period (PIP) does have to be the same as the tax year. A PIP normally runs for a year but can be less than a year or longer than a year. An individual who is a member of a number of pension schemes may find that different schemes have different PIPs. Further information on PIPs is available here

Information provided by the pension provider 
The pension scheme provider should issue a statement to the member whose pension input amount exceeds his annual allowance for a tax year. This should be issued automatically without the member requesting it and it should normally be provided no later than 6 October following the tax year. The statement should show the following: 

  • the member’s aggregate pension input amounts for the pension input period ending in the tax year
  • their annual allowance for the tax year
  • their aggregate pension input amounts for each of the pension input periods ending in the three tax years immediately preceding the tax year
  • their annual allowance for each of the three preceding tax years. 

However, if the member’s pension input amount does not exceed their annual allowance for a tax year then the pension scheme may not issue such a statement automatically and the member may need to request such a statement. The information requested by the member should be provided within three months of the request or, if later, by 6 October following the tax year. If the scheme administrator has not received the necessary information from the sponsoring employer of an occupational scheme, he is given until three months after receipt of that information to satisfy the member’s request. 

Tax charge
No tax charge arises on an individual who goes above the annual allowance in a tax year if they: 

  • retired and started taking a pension because of serious ill health
  • died. 

Subject to the above exemptions, the annual increase in an individual’s rights under all registered pension schemes of which they are a member is measured against their annual allowance, and any excess over the annual allowance (increased by carry forward of unused allowances in previous three years) is chargeable to tax (called the ‘annual allowance charge’). For 2011/12 onwards the excess is charge was as follows: 

  1. At the basic rate of tax in relation to so much of the excess, when added to the individual’s taxable income does not exceed the basic rate band
  2. At the higher rate of tax in relation to so much of the excess, when so added exceeds the basic rate limit but does not exceed the higher rate limit
  3. At the additional rate of tax in relation to so much of the excess, when so added exceeds the higher rate limit. 

The charge is not dependent upon the residence or domicile status of the individual or the scheme administrator. 

So effectively the excess contribution over and above the annual allowance is charged to income tax as though it were part of the individual’s taxable income and as if it formed the top slice of that income, although it is not treated for any tax purposes as income, so for example losses, reliefs and allowances cannot be set against it and it does not count as income for the purposes of any double tax treaty. 

The individual themselves is liable to the tax, although for 2011/12 onwards, if an individual’s tax liability on the annual allowance charge for a tax year exceeds £2,000 they may arrange for the tax to be paid from their pension scheme or schemes.

Clamping down on tax avoidance
The Finance Act 2014 contains a number of measures to minimise tax avoidance.

The Finance Act 2014 contains a number of measures to minimise tax avoidance. 

In recent years the government has clamped down significantly on tax avoidance schemes, in particular introducing the Disclosure of Tax Avoidance Schemes (DOTAS) which obliges promoters and users of tax avoidance schemes to provide early information to HMRC. 

It also introduced the General Anti-Abuse Rule (GAAR) which allows HMRC to counteract tax advantages arising from abusive tax arrangements that do not stay within the spirit of tax legislation. In short, if there is a tax arrangement which has the aim of achieving a result that Parliament did not anticipate and which cannot be regarded as reasonable then it will fall foul of the GAAR and HMRC penalties are likely to follow. It remains to be seen how the courts will interpret the GAAR. 

However well tax advisers draw clients' attention to the risks of tax schemes, clients who later receive an unwanted tax bill may be unhappy with those bills (including penalties) and/or with the fact that they have to incur costs to challenge the schemes. Unhappy clients make claims even if they may be unmeritorious. The government is continuing to introduce legislation in this area with a view to strengthening HMRC's powers to tackle tax avoidance, something which could have further repercussions in terms of such claims. 

The Finance Act 2014 has very recently seen the government bring in further measures and strengthen these powers. In particular, the Act includes the following notable changes: 

  • prescribed information
  • high risks promoters
  • judicially defeated schemes
  • contact.
     

Prescribed information
The Act extends the list of prescribed information that promoters and users of tax avoidance schemes must provide HMRC under the DOTAS rules. The changes will allow HMRC to access sample scheme documents in order to conduct a full analysis of how a scheme works. 

High risks promoters 
New measures will allow HMRC to issue a conduct notice to promoters of tax avoidance schemes who have met a threshold condition in the previous three years. Such promoters will be subject to additional disclosure obligations and may be named publicly by HMRC. In addition, they will be required to inform clients of their promoter reference number (PRN) and of the fact that they are monitored. 

Judicially defeated schemes 
The Finance Act also includes provisions designed to promote the early settlement of tax avoidance cases and to discourage the use of tax avoidance schemes by requiring payment of disputed tax up front in cases where the same or similar tax avoidance schemes have been judicially defeated in litigation. Where HMRC is enquiring into a taxpayer's return or claim and it is of the opinion that there is a final judicial ruling relevant to the taxpayer's tax arrangement, then it will be able to issue an accelerated payment notice requiring up front payment of the sum in dispute. 

The provisions are intended to have the effect of discouraging tax avoidance as well as allowing HMRC to recover tax earlier and prevent taxpayers from delaying the payment of tax through disputing the amount in demand. In addition, HMRC will be able to issue penalties of 5% of the unpaid amount if the taxpayer fails to make the accelerated payment by the relevant date, with a further 5% payable if the amount remains unpaid five months after the penalty date.  

There is some cause for concern here in that it appears that HMRC will have quite a wide discretion as to whether there is a relevant final judicial ruling, something that could lead to uncertainty for some time. A summary of responses to the draft legislation was published in March 2014 and HMRC confirmed that decisions of the First-tier Tribunal that are not appealed may be held to be relevant, something which means that this measure could potentially have a significant impact for users of tax avoidance schemes and thus may subsequently give rise to more claims against their tax advisers. 

In any event, with the introduction of accelerated payment notices, tax advisers will need to inform their clients that they may be required to pay tax up front; failure to advise could itself be negligent. 

Article written for Lockton by Simon Mason, Partner, DWF 

Lockton Companies LLP is ACCA’s recommended broker for Professional Indemnity insurance. For information, please contact Lockton on 0117 906 5057.

Finance providers still failing small businesses
Finance providers must change the way they treat small businesses seeking support, or leave themselves wide open to disruption, claims a new report by ACCA and Longitude Research.

Finance providers must change the way they treat small businesses seeking support, or leave themselves wide open to disruption, claims a new report by ACCA and Longitude Research. 

ACCA’s first State of Business Finance review combined five-and-a half years of economic survey data with considerable research and in-depth case studies on accountants’ experiences of raising finance. It found that business financing is now easier than it’s ever been since the crisis, yet small businesses are still finding the experience of fundraising much more challenging than their larger counterparts. 

Business financing conditions are an important matter for ACCA, which revealed that it has about 50,000 members regularly involved in helping businesses access finance, including over 10,000 in the world’s capital markets. 

A major concern to ACCA is the fact that a substantial share of business financing is still essentially only available on a ‘risk-free’ basis: the recipients must be seen as risk-free, or provide significant security. The global body stresses that neither ‘risk-free’ status nor collateral truly provide the safety credit providers seek, yet obsessing about the two starves some of the most promising businesses of finance. ACCA believes this problem will intensify as small businesses become increasingly dependent on intangible assets. 

ACCA believes that, in the future, truly complete finance professionals will have a greater advantage in helping businesses raise finance for four reasons:  

  • first, both traditional and innovative finance providers increasingly require timely information straight from operations and the supply chain, which requires accountants to act as true business partners
  • second, accountancy practitioners are increasingly expected to provide a quasi-assurance service to fundraising businesses. While valuable to businesses and finance providers alike, such services can only be monetised as part of a comprehensive advice offering
  • third, with a substantial amount of business financing provided or underwritten by directors, professionals need to be able to speak directly to boards and explain the long-term implication of financing decisions
  • fourth, an increasing array of financing options risks distracting business owners with disastrous results; businesses will need authoritative advice to help them narrow their options, not merely evaluate them. 

The first State of Business Finance review also considers what can be done to restore relationships between businesses and finance providers. ACCA calls for professionals to work with venture capitalists and not be afraid to challenge their herding behaviour, and for credit providers to prioritise timeliness, innovation and good conduct. Ultimately, the professional body said, financing relationships can only be mended by restoring trust, ownership and control where they belong. 

Looking deeper into the people involved in raising finance, ACCA noted that women were significantly under-represented in business financing, especially where finance was being raised for clients. While ACCA’s past research had found evidence of this split, the latest review suggests the findings cannot be explained away by business characteristics and other objective factors.

Finance professionals and entrepreneurs need to educate each other
Recommendations about how entrepreneurs, enterprises and finance professionals can achieve success together have been set out by ACCA’s Global Forum for SMEs.

Recommendations about how entrepreneurs, enterprises and finance professionals can achieve success together have been set out by ACCA’s Global Forum for SMEs. 

The paper, entitled A new breed of adviser for the modern-day enterprise, emphasises the importance of communicative ‘soft’ skills to the role of business advisers. 

The report also considers the potential of Massive Online Open Courses (MOOCs) in enterprise education, in light of ACCA’s recently launched course with the University of Exeter, named Discovering Business in Society. The Global Forum highlighted the ability of enterprise MOOCs to democratise training usually reserved for senior managers, thus increasing corporate entrepreneurial activity, and their potential to act as lead generators for public and private enterprise support. But to fulfil any of these roles, enterprise MOOCs need to emphasise the immersive and team experience that most entrepreneurs treasure. 

But the group also considered the role of accountants as de facto mentors. Rosanna Choi, Chair of the Global Forum for SMEs, said: ‘It is important that entrepreneurs understand the benefits that finance professionals can bring to their business. 

‘Accountants are trusted advisers to businesses, especially start-ups and SMEs (small and medium-sized enterprises) when they are in the first few years of formation and need to keep on top of the financial side of things in their aim to expand and grow. 

'However, in order to be able to provide the rounded support that enterprises need from the very beginning of their business journey, accountants need to view their role with the mindset of the entrepreneur.’ 

Some recommendations have been put together by the Global Forum for SMEs, about what the entrepreneur and their enterprise can do with their financial adviser to ensure business runs smoothly, as well as expand and grow when the time is right. 

Charlotte Chung, ACCA’s senior policy adviser, said: ‘The onus is on both the finance professional and the entrepreneur to keep themselves up-to-date with the latest in enterprise development and what this could mean for their respective professions. The global forum’s recommendations outline how they can go about this and also how they can work together in synergy to ensure business runs as smoothly as possible.’ These recommendations include: 

For entrepreneurs and enterprises

  • Invest in creating and building a robust business plan – Planning enables the entrepreneur to experiment with new ideas and to steady the firm for rapid growth while being anchored within sound financial parameters. Seeking professional support early on – working out what the business can and cannot afford to spend or working through potential scenarios and options for growth – is a worthwhile investment for helping entrepreneurs to flesh out their business and its potential beyond just the initial idea. This requires entrepreneurs to practise putting pen to paper using simple analysis and review techniques available in business planning, instilling a greater degree of discipline in the decision-making process.

For finance professionals

  • Understand the mindset of the entrepreneur – What entrepreneurs and accountants value and prioritise may differ widely, and the accountant will typically adopt a more conservative role – that of steward. Accounting education should therefore be better aligned with enterprise education, through the use of business scenarios, role playing and case study material.
  • Stay on top of technology –Technology-driven alternative finance providers such as crowdfunding platforms are enabling entrepreneurs to do business in new and innovative ways, where conventional practice and behaviours do not necessarily apply. If accountants want to remain businesses’ most trusted advisers, they will need to keep up with these developments; such changes are also likely to provide opportunities for developing new value-added services to businesses.
  • Develop a deeper understanding of business model typologies throughout the business cycle – Finance professionals need to be prepared to apply and adapt their rigorous approach to finance management to less familiar business models, particularly those during the start-up phase. The prevalence of technology has also sparked new models of doing business, such as those operating in e-commerce, which may not fit conventional moulds and metrics. It is ever more crucial for finance professionals to work closely with businesses to ensure that their support is fit for purpose and tailored to their client’s needs.
  • Be business partners - The skills that finance professionals do not typically excel in belong to what are often considered to be other ‘unrelated’ areas of the business: marketing, communications, brand and reputation management etc. Accountants need to address these weak spots in order to provide a more rounded service which factors in the value and impact of these areas on the bottom line, to get a truly accurate picture of the financial health and potential of a business.
Tax is difficult
How can we improve the cornerstones of a good tax system – certainty, simplicity and stability?

How can we improve the cornerstones of a good tax system – certainty, simplicity and stability? 

Tax is difficult because the world is complicated. Trite though that sounds, it is unfortunately the simplest way of expressing the inevitable outcome of a huge bundle of conflicting factors. One of the most fundamental issues is that tax is always expressed as an amount of money, but is at the same time used as a mechanism to influence underlying behaviours in line with society’s ‘values’. 

Whether you think of monetary labels as the price or the value of something may depend on your level of cynicism, but those amounts are only ever an equivalent for whatever the underlying 'thing' is worth. It follows that how we define and process those numerical expressions is fundamental to calculating tax liabilities so the ‘value’ of a business’s activities, as reflected by its tax contribution, is seen through that filter. 

Take a factory producing bicycles. The actual taxes paid by the operators of the business will certainly be far more sensitive to the accounting treatments of the factors of production than to the quality of the bicycles, the treatment of the workers or the environmental impact of the whole operation. Whether the ownership of the factory is leasehold or freehold, and whether the workers are employees or independent contractors makes no direct difference to the number of physical bicycles it can produce – and yet those different legal descriptions can radically alter the tax outcomes. 

In the long run it’s as likely, if not more so, that the success or failure of the venture will depend more upon the abstract legal considerations than it will on the quality of the bicycles or its treatment of the workforce and environment – even though you could make a good argument that it’s actually those aspects of the factory’s operations that society ought to be more interested in. 

For the vast majority of individuals things are generally simpler. There’s far less in the way of accounting to be done; all that matters is the tax treatment of the cash amounts of earnings that hit their bank accounts in the year and valuations usually arise only in the context of 'benefits in kind'. (It’s probably a given that all employees consider the monetary value their employers put on them to be far too low, but that’s another issue.) 

The other main tax that individuals pay in most countries is sales taxes or VAT – but these are almost entirely dealt with and accounted for by the businesses selling the goods to them, and the complexities that arise bypass the consciousness of consumers altogether. A recent change in VAT treatment of a popular consumer product in the UK hasn’t even resulted in a noticeable change in the retail price, despite the 20% shift in margins for supermarkets. 

The issues arise because society tries to use the application of the tax system to enforce its values directly (rather than just raising the revenue to fund other measures). Differentials in tax treatment inevitably end up cruder than the world they’re trying to operate on. There’s a myriad shades of difference between a factory employing local disadvantaged and disabled people to build environmentally friendly water filters for developing economies and a fully automated cigarette rolling plant that deposits its waste products straight into a local river. 

It may look simple to use the tax system to distinguish between those two extremes, but then comes the difficulty of drawing the black and white line between tax/no tax on infinite shades of grey. Somewhere, after all, the tax system has to draw the line, because tax is a binary choice between 'this dollar is yours to spend as you will' against 'this dollar is taken by the state and you no longer have a say in its use', and it’s around those tipping points that the uncertainty will crystallise. Set that in the context of accounting standards so complex that even experts can’t agree on them, and tax codes so long that no one dare claim to be expert on all aspects of them, and it can hardly be a surprise that we can’t work out what the tax system does do, let alone what it ought to. 

Read ACCA’s Certainty in Tax paper. 

Jason Piper – technical manager, Tax and Business Law, ACCA

Spotlight on accounting for complex supplier arrangements
The FRC has urged reporting entities to clarify the accounting treatment of complex supplier arrangements, which include supply chain finance and ‘pay to stay’ fees.

The FRC has urged reporting entities to clarify the accounting treatment of complex supplier arrangements, which include supply chain finance and ‘pay to stay’ fees. 

At the beginning of December the Financial Reporting Council (FRC) called retailers, suppliers and other businesses to include in their financial statements sufficient information on their accounting policies, judgements and estimates arising from their complex supplier arrangements. 

The FRC noted that the amounts involved in such arrangements are often significant in aggregate to the operating margins and other performance indicators of various entities and that therefore investors need to receive enough clear and relevant information to be able to evaluate a company’s performance and financial position. 

For such purpose the FRC expects to see high quality disclosures for such arrangements in the next annual reports and accounts and it will focus on this area of the financial statements when conducting its reviews of audits and accounts in 2015. The FRC’s focus is likely to be on large retailers, such as supermarket and clothing chains, which appear to be heavily involved in complex supplier arrangements. 

Complex supplier arrangements 
Complex supplier arrangements is a broad category that includes a number of regular features of supplier contracts in different industry sectors, including retail, such as fees, contributions, discounts, multiple offers and volume rebates. 

An example of a similar arrangement are the so-called ‘pay to stay’, or ‘slotting’, fees, where existing suppliers of a large retailer are required to pay a fee to have their products placed on the retailer’s shelves or to be kept on its list of suppliers.  

Another type of arrangement, which is likely to generate substantial inconsistency in accounting practice, is supply chain finance (SCF). The term supply chain finance includes a number of possible financial arrangements but it is commonly identified with the most popular and most widely used, which is reverse factoring.

SCF/reverse factoring is, in simple terms, a type of arrangement which is initiated by the buyer, who, upon receiving an invoice from a supplier, is asked to approve it. Once the invoice is approved, the supplier can sell it to a finance provider who advances discounted finance to the supplier based on the period between the cash advanced and the settlement of the account payable. As the supplier relies on the creditworthiness of the buyer, normally a larger entity, its cost of finance is lower than it would otherwise be if it raised the finance in its own right, for instance by using traditional invoice discounting. 

SCF is supposed to improve the working capital requirements of the supplier by allowing earlier access to cash. On the other end the buyer is capable of benefiting by extending the term for the settlement of accounts payable and therefore improving its working capital requirements. 

This graphic illustrates how SCF works 

The adoption of SCF as an alternative finance option for SMEs and mid-market companies is supported by the UK government and a report commissioned by the ACCA in 2014 showed how the benefits of SCF are normally shared between both buyers and suppliers. 

It has to be noticed that the Federation of Small Businesses (FSB) has also recently expressed concern in respect of some complex supplier arrangements, which in their opinion have been forced upon smaller suppliers to the extent of being tantamount to ‘supply chain bullying’.     

Dubious accounting treatment
As pointed out by the FRC, there is no single standard within IFRS which addresses the required accounting and disclosures for complex supplier arrangements. Additionally, in the absence of well-known industry norms, it is likely that the accountancy practice in respect of arrangements that are substantially the same may differ from one entity to the other. 

Therefore the inclusion in the financial statements of information about the accounting treatment for such arrangements, and about material judgements and significant estimates underlying it, is essential for the users of the financial statements to allow understanding and comparability of a company’s performance and financial position.

VAT: businesses supplying digital services to private consumers
New guidance covering the recent changes to the place of supply of digital services from 1 January 2015 is available from the GOV.UK website.

New guidance covering the recent changes to the place of supply of digital services from 1 January 2015 is available from the GOV.UK website.  

The services covered by the changes are digital services otherwise known as broadcasting, telecommunications and electronic services (BTE). This has been a well publicised change and the guidance reflects the current knowledge with additional help and supporting material. There is also a useful flow chart that looks at how you decide whether or not you are a digital services supplier and what you need to do if you are. 

There is greater detail on what falls within the definition of digital services, split into the three categories of broadcasting, telecommunications (transmission of signals of any nature by wire, optical, electromagnetic or other system) and electronic (e-services that are electronically supplied). Supplies that are unaffected by the change include:  

  • supplies of goods, where the order and processing is done electronically
  • supplies of physical books, newsletters, newspapers or journals
  • services of lawyers and financial consultants who advise clients through email
  • booking services or tickets to entertainment events, hotel accommodation or car hire
  • educational or professional courses, where the content is delivered by a teacher over the internet or an electronic network
  • offline physical repair services of computer equipment
  • advertising services in newspapers, on posters and on television. 


E-services are those that are automatically delivered over the internet or electronic network where there is minimal or no human intervention, for example: 

  • where the sale of the digital content is entirely automatic when a consumer clicks the ‘buy now’ button on a website and either:
    • the content downloads onto the consumer’s device
    • the consumer receives an automated e-mail containing the content
    • where the sale of the digital content is essentially automatic, and the small amount of manual process involved doesn’t change the nature of the supply from an e-service.
        

A full list of the digital services can be found on the European Commission’s website in the Annexes

Care must be taken on the bundled or multiple supplies; this follows the established principles and these services should be looked at on a case by case basis. The VAT Mini One Stop Shop (VAT MOSS) is a system available to registration for all businesses that fall within this regime, without which businesses supplying digital services may be obliged to register in the most extreme circumstances in all 28 EU member states. 

Until 30 June 2015 HMRC is offering help to micro businesses that are registering for VAT MOSS. Micro businesses are those trading below the VAT registration threshold, currently £81,000. HMRC is allowing micro businesses to base their customer location, VAT taxation and accounting decisions on information provided to them by their payment service provider. This means the business need not require further information to be supplied by the customer for this transitional period and will give micro businesses time to adapt their websites to meet the new data collection requirements. 

ACCA has recently updated its Guide To… VAT MOSS

 

VAT: partial exemption method using floor space
HMRC has issued Revenue & Customs Brief 35/2014: Lok.nStore Group PLC (LnS) decision on calculating deductible VAT.

HMRC has issued Revenue & Customs Brief 35/2014: Lok.nStore Group PLC (LnS) decision on calculating deductible VAT. 

The decision was focused on the use of the Partial Exemption Special Method (PESM) and how fair and reasonable it was when compared to the standard method. 

LnS operated self-storage facilities providing standard rated storage and exempt insurance provided to customers who wanted cover. The partial exemption calculation issue was in regard to the recovery of overheads such as construction, maintenance and operational costs. 

LnS put in a proposal to amend their partial exemption calculation based on floor space which resulted in an effective input tax recover of 99.98% on overheads. HMRC rejected this on the basis that this method did not result in a more accurate basis than the standard partial exemption method. 

LnS contested this and made an appeal to the First Tier Tribunal (FTT). The FTT based their decision on the AB SKF (C-29/08) where it was concluded that the proposed special method based on floor space was fair and reasonable and better than the standard method, HMRC appealed to the Upper Tribunal (UT). 

The AB SKF (C-29/08) decision focused on the ‘cost component price’ and the impact on the overheads on the price of insurance ‘must be very small’. In addition it was shown that the storage area of the buildings were ‘almost exclusively’ used for taxable storage. 

HMRC appealed on the basis that the FTT had erred and applied the wrong test in applying the cost component test. The UT agreed with HMRC that the FTT had erred though they were unconvinced that this would result in a different conclusion and HMRC’s appeal was dismissed. 

The UT concluded as is normal in these cases that close attention must be paid to individual facts, particularly in understanding and assessing the economic or commercial reality underlying the use of relevant VAT inputs. Though HMRC is not contesting the decision it has not amended its policy on using floor space for a PESM and deem them to normally be appropriate for a retail business. 

If you believe that decision has affected your business a retrospective claim can be made in line with VAT Notice 700/45 and in accordance with the standard four year time limit. View VAT Notice 700/45 for details on how to make a claim. 

The brief can be found here

NEWS
Progress with ACCA
Do you have any staff or colleagues looking to do a professional qualification?

Do you have any staff or colleagues looking to do a professional qualification? 

We are providing free online sessions for any prospective students looking for further information on how to progress their careers and support your business better. 

Sessions will be held at 12:30 and are scheduled for:  

  • 21 January
  • 18 February
     

What will the session cover? 
This session will provide a very useful overview of the ACCA Qualification, giving information on exemptions, entry routes and how to sign up, and will incorporate some first-hand information on why others have chosen ACCA as their next step. 

The session will last no longer than 30 minutes and will provide an opportunity for those attending to ask questions. 

To book a place on any of the above dates, please contact us via email stating the preferred session with names, email addresses, and employer details for those who wish to attend.

CPD
Saturday CPD conferences
Full details about our Saturday CPD conferences for practitioners.

SATURDAY CPD CONFERENCE FOR PRACTITIONERS

 

CONFERENCE ONE

• VAT and Cross-Border Transactions  
• Property Taxes
• The Tax Impact of FRS 102 and the New UK GAAP
• PAYE

                      

CONFERENCE TWO

• R&D Patent Box
• The Powers of HMRC
• Finance Bill/Act 2015
• Anti-money Laundering

                      

CONFERENCE THREE

• UK GAAP Reporting
• Self Employed Status and IR35 Issues and Planning


Please Note: The remaining two sessions have been left open to deal with issues arising during 2015.

Budget Breakfast 2015
Book now for our annual Budget Breakfast.

BUDGET BREAKFAST

19 March 2015, London

The event begins with a buffet breakfast at 08.00 followed by a discussion led by a panel of tax experts from ACCA’s Global Forum for Taxation, who will analyse the key issues arising from the Budget and debate their impact.

Those attending will receive an information pack containing Budget papers and press releases.

Residential Conference for Practitioners
Plan ahead with a date for your diary.
This year's ACCA's Residential Conference for Practitioners will be held as follows:

  • Residential Conference for Practitioners
  • Burleigh Court, Loughborough
  • 10-11 July 2015


Further details will be available shortly.

CAREERS
Legal advice service
Details of a competitively priced legal advice service that covers both business and personal issues.

Members often call ACCA asking for legal advice so we have teamed up with iQ Business to bring you a competitively priced legal advice service that covers both business and personal issues. 

In today's complex business environment there are potentially dozens of issues that require professional legal interpretation or guidance. This can prove prohibitively expensive if you have to consult local lawyers who charge for every minute they spend on your issue. 

The ACCA Legal Advice Service is available 24 hours a day, 7 days a week and covers both business and personal issues for just £95+VAT per year. 

Unlimited access to a constantly available advice line is the sensible way to ensure your organisation always acts lawfully. 

Examples of business issues covered include, but are not limited to:  

  • business motoring problems
  • company formation
  • company law
  • contract disputes
  • copyright & IP
  • data protections
  • e-commerce and internet
  • employment law
  • health & safety legislation
  • immigration law
  • labelling requirements
  • law
  • negligence
  • real estate
  • supplier / customer disagreements
  • tenancy disputes
  • trade statutory licences.
     

Click here for more details and information on how to subscribe. 

The ACCA Legal Advice Service, available 24 hours a day, 7 days a week for just £95+VAT per year.

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