Technical and Insight
Catch up on all things tax!

Our December issue focused on all things tax. If you missed it, browse the content now


Our December issue focused on all things tax. If you missed it, browse the content now

Important anti-money laundering update

Why firms need to review their anti-money laundering processes – now.


Why firms need to review their anti-money laundering processes – now.

 

There were a number of changes enacted by UK legislation to reflect the fifth Money Laundering Directive. The changes were effective from 10 January, with guidance being updated or being in the process of being revised. The changes have the largest impact on letting agents, art dealers and crypto currency dealers but will also affect other businesses including accountancy firms and other regulated firms.

 

The FCA has published specific new areas that firms need to comply with. The main changes and areas to consider are highlighted below.

 

Firm wide risk assessment and policies and procedures
The changes include the requirement that firms assess new and additional high-risk factors when deciding on the need for enhanced due diligence. The FCA highlights these may occur where:

  • there are relevant transactions between parties based in high-risk third countries
  • the customer is the beneficiary of a life insurance policy
  • the customer is a third-country national seeking residence rights or citizenship in exchange for transfers of capital, purchase of a property, government bonds or investment in corporate entities 
  • non-face to face business relationships or transactions without certain safeguards, for example, as set out in regulation 28 (19) concerning electronic identification processes
  • transactions related to oil, arms, precious metals, tobacco products, cultural artefacts, ivory or other items related to protected species, or archaeological, historical, cultural and religious significance, or of rare scientific value.

 

Customer due diligence

Amendments to Regulation 28 require firms to update their records relating to the beneficial ownership of corporate clients. Firms also need to understand the ownership and control structure of their corporate customers, and record any difficulties encountered in identifying beneficial ownership.

 

Electronic verification

Electronic verification is now written into the legislation with firms needing to verify the reliable source. The Regulation 28(19) states:

 

'For the purposes of this regulation, information may be regarded as obtained from a reliable source which is independent of the person whose identity is being verified where:

 

(a) it is obtained by means of an electronic identification process, including by using electronic identification means or by using a trust service (within the meanings of those terms in Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23rd July 2014 on electronic identification and trust services for electronic transactions in the internal market; and

(b) that process is secure from fraud and misuse and capable of providing an appropriate level of assurance that the person claiming a particular identity is in fact the person with that identity.'

 

Requirement to report discrepancies

There is also a requirement that firms update their records relating to the beneficial ownership of corporate clients. ‘Firms also need to understand the ownership and control structure of their corporate customers, and record any difficulties encountered in identifying beneficial ownership.’

 

There is a new requirement for firms to report to Companies House discrepancies between the information the firm holds on their customers, compared with the information held in the Companies House Register.

 

This means that accountants will need to inform Companies House if there’s a discrepancy between the information that they hold about a beneficial owner of a company, limited liability partnership, or Scottish limited or qualifying partnership and the information that’s on the Public People with Significant Control (PSC) register.

 

Companies House does have a narrow but important power to rectify the register in the case of such discrepancies and may evaluate whether false or misleading information has been publicly filed and utilise its power to penalise. 

 

EDD

Enhanced Due Diligence red flag transactions process requirements have been tightened. The SRA has a useful reminder within its guidance on this area stating that ‘Changes to existing Enhanced Due Diligence (EDD) requirements mean that you must apply EDD in all the following circumstances (formerly it was only necessary if all the listed elements were met):

  • where the transaction is complex
  • where the transaction is unusually large or
  • where there is an unusual pattern of transactions, or the transaction or transactions have no apparent economic or legal purpose (formerly both conditions had to be satisfied).

 

'Whether a transaction is ‘complex’ or ‘unusually large’ should be judged in relation to the normal activity of the practice and the normal activity of the client.’

 

Finally, training requirements on staff are extended to include any agents a practice may use for the purpose of its business where they are involved in the identification, mitigation, prevention or detection of money laundering or terrorist financing risk within the business.

 

CCAB is working on updating the AML guidance for the accountancy sector. We will include an update on our website as soon as the guidance is released.

 

ACCA’s Technical Advisory Team has produce a series of factsheets to help both new and experienced practitioners in complying with their Anti-Money Laundering obligations.

 

The factsheets address the following areas:  

  1. Firm-wide risk assessment
  2. AML policy
  3. AML procedures
  4. The (suspicion activity report) SAR process
  5. The role of the Money Laundering Reporting Officer
  6. Client due diligence
  7. Client risk assessment
  8. Effective AML training programmes.

 

Look out for these being published during February.

Off-payroll concerns continue – actions you can take

ACCA and many other bodies continue to highlight the impact and damage to the economy of the off-payroll changes due to be implemented in April.


ACCA and many other bodies continue to highlight the impact and damage to the economy of the off-payroll changes due to be implemented in April.

 

You may have seen the limited and narrow review being undertaken by the government to:

  • gather evidence from affected individuals and businesses to ensure smooth implementation of the reforms
  • determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms.

 

Please do continue to share your concerns about and issues with this legislation, including the impact on the entrepreneurs with which your business engages, via supportingpractitioners@accaglobal.com and also your MP https://members.parliament.uk/members/Commons

 

Large, medium sized businesses, charities and public bodies are being notified of the changes by HMRC. In their communication they are sign-posting resources including webinars and a factsheet for contractors.

 

Draft legislation has also been issued for consultation which closes on 19 February stating how the changes will shift responsibility for operating the rules from the worker’s company to the medium and large-sized organisation they work for.

 

As a reminder, HMRC’s limited guidance states:

  • look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies
  • determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Tax [see below re CEST] service to do this
  • start talking to your contractors about whether the off-payroll rules apply to their role
  • put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.

 

From a practical viewpoint, undertaking the assessments takes time and requires those assessing to have a knowledge of the work undertaken and also the terminology used. This is why many in the private sector have already, as was the experience in the public sector, removed many startup businesses from their list of suppliers .

 

CEST

As previously highlighted, the CEST tool has been updated allowing 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.’

 

Also, see our webinar The extension of IR35 to the private sector - is this the demise of the PSC?

 

Could entrepreneurs’ relief cease to exist?

Examining the definition of ‘trading’ in CGT reliefs and asking if entrepreneurs’ relief will continue to exist.


Examining the definition of ‘trading’ in CGT reliefs and asking if entrepreneurs’ relief will continue to exist.

 

The October 2019 ruling of the First Tier Tribunal in Potter provided clarification that what constitutes trading for the purposes of entrepreneurs’ relief extends to other CGT reliefs for both individuals and companies, such as substantial shareholding exemption or holdover relief.

 

In Potter vs. HMRC, HMRC attempted to deny Entrepreneur’s Relief on liquidated company shares of Mr and Mrs Potter, who were directors and shareholders of Gatebright Ltd, a company trading as a broker on the London Metal Exchange.

 

The facts of the case were that as a result of the 2008 financial crisis Gatebright suffered a significant decline in sales whilst at the same time investing 80% of available reserves in two six-year investment bonds, generating significant dividend income.

 

Although the economic recovery followed and efforts to broker deals continued, progress was slow due to director’s ill health, resulting in the last sales invoice being issued in March 2009.

 

In November 2015 the directors liquidated the company and claimed entrepreneur’s relief. HMRC denied entrepreneurs' relief on the grounds that:

  1. the company had ceased trading when the last invoice was issued (2009) and outside the three year period (before November 2012)  in condition B in section 169I of TCGA92
  2. the investment of reserves in the bonds meant that the company's activities had become investment activities.

 

The taxpayers appealed HMRC's decision.

 

FTT decision

The tribunal rejected HMRC’s arguments and ruled that:

  • trading activities did not cease in 2009 due to no sales being secured after this date. Activities carried out after 2009 amounted to trading activities: seeking new business, preparing the ground for the continuance of trade once market conditions improved
  • temporarily suspension of activities due to Mr Potter's ill-health did not mean that Gatebright ceased trading
  • investment in corporate bonds was not considered a significant non-trading activity as the company spent no time, money or effort on those activities. When considering activities as a whole, the FTT found that they did not, to a substantial extent, include activities other than trading activities.

 

Impact of the decision

The ruling reaffirmed the meaning of a ‘trading company’ per section 165A CGTA92: the essence of a trading status for a company is in whether trading activities are carried out, rather than how effective they are and a temporary suspension of trading activities due to circumstances beyond control is not sufficient to determine that trading has ceased.

 

As the status of trading has a broader relevance in tax law, the impact of the Potters' case is likely to help in cases involving holdover relief or substantial shareholding exemption.

 

Taking active steps to maximise investment returns, for example actively moving funds between high interest bearing accounts to maximise returns, taking planned investment risks or incurring costs on investment advice are likely to constitute significant non-trading activities. However, merely placing funds in a financial product does not, even if the amounts invested represent a significant proportion of company funds and most income the company generates comes from the investment.

 

For more entrepreneurs' relief tax cases see It’s not personal – HMRC wins entrepreneurs’ relief case

 

Finally, the government has highlighted that entrepreneurs’ relief is under review. The Conservative Party manifesto said entrepreneurs’ relief would be reviewed and reformed.  The PM in The Times stated:

 

‘Boris Johnson has signalled that a tax break for entrepreneurs is likely to be scrapped in the budget because it is merely making already “staggeringly rich” people even wealthier.


The Prime Minister said that the Treasury was vehemently against entrepreneurs’ relief, which saved company owners and investors £2.4bn in 2018 by allowing them to cut their tax bills when they sold their ventures.’

 

Has the relief encouraged investment?

You can let us know your thoughts on the above by sending your comments to supportingpractitioners@accaglobal.com

 

 

Independent review into loan charges

Have you seen HMRC’s response to the review’s outcomes?


Have you seen HMRC’s response to the review’s outcomes?

 

You may have already received HMRC’s communication highlighting its advice around the independent review into loan charges where it signalled it will refund voluntary payments.

 

HMRC stated in its update:

 

'On 20 De‌ce‌mb‌er 2019, the independent loan charge review was published along with the government’s response on G‌OV‌.U‌K. HMRC also published guidance on GOV.UK on the key changes to the loan charge policy and what this means for customers. 


'On 20 Ja‌nu‌ar‌y 2020, the government published draft legislation to implement the changes to the loan charge as recommended by the independent review. Further guidance has also been published which provides more details of the changes, including the self assessment process. 


'If any of your clients are affected by the loan charge, then we would advise you to review the latest guidance and discuss with your clients any changes they may need to make to their return. The new guidance can be found on GOV.UK'

 

The guidance summaries the following main changes:

  • the loan charge will apply only to outstanding loans made on, or after, 9 December 2010
  • the loan charge will not apply to outstanding loans made in any tax years before 6 April 2016 where the avoidance scheme use was disclosed to HMRC and HMRC did not take action (for example, opening an enquiry)
  • people can now elect to spread the amount of their outstanding loan balance (as at 5 April 2019, recalculated in line with the above changes) evenly across three tax years: 2018 to 2019, 2019 to 2020 and 2020 to 2021. This will give greater flexibility on when the outstanding loan balance is subject to tax and may mean that the loan balance is not subject to higher rates of tax
  • HMRC will refund voluntary payments (known as ‘voluntary restitution’) already made in order to prevent the loan charge arising and included in a settlement agreement reached since March 2016 (when the loan charge was announced) for any tax years where:
    • the loan charge no longer applies (loans made before 9 December 2010)
    • loans were made before 6 April 2016, the avoidance scheme use was disclosed to HMRC and the department did not take action (for example, opening an enquiry).

 

Could ‘nicheing’ help you find an edge in the market?

Find an edge in the market by ‘nicheing’, and by thinking smartly about what ‘niche’ can mean.


Find an edge in the market by ‘nicheing’, and by thinking smartly about what ‘niche’ can mean

 

Mike Crook, Managing Director, PracticeWeb

 

Watch this video introduction then read on for more...

 

‘Nicheing’ is a particularly ugly example of verbing a noun, but it’s become a buzzword because it encapsulates an effective business strategy: pick a target market and prioritise spend and energy in its direction.

 

There are an awful lot of accountancy practices that, to paraphrase, offer a wide range of tax and financial services, with a friendly, professional, proactive approach, to individuals and businesses across all sectors - both locally and nationally.

 

That’s understandable. In a hypercompetitive market, it can feel risky to do or say anything that might exclude even a single potential client.

 

By failing to focus, though, you could be excluding everyone who values specialist knowledge which, our research suggests, could be a lot of people.

 

Why seek a niche

When we surveyed small and medium-sized businesses last year, 71% of them said it was important or very important that their accountant knows their sector.

 

It can also have the added benefit of drawing talent to your firm – sharp people tend to enjoy working for a business with a clear purpose, especially when it aligns with their personal interests or professional background.

 

The recent State of Startups report found that employees care more about making an impact (55%), the problems they’d be solving (42%), the mission (40%), the team (39%) and the culture (30%) than compensation.

 

We practice what we preach in this regard. As a marketing agency, tempting as it might have been to broaden our client base at times, we’ve stuck to our guns and focused on accountants for more than 20 years.

 

That single-minded focus gives our clients clarity around our offer and confidence in our expertise.

 

General vs. specific

Imagine a Casterbridge dairy farmer in search of an accountant. She doesn’t have any word-of-mouth recommendations and is reliant on online research to draw up a shortlist.

 

One local firm, Generica Accountancy, claims to do everything for everyone, UK-wide.

 

Another, Henchard’s, says it specialises in tourism, agriculture and construction industry tax and every third item on the corporate blog is about farming. It has a single partner who specialises in agricultural accounting.

 

A third, Wessex Farm Accountants, does nothing but agricultural accounting; it has a complete guide to tax for farmers available to download; a blog full of tax advice for farmers; and the partners’ CVs reflect a personal interest in farming.

 

Not only is the latter more likely to surface in search results when people search ‘accountants for farmers’ or related terms, but it’s also more likely to resonate with the potential client in question.

 

Of course this approach won’t work for every firm and many, like the second imaginary firm above, will want to identify a few complementary niches rather than focusing on just one.

 

Beyond sectors

You don’t have to limit yourself to industry sectors when thinking about niches, either – it could be about targeting a particular spending bracket, businesses at a certain stage of their development, or something more complex based on market research and insight.

 

Buyer personas, AKA user or customer personas, can be one way to crack this. A persona is a portrait of an ideal client, often named, sometimes with a visual representation. The concept was originally conceived in the 1970s to help software developers focus on end-users but has found a new lease of life in modern marketing.

 

Is this campaign aimed at Zoe, the CEO of an 80-person catering business that’s about to go national, or Tom, a photographer operating as a sole trader with no ambition to grow?

 

Each needs to hear a different message, possibly in a different voice, through different channels.

 

We’ve worked with clients who, when given the chance to reflect in a facilitated workshop, have concluded they need to ditch the Toms and get more Zoes. The process can really transform your thinking.

 

What next?

One quick win is to think about which type of client you’d like fewer of on the books – a sort of anti-persona, if you like – and then reflect on what you might do to gently discourage them from getting in touch.

 

Next, consider undertaking a buyer persona exercise, ideally with a skilled facilitator.

 

When you know what your ideal client looks like, review your SEO strategy, marketing plan and content calendar so that your activity in the next six to 12 months is clearly focused on winning that business.

Capital gains exemptions and reliefs

Are your clients familiar with the various exemptions and reliefs available on CGT transactions?


Are your clients familiar with the various exemptions and reliefs available on CGT transactions?

 

Capital gains tax (CGT) is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.

 

All forms of property are chargeable assets unless exempt. Below are some of the exemptions and reliefs provided by TCGA 1992.

 

Wasting assets (s45): subject to certain exemptions, no chargeable gain shall accrue on the disposal of, or of an interest in, an asset which is tangible movable property, and which is a wasting asset.  A wasting asset means an asset with a useful life not exceeding 50 years. Useful life is determined at the date of acquisition, having regard to the purpose for which the asset was obtained.

One instance when wasting assets are not exempt from capital gains tax is when the wasting chattels are used in trade, and capital allowances have been claimed or could have been claimed on them (s47).  There would therefore be two potential tax liabilities arising on the sale of business machinery at a gain: the first as a balancing charge, and the second in the form of tax on the chargeable gain. Any tax allowable loss arising on the sale of business plant and machinery is reduced to take account of relief given by capital allowances.

 

Chattels (s262): a gain accruing on a disposal of tangible movable property is not a chargeable gain if the amount of the consideration for the disposal does not exceed £6,000.

 

Winnings from betting (s51) and sums obtained by way of compensation or damages for any wrong or injury suffered by an individual in his person or in his profession or vocation are not chargeable gains.

 

Disposal of private residence s222 provides relief for all or part of a gain accruing to an individual attributable to the disposal of a dwelling house which has been the individual’s only or main residence at some time in the period of ownership.

 

Seed enterprise investment scheme (SEIS) (s150 E) and  Enterprise investment scheme (EIS) Gains accruing on the disposal after the end of the ‘relevant period’ of shares for which income tax relief under the SEIS or EIS regime has been given (and not withdrawn) are not chargeable. Special rules apply to losses on disposal of such shares.

 

Venture capital trusts: subject to certain conditions, gains on a ‘qualifying disposal’ of ordinary shares in a venture capital trust is not a chargeable gain. Special rules apply to losses on disposal of such shares.

 

Gilt-edged securities and qualifying corporate bonds (QCBs) (s115):  a gain accruing on a disposal of government-issued securities known as gilts or any QCB are not chargeable gains. The list of gilt-edged securities which have a redemption date on or after 1 January 1992, disposals of which are exempt from tax on chargeable gains under section 115 of the Taxation of Chargeable Gains Act 1992, can be found here.

 

Pension funds, purchased annuities, and superannuation funds (s237)
No chargeable gain accrues on the disposal of a right to, or to any part of, any allowance, annuity or capital sum payable out of any superannuation fund, or under any superannuation scheme, established solely or mainly for persons employed in a profession, trade, undertaking or employment, and their dependants. The exemption covers the disposal of rights to payments under purchased annuities or covenants not secured on property.

 

Woodlands (s250): consideration for a disposal of trees (standing or felled or cut on woodlands managed by the occupier on a commercial basis) shall be excluded from the computation of the gain if the person making the disposal is the occupier. This also covers capital sums received under a policy of insurance in respect of the destruction of or damage or injury to trees by fire or other hazard if the person making the disposal is the occupier.

 

Cars (s263)  a mechanically propelled road vehicle constructed or adapted for the carriage of passengers, except for a vehicle of a type not commonly used as a private vehicle, shall not be a chargeable asset; and accordingly no chargeable gain or allowable loss shall accrue on its disposal.

 

Decorations for valour or gallant conduct (s268):  a gain accruing on the disposal by any person of a decoration awarded for valour or gallant conduct which he acquired otherwise than for consideration in money or money’s worth shall not be a chargeable gain.

 

Foreign currency for personal expenditure (s269): a gain accruing on the disposal by an individual of a foreign currency acquired by him or his family for personal expenditure outside the United Kingdom is not a chargeable gain.

The dangers of dabbling

As accountants diversify, are they covering the risks?


As accountants diversify, are they covering the risks?

 

Traditionally, accountancy practices have concentrated on an established area of advice; however, recently we have seen more and more accountancy firms diversifying the type of work they undertake.

 

Some of the reasons for this include a changing economic climate, whereby increased competition means firms need to maintain competitive rates, digitalisation of the industry and a desire not to turn clients away.

 

Digitalisation

In recent years, accountants have seen the introduction of Making Tax Digital, which allows individuals and businesses to submit their own tax returns. The increase in the number of sophisticated software products which enable small businesses to produce their own accounts, manage their own payroll and produce budgets and forecasts has thus reduced the necessity of engaging a professional accountant. 

 

Client retention

As an insurance broker, we often see accountants agreeing to take on a piece of work for a longstanding client as they are reluctant to say no or wish to do their client a favour. This is especially so if the accountant acts for all their client’s affairs. Understandably, accountants sometimes fear that if they pass on a piece of work to another firm, that client will then take the rest of their business with them. While saying yes may seem preferable to letting the client down or losing them to competition, it may be in both parties' best interests not to accept the instruction.

 

Increased opportunities

Similarly to avoid turning a client away, accountants may accept a piece of work in the hope that it will lead to bigger and better opportunities. While this may seem to be the case, and the accountant possesses the initial expertise required, they may not have enough experience to see the work through to its conclusion if this develops beyond the initial appointment.

 

Such dabbling can be detrimental to a practice, with potential lasting effects including loss of business, damage to reputation and claims for professional negligence.

 

A couple of examples of where dabbling goes wrong. . . . .

 

Example 1

An accountant carried out a due diligence report for a longstanding client for the purchase of shares in a specialist firm. The accountant had not carried out work of this type before but felt obliged to assist his client and went ahead and completed the review into the proposed purchase. The bank subsequently funded the purchasers based on the accountant’s report.

 

It later came to light that this specialist firm was in serious financial difficulty and the client who purchased the shares was unable to repay the loan instalments to the bank. The bank instructed Baker Tilly (eventually they were appointed as Administrators) to undertake a review. Baker Tilly identified a 'systematic and historic manipulation of vehicle leasing, financing, invoicing and accounting' which the accountant had failed to identify. The bank made a claim against the accountant and the vendors for over £2m while the legal costs to defend the accountant were in excess of £100,000.

 

Example 2

An accountant gave incorrect advice in that entrepreneurs’ relief would be available on the CGT payable on the sale of the claimant’s share of the family business to other family members. The entrepreneurs’ relief claim failed following an HMRC enquiry and the client made a claim against the accountant for £280,000 in addition to tax, penalties and interest. The client then appointed a tax specialist who identified that the client could have utilised rollover relief if the accountant had originally given the correct advice and made a further claim for an additional £120,000. The claim was eventually settled for £420,000 including legal costs.

 

Insurers' perspective

In a rapidly restricting marketplace, the work split of an accountant is a key consideration for insurers when assessing the risk profile of a firm. Having 1% or 2% of fee income attributed to numerous work disciplines will raise concerns. Whilst insurers appreciate that deviation from the norm will occur for one reason or another, they tend to prefer accountants that stick to their established areas of advice.

 

If an accountant’s work split is diverse, they will seek comfort that the individuals undertaking this work are experienced in the field. If insurers are not comfortable with the information provided then it is likely they will perceive the risk to be greater. This in turn will result in higher insurance premiums or a decline to offer terms altogether.

 

In summary, if a practice is contemplating expanding its services then it is important that careful consideration is given as to whether there is relevant expertise in the firm, whether appropriate supervisory procedures are in place and whether relevant training has been provided.  As the above examples show, it may not be a risk worth taking!

 

If you have any questions please contact Catherine Davis or Rosie Ali on 0117 906 5057 or ACCAaccountants@uk.lockton.com

 

Lockton is ACCA’s recommended broker for professional indemnity insurance

 

ICO issues consultation on data protection

What do you – and your clients – need to be aware of around this new consultation?


What do you – and your clients – need to be aware of around this new consultation?

 

The Information Commissioner’s Office (ICO) has issued a consultation on a direct marketing code of practice that is open until 4 March, with the final version intended to be laid before Parliament and issued later this year.

 

The ICO is clear on the impact, highlighting that ‘processing personal data for direct marketing purposes is carried out by the vast majority of organisations. Businesses from sole traders through to large corporations as well as the public sector, charities, political parties and other not-for-profit organisations all use direct marketing as a tool to grow their business or publicise their causes and aims.’

 

It states that the code helps businesses comply with and demonstrate compliance with data protection and e-privacy rules when processing data for direct marketing purposes or conducting direct marketing campaigns. It contains a number of examples that look at specific scenarios where GDPR and Privacy and Electronic Communications Regulations 2003 (PECR) apply.

 

The following is a useful example that will apply to many businesses – including practitioners – highlighting the distinctions between solicited direct marketing (marketing material that the person has specifically requested), unsolicited direct marketing where the client has opted to receive future information, with the PECR rules applying, and unsolicited direct marketing without any consent.

 

Example

An individual submits an online form to a double glazing company requesting a quote. By sending this quote to the individual the company is responding to the individual’s request, and so the marketing is solicited.

 

When they requested the quote for double glazing, the individual also ticked a box opting in to receiving information about future home improvement offers from the company. A few months later, the company sends an email with details of a new offer.

 

This is unsolicited marketing, because the customer did not contact the company to specifically request information about that particular offer. However, this does not mean that the company should not have sent details of the new offer. It can do so because the individual has consented to receiving these offers.

 

An opt-in means that the individual is happy to receive further marketing in future, and is likely to mean that unsolicited marketing is lawful. But it is still likely to be unsolicited marketing, which means the PECR rules apply.

 

You can find further guidance and support on ACCA’s website.

 

How does the death of a taxpayer affect capital gains tax?

An examination of four key areas to consider.


An examination of four key areas to consider.

 

The people involved would be the individual who has died, the personal representatives (known as executors if there is a will and as administrators if there is no will) and the legatees (the beneficiaries of the estate).

 

These are affected as follows:

  • No liability to capital gains tax arises on the death of the individual. If the individual made disposals in the tax year in which death occurs and if the allowable capital losses exceed the chargeable gains, the excess can be carried back and set off against chargeable gains in the three preceding tax years. Chargeable gains accruing in a later year must be relieved before those of an earlier year. However, any allowable losses carried back need not be deducted if this would result in the effective loss of the annual exemption. Where the ‘adjusted net gains’ exceed the annual exempt amount, such losses are deducted only to the extent necessary to reduce the excess to nil. Any remaining unused losses cannot be carried forward and set off against gains made by the personal representatives or legatees.

  • The personal representatives are treated as having acquired the deceased’s assets at market value at the time of death and are liable to capital gains tax on disposals of assets made by them. Any gain or loss arising on the disposal of the asset by the personal representatives after the death is calculated by reference to the market value of the asset at the date of death. They are entitled to the same annual exempt amount (£12,000 for 2019/20) as individuals for the year of death and the following two years.

  • No liability to capital gains tax arises on the transfer of assets from the personal representatives to the legatees. The legatee is treated as acquiring the asset at market value as at the date of death.

 

Valuations

Following the death of an individual, inheritance tax is chargeable on the value of that person’s estate immediately before the death. The value of assets for inheritance tax purposes is also the value used for capital gains tax purposes on their subsequent disposal, either by the personal representatives or the legatees. In the case of land and quoted shares and securities, proceeds of certain post-death sales within a specified period may be substituted for values at date of death for inheritance tax purposes. If such substitution revisions are made for inheritance tax purposes, they must also be made for capital gains tax purposes. However, this may not be the case if IHT values are increased in circumstances when IHT is not payable.

 

Two or more different assets comprised in an estate can be treated as a single unit of property if disposal as one unit was the course that a prudent seller would have adopted in order to obtain the most favourable price without undue expenditure of time and effort.

 

The single asset valuation for TCGA 1992 section 17 is modified by TCGA 1992 section 19 where there is a series of linked transactions between connected persons. Then each disposal in the series may be treated as being made for consideration equal to a proportion of the total value of all assets in the series.

 

Variations or disclaimers

The legatees may make variations or disclaimers and if these are made within two years of death they do not constitute disposals but are related back to the date of death so that a variation is treated as having been effected by the deceased and a disclaimed benefit is treated as never having been conferred. This treatment does not apply in respect of variations or disclaimers made for any consideration in money or money’s worth other than consideration consisting of the making of a variation or disclaimer in respect of another of the dispositions.

 

Personal representatives

TCGA 1992 section 62(3) says that ‘in relation to property forming part of the estate of a deceased person the personal representatives shall for the purposes of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the personal representatives), and that body shall be treated as having the deceased’s residence and domicile at the date of death’.

 

The personal representatives are liable to capital gains tax on disposals of assets made by them. This is based on the sale proceeds and the market value at the date of death. As they will be responsible for settling the liabilities of the estate they may be assessed in respect of disposals made by the deceased prior to death as well as on their own disposals.

 

They will be responsible for the preparation of the deceased's self-assessment tax return (if one is required) for the period from 6 April to the date of death. If the deceased made any capital gains in that period before they died the full year’s annual exemption (£12,000 for 2019/20) can be used against the gains and only the chargeable capital gains in excess of the annual exemption with be subject to tax.

 

The personal representatives will also be entitled to the full annual exemption for disposals they make in the period from the date of death to 5 April following that date. The personal representatives will also be entitled to the full annual exemption for the following two tax years.

 

Personal representatives, when computing chargeable gains on the disposal of assets, can add to the market value at the date of death the legal and accountancy costs that are involved in preparing the inheritance tax account and obtaining the grant of probate etc. However, sometimes it is difficult to identify the costs applicable to individual assets comprised in the estate; as a result HMRC will agree expenditure based on a scale published in HMRC Statement of Practice 2/04. HMRC will accept computations based either on these scales or on the actual expenditure incurred.

 

Legatees

When a person acquires an asset from an estate as legatee no chargeable gain accrues to the personal representatives. The legatee is treated as if the personal representatives’ acquisition of the asset had been the legatee's acquisition of it. Therefore the asset is taken as acquired at either the market value at the date of death or, if the asset was acquired subsequent to death, the allowable expenditure incurred by the personal representatives in providing the asset.

 

When a legatee disposes of an asset which was previously held by the personal representatives to which he became absolutely entitled as legatee, any incidental expenditure incurred by that person or the personal representatives in relation to the transfer of the asset to him is allowable as a deduction in the computation of the gain on disposal.

 

HMRC loses a principal private residence relief case (for now)

Recent case will have a major impact on the availability of PPR relief and may be particularly relevant in the post-Brexit property market.


Recent case will have a major impact on the availability of PPR relief and may be particularly relevant in the post-Brexit property market.

 

In the most recent chapter of the Higgins vs. HMRC case relating to principal private residence relief, the Court of Appeal ruled in favour of the taxpayer, but allowed an appeal. The conclusion of the case will have a major impact on the availability of PPR relief in case of disposals of properties purchased off plan, and may be particularly relevant in the post-Brexit property market.

 

In October 2006 Desmond Higgins paid a reservation deposit and exchanged contracts to secure a two-bedroom apartment off plan. Due to construction delays completion was not until January 2010 when the property was first available for occupation. Higgins sold the property in 2012 and claimed full PPR relief on the gain. HMRC denied full PRR on the basis that the property was acquired in 2006 but not occupied.

 

In 2017 the First Tier Tribunal decided that the date of ownership for PRR was the date of completion, but this was overturned by the Upper Tribunal in 2018. The Upper Tribunal decision was based on section 28 of TCGA92 – the start of a period of ownership was the acquisition date, which is the date when the contract is made, ie exchange, rather than completion.

 

The Court of Appeal noted that disallowing full PPR in cases similar to Higgins would mean that few people buying a new home would be able to claim PRR for the period between exchange of contracts and completion; this was clearly not the intention of the legislators.

 

The Court of Appeal found that:

  • although s28 of the TCGA confirms that the ‘period of ownership’ of a dwelling-house runs from the date of the contract for its purchase, the Principal Private Residence relief legislation (s222 and 223) does not refer to section 28, therefore there was no reason why the period of ownership for PPR purposes must run from the date of the contract (exchange) and not from the date of completion
  • the mere fact that someone has contracted to buy a property does not transfer ownership that would allow the person ‘to possess, occupy or even use the property, let alone to make it his only or main residence’.

 

It is likely the PPR relief legislation will need to be further amended, to clarify the tax position for property owners as the property market evolves and off plan purchases become more and more popular.

 

Currently ESC49 deals with the impact of a delay between acquisition (exchange) and occupation of a property and allows PPR relief if the delay lasts up to 12 months, or two years if the reasons to exceed the 12 month delay were outside the individual’s control.

 

ESC49 would not have helped Higgins if the date of ownership started at the point of exchange of contracts, as the delay would have been over three years.

Penalties for late filing

The grounds behind HMRC’s successful appeal in the Rogers case.


The grounds behind HMRC’s successful appeal in the Rogers case.

 

You may remember the First Tier Tribunal Rogers case and other cases where the FTT ruled against HMRC regarding whether a notice to file needed to be issued by a ‘flesh and blood’ officer.

 

HMRC appealed and it was successful in its appeal on grounds 2, 3 and 4 below:

  1. The FTT had no jurisdiction, in the taxpayers’ appeals against penalties imposed under Schedule 55, to consider whether a valid notice under s8 of TMA had been issued
  2. The FTT wrongly applied a literal interpretation of s8 of TMA by concluding that it required an officer to be identified when a notice to file under s8 was issued
  3. The FTT was wrong to conclude that s8(1) of TMA required a notice to file to be issued by a ‘flesh and blood’ officer rather than a computer
  4. Even if it had the requisite jurisdiction, the FTT should not have considered whether a notice under s8 of TMA was issued, or validly issued, because that was not a pleaded ground of challenge in the taxpayers’ Notices of Appeal and was not, therefore, in dispute between the parties. HMRC was denied procedural fairness by the FTT considering a matter that was not in dispute.

 

Read the case and decision in full

Averaging profits for farmers

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


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

 

Farm subsidies

The Direct Payments to Farmers (Legislative Continuity) (DPLC) Bill provides governments across the UK powers to administer direct payments to farmers for 2020. The Chancellor has confirmed the same level of funding for 2020 as for 2019.


The averaging relief is available to individuals in the following trades, professions and vocations such as:

  • farming or market gardening
  • intensive rearing in the UK of livestock or fish on a commercial basis for the production of food for human consumption, and
  • creative artists (two-year averaging only).

 

The rules relating to the averaging profits are in Income Tax (Trading and Other Income) Act 2005 (ITOIA 2005), Part 2 Chapter 16 s221 to s225.

These averaging rules were originally introduced because it was felt that farmers were suffering from a high effective rate of income taxation, mainly because of fluctuations in profits caused by the weather and increasing influence of world market prices.  Averaging may help farmers who pay tax at the basic rate one year and higher rate the next, or farmers who are liable to tax in one year but are not liable in the next year.

 

Farming is defined in Income Tax Act 2007 s996 as being the occupation of land wholly or mainly for the purposes of husbandry but excluding any market gardening.

 

Full averaging relief can be claimed where the profits of one tax year are 75% or less of the profits of an adjacent year

 

Averaging options

Finance Act 2016 extended the ability for profit averaging to five years and removed the marginal relief.

  1. two year averaging
  2. five year averaging (not available for creative artists)
  3. no averaging at all.

 

The following conditions have to be met for averaging provisions to apply:

  • For two year averaging, the current year and prior year’s profits must not be within 75% of one another, ie the difference between the profits for the two years must be more than 25% of the profits of the year with the better result.
  • For five year averaging, the average of the previous four years’ profits and the fifth year’s profits must not be within 75% of one another, ie the difference between the profits for 2018 to 2019 and the average of the profits for the four previous tax years must be more than 25% of the profits of the higher figure. This condition is also satisfied if any one of these years has nil profits or a loss. Those losses will then receive tax relief under the normal loss relief rules. The last year subject to the five-year averaging claim cannot already be subject to an averaging claim from a future tax year. As with a two-year claim, averaging claims must effectively be made in a consecutive order.

 

Averaging is NOT permitted:

  • in the year of commencement or cessation of trade
  • for other streams of income for the farmers such as letting of property, income from leisure activities or income generated from renewable energy etc
  • for farming on a contract basis
  • when using cash accounting
  • for partners who joined or left during the averaging period
  • no marginal relief is available after 1 April 2016
  • for companies, including corporate partners
  • for other bodies which are subject to corporation tax.

 

Example ― illustrating averaging options for 2018/19 losses (taken from Tolley)

Henry has been farming his land for many years. His recent results are listed below, together with the overview of the impact of the averaging claims between 2014/15 and 2018/19.

 

Tax year

Original profits

Averaged profits

Profit / (Loss)

Tax and Class 4 liability on original profits

Averaging adjustment on Tax Return

Revised tax and Class 4 liability on profits (as shown on the Tax Return)

 

£

£

£

£

2014/15

43,000

9,901.51

2,250

9,101.46

2015/16

31,500

6,289.60

2,250

6,942.10

2016/17

25,000

4,324.60

4,375

4,324.60

2017/18

24,000

3,925.24

 

3,925.24

2018/19

(20,000)

Nil

12,000

(3,128.16)

Total

 

24,440.95

 

21,165.24

 

The overall effect of the averaging claims over the period 2014/15 to 2018/19 is a reduction in income tax and Class 4 national insurance contributions (NIC) of £3,275.71.

 

The five-year period straddles the rule changes which apply from 2016/17 onwards, illustrating averaging under both the old rules and the new rules.

Henry made a loss in 2018/19 of £20,000, which may be carried back, offset against other taxable income or carried forward to offset against future trading profits. For averaging purposes, the profit for 2018/19 is nil. The rules changed with effect from 6 April 2016 and, as Henry is a farmer, he has the choice of:

  • a claim for two-year averaging
  • a claim for five-year averaging ― as the profits for 2018/19 are nil, the volatility condition in ITTOIA 2005, s222A(2)(b) is met and five years’ worth of profits can be averaged.

 

To decide which is more beneficial, it is necessary to run calculations under both.

In analysing the effect of two-year and five-year averaging, it is assumed that the trading loss for 2018/19 is offset against Henry’s other taxable income for 2018/19 (ie not affecting the trading income reported in 2018/19 (following the averaging claim) or 2017/18).

 

Two-year averaging

The two-year averaging claim would be half of the aggregate of £24,000 and nil: £12,000. This would lead to a reduction in income tax and NIC for 2017/18 of £3,480 (£3,925.24 – £445.24). The income tax and NIC due on trading profits of £12,000 for 2018/19 would be £351.84.

 

The adjustment for the difference in the 2017/18 liability would leave an income tax and Class 4 NIC refund of £3,128.16 (£351.84 less £3,480) on the 2018/19 Tax Return before taking into account tax on other income.

 

Five-year averaging

The profits for the tax years 2014/15 to 2018/19 total £123,500 and this is same whether you consider the original profits (£43,000 + £31,500 +£25,000 + £24,000 + nil) or the revised profits following the averaging claims (£40,750 + £29,375 + £29,375 + £12,000 + £12,000). Therefore, the average over the five years is £24,700.

 

In order to decide whether the five-year averaging claim is more cost effective it is necessary to calculate the tax due for each of the five tax years as if the profits were £24,700 and compare the overall tax liability against the tax liabilities if the five-year averaging claim is not made:

 

Tax year

Trading profits (based on averaging claims already made and assuming a two-year claim is made for 2017/18 and 2018/19)

Income tax and Class 4 liability on trading profits (based on averaging claims already made) *

Trading profits (under five-year averaging)

Income tax and Class 4 liability on trading profits (under five-year averaging)

 

£

£

£

£

2014/15

40,750

9,101.46

24,700

4,446.96

2015/16

29,375

5,673.35

24,700

4,317.60

2016/17

29,375

5,593.35

24,700

4,237.60

2017/18

12,000

445.24

24,700

4,128.24

2018/19

12,000

351.84

24,700

4,034.84

Total

 

21,165.24

 

21,165.24

 

* Rather than consider the income tax and Class 4 NIC on the trading profits reported on the tax return, this column looks at the position for the relevant tax year taking into account the reduction or increase in the liability as a result of the earlier averaging claims.

 

Conclusion

There is no difference between making the two-year averaging claim and the five-year averaging claim, but it is easier in terms of the tax return entries to make the two-year averaging claim.

 

Losses – sideways relief

Most losses can be claimed against other income, but there are special rules which restrict your ability to claim if your farm is not commercial or if you had a run of losses (worked out before capital allowances) of more than five tax years.

 

Time limit and how to claim

The time limit for making the claim is the first anniversary of 31 January following the latest tax year covered by the claim (eg where the claim relates to 2017/18 and 2018/19, the time limit is 31 January 2021).

 

They are claimed in the tax return for: 

 

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

 

Useful links

HMRC Helpsheet 224 for Farmers and market gardeners

HMRC Helpsheet 234 for Creative artists

ACCA examples for prior to 2016 changes

Capital gains on disposal of let property

Example calculations and the importance of considering a variation.


Example calculations and the importance of considering a variation.

 

With significant changes coming from April 2020 – including a requirement to pay CGT on land and building transactions within 30 days – use these worked examples to help keep clients on track.

 

As can be seen from examples 3 and 4 the taxpayer has saved £7,008 in capital gains tax by electing for property B to be his exempt residence for the six months from July 2003 to January 2004.

 

The main reason for the tax saving in example 4 is that on the sale of property B the last 18 months of ownership was exempt. As from 6 April 2020 this will change to the last nine months of ownership.

 

The individual had up to two years from July 2003 (assuming property B was first used as a residence of the individual in July 2003) to make an election for property B to be treated as his PPR. This is two years from the date his combination of residential properties changed. The election then applies from the date on which that particular combination of residences first occurred.

 

Where a dwelling house is acquired, the date on which there is a new combination of residences will not necessarily be the date of acquisition: it will be the date on which the dwelling house was first used as a residence. Similarly, where an individual ceases to use a dwelling house as a residence, the date on which there is a new combination of residences will be the date on which the dwelling house is no longer used as a residence: it will not necessarily be the date on which that dwelling house is disposed of.

 

A variation of a notice will apply from the date specified in the notice of variation which may be up to two years before the giving of the notice. A variation of a notice can be made at any time. Therefore, after electing property B for PPR a variation can be made at any time thereafter and it can be backdated up to two years from the date that variation is made.

 

There is no statutory form for a notice under TCGA 1992 s222(5) to elect for a dwelling to be treated as an exempt property or for a variation of such a notice. However, the following are requirements of such a notice or variation:

  • a nomination by an individual must be made to an officer of the Board and must be signed by the individual
  • spouses or civil partners who are living together can only have one main residence between them for the purpose of private residence relief. If a nomination affects both of them it must be made by notice in writing to an officer of the Board and must be signed by both of them
  • where one or more of the residences is occupied by a person entitled to occupy it under the terms of a settlement, the notice must be in writing to an officer of the Board and should be signed by both the trustees of the settlement and the person entitled to occupy the residence
  • the signature of an agent is not sufficient.

Do remember that from April 2020 taxpayers may easily overlook the in-year CGT reporting and payment requirements that apply. The most obvious group being those involved in buy to let or as above 2nd properties. The in-year requirement is that a return and payment of CGT is made within 30 days following the completion day for a UK land (including buildings) transaction when there is a charge to capital gains tax. There are very few exemptions.

 

NEWS
Get set for Budget 2020

Look out for our popular Budget Summary and guides to key changes and tax rates following the Budget.


Budget 2020 – 11 March

Will this year’s Budget contain a number of significant announcements such as one on the future of entrepreneurs' relief?

 

Budget updates

We will publish our popular Budget Summary and guides to key changes and tax rates following the Budget. Unfamiliar with this? Take a look at this previous offering.

 

 

 

IRIS Customer Awards 2020

It’s a good start to 2020 for multiple ACCA firms shortlisted for these prestigious awards!


It’s a good start to 2020 for multiple ACCA firms shortlisted for these prestigious awards!

 

Congratulations to the following ACCA firms and members who are all finalists in the IRIS Customer Awards 2020:

  • Makesworth Accountants
  • Flinder (multiple nominee)
  • Howards Chartered Certified Accountants
  • Avonmead Ltd
  • JMSolutions
  • Greg Houston of Infinity Partnerships
  • Kayleigh Williams of Duncan & Toplis.

 

ACCA will be at IRIS World at the ICC in Birmingham on 11 February during the day and then at the black-tie awards dinner in the evening – we look forward to seeing as many of you as possible!

 

Please let us know in advance if you are attending via email to supportingpractitioners@accaglobal.com and we look forward to welcoming you onto our stand.

 

If you are interested in entering other awards – but don’t know where to start – we have some great content to help you get started!

New guides and checklists

Have you seen our latest simple (free) checklists yet?


Have you seen our latest simple (free) checklists yet?

 

Our full suite includes 'Checklist: Staying within the law when using social media' where we provide a number of pointers for businesses to follow.

 

This can also be read alongside the employment law suite of factsheets, which includes a contract of employment and computer use policy.

 

Browse our guides and checklists or search our factsheets now.

Spring 2020 series of webinars for practitioners

Register now for one or more free webinars, starting next month.


Our popular spring series of free technical webinars for practitioners is now open for registration! Join us for one or more of the following webinars during February and March:

 

IR35 – the extension of IR35 to the private sector 7 February (12:30)

Speaker: Louise Dunford, LD Consultancy Limited

 

Reliefs and claims for personal taxation 19 February (12:30)

Speaker: Paul Soper, tax lecturer and consultant

 

Getting the most out of cloud accounting and app stacks for your firm and your clients 12 March (12:30)

Speaker: Matt Flanagan, Co-Founder of Appacus

 

The first Budget of a new era 13 March (12:30)

Speaker: Paul Soper, tax lecturer and consultant

 

Benefits in Kind update 18 March (12:30)

Speaker: Dr Ros Martin, consultant and lecturer

 

 

Register for any or all of these sessions using this link.

 

If you are unable to join us for the live webinars then you will be able to watch them on demand at your convenience.

 

Each webinar will count for one unit of verifiable CPD where it is relevant to the work that you do.

 

 

Enter the Accounting Excellence Awards 2020

The Accounting Excellence Awards are back to showcase the very best the accounting and finance profession has to offer.


The Accounting Excellence Awards are back to showcase the very best the accounting and finance profession has to offer.

 

AccountingWEB’s prestigious accounting and finance awards are now open for entries. The awards, which are accepting submissions until the end of March, recognise the UK firms and individuals who are innovating, driving success and inspiring the profession to even greater heights.

 

The awards, now in their 10th year, are continuing the long-standing partnership between the ACCA and AccountingWEB. And ACCA members have had a huge amount of success previously, with ACCA firms or members winning six awards in 2019.

 

Three new categories have been launched for 2020 to reflect the contribution and achievements of bookkeepers, sole practitioners, and pioneering digital firms. The awards will also continue to salute the achievements of large, medium and small firms who can demonstrate the impact they are making across a number of key areas including bottom-line growth, client success and employee development.

 

Last year’s popular ‘Investing in People’ award returns for a second year. This was a new award in 2019, recognising the importance the profession has placed on employee engagement, wellbeing and learning and development.

 

Firm awards

  • Bookkeeping Firm of the Year
  • Client Service Award
  • Digital Firm of the Year
  • Fast-track Firm of the Year
  • Innovative Firm of the Year
  • Investing in People Award
  • Large Firm of the Year
  • Medium Firm of the Year
  • New Firm of the Year
  • Small Firm of the Year
  • Specialist Team of the Year
  • Sole Practitioner of the Year
  • Software Innovation of the Year
  • Practice Pioneer of the Year

 

Entries will be judged by a panel comprising experts from within the accounting, finance, business and L&D profession, with finalists announced at the end of May. The winning firms will be announced at an awards ceremony taking place at The Brewery in London on 10 September.

 

To read about last year’s winners and what winning an Accounting Excellence award meant for them, visit accountingexcellence.co.uk/news/.

 

If your firm has what it takes to win this year, enter at accountingexcellence.co.uk before 31 March.

 

If you’re stimulated to enter, but not sure where to start, take a look at ACCA’s guidance on entering awards to help kick-start the process.