Technical and Insight
60 second update: Loss relief options available to a sole trader

If a taxpayer suffers a trading loss, what options are there to relieve the loss?


If a taxpayer suffers a trading loss, the loss can be relieved as follows:

 

1. Current year or carry back claim

a) S64 of Income Tax Act 2007 (ITA 2007) allows the trade loss to be offset against net income of the loss-making year, and/or of the previous tax year. The two claims are independent and can be made in any order. The claim is not mandatory, and the taxpayer can decide not to make it. This would be the case, for example, if the income is already covered by the personal allowance so there would be little point in making the claim.

 

b) Trade loss relief against general income is not available unless the trade is carried out on a commercial basis and with the view of making a profit.

 

c) From 6 April 2013, the total amount of certain income tax reliefs that can be used to reduce total taxable income is limited to the higher of £50,000 or 25% of the taxpayer’s adjusted total income. The remaining loss can be carried forward.

 

The limit on reliefs has no effect on the following:

  • relief for a tax year in which adjusted total income is less than £50,000
  • losses created by overlap relief or to the extent that the loss is augmented by overlap relief
  • losses used against profits of the loss-making trade
  • losses treated as an allowable loss for capital gains tax purposes.

 

d) There are further restrictions on relief in the case of farming or market gardening, known as ‘restriction on relief for “hobby farming”’. The way the loss is calculated is before capital allowances and balancing charges. 

 

The farming loss restriction only applies after five successive tax years of losses. So the loss relief would be given if the trade was started at any time within the five tax years before the current tax year.

 

There is anti-avoidance provision which prevents a farming business from being transferred between a husband and wife or to or from companies controlled by the same persons, which had the purpose of resetting the five year time clock.

 

e) No partial claims are permitted. It is not possible to restrict the loss relief to the taxable income only and retain the benefit of personal allowances, thereby increasing the losses available to set against income in other years. It is an all or nothing claim.

 

f) From a tax planning point of view, it is more advantageous to relieve the loss earlier rather than later. Any tax refunded is calculated using the previous year’s rates and allowance.

 

2. Extension to capital gains

a) Where a taxpayer has claimed trade loss relief against other income (under s64) and is unable to make full use of the loss, he may be able to treat the unused part as an allowable loss for capital gains tax purposes under s71 of ITA 2007.

 

b) Before the claim can be extended to capital gains, the taxpayer needs first to make a claim under s64 to offset the loss against net income. This would result in the loss of personal allowance.

 

c) The relief under s71 would be the lower of:
- the remaining loss under s71 and
- the net gains in the tax year less losses brought forward.

A partial claim would not be permitted. As a result, it is possible that a claim under s71 could potentially waste both the personal allowance and all or part of capital gains tax exemptions.

 

3. Carry forward losses against subsequent trade profits

Under s83 ITA 2007, losses carried forward can be set against future profit of the same trade.

 

Once an s83 loss relief claim has been made, the carried forward loss must be set off against the next available trading income.

 

Deadlines for making the claims

S64 claims must be submitted by 31 January which is 22 months after the end of the tax year of the loss.

 

S83 loss claims (carry forward) are automatic, but a claim must be made to establish the amount of loss to be carried forward. The claim must be made within four years from the end of the tax year in which the loss arose.

 

Update on entrepreneurs’ relief changes

Alphabet shareholders may benefit from new amendments to the Finance Act.


Alphabet shareholders may benefit from new amendments to the Finance Act.

 

As previously reported in our November issue, there were pre-budget rumours circulating regarding large scale changes to entrepreneurs’ relief. Post-budget there is some relief in the accountancy world as it appears that – for the time being – entrepreneurs’ relief is here to stay. But the recent budget did bring in two key changes which potentially could deny relief to shareholders. One of these has caused controversy and has resulted in ACCA, and other accountancy bodies, making representations to HMRC.

 

The original changes

As detailed in our October 2018 budget newsletter the Chancellor originally announced two key changes to entrepreneurs’ relief which may affect clients' plans.

These are:

  • an extension of the qualifying holding period from one year to two years from 6 April 2019
  • a change in the rules regarding the share rights/interests in the company that the claimant needs to hold to qualify.

 

What are the effects on taxpayers?

The first bullet point is mainly a planning opportunity as the changes are for disposals on or after 6 April 2019, so taxpayers affected have a short period in which to take advantage of the current rules. There are also transitional relief provisions where the claimant’s business ceased before 29 October 2018.

 

The second bullet point relating to the share rights/interests changes is the issue that has caused the most controversy and is the main reason behind the discussions with HMRC as the changes amount to a tightening of the rules. At present, in in order to qualify, the shareholder must have held shares which represented 5% of the voting rights. This is fairly straightforward to understand.

 

However, the new regime – which applies to all disposals after 29/10/18 – includes a further requirement that the individual needs to have had an entitlement to 5% of the distributable profits and the assets available for distribution in a winding-up in addition to the existing stipulation of 5% of the voting rights.

 

Clearly HMRC was aiming at ensuring that the individual genuinely had an economic interest in the business rather than being part of an arrangement that brought them within the entrepreneurs’ relief scheme. However, a consequence would also be that holders of alphabet shares could be caught as the share structure would have been set up to allow unequal dividends to be declared and so there may not be ‘an entitlement’ as above. Therefore, these shareholders could potentially be denied entrepreneurs’ relief.

 

The good news

HMRC has listened to the views of ACCA and other accountancy bodies with a government tabled amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes.

 

What effect does the amendment have?

The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company, which can be used instead of the tests based on profits available for distribution and assets on a winding up:

 

New subsection (3) defines personal company. This requires an individual to: hold 5% of the ordinary share capital of the company and have 5% of the voting rights, and meet one of two new conditions found at new subsection (3)(c).

 

These are (i) that the individual is entitled to both 5% of the profits available for distribution and assets available for distribution in a winding up or (ii) in the event of a disposal of the ordinary share capital of the company the individual would be entitled to 5% of the disposal proceeds.

 

So alphabet shareholders who complied with entrepreneurs’ relief requirements – but who would have been inadvertently caught by the Finance Bill changes – will not be denied the relief providing that (ii) is complied with. 

 

Progress of the Finance Bill 

As at 11/01/19, the Bill had completed report stage and third reading in the House of Commons with government amendments agreed to Schedule 15.

 

Register for our free webinar

ACCA is running a free webinar on Key changes to entrepreneurs’ relief on 5 February that provides a refresher on the basics of entrepreneurs’ relief as well covering the changes introduced by Budget 2018.

Making Tax Digital for VAT engagement letters

Joint working party issues supplementary schedule of services.


Joint working party issues supplementary schedule of services.

 

A joint working party of ACCA, ATT, CIOT, AAT, and STEP has prepared a supplementary schedule of services – Making Tax Digital for VAT (MTDfV). This should be read alongside the covering letter, privacy notice, schedules for other services, terms and conditions, and guidance in the main engagement letter guidance. This applies both for the Engagement Letters for Tax Practitioners and the Engagement Letter templates.

 

An important discussion will be required to establish with clients whether the client is keeping the digital records required under MTDfV or whether the practitioner is dealing with this. The schedule includes alternative wording depending on what has been agreed.

 

VAT on digital services

HMRC issues updated guidance on VAT on digital services.


HMRC issues updated guidance on VAT on digital services.

 

HMRC has updated its guidance on VAT place of supply rules for business that sell digital services to private consumers in the EU.

 

The changes apply from 1 January. For businesses established in the UK the rules apply where a UK business:

  • ‘charges consumers for digital services 
  • supplies services from the UK to private consumers in another EU member state
  • has EU consumers that are not VAT-registered businesses
  • does not sell digital services through a third-party platform or marketplace (not your own website).

 

For cross-border supplies of digital services on a business-to-consumer basis, the place of supply will be the UK on or after 1 January 2019 if:

  • your business is not established in any other EU member state
  • the total value of the cross-border digital sales is less than £8,818 in the current year and previous calendar year.

 

The place of supply of any digital services made before 1 January 2019 will be where the consumer is located.’

 

The guidance also states that ‘If the annual value of your total cross-border supplies of digital services to consumers in the EU in the current year and previous year is:

  • below the threshold, the place of supply is the UK
  • over the threshold, the place of supply is where the consumer is located’.

 

From 1 January 2019, UK businesses under the digital services threshold can elect to treat the place of supply as where the consumer is located.

 

You can find the conditions for the election and guidance online.

Why digital is changing the value of all practices

In the first of a series of articles with Foulger Underwood we explore the digital reality of MTD and the opportunities it offers for restructuring.


In the first of a series of articles with Foulger Underwood we explore the digital reality of MTD and the opportunities it offers for restructuring.

 

With MTD for VAT (MTDfV) now becoming a reality, Foulger Underwood is working with ACCA to support its practitioners who:

  • need some advice prior to digitalising
  • those who are half-way housing towards an exit in a few years’ time
  • may wish to scale back or stop in which case the window for selling a non-digitalised practice is closing very quickly
  • are actively looking to expand or start a practice.

 

The introduction of MTDfV is causing concern among some smaller practitioners, who view the introduction of new IT systems as costly and time consuming. In turn it can detract from undertaking day-to-day servicing work and could lead to potentially difficult conversations about the future of client servicing.

 

Conversely, many larger practices have IT personnel, marketing, social media and communications teams. Collectively, they have been preparing clients for digitisation and seeking their acceptance of new fees and new engagement procedures.

 

Some forward-thinking smaller practices are already digitally-enabled and may wish to acquire new clients through investing in non-digitalised practices. More traditional practices may be concerned that they lack the necessary digital skills and resources to move forward and be looking for a route out, help to digitalise or to tie up with a digitally-enabled practice.

 

However, the introduction of MTDfV is causing concern among some smaller practitioners who view the introduction of new IT systems as costly and time consuming. In turn it can detract from undertaking day-to-day servicing work and could lead to potentially difficult conversations about the future of client servicing.

 

If you work in in a small practice which has yet to start preparing for MTDfV, consider the best way to address these issues with your clients:

  • data input and the adoption of new software to replace spreadsheets and paper bags
  • the costs involved in moving data to a consistent format on the preferred system which your practice has selected
  • a fee increase due to additional work and – in the case of quarterly reporting where VAT has not been produced previously by the practice – the additional costs involved and how this will impact on year-end accounts preparation and advisory work.

 

At the same time, you will need to consider your employee skillsets and their flexibility to change and adapt to new working practices and processes.

 

For now, MTDfV is the primary driver, but digitalisation is only likely to accelerate over the next 3-5 years. Experience shows it can take firms two or three years to make the necessary changes and for these to bed in. It is inevitable that the scope of digitalisation will sweep up larger and specialised businesses at some point. In this environment, a sole practitioner or two-partner firm may want to consider a sale.

 

Preparing an exit strategy

If your practice is considering selling – or a retirement is likely within the next three years – it makes sense to consider an exit strategy now. Our experience shows there is always a market for fees; the price they can attract is linked to their quality.

 

The sale of a practice – or a block of fees – must be taken to market with a very clear strategy and objective. It is possible to achieve this within a 4-6 month period.

 

Half-way house

An alternative is to adopt some digitalisation and operational procedures which will make life easier, service clients and prolong the practice viability whilst protecting its saleability for perhaps another one or two years. This could allow an experienced partner to continue working, draw down profit share and work around the digitalisation changes but not fully adopting change and improving profitability.

 

There are some bureau-type operations which can provide support with MTDfV and digitalisation. They can minimise disruption and help a practice continue to trade for two to three years. Anything beyond three years should be a candidate for a full rationalisation of services, adoption of MTDfV and then a decision to market the business, scale the operations and generate additional profitability in year three onwards.

 

 

Keith Underwood – managing director, Foulger Underwood

 

ACCA is running a free webinar on Making Tax Digital for VAT at 12.30 on 6 February – register now to hear Dean Wootten talk about what is involved and how to make it work.

 

If you cannot join the webinar live then you can listen to it on demand at your convenience.

 

Our free MTD Tracker tool could also help you prepare for the introduction of MTDfV and we'll provide further updates in next month's In Practice. 

Opening up the MTD for VAT pilot to all customers

The MTD for VAT pilot is now open to all.


The MTD for VAT pilot is now open to all.

 

The MTD for VAT pilot is now open to all who will be mandated to use the MTD service from April.

 

HMRC has stated that ‘The pilot is progressing well – over 3,500 businesses have already joined and we have seen a dramatic increase in daily take-up from around 10-20 a day when the pilot first opened, to well over 100 a day, with the number of daily sign-ups continuing to grow.’

 

It has indicated that it wants as many eligible businesses as possible to join the pilot ahead of the mandation in April and directs users to the support packs available (updated guidance for businesses, updated guidance for agents and the stakeholder partner packs on GOV.UK.).

 

Do remember that the first returns will not be due until 7 August 2019 at the earliest, but these businesses will need to be using compatible software from April.

 

You must have already set up your Agent account, linked a client and checked that your software is compatible. You can see this explained in last month’s Why we recommend setting up your ASA now

 

We will have further updates next month on software and apps you can use as you help clients make the transition.

Nothing exotic about this dancer’s tax return

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


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

 

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

 

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

 

Travelling expenses

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

 

Horton v Young [1971] 47 TC 60

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

 

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

 

Samad Samadian v Revenue & Customs [2013] UKFTT 115

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Receipts or other primary records

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

 

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

 

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

 

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

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

Dissolving a small company

What needs to be included on the tax return to avoid giving yourself a headache.


What needs to be included on the tax return to avoid giving yourself a headache.

 

There are many reasons why a company is dissolved, ranging from insolvency to simply having come to the end of its useful life. Whatever the reason, it is essential that the correct advice is given by the company’s advisers and the correct decisions are taken by the directors. Get it wrong and it could mean the directors/shareholders lose money, incur unlimited fines and might need to restore the company.

 

In addition, the correct advice and planning is important from a tax efficiency point of view.

 

Tax efficiency and the different disclosures in the tax return

Good tax advice is important where the company is solvent and the directors are looking for the most tax efficient way out. The default position is that a distribution by a company is, strictly speaking, an income distribution. Even where a distribution is capital for other purposes, it is treated as income for income tax purposes

 

So how can the distribution be treated more efficiently?

 

Since 2012, where the assets of the company are below £25,000 a pre-dissolution distribution can be treated as a capital gain. Entrepreneurs' relief (ER) may also therefore be available which in many cases would create a tax saving.

 

Where the assets are above this figure then the distribution will normally be treated as a dividend with no ER available.  This could make the extraction of the final shareholders’ funds far less tax efficient depending on the shareholders' personal tax situation.

 

If a liquidator is appointed on behalf of members or creditors, then the distributions made by the liquidator to the shareholders may still be subject to capital gains tax (and possibly benefit from ER) in the hands of the shareholders. This is because of s829 of the Companies Act 2006 which states that:

 

The following are not distributions for the purposes of this Part:

  • an issue of shares as fully or partly paid bonus shares;
  • the reduction of share capital:
    - by extinguishing or reducing the liability of any of the members on any of the company's shares in respect of share capital not paid up, or
    - by repaying paid-up share capital
  • the redemption or purchase of any of the company's own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter 3, 4 or 5 of Part 18
  • a distribution of assets to members of the company on its winding up.

 

So the correct use (and expense of) a liquidator could save the shareholders a considerable amount of money as entrepreneurs’ relief may be available. If a formal close down was not performed then the default is that the final distribution may well be income subject to income tax.

 

To illustrate the tax savings consider the following example (courtesy of LexisNexis):

 

Example of capital treatment on winding up

Mr and Mrs Brown own equal shares in Brown Ltd, a trading company they set up in 1996. During 2018, Mr and Mrs Brown decided to retire and wanted to distribute the company’s post tax cash reserves of £1m in the most tax efficient manner.

 

Mr and Mrs Brown are additional rate taxpayers and utilise their annual capital gains tax exempt amount every year. They are entitled to entrepreneurs’ relief and have utilised their dividend allowance.

 

Without CTA 2010, s1030A, the entire £500,000 each paid to Mr and Mrs Brown would be treated as a dividend. Mr and Mrs Brown would both have additional rate tax liabilities as follows:

 

 

£

Dividend

500,000

 

 

Additional rate tax due at 38.1%

190,500

 

Applying CTA 2010, s1030A, £25,000 of the distribution may be treated as capital proceeds on the sale of their shares. This is on the assumption that a dividend may be paid in advance of winding up and does not constitute ‘a distribution in respect of share capital in anticipation of its dissolution’ under CA 2006, s1003.

 

In this situation it may be difficult to argue that such a dividend is not with a view to winding up, but it may depend on the timing of payments.

 

The £25,000 cap is per company, not per shareholder, so initially a dividend would need to be paid that left only £25,000 in the company. This would be a dividend of:

£1,000,000 – £25,000 = £975,000

 

This means that Mr and Mrs Brown would each receive a dividend of £487,500. This is subject to income tax as usual and produces a tax liability as follows:

 

 

£

Dividend

487,500

 

 

Additional rate tax due at 38.1%

185,737

 

Then, at a later point in time, the remaining capital would be distributed on an informal winding up. This provides Mr and Mrs Brown with a capital distribution of £12,500 each.

 

 

£

Capital distribution

12,500

Cost

Nil

Gain

12,500

 

 

Entrepreneurs’ relief applies

 

Tax at 10%

1,250

 

Because of the large amount of profits retained in the company it would certainly be more beneficial to incur the cost of a formal liquidation to secure a capital treatment.

 

(Note that ER (qualifying capital gains) for each individual are subject to various lifetime limits.)

 

Therefore directors will need to undertake some careful tax/operational planning if they are considering winding up the company especially where distributable reserves are more than £25,000.

 

For instance, contrast the following example (courtesy of LexisNexis) where savings are more marginal under an expensive formal liquidation and so other ways of reducing the reserves might be considered:

 

Example 2 ― marginal situations

The situation in Example 1 illustrates that where there are significant profits retained in the company, it will be far more beneficial to pay for a formal liquidation. Where the company has profits closer to the £25k threshold, the case for a formal liquidation diminishes.

 

Mr and Mrs Gray own equal shares in Gray Ltd, a trading company they set up in 1996. During 2018, Mr and Mrs Gray decided to retire and wanted to distribute the company’s post tax cash reserves of £54,000 in the most tax efficient manner.

 

Mr and Mrs Gray are higher rate taxpayers and have not utilised their annual capital gains tax exemption for 2018/19. They are entitled to entrepreneurs’ relief and have utilised their dividend allowance.

 

There are essentially three options available to Mr and Mrs Gray:

  • use an informal winding up procedure and distribute all profits of the company as dividends
  • distribute excess profits and use an informal winding up procedure to distribute no more than £25,000
  • use a formal liquidation procedure.

 

These produce net proceeds for Mr and Mrs Gray as follows:

 

 

Net position (each)

Income distribution

£18,225

Income distribution with £25k as capital

£22,208

Formal liquidation

£22,770

 

The workings are shown below.

 

It can be seen that at this level of retained profits, the results are very close to each other. Utilising an informal winding up may secure a good position if the dividend paid in advance of winding up is not caught by CTA 2010, s1030A(2)(b).

 

However, if the dividend paid before the informal winding up is considered to be a ‘distribution in respect of share capital in anticipation of its dissolution’, the position may be adjusted, following an HMRC enquiry, to give the worst outcome. Furthermore there may be penalties due if it is considered that reasonable care has not been taken.

 

The formal liquidation produces the best outcome and it is also the safest.

It may be that the liquidator fees are less than the £6,000 estimated below. If the fees were dropped to £4,500, the formal liquidation would actually provide a much more efficient outcome too.

 

Informal winding up ― all income

Mr and Mrs Gray receive a dividend of £27,000 each. This gives them liabilities as follows:

 

 

£

Dividend

27,000

 

 

Higher rate tax due at 32.5%

8,775

 

This means that Mr and Mrs Gray each receive proceeds net of tax of £18,225.

 

Informal winding up ― utilising s1030A

Mr and Mrs Gray distribute £29,000 of the profits as a dividend. They receive £14,500 each.

 

 

£

Dividend

14,500

 

 

Higher rate tax due at 32.5%

4,712

 

 

 

Then, at a later point in time, the remaining capital is distributed on an informal winding up. This provides Mr and Mrs Gray with a capital distribution of £12,500 each under CTA 2010, s1030A. After utilising their annual exempt amount of £11,700, this produces capital gains as follows:

 

 

£

Capital distribution

800

Cost

Nil

Gain

800

 

 

Entrepreneurs’ relief applies

 

Tax at 10%

80

 

This leaves Mr and Mrs Gray with net proceeds each after tax of £22,208.

 

Formal liquidation

Mr and Mrs Gray pay £6,000 for a formal liquidation, leaving £48,000 of profit to distribute. This gives them each a capital distribution of £24,000. After utilising their annual exempt amount of £11,700, they each have liabilities as follows:

 

 

£

Capital distribution

12,300

Cost

Nil

Gain

12,300

 

 

Entrepreneurs’ relief applies

 

Tax at 10%

1,230

 

This leaves Mr and Mrs Gray with net proceeds each after tax of £22,770.

 

Treatment of distributions on the tax return

As discussed above, the treatment of receipts needs to follow the legal form and so the entries on the 2017/18 self-assessment are crucial. If the client has not taken proper advice or properly planned the winding up of the company it can have severe consequences on the personal tax paid by the shareholders.

To file or not to file?

HMRC’s U-turn on the requirement to file tax returns by directors.


HMRC’s U-turn on the requirement to file tax returns by directors.

 

HMRC has made changes to its guidance on the requirement to file tax returns by directors. The guidance now makes a clearer statement that is more closely linked to the legislative requirement and the previous statements suggesting all directors’ have an obligation to file tax returns has been removed.

 

The recent amendments to HMRC’s guidance following the conclusion of Mohammed Salem Kadhem v HMRC [2017] TC05929, in which the tribunal ruled that ‘[The previous] government guidance notice [did] not accurately reflect what the law says’ will stop automatic self-assessment notices for directors.


When should a director submit tax return

Broadly, an individual (including a director) is required to fill in a tax return in three circumstances:

  1. notice to file was issued by HMRC
  2. there is statutory requirement to notify HMRC of his chargeability to income tax (section 7 TMA 1970)
  3. a tax relief or refund is to be claimed.

 

Notice to file issued by HMRC to tax payer

Under Taxes Management Act 1970 section 8(1):

 

Any person may be required by a notice given to him by an inspector or other officer of the Board to deliver to the officer within the time limited by the notice a return of his income, computed in accordance with the Income Tax Acts and specifying each separate source of income and the amount from each source.

 

What if the notice to file is not received?

HMRC may send a notice to file to a director who has not got any income to tax, and so does not expect it. If the notice is not received, and the director does not file the return, there is a risk of late filing penalties if HMRC can prove that the notice was in fact sent and was sent to the correct address. Precedent was established in Mohammed Salem Kadhem v HMRC [2017] TC05929 , when a director successfully appealed a late filing penalty as there was insufficient evidence to show that HMRC had sent him a notice to file.

2 Obligation on tax payer to notify HMRC

Taxes Management Act 1970  section 7 (1) and (2) refers to obligation to notify of liability to tax, as follows:

 

 (1) Every person who is chargeable to income tax for any year of assessment and who has not delivered a return of his profits or gains or his total income for that year in accordance with the provisions of the Income Tax Acts shall, not later than one year after the end of that year of assessment, give notice that he is so chargeable.

(2) A notice under this section shall be given to the inspector or, in the case of an individual who is not chargeable to income tax other than surtax, either to the inspector or to the Board.

 

3 Tax relief or refund to be claimed

In circumstances when a director will only be able to obtain a tax refund or claim a tax relief via self-assessment tax return, a tax return submission will be necessary.

 

HMRC clarification

In Agent Update HMRC states that ‘If an individual has received a notice to file and has no other taxable income to report, they can ask for the notice to file to be withdrawn. However, HMRC may decide that they still require a return and if so, the return must be submitted, otherwise penalties may be incurred.’

 

Amend any tax checklists so directors are asked if their income is under £50,000 if they would wish for a request to be sent to HMRC asking for the notice to file to be withdrawn.

Charity reporting: matters of material significance

Regulator taking a stronger line on reporting matters.


Regulator taking a stronger line on reporting matters.

 

The Charity Commission, in its report Accounts monitoring review: following up our review of reporting of matters of material significance by auditors, has clearly stated that where auditors or independent examiners fail to make a report regarding a matter of material significance the Commission will report this directly to professional bodies as a formal complaint. They will no longer contact auditors or independent examiners to ask why a report wasn’t made. 

 

What was and is clear is that it is important for anyone involved in the charity sector – especially trustees, auditors, independent examiners, internal auditors and professional bodies – to take appropriate action and, where appropriate, report.

 

In ACCA’s AB magazine in April 2018 we re-highlighted that for all audits or independent examinations for charities in England and Wales, Scotland and Northern Ireland, which are conducted and/or reported after 1 May 2017, there is a statutory responsibility to report matters of material significance.

 

The guidance issued by the regulators includes checklists, but also warnings. The regulators are clear that the guidance applies to auditors and independent examiners of charity accounts, and that it is designed to highlight their legal responsibility to report significant matters in accordance with the applicable law. They cite the relevant laws as section 67 of the Charities Act (Northern Ireland) 2008, sections 156 and 159 of the Charities Act 2011, and section 46 of the Charities and Trustee Investment (Scotland) Act 2005.

 

Auditors and independent examiners have a statutory duty to report and must report any matters of material significance which they become aware of during their appointment. The guidance states that ‘these are matters which are of material significance to the regulator in carrying out their functions. For example, the matter may be an issue which the charity regulator will consider for investigation or which could impact on the charitable status of the organisation.’

 

The advice contained in the guidance for internal auditors is that ‘it is currently not a legal requirement for those conducting internal audits to report matters of material significance, but the UK charity regulators consider such reporting to be helpful and best practice and, therefore, the internal auditor should familiarise themselves with the matters required to be reported to the charity regulator'.

 

The guidance also states that ‘charity trustees should therefore be aware of the matters of material significance and the duty placed upon an auditor or independent examiner to report matters to the regulator'.

 

Do remember that auditors and independent examiners are only expected to report matters which they identify in the normal course of their work. There is no expectation by the Commission that they should undertake additional work to identify such matters. It is, however, important to remember that auditors and independent examiners are expected to exercise their own judgement when considering if they have a duty to report. Even though a matter may not be listed, a report must be made if the auditor or independent examiner considers it appropriate.

 

You can find previous articles on this matter in AB July/August 2017, November/December 2017, January 2018, March 2018 and April 2018, while this factsheet contains valuable guidance.

 

You can listen to a webinar from 2018 and also register for a new webinar next month providing the latest charity update for auditors and independent examiners.

 

Accounting by limited liability partnerships

A topical summary of the new SORP for LLPs.


A topical summary of the new SORP for LLPs.

 

As a reminder, the LLP SORP is effective for periods commencing on or after 1 January 2019. Early adoption is permitted, provided all amendments are adopted from the same date, with some limited exceptions. CCAB, when considering whether the 2017 Triennial Review amendments created any issues specific to LLPs, concluded that only limited changes to the LLPs SORP were required:

 

‘These include updates to:

  • guidance on cash flow statement presentation to reflect the new requirement to disclose the changes in net debt between the beginning and end of the financial period
  • guidance on accounting by small LLPs to reflect the simpler recognition and measurement requirements available to small entities when accounting for certain loans
  • provide additional guidance on the revised recognition rules for intangibles assets acquired in a business combination
  • guidance on merger accounting to reflect the extended definition of a group reconstruction.’

 

The small company discounting relaxation for director loans in FRS102 (subject to the conditions in paragraph 57A) has been made available to small LLPs.  

 

Paragraph 57A states that when ‘members’ capital is classified as a financial liability it may – depending on the terms of the members’ agreement – constitute a financing arrangement and may therefore need to be discounted to present value in accordance with the requirements of paragraph 11.13 of FRS 102'.

 

However, discounting will not always be necessary as in many instances members’ capital will be repayable on demand or at short notice eg on termination of membership. In addition, there is an exemption for small companies and LLPs in paragraph 11.13A of FRS 102 from the requirement to discount basic loan financing transactions, provided it is a ‘...loan from a person who is within a director’s group of close family members, when that group contains at least one [member of the LLP who is a person]'.

 

The meaning of director has not been defined in FRS 102 for an LLP. ‘This SORP recommends that for the purposes of applying the exemption in paragraph 11.13A of FRS 102, a director is taken to mean a member, who is a person, with an equivalent role in the LLP. For some small LLPs that may be all members, for others, it may be a member who is part of a governing body or management board.’

 

You can find more information and CCAB guidance on our website.

 

Auto-enrolment changes

Ensure you are aware of the new minimum contributions.


The new tax year sees the increase in contributions for both employers and employees/workers.

 

The table below shows the minimum contributions:

 

Date effective

Employer minimum contribution

Staff contribution

Total minimum contribution

       

Currently until 5 April 2019

2%

3%

5%

6 April 2019 onwards

3%

5%

8%

 

Employers should note and ensure communication is in place to inform employees of the change in contribution.

Lockton launches new online portal

New portal will make it easier to manage your PII.


New portal will make it easier to manage your PII.

 

With our ACCA members’ scheme already offering wide policy coverage and enhanced benefits such as legal expenses, a loss of documents extension, a 60-minute free legal helpline* and interest free payment instalments, we have sought to further increase the benefits available to you.

 

We have achieved this by developing a new portal that allows you to renew your professional indemnity insurance quickly and securely online and provides instant access to policy documentation.

 

The portal provides useful tools such as FAQs, topical articles, webinars and CPD learning modules.  There is also the option to add extra covers to your insurance programme, including employers’ and public liability, management liability and cyber liability insurance. 

 

The renewal process is simple and offers you the following benefits:

 

  1. Complete your renewal at a time that suits you
    You will receive an email from us 45 days prior to your renewal date with a link to the portal and your log-in details. This will allow you to complete your renewal at a time that suits you.
  1. Pre-populated proposal form
    Your proposal form will be pre-populated with the information you provided at your last renewal. This means you will only be required to complete a short statement of fact and, if necessary, make changes to last year’s answers.
  1. Additional cover option
    Additional cover options will be provided, including employers’ and public liability, management liability and cyber liability insurance. Should you choose to add any of these valuable protections, there will be a short and simple statement of fact for you to complete.
  1. Instant quotation
    Once you have completed the relevant statements of fact, and if you fit the quotation criteria, instant quotes will be generated. You will also have the option of choosing quotes based on alternative limits and excesses.
  1. Easy payment process
    You will be able to make secure credit and debit card payments.
  1. Instant access to your renewal documentation
    Once you have accepted your quotation, cover will be bound and your policy documentation will immediately be generated. This will be stored in ‘your documents’ folder allowing any-time access. As such you can readily access your policy documentation during any ACCA monitoring visit and can use this as evidence of having appropriate cover when renewing your practising certificate.

 

We have a team of knowledgeable and experienced staff on hand to help you through the process should you require any immediate assistance or have any questions. You can of course still renew your policy directly through your account manager, if you prefer. The portal frees up time for our dedicated team to consult with you and provide you with professional advice as and when you need it.

 

Roselin Ali – ACCA unit manager, Lockton Companies LLP

 

Tel: 0117 906 5057

 

ACCAaccountants@uk.lockton.com

 

*The helpline is not for the notification of claims but is intended to cover issues you may face in the course of your professional business which may relate to a professional negligence claim. View this factsheet for more information.

Preparing tax return accounts at the last minute for a client?

Will cash accounting ease the pressure?


Will cash accounting ease the pressure?

 

Cash accounting (CA) is primarily designed for unincorporated small businesses to help ease the burden of preparing formal accounts. During the tax return season, especially for the ever present ‘last minute’ clients, CA may be a great opportunity to simplify and speed up the process of accounts/tax return entries.

 

However, CA may not suit all clients and the table below looks at the advantages and disadvantages of the scheme.

 

Eligibility

Cash accounting can be used if the clients:

  • run a small self-employed business, for example sole trader or partnership
  • have a turnover of £150,000 or less a year.

 

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £150,000.

 

The client can stay in the scheme up to a total business turnover of £300,000 per year.

 

Limited companies and limited liability partnerships can’t use cash basis, neither can a number of specialist entities. These are mainly unlikely to be small businesses but there are some which may for instance:

  • farming and creative businesses with a section 221 ITTOIA profit averaging election
  • businesses that have claimed business premises renovation allowance
  • businesses that have claimed research and development allowance.

 

Businesses with increasing or volatile turnover would need to consider the cost of changing from one system to another.

 

Advantages and disadvantages

 

Issue

Advantage

Disadvantage

 

 

 

Accounts preparation

  • Simpler and quicker as businesses will not have to make year-end accounting adjustments. The figures will ignore the usual adjustments for debtors, creditors or stock and so getting the information from clients will be easier

 

More sophisticated accounts might be needed for banks and other funders. For instance they will need to see what was owing/owed and how much capital is tied up in areas like stock. So additional figures may need to be produced in addition to tax return CA accounts

 

 

 

It can be argued that a business needs to use accruals and other adjustments to get a true ‘picture’ of the performance of the business. Simple figures showing cash in/out might not be appropriate

 

 

Taxation

At the end of the tax year the business owners won't have to pay tax on income they haven't yet received.  There might also be tax advantages in the first year as areas like stock will not be an issue. This should have the effect of improving cashflow.

 

The tax deferral is only temporary, as the timing differences on debtors, stock and creditors will unwind in the future.

 

Tax calculations are simplified as there is no need to make adjustments for capital allowances for plant and machinery, as capital expenditure (apart from cars) will simply be relieved as and when it is incurred.

 

A choice on the amount of capital allowances claimed is not available under cash accounting and this may be detrimental to a taxpayer with low profits especially when they are covered by personal allowances

 

 

Capital allowance adjustments might still be required under cash accounting for expenditure on cars, if businesses choose not to apply the simplified expenses mileage rate.  There may also be other private use of asset adjustments

 

 

 

Interest on cash borrowings will only be allowable up to £500.

 

 

Negative results (losses) under the cash basis can be carried forward and set off against future profits of the same trade.

The use of losses for tax is restricted as generally there is no sideways loss relief in the year or carry back provisions.

 

 

 

If a business is changing to CA certain adjustments will need to be made for tax purposes.

 

 

The business has the option of using the simplified expenses basis for certain categories of expenditure.

 

 

 

 

 

 

Alternative Dispute Resolution – a refresher

ADR can help resolve otherwise time-consuming tax disputes with HMRC.


ADR can help resolve otherwise time-consuming tax disputes with HMRC.

 

Resolving a tax dispute with HMRC can be a time-consuming process for a business. Alternative Dispute Resolution (ADR) refers to ways of resolving the dispute without the need to go to court.

 

Common forms of ADR are:

  • mediation: where an independent third party helps the disputing parties to come to a mutually acceptable outcome
  • arbitration: where an independent third party considers the facts and takes a decision that’s often binding on one or both parties.

 

Mediation as part of ADR was introduced by HMRC as a pilot in 2011 with a full launch in 2013. ADR’s aim is to reach an agreement on the day by facilitating a process of negotiating a dispute, while ensuring that the taxpayer and HMRC remain the decision-makers throughout.

 

Scope of ADR

ADR is usually used when a tax dispute has reached an impasse. The main reasons being:

  • the parties have not established or fully understood the relevant facts
  • one or both parties have made assumptions about particular facts
  • there are differences between the parties about how the law applies to the relevant facts
  • the parties have not discussed or fully understood their respective positions.

According to HMRC guidanceADR can be useful if: 

  • you and HMRC have different views on exactly what’s happened - the facts
  • communication between you and HMRC has broken down
  • you need to know why HMRC hasn’t agreed evidence that you’ve given it and why it wants to use other evidence
  • HMRC needs to explain why it needs more information from you
  • you’re not clear what information HMRC has used and think it may have made wrong assumptions.

 

ADR isn’t right for disputes about:

  • requests for time to pay or similar issues
  • fixed penalties on the grounds of reasonable excuse
  • tax credits
  • PAYE coding
  • HMRC delays in using information
  • cases that HMRC’s criminal investigators are dealing with
  • default surcharges.’

 

Expertise, independence and impartiality

The mediator should ensure that he/she:

  • possesses a general understanding of the law and the necessary knowledge and skills relating to the out-of-court or judicial resolution, to be able to carry out his/her functions competently
  • discharges his/her duties in a way that is unbiased as regards to both parties of a dispute
  • maintains impartiality by ensuring that his/her remuneration is not linked to the outcome of the alternative dispute resolution procedure.

 

Mediation techniques

The mediator should use his/her specialist mediation techniques to facilitate the parties’ discussions as a neutral third party, ensuring that:

  • they are satisfied that the parties to the mediation and their advisers understand the characteristics of the mediation process, their roles as parties and advisers, and the role of a mediator
  • before the mediation begins, the parties have understood and agreed the terms and conditions which will govern the mediation, including those relating to obligations of confidentiality on the mediator and the parties
  • they conduct the process with fairness to all parties and take particular care to ensure that all parties have adequate opportunities to be heard, to be involved in the process, and to seek and obtain legal or other counsel before finalising any resolution
  • they take reasonable steps to prevent any misconduct that might invalidate an agreement reached at mediation or create or aggravate a hostile environment
  • they are satisfied that the parties have reached agreement of their own choice and knowingly consented to any resolution
  • any agreement between the two parties is properly documented at the end of the meeting and that the ADR agreement correctly and fully captures what was decided on the day. The document forms a binding contract (subject, where relevant, to HMRC governance and in accordance with contract law) between both parties.

 

ADR agreement and HMRC code of governance

Taxpayers with a large or complex dispute must be aware that the agreement reached in principle at ADR could require review and approval by the Tax Dispute Resolution Board (TDRB) or another HMRC governance board before becoming binding. The upward referral depends on the size of the particular tax risk, as well as the overall tax at stake. In addition, if the matter has far-reaching implications or includes unusual or novel features then a ruling from a DRB is necessary before any agreement is formally accepted by HMRC.

 

For further information view the ADR application form and guidance on how to appeal against a tax decision

Do all landlords need to complete a tax return?

An examination of when an individual does not require to complete a tax return for their rental income.


An examination of when an individual does not require to complete a tax return for their rental income.

 

Not necessarily, it depends. How much tax is payable depends on the level of profits and the personal circumstances of each individual. In this article we discuss the circumstances where an individual does not require completing a tax return for their rental income but can get their tax paid by notifying to HMRC only.

 

HMRC notification

HMRC guidance clearly states that you must contact it if you have taxable profits from your rental property. The deadline for this notification is by 5 October following the tax year you had taxable rental profits.

 

HMRC does state that those with small amounts of profit have a choice of filing a tax return and paying taxes or getting their PAYE code adjusted with the level of profits. HMRC states that ‘it will ask for a return where rental income is £10,000 or more before allowable expenses’ and under this limit is likely to ask for a return where the rental income falls between ‘£2,500 to £9,999 after allowable expenses’.

 

If the rental income is below the above levels, then the individual may ask HMRC to deal with the profits by adjusting the PAYE code. However, if HMRC has issued a tax return, it has to be completed even if there is no tax to pay.

 

Property allowance

From 6 April 2017 you can get up to £1,000 a year in tax-free allowances for property income. If your annual gross property income is £1,000 or less, from one or more property businesses you won’t have to tell HMRC or declare this income on a tax return. Gross income means the total amount you would put on your tax return before any allowances or expenses are taken off. You must keep records of this income. This is known as ‘full relief’.

 

If your annual gross property income, from one or more properties is more than £1,000 you can use the tax-free allowances, instead of deducting any expenses or other allowances. If your expenses are more than your income it may be beneficial to claim expenses instead of the allowances.

 

If you use the allowances you can deduct up to £1,000, but not more than the amount of your income. This is known as ‘partial relief’. If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income.

 

Further guidance can be found here.

 

Pensions for self-assessment

Make sure your client gets the correct tax relief for 2017/18.


Make sure your client gets the correct tax relief for 2017/18.

 

Pension contributions can be a complicated area but thankfully for self employed people with personal pensions it should be fairly straightforward.  However, many clients do not understand exactly how the tax relief works and so may give their accountants incorrect pension information for the tax return – or miss them out altogether.  

 

There are also complicated rules governing the amounts that can be paid into a pension scheme annually which may – if exceeded – create additional tax liabilities.

 

So here is a quick recap to help with the 2017/18 tax return.

 

Basic rate taxpayer

When a contribution is paid the pension scheme reclaims income tax at the basic rate on behalf of the taxpayer and adds it to their pension pot. Therefore all of the relief is claimed and for a basic rate taxpayer the actual tax return entries will not affect the tax liability. Note that if the taxpayer’s rate of Income Tax in Scotland is 19% the pension provider will claim tax relief at a rate of 20%. The difference does not need to be repaid.

 

The pension contributions need to be disclosed on the tax return even when the relief has been claimed at source by the scheme. In addition the amounts contributed must be put down gross, ie not the actual amount paid but grossed up for the tax relief claimed at source. Make sure that your client has given you the correct figures and whether they are gross or net.

 

Example

Emma paid £700 into her pension scheme.

She puts £875 in box 1 (£700 divided by 80 and multiplied by 100), which is her net payment plus the tax relief of £175 (£875 at 20%).

The reason for the ‘gross’ entry is explained below.

 

Higher rate taxpayer

Where the person is a higher rate taxpayer or additional rate taxpayer, additional tax relief may be claimed. This is claimed through an extension in the basic rate band and higher rate band. Both bands are extended by the gross amount of thecontribution. Hence it is important for the client not to get confused between net and gross payments as this may directly affect the tax liability.

 

Example (courtesy of Tolleys) ― illustrating higher rate tax relief given by extending the basic rate band

 

Mr Hubert is self-employed and lives in Birmingham. He pays £600 net per month into his pension scheme. He has taxable trading profits of £70,000 and receives bank interest of £7,500 each year.

 

Mr Hubert

Income tax calculation

Year ended 5 April 2019

 

Total income

Non-savings income

Savings income

 

£

£

£

Trading income

70,000

70,000

 

Savings income

7,500

______

7,500

Total income

77,500

70,000

7,500

Less: personal allowance

(11,850)

(11,850)

______

Taxable net income

65,650

58,150

7,500

 

Tax thereon:

 

 

£

Non-savings

£43,500 (W1) (N1)

@ 20%

8,700

 

£14,650 (N1)

@ 40%

5,850

Savings

£500 (N2)

@ 0%

Nil

 

£7,000 (N2)

@ 40%

2,800

Tax due

 

 

17,350

Workings

(W1) Extending the basic rate band and savings basic rate band:

 

£

Basic rate band / savings basic rate band

34,500

Plus: gross pension contribution

 

 

9,000

Extended basic rate band

43,500

Notes

  • 1) Non-savings income is first taxed at the basic rate of 20% using the extended basic rate band. The non-savings income is more than the extended basic rate band and therefore £14,650 (£58,150 – £43,500) of non-savings income falls within the higher rate band.
  • 2) The amount of the savings nil rate band depends on the taxpayer’s marginal rate. Higher rate taxpayers, such as Mr Hubert, have a savings nil rate band of £500. The balance of the savings income, which amounts to £7,000 (£7,500 – £500), is taxable at the savings higher rate of 40%. See the Taxation of savings income guidance note.
  • 3) As Mr Hubert is self-employed, it is likely that he would have already paid some of his tax liability under the payment on account regime.

 

Special pension contributions

There are some specific contributions that need to be treated differently so again the devil is in the detail:

 

  • payments to a retirement annuity contract. These are becoming less common now. There is a specific box on the tax return for this as the (RAC) provider doesn’t use the ‘relief at source’ scheme and so they don’t claim the basic rate (20%) tax relief on behalf of the taxpayer. The total personal contributions to the RAC in the 2017 to 2018 tax year should be included in box 2
  • payments to your employer’s scheme which were not deducted from your pay before tax. There are various reasons why this might happen but again it may mean that basic rate tax relief has not been given and so needs claiming. The total unrelieved amount paid in the 2017 to 2018 tax year should be included in box 3
  • payments to an overseas pensions scheme – these may attract tax relief if they are eligible and were not deducted from pay before tax. The amount that directly qualifies should be included in box 4.

 

Company pension schemes

Remember that normally the relevant entries on the tax return relate to personal pension contributions. So if a tax payer is part of a company pension scheme these contributions should not be confused with personal ones.

 

Maximum contributions

The maximum contribution to a pension fund that a taxpayer can obtain tax relief for in any one tax year is the higher of 100% of his ‘relevant earnings’ for that year and the basic amount (£3,600). In effect anybody can pay up to £2,880 per year into a pension scheme regardless of the level of his or her earnings. Up to this limit, the pension scheme will claim basic rate tax relief. Grossing up for 20% basic rate tax makes the gross contribution £3,600.

 

Annual allowance

There is an annual allowance and if pension contributions go above this, tax may be payable. ‘Pension input’ broadly means employee’s plus employer’s pension contributions in the tax year. The allowance for 2017/18 is £40,000.

 

If the annual allowance for the current tax year (6 April to 5 April) is fully used, the taxpayer can carry over any unused allowance from the previous three tax years. Carry over unused allowance from the earliest tax year first.

 

Complications:

  • if the taxpayer is already accessing the pension, the annual allowance may be reduced and tax payable when exceeded
  • higher paid taxpayers have a reduced annual allowance.  Look at adjusted incomes over £150,000. Follow this link for HMRC’s reduced allowance calculator
  • the annual allowance includes all pension schemes. This is an important planning/timing issue as the client needs to get all of the necessary information from each scheme they contribute to.

 

And finally don’t forget the lifetime cap. It was reduced significantly over a number of years, reaching £1,000,000 for 5 April 2016. Increases in line with inflation apply and from 6 April 2018 the cap increased to £1,030,000 and will increase to £1,055,000 from April 2019.

 

Restrictions on claiming income tax reliefs on trade losses

A look at restrictions, including worked examples.


A look at restrictions, including worked examples.

 

One of the advantages of trading as a sole trader or a partnership is that if the business makes losses then they are relievable against the total income of the individual ie salary, rental income and even chargeable gains.

 

The legislation

As highlighted in (link to article Loss relief options available to a sole trader) s64 and s72 of Income Tax Act 2007 allows the trade losses to be set off against general income if the person: 

  • carries on a trade in a tax year, and
  • makes a loss in the trade in the tax year or in any of the next three tax years.

 

Trade loss relief against general income for a loss made in a trade in a tax year is not available unless the trade is commercial. The trade is commercial if it is carried on throughout the basis period for the tax year on a commercial basis and with a view to the realisation of profits of the trade.

 

Restriction on income tax relief

From 6 April 2013 the total amount of certain income tax reliefs that can be used to reduce total taxable income is limited to £50,000, or 25% of the individual's adjusted total income, if higher. Adjusted total income is only worked out if the total income is over £200,000. If total income is below £200,000 the limit on income tax reliefs is £50,000. Trading losses are included within the list of restricted reliefs.

 

The main reliefs subject to this limit are:

  • trade loss relief against general income and early trade losses relief 
  • property loss relief
  • post-cessation trade relief, post-cessation property relief, employment loss relief, former employees deduction for liabilities, losses on deeply discounted securities and strips of government securities
  • share loss relief, unless claimed on Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) shares
  • qualifying loan interest.

 

Example: Adjusted total income (as extracted from Tolley)

Henry has trade losses in 2018/19 of £200,000 and 2017/18 profits from the same trade of £70,000. He has other income each year of £120,000.

 

His relief against general income is capped at £50,000 for both 2017/18 and 2018/19.

 

Henry makes a claim to set £50,000 trade loss relief against his 2018/19 general income and to carry back £70,000 against 2017/18 profits from the same trade. He also claims £50,000 carried back against his general income in 2017/18.

 

Henry’s income chargeable to tax is:

2018/19

£

Income

120,000

Less: sideways trade loss relief (capped)

(50,000)

Income chargeable to tax

70,000

 

 

2017/18

£

Income (£70,000 + £120,000)

190,000

Less: 2018/19 trade loss relief against same trade (uncapped)

(70,000)

Less: 2018/19 trade loss relief (capped)

(50,000)

Income chargeable to tax

70,000

 

Note that this example ignores the personal allowance.

 

Useful links:

Help sheet 204

BIM85700

  

 

Declaring rental income on jointly-owned properties

A 50/50 split may not be tax efficient for your clients.


A 50/50 split may not be tax efficient for your clients.

 

What is the default position?

HMRC’s default position is that where someone lives with a spouse or civil partner – and has income from property which is jointly owned – normally they will be taxed on an even split of the income.

 

However, where the beneficial interests in the property are different it may be possible to apply for the income to be taxed in a different ratio. Clearly this will be tax efficient in certain circumstances such as one of the owners being a higher rate taxpayer.

 

For example, if the husband put in 60% of the capital to buy the property and the wife put in 40%, the couple could make an election for 60% of the interest to be assessed on the husband and 40% assessed on the wife. As the election must be aligned with the beneficial entitlement, it is not possible to choose a split purely based on the most tax efficient allocation (which may be 0% husband, 100% wife).

 

For 2017/18 tax returns a declaration now will be too late as it must be given to the inspector within 60 days of the date of the declaration. However, discussions with the client may mean that planning for 2018/19 needs to start now.

 

What is the catch?

The catch is that the beneficial interests need to be genuinely different to a straightforward even split. The reason behind the difference must also be evidenced.  HMRC states:

 

Married couples and civil partners do not have a general option to have income taxed in any way they like. They can depart from the standard 50/50 split for tax purposes only where: 

  • each spouse or civil partner is in fact entitled to a share other than 50/50 in the property and
  • the share that a spouse or civil partner has in the income is the same as their share in the property.

 

What evidence does HMRC accept regarding different beneficial interests?

Although HMRC does not specify an exact list, HMRC and most commentators refer to the evidence as normally being either a written declaration or a trust deed. 

 

How is a declaration made by the taxpayer?

The declaration is normally made online using this link.

 

Are there any other conditions?

There are a number of important issues to take into consideration before making a declaration. HMRC provides detailed guidance here on the whole subject but some of the main points are:

  • no split other than 50/50 can be accepted until a satisfactory declaration is received
  • a form 17 declaration must be made jointly. If one spouse or civil partner does not want to make a declaration both must accept the standard 50/50 split for jointly held property
  • a married couple or civil partners who have separated would not be subject to the 50/50 rule, as it applies only to couples living together. They will be taxed on their actual entitlement in any event, and so cannot make a form 17 declaration
  • individuals other than spouses or civil partners cannot make a form 17 declaration, for example siblings. The 50/50 rule does not apply to them. Income is attributable to them on the basis of their entitlement
  • a couple do not have to opt for a different split. A couple could accept the standard 50/50 split for jointly held property, even if one spouse or civil partner holds 90% of the capital and income and the other spouse or civil partner holds 10%
  • a couple might declare that their interest in property is split 60/40. Later their interests change so that they hold it 80/20. If they wish they may make a fresh declaration to reflect the new split. But it must reflect the actual position
  • there is no limit on the number of declarations.

 

Legal advice

Advice should be taken on the non-tax implications of changing the beneficial ownership. For instance, the changes may have an unintended effect on the split of sale proceeds of the property.

 

 

NEWS
Your guide to this month's highlights:


News and tools for you

ACCA is providing the following support to practitioners: demonstrate your excellence in Xero, how to profitably grow your firm while working fewer hours with less stress, our practical guide to apprenticeships, our free webinar on SRA reporting and how to save 86% on KPMG online courses.


Demonstrate your excellence in Xero

The one million pound firm: How to profitably grow your firm while working fewer hours with less stress

Free webinar: Avoid the pitfalls on SRA reporting

ACCA's practical guide to apprenticeships

SAVE 86%: new courses from KPMG

 

 

Demonstrate your excellence in Xero

Does your practice use Xero? Thanks to the Memorandum of Understanding we signed with Xero in August, your firm can now benefit from free access to Xero Advisor Certification. Completing the Xero Certification Equivalency Course is a great step towards gaining an extremely solid understanding of all things cloud accounting and of Xero. It’s also great for employability because demand for these skills has never been greater, both at bookkeeping and accounting practices and at more than 300,000 subscribers across the UK. Access this benefit now (use promo code ACCAX12m).

 

 

The one million pound firm: How to profitably grow your firm while working fewer hours with less stress

Join Heather Townsend’s The Accountants Millionaires Club in Birmingham for a free workshop which will:

  • motivate you to grow your practice armed with your top three priorities and three immediate next steps to unlock the growth of your practice
  • develop realistic action points in order to release your time to work on the business
  • demonstrate how to get your team to engage with your growth plans – and work the way you want them to - regardless of how resistant to change they may be
  • benchmark your firm and provide easy-to-implement action points in place to increase your cash flow and profitability, so you can reduce your stress levels and increase your practice income.

 

When: 20 February from 09:00-17:00

Where: Birmingham

Fee: £45 (ACCA members receive a 50% discount)

How to book: Book online here

 

 

Free webinar: Avoid the pitfalls on SRA reporting (7 February)

This webinar will cover the SRA's future policy reforms, new accounts rules (including guidance and implementation), key client money risks that are a priority (such as banking facilities, investment fraud), and quality of accountant's reports. Register your place now.

 

 

ACCA’s practical guide to apprenticeships
From funding and contracts to off-the-job training and further study, this is what you need to know about apprenticeships. They represent a highly cost-effective way for you to recruit and develop ambitious new talent to help you realise your business ambitions. Apprenticeships also have the added benefits of being able to offer high quality training, on-the-job experience and local employment opportunities. Apprenticeships can be complex so we have developed this guide that includes all the practicalities you need to consider if you are interested in taking advantage of the government’s funding to grow your own talent. 

 

 

SAVE 86%: new courses from KPMG

KPMG is offering up to 86% off the list price of three, brand new, online courses.

Use promo code: KPMG@100

 

Our top tips for a successful business in 2019
 

WATCH: Nigel and Nikki Adams reveal their top tips for a successful business.


Nigel and Nikki Adams (joint managing partners at Ad Valorem) reveal their top tips for running a successful business in 2019, including why February is a good time to take stock and consider your priorities for the year ahead as well as the app which is exciting them most at the moment.

 

 

Nikki and Nigel Adams Top Tip

How to future proof your practice
 

WATCH: Video highlights from our hugely successful digital roadshows.


Our recent digital roadshows proved a huge success, providing real insight into how you can embrace digital and ensure your firm is ready for the future.

 

Watch our video highlights now for a true flavour of the roadshows

 

If you attended one, you were able to talk with Xero and a selection of their app partners – including Hubdoc, Receipt Bank, Practice Ignition, GoCardless, FUTRLI and Fluidly – and learn about how these apps can transform elements of your business.

 

Many of these app partners have made available special offers for ACCA members, but hurry – these are all for a limited period only!

 

Find out more and select the right apps for your practice.

End of tax year series of free webinars for practitioners

Register now for any of our five free webinars (each worth 1 CPD unit).


ACCA UK is running an 'end of tax year' series of free webinars for practitioners starting on 5 February. The series will cover:

 

Key changes to entrepreneurs' relief 5 February (12:30)

Speaker: Dr Ros Martin, consultant and lecturer

 

Making Tax Digital 6 February (12:30)

Speaker: Dean Wootten, Wootten Consultants Limited

 

Audits of charities and independent examinations update 12 February (12:30)

Speaker: Don Bawtree, Business Assurance Partner, BDO

 

Risk and mitigation for the accountant – some key lessons from 2018 19 February (12:30)

Speaker: Louise Dunford, LD Consultancy Limited

 

Inheritance tax planning 26 February (12:30)

Speaker: Paul Soper FCCA, tax lecturer and consultant

 

Register for any or all of these webinars now. If you are unable to join us for the live webinars, 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.

 

In addition we're hosting a webinar to help you Avoid the pitfalls on SRA reporting on 7 February, covering the SRA's future policy reforms, new accounts rules (including guidance and implementation), key client money risks that are a priority (such as banking facilities, investment fraud), and quality of accountant's reports. Register your place now.

 

The 2018 practitioner webinar series is still available on demand

 

Technical Advisory Service helpline – trial changes to telephone hours

Trial aims to improve efficiency of telephone helpline for practitioners.


ACCA has undertaken a thorough examination of telephone calling patterns to our Technical Advisory Service helpline.

 

As a result of the findings, our telephone opening hours are going to change from 1 February 2019 for a four week trial period. The new revised opening hours during this period will be Monday to Friday from 09.00 to 15.30.

 

Our email service remains unchanged; you can email any query to advisory@accaglobal.com.

Changes to the ACCA Rulebook 2019

A summary of changes to ACCA’s Rulebook.


A summary of changes to ACCA’s Rulebook.

 

Changes to the 2019 edition of the ACCA Rulebook include the implementation of a restructured ACCA Code of Ethics and Conduct, and clarifications of the regulatory and disciplinary process.

 

The 2019 Rulebook incorporates the restructured IESBA International Code of Ethics for Professional Accountants (including International Independence Standards) within Section A of the ACCA Code of Ethics and Conduct. Key revisions include enhancements in respect of safeguards, long association of personnel with audits, professional accountants in business and pressure to breach the fundamental principles, and offering and accepting inducements. The most significant changes to the other sections of the Rulebook are outlined below.

 

Changes throughout the Membership Regulations have been made to reflect the Ethics and Professional Skills module, and to ensure compliance with the General Data Protection Regulation.

 

Changes to the Global Practising Regulations (GPRs) have been made to:

  • simplify the honorary reporting exemption provisions and enable a member to undertake an independent examination for a charity whose gross income does not exceed £250,000
  • remove the requirement to hold an ACCA practising certificate for South African members, although specific requirements in respect of tax practitioners are retained in accordance with the requirements of the South African Revenue Service.

 

Other changes to the GPRs include clarification that trust or company services do not constitute public practice and so do not give rise to the need to hold a practising certificate. Nevertheless, trust or company service providers that are not supervised by ACCA for anti-money laundering will be required to register with HMRC.

 

Sometimes the Rulebook is amended for greater transparency, consistency and clarity, and to allow enhancements to regulatory and disciplinary processes, or to reflect changes in legislation. In 2019, such changes include:

  • new provisions relating to the service of notices and documents, including that notices and documents sent by email will be deemed to have been served on the day on which they are sent, rather than after 72 hours
  • referring more consistently to notices and documents being ‘served’, rather than ‘received’
  • extending the period for notification and submission of documents for the relevant person to 21 days.

 

Further practical changes to the Rulebook include:

  • removing from the Complaints and Disciplinary Regulations the requirement to have a differently constituted Health Committee where the Disciplinary Committee orders referral to a health hearing
  • where an application to appeal has been refused by the chairman, removing the relevant person’s right to request that his application be considered by an appeal committee. Instead, permission to appeal may be considered by a second chairman
  • a provision to allow concessions to be made by the respondent at any time during the appeal process, and not only while the appellant is seeking permission to appeal
  • permitting the relevant person (as well as other parties) to request that his or her fitness to participate in the proceedings be considered by the Health Committee.

 

Specific clarifications to the Authorisation Regulations include:

  • making the consideration of applications by a chairman alone on the papers the norm
  • bringing together all the publicity requirements, and requiring post-hearing publicity (with reasons), subject to a hearing (or part of a hearing) being held in private
  • better explaining the limited circumstances in which a regulatory assessor’s decision would not be published
  • including the requirements of the Statutory Auditors and Third Country Auditors Regulations 2016 with regard to sanctions, as well as orders.

 

All members, students and others bound by the ACCA Rulebook should ensure they are fully aware of its contents. A detailed explanation of all the changes is available at accaglobal.com/rulebook.

 

Practising certificate application process

ACCA has introduced a new Practising Certificate Experience Form for anyone applying for a PC.


ACCA has introduced a new Practising Certificate Experience Form for anyone applying for a PC.

 

On 1 January ACCA launched new Practising Certificate Experience Forms (PCEF) for members who are training towards an ACCA practising certificate (PC) or an ACCA practising certificate and audit qualification (PCAQ) to record their experience.

 

Members must meet the Practising Certificate Experience Requirements (PCER) – which require members to obtain three years of relevant experience, which can include up to one year of pre-membership experience. However, where members were previously required to complete a Practising Certificate Training Record (PCTR), those who have not yet started their PCTR will need to document their experience in the PCEF.

 

Members will not be able to combine both the PCTR and the PCEF; they will need to complete a single document (either PCTR or PCEF) to evidence their complete period of relevant experience. The PCER state that all completed PCTRs need to be submitted to and approved by ACCA by 31 December 2020. After this date, only the PCEF will be assessed.

 

There is a transition guide to assist members who have already started completing their PCTR. It explains the best course of action for the transition period of 1 January 2019 to 31 December 2020. It also contains comparison tables to assist members and training principals to understand the PCEF framework.

 

The PCEF itself is in three parts. Part 1 contains the mandatory areas (professionalism and ethics, stakeholder relationship management, strategy and innovation, practice development, and leadership and management), together with guidance on completion of PCEF, the principal reviews and the time summary.

 

Part 2 contains the optional areas (corporate reporting and financial management, business advice, development and measurement, sustainable management accounting, taxation and business consultancy, and internal review).

 

Part 3 relates to audit. A member training towards a PC must complete parts 1 and 2; a member training towards a PCAQ must complete all three parts. Members need to complete statements of achievement, documenting experience gained in the above areas. Each statement should be evidenced by detailed narrative. These statements must be reviewed and achievement confirmed by the member’s training principal. Members can complete the statements at any point during their training towards a PC(AQ).

 

There are detailed guidance notes for each area. In addition to preparing verified statements of achievement, members must undertake six monthly reviews with their training principal. These should be recorded in the principal review section of PCEF. A training principal guidance pack has been produced to assist them in understanding their PCEF responsibilities.

 

There is also a time summary, which must be completed every six months. Members applying for a PCAQ for the UK or Ireland must undertake at least 44 weeks of audit experience in a three-year period, with at least 22 of these weeks being in statutory audit. As a guideline, 44 weeks of audit experience in three years equates to 1,540 hours.

 

The PCEF, supporting documents and bite-sized webinars explaining the different aspects of PCEF can be found on the practising certificates and licences section of ACCA's website.

 

More information

To supplement the guidance, a live PCEF Q&A session will run on 14 February. Register your place now.

Tolleys Taxation Awards 2019

Advice on entering awards which recognise excellence in tax, and so much more.


Advice on entering awards which recognise excellence in tax, and so much more.

 

Take a look at the Tolley’s Taxation awards and consider entering or nominating a person or firm.  The Taxation Awards made their debut in 2001 and quickly became recognised as a mark of excellence for UK tax professionals, whether they work for multinational companies or in accountancy and law firms.

 

These prestigious prizes are awarded in a range of categories covering the whole of the tax profession: in practice, in-house, from the largest firms to single office practices. In 2019 there are 19 categories, including two new ones and for the first time, the ability for the market to nominate a winner.

 

Being shortlisted or winning an award is hugely beneficial for profile-raising and marketing.

 

Entries close at the end of February and the winners are announced at a glittering ceremony on 16 May 2019 at the Hilton, Park Lane – possibly the biggest night of the year for the tax sector in the UK.

 

Find the full awards list at www.taxationawards.co.uk

 

Entering awards – ACCA guidance

ACCA is preparing practical guidance to help individuals and firms with their award entries. It will cover:

  • the attributes of a good awards entry
  • how to maximise the impact of entering an award
  • a look at different awards firms may wish to enter
  • how to counter any ‘naysayers’ in your firm
  • explanations, tips from award judges and common mistakes to avoid.

 

Our guidance will also allow you to help clients who wish to enter awards.

 

The practical guidance includes a video commentary and will be issued early next month. Look out for updates on our website, on Twitter and LinkedIn.

 

When you are considering your firm’s priorities this year, why not consider entering one of the following:

  • Accounting Excellence Awards
  • British Accountancy Awards
  • Barclays Entrepreneurs’ Awards
  • British Small Business Awards
  • CICM British Credit Awards
  • Queens Awards (covering innovation, international trade, sustainable development and promoting opportunity through social mobility)
  • Tolley’s Taxation Awards
  • IRIS Customer Awards
  • Xero Awards.