HMRC have recently issued a press release on tax avoidance. Let’s offer praise where it is due, first of all. They are right to say these things about tax avoidance:

The 10 things a promoter won’t always tell you:

1. Most schemes don’t work. You may be told that avoidance is legal, but if the scheme doesn’t work you’ll have made an incorrect tax return which is not in accordance with the law. You are legally obliged to pay tax that is due and you may be charged penalties if you try to avoid it.

2. It could cost you more than you bargained for. Avoidance schemes are complex. They can give rise to unintended additional tax consequences, and the fees you pay the promoter do not count as tax paid. So you could end up paying much more than just the tax you’re trying to avoid.

3. You may have significant legal fees to pay. If the scheme is taken to litigation, you’re likely to have hefty legal fees to pay. Your promoter may ask you to pay into a ‘fighting fund’ up front.

4. You could face criminal conviction. If you deliberately mislead or conceal information from HMRC you could be prosecuted and convicted.

5. You could face publicity as a tax avoider. If you are named in court papers when the case is litigated, or in public registers, you could be reported in the media as a tax dodger.

6. Your scheme is never HMRC approved. Getting an avoidance Scheme Reference Number from HMRC doesn’t mean the department has cleared the scheme. HMRC issues these numbers when a scheme has signs of being designed to avoid tax.

7. You could be marked out as a high-risk taxpayer. Use of a scheme could mark you out as a high-risk taxpayer, which means that all of your tax affairs will be closely scrutinised in future, not just your claim for relief.

8. HMRC is likely to beat your scheme in court. HMRC wins eight out of ten cases where taxpayers and promoters take avoidance schemes to court.

9. The risk is normally all your own. It’s unlikely that a promoter will give you a guarantee that a scheme will work. And they probably won’t be around to support you once HMRC starts investigating your tax affairs. Some promoters set up simply to sell the scheme, and then disband.

10. You’ll have to pay the tax up front anyway. You won’t get a cash-flow advantage while HMRC investigates a scheme. New legislation means you’ll have to pay the disputed tax up front.

I do not buy this:

The government has taken unprecedented steps to clamp down on the selfish minority who practise tax avoidance, because we are firmly on the side of the vast majority of taxpayers who play by the rules. As a result, tax avoidance is now very high risk.

This is true, to a degree, with regard to high risk domestic tax avoidance schemes, but this is a government that has massively increased the scope for tax avoidance for major companies by creating a territorial tax system, removing most of the controlled foreign company rules meaning tax haven usage is much more advantageous now, creating the patent box that the EU thinks abusive, creating arrangements that offshore finance operations in tax havens owned by UK based multinationals and more.

This government’s record on tax avoidance is poor, at best, and consistent with being a ‘high risk promoter’ in many cases. They have nothing whatsoever to shout about when it comes to their own record.

The Government is reforming the statutory pay and leave entitlements

available to employed parents. From next year, a new entitlement to Shared

Parental Leave and Pay (SPL) will be introduced. This will give parents more

flexibility in the way they share leave and pay between them. Where relevant,

employers will need to update their payroll systems to accommodate making

statutory parental payments to employees taking SPL. And to enable these

payments to be paid discontinuously, if necessary.

The current entitlement to statutory maternity/adoption leave is 52 weeks (39

paid) and two week’s statutory paternity leave and pay. This all unchanged.

What is new is that working parents of a baby due on or after 5 April 2015 may

be eligible to take SPL.

Under SPL, mothers (or adopters) will be able to choose to end their

maternity/adoption leave and pay early – at any point from two weeks after the

birth/placement – and share their untaken pay and leave with their partner.

The idea is to give families greater choice over their childcare arrangements in

the first year. It no longer has to be a year for mum and two weeks for dad. It’s

intended to enable fathers to take a greater role in caring for a child, and to

help both parents to better balance childcare responsibilities with staying in

work.

Parents will be able to take their leave in phases, for example 20 weeks for

the mother/adopter, followed by 20 weeks for the father/partner, followed by

10 weeks for the mother/adopter. So statutory parental pay could be paid over

one or two discontinuous periods.

We expect employers to start getting notifications of intention to take SPL from

February 2015. We will provide online tools to check eligibility.

Stamp Duty is to be replaced by a more progressive tax in Scotland

Yui Mok/PA WIRE

Scotland is to scrap Stamp Duty and put a new tax in its place.

The Land and Building Transaction Tax (LBTT) will only be added to properties that cost over £135,000. It will come into force in April 2015.

The problem with Stamp Duty

Stamp Duty is often criticised for working in a ‘slab’ nature. So while you don’t pay any tax on purchases of up to £125,000, pay just one penny more and you’ll be hit with a 1% tax. Similarly the difference between paying £250,000 and £250,000.001 for a property is a jump in Stamp Duty from 1% to 3%. And that difference is significant, jumping from £2,500 to £7,500.

How the new tax works

To get away from the ‘slab’ taxation of Stamp Duty, LBTT climbs in units. This means that a tax of 2% will apply in proportion to properties between £135,000 and £250,000. The next stage up is a 10% tax on properties between £250,000 and £1 million.

On the highest bracket, 12% tax will be placed on properties costing over £1 million.

Buyers at the higher end of the market will have a six-month window to purchase property before the tax change. Housing experts predict a sharp boost in this period.

Good for first-time buyers

The change should benefit first-time buyers that want to get on to the property ladder, who will save millions under this scheme.

Finance Secretary John Swinney argued that 90% of Scots will either pay less or be unaffected by the new tax:

Under Stamp Duty a first-time buyer buying a property worth £130,000 would have had to pay £1,300 in tax whereas now it’s tax-free.
A couple buying a flat for £140,000 will now pay tax of £100, saving £1,300 compared to Stamp Duty.
The average flat in Scotland is worth £162,000. Purchasing such a property would result in paying £1,620 in Stamp Duty, though this would fall to £540 under the new tax

Significant influence on property hotspots

For the 10% it does affect, it’ll be steep.

There will be big tax jumps in pricier locations like Edinburgh and Aberdeen, which could have a harsher effect on families looking to buy larger houses in central areas.

In Edinburgh the average family home costs £363,000 which clocks up £13,600 under the Land and Building Transaction tax.

Meanwhile, people buying properties worth £450,000 would pay £22,300 in tax, up £8,000 from their Stamp Duty bill.

The move has been criticised as a “Scottish mansion tax”, putting a strain on the squeezed middle.

HMRC Following In The Footsteps of Payday Lenders…

Raiding bank accounts to claw back debts is a favourite tactic of payday lenders-and now the Treasury is awarding the taxman similar powers.

HMRC can now target tax dodgers with the sort of methods usually used by companies such as Wonga.

Radical reforms unveiled in the budget will allow HMRC to bypass insolvency proceedings, asset freezes and debt collection to take what it believes is owed.

HMRC insist the powers will be used only on a small number of persistent tax dodgers and once someone had been contacted at least four times.

It applies only to people who owe more than £1000. Furthermore, HMRC must leave at least £5000 in the account.

The money is then put on hold for 14 days and account holders can set up a payment plan or the money is kept.

It pays to keep your manager sweet at HMRC!

A corrupt financial incentive system operates at HMRC as exposed by the Freedom of Information Act.

This explains why HMRC staff have got more aggressive in the last five to six years.

It also confirms for me that a lot of senior management who have overseen this system and implemented it need to go, otherwise why keep it so quiet?

HMRC award themselves bonuses just like the banks. It is a public disgrace.

HMRC staff have repeatedly denied that any financial incentive scheme was in place.

Following a Freedom of Information Act request to HMRC for details the truth is finally out!

HMRC hold your heads in shame!

Why try to hide something unless you KNOW it is fundamentally wrong.

Speaking to HMRC on a regular basis it is clear that many HMRC are unhappy with the organisation themselves. I hear it all the time from HMRC staff themselves. Many are disillusioned about the way HMRC is run now.

Many of these staff at HMRC are just trying to do their best in an organisation that is so poorly organised.

It’s not lack of staff that is the problem, it is the use of those resources and management level failures that is making the situation so poor.

Who is to blame?

The Treasury and Senior Management at HMRC are fair and squarly to blame for such a poor situation at HMRC.

But as Government (of whatever party) seems totally unable to get a grip of HMRC and turn it into a fit for purpose organisation the extremely bad state of HMRC is likely to just get worse with time, as it has steadily been doing so over the last five or so years.

And the PAYE Coding system is so badly flawed like a number if HMRC systems, but that’s another story… (likely to roll on and on and on…..)

Boy oh boy. What a mess…

The following list is a salutary lesson in what not to do if you want to keep your clients.

I have collated these points from various ideas found around the web. Such lists are normally aimed at encouraging clients of one accountant to move to another one. I thought it would be instructive to consider the same points from the perspective of an accountant.

Some of what follows will be facts. Some will be feelings and some will be false. But, even in the latter case, as I have often said: Perception is Reality. If any of your clients think of you as boring or uninteresting you may well be at risk of them being poached by a more stand out and successful accountant.

You are at risk of clients being tempted away if:

1. Their phone calls are not returned promptly
2. Promises, expectations and agreed deadlines not met.
3. Their work is not completed on a timely basis affording clients practically no time to make changes or ask questions.
4. You are providing poor value for money.
5. You are not evidently trying to help them to pay less tax.
6. You are not providing what they perceive to be a proactive service.
7. You make mistakes or have to accept there is a better solution when clients question your advice.
8. They have unexpected tax liabilities
9. They get charged penalties and interest charges about which you had not forewarned them
10. You charge unexpected or additional fees without warning clients of these in advance.

Take note. AF

What is the definition of “Furnished Property” To Qualify For 10% Wear & Tear Allowance?

Probably Qualifies…..

 Well here is the definition as far as HMRC is concerned as per their Manuals – Property Income Manual “PIM3200 – Furnished residential property: wear and tear allowance”

Definition

“A furnished property is one that is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc. The provision of nominal furnishings will not meet this requirement. If the accommodation isn’t furnished, or only partly furnished, the 10% wear and tear allowance isn’t due.”

What Does 10% Wear & Tear Allowance Cover

HMRC go on to state that the 10% wear and tear allowance is entended to cover:

The 10% deduction is given to cover the sort of plant and machinery assets that a tenant or owner-occupier would normally provide in unfurnished accommodation. 10% Wear and Tear Allowances includes things like:

• movable furniture or furnishings, such as beds or suites,
• televisions,
• fridges and freezers,
• carpets and floor-coverings,
• curtains,
• linen,
• crockery or cutlery,
• plant and machinery chattels of a type which, in unfurnished accommodation, a tenant would normally provide for himself (for example, cookers, washing machines, dishwashers).

This list isn’t meant to be complete but gives an idea of the assets the wear and tear allowances covers.

For more information on HMRC’s guidance of 10% Wear and Tear Allowance see http://www.hmrc.gov.uk/manuals/pimmanual/pim3200.htm

Or get in touch with us?

There Are a Variety of Ways Both Individuals and Companies Could Look To Reduce or Avoid Capital Gains Tax on The Sale of a Business.

In this post we look at some of the most common ways.

Sale of Shares by An Individual

Where you have an individual selling shares in a company some of the most common ways are:

Use of Annual Allowances and Tax Rates

An individual might decide to transfer some shares to their spouse prior to the sale. This will enable the spouse to use their annual capital gains exemption against the chargeable gain on the shares. It may also enable the spouse to use the 18% tax rate if available.

The same advantage can be taken of a child’s exemption and lower tax rate provided that hold-over relief can be claimed on the transfer of the shares to the child. This will be the case generally if the company is a trading company, or holding company of a trading group, and either the shareholder owns at least 5% of the votes or the company is unlisted.

Emigration

One way to escape the UK tax system altogether is to emigrate. The general rule under UK law is that UK residents can only avoid capital gains tax on a sale of shares by emigrating in one tax year, selling the shares in the next, and not returning to the UK for at least five complete tax years after their emigration. A successful emigration prior to the sale would avoid UK tax on the sale altogether.

Alternatively, it may be possible for a seller to decide to emigrate after the sale but before, say, any loan stock issued as consideration is redeemed. This could avoid the tax charge on the redemption of the loan stock but if prior to the sale the seller had an intention to emigrate he or she would have to mention this in the tax clearance made to the Revenue (discussed above) and this could result in the refusal of the clearance. Any clearance granted to an applicant who had failed to mention an intention to emigrate may well be invalid.

A final possibility is that a seller could persuade a buyer to enter into put and call options concerning the sale of the company, rather than agreeing now to sell the shares, such options only being exercisable after the seller has emigrated.

Another option could be to use a conditional contract for the sale with the condition only being satisfied in the tax year after you have left the UK. The disposal would then be free of CGT for you.

Death

Though not exactly a scheme, there are quite a lot of tax advantages in holding onto shares rather than selling them. If one dies whilst holding shares, there is no capital gains tax charge and the base cost of the shares is uplifted in the hands of the personal representatives to their market value at the date of death. Though inheritance tax is chargeable on death, business property relief will generally wipe out any charge on, for example, all shareholdings other than those in fully listed companies (and, indeed, even some shareholdings in such companies).

Tax Planning for Companies

UK companies are rather limited in their methods of reducing a tax charge on the occasion of a company sale.

The main options are:

Substantial Shareholding Exemption

Companies selling shares benefit from an exemption from corporation tax. The exemption applies generally where corporate shareholders sell shares in trading companies in which they own at least 10% of the ordinary shares, profits and assets, but only where they have owned them for at least 12 months in the two years preceding the sale.

The selling company must have been a trading company or member of a trading group generally for the twelve months prior to the sale and must generally continue to satisfy this condition following the sale (though this last condition is not necessary in all circumstances).

Where the exemption is available, the seller has a great incentive to ensure that the sale is structured as a share sale rather than an asset sale.

Share and Loan Note Exchanges

It’s possible to avoid a disposal of the shares in the target company for capital gains tax purposes if the transaction falls within section 135 of the Taxation of Chargeable Gains Act 1992. This can be achieved provided that the shares in the target company are sold, not its assets, and that the consideration takes the form of shares or debentures in the buyer company. The deferral under section 135 can also apply where the consideration is the issue of loan stock to the buyer.

Dividend Strip

Where the seller is a UK resident company, paying out a dividend to the seller prior to the sale results in it not paying any corporation tax on the dividend, compared with paying up to 26% corporation tax if the shares had been sold. Do not presuppose, however, that dividend stripping is without tax problems simply because it is common.

* First, where the seller is a company, a dividend strip cannot be used to create or increase an allowable loss on a sale of the shares, (section 177 TCGA 1992).

* Secondly, a mass of complex legislation (including section 31 TCGA 1992) prevents the use of the technique to reduce a chargeable gain in specific circumstances.

Dividend strips also work for individuals who are basic rate taxpayers because the tax rate on dividends (effectively nil for basic rate taxpayers) is less than their capital gains tax rate (18%). For higher rate taxpayers the saving from a dividend strip will only be 3% (i.e. 28% – 25%). Those paying income tax at 50% will find that a dividend strip actually increases their tax rate (from 28% to 36%).

Termination Payments

It is often suggested in the context of company sales that a termination payment is made to the departing directors, who will usually also be selling shareholders. The idea is usually to try to achieve a tax exemption for the first £30,000 of the termination payment (the exemption being available for non-contractual termination payments only). There is also the prospect of the target company being able to claim a tax deduction for the making of the payment.

This idea should be approached with caution. If it is the case that £30,000 has simply been taken from the purchase price and re-characterised as a termination payment, then not only might these tax advantages not arise, there may also be an argument that tax evasion has been committed. Any termination payment paid must be genuine (and even then it is arguable as to whether the target company will get its tax deduction).

Restrictive Covenant Payment

A similar idea is for the target company to make a payment to the retiring directors/sellers in return for them promising not to compete with the business of the target company. The idea here is to claim a tax deduction for the payment – such a payment is taxable as income in the hands of the recipients.

Again one should approach the suggestion with caution. Unless the agreement is genuine there is a possibility that it may be viewed as evasion if it simply involves re-characterising part of the purchase price as a restrictive covenant payment.

Need advice on selling your business? Get in touch here

Research and development expenditure credit – making the most of your R&D

Weigh Up The Benefits Before Signing Up

Details of the new research and development expenditure credit (RDEC) have been clarified in Finance Bill 2013. The RDEC will apply in relation to the current accounting period for many businesses, which could mean an increase in both the effective tax rate and profit before tax. This could have a potential impact on your quarterly, interim and full-year results, so you’ll need to start thinking about the possible issues this creates for your business. The accounting isn’t straightforward and it’s important that you talk through the impact both internally and with your Accountants.

The draft legislation reflects the Budget 2013 announcement that the RDEC rate is to be 10%. It’s no longer a tax incentive but becomes more like a grant which is offset against the research and development (R&D) cost in your profit and loss account. The credit will be available for loss-making companies, but we can now see the restrictions on the credit payable. We’re expecting further changes to the legislation.

There are also other issues you need to think about, including:

• the transfer pricing impact, particularly if you’re a group undertaking contract R&D
• the impact for budgeting for future R&D and effective tax rates
• any impact on your company’s bonuses, if they’re determined by profit before tax, and
• the need for real-time methodologies for compiling claims.

It’s important that you weigh up the benefits and the associated issues before you opt into the RDEC. Also, because of the increased visibility of an above-the-line credit, there’s likely to be much more pressure on your business to compile the claim quickly after the year end. This makes sure that an accurate claim can be included in your accounts but may also result in faster repayment of the credit.

If you need any advice on this or any other matter, please get in touch.