March Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue - March 2018.

Insurance company Canada Life's annual survey for 2017 has revealed growing confusion over the operation of inheritance tax. According to the survey, more than two thirds of respondents did not know the current level of the inheritance tax nil rate band - among adults over the age of 45 with assets in excess of £325,000, some 70% did not know that the threshold for the standard nil rate band is currently £325,000. This is a significant increase on the 61% shown in the 2016 survey. In addition, 55% of respondents did not know the rate at which assets above their available nil rate band are taxed - this represents an increase of 3% on 2016 figures.

The research found that over a quarter (27%) of those aged 45 or over with enough assets to trigger a potential IHT bill do not have a will, leaving their inheritance plans unclear and meaning their wealth could pass to relatives they did not intend to provide for under intestacy rules.

Another simple and effective estate planning strategy is to gift money to relatives, but just a fifth of respondents had done so - with over half (51%) saying they don't see a need.

One of the main reasons that simple estate planning tools are being ignored by people with enough wealth to benefit from them is a lack of understanding that could easily be rectified by better use of financial advice. However, Canada Life's research found that just 27% of wealthy Brits over the age of 45 have sought professional advice on IHT planning. At the end of January 2018, the Chancellor requested the Office for Tax Simplification (OTS) to carry out an IHT review, with the view to simplifying the 'particularly complex' system in which it operates.

The review will focus on the technical and administrative issues within IHT, such as the process of submitting returns and paying any tax due, as well as practical issues around routine estate planning and disclosure. It may also look at how current gift rules interact with the wider IHT system, and whether the current framework causes any distortions to taxpayers' decisions surrounding transfers, investments and other relevant transactions. Although there are no changes at present, there are likely to be future reforms in this area. With this in mind, individuals would do well to check their current position on inheritance tax issues and check that adequate provisions are in place.

Newsletter issue - March 2018.

HMRC have won a significant appeal concerning the application of employment intermediaries legislation to BBC television presenters. In Christa Ackroyd Media Ltd and the Commissioners for Her Majesty's Revenue and Customs, [2018] UKFTT 0069 TC06334, the First Tier Tribunal (FTT) ruled that the legislation (known as the 'IR35 rules') applied to the arrangements under which the BBC contracted one of the presenters of the regional news programme Look North.

Christa Ackroyd, whose 'personal service company' (Christa Ackroyd Media Ltd (CAM)), was engaged under a seven year contract with the BBC to provide her services on up to 225 days per year. Ackroyd was appealing against demands for some £419,151 from HMRC relating to income tax and National Insurance contributions (NICs) for the tax years 2006/07 to 2012/13.

This appeal is specifically concerned with 'hypothetical contract'. HMRC argued that such a contract between the BBC and Ackroyd would have been a 'contract of service' rather than a 'contract for services', that her status was that of an employee, and that CAM Ltd should therefore account for tax and NICs accordingly. The taxpayer however, contended that she was a self-employed contractor, and there was no further liability on the part of CAM Ltd.

The FTT found that the hypothetical contract would have been a contract of employment. Such factors as:

• mutuality of obligation;
• control of what, when, where and how the taxpayer performed her role;
• right of substitution; and
• whether the taxpayer was in business on her own account,

were all considered in depth.

In his ruling, the judge said that a hypothetical contract of seven years, for at least 225 days per year, and terminable only for a material breach, pointed towards a contract of employment. In particular, the length of the contract was 'pursuant to a highly stable, regular and continuous arrangement'. It involved a high degree of continuity rather than a succession of short term engagements. However, he also went on to say (at para. 171): ‘We do not consider that the fact the fees were payable on a monthly basis akin to the way an employee might be paid is significant. Nor is the absence of any provision for holiday, sick pay or pension entitlement.'

In this case, it was the ability of the BBC to 'control' the taxpayer, and the fact that there was a seven year contract for what was effectively a full time job, that were the significant factors in the Tribunal's findings that the taxpayer was an employee under a hypothetical contract.

The FTT said that whilst this appeal is one of a number of other appeals involving television presenters and PSCs, it is not a lead case as such. It is a significant ruling though as, not least, it indicates that the IR35 can be enforced where HMRC see fit to do so.

Newsletter issue - March 2018.

Many adults are likely to embrace the offer of help with technology from the younger generation! So where a child is employed in a family business to work on, say, website creation, management and social media, how can the owner make sure that their wages will be tax deductible? The recent case of Nicholson v HMRC (TC06293), in which the first tier tax tribunal examined a deduction made in sole trader's accounts for his university student son, gives us some pointers.

In this case, Mr Nicholson claimed that his son had been employed in promoting the business through internet and leaflet distribution and computer work. His wages had been calculated at a rate of £10 per hour for 15 hours per week, but unfortunately there was no evidence to support wages being paid on this basis. HMRC rejected the claim because of a lack of contemporaneous records preventing a successful reconciliation from the business bank statements.

Mr Nicholson claimed that payments to his son had been paid partly through the 'provision of goods'. He managed to identify £1,850 in cash by reference to his son's bank statements. He also substantiated a monthly direct debit of £18.51 in respect of his son's home insurance costs. However, the bulk of the claim was based on Mr Nicholson buying food and drink to help support his son at university.

The tribunal made reference to an earlier judgement in Dollar & Dollar v Lyon (HM Inspector of Taxes)[1981] CH D54 TC 459, which also involved payments to family members, and concluded that Mr Nicholson's payments were made out of 'natural parental love and affection'. There was a duality of purpose as the 'wages' had a major underlying 'private and personal' motive, and thus not for the purposes of the trade. The tribunal subsequently dismissed the appeal on the grounds that Mr Nicholson was doing nothing more than supporting his son at university.

In particular, this case highlights the importance of keeping proper records regarding the basis in which payments are to be made to children. The tribunal commented that the likelihood of a successful claim would have been increased had there been payment on a time-recorded basis, or a methodology in calculating the amount payable plus an accurate record of the hours worked. A direct link between the business account and the recipient's account would clearly be advisable.

Whilst there was no suggestion here that employing relatives is an issue in itself, the importance of paying a commercial rate for the work undertaken should be noted. The concept of 'equal pay for equal value' should help prevent a suggestion of dual purpose and thus, in turn, also help refute allegations of excessive payments to family members as a means of extracting monies from the business.

Finally, wherever payments are made to family member, legal issues such as the national minimum wage should also be borne in mind.

Newsletter issue - March 2018.

The maximum annual investment limit for Individual Savings Accounts (ISAs) will remain at £20,000 for 2018/19 (of which, for eligible investors, £4,000 may be saved in a Lifetime ISA). Although the investment limit is not rising in the new tax year, a couple will still be able to add up to £40,000 to their ISA accounts during the year - a substantial investment limit - and the interest received will be tax-free.

The maximum investment limit for Junior ISAs will rise from 6 April 2018 to £4,260, so there is scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Since it is possible for children to hold both a Junior ISA and a Child Trust Fund (CTF) (the CTF investment limit for 2018/19 is also rising to £4,260), there is plenty of scope for investors to look for higher-yielding products.

Help-to-buy ISAs continue to be available to assist first-time buyers save a deposit to purchase their first home. Under this relatively new scheme, up to £200 a month may be saved (along with an initial deposit of £1,000, and up to a maximum of £12,000) and, subject to certain conditions, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. A couple buying together could therefore save up to £30,000 tax-free towards the purchase of their first home, but it will take around four and a half years to achieve this level of savings using the Help-to-buy scheme.

Lifetime ISAs can be used by people aged between 18 and 40 to save for a first home or later life (again, subject to certain conditions). A total of £4,000 may be invested each year until aged 50. The Government will add a 25% bonus to savings, up to a maximum of £1,000 a year.

Unfortunately, the Government has recently confirmed that the new Help-to-Save scheme will not be fully available until October 2018. Ministers had originally said that the new accounts would start 'no later than April 2018' but this is not to be the case. This new type of account is designed to encourage people on low incomes to save for a rainy day by offering a 50% government top-up on savings. Over time, eligible individuals should be able to save a total of £2,400 in qualifying accounts, and receive bonuses of up to £1,200.

Newsletter issue - March 2018.

Q. I am a sole trader and have been trading for several years. My turnover has now exceeded the VAT registration threshold and I have registered with HMRC accordingly. I am currently waiting for VAT number and certificate. Will I be able to claim back VAT on purchases made by the business before the registration date?

A. There is a time limit for backdating claims for VAT incurred before the effective date of registration. From the date of registration, the time limit is:

• 4 years for goods you still have, or that were used to make other goods you still have;
• 6 months for services.

You can only reclaim VAT on purchases for the business now registered for VAT and they must relate to your 'business purpose'. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT return and keep records including:

• invoices and receipts;
• a description and purchase dates;
• information about how they relate to your business now.

Q. I own a buy-to-let leasehold property, which currently has 49 years remaining on the lease. Can I claim a tax deduction for the legal and professional costs of extending the lease?

A. The normal legal and professional fees incurred on the renewal of a lease are generally allowable if the lease is for less than 50 years. But any proportion of the legal and professional costs that relate to the payment of a premium on the renewal of a lease are not deductible.

Where a replacement lease follows closely on a previous one, and is in broadly similar terms, a change of tenant will not normally make the associated legal and professional costs disallowable. Any proportion of the legal or other costs that relate to the payment of a premium on the renewal of a lease will, of course, remain disallowable.

Q. I am self-employed and have been claiming capital allowances on certain business items. If I close down the business and move into employment, but continue to use the same assets for my work, can the transfer from one to the other be at the written down value, or will there be a balancing allowance at the date my business ends?

A. Strictly, the open market value should be used for the transfer, so that balancing allowances or charges result. However, since employees can claim capital allowances for equipment they provide for use in their work, and this will be a transfer between 'connected persons', you will be able to make an election to use the tax written down value for the transfer instead.

Newsletter issue - March 2018.

13 - Spring Statement 2018

19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/3/2018

Spring Statement 2018

Chancellor Philip Hammond said it would be a short, snappy affair when he delivered the government's first Spring Statement to the House of Commons today, and this was indeed to be the case - it took just 30 minutes to cover the key points.

The statement focused on the latest forecasts for the economy and the public finances provided by the government's independent forecaster, the Office for Budget Responsibility (OBR), which last reported in November 2017.

The Chancellor, who commented that he was feeling positively 'Tiggerlike', confirmed OBR reports that the economy has grown for five consecutive years, and exceeded expectations in 2017. GDP growth is forecasted at 1.5% in 2018 (up from 1.4%), whilst inflation is expected to fall over the next 12 months. Borrowing has fallen by three-quarters since 2010 - In 2009-10, the UK borrowed £1 in every £4 that was spent. The OBR expects that we will borrow £1 in every £18 this year.

However, the Chancellor went on to say that the UK's debt remains too high, equal to around £65,000 per household and this makes the economy vulnerable to future shocks. The government also views this as significant burden on future generations. The cost of debt interest payments is around £50 billion each year - more than the amount spent on the police and armed forces combined.

The government has previously stated a firm commitment to balancing its approach to reducing debt whilst continuing to fund public services, keeping taxes low, and investing in Britain's future. With this in mind, the Chancellor confirmed that the Treasury would be keeping a careful watch over the public purse in the coming months and if, and only if, scope became apparent for any manoeuvrability with regards taxes and further funding for public services, then any such announcements will be made in the Autumn Budget.

As expected, no changes to tax were announced in the Spring Statement. However, in advance of the 2018 Autumn Budget, a series of consultations has been launched inviting views on possible future changes to the tax system. These are summarised in the following paragraphs.

Online platforms

Online platforms and marketplaces are seen as being good for the economy and for consumers, who benefit from lower prices and more choice. However, some people who earn money from using these platforms may never have earned money without an employer to act as an intermediary between them and HMRC before, and can find it difficult to understand and meet their tax obligations. Most people want to comply with their tax obligations and the government believes the system should help them, but limit opportunities for the minority who seek to avoid paying their fair share.

The consultation, entitled The role of online platforms in ensuring tax compliance by their users, will explore how the government can build on work already undertaken with online marketplaces to gain a better understanding of how platforms interact with their users currently, what they know about them, and understand more about attitudes to tax among people earning money through platforms. 

The government wants to ensure that, where people have tax obligations because of these new opportunities, it is as easy as possible for them to comply. However, research suggests that some who provide goods or services through online platforms do not fully understand or are unaware of their tax obligations. For example, HMRC research found a quarter of those operating in the sharing economy through online platforms are not confident about their knowledge of tax obligations.

At the same time, there will always be those who seek to exploit opportunities to undermine the tax system. Some platform users will be existing businesses or individuals taking advantage of platforms to access new markets, and of those, as with the wider business population, there will be a minority who try to avoid paying their fair share.  The government needs to minimise opportunities for people to exploit this area of the economy to evade their tax obligations, at the same time as supporting those who want to comply. It is keen to explore what role platforms could play in tax administration, in the way other intermediaries, such as employers, have done in the past and continue to do.

The government intends to focus this work principally on direct tax in the first instance. However, it recognises that there may be similar challenges and opportunities in the wider tax system. The government will consider in due course whether the outcomes of this work could be applied more widely.

The consultation will run until 8 June 2018.

Self-funded work-related training

The government has launched a consultation on plans to extend the existing tax relief available for self-funded work-related training by employees and the self-employed, as part of the government's focus on creating an environment for individuals to develop their skills to boost productivity in the UK.

Most employers fund the work-related training of their employees, although sometimes the employee might pay for the training themselves and subsequently have the costs reimbursed. The current rules mean employers can deduct these costs for tax purposes. Employees are not taxed on the benefit when their employer pays for, or reimburses them for, the cost of work-related training and certain associated costs. Tax relief is also available in certain circumstances when an employer funds retraining to help an employee find another job with a new employer or set up as self-employed.  However, some employees pay for work-related training and this is not reimbursed by their employer. Employees cannot currently receive tax relief other than in limited circumstances when the training is an intrinsic contractual duty of their existing employment. The self-employed can deduct the costs of training incurred 'wholly and exclusively' for their business where it maintains or updates existing skills but not when it introduces new skills. This consultation will look at possibilities of making the rules fairer for everyone regardless of employment status.

The consultation will run until 8 June 2018.

Entrepreneurs' Relief

At present, entitlement to the special 10% rate of capital gains tax may be lost when an entrepreneur's company issues new shares and as a result causes their personal stake to fall below 5%. A proposal announced at Autumn Budget 2017, will allow an individual in this position to elect to be treated as if they had disposed of their shares and reacquired them at their market value just before the time the company issued new shares. The individual may claim Entrepreneurs' Relief on that gain either at the time of election, or on a future disposal of shares.

The consultation document, entitled Financing growth in innovative firms: allowing Entrepreneurs' Relief on gains before dilution, sets out the proposed changes in more detail, and invites views on how they will work in practice.

The consultation will run until 15 May 2018.

Alternative method of VAT collection - split payment

In relatively recent years, the expansion of e-commerce has posed a significant challenge to the UK VAT system. Certain businesses fail to charge VAT when they are supposed to on sales of goods to UK consumers. This non-compliance not only deprives the Exchequer of monies needed to fund public services (estimated at £1-1.5 billion in 2015-16), but also undercuts the honest majority of businesses. Whilst the Government has already taken action to address this issue (for example, introduction of the joint and several liability rules to hold online marketplaces responsible for the unpaid VAT of sellers on their platforms), it now wishes to go further in combatting online VAT fraud by harnessing new technology and exploring the possibility of introducing a new method of VAT collection.

The consultation document entitled Alternative method of VAT collection - split payment  examines potential for utilising payments industry technology to collect VAT on online sales and transfer it directly to HMRC. HMRC believe this would significantly reduce the challenge of enforcing online seller compliance and offer a simplification for businesses.   It sets out how the potential mechanism could work, how the system could be enforced, and considers a number of options for how the VAT could be accounted for.

The consultation will run until 29 June 2018.

VAT registration threshold: call for evidence

At Autumn Budget 2017, the Chancellor recognised that the UK had by far the highest threshold in the OECD and concerns about the cliff edge nature of the threshold. However, he noted that a high threshold has the benefit of keeping the majority of UK businesses out of VAT altogether. He announced that the government was not minded to reduce the threshold, but instead would consult on whether the design of the threshold could better incentivise growth. In the meantime, the threshold will remain at £85,000 for two years from April 2018. 

The document entitled VAT registration threshold: call for evidence is split into three sections:

• the first explores in more detail how the threshold might currently affect business growth;
• the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering; and
• the third considers possible policy solutions, based on international and domestic examples.

By way of background, the VAT registration threshold is a simplification measure that keeps businesses with a turnover at or below the threshold from having to register and account for VAT and it is estimated that some 3.5 million businesses benefit from its existence.  The UK threshold of £85,000 is the highest in the EU and the OECD, more than double the average in the EU and the OECD which is around £29,000 for both. The VAT threshold exempts businesses from VAT, and therefore costs the Exchequer money each year. In 2017/2018 it is forecast to cost £2.1billion.

The deadline for responses to this consultation is 5 June 2018.

Cash and digital payments in the new economy

Digital technology has revolutionised the way people shop, sell, and save, and people are increasingly moving away from using cash. According to government research, cash has fallen from being 62% of all payments by volume in 2006, to 40% in 2016, and is predicted by industry to fall to 21% by 2026. It represented only 15% of the total value of consumer spending in 2015.

Meanwhile, the growth in the use of digital payments has been rapid. Contactless payments made each month have grown by nearly twenty times in the three years to June 2017.Research suggests that two-thirds of people are making more payments digitally than they did five years ago.

The document Cash and digital payments in the new economy: call for evidence is a call for evidence to better understand the role of cash and digital payments in the new economy, with the aim of keeping pace with changes in the ways that people pay for goods and services.

The review will look at how the transition from cash to digital payments impacts on different sectors, different regions and different demographics. It is seeking both domestic and international evidence of what the government can and should do in this area. It will also consider barriers to the adoption of electronic payments, including charges, and will consider whether the current denominational mix of coins and banknotes should be changed. It looks at some of the issues around counterfeit coins and notes and also the use of cash for money laundering and to avoid tax.

The consultation closes on 5 June 2018.

Security deposits

The government announced at Autumn Budget 2017 that the current scope of the security deposit legislation will be extended to include corporation tax and Construction Industry Scheme (CIS) deductions from April 2019. HMRC are now seeking views on proposals for implementing this change to ensure that it is introduced in the most effective way, that the legislation is targeted, and that there are appropriate safeguards. The proposals are set out in the consultation document entitled Extension of the existing security deposit legislation to include CT and CIS deductions.

One of the compliance tools currently available to HMRC is the power to require high-risk businesses to provide an upfront security deposit, where they believe that there is a serious risk to the revenue. Security intervention is only considered in a small number of cases where there is clear evidence that a significant amount of revenue, relative to the size of the business, is at risk. In addition, there must either have been failure to comply with return filing and payment obligations, or the personnel actively involved in a current business must have been actively involved in another business that failed to pay the taxes that were due.

HMRC currently have powers to require a security deposit in respect of VAT, Pay As You Earn (PAYE) and National Insurance Contributions (NICs), Landfill Tax, Aggregates Levy, Climate Change Levy, Insurance Premium Tax and certain Gambling Duties. However, HMRC are aware that the non-compliant behaviours which trigger security action will typically be found across other aspects of these businesses' tax affairs. This consultation therefore seeks views on proposals to extend the legislation to corporation tax and CIS deductions.

The consultation will run until 8 June 2018.

Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation

Evidence gathered during a recent consultation suggested that knowledge-intensive firms - which have high growth potential but are R&D- and capital intensive - have the most difficulty obtaining the capital they need to scale up.  The Autumn 2017 Budget subsequently announced that the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes would therefore be significantly expanded for knowledge-intensive companies.  The government also announced that it would consult on a new EIS fund structure aimed at improving the supply of capital to such companies. 

A new consultation (Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation) aims to build the government's understanding of the capital gap that knowledge-intensive companies face, and seeks views on the best way of closing that gap.  It explores possible options for an EIS fund structure aimed specifically at investment in knowledge-intensive companies, while making clear the limitations within which such a fund model would operate.

The government considers that the definition of a knowledge-intensive company that is currently used in the venture capital schemes effectively captures the types of firm that have the most acute problems gaining investment. It is also conscious of the need for both investors and companies to have as much stability as is possible. It therefore intends to base any new fund structure on this existing definition.

The EIS is a notified state aid and any changes to the scheme will have to take into account constraints on state aid.  This consultation may lead to changes before the UK leaves the European Union. As the UK is still subject to state aid rules, the consultation seeks responses consistent with the current state aid regime. 

The design of any fund model would need to be proportionate to an identified market failure in the supply of capital to knowledge-intensive firms. For example, the EIS, SEIS, and VCT schemes already have among the most generous rates of income tax relief for schemes of their kind in Europe. The government is not considering raising the rates of income tax relief for the schemes.

The deadline for responses to this consultation is 11 May 2018.

Tackling the plastic problem

As widely speculated, the Chancellor announced a call for evidence to explore how changes to the tax system or charges could be used to reduce the amount of single-use plastics, by reducing unnecessary production, increasing reuse, and improving recycling.

In the consultation document entitled Tackling the plastic problem: using the tax system or charges to address single-use plastic waste , the government says it will also explore how it can drive innovation in this area to achieve the same outcomes, with funding available for businesses and universities to carry out work in this area.

The aim is to look at how the same economic incentives can drive innovation, for example by stimulating businesses to develop and integrate new technology, or by encouraging growth in the recycling industry by addressing barriers to investment.

The consultation will look broadly across the whole supply chain, from production and retail to consumption and disposal, in order to gain the best possible understanding of the whole landscape before the government decides on a course of action.

The consultation runs until 18 May 2018.

Benedicts Accountants are based in London, offering local business owners and individuals a wide range of services.

All clients are entitled to fixed fees, work delivered on time and unlimited phone support. Visit our website jbenedict.co.uk for more information.