March Tax Tips & News

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Newsletter issue - March 2019.

HMRC have published Spotlight 47, which provides guidance on tax avoidance schemes that try to avoid the income tax charge on distributions when a company is being wound up.

In recent years, HMRC have endeavoured to prevent schemes being used by shareholders to take advantage of more favourable capital gains tax rates when extracting value from their company.

Until 6 April 2016, under arrangements known as 'phoenixism', an individual shareholder who intended to carry on the company's activities could arrange matters enabling them to wind up the company and receive the company's undistributed profits. The profits would be classed as capital distribution (subject to capital gains tax rates), rather than a dividend or other income distribution (subject to higher income tax rates). The individual would then carry on the same or similar activity, often using a newly-formed company.

To counter this perceived avoidance, in 2015 HMRC introduced Targeted Anti-avoidance Rule (TAAR) legislation to prevent individuals from gaining a tax advantage by winding up companies, to make sure any distribution in the winding up is taxed as income, rather than being subject to capital gains tax.

Some scheme promoters have recently claimed that they can get around the TAAR legislation by making an artificial modification of the arrangements (for example by selling the company to a third party rather than winding it up). However, HMRC are adamant that such schemes do not work because:

• in many cases, the actual outcome is that the individual is receiving distributions in a winding up - as the individual carries on trading using a different vehicle these schemes are within the scope and purpose of the TAAR legislation; and
• phoenixism arrangements that claim to involve payments to shareholders taxed as capital instead of income are caught by the TAAR, or other provisions.

HMRC have said that they will investigate any attempts to avoid the income tax charge. If it is claimed that the phoenixism TAAR does not cover the arrangements, HMRC will consider whether the General Anti-abuse Rule (GAAR) applies to these schemes.

Penalties

HMRC have reaffirmed that a severe penalty regime exists in relation to such schemes - transactions after 14 September 2016 where the GAAR applies will be subject to a 60% user penalty. Moreover, for transactions entered into on or after 16 November 2017, any person who enabled the use of these sorts of schemes may be subject to a penalty as an enabler of an abusive scheme. The penalty amount will be equal to the amount of consideration they received for enabling the arrangements. The user may also be subject to penalties for filing an inaccurate return, with penalties of up to 100% of the undeclared tax.

For further information, see HMRC Spotlight 47 here.

Newsletter issue - March 2019.

As 31 March approaches, many companies will be getting ready to tie up tax matters for their financial year-end. Now is a time to ensure that everything is in order regarding directors' expenses and review loan account record-keeping procedures. This is particularly so as HMRC report that they commonly find errors in relation to directors' loan accounts when making routine reviews of company tax returns.

The statutory rules for computing taxable profits exclude companies from deducting expenditure unless it is incurred 'wholly and exclusively' for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur 'personal' expenses. However, many companies, particularly 'close' companies (broadly, one that is controlled by five or fewer shareholders), pay the personal expenses of their directors. Where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense and may not therefore be deductible for corporation tax purposes. In such circumstances it may be appropriate for these items to be set against the director's loan account.

Accounting disclosure requirements for directors' remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.

Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes should be paid. Where the expenditure does not form part of the remuneration package the relevant amount will normally be debited to the director's loan account.

Cash transactions between the company and directors may have tax consequences. A charge may arise where a director's loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period (known commonly as the 'section 455 charge').

Proper records should be maintained of all cash and non-cash transactions between a company and its directors. Poor record-keeping may result in non-business expenditure incurred by the directors being incorrectly recorded or misposted in the company's records and claimed in error as an allowable expense.

Newsletter issue - March 2019.

HMRC have updated their online guidance on disclosing unpaid tax to include information on authorising an agent to deal with a disclosure made through the Digital Disclosure Service (DDS).

The DDS gives individuals and companies a chance to bring their affairs up to date in a simple, straightforward way. Anyone who owes tax on income or gains must tell HMRC about any unpaid tax. They will then have 90 days to calculate and pay what is owed.

• How to make a voluntary disclosure to HMRC explains how individuals and companies not eligible for an HMRC campaign can make a voluntary disclosure to HMRC.
• Let Property Campaign: your guide to making a disclosure explains who can use the Let Property Campaign and how to make a disclosure to HMRC for unpaid tax. The online guidance has been updated to include details of a new form (form COMP1a), which can be used by clients to authorise agents to deal directly with HMRC about a disclosure made using the DDS. Agents should use the DDS to notify HMRC of a client's disclosure.

Spring Statement 2019

Summary

Chancellor Philip Hammond has delivered his 2019 Spring Statement to the House of Commons. A supporting Written Ministerial Statement (WMS) provides more detail on some of the announcements in the Spring Statement, and sets out details of other forthcoming government policies.

Mr Hammond opened his Statement by acknowledging that the most urgent task at present is to 'lift the uncertainty', but he also added a positive note, stating that the 'economy itself is remarkably robust'.

The Chancellor indicated that if the UK does leave the EU with a deal, there will be an economic boost due to a pick-up in business confidence and investment. He said his role will be to decide how much of this 'Deal Dividend' the Government can prudently release, and how it would be shared between increased spending on public services, capital investment in Britain's future prosperity and keeping taxes low, while continuing to keep debt falling.

As expected, 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). Growth forecasts have been revised for the current year - the Chancellor now expects growth of 1.2%, compared to the October 2017 forecast of 1.6%. Next year's forecast remains unchanged at 1.4%, followed with 1.6% in each of the following three years.

The Chancellor reported 'good news' on borrowing figures - this year it will be 1.1% of GDP, £3bn lower than forecast at the Autumn 2017 Budget. He also expects that borrowing will fall from £29.3bn in 2019/20, then £21.2bn, £17.6bn, £14.4bn and finally £13.5bn in 2023/24. The expectation is that the Government remains on track to meet its fiscal target early.

Assuming a Brexit deal is agreed, the Chancellor went on to say that he will launch a 'full three-year spending review' before the summer break and that this in turn will 'set departmental budgets beyond the NHS'. He said the review will 'reflect the public's priorities between areas like social care, local government, schools, police, defence and the environment'.

As expected, no changes to tax were announced in the Spring Statement speech itself. However, the supporting Spring Statement 2019: Written Ministerial Statement outlines thirteen consultations, draft regulations and call for evidence documents, which are due to be published immediately or over the coming months. These are summarised as follows:

Tax avoidance, evasion & non-compliance

The government has published:

Tackling tax avoidance, evasion and other forms of non-compliance

The government has previously stated its ongoing commitment to keeping the tax administration framework under review to ensure that it 'continues to strike the right balance between robustly challenging tax avoidance, evasion and other forms of deliberate non-compliance, and treating all taxpayers fairly'. Finance Act 2019 subsequently contained provisions introducing statutory reporting requirements by the government on certain anti-avoidance measures (FA 2019, s 92 and 93).

HM Treasury and HMRC have published a joint policy paper setting out the government's approach and achievements in tackling tax avoidance, evasion and other forms of non-compliance. The document is split into three chapters, which:

• outline HMRC's strategy and approach to compliance for different taxpayers
• detail the government's record in addressing areas where risks of non-compliance have been identified; and
• provide a summary of the government's record of investment in HMRC and its commitment to further action.

The policy paper can be found here.

Offshore tax compliance strategy: No safe Havens 2019

The Government's No Safe Havens 2019 publication is a policy paper setting out the direction for HMRC's updated strategy for offshore tax compliance, bringing together the government's response to all forms of offshore non-compliance. This reflects the substantial progress that the UK has made since the last strategy was published in 2014 and complements the paper on avoidance and evasion activity to date.

The policy paper can be found here.

Under the same heading of Tax avoidance, evasion & non-compliance, in the coming months the government will publish the following:

Preventing abuse of the R&D tax relief for small- or medium-sized enterprises (SMEs)

A consultation is to be launched on the measure announced at Budget 2018, as part of the package on tax avoidance. This consultation will focus on how the measure will be applied, to minimise any impact on genuine businesses.

Insurance Premium Tax operational review

There will be a call for evidence on where improvements can be made to ensure that Insurance Premium Tax operates fairly and efficiently.

VAT Administration in the Isle of Man

Following the Paradise Papers allegations, the Isle of Man Government invited HM Treasury to review its VAT administration processes for the importation of aircraft and yachts. HM Treasury is to publish its findings and recommendations to ensure the right VAT continues to be paid and collected in the Isle of Man.

Maintaining the tax system

Making Tax Digital (MTD)

Mandatory digital record keeping for VAT for businesses over the VAT threshold (with turnover over £85,000) comes into force from 1 April 2019. This is an important first step in this modernisation of the tax system to which the government remains committed. In the WMS, the Chancellor confirmed the government's 'light touch approach to penalties in the first year of implementation'. Where businesses are doing their best to comply, no filing or record keeping penalties will be issued. The focus will be on supporting businesses to transition and the government will therefore not be mandating MTD for any new taxes or businesses in 2020.

Capital allowances for new non-residential structures and buildings

The Chancellor announced the introduction of a new capital allowance for new non-residential structures and buildings (SBA) at the 2018 Autumn Budget, designed to support business investment in the UK, improve the case for developing new structural assets and enhance tax relief for such assets. A technical note published at that time, outlined the key features of the policy and included consultation questions on residential use exclusion, leasing provisions, overseas property treatment and disuse provisions.

For the second part of the consultation process, the Government is now inviting views on the legislative detail, before it is laid before and approved by the House of Commons. An overall response to consultation responses will be published in May 2019 and the final published version of this legislation will be in the form of a Statutory Instrument.

Broadly, the structure of the relief is summarised as follows:

• relief will be given at a flat rate of 2% over a 50-year period
• relief will be available for new commercial structures and buildings, including costs for new conversions or renovations
• relief is available for UK and overseas structures and buildings, where the business is within the charge to UK tax
• relief will be limited to the costs of physically constructing the structure or building, including costs of demolition or land alterations necessary for construction, and direct costs required to bring the asset into existence
• relief is available for eligible expenditure incurred where all the contracts for the physical construction works were entered into on or after 29 October 2018
• claims can only be made from when a structure or building first comes into use
• land costs or rights over land will not be eligible for relief, nor will the costs of obtaining planning permission
• the claimant must have an interest in the land on which the structure or building is constructed
• dwelling houses will not qualify, nor any part of a building used as a dwelling where the remainder of the building is commercial
• sale of the asset will not result in a balancing adjustment - instead, the purchaser takes over the remainder of the allowances written down over the remaining part of the 50-year period
• expenditure on integral features and fittings of a structure or building that are currently allowable as expenditure on plant and machinery, will continue to qualify for writing down allowances for plant and machinery including the Annual Investment Allowance (AIA) up to its annual limit
• SBA expenditure will not qualify for the AIA
• where a structure or building is renovated or converted so that it becomes a qualifying asset, the expenditure will qualify for a separate two percent relief over the next 50 years

The consultation documents can be found here.

Comments are invited by 24 April 2019.

Aggregates Levy review

The government is to publish a discussion paper launching a review of the Aggregates Levy, including the Terms of Reference, information on timing and scope of the review as well as membership of an expert working group.

Under the same heading of Maintaining the tax system, in the coming months the Government will publish the following:

Offshore receipts in respect of intangible property

Draft regulations to ensure the provisions apply as intended, and draft guidance relating to the practical application of the measure.

View the 2018 Autumn Budget policy paper here.

Hybrid and other mismatches

Draft regulations to update the definition of regulatory capital instruments that are entitled to an exemption within the hybrid mismatch rules.

View the original policy paper (6 July 2018) here.

General Anti-Abuse Rule (GAAR) Amendments

A technical note alongside draft legislation on minor procedural and technical changes to the GAAR legislation to ensure that it works as intended.

National Insurance Contributions (NICs) Employment Allowance draft regulations

A document inviting technical comments on the draft regulations implementing the reform, as announced at Budget 2018, of the NICs Employment Allowance to restrict it to businesses with an employer NICs bill below £100,000.

View the 2018 Autumn Budget proposal document here.

Child Trust Funds (CTF): consultation on maturing CTFs

Draft regulations to ensure that CTF accounts can retain their tax-free status after maturity.

VAT Simplification and the Public Sector

A policy paper exploring a potential reform to VAT refund rules for central government, with the aim of reducing administrative burdens and improving public sector productivity.

VAT Partial Exemption and Capital Goods Scheme: Simplification

A call for evidence on potential simplification and improvement of the VAT Partial Exemption regime and the Capital Goods Scheme – ensuring they are as simple and efficient for taxpayers as possible. This follows on from the recommendations of the Office of Tax Simplification, who have looked in detail at the UK VAT system and possible areas for improvement.

View the OTS VAT review interim report here.

Worldwide harmonised Light vehicles Test Procedure (WLTP) and vehicle taxes

Further to the 2018 Autumn Budget announcement, the government will publish its response to the review into the impact of the WLTP on Vehicle Excise Duty and company car tax.

View Review of WLTP and vehicle taxes here.

Consultation on the use of diesel by private pleasure craft

The government is to launch a consultation seeking evidence on the likely impact of government proposal to require diesel-powered private pleasure craft to only use full duty paid heavy oil (white diesel) for propulsion. This would replace the existing system where private pleasure craft use marked gas oil (red diesel) but pay the white diesel rate of fuel duty.

Review of Time Limits

The Government will publish a report, as required by Finance Act 2019, s 95, of comparing the time limits for the recovery of lost tax involving an offshore matter, with other time limits, including those provided for by Finance (No. 2) Act 2017, Schedules 11 and 12. In the report the government will set out the rationale for the charge on disguised remuneration (DR) loans legislated in Finance (No. 2) Act 2017 and its impacts. The report will be laid by 30 March 2019.

Social Investment Tax Relief (SITR)

There will be a call for evidence on the use of the SITR scheme to date, including why it has been used less than anticipated and what impact it has had on access to finance for social enterprises.

Enterprise Investment Scheme (EIS) approved funds guidelines

Draft guidelines will be published for comment alongside draft legislation. The document will contain guidelines stating HMRC's proposed policy and practice for approving funds. The legislation will include powers for HMRC to set appropriate conditions and approve funds.

CGT private residence relief

A consultation is to be launched on the changes, announced at 2018 Autumn Budget, to lettings relief and the final period exemption, which extend private residence relief in capital gains tax.

View the 2018 Budget document here.

Finally, the Government is to publish summaries of responses to the following documents:

Structures and buildings allowance

A technical note on the introduction of this allowance.

View the technical note here.

Protecting your taxes in insolvency

A consultation launched in February 2019, following the announcement at the 2018 Autumn Budget, to make HMRC a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business.

Broadly, the government is proposing to change the rules from 6 April 2020, so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers and temporarily held in trust by the business go to fund public services, rather than being distributed to other creditors. This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE income tax, employee National Insurance contributions and Construction Industry Scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer National Insurance contributions. This will be legislated for in Finance Bill 2019/20.

Corporate Capital Loss Restriction

A consultation is to be launched on a change announced at the 2018 Autumn Budget to restrict, from 1 April 2020, the amount of carried-forward capital losses a company can offset to no more than 50% of the chargeable gains arising in a later accounting period.

Broadly, the government will legislate in Finance Bill 2019/20 to restrict companies' use of carried-forward capital losses to 50% of capital gains from 1 April 2020. The provisions will include an allowance that permits companies unrestricted use of up to £5m capital or income losses each year, meaning that 99% of companies will be financially unaffected. A consultation paper was published on 29 October 2018 and draft legislation will be published in Summer 2019. An anti- forestalling measure to support this change took effect on 29 October 2018.

Stamp Taxes on shares consideration rules

A consultation on aligning the consideration rules of Stamp Duty and Stamp Duty Reserve Tax and introducing a general market value rule for transfers between connected persons.

Digital Services Tax

A consultation will be launched on the detailed design and implementation of the Digital Services Tax that will take effect from 1 April 2020.

Broadly, from April 2020, the government will introduce a new 2% tax on the revenues of certain digital businesses which derive value from their UK users. The tax will:

• apply to revenues generated from the provision of the following business activities: search engines, social media platforms and online marketplaces;
• apply to revenues from those activities that are linked to the participation of UK users, subject to a £25m per annum allowance;
• only apply to groups that generate global revenues from inscope business activities in excess of £500m per annum; and
• include a safe harbour provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins.

Amendments to tax returns

There is to be a call for evidence on simplifying the process of amending a tax return.

Newsletter issue - March 2019.

The tax and NIC treatment of tips will depend on how they are paid to the recipient.

Cash tips handed to an employee, or say, left on the table at a restaurant and retained by the employee, are not subject to tax and NICs under PAYE, so there is not responsibility for the employer to keep track of them and deduct tax or NICs. The employee is however, obliged to declare the income to HMRC and pay the tax and NICs due.

By contrast, if the employer passes tips to employees that are either handed to him (or the employees) or left in a common box/plate by customers, the employer will be responsible for operating PAYE on all such payments made. Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.

The obligation to operate PAYE remains with the employer where the employer:

• delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant; or
• passes tips/service charges to a tronc (see below), but the tronc is not a tronc for PAYE purposes.

Troncs

Where tipping is a usual feature of a business, there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. This type of arrangement is known as a 'tronc' and the person who is responsible for distributing the money is known as the 'troncmaster'. Where a person accepts and understands the role of troncmaster, he or she may have to operate PAYE on payments made. Broadly, under such arrangements the employer must notify HMRC of the existence of a tronc created and provide HMRC with the troncmaster's name.

There are no hard and fast rules regarding how a tronc should operate and HMRC will apply the PAYE and NIC rules to the particular circumstances of each tronc. Where payments made from a tronc attract NICs liability, responsibility for calculating the NICs due and making payment to HMRC rests with the employer. If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his or her PAYE obligations, HMRC can direct the employer to operate PAYE on monies passed to the tronc from a specified date.

NICs

Legislation provides that any amount paid to an employee which is a payment 'of a gratuity' or is 'in respect of a gratuity' will be exempt from NICs if it meets either of the following two conditions:

• it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example by customers; or
• it is not allocated, directly or indirectly, to the employee by the employer.

It is worthwhile checking that businesses treat tips and gratuities correctly. From time to time HMRC carry out reviews of employers' records to make sure things are in order for PAYE, NICs and separately for the National Minimum Wage (NMW). Any errors in tax and NICs treatment could prove costly.

Newsletter issue - March 2019.

Q. My wife and I own various assets - some are held in individual names and others are held jointly. We are wondering whether we should 'equalise' the value of our assets so as to reduce potential liability to capital gains tax at a future date.

A. As a general rule, so-called 'equalisation of estates' is often desirable for both capital gains and inheritance tax purposes. Broadly, this means that ideally each spouse/civil partner should own assets:

• amounting to at least the value of the inheritance tax (IHT) nil rate band (currently £325,000);
• which, on sale, enables full use of the capital gains tax (CGT) annual exempt amount (£12,000 for 2019/20); and
• generating income sufficient to mitigate any exposure to higher rate income tax.

Although inter-spouse/civil partner transfers are not technically exempt from CGT the mechanics of computation are such that no CGT charge arises on such transfers. This treatment requires the spouses/civil partners to be married and living together. The spouse or civil partner receiving the asset may have to pay tax on any gain if they later dispose of the asset. Their gain or loss may be calculated from the date the asset was acquired by the original spouse/civil partner.

Transfers between spouses must be 'real' transfers and effected as if to a third party. This means all relevant documentation must be correctly completed.

Q. I run my own business, which is registered for VAT. If I purchase a new car for business use, can I reclaim the VAT I pay on it?

A. If you only use the car for business purposes, you may be able to reclaim all the VAT paid on the purchase price. However, the car must not be available for private use, and you must be able to show HMRC that this is the case.

'Private use' includes travelling between home and work, unless it's a temporary place of work.

You may also be able to claim all the VAT on a new car if it's mainly used:

• as a taxi
• for driving instruction
• for self-drive hire

If you lease a car, you can usually claim 50% of the VAT. You may be able to reclaim all the VAT if the car is used only for business and is not available for private use, or is mainly used as a taxi or for driving instruction.

You can usually reclaim the VAT for buying a commercial vehicle (like a van, lorry or tractor) if you only use it for business.

Q. I bought a property several years ago to rent out. Over the last five years its value has risen from £120,000 to £220,000. I understand that if I sell it now, I would be liable to pay capital gains tax on a gain of £100,000. If I sell this property and re-invest the proceeds in another buy-to-let property would this mean I could delay paying the tax now?

A. Unfortunately not. Your plan to buy another house and thereby reduce the CGT payable on the first house is not allowed. 'Rollover' or 'holdover' relief from CGT is not available for investment properties, except for furnished holiday lettings, or compulsory purchase.

Newsletter issue - March 2019.

13 - Spring Statement 2019

19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/3/2019

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