2020 Innovation Training Tax Update Webinar February 2017 Martyn - - PDF document

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2020 Innovation Training Tax Update Webinar February 2017

Martyn Ingles FCA CTA

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• Draft Finance Bill 2017 clauses
• MTD update
• IR35 developments public sector workers
• Other recent tax developments

Webinar Overview

• Draft clauses issued for consultation 5 December
• Further clauses issued in January
• Many of measures announced in Autumn Statement
• Now includes MTD legislation
• And IR35 rules for public sector workers…

Draft Finance Bill 2017 clauses

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'Worker' 'Intermediary'

Service company/partnership

'Client' Public sector workers “Off payroll”

• Government departments, legislative bodies, armed

forces

• Local government
• NHS ( but not GPs)
• Schools and further and higher education institutions
• Police forces
• Other public bodies (such as BBC, Channel 4)

Public sector workers “Off Payroll”

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• From April 2017, individuals working through a

personal service company (“PSC”) in the public sector will no longer be responsible for deciding whether the intermediaries legislation applies

• The public sector employer/agency will have to

decide if the rules apply to a contract and, if so, account for and pay the liabilities through RTI and deduct the relevant tax and NICs.

Public sector workers “Off Payroll”

• HMRC guidance issued 3 February 2017
• Example:
• PSC invoices £6,000 + £1,200 VAT = £7,200
• Public sector employer/ agency deducts £1,871 tax, NIC
• PSC gets £4,129 + £1,200 VAT
• £4,129 can be drawn tax-free from PSC
• No CT on this £4,129

Public sector workers “Off Payroll”

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• Where a BiK is provided through salary sacrifice, it will be

chargeable to income tax and Class 1A employer NICs, even if it is normally exempt from tax and Class 1A NICs

• The greater of:
• the amount of salary sacrificed; and
• the cash equivalent set out in statute (if any)
• 5 Exceptions…

Limiting tax relief on Salary sacrifices

• 5 Exceptions:
• employer pension contributions;
• employer-provided pension advice;
• employer-supported childcare and provision of workplace

nurseries; and

• cycles and cyclist's safety equipment
• Ultra – Low (< 75g) CO2 emission cars

Limiting tax relief on Salary sacrifices

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• Date for “making good” benefits in kind to be 6 July
• Lower P11d benefits for electric cars – 2020/21
• Private use of assets – 20% charge limited to period

available for use by employee

• Pensions advice to employees - £500 tax free
• Deduction for employees’ liabilities
• PAYE settlement agreements simplified

Other employee benefit changes

• From April 2018:
• all PILONs will be subject to tax and NICs as earnings;
• all other post-employment payments which would have

been treated as general earnings if the employee had worked their notice period will be subject to tax and Class 1 NICs, including employer's NICs; and

• payments relating directly to the termination of the

employment will have a £30,000 income tax and employer NICs exemption. Unlimited employee NICs exemption on termination payments to continue?

Tax and NIC on termination payments

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• Flagship policy 2013 - “Employee shareholder” shares
• minimum £2,000 worth of shares if give up certain

employment rights – tax free

• Unfair dismissal, working time directive
• Gains on £50,000 of shares (at issue) exempt CGT
• So if subsequently receive £5m tax free!!
• Being abused by some employers
• Tax free gain was limited to £100,000 where shares

acquired after 16 March 2016

• Tax advantages now abolished from 1 December 2016

Employee shareholder shares New Tax Free Allowances

• From 6 April 2017:
• £1,000 self-employed income
• £1,000 rental income
• In addition to £1,000 savings allowance if basic rate

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EBT Loan Scheme

COMPANY TRUST LOANS Sub Trusts Taxable

• Loan transfers – debts transferred to third parties to be

within the scope of the disguised remuneration rules.

• Close companies - rules to prevent schemes which claim

that the disguised remuneration received by director of a close company is not in connection with their employment.

• Release of disguised remuneration loan – will give rise to

an income tax charge (except on death of the employee).

• Denying CT deductions for employee remuneration
• Transfer of liability from the employer to the employee if it

cannot reasonably be collected from the employer

Disguised Remuneration Schemes

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• The loan charge will apply to disguised remuneration loans

still outstanding at 5 April 2019, but will not apply to loans made before 6 April 1999.

• Avoiding double taxation – where a charge applies to a

disguised remuneration loan, but there has also been an earlier income tax charge on the same amount

• Measures to apply to self employed and partnerships where

taxable income has been replaced by loans and other non- taxable amounts to avoid tax

Disguised Remuneration Schemes

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• New “deemed domicile” rule – 15/20 years
• Will apply for IT,CGT and IHT (was 17/20)
• IHT to apply to UK residential property held by non-doms

through an overseas company or similar structure

• New rules for income tax and CGT for individuals who

are deemed to be domiciled in the UK,

• Protection for non-resident trusts set up before the settlor

became deemed-domiciled in the UK

• Business investment relief for remittance basis taxpayers

Non-domiciles rules from 6 April 2017

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• Individual deemed domiciled if meets either of two

conditions:

• was born in the UK and has a UK domicile of origin. The

individual must also be UK resident in the tax year under consideration, OR

• must have been UK resident for tax in at least 15 out of the

20 years preceding the tax year under consideration.

Deemed UK domicile for IT and CGT

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• S86 TCGA potentially attributes gains made by non-resident

trust to UK resident and domiciled settlor where property derived from settlor

• Paragraph 18 of the draft Schedule inserts a new paragraph

5A into Schedule 5 to TCGA which disapplies the effect of the amended section 86 (dealing with the attribution of gains to settlors of foreign or resident settlements trusts) where 6 conditions are met

CGT – non-resident trusts

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• If person was a non-UK dom remittance basis user prior to

2017/18 and becomes treated as UK domiciled under the 15

• ut of 20 rule from 6 April 2017 may rebase to 5 April 2017
• provided that during the person’s ownership the asset was

not situated in the UK in the period 16 March 2016 to 5 April 2017 (the “relevant period”),

• and the person remains deemed domiciled under the 15 out
• f 20 rule at all times until disposal.
• Person may elect for rebasing not to apply to a disposal.
• once made will be irrevocable.

CGT deemed Doms – Rebase to 5 April 2017

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• Individuals previously taxed on the remittance basis may

rearrange their overseas funds so that they will be able to bring money as “clean capital” to the UK without being taxed on a remittance basis purposes.

• Section 809R(4) ITA disapplied for any transfer of funds

made between two overseas accounts, one of is a mixed fund, provided certain conditions are met.

• These conditions are provided in subsections (a) to (f) of

paragraph 28(2) of Schedule12

CGT deemed Doms – Mixed Funds

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• Individual deemed domiciled if resident in the UK for at least

15 out of the previous 20 tax years (was 17/20) ending with the tax year in question.

• Also:
• If born in the UK with a UK domicile of origin and have

acquired a domicile of choice elsewhere - if at any time they are resident in the UK and have been resident in the UK in at least one out of the two previous tax years.

Deemed UK domicile for IHT

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• Excluded property – non UK situs property owned by non-

domiciled persons not charged to IHT

• UK residential property will be brought within the scope of

IHT where they are held by a non-domiciled individual through an overseas company or similar structure.

• Draft legislation amends the definition of excluded property

such that an interest in those properties will be treated as part of a person's estate and thus liable to IHT in the event

• f a chargeable transfer
• If property has been a dwelling in previous 2 years

Extending IHT charge to UK residential property held through offshore structures

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• New corporation tax loss set-off rules from 2017
• For new losses incurred on or after 1 April 2017,

companies will be able to use carried forward losses against profits from other income streams or other group companies

• “Old” losses will still be streamed
• Limited to 50% of future profits where company

profits exceed £5m (1% of companies)

• 25% set off restriction in the case of bank losses

Changes to company loss relief 2017

• Trading losses b/fwd at 1 January 2017 £400,000
• Year ended 31 December 2017 the company incurred

further trading losses of £1,200,000

• Year ended 31 December 2018 - trading profit of

£500,000 and profits from a new trade of £2,000,000

New company loss relief rules – Alpha Ltd

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Old trade New trade Carry forward Trading profits 500,000 2,000,000 Old losses (500,000) 200,000 New losses (900,000) Profits chargeable 1,100,000

New company loss relief rules – Alpha Ltd

CG EXEMPTION NO CAPITAL LOSS .

Substantial Shareholdings Exemption (SSE)

TRADE CO TRADE CO 10%

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• Investing company = trading company or trading

group – to be relaxed from 1 April 2017

• Target - trading co or group
• Substantial = 10% issued shares
• Direct or indirect holding
• Must hold shares >1 year

Current conditions for SSE

• Normal pension annual allowance £40,000 a year
• (plus unused relief from previous 3 years)
• But in flexible drawdown the limit was £10,000
• £10,000 limit dropping to £4,000 from 6 April 2017 on

contributions to money purchase fund where in flexible drawdown

Pensions - Money purchase annual allowance

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• CT relief for contributions to grassroots sports
• Patent box rules relaxed where 2 or more companies

collaborate on R&D (cost sharing)

• 100% FYA for electric vehicle charging points
• ATED rates increase in line with CPI – starts at £500K
• Extended Customs powers to search vehicles, boxes

Other Draft Finance Bill 2017 clauses

• “Requirement to Correct” offshore non compliance – from

Royal Assent next summer

• Partial closure notices in complex tax enquiries
• Taxpayers and agents will also be able to request
• Errors in taxpayers’ documents
• Cannot sidestep penalty for lack of reasonable care if

defence that relied on (unqualified) advice or from person connected with the avoidance

• New penalties for enablers of defeated tax avoidance

schemes

Other measures in Draft Finance Bill

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• New 16 ½ % Flat rate for “Limited Cost Traders”
• VAT inclusive expenditure on goods:
• < 2% of VAT inclusive turnover
• Or >2% but less than £1,000 pa
• Excludes capex, food, fuel, vehicles, servicing etc
• To apply from 1 April 2017

Abuse of VAT Flat Rate Scheme

• Bill clients £100,000 + £20,000 VAT = £120,000
• 2% threshold = £2,400 on goods excluding capex, fuel

etc…

• If not – pay HMRC 16.5% = £19,800
• Better to do normal VAT returns if input VAT > £200

Abuse of VAT Flat Rate Scheme

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• 1. Making Tax Digital – Bringing business tax into the

digital age

• 2. Business Income Tax – Simplifying tax for

unincorporated businesses

• 3. Business Income Tax – Simplified cash basis for

unincorporated property businesses

• 4. Business Income Tax – Voluntary pay as you go
• 5. Making Tax Digital – Tax administration
• 6. Making Tax Digital – Transforming the tax system

through the better use of information

Making Tax Digital – Summer 2016 Consultations

• Increasing turnover threshold for cash basis
• Reforms to basis periods for self-employed
• Simplifying reporting requirements
• Modifying the capital/revenue divide within cash basis

Making Tax Digital: Simplifying tax for unincorporated businesses

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• The making of voluntary payments will be flexible
• The administration will be simple for the customer and

HMRC

• HMRC will allocate voluntary payments against tax

liabilities as they become due

• Voluntary payments will be repayable
• Payments and repayments will be made electronically

Making Tax Digital: Voluntary Pay as You Go (PAYG)

• Spreadsheets will be acceptable but must meet

requirements of MTD for Business

• 3 line account reporting OK for small businesses
• Free software to be available for straightforward

businesses

• Need not make and store invoices digitally
• £10,000 exemption threshold retained
• Cash accounting may be used up to £150,000 T/O

Making Tax Digital - Update

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• Scheduled to start April 2018
• Most businesses, including landlords to update HMRC

quarterly – for income tax and NIC + PAYG

• PAYG for VAT quarterly from 2019
• PAYG for corporation tax from 2020
• Year end reconciliation will have to be submitted

within 10 months after the fourth quarter end

• 12 month pilot to test new system
• No late filing penalties for first 12 months of
• peration

Making Tax Digital – Quarterly Reporting

• New anti-avoidance applies from 5 July 2016
• Targeting overseas investors trading and developing UK

property through offshore structures

• Such profits will now be subject to UK corporation tax

irrespective of whether the property company is UK resident

• Will apply regardless of whether there is a UK PE
• Concern – could catch buy to let landlords?

Profits from trading in developing UK property

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Profits from trading in developing UK property

Appoint Contractors Carry out works Non resident investors Offshore Propco UK property Contractors

Profit taxed as income not capital gain if:

• A. One of the main purposes in acquiring the land was to

realise a profit on its disposal; or

• B. One of the main purposes in acquiring the property

which derives its value from land was to realise a profit

• n its disposal; or
• C. The land is held as trading stock; or
• D. One of the main purposes of developing the land was

to realise a profit on its disposal when developed = Sale of property by Buy to let investor?

Profits from trading in developing UK property

22 HMRC Guidance on transactions in land – BIM 60530

• “A trade of dealing in land exists where land and/or

property is acquired or developed with a view to profit

• n disposal. This is in contrast to the situation where

property is acquired for investment, usually rental income, but over time that property may increase in value and a profit may therefore be realised from its eventual disposal. This increase in value may arise as a result of movement in the property market or from action taken by an owner to enhance the value of the property for investment purposes”

Profits from trading in developing UK property

• Length of time the land is owned.
• Intention at purchase date.
• Any change of intention.
• How the acquisition is funded.
• The usage of the property by the owner.
• Whether it is developed or improved (rather than

repaired) before disposal.

• Whether there is a connection with an existing trade –

for example a builder buying a property to renovate and sell.

“Badges of Trade” Relevant:

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• BIM 60645 - The transactions in UK land rules can be

applied to ‘slice of the action’ contracts

• ‘Slice of the action’ = landowner acquires the right to

share in the proceeds of any subsequent development by the purchaser

• Example
• Landowner sells land to developer for £10m. plus 10%

share of profits on sale > £5m

• Developer makes £8m profit and pays the landowner

£300k. => trading profit

Profits from trading in developing UK property

• Holiday flights to the Caribbean
• Luxury watches as Christmas gifts for staff – even

though it had no employees.

• The cost of regular Friday night ‘bonding sessions’ -

running into thousands of pounds

• International flights for dental treatment ahead of

business meetings,

• Pet food for a Shihtzu ‘guard dog’. .

HMRC – Top 10 “Dodgy” Expense claims

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• Betting slips
• Armani jeans as protective clothing for a painter and

decorator

• Underwear (for personal use)
• The costs of a garden shed for private use, plus the

costs of the space it takes up in the garden,

• Expenses for a caravan rental for the Easter weekend.

HMRC – Top 10 “Dodgy” Expense claims

• West v HMRC [2016] UKFTT 536
• Directors loan account normally cleared by salary +

dividend

• Allowed to accumulate 2007 – 2010
• Cleared with director’s remuneration (net of PAYE, NIC)
• Company put into administration
• HMRC issued directions under the PAYE regulation 72

and the Social Security (Contributions) reg 86

• Was this wilful and deliberate?
• Held: Director not liable for unpaid PAYE and NIC

Director not liable for unpaid PAYE and NIC

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The End Any questions?

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