Agenda Next Finance Bill early September Making Tax Digital for - - PowerPoint PPT Presentation

• Next Finance Bill early September
• Making Tax Digital for Business delayed
• HMRC manual – Winding up TAAR
• Other HMRC announcements
• Recent tax cases – Rangers EBT case
• Using EIS to defer/avoid CGT

Agenda

• Legislation deferred because of Election
• New Finance Bill in September
• Some updated draft clauses issued
• Start dates confirmed
• Corporate tax changes – 1 April 2017
• Non-Dom changes – 6 April 2017

Another Finance Bill in Autumn

• They listened at last!
• 2020 at earliest for quarterly updating by traders and

landlords

• But VAT quarterly updating from 2019
• 12 month pilot of new VAT reporting
• Businesses below VAT threshold exempt – not £10,000
• Gives more time for testing and software development

Making Tax Digital delayed

HMRC Announcements and other developments

5

• Sections 35 in Finance Act 2016 - introduced Targeted Anti-

Avoidance Rule

• ITTOIA 200 section S396B and s404A
• Certain distributions on a winding up taxed as income not

CGT = up to 38.1% rather than 10%

• Applies to transactions from 6 April 2016
• New HMRC Manual Guidance - CTM36300

HMRC Guidance on Winding up TAAR

• A close company is wound up and an individual (S)
• with a material interest (5%) receives proceeds from the

shares

• Within two years of that distribution S (or a connected

person) continues to be, or becomes, involved in a similar trade or activity; and

• One of the main purposes of the winding up is to obtain a

tax advantage

• Note – successor could be unincorporated business

Liquidations taxed as income if:

• Company Liquidation previously taxed as Gain = 10% with

entrepreneurs relief

• Where income accumulated in company may now be taxed

as income? – Finance Act 2016

• Profits

1,000,000

• Less corporation tax 20%

(200,000)

• Retained profit

£800,000

• CGT @ 10%

(80,000)

• Net cash to shareholder

£720,000 28% tax

• Dividends taxed at 7.5%,32.5%, 38.1% now

Company distributions

• If distributed as a dividend:
• Profits

1,000,000

• Less corporation tax 20%

(200,000)

• Retained profit

£800,000

• IT @ 38.1% (AR)

(304,800)

• Net cash to shareholder

£495,200 50.48% tax

Company liquidations – if income

• Mrs F has been the sole shareholder of a company which

carries on the trade of landscape gardening for ten years. Mrs F decides to wind up the business and retire. Because she no longer needs a company she liquidates the company and receives a distribution in a winding up. To subsidise her pension, Mrs F continues to do a small amount of gardening in his local village.

• Condition C – similar trade or activity, BUT
• CGT treatment would not apply if arrangements do not

appear to have tax as a main purpose (condition D)

“Similar trade or activity” - example 2

Mr E is a builder who runs his business through two companies

• Company 1 specialises in loft conversions, and
• Company 2 specialises in extensions.

Mr E winds up Company 1, but the trade of Company 2 continues. As with Example 2, Mr E continues to be involved with a trade that is similar to that of the company that is wound up, and so Condition C is satisfied.

“Similar trade or activity” - example 3

• Mrs C, an accountant runs her business through a
• company. Her husband is a self-employed lion tamer. Mrs

C winds up her company and starts work for a newly- formed company owned by her husband, providing accountancy services.

• Mrs C continues to be involved with the same trade or

activity as the wound-up company was involved with (the provision of accountancy services), even though she is now an employee rather than business owner.

• She is connected to her husband and so Condition C is
• met. Condition D will still need to be satisfied.

“Continues to be involved in similar trade or activity”

• S396B applies Condition D where:
• “it is reasonable to assume, having regard to all the

circumstances, that –

• 1. The main purpose, or one of the main purposes of the

winding up is the avoidance or reduction of a charge to income tax, or

• 2. The winding up forms part of arrangements the main

purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax”

Condition D – section 396B

• Is there a tax advantage, and if so, is its size consistent

with a decision to wind-up a company to obtain it?

• To what extent does the trade or activity carried on after

the winding-up resemble the trade or activity carried on by the wound-up company?

• What is the involvement in that trade or activity by the

individual who received the distribution? To what extent have their working practices changed?

• Are there any special circumstances? For example, is the

individual merely supplying short-term consultancy to the new owners of the trade?

Factors HMRC will consider:

• How much influence did the person have over the

arrangements? Is it a reasonable inference that arrangements were entered into to secure this advantage?

• Is there a pattern, for instance have previous companies

with similar activities been wound-up?

• What other factors might be present to lead to a decision to

wind-up? Are these commercial and independent of tax benefits?

• Any events linked with the winding-up that might reasonably

be taken into account? For example, was the only trade sold to a third party, leaving just the proceeds of the sale?

Factors HMRC will consider:

• Distribution does not create chargeable gain
• Repayment of base cost of shares
• Distribution of irredeemable shares/ Demergers
• Where shareholder receives shares in a new company

and that new company receives all of the assets of the

• ld. Although it is arguable that there is a tax advantage

here, the chargeable gains legislation provides an exemption for reconstructions

Exclusions:

• Company A has two trades: an electrical supplies store and

a hair salon. The shareholders take the view that these trades would be better served by being carried on in separate companies with no group ties.

• This takes place through a “demerger”
• CTA 2010 S1030 - the distribution from the liquidation is

not an income distribution. TCGA 1992 S136 will also apply to the reconstruction – no gain

• Company A reorganises its share capital so that ‘P’ shares

are entitled to assets of the electrical supplies business and ‘Q’ shares are entitled to assets of the hair salon business.

Exclusions – Demerger example

• A is wound up and the electrical supplies business and

assets are transferred to new company B.

• New company B issues shares to holders of ‘P’ shares in A.
• The liquidator transfers the salon business and assets to

new company C, which issues shares to holders of ‘Q’ shares in A.

• The end result is that Company A no longer exists, and the
• riginal shareholders of Company A now hold shares

directly in Company B and in Company C.

Exclusions – Demerger example

• HMRC guidance updated October 2016
• Sneaky change in policy?
• If you increase your mortgage loan on your buy-to-let

property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

• Interest on any additional borrowing above the capital

value of the property when it was brought into your letting business isn’t tax deductible.

Buy to let interest - remortgages

• Flat in London worth £375,000
• Mortgage £80,000 = £295,000 starting capital
• Remortgage up to £205,000 = £125,000
• Rent out while abroad
• Use £125,000 to buy flat in Holland
• Interest on £205,000 allowed

Remortgage example – BIM 45700

• House of Commons Work and Pensions Committee
• “bogus” self-employment practices- burden welfare

state but reduce the tax contributions to sustain it.

• Followed an inquiry into companies such as Uber,

Amazon, Hermes and Deliveroo.

• The Committee recommended a default assumption of

“worker” status, rather than “self-employed”

• Taylor report focussed more on workers rights and

recommended new status of “dependent contractor”

Taylor report on “Gig” Economy

Employee Self-employed Own company Salary/ fees £40,000 £40,000 £40,000 Income tax 20% 5,800 5,800 NIC 3,833 3,020 350 NIC – ERs 4,401 (398) Corporation tax 5,721 Dividend tax 1,341 Total taxes 14,034 8,820 7,810 NET for worker £30,367 £31,180 £32,190

Employee v Self employed v Own co. 16/17

• 6 April 2018, the minimum amount your client will have

to pay in will be 2% of their staff's pay, and the amount their staff put in will rise to 3%.

• 6 April 2019, this will rise again to 3% contribution from

your client and 5% contribution from their staff member.

• TPR will be writing to all employers about the changes

Auto–Enrolment – increased contributions

• New scheme designed for working families, including

the self-employed

• For every £8 you pay in, the government will add

an extra £2, up to £2,000 per child under 12 years old,

• £4,000 per year for disabled children under 17
• Use account to pay for nursery provision, after school

care, childminder

• Parents of children who will be under 4 on 31st August,

and parents of disabled children, can apply now.

New “Tax Free” Childcare Accounts

• Aimed at helping and supporting tax agents and advisers
• Provide guidance on the errors that HMRC find commonly
• ccur in relation to accounts and Tax Returns.
• Contain useful checklists to assist review
• Use is entirely voluntary
• Taken into consideration in determining whether or not

reasonable care had been taken in the preparation of the return under the HMRC penalty system.

HMRC “Toolkits” – Do you use them?

• capital vs revenue expenditure
• business profits
• VAT Input Tax
• VAT Output Tax
• VAT Partial Exemption
• Inheritance Tax.

Updated HMRC “Toolkits”

Recent tax cases

27

HMRC beat Rangers at Supreme Court

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

Finance Bill changes

• 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

• ther non-taxable amounts to avoid tax

Finance Bill Changes

• James H Donald (Darvel) Ltd and ors v HMRC [2016]
• Scheme involved the transfer of shares in other group

companies to employees

• Employees pay then reduced to NMW
• Balance between NMW and what they would have been

paid under their original contracts of service was paid by way of dividend

• Held - necessary to identify what, in substance, was the

source of the income. The essential question was as to the character of the receipts in the hands of the employees - taxed as earnings – followed PA Holdings

Dividends can be taxed as emoluments

• James H Donald (Darvel) Ltd and ors v HMRC [2017]
• Upper Tribunal decision in 2016 – PAYE due on

dividends paid instead of salaries

• Dividends paid on shares in Retail (R) and Services (S)
• PAYE and NICs paid by those companies on the

“salaries”

• No Set-off of corporation tax paid by D Ltd

No set off of corporation tax against PAYE on dividends

• Bradley Saul v HMRC [2017] FTT
• VAT return filed electronically just before midnight on

the 7th day after the normal due date (that is, before the extended deadline for electronic returns).

• HMRC's computer systems recognised receipt early on

the 8th day, so after the deadline?

• “anyone using an online method of submission is

entitled to expect that submission and receipt will be as near as dammit simultaneous.”

• Filed on time no VAT default surcharge

Time of Receipt of Electronic VAT Return

Tax Planning Idea

Deferring or avoiding CGT using EIS (or Seed EIS)

35

• Reinvest the property gain in EIS company shares
• Defers the gain until the shares are sold
• Gain comes back into charge at the general rate of

CGT, currently 20% for a higher rate taxpayer.

• No minimum holding period for EIS deferral relief
• (3 years for income tax relief and unconnected)
• The reinvestment must take place during the period of

12 months before to 36 months after the date of disposal of the property.

Property disposals – 20% instead of 28% CGT

• On 1 July 2017 Mr and Mrs Smith sold a buy to let

property that they owned jointly for £140,000 realising a capital gain of £100,000. Both higher rate taxpayers so gain would be taxed at 28% after setting off their £11,300 CGT annual allowances = £21,672.

• By each investing £50,000 in shares in qualifying EIS

companies in August 2017 they would not only defer the CGT liability but they would each set £15,000 against their 2017/18 or 2016/17 income tax liability, saving £30,000 income tax, £51,672 including the CGT.

Deferring or Avoiding CGT with EIS

• Provided the shares are retained for at least three years

the income tax relief would not be clawed back.

• They could then sell 1/5 of the EIS shares each year

from year 3 (2020/21) to year 7 (2024/25). £10,000 of the original £50,000 gain would then be chargeable each year, below annual CGT exemption

Deferring or Avoiding CGT with EIS

The End – Have a Great Summer