Agenda Finance Act 2018 enacted Not much tax in Spring Statement - - PowerPoint PPT Presentation

• Finance Act 2018 enacted
• Not much tax in Spring Statement
• Tax efficient extraction of profit in 2018/19
• Recent tax cases
• HMRC announcements

Agenda

• “Light at the end of the tunnel”
• Paying for Brexit for many years….
• Consultation into VAT threshold – 50% over limit before

need to register? MTD impact?

• Cash and Digital payments in the New economy
• Copper coins to go? £50 note?
• Cash associated with tax evasion and crime
• OTS to simplify Inheritance Tax

Not much on tax in Spring Statement

• Non-savings, non-dividend income:
• 19% starting band on the first £2,000 of taxable income
• 20% rate applies to income between £13,850 and £24,000

(taxable income £2,001 to £12,150)

• 21% rate for income between £24,000 and £43,430.
• Scottish higher income tax rate 41% on income between

£43,430 and £150,000

• 46% on income above £150,000.
• Scottish taxpayers have a special S PAYE code so that

payroll software calculates the tax correctly.

Scottish Taxpayers – 2018/19

• Submitting IHT returns and paying tax, particularly where it

is clear from the outset that there will be no tax to pay

• The various gifts rules including the annual exemption, small

gifts and normal expenditure out of income, their interaction with each other and the wider IHT framework

• Other admin and practical issues around routine estate

planning, compliance, disclosure, obtaining probate

• Complexities of IHT reliefs and their interaction
• The impact on taxpayers' decisions, investments, asset

prices or the timing of transactions; and

• The perception of the complexity of the IHT rules

OTS – Simplification of Inheritance tax

Tax efficient extraction from the company

Income tax and NIC 2018/19

£150,000 £46,350 £11,850

45%, 38.1%(div) 20%, 7.5%(div)

I n c o m e t a x b a n d s £46,350 £8,424 UEL Earnings threshold 9%, 12%, 13.8% 2%, 2%, 13.8% N I C b a n d s (SE, E’ee, E’er) Personal allowance

40%, 32.5%(div)

Falling corporation tax rates:

FY2016

• 20%

FY2017

• 19%

FY2018

• 19%

FY2019

• 19%

FY2020

• 17%

• £11,850 salary each
• Then dividends, say £34,500 each (£46,350)
• No tax on salary (just ‘EEs NIC – 2018/19 £411)
• Just £2,000 dividends tax free
• Then 7.5% on £32,500 = £2,437 each
• £4,874 IT for the couple = £87,004 net
• Corporation tax on £69,000 PAT = £16,185 (19%)
• PBT £85,185 + salaries = £108,885 (20.1% tax and NI)
• Note: No £3,000 employment allowance for single

director companies

H & W companies – 2018/19

9

• £108,885 profit, say £54,442 each
• £11,850 @ Nil
• £34,500 @ 20% = £6,900 )
• £8,092 @ 40% = £3,237) IT £10,137 each
• Class 2 (last year) £153 each)
• Class 4 :
• 9% on (£46,350 - £8,424) = £3,413 ) £3,728 each
• 2% on £8,092 = £162 )
• Net, after income tax, NIC = £81,154 (25.5% Tax + NI)
• Same if company taxed on “Look Through” basis?

H & W partnership 2018/19

Company Individual Salary Deductible Taxable Dividend No deduction Taxable Interest Deductible Taxable Rent Deductible Taxable Pension Deductible Tax free (within limits)

Extraction of Profit

• Bonus saves corporation tax
• But – employers NIC @ 13.8%
• Plus employees NIC (12%, then 2% over UEL)
• No NIC on dividends – or is there?
• But not earnings for pension purposes
• No CT deduction
• Impact of new rates?

Bonus v Dividend

• PROFITS

10,000

• BONUS

(8,783)

• NIC @ 13.8%

(1,217) 10,000

• BONUS

8,783

• Higher rate taxpayer:
• IT + NIC @ 42%

(3,689)

• NET

50.9% 5,094

• EFFECTIVE RATE

49.1%

Tax on salary/bonus 2018/19

• PROFITS

10,000

• CT @ 19%

(1,900)

• NET CASH DIVI

8,100

• Higher rate taxpayer:
• INCOME TAX @ 32.5%

2,633

• NET

(45.3% TAX) 5,467

• Charge interest on loan a/c?

) still 40%

• Rent premises to company?

)

Tax on dividend at 19% CT rate

• PROFITS

10,000

• Interest expense

10,000

• Charged to Corp. Tax
• Interest income

10,000

• Higher rate taxpayer:
• Income tax

40% (4,000)

• NET

60% 6,000

• EFFECTIVE RATE

40%

• Same if charge rent – but CGT entrepreneurs relief?

Interest on loan account/rent

Profits 10,000 CT @ 20% (1,900) Capital retained 8,100 CGT on sale @ 10% (810) Net (72%) £7,290 Effective rate 27.1% Anti- avoidance from 6 April 2016

• if used to distribute retained income

Retain profits and sell/liquidate ?

Recent tax cases

• Peter Vaines v HMRC – EWCA
• Partner in law firm HH with loans from German banks
• Joined another law firm SSD
• PV paid £215,455 to bank to release him from all claims

against him in January 2008, borrowed from SSD

• If he was made bankrupt, PV would lose his position as

a partner in SSD. Would also affect his reputation

• PV claimed deduction against his 2007/08 income

Partners Personal Expenses not Allowable

• HMRC disallowed deduction
• PV successful at FTT
• Decision reversed at UTT
• Court of Appeal have confirmed - not allowable
• Partners’ personal expenses must be included in

partnership return not on personal return

• Not incurred wholly and exclusively for SSD trade
• Not an expense in SSD accounts – just a loan

Partners Personal Expenses not Allowable

Collision Damage Waiver was not Exempt supply of insurance

• Supercars v HMRC UKFTT 2018
• Collision damage waiver (CDW) payable by customers

for track days

• Otherwise customer paid first £2,500 repairs
• Policy taken out by Supercars and recharged to

customers

• VAT exemption did not apply as not an insurance

broker

Collision Damage Waiver was not Exempt supply of insurance

HMRC Announcements

• Register by 5 October of the tax year after either:
• the trust has been set up
• it starts to make income or chargeable gains, if later
• (2016/17 Deadline extended to 31 January 2018, no

penalties before 5 March 2018)

• Provide details of:
• The trust – name, address, tax residence
• Beneficiaries or class
• Trustees, settlors, protectors details
• Assets – details of shares, property, cash

Registering Trusts Online

• HMRC will charge a fixed penalty to reflect the period of

delay:

• Registration made up to three months from the due date

– £100 penalty

• Registration made three to six months after the due date

– £200 penalty

• Registration more than six months late – either 5% of the

tax liability or £300 penalty, whichever is the greater sum.

Penalties for late Registration of Trusts

• RTC obliges taxpayers to make a disclosure of unpaid

tax on assets, income and activities in other countries and transfers from the UK to other countries.

• Taxpayers need to act before 30 September 2018 to

avoid incurring much higher penalties

• Agents urged to check whether any clients need to make

a RTCorrection and help them to come forward

• Use Worldwide Disclosure Facility
• From 1 October 2018, the minimum penalty will be 100%
• f the tax owed and could be much higher depending on

circumstances.

Requirement to Correct (RTC)

• Parents whose youngest child is under 12 can now get up to

£2,000 a year towards their childcare costs

• Apply for Tax-Free Childcare online - reduces costs by up to

£2,000 per child per year, or £4,000 for disabled children.

• Use the money towards regulated childcare - nurseries,

childminders, after-school clubs or holiday clubs.

• Will eventually replace the existing “childcare voucher”

scheme - can still join voucher scheme providing they receive a childcare voucher before 5 April 2018.

• Can continue using childcare vouchers after April 2018

provided their current employer continues to offer scheme

“Tax Free” Childcare accounts

• Where Employer pays tax and NIC on employees’ behalf
• Gross up for tax and NIC
• Case of wine at Christmas £120 = £200 x 13.8%
• = NIC £27.60 + tax £80 if higher rate
• No need for employers to renew their PSAs annually -

Agreements will remain in place for subsequent tax years unless varied or cancelled by the employer or HMRC

• To be submitted digitally in future.
• Employers still required to provide an annual calculation.

Simplified PAYE Settlement Agreements (PSA)

Pensions Auto-Enrolment – How much?

Employee Employer Up to 6 April 2018 1% 1% 6/4/18 to 5/4/19 3% 2% From 6 April 2019 5% 3%

ATED rates from 1 April 2018, based on value 1 April 2017:

Property value ATED charge £500,000 < £1m £3,600 p.a. £1m < £2m £7,250 p.a. £2m < £5m £24,250 p.a. £5m < £10m £56,550 p.a. £10m < £20m £113,400 p.a > £20m £226,950 p.a.

• receive instant access to registration details, rather than wait

for them to be delivered in the post

• file all ATED returns
• get immediate confirmation of submission of a return
• save and retrieve return information before submitting to

HMRC

• view or amend returns already submitted
• save information previously submitted, reducing the need to

key in duplicate information in later years

• Etc.

New Digital ATED returns

Advisory Fuel Rates – 1 March 2018

Engine Petrol Diesel LPG < 1400 cc < 1600cc 11p 9p 7p 1400–2000 1601 - 2000 14p 11p 8p (9p) > 2000 cc 22p (21p) 13p 13p (14p)

• 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,

• New rules for “mixed funds” to allow funds to be cleansed
• Business investment relief continues

Non-domiciles rules from 6 April 2017

• Individual deemed domiciled if meets either of two

conditions:

• A - 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

• B - 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

• 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

• Was excluded property – non UK situs property owned by

non-domiciled persons previously not charged to IHT

• From 6 April 2017 - UK residential property (RPI) now within

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

• If property has been a dwelling in previous 2 years
• Also applies to loans to acquire UK RPI
• And certain disposals of company or partnership interests,

loans and repayments

Extending IHT charge to UK residential property held through offshore structures

• Lee isn't domiciled or resident in the UK and never has
• been. He owns the entire share capital of a Jersey company,

whose sole asset is a leasehold flat in London. The open market value of the shares is £2 million.

• Before 6 April 2017 this would have been excluded property

because the shares aren't located in the UK and Lee is non-

• domiciled. No IHT on transfer or on death
• From 6 April 2017 the shares are no longer excluded

property and because the value of the shares is wholly attributable to a UK RPI the full value of £2 million is within the scope of Inheritance Tax.

Example 1 – offshore company owning UK RPI

• Carlos isn't domiciled in the UK. He lends £1 million to his

student daughter Isabella, to purchase a £1∙1 million house in Oxford. If Carlos dies then the value of the loan will form part of his estate, even if the loan is structured as a foreign

• asset. Isabella has no other assets in the UK or elsewhere

and her net estate is initially £100,000

• A relevant loan extends to money or money's worth held or

made available as security, collateral or guarantee.

• If the loan to Isabella had been made by a bank which had

received a right over £2 million of Carlos' assets then such collateral can't be excluded property. The value is capped to the value of the loan, which is £1 million.

Example 2 – loan to acquire UK RPI

• Alice isn't resident and not domiciled in the UK. She has an

interest in a foreign close company, whose value is wholly attributable to UK RPI. In January 2018 she sells her stake in the company for the open market value of £1 million, which is deposited in her Jersey bank account.

• She then invests the proceeds in land in Spain. In

November 2019 she gifts the land to her children at its value

• f £1∙2 million. The gift isn't excluded property because it's

derived from the proceeds of the disposal of her stake in the company and the disposal was made in the 2 year period.

• It's a PET by Alice - value transferred capped at £1 million.
• After 2 years Spanish property is excluded property again.

Example 3 – Sale of shares in company with RPI and disposal within 2 years

Account A (Mixed fund)

HMRC Guidance on Cleansing Mixed Funds

I Capital Gains Income

• “Mixed fund” = income, gains, capital in same account
• Can cleanse mixed funds by transferring money from one
• ffshore account to another if you:
• are non-UK domiciled (not born in UK with UK dom.origin)
• can identify the make-up of your mixed funds
• have been taxed on the remittance basis in any year from 6

April 2008 to 5 April 2017

• meet the conditions in section 809B to E of the Income Tax

Act 2007 (remittance basis users)

HMRC Guidance on Cleansing Mixed Funds

From 6 April 2017 to cleanse your mixed fund accounts you must:

• 1. nominate the transfer
• 2. make the transfer between 6 April 2017 and 5 April 2019
• 3. only cleanse money
• 4. transfer from one overseas account to another
• 5. specify the amount for each category

HMRC Guidance on Cleansing Mixed Funds

• 6. not have nominated a transfer from account A to account B

before

• 7. be a qualifying individual at the time of transfer
• 8. make sure the transfer is for income, gains and capital, can

be the whole or part of what is in the account and doesn't exceed the amounts in the account immediately before the transfer

• 9. be able to identify the source of the funds

Make the nomination between 6 April 2017 to 5 April 2019 7 examples in HMRC guidance

HMRC Guidance on Cleansing Mixed Funds

Account A (Mixed fund)

HMRC Guidance on Cleansing Mixed Funds

I Capital Gains Income

Account A Account B

HMRC Guidance on Cleansing Mixed Funds

I Income Capital Gains Income

Account A Account C

HMRC Guidance on Cleansing Mixed Funds

I Gains Capital Gains

Account A Account B Account C

HMRC Guidance on Cleansing Mixed Funds

I Capital Gains Income

Making Tax Digital, Where are we now?

• First VAT Period starting on/after 1 April 2019
• Professional bodies – 1st AP starting after 1 April 2019
• Year ended 30 June – quarter from 1 April 2019 not 1

July 2019. Advise digital records from 1 July 2018?

• £85,000 threshold = taxable supplies only
• Business will come within MTD for VAT from start of the

next VAT period after its turnover has exceeded £85,000 – monitor monthly

• If drop below £85,000 – stay within MTD unless

deregister

MTD for VAT – When does it start?