unincorporated businesses Ros Martin CTA December 2017 The Budget - - PowerPoint PPT Presentation
Tax issues for unincorporated businesses Ros Martin CTA December 2017 The Budget Not much relating to self employed Property businesses can claim fixed rate mileage Various consultations announced Avoidance of tax due to
Ros Martin CTA December 2017
Not much relating to self employed Property businesses can claim fixed rate mileage Various consultations announced
Avoidance of tax due to transfer of income to unrelated
entities
NIC Overseas scale charges and general point on subsistence Training costs Taylor Report being taken forward Disincorporation relief
Partnerships with partnerships as partners – include full
details on SA return
Investment partnerships with non UK partners (no
chargeable to IT or CT) will not need to get reference for those
Allocation of partnership profit will follow account and
new process for assisting in disputes
What are the expected profits? What is the other income of the proprietor? Might there be losses? Any need for limited liability? Status issues? Employees and incentives to be provided? What is the long term aim? Is pension planning relevant?
Taxed on all profit NICs to be paid VAT will be due once threshold exceeded Investment only via loans PAYE for employees Providing incentives to employees may be difficult No separation of risk Losses can be utilised against other income
As above Except joint and several liability for debts Losses are subject to more anti-avoidance provisions
Again as above But the liability is limited More restrictions on loss set off And some cases where partners are taxed as employees
Can be a limited partner Or can have an LLP Managing risk can be an important aspect of
determining business structure
What does this protect you against?
Availability of losses in early years can be important too But need to be aware of significant restrictions And will see that HMRC are undertaking lots of work in
this area
LLPs holding property Can be useful to non UK investors or tax exempt funds UK tax liabilities are limited to basic rate band And no CGT on disposal of property other than
residential property
No tax on tax exempt bodies
No need to have central control and management
Can involve UK investors without anti-avoidance
provisions applying
LLPs can be useful vehicle to offer employees stake in
business
Without wanting to trigger charge under ERS provisions Can also get ER on share of underlying assets when sold Can also save NICs Need to be aware of anti-avoidance provisions
B commended work as a self employed locum with
agency
Set up company with he and wife as shareholders Compliance record of both self employment and
company were not good
All payments were made into personal account and
expenses all invoices to him personally
HMRC argued company never actually traded
FTT agreed with HMRC Taxpayer can carry on business through whichever
medium he wishes
But not enough to form a company and say income must
be declared via that
Must be providing services through company Nothing changed following incorporation
HMRC opened up enquiry into Mr S’s tax return Taxi driver Believed 10% private use adjustment was too low Normal business economics exercise Normal kind of dispute about income generating miles
and dead miles
Demonstrates the kind of arguments that can be made But FTT accepted the methodology adopted by HMRC Could not be definitive but appeared to them to be
reasonable
Yet another avoidance scheme which was looking at two
aspects
Was the business commercial Were the parties involved actively involved in the
business
Similar arguments being made in other cases too – not
just avoidance
Felt that any business which was very likely to make
losses could not be seen as commercial
So losses cannot be available for sideways loss relief
Individual with TO around £9K and negligible profits HMRC opened up enquiry based on lifestyle reports Various amounts were disclosed as part of enquiry However £52,000 of unexplained deposits Whittled down to £26,570 but HMRC simply did not
accept his explanations
HMRC assessed on basis that came from business Case ended up at FTT No evidence produced FTT could not disagree with HMRC’s analysis
Unincorporated businesses can used simplified expenses And can also use cash basis Cash basis now extended to property businesses Nothing is obligatory
Use fixed allowance for business mileage Use the normal AMAP rates Cannot use these if the vehicle has ever had capital
allowances claimed on it
Or has been subject to a deduction under cash basis If a fixed rate allowance is claimed, no other deduction
is allowed in respect of the qualifying expenditure
Need to be careful in decision to use this Does not cover incidental costs of travelling such as tolls
Need to keep good records
Can claim a deduction for use of home Can be a complicated calculation And HMRC expect there to be significant records to
support expenditure
And may well then restrict it to what they consider to
be reasonable
Can now claim flat rate Based on the amount of time working at home
Hours worked at home per month Deduction per month 25 or more but less than 51 £10 51 or more but less than 101 £18 101 or more £26
Number of hours worked means number of hours spent
wholly and exclusively doing qualifying work
Meaning for the purpose of the trade If partnership means work done by a partner on
partnership business
Must be core business activities Where more than one individual working in same
business, each hour only counted once
If more than one home, treated as one home
HMRC say that this deduction covers household running
costs
Could still then claim an additional amount for council
tax, insurance and mortgage interest
Fixed rate adjustment where have premises which are
mainly business but also used as a home
Take total amount of expenses and then deduct fixed
rate for non-business use
Based on number of relevant occupants Can pro-rata if number of occupants alters
Number of relevant
Additional per month One £350 Two £500 Three or more £650
Small businesses can elect to be taxed on cash basis Rather than having more complex provisions applying Only available for sole traders or partnerships Not corporate partnerships TO less than the higher of £150,000 or VAT threshold
(double this for UC recipients)
Cannot use if certain type of business eg LLP Once elect have to remain within until no longer
eligible or change in circumstances
Still wholly and exclusively provisions apply Capital expenditure deductible other than cars Interest payments limited to £500 Business losses can only be carried forward and set off
in future
No change in VAT provisions
When moving into or out of cash basis need to make any
relevant adjustments
To ensure that do not either ignore any income or
double count expenses
Obligatory for landlords Where income is less than £150,000 Unless opt out of regime If joint ownership must both use same principle in
calculating
Neither will affect the possible interest restriction
applying from 2017
Budget announcement that can use mileage rates for
property businesses
Confusion over interest relief where remortgage Separate from current restrictions on relief anyway HMRC have always remortgage up to original value Even where money used privately
You purchased a buy-to-let property for £120,000 with
a mortgage of £90,000 and let it to a tenant straight
£150,000 and you increase your mortgage on the property to £115,000. All of the interest on the mortgage can still be claimed as a revenue expense as the loan doesn’t exceed the initial £120,000 value of the property when it was introduced to your letting
the interest payable on the additional £5,000 is not tax deductible and cannot be claimed as a revenue expense.
Change in PIM ‘as long as the additional loan is wholly and exclusively
for the purposes of the letting business’
BIM has not changed – covers same point May have been an error?
Complex legislation S21 CAA 2001 – no buildings can get CAs S22 CAA 2001 – no structures can get CAs But then s23 gives exceptions to those basic rules But only if case law principles are followed Then specific issues covered which give allowances for certain
types of expenses
Premises test
Identify whether the asset is part of the premises in which the business is carried on
Wimpy International Limited v Warland
Functional test
Does the plant perform a function as apparatus to the taxpayers business
CIR v Barclay Curle & Co Limited 1969 45TC221 Cooke v Beach Station Caravans Ltd 1974 STC402 Schofield v R&H Hall 1975 STC353
Business use test
Does the asset perform a particular function as apparatus in the context of the nature of the particular trade being carried on
CIR v Scottish & Newcastle Breweries Ltd 1982 STC296
the legislation works, let us say that we have a prefab building put up by a contractor to provide shelter and recreational space for workers at a building site.
into full system in 2020 but could be later
Businesses with TO > VAT threshold will have to Keep digital records Provide 1/4ly updates via approved software Remain within MTD as long as registered for VAT If registered on voluntary basis can decide if want to go
into regime
Keep a digital record for each transaction Using software that is MTD compliant Expenditure allocated to relevant heading by software Summary information extracted and sent to HMRC No detail of exactly how records kept Need to consider functional software
HMRC are reviewing their compliance strategy in the
new digital world
Ultimately about use of information MTD will simply add to the information that is available
New report Interviews with 45 SMEs known to be tax avoiders Aim to try and establish motivation, modes of evasion
and ways to deter behaviour
In context of fact that HMRC believe £5.2bn of tax
evasion in total tax gap of £34bn
51% of this is from SMEs
Unthinking evaders Invested evaders Lifestyle evaders Systematic evaders
It’s my money I pay too much tax Everybody is doing it They’ll never know If I am caught it won’t matter much
Common thread is felt unlikely to be caught Not bothered about naming and shaming Felt unlikely to be prosecuted Did not necessarily appreciate the high level of financial
penalties
HMRC have large amounts of data being processed at
huge speed
Did you know that the hardened evader uses WhatsApp
to communicate as it is encrypted and can be deleted!
Data-led risk and intelligence
No judgement or empathy needed Could be replaced by machine
Desk based investigations
Getting accountant to do all the work
Digital disclosure Service
Over 22 bn lines of data 12m staff searches per year and rising Can identify patterns, links and networks which might
Contains 600m compliance documents such as tax
returns
Not yet in UK but Legislation to make illegal Automatic transmission of data to tax authorities –
Sweden have this
Remote access by tax authorities Prosecution
Easy to do nowadays and prevalent in VAT fraud Requires manual cross-checking: easy once you’ve
found it but hugely labour intensive
Mexico lost 3bn Euros in forged invoicing between 2007
and 2009 so introduced mandatory electronic invoicing
Believed to have bought 4.2m businesses into formal
economy
Limiting deductibility of cash payments Monitoring ATM withdrawals Eliminating high denomination currency (India) Encouraging or enforcing use of cashless payment
methods
Partnering with platforms such as Air BnB