Tips & Advice Tax - April

TIPS & ADVICE Tax

Your fortnightly guide to practical tax savings

INCOME TAX

HICBC - deadline to register looming

Changes to the high income child benefit charge mean some couples will pay less tax. Others can also benefit but must take steps to do so. What’s required and when?

HICBC recap. The high income child benefit charge (HICBC) has been contentious since it was introduced in 2013. It applies to individuals or their partners who have children and claim child benefit. Because of the unfair way in which it applies, until April 2024 a couple with one income exceeding £50,000 per annum were liable to the HICBC, while a couple with a joint income of over £50,000 per annum were not.

First Budget change. This inequity was addressed in the 2024 Spring Budget. The Chancellor announced that HMRC will consult on changes that will take account of household income rather than only that of the highest earner. While no date has been set for when changes will become effective, it’s hoped it will be no later than 6 April 2025. In the meantime, a temporary easing of the HICBC applies for 2024/25.

Second Budget change. For 2024/25 the HICBC threshold increased to £60,000 and the clawback rate is 1% for every £200 of income in excess of the threshold (half the previous rate). The effect of this is that a couple where the highest earner’s income is less than £80,000 will not lose all their child benefit to the HICBC.

Opted out. Many individuals and couples who are entitled to child benefit opted out of claiming it because they knew that the whole amount would be clawed back through the HICBC. However, because of the changes to the income threshold and rate many will now be better off claiming child benefit.

Tip. Child benefit is not given automatically, it must be claimed. If your client hasn’t registered for the benefit because of the HICBC, they should consider if they will now be better off doing so. To get the full entitlement for 2024/25 they must submit a claim no later than 5 July 2024 (see The next step

The next step

a link to the child benefit claim site, visit https://www.tips-and-advice.co.uk, code TATX24DA15.

› If your client is entitled to child benefit but hasn’t claimed it because of the benefit charge, consider if the new limits now make a claim worthwhile. If so, advise them to register their claim by 5 July 2024 to ensure that they obtain the

for 2024/25.

Construction industry scheme - what’s the latest?

In a move to prevent or at least reduce tax avoidance, changes to the construction industry scheme (CIS) rules took effect from April 2024. If your client is a contractor or subcontractor in the industry, what do they need to know?

Recap

The main aim of the construction industry scheme (CIS) is to prevent tax evasion in the construction industry by requiring contractors to deduct tax from payments they make to subcontractors at either 20% (standard rate for registered subcontractors) or 30% if not registered. They can apply to have payments made without tax deducted which HMRC will approve if conditions are met.

Registering for gross payment status

The registration process requires the subcontractor to provide proof of identity and show there is a bona fide construction business with a UK bank account; the annual turnover will be at least the lower of £100,000 or £30,000 per person involved in the management of the business (see The next step); and there have been no compliance irregularities. Trap. Providing or assisting with a fraudulent application can result in a £3,000 penalty.

Changes to the compliance test

This test considers the subcontractor’s compliance history during the twelve months prior to the date of the CIS gross payment status (GPS) application, i.e. whether:

• self-assessment tax returns and CIS monthly returns are due

• all information HMRC requested has been supplied

• all tax/NI due as an individual, business and employer, both in the UK and overseas has been paid; and

• deductions are due as a contractor under the CIS.

Note. Some minor mistakes where a reasonable excuse exists are ignored (see The next step).

Since 6 April 2024, a new condition applies.

It requires subcontractors to have a good VAT record, i.e. timely returns and payments. Tip. For subcontractors who already have GPS at 6 April 2024, previous VAT failures will not prejudice their status. However, for new applicants, VAT compliance history prior to 6 April 2024 will be taken into account.

Removal of GPS

The automated HMRC status check of GPS subcontractors is annual, although the first review for new applicants from 6 April 2024 will be brought forward by six months. From 6 April 2024, HMRC will gain the power to remove GPS in cases of serious non-compliance in respect of VAT, PAYE or self-assessment for income tax and corporation tax. Minor errors won’t jeopardise GPS. Tip. Contractors will be notified by HMRC if the status of any subcontractors they have verified or used in the last two tax years has changed.

Other changes

Landlords. From 6 April 2024, the majority of landlord to tenant payments are excluded from the CIS. This will ensure that where the tenant engages a subcontractor to complete construction work on the property, any payment from the landlord to the tenant is outside the scope of the CIS.

Digitisation. Since the beginning of April 2024 the default method to register for the CIS is online. However, for the time being HMRC is still accepting applications by post.

The next step

For links to HMRC’s guidance on turnover requirements and what counts as a minor mistake, visit https://www.tips-and-advice.co.uk, code TATX24DA15.

› As a subcontractor, since April 2024, poor VAT compliance could exclude clients from gross payment status, although there’s some leeway for minor mistakes. Plus, digital CIS registrations will be introduced which will eventually become mandatory.

Gifting shares and saving tax on company profits

To prevent parents gaining a tax advantage by shifting income to their children HMRC has tough anti-avoidance rules. Is there legitimate tax planning that company owners can use to work around them?

Tax planning is child’s play

Since the early 1960s clever schemes have been dreamt up to shift profits from company owners to their minor children in an attempt to save tax. Typically they involve a company owner transferring some of their shares to their children. HMRC can’t prevent the transfer but it applies tough antiavoidance rules (the settlements legislation) to prevent any income tax advantage. Trap. The settlements legislation makes the parent liable to tax on the income, e.g. dividends, arising from the shares (or other assets) gifted to their minor children.

More anti-avoidance

As well as the settlements legislation separate capital gains tax (CGT) anti-avoidance rules cause the gift of shares to be treated as if it were a sale at market value, i.e. the amount an unconnected third party would pay. If this is more than the shares cost the transferor, the difference is a taxable capital gain.

Tips & Advice Tax Memo

For detailed commentary on the anti-avoidance rules, visit https://www.tips-and-advice.co.uk, code TATX24DA15.

Think long term

Despite these anti-avoidance rules, giving shares to children can produce tax savings - clients just have to be patient. While your client’s children are minors and they pay the tax on the income (dividends) paid to them, they will be no worse off in tax terms than had they not transferred the shares. The tax magic happens when the children

cease to be minors, which is usually on their 18th birthday. The income tax anti-avoidance rule ceases to apply and your client’s children will then be taxable on the dividends. Tip. While they are minors clients should consider investing the money on their children’s behalf tax efficiently, say in a Junior ISA.

Options for adult children

When the child becomes 18 they have a number of options. They could continue to receive dividends to give them income on which they pay little or no tax, depending on whether they have other income. Alternatively, they might turn the shares into a cash lump sum.

Example. In June 2024 Jo gives her one-year-old son, Billy, shares in her company with a market value of £3,000. The shares cost Jo £3 when she started the company. The anti-avoidance rules means Jo is taxable on a capital gain of £2,997 but as this is less than her annual CGT exemption (£3,000 for 2024/25) there’s no tax for her to pay. By the time Billy reaches 18 and goes into further education the accumulated dividends plus growth amount to £50,000. Billy sells the shares back to Jo, or possibly to Jo’s company. The resulting CGT would be around £5,000 (assuming tax rates stay the same and Billy has little or no other income). This would leave him £45,000 to help with his tuition, etc. Tip. The tax plan works best if your client gives shares to their children while their company is relatively new or even at formation. That way their market value is likely to be relatively low, so they can give more away without triggering a CGT bill.

› While your client’s child is a minor the anti-avoidance rules apply, so giving shares to them doesn’t save any tax. But the rules cease to apply when they reach 18. From that point they have effectively shifted income to them. This could provide the youngsters with a low tax income or a capital sum just when they need it, say to help with further education.

Overseas business trip with the family - is it taxable?

A client is making an overseas trip for business and is taking her spouse and two children so they can holiday while she’s working. Her question is, can she put the expense through her company and if so are there any tax considerations?

A company expense

The answer to the first part of the question is “yes”. Of course, her company can pay for or reimburse the cost of the trip for herself and her family. Whether or not it’s tax efficient to do so is a different matter. We’ll therefore consider the tax and NI consequences of each travel-related expense that might be incurred on the trip.

Taxi fares

Composite fare. The tax and NI position for the taxi fares to and from the airport depends on how the fare is worked out. Generally, fares are the same whether there’s one or four passengers. Where this is so and your client is one of the passengers the whole cost can be included as a corporation tax (CT) deductible expense in the company’s profit and loss account without any further tax or NI issues to worry about.

Fare per passenger. The position is different if the taxi firm charges per passenger. If put through the profit and loss account the cost relating to your client’s family is still tax deductible for CT purposes, but there will be income tax and NI charges in respect of the additional fare charged for her family’s journey.

If the company pays the fares direct it is taxable as a benefit in kind or, if your client pays the fares and her company reimburses her, it must apply PAYE tax and NI to the reimbursement in the same way as salary.

Tip. The income tax and NI charges are avoided if the travel expenses for her family are recorded as a personal expense, say by debiting it to her director’s loan account (DLA) instead of including it in the firm’s profit and loss account.

Flights

The CT, income tax and NI positions follow the same principles as applied to the taxi fare. So, the cost of your client’s fare can be charged to the company’s profit and loss account without any corresponding income tax charge. Plus, the fares for her spouse and children can be debited to your client’s DLA to avoid income tax and NI.

Hotel and living expenses

The tax rules that applied to taxi fares and flights also apply to accommodation etc. expenses. If they can be specifically attributed to each person, the costs for your client are deductible for CT purposes with no other tax or NI issues while the costs for her family can be charged to her DLA to avoid tax and NI. If they are included in the profit and loss account they will be taxable as a benefit or salary.

Example. Your client and her spouse occupy one room and their children have another. The cost of each room is £1,000 for the duration of their stay. It’s the same regardless of the number of occupants. In effect there’s no additional cost for your client’s spouse staying with her and so the whole £1,000 is a deductible expense for CT purposes with no other tax consequences (see The next step). Conversely, the cost of the children’s room must be charged to your client’s DLA to avoid income tax and NI. Tip. If there’s no extra cost for a spouse, family member or other person accompanying you on a business trip, the whole cost is deductible for CT purposes and there are no other tax or NI charges to consider.

The next step

For a link to HMRC’s guidance, visit https://www. tips-and-advice.co.uk, code TATX24DA15.

› While any expense can be put through a company and be deductible for corporation tax purposes, doing so will result in income tax and NI charges if they have a private purpose. However, if the private use does not increase the cost of the business trip, no tax or NI liability arises.

Bump up pension savings with an in-specie contribution

Your client wants to make a pension contribution to take advantage of higher rate tax relief. The trouble is cash is tight and they can’t afford to contribute as much as they would like. How might an in-specie pension contribution help?

In-specie contributions

If your client is asset rich but cash poor, in-specie pension contributions are an alternative way to pay into a pension fund. Broadly, these involve transferring assets they personally own to their pension fund thereby increasing its value without a cash contribution. However, not all types of asset can be transferred this way.

Which sort of assets?

Although pension funds are allowed to hold almost any type of asset, there are some that HMRC doesn’t approve of, e.g. most types of residential property. To dissuade pension fund ownership of such assets HMRC imposes a tough tax charge if they are acquired. Consequently, pension companies usually won’t allow clients to invest in them through their pension. Therefore, an in-specie pension contribution is usually limited to assets that won’t trigger the special tax charge.

Getting an asset into your fund

There are tricky tax issues involved with in-specie contributions but the good news is that they can leave these up to the pension company to take care of. It will provide your client with the paperwork to make it work. Popular assets for in-specie contributions include quoted shares, commercial property, unit trusts and similar investments.

Trap. For transfers of shares or land and buildings by an in-specie contribution, the pension fund is liable to stamp duty or stamp duty land tax respectively (see The next step).

Trap. HMRC treats the transfer of an asset to a pension company as if your client had sold it at full

price. Therefore, an asset worth more than when they acquired it can result in a capital gains tax (CGT) bill.

Example. Jack, a higher rate taxpayer, owns 5,000 shares in a quoted company. He paid £4 each for them and they are now worth £10. He makes an in-specie contribution of 3,000 shares to his personal pension. Ignoring transaction costs the resulting capital gain is £18,000. Because he’s already used his annual CGT exemption the £18,000 gain is chargeable to tax at 20%, resulting in a bill of £3,600. The £30,000 contribution is treated as net of basic rate tax relief, making the gross contribution £37,500 (£30,000/(100%20%)). Jack is entitled to higher rate tax relief of 20% on the gross contribution, i.e. £7,500 (40% x £37,500 less 20% already paid by HMRC directly to his fund by the pension company).

Tax ins and outs

The overall tax position of Jack’s contribution is a tax refund of £7,500, a £7,500 credit to his pension fund from HMRC, and a CGT bill of £3,600. This means the in-specie contribution leaves him with an extra £3,900 (£7,500 - £3,600) in his pocket and £37,500 extra in his pension fund growing in value (hopefully) in a tax-free pension environment.

Tip. Employers can also make in-specie contributions. For example, a company could transfer an asset to the pension fund of a director. The value of the asset transferred qualifies for a corporation tax deduction.

The next step

For information about stamp duties, visit https:// www.tips-and-advice.co.uk, code TATX24DA15.

› Selling (transferring) assets your client owns to their pension fund qualifies for income tax relief (or for companies corporation tax relief) without having to use cash to fund a contribution. It also means that the assets move to the tax-free environment of a pension fund, i.e. income they generate will be tax free.

What can be deducted from capital gains?

The First-tier Tribunal (FTT) recently ruled on a dispute regarding what should be deducted when working out a capital gain. The FTT’s decision might seem surprising but was it correct?

Case background

Wayne Bottomer (W) had money to invest in the property market. Stuart Bottomer (S), an accountant and distant relation, put him on to a property that was suitable for development. W went ahead with the acquisition and agreed to pay S a fee for the introduction. S took over much of the project management because W became unwell. As a result, the deal changed so that S would be paid 50% of any profit made from the sale of the property.

The calculation

W worked out the gain (almost £64,000) from selling the property, deducted the 50% he paid to S and declared the rest as his gain. HMRC accepted the calculation with one key exception; it refused the deduction for the £32,000 paid to S and made W chargeable for the whole gain. HMRC would not be persuaded to accept W’s approach and so he appealed to the First-tier Tribunal (FTT).

Note. Before discussing the arguments it’s interesting to note that HMRC accepted that the profit made from the sale of the property was a capital gain and not a trading profit from property development. Had it done so it would have had to allow the £32,000 as a deduction in working out W’s profit. A cynical view would be that HMRC opted to accept the profit as a gain because it thought it would collect more tax. However, the FTT wasn’t asked to consider this point and so we’ll never know HMRC’s reasoning.

HMRC’s argument

At the FTT HMRC argued that only expenses set out in s.38(1)(2) Taxation of Chargeable Gains Act 1992

can be deducted in calculating a capital gain. Its internal guidance says, in capital letters, “NO OTHER EXPENDITURE IS ALLOWABLE”.

S.38 only allows deductions for costs wholly and exclusively incurred in: (1) acquiring the asset; (2) improving (enhancing the value) of the asset; (3) expenses associated with those costs; and (4) “incidental costs”. The latter only includes costs mentioned in s.38(2) which are:

• “fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser

• the transfer or conveyance (including stamp duty) of the asset

• advertising for a seller/buyer; or

• making a valuation required for the purposes of the computation of the gain.”

FTT’s ruling

The FTT could not find fault with HMRC’s argument. The rules on what can be deducted when working out a capital gain are clear and allow for no deduction for payments made to reflect what was a profit (gain) sharing agreement. The FTT ruled in HMRC’s favour.

Conclusion. In reality W made a gain of £32,000 which makes the FTT’s ruling seem illogical and unfair. But this is one of those cases where fairness and the tax rules are at odds with each other.

Tip. This case is a salutary reminder for clients to take expert advice before (not after!) signing any agreement unless they are 100% confident they understand the tax position. W could have easily avoided a tax problem by, e.g. sticking with the original plan of paying S a finder’s fee.

› The FTT ruled for HMRC. Only costs that are specifically mentioned in the capital gains tax legislation can be deducted when working out a gain. This is true even if the result is a taxable amount which exceeds the gain actually made. The taxpayer could have avoided this unfair outcome by taking tax advice before instead of after the event.

Leasing cars - what are the VAT pros and cons?

A client is considering leasing instead of purchasing cars for their business. This will improve cash flow and, according to the salesperson, allow them to reclaim VAT that they would not otherwise be entitled to. Are they correct?

Cars and the VAT block

Generally, VAT paid on the purchase of cars for use in a business (not cars bought for resale) can’t be reclaimed because the rules specifically prevent it. This block applies if there is expectation of any private use of the car, no matter how small. However, there are exceptions to the block.

Tip. Your client can reclaim the VAT if it’s to be used by their business as a taxi, driving school vehicle or car hire business. The car must be primarily used for these purposes and minor private use doesn’t prevent the VAT being reclaimed.

Trap. Where a car is used by one or more of your client’s workers, other than in the circumstances described in the Tip above, there must be a physical or legal restriction preventing private use, e.g. a strictly enforced contract with the worker prohibiting private use.

Special rule for leased cars

If your client leases instead of purchases a car, the Tip and Trap above apply so that they can reclaim all the VAT paid on leasing charges as long as there’s a prohibition on private use and there is no such use. But unlike VAT on car purchases, some VAT can be reclaimed on leasing charges even if there’s private use.

Tip. If a car is used for business and private purposes, your client can reclaim 50% of the VAT that the leasing company charges. This rule applies irrespective of the ratio of private to business use. For example, if your client or their workers use a car for business, say just 10% of the time and 90% for private journeys, they are still entitled to reclaim 50% of the VAT on the leasing charges.

VAT on related charges

While the 50% rule applies to all charges relating to the supply of the car, e.g. excess mileage fees, it doesn’t apply to additional services for which the leasing company charges your client, e.g. maintenance fees. However, this is only the case for costs that are separately identified on the leasing company’s invoices and which are optional add-ons. Such charges benefit from another VAT break.

Tip. The full amount of VAT paid on repair and maintenance costs for cars used for business, including separately identified maintenance charges for leased cars, can be reclaimed regardless of how much they are used for private journeys (see The next step).

Trap. Your client can only reclaim 50% of the VAT charged for compulsory additional fees even if they are separately identified on the leasing company’s invoices.

Lease termination charges

If your client or the leasing company terminate the lease early, the leasing company will usually charge a termination fee to which it will add VAT. This is also subject to the 50% rule. Similarly, if your client is paid a rebate of rentals at the end of a lease (typically, this happens after the vehicle is sold by or via the leasing company), they must declare 50% of the VAT credit on their return where they were subject to the 50% input tax block on the leasing payments.

The next step

For a link to HMRC’s guidance, visit https://www. tips-and-advice.co.uk, code TATX24DA15.

› Where your client leases a car for use in their business and there’s private use (no matter how small), they can reclaim 50% of the VAT they pay on the leasing charges. The good news is that they can reclaim 100% of the VAT for any additional fees, e.g. a maintenance charge, but only if it’s an optional service.

PAYE procedures relaxed for salary advances

Simplification. Following a short consultation HMRC has gone ahead with simplification of PAYE procedures where an employer makes an advance of salary to an employee or director. New regulations became effective from 6 April 2024.

Pay now, report later. Until the new regulations became law employers were required to treat a pay advance as a normal salary payment, which in turn meant reporting it to HMRC on a full payment submission (FPS).

It’s now possible for employers to make a salary advance without submitting an FPS as long as the advance is not a regular arrangement, it reduces the next normal salary payment only and doesn’t exceed the value of salary accrued by the employee at the time of the advance.

› Since 6 April 2024 the PAYE procedure is simplified for salary advances. An immediate full payment submission is not required. Instead, the advance must be included as salary in the employee’s next payday.

CAPITAL GAINS TAX

HMRC rewrites rules on private residence relief

Tribunal ruling. We recently told you about the Upper Tribunal’s judgment in the dispute between Mr and Mrs Lee and HMRC about capital gains tax (CGT) private residence relief (PRR) (yr.24, iss.3, pg.2, see The next step).

Period of ownership. The ruling overturned HMRC’s longstanding view of when, for the purpose of PRR, ownership of a residence begins, specifically where a person builds a home on land they already own. Previously, HMRC said that ownership began when the land was acquired but that occupation of the property for PRR purposes only began when the property was constructed and used as a residence. However, the Tribunal’s decision was that ownership for PRR purposes starts only when the property is ready for occupation and the earlier actual ownership is ignored.

New guidance. As we expected, HMRC has chosen not to appeal against the decision but instead has changed its guidance to comply with it. Revised guidance on PRR has been added to HMRC’s Helpsheet HS283 (Private Residence Relief). HMRC internal guidance will also be amended (see The next step). The judgment will apply to any similar ongoing disputes regarding the calculation of PRR.

The next step

For a previous article about the Tribunal’s ruling and a link to HMRC’s guidance, visit https://www.tips-and-advice.co.uk, code TATX24DA15.

› HMRC has changed its guidance regarding private residence relief (PRR) in response to a recent Upper Tribunal ruling. Its capital gains tax Helpsheet HS283 now confirms that ownership for PRR purposes usually begins when construction of a property is complete.

Editor-in-Chief: Tony Court

Contributing Editors:

Andrew Rainford - BA(Hons) ACA CTA

Sarah Bradford - BA(Hons) ACA CTA

Roger Lawes - Tax Advisor

Graham Palmer - Inst. of Cert. Bookeepers

Nick Avis - FCA

Simon Louis Cooper - Senior Tax Manager

Neil Warren - CTA (Fellow) ATT

Pete Miller - CTA (Fellow)

Steve Kesby - FCA, CTA

Publishing Director: Duncan Callow

A publication by: Indicator - FL Memo Ltd Calgarth House, 39-41 Bank Street Ashford, Kent TN23 1DQ

Registered in England Company Registration No. 3599719

We’re now on social media! Follow us @Indicator-FLMemo

Subscriptions:

Subscriber queries: Lisa Woods

Telephone: (01233) 653500

Fax: (01233) 647100

E-mail: subscription@indicator-flm.co.uk editorial@indicator-flm.co.uk www.indicator-flm.co.uk

TIPS & ADVICE ® is a Registered Trademark. © 2024 Indicator - FL Memo Limited. No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system without permission. Every effort has been made by the publisher to ensure that the information given is accurate and not misleading, but the publisher can not accept responsibility for any loss or liability perceived to have arisen from any such information. Subscribers should be aware that only Acts of Parliament and Statutory Instruments have the force of law and that only the courts can authoritatively interpret the law.