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TAX TIMES | WINTER 2012

HELP WITH COMPLEX BUSINESS AND PERSONAL TAX ISSUES

The country should have a tax system that looks like someone designed it on purpose.

William Simon US Treasury Secretary 1974 to 1977


Welcome

Business INFORMING, DEVELOPING AND SUPPORTING SMES 3

Parallel company and partnership structures

3

Real Time Information

3

National Minimum Wage

Corporate ENABLING, GUIDING AND OPTIMISING BUSINESSES 4

Dilapidations

4

Capital payments for leases

5

Share schemes update

6

Patent Box

7

Reverse charging VAT

Private Client DEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE 8

Income tax loss relief capping

8

Reminder: Income tax self assessment late filing penalties

9

New Statutory Residence Test

10

Proposed new taxes on residential property

11

Changes to child benefit

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Reduction in additional tax rate

The information contained herein is of a general nature and not intended to address the circumstances of any particular individual or entity. Whilst we have made an effort to provide accurate and up to date information, it is recommended that you consult us before taking or refraining from taking action based on matters discussed. Š 2012 Price Bailey. All rights reserved. For more information about Price Bailey and regulatory details please visit www.pricebailey.co.uk/legal

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Tax Times


Business INFORMING, DEVELOPING AND SUPPORTING SMEs

Parallel company and partnership structures The First Tier Tribunal found in the recent case of Cooper that cars paid for by a partnership and used by the partners were nevertheless taxable benefits provided by their parallel company. The partnership’s sole customer was a trading company under the partners’ control, a useful tax planning strategy for top rate taxpayers as long as there is a valid commercial reason for the partnership’s existence. The Cooper partnership had been providing services to the company, and it incurred costs in providing cars for its partners’ business and private use. The company and the partnership described the money paid by the company as ‘management expenses’. The tribunal determined that as the partnership existed for no other reason than to provide services for the company, the cost of the cars was ultimately borne by the company as a benefit for their employees. The company was required to reclassify the applicable portion of its management expenses paid to the partnership to ‘motor expenses’ paid for the directors’ private use of the cars and the directors were taxed accordingly. What are the implications? We should expect HM Revenue & Customs (HMRC) to pay much more attention to parallel company and partnership structures than before. In weak cases liabilities may even be applied retrospectively, resulting in significant tax bills. If you operate this kind of structure for this purpose, you should review its function sooner rather than later.

Remember, it is not what expenses are called or how they are categorised that determines their tax treatment but the purpose for which a cost is incurred.

Real Time Information (RTI) Don’t forget that RTI will be phased in from April 2013 and by October 2013 it will be mandatory for all employers to report

New rates for the national minimum

their PAYE information in real time. If you are an employer

wage took effect on 1 October. The

or draw a salary from your business you will be affected.

hourly rate of the national minimum

Our last edition of Tax Times and our most recent edition of our Pay Times newsletter addressed RTI in detail. You can access these newsletters on our website at: www.pricebailey.co.uk/resources/newsletters

Tax Times

National Minimum Wage

wage for adults over 21 increased to £6.19 and the rate for first year apprentices or apprentices younger than 19 was raised to £2.65.

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Corporate ENABLING, GUIDING AND OPTIMISING BUSINESSES

Dilapidations It is bad enough having to pay large amounts of money when a lease comes to an end, just to leave the building. But it gets even worse if there’s no tax relief for your payment. Here are the basic rules. n

Making good and other dilapidation rectification works n

Not all building work is repair.

n

Much is improvement or alteration or removal or reinstatement thereof, all of which are capital and none of which is tax deductible.

n n

There may even be difficulties getting plant and machinery allowances for reinstated services etc.

Payments in lieu of dilapidations n

A payment instead of building work is not building work. Therefore if you pay the landlord instead of doing the work, it’s not classed as ‘repairs’ and there may be no tax relief.

n

Landlord’s contributions n

A landlord agreeing to do something for a tenant can be taxable on the tenant as income.

Capital payments for leases The tax treatment of payments for leases is usually very complicated, and there are many opportunities for it to go wrong. The table below is a useful indicator.

Sum Payable by:

Payment for Grant or variation:

Payment for Termination:

Landlord - investor (or tenant if subletting)

Capital if lease exists at sale

Capital? Tax nothing?

Developer

Trading expense

Trading expense

Tenant

Part capital Part expense

HMRC will say no relief

Landlord

Part capital Part expense

Income or capital

Developer

Income

Income

Tenant/subtenant

Income but spread over lease

Capital

Sum Receivable by:

NB: the above doesn’t deal with VAT – that’s another complex area!

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Corporate ENABLING, GUIDING AND OPTIMISING BUSINESSES

Share schemes update A quick round up of recent share scheme news: On 16 June 2012, the Enterprise Management Incentive (EMI) Scheme option limit increased to £250,000 from £120,000. However, the total limit across all employees is still capped at £3,000,000 share capital so maximum options can now only be granted to 12 employees. Whilst the 5% minimum holding for Entrepreneurs Relief (ER) has been relaxed, the holding period of one year has not, so employees who want any chance of ER have to go ‘on risk’ at least a year before an exit event. This means ‘exit-only’ share options will not qualify for ER. Acquiring companies might therefore consider allowing target EMI option holders to roll over their options into the acquiring company, then exercise, hold for one year, and finally exit with the benefit of ER. This can apply even if the acquiring company is not itself allowed to use EMI. The benefits of an EMI Under a share option scheme an employee may buy shares in the future at a known price. This gives them an ‘upside only’ opportunity. If the share value goes up, they buy. If it doesn’t, they don’t. If the terms are established under an approved EMI share option scheme and the price is set at or above fair market value at the date of grant, there will be no income tax or national insurance payable on the grant or on the exercise of the option. When the shares acquired through exercise of the option are sold, the individual will be liable for capital gains tax on any profit charged at 18% or 28% for a higher rate taxpayer. In addition, there is an annual tax free capital gains tax allowance (£10,600 for 2012/13). ER may be available in certain circumstances to reduce the rate of tax to 10%. This compares very favourably to income tax rates of up to 50% for 2012/13. If the exercise price is set below fair market value at the date of grant (with agreement from HMRC), income tax will be payable at exercise equal to the difference between the exercise price and fair market value.

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Corporate ENABLING, GUIDING AND OPTIMISING BUSINESSES

Patent Box HMRC has recently published guidance on the new Patent Box regime that will come into force from 1 April 2013. What is it? The Patent Box regime will allow companies to apply a lower rate of Corporation Tax to profits earned from patented inventions and certain other innovations from 1 April 2013. This lower rate of tax is 10% to be phased in from 2013 to 2017. Companies may elect to join this regime but there is no box to tick on the Corporation Tax Return; instead the reduced 10% rate is achieved by subtracting an additional trading deduction from Corporation Tax profits. Who qualifies? The company must own or exclusively licence in patents granted by the: n

UK Intellectual Property Office

n

European Patent Office

n

certain countries within the EEA

n

supplementary protection certificates

n

plant breeders’ rights and community plant variety rights

and the company must have undertaken qualifying development for the patent by making a significant contribution to either the creation or development of the patented invention or a product incorporating the patented invention. What is qualifying income? The relevant IP income must come from at least one of the following: n

selling patented products (i.e. sales of the actual product or products incorporating it)

n

licensing out patent rights

n

selling patent rights

n

infringement income

n

damages, insurance or other compensation relating to patent rights.

There can also be benefits if you use a manufacturing process that is patented. What should you do now? The focus for patent holders should now be to get their house in order. You need to ensure you are aware of: n

the costs you are incurring for such patents

n

the true income you receive for them, and

n

your proper legal title to them.

It may seem like April 2013 (if not April 2017) is a long way off but, if eligible, the applicable Corporation Tax rate is a lot lower than the large company rate of 23%. Related reliefs The Patent Box regime does not change the company’s eligibility for R&D tax credits but rather operates alongside it – you should still explore whether R&D relief is available to you.

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Corporate ENABLING, GUIDING AND OPTIMISING BUSINESSES

Reverse charging VAT Normally the supplier is the person who must account to the tax authorities for any VAT due on a supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Purchasing services from abroad Services from an overseas supplier will usually be obtained free of VAT, so what is known as the ‘reverse charge’ procedure must be applied where the buyer, as the recipient of the services, must also act as the supplier. The recipient of the services must account for output tax on the full value of the supply received and (subject to partial exemption and non-business rules) include the VAT charged as input tax. What this means is that the reverse charge has no net cost if the buyer can attribute the input tax to taxable supplies – if so, it can be reclaimed in full. If not, the buyer is put in the same position as if the supply was from a UK supplier rather than from one outside the UK. This creates a level playing field between purchasing services from the UK and overseas. Purchasing goods from another EC Member State Something similar to reverse charge applies to goods purchased from other Member States. These are known as acquisitions; if they come from outside the EC they are known as imports. The full value of the goods is subject to output tax and the associated input tax may be recovered by the acquirer if the goods are used for taxable purposes. It might also be necessary to complete an Intrastat Supplementary Declaration if acquisitions of goods from the EC exceed an annual amount – currently £600,000. Deregistration Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self-supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self-supply. Flat Rate Scheme There is a self-supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered). Mobile phones Supplies of mobile phones and computer chips valued at £5,000 and over which are made by one VAT-registered business to another are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due. This was implemented in an attempt to counter missing trader intra-community fraud ‘MTIC'.

Tax Times

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Private Client DEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE

Income tax loss relief capping In July 2012 the Treasury and HMRC published a consultation document for proposals to cap certain currently uncapped tax reliefs. The caps will take effect on 6 April 2013. The following reliefs – some widely used and some unusual – will be limited to the greater of £50,000 or 25% of income: Widely used: n

trade loss relief against general income

n

early year trade loss relief

n

post cessation loss relief

n

share loss relief

n

qualifying loan interest.

Unusual: n

property loss relief against general income

n

post cessation property relief

n

employment loss relief

n

former employees deduction for liabilities

n

losses on peculiar loans (relevant discounted securities).

Relief for charitable gift aid will not be capped. What this means for you If you claim any of these reliefs, it may be advantageous for you to consider ways of realising losses in 2012/13 in order to obtain full tax relief including bringing forward the end of a loss making accounting period. Alternatively if it is known that a loss will be realised after 2013/14, it may be possible to defer income until that tax year so that the 25% cap is higher.

Reminder: Income tax self assessment late filing penalties You can no longer avoid a penalty for late filing of your tax return by ensuring your tax bill is cleared by 31 January. HMRC introduced new penalties that apply to all self assessment tax returns from 2010/11 onwards. If you are late filing a: n

Paper return due on 31 October 2012

n

Online return due on 31 January 2013

then you will be liable for a £100 penalty. Daily penalties of £10 per day will also be imposed if your tax return is still outstanding three months after the filing date.

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Private Client DEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE

New Statutory Residence Test The government's recently confirmed changes to the Statutory Residence Test (SRT) will be the most significant change to the UK's tax residence rules in the last hundred years. The new rules will apply from 6 April 2013 but can be applied to earlier years at the taxpayer’s option. The three tests The basic structure of the SRT is a three part test, where subsequent parts only need to be completed if the criteria for the previous part are not met. 1. Part A is the conclusive non residence test, and is largely based on the number of days spent in the UK during the tax year. If you have been resident for only one or none of the last three tax years and have not exceeded the day count for the current tax year then you will NOT be considered a UK resident for tax purposes. 2. If you don’t meet the criteria then you will need to look at Part B, the conclusive residence test, which considers day count, terms of your employment and whether your only or all your homes are in the UK. If you meet one or more of the criteria in this part then you WILL be considered a UK resident for tax purposes. 3. You will need to consider Part C, the other connecting factors and day counting test, if you have not been conclusively deemed a non-resident by Part A or a resident by Part B. This test looks at your ties to the UK including where your close family are resident, whether you have available accommodation, the number of days you spend working in the UK and the amount of time you have spent in the UK in the previous two tax years. The number of ‘ties’ you have to the UK determines the amount of time you can spend in the UK during a tax year in order to avoid resident status. Things to consider n

Both Part A and Part B are based primarily on days present in the UK. It is important that you have an appropriate way of recording the actual days you have spent in the UK and whether they have been ‘workdays’ or not. If you can anticipate the number of days you have spent in the UK or if it’s likely to change you should contact your tax adviser for advice.

n

Where you are not automatically resident or non-resident, you will have to consider the range of Part C connecting factors. Are you able to control these factors and thereby influence your likely residence status prior to April 2013?

n

The SRT is designed to make UK residence ‘more adhesive’. If you are considering leaving the UK it may be easier to arrange in the current tax year before the changes come into effect.

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Private Client DEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE

Proposed new taxes on residential property Provisions were announced in the 2012 Budget affecting the acquisition and ownership of high value UK residential property (worth more than £2m) by ‘non natural persons’ (essentially companies, partnerships with corporate partners and certain collective investment schemes) which will be enacted by the Finance Act 2013. SDLT Annual Charge n

The SDLT annual charge will apply from 1 April 2013 to residential properties valued at £2m or greater.

n

The definition of residential property will follow the same definition as for the 15% rate of SDLT. In unusual cases (such as hospitals, student accommodation and care homes) careful consideration will need to be given to ensure that such properties fall outside the residential property definition.

n

The entities affected by the annual charge will be the same as those to which the 15% rate of SDLT applies.

n

The annual charge will initially range from £15,000 (for properties valued at £2m-£5m) to £140,000 (for properties valued at over £20m) and will depend on the value of the property at 1 April 2012 or, if purchased later, the value on acquisition. This value is intended to apply for five years from 1 April 2013 to 1 April 2018, at which point the valuation will be updated to that of the property at 1 April 2017.

n

The annual charge, however, will be updated annually based on the consumer price index of the previous September.

Capital Gains Tax (CGT) n

From April 2013 the CGT charge will apply to the sale of residential property by any entity that is not an individual (including trustees). It is intended to apply irrespective of the use to which the residential property is put (meaning that it will also apply to commercially let residential property). The charge will also apply in cases where shares in a property owning company are sold.

n

In order to maintain consistency with the SDLT charge, the CGT charge will apply only where the value or consideration for a disposal exceeds £2m. Furthermore, the definition of residential property for CGT purposes is intended to mirror that for SDLT purposes.

n

The CGT charge will apply to the total gain accruing on a disposal of a property (and not the proportion of the gain accruing after implementation of the new charge in April 2013).

n

The rate of tax has not been set for the purposes of the CGT charge and will be confirmed by the 2013 Budget.

What next? If enacted these changes to the UK tax regime will be hugely significant and will impact the way in which non-UK buyers of high value residential property structure their future acquisitions. They demand detailed consideration as to whether existing offshore structures implemented under the old rules remain appropriate vehicles through which to hold residential property. If you currently indirectly own or are about to acquire high value UK residential property you should contact us.

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Private Client DEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE

Changes to child benefit From 7 January 2013 the government is introducing a new income tax charge called the High Income Child Benefit Charge (HICBC) applicable to households where the highest earner receives more than £50,000 per year. What are the implications? If this applies to your household, you may need to consider whether claiming the child benefit is still worthwhile. If you decide it is and are the household’s highest earner, it may mean you will have to complete a self-assessment tax form every year that you fit this criterion. So if I earn more than £50,000, do I lose child benefit entirely? No - if the highest earner in your household earns between £50,000 and £60,000 then your benefit will be reduced on a sliding scale. If the highest earner receives £60,000 or more however then you will lose it entirely. Does this apply even if it’s my partner that claims child benefit, not me? Yes – the HICBC is assessed per household that claims child benefit, irrespective of who is the claimant and who is the high earner. For the purposes of the HICBC, your partner is considered to be: n

your spouse, if you are not separated, or

n

your partner, if you are living together in a committed domestic relationship.

What if we claim child benefit and both of us are over the threshold? Will the charge apply to both of us? No – the charge will only be applied once to the household member with the highest income. What if there is a change in our circumstances? In situations where a relationship breaks down and you are the high earner and are not claiming child benefit, the HICBC will only apply to that period of time you were in a relationship. When will the charge take effect? The HICBC will apply from 7 January 2013, but households will be assessed for their eligibility based on income for the entire 2012/13 tax year so you need to be aware of the rules now. What do you need to do? If you’re concerned about how this might affect you or think you need advice on your personal situation, we suggest you contact us as soon as possible in order to ensure you’re prepared in time.

Tax Times

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Private Client DEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE

Reduction in additional tax rate From 6 April 2013 the rate of income tax for those with a taxable income of ÂŁ150,000 or more reduces from 50% to 45%. If this applies to you it may be beneficial to defer income into the next tax year in order to benefit from the lower tax rate. The amount you stand to save by implementing deferral correctly could be significant. Items include: n

salary

n

annual cash bonuses

n

exercise of share options or vesting of other long term incentive awards

n

dividends.

When contemplating deferral, you will need to take into account: n

relevant tax rules, including those related to earnings and entitlement

n

the approach you need to take in order to ensure the deferral is enacted in a suitable manner

n

past practice

n

contractual terms

n

disclosure.

If you are affected by the tax rate reduction and are considering exploring options for deferral we recommend you seek advice at the earliest opportunity.

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Tax Times


Tax Times: Winter 2012