National Insurance and dividend tax increases on the way

The Prime Minister recently announced rises in National Insurance, in the form of a new Health and Social Care Levy, and dividend tax rates. The COVID pandemic has hit the economy hard and as we see the after-effects, these may be the first of many tax rises to come over the next few years.

What is the new Health and Social Care Levy?

The Health and Social Care Levy will come into effect from April 2022 and be an additional charge of National Insurance for employees and employers, paid directly to the National Health Service and social care. Once HM Revenue & Customs have their systems in place to manage this, this will change to a new and separate ‘levy’, with NI rates reverting to current levels.

What increase will arise with the Levy and who will pay it?

The increase is 1.25% and will apply to Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions.  However, it wasn’t originally made clear that the levy will also affect employers, meaning their contribution rate of 13.80% will increase to 15.05%.

This increase will only apply to earnings over the current NI thresholds, so for example anyone earning below £9,568 still won’t be paying any National Insurance contributions.

In addition to employees, the levy will apply to all workers whether self-employed or employed, and also anyone over state pension age who is still working.

What will be the effect on me?

This levy will affect everyone who works and earns over the threshold.

From April 2022 the 1.25% will be added to your National Insurance contributions. This will change, likely from April 2023, and be treated as a new levy and should show as a separate entry on your payslips or tax returns.

This news has worried a lot of employers of all sizes, but particularly small employers. I hasten to use the words ‘the good news is’, but a lot of ‘small’ employers don’t actually pay employers National Insurance because they claim the Employment Allowance. This is a £4,000 annual allowance that eligible employers can offset against their National Insurance contributions. Therefore, for the employers who claim this, and have some levy spare, they likely won’t physically pay the additional 1.25% levy.

And what about the dividend tax increase and what impact will this have?

There will be an increase in all dividend tax rates of, again, 1.25% from April 2022. All individuals currently have an entitlement to a £2,000 dividend allowance so the change will only impact those who have dividend income in excess of this during the tax year.

The impacts are more likely to be felt by those with high value investments or owners of small companies who draw regular dividends which make up a significant part of their income. Such business owners may consider the possibility of bringing forward dividend payments to the current tax year before the new rates kick in.

The rate will increase from 7.5% to 8.75% for a basic rate taxpayer. The higher and additional rates will rise to 33.75% and 39.35% respectively.

Questions and support

If you have any questions or concerns about how the new levy or increased dividend rates will impact you as an individual or business owner, please do not hesitate to get in touch to talk through some worked examples to ensure you are prepared for April 2022.

Home Working Expenses for the Self-Employed

Working for yourself can be a great option for the modern professional and comes with a variety of perks, such as a flexible approach to work and a sky’s the limit attitude to earning money however you see fit. But, despite the benefits, it’s not just positives when it comes to the elephant in the room. We are of course talking about tax.

Whilst there are some great tax incentives to make you consider striking out alone in the big wide world, some additional incentives are sometimes unclear or may seem confusing. That’s where we come in.

One such relief comes in the form of the “use of home”.

Self-employed individuals working from home can claim a deduction for “use of home”. The following two methods are used to calculate the level of relief available:

  • Flat Rate Deduction
  • Proportion of Actual Costs

We’re going to break these down for you so you can see whether you might be able to get a little something back, and how much you could be entitled to.

What is the flat rate deduction?

The flat rate deduction is based on the number of hours an individual spends ‘wholly and exclusively’ working on core business activities from home. The level of relief available is as follows:

  • 25 hours or more @ £10 per month
  • 51 hours or more @ £18 per month
  • 101 hours or more @ £26 per month

In addition to the flat rate deduction, it is also possible to claim a deduction for certain fixed and variable costs.

What proportion of actual costs can I claim?

Rather than claiming a flat rate deduction, self-employed individuals can claim a proportion of actual fixed and running costs of their home.

Fixed Costs:
Fixed costs include council tax, home insurance and mortgage interest. To calculate the amount allowable, it is necessary to calculate a reasonable adjustment to the costs based on the time spent working from home and the area in the house this relates to.

Variable Costs:
A proportion of telephone, broadband, heat and light costs are also an allowable deduction for tax purposes. An adjustment will need to be made to these costs for any private use.

Can I claim relief for anything else?

It is possible to claim relief in respect of the purchase of some furniture and equipment. The costs will need to be reviewed to determine whether capital allowances should be claimed. If any items are also used for non-business purposes, an adjustment will be required to account for any private use.

What other factors should I consider?

Capital Gains Tax Implications:

When an individual disposes of their main home Principal Private Residence (PPR) relief is available to claim against the gain. If their home is used exclusively for business purposes i.e. the office does not have any private use, PPR relief will be restricted and part of the gain will be chargeable to capital gains tax.

We understand that tax can be confusing, but whether you’re just starting out in your trade or a budding entrepreneur, it’s easy to recognise that every little helps when it comes to these incentives.

If you would like to discuss the relief options available to you, or need help with any aspect of self-employment tax implications, please don’t hesitate to talk to our team for advice, they can be contacted at mail@chiene.co.uk

HMRC’s Family Investment Company Unit Closed

It was announced last week that HMRC has closed down its dedicated Family Investment Company (‘FIC’) Unit after finding no evidence of any link between the use of FICs and non-compliant behaviour. The FIC Unit was established by HMRC in 2019 to explore the tax avoidance risks associated with FICs, which have become increasingly popular as a wealth and succession planning tool in the last decade. FICs can often be used to meet objectives which are more traditionally associated with trusts, however, they are not subject to the same tax regime as trusts.

HMRC has never specifically stated which taxes they considered were at risk of avoidance, and whilst it was always difficult to see any means by which HMRC could have targeted FICs on a universal scale under current rules, the closing of the dedicated unit will come as a relief to many. That being said, it is notable that HMRC would not be drawn on whether any changes to tax policy are being considered which might make FICs less attractive as a succession vehicle in the future. In the meantime, FICs will continue to be subject to existing tax rules including existing general and targeted anti-avoidance provisions. Anyone considering establishing a FIC should therefore seek specialist tax and legal advice to ensure such planning meets their desired objectives whilst avoiding any unpleasant surprises.

If you have any queries about a Family Investment Company please feel free to contact Lisa Travers or Michelle Fallon or call 0131 558 5800.

There’s Something Phishy Going on Here…

We’ve seen it before. The classic email with words so exciting they wrote them into Monopoly: ‘Tax Refund’. Everyone dreams of getting a little something back from the tax man. But not all of us are so lucky.

Many of these communications from Her Majesty’s Revenue and Customs (HMRC), will be genuine – for example, you may have received a letter with details of your latest tax code, or for some of you in the Self-Assessment regime, a letter which contains a statement and instructions on how to pay your latest tax liability.

However, you may also receive communication from HMRC in other formats – perhaps an email or text which promises large sums of money via a tax repayment. Or maybe even a threatening phone call in which the caller demands immediate payment of sums under the threat of legal action.

But please don’t be fooled.

Any form of communication that uses threatening or coercive language, or that asks for sensitive or personal information, is likely a baited attempt to ‘Phish’ these details from you.

What is Phishing?

Phishing is an attempt by cyber criminals to acquire sensitive information by pretending to be a genuine organisation, such as HMRC, through communications like emails and texts.

Mobile numbers and weblinks in these messages often lead victims to resources that mimic the organisation. These sites or ‘representatives’ then ask for personal details that are collected by the criminals, not the organisation.

What Does Phishing Have to do With Tax?

Cyber criminals posing as HMRC officers prey on people’s emotions – particularly the excitement over potential tax repayments (because let’s be honest – who wouldn’t want that?), and fear of prosecution if confronted with a fake tax liability. These emotions often make us jump without thinking, falling straight onto the hook of the scam.

For a lot of people, tax can be a complicated subject under normal circumstances, but pandemic vulnerabilities have also made scams in relation to SEISS grants and VAT deferral schemes common.

Since the first lockdown in March 2020, cyber criminals impersonating HMRC has increased considerably, according to HMRC’s own data (see chart).

HMRC Phishing Chart

It is important to note that whatever your situation, HMRC will never inform you of a tax repayment, penalty or liability via text or email, and will never use these forms of communication to ask for your private information or payment details.

What Does HMRC Say?

HMRC have useful information on their website that shows how to spot and report scams to their investigators.

To stay safe, HMRC suggest doing the following:

  • If you receive a text or email from HMRC and you are unsure whether it is genuine, you should never open any attachments or click on any links.  Instead, report the fraudulent email to HMRC and then delete the message.
  • If you receive a phone call, HMRC stresses that you should not provide the caller with any sensitive data if it is asked for. Instead, they request that you keep a note of the number and the time and date of the call and report to their investigators.
  • HMRC suggest that everyone remains alert for any indicators that would suggest the communication is fraudulent.  These may include:

 

  • Spelling errors and poor grammar.
  • The use of a generic address such as ‘Dear Customer’ or ‘Dear email address’.
  • The use of non-legitimate HMRC email addresses: such as an email being sent from a Hotmail or Gmail account.
  • Aggressive wording that pressures the receiver into believing urgent action is required.

Genuine communications from HMRC will always have the following information:

  • They will greet you using the name that you have already provided to HMRC e.g. the name you used when signing up for HMRC services.
  • Communications will include information and instructions on how to report phishing emails or texts.
  • They will never include a personal email address for you to reply to and the email will come from a genuine HMRC account (always double check the sender address in full rather than depend on the title name provided!).
  • The communications should never ask for specific figures or calculations or have any attachments unless you have agreed to this previously with HMRC and have formally accepted the risks.
  • HMRC will never provide you with a link to use to log onto your Government Gateway.  Instead, they will request that you log-in by using the normal processes.

It is important to take some time to read through any communications from HMRC and ensure that the email, text or phone call you have received is genuine before proceeding.

What Can Chiene + Tait Do?

If you have concerns regarding any communications that you have received from HMRC, please get in touch with us at mail@chiene.co.uk. We would be more than happy to review the communication to check if it’s genuine.

Remember: if in doubt, give us a shout!

Reform of tax ‘Basis Period’ announced by HMRC

The Government has this week announced a consultation concerning a potential reform of the basis on which trading profits arising to the self-employed (including members of partnerships) are subject to income tax. Should the proposed changes go ahead they will impact the self-employed who carry on a trade for UK tax purposes and do not draw up annual accounts to 31 March or 5 April.

In very broad terms, to align the taxation of trading profits with other types of income arising to individuals, the Government has proposed that existing ‘basis period’ rules, whereby income tax on trading profits for a tax year is determined based on profits arising in the accounting period ending in the tax year, will be replaced by a simplified system which would require the self-employed to apportion trading profits to tax years.

Whilst the proposals should certainly remove much of the complexities associated with the taxation of trading profits for many self-employed individuals (particularly in the early years of trade), to align with the introduction of Making Tax Digital (MTD) for income tax, the Government has proposed that these changes will take effect from 2023/24 with a one year transitional period in 2022/23. This leaves very little time for businesses to prepare for the practical implications of the changes which, due to the transitional provisions which will apply in 2022/23, could include cash flow challenges arising from the possibility that a higher income tax liability will arise for that tax year than might otherwise have been the case.

Notwithstanding that the objective of the proposals is the simplification and modernisation of a somewhat outdated set of rules, implementation of the changes over such a short period of time could represent an added burden for the self-employed post-Covid and arguably another unwelcome level of disruption as the whole country looks towards a future after the global pandemic. The consultation closes on 31 August; we will provide further information when available.

Lisa Travers appointed as new Personal Tax Partner

Accountancy firm Chiene + Tait (C+T) has appointed a new Partner within its expanding Personal Tax team. Lisa Travers joins from RSM’s Glasgow office where she worked within its private client practice.  Prior that that she spent the first nine years of her career at KPMG before moving to Deloitte, where she was an Associate Director.

Lisa brings a wealth of experience to her new role as an experienced adviser on income and capital tax planning for high net worth individuals, entrepreneurs and private equity fund executives. Working alongside Michelle Fallon, C+T’s Head of Private Client Tax, Lisa will focus on further growing the firm’s private client business throughout Scotland.

Commenting on her new role, Lisa said: “I’m really thrilled to join the highly regarded Personal Tax team at Chiene + Tait. The entire firm’s growth over the past decade is so impressive. It’s incredibly exciting for me to now be part of this success and help further develop its private client practice.

Michelle Fallon, C+T’s Head of Private Client Tax, said: “Lisa is an experienced and talented personal tax specialist who has built a formidable reputation in her successive roles with so much to offer as we continue to grow our practice. We are very pleased to welcome her to the firm and I look forward to working closely with her and leveraging her wealth of expertise to benefit our clients.”

Chiene + Tait announces private client team promotions

Accountancy firm Chiene + Tait (C+T) has announced promotions within its Edinburgh-based private client team. Partner Michelle Fallon has been named as the firm’s new Head of Private Client Tax, leading the 20-strong team, while her colleague Alan Dean has been promoted to the role of Director.

Michelle joined the firm in 2013 as Personal Tax Manager before being promoted to director level in 2017 and was then made a Partner in 2019.

Alan joined C+T in 2018 after working with accountants French Duncan and legal firm Turcan Connell.  He specialises in advising high-net worth individuals, trusts and businesses on a range of tax planning issues, including succession planning, business structure, residency and employer taxes.

C+T Managing Partner Carol Flockhart said: “Michelle’s move to become Head of Private Client Tax and Alan’s promotion to Director marks another important stride forward for our renowned private client team. They are both well-regarded and highly respected personal tax experts who have contributed towards the growth of the firm.”

Tax planning ahead of Spring 2021 Budget

As we approach the end of 2020 we can reflect on a tumultuous year as a result of the Covid-19 pandemic. As seen recently in the financial press, there are a number of speculative discussions about possible future tax increases. While tax increases are possible, it is also clear that the Government will need to take steps to encourage investment, to boost the economic recovery.

At this time, we can only speculate about possible tax changes in 2021 however, we do know that changes to taxation will be announced in the Spring Budget, which will take place on 3rd March 2021. Rather than leave the usual year-end tax planning until February next year, it would be prudent to bring forward this process. If you are anticipating a quieter than usual festive period, it could be the perfect time to turn your attention to financial matters.

The Chiene + Tait Tax Team has flagged some areas that may be of interest to you or your business including gifting of assets to members of your family, pension planning if the higher rate tax relief is removed from contributions or what to look out for if you are thinking of selling your business.

Our infographics below highlight further areas for consideration. If you would like to discuss selling your business, please contact Jonathan Griffiths, if you would like to discuss any tax aspects for your family, please contact Michelle Fallon or Moira McMillan. Alternatively, please email us at mail@chiene.co.uk, we would be delighted to discussion the options available to you, your family or your business.

Areas families to consider Spring 2021
Family areas to consider ahead of 2021 Budget
Business areas to consider 2021 Budget
Business areas to consider ahead of 2021 Budget

Self-Assessment Taxpayers get additional help through HMRC Time To Pay

UK taxpayers can now apply online for additional support from HMRC to help spread the cost of their self-assessment tax bill from an annual payment to smaller monthly payments.

In his Winter Economy Plan, Chancellor Rishi Sunak announced that taxpayers could pay amounts due on 31 January 2021 (including any deferred payment on account from July 2020, their balancing payment owed for 2019/20 and the first payment on account for the current tax year) in monthly instalments online through HMRC’s online Time To Pay system.

Interest will still be charged on the tax owed from 1 February 2021.

Taxpayers who wish to set up an arrangement must:

·         Have no outstanding tax returns, other tax debts or existing HMRC payment plans;

·         Have tax due of between £32 and £30,000;

·         Put the payment plan in place no later than 60 days after the due date of 31 January 2021.

Anyone who has larger amounts due or needs more than 12 months to settle their tax affairs will need to contact HMRC separately.

HMRC has also asked taxpayers to be aware of scammers claiming to be from HMRC who offer to help set up Time To Pay.

Tax relief on home working costs during COVID-19 lock down

Given the Coronavirus outbreak, many employers will be considering providing their employees with additional support for working from home. If so, they will need to consider the tax implications of the payments. HMRC guidelines permit employers to pay their workers who regularly work from home under an agreed arrangement, a tax-free payment of up to £312 per year to help cover costs associated with higher household bills such as gas or electricity.

HMRC have confirmed that employers who require their employees to work from home as a result of the temporary closure of their business premises due to the Coronavirus will be able to provide a tax-free payment to workers, in addition to their salary, as a means of offsetting reasonable additional household expenses. HMRC say payments of £6 per week or £26 per month (£4 per week before 6 April 2020) can be made by the employer without keeping any records. Paying a higher amount will need to be supported with evidence that the employee had actually incurred additional costs amounting to more than £6 per week. Only extra costs that relate to working from home can be claimed – those that would still have arisen regardless of the employee working at home, such as council tax, mortgage payments and existing broadband/telephone charges that do not depend on usage, cannot be claimed.

It is up to an employer to decide whether to make the payment. If they don’t, employees may be able to claim tax relief from HMRC on the additional household costs of their home office. Again, HMRC guidance is that amounts of £6 per week (£4 before 6 April 2020) can be claimed without supporting evidence. Larger amounts can be claimed, but will require the employee to keep records of these costs and prove to HMRC that they were incurred ‘wholly, exclusively and necessarily’ in the performance of their work.

The official guidance on claiming tax relief for job expenses associated with working from home can be found on the HMRC website ‘Claim tax relief for your job expenses’. HMRC’s Coronavirus specific guidance can be found at ‘Check which expenses are taxable if your employee works from home due to coronavirus (COVID-19)

Residential Property – 30 Day Capital Gains Tax Returns

New rules requiring taxpayers to submit Capital Gains Tax (CGT) returns to report the sale of residential properties came into force on 6 April 2020.  These rules require taxpayers selling such properties to file a CGT Tax Return with HMRC and pay the tax due within 30 days of completion.  This will particularly affect those selling buy-to-lets, other rental accommodation and second homes.

No CGT return is required where no CGT is payable on the sale – for example where the gain is covered by losses realised in the past or a relief applies in full (in particular main residence relief, which applies to exempt the gain that arises in periods that a property is your main home.)

It may also still be necessary to include the gain on any self-assessment tax return prepared for the year.  This will be essential where circumstances mean that that the 30 day CGT payment made was too high or too low, which can often be the case, not least as the rate of CGT may be uncertain at the time the CGT return is prepared  – this can be 18% or 28% depending on income levels for the tax year.

Please let us know if you have sold or are planning to sell any residential property – we will be happy to provide advice and deal with the relevant tax returns required.  HMRC are able to apply significant penalties for late or incorrect returns and so it is vital to ensure that this is dealt with correctly. Contact us today at mail@chiene.co.uk or call 0131 558 5800.

EIS: The Current Landscape and Future Trends

The Enterprise Investment Scheme (EIS) has seen a lot of changes in recent years with the main focus of concentrating the scheme on high-growth companies, thereby re-positioning the market towards greater risk. The move from capital preservation to more organic high-growth companies has been driven by the new risk to capital condition. This has seen investment lean heavily towards the technology sector, whereas previously more investments were made in the infrastructure sector, which is traditionally more asset-backed, and the media and entertainment industry, using special purpose vehicles.

Although these changes may be realigning EIS with that of its intended purpose (focused on high-growth companies), their overall impact and therefore the number of businesses supported may be difficult to realise with the ever-looming issue of Brexit. Furthermore, it is expected that the changes will result in a drop in the number EIS investments made, however, we will need to wait until Spring 2020 when HMRC publishes its annual statistics for these effects to be quantified.

In summary, the volume of EIS investments completed has been steadily increasing for several years, and the figures published for the 2017/18 tax year show no divergence from this trend. As mentioned previously, these results are expected to drop significantly in response to the introduction of the risk to capital condition introduced last year.

EIS Investments HMRC 2019
Source: Alternative Investment Report 19/20: Enterprise Investment Scheme – Industry Report (Intelligent Partnership)

 

Although EIS is a hugely lucrative and popular scheme, there still seems to be an abnormally low level of utilisation in Scotland. Of the 3,920 EIS investments made in 2017/18, only 185 (5%) of them were made in Scottish companies, and a large number of the investments were in London based companies (1,860).[1]

The knowledge-intensive companies rules have seen several changes since their introduction in the 2015 Finance Act, the most recent of which sees the annual investment limits doubled to £2m and

10m for individuals and companies, respectively. HMRC have also been granted powers to approve knowledge-intensive funds, which should increase their use in the industry.[1]

HMRC’s Advance Assurance application process has also seen significant changes recently with the rejection of speculative applications and the introduction of a compulsory checklist. The change in HMRC’s position towards speculative applications (i.e. now refusing to consider them) has seen a reduction in the number of applications submitted, this is thought to have been done to ease the load on HMRC. However, it has caused some frustration in the industry, as investment opportunities were previously assessed by investors after Advance Assurance had been acquired. The figures also show that the percentage of submitted applications being accepted has dropped significantly, this may be in response to the new risk to capital condition that gives HMRC inspectors added discretion when it comes to accepting or rejecting applications.

ASA requests
Source: Alternative Investment Report 19/20: Enterprise Investment Scheme – Industry Report (Intelligent Partnership)

It seems as though the Government is attempting to direct EIS investment back towards high-growth, entrepreneurial companies and that can only be good for the economy. Although the investors in the market may be frustrated by these changes, it is unlikely that the level of investment made using EIS will change substantially due to how rewarding the scheme is in terms of tax breaks. With Brexit looming on the horizon, EIS may be subject to further changes as the EU state aid rules will no longer be enforced.[1] This may free the UK Governments hand to determine how they wish the tax relief to be structured.

As the EIS legislation becomes increasingly complex, and HMRC flex their muscles regarding the risk to capital condition, the need for experienced EIS advisors continues to grow. If you have a query about EIS investment or generally investing in a company, please contact Ryan today at ryan.lewis@chiene.co.uk.

Money and death: the essentials of succession planning

Succession planning is crucial if a family’s business and personal wealth is to continue to grow from one generation to the next. Finding the right time to bring up the subject of money and death can be hard; there are often hurdles to be overcome and difficult decisions to be made. The main issues that arise are when to pass on assets, the structure to provide flexibility over who ultimately benefits and how to retain control over the gifted assets.

HM Revenue & Customs recently commissioned a research report to understand gifting behaviours. Individuals with wealth of more than £500,000 were more likely to make lifetime gifts than the less wealthy, and not surprisingly nearly a quarter of those aged over 70 had made gifts in the previous two years. Having considered a number of factors including marital status and children, the analysis found that only age and wealth were significantly associated with the making of lifetime gifts. Interestingly, the primary reason for gifting was a wish to help the next generation rather than to save Inheritance Tax (IHT).

Even if your motive is to minimise tax on death, no planning can be undertaken without considering financial independence and other taxes. Parents will not want to pass on their business or personal wealth if they cannot afford to. For many this means putting in place sound remuneration, pension and investment strategies long before gifting is contemplated.

Many business owners may not understand the tax implications of extracting profit from their business. Taking a relatively small salary could still provide a qualifying year for the state pension, but without the need to pay national insurance contributions, which can be over 20% of salary. Income can be topped up with dividends, which attract a lower tax rate for the owner / director, and the retirement fund can be boosted by contributions to a pension.

For those wishing to invest long-term, selecting a tax-efficient corporate structure may allow for income to be reinvested tax-free, and for investment income or capital gains to be used for pension contributions. Such structures can also provide a bespoke vehicle for passing wealth to the next generation and, if required, tax-free access to the capital contributed.

Recently, the Government asked the Office of Tax Simplification (OTS), an independent adviser to come up with a list of options for simplifying IHT. Suggestions included:

  • Replacing the gift exemptions and the relief for gifts out of income with a single lifetime and personal gift allowance;
  • Reducing the period after which gifts are exempt from IHT from 7 years to 5 years;
  • Abolishing the reduced rate of IHT where a person dies within 7 years of the gift but survives more than 3 years;
  • Removing the tax-free uplift for capital gains tax if there is an IHT relief on death. This would largely affect the transfer of businesses and agricultural property.
  • Bringing furnished holiday lets in line with income tax and capital gains tax so that they qualify for IHT exemption.

Currently there are no definite plans to implement any of the proposals.

If succession planning isn’t on your radar, I would encourage you to think about it as soon as possible. Setting clear objectives, holding discussions with your family and timely implementation are key. Feel free to contact me at hazel.gough@chiene.co.uk or call 0131 558 5800.

Non-Resident CGT regime continues to cause a headache for taxpayers (and HMRC!)

Stephen Baker in our Personal Tax team outlines that the lack of publicity for the Non-Resident Capital Gains Tax return has seen a huge rise in individuals falling foul of the filing requirement.

Since 6 April 2015, non-resident individuals are liable to UK Capital Gains Tax on the disposal of UK residential property. Such disposals must be reported to HM Revenue & Customs (HMRC) within 30 days by way of a Non-Resident Capital Gains Tax (NRCGT) return. Penalties arise if the return is submitted late.

Despite rules being in existence for over 3 years, there continues to be a large number of individuals falling foul of this filing requirement. Recent published tribunal cases on the issue suggest that the reason for late filing is largely due to the short 30-day timescale for reporting and a general lack of awareness of this deadline.

In most cases where penalties have been levied, by the time the taxpayer realises that a return is required, it is likely that multiple late filing penalties are already accrued (even in cases where the CGT due is zero). For example, if a return is filed 12 months late on a disposal on which no tax is due, a total potential penalty of £700 may arise, comprising of a £100 late filing penalty and two £300 tax geared penalties.

A number of taxpayers have appealed against these penalties by bringing a case to the tax tribunal. From these appeals, a number of interesting outcomes have emerged. As would be expected, ignorance of the rules is not a reasonable excuse and the tribunal has stated this in several cases, although initial tribunal rulings were somewhat critical of HMRC’s lack of sufficient promotion of the new regime and found in favour of taxpayers in a couple of appeals on this basis. More recent tribunal decisions however, have found in favour of HMRC and concluded that lack of awareness of the change in law was not a reasonable excuse.

Despite the trend of cases in favour of HMRC, there were several smaller wins for taxpayers:

  • In cases where there were multiple disposals and subsequent multiple penalties, the tribunal has reduced or eliminated some of these penalties. It was found that there had been no chance for the taxpayer to learn from their first mistake (i.e. filing the return for the first disposal late) and therefore charging penalties for additional disposals would be unfair.
  • The tribunal analysed the penalty legislation in great detail and held that any tax-geared penalties should not exceed 100% of the actual tax due. Therefore, if no NRCGT is actually payable, penalties should be restricted to the initial £100 late filing penalty. It will be interesting to see how this point develops as the legislation applies to other taxes also.

Going forward it appears that there will need to be an increased awareness of the requirement to file a NRCGT return within 30 days. Although this is a requirement that tax advisers should be aware of, clients tend to notify advisers of transactions after the tax yearend (when a NRCGT return is likely to be already long overdue). This problem has the potential to become more prominent; currently there is a proposal to extend the 30-day reporting limit to both Non-resident commercial property disposals and to residential property disposals by UK residents.

It will be interesting to see how HMRC deal with any further appeals on this matter, but in the meantime, if you have any queries regarding NRCGT, please do not hesitate to contact me or one of the Personal Tax Team at Chiene + Tait on 0131 558 5800 or email mail@chiene.co.uk.

Do drivers dream of electric cars?

(This article on electric cars first appeared in the Winter 2017/18 edition of our Connect newsletter.)

It will now cost you £21.50 to drive into central London if your car is more than 10 years old. If it’s a diesel, by next April it could cost you £24. Edinburgh and Glasgow councils are considering their own congestion charges with additional charges for diesels – £20 a day is proposed in Edinburgh – which could be in effect by 2020. And certain councils have already introduced additional parking charges for cars with diesel engines.

The UK Budget also sought to discourage diesels: new diesel cars face being put in a higher VED band, and drivers of diesel company cars will face a 1% increase in company car tax.

Benefits for company electric cars

Meanwhile, electric vehicles are being encouraged through benefits in kind taxation on company cars. A taxable benefit in kind is due for employees who are provided with a company car, with a corresponding National Insurance charge for the employer. The taxable benefit is the list price of the vehicle multiplied by a percentage tax rate HMRC created based on the car’s carbon dioxide (CO2) emissions.

This means that electric cars and Ultra Low Emission Vehicles (ULEVs) incur reduced benefit in kind percentages, with vehicles omitting 0-50 CO2 g/km benefitting from rates as low as 9% (13% from 6 April 2018). Typical petrol vehicles will be subject to rates of 17% – 37% this tax year, with the lower rate increasing to 19% from 6 April 2018. Diesels incur an extra 3% surcharge.

A subtle but advantageous provision from this Autumn’s budget is that no benefit in kind will arise where an employer allows an employee to charge a company car at work. For petrol vehicles, the provision of company fuel can often lead to increased income tax and National Insurance charges which can, at times, be higher than the actual cost of the fuel provided due to a fixed rate fuel amount being multiplied by the car tax percentage. Electric cars and ULEVs can also benefit from salary sacrifice, following changes in April 2017 that restrict new schemes to cars with emissions of 75 CO2 g/km or less.

The head-to-head: electric vs petrol

The i3, BMW’s flagship electric vehicle, retails at around £30,000. The i3 would give rise to a taxable benefit in kind of £2,700 for this tax year, while a corresponding petrol 3 Series saloon, with the same list price and CO2 emissions of 102 g/km, would incur £5,700. Choosing the i3 would save the employee £3,000 per year at their marginal rate of income tax and mean a reduced National Insurance charge to the employer.

The future

This year, Volvo announced that it will make no new cars with petrol or diesel engines from 2019: everything it manufactures from then will have a hybrid or solely electric engine. The UK Government said that all new petrol and diesel engines will be banned from 2040, mirroring France (but 10 years later than Paris, which will ban these engines by 2030). Tesla announced an electric lorry that, they say, will be 20% cheaper to run than a diesel equivalent. Elon Musk predicted that running a diesel truck would soon be “economic suicide”.

There remain issues with widespread electric car take-up – not least the need to charge millions of cars in millions of locations – but problems with the technology and infrastructure are being solved at a rapid pace. The current direction of travel seems to be firmly set: it may be wise to consider an electric future.

HMRC’s behind you (if you are planning to claim inheritance tax reliefs)!

Paul Houston in our Personal and Business Tax Department reviews the long-awaited HMRC commissioned research into whether Inheritance Tax is being abused.

Inheritance tax (IHT) is an important source of revenue for the Treasury, with total income for the 2016/2017 tax year reaching close to £5bn*. Faced with the prospect of this golden goose laying more jewelled eggs, HMRC commissioned research earlier this year into the current use of inheritance tax reliefs, primarily Business Property Relief (BPR) and Agricultural Property Relief (APR). Both of these are meant to help individuals pass on their businesses to the next generation without requiring a sale of assets to meet the associated inheritance tax liability.

Although the catchily-titled ‘The influence of Inheritance Tax reliefs and exemptions on estate planning and inheritances’ report was completed in May 2017, it wasn’t publicly released until the Autumn Budget on 22nd November. Originally commissioning the research led to speculation that HMRC suspected that the reliefs were potentially being abused, with the delay in publication perhaps signalling that HMRC had identified instances of misuse, and would announce them with a dramatic Christmas pantomime-style pulling back of the curtain on budget day.

However, in a true theatrical moment, HMRC (our Dame of this piece), after a number of dramatic scenes in the build up to the finale, found…. nothing. APR and BPR are generally being used for the purposes for which they are intended** and are not being misused. This means that the Treasury (the Sheriff in our panto) has not recommended to restrict the future use of the reliefs to generate more golden eggs. However, Buttons in our panto (played by the Office of Tax Simplification) recently announced that it intends to commence work on a review of inheritance tax in general, so this issue is still front and centre stage.

So, what does this mean? Anyone who plans to use BPR or APR should ‘look behind you’? In reality, individuals and family businesses will face increasing resistance when making claims for IHT relief and it’s more important than ever to seek professional advice at the earliest opportunity. HMRC’s findings provide reassurance that there is unlikely to be any immediate, radical changes to how IHT works but there are more reviews and consultations planned for the future and the conclusion to this fairy-tale may not have a happy ever after ending.

* An increase of around £3bn in five years largely due to the increase in property prices and the freezing of the IHT nil-rate band (currently £325,000)

**HMRC conducted 80 interviews with individuals, most of whom did not hold assets in excess of £325,000.

 

If you have a question about Inheritance Tax, please contact Paul Houston on 0131 558 5800 or email paul.houston@chiene.co.uk.

How to plan for the future in turbulent times

Moira McMillan, Chiene + Tait Tax Director, writes about how to plan for the future in turbulent times.

When the news is dominated by turbulent events, it becomes harder to plan for the future.

I remember writing an article for Connect newsletter just before the Scottish independence referendum in September 2014 which mentioned the famous Donald Rumsfeld quote about the known knowns, the known unknowns and the unknown unknowns. With the ongoing political uncertainties, I could have called on this again but I have turned instead to a quote that is said to be an ancient Chinese curse. ‘May you live in interesting times’ somehow seems appropriate.

Brexit remains the key issue tripping off many a tongue. The snap General Election has failed to provide clarity on anything much, so we know that it will be some time before the Brexit process is complete – and, indeed, whether the UK will remain in the single market, the Customs Union, the European Court of Justice or myriad other Europe-wide institutions. This provides uncertainty for many: for businesses, which will find themselves in a different situation once the UK has left the Single Market, and for individuals, who may find themselves affected by new, harder borders.

Meanwhile, the possibility of another independence referendum seems to have diminished for now but it remains the policy of Scotland’s largest political party and we cannot rule anything out in these days of interest: who would have thought a year ago that Donald Trump would be President of the USA?

There are interesting times ahead too for the accountancy profession with the Government’s ‘Making Tax Digital’ (MTD) programme looming on the horizon (see pg 10 of our Summer 2017 Connect newsletter). This will radically and permanently change the way tax submissions are made to HMRC and will be the biggest change to the tax system since the introduction of Self-Assessment. Certain elements of MTD have been delayed but VAT compliance in 2018 is still necessary, and HMRC is pressing ahead with a bigger roll-out in subsequent years. This is despite ‘glitches’ in the HMRC software for the 2016/17 tax returns which will mean that some individuals will be forced to file paper returns this year. A cynic might wonder if the HMRC systems will be robust enough to cope with MTD.

Technological developments are an unavoidable feature of this interesting age. New systems and processes bring amazing benefits but also new challenges. The NHS, in common with many other organisations worldwide, recently suffered a phishing attack – basically, a criminal implanting a virus on their computers in an attempt to extort money or gather sellable data (see pg 5 of our Summer 2017 Connect newsletter). This sort of attack is ever more common, and will become increasingly difficult for organisations to prevent. Meanwhile, British Airways had a catastrophic collapse of its IT systems over one weekend that cost the company tens of millions of pounds. The new EU data protection legislation, the General Data Protection Regulations, or GDPR – to which the UK will still be subject when it is launched in May 2018 (see pg 8 of our Summer 2017 Connect newsletter) – is doubtless intended to add a layer of protection but it also adds a burden to businesses to ensure that they comply.

The way we shop and the way we travel has already been changed thanks to technology. What will be next? Driverless cars could threaten professional drivers – of taxis, lorries, delivery vans, buses – within 10 years. Even human interaction can be replaced by technology, so we can’t rely on the common fall-back defence that customers prefer face-to face service: Amazon’s size and growth shows that this isn’t always the case. It’s a big question: in 10, 20, 30 years, what jobs will have been automated?

 

What can you do?

The framework of the world will continue to be shaped by politicians and tech entrepreneurs. There will continue to be unpredictable events, uncertainties, debates, annoyances and hold-ups. The world will also continue to turn. The only battle you can’t win is the one against change. Fighting against change is a waste of energy: the best you can do is to understand change, help make it better, and have a plan.

The sensible course of action is to take control of your own destiny, as far as possible. It’s impossible to mitigate every risk but it’s sensible to take care. Making sure you have IT protection to ward off fraudsters is a good practical example; other problems might require more careful, thoughtful and tailored planning to address – ensuring flexibility in your skills as job roles are re-defined, for instance, is a longer and trickier project.

At Chiene + Tait we believe that our clients see us as their trusted advisers who can be relied upon to provide the right advice in turbulent times. We believe that we have the expertise across our various sectors to ensure that we can continue in this role during the interesting times ahead.

The Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is a new initiative designed to increase tax transparency. Though primarily aimed at financial institutions such as banks, it has ramifications for many types of organisations.

The regulations imposed by CRS are onerous and complex. We have produced Comment On factsheets showing the impact CRS will have on:

Additional Common Reporting Standard resources

You can also see Euan Morrison, our Head of Charities, present a webinar about the implications for Charities from CRS. Euan has also published a piece on why charities need to think about CRS in Third Force News.

Non-Resident Capital Gains Tax Returns

With effect from 6 April 2015, the UK capital gains tax (CGT) regime was extended to bring into charge non-residents disposing of UK residential property. Before this date, CGT did not apply to non-residents, other than those carrying on a trade in the UK, and since 6 April 2013, companies subject to the annual tax on enveloped dwellings (ATED) charge.

The charge applies to non-resident individuals who hold property directly or through a partnership, non-UK resident trusts and certain companies.

Where a property was acquired before 6 April 2015, it is only the gain accruing from that date which is charged to tax. The charge is normally the excess over market value at 5 April 2015 although it is possible to elect for an alternative method.

HMRC must be notified of any chargeable disposal within 30 days of the conveyance of the property (not the date of the exchange). The disposal is notified by means of an online form, found on HMRC’s website, and failure to notify HMRC within the required timeframe will attract a fixed penalty of £100 and the potential for further penalties, including daily penalties and tax geared penalties.

Payment of any CGT calculated is due at the same time as filing the CGT return unless the individual is already in the self-assessment regime, in which case CGT is payable by 31 January following the tax year in which the disposal is made (although note that a CGT return is still required within 30 days of completion).

Certain high-value residential properties owned by companies may already be subject to UK tax under the ATED regime. The threshold property value for ATED purposes is currently £500,000. Should a disposal fall within both the ATED and non-resident CGT regimes, the former takes precedence (although a non-resident CGT return will still be required).

It is important that non-residents are aware of their UK tax filing requirements when disposing of UK residential property. Differences of opinion have arisen between the accounting and legal professions as to who should be notifying an individual of their responsibility to notify HMRC within 30 days of completion. Ultimately, however, the responsibility rests with the individual to ensure that returns are submitted, and associated tax paid, on time.

If you have a query about non-resident CGT, contact our specialist Property Group today at property@chiene.co.uk.

Tax Changes to Buy To Let Property Rules for Landlords

Recent changes to the taxation of buy to let properties will have a substantial impact on landlords.

Land and Buildings Transaction Tax (LBTT)

From 1 April 2016, the Additional Dwelling Supplement imposes an additional 3% ‘slab tax’ on the acquisition of residential property which is not the purchaser’s main residence.

Restriction to Income Tax Relief for Interest Paid

Restrictions to income tax relief for financing costs for residential property apply from 6 April 2017. Under the new rules, rental profits and taxable income will be determined without taking account of interest payments.

The new rules are to be phased in and will apply to 25% of the interest in 2017/18, 50% in 2018/19 and 75% in 2019/20 with 100% of the interest being subject to the new rules from 6 April 2020.

The changes to the tax relief will not just result in a higher rate taxpayer paying additional tax equal to 20% of the interest paid (or 25% if an additional rate taxpayer). The changes may also lead to:

  • Tax being paid on rental income when there is a loss, after deducting interest.
  • The landlord moving from the basic rate to the higher rate of tax.
  • Tax on child benefit if taxable income exceeds £50,000.
  • Loss of personal allowance where taxable income exceeds £100,000.

Incorporation

The restriction to tax relief does not apply to companies. For some landlords moving the properties to a company of which the landlord is a director and shareholder may result in substantial tax savings. The transfer may be done legitimately without a charge to capital gains tax or LBTT but only if certain conditions are met. There is a need to act quickly and take advice early to check that incorporation may be achieved without a tax charge, and if, depending on the circumstances of the individual, incorporation is beneficial.

If you have a question about property tax changes, please email our specialist Property Group at property@chiene.co.uk.

Mortgage Interest Relief for Residential Landlords

Measures announced in the April 2015 Budget which impact on residential landlords took effect from 6 April 2017.  Previously, relief for finance costs, primarily mortgage interest, was deducted in full from property income to arrive at the level of taxable rental profit. Under the new rules, a basic rate reduction, equal to 20% of the interest paid, will be applied to an individual’s tax liability for any finance costs incurred.

This change is being phased in over four years, commencing 2017/18, with the amount of deductible finance costs reducing by 25% each year, and the amount that may be claimed as a reduction to tax increasing by 25% each year as follows:

Year % of Interest Deducted from Rent % of Interest with Relief at 20%
2016/ 17 100% Nil
2017/ 18 75% 25%
2018/ 19 50% 50%
2019/ 20 25% 75%
2020/ 21 Nil 100%

For Example

The landlord in this example has a portfolio of residential properties which is his only source of income.  His net rental income after deducting expenses such as repairs is £110,000 and from this he pays loan interest of £70,000.

2016/ 17 2017/ 18 2018/ 19 2019/ 20 2020/ 21
Net rental income 110,000 110,000 110,000 110,000 110,000
Less: interest (70,000) (52,500) (35,000) (17,500)             
40,000 57,500 75,000 92,500 110,000
Less: personal allowance (11,000) (11,500) (11,500) (11,500) (6,500)
29,000 46,000 63,500 81,000 103,500
Tax @ 20% 5,800 6,300 6,300 6,300 6,300
Tax @ 40% 5,800 12,800 19,800 28,800
Less: basic rate reduction              (3,500) (7,000) (10,500) (14,000)
Tax payable 5,800 8,600 12,100 15,600 21,100

 

This landlord was a basic rate taxpayer in 2016/17. The restriction to the relief for loan interest, results in him paying tax at the higher rate from 2017/18. By 2020/21, the landlord’s tax liability has increased by more than £15,000. In 2020/21, when no deduction can be taken for the loan interest, the landlord’s income is £110,000. The personal allowance is reduced by £1 for every £2 over £100,000, meaning that with an income of £110,000, the landlord’s personal allowance is reduced by £5,000 to £6,500.

Note: for the purpose of the above example, the personal allowance for later years is assumed to be the same as for 2017/18 and the basic rate band of 20% is assumed to be £31,500 for 2017/18 onwards. The landlord is assumed to be a Scottish taxpayer.

C+T Partnership aims to boost business angel investment

Accountancy firm Chiene + Tait has announced a partnership with Scotland’s business angel association, LINC Scotland, aimed at supporting its members and enhancing the level of investment into Scottish SMEs with strong growth potential.

Chiene + Tait will service a dedicated Business Angel Helpline, providing advice to Scottish angel syndicates on how they can best structure any potential investments and maximise available tax reliefs. For the last year, the accountancy firm ran an initial helpline trial where they assisted LINC’s members on a range of matters including pre-deal structuring questions, advice on EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) and assistance on other HMRC matters relating to potential angel investments.

Going forward the Helpline will remain focused on ‘de-mystifying’ the whole process of becoming a business angel by promoting the tax advantages that come through this form of investment. Angel investment syndicates will be able to contact the service where they will get direct advice from Chiene + Tait tax experts.

The aim of this approach is to promote wider economic growth in Scotland by supporting and encouraging more high net worth individuals to invest in SMEs with strong growth potential.

Chiene + Tait Entrepreneurial Partner Neil Norman said: “We are delighted to formally launch the Business Angel Helpline to support LINC’s members and help demystify the process of maximising tax efficiency around business angel investing. In the initial trial of the Helpline, we were contacted by over 50 per cent of Scottish-based angel syndicates who successfully accessed valuable tax advice and other important information to enable them to maximise their investment.

“This support vehicle is helpful to business angels and is also beneficial in encouraging more investment into Scotland’s SMEs.  A UK Business Angels Association highlighted that 90 per cent of angel investors utilise EIS or SEIS tax relief schemes. By offering a service which draws on our experience to help investment deals complete smoothly with maximum tax reliefs, we can support the existing business angel community in Scotland and also promote this form of investment to other high net worth individuals.

“This is a positive development which has real scope to benefit the growth of Scottish SMEs and help entrepreneurs punch above their weight by encouraging more activity within the business angel investment community.”

David Grahame, Executive Director of LINC Scotland said: “The Business Angel Helpline has provided a valuable resource for our membership. We are therefore delighted to have Chiene + Tait’s support in extending the service in the longer term where members will continue to have access to their tax expertise when considering investments into Scottish SMEs. The firm has been extremely supportive towards our members over last year’s helpline trial and their on-going involvement will help enhance the work of our current members and help promote both the financial and economic benefits of angel investing.”

Child Benefit: Is Yours Safe?

I have to admit that my heart sinks every time I have to look at the rules for entitlement to tax credits such as child tax credit or working tax credit. Why? The answer is that these are really social security benefits and having “tax” in the title is a bit of a red herring. The UK social security system is notoriously complicated and there can be nothing worse for a family on a tight budget than to receive regular money only to be told at a later date that they are not, in fact, entitled to it and must pay it back. Many tax credits debacles have been reported over the years and the problem is that claims have to be made in advance when actual income figures are unknown. This will not cause difficulties for people with income levels that do not fluctuate from year to year, but what about the self-employed or those with their own companies who want to see how well the business does before setting salary/dividend levels?

The tax credit system is old news now and despite its complications and uncertainties, it seems to be here to stay. Now, however, I cannot help but think “here we go again” with the introduction of a new tax charge to withdraw child benefit (worth £20.30 a week for the first child and £13.40 a week for every sibling – all tax-free) from families where one member of the household has adjusted net income of more than £50,000. Each of these terms warrants further explanation. First of all, child benefit will not actually be withdrawn. It will continue to be paid, usually to the mother, unless the claimant opts out. Opting out could, however, have an impact on future state pension entitlement as Home Responsibilities Protection is currently available to claimants of child benefit while the child is under 12 years old.

Household is defined as married couples, civil partners or couples living together as if they were married or civil partners. If a member of the household breaches the £50,000 income threshold, the tax system will be used to claw-back the benefit with a new tax charge. This will be collected initially through PAYE (another complication to the already complicated PAYE coding system) but with final adjustments through the annual self assessment tax return. It is estimated that this will mean that around 500,000 tax-payers who are not currently within the self assessment system will now be required to file returns.

The tax charge will be 1% of the child benefit received for every £100 of income in excess of the £50,000 threshold. Once income reaches £60,000, therefore, the tax charge will be 100% and the full child benefit received will be clawed-back. The new charge will take effect from 7 January 2013 i.e. during the current tax year. There will be planning points to consider as adjusted net income will take account of pension contributions and Gift Aid donations, making the tax relief on these even more attractive. It will pay to do the sums when income is around the claw-back threshold.

As far as practicalities are concerned, aside from the obvious unfairness (a couple each earning £49,000 will suffer no claw-back whereas a couple with only one earning £51,000 will be affected), there is the mismatch that the tax system has, for many years now, been based on the fundamental principle of Independent Taxation for spouses. This new tax charge can result in a claw-back from one individual in respect of a benefit paid to another. It is not unusual for couples to want to keep their finances separate and accountants will now have to ask for personal and financial details that have not in the past been relevant to the tax return completion process.

If you have a query about any tax matter, please contact Moira McMillan on 0131 558 5800 or email moira.mcmillan@chiene.co.uk