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61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
Phone

01332 202660

Blog

CGT gift relief

Adrian Mooy - Friday, February 28, 2020
 
Gift relief (referred to as ‘holdover relief’) is available when a taxpayer has either gifted a business asset (or sells it ‘other than at arm’s length’), or disposes of an asset to a trust where the transfer is immediately chargeable to IHT. The relief does not exempt the gain completely; HMRC will still eventually receive the tax due on the gain on the disposal of the asset. It does, however, change who pays the capital gains tax (CGT) and the timing of the payment.

 

The identity of the ultimate payee changes from the donor of the asset to the donee. The timing changes from the date of the gift to the date the asset is subsequently disposed of by the donee.

 

Gift relief is extremely useful, as irrespective of Whether the gift is made to a connected party or to a non-connected party in a ‘not at arm’s length’ transaction, the legislation dictates market value to be used (instead of the actual consideration (if any)) in the CGT computation. If this leads to a gain, the gain is taxable and any CGT will be due to be paid by 31 January in the year following the tax year of the disposal.

 

The issue is, in the case of a gift, no proceeds have been received, and in the case of a ‘not at arm’s length’ transaction, full market value has not been received; so there may be a cashflow issue associated with the payment of the tax.

 

Gift relief, in allowing the gain to be passed over to the recipient of the asset and not chargeable until they dispose of the asset, prevents this cashflow issue.
 
Two sections of the CGT legislation provide for gift relief. The first (TCGA 1992, s 165) allows gift relief for certain specific business assets. This is desirable for the economy as it is not in the government’s interest for CGT burdens to prevent the transfer of business assets, for instance, to the next generation. Gift relief must be claimed and the claim must be agreed and signed by both the donor and the donee.

 

The second form of gift relief is linked to inheritance tax (IHT) (TCGA 1992, s 260). This section allows gift relief for any asset, not just business assets. The conditions are that there must be both a charge to IHT and CGT on the gift/transfer. An example of this may be placing an asset into a discretionary trust. If the gift was made in the donor’s lifetime, this would normally be an immediately chargeable transfer for IHT purposes, and if a capital gain arises at the same time, the gain can be passed to the trustees and deferred for them to pay once they dispose of the asset in the future.

 

Gift relief under this section too must be claimed; but approval is required only from the settlor of the trust.
 
Gifting business assets is a crucial part of the succession of a family business. Gifting into a trust could incur IHT as well as CGT. Ensuring you are aware of the possibility to defer the gains in these situations may help enormously with the cashflow burden of a gain where no proceeds are received.

 

Claim R&D tax credits

Adrian Mooy - Wednesday, February 26, 2020
 
The UK government offers tax relief on research and development (R&D) projects to reward innovation by UK businesses. While data shows an accelerating upward trend in the number of claims, many potentially eligible firms fail to claim the tax credits they are entitled to.

 

Despite the potentially transformative nature of the relief to small and medium-sized enterprises (SMEs), there is a widespread concern by business owners about the applicability of claiming R&D tax relief. The three main assumptions that stop companies from claiming R&D tax credits are outlined below:

 

1. R&D only applies to large companies: In fact, the R&D tax credit scheme for SMEs - defined as companies with fewer than 500 staff and either not more than €1O0 million turnover or €86 million gross assets - is considerably more generous than the research and development expenditure credit (RDEC) available to large businesses.

 

2. R&D applies only to science and technology: The R&D criteria have been kept wide on purpose so that companies taking a risk by trying to resolve scientific or technological uncertainties qualify for the tax credit claim.

 

3. R&D relief only applies to profitable (tax paying) companies: On the contrary, companies of all sizes can benefit from R&D relief as a cash credit where they are loss making. R&D tax credits can either help to reduce a limited company’s corporation tax bill or be claimed as a cash sum reimbursement from HMRC if the company is loss making.

 

HMRC has cleared its recent backlog of R&D claims, reducing average processing time from an R&D claim being submitted to the tax credit from HMRC being received, from four to five months to four to five weeks. Any business needing a quick funding injection can now view an R&D tax relief claim as a potential cashflow boost.

 

At the time of writing, there is an impending Budget in February 2020, which may herald new changes to business tax. Whilst there is no way of knowing if the overall Budget outcome will make R&D tax credits more or less attractive, the new anti-abuse measures announced in last year’s Budget and consulted on in the spring will be revealed. These changes are set to reintroduce the PAYE cap on SME tax credits. The proposals would mean the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This will have a disproportionate effect on R&D claims from small and start-up companies with few employees.

 

Finally, Brexit is likely to have a significant impact on UK businesses. If forecasts are to be believed, foreign investment in the UK will fall. Uncertainty is likely to prevail for some time after an initial Brexit deal while the UK negotiates new relationships and trade deals with the rest of the world. Against a backdrop of a global economic slowdown, tax relief is more crucial than ever to boost profits, improve cashflow, and fuel further innovation and investment.

 

The above considerations should add an element of urgency for any company with a potential claim for R&D tax credits. The reality is that this relief is far more widely applicable than many believe, can be secured in a relatively timely manner, and continues to be hugely valuable to UK businesses who invest in innovation.

 

What will the VAT cost of Brexit be?

Adrian Mooy - Tuesday, February 25, 2020
 
Brexit will impact on VAT more than any other UK tax. However, for now until 31 December 2020 or possibly later, the VAT rules remain unaffected. Nonetheless, while your rights to reclaim VAT and obligations to charge it stay the same, there might be changes in procedure. For example, a change in the method for reclaiming VAT incurred personally on business expenses while travelling in the EU.

 

EU drift

 

Despite no sea change in VAT rules until the end of 2020, the EU may, and probably will, make changes to its VAT rules before then. Theoretically, the UK should follow suit and reflect the changes in UK VAT regulation or practice, e.g. the zero-rating of e-books etc. to align the VAT rate with that for printed books. However, the UK government might not follow suit and it’s extremely unlikely the EU will bother arguing the point. In any event, such changes won’t affect the VAT rules for transactions between UK and EU businesses.

 

EU trade costs

 

The extent of the cost of Brexit for businesses where trade with the EU is involved will depend on how closely aligned the UK and EU rules are after the transition period ends. Unless we continue to follow the EU’s rules there’s bound to be extra admin and probably duties involved in importing and exporting goods.
 
Any extra costs will need to be factored in when pricing goods or services sold to the EU if and when the exit deal is done. GOV.UK has a microsite dedicated to the Brexit developments that will help you keep track of developments.

 

What about extra VAT costs

 

There will be little or no change to the VAT consequences when acquiring goods or services from businesses after we’ve left the EU. To understand this you simply need to consider the current VAT position of customers in countries outside the EU, known as “third countries”. After the transition period, unless we stick completely with EU VAT rules we will become a third country.

 

Currently, if you sell goods to a customer in a third country, you don’t charge VAT because it’s an export outside the EU. When the goods arrive at the other country the tax authorities there assess and charge duties and their equivalent to VAT. Your customer, subject to the rules in their country, reclaims the VAT (or equivalent). Unless there’s a special arrangement where we keep the no-VAT treatment on imports from the EU, you’ll be in a similar position as your customer outside the EU, i.e. you’ll pay VAT on goods entering the country which you’ll be able to reclaim.

 

Paying and reclaiming VAT.

 

Rather than having to pay VAT on goods you import at the time they enter the UK, the government will probably allow you to account for the VAT on your next VAT return. At that point, subject to the usual rules, you’ll be entitled to reclaim the VAT thus resulting in a cost-neutral position without any loss of cash flow.
 
Unless there’s a deal which retains the existing rules, VAT will be payable on imports of goods from the EU. However, you will be entitled to reclaim any VAT paid as you currently are for other purchases. The direct effect of Brexit will therefore be VAT neutral.

 

 

Businesses distracted by April 2020 IR35 changes

Adrian Mooy - Monday, February 24, 2020
 
Changes to off-payroll working scheduled for April 2020 are causing businesses to overlook their normal obligations to check employment status.
 
Off-payroll working

 

Before IR35 existed HMRC frequently challenged the employment status of individuals who provided their services on a self-employed basis to businesses. Eventually, HMRC asked the government for a solution. IR35 gave it the power to extend its employment-status enquiries to individuals who worked for their customers indirectly, i.e. through an intermediary. The ongoing concerns regarding IR35, especially the April 2020 changes, is confusing businesses about their other employment status obligations.

 

New rules aren’t relevant

 

From 6 April 2020 businesses that aren’t small are responsible for checking the employment status of individuals who work for them through an intermediary. Until then it’s up to the worker to do it. All businesses, including those categorised as small, remain responsible for checking the employment status of individuals who work directly for them and are liable for any PAYE tax and NI lost if they get it wrong.

 

Which workers do you need to check?

 

You need to look at the overall picture of your firm’s relationship with the individual doing the work.
HMRC inspectors primarily look for whether you, the customer, control when and how the work is done and by whom.
It might be clear to you that a worker is freelance, but look at the position as an outsider might - is there the appearance of control over the work and the worker? If so, prove the self-employed status by entering all the facts into HMRC’s check employment status for tax (CEST)tool and keep a record of the result so you can deflect any HMRC enquiry before a tax inspector becomes entrenched in their view.

 

If you use the services of an individual working freelance, say a bookkeeper, you’re responsible for checking their employment status even if yours is a small business. Consider if someone outside your business could at first sight view the working arrangement as an employment. If so, use HMRC’s online status tool.

 

HMRC's VAT fixes

Adrian Mooy - Monday, February 24, 2020
 
One of the last acts of the EU before Brexit was to make quick fixes to the VAT rules for intra-EU trade. These must be followed by UK businesses.
 
Simplification - The VAT quick fixes simplify the VAT rules for business-to-business transactions for EU cross-border supplies. For some years businesses importing or exporting between EU countries have sometimes been caught by conflicting VAT rules imposed by their respective tax authorities. The four quick fixes are to prevent such conflicts and became effective from January 2020.
 
Mandatory VAT number check for zero-rating - When you sell goods to a business in another EU country you must only apply zero-rate VAT if your customer provides you with their EU VAT number. While this has always been recommended practice, until the fix you were only required to have evidence that the customer was in business.
 
Proof of intra-EU supplies - When you make a supply to a business elsewhere in the EU you must now have at least two documents from sources independent from of customer which show that the goods you’ve sold have been delivered to a place within the EU.
 
Call off stock - Until now if your business transfers stock from the UK to a location in another EU country before supplying the goods to a customer there have been varying procedures in the different countries to ensure that VAT is accounted for correctly. The quick fix creates a uniform procedure.
 
Chain transactions - A new rule applies if goods pass through another business before they reach your customer in another EU country, e.g. a UK head office sells to one of its subsidiaries which in turn supplies the customer, but the goods are shipped directly to the customer. Previously there’s been doubt over which business, head office or the subsidiary, is making the supply. The fix requires that one business is identified as the supplier who is responsible for the VAT export procedures rather than them applying at each stage of the chain.
 
All EU countries must now follow uniform rules when exporting, including obtaining independent evidence that goods have been shipped and an obligation to check that your customer is EU VAT registered.

 

SDLT and first-time buyers

Adrian Mooy - Friday, February 21, 2020
 
Stamp duty land tax (SDLT) is payable on the purchase of land or property in England or Northern Ireland where the consideration is more than the relevant threshold. SDLT is a devolved tax and does not apply to property transactions in Scotland and Wales to which land and buildings transaction tax (LBTT) and land transaction tax (LTT) apply respectively. While these are similar to SDLT, the rules are not identical. This article focusses on SDLT as it applies to land and property transactions in England and Northern Ireland.

 

Nature of SDLT

 

SDLT is payable on residential and non-residential land and property, with different rates applying to residential and non-residential transactions. SDLT is payable when a person:

 

 - buys a freehold property;
 - buys a new or existing leasehold;
 - buys a property through a shared ownership scheme; or
 - is transferred land and property in exchange for a payment (such as taking on a mortgage or buying a share in a house).

 

Residential Property

 

SDLT is payable on purchases of land and property in excess of the residential SDLT threshold. This is set at £125,000. Different rates apply to different ‘slices’ of the consideration above the SDLT threshold. The residential rates at the time of writing are as follows:

 

Consideration     Rate
Up to £125,000   0%
Next £125,000    2%
Next £675,000    5%
Next £575,000    10%
Remainder          12%

 

HMRC have produced a calculator that can be used to work out the SDLT payable on the purchase of residential property. The rules and rates are different for first-time buyers and on second and subsequent properties.

 

Leasehold property

 

The residential rates above apply to the purchase price of the lease (the lease premium) on the purchase of new residential leasehold property. Further, if the net present value of the rent is more than £125,000, SDLT is payable on the portion over £125,000 at a rate of 1% unless the purchase is of an existing (assigned) lease.

 

Second and subsequent properties

 

Higher SDLT rates apply to the purchase of second and subsequent residential properties. Such properties attract a supplement of 3% on top of the purchase price where the price of the second property is more than £40,000. The rates on second homes costing more than £40,000 are as follows:

 

Consideration     Rate

 

Up to £125,000   3%

Next £125,000    5%
Next £675,000    8%
Next £575,000    13%
Remainder          13%

 

First-time buyers

 

To help first-time buyers buy their first home, SDLT reliefs are available for first-time buyers. The savings can be great, but the relief is limited and its availability depends on the price of the property. First-time buyers do not pay any SDLT if they buy a property that cost no more than £300,000; where the purchase price is between £300,000 and £500,000, first-time buyer relief reduces the amount of SDLT payable - no SDLT is payable on the first £300,000 and SDLT on the portion between £300,000 and £500,000 is payable at a rate of 5%. First-time buyers who buy a property costing more than £500,000 pay the normal residential SDLT rates - there is no first-time buyer relief if consideration exceeds £500,000. A first-time buyer is an individual or individuals who have never owned an interest in a residential property in the UK or elsewhere in the world and who intend to occupy the property as their main home. It is not available to someone buying a property to let out, even if they have never owned a property before. First-time buyer relief must be claimed in the SDLT return. The relief is worth up to £5,000.

 

Return of the two-tier NI threshold

Adrian Mooy - Thursday, February 20, 2020
 
The government has announced the rates and thresholds for NI contributions for 2020/21. There will be two NI earnings thresholds (ETs). While in 2017 the government committed to aligning the ETs for employers and employees to simplify employment taxes, from 6 April 2020 they will diverge again, this time by a significant amount. Employers will start to pay for NI on workers’ salaries which exceed the rate of £8,788 per year, while the workers won’t start to pay until their salaries exceed the rate of £9,500 per year. Be aware of the different ETs when working out the most tax-efficient salary to take from your business.
 
From 6 April 2020 employers will be liable to NI on salaries they pay if they exceed the rate of £8,788 per year while the trigger point for directors is £9,500. Make sure you take account of the different thresholds when working out the most tax/NI efficient salary to take.

 

HMRC changes its time to pay arrangements

Adrian Mooy - Wednesday, February 19, 2020
 
If you can’t meet your tax bills you can sometimes negotiate with HMRC for more time to pay.

 

You can get a time to pay (TTP) arrangement with HMRC for any tax. If you’re in business, you can apply not just for a self-assessment bill, but payroll taxes, VAT and corporation tax. However, unlike commercial creditors HMRC won’t ever reduce the amount of debt but it will tailor a TTP arrangement to your financial circumstances.

 

You may not get a TTP arrangement if HMRC doubts you’ll keep up with the payment schedule. HMRC will want from you about your finances.

 

Payment periods are as short as possible, usually twelve months or less. But for individuals there’s no longer a maximum. Contact HMRC as soon as you think you won’t be able to pay a tax bill. If it’s before the payment deadline, ring the Payment Support Service. If the payment date has passed, ring the self-assessment payment helpline if it’s a personal tax bill.

 

By agreeing a TTP arrangement before the tax bill is due you’ll avoid late payment penalties that HMRC would otherwise charge.

 

HMRC have a new system for applying online. The service can only be used for self-assessment tax bills, where you owe £10,000 or less, have no other tax debts and no other TTP arrangements.

 

HMRC puts non-payers into one of two categories - “can’t pay” or “won’t pay”. It will put you in the “won’t pay” category if it thinks you have the financial means to pay but are playing for time. If so, it won’t agree a TTP arrangement and will fast track enforcement proceedings.

 

HMRC expects you to explore other means of raising cash to pay your tax bill before agreeing to a TTP arrangement. This might mean selling investments or borrowing elsewhere.

 

If you’re in business, this can be a difficult equation. You might have funds on hand but need them to meet costs like wages in order to keep trading. HMRC should take this into account and classify you as “can’t pay”.

 

Changing accounting date

Adrian Mooy - Tuesday, February 18, 2020
 
Accounting period

 

When you start a business, whether it’s via a company or sole trade, you can choose when your first financial (accounting) period will end. Tax and company law place limitations on companies but for unincorporated businesses the choice is more flexible. HMRC encourages unincorporated businesses to opt for an accounting period that coincides with the end of the tax year. This makes life simpler but is not necessarily tax efficient.

 

New business

 

Over the life of a business you’ll be taxed on the profits your business makes. However, the year in which the profits are taxed can vary depending on your choice of accounting date. There’s no single right answer, as different accounting dates suit different situations.

 

Example. You started a business on 1 May 2017 and prepared your first accounts for up to 5 April 2018. These showed a loss of £6,000. In the next year, 2018/19, you made a profit of £5,200. You estimate your profits for 2019/20 will be £30,000. For tax purposes losses for which no special tax relief is claimed reduce future taxable profits. Therefore, £5,200 of the £6,000 loss is used to reduce the taxable profit to £0 for 2018/19. Because you had no other income in 2018/19 you would not have paid tax on the £5,200 profit even ignoring the losses as your tax-free personal allowance (£11,850) would have covered them. You’ve therefore wasted some of the losses on income that would have been tax free anyway.

 

Too late?

 

Loss relief must be claimed within 20 months of the end of the tax year in which the losses occurred. As that was the tax year ended on 5 April 2018 you needed to have filed a claim with HMRC by 31 January 2020. Despite missing the time limit your can recover some of the wasted loss.
Retrospectively changing your accounting dates can alter which tax year profits are assessed. There are conditions and time limits but they allow for a great deal of flexibility in the first three years of a business.

 

You are entitled to amend your tax return for 2019/20 so that the accounting period for that year ends twelve months from the start of the business, i.e. 30 April 2018. Your accounts for the period 6 April 2018 to 30 April 2018 show a profit of just £120. So for the twelve months from the start of your business to 30 April 2018 your accounts show a loss of £5,880 (£120 profit plus the £6,000 loss from 1 May 2017 to 5 April 2018). Your taxable profit for 2018/19 is therefore £0 and you have only used £120 of your loss - the remaining £5,880 can be carried forward and used to reduce your taxable profits for 2019/20, which you know will be around £30,000.

 

Time limits apply but you can change your mind about the date on which your accounting period should end even after you’ve sent the figures to HMRC. This can change the amount of profit taxable for a year which means there’s some scope for retrospective tax planning.

 

Tax-free shopping

Adrian Mooy - Monday, February 17, 2020
 
The VAT retail export scheme allows overseas visitors to claim a refund of VAT on goods they buy and export from the EU in their personal luggage.
 
The scheme cannot be used for services supplied to customers such as hotel accommodation, meals, and car hire.

 

The term ‘overseas visitor’ has widened since the scheme was introduced to include migrating EU residents; as a result, there are complicated rules for students and workers from overseas who come to live in the EU for limited periods. Also, it is not always easy to determine whether a traveller is an overseas visitor if they have dual nationality or homes in more than one country.
 
Only customers from outside the EU are entitled to use the scheme. These include:
 
People who can prove they normally live outside the EU - they must prove this by (for example) showing their passport, identity card, driving licence, etc;
 
EU residents (including someone from the UK) who intend to leave the EU for a minimum of one year during the following three months - they must prove this by showing documents such as an overseas work permit, approved visa application, or a residency permit; and
 
Overseas visitors studying or working in the UK and leaving the EU at the end of their studies or contract - they should show their visa or work permit to prove that they are leaving within the following three months.
 
HMRC estimates that VAT of more than £300 million is refunded under the VAT retail export scheme each year. Around 3.6 million tax-free shopping forms are presented at UK exit points annually and, of these, more than 80% are presented at Heathrow Airport.
 
In all cases, the customer must personally buy the goods and fill in the relevant forms on the retailer’s premises. The goods must be exported by the last day of the third month after purchase (for example, goods bought in January must be exported by 30 April). When they leave the EU, the customer shows the goods, receipts, and VAT refund document to a Customs officer, who stamps the refund document. This is used to reclaim the VAT from the retailer.
 
VAT should be charged and accounted for at the time of sale in the normal way. When the retailer receives the completed and stamped refund document from the customer and has refunded the VAT, it can zero-rate the sale in its records. If it has already accounted for VAT, it can zero-rate the sale by reducing the amount of output tax shown in Box 1 of its next VAT return.
 
Some retailers use refund companies to handle the refund on their behalf. They usually give approved refund documents and tell the retailer when they have repaid the VAT to the customer. The retailer still needs to account for and adjust the VAT in their own records.
 
Some refund companies have refund booths at points of departure from the EU, where cash refunds can be made to customers before they leave the EU. They may charge the customer an extra administrative charge for this service.

 


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