Tax Advice UK

The gifts that were never gifts for inheritance tax!

noreply@blogger.com (Demetris) — Sun, 22 Jan 2012 13:30:00 +0000

If you gift an asset (e.g. a house) but you continue living in it (or have some benefit from it or you don't pay for the use of the asset), the taxman says, you never gave it away for inheritance tax! So, it will be part of the death estate on the donee's death, even though the donee survives for longer than 7 years.

However, if you die within 7 years of the gift, there is a problem: is the gift to be taxed as a lifetime gift or as part of the deathe estate? The answer is, the taxman will prepare two tax computations and the one with the highest tax will apply.

If the donee gives up any benefit from the asset just before he/she dies, the asset will not come back into the death estate! But, the taxman will treat it as a lifetime gift - with inheritance tax implications of course if death happened in less than 7 years from the date the benefit was given up! At least that way there is some hope!

Of course, having a gift being taxed as lifetime gift as opposed to being in the death estate has certain advanatages: The amount taxed is often lower for appreciating assets (e.g. houses) and the lifetime gift will attract annual exemptions and taper relief.

So, did you think you were the clever one?

How to minimise inheritance tax if assets in the death estate stand at a loss after the death!

noreply@blogger.com (Demetris) — Sun, 15 Jan 2012 16:13:00 +0000

If during the estate administration period, any losses arising from the sale by the personal representatives of death estate assets (within 1 year for quoted shares and 3 years for land & buildings), will reduce the value of the estate and hence the inheritance tax due on death - thus resulting in practice in inheritance tax repayment.

However, once the administration of the estate has ended and assets have been distributed to the beneficiaries, there will be no IHT repayments should the beneficiaries sell their assets at a loss. So, where there are assets in the estate that have depreciated in value post death, PR's should move quickly in realizing any assets if they have to, in order to have the IHT bill reduced and hence protect the beneficiaries!

And another thing: there anti-avoidance provisions in place to ensure that PR's do not deliberately sell quoted shares at a loss in order to generate an inheritance tax refund. According to those, all purchases of shares up until 2 months after the last sale in the 12 months period after the death, are taken into account for the loss calculation. In the case of land & buildings, we need to look at purchases up to 4 months after the last sale in the 3 years period after the death.

As we can see, the way the law has been designed acknowledges the fact that in practice it is not so unusual for administration periods to drag for way too long periods!

Inheritance tax valuation of similar assets owned collectively

noreply@blogger.com (Demetris) — Fri, 06 Jan 2012 14:05:00 +0000

The default position for valuing gifts is NOT open market values (i.e. how much the assets would fetch to the donee if sold on the open market.

Instead, we measure the value of gifts by how much the donor has lost as a result of the gift, i.e. by how much the donor's estate has gone down ("loss to the donor principle").

For the purpose of valuing similar assets owned jointly by spouses (e.g. shares), we look at them as one - doing so increases the value of shares when together spouses have control in the company (more than 50%) but individual shareholdings looked in isolation do not.

However, when similar assets are held jointly by individuals who are not married, the position is different. We value gifts of those assets using the loss to donor principle as explained above. But, there are special rules for real property (land and buildings) to take account of market realities.

Give away your assets as soon as possible to save your beneficiaries inheritance tax!

noreply@blogger.com (Demetris) — Fri, 30 Dec 2011 08:48:00 +0000

The longer you delay to gift your assets during your lifetime, the higher the inheritance tax your inheritors will have to pay on your death (because some of the inheritance tax exempt band will go towards the lifetime gifts, thus leaving more of the estate taxable).

Have it your way with inheritance tax where asset values go up or down between gift and death!

noreply@blogger.com (Demetris) — Tue, 27 Dec 2011 13:02:00 +0000

If inheritance tax is due on the death of the donor because the gift was made to you within 7 years prior to the death, you can make a claim to ensure that the tax you pay is based on the value of the gift on death as opposed to the value at the date of the gift, provided the asset has fallen in value between the gift date and the donor's death date. This works well with property and cash.

However, extra care needs to be taken with assets which are valued differently for inheritance tax (and hence, the reduction in the value of the donor's estate after the gift is not equal to the value of the gift for the donee (that is very much the case with shares).

So, the inheritance taxman is quite generous (for once!) and allows you to have it both ways, because as the normal rules say, the gift date value is used by default to value gifts on death. Hence, there is protection in-built from increased asset values between gift and death!

Inheritance tax on lifetime gifts that become taxable on death

noreply@blogger.com (Demetris) — Fri, 23 Dec 2011 09:31:00 +0000

Inheritance tax works on the cumulation principle. Hence, any lifetime gifts made by the deceased to individuals in the 7 years prior to death will become chargeable to inheritance tax on the donor's death. The amount of tax to be paid on those gifts (by the donees) will depend on the value of other lifetime gifts to certain trusts (as well as on the value of gifts to individuals that become chargeable on death) in the last 7 years prior to the chargeable gift on death.

Lesson: make lifetime gifts first to the persons you love the most and leave the others for later!

How to escape Inheritance tax on lifetime gifts

noreply@blogger.com (Demetris) — Fri, 23 Dec 2011 09:16:00 +0000

UK inheritance tax works on the principle that you pay IHT even though the lifetime gift to a trust is valued less than £325k, if you have made other gifts to certain trusts in the last 7 years.

Lesson: if you often make gifts to individuals and to trusts, make sure that the gifts to trusts chronologically come before the gifts to individuals in each tax year. This will reduce any inheritance tax on the latest gift.

If you make more than one gifts to trusts in the same tax year and on some gifts the trustees pay the tax whilst on others you do, to minimise your own inheritance tax bill, make sure that the gift you pay the tax is made earlier than the gift the trustees pay the tax.

Have you NOT lost your UK-resident status by going abroad?

noreply@blogger.com (Demetris) — Tue, 20 Dec 2011 14:30:00 +0000

These words are important to decide in which country a person pays income and capital gains tax: Residency, ordinary residence and domicile. The rules have been laid out by court cases over the years, but no definite legislation exists (statutory residence test comes into effect from April 2012), hence a lot of grey stuff at the moment!

There have been two cases recently, which (although different between them) (Gaines Cooper, Davies & James), seem to have moved the goalposts in the taxman's favour and made it more difficult for taxpayers to benefit from non-residency.

The critical question for many people who emigrate to another country is: When do I lose my UK-residency status? The answer should be straight forward by reading the taxman's guidance as contained in their IR20: From the day of departure if your move abroad is permanent or for at least 3 years or for a settled purpose and in all cases you have been absent for a whole tax year (with any visits to the UK totalling less than 183 days in any tax year and averaging less than 91 days per tax year over a four-year period).

The difficult part is, defining "permanent" . The HMRC seems to interpret the "going abroad" test very strictly, as a distinct break from the UK (incorporating taking up home permanently in a different country and breaking significant links with the UK) as opposed to just a mere change in circumstances (e.g. accommodation) for a number of years.

When it comes to employment taken up abroad, by concession IR20 states that you become non-UK resident if you are employed abroad for a complete tax year (the understanding has been so far that if not a complete tax year of employment in the year of leaving, then reliance could be placed on having full-time employment in the whole of the next tax year). Again, non-residency begins for date of departure if conditions are satisfied. The Supreme Court, however, in the Davies & James case saw that you have to be working full time for the whole of the relevant tax year in which a capital gain arises to qualify for non-residence status for capital gains tax!

I think what these two cases have done is that, unless you fit precisely into the words or examples given by the taxman in IR20 or HMRC6), you cannot expect the courts to extend the HMRC guidance to cover your non-residency claim, especially when there is a lot of tax at stake!

Bottom line is, some taxpayers, who have left the UK to escape UK income tax or capital gains tax, may have never left the UK for those taxes and they don't even know it! For example, those who left the UK for 5 complete tax years to escape capital gains tax on gains that arose in the tax year of their departure and worked as full-time employees abroad, may find to their detriment that the 5-year period never commenced!

Quick and easy protection from inheritance tax for non-UK domiciled persons

noreply@blogger.com (Demetris) — Mon, 12 Dec 2011 09:04:00 +0000

If you are of non-UK domicile (or of non-UK deemed domicile as defined for inheritance tax), you will still be liable to inheritance tax on any assets in your estate which are situated (i.e. physically located) in the UK! In layman words, this applies to people who were neither born or live in the UK. Does it sound bizarre?

Anything that can be done to escape the tax?

Put your money on authorised unit trusts or shares in open ended investment companies or hold your cash in UK banks in overseas currency.

For those on the other side of the fence:

What about those persons who, though born abroad by a non-UK father (and hence non-UK domiciled), are about to become UK-domiciled for inheritance tax because they have lived long enough in the UK? Is there anything they can do to protect their foreign assets from UK inheritance tax? The trick is to create a so called "excluded property trust", into which to put all their foreign assets, before they acquire UK domicile.

Chancellor's help for small businesses: Is this enough?

noreply@blogger.com (Demetris) — Sat, 03 Dec 2011 12:03:00 +0000

The Chancellor announced some measures to help small businesses during the November Statement. Among those are:

The small businesses rates relief holiday is extended to April 2013.
Businesses will be able to defer 60% of the increase in their 2012/13 business rates as result of RPI updating, and pay the increase equally in the following two years.
The National Loan Guarantee Scheme is introduced for businesses with turnover less than £50m. The scheme will make banks' lending to small businesses easier by offering low interest rates loans underwritten by the Government.
The corporation tax rate will fall in April to 25% (that will not have an effect on small companies though!)

The question is: Is this enough? How many small businesses will benefit and will actually those measures help the economy back into growth given that small businesses are the backbone of the economy? What is your take on this?

Crafty taxman!

noreply@blogger.com (Demetris) — Sat, 26 Nov 2011 15:31:00 +0000

Taxman is crafty! When your company makes a profit, you pay the tax on it after 9 months. But, if your company makes a loss, you will have to wait until 9 months after the end of the following year to get loss relief and that's provided there are enough profits in the future and from the same trade to absorb the loss - so, it could take ages! To get loss relief earlier, you need to make a claim in writing within 2 years of the end of the accounting period which produced the loss. They certainly make it difficult for business, don't they?

Budget 2011

noreply@blogger.com (Demetris) — Mon, 30 May 2011 14:32:00 +0000

Income tax:

Personal allowance (i.e annual tax-free income for individuals): The allowance for under-65s will rise by £1,000 from £6,475 to £7,475 for 2011/12. However, from 2012/13 it will rise in accordance with CPI (consumer price inflation) and not RPI (retail price index), and hence personal allowance for 2012/13 to be £8,105.
The higher rate of income tax threshold kicks in at £42,475 from April 2011 (as opposed to £43,875 in 2010/11).

(Comment: this cannot be welcome news as CPI is less generous than RPI, meaning less tax-free income allowances and more people drawn into the higher tax bands. In addition, the increase to £8,105 next April is counterbalanced by the freeze in the higher rate threshold in 2012 and by the decision to raise NI thresholds in line with CPI rather than the higher RPI. It is estimated that 750k more people will become higher rate taxpayers).
The 50% income tax rate: announcement made that it is a "temporary measure".
Benefits in kind:

Company cars: the multiplier for cars emitting over 95 grams of CO2 per km is increased by 1%.
Company car fuel benefit (taxable amount for private use) goes up by £800 to £18,800 from 6 April 2011.

National Insurance:

One per cent increase in all national insurance rates from 6 April 2011. This is partly mitigated by increases to the earnings threshold (point after which NIC kicks in).
NIC Class 2 contributions (payable by self-employed) to be collected on 31 January and 31 July in the future instead of monthly payments.

Business taxes:

The approved mileage allowance rate (where employees use own car for the employer's business and the cost is claimed from the employer) will be increased by 5p per mile from April (i.e. the first 10,000 miles claim is at 45p with 25p thereafter.

(Comment: although this may have an impact on the high mileage drivers of up to £500 saving, for the vast majority of drivers there is only one phrase: "Big deal!")
Capital allowances:

The rate of capital allowances for expenditure allocated on the main pool is reduced to 18% from 20% per annum from April 2012.
The rate of capital allowances for expenditure allocated on the special rate pools is reduced to 8% from 10% per annum.
The Annual Investment Allowance is reduced from £100,000 to £25,000 from April 2012.
The length of of short life asset pools is increased to 8 years from 4 from April 2011.

Furnished holiday lettings:

Availability and occupancy thresholds to qualify as FHL are revised from April 2012. Properties will need to be available for letting for 210 days (currently 140) and actually let for 105 (currently 70) in the year.
From 6 April 2011, FHL losses cannot be offset against other income; losses can only be offset against income from same FHL business.

Companies taxes:

Corporation tax for the year to 31 March 2011 is reduced for larger companies to 26% (and by 1% every year until it reaches 23% from 2014) and for smaller companies to 20% from April 2011.

(Comment: Some good news that will certainly help small and medium sized businesses, encourage the incorporation of more businesses and send signals to investors that Britain is open for business).

Capital gains:

The lifetime limit for Entrepreneurs Relief on capital gains from business disposals that qualifies for the 10% CGT rate (rather than the normal CGT rates of 18%/or 28%) is increased from £5 million to £10 million from 6 April 2011.
Annual exempt amount will from now on increase using CPI and not RPI.

Tax simplification:

Chancellor announced intention to merge the operation and administration of income tax with National insurance in order to cut the employers' admin costs and also bring savings for HMRC. Chancellor insisted this is not a move to increase taxes but to simplify them by merging the two admin systems.

(Comment: tax simplification is welcome but how are they going to deal with some obvious barriers, e.g. the NIC threshold is about £2,000 below the income tax threshold?)

Inheritance tax:

Rate of inheritance tax to be reduced if 10% of net estates are left to charity from April 2012. The IHT rate in those cases will be reduced from 40% to 36% for deaths occurring on or after 6 April 2012.

Consumers' taxes:

Petrol duty rate down by 1 penny per litre from 23 March 2011.

(Very short comment: this represents one of the biggest jokes ever heard!)

Benefits:

Tax credits:

If income goes up by more than £10k from the last tax year, tax credits for the current tax year will be reduced.
Families with gross income above £41,300 lose their Tax Credits from 6 April 2011.
Reduced CTC from April 2011 for families earning more than £40,000 per year.
Baby element of child tax credit (CTC) is removed from 6 April 2011.

Benefit payments from 6 April 2011 to rise in accordance with CPI instead of the higher RPI.

Pension plans:

Annual allowance for tax relief on contributions to pension funds reduces from £255,000 to £50,000 from 6 April 2011 .
The lifetime allowance (the value of private pension fund on retirement that can be drawn before extra tax is due) is reduced from £1.8 million to £1.5 millions from 6 April 2012.

Stamp duty land tax:

New 5% rate for residential properties over £1 million from 6 April 2011 (at present the highest rate of SDLT is 4% and applies to purchases where the consideration is over £500k).
Zero per cent "holiday" rate for residential properties valued up to £250,000 available to first time buyers to go from 25 March 2012.

Non-UK domiciled persons

UK residents who are non-UK domiciled for tax purposes, will have to pay a new £50,000 charge after living in Britain for 12 years if they use the remittance basis for taxing overseas income. Th£30,000 charge is kept for those who have been resident for 7 years but less than 12.
Exemption from tax where non-domiciled individuals remit overseas income/gains which are then commercially invested in UK businesses.

Enterprise incentives:

The income tax relief rate for shares subscribed into the Enterprise Investment Scheme goes up to 30% (currently 20%) from April 2011.
Also, the annual maximum amounts that can be invested into EIS and VCT investments goes up from April 2012 from £500k to £1m and it will be open to larger companies.

(Comment: the incentives could potentially go a long way to help businesses to access finance).

Savers:

ISA's for children under 18 will be introduced from autumn 2011. No further details announced.

Charities:

Charities will be able to claim gift aid on small gifts (£10 or less) without gift aid declarations up to £5,000 donation limit from April 2013.

IR35 update:

The office of tax simplification has suggested that it should be abolished or revised. HMRC have decided that IR35 is staying for now until ...

About Tax Penalties

noreply@blogger.com (Demetris) — Wed, 11 May 2011 07:48:00 +0000

The regime
New tax penalties rules were introduced by FA 2007 and apply to incorrect Returns and documents for all taxes (direct and indirect). The difference with the previous regime is that, the percentage of tax penalties on tax lost depends on taxpayer's behaviour:

Were they careless - did people exercise "reasonable care" before making the error? Although "reasonable care" depends on the circumstances and the capabilities if each person, HMRC thinks that reasonable care has been exercised when people keep records. If they made an error after taking reasonable care, no penalty is levied. Or, were they careless (if so, penalty is up to 30%).

Did they do it on purpose-and if yes, did they try to hide it? If they didn't attempt to hide it, then 70% penalty applies, but if they manufacture evidence to conceal the evasion, the penalty can reach 100% of tax lost.

Taxman's generosity
The taxman can be quite generous and reduce the penalties when people come out clean - normally the reduction is higher if they come out clean before the taxman discovers it (e.g. before a taxman notice to enquire is served). In addition, if the taxpayer has just been careless, the penalty can be suspended if the taxman thinks that doing so will help the taxpayer to improve his record keeping.

Isn't a rebasing for capital gains tax long overdue?

noreply@blogger.com (Demetris) — Sat, 09 Apr 2011 13:56:00 +0000

Isn't a rebasing (i.e. using market value instead of original cost to deduct from proceeds of sale) for capital gains tax purposes long overdue? Last rebasing was in March 1982 (some almost 30 years back!). Surely, the fact that market values at March 1982 are used, adds up to another stealth tax, especially since property prices have made such a big difference since March 1982 and since indexation allowance was abolished some years ago (i.e. the increase to cost to take account of inflation).

It's all about discrimination: New Equality Act has come into force on October 1, 2010

noreply@blogger.com (Demetris) — Thu, 28 Oct 2010 08:20:00 +0000

From 1 October 2010, the Equality Act 2010 has come into force. The Act unifies all different forms of discrimination (age, disability, race, sex, gender reassignment, religion or belief, sexual orientation, marriage and civil partnership, pregnancy and maternity) under the same umbrella. It also makes the law stronger (!) in some areas. Main changes are:

Third party harassment (different target): Employers can be sued if anyone (e.g. an employee) takes offence at something (e.g. a joke) said by another party (e.g. a customer), even though the offensive material was not directed at the person who makes the complaint. For example, an employee can make a claim for harassment if another employee is harassed by a manager because of a disability. The unaffected employee has the right to claim on the grounds that the harassment of the disabled member of staff has lead to an offensive work environment.

Comment: Aim is to force employers to establish zero tolerance towards potentially offensive behaviour. Valid question: How can possibly employers police the measure and hence steer clear possible employment tribunal claims?
Harassment by or against third parties: Employees can sue their employer if they were offended by people who are not employees (such as customers or contractors), if the employer does not take steps to address this when they become aware of it. Customers could also have a claim against the employer if they were offended by a member of staff.

Comment: Aim is to reduce discrimination at workplace by everyone. Employers could rightly ask: What control do they have over third parties like customers or contractors?

Discrimination by association: An employee will be able to sue their employer if they believe they have been discriminated against because of their association with someone else (for example, an employee is refused flexible working arrangements, even though it has been offered to others, because that employee has caring responsibilities for a child or spouse with a disability and the employer believes they may not be dedicated enough to their work).
Comment: Aim is to reduce discrimination at workplace. Are employers supposed to ask their staff intrusive questions to ensure they steer clear of offence or discrimination?
Discrimination by perception: Employees will be able to sue if they are treated unfairly because the employer or other employees think - rightly or wrongly - that they have a protected characteristic (for example, an employee is discriminated against because the employer thinks he is gay).

Indirect discrimination: If the employer has a condition, rule, policy or even practice that applies to everyone, but disadvantages a certain employee. Can get away with, if the employer shows that has acted fairly and reasonably towards achieving a legitimate business aim, other than solely reducing costs.

Pre-employment health secrecy: Employers will not be able to ask job applicants questions about their state of health except to help them decide whether the applicants could carry out functions essential to the job (for example, where a role involves heavy duty packing).

Comment: Aim of the measure is, supposedly, to protect people from health and disability discrimination. However, employers will be unable to spot any employees who are not fit for the job, or would be unreliable, due to ill health.
Equal pay direct discrimination: A claim of unequal pay can be made not only by comparison with a real person of the opposite sex in the same employment, but even if no real person can be found, by proving what their remuneration would be if they were of a different sex. See example in next point.
Pay secrecy: Employees will be free to discuss their pay or bonuses and employers cannot enforce secrecy clauses in employment contracts where they are related to protected characteristics such as race or sex. For example, a male employee working in female environment and doing same job as his female colleagues has a right to make a claim to equal pay as the opposite sex and his employer cannot prevent him from talking to his colleagues about pay differences.

Comment: Aim of the measure is, supposedly, to end pay discrimination. Employers fear this could lead to rash of claims for pay rises or even to claims if they believe they have been discriminated against.

Victimisation: When an employee is treated badly because they have made or supported a complaint or raised a grievance under the Equality Act (unless maliciously made or supported an untrue complaint), they have protection.
Employment Tribunals: Powers extend not only in fining employers, but also in (effectively) forcing employers to change work practices if found guilty of discrimination, not only in relation to the claimant but to the other employees too.

Comment: Employers fear this would amount to Tribunals interfering with the way businesses are run.
Disability: the definition of disability changes, making it easier for a disabled person to prove disability. A disabled person only needs to show that their physical or mental impairment has a substantial and long-term effect on their ability to carry out normal day to day activities, such as using the phone, reading a book or using public transport.

Taxman introduces penalties on all employers for paying PAYE late

noreply@blogger.com (Demetris) — Wed, 06 Oct 2010 09:01:00 +0000

What's new:
From May 2010, employers are subject to penalties for not paying their PAYE bill on time, either monthly, quarterly or annually. The late payment penalties apply to all employers, regardless of size. 'Late' in this context means the payment reaches the Tax Office after the 19th of each month, (or 22nd when paying electronically).

Until now the Taxman did not impose penalties or interest on small employers if all the payroll deductions for the year reached him by 19th April (or 22nd) after the end of the tax year. Large employers (those with more than 250 employees) have been subject to surcharges for late payment for some years, as they have been obliged to pay over all deductions electronically.Those surcharges for large employers have been scrapped and all employers are now subject to the same penalties. However, small employers do not have to pay over their deductions electronically.

For penalties relating to late payments due in the current tax year 2010/11, HMRC will send late payment penalty charges after the end of the tax year (5/4/11). HMRC can issue a penalty letter up to two years after the late payment occurred. It is your responsibility to make sure that you pay PAYE on time. HMRC does not issue reminder letters.

How penalties operate:
The penalty will be based on the total amount of deductions paid late for the tax year and will be calculated based on the number of times payments are late in a tax year as follows ...

- Late once – no penalty (as long as the payment is less than 6 months late)
- Late 2 to 4 times – 1% penalty
- Late 5 to 7 times – 2% penalty
- Late 8 to 10 times – 3% penalty
- Late 11 or more times – 4% penalty

If the employer has still not paid an amount in full after six months, a penalty of 5% may be due. A further penalty of 5% may be charged if payment is still outstanding after 12 months. Please note that these penalties are in addition to the penalties fro monthly and quarterly payments described above and they apply even where only one payment in the tax year is late!

(Comment: The taxman is closing down on all employers, going for their monies on time! However, it remains to be seen how the system will be implemented in practice, as the taxman doesn't know until after the end of the tax year - when P35 is filed - if there was any underpayment. Even if P35 shows an underpayment, surely, it is not possible to inspect PAYE records of all employers that underpaid to establish for how long the underpayment has been outstanding, so that the amount of the penalty is determined! In addition, even where P35 does not show an underpayment, it is possible that some amounts were paid late during the year and that cannot be discovered unless a PAYE inspection of the records. Bottom line is, this puts an additional responsibility on the employer's shoulders to reconcile the PAYE account every month, e.g. to ensure that late adjustments have been accounted for and so on).

Minimum National Wage increase from October 1st, 2010

noreply@blogger.com (Demetris) — Sat, 02 Oct 2010 14:21:00 +0000

Minimum national wage (hourly rates) rises from 1 October 2010 as follows:

Workers aged 21 and over: From £5.80 to £5.93.
Workers aged 18-21: From £4.83 to £4.92.
Workers aged 16-17: From £3.57 to £3.64.
Apprentices under 19 and apprentices aged 19 and over (in first year of apprenticeship) £2.50 .

(Notes: Minimum wage limits for apprentices have been set for the first time! Also, from 1 October the minimum age for the top rate to apply has been reduced from 22 to 21 ).

Government sets up OTS to simplify Taxes

noreply@blogger.com (Demetris) — Thu, 22 Jul 2010 13:07:00 +0000

The Government has announced that it has set up the Office of Tax Simplification with the view to simplify taxes in the UK.

The tax system in the UK is so complex that businesses have been complaining that it is a liability to the UK economy.

The OTS was welcomed by business groups and accountants, on two conditions: one that it is genuinely independent, the other that ministers are prepared to act.

The OTS is to be manned by a group of tax experts, lawyers and civil servants, to identify problem taxes and reliefs and recommend solutions. The OTS will deliver two reviews before the next Budget; one will be on small business tax simplification, including the IR35 on the tax treatment of contractors, the second on the system of tax reliefs.

The Government says that, despite no official commitment of ministers to the OTS, close public interest will be enough to create politicla pressure on the government to respond to recommendations.

(Our comment: The tax system is crying not just for simplification of the rules but for a radical overhaul, but we have heard this before! In our opinion, simplification starts from the HMRC, putting their house in order, making their operations more competent and efficient (so that it doesn't take a month to open a letter)and accountable to the taxpayer for their errors. Usually, politicians change things round for their own benefit; for example, I am wondering, could it be that they want to simplify tax rules as an excuse to introduce a general ("blanket") anti-avoidance rule? Can I remind my readers that the Emergency Budget last month mentions anti-avoidance several times?)

Taxman owes taxpayers £3bn

noreply@blogger.com (Demetris) — Wed, 21 Jul 2010 11:51:00 +0000

The taxman owes taxpayers in the UK as much as £3billion in tax overpaid, going back for more than 2 years, it was announced by the National Audit Office.

The National Audit Office put the blame on a backlog created by new computer system glitch, which involved 15 million taxpayers. The errors resulted in additional costs of £33 million and the loss of £55 million in planned efficiency savings!

It said that because of, the HMRC is also chasing unpaid taxes worth £1.4 billion.

(Our comment: What we have suspected from experience now confirmed: the taxman is hanging on to £3 bn in overpaid taxes and "doesn't want to give it back!")

Enterpreneurs Relief and pulling the rug from under the taxpayers' feet!

noreply@blogger.com (Demetris) — Fri, 16 Jul 2010 12:47:00 +0000

Today I will touch on an undesired development for property onwers that has literally removed the carpet from under their feet overnight!

Some time back in November 2007, the then government decided that capital gains tax was scandalously low, and so the Chancellor announced that he was making changes in the next budget to put up Capital gains tax (CGT).

He then in April 2008 abolished business asset taper relief and brought in what is known as Entrepreneurs Relief. Under this, capital gains made on disposal of assets owned by individuals and used in the trade are taxed on those persons at 10% up to an upper limit (currently £5 million). But, not quite so...

The point we are making is not with the particular kind of relief but with a certain condition contained in the new legislation: If a person owns the property used in the trade of his company, he will not benefit from the 10% rate when he sells (or disposes otherwise) the shares in his company together with the property if he has charged the company full rent all along for the use of the property to trade from. Instead, the CGT rate will be 28%!!!

Presumably, the justification for that is that the property is not a trading asset but an investment. Fair enough, what the heck! The problem is however where trading properties were purchased before 6 April 2008 and those traders were advised by their accountants back then to own the property personally rather than buy through their companies to make sure that they could benefit from the then Business Asset Taper relief, according to which CGT would be taxed at 10% provided the property was kept for at least 2 years. It was also a brilliant idea to extract rent from the company rather than salaries as there is no national insurance on rents (being treated as "unearned income").

What makes it worse is that those property owners also stand to lose the mortgage interest relief if they stop charging rent and will be unable to claim any capital allowances on fixtures fixed on the building as they will have no rental income to offset the capital allowances! Losing those reliefs could amount to higher taxes by hundreds of thousands in some cases!

Unfortunately, this shows that planning one's tax affairs within the foreseeable future is a very difficult task because of the uncertainty in the regulatory environment. I hate to say that all I can advise clients in this mess right now is to carry on charging rents so that no interest relief is lost and hope that the law will change before they sell (perhaps before an election!).

Please be free to add your own comments or similar experiences.

Emergency Budget 22 June 2010

noreply@blogger.com (Demetris) — Wed, 23 Jun 2010 08:14:00 +0000

With Budgets, the devil is in the detail. The obvious changes and looking beyond the headlines...

Business taxes

Corporation tax cut for large companies: The full rate of corporation tax to be reduced from 28% to 24% over the next 4 years by 2014. (Note: This is the rate paid on profits over £1.5 million).

Corporation tax cut for small companies: The tax rate for small companies to be cut from 21% to 20% from next April. (Note: Small companies are companies with profits up to £300,000).

Capital allowances reductions:

The main rate of capital allowances on plant & machinery is reduced from 20% to 18% per annum from April 2012. The rate on fixtures is reduced from 10% to 8%.
The annual investment allowance (this is the 100% first year allowance available to write off the cost of plant & machinery is reduced from £100,000 to £25,000 from April 2012.

(Comment: it is estimated that 2/3 of the corporation tax cuts will be recovered by a reduction in capital allowances for investment in plant, machinery and equipment from April 2012).

Capital gains

Capital gains tax rate rise: Capital gains tax on non-trading assets will rise from 18% to 28% from 23 June 2010 for higher-rate taxpayers. Basic rate taxpayers will continue paying CGT at 18%. (Note: Non-business assets include second homes, buy-to-let properties and shares. An individual’s capital gains will be added to their income in assessing whether they remained basic rate taxpayers for the purpose of the new higher rate of capital gains tax. The income threshold for the higher rate is currently £43,875).

Comment: Not many people will benefit from the 18% rate because, almost certainly, significant assets sales (property sales) will push a lot of lower-rate taxpayers into the higher rate of tax and hence taxed at 28%! Prediction: the no re-introduction of indexation allowance to eliminate effect of inflation on gains (or taper relief) will be more painful to investors than the rate increase! This will result in taxing the part of the gain that is attributable to inflation!!!

CGT annual exempt amount freeze: The tax-free allowance for capital gains tax remains the same at £10,100 per annum.

Entrepreneur’s relief increase to £5 million: The lifetime CGT allowance for entrepreneurs who sell their businesses is to be increased from £2 million to £5 million on gains arising from 23 June 2010.

Income tax

Personal allowance increase: Personal allowance (tax-free income) up by £1,000 to £7,475 from April 2011. This will take about £880,000 low-earners out of the tax system.

Higher rate threshold reduced: From April 2011, the threshold at which the 40% higher rate of income tax kicks in is lowered by £1,500 to £42,375. The new thresholds will be frozen for 3 years.

Comment: Taking into account the £1,000 rise in the personal allowances, the basic rate band is shrunk by a total of £2,500. This means that the basic rate limit, at which income is taxed at 20%, will fall from£37,400 to £34,900. This will result in about 700,000 more people falling into the 40% tax rate.

VAT

VAT increase: VAT standard rate is to be increased from 17.5% to 20% from January 4, 2011.

National insurance

NIC reduction for new regional businesses: Businesses setting up outside London, the South-East and East of England will be exempt from £5,000 of employer’s national insurance for each of the first 10 staff hired with immediate effect for three years beginning from September. Any new business starting up from 22 June 2010 will be eligible, subject to meeting various criteria. The tax break is worth up to £50,000 per business. HMRC has said that only those businesses carrying out a “new economic activity” will benefit.

Plan to lift employer’s NIC is partly axed: Employers employing staff earning less than £21,000 a year will be protected from a 1% increase in national insurance contributions from 6 April 2011. However, businesses with staff earning more than £21,000 will pay more. The so-called “jobs tax” brought in by Labour will not be abolished and the rise of 1% for employer’s and employee’s will go ahead from next April (Class 1 & Class1A)!

Employer’s NIC threshold rise: From 6 April 2011, the threshold at which employers pay Class 1 NIC on employees’ salaries will rise by £21 per week more than the annual increase in the RPI.

Comment: The rise above inflation together with protection from increase on lower paid employees has supposedly been introduced to mitigate the effect of the 1% hike on employer’s and employee’s national insurance contributions on salaries.

Consumer’s taxes

No increase in alcohol and tobacco duties. Plan for 10% increase on cider is scrapped. No increase in fuel duty either. Government to launch a review of fuel duty that will link petrol duty to the wholesale price of crude.

Comments:

The increase in VAT rate to 20%, coupled with rises in Labour’s Budget in March, will hit the cost of fuel, drinking and smoking.
Could this lead to petrol prices at the pumps being less volatile and even lower prices when crude price drops?)
Plans to levy 50p a month on every phone bill to pay for the introduction of rural broadband have been abandoned.

Families

Child benefit: 3-year freeze in child benefit. The benefit is worth £20.30 per week for the eldest child and £13.40 for any additional child.

Parents’ benefits cut: The £190 health-in-pregnancy grant is to be abolished from April 2011. The Sure Start Maternity grant worth £500 to mothers in jobseeker’s allowance would be limited to the first child. Lone parents will be expected to look for work when their youngest child starts school.

Tax credits cuts: From April 2011, the child tax credit (family element) worth £545 is no longer available to families with household income more that £40,000. But from April 2012, those families with combined income more than £28,000 will also lose the benefit, while those on £25,000 or above will see their payment reduced to £460. Furthermore, the child tax credit payable in the first 12 months after birth, worth £545 is abolished from April 2011. However, the child element of the child tax credit will increase by £150 a year for 2011/12 and by £60 f0r 2012/13.

Benefits

Housing benefit cap: Cap introduced to £250 for one-bedroom property and £400 for 4-bedroom property.

Disability living allowance: There will be medical checks for people on the benefit.

Pensioners

State pensions to be linked with earnings: From April 2011, pensions will rise from now by a minimum of 2.5% or in line with earnings or prices, whichever is greater.

Comment: Any rises will only be moderate and will not reflect the true effect of price rises as pensions will be liked to the Consumer Price Index (CPI) and not to the Retail Prices Index (RPI). RPI takes into account a wider range of costs including mortgage interest payments, which doesn’t the CPI.

State pension increase: State pension to increase by £1.45 next year.

Requirement to buy annuity extended to age 77: With effect from 5 April 2011, the age by which members of registered pension schemes have to buy an annuity will be increased from 75 to 77.

Retirement age increase:

Government plans to increase state retirement age from 65 to 66 from 2016 rather than 2024.
Default retirement age at 65 to be phased out. This means workers over 65 will not be forced to retire.

Old people’s benefits: Winter Fuel Payment and free bus travel not affected.

Registered pension plans

Pensions u-turn: The Finance Act 2010 restricts tax relief on pension contributions from 6 April 2011 for individuals with annual earnings of £150,000. However, this complex legislation is likely to be abolished, and replaced by a system of reduced annual allowances with a broadly similar effect (see below).

The Chancellor signalled a U-turn on previously announced plans to gradually withdraw higher-rate tax relief on pension contributions by those earning £130,000 or more. Instead, he is consulting with insurers and employers about drastically reducing the amount that can be saved into a pension annually and be eligible for tax relief to between £30,000 and £45,000. Doing so will still save the Treasury whilst being easier to administer. (Note: currently, contributions up to £255,000 per annum can be paid into pensions plan and qualify for tax relief).

Business start-up finance:

The Enterprise Finance Guarantee Scheme that guarantees 75% of finance to small businesses with no assets as security will be extended by an additional £200m.
The government also announced that it will set up a Growth Capital Fund as part of the Enterprise Capital Fund to tackle a shortage of private investment in young, growing companies with high growth potential by providing a further £37.5 million in equity finance.

And finally...

IR35 to be abolished?

Despite no announcements in the Budget, government small business minister M. Prisk announced that the spiteful and controversial IR35 will be abolished and that the government is looking at ways to replace it in a way that guarantees a lasting settlement.

Government to review IR35

noreply@blogger.com (Demetris) — Thu, 20 May 2010 12:57:00 +0000

The Chancellor has promised at his speech during the CBI dinner that the government will review the (unpopular) IR35 legislation as part of a “wholesome review of small business taxation” and it will seek to replace it with simpler measures. These plans “will prevent tax avoidance but will not place undue administrative burdens or uncertainty on the self-employed or restrict labour market flexibility”.

(Our comment: let’s hope simplification is not used again to tax self-employed even more!)

Chancellor to deliver emergency Budget

noreply@blogger.com (Demetris) — Mon, 17 May 2010 12:53:00 +0000

The Chancellor has announced that the coalition Government’s emergency Budget will be delivered on Tuesday, June 22. The Budget will lay out the specific measures to tackle the UK’s deficit.

IR35 - Taxman loses in the Novasoft case

noreply@blogger.com (Demetris) — Sat, 15 May 2010 12:48:00 +0000

The taxpayer’s appeal was allowed in full by the Commissioners against the HMRC. The tribunal decided that this was a case of “self-employment” and therefore the dreaded IR35 legislation (intermediary companies) did not apply. In reaching it verdict the tribunal quoted the Hall V Lorimer, that it is necessary to “paint a picture from the accumulation of detail”. It will be interesting to see if HMRC takes this case to further appeal although it will be more interesting to see what impact this case will have on the IR35 legislation.

(Note: IR35 is a complex set of rules introduced to catch disguised employees falsely trading through their own limited companies to reduce their tax. The problem lies in its complexity itself and in that it has in some cases it has unfairly treated genuine self-employed).

Taxman seeks access to accountants’ working papers

noreply@blogger.com (Demetris) — Thu, 13 May 2010 12:43:00 +0000

Government consultation on “Tax agents and deliberate wrongdoing” has been met with outcry by the accounting profession. They fear that the controversial government proposals will lead to deterring tax advisors from offering legitimate tax advice to clients for fear of opening themselves to prohibitive fines and investigation for assistance to unacceptable tax avoidance. Under the proposals, the HMRC will have access to accountants’ working papers.

(Our comment: we can’t help it thinking that this is another attempt by the taxman – following removal of legal privilege - to increase its take by restricting the taxpayer’s ability to influence the amount of their tax through legitimate tax planning by using accountants’ expertise).