Monthly Tax News – Winter 2016/17
INCOME TAX NOT CGT ON PROPERTY SALE
Finance Act 2016 brought in new rules to ensure that overseas property traders and developers are subject to UK income tax or corporation tax when they dispose of UK properties from 5 July 2016. However the way in which the legislation is drafted may catch some buy-to-let landlords.
The new rules treat UK property sales/development of land as part of a trade and therefore potentially taxed at income tax rates up to 45% instead of the 28% rate that would apply to capital gains. There would also be class 2 and class 4 national insurance contributions due if the transaction is deemed to be part of trading.
THE TRANSACTION IS TAXED AS TRADING IF:
- One of the main purposes in acquiring the land was to realise a profit on its disposal; or
- One of the main purposes in acquiring the property which derives its value from land was to realise a profit on its disposal; or
- The land is held as trading stock; or
- One of the main purposes of developing the land was to realise a profit on its disposal when developed
There will be no change in tax treatment for individuals or partnerships already operating as property dealers or developers.
100% TAX RELIEF FOR LOW EMISSION CARS TO CONTINUE
Currently 100% capital allowances are available when a business buys a motor car with CO2 emissions of no more than 75 grams per kilometre. Legislation has now been passed to reduce the threshold to just 50 grams from April 2018 but also to continue the tax relief for 3 years until 2021.
Normally motor cars only receive a writing down allowance at the rate of 18% or 8% on a reducing balance basis, which means it can take several years to get tax relief for the cost of the vehicle. The cost of a low CO2 car can therefore be immediately written off against business profits.
Note: The motor car must be new and bought either for cash or on hire purchase to get the 100% tax relief.
Where the car is provided for use by a director or employee of the business then there would be a Benefit in Kind taxable on the individual based on the CO2 emissions and original list price of the car.
ANOTHER 100% TAX RELIEF ENDS NEXT YEAR – ACT SOON
Currently the business premises renovation allowance provides 100% tax relief for the cost of renovating a commercial property located in one of the 2,000 or so designated disadvantaged areas, provided it has been out of commercial use for at least 12 months. The premises should then be brought back into commercial usage or rented out to a business to use within its trade or profession. Unfortunately this generous tax break is due to end in April 2017 so get in quick if you are considering renovating such a property. It may be an office block, factory or warehouse that you already own or a property on the market that has been out of use for at least 12 months.
Typical qualifying costs would include building works, architectural and design services, survey and engineering costs, planning application costs and other statutory fees. The works must now be completed within 36 months of the expenditure being incurred as many renovation projects involved the payment of certain costs in advance.
Provided the premises are retained for at least 5 years there is no claw back of the tax relief given.
PROPOSED CHANGES TO UK DOMICILE RULES
Where an individual is resident but not domiciled in the UK there are special rules that apply to that person’s overseas income and capital gains. Plus only their UK assets are charged to inheritance tax. The government has been consulting this summer on possible changes to the rules from 6 April 2017.
Currently the UK domicile rules provide that where an individual’s father is non-domiciled then his children automatically take on the father’s domicile (domicile of origin). However, it is proposed that from 6 April 2017, an individual is deemed domiciled for income tax and capital gains tax if he meets either of two conditions:
- was born in the UK and has a UK domicile of origin. The individual must also be UK resident in the tax year under consideration.
- must have been UK resident for tax in at least 15 out of the 20 years preceding the tax year under consideration.
The 15/20 year rule will also replace the current 17/20 year rule that currently applies for inheritance tax so that there is a common definition for all three taxes.
INHERITANCE TAX IMPLICATIONS OF NEW DOMICILE RULES
Individuals who are domiciled in the UK are subject to inheritance tax (IHT) on their worldwide assets wherever situated. Non-UK domiciled individuals are currently only subject to IHT on their UK assets.
Classic planning for non-doms was to hold UK assets, particularly UK houses, through an offshore trust or company. The consultation on proposed changes suggests that such a structure will be ineffective in future with the underlying UK house being chargeable to IHT.
These changes are extremely complex so please contact us if they are likely to affect you.
PENALTIES FOR CARELESS ERRORS IN ACCOUNTING RECORDS
Where additional tax is payable as the result of an HMRC enquiry and it is shown that the additional tax is due to poor accounting records, the maximum penalty that can be imposed is 30% of the additional tax for failure to take reasonable care. Where the error is deliberate, the penalty will be between 20% and 70% of the extra tax due, rising to 100% where the matter is deliberate and concealed by the taxpayer.
We can negotiate lower penalties on your behalf as the penalty can usually be reduced if we tell HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure and if we help HMRC work out what extra tax is due.
It is also possible to have the penalty suspended if the introduction of internal controls or additional checks can minimise the risk of the error recurring.
We can of course work with you to introduce procedures to minimise the risk of errors in your accounting records so that such penalties do not arise in the first place.
MORE BAD NEWS FOR PUBLIC SECTOR WORKERS “OFF PAYROLL”
In his Autumn Statement the Chancellor announced that the Government will implement significant changes to the taxation of workers providing their services to the public sector through their own company or via an agency. These new measures have now been included in draft clauses to be included in Finance Act 2017 which were issued for consultation on 5 December 2016. If brought in, new rules will apply from 6 April 2017.
“Public sector” includes central and local government, the NHS, state schools, and bodies such as the BBC.
The new rules will put the onus on the public sector engager or agency supplying the public sector body to determine whether or not the IR35 personal service company and intermediary rules apply to the relationship, and if so deduct and pay over income tax and national insurance on behalf of the worker.
This will be a major change as currently the worker and his company/ intermediary has to determine whether or not IR35 applies.
A further change proposed from 6 April 2017 is that the worker will no longer qualify for a 5% deduction currently deemed to cover administration costs.
These changes come on top of restrictions to relief for such workers’ travelling expenses that came into effect from 6 April 2016.
Please contact us if these changes are likely to apply to you.
MORE TAX FREE ALLOWANCES FROM 6 APRIL 2017
In addition to the current £5,000 tax free dividend allowance and the personal savings allowance of up to £1,000 there will be two further tax free allowances starting from 6 April 2017. These will be a new £1,000 tax free allowance for self-employed income and a £1,000 rental income allowance.
These new allowances mean that individuals doing a small amount of self-employed work or receiving a small amount of rental Income will not need to report such income and consequently may fall outside self-assessment.
Note that the £1,000 allowances are the gross amounts that will be tax free each year. Where the gross income exceeds £1,000 there will be the choice of paying tax on the excess over £1,000 or deducting allowable expenses in the normal way.
For example Mr Nikon has a full time employment but also has a part – time photography business earning £1,500 a year with £800 of business expenses. Rather than paying tax on the net profit of £700 the new system will mean that he will only be taxed on £500 (£1,500 less the £1,000 allowance). If his gross income was below £1,000 it would be tax free and would not need to be reported to HMRC, probably keeping him outside of self-assessment.
DON’T FORGET “RENT A ROOM” RELIEF
Whilst on the subject of tax free allowances remember that there is a further £7,500 a year allowance deducted from rent received from lodgers where you rent out part of your main residence.
This allowance increased from £4,250 from 6 April 2016 so that now the first £7,500 rent from lodgers is tax free. Where income from lodgers exceeds £7,500 a year only excess is taxable.
TAX FREE CHILDCARE ACCOUNTS TO START 6 APRIL 2017
New tax-free childcare accounts were announced in 2014 to replace the employer-provided childcare voucher scheme. Introduction has been delayed by legal disputes with organisations involved in administering the existing scheme, but the new accounts will at last be introduced on a trial basis in early 2017.
The new scheme will then be rolled out across the country based on the results of the trial. The rules are complex, but where both parents work and earn at least £115 per week, they will be able to put up to £8,000 a year into a special account which the Government will top up with 20p for every 80p contributed by the parents. This account can only be used to pay for childcare such as nursery fees.
It is anticipated that the new scheme will eventually replace the existing childcare voucher scheme which is only available to employees who work for organisations that offer such schemes. The new system will benefit the self-employed as well as those workers in organisations that currently do not provide childcare vouchers.
PASSING ON THE FAMILY HOME
New inheritance tax rules for passing on the family home start on 6 April 2017 and many people have a New Year’s Resolution to either make a Will or update their Wills. This new relief should be taken into consideration when drafting your Will and we can work with your solicitor to make sure it is tax efficient.
From 6 April 2017 a new nil rate band of £100,000 will be available on death where your residence is left to direct descendants. This is in addition to the normal £325,000 nil rate band and will increase over the next 4 years to £175,000 in 2020. You may recall that when this was originally announced in summer 2015 the chancellor said that a married couple should be able to pass on their family home worth up to £1 million free of Inheritance tax. The rules are fairly complicated and HMRC have recently issued guidance on how the new relief will operate. We can review your personal circumstances to ensure that you take advantage of all relief that you are entitled to.
DOWNSIZING TO A SMALLER PROPERTY
One of the features of the new inheritance tax rules for passing on the family home is that the relief is protected even when you downsize to a smaller property.
For example if a married couple currently live In a large house worth £800,000 and downsize to a flat worth £300,000 they could give away some of the proceeds during their lifetime and yet still benefit from inheritance tax relief based on the higher valued property. They could even sell up completely and move into a rental property and get the inheritance tax relief!
This would very much depend on the timing of such planning and, as mentioned above, the rules are very complicated so contact us to discuss how this can apply in your family circumstances.
MORE ON THE NEW HIGHER VAT FLAT RATE PERCENTAGE
As covered in the Autumn Statement newsletter a new VAT flat rate of 16.5% applies from 1 April 2017 for “limited cost traders”. This is being introduced as HMRC believe that the current system is being abused by some businesses providing their labour but who have very few costs.
The flat rate scheme was originally introduced as a simplification measure for small business as they merely pay a percentage depending on the type of business to their VAT inclusive turnover. For many businesses this process takes about 5 minutes but in future they may have to add up all the input tax on their expenses and deduct that from the output tax on their sales which will often take a lot longer!
Take for example a training consultant who bills his clients £100,000 a year, £120,000 inclusive of VAT. Using the flat rate scheme he currently pays 12% to HMRC = £14,400. If the VAT inclusive cost of his goods for the year is less than £2,400 (2%) excluding capital expenditure, food, fuel, vehicle costs then he would have to pay £19,800 to HMRC! It would almost certainly be beneficial for him to stop using the flat rate scheme.
If you are currently using the VAT flat rate scheme contact us to discuss whether the changes will apply to you.
MAKING TAX DIGITAL TO BE DELAYED?
The Treasury Select Committee has reviewed the proposals for the introduction of “Making tax digital” (MTD) and have agreed with the various professional bodies that if the new systems are introduced too quickly there could be a disaster. It would significantly increase burdens on small businesses. In their report they comment that the overall benefits of mandating the digitising of record keeping and quarterly reporting, as is currently envisaged, have yet to be proven.
The Select Committee further note that the cost to business of introducing MTD, as well as the continuing costs of maintaining digital records and submitting quarterly updates are of further concern to the Committee, as is the availability and functionality of the free software that has been promised.
At the time of writing we are awaiting the Government response to the November 2016 consultation and we will keep you updated about the implications for your business. Remembers that the proposals as they are currently drafted will apply to property rental businesses as well as trading businesses.
DO YOU HAVE ENOUGH SHARES TO QUALIFY FOR CGT ENTREPRENEURS’ RELIEF?
Entrepreneurs’ Relief reduces the rate of CGT to 10% on the first £10 million of gains on the disposal of qualifying business assets. This would include sole traders disposing of their business and partners disposing of their interest in a partnership carrying on a business. With many businesses operating as limited companies these days it is important to appreciate that not all shareholdings qualify for this generous relief.
Shareholdings qualify for Entrepreneurs’ Relief provided the company is a trading company or the holding company of a trading group. There are additional conditions that the shareholder is an officer or employee of the company and holds 5% or more of the company’s ordinary share capital and votes. All of these conditions must be satisfied throughout the twelve months up to the date of disposal.
A couple of recent tax tribunal cases have considered the 5% test and the HMRC view is that most shares except for certain preference shares need to be considered. Always contact us first if you are considering issuing additional shares in your company as it may have a detrimental effect on other shareholders’ entitlement to CGT Entrepreneurs’ Relief.
SHAREHOLDERS MUST ALSO BE OFFICERS OR EMPLOYEES
In order to qualify for CGT entrepreneurs’ relief on the disposal of shares, the shareholder must have been an officer or employee of the trading company or group throughout the twelve months up to the date of disposal. Although there is no minimum number of hours, it is important that there Is evidence that this condition is satisfied, so for example the employee/ director should not resign before the disposal of shares takes place.
HMRC are known to request such evidence and recent tax tribunal cases have resulted in Entrepreneurs’ Relief being denied .
NEW GOVERNMENT SAVINGS SCHEME STARTS IN APRIL 2017
From April 2017,adults under the age of 40 will be able to open a Lifetime ISA (LISA) and pay in up to £4,000 each tax year. They will be able to continue making contributions up to the age of 50. The government will add a 25% bonus to these contributions. This means that individuals who save the maximum will receive a £1,000 bonus each year from the Government.
The tax-free funds, including the Government bonus, can be used to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account. The funds, including the Government bonus, can be withdrawn from the LISA from age 60 tax-free for any purpose. LISA holders will also be able to access their savings if they become terminally ill.
If savers make withdrawals before age 60 for other purposes a 25% charge will apply to the amount of withdrawal. This returns the bonus element of the fund (including any interest or growth on that bonus) to the Government.
“Help to Save”, aimed at supporting people on low incomes to build up their savings will follow in 2018. That scheme will add a 50% Government bonus on savings up to £50 a month for up to four years. Help to Save will be available through NS&I to any adult who is receiving working tax credit or universal credit with minimum household earnings equivalent to 16 hours a week at the National Living Wage.
DON’T FORGET YOUR 2016/17 ISA ALLOWANCE
The current ISA allowance is £15,240, rising to £20,000 for 2017/18. Remember that there is no longer a 50% restriction on the amount that you can invest in a cash ISA; the £15,240 annual limit covers all ISA investments which could be in shares, bonds, cash or certain other investments.
AND MAKE PENSION PAYMENTS BEFORE 6 APRIL
The current annual pension limit remains at £40,000. In addition, unused relief from the previous three tax years may be utilised once the current £40,000 limit has been used. However, the relief from 2013/14 will lapse on 6 April 2017.
If, for example, you have £10,000 unused allowance from 2013/14 you would need to make pension contributions of at least £50,000 by 5 April 2017 to avoid losing your 2013/14 relief. Remember also that pension savings continue to qualify for higher rate tax relief and may help to reduce your payments on account.
ADVISORY FUEL RATE FOR COMPANY CARS
These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 December 2016. Where there has been a change the previous rate is shown in brackets.
|1400cc or less||11p||7p|
|1600cc or less||9p|
|1401cc to 2000cc||14p (13p)||9p|
|1601 to 2000cc||11p|
|Over 2000cc||21p (20p)||13p||13p|
DIARY OF MAIN TAX EVENTS FEBRUARY/MARCH 2017
|1 February||Corporation tax for year to 30/04/16|
|19 February||PAYE & NIC deductions, and CIS return and tax, for month to 5/2/17 (due 22 February if you pay electronically)|
|1 March||Corporation tax for year to 31/05/16|
|2 March||Surcharge of 5% on 2015/16 self -assessment tax still unpaid.|
|19 March||PAYE & NIC deductions, and CIS return and tax, for month to 5/3/17 (due 22 March if you pay electronically)|