Monthly Tax Update Webinar 23 February 2015...The changes will have effect in relation to chargeable events on or after 6 April 2015. 1.8 IHT – Interest in Possession Trusts and

2020 Monthly Tax Update Webinar – February 2015 Page 2

Monthly Tax Update Webinar

23 February 2015

Martyn Ingles FCA CTA

Ingles Tax and Training Ltd

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the author or 2020 Innovation Training Limited

2020 Innovation Training Limited ● 6110 Knights Court ● Solihull Parkway ● Birmingham Business Park ● Birmingham ● B37

7WY Tel. +44 (0) 121 314 2020 ● Fax +44 (0) 121 314 4718 ● Email: [email protected]

● Website: www.the2020group.comCan't


2020 – Monthly Tax Update Webinar – February 2015

Contents

1. DRAFT FINANCE BILL 2015 CLAUSES ........................................................................ 5

1.1 No Employer NICs for the Under 21s and Apprentices ........................................... 5 1.2 Benefits in kind rules to apply to all employees (apart from low paid vicars)............ 5 1.3 Reimbursed expenses – abolition of P11d dispensations........................................ 5 1.4 Exemption for “Trivial” Benefits in kind ................................................................... 6 1.5 “Payrolling” of Benefits in kind ................................................................................. 6 1.6 Fixed rate deduction for use of home as office extended to partners ..................... 6 1.7 IHT – Charges on Relevant Property Trusts ............................................................ 6 1.8 IHT – Interest in Possession Trusts and Successions ........................................... 7 1.9 IHT – Will Trusts dissolved within 3 months of death ............................................ 7 1.10 Changes to Late Paid Interest Rules ...................................................................... 7 1.11 Increased Penalties For Offshore Tax Avoidance ..................................................... 8

2. TAX CASES AND OTHER DEVELOPMENTS ............................................................. 10

2.1 Voluntary Disclosure Campaign for Solicitors ........................................................ 10 2.2 Partner not an Employee ..................................................................................... 10 2.3 Simplification of Partnerships – OTS Final Report................................................. 10

2.3.1 Education of Start-up Businesses .................................................................. 11 2.3.2 Partners’ Expenses ........................................................................................ 11 2.3.3 International partnerships .............................................................................. 12 2.3.4 LLP Group structures ..................................................................................... 13 2.3.5 CGT - Statement of practice D12 ................................................................... 13 2.3.6 Gift aid ........................................................................................................... 13 2.3.7 Other matters ................................................................................................. 14

2.4 QCB or not QCB That is the Question? ................................................................ 14 2.5 No loss relief for Hobbies ...................................................................................... 15 2.6 Racehorse was also a Loser ................................................................................. 15 2.7 Not the same business for loss carry forward ........................................................ 16 2.8 Employment Intermediaries – Traveling Expenses................................................ 16 2.9 Transferable allowance – New PAYE codes ......................................................... 17 2.10 Auto-Enrolment ..................................................................................................... 17

2.10.1 Employers' Obligations - Overview................................................................. 17 2.10.2 Guidance from Pensions Regulator ............................................................... 18

2.11 VAT Rules Changing For Prompt Payment Discounts (PPDs) .............................. 20

3. NEW THINKING AND FORWARD PLANNING ........................................................ 22

3.1 CGT on Incorporation – What Now? ..................................................................... 22


2020 MONTHLY PRACTICAL TAX UPDATE WEBINAR – FEBRUARY 2015 Happy New Year and welcome to the first tax update webinar of 2015. Hopefully you all survived the 31 January deadline and can now turn your attention to considering tax planning and other important issues that may impact on your clients in 2015. Remember that Budget Day is set for 11 March and the General Election is on 7 May so it could be an interesting year from a tax perspective. Depending on the outcome of the Election there may well be a further Budget after the Election, and who knows, if no party gets a working majority, we could find that there is a second General Election later in the year. We may find that many of the announcements in the 2014 Autumn Statement and March 2015 Budget do not get enacted as planned to giving advice to clients on tax proposals may need careful caveats. Remember what happened with Furnished Holiday Lettings in 2010! This is my first monthly webinar for 2020, so my style and approach may be slightly different from what you have been used to from Gerry. However I will be drawing on similar source material for the content of these webinars:

New legislation, in draft and enacted

HMRC practice and guidelines

Recent tax cases and Tribunal decisions

New thinking and forward planning


1. DRAFT FINANCE BILL 2015 CLAUSES

Draft clauses for inclusion in Finance Bill 2015 were issued for consultation on 10 December 2014. Many of the measures are those announced in the Autumn Statement on 3 December and were included in the December 2014 webinar but set out below are a number of additional measures.

1.1 No Employer NICs for the Under 21s and Apprentices

As previously announced from April 2015 employers NIC for those under the age of 21 will be

abolished. This exemption will not apply to those earning more than the Upper Earnings Limit

(UEL), Employers NIC will be charged as normal beyond this limit.

In addition, to encourage apprenticeships there will be no employers NIC payable in respect of

wages paid to apprentices under the age of 25 from 6 April 2016.

1.2 Benefits in kind rules to apply to all employees (apart from low paid vicars)

Legislation in the draft Finance Bill proposes to repeal Chapter 11 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) so that employees (other than a lower paid minister of religion) earning at a rate of less than £8,500 a year will, from 6 April 2016, pay income tax on their benefits in kind (BiKs) in the same way as other employees earning at a rate of £8,500 or more. This change follows consultation on work by the Office of Tax Simplification and will result in the removal of Form P9d as in future benefits for all employees will reported on form P11d irrespective of their level of earnings. As a result of the abolition of the £8,500 threshold, new exemptions are introduced for employed carers on board and / or lodging being provided in the home of the person that they are caring for. This exemption is covered in a separate clause.

1.3 Reimbursed expenses – abolition of P11d dispensations

Currently unless an employer holds a dispensation from HMRC, the value of deductible expenses and benefits which are paid or reimbursed by an employer have to be reported on form P11D. Employees can then claim for tax relief on that expense and/or benefit, typically reducing the taxable benefit to NIL. This leads to unnecessary administrative burdens for employers and employees, and processing costs for HMRC where there is no tax to collect. In response to recommendations from the Office of Tax Simplification as part of their general review of employee benefits and expenses, Ministers have agreed to introduce an exemption with effect from 6 April 2016 for paid or reimbursed deductible expenses and benefits. The effect of this legislation will be that there is no longer any reporting requirement on employers, and employees will automatically receive the tax relief they are entitled to. In addition, there will be no need for dispensations once the exemption becomes effective. New legislation in the draft Finance Bill introduces the necessary changes for income tax. Changes will be made to National Insurance contributions (NICs) legislation to mirror aspects of this change for payments that are subject to Class 1 NICs where necessary. For benefits which fall within a liability for Class 1A NICs, current Class 1A NICs legislation automatically mirrors the tax position.


1.4 Exemption for “Trivial” Benefits in kind

A new draft clause in Finance Bill 2015 has been introduced to provide an exemption from income tax for qualifying trivial benefits in kind (BiKs) where the cost of providing the BiK does not exceed £50. This is part of a number of measures announced by the Chancellor at Budget 2014 aimed at simplifying the administration of employee BiKs and expenses. The trivial BiKs exemption replaces a concessionary practice, whereby an employer is required to agree with HMRC whether a BiK can be treated as trivial and therefore not chargeable to income tax or liable for National Insurance contributions (NICs). A corresponding disregard will be introduced to remove any liability for Class 1 NICs for any qualifying non-cash vouchers provided under the exemption.

1.5 “Payrolling” of Benefits in kind

This clause introduces new powers for the Commissioners to make regulations to authorise employers to deduct or (repay) income tax through PAYE on the benefits that they provide to their employees (“payrolling”). This dispensation to allow employers to payroll their employee’s benefits and expenses voluntarily replaces an existing informal practice, where some employers operate payrolling but still have to comply with tax rules that require them to complete a form P11D (return of employee benefits and expenses) at the end of each tax year for each employee. The regulations will disapply that obligation for employers who payroll the benefits, thus reducing their administrative burdens.

1.6 Fixed rate deduction for use of home as office extended to partners

Simplified expenses was one of the measures introduced in 2013 as a consequence of a report by the OTS and a formal consultation. It was always intended that the provisions would apply equally to most partnerships and individuals and the purpose of these amendments is to clarify two of the provisions and thus ensure they are in line with the policy objectives. Subsections (1) and (5) of section 94H ITTOIA 2005 are to be amended to ensure that when considering a home used for the purposes of a trade then the provision applies to a partner’s home in the same way as it does to an individual’s home. “Qualifying work” is redefined to ensure that where work is undertaken by more than one individual in the home then any hour spent wholly and exclusively for the purposes of the trade is counted only once.

1.7 IHT – Charges on Relevant Property Trusts

The value of property held in most forms of trust is subject to IHT at 6% every ten years on the amount above the nil rate band (currently £325,000); and a proportionate “exit” charge when the value of the property leaves the trust between ten-year anniversaries. There have been a series of consultations into simplifying the calculation of these charges and the new regime is now being legislated. Where more than one trust is settled on the same day by the same person, they are “related settlements” and the value comprised in them is aggregated when determining the


rate at which tax is charged. Historically that rule could be avoided by creating multiple settlements on different days. The purpose of these proposed amendments is to prevent the leakage of IHT through the use of multiple trusts. The proposed changes also simplify some of the rules for calculating the rate of tax for the purposes of the ten year anniversary and exit charges. Note that the proposal to limit trusts created by the same settlor to a single nil rate band (currently £325,000) and require the settlor to nominate what proportion would be available to each trust has been dropped. The changes will have effect in relation to chargeable events on or after 6 April 2015.

1.8 IHT – Interest in Possession Trusts and Successions

It is proposed to amend the Inheritance tax (IHT) legislation relating to settlements created by individuals before March 2006 giving themselves an interest in possession or to their spouse, widow, civil partner or surviving civil partner. Where “interest in possession” appears in s80 of IHTA, it is replaced with “a qualifying interest in possession” which means that where one party to a couple succeeds to a life interest to which their spouse or civil partner was previously entitled to during the latter’s lifetime, section 80 will apply at that time (because neither spouse would then have a qualifying interest in possession). The amendment will mean that settled property is relevant property once spouse2 takes their life interest.

1.9 IHT – Will Trusts dissolved within 3 months of death

It is proposed to amend the inheritance tax (IHT) legislation relating to property that is settled by will. It will provide that where property is left in trust in which no interest in possession subsists and an appointment is made within 3 months of the date of death of that property to the spouse or civil partner of the testator, that appointment can be read back into the will and the IHT spouse exemption under section 18 IHTA (transfers between spouses or civil partners) will apply. The amendment applies to cases where the testator’s death occurs on or after 10 December 2014.

1.10 Changes to Late Paid Interest Rules

At Budget 2013, the Government announced a review of the corporation tax rules governing corporate debt (or ‘loan relationships’) and derivative contracts. There was consultation on a wide -ranging package of measures to update and simplify these regimes and to reduce their susceptibility to tax avoidance. A new clause is being introduced in the context of these wider changes, also to be included in Finance Bill 2015. The ‘late-paid interest’ rules were originally introduced as anti-avoidance Provisions to prevent mismatches between the timing of relief for interest in debtor companies and its taxation in the creditor. Interest may be accrued in the accounts of the debtor, and relieved, even though it may not be actually paid and taxed on the creditor until much later, or not at all.


A similar effect could be achieved through mismatches in the timing of relief for, and taxation of, discounts on deeply discounted securities. Rules in respect of interest on loans are in Chapter 8, Part 5 of CTA 2009, and Chapter 12 contains rules for deeply discounted securities. Under the late-paid interest rules, relief for interest unpaid 12 months after the period in which it accrued is deferred until it is actually paid . In the case of discounts on deeply discounted securities, no 12 month period is involved, but relief is not available until the security is redeemed. The Chapter 8 rules apply in four cases:

where the parties are connected;

where the creditor is a participator in a close company;

where one of the parties has a major interest in the other; and

where the loan is made by trustees of an occupational pension scheme. The Chapter 12 rules for deeply discounted securities effectively mirror the first, second and third of these cases . This clause is concerned with the rules in so far as they apply to connected parties and where one party has a major interest in the other In 2009 the scope of the rules was greatly restricted, so that, in the case of connected parties or where one party has a major interest in the other, they now only apply where the creditor is resident in a ‘non-qualifying’ territory (broadly, a ‘tax haven’). The anti-avoidance effect of the rules is therefore now very limited in those cases. In addition, the rules have regularly been used by some groups to manage and manipulate the emergence of profits and losses. Under the group relief rules in Part 5 of CTA 2010, excess amounts, including trading losses and non-trading loan relationship deficits, can be surrendered to other group companies, permitting immediate relief. If these amounts cannot be used in the period in which they arise, either in the company itself or by surrender as group relief, they can only be carried forward in the company until such time as profits arise in that company against which they can be relieved. Carried forward amounts cannot be surrendered as group relief. For this reason, some groups use structures involving companies in non-qualifying territories and deliberately defer payment of interest so that losses can be timed to arise in accordance with the availability of profits elsewhere in the group which can absorb them. This effectively Sidesteps the intention behind the group relief rules that relief should be available for in-year losses only. Nor does it accord with the anti-avoidance purpose of the late paid interest rules, described above. The wider changes being made to the loan relationships rules will include introduction of a new regime-wide anti-avoidance rule, whose scope will include counteraction of timing mismatches of the kind originally targeted by the late paid interest rules.

1.11 Increased Penalties For Offshore Tax Avoidance

Measures in the draft Finance Bill amend the existing penalty regime that applies to noncompliance involving an offshore matter. It is proposed that the current penalties are increased to up to 125% of the tax lost, and they will also extend the scope by applying the penalties to inheritance tax, and to where the proceeds of non-compliances are hidden offshore. There will continue to be a potential doubling of the penalty to a maximum of 250% in more serious cases.


The territory classification system is also updated to reflect advances in international tax transparency through the implementation of the Common Reporting Standard (CRS). As more overseas territories enter into agreements to provide greater automatic exchange of information with the UK under the new CRS (with first information exchanges to be made in 2017), the Government believe that there is a risk that money and investments will be moved from those territories to others that have not entered into such agreements in order to continue to ‘hide’ past failures to pay tax lawfully payable. While the past failures are already liable to penalties there would be no further sanction for new, additional steps taken to continue hiding the original failures. These provisions address this by imposing a further penalty for an offshore asset move irrespective of whether the conduct giving rise to the ‘original penalty’ occurred before or after the day on which Finance Bill 2015 receives Royal Assent, but only in cases where the original penalty reflected a deliberate failure. It is intended that territories will be ‘specified’ once they have committed to exchanging information under the CRS. It is anticipated that the provisions will commence in April 2016.


2. TAX CASES AND OTHER DEVELOPMENTS

2.1 Voluntary Disclosure Campaign for Solicitors

HMRC's latest voluntary disclosure campaign is aimed at solicitors, whether practising alone, in partnership, or in a company. Those wishing to make a disclosure must notify HMRC by 9 March 2015, then make a full disclosure and payment by 9 June. The Solicitors' Tax Campaign is the latest voluntary, intelligence-led disclosure opportunity giving specific groups of taxpayers the chance to get their tax affairs in order on the best terms available. Previous campaigns have included medical professionals, plumbers, tutors and coaches, electricians, online traders, landlords and health professionals. This approach has so far raised almost £1 billion from voluntary disclosures and follow-up activity by HMRC. As usual by using this campaign to come forward voluntarily, any penalties they might have to pay will be lower (typically between 0% and 20%) than if HMRC has to approach them first as otherwise the penalty could be 100% or more of the tax due, or even a criminal prosecution. Online tools are available to help solicitors and tax advisers work out how much they owe— www.hmrc.gov.uk/campaigns/5years-calc.pdf www.hmrc.gov.uk/campaigns/19years-calc.pdf

2.2 Partner not an Employee H S Patel v HMRC [2014]

UKFTT

The Post Office paid the taxpayer, who had run a sub-post office within his retail business, £76,008 as compensation for the loss of his position as sub-postmaster when the office was closed in June 2004. HMRC assessed the payment to tax on the basis that £30,000 was exempt under ITEPA 2003 s 403, but the balance was taxable. The taxpayer appealed. He claimed that his wife had been his employee when he was sub-postmaster and that he should be allowed a deduction for the payment of £37,122 he paid to her as redundancy. He also claimed the costs of refitting the shop to remove the trappings of the post office. The First-tier Tribunal found there was no evidence to show the wife had been an employee. Rather she had been a partner in the retail business, entitled to 50% of the profits. No deduction could therefore be allowed on the payment to the wife. Any expenses incurred by the taxpayer in refitting the shop when the sub-post office closed were not allowable because they related to the carrying on of the retail business. The taxpayer's appeal was dismissed.

2.3 Simplification of Partnerships – OTS Final Report

The Office of Tax Simplification (OTS) have now issued their final report on the simplification of the rules for the taxation of partnerships. One of the key OTS recommendations was that said HMRC should establish a head of partnerships role to help ensure the proper focus of tax policy and operational work. It also suggested that an industry/HMRC liaison group be set up to provide a forum to address issues arising from new, specialist partnership uses.

http://www.hmrc.gov.uk/campaigns/5years-calc.pdf

http://www.hmrc.gov.uk/campaigns/19years-calc.pdf


Other OTS recommendations include: ● clear and comprehensive guidance for partnerships when they register with HMRC; ● allow partners to claim their allowable expenses against their share of the profits; ● improvements to help partnerships with international operations, including a requirement for future double tax agreement renegotiations to consider partnerships issues; ● HMRC's Partnership Manual to address group relief on structures involving limited liability partnerships (LLPs); ● a revised and updated HMRC statement of practice D12 to govern partnership capital gains and address entrepreneurs' relief; and ● two new alternative routes to allow gift aid for partnerships.

2.3.1 Education of Start-up Businesses

The report noted that HMRC have set up some initiatives to help start-ups. This includes guidance on setting up in business. The report said this guidance should provide more information on the different forms of business. It should focus on “accidental” partnerships where people have begun working together without understanding the tax implications. The link to “running a partnership” contained limited information and did not refer to partnership agreements. The report was concerned that “the wording of the overview page on business structures [on GOV.UK] appears to imply a partnership is an elective option, rather than defined by the facts”. There was praise for HMRC's consolidated Partnership Manual which would be particularly useful for advisers, although unrepresented small partnerships may find it “overwhelming”. The OTS referred to the idea of a default partnership agreement that had been set out in the interim report. In essence, it would be based on provisions from the 1890 Partnership Act unless displaced by an agreement. HMRC were not keen on the idea, saying that a partnership agreement should be drawn up by the individuals with professional help. The report suggested that HMRC and the Department for Business, Innovation and Skills should provide a checklist of issues that need to be considered in a partnership agreement, with commentary and examples.

2.3.2 Partners’ Expenses

Following the OTS Interim Report HMRC rejected the OTS's suggestion that partners should be allowed to make claims for business-related expenses incurred wholly and exclusively against their partnership share in their personal returns. This was on the basis that it would add to the “burdens of administration of partnerships and partners, and not reflect the true profit or loss of the partnership business or the individual partners”. HMRC were also concerned that it could result in loss of revenue and compliance problems. The OTS was not content with this response, noting that HMRC's interpretation of the legislation is before the courts with the Upper Tribunal's decision awaited in Vaines v HMRC. It was clear from comments received that individual partners were being put off claiming business expenses and that the possibility of an increased Exchequer cost should not be a reason to deny change to improve the claim process. On HMRC's point that allowing partners to claim expenses would not reflect the true partnership profit, the OTS said the evidence suggested that “partnerships have always had flexible profit share arrangements and if partners choose to operate their business in this


manner, then that should be a matter for them”. Indeed, the lack of the partners' expenses would give a more accurate picture of how the business performed. As to compliance, respondents said that including the expenses on the individual's return would give HMRC more scope to enquire into partners' expenses. It would make the individual partners more responsible for what they are claiming on their tax returns. There would be no need for the partnership pages. Instead an additional box could be included in the income section of the self-employment pages to note that expenses were from a business activity carried on in partnership with others. This would be much simpler for individual taxpayers to understand. On finalising the partnership affairs, the responses showed that some partners would not provide details of their expenses until January. This held up finalising the partnership accounts, the partnership tax return and the personal tax returns of all the partners. Respondents named travel expenses, the costs of attending conferences, and purchases of books and journals as the types of expenses that should be claimed directly. There was no consensus on whether such a change would require adjustments in the accounts, although the OTS concluded none would be necessary on the basis that this would follow HMRC's practice of accepting adjustments for expenditure, and then treating the expenditure as if it had been included in the accounts. HMRC helpsheet 231 covers this. In essence, the OTS believes that partners should be allowed to claim their allowable expenses from their share of the partnership profits if the agreement permits. It acknowledged HMRC's concern that such an approach would contravene the principle that only expenses incurred wholly and exclusively for the purposes of the trade can be relieved against taxable profits. Also, because the trade is the partnership's, HMRC state that expenses can be claimed by the partnership only, not the individual partners because they do not carry on the trade. But the OTS said the second objection seemed to ignore “the principle that the partnership consists of partners carrying on the business together — it can only be carried on by the partners. The partners take a share of the firm's results to represent the results of their trade. Why should they not be allowed to deduct costs from that share — if that is how they wish to organise themselves?”

2.3.3 International partnerships

The OTS stated that, compared with corporations, partnerships tended to be an after-thought in international business transactions and, as a result, difficulties arose. A particular problem was the US limited liability company (LLC) which the US views as transparent but HMRC treat as a company. This results in payments from an LLC being treated as a dividend in the UK with no credit for the US taxes suffered as a partnership share. The report noted that HMRC have proved willing to “be pragmatic in a number of areas”, operating “unofficial practices to simplify administration and save time all round”. However, because this was, in effect, concessionary treatment, there was no guarantee that such practice would continue. Awareness of the tax treatment of UK liabilities of non-resident partners in UK LLPs was low, according to the report. As a result, “getting the right result is invariably expensive and difficult, and can result in the entire process containing a degree of commercial uncertainty for partnerships”.


Most double taxation agreements treated partnerships as fiscally transparent; the fact that some did not, such as those with Italy and China, caused confusion. There was also inconsistency in how profits should be allocated between partners resident in different countries and taxed. Lack of agreement could lead to partners being doubly taxed without relief. The report concluded that all double taxation agreements should recognise partnerships. This would be a major task because each treaty would have to be revised individually. Therefore, the best the OTS could hope for was that partnership issues should be considered when treaties were renegotiated.

2.3.4 LLP Group structures

The report noted that there is no HMRC guidance on group structures on corporation tax, capital gains tax, or inheritance tax. This needs to be rectified. For example, CTA 2009 s1273 states that references to a company do not include an LLP, while CTA 2010 s188 specifies that, for group relief, a company means any body corporate. It is unclear whether an LLP can head the group and HMRC treatment is not inconsistent in deciding whether group relief may be claimed. The OTS confirmed that HMRC had agreed to include guidance in the Partnership Manual to clarify matters. As regards inheritance tax, the report noted that shares in a holding company of a predominantly trading group qualified for business property relief but no such provision applied if an LLP was the holding vehicle for the trading group. The report explained: “The circumstances of anomalous results of an LLP heading the group instead of a company may apply in both cases and it would be unfair to only look at one of the reliefs applying.” The OTS suggested that, rather than guidance, legislation may be required to correct the anomaly.

2.3.5 CGT - Statement of practice D12

The report noted that HMRC agreed that SP D12 should be updated to reflect changes in business ownership and operations since it was issued in 1975. It recommended that when this is done, HMRC should “launch seminars and releases to raise awareness of the statement and its relevance”. Full guidance on entrepreneurs' relief for shares in trading companies held by an LLP would, also be helpful.

2.3.6 Gift aid

The earlier report found that, unlike companies and individuals, there is no provision allowing partnerships or LLPs to claim relief for gift aid contributions to charity. Donations have to be allocated to partners and claimed individually. This can be a burden for larger partnerships, particularly as many such firms make decisions about donations collectively. The OTS recommends simplifying the process for partnerships. It suggests two alternative routes: Under the first, the firm would make a donation and the relevant gift aid declaration would be treated as made by the representative partner. The donation would be treated as made under gift aid by the individual partners with the charity entitled to reclaim the basic rate income tax. This would require a statutory instrument to remove the requirement to list all partners' names and addresses. The second suggestion was for the partnership to take a deduction for the donation in its computation of trading profits. It would be treated as a gross donation with no eligibility for


the charity to reclaim basic rate tax. The OTS acknowledges that legislation would be needed for this route.

2.3.7 Other matters

The report repeated recommendations from the interim report on reducing VAT reporting, changing the law to allow mixed member partnerships to claim the annual investment allowance, and simplifying basis periods for trading and other income.

2.4 QCB or not QCB That is the Question? N Trigg v HMRC [2014]

UKFTT

The disposal of Qualifying Corporate Bonds (QCBs) are exempt from Capital Gains Tax (TCGA 1992 s115). This case concerns the definition of a QCB, in particular the conversion into a currency other than sterling. A qualifying corporate bond is defined as one that is issued after 13 March 1984 (s 117(7)(a) TCGA 1992). For a bond to be “corporate” there are three conditions. It must be a security, represent a normal commercial loan and be “expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling” (s 117(1)). Nicholas Trigg was part of a partnership which had bought undervalued bonds on the market. Six of those bonds had been sold and he, along with the other members of the partnership, claimed that no capital gains arose. This was on the basis that the bonds were qualifying corporate bonds and therefore exempt from capital gains tax. HMRC contended that they were not qualifying corporate bonds and that capital gains tax was due. Mr Trigg was the lead case for the other members of the partnership. In the Trigg decision, it was accepted that the bonds satisfied the first two conditions, so the case turned on the third. This condition is not breached if there is a provision for the bond to be redeemed other than in sterling but only at the rate of exchange prevailing at the date of redemption (s 117(2)(b)). The bonds had been issued when it was considered not inconceivable that the UK might join the eurozone, so each had one of two provisions (referred to as Schedule A or Schedule B) to take into account this possibility. Schedule A stated that, if the UK changed its currency, all amounts payable in respect of the notes would be converted into that new UK currency at the official rate of exchange recognised by the Bank of England. Schedule B was more specific; it referred to the UK adopting the euro as its currency, and allowed the bond issuer to deem the bonds to have been redenominated in euros on 30 days' notice, as long as the date this was done fell on a payment date for the notes. The conversion rate would be set by the council of the EU. Nothing hung on the specific terms of the different schedules but HMRC said that these conversion clauses meant that the bonds were not qualifying corporate bonds because of s117(1), so that capital gains tax was due on the disposals. Mr Trigg had two arguments. First, if the UK adopted the euro, it was not “a currency other than sterling”. Alternatively, he argued that the schedules did not provide for conversion into or redemption in euros.


The essence of the argument is that, taking a purposive approach, the word “sterling” in effect means “the lawful currency of the UK”. So, if the UK adopted the euro, the word “sterling” would mean the euro. The judge disagreed. He reviewed non-tax cases that considered the meaning of “sterling” and concluded that, at least by 1938, it was a word that referred exclusively to the UK pound. From a capital gains perspective, decided cases had demonstrated that the pound sterling was the measure of not just a gain but also the acquisition price and disposal values for capital gains tax purposes. Interpretation of s 117(1)(b) In reviewing the currency conversion provisions purposively, the judge said the only relevant intention was that of Parliament. The intentions of the issuer in including the clauses, or of the appellants in having bought and sold the bonds, were not relevant. In looking at the intention of parliament, the judge referred to previous cases that discussed the purpose of the exemption for qualifying corporate bonds. The original legislation was intended to give marketable bonds the same exemption from capital gains tax as gilts. The exemption was later extended to non-marketed bonds, on the basis that parliament intended it to apply to investments available in Britain to stimulate the market. The currency conversion exclusions were therefore intended to ensure that gains or losses on non-British securities would be taxed. The judge held that the word “sterling” must mean the pound sterling, not the currency in use from time to time in the UK. This is supported by his initial analysis of the legislation and on taking a purposive approach.

2.5 No loss relief for Hobbies D Patel v HMRC [2014]

UKFTT

The taxpayer, a social worker, was employed full-time by a district council. In 2004, he began a business supplying ingredients and running cookery workshops. Three years later he set up another business selling Indian art and photography. Neither business was profit-making and the taxpayer claimed sideways relief in respect of the losses against his employment income. HMRC refused on the ground that he had not run his businesses on a commercial basis. On appeal to the First-tier Tribunal it was found that the trades had begun as hobbies and never grew beyond that. Although some factors indicated a commercial approach, such as the creation of professionally designed websites and the taxpayer taking steps to protect his trademark, the tribunal concluded that the taxpayer had no clear idea of the level of sales nor was he seriously interested in profits. His aim was to pursue his interests and share his love of Indian culture. The judge decided neither trade was carried on on a commercial basis with a view to the realisation of profits. His appeal was dismissed.

2.6 Racehorse was also a Loser ELJ McMorris v HMRC [2014]

UKFTT

A similar decision was made by the First Tier Tribunal in this case concerning the loss on sale of a racehorse. In February 2010, the taxpayer bought a half-share in a racehorse and agreed to meet half the training, livery and racing costs. The horse was initially successful and the owners turned down an offer of £50,000 to buy it. The success was short lived and, in summer of 2011, they sold the horse for about £1,000, of which the taxpayer received half.


In his 2010/11 tax return, the taxpayer claimed loss relief in respect of self-employment, which he described as “racehorse”. HMRC refused the claim on the ground that owning a racehorse was a hobby, not a trade. The taxpayer appealed. The First-tier Tribunal referred to the “badges of trade” test cited by the judge in Marson v Morton (1986). In this instance, the deal was a one-off transaction, the taxpayer had not borrowed any money for the venture, there was no long-term plan and he “clearly derived pleasure” from the project, all of which pointed away from the badges of trade. Overall, the tribunal had no hesitation in deciding the taxpayer's activities did not amount to a trade. Furthermore, given the informality of the arrangements between the co-owners, s66 ITA 2007 was not satisfied, because the activities were not carried out on a commercial basis. The taxpayer's appeal was dismissed.

2.7 Not the same business for loss carry forward HL Amah v HMRC [2014]

UKFTT

The taxpayer operated a Dolland & Aitchison opticians franchise until 3 April 2009. Two months later he became a self-employed locum dispensing optician undertaking contract work. He wanted to carry forward losses, under s83 ITA 2007, from his franchise business and set them against his 2009/10 income on the basis that his self-employment was a continuation of his trade as a franchisee. HMRC refused the claim. They said the taxpayer's new business was different from his old one, and that the gap between ceasing one business and beginning another indicated the two were separate. The taxpayer appealed. The First-tier Tribunal noted that almost two months passed between the end of the taxpayer's franchise and the start of his self-employment as a locum. This, along with the difference in the kind of people seeking his services and the fact that he did not work from a fixed location, indicated that his self-employed work was “substantially” different from his franchise. The facts showed that the franchise business ceased and that he began another business. The losses could not therefore be carried forward and the taxpayer's appeal was dismissed.

2.8 Employment Intermediaries – Traveling Expenses HMRC Consultation

As part of their review of the use of overarching contracts (OACs) of employment by employment intermediaries in the temporary labour market to take advantage of the rules for travel and subsistence expenses, HMRC have launched a consultation. The government believes the use of such contracts by some employment businesses and umbrella companies allows temporary workers employed under them to benefit from tax and National Insurance relief on home-to-work travel expenses, which others cannot. The document, “Employment intermediaries: temporary workers — relief for travel and subsistence expenses”, sets out two options on how to address this issue. One option would introduce legislation to amend the tax rules on travel and subsistence expenses to the effect that individuals engaged under an OAC by an employment intermediary to work for a third party, would not be able to claim tax relief for travel and associated subsistence from their home to the workplace of the end client.


This could be achieved by deeming the workplace of the end client to be a “permanent workplace”. No relief for travel from home to that workplace and associated subsistence would therefore be available. It would apply whatever form the third party took and would not change the position of individuals who are directly employed by employers for short periods because they are currently treated as working at a “permanent workplace”. The second option would be to restrict tax relief for travel from home to workplace and associated subsistence costs when the individual was employed by an intermediary specifically under an OAC. This could be accomplished by stopping such contracts being treated for tax purposes as giving rise to a series of temporary “employments” under a permanent contract.

2.9 Transferable allowance – New PAYE codes

The transferable allowance for married couples and civil partners begins on 6 April 2015. The person receiving the transferred amount will have their tax-free personal allowance increased by £1,060 (10% of the basic personal allowance). Two new tax code suffixes will be introduced: “N” for the transferor and “M” for the recipient. These will operate in the same way as the existing ones. They will not be used on codes before April 2015 so will not be included on the 2015/16 P9 tax codes issued in January, February and March 2015.

2.10 Auto-Enrolment

2.10.1 Employers' Obligations - Overview

By the end of 2015 most employers will have to provide workers with a workplace pension scheme by law. This is called ‘automatic enrolment’. When your business must start doing this (known as a ‘staging date’) depends on how many people you have on your payroll. Check your staging date with The Pensions Regulator, this can be done online by entering your employers PAYE reference on the Pensions Regulator website. You must set up a workplace pension scheme before your staging date, if you don’t already offer one. If you already have a workplace pension scheme, check if you can use it for automatic enrolment. DC qualifying scheme tool You need to check whether your existing DC scheme qualifies and if you can use it for automatic enrolment. The Pensions Regulator DC qualifying schemes tool will guide you through the areas you need to look at to make an informed decision. Because every scheme is different, the tool is unable to tell you whether your particular scheme meets the criteria. You will need to work out whether you can use your scheme. If you don’t feel confident about deciding whether your scheme meets the criteria, you should ask the trustees or scheme provider running it. Those using DB and hybrid schemes should speak to the scheme trustees to check whether your scheme qualifies. There is further detailed guidance from the Pensions Regulator. You must enrol all workers who:

are aged between 22 and the State Pension age

earn at least £10,000 a year

work in the UK

http://www.thepensionsregulator.gov.uk/employers/explaining-qualifying-schemes.aspx

http://www.thepensionsregulator.gov.uk/employers/explaining-qualifying-schemes.aspx


You must make an employer’s contribution to the pension scheme for those workers. If you run your own pension scheme you must keep its assets separate from your business assets. Providing information You’ll need to give your pension provider information about your employees to enrol them. Check exactly what information your provider needs - as a minimum, for each of your employees you’ll need their:

name

address

date of birth

National Insurance number Paying contributions You must pay any pension contributions you take from your employees into your staff pension scheme by the date you’ve agreed with your provider. This date must be no later than the 22nd day (19th if you pay by cheque) of the following month. You may be fined by The Pensions Regulator if you pay late or don’t pay the minimum contribution for each member of staff.

2.10.2 Guidance from Pensions Regulator

Know when you need to be ready You must be ready to start enrolling staff from your staging date. This date will appear on letters from us about automatic enrolment. If you don’t have a copy of our letter, you can find out your staging date by entering your PAYE reference into the tool on our website. Find out your staging date: www.tpr.gov.uk/staging-date

Provide a point of contact There are several things that you need to do to be ready for automatic enrolment. Sign up to our emails to receive help and guidance over the coming months. To make sure that this help gets to the right person in your organisation you should nominate someone to receive these email updates. Let us know who to contact: www.tpr.gov.uk/nominate-contact Find out who to enrol You will have to assess all your staff for eligibility but you may not have to automatically enrol all of them. The table below outlines your duties depending on the salary of your staff member.

Monthly Earnings

Age

Age From 16 to 21

From 22 to SPA*

From SPA to 74

£481 and below Has a right to join a pension scheme

Over £481 up to £833

Has a right to opt in

Over £833 Has a right to opt in

Automatically enrol

Has a right to opt in

Figures correct as of 2014/2015. * SPA = state pension age

http://www.tpr.gov.uk/staging-date

http://www.tpr.gov.uk/nominate-contact


It’s against the law to take any action to induce anyone to opt out. Examples of this could include persuading or forcing staff to opt out by offering them a cash bonus to do so, or by withholding a pay increase until they opt out. Visit the link below to find out more about assessing your staff. Evaluate your workforce: www.tpr.gov.uk/evaluate Choose your software and check records You’ll need to know who has to be automatically enrolled and who can ask to join your pension scheme. Payroll software which is specifically tailored to automatic enrolment will help you keep track of the ages and earnings of all your staff and will tell you what you need to do for each of them. If you run your own payroll, you may already know whether this is built in. If someone else manages your payroll for you, you will need to ask them. To check, ask your payroll provider the questions found on the link below. You need to make sure your software supports automatic enrolment and you should test it well ahead of your staging date, to make sure it works. Taking the time to get your staff and payroll records in order ahead of your staging date is essential. You must be able to provide information to your pension scheme in the correct format. Make sure the necessary records are easily to hand and that you have correct information about your staff before your staging date, including:

dates of birth

National Insurance numbers, and

latest contact details. Choose a pension scheme If you have an existing scheme for your workforce (perhaps called a ‘stakeholder scheme’) you should check with your pension provider to see if you can use it for automatic enrolment. If you need to open a new scheme, make sure you approach a pension provider in good time because they will be taking on thousands of employers in the coming months. Don’t leave it too late. The Government has set up a pension scheme called the National Employment Savings Trust (NEST) to accept all employers wishing to use the scheme for automatic enrolment. This is one option, and there are other providers available. It’s important that the scheme you choose is well-run and offers good value for money for you and your staff. Our website has information to help you choose a pension scheme Your staff are likely to have heard about automatic enrolment in the media, and may want to know more. If you haven’t done so already, this is a good time to start raising awareness. We have a range of materials to help you. Automatically enrol your staff At your staging date you will need to identify which members of staff to automatically enrol and which will have a right to join your pension scheme on request. Payroll software will help you with this. By this point you will already know what information your scheme provider wants from you, so make sure you send this to them promptly. Make sure you pay the contributions across to the pension scheme before the deadline your provider has given you. Enrolling your staff: www.tpr.gov.uk/enrolling

http://www.tpr.gov.uk/evaluate

http://www.tpr.gov.uk/enrolling


Tell your staff After your staging date, you must write to your staff about how automatic enrolment affects them. We have template letters that you can use for this on our website.Writing to members of staff about automatic enrolment: www.tpr.gov.uk/writing Complete your declaration of compliance (registration) You must complete your declaration of compliance when you’ve automatically enrolled your members of staff. This confirms to us that you have fulfilled your legal duties. You may find it helpful to track your progress by starting your declaration early. It must be completed up to five months from your staging date. To help, we have a checklist of the information you’ll need to provide, found at the link below. Automatic enrolment declaration of compliance: www.tpr.gov.uk/declaration Maintain records As with real-time PAYE, you must keep records of your automatic enrolment activities. This will include the information you sent to your pension provider, and copies of any opt-out requests you receive. Record-keeping: www.tpr.gov.uk/records Ongoing responsibilities For automatic enrolment there are minimum contributions you must pay in order to comply with your duties. These are a percentage of earnings and are shown in the table below. Date

Employer minimum contribution

Total minimum contribution

Before 30/09/17 1% 2%

01/10/17-30/09/18 2% 5%

01/10/18 onwards 3% 8%

Your worker may also pay pension contributions, which you will need to make sure you deduct and pay to the scheme on time. Ongoing automatic enrolment responsibilities: www.tpr.gov.uk/ongoing Automatic enrolment is not just something that happens at your staging date – it is an ongoing duty. You’ll need to check every payday to see whether any of the members of staff who weren’t automatically enrolled are now entitled to be put into the pension scheme (for example if they have reached their 22nd birthday). After you have automatically enrolled your staff members, they may ask to ‘opt out’ of the pension scheme. You must then stop deductions of contributions and arrange a refund of any contributions they have paid to date. Staff who have not been automatically enrolled may ask to join the scheme. If you receive such a request, your software should help you process this. Automatic enrolment will be ‘business as usual’, just like real-time PAYE or filing your employer return with HMRC.

2.11 VAT Rules Changing For Prompt Payment Discounts (PPDs)

In last year’s Finance Act it was announced that the VAT rules for dealing with prompt

payment (or early settlement) discounts would be changing from 1 April 2015. HMRC have

now issued brief 49/2014 setting out guidance for businesses affected by the change many of

whom may need to change their invoicing procedures.

From 1 April 2015 output VAT will need to be calculated on the consideration actually

received from the customer instead of the current rules where VAT is calculated on the value

of the supply net of any discount for prompt payment.

http://www.tpr.gov.uk/writing

http://www.tpr.gov.uk/declaration

http://www.tpr.gov.uk/records

http://www.tpr.gov.uk/ongoing


Let’s assume for example that you supply goods to the value of £100 but allow the customer

a 2.5% discount if they pay within 30 days. Under the current rules VAT is charged on the

discounted price £97.50 not £100, whether or not the customer pays within 30 days.

From 1 April 2015 on issuing a VAT invoice, suppliers will enter the invoice into their

accounts, and record the VAT on the full price. If offering a PPD suppliers must show the

rate of the discount offered on their invoice. The supplier will not know if the discount has

been taken-up until they are paid in accordance with the terms of the PPD offer, or the time

limit for the PPD expires. The supplier will then have two options to deal with the discount:

(a) they may issue a credit note to evidence the reduction in consideration, (b) alternatively, if they do not wish to issue a credit note, they will need to adjust the output

tax in their VAT return and the invoice must contain the following information:

(1) the terms of the PPD (in particular the time by which the discounted price must be made).

(2) a statement that the customer can only recover as input tax the VAT paid to the supplier.


3. NEW THINKING AND FORWARD PLANNING

3.1 CGT on Incorporation – What Now? “Taxation” Article 22 January 2015

An article in “taxation” Magazine by Iain Robertson on 22 January 2015 considers the implications of the exclusion from CGT Entrepreneurs’ Relief for the gain arising on the transfer of goodwill from a sole trader or partnership to a company which is a related party. There is a corresponding denial of a corporation tax deduction for the transferee company where the transfer took place on or after 3 December 2014. The article also considers the use of alternative relief under s162 or s165 TCGA 1992. The following example illustrates in particular the additional tax that will now be payable and the cash flow implications. Mr Smith — Pre 3 December 2014 incorporation: Mr Smith set up his business in 2004. He made £100,000 profits each year and had his goodwill is valued at £1m. On 30 November 2014, he transferred that goodwill without seeking rollover relief for £1m to Smith Ltd, a company he owns. He paid £100,000 capital gains tax after entrepreneurs' relief on 31 January 2016. He can draw £1m tax free from Smith Ltd as the company makes profits in future years. If Smith Ltd continued to make £100,000 profits a year, but amortised the goodwill at 10%, the company would make nil taxable profits. That saves £20,000 corporation tax and could allow Mr Smith to draw the full £100,000. Over ten years the tax would be the £100,000 capital gains tax paid on £1m profits and there is £900,000 net cash in the hands of Mr Smith. Mr Smith — Post 3 December 2014 incorporation: Suppose Mr Smith carried out the same plan on 6 December 2014. The capital gains tax on 31 January 2016 will be £280,000 on the £1m gain without entrepreneurs' relief. Smith Ltd, not able to claim tax relief on amortising the purchased goodwill, will pay £20,000 corporation tax each year so Mr Smith can draw £80,000. After ten years, the aggregate tax will be £480,000 (£280,000 capital gains tax plus £200,000 corporation tax). Mr Smith now has £520,000 net cash after ten years (his £800,000 draw less the £280,000 CGT). The company still owes him £200,000, which would take 30 more months to repay so he eventually has £720,000 cash but the company has paid a further £50,000 corporation tax. Over the 12.5 years the total tax paid is £530,000. Also, he would not be able to fund most of his £280,000 capital gains tax by the cash releasable before 31 January 2016.


Use alternative CGT reliefs on incorporation It is still possible to use s162 TCGA 1992 rollover relief (or s 165 gift relief) to avoid an immediate capital gain on incorporation. The consideration for a s 162 based incorporation has to involve shares issued, so there cannot be a simple cash-free drawing as with an amount outstanding on the sale of the goodwill. Relief under s162 TCGA is automatic if the conditions for the relief are satisfied and an election under s162A is required to disapply the application. The relief requires all of the assets (with the exception of cash) to be transferred to the company with the consideration being wholly or partly in shares. For investment businesses, such as those with property rental portfolios, the position on incorporation generally remains unaltered by the autumn statement changes. They would previously have had a 28% capital gains tax charge on incorporation of the investment properties unless s 162 rollover relief was obtained and the usual absence of goodwill with such businesses normally renders the intangible assets rules irrelevant. It is not possible to prevent a tax charge on incorporation by selling for nil consideration (assuming s 165 did not operate). This is because s17 TCGA 1992 imposes a market value on the sale of chargeable assets where there is not a bargain at arm's length. Other reliefs There may be cases where the planning, at least in connection with capital gains tax and obtaining cash-free drawings, could still be worth considering. For example: ● sales by clients who have capital losses available to off set; ● clients who have recently acquired a business on death with a stepped-up base cost; ● clients moving to the UK who can plan ahead while not yet UK tax resident; and ● Allocating more of the value of the business to properties that are transferred as a part of an incorporation rather than to goodwill. The latter will require expert valuation support and the stamp duty land tax position would need to be considered because market value applies the deemed consideration for SDLT purposes on incorporation.

Monthly Tax Update Webinar 23 February 2015...The changes will have effect in relation to chargeable events on or after 6 April 2015. 1.8 IHT – Interest in Possession Trusts and

Documents