CGT horror, VAT on overseas expenses, Contracts for difference

To coincide with Halloween, when frightening and spooky things abound, we have three tales of tax horror to shock you. First: bad advice given by a solicitor on the gift of a house. Second: the lack of advice given by a large firm of accountants on reclaiming VAT on overseas expenses. Finally a warning about letters from HMRC concerning schemes involving contracts for difference. There is something to learn from each of these situations.

This is an
extract from our topical tax tips newsletter dated 29 October 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

CGT horror 
Imagine this: your client tells you he has given his daughter a let property to reduce the value of his estate for IHT purposes, and to provide his daughter with a source of income. The solicitor who handled the conveyance said as no money changed hands there was no capital gains tax to pay. 
  
The solicitor’s advice is wrong on two fundamental points. The gift between the father and daughter is taxable, as it doesn’t fall into one of specific exemptions provided by the legislation – such as a transfer between spouses/civil partners (TCGA 1992, s 58). 
  
Where a transaction – including a gift – occurs between connected parties, the transaction is deemed to occur at the open market value of the asset transferred (TCGA 1992, s 17). The father and daughter are connected persons as they are relatives (TCGA 1992, s 286(2)). It makes no difference that the daughter is an adult, she remains connected to her father for the whole of her life. The fact that no money changed hands doesn’t change the deemed consideration for the transaction. 
  
If the property has increased in value while your client has owned it there may well be CGT to pay. The taxable gain is calculated as if he had sold the property to his daughter at its market value. 
  
There are two possible ways to mitigate this gain:…..

The
full newsletter contained the remainder of this piece plus links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.


Repairs or improvement, Pensions annual allowance, Learning from BRC

The allocation of costs between repairs and improvements always involves an element of judgment, but if HMRC disagree with the taxpayer’s decision additional tax and penalties can be due, as we explain below. We also have a warning about pension annual allowances and the declaration required on the taxpayer’s SA tax return. Finally we celebrate an outbreak of common sense at HMRC concerning Business Record Checks.

This is an
extract from our topical tax tips newsletter dated 22 October 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Repairs or improvement 
If a client spends a substantial sum on repairing or altering their let property you will probably learn about the project after the event, when you complete the tax return. What you do next could have a huge bearing on the level of any penalty payable should HMRC question the apportionment between repairs and capital. 
  
Only the landlord can know whether the work undertaken has installed a fixture, fitting, or part of the structure which did not previously exist, or has improved such an item so its nature has been transformed. Any of those outcomes means the cost should be classified as an improvement (capital expenditure); everything else is a repair. A diligent taxpayer will record all the expenditure when the work is done and categorise the costs at that time. 
  
However, without back-up to support the landlord’s records, his analysis is worthless. If HMRC open an enquiry the tax inspector will ask for sight of various documents to support the cost apportionment. Those will include: architects drawings, builders’ estimates, receipts and building inspector’s report. Ideally the documents should tell a clear story to link the before and after state of the property. In reality this is unlikely to be the case, but HMRC will demand evidence of why and how each section of work was done. 
  
When the tax inspector’s view of the repair/capital cost split differs from the landlord’s, HMRC may seek to impose a penalty for a careless inaccuracy – up to 30% of the underpaid tax. You can counter this with the argument that the taxpayer took reasonable care establish the correct deduction claimed on the tax return. 
  
The HMRC compliance manual (para CH81130) says if an inaccuracy in a document exists despite the person having taken reasonable care, no penalty will be due. The HMRC manual goes on to say the standard of care is: “that of a prudent and reasonable taxpayer in the position of the taxpayer in question.” 
  
The alternative approach is to encourage clients to keep adequate back-up to support all repair/ capital apportionments, and advise them not to claim costs as repairs which could be shown to be improvements. 

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.


Errors in loss calculations, Nudge letters, Non-resident or Non-domicile

How confident are you that your tax return software calculates the tax due correctly? In last week’s newsletter we explained why you may need to be sceptical. We also highlighted some underhand letters HMRC are sending to taxpayers. Finally there was a revised HMRC guidance note and a consultation document which you should read if you have any non-domiciled or non-resident clients.

This is an
extract from our topical tax tips newsletter from last week, dated – 8 October 2015. 
You can obtain future issues as they are published by registering here>>>

Nudge letters 
HMRC has a “nudge” unit. Its policy is to persuade taxpayer to pay the right amount of tax. It does this through carefully worded letters containing psychology techniques to subconsciously nudge the recipients to declare previously undeclared profits. We have reported earlier missives from the HMRC nudge unit in our newsletters on 17 April 2014 and 3 July 2014. 
  
The latest targets of the nudge unit are taxpayers who are in dispute with HMRC. Some of those taxpayers have been receiving letters that encourage them to settle the dispute with HMRC. The letters play on the natural desire of taxpayers to avoid confrontation, particularly when up against a powerful opponent such as HMRC. 
  
If your client has received such a letter, but you may not be aware of it as HMRC are not sending copies of the letters to the registered tax agent. This is a serious issue, as those nudge letters could be construed as an attempt to apply improper pressure to settle the tax dispute – coming from the party that has the greater power. 
  
If you feel a line has been crossed by the nudge letter your client has received in connection to their tax dispute, a reasonable course of action would be to complain to HMRC. Out tax investigation experts can provide impartial advice on the issues underlying the tax dispute and the likelihood of winning the argument. 

As always, the
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.


VAT and DIY, Employee share schemes, US tax returns

Last week we contemplated the hazards of completing tax forms incorrectly or late. We had a cautionary tale of mistakes when submitting a VAT claims under the DIY builder scheme, and a report of faults in HMRC’s processing of 2014/15 share scheme returns. We also had a final warning of the deadline for submitting USAtax returns – this applies to more people than you may realise.

US tax returns 
The USA has a citizen based taxation system, rather than a residence based system, which most other countries in the world operate. This means that all citizens of USA must complete a USA tax return every year, even if they have never lived in the USA. 
  
This obligation to file a USA tax return extends to non-USA citizens who are in possession of a valid “green card” which allows a person to work in the USA. The deadline for filing the 2014 tax returns for US-related individuals who live outside the US was 15 June 2015, although a four month extension could be requested on IRS form 4868. 
  
That extension is due to run out on 15 October 2015, which is also the last day on which an electronically filed personal tax return will be accepted by the IRS. Taxreturns submitted later must be filed on paper. Even if there is no tax liability in the US, a late filing penalty of up to $10,000 can apply. 
  
The USA tax return needs to report the individual’s worldwide income, not just income that arises within the USA. This requirement gives rise to a potential double tax charges on non-USA income and gains. However, due to the operation of double taxation agreements with USA, there may not be any further tax to pay for a UK resident, as tax rates in the UK are generally higher than in the USA. 
  
Having said that anyone completing a USA tax return must consider categories of income and gains which are tax free in the UK, but which are wholly or partially taxable under US law, such as:

  • sale of the taxpayer’s own home;
  • premium bond or lottery prizes; and
  • interest & gains generated within an ISA or pension fund.

Our US-tax experts can help you understand the USA tax compliance requirements for individuals, companies and trusts.
This is an
extract from our topical tax tips newsletter dated 1 October 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. We’ve been publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to know about each week.


State pension entitlement, Student loan repayments, IHT changes

Last week we had advice for older clients concerning their entitlement to the state pension and for employers of young people who are repaying student loans. We also reviewed the changes just over the horizon for IHT.

IHT changes 
The Budget on 8 July 2015 introduced the concept of an IHT nil rate band attached to the family home (“RNRB”). The latest HMRC Trust & Estates newsletter includes new guidance on the RNRB, and the current Finance Bill has been amended to clarify some points. 
  
The RNRB will start at £100,000 per person for deaths from 6 April 2017 and will eventually be worth £175,000 per person from 2020. However, it will only be of use to taxpayers with children as the exemption will be restricted to homes which are left on death to direct descendants: eg to a child or the child’s widow/widower where the child died before the parent  – as long as the widowed spouse has not remarried by the date they inherit the property. 
  
Some families have already placed properties in a trust for the benefit of the children, or the Will provides that the property is to be held in a trust on the death of the parent. In such circumstances the RNRB will apply to the value of the property if the trust is:
  • a trust for bereaved minors;
  • 18-25 trust; or
  • qualifying interest in possession trust.

Where the Will leaves the property to a discretionary trust for the benefit of the direct descendants the RNRB will not apply. This is a common structure used in Wills drawn up before 2007, so a review of the Will is now essential. 
Another feature of the RNRB is to preserve its use where the family home has been sold since 8 July 2015, and the proceeds have not been fully invested in a new property. In other words the parent has down-sized or moved to rented accommodation such as a care home. The Government has issued a technical paper which attempts to explain how this down-sizing relief will work. It’s worth reading if you have clients in that situation.
This is an
extract from our topical tax tips newsletter dated 24 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. We’ve been publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to know about each week.


Planning for death, Travel and subsistence, P800 may be wrong

Last week we are urging you to help clients plan for an untimely death, for reasons we explain below. We also outlined the proposed changes to tax relief for travel and subsistence expenses incurred by employees of personal service companies and other intermediaries. Finally we issued the annual warning about incorrect P800s which are on their way to your clients.

Planning for death 
For third time in a month we have received an email which begins: “It is with deep sorrow I have to inform you of the sudden death of our colleague…”. This is a reminder that death is not a distant appointment; it should be planned for as it may arrive tomorrow. 
  
A useful way to introduce the topic of death into a conversation with a client is to check whether they are married or in a civil partnership with their long-term partner, then run through the benefits and tax reliefs which the survivor of an unmarried couple may be denied on death.
  • Surviving unmarried cohabitees have no rights to state bereavement benefits based on their late partner’s national insurance contributions.
  • The unmarried partner may not be able to receive a pension from their deceased partner’s employer, although that will depend on the terms of the pension scheme.
  • Assets passed to the bereaved unmarried partner may be subject to inheritance tax, where the value of the estate exceeds the nil rate band of £325,000.
  • There is no transfer of the unused IHT nil rate band to the survivor of an unmarried couple.
When valuable assets are exchanged between the couple before death the transfer is taxed as if it was a sale at market value, if the two parties are not married. 
  
The pension issue may be solved in advance by making a nomination in favour of a named individual and ensuring the pension trustees have a copy of that nomination. The other issues can only be avoided by marrying or not dying. 
  
The conversation can move on to what would happen to the business if the main earner died suddenly. Practical issues such as; who would take control of the bank accounts, access the passwords to computer systems, and step in to meet the business customers’ needs, all need to be addressed. 
  
This last point is relevant to your own practice if you operate as a sole practitioner. Your clients’ tax return filing deadlines will still have to be met after your death or incapacity. Have you nominated alternate for your business, and does your spouse or partner know who that is?

This is an
extract from our tax tips newsletter dated 17 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.


Distribution of printed products, CIS gross payment status, European VAT reclaim scheme

Last week we had a VAT-CIS sandwich, starting with a change in HMRC’s view of the VAT treatment of services connected to the delivery of printed products. The CIS meat in the sandwich examines excuses which can be used to overturn HMRC’s decision to withdraw gross payment status. Finally the deadline for reclaiming VAT under the European VAT reclaim scheme is fast approaching.

CIS gross payment status
The cancellation of gross payment status for a contractor in the construction industry scheme (CIS) can put that contractor out of business. If there is a good chance of overturning HMRC’s decision it may be worth fighting the case through the Courts.
In our newsletter on 24 March 2011 we outlined three arguments which have been used successfully to restore the contractor’s gross payment status.

Proof of the notice given
HMRC did not inform the contractor in a timely manner that his gross payment status had been withdrawn (Ithell v HMRC). HMRC are not good at keeping copies of the form CIS308 which provides this information, so it can’t prove when the notice was sent.  

Reasonable excuse
The taxpayer didn’t understand how to arrange a time to pay schedule and instead sent post-dated cheques to HMRC. This was counted as a compliance failure, but the tribunal viewed it as a reasonable excuse (A Wood v HMRC). If HMRC has misallocated funds, you may be able to argue that the late payment was not the fault of the taxpayer. Other reasonable excuses for late payment or late filing can cancel out the compliance failures. 

Disproportionate effect on business
Some tribunal judges have accepted that the consequences that flow from the withdrawal of gross payment status operate as a reasonable excuse for the taxpayer. This was successfully argued in S Morris Groundwork v HMRC, and in T Bruns v HMRC which was quoted in that case. However, both of those cases were heard at the First-tier Tribunal, which means they don’t form a binding precedent that other cases should follow.
The Upper Tribunal has now heard a case using this argument (JS Whitter v HMRC), which does form a binding precedent, unless it is overturned at a higher court. 

The company convinced the First-tier Tribunal that the loss of gross payment status would have a detrimental effect on its business and put at risk 25 jobs, and HMRC should have taken this into account when removing its gross payment status. The Upper Tribunal ruled that HMRC don’t have to consider the financial effect on the business, so the company’s gross payment status was cancelled. 

This means several minor compliance failures, such as late payment of PAYE by a few days, can lead to withdrawal of gross payment status. CIS contractors should be aware they need to aim for a perfect tax compliance record, or their business could be at risk. 

This is an
extract from our tax tips newsletter dated 10 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>

The newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.


Buy to let property, ATED returns, CGT on the garden

Land and buildings are a good source of tax revenue as they don’t move and their ownership is usually easy to determine. This week we examine the forthcoming changes to tax deductions for expenses relating to residential properties, a new filing regime for properties subject to the ATED, and a CGT trap when selling part of the garden.

Buy to let property 
Landlords holding residential property are beginning to wake-up to the increased tax charges they will have to pay when the changes to tax deductions, announced in the Summer Budget, come into effect. 
  
The first change is the removal of the wear and tear allowance from April 2016. This will apply to both individual and corporate landlords, and will increase the taxable profits from furnished properties by 10% at a stroke. 
  
Instead of the flat 10% of rents deduction, landlords of all residential properties (furnished and unfurnished) will be permitted to deduct the actual cost of replacing furnishings, free-standing appliances, carpets, curtains and other loose items provided in the property. This will align the tax rules between furnished and unfurnished properties. Note the initial cost of providing the furniture etc, won’t be deductible. 
  
The second major change is the removal of the interest and other finance costs as a tax deductible expense. This will only affect individual landlords, not companies. From 6 April 2017 the amount of interest deductible for tax purposes will be restricted to 75% of the amount paid. This restriction will increase to 50% in 2018/19, and 75% in 2019/20, and from 6 April 2020 100% of the interest will be denied as a deduction.    
  
In place of the interest deduction the landlord will receive tax credit equivalent to 20% of the restricted amount of interest. The following is a simplified example (ignoring other deductible expenses) of how the effect on a landlord who pays tax at 40% in 2016/17 compared to 2020/21.

Table 
  
The effect on individual landlords will vary according to the level of debt the lettings business holds. Your landlord clients will need tailored advice as to the likely impact on their business, and how vulnerable they are to rises in interest rates, which are also on the horizon. 
  
This is an
extract from our tax tips newsletter dated 3 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Last week’s newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.


SDLT warning, Bags and alcohol, CT service issues

There are some things you can count on in tax – like the law taking effect from the day it is passed, or occasionally from the day the Chancellor announces the change. That is no longer the case with SDLT, as we explain below. We have advance warning of a new charge and a new registration scheme which certain retailers and wholesalers may need to comply with. There are also current and future issues with corporation tax filing software.

SDLT warning 
When your client purchases a new home you may not be involved in the transaction at all. The conveyancing solicitor will handle the land registration and SDLT forms, and in the past some conveyancers offered schemes to avoid paying the SDLT. 
  
If your client took up such a SDLT avoidance scheme you need to talk to them about HMRC’s new position on SDLT avoidance, as set out in Spotlight no. 25. HMRC are advising taxpayers who have used any SDLT avoidance scheme to contact them without delay and pay the SDLT liability due. There is likely to be interest due on any late paid SDLT, but the taxpayer may get away with a zero or low penalty if they make a full disclosure before HMRC approach them. 
  
Your client may protest that the SDLT scheme they were sold was “water tight” and no tax cases have been taken to prove it doesn’t work. That may be so, but the Government can change the tax law with retrospective effect, and the case of APVCO Ltd has shown that taxpayers have no grounds on which to argue against that. 
  
On 21 March 2012 George Osborne announced measures to block various SDLT schemes and said that similar schemes would be blocked when discovered. Anti-avoidance legislation was included in FA 2012 and FA 2013, with both sets of provisions back-dated to take effect from 21 March 2012. So where your client tried to avoid SDLT on or after 21 March 2012, they will now have to pay up.

This is an
extract from our tax tips newsletter dated 27 August 2015
. You can obtain future issues by registering here>>>

Last week’s newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.


Dividend tax and allowance, Incorrect P11D penalty letters, VAT advice

Since the Summer Budget small company owners and their accountants have been worrying about the proposed new dividend tax and allowance. HMRC has just released some brief guidance on these proposals, which changes our understanding of how they will work, as we explain below. We also have warnings about incorrect P11D penalty letters and where to source your VAT advice. 

Dividend tax and allowance 
From 6 April 2016 the taxation of all dividends received by individuals will change significantly – pension funds, ISAs and companies will not be affected. There are still outstanding questions about the taxation of dividends received by trusts and non-resident individuals. 

There are three key facts to understand about the new dividend tax regime: 

1. The cash amount of dividend received will be the amount subject to tax – there will be no grossing up for tax purposes. 
2. The first £5,000 of dividend income per year will be taxed at 0% – whatever income tax band it falls into. 
3. Dividends received in excess of £5,000 will be taxed at 7.5%, 32.5% or 38.1%, depending on whether they fall into the basic, higher, or additional rate income tax band. 

The HMRC factsheet on the dividend allowance explains how this “allowance” will apply. It won’t work like the personal allowance, which was the impression given by the Summer Budget announcement, it will be a zero tax rate. 

Dividend income will be taxed as the highest slice of income (as now), so it will fall within the highest tax band for the taxpayer. However, within that tax band the first £5,000 of dividends will be subject to tax at 0% rather than at the rate applicable to dividends.  

Example 

In 2016/17 Harry takes dividends of £60,000 from his own company, but no salary. The personal allowance is £11,000 and basic rate band: £32,000.
Income
Tax payable
Dividend received
£60,000
£
Personal allowance
(11,000)
49,000
Basic rate band :
(32,000)
Dividend ”allowance”
5,000 @0%
0
Residue of basic rate band
27,000 @7.5%
2,025
Higher rate band:
17,000
17,000 @32.5%
5,525
Total tax payable:
7,550

It is possible that the dividend “allowance” – or zero rate for dividends – to give it a more accurate name, will fall into two income tax bands, as is illustrated in example 6 in the HMRC factsheet.  

The total amount of dividend income received will count as part of the taxpayer’s net adjusted income when calculating whether the £100,000 threshold for withdrawing the personal allowance is breached. Also parents need to count all their dividend income to test whether the £50,000 threshold for the high income child benefit charge is breached. Although the dividend income included in those calculations is the amount received, not a grossed-up amount.

This is an
extract from our tax tips newsletter dated 20 August 2015
(5 days before we publish an extract on this blog). Try it
for free by registering here>>>

Last week’s newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.