Reduction in entrepreneurs’ relief lifetime limit

After much speculation that it would be abolished in the Budget, entrepreneurs’ relief remains available, but with a significantly lower lifetime allowance. For qualifying disposals on or after Budget day (11 March 2020), the lifetime limit is £1 million – reduced from £10 million.

Where clients took protective action prior to Budget day in an attempt to secure availability of the relief, it should be noted that anti-forestalling provisions apply.

Where a contract was entered into prior to 11 March 2020 in respect of a disposal that would be a qualifying disposal for entrepreneurs’ relief purposes, the new £1 million lifetime limit will apply rather than former £10 million lifetime limit unless the parties to the contract are able to demonstrate that they did not enter into the contract to take advantage of the timing rules in TCGA 1992 whereby the date of the disposal is set as the time at which the contract was made. Further, where the parties to the contract are connected, they must also demonstrate that the contract was entered into wholly for commercial reasons to benefit from the £10 million lifetime limit.

Anti-forestalling measures also apply in certain circumstances where shares are exchanged for those in another company in the period from 6 April 2019 to 11 March 2020 and both companies are controlled or owned by substantially the same person.

It should be noted that disposals qualifying for entrepreneurs’ relief prior to 11 March 2020 count towards the new £1 million limit and clients who have already benefitted from entrepreneurs’ relief on qualifying disposals of more than £1 million will not be able to benefit from the relief on further disposals. Spouses and civil partners have their own lifetime limits allowing some planning to maximise the relief available, but each must meet the qualifying conditions for the requisite two-year period.


Pension contributions

Doctors have been retiring early and turning down extra shifts because the extra earnings pushes their pension contributions over the permitted level of annual allowance, leading to penal tax charges. The Budget has gone some way to solve this problem for high earning medics from 2020/21.

“High earning” in this context means having adjusted net income of over £150,000 AND threshold income of over £110,000. These thresholds will increase to £240,000 and £200,000 respectively from 6 April 2020.

“Net income” is basically income from all sources including the value of pension contributions, “threshold income” is net income less all pension contributions (see link below).

These higher earners currently have their pensions annual allowance tapered down by £1 for every £2 over the threshold to a minimum of £10,000 per year. From 2020/21 this minimum will be £4,000 in line with the MPAA.

However, unlike those subject to the MPAA, taxpayers with a tapered annual allowance canuse up any unused annual allowance brought forward from the three immediately preceding tax years (ie 2016/17, 2017/18 and 2018/19). The unused allowance from 2016/17 will drop out of the calculation for contributions made on and after 6 April 2020.

When the value of pension contributions exceeds the available annual allowance, the taxpayer must pay an annual allowance charge. Where this charge is more than £2,000 they can ask the pension scheme to pay under the “scheme pays” rules. The detailed rules are complex, so take advice from a qualified IFA.

Contractors who are winding down their companies, as they will be caught by the off-payroll rules from 6 April 2020, may want to extract the maximum cash as pension contributions before that date.

You will need to work closely with their IFA to ensure that the company has sufficient available profits and the individual has the available annual allowance. A pension contribution paid after the company has ceased trading, and has no income, will not get tax relief on that contribution.

Remember you should not recommend that a payment should be made into a specific pension scheme unless you are authorised to give financial advice and registered with the Financial Conduct Authority (FCA).


HMRC issue Notice of Coding notifications

HMRC are sending out P9 Notice of Coding notifications during the period 10 February 2020 to 10 March 2020. The P9 notices tell employers the code that they need to use for the employee in question for the 2020/21 tax year. They can be accessed electronically from the employer’s PAYE online account. Employers should receive paper P9 notices by 21 March 2020.

Although it is expected, as announced at the time of the 2018 Budget, that the personal allowance for 2020/21 will remain at £12,500, this will not be finalised until the Budget on 11 March 2020. In light of this, HMRC have issued codes for 2020/21 based on 2019/20 rates and allowances. In the event that changes are announced in the Budget, HMRC will undertake a recoding exercise and will issue revised codes on form P6b. Should this happen, employers should note that they should only start using the code shown on the P6b from the date shown on that notice.


Indications of being inside IR35

HMRC are still challenging taxpayers under the IR35 rules, and such disputes can take years to reach the tax tribunal in order to resolve the matter. If your client is at risk of an IR35 challenge, it’s worth checking whether the following indicators of employment exist in their case:

Mutuality of obligation
If the contractor is obliged to take up any work offered under the contract, and the engager is obliged to pay the contractor whether or not the work is performed, this is a clear indicator that there is a mutuality of obligation. This is a cornerstone of an employment/ employee relationship.

No substitution
Where the individual is performing a role because of their “star quality”, the engager may insist that the worker can’t be substituted by another person. In this case it is clear that only a personal performance of the task is acceptable, that is what the engager is buying. This is a strong indication of an employment; a contract of service rather than a contract for services.

Control
Independent contractors like to think that they not controlled by the engager, but you need to question the detailed rules which they work under. For example, is the worker required to wear a uniform, or forbidden to wear certain items? Is his other commercial activity restricted where it could conflict with his work for the engager? Does he have to keep away from risky leisure activities?

All of these restrictions point to controls over the contractor by the engager, in a similar fashion that an employer may place controls on an employee’s behaviour.

Expenses
Is the contractor expected to bear all of their traveling and accommodation expenses? If the engager books and pays for hotel accommodation where the work is performed off-siter, or pays directly for transport to the engager’s workplace, this is an indication of an employment relationship.

To maintain an independent relationship the contractor should book and pay for any travel and subsistence, even if he later charges that cost on to the engager.

All of the above indicators of employment were present in the case of Eamonn Holmes’ contract with ITV, which was found to fall within the IR35 rules.


Money laundering supervision

As an accountant you will be aware of the obligation to train your staff to be aware of the laws covering money laundering. HMRC advise that this training should cover anyone who deals with your customers, including the receptionist.

At the very least every member of your staff should know:

who the nominated officer is and what they are there for;
how to spot suspicious activity and report it to their senior manager or the nominated officer; and
know where to go for help about the money laundering regulations.
But are your staff aware of which of their own clients have an obligation to register with HMRC for money laundering supervision?

This includes any business in one of the following categories, if they are not already supervised by their own professional body, the FCA, or the Gambling Commission:

  • art market participants (see below)
  • accountancy service providers
  • bill payment service providers
  • company or trust service providers
  • estate agents
  • high value dealers
  • money service businesses
  • telecommunications, digital and IT payment service providers

The art market participants are only brought within the money laundering rules if they sell or purchase works of art in a single transaction, or in series of linked transactions, for €10,000 or more.

Trading in any of these sectors while not registered with HMRC (or other supervisory body) is a criminal offence, which may result in a penalty or prosecution.

The businesses in these sectors also need to register their business premises including; offices, shops, call centres, auction houses, and even cruise ships in UK territorial waters. Buildings which are only used for training employees or storing business records do not need to be registered for money laundering purposes.


Change to off-payroll working rules

The off-payroll working rules are due to be rolled-out to private sector contracts from 6 April 2020, but it seems that neither the Government, HMRC, engagers or the contractors themselves are ready.

This is hardly surprising since the legislation to introduce these rules is still in draft, there are two on-going reviews into how the law will work, and a key aspect of the implementation was changed only last week.

As we explained on 29 August and 7 November 2019, the off-payroll working rules are a fresh application of IR35, with the responsibility for compliance switched 180 degrees to the engaging organisation. Those contractors who work for “small” clients (generally those which don’t require an audit), are not affected.

As originally proposed the off-payroll working rules were to apply to private sector contracts where payment for the services was made on or after 6 April 2020. This would have meant that work performed in February and March 2020 would be drawn into the new regime, as contractors regularly have to wait 30 days or 60 days for their payments.

Fortunately, common sense has prevailed. Now the off-payroll working rules will only apply in the private sector where the service is performed on or after 6 April 2020 and payment for those services is also made on or after that date.

HMRC has published detailed guidance in its Employment Status Manual at ESM 10000 onwards, but all the guidance relating to the rules from April 2020 is marked: “This is a draft and may be subject to change”. In spite of this warning it is worth reviewing this guidance if you have any contractor clients who will be affected by off-payroll working.


Adjusting income tax computations

One of the fundamental principles of self-assessment is that the taxpayer should get “finality” within a set period of submitting his tax return and tax computation.

This period is normally 12 months from the filing deadline, during which the taxpayer can amend the return, and HMRC can open an enquiry. HMRC can also raise discovery assessments within a much longer period.

Where there is an obvious error or omission, or anything else that the officer has reason to believe is incorrect in the return, HMRC can correct it. They have used this procedure to adjust for the omission of the HICBC (see our newsletter 12 February 2015). The taxpayer has 30 days to reject the HMRC correction, otherwise it will stand.

HMRC should make any such corrections within nine months of the submission date on the return (TMA 1970 s 9ZB(3)), but they are now using this correction power for tax returns for 2016/17 and 2017/18 which were affected by the online filing exclusions.

Since April 2017 the number of exclusions for online filing has escalated (see our newsletter 27 April 2017), and HMRC has recalculated the tax due for up to 40,000 returns for 2016/17, and for least 15,000 returns for 2017/18, so far. Where the HMRC adjustment reduces the tax payable for the year, the taxpayer will be quite happy. But what if it generates a tax underpayment?

Where the 2016/17 return was filed by the due date of 31 January 2018, any tax demanded following the recovery performed in November 2018 is not due because the correction was made more than nine months after the return was filed. If your client paid the extra tax on request of HMRC, they can ask for it back.

The recalculation exercise for the 2017/18 returns was performed on 28 October 2019, so that will also be out of time for all 2017/18 returns except those filed on or after 29 January 2019. So for those taxpayers should not have to pay any further tax demanded.


Loan charge

We outlined the changes for those affected by the loan charge in our newsletter on 9 January 2020. Since then HMRC has updated its guidance and published draft legislation to bring those changes into effect from 5 April 2019.

To help your clients make the correct disclosures, and pay the right amount of tax in respect of the loan charge you need to know exactly when each loan was advanced to them and if it was repaid by 5 April 2019.

The following loans are now not subject to the loan charge:

  • those repaid before 5 April 2019
  • advanced before 9 December 2010
  • advanced before 6 April 2016 and fully disclosed to HMRC, and HMRC did not take action to demand tax due in respect of the loan before 5 April 2019 – this is then an “unprotected year”.

Where the taxpayer received regular loans in the tax year 2010/11, HMRC will permit you to apportion the total amount lent in the year as 2/3 prior to 9 December 2010 (escapes loan charge), and 1/3 post 9 December 2010 (subject to loan charge).

HMRC has clarified that the disclosure requirement will be met where the DOTAS number for the tax avoidance scheme used was provided on the relevant tax return, or if there was no DOTAS number to declare, the loan arrangement was described elsewhere on the return. That description must have contained sufficient information to show that a tax liability may have arisen from the loan. You may need to review the 2010/11 tax return very carefully.

Taxpayers can now spread the declaration of their outstanding loans which are subject to the loan charge over the tax returns for: 2018/19 to 2020/21, which spreads the tax due under the loan charge over those years.

To do this the taxpayer must elect on the “additional information form” before 30 September 2020, but that form won’t be available from HMRC until April 2020. If it makes sense for the taxpayer to spread the loan charge (and it won’t in every case), you should complete the 2018/19 tax return on the basis that this election has been made.

Where the 2018/19 tax return has already been submitted it may need to be amended to the reflect the above changes to the loan charge liability.

If the 2018/19 tax return has not been filed you can either include estimated figures of the tax due, or file and pay by 30 September 2020, in which case the late filing and late payment penalties will be waived.


Pay CGT in 30 days

Capital Gains Tax due on sales of residential property completed on and after 6 April 2020 will have to be paid within 30 days of the completion date. Non-resident owners already have to pay the CGT within 30 days, but from April 2020 this short payment period will also apply to all UK-based sellers.

This is going to come as a shock to many landlords and their accountants, who have been used to paying CGT on property sales up to 22 months after the transaction, ie by 31 January following the tax year end.

The taxpayer, or their agent, will also have to complete a new online return to report the CGT due within 30 days. This new online system is currently being tested by HMRC, who are looking for agents and their clients to take part in that trial, see link below.

It appears that this new online reporting system is not the same as the real time transaction return, which we outlined on 19 April 2018. That real time CGT reporting system is only open to taxpayers to use, and not their agents.

The new online CGT reporting system will be open to agents to use, but you will need a separate agent authorisation to use the service on behalf of your client, as the authorisation to act for income tax will not be sufficient.


Amended SA returns

The HMRC Agent Update for self-assessment contains an odd warning about submitting a tax return as an amendment, when the original return has not been submitted. When this happens the “amended return” cannot be processed, which may result in a late filing penalty.

HMRC says is it receiving large numbers of “amended” returns filed online this season, which indicates there is a common trap that many accountants are falling into. You would think that tax software would be intelligent enough to prevent this from happening, but not all software products have this fail-safe mechanism.

For example, it is quite easy to click the “amended” box in the Taxcalc or Taxfiler software when completing a tax return, in which case the return will be submitted as an amended return, even if no original version of that return has been filed.

It is sensible that the HMRC computer system should not accept amended returns if an original version of that tax return has not been logged as received. There is a real risk of hackers submitting amended returns and diverting tax repayments to their own bank accounts, so HMRC has to be particularly careful about accepting any amendments to returns.