CGT on overseas properties, Paying PAYE, NMW traps

As you finalise the last of the SA tax returns for 2015/16, pay close attention to any capital gains relating to overseas property. The correct computation of such gains is not obvious, as we explain below. We also have tips for paying PAYE, and a warning for employers concerning the next scheduled increase in the national minimum wage.

What follows is an extract from last week’s tax tips email for general practitioner accountants – see side box for more info.

CGT on overseas properties

Calculating the CGT due on the disposal of a property is not easy; you need to know which expenses can be deducted, and if any tax reliefs are due. If the property was located overseas, the computation is complicated by the fact that the consideration, and possibly the purchase, are likely to have been made in a foreign currency.

If your client has sold an overseas property you should check that the gain has been calculated in line with HMRC guidance and case law, as any deviation from the approved method will leave the taxpayer open to penalties for errors.

Mr & Mrs Knight calculated the gain on the disposal of their property in Switzerland in Swiss francs, and translated the resulting gain into sterling at the exchange rate applicable on the date of disposal. This appeared logical, as they purchased the property in 1988 in Swiss francs, and sold it in 2010 for consideration received in Swiss francs.

However, it was established in Capcount Trading v Evans [1993], that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.

This method of calculation pulls in any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-gain also subject to CGT. This may appear unfair, but that is how the computation must be done.

Whenever a client disposes of an overseas property, you also should check that any income received from letting the property has been correctly declared on their earlier tax returns. This is the first question HMRC will ask when they see the gain from the property disposal reported.


Inaccuracy penalties, Scottish tax bands, The Santa clause

Even in the middle of the SA tax return season, HMRC continue to issue penalties for errors in past returns. In many cases those penalties can be suspended, and we have some tips to help you achieve the best outcome for your client. We also explain how the Scottish income tax bands for 2017/18 will work. Finally, in case you have not completed your Christmas shopping, we have a reminder of the “Santa clause” regarding tax-free gift vouchers for employees.

What follows is an extract from our weekly tax tips as explained in the box at the side (or below if you’re viewing this on a mobile device)

The Santa clause

If your clients are feeling generous towards their employees this Christmas, you can advise them to provide each employee with a gift voucher worth up to £50. These vouchers are tax and NI free, if certain conditions are met, and a company can even give tax-free vouchers to its directors.

This tax-free gift possible due to the new statutory exemption for trivial benefits, which applies from 6 April 2016 (see page 4 of Employer Bulletin). The vouchers must not be exchangeable for cash, so if the shop allows the customer to receive change in cash when using the voucher, it doesn’t qualify as a tax-free trivial benefit.

Also, the gift vouchers (or other non-cash benefit) must not be given as reward for services. So the employer can’t say to his staff; “If you finish all the orders by 24 December I’ll give you each a voucher”. He has to surprise them with the gifts, but he doesn’t have to give the same amount to everyone in order to make it tax-free.

The company can also be generous to its management, but the directors and their families can only receive up to £300 of tax-free trivial benefits per tax year. There is no limit to the number of tax-free vouchers an employer can give to other staff members, as long as each gift is not worth more than £50.


Property businesses, Selling a home, Pay class 2 NIC early

The British are often said to be obsessed with the value of their homes. Last week we examined two ways in which the government is seeking to extract the maximum amount of tax on that value on the disposal of UK properties. We also explained why it may benefit your clients to pay their class 2 NIC in December rather than in January.

What follows is just an extract from last week’s tax tips sent out to all subscribers on Thursday morning. Please also note the caveats in the box on the right.

Pay class 2 NIC early

Paying Class 2 NIC allows the individual to qualify for certain contribution-based state benefits including; state retirement pension, maternity allowance, employment support allowance (ESA) and job seekers allowance (JSA). Note there are non-contribution versions of JSA and ESA.

To be eligible to receive the benefit the taxpayer must have paid sufficient class 2 NIC for a specified period, which differs for each benefit. For ESA and JSA the claimant must have paid at least 50 weeks of NIC for both of last two tax years which ended before the beginning of the benefit year. The DWP benefit year starts on the first Sunday in January, not on 6 April, as you might expect.

If the taxpayer pays all his class 2 NIC for the 2015/16 in January 2017 (due date is 31 January 2017), he won’t have paid those contributions before the start of the benefit year which starts on 1 January 2017. This means he will have paid insufficient class 2 NIC for the tax year 2015/16, and won’t qualify for the contribution based ESA or JSA for in 2017. The claimant may have to apply for income-based JSA instead.


Child benefit and pensions, ATED and developers, Class 2 NIC mismatches

As an accountant you will be practised at pointing out tax traps to your clients, and helping them out of the holes they have fallen into. Last week we highlighted two tax traps; for parents who haven’t claimed child benefit, and property developers who haven’t claimed ATED relief. We also explained how mismatches between class 2 NIC and self-assessment occur, and how to resolve them.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Class 2 NIC mismatches

When the collection of class 2 NIC was transferred to the income tax SA system for 2015/16 onwards, most advisers assumed that the calculation of the class 2 liability would also be generated by the data included on the SA return. This is not the case.

HMRC continues to run two separate computer systems; SA for income taxreturns, and the NPS which contains class 2 NIC records. The liability for class 2 NIC is based on the NPS record, not on the information from SA returns.

Entries on the SA return do not update the taxpayer’s NPS record. Recording a commencement or cessation date for a self-employment on the SA return will not affect the liability for class 2 NIC. HMRC must be separately informed of that information.

However, data from the NPS is used to overwrite data from the SA return. For example, when the direct debit mechanism for paying class 2 NIC stopped in mid-2015, the taxpayer may have cancelled their direct debit. The NPS computer interpreted this as a cessation of self-employment, and transmitted this information to the SA computer. As a result the taxpayer has no class 2 NIC collected as part of his SA liability for 2015/16, although it continues to be due.

Check that your self-employed client has a class 2 NIC liability for 2015/16. Non-payment of class 2 NIC may affect the taxpayer’s eligibility for a state pension.


VAT flat rate scheme, Pensions recycling, Employee shareholder scheme

The Autumn Statement included three announcements which may have an almost immediate impact on your clients. You need to talk to all those clients who use the VAT flat rate scheme, as changes from 1 April 2017 may make it uneconomic to use. Individuals who have drawn some pension benefits, but who are still employed, could be caught out by changes to the pensions recycling rules. Investors who are planning to use the Employee Shareholder Scheme need to be aware that the rules have changed from today.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Employee shareholder scheme

Under the employee shareholder scheme (ESS) employees can receive shares in their employing company if they sign an employee shareholder agreement under which they surrender a set of statutory employment rights, including redundancy pay. The employee receives up to £2000 worth of shares free of tax and NIC, and the company can claim a tax deduction for the cost of supplying those shares.

When the taxpayer disposes of his ESS shares the first £100,000 of gains are exempt from CGT. If the ESS shares were awarded under an employee shareholder agreement signed before 16 March 2016, the CGT exemption was restricted to £50,000 of ESS shares, as valued on acquisition. This effectively gave an unlimited CGT exemption on disposal of the shares, as £50,000 was a huge amount of ESS shares to acquire.

There has been no restriction on who could receive the ESS shares; the shares could be awarded to existing shareholders, even those who hold a material interest in the company. So rather than being a way to incentivise ordinary employees, the ESS has been used by equity investors to award themselves tax-free shares in fast growing companies. Those investors are not concerned with surrendering their employment rights, as they generally have control of the company they invest in.

The Government has finally realised that the ESS has not been used for the purpose it was intended. It has removed the income tax, NIC and CGT reliefs for employees, but only in respect of ESS shares awarded under employee shareholder agreements entered into on or after 1 December 2016. Where the employee had already taken advice regarding the employee shareholder agreement before 1.30pm on 23 November 2016, that agreement can go ahead with the tax relief in place if it is signed by 2 December 2016.

The corporation tax deduction for the employing company remains in place. Also the CGT exemption for ESS shares already issued remains.


Misleading gov.uk, Class 2 NIC back payments, Employment allowance

Oxford Dictionaries has declared the 2016 word of the year to be: ‘post-truth’. Bear this in mind when searching for information on gov.uk, or advising clients about what they may have read. Our tax tips this week include a number of ‘post-truth’ examples from gov.uk that could impact advice you give clients. We also have tips on how to deal with a deficiency in class 2 NIC, and some practical advice for claiming the employment allowance.

As usual we have summarised below one of the 3 tax tips we shared by email with our general practice accountant subscribers last week. Further details are in a box on the right.

Class 2 NIC back payments

From 2015/16 onwards the self-employed are due to pay class 2 NIC alongside their self-assessment. This has caused all sorts of problems with the HMRC computer.

The correct amount of class 2 NIC for 2015/16 is normally £145.60 (52 x £2.80), but in some cases the computer thinks it should be £179.40 (52 x £3.45) which is the special rate for share fishermen.

Occasionally the tax computation includes a nil liability for class 2 NIC, although the self-employed profits exceed the small profits threshold of £5,965. When questioned HMRC say the taxpayer hasn’t been registered for class 2 NIC. Where the taxpayer can prove he has paid class 2 NIC for earlier years, the HMRC position should be challenged without delay. If HMRC’s record of class 2 NIC payments for the taxpayer is incorrect he will not receive the level of state pension he is expecting.

There are taxpayers who haven’t paid class 2 NIC for many years, as the underpayment was never chased up, or they didn’t realise they had to pay class 2 and class 4 NIC. For those cases the taxpayer should be advised to pay the class 2 NIC due for as many years as HMRC will accept. This will be a minimum of six years, and the payment will generally need to be paid by 6 April 2017, but the deadline may be longer if the taxpayer is close to retirement age.

If the taxpayer has decades of unpaid class 2 NIC, look at the case of Richard Thomas. He won the right to pay voluntary class 2 NIC back to 1976 as he had been badly advised, and HMRC had not chased for payment.


Effective date for CGT, VAT on pre-registration assets, New deemed domicile rules

Last week we drew a lesson from an accountant who should have known the law when advising a client about CGT. HMRC has back-tracked on claims for repayment of VAT relating to assets acquired before registration. Also, just in case your American clients are thinking of staying the UK, we have a brief review of the changes to the deemed domicile rules from April 2017.

This is an
extract from our topical tax tips newsletter dated 10 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

New deemed domicile rules

All the rules you know about domicile and deemed domicile for UK tax purposes will be rewritten with effect from 6 April 2017. The new law will extend the deemed domicile treatment to all UK taxes, not just IHT.
UK residents who enjoy non-dom status will be deemed to be UK domiciled, if they have lived in the UK for at least 15 of the preceding 20 tax years. Also any UK residents who were born in the UK with a UK domicile (former domiciled resident or FDR), but have chosen to adopt a foreign domicile, will have their domicile of choice ignored for tax purposes. Those FDR taxpayers are treated as UK domiciled from 6 April 2017 however long they have been UK tax-resident.
These changes mean the remittance basis will no longer be available to many people who live in the UK, so those individuals will be taxed on all their worldwide income and gains, whether or not the offshore funds are remitted to the UK. The remittance basis remains (and doesn’t have to be claimed) for individuals with less than £2,000 per year of unremitted foreign income or gains.
The years to count for the 15/20 test are all years of UK residence, including split years and years when the individual was aged under 18. To shake off the deemed domicile treatment for income tax and CGT the taxpayer will have to become non-resident for six entire tax years. However, only four tax years of non-residence will be required to shift deemed domicile for IHT purposes.

You need to talk to all your non-domiciled clients about these changes as soon as possible, as transactions undertaken before 6 April 2107 could undermine transitional reliefs available from that date. Our expat taxation experts can help you understand the implications for your clients.

This is an
extract from our topical tax tips newsletter dated 10 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material 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.
You can obtain future issues by registering here>>>


Simple assessments, NI for offshore workers, Professional conduct

Every week we endeavour to find three practical tax points which are relevant to your practice. This week we have uncovered a new form of tax assessment which can be issued for 2016/17 onwards, and changes to the NIC regulations for overseas and offshore workers. We also alert you to a new version of the tax advisers’ code of conduct: Professional Conduct in Relation to Taxation (PCRT).

This is an
extract from our topical tax tips newsletter dated 3 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Simple assessments 

Do you remember how personal tax worked before self-assessment? The Inland Revenue would raise an estimated tax assessment; the taxpayer would appeal, a taxreturn would be submitted and eventually the figures would be agreed, then the taxwould be paid. HMRC seem to have turned the clock back to pre-SA days with a new power to raise ‘simple assessments’, from 15 September 2016 (FA 2016, Sch 23, s 167). 
A simple assessment is made by HMRC not by the taxpayer, so it is the opposite of a self-assessment made alongside a SA tax return. HMRC can raise a simple assessment when it has information that the taxpayer has received income or gains which are not taxed under PAYE, but that taxpayer hasn’t submitted a SA tax return for the year, and is not due to submit a SA tax return. 
HMRC envisage that simple assessments will be used where the taxpayer’s main source of income is taxed under PAYE, but he also has up to £10,000 of other taxable income or gains. This income threshold is not set in the legislation. 
The taxpayer will have 60 days to query the simple assessment or such longer period as HMRC allow. The tax due will be payable by 31 January after the tax year end, or if the simple assessment is issued after 31 October following the tax year, the tax will be payable three months after the date of the assessment. The taxpayer will not have to make payments on account after receiving a simple assessment, as would be the case when making a SA tax return. 
It is likely that any explanation of the tax demanded on a simple assessment will only be available in the taxpayer’s personal digital tax account, which you may not have access to. There is no guidance available from HMRC about how simple assessments will work in practice, but HMRC does have the power to raise them for 2016/17 and later years. 
If you come across a simple assessment, do contact one of our personal tax experts for guidance.

This is an
extract from our topical tax tips newsletter dated 3 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material 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.
You can obtain future issues by registering here>>>


IHT nil rate band, Statutory maternity pay, Errors in PAYE accounts

Tax reliefs and benefits have to be targeted, in order that the tax advantage is restricted to the class of taxpayers whom Parliament intended should be the recipients. The complex rules sometimes create unexpected outcomes, as can be seen with the residential nil rate band for IHT, and the calculation of statutory maternity pay. In last week’s newsletter we also highlighted a problem with certain online PAYE accounts maintained by HMRC.

IHT nil rate band

The IHT nil rate band (NRB) has been frozen at £325,000 per person since 6 April 2009, and is set to stay at that level until 6 April 2021. However, to meet an election promise to increase the IHT exemption to £1m, a separate residential nil rate band (RNRB) is available to set against the value of the family home for deaths from 6 April 2017.

The RNRB starts at £100,000 per person in 2017, and increases by £25,000 each year to £175,000 in 2020 (coinciding with the next general election). When the RNRB is combined with the NRB of £325,000, the individual has £500,000 of IHT-exempt wealth, or £1m for a married couple.

HMRC has recently published guidance on the RNRB, which is worth reading, as taxpayers could miss out on this relief if they make gifts in the wrong order, or to the wrong people.

The RNRB only applies to a home (or its value) given to one or more direct descendants on death, either under a will, by intestacy, or via a deed of variation. The executors of the estate can sell the home and pass the value to the descendants, and the RNRB still will apply.

If the home is held in a trust, you need to check who the beneficiaries of the trust are, as the home must be treated as part of the deceased’s estate on death to qualify for RNRB. A home caught by the ‘gift with reservation of benefit’ rules (ie the donor lives there after giving it away) will qualify for RNRB, as the home is treated as part of the deceased’s estate although it may be legally owned by another person.

The RNRB does not apply if the home:

  • was given to the relative during the deceased’s life, so is a potential exempt transfer (PET);
  • is transferred into a trust on death to be held until the beneficiaries reach a certain age;
  • is given to someone who is not a direct descendant, such as a niece or god-child;
  • has never been a home of the deceased (eg is an investment property).

There are further complicated rules that apply where the home was sold on or after 8 July 2015 in order to downsize, or for the owner to move into rented property such as a care-home. Please ask one of our IHT experts for advice on this tricky area.


Trivial benefits, VAT on market stalls, Taxable employee expenses

There are many influences which add to the constant changes for the UK tax system, but the top three are; new tax legislation, rulings in tax cases, and alterations in HMRC practice. We had examples of each of these last week; new rules about trivial benefits enacted by FA 2016, VAT treatment of market stalls decided by an Upper Tax Tribunal, and changes to the P11D proceeds effective from 6 April 2016.

This is an
extract from our topical tax tips newsletter dated 27 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Trivial benefits 

For years HMRC has applied a concessionary tax exemption for trivial benefits provided by employers to their employees. This exemption has been given statutory backing in ITEPA 2003, ss 323A-323C, introduced by FA 2016, s 13 with effect from 6 April 2016. 
The new rules are actually very generous. The employer can provide a trivial benefit to any employee without having to justify his reason, on as many days in a tax year as he wishes, although there is a cap on the value of benefits provided to close company directors and their families (see below). 
If the benefit meets the following three conditions it can be paid with no tax or NIC for employee or employer, and business can claim tax deduction for the cost. The benefit must: 
a) cost no more than £50; 
b) not be a reward for services or in any way contractual; and 
c) not be cash or voucher which can be exchanged for cash. 
In theory the employer could provide a £50 gift voucher to every employee on every working day of the year, but that is likely to be seen as a reward for services, so it would break condition b) above. 
HMRC have provided some detailed guidance on these new rules which includes examples of the wide range of situations in which the trivial benefit exemption can be used. It is certainly worth reading to help answer clients’ questions in this area. 
Directors and office-holders of close companies are only permitted to receive up to £300 of trivial benefits per tax year. That total includes the value of trivial benefits provided to the director’s family members. This allows the company to buy six £50 gift vouchers to give to the director/shareholder at intervals (they must be separate gifts), who is then free to spend or distribute those gift vouchers as he wishes.

This is an
extract from our topical tax tips newsletter dated 27 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material 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.
You can obtain future issues by registering here>>>