Tax News July 2017 - Albert Goodman

TAX NEWSLETTER

CHARTERED ACCOUNTANTS, TAX CONSULTANTS & FINANCIAL PLANNERS

CHARTERED ACCOUNTANTS, TAX CONSULTANTS & FINANCIAL PLANNERS

Contents Queen’s Speech and proposed legislation Simplifying corporation tax Calculating rental profits….simple? Residential investment properties – time to consider incorporation? Selling your home – is it always tax free? Unfogging the future A valuable relief for valueless assets Land Transaction Tax Does a company director need to complete a tax return? Securing entrepreneurs’ relief on a share disposal Tax credit renewal

RENTAL PROPERTY SPECIAL

Employment Related Securities – extension to the annual return deadline

A raft of new legislation has put landlords under increasing pressure, in this issue we take a closer look at rental property businesses, the impact of all the recent changes and the options available to mitigate them.

In the news

TAX NEWSLETTER JULY 2017

ICO warning as business fined £60,000 following cyber attack Latest guidance for employers Online Trust register Holiday entitlement

www.albertgoodman.co.uk

WELCOME

Welcome to this month’s ENews. Confirmation has now been received that the next 2017 Finance Bill will not be published until after the Parliamentary summer recess. Provisions which were due to take effect from April 2017 will continue to do so, albeit some in an amended form. Two welcomed recent announcements include the deferred introduction of Making Tax Digital (MTD) and also the appointment of Jane Ellison as special adviser to the chancellor, having lost her ministerial seat in June’s election. The unexpected but eminently sensible move means that the treasury retains all the MTD knowledge Jane acquired during her time as financial secretary. The new timetable means that digital tax records will have to be kept for VAT purposes only from 2019. No business will need to keep digital records for any other purpose nor will they be required to make quarterly updates to HMRC until at least April 2020. The MTD programme is still coming though just in a more leisurely pace. This month’s ENews has a property theme; we take a closer look at rental property businesses, the impact of all the recent changes and the options available to mitigate them. Selling your home should not result in a capital gains tax liability, we outline the reasons why this assumption could be incorrect. Finally in light of recent court cases, we highlight the issues surrounding the disposal of company share capital and securing entrepreneurs’ relief. On a personal note, I would like to congratulate all the tax team members who passed their ATT and CTA exams this month. Investing in my staff ultimately pays dividends for our clients and I am extremely proud of their efforts – well done to all! As usual, if you would like to discuss any of the articles in more detail, please get in touch.

Tracey Watts Tax Partner

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Queen’s Speech and proposed legislation The Queen delivered the 2017 Queen’s Speech on 21 June which set out the government’s agenda for the coming parliamentary session. The speech outlined the government’s proposed policies and legislation. This Queen’s speech announced that the government will focus on: a Brexit deal that • delivering works for all parts of the United Kingdom and

a stronger, fairer • building country by strengthening our economy, tackling injustice and promoting opportunity and aspiration.

The supporting documentation confirms 27 Bills and draft Bills which are expected to be in the legislative programme, which will deliver on these themes. Details of the Bills that the government propose to introduce are available

via the links at the end of this article. In reference to tax legislation it states: ‘The programme will also include three Finance Bills to implement budget decisions. Summer Finance Bill 2017 will include a range of tax measures including those to tackle avoidance. The programme will also include a technical Bill to ratify several minor EU agreements and further Bills, which will be announced in due course, to effect the UK’s withdrawal from the EU. The government will also be taking forward a range of other measures which may not require primary legislation.’ We will update you on developments. Internet links: GOV.UK summary what it means Speech GOV.UK background notes

Simplifying corporation tax

The Office for Tax Simplification has published their recommendations on simplifying the corporation tax computation. This report sets out some significant steps towards creating a 21stcentury corporation tax system in the UK, responding to calls from businesses of all sizes to make the calculation of corporation tax simpler, with fewer changes and more time to plan. The report looks at four broad themes:

• simpler tax for smaller companies the tax rules more closely with accounting rules where • aligning appropriate • simplifying tax relief for capital investment • a range of further issues affecting the largest companies.

We will keep you informed of developments in this area. Internet link: GOV.UK review CT


Calculating rental profits… simple?

The Spring Budget saw confirmation that the Finance Bill 2017 would include legislation to offer some unincorporated property businesses the option to calculate their rental profits using a simplified cash basis of accounting, rather than the Generally Accepted Accounting Principles (GAAP) currently demanded. The announcement was originally part of HMRC’s Making Tax Digital (MTD) initiative and although these proposals were dropped from the finance bill prior to the general election, it has now been confirmed that they will take effect retrospectively from April 2017 once enacted. Although this proposal includes the word “simplified”, do not be lulled into a false sense of security. Calculating rental profits using the cash basis may not be as simple as it seems and mistakes can be costly! Irrespective of the accounting method used, tax relief for different types of expenditure is given in different ways and can produce varying results. In addition, determining whether an expense is allowable when calculating the taxable profit can sometimes be problematic.

Revenue expenditure

Revenue expenditure includes the day to day running costs of the property business. Providing the expense is incurred wholly and exclusively for business purposes, relief is given in full as a deduction against the income in computing the rental profits. This includes the general repairs and maintenance costs of the property.

Capital expenditure

By contrast, property improvements are treated as capital expenditure and are not an allowable deduction when calculating the rental profit. These expenses are instead allowed if or when the property is sold, reducing any capital gain which may have arisen. It is therefore important to keep detailed records of expenditure to support any future claims for relief. Although in many cases the type of expenditure incurred will be obvious, there are also many cases where it will not and guidance should be sought to avoid errors.


Interest relief restriction

An added complexity over the next three years is the interest relief restriction. The restriction is designed to restrict the relief for mortgage interest to the basic rate of tax and is being phased in from 6 April 2017. For the current year, only 75% of the mortgage interest incurred may be deducted from the rental income. The remaining 25% is then multiplied by 20% and deducted from an individual’s overall tax liability.

Replacement of domestic items relief

Many will be aware of the new relief for landlords purchasing domestic items such as furniture, furnishings, household appliances and kitchenware. Previously a wear and tear allowance equating to 10% of the rental income was available to landlords of ‘furnished’ property only. This was abolished with effect from 6 April 2016 and instead all landlords can claim a deduction when replacing these items. Please note however this relief is only available when items are replaced, there is no deduction available for the initial purchase.

New tax allowance for property income Also announced in the Spring Budget was an allowance of £1,000, ensuring that individuals are not required to declare this income on a tax return where the rental income value does not exceed this threshold. This measure was also put on hold prior to the general election, but it has now been confirmed that the allowance will still take effect from 6 April 2017 in its proposed form.

Although it would appear that HMRC are trying to reduce the complexity of calculating rental profits, I think we can agree that there is still much scope for the occurrence of errors. It is therefore important to take great care in arriving at the figures to be reported on the tax return and to seek assistance from your tax adviser where there is any doubt.

Kayleigh Oaten

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Residential investment properties – time to consider incorporation? For residential property landlords subject to higher rate tax, the tax return signed and submitted before the 31 January next year will signify the end of full mortgage interest relief secured on these properties. For those waiting for the outcome of the court case brought by ‘Axe the Tenant Tax’ group or simply for government to have a change of heart, with the restrictions taking hold now might be the time to revisit your position. A reminder of the rules The deductibility of interest and other finance costs (such as arrangement fees), against rental property income will be restricted starting with the current tax year 2017/18. 2017/18 75% may be deducted against rental income 2018/19 50% may be deducted against rental income 2019/20 25% may be deducted against rental income The balancing amount of finance costs may attract basic rate tax relief, but this is subject to a convoluted calculation. A similar provision applies to interest paid on debt raised to invest in a property partnership. These rules do not impact commercial property, furnished holiday lets or properties held by companies.

What are my options?

the increased tax charge (the first self• Accept assessment payments impacted will likely be 31

January 2019). Contemplate income tax mitigation reliefs and investments, which could include: o Personal pension contributions; o Enterprise Investment Scheme relief; o Social Investment relief; o Venture Capital Trusts relief. Consider whether the property ownership proportions are held tax efficiently. Review the performance of your residential property

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portfolio and consider alternative property not impacted by these rules. Weigh up the impact of incorporating your residential property business.

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Incorporating a residential property business Step 1 – consider the tax exposure

Gains Tax – the properties will be considered to • Capital transfer at their current market value, which may result

• • • • •

in an overall capital gain. Incorporation relief may be available, non-statutory clearance can be obtained from HMRC. SDLT – an exemption exists for partnerships, multiple dwellings relief may be available on other transfers reducing the SDLT exposure on transfer. Capital allowances – residential properties generally do not attract capital allowances, assets used in the rental property business can be transferred without creating an additional tax liability. VAT – not applicable for residential property businesses. Income tax – if incorporation is chosen, review your payments on account in light of your altered income sources. Corporation tax – the company will pay its first corporation tax liability nine months after its accounting year end.

Step 2 – consider any additional compliance costs

annual cost of company filings and company law • The obligations. reporting for residential property valued over • ATED £500,000.

Step 3 – talk to the bank

might be worth checking whether the bank is • Itamenable to re-financing within a corporate structure

and whether there are any punitive costs before step 1.


your accountants’ report will outline the initial • Ideally costs associated with step 1 and 2 but also the tax

savings over the longer term, to assist with any detailed discussions. With this report in hand (and possibly your accountant), your bank should then be able to formalise the mortgage offering for the properties transferred into the company structure.

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Step 4 – instruct your solicitor

solicitor should be engaged for the conveyancing • Your and submission of SDLT returns on transfer.

Step 5 – practicalities of incorporating

• A company bank account will need to be set up. lease or assured shorthold tenancy • Update agreements. policies will need to be obtained in the • Insurance company name. any suppliers such as utility providers or the • Inform council. • Those with a HMO licence should contact the council.

Summary

Tax rules are subject to change so taking the decision to incorporate your rental property business should be given due consideration. That said, whilst the youngest generation struggle to get onto the property ladder, it would not be politically astute to remove these finance restrictions. If the intention is to hold the property portfolio for the longer term, company structures can assist with expanding the property portfolio by limiting the tax exposure on profits generated. Corporation tax rates are currently very low, (19%), however extracting profits will likely attract further tax charges on the owners. As an alternative, rather than incorporating an existing property business, any new acquisitions could be acquired within a corporate structure. Elaine Grose

Selling your home – is it always tax free? Most people think that if they sell their home any gain arising will not be subject to capital gains tax. Broadly speaking this is correct provided they have lived in the property as their main residence for the entire period of ownership. There are certain absences from the property which are permitted and relief will still be due. However, the relief is not always due where the house has a particularly large garden, or perhaps a pony paddock attached. Legislation permits an area of up to 0.5 of a hectare of land, garden or grounds to be sold as part of a main residence and qualify for relief. In some cases a larger area can qualify for relief if it is required for the reasonable enjoyment of the dwelling house, having regard to the size and character of the dwelling house. This condition is of course subjective and there are many factors that need to be taken into account. Each case must be considered on its own merits as there are no hard and fast rules to determine what qualifies once the 0.5 hectare limit is exceeded. HMRC have published guidance on what qualifies as garden or grounds and there has also been a significant amount of case law in this area. Land which is in agricultural use for example can never qualify for main residence relief. If you are selling property and need to consider whether main residence relief will be available please do get in touch.

Tara Hayes

Unfogging the future With a record-breaking £5.1bn of Inheritance Tax (IHT) collected by HMRC in the year to 31 May 2017, if your intention is to maximise the level of wealth passed onto your beneficiaries, planning early is advised. For those fortunate enough to pass away with wealth attracting IHT, the government can take up to 40% of the exposed estate. With the recent introduction of the residence nil-rate band, additional relief will be available to some, but not all. Here are our top five tips for IHT planning: 1. Firstly understand whether you have a current IHT exposure. 2. Consider whether you can afford to gift during your lifetime.


3. Review your investments; reconsider options which attract IHT reliefs. 4. Research the benefits of whole-of-life insurance to cover your IHT exposure. 5. Discuss the above with our tax advisers and financial planners and engage a solicitor to draft your will! Interestingly a 51–page briefing paper on Inheritance Tax, was issued to MPs this month without explanation. Watch this space for IHT announcements this autumn…

Hannah Terry

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Land Transaction Tax

From April 2018, Land Transaction Tax (LTT) will replace Stamp Duty Land Tax (SDLT) in Wales. Land and Buildings Transaction Tax (LBTT) already applies in Scotland.

A valuable relief for valueless assets You may not be aware of a valuable relief that allows you to crystallise a capital loss on an asset which has become worthless, without actually having to dispose of the asset. Claims can be made by individuals and companies if the asset has become of negligible value; although this is not specifically defined it should be taken as meaning the asset is worth next to nothing. The most common asset on which a claim is made is share capital of a quoted company. This may be due to the company ceasing to trade, resulting in its share value dropping to almost nil. In fact, this is so common that HMRC have a list of quoted companies for which a claim can be made. A link to this list has been provided below. A claim can be backdated up to two years if the taxpayer owned the asset and it was of negligible value at that time. Backdating can be useful if a

taxpayer had chargeable gains in an earlier tax year which the loss can be set against or, if conditions are met, an individual wishes to set the loss against income for a specific year. However, in order for a claim to be successful, the taxpayer must still own the asset at the time the claim is made. Hence if a company is dissolved, the taxpayer will not be able to make a claim, as the shares effectively cease to exist at this time. If you would like advice on how to make a claim, please get in touch. Link: https:// www.gov.uk/ guidance/ negligiblevalueagreements

Like SDLT (and LBTT), LTT will generally be payable on the purchase or lease of a building or land. The new tax may therefore be relevant to house buyers and sellers and businesses including builders, property developers and agents involved in the transaction process (such as solicitors and conveyancers).

Rates of the new tax

The proposed tax rates and bands will be announced by October 2017.

Additional residential properties Higher rates of SDLT and LBTT apply to purchases of additional residential properties, including second homes. The National Assembly for Wales has confirmed these increased rates will continue to apply in Wales under LTT. More details can be found at National Assembly for Wales.

Kelly Wilkinson

Internet link: gov.wales/landtransaction-tax

Does a company director need to submit a tax return? We often get asked by individuals whether they need to complete a tax return. HMRC helpfully provide a list of the cases whereby they require a tax return, as part of their online guidance, and this can be found at: https://bit. ly/1K4mvJK

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or if they have income or gains which are chargeable to tax for the year. A director whose only income is taxed under PAYE, or has no taxable income at all, would therefore not be required to report to HMRC or register to file a tax return.

One of the criteria listed is that you were a company director, unless it was a non-profit organisation (such as a charity) and you didn’t get any pay or taxable benefits. Although this features in the HMRC guidance, there is no requirement in legislation for a company director to file a tax return.

We have successfully appealed several late filing penalties on behalf of clients who have been issued with tax returns only because they have become a company director and there is in fact no tax payable to HMRC. A case was also taken to the tax tribunal recently whereby the taxpayer successfully appealed late filing penalties on the same basis.

The legislation merely states that an individual must file a return if they are issued with a notice to complete a return,

If you are unsure whether you need to complete a tax return, or need help to complete your return, please contact us.


Securing Entrepreneurs’ Relief on a share sale You’ve sold your company shares, banked the proceeds and now you’re considering what to do with the money. First things first, let’s talk tax! The 10% tax rate which entrepreneurs’ relief attracts unsurprisingly has a number of conditions attached.

The basic points

Throughout the year ending with the share disposal: The individual – Owns at least 5% of the ordinary share capital which attracts at least 5% of the voting rights of the company. Is an employee or officer of the company or one or more of the companies which are members of the trading group.

• •

The company – Is either trading or a holding company of a trading group. If these conditions are met in the year up to the company ceasing to trade, the individual has three years to dispose of their shares to still claim relief.

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The individual conditions for shares acquired under an EMI option scheme have a slightly different set of rules.

What can go wrong?

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Investment activities of the company or group result in the company not meeting the trading status tests. The company is a corporate partner and the

• • • • • •

shareholder does not also hold the necessary in/direct partnership interest which could impact the company’s trading status. Resignations of employment or office holdings take place prior to the share disposal. Option holders enabled by a sale to acquire share capital, dilutes the ordinary shareholder interest below the 5% threshold prior to the disposal date. Previous gains result in the £10m lifetime allowance being exceeded. Certain trust structures are used where entrepreneurs’ relief is not available. The relief is not claimed within the statutory time limits i.e. the first 31 January anniversary following the tax year of disposal. Preference shares with terms which result in them falling into the ordinary share capital classification, can reduce ordinary shareholdings below the 5% threshold.

On this final point, the McQuillan case began in the Upper Tribunal on 26th July to consider whether shares without dividend rights are excluded from the ordinary share capital definition. The result of this case could have a significant impact on ordinary shareholders expecting to claim entrepreneurs’ relief. The moral of this story is to review your position regularly and take specialist advice when it comes to the share capital of your company. Elaine Grose

Tax Credits renewal due by 31 July 2017

If you claim tax credits you should have by now received a renewal pack from the Tax Credit Office. The deadline for renewing claims is 31 July 2017 and if this date is missed tax credit payments will stop. Any credits paid to you since 6 April 2017 may also need to be repaid. You can renew your tax credits online,


over the telephone or by completing and returning the paper form included in the renewal pack. The information provided will allow HMRC to finalise the tax credit award for last year and also to renew the claim for the current year. If you do not yet have final income figures for 2016/17 you are able to

complete the renewal process using estimated figures, provided the actual figures are then provided before January 2018. If you have any questions about tax credits or need help to complete your renewal then please get in touch.

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Employment Related Securities return deadline HMRC are advising that there have been technical issues with their Employment Related Securities (ERS) annual returns online service. Employers have to complete returns for any schemes that have been registered on the ERS online service, such as Enterprise Management Incentives (EMI), a non-tax advantaged scheme or award, Company Share Option Plan, Save As You Earn Scheme and Share Incentive Plan

Penalties for late returns

HMRC apologise for the difficulties which had prevented some returns from being submitted online. They have confirmed that the service is now working and allowing users to upload the necessary templates and files as part of the return process.

Additional automatic penalties of £300 will be charged if the return is still outstanding 3 months after the original deadline of 6 July, and a further £300 if it’s still outstanding 6 months after that date. If a return is still outstanding 9 months after the 6 July, daily penalties of £10 a day may be charged.’

The deadline for filing annual returns is generally 6 July following the end of the tax year, so for the tax year 2016/17 it would usually be 6 July 2017. However, in view of the recent problems HMRC have extended the deadline to 24 August 2017 for the tax year 2016/17.

Due to the change in deadline this year HMRC are advising that: ‘Penalties are charged if you file your return late. If your return isn’t filed by the extended deadline of 24 August 2017 the first late filing penalty of £100 will be issued on 25 August 2017.

If you would like any help or guidance on share incentives or how these should be reported to HMRC please contact us. Internet link: GOV.UK bulletin

ICO warning as business fined £60,000 following cyber attack

The Information Commissioner’s Office (ICO) is warning SMEs to take care or face a fine. The warning comes after a company which suffered a cyber attack was fined £60,000. The investigation by the ICO found Boomerang Video Ltd based in Berkshire failed to take basic steps to stop its website being attacked.

Latest guidance for employers

Sally Anne Poole, ICO enforcement manager, said: ‘Regardless of your size, if you are a business that handles personal information then data protection laws apply to you.’ ‘If a company is subject to a cyber attack and we find they haven’t taken steps to protect people’s personal information in line with the law, they could face a fine from the ICO. And under the new General Data Protection Legislation (GDPR) coming into force next year, those fines could be a lot higher.’ ‘Boomerang Video failed to take basic steps to protect its customers’ information from cyber attackers. Had it done so, it could have prevented this attack and protected the personal details of more than 26,000 of its customers.’ Further details of the case can be found using the links below together with guidance on data protection issues including guidance on the new General Data Protection Regulations which come into effect on 25 May 2018. Internet links: ICO news ICO report Boomerang data protection reform updated toolkit for SMEs

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HMRC have issued the latest version of the Employer Bulletin. This edition has articles on a number of issues including: P11D and P11D(b) filing and payment deadlines Paying the right amount of tax through PAYE Construction industry scheme repayment claims for limited companies The Apprenticeship Levy and funding of apprenticeship training Tax-free childcare rollout including guidance on dealing with employee opt outs of current childcare voucher schemes Student Loan employer prompts where deductions have not been made GCSEs in England - new grading system explained for employers. If you have any queries on payroll matters please contact us.

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Internet link: GOV.UK Employer bulletin


Online trust register You may be aware that HMRC were due to launch a new online trust register to report new and existing trusts to HMRC. The register was scheduled to be available from June 2017 for trustees, with agents being able to access it from September 2017.

Holiday entitlement

The normal form for registering trusts with HMRC (Form 41G(Trust)) was withdrawn back in April meaning that there has been no way to register new trusts, until now. Despite initial delays, the new service is now up and running for trustees to use and it is still anticipated that agents will be able to use the service later this year. All trusts and estates with a tax liability must register with HMRC and submit a tax return after the end of each tax year to report their income and gains. In addition, all existing trusts will be required to register using the new online service. The service can be accessed at: http://bit.ly/1PjPOwE If you have any queries regarding the registration of a trust or estate then please get in touch.

In the news: Taylor review of modern working practices was • The released this month, with the report paying particular attention to the gig economy.

of David Gauke’s first acts as work and pensions • One secretary was to announce government’s intention to

increase the state pension age to 68 from 2037, 7 years earlier than originally planned.

workers were warned this month by The • Young International Longevity Centre – UK that they should be saving 18% of their earnings to achieve an adequate income in retirement.

Bank of England released mortgage data for the • The first quarter of 2017, noting a worrying trend of longer

term mortgages with over 15% issued in Q1 with terms in excess of 35 years.

BBC disclosed for the first time those staff • The being paid £150,000 or more, exposing its gender

pay disparity. Those operating through independent production companies were not part of the disclosure.

national minimum & living wage enforcement • HMRC’s budget has been increased from £20m to £25.3m for 2017/18.

warns of a major financial crisis in the social • Mencap care sector after losing its national minimum wage appeal for ‘sleep in’ staff.

Parental Bereavement (Pay and Leave) Bill • The announced this month seeks to ensure that statutory paid leave is available to grieving parents.

Now is the time of year when many of us turn our thoughts to holidays and it is important to get holiday entitlement and holiday pay right. The June 2017 acas newsletter includes links to useful guidance on calculating holiday and holiday pay entitlements as well as guidance on hot weather working. The GOV.UK website includes a useful calculator. If you would like help with payroll matters please contact us. Internet links: GOV.UK calculator acas newsletter


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CHARTERED ACCOUNTANTS, www.albertgoodman.co.uk TAX CONSULTANTS & FINANCIAL PLANNERS