Thursday 31 January 2013

Tax Schemes & Swiss Bank Accounts

Have you received a letter from the Taxman recently, inviting you to pay tax avoided by using a tax scheme or Swiss bank account?

The specific tax avoidance schemes involve one or more of the following:

- the manipulation of accounting rules;
- British film tax relief;
- artificial trading losses.

The Taxman believes these tax schemes don't work, but rather than go to the trouble and expense of proving this in the Courts, he is asking taxpayers to pay the tax they have avoided by using the scheme. This settlement offer does not include any attractive penalty terms or reduction in interest due. The only benefit to you is a quick resolution of your tax affairs without a drawn-out investigation which could potentially lead to a criminal prosecution. Only taxpayers who receive a specific invitation from the Taxman can take up this settlement opportunity.

The UK/Swiss tax agreement applies to bank accounts held in Switzerland by individual UK resident taxpayers which were open on 31 December 2010 and remain open on 31 May 2013. If the bank account holder does not instruct the bank to disclose details of the account to the UK tax authorities, the funds in that account will be subject to a one-off tax deduction that covers income tax, capital gains tax, inheritance tax and VAT liabilities, calculated on a formula based on the length of time the account was held and the rate the balance in the account increased over that period.

The taxman is writing to taxpayers who are known to hold Swiss bank accounts, to warn them that tax deductions will apply unless the relevant disclosures are made, and penalties of up to 150% of the tax due could be imposed. Note that if you opt for the one-off tax deduction, as opposed to full disclosure, you will not be protected from possible criminal prosecution.

If you have received either of these warning letters from the Taxman, please contact us immediately for advice.

Letting Relief Explained

If you have let a property which was once your main home, or was treated as your main home as you lived in job related accommodation, letting relief can help reduce the tax you pay on the eventual sale. This tax relief cannot apply to a buy-to-let property that has never been occupied by the owner.

The property must be let as residential accommodation, not as office space, or operated as a trade such as bed and breakfast. If only part of the property is let, that let part must not form a self-contained annexe such as a granny flat.

The tax relief for letting is given in addition to exemption from tax for gains arising in respect of any periods when you occupied the property as your main home. This exemption is also extended to cover the gain arising in respect of the last 36 months of ownership.

The letting tax relief is the lower of three amounts:

- The part of the gain exempt because it was used as your main home;
- the gain attributed to the let period; and
- £40,000 per owner.

Example

Julie owned a property for 13 years, but lived in it for only the first 18 months as her main home. After that it was let for ten years and remained empty before sale. The gain is £130,000 or £10,000 per year of ownership. The taxable gain is calculated as follows:

Capital gain before tax relief: £130,000

Exemption for main home for 18 months, plus last 3 years of ownership: £45,000

Relief for letting is £40,000 as is the lower of:

- £45,000 for period of residence or deemed residence
- 10 x £10,000 actual let period
- and £40,000 maximum lettings exemption

Net gain chargeable: £130,000 - £45,000 - £40,000 = £45,000

SEIS - The Opportunity

The Seed Enterprise Investment Scheme (SEIS) will have a limited life - only five years to 5 April 2017. It allows investors to receive 50% income tax relief on the amount invested and up to 28% capital gains tax relief for a limited period. Also if you make a loss on the SEIS shares you can get further income tax relief for that loss.

This sounds very attractive, but you need to be aware of the various traps and limitations of the SEIS before you commit your money. In particular SIES can only be used to invest in small companies (asset value of no more than £200,000 and up to 25 employees), which the SEIS investor can't control. In fact the SEIS investor together with his associates must not own more than 30% of the company. Each company can raise up to £150,000 of investment under SEIS in its lifetime, and each investor can invest up to £100,000 per tax year.

The greatest amount of tax relief is achieved by reinvesting a capital gain made in the year ended 5 April 2013 in SEIS shares, when you get both the income tax relief at 50% and full exemption from tax on the reinvested gain. The SEIS shares must be eligible for income tax relief for 2012/13. This means the SEIS shares must be issued in 2012/13 or issued in 2013/14 and subject to an election to carry back the tax relief to 2012/13.

If you are thinking of investing under SEIS or using SEIS to attract an outside investor to your company, please talk to us first as there are lots of hoops to jump through.

Green Car Scam

Please don't be taken in by a scheme which claims to reduce the taxable benefit of your company cars. The taxman has specifically warned taxpayers about this scheme on the spotlights page of his website.

The scheme promoters persuade employers to buy carbon credits to off-set against the carbon dioxide (CO2) emissions of company cars. This is fine, but buying carbon credits can't reduce the CO2 emissions rating of your company cars as recorded on the registration documents.

A vehicle's CO2 emissions are fixed at the time of its manufacture, and can't be changed for tax purposes. You must use the CO2 figure recorded on the vehicle's registration document for calculating the taxable benefit of the car, and the taxable fuel benefit if fuel is provided.

If you report a reduced figure of CO2 emissions for each of your cars on the P11D forms, as persuaded to by the 'plan green' promoters, you will pay less class 1A NICs for each car. Also your employees will be taxed on a lower percentage of the vehicles' list price. However, when the Taxman discovers the P11D forms used incorrect CO2 figures for each car, he will demand payment of the tax and NI avoided plus interest and penalties.

Monday 7 January 2013

Polytunnels and Glasshouses

Does your business use a polytunnel or glasshouse?

In the past the Taxman has refused to allow a tax deduction for the cost of such structures, on the basis that greenhouses are buildings. A greenhouse is generally expected to last several years, so the cost of the structure should be treated in the business accounts as 'capital' rather than as a 'revenue' expense. The cost of capital items cannot be deducted from annual profits, as the total expenditure must be spread over the life of the asset, using capital allowances. However, no capital allowances are given for the cost of buildings and similar structures (as opposed to the equipment they contain).

Now the Taxman has changed his mind. Polytunnels can qualify for capital allowances in certain circumstances, such as where the tunnel is moved around to aid the growth of particular crops in different areas at different times. If the primary function of the polytunnel is to provide shelter for livestock or stores, it will be regarded as 'premises' and not qualify for capital allowances.

A glasshouse may qualify for capital allowances if it contains, as part of the structure, permanently installed computer controlled equipment that automatically adjusts the heat and humidity inside the glasshouse. Unheated glasshouses will not qualify for capital allowances, as the Taxman views these as fixed buildings which happen to be made of glass.

The good news is that this change of approach comes into effect immediately, so all open claims for capital allowances on polytunnels or glasshouses can be settled in line with the Taxman's new guidance. If you have had a claim for capital allowances refused based on the old guidance, you can ask the Taxman to reconsider your claim.

Increased Annual Investment Allowance

The annual investment allowance (AIA) gives a 100% deduction for tax purposes for the cost of plant, equipment and certain fixtures in buildings, which qualify for capital allowances. The AIA has an annual cap. This started at £50,000 in 2008, was increased to £100,000 by the previous government, and was cut to £25,000 in April 2012 by the current incumbents.

Now the AIA cap will temporarily increase to £250,000 for expenditure incurred in the two years from 1 January 2013. Equipment bought on and after 1 January 2015 will be subject to the reduced AIA cap of £25,000, unless the Chancellor of the day has another change of mind. Expenditure that qualifies for capital allowances, but which exceeds the available AIA cap for the business is given tax relief at the rate of 18% or 8% per year, depending on the nature of the item purchased.

The AIA cap for accounting periods that end on 31 December 2013 and 31 December 2014 will be £250,000, fair and square. But where your business has an accounting period that straddles 1 January 2013, the calculation of the AIA cap is complicated. Say your accounting period ends on 31 March 2013. You need to split the accounting period (for AIA purposes only), into:

a. 1 April 2012 to 31 December 2012 (portion of £25,000 AIA); and
b. 1 January 2013 to 31 March 2013 (portion of £250,000 AIA).

The maximum AIA for the business is the sum of the portions of the AIA cap due for each of those sub-periods a) and b). However, the expenditure must also be spread over those two periods to gain the maximum advantage from the AIA. The business cannot spend its maximum AIA in the period from 1 January 2013 to 31 March 2013.

The complications do not stop there, as there is protection for businesses that have already spent their maximum AIA of £25,000 in 2012. Please ask us to check how much the AIA cap will be for your business before you purchase any expensive equipment.

RTI - More Information

The rules for reporting wages, hours worked and payroll deductions under real time information (RTI) are still being written.

What to report

RTI reports will need to be made where at least one employee is paid above the lower earnings limit (LEL), (£109 per week for 2013/14). For wages between the LEL and the Primary threshold (£149 per week for 2013/14) the worker is given NI credits although they don't actually pay any NI, so the level of their wages needs to be reported.

A major difference between RTI and the current system, is that once the employer is reporting under RTI, reports must be made for each employee even if no tax or NI are deducted for a particular period. This because RTI has two functions; - to report deductions to HMRC and to report net pay for each worker to the Department of Work and Pensions (DWP) to allow the DWP to calculate top-up benefits such as Tax Credits and the new Universal Credit.

The wages for employees aged under 16 are not required to be included in the RTI report, unless those wages are so high that the worker will be subject to income tax. Workers aged under 16 do not pay NICs, and are not eligible to claim Tax Credits.

Penalties for errors

The draft legislation released on 11 December 2012 indicates that penalties for errors in RTI reports will apply from 6 April 2013, when most employers will be required to start using RTI. Those employers who are already in the RTI pilot programme may be subject to penalties if their last RTI report for the 2012/13 tax year is incorrect.

In either case the penalties for errors in RTI reports will not be collected until the 2013 Finance Act has been passed, probably in late July 2013. This application of penalties from the start of RTI has come as an unpleasant surprise, because tax and accountancy bodies have been pushing for a 'soft-landing' for the RTI penalty rules for all employers.

Penalties for late reports

Penalties for RTI reports which are submitted late will generally apply from 6 April 2014 onwards. Remember an RTI report will have to be filed every time employees are paid. Under the current system a report of PAYE deductions is only required to be submitted to HMRC once per tax year, by 19 May after the end of the tax year.

Where the last RTI report for the tax years 2012/13 (for employers in the RTI pilot) or 2013/14 is submitted by 19 May after the end of the tax year, there will be no late-filing penalty. However, from 6 April 2014, where the employer fails to submit RTI reports on time within the tax year, the employer could be fined for each month for which RTI reports are late. Only one penalty per month will apply even if the employer makes more than one RTI report during the month.

New Tax Free Allowance

The standard personal allowance (amount of tax-free income) for 2013/14 will be £9,440. We had been expecting a smaller increase to £9,205.

The new higher allowance allows an individual to earn £181.54 per week (about £787 per month) tax free. But the NIC thresholds will not increase by as much, so an employee starts to pay NICs on income way below the tax-free threshold.

In 2013/14 the class 1 primary NI earnings threshold for employees will be £149 per week (£7755 per year). Employers will pay class 1 NI on wages of £148 or more per week (£7700 per year). You need to consider the NI costs for both you and your company when deciding how much you can extract from your own company as salary.

If you pay yourself the full personal allowance of £9,440 as salary from 6 April 2013, you will have personal NIC of £202.20 (12% x (9440-7755)) for the year. Your company will also pay £240.12 (13.8% x (9440-7700)) in class 1 NICs. However, the salary and NIC cost is fully tax allowable for the company.

A salary of £7,695 per year (about £147.98 per week) will avoid both employees and employers NICs. But you will get an NI credit for state retirement pension purposes if your salary lies in the range £109 to £149 per week. Unfortunately under RTI (see above), payments of salary in that range will have to be reported to HMRC, so there is no admin saving on paying a low salary.