Friday 31 January 2014

IHT Relief on Business Assets

Inheritance tax (IHT) is payable at 40% on the net value of the assets you own when you die, plus (to a certain extent) on the value of the gifts you made in the seven years before you die. The first £325,000 of assets is currently exempt from IHT in all cases.

There are also exemptions from IHT for business assets, such as shares held in unquoted companies. However, you cannot escape IHT by holding all your investments and spare cash inside your personal company. The business of the company must be more than passive holding of investments, and the Taxman normally regards letting property as an investment, but this is a grey area.

Even where your company has an active trade, it doesn't follow that the full value of its shares will qualify for the IHT exemption. The Taxman wants to look inside the company and check that each asset it holds, including cash, is used for the purpose of the trading business.

This can cause difficulties for companies which hold more cash than is needed for everyday working capital. If your company is in this position, to get the IHT exemption you need to form some plans for use of the funds within the business and document those plans.

The IHT exemption applies where the shares of the trading company are held by individuals, or where a holding company holds the shares, and shares in that holding company are held by individuals. However, where the holding vehicle is a general partnership or an LLP, instead of a company, the IHT exemption does not apply.

VAT penalties

If you pay your VAT late to HMRC, even one day late, your card will be marked for a VAT penalty called a 'default surcharge'. The first late payment doesn't attract a monetary penalty, but the second occasionon which you are late within 12 months triggers a penalty of 2% of the VAT due. The third, fourth, and fifth occasions of lateness increase the percentage of the penalty to 5%, 10% then 15% of the VAT due (ouch!).

You may not notice the first two penalties set at 2% and 5% of the VAT due as HMRC will only demand payment from a small business if the total penalty amounts to over £400. However, you will receive a warning letter, and you should appeal against the penalty if you had a reasonable excuse for paying late.

Not having the money available to pay your VAT bill is not a reasonable excuse. If your business has a cash flow problem you need to ask the HMRC business support service for time to pay before the VAT becomes payable, or we can do this on your behalf. The number to ring is: 0300 200 3835, and it's open every day. Don't ring the VAT helpline as they can't deal with VAT debt issues.

If your VAT payment was delayed by circumstances outside your control, for example a computer failure at your bank, that would be a reasonable excuse. However, you do need to present evidence of this reason when asking HMRC to review the penalty. Around 60% of VAT penalties are overturned on review, so it's worth a try!

Non-Resident Landlords

If you leave the UK and let your property here, your letting agent (or the tenant where there is no agent) should deduct basic rate (20%) tax from the rents paid after deduction of certain expenses, under the non-resident landlord scheme (NRL). This ensures that at least some tax is paid on the income in the UK.

You can avoid having 20% tax deducted if you successfully apply for approval under the NRL scheme from HMRC. Approval will be granted where your UK tax affairs are up to date, or you don't expect to be liable to pay UK tax in the year you apply.

The NRL scheme applies if the landlord's usual place of abode is not in the UK. This is not the same as being not resident in the UK for tax purposes. An absence from the UK for as little as six months can be enough to establish your usual place of abode as being outside the UK.

The NRL scheme applies to members of the armed forces and diplomats, just as it does to any other non-resident landlord. It also applies to overseas trusts and companies, which must have income tax (not corporation tax) deducted from their rental income.

If your UK property is let as holiday accommodation, you may need to register for VAT in the UK as holiday lets are subject to standard rate VAT. As an overseas person you have a zero turnover threshold for VAT registration, so you may have to register for VAT immediately on letting holiday accommodation. However, where a UK letting agent manages the property on your behalf, the VAT registration threshold of £79,000 applies for that landlord.

CGT on Home Developments

Your main home is exempt from capital gains tax when you sell it, but only if you bought the property with the intention of living in it on a permanent basis, not as a project to renovate and sell. People who are required to live in job related accommodation, such as prison warders and church ministers, can have a separate tax-exempt home without having to live in it.

Some taxpayers who have taken on renovation projects have found the gain on their property doesn't qualify for the tax exemption, because they can't prove they occupied the property on a permanent basis while it was being renovated before the sale.

For example, Jason Moore bought a property with his girlfriend in December 1999. He claimed to have lived there while he renovated it in the period to late February 2000, when he returned to live with his girlfriend. The property was then let to tenants until it was sold for a profit in June 2004. Jason had no documentary evidence of his time at the property in the three months to February 2000, so his claim for the tax exemption failed.

Paul Gibson went much further in knocking down his whole home and constructing a new one on the same site, which he sold shortly after it was completed. Although Paul intended to live in the new property, he was forced to sell it to repay the loans he had taken out. He claimed to have occupied the finished house for about five months before the sale, but he couldn't prove this with any documents.

If you are planning a "grand design" conversion for your own home talk to us first about the tax implications.

Friday 3 January 2014

Capital Allowances on Fixtures

There are a number of capital allowance claims firms targeting businesses which have recently bought or sold commercial property. These 'experts' suggest the business needs to pay for a special survey to claim all the capital allowances they are entitled to, and this must be done quickly in order to claim all the allowances due.

In most cases a special survey is not needed. However, it is true that for commercial building sales made since 1 April 2012 the vendor and purchaser must take formal steps (usually an election) to agree the value of fixtures included in that building. This value must be agreed within two years of the transfer of ownership. If agreement cannot be reached the two parties can go to the tax tribunal where the judge will make a decision.

The agreed value for fixtures is brought into the capital allowance pool as the disposal value for the vendor and is added to the capital allowance pool for the purchaser.

There is another change on its way for transfers of commercial buildings from April 2014. The value of fixtures and fittings must be claimed as part of a capital allowances pool by the vendor in an accounting period prior to the sale of the building. If the vendor does not make this claim, the purchaser is barred from claiming any capital allowances for the fixtures it acquires.

We can help you make the necessary elections and claims for capital allowances.

Partly-exempt Businesses

If your business supplies some goods or services which carry VAT, and other items which are exempt from VAT (such as charitable events and financing), the business is likely to be partly-exempt for VAT purposes. Being partly-exempt means you may not be able to reclaim all of the VAT on your purchases (input VAT).

Where the input VAT that relates to your exempt sales is no more than £625 per month, and it is also less than half of your total input VAT, you can reclaim all of the input VAT. In other cases you can only reclaim the input VAT which relates to the supplies that carry VAT. There are various methods to apportion input-VAT which can be agreed individually with HMRC, or you can use the standard method.

Whichever method you use to allocate input VAT, this should be reviewed at least once a year, to see if it still gives the best outcome for your business. We can help you with this.

If you pay VAT on road fuel used for private journeys, based on the road fuel scale charges published by HMRC, you need to be aware that the concession for partly-exempt businesses is withdrawn from 1 January 2014. Under this concession the business is permitted to reduce the output VAT due on the road fuel scale charges in line with its partial-exempt position. If you have been using this concession we definitely need to review the methods you use to apportion input VAT from 1 January 2014.

New RTI Relief

Have you been struggling to send full payment summary (FPS) reports under RTI to HMRC on or before the days on which your employees are paid? This is particularly difficult when your workers receive irregular amounts of pay on varying dates. In such cases you may not know the amounts of wages and deductions to report until the workers have finished their shifts.

The concession for small employers with fewer than 50 employees has helped. This allows you to submit all the figures on one FPS report when you make your last payroll run in the month, but this must be no later than the end of the tax month. However, this concession is due to end on 5 April 2014.

The good news is that until 5 April 2016, employers with fewer than 10 workers will be able to send in the FPS covering all payments by the last pay day of the tax month. This new relaxation will only apply to existing employers. Any new PAYE scheme commencing on or after 6 April 2014, or any scheme with 10 or more employees will have to report all the wages and deductions on or before each day the employees are paid, even if that is multiple times in the month.

If you have 10 to 50 employees on your payroll, and have been using the small employer concession to cope with multiple pay dates in a month, we need to talk about how to adjust your systems from April 2014.

Disguised Employment

The Government is cracking down on situations in which workers are treated as self-employed for tax purposes, and hence pay low amounts of NICs, but from the outside they appear to act as employees. The following changes in the tax law are proposed to block the use of 'self-employed' workers working through LLPs or who are hired-out through employment agencies.

LLPs

All individual members of LLPs are currently taxed as self-employed persons, even if they receive a regular 'salary'. This is the default position of the law and nothing is being 'fiddled' to put workers in this position. However, HMRC believe this rule is being abused, and the workers involved may not realise that they are technically self-employed.

From 6 April 2014 salaried members of LLPs will be treated as employees of the LLP if all of the following conditions are met:

- the member works for LLP and at least 80% of the pay he receives from the LLP is 'disguised salary';
- where the member has contributed any capital to the LLP, that capital amounts to less than 25% of the member's 'disguised salary' for the year; and
- the member is not involved significantly in the management of the LLP.

The Government has not yet defined term 'disguised salary'. If you have salaried members in your LLP we need to talk about these tax changes.

Employment Agencies

From 6 April 2014 if a worker supplied by an offshore employment agency personally carries out the work, or is involved in the provision of the services, the payment from the engager to the worker will have to be taxed under PAYE with class 1 NICs deducted. Any apparent right of substitution in the worker's contract will not prevent PAYE and NICs being due at the employed rates. The agency at the end of the chain must be an off-shore agency for the new rules to apply, but there may be UK based agencies in between and it may not be obvious to the worker or the engager of that worker, that an off-shore agency is in the chain

If you have any doubts about the contracts you are using either as a worker or an employer, our tax experts can help check the tax implications for you.