Offshore matters or transfers, disclosure for UK tax and the new failure to correct penalty from 1 October 2018

Following my blog "UK tax compliance and HMRC Campaigns", I am focusing here on offshore involvements and UK tax. 

If you have, or have had involvements offshore, are you happy that these affairs have been correctly disclosed and taxed in the UK?

There is a new legal requirement included at Section 67 and Schedule 18 of the Finance (No. 2) Act 2017 that creates an obligation for anyone who has undeclared UK tax liabilities involving offshore matters or transfers to disclose the relevant information about this non-compliance to HM Revenue and Customs (HMRC) by 30 September 2018.

Failure to disclose the relevant information to HMRC on or before 30 September 2018 will result in the person becoming liable to a new penalty as a result of their failure to correct (FTC). The new FTC penalty is likely to be much higher than the existing penalties, with a minimum penalty of 100% of the tax involved.

To avoid becoming liable to these new higher penalties, a person must correct the position by no later than 30 September 2018. If they do this, the tax and interest will be collected and the existing penalty rules will apply.

HMRC has previously run campaigns specifically aimed at tax payers with overseas affairs who may not have made correct disclosure and/or paid enough tax in the UK. These campaigns are now over, but anybody wanting to make a tax disclosure voluntarily about any area of UK tax can still make a disclosure by using the Campaign Voluntary Disclosure Helpline on 0300 123 1078 - Monday to Friday, 8 am to 6:30 pm.

If taxpayers are unsure whether they have undeclared UK tax liabilities that involve offshore matters or transfers, they should check their affairs and if necessary put things right before they become liable to the new FTC penalties that will come into force on 1 October 2018.

Further guidance on this is available from HMRC here

UK tax compliance and HMRC Campaigns

The tax gap is the difference between the estimate of the tax that should be paid and the amount actually paid.

A 2014 report commissioned by the Public and Commercial Services Union estimated that the UK‟s tax gap was £122 billion a year and growing. This was a big increase on the 2010 estimate of £95 billion. 

In an attempt to reduce this gap, HM Revenue & Customs ("HMRC") runs campaigns that are designed to:

• help people to bring their tax affairs up to date
• help them keep them that way, and
• help stop them getting it wrong in the first place.

These campaigns do the following;

• provide opportunities that make it easier to be compliant – including offering an incentive to self-correct
• bring together a basket of activities to encourage voluntary compliance in the target population
• look for opportunities to inform customers who are entering the targeted risk area for the first time
• use what is learned to help HMRC improve processes to deal more efficiently with customers in the future.

These campaigns offer people a chance to get their tax affairs in order on the best possible terms. They provide tools and information to help people do that; to help people keep their affairs in order; and to help stop people getting it wrong in the first place.

Where people choose not to take the chance to set the record straight, HMRC uses the information, gathered before and during the campaign, to conduct follow-up work. This includes investigations and prosecutions.

The current campaigns relate to:

• Credit and debit card sales,
• Second Income,and 
• Let Property.

Anybody wanting to make a tax disclosure voluntarily about any area of UK tax can still make a disclosure by using the Campaign Voluntary Disclosure Helpline on 0300 123 1078 - Monday to Friday, 8 am to 6:30 pm.

The Child Benefit Charge Trap

As it stands, tens of thousands of people, mostly mothers will be missing out on all or part of their future state pension payments and it is estimated that this number is growing by about 20,000 every year.

The amount of state pension to which we are each entitled is based on the number of years of national insurance contributions. One of the advantages of child benefit payments is that they provided national insurance credits adding to the future state pension entitlement for the stay at home parent.

The High Income Child Benefit Charge ("HICBC") was introduced in January 2013 and has had a big impact on families and their decision not to claim child benefit. 

Under HICBC, if either partner has an income over £50,000, the tax charge will reduce and over £60,000 will wipe out any benefit. The benefit is payable to the lower earner but the tax is bourne by the higher earner.

Since the introduction of HICBC, many families are deciding that they will not clam child benefit and many new families do not submit a claim. This is where the problem lies.

For stay at home parents, usually mothers, registering to claim child benefit provides a National Insurance credit. The number of years that a parent stays at home varies from family to family, but is typically many years and can make a sizable impact on pension entitlement. 

This impact on pension entitlement should be considered when deciding whether or not to claim child benefit.

More importantly, new families must make a child benefit claim.  

Having made a claim, it is still possible to decide not get the payments, but it does ensure;

• national insurance credits that count towards the state pension, and
• the child being registered and issued with a National Insurance number when they turn 16.

Rental income on residential property (Buy to let) - an update

Since writing the original blog on rental income, there have been a couple of significant changes.

The first relates to the wear and tear allowance. This change takes effect from April 2016 so we are just at the end of the first tax year affected by this change.

Under the old system, landlords with furnished property could make a deduction of 10% ( possibly with a few small adjustments) of their rental income in calculating the taxable profit.

This will affect all residential landlords whether personal or corporate.

Under the new rules, the costs actually incurred on replacements will be an allowable deduction

A complication arises where the replacement is not like-for-like (or the nearest modern equivalent) since the cost of any improvement is not an allowable deduction.

The second change relates to the deduction of finance costs (for example, mortgage interest) in arriving at taxable profits. This deduction would have caused tax relief at the top rate of tax being paid by an individual, often at 40% or even 45%. Restriction of this relief will now be phased in from April 2017 with 25% of the finance costs only achieving basic rate tax relief. This basic rate element will increase to 50% in 2018/19, 75% in 2019/20 and will be entirely at basic rate only from 2020/21.

The effect of this change is that from 2020/2021, all taxpayers with rental income, whether personal or corporate, will receive the same tax relief (20%) on their finance costs, regardless of their tax rate.

The structure of holdings of residential, rental property should be reviewed in 2017/18 for existing holdings and as new acquisitions are planned going forwards.

Good advice should consider the situation on a case by case basis because there are other factors, including other taxes to consider.

Partners who together own rental property and are not married can agree to how any taxable income should be split. However this is not so straight forward when the partners are married.

Married couples often own property as joint owners. This means that they jointly own the entire property in equally shares. The split of any rental income is 50:50. It should also be noted that in this situation, where one spouse dies their share in the property goes to the surviving spouse and can not be treated otherwise by the will.

The alternative is to hold the property as tenants in common. This allows distinct shares in the property, which need not be equal. It also allows the will to determine what will happen to the share property in the event of death.

Where the percentages of beneficial ownership between husband and wife are formally amended, HM Revenue & Customs must be notified within 60 days by lodging Form 17 ("Declaration of beneficial interests in joint property income").

Expenses if your self employed

When advising people who are new to self employment, one of the questions I am asked most often is  " what can I claim as costs of my business"
The simple answer is business expenses that are wholly and necessarily for the purpose of the business.  However it is generally helpful to go into a bit more detail.

Costs you can claim as allowable expenses.

These include:

• office costs, eg stationery or phone bills

• travel costs, eg fuel, parking, train or bus fares

• clothing expenses, eg uniforms

• staff costs, eg salaries or subcontractor costs

• things you buy to sell on, eg stock or raw materials

• financial costs, eg insurance or bank charges

• costs of your business premises, eg heating, lighting, business rates

• advertising or marketing, eg website costs.

If something is used for both business and private purposes, then only part of the cost equivalent to the business use can be claimed.

If you work from home you have a choice. You can claim a tax deduction using the specified allowance for use of home or you can use a reasonable estimate, based on a reasonable proportion of the actual costs.

You may be able to claim a proportion of your costs for things like:

• heating
• electricity
• Council Tax
• mortgage interest or rent
• internet and telephone use

The cost of buying assets, such as equipment, for the business does not get deducted like expenses but instead there are tax adjustments called capital allowances. Usually these allowances spread the cost over more than one year.

These are the principal categories,

• equipment
• machinery
• business vehicles, eg cars, vans, lorries.

Any specific questions, let me know.

Rental income on residential property

You are receiving taxable income that you need to declare if you are receiving rental income in the UK from residential property.

This applies whether you are in the UK or overseas.

There are penalties for failure to declare and HM Revenue & Customs have advised that they are clamping down on undeclared income in this area.

If you have not previously notified HM Revenue & Customs of this income, they are currently offering an opportunity for you to bring your affairs up to date on more favourable terms than would normally be available.

There are various reliefs and deductions available so it would be wise to consult a good accountant if you are in this situation. The potential savings could well outweigh their fee.

If you have never lived in the property you will have to pay capital gains tax on any profit when you sell.

Unless you have lived in your house for the whole period of ownership, you may still have capital gains tax to pay on some of the profit.

There are a couple of recent changes that you should be aware of.

If you have let the house in which you have lived, you are eligible for principal private residence (PPR) and lettings relief against any capital gain. Under the current rules since 6 April 2014' the last 18 months are added to the period in which you lived in the property to work out the proportion of time for principal private residence relief. Before 6 April 2014, this additional period was 36 months.

Prior to April 2015, if you were overseas and not a UK tax payer, you were not subject to capital gains tax on the sale of a UK residential property. This changed from 6 April 2015. Capital Gains Tax  will be payable on the post 6 April 2015 gain at 18% and/or 28% depending on the amount if gain and your individual circumstances in relation to UK personal tax.

Property can be a complex area for UK taxes. Apart from income tax and capital gains tax, you may need to consider VAT and stamp duty land tax. Good planning is crucial.

If you have specific questions, please drop me an email.

Capital Allowances on Property Acquisitions

One of the major changes under the Finance Bill 2012 relates to the capital allowances available to the purchaser of a property.

Previously the section 198 election was optional it will now become mandatory.

Even if the seller has not claimed any capital allowances there will be a mandatory requirement for capital expenditure to be identified and pooled by the seller (that is, notified to HMRC). Broadly, this can be done up to two years after the sale of the property.  This leads to the strange possibility that the buyer may have to ask the seller to pool the expenditure after the sale has been completed which would be achieved by the commissioning of a capital allowances specialist. There will obviously need to be a negotiation over who pays for the capital allowances claim in these circumstances and how any identified capital allowances will be allocated between the parties.

If the seller has not pooled the capital allowances qualifying expenditure within the required period then the right to claim capital allowances is lost not only by the new owner but by any subsequent potential purchaser.  Furthermore, a S198 election agreement must be entered into. If either requirement is missed then any right to claim capital allowances on the property will be lost entirely to both the new owner and any future owner.

Where capital allowances claims are missed in this way it could actually reduce the potential value of the property in a buyer’s eyes so making a capital allowances claim is an imperative for owners of commercial property.  Potentially conveyancing solicitors will need to take much more interest in capital allowances or risk being sued by their clients for not providing the correct advice at the time of sale / purchase.

This is now a critical consideration as part of the pre completion paperwork for a buyer of property to ensure that the seller has made the appropriate election.

Source: HMRC

Pensions and the Lifetime Allowance - do you need to act before 6 April 2014?

The amount that an individual in the UK can accumulate in their pension scheme before it will be hit by a tax charge is called their Lifetime Allowance ("LTA").

As of 6 April 2012, this was reduced from £1.8m to £1.5m. A further reduction to £1.25m will take place on 6 April 2014.

If you have a pension pot that you expect to be over £1.25m by the time you take your benefits, you can apply for protection to retain the higher £1.5m lifetime allowance. There are conditions attached that include making no further pension contributions. There are two forms of protection available, both of which can be applied for, but one must be claimed by 5 April 2014.

This situation applies to more people than is immediately apparent.

Consider two examples with no further pension contributions:

- You are now 45, looking to retire at 60 and currently have a pot of £450,000.

With average annual growth higher just 7%, your pot will exceed £1.25m by the time you retire.

- You are now 40, looking to retire at 65 and current have a pot of just £225,000.

If we again assume an average annual growth rate over 7% , your pot will be over the threshold when you reach 65.

Please note that one of the condition for this protection to remain in place is that you do not make further pension contributions so Once auto enrolment arrives for you, you will need to opt out of it within 1 month in order to retain this protection.

If this siuation might apply to you, you should take proper professional advice as soon as possible.

Bear in mind that if you have a reasonable pension pot and you are in a position to make additional contributions this year, it may be advantageous to do so.

If you have further questions or would like an introduction to a very helpful wealth planner, who can review your pension arrangements, please drop me an email ( philip.gale@businessorchard.com )

If you know of someone else who may be affected by this, please pass this on. 

Failure to act now could be very expensive.

VAT and the Single Market

Value Added Tax known as VAT is the UK version of sales tax.

Unlike in some other countries, it applies to the sale of goods and services.

The standard rate of VAT is 20%, but there are extensive rules about how VAT operates and some areas such as property and international trade are complex.

The rules are mostly based on legislation, though like any tax in the UK, court cases and tribunal decisions do play their part. Unlike other UK taxes because of the direct impact of sales tax on the value of sales and the resulting interplay across national borders, VAT legislation is heavily influenced by European Directives. The rules that apply to VAT and international trade vary depending on whether the supply is to a business or directly to the consumer. The place of supply being in the domestic market, within the EU, the European Single Market, or elsewher in the world outsidebthe EU has a bearing. There is a very comprehensive notice covering trade within the Single Market. this notice 725 has recently been rerreleased but with only minor changes.  HMRC Reference:Notice 725 (June 2013) - The Single Market

This notice explains the way VAT is charged and accounted for on movements of goods within the EC Single Market and how businesses should account for VAT on goods they buy from other EC Member States.

There are only limited changes from the previous version of the notice as follows;

- VAT registration numbers in other Member States. 

- Introduction of Croatia with effect from 1 July 2013, and

- changes to Ireland.

With the introduction of the Single Market, goods leaving the UK to go to other Member States are no longer called exports, but are referred to as dispatches or removals. The term 'export' is only used for goods leaving the UK to go to countries outside the EC. For information about exports, see HMRC Reference Notice 703 - VAT: Exports of goods from the UK

If you are involved in international trade and you are not sure of the rules, you should discuss your specific situation with an accountant or other VAT expert. 

If  you don't have one,why not try;
Business Orchard

Practical steps to tackle tax evasion ahead of G8

Several overseas territories along with the Cayman Islands and the Crown dependencies of Guernsey, Jersey and the Isle of Man have agreed to join and take an active part in the multilateral Automatic tax information exchange launched by UK, France, Germany, Italy and Spain. Joining the Multilateral Convention will allow more countries to quickly benefit from greater levels of tax information exchange. This will be particularly beneficial for developing countries as it allows them to sign up to one multilateral treaty rather than several bilateral arrangements. The action plans on beneficial ownership they have committed to produce will ensure much greater clarity about who really owns, controls, and benefits from companies.This follows an announcement from Prime Minister David Cameron on new rules to bring unprecedented transparency on company ownership, and will make it harder to launder money, evade and avoid tax, finance terrorism, bribe officials, hide stolen assets and evade financial sanctions.
The full statement was as follows: We, the Political Leaders of the Overseas Territories of Anguilla, Bermuda, British Virgin Islands, Gibraltar, Montserrat and Turks and Caicos, warmly welcome our meeting with the Prime Minister today to discuss Tax, Trade and Transparency, where we had a very clear agreement and constructive exchange of views on the practical steps needed to tackle the global problem of tax evasion and how the UK and the Overseas Territories will continue to apply our high standards of regulation to address this.

As part of our contribution to advancing this global agenda and to create a level playing field right across the world, different Overseas Territories at different times, and now unanimously, have reiterated and confirmed our agreement to the following three (3) important steps: 

• To play an active part in the new pilot initiative of multilateral automatic tax information exchange launched by the UK, France, Germany, Italy and Spain;
• To prepare national action plans on Beneficial Ownership to meet the FATF standards;
• To commit to joining the Multilateral Convention on Mutual Administrative Assistance on Tax Matters.

It is our collective view that as we free up the world economy we must make sure openness delivers benefits for rich economies and developing countries alike and that we maintain confidence in the fairness and effectiveness of our tax systems and in the operation of global markets. Tackling tax evasion and fraud is a global responsibility in which we will continue to play our full part.

We welcome the Prime Minister’s willingness to work in partnership with us in seeking to achieve a step change in international standards and establishing a global level playing field through the UK’s G8 Presidency.

As part of our continuing commitment to tackling tax evasion and fraud, we have also undertaken to prepare Action Plans setting out the concrete steps, where needed, to fully implement the Financial Action Task Force standards to further increase our already high standards of transparency on beneficial ownership information and to ensure that this information is available to law enforcement and tax authorities in accordance with our established mutual legal assistance cooperation regimes.

 The Multilateral Convention on Mutual Administrative Assistance in Tax Matters is an important global instrument, which builds upon our existing network of many bilateral agreements and other existing arrangements for exchanging information between tax authorities. The Convention offers an accessible route to increase the number of jurisdictions which will be able to benefit from information exchange. It is for this reason that we have committed to joining the Convention and have requested its extension to our jurisdictions as soon as possible, subject to our national procedures and the need for ensuring the achievement of a global level playing field.

 We are committed to continuing to play a leading role in delivering a fair, responsible and effectively regulated global business environment.

 We express the hope that the UK Prime Minister will succeed at Lough Erne in securing a new global standard and all Leaders will commit to move together on this common agenda designed to secure more economic growth.

As part of our contribution to advancing this global agenda and to create a level playing field right across the world, different Overseas Territories at different times, and now unanimously, have reiterated and confirmed our agreement to the following three (3) important steps: 

• To play an active part in the new pilot initiative of multilateral automatic tax information exchange launched by the UK, France, Germany, Italy and Spain;
• To prepare national action plans on Beneficial Ownership to meet the FATF standards;
• To commit to joining the Multilateral Convention on Mutual Administrative Assistance on Tax Matters.

It is our collective view that as we free up the world economy we must make sure openness delivers benefits for rich economies and developing countries alike and that we maintain confidence in the fairness and effectiveness of our tax systems and in the operation of global markets. Tackling tax evasion and fraud is a global responsibility in which we will continue to play our full part.

We welcome the Prime Minister’s willingness to work in partnership with us in seeking to achieve a step change in international standards and establishing a global level playing field through the UK’s G8 Presidency.

As part of our continuing commitment to tackling tax evasion and fraud, we have also undertaken to prepare Action Plans setting out the concrete steps, where needed, to fully implement the Financial Action Task Force standards to further increase our already high standards of transparency on beneficial ownership information and to ensure that this information is available to law enforcement and tax authorities in accordance with our established mutual legal assistance cooperation regimes.

 The Multilateral Convention on Mutual Administrative Assistance in Tax Matters is an important global instrument, which builds upon our existing network of many bilateral agreements and other existing arrangements for exchanging information between tax authorities. The Convention offers an accessible route to increase the number of jurisdictions which will be able to benefit from information exchange. It is for this reason that we have committed to joining the Convention and have requested its extension to our jurisdictions as soon as possible, subject to our national procedures and the need for ensuring the achievement of a global level playing field.

 We are committed to continuing to play a leading role in delivering a fair, responsible and effectively regulated global business environment.

 We express the hope that the UK Prime Minister will succeed at Lough Erne in securing a new global standard and all Leaders will commit to move together on this common agenda designed to secure more economic growth.

HMRC revised toolkits to help minimise common errors

HMRC has published the updated Business Profits and Capital v Revenue Toolkits to assist agents when completing their clients' 2012-13 returns. These can be useful to individuals who have an understanding of the tax rules and wish to prepare their own tax returns. Links are provided here and they should should be read in conjunction with the essential information reproduced below.

If in any doubt contact an accountant to assist you.

If  you don't have one,why not try;

Business Orchard

Individuals, business and corporations

• Business Profits (PDF 181K)
• Capital Allowances for Plant and Machinery (PDF 255K)
• Capital Gains Tax for Land and Buildings (PDF 243K)
• Capital Gains Tax for Shares (PDF 191K)
• Capital v Revenue Expenditure (PDF 147K)
• Chargeable Gains for Companies (PDF 221K)
• Company Losses (PDF 152K)
• Directors' Loan Accounts (PDF 120K)
• Expenses and Benefits from Employment (PDF 207K)
• Income Tax Losses (PDF 127K)
• National Insurance Contributions and Statutory Payments (PDF 250K)
• Private and Personal Expenditure (PDF 247K)
• Property Rental (PDF 209K)
• Small Profits Rate and Marginal Relief (PDF 112K)
• VAT Input Tax (PDF 182K)
• VAT Output Tax (PDF 208K)
• VAT Partial Exemption (PDF 155K)

Trusts and Estates

• Capital Gains Tax for Trusts and Estates (supplement) (PDF 215K)
• Inheritance Tax (PDF 180K)
• Trusts and Estates (PDF 223K)

Toolkits to help reduce errors - essential information
These toolkits are aimed at helping and supporting tax agents and advisers. They are part of HM Revenue & Customs' (HMRC's) wider approach to improving tax compliance, which is focused on help and support to ensure that returns are correct.

The toolkits have been developed with the benefit of input from agents and their representatives, including the Compliance Reform Forum. However, the content is based on HMRC's view of how tax law should be applied.

Read more about the Compliance Reform Forum

The application of these toolkits to specific cases will depend on the law at the relevant time and on the precise facts.

Overview

Each toolkit has three key elements:

• A checklist - to help you to address the areas of possible error that HMRC identifies as key.
• Explanatory notes - which identify the underlying types of error, how to mitigate those errors and a brief outline of the tax treatment. HMRC recommends that you review these notes, even if you are confident about answering the questions in the checklist.
• Cross references - linking to the relevant guidance available online, so you can easily find more detailed guidance if required.

By being more open on the errors that HMRC sees in returns, and suggesting the steps that you can take to reduce those errors, the toolkits will help you to assure the completeness and accuracy of your clients’ returns.

Use of the toolkits is voluntary and you can use them in whatever way best suits you and your clients.

Examples of how the toolkits are used include:

• as a straightforward checklist
• to complement or check and refresh your existing processes
• as a training aid for your staff

It should not be necessary for you to refer to all of the toolkits, only those that are relevant to your clients' circumstances and the return being completed.

Scope

Each toolkit is focused on errors which HMRC finds commonly occur. They are not comprehensive statements of all types of error that may arise in any particular return. For areas not dealt with in the toolkits you should refer to the full HMRC guidance.

Find HMRC reference material and publications

Each toolkit will be updated each year to reflect any changes arising from the relevant Finance Act, where applicable, and released for use with that year’s returns.

Where there are changes to legislation, the toolkits provide a brief summary of those changes. The types of error that may arise from new legislation will not be immediately apparent, but if HMRC encounters particular areas of common error, they will seek to address these errors by releasing an updated version.

HMRC's guidance is updated regularly. There will however be occasions when the draft guidance has not yet been published. Where that is the case, the toolkits provide a link to the latest publication available on the HMRC website.

The toolkits do not cover tax avoidance or deliberate attempts to evade tax, which are outside the scope of the toolkits and are subject to HMRC's normal compliance procedures.

Taking reasonable care

Under the penalty legislation, there will not be a penalty for an error in a return or other document where the person has taken reasonable care that the return or document is accurate. As part of their efforts to take reasonable care, a person may seek professional advice and may appoint an agent to help them.

Where a person appoints an agent, this does not relieve them of their responsibility for their tax affairs. They still have a duty to take reasonable care, within their ability and competence, and this includes the person taking reasonable care to avoid inaccuracy by their agent.

Further guidance on reasonable care

The aim of these toolkits is to highlight errors which HMRC finds commonly occur and to help you avoid inaccuracies in your clients' returns that may otherwise lead to penalties. Their use remains entirely voluntary. Whether reasonable care has been taken in any particular case will be a question of fact and will not depend on whether a toolkit has or has not been used.

Further guidance on penalties where an agent is acting

Find more information on understanding penalties

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