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

Proposed changes to the taxation of partnerships

HMRC Consultation document on the tax rules for partnerships

On 20th May, HM Revenue & Customs issued it's long awaited consultation paper on the tax rules for partnerships. This consultation was announced in the March 2013 budget.

The taxation of partnerships has been under scrutiny for some time, with the suggestion that they are not always purely for commercial purposes but are increasingly being used to achieve tax advantage.
The areas of particular concern relate to national insurance contributions (nic), income tax and capital gains tax.

The consultation is looking at two particular, but unrelated areas where HMRC believes income tax and nic are being avoided. They are disguised employment and Profit and Loss allocation schemes.

Disguised employment

Employment status has been in the spotlight for several years and HMRC has already introduced specialist officers to consider the status of self employed people to cut down on the perceived loss of tax revenue through the artificial take up of the advantageous tax and nic regime for the self employed.

There is a statutory presumption that partners in a partnership are self employed and they have always been taxed on a self employed basis. The Limited Liability Partnership Act 2000 introduced the Limited Liability Partnership from April 2001. The partners within an LLP are taxed like any other partners on a self employed basis.

Currently partners can be remunerated by means of a fixed, predetermined profit share equivalent to a salary and they are still taxed on a self employed. In some cases this has been taken further by changing employees, who have no part in the risk or operation of the business, to partners in the LLP in order to take advantage of the beneficial tax and nic position.

The aim is to prevent a member of an LLP benefiting from the default partner status if the terms of his or her engagement with the LLP are tantamount to an employment. This will be achieved by providing that an individual member who meets either of two conditions be classed as a “salaried member” and, in that capacity, will be liable to income tax and primary (Class 1) NICs as an employee.

The first condition states that a “salaried member” of an LLP is an individual member of the LLP who, on the assumption that the LLP is carried on as a partnership by two or more members of the LLP, would be regarded as employed by that partnership.

This would be determined by referring to the status tests already in use.It is understood that an LLP agreement will not have the terminology or characteristics expected in a contract for services and so there is a second condition;

A “salaried member” of an LLP includes an individual member of the LLP who does not meet the first condition but who:
(a)  has no economic risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up;
(b)  is not entitled to a share of the profits; and
(c)  is not entitled to a share of any surplus assets on a winding-up.

Profit and Loss allocation schemes

It potentially links directly with the above in how different classes of partners are rewarded for their contribution, funding of the partnership and probably artificial arrangements involving companies with non-commercial arrangements on say transfer pricing and profit sharing or extraction.

There are a number of particularly aggressive arrangements that exist in the market. For example some structures are designed so that all revenue profits are earned in a company whilst all capital gains are earned in a partnership for the same business.

The proposed treatment is to reallocate profits for tax and nic purposes on a just and reasonable basis and to deny loss relief claims where these losses are considered to be articificial. 

Additionally buying and selling of partnership profits will be looked at to ensure that the transaction is not purely an attempt to switch income otherwise subject to income tax to a gain subject to tax at a lower rate.

The changes will take effect from 6 April 2014, with the government seeking views on these proposals for changing the partnerships rules by 9 August 2013.

HMRC recalculates bills for 5 million taxpayers

Some 5.5 million people overpaid or underpaid tax last year, HM Revenue & Customs has admitted. It means they will be clawing back up to £1bn from unsuspecting taxpayers for unpaid tax in the 2012-13 financial year.

But up to 3.5 million will receive an average repayment of between £350 and £500. That means HMRC will be handing back up to £1.75bn.

About 2 million taxpayers will receive surprise demands after the Revenue calculated they underpaid tax in the 2012-13 financial year. They will be asked to make up an average shortfall of between £400 and £500, although the Revenue said it allow the shortfalls to be paid during the 2014-15 tax year.

HMRC began the laborious process of contacting the millions affected on Wednesday after it started its annual PAYE End of Year Reconciliation process for 2012-13. With so many people to contact, some taxpayers won't find out whether they owe money – or are due a refund – until October.

An HMRC spokesperson explained: "Around 85 per cent of pay as you earn taxpayers pay the right tax throughout the year. But if a customer's circumstances have changed over the course of the year – if, for example, they have moved in and out of work, or received new benefits – we need to work out whether they have paid too much or too little tax. This is the normal process that the PAYE system has used for 70 years."

By Simon Read

The Independent