The Blog

UK inheritance tax move to hit non-domiciled property owners

The Government plans to extend its inheritance tax (IHT) rules to cover properties held by non-domiciled residents in an offshore entity.

Under new guidelines from the Treasury issued in a consultation paper last week, residential property will be liable to inheritance tax (IHT) even if it is owned by an offshore trust.

As part of 2015’s Summer Budget, the Government announced it would be amending the rules for non-dom residents, particularly in terms of IHT.

Under the new guidelines, non-dom residents who own residential property in the UK will be subject to inheritance tax from April 6 2017. “This charge will apply to both individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled,” according to the Treasury’s consultation paper.

It added that no change will be made to the taxation of UK property which is held by corporate or other structures and which are owned by UK domiciled individuals or by trusts made by UK domiciled individuals.

Many advisers have welcomed this clarification, but there are concerns that this might alienate current non-doms and deter wealthy individuals or families who are considering moving to the UK.

There had previously been hints that tax relief may be available for those who decide to remove UK properties from foreign company ownership structures, but the Treasury has now decided reducing the tax costs associated with restructuring UK property ownership would not be appropriate.

In the consultation paper the Treasury says: “While the Government can see there might be a case for encouraging de-enveloping, it does not think it would be appropriate to provide any incentive to encourage individuals to exit from their enveloped structures at this time.”

The Treasury said the reason for the planned changes is because non-doms currently enjoy a significant advantage over other individuals in this area.

The Government has now opened a consultation on the new IHT rules, which will run until 20 October 2016, but said the rule change it has outlined has been determined to be the best option and it is currently developing a framework for implementation.

Businesses able to submit ‘voluntary’ tax payments under HMRC’s PAYG proposals

Sole traders, landlords and unincorporated businesses will be able to submit ‘voluntary’ tax payments towards unexpected tax liabilities, under new HMRC proposals.

The news comes alongside the much anticipated publication of six consultation documents into HMRC’s ‘Making Tax Digital’ campaign, which the tax authority hopes will make all tax “100 per cent digital by 2020”.

HMRC’s proposed pay as you go system is one of many unanticipated changes to Making Tax Digital outlined in the tax authority’s latest consultations, which were published this week.

The proposed system will allow taxpayers to take full control over how often they wish to pay, and how regularly – although businesses with an annual income of £10,000 or more will also find themselves under new obligations to report accounts information to HMRC “at least quarterly” according to the consultations.

HMRC has said that their optional voluntary system will apply to the likes of Capital Gains Tax (CGT), income tax and national insurance (NI) contributions from 1 April 2018 – and to VAT from April 2019.

By 2020, HMRC hopes PAYG will also be open to incorporated businesses in respect of their corporation tax affairs.

Proposals under Making Tax Digital are complex and confusing, and taxpayers and businesses alike are advised to seek advice, to determine exactly how HMRC’s tax overhaul will affect them personally.

The Association of Taxation Technicians (ATT) recently branded Making Tax Digital “the biggest change to the way taxpayers will engage with HMRC since the introduction of PAYE in 1945”.

The end of salary sacrifice?

HMRC has revealed plans to limit tax and national insurance savings from salary sacrifice schemes.

In a 17 page consultation document released this week, HRMC stated that the government does not believe benefits-in-kind, effectively paid for by employees through reductions in gross salary, should be provided by employers at a cost to the Exchequer through salary sacrifice arrangements.

Plans were unveiled to change tax legislation so that where a benefit-in-kind is provided through salary sacrifice, it will be chargeable to income tax and Class 1A employer national insurance contributions, even if it is normally exempt.

Among the salary sacrifice schemes set to be hit are life insurance policies and mobile phone contracts, which will become taxable on employees. However, the paper did state that not all current schemes will be hit by the changes to the rules.

The purpose of the salary sacrifice consultation is to explore the potential impact on employer and employees should the government decide to implement these changes.

Several health-related benefits-in-kind such as the cycle to work scheme are not included as the government wishes to encourage their use. The consultation is also not asking for views on employer pension contributions, employer-provided pension advice and employer-supported childcare provision.

The consultation will run from 10 August 2016 to 19 October 2016 and the government is interested in hearing from employers, trade organisations and other interested parties who may be affected by the proposed changes.

The consultation on salary sacrifice for the provision of benefits-in-kind can be viewed here.

What does Brexit mean for VAT?

On 23 June the UK voted to leave the EU. This decision will have implications for businesses, individuals, the economy and the tax system.

However, the decision to invoke Article 50 and give official notice to exit the EU has not yet happened, and we will remain a member of the EU for at least the next 2 years.

It’s important to remember that the UK economy is essentially strong, and whilst we will see movements in exchange rates and the markets in the short term, they will eventually find their level.

The Chancellor has discounted the possibility of an emergency Budget in response to ‘Brexit’, but we can expect a clearer roadmap of how the UK’s tax and spending plans will evolve going forward to be outlined in the Autumn Statement.

One significant area likely to be affected will be VAT.

Value Added Tax derives from European law and was introduced in the UK as part of our original accession to the Common Market in 1973. However, it is one of the largest revenue generating taxes for the UK government, so it is unlikely to be abolished or significantly changed as a result of Brexit.

The way VAT currently operates is closely connected to our EU membership in many different ways. For UK businesses operating mainly within the UK, the effects of any changes are likely to be less than those for more internationally-focused businesses.

Going forward, the UK government will have more flexibility over the setting of VAT rates and liabilities. The current single claim mechanism will cease to apply and the process for UK businesses to reclaim VAT incurred in EU member states will become more administratively complex.

Cross border reclaims will need to be made to individual member states and will depend on the UK offering reciprocity (i.e. paying UK VAT claims from EU member states).

The changes for VAT on international transactions are likely to be more significant, and will be more dependent on the terms of the UK’s exit.

As a full member state of the EU, the UK is currently within the single market and the customs union, which means borderless movement of goods within the EU. If we negotiate a similar position to Norway and other EEA states, this will give us continued access to the single market. However, Norway is not within the EU customs union. This has significant implications for the VAT treatment of the movement of goods.

If we are outside the EU customs union, all goods moving between the EU and the UK will require customs clearance for VAT purposes, although there may be no customs duties imposed. For good entering the UK from the EU, import VAT will need to be paid or deferred before they can be cleared. This is likely to lead to delays and increased administrative costs, and increases the likelihood of a customs border being needed between Northern Ireland and the Irish Republic.

Businesses with complex supply chains will need to keep these under review and assess the implications as the financial position becomes clearer. Future plans will need to be flexible and take into account potential future changes.

Businesses selling good online to consumers in EU member states will need to review their business models, unless specific arrangements are negotiated. Currently, UK VAT is charged until sales reach a certain level when local VAT registration is needed. When the UK leaves the EU, the default position would be that EU customers would need to pay the import VAT due on their online purchases before the goods could be delivered to them.

Although nothing will change in the short term, and very little may change for UK focussed businesses in the future, there will be major considerations for any business with significant trading relationships with the EU. This will need to be kept under review as the situation develops.

However, it is important not to act in haste while so much remains unclear. Over the coming months we should start to see some clarity over how the UK’s relationship with the EU will evolve and these detailed negotiations will determine the exact arrangements going forward.

If you have any concerns or questions about your VAT position, please contact us to speak to our expert VAT advisors today.

Payments on Account Explained

Time is running out for self employed workers to pay the second part of their tax bill.

Most self employed workers pay tax bills in installments: one in January and one in July under the ‘payments on account’ system. If you have a payment on account to make to HMRC, you must do it by midnight on 31 July, or face a fine and additional interest on your outstanding balance.

These payments on account spread the cost of your tax bill across the year and are designed as a method for paying some of your tax in advance, therefore preventing people being indebted to HMRC.

Payments on account are calculated by looking at your previous year’s tax bill. The first installment is due on 31 January (the same day as your ‘balancing payment’ which clears your tax bill for the previous year), and the second is due on 31 July.

Each of the two installments of the payments on account is usually 50 per cent of the previous tax bill. This will include Class 4 National Insurance Contributions where applicable.

There are some circumstances where a payment on account will not be due. If your tax bill for the previous year was less than £1000 after PAYE or other deductions at source, you will not need to make a payment on account. Similarly, if you’ve already paid more than 80 per cent of the tax you owe you will not need to make a payment on account.

If you still have tax to pay after making your payments on account, you must make this balancing payment by midnight on 31 January.

For example

Your tax bill for the 2013/14 tax year is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2015 is £2,700. This includes:

  • Your balancing payment for 2013/14 of £1,200 (£3,000 minus £1,800)
  • The first payment on account of £1,500 towards your 2014/15 tax bill (Half your 2013/14 bill)

You will then have to pay your second payment on account (£1,500) by midnight on 31 July 2015.

If your tax bill for 2014/15 is then more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2016, plus the first payment on account for the following year.

Reducing your payment on account

Self employed people’s income can fluctuate from year to year. If your income for the next tax year will be lower than in the previous year, you can apply to have your payment on account reduced.

You should think carefully before doing this and seek advice from an expert. Underpayments may be subject to interest, so if you reduce your payment on account and it subsequently turns out you have underpaid, you may find yourself facing an even bigger bill.

It is advisable to complete your tax return as early as possible, particularly if you’re paying payments on account. If you complete your tax return before 31 July, you may be able to reduce your payments on account, and you’ll know what your tax bill is going to be well in advance of the 31 January deadline – giving you more time to prepare for the cost.

Speak to an accountant to calculate your tax bill and see if you can reduce your payments on account. Contact us today for a free initial consultation.

SMEs failing to take cyber security seriously, says study

Small and Medium Enterprises (SMEs) across the UK are putting themselves at risk by failing to take their cyber security seriously, according to new research.

A study carried out by Barclaycard found that just one in five SMEs consider cyber security a ‘top business priority’, despite the fact that 74 per cent of UK firms found themselves facing at least one security breach during 2015, according to HM Revenue and Customs (HMRC).

The Government has warned that the average cyber-attack can potentially cost a business anywhere between £75,000 and £311,000.

The National Audit Office (NAO) has added that cyber-attacks could become more common following HMRC’s shift to an all-digital tax system.

Making Tax Digital (MTD) proposals came under fire last week, after an NAO report fund that much more still needs to be done by HMRC ‘to use data and technology to reduce fraud and error’.

The NAO said that HMRC is facing a great challenge in building “public trust that the new digital tax systems are easy to use and secure”, in order to protect both itself and SMEs from potential data loss and IT crime as the new systems are brought online.

Their report added that HMRC “must also demonstrate to taxpayers that its controls to verify each taxpayer’s identify and protect the confidentiality of data and working effectively.”

HMRC underestimating the cost of Making Tax Digital for SMEs, says NAO

HMRC are failing to fully estimate how much it could cost Small and Medium Enterprises (SMEs) to convert to Making Tax Digital, according to new criticisms.

The National Audit Office (NAO) has said that although the Government’s approach to the Making Tax Digital transformation is ‘credible’, HMRC must do more to increase public confidence in the online services currently being developed – and to inform SMEs of what they need to do in order to comply.

According to the NAO, HMRC needs to remain optimistic and committed to meeting its goals, but veer away from over-ambition, which the NAO believes is a recipe for failure.

An NAO report read “HMRC was over-optimistic about how much change it could deliver all at once, and how fast it could reduce demand for telephone contact in particular. This resulted in a collapse of its service to personal taxpayers in 2014/15 and the first half of 2015/16.

“HMRC has since recovered the quality of its service to personal taxpayers by recruiting more staff and has adjusted its future resource plans in the light of this experience.

“In the past year HMRC has made plans to invest more than £2bn on its transformation in the next five years,” the report added.

“HMRC has launched digital accounts for individuals; announced plans to close 137 offices and the location of 13 new regional hubs; and secured agreement for its plans to replace its IT services contract, Aspire, which it has revised to reduce the risk of carrying out too much change too quickly.”

The NAO reminded SMEs that “Most business customers will be required to update HMRC quarterly rather than annually about their tax affairs, and some may need to purchase new software that works with the new systems.”

SMEs concerned about how the switch over will affect them are urged to contact tax experts for advice.

Report assesses impact of National Living Wage

One of the biggest announcements to come from last year’s Summer Budget was the introduction of National Living Wage for UK workers aged 25 and over.

The changes came into effect in April 2016, raising hourly wages from £6.70 to £7.20 on 1 April, and is expected to rise steadily to £9 by April 2020.

New research conducted by an influential think tank has now shed light on how UK companies have coped following the introduction of the new National Living Wage earlier this year.

The survey, which was carried out by the Resolution Foundation, found that the majority of employers have favoured raising prices over cutting the number of staff on their books.

These findings appear to dampen fears that the changes would lead to an increase in redundancies.

The Office for Budget Responsibility (OBR) had previously suggested that the new rules could lead to as many as 60,000 job losses by the turn of the decade.

While the latest survey, which involved 500 companies across a range of sectors, may suggest that these fears won’t be borne out, there has nonetheless been a squeeze on many employers’ budgets.

Around three in ten of the firms who took part in the survey said they had reduced profits to cope with the new requirements. A small number of companies also admitted making changes to staff terms and conditions, with eight per cent having cut perks such as paid breaks or overtime pay.

If you need help planning for the increased costs incurred from the National Living Wage, contact us today. Our specialist team can help ensure your business stays in the strongest possible financial position.

The new Confirmation Statement explained

The confirmation statement is used by limited companies and limited liability partnerships (LLPs) to inform Companies House about the accuracy of information held on public record.

This is essentially a simplified version of the annual return, with the additional requirement to include details of the information held on your register of people with significant control (PSC register).

To complete your confirmation statement you need to check that the information that Companies House hold about your company is correct and fully up to date.

You only need to file your confirmation statement once a year and there is no change to the filing fee (313 online or £40 on paper) or deadline. However the 28 day grace period that applied to annual returns has changed to 14 days.

Company officers and designated LLP members are responsible for delivering a confirmation statement to Companies House. The filing deadline is now 14 days after:

  • The anniversary of company registration
  • The anniversary of the last annual return ‘made-up’ date

If your made-up date fell on or before 29 June 2016 you may still need to deliver an annual return. In such instances, you’ll have 28 days from the made-up date to file your last annual return at Companies House.

If the made-up date is on or after 30 June 2016, you should complete a confirmation statement instead of an annual return. Your confirmation date will fall on what would have been the made-up date of an annual return. You will only have 14 days from the confirmation date to deliver the confirmation statement.

All companies limited by shares or guarantee, regardless of whether they are dormant or active, must submit a confirmation statement to Companies House at least once every year. If you fail to do so, your company will no longer be in ‘good standing’ and it may be struck off the register.

If you have any questions relating to the confirmation statement or PSC register, please contact us on 01905 777600. We have a full range of company secretarial services and can take care of your confirmation statements and PSC register for you – giving you more time to focus on your business. Speak to us today to find out more.

Landlords warned against ‘illegal’ stamp duty schemes

The popularity of illegal tax schemes which some landlords are using to avoid a recently introduced Stamp Duty Land Tax (SDLT) surcharge is on the rise, according to a recent investigation by The Telegraph.

HMRC has issued a warning advising investors to steer clear. These so-called ‘stamp duty schemes’ have been on the rise in recent months – many of which are illegal and could see landlords facing prosecution.

These schemes have gained prominence following George Osborne’s introduction of an additional 3 per cent SDLT surcharge on second home purchases in the Budget. Many investors and critics have labelled the surcharge ‘unfair’ since it was first implemented in April.

HMRC have spoken out against landlords who might be tempted to take advantage of legal loopholes to avoid paying the charge, warning “They [landlords] will be much worse off than if they had just paid the right tax at the right time, especially when they have paid fees to the promoter of the avoidance scheme, which are not refundable”

An HRMC statement read: “These kinds of schemes don’t work. We have investigated thousands of cases since 2013, bringing in over £200 million in Stamp Duty Land Tax. These individuals have had to pay 100 per cent of the original tax due, plus interest.”

If you’re a landlord, don’t be tempted to use an illegal tax scheme. Instead, speak to an expert to make sure your financial affairs are as tax efficient as possible and compliant with legal requirements, otherwise you could face strict penalties and even criminal prosecution.

Ormerod Rutter Chartered Accountants have a specialist team with experience of helping landlords structure their affairs in the most tax efficient way possible. If you would like further information about how the changes will affect you, please contact us to arrange a free initial consultation.

Self-employed pensions – are you saving enough?

Recent reforms to the state pension system could give millions of self-employed people more money from the Government to help them through retirement.

As of 6 April this year, people who work for themselves will be able to qualify for the full flat-rate weekly payment of £155.65, provided they have made sufficient National Insurance contributions.

Under the old system, the amount self-employed people could receive was limited because they were unable to get the top-up “state second pension” payments that were made to many employees.

This is welcome news which could see millions of self-employed people better off in their retirement, but the news is not so good when it comes to private pensions.

A record number of people in the UK are becoming self-employed or starting their own business. According to the Office for National Statistics, the number has increased by 182,000 to just under 4.7 million.

However, there are growing concerns that this new generation of entrepreneurs are not saving enough for their retirement. A new report by the Federation of Small Businesses shows that less than a third (31%) of self-employed people are saving into a private pension.

The number of people who pay into pensions and the typical contribution rate have both dropped sharply in the wake of the financial crisis and recession.

Someone starting to save £320 a month at age 45 would end up with a pension fund worth around £92,000 when they retire at 67. This would give an income of around £4,000. Added to the £6,000 from the state pension would only generate an annual pension of £10,000, which is unlikely to be enough for a good standard of living for most people.

Research from the government-backed Money Advice Service suggests that people need pensions worth somewhere between 50% and 80% of their pre-retirement salaries.  As it currently stands, self-employed people are unlikely to get anywhere near this target level of retirement income.

Many experts believe that the Government should introduce some form of automatic pension saving for the self-employed. Auto enrolment is currently being rolled out for employees, so the vast majority of people will join their company’s pension scheme and benefit from regular contributions from their employer too. However, this will have no impact on self-employed workers in its present form.

Although self-employed people won’t benefit from the employer contributions, there is still a big tax incentive to save into a pension.

Any payments you make will automatically be given tax relief at the basic rate (20%), which means that every £80 you pay into your pension is topped up to £100. For higher-rate taxpayers, a further £20 can be claimed back through the self-assessment system – this means £100 of pension only costs £60.

Tax amnesty for second incomes

HMRC is offering individuals a tax amnesty when they come forward and communicate previously undisclosed second incomes, in return for reduced penalties.

This is one of a number of tax amnesties HMRC has offered over recent years. Penalties are normally substantially reduced if a voluntary disclosure is made under these schemes, instead of penalties of up to 200% of any tax owed if the tax office discovers the income itself.

The second income amnesty is open to individuals in employment who have an additional untaxed source of income.

Examples of second income could include:

  • Fees from consultancy or other services such as public speaking or providing training
  • Payment from organising events and parties or providing entertainment
  • Income from activities such as taxi driving, hairdressing, providing fitness training or landscape gardening
  • Profits from buying and selling goods, e.g. regular market stalls, car boot sales etc.

It’s also important to be aware of the point at which HMRC considers your hobby to be a business. More information can be found in this blog post.

If you are considering making a disclosure, it is strongly recommended that you seek professional advice. For a free, confidential initial consultation, please contact us and speak to Anthony Middleton today.

More information is available on the HMRC website.

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