2017: New Year's Resolutions...

It's been a little while since I've been regularly commenting in my blog, and my posts have been a bit hit and miss as to when they go up. All rather remiss of me I know, and that's why in the New Year it is one of my resolutions to become more active in writing about tax again with the aim of publishing at least one tax blog every month. Not the most thrilling resolution I'm sure, but 2017 is likely to be one of the most eventful years in taxation that we have seen in some time!


For starters, we have May and Hammond (our new Prime Minister and Chancellor of the Exchequer, if only Boris Johnson's surname was Clarkson it would be uncanny), the latter of whom will be delivering his first Budget speech on 8 March 2017 this year. Hopefully this will pass without the prerequisite tomfoolery of their namesakes on Amazon Prime!

The New Year will also bring with it ramifications for European and global markets as we see Brexit gain pace in the spring and the arrival of President Trump in the White House. I'm sure there will be no end of commentary over these particular events in early 2017, which will undoubtedly have differing effects on business generally. The former (Brexit) could see some major changes to the UK's tax legislation, but it remains to see what Donald Trump will do for trans-Atlantic tax harmony.

On another level we will also see further developments on MTD (Making Tax Digital, not Match of The Day) as we stride ever closer to digital integration with HMRC, and lets not forget of course the notification process for those with overseas assets and property.

Yes, 2017 should prove to be a most interesting year...

Share the wealth (but keep it in the family)

For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.

It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years.  Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.

BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.

Selling company shares?

Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.

So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.

All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).

Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix? 

Share the wealth (but keep it in the family)

For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.

It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years.  Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.

BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.

Selling company shares?

Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.

So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.

All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).

Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix? 

Incentivise your key players

So, you've built up a successful business, which has grown and therefore necessitated bringing others on board to help you run it. Or perhaps you're nearing retirement, or simply wanting to slow down and let your management team take up the strain, whilst you take time to enjoy the fruits of many years hard work.

Of course, the problem here is how do you ensure that those key people, the one's you'll rely on to keep you business ticking, don't jump ship, or simply decide they could go and run their own business? Well, you could always give them a pay rise, or a bonus, but we all know that is only a short term incentive. How can you truly tie these 'employees' into your business? The answer is simple, give them ownership!

"Whoa, surely you don't mean give away my business?" I hear you cry. Well, you kind of have to, but not all of it, infact only a small part of it, and if you're careful about how you do it you will lose zero control and even only 'pay out' if the business is ever sold. No, I'm not talking about financial wizardry, or being less than honest with your people, I'm talking about share options, or more specifically the Enterprise Management Incentive (EMI) share options.

A share option gives someone the right to buy your company’s shares in the future, but at a price that is fixed now. This means in effect that you are giving away none of the business you have built to date, rather what you are giving away is an option to benefit from future growth. So, if your team do more than sail the same course, and they actually grow your business, then everyone wins!

Options are very useful for business owners that wish to incentivise and retain key employees because as I have already pointed out, if the value of the shares escalates over time those employees could make a significant capital sum when they sell their shares. An EMI share option scheme provides significant tax advantages to those employees (and you as their employer). 

Quite simply, an EMI scheme is by far the most tax beneficial structure for staff, it was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.

The principal tax benefit of an EMI share option scheme is that employees do not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If you grant shares to an employee in other ways tax would be due on their value. It's also worthy of note that because of the advance agreement available on share values granted under EMI schemes, it is usual to agree discounts of up to 80% of the actual value, which further mitigates taxes.

If employees are given options under an approved EMI scheme, they are only charged capital gains tax at 10% on the increase in value over the option exercise price (what they pay for the shares), so long as that price is at or above the market valuation of the shares on the date of granting the options. This value is agreed in advance with HMRC as part of the process prior to entering into any agreement with the employee.

"All of this is well and good" I hear you say. Yes, it is very good news for your employees (or at least those key ones you want to incentivise).

"So what's in it for me?" you ask. The answer is simple, a team that now has an incentive to run your business well, after all they now have some ownership (albeit a small percentage) and their performance directly relates to their ultimate reward, which might be a business sale, or even a full management buy out. By giving them control of their own financial destiny, your own is assured as you step back from the day to day of running your business. Sounds nice doesn't it...

Brexit: The Aftermath

Last Thursday as a nation we voted and on Friday, depending on your personal inclination, we either celebrated or despaired as a nation divided. Yes, the vote was close, 52% vs 48%, and we saw record turnouts for the referendum, certainly higher than any I can remember in recent history for the UK electorate, which should be taken as a positive if it can be turned into greater participation in our national politics.

Anyway, as you should have guessed by now this is a blog about tax (with other musings occasionally I admit), so how has our decision to leave the EU affected tax? The short answer, as of yet is that it  hasn't, and Mr Osborne's speech this morning would seem to give us a reprieve until at least autumn time when we will have a new Prime Minister and leader of the Conservative party.

So, what can we expect?

The Chancellor was quoted pre-referendum as saying we would see £15bn of tax rises, comprising a 2p rise in the basic rate of income tax to 22%, a 3p rise in the higher rate to 43% plus a 5% rise in the inheritance tax rate to 45p. There would also be an increase in alcohol and petrol duties by 5%. He also mooted that there would be spending cuts worth £15bn, including a 2% reduction for health, defence and education, equivalent to £2.5bn, £1.2bn, £1.15bn a year respectively, along with larger cuts of 5% from policing, transport and local government budgets. Yet this morning he seemed more conciliatory, stating the strength of UK Ltd and our ability to weather the storm and emerge stronger. Was this simply scaremongering to maintain the status quo? Only time will tell...

What should be of more concern are the tax impacts of leaving the EU, rather than those likely to be imposed by our Chancellor.

As a result of Brexit the UK would no longer be part of EU’s Customs Union. This raises the prospect that the EU’s customs duties could apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies. The UK of course could do the reverse, and as the UK is a net importer from the EU such a move is unlikely by either party.

After a Brexit, sales of goods to and from the UK may no longer be able to use the EU’s acquisition and dispatch system (accounted for on VAT returns). Instead they would become imports and exports which would need to clear customs and incur import charges.

These are but two of the potential impacts, but the consequences of departing from fiscal union with the EU may not be as apocalyptic as we have been led to believe, however, expect a bumpy ride on the train out of Brussels...

Brexit: A Perfect Storm?

Like most of you, I'm sure, I seem to be having a lot of conversations about Europe, the EU and Brexit, indeed I've just read a blog by our National Managing Partner on the subject. Being the political cynic that I am, I just can't help but wonder if we've collectively taken our eye off the ball as far as some of the wider economic issues are concerned, and the upcoming referendum seems to be doing little to improve the level of certainty in the UK, and wider economy.


Ignoring Brexit for a moment lets look at some of the economic indicators in the UK:

• We still have record low interest rates in the UK, combined with continued low inflation (0.3% in March);
• Today it has been announced that unemployment figures have risen over the last quarter to 1.7 million;
• Increases in earnings have begun to slow over the same period down to 1.8% from 2.1% in the previous quarter; and
• UK  property prices are around the same levels now as they were before the start of the global economic crisis (some commentators believe they have already begun to fall);

Of course, these are not all of the issues, just some of the headline ones and whilst none of this is catastrophic, it is clearly not a picture of health from an economic viewpoint. The vista is not much better if we look further afield than the UK either I'm afraid.

Our financial markets are performing much better, for now, but one wonders how long that can continue. I was listening to a leading investment manager over lunch yesterday, reflecting on how we are currently enjoying one of the longest bull markets in recent history, and that many analysts believe the markets are close to the top of that now with pessimism starting to creep in. An interesting fact I will share with you, of our FTSE 100 companies, 70-80% of their earnings come from outside the UK. So they are not a particularly good indicator of the wider UK economy anyway.

At this point I really must remove the cowl and put down the scythe, as I will be talking us into another recession, but I do think it is important to consider the impact of the upcoming referendum in light of our current economic climate. The one thing that economies and markets really do not like is uncertainty, and in the absence of any real plans being put forward by our politicians I am afraid that is what will result from a vote to leave, uncertainty...

#Budget2016

Well, that was certainly an interesting speech from our current Chancellor Mr Osborne. It very much read as more of the same and holding the current course. However there were some big bonuses for small businesses, as well as some unexpected nasties hiding in the details...

It will be interesting to see how the budget is received in the wider media, a lot of social media comment (a useful social barometer) has so far been on the negative side.


Here are some of the highlights:

• Corporation Tax Cut: it was 20% at the start of the parliament. By 2020 it will fall to 17%. "Britain is blazing a trail, let the rest of the world catch up," the Chancellor says.
• Business Rates Cut: a permanent increase to the threshold for business rates from £6,000 to £15,000 will benefit many small businesses. The higher rate will rise from £18,000 to £51,000. Over 600,000 small businesses will pay no business rates from next year.
• Insurance Premium Tax: only rising by 0.5% rather than the 3.0% that was mooted earlier in the day.
• Capital Gains Tax: current rates will be cut from 28% and 18% to 20% and 10% respectively, although it looks like the old rates may still apply to gains on property (so no bonus for beleaguered property investors). Entrepreneurs relief has also been left alone (for now), although relief on associated disposals has been extended.
• Income Tax: the personal allowance will rise to £11,500 and the higher rate band goes up to £45,000 too.
• National Insurance: Class 2 contributions are to be abolished.

There were however some not so welcome low points of the speech:

• Tax Avoidance Crackdown: The Chancellor announces a series of actions to tackle tax avoidance and evasion totaling £12bn, including moves to end the use of "personal service companies" by public sector employees to minimise their tax liabilities.
• Loans to Participators: the tax charged on loans to directors and shareholders of businesses will see the punitive tax charged from 25% to 32.5%.

Full details of the budget proposals can be found here:

https://www.gov.uk/government/collections/budget-2016-tax-related-documents 

Dividend Tax: HMRC's smash and grab...

As I'm sure you're aware the much heralded dividend tax comes into force with effect from 6 April 2016.  It will apply to all dividends received in excess of £5,000 per tax year (regardless of whether from listed investments or your own company). All of this means that an average company director taking a modest salary within his personal allowance, and the rest of his income from the company as dividends, will pay more tax in 2016/17 than he did in 2015/16.

This additional tax would be payable, under self-assessment by 31 January 2018, as the balancing payment for that tax year. However, it would seem that HMRC does not want to wait for the extra tax in the Treasury's coffers, and it's solution to improve the nation's cashflow has been to amend the tax codes of many company owner/directors to effectively collect "at source" an estimated amount based on the previous year's returned figures.

The deduction in a client's PAYE code is to be labelled as ‘dividend tax’, and the notes on the P2 (PAYE coding notice) will say: "this is to collect the basic rate of tax due on your dividend income".

The net result of this is that a lot of company owner/directors will suddenly start to see tax being deducted from their salaries (which are typically below the tax free personal allowance). Unfortunately, this is just another underhand smash  and grab by HMRC and the Treasury on the pocket of private business!

You can contact HMRC by telephoning them on 0300 200 3300 or complete an online coding notice query here. Alternatively, although not as quick as the two previous methods, you can write to HMRC at:

Pay As You Earn and Self Assessment

HM Revenue and Customs

BX9 1AS

Claiming Marriage Allowance

Source: HM Revenue & Customs

Marriage Allowance opened to the public in September this year, allowing eligible couples to save up to £212 in the tax they pay each year. An application can be submitted within your Self Assessment tax return or made online.

Marriage Allowance lets you transfer £1,060 of your Personal Allowance to your husband, wife or civil partner. Your Personal Allowance is the income you don’t have to pay tax on - for most people it’s £10,600. Adding £1,060 to your partner’s Personal Allowance means they’ll pay £212 less tax in the tax year (6 April to 5 April the next year). You can get Marriage Allowance if both:

• your partner’s income is between £10,601 and £42,385
• you and your partner were born on or after 6 April 1935

By claiming Marriage Allowance:

• your partner’s Personal Allowance increases to £11,660 - they’ll pay £212 less tax
• your Personal Allowance goes down to £9,540 - you won’t pay any tax if your income’s less than this

You can apply for Marriage Allowance online. If your application is successful, changes to your Personal Allowances will be backdated to the start of the tax year (6 April).

If your circumstances change, then you may need to cancel your Marriage Allowance, for example if your partner dies, or you get divorced. More details of this can be found here

.

Osborne Attack on Property Investors

Announced in yesterday's Autumn Statement, the chancellor continues his attack on property investors. Not only will tax relief on interest payments now be greatly curtailed, but from 1 April 2016 higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes.

The higher rates will be 3 percentage points above the current SDLT rates. These higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda.

The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate. This would seem to imply that smaller corporates, such as family investment companies may be affected by the proposed changes.

Also, from April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief. The government will publish draft legislation for consultation in 2016.

One has to ask if this is genuine tax policy, or merely using tax as the tool with which to discourage small individual property investors in order to open up the property market for first time buyers. If that is the case, then Mr Osborne has far more to do as the current crisis is far more complex than simple supply and demand...