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Contractor Loan Schemes and Employee Benefit Trusts – The Latest News

In January, the HMRC published a consultation document, Tackling Marketed Tax Avoidance.  Two of areas covered in this proposed anti-avoidance strategy were Employee Benefit Trusts (EBTs) and Contractor Avoidance where contractors used offshore intermediaries and EBTs who make loans in place of remuneration to avoid Income Tax and National Insurance Contributions.

The gist of the proposal was that, where the HMRC are able to issue a ‘Follower Notice’ to someone whose case is the same or “substantially similar” to a case already decided in HMRC’s favour by a tribunal or court, the taxpayer will be required either to settle their dispute or to pay the tax in dispute where the dispute is not settled.

An Accelerated Payment Notice will be issued alongside the ‘Follower Notice’ which would have a ninety-day response time and the payment would be due at the end of this period unless a settlement is agreed with HMRC.

Two key points within the proposal were that, as HMRC will have issued a ‘Follower Notice’ on the grounds that, in HMRC’s opinion, the tribunal or court has decided the substantive issue, there would be limited grounds for the taxpayer to challenge the Accelerated Payment Notice (an error in process) and this procedure would apply to open Self-Assessment tax assessments which are under appeal.

Despite receiving representations from legal and tax experts such as The Chartered Institute of Taxation who, whilst agreeing with the principle of ‘Follower’ cases, stated that “However, the way of achieving this should not be to take away a taxpayer’s normal safeguards and rights of appeal and to give HMRC almost unprecedented executive powers….”, the measures in the 2014 Finance Bill are virtually unchanged from the HMRC Consultation Document published in January.

Although the legislation states that, once an Accelerated Payment Notice has been issued, the taxpayer has ninety days to pay the tax demanded, there has been an acknowledgement that, in many cases, the taxpayer would not have the funds to pay.  In such circumstances, the taxpayer can contact HMRC in the ninety day period to agree arrangements for payment.

In terms of the legislative process, the 2014 Finance Bill is being considered by the Public Bill Committee of the House of Commons who are due to report by 17th June.  The timetable remains for the Bill to receive Royal Assent and become law by mid-July. 

Although there have been powerful submissions against these proposals, there is little doubt that they will be passed into law.

As a result, we have been in discussions with HMRC on this and can summarise the latest position:

–          There is an acknowledgement by HMRC that there are inaccuracies in the Tax Assessments calculations that have been issued and there is an opportunity to correct these.

–          There has been an acceptance by HMRC that individuals entered into Employee Benefit Trust and Contractor Loan schemes “with the perhaps mistaken belief that it was correct.”  As a result, the HMRC will not being seeking to charge a penalty but will be looking to recover unpaid tax and interest,

–          There is the opportunity to reach a full and final settlement with HMRC on this basis before the 2014 Finance Bill becomes law.

–          The agreement of an extended period of time to pay the HMRC will be based on individual circumstances and whether the individual has used the ‘Time To Pay’ scheme before.

–          A new phrase – Contractor Loan Schemes – has started to be used in the correspondence from HMRC.

–          The HMRC are actively using the First Tier Tribunal ruling in the Boyle Case (which was a soft currency loan scheme) to support their assertion that Employee Benefit Trust loans were “not a loan but remuneration for work done or services provided in the UK…”

–          The First Tier Tribunal in the Boyle determined that the loans were taxable income but could potentially be taxed as employment income or under the transfer of asset rules.

–          As neither party has appealed the First Tier Tribunal ruling in the Boyle Case, the HMRC considers that this decision is final.

These last two points need careful consideration.  The HMRC are clearly intending to argue that the Boyle case is “substantially similar” to Contractor Loan schemes. 

Once the Finance Bill becomes law in July, as the HMRC has a Final Ruling in the Boyle case, they may well issue Follower and Accelerated Payment Notices on this basis.

Furthermore, the vagueness as to whether the loans ought to be taxed as employment income or under the transfer of asset rules carries an implicit risk.  If the HMRC opt to pursue this as employment income (which is not currently their position), then the amounts would not only be subject to Income Tax but also National Insurance.

However, there is a strong body of expert opinion that believes the HMRC will be open to legal challenges on their decisions.

At CooperFaure, we have extensive knowledge of this sector.  If you would like to discuss your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.

Old Style £50 Note is Withdrawn from Circulation

The old-style £50 note which features a portrait of Sir John Houblon, the first governor of the Bank of England, is to be withdrawn from circulation on Wednesday 30th April. 

As a result, from 1st May, shops are unlikely to accept this note as payment.  The new-style notes featuring portraits of Matthew Boulton and James Watt that were introduced in 2011 will still be legal tender.

The only problem is that the Bank of England estimates that there are still 53 million of the old-style notes in circulation which equates to £2.65bn.  This large number is explained by the surge in demand for £50 notes during the financial crisis at the turn of the decade.

For the next few months, most banks will accept these notes for deposit into customer accounts.  However, agreeing to exchange notes is at the discretion of individual institutions.  Only Barclays, RBS, NatWest, Ulster Bank and the Post Office have agreed to exchange the old-style £50 notes, for up to £200 in value, at their branch counters for both customers and non-customers until 30th October 2014.

To comply with anti-money laundering regulations, you may be required to provide identification, such as a passport or driving licence, when exchanging your notes.

Ultimately, the Bank of England will always exchange its old-series notes at their premises on Threadneedle Street in the City of London.

If you are not sure which style of £50 notes that you have, please visit http://www.bankofengland.co.uk/banknotes/Documents/houblon50a4poster_gb.pdf to see a specimen.

Securing A Mortgage Just Got Tougher

From Saturday 26th April, the full implementation of new rules designed by the Financial Conduct Authority come into effect across the UK mortgage lending sector.  These rules, the Mortgage Market Review, aim to protect consumers from the reckless lending that led to the crash in 2008 by changing the criteria on which a lending decision is made.

Traditionally, a mortgage lender would determine the amount that an applicant could borrow by applying a multiplier to their income.  Under these new rules, the emphasis has shifted to the ability to afford the repayments.

The mortgage lender will interview all applicants to carry out an Affordability Check where their household income and expenditure will be reviewed in microscopic detail and where they are required to disclose any significant upcoming changes to their income.

One of the area of expense expected to come under particular scrutiny is child care costs. The government Tax-Free Child Care scheme does not come into effect until autumn 2015 and, until then, in many cases the parents carry the full cost.

Applicants are therefore faced with a vicious circle where this cost of allowing both parents to work to increase their household income will become an impediment to securing a mortgage. 

Not only does the Affordability Check have to show that the repayments can be afforded today but also for the next five years.  For example, lenders will apply a stress test to determine if the household budget can sustain the repayments if the level of interest rates were to increase by 3%.

These rules apply both to first-time buyers and those looking to remortgage and will have an impact both on the amount that can be borrowed and the length of time the application process will take.

To present the best picture to mortgage lenders, applicants are advised to have their household budget worked out in detail and to have reviewed their regular expenditure before starting the process.  Paying off any debts, where possible, and the trimming the extras (such as unused gym memberships, a subscription to a streaming service or a wine club fee) will boost the profile.

It needs to be borne in mind that the mortgage lender will require at least three months of supporting documentation to show that they are financially healthy.  As a result, any lifestyle changes need to be made well in advance of starting the application process.

Whilst those with a thrifty lifestyle and no dependants will potentially be able to secure a larger mortgage than they would have done previously, for the vast majority securing a mortgage just got tougher!

If you would like more detailed guidance on the impact of the Mortgage Market Review or have a specific question, please contact welcome@cooperfaure.co.uk to arrange a consultation.

Ever Wondered Why the Tax Year in the UK Starts on 6th April?

Have you ever wondered why the tax year in the United Kingdom runs from 6th April to 5th April?  The reason is steeped in history.

Prior to 1752, the New Year’s Day in Britain used to be in on 25th March, the Spring Quarter day, and the tax year started on the same day.

Back in 1582, Pope Gregory XIII had reformed the calendar from the Julian predecessor to the new Gregorian calendar.  To improve accuracy, the length of a year was slightly reduced.

Britain was slow to adopt this change – by 1752 their calendar was eleven days out of sync from the rest of Europe.

To correct this, Wednesday 2nd September 1752 was followed by Thursday 14th September 1752, a change that literally led to riots on the streets due to the lack of compensation for the loss of income from the short working month.

The Treasury, mindful of this public fury, moved the start of the next tax year back by eleven days to 5th April 1753 so that the populous was not paying a full year of tax for only 354 days.

Although, as part of the change to the Gregorian calendar, New Year’s Day was moved to 1st January, the quarter days still are used in the determining when agricultural and commercial rents are payable.

The adjustment in the Gregorian calendar to slightly reduce the effective length of each year was to stop the century years from being a leap year, as they were under the Julian calendar.  As a result, 1800 was a day shorter than it would have been.  To reflect this, the Treasury moved the start of the tax year back by a day to 6th April 1800 and it has continued to be 6th April ever since!

The 2014-15 UK Tax Year has Started……

Here are five Key Tax Changes have or will shortly come into force in the 2014-15 tax year:

– the standard Personal Allowance has increased to £10,000.
– the new ISA annual allowances are £5,940 each for a Cash ISA and a Share ISA.
– from 1st July 2014, all ISAs will be converted to New ISAs (NISAs) with an overall unrestricted annual allowance of £15,000.
– the Capital Gains Tax Private Residence Relief period will reduce from three years to eighteen months with effect from April 2014.
– almost every business is eligible for the Employment Allowance that reduces Employer’s National Insurance contributions by up to £2,000 per year.

Investment in Fine Wine

As the UK passes the fifth anniversary of the interest base rate being at a historic low of 0.5%, this leaves businesses and individuals who have cash earning little return from holding these funds on deposit in a conventional bank or building society account.

For investors looking for a higher rate of return, there are a number of options – share portfolios, property, crowd funding and peer-to-peer lending a just a few.

One growing sector is investment in Fine Wine.  Whilst this seems exotic and glamorous, it is crucial to understand how the system works and the risks that are involved.

In Bordeaux, with the notable exception of Chateau Latour, the ‘en primeur’ or wine futures market operates.  This allows the chateaux to offer for sale some of their wine that is still in the barrel.  For instance, the en primeur market for 2012 is still open but the wine will not be available for shipping until autumn this year or spring 2015.  Similarly, this month the market for the 2013 vintage will open.

Important considerations are that a chateau set their price based on barrel samples that are only six to eight months old and that, once the price is set, it does not change.  The result is that the wine is available at price before the finished product is tasted by the extremely influential wine critics.

For the chateau, this provides much-needed cashflow.  For the investor, there is the opportunity to secure wines from classified Bordeaux estates of very limited quantities and that would be difficult to obtain and, potentially, much more expensive after they are released.

Alongside Bordeaux, Burgundy, the Rhône Valley and Port also operate an en primeur system.

There are, however, two important considerations.  Firstly, wine has to be seen as a delicate investment with the potential for either a loss or a considerable profit and, to this end, no investment should be made without thorough research.

Secondly, the investor is not able to purchase directly from the chateau and, as a result, has to operate through a broker.  As the product does not exist at the time of purchase, this does create the opportunity for fraud especially on the internet with a number of bogus brokerages having been exposed in recent years.

At CooperFaure, we have extensive knowledge of this sector and if you would like more detailed guidance on investment in Fine Wine, please contact admin@cooperfaure.co.uk to arrange a consultation.

The Budget 2014

Further to our live Twitter feed of the main announcements in the 2014 Budget.  This newsletter looks in more depth at some of the key policy decisions that will impact individuals and businesses.

As previously announced, the Personal Allowance for the 2014-15 tax year will increase to £10,000.  In the Budget, the Chancellor of the Exchequer set the Basic Rate Tax Threshold for the year at £31,865.  Further, he announced that these limits for the 2015-16 tax year will be £10,500 and £31,785 respectively.

As a result, this means that the overall earnings amount before entering the Higher Rate Tax band is set to increase for the first time in this parliament.

The impact of this for an Owner/Director who is entitled to the full Personal Allowance, is paid an annual salary of £15,000 and has no other income, is to increase the amount available for the payment of Dividends without incurring personal tax from £23,805 in the current tax year to £24,178.50 in 2014-15 and £24,556.50 in 2015-16.

The Transferable Tax Allowance for married couples and civil partners will increase to £1,050 in the 2015-16 tax year where neither partner is a Higher or Additional Rate tax payer.  This transferable amount will be set at 10% of the Personal Allowance in each tax year thereafter.

The change announced in the 2013 Budget to Employer provided Benefits in Kind relating to beneficial loans will come into force from April 2014.  From then, the threshold for the small loans exemption limit will be increased from £5,000 to £10,000.

To encourage businesses to develop, the Annual Investment Allowance is set to increase to £500,000 for all qualifying investment in plant and machinery made on or after 1st April 2014 with this increased allowance running until 31st December 2015.  This enables companies to claim the full cost of the expenditure against profits in the financial year of purchase.

In another step to encourage investment, the Seed Enterprise Investment Scheme (SEIS) is set to become permanent along with associated Capital Gains Tax reinvestment relief.

There have been modest steps in the Budget towards simplifying the tax system.  The most tangible being that from April 2016, Class 2 National Insurance contributions for the self-employed will be collected through the Self-Assessment tax return rather than the current monthly or quarterly periodic payments.

In addition, the government has undertaken to consult of simplifying the rules on Employee Benefits and Expenses and the Construction Industry Scheme (CIS).

Whilst the pre-Budget rumours suggested that there may be a surprise in the realm of personal taxation, as it transpired it was the areas of Savings and Pensions that had the major reforms.

We will be issuing a Newsletter next week specifically on the Pension reforms and the impact of the proposed increased flexibility.

On Savings, the Individual Savings Accounts (ISA) has been dramatically simplified.  Whereas up until now, there have been separate annual limits on the amounts to save in Cash ISAs and Share ISAs, from 1st July 2014 these will be merged into a  single overall limit.  Moreover, this limit will be increased to £15,000.

At the same time, the annual subscription limit for Child Trust Funds and Junior ISAs will be increased to £4,000.

The list of qualifying investments for ISAs will be extended to include peer-to-peer loans.  In addition, the government will investigate further extending the list to include debt securities offered by crowdfunding platforms.

If you would like more detailed guidance on the impact of any of the Budget announcements, whether or not featured in this newsletter, or have a specific question, please contact admin@cooperfaure.co.uk to arrange a consultation.