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Over the last few days, the three of the most senior judges in the United Kingdom – the Lord Chief Justice, the Master of the Rolls and Lord Justice Sales – have presided over hearings in the Divisional Court that could potentially determine the timetable and, ultimately, the fate of Brexit.
The hearings were a judicial review into whether the Prime Minister has the authority to invoke Royal Prerogative to trigger Article 50 of the Lisbon Treaty or whether this requires the assent of Parliament.
The government took the unusual step of sending the Attorney General, Jeremy Wright QC, as part of their legal team.
Those seeking the judicial review argue that the referendum in June was merely consultative and, in itself, does not constitute a decision to leave. Instead, they contest that, as activating Article 50 effectively repeals the European Communities Act 1972 which was passed by Parliament, that this also requires approval by Parliament.
The government has countered that, as triggering Article 50 is concerned with ending a treaty with the other European Union member states, this is within the remit of prerogative powers. These are executive powers allowing the government to act without requiring recourse to Parliament and, it is argued, are the norm when making or ending international treaties.
Article 50 itself states that any member state may leave “in accordance with its own constitutional requirements”. The vagueness of this phrase has enabled both sides to promulgate differing interpretations.
The judges are expected to deliver their ruling within the next two weeks with the losing side almost certain to appeal.
A similar case is already awaiting judgement in Northern Ireland with the additional aspect of the devolution legislation which, it is contended, would prevent triggering Article 50 without consultation. Again, the losing side is expected to appeal.
Given the timeframe, the unusual measure has been adopted to allow these appeals to be made directly to the Supreme Court, bypassing the Court of Appeal.
In what could be the ultimate irony, it is entirely possible that the Supreme Court will defer to the European Court of Justice to interpret the meaning of “in accordance with its own constitutional requirements”.
The whole process is throwing out a raft of deeply complex constitutional questions the answers to which will determine when and, in reality, whether Article 50 will be activated.
All this against a backdrop of ongoing economic uncertainty that is beginning to have a tangible effect with inflation rising from 0.6% to 1.0% in September whilst unemployment for the three months to August has stabilised at 4.9% of the workforce.
We will be monitoring developments and looking at the economic impact throughout this process. In the meantime, if you have any questions, please feel free to email us at tax@cooperfaure.co.uk.
In the spring, we published a newsletter that outlined the policy objectives of the Government investing £1.3 billion into HM Revenue and Customs to transform the UK into one of the most digitally advanced tax administrations in the world and how it would impact you.
Over the summer, HMRC published the six consultation documents and invited responses by 7th November 2016. Since then, CooperFaure has been actively engaged with both HMRC and software providers and, as a result, thought it was timely for an update.
By 2020, most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and to update HMRC at least on a quarterly basis through their digital tax account.
The HMRC plan is to phase this in by starting with Income Tax from April 2018 then VAT from April 2019 and, finally, Corporation Tax from April 2020. This seems perverse and it would be far more logical to start with the largest incorporated businesses, who invariably would hold records digitally on their accounting software, and work down.
Setting aside the natural scepticism of the HMRC being able to deliver such an ambitious IT project to time, the course is set.
In practise, this means that almost everyone that currently completes a Self-Assessment Tax Return will be the first to be impacted.
There are some specific exemptions in the consultation:
However, in a significant move, the consultation is proposing a deferral to April 2019 for smaller self-employed businesses and landlords and is asking for feedback on the level of this deferral threshold. Our view, that chimes with the vast majority of the accountancy profession, is that the deferral threshold should align with the VAT threshold.
It seems frankly ludicrous to ask a sector that currently is not required to have any online engagement with HMRC to be the trailblazers in implementing a completely new reporting system. However, despite the logic, whether setting the deferral level at £83,000 is anyway in line with HMRC thinking remains to be seen.
Self-employed businesses and landlords will need the tools to enable them to file digitally in a prescribed manner. Unlike with the current Self-Assessment Tax Return or RTI-compliant payroll, HMRC will not be providing free software for Making Tax Digital.
Instead, they are looking to the software providers to make available free software for the smallest of businesses as part of a basket products catering for the wider market. It seems, at best, the free software will only deliver the specific HMRC requirements, so some other form of bookkeeping software will be necessary to run in tandem.
As a result, for self-employed businesses and landlords, one logical conclusion could be to incorporate their businesses and automatically set a deferral at least to April 2020.
In the 2015 Autumn Statement, Making Tax Digital was lauded as a reform targeted to reduce the costs to business of tax administration by £400 million by the end of the 2019-20 tax year.
The reality is that asking a business to report at least four times a year rather than once and being required to do so on a proprietary software can only add to the administrative burden and cost. Indeed, for more complex businesses, there will also be an ‘End of Year’ filing to review the four quarterly returns and make any necessary accounting adjustments or claim any reliefs and allowances not able to be included in the quarterly returns.
This has been recognised in the consultation which asks the questions “What level of financial support might it be reasonable for the government to provide towards investing in new IT, software or training?”, “What costs might you expect your business to incur in moving to the new regime?” and “Do you expect that your business will incur additional on-going costs as a result of these changes?”.
We urge every stakeholder to make their voice heard and take part in the HMRC consultation here. These questions fall under the ‘A: Bringing business tax into the digital age’.
Despite the Brexit effect and all the concerns and misgivings, we believe this tax revolution will happen as it is ultimately part of a process to accelerate the collection of business and personal taxes.
At CooperFaure, we are have already implemented accountancy solutions to enable our clients to thrive in the digital age. We will also be participating in alpha testing with software providers and private beta testing with HMRC, that will enable us to keep you fully informed on every step of the journey.
We anticipate that the 2016 Autumn Statement on Wednesday 23rd November will include draft legislation. At CooperFaure we will be providing a live Twitter Feed on @cooperfaure together with digest and detailed newsletters on the day.
For the first time, on Thursday 24th November, we will be hosting a Free Webinar between 1pm and 2pm looking at the impact on business, the contractor and the property investor and answering your questions.
As well as expert advice and a free copy of the presentation, you can ask that nagging question in our Q&A session. As ever, places are limited so to register and avoid missing out, please click here.
In the meantime, if you like any further information, please let email us at tax@cooperfaure.co.uk.
For many nascent entrepreneurs, the greatest challenge is to secure adequate funding to take their venture from the kernel of an idea to a revenue-generating business.
This is particularly apropos for Tech Start Ups, where, in most instances, you are presenting an idea.
The good news is that there are investors out there that specialise in the critical early stage investment. However, it is a hugely competitive market, so it is vital that your pitch stands out from the crowd.
At the recent Richmond New Tech 2016, we had the chance to discuss with early stage investors and entrepreneurs the elements that increase the odds of a successful pitch.
For an investor in this space, they are invariably looking for new technology that is easily scalable. In the current market, innovation is the key.
Whilst not being a hard and fast rule, there seems to be a preference for a Business-to-Business proposition that has a recurring revenue element at the core.
There has been a Brexit effect which has made securing funding more difficult and, given the volatility in the currency markets, the Sterling investor is more comfortable with a proposal that shows income generated in Sterling.
At the end of the day, it is all about the pitch – your chance to make your idea stand out from the crowd. Gimmicks and gizmos do not cut it, the pitch must reflect the personality and belief system of the founders.
Practise makes perfect and it needs to be more than in front of a mirror or to friends and family. Reach out to experienced advisors who will critique and polish your presentation and with whom you can brainstorm why the investor might be inclined to say no and prepare answers accordingly.
The pitch must be backed by a tight business plan which shows that you have analysed the sector, have a clear vision for your idea, it’s competitive advantage and a strategy to get to market. All this supported by financial projections that are properly costed and realistic.
Like the pitch itself, the business plan needs a professional input either in crafting it or, at least, in reviewing it. As Dragon’s Den shows, a grasp of the numbers is essential to have a chance of success.
Finally, if you are in a situation where there are going to be multiple pitches in a day and you are given a choice, it can pay to pitch first. This allows you to set the agenda.
Assuming that the investor is in the United Kingdom, most likely they would want to utilise the Seed Enterprise Investment Scheme or Enterprise Investment Scheme, dependent on the level of investment, which gives them an immediate tax break.
As a result, your company needs to be SEIS/EIS ready. Our ‘Seed Enterprise Investment Scheme – The Essential Guide’ is available to download for free here.
If you would like an initial call or meeting to discuss your circumstances, please email us at tech.hub@cooperfaure.co.uk to arrange a time. It is absolutely free and there is no obligation.
For a business start-up seeking early stage investment capital, the Seed Enterprise Investment Scheme (SEIS), is an invaluable tool in attracting investors.
Under SEIS, the company issues shares in return for an investment against which the investor can normally claim tax relief of 50% of their funding. Usually, these shares have a limited lifespan which has to be a minimum of three years.
The company is restricted to borrowing £150,000 in total including any State Aid that it receives.
However, for the investor to be able to claim and keep the tax relief, the company must meet a set of conditions. These conditions split between those that:
Requirements At The Time Of The Issue Of The Shares
Requirements To Be Met Continuously From The Date Of Incorporation
Requirements To Be Met Continuously From The Date Of Issue Of Shares
How The Money Raised By The Relevant Share Issue Must Be Used
It is essential that within three of the share issue all the funds raised have been spent for the purposes of a qualifying business activity. If this condition is not met, investors will lose their tax relief.
Buying shares or stock in another company is not regarded as being spent for a qualifying business activity. However, the company can invest the funding into a subsidiary at least 90% owned by the company, providing that the monies are thereafter used for a qualifying business activity.
The payment of dividends to shareholders is not a qualifying business activity.
A qualifying business activity is either:
What Is A Qualifying Trade?
The principal rule is that a qualifying trade is one which is conducted on a commercial basis with the aim of making a profit.
However, the following trades are excluded and, therefore, not eligible for SEIS:
The Benefit Of Advanced Assurance
In order to give comfort to your potential investors that your business qualifies for SEIS, HMRC have introduced an Advanced Assurance facility.
Their Small Companies Enterprise Centre (SCEC) will decide if your company and share issue qualify under SEIS and monitor you to ensure that they the requirements continue to be met for the duration the share issue.
Under Advanced Assurance, you can submit details of their plans to raise money, business structure and activities to SCEC in advance of the share issue. In turn, SCEC will provide counsel on whether or not the proposal is likely to qualify for relief.
Although this is not mandatory, we would strongly advise taking advantage of this especially if this is your first SEIS application.
Submitting The Final Application
Before your investors can claim their tax relief, your company must complete form SEIS1 and submit it to SCEC.
The form is essentially a declaration that, at the time of completion, your company has already met the requirements of the scheme to the date and that it expects to meet all other requirements.
You also need to provide the details of your investors. However, our Top Tip is that you only need to include the details of investors that will be claiming SEIS relief. For a variety of reasons, the investor may be ineligible or not benefit from SEIS, so it is important to establish this as part of the investment process.
You can only submit the SEIS1 once your company has been either:
Assuming SCEC accepts that the all the requirements have been met, it will issue your company with a certificate accordingly and will supply claim forms (SEIS3s) for you to send to your investors so they can claim tax relief.
The £150,000 maximum borrowing can be aggregated through multiple share issues for different funding elements. The process must be followed for each issue of shares where it is intended SEIS relief will be claimed.
Hence, the value in ascertaining from your investors whether they intend to claim SEIS relief.
How Do Your Investors Claim Their Tax Relief?
The tax relief can only be claimed once your company has issued the investors with their SEIS3 form. Most commonly, the investor claims their relief on the Self-Assessment tax return for the tax year in which the shares were issued.
However, the investor can claim the relief at any time up to five years after 31st January following the tax year in which the investment was made. For example, for an investment made in the 2016-17 tax year, the relief can be claimed up to 31st January 2023.
This flexibility can be extremely advantageous to a backer looking to optimise their tax efficiency.
The Next Step
On paper, this process can seem daunting but the reality is that, with good advice, it is fairly straightforward. At CooperFaure, we have vast experience of helping business start-ups to secure funding and, in particular, benefit from government schemes.
As your business matures, the Enterprise Investment Scheme or Venture Capital Trust offer a similar style of investor benefits, albeit at a lower 30% level of tax relief, for funding of up to £5,000,000 in a twelve-month period.
If you would like an initial call or meeting to discuss your circumstances, please email us at startup@cooperfaure.co.uk to arrange a time. It is absolutely free and there is no obligation.
We are delighted to announce that Freddie Faure, Lindsay Kantorowicz and Emma Kiviniemi Andersson have qualified as Xero Certified Advisors.
Whether you have implemented Xero and want to unlock its full potential or are looking to migrate to the software, we have the expertise to navigate you through the process from the basic set-up through to developing sophisticated reports.
In a further development, we have implemented Digita, a Thomson Reuters product, to integrate with Xero to seamlessly produce the draft Annual Accounts and the Corporation Tax return.
Already a Xero Gold Partner and with other system implementations on the horizon, this represents a major step to define CooperFaure as the Silicon Valley of Accounting.
If you would like any assistance or advice on Xero or Digita, please email us at welcome@cooperfaure.co.uk for an initial consultation.
On Wednesday 23rd November, Philip Hammond will be delivering his first Autumn Statement as Chancellor of the Exchequer.
Although three months have passed since the EU Referendum and the government repeats the mantra of ‘Brexit means Brexit’, it is still totally unclear exactly what Brexit means.
Against this backdrop, the 2016 Autumn Statement is seminal in shoring up business confidence in these uncertain times. We have advocated restoring the small profits rate of Corporation Tax and setting it at 15% and locking the rate at 5% below the main rate.
On Thursday 24th November, we will be hosting a Free Webinar on the Autumn Statement between 1pm and 2pm. We will be looking at the impact on the entrepreneur, the contractor and the property investor. As well as expert advice and a free copy of the presentation, you can ask that nagging question in our Q&A session.
As ever, places are limited so please click here to register.
The government has accepted the recommendations from The Low Pay Commission to increase the National Minimum Wage for workers aged under 25 and apprentices with effect from 1st October 2016. The changes include:
For workers aged 25 and over, National Living Wage remains at £7.20 an hour.
In a departure from previous years, these new rates are set to last for six months only until 31st March 2017. This is to harmonize the National Minimum Wage and The National Living Wage cycles with new rates for all five categories from 1st April 2017 expected to be announced in the Autumn Statement.
A new business starts on a wave of optimism and enthusiasm whether it be to pursue your dream, to develop a new product or to leverage your talent.
In many cases, the business is incorporated into a Limited Company with a friend, colleague or partner to share the journey and it seems only fair to divide the shares on a 50:50 basis.
Unwittingly, by adopting this structure, you have both just created the potential for deadlock which could have dire consequences in the years ahead.
Like relationships in life, a business relationship can breakdown with irreconcilable differences. If the fall out means that neither shareholder can agree on the business strategy, the company is in deadlock and no decisions can be advanced.
Whilst there are remedies, it is important to recognize that this situation is not catered for in the model Articles of Association when the company is incorporated.
Deadlock is damaging for any business but particularly in the early years where finances and deliverables tend to be tight and the reputational harm can be irreparable.
Should you end up in this unwelcome situation, it is vital that you take action as the future of your business is in peril. The problem is that the remedies at this stage are likely to carry a punitive cost whether it be initiating a court action or seeking to injunct a formal negotiation process.
The first step is to engage a commercial lawyer to advise you of your rights and steer you through the process.
However, this could all have been avoided at the outset by putting a simple Shareholders’ Agreement in place as part of the overall business set-up process.
A Shareholders’ Agreement is a private contract between the parties unlike the Articles of Association that are in the public domain. As such, it provides a framework to formalise a process to resolve a deadlock discreetly.
A Shareholder’s Agreement is also platform to define in detail the rights and the responsibilities of shareholders with regards to the management of the business, the treatment of shares and dividends and their exit strategy.
Another risk from deadlock is that it will lead to diverting profits. It is important to be aware that, whilst the Directors have a fiduciary duty to act in the best interests of the business this does not automatically apply to shareholders. As such, without a Shareholders’ Agreement specifying otherwise, there is nothing to prevent a shareholder establishing a competing business and plundering your business’s employees and customers and, effectively, diverting your profits.
As a Shareholders’ Agreement is additional cost at the time when the business is a kernel of an idea and all-consuming, plus it can be perceived to infer a lack of trust, all too often the founders defer or ignore the issue.
The reality is that there is no better time than the early days to address this whilst the plans and expectations of the founders are fully aligned and the business structure is straightforward.
‘Kicking the can down the road’ invariables results in a costlier Shareholders’ Agreement both as the business matures and adds complexity and as views diverge. On the occasions when deadlock occurs it is too late!
At CooperFaure, we can guide you through the issues that you need to consider and prepare a Shareholders’ Agreement for your business. For further information, please contact us at tax@cooperfaure.co.uk.
The date for the court hearing to decide whether there should be a judicial review of the tax changes to mortgage interest relief on buy-to-let properties has been moved.
This hearing was originally due today but has been rescheduled to Thursday 6th October at the request of HMRC who indicated that their lawyers were not available this week.
The court date in October will determine whether the case put forward by landlords Steve Bolton and Chris Cooper is sufficiently compelling to warrant a full judicial review. However, this is not an indicator that the action will ultimately be successful. We will be reporting as events unfold.
Amongst a whole host of HMRC consultations that are underway is one looking at “salary sacrifice for the provision of benefits in kind” with a view to introducing reforms from April 2017.
Since the turn of the decade, the level of PAYE clearance requests for salary sacrifice schemes has risen by over 30% and there is little doubt that the potential tax savings have been a contributory factor to this increase.
At the moment, under a salary sacrifice or flexible benefit scheme, an employee may be offered a benefit in return for a compensating reduction in salary and there is no restriction on what the benefit can be.
Take the example of a corporate gym membership that costs £700.00 per year. If this is provided to an employee under a salary sacrifice scheme, the cost to the employee in the basic rate tax band in the reduction of net pay would be £476.00. The remaining £224.00 would be funded by reduced Income Tax and National Insurance deductions from the lower salary. Moreover, the employer would save £96.60 of Employer’s National Insurance contributions.
For an employee in the higher rate tax band, the cost would be £406.00 and the Income Tax and National Insurance savings would be £294.00. The employer’s element remains the same.
The government is proposing that, from April 2017, the gym membership itself would be treated as a benefit in kind and, therefore, there would be no tax saving for either the employee or employer.
For the following specific areas, there will be no change to the current system with the tax savings remaining:
Whilst the proposals do not impose any constraint on the benefits an employer can offer under a salary sacrifice arrangement, everything else would be taxed as a benefit in kind.
Therefore, the only potential upside for the gym membership in our example or, say, a mobile phone contract or laptop, would be if the buying power of the company enabled it to attract a better price than the individual.
The taxable benefit in kind is set to start from 6th April 2017. The consultation document uses the example of and employee that starts to sacrifice £600.00 per year for a workplace parking space in September 2016. Until 5th April 2017, there continues to be no Income Tax or National Insurance due on the parking space but from 6th April 2017 it will be treated as taxable.
Employers would be required to report these taxable benefits in kind provided through salary sacrifice to HMRC in the same manner as other taxable benefits in kind that they already report, such as company cars or private medical insurance. Usually, this requirement is met by submitting P11Ds at the end of the tax year.
In our response to the consultation that we will be submitting at the beginning of October, we will highlight two main concerns.
Firstly, from the employee’s perspective, there will be no visibility that anything has changed. Taking the consultation document example, the payslip in March 2017 and April 2017 will be identical with a £50.00 salary sacrifice for the parking space reducing the gross pay.
It will only be when the P11D is submitted at around July 2018 that the tax liability for the 2017-18 would become apparent to HMRC and the tax would fall due.
Secondly, whilst the parking space is clearly optional and the employee can choose to end the arrangement at the end of March 2017, no provision has been made for instances where the employee is locked into an arrangement. For example, a two-year mobile phone contract with a third party vendor.
The employer and employee have made an arrangement in good faith under one set of rules only for these to change part way through with no exit strategy.
Whilst at the margin salary sacrifice or flexible benefit arrangements have been used to manipulate an employee’s income to reduce Student Loan repayments or to enable the continued entitlement to Child Benefit, broadly speaking these schemes have been operated as a genuine incentive to staff.
Although HMRC estimate that the overall cost to the Exchequer is in the region of £5 billion a year, it is clear that the vast amount of this is driven by pension contributions and childcare schemes that will remain unchanged.
As a result, we believe that it would be far more fair and equitable for this change to apply to new arrangements from 6th April 2017 onwards and for the resulting additional tax to be collected via the payroll rather than the P11D process.
If you have any questions, comments or concerns on this HMRC proposal, please email us at tax@cooperfaure.co.uk.
An ever-increasing number of property owners are offering their home for a short-term let either around sporting events like Wimbledon or through Airbnb whilst on vacation.
A common misconception is that the income received is covered by the Rent a Room scheme but this is not the case if the whole property is let out.
In these cases, the income must be declared on a Self-Assessment Tax Return and the resulting tax paid accordingly. This is an area HMRC are focusing on as part of their crack down on tax evasion.
You would qualify for the Rent a Room scheme if you are a resident landlord letting out a part of your only or main home on a furnished basis. This can be a room or an entire floor but not a purpose-built flat within the premises.
For the 2016-17 tax year, the scheme allows you to earn up to £7,500 per year tax-free. For the 2015-16 tax year, the threshold was £4,250. These thresholds apply to the property and would be halved if you share the income with your partner or someone else. Should you elect to charge for additional services such as meals or laundry, all payments received must be added to the rent in determining your total income.
If your overall income is below the threshold, the tax exemption is automatic and there is no requirement to report this to HMRC.
However, you must complete a tax return if you earn more than the threshold. If this is the case, you can either opt into the scheme and claim your tax-free allowance or, instead, record your income and expenses in the property section of your tax return.
In theory, you can be a resident landlord irrespective of whether or not you own your home but, if you are a lodger, you need to be certain that your tenancy agreement allows you to take in a lodger.
The manner in which you share your home impacts the kind of tenancy the lodger has and their resulting rights and how the tenancy can be ended.
For the resident landlord, your lodger is deemed to be an ‘excluded occupier’ if they share a kitchen, bathroom or living room with you or a member of your family.
If this is the case, you only have to give them reasonable notice to end the letting, which is commonly reckoned to be the length of the rental payment period, and you can evict them without redress to a court order.
If your lodger does not share any living area with you and your family, they would be classed as an ‘occupier with basic protection’.
In this case, you must serve them a written ‘notice to quit’ and the notice period would need to be stipulated in the tenancy agreement. If your lodger refuses to leave, you would need a court order to evict them.
There are no restrictions per se on the level of the rent you can charge and this can include Council Tax and utility bills. However, this needs to be agreed with your lodger beforehand.
There are other considerations:
As well as the Income Tax on your rental income, it is important to consider the Capital Gains Tax consequences.
You are entitled to full Private Residence Relief, which would mean the gain on the sale of your home would be exempt from Capital Gains Tax when you sell the property, if the following conditions apply:
As a result, whilst it may be tempting to take in more than one lodger at a time, you must bear in mind that this could result in a Capital Gains Tax liability in the future.
If you let rooms to more than two lodgers at the same time, your property would be classed as a House in Multiple Occupation which has far more stringent standards and safety requirements and can require a licence.
If you have any questions around any aspect of renting your property, please email us at tax@cooperfaure.co.uk for an initial, free consultation to discuss your situation.
Last weekend Emma was in Stockholm competing at the Swedish National Athletics Championships in her sport of pole vaulting.
Emma exceeded her ranking by finishing a magnificent fifth with a season’s best clearance of 3.77 metres in a competition where the first and second placed athletes had represented Sweden in the Rio Olympics.
A massive congratulations to our young accountant as she continues her quest to compete for her country at the Tokyo games with the support of the West London Pole Vault team at Brunel University.
In the United Kingdom, for all landlords, Income Tax is due on the rental income from a property on an annual basis and, potentially, Capital Gains Tax in the year the property is eventually sold.
The calculation of Income Tax for a non-resident landlord or overseas investor is broadly the same as a UK-based landlord.
However, there are two specific considerations – the Personal Allowance and, if applicable, the impact of a double-taxation agreement.
As it stands, you are entitled to receive a Personal Allowance if you are a British passport-holder, a citizen of a European Economic Area country or if it is provisioned in a double-taxation agreement between the UK and the country you are living in.
The key point as a non-UK resident is that you have to claim the Personal Allowance at the end of each tax year in which you have UK income by sending form R43 to HM Revenue and Customs (HMRC). The R43 form can downloaded here and the Guidance Notes here.
Whilst the government has mused on restricting the entitlement of a non-UK resident to a Personal Allowance, there is a commitment that no change would be made before the start of the 2017-18 tax year.
If you are eligible for a Personal Allowance, you pay Income Tax on your income above that amount. Otherwise, you pay Income Tax on all your income.
If you are also taxed on your UK income by the country in which you are resident, you may be entitled to a partial or full relief from paying tax twice depending on whether there is a double-taxation agreement in place between that country and the UK.
Each double-taxation agreement stipulates whether you can either apply for a relief before the tax has been paid or a rebate after you have been taxed. As a general principle, if the rates of tax are different in the two countries, you will end up paying the higher rate of tax.
If you would like more information on the double-taxation agreement between your resident country and the UK, please email us at tax@cooperfaure.co.uk.
Even if there is no Income Tax to pay, you are required to submit a Self-Assessment Tax Return for each tax year that you have UK income. The tax year runs from 6th April to 5th April.
The HMRC online filing service is not available to non-residents. As a result, the options are to send your tax return by post which must be done by 31st October or to engage an accountant to act on your behalf which extends the deadline to 31st January.
The rules for Capital Gains Tax are driven by whether you are UK tax resident when come to sell the property.
Take the scenario where you have bought a property as your home only to rent it out to pursue an employment opportunity overseas but subsequently return to the UK to sell property. As long as you have established a footprint that you have lived in the property as your main residence, however briefly, then you will be entitled to Private Residence Relief and Letting Relief.
Unless you have lived in the property as the owner, then the only allowance would be the Annual Exempt Amount that is currently £11,100.
Private Residence Relief exempts the period that you lived in the property and the final eighteen months of ownership, irrespective of whether you are living in the property, from Capital Gains Tax.
The remaining time as a percentage of the total period of ownership determines the amount of the Chargeable Gain against which Letting Relief is claimable at the lowest of:
There are a couple of key points to make about Letting Relief. It pertains to the person and not the property so, if the property is jointly-owned, each owner would be entitled to the relief on their portion of the chargeable gain. However, it cannot be applied to a Chargeable Gain made whilst your home is empty.
Finally, the £40,000 ceiling on Letting Relief has not changed since 1991 which has undoubtedly blunted its impact. However, for a Higher Rate taxpayer, it would have reduced the Capital Gains Tax payable by £11,200 in the 2015-16 tax year.
For overseas investors disposing of a UK residential property, Capital Gains Tax has applied on gains arising on disposals after 5th April 2015 but only on the portion of the gain accrued since 5th April 2015.
There are two main methods to calculate the portion of the taxable gain – rebasing or time apportionment.
For rebasing, you would need to establish the value of the property on 5th April 2015 and the gain arising between then and the date of sale would be taxable. This is difficult to validate retrospectively unless a valuation was undertaken at the time.
Therefore, time apportionment may be the better option. Here the overall gain is calculated and factored by the proportion of the time of ownership since 5th April 2015.
As a result, the dates of the purchase and sale form a central part of the Capital Gains Tax calculation together with the financial details around the purchase and sale of the property.
An important note is that there are no double-taxation arrangements in place for Capital Gains Tax resulting from the sale of a UK residential property.
Even if you have no tax to pay, you must notify HMRC that you have sold the property within thirty days of transferring ownership commonly referred to as conveyancing.
This thirty-day deadline also applies to the payment of the Capital Gains Tax due unless you are already submitting a Self-Assessment Tax Return. In which case you can choose to make the payment when your return is submitted or on the normal due date of 31st January after the tax year of the disposal.
We have prepared worked Capital Gains Tax examples for Private Residence Relief and Overseas Investors.
However, this is a complex area of taxation that we specialise in at CooperFaure. Please email us at tax@cooperfaure.co.uk if you would like an initial, free consultation to discuss your situation.
Next Monday, we will be publishing a newsletter that looks in detail at the rules for a Resident Landlord as HMRC looks to crackdown on collecting the tax due from Airbnb income.
Whether you have decided to move abroad for work or lifestyle reasons but keep your UK property or you have opted to buy a property in the UK as an investment, you need to be aware of the tax implications both if you rent out the property and when you come to sell it.
The rental income of the property is subject to UK Income Tax. The level of net income combined with whether you qualify for a Personal Allowance determines how much tax is due.
To protect the Exchequer, the HMRC introduced the Non-Resident Landlord Scheme to collect tax at source from overseas landlords either from the letting agent or the tenant, unless you receive a rent of less than £100.00 per week directly from the tenant.
This is also the case should the payment be made from the tenant to your UK representative, such as a friend or family member, who is not a letting agent.
Under the scheme, the rent, less any direct expenses incurred, is taxed at the basic rate of 20% with no consideration made of your entitlement to a Personal Allowance or the other costs incurred on the property.
As a result, in most cases, the landlord is grossly over-taxed and only has the chance to remedy the situation at the end of the tax year.
To counter this, as non-resident landlord, you can apply to have you rent received without tax deducted. Broadly speaking, the application will be approved so long as you are up to date with your UK tax returns and payments.
If your application is approved, HMRC will instruct your letting agent or tenant not to deduct tax from your rent. Instead, you will be required to declare your income through a UK Self-Assessment Tax Return.
It is important to bear in mind that if you intend to no longer live in the UK, it does not automatically follow that you are a non-resident for tax purposes and, if you are, there are absolute rules on the number of days you will be allowed to spend in the UK. This will be determined by the Statutory Residence Test. The HMRC provided an online Tax Residence Indicator but, given the Guidance Notes run to 105 pages, we would strongly recommend that you review this with a tax advisor.
Although you have the option of managing the rental of the property yourself or relying on friends or family, this can be extremely time-consuming and stressful. As a result, most commonly a professional letting agent is appointed to administer the property.
As a rule, the agency fee will be between 10% and 15% of your rental income. In exchange, the agency will ensure that the property is tenanted with as few breaks as possible, the rent is collected in a timely manner and the property is well maintained.
If you have a mortgage on the UK property that you are planning to rent out, it is vital that you contact your provider and notify them before you commit to the decision. It may be moving overseas and renting out your property violates your current loan agreement. This needs to be resolved prior to you embarking on the property rental.
Finally, it is critical to ensure that you have adequate landlord insurance in place not only covering the building and contents but also rent arrears, legal costs and damage.
This is easier said than done as the main insurers tend not to make it obvious whether they cover overseas landlords.
To save time on lengthy research, you could opt to contact a landlord insurance broker to advise on the providers and their level of cover and policy limits.
Emergencies tend to happen at the most inconvenient times so, as well as the cost of the premium itself, you should consider how contactable the insurer will be. For instance, an online chat facility would reduce the cost of phone calls.
Ideally, the policy will allow a disclosee to be nominated. This is a person authorised to act on behalf of the policyholder which can be especially useful where your time zone difference becomes a factor.
At CooperFaure, we are currently advising clients with both individual and corporate property portfolios and would be pleased to review your circumstances. Please email us at tax@cooperfaure.co.uk for an initial, free consultation.
We will be publishing an accompanying newsletter that looks in detail at the Personal Allowance, Income Tax and Capital Gains Tax implications for overseas landlords.
In the meantime, this BUTTON links to a free tax calculator to provide an indication of the Income Tax due for the 2015-16 and 2016-17 tax years.
The 2016 Budget included a clause on future measures to tackle the current and historic use ‘disguised remuneration’ schemes. These are generally schemes that involve individuals being paid in loans through structures such as an offshore Employee Benefit Trust (EBT) or Contractor Loans. In both instances, whilst the loans are theoretically repayable, the Loan Agreement is drawn up in a such a way to ensure that, in reality, these loans are never repaid.
The clause ended “…this will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5th April 2019.”
In the first step on this journey, individuals that have been remunerated through an EBT and who have not settled with HMRC by 30th November 2016, will no longer qualify for relief on investment returns.
Commonly under an EBT, an employer paid in funds to an offshore Trust to benefit an employee. At the moment, HMRC has been looking to settle based on the amount paid into the Trust by the employer whilst there is a relief against any gains made on these monies whilst within the Trust. From 30th November 2016, tax will be due on the full amount.
Contractor Loan schemes are still actively marketed on the basis that it will reduce a tax bill for a contractor. Ironically, running a contract through a Limited Company in a tax efficient and compliant manner can usually yield the same return.
Under these schemes, rather than being paid directly from the company that the employee is working for, the remuneration is via loans from an associated trust, partnership or company.
The employee is taxed on the Benefit in Kind of receiving an interest-free loan. For the 2016-17 tax year, this would be 3.00% of the loan and this continues over the length of the employment.
If you are working under a Contractor Loan scheme, it is mandatory for the promoter to declare the scheme to HMRC. HMRC will issue the scheme with a reference number that the promoter must pass on to you for inclusion in your personal tax return.
However, any suggestion that the issuing of this reference number infers that the HMRC has approved the scheme is mendacious. The reality is that this is identifying you as a user of the scheme ahead of future investigation.
Even before the impact of the upcoming changes outlined later in this newsletter, HMRC is aggressively pursuing the users of these schemes.
For instance, under an investigation, HMRC could review your mortgage or other credit applications for evidence of a disparity between the income declared on these and that declared on your tax return. If loan receipts have been included as income for mortgage purposes, HMRC would have compelling evidence of a wilful complicity in tax evasion.
At CooperFaure, we have successfully negotiated settlements with HMRC for our clients working under a raft of these schemes. If you are concerned about your situation, please contact us at tax@cooperfaure.co.uk for a free and informal consultation.
Before looking at the impact of the proposed future measures outlined in the Technical Note published by HMRC, it is important to bear in mind the Brexit effect. A consultation on the proposals was due over the summer but, as yet, HMRC are unable to confirm when this will actually start.
In essence, the government is planning to introduce legislation to put beyond doubt that all loans and other income from a disguised remuneration scheme will be taxed as earnings if these have not been fully taxed or repaid by 5th April 2019.
Thereby, this would remove the necessity for HMRC to prove that a particular scheme was a method of tax evasion.
Within the Technical Note, there are some alarming proposals, the front and centre of which is that the notion of there being a time limit on how far back the HMRC can go to claim and collect tax on disguised remuneration is removed.
Legislation was originally introduced in Finance Act 2011 aimed at putting beyond doubt that EBT schemes in particular were not effective. This legislation came into effect from the date it was announced on 9th December 2010.
Now, HMRC are pointing to their Spotlight 5 published on 5th August 2010 to validate their view is that these schemes were never tax compliant.
Individuals that operated under an EBT scheme before 2011 have a powerful argument that tax was not payable under the law at the time when the loan was advanced. Participators in various schemes are seeking a tax tribunal hearing to make this case.
Even if the tax tribunal ruling goes in their favour, this will be overridden by the proposed new legislation. Moreover, it effectively allows HMRC carte blanche to pursue loans made all the way back to the first EBT schemes in the late 1980s.
The usual tenet is that the responsibility for the payment of PAYE and National Insurance lies with the employer that was party to the avoidance scheme.
Disturbingly, the proposals include an amendment to PAYE regulations to allow the Income Tax and National Insurance to be collected from the employee “where it cannot reasonably be collected from the employer.”
Given that many of the promoters are no longer around for the HMRC to pursue, the is putting the individual fore square in their sights.
Whilst it may seem grossly unjust to target individuals who have effectively been mis-sold schemes on the basis that they were tax compliant, public opinion is with the government especially in the light of the lurid cases of public figures and celebrities using such schemes to avoid tax.
What is beyond doubt is that the legislation scheduled for inclusion in the Finance Bill 2017 will be a game changer.
At CooperFaure, we will be actively participating in the HMRC consultation process. If you have any concerns from working under an EBT or Contractor Loan scheme either currently or historically, we would be pleased to have a candid and realistic discussion on this with you.
We urge anyone with an outstanding EBT enquiry to consider the implications of the direction of travel.
If you would like to arrange an initial consultation on your circumstances or to receive our free newsletters on this and other tax matters, please email tax@cooperfaure.co.uk.