CHANGES TO PROCEDURES FOR HMRC FIELD OFFICER VISITS IN DEBT MANAGEMENT

The controversial issue of HMRC’s debt management processes is set to undergo some welcome changes.

You may know from bitter experience that HMRC are only too keen to press for payment of tax debts without drawing breath and reflecting the particular circumstances. That could change to a degree as we are told we can look forward to the following:

  •        By August HMRC will provide a facility for taxpayers/agents to verify the identity of the Field Force Officer.
  •        Also by August, HMRC will provide a dedicated line for agents to call in stress situations when the Field Force officer is on the doorstep.
  •       By September, Collectors will provide information for taxpayers, setting out the legal rights of the taxpayer and obligations of the taxpayer and of the Field Force Officer.
  •        From September onwards Field Force Officers will be issued with IT providing them with access to up to date information.

COMPANY CAR ADVISORY FUEL RATES

These are reviewed each quarter on 1 March, 1 June, 1 September and 1 December. They have shown very little change in recent times, but the new rates from 1 June 2013 do show a reduction in some situations with the previous rates in brackets where a change applies: 

engine size petrol diesel LPG
1,400 cc or less 15p   10p
1,600 cc or less   12p (13p)  
1,401cc to 2,000cc 17p (18p)   12p
1,601cc to 2,000cc   14p (15p)  
over 2,000cc 25p (26p) 18p 18p

 

 

 

TAX CHARGE ON TAKING A LOAN FROM A CLOSE COMPANY

Avoiding the new tightening-up of popular arrangements previously succeeded in avoiding any tax charge on a loan simply by making sure the loan is repaid within 9 months of the end of the company’s accounting period.

If at least £15,000 is outstanding by a participator to the close company immediately before a repayment and at that time there is an intention to re-borrow from the company, and that intention is carried out, the amount repaid is ignored and the result is a tax charge.

That could catch common arrangements where all withdrawals from the company are treated as debits to the director’s loan account and are then cleared before the 9 month limit by way of voting a dividend or salary.

That in itself should still work, as where a charge to income tax arises on the participator in respect of a reduction to the loan account by way of a dividend or salary that reduction is still taken into account.

However, the likely issue on this is that you will need to ensure correct paperwork is in place to identify the method of reducing the loan account both within the accounting period and the 9 months afterwards. That is something which often did not happen.

SHOULD LLPs INCORPORATE?

A consultation document has been published on an HMRC attempt to stop what they believe are artificial profit and loss allocation schemes involving members of LLPs (and indeed other partnerships) where some of the members are chargeable to income tax but others are not.

What they do not like is allocating to a limited company member of the partnership a greater share of the partnership profits than is justified, so as to take advantage of the fact that an individual pays tax at an effective top rate of 47% (45% + Class 4 NICs at 2%) whereas for a limited company it will often be only 20% if the profits are kept in the limited company, or 44.44% if they are paid out as a dividend (20% corporation tax plus income tax on the balance of 80% which is then effectively taxed at 30.55%).

With all limited companies at whatever profit level due to enjoy a 20% rate of corporation tax from April 2015 (and only 1% more than that from April 2014), it really begs the question as to whether there is any tax advantage in operating as  a partnership. Incorporation for all partnerships could well be the way ahead, which will not be what the Treasury was looking for!

 

IS PROPERTY LETTING A BUSINESS OR A TRADING ACTIVITY?

This is often a moot point, but following a recent tax tribunal decision (Elizabeth Moyne Ramsey v HMRC UKUT266) we now know that it is a business for the purposes of claiming CGT roll-over relief on incorporation of a property letting activity. That means no immediate tax charge on incorporation.

That could be very handy if it becomes a good idea to own a property letting portfolio within a limited company. The tribunal held that whether a business exists for this purpose should be interpreted broadly.

Exploiting Partnership Rules to Secure Tax Advantages

The Government is proposing changes to the law regulating the taxation of partnerships to ensure that:

  • People who, in practical and economic terms, are working as employees, but who technically are working as members of a limited liability partnership (LLP), are treated as employees for tax and National Insurance purposes
  •  Tax liabilities cannot be deferred or reduced by introducing a company as a partner (into either a traditional partnership or an LLP)

Although HMRC has published a single consultation document covering both issues, they are in fact quite distinct and are considered separately below.  It is proposed that the changes recommended will come into force on 6 April 2014.

Disguised employment using LLPs

Although an LLP is a body corporate, section 863, Income Tax (Trading and Other Income) Act 2005 deems any trade, profession or business which it carried on, to be carried on in partnership by its members.  It follows that every member of an LLP is taxed as if he was a partner even if, were he engaged on similar terms by an ordinary partnership, he would be taxed as an employee.  For example, LLP members will be taxed as partners, even if they have fixed salaries, are not exposed to any financial risk, and take no substantive role in the management of the business.

In practice, LLPs are used to avoid employment status in two situations.  The first is where workers are engaged on standard terms as part of a mass recruitment exercise, or where a firm’s existing workforce is transferred en bloc to an LLP.  Here the principal objective is likely to be avoiding the employer’s secondary National Insurance contributions.  The consultation document proposes that this should be countered by deeming the working to be an employee, if he would have been an employee, had he been engaged on the same terms by an ordinary partnership.

The second situation is where the objective is to avoid paying Class 1 National Insurance contributions for a small group of highly paid individuals.  On the facts, it may be difficult to show that they would have been employees, had they been employed on the same terms by an ordinary partnership, and so they will be treated as employees if they:

  • Are not subject to any economic risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up;
  •  Are not entitled to a share of the profits; and
  •  Are not entitled to a share of any surplus assets on a winding-up                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

‘Window dressing’ provisions – for example, a share of profits over a threshold unlikely ever to be achieved – will be ignored.

 Allocating profits to a company

At its simplest, the members of a professional partnership may know that they need to retain some profits as working capital.  Accordingly, they introduce a limited company as a partner, on the basis that the profit share allocated to the company will then be taxed at the lower corporation tax rate.  More complex plans, sometimes involving changing profit shares from year to year, are also possible.

It is proposed to counter them all by providing that, if the main purpose, or a main purpose, of such an arrangement was to secure an income tax advantage for any person, then the profit allocated to the company shall be reallocated between the individual partners on a ‘just and reasonable’ basis.

The question is: Repair or Renewal?

HMRC have substantially rewritten their guidance on drawing the line between a repair of a business asset, which will usually be revenue expenditure, and a renewal, which will usually be capital, which previously appeared in paragraphs BIM 46900 to BIM 36870 of the Business Income Manual and paragraphs PIM 2020 of the Property Income Manual.

The guidance covers both expenditure on plant and machinery, and on buildings and other structures.

The new guidance is, in some areas, more detailed than the old, and it includes more examples.  Other changes reflect:

  • The withdrawal of the concessionary ‘renewals basis’ from April 2013
  •  The rule that if repairs to an ‘integral feature’ of a building (such as an electrical or cold water system) cost more than half the price of outright replacement, then (for tax purposes) those repairs will not count as revenue expenditure, but may qualify for capital allowances at the ‘special rate’ of 8%
  •  The growing number of ‘buy-to-let’ landlords: more of the examples now illustrate the tax treatment of work carried out on residential property

There is also a new emphasis on the Revenue’s view that whether expenditure is capital or revenue is a question of tax law, not accountancy practice.

The importance of the guidance is in the details exposition which it gives of HMRC’s approach to deciding whether work carried out was a tax deductible report or a non-deductible renewal.  As such, it cannot usefully be summarised, and so we would recommend all practitioners to download and read the new version – it is currently posted at www.hmrc.gov.uk.briefs/income-tax/draft-guidance.pdf.

An interesting aside is that the paragraph on maintaining a technical library no longer appears – maybe it is no longer needed because everyone pays an annual subscription to an online database these days.

Finally, HMRC have also said that, later this year, they will be refreshing the detailed guidance on technical issues such as repairs to old buildings and to assets bought in a defective condition, which is currently published in BIM 35350 to BIM 35470.

GIFT AID IN CHARITY SHOPS

HMRC have highlighted the contents of their guidance on claiming Gift Aid on donations of goods to charity which are then sold by the charity, which perhaps suggests that the correct procedures have not always been followed.

You must get the procedures correct, and as an example Gift Aid applies only to gifts of money by an individual so if a person simply donates goods to a charity, Gift Aid does not apply. Charities cannot claim Gift Aid on donations of any physical items, such as clothes or books. However, in certain situations Gift Aid can be claimed by charities or community amateur sports clubs (CASCs) on the income from the sale of supporters’ goods. That involves getting the paperwork right (sounds familiar?!) and that means the charity or its trading company asking the owner of the goods to donate the sale proceeds to the charity. If the owner agrees to do just that the sales proceeds go to the charity which can then claim Gift Aid on the net sales proceeds subject to all other Gift Aid conditions being satisfied.

Certain conditions need to be reflected in the agreement.

DO YOU LET PROPERTY FURNISHED OR UNFURNISHED?

This has always been an important distinction, as only furnished lettings entitle you to the valuable annual wear and tear allowance of 10% of the rents. Now it is definitely worth reviewing whether you could show the property is furnished given that the renewals basis for replacing items in commercial or residential properties let unfurnished ceased from 6 April 2013.

It has recently become apparent that it is not always too difficult to show that a property is let furnished. HMRC guidance is that a property is furnished if it includes some (but not necessarily all) items that a tenant or owner-occupier would normally provide in unfurnished accommodation. That vague statement is then amplified and indeed the 10% allowance should be claimable where the property contains sufficient furniture, furnishings and equipment for normal residential use.