Archive for August, 2018

Points based penalties

Monday, August 13th, 2018

In the recently published draft clauses that will form the basis of the Budget later this year, HMRC has outlined a significant change to the way they will be levying penalties for late filing breaches under the Making Tax Digital regulations.

Rather than base penalties on each transgression, taxpayers will receive a penalty point per event, and when these penalties reach a certain amount the taxpayers will be required to pay a fixed penalty.

Essentially, if you miss a deadline a point will be given, but a penalty will only be charged when a specified number of points are accrued. According to HMRC, the number of points required for a penalty to be levied depends on the filing frequency of the return.

HMRC is also introducing an amended penalty for deliberately withholding information from HMRC. The changes to this penalty are required to accommodate the new points based regime and ensure that the penalty works as intended. The enacting schedule gives HMRC the power to charge penalties where a taxpayer deliberately withholds information which would enable HMRC to assess their tax liability. These penalties are based on a percentage of the tax due and can be reduced based on the taxpayer’s willingness to correct past disclosure.

The new system is similar to that adopted for driving offences. Of course, there is no suggestion that if you gather enough points to pay tax penalties you will then be banned from paying tax…

Undeclared offshore assets

Thursday, August 9th, 2018

From 1 October more than 100 countries, including the UK, will be able to exchange data on financial accounts under the Common Reporting Standard (CRS). CRS data will significantly enhance HMRC’s ability to detect offshore non-compliance and it is in taxpayers’ interests to correct any non-compliance before that data is received.

The most common reasons for declaring offshore tax are in relation to foreign property, investment income and moving money into the UK from abroad. According to HMRC, over 17,000 people have already notified the department about tax due from sources of foreign income, such as their holiday homes and overseas properties.

HMRC is urging UK taxpayers to come forward and declare any foreign income or profits on offshore assets before 30 September to avoid higher tax penalties. New legislation called ‘Requirement to Correct’ requires UK taxpayers to notify HMRC about any offshore tax liabilities relating to UK income tax, capital gains tax, or inheritance tax.

However, some UK taxpayers may not realise they have a requirement to declare their overseas financial interests. Under the rules, actions like renting out a property abroad, transferring income and assets from one country to another, or even renting out a UK property when living abroad could mean taxpayers face a tax bill in the UK.

Taxpayers can correct their tax liabilities by:

• Using HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility or any other service provided by HMRC as a means of correcting tax non-compliance

• Telling an officer of HMRC in the course of an enquiry into your affairs

• Or using any other method agreed with HMRC

Once a taxpayer has notified HMRC by 30 September of their intention to make a declaration, they will then have 90 days to make a full disclosure and pay any tax owed.

HMRC have provided a list of offshore assets required to be disclosed under these arrangements. They are:

• art and antiques

• bank and other savings accounts

• boats

• cash

• debts owed to you

• gold and silver articles

• government securities

• jewellery

• land and buildings, including holiday timeshare

• life assurance policies and pensions

• other accounts, such as stockbroker or solicitor

• other bond deposits and loans including personal portfolio bonds

• rights or intellectual property including image rights

• stocks and shares

• trusts including employee benefit trusts and self-employed persons trusts

• and vehicles

Clearly this is a major change as HMRC will soon gain information about overseas assets that will enable them to trace taxpayers who have not declared these interests on their UK tax returns. If you are concerned by this new legislation, please contact us so that we can regularise your affairs before the 30 September 2018 deadline.

 

 

Work from home?

Tuesday, August 7th, 2018

We are often quizzed by clients who are contemplating working from home: what are the tax consequences? And in particular, will I have to pay capital gains tax?

Capital gains tax

Generally speaking, if your business use is limited to allocating space for a home office, then as long as there is duality of use, no capital gains tax complications should arise when you sell the property. Duality of use means that your home office: doubles as a spare bedroom, or a storage space for domestic items, or is a study or has a similar non-business as well as a business use.

If the property you work in has a more permanent business area, for example if you live in a flat above shop premises, then sale proceeds will need to be apportioned and you will need to consider the capital gains tax position of any profit on sale attributed to the business premises.

Business tax

If you use space at home as a self-employed person you can claim reasonable, apportioned costs for the use of the space. How you make the calculation can be quite complex and will need to be based on the actual costs of occupying the relevant space. If you work 25 hours or more from home each month, you can claim using HMRC’s simplified rates:

• 25 to 50 hours a month – £10 per month,

• 51 to 100 hours a month – £18 per month, and

• Over 100 hours a month – £26 per month.

Business rates

You won’t need to worry about paying business rates for home-based businesses if you:

• use a small part of your home for your business, for example if you use a bedroom as an office, or

• sell goods by post.

You may need to pay business rates as well as Council Tax if:

• your property is part business and part domestic, for example if you live above your shop,

• you sell goods or services to people who visit your property,

• you employ other people to work at your property,

• you’ve made changes to your home for your business, for example converted a garage to a hairdresser’s salon.

You should contact the Valuation Office Agency to find out if you should be paying business rates. In Scotland, contact your local assessor.

In conclusion

Other complications arise, for example you may be required by your employer to work from home a fixed number of days a week. Any contribution you receive from your employer to cover your costs could be tax free if a nominal amount or a taxable benefit if excessive.

If you are considering working from home, to manage your own business or your employment needs, we can help you quantify any tax implications, and in particular, calculate a realistic “rent” for your home space that will not cause any unexpected tax consequences.

Planning for early losses

Thursday, August 2nd, 2018

If you are setting up a new business, you may discover that establishing a profitable base takes time. If your pre-trading planning discloses an initial loss making period, you may want to take advice about the business structure you adopt.

For example, if you set up the business as a company, the early year’s losses can only be carried forward to set off against future profits.

Alternatively, if you set up the business as a sole trader (or certain partnerships) there is a possibility of setting the initial trading losses against your other earnings. In this way you could recover the tax relief much faster than waiting for a company to become profitable.

This would be especially beneficial if you have paid income tax on other earnings at the higher rates as the early trading losses would create tax refunds at your marginal rates (40%, 45%, or perhaps 60% if your other income exceeds £100,000). Losses carried forward in a company would only reduce any future liability at corporation tax rates, currently 19%.

Deciding on the optimal structure for a new business is not a process that you should contemplate without taking professional advice. There are many pitfalls waiting for the unwary entrepreneur. We have listed below a few examples of the restrictions you would need to consider. It is unlikely that you could claim to set losses against other income if you:

  • use the cash basis for working out your tax
  • don’t run your trade commercially and for profit, for example if your trade is run as a hobby
  • are a farmer or market gardener and you also made a loss (worked out for this purpose only before capital allowances are considered) in each of the previous 5 tax years

The amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:

  • worked for less than 10 hours a week on average on commercial activities of the trade
  • are a Limited Partner or a member of a Limited Liability Partnership
  • have a trade which is carried out wholly overseas
  • have claimed certain capital allowances
  •  have income from oil extraction activities or oil rights.

However, there is some merit in the strategy outlined in this article. If you are thinking about a new business, and you are more than likely to make losses in the early years, then you may be able to make best use of any tax losses by being a sole trader in this early period. You will need to consider other commercial factors, such as the exposure to your personal assets of business risks.

We can help you explore your options.

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