oxford branch tax clinic
TRANSCRIPT
AAT Oxford Branch21 November 2011TAX CLINIC
Presented by Michael Steed, MA(Cantab) CTA (Fellow) MAAT, ATT
Use of the AMAP
• Can I use the AMAP for self-employment?
• Strictly no, as it only applies to employed people;
• But by concession, HMRC allow it to be used in self-employment.
Use of the AMAP
• Can I use the AMAP for vans?
• Yes – it applies to: cars, vans, motorcycles and cycles.
• (S235, ITEPA 2003).
Use of the AMAP
• Can also be used as a top-up for employees who do not have cars provided by their employer;
• So applies to employees who have a car allowance;
Use of the AMAP
• If an employer pays below the AMAP rates, then the employee can use the AMAP as a top-up;
• Through their tax return or form P87;
• If an employer pays above the AMAP rate, then the employee is taxed on the excess.
Business travel
Use own car for business travel
25 miles
14 miles35 miles
Work at client 4 weeks
Business travel
Use own car
Employer reimburses:
4 x 5 x 2 x 10 = 400 miles @ say 15p = £60
Allowed by HMRC:
4 x 5 x 2 x 35 = 1,400 miles @ 45p = £630
Difference £570
If hr taxpayer, refund = £570 @ 40p = £200
Financing buy-to-lets
• Does it matter where I get the money from to finance a buy-to-let?
• Could I remortgage a buy-to-let to buy a boat?
Property tax issues
• Tax deductions on interest payments;
• “Wholly and exclusively”;
• Interest only, not capital;
• What about refinancing?
Property tax issues - refinancing
• Scenario 1:
• I borrow money from a bank to purchase a buy-to-let;
• Easy – the interest is deductible against my profits;
• It doesn’t matter where the money comes from – it’s the purpose it’s put to that’s important.
Property tax issues - refinancing• Scenario 2:
• I borrow money against my principal private residence to purchase a buy-to-let;
• Still easy – the interest is deductible against my profits;
• (Remember, it doesn’t matter where the money comes from – it’s the purpose it’s put to that’s important!).
Property tax issues - refinancing• Scenario 3:
• I borrow money against my buy-to-let to purchase another buy-to-let;
• Still easy – the interest is deductible against my profits;
• (Remember, it doesn’t matter where the money comes from – it’s the purpose it’s put to that’s important!).
A person’s UK property business
• Repairs v renewals:
• Repairs prevent the property from deteriorating – likely to be revenue and deductible;
• Renewals - improvements – likely to be capital – although special rules for furnished lets- PIM46900;
• Replace double glazing?• Replace a cooker?
Capital allowances
• General rule: no capital allowances in domestic property;
• But CAs available on P&M used in the property letting business – eg vans, ladders etc;
• .AIA?
• So either renewals basis (generally inefficient), or 10% wear and tear allowance;
Wear and tear allowance• ESC B47 (will it survive?)
• Only available for furnished lettings – not FHLs;
• On suites, beds, cookers etc;
• Also available: renewals on fixtures (ie which become an integral part of the building):
• Eg baths, wash basins and toilets.
Wear and tear allowance
• Note that the 10% wear and tear allowance is an all or nothing concession;
• You must use it for all your rented properties or none;
• The allowance is NOT available for FHLs (they can have capital allowances).
Landlord’s energy savings allowance (LESA)• Tax allowance up to £1,500 per property (not per
building) – until 2015;
• Available for both individual and corporate landlords;
• Cavity wall insulation;• Draught-proofing;• Floor insulation;
• NOT double-glazing (other tax reliefs?).
Can I use the PPR rules to help shelter buy-to-let gains?
Principal Residence
What is aPPR
Absences
Letting
Businessuse
1 property
Principal Residence
• House plus grounds up to a half hectare exempt from CGT on disposal– Larger area of land if relevant to property
• Only one allowed for married couples;
• Must occupy as residence.
Principal Residence
• Problems can occur with out-buildings and cottages in grounds etc;
• Also an issue where garden sold separately from house;
• Best to sell garden first.
Non-occupation
• Last 3 years treated as exempt providing occupied as PPR at some time during ownership;
• If not occupied for full ownership a proportion of the gain becomes chargeable– only consider periods since 31 March 1982.
Non-occupation
• Deemed occupation– Any period employed overseas– Up to 4 years employed elsewhere in UK– 3 years for any reason
• Must occupy at some time before and after absence
• For employment absences exemption still available if employer prevents re-occupation
Letting
• Owner occupies part and lets part– not self-contained flats
• Letting during period of absence– if period is ‘deemed’ occupied letting ignored
• Reduce gain by lower of– Gain on let part– Gain on owner occupied element– £40,000
More than one property
• Elect which is PPR– within 2 years of start of occupation of new property
• Considerations– which is the most likely to be sold– Last 3 years exemption
• Job related accommodation– Can exempt non-occupied home;
More than one property
• Can we use the PPR rules for buy-to-lets?
• Possible, but need to establish it as a “residence”;
• Then nominate the property as the PPR;
• Occupy for preferably a year;
• But re-nominate first property after a short period – saves CGT on last 3 years.
More than one property
• Husband and wife– only one PPR per couple– Separation – ceases to be PPR from date of
leaving• next 3 years exempt
– Transfer of ownership to spouse remaining in property – no CGT
• Do I always need a VAT invoice to reclaim input tax?
Claiming back VAT on expenses
• What evidence is required?
• Normally an invoice is required
• NO INVOICE; NO RECOVERY; but
• Some expenses don’t need an invoice - if less than £25 (including the VAT) – see PN 700.
Claiming back VAT on expenses• Examples include:
• Coin operated telephones;
• Coin operated machines;
• Car parking charges (NOT meters – o/scope of VAT);
• Toll charges (where chargeable).
Tolls and bridges – VAT?
• Dartford crossing?
• Severn bridge crossing?
• Forth road bridge?
Claiming back VAT on expenses
• Employers can’t recover any VAT on flat rate expenses given to employees (per diem expenses).
Claiming back VAT on expenses
• Most employee expenses are recoverable;
• These include:
• Travel and subsistence;
• Hotels (watch for booking commissions eg lastminute.com).
Claiming back VAT on expenses
• Taxis – not generally registered for VAT, so no VAT to reclaim;
• However, if taxi supplied by a taxi firm, then more likely that VAT is in the sum;
• Check for a VAT number on the receipt – although not always present.
Claiming back VAT on expenses
• Trains and planes:
• Zero-rated;
• Petrol standard rated – employer can recover, provided employee provides enough VAT receipts to cover the claim;
• Applies to 45p/25p AMAP system as well!
• I’m killing off a company – can I still use ESC C16?
Where are we with ESCs?
• R v CIR exp Wilkinson (2006) STC 270;
• The taxpayer argued that S1(1), TMA 1970 gave HMRC discretionary power to grant concessions and to extend the widow’s bereavement allowance to be made available to widowers;
• HOL said that the powers should not be construed so widely as to enable the Commissioners to give discretion that parliament had not intended;
• This effectively invalidates ALL ESCs.
Where are we with ESCs?• Legislation in FA 2008 to allow HMRC to continue
applying ESCs;
• Consultation in Nov 2008 – divides ESCs into three groups;
• Those that can be legislated under FA 2008;• Those that can remain as ESCs;• Those where clarification is needed before legislation was
drafted.
• ESC C16 fell into number three.
ESC C16
• Draft legislation produced in December 2010;
• For consultation until March 2011;
• Draft legislation said:
• OK to strike off at Companies House provided that company has collected all debts and paid all liabilities; AND
• The distribution does not exceed £4,000.
ESC C16• Meant to protect micro businesses;
• But many businesses above this;
• It’s gone very quiet!
• Nothing obvious from HMRC;
• So, make hay while the sun shines;
• Be careful to read the ESC carefully.
Bona Vacantia
• Latin: ownerless goods;
• What does this mean?
• It give the crown rights to claim ownerless goods (eg someone dying without family or will;
• Why is it relevant here?
• Because of the “link” between bona vacantia and ECS C16.
Bona Vacantia
• The “link” between bona vacantia and ECS C16;
• Strictly they are entirely separate, but if you Google ESC 16, the links will include references to bona vacantia;
• What’s new is the Treasury Solicitor withdrawing the guidelines on when the crown will act (on 14th October 2011);
• This is because of the changes to company law under Companies Act 2006, so harder for the crown to act.
Inheritance Tax – how much can I give away in my lifetime to avoid IHT?
Inheritance tax – lifetime gifts
• Individuals to individuals – PET;
• Fully exempt of donor survives 7 years;
• Otherwise donee pays the tax;
• Taper relief available;
• Consider decreasing term insurance
Inheritance tax
• Gifts into trust – chargeable lifetime transfers;
• IHT payable at half death rates (above the nil rate band);
• Who pays the tax?
Lifetime gifts - exempt
• Annual £3,000 per person;
• Small annual gifts (up to £250 per person per annum);
• Gifts in consideration of marriage;
• Gifts out of income;
• Spousal (CP) gifts;
• Gifts to charities and political parties.
Lifetime gifts - taxable
• Annual £3,000 per person;
• Small annual gifts (up to £250 per person per annum);
• Gifts in consideration of marriage;
• Gifts out of income;
How do I value goodwill on incorporation?
Dealing with goodwill on incorporation
• Care needed with valuing the goodwill;
• Many SMEs will have a goodwill that is profits based;
• HMRC’s approach is as follows:
• You need to establish the superprofits;
• Average the profits over three years;
Dealing with goodwill on incorporation
• Minus the cost of running the business as the incomer;
• (basically the cost of hiring someone);
• What’s left you multiply by a multiplier of between 1 and 3 depending on the business;
• This gives you the value of the goodwill.
Dealing with goodwill on incorporation
• What are the options?
1 Pay the tax, but have a tax-free pot in the company to draw down on;
2 Use S162, TCGA 1992 – defers the gain;
3 Use a mix of the above;
Dealing with goodwill on incorporation
• What are the options?
4 Use S165, TCGA 1992 – the gift relief provisions:
4a – Total gift – defers the gain;
4b – Sell at an undervalue – some tax may be payable (tax the cash).
Dealing with goodwill on incorporation -the double entries
• No S162 – Dr assets, Cr Directors’ loan;
• S162 – Dr Assets, Cr Share (premium?) account;
• S165 pure gift– no consideration, so arguably no double entry;
• S165 – sell at an undervalue – Dr Assets, Cr Directors’ loan.
What are the changes to the associated companies rules in 2011?
Associated companies• Changes from 1 April 2011;
• Definition of associated company?
• Impact – consider a H &W company – different businesses, even different location;
• Were they associated under the old rules?
• Associated under new rules?
Associated companies• Where two or more companies are under the “direct” control of one
person or an identical group of persons;
• Then they will be “associated” – this does not change in 2011;
• However, in the new rules from 1 April 2011:
• If there is “substantial commercial interdependence”, then you need to look at the “indirect” as well as the “direct” control;
• So you need to look at the associates (eg a spouse or civil partner).
Associated companies
• “Substantial commercial interdependence” means?
• Administration, directorships, staff, premises, purchasing/selling arrangements etc.
Food for thought......
• Would a husband and wife who ran a pub and who each had limited companies be associated?
• Husband Ltd runs the drinks;
• Wife Ltd runs the catering.
Whilst we are there……
• How many AIAs could a husband and wife companies have?
• Note the CAA Act rules are different to the associated companies rules;
• Only one AIA between them if:
• Same trade; or
• Same premises.
Family businesses
Can I use the employers’ regional NIC holiday to employ family members?
• There do not appear to be any impediments to using the rules in a family context.