Highlights from the Autumn Statement 2012 & Draft Finance Bill 2013

A summary of the key changes affecting businesses, individuals and estates from the Autumn Statement 2012 and the Draft Finance Bill 2013

Businesses

Annual Investment Allowance

The Annual Investment Allowance (AIA) for capital allowances will increase from £25,000 per annum to £250,000 per annum.

The increase will take effect from 1 January 2013 and will last for 2 years.

The increased relief should be of benefit to those businesses that intend to invest in capital assets/expansion during the next few years.

Businesses whose accounting periods do not end on 31 December 2012 will need to take care when apportioning the amount of the AIA available to them in accounting periods that straddle the change.  This is an area that has caused confusion following numerous changes to the amount of the AIA in recent years.

Cash Basis for Small Businesses—Income Tax

A new simpler scheme is to be introduced so that ‘eligible sole    traders and partnerships’ will be able to calculate their taxable profits on a cash basis if they wish.

Eligible sole traders and partnerships will include those whose receipts for the year are below the VAT registration limit (currently £77,000) or twice the VAT registration limit (currently £154,000) for recipients of the Universal Credit.  Businesses must leave the scheme where their receipts exceed twice the VAT registration limit.

There are particular rules for determining the ‘receipts’ and ‘allowable payments’ of the business and any losses may only be carried forward against future profits.

The scheme is likely to be of use to smaller traders; however care will need to be taken to ensure that the intricacies of the scheme are adhered to.

Corporation Tax Rates

The main rate of corporation tax for FY 2014 has been reduced by an additional 1% from the rates previously announced.

The rates will therefore be:

FY 2013

Small Companies Rate      20%

Main Rate                              23%

FY 2014

Small Companies Rate      20%

Main Rate                              21%

The latest reduction means that the gap between the small company’s rate and the main rate of corporation tax is becoming ever smaller, thus reducing the potential impact of having associated/group company structures.

 

Individuals & Estates

Personal Allowance

The personal allowance will be increased to £9,440 in 2013/14.  This will save basic-rate taxpayers up to £267, although changes to the basic rate band mean that higher-rate taxpayers are unlikely to benefit

Income Tax Rates

The additional rate of tax is set to be reduced from 50% to 45% with effect from 6 April 2013.

Pension Annual Allowance

The annual allowance for tax relieved pension savings is to be reduced to £40,000 with effect from the tax year 2014/15.

Where a taxpayer’s gross pension contributions (including employer contributions) exceed the annual allowance a tax charge will apply.  The amount of the charge is calculated so as to eliminate tax relief on the excess contribution.

Inheritance Tax—Nil Rate Band

The nil rate band will be increased to £329,000 with effect from 2015/16.

Don’t forget—the unused portion of the nil rate band may be transferred to the estate of the surviving spouse.

 

Finance Bill 2013

The Finance Bill 2013 has been released in draft and includes legislation in respect of:

  •  Income tax reliefs that will be limited to the higher of £50,000 and 25% of adjusted net income.  This does not apply to gift aid on charitable giving.
  •  Entrepreneurs Relief and Shares Acquired under EMI Share Options—subject to the trading/employment conditions being met, entrepreneur’s relief will be available where the EMI options were granted at least 1 year prior to the disposal of the shares.  It is not necessary for the EMI options to have been exercised 1 year prior to the disposal nor for the employee to hold at least 5% of the share capital.
  •  Statutory Residence Test—the draft rules set out a legislative test to determine whether a person is UK resident in a given tax year.  This should give more certainty to taxpayers, however given that the rules are more prescriptive than the current case law based guidance taxpayers should consider their position before the new rules come into force on 6 April 2013.

Please note that our offices will be closed for the Christmas period from Saturday 22 December 2012, reopening on Wednesday 2 January 2013.

 

Wishing you a Merry Christmas & a Happy New Year from all the team at Eaves & Co.

 

Tax Reliefs for Innovative Companies – Patent Box and R&D Tax Relief

The Patent Box

From 1 April 2013 companies that make a profit from the exploitation of patents will Patent Boxbenefit from a reduced rate of Corporation Tax.

The reduced rate of Corporation Tax will eventually be as low as 10% by April 2017, but will be phased in from 1 April 2013. The reduced rate will be achieved by way of an enhanced Corporation Tax deduction.

Definition of Patent for these Purposes

i) Patent granted by the UK Intellectual Property Office or European Patent Office or certain other EEA qualifying patent jurisdictions; or

ii) Rights similar to patents relating to human and veterinary medicines, plant breeding and varieties.

Ownership Conditions

In order to qualify for the reduced rate of Corporation Tax the following conditions must be met:

  • Patents must be owned or licensed-in on exclusive terms
  • The group in which the patent is owned must have played a significant part in the patents’ development or a product which incorporates the patent
  • If the patent has not been self-developed the company holding the patent must actively manage its portfolio of patents

Relevant IP Profit

The profits to which the reduced rate of Corporation Tax is applied are the ‘relevant IP’ profits.

The ‘relevant IP profit’ is broadly speaking the proportion of taxable trade profits (TTP) relating to qualifying patents and Intellectual Property (IP), less a deduction for brand and marketing profits and a 10% deduction to represent routine costs such as premises, employees etc.

Valuation issues may come into play in relation to calculating the deduction for brand/marketing profits.

How Can Eaves & Co Help?

  • Provide advice regarding the conditions and availability of the patent box
  • Provision of computations and accompanying report to be included in the Corporation Tax return
  • Valuation support where the computations include a deduction for notional marketing royalty

Research & Development Expenditure

Qualifying Expenditure

R&D tax relief is available where a company seeks to achieve an advance in overall knowledge or capability in a field of technology or science through the resolution of scientific or technological uncertainty.

R&D expenditure is not limited to laboratories, with innovative work and problem-solving in many other industries, such as construction, logistics design engineering, manufacturing and new media qualifying for relief.

For qualifying expenditure the following reliefs are available:

1. Enhanced Corporation Tax Deduction

For SMEs the enhanced deduction is equal to 225% (200% before 1 April 2012) of the qualifying R & D spend, and for large companies the deduction is equal to 130%.

This enhanced deduction is only available on revenue costs directly related to the R&D such as staff costs, materials, utilities and software.

2.Tax Credit

If the company is loss making then it is possible to surrender the loss for a tax credit.

The tax credit is equal to 11% of the lower of (i) 225% of Qualifying R & D expenditure, and (ii) the unrelieved trading loss in that period.

Example

If an SME spends £100,000 on qualifying R&D then it will be entitled to a deduction from taxable profits of £225,000.

If the above the company makes a loss of £300,000 the company can surrender the loss for a tax credit.

The tax credit is equal to £225,000 x 11% (lower of £225,000 & £300,000) which is £24,750.

The loss carried forward will be restricted by the loss surrendered, in this case to £75,000 (£300,000 – £225,00).

Termination Payment Tribunal Case – PILON Was Contractual (Kayne Harrison v HMRC)

Termination payments, specifically a payment in lieu of notice, were considered in the recent First-tier tribunal case of Kayne Harrison v HM Revenue & Customs.

Mr Harrison had been dismissed on 16 February 2006 without written notice and had successfully won a small amount of compensation from an Employment tribunal.

Three days after he was dismissed, his employers made a termination payment, consisting of a payment in lieu of notice.  This termination payment was made in line with the terms of his employment contract.  Mr Harrison argued that as his position was terminated without written notice, the payment was not contractual as it had been made in circumstances outside of his contract.  He believed that the findings of the Employment tribunal backed up this belief.

The tribunal found that Mr Harrison’s interpretation of the Employment Tribunal was incorrect in that they found the payment in lieu of notice had been made in accordance with the contract.  Despite the issues raised at the Employment Tribunal, Mr Harrison’s employment had ended on 16 February 2006 and the payment had been made in accordance with his contract.

HMRC were therefore correct to argue that the payment was taxable and the tribunal dismissed Mr Harrison’s appeal.

Recent Inheritance Tax Case – Silber v HMRC

The First Tier Tribunal Inheritance Tax Case of Silber v HMRC looked at how a settlement of cash made between the beneficiaries of the deceased’s estate and the deceased’s sister should be treated for Inheritance Tax.

The sister challenged the will of the deceased and she was paid an out of court settlement of £400,000 by the beneficiaries.

The Beneficiaries claimed the £400,000 as a liability of the estate and thus a reduction in Inheritance Tax payable of £160,000 (£400,000 x 40%).

The Court held that the money paid was not a liability incurred by the deceased and thus wasn’t allowable for IHT relief.

The taxpayers’ case was not helped because of the fact that they did not turn up for the Tribunal hearing (even though they were expected) although there is little doubt that the tribunal reached the right conclusion anyway.

Eaves & Co are experienced in inheritance tax planning and compliance, please call if you have IHT concerns.

 

Draft Finance Bill 2013 Published

The suggested content of the Finance Bill 2013 has now been published.  If it obtains Royal Assent then the new rules it contains will form part of UK tax legislation from 6 April 2013.  As ever, it is a long document and briefly here are some of the highlights:-

  •  The proposed statutory residency test is included in the Finance Bill 2013.  It has been changed from the draft published under the last consultation and it is therefore worth reviewing these new rules in more detail if they apply to you or your clients.
  • Income tax reliefs are to be limited to £50,000 or 25% of total income
  • Shares acquired through an EMI share option scheme could qualify for Entrepreneurs relief after 1 year from the date of the option’s grant (as opposed to the current rules where the shares had to be owned for a year before a sale).  The 5% shareholding requirement is also removed from shares acquired under EMI options.
  • Pension payments made by employers will only be an exempt benefit to an employee, not the family of an employee.

As ever there are a number of changes.  If you would like advice on any of these please contact Eaves and Co for further details on how the Finance Bill 2013 could affect you.

Interpretation of Double Tax Treaty – Meaning of “Subject to Tax” TC02178

In the recent case of Paul Weiser v HMRC (TC02178) the first tier tribunal considered the interpretation of the double tax treaty between the UK and Israel and in particular the meaning of the phrase “subject to tax”.

Article XI of the UK-Israel double tax treaty provides that UK source pensions will not be subject to UK tax where they are received by a resident of Israel and subject to Israel tax in respect thereof. However under Israeli tax rules, UK pension income is excluded from tax in Israel during the first 10 years of residence.

HM Revenue and Customs therefore argued that because the pension income was exempt from tax in Israel it could not be said to be subject to tax.

On the other hand, the taxpayer claimed that he is within the charge to tax in Israel by virtue of living there even though Israel does not levy tax on his UK pension income because of the exemption.

Following the decision in Bayfine UK v HMRC (STS 717) the tribunal found that the double tax treaty should be interpreted using a purposive rather than a literal approach. The primary purpose of the double tax treaty is to eliminate double tax and prevent the avoidance of tax, the purpose is not therefore to enable the double non taxation of income.

The case therefore centred around the meaning of the phrase “subject to tax” and the difference in international tax treaties between this phrase and the phrase “liable to tax”.

HM Revenue and Customs presented various examples of case law from other countries and academic articles that examine the distinctions between the two phrases. The tribunal noted that whilst such authorities are not determinative they are relevant.

In HM Revenue and Custom’s view, the distinction between the two phrases is that the expression “liable to tax” requires only an abstract liability to tax (i.e. a person is within the scope of tax generally irrespective of whether the country actually exercises the right to tax) and therefore has a much broader meaning than the phrase “subject to tax” which requires that tax is actually levied on the income.

The first tier tribunal decided the case in favour of HM Revenue and Customs such that relief was not available under the UK-Israel tax treaty to exempt the pension from UK tax because the pension was not subjected to tax in Israel.

The tribunal’s interpretation of the UK-Israel double tax treaty and meaning of “subject to tax” will be of interest to taxpayers relying on double tax treaties and those practitioners who advise on double tax treaties.

Tribunal Increases Penalty: Seacourt Developments Limited (TC02918)

The recent tribunal case of Seacourt Developments Limited v HMRC involved appeals against a number of determinations by HMRC in respect of PAYE, national insurance contributions (NICs) and Construction Industry Scheme (CIS) deductions.

Seacourt had previously stated that it only had seven employees via its P35 and no subcontractors were detailed in its CIS returns for 2005/06. In August 2008 the company’s new auditors submitted a revised schedule showing “workers” for 2005/06 as being 176, however no additional detail could be provided on their status as Seacourt did not provide it.

HMRC subsequently issued determinations for the 169 additional “workers” from 2005/06 -2007/08 on the advice of the company’s accountants (Seacourt failed to arrange a meeting with their accountants to discuss the issues). HMRC made an estimate as to which “workers” should have been dealt with under PAYE and CIS, with the total amount of PAYE and NIC due being £758,124.

In addition to the tax due HMRC also issued penalty notices. The maximum amount that could be charged was 100% of the tax due; however HMRC mitigated the penalty by reducing it by 10% for disclosure (max 20%), 20% for co-operation (max 40%) and 20% for seriousness (max 40%). The result being that the penalty was reduced to 50% of the tax due.

Seacourt appealed against the penalty but the judge ruled in HMRC’s favour. However, perhaps most surprisingly the tribunal ordered that the penalty be increased to 95% of the tax found to be due, bringing the total penalty to £720,217.80 (previously £379,060).

The penalty was increased on the basis that Seacourt had failed to co-operate and the offence was serious in nature, and therefore the discounts previously afforded by HMRC were removed. The tribunal also felt the disclosure was not of sufficient quality to warrant a 10% reduction and reduced it to 5%. As a result the maximum penalty was only reduced by 5%.

The overall outcome of the case is not surprising given the facts, however the fact that the tribunal ordered the penalty to be increased is. This could have an impact on HMRC’s penalty mitigation criteria in the future and also make taxpayers think twice before appealing an already reduced penalty.