Further Amendments to Entrepreneurs’ Relief

HMRC have published further changes to Entrepreneurs’ Relief (ER) in response to consultation with the professional bodies over the changes brought in with the Budget in 2018.

As we noted in our post, HMRC Challenges on Entrepreneurs’ Relief and Dividend Planning – BEWARE, the original changes had the potential to prevent ER from applying in situations where there were different classes of shares with potentially different dividend rights.

The new amendments are designed to combat this, although unfortunately the way in which they are implemented is perhaps not as clear as it could have been.

The changes relate to qualifying as a ‘personal company’ which is one of the requirements for ER to apply on sales of shares.  For a company to be the seller’s personal company the shareholder must meet four conditions with regard to their shares:

  1. hold at least 5% of the ordinary share capital
  2. control at least 5% of the voting rights
  3. have a right to at least 5% interest in the distributable profits
  4. have a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.

The new tests 3) and 4) were brought in from 29 October 2018 and have now been joined by a further new test per the amendments of 21 December 2018 to the Finance Bill at , Sch 15, para 2.

This adds an alternative test for a “personal company” based on the shareholder’s entitlement to proceeds in the event of a hypothetical sale of the whole company and requires the shareholder to instead be entitled to at least 5% of the proceeds in the event of such a disposal of the whole company. This test can be used instead of tests 3) and 4), however those tests remain in force as well.

This new test can have interesting implications in certain cases, and may be particularly relevant in buy-out situations where the terms provide for certain additional proceeds on a future sale depending upon meeting certain targets.  Being entitled to a larger share of the profits could then conceivably make the difference between obtaining ER or not.  The exact treatment will depend on the exact situation and terms, and so advice on these aspects will be vital in ensuring any expected ER is maintained.

To add to the complication, any disposals made between 29 October 2018 and 20 December 2018 must apply tests 3) and 4) and cannot apply the new test which only applies to disposals after 21 December 2018.  This means the position could change in certain circumstances depending upon whether the sale was before, during, or after this interim period.

These changes make it more important than ever that professional advice is sought before making a disposal.  This way, the position can be ascertained in advance, with suitable planning undertaken where necessary/possible to improve the position.  Eaves and Co would be delighted to assist if you or your clients have any queries in the area.

HMRC Challenges on Entrepreneurs’ Relief and Dividend Planning – BEWARE

entrepreneursrelief

Keeping up to date with technical developments is difficult, especially with so many updates these days, when it is difficult to sort the wood from the trees.

With the possibility of dividend planning many companies have chosen to have different classes of shares. In our experience they have not always thought through the wording of the proposed amended Articles or had legal advice, which has led on occasion to HMRC challenges. Many though have probably not been subject to HMRC enquiries so have muddled through, because the parties internally ‘knew what they meant to say’.

Attacks on dividend planning are now getting more ‘fashionable’ with HMRC seems to be the underlying message, taking in certain arrangements with ‘alphabet shares’ and dividend waivers.

The latest development may go beyond those arrangements and affect long term capital gains tax planning.

The current Finance Bill contains provisions whereby if there are different classes of shares in a company it may be difficult for a shareholder to show he has met all the new requirements to qualify for Entrepreneurs’ Relief. Of course, this is not yet law, but checking the position on such a valuable relief would be prudent. With the new qualifying period due to increase to 2 years from 1 year it would be wise to do this sooner rather than later, so as to implement any changes necessary as early as can be managed.

To the Battlements!

Here is a Tax Exempt Castle

castle

“That’s not a Castle!  It’s a cardboard cut-out!”

All together now;

“Oh No It Isn’t!”

“Oh Yes It Is!”

As the Pantomime Season approaches there may be a lot of it about?  By this, I do not mean the standard of scenery in the local production of Robin Hood, but the naïve way many people seem to view the “exemption” due under what strictly is private residence relief S222 TCGA 1992.  It is a relief because the rules apply to give a deduction against real chargeable assets.  The need to do a computation of a gain applies invariably.  The quantum of tax is subject to the amount of relief.  Admittedly, in many circumstances, this relief may amount to 100% of the gain, but that is by no means all circumstances.

There are (no doubt) many parents eagerly awaiting the return of their beloved offspring from University for Christmas.  They may even have helped purchase accommodation for them away from the family home.  How many are hoping any gain on such property will slip through, as a gain the particular child is “entitled to” on their “own home”?

Might they be correct in such interpretation?

Well, it depends ~ to use a famous technical phrase.

The recent case of K Lo demonstrates this.  In this case the taxpayer claimed private residence relief on a flat but this was rejected by the Tribunal.  They found it was for the taxpayer to show she was entitled to it, not HMRC to disprove her claim.  They found her story regarding her long term intentions for it to be her main home did not quite ring true.  Although they accepted the taxpayer stayed in the accommodation at weekends and during University vacations, they did not accept the “quality of residence” was sufficient to make it her main residence.  This “quality of residence” point was based on the Tribunal’s view of the facts, perhaps with an implication the taxpayer and her boyfriend would have done more (in the few months she owned the property) to clean up what was plainly a run-down, badly maintained house, full of rubbish hoarded by the previous elderly tenant, if they had truly intended to make it their first home.

The fact that she was not on the electoral roll at this address was another factor against the property being treated as her residence.  Thus, the Courts found not only was she chargeable to CGT with no private residence relief but also exposed to penalties because she had been negligent in not making proper disclosure and not taking professional advice to understand the areas of possible doubt.

The result equals one unhappy taxpayer, I imagine.

Interestingly, if she had taken professional advice, it may have been perfectly possible legally to make an appropriate election and thus eliminate both the capital gains tax and also the associated penalty.

Another Tax Tribunal noted recently (in George Edwards Consulting Ltd) it was ironic that by trying to save costs by not seeking professional advice, this inaction cost the taxpayer 3 times as much in penalties!

The penalty regime is now raising significant money for Government.  Getting professional advice to get things rights is a prudent protection.

An Englishman’s Home is his Castle?

Or is HMRC undermining it?

CardiffCastle-Exterior41-med-A0013928-1

  1. “Everyone” knows a capital gain on your own residence is “tax exempt”.

 

  1. “Everyone” knows offshore gains are “tax exempt”.  Isn’t this in the Press on a regular basis?

 

Hence, people with “circumstances” which in reality encompass an awful lot of the nation, may actually discover that they need professional advice, because what they thought was tax exempt is not – in reality.

 

Things which may affect the above “tax exempt” analysis potentially include:-

 

a).   Being UK tax resident.

 

b).  Not being UK tax resident, but having property here.

 

(That just about covers everyone!)

 

Crucially, Private Residence Relief is a relief for qualifying periods of ownership.  This may (or may not) include the whole period of ownership as case law shows.  It is a very complex area; plus the changes in the October 2018 Budget may reduce the length of qualifying periods, particularly for those involved in “strange” lifestyle matters, such as moving house for career, inheriting property, getting divorced etc.

 

For many people their family home is the most valuable asset they will ever own.

 

There are opportunities to plan to mitigate tax.  Such steps are lawful and (presuming you love and respect your family more than HMRC) I believe, appropriate.

 

The only thing to note is, when you accidentally fall into assumptions (1) or (2) noted above, not only will HMRC lawfully demand the tax, plus interest for not paying on time, but also penalties.  The penalties may be up to 200% of the original tax, so you could be paying 3x the original undeclared bill.  For those not of an arithmetic mind, for a typical 28% tax rate on a residential property that is 84% of the gain, going to the Government.  In other words on a gain of £100,000, that is £84,000 plus interest that could go to the Government, just because you assumed ….

 

Of course, some people may say well that still leaves 16% of the gain, but that excludes interest, and experience says trauma and cost of getting caught.  Plus those who actually wished to use the money may have to sell their dream home.  Maybe leading to further complications?

 

However, with appropriate planning and making the right tax elections in some circumstances, the gain may be legitimately eliminated altogether.  A much better result!

 

  1. Get advice.
  2. Get it right.
  3. Document it.

 

No one likes spending money on professional advice – until they haven’t!

The Importance of getting ‘It’ Right

Recent Tax Cases reinforce the message : Get Advice : Get It Right : Document It.

The case of D. George shows the common promise of “you will be looked after on a third party sale” can fall foul of horrid tax consequences if there is no advance advice and documentation.

On a separate, and totally different technical argument, a taxpayer and spouse undertook (for presentational purposes) a development project through an associated company, which they owned jointly. Circumstances, with a crash in the development value, made their ideas change. In the end, the company was wound up without repaying the director’s loan which funded the development work. As a result, the owners were not deemed to have incurred the crucial enhancement expenditure on the development, and so obtained no tax relief on £250,000 paid out.

Painful lessons on both counts.

1. Get Advice
2. Get It Right
3. Document It.

If in doubt, repeat step one!

Is Ignorance of the Law a Reasonable Excuse?

eaves and co lawOf course, all first year law students will bellow ‘No’ to what has long been thought a standard legal principle. However, in today’s complex, highly regulated society a strand of case law is emerging which suggests that in certain circumstances a lack of knowledge of the detail of the law can be a reasonable excuse, thus preventing a penalty from being levied.

The recent First Tier Tribunal hearing in respect of A and R Bradshaw is a case in point. The taxpayers lived in the UK for many years before emigrating to Canada. Their former marital home was put on the market, with the sale going through after the couple had left the country. No capital gains tax was due, because the property had qualified as their principal private residence.

However, HMRC sought to impose a late filing penalty, because strictly a return should have been made under the Non Resident Capital Gains Tax Regime (NRCGT). The judge in giving his verdict acknowledged that a return should have been made under the law. He did dismiss he HMRC penalty demand though. The judge said that the rules were new and had not been well publicised despite marketing a significant departure from previous, well established tax policy in imposing CGT on non-residents. He also noted the new legislation demanded a novel and onerous reporting deadline of only 30 days after the disposal.

This may be very tight especially if a complex capital gains tax computation was required or information needed to be garnered from earlier years. Citing the cases of Perrin v CRC, McGreevy and Scowcroft the judge accepted that in this case ignorance of the law amounted to a reasonable excuse.

It is pleasing to see the Courts accepting that in the real world of unfortunate circumstances and human foibles that ‘reasonable excuse’ can go beyond the trite triple of ‘disease, disaster and death’ Taxpayers and their advisors should therefore look at the whole picture and consider mitigating factors before accepting an HMRC demand for penalties.

Of course, certain excuses are unlikely to succeed. Crafting an argument around ‘The Dog Ate My Tax Return’ would I suggest remain doomed to fail.

eaves and co dog

We are confident though we can help on more reasonable arguments and are always interested to hear of practitioners experience in this area.

Requirement to Correct – 30 September Deadline Looms

sun

The Weather Today – Scorchio!

 

BUT 30 SEPTEMBER DEADLINE LOOMS

 

WINTER IS COMING!

 

Requirement to Correct

 

Many people over the years of the world becoming smaller and more accessible may have acquired assets abroad.  For example, immigrants and emigrants may have UK interests, but also ones in other countries, whether because of family, work or just acquiring (and perhaps disposing of) a holiday home.

 

Sometimes (it may sound odd) it seems, perhaps when lying on the patio of their newly upgraded Spanish villa, the owner may reach for an escapist novel (such as Banker’s Draft by RG Lennon https://www.amazon.co.uk/Bankers-Draft-R-G-Lennon-ebook/dp/B07CW4JC1J) instead of the latest Taxes Acts.

 

The Taxes Acts would of course warn the reader of the forthcoming deadline of 30 September 2018.  This is to disclose any offshore liabilities (including say Capital Gains on the older villa used to help finance the new one) or the rent when you weren’t using it, or the sale of the home inherited from an uncle, or the apartment in Delhi where your Dad used to live and rental values have gone up so much it would be rude not to etc., etc.,

 

The world is small, families are dispersed; so are assets.  Thanks to automatic sharing of financial information across Governments – permitted in most international double tax treaties,  HMRC will receive bucket loads of data automatically.  Modern computers will allow this to be analysed.  No doubt HMRC will leap to conclusions and try to assess ‘evaded tax’.

 

Key points:

 

  1. Crucially, the time limit for assessment is planned to be extended to 12 years (going back from 4 years) which makes retaining records more important.

 

  1. There is to be a new criminal offence for ‘offshore evasion’, which means HMRC do not need to prove there was ‘deliberate intent’. This heightens the need for professional advice, because innocent ignorance is unlikely to amount to a successful defence.

 

  1. There will be new sanctions for ‘offshore evaders’ based on a penalty of up to 10% of the value of the underlying assets.

 

  1. Tougher sanctions come in for those who fail to disclose relevant offshore interests before 30 September 2018

 

IF IN DOUBT TAKE PROFESSIONAL ADVICE

 

Disguised Remuneration Schemes

 

Anyone involved or may have clients involved in what HMRC may consider to be caught in the new ‘disguised remuneration schemes’ should take independent advice soon, to ensure they can meet the deadline for any appropriate disclosure of 30 September 2018.  It is now less than 2 months away.

 

Settlement terms are available for appropriate disclosure made before the deadline.  After that date, HMRC are threatening more severe action.

An Englishman’s Home is his ‘Tax Exempt’ Castle – Private Residence Relief (PRR)

CardiffCastle-Exterior41-med-A0013928-1“Everyone knows” that:-

“A person’s home is exempt from capital gains tax” – SIMPLES!

Well, no actually! In law it may get up to 100% tax relief, but it remains a chargeable disposal.

Imagine:-

1. You own more than one property (including say a holiday home overseas) OR
2. You buy a property to live in, but actually live elsewhere (say in rented accommodation) OR
3. Circumstances change over your period of ownership.

Each of these (quite common) circumstances could give rise to a nasty, unexpected tax liability. We have seen a number of situations where advice has been sought ‘Just Too Late’. This can mean a relatively small outlay “saved” on proper professional advice, results in an expensive (and potentially unnecessary) tax bill – plus, on occasion penalties, for naïve belief in the somewhat misleading phrase, set out above.

Some of the benefits of this suggestion are reflected in the recent case reported below.

Private Residence Relief Claim Rejected

Private Residence Relief (PRR) can be a very beneficial relief where the conditions are met, providing for up to 100% of a gain to be exempted where a property has been a taxpayer’s main residence throughout ownership.

Of course though careers, inheritance, divorce and the general messiness of real life, things do not always quite pan out as simply as “always” living in one house. As a result, claims made perhaps in ignorance and good faith, can lead to disagreements between HMRC and taxpayers over whether, and the extent to which, properties may qualify. This can lead to appeals, so a number of cases end up being dealt with through the courts.

One such recent case was P Lam v HMRC at the First-Tier Tribunal. The case found that a taxpayer’s occupation of the property was not sufficient to meet the conditions. HMRC accepted the taxpayer had spent some time in the property whilst she was renovating it, but they argued that the nature and extent of that occupation was not enough to qualify for relief, which requires a degree of permanence.

What may be useful for taxpayers is that the Tribunal provided a list of things that the taxpayer in this case was not able to provide as evidence. Such factors therefore appear to be key in being able to prove that occupation in a property should be sufficient for the relief. This list included:

• Proof of how many days she lived in the property
• utility bills to establish the time spent there
• moving any furniture into the house
• bringing items that would have made occupation more comfortable
• providing evidence of a change of address

Taking professional advice in advance and keeping good records will certainly make matters easier in the event of an HMRC challenge into a PRR claim. Perhaps an easier route would have been to file a timely election for the relevant property to be deemed the qualifying property.

To quote an old motto, regarding getting matters in order in advance …

“A stitch in time, saves 9”.

Mind the Gap – EMI Share Options from 6 April 2018

Mind-the-GapHMRC have announced via their Employment related securities bulletin (No 27 – April 2018) that due to not having yet received EU State Aid approval for the EMI scheme (the previous approval expired on 6 April 2018) new EMI share options issued after 6 April 2018 will not be treated as tax-approved share option schemes and would therefore be taxed under the far less favourable non-approved regime.

HMRC do reassure taxpayers that options granted up to 5 April 2018 will continue to qualify, so there is no need to panic over existing share options.

However, if you or your clients are in the process of implementing an EMI share scheme, it would be advisable to delay granting options until the approval is granted. Of course, if this is not possible then clients should be made aware of the implications of options falling to be treated as unapproved, or consider other options such as a CSOP.

One of the big differences between approved EMI options and unapproved ones is that any tax paid on exercise is based on the value of shares at grant of the options for EMI schemes, and on the value at exercise for unapproved ones. Therefore any growth in value is sheltered under the EMI scheme.

EMI schemes also provide other valuable features including relaxations of Enterpreneurs’ relief conditions for employees.

Please get in contact with us if you have any concerns or if you require assistance with share option schemes.

Offshore Client Notifications – Are you Affected?

We have written previously on this blog about various HMRC offshore disclosure facilities designed to encourage taxpayers to come forward and declare any unreported foreign income or gains.

HMRC continue to acquire new powers in order to pursue taxpayers and one of the latest requires advisors themselves to write to certain clients on their behalf.

These rules apply to financial institutions like banks but also to so-called “specified relevant persons” (SRPs). Accountants and tax advisors are likely to be an SRP if they provided offshore advice or services over and above simple preparation and delivery of tax returns in the year to 30 September 2016 regarding a client’s personal tax affairs.

If the advisors fall within the rules and are not covered by certain exemptions they will be required to send a standard HMRC headed document to these clients (although writing to all clients is also permitted) with a covering letter that includes certain wording which may not be altered (these are the Offshore Client Notifications).

One of the key things to note is that HMRC’s document directs clients to submit their own online disclosure. You may suspect they are thus attempting to bypass the advisors. We could not possibly comment! If you need to send such letters, we recommend highlighting to the client the dangers of doing so!

The wording SRPs must include in their covering letter is as follows:

“From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information about people’s overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency. This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.

If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.”

If you are concerned about how these rules might affect your firm, or are an individual with unreported overseas income, please get in contact with us as we would be happy to assist.