Background

Disincorporation Relief was introduced from 1 April 2013 and is a form of roll-over or deferral relief.

When a company ‘disincorporates’ there is a transfer of assets between the company and its shareholders.  As the parties are connected, the transfer is deemed to occur at market value for tax purposes and normally results in a Capital Gain.  Prior to the introduction of disincorporation relief this would result in a Corporation Tax charge being incurred.

Disincorporation relief enables small owner-managed companies to transfer qualifying assets so that no capital gain arises, and as a result no Corporation Tax charge is incurred.

The availability of Disincorporation Relief coincides with the introduction of other tax simplification measures for unincorporated businesses, such as the ‘Cash basis’ election and the flat rate expense allowances.

Conditions for Relief

A company and its shareholders can make a claim for Disincorporation Relief if:

  • the company transfers its business to some or all of its shareholders
  • the transfer is a ‘qualifying transfer’
  • the transfer occurs between 1 April 2013 and 31 March 2018
  • the transfer is to either a sole trader or individuals in partnership, but not to members of a limited liability partnership (LLP)

Qualifying Transfer

There are a number of conditions to be met, and each case should be considered in the light of the facts.  One of the key requirements, which will restrict the application of the relief, is that the total market value of ‘qualifying assets’ (land and goodwill) at the time of the transfer must be below £100,000.

If you would like more information on Disincorporation Relief please contact Paul Eaves on 0113 244 3502 or peaves@eavesandco.co.uk.

This new tax year sees the opening of new tax disclosure facilities for offshore tax havens of Isle of Man, Jersey and Guernsey.  They offer a streamlined disclosure method for offshore hidden funds with a laid down table of reduced penalties for tax errors.
In many ways these new tax treaties are similar to the Liechtenstein Disclosure Facility (LDF) which has been operating for some time now.  It therefore makes sense to consider them in the light of experience and lessons learned from the LDF.
The new opportunities to disclose run from 6 April 2013 to 30 September 2016.  Whilst 2016 currently sounds a long way off. It is surprising how fast time goes by.  Experience with LDF suggests that people are liable to procrastinate, so the sooner they get relevant information, the more likely it is they will take appropriate action before it is too late.
Registering sooner rather than later gives greater protection, because HMRC enquiries continue, and those caught in an investigation are too late to take advantage of the benefits of reduced penalties and time scope of those disclosure schemes.
Whilst Accountants hope that all their clients are honest and do not need specialist disclosure facilities, as a firm dealing in serious tax investigations we see that such hopes are sometimes dashed.  It is useful to make all clients aware of the disclosure facilities, because even the most honest ones may have funds or relations who requires help.  Specialist advice is essential (we can help).  Sometimes the happiest way forward can be just to provide the client with contact details, so that the existing client relationship is unaffected.

Under current legislation a corporate tax deduction is given on shares acquired through employee shares schemes. The amount of the deduction available is the amount that is chargeable to income tax when the shares are acquired by the employee or the amount that would be chargeable if the employee was a UK resident and other reliefs were unavailable.
The legislation introduced under Finance Bill 2013 clarifies that if relief is given under Part 12 CTA 2009 it is not possible to claim any other deduction for Corporation Tax in relation to those employee shares or options.
The legislation also highlights that no Corporation Tax deductions are available to a company in relation to employee share options unless shares are actually acquired by an employee in accordance with the option.
It appears these provisions are largely to prevent avoidance and should not affect genuine planning using tax efficient options such as EMI schemes.

There has been much publicity in the media in recent months over tax avoidance, and whether certain parties are paying the “right” amount of tax.  Whilst such discussions have often focused on big businesses trying to pay less tax, fairness in the tax system can swing both ways with unexpected bills being incurred.  The theme of fairness ran through three recent tax cases heard by the courts.
In the First-tier Tribunal case of Joost Lobler v HMRC (TC2539) the taxpayer was hit with a huge tax bill on partial surrenders of life insurance policies, despite having made a loss.  If he had made full surrenders, then he would have had no tax to pay.  The tribunal suggested that the taxpayer’s situation was “outrageously unfair” as he had made no profit or gain, but had become liable to tax, under the letter of the law, which could potentially bankrupt him.
In the recent case of T James V HMRC, the taxpayer persuaded the Tribunal that he had a ‘reasonable excuse’ for late payment because he chose (out of limited resources) to provide his corporate business with funds to pay their PAYE, VAT and corporation tax, rather than keep up with his previously agreed ‘time to pay’ arrangements on his personal account with HMRC.  This enabled the business to continue and increase the total tax take to HMRC.  Despite this, HMRC still took the case to tribunal rather than consider the fairness of the case internally.
Finally, in the case of J Jackson v HMRC (TC2448), the taxpayer had received termination payments from his employer when he retired, on which tax had been deducted at basic rate.  The payment was included on Mr Jackson’s tax return, which was filed on time. He believed that his employer would have deducted any tax due, having always been taxed through PAYE and therefore made no payment of tax at the higher rate.
He received a tax demand from HMRC.  On receiving written confirmation of what the additional tax related to, he paid the tax but was then issued with a late payment penalty.  The Tribunal found that the taxpayer had acted reasonably and had a genuine belief that his taxes were up-to-date.  The tribunal overturned the penalty and noted that the taxpayer clearly felt aggrieved and unfairly treated.
As can be seen from these cases, HMRC’s view on fairness appears to be at odds with that of the general population and the concept of “paying the right amount tax” is not as clear cut as the media portrayal.  Tax is complicated, and taking professional advice is therefore essential.

HMRC announced three more disclosure facilities in quick succession as they attempt to tighten the net on tax evaders operating closer to the UK.  Memoranda of understanding have been signed with the Isle of Man, Jersey and Guernsey in the last few months meaning more and more taxpayers could be under scrutiny.

Whilst co-operation with HMRC from the above jurisdictions is another nail in the coffin for tax evaders operating off the coast of the UK, these disclosure facilities offer a great opportunity for individuals to wipe their slate clean and take preemptive action.

If individuals come forward under one of the disclosures they will be liable to reduced penalties – which can result in sizeable savings when compared to an ad hoc disclosure or HMRC investigation.

However the disclosure facilities do not offer immunity from criminal prosecution, therefore individuals may wish to disclose using the Liechtenstein Disclosure Facility (LDF).  The LDF can be used on worldwide assets providing sufficient funds are transferred to a financial intermediary in Liechtenstein.  The LDF offers both reduced penalties (as low as 10%) and immunity from criminal prosecution.

This is certainly an area in which to be proactive on as under the terms of the agreements the jurisdictions will provide HMRC with details of suspected evaders in due course.

Therefore disclosing to HMRC before they come ‘knocking’, not only secures reduced penalties but also allows individuals a greater element of control as to the manner and time frame in which they disclose. This offers piece of mind to the individuals involved.

In addition to the above HMRC are also looking to sign similar agreements with British overseas territories. There are 14 such territories including Bermuda, the British Virgin Islands and the Cayman Isles.

Where a taxpayer is subject to a penalty from the tax year 2008/09 onwards, HM Revenue & Customs (HMRC) have the power to suspend a penalty for a careless inaccuracy.

However what many people may not be aware of is that in addition to HMRC granting a suspension it is also possible for the taxpayer to request that they do so.

If HMRC refuse to suspend a penalty it is possible to appeal to the First-tier Tribunal, but the tribunal can only allow your appeal if it thinks that the HMRC decision is flawed.

A complete failure to exercise the discretion, i.e. not to consider a suspension in light of the taxpayer’s circumstances, is generally considered a flawed decision.

There is however nothing which prevents HMRC adopting policies or practices which indicate factors it may take into account when exercising its discretion; so long as they do not prevent consideration of individual circumstances.

HMRC’s instruction to staff is to only consider a suspension where they can set at least one condition that, if met will help the taxpayer to avoid a further penalty.

Some officers claim that HMRC cannot suspend a penalty for errors involving capital gains tax (CGT).  This is incorrect as there is no reason that HMRC cannot suspend a penalty in relation to CGT providing at least one condition can be set.

Case law however has proved inconclusive. In Fane v HMRC the tribunal accepted HMRC’s view that a one-off error was not suitable for a suspended penalty, however in Boughey v HMRC the tribunal disagreed and overturned the decision not to suspend.  Both tribunals said that the suspension conditions need not relate to the specific error.

Budget 2013 announced the introduction of a 10% ‘Above the Line’ credit for large company R&D activity.

The ‘Above the Line’ credit is designed to increase the visibility of large company R&D relief and provide greater cash-flow support to companies with no corporation tax liability.

Companies will be able to claim the ‘Above the Line’ tax credit for their qualifying expenditure incurred on or after 1 April 2013.  The credit will be equal to 10% of the qualifying R&D expenditure.  The credit will be fully payable, net of tax, to companies and will not be liable to Corporation Tax.

The ‘Above the Line’ credit scheme will initially be optional and companies will be required to elect to claim R&D relief under this scheme.

Companies that do not elect to claim the ‘Above the Line’ credit will be able to continue claiming R&D relief under the current large company scheme until 31 March 2016.

The ‘Above the Line’ credit will become mandatory from 1 April 2016.

Budget 2013 announced various anti avoidance measures aimed at the loan to participators/overdrawn directors accounts s.455 tax charge .

Repayment Provisions Amended To Deny “Bed & Breakfasting”

Certain owner managed companies have previously been extracting funds from the company through overdrawn directors loan accounts, which are then repaid by crediting the loan account just before the date when tax would become due under s.455. They would then subsequently recreate a similar debt to the company. Such tactics are now being targeted by HMRC as previously there were no specific rules to prevent it.

The repayment provisions are to be amended so as to deny relief for the loan to participators s.455 tax charge where repayments and re-drawings are made within a short period of time of each other, or there are arrangements (or an intention) to make further chargeable payments at the time repayment is made (and there are subsequent re-drawings).

The effect of this being that the loan to participators s.455 tax charge can no longer be avoided by repaying the loan within 9 months of the accounting period end if a loan is taken out again soon after or there is an intention to do so.  Therefore such ‘bed and breakfasting’ is no longer a possibility.

Loans via Relevant Partnerships & LLPs

Legislation will be introduced in Finance Bill 2013 to apply the loan to participators s.455 tax charge to any loans from close companies to participators made via partnerships (including LLPs) in which the close company and at least one partner/member is a participator (or associate of).

Extractions of Value

Where there is an extraction of value from a close company and the value is transferred to a participator, there will be a 25% tax charge on the close company on the amount of the payment to the participator.

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.