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!

Making Tax Digital (MTD) for VAT – Are you Ready?

VAT Tax Advice

Recent surveys suggest that only 50% of affected businesses are aware of the new rules being brought in from April 2019 in relation to VAT. Even those who are aware of the changes are not prepared, with 20% of those who are aware of them currently have no plan at all.

If you have followed this blog, you will be aware that we have been critical of the proposals under MTD (see here) however HMRC and the government have continued to press ahead with them and it appears very likely that the rules for VAT will be coming in in April 2019, and will be compulsory!

From that date, all businesses who are required to be VAT registered (i.e. they are above the VAT registration threshold) with be required to comply with the MTD for VAT rules. From April 2019, such businesses will be required to keep business records digitally from the start of their accounting period and will need to file in an MTD approved manner.

A spreadsheet can be used to keep records, however MTD-compatible software will be needed to send HMRC the VAT returns and so bridging software might be required in order to transfer the data between systems. HMRC have announced a ‘soft landing’ for digital links, giving businesses until April 2020 to make sure there are digital links between software products, but preparation now makes sense, because it is a radical departure in terms of there being a Government prescribed method for record keeping.

If you are concerned about the new rules and would like help understanding them, please get in touch with David Stebbings. It is better to be prepared now rather than waiting until April!

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.

Brexit and the Route Map: Do all roads lead to Rome?

Brexit and the Route Map?

Do all roads lead to Rome?

Rome

Whatever people think of the merits or demerits of Brexit, if, as seems increasingly likely, we fail to agree on all aspects of a Brexit formula before March 2019 (now just a few months away) how are we supposed to advise clients?

It is the nature of our business that we often get asked about the more esoteric bits of tax practice, such as cross border matters and the impact of double tax.

Here is an example, which we have just looked at as part of researching advice for a client in respect of the Swiss/UK double tax treaty.  Of course, Switzerland is not a member of the EU.  However, Clause 18 (4) of the UK/Swiss Treaty only applies if the individual making the claim is “subject to the legislation of the Home State in accordance with the Agreement on the Free Movement of Persons”.

I appreciate this may only apply to a few people, although it should be noted the Governmental Authorities each thought the issue significant to incorporate specifically into the Treaty.  Anyway, are not individual citizens important?

Additionally, if EU concepts are so ingrained into UK tax procedure as to affect non-EU Treaty countries, surely there must be more issues lurking.

Professional bodies what are your views?

In this context, I commend the Article by Alistair Spencer Clarke in the August 2018 edition of ICAEW Tax Line.  Ownership of Spanish property is not an outlandish thought for many UK citizens, quite apart from many other cross border situations which are now common place in our shrinking world.

Please can we start a debate about how to approach this matter?  Here I am talking about practical reality and proper approaches for Tax Practitioners to ensure they are giving best advice to clients.  Constitutional jurisprudence is for another day!

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”.

Good News for EMI

The EU have signed off on ‘State Aid’ rules which mean that it should be possible to start granting EMI share options again shortly. It is believed HMRC will announce an exact date soon.

EMI is a very attractive and popular measure which allows selected employees in small trading companies to be rewarded in a tax efficient manner which is HMRC approved (and has been for 18 years, with cross party support).

Anyone wishing to get more information or advice, please call Paul Eaves on 01704 548698

Appeal Rights

Like any large organisation, HMRC sometimes acts in a way that can make individuals, who may be challenged by this monolith feel intimidated.  Fortunately, there are general rights of appeal.  Recent cases have shown that these rights are useful in ensuring HMRC do not overstep the mark and abuse their powers.

In M. Miron, it was held that the taxpayer’s accountants were at fault in not following a fairly simple procedure.  However, that did not excuse the ‘terrible muddle’ that the taxpayer ended up in.  The fact that HMRC was a large organisation could not justify a situation where one hand did not know what the other was doing.  “The whole purpose of maintaining a file was to ensure knowledge is disseminated across an organisation”.  Thus the taxpayer had a ‘reasonable excuse’ in not filing her appeal in a more timely manner.

Similarly, in M. Capuano the ‘staggeringly bad’ service provided by HMRC generally, contributed towards the taxpayer having a ‘reasonable excuse’ for late filing.

M. Beardwood was also held to have had reasonable excuse for late filing.  Indeed the First Tier Tribunal said it was ‘difficult to see what more the appellant could have done’.  They considered HMRC had wasted everyone’s time in bringing a case which had very little merit on the side.

This contrasted with R. Popat, where the taxpayer (who again won) was allowed an appeal where he wished to postpone payment of tax assessed on an assessment.  The taxpayer only had a low hurdle to overcome to get tax postponed, pending settlement of the relevant appeal.  The purpose of the postponement hearing was not to settle the appeal finally on its merits, but to allow tax collection to be postponed pending a full rehearsal of all the relevant facts.

For advice on HMRC powers and penalties please contact either Paul Eaves or David Stebbings.

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.

HMRC Publish New Research & Development (R&D) Guide

Research & Development (R&D) remains a highly beneficial area for those companies carrying out qualifying work.  Historically it has been an underused relief with HMRC and Government seeking ways to highlight the availability of the relief.

As part of this on-going initiative, HMRC have published a document on R&D designed to ‘Make R&D easier for small companies’.  It does contain some useful summaries and case studies for those who are unfamiliar with the relief.

As a reminder, R&D tax relief is available to companies that are developing a product through an advance in science or technology by overcoming scientific or technological uncertainty.

For small to medium sized companies (SMEs), the relief takes two forms:

  • Firstly, enhanced R&D tax relief – for every £1 of qualifying costs spent on R&D, the company receives a deduction in calculating their taxable profit for corporation tax purposes of £2.30.
  • Secondly, for loss making companies up to 33% of the qualifying cost can be available as a tax refund.

The Research and Development Expenditure Credit (RDEC) scheme which pays a taxable credit of 11% of qualifying expenditure may also be relevant to SMEs, for example where they are carrying out work for larger companies.

HMRC’s new guide goes through some of the factors to consider in determining whether projects would qualify for R&D relief, but does highlight that the relief is not just for ‘white coat’ scientific research, but also for other “development work in design and engineering that involves overcoming difficult technological problems”.

It also includes case studies on certain areas, such as food, ICT and construction.  The food case study for example notes that, “Creating an innovative chilled food container that provides a substantially longer shelf life than currently available, would […] qualify. The scientific or technological uncertainties to be addressed are in the interactions between the food, gas content and container to keep the food fresh for longer. By contrast, the work in dealing with authorities to comply with extended use-by date regulation would not qualify.”

Eaves and Co has dealt with a number of R&D claims and have a proven track record in completing successful claims and can offer assistance in all aspects of the claim process.  If you would like to discuss how we can help, please get in touch.