The Result is in …..

We have opened the right envelope!

Congratulations and thank you for all who correctly entered our ‘Twelve Days of Christmas’ Quiz.  Eaves and Co are pleased to announce that the winner is Catherine Rogers of Ashford Rainham Ltd.  David Stebbings recently handed over her prize.

 

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For completeness here are the answers:-

 

The name Santa Claus evolved from Sinter Klass, a nickname for Saint Nicholas. What language is Sinter Klaas? Dutch

 

What fruit is traditionally used to make a ‘Christingle’?  Orange

 

Who ‘Rattle and Hum’ along to Angel of Harlem?  U2

 

Which carol is about a 19th Century Duke of Bohemia? Good King Wenceslas

 

“Christmas won’t be Christmas without any presents” is the first line from which literary classic by Louisa May Alcott? Little Women

 

Christmas Island, in the Indian Ocean, is a territory of which country? Australia

 

In the song ‘The Twelve Days Of Christmas’, how many swans were a-swimming? Seven

 

The North Pole, said to be Santa’s home, is located in which ocean? Arctic Ocean

 

The name of which of Santa’s reindeer means ‘Thunder’? Donner

 

Marzipan is made mainly from sugar and the flour or meal of which nut? Almond

 

Which traditional Christmas plant was once so revered by early Britons that it had to be cut with a golden sickle? Mistletoe

 

Who was Jacob Marley’s business partner?  Scrooge

 

The initial of each answer spells out DOUGLAS ADAMS.  The quote attributed to him on our website is ‘I’m spending a year dead for tax reasons’.

We are not, so look forward working with you again this year.  Remember the new tax year starts on 6 April.

The Importance of Advanced Planning – VAT Registration

A recent case at the First-Tier Tribunal, DJ Butler v HMRC, highlighted again the benefits of taking professional advice in good time. The taxpayer operated as a sole-trader working as a decorator, project manager and carpenter.

In the absence of the project management turnover the taxpayer would have been below the VAT registration threshold. After HMRC identified that his turnover was above the limit, the taxpayer argued that the project management was run as a partnership with his wife; however he had always declared it on his individual self-assessment tax returns as sole trader turnover.

The Tribunal considered that the project management work should rightfully be considered an extension of his sole trader activities and that no partnership existed. It did not help that no profits were reported on his wife’s tax returns, and nor were there separate partnership bank accounts or sales invoices raised in its name. The taxpayer’s appeal was therefore dismissed.

It would appear that if the taxpayer had taken steps in advance to create a separate legal entity for the project management, whether a partnership or a company, and followed the correct reporting and legal steps, the planning may have been effective. As it was, it was difficult to argue that self-assessed sole-trader income was in fact from a partnership.

Taking professional advice in advance would have helped this taxpayer, is there anything we can help you with?

The Fool on the Hill?

I note commentary in Taxation approving of ‘High Tech’ solutions. This would encompass (I gather) everyone signing up to the ‘Cloud’.

Technology is wonderful. BUT:

Some points. They are meant for debate, and I certainly do not believe in the extremes some of the ideas below may suggest (so no abuse to anyone, please, just healthy discussion).

1. Tax Authorities are obliged to deal with everyone (presuming they wish everyone to pay tax). This must include the elderly and the computer illiterate. The Victorians did not exempt those who could not read from tax. Try to be fair Government! It will get you far more benefits that you could imagine.

2. I did a Bio-Chemistry Degree and learned exciting things about genetics! Who would have thought (query designer babies?) that the recessive gene for sickle cell anaemia (bad) actually is in its more common form, beneficial in terms of resisting malaria?

3. Monocultures are dangerous in terms of ecosystems. I suspect they are also bad in terms of governance and economics? Perhaps not everything should be run through companies quoted on a stock exchange, nor every tax return run through the same memory system.

4. Having experienced the dire impact of a computer crash on a number of occasions, the point about monocultures is perhaps exemplified. In the ‘olden days’ (not that long ago) when a crash happened we just went back to those tasks we could do by hand. Now, we sit frustrated. When it happens, small business owners worry about economic loss; employees worry about whether they may get paid, and if so how soon they may legitimately disappear back home/to the pub/etc. PLC’s wish to send out questionnaires from the call centres, but cannot because the system has failed.

5. Unfortunately, evil exists in the world, and I fear a Government with a one track computer system may well find it has been hacked? At what level of loss does it go from being an embarrassment to be kept secret to an outright potential coup? A Government with no money will swiftly run out of a mandate to govern!

6. How many Government computer projects have developed totally smoothly, efficiently and on budget?

7. This is not to dismiss the Fool on the Hill, Head in a Cloud – It is just that the Man of a thousand voices is talking perfectly loud. (Thank you Lennon and McCartney). Those voices encompass the lonely who may not have computer access. Would Eleanor Rigby have had a laptop next to her face in a jar? How would she submit her tax returns?

8. As I think most people would agree Windows and Google are fantastic – when they work… Imagine a virus when they did not?

9. The recent debates suggest TAX = POLITICS. The LA Gangs got this right when saying a mugging was a ‘tax’. Why give money to someone you do not support? Do not give it to a gang. This is the reason you can vote and Government should look after all, not just their voters. It should mean a vote for someone who does not get in, is not ‘wasted’. It should be like an insurance premium. You do not wish the disaster risk you insure against to occur. Still pay it – it is better than the alternative!

10. HMRC should employ and train more technical Revenue Officers. There is no shortage of rules. My belief is HMRC are short of the resources to enforce them. From my experience losing enforcement ability is the easiest way to lose compliance enthusiasm from the general public.

Vote and then demand intelligence and flexibility from those who get it. [Not mere lobby fodder].

Views welcome. Share them also with the prospective MPs who intend to write your tax laws for the next 5 years.

Confirmation that Dividend Waivers should be treated with Caution

The recent First-Tier Tribunal (FTT) case of Donovan & McLaren v HMRC has confirmed that regular dividend waivers constitute a settlement for Income Tax purposes.

HMRC’s CASE

It was argued by HMRC that the effect of the dividend waivers and the intention of them was to allow higher dividends to be paid to the two directors’ wives than their respective shareholdings entitled and lower dividends to be received by the two directors.

HMRC stated that according to ITTOIA 2005 s.620 the directors’ dividend waivers and the consequent payment of dividends to their wives constituted an arrangement that can be defined as a ‘settlement’ whereby the directors were the settlors. HMRC inferred that the directors waived entitlement to dividends as part of a plan that dividend income otherwise due to the directors would be paid to their wives, therefore constituting an ‘arrangement’ under the settlements legislation. It was argued that this scheme was used for tax avoidance purposes so that the directors and their wives could reduce this aggregate liability income tax by using the wives’ unused basic rate band of tax.

HMRC rejected the alleged commercial rationale for executing the dividend waiver which was to maintain reserves and cash balances in order to accumulate sufficient of each to fund the purchase of the company’s own freehold property. They contended that this could have been more easily achieved by voting a lower rate of dividend.

The settlements legislation also requires an element of bounty to be part of the arrangement. Consequently, HMRC argued that the directors’ arrangement was not one that was entered into at arm’s length and the arrangement therefore contained an element of bounty.

APPELLANTS’ CASE

The two directors failed to provide any evidence to defend their position other than inferences from previous correspondence submitted by them and their accountant. Furthermore it had been admitted by the appellants and their agent in a letter to HMRC that ‘dividend waivers are by their very nature not on arm’s length or commercial’ which substantially weakened their appeal.

They had also argued that structuring the waivers as they did was tax efficient and made commercial sense.

FTT DECISION

The FTT found that the directors had waived their entitlement to dividends as part of a plan to ensure that the dividend income became payable to their wives so as to reduce their aggregate liability to Income Tax. The income which arises from the dividend waiver arrangement clearly arose during the lives of the director and the dividend income paid to their wives from their shares together with the dividend rights attached to them are benefits enjoyed by the directors’ wives. On the balance of probabilities the FTT accepted the submissions by HMRC; including the opinion that there was no commercial purpose for the waivers and that they did not have taken place at arm’s length.

The FTT also found that there was a lack of sufficient distributable reserves within the company were it not for the directors waiving the dividends.

Finally, they rejected the claim by the directors that the discovery assessments raised by HMRC were invalid. All appeals asserted by the two directors were dismissed.

CONCLUSION

This case serves as a reminder that companies need to be cautious when considering the use of dividend waivers. The definition of a ‘settlement’ is wide-ranging and to avoid being caught in an arrangement which may constitute a settlement arrangement it is best to seek professional advice.

There are options that remain effective for efficient tax planning through family companies that can be used without the need for dividend waivers. Seeking professional advice in advance is preferable to finding out the planning did not work in the Courts.

Boyle v HMRC: Crack down on Payroll Tax Avoidance Scheme Continues

In the recent Autumn Statement, George Osbourne announced several governmental counter-avoidance measures that confirm that the net is closing in on those who subscribe to tax avoidance schemes. A failed tax avoidance scheme marketed by Consulting Overseas Limited has been identified by a recent First-Tier Tribunal case of Boyle v HMRC. HMRC has vowed to pursue all other subscribers to the same scheme that Mr Boyle was involved with and will also target others who have used similar schemes to avoid tax.

Mr Boyle was a contractor who originally worked for a company called Sandfield Systems Limited (SSL) and subsequently worked for Sandfield Consultants Limited (SCL) when a significant fall in his income was noticed by HMRC. It is important to note that Sandfield Consultants Limited (SCL) was a company registered in the Isle of Man. The director of SSL was also the director of SCL and Consulting Overseas Limited (COL) which marketed the tax avoidance scheme. The scheme was marketed by COL to the employees as a remuneration package that could achieve income tax and national insurance contributions (NICs) savings.

The FTT found the conclusions of HMRC’s investigation to be correct. The significant fall in Mr Boyle’s income was explained by the fact that about 2/3 of the income generated by the taxpayer was withheld and then paid to him by way of a ‘loan’ made in Romanian, Byelorussian or Uzebekistani currency. When Mr Boyle entered into a contract of employment with SCL it was agreed that he would be paid a salary but he would also participate in the ‘soft currency loan scheme’ arranged by SCL to receive the remainder of his salary. All employees of SCL used the foreign broker Credex International SA, when taking out the loans in question. It was the currency trades organised by Credex that turned the earnings into what the scheme claimed to be “non-taxable foreign exchange gains”.

The FTT found that the loans were not genuine and also found no evidence to prove that the foreign currency ever existed or that Credex was a genuine dealer independent of SCL. Notably the FTT ruled that the monies which were allegedly paid to Mr Boyle as loans in foreign currency constituted emolument from employment/earnings under s.173 ITEPA 2003. Furthermore, according to s.188(1)(b), as the ‘loans’ that were made were essentially written off, the amount written off is deemed to be treated as earnings from employment for that year and therefore should have been subject to income tax and NICs. They also ruled that Mr Boyle was aware that the loans were a means of receiving his income to avoid tax.

The FTT also stated that even if they were wrong to state that the loans were emoluments of his employment, Mr Boyle should be liable to tax under the transfer of assets provisions so there would not be any further grounds for appeal. The numerous appeals raised by Mr Boyle including his claim that he was entitled to credit for income tax which ought to have been deducted by SCL, were rejected in their entirety. It was found that Mr Boyle was liable to income tax for the years 2001/02, 2002/03 and 2003/04 in respect of monies he received as employment income.

This case demonstrates that efforts to avoid tax using offshore vehicles are being increasingly targeted in the crackdown against tax avoidance. This case also suggests that schemes where employees receive ‘loans’ as a form of payment are also being treated with suspicion. It is estimated that more than 15,000 people have used schemes similar to Mr Boyle and that the pursuit of the outstanding tax and national insurance contributions associated with these schemes will amount to over £400 million.

With the courts continuing to find against avoidance schemes, and the host of new regulations designed to increase the pressure on such schemes, the viability of such schemes is seriously called into question. Genuine tax planning, rather than convoluted schemes, appears to be the way forward and Eaves and Co are here to help.

Hossein Mehjoo v Harben Barker: Professional Negligence and Tax Planning?

The recent High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, regarding specialist tax advice.

 

According to some media reports, the case means that accountants are required to advise on complex tax avoidance schemes, but the reality is slightly more subtle than that.

 

Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including his first tax returns in the 1980s.

 

The case therefore revolved around whether the accountants had been negligent in failing to notice his non-domicile status and the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs.

 

In October 2004 his accountants considered the CGT position on Mr Mehjoo selling his shares in a company. Neither the firm’s general practice partner, nor the tax partner appeared to have considered the non-domicile status or the impact this could have.

 

The accountants claimed that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was found to be not the case, in part due to the fact that they had provided such advice on a number of occasions without express instruction.

 

The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself.

 

Tax is complicated, and the ever increasing tax legislation means it is harder than ever to keep up-to-date.  The key message for accountants is that they need to know enough to know that there is a problem, and seek out relevant specialists to assist.  Please feel free to contact us if you feel you may need specialist tax advice for your clients.

UK-Swiss Tax Treaty – Swiss pay 500m Swiss francs over to HMRC

As part of the agreement between the UK and Swiss governments which recently came into force, the UK-Swiss Tax Treaty, in an attempt to reduce evasion in Swiss bank accounts the Swiss have paid over the equivalent of £342m to the UK.

The payment is the first instalment of the levy on bank accounts held in Switzerland by UK taxpayers, designed to cover arrears on previously unreported income.  The levy will apply to accounts in Switzerland unless the account holder allows the bank to disclose details to HMRC.

Current and future tax liabilities will be covered under the UK-Swiss Tax treaty and it is anticipated it will raise around £5bn in the next five years.  Prior years will be covered by the levy whilst future years will be covered by witholding taxes within the accounts in Switzerland.  In many cases, depending on the level of growth seen in the accounts, the levy under the treay can work out more expensive than other disclosure options, such as the Liechtenstein Disclosure Facility (LDF).

If you are interested in more details on the UK-Swiss Tax Treaty or the Liechtenstein Disclosure Facility, please contact us or take a look at our UK-Swiss Tax Treaty page.

Deadline to opt out of Child Benefit charge – High Income Child Benefit Charge (HICBC)

The High Income Child Benefit Charge (HICBC) starts on 7 January 2013. The new charge will be imposed if a taxpayer’s, or their partner’s, income is more than £50,000 in a tax year, where they or their partner are in receipt of the child benefit.

Taxpayers earning more than £60,000 and in receipt of child benefit only have until 6 January 2013 to opt out of receiving the benefit, to prevent the benefit from being clawed back at the end of the tax year.

Taxpayers with income of more than £60,000, will incur a tax charge of 100% of the amount of Child Benefit. Those with income between £50,000 and £60,000 will incur a proportionate charge.

It is therefore now the time to decide whether to keep receiving Child Benefit and pay the charge through Self Assessment, or stop receiving Child Benefit and avoid the later charge.  Care should be taken, however, as receipt of Child Benefit can currently be used to determine qualifying years for the state pension for those taking time out of work to bring up children.

In addition, if income is less than £60,000, the tax charge will always be less than the amount of Child Benefit, so a couple could lose money to which they are entitled if they choose to stop receiving Child Benefit and their income dips below the £60,000 mark.

If you keep receiving Child Benefit and you or your partner earn over £50,000 then you should lay plans of how to pay the benefit back and make sure that you file a tax return for the year in question.

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.