Have you missed the Square Circular? Better not answer that. We should have gone to press a few weeks ago. We were waiting for HMRC’s response to the Making Tax Digital consultation and that wasn’t published until midday on 31 January. A good day for burying bad news?
There’s quite a bit about Making Tax Digital in this Square Circular plus a few other points which we hope you’ll find of interest.
If you want more details about any of the matters we’ve mentioned in this issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.
We suppose that, by now, the Autumn Statement at the end of November is more history than news. But have you got over the exciting bit; no more Autumn Statement and no more Spring Budgets. Instead it looks like we’re going to have an Autumn Budget and a Spring Statement. That’s a radical change. Having said that, going back in time, we probably had an Autumn Budget and Spring Statement at some stage. Any historians out there?
Then, in December, we had the draft legislation for next year’s Finance Bill. More small print to read. And bringing things right up to date there’s the Making Tax Digital saga, more of which, later.
Closer to home new faces in the office are Robert Wilson in our tax department and Lauren Leslie in our payroll department. And a more familiar face is Emma, our audit manager. Remember Emma? She’s back after what those of us in the office call a twelve month holiday, officially known as maternity leave. We’re delighted she’s back.
Finally, just to round off the “new faces in the office” story, can we introduce you to Alex Savage. That’s Alex as in Alexandra not Alexander. Any advice needed on pensions, investments, mortgages etc. you need to speak to Alex. She’s the new Pareto person in our office. Paul Stones is still around for those who know him. It’s just that he’s got so busy he needs reinforcements.
Come on, by now, you must know what those letters stand for. Making Tax Digital. Perhaps the biggest change since 9 January 1799 when Pitt the younger originally introduced income tax to fund the war against the French. All right; maybe a bit of hyperbole but possibly not far wrong.
The story so far. HMRC made radical proposals to bring our income tax system into the 22nd Century (not 21st). A few months ago they issued half a dozen MTD Consultation Documents and invited responses. They got loads of responses including a not very happy one from the Treasury Select Committee. On 31January they issued their response to the responses. We are just picking out below the main points:
- Make no mistake; MTD will happen. Most seemed to agree that the tax system has to be fit for purpose for the future.
- Having said that, most opinion seemed to think that HMRC was rushing things and that the programme of starting in April 2018 and going 100% digital by 2020 or 2021 was over-ambitious. No change there. HMRC are sticking to their programme. They will begin piloting digital record keeping and quarterly updates from April 2017 to April 2018 for some businesses with a view to starting the programme proper in April 2018.
- When MTD was first mooted the big outcry was about having to touch base quarterly with HMRC with a final account at the end of the year. No change there. It looks like quarterly reporting is still on the cards with year end activity having to be reported to HMRC either by ten months after the year end or 31 January, whichever is sooner.
- There was some concern about businesses having to use MTD compliant accounting software. Apparently, most businesses use spreadsheets for record keeping and can continue to do so but will probably have to combine the spreadsheet with software to comply with MTD.
- There was some concern that the £10,000 threshold for quarterly reporting was too low. The jury’s still out on that one. We may know more by the summer.
By now, you may be getting the impression that MTD is a serious business. Don’t worry, we’ll keep you informed of developments as the sword of Damocles comes nearer. Meanwhile, any suggestions what the letters MTD stands for as an alternative to Making Tax Digital?
LAST CHANCE SALOON
An ongoing story over the past few years has been an increased level of HMRC investigation into offshore activities accompanied by disclosure facilities enabling a naughty taxpayer to come clean without suffering penalties that were too severe. That’s the carrot, rather than the stick. Perhaps the best known is the Liechtenstein Disclosure Facility, the LDF. Activities in Switzerland, Isle of Man and the Channel Islands also spring to mind. And don’t mention Panama. We don’t yet know what’s to come out of the Panama papers but understand that there are a few handfuls of UK companies to be investigated for tax irregularities.
With the closure of disclosure (yes, you read that right) facilities we’ve finally come to the mother of all disclosure facilities. It’s the worldwide disclosure facility called, yes you guessed it, the WDF. That’s an original-named title.
The WDF pretty much does what it says on the tin. It invites taxpayers to review their offshore tax affairs and to correct any unpaid tax liabilities by September 2018. Only it doesn’t offer any carrots such as reduced penalties or immunity from prosecution although prosecution may be unlikely if there’s a voluntary disclosure. But there is a stick. If irregularities which should have been disclosed come to light after 30 September 2018 – well, you’ll wish you’d taken advantage of the WDF.
It may be an idea for anyone with offshore interests to review their position with one of our tax team just to be absolutely sure there are no problems.
INCORPORATING A PROPERTY PORTFOLIO
Square Circular has mentioned this in the past but it’s now getting to decision time. Not just because we’re getting close to April 2017 which is the date of the first phase of the main change but also because of something the Chancellor mentioned in his Autumn Statement.
The big issue is the plan to eventually restrict tax relief on mortgage interest for the higher rate taxpayer to 20% but to continue taxing him a higher rate on the income (less expenses, except mortgage interest). The plans have even been challenged by Cherie Blair on the basis that it puts individual landlords in an unfair position compared to corporate landlords. All to no avail. So, one solution is to incorporate your property rental business.
We’ve explained in the past that this isn’t a simple step. The problem is that to get CGT “breaks” the property rental activity has to be a business. It has to be your commercial activity and not just enjoying the rental income from one or two properties the management of which you leave in the hands of a property agent. It’s not always easy to say whether you’re carrying on a business activity or just exploiting your ownership rights over property so, whatever you do, don’t go ahead without first getting advice from one of our tax team.
So what’s inspired us to tell you about all this yet again. True there’s been no change in the rules – yet. But the Chancellor did mention in his Autumn Statement that the trend towards business incorporation is taking money away from the Exchequer and that there would be a consultation on the incorporation question. It could be – and we’re not saying it will be – a matter of time before the CGT concession of holding over from properties into shares is taken away. It’s not beyond the bounds of possibility that a few months’ time could see the last chance to follow this incorporation path.
A BIT MORE ABOUT RESIDENTIAL PROPERTIES
What’s the current rate of CGT for a higher rate taxpayer. Easy question – 20% of course.
Yes, but what if the asset sold is a residential property (which isn’t your principal private residence). Ah, that’s different. That’s at 28%.
Suppose you sell a property for say £500k, make a gain of £200k and reinvest the £200k gain into a qualifying Enterprise Investment Scheme (EIS) company. The £200k gain would be deferred until the EIS shares are sold. If you hang on to the shares for three years and sell them say for £230k, the £30k gain on the shares is free of CGT while the £200k deferred is taxed at 20%.
It goes without saying that EIS companies may be risky investments and you should take the proper investment advice before taking the plunge. But all things being equal, it does seem a bit of an, as yet, unplugged loophole, to convert a 28% taxable gain into a 20% gain.
Earlier this month Pimlico Plumbers lost a case in the Court of Appeal. It wasn’t a tax case. It was an employment law case. The plumber who worked for Pimlico for six years until 2011 said he was Pimlico’s employee. Pimlico said he was an independent contractor. Obviously, independent contractors don’t have the employment law protection that employees have. That’s what the case was about but you can also see that it’s going to have tax implications as well.
Pimlico said they might appeal. That would put them in the same boat (or should that be taxi?) as Uber. Again it was an issue of employment rights. A tribunal ruling about four months ago in favour of the employment rights of the Uber workers has got HMRC very interested. Uber, of course, are appealing.
By coincidence, a case before the Tax Tribunal about sub-contracted haulage drivers was recently reported. It was also a question of employment status and it went in HMRC’s favour. Not high profile like Pimlico or Uber. But a case, just the same.
In reality, nothing’s changed. The criteria for determining whether a worker is an employee or is self-employed haven’t changed, and, as always, it all depends on the facts. It’s just that every now and then the spotlight swivels round and shines on that particular area. Whether you’re a principal or worker, if you’d like one our tax team to throw some light on your arrangements before the spotlight shines on you please do feel free to get in touch.
From the church notice board.
“The eighth-graders will be presenting Shakespeare’s Hamlet in the Church basement Friday at 7pm. The congregation is invited to attend this tragedy”.