tax times: winter 2012

The country should have a taxsystem that looks like someonedesigned it on purpose.

William SimonUS Treasury Secretary 1974 to 1977

”“

TAX TIMES | WINTER 2012HELP WITH COMPLEX BUSINESS AND PERSONAL TAX ISSUES

Welcome

The information contained herein is of a general nature and not intended to address the circumstances of any particular individual or entity. Whilst we have made aneffort to provide accurate and up to date information, it is recommended that you consult us before taking or refraining from taking action based on matters discussed.© 2012 Price Bailey. All rights reserved. For more information about Price Bailey and regulatory details please visit www.pricebailey.co.uk/legal

BusinessINFORMING, DEVELOPING AND SUPPORTING SMES

3 Parallel company and partnership structures

3 Real Time Information

3 National Minimum Wage

CorporateENABLING, GUIDING AND OPTIMISING BUSINESSES

4 Dilapidations

4 Capital payments for leases

5 Share schemes update

6 Patent Box

7 Reverse charging VAT

Private ClientDEFENDING YOUR FINANCIAL ASSETS FOR THE FUTURE

8 Income tax loss relief capping

8 Reminder: Income tax self assessment late filing penalties

9 New Statutory Residence Test

10 Proposed new taxes on residential property

11 Changes to child benefit

12 Reduction in additional tax rate

2 Tax Times

Parallel company and partnership structures

The First Tier Tribunal found in the recent case of Cooper that cars paid for by a partnership and used by the partners were nevertheless taxablebenefits provided by their parallel company.

The partnership’s sole customer was a trading company under the partners’ control, a useful tax planning strategy

for top rate taxpayers as long as there is a valid commercial reason for the partnership’s existence. The Cooper

partnership had been providing services to the company, and it incurred costs in providing cars for its partners’

business and private use.

The company and the partnership described the money paid by the company as ‘management expenses’. The

tribunal determined that as the partnership existed for no other reason than to provide services for the company, the

cost of the cars was ultimately borne by the company as a benefit for their employees. The company was required to

reclassify the applicable portion of its management expenses paid to the partnership to ‘motor expenses’ paid for the

directors’ private use of the cars and the directors were taxed accordingly.

What are the implications?We should expect HM Revenue & Customs (HMRC) to pay much more attention to parallel company and partnership

structures than before. In weak cases liabilities may even be applied retrospectively, resulting in significant tax bills.

If you operate this kind of structure for this purpose, you should review its function sooner rather than later.

Remember, it is not what expenses are called or how they are categorised that determines their tax treatment but the purpose for which a cost is incurred.

BusinessINFORMING, DEVELOPING AND SUPPORTING SMEs

Real Time Information (RTI)Don’t forget that RTI will be phased in from April 2013 and by

October 2013 it will be mandatory for all employers to report

their PAYE information in real time. If you are an employeror draw a salary from your business you will be affected.

Our last edition of Tax Times and our most recent edition of

our Pay Times newsletter addressed RTI in detail. You can

access these newsletters on our website at:

www.pricebailey.co.uk/resources/newsletters

National MinimumWageNew rates for the national minimum

wage took effect on 1 October. The

hourly rate of the national minimum

wage for adults over 21 increased to

£6.19 and the rate for first year appren-

tices or apprentices younger than 19

was raised to £2.65.

Tax Times 3

DilapidationsIt is bad enough having to pay large amounts of money when a lease comes to an end, just to leave the building. But it

gets even worse if there’s no tax relief for your payment. Here are the basic rules.

n Making good and other dilapidation rectification worksn Not all building work is repair.

n Much is improvement or alteration or removal or reinstatement thereof, all of which are capital and none of

which is tax deductible.

n There may even be difficulties getting plant and machinery allowances for reinstated services etc.

n Payments in lieu of dilapidationsn A payment instead of building work is not building work. Therefore if you pay the landlord instead of doing

the work, it’s not classed as ‘repairs’ and there may be no tax relief.

n Landlord’s contributionsn A landlord agreeing to do something for a tenant can be taxable on the tenant as income.

Capital payments for leasesThe tax treatment of payments for leases is usually very complicated, and there are many opportunities for it to go

wrong. The table below is a useful indicator.


4 Tax Times

Sum Payable by: Payment for Grant or variation: Payment for Termination:

Landlord - investor (or tenant if subletting) Capital if lease exists at sale Capital?

Tax nothing?

Developer Trading expense Trading expense

Tenant Part capital Part expense HMRC will say no relief

Sum Receivable by:

Landlord Part capital Part expense Income or capital

Developer Income Income

Tenant/subtenant Income but spread over lease Capital

NB: the above doesn’t deal with VAT – that’s another complex area!

Share schemes update

A quick round up of recent share scheme news:

On 16 June 2012, the Enterprise Management Incentive (EMI) Scheme option limit increased to £250,000 from

£120,000. However, the total limit across all employees is still capped at £3,000,000 share capital so maximum

options can now only be granted to 12 employees.

Whilst the 5% minimum holding for Entrepreneurs Relief (ER) has been relaxed, the holding period of one year has

not, so employees who want any chance of ER have to go ‘on risk’ at least a year before an exit event. This means

‘exit-only’ share options will not qualify for ER. Acquiring companies might therefore consider allowing target EMI

option holders to roll over their options into the acquiring company, then exercise, hold for one year, and finally

exit with the benefit of ER. This can apply even if the acquiring company is not itself allowed to use EMI.

The benefits of an EMIUnder a share option scheme an employee may buy shares in the future at a known price. This gives them an

‘upside only’ opportunity. If the share value goes up, they buy. If it doesn’t, they don’t. If the terms are established

under an approved EMI share option scheme and the price is set at or above fair market value at the date of grant,

there will be no income tax or national insurance payable on the grant or on the exercise of the option.

When the shares acquired through exercise of the option are sold, the individual will be liable for capital gains tax

on any profit charged at 18% or 28% for a higher rate taxpayer. In addition, there is an annual tax free capital

gains tax allowance (£10,600 for 2012/13). ER may be available in certain circumstances to reduce the rate of tax to

10%. This compares very favourably to income tax rates of up to 50% for 2012/13.

If the exercise price is set below fair market value at the date of grant (with agreement from HMRC), income tax

will be payable at exercise equal to the difference between the exercise price and fair market value.


Tax Times 5

Patent Box

HMRC has recently published guidance on the new Patent Box regime thatwill come into force from 1 April 2013.

What is it?The Patent Box regime will allow companies to apply a lower rate of Corporation Tax to profits earned from

patented inventions and certain other innovations from 1 April 2013.

This lower rate of tax is 10% to be phased in from 2013 to 2017. Companies may elect to join this regime but there

is no box to tick on the Corporation Tax Return; instead the reduced 10% rate is achieved by subtracting an additional

trading deduction from Corporation Tax profits.

Who qualifies?The company must own or exclusively licence in patents granted by the:

n UK Intellectual Property Office

n European Patent Office

n certain countries within the EEA

n supplementary protection certificates

n plant breeders’ rights and community plant variety rights

and the company must have undertaken qualifying development for the patent by making a significant

contribution to either the creation or development of the patented invention or a product incorporating the

patented invention.

What is qualifying income?The relevant IP income must come from at least one of the following:

n selling patented products (i.e. sales of the actual product or products incorporating it)

n licensing out patent rights

n selling patent rights

n infringement income

n damages, insurance or other compensation relating to patent rights.

There can also be benefits if you use a manufacturing process that is patented.

What should you do now?The focus for patent holders should now be to get their house in order. You need to ensure you are aware of:

n the costs you are incurring for such patents

n the true income you receive for them, and

n your proper legal title to them.

It may seem like April 2013 (if not April 2017) is a long way off but, if eligible, the applicable Corporation Tax rate is

a lot lower than the large company rate of 23%.

Related reliefsThe Patent Box regime does not change the company’s eligibility for R&D tax credits but rather operates alongside

it – you should still explore whether R&D relief is available to you.


6 Tax Times

Reverse charging VAT

Normally the supplier is the person who must account to the tax authoritiesfor any VAT due on a supply. However, in certain situations, the position isreversed and it is the customer who must account for any VAT due.

Purchasing services from abroadServices from an overseas supplier will usually be obtained free of VAT, so what is known as the ‘reverse charge’

procedure must be applied where the buyer, as the recipient of the services, must also act as the supplier. The

recipient of the services must account for output tax on the full value of the supply received and (subject to partial

exemption and non-business rules) include the VAT charged as input tax. What this means is that the reverse charge

has no net cost if the buyer can attribute the input tax to taxable supplies – if so, it can be reclaimed in full. If not,

the buyer is put in the same position as if the supply was from a UK supplier rather than from one outside the UK.

This creates a level playing field between purchasing services from the UK and overseas.

Purchasing goods from another EC Member StateSomething similar to reverse charge applies to goods purchased from other Member States. These are known as

acquisitions; if they come from outside the EC they are known as imports. The full value of the goods is subject to

output tax and the associated input tax may be recovered by the acquirer if the goods are used for taxable

purposes. It might also be necessary to complete an Intrastat Supplementary Declaration if acquisitions of goods

from the EC exceed an annual amount – currently £600,000.

DeregistrationAny goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are

subject to a self-supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied

to the business by the business and output tax is due. However, in these circumstances it is not possible to recover

any input tax on the self-supply.

Flat Rate SchemeThere is a self-supply of capital items on which input tax has been

claimed when a business leaves the flat rate scheme (and remains VAT

registered).

Mobile phonesSupplies of mobile phones and computer chips valued at £5,000 and over

which are made by one VAT-registered business to another are subject to

the reverse charge. This means that the purchaser rather than the seller is

responsible for accounting for VAT due. This was implemented in an

attempt to counter missing trader intra-community fraud ‘MTIC'.

Tax Times 7


Income tax loss relief capping

In July 2012 the Treasury and HMRC published a consultation documentfor proposals to cap certain currently uncapped tax reliefs.

The caps will take effect on 6 April 2013. The following reliefs – some widely used and some unusual – will be

limited to the greater of £50,000 or 25% of income:

Widely used:

n trade loss relief against general income

n early year trade loss relief

n post cessation loss relief

n share loss relief

n qualifying loan interest.

Unusual:

n property loss relief against general income

n post cessation property relief

n employment loss relief

n former employees deduction for liabilities

n losses on peculiar loans (relevant discounted securities).

Relief for charitable gift aid will not be capped.

What this means for youIf you claim any of these reliefs, it may be advantageous for you to consider ways of realising losses in 2012/13 in

order to obtain full tax relief including bringing forward the end of a loss making accounting period. Alternatively

if it is known that a loss will be realised after 2013/14, it may be possible to defer income until that tax year so that

the 25% cap is higher.


8 Tax Times

Reminder: Income tax self assessment late filing penaltiesYou can no longer avoid a penalty for late filing of your tax return by ensuring your tax billis cleared by 31 January.

HMRC introduced new penalties that apply to all self assessment tax returns from 2010/11 onwards.

If you are late filing a:

n Paper return due on 31 October 2012

n Online return due on 31 January 2013

then you will be liable for a £100 penalty. Daily penalties of £10 per day will also be imposed if your

tax return is still outstanding three months after the filing date.

New Statutory Residence Test

The government's recently confirmed changes to the Statutory ResidenceTest (SRT) will be the most significant change to the UK's tax residencerules in the last hundred years.

The new rules will apply from 6 April 2013 but can be applied to earlier years at the taxpayer’s option.

The three testsThe basic structure of the SRT is a three part test, where subsequent parts only need to be completed if the criteria

for the previous part are not met.

1. Part A is the conclusive non residence test, and is largely based on the number of days spent in the UK during

the tax year. If you have been resident for only one or none of the last three tax years and have not exceeded

the day count for the current tax year then you will NOT be considered a UK resident for tax purposes.

2. If you don’t meet the criteria then you will need to look at Part B, the conclusive residence test, which

considers day count, terms of your employment and whether your only or all your homes are in the UK. If you

meet one or more of the criteria in this part then you WILL be considered a UK resident for tax purposes.

3. You will need to consider Part C, the other connecting factors and day counting test, if you have not been

conclusively deemed a non-resident by Part A or a resident by Part B. This test looks at your ties to the UK

including where your close family are resident, whether you have available accommodation, the number of days

you spend working in the UK and the amount of time you have spent in the UK in the previous two tax years.

The number of ‘ties’ you have to the UK determines the amount of time you can spend in the UK during a tax

year in order to avoid resident status.

Things to consider n Both Part A and Part B are based primarily on days present in the UK. It is important that you have an

appropriate way of recording the actual days you have spent in the UK and whether they have been ‘workdays’

or not. If you can anticipate the number of days you have spent in the UK or if it’s likely to change you should

contact your tax adviser for advice.

n Where you are not automatically resident or non-resident, you will have to consider the range of Part C

connecting factors. Are you able to control these factors and thereby influence your likely residence status prior

to April 2013?

n The SRT is designed to make UK residence ‘more adhesive’. If you are considering leaving the UK it may be

easier to arrange in the current tax year before the changes come into effect.


Tax Times 9

10 Tax Times

Proposed new taxes on residential property

Provisions were announced in the 2012 Budget affecting the acquisitionand ownership of high value UK residential property (worth more than£2m) by ‘non natural persons’ (essentially companies, partnerships withcorporate partners and certain collective investment schemes) which willbe enacted by the Finance Act 2013.

SDLT Annual Chargen The SDLT annual charge will apply from 1 April 2013 to residential properties valued at £2m or greater.

n The definition of residential property will follow the same definition as for the 15% rate of SDLT. In unusual

cases (such as hospitals, student accommodation and care homes) careful consideration will need to be given to

ensure that such properties fall outside the residential property definition.

n The entities affected by the annual charge will be the same as those to which the 15% rate of SDLT applies.

n The annual charge will initially range from £15,000 (for properties valued at £2m-£5m) to £140,000 (for

properties valued at over £20m) and will depend on the value of the property at 1 April 2012 or, if purchased

later, the value on acquisition. This value is intended to apply for five years from 1 April 2013 to 1 April 2018, at

which point the valuation will be updated to that of the property at 1 April 2017.

n The annual charge, however, will be updated annually based on the consumer price index of the previous September.

Capital Gains Tax (CGT)n From April 2013 the CGT charge will apply to the sale of residential property by any entity that is not an

individual (including trustees). It is intended to apply irrespective of the use to which the residential property is

put (meaning that it will also apply to commercially let residential property). The charge will also apply in cases

where shares in a property owning company are sold.

n In order to maintain consistency with the SDLT charge, the CGT charge will apply only where the value or

consideration for a disposal exceeds £2m. Furthermore, the definition of residential property for CGT purposes is

intended to mirror that for SDLT purposes.

n The CGT charge will apply to the total gain accruing on a disposal of a property (and not the proportion of the

gain accruing after implementation of the new charge in April 2013).

n The rate of tax has not been set for the purposes of the CGT charge and will be confirmed by the 2013 Budget.

What next?If enacted these changes to the UK tax regime will be hugely significant and will impact the way in which non-UK

buyers of high value residential property structure their future acquisitions. They demand detailed consideration as

to whether existing offshore structures implemented under the old rules remain appropriate vehicles through which

to hold residential property. If you currently indirectly own or are about to acquire high value UK residential property

you should contact us.



Tax Times 11

Changes to child benefit

From 7 January 2013 the government is introducing a new income taxcharge called the High Income Child Benefit Charge (HICBC) applicable tohouseholds where the highest earner receives more than £50,000 per year.

What are the implications?If this applies to your household, you may need to consider whether claiming the child benefit is still worthwhile. If

you decide it is and are the household’s highest earner, it may mean you will have to complete a self-assessment tax

form every year that you fit this criterion.

So if I earn more than £50,000, do I lose child benefit entirely?No - if the highest earner in your household earns between £50,000 and £60,000 then your benefit will be reduced

on a sliding scale. If the highest earner receives £60,000 or more however then you will lose it entirely.

Does this apply even if it’s my partner that claims child benefit, not me?Yes – the HICBC is assessed per household that claims child benefit, irrespective of who is the claimant and who is

the high earner.

For the purposes of the HICBC, your partner is considered to be:

n your spouse, if you are not separated, or

n your partner, if you are living together in a committed domestic relationship.

What if we claim child benefit and both of us are over the threshold? Will the charge apply to both of us?No – the charge will only be applied once to the household member with the highest income.

What if there is a change in our circumstances?In situations where a relationship breaks down and you are the high earner and are not claiming child benefit, the

HICBC will only apply to that period of time you were in a relationship.

When will the charge take effect?The HICBC will apply from 7 January 2013, but households will be assessed for their eligibility based on income for

the entire 2012/13 tax year so you need to be aware of the rules now.

What do you need to do?If you’re concerned about how this might affect you or think you need advice on your personal situation, we

suggest you contact us as soon as possible in order to ensure you’re prepared in time.

12 Tax Times


Contact usFor specific advice contact your usual clientservice team or contact the tax helpdesk:

T: +44 (0)1223 507630

E: [email protected]

W: www.pricebailey.co.uk/tax

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Reduction in additional tax rate

From 6 April 2013 the rate of income tax for those with a taxable incomeof £150,000 or more reduces from 50% to 45%. If this applies to you itmay be beneficial to defer income into the next tax year in order to benefit from the lower tax rate.

The amount you stand to save by implementing deferral correctly could be significant. Items include:

n salary

n annual cash bonuses

n exercise of share options or vesting of other long term incentive awards

n dividends.

When contemplating deferral, you will need to take into account:

n relevant tax rules, including those related to earnings and entitlement

n the approach you need to take in order to ensure the deferral is enacted in a suitable manner

n past practice

n contractual terms

n disclosure.

If you are affected by the tax rate reduction and are considering exploring options for deferral we recommend you

seek advice at the earliest opportunity.

tax times: winter 2012

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