Finance Act 2016: The Devil is in the Detail

The Finance Act 2016 has resulted in a whole raft of taxation changes for British businesses and their professional advisors.

Pete Miller, tax expert with The Miller Partnership, looks at the wider implications of the Act’s new anti-avoidance measures and explains what the new legislation might mean for your business.

He also takes a more in-depth look at how the new tax rules will affect stamp duty, Patent Box and Entrepreneurs’ Relief.

Changes to Transactions in Securities:

HMRC has extended the reach of the transactions in securities rules to counter what it regards as an income tax advantage when you take money out of a company in such a way that you pay capital gains tax at 10% or 20%, instead of income tax on dividends, at up to 38.1%.

This change to TIS – and what it means for insolvency practitioners as well as businesses – was highlighted in our recent newsflash.

From April 6 2016, TIS rules potentially apply if you liquidate a company – which you might do if you have sold the business and don’t need the company any more.  If these rules do apply to you, it means HMRC can charge income tax as if on a dividend, instead of on capital gains tax.

HMRC keeps telling us that it does not intend to use these rules in a ‘normal’ liquidation, whatever that is.  But we cannot rely on these statements, so we strongly recommend that you ask HMRC for a clearance before your company is liquidated. If you are an adviser, it may well be that your professional indemnity insurers would expect you to apply for these clearances as a matter of course.

Tax law says that HMRC must answer these clearance applications within 30 days and we are very experienced at preparing them, so please give us a call.

Of course, this change means that HMRC is going to have to cope with tens of thousands more new applications. This bureaucratic headache for our already over-stretched Revenue is among the concerns the professional tax community shares in respect of changes implemented by the Finance Act 2016.

TAAR

The Government’s new Targeted Anti Avoidance Rule (TAAR) is designed to prevent ‘phoenixing’ – the practice where shareholders receive capital distributions on the winding up a company, then run a similar business in some other form. Examples of this would include starting to carry on the same business after winding up your previous one or if you continued to trade through another company.

If you are caught by TAAR, then you may well find that your capital distributions are taxed as dividends at a tax rate of up to 38.1 per cent, rather than as capital gains which may attract entrepreneurs’ relief at much more palatable 10 per cent.

The crux of the new rule is whether you are trying to avoid income tax by phoenixing the business, which only you or your clients can decide.

Crucially, there is no clearance for these new rules, so under self-assessment you and your clients will have to decide whether the new rules apply. This carries the threat of having to pay extra tax and penalties if you get it wrong.

While this is new legislation, we have many years’ experience dealing with these motive-based tests in the tax legislation, so if you’re worried, please call!

Changes to stamp duty

Another new rule came into force on June 29 2016 which makes stamp duty chargeable in many situations where you put a holding company on top of an existing company in a share exchange transaction.

However these regulations relating to stamp duty should only be applicable in certain circumstances.

If the new holding company issues shares of the same class and in the same proportions, as it usually will, there should not be a stamp duty charge.

This is because the new rule is intended only to impose a charge where a takeover is intended and stamp duty is otherwise avoided.

But the way the new rule is worded means that it also catches a number of normal commercial transactions, such as certain demergers and sales where stamp duty is payable in the normal way. These are clearly not the intended targets.  As a result, there is now a real possibility of double taxation in completely inoffensive transactions.

We have suggested to HMRC that this new rule needs revisiting, so that it targets only the intended transactions and does not impose a double tax charge.  Unfortunately, any changes must wait until Parliament returns from its summer recess in September.

If you are relying on this relief, however, please ring or email to see if we can help.

Patent Box

Another tax regime which has been somewhat revised by Finance Act 2016 is Patent Box, the initiative aimed at rewarding and encouraging innovation among UK businesses.

First introduced in April 2013, Patent Box effectively offers Britain’s entrepreneurs a 10 per cent cut in corporation tax on the income they received from their patents. However, for a number of reasons, calculating the relief has become much less straightforward.

Some of the changes to Patent Box have been implemented because of objections from other EU member States (actually, just Germany) and also stem from the international anti-avoidance initiative, the Base Erosion and Profit Shifting (BEPS) project.

Hypothetically businesses paying £100,000 of corporation tax, can, through Patent Box, make savings of around £50,000.

However, as part of the Finance Act 2016, the rules have now been modified to incorporate new ‘nexus’  calculations which link research and development spend directly to patents.

Under the old regime, it was irrelevant who undertook the original research resulting in the patents. But, in order to satisfy the revised rules, Patent Box claimants must now prove that they did the work themselves or paid for it to be done by somebody else.

Patent Box relief under the new regime will often need separate calculations of the profits made by each individual patent or product, which will hugely increase the complexity of the calculations.

These tough new regulations have caused UK entrepreneurial companies to re-evaluate their corporate structures – and I’m sure that all the red tape will have put off some smaller businesses from pursuing Patent Box.

It’s not been made any simpler by the 71 amendments to the draft legislation that were passed by Parliament in June!  So we are all still trying to make sense of the detail of the new regime.

In the meantime, businesses who lodged their patent application before  July  1 2016, or who already hold a patent, have two years (until June  30 2018) to opt into the old, much less complex, regime, so it is worth making the most of Patent Box’s potential tax benefits.

If you or your clients are exploiting patents that they own or license, call us to see if they can claim the patent box relief.

Entrepreneurs’ relief

Although many of the changes implemented by the Finance Act 2016 are indeed onerous, it is not all bad news.

Thanks to the collaborative approach taken by the tax community and HMRC – and following lengthy negotiations – some of the worst excesses of last year’s Finance Act have now been rolled back.

Last year HMRC made a number of changes to Entrepreneurs’ relief in the Finance Act 2015, which, although intended to combat avoidance, were so poorly targeted that many commercial structures were affected.

Under those changes made in the Finance Act 2015, entrepreneurs’ relief was not available for a sale of a business by a sole trader or a partnership to a company owned by a relative.

Thankfully this has now been amended, so that you can sell your business to a relative through a company and still claim entrepreneurs’ relief.

Additionally entrepreneurs’ relief was not available where the trade was carried on as a joint venture or a corporate partnership.

This has since been amended so that the shareholders of the parent or partner company can now claim relief, as long as their interest in the underlying trade is at least 5%.

And, under last year’s rules, the relief for associated disposals was often not available when shares or partnership interests were sold to family members – a particular problem within the farming community.  This aspect too has been revised to prevent an inadvertent barrier to family successions.

All of the changes relating to this relief have been backdated to the dates that the original changes were effective.  This is an excellent example of HMRC and the tax profession working together to understand each other’s positions and coming up with workable solutions to these problems.  It’s a pity that the initial changes were not drawn up in this way, which would have saved a lot of time and trouble on all sides, but all’s well that ends well.

Having been closely involved with the new amendments, we are extremely well placed to help you with your entrepreneurs’ relief questions.

For more information and advice on the Finance Act 2016 and how it affects you, please contact Pete Miller on 0116 208 1020

‘Slaughter’ warning – Leicester Mercury

Pete Miller of The Miller Partnership commenting on Government proposals which would see accountants or tax advisers who help clients gain tax advantages that HMRC thinks were not intended by Parliament being fined up to 100% of the tax bill that had been avoided.

Read Pete’s comments here: https://www.themillerpartnership.com/wp-content/uploads/Leicester-Mercury-22.08.16.pdf

 

Posted in Uncategorized

Insolvency and Anti avoidance: What YOU Need to Know

Anti-avoidance rules in force from 1 April 2016 mean that the proceeds of a liquidation might be charged to income tax at up to 38.1%, instead of to capital gains tax at only 10%. We strongly recommend that all insolvency practitioners ask HMRC for a clearance before distributing any of the assets of a company in liquidation.

If you are an insolvency practitioner, or if you work with insolvency practitioners, you will need to get to grips with these new rules as soon as possible.

We have studied the regulations in depth and had meetings with HMRC about them. Most importantly, we are experts in obtaining clearances so contact us now on 0116 208 1020 for more help and advice.

A phone call to talk about the new rules will cost you nothing and could save your clients a fortune!

Ideas to improve the substantial shareholdings exemption

Pete was recently interviewed for an article on Accounting Web about the Substantial shareholding exemption (SSE) which provides a tax exemption for the gain made when a trading company (the investor) disposes of shares in a trading subsidiary (the investee).

Pete believes the SSE relief is defective in parts and the current consultation doesn’t address those failings.

See Ideas to improve the substantial shareholdings exemption for the full article

Tax evasion or tax avoidance: Did Prime Minister David Cameron conduct his taxation affairs improperly and just how much past tax should Google have paid in the UK?

The recent media furore resulting from the revelations in the leaked Panama Papers has again thrown up the big question of what constitutes tax evasion and, indeed, tax avoidance.

Firstly, it’s vital to make the proper distinction between evasion and avoidance: If you are hiding untaxed profits in an offshore account, deliberately concealing your profits from the tax authorities, then that constitutes tax evasion, which is a criminal act for which the perpetrators can be prosecuted. Avoidance is perfectly legal, regardless of what people think about it ethically.

Banking secrecy is not a crime, despite what the media might be suggesting.  Just because people choose to keep their money in offshore accounts does not mean they are doing anything unlawful or dodgy – in respect of their tax liability or anything else for that matter.

For the moment all we have is information about people using Panama for their banking affairs, not that they are avoiding or evading tax.

It is also inaccurate and wrong to suggest that David Cameron’s £200,000 gift from his mother is tax avoidance.  The Prime Minister has not broken any taxation rules by accepting the money, as there is no tax on gifts of cash, regardless of what certain newspapers have suggested, clearly in total ignorance of the capital gains tax laws.  And under the UK’s inheritance tax laws, tax-free gifts are permitted if the donor survives for seven years after making the gift.  Parliament says that this should be the case, so it is hardly tax avoidance to take advantage of those rules.

Despite the hard-hitting front page editorials following the Panama fall-out, every newspaper’s financial pages tell readers to make the most of the seven-year gift rules as part of sensible inheritance tax planning.

Perhaps the editorials should concentrate on the need for informed specialist tax planning to enable people to make some sense of an over-complicated tax system, rather than berating people who have done nothing wrong?

The media’s ill-informed take on the Panama situation, and indeed commentators’ reactions to the corporate taxation positions of major international businesses such as Google, have come as no huge surprise to me.

As a business tax adviser I have often found that journalists and politicians have a poor grasp of the way tax works.

When  Google  recently announced it was settling its past tax liability of £130 million, some raged that this sum was nowhere near enough, while  others tried to ‘guestimate’ the internet giant’s  UK taxable profits over the period.  This is a pointless exercise, as my understanding is that the settlement was a technical issue relating to employee shares and options, so it had nothing to do with Google’s international structure.

The issue with the international group structure, which is not in dispute for previous years, hinges on whether or not it forms a ‘permanent establishment’, the concept which determines what  proportion of company profits, if any, should be chargeable  to tax in other countries.  Under this rule, aspects such as sales and marketing through agents may be tax-exempt in certain circumstances.

Specifically, a dependent agent, i.e. one employed, in this case, by Google, does not create a taxable presence in the UK if those agents are only able to negotiate sales but are not allowed to conclude the contracts.

Google has always argued that its contracts are concluded in Ireland, which is where the taxable profits arise, however much of the negotiating is done in the UK by its agents.

While it has been suggested that Google’s contracts are actually concluded in the UK, we must assume that HMRC is satisfied that this is not the case.

Some people find this offensive, but, to use a football analogy, nobody suggests that a player is cheating by getting as close to being offside as he can, without actually being offside.

Let’s not forget that for every Google investing in the UK but able to take advantage of the permanent establishment rules, there are UK corporations investing into other countries and doing the same – paying UK corporation tax rates at 20%, rather than at those countries’ higher rates.

So, as far as we are aware, Google is complying absolutely with its UK tax obligations. Anyone who thinks that it should be paying more tax should remember that the same argument could be levied at the many UK multinationals investing outwards into other countries with higher corporation tax rates.

We should also bear in mind that Google has 2,300 employees in Britain earning on average £160,000 a year and all paying tax under the PAYE system.   With income tax rates of up to 45% and National Insurance contributions (employer’s and employees’) up to another 25%, Google is paying a substantial amount of tax in respect of those people.  So it’s not as though the company is not making a fairly major contribution to the UK economy.

As Google consumes services in this country, it also pays VAT at 20%.  VAT, National Insurance contributions and income tax are by far the three largest components of the UK’s tax take, so, while corporation tax is not insubstantial, it only makes up around 7 per cent of the total.

And despite comments to the contrary, companies are not morally obliged to pay tax. They are simply under a legal obligation to pay the tax levied under the law of each state in which they operate.

As Google and others have pointed out, if the rules on permanent establishments are not fit for purpose it is up to national governments, not the companies doing business here, to change them.

Both professionally and on a personal level I have had substantial input in feeding back to HMRC the tax sector’s reaction to recent anti-avoidance provisions.

As a member of the CIOT, and of the ICAEW Tax Faculty, and as an independent corporate tax consultant, I have asked HMRC to consider whether such measures are practical to operate, whether they will have the required impact and whether they are in fact fair.

In last year’s Budget,  for example, the Chancellor made  several changes  to entrepreneurs’ relief ‘to counter avoidance’  but  his  revised rules went  far beyond  their intended  targets and prevented  business owners  from passing businesses on to their families.  I was very involved in discussions with HMRC about this apparent attack on family businesses and it was gratifying to see that, thanks to our hard work, the rules were subsequently changed to hit only the intended targets.

All of this proves that we are more likely to have a coherent and sensible tax system if we put aside the hysteria about so-called avoidance – which often isn’t – and engage professionally with HMRC to get our tax legislation right.

Calling comedians… it’s time to stand up again!

All smiles after the event!  Pete Miller of The Miller Partnership celebrating with the winner of Leicester’s Comedy Festival Stand Up Challenge.  The Comedy Festival is now looking for a new cadre of business folk to step up to the challenge and deliver their own stand-up routine!

https://www.themillerpartnership.com/wp-content/uploads/Leicester-mercury-17.05.2016.pdf

 

Posted in Uncategorized

Revised changes to Entrepreneurs’ Relief are welcome while Budget’s latest anti-avoidance measures remain questionable

One of the most welcome business taxation measures in the March 2016 Budget is without doubt the Chancellor’s revised changes to Entrepreneurs’ Relief

As you will recall, corporate tax experts were concerned by the original ER changes in last year’s Budget which, although designed to ‘prevent avoidance’, also adversely impacted upon business owners’ exit strategies when selling to family members.

The 2015 changes went far beyond their intended targets and were widely seen as an attack on owners’ rights to pass on their trades to their families.

I was part of the team, representing both the Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW), that met to discuss the new rules with HMRC.

Happily, HMRC listened to our concerns and has, in this Budget, amended the new rules to hit only the intended targets. Additionally, the revised rules will be backdated to the time when they were first introduced.

This development is a victory for collaborative working and shows what can be achieved when tax advisers and their counterparts at HMRC come together to discuss difficult business taxation issues. Tax practitioners put in a lot of hard work to present their case, effectively working voluntarily, but the outcome was well worth the effort.

Another positive step for small business owners is the extension of Entrepreneurs’ Relief to external investors – i.e. non-employees of unlisted companies – as long as the investors subscribe for new shares and hold them for at least three years.  Making the use of company losses more flexible – probably as from 2017 – and cutting both corporation tax (from 2017) and business rates are also among the welcome measures for small businesses.

A reduction in Capital Gains Tax to 20 per cent is good news for everyone, although unfortunately it will not apply to residential property as the Government wants to encourage investment in trading companies. These CGT cuts may not have the desired effect though, as I’m sure people would rather invest in bricks and mortar if they can, than in unlisted companies which are far riskier.

Less happily, the Budget contains an increase in the tax charge on loans to shareholders and a raft of new anti-avoidance measures which will introduce instability and make life more confusing for the average business owner.  They will also result in greater complexity and higher compliance costs for everyone.

Whether HMRC will be able to bring in an additional £12bn through George Osborne’s anti-avoidance plan remains to be seen.  His estimates are usually way out and any extra tax collected is often relatively low so the merit of these latest measures is questionable.

Entrepreneurial businesses advised to apply for Patent Box before rule changes introduced

Entrepreneurial UK businesses who want to make the most of the Government’s Patent Box tax savings initiative should consider applying now before stringent new rules take effect this summer.

By joining the scheme before the end of June, they could avoid onerous red tape and still enjoy the benefit of paying less tax on the money earned from their patents.

As you will be aware, Patent Box, which was introduced in April 2013 to encourage UK technology innovation and entrepreneurship, effectively offers a 10 per cent reduction in corporation tax on income received from patents.

Hypothetically, this means that businesses paying £100,000 of corporation tax, could, through Patent Box, save themselves as much as £50,000.

The scheme has, however, recently been reassessed making the rules much tighter, so new entrants wanting to benefit from the existing regime need to apply before June 30 2016.

Under the current regime, it does not matter who carried out the original research leading to the patent.  From July 2016, however, new Patent Box claimants will need to prove that they did the research themselves, or paid for it to be done by someone else.

And claims will become more complicated to make, as companies will have to track their Patent Box profits on a patent-by-patent or product-by-product basis. Some historic R&D projects may also be subject to this bureaucratic new requirement.

Larger companies with a complex corporate structure and whose R&D is undertaken by more than one of their businesses, will also find it harder to satisfy the terms of the modified scheme.   Under the new arrangement the advantages of Patent Box will be lessened because of something called the R&D fraction.

If, for instance, a  British company subcontracts  some of its R&D work to  another  business within its group, the  R&D fraction will be reduced whether or not  the company undertaking the R&D is based  in the UK or overseas. On the other hand if a UK company subcontracts its R&D to a third party outside its organisation, the R&D fraction will not be cut.

These stringent changes are causing larger British companies to re-evaluate their corporate structure in order to fulfil the terms of the revised scheme and to ensure they continue to gain from it, tax-wise.

Smaller businesses will, I fear, find it too much of a challenge to meet the scheme’s onerous new administrative requirements and could well be put off the Patent Box despite its obvious benefits.

However there is still time to take advantage of the potential tax savings offered in the existing scheme so it is well worth seeking professional corporate tax advice.

Fine & Funny Dining

lcf_logoYou may have heard of the ‘Fine & Funny Dining’ evening which The Miller Partnership are hosting at Soft Touch Arts as part of Dave’s Leicester Comedy Festival line up (see page 68 of the festival brochure for details).

Celebrating 30 years of Soft Touch Arts and their fabulous, business friendly, ‘Cooking Up Business’ initiative, new for 2016, the evening is being generously sponsored by K Kong Events and The White Peacock whose chef patron Philip Sharpe will be cooking up a storm in the Soft Touch kitchen to take care of the Fine Dining part of the evening.

The Funny comes courtesy of K Kong who proudly present award winning comic Jarred Christmas – Fine & Funny Dining’s headline act. He’ll be joined by some of the stars of Leicester’s Stand Up Challenge, including our very own Pete Miller and an exclusive local comedy talent, all corralled by Coalville’s stalwart comedy compère Alan Seaman.

Food, giggles, great company and most importantly, all for a good cause … what’s not to love?!