Budget 2017 – highlights and (more) lowlights!

 TAX, TAX ACCOUNTANTS, Tax Advice, Tax Consultants, UK TAX, UK TAX ADVICE, UK tax residence  Comments Off on Budget 2017 – highlights and (more) lowlights!
Mar 092017
 

Here is a summary of all the Budget 2017 proposals affecting mainly small and mediums sized businesses and private clients:

Corporation tax:

  • Offshore property developers: all profits arising on or after 8 March 2017 from trading in and developing land in the UK will be taxed in the UK.
  • Substantial Shareholding Exemption:   new rules will remove the investing company requirement within the Substantial Shareholdings Exemption, and provide a more comprehensive exemption for companies owned by qualifying institutional investors.
  • Loss relief reform: the amended rules a) give all companies more flexibility by relaxing the way in which they can use losses arising on or after 1 April 2017 when they are carried forward – these losses will be usable against profits from different types of income and profits of other group companies and b) restrict the use of losses carried forward by companies so that they can’t reduce their profits arising on or after 1 April 2017 by more than 50% – this restriction will apply to a company or group’s profits above £5 million – carried forward losses arising at any time will be subject to the restriction
  • Tax treatment of appropriations to trading stock: new proposals will remove the ability of businesses with loss-making capital assets to obtain an unfair tax advantage by converting those losses into more flexible trading losses. The changes will take immediate effect from Budget on 8 March 2017.
  • Corporation tax rate has changed from 20% to 19% effective 01 April 2017

Income tax:

  • Income Tax charge and rates: tax year 2017 to 2018 will see 3 distinct groups of rates: the ‘main rates’, which will apply to ‘non-savings, non-dividend’ income of taxpayers in England, Wales and Northern Ireland, the ‘savings rates’, which will apply to savings income of all UK taxpayers, and the ‘default rates’, which will apply to a very limited category of income taxpayers that will not fall within the above 2 groups, made-up primarily of trustees and non-residents (details here)
  • Dividend allowance reduction: the 0% tax allowance for dividend income will be reduced from £5,000 to £2,000 from April 2018 ()
  • EIS and SEIS: the rights to convert shares from one class to another will be excluded from being an arrangement for the disposal of those shares within the no pre-arranged exits requirements for the EIS and SEIS for shares issued on or after 5 December 2016.

………more to follow

 

Jan 182014
 

Tax residency in the UK has long been a highly contentious issue particularly for those with tax affairs in more than one jurisdiction. As there was no statutory definition of what makes a person a ‘resident’, often it was left to individual circumstances, general practice, judicial interpretations and at times even pure ‘common sense’! The system was so uncertain that the Gaines-Cooper case of 2008 demonstrated how unreliable HMRC’s published guidance in this regard could get. Well, that is all history now. Finance Act 2013 (Schedule 45) now clearly defines under what circumstances a person could be resident or non-resident, with the concept of ‘ordinary residence’ having gone the dinosaurs’ way!

Let us in this article consider the status of a person arriving in the UK.

 

First Test – Automatically resident in the UK

If you spend 183 or more days in the UK in a tax year you’re tax resident in the UK. You will be considered to have spent the day in the UK if you’re here at midnight. Even if you have not been in the UK at the end of the day (midnight) for 183 days, still you could be UK resident under the ‘deeming rule’ whereby a) you have been tax resident in the UK in one or more the last three years, b) you have at least 3 UK ties, and c) you have been present in the UK for at least 30 (qualifying) days without being present at the end of the day. However, transit days are not counted where you arrive in the UK whilst travelling from one country to another outside the UK and leave the next day. Transit passengers are not expected to engage in any activity substantially unrelated to your transit.

 

Second Test – Automatically resident overseas, so not resident in the UK

If you fail test 1 and is unsure of your residence then you need to check the following table and see if you’re automatically resident overseas. If you’re automatically resident overseas then obviously you’re not resident in the UK.

Days spent in the UK during the tax year Resident in any of the previous 3 years Not resident in any of the previous 3 years
Less than 16 Automatically Non-resident Automatically non-resident
Less than 46 days Take Test 3 Automatically non-resident

There is yet another way to be automatically resident overseas; i.e. if you work full time overseas. The conditions are:

a)    If you work full time overseas over the tax year without any significant breaks from overseas work during the tax year, and

b)   You spend fewer than 91 days in the UK during the tax year

c)     You work in the UK for more than 3 hours a day but fewer than 31 days in the tax year.

Broadly, fully time overseas work effectively means working 35 hours during a working week. Obviously days worked in the UK will be disregarded.

 

Third Test – Other cases of being automatically resident in the UK 

Having come this far and if you’re still unsure of whether you’re resident or not, follow these steps to see if you still automatically qualify to be a UK resident.

1. This is relevant if you have a home in the UK.

If you had a home in the UK and you spend at least 91 consecutive days in the UK and at least 30 of those days fall within the tax year, then you are conclusively tax resident in the UK

2. This is for those working work full time (broadly at least 35 hours a week) in the UK.

If you work in the UK for any period of 365 days without any significant break from UK work and:

a) all or part of the 365 days fall within the tax year,

b) 75% of the work days comprising more than 3 hours of work a day out of the 365 days are within the UK, and

d)   at least ONE of those of days per b) above fall within the tax year then

you’re automatically UK resident.

 

Finally the fourth sufficient ties test

Having taken the three tests above and still unsure of whether you’re tax resident in the UK you could now take this test which is based on your connections with the UK.

Days spent in the UK during the tax year UK resident in one or more of the last 3 years Non-resident in the last 3 years
< 16 days Always non-resident Always non-resident
16-45 days 4 ties Non-resident
46-90 days 3 ties 4 ties
91-120 days 2 ties 3 ties
120-182 1 tie 2 ties
> 182 days Always resident Always resident

 

And the four relevant ties are:

Tie 1 – Family tie: This tie is basically about the relationship of an individual with a family member who is tax resident in the UK. If your spouse, civil partner (not yet separated) or minor children (not those in full time education) are resident in the UK you satisfy the family tie test. Children under the age of 18 are considered for this tie and you should have spent at least 61 days with the child during the tax year to have had this tie.

Tie 2 – Accommodation tie: If you have a place available to you to live in the UK and a) that is available to you for 91 days or more during the tax year and, b) if you spend one or more nights there during the tax year, c) or if it the home of a close relative (parent, grandparent, brother, sister, children or grandchildren of 18 and above) you spend 16 or more nights there during the tax year you have had this tie.

Tie 3 – Work tie: If you work for 40 or more days in a tax year with each work day comprising 3 hours of work, you will have had this tie.

Tie 4 – 90 day tie: If you spend more than 90 days in either or both of the last two tax years in the UK you will have met this tie test.

Tie 5 – Country tie: You will have met this tie test if UK is the country where you spent more nights than any other country in the tax year.

Whilst this is a simplified version of a very elaborate rule-based statutory residence test, it nevertheless should give the reader a broad idea of how the whole test system works.

Tax Partners

Controlled Foreign Company (CFC) Rules – Part I

 CFC Rules, UK holding company, UK TAX ADVICE  Comments Off on Controlled Foreign Company (CFC) Rules – Part I
Feb 162013
 

The Finance Act 2012 (FA 2012) – Schedule 20 effectively changed the course for CFC rules by inserting a new Part 9A in to the Taxation (International and Other Provisions) Act (TIOPA) 2010. The new rules apply to accounting periods of a CFC commencing on or after 1 January 2013.

In a series of articles we’ll be examining CFC rules in detail. In this part we provide an overview of the CFC rules followed by explaining what a CFC means. Readers should note that the end impact of CFC rules would be that a CFC charge will apply on the CFC profit, and will be payable by the chargeable company, which will be a UK company holding relevant interest.

Broadly, there are three steps involved in determining if a CFC charge applies. There is no particular order in which these steps need to be followed and if an exemption applies at any stage then there is no need to go any further.

Step 1: Check if the foreign company is a CFC. If it is not then simply the rules don’t apply and no need to go any further.

Step 2: If it is indeed the foreign company is a CFC then check if:

a) Any of the entity-level exemptions apply to the CFC?
b) The CFC has any chargeable profits?
c) There is a chargeable UK company?

Step 3: If the final answer is a ‘YES’ to b) and c), and a ‘No’ to a) above, then work out the chargeable profits and apply CFC charge to the chargeable UK company.

Definition of a CFC

Basically, the CFC rules apply to companies (and by extension to exempt foreign branches of UK resident companies) resident outside the UK but controlled by UK resident(s). So in order to define a “CFC” it is important to know if it is non-UK resident and controlled by a UK resident person or persons {(s.371AA(3)}

Determining the ‘residence’ of a company can be complicated by the operation double tax treaty provisions. Therefore, S371TA provides further insight to what is meant by ‘resident’ in such situations, as outlined below:
(a) A CFC is resident in the territory where it is liable to tax by reason of domicile, residence or place of management. A company’s domicile is usually taken to be the territory where it is incorporated.
(b) Where residence cannot be determined on the basis of (a) above and if the company is a UK incorporated one but non-resident due to the operation of a treaty tie-breaker (s18 of CTA 2009) then will be treated as resident in the territory where it is treated as resident by virtue of the double tax treaty;

(c) In all other cases the CFC is resident in the territory where it is incorporated or formed.

‘Control’ is defined to mean the power to secure that the affairs of a company are conducted in accordance with the wishes of the UK resident person or persons obtained through shares or voting power, or by powers in the articles of association or some other document (s.371RB, 371RE). The definition includes a 50% test, a 40% test and then a new FRS 2 accounting test where there is a need to consolidate accounts. Therefore, as a caution it is advisable that a company having an investment of 25% and above in a non-resident company checks if it is caught by this definition.

Normally to ‘control’, more than 50% of the shares, rights and powers with regard to that company are required. However, the definition is extended to catch joint venture situations involving two shareholders each having at least 40% of the holdings, rights and powers over the company. In other words if a UK-resident person A has at least 40% of the interests, rights and powers and a non-UK resident person B with at least 40% but not more than 55% of the interests, rights and powers with regard to the company, then A and B are considered as controlling the company (s 371RC).
Then finally the FRS 2 accounting test of control means if the person is the (potential) CFC’s ‘parent undertaking’ that is required to prepare consolidated financial statements, whether actually prepared or not, and at least 50% of the CFCs chargeable profits would be apportioned to the parent company, then that person controls the CFC (s371RE).
If the company in question fails the CFC test then the CFC rules do not apply. In the next part we will deal with entity (CFC) level exemptions.

Tax Partners

Aug 152012
 

Unlike some other tax jurisdictions, residence, ordinary residence and domicile status assume considerable significance when it comes to an individual’s liability to UK tax. UK residents not domiciled in the UK (‘non-doms’ for short) are treated to some special rules on their overseas income and gains. Whilst the Finance Act 2008 (FA 2008) fundamentally changed the course of non-dom taxation, the Finance Act 2012 (FA 2012) introduced further changes and added some sweeteners as well.

Normally, UK residents are liable to pay UK tax on their worldwide income and chargeable gains on ‘arising’ basis. In other words, if you are tax resident in the UK you are liable to pay UK tax on your income earned and gains made wherever in the world. However, if you’re resident but not domiciled in the UK you could opt for your overseas income and gains to be taxed in the UK on ‘remittance’ basis. What it means is that you will be taxed on your foreign income and gains only to the extent to which they are remitted over to, or received in, the UK.

The changes made by FA 2008 and FA 2012 mean that now we have three broad classes of non-domiciled residents for tax purposes:

1) Those resident in the UK for at least 12 of the last 14 years

Unfortunately the law assumes that the longer you’re resident in the UK the richer you get overseas!! Accordingly, if you have been resident in the UK for at least 12 out of the last 14 years and if you wish to pay UK tax on remittance basis, you will need to cough up a remittance basis charge (RBC) of £50,000. In effect this is a charge for not paying tax on your worldwide income and gains on an arising basis. This is in addition to any tax that you might have to pay on your UK income and gains and on the amount remitted to the UK. But, the RBC could be nominated against tax due on your unremitted overseas income and gains, so to that extent they are not taxed again.

Let us consider a scenario where you are a 40% tax payer and you have an overseas income totaling £225,000. If you remit £100,000 you will pay £40,000 (£100,000 @ 40%) straight away. Over and above that you will also pay the RBC of £50,000 because you have been resident in the UK for at least 12 of the last 14 years. However, this RBC could be nominated against your unremitted income of £125,000. Should you bring this £125k over to the UK in later years you don’t need to pay any more tax because the RBC has sufficiently covered the tax due (£125,000 @40%. Should you have an unremitted income of £300,000, you will be liable to pay tax on £175,000 (i.e. £300,000 – £125,000) whenever that is remitted to the UK. However, the RBC of £50,000 would care of part of the tax due i.e. on £125,000 income.

The consequence of this change is that from April 2012 if you have been resident in the UK for at least 12 years you should opt for remittance basis only if your overseas income is more than:

a) 50,000/45% – £111,111 for those paying the additional rate of tax,
b) 50,000/40% – £125,000 for those in the higher tax rate, and
c) 50,000/20% – £250,000 for those paying basic rate of tax.

(For simplicity this illustration considers overseas income only, whereas both income and gains are taxable)

2) Those resident for at least 7 out of the last 9 years

The tax exposure for those in this category will be on identical lines as above except that the RBC payable is limited to £30,000. Therefore, you should opt for remittance basis only if your overseas income is more than:

a) 30,000/45% – £66,667 for those paying the additional rate of tax,
b) 30,000/40% – £75,000 for those in the higher tax rate, and
c) 30,000/20% – £150,000 for those paying basic rate of tax.

3) Those resident in the UK for less than 7 years

You have the option of either paying UK tax on your worldwide income and gains or you could opt for the remittance basis. Should you opt for the remittance basis you will need to pay UK tax in the year in which the money is received in the UK.

Making a claim

In order to benefit from the remittance basis, every tax year you will need to make a claim on your tax return. You do not need to make a claim in the following circumstances: a) Your unremitted ‘relevant’ overseas income and gains is less than £2000; OR b) if you meet all the following conditions: (i) you have no ‘UK income or gains’ for the tax year other than taxed investment income of no more than £100 gross; (ii) you have no ‘relevant income’ or ‘gains’ remitted to the UK in the tax year; and iii) you have been resident in the UK for not more than six years or you are less than 18 years of age

Key points

• An individual who claims the remittance basis for any tax year is not entitled to any personal reliefs (e.g. personal allowance) for that tax year and is not entitled to the annual exemption for capital gains tax.

• The remittance basis applies to foreign capital gains and income. It cannot be claimed for gains or income in isolation.

• The remittance basis can be claimed on a tax year basis i.e. you could opt to claim remittance basis for a particular year but could choose to pay tax on ‘arising’ basis the next year.

• The definition of what constitutes ‘remittance’ is very wide and includes virtually anything a ‘relevant person’ brings in, receives in the UK.

Unremitted income and gains

So what about the unremitted foreign income and gains? Whether or not you opt for the remittance basis, as a non-domiciled tax resident you are liable to disclose your unremitted overseas income and gains over £2,000. Where do not opt for the remittance basis you’re liable to pay tax on arising basis. Should you wish to pay tax on arising basis, you could claim a credit (Foreign Tax Credit Relief) for all or part of the foreign tax paid against any UK tax due. In many cases this will be covered by a Double Taxation Agreement (DTA) with the country in which you have paid the foreign tax. Where no treaty exists, the UK rules allow unilateral tax credit relief. So, in many cases you will find choosing the ‘arising’ basis a better option, the only change being some additional accounting computation work.

The FA 2012 sweetener

Even if you opt for the remittance basis, you could still escape UK tax on the remittance made under a new law effective April 2012. Called Business Investment Relief, if the qualifying conditions are met, such remittances will not constitute ‘remittance’ and will not, therefore, be taxed. Broadly the conditions are:

a) The remittance must be in the form of an investment (in the form of shares or a loan) in to a ‘qualifying company’ that meets the eligibility conditions for the relief

b) The investment must be made within 45 days of your foreign income and gains being brought to the UK

c) No relevant person is able to obtain benefits, either directly or indirectly, that are attributable to the investment

d) You must make a claim for the relief from UK tax on your Self Assessment tax return in the year of investment

e) Upon disposal of the investment the proceeds (up to the amount of the investment) should be taken offshore or be re-invested in another qualifying investment within 45 days.

And then of course, as with any piece of tax legislation, there is the universal tail-end rider: the investment must not be made as part of a scheme or arrangement, the main purpose of which is tax avoidance.

Eligible trading company: In order to claim this relief the target company should be a private limited company:

a) Carrying on a commercial trade, or
b) One that is preparing to do so within 2 years of remittance, and
c) Carrying on commercial trade is what it does or substantially does

There are then elaborate anti-avoidance rules, called chargeable events, that would reverse the relief unless mitigation steps are taken.

Advance assurance

HMRC does offer an advance assurance scheme where the remittance basis user could make a request to HMRC for opinion on whether a planned investment would be treated as a qualifying investment under the business investment relief provisions.

Watch this space for detailed analysis of the business investment relief provisions.

Tax Partners

Jun 102012
 

HMRC defines a ‘reasonable excuse’ as some unexpected or unusual event beyond your control and provides a few examples on its website such as: a) a failure in the HMRC computer system, b) taxpayer’s computer breaking down before or during the preparation of the online return, c) a serious illness making the taxpayer incapable of filing his tax return, or d) a taxpayer registered with HMRC for online services not getting the activation code in time.

However, many of the cases decided by the First-tier Tribunal seemed to differ in spirit with HMRC’s definition of what constitutes a reasonable excuse. Here are some examples:

TC01618 decided on 02/12/2011:

In this case the taxpayer logged onto the HMRC system in good time, and printed out a copy of what he thought was a completed P35 return and genuinely believed that he had filed the return. Whilst he didn’t wait for the online submission message, his behaviour was that of someone who seriously intended to honour his tax liabilities, and, in genuinely believing that he had filed the return, the tribunal decided that he had a reasonable excuse for filing the P35 return late.

TC01626 decided on 06/12/2011:

This case was about penalties imposed by HMRC for late payment of PAYE and NIC dues. The taxpayer’s severe financial difficulties leading to insufficiency of funds, which was attributable to events outside his control, was considered a ‘reasonable excuse’.

TC01634 decided on 07/12/2011:

HMRC’s failure to promptly notify and collect dues from the taxpayer was considered a reasonable excuse for not filing the return on time. The first P35 late filing notice was sent to the taxpayer after four months.

TC01636 decided on 07/12/2011

In this case a partnership did not file the paper return due by the end of October 2010 as it intended to file it online by the later filing date. When it tried online, it found that the HMRC website did not provide the necessary software for partnerships. Unlike other taxpayers, filing a partnership return online requires the taxpayer to purchase an HMRC accredited software from the market. The tribunal observed that the taxpayer did not know that it would be faced with an inability to file online, by reason of HMRC’s failure to provide the faciliy. So the appeal was allowed.

TC01706 decided on 04/01/2012

In this case the taxpayer filed the tax return for the year ended 05 April 2010 on time but his agent sent a cheque for the tax due by post to the HMRC by first class post on 24 February 2011, which should have been delivered to HMRC well before 28 February 2011, to avoid surcharge. HMRC received the payment on 02 March 2011. HMRC argued that it was not responsible for inefficiencies within the postal system. The tribunal found that the appellant exercised due diligence in instructing a professional agent to assist her and the agent did dispatch the payment at such time and in such manner that it was reasonable to expect that it would be received by HMRC within 28 days from the due date i.e. 28 February 2011 and the appeal was allowed.

‘Reasonable excuse’ is a very wide term and depending on individual situations, its interpretation can go far beyond that mentioned on the HMRC website.

Tax Partners

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