MAH, Chartered Accountants

Category: Tax

  • 2018 Autumn Budget Update

    As usual there are many changes to the 2018 Autumn Budget, however they’re not all relevant to our clients. So here we have set out the important changes that may affect our clients. The 2 main issues are IR35 changes for contractors and limits on R&D cash refunds. We’ve also added a reminder about the changes in property taxes and an update for MTD for VAT registered clients.

    1) Income tax / dividends: good news from company owners
    The personal allowance threshold has increased to £12,500 per year and the higher rate tax will start at £50,000.

    This means that more dividends can be taken out at the lower rate of 7.5%. We’ll soon advise on the monthly amount of salary and dividends that can be taken without paying the higher rate from April 2019 onwards.

    2) R&D: bad news for cash refunds
    Currently many of our clients are claiming R&D tax credits to reduce their corporation tax bill if they are profit making, or to receive a cash refund if they are loss making.

    Many do not have any staff or have very low payroll costs as the majority of development is outsourced or directors are not drawing salaries.

    However, under the new rules that may come into play from 1 April 2020, companies will only be able to receive a cash refund of upto 3 times the total PAYE/NIC bill for that year.

    So for example, a client who has outsourced 100% of its R&D will not receive any cash refund at all.

    Although the rule change has not yet been confirmed as HMRC will consult on this change, many of our clients are claiming cash refunds every year and so forecasts/cash burn and run rate calculations will need to consider that R&D refunds may be restricted in future.

    Clients who use R&D tax credits to reduce their tax bill and don’t normally receive cash refunds will not be affected.

    3) IR35: bad news for contractors
    Private sector engagers (agency or “hiring” company) will now have to be responsible from April 2020 for deciding if contractors are within IR35 or not.

    Currently, the contractor can setup a limited company and when they start a contract they can decide themselves if they’re inside or outside IR35. They then invoice the engager their daily rate under both circumstances, but if they’re inside IR35 the contractor’s limited company has to pay NIC and PAYE.

    The agency/employer isn’t affected either way. (our clients are all outside IR35 and so currently avoid NIC/PAYE)

    But under the new rules, engagers will have to decide if the contractor is inside or outside IR35. If they’re inside IR35 because they’re basically like a shadow employee, then the agency/employer will have to pay them via payroll and deduct PAYE/NIC. The contractor can only be paid via an invoice if they’re outside of IR35.

    What we saw last year with public sector engagers such as the NHS, is that they generally deemed most contractors to be inside IR35 and so paid them via PAYE.

    Its not clear at this time what medium and large private companies such as banks and IT companies will do, buts its possible that our contractor clients may end up being paid via PAYE. In this case, it may not be worth continuing to use their limited company other than for investment purposes or to withdraw profits.

    Small engagers will be exempt, but the majority of our contractor clients seem to work for medium and large engagers.

    4) Other changes
    Training costs may no longer be tax deductible – but we’d need to look into the circumstances, please check with us if the tax deduction is a factor in deciding to undertake training.

    Employment allowance: the £3k NIC allowance will no longer be available to employers with an employers NIC bill greater than £100,000 per year. This won’t affect most clients, but there a few with large wage bills. We/you’ll need to ensure that its not claimed from April 2020.

    Entrepreneurs’ Relief: the minimum term to hold qualifying business investments is increasing from 1 year to 2 years. Although practically speaking, most clients with a capital gain on selling their business will have held it for more than 2 years anyway, so this may not have much of an impact.

    Annual investment Allowances: increased to £1m temporarily. Some of our clients invest significant amounts in computer hardware or software which is capitalised as tangible fixed assets. Previously the tax deduction was limited to £200k.

    Digital services tax of 2% on revenues for online marketplaces > £25m per year: we’re mentioning this as we have a number of tech startups with online marketplaces but their revenues are currently below the limits. Maybe something to consider if future growth plans are met.

    5) MTD from 1 April 2019 for VAT registered businesses with > £85k turnover

    We have been a bit quiet on Making Tax Digital as the Government kept delaying the start date and its only recently been confirmed that it will kick in from 1 April 2019 (although it could possibly be delayed again as this is straight after Brexit).

    The first phase of MTD will only be compulsory for VAT registered businesses with > £85k annual taxable turnover.
    Records will need to be kept digitally and submitted to HMRC in a different way than before.

    Xero will be MTD compliant but for clients who currently use spreadsheets, we are currently trialling different solutions to find the easiest/cheapest way to deal with MTD.

    In the past we haven’t charged extra for dealing with new laws/regs eg flat rate VAT changes or auto enrolment pensions, but MTD is likely to increase our time spent working on jobs and there will be a cost for this.

    Once we’ve estimated the extra time that we’ll need to spend on Xero and non-Xero clients we’ll inform you of the extra costs that we’d need to charge if you’d like us to deal with MTD. As usual, we’ll try to keep these fees as low as possible and for some clients we may not need to charge extra if it doesn’t take us long to deal with.

    6) Property tax restrictions for mortgage interest
    As discussed previously, mortgage interest will only be tax deductible at 20%. There were no changes mentioned in this 2018 Autumn Budget, but we’d like to remind our clients about the reductions in tax relief as 2017-18 was the first tax year that the restrictions started and its being gradually implemented by 2020 at which time there will be no 40% relief available.

  • MiFID II and VAT on Research – still in the dark!

    MiFID II and VAT on Research – still in the dark!

    MiFID II

    31 October 2017

    Although the MiFID II regulation has been published since 2014 (delayed implementation date – 3rd January  2018), it is surprising that H M Revenue & Customs has not yet provided any firm guidance on the VAT treatment of research work.

    Recent press states that HMRC is now meeting with industry groups and is set to publish guidance on the VAT treatment of research work carried out from 3 January 2018 onward under MiFID II.

    Commission sharing agreements  (CSA)

    Currently, any research work paid via a CSA is potentially an exempt supply for VAT purposes as it is normally bundled with a payment for execution services. Execution commissions are exempt supplies for VAT and if research is part and parcel of the execution services, then the bundled research services are also exempt from VAT. MiFID II seeks to separate research from commissions as part of a larger aim to reduce the research data being fed to fund managers.

    Fund managers

    Firms that manage funds are generally not eligible to register for VAT as they mainly deal in financial products, which are exempt from VAT.

    MiFID II requires that the payment for research work is done separately and independently from the payment of commissions for execution services. Research Payment Accounts (RPA) are now going to be used by many fund managers.

    VAT position after MiFID II?

    If research is to be identified as a separate supply from that of execution services, HMRC rules could deem the supply of research services as VATable services at the standard rate of 20%.

    HMRC

    The disadvantage here would be felt by research providers as:

    • Fund managers will not be willing to increase their budgets for research given that they are unable to reclaim any VAT suffered on research costs,
    • Research providers would be pricing themselves out of market (against providers outside Europe) should they try and increase their prices by 20% in order to accommodate the possible new VAT burden, and
    • as a result, UK based research providers will be forced to absorb the 20% VAT burden and accept lower fees than what they are receiving now.

    We are keenly following this issue for our clients. If you require any assistance with your company’s VAT or tax position in respect of work in the Financial Services industry, please contact us.

    Also read…

    VAT and financial services

    Financial services

  • EMI Schemes (Enterprise Management Incentive)

    EMI schemes (Enterprise Management Incentives) are tax advantaged schemes offered by H M Revenue & Customs to small and medium sized businesses (“SME”) for incentivising the SME’s employees.

    EMI schemes are share option schemes which fundamentally provide tax savings for both the employee and the SME whilst also providing the facility for the SME to incentivise and reward its employees.

    EMI Scheme

    Current perception of EMI schemes

    It is a common misconception that EMI schemes are complicated and EXPENSIVE! This is not the case.

    Whilst the set-up of the scheme may cost a certain amount of money, the tax advantages achieved can far outweigh the scheme’s implementation costs.

    It is true that the rules surrounding EMI schemes are detailed and may be viewed as complicated. However, the government has put in place such rules so that the maximum number of SMEs and employees can benefit from the available tax advantages and, in turn, incentivise SMEs and employees for commercial progression.

    Advantages of using an EMI scheme

    The employee will not be subject to any PAYE or NIC on acquisition of shares when he/she exercises the share options. The only times PAYE/NIC may be payable are if the share options were granted at a discounted value or if the share options are exercised after a disqualifying event.

    In comparison to a simple reward of shares (which triggers a PAYE/NIC liability on acquisition or vesting), the EMI scheme provides a tax free environment of growth so that the employee can benefit from a tax free uplift in value of his/her shareholding.

    The company also benefits from a Corporation tax saving on the value of the shares passed to the employee when the share options are exercised. It is therefore a win-win situation for both the employer and employee.

    If the employee sells his/her shareholding then there may be a Capital Gains Tax liability that arises. However, being in an EMI scheme also enables the employee to take advantage of Entrepreneurs’ Relief. Entrepreneurs’ Relief means that the employee will only pay tax at 10% on the gains made from selling the shares.

    Certain conditions of the EMI share option scheme

    Employees: generally only those employees who work for 25 hours or more per week are eligible for EMI options.

    Employee: the total market value of an employee’s unexercised share options cannot exceed £250,000 at any given time.

    Company: the total market value of all unexercised EMI share options cannot exceed £3m at any given time.

    Company: the SME must not be under the control of another company.

    Company: the company must have Gross Assets of less that £30m.

    Company: it must have fewer than 250 full time employees.

    Company: it must be carrying out a qualifying trade as its main purpose.

    Shares: the shares subject to the EMI option plan should be ordinary, non-redeemable, and fully paid up shares.

    Grant: the options must be granted for bona-fide commercial reasons and not to avoid tax.

    Process

    The process to get an EMI scheme set up for an SME starts with understanding a client’s needs and what outcome is sought. Once this has been established, we can start structuring the EMI scheme which entails communicating with H M Revenue & Customs and putting in place required share option agreements with the relevant employees.

    Communication with H M Revenue & Customs is for approval of scheme qualification as well as obtaining their agreement to the company’s share valuation. The most advantageous valuation is always sought for the client company.

    Once the above are in place, the company is in a position to grant the share options to its employees. These grants should then be notified to H M Revenue & Customs within 92 days in order to preserve the related tax advantages.

    Annual filings with HMRC are also required for an EMI scheme so that HMRC can be kept informed of the scheme’s activities.

    Further information

    HMRC’s website also provides brief details on the benefits of using an EMI scheme.

    Where can MAH help?

    We can provide you with a free, no obligation consultation for initial advice on the EMI scheme and can demonstrate how it may be beneficial for your company. There are both, financial and non-financial benefits for offering employee incentives under the EMI scheme.

    To book your consultation with our tax specialist Prashant Malde, please contact us.

  • Overseas Workday Relief – OWR

    Overseas Workday Relief – OWR

    Have you recently started to live and work in the UK but consider your “home” country to be elsewhere? If so, you are likely to be a UK resident but non-domiciled in the UK.

    If prior to becoming UK resident, you were also non-UK resident for a continuous period of 3 tax years, you are likely to be eligible for a special Overseas Workday Relief (“OWR”) exemption.

    Such individuals who earn income (either abroad or both in the UK & abroad) are able to benefit from the “remittance” basis of taxation which means that the UK revenue authority would not tax income which is earned abroad and kept abroad.

    As always, the related tax rules are complex and somewhat confusing.

    Overseas Workday Relief:

    Individuals who become resident in the UK but continue to work abroad can benefit from the Overseas Workday Relief which is premised on the UK’s remittance basis rules of taxation. Under the OWR an individual’s income for work performed overseas is potentially not taxable in the UK.

    OWR is available to an individual for the first 3 tax years when the individual becomes UK resident. A significant number of workers come to the UK for short or medium term placements and miss this tax saving opportunity. The OWR is not available after the first 3 tax years, therefore proactive planning on an individual’s circumstances would stand to benefit the most.

    Remittance basis:

    An individual in the above explained UK resident but non-domiciled position will be able to  select the remittance basis of taxation in order to benefit from UK tax savings. There are various conditions to be met in order to claim the remittance basis such as not remitting your foreign income or capital gains into the UK, and forgoing your personal allowances in the year of the claim.

    In addition, for the Overseas Workday Relief to apply, employment duties need to be performed wholly or partly abroad, accurate records of travel and the duties performed need to be kept, and income relating to the overseas proportion of employment duties need to be kept abroad.

    The retention of income abroad for non-UK domiciled individuals can be tricky and needs to be planned carefully.

    Overseas Workday Relief

    Cleansing of mixed fund accounts:

    When foreign income and gains are kept abroad (most likely in one or more bank accounts) for more than one year, the accounts can end up becoming “mixed fund accounts”. A mixed fund account is one which contains any mixture of capital, capital gains, income etc.

    The 2017/18 and 2018/19 tax years are golden years where the government is bringing in rules for helping remittance basis users and allowing them in segregating their mixed fund accounts to achieve a more tax efficient remittance strategy. This facility is not likely to be available after the 5th April 2019. Until now the disadvantage was to the tax payer as any remittance from the mixed fund account would first favour H M Revenue & Customs’ position for taxing that remittance. Taxpayers will now have the ability to decide which funds to remit and will know beforehand whether that remittance is made out of capital or whether it is taxable income/gains.

    We assist clients in arranging their UK tax affairs so that they are not paying excessive tax.

    Where can MAH help?

    We can provide you with a no obligation consultation in order to determine your exact circumstance. You may already be in the UK and have started working here in which case you should get some professional advice as fast as possible. You could be planning your move to the UK in which case you can proactively plan your tax affairs so that you can save as much UK tax as possible.

    Book your free no obligation consultation

    A free, initial, no obligation consultation is available, which should reveal to you whether there is any possibility of saving tax given your residence but non-domiciled status in the UK. To book your consultation with our tax specialist Prashant Malde, please contact us.

  • New VAT flat rate scheme limited costs

    Old flat rate scheme

    Prior to 1 April 2017 the old flat rate scheme was very popular with many of our clients as they could earn an extra income under the scheme. Although they were not able to reclaim input VAT on expenses, they didn’t have to pass on the full 20% VAT charged to customers. Depending on their business category/sector they would pay a flat rate VAT less than 20% and so they could keep the difference.

    New flat rate scheme for limited costs: 16.5%

    The old scheme was originally designed to make things easier/quicker for small businesses to comply with quarterly VAT returns as it didn’t require businesses to record all their costs/expenses each quarter.

    But in the Autumn Statement on 23 November 2016 the Government declared that businesses with limited costs were in effect “abusing” the flat rate scheme as their affairs were so simple they didn’t need it .

    From 1 April 2017 businesses with limited costs would need to apply a much higher flat rate of 16.5%.

    What are limited cost businesses?

    A business will have “limited costs” if the gross amount it spends on relevant goods is either:

    • less than 2% of VAT flat rate turnover (ie gross UK sales)
    • more than 2% but less than £1,000 per year

    Relevant goods include: stationery/office supplies, gas/electricity, stock, cleaning products etc.

    They exclude services such as rent, accountancy fees, advertising, laptop/mobile and also electronic services such as software.

    What is the impact of the new scheme?

    If a business does not have limited costs or ….., then there is no impact and they can continue as normal.

    For businesses with limited costs, the new flat rate scheme is 16.5%.

    Example

    Net sales £100,000

    VAT charged to customers: £20,000

    Gross sales: £120,000

    Old flat rate scheme

    eg consultant/contractor with flat rate of 14.5%

    Flat rate payable is £120,000 x 14.5% = £17,400.

    Profit on flat rate scheme is £20,000 – £17,400 = £2,600

    So as long as input VAT on expenses is less than £2,600 then the flat rate earns an extra 2.6% for the business.

    New flat rate scheme

    eg any business meeting criteria of limited costs has a flat rate of 16.5%

    Flat rate payable is £120,000 x 16.5% = £19,800.

    Profit on flat rate scheme is £20,000 – £19,800 = £200

    So this is a loss of £2,400 compared to the old scheme.

    Normally most limited cost businesses will have more than £200 of input VAT, for example from accountancy fees, telephone bills, software/subscriptions etc. If so, then they should leave the flat rate scheme and claim input VAT under the normal scheme.

     

     VAT returns that straddle 1 April 2017

    VAT returns for QE April and May 2017 will straddle the start date. The return has to be split into 2 periods, before and after 1 April 2017. The first period will be treated as under the old rules and the second period under the new rules.

     

    Leaving the flat rate scheme

    For businesses with limited costs and turnover below £83,000 pa it may be worthwhile to deregister for VAT completely to avoid the additional admin.

    For businesses with turnover above £83,000, it may be best to leave the flat rate scheme. This can be done by writing to HMRC and requesting to leave. The normal leaving date will be the end of a VAT return period, but a leaving date of 1 April 2017 could also be requested.

    Please contact us if you need help with this.

  • Setting up company structure

    Factors involved in setting up company structure

    There are different factors involved in setting up company structure and it depends on the type of business, circumstances of the shareholders and their aims for the business.

     

    Shareholders:

    • if you may sell the company and re-invest the profits a holding company may be useful
    • otherwise, the co-founders can be the shareholders
    • for contractors and family owned businesses, husband/wife can be shareholders to maximise dividends
    • ambitious startups looking to grow should setup a share cap table
    • leave an option pool for key staff
    • eg 2 co-founders setup a company owning 45% each and leave 10% option pool

    Multiple trades:

    Clients often have more than 1 business. The simple and efficient solution is to have 1 company and run the different businesses as divisions of this company.

    For tax purposes, the different trades need to have separate profit and loss calculations. This is because losses from a trade can be set against the profits from another trade in the same year. But if losses are carried forward against future profits they can only be used against profits from the same trade.

    If you’ll be expecting to sell a business/trade, it can be hived out into a separate company before sale. If its held for at least 1 year before sale, then there is no tax due to Substantial Shareholding Exemption.

    Sometimes its better to start off with a group structure, so 1 holding company and 3 subsidiaries for the different businesses/trades, although this can also be achieved later on.

    Dividends:

    Profits after tax can be given to shareholders, and this is normally the most tax efficient way to extract profits.

    Dividends have to be paid according to shareholding. So if a husband and wife hold 50% each, they have to receive equal dividends. Sometimes, it may make sense for 1 spouse to hold 100% shares and shares can be transferred between spouses without tax at any time (with the right paperwork) to maximise differences in tax rates and allowances.

    If you’ll be receiving investment, the investors will also be able to receive dividends. So if you have a separate side business operating out of the same company, it will normally be better to hive this out before receiving investment.

    Need help?

    If you need more help on setting up company structure then please contact us for a free consultation.

  • VAT for non-EU sellers

    Is registration required for VAT for non-EU sellers using Fulfilment by Amazon in the UK?

    This has been in the news recently and HMRC may have lost £2bn in recent times from non-EU sellers who have illegal evaded VAT and have recently announced methods of enforcing the VAT.

    This is a tricky subject and can get very technical as many words used in the tax legislation have very specific meanings and there are also court cases about the VAT treatment, so this post is a very basic and simplified overview. Please see the video below for further details.  There may also be corporation tax considerations if selling to customers based in the UK.

    If sales have a place of supply in the UK and involve consideration and are not exempt, then they will be taxable supplies.

    The place of supply largely depends on the location of the goods and the identity of the importer. If the importer is also the supplier, then they will have to pay UK VAT when the goods are imported into the UK. This is because a non-EU seller who ships goods to Amazon’s Fulfilment Centre are the consignee and will be the importer and retain legal title over the goods.

    Only once the goods are in the UK can they then be sold to customers via Amazon’s website. As the goods are in the UK at the time of purchase by a UK customer, the place of supply will be the UK under the VAT Act 1994 s.7.

    For the purposes of VAT for non-EU sellers if they don’t have a business establishment in the UK they will be treated as a Non-established taxable person (NETPs).

    If an NETP makes ANY sales, it has to register for VAT.

    Therefore, all the criteria will met for VAT to be charged on sales under the VAT Act 1994 s.4, and registration for VAT for non-EU sellers will require the collection of 20% output VAT in their fixed prices charged to customers. They’ll then need to  pay this 20% to HMRC, although they can offset the related input or import VAT.

    Please contact us for further information as there are a number of tax issues and court cases to be considered. For example, we recently wrote a very long memo on similar VAT and tax issues for a non-EU client.

  • How does the flat rate VAT scheme work?

    If your business doesn’t have to pay much input VAT on its purchases, then it could make an extra profit using the flat rate VAT scheme. So even if it isn’t compelled to register as turnover is below £81,000 it could still be a good idea to register voluntarily.

    Please refer to the free pdf report for full details and the key points are summarised below:

    The flat rate scheme simplifies the VAT process and reduces the level of administration involved. You only have to include sales in the VAT return and don’t need to include your expenses.

    To qualify, you need to have net taxable income (excluding VAT and non-UK sales) < £150k and you have to leave the scheme if total gross income (including VAT and non-UK) > £230k.

    You collect 20% VAT on sales invoices from customers as normal, but you only pay the flat rate percentage on gross income to HMRC.

    For example, for “Computer and IT consultancy or data processing” businesses, the rate of overall VAT is 14.5%. (with a 1% reduction to 13.5% in the first year for new VAT registrations). If annual sales before VAT are £40k, you collect 20% VAT from customers which is £8,000. But under the flat rate scheme you only pay 14.5% of the gross £48,000 = £6,960 which gives an extra profit of £1,040.

    However, you cannot reclaim input VAT on purchases apart from on large capital items costing more than £2,000 incl VAT.

    If you need help to register or maintain a flat rate VAT scheme then please contact us for a quote.

  • Diverted Profits Tax

    Draft legislation has just been released  for the diverted profits tax, which was recently announced in the Autumn Statement 2014

    https://www.gov.uk/government/publications/finance-bill-2015-draft-legislation-overview-documents

    Effective date

    The new rules will be effective in respect of profits arising on or after 1 April 2015.

    1st Rule

    The first rule is designed to address arrangements which avoid a UK permanent establishment (PE) and comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided that the detailed conditions are met.

    This only applies where the UK person and foreign company are not small or medium-sized enterprises (SMEs).:

    Maximum number of staff And less than one of the following limits: Annual turnover Balance sheet total
    Small Enterprise 50 €10 million €10 million
    Medium Enterprise 250 €50 million €43 million 

    There will also be an exemption based on the level of the foreign company’s (or a connected company’s) total sales revenues from all supplies of goods and services to UK customers not exceeding £10 million for a twelve month accounting period.

    2nd Rule

    The second rule will apply to certain arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome” are met.

    This only applies where the two parties to the arrangements are not SMEs (the SME test will apply to the group).

     

    For more details, please look at the pdfs at the link above, or get in touch with us if you need advice.

  • VAT and financial services

    VAT and financial services:

    Are you losing out on VAT?

    VAT and financial services is a very tricky area and this video presentation gives a brief overview:

    https://www.youtube.com/watch?v=IaYzGej4p0c

    The main points covered are:

    1) VAT and financial services exemptions under VAT Act 1994 Schedule 9 Group 5 (eg money, loans, securities, advising collective investment scheme)

    If a firm is making exempt sales, then it doesn’t have to pay any VAT on income to HMRC, however it also cannot reclaim VAT on its expenses.

    2) Standard rated items, mainly looking investment management/advisory. If  a firm is providing advice or is using its discretion to manage investments or funds and isn’t merely executing transactions according to clients’ instructions, then these services are taxable at 20%. Either the client has to pay an extra 20%, of the firm has to take a hit of 20% on its fees.

    This may be avoided by carefully structuring the services with an SPV so that the investment manager has an interest in the trading profits of the fund, as a principal. Therefore, its share of profits would be exempt.

    If the investment manager is an external entity providing services as an agent, then even if its consideration is contingent eg 20% of trading profit if hurdles met etc, then they would still be subject to VAT

    3) The place of supply rules need to be checked. If the client is located outside of the UK, then the sales may be outside the scope of VAT. In this case, no VAT is due on sales and the firm may be able to reclaim VAT on its expenses if the sales would normally have been subject to VAT if supplied in the UK.

    Contact us

    This is a brief summary. VAT and financial services is a very complex area and we can discuss your circumstances and look at your contracts, as well as the legislation and VAT cases to design a VAT strategy. Please contact us for a free, no obligation consultation to discuss your requirements. Our base at Liverpool Street is within easy reach of the City, Canary Wharf or Mayfair or we could also visit you at your offices.