Category: Tax

  • 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.

  • Pre trading expenses

    Pre trading expenses: summary

    You can get a tax deduction for pre trading expenses incurred upto 7 years before your business started trading.

    Pre-trading

    Under CTA2009 s.61, if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade and a deduction would be allowed for them if they were incurred on the start date, then the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

    Pre-incorporation

    Note that CTA2009 s.61 mentioned above relates to pre trading expenses incurred by the company. If a company doesn’t yet exist, how can it buy goods or services?

    There could be a risk that this legislation technically may not apply to pre-incorporation expenditure, as this has been incurred by a person who is intending to incorporate.

    However, a pre-incorporation contract could potentially be used which states that the founder/director will be acquiring fixed assets and incurring expenses on behalf of a new company yet to be incorporated, not on behalf of themselves.

    This would then need to have been ratified after incorporation, in accordance with Companies Act 2006 s.51 “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.“ (this legislation normally applies to contracts with external parties, but should be relevant to this context).

    When does “Trading” start?

    Just in case you’re interested in the details behind commencement of trading or tax periods:

    Under CTA2009 s.9 (1) an accounting period of a company begins when the company comes within the charge to corporation tax.

    S.9(2) also mentions a company is treated as coming within the charge to corporation tax when it starts to carry on business.

    Therefore, if a startup has not started to carry on its business by the end of its accounting year, it would not have come within the charge to corporation tax, and therefore there would not be any accounting period for corporation tax purposes.

    BIM70505 provides guidance that the House of Lords judgements in Ransom v Higgs [1974] 50TC1 stress the active nature of trading – the need to be providing goods or services, to be trading with someone.

    The courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:
    – is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
    – does so, or offers to do so, by way of trade.

  • VAT on Bitcoins

    VAT on Bitcoins

    see here for latest HMRC guidance on Bitcoins.

    http://www.hmrc.gov.uk/briefs/vat/brief0914.htm

    The post below was written before their guidance was published:

     

     

    VAT on Bitcoins

    Download the full report here

    There has been a lot of uncertainty regarding the treatment of VAT on Bitcoins and other cryptographic currencies. This uncertainty has led to a VAT risk as individuals and businesses are not sure of what their VAT liability, if any, could be from being involved in transactions with Bitcoins and cryptographic currencies.

    This report sets out to explore the various VAT issues surrounding the Bitcoin ecosystem, apart from whether or not Bitcoins could be classified as “money” or “currency” for VAT purposes, as this is still a work-in-progress.

    We have not identified any significant differences between the different crypto coins for VAT purposes.

    Are Bitcoins face-value vouchers or something else?

    HMRC appears to have classified Bitcoins “face-value vouchers” which may be single purpose.

    There may not appear to be any basis for this as demonstrated in the full report.

    However, Bitcoins could still be classed as digital commodities (software) or non-face value vouchers, in which case VAT would still be chargeable. This is unless an exemption can be found for them.

    Bitcoins do not appear to be Electronic Money as defined by EU Electronic Money Directive Directive 2009/110/EC.

    The ideal scenario would be if Bitcoins were classified as “money” or “currency” as these are exempt. Although VATA 1994 doesn’t define money, the EU Sixth Directive does make mention of legal tender. However, this is something which we are exploring in case there is any legal precedent to allow Bitcoins to fall within the exemptions.

    If there’s VAT on Bitcoins, how should people deal with VAT

    If merchants accept Bitcoins as payment for goods and services, then they would need to account for VAT on their services as normal. The amount is likely to be the market value of Bitcoins as at the tax point.

    However, it may be possible for merchants to avoid VAT on Bitcoins when exchanging for legal tender, as they would be used as consideration for a VAT exempt item (money).

    Miners, investor/traders and exchanges selling Bitcoins may need to account for VAT at 20% if they are supplying taxable supplies in the course of business. This will need to be looked at on a case by case basis, and there are 6 key tests.

    Donations received in Bitcoins may be able to avoid attracting VAT if they are freely given without expectation of goods or services in return, and not in the course of business.

    Is there VAT on Bitcoins if customers are located overseas?

    Bitcoins are likely to be classified as electronically supplied services in the absence of any exemptions and the special place of supply rules would apply for a UK supplier:

    business customer overseas: supply occurs in their country and not subject to UK VAT.
    consumer in EU: supply occurs in UK and subject to VAT
    consumer outside EU: supply occurs outside EU and not subject to VAT.

    Download the full report here