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Sale of income by an individual

A capital sum received by an individual in respect of the sale or relinquishment of income to be derived from his or her personal activities, can sometimes be treated as earned income and chargeable to Income Tax. If this is the case, the amount charged to Income Tax is not also charged to Capital Gains Tax.


The following conditions must all be present before the sale of income legislation can operate:



  1. The individual must be carrying on an occupation wholly or partly in the UK.

  2. Transactions or arrangements must have been affected putting some other person in a position to exploit the earnings capacity of that individual.

  3. A ‘capital amount’ must have been obtained by the individual or for some other person, as part of, or in connection with, or in consequence of the transactions or arrangements.

  4. The main object, or one of the main objects, of the transactions or arrangements must be the avoidance or reduction of liability to Income Tax.

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What are the badges of trade?

The ‘badges of trade’ tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side line to a hobby. Careful consideration needs to be given when deciding if a hobby has become a taxable activity.


It is clear from the significant amount of case law on this subject that a decision on whether there is a business activity is often not clear. In fact, both HMRC and the courts are of the opinion that it is important to look at the whole picture rather than looking at each ‘badge’ in isolation or even relying too heavily on the badges of trade at all. In some cases, taxpayers will seek to argue that their hobby is actually a trade in order to benefit from certain tax reliefs, usually related to utilising a trading loss.


HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:



  • Profit-seeking motive

  • The number of transactions

  • The nature of the asset

  • Existence of similar trading transactions or interests

  • Changes to the asset

  • The way the sale was carried out

  • The source of finance

  • Interval of time between purchase and sale

  • Method of acquisition

The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby tax-free.

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Treatment of deposits for VAT purposes

As a general rule, most deposits made by customers serve as advance payments and create a VAT tax point when the deposit is received. It is important that businesses ensure that the VAT element of any deposits received is accounted for correctly. Usually this will mean that VAT is due on a deposit when it is received and not when the supply is actually made.


VAT does not apply to some types of deposit. For example, a deposit received as security to ensure the safe return of goods hired out does not create a tax point. In this case the deposit would be refunded when the goods are returned safely or forfeited to compensate the supplier for loss or damage to the goods.


HMRC’s policy in respect of the VAT treatment of retained payments and deposits changed from 1 March 2019. This change relates to businesses that retain payments and deposits for goods and services which customers do not take up. HMRC previously let businesses treat these payments as outside the scope of VAT where the customer did not use the service or collect the goods in relation to which a deposit had been paid.


Following judgements of the Court of Justice of the European Union, HMRS’s new policy is that VAT is due on all retained payments for unused services and uncollected goods. This change clarifies the VAT treatment on payments for goods and services where there is an unfulfilled supply.

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Lost your Unique Tax Reference number?

Your Unique Taxpayer Reference (UTR) identifies your tax records at HMRC. The number is also known as your taxpayer number or tax reference number and should be used whenever you contact HMRC, or when you file your tax returns. The UTR is a unique 10 digit code. You are automatically given a UTR when you set yourself up to file Self Assessment tax returns or form a limited company.


If you have mislaid your UTR, you should be able to find the number on previous tax returns and other documents from HMRC, for example, on notices to file a return and payment reminders. You can also find your UTR in your HMRC online account.


If you are still unable to locate your UTR you can call the Self Assessment helpline to request your UTR on 0300 200 3310. The lines are usually open from Monday to Friday: 8am to 8pm, Saturday: 8am to 4pm and Sunday: 9am to 5pm.


If you have mislaid your Corporation Tax UTR, this can be requested online and HMRC will send a copy of the number by post to the company’s registered address.

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Topping up your self-employed NIC contributions

In many circumstances it can be beneficial to make voluntary Class 2 National Insurance Contributions (NICs) to increase your entitlement to benefits, including the State or New State Pension if you are self-employed.


You might want to consider making voluntary NICs because:



  • you’re close to State Pension age and do not have enough qualifying years to get the full State Pension

  • you know you will not be able to meet the qualifying years you need to get the full State Pension during your working life

  • you’re self-employed and do not have to pay Class 2 contributions because you have low profits or live outside the UK, but you want to qualify for some benefits

There is also a specific list of jobs where class 2 NICs are not payable. These are:



  • examiners, moderators, invigilators and people who set exam questions

  • people who run businesses involving land or property

  • ministers of religion who do not receive a salary or stipend

  • people who make investments for themselves or others – but not as a business and without getting a fee or commission

If you fall within any of these categories it can be beneficial to get a State Pension forecast and examine whether to make voluntary Class 2 NICs to make up missing years.

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Spring Statement – 13 March 2019

The following comments were written on the 13th March 2019 immediately following Philip Hammond’s presentation of the 2019 Spring Statement to Parliament. In theory, the Government uses the Spring Statement to respond to the most recent forecasts made by the Office of Budget Responsibility (OBR).


In a nut-shell, the OBR forecast that:



  • the UK economy will continue to grow, and 

  • Government borrowing, and therefore interest payments, will continue to fall.

Unfortunately, the Brexit debate has compromised the Chancellor’s position and he has found himself in a three-legged race, bound to a Brexit process that delivers no certainty and which makes real forecasting of the UK’s future economic position almost impossible to predict.


If further votes on the Brexit debate take us into a no-deal situation on the 13th March, it looks as if we will see an emergency budget delivered next month, whereas a postponement of the 29 March 2019 deadline would provide breathing space: time to fully consider his options. Readers will no doubt have followed the Brexit votes in Parliament that followed the Spring Statement.


Whatever the outcome, Brexit is proving to be the glue that is holding back real planning – and perhaps real progress – on the part of the Treasury to manage the UK economy in our best interests.
However, what follows is a short summary of the points Philip Hammond did raise today.


Employment



  • Since 2010 there are more than 3.5m more people in work.

  • Employment is forecasted to increase by a further 600,000 by 2023.

Public finances



  • Debt fell last year and is forecast to fall continuously to 2023-24.

Tech and the new economy



  • In response to a government sponsored consultation, moves are afoot to update competition rules and increase competition in the digital economy.

  • The tech market place will be encouraged to allow smaller firms to participate.

  • Regulation may be introduced to make users’ personal data portable. For example, transfer lists of friends to new platforms and search engine histories to new search engines.

Border access



  • From June 2019, citizens of a number of non-EU countries will be able to use e-gates at UK airports and border crossing points.

  • The process of abolishing landing cards will also commence from June 2019.

Clean growth



  • Government is to explore schemes to encourage energy efficiencies for smaller businesses.

  • Developers will need to build in increases in biodiversity.

  • The decarbonisation of gas supplies is to be increased by using green gas suppliers.

  • From 2025 new homes will need to meet new low energy standards.

Housing and infrastructure



  • The government is on track to increase housing supply to its highest level since 1970 by the end of this parliament with an average of 300,000 properties a year.

  • A number of new steps were set out in the Spring Statement including the use of the Housing Infrastructure Fund and the Affordable Homes Guarantee Scheme to help the supply of more new homes across the country.

National Living and National Minimum Wage changes



  • The government has tasked the Low Pay Commission to make recommendations for changes to these rates to apply from April 2020. A response is required by October 2019.

Hampered by Brexit uncertainties, the Chancellor made no tax changes, his next round of changes will have to wait until the next Autumn Budget 2019, or April 2019 if we pursue a no-deal Brexit.


All eyes are now fixed on parliament and its attempts to achieve a workable Brexit solution that will have cross-party support.

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Expenditure on building that qualifies as plant

Capital Allowances are the deductions which allow businesses to secure tax relief for certain capital expenditure. Capital Allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable to Corporation Tax.


Interestingly, the Capital Allowance legislation does not specifically define plant and machinery (P&M). However, there is legislation that makes it clear that most buildings, parts of buildings and structures are not P&M. Attached to this legislation is confirmation that the following listed items are to be treated as if they were P&M for Capital Allowance purposes.



  • Thermal Insulation added to qualifying buildings;

  • Expenditure on fire safety in certain buildings if incurred before 1 April 2008 (CT) or 6 April 2008 (IT);

  • Safety costs at designated sports grounds;

  • Safety costs at regulated stands at sports grounds;

  • Safety costs at other sports grounds;

  • Expenditure on personal safety due to a special threat;

  • Expenditure on the provision or replacement of integral features;

  • Computer software;

  • Films for which a qualifying election is made.

P&M generally includes items such as cars, vans, machines and the working parts of machines, equipment, computers, furniture and other similar items used by a business. The meaning of the term ‘plant’ can be difficult and before any claim is made it is important to ascertain if an allowable deduction can be made. There are also special rules for items of P&M used privately before being used by a business as well as for items used only partly for business purposes.

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Companies House – Late Filing Penalties

There are Late Filing Penalties which are designed to encourage companies to file their accounts and reports on time. The penalties were first introduced in 1992 and were significantly increased from February 2009. All companies, private and public, large or small, trading or non-trading must send their accounts to Companies House. The late filing penalties guide has recently been updated although there have been no changes to the penalty amounts.


The table of penalties for late submission is as follows:
























How late are the accounts delivered  Penalty – Private Company    Penalty – PLC
Not more than one month     £150 £750
More than one month but not more than three months  £375 £1,500
More than three months but not more than six months     £750 £3,000
More than six months      £1,500 £7,500
 
Failure to file confirmation statements or accounts is a criminal offence, and which could see directors personally fined in the criminal courts. Late penalties which are unpaid will be referred to collection agents and may result in a County Court judgement or a Sheriff Court decree against the company.


It is possible to appeal against a penalty, but it will only be successful if the appellant is able to demonstrate that the circumstances of the late filing were exceptional.

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Have you received income in the form of loans?

HMRC has issued a new briefing paper on disguised remuneration charge on loans. Disguised remuneration schemes are tax avoidance arrangements that seek to avoid Income Tax and National Insurance contributions by paying scheme users their income in the form of loans.


HMRC is clear that these loans were never intended to be repaid and are no different to normal income and are therefore taxable. HMRC is encouraging tax-payers affected to come forward and settle their tax affairs before a charge on these outstanding loans comes into effect.


The charge will not arise on outstanding loans if the individual has agreed a qualifying settlement with HMRC before 5 April 2019. HRMC is offering flexible payment arrangements to those having genuine difficulty paying what they owe. For example, HMRC will allow scheme users to spread their payments over 7 years if their current taxable income is less than £30,000, and 5 years if their current taxable income is less than £50,000. This offer only applies if the taxpayer is no longer engaged in tax avoidance and takes sufficient action before 5 April 2019. HMRC will look at other taxpayers on a case-by-case basis.


Although the deadline is fast approaching, HMRC has been clear that you will not be disadvantaged if you provided the relevant information by 5 April but have not been able to settle due to a delay at HMRC.

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Last chance to get ready for VAT filing changes 1 April 2019

The deadline for the introduction of VAT filing changes is now just weeks away. For VAT returns periods starting on or after 1 April 2019, some 1 million businesses with a turnover above the VAT threshold (currently £85,000) will be required to start keeping their records digitally (for VAT purposes only) and provide their VAT return information to HMRC by using compatible software.


HMRC has published a press release to help remind businesses to get ready for the change and suggested the following action points:



  • Take steps to find out if your business is affected by the Making Tax Digital process and what you need to do if it is – most businesses above the VAT threshold have to start keeping their records digitally and sending their VAT return to HMRC direct from their software for VAT periods starting on or after 1 April 2019.

  • Talk to your accountant or other agent – if you use one to manage your VAT affairs – about how they are making returns Making Tax Digital compliant.

  • Speak to your software provider if you already use accounts software to ensure it will be compatible.

  • If you’re either not represented by an accountant, and/or do not already use software, you’ll need to select software to use and sign-up to Making Tax Digital – GOV.UK webpages provide information on a wide variety of products, from free software for businesses with more straightforward tax affairs, to increasingly sophisticated paid solutions. There are also products that can be used in conjunction with a spreadsheet for those businesses who don’t want to change their underlying record keeping system.

HMRC has advised that during the first year of the changes they will take a light touch approach to digital record keeping and filing penalties, especially if businesses are doing their best to comply with the law. However, this does not mean a blanket ‘no penalties promise’.


Planning note


If you are VAT registered, with turnover above £85,000, and you have not yet converted to the use of accounts software that will link with HMRC’s systems, please call as we can help you deal with the updates and changes required.