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Corporation Tax relief for carried forward losses

The rules for the Corporation Tax treatment of carried forward losses changed from 1 April 2017. The changes increased flexibility to set off carried forward losses against total profits of the same company or another company in a group whilst at the same time introducing new restrictions as to the amount of profits against which carried forward losses can be set.

A number of further changes to the Corporation Tax treatment of carried forward losses rules were included in the draft Finance Bill 2018-19. These measures make some amendments to the reform of loss relief rules to correct some anomalies.

The first change relates to the treatment of Basic Life Assurance and General Annuity Business (BLAGAB). We are told in HMRC’s policy paper that the inclusion of the special BLAGAB rules in the loss reform legislation created an unintended consequence that may result in relief for carried-forward losses being claimed in excess of that intended. Furthermore, the ‘BLAGAB rules’ do not fully meet the policy objective as they restrict losses using a measure of profit that is in part not subject to Corporation Tax and this can lead to excessive relief.

The other aspects of the legislation that require changes to ensure that they work as intended are as follows:

  • the deductions allowance 
  • terminal relief
  • transfer of a trade without a change of ownership
  • oil and gas losses

The change relating to BLAGAB was made effective from 6 July 2018 with all other changes expected to come into force from 1 April 2019.

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VAT and gift vouchers

New draft legislation has been published as part of the draft Finance Bill 2018-19 that aims to change the VAT treatment of vouchers. The legislation will focus on bringing the UK VAT treatment of vouchers in line with that published in the EU directive. Notwithstanding the Brexit negotiations, the UK continues to be a member of the EU for the time being and this legislation will help remedy a long running saga concerning the VAT treatment of vouchers.

The new legislation is not concerned with the scope of VAT and whether VAT is due, but with the question of when VAT is due and – in the case of multi-purpose vouchers – the consideration upon which any VAT is payable. The changes will apply to any vouchers issued on, or after, 1 January 2019 and will introduce a common VAT treatment of vouchers across the EU.

The new rules will see a consistent approach to the VAT treatment of vouchers especially those that involve more complex scenarios: where vouchers can be used in the UK and across the EU. This will help ensure that the correct amount of VAT is charged irrespective of the payment method used. This in turn will help stop the double-taxation or non-taxation of goods or services purchased with the use of a voucher.

HMRC has said they will take a pragmatic approach to businesses experiencing any difficulties complying with the new rules especially as the changes will be implemented over the busy Christmas holiday period.

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Change to penalties for late payment of tax

Plans to introduce a new two tiered penalty system for individuals and businesses that do not pay their tax bills on time have been included in the draft Finance Bill 2018-19. The government has said that the new late payment penalty regime will help to ensure that those who pay their tax on time are not disadvantaged by those who do not and to incentivise payment on time where possible. There will also be measures put in place to ensure that taxpayers who have a reasonable excuse for not making a payment on time are not disadvantaged.

The new regime will initially apply to regular VAT, CT and Income Tax Self Assessment obligations. The penalties will consist of two separate penalty charges. The first charge will be based upon payments and agreements to pay in the first 30 days after the payment due date. If a payment is made within 15 days of the due date no penalty will be payable, a reduced penalty will be payable if payment is made between 16-30 days. After 30 days a full penalty will be charged. A second charge based upon how long the debt remains outstanding will start to be levied after 30 days and will continue until the debt is repaid in full.

HMRC will publish further details including the rates of the penalties in due course. A staged implementation of the measure is expected to start with VAT from 1 April 2020.

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HMRC security deposit regime to be extended

The security deposit legislation is to be extended to both Corporation Tax and Construction Industry Scheme (CIS) deductions from April 2019. The security deposit regime allows HMRC to require security from high-risk businesses where there is a serious risk that taxes owed will not be paid.

At present HMRC’s security deposit powers only apply to VAT, PAYE and National Insurance Contributions, Insurance Premium Tax (IPT) and some environmental and gambling taxes. This measure will give HMRC the power to require securities in relation to Corporation Tax and CIS deductions.

There are many reasons for non-payment of tax to HMRC including phoenixism where businesses evade tax by becoming repeatedly insolvent and a new company being set-up. These measures also target businesses that build up large debts to HMRC. The extension of these powers to Corporation Tax and Construction Industry Scheme (CIS) deductions will help target businesses that seek to fail to comply with their tax obligations.

The required security will usually be payable by electronic payment to a specified HMRC bank account, by cheque, by banker’s draft, a specified bank guarantee or by way of a payment into a joint HMRC/taxpayer bank account. The amount of security required is calculated on a case by case basis. If the business does not meet HMRC’s security deposit requirement they will have committed an offence and will be subject to a fine. Businesses required to pay a security deposit will have the option to appeal any decision by HMRC.

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New points-based late filing penalties

The Finance Bill 2018-19 draft legislation includes a new measure to introduce a points-based penalty system for certain regular (e.g. monthly, quarterly and annual) returns that are filed late. The introduction of a points system was first announced at Autumn Budget 2017 and will operate in conjunction with HMRC’s Making Tax Digital (MTD) initiative.

The changes will initially apply to regular VAT and Income Tax self-assessment obligations. Corporation Tax late filing penalties are not included within the scope of the current proposed legislation. However, it is the government’s intention to extend the new points-based penalty system to the Corporation Tax regime in due course. The government plans to roll-out the implementation of the new regime starting with VAT filing obligations from 1 April 2020. No timetable has yet been announced in relation to the introduction of the new penalties regime for Income Tax self-assessment.

Under the new system, a defined number of penalty points will be given where a regular tax filing is made late. The amount of penalty points will depend on several factors. When a taxpayer is given penalty points this will not mean an automatic penalty will be levied. A penalty will only be levied when a pre-defined points threshold has been reached. The points issued will be set to expire after a fixed period of compliance by the taxpayer. There will also be a new process under which penalties and points can be appealed and reviewed. HMRC will publish further details in due course. Presently, no penalty rates have been published.

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Non-UK resident property companies to be charged Corporation Tax

The government is to move forward with plans to charge Corporation Tax to non-UK resident companies with property income. Currently, these companies are chargeable to Income Tax and not UK Corporation Tax.

This change is part of the government’s aim to ensure that all companies are subject to the same tax treatment and to limit some of the reliefs claimed by foreign companies on UK rental income. Whilst the Corporation Tax rate continues to fall, the benefit of the falling tax rate may not offset the tighter restrictions faced by non-resident companies claiming tax relief on rental income.

The change is expected to take effect from 6 April 2020, when any non-UK resident companies that carries on a UK property business or has any other UK property income will become liable to Corporation Tax rather than Income Tax as at present.

This measure is expected to affect approximately 22,000 non-resident company landlords. The restriction on interest relief could have a significant impact on non-UK companies that receive UK rental income as well as some entities that seek to reduce their tax bill on UK property through offshore ownership.

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Change to evidence required for employee expenses

A new measure to remove the requirement for employers to check receipts for expense claims made by employees using the HMRC benchmark scale rates or overseas scale rates is to be introduced.

The benchmark scale rates can be used by employers to reimburse staff for subsistence expenses when they are travelling on business away from their normal workplace. HMRC lists maximum rates but employers can choose to pay less if they so wish.

The change will be legislated for in Finance Bill 2018-19 and will remove the onerous requirement for employers to check evidence, such as receipts, of the amounts spent when using benchmark scale rates to pay or reimburse qualifying subsistence expenses when employees travel for work.

The new legislation will also place the concessionary accommodation and subsistence overseas scale rates on a statutory basis and the same rules will apply. The overseas scale rates are similar but take into account the cost of subsistence overseas, including hotel accommodation etc, and are calculated on a country-by-country basis.

From April 2019, employers will only be asked to ensure that employees are undertaking qualifying business travel when claiming the benchmark scale rates and / or overseas scale rates. This measure was first announced at Autumn Budget 2017 and should create ongoing administrative savings for many businesses.

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Draft clauses for forthcoming Autumn Budget are published

The Finance Bill 2018-19 draft legislation was published on 6 July 2018. The Bill which runs to 226 pages (with a further 143 pages of explanatory notes) contains the legislation for many of the tax measures that had previously been announced by the government as well as new initiatives.

The publication of the draft Finance Bill is in line with the approach to tax policy where the government committed to publishing most tax legislation in draft for technical consultation before the legislation is laid before Parliament.

The Bill is open for comment until 31 August 2018 and the draft legislation is subject to change. The final Finance Bill will be published shortly after Budget 2018 which is expected to take place in November this year. The Bill, colloquially known as Finance Bill 2018-19, will become Finance Act 2019 after Royal Assent is received.

Supporting documentation for 33 separate measures have been published. This includes changes to rent-a-room relief, simplification of donor rules for Gift Aid, Corporation Tax reform of loss relief rules, changes to the VAT grouping eligibility requirements and a new points-based penalty regime for certain regular tax filings.

Commenting on the publication of the draft Finance Bill, Mel Stride, Financial Secretary to the Treasury, said:

‘Britain is one of the best places in the world to do business, and we’re determined to see that continue. This legislation illustrates our commitment to creating an environment in which innovation and enterprise can thrive, while ensuring that everyone plays by the same rules.’

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Rules for use of taxable cars and vans to be updated

The Finance Bill 2018-19 draft clauses include new measures that will address two anomalies in the Optional Remuneration Arrangements (OpRA) rules.

These measures will:

  • ensure that when a taxable car or van is provided through OpRA, the amount foregone, which is taken into account in working out the amount reportable for tax and National Insurance contributions purposes, includes costs connected with the car or van (such as insurance) which are regarded as part of the benefit in kind under normal rules
  • adjust the value of any capital contribution towards a taxable car when the car is made available for only part of the tax year.

The proposed legislation will ensure that the OpRA rules work as intended.

The Finance Bill 2018-19 will also introduce another car related measure that will see the introduction of legislation to remove any tax liability for charging electric cars or plug-in hybrids at or near a workplace. This measure will have retroactive effect from 6 April 2018.

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Beneficiaries of tax exempt pension benefits to be extended

The draft Finance Bill includes a new measure that will help modernise the tax treatment of employer paid premiums for the provision of death in service life assurance products for their employees. 

Currently, these premiums are only tax-exempt if the named beneficiary is a member of the employee’s family, or a member of their household. This includes the employees spouse or civil partner, parents, children and members of the employee’s household (such as domestic staff). As the law stands, if the beneficiary is not a member of the employee’s family or household, the premiums paid by the employer are treated as a taxable benefit in kind.

This new measure will see the tax exemption modernised and extended to include any individual or registered charity as a beneficiary. The inclusion of registered charities is in line with the government’s policy of providing tax relief on charitable donations and has been welcomed by the charity sector.

The changes will also apply to employer contributions to qualifying recognised overseas pension schemes (QROPS). The government has said that these changes are being made to ensure the tax system remains relevant and fair and to reflect societal changes. The new measures are expected to take effect from 6 April 2019.