This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Tax Aware - March 2015
04 March 2015

Tax Aware - March 2015

This edition of Tax Aware explores the regimes introduced by government for entrepreneurial trading companies and their owners and the unexpected consequences of the offshore disclosure regime. It considers whether house builders can recover VAT and how Accelerated Payment Notices may impact upon you, as well as explaining VAT associated with Superyachts and the restructuring of Mixed Trading and Investment Groups.

Lawfully yours

Previously we have covered what the Government actively encourages you to do in your personal affairs and those of your children. This time we turn to employees.  Whilst HMRC continues to challenge many schemes, there are a number of regimes introduced by government especially for entrepreneurial trading companies and their owners.  This next month we focus on employees and directors.

One of the most recent changes was the introduction of employee shareholder shares.  The employee surrenders certain employment law rights and in return the employer allots or issues at least £2,000 of shares to the employee.  The first £2,000 of shares are received free of income tax and NIC and the first £50,000 are CGT-free on disposal.

The more common relief is Entrepreneurs' Relief, available to those who work full time in the company and have more than 5% of the share capital.  This is a lifetime relief and allows an individual to make capital gains of up to £10m on such shares and pay tax at 10% instead of the usual 28% - i.e. a maximum saving of £1.8m of CGT.

Options are another opportunity to consider.  Whereas shares have to be paid for, options give the employee the benefit without the risk.  Options can be within the Enterprise Management Investment scheme and if they meet the conditions then they fall into the CGT regime rather than the income tax regime.  This means that the top rate of tax is 28% or, if the shares also qualify for Entrepreneurs' Relief, the rate could drop to 10%.  By comparison, under the income tax regime the tax rate is up to 45%, plus NICs at 2% for the employee and 13.8% NIC for the employer.

If and when you do buy shares, then note that the interest paid on any money you borrow could be tax deductible, even if the company invests in properties rather than trades.  There are many other little wrinkles and benefits tied up in these regimes, but if you can operate within them, the tax savings are substantial.

Unexpected consequences of the offshore disclosure regime

You will be aware that HMRC and the UK Government have been signing agreements with other Governments to ascertain who in the UK has money in offshore bank accounts, for example, a UK-resident but non-domiciled individual paying tax on the remittance basis and therefore keeping offshore income outside of the UK tax regime.

Many of these people will have left money with a non-UK bank with the instructions that they cannot invest in the UK, because to do so would constitute a taxable remittance.

HMRC have started to review the affairs of such people to make sure there have been no remittances.  Unfortunately in a number of cases HMRC have found that contrary to the clients' instructions, monies have been invested into UK assets, giving rise to a tax liability.  As a taxpayer, the individual has to pay.  A bank not following instructions is not a defence to a tax assessment.  It may, however, be a good reason to seek recompense from the bank.

Recovery of VAT for house builders

House building benefits from a very beneficial VAT treatment in that VAT on costs is recovered and the sale of a new house attracts no VAT either.  However VAT on white goods and carpets is not recoverable.  Taylor Wimpey is challenging this through the courts on the basis of, amongst other things, EU law.  If they are successful it would benefit house builders who have to account for such VAT, and also those converting properties into residential properties and selling on.  In the meantime developers should be making provisional claims against HMRC.

Accelerated Payment Notices: how might it impact upon you?

An Accelerated Payment Notice (APN) informs a taxpayer that he must pay HMRC a specified amount within 90 days, which equates to the tax in dispute as a result of use of an avoidance scheme.

HMRC can now issue an APN to a taxpayer if a tax enquiry or appeal is in progress relating to arrangements which:

  1. have been formally notified to HMRC through the Disclosure of Tax Avoidance Schemes (DOTAS) rules;
  2. are subject to the General Anti-Abuse Rule; or
  3. are similar to ones already defeated in court.

Of particular importance to many taxpayers is that HMRC can issue an APN even if the tax planning arrangement has already been disclosed under DOTAS before the new legislation was implemented. HMRC can even do this in cases where it is yet to be successful in the court or tribunal against the scheme.

Recently, a group of taxpayers won the right to challenge such APNs by way of a judicial review.  The position is likely to be clarified by the early summer.

However, gone are the days where it would be advisable to "wait and see" whether a tax arrangement entered into will be successful in the court or tribunal. Demands for payments of tax have already been issued and, given the tight timeline in which to respond and the fact that there is no right of appeal against the APN, it's best to be on the front foot and consider your options as soon as possible.

Superyachts and VAT

The superyacht industry in Europe is subject to inconsistent legislation. Historically there have been a variety of VAT treatments and practices for superyachts throughout the EU, particularly in the Mediterranean countries where until 2013, the French applied the ‘commercial exemption’, while some member states (especially the UK and therefore, by extension, the Isle of Man) struggle with mixed business and private use.

The perception is that superyachts are relevant only to a small group of highly wealthy individuals.  However, that perception needs to be addressed. Superyachts form an industry supporting manufacturing jobs in Netherlands and Germany, crew, support and maintenance jobs along the Mediterranean coast and represent a £20billion industry.

If your business supplies digital services to consumers in the EU, you can register for HM Revenue and Customs (HMRC) VAT Mini One Stop Shop (VAT MOSS) scheme. Using the VAT MOSS for superyachts should make VAT compliance manageable and auditable. Together with GPS data to support the veracity of what the captain says, tax authorities across Europe should be delighted. Further initial reports from the European Commission are that VAT MOSS is working well.  The long-term aim of the EU Commission is to have all VAT returns done in this way so the superyacht industry can take the lead.

Mixed Trading and Investment Groups

It is not uncommon for a successful entrepreneur to reinvest corporate profits in to something more secure, usually real estate.  The result can be a group of companies with an active trade in them and an investment company holding properties.  Unfortunately for tax purposes this has two big disadvantages – the possible loss of both Entrepreneur's Relief (ER) for CGT, and for those nearing retirement or considering succession issues, the loss of Business Property Relief (BPR) for inheritance tax purposes.

We are restructuring a number of such groups with a view to protecting ER, BPR or both, and where the value of the non BPR qualifying assets is high, making sure that value is held in a form which does obtain BPR.

Once done, succession planning can be driven by the entrepreneur's true wishes rather than by tax.