Gifts and awards of shares in companies, often known as employment related securities (ERS) are commonly used by employers to reward, retain or provide incentives to employees. They can be tax advantaged or non-tax advantaged.

You must notify HMRC of all new ERS schemes including one-off awards or gifts of shares by 6 July following the end of the tax year in question or you may have to pay a penalty.

Once you have registered the share scheme you need to submit an ERS return (or nil return) even if there have been no transactions in the year otherwise the company may be liable to a penalty.

Please contact us if you need assistance dealing with these reporting obligations.

Extracting profit from the family company

The start of the new tax year means that shareholder/ directors may want to review the salary and dividend mix for 2019/20. The £3,000 employment allowance continues to be available to set against the employers national insurance contribution (NIC) liability which means that where the company has not used this allowance it may be set against the employers NIC on directors’ salaries.

Thus, where the only employees are husband and wife there would generally be no PAYE or employers NIC on a salary up to the £12,500 personal allowance.

There would however still be employees NIC at 12% on the excess over £8,632 (£166 per week) which would be £464 on a £12,500 salary, leaving £12,036 net.

Taxation of Dividend Payments in 2019/20

Traditional advice would then be to extract any additional profits from the company in the form of dividends. Where dividends fall within the basic rate band (now £37,500) the rate continues to be 7.5% after the £2,000 dividend allowance has been used. Thus where husband and wife are 50:50 shareholders they would each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving £34,837 net of tax.So a combination of £12,500 salary and £37,500 in dividends would result in £46,873 (93.7%) net of income tax and NICs.

Ensure dividend payments are legal

The Companies Act requires that companies may only pay dividends out of distributable profits. This means that in the absence of brought forward reserves the company would need to provide for 19% corporation tax in order to pay the dividends and thus there would need to be profits of £92,593 in order to pay dividends of £75,000 (after providing corporation tax of £17,593).

Overall the combination of salary and dividends suggested above would result in net of tax take home cash of £93,746 for the couple out of profits before salaries and corporation tax of £117,593 (20.3% overall tax). This still compares very favorably with the amount of tax and NIC payable if the couple were trading as a partnership.

The Annual Investment Allowance (AIA) which provides businesses with a 100% write off against profits when they acquire plant and machinery has been temporarily increased from £200,000 to £1 million for two years from 1 January 2019. This will again mean that the timing of expenditure will be critical. It may be advantageous to delay expenditure until after 1 January 2019 to get full benefit in certain circumstances.

However, the current enhanced capital allowance for energy efficient plant will be abolished from April 2020. A further change is that the writing down allowance for special rate pool equipment, broadly long-life assets and fixtures in buildings, is being reduced from 8% to 6% from April 2019.

The Chancellor has announced that the minimum qualifying period for CGT entrepreneurs’ relief will be increased from 12 months to 24 months for disposals on or after 6 April 2019.

There are further changes affecting shareholdings in personal companies. In addition to the individual holding 5% or more of the ordinary share capital and voting control they will also now be required to be entitled to 5% or more of the company’s distributable profits and assets in a winding up.   As now the individual must also be an officer or employee of the company concerned; and the company must be a trading company or the holding company of a trading group.

What is missing trader fraud?

Missing trader fraud involves a ‘missing’ or ‘defaulting’ trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK. Those supplies may pass through a number of intermediary traders before they are either sold to an end user in the UK or dispatched/exported to an overseas customer. These supply chains are known as ‘tax loss chains’. In some cases the organisers of the fraud will use non-tax loss chains alongside tax loss chains in order to disguise the VAT losses as part of an overall scheme to defraud HMRC.

What is the impact of missing trader fraud?

Missing trader fraud steals large amounts of VAT from the public purse, which could be used for essential public services such as hospitals and schools. The Government’s measures to combat this fraud place a responsibility on those who might deal with the fraudsters to take reasonable precautions.

How can missing trader fraud affect your business?

If you knew or should have known that your transaction was connected with fraud then HMRC may refuse your VAT claim in respect of that transaction. In determining whether you knew or should have known HMRC will consider all of the circumstances relating to the transaction, including whether you took reasonable steps to verify the integrity of your supply chain.

How can a business avoid becoming caught up in missing trader fraud?

It is in your interest to check carefully who you are dealing with. It is good commercial practice for businesses to carry out checks to establish the credibility and legitimacy of their customers, suppliers and supplies. These checks may need to be more extensive in business sectors that are commercially risky or vulnerable to fraud and other criminality.
HMRC does not expect you to go beyond what is reasonable. However HMRC would expect you to make a judgement on the integrity of your supply chain and the suppliers, customers and goods or services within it.

What kind of checks can I undertake to help ensure the integrity of my supply chain?

The following are examples of indicators that could alert you to the risk of a connection with missing trader fraud:

1. Legitimacy of customers or suppliers.

For example:• What is your customer’s/supplier’s history in the trade?
• Have you been contacted within a short space of time by a prospective buyer and seller offering to buy/sell goods of the same specifications and quantity?
• Has your supplier referred you to a customer who is willing to buy goods of the same quantity and specifications being offered by the supplier?
• Does your supplier offer deals that carry no commercial risk for you – e.g. no requirement to pay for the goods or services until payment is received from the customer?
• Are you being offered deals that involve consistent or pre-determined profit margins, irrespective of the date, quantities or specifications of the goods or services being traded? Have normal commercial practices been adopted in negotiating prices?
• Are you being asked to make payments to third parties other than your supplier or payments to an offshore bank account?
• Are the goods adequately insured?
• Are high value deals being offered with no formal contractual arrangements?
• Are high value deals being offered by a newly established supplier with minimal trading history, low credit rating etc?
• Is a small, newly-established business offering to supply you with goods cheaper than a long-established supplier?
• Has HMRC specifically notified you that previous deals involving your supplier were connected to fraudulent VAT losses?

2. Viability of the goods as described by your supplier. For example:
• Can you be sure the goods exist in the quantity and specification being offered?
• Are they in good condition and not damaged?
• Why are large quantities of goods with non-UK specifications being offered for supply to you in the UK?
• What recourse is there if the goods are not as described.

Examples of specific checks carried out by existing businesses

The following are examples that may help you to decide what checks you should carry out. This list is not exhaustive and it is for you to decide what checks you need to carry out before dealing with a supplier or customer:

• obtain copies of Certificates of Incorporation and VAT registration certificates
• verify VAT registration details with HMRC
• obtain signed letters of introduction on headed paper
• obtain some form of written and signed trade references
• obtain credit checks or other background checks from an independent third party
• insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises if possible
• obtain the prospective supplier’s bank details to check whether (a) payments would be made to a third party and (b) in the case of an import, the supplier and their bank share the same country of residence
• check details provided against other sources e.g. website, letterheads, BT landline records. Paperwork in addition to invoices may be received in relation to the supplies you purchase and sell. This documentation should be kept to support your view of a transaction’s legitimacy. The following are examples of additional paperwork that some businesses retain:
• purchase orders
• pro-forma invoices
• delivery notes
• CMRs (Convention Merchandises Routiers) or airway bills
• allocation notification
• inspection reports.
What will HMRC look out for when considering the extent
of my checks?

In each case HMRC will seek to identify what actions or precautions you took in response to any indicators of risk. This will focus on the due diligence checks you undertook and the actions taken by you in response to the results of those checks.

In each case HMRC will consider:
• the due diligence checks that were performed, including any checks designed to address the specific risks of a particular transaction
• the extent to which your checks were appropriate, adequate and timely in relation to addressing the risks identified
• the results of those checks and what action was taken, if any, in response.

Can HMRC tell me exactly what checks I should undertake?

No. The examples contained in this leaflet are only guidelines for the kind of checks you could make to help you avoid participating in a fraudulent supply chain. The checks you will need to make, and the extent of them, will vary depending on the individual circumstances of your trade and it is for you to consider what questions you need to ask to protect yourself in the particular circumstances of your individual transactions.

What do I do if my checks indicate that a fraud exists?
If your checks indicate that there may be a fraud you should consider whether you wish to continue with the transaction. You may also wish to inform HMRC anonymously using the following link: gov.uk/report-vat-fraud

What will happen if HMRC refuse my VAT reclaim on the grounds  that I knew or should have known of a connection with fraud? HMRC will send you a decision letter if:

• you have purchased goods or services from a supply chain where VAT was fraudulently evaded by another person in the supply chain; and
• HMRC believe that you knew or should have known that the transaction was connected with fraud. Before a decision is made every case will be independently reviewed and authorised by a central team within HMRC to ensure there is sufficient evidence to demonstrate that the above criteria are met. HMRC will explain the reasons why it considers you knew or should have known of a connection with fraud in the decision letter. HMRC may send notification letters to other businesses in the same supply chain where it considers they also knew or should have known of a connection with fraud.
Appealing a decision to deny a VAT claim You can ask HMRC to reconsider its decision. If you think there are additional facts which should have been taken into account please tell HMRC. It is in your interests to provide any further information as soon as possible. If you do not agree with the decision you can ask for it to be reviewed by a HMRC Officer not previously involved in the matter, or you can appeal to an independent tribunal. Further information about appeals and reviews can be found here: gov.uk/tax-appeals

Further information concerning VAT tribunals, including ways to contact the tribunal, can be found here: gov.uk/courts-tribunals/first-tier-tribunal-tax

Further information

You should also be aware that on 30th September 2017 the offence of ‘Corporate Failure to Prevent the Criminal Facilitation of Tax Evasion’ came into force as part of the Criminal Finances Act 2017. Companies which fail to prevent representatives acting on their behalf from facilitating tax evasion can be prosecuted and if found guilty be subject to an unlimited fine. More information about this offence and suggested prevention procedures can be found in ‘Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion’ which can be found here: gov.uk government/consultations/tacklingtax-evasion-a-new-corporate-offence-of-failure-to-prevent-the-criminal-facilitationof-tax-evasion

Need more VAT help?

We offer a wide range of VAT services to help your business.

Our team of chartered accountants have a wealth of experience in a broad range of sectors, from construction and property to the charity sector.

If you want to learn more about how the team can help or simply want some tax advice from a trusted accountant, please contact us by filling in a contact form or calling 0161 962 1855.

In 2016 the government consulted on a proposed abolition of Class 2 National Insurance contributions (NICs) for the self-employed. This flat rate contribution, currently £2.95 a week is payable by the self-employed in addition to Class 4 contributions based on the level of profits. The flat rate contributions were due to cease on 5 April 2019 but will now continue “for the life of this parliament”.

The reason for the u-turn concerns businesses owners with low profits or making losses. In order to maintain their NI Contribution record, many self-employed individuals voluntarily continue to pay Class 2 contributions despite their profits being below the £6,205 small earnings exemption. Having a full NI contribution history helps maximize an individual’s entitlement to State Benefits. For example full State Pension entitlement requires 35 years contributions.

With the abolition of Class 2 NICs, those with low profits or making losses would need to make voluntary Class 3 contributions (currently £14.65 a week, £761.80 a year) in order for that year to count as a contribution year.

CHECK YOUR CONTRIBUTION HISTORY

As mentioned above, in order to maximise entitlement to full State Benefits a full contribution record Is required. It is possible to check your National Insurance record online to see:
• what you’ve paid, up to the start of the current tax year (6 April 2018)

• any National Insurance credits you’ve received
• if gaps in contributions or credits mean some years don’t count towards your State Pension (they aren’t ‘qualifying years’)
• if you can pay voluntary contributions to fill any gaps and how much this will cost

Certain traders can be made liable for the unpaid VAT of another VAT-registered business when you buy or sell specified goods. HMRC have recently updated VAT notice 726 which advises traders to carry out due diligence into their supply chain.

The specified goods are any equipment made or adapted for use as a telephone and any other equipment made or adapted for use in connection with telephones or telecommunication, such as SIM cards.

Also included is equipment made or adapted for use as a computer and any other equipment for use in connection with computers or computer systems and also other electronic equipment for use by individuals for the purposes of leisure, amusement or entertainment, such as Satnavs and games consoles.

HMRC have updated their guidance on the rules for carrying forward the unused pension savings annual allowance, together with a calculator on their website.

For most taxpayers the maximum amount of pension savings that qualifies for tax relief each tax year is £40,000. It is possible to increase this amount by utilising unused relief brought forward from the previous 3 tax years, provided the individual was a member of a pension scheme that year.

The brought forward relief from the earliest year is utilised before later years. Thus for the current tax year 2018/19 the unused relief from 2015/16 may be utilised in addition to the current year relief, followed by 2016/17 and then 2017/18.

HMRC are consulting on ways to simplify the tax treatment of short-term business visitors from the foreign branch of a UK company, to ensure the UK is an attractive location for business headquarters.

The consultation considers potential changes to the PAYE arrangements under which UK employers need not operate PAYE for employees of their overseas subsidiaries on short stays in the UK. This treatment does not currently apply to visits to the UK by employees from overseas branches of UK companies

The consultation proposes two broad options:

• Extending the UK workday rule from 30 to 60 days.
• Introducing a new tax exemption for short-term visitors from overseas branches.

TRUST TAXATION

We are still awaiting the promised consultation on the taxation of trusts announced in the Autumn 2017 Budget. However, in the meantime HMRC have updated their guidance on how different types of trust income are taxed, what management expenses and reliefs can be deducted, and understanding the tax pool.

Please contact us if you are considering setting up a trust or wish to discuss estate planning more generally.

Last month, we reported that the Enterprise Management Incentives (EMI) share option scheme lost its EU State Aid approval on 6 April 2018. The consequence of loss of approval being that the tax advantages of such options was temporarily withdrawn.

On 16 May 2018 the European Commission gave formal state aid approval to EMI. Qualifying companies can now resume awarding EMI options to attract and retain employees.

There are considerable tax advantages for employees and employers of introducing a tax advantaged share incentive scheme.

Please contact us if you would like to consider introducing a share incentive scheme for your employees.

HMRC are carrying out a review of rent a room relief to discover whether the scheme, introduced back in 1992 provides the right incentives for the rental market. The current scheme exempts from tax, gross rents up to £7,500 where rooms within the taxpayer’s main residence are rented out.

Most accountants that responded to the call for evidence were keen for the relief to continue as it encourages taxpayers to let out spare rooms and provides them with additional income.
Note that where the gross rental income exceeds £7,500, say £12,000, the excess of £4,500 would be taxable. Alternatively the taxpayer may deduct costs of providing the living accommodation such as a proportion of mortgage interest and light and heat. If these allowable expenses amounted to £9,000 then it would be more appropriate to be taxed on the net rental profit of £3,000.

Note also that the current scheme only provides relief where the rooms let are in the taxpayer’s main residence and if the property is jointly owned, the relief would be £3,750 each. Where the lettings are in another property, the new £1,000 property allowance could be set against the gross rental income, however this allowance applies to each taxpayer.

Whilst on the subject of the reduction in cash transactions, we take the opportunity remind you of the Gift Aid Small Donations Scheme (GASDC). Under this scheme a charity or community amateur sports club (CASC) can claim top-up payments on small donations up to £20.

From 6 April 2017 charities have also been able to claim tax back on donations made using contactless technology, such as a contactless credit or debit card.

Before 6 April 2017, charities could only claim top-up payments on small cash donations. Cash donations can be in coins or notes that have been collected and banked in the UK. The charity does not need to know the identity of the donors or collect Gift Aid declarations.

GASDS claims are worked out in the same way as Gift Aid. If the basic rate of Income Tax is 20%, the charity can claim a GASDS top-up payment of £2,000 on up to £8,000 worth of small donations. This is limited to 10 times the amount that the charity receives in Gift Aid donations that tax year.

We have featured the tax efficiency of pension fund investment in a number of recent newsletters. As well as the increased flexibility in terms of drawdown arrangements that were introduced in April 2015 there were some important changes to what happens to the undrawn funds on death. These changes mean that your pension fund can be passed to survivors tax efficiently.

Where the pension scheme member dies under age 75 certain lump sum death benefits are now tax-free. In particular a drawdown or flexi-drawdown pension fund lump sum death benefit or an uncrystallised funds lump sum death benefit.

Where the member at the time of their death was age 75 or older the special lump sum death benefit charge on the fund will be 45%. However, if a nominated beneficiary wants to draw down income each year rather than take the lump sum the amounts drawn would be taxed at their marginal income tax rate. It has recently been reported that there are currently £2 billion of pension assets in drawdown where the beneficiary is aged under 55 suggesting that a significant number of individuals have taken advantage of the new rules.

Note that cash and quoted shares, including those held within an ISA, are subject to inheritance tax on death whereas pension fund assets are generally free from inheritance tax. It may therefore be more tax efficient to spend or give away cash and shares rather than draw on the pension fund.

Please contact us if you would like to discuss estate and inheritance tax planning in more detail.