Category: Insights

There are now only three months remaining for clients to tidy up their offshore tax affairs before the penal penalty regime on underpaid tax kicks in. Most people turn off at the mention of offshore tax matters as they believe it does not affect their clients but this could apply where the clients simply hold a foreign rental property or have a foreign bank account. From 30 September 2018 the new regime known as the ‘Requirement to Correct’ will be applied, where there is underpaid tax arising from the holding of offshore interests, of whatever nature.

The penalties arising can be as high as 200% of the unpaid tax, with mitigation to 100%, with no ability to negotiate. There may be a ‘reasonable excuse’ as to why penalties do not apply but it will be very difficult to meet this definition.

For example reasonable excuse will not apply:

• If a client set up an offshore trust in which income has arisen that should have been reported in his tax return, even if the client sought tax advice from someone associated with the tax planning at the time and it was decided that a tax liability did not arise.
• If the client sought independent advice and the adviser looked at their affairs holistically and had the full facts made available to them, there should be reasonable excuse. The tax and interest would still be payable but the large penalties should not arise.

To avoid any uncertainty, the Worldwide Disclosure Facility allows a taxpayer to declare this unpaid tax before 30 September without these high penalties. This reporting can often be restricted to four years, depending upon the circumstances.

HMRC now have the capabilities of extracting information on clients from their various international databases which makes the ability to file under the Worldwide Disclosure Facility a particularly attractive option.

Therefore, the next three months are a good time to undertake a health check of a client’s affairs, with a view to hopefully confirming their affairs are in order or if not, making disclosure before 30 September.

The health check could include:

• A review of trusts where there are UK resident beneficiaries to ensure no benefits provided by the trust have been omitted from the beneficiaries’ tax returns.
• Ascertaining whether they hold any property overseas on which any rental income has been under declared.
• Asking whether they have any overseas bank accounts where they haven’t declared the income, no matter how small.
• A review of a settler’s current domicile position to ensure that the new rules that protect income and capital gains arising in an existing offshore settlement from being taxed on the settler,  continue to apply. Many years may have passed since the settlement was created and the settler’s intentions may have changed which affects their domicile and in turn, affects the protected status of the trust.
• A review of the domicile position of the settler at the time the settlement was created. It may be that an independent review is needed to cover the settler, not only to advise that no tax has been underpaid but also should that later independent ruling be found to be incorrect, to protect them from penalties under reasonable excuse.
• A review of offshore trusts to ascertain that any 10 year charges to inheritance tax or exit charges have been properly reported. This will also include any 10 year charges that arose since 5 April 2017 where the trust holds UK residential property through an offshore company.

HMRC are taking a much stronger stance on domicile than before and therefore it is important to review the position continually to ensure correct reporting is made.

These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 June 2018. Where there has been a change the previous rate is shown in brackets.

Engine Size                           Petrol                     Diesel                     LPG  

1400cc or less                     11p                                                             7p

1600cc or less                                                             9p

1401cc to 2000cc               14p                                                               9p (8p)

1601 to 2000cc                                                         11p

Over 2000cc                       22p                                 13p                     14p (13p)

Note that for hybrid cars use the equivalent petrol or diesel scale charge. However, it may be more beneficial to compute the actual cost.

You can continue to use the previous rates for up to 1 month from the date the new rates apply.

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.

HMRC have published revised guidance on settling tax liabilities in relation to the use of disguised remuneration schemes involving Employee Benefit Trusts (EBTs) and similar arrangements.

In order to settle on preferential terms before the outstanding loan charge arises on 5 April 2019, taxpayers must register with HMRC and provide all of the required information by 30 September 2018.

WHAT IS THE 2019 LOAN CHARGE?

This is a tax charge on any outstanding loans that exist as a result of a disguised remuneration tax avoidance scheme. It applies to any loans that were taken out under a disguised remuneration scheme since 6 April1999.

The most common schemes were Employee Funded Retirement Benefit Schemes (EFRBS) and Employee Benefit Trusts (EBT). When used for tax avoidance, both involved the diversion of employment income to a trust; the trust would then ‘loan’ the employment income to the individual (meaning no PAYE/National Insurance tax was paid) who sought to benefit from the Scheme.

It is the responsibility of the employer/company to pay the 2019 Loan Charge under PAYE legislation. The employer is then expected to pass this cost on to the individual. Whilst the initial liability falls to the employer, it can be passed to the individual beneficiary of the scheme by HMRC if unpaid.

By contacting HMRC to settle your tax affairs now, you can obtain certainty of what you owe and if required, arrange a payment plan.

Under new rules due to come in on 1 October 2019 builders, sub- contractors and other trades associated with the construction industry will have to start using a new method of accounting for VAT.

The measure is designed to combat VAT fraud in the construction sector labour supply chain which HMRC argue presents a significant tax loss. HMRC has now published draft legislation to introduce the Reverse Charge for Construction Services.

Under the proposed new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the reverse charge a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) would then account for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position. This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors.

CONSTRUCTION WORK AFFECTED

The reverse charge will apply to a wide range of services in the building trade, including construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, and foundation works. The definitions have been lifted directly from the CIS legislation.

EXCLUDED WORKS

Professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape are not covered by the new rules. The draft legislation sets out other work to which the reverse charge does not apply.

It is hoped that the legislation and guidance will be finalized by October 2018 to allow businesses at least 12 months in which to make the necessary changes to systems. Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system.

The Office of Tax Simplification (OTS) have been tasked with carrying out a review of Inheritance Tax (IHT) with a view to simplifying how the tax operates. IHT is perceived to be complicated and currently yields a relatively small amount of tax compared to income tax and national insurance.

There are a number of reliefs and exemptions currently available which may be withdrawn or simplified as a result of the review. Major changes to the tax are probably a year or so away and we will keep you updated as the review progresses. It may be necessary to review your Will and plans for passing on your business and estate when we see any new rules.

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.

In April 2017, the Government reformed the rules for engagements in the public sector, and early indications are that this has resulted in an increase in public sector compliance. The April 2017 change requires the public sector body or agency, not the worker, to decide whether or not the IR35 rules apply and then deduct income tax and national insurance from payments to the worker.

There are however concerns that many of such workers are being treated as quasi-employees incorrectly. The consultation document states that there is evidence that some public authorities did have difficulties implementing the reform, both understanding the new rules and resolving disputes with contractors. HMRC have introduced the Check Employment Status

for Tax service (CEST) software on their website to assist employers in reviewing workers’ contracts.