Category: Taxation

Spring Budget 2024 – Key Issues

Posted on by Derval Rooney

Introduction

• The Chancellor, Jeremy Hunt, has just delivered the Government’s Spring Budget, which could well be the last fiscal statement before the next General Election (due to be held no later than January 2025).
• The Chancellor was able to point to a reduction in the rate of inflation since he came to office in late 2022 (from 11% to 4%, with a further expected fall to below 2% in the next few months). However, as growth levels remain relatively low, he was not expected to have a lot of room for manoeuvre in terms of spending commitments or tax cuts.
• As is now customary, there was a lot of speculation about the measures to be introduced, and so the headline measure – a 2% drop in the employee/self-employed NIC rate – was well trailed. As had also been discussed in the press, he announced the removal of ‘non-dom’ status, albeit to be replaced by a new regime for individuals coming to the UK.
• From the point of view of taxation, there were a number of other key measures of interest to businesses (and their owners and employees). Further details are set out below.

Income Tax/ NICs

• The main rate of employee’s and self-employed (Class 4) NIC will both reduce by a further 2% from 6 April 2024. As a result, from that date the main rate of employee’s NIC will be 8%, and the Class 4 rate will be 6%.
• On High Income Child Benefit Charge (HICBC), the Government announced it’s intention to move this to a ‘household’ based threshold with effect from April 2026. In the meantime, the starting threshold has been increased from £50,000 to £60,000, with a taper applying to the charge for individuals with income up to £80,000.
• A new ‘UK ISA’ will be introduced (following consultation), to allow investment in UK equities of up to £5,000. This will bring the total amount an individual can hold in an ISA from £20,000 to £25,000.

Full expensing and film tax credits

• Full expensing provides a 100% deduction for expenditure on new and unused assets that would otherwise qualify for the main pool capital allowances relief over a number of years, reducing a Company’s corporation tax bill in the year of the expenditure by up to 25% of the expenditure incurred. Special Rate Pool assets can qualify for a 50% First Year Allowance.
• Assets used for leasing (along with land & buildings and cars) are ineligible for the allowance. However, draft legislation will be published for technical consultation, in order to consider the potential extension of full expensing to include plant and machinery for leasing. This will be ‘subject to future decision’, meaning that any change would only be expected when the economic conditions allow.
• A new UK Independent Film Taxation Credit will allow eligible films (those with a production budget up to £15m and meet the requirements of a new British Film Institute test) to claim a 53% enhanced audio visual expenditure credit on qualifying expenditure. Designed to boost the production of UK independent films and support UK talent, productions will need a “theatrical release” in order to qualify

Property taxes

• The Furnished Holiday Letting Regime is to be abolished with effect from April2025. Landlords who previously benefited from tax advantages under this regime may see an increase in their tax liabilities (through losing eligibility for capital allowances and mortgage interest relief), as well as losing various capital gains tax(CGT) reliefs.
• The higher rate of CGT on residential properties will be reduced from 28% to 24%,with this change taking effect from 6 April 2024. The lower rate will remain at 18%for any gains that fall within an individual’s basic rate band.
• For SDLT, multiple dwellings relief (MDR, which can reduce the overall effective rate of SDLT where more than one dwelling is purchased) will be abolished for transactions with an effective date from 1 June 2024, with transitional rules for contracts exchanged on or before 6 March 2024.

Other matters

• The existing non-domicile rules will be abolished and replaced with a ‘simpler residence-based regime’. Under the new regime, individuals (who will opt in to it) will not pay UK tax on foreign income and gains for the first four years of UK tax residence. There will also be transitional arrangements for existing non-domiciled individuals claiming the remittance basis including a two year ‘Temporary Repatriation Facility’ to bring previously accrued foreign income and gains into the UK at a 12% rate of tax. The new regime will take effect from 6 April 2025.
• The VAT registration threshold will increase £85,000 to £90,000 (effective from 1 April 2024). This is the first increase since 2017. The deregistration threshold will also increase, from £83,000 to £88,000.

If you would like to discuss any of the matters arising from today’s Statement, please contact any member of the tax team.

Autumn Statement 2023

Posted on by Derval Rooney

The Chancellor, Jeremy Hunt, has just delivered the Government’s Autumn Statement which is likely to be the penultimate fiscal statement before the next General Election (with a Spring Budget expected in March 2024).

From an economic viewpoint, the headline was the reduction in inflation over the last year – from 11% to 4.6% (as measured by the CPI), thus allowing the Prime Minister to say that he has fulfilled the pledge to halve inflation this year. This, along with slightly improved debt forecasts since the Spring Budget, gave the Chancellor some headroom to cut taxes.

There had been much speculation in recent weeks about the nature of these cuts. In the end, neither income tax nor inheritance tax have been touched – although the reduction to national insurance contributions will have benefits for workers and the self-employed.

From a tax perspective, there were three main measures which are of interest to businesses and workers.

National insurance contributions (NICs)

The Chancellor announced a 2% cut to the employees class 1 National insurance contribution rate. Acknowledging that a combined rate of tax and national insurance for a basic rate taxpayer was “too high” at 32%, he has reduced the employee’s national insurance rate for that part of income falling between £12,570 and £50,270 from 12% to 10%. This will be effective from 6 January 2024, rather than the usual 6 April.

For those who are self-employed, the Government will abolish the compulsory flat rate weekly Class 2 national insurance contributions (currently £3.45 per week) and reduce the Class 4 contribution rate from 9% to 8% – both effective from 6 April 2024.

Full expensing

The Autumn Statement details the Government’s intention to give companies certainty to plan long-term investments, and to assist companies that want to decarbonise by investing in newer, greener plant and machinery. Full expensing, the previously temporary successor to the Super Deduction has now been made permanent, with the government estimating that this will unlock an additional £14 billion of investment over the next 5 years.

Full expensing provides a 100% deduction for expenditure on new and unused assets that would otherwise qualify for the main pool capital allowances relief over a number of years, reducing a Company’s corporation tax bill in the year of the expenditure by up to 25% of the expenditure incurred. Special Rate Pool assets can qualify for a 50% First Year Allowance. However, land and buildings, cars, and assets used for leasing are ineligible for the allowance.

Research & Development

Following consultation, the Chancellor has indicated that the new ‘merged’ R&D relief scheme will go ahead with effect for accounting periods beginning on or after 1 April 2024. Under the merged scheme, a tax credit (expected to be 20% of qualifying expenditure) will be paid to companies. This tax credit will itself be taxable, but the Chancellor indicated that, for loss making companies, the applicable rate of tax will be 19% rather than 25%.

The current SME scheme will continue to apply for loss-making R&D intensive SMEs from 1 April 2023, whereby a tax credit is available at 14.5% for losses surrendered, rather than 10%. In order to qualify for this scheme, the SMEs were required to incur at least 40% of total expenditure on R&D – for accounting periods beginning on or after 1 April 2024, this reduces to 30%.

Other matters

It’s worth noting that the Autumn Statement is not a Budget – that will happen next Spring. However, the Government will shortly be publishing the Finance Bill which will contain the above measures, and many others which have previously been announced. It’s in this document that we will see the substance of how these measures will operate in practice and, as usual, it’s always necessary to read the ‘fine print’.

If you would like to discuss any of the matters arising from today’s Statement, please contact any member of the tax team.

Thoughts in advance of the 2023 Autumn Statement

Posted on by Derval Rooney

For many years Autumn Statements did not create much interest outside of economic and political circles. They were more like midterm report cards that would signpost how things were going in the economy, with updates on public spending and borrowing. Since 2018 the plan was for the Budget to take place in the Autumn and then there would be an economic update in the spring to be called the Spring Statement. The theory was to avoid two fiscal events in the same year and to enable Parliament to have more time to debate and review draft fiscal legislation. However, since 2018, the reality has been much less clear cut with a plethora of ad hoc fiscal statements and indeed last year a budget statement reversal after the chaos caused by the Truss/Kwarteng budget statement in September 2022.

On 22nd November 2023 Jeremy Hunt will present his Autumn Statement to Parliament. He will no doubt be relieved that he has survived the recent cabinet reshuffle, but that relief will be significantly tempered by the thought of an election which must take place within the next 15 months. The current opinion polls, the state of the UK and global economies and the fact that the current Government has put in place fiscal measures that have led to the highest tax burden in the UK since the end of the Second World War will mean that any thoughts of job security may be temporary.

So, will the Chancellor make any surprise announcements at the Autumn Statement in a bid to both stimulate the economy and start to reverse the trends in the polls? The general thinking is that he has virtually no room to manoeuvre at the minute. Whilst tax receipts have been extremely buoyant in the last six months due partly to the better-than-expected economic growth but mainly to the impact of the increased tax burden, the impact of inflation on public sector costs and the huge increase in government borrowing interest costs (rising to over £100bn this year) will mean there is virtually nothing in the kitty for any big tax give-aways.

With that in mind, it is always worth looking at what might be included in the statement (or maybe even in the Spring Budget):

Corporation tax rates went from 19% to 25% from 1st April this year (despite the Truss/Kwarteng attempt to reverse this last year). The higher rates will no doubt impact on foreign direct investment, and it may be too early to tell whether the higher rate will result in a higher tax yield. Whilst the natural home for a Conservative Chancellor would be to lower corporation tax rates, one must remember that companies don’t vote and we are too far into the current election cycle for a cut in corporation tax rates to have any significant impact in time for the next election.

Inheritance Tax is regarded as the most hated tax in the UK — effectively paying tax on wealth that has already been subject to income tax and capital gains tax. There were some hints earlier this year that this tax may be subject to a root and branch review and that it would be adjusted so as to take most people out of the inheritance tax net, leaving only the wealthiest subject to it. However, inheritance tax is actually not paid by the majority of people and its dislike is more often about its perceived impact rather than its real impact. Whilst the cost of making some significant changes would not be enormous, it would be seen as handing a tax break to the wealthy at a time of austerity and thus it may not have the electoral impact that would make it worthwhile.

Stamp Duty Land Tax has been around for 20 years now and the rate has steadily increased over that time. There may be merit in a reduction in the rate at the bottom end of the property ladder to not only help stimulate the struggling housing sector but also to encourage younger people to get onto the property ladder. Having said that, with the base interest rates now north of 5% after a decade of interest rates closer to 1%, the reduction in SDLT rates may not give the necessary short term boost to first time buyers.

It is highly unlikely we will see any reduction to income tax rates or national insurance rates, the cost of such reductions would be just too great and any such rate cuts at this time could spark unwelcome movements in the UK government bond market similar to those seen last autumn.

Mr Hunt is between a ‘high tax rock’ and a ‘looming election hard place’. It is hard to see him having any wriggle room just now. However, the November Statement is not quite the last chance saloon, that will be the Budget Statement next spring. I suspect the Chancellor and his government will be keeping their fingers crossed that tax receipts will stay buoyant, global economic factors will enable inflation to fall back further and that interest rates will ease back below 5%. They say a week is a long time in politics but the question is will four months be long enough for the economy to provide a window of opportunity for the Chancellor? Watch this space.

Budget 2023

Posted on by Rory Moynagh

Earlier today, Chancellor Jeremy Hunt delivered his second major fiscal statement in five months. With the OBR forecasting that the UK will not enter a technical recession this year (albeit it still expects a contraction of 0.2% in the economy) and that inflation will fall below 3% by the end of 2023, the Chancellor felt justified in saying that the UK economy was on the right track.

In terms of specific policies, as is becoming the norm, the headline announcements have been trailed in advance over the last few days. The main focus this year was on expanding free childcare provision – while the key announcements applied to England, they should lead to increased funding for Northern Ireland via the Barnett formula.

Pensions Tax Relief

The main personal tax-related announcement in this Budget was probably the changes to the pension annual and lifetime allowances. The annual allowance (the amount which can be contributed to pension schemes tax-free each year) will increase from £40,000 to £60,000 from 6 April 2023. The three year carry-forward of unused annual allowances is retained.

The lifetime allowance charge (currently applicable to pension pots in excess of £1,073,100) will be removed from April 2023, with the lifetime allowance being abolished from April 2024. However, the maximum tax-free lump sum that can be taken from pensions at commencement will be retained and frozen at its current level of £268,275 (i.e. 25% of the current lifetime allowance).

Capital Allowances

The Chancellor committed to making the UK tax system one of the most competitive in the world. He introduced two major capital allowances designed to boost investment.

Full Expensing (“FE”) will allow companies incurring expenditure on capital allowance main rate pool assets to claim a 100% deduction for the cost of the assets from their profits. This FE will apply from 1 April 2023 to 31 March 2026 and will result in a tax saving of 25p per £1 spent.

In addition, the 50% First Year Allowance (FYA) which is available on plant and machinery which qualify as special rate assets has been extended until 31 March 2026. For each year following the FYA claim, the remaining expenditure will continue to be written off at 6% per annum.

The Chancellor’s long-term commitment is to make both these reliefs permanent. However, while the £1m Annual Investment Allowance currently remains in place indefinitely, we consider that the new relief will be of limited benefit to most small or medium-sized businesses.

Research & Development

In the Autumn Statement 2022, the government announced that from 1 April 2023 the rate of the Research & Development Expenditure Credit (RDEC) for large companies would be increased from 13% to 20%. 

At the same time a reduction in the Enhanced Expenditure Relief for Small and Medium size Enterprises (SMEs) was announced, with the enhanced deduction for qualifying expenditure reduced from 130% to 86% from 1 April 2023 and the payable credit for loss making companies cut to 10% from 14.5% from the same date.

These changes announced in the Autumn Statement will still come into effect on 1 April 2023. However, today the Chancellor has announced an increased rate of relief for loss-making R&D intensive SMEs. SME companies for which qualifying R&D expenditure constitutes at least 40% of total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying R&D expenditure (resulting in £27 from HMRC for every £100 of R&D expenditure.)

The implementation of overseas expenditure restrictions has been delayed for one year and will now come into effect on 1st April 2024. This is to allow the government time to consider the impact of this restriction on a single merged R&D relief. The consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes closed on 13 March and draft legislation on a merged scheme is expected to be published this summer for technical consultation.

Other Matters

The Budget was noticeably light on mentions of income tax, national insurance contributions and tax-free allowances –primarily because tax thresholds and allowances have been frozen until 2027/28.

However, one other point of note for SMEs was the announcement of a relaxation of administration rules for Enterprise Management Incentive Schemes. From April 2023, there will no longer be a requirement for option agreements to include details of share restrictions, nor for a company to declare that an employee has signed a working time declaration. From April 2024, the deadline for notification of the option grant will be changed from 92 days following grant, to the 6 July following the end of the tax year in which the grant took place.

If you would like to discuss any of the above matters (or any other tax related issues) in more detail, please contact any member of our Tax team.

Pre Budget Predictions

Posted on by Rory Moynagh

In November 2022, the Chancellor delivered what was in effect a Budget in all but name in which he cut spending and raised taxes in an attempt to reassure investors about the UK’s commitment to financial stability. Given that Government typically announces significant policy changes in the autumn and lesser changes in the spring we are left wondering what Mr. Hunt will do on 15 March 2023 when he delivers his promised “full fat” budget and OBR Forecast.  Whilst we can’t be certain what the Chancellor will do, we do not expect major changes to the following reliefs and incentives.

Seed Enterprise Investment Scheme (SEIS)

SEIS is a small-scale venture capital scheme designed to help start-up companies obtain initial investment. Amendments to expand the scheme were announced in the “mini budget” on 23 September 2022 and were one of the few announcements to escape the Government U-turn later in the year.

The new changes come into effect from April 2023 and provide for the following:

  • – The maximum amount a company can raise is increased from £150,000 to £250,000
  • – The gross asset limit will increase from £200,000 to £350,000
  • – The age of the new qualifying trade will increase from 2 to 3 years and
  • – The annual investor limit will double to £200,000.

For the investor with a stake of less than 30% in a qualifying company, SEIS can provide income tax relief of 50% of the amount invested up to a maximum relief of £100,000. The relief can be claimed in the year of investment, or any unused annual relief can be carried back to the previous tax year.  In addition, any gain arising on the disposal of shares on which the investor received SEIS income tax relief (which has not been withdrawn) is not a chargeable gain, where the disposal takes place more than three years after issue.

Enterprise investment Scheme (EIS)

The tax incentives offered for EIS investments are intended to encourage investment in small, young high-risk companies which have limited access to market finance. There are stringent conditions attached to both the EIS issuing company and investor in order to obtain the relief.  Originally EIS was subject to a sunset clause whereby the relief was to be no longer available for subscriptions made on or after 6 April 2025. The scheme has now been extended beyond 2025.  

An investor subscribing for new shares in a qualifying EIS company can benefit from a number of reliefs including income tax relief up to 30% of the permitted maximum subscription, capital gains tax exemption, loss relief against capital gains or income tax and the ability to defer capital gains. In addition, Inheritance Tax Business Property Relief may also be available.

The permitted maximum investment in a qualifying company is £1m (or £2m where the investment is in a “knowledge intensive” company).  However, the tax relief attaching to the investment can reduce a tax liability to nil but cannot generate a tax repayment so care needs to be taken not to invest more than the relief that can be claimed in the current or prior year.

Enterprise Management Incentive Scheme (EMI)

The need to attract and retain quality staff has always been important for employers but even more so in a competitive market where there is a skills shortage in the labour force.

EMI, which is tax advantaged share option scheme, is a selective share scheme allowing companies to target rewards to particular employees in order to drive performance and reward loyalty.  With many businesses suffering from cash flow problems against a tide of rising inflation, offering non cash incentives to key employees may make leaving an employment a bigger decision than might otherwise be the case with a salary-only package. Employee share schemes can be used to create long term incentives typically aimed to crystallise on a sale or listing of the company, or alternatively as a reward for completion of a number of years’ service.

Share options allow employees to acquire shares at a fixed date in the future or following a predetermined event.  The price they will pay for their shares is determined at the start of the process and employees have nothing to pay until they exercise the option and acquire the shares.   No income tax or NIC is payable when the option is granted.  Similarly, the exercise of the option should not give rise to an income tax/NIC charge (provided the various conditions of the scheme are met). Companies may also be able to claim a corporation tax deduction for the difference between the market value of the shares when the options are exercised, and the amount paid by the employee to acquire them.

The employees will be subject to capital gains tax when they sell the shares they acquire via the option but shares acquired via an EMI scheme may also qualify for Business Asset Disposal Relief resulting in a 10% capital gains tax rate on the first £1m of gains. This makes an EMI reward far more attractive from a tax perspective than a cash bonus on a sale of the company which would result in a tax charge of up to 47%.

Business Asset Disposal Relief (BADR)

BADR remains an important valuable tax relief – even after the reduction of the lifetime limit from £10m to £1m in March 2020. Originally called “Entrepreneurs Relief” it can be available on the disposal of a “business” such as a trading company, a sole trade business, share of a trading partnership or assets used by a trading company or partnership.

For shares in a trading company, the shareholder must hold at least 5% of the company’s ordinary share capital, voting rights, rights to dividends and assets on winding up at least 2 years prior to the sale as well as being an officer or employee of the company for an uninterrupted period of 2 years back from the date of sale.

Where the relief is available up to £1m of capital gains will be subject to tax at 10%.

Inheritance Tax (IHT) and wealth management

IHT, sometimes referred to as the “death tax”, is charged at 40% on the excess value of a person’s worldwide non-exempt assets or “estate” (after deducting funeral expenses and debts) over the IHT threshold.  As the threshold or the nil rate band has been frozen at £325,000 since 2009 and will be kept at that level until at least 2026, more people than ever may find themselves unexpectedly caught by this tax.

There are some steps that can be taken to help minimise any IHT exposure although generally IHT planning should take place earlier rather than later due to the 7-year cumulative clock on lifetime gifts that runs back from the date of death.

There are exemptions for IHT transfers between spouses i.e., those who are legally married to each other, those who are legally registered as civil partners and those who are legally married although separated at death.  Individuals who are cohabiting are not considered spouses for IHT purposes.

Business Property Relief (BPR) is a very valuable IHT relief and usually applies to shares in trading companies.  However, if the shares in a trading company are sold, BPR relief is lost, and the resultant sales proceeds could be exposed to IHT.  Careful pre-sale planning can help mitigate future IHT risks.

If you would like to discuss any of the above matters (or any other tax related issues) in more detail, please contact any member of our Tax team.

Taking Stock Amidst Turbulent Times in the Tax World

Posted on by Rory Moynagh

The word ‘unprecedented’ can be overused in the modern world, but when it comes to looking at events of the past few months associated with changes in UK economic and tax policy, it seems particularly appropriate. In the Autumn of 2022, major tax changes were announced (and, in many cases, withdrawn) at a pace never seen before.

While financial markets appear to have settled somewhat since the Autumn Statement delivered on 17 November, there might easily be some confusion as to what the current position is with respect to those matters which were subject of discussion.

Therefore, it is worth taking stock of where some of those key matters now stand. What follows is a brief summary of some of the main points, setting out what the current position is.

1. Capital Gains Tax (“CGT”)

The headline announcement was that the Annual Exempt Amount (“AEA”) will be reduced from £12,300 to £6,000 in April 2023, before being further reduced in April 2024 to £3,000. Key reliefs remain available (e.g. Business Asset Disposal Relief and Investor Relief.) There are no indications whether the rates will increase in the short to medium term but for now they remain unchanged and are still relatively low:

BandRate
Basic Rate BandResidential Property Gains18%
All other gains10%
Higher Rate BandResidential Property Gains28%
All other gains20%

The current capital gains rates are still attractive compared to the much higher income tax rates. There may also be merit in maximising the AEA by timing smaller disposals to happen before the reductions begin in April 2023.

2. National Insurance Contributions (“NIC”)

Perhaps the source of the greatest confusion has been the increase in national insurance rates and the introduction of the Health and Social Care Levy (“HSCL”) in April 2022, followed by their withdrawal from 6th November 2022.

The amount at which an individual employee starts to pay NIC was aligned with the Income Tax Personal Tax Allowance from 6th July 2022 (£12,570). The rate at which employers start to pay NICs is £9,100.

Details of the rates and bands applicable throughout the year are set out in the Appendix at the end of this article.

There is also a hybrid rate for Class 1A NIC for the full tax year ended 5th April 2023 in relation to expenses and benefits, and Class 1B NIC in relation to PAYE settlement agreements – this rate is 14.53%. This is also the rate for directors cumulative NIC calculations for 2022/23.

Dividend rates increased from 6th April 2022 in tandem with the NIC rates, by 1.25% each. However, unlike the NIC rates, these were not reduced in the Autumn Statement. Rates remain 8.75% for basic rate band dividend income, 33.75% for higher rate band dividend income and 39.35% for additional rate dividend income. The dividend allowance is to be reduced from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.

3. Off Payroll Working (“OPW”) Rule

Most businesses would have breathed a sigh of relief when the “Mini-Budget” announced the reversal of the extension to the OPW rules (by abolishing the new rules brought in from April 2017 and April 2021), returning the responsibility for operating PAYE/ NICs to the Personal Service Company (“PSC”) itself.

Their relief was to be short-lived though, as, soon after taking office as Chancellor, Jeremy Hunt announced that these new rules were not to be abolished.

Under the Off-Payroll Working Rules it is the company to which the worker or director provides their services (i.e. the client) that has responsibility for making the Status Determination Statement in respect of the worker, with the fee-payer (and not the PSC itself) having responsibility for deducting the tax and NIC liability via payroll, if the relevant employee is found to have employee status for tax purposes. The rules apply if a worker provides their services to a client through an intermediary but would be classed as an employee if they were contracted directly.  Initially, the new rules only applied to public sector clients from April 2017, but from 6 April 2021 they extended to clients in the private sector that are medium or large.

Where a contractor is working for a small client entity the OPW rules continue to apply as prior to April 20017 in respect of potential deemed employment relationships, i.e. it is the PSC which has any responsibility for paying PAYE/ NIC  to HMRC.

4. Research & Development (“R&D”) Changes

Changes to the R&D schemes were not unexpected following the 90% increase in R&D enquiries amid HMRC’s continuing concerns over the level of error and fraud in R&D claims. It is hard to see however how the changes introduced can be used to prevent fraudulent claims. Changes to both schemes from 1st April 2023 are as follows:

  • SME incentive scheme:
  • – Additional deduction reduced from 130% to 86%
  • – SME tax credit reduced from 14.5% to 10%
  • RDEC incentive scheme:
  • – RDEC rate increased from 13% to 20%

Further measures to tackle fraud in R&D claims have been set out in draft legislation, intended to be introduced from April 2023, and include the requirement to name the adviser preparing the R&D report on the claim, the requirement to make advance notification of a claim and the requirement to have the claim signed off by a senior officer of the company. The requirement to name the adviser compiling the report will presumably help HMRC develop a list of trusted agents which could then expedite some claims, freeing up HMRC staff to enquire into the higher risk claims.

5. Stamp Duty Land Tax (“SDLT”)

On 23rd September, Kwasi Kwarteng announced, as part of his Growth Plan, the doubling of the stamp duty threshold to £250,000 and increased the threshold for first time buyers from £300,000 to £425,000 and increased the maximum property value for first time buyers from £500,000 to £625,000.

There had been no time limit placed on these threshold extensions, however Jeremy Hunt has now confirmed in his Autumn Statement that this will be a temporary measure, ending on 31 March 2025.

6. Surviving from the Growth Plan

Between the Growth Plan Statement and the Autumn Statement many elements of the former were quickly dropped. To try to stabilise the markets the abolition of the additional rate band was abandoned (with the Autumn Statement increasing the band of income which will be subject to the additional rate), the cancellation of the increase in corporation tax was set aside, as was the cancellation of the increase in dividend tax rates. Not all elements of The Growth Plan were scrapped though, as set out below:

  • – The permanent increase of the Capital Allowances Annual Investment Allowance to £1 million remains
  • – The increase in the Company Share Option Plan Limit from £30k to £60k will go ahead
  • – The increase in the amount of SEIS investment companies can raise (from £150k to £250K) has been retained
  • – The Health and Social Care levy remains cancelled.  

It is to be hoped that, following an Autumn of significant upheaval for the Government – in terms of both economic policy and personnel – there will be a period of relative calm which will allow businesses to adjust to the new landscape. However, there are no guarantees of this in the current climate and businesses will need to remain adaptable in the face of ongoing political and economic uncertainty.

If you would like to discuss any of the above matters (or any other tax related issues) in more detail, please contact any member of our Tax team.

Appendix – NIC rates and band applicable in 2022/23

The rates for 2022/23 are as follows:

6th April 2022 – 5th July 2022

Band Percentage
Employee ContributionsBetween £12,570 and £50,270 13.25%
Over £50,270 3.25%
Employer Contributions Over £9,100* 15.05%

6th July 2022 – 5th November 2022

BandPercentage
Employee ContributionsBetween £12,570 and £50,270 13.25%
Over £50,270 3.25%
Employer Contributions Over £9,100* 15.05%

6th November 2022 onwards

BandPercentage
Employee ContributionsBetween £12,570 and £50,27012.00%
Over £50,2702.00%
Employer ContributionsOver £9,100*13.8%

*Disregarding the exemption for employer’s contributions in relation to employees under 21 years of age.

The Growth Plan 2022

Posted on by Rory Moynagh

Although described as a ‘mini-Budget’, the Chancellor’s Statement on The Growth Plan 2022 earlier this morning introduced a wide range of measures. In addition to attempts to deal with rising energy prices, the Government set out a range of tax cutting and other incentive proposals with the key aim of stimulating economic growth. The main tax-related measures are noted below:

Income Tax and NIC

  1. The Basic Rate of Income Tax will be cut from 20% to 19% from April 2023.
  2. The temporary increase in NIC of 1.25% is to be cancelled effective from 6th November 2022. The 1.25% increase in dividend rates will be cancelled from April 2023. The Health and Social Care levy, which had been proposed for introduction in April 2023 has also been cancelled.
  3. The government will also abolish the Additional Rate of Income Tax such that, with effect from April 2023, there will be a single higher rate of Income Tax of 40 per cent, rather than an additional 45% on annual income above £150,000.

Corporation Tax

  1. There will no longer be an increase in the headline corporation tax rate to 25%, keeping the rate at 19% after 1st April 2023.
  2. The reduction in the level of Annual Investment Allowance is also cancelled, with the relief now available permanently on £1 million of qualifying expenditure on plant and machinery per year.

Stamp Duty Land Tax (SDLT)

  1. The government is reforming SDLT in England and Northern Ireland by doubling the level at which people begin paying this from £125,000 to £250,000 from today.
  2. There are also increases in reliefs offered to first time buyers- by increasing the level first-time buyers start paying SDLT from £300,000 to £425,000, and by allowing them to access the relief when they buy a property costing less than £625,000 rather than the current £500,000.

Other Matters

  1. With effect from April 2023 the government will repeal the off-payroll working (i.e. IR35) reforms introduced in 2017 and 2021. This will once again leave the primary responsibility for determining employment status (and also operating PAYE and NIC) with the personal service company, rather than with the client/ engager.
  2. Company Share Option Plan limit increased from £30k to £60K from April 2023
  3. The amount and availability of the Seed Enterprise Investment Scheme (SEIS) will be increased, with companies able to raise up to £250k of SEIS investment, increased from £150k.
  4. The government remains supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and sees the value of extending them in the future.
  5. Businesses in designated “Investment Zones” will benefit from time-limited tax benefits in England, including enhanced capital allowances, structure and buildings allowances, business rates relief, Employers NIC relief and SDLT relief. The government intend to work with devolved administrations to develop similar opportunities in Northern Ireland, Scotland and Wales.

The measures outlined today went further than what had been trailed in the press over recent days and it obviously remains to be seen whether they will have the desired effect. However, it would be fair to say from the outset that the desire to simplify the IR35 rules will be welcomed, as these have been causing significant uncertainty for businesses in recent years.

If you have any queries on today’s announcements, please contact any member of our Tax team.

Time to plan for an MVL?

Posted on by Rory Moynagh

Written by Jamie Callaghan

With the Chancellor’s Spring statement fast approaching, those business owners contemplating retiring or exiting their business will no doubt be considering the possible implications for them should the Government announce changes to the Capital Gains Tax (‘CGT’) regime. 

As the Government continues to deal with the aftermath of unprecedented borrowing to support the economy during the pandemic, some consider that CGT could be next on the Chancellors hit-list to raise funds. This could be achieved through the removal of business asset disposal relief (‘BADR’) or, as recommended by the Office of Tax Simplification, increasing the CGT tax rate. 

Business owners can mitigate their risk now by discussing a Members’ Voluntary Liquidation (‘MVL’) with an Insolvency Practitioner to explore whether it is an option suitable for them. 

An MVL is an option for solvent companies wishing to wind down their activities and allows for assets to be distributed in a tax-efficient manner, whilst also giving directors certainty given the finality of the liquidation process. Subject to certain conditions, distributions made in an MVL can qualify as capital distributions and business owners can avail of BADR with a tax rate of 10%. At current rates, this relief can save business owners up to £100,000 in CGT. 

An MVL is only an option for solvent companies meaning that the company must hold enough assets to be able to settle all liabilities and interest in full, normally within 12 months. Due to the ability under company law to hold members’ meetings at short notice, companies can often be placed into an MVL within a couple of days. 

While no-one really knows what the Chancellor’s plans are for CGT come 23rd March and beyond, business owners should always keep one eye on their exit strategy and plan accordingly. This will ensure their company’s activities are wound down in the most efficient possible manner.

Business Advisory Services – “We Are Hiring”

Posted on by Derval Rooney

Due to ongoing growth in our Business Advisory Services Practice (“BAS”), we are now looking to recruit an Assistant Manager / Manager to join the firm. The successful candidate will report to the BAS Directors and will be involved in the provision of advisory and restructuring services to a wide range of stakeholders, including banks, funds, alternative lenders and corporates. The role will include the following:

  • Provision of professional advice and services to a wide ranging portfolio of clients, to include:
    • Turnaround options advice and business restructuring;
    • Debt and refinancing advice;
    • Accelerated M&A;
    • Independent Business Reviews;
    • Corporate simplification;
    • Corporate insolvency; and
    • Personal insolvency.
  • Business Development activities, to include identifying and pursuing opportunities to grow the practice, in terms of both client portfolio and service offering

Essential Criteria

  • CAI (or equivalent) qualified;
  • Ability to work independently, but also collaboratively as part of a team;
  • Ability to work efficiently and prioritise as needed;
  • Strong interpersonal skills and ability to manage client expectations;
  • Excellent technical skills, coupled with strong commercial awareness; and
  • Confident with Microsoft applications including Outlook, Word, Excel and PowerPoint.

This is a full time position and will be based in our Belfast office.

To apply for this position please submit a CV by email to careers@hnhgroup.co.uk by no later than 5pm on 14 January 2022.

Autumn Budget 2021

Posted on by Derval Rooney

Today’s Budget announcement covered a lot of ground and set out the Governments direction of economic travel for the next 3 years. However from a tax perspective, the Budget Speech did not contain much in the way of change. Indeed most of the main changes that will take effect over the next 18 months had already been previously announced, or to the annoyance of the Speaker of the House of Commons, already leaked/briefed to journalists.

There was no changes announced to income tax rates or allowances, which given that the personal allowance relief and tax bands are not going to increase, means an effective tax rise for all tax payers in these inflationary times. The increase of 1.25% in national insurance rates and dividend tax rates had already been announced and will take effect from next April. The corporation tax rate will remain at 19% until March 2023 and then, as previously announced, will rise to 25%. There were several technical announcements that will apply to banks, internet retail giants and REITS but these will have little impact on most corporates. However there was a welcome extension to the Annual Investment Allowance limit of £1m until 31 March 2023 to help companies investing in plant and machinery. There was also the announcement that very large residential house builders will have to pay an extra 4% tax on profits in excess of £25m, which is only going to apply to the largest of house builders.

Surprisingly the chancellor left capital gains tax and inheritance tax almost completely untouched with tax rates and existing reliefs remaining as they were before he stood up to speak. This means that Business Asset Disposal Relief will remain for the first £1m of capital gains on the sale of shares in trading companies, if the qualifying conditions are met, and also that inheritance tax business property relief will continue to apply at 100% on the transfer of unquoted shares in trading groups and companies. Indeed the feared removal of the capital gains uplift on death did not happen nor was there a reduction or removal of the capital gains annual exemption which remains at £12,300. Those who are expecting to realise a capital gain in the short term may be breathing a sigh of relief.

There was yet more legislation announced to clamp down on those who promote tax avoidance schemes and there will be a requirement for large businesses to notify HMRC if they take a tax position in their financial statements that is either uncertain or contrary to HMRC’s known interpretation. There will also be reform of the research and development tax credit regime for companies to include expenditure on data and cloud costs but on the other hand to focus (limit) the relief to expenditure incurred in the UK. There were no changes to the rates of VAT.

All in all from a tax perspective, this budget will not go down as a show stopper or even being that memorable. However, given that it did not introduce changes to the capital gains tax or inheritance tax regimes, business owners may be forgiven for being pleased with today’s announcements.

The Autumn Budget approaches!

Posted on by Derval Rooney

As 2021 enters the last quarter, it’s hard to tell whether we are leaving a period of uncertainty or entering into a new phase of the last turbulent 18 months. Whilst the coronavirus pandemic no longer seems quite so traumatic (despite still being with us), the business world is now having to deal with the ongoing consequences of Brexit, labour shortages, supply chain malfunctions and a looming energy crisis. To some of a certain vintage this may have echoes of the 1970’s – but without the flared trousers and glam rock.

It is good to know however that some things don’t change and one of these is the Governments need to raise cash. As a result the 2021 Autumn Budget – to be held on Wednesday 27th October – will be the latest attempt by the government to pluck the maximum amount of feathers with the least amount of hissing (to paraphrase Monsieur Jean Baptiste Colbert). Chancellor Rishi Sunak will rise to his feet and deliver his second budget of the year following his April Budget which was delayed from 2020.

We already know that corporation tax rates are going to rise to 25% in April 2023 and that there will be a 1.25% increase in national insurance ( which will eventually become the new Health Levy) and dividend rates from 6th April 2022 to help fund the NHS and the health care sector. However, what else might be in the forthcoming Budget? Here are some possible changes. However, please do note that this is in the realm of speculation as I don’t have a hot line to No 11 Downing Street.

1. Capital Gains tax is still low by comparison to income tax. The current main rate of 20% could be uplifted as it is less than half of the top rate of income tax. Having said that, unlike income, capital gains are comparatively easier to defer and a large increase in the rates could end up yielding less tax as more people would delay making disposals. However watch out for an announcement of increased rates next April to ‘encourage’ capital disposals in advance of that – it’s one way of raising more capital gains tax quickly as folk rush to avoid the increase.

2. Sticking with capital gains tax, the Business Asset disposal Relief, the new name for the former Entrepreneurs’ Relief could be on the chopping block. The relief is worth up to £100,000 to those making gains up to £1m on trading business assets or shares, by applying a 10% rate to such gains. Recent economic reports have called into question the benefit of this relief as it does not of itself appear to encourage re-investment of proceeds. However the Chancellor will be mindful of the potential political backlash of removing this relief as it will hit mainstream tory voters the hardest.

3. There has been little change to inheritance tax over the last few years. It is not a big earner for the Government and once again a Tory Chancellor will be reluctant to ‘stick it’ to his core voters. Mind you some tweaks might be made around the edges that could raise a few pounds without cutting to the bone. A likely contender is the relief known as ‘gifts out of surplus income’, which currently takes out of the inheritance tax net regular gifts made from the income a person generates that is in excess of their normal living expenses. Another outside bet could be a reduction on the rate of business property relief, which for many business assets amounts to 100% of the value of such assets. In other countries, this relief is capped, for example in Ireland the relief is limited to 90%. Such a change would mean a limited but not insignificant amount of tax would be payable on the transfer of business assets following death or a transfer to a trust.

4. There has been considerable talk about a wealth tax coming into play. Whilst there is some support for this type of tax, the practical realities of applying such a levy are very challenging and the view from many commentators is that it is unlikely to raise much, if any, money. Once again it is not something one would expect from a Conservative chancellor.

5. Other possible targets include: an increase in VAT – possible by taxing certain foods at standard rates or putting a higher rate on certain luxury goods; limiting the capital gains relief on the sale of people’s homes to a capped amount; new or increased environmental taxes (especially given the proximity of the COP26 summit in Glasgow); and possibly a removal of the national insurance age limit so that all workers will be liable to national insurance charges no matter what age they are.

As I noted above, the proceeding list is just my thoughts of what could happen and readers should not take any action based solely as a result of these suggestions. However if one was considering selling or gifting a business asset in the foreseeable future, it would be worth seeking professional advice before the 27th October as it may reduce the risk of unwelcome tax changes.

It was noted that when directly asked about further tax increase the Prime Minister avoided a direct answer and came out with the phrase the he was ‘zealously opposed to unnecessary tax increases’. Quite what will be deemed as necessary is something we will get a better idea of on Wednesday 27th October.

We Are Hiring – Tax

Posted on by Derval Rooney

Due to ongoing growth in our Tax Advisory Practice, we are now looking to appoint a Tax Manager. The successful candidate will deal directly with clients and also report to the Tax Directors and support them with the overall provision of tax services to our clients. The successful candidate will be involved in the provision of tax services to a wide range of clients, including HNWIs, OMBs, SMEs and larger corporates.

The role will include the following:

  • Provision of general tax advice to a wide ranging portfolio of clients, to include in particular advice on Corporation Tax, Capital Gains Tax, Inheritance Tax and Income Tax matters
  • Preparation of Tax Due Diligence reports and provision of advice in respect of M&A and funding matters
  • Ability to carry out detailed technical research
  • Business Development activities, to include identifying and pursuing opportunities to grow the practice, in terms of both client portfolio and service offering
  • Ability to deliver tax compliance services, including preparation of individual and partnership self-assessment tax returns and corporation tax returns

Essential Criteria

  • CAI (or equivalent) qualified
  • CTA qualified, with two years PQE
  • Experience of working in a similar role
  • Ability to work independently, but also collaboratively as part of a team
  • Ability to work efficiently and prioritise as needed
  • Strong interpersonal skills and ability to manage client expectations
  • Excellent technical skills, coupled with strong commercial awareness

Desirable Criteria

  • UK GAAP accounting experience
  • Experience of property tax-related matters, including VAT, SDLT and CIS matters
  • Experience in Trust Registration matters  

This is a full time position and will be based in our Belfast office. Remuneration will be in the region of £40-44k per annum plus benefits, depending on experience.

To apply for this position please submit a CV by email to careers@hnhgroup.co.uk by no later than 5pm on 29 October 2021.

Budget 2 – The Sequel? (Publication of the 2021 Tax Policies and consultations)

Posted on by Rory Moynagh

Earlier today the Government issued its ‘Tax Policies and Consultations’ document. There was speculation that this would be the opportunity for the Government to signal future tax changes (and for that, read tax increases) that would take place in the coming years.

This document, in the form of a command paper, announced approximately 30 Government consultations which would normally have been published at the time of the Spring Budget. However publishing these documents post Budget is a new approach by the Government as part of the 10 year tax administration strategy they produced last summer. The Government’s objective is to build a trusted, modern tax administration system to facilitate tax policy development across a range of important tax issues covering rapid social, economic and technological change, whilst seeking to create greater visibility and transparency for parliamentarians, tax professionals and other stakeholders. The Government’s hope is that increased scrutiny of tax measures will increase the overall quality of tax policy and legislation.

So with all that now explained, was there anything of note in the documents published today? In simple terms there were no real headline grabbing announcements which will result in immediate tax changes. However, there are some noteworthy proposals that have been put out for consultation which will have a medium to longer term impact on business.

In terms of tax administration, the clear direction of travel is towards continued digitisation. The ‘making tax digital’ process for VAT has been regarded as a success and the Government intends to carry on with its introduction to the income tax self-assessment system. The Government has further committed to investing into the digitisation of the tax administration infrastructure so that each citizen will end up with a ‘single digital account’ and a ‘single digital record’. There are also consultations on raising the standards in the ‘UK tax advice market’, including the proposal that all tax advisers should have professional indemnity insurance and recommendations that the reporting of inheritance tax should be significantly simplified in respect of estates for which no inheritance tax is due.

No Government fiscal announcement would be complete without the ubiquitous tackling of ‘non-compliance’. There are further consultations on clamping down on the promoters of tax avoidance and tackling disguised remuneration, which normally takes the form of non-taxable loans being issued to employees instead of salary or bonuses. There is the publication of some research on the impact of the ‘off payroll working’ rules (known as IR35) which were introduced into the public sector in 2017 and which are coming into the private sector in April 2021 – but there is no indication of the latter reforms being delayed. There is also a consultation on making the renewal of certain Government licences in Northern Ireland (and Scotland) conditional on Applicants completing checks that they confirm they are appropriately registered for tax (this legislation already exists in England and Wales).

Contained in the ‘other consultations’ section is a consultation dealing a review of aviation tax, with a potential reduction in air passenger duty for intra UK flights (i.e. Belfast to GB) being financed by an increased air passenger duty on longer international flights. There is a consultation on a new tax on the largest residential property developers with a view to such tax helping to pay for the costs of cladding remediation. There is a publication of the review of the taxation of trusts which is indicating that no major changes are likely ‘at this stage’ and there are consultations on the aggregates levy and landfill tax. There is a report on the consultation in respect of the requirement for large businesses to notify HMRC of uncertain tax treatment (this reporting requirement is now delayed until April 2022). There are also several reports on previous VAT consultations covering: VAT grouping (as a result of which no changes are to be made to the current rules); VAT partial exemption and the prevention of value shifting of VAT in respect of multicomponent goods with different VAT rates. There are also consultations to simplify the maintaining of transfer pricing documentation and on the options to clarify and update the rules in respect of securitisation vehicles.

So what was not subject to a consultation in today’s publication? Somewhat surprisingly capital gains tax was not mentioned, despite two Office of Tax Simplification (‘OTS’) reports last year which looked at potential major changes to the capital gains tax regime. Similarly, whilst there were some proposed simplifications to the inheritance tax reporting regime, there was no consultation on the determination of inheritance tax, again despite an OTS report being published in 2019 on this topic. There was however a letter to the OTS which indicated that “The Government will respond to the recommendations made in the OTS inheritance tax report on simplifying the design of inheritance tax in due course”. Whilst no potential changes were announced today, it would appear that this issue has not gone away! So the good news is that there should still be time for tax efficient estate planning strategies to be implemented.

Budget 2021 – the start of the road to recovery?

Posted on by Rory Moynagh

In his second Budget, the Chancellor focused on three main areas – supporting business and people; fixing the public finances; and building the future economy. The total government support programme for the last fiscal year and this coming year, the detail of which was contained in the first part of the Budget speech, will have cost over £400 billon. The impact of this supercharged public expenditure on the national debt has been enormous and will continue to be so for decades to come. Unsurprisingly, the second part of Mr Sunak’s speech turned to the daunting task of what to do about this debt, which is soon going to peak at almost 100% of national income. Having discounted doing nothing, cutting public expenditure or raising income tax or VAT rates, the Chancellor announced that most tax reliefs and exemptions would be frozen until at least 2026 and that the corporation tax rate for large companies would rise to 25% in two years’ time. In the third and final part of his speech Mr Sunak announced incentives to encourage capital investment by businesses, continued short term stamp duty help for house buyers and a short term continuation of a reduced VAT rate for the hospitality industry. There was no mention of a further Budget later in the year but given the scale of the fiscal issues caused by the Covid 19 pandemic, it would not be surprising to see the Chancellor back on his feet with additional fiscal measures before Christmas.

Some of the key tax-related points are set out below:

  1. Capital Gains Tax (“CGT”) and Inheritance Tax (“IHT”) – there have been no changes to the headline rates or reliefs for either CGT or IHT. Business Asset Disposal Relief remains available for CGT purposes for total qualifying lifetime gains of up to £1m, while Business Property Relief for IHT is also unchanged. The IHT nil rate band will continue at £325,000 from 6 April 2021 until 5 April 2026.
  2. Income tax allowances and thresholds – the personal allowance, basic rate limit and higher rate threshold will all increase with effect from 6 April 2021 as previously announced, to £12,570, £37,700 and £50,270 respectively. Thereafter, these allowances and limits will be frozen (i.e. with no further CPI increase) until 5 April 2026.
  3. Increase in corporation tax rate – the main rate of corporation tax for will increase from 19% to 25% with effect from 1 April 2023.
  4. Corporation tax small profits rate – a small profits rate of corporation tax of 19% will be introduced from 1 April 2023 for companies with profits of £50,000 or less.  Companies with profits between £50,000 and £250,000 will be taxed at 25% but will be able to claim marginal relief.   These thresholds are proportionately reduced for the number of associated companies and for short accounting periods.
  5. Use of trading losses – companies and unincorporated businesses will be able to carry back trading losses of up to £2m per annum incurred in the years ended 31 March 2021 and 2022 for a period of three years rather than one year. This should facilitate tax refunds for formerly profitable businesses temporarily hit by the lockdown.
  6. Capital Allowances – the Annual Investment Allowance of £1m has been extended to 31 December 2021.
  7. Super deduction for qualifying plant and machinery – from 1 April 2021 to 31 March 2023, fixed asset investments qualifying for main rate capital allowances will be relieved by an enhanced temporary 130% first year allowance or “super deduction”.  Investments in capital assets which qualify for special rate relief, will be eligible for a 50% first year allowance.
  8. Pension Lifetime Allowance – similarly, the standard Lifetime Allowance for pensions will be frozen at £1,073,100 from 6 April 2021 to 5 April 2026.
  9. Stamp Duty Land Tax nil rate band – the increase of the nil rate band for residential property in England and Northern Ireland to £500,000 will be extended from 31 March to 30 June 2021. It will then reduce to £250,000 from 1 July to 30 September 2021, and then to the standard amount of £125,000 from 1 October 2021.
  10. VAT for tourism and hospitality – the temporary reduced rate of VAT (i.e. 5%) for hospitality, holiday accommodation and attractions will also be extended for 6 months to 30 September 2021. It will then increase to 12.5% from 1 October 2021 to 31 March 2022, after which it will return to the standard rate of 20%.
  11. Research and Development (“R&D”) tax relief – for accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D credit that a company can receive in any one year will be capped at £20,000 plus 3 times the company’s total PAYE and NIC contributions.
  12. Freeports – a number of ‘Freeport’ tax sites will be created at various locations around the UK, allowing businesses in these tax sites to benefit from a number of tax reliefs. Eight Freeport sites have been announced in England, and the Government will consult with the devolved administrations on its intention to create similar sites in Northern Ireland, Scotland and Wales.

If you would like to discuss any of the matters arising from today’s Budget, please contact Eamonn Donaghy, Mark Hood or June Barton.

Changes to the Off-Payroll Working (“OPW”) rules with effect from 6 April 2021

Posted on by Rory Moynagh

After a one-year delay due to the impact of the Covid-19 pandemic, changes to the OPW rules (sometimes referred to as “IR35 rules”) for the private sector are finally coming into force with effect from 6 April 2021. This will bring the private sector substantially into line with rules which have been applied to the public sector since 6 April 2017.

Broadly, the OPW rules apply to situations where individual contractors or consultants (referred to as “workers” below) provide their personal services to client organisations (usually companies) through an intermediary (usually their own ‘personal service companies’ or “PSCs”). The supply chain can also sometimes involve agencies. Under current rules for the private sector, if a hypothetical contract between the individual worker and the client would be a deemed employment relationship for tax purposes,  the PSC is required to account for PAYE and NICs on the payments that it receives under its contract with the client. It is currently the PSC’s responsibility to determine the deemed employment status of the individual worker and pay over any PAYE/NICs to HMRC. The client currently has no obligations with respect to PAYE/NICs in respect of payments to workers via their PSC or intermediate agents.

For payments made on or after 6 April 2021, the responsibility for determining the deemed employment status becomes that of the client, and the responsibility for accounting for PAYE and NICs (and, if applicable, apprenticeship levy) on payments to the PSC will become that of the party which makes the payment to the PSC (the ‘fee payer’). Where there are no other parties in the contractual chain between the client and the PSC, the client will be the fee payer and will thus have responsibility for deducting PAYE and NICs and accounting for same to HMRC.

Therefore, with effect from 6 April 2021, clients’ responsibilities will be significantly increased, and will include the following:

Carrying out a status determination

The client must carry out a status determination in respect of any worker who provides their services to the client through an intermediary. The client is required to take ‘reasonable care’ when carrying out such a determination. The determination of employment status is not straightforward and is based on a number of different factors including control, personal service, financial risk and mutuality of obligation.

HMRC has developed a tool (the ‘Check Employment Status for Tax’ or ‘CEST’ tool) to help organisations to determine employment status. It should be noted that there are some instances where CEST will not come to a formal determination, and indeed the Courts have, on occasion, disagreed with a CEST result (although HMRC significantly enhanced the tool in November 2019, to provide a greater degree of accuracy). Given that HMRC has stated that, provided the questions in CEST are answered accurately and in accordance with HMRC guidance, they will stand over the CEST result, it is at least a good place to start when looking at employment status.

Delivering a Status Determination Statement (“SDS”)

The client must deliver an SDS to the worker and also to any third party that the client contracts with. This SDS must set out the reasons for the status determination. There is no set format for such a statement although HMRC has stated that if the CEST output is delivered, they will regard this as constituting a valid SDS, provided the CEST questions have been answered accurately and in accordance with HMRC guidance. The SDS must be delivered by the client before any payment is made.

Establishing a disagreement process

This is to allow workers to challenge the status determination, if they so wish. Where a worker makes such a challenge, the client is required to respond to the worker within 45 days either with reasons why it does not agree with the challenge or to provide a new SDS on the basis of the worker’s representations and state that the previous SDS is withdrawn.

Accounting for PAYE and NICs

Where the client is also the fee-payer, it must deduct and account for PAYE and NICs (and, where appropriate, apprenticeship levy) to HMRC in respect of payments made to the PSC.

There is an exemption from the new OPW rules for ‘small’ client businesses, such that the responsibility for determining status and accounting for PAYE and NICs remains with the PSC. In order to be small, a business will need to satisfy two or more of the following requirements:

  • 1) It has an annual turnover not exceeding £10.2m
  • 2) It has a balance sheet total not more than £5.1m
  • 3) It had an average of no more than 50 employees for the company’s financial year.

There are specific rules for businesses becoming or ceasing to be small, and also for unincorporated businesses. Specific advice should be taken regarding whether, and when, the ‘small’ business exemption will apply.

It should be noted that the changes to the OPW rules do not change the criteria for determining employment status for tax purposes, and it should also be emphasised that deemed employment status under the OPW rules applies for tax purposes only. Legal advice should always be taken in order to determine an individual’s position – and an organisation’s responsibilities – for the purposes of employment law.

If you have any queries about how the forthcoming changes to the OPW rules will affect your organisation, please contact Eamonn Donaghy, Mark Hood or June Barton to discuss further.

Significant Tax Changes on the way?

Posted on by Rory Moynagh

Every year the tax system gets a makeover at the time of the Budget, when new rules and regulations are introduced to extract funds from citizens and businesses in order to fund the running of the country and the obligations of the public sector. Over the last decade the frequency of tax regulatory change events has increased with the once annual Budget being replaced by a myriad of spring, autumn and emergency announcements that have ushered in an ever more complex and voluminous tax regime. Indeed last month the draft clauses for next year’s Finance Bill were published the day after Royal Assent was granted to this year’s Finance Act! It’s all rather exhausting and one could be forgiven for thinking that we are on a never ending treadmill.

Despite this, there has been a lot of talk recently about an ‘overhaul’ of the UK tax system by both politicians and tax commentators. The COVID 19 pandemic (together with its £300 billion estimated price tag) appears only to have accelerated and enhanced this proposed overhaul. So it was not really a surprise that during July, the House of Commons Treasury Committee opened an inquiry into the UK tax system called “Tax after coronavirus”. The Committee will look at what the major long-term pressures on the UK tax system are, what more the UK can do to protect its tax base from globalisation and technological change, and whether such pressures should be met with tax reform. The Committee will also seek evidence on what overall level of taxation the economy can bear without undesirable harm to economic growth, the role of tax reliefs in rebuilding the economy, and whether there is a role for windfall taxes in the post-coronavirus world.

The Committee Chair argued it was the right time for such an inquiry for three reasons: it was a long time since there had been any fundamental reform in the UK tax system; the pandemic was going to leave the country with significantly elevated debt levels which would have to be dealt with, and tax would have to play a major part, in his view; and the pandemic had affected groups such as the young and the low paid in particular, and how the tax system dealt with that needed to be considered.

In particular, the Committee Chair was concerned about the taxation of digital companies and the differences in taxation between the employed and the self-employed. He was also very aware of how there was an increasing accumulation of wealth in the hands of a relatively dwindling number of individuals. He further noted that the effectiveness of tax reliefs needed to be reviewed; although some were in place for good reasons, collectively they cost the Exchequer a great deal.

Unpicking the terms of reference and the Committee Chairman’s own views, the following are areas which appear to be high up on the agenda for an overhaul

The Three Person tax issue

There has been a quiet revolution in the jobs market over the last decade, with the arrival of the ‘gig’ economy. In the past, individuals were either taxed as employees working for someone else or self-employed working for themselves. Now the lines are blurred in that a person can be regarded as a ‘worker’ which is somewhere between a self-employed person and an employee. From a tax perspective, the key differences between someone who is an employee and someone is not comes down to whether employer’s National Insurance is payable (at 13.8%) and whether tax needs to be deducted at source under PAYE. Clearly, from a tax generating perspective, the Government want as many individuals to be employees as possible. However the line between employee and self-employed is not always clear and the use of personal service companies [‘PSC’s’] to provide the ‘work’ services of their shareholders to ‘providers of work’ has made the distinction even harder to discern. HMRC introduced the IR35 regime over 20 years ago as a means of collecting PAYE/NIC from PSC’s that were used to employ individuals who in effect worked solely for one customer. Recent high profile tax cases involving media celebrities who used PSC’s have proved how difficult it is to determine the tax status of the individual and their PSC. In response the Government changed the rules in 2018 for public sector employers and put the onus back to the large employer to operate PAYE/NIC rather than the PSC. These rules are now to be extended to include private sector employers from next April. Even with this change, there is still a concern that it is becoming ever more difficult to determine the tax status of many individual’s. There is a lot of tax at stake and it is clear the Government and indeed opposition MP’s want to amend the rules to treat many more individuals as employees for tax purposes. No doubt this will involve making the employers the gate keepers of this decision and of course the rules will look to penalise them if they get it wrong.

Reform of Inheritance Tax?

There has been recent discussion about making significant changes to inheritance tax [IHT] so as to make it apply to more people and thus generate more tax for the government. However this is an unpopular tax and politicians are unlikely to risk the ire of voters by extending the reach of IHT too far.

Nevertheless, a cross-party group of MPs have called for significant changes to IHT, including a reduction in the current 40% rate that applies on death to 10% on taxable amounts up to £2m and 20% on the balance of the estate. The rate reduction would be balanced against the abolition of a series of reliefs, including the seven-year rule on lifetime gifts (which removes IHT liability from assets if gifted seven years before death), gifts out of income and the important business and agricultural property exemptions. The abolition of business property relief would be of big concern to business owners and to address the issue of taxing business assets on death, the report recommends that where tax arises on business assets, there is an option for the tax to be paid in instalments over 10 years. While the instalment option would make it less likely that beneficiaries will need to sell the business to pay the tax due, the abolition of the current reliefs would have significant implications for business owners.

The report further advocates that the small annual gift exemptions are abolished and replaced with one simple annual exemption of £30,000. Once the annual allowance is exceeded, a lifetime tax at 10% would be applied.

One additional significant recommendation is that when IHT interacts with capital gains tax [‘CGT’] on the death of an individual, that, instead of beneficiaries inheriting assets at their probate value (i.e. the value at the owner’s death), they should inherit the deceased’s original acquisition cost for tax purposes. The impact of this would be that CGT would more likely arise if a beneficiary sells the inherited asset, as the base cost of the asset would no longer be the value at the date of death.

If some or all of these changes were to be introduced, significant revisions to IHT planning would have to be considered, even for those with well thought out existing strategies.

Is a Wealth tax on the way?

One of the significant sources of tax for many countries around the world is a wealth tax, which in simple terms is an annual tax that is payable based on the value of assets that are owned by individuals. For example, a wealth tax could be imposed in the UK by applying a rate of tax on the market value of all property and other tangible assets owned by an individual. It would be a sure fire way to raise taxes but would be deeply unpopular with voters. It would also require a significant amount of detail and specific exemptions and reliefs for certain classes of assets. There would almost certainly have to be a de-minimis amount of value owned by an individual before the tax would apply and there would also likely be a sliding scale of rates that increases as the value of a person’s estate rises. On top of this, special consideration would have to be given to assets held by trusts and offshore entities. Indeed it is probably for the above mentioned reasons that it is unlikely that a Conservative-led government would introduce such a tax. However, in the ‘post coronavirus’ world, where the UK economy is not going to be in great shape, one should not entirely rule out a move to some form of wealth tax.

Tax on Globalisation

To a certain extent the horse has already bolted on this issue, as in April this year the UK introduced the Digital Services Tax, aimed at large (mainly US) ‘on line’ vendors. The tax was introduced in advance of a globally agreed system to apply to such organisations, the introduction of which may be several years away. Whist this has not gone down well in the USA, it will be the first step towards a more joined up global system to make large corporates liable to taxation in countries where they make sales but don’t necessarily have a physical footprint (which is a key requirement in order to be taxed in a country under existing laws). The Treasury Committee will no doubt want to ensure that the UK tax system is appropriately structured to enable the UK to get its fair share of tax from the global internet giants who sell to UK customers.

Removal of tax reliefs

There are a myriad of tax reliefs and exemptions included in the UK tax code. A recent report highlighted that many of these were poorly targeted and unjustifiable in terms of lost tax. This report may give the Government cover to remove certain reliefs. Some high profile reliefs which have been signalled for the chop include:

  • 1) Removing or reducing the Private Residence Relief, which normally exempts or significantly reduces the capital gains tax that arises when an individual sells the home they live in. Whilst removal of the relief entirely is unlikely, there is the possibility that, unlike the complete exemption that currently applies, the amount of the relief will be limited to a maximum cap, with capital gains tax arising on gains in excess of that amount.

  • 2) The last budget saw a significant reduction in the value of Entrepreneurs’ Relief, as a result of limiting the 10% tax rate to gains of £1m or less from the previous limit of £10m. There is still the possibility that the relief could be reduced further or even abolished.

  • 3) Prior to 1985, the Government taxed non trading income of privately owned companies that was not paid out as dividends to its shareholders. This was called the close company surcharge. Whilst the removal of the surcharge was technically not a relief, its re-imposition would be an unwelcome tax charge, although it would have the potentially beneficial effect of encouraging companies to commence trading, thus limiting their investment income.

There are a lot of ways that the Government can look to raise taxes. There could, of course, be increases in tax rates on income both for individuals and companies. However the current Government is less likely to do this than a future potential Labour Government. Having said that, there is a prospect that the CGT rate could rise as the current main rate of 20% looks light compared to the top income tax rate of 45% – but again such a rate increase would go against the grain of a Tory Government. As we will eventually say goodbye to the EU at the start of next year, there could be changes to the VAT regime, but at 20%, the main VAT rate is already quite toppy and it would be surprising to see it rise.

Predictions on future tax changes is somewhat akin to picking a winner at the races – but without the enjoyment of a day out! Whilst some, all or none of the points raised in this article may come to pass, one thing is for certain, there will be significant changes to the tax code over the next year and it is unlikely that many of those will result in less tax being paid!

Eamonn Donaghy

Tax Director

The Chancellor’s Summer Statement – the ‘Plan for Jobs’

Posted on by Rory Moynagh

Yesterday the Chancellor made a statement to the House of Commons and unveiled his ‘Plan for Jobs’, as the second phase of the Government’s response to the COVID-19 pandemic. He announced a number of measures designed to support, protect and create jobs, with a particular focus on the hospitality and accommodation sectors and in a bid to get the property market moving.

The most high profile announcement was the confirmation that the Coronavirus Job Retention Scheme (i.e. the ‘furlough’ scheme) will cease at the end of October. Instead, and in a bid to encourage employers to retain employees, a Job Retention Bonus will be paid to employers, being a payment of £1,000 for every furloughed employee who remains continuously employed to the end of January 2021. It remains to be confirmed whether this bonus will be paid in respect of employees who had been ‘furloughed’ at any time since the beginning of the scheme in March, or will be restricted to employees who are only brought back to work after a certain date. Further detail about how the scheme will operate will be published by the end of July. Additional announcements included a wide range of new policies to fund various training, apprenticeship and job support schemes over the coming months.

To boost the hospitality and tourist industries, one of the more eye-catching announcements was the ‘Eat Out to Help Out’ scheme, which will apply for the month of August across the UK. Under the scheme, participating restaurants, cafes, pubs and other food service establishments can offer a 50% discount to every diner, of up to £10 per head, on any eat-in meal, with such discount being reimbursed by the government. The scheme only applies from a Monday to Wednesday each week.

From a tax perspective, the only changes were in the areas of VAT and Stamp Duty Land Tax (“SDLT”).

VAT has been reduced from 20% to 5% for the period from 15 July 2020 to 12 January 2021 in respect of the following:

  1. supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafes and similar premises across the UK (in order to support businesses and jobs in the hospitality sector), and
  2. supplies of accommodation and admission to attractions across the UK (in order to support the tourist industry).

Regarding SDLT, it was announced that the Nil Rate Band of Residential SDLT in England and Northern Ireland would increase from £125,000 to £500,000 for the period from 8 July 2020 to 31 March 2021. This temporary reduction is designed to support the housing market, and it is estimated that this will mean that nearly nine out of ten people getting on or moving up the property ladder will pay no SDLT at all. It is to be confirmed whether this applies to all residential property transactions, or only those for a person’s ‘main’ residence.

The Chancellor stated that he would “never accept unemployment as an inevitable outcome” of the pandemic. It is to be fervently hoped that all of the measures announced yesterday will yield a positive impact for employers and employees as the economy begins to recover from the effects of the pandemic.

COVID-19: Some key tax considerations

Posted on by Rory Moynagh

The impact of the Coronavirus pandemic has been unprecedented, certainly for anyone born after the Second World War, and it would be fair to argue that the Government’s financial response to that impact has been just as unprecedented.

It is understandable that the tax implications of the measures which have been introduced have not been at the forefront of anyone’s mind in the last four months, but nevertheless it is worth reminding ourselves of some key points which will be of increasing relevance in the months ahead.

Coronavirus Job Retention Scheme

Probably the most high-profile of all of the measures introduced in recent months is the Coronavirus Job Retention Scheme (“CJRS”), which has been available to employers as a grant to cover up to 80% of their employees’ wages (up to a maximum of £2,500 per month), plus relevant employer’s National Insurance Contributions (“NICs”) and auto-enrolment pension contributions. The CJRS will be amended over the course of the next few months (to allow the employer to bring back employees on a part-time basis, and to reduce the percentage of wages covered by the scheme on a phased basis), and is currently scheduled to end on 31 October 2020.

From an employer’s perspective, the tax treatment of any CJRS grant received is quite straightforward – it will be taxable income, subject to income tax or corporation tax as appropriate. The payments made to employees (for which the grants have been claimed) should continue to be deductible as a business expense.

Grants made under the Self Employed Income Support Scheme are similarly subject to income tax and self-employed NICs, and should be reported on an individual’s self-assessment tax return.

Tax Deferrals

One of the first measures to be introduced to assist individuals and businesses was a deferral of VAT and income tax payments, as follows:

  • VAT – any VAT payments due between 20 March and 30 June 2020 could be deferred until 31 March 2021. Effectively, this allowed a business to defer one quarter’s VAT payments. However, any VAT payments due on or after 1 July 2020 remain payable by the normal due date.
  • Income tax – the second payment on account for the 2019/20 tax year, which would otherwise be due on 31 July 2020, can be deferred until 31 January 2021. There is no requirement to tell HMRC about any intention to defer, and interest and penalties will not arise provided payment is made by 31 January 2021.

While both of these measures look attractive and from the perspective of immediate business requirements, it should be emphasised that they are deferral measures only, and not a write-off by HMRC of a tax liability. They will therefore lead to (potentially significantly) higher tax payments required in the first quarter of 2021, and should thus be properly factored into future cash flow planning.

Utilisation of losses

The economic downturn brought about by COVID-19 will undoubtedly lead to some businesses incurring trading losses in the current period. Such losses can be used to shelter other profits and gains arising in the same period, and can then be carried back to set against income and gains (subject to certain restrictions) arising in the immediately prior year, thus leading to repayments of income or corporation tax.

In the worst case scenario, a business might be forced into a cessation of trade by current economic conditions. In those circumstances, trading losses can be carried back up to three years before the period of cessation (as opposed to the one year carry-back for ‘standard’ trading loss relief claims), thus potentially giving rise additional tax repayments.

Company wind-up – Members’ Voluntary Liquidation

Where a company’s trade ceases and there is no likelihood of it starting up another business in the short to medium term, the shareholders might also decide that the company itself should be wound up. In such a case, where there are still reserves that might be returned to shareholders, the most tax-efficient method of extraction is likely to be a Members’ Voluntary Liquidation (“MVL”). The funds distributed to shareholders should be subject to capital gains tax rather than income tax and, where Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) is also available, the tax rate would be reduced from 20% to 10% (subject to a lifetime limit of £1m of gains).

It should be borne in mind that there are certain anti-avoidance provisions which can apply when carrying out an MVL, particularly around the area of ‘phoenixism’. This is the situation whereby an individual receiving the liquidation distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years of the date of distribution. If the legislation applies, it can give rise to the distribution being taxed as income at up to 38% rather than capital being taxed at 10%. Specialist advice should always be sought before any MVL process is commenced.

Finally, it is worth reminding ourselves that nothing about the future is certain and it is very possible – even very likely – that the Government will introduce further changes to extend and bolster the relief available to individuals and businesses alike, whether this be by extending the time period for existing schemes and programmes, or introducing brand new measures. With that in mind, the Chancellor’s financial statement, due to be delivered on Wednesday 8 July, is being keenly anticipated, and we will summarise the key measures following their announcement.

On the flip side, the Government is likely to introduce new tax-raising measures to start to pay the Coronavirus bill. It will be very important to pay heed to the tax consequences of these measures, even if the ‘cash’ tax impact may not arise for some time to come.

Is It Time To Cash In?

Posted on by Rory Moynagh

The past months have had a deep and lasting impact for all of us. In February, the terms social distancing, furloughing and COVID-19 were almost unheard of and now they are part of our everyday ‘virtual’ lexicon. The world has tilted on its axis and life for all of us has changed. Indeed for many the enforced extra down time will have provided an opportunity for some strategic thinking and planning for the future; entrepreneurs and business owners may well have turned their thoughts to the possibility of selling up, cashing in or moving in a different direction. For those who are contemplating such a move (even if they don’t want to admit it!) the next question is how might they go about it?

When a decision has been made to sell/exit a company, one needs to consider the options, select the most suitable one, prepare a comprehensive plan and implement the plan accordingly. While most business owners will recognise this process as being part of their everyday business makeup, when it comes to actually selling your company/business, the big difference is that most people only do this once or by exception a couple of times in their lifetime and thus it is not a process that they are entirely familiar with.  So what are the key factors to consider?

If the decision has been taken to sell, then the first key factor is to work out who is going to buy the business. In an article last year we discussed the various exit routes that are typically open to shareholders. For many businesses, taking them to market via a trade sale process is the preferred option, in that, more often than not, it results in the highest valuation being achieved.  

However, as we embark on what will likely be a lengthy recovery period post-COVID, it may be that for some businesses a trade sale is no longer the best direction. Prospective buyers may be preoccupied with their own internal issues, or may approach M&A activity with an opportunistic mindset unlikely to lead to an acceptable valuation for the seller. 

In these circumstances, it is therefore more important than ever to weigh up the alternative options. Four that we will examine in more detail are: the Management Buy-out; the Management Buy-in; the Employee Buy-out and the Members Voluntary Liquidation.

The Management Buy-Out (MBO)

In its simplest form an MBO, is a deal in which members of the company’s incumbent management team acquire all of or a controlling stake in the business from the existing shareholders. Typically, this involves the creation of a new company (Newco), which is used to acquire the shares (or in some cases the trade and assets) of the trading company.

Typically, the MBO team will not have access to sufficient personal resources to complete the deal with a full cash consideration. Depending on the nature of the business, the long-term growth strategy and how much the team can commit personally, it may be possible to bridge the gap by bringing in external funders such as a PE fund, debt fund, or bank. Equally, it may be possible for the vendor(s) to part-finance the deal via deferral of a proportion of the consideration or via loan notes in Newco.

There are quite a few tax considerations in an MBO, not only for the existing owner but also for the management team and the buyout company. The vendors will want to ensure that they qualify for capital gains tax treatment in respect of the proceeds they receive and also maximise their entitlement to Business Asset Disposal Relief (‘BADR’, previously known as Entrepreneurs’ Relief). This is now only available for gains of up to £1m but still saves £100,000 in tax per qualifying shareholder. If they are going to retain a minority interest in the company or help finance it via loan notes then the share for share/loan note exchange rules can come into play and a pre-transaction clearance from HMRC is strongly advised to ensure that the anti-avoidance rules will not be applied so as to treat the transaction as being subject to income tax. On top of this there may be a need to elect to dis-apply the share for share/loan note rules in certain circumstances if this could lead to a loss of entitlement to BADR.  The MBO team will also need to be mindful of the tax legislation that applies to employment related shares and they may also need to consider making certain elections to avoid future exposure to income tax arising on the ultimate sale of their shares in the buyout company. It would therefore be important to have all of these matters considered and planned for prior to completing the MBO.

 The Management Buy-In (MBI)

An MBI can be viewed as a hybrid of an MBO and a trade sale in that an external team acquires the business from the existing shareholders. To all intents and purposes the structure of an MBI is the same as for an MBO: a Newco will be established as the acquisition vehicle, it will raise the necessary finance to execute the deal and ultimately acquire the business. 

The funding options for an MBI are the same as for an MBO in that the team will typically need to augment what they can bring to the table with some third party funding. That said, it can be more difficult to raise finance for an MBI as, by definition, it involves an external team taking over the business and funders are often concerned that a lack of familiarity with the business, or cultural clashes with staff can increase the risk of post-completion setbacks.   

The tax considerations for the vendors will be similar to those noted above in respect of the management buyout in that the sellers will want to ensure that they qualify for capital gains tax treatment in respect of the proceeds they receive and also maximise their entitlement to BADR. Once again, if they are going to retain a minority interest in the company or help finance it via loan notes then a pre-transaction clearance from HMRC is strongly advised in respect of any share for share/loan note exchange. Also the vendors may wish to elect to dis-apply the share for share/loan note rules in certain circumstances if this could lead to a loss of entitlement to BADR.  As the MBI team (which may include some of the existing management) will become employees, they will need to take account of the employment related share rules, which may entail making an election to avoid future exposure to income tax arising on the ultimate sale of their shares in the company. Once again some pre-transaction tax planning is highly recommended.

Employee Buy-Out (EBO)

An option that is growing in popularity, but still somewhat under the radar, is the EBO.  Under this option, rather than a small group of managers acquiring the business (an MBO), the entire workforce participates in the deal, either directly or indirectly.   Indirect participation in the EBO is generally via an employee ownership trust that acquires shares on behalf of the beneficiaries.

While the EBO is a relatively uncommon option, there are some high profile examples of employee-owned businesses, with John Lewis/Waitrose probably the most well-known. With employee engagement an increasingly hot topic and retiring shareholders keen to protect their legacies, an EBO can be an exit route that is worth exploring.

From a tax perspective a sale of the shares in a trading company (or trading group) by existing shareholders to an employee ownership trust will be deemed for tax purposes to be for a consideration that gives rise to neither a capital gain nor a capital loss – in effect the transfer will be deemed to be tax free. There are several criteria which need to be met including that the trust must be solely for the benefit of all eligible employees of the company on the same terms. An eligible employee excludes any current shareholder with a holding in excess of 5% (taking into account holdings of anyone who is connected with the shareholder). After the share transfer, the trust must control more than half of the shares, votes, profits available for distribution and assets available on a winding up of the company. There are several other criteria that must also be met for the favourable tax treatment to apply in respect of disposals to an employee ownership trust. It is therefore imperative that careful consideration is given to the detailed rules in advance of shareholders disposing of their shares to such a vehicle and being entitled to claim the capital gains tax relief. If the requisite rules can’t be met then any disposal to such an employee trust should be within the charge to capital gains tax, at a rate of 10% if the conditions for BADR are met (and 20% on gains in excess of £1m or where the conditions for BADR are not met).

Members’ Voluntary liquidation

Sometimes there may be little of the original business to carry on once the main shareholders decide to call it a day (especially if the service provided by the company is dependent on the shareholders’ skill sets). In such cases, where there has been a build-up of undistributed cash and assets, it is possible for the business to cease and the company to enter into a members’ voluntary (solvent) liquidation.

This is a formal insolvency process in which a licensed insolvency practitioner is appointed to take control of the company, liquidate all of its assets and, after paying off all creditors, distribute the remaining assets and cash of the company to the shareholders and then wind up the company. Whilst the process is formal and requires strict compliance with the insolvency rules and company law, it is a well-trodden path for experienced insolvency advisors who under the right circumstances can distribute a significant majority of the company assets to the shareholders shortly after they have been appointed, with the remainder of the assets being distributed after the formal requirements of the liquidation process have all been completed.

For tax purposes the main benefit of a members voluntary liquidation is that the distributions should be treated as capital distributions for tax purposes and thus subject to capital gains tax treatment at a rate of 10% if the conditions for BADR are met (and 20% on gains in excess of £1m or where the conditions for BADR are not met). This provides a big advantage over normal income distributions/distributions which are subject to income tax at up to 38.1%.

However, there is a nasty tax trap that can arise for those who go down this route and then decide to start up again in the same or similar business under a different vehicle within a two year period following the liquidation of the original company. If a shareholder either sets up a new company or even starts up  a similar business by himself/herself or in partnership with someone else, HMRC may apply the ‘anti phoenixism’ rules which enables them to  treat the liquidation distribution as being subject to  income tax and not capital gains tax. Falling into this trap could result in an additional tax charge of almost 30%. Once again careful planning and consideration is required.

So if you are thinking that it might be time to ‘cash in your chips’, there are various ways that you might be able to do so, even if a third party purchaser is not on the horizon.

Eamonn Donaghy

Head of Tax Advisory

Richard Moorehead

Head of Deal Advisory

Budget 2020 – is change in the air for Entrepreneurs’ Relief?

Posted on by Alison Jones

The Chancellor of the Exchequer, Sajid Javid, has announced that his first Budget will be delivered on Wednesday 11 March. This will also be the first Budget of Boris Johnson’s premiership and so will obviously attract significant attention.

There are expected to be a number of tax-related announcements, but one area that should certainly be of interest to business owners is that of Enterpreneurs’ Relief. The availability of an effective 10% tax rate on capital gains arising on the disposal of certain business assets/shares has been the subject of much discussion in recent months. In particular, there seems to be a growing consensus that the relief (which applies to qualifying gains up to a lifetime limit of £10m) has not achieved the purpose for which it was introduced. In the section dealing with ‘Backing Entrepreneurs and innovation’, the 2019 Conservative Party general election manifesto noted that, “We also have to recognise that some measures haven’t fully delivered on their objectives. So we will review and reform Entrepreneur’s Relief”.

There are various possible outcomes of such a review, including (i) a reduction to the £10m lifetime limit, (ii) an increase to the 10% effective tax rate, (iii) reform into a different type of business tax relief, and (iv) abolition of Enterpreneurs’ Relief altogether.

Whatever the outcome, in order to ensure that any disposal qualifies for Entrepreneurs’ Relief under the existing regime, an unconditional contract in respect thereof would need to be entered into before 11 March 2020 (assuming any legislation introduced in the Budget is not retrospective).

For further information on this, and our other expectations regarding the forthcoming Budget, please contact Eamonn Donaghy, Mark Hood or June Barton.

One Year of Tax at HNH

Posted on by Rory Moynagh
Eamonn Donaghy, June Barton and Mark Hood, HNH Tax
Eamonn Donaghy, June Barton and Mark Hood, HNH Tax

Where does a year go?

HNH Tax opened for business in September 2018 and since then has been involved in some of the key mergers and acquisitions (M&A) transactions which the firm has advised on. This includes the disposal of Foodco (NI) to Henderson Foodservice, the capital investment by 57 Stars and Foresight Group into the 3fivetwo Group, and the disposal of SSAS Solutions to Mattioli Woods.

It has also complemented the newly-formed Transaction Services department, enabling HNH to offer a comprehensive Financial and Tax Due Diligence Service, while also providing a broad range of tax advisory and compliance services to individuals and corporates, including advice on group reorganisations, debt refinancing, MBOs, estate planning and obtaining settlements in cases of HMRC disputes.

Starting with Eamonn Donaghy and Mark Hood in September 2018, the team was strengthened by the addition of June Barton in February 2019. Together, they offer more than 60 years of tax advisory experience.

Commenting on the first anniversary, HNH Managing Director Craig Holmes said, “We are delighted at how well the new Tax team fitted into the HNH Group, and we’ve already seen significant benefits for our client base arising from this new service line.”

Year two promises to be no less busy than year one, particularly with the recent opening of HNH’s new Edinburgh office.

For further information about how HNH Tax might be able to help you, feel free to contact Eamonn, Mark or June.

Eamonn Donaghy HNH Group

Eamonn Donaghy
Director: M&A Taxation
Email: eamonn@hnhgroup.co.uk
Telephone: 02890 278 100

June Barton HNH Group

June Barton
Director: M&A Taxation
Email: june@hnhgroup.co.uk
Telephone: 02890 278 100

Mark Hood HNH Group

Mark Hood
Director: M&A Taxation
Email: mark@hnhgroup.co.uk
Telephone: 02890 278 100

Members’ Voluntary Liquidations

Posted on by Rory Moynagh

Whilst the political and economic landscape in 2019 has continued to be dominated by uncertainty, one option for company directors to manage any uncertainty in the wind down of a company’s affairs is via a Members’ Voluntary Liquidation.

A Members’ Voluntary Liquidation (or “MVL” as it is commonly known) is an option for solvent companies wishing to wind down their activities and allows for assets to be distributed in a tax-efficient manner, whilst also giving directors certainty given the finality of the liquidation process.

An MVL is only an option for solvent companies meaning that the company must hold enough assets to be able to settle all liabilities and interest in full, normally within 12 months. The reference to interest is an important one, given HMRC’s request for 8% statutory interest on all outstanding tax liabilities from the date of liquidation until payment is received.

Why used?

Directors often pursue an MVL for one (or a combination) of the following reasons:

Why would you pursue a Members' Voluntary Liquidation?

Process

Pre – Appointment

A director-led process, an MVL involves the Board resolving to place the company into solvent liquidation and the swearing of an asset and liability statement (known as a “Declaration of Solvency”) for the company confirming that the entity is indeed solvent, and has the ability to satisfy all creditor liabilities plus statutory interest, within 12 months. This is then ratified at a members meeting of the company, following which the entity will formally be placed into liquidation and a liquidator(s) appointed.

Members' Voluntary Liquidation Process

Post – Appointment

Once appointed, the liquidator will wind down the company’s affairs, including the realisation of all company assets, distribution of a dividend to all creditor claims (if any) and dissolution of the entity following receipt of appropriate tax clearance. Whilst a company may be registered in one jurisdiction, it may be tax resident in an alternative jurisdiction, and therefore the resolution of its tax affairs and receipt of appropriate clearance is vital in any MVL.

The winding up of an entity’s affairs by an insolvency practitioner in this manner gives directors and shareholders comfort that the company’s assets and tax affairs have been dealt with appropriately. Statutory notices and public advertisement offers stakeholders a protection mechanism against any future request by creditors to have the entity restored to the company’s register following dissolution.

Tax considerations

Capital Gains v Income Tax

Upon closure of a company by way of an MVL all retained profits are treated as capital rather than income. This means the funds distributed to shareholders should be subject to Capital Gains Tax (“CGT”) rather than income tax.

The headline CGT rate is 20%, however this is reduced to 10% if Entrepreneur’s Relief (“ER”) is available. It should be noted that each distribution in a winding up (e.g. where there is an initial distribution, followed by a final distribution upon completion of the liquidation) is a separate CGT event and therefore the ER conditions will need to be assessed on each separate occasion.

Anti – Avoidance

In recent years, HMRC have been extending the reach of tax anti-avoidance legislation, including the treatment of distributions arising on a winding up. The ‘Transactions In Securities’ (“TIS”) rules have been amended to include such distributions, although there is a mechanism to seek advance clearance from HMRC that they will not apply a TIS counteraction to a given transaction.

Furthermore, a Targeted Anti-Avoidance Rule’ (“TAAR”) was brought in with effect from 6 April 2016 to prevent ‘phoenixism’. The TAAR applies where (in addition to other conditions) the individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution. Unlike the TIS rules, there is no clearance procedure in respect of the anti-phoenixism TAAR.

While the MVL route still offers a return on capital which is subject to relatively low CGT rates, care should be taken with the winding up itself and any other transactions taking place which are (or could be) connected with it under the anti-avoidance legislation.

Alternative 

The alternative to winding down a solvent entity’s affairs is via an application to have the company “struck off” the company’s register. Whilst the “striking off” process is straightforward it does not provide the company directors and shareholders with the same level of protection as the above MVL process. Furthermore, if the distribution in respect of share capital on a striking off exceeds £25,000, for tax purposes the full amount of the distribution will be subject to income tax rather than CGT.

When considering how best to wind down an entity’s affairs, the professional advice of an insolvency practitioner should always be sought.

Contact us


Mark Hood
Director – M&A Taxation
Email: mark@hnhgroup.co.uk
Telephone: 02890 278100

Rory Moynagh HNH
Rory Moynagh

Associate Director
Email: rory@hnhgroup.co.uk
Telephone: 02890 316937

Autumn Budget 2018: Goodbye Austerity … Hello HMRC

Posted on by Alison Jones

Last week the Chancellor made a number of announcements in the Autumn budget, including signalling the end to austerity.

For the restructuring profession one of the most notable announcements was that HMRC will become a secondary preferential creditor for taxes held by companies on behalf of employees and customers (i.e. VAT, PAYE Income Tax, Employee NICs, and Construction Industry Scheme deductions) from April 2020.

The change will not apply for taxes owed by businesses, such as Corporation Tax and Employer NICs.

Currently the only creditors who enjoy preferential status to ordinary unsecured creditors, are the liabilities of former employees in respect of arrears of wages, accrued holiday pay and outstanding pension contributions, up to statutory limits.

As such HMRC presently rank pari-passu (or equally) with all other unsecured creditors in any dividend distribution. Whilst this change doesn’t fully return HMRC to the preferential status it once enjoyed pre 2002 (UK) / 2006 (NI) it does push HMRC higher up the repayment ranking in an insolvency event.

The Chancellor has attempted to defend this change, claiming that it is being made to “ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC”, rather than being distributed to other creditors.

The result of HMRC’s improved ranking will undoubtedly see a reduced dividend paid to unsecured creditors, including lending institutions – where floating charge security will now rank behind HMRC’s new ‘preferential’ status. As such, businesses may experience increased costs of borrowing as lending institutions take into account the enhanced risk and effective devaluation of their floating charge security.

The impact in instances whereby distressed businesses may have in the past received financial assistance from their incumbent lender (as the lender would have taken comfort that such funds would be protected by their floating charge security) remains to be seen.

Whilst it is not clear when these changes will take effect in Northern Ireland, this certainly signals an impending change to the status quo.

 

james
James Neill
Director

Email: james@hnhgroup.co.uk
Telephone: 02890 316934

rory moynagh
Rory Moynagh
Associate Director

Email: rory@hnhgroup.co.uk
Telephone: 02890 316935

Budget 2018 – Fiscal Phil’s Budget Top Ten (plus one!)

Posted on by Rory Moynagh

Today the Chancellor announced that the “Era of austerity is finally coming to an end”. History will be the judge of that statement but for business, this Budget had several interesting and important announcements. Below we have summarised the ones most relevant to entrepreneurs and business owners.

1.Entrepreneurs Relief – the period for which the 5% minimum shareholding requirement must be met has been increased from 1 to 2 years, for share disposals after 6th April 2019. Also for disposals from today, the minimum shareholding of 5% will apply not only to the amount of share capital held and the voting rights but also to the entitlement to distributable profits and net assets of the company.

2.Corporation Tax Rate – the Chancellor confirmed that the corporation tax rate will remain at 19% for the year to 31 March 2020 and will then fall to 17% thereafter.

3.Capital Allowances for buildings- a new allowance will be available for expenditure incurred on contracts for physical construction works on new non residential structures and buildings entered into on or after today. The rate of allowances will be 2% on a straight line basis. This allowance will be paid for by reducing the allowance on the plant and machinery special rate pool from 8% to 6%.

4.Annual Investment Allowances – there will be a two year increase in the annual investment allowance from £200,000 to £1,000,000 from 1 January 2019.

5.R&D Tax Relief for SME’s – there will be a restriction on the amount of payable R&D tax credits for SMEs, which will cap the amount payable to 3 times the company’s PAYE & NIC liability for the year. This will take effect from 1 April 2020 and is aimed at tackling fraudulent claims.

6.Intangible fixed asset regime – two changes for the price of one here. Firstly the government will introduce tax relief for the purchase of goodwill in the acquisition of businesses with eligible intellectual property (which partly reverses the denial of relief for goodwill introduced in July 2015). Secondly, there will be a reform to the de-grouping rules for intangibles so that they will be better aligned to the de-grouping rules for capital gains purposes. This should make the demerger of groups with several trades easier to achieve.

7.HMRC to become a preferred creditor – From 6th April 2020, HMRC will be a preferred creditor in respect of taxes collected by businesses on behalf of other tax payers, including PAYE, employees national insurance and VAT. HMRC will remain an un-preferred creditor in respect of taxes owed by the insolvent business such as corporation tax and employers national insurance.

8.Corporate Capital Loss Restriction – from 1 April 2020, companies will only be able to relieve 50% of their capital gains with brought forward capital losses. There will be a £5m de-minimis level that will apply in respect of all brought forward losses (capital and income) before the restriction will apply.

9.VAT Grouping extension – during 2019, certain non corporate entities (e.g. partnerships or individuals) will be permitted to join VAT groups with body corporate subsidiaries if they control all the members in the VAT group.

10.Off payroll working in the private sector – from April 2020 there will be changes to the IR35 rules that deal with ‘off payroll workers’ (similar to the changes introduced last year to the public sector), which will put the responsibility for operating PAYE/NIC on the paying organisation rather than on the worker or their company.

11.Employment allowance changes – from April 2020 the Employment Allowance of £3,000 will be restricted to employers with an employer NIC liability of less than £100,000 in the previous tax year.

There were several other measures of note such as; the increased personal allowance to £12,500 and the higher rate threshold to £50,000; the introduction of a new Digital Services Tax (which will be of limited interest to NI companies as the group global revenue threshold is to be set at £500m!); the increase in the SDLT exemption for first time buyers of shared ownership property to £500k; and a reduction on the capital gains private residence relief final period of ownership exemption to 9 months.

The Chancellor did caveat his statement that in the event of a ‘no deal’ Brexit, he may have to come back to Parliament with a further Budget in the Spring. Whether he does or not or indeed whether it is Mr Hammond who delivers such a Budget statement, we can only wait and see how events turn out over the forthcoming months.

Budget date announced as 29 October 2018

Posted on by Rory Moynagh

The Treasury has announced that the 2018 Budget will be delivered on Monday 29 October, a few weeks earlier than the November date which would ordinarily have been expected. Interestingly, this will be the first Budget delivered on a Monday since 1962, and the first delivered in October since 1945. Officially, the Treasury has said that this timing gives Parliament more time for debate before it rises for recess on 6 November – whether it also has anything to do with falling between two key Brexit summits in mid-October and mid-November is a matter for conjecture.
In accordance with the new Budget timetable the 2018 Budget will make the final announcement on measures to be introduced in Finance Bill 2018-19 and an initial announcement about measures which are being considered for Finance Bill 2019-20. A large part of the draft legislation for Finance Bill 2018-19 was published in July 2018 (and that after a period of consultation), so we have a good idea of what to expect. Some of the key changes are expected to be:

• An extension of the availability of Entrepreneur’s Relief to cases where an individual’s shareholding has been reduced below the 5% de minimis limit as a result of a dilution of his/her shareholding. This change is being implemented to avoid entrepreneurs being placed in a position where they are unwilling to seek additional capital for their businesses if this would jeopardise their Entrepreneur’s Relief position. The new rules will operate by way of two elections (the first being for a deemed disposal and reacquisition of the shares at market value immediately prior to dilution, and second for a deferral of the gain arising until an actual disposal), with the intention that the gain arising in the period up to dilution should qualify for Entrepreneur’s Relief. Following consultation, HMRC have confirmed that the market value required for the purposes of the first election will not have to take account of a minority discount (which would otherwise potentially disadvantage taxpayers). [Effective from 6 April 2019]

• The implementation of changes to bring UK property income of non-resident companies within the scope of UK corporation tax rather than income tax. Although the corporation tax rate applicable to such income is expected to be lower than the basic rate of income tax which is currently applicable (17% v 20%) and there will be provisions to allow existing income tax losses to be carried forward against corporation tax profits, this change will bring such companies within UK corporation tax rules for loan relationships (including corporate interest restriction and the anti-hybrids rules) which they hitherto would not have been required to consider. [Effective from 6 April 2020]

• Similarly, all non-UK resident persons will be taxable on gains on disposals of interests in any type of UK land, whether residential or non-residential – currently, such gains are only taxable (with some exceptions) for residential properties. The new rules will also give rise to a tax charge on indirect disposals of UK land, i.e. where a person makes a disposal of an entity that derives 75% or more of its gross asset value from UK land. There will be an exemption from this ‘indirect disposal’ rule for investors in such entities who hold an interest of less than 25%. [Effective from 6 April 2019]

• The disposal of a residential property by a UK resident will need to be reported in a return to HMRC, together with any applicable payment on account, within a ‘payment window’ of 30 days following the completion of the disposal. Certain non-UK residents are already required to make such returns and payments – the range of persons to whom these rules apply will be expanded. [Effective 6 April 2019 and 6 April 2020]

• The filing deadline for a Stamp Duty Land Tax (“SDLT”) return (and payment of related SDLT) will be reduced from 30 days to 14 days. [Effective 1 March 2019]

For further information or to discuss how the potential changes may impact you or your business, please contact Mark Hood, Director – M&A Taxation