Agenda • Next Finance Bill early September • Making Tax Digital for Business delayed • HMRC manual – Winding up TAAR • Other HMRC announcements • Recent tax cases – Rangers EBT case • Using EIS to defer/avoid CGT
Another Finance Bill in Autumn • Legislation deferred because of Election • New Finance Bill in September • Some updated draft clauses issued • Start dates confirmed • Corporate tax changes – 1 April 2017 • Non-Dom changes – 6 April 2017
Making Tax Digital delayed • They listened at last! • 2020 at earliest for quarterly updating by traders and landlords • But VAT quarterly updating from 2019 • 12 month pilot of new VAT reporting • Businesses below VAT threshold exempt – not £10,000 • Gives more time for testing and software development
HMRC Announcements and other developments 5
HMRC Guidance on Winding up TAAR • Sections 35 in Finance Act 2016 - introduced Targeted Anti- Avoidance Rule • ITTOIA 200 section S396B and s404A • Certain distributions on a winding up taxed as income not CGT = up to 38.1% rather than 10% • Applies to transactions from 6 April 2016 • New HMRC Manual Guidance - CTM36300
Liquidations taxed as income if: • A close company is wound up and an individual (S) • with a material interest (5%) receives proceeds from the shares • Within two years of that distribution S (or a connected person) continues to be, or becomes, involved in a similar trade or activity ; and • One of the main purposes of the winding up is to obtain a tax advantage • Note – successor could be unincorporated business
Company distributions • Company Liquidation previously taxed as Gain = 10% with entrepreneurs relief • Where income accumulated in company may now be taxed as income? – Finance Act 2016 • Profits 1,000,000 • Less corporation tax 20% (200,000) • Retained profit £800,000 • CGT @ 10% (80,000) • Net cash to shareholder £720,000 28% tax • Dividends taxed at 7.5%,32.5%, 38.1% now
Company liquidations – if income • If distributed as a dividend: • Profits 1,000,000 • Less corporation tax 20% (200,000) • Retained profit £800,000 • IT @ 38.1% (AR) (304,800) • Net cash to shareholder £495,200 50.48% tax
“Similar trade or activity” - example 2 • Mrs F has been the sole shareholder of a company which carries on the trade of landscape gardening for ten years. Mrs F decides to wind up the business and retire. Because she no longer needs a company she liquidates the company and receives a distribution in a winding up. To subsidise her pension, Mrs F continues to do a small amount of gardening in his local village. • Condition C – similar trade or activity, BUT • CGT treatment would not apply if arrangements do not appear to have tax as a main purpose (condition D)
“Similar trade or activity” - example 3 Mr E is a builder who runs his business through two companies • Company 1 specialises in loft conversions, and • Company 2 specialises in extensions. Mr E winds up Company 1, but the trade of Company 2 continues. As with Example 2, Mr E continues to be involved with a trade that is similar to that of the company that is wound up, and so Condition C is satisfied.
“Continues to be involved in similar trade or activity” • Mrs C, an accountant runs her business through a company. Her husband is a self-employed lion tamer. Mrs C winds up her company and starts work for a newly- formed company owned by her husband, providing accountancy services. • Mrs C continues to be involved with the same trade or activity as the wound-up company was involved with (the provision of accountancy services), even though she is now an employee rather than business owner. • She is connected to her husband and so Condition C is met. Condition D will still need to be satisfied.
Condition D – section 396B • S396B applies Condition D where: • “it is reasonable to assume, having regard to all the circumstances , that – 1. The main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or 2. The winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax”
Factors HMRC will consider: • Is there a tax advantage, and if so, is its size consistent with a decision to wind-up a company to obtain it? • To what extent does the trade or activity carried on after the winding-up resemble the trade or activity carried on by the wound-up company? • What is the involvement in that trade or activity by the individual who received the distribution? To what extent have their working practices changed? • Are there any special circumstances? For example, is the individual merely supplying short-term consultancy to the new owners of the trade?
Factors HMRC will consider: • How much influence did the person have over the arrangements? Is it a reasonable inference that arrangements were entered into to secure this advantage? • Is there a pattern, for instance have previous companies with similar activities been wound-up? • What other factors might be present to lead to a decision to wind-up? Are these commercial and independent of tax benefits? • Any events linked with the winding-up that might reasonably be taken into account? For example, was the only trade sold to a third party, leaving just the proceeds of the sale?
Exclusions: • Distribution does not create chargeable gain • Repayment of base cost of shares • Distribution of irredeemable shares/ Demergers • Where shareholder receives shares in a new company and that new company receives all of the assets of the old. Although it is arguable that there is a tax advantage here, the chargeable gains legislation provides an exemption for reconstructions
Exclusions – Demerger example • Company A has two trades: an electrical supplies store and a hair salon. The shareholders take the view that these trades would be better served by being carried on in separate companies with no group ties. • This takes place through a “demerger” • CTA 2010 S1030 - the distribution from the liquidation is not an income distribution. TCGA 1992 S136 will also apply to the reconstruction – no gain • Company A reorganises its share capital so that ‘P’ shares are entitled to assets of the electrical supplies business and ‘Q’ shares are entitled to assets of the hair salon business.
Exclusions – Demerger example • A is wound up and the electrical supplies business and assets are transferred to new company B. • New company B issues shares to holders of ‘P’ shares in A. • The liquidator transfers the salon business and assets to new company C, which issues shares to holders of ‘Q’ shares in A. • The end result is that Company A no longer exists, and the original shareholders of Company A now hold shares directly in Company B and in Company C.
Buy to let interest - remortgages • HMRC guidance updated October 2016 • Sneaky change in policy? • If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business. • Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.
Remortgage example – BIM 45700 • Flat in London worth £375,000 • Mortgage £80,000 = £295,000 starting capital • Remortgage up to £205,000 = £125,000 • Rent out while abroad • Use £125,000 to buy flat in Holland • Interest on £205,000 allowed
Taylor report on “Gig” Economy • House of Commons Work and Pensions Committee • “bogus” self -employment practices- burden welfare state but reduce the tax contributions to sustain it. • Followed an inquiry into companies such as Uber, Amazon, Hermes and Deliveroo. • The Committee recommended a default assumption of “worker” status , rather than “self - employed” • Taylor report focussed more on workers rights and recommended new status of “dependent contractor”
Employee v Self employed v Own co. 16/17 Employee Self-employed Own company Salary/ fees £40,000 £40,000 £40,000 Income tax 20% 5,800 5,800 NIC 3,833 3,020 350 NIC – ERs 4,401 (398) Corporation tax 5,721 Dividend tax 1,341 Total taxes 14,034 8,820 7,810 NET for worker £30,367 £31,180 £32,190
Auto – Enrolment – increased contributions • 6 April 2018, the minimum amount your client will have to pay in will be 2% of their staff's pay, and the amount their staff put in will rise to 3%. • 6 April 2019, this will rise again to 3% contribution from your client and 5% contribution from their staff member. • TPR will be writing to all employers about the changes
New “Tax Free” Childcare Accounts • New scheme designed for working families, including the self-employed • For every £8 you pay in, the government will add an extra £2, up to £2,000 per child under 12 years old, • £4,000 per year for disabled children under 17 • Use account to pay for nursery provision, after school care, childminder • Parents of children who will be under 4 on 31st August, and parents of disabled children, can apply now.
Recommend
More recommend
