Tax issues for unincorporated businesses Ros Martin CTA December 2017
The Budget Not much relating to self employed Property businesses can claim fixed rate mileage Various consultations announced Avoidance of tax due to transfer of income to unrelated entities NIC Overseas scale charges and general point on subsistence Training costs Taylor Report being taken forward Disincorporation relief
Partnerships Partnerships with partnerships as partners – include full details on SA return Investment partnerships with non UK partners (no chargeable to IT or CT) will not need to get reference for those Allocation of partnership profit will follow account and new process for assisting in disputes
Choice of business structure
Basics First decision when starting is to determine structure Sole trade Partnership including LLP Corporate entity
What are the relevant issues? What are the expected profits? What is the other income of the proprietor? Might there be losses? Any need for limited liability? Status issues? Employees and incentives to be provided? What is the long term aim? Is pension planning relevant?
Sole trade Taxed on all profit NICs to be paid VAT will be due once threshold exceeded Investment only via loans PAYE for employees Providing incentives to employees may be difficult No separation of risk Losses can be utilised against other income
Partnerships As above Except joint and several liability for debts Losses are subject to more anti-avoidance provisions
Limited liability partnerships Again as above But the liability is limited More restrictions on loss set off And some cases where partners are taxed as employees
Limiting liability Can be a limited partner Or can have an LLP Managing risk can be an important aspect of determining business structure What does this protect you against?
Losses Availability of losses in early years can be important too But need to be aware of significant restrictions And will see that HMRC are undertaking lots of work in this area
Particular uses for LLPs LLPs holding property Can be useful to non UK investors or tax exempt funds UK tax liabilities are limited to basic rate band And no CGT on disposal of property other than residential property No tax on tax exempt bodies
Other advantages No need to have central control and management outside of UK to get advantages Can involve UK investors without anti-avoidance provisions applying
Offering employees stake in business LLPs can be useful vehicle to offer employees stake in business Without wanting to trigger charge under ERS provisions Can also get ER on share of underlying assets when sold Can also save NICs Need to be aware of anti-avoidance provisions
Calculating profit – recent case law
Income earned by company or individual B commended work as a self employed locum with agency Set up company with he and wife as shareholders Compliance record of both self employment and company were not good All payments were made into personal account and expenses all invoices to him personally HMRC argued company never actually traded
Decision FTT agreed with HMRC Taxpayer can carry on business through whichever medium he wishes But not enough to form a company and say income must be declared via that Must be providing services through company Nothing changed following incorporation
Private use too low HMRC opened up enquiry into Mr S’s tax return Taxi driver Believed 10% private use adjustment was too low Normal business economics exercise Normal kind of dispute about income generating miles and dead miles Demonstrates the kind of arguments that can be made But FTT accepted the methodology adopted by HMRC Could not be definitive but appeared to them to be reasonable
Sideways loss relief Yet another avoidance scheme which was looking at two aspects Was the business commercial Were the parties involved actively involved in the business Similar arguments being made in other cases too – not just avoidance Felt that any business which was very likely to make losses could not be seen as commercial So losses cannot be available for sideways loss relief
Were deposits business income? Individual with TO around £9K and negligible profits HMRC opened up enquiry based on lifestyle reports Various amounts were disclosed as part of enquiry However £52,000 of unexplained deposits Whittled down to £26,570 but HMRC simply did not accept his explanations HMRC assessed on basis that came from business Case ended up at FTT No evidence produced FTT could not disagree with HMRC’s analysis
Fixed rate deductions and cash basis
Simpler accounts Unincorporated businesses can used simplified expenses And can also use cash basis Cash basis now extended to property businesses Nothing is obligatory
Business mileage Use fixed allowance for business mileage Use the normal AMAP rates Cannot use these if the vehicle has ever had capital allowances claimed on it Or has been subject to a deduction under cash basis If a fixed rate allowance is claimed, no other deduction is allowed in respect of the qualifying expenditure Need to be careful in decision to use this Does not cover incidental costs of travelling such as tolls or finance costs Need to keep good records
Use of home Can claim a deduction for use of home Can be a complicated calculation And HMRC expect there to be significant records to support expenditure And may well then restrict it to what they consider to be reasonable Can now claim flat rate Based on the amount of time working at home
Rates of deduction Hours worked at home per Deduction per month month 25 or more but less than 51 £10 51 or more but less than 101 £18 101 or more £26
Definitions Number of hours worked means number of hours spent wholly and exclusively doing qualifying work Meaning for the purpose of the trade If partnership means work done by a partner on partnership business Must be core business activities Where more than one individual working in same business, each hour only counted once If more than one home, treated as one home
Additional expenses HMRC say that this deduction covers household running costs Could still then claim an additional amount for council tax, insurance and mortgage interest
Business premises Fixed rate adjustment where have premises which are mainly business but also used as a home Take total amount of expenses and then deduct fixed rate for non-business use Based on number of relevant occupants Can pro-rata if number of occupants alters
Adjustment Number of relevant Additional per month occupants One £350 Two £500 Three or more £650
Cash basis Small businesses can elect to be taxed on cash basis Rather than having more complex provisions applying Only available for sole traders or partnerships Not corporate partnerships TO less than the higher of £150,000 or VAT threshold (double this for UC recipients) Cannot use if certain type of business eg LLP Once elect have to remain within until no longer eligible or change in circumstances
Principles Still wholly and exclusively provisions apply Capital expenditure deductible other than cars Interest payments limited to £500 Business losses can only be carried forward and set off in future No change in VAT provisions
Transitional rules When moving into or out of cash basis need to make any relevant adjustments To ensure that do not either ignore any income or double count expenses
Cash basis for landlords Obligatory for landlords Where income is less than £150,000 Unless opt out of regime If joint ownership must both use same principle in calculating Neither will affect the possible interest restriction applying from 2017 Budget announcement that can use mileage rates for property businesses
Interest relief Confusion over interest relief where remortgage Separate from current restrictions on relief anyway HMRC have always remortgage up to original value Even where money used privately
Example You purchased a buy-to-let property for £120,000 with a mortgage of £90,000 and let it to a tenant straight away. Three years later the property is valued at £150,000 and you increase your mortgage on the property to £115,000. All of the interest on the mortgage can still be claimed as a revenue expense as the loan doesn’t exceed the initial £120,000 value of the property when it was introduced to your letting business. If you increased the mortgage to £125,000, the interest payable on the additional £5,000 is not tax deductible and cannot be claimed as a revenue expense.
PIM Change in PIM ‘ as long as the additional loan is wholly and exclusively for the purposes of the letting business’ BIM has not changed – covers same point May have been an error?
Capital allowances
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