Oxford Branch Tax Clinic

AAT Oxford Branch21 November 2011TAX CLINIC

Presented by Michael Steed, MA(Cantab) CTA (Fellow) MAAT, ATT

Use of the AMAP

• Can I use the AMAP for self-employment?

• Strictly no, as it only applies to employed people;

• But by concession, HMRC allow it to be used in self-employment.

Use of the AMAP

• Can I use the AMAP for vans?

• Yes – it applies to: cars, vans, motorcycles and cycles.

• (S235, ITEPA 2003).

Use of the AMAP

• Can also be used as a top-up for employees who do not have cars provided by their employer;

• So applies to employees who have a car allowance;

Use of the AMAP

• If an employer pays below the AMAP rates, then the employee can use the AMAP as a top-up;

• Through their tax return or form P87;

• If an employer pays above the AMAP rate, then the employee is taxed on the excess.

Business travel

Use own car for business travel

25 miles

14 miles35 miles

Work at client 4 weeks

Business travel

Use own car

Employer reimburses:

4 x 5 x 2 x 10 = 400 miles @ say 15p = £60

Allowed by HMRC:

4 x 5 x 2 x 35 = 1,400 miles @ 45p = £630

Difference £570

If hr taxpayer, refund = £570 @ 40p = £200

Financing buy-to-lets

• Does it matter where I get the money from to finance a buy-to-let?

• Could I remortgage a buy-to-let to buy a boat?

Property tax issues

• Tax deductions on interest payments;

• “Wholly and exclusively”;

• Interest only, not capital;

• What about refinancing?

Property tax issues - refinancing

• Scenario 1:

• I borrow money from a bank to purchase a buy-to-let;

• Easy – the interest is deductible against my profits;

• It doesn’t matter where the money comes from – it’s the purpose it’s put to that’s important.

Property tax issues - refinancing• Scenario 2:

• I borrow money against my principal private residence to purchase a buy-to-let;

• Still easy – the interest is deductible against my profits;

• (Remember, it doesn’t matter where the money comes from – it’s the purpose it’s put to that’s important!).

Property tax issues - refinancing• Scenario 3:

• I borrow money against my buy-to-let to purchase another buy-to-let;

• Still easy – the interest is deductible against my profits;

• (Remember, it doesn’t matter where the money comes from – it’s the purpose it’s put to that’s important!).

A person’s UK property business

• Repairs v renewals:

• Repairs prevent the property from deteriorating – likely to be revenue and deductible;

• Renewals - improvements – likely to be capital – although special rules for furnished lets- PIM46900;

• Replace double glazing?• Replace a cooker?

Capital allowances

• General rule: no capital allowances in domestic property;

• But CAs available on P&M used in the property letting business – eg vans, ladders etc;

• .AIA?

• So either renewals basis (generally inefficient), or 10% wear and tear allowance;

Wear and tear allowance• ESC B47 (will it survive?)

• Only available for furnished lettings – not FHLs;

• On suites, beds, cookers etc;

• Also available: renewals on fixtures (ie which become an integral part of the building):

• Eg baths, wash basins and toilets.

Wear and tear allowance

• Note that the 10% wear and tear allowance is an all or nothing concession;

• You must use it for all your rented properties or none;

• The allowance is NOT available for FHLs (they can have capital allowances).

Landlord’s energy savings allowance (LESA)• Tax allowance up to £1,500 per property (not per

building) – until 2015;

• Available for both individual and corporate landlords;

• Cavity wall insulation;• Draught-proofing;• Floor insulation;

• NOT double-glazing (other tax reliefs?).

Can I use the PPR rules to help shelter buy-to-let gains?

Principal Residence

What is aPPR

Absences

Letting

Businessuse

1 property

Principal Residence

• House plus grounds up to a half hectare exempt from CGT on disposal– Larger area of land if relevant to property

• Only one allowed for married couples;

• Must occupy as residence.

Principal Residence

• Problems can occur with out-buildings and cottages in grounds etc;

• Also an issue where garden sold separately from house;

• Best to sell garden first.

Non-occupation

• Last 3 years treated as exempt providing occupied as PPR at some time during ownership;

• If not occupied for full ownership a proportion of the gain becomes chargeable– only consider periods since 31 March 1982.

Non-occupation

• Deemed occupation– Any period employed overseas– Up to 4 years employed elsewhere in UK– 3 years for any reason

• Must occupy at some time before and after absence

• For employment absences exemption still available if employer prevents re-occupation

Letting

• Owner occupies part and lets part– not self-contained flats

• Letting during period of absence– if period is ‘deemed’ occupied letting ignored

• Reduce gain by lower of– Gain on let part– Gain on owner occupied element– £40,000

More than one property

• Elect which is PPR– within 2 years of start of occupation of new property

• Considerations– which is the most likely to be sold– Last 3 years exemption

• Job related accommodation– Can exempt non-occupied home;

More than one property

• Can we use the PPR rules for buy-to-lets?

• Possible, but need to establish it as a “residence”;

• Then nominate the property as the PPR;

• Occupy for preferably a year;

• But re-nominate first property after a short period – saves CGT on last 3 years.

More than one property

• Husband and wife– only one PPR per couple– Separation – ceases to be PPR from date of

leaving• next 3 years exempt

– Transfer of ownership to spouse remaining in property – no CGT

• Do I always need a VAT invoice to reclaim input tax?

Claiming back VAT on expenses

• What evidence is required?

• Normally an invoice is required

• NO INVOICE; NO RECOVERY; but

• Some expenses don’t need an invoice - if less than £25 (including the VAT) – see PN 700.

Claiming back VAT on expenses• Examples include:

• Coin operated telephones;

• Coin operated machines;

• Car parking charges (NOT meters – o/scope of VAT);

• Toll charges (where chargeable).

Tolls and bridges – VAT?

• Dartford crossing?

• Severn bridge crossing?

• Forth road bridge?

Claiming back VAT on expenses

• Employers can’t recover any VAT on flat rate expenses given to employees (per diem expenses).

Claiming back VAT on expenses

• Most employee expenses are recoverable;

• These include:

• Travel and subsistence;

• Hotels (watch for booking commissions eg lastminute.com).

Claiming back VAT on expenses

• Taxis – not generally registered for VAT, so no VAT to reclaim;

• However, if taxi supplied by a taxi firm, then more likely that VAT is in the sum;

• Check for a VAT number on the receipt – although not always present.

Claiming back VAT on expenses

• Trains and planes:

• Zero-rated;

• Petrol standard rated – employer can recover, provided employee provides enough VAT receipts to cover the claim;

• Applies to 45p/25p AMAP system as well!

• I’m killing off a company – can I still use ESC C16?

Where are we with ESCs?

• R v CIR exp Wilkinson (2006) STC 270;

• The taxpayer argued that S1(1), TMA 1970 gave HMRC discretionary power to grant concessions and to extend the widow’s bereavement allowance to be made available to widowers;

• HOL said that the powers should not be construed so widely as to enable the Commissioners to give discretion that parliament had not intended;

• This effectively invalidates ALL ESCs.

Where are we with ESCs?• Legislation in FA 2008 to allow HMRC to continue

applying ESCs;

• Consultation in Nov 2008 – divides ESCs into three groups;

• Those that can be legislated under FA 2008;• Those that can remain as ESCs;• Those where clarification is needed before legislation was

drafted.

• ESC C16 fell into number three.

ESC C16

• Draft legislation produced in December 2010;

• For consultation until March 2011;

• Draft legislation said:

• OK to strike off at Companies House provided that company has collected all debts and paid all liabilities; AND

• The distribution does not exceed £4,000.

ESC C16• Meant to protect micro businesses;

• But many businesses above this;

• It’s gone very quiet!

• Nothing obvious from HMRC;

• So, make hay while the sun shines;

• Be careful to read the ESC carefully.

Bona Vacantia

• Latin: ownerless goods;

• What does this mean?

• It give the crown rights to claim ownerless goods (eg someone dying without family or will;

• Why is it relevant here?

• Because of the “link” between bona vacantia and ECS C16.

Bona Vacantia

• The “link” between bona vacantia and ECS C16;

• Strictly they are entirely separate, but if you Google ESC 16, the links will include references to bona vacantia;

• What’s new is the Treasury Solicitor withdrawing the guidelines on when the crown will act (on 14th October 2011);

• This is because of the changes to company law under Companies Act 2006, so harder for the crown to act.

Inheritance Tax – how much can I give away in my lifetime to avoid IHT?

Inheritance tax – lifetime gifts

• Individuals to individuals – PET;

• Fully exempt of donor survives 7 years;

• Otherwise donee pays the tax;

• Taper relief available;

• Consider decreasing term insurance

Inheritance tax

• Gifts into trust – chargeable lifetime transfers;

• IHT payable at half death rates (above the nil rate band);

• Who pays the tax?

Lifetime gifts - exempt

• Annual £3,000 per person;

• Small annual gifts (up to £250 per person per annum);

• Gifts in consideration of marriage;

• Gifts out of income;

• Spousal (CP) gifts;

• Gifts to charities and political parties.

Lifetime gifts - taxable

• Annual £3,000 per person;

• Small annual gifts (up to £250 per person per annum);

• Gifts in consideration of marriage;

• Gifts out of income;

How do I value goodwill on incorporation?

Dealing with goodwill on incorporation

• Care needed with valuing the goodwill;

• Many SMEs will have a goodwill that is profits based;

• HMRC’s approach is as follows:

• You need to establish the superprofits;

• Average the profits over three years;

Dealing with goodwill on incorporation

• Minus the cost of running the business as the incomer;

• (basically the cost of hiring someone);

• What’s left you multiply by a multiplier of between 1 and 3 depending on the business;

• This gives you the value of the goodwill.

Dealing with goodwill on incorporation

• What are the options?

1 Pay the tax, but have a tax-free pot in the company to draw down on;

2 Use S162, TCGA 1992 – defers the gain;

3 Use a mix of the above;

Dealing with goodwill on incorporation

• What are the options?

4 Use S165, TCGA 1992 – the gift relief provisions:

4a – Total gift – defers the gain;

4b – Sell at an undervalue – some tax may be payable (tax the cash).

Dealing with goodwill on incorporation -the double entries

• No S162 – Dr assets, Cr Directors’ loan;

• S162 – Dr Assets, Cr Share (premium?) account;

• S165 pure gift– no consideration, so arguably no double entry;

• S165 – sell at an undervalue – Dr Assets, Cr Directors’ loan.

What are the changes to the associated companies rules in 2011?

Associated companies• Changes from 1 April 2011;

• Definition of associated company?

• Impact – consider a H &W company – different businesses, even different location;

• Were they associated under the old rules?

• Associated under new rules?

Associated companies• Where two or more companies are under the “direct” control of one

person or an identical group of persons;

• Then they will be “associated” – this does not change in 2011;

• However, in the new rules from 1 April 2011:

• If there is “substantial commercial interdependence”, then you need to look at the “indirect” as well as the “direct” control;

• So you need to look at the associates (eg a spouse or civil partner).

Associated companies

• “Substantial commercial interdependence” means?

• Administration, directorships, staff, premises, purchasing/selling arrangements etc.

Food for thought......

• Would a husband and wife who ran a pub and who each had limited companies be associated?

• Husband Ltd runs the drinks;

• Wife Ltd runs the catering.

Whilst we are there……

• How many AIAs could a husband and wife companies have?

• Note the CAA Act rules are different to the associated companies rules;

• Only one AIA between them if:

• Same trade; or

• Same premises.

Family businesses

Can I use the employers’ regional NIC holiday to employ family members?

• There do not appear to be any impediments to using the rules in a family context.