BRIEFING · 2017. 12. 14. · 2016 Property Briefing. The Greek philosopher, Heraclitus, is attributed as saying “the only constant is change”. Although that phrase is over 2,500

© haysmacintyre - Property Briefing - Summer 2016 Page 2

Letter from the EditorWelcome to our Summer 2016 Property Briefing.

The Greek philosopher, Heraclitus, is attributed as saying “the only constant is change”. Although that phrase is over 2,500 years old it perfectly describes the

events of the last month: the expectation that the UK would stay in the European Union and then voting to leave; David Cameron resigning thinking he had until September to pack for the removal men and then getting 48 hours; the tug of war contest to decide our next Prime Minister until one of the contestants called off before taking the strain; the cartoon writers’ delight at the prospect of two blonds running two powerful nations only to find one of them having his running spikes pinched before the gun was fired; and the official Opposition seeming to have forgotten that opposition is about challenging the Government not opposing themselves.

I cannot promise you all the intrigue and double dealing of the last month in this edition of our Property Briefing, however, I hope you find the articles interesting and relevant to your business.

It would be impossible at this time to avoid mention of the “Brexit” word and I am delighted that in this issue we have an article from Nick Marshall, Partner at the international legal practice DAC Beachcrofts. Nick looks at the possible impact of the referendum on the planning landscape. We also look at the recent changes in business expenses and in the way UK property trades are to be taxed, effective contract management and how the SORP on LLPs will interact with the recent changes in the UK accounting framework.

With change being the only constant, it has never been more important to ensure your financial and accounting affairs are appropriate to your circumstances. Please feel free to contact your usual haysmacintyre contact, or me, if you require assistance with your property issues, or have any thoughts on this Briefing.

We look forward to hearing from you.

Ian Daniels, Head of Property at haysmacintyreT 020 7969 5502 E [email protected]

mailto:idaniels%40haysmacintyre.com?subject=Property%20Briefing%20Summer%202016

© haysmacintyre - Property Briefing - Summer 2016

Business Expense Payments ExemptionAlthough property companies frequently have relatively few employees, compared to the size of their assets, directors and employees are an integral part of any successful property business. With employees and directors comes a payroll and the attendant payroll compliance issues. However, from the start of this tax year, HM Revenue & Customs (“HMRC”) has changed the P11D reporting regime.

Whilst you may have just submitted your 2015/16 Forms P11D to HMRC, the changes which are now in place may require changes to be made to your current procedures otherwise you may experience some “challenges” when it comes to preparing your 2016/17 forms. Consequently, some planning now will help to make life a lot easier in the future.

New regime

Any P11D Dispensation Agreements you had in place with HMRC has now expired. Instead employers will be required to “self-assess” the tax and national insurance treatment of benefits and expense payments paid to, or on behalf of, employees. Where the employer is satisfied that an expense has been incurred “wholly, exclusively and necessarily” in the performance of the employee’s duties, details of these expenses do not need to be reported on an employee’s P11D. However, where the costs incurred do not fulfil any part of the above test, details of such costs incurred must be reported to HMRC on a P11D.

Whilst the underlying test has not changed, under the Business Expense Payments Exemption regime the onus is firmly placed upon the employer to “get it right”. Consequently, it is important to ensure your systems and controls can cope with the additional demands being placed on you as an employer. If you are unable to correctly determine the tax and National Insurance treatment of your employees’ expenses, you are potentially putting your organisation at risk of penalties.

It will be prudent for you to have robust controls and procedures in place to ensure that, for example:

• You have an up-to-date staff expenses policy.• All employees are aware of the policy and the basis

upon which expenses are paid/reimbursed to them.• There is no self-authorisation of expenses.• You can distinguish expenses incurred “wholly,

exclusively and necessarily” in the normal course of the employment from any that are not.

Without such controls you will potentially have difficulty submitting accurate P11D forms to HMRC. HMRC can seek to recover any underpaid tax and National Insurance, together with interest and penalties, where there has been a failure to submit complete and accurate forms P11D.

Benchmark scale rates

One exception to the Business Expense Payments Exemption regime is where an employer pays employees fixed rates for the provision of meals whilst travelling which are in excess of the HMRC Benchmark rates. Any new rates will need to be re-negotiated with HMRC before they can be paid without the need to deduct either income tax or National Insurance.

It must be possible to demonstrate to HMRC that the rates are intended to meet the actual costs incurred and not designed to enable employees to make a profit. It will also be necessary to undertake a random sampling exercise to demonstrate the rates are reasonable.

HMRC typically expect a sample to be:• a random sample;• cover 10% of the eligible employees; and• for a minimum period of one month.

However, the basis of the sampling exercise will vary depending upon your size and number of employees. Once obtained, the agreement to pay the flat rate expenses will be in place for up to five years. This will prove advantageous for employers who incur a high level of subsistence claims.

Where a scale rate payment is paid, HMRC will also expect employers to have an independent checking procedure in place. HMRC expect the procedures will meet the following criteria:

• Random checking of claims to be made. The number of claims will depend upon the size of your workforce.

• Claims to be independently checked and authorised.• Verification to be undertaken by reference to

worksheets, timesheets or diaries.• Employees need to be aware of the fact that

expense payments will be subject to review.

Conclusion

Whilst an employer may find that there is less to enter onto an employee’s P11D, this comes at an additional obligation on the employer to “get it right”. Acting now by reviewing and updating your procedures will make life a lot easier for you later on.

Nick Bustin, Director of Employment Tax at haysmacintyreT 020 7969 5578 E [email protected]

mailto:nbustin%40haysmacintyre.com?subject=Property%20Briefing%20Summer%202016


The Lisbon Treaty requires the EU and member states to pursue policies to protect the environment and promote energy efficiency. The aim is not just to protect natural resources and human health, but also to promote a level playing field within the single market by ensuring as far as possible that the regulatory impact is felt evenly by each member state.

These twin ambitions are given effect through a series of directives, which in turn, have been incorporated into English and Welsh law by a series of Regulations, most obviously:

• The Environmental Assessment of Plans and Programmes Regulations 2004 (“the SEA Regulations”) which require public authorities, including the Government, to assess and publicise the likely significant environmental effects of plans and programmes which set the framework for development consents before they are adopted.

• The Town and Country Planning (Environmental Impact Assessment) Regulations 2011 (“the EIA Regulations”) which require information on the likely significant environmental impacts of major developments to be assembled, made public and taken into account before planning permission is given for the development.

• The Conservation of Habitats and Species Regulations 2010 (“the Habitats Regulations”) which require an appropriate assessment to be carried out and publicly consulted on before plans and planning applications, which are likely to have a significant effect on certain ecologically sensitive sites, are approved (and which prohibit some development with significant adverse impacts except, unless, there are overriding public interest arguments).

• The Building Regulations 2010 and Schedule 1, Part L which require all new buildings in the UK to meet certain construction standards as part of wider ambitions to reduce greenhouse gas emissions.

The SEA, EIA and Habitats Regulations also give effect to the public’s Aarhus Convention right to take part in decisions that affect the environment. This includes requiring public authorities to actively disseminate the environmental information on plans and developments.

This regime of controls has undoubted benefits in encouraging less environmentally damaging proposals, promoting greater energy efficiency and through involving the public in those decisions. However, in pursuing those aims, it also builds in delay and costs which, in economically constrained times, can mean that development doesn’t move ahead.

The delays don’t simply affect planning applications, but also the public sector’s ability to quickly adapt policy to changing circumstances. For example, Eric Pickles’ decision in 2010 to abolish by order all regional spatial strategies to give effect to the Coalition Government’s commitment to, “rapidly… return decision making powers on housing and planning to local councils” came unstuck amongst other reasons, because the decision had not been subject to an assessment under the SEA Regulations.

From a developer’s perspective, legal challenges to unpopular development proposals alleging breaches of the EIA Regulations have become so common that local authorities and developers now start with a defensive mind set. The resulting leviathan environmental impact assessments can run to hundreds and even thousands of pages, much of which will be dedicated to showing that even the most obscure and unlikely impact has been considered and ruled out. Preparing and assessing these documents is expensive and time-consuming for both developers and local authorities.

The Brexit planning landscapeWhile the short-term impact on planning will be negligible, the longer term planning and development landscape could look very different as a result of the Brexit vote. The EU’s main impact on planning and development is through its policies on the environment and climate change.


Even once planning permission is secured, the energy performance requirements in the Building Regulations impose additional constructions costs. The Performance of Buildings Directive (2010/31/EU) requires all new homes to be constructed to ‘Nearly Zero Energy Building’ standards by 2021. The Government originally intended to achieve this by gradually tightening the Building Regulations so that all new homes would be Zero Carbon (formerly Code level 6) by 2016. That ambition was abandoned in July 2015 in the Treasury paper “Fixing the Foundations”. At the moment it is unclear how, or when, the Government expects to meet the Nearly Zero Energy Building standards.

The post-Brexit picture is not clear. The Government could abolish the various regulations as a quick route to cutting development costs in an uncertain economic environment.

Changing the regulations would also free the UK courts to move on from earlier precedent rulings which gave effect to the European Court of Justice’s interpretation of the various directives. However, change is more likely to be gradual and incremental rather than revolutionary.

Although the regime is not loved by either policy makers or developers, it does ensure that environmental considerations are firmly in view when planning decisions are made and that the public can have its say. Initial change may take the form of tinkering with the thresholds above which the regulations start to apply and perhaps further exemptions for SME developers. However, even an incremental approach carried out over a number of years could still eventually result in a planning system that looks very different from today’s.

The real challenge post-Brexit is to make sure that the benefits of the current regime, in terms of environmental protection and public engagement, are preserved, while paring away at the unnecessary aspects. A post-Brexit Government will need to be careful not to throw the baby out with the bathwater.

Nick Marshall, Partner at DAC BeachcroftT 020 7242 1011 E [email protected]

Even an incremental approach to planning regime change post Brexit could result in a system that looks very different to today’s.

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Treatment prior to 5 July 2016

Profits from trading in UK property were, generally, determined by the residence of the person undertaking the activity. The property trading activity of UK residents was taxable. Non-residents were taxed if the trade was carried on through a UK Permanent Establishment (“PE”) by a company subject to Corporation Tax or, in the case of an unincorporated trader subject to Income Tax, if the trade was carried on in whole, or in part, in the UK.

These territorial connecting factors may be modified, or overridden, by a relevant double tax treaty. The effect of which will be, typically, to substitute the relevant treaty definition of a PE as the connecting factor in deciding where profits are to be taxed.

In March 2016, HMRC published a technical note explaining new anti-avoidance provisions it would combine with its proposals to tax offshore property developers on their UK profits. These proposals have been introduced into the Finance Bill 2016 which will, in due course, become the Finance Act 2016.

The “problem” being targeted

A PE generally requires a physical presence. This will involve the existence of people and premises carrying on an activity on behalf of the non-resident in the UK. In the case of an agency PE, where a UK agent of the non-resident habitually exercises contractual authority on behalf of the non-resident, a physical presence in the UK would also be expected.

Perhaps surprisingly, HMRC has found it difficult to police this territorial scope with respect to property trades. Given that UK land is, by its very nature, physically part of the UK, a UK PE or trade carried on in the UK of a property trade might reasonably have been expected to be identifiable. Frustratingly for HMRC, non-residents have successfully (de facto if not de jure) structured their UK property transactions to avoid the creation of a taxable PE in the UK. In other cases, where a taxable PE has been created, the non-residents have entered into arrangements to envelope, or fragment, the profits derived from such transactions such that the vast majority of the profits generated escape the territorial scope of UK tax.

HMRC’s response

The response from HMRC, originally announced at the time of Budget 2016 on 16 March, has now been delivered by way of draft clauses included in Finance Bill 2016. The core change is to abandon the requirement for a connecting factor where the trade concerns dealing in, or developing, UK land; the location of the land in the UK will now provide the connecting factor. Consequently it will no longer be relevant whether the trade is carried on in the UK, or through a UK PE, in determining the UK’s ability to tax the activity.

The draft clauses, which were only issued on 5 July, are to be effective from that date.

Clearly HMRC, having struggled under the existing rules to police the territorial scope of UK taxation with respect to property trading, were determined to re-arm themselves with every legislative advantage for their arsenal. Accordingly, a trade of dealing in, or developing, UK land is to be widely defined. The definition extends to any activities where a gain is realised from a disposal of land, or of any property deriving its value from land, in circumstances where the land is acquired or developed with a view to realising a gain on its disposal.

The extension of the charge to any property deriving its value from the land includes a shareholding, interest in a partnership or interest in a trust. This addresses HMRC’s concerns towards structures where land is held (enveloped) in another structure, typically a company. Similarly, HMRC’s concerns over fragmentation, under which profits are diverted from the land dealer, or developer, to an associated entity outside the scope of UK taxation, are met by way of rules which effectively restore such profits to the person disposing of the UK land.

Anti-avoidance provisions

The changes come complete with four targeted anti avoidance rules (“TAARs”); two for each on Corporation Tax and Income Tax. This doubling up is in order to secure that the substantive changes, effective from 5 July, are protected by a TAAR and that HMRC has anti-forestalling provisions available to it to defeat any planning entered into since the Budget on 16 March in anticipation of the changes now introduced.

A new tax framework for dealing in or developing UK landHistorically, the taxation of profits from trading in UK property depended on the residence of the person undertaking the venture. However, with effect from 5 July, HMRC has changed the rules of engagement and created a, perhaps unwelcome, status for the taxation of such ventures.


In conclusion

The changes give a new and special status for a trade of dealing in, or developing, UK land carried on by a non-resident and come as a result of considerable legislative effort. In addition to the clauses introduced into Finance Bill 2016, HMRC had already taken the opportunity of amending the tax treaties with Guernsey, Jersey and the Isle of Man to recover taxing rights over UK land.

With UK tax rates falling, and post-Brexit destined to fall further (although we will need to see whether this commitment continues with the new Chancellor), the payback from structuring to avoid the scope of UK taxation was already seeing decreasing returns.

Consequently these efforts may seem disproportionate to the risk of the tax revenues involved.

However, there is also a very practical reason for limiting the territorial scope of any system of taxation: in order to be effective the country needs to be able to secure collection of the tax due. Whilst the existence of a PE is now irrelevant in determining the charge to UK taxation on land dealing and development transactions, a PE did, at least, give something for HMRC to aim at to collect the tax due. However, without the ability to target a PE to enforce the reporting and collection aspect, HMRC might find it easier to collect tax from will-’o’-the-wisps! Time will tell as to how effective these new rules will be in increasing the tax collected on such transactions.

Neil Simpson, Partner at haysmacintyreT 020 7969 5512 E [email protected]

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Effective contract management

Whilst there are numerous theories and models covering contract management, there is a danger that it can be made over complicated, especially for a relatively small number of employees and directors to keep under control. In fact, it can be a very simple process if effectively managed.

However, before going further, it is worth considering two simple questions:• can you provide a list of your current contracts?;

and• do you have any documented contract management

procedures?

If the answer to either of these questions is “no”, the creation of a contract register and developing a consistent approach to contract management is likely to be time well spent.

The reality is that no two businesses are exactly alike and therefore a one size fits all to contract management will not work. Factors such as cost, how critical the contract provision is to the property business, length of contract, reputation of the provider, transferability and required service delivery level will all be relevant when deciding how much time and resource should be committed to contract management. However, in the rest of this article we look at some of the fundamentals we would expect to see in an effective and efficient model controlling contract management.

Managing an individual contract

Before a contract is accepted it should be subjected to due diligence and challenge. For instance, does the contract satisfy a need of the business, is it cost effective, will the proposed provider supply on time and to the required standard and have alternatives been considered?

Creating a control checklist covering contract approval and agreement can be useful to ensure the contract passes through all relevant phases of development, including sign off and approval. This can be developed through experience but should ensure the following issues are considered:

• Risk assessment – Consider the key risks and rewards of entering into the contract. A preliminary assessment and approval at this point can avoid resources being wasted by going ahead with

negotiating a contract that is not appropriate to the business.

• Design – Ensure the contract content is carefully considered and appropriate to the business. For instance, is the minimum contract term appropriate, does the draft agreement reflect what has been discussed and are minimum performance criteria objectively set out. A legal, or equivalent, review should occur over all material contracts. Whether such reviews are required should be established at the risk assessment stage and set down in the procedures.

• Negotiation – Ensure relevant experts are involved at this stage and that those persons involved review the contract prior to approval to ensure it accurately reflects the discussions.

• Approval – Finally, ensure appropriate persons who either have, or have been, delegated with the appropriate authority sign the contract and ensure it is kept secure and added to the contract register.

Businesses should also consider whether there are potential conflicts of interest that might arise and how these are to be managed. Those involved in the contract management should have an obligation to declare such potential conflicts.

Maintenance of the contract over its lifecycle

Negotiating and agreeing the contract is only the start. Once the contract is agreed a contract needs to be managed to ensure the business obtains added value from it. Ideally an appropriate individual within the business should have responsibility for monitoring the contract over its lifecycle.

This should include the following:

• Monitoring compliance with terms and conditions on a regular basis.

• Measuring performance according to an agreed framework which ideally should have been set as part of the design stage referred to above.

• Where amendments are required to the contract, to ensure the relevant stages are considered, such as the risk assessment, design, negotiation and approval stages above.

Property companies frequently have relatively few employees, preferring to buy-in specialist advice and skills as and when required. Whilst this provides a flexible business model, it inevitably means introducing the property business to external risks which need controlling. Ultimately, this means having legal agreements to set out performance criteria, remuneration and responsibilities — in other words, effective contract management.


Many contracts will require renewal at some stage. However, such renewal should not be undertaken without due consideration. It may not be necessary to go back to the start and repeat all the steps to the same level of detail as recommended for a fresh contract, but a constructive and challenging review should be undertaken.

Overall system of contract management

Having documented procedures, which guide those involved in contract management, provide a structured framework and ensure contracts are agreed and managed on a consistent and best practice basis.

Key points to consider are:

• The detail will depend on the quantum of contracts and size of your organisation – don’t over complicate matters.

• Ensure the procedures are reviewed by a person with the relevant knowledge and have these approved for adoption by the most relevant committee or Board.

• Ensure all staff are aware of the procedures and their location.

• Establish a record of all contracts across the organisation and ensure they are kept up to date.

Finally, for contract management processes to be effective, they need to be communicated, explained and appropriate training provided.

Conclusion

The key is to have a structured framework that meets the needs of your organisation. This, together with maintaining good records of contracts entered into, should ensure your organisation can meet the challenge that contract management entails. Above all, keeping it simple can be very effective.


The LLP SORP

Background

The revised SORP, published in July 2014 by the Consultative Committee of Accountancy Bodies (“CCAB”), became effective for periods commencing on, or after, 1 January 2015 for all LLPs adopting FRS 102 or the FRSSE.

The SORP was developed as a result of developments within UK GAAP, notably the creation of FRS 102 and the updated FRSSE. It was designed to be used in conjunction with the Company Law LLP regulations to provide a reporting framework for LLPs.

Whilst most of the changes in the recognition of transactions and balances within the financial statements of property businesses originate from FRS 102 or the revised FRSSE, the new SORP applied presentational changes to LLPs.

Key differences from the old LLP SORP

In summary, the new LLP SORP made the following changes from the old SORP:

• Changes to the form and content of financial statements.

• A statement of changes in equity (“SOCIE”) or reconciliation of Members’ interests became required as a primary statement.

• No longer is the Members’ Report a statutory requirement.

• Members’ capital and current accounts may be presented differently.

• The total compensation of key management personnel needs to be disclosed.

• The guidance on post-retirement benefits has been expanded.

Below we look at each of these issues in more detail.

Changes in the form and content of LLP financial statements

The new LLP SORP reflected the changes to terminology permitted by FRS 102 (“permitted” as company law still allows use of terms such as profit and loss account and balance sheet).

The table overleaf summarises the main changes in terminology between the two SORPs.

In certain circumstances, FRS 102 allows entities to present a single statement of income and retained earnings in place of the statement of comprehensive income and statement of changes in equity. However, the SORP does not recommend this approach for LLPs believing it to be, in most cases, of little benefit to users of LLP financial statements.

SOCIE or reconciliation of members’ interests

A SOCIE, or reconciliation of members’ interests, is now required as a primary statement. If applied in its basic form, this would be a statement reconciling the movement in “members’ other interests”. For many LLPs, this would result in a primary statement which did not contain any meaningful information.

FRS 102 requires entities without share capital, such as an LLP, to provide equivalent information to show changes in the period for each category of equity. The LLP SORP says this requirement will be satisfied by the inclusion of a “Reconciliation of members’ interests” table within the notes. However, this table may be included as a primary statement instead of a SOCIE but where this option is taken, full comparatives are required for the prior period.

Limited liability partnerships (“LLPs”) can be an effective way of structuring transactions for parties collaborating together and are often found in the property sector. Although the introduction of the Financial Reporting Standard 102: “The Financial Reporting Standard applicable in the UK and Republic of Ireland” revolutionised traditional UK Generally Accepted Accounting Practice (“UK GAAP”), for account periods beginning on, or after, 1 January 2015, little has been heard of the revised LLP Statement of Recommended Practice (“SORP”) and therefore in this article we look at the revised LLP SORP.


New LLP SORP Old LLP SORP

Income statement Profit and loss account

Statement of comprehensive income Statement of total recognised gains and losses

OR a single statement of comprehensive income combining both elements above

Statement of financial position Balance sheet

Statement of changes in equity (“SOCIE”) N/A

Statement of cash flows Cash flow statement

Notes to the financial statements Notes to the financial statements

Members’ report

Whilst a members’ report is no longer required under the new LLP SORP, many of the disclosures it previously contained, such as principal activity, designated members and policies for members’ drawings remain mandatory requirements and must therefore be included elsewhere within the financial statements if the LLP elects not to prepare a members’ report. Practically, LLPs may continue to prepare a members’ report in order to provide the mandatory information in a logical place.

Members’ capital

When members’ capital is classified as a financial liability it may constitute a financing arrangement under FRS 102 and, if not subject to a commercial rate of interest, may require discounting to its present value. Members’ capital is often repayable on demand or at short notice, such that this discounting requirement may be disapplied, but members should consider the possible impact of FRS 102 on any element of long term capital.

Members’ current accounts

Clarification has been included in the new SORP regarding disclosure of the protection afforded to other creditors in a winding up and the ability of members to reduce the LLP’s equity. The LLP SORP now requires the notes to the financial statements to disclose any limitations on the members’ ability to reduce “members’ other interests”, or state that there are no such restrictions.

Key management personnel

FRS 102 requires the disclosure of total compensation paid to key management personnel, which may comprise elements of employee remuneration and profit attributable to members. Key management personnel is defined as those persons having authority and responsibility for planning, directing and controlling the activities of the LLP, directly or indirectly, whether designated members, members or employees. In smaller LLPs this is likely to be the same as the members but, in larger organisations, this may involve a different category of persons, especially if the LLP has a management structure which involves non-members in executive positions.

Post-retirement benefits

Guidance in this area has been significantly expanded in the new LLP SORP and amended in line with the new UK GAAP. In particular, the LLP SORP includes a helpful flowchart, which can be found at paragraph 76B, which assists in determining how post retirement payments should be accounted for.

Conclusion

Those involved in the preparation of LLP financial statements will find it helpful to familiarise themselves with the LLP SORP as it contains useful and focused commentary.

Summary of main changes in terminology

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BRIEFING · 2017. 12. 14. · 2016 Property Briefing. The Greek philosopher, Heraclitus, is attributed as saying “the only constant is change”. Although that phrase is over 2,500