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Chapter 1 Introduction .................................................................................................................................... 7  1.01 Introduction .............................................................................................................................................................. 8  1.02 Budget and Chancellor Speech ................................................................................................................................ 9  1.03 Tax changes in 2014-15 ......................................................................................................................................... 10  1.04 Future changes to the tax system ............................................................................................................................ 14  

Chapter 2 Tax basics .................................................................................................................................... 17  2.01 Income tax .............................................................................................................................................................. 18  2.02 National insurance contributions (NICs) ................................................................................................................ 19  2.03 Capital gains tax (CGT) ......................................................................................................................................... 20  2.04 Corporation tax ....................................................................................................................................................... 21  2.05 Value added tax (VAT) .......................................................................................................................................... 22  2.06 Inheritance tax ........................................................................................................................................................ 22  2.07 Stamp taxes ............................................................................................................................................................ 24  2.08 Scottish taxation ..................................................................................................................................................... 26  

Chapter 3 Residence and domicile .............................................................................................................. 27  3.01 The rules determining residence ............................................................................................................................ 28  3.02 Days spent in the UK ............................................................................................................................................. 28  3.03 Steps to determine your residence .......................................................................................................................... 28  3.04 Automatic overseas tests ........................................................................................................................................ 28  3.05 Automatic UK tests ................................................................................................................................................ 29  3.06 Sufficient ties .......................................................................................................................................................... 30  3.07 The sufficient ties test ............................................................................................................................................ 31  3.08 Ordinary residence ................................................................................................................................................. 32  3.09 Temporary non-resident ......................................................................................................................................... 32  3.10 Becoming non-resident .......................................................................................................................................... 33  3.11 Non-resident: tax planning ..................................................................................................................................... 33  3.12 The concept of domicile ......................................................................................................................................... 34  3.13 Ascertaining domicile ............................................................................................................................................ 35  3.14 Becoming domiciled in another country ................................................................................................................ 36  3.15 How residence and domicile affect your tax .......................................................................................................... 37  3.16 The arising basis of taxation ................................................................................................................................... 38  3.17 The remittance basis of taxation ............................................................................................................................. 38  3.18 The remittance basis of taxation: tax planning ....................................................................................................... 38  3.19 The remittance basis of taxation: exemptions ........................................................................................................ 39  3.20 Inheritance tax (deemed domicile) ......................................................................................................................... 39  3.21 Split-year treatment ................................................................................................................................................ 40  3.22 Summary ................................................................................................................................................................ 40  3.23 Case study 1: Arcadia not so green on tax planning .............................................................................................. 41  3.24 Case study 2: allowances may be axed for expatriates .......................................................................................... 42  

Chapter 4 Employee national insurance contributions ............................................................................. 45  4.01 National insurance contributions (NICs): introduction .......................................................................................... 46  4.02 As an employee what NICs must I pay? ................................................................................................................ 46  

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4.03 Exemptions: Who doesn’t have to pay NICs? ....................................................................................................... 49  4.04 Pensions and contracted-out employees ................................................................................................................. 50  4.05 Married women and widows .................................................................................................................................. 52  4.06 Company directors ................................................................................................................................................. 54  4.07 Maximum contribution and multiple employments ............................................................................................... 55  4.08 Class 3 NICs: Voluntary contributions .................................................................................................................. 57  

Chapter 5 Employer national insurance contributions (NICs) .................................................................. 59  5.01 As an employer what NICs must I pay? ................................................................................................................. 60  5.02 Class 1 NICs: Secondary contributions .................................................................................................................. 60  5.03 Must I pay NIC’s on benefits I provide to my employees? ................................................................................... 61  5.04 NICs for self-employed workers ............................................................................................................................ 62  5.05 What happens if I’m both an employee and self-employed? ................................................................................. 65  5.06 Partnerships and sleeping partners ......................................................................................................................... 68  5.07 Interest and penalties .............................................................................................................................................. 69  5.08 Case study: schools get a lesson on avoiding employer NICs ............................................................................... 70  5.09 Case study: self-employed employees ................................................................................................................... 71  

Chapter 6 Types of income .......................................................................................................................... 73  6.01 Types of income ..................................................................................................................................................... 74  6.02 Income tax year ...................................................................................................................................................... 77  6.03 The order of taxation .............................................................................................................................................. 77  6.04 Exempt income ....................................................................................................................................................... 78  6.05 Further exemptions from income tax ..................................................................................................................... 87  

Chapter 7 Employment income ................................................................................................................... 91  7.01 How do I know if I’m employed? .......................................................................................................................... 92  7.02 How am I taxed as an employee? ........................................................................................................................... 92  7.03 Benefits ................................................................................................................................................................... 92  7.04 The benefits code ................................................................................................................................................... 93  7.05 The cash equivalent of a benefit ............................................................................................................................. 94  7.06 What benefits are exempt? ..................................................................................................................................... 94  7.07 On what benefits am I taxed? ............................................................................................................................... 101  7.08 Expenses ............................................................................................................................................................... 109  7.09 Employee incentives and awards ......................................................................................................................... 118  7.10 Statutory sick pay, maternity pay and paternity pay ............................................................................................ 123  7.11 Commencement and termination payments ......................................................................................................... 125  7.12 Case study: avoid avoiding tax like a DJ ............................................................................................................. 127  

Chapter 8 Trading income .......................................................................................................................... 131  8.01 What is trading income? ....................................................................................................................................... 132  8.02 Sole traders, partnerships or companies ............................................................................................................... 133  8.03 How am I taxed if I carry on a trade? ................................................................................................................... 134  8.04 Why are dividends better than a salary? ............................................................................................................... 136  8.05 Other taxes to consider ......................................................................................................................................... 139  8.06 Record keeping ..................................................................................................................................................... 141  8.07 Losses: the upside ................................................................................................................................................. 141  

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8.08 Pensions ................................................................................................................................................................ 144  8.09 Reliefs and additional tax incentives .................................................................................................................... 145  8.10 The intermediaries legislation (IR35) .................................................................................................................. 150  8.11 Managed service companies ................................................................................................................................. 153  8.12 Occasional income ............................................................................................................................................... 154  8.13 Calculating profits ................................................................................................................................................ 154  8.14 Case study: undeclared income is no small thing ................................................................................................ 156  

Chapter 9 Savings and investment income .............................................................................................. 159  9.01 What is savings and investment income? ............................................................................................................. 160  9.02 What tax is due on my savings and investment income? ..................................................................................... 160  9.03 National savings and investments ........................................................................................................................ 162  9.04 Individual savings accounts (ISAs) ...................................................................................................................... 164  9.05 Gilt-edged securities ............................................................................................................................................. 166  9.06 Accrued income scheme ....................................................................................................................................... 167  9.07 Save As You Earn (SAYE) .................................................................................................................................. 168  9.08 Bank and building society investments: additional information .......................................................................... 168  9.09 Investing in shares and stocks .............................................................................................................................. 170  9.10 Authorised Investment Funds (AIFs) ................................................................................................................... 179  9.11 Investment trusts .................................................................................................................................................. 180  9.12 Deeply discounted securities (DDS) .................................................................................................................... 181  9.13 Mergers, acquisitions and reconstructions ........................................................................................................... 182  9.14 Chattels and valuables .......................................................................................................................................... 186  9.15 Foreign savings and investments .......................................................................................................................... 187  9.16 Case study: advanced payment notices have arrived ........................................................................................... 188  

Chapter 10 Pension income ....................................................................................................................... 191  10.01 Am I a pensioner? .............................................................................................................................................. 192  10.02 What qualifies as pension income? .................................................................................................................... 195  10.03 Taxes on pension income ................................................................................................................................... 196  10.04 The basic State pension and additional State pension ........................................................................................ 200  10.05 Workplace or occupational pensions .................................................................................................................. 203  10.06 Personal or stakeholder pensions ....................................................................................................................... 206  10.07 The annual allowance ......................................................................................................................................... 208  10.08 The lifetime allowance ....................................................................................................................................... 209  10.09 How do I get pension relief? .............................................................................................................................. 210  

Chapter 11 Property income ...................................................................................................................... 213  11.01 What qualifies as property income? ................................................................................................................... 214  11.02 What taxes must I pay on property income? ...................................................................................................... 214  11.03 Value added tax (VAT) ...................................................................................................................................... 216  11.04 Stamp duty land tax (SDLT) .............................................................................................................................. 217  11.05 Business rates and council taxes ........................................................................................................................ 219  11.06 Compulsory purchases and surrendered leases .................................................................................................. 220  11.07 Furnished holiday lettings .................................................................................................................................. 220  11.08 The family home ................................................................................................................................................ 223  11.09 The annual tax on enveloped dwellings ............................................................................................................. 227  11.10 Real estate investment trusts .............................................................................................................................. 229  

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11.11 Time shares ........................................................................................................................................................ 229  11.12 Case study: UK property for non-residents and non-domiciliaries .................................................................... 229  

Chapter 12 Calculating your income tax ................................................................................................... 233  12.01 The seven steps ................................................................................................................................................... 234  12.02 Reliefs (deductible at Step 2) ............................................................................................................................. 234  12.03 Allowances (deductible at Step 3) ...................................................................................................................... 235  12.04 Rules for deductions made at Steps 2 and 3 ....................................................................................................... 235  12.05 Reliefs (deductible at Step 6) ............................................................................................................................. 236  12.06 Other amounts of tax (due at Step 7) .................................................................................................................. 237  12.07 Tax credits .......................................................................................................................................................... 238  12.08 Universal Credit (UC): The new system ............................................................................................................ 243  

Chapter 13 Corporation tax ........................................................................................................................ 245  13.01 Corporation tax: general principles .................................................................................................................... 246  13.02 How are corporate profits calculated? ................................................................................................................ 248  13.03 Reliefs and allowable deductions ....................................................................................................................... 251  13.04 Distributions ....................................................................................................................................................... 252  13.05 The accounting period ........................................................................................................................................ 253  13.06 Calculating corporation tax ................................................................................................................................ 254  13.07 When is corporation tax due? ............................................................................................................................. 259  13.08 Bank levy ............................................................................................................................................................ 261  13.09 Close companies ................................................................................................................................................. 261  13.10 Members’ clubs .................................................................................................................................................. 261  13.11 Company groups ................................................................................................................................................ 262  13.12 Case study: Dutch sandwiches and the Double Irish ......................................................................................... 263  

Chapter 14 Value added tax (VAT) ............................................................................................................. 267  14.01 Value added tax (VAT): general principles ....................................................................................................... 268  14.02 Reduced rate goods and services ........................................................................................................................ 275  14.03 Zero-rate goods and services .............................................................................................................................. 276  14.04 Exempt goods ..................................................................................................................................................... 278  14.05 Single and multiple supplies .............................................................................................................................. 279  14.06 Partial exemption ................................................................................................................................................ 281  14.07 Other VAT systems ............................................................................................................................................ 282  14.08 VAT and the European Union ............................................................................................................................ 285  14.09 VAT and vehicles ............................................................................................................................................... 287  14.10 Administration .................................................................................................................................................... 289  14.11 VAT fraud .......................................................................................................................................................... 291  14.12 Groups ................................................................................................................................................................ 291  14.13 Case study: a £176 million carousel ride ........................................................................................................... 292  

Chapter 15 Inheritance tax ......................................................................................................................... 297  15.01 Inheritance tax: general principles ..................................................................................................................... 298  15.02 Who pays inheritance tax? ................................................................................................................................. 299  15.03 Potentially exempt transfers ............................................................................................................................... 300  15.04 Exemptions ......................................................................................................................................................... 302  

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Chapter 19 International tax ....................................................................................................................... 385  19.01 Reasons for investing abroad ............................................................................................................................. 386  19.02 Political risk and foreign investments ................................................................................................................ 386  19.03 UK tax on foreign investments ........................................................................................................................... 388  19.04 Double taxation treaties ...................................................................................................................................... 390  19.05 Tax information exchange agreements .............................................................................................................. 391  19.06 Double contribution and social security conventions ........................................................................................ 393  

Chapter 20 Environmental tax ................................................................................................................... 395  20.01 Environmental taxes: general principles ............................................................................................................ 396  20.02 The aggregates levy ............................................................................................................................................ 396  20.03 The climate change levy ..................................................................................................................................... 398  20.04 The landfill tax ................................................................................................................................................... 400  20.05 Case study: perhaps it’s time to reconsider landfill tax increases ...................................................................... 404  

Chapter 21 Avoidance and evasion .......................................................................................................... 407  21.01 What is tax evasion? ........................................................................................................................................... 408  21.02 What is tax avoidance? ....................................................................................................................................... 408  21.03 Government policy ............................................................................................................................................. 409  21.04 Combatting tax evasion ...................................................................................................................................... 410  21.05 Combatting offshore tax evasion ........................................................................................................................ 415  21.06 Combatting tax avoidance .................................................................................................................................. 417  21.07 March 2011 report: tackling tax avoidance ........................................................................................................ 422  21.08 Voluntary disclosure .......................................................................................................................................... 426  

Appendix A: fixed-rate expenses .............................................................................................................. 429  Appendix B: UK double tax treaties (DTT) ................................................................................................ 434  Index ............................................................................................................................................................. 445  

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15.05 Reliefs ................................................................................................................................................................. 305  15.06 Excluded property .............................................................................................................................................. 310  15.07 Lifetime transfers ............................................................................................................................................... 311  15.08 Transfers after death ........................................................................................................................................... 312  15.09 Giving is good: charity donations ...................................................................................................................... 313  15.10 Anti-avoidance provisions .................................................................................................................................. 314  15.11 Administration .................................................................................................................................................... 315  15.12 Case study: Bob Bradley’s lotto story ................................................................................................................ 316  

Chapter 16 Stamp taxes ............................................................................................................................. 319  16.01 Stamp taxes: general principles .......................................................................................................................... 320  16.02 Stamp duty .......................................................................................................................................................... 321  16.03 Stamp duty reserve tax ....................................................................................................................................... 324  16.04 Stamp duty land tax ............................................................................................................................................ 326  16.05 Stamp taxes: reliefs and exemptions .................................................................................................................. 329  16.06 Case study: homes without fixtures and fittings ................................................................................................ 331  

Chapter 17 Capital gains tax (CGT) ........................................................................................................... 333  17.01 Capital gains tax (CGT): general principles ....................................................................................................... 334  17.02 Allowable losses ................................................................................................................................................. 336  17.03 Wasting assets .................................................................................................................................................... 337  17.04 No gain and no loss disposals ............................................................................................................................ 338  17.05 Death .................................................................................................................................................................. 338  17.06 Corporate chargeable gains ................................................................................................................................ 338  17.07 Connected persons .............................................................................................................................................. 339  17.08 Spouses and civil partners .................................................................................................................................. 340  17.09 Unused exemptions ............................................................................................................................................ 341  17.10 Crystallising gains .............................................................................................................................................. 341  17.11 Reliefs and exemptions ...................................................................................................................................... 342  17.12 Stocks and shares ............................................................................................................................................... 351  17.13 Options ............................................................................................................................................................... 357  17.14 Computation ....................................................................................................................................................... 357  17.15 Case study: CGT on the horizon for non-resident home owners ....................................................................... 362  

Chapter 18 Capital allowances .................................................................................................................. 363  18.01 Capital allowances: general principles ............................................................................................................... 364  18.02 Qualifying expenditure ....................................................................................................................................... 365  18.03 How will I receive a capital allowance? ............................................................................................................. 366  18.04 Plant and machinery ........................................................................................................................................... 368  18.05 Patent rights ........................................................................................................................................................ 376  18.06 Research and development ................................................................................................................................. 377  18.07 Know-how .......................................................................................................................................................... 377  18.08 Mineral extraction .............................................................................................................................................. 378  18.09 Industrial buildings ............................................................................................................................................. 379  18.10 Buildings in enterprise zones ............................................................................................................................. 380  18.11 Hotels ................................................................................................................................................................. 381  18.12 Case study: Thames Water ................................................................................................................................. 382  

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Chapter 1 Introduction

IN A NUTSHELL 1. The UK imposes a wide range of taxes on individuals and companies: income tax, national insurance contributions, corporation tax, capital gains tax, inheritance tax, environmental taxes and VAT. 2. Simple planning can reduce the impact of these taxes.

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7.01 How do I know if I’m employed? You are probably employed if you:

(a) have to do the work yourself, (b) work for one person at a time, who is in charge of what you do and takes on the risks of the business, (c) can be told how, when and where you do your work, (d) have to work a set amount of hours, and (e) are paid a regular amount according to the hours you work, and get paid for working overtime.

You are probably self-employed if you:

(a) run your own business and take responsibility for its success or failure, (b) have several customers at the same time, (c) can decide how, when and where you do your work, (d) are free to hire other people to do the work for you or help you at your own expense, and (e) provide the main items of equipment to do your work.

You can also be employed and self-employed at the same time, perhaps by working for an employer during the day and running your own business in the evenings. You should consider each contract separately; you may find that you are self-employed for one but employed for another. Whether you are employed or self-employed depends upon the facts of your working arrangements, what your contract says, or a combination of both. Even if you do casual or part-time work, you can still be employed.

7.02 How am I taxed as an employee? As an employee you will be taxed on the wages you receive from your employer; the taxes that apply include both national insurance contributions (NICs) and pay-as-you-earn (PAYE) income tax. The thresholds and rates for these taxes have been outlined in previous chapters. However, your salary is not the only source of income which is taxable. Some benefits and expenses which your employer pays may also be liable for taxes, while others will be exempt. Whether or not they are taxable depends on the nature of the benefit or expense. It also depends on the specifics of how it was provided, paid or reimbursed. The following sections in this chapter outline the employment benefits and expenses which are exempt from income tax and those which are taxed.

7.03 Benefits If you are an employee and you receive certain benefits from your employer then you may have to pay tax on the cash equivalent of their value. Whether you have to pay tax or not depends on what type of employee you are and also on the nature of the benefit.

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7. Payment to enhance an asset’s value If your employer makes payments that enhance the value of an existing asset that you already own - for example, by paying an additional premium to a life insurance policy - you will have to pay income tax on the value of the enhancement. This also applies where your employer makes payments to enhance the value of assets owned by your family or household members. HMRC has noted that these type of payments were made in some PAYE avoidance schemes from the early 1990s onwards: “A common non-cash remuneration scheme involved an employer paying a premium to a life assurance policy already owned by an employee.”

EXAMPLE

You are the director of a close company and on 27 September you take out a life assurance policy with a well known provider, investing £10,000 at the time. Several days later, on 1 October, your employer pays you a £75,000 bonus. However, instead of a cash payment the bonus takes the form of an additional £75,500 premium payment to your recently opened life assurance policy, taking its overall value up to £85,000 after commissions have been deducted. Several days later you cancel your life insurance policy and take out your £85,000. Conclusion: As the additional premium that your employer paid enhanced the assets value by £75,000 you will be charged income tax on this amount.

8. Scholarships to employees’ children Any scholarships that your employer pays to a member of your family or household is liable for income tax and Class 1 NICs if you earn more than £8,500 per year (i.e., you are a P11D employee). In order for the scholarship to be taxable there must be a direct connection between you, your employer and the scholarship’s provision. In other words, it must be the case that you or your family/household member wouldn’t have been awarded the scholarship if you had a different employer. HMRC state that a scholarship is “an award, usually made on merit, which supports a student during a period of study.” Their definition also extends to cover any exhibitions, bursaries or similar education-related endowments. However, loans or payments under a deed of covenant that are made to students are usually not considered scholarships for tax purposes.

TIP If the connection between yourself, your employer and the scholarship is fortuitous then you are not liable for income tax or NICs. A scholarship is considered fortuitous if it wasn’t awarded by reason of your employment and the recipient is in full-time education. A fortuitous scholarship must also be provided from a trust fund or scheme in which no more than 25% of the total payments relate to employees. For example, scholarships from a fund where 20% of the payments relate to your family members and 10% relate to employees in another company are not fortuitous. This is because 30% of the fund’s scholarships are linked to employment.

9. Use of employer’s assets You are normally charged income tax on any benefits arising from the use of your employer’s assets. If your employer makes an asset available for your private use the amount on which you will be taxed is the total of the following two components:

(a) the greater of:

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9.14 Chattels and valuables A chattel is a tangible asset that is physical moveable. The word is a legal term; however, it broadly means some form of property that can be both touched and moved. Many of your personal possessions will be deemed chattels. For example, jewellery, coins, furniture, antiques, crockery, china, silverware, motor vehicles, paintings, sculpture and other pieces of art are considered chattels. Any plant or machinery that is not permanently fixed to a building is also a chattel. Because many chattels have a defined lifespan they are exempt from CGT; however, certain durable chattels will still be liable for the tax if you dispose of or sell them. Even where the gain is taxable you will only have to report it on your tax return if the sale proceeds exceed £6,000. The actual gain is calculated by subtracting the chattel cost and expenses incurred during the sale from the proceeds you receive. Calculating the maximum chargeable gain is slightly more complicated. You must determine the amount by which your disposal proceeds exceed £6,000 and then multiply this by 5/3.

EXAMPLE

In 2005 you purchased a sculpture for £1,750 from a local artist. The artist died less than a year ago and the value of his work has since increased in value. Thinking it might be a good time to cash in on the investment you sell the sculpture for £7,750 at an auction. The company organising the auction charged you a £375 commission for arranging and processing the transaction. Your actual gain is the sale proceeds less the chattel’s cost and any expenses incurred during the sale: £7,750 - (£1,750 + £350) = £7,750 - £2,100 = £5,650 Your maximum chargeable gain is the value of disposal proceeds above £6,000 multiplied by 5/3: [(£7,750 - £6,000) x (5/3)] = £1,750 x (5/3) = £2,917 You will use the maximum chargeable gain figure on your tax return.

The amount of tax relief you can claim for any losses when disposing of a chattel is limited to £6,000, provided the sales proceeds don’t exceed £6,000. If the sales proceeds are larger than this threshold then there is no restriction on the tax relief you can claim for the loss. Wasting assets have a predict lifespan no longer than 50 years. The majority of gains from chattels which are wasting assets are exempt from CGT. However, you will be liable for the tax if you have claimed capital allowances for the chattel. Plant, machinery and other types of chattels are always treated as wasting assets. When you sell several chattels which make up a set the £6,000 limit is applied to the set and not each individual asset. Examples of chattel sets would be books by the same author, matching crystal or ornaments. Special rules will apply if you have broken up a chattel set and sold them separately.

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11.01 What qualifies as property income? Any rental income you receive is charged to tax as property income, irrespective of whether it’s a UK or overseas property business. If UK tax is due on rental income from an overseas property, you can deduct certain expenses and allowances in the same way as you can from the income generated by a UK property. You can claim relief for tax paid in the other country in the foreign pages section of the tax return.

11.02 What taxes must I pay on property income? Any income you generate from land and buildings within the UK will usually be taxed as property income. The exception is income from furnished holiday lettings (see 11.07). Investment properties don’t qualify for CGT rollover relief or gifts relief. Similarly, investment property disposals don’t qualify for entrepreneur’s relief. You are not entitled to business property relief for inheritance tax purposes if your business comprises the making or holding of investments, including any letting of land. However, agricultural property relief is available if you rent out agricultural property.

Individuals Broadly, all income you generate from UK property will, for tax purposes, be treated as profits from carrying on a UK property business (i.e., property income). In this context UK property also includes caravans and houseboats. It also doesn’t matter whether the landlord or tenant is responsible for carrying out repairs on the property. Similarly, the number of lettings and whether the property is furnished are also irrelevant. Generally the tax year will run from 6 April to 5 April; however, this changes if you are in a partnership. If you jointly own a let property then, in certain circumstances, the letting could be considered to be a part of a business partnership.

National insurance contributions (NICs) If you engage in property letting then, in the vast majority of cases, you are not deemed to be self-employed for NIC purposes. One exception to this might occur if you have an active and substantial role in managing lettings. Under such circumstances HMRC may take the view that your activities constitute a business and you are therefore liable for Class 2 NICs. Your property income (including income from furnished holiday lettings) will not be liable for Class 4 NICs because they only apply to trading income.

Allowable deductions Broadly, you are entitled to deduct expenses incurred wholly and exclusively during the course of the letting business. Allowable expenditure also includes anything you incurred prior to letting the property, just as it would for expenditure incurred before starting to carry on a trade, provided it was incurred within seven months before the rental business commenced. However, there are some exceptions and capital expenditure is only deductible for CGT purposes when you dispose of the property. For example, any amount you spend on installing central heating or building an extension to the property is not deductible. However, it will be deductible for CGT purposes. Private expenses are not deductible. Examples of allowable expenses include:

(a) council taxes and business rates, (b) maintenance, (c) repairs, (d) rent payable to a higher landlord,

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13.03 Reliefs and allowable deductions

Loss relief There are several types of loss relief available; the first three of these apply if your company incurs a trading loss. These are carry back loss relief, carry forward loss relief and set off. Your company is entitled to claim these reliefs if it carries on a trade or business on a commercial basis to generate profits.

Carry back loss relief Once you have used set off relief against profits incurred during the same financial year, you can then carry the balance back and deduct it and any remaining loss from any profits generated in the previous 12 month period. The set-off is not limited to trading profits, it can be applied against all profits. Under certain circumstances this carry back period can also be extended to three years, provided the company was carrying on the trade at that time. This happens on the cessation of a trade or where trading losses have been suffered during accounting periods ending between 24 November 2008 and 23 November 2010. When carry back loss relief is applied HMRC will return corporation tax that you have already paid. If the tax is due then the relief will reduce or eliminate the amount you have to pay. Consequently, you could be entitled to tax relief at the main and small profits corporation tax rates

Carry forward loss relief If there is still an amount of unused trade losses - after set off and carry back relief have been applied - then you are entitled to carry it forward. This means that any remaining loss can be deducted from future profits. There is no cut-off point by which the loss will no longer be eligible for carry forward relief if it is not used. Generally, carry forward relief doesn’t apply if there is a cessation of trade. One exception to this is that it may be applied against gains arising from the sale of certain types of buildings.

Set off Any trading loss your company incurs can be set off against any profits the company generates during the same financial year. This will reduce - or perhaps even wipe out entirely - any corporation tax you may have to pay. As stated previously, if you have incurred any non-trading losses on loans they will take priority over set off. Profits can include all your sources of income and capital gains which relate to the relevant period.

Terminal losses In the event that a company ceases trading it is entitled to claim terminal loss relief, which permits it to carry back trade losses generated in the company’s final accounting period for set off against any profits made in the past three years. The company must offset losses against profits generated in the most recent years before carrying back to earlier years. It can only offset losses against profits in any given year if it carried on the same trade at some point in the accounting period, or periods, that make up that year. HMRC have created measures to prevent a company claiming terminal loss relief in situations where its trade is transferred to another person and the primary purpose of the transfer is to benefit from the loss relief.

Property-related losses Separate rules apply if a company generates losses on property income (e.g., by renting out business or office premises). In situations where this happens the losses can be offset against other profits in the same accounting period. The company is entitled to carry forward the losses for offset against property income profits in the following accounting period. However, the losses cannot be carried back for set off against profits from previous accounting periods. If the

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13.08 Bank levy As a means of encouraging banks to lower the risk of their funding profiles the Government introduced the bank levy, which is a charge that applies to certain liabilities exceeding £20 billion on a bank’s balance sheet. The levy is not deductible for the purposes of corporation tax. The applicable charges are outlined in the table below. Table: Bank levy rates Liability From 1 January 2014 From 1 January 2013 From 1 January 2012 Short-term chargeable liabilities 0.156% 0.130% 0.088% Long-term chargeable liabilities and equity 0.078% 0.065% 0.044%

13.09 Close companies A company is a close company if it is controlled by:

(a) five or less participators, or (b) its directors.

A participator is any person having a share or interest in a company’s capital or income. Specifically, this would include a person who:

(a) possesses or is entitled to acquire share capital or voting rights in the company, (b) is entitled to secure company income or assets (present or future) to be applied for his benefit, (c) is a loan creditor of the company, or (d) possesses or is entitled to acquire a right to receive or participate in company distributions or in any amounts payable by the company (in cash or kind) to loan creditors by way of premium or redemption.

There are additional requirements for the corporation tax rules governing close companies. For example, unless it is already treated as earnings, any benefit-in-kind to participators that the close company provides will be treated as a distribution. Loans made by the close company to a participator are liable for a tax charge. This charge also applies if the close company is involved in arrangements whereby the loan’s benefit is conferred to one of its participators. Profits of a close investment holding company are taxed at the main rate. It will be entitled to neither taxation at the lower small profits rate nor marginal relief. A company is not considered a close investment holding company, if:

(a) it carries on a trade on a commercial basis, (b) it carries on a business of commercial property investment or land, not let to connected persons, (c) it is a trading company dealing in shares or securities, or (d) it is a holding company of a qualifying company.

13.10 Members’ clubs Members’ clubs are also subject to corporation tax. Broadly, the tax applies to all transactions that are not between club members. For example, corporation tax is charged on interest the club receives for placing its funds on deposit somewhere. The club will have to charge the appropriate rate of corporation tax to the entire amount of interest under

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(b) UK-domiciled at any time during the three years directly before the transfer.

15.02 Who pays inheritance tax? Generally, it is the executor or personal representative who pays inheritance tax from the deceased’s estate. Where trust assets are involved the trustees or settlors may be liable, depending on the nature of the transfer. There are also situations where a beneficiary or donee (i.e., the recipient of a gift) must pay inheritance tax.

Executors and personal representatives Usually, the executor or personal representative will pay any inheritance tax arising on assets in the deceased person’s estate which are not held in trust. The money to pay the tax is usually taken from the estate’s assets. However, this can create problems because the tax must be paid within six months of the death. Consequently, it is not uncommon for the executor to borrow money or use their own funds to pay the tax. Usually this will happen because the value of the estate is tied up in assets which have yet to be sold. The executor, lender or whoever paid the tax bill is entitled to reimbursement from the estate before its assets are distributed to beneficiaries. The same principles apply where cases of intestacy (i.e., where there is no will for the estate) are concerned. However, it is the administrator who is liable for inheritance tax.

Settlors and trustees Inheritance tax becomes due on a transfer into trust in excess of the nil rate band. In these circumstances it is the person making the transfer (i.e., the settlor) who is liable. Trustees (i.e., the people running the trust) are subject to inheritance tax on any assets (including land) that are already held in trust, if:

(a) the assets are transferred out of trust (i.e., the exit charge), (b) the ten-year anniversary charge applies, or (c) the trust’s beneficiary (i.e., the life tenant) dies.

The ten-year anniversary charge falls due every ten years following the original transfer into trust. Situation (c) only applies to interest in possession trusts. An interest in possession trust is one where the beneficiary has an immediate and automatic right to the trust’s income after expenses. Usually the beneficiary receiving the income doesn’t have any rights over the capital held in the trust.

Beneficiaries and donees In situations where the executor or trustees are unable to pay any inheritance tax due, the beneficiaries or donees (i.e., the recipients) may become liable for the outstanding amount. In addition, beneficiaries and donees are liable to inheritance tax if they:

(a) receive a gift within seven years of the donor’s death (see 15.03), (b) benefit or receive income from assets in a trust at the time of death, (c) receive a share of an estate following a death, or (d) jointly own a property (but not with their spouse or civil partner).

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(a) 50 years or more, at a premium, CGT is charged on the premium. (b) less than 50 years, income tax is charged on the premium; the cost of the lease is treated, in the hands of the tenant, as a wasting asset.

17.15 Case study: CGT on the horizon for non-resident home owners One perk of not being in the UK, for tax purposes, is not being liable to CGT on residential property. However, it seems that this is now set to change. In his autumn statement the Chancellor of the Exchequer, George Osborne, said that while Britain welcomes investment from “all over the world...it’s not right that those who live in this country pay CGT when they sell a home that is not their primary residence, while those who don’t live here do not.” The Government is now set on closing this loophole for non-residents, which allowed investors to make CGT-free profits on residential property sales. The future change in the tax legislation has been referred to as the “oligarch tax”. Taxing non-residents in this manner has also been viewed as a means to calm the UK’s property market, in which much of the recovery has been attributed to purchases by non-resident investors. In March 2014 Exchequer Secretary to the Treasury, David Gauke, noted that the new tax measure will align the UK with many other countries which apply CGT on the basis of the residential property’s location “rather than the location of the seller.” In the same HMRC consultation document - titled Implementing a capital gains tax charge on non-residents - Mr Gauke stated that the new charge will apply from April 2015 onwards and will be limited to gains arising from that date. The Government has estimated that amending the tax law in this manner will generate an additional £125 million in Exchequer revenue between 2015 and 2018.

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TRAPS 1. A company is not entitled to make separate claims for capital allowances included in the losses of its letting business. 2. HMRC takes the view that once your business elects to claim one type of capital allowance instead of another, the decision is irrevocable. 3. Although capital allowances have been withdrawn on buildings in enterprise zones you may still be liable for balancing charges after April 2011. 4. Measures have been put in place to prevent a business from obtaining inflated allowances on the disposal of certain assets. This particularly applies to the pre-April 2011 disposals of industrial and agricultural buildings as well as certain types of flat conversions.

18.04 Plant and machinery

Definition UK tax legislation does not provide a precise definition of plant and machinery; instead it provides lists of items which are deemed to fall within the definition and other items which HMRC explicitly states are not deemed to be plant and machinery. In addition, HMRC lists items that fall outside the excluded items which are usually accepted as plant and machinery, based on precedents which has been established through the courts. As regards legal disputes it is the definition of plant which has been the most contested. When establishing whether an item is plant you should consider whether it is:

(a) apparatus which is necessary for you to carry on your business, or (b) it forms part of the setting in which you carry on your business.

Any assets which form part of your business setting does not generally qualify for capital allowances. This would include expenditure on assets which become part of your business premises, for example:

(a) flooring, (b) shop fronts, (c) suspended ceilings, (d) basic plumbing systems, and (e) basic electricity systems.

Basic plumbing and electricity systems can qualify for capital allowances under the definition of integral features (see Fixtures below). Computers fall under the definition of plant and machinery. You are entitled to claim capital allowances on such expenditure under the rules for short-life assets. You can also claim for computer software, even if it is not technically purchased but licensed and electronically transmitted (e.g., cloud-based) software. Similarly, you can also claim capital allowances on the expenditure incurred to develop a website.

TIPS 1. Any expenditure for lifts and central heating systems is treated as plant, and are therefore eligible for capital allowances. 2. You may be entitled to capital allowances on items forming part of your business setting if the atmosphere of your premises is important to your business. For example, specific lighting to create an ambience in a hotel and special lighting for fast-food restaurants have been considered plant. 3. You are entitled to deduct the cost of a replacement shop as a revenue expense. However, if the replacement shop front includes an element of improvement then this excess value cannot be deducted. 4. You are usually entitled to deduct lump sum payments for software from your taxable profits if the expected lifetime of the software is less than two years.

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19.01 Reasons for investing abroad There are several benefits to investing abroad whether you are acting as an individual or on behalf of a company.

Individuals Generally, the main benefit for individuals to invest in foreign assets is diversification. Numerous studies and research have shown that, for any given rate of risk, you can obtain a higher rate of return by including foreign stocks and shares in your portfolio. The same principles of exposing your investments to a variety of macro- and micro-economic risks can be applied to any type of assets. Another reason for investing abroad may simply be that your personal connections and circumstances have presented you with an opportunity that is much more favourable to anything available in the UK. Whatever the reason, you should always consider first how much the investment will return. In other words, will it produce a positive return, and if so, how much in comparison with other potential investments? Is the level of risk commensurate with your rate of return? Is the level of risk suited to your age? Are you buying an asset that will pay for itself, or are you buying into something that will drain your cash flow for years to come? In tandem with the investment’s income, you should also assess its potential and expected level of capital appreciation over a five and ten year period. If your investment horizon is more of a short-term bet you will assess it over a shorter time frame. Similarly, if you are in it for the long run and hope to pass the investment onto your children, then it will be worthwhile analysing it over a longer period of time.

Companies In addition to the reasons previously outlined companies also invest internationally to:

(a) take advantage of lower labour costs, (b) circumvent trade barriers, (c) secure protection of intellectual property and highly valuable intangible assets, (d) account for supply and demand imbalances at different stages in the product life cycle, and (e) pursue vertical integration.

If you own or run a company then you may consider investing abroad for one of these reasons. Vertical integration refers to a company expanding its operations along the supply chain either to guarantee inputs (backward vertical integration) or to ensure a distribution network for its output (forward vertical integration). For example, when Ticketmaster and Live Nation merged, the two companies it created a vertically integrated company which manages artists, produces shows and sells tickets for those events.

19.02 Political risk and foreign investments If you’ve ever seen the Godfather films, then you may recall that New Year’s Eve party scene in Cuba where Al Pacino’s character flees to Miami upon hearing that Fidel Castro’s revolution is about to overthrow General Fulgencio Batista’s regime. In the film the political change marks an end of the mafia family’s business ties to the Caribbean

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Chapter 21 Avoidance and evasion

IN A NUTSHELL 1. Keep proper records of purchases, sales, cheque payments, and moneys received. 2. Cash payments are difficult to verify and may lead to suspicion if margins are below “acceptable” levels. 3. Tax evasion is not worth the stress and hassle of a HMRC audit, prosecution and possible imprisonment.

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Appendix A: fixed-rate expenses

Below is HMRC’s list of fixed-rate expense limits according to occupation and item.

Industry Occupation Deduction (£)

Agriculture All workers. 100

Airlines Uniformed commercial pilots, co-pilots & crew Cabin crew

1,022 720

Aluminium (a) Continual casting operators, process operators, de-dimplers, driers, drill punchers, dross unloaders, firemen, furnace operators and their helpers, leaders, mould-men, pourers, remelt department labourers and roll flatteners. (b) Cable hands, case makers, labourers, mates, truck drivers and measurers and storekeepers (c) Apprentices. (d) All other workers.

140

80

60 120

Banks and Building Societies Uniformed doormen and messengers. 60

Brass and Copper Braziers, coppersmiths, finishers, fitters, moulders, turners and all other workers.

120

Building (a) Joiners and carpenters. (b) Cement works, roofing felt and asphalt labourers. (c) Labourers and navvies. (d) All other workers.

140 80 60

120

Building Materials (a) Stone masons. (b) Tilemakers and labourers. (c) All other workers.

120 60 80