Spousal CGT tax advantages

It is fairly common knowledge that the UK tax system is biased in favour of married couples or those partners who have entered into a formal civil partnership.

Note that from 2 December 2019, the Civil Partnership (Opposite Sex Couples) Regulations 2019 came into effect in England and Wales allowing opposite sex couples to enter into a Civil Partnership for the first time.

Transfers of chargeable assets for CGT purposes are exempt between spouses and civil partners. Also, the annual exemption is available to both parties. This combination means that couples may be able to share the gain on a disposal of assets and reduce their overall CGT charge.

This strategy, of transferring partial ownership to a spouse (or civil partner), can also reduce an overall CGT charge if the transferring partner/spouse is due to pay CGT at the higher 20% or 28% rate (as their gains fall to be taxed in the higher rate tax band) and the receiving partner/spouse would only be liable to pay CGT at the lower 10% or 18% (as their share of a transferred gain would fall into their free basic rate band).

The 10% and 20% rates have applied from April 2016, but do not apply to disposals of residential property or carried interest – for these latter items, disposals are taxed at 18% to 28%, dependent on where the gains sit in the basic or higher rates bands.

And don’t forget, CGT is assessed and payable as part of your self-assessment. Any tax payable for 2019-20 will be due for payment 31 January 2021. On the same day you will also have to pay any other underpayment of Income Tax for 2019-20 and your first payment on account for 2020-21.

Also, please note that from 6 April 2020, any CGT due on the sale of a residential property by a UK resident will need to be reported and paid within 30 days of the completion of the sale transaction.

If you own assets that are subject to CGT on disposal and you, and possibly your spouse, are struggling to fully utilise your CGT annual exemption, or you would like to discuss ways to minimise any CGT payable, please call to discuss your options.

In Business? Add these to your new year resolutions

The end of the calendar year is a popular accounting date for many businesses, but for those of us with a year-end accounting date of 31 March 2020, reviewing your management accounts for the nine months to the end of December 2019 is a must-do. Please use the following notes as a check list when you undertake this review:

 

  • If you are self-employed and for the nine months you are predicting lower profits for 2019-20 (compared to 2018-19) it may be possible to reduce your self-assessment payment on account due at the end of January. Contact us so we can file an appropriate election.
  • If you are self-employed and your profits are predicted to be higher for 2019-20, then you may have underpaid your self-assessment tax for 2019-20. Again, contact us so we can estimate this possible underpayment and work out a realistic savings plan to accumulate the necessary funds to meet this additional tax charge when it becomes due 31 January 2021.
  • Use the nine months figures to update your financial budgets for 2020-21. We recommend that all businesses undertake this task as it will identify high points and low points in your cash flow and solvency. Please call if you need help with this task. If you have never created a budget before we can help you crunch the necessary numbers.

 

Needless to say, if you are concerned by the historical results to 31 December 2019 or the outlook for 2020-21, let’s get together and see how best to meet these challenges. With the external pressures that Brexit may pose for your business this is not a time for wishful thinking. Be prepared.

When assets can become a tax liability

There are certain assets that may be carried on your balance sheet at values higher than their market value or past their sell by date. If so, and if these amounts are written-off against your profits, you will pay less tax.

Three possibilities are sketched out below:

Stock

Businesses that accumulate stocks of goods do so in the expectation that the stock items will either be sold on at a profit or processed in some way and then sold at a profit. But, of course, this oversimplifies the conversion process.

However cautious or effective you are at manging your stock levels it is likely that from time to time you may be left with obsolete stock that will never be sold. The cost of these goods, rather than being charged to purchases in your profit statement, will boost the value of stock on your balance sheet.

Action: Sell the obsolete items in a sale or scrap them. In both cases write off any loss against your profits – and save tax – and free up valuable storage space for more productive activity.

Trade debtors

Ask your bookkeeper to provide you with a detailed list of customers that are never likely to pay-up and consider writing off the amounts owed as bad debts. Again, amounts written-off specific debts will reduce your tax.

There may also be an opportunity to reclaim any VAT you may have paid to HMRC on the debts written-off unless you are using one of the VAT special schemes that incorporates calculations made on a cash basis.

Equipment

It is worth reviewing your fixed assets register to consider old plant or other equipment that may no longer take a productive part in your business. As with our suggestions regarding stock above, selling or scrapping these assets may produce a tax loss; although the tax consequences are more difficult to judge.

For example, if the original cost of the redundant item was fully written-off for tax purposes when the assets was first purchased – 100% allowances have been available for some time now – then any funds realised would actually increase your tax bill. Only when the tax written-down value of the asset is higher than the scrap value will a reduction in tax be achieved.

If you are in the run-down to your business trading year end we recommend that you take a hard look at these and other issues in order to undertake a thorough review of your business trading and financial position. Please call our office if you would like our help to do this.

Last week in the EU

At the end of this week, 31 January, the UK is leaving the EU. In actuality, we are entering the “transition” period during which we will need to negotiate our ongoing terms of trade with the EU. This transition period is due to end 31 December 2020.

In the meantime, back at the coal-face, what do we need to change in order to import, export or travel to the EU from 1 February?

Most of the government missives are based on the outcome of a No-Deal Brexit. This outcome is still a real possibility unless our negotiating team reach a formal trade deal with the EU block before the end of the transition period, 31 December 2020.

Accordingly, we have summarised below the published instructions from the gov.uk website. They are:

For exporters to the EU

  1. Make sure you have an EORI number that starts with GB.
  2. Check that your importer has an EU EORI number.
  3. Decide who will make the export declarations.
  4. Decide if you want to export your goods using transit.
  5. Check the rate of duty and tax for your goods.
  6. Check what you need to do for the type of goods you export.
  7. Find out how VAT changes will affect you.
  8. Decide who will transport your goods outside the UK.

For importers from the EU

  1. Make sure you have an EORI number that starts with GB.
  2. Decide who will make the import declarations.
  3. Apply to use the transitional simplified procedures.
  4. Set up a duty deferment account if you import regularly.
  5. Check the rate of tax and duty you will need to pay.
  6. Check what you need to do for the type of goods you import.

For firms transporting goods out of the EU by road

  1. Apply for operators licences and permits
  2. Make sure drivers are eligible to drive abroad.
  3. Check rules for the goods you are transporting.
  4. Make sure your driver has the right export documents.
  5. Find out what vehicle documents your driver needs to carry.
  6. Check local road rules.

Full details of all these issues can be found on the gov.uk website at https://www.gov.uk/transition

VAT – how this can affect your cash-flow

Paying VAT should never reduce your business profits as you are acting as an unpaid tax collector for HMRC: the VAT added to your sales (less any VAT paid on your purchases) is simply collected from your customers (less amounts paid to suppliers) and the difference paid to HMRC.

But if my customers are registered for VAT can’t they claim this VAT back?

And therefore, isn’t this whole process a waste of time?

A good point, but eventually, supplies will be made to someone who is not VAT registered and at that point any VAT paid is a tax charge.

The expression “ Value Added” is just that; if you add value to a bought-in item or service, by subjecting it to a manufacturing or other process that adds value to this cost before it is sold, then the increase in the value you have added is subject to VAT. At some point in the supply chain, these goods or services will be sold to someone who cannot reclaim the VAT charged to them and HMRC will retain the VAT charged and paid to them by the last supplier in the chain.

But what if I must pay VAT before my customers have paid me?

This is an undesirable outcome, and for smaller businesses there is a remedy. You can register for the Cash Accounting Scheme (CAS). If you qualify for the CAS, instead of paying HMRC the VAT added to your sales (less VAT invoiced by suppliers), you instead pay HMRC the net VAT collected during each reporting period.

In this way, the CAS will protect your cash flow. Under current rules, the CAS is only available to businesses whose annual turnover is below £1.35m.

The CAS will not usually benefit traders who operate on a cash basis – retailers for example – or traders who are efficient at collecting amounts invoiced from customers. If you want to see if the CAS may be available and beneficial for your company, please call so that we can organise a review for you.

Is your home a tax-free zone?

In most cases, if you have lived in your home during the entire period of your ownership of a property, then when you sell that property you should pay no capital gains tax (CGT) on any profit you make on the sale. You can claim the Private Residence Relief (PRR) to exempt any profits made.

The situation is very different if you have periods of time – during your ownership of a property – when you let out all or part of the property.

The current rules up to 5 April 2020

If you let your entire property for a period or periods of time this gap or gaps in your residence will potentially push a proportion of the profit you make when you sell the property into charge for CGT purposes.

However, under the current rules, up to £40,000 (£80,000 for a couple) of lettings relief can be claimed to reduce or eliminate this charge – whether or not you share occupancy of your home with your tenant.

Additionally, the last 18 months of your ownership are disregarded and treated as exempt from any CGT charge.

These current, additional reliefs will usually exempt any potential CGT charge occasioned by short periods of letting.

Two important changes are about to impact these additional from reliefs from April 2020.

Changes from 6 April 2020

From this date, you will only qualify for letting relief if during the period your home is let you are in shared accommodation with your tenant. In other words, letting relief is becoming a lodger’s relief.

Homeowners who do not reside in their property during periods when their property is let will not be able to claim lettings relief for the period that occurs after 5 April 2020.

Additionally, the 18 months exempt period at the end of your ownership is being reduced to 9 months from the same date, 6 April 2020.

Homeowners should take both of these changes into account when letting their home from April this year.

How much tax will you need to pay if affected?

If you presently let your home, or have let the property in past years, and you want clarity about any risk of paying tax when you sell the property, please call and we will help you assess this risk.

VAT – leaving the Flat Rate Scheme

The VAT Flat Rate Scheme (FRS) does simplify the calculation of VAT returns, but there are certain circumstances when you may no longer use the FRS.

You will need to leave if your turnover on the anniversary of joining was more than £230,000 including VAT in the last twelve months or if you expect your total income in the next thirty days to be more than £230,000 (including VAT).

You may also decide that you should leave the FRS if you are classified as a “limited cost trader”. This is defined by HMRC as:

You are classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%.

If you are obliged to use a rate of 16.5% – if your circumstances reveal that you are a limited cost trader – there is no real benefit in using the FRS apart from the simplicity of the reporting.

Traders who use the FRS can make a cash profit if the rate they use – based on their business classification – is one of the lower rates. The FRS rates currently range from 4% to 16.5%. The profit arises because the amount that they are required to pay under the FRS is less than the VAT added to their sales less any VAT included in purchases of goods or services.

If you do benefit in this way you may be reluctant to leave the FRS. Unfortunately, ignoring the turnover exit limits or the limited cost trader regulations is not to be recommended. HMRC are empowered to enforce these rules and charge penalties for non-compliance.

We recommend a periodic review of the VAT scheme that you use to ensure that you are still meeting the requirements to stay in the scheme. It is also advisable to check out any other schemes that you might qualify to join and see what benefits they might offer.

Please call if you would like to discuss your options.

Budget day 2020

The treasury has announced that the next budget will be presented by the Chancellor, Sajid Javid, on Wednesday 11th March 2020.

In recent years, the Budget has been held in the Autumn. The Autumn Budget 2019 was postponed due to the pre-election uncertainties last year. Now that our government has a significant working majority those uncertainties have been removed. Accordingly, matters that need to be resolved for the tax year 2020-21 – certain Income Tax allowances for example – can be attended to.

It is difficult to predict what The Chancellor will include in his announced changes.

During the recent election campaigning, Boris Johnson did promise that none of the major taxes would be increased and he did announce that the promised decrease in corporation tax, 19% to 17% from April 2020, would likely be deferred.

Hopefully, there will be measures to support business owners as we transition through the EU withdrawal process. Certainly, there should be confirmation that UK businesses in receipt of EU funding will continue to receive equivalent funding from the government once the EU funding tap is turned off.

Due to the possible disruption in supply lines from the and of this month – when the transition away from the EU begins – it would be helpful if the government included supportive changes in the budget that helped UK businesses to maintain their profitability and cash flow.

Parliamentary committees will need to get their skates and resolve any debate on budget clauses as quickly as possible. There is less than 30 days between 11 March and the end of the tax year – 5 April 2020.

We will be reporting on significant changes in this blog immediately following the budget. Until then, we can probably rest easy that tax rates are unlikely to be increased.

Minimum wage rates increase from April 2020

Businesses that have a significant number of staff paid at Minimum Wage or National Living Wage rates should take note that from April 2020 the rates are increasing.

 

In more detail the changes announced 31 December 2019 are:

  • Annual pay rise of up to £930 for a full time worker.
  • National Living Wage (NLW) increasing from £8.21 to £8.72 per hour.
  • New NLW rate starts on 1 April 2020 and applies to over 25 years olds.

Nearly 3 million workers are set to benefit from the increases to the NLW and minimum wage rates for younger workers, according to estimates from the independent Low Pay Commission. The rise means Government is on track to meet its current target for the NLW to reach 60% of median earnings by 2020.

The new rate starts on 1 April 2020 and results in an increase of £930 over the year for a full-time worker on the National Living Wage. Younger workers who receive the National Minimum Wage will also see their pay boosted with increases of between 4.6% and 6.5%, dependant on their age, with 21-24 year olds seeing a 6.5% increase from £7.70 to £8.20 an hour.

It is worth pointing out that these are not advisory rates, they are compulsory if your staff qualify for either the National Minimum or National Living Wage rates.

Those who are not entitled to the minimum wage, according to the HMRC website, are:

  • self-employed people running their own business
  • company directors
  • volunteers or voluntary workers
  • workers on a government employment programme, such as the Work Programme
  • members of the armed forces
  • family members of the employer living in the employer’s home
  • non-family members living in the employer’s home who share in the work and leisure activities, are treated as one of the family and are not charged for meals or accommodation, for example au pairs
  • workers younger than school leaving age (usually 16)
  • higher and further education students on work experience or a work placement up to one year
  • people shadowing others at work
  • workers on government pre-apprenticeships schemes
  • people on the following European Union (EU) programmes: Leonardo da Vinci, Erasmus , Comenius
  • people working on a Jobcentre Plus Work trial for up to 6 weeks
  • share fishermen
  • prisoners
  • people living and working in a religious community

HMRC’s powers to enforce compliance in this area have teeth. Not only will you have to stump up for any arrears if you pay less than the statutory rates, HMRC can also levy penalties.

HMRC reflects on 2019 successes

Not all penalties levied by HMRC are civil, many cases are serious enough to warrant a criminal investigation. The first post in the “money” section of the gov.uk website in 2020 reflects on this. The title of the post is a give-a-way:

“Busted! HMRC reveals biggest criminal cases of year 2019”

In what could be seen as a propaganda exercise HMRC are clearly underlining the fact that tax evasion of the criminal kind has their full attention. In more detail the press release says:

This year’s top criminal cases include:

1. 2 wealthy professionals who attempted to steal more than £60 million through a fraudulent tax avoidance scheme which claimed to invest in HIV research and conservation and were jailed for a total of 14 and a half years.

2. A Berkshire-based gang that stole £34 million in VAT and laundered £87 million, the proceeds from selling illicit alcohol through bank accounts in Britain, Cyprus, Hong Kong, Dubai and other countries – were jailed for more than 46 years.

3. A fugitive £17 million tax fraudster who is finally behind bars after he was tracked down to his Prague hideaway and brought back to the UK to serve his 8-year sentence.

4. Five people, including the former owners of a Sussex petrol station, who were sentenced for distributing and selling an estimated 4.8 million litres of illicit fuel to unsuspecting motorists, including haulage companies across the South East.

5. The jailing of a former Top Gear mechanic who helped father and son tax cheats escape from the UK via ferry and Eurotunnel prior to sentencing for a £1 million VAT fraud.

6. Payback time for 5 wealthy tax fraudsters who were involved in one of the UK’s biggest tax frauds.

7. An apparently jobless Londoner who enjoyed a sociable lifestyle of golf and exotic holidays by dodging tax on smuggled tobacco has been jailed.

8. A charity treasurer who tried to steal more than £330,000 in a Gift Aid repayment fraud and spent the money on lavish cruise holidays.

9. Our work with Interpol to take apart a pan-European crime gang involved in cigarette trafficking, drug smuggling and money laundering.

 

All in all, not a bad haul. We can expect HMRC to expand the range of their anti-tax evasion activities in 2020. No doubt the forthcoming spring budget will have the usual sprinkling of fine print, adding more regulation to the tax code.