ETC Tax- Autumn Newsletter 2023 | Tax Matters That Matter by ETC Tax

Autumn 2023

TAX MATTERS TAX "HOT TOPICS"

Navigating

BANGERS AND CASH?

Is there anything to stop me selling my classic car to my limited company?

Complex Tax Issues

GUEST ARTICLE

The Biggest Change to Civil Litigation this Century (so far!)

CAPITAL ALLOWANCES SUPER-DEDUCTION The need to act quickly.

Up and coming ETC Tax online events

Tax ‘hot topics’: Navigating complex tax issues

Mistakes in Corporate Transactions

7TH DECEMBER 1 0 .00 A M - 11.00 A M

2 2 N D F E B R UA R Y 10.00 A M - 11.00 A M

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SPEAKER

Angela Wood Managing Director at ETC Tax

Clive Howarth Associate Director at ETC Tax Guest speaker from Bermans

• Book early to secure your place and don’t miss our early bird offers! • Free ticket for Tax Partner Pro Members • Follow us on Eventbrite

To view our next up and coming events, and to purchase your tickets click here

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Autumn 2023

Contents

First word

Features

“Designers want me to dress like spring, in billowing things. I don’t feel like spring. I feel like a warm red autumn

– Marilyn Monroe

Tax “Hot Topics” - Navigating Complex Tax Issues

Autumn has made a sudden appearance, with its vibrant colours and misty mornings. While the weather remains unpredictable one constant is our latest newsletter, Tax Matters, That Matter which is full of topical and informative articles. Don’t forget, our e-Newsletter will arrive via your inbox each month so you won’t miss out on any tax news and updates from our expert tax advisers!

Capital Allowances The need to act quickly

SDLT and mixed use property: proceed with caution!

This quarter we bring you… Tax “hot topics”: Navigating Complex Tax Issues - Angela Wood explores some of the current “hot topics” in tax, ranging from how to spend surplus cash to dealing with complex VAT issues. SDLT and mixed use property: proceed with caution! Arjan Singh explains if a garage letting constitute a residential property purchase ‘mixed use’ for the purposes of SDLT. Angela Wood explains why we need to act quickly when it comes Capital Allowances Super-Deduction.

Guest Article Fixed Costs – The Biggest Change to Civil Litigation this Century (so far!)

Bangers and Cash? Is there anything to stop me selling my classic car to my limited company?

Guest article this quarter comes from Andrew Koffman of Bermans where he discusses the Biggest Change to Civil Litigation this Century (so far!) Case of the quarter: Bangers and cash - Clive Haworth discusses VAT recovery on libel case legal fees. Don’t forget to reserve your place on our next live webinar “Tax Hot Topics; Navigating Complex Tax Issues ” on 7th December at 10am click here for more information. Many thanks to Sarah Aston and all the contributors who made this edition happen. If you have any queries, comments, or observations, then please let us know. We’d love to hear from you. Best wishes, Angela

Regulars

Bulletin Angela Wood Managing Director angela.wood@etctax.co.uk 3

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TAX “HOT TOPICS”:

NAVIGATING COMPLEX TAX ISSUES

In this article, we explore some of the current “hot topics” in tax, ranging from how to spend surplus cash, to dealing with complex VAT issues. Surplus Cash – A Nice Problem to Have!!!

Retaining talent

The issue: we are increasingly speaking to business owners who have found themselves accumulating surplus cash or investments within their trading companies.

The issue: Finding and retaining skilled staff is a growing challenge for many business owners and firms have to think creatively to ensure that they have access to the best talent pool.

While this may seem like a great situation to be in, managing this excess cash efficiently and planning for its tax efficient use often require proper thought.

Things to think about: Enterprise Management Incentive (EMI) schemes and growth share arrangements have become two increasingly popular ways of incentivising key employees. (click here for further articles on EMI). There are a number of tax and commercial issues to consider including valuation (approval by HMRC is needed for EMI valuations), EMI advance assurance, and employment related securities issues. Commercially clients need to think about how and when shares will be awarded i.e will performance criteria apply?

Things to think about: many clients want to use surplus cash to assist future generations and/or to provide an alternative income stream in retirement. One way to achieve this is for clients to set up a Family Investment Company (FIC). There are of course a number of tax considerations here, including whether to use a Holding Company (HoldCo) or a new company (NewCo) and how to move cash/ assets tax-efficiently between companies. Inheritance Tax (IHT) planning is often a key consideration also.

Many clients want to use surplus cash to assist future generations and/or to provide an alternative income stream in retirement. 4

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Specific HMRC campaigns continue to target certain sectors, from online traders to property income and gains.

Angela Wood Managing Director angela.wood@etctax.co.uk

For those leaving the UK, tax equalisation issues can be complex.

Post-Covid Comings and Goings

Increased HMRC scrutiny

The issue: The COVID-19 pandemic has reshaped the way people live and work. This has led to important considerations related to tax residence and domicile.

The issue: HMRC, is becoming increasingly proactive in its efforts to ensure tax compliance. This includes more and more “nudge” letters, as well as more comprehensive enquiries, compliance checks, and discovery assessments.

Things to think about: When dealing with residence and domicile issues, individuals and businesses need to consider things like the difference in tax terms between a permanent and a temporary move and the effect on their income tax position; what happens to any assets they own in the UK (particularly UK properties) and social security implications. For those leaving the UK, tax equalisation issues can be complex. Domicile and deemed domicile status are also important considerations.

Things to consider: Taxpayers should be aware that there really is “nowhere to hide” as HMRC continues to gather wider powers to share data with third parties, such as Companies House. Specific HMRC campaigns continue to target certain sectors, from online traders to property income and gains. It’s essential to act quickly to mitigate penalties but taxpayers and their advisers should also tread carefully so as to ensure they don’t give away more information than they need to.

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Growth shares can also present significant IHT opportunities

Accidental landlords and the IHT time bomb The issue: Whilst the government may be talking about abolishing IHT, in the meantime, there are lots of individuals out there with significant buy-to-let property portfolios who may find themselves facing substantial Inheritance Tax (IHT) liabilities. Things to consider: While there’s no IHT magic wand to wave, it’s crucial to start planning early and consider strategies which allow individuals to “reset” the seven-year clock for potentially exempt transfers. Growth shares can also present significant IHT opportunities. VAT – The Forgotten Tax? The issue: Value Added Tax (VAT) is often underestimated in its complexity, with many business owners and their advisers lacking a deep understanding of VAT beyond basic VAT returns. Things to consider: For online traders, knowing when to register for VAT can be challenging. Specific industries, such as financial services and land and property, have their own intricate VAT rules. Recent cases, like Sonder Europe Limited v HMRC and Hotel La Tour highlight the importance of staying on top of VAT case law to ensure that clients are kept informed of opportunities for VAT recovery where those may not have previously existed.

Enjoying this article, but need more advice on any of the topics covered? To discuss how ETC can help with your tax questions call the team on 0161 711 1320 or email enquiries@etctax.co.uk

Conclusion Whether your clients are dealing with surplus cash, navigating staff retention challenges, dealing with residency issues, facing increased HMRC scrutiny, looking for help with IHT planning, or grappling with complex VAT, there are always opportunities to talk to them about tax and to enhance the value of the services you offer by providing your client with informed choices. 7

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CAPITAL ALLOWANCES SUPERDEDUCTION.

it’s not too late to claim but act quickly! What are capital allowances? Put simply, capital allowances are a system of valuable tax reliefs intended to provide incentives for the private sector to invest in capital assets and infrastructure. One of the challenges for taxpayers and their advisers is keeping up with the ever changing rules. This article summarises the recent transition from the ‘superdeduction’ to a ‘full expensing’ basis of claim. Background The capital allowances ‘super-deduction’ was introduced in Rishi Sunak’s first budget, to encourage the UK to get back to productivity after Covid. This allowed companies to write off 130% of qualifying expenditure against tax, and applied to expenditure incurred from 1 April 2021 to 31 March 2023 under contracts entered into, on or after 3 March 2021. Some assets, known as ‘integral features’ and ‘long life assets’ were excluded from the super deduction. Instead, they qualify for a ‘special rate first year allowance’ (also referred to as an SR allowance) equal to 50% of qualifying expenditure. From 1 April 2023 to 31 March 2026, the super deduction has been replaced by a new capital allowances regime called ‘full expensing’. This allows 100% of the cost of qualifying assets to be written off via a company’s P&L account, although the SR Allowance still applies to integral features and long-life assets.

These allowances are available only on new and unused assets. They apply only to incorporated businesses and not to individuals, partnerships etc. Key Points Qualifying expenditure on these assets within buildings is often overlooked. Deciding what qualifies for capital allowances requires a specialist to analyse the construction costs on building projects or the purchase price paid for a new building. Capital allowances must be claimed in the accounting period during which the expenditure is incurred, otherwise the expenditure will have to be ‘pooled’ and then written off more slowly at 18% or 6% per annum. What do you need to do? If you have spent money on building or refurbishing property over the past two years, or have bought an unused property in that time, you may still be able to make a claim for the super deduction or SR allowance. You will need to act quickly though. For example, qualifying expenditure incurred during the year to 31 March 2022 must be identified and claimed in the tax return for that year, which will have been filed by 31 March 2023, but can be amended up to 31 March 2024.

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How ETC Tax can help The capital allowances regime comprise a substantial body of rules which are complex and very technical. The rules are often changed at every budget, which makes it difficult for business to understand and decide how to make best use of them. Angela Wood Managing Director angela.wood@etctax.co.uk

As specialists in tax, we have a team that can review your capital expenditure and help ensure that you make full use of the tax reliefs available to you. Please do contact us if you wish to review your property expenditure.

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SDLT

and mixed use property: proceed with caution! Arjan Singh Assistant Tax Manager arjan.singh@etctax.co.uk

What is important here is the status of the property at the time of completion. 10

The Case

Key Considerations

The property consisted of a substantial residential property and a sizeable garage, both held under separate title numbers. The garage was within the garden and grounds of the main house and could be accessed from the garden of the main house both on foot and by road.

The three primary areas of consideration by the FTT were as follows:

A tenancy was granted over the garage to a company on the same date that the sale of the property completed. Whilst the company was a commercial business, Kozlowski (the purchaser of the property) was a minority shareholder in that company. The company planned to use the garage to store books (although it did not allow the tenant ‘exclusive possession’ of the garage). This was important as Kozlowski also stored his own possessions in the garage. Under the terms of the tenancy agreement the company was required to pay £50 per month to Kozlowski as well as electricity costs of the garage. However, there was no evidence that payments had been made.

1. Whether the lease existed at the time of the purchase 2. Whether the garage falls within the definition of residential property (and therefore the use of the garage was irrelevant) 3. Whether the garage was an interest in land that exists for the benefit of the main house The decisions were as follows: 1) In line with previous case law (specifically Ladson Preston v HMRC), the FTT noted that what is important is the status of the chargeable interest at the time it was acquired. In this case, the chargeable interest was wholly residential and the fact that a lease was then granted in respect of part of that property was irrelevant. 2) The garage was not found to used for a separate non-residential purpose and was found to be part of the garden and grounds of the main property. 3) In line with 2),the garage was found to be part of the property and could not be regarded as an interest in land in its own right.

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Key takeaways • What is important here is the status of the property at the time of completion. • Where structures might be considered to be “ancillary” to the main subject matter of the transaction, usually the main property these are highly likely to be seen to be part of the garden and grounds of that property and for its use and enjoyment. Other examples of this are residential purchases involving paddocks (with some exceptions such as Suterwalla v HMRC). What does this mean for buyers of residential property with additional features? We envisage that HMRC will continue to dig deep into purchases involving SDLT claims for mixed use Property.

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A 12-week HMRC consultation into SDLT matters such as this ended on 22 February 2022 but an approach (or change in approach) to calculating SDLT on transactions such as this is yet to be announced. It is highly likely that there will be material changes to the SDLT rules in the short-term and we would advise people buying property that is a little out of the ordinary to seek advice on the specific SDLT treatment of the transaction, especially as there may be a need to act quickly if changes are proposed. Next Steps If you require assistance with claiming relief for SDLT, or in reclaiming overpaid SDLT, please do not hesitate to get in touch. Our team of expert advisers have a wide range of experience of dealing with SDLT matters.

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FIXED COSTS

– THE BIGGEST CHANGE TO CIVIL LITIGATION THIS CENTURY (SO FAR!) ANDREW KOFFMAN, HEAD OF LITIGATION, BERMANS

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Guest article Bermans is a multi-award winning practice of commercial, forward-thinking lawyers, recognised by The Legal 500 as a top tier law firm for debt recovery. Our partner-led approach to client service is underpinned by clear, uncomplicated legal advice. We are a full-service Commercial law firm who are market leaders in Asset Finance and Invoice Finance, having won 'Best Receivables Finance Lawyer 2021' at The Business Money Receivables Awards. Our team of highly experienced lawyers is able to provide specialist advice on a comprehensive range of Commercial legal issues.

Even the best-run businesses can find themselves embroiled in litigation from time to time. 1 October 2023 saw the largest change to litigation procedure in England and Wales since the Civil Procedure Rules (CPR) were introduced in 1999. Civil court claims for over £10,000 and up to £100,000 will now be governed by new fixed cost recovery rules, which determine how much the winner can recover from the loser, for all cases issued on or after 1 October. There are no transitional arrangements other than for personal injury and other health damage claims, which are not relevant to this article. The recovery of costs will be determined according to two tables of figures. The amount recoverable will depend on a number of factors including the “track” to which the case is allocated; the complexity of the claim, the stage reached before the matter is concluded (e.g. by settlement or trial) and the amount of the claim to some extent. This is very different from the old rules.

The old rules A civil claim issued before the end of September, once defended, is allocated to one of three “tracks”: • Small claims track, £0 to £10,000: generally little or no costs recovery apart from court fees. • Fast track, £10,001 to £25,000: the costs are assessed and the court has a wide discretion except that the trial costs are fixed. • Multi-track, £25,001 upwards: the costs are assessed and the court has a wide discretion. However only “reasonable and proportionate” costs will generally be allowed. In the multi-track there is a process of “costs budgeting” that takes place during the case. In most cases costs are assessed on the “standard basis” which is less generous to the recipient than the “indemnity basis”. The new rules Instead of three tracks there are now four: • Small claims track: unchanged. • Fast track: the financial limits are unchanged but the fixed costs regime now applies. • Intermediate track: this is new for cases valued from £25,001 to £100,000. A different albeit similar fixed costs regime applies, with a different table of figures. • Multi-track: the processes are unchanged but only cases valued at £100,001 or more now fall into it. 13

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Author

Cases in the fast and intermediate tracks will also be assigned to a complexity band. What factors will no longer be relevant?

Andrew Koffman | Partner Head of Litigation 0161 827 4604 www.bermans.co.uk

A number of factors were formerly relevant to the amount of assessed costs, which in the fast track and the new intermediate track will no longer be relevant. These include: • The status of the lawyer(s) doing the work • Hourly charging rates • Number of hours spent on the matter • How much the winning party has to pay their own lawyers. Non-money claims Certain claims in which the main remedy sought is not financial (such as an injunction, or possession of a property) may be allocated to the fast track or intermediate track and the new rules will apply as if they were financial claims. Those in the multi-track will not be affected.

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Contracting out In some commercial contracts (such as guarantees, mortgages or leases), the parties will often agree that where one of them (e.g. the guarantor) is in default they will give the other party a full indemnity for their costs. Will such a clause enable the party not in default to seek costs on the indemnity basis despite the introduction of the new rules? The answer is probably yes! However the new Part 45 of the CPR strangely refers to the court only being able to award “neither more nor less than the fixed costs”. This could be taken to mean that parties are no longer entitled to agree a different outcome, but most commentators believe this provision has been included to stop parties to ongoing litigation from agreeing to a separate outcome e.g. in a consent order. It therefore seems highly likely that parties remain free to contract out before the event.

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The costs tables

Conclusion

These are the meat of the new rules. The fast track is dealt with in table 12 and the intermediate track in table 14.

The rules have been promoted as encouraging parties to pursue claims (increasing access to justice) because of the certainty they will bring.

https://www.justice.gov.uk/courts/ procedure-rules/civil/rules/part45-fixed-costs/ practice-direction-45-fixed-costs A case will be allocated by the judge to one of four complexity bands. In claims involving businesses, the guidance is somewhat limited although some guidance appears within Part 26 of the CPR. The band to which the case is assigned is going to be highly important. The parties can informally agree on a complexity band between themselves but the final decision rests with the court. Who will be the winners and losers from the changes? Much of the detail remains to be determined in practice. However, most often, the winner of a case (including one that is settled on favourable terms) will recover less by way of costs than before, especially in lower value or less complex cases. The new rules only determine how much the winner of the case can recover from the loser – not the amount they will have to pay their own solicitors. Under the old rules, in a typical case worth over £25,000, the usual rule of thumb was that the winner can expect to recover somewhere 60% to 80% of their own costs. That will now completely change and the amount recoverable will be determined in accordance with the tables, irrespective of how much the winning party has to pay the lawyers.

There may be some truth in this although for every winner there is likely to be a loser. Also court fees have increased steeply in the last 10 years or so. It is likely that “fixed recoverable costs” will eventually apply to all claims valued at up to £250,000. Any party faced with bringing or defending a court claim for over £10,000 and up to £100,000 is advised to take legal advice as early as possible, in all such cases but especially where the amount in dispute is at the lower end of that bracket. Editor’s note As Andrew notes, unfortunately litigation or other legal expenses are costs that many small business’ are likely to face at some point. Whilst litigation expenses are generally regarded as legitimate expenses for tax purposes if incurred as part of a company or business’s normal trading activities this actually a complex area and there are numerous reasons why a deduction may be denied for legal and professional expenses. For example, an expense may be regarded as attributable to capital; it may be regarded as not wholly and exclusively for business purposes; or it may be seen as an application of profits already earned rather than as an expense in calculating those profits. Should you require any help with this or any aspect of corporation tax deductibility for professional expenses please do get in touch and we would be happy to assist.

BANGERS A

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Case Case ofofthe the month month

Spring 2023

We recently had an interesting query from a client of one of our accountancy contacts: Is there anything to stop me selling my classic car to my limited company?

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First of all, why would the client want to that in the first place? In this particular case the car in question was a high-end classic car with a value of £1m. It had cost the client £100,000 many years earlier. The main motivations for the client were: The capital gain of £900,000 on the disposal at market value to the company would not be taxable as there is an exemption for any gains on disposals of “passenger vehicles” under Section 263 Taxation of Chargeable Gains Act 1992; and This would mean that the client could either withdraw surplus cash of £1m from the company tax-free or, alternatively, create a credit director’s loan account balance of £1m to drawdown in the future. Sounds too good to be true?... HMRC Bear Trap The main stumbling block here are the benefit-in-kind (BIK) rules relating to company cars. A BIK arises where a car of van is made available to an employee or a member of the employee’s family (s.114 ITEPA 2003). Clive Haworth Associate Director clive.haworth@etctax.co.uk

On the issue of whether a car is “made available”, HMRC adopt a hard line. To illustrate this point, HMRC do not accept that a car is not available in the following scenarios: • Where the director has been banned from driving does not mean that the car is not available for private use, even though using the car would be illegal. • Where the car has an off-road ( SORN) declaration so that driving it would also be illegal does not mean that is not available for private use. • Similarly, if the car is not taxed, insured, or has a valid MOT does not mean it is unavailable for private use. • If the director had a broken leg meaning that they were incapable of using the car, that does not mean it is not available for private use. Not also that it is only necessary for a car to be “available” for a BIK to arise – even if the car is not actually used a BIK will still arise

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Calculation rules for BIK on classic cars

The normal computational rules for car benefit, based on list price and CO2 emissions do not apply to classic cars. If they did, the taxable benefit on a high value car would be negligible, so not surprisingly HMRC introduced different computational rules.

Cars registered before 1 January 1998 do not have a CO2 emissions figure, so the car benefit is calculated by reference to the market value of the car multiplied by the ‘appropriate percentage’ based on the engine size. The percentages are: 0 -1,400 cc

24%

1,401 – 2,000 cc

35%

Over 2,000 cc

37%

The fair market value is £1m and in this case the car was over 2,000 cc, so if HMRC were to successfully argue that the car was ‘available’ and therefore a BIK arose the annual BIK would be: £1,000,000 x 37% = £370,000 This would obviously be taxed at rates of 40%/45% depending on the client’s other income, so it would probably result in an annual income tax charge of £220,000 per annum. This would of course negate the benefit of the initial tax-free gain and it would obviously not make sense to proceed with the transaction in these circumstances. Avoiding the bear trap To avoid the BIK rules the client would have to convince HMRC that the car was not “available”. We therefore submitted a Non-Statutory Clearance seeking confirmation that the BIK rules would not apply. There was an exchange of letters with HMRC and HMRC’s initial stance was that simply having Board Minutes prohibiting private use was not sufficient to show it was not “available” since it was the director and spouse’s company. Similarly keeping the vehicle on company premises, accessible to the director, also didn’t mean the car wasn’t available. In the end HMRC agreed a BIK would not arise in the following circumstances: • At point of sale the car was to be transported by a specialist firm to a purpose-built storage facility 175 miles away. • All the keys to the vehicle would be held by the specialist firm. • The vehicle would be insured by the specialist firm and not in the name of the company or the Directors. • The insurance for the vehicle is only whilst it is in storage and not for road use. • The vehicle will be transported for repairs and maintenance by the specialist firm. Anything to worry about in the future? In this case the holding company purchased the car, so it was one of several investments held by the company. The only thing to watch out for in the future is the level of investment activity. In the future it may be that the level of investments held mean that the overall group becomes an investment company group rather than a trading company group, which might affect the availability of other tax reliefs relating to capital gains tax and inheritance tax. Next Steps Our team at ETC Tax have extensive knowledge of both capital gains tax and inheritance tax. It's essential to have the right advice when dealing with these tax matters as getting the correct advice is crucial. If you have any questions or need information on the above, feel free to get in touch. 17

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Bulletin:

The latest news round-up from the ETC team

Newest Well-earned Member promotion of the team for Olivia Congratulations goes to Olivia who has been promoted to Assistant Tax Manager.

CIOT Quiz champions Yes, you heard it right ETC Tax aka Taxmanian Devils were crowned winners at this year's CIOT quiz evening!!! Shocked…So were we!

Matthew Stambach has been with ETC for a few weeks now, and whilst settling into his role nicely he has also revived "Fry Up Friday," much to the delight of the team. Matt will be supporting Angela Wood in her role as well as having a specific focus on business development, complex compliance and HMRC enquiries and disclosures.

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Our monthly case review and activity report Crypto Compliance Crypto compliance and disclosure

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Up and coming Events Tax ‘hot topics’: Navigating complex tax issues

Mistakes in Corporate Transactions

7th December 10am

22nd February 10am

PCD back in Manchester

Non-resident landlord tax return IHT and CGT Tax Advice Non-Dom - Remittance & Self Assessment Incorporation of property business Company reorganisation EIS Relief

Once again PCD hosted a networking dinner in Manchester and what a great night it was. ETC had its own table this year, it was great to be able to invite staff and play host to our professional contacts. It was lovely to see so many familiar faces and to get the chance to meet new likeminded professionals, we look forward to PCD return in 2024.