Talking Tax Autumn 2019 by Hazlewoods

Talking Tax DRIVING LIFELONG PROSPERITY

Autumn 2019

SPOTLIGHT ON THE FUTURE TAX LANDSCAPE

Welcome..

As we head into autumn, we also enter a period of uncertainty with Brexit on the horizon, an imminent Budget under a new party leader and Chancellor, as well as the possibility of a general election in the near future. In this issue we consider how the tax landscape may change as a result. For now, however, it is business as usual and we take a look at some upcoming changes ahead for homeowners and off-payroll workers. We also look at a new capital allowance for buildings, international tax traps for the unwary and HMRC’s PAYE questionnaires.

SIGN UP TO RECEIVE OUR BUSINESS UPDATES INSIDE Tax and political uncertainty A new allowance > Private sector off-payroll working > Are you a homeowner? > International tax for SMEs – traps for the unwary > Delay to new VAT reverse charge > HMRC question PAYE processes > >

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Tax and political uncertainty With Boris Johnson settling in (?!) as prime minister, a rapidly approaching Brexit deadline, and the possibility of a general election in the very near future, it is hard to predict what changes in the world of tax are ahead. Given this uncertainty, many may predict that Savid Javid’s first Budget as Chancellor of the Exchequer may not bring about any big tax giveaways (if indeed an election is not called before). During the leadership contest, however, Boris did hint at an increase in the income higher rate threshold from £50,000 to £80,000 as well as a hike in the national insurance threshold. This would mean a reduction in tax for many taxpayers paying just 20% on their income between £50,000 and £80,000 rather than 40%. It will be interesting to see what measures he comes up with to make up for this shortfall but it appears that his initial strategy may be to take advantage of, currently, low interest rates and increase borrowings. Conversely, Jeremy Corbyn has suggested that he would look at increasing the income tax take by introducing a new 45% band for those earning over £80,000. Corbyn has also hinted at a significant increase to the corporation tax rate of up to 32% compared to the 17% rate due to come in from April next year.

Johnson has also suggested significantly reducing stamp duty land tax (SDLT) rates for residential property purchases funding this by increasing costs for investors and significant increases for high value commercial properties. He has also mooted shifting the SDLT liability from the buyer to seller. Corbyn has announced proposals for a reform of council tax increasing bills for those with larger homes and shifting the liability to landlords. If Labour is successful in a snap general election, entrepreneurs may also see the withdrawal or restriction of tax reliefs. Currently, business owners pay half the standard rate of capital gains tax on disposals of business assets, but it is anticipated that this relief could be axed altogether. The widely reported uncertainty as to the tax landscape following Brexit also remains with potential implications for customs duties, withholding taxes and employee mobility to name but a few. The coming months will hopefully start to unravel some of that uncertainty and is likely to bring about interesting times for a tax adviser!

A new allowance In what we now know was Philip Hammond’s last Budget speech, he announced the introduction of a new capital allowance for structures and buildings. For those that remember industrial buildings allowances, this appeared to be a ‘déjà vu’ moment but there are some key differences to the new regime. See below for our quick guide on what you need to know about this new allowance. WHO WILL IT APPLY TO? Businesses incurring qualifying expenditure on new nonresidential structures and buildings will be able to benefit from the new structures and buildings allowance (SBA). WHEN DOES IT APPLY FROM? SBA’s can be claimed for construction contracts entered into on or after 29 October 2018. Care should be taken where the contract forms part of a series of works, however, as HMRC may look to deny relief where a ’linked’ construction contract was entered into prior to this date. WHAT EXPENDITURE WILL QUALIFY? Costs relating to the physical construction, renovation or conversion of a structure or building are eligible for the SBA. This includes demolition and land alterations but will not extend to the cost of the land itself, rights over land, or costs connected with obtaining planning permission.

WHAT RELIEF IS GIVEN AND WHEN? Relief at an annual rate of 2% will be given on a straightline basis over a 50 year period from the point that the building is brought into qualifying use. SBA qualifying costs are not eligible for the annual investment allowance. HOW DO YOU CLAIM? Relief can be claimed via the business tax return but an allowance statement must also be completed including information such as the date of the written construction contract, details of qualifying expenditure incurred, the date the building was first brought into use and any other ‘supplementary’ information. WHAT HAPPENS WHEN I DISPOSE OF THE PROPERTY? No balancing adjustments will arise on disposal of the property, however, for capital gains tax purposes, any relief given under the SBA will be deducted from the base cost of the property. The purchaser can continue to claim SBA’s over the remainder of the 50 year period.

PRIVATE SECTOR OFF-PAYROLL WORKING From April 2020, medium and large sized private sector businesses will become responsible for assessing the employment status of any off-payroll workers with whom they engage that operate through an intermediary. The off-payroll working rules apply to people working like employees, but operating through a company (often known as a personal service company or PSC). Currently it is the PSC’s responsibility to determine whether the off payroll working rules apply when engaged by a private sector company. Where the individual is self-employed, it is always the responsibility of the engaging firm to determine employment status and operate PAYE as appropriate. A small business will be defined using the Companies Act definition and will, therefore, be deemed to be small if it satisfies two of the following conditions: >

a nnual turnover – not more than £10.2 million;

b alance sheet total – not more than £5.1 million; and

n umber of employees – not more than 50.

Where there are several agencies or intermediaries in the chain, the end client is required to complete and provide a ‘status determination sheet’ and communicate this down the chain so that the agency or intermediary making the payment can deduct PAYE/NIC as appropriate. If they fail to provide a valid statement, the end client will be treated as the fee-payer and become responsible for operating payroll as appropriate.

The draft legislation also introduces a ’client-led disagreement process’ in cases where the individual or intermediary disagrees with the determination. This is an appeal to the end user, who will be required to review and re-assess but there will be no independent review available. The draft legislation also provides powers to HMRC such that they can pass any PAYE/NIC liability through the chain where they are unable to collect any unpaid taxes from the party that has failed to comply. Final legislation should be published shortly after the Budget, but we would recommend that businesses begin to prepare now and assess how they may be impacted. Some actions to consider taking may include: >

I dentify any workers engaged through agencies or other intermediaries to establish if services are being provided through a PSC.

I dentify any existing contracts extending beyond April 2020 and determine if the off payroll rules will apply. Talk to those contractors potentially affected.

E stablish internal processes or seek professional advice to consider whether the rules apply to new engagements.

We can help you to understand your responsibilities and assess engagements to determine if the new rules will apply.

ARE YOU A HOMEOWNER? Earlier this year we issued a release on the upcoming changes to available reliefs when disposing of your main residence. As we edge closer to the commencement date, you may wish to think about acting sooner rather than later if you are planning on selling up. Principal private residence (PPR) relief is available to shelter capital gains tax (CGT) arising on the disposal of a property which has been your only or main residence. Where there have been periods of absence from the property other reliefs may be available. As a quick recap, from April 2020: >

ettings relief is currently available for the period L that the property has been let sheltering gains of up to £80,000 for a couple. From April next year, this will only be available where the owner is in shared occupancy with the tenant, effectively abolishing lettings relief and increasing a couple’s tax liability by up to £22,400.

he final period exemption will be reduced from T 18 months to 9 months.

transfer of a property to a spouse after this date A will always result in the receiving spouse inheriting their spouse’s PPR history. Currently, the receiving spouse only inherits the prior ownership period for PPR relief where it is their main residence at the time of the transfer.

In addition, any CGT due on the disposal of a residential property will be payable within 30 days of the sale. This could mean CGT being due up to 20 months earlier than is currently the case. Complications could also occur where there are multiple disposals during the same tax year and/or if you are uncertain of your likely income for the year and hence determining whether tax should be paid at the basic or higher rate (18% or 28%). We can advise on the reliefs available, calculating potential CGT liabilities and/or assessing the impact of the new rules.

INTERNATIONAL TAX FOR SMES – TRAPS FOR THE UNWARY When we think of international tax, our attention tends to be drawn to the activities of large multi-national enterprises that have been in the press over recent years. And whilst this has also been the focus of governments, tax authorities, and commentators it is important to understand that many of the issues faced by these large organisations can equally apply to smaller businesses who are making their first forays into international trade. It should also be noted that whilst global trade, communications and technology have developed exponentially in recent years, the rules of international tax have been slow to adapt and can therefore seem unwieldy in comparison. As with any tax issue, it is always preferable to seek advice before final decisions are made. Beginning expansion plans overseas attracts its own set of potential tax issues and upfront planning enables these to be both considered and, where possible, mitigated. That is not to say that tax considerations should drive commercial decisions, but understanding the potential tax impact ensures that the company is aware of any requirements and can meet its compliance obligations without incurring excessive fees or penalties. Key areas to watch out for include: CORPORATE RESIDENCY In the UK a company is considered to be UK tax resident if it is either incorporated or ’centrally managed and controlled’ in the UK. In broad terms, centrally managed and controlled refers to where the key executive decisions are made; an example of this may be board meetings. If a company is incorporated overseas but key executive decisions are made in the UK, this can lead to a company being both overseas and UK tax resident and having to pay tax in both countries. While this “double taxation” can often (although not always) be resolved, it can be a lengthy and expensive process. Appropriate planning can prevent the issue arising in the first place.

COMPANIES DOING BUSINESS OVERSEAS Where a company carries on a business overseas, there may be local compliance and reporting obligations which, if not met, can result in substantial penalties, such as in the United States. Whether a company pays tax overseas or in its host country on overseas business is usually determined by whether it has a permanent establishment (PE). This is a taxable presence without a legal entity; for example a branch of a company. It is a tax construct which looks to define the point where a company moves from doing business with a country to doing business in a country. Depending on the activities being undertaken a PE can arise where a UK company has premises or access to premises overseas, or even sends an employee overseas. The tax consequences of proposed locations of assets, activities and personnel should be factored into decision making. TAXATION OF INDIVIDUALS Sending a UK employee to work overseas may lead to a requirement to register for employment taxes. From a double tax treaty perspective this often only applies when an employee is overseas for more than 183 days, but can apply immediately if the employer is deemed to have a permanent establishment in the overseas state, and that PE is considered to have borne the cost of the employee. There may, however, be local compliance requirements; for example, in the UK there is an obligation to report short term business visitors to the UK.

TRANSFER PRICING Whilst the UK has the small and medium enterprise (SME) exemption for transfer pricing, this is not the case for most other jurisdictions. At the level of the small company, transfer pricing does not have to be an onerous task but it is worth considering the company’s future plans in order to ensure that decisions made in the early stages don’t adversely impact the future. For example, if an overseas company is reporting tax losses in say a start-up phase, this may indicate that it is bearing a greater proportion of risk in anticipation of higher profits in the future when the business takes off i.e. as a reward for bearing that risk. Finance Act 2019 has introduced new legislation in respect of ’avoidance involving profit fragmentation arrangements’. This legislation has the potential to affect SME companies who would ordinarily not fall within transfer pricing regulations, if a UK group company is transacting with a group company in a lower tax territory. If your business is looking to expand overseas, whether it be a leap or a more modest dipping the toe in the water, Hazlewoods can help you to navigate the international tax landscape. We have an in house tax team, which includes international tax specialists, and access to the expertise of our colleagues across the global HLB network to ensure a joined up and proactive approach.

DELAY TO NEW VAT REVERSE CHARGE The government has announced a 12-month delay for implementation of the VAT reverse charge for building and construction services. Due to come in from 1 October 2019, this measure will now be deferred until 1 October 2020 giving businesses more time to prepare for the change, with the government stating that they have listened to the concerns raised by industry representatives. They have confirmed, however, that they still remain committed to introducing the change and that this is just a deferral, rather than abandonment. This is a welcome announcement as there was growing concern that some businesses were not even aware of the change, let alone ready to start applying the rules. With Brexit on the horizon, along with Making Tax Digital for VAT only just bedding in, it seems a sensible move to give both businesses and HMRC a bit more time to tackle this change. For further information on any of the points raised above, please contact a member of the Indirect Taxes team.

HMRC question PAYE processes We have become aware that HMRC has been focusing in on PAYE compliance and sending out a spate of â&#x20AC;&#x2122;employer compliance check questionnairesâ&#x20AC;&#x2122; to businesses without notifying agents.

If you receive a questionnaire, we would recommend seeking professional advice as inaccurate answers or failure to complete the questionnaire could result in a lengthy and costly PAYE enquiry.

The questionnaire asks a number of questions including details about the business, the directors, payroll, entertaining, benefits, loans and company vehicles.

We can also carry out a PAYE health check to ensure that your systems are compliant and minimise the risk of a HMRC investigation.

This appears to be a new approach to the traditional PAYE compliance visits, saving HMRC time and money in identifying companies that may not be complying.

MEET THE TAX PARTNERS

NICK HAINES 01242 237661 nick.haines@hazlewoods.co.uk

TOM WOODCOCK 01242 237661 tom.woodcock@hazlewoods.co.uk

PETER WOODALL 01242 680000 peter.woodall@hazlewoods.co.uk

RUTH DOOLEY 01242 680000 ruth.dooley@hazlewoods.co.uk

DAVID CLIFT 01242 680000 david.clift@hazlewoods.co.uk

NICHOLAS SMAIL 01242 680000 nicholas.smail@hazlewoods.co.uk

Windsor House, Bayshill Road, Cheltenham, GL50 3AT Tel. 01242 237661 www.hazlewoods.co.uk / @Hazlewoods_Tax This newsletter has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us. Hazlewoods LLP is a Limited Liability Partnership registered in England and Wales with number OC311817. Registered office: Staverton Court, Staverton, Cheltenham, Glos, GL51 0UX. A list of LLP partners is available for inspection at each office. Hazlewoods LLP is registered to carry on audit work in the UK and Ireland and regulated for a range of investment business activities by the institute of Chartered Accountants in England & Wales.