Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

IHT: know your limit

Insurance company Canada Life’s annual survey for 2017 has revealed growing confusion over the operation of inheritance tax. According to the survey, more than two thirds of respondents did not know the current level of the inheritance tax nil rate band – among adults over the age of 45 with assets in excess of £325,000, some 70% did not know that the threshold for the standard nil rate band is currently £325,000. This is a significant increase on the 61% shown in the 2016 survey. In addition, 55% of respondents did not know the rate at which assets above their available nil rate band are taxed – this represents an increase of 3% on 2016 figures.

The research found that over a quarter (27%) of those aged 45 or over with enough assets to trigger a potential IHT bill do not have a will, leaving their inheritance plans unclear and meaning their wealth could pass to relatives they did not intend to provide for under intestacy rules.

Another simple and effective estate planning strategy is to gift money to relatives, but just a fifth of respondents had done so – with over half (51%) saying they don’t see a need.

One of the main reasons that simple estate planning tools are being ignored by people with enough wealth to benefit from them is a lack of understanding that could easily be rectified by better use of financial advice. However, Canada Life’s research found that just 27% of wealthy Brits over the age of 45 have sought professional advice on IHT planning. At the end of January 2018, the Chancellor requested the Office for Tax Simplification (OTS) to carry out an IHT review, with the view to simplifying the ‘particularly complex’ system in which it operates.

The review will focus on the technical and administrative issues within IHT, such as the process of submitting returns and paying any tax due, as well as practical issues around routine estate planning and disclosure. It may also look at how current gift rules interact with the wider IHT system, and whether the current framework causes any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions. Although there are no changes at present, there are likely to be future reforms in this area. With this in mind, individuals would do well to check their current position on inheritance tax issues and check that adequate provisions are in place.


ISA limits update

The maximum annual investment limit for Individual Savings Accounts (ISAs) will remain at £20,000 for 2018/19 (of which, for eligible investors, £4,000 may be saved in a Lifetime ISA). Although the investment limit is not rising in the new tax year, a couple will still be able to add up to £40,000 to their ISA accounts during the year – a substantial investment limit – and the interest received will be tax-free.

The maximum investment limit for Junior ISAs will rise from 6 April 2018 to £4,260, so there is scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Since it is possible for children to hold both a Junior ISA and a Child Trust Fund (CTF) (the CTF investment limit for 2018/19 is also rising to £4,260), there is plenty of scope for investors to look for higher-yielding products.

Help-to-buy ISAs continue to be available to assist first-time buyers save a deposit to purchase their first home. Under this relatively new scheme, up to £200 a month may be saved (along with an initial deposit of £1,000, and up to a maximum of £12,000) and, subject to certain conditions, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. A couple buying together could therefore save up to £30,000 tax-free towards the purchase of their first home, but it will take around four and a half years to achieve this level of savings using the Help-to-buy scheme.

Lifetime ISAs can be used by people aged between 18 and 40 to save for a first home or later life (again, subject to certain conditions). A total of £4,000 may be invested each year until aged 50. The Government will add a 25% bonus to savings, up to a maximum of £1,000 a year.

Unfortunately, the Government has recently confirmed that the new Help-to-Save scheme will not be fully available until October 2018. Ministers had originally said that the new accounts would start ‘no later than April 2018’ but this is not to be the case. This new type of account is designed to encourage people on low incomes to save for a rainy day by offering a 50% government top-up on savings. Over time, eligible individuals should be able to save a total of £2,400 in qualifying accounts, and receive bonuses of up to £1,200.

HMRC win IR35 appeal

HMRC have won a significant appeal concerning the application of employment intermediaries legislation to BBC television presenters. In Christa Ackroyd Media Ltd and the Commissioners for Her Majesty’s Revenue and Customs, [2018] UKFTT 0069 TC06334, the First Tier Tribunal (FTT) ruled that the legislation (known as the ‘IR35 rules’) applied to the arrangements under which the BBC contracted one of the presenters of the regional news programme Look North.

Christa Ackroyd, whose ‘personal service company’ (Christa Ackroyd Media Ltd (CAM)), was engaged under a seven year contract with the BBC to provide her services on up to 225 days per year. Ackroyd was appealing against demands for some £419,151 from HMRC relating to income tax and National Insurance contributions (NICs) for the tax years 2006/07 to 2012/13.

This appeal is specifically concerned with ‘hypothetical contract’. HMRC argued that such a contract between the BBC and Ackroyd would have been a ‘contract of service’ rather than a ‘contract for services’, that her status was that of an employee, and that CAM Ltd should therefore account for tax and NICs accordingly. The taxpayer however, contended that she was a self-employed contractor, and there was no further liability on the part of CAM Ltd.

The FTT found that the hypothetical contract would have been a contract of employment. Such factors as:

  • mutuality of obligation;
  • control of what, when, where and how the taxpayer performed her role;
  • right of substitution; and
  • whether the taxpayer was in business on her own account,

were all considered in depth.

In his ruling, the judge said that a hypothetical contract of seven years, for at least 225 days per year, and terminable only for a material breach, pointed towards a contract of employment. In particular, the length of the contract was ‘pursuant to a highly stable, regular and continuous arrangement’. It involved a high degree of continuity rather than a succession of short term engagements. However, he also went on to say (at para. 171): ‘We do not consider that the fact the fees were payable on a monthly basis akin to the way an employee might be paid is significant. Nor is the absence of any provision for holiday, sick pay or pension entitlement.’

In this case, it was the ability of the BBC to ‘control’ the taxpayer, and the fact that there was a seven year contract for what was effectively a full time job, that were the significant factors in the Tribunal’s findings that the taxpayer was an employee under a hypothetical contract.

The FTT said that whilst this appeal is one of a number of other appeals involving television presenters and PSCs, it is not a lead case as such. It is a significant ruling though as, not least, it indicates that the IR35 can be enforced where HMRC see fit to do so.

March 2018 Q&A

Q. I am a sole trader and have been trading for several years. My turnover has now exceeded the VAT registration threshold and I have registered with HMRC accordingly. I am currently waiting for VAT number and certificate. Will I be able to claim back VAT on purchases made by the business before the registration date?

A. There is a time limit for backdating claims for VAT incurred before the effective date of registration. From the date of registration, the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have;
  • 6 months for services.

You can only reclaim VAT on purchases for the business now registered for VAT and they must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT return and keep records including:

  • invoices and receipts;
  • a description and purchase dates;
  • information about how they relate to your business now.

Q. I own a buy-to-let leasehold property, which currently has 49 years remaining on the lease. Can I claim a tax deduction for the legal and professional costs of extending the lease?

A. The normal legal and professional fees incurred on the renewal of a lease are generally allowable if the lease is for less than 50 years. But any proportion of the legal and professional costs that relate to the payment of a premium on the renewal of a lease are not deductible.

Where a replacement lease follows closely on a previous one, and is in broadly similar terms, a change of tenant will not normally make the associated legal and professional costs disallowable. Any proportion of the legal or other costs that relate to the payment of a premium on the renewal of a lease will, of course, remain disallowable.

Q. I am self-employed and have been claiming capital allowances on certain business items. If I close down the business and move into employment, but continue to use the same assets for my work, can the transfer from one to the other be at the written down value, or will there be a balancing allowance at the date my business ends?

A. Strictly, the open market value should be used for the transfer, so that balancing allowances or charges result. However, since employees can claim capital allowances for equipment they provide for use in their work, and this will be a transfer between ‘connected persons’, you will be able to make an election to use the tax written down value for the transfer instead.

HMRC clarify VAT treatment of affiliation fees for sports clubs

HMRC recently published a reminder that the concession enabling clubs to treat affiliation fees as exempt from VAT, will be withdrawn with effect from 1 April 2018.

A sport’s governing body, or similar umbrella organisation, often charges an affiliation fee to individual clubs who make an onward charge to their members. Where the clubs are non-profit making, the supply of this affiliation fee to their individual members is exempt from VAT. However, if the club is a profit-making commercial club, then the supply to their individual member is standard rated.

The concession aimed to put profit-making commercial clubs in a similar position to non-profit making clubs, so that they didn’t need to account for output tax on the fee charged. It achieved this by allowing profit-making commercial clubs to treat these re-charges to their members as though they were disbursements. However, as such re-charges of affiliation fees aren’t legally disbursements, the concession goes beyond HMRC’s discretion and is being withdrawn with effect from 1 April 2018.

Withdrawal of the concession means that the onward charge of the affiliation fee will be liable to VAT at the standard rate of 20%, unless it meets the conditions of a disbursement.

There will be no impact on the VAT treatment of affiliation fees by non-profit making sports governing bodies, or similar umbrella organisations, and on non-profit making sports clubs to their members. In their case, the charge they make for affiliation fees will continue to be exempt under the law. If they are partly exempt for the purposes of calculating their recoverable input tax, such bodies should ensure that they continue to include affiliation fees in their exempt and total supplies in any appropriate partial exemption calculation.

Tax-free childcare now open to under 9s

In April 2017 HMRC started rolling out tax-free childcare, a scheme designed to help working parents with the cost of childcare with up to £2,000 of support per child per year, or £4,000 for disabled children. The scheme is now open (from 15 January 2018) to parents whose youngest child is under 9, or who turned 9 on that date. All remaining eligible families with children under 12 can apply from 14 February 2018. This means that all eligible parents will have the opportunity to apply for tax-free childcare before the end of the current financial year.

Parents, including the self-employed, can apply online for tax-free childcare by visiting the Childcare Choices website. Parents can also access the government’s childcare calculator through the website, which is designed to help them choose which government childcare support is best for them.

According to Government reports, since opening the childcare service, through which parents apply for 30 hours free childcare and tax-free childcare, more than 325,000 individuals have successfully applied and are now using the service. Of these, more than 170,000 have opened a tax-free childcare account.

Latest MTD progress

Draft regulations, together with a draft explanatory memorandum and a draft VAT Notice, covering required changes to the VAT regime under the Making Tax Digital (MTD) project were published for consultation in December 2017. The consultation runs until 9 February 2018, and it is expected that live pilot testing will then begin in spring 2018.

With this in mind, the Association of Taxation Technicians (ATT) has recently been urging software houses and HMRC to identify MTD-compliant software packages urgently to allow businesses to make an informed decision on which to use and help to avoid the need to make a troublesome mid-accounting period change.

Some businesses will need to have MTD complaint software in place in just five months’ time.

Under MTD, businesses above the VAT threshold will be required to keep their records digitally and provide HMRC with quarterly VAT updates from the beginning of their first VAT quarter starting on or after 1 April 2019.

Quarterly updates will have to be submitted to HMRC from software via an Application Programme Interface (API). It is therefore important for such businesses to make sure that they have an accounting package which can do this and, if not, ensure they do in good time for their first quarterly VAT update under MTD.

Commenting on the implementation timetable, Co-chair of ATT’s Technical Steering Group said:

“The first businesses to come into MTD will be those with a VAT quarter running from 1 April to 30 June 2019. If they happen to have a 30 June year end, they will need to have an MTD-compliant accounts package in place by 1 July 2018 or risk changing their accounting package mid-year. This gives them only five months to select and integrate a new package if their current one would not be MTD compliant.

It would be a major headache for businesses, from a practical perspective, to have to change mid-accounting period, as when they come to do their accounts or tax return, the information would be spread over two systems. It would also make it difficult to get an in year view of profitability.

HMRC will be providing an online tool to help businesses identify which software packages will meet their MTD needs but until that is available it will be very difficult for businesses and the agents advising them to make an informed decision.

The ideal solution would be for the MTD for VAT start date to be altered so that it applied from a business’s first accounting period (and not VAT quarter) starting on or after 1 April 2019.”

Whilst we wait for the detail of the MTD implementation process to evolve, businesses should be able to gain some comfort in the Government’s confirmation that it will not widen the scope of MTD beyond VAT before the system has been shown to work. This means that businesses can focus on this one area for now.

Two million couples still missing out on Marriage Allowance

Recent government statistics indicate that out of four million eligible couples, around half are still not benefiting from the income tax Marriage Allowance (MA). The allowance was first introduced in April 2015, which means that a backdated claim made in 2017/18 could be worth up to £662. It’s worth checking to make sure claims are made, where appropriate.

In brief, Marriage Allowance is a way for couples to transfer a proportion of their individual Personal Allowance between them in a tax-efficient manner. Where a couple satisfies the following criteria, it should be possible to claim the allowance:

  • The couple must be either married or in a civil partnership – living together is not sufficient for the allowance to be claimed.
  • One partner needs to be a non-taxpayer – which generally means they are earning less than the personal allowance (£11,500 for 2017/18, rising to £11,850 from 6 April 2018).
  • The other partner needs to be a basic 20% rate taxpayer, which generally means they are earning less than £45,000 in 2017/18 (rising to £46,350 for 2018/19) (note that rates are different for Scottish taxpayers). Higher rate and additional rate taxpayers are not entitled to the allowance.
  • Both partners must have been born on or after 6 April 1935.

For 2017/18, the maximum amount that can be transferred from one partner to the other is £1,150, which means that the spouse or civil partner receiving the transferred allowance will be entitled to a reduced income tax liability of up to £230 for 2017/18 (£1,150 @ 20%).

Backdated claims

For 2015/16 Marriage Allowance was worth £212, and for 2016/17, the allowance was raised to £1,100, making it worth £220. Backdated claims are possible – a claim for all three years from 2015/16 to 2017/18 inclusive will therefore be worth up to £662.

The allowance is set to rise to £1,185 on 6 April 2018, so it will be worth a further £237 in 2018/19.

As announced in the 2017 Autumn Statement (applicable from 29 November 2017), it is possible to claim Marriage Allowance even where one partner has died since April 2015, providing all the eligibility criteria outlined above is satisfied.

In most cases, the allowance will be given by adjusting the recipient partner’s personal tax code and the allowance will be received via the PAYE system. The partner who transferred their personal allowance will also receive a new, reduced, tax code, which will be operated against their employment income where applicable. If the recipient partner is self-employed, the allowance can be claimed via the self-assessment tax return and the allowance will be given as a reduction against their self-assessment tax liability.

February 2018 Q&A

Q. I own several properties jointly with my son. Most of them are rented out, but my son has lived in one of them for five years. My son is now considering buying a house on his own and this will become his main residence. Will he have to pay the higher stamp duty land tax charge on the purchase?

A. Broadly, if the value of your son’s share of the rental property is more than £40,000, he will be liable to the higher rate of SDLT when he purchases a new property.

Further information can be found in the HMRC guidance on the higher rates of SDLT applicable to the purchase of additional residential properties, which was published in November 2016; and on the GOV.uk website at https://www.gov.uk/guidance/stamp-duty-land-tax-buying-an-additional-residential-property.

Q. I am the sole director and 100% shareholder of a company. Can the company claim capital allowances for the cost of setting up a website?

A. Expenditure on setting up a website is generally treated as expenditure on computer software. According to HMRC guidance (Business Income Manual: BIM35815), ‘the cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue’.

Computer software acquired with hardware (e.g. an operating system) and accounted for as part of the cost of the hardware will qualify as plant in the main capital allowances pool.

Other computer software qualifies for capital allowances under CAA 2001, s 71. However, from 1 April 2002, new expenditure on software will initially qualify for relief as an intangible asset (under CTA 2009, Part 8) provided it is incurred by a company. If the company wishes to exempt such expenditure from CTA 2009, it must make an irrevocable election within two years of the end of the accounting period in which the expenditure was incurred. This means that companies can effectively choose between capital allowances (under CAA 2001, s 71) and amortisation (under CTA 2009 Part 8). Where amortisation is charged in the accounts, the advisability of making an election will depend on the period in which the policy is used (i.e. the period over which the expenditure is written-off).

Q. What should we pay employees who are on jury service?

A. There is no statutory entitlement for an employee to be paid by his employer during jury service. However, if the contract of employment has a clause covering such a situation, the employer must follow the terms of the contract.

Whilst on jury service, the employee is entitled to claim allowances from the court to cover travel and subsistence costs. In addition, a financial loss allowance may be claimed in respect of any loss of net earnings suffered as a result of attending the court.

The maximum financial loss allowance depends upon the number of hours served. These amounts are reviewed annually and are currently as follows:

  • First 10 days: 4 hours or under each day – £32.47
  • First 10 days: Over 4 hours each day – £64.95
  • Day 11 to day 200: 4 hours or under each day – £64.95
  • Day 11 to day 200: Over 4 hours each day – £129.91
  • After day 201: 4 hours or under each day – £114.03
  • After day 201: Over 4 hours – £228.06

New Budget timetable and Spring Statement date confirmed

HM Treasury has confirmed that the Spring Statement will take place on Tuesday 13 March 2018.

At Autumn Statement 2016, the Chancellor announced that in future there will be a single fiscal event each year – the annual Budget statement, which will be delivered in the autumn. Autumn Budget 2017 was the first Budget in this new cycle. From Spring 2018, an annual Spring Statement will accompany an updated economic and fiscal forecast from the Office for Budget Responsibility. The Chancellor has said that he will not make significant tax or spending announcements at the Spring Statement, unless the economic circumstances require it.

HM Treasury has also published a policy document setting out a summary of the timetable and process the Government will use for tax policy making and consultation following the move to a single annual fiscal event.