BREAKFAST BRIEFING FOR INSURANCE INTERMEDIARIES. Tax Update 14 October 2015

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1 BREAKFAST BRIEFING FOR INSURANCE INTERMEDIARIES Tax Update 14 October 2015

2 Tax Update for Insurance Intermediaries October 2015 Chris Riley Corporation Tax Partner General Tax Update for Brokers and MGAs following the 2015 Budgets Ian Gadie Business Tax - Senior Manager PAYE and benefit changes (2016 and the future) Luigi Lungarella Indirect Taxes Director VAT and IPT changes for Brokers

3 Chris Riley Tax Partner General Tax Update for Insurance Intermediaries

4 We re going to cover Tax paid by your Business Corporation Tax, Capital Allowances, LLP Taxation reminder and Business Acquisitions Tax paid by the Owners Salaries and Dividends, Entrepreneurs Relief, Pensions Tax paid by Someone Else (hopefully) Diverted Profits Tax

5 20% 21% 20% 25% 20% 24% 20% 23% 20% 21% 20% 20% 19% 19% 18% 18% 30% 30% 28% 26% 35% 40% 40% 38% 42% 40% 52% 52% Corporation Tax Rates DOWN, DOWN, DOWN Small Companies Large Companies

6 Annual Investment Allowance A LITTLE LESS PREDICTABLE AIA/year 500, , ,000 50,000 50, ,000 25,000 25,000 APRIL 2008 APRIL 2009 APRIL 2010 APRIL 2012 JANUARY 2013 APRIL 2014 APRIL 2016 JANUARY 2016

7 Limited Liability Partnerships Before April 2014 LLPs had been aggressively used as a tax planning tool Legislation defined that Partners were always self employed Significantly reduced the National Insurance Cost on salaries Beneficial treatment of Benefits in kind Accordingly many Staff artificially reclassified as Partners

8 Limited Liability Partnerships Still remain a valuable structure to incentivise Key Management, but they must be Genuine Partners: Variability of Income by reference to the profits of the LLP, or Fundamental role in day to day management of the business, or Significant Capital at risk in the partnership by reference to income level. Key benefits of Partner Status: National Insurance savings as previously Capital stake in the business for future exit 10% CGT

9 Business Acquisitions Historically - Vendor would want to sell the shares Generally wants a clean break if selling the whole business. No exposure to past liabilities (although warranties could cover) Risk of Double Tax charge on the disposal on Goodwill. Easy access to Entrepreneurs Relief no requirement to liquidate.

10 Business Acquisitions Purchaser would want to buy the assets Hidden Liabilities may be acquired in a share purchase Warranties could protect in a share purchase but drawn out process Due Diligence and legal costs of acquisition increased. Acquired business likely integrated and absorbed in existing company Post acquisition costs would need to deal with this in a share purchase Tax relief on amortisation of Goodwill NOT FROM JULY 2015

11 Salaries vs Dividends Current status SALARIES DIVIDENDS Income Tax Rates of 20%, 40%, 45% (Effective) Rates of 0%, 25%, 31.6% National Insurance 12%, 2% 13.8% Ignored for NI purposes Corporation Tax Reduce profits for Corporation Tax purposes Ignored for Corporation Tax purposes

12 The New Dividend Rates Income Band Effective rate (Current) Effective Rate (From 5/4/16) Personal Allowance 0% 0% Basic Rate 0% 7.5% Higher Rate 25% 32.5% Top Rate 30.6% 38.1% Other Pointers to note: No complex tax credit rules any more First 5,000 of dividends are tax free (in addition to Personal Allowance) In Most Cases Dividend better than Salary but gap is closed Dividend route now looks very similar to LLP route subject to timing Accelerate dividends into the current tax year?

13 Entrepreneurs Relief Still the Panacea 10% Rate of Capital Gains Tax if conditions are met 5% of shares held (Voting rights), for 12 months, and an employee throughout. 5% and 12 month test relaxed for shares acquired under an EMI scheme Despite being based on Retirement Relief Rules (Pre 1998 CGT legislation) in many respects the rules have always been more generous No Age limit, 10m allowance

14 Entrepreneurs Relief changes Self Incorporations Blocked A common strategy for decades Eg: Sole Trader business worth 1m Sell business to newly formed company on loan account CGT on disposal with ER claim tax bill of 100,000 Draw down loan account tax free Blocked from 3 December 2014

15 Entrepreneurs Relief changes Trading Company definition changed. In principle a non controlling shareholding held by a company is an investment and not a trading activity. But a secondary provision in the ER rules treated this as trading where the company invested in was a trading entity and controlled 5 by five or fewer shareholders. This secondary provision no longer applies from 18 March 2015

16 Trading company changes Blocks this structure Also Blocks this structure Owner/Manager Company Single shareholder Trading Company Staff company 10 shareholders of 10% each 90% 10% Shareholder 1 Company Single shareholder Shareholder 2 Company Single Shareholder 50% 50% Trading Company Previously, Staff Co would qualify for ER as only activity was interest in a JV company

17 Pension Contributions Further, significant reductions in potential tax efficient pension contributions. For 2014/15, and 2015/16-40,000 Don t forget can carry unutilised amount forward. For 2016/17 Still 40,000, but Income over 150,000 limit tapers away 1 for every 2 of income Minimum allowance remaining post taper of 10,000 Due to rule changes, 2015/16 allowance is potentially increased 40,000 allowance both pre and post 8 July (Budget Day)

18 And Finally

19 Diverted Profits Tax Tax charge of 25% on profits artificially diverted from the UK As opposed to 20% if the profits remained in UK and subject to Corporation Tax Potential Double Whammy for overseas parents as DPT not creditable. Two types of structures targeted Avoidance of taxable presence in the UK for the income in question, or Artificial payments out of the UK to avoid tax Generally requires two features to be present Tax Mismatch tax charge on other side less than 80% of UK rate No non-tax economic substance to the transaction

20 Diverted Profits Tax - An issue? SMEs are exempt from the rules Under 250 employees and either Turnover over 50m or, Assets over 43m Even if not exempt Avoided PE rules require diversion of 10m UK income No de-minimis level for Payment with no economic substance However risk that the principles may increase in scope in near future Key risk area for intermediaries could relate to Gibraltar operations with few staff but most of the profit.

21 Uncertain times None of the following changes were mooted prior to announcement. Entrepreneur Relief, Goodwill, LLPs or Dividend Taxation. All of the issues resolved have been in existence for some time. Some of the measures taken have far wider impacts than the stated plan. Given the Triple Lock on Income Tax, VAT and National Insurance Rates, it is likely that other changes to Make Taxation Fairer will arise with similar impacts.

22 Ian Gadie Business Tax Senior Manager

23 Employer compliance update Changes effective from 6 April 2016 Abolition of 8,500 threshold for lower paid employment Trivial benefits exemption Replacing dispensations with a statutory exemption Voluntary payrolling of benefits in kind

24 Abolition of 8,500 threshold P11Ds will replace P9Ds for a small number of employees who receive benefits in kind To protect vulnerable groups of employees (Ministers of religion and carers) new exemptions are to be introduced

25 Trivial benefits exemption Originally planned to be introduced on 6 April 2015 but postponed at the last minute Now planned to be introduced from 6 April 2016 Individual limit: less than 50 Still to be announced if there will be an overriding annual maximum per employee

26 Replacing dispensations with a statutory exemption All dispensations will be withdrawn from 6 April 2016 Can still apply for dispensations for this current tax year 2015/16 Bespoke subsistence rates agreed with HMRC in 5 years preceding 6 April 2016 will continue until the 5th anniversary of their agreement

27 Replacing dispensations with a statutory exemption Payment of expenses not covered by exemption after 5 April 2016 will need to be processed through the PAYE scheme and so no reporting on forms P11D For example, payments not on an approved scale rate of expenses or paid under a salary sacrifice arrangement.

28 Voluntary payrolling benefits in kind First proposed in 2015 Advantages Avoid burdensome P11D process Fewer PAYE code changes Simplify Self Assessment Tax Returns Fits in with HMRC s digital strategy and RTI Earlier payment of tax Possible disadvantages More administration during the year Explanations to staff Still some year end reporting

29 Voluntary payrolling benefits in kind Draft legislation consultation ended 2 September 2015 All benefits in kind can be included other than: Accommodation benefits Beneficial loans Credit tokens and vouchers Employers must apply to HMRC for authorisation using HMRC s payroll registration service

30 Voluntary payrolling of benefits in kind Employer selects benefits and employees to be included Detailed guidance to follow on: Starters and leavers during the tax year How benefits are taxed via payroll Step process for determining value of taxable benefit to be included in each monthly payroll run Adjustments for changes to the value of benefits to be taxed.

31 Voluntary payrolling benefits in kind Overriding limit for tax deduction is 50% of the PAYE income If there is insufficient income to deduct the full amount of Income Tax due on the benefit in kind, the value of the benefit to be included in the payroll is reduced to nil If in subsequent periods there is sufficient income to deduct the full amount of tax due, the balance of the taxable benefit for the remainder of the tax year is split between the remaining tax months and taxed accordingly

32 Voluntary payrolling of benefits in kind Making good - taxable value of benefit in kind is net of amount made good If amount to be made good not fully paid by the last tax month for the payroll, the difference is included as a taxable amount in the final pay period If there is insufficient income in the final month to pay the full amount of tax due, no benefit is included in that month and instead the taxable benefit is included in the next tax year and tax deducted accordingly.

33 Voluntary payrolling benefits in kind Car fuel benefit - making good If car fuel for private use is not made good within 30 days of the year end, the taxable benefit is included in the next tax year and tax is deducted in the subsequent tax year Ceasing employment and benefit in kind continues Benefit in kind taxed over remaining months to cessation of employment If insufficient income in the remaining period, authorisation to payroll benefit in kind ceases with immediate effect

34 Voluntary payrolling of benefits in kind Issues to be resolved How is Class 1A to be advised and paid? Will it be necessary to file annual forms P11D(b)? Underpayments of tax on benefits in kind - how long can it be carried forward? Mistakes on calculating the value of taxable benefits in kind - how is HMRC informed and how is the tax and Class 1A NIC paid?

35 Voluntary payrolling benefits in kind Should an employer sign up? Do you want to be an early adopter teething problems with software! Adopt to it before it becomes compulsory More or less administration? How good are your systems for identifying and recording benefits? Do you have the time and resources to review the benefits being taxed each month? How many benefits do you provide? How many staff do you want to include? You could end up with the worse of both worlds!

36 Employer compliance update Other matters being considered Travel and subsistence Discussion paper published 23 September 2015 Responses by 16 December 2015 This is part of the policy development process, no firm proposals at this stage and there will be a full consultation at a later date

37 Employer compliance update Other matters being considered Travel and subsistence Aim is to reduce/remove the complexities and inconsistencies in the current system Simplification must not come at an overall cost to the Exchequer. Greater tax relief must be balanced by restrictions elsewhere Permanent Workplace and Temporary Workplace often misunderstood and HMRC s rules appear inconsistent. Other proposed terms, Main Base and Detached Duty Work Location defined by percentage of working time spent at the locations

38 Employer compliance update Other matters being considered Travel and subsistence No change to Ordinary Commuting and Private Travel still taxable Travel in course of business still not taxable Possibility that Home could be the Main Base if no other location qualifies, but tax benefit should not be an incentive to work from home Work locations instead of work places Day subsistence - current rules may be overly generous you eat to live, you do not eat to work!

39 Employer compliance update Other matters being considered Travel and subsistence Overnight subsistence - a good case for retaining some tax relief Specific issues to be addressed later: International travel Industry specific travel Recordkeeping

40 Employer compliance update Other issues being considered Accommodation benefits Termination benefits Simplify complexities of employment status Closer assignment of Income Tax and National Insurance Contributions

41 Luigi Lungarella Director of VAT

42 What are we going to cover? Insurance Premium Tax VAT European trends UK rate increase Background Recent developments Likely future developments

43 Recent Insurance Premium Tax changes Additions to the IPT family France: legal expenses cover Slovenia: increased from 6.5% to 8.5% Greece: increased from 10% to 15% Malta: from 10% to 11% Portugal and Italy

44 UK Insurance Premium Tax Standard rate will increase from 6% to 9.5% on 1 November 2015 Lower than most European Union Member States IPT cash receipt method Transitional provisions Special accounting scheme From 1 March 2016 all premiums are to be taxed at the 9.5% rate Premium refunds Anti-forestalling tax avoidance measures

45 Input tax deduction

46 Input tax deduction Change Right to input tax deduction Direct and immediate link test vs cost component Beteiligungsgesellschaft Larentia + Minerva mbh & Co. KG & Marenave Schiffahrts AG Multiple questions from Germany with significant impacts in the UK

47 Holding companies VAT incurred by management holding companies on fees: acquiring subsidiaries raising capital to acquire subsidiaries Could tax authority apportion between active and passive roles? An active management holding co can attribute input tax to its whole activity Only disallowed if exempt supplies are made

48 Holding companies - recommendations Review corporate organisation Monitor changes from HMRC and other EU tax authorities File voluntary disclosures in relation to under-claimed input VAT Mixed holding companies Mitigating risks relating to past transactions Input tax apportionment relating to future activities Service agreements

49 Other areas affecting intermediaries VAT treatment of temporary workers Developments since the Reed Employment case Partial exemption special methods Do you have one in place? Is your PESM up to date? When was this last reviewed?