2020 INNOVATION. Monthly Tax Update Webinar. 20 April 2015

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1 2020 INNOVATION Monthly Tax Update Webinar 20 April 2015 Martyn Ingles FCA CTA Ingles Tax and Training Ltd 2020 Monthly Tax Update Webinar April 2015 Page 1

2 2020 Monthly Tax Update Webinar April NEW LEGISLATION Finance Act 2015 Enacted Changes to CASC scheme in April Open to the whole community Organised on an amateur basis Payments to players Provide facilities for or promote participation in an eligible sport The income condition The management condition The location condition The benefits of becoming a CASC Trading income exemption TAX CASES AND OTHER DEVELOPMENTS Disposal of Main Residence or Trading? Property Development - Investment or Trading? Dividends or Remuneration? Was PAYE due? Farming Losses Any Sideways Loss Relief? Confirmation Of Income For Mortgage Purposes HMRC Guidance on New Reporting by Employment Intermediaries Implications for Personal service companies How to send reports to HMRC Penalties Information that should be included in the report Worker details Engagement and payment details What This Means For A Worker Revised SP D12 Partnership CGT Valuation of a partner s share in a partnership asset Disposals of assets by a partnership Partnership assets divided in kind among the partners Changes in partnership sharing ratios Contribution of an asset to a partnership Adjustment through the accounts Payments outside the accounts Transfers between persons not at arm s length Annuities provided by partnerships Mergers Shares acquired in stages Pooling Elections under TCGA92 Sch2 Para Partnership goodwill Entrepreneurs' relief and roll-over relief on transfer of a business MANIFESTO TAX POLICIES OF THE MAJOR PARTIES Conservative Party Tax Policies Labour Tax Policies Liberal Democrat Tax Policies UKIP Tax Policies Green Party Tax Policies Monthly Tax Update Webinar April 2015 Page 2

3 2020 MONTHLY PRACTICAL TAX UPDATE WEBINAR APRIL 2015 Despite being an Election year the Finance Bill issued on 24 th March and enacted on 26 th March 2015 contained 127 sections and 20 Schedules! With such limited time for scrutiny by Parliament there may well be a number of drafting errors that greater scrutiny may have eradicated. Note however that many of the Finance Bill clauses were issued for consideration on 10 December 2014 just after the Autumn Statement. Note also that many of the announcements in the Budget on 18 March 2015 were not included in the first Finance Act of 2015 and may either be included in future Finance Acts, or not at all depending upon the outcome of the General Election on 7 May Depending on the outcome of the Election there may well be a further Budget after the Election, and who knows, if no party gets a working majority, we could find that there is a second General Election and maybe yet another Budget later in the year. As in previous webinars the material for the content of these webinars will be drawn from: New legislation, in draft and enacted HMRC practice and guidelines Recent tax cases and Tribunal decisions New thinking and forward planning And this month the Election Manifestos of the main political parties 2020 Monthly Tax Update Webinar April 2015 Page 3

4 1. NEW LEGISLATION 1.1 Finance Act 2015 Enacted The Finance Bill issued on 24 rd March and enacted on 26 th March 2015 contained 127 sections and 20 Schedules and many of the clauses issue for consultation on 10 December 2014 found their way into the legislation that was enacted. The very controversial diverted profits tax and country by country reporting targeting multinational companies took up 40 sections and 2 Schedules. A number of measures did not go ahead in the first Finance Act and may reappear in a future act. Notable exclusions were the new powers for direct recovery of debts from taxpayers bank accounts and the proposed change to exempt trivial benefits in kind. The latter was intended to provide an exemption from income tax for qualifying trivial benefits in kind (BiKs) where the cost of providing the BiK does not exceed 50. The trivial BiKs exemption was intended to replace a concessionary practice, whereby an employer is required to agree with HMRC whether a BiK can be treated as trivial and therefore not chargeable to income tax or liable for National Insurance contributions (NICs). Following technical consultation an amendment was made to set an annual cap of 300 for office holders of close companies and employees who are family members of those office holders. 1.2 Changes to CASC scheme in April 2015 New legislation introduced a number of changes to the Community Amateur Sports Club (CASC) scheme with effect from April There was also an increase in the tax exemptions for property and trading income. Note that if a sports club is registered as a CASC then the club is treated in a similar way to a charity with various tax exemptions, and individuals and companies are able to obtain tax relief for their donations. HMRC have issued new guidance which explains what these changes mean for clubs in relation to: increases in exemptions the new income limit condition the requirement that CASCs have 50% participating members travelling and subsistence expenses payments to players restrictions on the level of membership costs To be registered as a CASC a sports club must: be open to the whole community be organised on an amateur basis have as its main purpose the provision of facilities for, and the promotion of participation in, one or more eligible sports not exceed the income limit meet the management condition meet the location condition Open to the whole community To be open to the whole community a club must: have a membership that is open to all without discrimination have facilities that are open to all members without discrimination have fees that do not represent a significant obstacle to membership or use of its facilities The term membership refers to the people the club recognises as having accepted the rights and liabilities as set out in its governing document. It's up to a club to set out in its governing documents the rights of the members. Usually clubs allow members to attend general meetings and decide resolutions by majority vote. However a club may accept juniors as members without a right to vote until they reach the age of Monthly Tax Update Webinar April 2015 Page 4

5 This club would not be discriminating against juniors; membership is open to all even though juniors may have to wait until they are 18 to vote at AGMs. Clubs cannot restrict membership to only those prospective members who have already achieved a certain level of ability. The club should encourage participation in the sport at all levels and restrictions based on ability are not acceptable. For example, a golf club that restricts membership or access to facilities based on a prospective member's handicap certificate would not be suitable for CASC status. Any club that required prospective members to complete a trial to test their ability before accepting them as a member would also be discriminating and could not be a CASC. If a club charges any member more than 1,612 a year ( 31 a week) for membership fees then it would not be considered open to the whole community. The club would not be eligible for CASC status even if they offered discounted or cheaper memberships to other members. If a club has costs associated with membership that are more than 520 a year then it will be required to make provisions for those who cannot afford to pay more than 520 a year. If no suitable arrangements are made then this club will not be able to be a CASC because it is not open to the whole community. There is also guidance on calculating other costs associated with membership such as the hire or purchase of equipment Organised on an amateur basis A club is organised on an amateur basis if it: is non-profit making only provides the ordinary benefits of an amateur sports club for members and their guests has a governing document that requires any net assets on the dissolution of the club to be applied for approved sporting or charitable purposes HMRC considers all the facts to decide whether a club meets this requirement. For example, it would not be acceptable for a privately-owned club or business to draw up rules to meet this requirement. HMRC requires detailed evidence to show a club is run as a members' club whose rules require it to be non-profit making. The CASC scheme is not suitable for proprietary clubs and businesses. A club should only provide the ordinary benefits of an amateur sports club for members and their guests. These are: the provision of sporting facilities reasonable provision and maintenance of club-owned sports equipment the provision of suitably qualified coaches provision for reimbursement of the costs of coaching courses insurance cover the provision of medical treatment the reimbursement of necessary and reasonable travel and/or subsistence expenses incurred by players, match officials, coaches, first aiders and accompanying individuals travelling to away matches reasonable provision of post-match refreshments for players and match officials the sale or supply of food or drink as a social benefit which arises incidentally from the sporting purposes of the club The HMRC guidance sets out what would be acceptable activities on a club tour! Payments to players For HMRC to accept that a club is organised on an amateur basis they must not pay players more than 10,000 in a 12 month accounting period. There's no limit on the number of players that a club can pay for playing as long as the total amount paid to all players is less than 10,000 a year. To work out how much your club can pay players you must also include the value of any non-cash benefits. HMRC expects clubs to follow the benefits code to work out the value of any benefits they offer to paid players. The value of the benefit is worked out on the cash equivalent of the benefit this is usually the cost to the club less any amount made good by the paid player. In some cases there could be a scale 2020 Monthly Tax Update Webinar April 2015 Page 5

6 charge (for example car benefits), so to work out the amount of the cash equivalent in each case you'll need to look at the instructions for that particular benefit. Payments to members for non-playing services do not count towards the 10,000 limit. Clubs may enter into agreements with members to supply goods or services to the club, or employ members. This means that clubs can pay members for work done on a self-employed basis, or as staff for the club, provided that the arrangements are the same as if the people doing the work were unrelated to the club. Examples would include catering services, bar work, coaching and ground work Provide facilities for or promote participation in an eligible sport The main purpose of the club must be clearly stated in its governing document, or constitution, and must be to provide facilities for, and encourage participation in one or more eligible sports. Eligible sports are those on the list of recognised sports which is maintained by the National Sports Councils. To meet the main purpose test a club must ensure at least 50% of the members are participating members. To be a participating member they must participate in the sporting activities of the club on a number of occasions that is equal to or more than the club's participation threshold. The participation threshold is based on the number of weeks in the club's accounting period but there are reduced thresholds for members who join or leave a club at a time other than the start of an accounting period. HMRC guidance suggests that a member must participate at least 12 days a year to count towards this test The income condition CASCs can earn up to 100,000 a year from non-member trading and property income, known as the relevant threshold. There's no limit on the amount of income clubs can generate from members (apart from property income from members which also counts towards the 100,000 cap). Property Income for purposes of this test means gross income* (or receipts) from a UK property business or an overseas property business. For example, this would include income received from renting out the club's grounds or clubhouse. If a CASC is considering setting up a trading subsidiary it should consider seeking professional accountancy and legal advice. You could also consider contacting your sport's governing body who may be able to provide further advice and assistance. If the club is already a registered CASC with high levels of non-member trading income and/or property income and you do not want to be deregistered you may want to consider setting up a trading subsidiary. Any income that is generated by a trading subsidiary will not count towards the club's income threshold. A trading subsidiary should be owned and controlled by the CASC. The trading subsidiary can trade but will not be entitled to any CASC reliefs The management condition This condition for eligibility as a CASC was added by Finance Act The condition is met where a club's managers are fit and proper persons. Club's managers mean people who have the general control and management of the administration of the club. This might include committee members The location condition The location condition for eligibility as a CASC was added by Finance Act 2010 to make it clear that the CASC scheme is open to qualifying sports clubs in other European Union member states and relevant territories The benefits of becoming a CASC Registered Community Amateur Sports Clubs are entitled to certain tax reliefs: 2020 Monthly Tax Update Webinar April 2015 Page 6

7 exemption from Corporation Tax on UK trading profits if the turnover from that trade is less than 50,000 a year ( 30,000 a year before 1 April 2015) exemption from Corporation Tax on UK property income if the total income from property is less than 30,000 a year ( 20,000 a year before 1 April 2015) exemption from Corporation Tax on interest received exemption from Corporation Tax on chargeable gains To be eligible for these reliefs the club must use all of its income and gains for qualifying purposes. This means that you must use your money to promote participation and provide facilities for your eligible sport. If you do not use all of your income and gains for qualifying purposes then you may have to pay tax. CASCs also benefit from: Gift Aid on qualifying donations Gift Aid Small Donations payments on small cash donations mandatory 80% charitable rate relief other tax reliefs available to encourage individuals and companies to support CASCs Note that there are no specific VAT reliefs for CASCs (unlike charities). CASCs are therefore not eligible for the charity VAT reliefs on purchases of goods and services Trading income exemption Where a club is a CASC for all its accounting period and its turnover from trading isn't more than the limit of 50,000, the whole of the profit from that turnover is exempt provided it is applied for qualifying purposes. If the limit is exceeded there is no marginal relief available and the whole of the profit will be subject to Corporation Tax. Where a club is registered as a CASC for only part of its accounting period, the period for which it is registered is treated separately. The effect is that the club is treated as having 2 separate accounting periods, and the relevant limits and reliefs are correspondingly reduced. For income to benefit from the trading exemption it must be trading income. The supply of goods or services with a view to making a profit will amount to trading, and the profits will be liable to Corporation Tax as trading income. This is not normally the case where a members club makes supplies to its own members. So membership subscriptions paid to a CASC will not be trading income. Similarly, amounts paid by members to use facilities or for bar and catering are unlikely to be trading income Monthly Tax Update Webinar April 2015 Page 7

8 2. TAX CASES AND OTHER DEVELOPMENTS 2.1 Disposal of Main Residence or Trading? Hartland v HMRC (2014) UKFTT 1099 In determining whether or not the disposal of a property is a trading transaction the courts will consider a number of factors, in particular the intentions of the taxpayer. HM Revenue and Customs will often give the transaction more scrutiny where the taxpayer is in the building industry. In this particular case Mr Hartland, who was self-employed, ran a plant hire business. In January 1996 he bought a property ( W ) for 70,000 and, after renovating it, sold it four years' later for 181,000. He then acquired a property ( P ) which he sold in July 2002 for 550,000. In September 2002 he purchased another property ( G ) for 170,000 which was sold in February 2004 for 625,000. In the meantime, in January 2004, he acquired a property ( N ) which was in a poor state of repair. While N was being rebuilt, Mr Hartland decided to buy another property ( C ). He did not make any references to the purchases and sales in his tax returns for the relevant years. HMRC issued a discovery assessment in respect of the tax year 2002/03 and an amendment to the appellant's return and self-assessment for the year 2002/03, on the basis that the various property transactions undertaken by him amounted to ventures in the nature of trade. Mr Hartland appealed contending that because the two properties he sold during the years under appeal (P and G) were his homes, the profits he made on their disposal did not attract either income tax as the purchases and sales were not trading transactions, or capital gains tax ( CGT ) because of the exemption from tax of disposals of principal private residences under s222 TCGA1992; and it was for those reasons he had not referred to them in his tax returns. His evidence was that when he purchased P and G he had hoped his girlfriend would move into them as well, and when he demolished G and N he lived on site in a static caravan, and his girlfriend had moved into C (but he did not). The intention was to make N their family home, and the girlfriend finally agreed to move in with him there, whereupon he began refurbishment work on C. He said he had to sell N because of the continuing investigation into his tax affairs, and C was sold at a loss. HMRC submitted that the three properties (P, G and N) were all acquired and sold, or in the case of N taken into personal ownership, as part of a property development business; both P and G had been owned by the appellant for a very short period before he put them up for sale, with offers for sale made immediately or almost immediately after the works were completed, and while the properties were vacant; and that conclusion was reinforced by the financing of the properties as loans were made on a short-term basis and upon the assumption he would sell the properties very quickly on completion of the works. In determining whether various property transactions undertaken by the appellant amounted to ventures in the nature of trade, the tribunal should not examine the Badges of Trade one by one, in part because they were of little real assistance in the present case. Rather, the correct approach was to stand back from the facts, relating not only to the two years of assessment but also to the periods before and after, and ask whether the picture they painted, viewed from a reasonable distance, was of a man making improvements to his home before selling it and moving on to repeat the exercise on the one hand; or of a person setting out to earn a living by buying run-down houses, or at least houses with development potential, then improving, extending or rebuilding them, in order to make a profit to be utilised in the next venture. What mattered was not the intention at acquisition, but what the person concerned did; and what the person did could not be considered in isolation if it was part of a course of conduct. It was also clear that the picture had to be considered objectively; thus although the intentions of the person concerned might be illuminating, they did not represent the test. Applying those principles, and bearing in mind that intention was not determinative, to the facts it was clear the appellant bought his first property, W, with the intention of making it his and, hopefully, his partner's home and the work he undertook there, extensive though it was, was undertaken for personal rather than for business reasons. Thus what the appellant intended in relation to that property was reflected in what he did as a matter of fact. In other words, such profit as he made on the disposal of W was neither a trading profit nor a chargeable gain, because of s222 TCGA In addition, the appellant acquired P with the intention of making that his home, as a step up the property ladder, and in the renewed hope that his partner would join him there. By contrast, the acquisition, demolition, rebuilding and sale of G were undertaken in the course of a property redevelopment trade. The appellant could not realistically have thought that G, when he bought it, was fit for family occupation even if he had not fully appreciated that the only practical course was to demolish and reconstruct it Monthly Tax Update Webinar April 2015 Page 8

9 On the facts he sold it almost as soon as the works were complete and there were no evidence that he ever lived in it. The next question was whether, despite his intentions when he bought it, P ceased to be the appellant's principal private residence and became a business asset to be exploited by way of trade before he sold it. Although he undertook quite extensive works on it, P remained the appellant's principal private residence throughout his period of ownership and accordingly the profit, or gain, he made when it sold it was not chargeable to tax. Accordingly, the discovery assessment for 2002/03 had to be discharged because the sale of P did not result in a taxable profit or gain, but the amendment to the appellant's selfassessment for 2003/04 was properly made because his purchase, reconstruction and sale of G were carried out in the course of trade. The appeal would therefore be allowed in part. 2.2 Property Development - Investment or Trading? Terrace Hill (Berkeley) Ltd v HMRC (2015) UKFTT 75 In another recent case considering whether a property disposal was on trading account or capital account Terrace Hill was a special purpose vehicle formed to hold a property development group's 50% beneficial interest in a development of an office property in Mayfair. Terrace Hill contended that the property concerned was held as an investment in order that on disposal capital losses (from a capital loss scheme) could be set off against the gain on disposal. The issue for consideration by the First-tier Tribunal was whether it was true that when the property was acquired it was intended to retain it as an investment, subject to the reality that if circumstances changed radically, the property might have to be sold. HMRC argued that Terrace Hill had always intended to sell its interest in the property once its maximum value had been achieved, in other words once the building had been completed and fully let. In evidence the chairman claimed to be pursuing a strategy of seeking to retain developments where rental growth looked highly promising, and trying to maximise the steady income of net rental profits, so as to diminish the fluctuating results and delays in realisation of profits in the development activity. His aim in particular was to retain the completed development of the property following completion and that was supported by the company s contemporaneous records. Further evidence was that the property was always treated as a capital asset for accounting purposes, and capital allowances were claimed and conceded by HMRC in relation to the plant and machinery component of costs. The Tribunal said that in the case of a property development group the starting point would be to presume that properties were normally held on trading account. In order, thus, to distance a property purchase by a development group which generally or always realised its developed properties following completion, there would need to be a marked difference in approach that would distance a particular purchase from those normal trading expectations. The chairman s evidence that he regarded the property from the outset as a highly attractive asset, and he wanted to retain the completed investment because it would be a high quality office property in virtually the best street in the UK, and thus a property with great potential for rental growth. His policy of gradually building up good quality investment properties had been pursued. The accounting treatment confirmed that strategy. The Tribunal also noted the financing of the development. Representations to bankers about an early sale were considered. If the appellant had been unable to raise long-term borrowings when repayment was due to the bank, it would have had to sell the property if demanded. Based on the facts in this particular case the Tribunal made the finely balanced decision that this particular property was held as an investment and as such its disposal gave rise to a capital gain and the appeal would be allowed Monthly Tax Update Webinar April 2015 Page 9

10 2.3 Dividends or Remuneration? Was PAYE due? Jones and another v HMRC (2014) UKFTT 1082 Mr and Mrs Jones were directors of a recruitment consultancy business ( the company ). The company paid them interim and final dividends, together with modest monthly payments of directors' fees. The annual accounts for the year ended 31 March 2007 showed directors' salaries of 10,800 and dividends of 139,000. The first set of draft accounts for the year ended 31 March 2008, which had been produced by 9 May 2008, showed directors' salaries of 10,800 and an interim dividend of 138,000. By the summer of 2008 the company began to start feeling the effects of the global financial crisis and the appellants reduced the level of dividends by 50%. The company factored its debtors with a company ( CI ), but in January 2009 CI withdrew the company's credit facility. Attempts to obtain alternative funding were unsuccessful. The appellants were advised to consult with an insolvency practitioner with a view to putting the company into liquidation. They were also advised that there were overdrawn directors' loan accounts and that the liquidator would seek repayment; and to treat the sums originally received by way of dividends as remuneration subject to PAYE and national insurance which the parties described as a reclassification. The company's second set of draft accounts for the year ended 31 March 2008, produced in February 2009, showed dividends of 45,000 and directors' salaries and national insurance contributions of 213,178. The company went into insolvent liquidation in February HMRC concluded there had been a wilful failure to deduct tax and national insurance from the appellants' emoluments in the tax years 2007/08 and 2008/09 and that the appellants knew of that failure. HMRC therefore issued a direction notice to the appellants on the basis that Condition B in reg 72(4) of the Income Tax (Pay As You Earn) Regulations 2003, SI 2003/2682 ( the 2003 Regulations ) was satisfied. HMRC also sought to recover national insurance contributions from the appellants under reg 86(1)(ii) of the Social Security (Contributions) Regulations 2001, SI2001/1004. The appellants appealed to the First-tier Tribunal contending that in reg 72(4) of the 2003 Regulations the knowledge of the employee had to be at the time the relevant payment was received by him ie for Condition B to be satisfied, the employee had to know at the time payment was made that the employer had wilfully failed to deduct tax; and the conditions in both pieces of legislation did not fall to be considered retrospectively. HMRC argued that the time of payment for present purposes was when the dividends were reclassified as salary; and whilst the appellants were entitled to withdraw income from the company in the most tax efficient way, reg 72 and reg 86 would apply if there was a change of mind as to how payments should be classified. In the present case the reclassification which occurred did not truly reflect the nature of the payments at the time they were made. The payments were clearly made as interim dividends and taxable as such rather than as salary. The directors could not retrospectively alter the nature of the payments simply by deciding to treat them differently. They could not transform what had previously been received as dividends into salary unless there had been some error or misunderstanding at the time of payment. On the basis that the dividends were lawfully paid, the so-called reclassification in January 2009 would have no effect. On the facts there was no obligation on the company to deduct PAYE or to pay national insurance, either at the time of payment or at the time of reclassification. If the dividends had been unlawful then the position would have been different. The appeal would accordingly be allowed. 2.4 Farming Losses Any Sideways Loss Relief? French and anor v HMRC (2014) UKFTT 940 In the 1998/99 tax year the first appellant, who ran a dairy farm in partnership with his wife (the second appellant), decided to abandon dairy farming in the light of falling milk prices. He sold his herd in 2000 and he let/licenced some of his land to a neighbouring farmer ( C ). Between 2001 and 2004 the farming activity at the farm was conducted entirely by C; the appellants simply received a rental return. In 2004 the licence to C was terminated but C continued to farm the land on a contract basis and the appellants re-commenced their farming trade. The appellants' farm continued to make a loss until the tax year 2011/12 when it made a profit. The appellants sought to set farming losses 2020 Monthly Tax Update Webinar April 2015 Page 10

11 against other income in the 2010/11 tax year. HMRC challenged the sideways offset of losses under s67 ITA 2007, which introduced an objective test designed to deal only with farming and market gardening trades and provided that, subject to various exemptions, the additional reliefs for losses were denied for a loss if there had been losses, calculated without regard to capital allowances, in the previous five years. HMRC calculated that it had taken the appellants seven years (from 2004 to 2011) to conduct arable farming on the land, so as to end up anticipating profit ; the first appellant was plainly competent, so the same seven-year period was taken to calculate how long a competent farmer would take to anticipate profits on conducting arable farming activities on the farm, which was Spring Therefore as the appellants were not anticipating profits until 2011/12 which was behind the notional competent farmer in achieving profits they could not offset losses for any of those periods on and after HMRC accepted they could not make discovery assessments before the tax year 2008/09 so the challenge was made only for that and the following two years. On the appellants' appeal to the First-tier Tribunal two issues arose for consideration (i) whether the appellants actually ceased the trade of farming altogether between 2001 and 2004; and (ii) if there was no break in the farming trade, with the result that the appellants incurred farming losses for 13 years, how to apply the test in the second paragraph of s68(3) ITA 2007 in that situation. On the facts, it was clear that there had been a break in the appellants' farming trade between 2001 and During that period no farm trade was conducted on any of the land and C was farming the land let to him, not the appellants. Once it was concluded that the farming losses in 2010/11 spanned back for only seven years and not 13, it followed that s68(3) did not preclude the sideways offset of the losses. That was because HMRC had already calculated the time that the notional competent farmer, commencing the arable farming trade in 2004, would have taken to anticipate profit by the period that it took the present competent appellant to anticipate profit (seven years in both cases) and so the appellants satisfied the tests in both paragraphs of s 68(3). The appeals would be allowed. 2.5 Confirmation Of Income For Mortgage Purposes Many mortgage lenders now request a copy of the official HMRC tax calculation (SA302) as confirmation of income. As the result of lobbying from the accounting profession there has been a change of heart and from January 2015, self-employed individuals with a self assessment online account, can provide proof of their income by downloading copies their Tax Calculation and their Tax Year Overview from the HMRC online service, which will be the evidence they need to support a mortgage application. There is still a conflict between planning to minimise income for tax purposes and declaring a higher level of income to support a mortgage application. 2.6 HMRC Guidance on New Reporting by Employment Intermediaries As legislated in Finance Act 2014 from 6 April 2015, employment agencies must return details of all workers they place with clients where they don't operate PAYE on the workers' payments. The return is a report that must be sent to HMRC once every 3 months, using HMRC's report template. The template and online service for submission of reports are now available. The policy background is that in recent years HMRC has seen increasing evidence of growth by some intermediaries: 1. helping to create false self-employment; and 2. supplying UK workers from an offshore location Both of these methods have been used to reduce employment taxes and avoid having to fulfil their legal employment rights and obligations Monthly Tax Update Webinar April 2015 Page 11

12 You need to send a report to HMRC if at any time in a reporting period you: 1. are an agency 2. have a contract with a client 3. provide more than one worker's services to a client because of your contract with that client 4. provide the worker's services in the UK - or if the services are provided overseas, that the person is resident in the UK 5. make one or more payments for the services (including payments to third parties) If the workers you supply provide their services at sea in the oil and gas industry wholly on the UK continental shelf, you don't need to send HMRC reports. You will need to provide the worker's details and payment details for workers where you don't operate PAYE. This includes overseas workers and payments where the worker is working in the UK or working temporarily abroad. You don't have to include any details of workers who are your own employees. You don't have to include any payment details where the payments have already been included as part of a PAYE Real Time Information (RTI) submission by any other organisation Implications for Personal service companies One-person limited companies, or personal service companies, that only supply a client with 1 worker don't have to send reports to HMRC. If the worker is supplied through an intermediary they will be included in the return of the intermediary that has the contract with the end client. If a personal service company supplies more than 1 worker, including any subcontracted workers, it will be acting as an intermediary and will have to send reports for each reporting period How to send reports to HMRC Following the end of the first reporting period from 6 April to 5 July 2015 you will have until 5 August 2015 to send your first report to HMRC. Reports will then be required 3 monthly thereafter. You must use HMRC's report template to create the reports. HMRC provide an online service for you to upload and send your report. The service uses your PAYE reference and Accounts Office reference from when you sign in to the service as part of the report. When you use the service, you have to state that the information in the report is correct before you can send it to HMRC Penalties If your report is late, incomplete or incorrect you may be charged a penalty. Automatic penalties have been introduced for not sending a report or for sending a late report. These are given based on the number of offences in a 12-month period. These are: first offence second offence 1,000 - third and later offences If there are 12 months or more between offences, you will only be charged 250 for the first offence in the new 12-month period Monthly Tax Update Webinar April 2015 Page 12

13 Where there is continued failure to send reports or send reports late you may receive a penalty every day that you don't send a report. There is a new appeal process for these new penalties. For incomplete and incorrect reports, manual penalties may apply on a case-by-case basis. If you replace a report before the deadline of the next reporting period without being asked to, HMRC will consider this when they decide if you have to pay a penalty Information that should be included in the report If you are responsible for sending the report to HMRC, you should include: your full name, address and postcode the worker's personal details the engagement and payment details You may receive a penalty if your reports are incomplete or incorrect Worker details These are the personal details of the workers, including partners within a partnership and limited company directors, who personally provided their services to the client. These details must be included no matter how many intermediaries are involved in supplying the worker to the client. The intermediary sending the report must get these details from the worker or from any other intermediary that supplied the worker. You should include each worker's: full name, address and postcode National Insurance number - if they have one and you don't know their date of birth and gender date of birth and gender - if they don't have a National Insurance number Engagement and payment details You must select the reason why you didn't operate PAYE on the workers payments from these options: A: Self-employed B: Partnership C: Limited liability partnership D: Limited company including personal service companies E: Non-UK engagement F: Another party operated PAYE on the worker's payments If more than one reason applies select the option that comes first on the list. For example, if A and E both apply, select A. You should also include the: worker's unique taxpayer reference - if they are self-employed or a member of a partnership start date of work with client end date of work with client - if there is one The start date is the first date that a worker provides their personal services to a client for which they are paid. The end date is the last date that a worker provides their services to a client for which they are paid. Where the worker's services are provided on different occasions to a single client in a reporting period the payments should be combined into a single figure Monthly Tax Update Webinar April 2015 Page 13

14 Where the worker's services are provided on different occasions to more than one client in a reporting period, you can either: combine the engagements into a single record with a single payment provide a separate line and payment for each client If a bureau is used to pay another party on the worker's behalf the name of the company or partnership should be reported, not the bureau. If the worker was engaged to do the work and their payments have not been reported to HMRC using RTI, any worker engaged through options A to E, you must also include: total amount paid for the worker's services - this is the total payment that you contracted for the worker's services including any expenses and VAT currency - this must be given in Great British pounds (GBP) or euros (EUR) and if the worker was paid in another currency it should be converted into Great British pounds or euros using HMRC exchange rates whether or not VAT has been charged on the payment the full name or trading name and address of who the intermediary paid for the worker's services - this may be the worker's company or partnership Companies House registration number - only if the worker was engaged to do the work through a limited company (option D) What This Means For A Worker If you use an intermediary or agency to get work you aren't usually considered an employee of the client or intermediary because you don't: have a contract with the client do any work for the intermediary An intermediary, or any third party that has a contract with a client that results in you doing work for the client, must treat you as their employee for Income Tax and National Insurance purposes when certain conditions are met. The intermediary is responsible for operating Pay As You Earn (PAYE) and Income Tax and National Insurance will be deducted from your payments where those conditions apply. Because of these changes, you may have to provide the intermediary with your: name address and postcode National Insurance number or gender and date of birth unique taxpayer reference (UTR) number This allows the intermediary to complete and send legally required reports to HM Revenue and Customs about workers they don't operate PAYE for. Any payments you receive for that work where PAYE was operated must be treated as employment income for Income Tax and National Insurance purposes. If you are not usually treated as an employee for the other work you do, you'll need to keep records of the payments you received where PAYE was operated and include them on your Self Assessment return. This makes sure you receive credit for any Income Tax and National insurance deducted by the intermediary, and you only pay the correct amount due overall. 2.7 Revised SP D12 Partnership CGT The computation of capital gains made by members of a partnership is set out in Statement of Practice D12 which is regularly updated when the CGT rules change. However there was no revision of the statement of 2020 Monthly Tax Update Webinar April 2015 Page 14

15 practice following the introduction of entrepreneurs relief. Following a review by the Office of Tax Simplification the latest draft was issued in March 2015: D12: PARTNERSHIPS This statement of practice was originally issued by HMRC (previously Inland Revenue) on 17 January 1975 following discussions with the Law Society and the Allied Accountancy Bodies on the Capital Gains Tax treatment of partnerships. This statement sets out a number of points of general practice which have been agreed in respect of partnerships to which TCGA 1992 s59 applies. The enactment of the Limited Liability Partnership Act 2000 created, from April 2001, the concept of limited liability partnerships (as bodies corporate) in UK law. In conjunction with this, new Capital Gains Tax provisions dealing with such partnerships were introduced through TCGA 1992 s59a. TCGA1992 s59a(1) complements TCGA 1992 s59 in treating any dealings in chargeable assets by a limited liability partnership as dealings by the individual members, as partners, for Capital Gains Tax purposes. Each member of a limited liability partnership to which TCGA 1992 s59a(1) applies has therefore to be regarded, like a partner in any other (non-corporate) partnership, as owning a fractional share of each of the partnership assets and not an interest in the partnership itself. This statement of practice was therefore extended to limited liability partnerships which meet the requirements of TCGA1992 s59a(1), so that capital gains of a limited liability partnership fall to be charged on its members as partners. Accordingly, in the text of the statement of practice, all references to a partnership or firm include reference to limited liability partnerships to which TCGA1992 s59a(1) applies, and all references to partner include reference to a member of a limited liability partnership to which TCGA1992 s59a(1) applies. For the avoidance of doubt, this statement of practice does not apply to the members of a limited liability partnership which ceases to be fiscally transparent by reason of its not being, or it no longer being, within TCGA 1992 s59a(1). In Budget 2013 the Government asked the Office of Tax Simplification (OTS) to carry out a review of ways to simplify the taxation of partnerships. The OTS published its interim report in January 2014 and its final report in January OTS concluded that as Statement of Practice D12 provides a reasonable result in most circumstances, it should be left essentially as it is, but that some text should be rewritten to replace out of date language and to replace some content which was obsolete. The recommendations made by OTS have been implemented in this revision of the statement of practice. 1. Valuation of a partner s share in a partnership asset Where it is necessary to determine the market value of a partner's share in a partnership asset for Capital Gains Tax purposes, it will be taken as a fraction of the value of the total partnership interest in the asset without any discount for the size of his share. If, for example, a partnership owned all the issued shares in a company, the value of the interest in that holding of a partner with a one-tenth share would be one-tenth of the value of the partnership's 100 per cent holding. Guidance and an example concerning section 1 are available in HMRC s Capital Gains Manual at CG Disposals of assets by a partnership Where an asset is disposed of by a partnership to an outside party, each of the partners will be treated as disposing of his fractional share of the asset. In computing gains or losses the proceeds of disposal will be allocated between the partners in the ratio of their share in asset surpluses at the time of disposal. Where this is not specifically laid down, the allocation will follow the actual destination of the surplus as shown in the partnership accounts; regard will of course have to be paid to any agreement outside the accounts Monthly Tax Update Webinar April 2015 Page 15

16 If the surplus is not allocated among the partners but, for example, put to a common reserve, regard will be had to the ordinary profit sharing ratio, which is likely to be indicative in the absence of a specified assetsurplus-sharing ratio. Expenditure on the acquisition of assets by a partnership will be allocated between the partners according to the same principles at the time of the acquisition. This allocation may require adjustment if there is a subsequent change in the partnership sharing ratios (see section 4). Guidance and an example concerning section 2 are available in HMRC s Capital Gains Manual at CG Partnership assets divided in kind among the partners Where a partnership distributes an asset in kind to one or more of the partners, for example on dissolution, a partner who receives the asset will not be regarded as disposing of his fractional share in it. A computation will first be necessary of the gains which would be chargeable on the individual partners if the asset had been disposed of at its current market value. Where this results in a gain being attributed to a partner not receiving the asset, the gain will be charged at the time of the distribution of the asset. Where, however, a gain is attributed to a partner receiving the asset concerned there will be no charge on distribution. Instead, the gain is effectively deferred by reducing his Capital Gains Tax cost by the amount of his gain: the cost to be carried forward will be the market value of the asset at the date of distribution less the amount of gain attributed to him. The same principles will be applied where the computation results in a loss. Guidance and an example concerning section 3 are available in HMRC s Capital Gains Manual at CG27400: Example A A and B carry on a business in partnership and hold equal interests in partnership assets. The partnership owns a freehold property which cost 400,000. On the dissolution of the partnership the property was distributed to Partner B. The market value of the property at the time of the distribution was 640,000. The chargeable gain arising on the disposal by A of his fractional interest in the asset at the time of the distribution and the notional gain arising on B s fractional interest in the asset are computed as follows: Partner A Partner B Disposal proceeds based on market value 640,000 x 50% 320, ,000 Less acquisition cost 400,000 x 50% 200, ,000 Chargeable Gain 120,000 Notional Gain 120,000 Partner A The gain accruing to Partner A, 120,000, will be chargeable at the time of the distribution. Partner B 2020 Monthly Tax Update Webinar April 2015 Page 16

17 The notional gain accruing to Partner B is not chargeable as the effect of the distribution is that his interest in the asset has increased. His CG base cost on a future disposal of the property will be the market value of the asset at the time of the distribution reduced by the notional gain: Market value of asset 640,000 Notional gain on distribution 120,000 CG base cost 520,000 Note that Partner B acquired a 50% interest in the asset for 200,000 on its acquisition by the partnership. At the time of the distribution he acquired a further 50% interest for an amount equal to the disposal consideration taken into account for Partner A, ie 320,000. His total acquisition cost is therefore 520, Changes in partnership sharing ratios An occasion of charge also arises when there is a change in partnership sharing ratios, including changes arising from a partner joining or leaving the partnership. In these circumstances a partner who reduces or gives up his share in asset surpluses will be treated as disposing of part of the whole of his share in each of the partnership assets and a partner who increases his share will be treated as making a similar acquisition. Subject to the qualifications mentioned at sections 6 and 7 below, the disposal consideration will be a fraction (equal to the fractional share changing hands) of the current balance sheet value of each chargeable asset, provided there is no direct payment of consideration outside the partnership. In certain circumstances the calculation of the disposal consideration by reference to the current balance sheet value of the asset will produce neither a gain nor a loss. This will occur where the disposal consideration is equal to the allowable acquisition costs and is likely to arise where the partners CG base costs are based on an amount equal to the balance sheet value of the asset. However, this outcome is unlikely to arise on a change in sharing ratios where, for example, an asset has been revalued in the partnership accounts, or where a partner transferred an asset to the partnership for an amount that is not equivalent to the CG base cost, or where the partners CG base costs were determined in accordance with S171 TCGA 1992, rather than on the cost of the asset to the partnership. A partner whose share in a partnership asset reduces will carry forward a smaller proportion of cost to set against a subsequent disposal of his share in the asset and a partner whose share increases will carry forward a larger proportion of cost. The general rules in TCGA92/S42 for apportioning the total acquisition cost on a part-disposal of an asset will not be applied in the case of a partner reducing his asset-surplus share. Instead, the cost of the part disposed of will be calculated on a fractional basis. Guidance and an example concerning section 4 are available in HMRC s Capital Gains Manual at CG27500 and CG Example B - No gain/no loss The sharing ratios for a partnership between A and B were: Partner A 60% Partner B 40% On the admission of Partner C the partnership sharing ratios were changed to: Partner A 50% Partner B 30% Partner C 20% The current balance sheet value of the partnership s only chargeable asset was 200,000. Partner C made direct payments of 10,000 to each of Partners A and B for his acquisition of a 20% interest in the asset Monthly Tax Update Webinar April 2015 Page 17