Private Client Briefing

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1 chartered accountants & tax advisers Private Client Briefing Autumn 2018 Articles in this edition Requirement to Correct Late payment interest Non-UK domiciled individuals Mixed Fund Cleansing deadline approaching Beneficial ownership of UK property Extension of UK CGT to commercial property for non-residents Non-residents selling UK residential property HMRC s Civil Information Powers Making Tax Digital where are we? Pension annual allowance Self-assessment late filing penalties to be replaced with new point system Disguised remuneration 2019 loan charge MVL liquidations and distribution of Directors Loan Accounts Changes to the Entrepreneurs Relief rules dilution HMRC s Trust Registration Service

2 Contents 2 Requirement to Correct 2 Late payment interest 3 Non-UK domiciled individuals Mixed Fund Cleansing deadline approaching 4 Beneficial ownership of UK property 4 Extension of UK CGT to commercial property for non-residents 5 Non-residents selling UK residential property 6 Changes to the Entrepreneurs Relief rules dilution 7 HMRC s Civil Information Powers 8 Making Tax Digital where are we? 9 Pension annual allowance 10 Self-assessment late filing penalties to be replaced with new point system 11 Disguised remuneration 2019 loan charge 12 MVL liquidations and distribution of Directors Loan Accounts 12 HMRC s Trust Registration Service Welcome to our Autumn 2018 Briefing for Private Clients After a hot summer, we await confirmation of the Brexit deal (or is that no deal?) and the next Budget. In the meantime, the Requirement to Correct, amendments to the penalty regime, and additional proposed information powers for HMRC add further complexity for taxpayers. There s additional compliance too for owners of UK property, but planning opportunities are still available for non-uk domiciled individuals and members of UK pensions schemes. Our Briefing summarises the key issues tax payers should consider and on all matters your haysmacintyre advisers are available to assist you. Katharine Arthur Head of Tax, Partner T E karthur@haysmacintyre.com Follow on

3 Requirement to Correct The Worldwide Disclosure Facility, which is set to close by 30 September 2018, is the final opportunity afforded by HMRC to correct one s UK tax position relating to offshore matters and take advantage of a more favourable penalty regime. Non-UK domiciled individuals Mixed Fund Cleansing deadline approaching From 1 October, the Requirement to Correct (RTC) will apply and failure to disclose by 30 September 2018 could result in a maximum penalty of 200% (minimum 100%) of the tax liability. In the most serious of cases there could be an additional penalty of up to 10% of the value of the relevant offshore asset and having your details named and shamed on a public website. Whilst Income Tax, Capital Gains Tax and Inheritance Tax are the main focus for RTC, all other tax affairs should be brought up to date. How far back you need to correct will depend on the relevant behaviour it could be four years (non-careless), six years (careless) or 20 years (deliberate). The only defence is where a person has a reasonable excuse not to correct. The definition of reasonable excuse is extremely narrow and even excludes instances where professional advice had been applied. Many countries are now sharing information and so HMRC are likely to be armed with details of offshore income and gains of UK resident persons. RTC will not only tackle offshore evasion, but will also be relevant to many common technical aspects where disclosures are required, such as: Remittances of offshore income and gains Purchasing UK assets with foreign income UK source income in offshore accounts Benefits received from offshore trusts. Individuals, companies and trustees with offshore interests such as income, assets, activities or transfers, should review their affairs. Late payment interest HMRC have increased the interest they charge for the late payment of any tax by 0.25% to 3.25% with effect from 21 August 2018, following on from the Bank of England s increase to the base rate. You won t be surprised to find out that the rate for any repayment supplement paid by HMRC stays unchanged at 0.5%, where it has remained since 29 September HMRC justifies this by arguing that they cannot pay a commercial rate as it would encourage taxpayers to overpay in the hope of getting a better interest rate from HMRC than from their bank. Kiran Chotai Private Client Tax Manager T E kchotai@haysmacintyre.com The concept of deemed domicile was introduced for income tax and capital gains tax from 2017/18 onwards. As part of these provisions, non-domiciliares: if they are caught by the deemed domicile 15 year rule in 2017/18 can rebase their foreign chargeable assets for Capital Gains Tax (CGT) purposes as at 5 April 2017 and have a one-off opportunity to clean up existing mixed funds. Once a person becomes deemed domiciled for income tax and CGT, they are taxed on the arising basis. Due to the way the mixed fund rules work, non-domiciliaries approaching the date on which they become deemed domicile would find it expensive to reorganise their affairs, as the most highly taxed constituent of that mixed fund is deemed to be remitted first. The Government acknowledged these consequences, stating:... an individual with a mixed fund will find it difficult to bring any money from the fund into the UK without paying tax at their top rate of tax when they do so. For some, this will be a punitive outcome, as the fund will be comprised of a mix of both foreign income which would be taxable at the highest rate of tax as well as money that would be taxable at a lower rate; for example, foreign gains which would be taxed at a top rate of 28% or clean capital, which would not be taxable at all even when remitted. Therefore, there is a one-off opportunity for non-domiciliaries with mixed funds to separate them into their constituent parts. Individuals have until 5 April 2019 to complete this clean-up of mixed funds. The detailed rules of how this works in practice can be quite complex, and taking advice is recommended. Trevor D Sa Tax Director T E td sa@haysmacintyre.com haysmacintyre Private Client Autumn 2018 Briefing 2018 haysmacintyre Private Client Autumn 2018 Briefing 3

4 Beneficial ownership of UK property The government has announced plans to introduce a public register of the beneficial ownership of UK property by foreign companies. The aim behind this is to provide greater transparency on the ultimate ownership of property and to reduce incidents of money laundering and fraud, particularly in the London property market. Non-residents selling UK residential property The register, which will be similar in operation to the Persons with Significant Control register of corporate beneficial ownership, will be operated by Companies House and will apply to all foreign entities except governments and public bodies. All freehold property and any leases longer than seven years will need to be registered. Foreign owners will have a duty to keep the register up to date with any changes and will have to confirm annually that the published details remain correct. The Government is considering criminal sanctions for non-compliance, but any entity that has not registered will be prohibited from transferring title or grant new long leases. There will be an introductory period lasting 18 months to allow foreign owners to register for the first time and it is expected that the register will be operational from Any company that does not wish to register its owners will need to dispose of the property before the end of this introductory period otherwise future disposals or property transfers will be prohibited. Extension of UK CGT to commercial property for non-residents Following on from the changes introduced in April 2015 that made non-residents liable to Capital Gains Tax on the sale of UK residential property, the scope of tax will now be extended to cover gains made by non-residents on commercial property as well. Contracts exchanged on or after 6 April 2019 will be liable to tax. The forthcoming extension of Capital Gains Tax (CGT) to commercial property for non-uk residents is perhaps a good opportunity to remind everyone that it has applied to the disposal of residential property since April Not only that, but anyone selling or transferring a property must report the transaction to HMRC within 30 days of completion even when there is no gain or any tax to pay. Where tax is due, in some circumstances it is also necessary to make the payment within the same 30 day notice period. The property revaluation rules introduced in April 2015 mean that only the growth in value since that date will be liable to tax. Non-resident taxpayers can opt for a different method of calculating the gain if the property was worth less in 2015 than the price they paid to acquire it in earlier years. Failure to report within the 30 day period is liable to a fine starting at 100 which increases the longer the report is delayed. There have been circumstances where the penalties have been overturned on appeal to the Tax Tribunal, however the process can be slow and expensive. Non-residents will be allowed to opt for re-basing, effectively meaning that only the growth in value after April 2019 will be taxable. Gains will be taxed at 10% or 20% depending on the taxpayer s total UK income and gains. The ability to deduct the annual exempt amount (currently 11,700) will depend on the taxpayer s personal circumstances and the relevant tax treaties the automatic right of EU citizens to the annual exemption will be subject to confirmation after the Brexit negotiations are complete. In addition to the widening of the tax scope to include commercial property, sellers will also have to obey the rules on reporting sales to HMRC. As is currently the case with residential property, non-resident owners will have 30 days following completion to disclose the sale, calculate the gain and potentially pay any tax due, although this can be deferred if the taxpayer is already within the self-assessment tax system. Mark Pattenden Private Client Tax Partner T E mpattenden@haysmacintyre.com haysmacintyre Private Client Autumn 2018 Briefing 2018 haysmacintyre Private Client Autumn 2018 Briefing 5

5 Changes to the Entrepreneurs Relief rules dilution HMRC s Civil Information Powers Entrepreneurs Relief (ER) is intended to encourage the owners of successful companies to grow their businesses, but owners who raise extra funds to grow can find that doing so means they lose their entitlement to this relief. Measures to alleviate this problem will come into effect on 6 April 2019, so business owners need to take great care with the timing of any new fundraising. HMRC issued a consultation paper in July 2018, seeking views on the efficiency and effectiveness of its current powers to demand information and documentation from taxpayers and third parties, and on specific improvements. What has happened? On 6 July 2018, draft legislation was published for inclusion in Finance Bill 2019 to allow investors to retain a measure of Entrepreneurs Relief when the result of issuing shares to other investors is that their own shareholding falls below 5% (the minimum holding that qualifies for Entrepreneurs Relief). At the moment, such a share issue would mean that entitlement to Entrepreneurs Relief is lost completely, even for the period when the qualification conditions were met. From April 2019, this will change. Relief will be preserved up to the date on which the share dilution occurs. This is achieved by allowing an individual to treat a gain as arising immediately before the share issue, based on the market value of the shares at that date. This gain will qualify for Entrepreneurs Relief. The gain from the date of dilution to the ultimate sale of shares will be chargeable at normal Capital Gains Tax (CGT) rates without the benefit of Entrepreneurs Relief. In itself, this only gives a partial solution to the problem, because the deemed gain gives rise to a dry charge - ie no cash is available to pay the tax so it will also be possible to delay the time that the gain is taxed until the ultimate sale of shares. Again, this is not compulsory, but it is hard to think of reasons why people would not do this. Important points relating to this change are: It only applies when the shares that cause the dilution are subscribed for in cash The subscription must take place on or after 6 April 2019 Relief will not be available where tax avoidance is involved The valuation of the shares immediately before the share subscription can be based on the value of the whole company it is not necessary to apply the discounts normally required in valuing minority interests The relief is not automatic and must be claimed. The time limit for the election to crystallise the gain at the point of dilution is 31 January in the year following the year of disposal. For the election to defer the gain becoming chargeable until the ultimate sale of the shares, the limit is four years from the end of the tax year in which the dilution occurred. Practical implications This is a welcome change. Although not that many people will be affected, it will be of real benefit to those individuals who have faced the choice between attracting additional funding at the cost of a loss of tax relief or not raising the funding so that they can retain the benefits of Entrepreneurs Relief. The ability to use an undiluted valuation basis in computing the notional gain is a welcome change from the original proposals. Without it, the gain on which Entrepreneurs Relief was due would in many cases have been so small that the relief would have ended up having negligible financial benefit. The immediate action point is to ensure that the timing of any new share issue is managed. If it is commercially possible to delay the issue of new shares until 6 April 2019, this will enable shareholders to access the new regime. The proposed changes being considered include: Aligning the process for third party information notices with that for taxpayer notices ie remove the requirement for HMRC to seek approval from the Tax Tribunal for third party notices. Introducing a new information notice specifically for seeking information from banks (including bank statements, information about transactions on the account and information on legal and beneficial ownership of the account) this new notice would not require Tribunal approval and there would be no right of appeal. Facilitating requests to be made by HMRC on behalf of overseas revenue authorities. Allowing HMRC to issue notices to obtain information for debt collection purposes (currently, notices can only be issued for information reasonably required for checking a taxpayer s tax position). Clarifying the rules on daily penalties for failure to comply. Placing an obligation on the third party recipient of an information notice not to inform the taxpayer about the notice, in certain specified circumstances. These additional/amended powers, if enacted, could become effective from as early as April HMRC invites comments by 2 October Katharine Arthur Head of Tax, Partner T E karthur@haysmacintyre.com Trevor D Sa Tax Director T E td sa@haysmacintyre.com haysmacintyre Private Client Autumn 2018 Briefing 2018 haysmacintyre Private Client Autumn 2018 Briefing 7

6 Making Tax Digital where are we? Whilst Making Tax Digital (MTD) for Income Tax has been delayed until April 2020 at the earliest, MTD comes into effect for VAT on 1 April All individuals/entities which are mandatorily VAT registered will be subject to MTD from their first VAT return starting on or after 1 April This means that for organisations with calendar quarter VAT returns, their first affected return will be for the period ending June For those whose returns end in April, the first affected return will be for the period ending July, and for those with a return ending in May the first affected return will be for the period ending in August. For entities on monthly returns the first affected return will be the April return. MTD: what is it? MTD requires entities which are subject to it to keep certain records in a digital format and submit their returns digitally. Please note this is not the same as submitting returns electronically as is now the case. Returns must be submitted via an Application Programming Interface (API) which takes the return figures automatically from your software, as opposed to you keying in the totals for the nine boxes on your VAT return. Invoices do not need to be kept in a digital format or be scanned in to your software. HMRC refer to the software as functional compatible software. This need not be a single programme but can include a set of software programmes including spreadsheets which record and preserve digital information, provide to HMRC information and VAT returns from data held in those records by using the API and which can receive information back from HMRC via the API, eg confirmation that a return has been submitted. The key point is that the information must be digitally linked, ie once data has been input any further transfer, recapture or modification of that data must be done digitally. It is not possible to take figures from your accounting software and manually key it in. This will include spreadsheets, though for the first year it will be possible to cut and paste information on a spreadsheet and enter it elsewhere. What records must be kept digitally? You must have a digital record of your business name, the address of your principal place of business, your VAT registration number and any VAT accounting scheme which you use. For each supply that you make you must record the time of supply, the value of the supply (exclusive of VAT) and the rate of VAT charged. For purchases, again you record the time of supply, the value of the supply (excluding VAT) and the amount of input tax that you will claim. This only includes purchases which end up on the VAT return so you would not need to include salaries, for example. To support each VAT return that you make, the functional compatible software must contain: the total output tax you owe on sales; the total tax you owe on acquisitions from other EU Member States; the total tax you are required to pay under a reverse charge procedure; the total input tax you are entitled to claim on business purchases; the total input tax you can claim on acquisitions from other EU Member States; the total tax that needs to be paid or you are entitled to reclaim following a correction or error adjustment and any other adjustment allowed or required. What to do next? Speak to your software provider as soon as possible to find out what they have done to comply with MTD. Where haysmacintyre prepares and submits your VAT returns, we will discuss your record keeping requirements with you. We are working with software providers to ensure our software is fully MTD compliant in advance of the April 2019 deadline. Katharine Arthur Head of Tax, Partner T E karthur@haysmacintyre.com Pension annual allowance Changes to pensions annual allowances over the last few years have severely limited the amount higher and additional rate taxpayers can contribute to their schemes. Although the annual allowance is officially 40,000, this headline rate tapers away for those earning more than 150,000. At the upper level, the combined amount of personal and employer pension contributions cannot exceed 10,000 for anyone with income over 210,000, otherwise they may be liable to a personal tax charge effectively making their employer pension contributions a taxable benefit. Due to the complex rules in place, anyone earning more than 110,000 will need to check their position closely to ensure they do not inadvertently create a liability. It is possible to contribute more than the annual allowance if you haven t fully utilised your annual amounts from previous years. Surplus allowance can be carried forward three years, so anything still available from the 2015/16 tax year must be used by 5 April 2019 otherwise it will be lost. Please speak to your usual haysmacintyre contact if you would like to check your position and whether you can make additional pension contributions. Mark Pattenden Private Client Tax Partner T E mpattenden@haysmacintyre.com haysmacintyre Private Client Autumn 2018 Briefing 2018 haysmacintyre Private Client Autumn 2018 Briefing 9

7 Self-assessment late filing penalties to be replaced with new point system The draft 2019 Finance Bill includes a new points-based penalty system for certain regular (eg monthly, quarterly and annual) returns that are filed late. The introduction of a points system will operate in conjunction with HMRC s Making Tax Digital (MTD) initiative. If approved the measures will take effect from 1 April Disguised remuneration 2019 loan charge The changes will initially apply to regular VAT and Income Tax self-assessment obligations. Corporation tax is not currently included in the new regime, but it is the government s intention to extend the provisions to companies and other taxes in due course. At present, taxpayers who fail to submit their personal tax returns by 31 January each year are liable to instant 100 fines, which rises periodically the longer the return remains outstanding. Fines scrapped until penalty points are accrued The new points-based system will adopt a similar approach to the UK s driving licence points system, with a defined number of penalty points given where a regular tax filing is made late. The penalty points will depend on several factors. When a taxpayer is given penalty points this will not mean an automatic penalty will be levied. A penalty will only be levied when a pre-defined threshold has been reached. It is anticipated that one missed deadline will equate to one penalty point. Therefore a taxpayer will automatically receive a point each time a return is submitted late. Once they have received a certain number of points, penalties will be charged for any further returns which are submitted late. The points limit varies according to the nature of the return being considered, as shown in the table below: Submission frequency Penalty threshold Annual 2 points Quarterly (including Making Tax Digital) 4 points Monthly 5 points HMRC are unlikely to be suggesting, as with driving penalties, that if you collect enough points you will be banned from paying tax, but the liability to penalties will remain until a fixed period of two years good compliance by the taxpayer has elapsed. Notify taxpayer HMRC will have to notify a taxpayer a point has been incurred before their next return is due as indicated below: Submission Time limit for frequency notifying a point Annual 12 months Quarterly (including Making Tax Digital) 3 months Monthly 1 month The idea behind the new scheme is to avoid penalties for oneoff bona fide errors. There will also be a new process under which penalties and points can be appealed and reviewed. HMRC will publish further details in due course. Jenny Gotts Tax Manager T E jgotts@haysmacintyre.com A new tax will be introduced from April 2019 affecting loans still outstanding from previous disguised remuneration arrangements. Such schemes were popular in the 1990s and 2000s and often involved employers transferring cash or assets to employee benefit trusts (EBTs) as a means of providing emoluments to employees and avoid immediate payments of tax and national insurance. The law was subsequently changed to stop employers claiming a corporation tax deduction without a corresponding tax on the receipt by the employee, however many loans remained outstanding. For those with loans still outstanding, there are several courses of action available. Firstly, contact HMRC and see if an opportunity is available to reach a final settlement. Secondly, the loan could be repaid if no loan is outstanding there is no benefit for the new tax to charge. Thirdly, do nothing and pay the tax, remembering of course that this is based on the full amount of the accumulated balance outstanding since the arrangements began. This is a complex area and a full review of your position will be necessary before deciding on how to proceed. Mark Pattenden Private Client Tax Partner T E mpattenden@haysmacintyre.com haysmacintyre Private Client Autumn 2018 Briefing 2018 haysmacintyre Private Client Autumn 2018 Briefing 11

8 MVL liquidations and distribution of Directors Loan Accounts Notes New targeted anti-avoidance rules (TAAR) aiming to combat cases of phoenixism apply to distributions made in the process of winding up companies on or after 6 April 2016 where conditions are met. Phoenixism is the practice whereby a company is liquidated and subsequently its business is carried on under the same or broadly the same ownership via a new entity. This may be for commercial/legal reasons or to achieve a tax saving from obtaining capital rather than income treatment on company reserves. For distributions made before the TAAR came into effect on 6 April 2016, phoenix arrangements may have been caught in any case by the Transactions in Securities (TiS) legislation in certain circumstances. In addition, HMRC might (both before and after 6 April 2016) contend that in such arrangements the trading company requirement for Entrepreneur s Relief (ER) is not met. This would be on the basis that accumulated cash reserves represent non-trading assets on the company s balance sheet. Of course, there are also other important measures that may point towards the company being a trading company (such as sales, profits/income and employee/management time). However, if ER is not available, the default CGT rate is now only 20%. HMRC are now seeking to tighten the rules further. Previously, where a company went into liquidation with an overdrawn loan account, an in specie distribution of that loan account, effectively clearing it out of the liquidation proceeds had always been accepted as a capital payment. HMRC are now seeking to tax such distributions as income and therefore taxed at dividend rates, up to 38.1%. If possible, it would appear to be beneficial for the director to repay the overdrawn loan account (with short term borrowing if necessary) pending return of the cash as a capital distribution as part of the winding-up. Trevor D Sa Tax Director T E td sa@haysmacintyre.com HMRC s Trust Registration Service All trusts, whether UK or offshore, which have a UK tax liability (Income Tax, Capital Gains Tax, Stamp Duty etc) are required to register with HMRC. This is separate and in addition to the requirement to register a trust for self-assessment. Due to further delays with HMRC s online system, it is not yet possible to carry out this annual review: it may be summer 2019 before the facility is fully operational. We will update Trustees as soon as we know more. After a number of glitches with HMRC s online systems, most trusts were registered by 5 March In addition to the initial registration, there is an annual requirement to check and amend the registration details, with the first deadline for this on 31 January Katharine Arthur Head of Tax, Partner T E karthur@haysmacintyre.com haysmacintyre Private Client Autumn 2018 Briefing 2018 haysmacintyre Private Client Autumn 2018 Briefing 13

9 haysmacintyre 10 Queen Street Place London EC4R 1AG T F E marketing@haysmacintyre.com About haysmacintyre haysmacintyre is an award winning firm of chartered accountants and tax advisers in the UK, based in central London. With 33 partners and over 240 staff, we are among only a few firms which bridge the gap between the largest firms which can accommodate most services but may lack the personal touch, and smaller firms which may be able to provide only a narrow range of services. International haysmacintyre is a member of MSI Global Alliance (MSI), which we co-founded over 20 years ago, with the aim that it would support our clients international business operations and growth plans. Now MSI is the seventh largest alliance in the world, involving over 250 medium sized legal and accounting firms based across more than 100 countries. Being part of MSI allows us to offer our clients expert guidance and support internationally through working with our alliance colleagues. Copyright 2018 haysmacintyre. All rights reserved. haysmacintyre is registered to carry out audit work and regulated for a range of investment business by the Institute of Chartered Accountants in England and Wales. A list of partners names is available for inspection at 10 Queen Street Place, London EC4R 1AG. Disclaimer: This publication has been produced by the partners of haysmacintyre and is for private circulation only. Whilst every care has been taken in preparation of this document, it may contain errors for which we cannot be held responsible. In the case of a specific problem, it is recommended that professional advice be sought. The material contained in this publication may not be reproduced in whole or in part by any means, without prior permission from haysmacintyre. Finalist: Tax Team of the Year Winner: Audit Team of the Year Top 15 auditor to quoted companies in Advisor Ranking Listing An eprivateclient top accountancy firm Best Hedge Fund Manager Audit and Accountancy Firm 2018 & Most Trusted Tax Advisory Specialists - UK