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Enquiries into Tax Returns

 A series of compliance pages dealing with tax return enquiries is now available on the Revenue website. 

The enquiry pages are aimed at helping people who deal with their own tax affairs to understand the process of an enquiry.  We would however strongly advise you to contact a professional adviser if your return is under enquiry.

Proceeds of Crime Act

A confiscation order awarded against a Manchester businessman following his conviction for tax fraud has been upheld by the court of appeal..

 Under the terms of the confiscation order, the judge ruled that the amount should reflect the full value of the diverted funds, £1,068,441 as opposed to the £450398, which was the amount of tax and interest lost to the Crown.

Employees coming from abroad to work in the United Kingdom

Total emoluments between UK and non-UK duties for a non-UK resident, or a not ordinarily UK resident, employee have to be allocated.

If the employee is resident in the UK but not ordinarily resident then emoluments apportioned to the non-UK duties are chargeable to the extent they are remitted to the UK.

If the employee is not resident in the UK then there is no charge in respect of emoluments for overseas duties.

Emoluments for such individuals in respect of duties performed in the UK are chargeable.

If emoluments cannot be directly attributed to either UK or overseas duties then they must be apportioned and this is to be done on a time apportionment basis depending on the number of days worked.

Days worked overseas are days that have been spent outside the UK substantially performing the duties of the employment.

In respect of any particular day you have to decide first whether the day was spent substantially performing the duties of the employment and then, secondly, where those duties have been performed.   There can be complications in determing whether a day is applicable to UK or non-UK duties.

If you require any assistance in this area please give us a call.

Payments in lieu of notice (reminder)

The basic distinction is between “Payments in lieu of notice” payments that relate to the employment, and are fully taxable, and payments that are for breach of contract. The latter benefit from the £30,000 exemption and are not liable to NIC. A PILON is fully taxable and is also liable to NIC. In practice the distinction between the two types of payment can be very difficult to distinguish but the consequences are significant.

If a settlement is broadly, the same in value as exercise of the discretion would have produced it is likely to be viewed as made in exercise of that discretion. The payment does not have to be made in either the sum, or in the form, provided for by the contract for it to held to be made by way of exercise of the employer’s discretion.
 A payment resulting from a decision not to exercise discretion would be expected to have characteristics normally associated with compensation or damages for breach of contract. So compensation for breach of contract would reflect the fact that the first £30,000 is tax free and there is no NIC liability. A decision by an employer not to exercise its discretion should be evidenced in writing.

Any employer making an employee redundant needs to consider carefully the nature of any payment it proposes to make to the employee and, if possible, document the circumstances surrounding the payment.

If you require any assistance in this area please contact us.

Employee Remuneration Packages – Loans in  ‘soft’ currencies

There have been a number of schemes to pay bonuses in a tax free form and also free of NIC by using payments in soft currencies.

The employer makes a loan to an employee in a currency, which is expected to decrease significantly in value. When the loan is repaid the employee makes a significant gain in sterling terms and the employer receives, for example, the Turkish lire that it originally lent to the employee but which are now worth considerably less.

The Revenue has stated they believe they can deny tax relief for the exchange loss made by the employer.

For the employee s they have stated,  “A detailed investigation of all the facts surrounding the payment will be required in every case to determine the precise contractual arrangements.”

It is clear that the Revenue does not like the arrangements and will do everything in their power to harass users of the schemes to discourage others.

Married Couples: Unequal Shares in assets

Form 17 is used when married couples own property in unequal shares and elect to have income taxed in accordance with those unequal proportions rather than 50:50 standard split.

A new Form 17 has been issued. It also makes it clear that main joint bank and building society accounts are owned 50:50 and an election cannot normally be made to split the income in different proportions. This would only be the case if a couple has formally changed the legal basis on which they hold the account, for example by way of deed. In such a case they must submit the documentary evidence with Form 17 when they send it in to the Revenue.

New interest rates
 

The Inland Revenue has announced new rates of interest for underpaid and overpaid instalment payments of corporation tax, and early payments of corporation tax not due by instalments, in respect of accounting periods ending on or after 1 July 1999.

The rate of interest charged on underpaid instalment payments of corporation tax has changed from 5.00 per cent to 4.75 per cent.

The rate of interest on overpaid instalment payments of corporation tax, and on corporation tax paid early (but not due by instalments), has changed from 3.75% per cent to 3.5% per cent.

These rates will take effect from 17 February 2003
 

Pensions

In certain circumstances the Revenue have agreed that where an individual has been paying AVCs, he or she can he take the main scheme lump sum on retirement and the AVC lump sum later.

Congestion Charging and Tax

Details of the London congestion charging scheme and tax deductions, have been published on the Revenue’s website.

A fixed daily amount is payable if a car moves once or more inside the charging zone at any time during a day.

The probability is that in most cases some of the movements of the car will be in the actual performance of the duties of an employee but some will not.

It is not yet clear how this is dealt with by employers.
 

Incorrect PAYE code numbers

Employees have started to receive coding notices for 2003-04, some with incorrect figures for car and fuel benefit. Many will underpay tax as a result.

In many cases, the cars have been taxed at 15% of list price, irrespective of their CO2 rating. This is the same problem as last year, where inadequate data was held and the respective Inland Revenue departments did not liase with each other.

The fuel benefit has usually been included as 35% of £14,400, which is correct only if the CO2 rating is over 255 g/km.

Percentages for car and fuel should be the same, so clients' K-codes should usually be much higher.

Small Earnings Exception – National Insurance Contributions
 

Self-employed people expecting to earn below £4095 for 2003/04 can apply for a Small Earnings Exception (SEE) certificate to exempt them from paying Class 2 National Insurance Contributions.  A SEE certificate issued on registration of self-employment expires at the end of that particular tax year, but subsequent certificates are valid for three years. When a certificate expires, NICO automatically invites existing holders to apply for renewal and the renewal exercise is due to start during the first week in March.

If you wish to apply for a SEE please contact us.

Landfill Tax credit scheme

The following changes come into effect from 1 April 2003:

- Landfill site operators will not be able to claim credit in respect of contributions made to object c & cc projects after the 31 March 2003.

- The reduction of the maximum percentage credit of annual landfill tax liability for a landfill site operator from 20% to 6.5%.

-  All current contribution years will end on 31 March 2003 and from that date all operators’ contribution years will run from 1 April to 31 March every year.

- Environmental bodies will need to account separately for funds that were received in respect of contributions made before and after the end of March.

Share options awards and transfer pricing:

 The Special Commissioners have decided that if a UK company sets up an offshore Employee Share Option Scheme from which employees of overseas subsidiary companies can benefit, then the UK company needs to make a recharge to the overseas subsidiary under the transfer pricing legislation. The company is deemed to have provided “business benefits” within the meaning of the transfer pricing legislation. The transfer pricing adjustment must be at market value.

Proposed new legislation, a draft of which was published on 19 December 2002, giving companies a statutory right to a deduction in respect of the expense incurred on employee acquisitions of shares, may have an impact upon this issue.

The proposal is that the deduction will be equivalent to the difference between the market value of the shares at the time they are acquired and the amount payable by the recipient, or another, in respect of the shares.

This new statutory deduction will override any transfer pricing implications in the case of an employee of a UK company who acquires shares in a non-UK subsidiary.

Double Taxation Relief:

Australia has introduced a tax consolidation regime for groups of companies. The new regime is effective from 1 January 2003. This means that UK companies that receive a dividend from such a group of companies can aggregate relevant profits and tax for the purpose of calculating the rate of underlying tax that is attributable to the dividend.

Corporation tax

The value of the retail price index to be used for chargeable gains subject to corporation tax for January 2003 is 178.4.

Controlled Foreign Companies

The detailed guidance on the application of the Motive Test exemption for Controlled foreign companies will be issued on 24 February.

Substantial Shareholding Exemption (SSE)
 

If a shareholder company sells its shareholding in another trading company then any gain will be exempt, providing it has more than a 10% shareholding and the various other conditions for relief are satisfied.

But the exemption does not extend to contingent consideration.

So if part of the consideration is dependent on the company being sold achieving various profit targets, any further consideration payable is going to be taxable.

The right to receive further consideration will itself have to be valued and that value will be covered by the SSE exemption. So if this right is valued at £1/2 million that sum will be exempt. It will be set against the contingent consideration actually received, and the net amount will be fully taxable.

Refunds of Stamp Duty

Stamp duty was abolished in November 2001 on property sales of up to £150,000 in some of the poorest communities.

But, although the changes were announced over a year ago, there have been claims the new rules have not yet been properly introduced - meaning thousands of housebuyers have continued to pay the charge.

 
There appear to have been cases where solicitors had checked the postcode on the Inland Revenue internet site, but the information was out of date and the buyers were, in fact, entitled to claim a discount.

If you think you may have been affected please contact us.

Property valuations

The Royal Institute of Chartered Surveyors has issued a new Guidance Note on valuations for the purposes of Capital Gains Tax and Inheritance Tax.

In order to avoid a potential enquiry from the Revenue valuers should be instructed to carry out valuations in accordance with the guidance note. The Revenue recommends attaching a copy of the valuer’s report when a valuation is used in the computation of a chargeable gain included in a self-assessment return.

Relief against income for capital losses
 

Income tax relief for those who make a capital loss on the sale of shares newly-issued on the exercise of an option, may now be available following the Revenue’s Mansworth v Jelley note.

If an individual makes a capital loss on the sale of shares that he subscribed for in a qualifying trading company, then the loss can be offset against income, provided a claim is made within 1 year and 10 months of the end of the year of disposal.  The relief applies to shares in trading companies that are unquoted and carry on business wholly or mainly in the UK.

Those who have made a capital gains tax loss on the sale of shares that were issued to them on exercising an unapproved option, may be able to benefit from this relief. Those who have not yet exercised their options and/or have not yet sold their shares would do well to compute the likely gain or loss to see whether they are able to use this relief.

If you may be affected by this, please contact us for help.

VAT: treatment of services by financial advisers
 

A new  VAT Information Sheet sets out the VAT treatment of financial services, giving more information specifically for financial advisers. There has been no change to the VAT liability of financial advisers’ services – this information sheet expands on the advice already set out.

Reminder

In deciding the correct VAT liability of an adviser’s services, the key factor is the nature of the service provided rather than whether the financial adviser is paid by commission or fee. It is also important to consider whether the financial adviser is acting as an agent or intermediary in arranging a financial or insurance product and to look at the type of product being arranged.

In many cases, where an adviser is remunerated by commission the supply will be exempt from VAT. However, it does not necessarily follow that all 'commissions' are exempt; or that all 'fees' are taxable.

The provision of advice is taxable.  Therefore, if only financial advice is given VAT will be due.

The provision of intermediary services for arranging most financial and insurance products is exempt from VAT.

Intermediary services must contain three elements:

• Bringing together a party seeking a financial service with a party providing financial services,
• Acting between those parties;
• Undertaking work preparatory to the completion of a contract for the provision of financial services.

Work preparatory to the completion of a contract could include completing or assisting with the completion of application forms; checking completed application forms and forwarding forms to the financial services provider; making representations on behalf of one party or the other; and

Financial services include credit (including loans, mortgages, hire purchase, credit or conditional sale agreements); securities investment (including shares stocks, bonds, debentures, units in an authorised unit trust, PEPs and ISAs); payments and transfer services; currency; and insurance.

For insurance and transactions in securities, preparatory work is not necessary, and exemption can apply to the mere introduction of a person seeking, and someone providing, such a product.

In many cases, customers will receive advice, which in turn leads to their purchasing a financial or insurance product. In these cases, it is important to establish which of the two elements of service predominates. Where advice directly results in a customer taking out a financial or insurance product and all the criteria for intermediary services are met, the whole of the service – including the advice element – will be exempt from VAT. The advice is seen as ancillary to an overall exempt service of intermediation. If commission is received from the finance/insurance product provider, it is consideration for a separate exempt supply of intermediary services.

The financial adviser’s advice may outweigh the work done to arrange a contract.  In these circumstances, the intermediary service is ancillary to the advice, and VAT is due on the whole service. The predominant service in any supply is a question of fact and cannot be chosen solely to achieve the best VAT result.

Zero rated supplies

Medical services provided by GPs are exempt from VAT, and therefore most GP practices are not registered for VAT. In a recent case the Court of Appeal has ruled that when a dispensing doctor personally administers drugs to a patient, the supply and administration of the drugs is separate for VAT purposes from the doctor's VAT exempt services of medical consultation, diagnosis and prescription. When the drug is personally administered to a patient to whom the GP is authorised or required by the NHS to provide pharmaceutical services, NHS payments for the supply and personal administration of the drug are zero-rated. Customs have sought leave to appeal against this decision.

 
Pending the outcome of Customs’ application, and any subsequent appeal, medical practitioners may continue to treat the personally administered drugs and appliances as an integral part of their VAT exempt supplies of medical services. Customs do not require doctors to make any adjustment to the VAT treatment of past or present supplies of drugs as a result of the Court of Appeal judgment.

Any GP may, of course, choose to apply the Court’s judgment and to make a claim to Customs for the VAT incurred on personally administered drugs or appliances.

Extensive evidence that will be required to support a claim. It is also worth remembering that if Customs are successful in any appeal against this decision, they will require repayment of any sums recovered, with interest if appropriate

Flat rate scheme for small businesses

Journalists and Beauticians have been added to the list of those eligible to join the flat rate scheme.

To determine the flat rate for your business, look at the table below and decide which of the sectors most accurately reflects your business. You then apply the appropriate flat rate percentage to turnover to arrive at the VAT due under the flat rate scheme.

This is the table of flat rate percentages by trade sector.

Double Tax Convention: South Africa
 

The Double Taxation Convention between the United Kingdom and South Africa became active on 17 December 2002.

The provisions of the Convention will apply in the United Kingdom, from 1 April 2003 for corporation tax and from 6 April 2003 for income tax and capital gains tax; and in South Africa, from 1 January 2003.

The Convention replaces the existing Convention.

Double Tax Convention: Taiwan

The Double Taxation Agreement between the British Trade and Cultural Office, Taipei and the Taipei Representative Office in the United Kingdom, became active on 23 December 2002.

The provisions of the Agreement will apply in the United Kingdom, from 1 April 2003 for corporation tax and from 6 April 2003 for income tax and capital gains tax; and in Taiwan, from 1 January 2003.