da596022 ffd1 4abb 9267 55400dd9833d 800x380 - Examples when settlement legislation does not apply

Examples when settlement legislation does not apply

The settlement legislation seeks to ensure that where a settlor has retained an interest in property in a settlement that the income arising is treated as the settlor’s income for tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner. In general, the settlements legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved. 

However, in most everyday situations involving gifts, dividends, shares, partnerships, etc. the settlements legislation will not apply. For example, if there is no “bounty” or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income.

HMRC’s manuals provide the following two indicative examples of when the settlement legislation does not apply:

Outright gift to a spouse
Mrs L owns 10,000 ordinary shares in a FTSE 100 company. Those shares are worth £40,000. Mrs L gives those shares to her husband. Mr L is now entitled to all the dividends from the shares and can sell the shares if he wants and keep the proceeds. This is an outright gift of shares that are not wholly, or substantially, a right to income since they have a capital value and can be traded, so the settlements legislation does not apply.

Subscribed shares
Mr M is the sole director and owns all the 100 ordinary shares in M Limited, a small manufacturing company. The company employs 10 people and owns a small factory, a high street shop, tools fixtures and fittings, and three delivery vehicles. Mr M draws a salary of £30,000 each year and receives dividends of £20,000. Mr M then gifts 50 shares to his wife who plays no part in the business. Mr and Mrs M then each receive dividends of £10,000.

HMRC would not seek to apply the settlements legislation to the dividends received by Mrs M. This is because the outright gift of the shares cannot be regarded as wholly or substantially a right to income. The shares have capital rights, and the company has substantial assets so on the winding up or sale of the business the shares would have more than an insubstantial value.

Source: HM Revenue & Customs Tue, 01 Mar 2022 00:00:00 +0100
cb17ce42 155e 4ead bf3e 21e502898ea8 800x380 - Hobbies and artificial trades

Hobbies and artificial trades

HMRC uses a number of different measures to help determine whether an activity is a trade irrespective of whether the activity leads to a profit or a loss. This includes looking at whether an activity is a hobby or artificial trade.

HMRC manuals implore inspectors to critically examine claims that a trade exists where that claim may have been made to get relief:

  • that is only available to traders, such as loss relief, or
  • for the costs of a hobby, or
  • for investment losses, or
  • for capital expenses, particularly in group situations, by transmuting them into revenue deductions using an artificial trading company.

In particular, HMRC will consider whether a profit is an isolated event. A taxpayer who wants tax relief for losses, which are not, in truth, trading losses, may point to a profit in a particular year to support the trading assertion. HMRC is clear that this factor would normally carry little weight if that profit was an isolated event in an overall picture of continuing losses. For example, taxpayers using an artificial trade disguised as commercial activity in order to create losses and claim various loss reliefs.

Source: HM Revenue & Customs Tue, 22 Feb 2022 00:00:00 +0100
2694c357 c3ce 4243 b701 5a1309b0c592 800x380 - Preparing a charity annual return

Preparing a charity annual return

The Charity Commission requires that charities registered in England or Wales must send an annual return to report their income and expenditure. The deadline for charities with a standard 12-month accounting period ending on 31 December 2021 is 31 October 2022.

Not filing on time means that the charity will go into default with the information being displayed to the public on the charity register. The annual return is separate from the charity’s annual accounts and the charity tax return sent to HMRC.

A full annual return is required if either:

  • the charity’s income is more than £10,000
  • the charity is a charitable incorporated organisation

If the charities income is over £25,000 then further documents including a trustee annual report, accounts and independent examiner’s report will also need to be submitted. A full audit is required if the charity has income over £1 million or gross assets over £3.26 million and income over £250,000.

There are different rules if the charity is registered in Scotland or Northern Ireland.

Source: Other Tue, 08 Feb 2022 00:00:00 +0100
adc2e205 ee8d 42be 9194 b8751e74e90a 800x380 - Who should register for Plastic Packaging Tax

Who should register for Plastic Packaging Tax

The new Plastic Packaging Tax will come into effect from 1 April 2022. The tax will not apply to any plastic packaging which contains at least 30% recycled plastic, or any packaging which is not predominantly plastic by weight. The tax will be charged at a rate of £200 per metric tonne and will apply to packaging with less than 30% recycled plastic. 

The online service to register and pay will be made available on 1 April 2022 when the tax takes effect. Businesses that have manufactured or imported 10 or more tonnes of plastic packaging within the last 12 months, or plan to do so in the next 30 days are required to register. 

The 12-month check is usually a rolling check looking back over the last 12 months. However, as the tax starts on 1 April 2022, this test works differently between 1 April 2022 and 30 March 2023 meaning businesses only need to look back to 1 April 2022.

The requirement includes non-resident taxpayers who import finished plastic packaging into the UK on their own behalf, or manufacture finished plastic packaging in the UK.

Businesses must register for the new tax within 30 days of becoming liable to do so and will need to pay the tax on all components on which it is due, from the day that they become liable to register.

Source: HM Revenue & Customs Tue, 25 Jan 2022 00:00:00 +0100
4148fe79 e1e6 4f1b a041 915c88bdd218 800x380 - Replacement of domestic items in let property

Replacement of domestic items in let property

The replacement of domestic items relief has been in place since April 2016. The relief allows landlords to claim tax relief when they replace movable furniture, furnishings, household appliances and kitchenware in a rental property. The allowance is available for the cost of domestic items such as free-standing wardrobes, curtains, carpets, televisions, fridges and crockery.

The amount of the deduction is based on:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
  • the incidental costs of disposing of the old item or acquiring the replacement;
  • less any amounts received on disposal of the old item.

There is an important distinction between deciding whether or not a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s internal guidance provides an example highlighting when a brand-new budget washing machine costing circa £200 is not an improvement over a 5-year-old washing machine that cost around £200 at the time of purchase (or slightly less, considering inflation).

However, if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.

Source: HM Revenue & Customs Tue, 18 Jan 2022 00:00:00 +0100
af2700e3 7a14 4217 bb86 8a308f7a7e44 800x380 - Changes to customs declarations 1 January 2022

Changes to customs declarations 1 January 2022

There are special procedures for importing goods into the UK. Following the end of the Brexit transition period on 31 December 2020, the process for importing goods from the EU effectively mirrors the process for all non-EU international destinations.

However, a number of easements had been in place to help ensure a smooth transition for goods coming from the EU. This included a delay in the requirement for full customs declarations and controls until the end of this year.

And so, from 1 January 2022, businesses will no longer be able to delay making import customs declarations under the Staged Customs Controls rules that have applied during 2021. This will mean that most businesses will have to make declarations and pay relevant tariffs at the point of import.

Affected businesses should ensure that they consider as a matter of urgency how they are going to submit customs declarations and pay any duties. Businesses can appoint an intermediary, such as a customs agent, to deal with their declarations or they can submit them directly; although this can be daunting for businesses unused to the processes involved.

There is a ‘Simplified Declarations’ authorisation from HMRC that allows some goods to be released directly to a specified customs procedure without having to provide a full customs declaration at the point of release. However, this needs specific authorisation from HMRC and there are also other requirements that must be met. An application made now is unlikely to be approved before 1 January 2022.

Source: HM Revenue & Customs Tue, 14 Dec 2021 00:00:00 +0100
5645b682 b851 4923 a7dd 117eb0b9cc2d 800x380 - Appealing to the First-tier Tribunal (Tax)

Appealing to the First-tier Tribunal (Tax)

There are a number of different options open to taxpayers that disagree with a tax decision issued by HMRC. Usually, the first step is to make an appeal to HMRC against the tax decision. The case worker who made the decision will look at your case again and consider your appeal. If they do not change their decision, you can request what is known as a ‘statutory review’. This is where the decision is looked at by someone at HMRC who was not involved in the original decision.

If the taxpayers do not agree with HMRC’s review, there are further options available which include making an appeal to the tax tribunal or using the Alternative Dispute Resolution (ADR) process.

If you decide to appeal to the First-tier Tribunal (Tax) in relation to a ‘direct tax’ issue you must have appealed to HMRC first. For ‘indirect tax’ issues such as VAT and excise duties you can usually lodge an appeal straight to the Tribunal. An appeal to the Tribunal must be made within the time limit stated on your decision letter and any disputed tax ‘due’ must usually be paid upfront. An appeal can normally be made online or by post.

You can apply for ADR after you’ve appealed to the tribunal and your appeal has been accepted. The ADR seeks to offer a fair and quick outcome for both parties, helping to reduce costs and avoid a Tribunal case. However, in some cases the cost and effort of going to Tribunal can be worthwhile and needs to be properly considered.

Source: Tribunal Tue, 16 Nov 2021 00:00:00 +0100
3c3dfb87 e6b2 41c8 8820 75297e626651 800x380 - Self-employed basis period reforms

Self-employed basis period reforms

The government announced back in September that the introduction of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) has been delayed by one year until April 2024. There had been widespread concerns on the speed of the MTD for ITSA rollout and the delay was widely welcomed.

In tandem with this announcement, the government also announced that proposals for Income Tax basis period reform would also be delayed until the 2024-25 tax year with 2023-24 being a transitional year. The proposals change the basis period from a ‘current year basis’ to a ‘tax year basis’. Under the current rules there can be overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. The new method of using a ‘tax year basis’ removes the basis period rules and prevents the creation of further overlap relief. 

HMRC has published a new policy paper on this change. The paper confirms that the measure will only affect businesses which draw up annual accounts to a date different to 31 March or 5 April (mainly seasonal businesses and large partnerships), and businesses that commence from 6 April 2024. On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.

Source: HM Revenue & Customs Tue, 02 Nov 2021 00:00:00 +0100
4b0be164 07ec 42ae 948f a3fc5b348081 800x380 - Discovery assessment changes

Discovery assessment changes

HMRC has taken action to ensure that discovery assessments relating to certain aspects of the High Income Child Benefit Charge (HICBC), Gift Aid Donations and different pension charges act as intended.

According to HMRC, this new measure does not change this policy but makes a technical point to clarify the law to provide legal certainty and maintain the status quo. The change applies both retrospectively and prospectively and does not impose any additional liability.

A recent Upper Tribunal case found that HMRC did not have the power to recover an individual’s HICBC by issuing a discovery assessment. HMRC is appealing the decision to the Court of Appeal. However, in advance of that appeal, this new measure will provide certainty that HMRC may recover HICBC through the issue of a discovery assessment.

The legislation will not apply retrospectively to those individuals who previously received a discovery assessment and who appealed on or before 30 June 2021, the date at which the Upper Tribunal handed down its decision in the relevant case. However, HMRC will be hoping to win their Court of Appeal case which would make this a moot point.

Source: HM Revenue & Customs Tue, 02 Nov 2021 00:00:00 +0100
1d124bfc 19eb 4935 8c13 1d91fafe4d0a 800x380 - Letting agencies and the Money Laundering Regulations

Letting agencies and the Money Laundering Regulations

HMRC is responsible for the money laundering supervision of certain businesses including letting agencies. Businesses that HMRC is responsible for supervising should be aware of the requirement to register with HMRC and the penalties for failing to register. It is a criminal offence to trade as a letting agency business (as defined within the Regulations) without being registered for money laundering supervision.

You may need to register with HMRC if your business operates as a letting agency business.

A letting agency business means a firm or sole practitioner whose work consists of things done in response to instructions received from a:

  • prospective landlord seeking to find another person to let land to,
  • prospective tenant seeking to find land to rent.

This is for a term of a month or more and over €10,000 per month. This covers both residential and commercial property lettings.

A lettings agent carrying out lettings activity not defined within the Regulations, for example, below €10,000 per month, is not required to register.

There are penalties for not registering in a timely manner. If you think you should have been registered or need further clarification, we would be happy to help.

Source: HM Revenue & Customs Tue, 12 Oct 2021 00:00:00 +0100