Archives 2024

This is a story, not about the big man in red,

No, it’s actually a story about his big brother instead.

So, not the one guided by reindeers eight

But the man who helps put Christmas dinner on your Christmas dinner plate.

His transport more John Deere, than magical beast

Yes, I talk of Farmer Christmas, the brother of which you know the least.

So we pick up this particular tale in a farmhouse kitchen,

Where Farmer Christmas, to his brother, Father Christmas, is bitchin’

His bitchin’ regales the tale of All Hallow’s eve,

And the early arrival of Christmas Grinch, the Rt Honourable Rachel Reeves.

With the just one stroke of her brand new Mont Blanc pen,

She smited family farms and businesses from Wales to the fens.

Only 500 farms would be affected, she told us with redistributive glee

“And let’s face it, most of those will be like Jeremy C”

But the figures are claptrap said Richard Teather of ASI

Indeed, as fabricated as Mrs Reeves very own curriculum vitae.

This is because ‘500’ a year is really 15,000 a generation;

If one also considers BPR, its more like 35,000 – what a revelation!

Further, ongoing farm consolidation, make HMRC’s statistics out of date,

So, you could add, say, 20% to that, meaning 42,000 on the taxing plate.

And lets add to those who plan and make gifts,

63,000 affected say Adam Smith, and so the Government’s credibility drifts.

So when the statistics tree is well and truly shook

What falls from the tree is closer to 70,000 farmers on the hook.

“Yes, yes, yes,” said old Santa Claus

“But what’s this got to do with me?” he says after a short, awkward pause

“Well, excuse me”, said his Farmer bro, aghast

Do I need to arrange a visit from the ghost of Christmas past?

Well, said Father C, with a glint in his eye,

As I remember, as Christmas ghosts go, he’s a real party guy.

“In any event, I view myself as a public service, you see,

It’s not all about turnover, cashflow and profitability.”

He pulled up his belt and stroked his beard,

As if this was the final word, with no others to be heard.

“Yes, that’s fine”, said Farmer C with biliousness

“But who pays for you to spread your Yuletide largesse?”

“Who works 365 days a year to fund your annual trip,

I’ll tell you, a tax base of one, me, the drip!”

“Well, err, there’s no need to go there, as his ruddy faced became ruddier

We don’t need to further drag our family affairs, make them even muddier”

“Well, I think we do”, said Farmer C, a spring starting to spring in his step,

He took a swig of egg-nog for a little extra pep.

“You see, it is my toil on this farm throughout the year,

Which allows you to fill your sled, and spread your Christmas cheer”

“It may be your face on cards, books, films and the like,

But who pays for it? Who greases the wheels of this, well, festive bike.”

He immediately regretted his appalling metaphor (or was it a simile?)

But he wasn’t going to let this elephant in the room rest easily.

“You see dear brother, whilst you’ve lived offshore,

Paying my taxes and eeking out a living, has become a chore.”

Father said “Don’t worry bro, it won’t matter much,

We’ll get through this, in Starmer we trust!”

“No, I implore you dear bro, let there be no confusion

My financial straits are not merely an illusion.”

“Can’t pay the gas or leccy, let alone your ELF 100 Reactor

It’s not as if I can go out and simply sell the tractor.”

“Dear Santa, why can’t you see this is serious?

The Labour Party has pretty much ended Christmas!”

“Don’t fret, don’t worry, it’ll be all right my bro

I’ve made a pile of cash from buying and selling crypto!”

“Bitcoin, ether, DeFI and memes!

I think that crypoassets are in the family’s genes”

“Whilst you’ve been working so hard on the land

I’ve been working smart, making moon money, gettin’ diamond hands”

“Let me get this straight”, said Farmer in despair,

“You’ve been trading crypto? No wonder I’ve lost my hair”.

“Well”, said, Father, hardly making his brother calmer,

We’re both farmers now, it’s just I’m a Yield Farmer!”

Suddenly, at long last, Santa began to read the room

“Well, my tax adviser did call the other day, which lifted the gloom”

He bellowed “Brother, FIGs, FIGs FIGs is exactly what he told me”

The tone in his voice was absolutely bursting with glee.

“You and your figgy pudding predeliction

I’m getting concerned, brother, is this becoming an addiction?”

“No ho ho”, said Father C with a rioutous shout

“It’s the new foreign income and gains tax regime I’m talking about.”

“You see, I’ve been in Lapland so long my dear

And I might have frostbite where you’d rather not hear.”

“But this new announcement is really da bomb

I’ll no longer even have to pretend to be non-dom”

“So”, said Farmer C, with little festive cheer

“Let me get this straight, you’re moving back HERE…”

“Yes, maybe, I can bring my foreign income and gains, isn’t it great,

Without the taxman taking anything from my plate!”

“I can help you on the farm. Callooh! Callay!

I’ll bring the elves and reindeers to help pay our way.”

“But, but, but” sighed Farmer with his head in his hands,

“Have you not seen Rachel Reeves other confiscatory plans”

“If we do this, we’ll now get rinsed for N.I.C,

And, with Angela Rayner’s Employments Rights Bill, things will be really iffy.”

“Ok, dear brother, we can park that for now,

But I want to help, please tell me how?”

“Well, do you still keep the naughty list for a start?”

“Oh yes, upgraded it to a naughty contract using Ethereum… now it’s smart.”

“Perhaps then, on it Rachel Reeves’ name you can pop”

“Sure, my bro, I’ll make sure she’s there, right at the top”

“Did I say”, said Santa, “I’m getting stung for IHT don’t you know?”

“On my Santa Invested Personal Pension, which has just started to grow.”

“You have a SIPP?” said Farmer, surprise etched on his face

“Yes,” responded Father, “I set it up with St Nick’s Place”

“But don’t you need to have some actual earnings to fill up the pot?

I know my funding is pretty all that you’ve got”

“Ah”, said Father C, tapping his nose

“Tips! Mince pies, whisky etc I get plenty of those”.

“But mince pies and glasses of scotch?

How do you turn those into cash? Is this a YouTube I gotta watch.”

“Well, I scoop up the bounty in my magic sack,

And I put it in my sleigh and to Lapland I take back”

“On the trip the mince pies are boxed and the whisky casked,

How it happens? Well, that, dear brother, I’ve never asked”

“But then we go online and we sell it all on E-Bay

The E stands for Elf, (despite what they might say)”

“So its magically bottled and boxed in your sack,

And you sell it on the market, a market that’s black?”

“Not black, no, no, no, it’s more like Elfish Green

I’ll tell you, you have to believe it, for it to be seen” 

“Well, I’d don’t want to spoil your pecuniary ruse,

But I’m pretty sure that’s getting close to tax abuse”

“Well, funny you say that, I’ve I had an enquiry, but I’m fine,

A lovely inspector opened it under COP9”

“He wanted to check the source of my funds

Broadly, was tax due on these ex-gratia festive bungs?”

“But he decided they weren’t subject to a levy,

Though he was interested in the profits from selling the pies and bevvies”

“I persuaded him to that there was no truth (not even a grist)

And if he didn’t accept that, he’d be straight on the naughty list

And with that, the Christmas brothers, were reunited as a pair,

Proving nought thicker than blood and, well, mutual taxation despair.

They drank and they laughed adding Reeves and Starmer to the naughty list

They drank and laughed some more until they were totally p….

And so comes to an end this story rhyming, long and tall

All’s that’s left for Tax Dog to say is…

… “Merry Christmas one and all”.

By Tax Dog

Introduction – Tax issue and it’s importance

The tax issue involves the deliberate overclaiming of input tax using false invoices, which had been issued for supplies that were never made. This is significant because it addresses the integrity of the VAT system, ensuring that businesses accurately report and pay their taxes. Deliberate fraud undermines the tax system, leading to revenue loss for the government and unfair competition among businesses.

Problem in the Case

In this case, the problem was that HMRC assessed Lancer Scott Ltd for overclaiming input tax on its VAT returns between September 2006 and December 2009. The issue revolved around false invoices for supplies that were not made, with the company accused of participating in transactions connected to VAT fraud.

Taxpayer’s Argument

Lancer Scott Ltd argued that HMRC’s assessment was issued too late, suggesting that HMRC had sufficient evidence to raise the assessment before the critical jury bundle was received from a related criminal prosecution. They claimed that the evidence HMRC needed to make the assessment was already available to them during Mr. Folwell’s trial, who was convicted of money laundering and was connected to the company.

HMRC’s Argument

HMRC argued that the input tax claims were based on non-existent supplies and that the company knowingly engaged in transactions connected to VAT fraud. They presented comprehensive evidence showing that the invoices were false and that the taxpayer had participated in fraudulent activities. HMRC also contended that their assessment was timely because it was issued within one year of receiving sufficient evidence from the criminal prosecution’s jury bundle.

Outcome/Decision

The First-tier Tribunal (FTT) sided with HMRC, accepting their evidence that the appellant had deliberately overclaimed input tax using false invoices. The FTT found that the majority of the claimed items were not supplied and that the overclaims were intentional. Consequently, the appeal against both the assessment for overclaimed input tax and the associated penalties was dismissed.

Implications for Clients

For our clients, this case shows the importance of maintaining accurate and honest records for VAT purposes. It highlights the extended timeframe HMRC has to assess cases involving deliberate VAT fraud, which can be up to 20 years. Clients must ensure their transactions are legitimate and correctly documented to avoid harsh penalties and assessments. Additionally, the burden of proof lies with the taxpayer to demonstrate the correctness of their VAT claims, emphasising the need for thorough and transparent accounting practices.

Next Steps

At ETC Tax, we pride ourselves on our values, with excellence being at the forefront. We are dedicated to ensuring your records are both up-to-date and accurate, so you can avoid the stress of HMRC assessments. If you need further guidance on VAT, a complex area of tax, please get in touch with us today. Our team is here to help you navigate these challenges with confidence and expertise.

What do you need to know?

Introduction

Navigating the complexities of the UK tax system can be challenging, especially when certain charges catch you off guard. Among these often-overlooked areas are the High-Income Child Benefit Charge (HICBC) and pension-related tax charges. These can be significant, but many taxpayers are either unaware of their existence or unsure of how they apply. In this article, we’ll explore both, explaining why it’s crucial to stay vigilant.

The High-Income Child Benefit Charge (‘HICBC’)

The HICBC is an additional tax that affects those who claim Child Benefit but earn above a certain threshold. Introduced in 2013, it’s aimed at clawing back Child Benefit payments from higher earners. Despite being in place for over a decade, many taxpayers remain unaware of the charge, often to their detriment.

The charge applies when either the claimant or their partner earns more than £60,000. As the income level rises, a portion of the Child Benefit is effectively taxed away, and when the income reaches £80,000, the full amount of the Child Benefit is taxed back.

Let us explain

For example, for every £2,000 earned above £60,000, 10% of the maximum Child Benefit amount entitlement but be paid back. Therefore, if an individual were to earn £75,000 a year, they must pay back 75% of their Child Benefit receipt. In turn, once £80,000 is hit by an individual, the charge will be equal to 100% of entitlement.

What makes the charge tricky is that it applies to the higher earner in a household. Even if that person isn’t the one receiving the benefit. This can catch many families by surprise, particularly those with fluctuating incomes or those unaware they crossed the threshold. Failure to register for the HICBC can result in penalties, and many don’t realise they need to notify HMRC if their circumstances change.

Pension Charges for High Earners

Pension contributions are another area where high-income individuals need to be cautious, particularly due to the Annual Allowance and the Tapered Annual Allowance.

The Annual Allowance is the maximum amount of tax-relieved pension contributions you can make in a given tax year, recently increased to £60,000. If this limit is exceeded, taxpayers may face an additional tax charge on the excess.

For high earners, the Tapered Annual Allowance further reduces this cap. If your “adjusted income” (your total taxable income, including pension contributions) exceeds £260,000, your annual allowance decreases by £1 for every £2 of income above this threshold, down to a minimum allowance of £10,000.

Let us explain

To illustrate this, lets focus on an individual with an adjusted income of £320,000 including pension contributions of £40,000. As this income is £60,000 above the tapering threshold, this would result in a deduction of £30,000 to the annual pension allowance. Subsequently meaning £10,000 of pension contributions will be subject to the annual pension charge.

Many high-income taxpayers contribute to pensions automatically, through salary sacrifice schemes or company contributions. This can result in exceeding the Annual Allowance without realising it, especially if your income fluctuates or increases unexpectedly.

Exceeding your Annual Allowance triggers a tax charge, which needs to be declared via self-assessment. Much like the HICBC, many taxpayers are unaware of this requirement, potentially leading to hefty charges and penalties.

Seek Advice

With careful tax planning and close monitoring of your income, you can avoid unnecessary charges. However, given the complexities involved, seeking advice from a tax professional is often the best way to ensure you remain compliant and avoid unexpected tax bills. A tax advisor can help you identify potential issues before they become problems.

Both the High-Income Child Benefit Charge and pension tax charges for high earners are areas that can lead to unexpected tax liabilities. While these charges are far from new, they remain under-the-radar for many taxpayers. By staying informed and vigilant, you can avoid falling into these common traps and ensure you’re not hit with unexpected charges and penalties.

Next Steps

If in doubt, seeking our expert tax advice can save you significant time, stress, and money in the long run. The team here at ETC Tax can advise and guide you given the complexities involved, please get in touch if you want to discuss any

Introduction

Our client owns three UK companies and recently moved abroad for the foreseeable future. Our client intends to run their companies from another country and wants to understand any UK corporation tax consequences of doing so.

Issue

It is possible for a company to be resident in more than one country and if this is the case, we need to review the double tax agreement (DTA) which should allocate treaty residence to one of the jurisdiction. If a company does lose it’s UK tax residence status, there will be a deemed disposal of its assets for UK tax purposes.

How we solved it

We provided an analysis of the UK tax consequences of our client’s companies losing their UK tax residence status and advised on the steps our client would need to take to ensure that this does not arise. We also advised on how the DTA would impact our client’s companies if they do remain UK tax resident and any associated reporting requirements.

The outcome

Our client was able to understand the steps necessary for their companies to remain UK tax residences and avoid any adverse UK tax implications. Without this planning, our client may not have been aware of the deemed disposal rules for a company losing it’s UK tax residence status and could have faced a large disposal for tax purposes.

Next Steps

If you are considering moving abroad and wondering what the tax implications are for your UK company then get in touch.

Introduction to Employee Ownership Trusts

Employee Ownership Trusts have grown in popularity over the past few years with an attention grabbing headline of ‘NO CGT IF YOU SELL YOUR COMPANY TO AN EOT’.

In this article, we’ll do a little digging into Employee Ownership Trusts to see if the attention grabbing headlines are a bit too good to be true.

What is an Employee Ownership Trusts?

An EOT is a type of trust that holds shares in a company on behalf of its employees. Unlike direct employee ownership, where employees are shareholders, the EOT allows employees to benefit from the company’s success without actually holding shares themselves.

This structure is designed specifically for trading companies as non-trading entities (such as investment companies) do not qualify.

Key Features of an Employee Ownership Trusts

To qualify as an EOT, the trust must own more than 50% of the company’s shares and voting rights. This creates a separation of ownership and management, where the trustees are the legal owners of the company and act in the best interests of the employees.

Meanwhile, the existing management team can continue to run the day-to-day operations.

The Impact of Employee Ownership Trusts: Stats…

As mentioned earlier in this article, employee ownership through EOTs is fast gaining popularity. As of October 31, 2023, there were over 1,650 employee-owned businesses in the UK, with approximately 330 new businesses adopting this model in the previous 12 months. The benefits appear to be clear with:

• 57% of these businesses reported increased profits.
• 83% saw a rise in employee engagement.
• 73% noted improved job satisfaction.

What are the Advantages?

From the stats above, EOTs offer several compelling benefits:

• Enhanced Productivity: Employees tend to be more engaged and motivated when they have an interest in the businesses success. This drives productivity.
• Legacy Protection: The business owners can protect their legacy while facilitating a leadership succession over time.
• Financial Benefits for Owners and Employees: Owners can access the value they’ve created, and employees can receive annual tax-free bonuses of up to £3,600. Additionally, the sale of shares to an EOT can be tax-free if done within the same tax year, offering significant capital gains tax relief.

What are the potential drawbacks?

Despite the apparent advantages, there are some challenges to consider:

• Limited Participation: The sellers of the business generally can’t be beneficiaries of the trust, meaning they must relinquish control.
• Mental Adjustment: For original owners, losing control of the company can be a significant psychological hurdle.
• Valuation Risks: If HMRC suspects the company’s valuation is overstated, it may classify excess value as employment income, triggering tax liabilities under disguised remuneration rules.
• Restrictions on Tax-Free Payments: Bonuses can only vary based on specific criteria like remuneration, length of service, or hours worked. Failing to comply with these rules could jeopardise the EOTs status.

Are there many risks?

The risks associated with EOTs can be pretty severe:

• Tax Benefits Withdrawal: If the Employee Ownership Trusts loses control of the company or the company ceases trading, the associated tax benefits can also be withdrawn.

In such cases, the EOT may be deemed to sell its shares at market value, potentially incurring capital gains tax without having the cash to cover it.

• High Tax Rates on Sales: If the Employee Ownership Trusts sells the company, it assumes the seller’s base cost, meaning it pays tax on the held over gain. Any distributions to employees are taxed as employment income, which can be costly (particularly for higher earners).
• Considerations for Sellers: Sellers must consider the impact on any shares they retain and the potential Inheritance Tax (IHT) implications, particularly if deferred consideration is involved. Fixed term insurance might be necessary to cover IHT exposure.

Ok, I’m still interested…….what are the practical considerations for setting up an Employee Ownership Trusts?

Setting up an Employee Ownership Trust requires diligent planning:

• Trustee Identity and Location: There are ongoing consultations about requiring a UK residency for the trust and the inclusion of at least one independent trustee.
• Funding Considerations: Contributions to the Employee Ownership Trusts to fund share purchases may be treated as dividends for tax purposes, so it’s crucial to seek advice.
• Dividend Payments: Receiving dividends can be tax-inefficient for the trust, and deferred consideration periods pose risks for sellers.

Summary

Employee Ownership Trusts can offer significant benefits for businesses and employees, but they come with complex requirements and potential risks.

If implemented for the right reasons, an Employee Ownership Trusts can drive productivity, protect a business owner’s legacy, and provide financial rewards for employees. However, tax incentives should not be the sole motivation for establishing an EOT. Given the numerous qualifying criteria and the serious consequences of disqualification, it’s essential to seek specialist tax and legal advice before proceeding.

The team at ETC Tax have a wealth of experience in dealing with employee ownership trusts. If you are a trading company and want more information about Employee Ownership Trusts please get in touch.

We have supported our Tax Partner Pro members via email and call-back service. Here’s an overview of some of the more recent questions we have answered during November 2024

Q

Could I have some information on the 10-year anniversary trust return completion, I have looked at HMRC and its very contradictory.

My client has a trust this has a GIA ( originally investment £66,500), the income is generated from dividends and interest from the GIA portfolio of stocks and shares (2024 was < £1,000.00)

Does the client fall into the category to report its 10 year anniversary?

What does qualify a trust to complete a 10 year anniversary form?

A

In general, if the trusts assets are valued at less than 80% of the NRB then it would be an excepted estate and no 10 year anniversary charge return is required.

Q

We have a client how earns £488,000 through PAYE per year gross and is having RSU Gains and Tax withheld through his payslip.

Are there any additional disclosures we need to make on the self-assessment other than reporting the P60?

A

No there shouldn’t be. The income has been declared and the tax paid via PAYE so just the P60 is all you’d need.

You’ll need to report on the CGT pages when the shares are sold if there is a gain to be declared.

Q

I have a one person company client who is considering ceasing trading as his last trading receipt was in January, though he has just quoted for a small project and is waiting to hear if it will go ahead. Meanwhile, he’d like to make a £60,000 pension contribution from the company. My concern is that – especially if the small project does not materialise – that the contribution will be 9 months after the last trading receipt and may not be allowable for corporation tax – being considered part of the process of closing the company down rather than say part of the director’s remuneration.

A

My concern would mirror yours, as the business appears to have ceased to trade.

Contributions made as part of the arrangements for going out of business, in particular where there is no pre-existing contractual obligation to make such a contribution, are not considered as meeting the ‘wholly and exclusively for the purpose of the trade’ test.

In the case of CIR v Anglo Brewing Co Ltd [1925] 12 TC 803, the company decided to close down its business. In the past, the company had granted pensions to employees on their retirement. The company promised to treat its present employees with equal generosity. The company therefore agreed pension amounts (which were later commuted for lump sums) and compensation payments. The company claimed the costs as a deduction in computing its profits.

The high court took the view that the payments were made for the purpose of winding up the company and that no deduction was due for the pensions or the compensation. There is now a statutory relief for redundancy payments but the principle of the decision, that payments to go out of business are not allowed, remains valid.

Q

I have a client who is a musician. He is looking to “book some music related events next year for research purposes in order to keep track of current and new trends in the electronic music market. “

 He has asked me about whether this is tax deductible.

 I am aware of wholly and exclusively and have shared this with him but he’s shared with me an example of a business package referencing VAT etc  

I am not sure what to advise. It makes sense for him to attend these events for research but by the letter of the law is looks like it could be entertaining it and then would it be disqualified in full!! I cannot find any similar case law.

 Are you please able to advise?

A

I think it would be hard to justify this as an expense and would expect HMRC to disallow if challenged.

You could perhaps claim a portion of the cost and argue that there is a duality of purpose but I’d emphasise the risk of it being disallowed if HMRC were to challenge it.

That being said, in an article in Tax Weekly magazine in May 2024 there is some commentary on this and the adviser quoted “If a performer incurs research expenditure to research their role, such as attending performances, this will probably be allowable.”

 I note the commentators use of the word ‘probably’ in that passage as it’s a subject that no one will be able to offer iron clad case law backed opinion on the matter.

 I’d suggest making the client aware of the risk, but ultimately letting them make the call on it.

Q

We have a client who invested in a US fund (not listed in HMRC’s reporting fund listing) in the last 2-3 years and according to her financial advisers, the fund is making losses. She is looking into selling the fund to realise the losses. From reading HMRC’s manual IFM13550, I understand the losses would be treated as a capital loss – please confirm that my understanding is correct?

Furthermore, could you also please confirm that the above losses can be offset against capital gains arising (in the same year/future) in the normal way.

A

Yes, the losses will be capital losses and relievable in the normal way (against current year or future years capital gains)

Next Steps

Do you have any questions similar to the above, could Tax Partner Pro membership be right for you? Don’t hesitate to get in touch with ETC Tax to find out more.

Upcoming changes to the UK’s tax regime for non-domiciled individuals (non-doms) may inadvertently deepen the fiscal deficit. The Government’s newly introduced transitional rules, to take effect in April 2025, could accelerate the departure of non-doms, thus reducing potential tax revenue.  

A Lucrative One-Way Ticket?

The new rules, effective from 6 April 2025, will end the current reliance on domicile as a tax-defining factor. For a long time, the UK has been the only country to consider an individual’s domicile status. Instead, a person’s tax residence will determine whether their worldwide income and assets fall under the UK’s IHT regime. Non-doms who have been UK residents for at least 10 of the past 20 tax years will be subject to IHT on their global assets, even after they leave for a period of ten years (known as the Ten Year Tail).

However, the proposed transitional rule allows non-doms planning to leave the UK next year to avoid this new 10-year IHT tail, creating a short-term lucrative opportunity for those already considering relocation.

Impact on Offshore Trusts

The reforms will also have significant implications for trusts. Currently, trusts holding non-UK assets are typically exempt from IHT as long as the settlor is not UK-domiciled. From April 2025, however, the trust’s IHT status will depend on the settlor’s residency status.

Previously, a trust could shift in and out of the inheritance tax system depending on whether the settlor was deemed a long-term UK tax resident. This introduces added complexity for trustees, who may not always maintain regular contact with settlors over time.

Trustees could also face an “exit charge” on non-UK assets if the settlor ceases to be a long-term resident.

Urgent Decisions for Non-Doms

With only a few months until the rules take effect, non-doms need to consider whether to relocate to countries with more favourable tax regimes, some of which offer zero IHT.

Next Steps

As the deadline for the new rules approaches, please do get in touch if you require any UK tax support.