I’ve set out to find the nation’s best cheese ‘n’ onion crisps, with a mass taste test of 44 different packs, sampled by 26 tasters. This is my second data-Crunch – it all started last year, with the glorious best salt ‘n’ vinegar crisps tasting. Yet some people, strangely (or perhaps more accurately), started to say it couldn’t end there, and that I needed do the same with cheese ‘n’ onion.
Our client is the beneficiary of a discretionary trust. With a discretionary trust all distributions received by beneficiaries are treated as though they have already been taxed at 45%. Therefore, beneficiaries who are not additional rate taxpayers should claim back the additional trust tax from HMRC.
Our client lives overseas, and they were not aware that their trust income was being taxed in the UK at 45%. They had received trust distributions for a number of years without knowing they were to complete form R40 and send this to HMRC to receive the refund.
Once our client found out they were able to reclaim the tax, they engaged us to analyse their circumstances and claim the additional tax they had paid. We completed calculations to understand their position and how much they were entitled to reclaim. As they were non-UK resident and did not have any other UK sourced income, their trust distributions were below the personal allowance and UK tax was not required. We completed form R40 for all of the relevant years and wrote to HMRC alongside the forms to explain the situation.
Once HMRC had time to review our documents, they agreed to our conclusions and accepted our claim for the tax to be repaid back to our client. This was a brilliant outcome for our client as they had paid thousands in tax unknowingly over the years and they were able to reclaim this.
Does this case sound similar to you? If so why not get in touch and let us support you.
As technology becomes a key part of working life, more and more companies find themselves investing in software or app development.
Up until the last few years, it appeared to be a given that most companies developing this kind of technology would be able to make a claim for R&D tax relief.
However, as those processes have become more and more familiar and app development in general a more “run of the mill” thing, it is no longer always easy to work out whether companies involved in software development can make an R&D claim.
It is, of course, important for companies to understand this at the outset as the process for developing that app can be time-consuming and costly and, as such, to the extent that an R&D claim cannot be made, this may impact the company’s decision to go forwards.
This would be a shame of course, as one of the main aims of the R&D tax regime is to encourage innovation, which many of the new apps and pieces of software will surely deliver.
That being the case, what’s the problem then?
Well first things first. In reality, most software development projects should still qualify for R&D. That is as long as they demonstrate an advancement within the industry and not just within the company itself.
The company making the claim must be able to provide sufficient evidence to explain how technological uncertainties have been resolved.
Common areas that often qualify for R&D include the use of Artificial Intelligence, Cloud Computing, Robotics, Data Processing, and Augmented Reality.
In these cases, R&D relief will often apply to companies, whether they are developing a new software product or service or simply improving an existing project or system.
However, it’s not quite as straightforward as that.
As a reminder, R&D generally takes place when a project “seeks to achieve an advance in science or technology”.
However, this can be, and has been, interpreted in many different ways.
It is the activities of the company, which directly contribute to achieving this advance in science or technology, through the resolution of a scientific or technological uncertainty, that will qualify for R&D.
This is regardless of whether the company was successful in achieving the advancement or not.
It may be relatively simple for a company to explain how their own state of knowledge or capability has advanced within the technology space, via their work on a particular project.
However, this may not be an advance in the overall industry itself, which can be very difficult to prove and evidence within such a fast-paced industry.
The main challenge for companies is explaining how their project has advanced the industry itself.
This can be particularly challenging if HMRC officers do not fully understand the intricacies of software development. In this case, it is critical to provide clear evidence to substantiate your case.
The starting point is to determine whether an existing solution is readily deducible by a competent professional in the field.
In other words, could someone with the same experience and qualifications easily arrive at the same advancement? Does the company’s solution address any technical uncertainties?
It is important to differentiate between an ‘uncertainty’ and a ‘complexity.’ While a complex project may require more time, resources, and expertise, it doesn’t necessarily mean the outcome was uncertain.
For example, a software project could be highly complex, but if the underlying technology to develop that software or technology already exists, the entire project may not qualify as R&D.
It is also important to note that some R&D projects that qualified in previous years may no longer do so if technological capabilities have advanced within the industry, and this is where things become challenging, as the industry has clearly come on a lot in the last few years – to the point where it can feel like everyone is having a go!
To assist HMRC in understanding the advancement in science or technology which has taken place, it is mandatory to explain the technological baseline of the project on the (not so new) additional information form which is submitted as part of the R&D claim.
This baseline should refer to the industry standard, not just the company’s internal capabilities. What was the industry standard, and how has your project improved upon it?
Clear evidence must be provided to show that the project has significantly advanced technology beyond this baseline.
It is crucial to involve a technically competent professional in considering this as it is their expertise which will be key to supporting the claim and any challenge by HMRC.
It is worth remembering that many companies whose main business is not software or app development will outsource their software development to a software development engineer, often a freelancer.
This is OK, and the costs of paying that subcontractor can still be included in the claim provided the claim as a whole qualifies for R&D, but subcontracted costs can only be included as to 65%.
Due to a history of non-compliant and fraudulent claims, HMRC has significantly increased its scrutiny of R&D claims, introducing new mandatory requirements to identify and reject illegitimate claims. Consequently, even genuine claims now face a more challenging process.
This is particularly true for software development companies, which we consider is often a “red flag” for HMRC for the reasons highlighted above.
Navigating the R&D claim process can be challenging, especially for those in the software development industry and/or companies outsourcing software development, where there is in our view a greater risk of challenge.
We advise companies planning to make a claim to seek help from a qualified tax professional. This ensures that you receive clear guidance through the process.
At ETC Tax, we have the expertise and experience to assist your company with its software development R&D claim. Please do not hesitate to contact us today.
Nearly a million pensioners are missing out on pension credit, a vital benefit worth £1,000s a year for many, which tops up your income.
law
I have a client that is an invigilator and paid on PAYE. When I do the self assessment checker the last question asks if they are invigilator and then says they have to do self assessment.
I don’t understand why as they are on PAYE. Can you please clarify?
Also it looks like invigilators can claim journeys to work etc. Is that right?
Yes that is right.
If you are an Examiner, an Exam moderator (not quite sure how that is different), or an invigilator, you are required to complete a self assessment.
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We have a client that owns 2 Furnished Holiday Lets and is selling one of them.
The property meets the criteria for being a FHL, and has been let as such for more than 2 years but I understand there may be an issue where only 1 of the 2 is being sold?
Is that correct, if so is there anything we can do to ensure that BADR applies?
That’s correct, the issue to contend with is that the conditions for BADR for a sole trader must ensure that all or part of the “business” is sold.
There is no other way to claim BADR, as this is the condition which will be relevant to your client in this case. The other conditions relate to selling shares in a company or an interest in a partnership.
Therefore, where your client sells only one property within the FHL business, it needs to be argued that this ‘part’ of the business is capable of being operated separately. This depends on the facts of the case.
It would be necessary to show on the facts that the property being sold amounts to separate, distinct and clearly identifiable part of the overall FHL activity as opposed to merely being an asset of the business which does not itself constitute a viable business in its own right. For example, if one has various properties all over the UK, this is more likely to be eligible than one who sells one unit from a single location that holds 5 other units which you continued to operate.
If very similar properties are let in each location, there is considerable overlap of the type of guests staying in them and the properties are very much run as one activity, then it may be more difficult to show that the sale of one of them would be the sale of part of a business.
However, if the properties are of a different size – say, a two-bed property in one location has been sold whereas the other property is operated as four, five- or six-bedded property – and it can be clearly shown that both the clientele and the marketing and advertising approach are different, then BADR should be available.
Its important that if you do believe BADR is available based on the facts then a disclosure is made to this extent in the clients tax return, presenting the reasons stated above and applying the facts.
You should take note too that there is a proposed abolition of the FHL regime from 6th April 2025 so it may be if they sell after this point, it may not qualify for BADR at all and instead potentially taxed at the CGT residential rates. However, due to the change in government we are waiting to hear on the outcome of these proposed plans.
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Could you please advise on the tax implications of moving the cigar shop to the new company?
I’ve added some initial comments below which hopefully will assist in the short term – you will appreciate this is only a high level view and we’ve not looked at the situation in detail – if you or the client would like more formal advice then we would be happy to provide you with a quote for the work.
Probably the one thing to check is to make sure that the Kuwaiti entity is actually viewed as a company by HMRC – can’t see why it would not be but some types of entity can be treated differently by HMRC. If it is a company with shares as we would recognise them it will probably be seen as a corporate entity by HMRC.
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Husband/wife Ltd company – 50/50 share holding. 2 shares they have been trading for several years – make circa 60k per year- distribute 40k in dividends and retain 20k.
They want to bring in their daughter as a 1/3 partner – will create another share and gift to her.
Business has net assets of 50k and share will pay dividend – so if we say for example co is valued at 75k,
She is therefore being gifted share worth 25k-
Is there any immediate tax implication for CGT etc – if so could a hold over claim be used.
If the transfer were to go ahead and the client do nothing, then yes CGT would apply to the transaction as it is a material disposal of value to a connected person.
However, as it is a trading company, a gift hold over election can be completed between the transferor and transferee to roll over the gain into the shares of the recipient, so the CGT would fall on the recipient as and when they dispose of the shares.
Can you relate to the questions above? Don’t forget each Tax Partner Pro membership comes with 30 free minutes a month so send your questions to [email protected]
Some advisers claim that by taking a series of pre-planned steps, the value of shares in a property company are completely sheltered from Inheritance Tax (IHT).
Unfortunately, the reality is that properties held personally, in a trust or in a company will be liable to IHT. Of course with a Labour Budget on 30 October, IHT may be increased. There is also speculation is that the capital gains tax tax-free uplift on death may also be removed, meaning there is effectively a “double death tax”. This could mean that a gain on a buy-to-let property is effectively taxed at just over 54%.
So, what can you do to protect against IHT changes? This will depend on how the properties are held.
If there are a number of properties being run as a business you may consider incorporating the business. Incorporation Relief should be available so that there is no capital gains tax payable and the company takes over the properties at current market value. Stamp Duty Land Tax would however be payable, although this can be reduced by applying commercial rates of SDLT where six or more properties are transferred.
You can then consider gifting shares either outright or into trust to family members. This might trigger a capital gains tax charge but currently the maximum rate of CGT on shares is 20%. The value of the shares gifted will be outside your estate after 7 years.
You can also create growth shares which only participate in future growth in value over a pre-determined hurdle rate. With careful planning HMRC should accept that these shares have little value on issue.
Where properties are owned through an existing partnership, incorporation can take place without SDLT being payable.
Alternatively, you could simply “sell” the properties to your own limited company. Yes, this will create capital gains tax and SDLT liabilities but it would “bank” these at the current rates. It would be necessary to crunch the numbers to calculate what the overall effective tax rate is.
The advantage of this would be that it would create a significant director’s loan account credit. You could immediately gift some or all of this to your children. This would be a Potentially Exempt Transfer (PET) and outside your estate after 7 years. Whilst you have “given away” the loan account (or part of it) your children can only access the funds on your say so.
Forget forming a partnership to incorporate later on. The extensive SDLT anti-avoidance rules mean that on incorporation SDLR relief will not be available.
Instead, it is possible to form a partnership with family members entitled to a future share in the growth in value of the properties. With care, this can be achieved without any tax cost and will mean that the majority of future growth in value falls outside your estate.
You can make outright gifts of property to your children. There will be no SDLT payable but there will be capital gains tax to pay on any increase in value of the property since it was acquired. Any gain would have to be reported to HMRC and the tax paid within 60 days of completion.
The capital gains tax payable on direct gifts of property may make this option unattractive. As an alternative, you could consider using a trust. The transfer into the trust is a Chargeable Lifetime Transfer, so any transfer of value over £325,000 (£650,000 for a married couple) would incur a lifetime IHT charge at 20%. However, as it’s a gift into trust any capital gain can be held over, meaning that the trust effectively takes over the original base cost of the property.
At a later date the property can be transferred out of the trust to your children and again the gain can be held over. This means that the trust can act as a “stepping stone” to pass properties indirectly to the children without suffering a capital gains tax charge.
You can of course opt to do nothing and see what the Budget brings. It may be that nothing changes, although this appears increasingly unlikely.
If you want to learn more about sheltering the value of shares in a property from IHT or maybe you are interesting in learning more about making outright gifts of property to your children then get in touch.
Tax rules for non-UK domiciled individuals
Starting next year, non-domiciled individuals (non-doms) in the UK will face a tougher tax regime as Labour aims to eliminate what they see as an outdated tax benefit and reform inheritance tax (IHT) liabilities.
Labour plans to enhance the Conservative proposals from the March Budget by implementing stricter transition rules and introducing a new residence-based system for IHT, effective from 6 April 2025. The full details of the rebasing dates will be disclosed in the autumn Budget.
The new system will shift from a domicile-based IHT approach to one based on residence, targeting those who have been UK residents for the past 10 years. This change will affect the scope of property subject to UK IHT for both individuals and trusts, and will only apply to deaths occurring after the new rules take effect, avoiding retrospective application.
The Labour government will not continue the transitional measures announced by former Conservative Chancellor Jeremy Hunt, such as the 50% tax reduction on foreign income for individuals losing access to the remittance basis in the first year. Instead, they will implement a four-year foreign income and gains (FIG) regime, offering 100% relief on FIG for new UK arrivals in their first four years of tax residence, provided they have not been UK tax residents in any of the previous ten years.
UK residents ineligible for the four-year FIG regime will be subject to capital gains tax (CGT) on foreign gains as usual. Remittance basis users can rebase foreign capital assets to their value on a specified date for CGT purposes when they dispose of them. This rebasing date will be confirmed in the upcoming Budget.
As of April next year, income and gains within settlor-interested trust structures will lose tax protection. A new temporary repatriation facility (TRF) will be introduced, allowing individuals who have previously used the remittance basis to remit FIG accrued before 6 April 2025 at a reduced tax rate for a limited time. The specifics of this will be detailed in the Autumn Budget.
Furthermore, there will be a review of offshore anti-avoidance legislation, including the transfer of assets abroad and settlement rules, to clarify and simplify the current laws. Any changes resulting from this review are not expected before April 2026.
The Overseas Workday Relief (OWR) scheme will continue, with more details to be announced in the Autumn Budget.
If you have any questions on how your tax liabilities will be affected by the new labour government then please get in touch. Our team of experience tax advisers will be able to guide through proposed changes.
The post Labour plans to tighten tax rules for non-UK domiciled individuals appeared first on Making the Complex Simple.
Buying and selling a company – Management Buy Out
We were asked to advise on a tax efficient way for the Founders to hand over control to an existing employee and minority shareholder. The Founders wanted to have a minority stake in the business going forward.
The minority shareholder did not have the funds to purchase the shares outright from the Founders. As an existing employee, we also had to consider the Employment Related Securities legislation.
A Newco was formed which acquired all the shares in the trading company (“Oldco”). The minority shareholder exchanged shares in Oldco and the Founders exchanged their shares for a combination of cash, loan notes and shares in Newco.
The cash consideration and redemption of loan notes was funded from the future profits generated by the trading company enabling the employee to end up with a majority shareholding for a relatively small financial commitment.
Do you want to hand over control of your company? Do you want to ensure this is done in the most tax efficient way? Contact us and our team of expert tax advisers will be happy to guide you.
VAT on starter business investments
Our client ran a firm that specialised in finding investors for high-tech startups. They had a complex commission structure partly based on the potential future value of the businesses into which investment was placed.
Our client had received conflicting advice on the VAT treatment of its activities.
We reviewed the activities, its sources of income including the mechanism under which it was paid for its services. We reached a conclusion, based on sound analysis of the VAT legislation, HMRC guidance notes and relevant caselaw, that our client’s services were VAT exempt.
Our client was able to move forward with certainty on how VAT applied to its business.
If you are having difficulty navigating VAT for your business then get in touch with ETC Tax and we can guide you on all tax matters.
CASE REVIEW: SDLT – Non Residential / Residential
Stamp Duty Land Tax (SDLT) is a tax imposed on property purchases in the UK, with rates varying based on whether the property is classified as residential or non-residential. Classification ambiguities can easily lead to disputes. Two recent cases highlight these complexities and their respective resolutions.
In August 2021, Ms. Anne-Marie Hurst purchased a 16th-century manor house in Devon for £1,800,000 and filed her SDLT return under non-residential rates. She argued that the property was used as a ‘hotel or inn or similar establishment’ and noted that a meadow within the grounds was leased commercially for grazing and hay harvesting. HMRC disagreed, issuing a closure notice reclassifying the property as wholly residential, leading to an increase in SDLT of £47,750.
Ms. Hurst, who had previously operated a wedding venue and a wine business, intended to use the manor in a similar capacity. The vendors had upgraded the property to function as a bed-and-breakfast or boutique hotel, offering high-quality accommodation despite COVID-19 restrictions. Ms. Hurst chose not to purchase the business as a going concern but focused on the property’s fixtures and fittings. After the purchase, she converted parts of the house for self-catering accommodations and formalised a commercial lease for the meadow at £500 annually. Upon review by the courts, the taxpayers appeal was allowed on the grounds that the property had been used as a hotel, saving Ms Hurst the additional liability plus interest which HMRC had intended to levy.
In the case of Mr. Taher Suterwalla and Mrs. Zahra Suterwalla v HMRC [2024] UT 00188, the Upper Tribunal (UT) upheld the First Tier Tribunal’s (FTT) decision that a paddock was not part of the residential property grounds. The Suterwallas had purchased a house with a tennis court, indoor swimming pool, pavilion, and paddock, letting the paddock out for horse grazing on the day of completion. They filed their SDLT return as non-residential, but HMRC issued a closure notice, reclassifying the paddock as residential and applying the residential SDLT rate.
The FTT ruled in favour of the taxpayers, and the UT upheld this decision, finding the grazing lease irrelevant since it did not exist at the time of purchase and there was no evidence of prior commercial use. The paddock had a distinct title, was not visible from or integral to the house, and did not support the dwelling or other amenities. This decision emphasizes that post-completion use, such as a grazing lease, can still influence the property’s classification at the time of purchase, depending on specific case details.
Both cases underscore the complexities of SDLT classifications and the significant tax implications tied to property use definitions. They highlight the importance of accurately assessing and documenting property use at the time of purchase, as post-completion arrangements can affect tax outcomes. These rulings provide valuable precedents for understanding how properties with mixed uses may be classified for SDLT purposes.
If you require our support regarding stamp duty land tax please contact us.