Navigating the new R&D Merged Scheme


Introduction

From 1 April 2024, the government has put in place a new merged R&D tax relief scheme.

This is intended to simplify the R&D tax incentive scheme process by introducing a combination of the existing enhanced tax relief and payable credits for SMEs and the R&D expenditure credit (RDEC) for larger businesses.

The aim of the new scheme is to provide simplification, consistency and to protect the scheme from abusive claims.

For those who have previously claimed under the SME scheme this represents a considerable change so there is plenty for businesses to consider and plan for in respect of their R&D claims, and claims are likely to fall under more scrutiny than ever before.

How does the scheme work?

The new merged scheme will follow similar principles to the RDEC scheme by way of providing a tax credit of 20% of the qualifying expenditure, which is recognised as deemed trading income of the company before applying Corporation Tax. The company can then use that credit against their liabilities or eventually as cash paid into their business.

This new regime applies to all businesses regardless of their size. The exception is for R&D intensive SMEs (see below) where a more generous scheme will exist in parallel to the new merged scheme.

The table below shows how R&D tax relief effective rates have changed in recent years and the new rates under the merged scheme.

The merged scheme applies for accounting periods beginning on or after 1 April 2024. This means for a business with an accounting period end of 31 December, they will be under the merged scheme for the year to 31 December 2025.

  Current incentives   Merged Scheme  
Your business SME R&D tax incentive RDEC Merged scheme SME intensive scheme
Company type Before 1 April 2023 After 1 April 2023 Before 1 April 2023 From 1 April 2023 From 1 April 2024 From 1 April 2024
Loss-making SME Up to 33.35% Up to 18.6% 10.5% 15% 16.2%
Profit-making SME Up to 24.7% Up to 21.5% 10.5% Up to 16.2% Up to 16.2%
R&D intensive SME Up to 27% Up to 27%
Large company 10.50% Up to 16.2% Up to 16.2% 

What are the key differences?

1 Lower effective rate for SME’s

For the purposes of the former SME scheme, an SME must have fewer than 500 staff, and either a turnover of less than 100m euros or gross assets less than 86m euros.
The proposed changes will mean the tax benefit for SMEs is reduced to 16.2% of their qualifying R&D spend compared to previously larger amounts of up to 33.35%, for loss making companies.
They will need to change how the credit is applied in their tax computations and tax returns. The RDEC credit can also be reflected as an “above the line” credit in the SME’s accounts if they choose to do so.
This is unless they are considered to be an R&D-intensive SME, as explained below.

2 Enhanced Support for R&D intensive SMEs (ERIS)

As an SME, you should consider whether your total qualifying R&D expenditure is 30% or more of your total spend.

If so, the company will be considered one that is ‘knowledge-intensive’ for R&D purposes and may still be able to claim relief under the similar old SME scheme rules.

This is an alternative scheme which will run alongside the merged scheme and will apply to loss-making intensive SMEs only. It provides an effective tax saving of 27% compared to 16.2% for the merged scheme.

It is not compulsory to claim under this scheme and instead companies can still opt for the merged scheme. They cannot claim under both schemes for the same expenditure.

We would expect HMRC to examine these claims with great scrutiny particularly where qualifying expenditure is close to the 30% threshold, so it is advisable that care is taken to ensure the conditions are met.

3 Payment Steps

To explain another change resulted from the merged scheme, it is best presented by an example.

Example
A Ltd undertakes R&D. Their profits, before claiming under the merged scheme, are £25,000. They are considered a small profits company, as their profits are less than £50,000.
Its qualifying R&D expenditure for the year ended 31 March 2024 is £50,000.
They can include an above the line credit of 20% = £10,000.
This increases their taxable profits to £35,000, leading to a corporation tax charge at 19% of £6,650.

To offset this credit, the company must apply the following steps:
Step 1 – Offset the credit against the Corporation Tax Liability for the Accounting Period.
• £6,650 – £10,000 = (£3,350) credit remaining
• If any credit is remaining, go to step 2.

Step 2 – Compare the credit remaining with the ‘net’ amount of expenditure claimed.
• It is the lower of the two figures that is carried down to step 3.

1 The credit remaining = £3,350

2 The ‘net’ amount of expenditure claimed is the figure you have claimed (£10,000) less notional tax of 19% (£1,900) = £8,100

The lower figure here is £3,350.

• The £3,350 is then carried forward to the usual steps under RDEC and either used against other CT liabilities, surrendered to other group members or, as long as the ‘going concern’ condition is met, paid direct to the company.

As you can see, the notional tax restriction that applies when considering the payment of the credit to companies will now depend on whether the company is small profit making. If the company has profits less than £50,000 or has made a loss, a 19% rate will be used, as above.
Under the RDEC scheme it was always assumed that a 25% rate was used regardless of profit levels.

4 PAYE Cap

The amount of credit available is subject to a PAYE cap of £20,000 plus 3 x the company’s PAYE and NIC liabilities for the year. This can limit the amount of payable credit you can receive in the accounting period for which you claim.

Any excess credit above the cap can be carried forward to the next accounting period.

This is a more generous cap than the one previously applied to the RDEC scheme.

5 Subsidised Expenditure

There is no restriction on claiming for subsidised expenditure under the merged scheme or ERIS, unlike what was previously in place for SMEs.

6 Contracted out R&D

The new scheme and guidance aim to provide further certainty on which company should claim R&D relief where a series of subcontractors are all working to solve the same scientific or technological uncertainty.

The approach has changed so that it is now the party who decides to undertake R&D that is able to make the R&D claim. You can still claim R&D if work has been contracted to you whereby it was your company that took the initiative to do the R&D.

It should be noted however that during the transition, where a contractor or customer is still able to claim for the work they do for you under the old RDEC or SME rules, this claim will not be available to your company.

HMRC have published draft guidance on this area and careful attention is required to ensure a correct claim is made.

7 Overseas R&D costs and subcontractors

Under the previous schemes, there were minimal restrictions on costs for overseas expenditure, which meant they could claim for contractors and EPW’s regardless of where the worked took place.

From April 2024, expenditure on R&D activities that occurred overseas, will generally not qualify for the credit, unless covered under a specific exception. The exception for qualifying overseas expenditure applies if it meets the following three conditions:

  1. The conditions necessary for R&D are not present in the UK;
  2. The conditions are present in the location where the R&D is undertaken;
  3. It would be wholly unreasonable to replicate the conditions in the UK.
    There are different rules applying depending for subcontracted work and EPWs for overseas matters. This should be carefully examined to ensure the claim is maximised to its full potential.

How do I make an R&D claim under the new scheme?

The process for submitting the claim has not changed since the new procedure was introduced on 8th August 2023.

If a company has not claimed R&D before, or has not made a claim for the past three years, they will need to inform HMRC in advance by submitting an Advance Claim Notification to HMRC. This must be done no later than six months after the end of the accounting period.

As part of submitting the Corporation Tax return, a mandatory Additional Information Form must be submitted to accompany the claim.

Next Steps…Seek professional advice

HMRC are currently checking 20% of R&D claims and this is expected to increase as compliance and challenging abusive claims remain a high priority.
Make sure you get your claim right and speak to us as professional tax advisers, to ensure your compliance obligations are met. Get in touch here!



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Employee Ownership Trusts


Employee Ownership Trust (“EOT”) structures continue to be a popular option for business owners looking to exit their business.  There are clear tax benefits to be had to the selling shareholders and the opportunity for employees to get some tax-free cash on an annual basis. 

However, it is easy to be blinded by the up front tax benefits and lose sight of some of the challenges associated both with a sale to an EOT and also if and when the EOT looks to sell its shares in the future.

Employee Ownership Trusts – The Basics

An EOT is a trust for the benefit of all of the employees of a company or group.  If the owner(s) of a business sell a controlling (more than 50%) interest in their company to an EOT then any gain they realise on the sale should be tax free.  There are lots of conditions to be met before the tax free sale is achieved but if proper advice is taken then there are clear tax benefits to be achieved.  There is also the opportunity to pay employees tax free bonuses of up to £3,600 per year when under the ownership of an EOT.

This all sounds very attractive, but if the tax benefits are the sole or main reason you are thinking of an EOT structure then it may be wise to consider the points below before launching into the process.  As a general rule EOTs are a great solution for those who enter into the process for the right reasons – but for those who see it as a way to realise some tax-free cash it can lead to significant difficulties in the future.

Losing Control!

The first point may seem an obvious one but it often overlooked.  The shareholder(s) have to sell a controlling interest to the Employee Ownership Trust – so they no longer are able to control the destiny of the company.  The seller(s) can of course remain in the business and they may become trustees of the trust but best practice for trustees is that there should be at least one independent trustee and potentially an employee trustee as well.  There is a strong sense this requirement may become law at some point.

So while the former owners may continue to run the business day to day the long term future of the business is in the hands of the trustees, whose responsibility is to protect the interests of the employees.  Business owners can and do find this a challenging transition to make. 

Jam Tomorrow…

In the majority of cases the purchase by the Employee Ownership Trust will be funded by a combination of cash from the company on day one and deferred payments to be funded out of future profits.  This often means a significant chunk of the shareholders’ cash is dependent on the future performance of the business.  Does that mean you will need to stay involved until you have received your cash?  What happens if business performance takes a turn for the worse?  Could the deferred consideration hamstring the cashflow of the business?  How long are you prepared to leave your cash on the table?  The longer the payments are spread over, the greater the risk of something going pear shaped.

There may be a thought that the deferred payments can be funded out of the sales proceeds of a sale by the trust at some point in the future – while this may well be a possibility then given the amount of tax the EOT will need to pay on a later sale (see below) how confident will you be that the is enough cash left to repay the outstanding amounts?  And will the trustees consider a future sale to be in the best interests of the employees?

The lesson here is , when looking at the sale value to the Employee Ownership Trust and the level of deferred payments, make sure a balance is struck between all of the competing factors – affordability of the payments, length of the payback period, how long you will need to stay to look after your interests and other factors as well.

Death and Taxes

In a typical business sale situation, the sellers of a trading company will be converting a very inheritance tax (“IHT”) friendly asset (shares into a trading company) into a very IHT-unfriendly asset – cash.  Absent other planning the full amount of that cash would be exposed to IHT in the event of the owner’s unfortunate demise.  Generally though, if the deal has been well negotiated, the owner will have received a significant majority of that cash up front so at least the money is there to pay the IHT.

Looking at an Employee Ownership Trust situation however, a large proportion of the proceeds may be made up of deferred amounts.  In the event the worst happens then those amounts will be considered to be an asset of the estate of the deceased (a debt) and subject to IHT on the full amount owed – even if some of the cash is not due to be received for many years.  The law does not make provision for the IHT to be deferred to match the receipts of the deferred consideration, so this can mean a real cashflow hit to beneficiaries…  There are ways to manage the risk but these are far better thought of before the sale than after.

Second Exit

In the hope that the second exit does not fall within the previous section, many business owners will retain a stake in the company they are selling in anticipation of a second sale in the future.  The first thing to note here is that the tax free sale to the Employee Ownership Trust is a one-hit wonder – any sales in a later tax year will be fully subject to capital gains tax in the normal way.  Secondly of course they no longer have control of their own destiny – that will be in the hands of the trustees!

Common Misconception

A common misconception is that the tax free sale of the shares to the EOT is some sort of exemption – nothing could be further from the truth.  Certainly provided the business owner is careful about the conditions then once a certain period has passed they are in the clear.  However the same cannot be said for the Employee Ownership Trust.

When the tax free sale takes place then for CGT purposes the EOT assumes that tax cost base of the shares from the original owner.  So if the owner simply subscribed for £100 in share capital then that is treated as the cost of the shares to the EOT, irrespective of the actual price paid at the time the EOT acquires the shares.

In practice what this can mean is that the EOT will effectively pay CGT (at 20%) on the full proceeds it receives from any sale.  As above this can leave a very large hole in the cash received to pay out benefits to employees or to pay the balance of any deferred consideration. 

If there is cash left to pay out to employees then the hits keep on coming.  The employee is taxed on the distribution of the proceeds as if it were remuneration from their employment – at rates of up to 47% including NIC.  In addition the employer will have to pay NIC at 13.8% on the amounts distributed.

So what does this mean?

All of this means that the net received by employees can be only a relatively small proportion of the gross proceeds from the sale.  This is something the trustees will have to weigh up when considering whether a sale is the right option for the benefit of the employees.

In Summary…

None of the above is intended to put anyone off exploring an EOT as an option for their business.  For the right businesses and when done for the right reasons the EOT can be hugely successful in driving employee engagement and with it profitability and growth.  However, for those who enter into an EOT without taking proper advice and understand all of the implications then the EOT structure can be the source of considerable pain (and cost!).  It is critical the decision to proceed is as well informed as it can be so all of these potential issues can be priced in and managed before they arise.

Next Steps

At ETC Tax we have implemented a number of EOT transactions working with business owners to ensure they achieve the outcomes they are looking for and giving honest impartial advice as to whether an EOT is right for them.  For more information on EOTs and other forms of business exits contact us.



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Election Fever – its getting hot in here!


With election fever hotting up and only 3 weeks to go, we take a look at the key tax proposals from each party’s manifesto.

Conservative Party’s Tax Proposals

National Insurance Reduction: The Conservative Party plans to halve employee National Insurance contributions from 12% to 6% by April 2027, with the ultimate goal of eliminating it when economically feasible.

Self-Employed National Insurance: The manifesto proposes abolishing Class 4 National Insurance contributions for the self-employed, simplifying the tax system and benefiting approximately 93% of self-employed individuals.

Tackling Tax Evasion and Avoidance: The Conservatives aim to raise an additional £6 billion annually by targeting tax avoidance and evasion. This includes increasing HMRC staffing, investing in technology, and focusing on areas such as umbrella companies and tax advice regulation.

Inheritance Tax: A shift from a domicile-based to a residence-based system for inheritance tax is planned. This would subject individuals who have been UK residents for 10 years to UK inheritance tax on their worldwide assets.

Temporary Repatriation Facility: A proposed Temporary Repatriation Facility would allow non-doms to bring foreign income and gains into the UK at a flat rate of 12% tax during the 2025/26 or 2026/27 tax years.

These proposals aim to simplify the tax system, boost economic activity, and increase tax revenues to support public services. Their implementation depends on economic conditions and parliamentary approval.

Labour Party’s Tax Proposals

Taxation of High Earners: Labour plans to raise an additional £5 billion annually for health and education by cracking down on tax dodging. This includes boosting compliance, investing in technology, and making legal changes to close the tax gap.

Non-Dom Taxation: Labour supports replacing the non-dom rules with a residence-based system similar to the Conservatives’ proposal. They aim to close perceived loopholes, such as including all foreign assets in inheritance tax and removing a 50% discount on income during the transition.

Investment Incentives: Labour is considering introducing investment incentives during the initial four-year window of the new non-dom rules to encourage UK investment income and discourage moving funds offshore.

Tax Evasion and Avoidance: Like the Conservatives, Labour targets an increase in tax revenues by tackling tax evasion and avoidance, though their specific measures may differ.

Labour’s tax policies emphasise fairness and closing perceived loopholes while generating revenue to fund public services. This approach contrasts with the Conservative focus on reducing tax rates and simplifying the tax system.

These proposals reflect Labour’s stance on tax fairness, economic policy, and funding priorities, aiming to redistribute wealth and ensure equitable contributions to public services.

Liberal Democrats’ Tax Proposals

Taxing Wealth: The Liberal Democrats propose an overhaul of wealth taxation, including higher taxes on income from capital gains and dividends, and reforming inheritance tax to make it fairer.

Income Tax: They plan to introduce a 1% rise in all income tax rates to fund the NHS and social care, targeting higher earners.

Corporate Taxes: The party aims to increase corporate tax rates and implement a “Digital Sales Tax” on large technology firms.

Environmental Taxes: They advocate for green taxes, including a frequent flyer levy and higher taxes on single-use plastics.

Tax Evasion and Avoidance: The Liberal Democrats pledge to increase resources for HMRC to tackle tax evasion and avoidance, aiming to close loopholes and ensure fair tax contributions.

Overall, the Liberal Democrats’ tax policies prioritise wealth redistribution, environmental sustainability, and funding public services through increased taxation, particularly targeting higher-income individuals and corporations. Their emphasis is on fairness and environmental responsibility.

Reform’s Tax Proposal

The Reform Party’s manifesto outlines several key tax implications designed to simplify and reduce the tax burden:

Flat Tax Rate: The Reform Party proposes introducing a flat tax rate of 20% on income, aimed at simplifying the tax system and making it more transparent.

Abolishing Inheritance Tax: They plan to abolish inheritance tax entirely, arguing that it is an unfair tax on the savings and assets people leave to their families.

Reducing Corporation Tax: The manifesto includes a proposal to lower the corporation tax rate to 15%, intending to make the UK more competitive for businesses and encourage investment.

Simplifying VAT: They advocate for simplifying the VAT system by reducing the number of different rates and exemptions, aiming to streamline tax compliance for businesses. They also argue in opposition of Labour and propose they will not charge VAT on private school fees and instead will offer tax relief if you pay for private education.

National Insurance Overhaul: The Reform Party proposes merging National Insurance contributions with income tax to create a single, simpler tax on earnings.

The tax proposals outlined in the Conservative, Labour, Liberal Democrat and Reform manifestos signal significant changes to the UK’s tax landscape. From reductions in National Insurance and tackling tax evasion to fairness and closing loopholes and emphasis on wealth redistribution and environmental sustainability, these changes will impact individuals and businesses alike. Navigating these new tax policies can be complex and challenging.

Next Steps

Whilst the polls indicate that Labour are tipped to win, we know that things can change quickly. Whatever the party in power, it is likely that any tax changes won’t be properly debated and/or introduced until the first post-election budget which will likely take place in the Autumn so there is still time to act decisively if there is anything in any of the manifestos that concerns you.

Whilst it is highly unlikely (although not impossible) that legislation will apply retrospectively, acting now, could be the right thing in certain circumstances and we would be happy to chat through your options. Please do get in touch.



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PAYE Settlement Agreement


A PAYE Settlement Agreement (PSA) is an arrangement with HM Revenue and Customs (HMRC) that allows employers to settle certain types of tax and National Insurance contributions (NICs) liabilities on behalf of their employees. This can be particularly beneficial for covering liabilities on benefits that are minor, irregular, or impractical to tax through the payroll.

Below we have set out a guide on how PSAs work, their benefits, and the process involved.

What is a PAYE Settlement Agreement (PSA)?

A PSA is a voluntary agreement enabling employers to make a single annual payment to cover the tax and NICs on specific expenses and benefits provided to employees. This often simplifies the process for both the employer and employees, ensuring that employees do not have to worry about the tax implications of smaller benefits and expenses

Benefits of a PSA

1. Simplification –  PSAs simplify the tax process by consolidating multiple tax liabilities into a single annual payment.

2. Employee Satisfaction – Employees benefit as they do not have to deal with the tax implications of the covered expenses and benefits.

3. Administrative Ease – A PAYE Settlement Agreement (PSA) is an arrangement with HM Revenue and Customs (HMRC) that allows employers to settle certain types of tax and National Insurance contributions (NICs) liabilities on behalf of their employees reduces the administrative burden for employers, who would otherwise have to report these expenses and benefits through P11Ds or the payroll.

What Can Be Included in a PAYE Settlement Agreement?

Not all expenses and benefits can be included in a PSA. The types that are generally covered fall into three categories:

1. Minor Items – Such as small gifts, staff entertaining, or non-cash vouchers.

2. Irregular Items –  Such as one-off relocation expenses that exceed the tax-free limit.

3. Impractical Items – Such as shared benefits, where it is difficult to attribute the exact cost to individual employees.

Setting Up a PAYE Settlement Agreement

To set up a PSA, these are the steps that must be followed:

1. Application to HMRC – Employers need to apply to HMRC to set up a PSA. This should be done in writing to HMRC with details of the benefits and expenses you wish to be covered.

2. Agreement – Once HMRC agrees, they will send a PSA agreement form for the employer to sign and return.

3. Annual Calculation – Each year, the employer must calculate the total value of the benefits and expenses included in the PSA, determine the tax and NICs due, and make a single payment.

Calculating the Tax and NICs

The calculation of the tax and NICs for a PSA involves several steps:

1. Grossing Up – Since the employer is covering the tax, the benefits and expenses need to be grossed up to reflect the tax that would have been payable by the employee.

2. Tax Calculation – Apply the appropriate tax rates for each individual to the grossed-up amounts.

3. NICs Calculation – Class 1B NICs are payable on the grossed-up value of the benefits and expenses.

Deadlines and Payment

Employers must apply for a PSA by 5 July following the end of the tax year in which the benefits and expenses were provided.

The payment of tax and NICs under a PSA must be made by 22 October (or 19 October if paying by cheque – yes, cheques do still exist!) following the tax year to which it relates.

Renewing a PAYE Settlement Agreement

Once a PSA is in place, it typically continues until either the employer or HMRC cancels it. Employers must review and renew the agreement annually, ensuring it still accurately reflects the benefits and expenses being provided.

Conclusion

A PAYE Settlement Agreement can be a valuable tool for employers who wish to provide benefits to their employees but don’t wish for the employees to be adversely effected by having to pay tax on the value of the benefits provided.

Next Steps

By understanding the process, benefits, and compliance requirements, employers can effectively manage their tax obligations under a PSA. If you would like further guidance please do get in touch.



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Martin Lewis: Employed aged under 22, or any age earning under £10,000? How to get a hidden pay rise


If you’re under 22 or on a low income, a pension is probably the furthest thing from your mind, but what if I were to tell you there’s a totally legal way, that doesn’t need any negotiation, to make your employer pay you more money – possibly £1,000s over the years? Hopefully that piques your interest, and means you’ll forgive me for not mentioning pensions in the blog title – but I wanted to ensure you read this.



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Employment Related Securities


Introduction

For most employers, they will tend to only come into contact the employment related securities (“ERS”) rules on very few occasions. 

The typical instances will be if the employer provides their employees with free or discounted shares, or if they grant options to employees to acquire shares in the future.  

In the vast majority of cases shares acquired by an employee in their employing company or group will be considered to be employment-related and therefore reportable.  It is important to note that the shares need not be acquired from the employer – if another shareholder provides the shares then these will also fall within the regime.

There are also a number of other events that do not relate directly to the acquisition or disposal of shares but which need to be reported.  The most likely one is where shares have been issued with restrictions over them (for example on the ability to sell them) – referred to as restricted securities.  The restrictions will have most likely depressed the market value of those shares – and once the restrictions re lifted then the market value will increase. 

The increase in value as a result of the lifting of restrictions is taxable on the employee and must be reported.  The only exception is where the employee and employee have elected at the time the shares were issued to ignore the effect of the restrictions in valuing the shares – this is known as a “section 431 election.”

The Reporting Regime

The reporting regime now provides that a return in a specified form must be submitted for each fiscal year (i.e. the year to 5 April) that a ‘scheme’ is open on HMRCʼs system, whether or not there have been any reportable transactions in the year.  This last point can be problematic when a “scheme” is opened to report a one-off event but then not “closed” – HMRC will expect a report each succeeding year and will issue penalties for a failure to file even if the return would be “nil.”

The reports must be filed no later than 6 July following the end of each fiscal year. Failure to comply results in an automatic penalty of £100, followed by later penalties of £300 each if the filing remains outstanding at the three and six month mark – a daily penalty of £10 per day can be applied if the compliance failure continues past that point.

A similar system now also applies to the various statutory share schemes (such as the Enterprise Management Incentive scheme), which each have their own reporting regime.

Reportable Events

Reports will be required for most acquisitions of shares by employees, subject to certain limited exceptions:

  • Shares acquired on the incorporation of a company (or shortly after incorporation), provided that the company provided the company has no assets other than share capital when the shares are acquired
  • Transfers of shares in the normal course of domestic, family or personal relationships (this is a key “get out of jail free” card for the ERS regime as a whole)
  • Flat management companies and membersʼ clubs – there is generally no need to report the acquisition or disposal of shares in flat management companies unless the transaction has some element of ‘bounty’ in it (for example, the shares are sold at over-value) or the shares are restricted securities
  • There is no need to report acquisitions by employees who are not UK resident and do not have any UK duties in the year of the award, as long as they are not likely to become UK resident or work in the UK during the vesting period of the award

If shares have previously been acquired by an employee as employment-related securities then any further shares acquired by way of a share for share exchange will also be employment-related securities and should be reported.  If however the original shares are not required to be reported because they were acquired on incorporation then the new shares should also not be considered to be employment related and need not be reported. 

Practicalities of Reporting

The reporting system for ERS is something of an administrative nightmare for employers.  To make a report, the employer will need to go into its ‘PAYE for employers’ account on the HMRC website and then access the section marked ‘ERS for employers’ to set up a ‘scheme’. This can only be done using the employerʼs log-in credentials; an agent cannot establish a scheme on an employerʼs behalf. 

If the employer wishes to have an agent file the ERS return on their behalf a code must be requested by the agent, the code will be sent to the employer who must then provide the code to the agent to allow them register themselves and file the return.  All of this takes time which means that setting up a scheme cannot be left to the last minute if penalties are to be avoided!

A scheme will need to be set up even if an employer simply wishes to report a share transaction that does not fit within a conventional employeesʼ share scheme.

Once the scheme has been established the employer or its agent can then upload information using spreadsheets saved in the .ods format. The system is very prescriptive – a small step away from the prescribed format will result in the spreadsheet being rejected which can lead to a significant degree of frustration!

Once all of the transactions under a scheme have been completed, the scheme will need to be closed (again, this can only be done by the employer). As above, if a scheme is not closed, the employer must continue to file returns and will be liable for penalties if the returns are not made.

Next Steps

ERS reporting is a complex and messy exercise! If you think you may have to file a report by 6 July but are unsure, or need help with the reporting itself then contact ETC Tax



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Case – Why it is important to understand whether a property is opted to tax for VAT purposes


Introduction

Our client was buying land that the vendor thought was within the scope of an Option To Tax 

The Issue  

The addition of VAT to the sale price would make the transaction untenable, as the client would not be able to recover the VAT. 

How we solved it 

We reviewed documentation dating back to 2004, when the original Option to Tax was made to understand whether the scope of the Option had been fully defined. We also reviewed the VAT legislation that was in force at the time and identified arguments that would subsequently disapply the Option to Tax even if it had been in place. 

The Outcome 

We presented our arguments to the seller’s solicitors to enable the sale to proceed without a VAT charge being applied, a great outcome for our client. 

Next Steps

If you have a case similar to the one above and want an expert opinion please do get in touch

The post Case – Why it is important to understand whether a property is opted to tax for VAT purposes appeared first on Making the Complex Simple.



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Case: Saving IHT when passing on wealth


Introduction

We were approached by a client who was reaching her mid-70s and was considering how to tax-efficiently pass on her wealth to her family.

Issue

To do this, she needed to consider what her current exposure to Inheritance Tax (IHT) was, to then understand how much of her wealth could be passed on.

She then wanted to consider what planning opportunities were available to reduce that exposure and prevent her estate from growing further, before her death.

How we solved it

We gathered all the relevant background to understand her circumstances and what structures would be suitable for her to achieve her objectives.

We provided calculations of her current exposure to IHT.

We then provided recommendations based on her circumstances to reduce that exposure, including opportunities for making lifetime gifts, making strategic investments, will planning, trusts and the potential to set up a family investment company (FIC).

This included considerations of any beneficial exemptions and reliefs available to her.

The outcome

Due to our expertise we produced a bespoke advisory report on the opportunities available to her to reduce her potential IHT bill. If she were to implement the planning to its fullest potential, her IHT bill would be reduced from approx. £1,300,000 to £300,000, a tax saving of £1,000,000.

This ultimately would provide more of her estate left over for distribution to her family.

The advice gave her clarity on the actions she needed to take and the timings of those actions in order to implement the planning effectively.

Next Steps

If you need IHT advice then please do get in touch



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Tax Partner Pro – Your Q answered. May 24


We have been supporting our Tax Partner Pro members via our email and call back service. Here’s an overview of some of the more recent questions we have answered during May 24.

Q

My client is just about to acquire her first UK residential property.  She is UK resident, h owever she is already a 1/3 member of an LLP which owns a 1 mixed use property in Germany, but part is residential part commercial – this property was inherited from a German relative and put straight into a UK LLP.

Does she have to pay the 3% second home surcharge on her acquisition here or what would need to be the value of the residential portion in Germany to not pay it?

Does this make her ineligible for first time buyer discount on SDLT?

A

Our view is that the client would lose out on their first-time buyer’s exemption as they already have a share in a partially residential property. Even though this property isn’t in the UK, HMRC consider property owned anywhere in the world.

This would also mean that the 3% surcharge will apply as the client will be deemed to own another property and has another residential interest.

Q

I have a question about travel expenses for my limited company client. It’s just one director and the services they provide are business coaching services. 

They mostly work from home (80% of their time) but occasionally they rent an office and deliver the sessions from there.

I’m not sure what will be the correct treatment for the travel expenses and whether these will be allowable for the corporation tax purposes in the situations where they travel from home (which is also their permanent place of work) to that rented office for some sessions. They sometimes buy lunch while performing their duties from that office.

A

As your client’s home is their permanent workplace, any time spent visiting offices to deliver training sessions from there will be classed as a ‘temporary workplace’.

 A ‘temporary workplace’ means that you attend the workplace for a limited duration or temporary purpose. If a director (or employee), is relocated to a temporary workplace from their regular base of operations (i.e., their home in this instance) for an extended period, the new workplace may still be classified as temporary if:

 a) It’s anticipated to last under 2 years;

b) It’s expected to last over 2 years, but they’ll spend less than 40% of their working time there.

 Any accommodation, food, and drink costs you incur whilst your client is working away from their permanent workplace are tax deductible for the company. It is important to note your client would need to ensure the costs are reasonable.

Q

I have a question about SDLT – a client is buying a freehold block, with 7 flats in one single purchase for £341,000 so an average of £48,700 per each flat. I am not too sure on the Stamp Duty treatment of this, would it qualify for Multiple Dwellings relief or ‘non residential’ rates, due to the criteria: ‘6 or more properties bought in a single transaction’ based

A

Providing there is no headlease and none of the flats are subject to a long lease the purchase of the freehold is treated as if it were an interest in the individual dwellings. As such, this would be a relevant transaction for the purposes of MDR relief.

If the conditions are met, MDR can be claimed but in almost all examples like this, this higher rate for additional dwellings will apply.

If MDR can be claimed and the average price of each flat is £48,700 then only a 3% SDLT rate would apply.

Q

Is it considered a supply and VAT chargeable and, subject to breaching thresholds, the trader  (a company in this case) would need to register?

They’re a finance broker and lenders pay a commission, my take is that their services are more consultancy and therefore a supply and should be registered. They’re saying others in the industry aren’t charging VAT – so wondering if there’s an exemption somewhere?

A

If it is a commission earned in the provision of a professional service then it would be VAT-able.

However, commission received by an intermediary in connection with financial services are exempt from VAT if the role of the intermediary is simply to make an introduction. i.e the bringing together a person seeking a financial service with a person who provides a financial service.

So it depends on the scenario…



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