Income producing assets

In a previous blog, we described how savings income arising to children from cash provided by their parents will be taxed on the parents. Do the same rules apply to other income-producing assets?

Very probably. The basic rule is that income arising under a settlement is treated as the parent’s income for tax purposes if it is paid to or benefits his or her child (or, more correctly, a child or stepchild who is a minor and is not married or in a civil partnership). For this purpose a settlement is very widely defined to include not only trusts but also agreements, arrangements and transfers of assets.

Decided case law provides a useful example. Two brothers formed a company and arranged for shares to be allotted to their children. The company acquired and developed some property and profits were distributed to the children by way of dividend.

The Courts decided that this series of events constituted arrangements which in turn constituted a settlement for income tax purposes and so the resulting income was assessable on the parents.

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VAT – Charities, Energy Saving Materials & Builders

A client is a VAT registered builder. He has been asked to install draught stripping to the windows and doors in a church. The customer has said that as the Church is a charitable organisation my client should not charge VAT at the standard rate. What’s correct?

Draught stripping for windows and doors is defined in VAT legislation as an energy saving material (“ESM”)
The reduced rate of 5% applies to the service of installing ESMs in residential accommodation (VATA 1994, Schedule 7A, Grp 2, item 1), and also to the supply of those materials by the person who installs them in the residential accommodation (VATA 1994, Schedule 7A, Grp 2, item 2).

Historically the 5% rate of VAT also applied to the installation of ESMs in buildings used for a relevant charitable purpose, but this provision was removed from the legislation with effect from 1 August 2013. The reduced rate of VAT for the installation of ESMs was only intended by the EU to apply to residential accommodation, so the amendment to UK legislation brought it into line with the intention of the Directive.

Consequently, the client will need to charge at 20% to the Church for the installation of draught stripping.
Charities are entitled to VAT relief on certain purchases of goods and services, but the conditions can be complex and eligibility declarations or certificates are often issued in error. As a supplier the client is responsible for determining the correct VAT treatment, so was wise to check the correct position and not take the charity’s statement at face value. This should be standard practice in any business supplying a charity and being provided with a request for VAT relief, whether verbal or in an eligibility declaration.

The Last Autumn Statement

Philip Hammond delivered his 2016 Autumn Statement on 23 November and announced it will be the last of its kind.  There will be a Spring Budget in 2017 followed by a second Budget later in the year followed by annual winter Budgets. One of the reasons for this change is to allow Finance Bills to be introduced with sufficient time for Parliament to scrutinise any proposed tax changes and to reach Royal Assent during the following spring and before the start of the new tax year. In addition, the Spring Budget will be replaced by a Spring Statement, starting in 2018, and there will be greater consultation on draft legislation.

The following summary is based upon material made available on the gov.uk website following the Chancellor’s statement.


Income tax: Rates and allowances

As expected, the personal allowance is increased to £11,500 and the basic rate band to £45,000 in 2017-18. The Government has confirmed its commitment to increase the allowance to £12,500 and increase the basic rate band to £50,000 by the end of the current parliament.

Income Tax: Benefits in kind

As announced in the 2016 Budget, legislation to be introduced in Finance Bill 2017 and having effect from April 2017 will allow an employee to make a payment in return for a benefit in kind and reduce the taxable value of the benefit as long as the payment is made by 6 July in the following tax year.

From April 2017, an employee who is required to give evidence in court will no longer be subject to tax on legal support provided by the employer.

In addition, Finance Bill 2017 will include provisions intended to clarify existing legislation so that employees will only be taxed on business assets for the period the assets are made available for private use.

The Government intends to carry out a review of how benefits in kind are valued and will publish a consultation document on employer-provided living accommodation.

 Income Tax: Pay As You Earn Settlement Agreements

The Government has confirmed its intention to simplify the process for applying for and agreeing PSAs. Legislation will be included in Finance Bill 2017 to take effect from the 2018-19 tax year.

 Income Tax: Partnerships

The Government is to introduce legislation intended to ensure profit allocations to partners are fairly calculated for tax purposes. Draft legislation will be published for consultation.

 Income Tax: Junior ISAs and Child Trust Fund limits

The proposed increase in the annual subscription limit to £4,128 will take effect from 6 Appril 2017.

Income Tax: Property and trading income allowance

As announced in the 2016 Budget, two new income tax allowances of £1,000 each for property and trading income. Individuals with income below the level of the allowances will no longer need to declare or pay tax on that income. The trading income allowance will also apply to certain income from providing services or assets.

Income Tax: Employee expenses

The Government intends to carry out a review of income tax relief for employees’ business expenses, including those which are not reimbursed by the employer.

National insurance: Thresholds

The employee and employer thresholds will be aligned from April 2017 so that both employee and employer will start paying National Insurance contributions on weekly earnings above £157.

National Insurance: Termination payments

As announced in the 2016 Budget, from April 2018 termination payments in excess of £30,000 which are subject to tax will also be subject to employer NICs.

Income Tax and National Insurance: Salary sacrifice schemes

As widely predicted, measures will be introduced, taking effect from April 2017, to ensure that benefits provided as part of a salary sacrifice scheme will be treated the same as cash income. Pensions, pension advice, childcare, cycle to work schemes and ultra-low emission cars will be exempt from the new rules. Any arrangements in place before April 2017 will be protected from the new rules for up to a year and arrangements involving cars, accommodation and school fees will be protected for up to four years.

 Taxation of investments

As announced in the 2016 Budget, Finance Bill 2017 will include legislation to amend the disproportionate tax charges arising on some surrenders and assignments of life insurance policies from 6 April 2017 and, with effect from Royal Assent, legislation relating to the list of assets which life insurance policyholders can invest in without triggering certain anti-avoidance provisions.

As previously announced, the ISA limit will increase from £15,240 to £20,000 in April 2017.

 Income Tax and Capital Gains Tax: Employee shareholder status

The Government has concerns that some companies are not using employee shareholding status as intended. Income tax reliefs on the receipt or buy-back of shares issued to an employee under an employee shareholder agreement will be withdrawn as will the capital gains tax exemption relating to shares received for entering such an agreement. An individual who before 23 November 2016 has taken independent advice on entering an agreement has, depending upon exactly when the advice was received, until 1 December or 2 December 2016  to enter an agreement and still receive the income tax and capital gains tax advantages.

 Income Tax and Capital Gains Tax: Tax-advantaged venture capital schemes

Various measures will be included in Finance Bill 2017. The Enterprise Investment Scheme and Seed Enterprise Investment Scheme rules on share conversion rights for shares issued on or after 5 December 2016 will be clarified. The rules for certain follow-on investments in  Venture Capital Trusts will be changed from 6 April 2017 to align them with Enterprise Investment Scheme rules.


 Corporation Tax: Rates

The Government has confirmed its commitment to cut the corporation tax rate to 17% by 2020.

 Corporation Tax: Patent Box

Legislation to be included in Finance Bill and taking effect for accounting periods commencing on or after 1 April 2017 will ensure that two or more companies carrying out research and development under a “cost sharing arrangement” are neither penalised by nor are able to benefit from their arrangement.

 Corporation Tax: Contributions to grassroots sport

As announced in the 2015 Autumn Statement, Finance Bill 2017 will include tax relief for certain contributions to grassroots sport from 1 April 2017.

 Research and Development

In a separate related announcement, the Government has undertaken to review the R&D tax system of reliefs in an effort to make the UK an even more competitive place to carry out R&D.

 Capital allowances

In the interests of promoting the wider uptake of electric vehicles, expenditure incurred on electric charge point equipment on or after 23 November 2016 will qualify for a 100% first-year allowance. The allowance will expire on 31 March 2019 for corporation tax purposes and 5 April 2019 for income tax purposes.


VAT: Changes to the VAT Flat Rate Scheme

HMRC are making a stand against “limited cost” businesses they see as unfairly benefitting from the flat rate scheme. From 1 April 2017 flat rate scheme businesses must determine whether they meet the definition of a limited cost trader. Limited cost traders are defined as those whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive turnover in a prescribed accounting period or greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).Such traders will be required to apply a flat rate scheme percentage of 16.5%.

To make matters worse, excluded from the definition of goods are capital expenditure, food or drink for consumption by the flat rate business or its employees, vehicles, vehicle parts and fuel (except where the business is one that carries out transport services).  These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation has also been published to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. Draft secondary legislation will be published on 5 December 2016 and businesses will have 8 weeks to comment.

This will affect most personal services companies, consultants, locum doctors and engineers using the flat scheme who will be forced to apply a higher flat rate scheme percentage or leave the scheme completely. Any businesses that trade below the threshold but have registered for VAT voluntarily to use the flat rate scheme because they have minimal costs could also be affected. Presumably businesses will need to apply the test on an annual basis by looking at their previous year’s purchases, although the press release does not make that clear. This may mean that small businesses on the scheme will need to keep something close to full VAT records which is precisely what the scheme is intended to avoid!

VAT:  Tackling exploitation of the VAT relief on adapted cars for wheelchair users

The Government will clarify the application of the VAT zero-rating for adapted motor vehicles to stop the abuse of this legislation, while continuing to provide help for disabled wheelchair users.

VAT: Updating the VAT Avoidance Disclosure Regime

As announced at Budget 2016 and following consultation, legislation will be introduced in Finance Bill 2017 to make scheme promoters primarily responsible for disclosing schemes to HMRC and the scope of the regime will be extended to include all indirect taxes. This will have effect from 1 September 2017.

VAT: Penalty for participating in fraud 

As announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to introduce a new penalty for participating in VAT fraud. It will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud. This will be implemented following Royal Assent of the Finance Bill 2017.

VAT: Retail Export Scheme

HMRC will provide funding with a view to digitising fully the Retail Export Scheme to reduce the administrative burden to travellers.


Insurance Premium Tax

The rate of Insurance Premium Tax will rise from 10% to 12% on 1 June 2017.

Annual Tax on Enveloped Dwellings: Rates

The annual charges will rise in line with inflation for 2017-18.

Tax avoidance

The crackdown on tax avoidance continues with new penalties which may apply to advisers who assist taxpayers in the use of failed avoidance schemes. Measures will also be introduced to limit a tax avoider’s defence against penalties in certain cases. Anti-avoidance legislation intended to counter disguised remuneration schemes will be extended to include similar schemes used by the self-employed and tax relief for an employer’s contributions to disguised remuneration schemes will be denied unless tax and national insurance is paid within a specified period.

Buy to let repairs before the tenant…

A client has acquired a buy-to-let property and will be carrying out some repairs before taking on tenants. Will the repair costs qualify for a tax deduction?

This is a fairly common question which is often fraught with difficulty. The answer very much depends upon the facts. The discussion which follows relates to genuine repair and maintenance costs and not to works which result in a significant improvement over the asset’s original condition. The cost of such works will invariably be treated as capital.

It is generally accepted that the cost of routine repairs and maintenance, for example redecorating, carried out after a property acquisition is a revenue cost. Similarly, work to repair or reinstate a worn or dilapidated asset is usually deductible as a revenue expense and HMRC accept that carrying out repairs shortly after acquisition does not necessarily point to a capital expense. However, they also point out that if buying a property in good condition is capital then the combined cost of buying a dilapidated property and putting it into good condition must also be capital. So, in their view, the cost of repairs carried out after buying a property which was not in a fit state to let until the repairs had been carried out is a capital cost and even more so if the price paid for the property clearly reflected its dilapidated state.

This can perhaps be contrasted with the situation where the property is capable of being used in its current state but the new owner wishes to carry out some repair and maintenance work to appeal to a particular class of tenant, in which case the expenditure is, arguably, revenue in nature and deductible.

VAT on residential properties, residential care homes etc…

A client rents out a number of residential properties and as the rental income is exempt he is not registered for VAT. He has recently acquired some land and is going to build a new residential care home on it. The client is not sure if he is going to run the care home himself or sell it to a third party. Their understanding is that he can receive building services from a building contractor at the zero rate of VAT in either scenario but please can we clarify the position?

A supply in the course of construction of a building intended for use solely for a relevant residential purpose and of any services related to the construction (other than services of an architect, surveyor or any person acting as a consultant or in supervisory capacity) can be zero rated (VATA 1994, Schedule 8, Grp 5, item 2(a)).

Included within the definition of relevant residential purpose is a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder. (VATA 1994, Schedule 8, Grp 5, Note 4). Also included within the definition of relevant residential purpose are homes providing residential accommodation for children, hospices and residential accommodation for students or school pupils and the armed forces. A full list is provided in VAT Notice 708: Buildings and construction Section 14.

In order to qualify for zero-rating the supply must be made to the person that intends to use the building for a relevant residential purpose. (VATA 1994, Schedule 8, Grp 5, Note 12 (a)) and that person is required to give a certificate to the building contractor certifying that they will use the property for relevant residential purposes. (VATA 1994, Schedule 8, Grp 5, item 12(b))

Therefore, if the client chooses to run the care home himself, he will be able to issue a certificate certifying that he will be using the building for a relevant residential purpose and obtain the building services at the zero rate. However, if the client decides to sell the care home, he cannot issue a certificate and so the building services he receives will be standard rated.

The VAT legislation surrounding relevant residential buildings such as nursing and care homes and also student accommodation is complex and advisors working in this area need to be especially cautious because there are numerous traps for the unwary. It is easy to underestimate the complexities of such transactions and getting it wrong can easily result in a substantial irrecoverable VAT cost.

HMRC Clarify Position on Pre-Registration on Input Tax

RC have finally addressed the uncertainty regarding recovery of input tax on assets purchased prior to VAT registration.  Historically HMRC’s position was that  a fully taxable business was able to recover VAT in full on fixed assets purchased by that business within 4 years of the effective date of registration,  providing those assets were still “on hand” and in use by the business.  There was no published change of policy,  but following an update to the HMRC internal Input Tax Guidance Manual (VIT32000)  which advised that a business was required to apportion the VAT claimable on assets purchased prior  to registration,  HMRC officers have been challenging businesses which have recovered  the VAT on the asset purchases in full.

Revenue and Customs Brief 16 (2016): treatment of VAT incurred on assets that are used by the business prior to VAT registration  confirms that HMRC will accept corrections from businesses which have overpaid VAT by voluntarily reducing the amount of VAT claimed on the purchase of pre-registration assets or been forced to do so by HMRC via an assessment or a reduction to a repayment claim.

Action should be taken to review  VAT returns containing pre-registration input tax, submitted, particularly those  approaching 4  years since the submission deadline.  The time limit for correction of errors is :-

  • 4 years from the due date of the relevant VAT return where VAT deduction has been restricted in error by the business, or HMRC has incorrectly reduced a repayment

4 years from the date the assessment was paid where HMRC have raised an assessment that incorrectly restricts VAT deduction.

More information at https://www.gov.uk/government/publications/revenue-and-customs-brief-16-2016-treatment-of-vat-incurred-on-assets-that-are-used-by-the-business-prior-to-vat-registration/revenue-and-customs-brief-16-2016-treatment-of-vat-incurred-on-assets-that-are-used-by-the-business-prior-to-vat-registration

Annual Investment Allowance Reduction… What can be done?

My client company is currently incurring large amounts of capital expenditure including significant amounts of plant and machinery. The reduction in the Annual Investment Allowance on 1 January 2016 was a huge disappointment to my client. Can anything be done to counter the reduction in available capital allowances?

The client might wish to consider whether any of the expenditure qualifies for the 100% “enhanced capital allowances” which can be claimed for certain expenditure on energy-saving and environmentally beneficial plant and machinery. Details of qualifying expenditure can be found at www.gov.uk/guidance/energy-technology-list and at  www.gov.uk/government/publications/water-efficient-enhanced-capital-allowances.

Loss-making companies have the possibility of surrendering some or all of the ECAs for a 19% tax credit but any repayment cannot exceed £250,000 and may be restricted by reference to the company’s PAYE and NIC liabilities.

Whether or not expenditure already incurred qualifies for ECAs is a question of fact but there may be time to revisit proposed expenditure to determine whether there is an overall benefit to be gained by substituting qualifying for non-qualifying.