HERE IS A REMINDER OF SOME RECENT PROPOSED TAX CHANGES WHICH ARE ALSO INCLUDED IN PUBLISHED FINANCE BILL 2017 DRAFT CLAUSES ….

Corporation Tax: Losses

There will be greater flexibility for relieving various types of loss which arise on or after 1 April 2017 and which are carried forward to a later accounting period. Such brought forward losses may be relieved against the company’s total income rather than specified classes of income. In addition, losses carried forward to a later accounting period will, in certain circumstances, be capable of being surrendered as group relief.

Corporation Tax: Substantial shareholding exemption

The condition that the investing company is a trading company or member of a trading group is to be withdrawn, as is the condition that the company being sold is a trading company or the holding company of a trading group, unless the disposal is to a connected person. Currently, a substantial shareholding must have been held for minimum period of twelve months starting not more than two years prior to the disposal. The two year period is to be extended to six years. These changes apply to disposals on or after 1 April 2017.

Inheritance tax: Deemed UK domicile

Non-domiciles who are long-term UK residents or who previously had a UK domicile and are resident in the UK will, from 6 April 2017, be treated as UK domiciled for income tax and capital gains tax purposes.

Employment status: Working for the public sector through intermediaries

From 6 April 2017 public authorities will have responsibility for determining whether the workers they engage fall within the intermediaries legislation (IR35). If the public authority decides the rules apply it will be required to deduct income tax and national insurance from the payments it makes to the worker or the worker’s intermediary. The new rules will also apply where work is completed before 6 April 2017 but payment is made on or after that date.

THESE ARE SOME OF THE PROPOSED CHANGES WE ALREADY KNEW ABOUT …..

Some proposed changes which were announced by the Chancellor in the 2016 Budget and Autumn Statement and which appeared in our previous summaries are due to be enacted.

Income Tax: Benefits in kind

Draft Finance Bill 2017 clauses having effect from the 2017-18 tax year 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.

There are also draft clauses clarifying existing legislation so that employees will only be taxed on business assets for the period the assets are made available for private use and removing the tax charge on certain legal costs and costs of pension advice borne by employers.

Income Tax: Property and trading income allowance

The draft Finance Bill 2017 introduces 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. If income exceeds the relevant allowance then the individual may choose to pay tax on the amount by which income exceeds the allowance. The trading income allowance will also apply to certain income from providing services or assets.

Income Tax and National Insurance: Salary sacrifice schemes

The proposed changes affecting salary sacrifice schemes or “optional remuneration arrangements have been announced and will be included in Finance Bill 2017. The new measures, to take effect from the 2017-18 tax year, are intended to ensure that most 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. 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

Draft Finance Bill 2017 clauses will allow taxpayers to apply for a recalculation of “wholly disproportionate” taxable gains arising on some surrenders and assignments of life insurance policies. If successful, the gain will be recalculated on a just and reasonable basis.

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

Draft Finance Bill 2017 clauses include clarification of the pre-arranged exit rules for Enterprise Investment Schemes and Seed Enterprise Investment Schemes. There are also changes to the rules for certain follow-on investments in Venture Capital Trusts with effect from 6 April 2017.

Income Tax and Capital Gains Tax: Employee shareholder status

Draft Finance Bill 2017 clauses confirm that new issues of employee shareholder shares no longer qualify for income tax and capital gains tax reliefs and exemptions

Corporation Tax: Patent Box

Draft Finance Bill 2017 clauses include detailed rules dealing with the tax treatment of costs incurred by two or more companies carrying out research and development under a “cost sharing arrangement”.

Corporation Tax: Contributions to grassroots sport

Draft Finance Bill 2017 clauses include a new tax relief for certain contributions to grassroots sport from 1 April 2017.

Capital allowances

Draft Finance Bill 2017 clauses confirm that expenditure incurred on charging points for electric vehicles will qualify for a 100% first-year allowance. The allowance is available until 31 March 2019 for corporation tax purposes and 5 April 2019 for income tax purposes.

PAYING INTEREST ON DIRECTORS LOANS IS BETTER THAN DIVIDENDS NOW?

The new 32.5% rate on dividends received by higher rate taxpayers means paying interest on directors’ loan account credit balances is now more tax efficient than paying dividends, once the new £5,000 dividend allowance has been used. This will also avoid the accounting issue mentioned above if a market rate of interest is paid. Unlike bank interest the company is still required to deduct 20% basic rate income tax and pay this over to HMRC quarterly with form CT61. Remember that higher rate taxpayers can receive £500 interest income tax free from 6 April 2016.

INTEREST FREE LOANS AND THE NEW

One of the areas where there may be a change in your company’s accounts is where you have received or made a loan that is interest free or at less than market rates. Unless the loan is repayable on demand the new accounting rules require the loan to be recorded in the accounts on an amortised cost basis. For example this means that a £20,000 interest free loan repayable in two years time would be valued at £18,141 if the market rate of interest is 5%.

This method recognises that £20,000 today is worth more than £20,000 in two years time. If your company is borrowing the £20,000 then there would be finance expenses of £907 in year 1 and £952 in year 2 reflecting the initial £1,859 discount. These finance expenses would be deductible for corporation tax provided the lender is also charged to UK corporation tax on the interest. But if the interest free loan was from an individual such as a director there would be no tax deduction, a point clarified in the latest Finance Bill.

TAX IMPLICATIONS OF NEW ACCOUNTING RULES

The calculation of profits for tax purposes is based on the profits of the business computed in accordance with Generally Accepted Accounting Principles. The introduction of a new accounting standard (FRS 102) means that some of the figures in your accounts may need to be restated and these changes may have tax implications. We will discuss these changes with you and seek to minimise the tax impact where possible.

EMPLOYMENT ALLOWANCE IS NOW £3,000 BUT NOT SINGLE DIRECTOR COMPANIES

For the last two years there has been a £2,000 allowance available to employers to set against their employers National Insurance liability for the year. This increased to £3,000 from 6 April 2016 and no action is required if you claimed the allowance for 2015/16. However, from 6 April 2016, limited companies where the director is the only employee paid earnings above the Secondary Threshold for Class 1 National Insurance Contributions (£156 a week) will no longer be entitled to claim the Allowance.

 

HMRC guidance states that if more than one employee or director earns above the Secondary Threshold, the company will continue to be eligible for Employment Allowance for the whole tax year. This other employee could be the director’s spouse or partner. The HMRC guidance is not consistent with the legislation however and we hope to clarify the matter so that you don’t miss out.