Warning to expats from HMRC over EBT schemes

HM Revenue & Customs is warning expats and other workers utilising Employee Benefit Schemes (EBT) for tax benefits should declare them and pay up taxes due or face significant fines and court action.

The current disclosure program initiated by HMRC can avoid penalties and legal action in some cases and provide a framework for settlement of taxes.

The program covers various EBT structures and taxes such as:

• Income tax (PAYE)
• National Insurance Contributions
• Corporation Tax
• Inheritance Tax
• Other taxes on EBT's and beneficiaries

Assuming a settlement is agree with HMRC the disclosure program :

• Allows payment to be made to HMRC of taxes due
• Avoids complex and lengthy tax enquiries and legal costs
• Provides certainty and finality to tax liabilities

EBT's were outlawed in January 2011 when HMRC successfully challenged the structure in the case against PA Holdings Ltd. It was determined by the Court and by a subsequent supported by the Court of Appeal that the arrangements avoid PAYE and NIC's through the EBT structures does not work.

Employer-Finance Retirement Benefit Schemes (EFRBS) are also considered not to work.

Are Christmas Parties Tax-Deductible ?

It's coming up to that time again when companies are considering a good night out with colleagues. So, are Christmas parties tax-deductible ? Here are a few guidelines:

For the cost to be tax-deductible it must be:

·          

•           Open to all employees
•           An annual event
•           Cost less than £150 per head

If your event meets the above criteria then there is no benefit in kind on the Christmas Party/meal and it is allowable for tax.

However beware...

• The £150.00 includes VAT
• If the cost is £151.00 then all of it is taxed as a benefit in kind
• This is not a licence to put a flat rate of £150.00 through your accounts
• You can have more than one event but the £150.00 is reduced proportionately
• Like all business costs you must have a receipt
• The event must be for all employees and not just directors - except where the director is the only employee

The £150.00 limit is for each employee so no family or friends allowed. However if you are a Director and therefore an employee of your own company then you can have a Christmas meal courtesy of the company.

Tax Return Initiative for 2009/10 and earlier

HMRC is about to send our reminders to thousands of higher rate taxpayers with overdue self-assessment tax returns for 2009/10 and earlier. Individuals will have until 2 October 2012 to inform HMRC that they wish to participate in the 'Tax Return Initiative', to submit the tax returns and to pay any outstanding tax.

HMRC say that by coming forward individuals will receive better payment terms and penalties will be lower than if HMRC catch up with them first. The spreading of payments may also be available under certain conditions and circumstances.

Hairdresser chair rental - VAT rules from October

HMRC has confirmed that chair rentals within hairdresser/barber businesses will be subject to VAT at the standard rate of 20% from October 2012.

The new ruling will include a chair with certain right of access, in a defined area of a room or premises, and/or including related hairdressing services.

This ruling also includes services provided by any assistants, the booking of appointments and laundry services.

Currently most hairdressers are sole traders and are not VAT registered and therefore this could increased their costs by 20% as they cannot recover the VAT.

Advice should be sought by traders to understand the implications of these new rulings.

Overseas business options - The Republic of Ireland

The Republic of Ireland could be a good option to set up a new business as the Corporation Tax rate is only 12.5%. Transferring an existing company to Ireland is possible however setting up a new LTD company has added tax advantages. New start-ups can apply for the three-year corporate and capital gains tax exemption which started in 2010 but has now been extended for another 3 years for companies starting up in 2012, 2013 and 2014.

The scheme was last year modified so that the value of the relief is linked to the amount of employers’ PRSI (Social Insurance) paid by a company in an accounting period subject to a maximum of €5,000 per employee. If the amount of qualifying employers’ PRSI is lower than the reduction in corporation tax liability otherwise applicable, relief will be based on the lower amount.

3 Year Exemption – Eligible Companies

This is a new relief which you can claim if:

• You are a new company (incorporated in Ireland or another EEA State) since 14th October 2008
• Which commences a qualifying trade in 2009-2014
• Whose corporation tax liabilities do not exceed certain levels

You must commence a qualifying trade. A qualifying trade does not include:

a) A trade previously carried on by another person. The trade must be a new business and not the transfer of an existing business or part of a business from a sole trader or previous company

b) An excepted trade (subject to 25% tax). Profits from non trading activities such as rental and investment income are taxed at 25% and do not qualify for the relief

c) A trade carried on entirely outside Ireland and whose profits are subsequently taxed at 25%. An Irish incorporated company must be managed and controlled in Ireland and have “substance” in Ireland in order to qualify for the 12.5% corporation tax rate and in turn the exemption as outlined in this article

d) A trade dealing in or developing land or exploration and extraction of natural resources

e) A trade of a “service company” that would be subject to a professional companies profits surcharge as per S441 TCA. Effectively, the “service companies” that do not qualify for this tax relief include close companies (5 or fewer shareholders/ directors) whose businesses consist of the carrying on of a profession or the provision of professional services, or of exercising an office or employment. These “service companies” also include businesses that provide services to professionals

f) A trade in the fishery or aquaculture sectors

g) A trade active in the primary production of agricultural products

h) A trade active in the coal sector

Statutory Definition of Residence Theoretically Good News for Expats

www.yourtaxoffice.co.uk

The Government has announced that it will consult on the introduction of a statutory definition of residence to provide greater certainty for taxpayers.

This statutory definition of residence is theoretically good news for expats as we will now discuss – however, let’s not get too excited just yet, because we have yet to see how the definition will actually be defined!  Also, what impact might it subsequently have?  Everyone is hoping that a clarification of the rules will be a good thing – but what if the rules change for the worse? 

As most British expats are aware, when you leave the UK for good you should advise HMRC that you’re no longer resident so that they can assess you for taxation purposes accordingly.  You can fill in form P85 if it’s relevant to your situation – and in theory, as long as you meet the following HMRC defined guidelines, you should achieve non-residency status, and therefore theoretically not be liable for UK taxation on your income: (note, plenty of exceptions to this exist, so do not ever assume you’re not liable for UK tax – speak to an accountant!!): -

“Normally if you leave the UK to work abroad full-time, you will become not resident and not ordinarily resident in the UK if:

- your absence and employment from the UK covers a complete tax year (that is 6 April to 5 April)

- you spend less than 183 days in the UK during the tax year

- your visits to the UK do not average 91 days or more a tax year over a maximum of four years

From 6 April 2008, days when you are in the UK at the end of the day, that is midnight, are normally counted as days spent in the UK.”

However, as mentioned, there are exceptions to these guidelines – and they are guidelines only, not constitutional and legally enforceable rules – and therein lies the current problem for all British citizens!

There is no legally defined set of rules that have been tried and tested and proven in a court of law to say what constitutes residency in the UK.  All we have are documents such as IR20 – which was replaced by HMRC6 – and the results of a few fairly high profile court cases where IR20 and HMRC6 have been called into question.

Theoretically, if you fulfil the above detailed criteria you are unlikely to be investigated for non-payment of British taxation as you are indeed non-resident.  However, if HMRC decides it would actually like to investigate you and claim tax off you, it currently can. Google the case of Robert Gaines-Cooper if you want to read more about this.

So, in the budget last week it was announced that the government is finally going to consult on introducing a statutory definition of residence that will remove all confusion, and ensure that it is very easy to see whether you’re resident or non-resident – and therefore liable or not liable for taxation in the UK, (that is putting it quite simply, because there are times when even a non-resident is liable for taxation – such as on gains made on a UK asset if it is sold within a certain amount of time after you have become non-resident for example!).

The idea put forward is that the statutory definition of residence will be consulted on over the next year, and if an agreement can be reached, it will be implemented in April 2012.

On paper this is great news for British expats everywhere as they should then very easily be able to meet the residency/non-residency rules and simplify their position for tax purposes accordingly.  At Shelter Offshore we very much welcome any simplification when it comes to taxation for expats!  It’s been too wishy washy and confusing for too long.

However, before anyone gets too excited, the rules that could potentially be defined may be strict, harsh, difficult and overwhelmingly negative for expats.  We have already seen that this government will do anything to claw cash back from every member of society, and so surely, if it can include more people within its tax net it will do so.  Therefore we think expats should be wary of what may come next.

Of course, we hope that the government will simplify everything and ‘just’ make the current HMRC guidelines law…but we’re not going to hold our breath.  Watch this space for updates on this story as they become available…and please remember, you really should seek the support of a qualified international taxation expert or accountant if you have complex financial/taxation affairs and you’re not sure about residency rules and how and where you may be liable for taxation.  Never assume you’re not liable, because when it comes to tax, ignorance of your position is not an excuse if you fail to make payment.

Tax Question....If a director pays himself £7,068 on 6 April 11, and then nothing for the rest of the year, does he have to pay tax/NIC in May?

Question:

If a director with tax code 747L pays himself £7,068 on 06/04/11, and then nothing for the rest of the year, does he have to pay tax/NIC's in May?

Answer:

Techically yes....

There should be an up-front PAYE bill for the tax (no NIC's as it is calculated on a cumulative basis for directors) followed by monthly/quarterly refunds by the company to the director on his net pay. At the end of the tax year he would have to offset it against any other tax he owes when he does his self assessment return or claim a rebate. Alternatively the company could ask for a PAYE rebate as they would have overpaid for the year but this is likely to take a while and may well be queried, attracting unwanted attention.

HMRC used to do annual PAYE schemes in such cases where they wouldn't hassle you with pink reminders every month but I'm not sure if they still do them. Even if they do, could you avoid a surcharge for a late PAYE payment under the new regime? Probably if you appealed, but I wouldn't count on it, as I believe the annual schemes were meant for year end salaries, not up-front payments or monthly/quarterly ones.

Hard to see how HMRC would ever find out about it anyway as there is no need (yet) to disclose when someone is paid. Obviously that would change if RTI comes in next year as planned. Even if the client had a PAYE visit, it would probably not get picked up as they tend to focus on payroll, bank statements, credit card bills and expense claims. If it just goes through loan account to clear a debit balance they would probably never know.