Summer 2018 Newsletter

Our Summer 2018 newsletter contains an update on MTD, tax planning tips for the new year, information on buying UK property and details about shared paternal leave.

Making Tax Digital for VAT (MTDfV) is on the horizon. There is now less than a year to prepare for this momentous change in the way VAT registered businesses interact with HMRC. We cover this in our front page article.

MTDfV begins with the first accounting period starting on or after 1 April 2019. Only those businesses whose turnover is above the VAT registration threshold are mandated to join, although voluntarily-registered businesses may also join if they choose. However, any business operating at around the registration threshold will also need to be aware of developments – and monitor turnover closely – as newly-registered businesses will be required to be MTD-compliant from day one of VAT registration.

We also draw attention to the many opportunities available to taxpayers to structure their affairs efficiently in the current tax year. These can arise, for instance, when disposing of a capital asset, reviewing pension plans or considering investments such as an Individual Savings Account.

In our other articles, we examine:

  • the stamp duty implications of property purchase across English, Welsh and Scottish borders
  • employee rights to shared parental leave and pay on the arrival of a new baby

Summer 2018 Newsletter

MTD is coming

Making Tax Digital (MTD) is on the horizon for many businesses. It represents a momentous change in the way taxpayers keep records and submit information to HMRC.

MTD affects VAT first. For return periods starting on or after 1 April 2019, businesses operating over the VAT threshold (currently £85,000) must keep records digitally, using MTD functional compatible software. That’s essentially software, or a combination of software and spreadsheets, which can connect to HMRC via an Application Programming Interface. VAT submissions will then be made direct from the digital records. Manual input will not be acceptable, although there will be a ‘soft landing’ period of 12 months where HMRC will not impose penalties if digital links do not exist between software programs used for submission. It will no longer be possible to submit returns through HMRC’s online portal – except for businesses voluntarily registered for VAT. These businesses will not have to comply unless electing to enter the MTD regime.

Recent slowdown in some areas, such as real-time tax coding and Simple Assessment, will mostly affect non-business taxpayers. MTD won’t be mandatory for taxes such as income and corporation tax until April 2020 at the earliest.

Going forwards

HMRC are currently carrying out a VAT pilot and income tax pilot for small businesses and landlords. Whilst not necessarily advantageous to participate in these, this is definitely the time to consider the next steps on the road to MTD for you and your business. Businesses currently keeping manual records would be well advised to make the transition to digital record keeping, and businesses already digital will need to check when their software provider will meet MTD requirements. Upgrades or bespoke solutions may be necessary to ensure data can be sent seamlessly to HMRC. Please do contact us if you would like help with your new compliance obligations.

New tax year, new tax plans

As we head into the season to submit tax returns for the tax year ended 5 April 2018, it’s a good time to think about saving tax in the current tax year. There are many points to consider as you plan for the future, and we will be pleased to advise in areas of such perennial importance as the following:

Disposing of capital assets

Careful planning is essential when it comes to disposing of capital assets such as a second home, jewellery, shares, a business or antiques and works of art. An individual can make capital gains up to the annual exemption limit without paying capital gains tax, and each spouse/civil partner will have their own limit. For 2018/19, this limit is £11,700. It can’t be carried forward to a future tax year, and can’t be transferred to anyone else, including a spouse or civil partner. Thus it can sometimes be advantageous to transfer assets between spouses or civil partners to ensure that each individual’s annual exemption is used.

Making the most of your pension

The annual allowance, which sets a cap on the amount you can contribute to a pension and still get tax relief, is £40,000 in 2018/19. Contributions in excess of this are potentially charged to tax on an individual as the top slice of income. There are, however, restrictions on the annual allowance available for those with adjusted annual income over £150,000, so that it can potentially be reduced to a minimum of £10,000.

However, unused annual allowance can often be carried forward for up to three years. This means unused allowances for the three years prior to the current tax year can be used this year. The remaining allowance for 2015/16 would therefore need to be used by 5 April 2019, but can only be utilised after using the annual allowance for the current year.

Using your ISA allowance

Individual Savings Accounts (ISAs) can make a tax-efficient investment, since income from ISA investments is exempt from income tax, and capital gains made on investments held in an ISA are exempt from capital gains tax. The maximum you can save in ISAs for 2018/19 is £20,000. This can be split between different ISAs, though funds may be invested in only one of each type per tax year. An ISA allowance can’t be carried into the next tax year, so it’s worth planning now to take advantage of it.

There are now quite a range of ISAs on offer. They include the Innovative Finance ISA, designed for peer to peer lending – essentially lending that cuts out a bank. These usually offer higher returns because of the higher risk. An ISA portfolio could include a small subscription in a higher risk ISA like this.

Adults under the age of 40 might want to consider the Lifetime ISA. Here up to £4,000 per annum can be invested. This counts towards the overall annual ISA limit, but the advantage is that the government will put in a 25% top up, up to a maximum of £1,000 per annum. The Lifetime ISA is designed to fund the purchase of a property for a first-time buyer to live in (not as a buy-to-let), or to save for later life. Where two first-time buyers are buying a home together, each buyer – if eligible – can take advantage of the Lifetime ISA bonus. There are various conditions, including a charge for early withdrawals.

If you are considering a capital disposal this tax year, or considering investment or pension choices, we would be delighted to help you structure your affairs tax efficiently.

Buying property across UK borders

Now that Wales and Scotland each has its own property tax regime, the rules affecting the purchase of property have changed. Close attention to detail will be needed to ensure that correct procedures are adhered to. In some cases, the purchase of land and property may now qualify as a ‘cross border’ transaction, and in this case, special rules apply.

The newest development in devolved property tax is very recent, and affects Wales, where SDLT was replaced by Land Transaction Tax (LTT) for purchases on or after 1 April 2018. In Scotland, Stamp Duty Land Tax (SDLT) was replaced by Land and Buildings Transaction Tax (LBTT) for purchases on or after 1 April 2015.

The existence of multiple UK tax regimes gives rise to the possibility that a property transaction may now incur liability to more than one tax. This could happen in one of two ways. It could arise where a single property, comprising land on both sides of the English-Scottish or English-Welsh border, is purchased. This could be a farm straddling both sides of a border, for example.

Liability could also arise where there is a ‘multiple property transaction.’ This could be the case where there is a single agreed amount of consideration for the purchase of two or more property interests in different UK tax jurisdictions – whether that’s as a single transaction or a number of connected transactions. So liability could arise via a single transaction whereby a purchaser acquires a business which includes three shops – one in Wales, one in Scotland, and one in England, for example, or where a holiday accommodation business, comprising properties on both sides of say, the Scottish border, is purchased.

In eventualities such as these, the total consideration must be divided or apportioned on a just and reasonable basis to determine the appropriate consideration for the part in each UK tax jurisdiction. As with any tax matter, it is open to the relevant tax authority – HMRC, the Welsh Revenue Authority (WRA) or Revenue Scotland (RS), to challenge any return made or enquire into the basis on which apportionment was made.

Example

A farm in Powys is being sold. It comprises 20 fields, a farmhouse, bungalow and agricultural buildings. Nine fields are wholly in England, nine wholly in Wales, and two in both England and Wales. Here apportionment would need to take into account where buildings are located and the nature of the buildings, as well as any parts of the land that may be more valuable because of location, access, use or development (such as field drainage).

Where the consideration (as apportioned) is more than the limit for notification to the relevant tax authority, a return will be needed. Potentially, then, up to three tax returns may be needed – for SDLT, LBTT and LTT – with payment made to three different tax authorities: HMRC, the WRA and RS.

This is a complex area, and we are more than happy to advise, for example in relation to the apportionment of consideration. This may be especially relevant if there is any question of a claim to private residence relief for capital gains tax purposes being involved. Please do not hesitate to contact us for further information here, or on any other tax aspect of a property transaction.

Employee rights: shared parental leave

Following suggestions that less than half the public is aware of the scheme, HMRC are promoting awareness of Shared Parental Leave (SPL) rights among employees.

SPL and Statutory Shared Parental Pay (ShPP) provide flexible childcare options in the first year after the arrival of a new baby, enabling both parents to share childcare, and giving mothers the ability to go back to work sooner. Parents adopting or involved in surrogacy arrangements are also eligible.

In practice

SPL involves quite a lot of admin for participating parents – and their employers. Parents, for example, will have to provide the employer with specific information in the form of written notices and declarations. Gov.uk offers model forms, though as a matter of convenience, employers may want to consider creating their own bespoke forms. There is however no legal requirement for them to do so, nor for employees to use them. The Department for Business, Energy and Industrial Strategy report that one question commonly asked is ‘Will my employer know if I qualify for SPL?’ Employees can be advised that an employer is not in a position to answer this until an employee tells them – because to be eligible, both parents must meet certain conditions.

To qualify, an employee must generally:

  • have worked continuously for the same employer for about 40 weeks
  • intend to share responsibility for childcare with the other parent
  • to claim ShPP, earn at least the lower earnings limit £116 (2018/19) or £113 per week (2017/18), over an eight-week period.

The other parent must also satisfy work and earnings criteria.

Employees should be advised to use the Eligibility Checklists on gov.uk goo.gl/dCicPz