Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.
While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.
Kwasi Kwarteng – New Chancellor
Kwarteng’s priority at the Treasury will be focused on the government’s plans for a massive financial package for individual consumers to support them through the energy crisis.
Another key element of Truss’ leadership campaign focused on cutting taxes, with pledges to cancel the social care levy which saw a 1.5% increase in national insurance rates for employees and employers. The expected £12bn raised from this measure was supposed to help cut the NHS backlog and in the longer term would be earmarked for social care funding.
Chris Philp MP has been named as chief secretary to the Treasury, replacing Simon Clarke. Philp was previously parliamentary under-secretary of state at the Department for Digital, Culture, Media and Sport between 17 September 2021 and 7 July 2022. He was elected as an MP in 2015 and previously ran a number of businesses.
Clarke has been appointed secretary of state for levelling up, housing and communities.
Lucy Frazer remains in her post as financial secretary to the Treasury, with responsibility for HMRC and the rollout of Making Tax Digital.
In his first official engagement as Chancellor, Kwarteng set out the government’s pro-growth economic approach, setting a target of 2.5% growth by creating the right conditions for business investment and innovation, and reducing burdensome regulation and taxes.
Kwarteng stressed that the government will immediately focus on supporting families and businesses to navigate the gas crisis this winter and next, supporting the economy to grow, and committing to fiscal sustainability.
The Chancellor also reiterated his full support for the independent Bank of England and their mission to control inflation, which is central to tacking cost of living challenges.
Jacob Rees-Mogg has been named as secretary of state for business, energy and industrial strategy, replacing Kwarteng who had been in the job for 18 months. From the perspective of accountants, the priority will be the introduction of audit reform and the creation of the new audit regulator, the Audit, Reporting and Governance Authority (ARGA) to replace the Financial Reporting Council (FRC).
Construction Workers Tax Repayment Fraud
The convicted construction workers were based in Northern Ireland. They submitted fraudulent claims for tax repayments amounting to £260,455.68, under the Construction Industry Scheme (CIS).
The individual at the centre of the conspiracy used two businesses to exploit the CIS using contractors to deduct tax from payments to subcontractors that should have then been passed on to HMRC.
The man at the centre of the scam was sentenced to two years imprisonment and ordered to pay a confiscation order of £150,000.
The other defendants were given suspended prison sentences after pleading guilty at earlier hearings.
One was sentenced in January to three years imprisonment, suspended for two years, another was sentenced to two years in prison, suspended for 18 months while a third was sentenced to nine months, suspended for three years.
Accountant jailed for £1.2m tax fraud
A tax agent has been given a four and half year jail sentence at Liverpool Crown Court.
The agent ran a fraud where she told clients she could arrange tax rebates for them, and secured fraudulent claims of £1.2m in rebates for 150 customers.
For two years between October 2015 and November 2017, the agent submitted false tax returns under false representation.
The agent would instruct customers to register for self-assessment tax returns and to provide her with their personal details. She would then submit false repayment claims on their behalf.
The agent never asked her clients to provide receipts and did not tell them the value of the claims she made in their name.
She recruited her clients mostly plumbers and heating engineers, through word of mouth and communicated with them through a WhatsApp group. They paid her a flat fee of £150 plus 10% of the rebate claim, earning her around £191,000.
Ian Hackett, assistant director, Fraud Investigation Service, HMRC, said the agent “ was an unregistered tax agent who committed a brazen fraud and got found out. We urge anyone who is thinking of using someone to help them manage their tax affairs to read the advice on gov.uk and complete our online form.’
She failed to follow the rules required of fee-earning tax agents – she did not register with HMRC or report acting on behalf of someone else when she completed clients’ self-assessment tax returns.
During a 10-day trial at Liverpool Crown Court, she denied a charge of fraud by false representation, but was found guilty by jury on 7 September. She was sentenced to four and a half years.
She committed fraud in that she dishonestly made a false representation, namely purporting to be the taxpayer and submitting false tax returns, intending to make a gain to obtain commission and fees from the tax repayments and cause loss to HMRC.’
Tax Implications of Distance Working
The Office of Tax Simplification (OTS) is consulting on the tax implications of hybrid and distance working, particularly when staff work overseas on an ad hoc basis
The review is considering whether tax rules need to be modernised to take into account changing work patterns since the pandemic.
The OTS has expressed concerns that the current tax system is not equipped to handle the changing work environment, for example when staff work abroad on an informal basis rather than on an expatriate contract.
The OTS view is that UK employment tax rules are old fashioned and have not responded to the new work patterns and that in the UK, rules and guidance around employee expenses, and concepts like permanent workplace, seem designed for traditional ways of working and may begin to feel stretched,
The consultation is designed to look at trends in working across international borders, and what that means for issues like tax, social security, tax residence, and permanent establishment. It will also consider how accommodation, travel, and other expenses work in a hybrid world, including who will pay and whether permanent workplace rules make sense.
Another important area is the application of short-term business visitor rules, overseas workday relief, and modified payroll requirements, as well as the treatment and impact on pension contributions and share schemes.
The consultation closes for comment on 25 November 2022 and the OTS will report back on its findings in early 2023.
Property Incorporations
With rising interest rates, we may see more property landlords looking to incorporate.
Since 6 April 2017, there has been a restriction to the finance costs that you could deduct from rental income if the loan was a ‘dwelling related loan’ relating to let residential properties. There is now a tax reducer that effectively restricts the tax relief on these loans to basic rate.
This does not apply to commercial property landlords, companies with residential let properties or to loans to purchase furnished holiday accommodation.
In order to calculate the tax you first calculate the profits before any finance costs. You then reduce the resulting tax liability by the basic rate times the finance costs (the tax reducer).
Under this system you are more likely to have higher rates of tax to pay which are then set off by the tax reducer. Whichever way you look at it, you are likely to be paying more tax on your residential property rentals.
Incorporation is a disposal for CGT purposes and a land transaction for LBT and ADS.
Capital Gains Tax
All the properties will be transferred to the company at current market value which may create a capital gain but this could be set against the value of the shares if the transaction qualifies for incorporation relief.
If the consideration given by the newly incorporated company for the properties is not wholly satisfied by the issue of shares, the part not converted into shares is subject to actual Capital Gains Tax.
You can only utilise incorporation relief if there is substantive property letting activity.
Activities ordinarily associated with managing an investment property portfolio can be regarded as a business and therefore qualify for the relief. These activities must:
- represent a seriously pursued undertaking;
- be conducted on sound and recognised business principles; and
- be of a kind that are commonly made by those that seek to profit from them.
Furthermore, the activities must have a degree of substance with a reasonable amount of time being spent on property related activities.
It is unlikely that a property portfolio of one or two properties with minimal management would satisfy the test.
CGT and Inter-Spouse Transfers
New legislation is being introduced with effect from 6 April 2023 which will change the rules relating to the Capital Gains Tax treatment of assets transferred between spouses.
At the moment transfers of chargeable assets between spouses take place at “no gain, no-loss” for CGT purposes. A disposal has taken place. However the consideration which is treated as passing between the spouses is equal to the CGT base cost of the spouse making the transfer, thereby giving a nil result. There is no opt out.
Any actual consideration paid by one spouse to the other for the transfer of the asset is ignored.
The receiving spouse is not treated as acquiring the asset on the same date that the donor acquired it. So the receiving spouses date of acquisition is the date of the inter-spouse transfer.
One important proviso is that the spouses must be “living together” in the tax year in which the transfer take place. This does not have to be taken literally and a married couple are physically living in separate homes perhaps because one is working abroad on a temporary assignment.
The term “Living together” means that the marriage has not irreversibly broken down. If it has then “Separation” take you out with the CGT exemption. The date of separation is a question of fact and is commonly taken as the date on which one of the spouses leaves the matrimonial home for good.
However this is not necessarily the effective date of separation, because the spouses could continue to live in the same property but not as a couple.
Once the date of separation has been established, any transfers up until the 5 April following that date will take place at no-gain / no-loss.
The difficulty here is that in the period after separation, CGT is rarely a hot topic so getting transfers done in the tax year of separation is unlikely to be achievable.
Inter-spouse transfers after the end of the tax year of separation are deemed to take place at market value.
The end result of transfers not being achieved in the tax year means that CGT could be payable unless some form of tax relief is available e.g. gift relief for a business asset which might include shares in the family company or a furnished holiday let property.
Proposed changes
Finance Bill 2023 proposes changes to these rules for transfers made on or after 6 April 2023 so that the no-gain / no loss treatment will continue until the earlier
of:
- The 5 April following the third anniversary of the date on which the couple separate; and
- The date on which the couple divorce (or the date on which the marriage or civil partnership is dissolved or annulled).
So, don’t get divorced until you have made all the appropriate transfers, but also make sure you get them done by the 3rd anniversary of 5 April after separation.
The new rules will not affect couples who separate in 2022/23. No-gain / no-loss treatment
will continue to be available for the whole of 2022/23. The new rules will apply thereafter.
However, couples who separated before 6 April 2022 and did not transfer their assets before
the end of the tax year of their separation, will now need to wait until 6 April 2023 to take advantage of the new rules.
Other proposed changes include:
a) The no-gain / no-loss treatment will also apply to assets that separated spouses transfer between themselves as part of a formal divorce agreement.
b) Private Residence Relief will be extended so that the departing spouse who retains and interest in the former matrimonial home can still claim Private Residence Relief is certain circumstances, which will be important if the home is subsequently sold.
c) Individuals who have transferred their interest in the former matrimonial home to their ex-spouse, perhaps following leaving the property, and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to those proceeds that applied when they transferred their original interest in the home to their ex-spouse.
Questions? If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.
