Tax Matters
Guidance on proposed new rules on taxation of Husband and wife businesses
The technical term for the matter under consideration is income shifting. In December 2007 HM Revenue and Customs issued a consultation document setting out the proposed new rules for taxing so called ‘husband and wife’ businesses. This follows the court decision against the Revenue in Jones v Garnett or the ‘Arctic Systems’ case. You may recall that the courts found it acceptable that Mr & Mrs Jones could split income, primarily earned by the husband, between them by using a small limited company. This has been standard tax advice for many years.
The proposed legislation will also apply to partnerships and not just to spousal relationships but any business where income is diverted to family members. The consultation period lasts until 28 February 2008 and, after any amendments arising out of the consultation, is due to apply from 5 April 2008.
The proposed rules are that the shifted income will be treated as the income of the first individual if four conditions are satisfied:
1. the first individual is party to or has the power over the relevant arrangements.
2. the first individual forgoes income, and the forgone income is the second individual’s for the relevant tax year.
3. the first individual has the power to control the amount that is shifted.
4. the shifted income consists of distributions of a company or profits of a partnership.
A relevant arrangement is one where the purpose or main purpose is the avoidance or reduction of a charge to income tax. Note that Commercial arrangements are not affected. This is likely to be the main defence against the new rules. In other words the non-earning spouse, as it were, does sufficient work in the business to justify the split of income.
All of the professional bodies are mounting robust campaigns to point out how difficult this legislation will be to apply. Also how unfair it is given that the spouse in many businesses offers support, both financial and emotionally, that is not taken account of here. We will update you on any developments.
Will CGT change be a Gain for you?
Many of you will have heard that the Chancellor announced changes to the way that Capital Gains are taxed from 5 April 2008. The change will affect anyone owning an asset that is subject to Capital Gains Tax [CGT] when they sell it. Most commonly this will be property or shares. There will be winners and losers as a result of the change and it must be remembered that this is a revenue raising measure expected to bring in an additional £700m per year to the Treasury.
What is the change? A flat CGT rate of 18% was proposed in the pre-budget report in October and this has now been amended to include a reduced 10% rate for business assets on which the gain is below £1 million. This makes the taxable gain very easy to work out – it is just sale price less the original cost. However, two reliefs have been lost, taper relief which is a percentage reduction in the taxable gain dependant on how long you owned it, and indexation relief which applies to assets acquired before 1998 and uplifts the original cost by reference to inflation.
Winners will be persons who have bought assets since 1998 and who would have been subject to higher rates of tax than 18%. People with buy to let property are the most common example.
Losers will broadly be people who acquired assets before 1998 and lose what may be valuable indexation relief (especially if the asset was acquired before 1982) and owners of business assets whose gains are more than £1 million.
You can ‘capture’ this lost relief but action must be taken before 5 April 2008. Contact your accountant who will be able to advise you quickly whether you are likely to lose out and what can be done.
Posted 25 February 2008
Overseas Bank Accounts
HM Revenue & Customs recently announced an amnesty on penalties for disclosure of offshore bank accounts. This has come about because the Revenue recently won a case in the Courts forcing UK banks to disclose details to the Revenue of any of their customers who hold offshore bank accounts.
UK residents are taxable on their worldwide income. Therefore if they receive interest on an offshore bank account this should have gone on their UK tax return. UK residents may have an offshore bank account because they own property overseas or until recently it was a popularly held misconception that money held offshore was a good way to avoid tax.
The amnesty reduces the penalty for non-disclosure from a potential 100% to 10%. Taxpayers need to let the Revenue know that they wish to make full disclosure and do this before 22 June 2007 to take advantage of this offer. They then have until 22 November 2007 to let the Revenue have the actual figures. If you require any advice regarding the implications of disclosure please contact Chris Wright.
Updated 11 November 2007
Having trouble with your Tax Return? - You are not alone!
Recent research commissioned on behalf of The Chartered Institute of Taxation (CIOT) www.tax.org.uk reveals that a third of UK taxpayers find the self-assessment (SA) forms difficult to complete. HM Revenue & Customs (HMRC) issue two tax calculation guides to assist taxpayers. However, both of these are also complicated.
John Cullinane, CIOT President, says: “The forms and guides reflect how complex the UK tax system is. In order to simplify the SA forms and guides one first needs to make the system simpler and clearer. Without this any move to making the forms ‘easier’ could in fact lead to people getting their tax return wrong.”
Complexity creates a Hobson's choice for HMRC – the SA forms will either be complicated or inaccurate.
The research found that 67% of taxpayers polled complete the form themselves. 42% said they found it ‘very’ or ‘fairly’ difficult to understand whether they are paying the right amount of tax.
HMRC data shows that just under half a million taxpayers (7%) failed to submit their self-assessment tax form on time. If every offender was issued the standard £100 fine for late submission, it would add up to just under £50 million.
If you are having difficulty in completing your return, want to take the worry out of completing it or simply want some advice please contact Chris Wright for a no-obligation discussion. You'll be surprised how cheaply we can prepare returns and the calculation of your tax liability comes as part of the service.
Posted 9 May 2007
