Welcome

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Welcome to the first edition of our newsletter since relocating to Bristol. The aim is to provide our clients and intermediaries with a regular update of “Edge News” as well as topical issues and developments that may be of interest for private and corporate clients.  In addition, our new tax director, Dave Hedges, will regularly cover employer solutions.

In this edition we focus on some recent developments and also take the opportunity to provide information about one or two broader opportunities that may be of interest to you. Please let us know if you would like any further information by contacting us on 01454 777831 or email newsletter@edge-tax.com.  

If there are any particular subjects you would like featured in future editions please do let us know.  We hope you find this newsletter useful.

Edge News

Recent additions to the team include: 

• Sarah Harris has joined the technical team bringing a wealth of financial and employer solutions experience with her.
• More recently, Dave Hedges joined as a tax director.  Dave and Anton have known each other since 1996 when they worked together at Ernst & Young.  

In the last quarter, we have worked on a number of projects including:

• Defending two civil investigations of fraud cases (can’t say much more other than we didn’t advise on the planning!);
• Relocation to Barbados (business trip to follow......);
• Overseas pension investment into a property development;
• Enterprise management incentive;
• A complex reorganisation (success – clearance obtained in 10 days with no questions!);
• Several inheritance tax and estate planning structures (we have been to QC on some rather unique ideas);
• Advising on the aftermath of all the changes affecting employee benefit trusts and employer financed retirement benefit schemes (the joy of new and non-descriptive legislation!). 

Salary sacrifice

The concept of salary sacrifice is not a new one. However the current economic climate combined with changes to income tax and National Insurance rates and thresholds continues to make salary sacrifice a very attractive proposition for employers on the basis that they are able to reduce earnings whilst providing benefits which are efficient from an income tax and NIC perspective.  A range of benefits may be provided in this way. Two areas where particular savings can be made are with regard to pensions and travel allowances.  

Pensions:  

The basic concept is that employee pension contributions (which do not attract NIC relief) are replaced by an enhanced employer contribution (which do attract NIC relief). This is combined with the employee agreeing to a reduction in his annual salary. Provided the salary sacrifice is effectively structured and the company’s pension arrangements allow for this type of arrangement this can result in significant saving for both employer and employee.

Travel Allowances:

The same concept may also be used where an employer has employees who have no permanent workplace - employees who are mobile. This could be sales people or drivers but may also cover other professions for example service or maintenance engineers. The opportunity flows from the fact that employers may pay subsistence expenses on a non-receipted basis at HM Revenue & Customs approved rates. If the employee is paying for his own subsistence (that is to say the cost of a meal) out of his net pay (i.e. after income tax and NIC deductions), the implementation of a subsistence allowance in conjunction with a salary sacrifice arrangement can result in reduced company cost and increased net pay for the employee.

Dispensations

6 July generally brings a collective sigh of relief with the submission of P11D returns and this year is no exception!

Whilst it is tempting to move swiftly on to the next deadline based project it is worthwhile reflecting on the possibility of improving the process and therefore simplifying the submission process for next year. P11D forms are increasingly coming under HMRC scrutiny and any errors or inconsistencies can raise an employer’s “risk” rating with HMRC, which may lead to a review by them to include PAYE and other taxes and which may result in arrears of tax, interest and penalties.

A dispensation, be it a new one or an extension to an existing arrangement, is an agreement which will allow an employer not to report on the P11D particular business expenses that they pay directly or reimburse to their employees. Typically this will cover such items as non-taxable travel, subsistence, business entertaining but there is a range of specific items which may be included to help ease the annual P11D reporting obligation.

Without a dispensation all such costs must be included on the P11D, although they may not ultimately be taxable – the reporting obligation remains and penalties exist where HMRC can prove a P11D is incorrect, even though no tax may ultimately be at stake.

A dispensation is therefore a very valuable agreement – it will reduce the P11D reporting requirement (and the time spent in preparing them) and should help to lower business risks. It will only be granted by HMRC where an employer demonstrates that the business has adequate controls in place to allow business expenses to be properly controlled and monitored.  

If you would like to apply for a dispensation or review your existing arrangements please do let us know.

New Fuel Rates

HMRC have announced revised company car fuel rates. The rates apply to all journeys from 1 June and whilst the previous rates could be applied up to 1 July the rates set out below represent the maximum payment applicable from 1 July. These amounts can be used for VAT purposes.

 

Engine size	Petrol	LPG
1,400cc or less	15p	11p
1,401cc to 2000cc	18p	13p
Over 2,000cc	26p	18p
Engine Size	Diesel
1,600cc or less	12p
1,601cc to 2,000cc	15p
Over 2,000cc	18p

*Note: Petrol hybrid cars are treated as petrol cars.

Pool or company car?

A benefit in kind arises in relation to a particular year if in that year a car is made available to an employee or a member of the employee’s family or household, is so made available by reason of the employment, and is available for the employees’ private use.

A pool car on the other hand is one which is made available and actually used by more than one employee by virtue of their employment. It must not be ordinarily used by one employee to the exclusion of the others, and for each employee the private use of the car must be merely incidental to the employee’s other use of the car in the year. Furthermore, the car must not normally be kept overnight on or in the vicinity of any residential premises where any of the employees reside, except while being kept overnight on premises occupied by the person making the car available to them (i.e. the employer).

This is of course an important distinction on the basis that a true pool car will not result in a benefit in kind. Whilst it may be tempting to treat a car as a “pool” car thus avoiding an expensive company car benefit in kind this is an area that is carefully, and consistently, reviewed by HMRC as a recent tribunal case illustrates.

In the case of A Ryan-Munden (TC889), a company director was provided with the use of a Mercedes which was claimed to be a pool vehicle thus resulting in no company car benefit charge. HMRC raised assessments on the basis that the vehicle was a company car and although the company appealed the assessments the appeal failed. This was despite the fact that the tax-payer said she had another company car on which tax was paid, owned another vehicle privately, and used the Mercedes only to visit clients and not privately. In addition the company said that it kept a log of journeys made but this was conveniently lost.  Although the tax-payer kept a record in her diary of mileage HMRC’s view was that it did not appear that this was contemporaneous nor was it supported by a company log.

As such it was adjudged that there was not sufficient evidence to support that the car could be treated as a pool vehicle. It does demonstrate that HMRC are looking at this area in some depth and strictly interpreting the legislation around company cars and pool vehicles. In this case there were a number of helpful factors but the position could not be proven.

If your business provides cars (or vans) and you believe that they do not attract a tax charge on the basis you consider them to be “pool” vehicles, it is recommended that your systems are reviewed to ensure they are sufficiently robust.  

Moving Abroad

A greater number of UK residents want to move abroad permanently.  Having advised hundreds of clients on leaving the UK over the past decade and a half, we have been given a number of reasons for the move including:

• UK Tax issues;
• Searching for a better climate;
• Improvement of lifestyle;
• Marital disharmony!
• Business opportunities; and
• A general disenchantment with Government policies and UK social economic environment.

Whilst all these people want to leave the UK, HMRC are intent on making it more difficult to leave from a tax perspective.  It all started after the withdrawal of IR20, which had governed practice on residence for over three decades and its replacement - HMRC6.  After more than thirty years of having guidance and quite a settled and accepted practice, it was pushed to one side in favour of what on the face of it seems to be somewhat more vague guidance.  

The main changes in guidance are:

• In order for individuals to be able to rely on the 90 day rule, they have to prove they had left the UK (severed ties enough to be non-resident); and
• When considering if someone has become non-resident, their connections with the UK need to be considered.
• Broadly, the guidance indicates that more onus will be placed on whether someone has ties with the UK, for example if they retain:
• Their main residence and can occupy it;
• UK employment/directorships;
• A centre of economic influence here; and
• If their spouse and/or children continue to live in the UK.

More recently and as announced in the 2011 Budget, the consultation in respect of the statutory residence test has begun on residence and non-domicile.  For us advisers involved in international tax planning, the excitement has been ever mounting.  

The consultation commits to a test combining days present in the UK and underlying connections.  It suggests the connections should be from a limited range.  An individual would be able to claim successful non-residence by meeting the day test rule as well as “significantly reducing their connection”.  Whilst the proposals still have elements open to subjectivity, it appears easier to have certainty, which is not necessarily the case under HMRC6.  

If enacted as is, what may be quite interesting is defining a “significant reduction”.  For example, if family remain living in the UK and the leaver doesn’t speak to them anymore, would this be a significant reduction?  What if the leaver keeps their main residence and rents it out?  If the leaver does keep the main residence, would this affect whether economic ties have been significantly reduced? Would the leaver maintain economic ties if they moved the ownership of assets to an offshore structure where the management was no longer in their full control?

One thought that did enter our politically correct minds: was a cost analysis undertaken pre HMRC6 and pre statutory residence test to determine the impact on Revenue collection, the economy, and professional costs from withdrawing IR20?  A fundamental aspect of an efficient economy is the simplicity and fairness of a tax system:  It makes collection of taxes easier and abuse harder.  Fortunately, the writers of UK tax legislation keep consultants like us in business.  

Why reorganise?

Consider the following scenario. Joe and his wife, Joanne, set up a business many years ago.  The business grew and eventually they incorporated (Co A).  It became a good family business over the twenty years or so since incorporation delivering healthy annual income for the family members working in the business.  

The business actually earned more income than it needed and made some investments with the excess income.  Also, a number of new business ventures were introduced by Joe’s sons.  Joe, wanting to give them a chance to build their own business whilst maintaining an interest in the capital used for those businesses created a joint venture arrangement,  Admittedly the arrangement was a little strange involving a management company holding some shares in Co A – the majority were owned by Joanne.  In turn Co A held shares in Co B and Co C – the two ventures operated by the sons.  

The reason for the structure seems reasonable although the structure potentially compromises the availability of entrepreneur’s relief for CGT and business property relief (“BPR”) for IHT.  It just so happens that Joe and Joanne now wish to sell Co A (for a mere £22m+) and they are also keen to undertake inheritance and estate planning.  

When discussing estate planning, it transpired that Joe would rather his sons receive assets in a controlled manner and in a way that their value be protected from ex-spouses and creditors (one son may have married spontaneously to a new arrival to the UK!).

The disposal of the business was the key to any structuring.  A few interesting ideas were discussed involving the transfer of shares qualifying for BPR to trusts and foundations. The ideas were parked because it was felt a potential purchaser may be wary of acquiring the shares from these structures. It was good fun thinking about them though.

Priority one was making the company ready and appealing for a share sale and maximising entrepreneur’s relief.  Broadly this involved a tax review to ensure there weren’t any skeletons in the closet.  Needless to say the usual suspects were in the closet: director’s expenses, self-employed status, VAT on expense claims and incorrect treatment of certain expenses against corporation tax.  The history was rectified and policies put in place to ensure no repeats.

Next step was to reorganise the group structure.  The issues at hand were separating Co B and Co C and moving investment assets out of Co A.  A reorganisation can result in an income tax charge arising where the strict rules of the tax legislation are not met.  Also, where assets have been transferred to group companies subject to the reorganisation, a disposal can result on their exit from the group.  It is always advisable to obtain advance clearance from HMRC that certain legislation does not apply.  Clearance will be given where it is demonstrated the rules are met and where the reorganisation is for commercial reasons and not the avoidance of tax.  Once clearance is obtained, consideration would be paid to the structuring for IHT and estate planning.  In this particular case we were considering the use of trusts and foundations and will allude to potential planning in our next newsletter.

In conclusion, the planning needs of shareholders during the period of owning a company change.  With hindsight, the shareholders could have planned more actively for future events and it is always advisable in our opinion for taxpayers to consider the longer term needs against the short term ones.