Welcome to December's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you abreast of the latest developments in taxation.
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HMRC continue with modernisation plans
The recent formal announcement that HMRC will be replacing local offices with thirteen large regional centres has served to alert the general public to what tax professionals and accountants have known for some time - that to meet government cost and performance targets, HMRC must cut back on frontline staff and take forward digital interactions with taxpayers and their advisers. The announcement comes at a time when HMRC are also facing criticism over customer service issues. In its report on HMRC's performance in 2014-15, the House of Commons Public Accounts Committee (PAC) recently found that 'HMRC is still failing to provide an acceptable service to customers and could not tell us when it would be able to do so'. The Committee reported that HMRC only answered 72.5% of calls during 2014-15 (of which only 39% were answered within five minutes) and only 50% in the first six months of 2015, against an unambitious target of 80%. PAC is concerned that 'customer service levels are so bad that they are having an adverse impact on the collection of tax revenues'.
HMRC currently have 170 offices around the country. Under the modernisation programme, the changes will result in the closure of 137 offices by 2027, to be replaced with thirteen new regional centres. The restructuring of the entire department's workforce is a huge change, but it is expected to generate estate savings of £100 million a year by 2025.
The first regional centre is expected to open during 2016-2017. Broadly, HMRC employees will be brought together into these centres, which will contain a mixture of operational, tax professional and corporate services. It is expected that 90% of the current 58,000 HMRC employees will either work in a regional centre or see out their career in an HMRC office. Employees were first told about the modernisation plans some eighteen months ago and the subsequent ten-year phasing in period is designed to keep redundancies to a minimum.
A limited number of transitional centres will be kept open for up to twelve years and four specialist centres will also be retained.
The thirteen regional centres will vary in size and in the mix of operational, tax professional and corporate services work that they contain. According to latest information, the smallest will hold 1,200 to 1,300 full-time equivalent members of staff and the largest, operationally-focused centres will hold more than 6,000.
HMRC will have four specialist sites for work that cannot be done elsewhere, notably where HMRC needs to work with its IT suppliers or other government agencies or departments. These will be in Telford, Worthing, Dover and at the Scottish Crime Campus in Gartcosh.
Although HMRC are still searching for specific properties that will meet their criteria for the modernisation programme, it has been confirmed that they will eventually be located in the following cities:
- North East (Newcastle);
- North West (Manchester and Liverpool);
- Yorkshire and the Humber (Leeds);
- East Midlands (Nottingham);
- West Midlands (Birmingham);
- Wales (Cardiff);
- Northern Ireland (Belfast);
- Scotland (Glasgow and Edinburgh);
- South West (Bristol);
- London, South East and East of England (Stratford and Croydon).
Much modern compliance work can be done from any location but HMRC's investigators and field force remain a mobile workforce able to cover the entire country as and when they need to make contact face-to-face or at people's premises. There will also continue to be mobile customer services for vulnerable individuals or those with additional needs.
See the GOV.uk website for further details.
Company cars - April 2016 increases
The financial benefits of driving a company car have continued to erode over recent years, but this benefit remains one of the most popular and potent perks of a job. In general terms, less tax will be payable on 'greener' cars, but the tax charges on lower emissions vehicles are set to rise significantly in real terms over the next few years.
Two new appropriate percentage bands apply from 2015-16 for cars emitting between zero and 50gkm CO2, and between 51and 75gkm CO2, with the appropriate percentages set at 5% and 9% respectively. For cars emitting 76-94gkm CO2 the appropriate percentage band increased to 13% from 6 April 2015. Finance Act 2014 made further changes to increase these 'lower emissions' bands to 7% and 11% respectively from 2016-17. The appropriate percentage for cars with emissions of between 76-94gkm CO2 will rise to 15% from 6 April 2016.
It was announced at Budget 2014 that in 2017-18, the appropriate percentage for the 0-50gkm CO2 band will be 9% and 13% for the 51-75gkm CO2 band. Finance Act 2015 enacted these figures, together with the figure of 17% for the 76-94gkm CO2. Budget 2014 also announced that in 2018-19 and future years, the appropriate percentage for the 0-50gkm CO2 band will be 13% and 16% for the 51-75gkm CO2 band. Again, Finance Act 2015 enacted these figures, together with the figure of 19% for the 76-94gkm CO2.
If the emissions figure is equal to the relevant threshold, the appropriate percentage is 14% for 2015-16, rising to 16% in 2016-17. If the emissions figure exceeds the relevant threshold, the threshold percentage is increased by one percentage point for every 5gkm CO2 in excess of the relevant threshold up to a maximum of 37% for 2015-16 and subsequent years.
Although the tax payable on cars with lower emissions is still considerably lower than those with higher outputs, the increases set to take effect over the next few years will mean 'greener' company car drivers will experience steeper increases in the resulting tax payable.
It is worth noting that up to £5,000 may be deducted from the list price calculation for any capital contribution made by the employee, which could be provided in the form of an interest-free or low interest loan from the employer. This may help to reduce the tax payable on the provision of a company car.
The government announced at the summer 2015 Budget, that a new dividend allowance of £5,000 will be introduced from 6 April 2016. Broadly, from that date, it is expected that the existing dividend tax credit will be abolished, a new annual dividend tax allowance of £5,000 will be introduced, and the rates of tax on dividend income will change. The legislation introducing the dividend tax changes has not yet been published and the rules outlined below are therefore still subject to possible change.
From April 2016, the 10% non-refundable dividend tax credit that currently attaches to dividends will be abolished, the dividend tax allowance will take effect, and the rates of tax on dividend income exceeding that allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. The dividend allowance will be available to anyone who has dividend income. However, it has been designed in such a way that those with significant dividend income will pay more tax than those with smaller amounts.
The new rates of dividend tax will apply only to the amount of dividends received in excess of £5,000 (excluding any dividend income paid within an individual savings account (ISA)). It is important to note that the dividend allowance will not reduce total income for tax purposes, and dividends within the allowance will still count towards the basic or higher rate tax bands. This means that the dividend allowance is effectively treated as a zero rate of tax on the first £5,000 of dividends. This differs from other tax allowances (for example, the personal allowance) which are deducted from taxable income.
Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an ISA, will continue to be tax free.
HMRC win 'Rangers' tax case
The Scottish Court of Session's recent judgment in the 'Rangers' EBT' case (Murray Group Holdings & Others  CSIH 77) has attracted much attention in the press, with opinions of both support and criticism being voiced. It is not often that a Court both overturns the decisions of two Tribunals beneath it, and expressly declines to follow previous cases that have gained a certain acceptance.
This case concerned a scheme involving payments to various trusts set up in respect of executives and footballers employed by the former Rangers Football Club. In summary, the Court ruled that such payments amounted to 'a mere redirection of emoluments or earnings' and were accordingly 'subject to income tax'.
Companies within the Murray group entered into a series of transactions as part of a scheme designed to avoid the payment of income tax and NICs in respect of their employees, which resulted in assessments being made by HMRC for income tax and NICs payable under PAYE for the years 2001/2 to 2008/9. The assessments were successfully appealed before the First-tier Tribunal (FTT). HMRC's appeal to the Upper Tribunal was refused but permission to appeal to the Court of Session was subsequently granted.
The scheme involved a cash payment into an employees' remuneration trust (the Principal Trust), and the trustee of the trust then paid the same amount into a sub-trust for the benefit of the employee and his family. The trustee of the sub-trust then advanced funds on loan to the employee in question.
The FTT held that the trustee of the Principal Trust had a 'genuine discretion' as to how to apply the funds advanced to it, thus the benefit enjoyed by the employee and his family once the funds were resettled into the sub-trust resulted from the exercise of a 'discretionary power' by the trustee of the sub-trust. The FTT therefore ruled that such payments were not payments of emoluments or earnings, and were therefore not subject to income tax. HMRC, however, contended that the cash payment made by the employing company to the trustee of the Principal Trust was in consideration of services by the employee, and had therefore been 'earned' by the employee. HMRC said that the scheme amounted to 'a mere redirection of earnings which did not remove the liability of employees to income tax'. The Court concluded that the argument by HMRC was correct, and accordingly allowed the appeal on that ground.
December Question and Answer Section
Q. Can I claim for the time I spend repairing my rental property? I own three rental properties and spend a considerable amount of time each year undertaking various necessary repairs. Can I pay myself say, an hourly rate, for the time I spend on the properties and claim a corresponding deduction in my accounts?
A. Any amounts taken from the property rental business will simply be viewed as a withdrawal of profits from the business and taxed accordingly. The HMRC Property Income Manual states 'A landlord can't deduct anything for the time they spend themselves working in their own rental business. They can deduct any wages or salaries they pay to their spouse, civil partner or other relations for working in the rental business provided the amounts paid represent a proper commercial reward for the work done. The spouse, civil partner or relative will be taxable on their earnings if their income is large enough'.
Q. What is the difference between zero-rated and exempt supplies for VAT? I have recently started running my own business providing training services. HMRC have advised me that VAT is not charged on the type of services I am providing. Does this mean that my services are zero-rated for VAT or actually exempt? Do I need to register for VAT? I am confused!
A. Although both zero-rated and exempt supplies result in no VAT being applied to the supply, the consequence is very different between them and it is important to get it right.
Zero-rating is a rate of VAT, albeit at zero per cent. The goods and/or services to which it applies are taxable supplies. This in turn renders any supplier of zero-rated goods and/or services liable to register for VAT, where appropriate (see the GOV.uk website here for further information on registration). The advantage of VAT registration is that VAT can be reclaimed on costs.
However, a business making solely exempt supplies is not making taxable supplies, so cannot register for VAT. Consequently, all VAT incurred upon expenditure becomes an additional irrecoverable cost.
Where a supply could be either zero-rated or exempt, zero-rating takes priority.
Q. Is medical treatment taxable? One of my most valuable employees has been ill over recent years and as a result has had to take several weeks off work. If I pay for any medical treatment on his behalf, will my employee be liable to tax on it?
A. Expenditure by employers on medical treatment for employees is generally chargeable to income tax either as a payment of earnings or as a taxable benefit. However, from 1 January 2015, an exemption from income tax applies where an employer funds recommended medical treatment where the recommendation itself meets certain specific requirements. This means that expenses incurred by an employer to cover medical treatment which is recommended to an employee for the purposes of assisting the employee to return to work after a period of absence due to injury or ill health should not be treated as a chargeable benefit on the employee. The exemption applies to expenditure up to a cap of £500 per tax year per employee.
See the HMRC Employment Income Manual here for further details.
December Key Tax Dates
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/12/2015
30 - Deadline for 2014/15 self assessment online returns to be filed if you are an employee and want tax underpaid to be collected by adjustment to your 2016/17 PAYE code (for underpayments of up to £3000 only)