Welcome to February'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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We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.
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Stamp Duty Land Tax (SDLT) on additional properties
Proposals to bring in higher rates of stamp duty land tax (SDLT) on purchases of additional residential properties are expected to be finalised in time for the forthcoming Spring Budget on 16 March 2016.
SDLT is paid on the purchase of residential property in increasing portions of the property price above £125,000. Current rates are as follows:
- SDLT for a property with purchase price of up to £125,000 is currently 0%; the proposed additional properties rate in this band is 3%.
- SDLT on the next £125,000 of the purchase price is currently 2%; the proposed additional properties rate in this band is 5%.
- SDLT on the next £675,000 of the purchase price is currently 5%; the proposed additional properties rate in this band is 8%.
- SDLT on the next £575,000 of the purchase price is currently 10%; the proposed additional properties rate in this band is 13%.
- SDLT on the remaining amount of the purchase price (portion above £1.5m) is currently 12%; the proposed additional properties rate in this band is 15%.
The proposed higher rates will only apply to purchases of additional residential property which complete on or after 1 April 2016. If contracts are exchanged after 25 November 2015 then the higher rates will apply if the purchase is completed on or after 1 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rates will not apply.
The higher rates will not apply if at the end of the day of the transaction an individual owns only one residential property, irrespective of the intended use of the property.
If at the end of the day of the transaction an individual purchaser owns two or more residential properties, whether the purchaser pays the higher rates or not will depend on whether they are replacing their main residence. If the purchaser has sold a previous main residence within 18 months before the day of the transaction and the transaction is a purchase of a new main residence, the purchaser will be considered to be replacing a main residence. Where an individual is replacing a main residence the higher rates of SDLT will not apply.
However, if the purchaser is not replacing a main residence (either because they have not sold a previous main residence within the last 18 months or the property being acquired is not a new main residence), the higher rates will apply.
Recognising that there may be certain circumstances where purchasers experience difficulties with conveyance transactions, there will be a refund mechanism for those who sell their previous main residence within 18 months of the purchase of the new main residence.
A potential problem may arise where two or more unmarried people own or purchase property jointly. The proposals currently state that if, at the end of the day of a transaction, any of the joint purchasers has two or more properties and is not replacing a main residence, the higher rates will apply to the entire consideration for the transaction. This is designed to provide simplicity and aligns with other areas of the tax system. However, as the purchased property may be a first property for one or more of the joint purchasers, the government is currently considering whether the current proposals will produce the fairest outcome.
HMRC prepare for National Living Wage (NLW)
The government has recently launched its campaign to promote the introduction of the new national living wage (NLW), which will take effect from 1 April 2016. From that date workers in the UK aged over 25 earning the minimum rate of £6.70 per hour will see a 50p increase in their minimum hourly rate, which is set to rise to £7.20 per hour.
The NLW will be enforced by HMRC alongside the national minimum wage (NMW), which they have enforced since its introduction in 1999.
The NMW is the minimum pay per hour most workers are entitled to by law. The rate to which they are entitled depends on a worker's age and whether they are an apprentice.
The rates from 1 October 2015 are:
- £6.70 for workers 21 and over;
- £5.30 aged 18-20;
- £3.87 for those aged 16-17, who are above school leaving age but under 18; and
- £3.30 for apprentices under 19, or 19 or over who are in the first year of apprenticeship.
There are a number of people who are not entitled to the NMW, including:
- self-employed people;
- volunteers or voluntary workers;
- company directors; and
- family members, or people who live in the family home of the employer who undertake household tasks.
All other workers including pieceworkers, home workers, agency workers, commission workers, part-time workers and casual workers must receive at least the NMW.
The compulsory national living wage (NLW) is the national rate set for people aged 25 and over. Whilst the NMW rates for those aged under 25 normally change on 1 October every year, the NLW rate for those aged 25 and over will change (where applicable) every year on 1 April. The rate for the NLW has been set at £7.20 per hour from 1 April 2016. The current NMW for those under the age of 25 will continue to apply from 1 April 2016.
The NMW is reviewed annually by the Low Pay Commission and any changes to the rate are normally introduced in October each year.
As with the NMW, the NLW will be reviewed annually by the Low Pay Commission who will recommend any future rises.
Generally all those who are covered by the NMW, and are 25 years old and over, will be covered by the NLW. These include:
- most workers and agency workers;
- casual labourers;
- agricultural workers; and
- apprentices who are aged 25 and over.
Following the recent Spanish case of Federacion de Servicios Privados del sindicato Comisiones Obreras v Tyco Integrated Security SL (Tyco) (Case C-266/14), there could potentially be NMW claims if, taking into account travelling time, a mobile worker's hourly pay rate falls below the minimum rate. The UK professional bodies are currently assessing the impact of the European Court of Justice (ECJ) decision in this case on the NMW and further guidance is expected in due course.
The government is continuing to raise awareness to businesses to make sure they are ready to pay the new wage on 1 April 2016. As part of this, a four-step guide for businesses has been published on a new dedicated website (www.livingwage.gov.uk), which asks firms to:
- check they know who is eligible in their organisation;
- take the appropriate payroll action in advance of the commencement date;
- let employees know about their new pay rate; and
- check that staff under 25 are earning at least the right rate of NMW.
The penalty for non-payment of the NLW will be 200% of the amount owed, unless the arrears are paid within 14 days. The maximum fine for non-payment will be £20,000 per worker.
Employers need to take action over the coming weeks to ensure they are ready for the launch of the NLW on 1 April.
Simplification of VAT MOSS for small businesses
HMRC Brief 4/2016 entitled VAT MOSS - simplifications for businesses trading below the VAT registration threshold, outlines simplifications available to businesses trading below the UK's VAT registration threshold (currently £82,000) that make supplies of digital services (telecommunications, broadcasting or electronically supplied services) to consumers in other EU member states. Some simplifications are already in place and Brief 4/2016 announces two new areas of help for the smallest businesses.
Businesses need to determine where their customer is located. There are specific rules in place for certain types of transactions (see the gov.uk website here for further details). For all other supplies of digital services, the normal rule is that businesses must collect two pieces of non-contradictory information to evidence their customer's location.
HMRC have previously allowed UK businesses that are below the UK VAT registration threshold and registered for VAT MOSS, to base their customer location decisions on a single piece of information provided to them by their payment service provider. HMRC introduced this simplification in response to feedback from small businesses that said that they found it difficult to obtain two pieces of evidence. However, in the latest guidance, HMRC say that they recognise that some small businesses have still found this difficult. Consequently, they have now said that they will allow businesses below the UK VAT registration threshold to 'exercise their best judgement'. This means businesses can rely on any single piece of information, such as the address provided by the customer, to determine where their customer is located. This additional flexibility should provide additional help for businesses below the UK VAT registration threshold.
Brief 4/2016 can be found on the gov.uk website here.
Could EA exemption be avoided?
The Chartered Institute of Taxation (CIOT) has recently warned that Government plans to exclude one-person businesses from claiming the national insurance Employment Allowance (EA) from April 2016 will be too easy to dodge.
The Institute says that the planned curbs are easily avoided, either by appointing another director, such as a spouse, civil partner, other family member or friend, and paying that person a token wage; or by arranging payments of earnings so that the worker is not a director when at least one of the payments is made. The CIOT suggests that the legislation should include a connected persons test to prevent any limited company where there are two directors who are connected persons, and no other employees, from benefiting from EA.
There is another possible problem with the Government's proposal, which relates to how payments are made. The CIOT believes the exclusion is also open to abuse in that making a single payment after the director has resigned would seem to enable the company to escape the exclusion and hence qualify for Employment Allowance. That former director could then even go as far as getting themselves re-appointed as director of the same company.
No doubt the Government will wish to address these potential issues and further clarification can be expected in due course.
February Question and Answer Section
Q. Did my extended leave constitute a cessation of trade? I have been the sole director of a trading limited company for many years. Last year, I decided to take a long holiday and travelled around the world with my wife - indeed, we got on so well that we stayed away for around 12 months! Whilst I was away the company continued to collect outstanding payments, but it received no other income. I have now taken on another director/shareholder (50%) and company trading has resumed. Should I have informed HMRC that I was going away and how should the losses in the period of temporary non-trading be treated?
A. According to the HMRC Business Income Manual (para BIM80500 onwards), your 'intention' to continue to trade at a later date will be an important factor in deciding whether there was a cessation. The Manual states:
'...if activity is recommenced, and the question is whether the new business is a continuation of the old, evidence of the proprietor's intention will be relevant (BIM80580).
A mere decision to wind down or dispose of the business does not of itself amount to a permanent discontinuance if trading activity in fact continues after the decision (J & R O'Kane & Co v CIR (1922) 12TC303).'
If HMRC rule that the old trade did not cease, and therefore a new trade has not commenced, then any losses can simply be carried forward and set off against future profits from the same trade. Also, if it is decided that there was no cessation of trade, there is no requirement to notify HMRC.
Q. Should I transfer my rental property to my wife? I own a flat which has a buy-to-let type mortgage on it. I am a higher rate taxpayer, but my wife doesn't work and doesn't pay tax. Can we arrange things so that she receives the rental income and responsible for any tax due?
A. If you want your wife to receive the income from the flat, you will need to transfer the property to her, so that she owns it. You could do this by a formal conveyancing, or less formally, by using a deed of trust, which should work for income tax purposes. Information on trusts of this nature for tax purposes can be found in the HMRC Trusts, Settlements and Estates Manual at para. TSEM9520.
You should also be aware of the stamp duty land tax (SDLT) implications here. If you transfer the responsibility of the mortgage to your wife, but the mortgage is less then £125,000, there will be no SDLT to pay. Above this amount, you will have to factor in the additional expense.
Q. Is my season ticket loan taxable? My employer says he will give me an interest-free loan to purchase my annual rail fare ticket. This is very kind of him, but as the annual cost of the ticket is £6,000 I am worried that I will have to pay tax on the loan.
A Strictly, the taxable benefit on cheap or interest-free loans is the difference between any interest paid and the interest payable at the 'official rate' (currently 3.00%). However, there is no charge where the total of all beneficial loans made to an employee do not exceed £10,000 at any time in the tax year.
You should note that tax is charged on the amount written off of any loans, whether or not the recipient of the loan is still employed.
February Key Tax Dates
2 - Last day for car change notifications in the quarter to 5 January - Use P46 Car
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/2/2016
28 - Talk to us about year end and pre-budget planning
First 5% penalty surcharge on any 2014/15 outstanding tax due on 31 January 2016 still unpaid