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Taxpayers who sell their business will generally be aware that capital gains tax is payable on any gain, and that entrepreneurs’ relief (ER) can reduce the rate of CGT due. However, the taxpayers may not appreciate the detailed conditions needed for ER to apply.

This is where you need to step in with timely and accurate advice.

For an unincorporated business you should first check who owned what proportion of the business, and for which periods. For ER to apply there is a 5% ownership threshold to meet for company and partnership shares, although this is subject to variations for retiring partners and diluted shareholdings.

The next point to clarify is whether the business was trading for at least a year up to the date of disposal, or cessation of the trade. This period is now two years for disposals made on or after 6 April 2019.

The Potter case, (see our newsletter 10 October 2019), examined whether a period of very low activity with no actual sales could be considered to be trading. The FTT decided the minimal activity was trading, and crucially there was no investment activity in that period, so the Potters’ ER claim was upheld.

Letting out property is nearly always regarded as an investment activity rather than trading, so where the business has been letting property you need to look for other activities which could be trading. The recent case of Stephen & Lynne Reneaux illustrates this problem.

The couple jointly owned two commercial units which were used for Stephen’s business until 2003. For the next 10 years the income from letting the units was reported as rental income inequal shares on the couple’s tax returns. The units were sold in 2013, and the individuals both claimed entrepreneurs’ relief on their share of the gain.

The FTT looked for substantial activity associated with the letting of the units which could be regarded as a trade, but concluded that the activities required to generate income from the units did not amount to a trade. The ER claims were rejected.

Written by the Tax Advice Network

When you close or sell your business, you may want to start up a new venture. Before we give your new idea our full blessing we should sit down with you and discuss the anti-avoidance rules which could kick in to foul-up your plans.

HMRC are alive to the issue of phoenix companies. This is when one company is closed down and liquidated, with the accumulated cash subject to CGT, then the same owner starts another business running a very similar trade.

The targeted anti-avoidance rule (TAAR) in ITTOIA 2005 s.396B and s.404A, can apply if the person who receives the distribution from the liquidated company starts up a similar trade or activity (not necessarily in a company) within two years of the liquidation. It must also be reasonable to assume that the main purpose, or one of the main purposes, behind winding up the company was to reduce that person’s income tax liability.

When the TAAR applies the distribution from the company is subject to income tax rather than CGT. However, in Spotlight 47 HMRC declared that the TAAR can also apply when the original company is sold rather than liquidated by the owners. This approach does not find full agreement within the tax profession.

There will be a range of circumstances between; selling the company with no intention to work in the area again, and disposing of the assets and trade out of the company then selling the cash-rich shell to a third party to liquidate. In the later case HMRC may invoke the general anti-abuse rule (GAAR) to counter the perceived tax avoidance.

When planning any death and rebirth of a business, take advice in advance of the transaction.

Written by the Tax Advice Network

Items of post can go missing at this time of year, but when the letter is from HMRC this may have serious consequences for the taxpayer.

If HMRC has a letter to a business returned to it as undelivered, its new policy is to mark the trader as “missing”. This flag means the trader’s VAT record is frozen and it is unable to submit VAT returns until the “missing” flag is lifted. An unincorporated business will also have their self-assessment account frozen, and won’t receive any SA demands.

No doubt HMRC believes it is protecting the national revenue by taking this action, as fraudulent traders can reclaim large amounts of VAT and then disappear. However, before setting the “missing” flag HMRC doesn’t contact the business by an alternative route, such as by phone or email, or even attempt to contact the tax agent.

If our client is flagged as “missing” the first we may know about it is when we can’t submit your VAT return, as no VAT return has been “issued” by the system.

It can take some time to resolve this mess as we need to call HMRC to confirm the client’s address, and our client may have to contact HMRC directly.

In the meantime, the filing of one or more quarterly VAT returns will have been missed so the next VAT return may have to cover six or nine months. This should not generate penalties as the missed VAT returns were not “issued” during the period the VAT account was frozen.

Written by the Tax Advice Network

The General Election is upon us and your clients may be asking whether they can donate funds or goods to a political party from their business.

There is nothing to prevent a business owner from making a political donation out of their business bank account, or from their personal bank account. There is no upper limit on the amount which can be given to any one political party, either in cash, as services or goods.

Amounts to political parties that don’t exceed £500 (£50 received by the candidate or their agent) are not technically “donations” under electoral law. However, the recipient Party should keep a running total of such receipts, in case the £500 threshold is breached by a series of donations in a short period.

Any donations with a value exceeding £500 can only be accepted from; individuals registered on the UK electoral roll, UK-registered companies or businesses, UK registered trade unions, certain trusts and building societies. Political parties can also receive public funds.

Donations exceeding £1,500 to a local Party branch, and donations exceeding £7,500 to the central Party, must be reported to the Electoral Commission, which publishes details of the donors and the amounts once a quarter. Unincorporated organisations which make political donations exceeding £25,000 in a year must register with the Electoral Commission.

Political parties are not charities, so there is no tax deduction for amounts given by individuals or businesses. The political gift must added-back as a disallowable item in the tax computation for the business. Where the donor is a company a gift to political party doesn’t create a taxable benefit in kind for the director or shareholders of that company.

A business may also donate goods, or the services of its staff, by seconding them to work for or on behalf of the political party. If these goods or services are provided for free or with a discount of more than 10% the value of the donation is the difference between what was paid and the market value.

When giving away stock the company should not include the value as a sale for tax purposes, but the VAT on the item must be accounted for as if the item was sold.

This month HMRC is writing to taxpayers who HMRC believes have invested in offshore collective investment funds. The purpose is to remind taxpayers to declare the income received from those investment funds and any gains made when the funds are cashed-in.

If you hold money in such off-shore funds, we need to know whether the fund is an “approved offshore reporting fund”, a “non-reporting fund”, as the tax treatment is different.

Reporting funds

Actual or deemed distributions to the investor may arise in the form of interest or foreign dividends. The reporting is complex:

• Foreign dividends of up to £300 should be included in box 6 on the main part of the tax return.
• Foreign interest of less than £2,000, where no tax has been deducted at source, should be included in box 3 on the main tax return.
• Larger amounts of interest or dividends should be included under reportable income on pages 2 and 3 of the foreign income supplementary pages.
• Profit made on a fund which is not distributed to investors is called excess reportable income (ERI). This ERI must be included on the SA return for the tax year which includes the fund distribution date.
• Gains made on disposal of the fund are subject to CGT.

Where the fund is held within an ISA no reporting is required.

Non-reporting funds

• Distributions to the investor must be declared and are subject to income tax
• Gains made on disposal of the fund are taxed as offshore income gain and are subject to income tax. Report this on the foreign income pages in box 41 of the tax return.

 

We may need to amend an earlier tax return to declare ERI or gains due for that period. If you have any queries please contact our office.

Another TV presenter; Helen Fospero, has won her IR35 case. Helen worked with, and acted as a substitute for Lorraine Kelly, whose case we discussed in our newsletter on 18 April 2019.

Like Lorraine, Helen worked on many different contracts through her own personal service company: Canal Street Productions Ltd from 2002 onwards.

The FTT was only concerned with three contracts between Canal Street and ITV Breakfast Ltd in 2012/13 and 2013/14 for providing Helen’s services as a presenter on the programmes: “Daybreak” and “Lorraine”. During those years the ITV contracts generated up to 74% of Canal Street’s income, but the company also had 10 to 20 other customers.

The FTT established the following facts:

• The contracts with ITV did not establish a mutuality of obligation (MOO) to offer and accept work.
• There was no right of substitution written into the contracts.
• ITV had editorial control over the content of the programmes.
• ITV did not control where, when and how Helen prepared to present those programmes.
• Helen provided her own laptop and earpiece.
• Helen had no office or fixed place of work at ITV.
• There was little risk that Canal Street’s invoices would not be paid by ITV. However, it would not be paid if Helen was absent due to sickness, holiday or maternity.

The FTT concluded that there was insufficient MOO to establish a hypothetic employment contact. The control which ITV had over Helen was the same as it applied to any other presenter, whether an employee or not, so it was not indictive of an employment relationship. The other indicative factors pointed conclusively towards Helen being self- employed. The IR35 tests were not met.

Written by the Tax Advice Network