Autumn Statement 2014 - Summary by Levicks Chartered Accountants

On Wednesday 3 December the Office for Budget Responsibility published its updated forecast for the UK economy. Chancellor George Osborne responded to that forecast in a statement to the House of Commons later on that day.
In the period since the Budget in March a number of consultation papers and discussion documents have been published by HMRC and some of these proposals are summarised here. Draft legislation relating to many of these areas will be published on 10 December and some of the details in this summary may change as a result.
Our summary also provides a reminder of other significant developments which are to take place from April 2015.

The Chancellor's statement

His speech and the subsequent documentation announced tax measures in addition to the normal economic measures.
Our summary concentrates on the tax measures which include:

• improvements to the starting rate of tax for savings income
• new rules for accessing pension funds
• removal of corporation tax relief for goodwill on incorporation
• changes to the Construction Industry Scheme
• the introduction of new CGT rules for non-residents and UK residential property
• changes to the remittance basis charge for resident non-domiciles
• changes to the tax treatment of pensions on death
• changes to the IHT treatment of trusts
• changes to Stamp Duty Land Tax for residential property

Personal Tax

The personal allowance for 2015/16

For those born after 5 April 1948 the personal allowance will be increased from £10,000 to £10,600.

Comment

The reduction in the personal allowance for those with 'adjusted net income' over £100,000 will continue. The reduction is £1 for every £2 of income above £100,000. So for 2014/15 there is no allowance when adjusted net income exceeds £120,000. In 2015/16 the allowance ceases when adjusted net income exceeds £121,200.

Tax bands and rates for 2015/16

The basic rate of tax is currently 20%. The band of income taxable at this rate is being decreased from £31,865 to £31,785 so that the threshold at which the 40% band applies will rise from £41,865 to £42,385 for those who are entitled to the full basic personal allowance.
The additional rate of tax of 45% is payable on taxable income above £150,000.
Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 37.5%.

Starting rate of tax for savings income

From 6 April 2015, the maximum amount of an eligible individual's savings income that can qualify for the starting rate of tax for savings will be increased to £5,000 from £2,880, and this starting rate will be reduced from 10% to nil. These rates are not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

Comment

This will increase the number of savers who are not required to pay tax on savings income, such as bank or building society interest. If a saver's taxable non-savings income will be below the total of their personal allowance plus the £5,000 starting rate limit then they can register to receive their interest gross using a form R85.
The increase will also provide a useful tax break for director/shareholders who extract their share of profits from a company by taking a low salary and the balance in dividends. This is because dividends are taxed after savings income and thus are not included in the individual's 'taxable non-savings income'.

Example

Type of income	Amount	Tax rate	Comment on tax rate
Salary	£10,600	Nil	(as covered by personal allowance)
Bank interest	£3,000	Nil	(as salary plus interest is less than £15,600)

Dividend income is then taxed at the appropriate dividend tax rates.

Transferable Tax Allowance for some

From 6 April 2015 married couples and civil partners may be eligible for a new Transferable Tax Allowance.
The Transferable Tax Allowance will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.
The option to transfer will be available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner which means £1,060 for the 2015/16 tax year.

Comment

For those couples where one person does not use all of their personal allowance the benefit will be up to £212 (20% of £1,060).
HMRC will, no doubt, be publicising the availability of the Transferable Tax Allowance in the next few months and details of how couples can opt to transfer allowances.

New Individual Savings Accounts (NISAs)

On 1 July 2014 ISAs were reformed into a simpler product, the NISA, and the overall annual subscription limit for these accounts was increased to £15,000 for 2014/15. From 6 April 2015 the overall NISA savings limit will be increased to £15,240.
The Chancellor has now announced an additional ISA allowance for spouses or civil partners when an ISA saver dies. From 6 April 2015, surviving spouses will be able to invest the inherited funds into their own ISA, on top of their usual allowance. This measure applies for deaths from 3 December 2014.
At Budget 2014, the Chancellor announced that peer-to-peer loans would be eligible for inclusion within NISAs. The government is consulting on the options for changes to the NISA rules to allow peer-to-peer loans to be held within them.
No start date has been announced.

Comment

Peer-to-peer lending is a small but rapidly growing alternative source of finance for individuals and businesses. The inclusion of such loans in NISAs will increase choice for investors and encourage the growth of the peer-to-peer sector.

Junior ISA and Child Trust Fund (CTF)

The annual subscription limit for Junior ISA and Child Trust Fund accounts will increase from £4,000 to £4,080.
The government has previously decided that a transfer of savings from a CTF to a Junior ISA should be permitted at the request of the registered contact for the CTF. The government has confirmed the measure will have effect from 6 April 2015.

Bad debt relief on investments made on peer-to-peer lending

The government will introduce a new relief to allow individuals lending through peer-to-peer platforms to offset any losses from loans which go bad against other peer-to-peer income. It will be effective from 6 April 2016 and, through self assessment, will allow individuals to make a claim for relief on losses incurred from 6 April 2015.

Pensions - changes to access of pension funds

In Budget 2014, George Osborne announced 'pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want'. Some of changes have already taken effect but the big changes will come into effect on 6 April 2015 for individuals who have money purchase pension funds.
The tax consequences of the changes are contained in the Taxation of Pensions Bill which is currently going through Parliament.
Under the current system, there is some flexibility in accessing a pension fund from the age of 55:

• tax free lump sum of 25% of fund value
• purchase of an annuity with the remaining fund, or
• income drawdown.

For income drawdown there are limits, in most cases, on how much people can draw each year.
An annuity is taxable income in the year of receipt. Similarly any monies received from the income drawdown fund are taxable income in the year of receipt.
From 6 April 2015, the ability to take a tax free lump sum and a lifetime annuity remain but some of the current restrictions on a lifetime annuity will be removed to allow more choice on the type of annuity taken out.
The rules involving drawdown will change. There will be total freedom to access a pension fund from the age of 55.
It is proposed that access to the fund will be achieved in one of two ways:

• allocation of a pension fund (or part of a pension fund) into a 'flexi-access drawdown account' from which any amount can be taken over whatever period the person decides
• taking a single or series of lump sums from a pension fund (known as an 'uncrystallised funds pension lump sum').

When an allocation of funds into a flexi-access account is made the member typically will take the opportunity of taking a tax free lump sum from the fund (as under current rules).
The person will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt.
Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking an uncrystallised funds pension lump sum.
The tax effect will be:

• 25% is tax free
• the remainder is taxable as income.

Comment

The fundamental tax planning point arising from the changes is self-evident. A person should decide when to access funds depending upon their other income in each tax year.

Pensions - changes to tax relief for pension contributions

The government is alive to the possibility of people taking advantage of the new flexibilities by 'recycling' their earned income into pensions and then immediately taking out amounts from their pension funds. Without further controls being put into place an individual would obtain tax relief on the pension contributions but only be taxed on 75% of the funds immediately withdrawn.
Currently an 'annual allowance' sets the maximum amount of tax efficient contributions. The annual allowance is £40,000 (but there may be more allowance available if the maximum allowance has not been utilised in the previous years).
Under the proposed rules from 6 April 2015, the annual allowance for contributions to money purchase schemes will be reduced to £10,000 in certain scenarios. There will be no carry forward of any of the £10,000 to a later year if it is not used in the year.
The main scenarios in which the reduced annual allowance is triggered is if:

• any income is taken from a flexi-access drawdown account, or
• an uncrystallised funds pension lump sum is received.

However just taking a tax-free lump sum when funds are transferred into a flexi-access account will not trigger the £10,000 rule.

Taxation of resident non-domiciles

The Chancellor has announced an increase in the annual charge paid by non-domiciled individuals resident in the UK who wish to retain access to the remittance basis of taxation.
The charge paid by people who have been UK resident for seven out of the last nine years will remain at £30,000. The charge paid by people who have been UK resident for 12 out of the last 14 years will increase from £50,000 to £60,000. A new charge of £90,000 will be introduced for people who have been UK resident for 17 of the last 20 years. The government will also consult on making the election apply for a minimum of three years.

Business Tax

Corporation tax rates

From 1 April 2015 the main rate of corporation tax, currently 21%, will be reduced to 20%.
As the small profits rate is already 20%, the need for this separate code of taxation disappears. The small profits rate will therefore be unified with the main rate.

Research and Development (R&D) tax credits

The government will increase the rate of the 'above the line' credit from 10% to 11% and will increase the rate of the SME scheme from 225% to 230% from 1 April 2015.
It is proposed to restrict qualifying expenditure for R&D tax credits from 1 April 2015 so that the costs of materials incorporated in products that are sold are not eligible. There will be a package of measures to streamline the application process for smaller companies investing in R&D.

Construction Industry Scheme (CIS) improvements

In Budget 2014 the government announced that it would consult on options to improve the operation of the scheme for smaller businesses and to introduce mandatory online CIS filing for contractors. The consultation has now taken place.
A key reform concerns changes to the requirements for subcontractors to achieve and retain gross payment status. There are proposals for simplifying and improving the compliance and turnover tests which will enable more subcontractors to access gross payment status. There is no intention to change the £30,000 turnover test for sole traders, but the government proposes lowering the threshold for the upper limit of the turnover test to help more established businesses with multiple partners or directors qualify for gross payment status. The current upper threshold of £200,000 could fall to as little as £100,000.
Some compliance tests would be relaxed so that it would be easier for subcontractors to retain their gross payment status.
For contractors the government is proposing mandatory online filing of monthly CIS returns. Improvements will be made to the IT systems to provide a better CIS online service. These will include the online system for verification of subcontractors by contractors.

Comment

About two thirds of CIS contractors are also employers who therefore file Real Time Information PAYE returns online. It is no surprise that the government wants to extend the scope of mandatory online filing. The improvements to the online verification process would be welcome but the government is also proposing to remove the option of verifying subcontractors by telephone.

Class 2 National Insurance contributions (NIC)

From 6 April 2015 liability to pay Class 2 NIC will arise at the end of each year. Currently a  liability to Class 2 NIC arises on a weekly basis.
The amount of Class 2 NIC due will still be calculated based on the number of weeks of self-employment in the year, but will be determined when the individual completes their self assessment return. It will therefore be paid alongside their income tax and Class 4 NIC. For those that wish to spread the cost of their Class 2 NIC, HMRC will retain a facility for them to make regular payments throughout the year. The current six monthly billing system will cease from 6 April 2015.
Those with profits below a threshold will no longer have to apply in advance for an exception from paying Class 2 NIC. Instead they will have the option to pay Class 2 NIC voluntarily at the end of the year so that they may protect their benefit rights.

Corporation tax relief for goodwill on incorporation

Corporation tax relief is given to companies when goodwill and intangible assets are recognised in the financial accounts. Relief is normally given on the cost of the asset as the expenditure is written off in accordance with Generally Accepted Accounting Practice or at a fixed 4% rate, following an election.
An anti-avoidance measure has been announced to restrict corporation tax relief where a company acquires internally-generated goodwill and certain other intangible assets from related individuals on the incorporation of a business.
In addition, individuals will be prevented from claiming Entrepreneurs' Relief on disposals of goodwill when they transfer the business to a related company. Capital gains tax will be payable on the gain at the normal rates of 18% or 28% rather than 10%.
These measures will apply to all transfers on or after 3 December 2014 unless made pursuant to an unconditional obligation entered into before that date.

Comment

Prior to this announcement it was possible, for example, on incorporation of a sole trader's business to a company which is owned by the sole trader, for the company to obtain corporation tax relief on the market value of goodwill at the time of incorporation. The disposal by the sole trader would qualify for a low rate of capital gains tax.
The government considers this is unfair to a business that has always operated as a company.

Corporation tax reliefs - creative sector

Two new reliefs and a change to an existing relief are proposed:

Children's television tax relief

The government will introduce a new tax relief for the production of children's television programmes from 1 April 2015. The relief will be available at a rate of 25% on qualifying production expenditure.

Orchestra tax relief

The government will consult on the introduction of an orchestra tax relief from 1 April 2016.

High-end television tax relief

The government will explore with the industry whether to reduce the minimum UK expenditure for high-end TV relief from 25% to 10% and modernise the cultural test, to bring the relief in line with film tax relief.

Overarching contracts of employment and temporary workers

The government will review the increasing use of overarching contracts of employment by employment intermediaries such as 'umbrella companies'. These arrangements enable workers to obtain tax relief for home to work travel that would not ordinarily be available. The government will publish a discussion paper shortly which may result in new measures at Budget 2015.

Banks - loss relief restriction

The government will restrict the amount of a bank's annual profit that can be offset by the carry forward of losses to 50% from 1 April 2015. The restriction will apply to losses accruing up to 1 April 2015 and will include an exemption for losses incurred in the first five years of a bank's authorisation.

Diverted profits tax

A new tax to counter the use of aggressive tax planning techniques by multinational enterprises to divert profits from the UK will be introduced. The Diverted Profits Tax will be applied using a rate of 25% from 1 April 2015.

Employment Taxes

Employer provided cars

The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are now announced well in advance. Most cars are taxed by reference to bands of CO₂ emissions. The percentage applied to each band has typically gone up by 1% each year with an overriding maximum charge of 35% of the list price of the car. From 6 April 2015, the percentage applied by each band goes up by 2% and the maximum charge is increased to 37%.

Comment

These increases have the perverse effect of discouraging retention of the same car. New cars will often have lower CO₂ emissions than the equivalent model purchased by the employer, say three years ago.

Employer National Insurance contributions (NIC) for the under 21s

From 6 April 2015 employer NIC for those under the age of 21 will be reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid.
This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period. The weekly UST is £815 for 2015/16 which is equivalent to £42,385 per annum. Employers will be liable to 13.8% NIC beyond this limit.

Comment

The UST is a new term for this new NIC exemption. It is set at the same amount as the Upper Earnings Limit, which is the amount at which employees' NIC fall from 12% to 2%.

NIC for apprentices under 25

The government will abolish employer NIC up to the upper earnings limit for apprentices aged under 25. This will come into effect from 6 April 2016.

NIC Employment Allowance

The Employment Allowance was introduced from 6 April 2014. It is an annual allowance of up to £2,000 which is available to many employers and can be offset against their employer NIC liability.
The government will extend the annual £2,000 Employment Allowance for employer NIC to care and support workers. This will come into effect from 6 April 2015.

Review of employee benefits

The Office of Tax Simplification has published a number of detailed recommendations on the tax treatment of employee benefits in kind and expenses. In response the government launched:

• a package of four related consultations on employee benefits in kind and expenses
• a longer term review of the tax treatment of travel and subsistence expenses
• a call for evidence on modern remuneration practices.

The government has now announced:

• From 6 April 2015 there will be a statutory exemption for trivial benefits in kind costing less than £50.
• From 6 April 2016, the £8,500 threshold below which employees do not pay income tax on certain benefits in kind will be removed.This threshold adds unnecessary complexity to the tax system. There will be new exemptions for carers and ministers of religion.
• There will be an exemption for certain reimbursed expenses which will replace the current system where employers apply for a dispensation to avoid having to report non-taxable expenses. The new exemption for reimbursed expenses will not be available if used in conjunction with salary sacrifice.
• The introduction of a statutory framework for voluntary payrolling benefits in kind. Payrolling benefits instead of submitting forms P11D can offer substantial administrative savings for some employers.

Capital Taxes

Capital gains tax (CGT) rates

The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The rate for disposals qualifying for Entrepreneurs' Relief is 10% with a lifetime limit of £10 million for each individual.

CGT - Entrepreneurs' Relief (ER)

The government will allow gains which are eligible for ER, but which are instead deferred into investments which qualify for the Enterprise Investment Scheme or Social Investment Tax Relief to remain eligible for ER when the gain is realised. This will benefit qualifying gains on disposals that would be eligible for ER but are deferred into either scheme on or after 3 December 2014.

CGT - non-residents and UK residential property

At present a non-resident individual or company is not liable to CGT on residential property even though it is located in the UK. This is in marked contrast to many other countries that charge a capital gains tax on the basis of the location of a property rather than on the location of the vendor.
Therefore from 6 April 2015 a CGT charge will be introduced on gains made by non-residents disposing of UK residential property. The rate of tax for non-resident individuals will be the same as the CGT rates for UK individuals. Non-resident individuals will have access to the CGT annual exemption.
The rate of tax for companies will mirror the UK corporation tax rate.
The charge will not apply to the amount of the gain relating to periods prior to 6 April 2015. The government will allow either rebasing to a 5 April 2015 value or a time-apportionment of the whole gain, in most cases.
The government has decided that some changes are required to the rules determining the circumstances when a property can benefit from Private Residence Relief (PRR). The changes will apply to both a UK resident disposing of a residence in another country and a non-resident disposing of a UK residence.
From 6 April 2015 a person's residence will not be eligible for PRR for a tax year unless either:

• the person making the disposal was resident in the same country as the property for that tax year, or
• the person spent at least 90 midnights in that property.

Comment

The main point of the changes to the PRR rules is to remove the ability of an individual who is resident in, say, France with a property in the UK as well as France to nominate the UK property as having the benefit of PRR. Any gain on the French property is not subject to UK tax anyway and, without changes to the PRR rules, the gain on the UK property could be removed by making a PRR election.
The good news is that the latest proposals retain the ability of a UK resident with two UK residences to nominate which of those properties have the benefit of PRR.

Changes to the tax treatment of pensions on death

IHT and pension funds

If an individual has not bought an annuity, a defined contribution pension fund remains available to pass on to selected beneficiaries. Inheritance tax (IHT) can be avoided by making a 'letter of wishes' to the pension provider suggesting to whom the funds should be paid. If an individual's intention has not been expressed the funds may be paid to the individual's estate resulting in a potential IHT liability.

Other tax charges on pension funds - current law

There are other tax charges to reflect the principle that income tax relief would have been given on contributions into the pension fund and therefore some tax should be payable when the fund is paid out. For example:

• if the fund is paid as a lump sum to a beneficiary, tax at 55% of the fund value is payable
• if the fund is placed in a drawdown account to provide income to a 'dependant' (for example a spouse), the income drawn down is taxed at the dependant's marginal rate of income tax.

There are some exceptions from the 55% charge. It is possible to pass on a pension fund as a tax free lump sum where the individual has not taken any tax free cash or income from the fund and they die under the age of 75.

Other tax charges on pension funds - changes

The government has decided to introduce significant exceptions from the tax charges.
Under the new system, anyone who dies under the age of 75 will be able to give their remaining defined contribution pension fund to anyone completely tax free, whether it is in a drawdown account or untouched.
The fund can be paid out as a lump sum to a beneficiary or taken out by the beneficiary through a 'flexi access drawdown account' (see the personal tax section of this summary for an explanation of this term).
Those aged 75 or over when they die will be able to pass their defined contribution pension fund to any beneficiary who will then be able to draw down on it as income at their marginal rate of income tax. Beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45%.
The proposed changes take effect for payments made from 6 April 2015.

Tax treatment of inherited annuities

The Chancellor has announced further changes to the pension tax regime. From 6 April 2015 beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary.

Comment

Without this change in tax treatment of inherited annuities, individuals had a potential prospective tax advantage in choosing not to purchase an annuity. If an individual died relatively early, their fund would pass tax free to beneficiaries.  If the individual would prefer the financial comfort of a guaranteed payment of income, beneficiaries would be taxed on the income at their marginal rate of income tax under current rules. From 6 April 2015, the beneficiaries will be able to receive any future payments from such policies tax free.

Changes to the trust IHT regime

Certain trusts, known as 'relevant property trusts', provide a mechanism to allow assets to be held outside of an individual's estate thus avoiding a 40% IHT liability on the death of an individual. The downside is that there are three potential points of IHT charge on relevant property trusts:

• a transfer of assets into the trust is a chargeable transfer in both lifetime and on death
•  a charge has to be calculated on the value of the assets in the trust on each ten-year anniversary of the creation of the trust
•  an exit charge arises when assets are effectively transferred out of the trust.

The calculation of the latter two charges is currently a complex process which can take a significant amount of time to compute for very little tax yield.
A third consultation on proposed changes was issued in June 2014. Although still proposals, the new rules already apply in order to prevent tax planning to forestall the effect of the new rules. The new rules will apply to situations where:

• a new trust is made after 6 June 2014
• property is added to an existing trust after 6 June 2014
• property in an existing trust, the terms of which are changed in certain ways after 6 June 2014.

Under the new rules an individual would have a 'settlement nil rate band' (SNRB) which would be unconnected to their personal nil rate band. The SNRB will be the same amount as the personal nil rate band (currently £325,000). Where an individual intends to create more than one trust in their lifetime, that person can make an election to determine the percentage of their SNRB to be allocated to each settlement for the purposes of both ten-year and exit charges.

Comment

If Mr A considers he will want to create two trusts in his lifetime, he can elect for each trust to have part, say half, of the SNRB. The ten-year charge for each trust would then be calculated by deducting half of the SNRB from the value of the assets in the trust at the ten-year date.
This is less generous than the regime for a trust which was established before 7 June 2014 (and where no new property is added and the terms of the trust are not changed). For many such trusts, with effective planning, the ten-year charge calculation would have the benefit of the full nil rate band even though the individual had created more than one trust.

If no election is made to allocate part of the SNRB, a trust would have to calculate the charges on the basis that none of the SNRB is available.
New funds added from 7 June 2014 will be treated as a separate fund within the settlement. The individual who created the trust can allocate any part of his SNRB to the fund. The property put into the trust before 7 June would remain subject to the old tax regime.

IHT - exemption for emergency services personnel and humanitarian aid workers

Following consultation since Budget 2014, the government will extend the existing IHT exemption for members of the armed forces whose death is caused or hastened by injury while on active service to members of the emergency services and humanitarian aid workers responding to emergency circumstances. It will have effect for deaths on or after 19 March 2014.

Stamp Duty Land Tax (SDLT)

The Chancellor has announced a major reform to SDLT on residential property transactions. SDLT is charged at a single percentage of the price paid for the property, depending on the rate band within which the purchase price falls. From 4 December 2014 each new SDLT rate will only be payable on the portion of the property value which falls within each band. This will remove the distortion created by the existing system, where the amount of tax due jumps at the thresholds.
Where contracts have been exchanged but not completed on or before 3 December 2014, purchasers will have a choice of whether the old or new structure and rates apply. This measure will apply in Scotland until 1 April 2015 when SDLT is devolved to the Scottish Parliament.
The new rates and thresholds are:

Purchase price of property	New rates paid on the part of the property price within each tax band
£0 - £125,000	0%
£125,001 - £250,000	2%
£250,001 - £925,000	5%
£925,001 - £1,500,000	10%
£1,500,001 and above	12%

Comment

Purchasers of residential property valued at £937,500 or less will pay the same or in most cases less tax than they would have paid under the old rules.

Annual Tax on Enveloped Dwellings (ATED)

The ATED is payable by those purchasing and holding their homes through corporate envelopes, such as companies. The government introduced a package of measures in 2012 and 2013 to tackle this tax avoidance. One of the measures was the ATED.
The government has now announced an increase in the rates of ATED by 50% above inflation. From 1 April 2015, the charge on residential properties owned through a company and worth:

• more than £2 million but less than £5 million will be £23,350
• more than £5 million but less than £10 million will be £54,450
• more than £10 million but less than £20 million will be £109,050
• more than £20 million will be £218,200.

Other matters

Devolved tax powers to Scottish Parliament

Following the referendum on Scottish independence, the main political parties in Scotland have agreed on new devolved powers. The UK government will publish draft clauses in January 2015 for the implementation of these powers.
For income tax:

• the Scottish Parliament will have the power to set income tax rates and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers
• all other aspects of income tax will remain reserved to the UK Parliament, including the imposition of the annual charge to income tax, the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs and the definition of income
• HMRC will continue to collect and administer income tax across the UK.

For other taxes:

VAT

Receipts raised in Scotland by the first 10 percentage points of the standard rate of VAT will be assigned to the Scottish government's budget. All other aspects of VAT will remain reserved to the UK Parliament.

Air passenger duty

The power to charge tax on air passengers leaving Scottish airports will be devolved to the Scottish Parliament, with freedom to make arrangements with regard to the design and collection of any replacement tax.

Aggregates levy

The power to charge tax on the commercial exploitation of aggregate in Scotland will be devolved to the Scottish Parliament, once the current European legal challenges are resolved.

Devolution to Northern Ireland 

The government recognises the strongly held arguments for devolving corporation tax rate-setting powers to Northern Ireland. HMRC and HM Treasury have concluded that this proposal could be implemented provided that the Northern Ireland Executive is able to manage the financial implications.
The parties in the Northern Ireland Executive are currently taking part in talks aimed at resolving a number of issues. The government will introduce legislation in this Parliament subject to satisfactory progress on these issues in the cross-party talks.

Devolution of non-domestic rates to Wales

Agreement has been reached with the Welsh government on full devolution of non-domestic (business) rates policy. The fully devolved regime will be operational by April 2015.

Offshore tax evasion

In 2014, the government announced its intention to introduce a new strict liability criminal offence of failing to declare taxable offshore income and gains. This means that HMRC would need only demonstrate that a person failed to correctly declare the income or gains, and not that they did so with the intention of defrauding the Exchequer. This will complement existing offences, such as the common law offence of cheating the public revenue, with less serious sanctions than existing criminal offences.
The government is consulting on the design of the new offence.
The government considers the majority of cases are still likely to be investigated and settled through civil means. Another consultation is seeking views on strengthening the existing civil penalty regime on offshore evasion.
The offshore penalties regime has applied to liabilities arising from 6 April 2011. The level of penalty is based on the type of behaviour that leads to the understatement of tax, and is linked to the tax transparency of the territory in which the income or gain arises. The underlying premise is that where it is harder for HMRC to get information from another territory, the more difficult it is to detect and remedy non-compliance and therefore the penalties for failing to declare income and gains arising in that territory will be higher.

Direct Recovery of Debts (DRD)

At Budget 2014, the Chancellor announced HMRC would be given the power to recover tax and tax credit debts directly from the bank and building society accounts (including NISAs) of debtors. A consultation on DRD set out the process and safeguards but many commentators considered the safeguards were not robust enough. In response to concerns about the risk of DRD being used in error and the potential impact on vulnerable individuals, the government will introduce further safeguards.
It is now proposed the main features of the DRD process will be:

• only debts of £1,000 or more will be eligible for recovery through DRD
• HMRC will always leave £5,000 across a debtor's accounts, as a minimum, once the debt has been held
• guaranteeing every debtor will receive a face-to-face visit from HMRC agents, before their debts are considered for recovery through DRD
• extending the window to 30 calendar days, from the start of the DRD being initiated to the earliest point at which funds could be transferred to HMRC
• an option for debtors to appeal against HMRC's decision to a County Court on specified grounds, including hardship and third party right.

Scotland will be removed from the scope of DRD as HMRC already has summary warrant powers in Scotland to recover debts in a similar, though not identical, manner to DRD.
In order to allow for an extended period of scrutiny, the government intends to legislate in 2015, during the next Parliament.

Comment

HMRC state that the vast majority of people pay their taxes in full and on time and DRD will only affect individuals and businesses who are making an active decision not to pay. HMRC also state they will use the power in a very small minority of cases.
Last year, HMRC collected £505.8 billion from about 35 million taxpayers. About 90% was paid on time but around £50 billion was not, and became a debt. They made around 16 million contacts with debtors by letter, phone, text message or other means to collect the debt. This included making more than 900,000 visits to follow up on around 400,000 debt cases. HMRC estimate they will use DRD 17,000 times a year.

Air Passenger Duty (APD)

The Chancellor announced an exemption from reduced rate APD from 1 May 2015 for children under 12 and from 1 March 2016 for children under 16. The government has reviewed how to improve tax transparency in ticket prices and will consult on whether the APD needs to be displayed on airline tickets.



If you wish advice on any of the above, please do not hesitate to  contact us! Levicks Website

Buy to Let Investment Follow-up Facts

On the basis that investment in property appears to make commercial sense what tax factors should you take into account? If you are considering property investment we, at Levicks, can help you to make property investments in a tax efficient manner.

Investment in property has been and continues to be a popular form of investment by many people. It is seen as a route by which:

• relatively secure capital gains can be made on eventual sale
• income returns can be generated throughout the period of ownership
• mortgage finance is covered in repayment terms by the security of the eventual sale of the property and in interest terms by the rental income.

Of course, the net returns in capital and income will depend on a host of factors. But on the basis that the investment appears to make commercial sense what tax factors should you take into account?

Who or what should purchase the property?

An initial decision needs to be made whether to purchase the property:

• as an individual
• as joint owner or via a partnership (often with a spouse)
• via a company.

There are significant differences in the tax effects of ownership by individuals or a company.
Deciding the best medium will depend on a number of factors.

Commercial property

You are currently trading as a limited company

The personal purchase of new offices or other buildings and the charging of rent for the use of the buildings to your company is very tax efficient from an income tax position as:

• the rental you receive from the company allows sums to be extracted without national insurance
• the company will claim a corporate tax deduction for the rent
• finance costs will be deductible from the rents.

Capital gains

Capital gains on the disposal of an asset are generally calculated by deducting the cost of the asset from the proceeds on disposal and reducing this by the annual exemption. Gains are treated as an individual’s top slice of income and taxed at 18% or 28% or a combination of the two.

Capital gains tax and Entrepreneurs’ Relief (ER)

Unfortunately ER is unlikely to be available on the disposal of business premises used by your company where rent is paid. This is due to the restrictions on obtaining the relief on what is known as an “associated disposal”. These restrictions include the common situation where a property is currently in personal ownership, but is used in an unquoted company or partnership trade in return for a rent. Under the ER provisions such relief is restricted where rent is paid from 6 April 2008 onwards.

Residential property

The decision as to who should own a residential property to let is a balancing act depending on overall financial objectives.
The answer will be dependent on the following factors:

• do you already run your business through your own company?
• how many similar properties do you want to purchase in the future?
• do you intend to sell the property and when?

Do you already have a company?

If you already run your business through a company it may be more tax efficient to own the property personally as you will be able to make use of your CGT annual exemption (and spouse’s annual exemption if jointly owned) on eventual disposal to reduce the gain.
The net rental income will be taxed at your marginal rate of tax, but if you are financing the purchase with a high percentage of bank finance, the income tax bill will be relatively small.
In contrast, a company can still currently use indexation allowance to reduce a capital gain. This effectively uplifts the cost of the property by the increase in the Retail Price Index over the period of ownership. Indexation is not available to reduce the gain on the disposal by an individual so in situations where indexation allowance is substantial, this could result in lower gains.
The net rental income will be taxed at the company’s marginal rate of tax, which is generally lower than for an individual but again if the purchase is being financed with a high percentage of loan/bank finance, the corporation tax bill will be relatively small.
But there are other factors to consider:

• there is frequently a further tax charge should you wish to extract any of the proceeds from the company
• inserting the property into an existing company may result in your shareholding in that company not qualifying for ER
• if you form another company to protect the trading status of the existing company, that may increase the corporation tax bill on your trading company (because of ‘associated company’ rules).

If you do not have a company at present

Personal or joint ownership may be the more appropriate route but there are currently significant other advantages of corporate status particularly if you expect that:

• you will be increasing your investment in residential property and
• you are unlikely to be selling the properties on a piecemeal basis or
• you are mainly financing the initial purchases of the property from your own capital.

If so, the use of a company as a tax shelter for the net rental income can be attractive.

Use of company as a tax shelter

Profits up to £300,000 are currently taxed at 20%. This rate applies for trading companies or property investment companies.
Where profits are retained the income may be suffering around half of the equivalent income tax bills. That means there are more funds available to buy more properties in the future.

Tax efficient long-term plans

There are two potential long-term advantages of the corporate route for residential property:

• is there an intention to sell the properties at all? May be the intention is to retain them into retirement (see below Using the company as a retirement fund)
• can the shares be sold rather than the property?(see below for issues regarding Selling the shares)

Using the company as a retirement fund

A potentially attractive route is to consider the property investment company as a ‘retirement fund’. If the properties are retained into retirement, it is likely that any initial financing of the purchases of the property has been paid off and there will be a strong income stream. The profits of the company (after paying corporation tax) can be paid out to you and/or your spouse as shareholders.
To the extent that the dividends when added to your other income do not exceed your personal allowances and the basic rate band, there will be no income tax to be paid.

Selling the shares

CGT will be due on the gain on the eventual sale of the shares.
The share route may also be more attractive to the purchaser of the properties rather than buying the properties directly, as they will only have 0.5% stamp duty to pay rather than the potentially higher sums of stamp duty land tax on the property purchases.

Stamp duty land tax (SDLT)

SDLT is payable by the purchaser and is a flat percentage of the consideration paid (up to 7%).
Where the consideration on residential property is £125,000 or less no SDLT is payable.

Corporate investment in expensive residential property

In 2012 a new top rate of SDLT was introduced where expensive residential property, valued at more than £2 million, is purchased by a ‘non natural person’ broadly a company. With effect from 20 March 2014 the value limit was reduced to £500,000 for acquisitions on or after this day.
From 1 April 2013 a further annual charge, the Annual Tax on Enveloped Dwellings (ATED) has been introduced. The ATED is between £15,000 and £140,000 depending on the value of the residential property.
It is proposed that there will be two new bands for ATED. Residential properties worth over £1 million and up to £2 million will be brought into charge with effect from 1 April 2015.  Properties worth over £500,000 and up to £1 million will be brought into charge with effect from 1 April 2016.
At present CGT is charged at 28% on disposals of properties liable to ATED. This will be extended to residential properties worth over £1 million with effect from 6 April 2015 and for residential properties worth over £500,000 from 6 April 2016.

How we can help

This factsheet has concentrated on potentially long-term tax factors to bear in mind with property investment.
You need to decide which is the best route to fit in with your objectives. At Levicks, we can help you to plan an appropriate course of action for your property investment.

Buy to Let Property Investment Facts

Buy to let traditionally involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings. At Levicks, we can help you sort out some of the potential problems that may arise and structure the investment appropriately.

In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.
The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.
Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.
However, the gross return from buy to let properties - ie the rent received less costs such as letting fees, maintenance, service charges and insurance - is no longer as attractive as it once was. Investors need to take a view on the likelihood of capital appreciation exceeding inflation.

Factors to consider

Do

• think of your investment as medium to long-term
• research the local market
• do your sums carefully
• consider decorating to a high standard to attract tenants quickly.

Don‘t

• purchase anything with serious maintenance problems
• think that friends and relatives can look after the letting for you - you‘re probably better off with a full management service
• cut corners with tenancy agreements and other legal documentation. 

 Which property?

Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links? An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.

Agents

Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.

Tenancy agreements

This important document will ensure that the legal position is clear.

Taxation

When buying to let, taxation aspects must be considered.

Tax on rental income

Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent‘s letting fees and an allowance for furnishings.

Tax on sale

Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. This gain may be further reduced by any annual exemption available and is then taxed at either 18% or 28% or a combination of the two rates. CGT is payable on 31 January after the end of the tax year in which the gain is made.

Student lettings

Buy to let may make sense if you have children at college or university. It is important that the arrangement is structured correctly. The student should purchase the property (with the parent acting as guarantor on the mortgage). There are several advantages to this arrangement.

Advantages

This is a cost effective way of providing your child with somewhere decent to live.
Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.
As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.
The amount of rental income chargeable to income tax is reduced by a deduction known as ‘rent a room relief’. This is £4,250 each year. In this situation no expenses are tax deductible. Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.

Furnished holiday lettings

Furnished holiday letting (FHL) is another type of investment that could be considered. This form of letting is short holiday lets as opposed to letting for the residential market.
The favourable tax regime for furnished holiday letting accommodation has been significantly amended. Most importantly the regime has been extended to cover qualifying property located anywhere in the European Economic Area (EEA). This extension is effectively backdated and means that it may be possible to claim the benefits of FHL treatment of losses and capital gains in UK tax years within the normal four year time limit.
The conditions necessary to qualify for FHL treatment have been amended from 6 April 2012. From that date the property will have to be available for letting for at least 210 days in each tax year and must actually be let for 105 days. Provided that there is a genuine intention to meet the actual letting requirement it will be possible to make an election to keep the property as qualifying for up to two years even though the condition may not be satisfied in those years. This will be particularly important to preserve the special CGT treatment of any gain as qualifying for the lower CGT rate of 10% where the conditions for Entrepreneurs’ Relief are satisfied.
One area of previous benefit which has now gone is that losses arising in an FHL business can no longer be set against other income of the taxpayer. This change applies for the 2011/12 tax year onwards. It also becomes necessary to segregate losses into UK losses and EEA losses. Each can only be offset against profits of the same or future years in each relevant sector.
FHL property has some advantages but it has other disadvantages which should also be considered.

Advantages

You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.
Generally however the rules for allowable expenditure are more generous.

Disadvantages

Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees (for example more regular cleaning).
Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.
If you would like any further advice in this area please get in touch.

How we can help

Whilst some generalisations can be made about buy to let properties it is always necessary to tailor any advice to your personal situation. Any plan must take into account your circumstances and aspirations.
Whilst a successful buy to let cannot be guaranteed, professional advice can help to sort out some of the potential problems and structure the investment correctly.
We would be happy to discuss buy to let further with you. Please contact us at Levicks for more detailed advice.

What are a director's responsibilities?

Becoming a director carries with it potentially onerous duties. Make sure you know what those duties are. At Levicks, we can provide professional advice to help you fulfil your duties and obligations.

The position of director brings both rewards and responsibilities upon an individual.
Whether you are appointed to the Board of the company you work for or you are involved in establishing a new business and take on the role of director you will feel a sense of achievement.
However the office of director should not be accepted lightly. It carries with it a number of duties and responsibilities. We summarise these complex provisions below.

Companies

You can undertake business in the UK as either:

• an unincorporated entity, ie a sole trader or a partnership or
• an incorporated body.

An incorporated business is normally referred to as a company. Although there are limited liability partnerships and unlimited companies the vast majority of companies are limited by shares. This means the liability of shareholders is limited to the value of their share capital (including any unpaid).
A limited company can be a private or public company. A public company must include 'public' or 'plc' in its name and can offer shares to the public.
The responsibilities and penalties for non compliance of duties are more onerous if you are a director of a public company.

Directors

When you are appointed a director of a company you become an officer with extensive legal responsibilities. For a director of an incorporated body, the Companies Act 2006 sets out a statement of your general duties. This statement codifies the existing ‘common law’ rules and equitable principles relating to the obligations of company directors that have developed over time. Common law had focused on the interests of shareholders. The Companies Act 2006 highlights the connection between what constitutes the good of your company and a consideration of its wider corporate social responsibilities.
The legislation requires that directors act in the interests of their company and not in the interests of any other parties (including shareholders). Even sole director/shareholder companies must consider the implications by not putting their own interests above those of the company.
The aim of the codification of directors’ duties in the Companies Act 2006 is to make the law more consistent and accessible.
The Act outlines seven statutory directors' duties, which also need to be considered for shadow directors. These are detailed below.

Duty to act within their powers

As a company director, you must act only in accordance with the company’s constitution, and must only exercise your powers for the purposes for which they were conferred.

Duty to promote the success of the company

You must act in such a way that you feel would be most likely to promote the success of the company (ie. its long-term increase in value), for the benefit of its members as a whole. This is often called the ‘enlightened shareholder value’ duty. However, you must also consider a number of other factors, including:

• the likely long-term consequences of any decision
• the interests of company employees
• fostering the company's business relationships with suppliers, customers and others
• the impact of operations on the community and environment
• maintaining a reputation for high standards of business conduct
• the need to act fairly as between members of the company.

Duty to exercise independent judgment

You have an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.

Duty to exercise reasonable care, skill and diligence

This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objective’ standards. You must exercise reasonable care, skill and diligence using your own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.

Duty to avoid conflicts of interest

This dictates that, as a director, you must avoid a situation in which you have, or may have, a direct or indirect interest which conflicts, or could conflict, with the interests of the company.
This duty applies in particular to a transaction entered into between you and a third party, in relation to the exploitation of any property, information or opportunity. It does not apply to a conflict of interest which arises in relation to a transaction or arrangement with the company itself.
This clarifies the previous conflict of interest provisions, and makes it easier for directors to enter into transactions with third parties by allowing directors not subject to any conflict on the board to authorise them, as long as certain requirements are met.

Duty not to accept benefits from third parties

Building on the established principle that you must not make a secret profit as a result of being a director, this duty states that you must not accept any benefit from a third party (whether monetary or otherwise) which has been conferred because of the fact that you are a director, or as a consequence of taking, or not taking, a particular action as a director.
This duty applies unless the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty to declare interest in a proposed transaction or arrangement

Any company director who has either a direct or an indirect interest in a proposed transaction or arrangement with the company must declare the ‘nature and extent’ of that interest to the other directors, before the company enters into the transaction or arrangement. A further declaration is required if this information later proves to be, or becomes either incomplete or inaccurate.
The requirement to make a disclosure also applies where directors 'ought reasonably to be aware' of any such conflicting interest.
However, the requirement does not apply where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or where other directors are already aware (or 'ought reasonably to be aware') of the interest.

Enforcement and penalties

The Companies Act states that they will be enforced in the same way as the Common Law, although under Company Law. As a result there are no penalties in the Companies Act 2006 for failing to undertake the above duties correctly.
Enforcement is via an action against the director for breach of duty. Currently such an action can only be brought by:

• the company itself (ie the Board or the members in general meeting) deciding to commence proceedings; or
• a liquidator when the company is in liquidation.
• an individual shareholder can take action against a director for breach of duty. This is known as a derivative action and can be taken for any act of omission (involving negligence), default or breach of duty or trust.

Where the company is controlled by the directors these actions are unlikely.

How we can help

You will now be aware that the position of director must not be accepted lightly.

• the law is designed to penalise those who act irresponsibly or incompetently.
• a director who acts honestly and conscientiously should have nothing to fear.

We can provide the professional advice you need to ensure you are in the latter category.
Please contact us via our the Levicks Website if you would like more information on directors' responsibilities.

Business Plans - The Basics

We consider why you should draw up a business plan and what it should include. If you are starting, or have recently started a business we, at Levicks, can help you develop a business plan.

Every new business should have a business plan. It is the key to success. If you need finance, no bank manager will lend money without a considered plan. It is one of the most important aspects of starting a new business. Your plan should provide a thorough examination of the way in which the business will commence and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.

Why does a business need a plan?

Preparing a business plan will help you to set clear objectives for your business and clarify your thinking. It will also help to set targets for future performance and monitor finances and profitability. It should help to provide early warning for when you might need to reconsider the plan.

Always bear in mind that anyone reading the plan will need to understand the essentials of your business quickly and easily.

Contents

The business plan should cover the following areas.

Overview

An overview of your plans for the business and how you propose to put them into action. This is the section most likely to be read by people unfamiliar with your business so try to avoid technical jargon.

 

Description

A description of the business, your objectives for it and how you plan to achieve them. Include details of the background to your business for example how long you have been developing the business idea and the work you have carried out to date.

 

Personnel

Details of the key personnel including you and any external consultants. You should highlight the skills and expertise that these people have and outline how you intend to deal with any weaknesses.

 

Product

Details of your product or service and your Unique Selling Point. This is exactly what its name suggests, something that the competition does not offer. You should also outline your pricing policy.

 

Marketing

Details of your target markets and your marketing plan. This may form the basis for a separate, more detailed, plan. You should also include an overview of your competitors and your likely market share together with details of the potential for growth. This is usually a very important part of the plan as it gives a good indication of the likely chance of success.

 

Practices

You will need to include information on your proposed operating practices and production methods as well as premises and equipment requirements. 

 

Financial forecasts

The plan should cover your projected financial performance and the assumptions made in your projections. This part of the plan converts what you have already said about the business into numbers. It will include a cash flow forecast which shows how much money you expect to flow in and out of the business as well as profit and loss predictions and a balance sheet. Detailed financial forecasts will normally be included as an appendix to the plan. As financial advisers we are particularly well placed to help with this part of the plan.

 

Financial requirements

The cash flow forecast referred to above will show how much finance your business needs. The plan should state how much finance you want and in what form. You should also say what the finance will be used for and show that you will have the resources to make the necessary repayments. You may also give details of any security you can offer.

 

The future

Putting together a business plan is often seen as a one-off exercise undertaken when a new business is starting up.
However the plan should be updated on a regular basis. It can then be used as a tool against which performance can be monitored and measured as part of the corporate planning process. There is much merit in this as used properly it keeps the business focused on objectives and inspires a discipline to achieve them.

How we can help

At Levicks we can look forward with you to help you put together your best possible business plan for the future.

Employment and related matters - National Minimum Wage

We highlight the main principles of the minimum wage regulations including the hourly pay rates together with the penalties for failure to comply. If you are an employer we, at Levicks, can provide you with assistance or any additional information required. We also offer a payroll service.

The National Minimum Wage (NMW) was introduced on 1 April 1999 and is reviewed each year by the Low Pay Commission. Any changes normally take place on 1 October. There have already been a number of instances of employers being penalised for not complying with the legislation. HMRC are the agency that ensures enforcement of the NMW.
We highlight below the main principles of the minimum wage regulations.
Please contact us for further specific advice.

What is the National Minimum Wage?

There are different levels of NMW, depending on your age and whether you are an apprentice. The rates are given in the following table:

Age	Rate from 1 Oct 2013	Rate from 1 Oct 2014
the main rate for workers aged 21 and over	£6.31	£6.50
the 18-20 rate	£5.03	£5.13
the 16-17 rate for workers above school leaving age but under 18	£3.72	£3.79
the apprentice rate, for apprentices under 19 or 19 or over and in the first year of their apprenticeship	£2.68	£2.73

The age at which you become entitled to the main rate was reduced from 22 to 21 on 1 October 2010. The apprentice rate was introduced on the same date.
The apprentice rate applies to:

• apprentices under 19
• apprentices aged 19 and over, but in the first year of their apprenticeship.

If you are of compulsory school age you are not entitled to the NMW.
In addition, there is a fair piece rate which means that employers must pay their output workers the minimum wage for every hour they work based on an hourly rate derived from the time it takes a worker working at average speed to produce the work in question. The entitlement of workers paid under this system is uprated by 20%. This means that the number reached after dividing the NMW by the average hourly output rate must be multiplied by 1.2 in order to calculate the fair piece rate.
There are no exemptions from paying the NMW on the grounds of the size of the business.

Key questions

Who does not have to be paid the National Minimum Wage?

• The genuinely self–employed.
• Child workers – anyone of compulsory school age (ie. until the last Friday in June of the school year they turn 16).
• Company directors who do not have contracts of employment.
• Some other trainees on government funded schemes or programmes supported by the European Social Fund.
• Students doing work experience as part of a higher education course.
• People living and working within the family, for example au pairs.
• Friends and neighbours helping out under informal arrangements.
• Members of the armed forces.
• Certain government schemes at pre–apprenticeship level, such as:
  • in England, Programme Led Apprenticeships
  • in Scotland, Get Ready for Work or Skillseekers
  • in Northern Ireland, Programme Led Apprenticeships or Training for Success
  • in Wales, Skillbuild
• Government employment programmes
• European Community Leonardo da Vinci, Youth in Action, Erasmus and Comenius programmes
• Share fishermen.
• Prisoners.
• Volunteers and voluntary workers.
• Religious and other communities.

Please note that HMRC have the power to serve an enforcement notice requiring the payment of at least the NMW, including arrears, to all family members working for a limited company.

What is taken into account in deciding whether the NMW has been paid?

The amounts to be compared with the NMW include basic pay, incentives, bonuses and performance related pay and also the value of any accommodation provided with the job.
Overtime, shift premiums, service charges, tips, gratuities, cover charges and regional allowances are not to be taken into account and benefits other than accommodation are also excluded.

What records are needed to demonstrate compliance?

There is no precise requirement but the records must be able to show that the rules have been complied with if either the HMRC or an Employment Tribunal requests this to be demonstrated. Where levels of pay are significantly above the level of the NMW, special records are not likely to be necessary.
It is recommended that the relevant records are kept for at least six years.
Normally there is not likely to be any serious difficulty in demonstrating compliance where employees are paid at hourly, weekly, monthly or annual rates but there may be difficulties where workers are paid on piece–rates and where, for example, they work as home–workers.
Where piece rates are used, employers must give each worker a written notice containing specified information before the start of the relevant pay period. This includes confirmation of the ‘mean’ hourly output and pay rates for doing their job.

What rights do workers have?

Workers are allowed to see their own pay records and can complain to an Employment Tribunal if not able to do so.
They can also complain to HMRC or to a Tribunal if they have not been paid the NMW. They can call the confidential helpline 0800 917 2368.

What are the penalties for non–compliance?

Enforcement notices can be issued if underpayments are discovered and there can be a penalty equivalent to twice the hourly amount of the NMW for each worker that has been underpaid multiplied by the number of days that enforcement notices are not complied with.
There could also be a maximum fine of £20,000 for having committed a criminal offence.
Employers who refuse to pay the NMW may also face a fine in excess of £200 for every worker they underpay. Employers have to pay back arrears they owe to workers and those who refused to pay up could be penalised.

How we can help

We will be more than happy to provide you with assistance or any additional information required on the National Minimum Wage. We also offer a full payroll service - please contact us at Levicks if you would like more information.

Warm welcome to our new partner, Jamie Sunnucks

Today, Levicks are celebrating the announcement of a new partner of the firm, Jamie Sunnucks. 

Jamie joined Levicks as trainee in July 2001 and has significant experience in advising SME’s in respect their taxation and accountancy affairs. He will continue to develop his own client portfolio together with sharing the management of the partnership.

Senior partner, Michael Collier, welcomes Jamie onboard to not only bring further skills to complement the existing partnership, but also for succession of the firm into the future.

View Jamie's profile now on our website, http://www.levicksaccountants.co.uk/profiles.htm

Levicks Chartered Accountants

Engaging audiences via our social media

Why not link up with Levicks via our other social media sites below:

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Or you can make contact with us via our website, Online Contact Page for individual advice.

Levicks Chartered Accountants have offices in Maidstone, Broadstairs and Canterbury serving the south-east and further afield.

Capital Gains and Inheritance Tax Changes in the 2014 Budget

For further information, view our website - Levicks Website

CGT rates

The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The rate for disposals qualifying for Entrepreneurs' Relief is 10% with a lifetime limit of £10 million for each individual.

CGT annual exemption

The CGT annual exemption is £10,900 for 2013/14 and will be increased to £11,000 for 2014/15.

CGT - Private Residence Relief

A gain arising on a property which has been an individual's private residence throughout their period of ownership is exempt from CGT. There are deemed period of occupation rules which may help to provide an exemption from CGT even if the individual was not living in the property at the time. This may mean the individual is accruing private residence relief on another property at the same time.
The final period exemption applies to a property that has been an individual's private residence at some time even though they may not be living in the property at the time of disposal.
For disposals on or after 6 April 2014 the final period exemption will be reduced from 36 months to 18 months. There may be exceptions for disabled individuals and long term residents in care homes.

CGT - non-residents and UK residential property

From April 2015 a CGT charge will be introduced on future gains made by non-residents disposing of UK residential property. A consultation on how best to introduce this will be published shortly.

Business roll-over relief

Roll-over relief allows CGT to be deferred on gains made on certain qualifying assets where the proceeds are used to purchase other qualifying assets within a specified period of time. With effect from 20 December 2013 a payment entitlement under the new EU Basic Payment Scheme for farmers will become a qualifying asset.

IHT nil rate band

The IHT nil rate band remains frozen at £325,000 until 5 April 2018.

IHT exemption for emergency service personnel

The Government will consult on extending the existing IHT exemption for members of the armed forces whose death is caused or hastened by injury while on active service to members of the emergency services.

Changes to the trust IHT regime

Certain trusts, known as 'relevant property trusts', provide a mechanism to allow assets to be held outside of an individual's estate for the purpose of calculating a 40% IHT liability on the death of an individual. The downside is that there are three potential points of IHT charge on relevant property trusts:

• a transfer of assets into the trust is a chargeable transfer in both lifetime and on death
• a charge has to be calculated on the value of the assets in the trust on each ten-year anniversary of the creation of the trust
• an exit charge arises when assets are effectively transferred out of the trust.

The calculation of the latter two charges is currently a complex process which can take a significant amount of time to compute for very little tax yield. HMRC therefore wants to simplify the process and will consult on proposals to take effect in 2015.
Two changes will however be introduced in Finance Bill 2014:

• simplification of filing and payment dates for IHT relevant property trust charges
• income arising in such trusts which remains undistributed for more than five years may be treated as part of the trust capital when calculating the ten-year anniversary charge.

Comment
Part of the price of the tax simplification proposals will be that some planning techniques where an individual creates more than one relevant property trust will no longer work. For example, a nil rate band that may be currently available for each trust may, in future, need to be split between the trusts resulting in higher IHT charges

IHT anti-avoidance

In 2013 measures were introduced to restrict the use of liabilities to reduce IHT liability where loans were used to purchase assets which are excluded property for IHT purposes. A common situation which was blocked was the use of loans to purchase assets outside the UK which were held by a non-domiciled individual. A loophole has been spotted where a non-domiciled individual holds a foreign currency account in a UK bank. Such an asset is not chargeable to IHT but is not excluded property. That loophole will now be blocked by treating such an account as if it were excluded property.

Residential property held through a company

A range of measures exist to discourage the holding of residential property in the UK via companies and other non-natural persons. Specifically where the property has a value of at least £2 million:

• stamp duty land tax (SDLT) is payable at 15% on acquisition
• an annual tax on dwellings (ATED) applies at a fixed amount depending on value, and
• CGT at 28% is payable on a proportion of gains.

For SDLT the value limit is being reduced to £500,000 for acquisitions on or after 20 March 2014.
The Government will introduce two new bands for ATED. Residential properties worth over £1 million and up to £2 million will be brought into the charge with effect from 1 April 2015. Properties worth over £500,000 and up to £1 million will be brought into the charge with effect from 1 April 2016.
The related CGT charge on disposals of properties liable to ATED will be extended to residential properties worth over £1 million with effect from 6 April 2015 and for residential properties worth over £500,000 from 6 April 2016.
Comment
The Government is determined to drive out the use of so-called 'envelopes' for the ownership of residential property in the UK. The major group affected will be non-domiciled individuals who have historically used overseas companies to hold UK residential property.

Employment Tax Changes from Budget 2014

For further information, please view our website - Levicks Website

Employer provided cars

The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are now announced well in advance. From 6 April 2014, the bands used to work out the taxable benefit remain the same but the percentage applied by each band goes up by 1%. There is an overriding maximum charge of 35% of the list price of the car. From 6 April 2015, the percentage applied by each band goes up by a further 2% and the maximum charge is increased to 37%.
Comment
These increases have the perverse effect of discouraging retention of the same car. New cars will often have lower CO₂ emissions than the equivalent model purchased by the employer, say three years ago. Particular attention should be paid to the benefit increase from 6 April 2015

Exemption threshold for employment-related loans

Where an employer provides an employee with a cheap or interest free loan they have to report notional interest on the loan at 4% per annum on the form P11D. Where the balance of the loan is no more than £5,000 throughout the tax year no benefit is reportable.
The exemption applies if the total balance, at any point in the tax year, does not exceed the limit of £5,000 and includes the total of low cost or interest free loans, or notional loans arising from the provision of employment-related securities.
From 6 April 2014 where the total outstanding balances on all such loans do not exceed £10,000 at any time in the tax year, there will not be a tax charge and employers will no longer be required to report the benefit to HMRC.
Comment
This change reflects the increase in the cost of commuting for an employee and allows the employer to provide finance for the purchase of season tickets for rail fares.

National Insurance - £2,000 employment allowance

The Government has introduced an allowance of up to £2,000 per year for many employers to be offset against their employer Class 1 National Insurance Contributions (NIC) liability from 6 April 2014. The legislation is contained in the National Insurance Contributions Act 2014.

There will be some exceptions for employer Class 1 liabilities including liabilities arising from:

• a person who is employed (wholly or partly) for purposes connected with the employer's personal, family or household affairs
• the carrying out of functions either wholly or mainly of a public nature (unless charitable status applies), for example NHS services and General Practitioner services
• employer contributions deemed to arise under IR35 for personal service companies.

There are also rules to limit the employment allowance to a total of £2,000 where there are 'connected' employers. For example, two companies are connected with each other if one company controls the other company.
The allowance is limited to the employer Class 1 NIC liability if that is less than £2,000.
The allowance will be claimed as part of the normal payroll process. The employer's payment of PAYE and NIC will be reduced each month to the extent it includes an employer Class 1 NIC liability until the £2,000 limit has been reached.

Employer NIC for the under 21s

From April 2015 the Government will abolish employer NIC for those under the age of 21. This exemption will not apply to those earning more than the Upper Earnings Limit, which is £42,285 per annum for 2015/16. Employer NIC will be liable as normal beyond this limit.

Employee ownership

Following a consultation the Government will introduce three new tax reliefs to encourage and promote indirect employee ownership. The reliefs are as follows:

• From 6 April 2014 disposals of shares that result in a controlling interest in a company being held by an employee ownership trust will be relieved from CGT.
• Transfers of shares and other assets to employee ownership trusts will also be exempt from inheritance tax providing certain conditions are met.
• From 1 October 2014 bonus payments made to employees of indirectly employee owned companies which are controlled by an employee ownership trust will be exempt from income tax up to a cap of £3,600 per annum.

Real Time Information (RTI) late filing penalties

RTI requires employers operating PAYE to report information on employees' pay and deductions in 'real time' to HMRC. Under RTI employers are obliged to tell HMRC about payments they make to their employees, on or before the date payments are made. Employers continue to pay over to HMRC the sums deducted from their employees under the PAYE system either monthly, quarterly or annually.
HMRC are introducing automatic in-year penalties for RTI to encourage compliance with the information and payment obligations.
In essence late filing penalties will apply to each PAYE scheme, with the size of the penalty based on the number of employees in the scheme. It is proposed that monthly penalties of between £100 and £400 will apply to micro, small, medium and large employers.
Each scheme will be subject to only one late filing penalty each month regardless of the number of returns submitted late in the month. There will be one unpenalised default each year with all subsequent defaults attracting a penalty.
This regime will start in October 2014.
Another change is more imminent. For tax years 2014/15 onwards, HMRC will charge daily interest on all unpaid amounts from the due and payable date to the date of payment, and will raise the charge when payment in full has been made.

Business Tax Changes from the 2014 Budget

Please check out our website for further information - Levicks Website

Corporation tax rates

The main rate of corporation tax will be 21% from 1 April 2014. The current rate is 23%. From 1 April 2015 the main rate of corporation tax will be reduced to 20% and unified with the small profits rate.
The small profits rate will therefore remain at 20% until then.

Annual Investment Allowance (AIA)

The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.
The maximum amount of the AIA was increased to £250,000 from £25,000 for the period from 1 January 2013 to 31 December 2014. The amount of the AIA is further increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. The AIA will return to £25,000 after this date.
Comment
The increased AIA will mean that up to 99.8% of businesses could receive 100% upfront relief on their qualifying investment in plant and machinery. For example a single company with a 12 month accounting period to 31 December 2014 could obtain overall relief for the period of £437,500 (£250,000 x 3/12 plus £500,000 x 9/12). There is a restriction of £250,000 for expenditure incurred in that part of the accounting period which falls before 1 April 2014.

Members of Limited Liability Partnerships (LLPs)

Since their introduction in 2000, LLPs have become increasingly popular as a vehicle for carrying on a wide variety of businesses. The LLP is a unique entity as it combines limited liability for its members with the tax treatment of a traditional partnership. Individual members are currently deemed to be self-employed for income tax purposes and are taxed as such on their respective profit shares.
It is proposed to reclassify some members of an LLP from self-employment to employees of the LLP. As a consequence employer's National Insurance Contributions will be due and PAYE will need to be applied to the 'remuneration' of the member from the LLP.
A member is potentially a salaried member if 'Condition A' is satisfied. However if caught by Condition A there are two further conditions which, if either apply, will result in the member not being treated as a salaried member.
The main part of Condition A is a test of whether it is reasonable to expect that at least 80% of the total amount payable by the LLP to the member will be 'disguised salary'.
Amounts which vary by reference to the overall amount of profits of the LLP are not disguised salary. A disguised salary would include for example a salary or a guaranteed profit share. Whether a bonus based on personal performance is disguised salary will depend on the precise circumstance. For example, a bonus based only on the performance of the individual is not a profit share. A performance bonus calculated by reference to the LLP's profits is not disguised salary.
However, a member is not caught if either of the following apply:

• the individual has a significant influence in the running of the business as a whole, or
• the individual has invested capital in the LLP that is at least 25% of their expected income from the LLP.

The new regime will come into force on 6 April 2014. The tests will need to be applied at that date for existing members. For the capital invested rule, the measurement of capital will include amounts the member has undertaken to contribute by 5 July 2014.
Comment
Many professional firms are now LLPs. The potential risk is that some junior members with a significant fixed element to their profit share may be treated for tax purposes as employees unless their contractual arrangements with the LLP are modified.
Those LLPs potentially affected may wish to consider increasing member capital contributions to allow the capital invested rule to be satisfied. Undertakings made by members by 6 April 2014 (and actually contributed by 5 July 2014) will be taken into account.

Employment intermediaries and 'false self-employment'

The Government considers that employment intermediaries are increasingly being used to disguise employment as self-employment. The largest business sector affected will be the construction industry. However, there are other sectors such as the driving, catering and security industries where there is evidence of existing permanent employees being taken out of direct employment and being moved into false self-employment arrangements involving intermediaries.
The central proposal is to make a change to the agency legislation. If the agency legislation applies, payments received by a worker are treated as being in consequence of an employment between the intermediary (agency) and worker. This means that the intermediary must deduct PAYE and NIC.
Currently the agency legislation only applies to workers providing their services under the terms of an agency contract. This is defined as:
'A contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client.'
This has led intermediaries to set up contracts which allow the worker to send someone else to do their job and thus it is argued that the worker is not obliged to personally provide services.
The Government proposes removing the obligation for the worker to provide their services personally. Instead the proposal is that the agency legislation will apply where the worker is:

• subject to (or to the right of) control, supervision or direction as to the manner in which the duties are carried out
• providing their services personally
• remunerated as a consequence of providing their services
• receiving remuneration not already taxed as employment income.

The legislation will be amended with effect from 6 April 2014.
It is proposed that the legislation will be supported by record keeping and statutory returns requirements. The intermediary will need to submit a quarterly electronic return containing details of any workers it has placed for whom it is not deducting PAYE and NIC. The aim of this requirement is to allow HMRC to identify possible cases of non-compliance with the new agency legislation.
The record keeping and returns requirements will come into force from 6 April 2015.
Comment
The use of intermediaries to facilitate false self-employment started in the construction industry as a way to reduce the risk to contractors of incorrectly engaging workers on a self-employed basis. The Government considers that around 200,000 workers in the construction sector are engaged through intermediaries.

Community Amateur Sports Club (CASC)

The Community Amateur Sports Club (CASC) scheme provides a number of tax reliefs, similar to those available to charities, to support amateur sports clubs. For example an individual can make a donation to a CASC as Gift Aid.
The Finance Bill 2014 will include provisions to extend corporate Gift Aid to donations of money made by companies to CASCs. This will allow companies to claim tax relief on qualifying donations they make on or after 1 April 2014.
Comment
The corporate Gift Aid provisions will not only encourage companies to make donations to clubs which are registered as CASCs but will also encourage clubs with high levels of commercial trading to potentially benefit from CASC status. A club with significant trading receipts may well not qualify for CASC status because of the trading receipts. It could however set up a trading subsidiary and donate the profits to the club. The donation received by the club will not be treated as trading receipts and thus the club could apply for CASC status. The new Gift Aid relief will eliminate the corporation tax charge on the profits of the company.

Research and Development (R&D) relief

R&D relief gives additional tax relief to companies for expenditure incurred on R&D projects that seek to achieve an advance in science or technology. For an SME company which incurs losses when conducting R&D activity a tax credit can be claimed by way of a cash sum paid by HMRC. From 1 April 2014 the rate of the R&D payable tax credit will be increased from 11% to 14.5%.

Business Premises Renovation Allowance (BPRA)

BPRA provides for 100% tax relief on expenditure in bringing business premises in disadvantaged areas back into business use. Following a review of BPRA, the Government will make changes to clarify the type of expenditure which qualifies and other modifications to make it more certain in its application. The changes are to take effect from April 2014.

Enterprise Zones and capital allowances

Subject to certain conditions being met, 100% enhanced capital allowances are available for expenditure incurred by companies on qualifying plant or machinery for use primarily in designated sites within Enterprise Zones. The qualifying period was due to expire on 31 March 2017 and is proposed to be extended to 31 March 2020.

Mineral Extraction Allowance

Mineral exploration and access expenditure attracts an annual 25% capital allowance relief (100% for oil and gas) whereas the acquisition of a mineral asset only attracts 10% relief annually. Expenditure on successful planning permission costs is to be treated as mineral exploration and access rather than as expenditure on acquiring a mineral asset. This applies to expenditure incurred from the date of Royal Assent.