Charity Tax Commission invites comments on effectiveness of tax reliefs

An independent commission reviewing the UK’s tax treatment of charities has suggested that Brexit may present opportunities for addressing several issues. The Charity Tax Commission, which the NCVO established in October 2017, has invited comments by July 6.

Tax reliefs for charities are estimated to be worth £3.8 billion a year, and reliefs for donors are worth £1.5 billion, according to the commission.

My news story of March 19 for Tax Notes (paywall) is now reproduced in full with permission:

UK charity body launches review of tax breaks (PDF)

UK tax advisers welcome new HMRC service for expanding businesses

Expanding UK businesses are to receive tailored tax assistance from growth support specialists at HM Revenue & Customs who will offer help with tax queries and support in accessing reliefs and incentives.

“Mid-sized businesses make a vital contribution to the U.K. economy and I want to see them grow, succeed, and prosper,” Mel Stride, financial secretary to the Treasury, said in a September 20 statement.

About 170,000 UK businesses with turnover of more than £10 million or more than 20 employees are eligible and can apply online, HMRC said. Industries that could benefit include manufacturing, information and communications, and professional services, including legal and accountancy services. Read more:

My news story for Tax Analysts, September 21 (paywall)

‘Patient capital’ review invites feedback on UK tax reliefs

HM Treasury is seeking feedback on the cost effectiveness of tax relief measures to promote entrepreneurship as part of a consultation on how best to provide funding to help British start-ups become “world-leading unicorns.”

The UK leads Europe in the creation of so-called unicorns — innovative firms valued at more than $1 billion — but lags behind the US and China, the Treasury said in an August 1 statement. A new National Investment Fund will address a £4 billion “funding gap” between American and British firms, the Treasury said …

The consultation is part of a “patient capital” review expected to report in the autumn on how best to help innovative firms obtain long-term financing. Read more:

My news story for Tax Analysts, August 2 (paywall)

Innovate UK news release August 3

Tax relief on disincorporation may ‘fall by the wayside’

A tax relief intended to help owners of smaller companies revert to self-employment will not be available for transfers after March 2018 unless action is taken, the Office of Tax Simplification has pointed out. Take-up of the relief has been lower than expected.

Disincorporation relief, introduced in Finance Act 2013, provides relief from corporation tax when a company transfers qualifying business assets to its shareholders. No claim can be made if the value of the assets exceeds £100,000, however, and the OTS believes that this limit is one of a number of possible reasons for the low take-up.

The OTS is seeking to establish whether there is an “untapped appetite” among businesses to disincorporate in order to reduce the burden of administration. A focus paper invites readers to suggest, by September 15, what improvements are needed for the relief to be more effective.

Facilitating disincorporation would “appear to fit well with any moves to reduce the extent of tax motivated incorporations,” the OTS said. HM Treasury indicated that about 610,000 companies would be eligible for the relief, but fewer than 50 claims had been made by March 2016.

UK flags record tax relief for creative sector

Tax reliefs continued to support the UK’s creative industries, including films and high-end television production, video games, and animation, contributing more than £700 million in the last financial year, the government said.

Productions benefiting from the reliefs included the award-winning Netflix series The Crown and the award-winning film Lady Macbeth, which was released in the U.S. on July 14. The creative sector employs two million people across the UK, according to a July 20 release issued by HM Treasury, HM Revenue & Customs, and the Department for Digital, Culture, Media & Sport. Read more:

My news story for Tax Analysts, July 24 (paywall)

Simplifying the tax and NIC treatment of termination payments

Budget 2016 announced changes to the taxation of termination payments, following a consultation launched in summer 2015. The government noted that “certain forms of termination payments are exempt from employee and employer national insurance contributions (NICs) and the first £30,000 is income tax free”.

It added: “The rules are complex and the exemptions incentivise employers to manipulate the rules, structuring arrangements to include payments that are ordinarily taxable such as notice and bonuses to minimise the tax and NICs due.” From April 2018, the government would “tighten the scope of the exemption to prevent manipulation and align the rules so employer NICs are due on those payments above £30,000 that are already subject to income tax”.

The government said it would “continue to support those individuals who lose their job”. The first £30,000 would remain exempt from income tax and the full payment would be outside the scope of employee NICs.

A note of the outcome of this consultation was posted on 10 August, and a second consultation inviting comments by 5 October includes draft income tax legislation for Finance Bill 2017. Draft NICs legislation is expected in autumn 2016. Continue reading Simplifying the tax and NIC treatment of termination payments

Tax professionals urge UK government to delay interest expense reform

The U.K. government’s timetable for implementation of a key base erosion and profit-shifting project reform is too ambitious, tax professionals have warned.

There is “no need to rush” a review of U.K. law on deductibility of interest because existing rules already limit deductibility, the Chartered Institute of Taxation said …

The proposed restrictions are likely to have “significant adverse consequences” for heavily geared infrastructure and energy projects whose viability is often reliant on tax relief for interest, said Eloise Walker, partner at Pinsent Masons LLP, in a client briefing … Continue reading Tax professionals urge UK government to delay interest expense reform

Making Tax Digital: Understanding the costs and benefits for taxpayers

A National Audit Office report has identified two areas of risk in HMRC’s stated aim to have “one of the most digitally advanced tax administrations in the world”. These are optimism bias in the department’s key assumptions, and the need to understand the costs and benefits of the proposed “transformation” for taxpayers.

The NAO said: “Most business customers will be required to update HMRC quarterly rather than annually about their tax affairs, and some may need to purchase new software that works with the new systems … Some businesses are sceptical of HMRC’s evaluations of the costs and benefits of previous changes to the tax system. HMRC plans to develop a fuller picture of what it will cost taxpayers and businesses to use the new systems over the next year.” Continue reading Making Tax Digital: Understanding the costs and benefits for taxpayers

The marriage allowance and why becoming a higher rate taxpayer could become ‘very expensive’

When I was one of those people who thought Labour might win last year’s general election I suggested that the new income tax ”marriage allowance” might be short-lived. “We think it is a dud of a policy,” Labour’s shadow Treasury minister had said.

The government said more than four million married couples and 15,000 civil partnerships would be eligible for the allowance, introduced from April 2015. The maximum benefit is just over £4 a week.

But in a parliamentary written answer on 2 February the government said only 332,301 couples had successfully claimed the allowance by 28 January, prompting another shadow minister to call the policy a “complete and utter flop”.

HMRC calls it the “marriage allowance” but the legislation[1] calls it (more accurately, but it’s a bit of a mouthful) a “transferable tax allowance for married couples and civil partners”. It is not available to higher rate taxpayers.

For example, H works full-time and is a basic rate taxpayer, and W works part-time and has an income below the personal allowance. H is entitled to a tax reduction of £212 (20% of £1,060) for 2015/16 if W elects “for a reduced personal allowance”.

HMRC points out that W can transfer “no more and no less than £1,060” of her personal allowance.

What happens if H gets a pay rise and becomes a higher rate taxpayer? As Paul Johnson of the IFS told a Lords committee on the draft Finance Bill last month, he would lose the benefit of the allowance immediately, so “you are facing several hundred per cent tax at the point at which you move from the basic to higher rate”.

An IFS briefing note had said in the run-up to the election:

“Indeed, some can be worse off after a pay rise, or better off after a pay cut, because the transferred allowance is withdrawn in ‘cliff-edge’ fashion – that is, income tax liability jumps by more than £200 per year when taxable income crosses the higher-rate threshold. The removal of this cliff edge would be a welcome side effect of abolishing the transferable personal allowance.”

Johnson was giving evidence to peers discussing the new personal savings allowance and the new regime for taxation of dividends. These changes, to be introduced in Finance Bill 2016, are raising some serious concerns.

We will have “all sorts of additional marginal rates layered on top of each other,” he said, adding that “becoming a higher rate taxpayer is going to become a very expensive part of your life”.

[1] Income Tax Act 2007 sections 55A-55E

Why do we have tax relief for losses?

Our tax code provides relief for losses so that the profits earned over the lifetime of a business are taxed once and only once. For example, a business has made trading profits of £550,000 and losses of £200,000 over five years, and has no other income. Its net profits are £350,000 and tax is paid on that amount, as shown below:

Losses

The company would be able to claim to have the loss in year 3 set first against the profit of year 2, leaving a smaller loss to carry forward, but the table shows how the carry forward of trade losses works. There are conditions, and special rules for banks and groups of companies.

Bringing forward allowable trading losses is not tax avoidance, and it is worth noting that a similar relief (with some important differences) is available to the self-employed. It is not just for companies.

The new income tax marriage allowance may be short-lived

The new transferable tax allowance for married couples and civil partners may be short-lived if Labour win the general election.

Eligible couples can now register an interest online, and registered couples will be invited in stages, after 6 April, to apply for the allowance. It will not be possible to call HMRC to register an interest, but those who do not register will still be able to apply “later in 2015”. An HMRC issue briefing provides further details, and the CIOT’s Low Incomes Tax Reform Group has published some useful guidance.

From 2015/16 a married person or member or a civil partnership will be able to transfer 10% of their personal allowance to the other spouse or partner, so long as the transferee is not liable to income tax at the higher rate or the additional rate. The maximum tax saving for 2015/16 will be £212, or just under £18 a month.

“This measure recognises marriage and civil partnerships in the income tax system,” said a tax information and impact note. “Taking the tax liabilities of a couple together, it can provide a financial benefit where one spouse or civil partner has an income less than their personal allowance.”

David Cameron has said the policy is about “valuing commitment”. More than four million married couples and 15,000 civil partnerships will be eligible and the application process is simple, the government says.  But no-one is seriously suggesting that a tax saving of £4 a week is going to persuade a couple to marry, or to stay married.

The complex rules are set out in Finance Act 2014. Paul Johnson, director of the Institute for Fiscal Studies, has noted that they create an “infinite” marginal rate of tax because the full allowance is withdrawn if one partner becomes liable to higher rate tax.

“We think it is a dud of a policy,” said Labour’s shadow Treasury minister Catherine McKinnell during a Commons debate on the Finance Bill last April. The measure was “highly restrictive and very complicated”.

She noted that the measure will not benefit “married couples and civil partners on the very lowest incomes where both spouses earn below the income tax personal allowance”, nor will it benefit “couples where both spouses, possibly both basic rate taxpayers, have incomes higher than the personal allowance and therefore have no unused portion to transfer”.

The government argued that these couples had benefited from other tax measures. Financial secretary David Gauke said the purpose of the new measure was to reinforce the institution of marriage while providing support for many households that have not been able to benefit fully from changes to the personal allowance.

Tax transparency, public understanding and a shared purpose

The role of greater transparency in improving public understanding of tax issues and enhancing confidence in the system was the subject of an informative and good-natured debate at the House of Commons on 8 July, hosted by Mazars and the Association of Revenue and Customs and chaired by Margaret Hodge MP, chair of the Commons Public Accounts Committee.

My report focuses in turn on some of the key issues relating to tax authorities, tax advisers and taxpayers – three groups forming what Mazars has called the “transparency triangle”.

Read more on the Mazars Tax Transparency blog.

See also recent Published work.