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Weekly Tax Brief 19 October 2011

George Bull
Senior Tax Partner

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In this edition of Baker Tilly’s weekly round-up of the most important tax news, we cover the latest developments.

  • 1. Tax and the sum total of human happiness

    Tax is not generally regarded as a source of happiness, even if you are one of the six million UK residents in line for a welcome tax refund before the end of December. However, that may be to deny one of the less obvious benefits of a properly thought-through tax system which is administered effectively and efficiently.

    Although wealthy nations tend to be happier than poorer ones, for the citizens of wealthy nations neither national nor individual economic growth and fortune seem to have any significant impact on their subjective sense of well-being. There appear to be three reasons for this.

    First, individuals overestimate the extent to which additional consumption will improve their happiness.

    Second, increasing the income of some depresses the happiness of others.

    Third, the level of inequality in a society affects levels of happiness. Social stability may be undermined as inequality increases; greater inequality is a factor that some commentators believe lay behind the August 2011 riots in England.

    If that’s correct, then these three factors provide a justification for a transparent, fair, stable and progressive tax system: to quote Thomas Griffith (Professor of Taxation, University of Southern California Law School) “income has declining marginal utility thus redistribution can increase total welfare in society”.

    Something to think about.

  • 2. A T-CUP for teacher

    Taxmen and teachers are tangling over two topics, and HMRC seems to be in a bit of  a muddle, pulling in two directions at once.

    Somebody in HMRC has decided that there is too much tuition and coaching going on in the shadow economy, and that too little tax is being declared. Aerobics instructors across the land who hire the village hall to help people keep fit, teachers who moonlight giving private lessons during evenings and weekends, and many others are being targeted. Miscreants are now able to come clean and make a disclosure to HMRC of their undeclared earnings under the Tax Catch-Up Plan (TCUP).

    They have been offered the chance to notify by 6 January 2012 their intention to disclose hidden earnings, followed by a full disclosure and payment by 31 March 2012. The forms and guidance are now on HMRC’s website.

    At the same time, HMRC is proposing to repeal a set of NIC regulations that deem the earnings of lecturers, teachers and instructors to be employment earnings for NIC purposes. Self-employed teachers (such as peripatetic music teachers) must be paid through payroll if they teach in an educational establishment, even if genuinely self-employed. This rule became a problem in the case of vocational trainers such as first aid instructors, with fanciful HMRC arguments to the effect that wherever they taught was in effect an educational establishment and whoever engaged them had to put their payment through the payroll, which was pointlessly bureaucratic.

    Thankfully, this latter nonsense is to disappear. However, if genuinely self-employed trainers and tutors are to be allowed to be self-employed, HMRC will be relying on them to report their income and pay their own tax and NIC, which appears not to happen enough: the problem the TCUP is aimed at. Relaxing the rules on one group may create the need for more TCUPs in the future. Watch for guidance on a new Tax Payment Option for Teachers.

  • 3. When we can’t get what we need from the banks

    Economists agree that SMEs will lead the UK economy back into growth, despite the economic growth forecast for the year having been reduced. Alternative sources of finance are growing in popularity as these businesses look beyond banks. Furthermore, the low interest rates available to savers are leaving many people wondering if it is worthwhile saving; should they just spend instead?

    A potential solution to both of these issues comes in the form of loan clubs; there are several available on the internet. 

    Savers make their capital available to businesses needing funding in return for interest rates as high as 15% for the most risky loans. Savers can split their funds between several borrowers in order to spread their risk and they can make enquiries about and research the potential borrowers, sometimes on a no-names basis. It is possible to choose repayment terms to suit, either long or short term.

    Risk warnings abound. There is no £85,000 guarantee if the borrower defaults and no FSA regulation to protect the investor. The golden rule that you should only gamble what you can afford to lose definitely applies to savers tempted by the high returns of loan clubs. For borrowers, loan clubs can provide a source of funds when the banks are not listening.

  • 4. Onshore funding from offshore funds

    An alternative form of tax-efficient business finance is set to become available after 5 April 2012. The June 2011 Treasury consultation document on the ‘Reform of the taxation of non-domiciled individuals’ proposes measures that would allow non-domiciled individuals to use overseas income or gains to invest in UK businesses without giving rise to a remittance liable to UK tax. The government anticipates this relaxation of the remittance rules will attract significant investment to the UK.

    Currently, non-domiciled individuals will be taxed on their overseas income and gains that are remitted to the UK if they have not already been subject to UK tax. The proposal is that commercial investment in businesses carrying out either a trading activity or the development or letting of commercial property will not be treated as a remittance. Although this gives a very wide scope the proposal is that the business must be a limited company, sole traders and partnerships are to be excluded; the consultation asks for comments on whether the companies should be private companies or if listed companies should be included.

    When the non-domiciled individual disposes of the investment then there will be a proposed time limit of two weeks for the investor to either remove the funds from the UK or reinvest in a new qualifying business.

    It is the intention that the rules be kept simple and to a minimum otherwise investors will not take the plunge. Whilst some of the investment will be directly into businesses that the investor is already associated with there will be investment into unrelated businesses, the difficulty here may be matching the borrowers and lenders.

  • 5. Companies with overseas operations need to act now or miss the deadline for electing for profits from overseas branches to be exempt from UK corporation tax.

    New rules were introduced in Finance Act 2011 to exempt the profits of certain branches of UK companies from UK corporation tax – as part of the Government’s stated aim to make the UK ‘the most competitive tax system in the G20’.

    However, companies need to elect for these rules to apply – this is a one off, irrevocable election and is needed for each individual company, regardless of what group structure may be in place.

    Time is of the essence – the election needs to be made before the end of an accounting period in order to take effect for the next one.

    With a lot of companies traditionally having December year ends, urgent consideration needs to be given now as to whether to make an election or not, or whether alternative tax planning should be considered.

    As a result of the election, the qualifying profits of the overseas branch would no longer be subject to corporation tax in the UK, subject to some complex transitional and anti-avoidance rules.

    The downside is that the company would no longer get UK corporation tax relief for any loss making branches.

    Every situation will therefore be different, there is no ‘one size fits all’ solution – what is key is that company owners need to consider fully what impact these new rules have on them and ensure that, should they wish to make this election, they do so before the end of the current accounting period – or risk facing a potentially unnecessary UK tax bill.