Welcome to this bumper edition of Baker Tilly’s weekly round-up of the most important tax news:
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Just in time for Parliament’s Summer Recess, the Treasury has published nine further consultation documents following the June Budget. The consultation on furnished holiday lettings (FHLs) contains three comparatively clear proposals:
• increasing the number of days per year in which the property must be available for letting from 140 to 210;
• increasing the required number of days of actual letting from 70 to 105; and
• most significantly, restricting the set-off of losses.
The restriction on loss relief at first sight seems extremely strict: the proposal is to ring-fence losses so that they are only available to set off against profits from the same business. This would mean that if FHL treatment was claimed, losses would not even be available to be set off against other property income.
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Still on the subject of consultations, we’ve yet to come to grips with all aspects of the pensions consultation which was published yesterday. At first sight, these aspects are worthy of comment:
• Adoption of a much-reduced annual allowance (AA) of between £30,000 and £45,000 risks a “one club golf” approach: it may be simple but it won’t always be the most effective.
• Retention of a lifetime allowance (LTA) appears to be a fall-back position intended to prevent employers from substantially enhancing the value of benefits to be provided by schemes, especially in defined benefit (DB) schemes.
• Simply applying an LTA as an overall limit potentially risks creating clawback charges on funds that do well solely through sound management.
• Capping relief for annual contributions at 40% fits in with the proposition that the 50% top rate of tax is truly an additional rate intended as a short term measure, so that pension contributions will not secure disproportionate benefits for the highest earners.
• There is still clearly great concern about problems of valuation of contributions to DB schemes. There is a hint that this may prove to be a “too difficult” issue and it will be left to the LTA limit to catch over-funding of DB schemes.
• Alignment of pension years with tax years will address a perceived 'mischief', the effect of which is to be severely diminished by the reduction to the AA. The facility to make three “annual” contributions of up to £245,000 instead of two, over two tax years was significant: three lots of £45,000 instead of two would be less significant. In either case, the LTA would provide a limit on over-funding.
• There is no reference at all to carry-forward of unused AA which could be a serious restriction on the ability of earners with fluctuating profits to maintain and build even a modest pensions pot. Serious consideration of a mechanism to allow at least some carry-forward of unused AA is necessary, perhaps aligned with the general time limits for tax claims (four years).
Baker Tilly will be contributing to this and the other consultations and reporting on developments.
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As the 31 July deadline for paying self assessment tax and national insurance contributions looms large, HMRC’s tightening of its policy on allowing extended time to pay under the Business Payment Support Service (BPSS) may push taxpayers towards less conventional sources of funds to pay the tax due. Applications are normally made under the BPSS when conventional sources of finance have been exhausted, so if HMRC refuses extended credit businesses are faced with some awkward choices; if the tax is paid late HMRC will charge interest and, if arrears are not cleared within a month, surcharges. More significantly for many, especially subcontractors in the construction industry who need to keep a clean tax record to retain gross payment status, a missed payment can have further ramifications.
If mainstream banks aren’t happy to lend, taxpayers may then find themselves turning to secondary lenders whose interest and charges are likely to be higher than those charged by the main banks, as well as carrying the risk of loss of personal assets, even the borrowers’ homes.
For some, unfortunately, HMRC’s refusal of credit may even be the tipping point into insolvency, causing the business to cease trading altogether for lack of funds. This is not necessarily HMRC’s fault: if a business is fundamentally unsound it is not HMRC’s job to prop it up by extending credit without the hope of recovery.
Businesses facing these stark choices do not automatically have to face higher lending fees or go out of business: they can consult a business recovery specialist who can advise them about all the options for either preserving their business or managing the cessation in the least harmful way.
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The stated objectives of making the UK the most competitive G20 country and reducing the complexity of the UK tax code will undoubtedly be difficult to achieve. All too often the reaction to “challenges” to the system has been to add yet further levels of complexity. This is exemplified by the latest stage in the decade-long (the claim was made on the 31st March 2000) argument over the scope of the UK restrictions on the availability of loss relief within international corporate groups.
At the heart of the problem is the basic distinction between the taxation of a branch operation and that of a subsidiary. Undoubtedly the recent enactment of legislation, exempting most overseas dividends from UK corporation tax, will go some way towards creating a more logical structure.
In the case of Marks and Spencer (M&S), the decision of the European Court of Justice in December 2005 led to changes being made to UK law. However, rather than endeavouring to produce a rational structure, severe restrictions on the availability of the relief were incorporated into the legislation. The way in which the legislation was drafted made it almost impossible to claim the relief and both the legislation and the UK’s application of the ECJ decision have been justifiably criticised as attempting to flout the ECJ’s judgment and have been subject to further, time-consuming challenges.
By way of a reminder, M&S has been trying to claim relief against its UK tax bill for losses suffered by its former German and Belgian subsidiaries as far back as 1998. The most recent decision was that the company was entitled to claim group relief for losses made in 2000, 2001 and 2002 but the Court rejected other claims. The technical question considered in the recent case relates to the requirement that there should be “no possibility” that the losses a company makes in a foreign subsidiary are unable to be offset in the country they were generated. This is phrased as a double negative. In essence, the requirement is that relief is not available if there is any possibility that the loss could be used in the country in which it is generated.
There are other fundamental issues with the legislation, such as the difficulty of actually computing the losses as required by the law, and no doubt they too will create continuing uncertainty.
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In March 2010 the Advocate General (AG) opined that employers must account for output tax on the supply of salary sacrifice vouchers to employees.
It is believed that, although many employers recover VAT charged to them on the supply of vouchers, there are likely to be a number of those that do not account for output tax on the provision of the voucher to the employee. If the European Court of Justice follows the AG’s opinion in Thursday’s judgement, it is likely that HM Revenue & Customs will begin to raise assessments for the output tax due.
This could cost employers a substantial amount of money, and we recommend that they look at their salary sacrifice arrangements as a matter of urgency.
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One of the most promising initiatives of the coalition government is the creation of the Office of Tax Simplification (OTS) as an independent Office of the Treasury. The OTS is intended to provide the government with independent advice on simplifying the UK tax system and has been charged with reporting back on two key issues (a review of the various reliefs and small business taxation). Equally welcome is the fact that the first Tax Director of the OTS, John Whiting, has a long record of pressing for a rational basis to UK taxation on behalf of the tax profession in his various capacities with the Chartered Institute of Taxation. Indeed, as this is a part time role, he will continue to have access to feedback from tax practitioners.
Industry and the professions have long campaigned for a more transparent and inclusive tax technical legislative process. Changes have been promised by this Government and the initial signs are promising.
The OTS has a daunting task as the existing process is shrouded in a veil of secrecy. Complex procedures and the policy underlying much of the legislation is unduly influenced by short-term political objectives which add complexity without significantly influencing the amounts of tax charged. Furthermore, tax legislation often fails to achieve its stated objective and too often remedial action is required. Changes to tax law, announced by Chancellors as if pulling rabbits from a hat, often spawn the need for corrective law changes which, like rabbits are apt to multiply to the point of nuisance.
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Eager as we are to see simplification we cannot endorse the suggestion that the Two Ronnies offered many years ago for a three part tax form:
1. How much money did you make last year?
2. How much have you got left?
3. Send it.