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Autumn 2019

December 2nd, 2019

LONGHILL ACCOUNTING TECHNICAL UPATE

AUTUMN 2019

We have rather given up waiting for a Budget this year. We have had a Queens Speech that sounded more like a list of aspirations than anything else but there will be no Budget that can pass Parliament this side of the General Election, and probably not before the turn of the year.

However, there are a number of tax changes that came into force this tax year or are due to with effect from April 2020 and it is worth summarising these. This is rather a mixed bag of measures and it is likely that we will have to issue a follow-up after any new Budget.

As ever with these circulars we try to restrict ourselves to talking about changes that are likely to be relevant to at least some of our clients, and to the work we carry out for them.

Having said that, many of our clients will be only minimally affected by the measures alluded to below or not be affected at all.

Tax rate changes

Income tax –  no known changes to basic and higher rates of tax

Current personal allowance is £12,500 (2019-20 tax year) and this is currently expected to remain at this level for 2020-21.

No known forthcoming adjustments to current tax thresholds of £37,500 (basic rate) and £150,000 (higher rate). In the normal course of events we would expect the former threshold to increase from 5 April 2020.

Corporation tax – the main rate of Corporation tax was due to reduce by 2% to 17% with effect from next April 2020. This seems very unlikely to take place regardless of who wins the election. The current administration has stated that the reduction will be postponed and a different administration is unlikely to be offering tax cuts. Some of us never really believed in this tax cut anyway.

Capital Gains Tax –  no known adjustments to rates or annual exemption (currently £12,000). Some large changes to the way in which capital gains tax on residential property is computed & collected – see below.

VAT – no known forthcoming changes.

CAPITAL ALLOWANCES

Structures & buildings allowance guidelines (shed in garden)

The Structures & Buildings Allowance (SBA) came into force for 2018-19.

This allows taxpayers a flat 2% tax-deductible allowance for the construction of any non-residential building used for trading or business purposes. The allowance conspicuously excludes the following:

  • Buildings built in the grounds of a private residence (e.g. home office in garden)
  • Properties used in holiday letting or residential letting businesses

INCOME TAX – RENTAL PROPERTY

Tax treatment of mortgage interest on residential properties – individuals

Tax treatment of mortgage interest on residential properties rented by individuals is changing.

Instead of mortgage interest counting as a tax-deductible expense the taxpayer will receive a deduction from his /her tax bill of 20% of the disallowed mortgage interest.

Essentially if you are a basic rate taxpayer measure makes no overall difference to your tax bill; higher rate tax payers can expect to pay 20% more tax on some or all of the disallowed mortgage interest.

The measure is going through a transition period of 4 years, during which an increasingly large portion of mortgage interest is disallowed at source. 2018-19 marked the halfway point.

This measure does not affect residential property held within limited companies.

PAYE-RELATED MATTERS

IR35 for private sector

As those working in the sector will know the supply of time through a personal services company (the company typically supplies the services of the owner to its customers) has long been a target of HMRC who see these companies as a way of avoiding National Insurance.

The IR35 rules are designed to apply where the relationship between customer and supplier would be one of employer-employee but for the existence of the limited company and basically taxes receipts from the affected customer as if they were PAYE earnings (this tends to increase the amount of tax & NI paid by the company and its owner). The decision as to whether these rules apply has basically been left to the service company which in the view of HMRC is a bit like a turkey deciding whether Christmas should be celebrated, and in their view basically doesn’t work.

For the last two years and in the public sector only the decision and responsibility for applying the rules correctly has been moved from service company to ultimate customer; with effect from 5 April 2020 this will also apply in the private sector.

  • If a customer decides that IR35 rules apply it will deduct personal income tax and NI from the supplier’s invoice and pay the net amount to the service company. The individual will be given payslips and other payroll related tax information but will not necessarily be entitled to holiday or sick pay.
  • Accounting in the service company is too complicated to go into here but basically the accounts ignore turnover treated in this way and the income is treated as the personal income of the director-shareholder. Ultimately this may leave the company with costs that it cannot offset against income.
  • The 2018 Budget stated that this measure would apply to larger companies only (defined as > 50 employees).
  • We expect some initial teething troubles as the measure is rolled out, especially with customers trying to apply the rules to suppliers undertaking work that does not fall within IR35

Anecdotal evidence suggests that many large companies are adopting a blanket approach towards subcontractors, and in effect offering subcontractors a choice between going on the payroll and leaving altogether.

CAPITAL GAINS TAX

CGT PPR changes

  • As many of you will know the sale of residential buildings meeting the definitions of Principal Private Residence (PPR) relief is exempt from Capital Gains Tax (‘CGT’). This basically means the individual’s home.
  • The principle is not changing but the definition of periods of ‘deemed occupation’ is changing significantly from April 2020. In particular:
  • Currently the last 18 months of ownership of a property formerly used as a main residence is treated as a period of deemed occupation and therefore exempt from CGT – this period is being cut to 9 months from April 2020.
    • If a main residence is rented out then the proportion of the gain relating to the period of rental (up to a maximum of £40,000) is currently treated as a period of deemed residence. From April 2020 this will only apply to properties where the landlord lives in the same property. This change will affect many married couples who elect to live in one spouse’s property but rent out the second.

CGT spousal transfers

There is a small technical point on spousal transfers that may render some married couples liable to payment on more CGT than under current rules. A summary of the existing position is necessary first:

  1. If a taxpayer gets married and the couple live in the former main residence of that taxpayer then both spouses are entitled to claim PPR on sale even though the incoming spouse had not lived in the property for the whole period.
  2. However if a taxpayer gets married and the couple live in a former rental property of that taxpayer then the incoming spouse is only treated as taking ownership of the property from the date of transfer (so any CGT relating to the rental period falls purely on the original owner)

From April 2020 the treatment of 2 will fall into line with that of 1 so the incoming spouse will share the tax liability for the rental period even though he/she did not own the property for the rental period.

CGT reporting on residential property

  • From April 2020 reporting of CGT gains on residential property will also change. At present CGT gains are reported as part of the normal self-assessment tax return.

From next year capital gains on residential property must be separately reported to HMRC within 30 days of completion (fortunately not exchange of contracts), and any tax due paid at the same time. We believe that the gains will also need reporting as part of the self-assessment return, with any tax already paid being deducted off the eventual overall CGT liability.

As the rate of CGT payable on residential property (18% or 28%) depends on your overall income it seems to therefore follow that where a disposal is carried out early in the tax year you will have to estimate your taxable income and whether it falls into the higher rate tax band. We do not know whether HMRC intend to levy penalties in the event that you get the assessment wrong and pay the initial tax at too low a rate.

VAT

VAT Domestic reverse charge construction industry

  • A ‘reverse charge’ VAT levy is to be brought in affecting the building industry. This was originally announced in 2018 and was due to come into force on 1 October 2019. However, as the industry was nowhere ready by September the measure has been postponed for 12 months.
  •  This measure will affect the supply of services (i.e. labour) in the construction industry where both contractor and subcontractor are VAT-registered and is designed to combat perceived VAT fraud in the building industry.

The list of services affected is the same as those affected by the Construction Industry Scheme.

Under these new arrangements, a subcontractor will no longer charge the contractor VAT if the contractor is VAT-registered. The contractor will account for both sales and purchase VAT on its own VAT return (so a nil net position). This prevents the situation arising where the contractor claims back the subcontractor VAT but the subcontractor does not declare it to HMRC (clearly HMRC think that this is happening). If a contractor is not VAT-registered then the subcontractor presumably charges VAT as normal.

Both subcontractor and contractors will have to ensure that VAT is charged and declared correctly. We will pick this issue up separately with all clients likely to be affected in the next 6-8 months.

ADMINISTRATION

Making tax Digital

Making Tax Digital (‘MTD’) has now been in force for about eight months. This currently applies only to VAT returns filed by businesses with turnover above the VAT threshold (£85,000 p.a.).

Most businesses will by now have filed at least one VAT return under MTD and although we have not exactly found the process to be smooth we have at least negotiated it.

HMRC is not currently applying penalties for non-compliance though that may change with effect from April.

There are currently no published timescales for applying MTD to any other types of tax. The last published advice stated that no new measures would be introduced in 2020.

PAYE reviews

The PAYE section of HMRC usually carries out a review of a taxpayers PAYE affairs to establish whether a taxpayer has paid too much or too little PAYE tax. These reviews are carried out without reference to a taxpayers non-PAYE income and are a classic case of the left hand of HMRC not talking to the right.

These reviews can therefore sometimes appear confusing to the recipient & contradict information that has come from us. If you are unsure please contact us.

Online & Telephone fraud

As ever with these circulars we issue our general warnings against fraudsters posing as the Inland Revenue [HMRC]. Be on your guard against:

  • Emails purporting to be from HMRC, especially those claiming that you are owed money.
  • Unexpected phone calls purporting to be from HMRC debt collection agencies.
  • Text messages purporting to be from HMRC.

HMRC should never be contacting you by email or by text and will only be phoning you in connection with unanswered written correspondence. Other attempts to contact you are usually attempts to steal bank details or install ransomware on your PC

If in doubt please check with us before responding to such contacts. We can easily review your tax affairs in most cases and if necessary communicate with HMRC direct.

In addition, although outside the scope of our dealings with you and although I am sure that most of you are savvy enough to know this, be aware of fraudulent email or text messages purporting to be from your bank, social media accounts, credit card companies etc.

Be careful about sending bank details by email – these can be easily intercepted if your email is compromised – and make sure that your customers query unexpected changes of bank details sent to them apparently by you.

As ever if you wish to discuss any of the above changes to the tax system or indeed any other tax aspects please feel free to call

Chris Thring

Longhill Accounting Limited

The content of this article is for general information only. It should not be relied on and action which could affect your business or personal circumstances should not be taken without appropriate professional advice.