New clampdown on capital treatment of distributions

Starting April 6th next month, a new targeted anti-avoidance rule (TAAR) will make it more difficult to convert profits generated in a company into a capital receipt in the hands of the shareholders. Indeed, a capital distribution made in the winding-up of a company will be taxed as income if either within two years of the winding-up the shareholder continues to be involved in the same trade as that carried out by the company that has been wound-up or if profits, in excess of those required by the company, were retained in the company so that they could be received as capital on a later liquidation.

These new measures only apply to individual shareholders and close companies (broadly, companies controlled by five or fewer people) but it represents a significant tax increase where the shareholder was able to claim Entrepreneur's Relief on the gain (a jump from 10% to 38.1% if dividends are falling within the additional rate band).

More specifically, the anti-avoidance is targeted after the following behaviours:

How to Save even more Money on Foreign Exchange

In the last few years a numbers of foreign exchange brokers have been appearing undercutting banks and providing much cheaper exchange rates.

The difference in spread and fees is often huge resulting in significant savings for individuals that need to transfer money overseas or companies that often trade in multiple currencies.

The problem is however that those rates are very attractive on the first few transactions but have a tendency to creep up after a while. Most people will spend time initially to select a broker based on price but few will put in competition multiple brokers every time they need to do a transfer.

This is where a new start-up found an opportunity. Called currencytransfer.com, the company takes care of registering you with up to 8 brokers (yes the compliance process is done just once and passported over to the other brokers). Going forward when you need to do a forex transaction, the platform will put a bid on your behalf to all available brokers. You just have to pick-up the best price and off you go, with just a few clicks. Everytime.

This is a huge benefit as brokers have to stay honest if they want your business and it therefore guarantees the best possible price everytime without you having to be a specialist.

Five tips to mitigate Inheritance Tax in the UK

Inheritance Tax (IHT) in the UK can be extremely punitive. For spouses or civil partners there is no tax to pay but for anyone else, the IHT rate is 40% for sums above the nil rate band (NRB) of £325,000 per individual.

It does not have to be. There are a number of ways one can significantly reduce this tax with a little bit of estate planning. Here are 5 tips you need to keep in mind when it comes to IHT:

1. Gifts from disposable income

This is actually an HMRC concession that most people are unaware of. It relates to the ability to give away an unlimited amount provided it qualifies as "normal expenditure out of income" and it is arguably one of the most useful IHT exemptions. It is also very flexible, because you don't have to gift the same amount every year or make the gifts to the same person. Many people use the exemption to pass on money on a regular basis to children or grandchildren. It is important to remember however that the exemption is not given automatically and has to be claimed retrospectively by the executors of your estate. For the gifts to qualify, you must be able to show that the payments are made out of surplus income - either earned income or investment income - and that they do not reduce your standard of living and in particular you cannot pass on income and then use your capital to supplement living costs.

2. Gifts of capital survived 7 years

There is a way to give your whole estate away and pay no tax at all. As long as you survive the gift by 7 years or more. This type of transfer is known as a "Potentially Exempt Transfer" or a PET. It is important to bear in mind that when making a large gift it has to be in excess of the nil band rate (NBR) to benefit from any potential reduction in the potential tax due as a result of the taper relief. In addition it is also important to be aware that any gift made essentially uses up the nil rate band and could push the remaining estate into a full rate of tax with no relief at all for the subsequent 7 years.

Keep in mind that if you give your estate away, you don't control it anymore. Something that many people are reluctant to do. But there is another option. Please read on....

Changes To Dividend Taxation From April 2016

You will have heard by now of the changes that were announced during the Summer Budget 2015 last month regarding dividend taxation.

To re-cap, the current proposals are to abolish the 10% tax credit on dividends from April 2016 and replace it with a new £5,000 dividend allowance. The proposals also set out the intention to change the rate at which dividends are taxed from April 2016 to the following:

• Basic rate band: 7.5%
• Higher rate band: 32.5%
• Additional rate band: 38.1%

Currently the effective rates are 0% in the basic rate band, 25% in the higher rate band and 30.56% in the additional rate band. Since the Summer Budget last month no further information has been released, and we are still waiting for the draft legislation which may not arrive until the Autumn Statement later this year.

As it stands the information provided is very general, and the following is unknown:

• How the dividend allowance will interact with the personal allowance
• Whether the dividend allowance is available in full for higher and additional rate tax payers

If the proposed changes go ahead then it is clear that personal tax liabilities will increase for director/shareholders who pursue a strategy of taking a small salary and dividends to extract profit. But it's impossible at this stage to a reliable calculation.

Many people are wondering whether it still makes sense to operate as a Limited company or if it will be more tax efficient to operate as a sole trader from April 2016. However it's impossible to answer this question right now as it is rumoured that Class 4 NIC may increase, partly due to the fact that Class 2 is being abolished from April 2016. And the much publicised ‘Tax Lock’ does not apply to Class 4 NIC.

The tax implications of using Airbnb in the UK

Airbnb is gaining in popularity every day. Just in London there are more 20,000 properties available on the Airbnb web site. With occupancy rates as high as 80% you might be tempted to convert your regular Buy to Let investment (BTL) into an short term let. While you will most probably increase your yields (yields are typically as much as twice what you can get on a regular BTL), doing so is fraught with risks that you need to be aware of.

The first question is to answer is if your property business qualifies as a Furnished Holiday Let (FHL). HMRC spells out the rules very clearly. In a given tax year, an accommodation qualifies for FHL if:

1. The property is located in the UK or the EEA and is let commercially (i.e. with the intention to make a profit)
2. The total of all lettings that exceed 31 continuous days is less than 155 days
3. The property is available for letting for at least 210 days in the year (excluding your days of occupancy)
4. You have let the property as a furnished holiday accommodation for at least 105 days in the year (excluding periods let at reduced rate to friends or let for more than 31 days).

Please note that if you business is considered a FHL, the tax treatment will be different. And you cannot just opt for regular BTL tax treatment instead. Also, all your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business (losses cannot be transferred from one business to the other or to any other business -- no more sideways relief).

So here are the important points to consider:

Record VC funding quarter for UK startups

Startups in Silicon Valley, the epicenter of the tech world, and the U.S. overall have seen an unprecedented amount of investment as consumers and businesses buy into more online services, and investors flock to fund the next big thing. But the ripples of that trend are being felt elsewhere, too. A new report says that London chalked up a record $682.5 million of investment in the first three months of this year, a rise of 66 percent on a year ago and busting through the previous record of $411.62 million, set in Q4 of last year. At the current rate, investments in London startups are on track to break past $2 billion this year.

The figures, tracked by London & Partners, the mayor of London’s business development group, also speak to how out of balance the tech economy is in the U.K. That $682.5 million makes up 80 percent of all VC investment in the U.K. for Q1 ($856.7 million). But they also point to the imbalance in the marketplace over a wider geography. In 2014, London startups attracted $1.35 billion in investment. In comparison, the National Venture Capital Association says that U.S.-based Internet companies took $11.9 billion of VC money in the year, while U.S.-based software companies attracted $19.8 billion in investment — both all-time highs.

In other words, if London is leading tech investment in European startups, Europe still has a very long way to go before getting anywhere close to the size of the U.S. market for tech, both in terms of businesses and those willing to back them. Still, the market has come a long way when you consider that in 2010, London startups raised a mere $101 million.

London & Partners, working with data from CB Insights, says that money-transfer startup WorldRemit raised the most of any other company in Q1, a $100 million round in February. “London is the ideal place to start a fintech company, as it is a technology hub as well as a financial services hub,” said Ismail Ahmed, founder and CEO of WorldRemit, in a statement. “There is an abundance of world-class talent in the city, and the convenient time zone, which enables communication with Asia and the Americas in same working day, is an attractive factor for us as an international money transfer service.”

HMRC defeats film scheme in ‘watershed’ ruling

HM Revenue & Customs has defeated in the Court of Appeal a tax avoidance scheme which made false investments into Disney films. Eclipse 35 LLP claimed to trade in film rights but has been defined as a tax avoidance scheme by UK courts. HMRC said an estimated £635m in tax has been "protected" by the scheme's defeat. Investors into the scheme borrowed money which qualified for interest relief claims because it was intended for trade use. Eclipse used the money to acquire the rights to Disney films before sub-leasing them back to a different Disney entity for a guaranteed income stream.

In reality, the borrowed money earned interest, which was then filtered through Eclipse as a tax-efficient trading transaction to pay the interest on investors’ loans. The Court of Appeal upheld its earlier tribunal decision, which ruled that investors were not eligible for interest relief and profits from Eclipse 35 because the partnership was not trading. There were 31 Eclipse partnerships that ran for between 11 and 20 years, but Eclipse 35 is the first to be taken into litigation.

An update on VAT MOSS

Furious at the upcoming changes regarding VAT on sales of digital services to non-business customers in the EU, many small businesses have taken their anger to social media as the surge in messages tagged #VATMOSS or #VATMESS can attest.

We mentioned the upcoming changes in a previous article but to recap, from 1st January 2015, if a UK business sells digital services (e.g. apps, music, e-books) to a consumer in the EU (B2C) then that UK business would normally need to register for VAT in the country of the consumer. To avoid having to register for VAT in multiple countries HMRC offer the Mini One Stop Shop (MOSS) where a UK business can declare their EU B2C digital service sales and pay the appropriate VAT to HMRC. MOSS returns are due quarterly to 31 March, 30 June etc and to be submitted, together with payment in the domestic currency, sterling for the UK MOSS, by the 20th of the following month.

The problem is that to be able to use MOSS a UK business must be registered for VAT in the UK. This lead to concerns that many unregistered businesses would now have to register in order to use MOSS, and be forced to charge VAT on their UK sales even though those sales are below the UK threshold.

Surprise changes on incorporation relief

Earlier this week, George Osborne announced during the Autumn Statement some major changes to the tax reliefs available when an unincorporated business transfers into a related company (e.g. a sole trader transferring their business into a Limited company that they also own).

It has been common practice in the past to start a new business as a sole trader business and then incorporate at a later date. The benefits were multiple. First, because a sole trader business can carry back losses, if one creates a business with high startup costs, tax relief can be carried back and offset against tax paid in previous years, including tax payed on employment earnings. For someone leaving the corporate world that's a nice incentive and this has not changed.

What has changed however is the relief available when changing the status from sole trader to limited company. Indeed once the losses have been offset against past earnings, using a limited company is much more tax efficient especially because it's possible to avoid national insurance to a large extent. In the past the incorporation process would have generated 2 significant reliefs. They are now gone.

UKTI Export Week starting next Monday

UK Trade & Investment will be holding its 6th Export Week during the week of 10-14 November. Across the week there will be a varied series of events all over the UK, aimed at businesses to either start their export journey or increase their international business. Previous Export Weeks have seen over 17,000 companies in the UK attend exporting focussed events. This week we will again have over 70 events across the UK; there will be at least one event per day in every part of the UK.

The flagship road show, ExploreExport, will be touring the entire country at 11 venues across England, Scotland, Wales and Northern Ireland. Over 120 UKTI Trade Officers worldwide will be available for 1-2-1 meetings on their dedicated markets to help companies “explore” the possibilities of exporting to their countries. The aim is to bring the world to all parts of the UK.