The Lifetime ISA aka LISA

With just 2 weeks left until the end of the tax year, now is the time to look at all the options available to reduce your tax bill for the year 18/19.

We have written a detailed article on the subject in the past and most taxpayers are aware of the more popular options such as pension contributions and investments into ISA or EIS.

One container however which is often overlooked is the Lifetime ISA aka LISA. It was introduced in 2017 and can be used in conjonction with the other vehicles (even though the total amount for both ISA and LISA remains capped at £20,000). As with a regular ISA, all income and gains inside the container are tax free. But as with a pension, money contributed up to £4,000 will receive a 25% top-up from the government. All the specifics are described in the article mentioned above so please refer to it for more details but here is a list of scenarios where investing in a LISA makes sense:

You plan on purchasing your first home in the near future

Obviously this is the main use case for that product and it therefore makes sense to use it in that case. The only constraint is that the house be less than £450,000.

You are a basic rate band tax payer

If you are basic rate band tax payer, i.e. you marginal tax rate is 20%, the tax benefit you get from the LISA is identical to the one you get from a pension. But with a LISA the money is blocked for a much shorter period since you can get the money out when you purchase your first home. If you don't have a property yet, this is therefore a great option for you to look at.

KPMG small business accounting unit bites the dust

After having decided in the wake of Carillion to stop non-audit services to the FTSE 350 clients they are auditing, KPMG has now decided as well to stop the small business offering that was launched in 2014. Clients of the accountancy firm have been receiving letters announcing the move and requesting that they find alternative arrangement for their accounting needs.

KPMG had vowed in 2014 to disrupt the SME market by saying at the time "you can pay us the same as your current accountant but we'll give you more". The market at the time had been skeptical that a  big four firm like KPMG with the overheads they are famous for could be competitive in such a market. And it looks those pundits were right.

No one likes business disruption, but the good news if you have been receiving one of those letters is that we, at TaxAssist Accountants, a firm that focuses on small businesses, are ready to take over your accounting business. We do support Xero and Receipt Bank so your day to day will remain unchanged and your business undisrupted. We will also, in most instances, be able to match the existing KPMG pricing.

So if you are looking for an accountant to replace KPMG, don't hesitate to give us a call at 020 3397 1520 to discuss how TaxAssist can help your business. Our first consultation is always free!

Tax treatment of cryptoassets: an update from HMRC

HMRC published this week a new policy paper on the tax treatment of crypto-assets. The previous paper was from 2014 (see our previous article on the subject) and this one goes into further details  but only concerns the individual taxpayer. The government has promised a further update for corporations at some point in the future.

In the paper HMRC defines 3 types of assets: Exchange Tokens (such as Bitcoin and most crypto-currencies and that can be used as payment rails), Utility Tokens that provide the holder with access to specific goods or services (such as those issues during an ICO) and Security Tokens which provide the holder with interest in a business (either debt or equity).

Essentially, individuals will be liable to pay either Capital Gains Tax (CGT) if investment is casual or Income Tax (IT) if they are actively involved in the trading of the cryptoassets. The paper goes into quite a lot of details and specifies many possible scenarios and their tax treatment but here are a few points that are worth noting:

Change in VAT treatment of retailer vouchers

HMRC issued guidance recently aimed at simplifying the tax treatment of retailer vouchers and at bringing it up to date with a revised EU VAT directive.

Those changes are to be effective January 1st 2019 and even though they may seem like a minor, it could mean significant tax increases for some retailers who will see some of their vouchers reclassified and their VAT treatment altered.

Currently there are 3 different types of vouchers:

1. Experience vouchers that have no face value but entitle the bearer to redeem a specific service.
2. Single purpose vouchers (SPVs) which entitle the bearer to redeem for only one type of goods or services which are subject to a single rate of VAT
3. Multi-purpose vouchers (MPVs) which can be redeemed for any type of goods or services and are subject to different rates of VAT

For experience vouchers and SPVs, VAT needs to be accounted when the voucher is issued or sold rather than when it is redeemed. This is regardless of whether it is ever redeemed. There is no provision for adjusting the VAT if the voucher is not redeemed before the expiry date. The new guidance actually widens the definition of an SPV: going forward an SPV will be defined as one where, at the time of issue, both the VAT liability and the place of supply of the underlying goods or services are known. An MPV is then a voucher which is not a SPV.

Changes in off-plan treatment for PPR relief

Principal property relief (PPR) sometimes also called private residence relief (PRR) saw its usefulness seriously curtailed following a recent decision of the Upper Tribunal (UT) that overturned a First-tier Tribunal (FTT) ruling of 2017. The issue at stake is how to determine the date of acquisition of an off-plan property and the new ruling means that property owners should be very cautious when they purchase off-plan their principal residence.

PPR reduces any taxable capital gain on a property if the property has been used as a principal residence for part of its ownership. The case in question concerned the definition of ownership for the purpose of the relief. HMRC argued that the date of acquisition was the date when contracts were exchanged whereas the taxpayer argued it was the date when he was finally able to occupy the property, three years later. The FTT agreed with the taxpayer but HMRC appealed and the UT decided to side with HMRC.

The UT took the view that even though there was a period when the property was not even a dwelling, it was a chargeable asset nonetheless. As a matter of fact, the taxpayer had the right all along to sell the property and therefore there was no doubt that profit from such a sale would be taxable.

Now, not all is lost in case the delay in taking up occupation is less than a year (2 years at most in exceptional circumstances) thanks Extra Statutory Concession D49 that allows for relief in such a case. But caution should be exercised if you suspect there will be delays in construction as it will now most probably have negative tax implications for the homeowner upon resale.

Clothing costs tax deductibility

Our clients often ask if purchase, rental or even cleaning of clothes is an allowable expense for their business when those are used in a business context. Unfortunately, the answer is most often no.

To begin with, only protective clothes or uniforms are allowed (be it their direct cost or their cleaning cost). A TV presenter will therefore be unable to claim the cost of his wardrobe used to go on air, even it it has never left the studio. As a matter of fact BBC Breakfast host Sian Williams lost such a case with HMRC. The taxpayer, claimed deductions for a ‘professional hairdo’, professional clothing and laundry in her 2004/05 tax return and HMRC did not allow the claim. The taxpayer appealed but the judge found for HMRC, arguing that the taxpayer’s clothing was ordinary everyday wear and not restricted to work. It was irrelevant whether or not the clothing was worn when away from work; it was enough that it could be.

In cases where the clothes are protective or clearly branded, ie. cannot be used outside of work, their cost is an allowable expense and accordingly, their cleaning as well. However HMRC has put limits in place as to how much those expenses can be. They even put up a detailed page with a maximum cost one can deduct based of the type of occupation. For example, the armed forces can claim £100 per year whilst a firefighter can claim £80. Whilst for other employees £60 per year that can be claimed by employees in general where they can meet the statutory test outlined below.

Another IR35 lawsuit: this time HMRC loses!

A judgment providing another IR35 victory for the taxpayer has just emerged, although the case was heard at the First Tier Tribunal (FTT) over 18 months ago. The case concerns Armitage Technical Design Services Ltd (ATDSL), the personal service company of Mr Armitage. John Hill represented Armitage at the hearing and both he and Armitage are happy for this case to be reported.

The case took around four years to reach the tribunal. Although the taxpayer and his advisers were convinced that the contracts were not within IR35, they didn’t want the case to drag on, so they offered to settle the tax and NIC due for the two in date years with no penalty. But HMRC refused as it wanted a penalty for negligent conduct on the basis that the taxpayer had not discussed IR35 in sufficient detail with his accountant before the P35s were submitted.

Armitage is an electrical control and instrumentation designer who has worked in the nuclear industry for decades. He contracted through ATDSL and two different employment agencies to provide his services to Diamond Light Source Ltd (DLS).

HMRC asserted that the work Armitage performed over the four years 2009/10 to 2013/14 fell within IR35. During this period Armitage completed several separate projects for DLS and also worked for other customers. The judge examined various indications of employment and self-employment set down in case law and highlighted the following points:

Substitution

DLS would accept a reasonably qualified substitute in the place of Armitage, but this was never tested in practice. The tribunal was satisfied that there was not an absolute requirement for Armitage to personally perform the tasks.

Refinancing of a buy-to-let: the tax implications

It's has been common practice in the past to refinance a property and then expense the additional interest against property income, as long as the amount borrowed was still smaller than the original cost (or the value when the property business started).

But in April 2017 HMRC rewrote its guidance to restrict deductions to those cases where the proceeds of the loan are actually used in the property business and not for other purposes.

Prior to 2017 HMRC manuals used to contain this example:

• You purchased a buy-to-let property for £120,000 with a mortgage of £90,000 and let it to a tenant straight away.
• Three years later the property is valued at £150,000 and you increase your mortgage on the property to £115,000. All of the interest on the mortgage can still be claimed as a revenue expense as the loan doesn’t exceed the initial £120,000 value of the property when it was introduced to your letting business.
• If you increased the mortgage to £125,000, the interest payable on the additional £5,000 is not tax deductible and cannot be claimed as a revenue expense.

Changes for termination payments coming in April

Here are some notable changes when it comes to termination payments:

Foreign service relief termination payments

The Government has decided that taxpayers who have worked abroad but are resident in the UK in the tax year in which their employment is terminated should be subject to exactly the same rules as taxpayers who have not been abroad. Clients will benefit from the existing £30,000 exemption only. The only exception to this change is if you are a seafarer.

In the past, employees who received termination payments and who had spent all or a large part of their employment overseas have been eligible to qualify for what is known as ‘foreign service relief’. This could potentially give them income tax relief of an amount greater than the standard £30,000 deduction. In some cases, the payment would be completely exempt from income tax.

The measure will apply to those who have their employment contract terminated on or after 6 April 2018. If the payment is received from 14 September 2017 onwards in advance of the termination of the employment, the restriction will also apply.

More restrictive PILON classification

The income associated with a contractual notice period that is not worked will no longer benefit from the £30,000 termination payment exemption. To further confuse matters HMRC are now referring to PILONs (Pay in Lieu of Notice) as ‘PENPs’(Post-employment Notice Pay) which represents the amount of pay, and/or benefits, that the employee will not receive because their employment was terminated without full, or proper notice being given.

Optimal salary for a company director - 2018 update

It’s that time of year when we need to look at the level of salary that company directors should be paying themselves from 6th April.

As in previous years, the main question is whether to pay a salary up to the Personal Allowance level or whether to pay a salary to the level at which National Insurance kicks in. We would generally recommend the second option to reduce administration. TL;DR: if the director has no other income and the Employment Allowance will be used up against other staff salaries then the best option would be for the director to be paid a salary of £8,424 (£702 per month). This should be topped up with £37,926 of dividends.

If the director is owed money by the company however they could also charge interest on their loan account so this may be an additional consideration for some. In the following it is also assumed the director wishes to stay below the higher rate tax band threshold for personal income tax. It is also assumed that they have no student loan balance, are not caught by IR35 and have a full personal allowance. It is assumed they are UK resident and have no other income, capital gains and there is no relief from tax to claim such as gift aid or pension payments.