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.

Why overtaxing non-doms is not a good idea

Wealthy foreigners living in the UK are paying less income tax, but it is unclear whether this is due to relocation or rearrangement of their tax affairs. According to HM Revenue & Customs figures released under a Freedom of Information request, the amount of income tax paid by non-domiciled residents fell from £11.4bn in 2011-12 to £10.8bn in 2012-13, the most recent year for which estimates are available.

This was largely due to a £500m fall in the income tax yield from non-doms who elect to be taxed on a so-called “remittance basis” to £4.6bn. While this represents a 10 per cent year-on year decline in revenues in 2012-13, the number of individuals claiming the remittance basis that year fell by only 6 per cent to 46,700. Under the remittance basis, income and gains from UK sources are taxable along with any foreign income and gains brought to the UK. Income generated overseas that is not repatriated to the UK is not liable for tax. To benefit from this, an annual charge of £30,000 is payable after seven years as a UK resident, rising to £50,000 after 12 years. Non-doms who do not choose to be taxed on the remittance basis are liable to pay UK tax on their global income and gains.

When tax treaties don't really help...

Many countries have double taxation tax treaties with one another to allow taxpayers not to pay tax in both countries.

There are more than 3,000 double taxation treaties world-wide and the UK has the largest network of treaties, covering around 120 countries. Some treaties are more exhaustive than others but even when tax treaties cover all aspects of taxation, there can be situations where can still pay tax twice. Here are a few examples of situations that arise in practice, that we come across on a regular basis and for which unfortunately there is no easy answer.

Using goodwill to save tax on incorporation

Incorporating a sole trader may happen for a number of reasons. For example you started a business on the side not sure whether it would work out and you wanted to reduce overhead costs initially. After a while the success is here and you want to make use of the lower taxes enjoyed by limited companies. Another reason could be that you had paid significant taxes prior to starting your business and because, as a sole trader you can offset trading losses against salaries in previous years, it makes sense to not incorporate right away if you know that your business will incur losses initially. Once the business starts to make a profit however, it makes sense to incorporate.

Incorporating means creating a company and having this new company of which you are the shareholder buy the existing unincorporated business from yourself. If the value of your business is say £100,000 you will make a capital gain of £100,000 and your company will have a goodwill of £100,000 on its balance sheet (assuming there are no fixed assets). Either the company pays you right away or most probably it credits the director's loan account allowing you to draw funds as they become available in the business. But why is it a good thing?