If a sole trader makes a loss from their business, it may be possible for them to offset this loss against their other income in the same year. This would lead to a reduction in their taxable income and therefore less tax payable. A reduced tax bill is obviously a very appealing prospect. However, as David Cliff (“DC”) (in the case of D Cliff v HMRC [2019]) recently found out in his appeal to the First Tier Tribunal, there are strict rules in place that dictate when a sole trader is allowed to offset their losses against other income; failure to adhere to these rules may result in a discovery assessment by HMRC and hefty penalties. Loss Relief Rules The legislation states that in order for loss relief to be claimed against the...

Determining a company’s residence status is crucial when considering its liability to UK tax. There are two important tests to consider when deciding a company’s residence: the Incorporation Test, and the Central Management and Control ("CMC") Test. Incorporation Test The incorporation test set out in 2009 CTA s.14 is simple; a company incorporated in the UK is regarded as resident in the UK for tax purposes. If a company does not fall into this test, the second test must be considered. “Central Management and Control” Test The CMC test is derived from case law.  As the name suggests, this test seeks to determine where the central management and control of the company vests. This involves looking at where the orde...

On a sale of shares, proceeds of the sale may be paid in full on completion. Alternatively, part of the proceeds may be paid on completion, with the balance becoming payable at one or more future dates. In the latter case, there may be certain performance conditions attached to the future proceeds (typically related to the financial performance of the company) that must be met in order for the vendor to receive further payment. The latter case is commonly called an “earn out”, and there are several tax points to consider when negotiating a sale of shares to ensure that the earn out is practical and tax effective for the parties involved. Why Consider an Earn Out? There are numerous reasons to have an earn out as part of a share...

When businesses/companies employ capital assets (e.g. machinery, motor vehicles) for use in their business, such costs are not deductible from trading profits because the expenditure will have an enduring benefit for the trade. Instead, relief is available through capital allowances which essentially allows relief for the fall in value of capital assets, providing a deduction when arriving at taxable profit. Furthermore, the annual investment allowance (AIA) is available to businesses to encourage greater levels of investment. The AIA reduces the costs of capital by providing 100% capital allowances for the first £1,000,000 (between 1 January 2019 and 31 December 2020) of plant an machinery (excluding cars) acquired by the business for...

Follower and accelerated payment notices were introduced in Finance Act 2014 with a view to addressing taxpayers and promoters involved in tax avoidance schemes. The objective of these rules was to improve efficiency with dealing with tax avoidance schemes and to ensure that tax in dispute in relation to the use of an avoidance scheme is held by HMRC until it is resolved. However, these measures have been criticised as draconian by some of those affected, citing the lack of right of appeal and scepticism over whether they are sufficiently targeted as areas for concern. What is a Follower Notice? Where marketed tax avoidance schemes are entered into by a large number of taxpayers, it is more efficient for HMRC to investigate a re...

Research & Development ("R&D") relief is available to companies that engage in projects that seek an advance in science or technology. Where available, the relief provides assistance in the form of a reduced tax bill or a repayable tax credit, calculated by reference to the level of expenditure incurred by the company on research and development activities. Carry on reading for some of the latest developments in the world of R&D relief. Not sure what R&D Relief is? You can read more about R&D relief and when it applies by visiting the Research & Development page of our website. PAYE & NICs Cap As announced in the 2018 Budget, for accounting periods beginning on or after 1 April 2020 the R&D...

From 1 October 2019, a new domestic reverse charge system for VAT will come into effect. This blog will explain how the new system will work and who it will apply to. The Current System Under the current rules, a supplier of construction services is liable for the VAT on the supply of goods and services. In practice, this means that the supplier charges VAT when they bill their customer. Their customer then pays their bill and the VAT to the supplier, who then forwards the VAT payment to HM Revenue & Customs ("HMRC"). However, there have been increased instances of criminal activity in relation to this, whereby the supplier has gone missing, along with the charged VAT before it is paid to HMRC. Therefore, new preventative ru...

In this two part series, we’ll be looking at the tax advantages of company share schemes for directors looking to reward, retain, and incentivise their staff. In Part 1 we looked at Company Share Option Plans (“CSOPs”) and Enterprise Management Incentive schemes (“EMIs”) which are more common with SMEs. In this part, we’ll be looking at Share Incentive Plans (“SIPs”) and Save As You Earn schemes (“SAYEs”) which can often be more appropriate for larger companies. As we discussed in Part 1, providing employees with shares directly can come with significant tax and National Insurance Contribution ("NIC") costs as well as cash flow problems for the employees receiving shares. Tax Advantaged Share Schemes for Empl...

In welcome news for those setting up EMI schemes, HMRC has announced that the window for agreeing EMI share valuations has been extended from 60 to 90 days. The Announcement HMRC made the announcement through the Employment Related Securities Bulletin 32 (June 2019). You can find the full bulletin here. What are EMIs? As covered in our previous blog, EMIs are a type of tax advantaged share scheme that allows companies to reward, retain, and incentivise select staff. EMI schemes operate by allowing companies to give select staff the opportunity to buy shares in the company at a price set when the share option is agreed. The Importance of Correct Valuations If EMI share options are priced at the market price when the o...

Certain taxpayer expenditure can qualify for tax relief, and these amounts are known as deductible payments. The payments are deducted from income when calculating taxable income, effectively saving tax at a taxpayer’s marginal rate. For example, if a taxpayer pays tax at a marginal rate of 40%, they will  have saved 40p for every £1 of the payment they pay in the tax year. Interest paid on qualifying loans is a deductible payment, however there is a cap on the amount that may be relieved each tax year.  The total amount which can be deducted is the greater of £50,000 or 25% of adjusted total income (being total income less payroll giving and gross pension contributions paid). Qualifying Interest Where a loan is a qualify...