Bloomsbury Tax Books

Tip-offs to HMRC’s Tax Evasion Hotline hit almost 300 calls per day over the last year

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Wednesday, June 19th, 2013

· 72,000 reports in the last twelve months

· Calls rarely lead to extra tax revenue and can embroil businesses and individuals in unnecessary investigations

HMRC’s Tax Evasion Hotline received 72,000 tip-offs over the last year – roughly 300 calls per day – according to our survey. The high volume of calls reflects the public’s increased concerns over tax evasion. The Tax Evasion Hotline lets members of the public and businesses inform HMRC of suspected cases of tax evasion.

Martin Casimir, Managing Director of Bloomsbury Professional, comments: “The sheer volume of calls to the hotline is astounding. People are clearly keen to ensure that no-one cheats the tax system and that everybody pay their fair share of tax.”

“For many people, wages have flatlined in real terms over the last few years whilst at the same time the tax burden has increased. That makes them especially indignant and motivated to call the helpline if they suspect tax evasion.”

Calls rarely lead to extra tax revenue

Although the volume of calls to the Tax Evasion Hotline is extremely high, it does not necessarily mean that large amounts will subsequently be recouped through investigations.

Martin Casimir explains: “HMRC is already on a stretched budget. There’s a question mark over whether HMRC has the manpower to deal with all the complaints that it receives.”

Casimir says that HMRC would not disclose how many of the calls they received directly led to successful investigations into tax evasion. However, he believes the figure is likely to be extremely low.

The National Audit Office has identified the Tax Evasion Hotline as the least cost-effective method of detecting tax evaders. It yields just twice the amount of money it costs to operate it. In 2006/7, HMRC took back just £2.6 million from calls made to the Hotline. The original estimate was £32.5 million that the helpline had hoped to recoup.

Martin Casimir comments: “HMRC should be concerned about how few calls actually reveal a tax evasion case of note.”

“Whilst people are now more sensitive to the possibilities of any tax irregularities, it can lead to people being over-keen and making calls that are misguided.”

As well as HMRC being unable to deal with the sheer volume of calls, many of the calls it receives reveal only small amounts of tax evasion.

Martin Casimir says: “It’s a rarity that calls to HMRC reveal a large-scale evasion of tax. Many of the calls relate to tradesmen being asked to be paid cash-in-hand, for example. The loss of tax for HMRC is rather small.”

“Investigating tax evasion cases can be a costly procedure so HMRC has to weigh up the benefit of the amount of tax they can potentially reclaim versus the cost of actually pursuing the tax.”

“It is also worth remembering individuals or businesses that are found not to owe any additional tax are usually not entitled to compensation so fighting unfounded tax investigations can be a costly nuisance.”

Press enquiries:

Martin Casimir
Managing Director
Bloomsbury Professional
Tel: +44 (0)1444 416119

Nick Mattison or William Bray
Mattison Public Relations
Tel: +44 (0)207 6453636

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Categories : Uncategorized

A Rising Tide of Anger: EMI Share Options

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Monday, June 17th, 2013

An article by David Cohen

With a rising tide of anger, among both politicians, the media and the general public, against executive pay and tax avoidance, it is remarkable that the Finance Act 2013 has brought about a 64% reduction in the rate of capital gains tax payable by a major category of executives who exercise share options. However, as with any tax relief, there are pitfalls which can cause the relief to be lost. Woe betide an adviser whose client is tripped up by one of these pitfalls. Diligent readers of EMI Share Options – a Complete Guide should be saved from such a fate.

Enterprise Management Incentives (EMI) share options can be granted to selected employees by independent trading companies with gross assets of no more than £30 million and less than 250 employees. An individual can hold EMI options over shares worth up to £250,000 (increased last year from £120,000) and the exercise of such an option will generally be exempt from income tax and national insurance contributions (NICs). However, gains made on the sale of shares acquired by exercising an EMI option were almost always subject to capital gains tax at the higher rate of 28%.

In theory, this could be reduced to 10% if the conditions for entrepreneurs’ relief were met but this would have required an employee to hold at least 5% of the ordinary share capital and to control at least 5% of the voting rights. Furthermore, the shares would need to have been held for at least a year whereas EMI options are often exercised on an exit event and the shares are immediately sold.

The Finance Act 2013 removes the 5% condition for EMI participants and allows them to count their period of ownership from the date on which the option is granted. This might suggest that provided an employee can hold onto his option for at least a year, he should be home and dry. But this is to overlook the potential impact of a disqualifying event. There are 10 such events of which the most likely to occur are the EMI company losing its independence or ceasing to carry on a qualifying trade or the employee ceasing to be employed by the EMI company or no longer working for it for sufficient hours per week.

If an EMI option is not exercised within 90 days of a disqualifying event (increased from 40 days for disqualifying events occurring on or after the date of Royal assent to FA 13) any gain arising between the date of the event and the date of exercise is subject to income tax and possibly NICs. But that is not all. Failure to exercise within 90 days will also mean that the special EMI route to entrepreneurs’ relief will be closed off. Hence, apart from in the unlikely event that the option holder has held at least 5% of the ordinary shares in the company for 12 months, CGT will be levied at 28%.

Even where an option is exercised within 90 days of a disqualifying event, entrepreneurs’ relief may still be lost. This is because the occurrence of a disqualifying event will mean that the 12 month period between option grant and share sale will instead end on the date of the disqualifying event. Suppose, for example, an EMI option is granted in May 2014 and that the option is exercised and the shares are sold in June 2015. If the option holder becomes a non-executive director (a disqualifying event) in April 2014, he will not qualify for entrepreneurs’ relief, even though the exercise is within 90 days, because the period from grant to event is less than 12 months.

Difficult issues may arise if the EMI company is taken over within a year of an EMI option being granted. If the option holder is forced to take cash, he will not benefit from entrepreneurs’ relief. If he exercises his option and then exchanges his shares for new shares in the acquiring company, those shares will not be treated as “relevant EMI shares” so the 10% tax rate still be out of reach.

Indeed, there may be a difficulty even if the option has been held for more than a year. This is because a share-for-share exchange will normally not be treated as a disposal for CGT purposes and the subsequent disposal will then be of shares which are not relevant EMI shares. Thankfully, there is a potential escape from this particular trap. The employee can elect for the share exchange to be treated as a CGT disposal as far as his shares are concerned. Making such an election will not always turn out to be beneficial. The electing employee may need to pay CGT (albeit at only 10%) before he receives any cash for his shares and he takes the risk that a fall in share price will mean that some of the gain on which he has paid tax evaporates, leaving him a capital loss when he may not have capital gains against which to offset it.

The position will be more promising if the bidder is prepared to offer option holders an exchange of their EMI options for equivalent new options over shares in the acquiring company. Provided the new options qualify as “replacement options”, any period for which the new options are held can be added to the period for which the original options were held when calculating the minimum 12 month period for entrepreneurs’ relief.

There is a very specific trap which lies in wait for an EMI option holder who exercises her option and then, in time honoured tax planning fashion, gives some of her shares to her husband or civil partner. The transferee will have their own CGT exemption but that benefit may well be outweighed by the loss of the entrepreneurs’ relief which, had she retained the shares, would have attached to 100% of her holding.

Finally, if all these obstacles can be overcome, there will be further complexity with which to grapple if an individual holds some shares acquired by exercising an EMI option and some other shares and is not selling the whole of his holding. Special identification rules apply to determine how many of the shares being sold are to be treated as EMI shares for entrepreneurs’ relief purposes. But that would be the subject of a whole new article!

EMI Share Options – A Complete Guide

ISBN: 978 1 78043 254 0

Publication Date: Aug-13
Format: Paperback
Availability: Not yet published
List price: £65

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Categories : EMI

Close company participators: The 25% charge

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Monday, June 17th, 2013

An article by Mark McLaughlin

[Note – this article is based on legislation in the Finance Bill 2013, which is subject to amendment.]

The provisions imposing a 25% charge on close companies in respect of loans to participators (CTA 2010, Pt 10, ch 3) is well known to most tax advisers. The charge under CTA 2010, s 455 (commonly referred to as the ‘section 455 charge’) comes as something of a surprise to some company owners, whereas others have sought to avoid the charge using certain planning arrangements.

For some time, HM Revenue and Customs (HMRC) guidance has indicated some concern about arrangements to avoid the s 455 charge. Subsequently (and without notice or consultation it seems), the government and HMRC announced at Budget 2013 that measures would be introduced to close perceived “loopholes” in the loans to participator rules and prevent avoidance of the tax charge. In addition, in its technical note of 20 March 2013 (‘Close company loans to participators (loophole closures)’), HMRC stated the government’s intention to undertake a “wider review of the loans to participators regime”. A consultation paper on the subject will be published, but is still awaited at the time of writing.

The ‘loopholes’

The three types of arrangements which the government has sought to block are broadly as follows:

• Loans or advances via certain types of intermediary;

• Extractions of value to participators (directly or indirectly) other than as loans or advances of money;

• ‘Bed and breakfasting’, i.e. broadly arrangements in which a loan to a participator is repaid to the company before a s 455 charge arises, followed by the company making a new loan to the participator shortly afterwards.

Legislation to block these arrangements was subsequently published in Finance Bill 2013.

Loans via Intermediaries

HMRC guidance published before the above changes indicated that there were “doubts” about the application of ICTA 1988, s 419 (now CTA 2010, s 455) to loans to a partnership whose members include the company itself. Indeed, the guidance states (at CTM1515): “You should not contend that such loans are within the charge to [s 455] if there is a genuine partnership and you are satisfied with the bona fides of the arrangements”.

HMRC now state that they have “put beyond doubt” that loans to certain intermediaries are within the s 455 charge. This has been achieved simply by extending its scope, so that it applies if a close company makes a loan or advance to the following:

• Settlement trustees – if a trustee or beneficiary (actual or potential) is a participator (or associate) in the company; or

• A partnership (including a limited liability partnership (LLP)) – if a partner is a participator (or associate) in the company.

However, the above change only applies to loans or advances made on or after 20 March 2013. The fact that it has been necessary to introduce legislation to this effect means that some taxpayers may be encouraged to resist any HMRC challenge that a s 455 charge applies in such circumstances. It should also be remembered that there are certain (albeit limited) exceptions to the s 455 charge (in s 456), such as loans made in the ordinary course of a money lending business.

Extractions of value by participators

A new tax charge of 25% has been introduced to deal with perceived avoidance in this area. The type of arrangement envisaged by HMRC involves an intermediary.

The example given by HMRC is where an individual participator (M) and the close company (CC Ltd) form a partnership. The partnership agreement allocates the profits to CC Ltd. HMRC points out that some have previously argued that if CC Ltd leaves the profits undrawn in its capital account with the partnership, or if CC Ltd draws the profits but then pays them back to the partnership as a capital contribution, M could draw on those capital amounts without CC Ltd being subject to a s 455 charge.

The new tax charge (under s 464A) applies if there is a “tax avoidance arrangement” (i.e. broadly to avoid or reduce, or obtain relief from, a s 455 charge), and that arrangement results in a benefit being conferred (directly or indirectly) on an individual participator or associate. However, there is an exception from the 25% tax charge in s 464A if the benefit gives rise to a s 455 charge on the company, or if an income tax charge arises on the participator or associate.

Relief from a s 464A charge is claimable (under new s 464B) if a “return payment” is made to the company in respect of the benefit, for which no consideration is given. The relief must be claimed within 4 years from the end of the financial year in which the return payment is made. The new charge and relief both apply where the close company becomes a party to the arrangement on or after 20 March 2013.

Whilst this charge potentially affects (among other structures) partnerships comprising individuals and corporate partners, its scope is at least limited to tax avoidance arrangements. However, this is an “only or main purpose” test, and it may therefore be necessary for the close company to prove that there was no such avoidance motive.

‘Bed and breakfasting’

HMRC has also apparently been concerned for some time that the provisions allowing relief from the s 455 charge on the repayment of a loan (in s 458) were being exploited using a practice known as ‘bed and breakfasting’.

For example, the participator might repay a loan either before the end of the accounting period or within the following nine months, so that the s 455 charge is not due. The participator then withdraws a similar (or greater) amount from the company shortly thereafter. This practice was highlighted in HMRC’s Enquiry Manual (at EM8565) even before the anti-avoidance provisions, and also in the Company Taxation Manual (at CTM61615). At the time of writing, the latter guidance states:

“You may find that a participator’s indebtedness to the company is shown as reduced or eliminated immediately before the accounting date, or before the due date for payment of the [s 455] tax, only to be followed by a fresh loan or advance of the same or of a similar amount soon afterwards.”

“The temporary reduction in indebtedness is often brought about by the participator borrowing funds on a short-term basis from a third party such as a bank. But it may come from a transfer of assets to the company, or a transfer from another account with the company. You may come across other schemes for ‘bed and breakfasting’ the debt.”

Relief restrictions

A new s 464C denies (or withdraws) relief from a s 455 charge (which is given under s 458(2)), and also from the new charge under s 464A above (under s 464B(2)), broadly in two circumstances:

• A ’30 day rule’ – Where repayment(s) of £5,000 or more are made to the close company in respect of loans, advances, or benefits which have given rise to a charge (under s 455 or 464A), and further loans, advances or conferred benefits amounting to £5,000 or more are subsequently paid within a 30 day period.

• Amounts of £15,000 or more – Where loans, advances or benefits from the close company are outstanding amounting to at least £15,000, and at the time of a repayment there are arrangements, or there is an intention, for a subsequent loan, advance or benefit, and at any time after the repayment such a return payment is made. Note that this relief restriction is not subject to a 30 day time limit.

The effect of s 464C is that relief is denied (or withdrawn, if it has already been given) for an amount equal to the lower of the amount repaid to the company, and the amounts redrawn (in the first bullet point above) or the new amount withdrawn (in the second bullet point).

However, the above treatment does not apply in either of the above circumstances if the repayment gives rise to an income tax charge on the participator (or associate) in respect of the loan, advance or benefit. This exception is presumably intended to cover circumstances such as where a dividend has been paid to clear the amount outstanding to the company, and the participator is charged to income tax on the dividend).

The new provision applies to any repayments (for s 455 purposes) and return payments (for the purposes of new s 464A) made on or after 20 March 2013.

Conclusion

The HMRC technical note mentioned at the beginning of this article includes some illustrations of when the new anti-avoidance rules may apply (www.hmrc.gov.uk/budget2013/close-company-loans-loophole.pdf). The provisions are widely drawn. For example, the ’30 day’ test above does not require a tax avoidance motive, and therefore has the potential to catch ‘innocent’ loan repayments by participators unless, it seems, the repayment was of a kind (e.g. a bonus or dividend credited to the loan account) on which the participator (or associate) is liable to an income tax charge. Participators and their advisers will need to keep the anti-avoidance provisions in mind when dealing with close companies generally.

Mark McLaughlin CTA (Fellow) ATT TEP

Twitter: https://twitter.com/charteredtax

Linkedin: http://www.linkedin.com/pub/mark-mclaughlin/11/811/12

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Categories : HMRC

SAVE TIME, SAVE MONEY AND REDUCE RISK WITH DISCLOSURE CHECKLISTS

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Monday, June 3rd, 2013

Pentana have supplied industry leading Financial Disclosure Checklist technology via the Checker Software for over 20 years.

Now Bloomsbury Professional have teamed up with Pentana to offer you high-quality, digital, financial disclosure checklists at an industry-leading price.

Developed by dedicated industry experts, Bloomsbury Professional’s Disclosure Checklists are an easy-to-use, software-based alternative to paper checklists that will allow you to accurately complete complex assessments in faster and more cost-effective way.

How does it work?

Disclosure Checklists use an intelligent tailoring process that takes key information about the company you are reviewing and uses it to quickly determine exactly which disclosures are required.

This expert tailoring system filters out all of the irrelevant information for you, so you no longer need to waste valuable time assessing questions that are not applicable to the accounts you are reviewing. By presenting you with only the disclosures that are relevant to your clients, it is possible to include a broader set of standards in each checklist.

Checklists available from Bloomsbury Professional

All checklists are available on an annual subscription basis and are for 1-3 users:

• Companies (private companies applying UK GAAP) £150.00
• Limited Liability Partnerships £75.00
• Charities £75.00
• Higher and Further Education Institutions £75.00
• Registered Social Landlords £75.00

Save time, save money and reduce risk

Bloomsbury Professional’s Disclosure Checklists will help you to save time, save money and reduce risk.

Be assured that you are up to date and compliant

The checklists are updated throughout the year in line with changes to Companies Legislation and UK accounting standards, including FRS 102 (or ‘new UK GAAP’) and relevant Statements of Recommended Practice (SORPS).

No need to start from scratch each year

Each completed checklist can be revisited and updated the following year, saving time and allowing you to quickly build a clear picture of a client’s year-on-year performance.

Complete professional work in a faster more cost-effective way

The intelligent tailoring within each checklist allows employees below Partner level to confidently carry-outcomplex assessments, freeing partners’ time to complete more in-depth fee earning work.

Extra assurance that the disclosures made are correct for your client

Additional information is provided with each question helping you to understand exactly why a particular question is being asked. This makes Bloomsbury Professional Checklists an excellent training tool, as well as a practical day-to-day resource.

No need for lengthy review processes and sign-off meetings

Users can raise queries and add comments to the checklist to illustrate why specific answers have been given, providing partners with all the information they need to quickly complete the sign-off process.

Get rid of paper checklists forever! Go digital and make sure that completing disclosure checklists is no longer a repetitive and time-consuming drain on your resources.

Free trials coming soon at www.bloomsburytax.com

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Categories : Uncategorized

Is HMRC on the mend as staff morale turns corner?

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Thursday, May 30th, 2013

Improving morale important as it should lead to better service for taxpayers and accountants

Staff morale at HM Revenue & Customs (HMRC) is beginning to bounce back from recent rock-bottom levels*.

Our research says that HMRC staff surveyed in 2012 are increasingly positive about the organisation’s direction and management (see graph).

In particular:

21% of staff believe HMRC is ‘well-managed’, up from just 11% in 2009;

24% of staff believe that senior managers have a ‘clear vision’ for HMRC, up from just 15% in 2010;

23% of staff say they are ‘proud’ to work for HMRC, also up from just 15% in 2010.

Martin Casimir, Managing Director here at Bloomsbury Professional, says: “HMRC morale has been at record lows over the last few years, so it is encouraging to see that things are starting to turn a corner.”

“Staff morale is still low when compared to other major organisations, and HMRC is starting from a low base, but the momentum towards improvement is there. Staff are now happier with the organisation’s leadership and direction than they have been for a long time.”

Despite cuts to HMRC’s budget, HMRC staff are increasingly happy with their workloads. 62% of staff said their workload was acceptable in 2012, compared to 54% in 2010.

Martin Casimir says: “Staff happiness with workloads might suggest HMRC has been managing the effect of budget cuts on its staff better than expected. However, it’s important that heavier workloads do not mean a lower level of service for taxpayers. HMRC should make sure it finds ways to do more with less for its customers.”

Improvements in HMRC staff morale are important as they should lead to a better quality of service for taxpayers and accountants.

Martin Casimir says: “Hopefully, the internal signs of improvement will filter through into a better experience for the taxpayers and accountants that rely on an efficient and customer-focused HMRC.”

“Improved morale should also lead to better levels of staff retention and more experienced HMRC staff. One of businesses’ and accountants’ biggest complaints about HMRC recently has been its failure to adequately replace the experienced and knowledgeable staff that have left the organisation.”

Other findings from the HMRC staff surveys include: