23.11.2009
Latest on tax reliefs, HMRC new campaign, VAT updates, pensions changes in the Finance Act 2009 and some festive cheer.
Click on the links below to read more
Don’t get caught out by falling values – use the available tax reliefs
HMRC launches second campaign targeting tax evaders
Independent Schools – VAT concession does not apply
Return of 17.5% VAT standard rate
New VAT Rules and additional administration for International Services
Festive fun... a reason for cheer!
Don’t get caught out by falling values – use the available tax reliefs
Many families try to soften the impact of inheritance tax (IHT) through making lifetime gifts. If the donor survives for seven years from the date of the gift it will pass free of inheritance tax. However, if the donor fails to survive for the seven year period and the value of the gift exceeds the donor's available nil rate band, IHT at 40% is payable by the recipient.
The tax is calculated by reference to the value of the gift at the date of the gift. But what happens if that value has fallen? Fortunately, given the current economic climate, relief is available. The value on which tax is charged on the death is reduced by the amount the transferred property has fallen in value (subject to detailed rules concerning amendments to property).
The IHT legislation provides for relief similar to that relating to falls in value where stocks and shares are sold. There are some differences, however. For example, sales of land must be made within four years from the date of death (or three years if the death was before 15 March 1990). There are also certain situations where a sale is excluded from relief, for example, where the sale is made to someone beneficially entitled to the property.
HMRC launches second campaign targeting tax evaders
HMRC has followed Prime Minister Gordon Brown’s lead by posting a video on the social video-networking site, YouTube, to warn individuals and the self-employed businesses operating as sole traders or limited companies about the implications if they do not disclose their offshore bank accounts.
This is the second campaign HMRC has run in recent years to encourage individuals and businesses to reveal their holdings overseas. The first campaign ran in 2007 and raised £450m for the Treasury. HMRC has warned that anyone who receives investment and savings income from overseas needs to declare it on their tax return.
Paper disclosures can be made up until 31 January 2010; those who disclose electronically have until 12 March 2010 to get their affairs in order. Those who continue to avoid revealing their overseas bank accounts could face a fine of between 30% to 100% of the unpaid tax and likely prosecution.
New Building
Scott-Moncrieff’s Edinburgh Office has now successfully relocated to Exchange Place 3. The firm has taken three floors of Exchange Place 3, one of three new state-of-the-art buildings forming the Exchange Place complex off Semple Street.
To see a map and for further information please click here
The new address is
Exchange Place 3
Semple St,
Edinburgh EH3 8BL
Independent Schools – VAT concession does not apply
You may have heard about changes in VAT law that restrict the benefits of zero-rating new buildings for charities. Although these changes come into force in 2010, they do not affect all charities.
The Rules
The VAT legislation allows a charity to zero-rate the construction of a new building or approved alterations to be made to listed buildings, on condition that the building in question is used for relevant charitable purposes.
The term relevant charitable purpose is very specific and means that the building must be used by a charity for non-business purposes. In plain English, this includes the provision of free-of-charge goods or services or in some cases (eg the provision of welfare) significantly below market value.
HMRC have historically accepted that if at least 90% of a building is qualifying, the remaining 10% business use could be disregarded. HMRC have amended this concession, and announced that from 1 July 2010, qualifying use must exceed 95%.
In addition, charities that benefit from zero-rating from 1 July 2010 must monitor the use of the building for 10 years. If in any year, the building does not meet the 95% test, it will be required to pay HMRC an element of the VAT that was saved on the original costs.
Application to Independent Schools
Although this will affect a number of charities, it should not affect the majority of independent schools.
Although most independent schools enjoy charitable status, the provision of education (in return for a fee) is seen as a business activity for VAT purposes. We acknowledge that independent schools give bursaries and may have other non-business activities, however, in most cases this does not exceed the 90% VAT test under current rules.
In conclusion, although HMRC are restricting the availability of zero-rating for charities, this should not affect the independent schools. Indeed it is unlikely that they would have benefited from the existing rules in the first place.
That said, under different rules, zero rating is available for the construction of new residential accommodation – including student accommodation. With careful planning, the extent of zero rating can often be maximised.
Return of 17.5% VAT standard rate
Barring any last minute Government U-turn, the standard rate of VAT will return to 17.5% on 1st of January 2010. HMRC has added detailed guidance to their website and have attempted to answer a number of common questions and practical arrangements.
This information can be found at www.hmrc.gov.uk/VAT/forms-rates/rates/rates-rise-guidance.pdf
Specific guidance has been issued to the construction sector, solicitors, barristers, advocates, auctioneers, clubs and associations.
VAT registered bodies will have to pay close attention to tax points (when VAT is accounted for) especially on deposits, pre-payments and sales that span the VAT rate change as well as practical issues such as pricing changes, tills and accounting systems.
The increase in the VAT rate also provides an opportunity (for some) to reduce the cost of VAT on significant purchases. However, those who try to make savings must be aware of the anti-forestalling legislation which is aimed at abusive schemes that gain an unfair advantage!
Retailers that are open late on 31st December (eg pubs, restaurants and hotels) will be allowed to account for VAT at the lower rate until close of business on 1st of January (or 6 am on the 1st if they remain open throughout the whole night).
HMRC have stated that they will take a “light touch” approach to those affected by the change and they will not raise assessments for any errors made as a result of the change unless these lead to a significant loss to the Revenue.
New VAT Rules and additional administration for International Services
New VAT rules for determining the place of supply of services take effect on the 1st of January 2010.
The “basic rule” that applies to services including management, administrative and clerical services is changing.
At present these services are treated as being supplied wherever the supplier belongs. Under the new rules the “basic” place of supply will be:
• Where the recipient belongs - where the recipient is a business customer; or
• Where the supplier belongs - where the recipient is an individual.
Whilst this may be good news for some and could end the application of UK VAT to international management charges, it is anticipated that charities will suffer additional irrecoverable VAT where services are bought in from abroad.
Businesses involved in supply or receiving services from outside the UK must confirm their position.
From 1st January 2010 EC sales lists have to be completed where services are supplied to businesses in other EU member states. At present this is only required for suppliers of goods. The time limits for submitting EC sales lists have also been changed.
Businesses making or receiving supplies of international services will therefore need to ensure that they comply with this additional administration.
more VAT News
Pensions Tweak
The Finance Act 2009 contains tweaks to pension provisions that could benefit some individuals making irregular pension contributions. From April 2011, tax relief on pensions for individuals earning £150,000 or more will be tapered downwards, falling to 20% for those earning £180,000 plus.
Anti-forestalling provisions were introduced to prevent people paying unusually large sums into their pension funds this year. Originally the Government planned to impose a charge on (irregular) pension contributions over £20,000. However, under the Finance Act 2009, the limit has been raised to £30,000 (where individuals have made contributions totalling £30,000 or more on average over the last three years).
Festive fun... a reason for cheer!
Staff functions such as Christmas parties – or summer barbeques or other events during the year – are covered by a statutory exemption. To meet the necessary conditions, the function or functions must be available to employees generally or available to employees generally at one location, where the employer has more than one location
If the employer provides one annual function for employees, no charge to income tax arises if the cost of the event per head does not exceed £150. When doing the necessary sums, the total cost of the function should include VAT plus the cost of transport and/or overnight accommodation if provided to enable employees to attend. The total cost is divided by the total number of people attending, including non-employees such as partners or guests, in order to arrive at the final cost per head.
Note that the exemption figure of £150 is not an allowance. Therefore, functions that do not meet the specified requirements or whose cost exceeds the £150 per head threshold will result in an income tax liability arising. In other words, if an event costs £155 per head, the full sum will be taxable, not just the excess of £5 per head.
An employer can hold more than one function in any tax year as long as the combined cost per head does not exceed £150. Imagine that Generous Co holds a summer and Christmas dinner dance open to all its employees. The total cost of the summer party, including transport and accommodation, is £10,000. With 100 people attending, the cost per head is £100. The Christmas dance costs £8,000 and again 100 people attend, resulting in a cost per head of £80.
Unfortunately, because the combined cost per head for the two functions is £180, they cannot both qualify for the exemption. However, since the cost per head of each individual party does not exceed £150, either event can qualify for exemption on its own. Common sense indicates that because the summer party had the greater cost per head, this event should take advantage of the exemption. The £80 per head cost incurred by the Christmas dinner dance remains taxable. This would have to be disclosed on Form P11D or included within a PAYE Settlement Agreement.
