Annual Tax on Enveloped Dwellings (ATED)

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The Annual Tax on Enveloped Dwellings (ATED) is a tax payable by companies that own high value residential property (a ‘dwelling’). It came into effect from 1 April 2013 and will be payable each year.

The deadline for filing the return for any properties owned on 6 April 2013 is 1 October 2013.

You’ll need to complete an ATED Tax Return for your property if all of the following apply:

  • it’s a dwelling situated in the UK
  • it was valued at more than £2 million on 1 April 2012, or at acquisition if later
  • it’s owned, completely or partly, by a company.

There are reliefs available that could reduce the tax completely .

The amount of ATED is worked out using a banding system based on the value of your property.

Rate bands

Property Value

Annual Tax 2013-14

£2,000,001 to £5,000,000 £15,000
£5,000,001 to £10,000,000 £35,000
£10,000,001 to £20,000,000 £70,000
£20,000,001 and over £140,000

 

If you only own the dwelling for part of a year, or you change how you use the property so that it moves into or out of ATED, then ATED applies on a proportionate basis.

What is a dwelling

ATED applies to residential properties (‘dwellings’) that are physically located in the UK. A dwelling may be all or part of a residential or mixed-use property. Sometimes a dwelling is part of a larger, mixed-use property that has parts not used for residential purposes. Only the residential part would have ATED payable on it. The residential part will need to be valued to work out which ATED band it falls into.

Historic houses

If a company owns an historic house that’s open to the public or provides access to the dwelling as part of its services (for example, as a wedding venue) with the intention of being open for at least 28 days per annum it may be able to claim a relief that will reduce its ATED charge to nil. The company’s activities in the historic house must be commercial and with a profit-seeking motive, even if that profit doesn’t cover the full costs of the house.

Working farmhouses

If a company owns a farmhouse that carries on a trade of farming commercially and with a profit seeking motive it may be able to claim a relief that will reduce its ATED charge to nil.

To qualify for this the criteria will include that a ‘farm worker’ must occupy the property.

What valuation?

A valuation at 1 April 2012 will decide which ATED band the property will fall into for five years.

Take note, if HMRC challenge a valuation and find that it’s wrong, the person responsible for paying ATED may have to pay penalties as well as the increased ATED payable, plus interest for late payment.

What next?

If you have a valuable property owned in whole or in part by a company you need to review this tax provision now, as the deadline for reporting to HMRC is 1 October 2013.

 

Research and Development (R&D) Tax Credits – are you eligible?

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Research & Development (R & D) tax credits are the topic of an annual report by HMRC, with the statistics broken down across the small medium sized enterprise scheme and the large company scheme, further analysed between regions and industry sectors.

For this purpose, an SME is a company with fewer than 500 employees and either annual turnover not exceeding 100 million euros or balance sheet total not exceeding 86 million euros (this is a more generous definition, solely for R&D purposes).

By way of reminder, there are two rates of R&D tax credits:

  1. For Small and Medium Enterprises (SME), the SME scheme enables an enhanced deduction of 125% of qualifying expenditure (225% in total), and the ability to surrender losses in exchange for a repayable tax credit.
  2. The large company scheme enables an enhanced deduction of 30% (130% in total), or by election a credit of 10%, which may be payable in certain circumstances where there is no liability to offset. SME’s would need to access the large company scheme where working for large companies as subcontractors.

According to the HMRC report, a review of claims in 2009 found that the R&D tax credit had little impact on company decisions as to whether to carry out the R&D work.  However, the amount of R&D relief claimed is increasing, with the statistics showing an increase in the value of claims in 2011/12 of 20% for SME’s and 3% for large companies.  This may be due to larger companies having already sought advice on R&D, with smaller businesses looking to catch up.

For companies that are carrying out development work anyway, then the R&D review should form part of the end of year financial review – the enhanced deductions can save a considerable amount of tax.   Businesses should think about whether anything they do is innovative, or whether they are finding new approaches to achieve their objectives.  By its very nature, R&D cannot be closely defined and advice should be sought as to whether a company can qualify – the rules are more generous than most people think!

It is widely known that there is substantial qualifying expenditure that is still not being claimed, so to avoid being part of that group, or for more information and to see whether you could claim please contact Leanne Hathaway on leanne.h@ehltax.co.uk

Professional Negligence and Tax Planning?

Hossein Mehjoo v Harben Barker: Professional Negligence and Tax Planning?

The recently reported High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, as it regards specialist tax advice.

Some reports are saying that the High Court requires accountants to advise on complex tax avoidance schemes, but this is not quite how I interpret the decision. Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including preparing his first tax returns several years earlier.

The issue was whether the accountants had been negligent in failing to identify his non-domicile status and advise on the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs. Of course, in practice it can be difficult to confirm a domicile status.

In October 2004 the accountants advised on the CGT position on Mr Mehjoo selling his shares in a company. The firm did not appear to have considered the non-domicile status of their client or the impact this could have. The firm provided tax advice, but failed to offer planning only available to non-domiciled individuals.

The accountants argued that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was rejected by the High Court, in part due to the fact that they had provided such advice on a number of occasions without express instruction.

The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself. It seems that the lesson to be learnt by professional advisers is to know when a second opinion is needed.

If you do need a second opinion, Edward Hands and Lewis provide specialist tax support.

Basic principles of agreeing a settlement of tax enquiries

In 2007, HMRC published the litigation and settlement strategy (LSS), which was revised in July 2011 following some key cases.

The LSS sets out the principles and standards which HMRC should apply when settling disputes with taxpayers. The general principles include:

1. Each dispute should be settled on its own merit. There should be no trade-off between unrelated points and no package deals should be offered.
2. If a dispute arises from an all-or-nothing point, the settlement terms should be on all-or-nothing terms.
3. Tax, interest and penalties should be not be undercharged in order to reach a quick settlement.

In tax avoidance cases, if HMRC’s position is strong, HMRC should not settle for less than 100% of the tax and interest due.

HMRC is responsible for collecting and managing the public revenue and by adhering to this approach the aim is to act consistently.

If it is possible to reach a settlement then HMRC are open to resolving matters without resorting to litigation. In many cases this is the best possible outcome, particularly if all relevant factors (such as interest, penalties and consequential tax charges) are taken into consideration at the time.

For assistance with HMRC enquiries, please contact Leanne Hathaway, our in house Chartered Tax Adviser.

Edward Hands & Lewis have offices at Leicester, Loughborough and Market Harborough.

HMRC Enquiry Settlements: some flexibility is allowed

The High Court held that HMRC’s decision to reach a settlement with Goldman Sachs in relation to outstanding national insurance contributions (NICs) and interest thereon was not unlawful, as had been challenged through Judicial Review.

This is a welcome decision as, if the decision had been different, it would have set a precedent that could have impacted greatly on the scope to flexibly resolve outstanding tax enquiries with HMRC.

The point in question is whether HMRC had to charge interest on an amount of unpaid NICs later found to be due. HMRC deviated from the standard approach taken in reaching settlement.

The court found that the guidelines in HMRC’s own settlement strategy were not applicable because the situation was unique and was not contemplated in the strategy. Goldman Sachs had threatened to withdraw from the code of practice for banks if HMRC required it to pay interest on outstanding NICs due which was thought could give rise to embarrassment to the Chancellor of the Exchequer. The court found that HMRC would in any event have approved the settlement which involved waiving the interest. The court also found that HMRC was correct to consider its relationship with Goldman Sachs and its wider reputation when approving the settlement.

The court’s decision is not surprising as many expected that the judicial review application would be dismissed. However, it has caused a lot of embarrassment for HMRC with the court acknowledging that “the settlement with Goldman Sachs was not a glorious episode in the history of the Revenue”.

HMRC has since reviewed and strengthened its governance processes and the fact that the case was taken has led to a more cautious approach being taken by HMRC in discussing the scope of any settlements.

For assistance in negotiating HMRC settlements please contact Leanne Hathaway, our in house Chartered Tax Adviser. The above decision was reported on 16 May 2013.

Edward Hands & Lewis have offices at Leicester, Loughborough and Market Harborough.

GAAR: General Anti-Abuse Rule (Tax) – 17 July 2013

The general anti-abuse rule, or GAAR, came into force on 17 July 2013 as the Finance Act 2013 received Royal Assent. The GAAR applies to abusive tax arrangements that do not pass what has become known as ‘the double reasonableness test’ having regard to all the circumstances, including the principles on which the legislation was based and whether the planning was intended to exploit any shortcomings.

There is a clear message for individuals considering schemes that seek to generate more in tax refunds than the original investment, and HMRC may well challenge these.

The message for businesses, however, is less clear as the complexity of business transactions and our existing law will produce an element of uncertainty. Tax is often only one factor when determining how to structure business affairs and this makes a reasonableness test difficult to apply.

Businesses and their advisers will need to assess whether planning is reasonable in the context of the legislation and their own particular commercial position. The GAAR guidance should help define what is, and what is not, acceptable.

HMRC and the independent GAAR advisory panel will need to continue to provide guidance on where the GAAR applies and where it does not. It is not envisaged that the GAAR will impact on everyday simple tax planning, but is directed at aggressive structures. However, care needs to be taken to review on a case by case basis and those advising on or deciding a case may need to refer not just to the legislation but to explanatory notes, ministerial statements and other evidence.

For independent tax advice or a second opinion please contact Leanne Hathaway at Edward Hands and Lewis.

Tax Avoidance Scheme Promoters: Government Closes In

Users of failed tax avoidance schemes will face penalties, and government will clamp down on high-risk promoters under proposals put forward in a newly launched consultation (see the Government announcement here this week – https://www.gov.uk/government/news/government-closes-in-on-high-risk-tax-avoidance-scheme-promoters

This consultation will focus on two main issues:

i) tackling the behaviour of high-risk promoters of avoidance schemes, and

ii) penalties for users of failed avoidance schemes.

It is reported that there are 20 or so firms who develop and promote aggressive tax avoidance schemes nationally and the Consultation aims to seek feedback on whether naming “high-risk promoters” publicly will distinguish them from mainstream tax advisers, and ensure that their clients know who they are dealing with.

There are some clear challenges with this approach; not least who will be deciding who is considered to be “High Risk” enough to be publicly named and shamed, and it is hoped that this would not be taken lightly as there are many tax advisers who offer tax planning that does not border on illegality and whose business could be greatly impacted by being named.

Know who you are dealing with

It can be difficult to know who to trust as, unlike with Solicitors, “Tax Adviser” is not a restricted term. There are, however, a few simple steps you can take to help decide whether you are comfortable with your tax adviser:

1. The Chartered Institute of Tax and the Chartered Tax Adviser (CTA) qualifications show that your adviser has strong tax knowledge and has committed to working within professional guidelines.
2. The Solicitors Regulator Authority (SRA) further regulates those firms that are registered as Solicitors.
3. Meet your adviser at their premises if possible.
4. Ask for confirmation of indemnity insurance being in place.
5. Ask whether any tax advice is subject to the DoTAS regime (this is the requirement for certain tax planning to be separately notified to HMRC)
6. Check whether any tax planning has a “smoke and mirrors” element to it – tax planning should not be reliant on no-one ever finding out about it.

If you want a second opinion on any planning you have been presented with, our Chartered Tax Advisers at Edward Hands and Lewis offer this as a standalone service.

Hossein Mehjoo v Harben Barker: Professional Negligence and Tax Planning?

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Photo Credit: kenteegardin via Compfight cc 

The recently reported High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, as it regards specialist tax advice.  Some reports are saying that the High Court requires accountants to advise on complex tax avoidance schemes, but this is not quite how I interpret the decision.


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