Keen not to miss the boat, HMRC also adopted a similar strategy to segmenting its ‘customers’ and the ‘service grade’ it provides when it originally launched the Affluent Compliance Team. This was set up in 2010 to carefully scrutinise the financial affairs of the wealthiest taxpayers in the UK and has recently been expanded as we will discuss.

According to HMRC, this division, dedicated to ensuring ‘the better off play by the rules’, has appointed a further 100 Inspectors as its work expands. The cost of these additional Inspectors has been covered by an extra £5million in Government funding and HMRC expects to generate an extra £75m a year through its activities. Although no-one wants to be the subject of an HMRC enquiry, from our experience the Affluent Compliance Team does provide a ‘platinum grade service’ so falling into their remit is not necessarily a bad thing.

This is because its general staffing level is of a higher grade than in other offices, as one would expect given the much higher tax which is being collected from those individuals. When announcing the recruitment drive, HMRC outlined the person specifications for the roles it was filing as having “…external experience and appropriate qualifications for Inspector and lead case director roles. We want people with recent commercial and corporate experience in personal tax to help us understand our customer base. This is an exciting opportunity to work at the forefront, tackling those who do not pay the right tax.”

However, regardless of whether they provide a better service or not, no-one wants to be the target of an enquiry as a result of HMRC broadening its ‘wealth’ eligibility criteria. Originally, the Affluent Team’s focus was taxpayers with an annual income of more than £150,000 and ‘wealth’ of between £2.5 million and £20 million. This has been decreased and will now cover those with ‘wealth’ valued at between £1 million to £2.5 million and earning £150,000.  HMRC’s High Net Worth Unit will continue to serve those with a wealth in excess of £20 million.

What exactly does HMRC mean by wealth we wonder? They have suggested that originally they were interested in the affairs of roughly 300,000 people, which after broadening the criteria of the Affluent Unit has extended to a further 500,000 people.

Our advice is to be aware of this new taskforce and ensure your tax affairs do not look irregular. The Affluent Unit has said they are specifically on the look out for people who meet their income/asset criteria and who also:

• Employ aggressive tax planning strategies and habitually use tax avoidance schemes;
• Have a low effective Rate of Tax across their (large) total income;
• Use bank accounts in Switzerland which they may not be declaring;
• Are late to file their Self Assessment Tax returns;
• Employ strategies to avoid or evade Stamp Duty (SDLT) on property purchases;
• Have UK and overseas property interests.

As we mentioned last month, HMRC now has international agreements in place with all tax efficient jurisdictions whereby it has free access to bank statements and financial information relating to offshore accounts.

Where HMRC is able to obtain detailed bank statements from individuals, undeclared overseas property income can be traced for instance by  looking for patterns showing air travel costs to the same location, local transactions at supermarkets or cash being withdrawn from ATMs and evidence showing local bank accounts are being used to hold, for example, undeclared rental income.

Inspectors working in these units are highly competent and will quickly amass a detailed enough knowledge to spot suspicious patterns of behaviour. As a result, discrepancies are more likely to be identified and result in an investigation.

In all such situations, our advice to clients is to be as transparent as possible and, if necessary,  to take advantage of an opportunity to make a disclosure using the various Facilities available. This means any penalties charged will be fixed and a criminal prosecution can be avoided. For instance, if your concerns relate to overseas income, the Lichtenstein Disclosure Agreement may be relevant and for other tax underpayments or past fraudulent activities, there is the Contractual Disclosure Facility.

If you have concerns or questions relating to making a voluntary disclosure about tax underpayment, it is important to see professional advice beforehand. For further information, please contact Lesley Stalker by emailing las@rjp.co.uk

RJP is very proud to be one of the sponsors, supporting 6 teams of rowers including Sally Whittle who is from Kingston. Sally and her partner Charlene Ayres are the only women’s pair participating in what is described by race organisers as the ‘toughest rowing race in the world’ – we can quite believe it! Other local people competing in GB Row are David Hosking, MBE from Wimbledon and Stuart Chamberlayne from Coulsdon in Surrey.

During June, we will be following the progress made by the GB Rowers who together, have to cover over 2000 miles around the coast of Britain. They will be navigating some of the most dangerous tides on the planet, crossing the world’s busiest shipping lanes and battling against the unpredictable summer weather. Experts have told us that the fast turning tides the rowers will encounter make this a greater test of endurance and skill than trans-ocean rowing. Once the race has started, rowers will have no contact with the shore or support vessels. Every challenge has to be dealt with using the materials and skills each team brings on board at the start.

On 1^st of June 2013, the boats will be leaving Tower Bridge and competing in crews of 2, 4, and 6 people during the race. The prize they are hoping to win is £100,000, which will be awarded to the first crew to beat the existing world record of 26 days, 21 hours and 14 minutes, set in 2005. It is the biggest prize offered for a rowing event anywhere in the world.

The reason RJP decided to support GB Row is because we believe this challenge has many parallels with the challenges our clients face when growing successful businesses. GB Row is all about supporting ordinary people to do extraordinary things and that’s very similar to what we help our clients as entrepreneurs to achieve.

We also like the fact that this race isn’t elitist and anyone with enough vision can take part in the challenge. That’s exactly what business people do every day. Many come from very ordinary backgrounds, they believe in what they can achieve and succeed as a result. We know the brave people who are taking part in GB Row will do the same. Good luck to everyone.

Over the coming weeks we will have a direct feed showing the race’s progress on our website and we’ll be tweeting updates so follow @taxtalkrjp for more information.

Last year this issue hit the headlines when BBC personalities, for example Fiona Bruce and Jeremy Paxman, plus senior civil servants and other high-ranking public sector workers were found to be using personal service companies to reduce their tax liabilities, although arguably they were effectively employees who bore none of the risks of being self employed.

The Government has been threatening to review IR35 legislation for a long time, and at the start of April 2013, took its first steps towards tightening up the rules. This latest change will have an immediate impact on clients who are officers of a company, and provide their services through that company as for example, executive or non executive directors.

When does IR35 apply?

To establish whether IR35 applies, HMRC looks at the nature of the relationship between the worker and engager. Where the relationship could be considered employment, were it not for the involvement of the intermediary entity, then IR35 legislation usually applies. Where IR35 legislation does apply, any income received by the intermediary (company) is regarded as employment income and subject to income tax at the relevant rates. For higher rate taxpayers this is now 45%.

How has IR35 been extended?

In April 2013, existing IR35 legislation was extended, making it applicable to company office holders such as non-executive directors when they are engaged through a third party intermediary such as a private service company (PSC).

This extension effectively applies in any case where, if it were not for the presence of the intermediary, the services provided by the office holder could be regarded as employment. By extending the legislation, HMRC now has the power to invoke IR35 rules and recover taxes it considers to be outstanding from office holders where previously they would not have been liable to pay income tax on their earnings under PAYE.

Our advice to clients who hold positions on the board of different companies and are paid through a limited company, is to contact us to discuss how to manage the tax implications. For more information email Lesley Stalker at las@rjp.co.uk.

Under the terms of these automatic information-sharing arrangements, all the countries involved agree to provide greater levels of information about bank accounts held by taxpayers in UK related jurisdictions. The level of information to be exchanged is detailed and will include names, addresses, dates of birth, account numbers and account balances. It will also include trust fund information and details of payments made into or from accounts or trusts. Back in the UK, in order to validate the accuracy of what is shared, HMRC has a team of specialist investigators working in its Offshore Co-ordination Unit whose job is to review this information and compare it with existing records held, which will for example include tax returns submitted.

In most cases, if HMRC identifies a discrepancy, the taxpayer will have the chance to make a disclosure before a full investigation is launched. If this happens, HMRC will follow the Contractual Disclosure Facility investigation process. This means that if there is a tax underpayment, you could be liable to pay up to 200% of the tax liability arising. You may also lose the right to anonymity – we have all seen HMRC’s lists of its ‘most wanted’ taxpayers publicised in the media.

It is clear that the Government intends to continue its efforts to reduce tax avoidance and identify every possible opportunity to secure additional revenues for the Treasury, in order to reduce the Budget deficit. Our advice to clients with offshore accounts is to ensure they have declared all income generated. If they have not already done this, then they should take full advantage of the potential to make a voluntary disclosure to HMRC. Making a voluntary disclosure of tax underpaid will ensure you do not face excessive penalties for tax evasion. It can also reduce the threat of a full investigation being launched, together with the potential for a criminal prosecution. When making a voluntary disclosure, you can expect to pay a fixed penalty of up to 20% of unpaid tax in addition to the amount of underpaid tax that is outstanding, and the interest arising on that underpaid tax.

If you think you may have under-declared your income and owe additional tax to HMRC, please contact us. We can advise you on the best way to make a voluntary disclosure and help you to get your tax affairs in order. Contact Lesley Stalker by emailing las@rjp.co.uk.

It is common for LLPs to have a ‘secondary’ band of partners, usually known as salaried partners. These partners will typically receive a salary and may perhaps be allocated a small share of business profits, they are usually treated as self employed and HMRC have not generally challenged this status. Now however, in line with HMRC’s strategy to close as many ‘loopholes’ of (what it regards as) tax avoidance as possible, there are some important changes to be aware of.

As announced in the Budget, HMRC have begun a consultation process which is considering treating secondary partners as employees. They are particularly interested in targeting salaried partners whose main financial compensation is not dependent on business results and who do not bear the risks that main partners within an LLP do. Whilst this consultation is ongoing and we do not know what the implications will be, any additional tax charges that HMRC deems to be due in relation to secondary partners are expected to come into effect on 6^th April 2014.

Tax planning advantages of corporate partners within LLPs

An LLP is a flexible structure but not necessarily the most tax efficient. As a result, since the introduction of the 50% rate (now reduced to 45%) for individuals earning over £150,000, the introduction of corporate partners has been a tax planning strategy in widespread use. The benefit of introducing a limited company as a partner to an LLP is that it enables a percentage of the profits of the LLP to be allocated to the corporate partner at the lower rates of corporation tax. The shareholders of the corporate partner will usually be the other members of the LLP, and this provides them with flexibility to extract profits from the limited company tax efficiently.

This strategy offers clear advantages for reducing tax liabilities, and HMRC are now looking closely at these arrangements, specifically with regard to Hedge Fund planning. We will have to wait until the end of their consultation process to find out exactly what changes will be implemented and whether these will have an impact on general trading LLPs. However in the meantime, HMRC have introduced new rules governing loans made within corporate partnership structures and these have an immediate impact on general trading LLPs. It is therefore important to be aware of these changes, so that you do not inadvertently create an unexpected (and potentially large) tax charge.

New rules governing loans made by corporate LLP partners

Where a member of an LLP is also a shareholder of the corporate member, and where that corporate member then loans funds to the LLP or its members, a 25% corporation tax charge arises on the company, which can only be reclaimed once the loan has been repaid. With effect from March 2013, this applies even where the loan is made on a commercial basis – a tougher stance on this practice since commercial loans were not previously targeted by HMRC. The charge is also extended to cover any contributions or benefits made by a corporate member to an LLP.

In the future therefore, in addition to avoiding such loans, it will also be important to ensure that corporate partner profit shares are paid by the LLP to the corporate partner when it becomes entitled to them rather than waiting, in order to avoid the outstanding profit share potentially being treated as a loan. Overdrawn partners’ loan accounts, which relate to individual members of LLPs who are also shareholders of corporate members, may also be caught by these new rules.

Our advice to clients who operate a business as an LLP and where that LLP has a corporate member is to discuss this situation with us directly to ensure they are not exposed to additional tax liabilities. For more information on tax planning for LLPs, please contact Lesley Stalker by emailing las@rjp.co.uk.

When making tax planning decisions there are many factors to consider, not least of which is the long term consequence of a particular action. Today’s tax policies may have changed in two or three years’ time and reversing a decision can be costly. In some instances, flexibility can be the most important consideration for a business, even if it means paying slightly higher taxes; this issue often lies at the heart of deciding which business structure to adopt.

In this blog we examine the pros and cons of two structural options for business owners requiring limited liability; we look at the commercial flexibility of limited liability partnerships (LLPs) compared with the tax advantages of limited companies.

LLPs have been available for over a decade now and are particularly popular as a legal entity for professional service firms such as solicitors, accountants and quantity surveyors. This is broadly because of the commercial flexibility they offer to owners.

However, whilst LLPs offer greater flexibility than limited companies in a number of ways, they tend to be less tax efficient. But in spite of this, they remain the entity of choice for professional service firms.

One reason for this preference stems from the traditional hierarchy found within these kinds of firms with the most senior individuals being appointed partners often creating a high level of fluidity at the top, with partners moving around within their industry to different firms as they progress through their careers and specialisations.

Having access to the informality and flexibility offered by an LLP, whereby partners can be appointed and leave with no capital changing hands, and no tax implications arising despite entitlement to a profit share, is often a very attractive and compelling reason for adopting LLP structure, even though it is less tax efficient.  LLPs are also considerably more flexible than limited companies in the way profits can be allocated between partners year on year.

Limited company structure on the other hand, offers the flexibility to shelter profits from the highest rates of income tax, which can have significant tax savings. It does also however create a tax environment whereby incoming shareholders must either pay market value for the shares they acquire, or  income tax on that market value. In addition to attracting a tax liability therefore, changes in shareholders can also mean entering into often lengthy negotiations with HM Revenue & Customs in order to reach agreement over the market value of the shares.

Whilst these are the obvious reasons why professional partnerships often prefer to use LLP rather than limited company structures, it is not the whole story, because of course the issues outlined do not apply to all professional partnerships. It may simply be the case that LLPs are the accepted trading structure for the industries concerned, and as a result, business owners often do not consider the tax advantages associated with transferring their business into a limited company. Perhaps now is a good time to consider them!

In summary: pros and cons of LLPs vs Limited Companies

Key considerations when forming a limited company

• Corporation tax is payable on all profits. At 20% – 23% this is considerably lower than the top rates of income tax and NICs, and can be useful for maximising profits to be used for business cashflow;
• Shareholders may take dividends on company profits and to the extent these fall within their basic rate band, they do not attract any additional income tax;
• Dividends can be voted at different rates on different classes of shares;
• The shareholders’ agreement can cover the position on an employee shareholder leaving the company;
• Incoming shareholders are required to pay market value for the shares they acquire, or to pay income tax on that value;
• Limited companies can be dissolved and it may be possible to utilise disincorporation relief and avoid incurring further taxes.
• On transferring the business of an LLP into a limited company, the market value of that business provides an opportunity for large tax savings using entrepreneurs’ relief.

Key considerations when forming an LLP

• Income tax plus national insurance contributions are payable by partners on their share of profits as they arise. The highest rate of income tax is currently 45%;
• All profits are charged to tax in this way regardless of whether they are distributed or retained within the LLP;
• Partners profits are not subject to employers’ national insurance contributions;
• Partners’ share of any trading losses can be offset against their other income up to a maximum value of £50,000;
• LLPs offer flexibility to alter partners’ profit sharing ratios and to introduce/remove partners.

The choice of whether to trade as a limited company or an LLP is specific to the particular circumstances of each case and should be carefully evaluated. Making a carefully evaluated decision can have significant tax benefits; but tax benefits should not be regarded as the most important factor. For professional services firms especially, flexibility can be key.

For more information on setting up a new legal entity for your business and the potential tax implications, please contact Lesley Stalker by emailing las@rjp.co.uk.

However, for some businesses incorporation does not work out to be a beneficial option. For instance, many small businesses incorporated in order to save tax in the mid-2000s, following the introduction of the zero per cent rate of corporation tax in 2002-03, only to find the zero rate was then abolished because, as the then Government found, companies were taking advantage of the tax saving opportunities! Those company owners may subsequently have wished to disincorporate their business, only to find it was a very difficult procedure, fraught with tax charges. As a result, they may find their business is ‘trapped’ within a corporate structure.

Another reason for wanting to disincorporate may be to avoid the additional administrative and regulatory requirements of being a limited company, especially if profits are decreasing and the tax benefits offered by sheltering profits within a company are no longer so beneficial. In addition, for business owners who are not used to maintaining a clear distinction between their business finances and personal cash, financial administration can be simpler outside a company and for this reason they may find it easier to operate outside the legal structure of a company entity.

Historically, disincorporating a company has attracted tax charges, because the valuable reliefs which are available when you incorporate a business have not been available where you disincorporate it. Therefore it could be a costly exercise for a limited company to reverse its decision to incorporate. Now, following a detailed consultation process, and with effect from 1 April 2013 for a period of 5 years, a new ‘disincorporation relief’ has been introduced by the Government.

This new tax relief has been designed to help avoid the tax charges incurred by companies who want to change their status into a non-corporate structure; for example sole trader or partnership. The relief applies only to companies which have assets with a value of less than £100,000 – estimates from the Treasury suggest this is approximately 40% of all companies registered in the UK.

There are certain qualifying conditions which must be met to take advantage of this new disincorporation tax relief. These are complex and a detailed discussion of the qualifying criteria is beyond the scope of this blog. Instead, we have summarised what is most significant for business owners to be aware of. If you are interested in the possibility of disincorporating your company, these conditions will apply and it will be worth having a more detailed discussion with us to see if the use of this option might be applicable to your own circumstances.

Criteria to qualify for disincorporation relief

Below is a simplified summary of the main eligibility criteria:

• The company must have been operational for 12 months;
• An incorporated business must transfer some/all of the trading business to the existing company shareholders as a going concern;
• The transfer must become effective within 5 years of March 31^st 2013;
• All assets (including goodwill, capital assets, trading stock and cash), must be included in the transfer and the value of the assets must be no greater than £100,000;
• Recipients of the new ‘disincorporated’ entity must either be individuals or partnership members; they cannot be members of an LLP.
• All shareholders must have owned their shares for at least 12 months before the transfer is made (so an incorporated business cannot be less than 12 months old before being eligible for disincorporation relief).

If you are interested in considering disincorporation as an option please contact Lesley Stalker by emailing las@rjp.co.uk.

Also aimed at property owners, more recently, on March 5th 2013, HMRC unveiled its Property Sales Campaign (PSC). This is aimed at taxpayers who have sold or disposed of second properties either in the UK or abroad and not reported their tax liabilities to HMRC properly. If these circumstances apply to you, the PSC then requires you to disclose any other undisclosed income or gains. This can either relate to the property which is the subject of the disclosure or it can relate to entirely separate business interests.

Operating as an Amnesty in the same way as previous initiatives, any taxpayers who are affected by the PSC have been given until August 9th 2013 to notify HMRC of their intention to participate. They then have until September 6th to make a full disclosure and pay any tax due.

Not all property owners will be eligible to use this facility. The PSC is restricted to property owned by an individual. Companies, partnerships and trusts cannot use the disclosure facility; neither can individuals who are in the business of property development.

If you think you might need to take advantage of the PSC to rectify any omitted property transactions you have the added benefit of being able to set your own penalty charges (subject of course to HMRC review) and the potential to pay any outstanding tax via installment arrangements.

• No penalty payable for genuine mistakes (for this to apply you would need to be able to demonstrate that you took reasonable care in dealing with your tax affairs)
• Careless reporting will attract a 30% penalty on the total amount of tax outstanding
• Deliberate tax evasion will attract the maximum penalty level of 100% of tax outstanding and in the case of assets and income from overseas property this increases to 200%.

To understand whether this campaign might apply to your own circumstances, it is worth seeking specialist advice. If these circumstances apply to you there is still the opportunity to take advantage of the Liechtenstein Disclosure Facility instead of the PSC, but this is likely to apply to a minority with very complex affairs or where there are large amounts of tax at stake.

To find out more about using HMRC’s PSC disclosure facility please contact Anne Eager by emailing ae@rjp.co.uk.

These new proposals effectively require an employee to relinquish some of their employment rights and adopt a new ‘employee shareholder’ employment status. They are then able to acquire shares in their employing company through the adoption of this status. These shares will in turn attract new tax reliefs which will ensure that shares acquired up to a value of £2,000 will not attract tax and national insurance contributions when they are acquired, and sale proceeds received of up to £50,000 from eventually selling the shares will not be charged to capital gains tax.

It is proposed that under the terms of their alternative contracts, employees will forfeit the right to claim unfair dismissal and will not be eligible for redundancy pay; they will also lose the right to request flexible working hours and to have any time off for training (unless at the employer’s discretion). A further contractual change is the requirement to provide employers with 16 weeks’ notice (compared with the usual 2 months) and new mothers will need to give their employer a fixed date of return from maternity leave.

These proposals are intended to come into effect from 1 September 2013, but may not fully come to fruition if they are considered to be in contravention of employment legislation; it will be interesting to watch how the employment arguments unfold in the next few months.

It is clear that in designing this policy the Government is looking for ways to help entrepreneurs and small company owners by making it easier for them to recruit talented people without the fear of onerous employment restrictions, whilst also inspiring them to succeed. The economy continues to be depressed in many sectors, yet the challenging market conditions mean most company owners say they have never been so busy. This new way of offering employment contracts will offer a flexible and less risky way to expand a workforce, if it is allowed to proceed in its proposed format.

Giving shares to employees still needs careful consideration however, because making employees shareholders of course has its own issues, and if you already operate an EMI (enterprise management incentive) share option scheme, this may be something you can offer as an added incentive.

What makes this proposal particularly interesting is the way it seeks to address a particular problem for business owners; the increasing litigation culture.  In our view this new policy, if allowed to progress, will offer a good way to help business owners reduce some of the risks of employing staff in return for offering their employees more involvement in the company. It should be a way for smaller company owners in particular to become a more attractive employment proposition, helping them to recruit the best talent for their growing businesses.

If you are interested in discussing the tax implications of offering the new employee shareholder contracts to your employees from September 2013, please contact Lesley Stalker by emailing las@rjp.co.uk.

Much of what was covered in the Chancellor’s speech today was already announced in the Autumn Statement, but we still managed to have a few additional surprises.

For instance, we weren’t expecting the news that new capital gains tax (CGT) breaks were being introduced for companies who ‘sell their businesses back to employees’. Maybe the Chancellor wasn’t planning this one either, because the detail around what this actually means hasn’t been announced yet. Apart from the initial headline, there’s no mention of it in HMRC’s notes. We will have to look out for the update and report back then. Perhaps it’s a way for the Government to encourage serial entrepreneurialism? By helping entrepreneurs to go ahead and develop new ventures based on visionary ideas, and then sell them to the employees that helped bring them to life, leaving them free to work on their next start up idea? It’s a very sustainable approach to promoting entrepreneurialism.

There was also a fleeting reference made to tax and NI benefits for employee share schemes; these already exist but the suggestion was there would be (favourable) changes. Again there is no further detail available at the moment, so watch this space!

What else was interesting in this Budget? We have known the Coalition Government was planning to raise the personal allowance threshold to £10,000 since their inception. Now, we hear that the date this will come into effect is being brought forward by a year to April 2014. It sounds like good news for the masses but in reality, it’s just a bit of mathematical massaging for the majority of tax payers.  Whilst the increase in personal allowance is the headline news, there is no mention made of the decrease in basic rate threshold that has been made. The effect of this is that most basic rate taxpayers are unlikely to notice any difference in their tax liability. For an unfortunate few there is even the possibility that they could be worse off (if their income is near the top end of the basic rate threshold).

The government also announced an ‘Employment Allowance’ of £2,000 per year for all businesses to offset against their employers’ NI liability.  The allowance will be claimed as part of the normal payroll process through RTI and comes into effect from 2014. Exact details will be formulated after a Government consultation, with full legislation coming later in the year – probably in the next Autumn Statement.

Finally, for companies targeting the public sector, the Government has pledged to increase by five fold, the proportion of procurement budgets spent with small businesses through the ‘Small Business Research Initiative’. This is a measure we shall have to monitor carefully. Is it a way of supporting businesses who are genuinely providing public sector support? Or a way of helping public sector workers cushion an inevitable move into the private sector (to avoid being unemployed)? In other words, will this be a way to help them become successful with any new ventures, taking the pressure off government departments in the wake of continued spending cuts? Especially since the government has such a big a vested interest in making this work. Just as with the announcement about apparent additional tax reliefs for employee share schemes, we shall have to wait and see.

Lesley Stalker is Head of Tax at business tax specialists, RJP

www.rjp.co.uk