Reclaiming tax on small pension commutations

If you want to cash in a small pension, or several small pensions of up to £17,500 in value during the tax year to 5 April 2010, you may find that too much tax is taken off the lump sum you get.

I will explain how this happens, and what you need to do to reclaim the excess tax.

Cashing in your small pension fund

If you are aged between 60 and under 75 and you have a small pension fund or multiple small funds which you want to cash in. By ‘small’ we mean under £17,500 in total – this is 1% of your lifetime allowance in the 2009/10 tax year, and will increase in subsequent years in line with the lifetime allowance (£ £1.8 million for each year from 2010/11 until 2015/16). The process of cashing in the benefits from a small pension, or a number of small pensions within the £17,500 limit, is known technically as ‘trivial commutation’. It is important to understand that for this to apply - your pension funds from ALL schemes when added together must not exceed the £17,500 limit.

Not all pension scheme providers allow trivial commutation so if you want to take advantage of the new rules you need to contact your insurance company and find out their policy on this.

If you cash in a small pension fund or funds, the first 25% of the lump sum will be tax free, but the remainder will be taxed under PAYE just like wages or pensions are at present. You will have up to 12 months from the date you cash in the first pension to commute up to the £17,500 limit. Bear in mind though that if you are already in receipt of pension income from other schemes, the crystallised pension rights from these schemes will be taken into account when working out whether you will have exceeded the limit.

How to reclaim tax

This is how you should go about claiming a tax repayment if you do cash in a small policy and you think that the tax taken off may be excessive.

When you cash in your policy, your insurance company will send you a form P45. This is the same form as you get when you leave a job. The form shows the amount of the taxable lump sum payment and the PAYE tax taken off.

If you are already receiving a pension from that particular insurance company, they will use your existing code number when they work out the tax due. But if you have not yet started to receive a pension, the company will have to use what is called an emergency code number. This makes it more likely you will have paid too much tax on the lump sum.

Normally HMRC will check your tax position at the end of the tax year and make any repayment due to you then, but if you think you have definitely paid too much tax you can claim an immediate repayment instead of waiting until after 5 April. See below if you complete self assessment tax returns.

If you have any problems getting HMRC to make an in-year repayment I suggest you might quote their own revised manual page to them. The page is PAYE 91045 - taxpayer end of year: taxpayer overpayments: in-year repayments and trivial commutation payments.

To make your claim, you will need to call your HMRC Contact Centre (the phone number will be on your notice of coding or any other correspondence you have had with HMRC) and ask them for a form P53 to complete. If you have had no contact with HMRC in the past you can find phone numbers here or alternatively, in the BT phone book under HM Revenue & Customs (Inland Revenue in older editions). If you are using any other phone company you can still get details from the Yellow Pages under Government Offices.

It is important to note that form P53 can only be issued by your tax office and not by download from the HMRC website or via the Orderline.

You may find that your insurance company will write to you setting out most of the above points when they send you your form P45, but in case they do not, it is worth knowing that you may end up overpaying tax and how to go about reclaiming it.

Self assessment taxpayers - claiming an in-year repayment

For self assessment taxpayers - the option to claim an in-year repayment is available from 6 April 2009.

The form P45 you receive (see above), will ask you to use form P50 to claim a repayment. This form however, will not be appropriate when an in-year payment is requested because you may not be able to sign the relevant declaration. HMRC may want to establish why you think that a repayment is due and in order to do so they will want you instead to complete form P53. This will then provide your tax office with details of your other income. The form can be used either:

To provide estimated details of income, during the year, for early repayment or;

After the end of the year, to check details previously provided. The form is only issued after the end of the year if one has already been issued in year

You can use form P53 despite the fact that the information you give will be estimated for in-year repayments. In any event, HMRC will check the position again after the end of the tax year. You should sign the declaration on the form, and return it along with forms P45 Parts 2 and 3, which are required before any repayment can be made.

You will need to return the form P53 to your main PAYE tax office which is not necessarily the office where your pension/annuity reference is held.

If you are non-resident HMRC will not issue a form P53 as this does not contain enough information to enable them to deal with your claim. You should instead contact CAR - Residency on 0845 070 0040 (or from outside the UK (44) 151 210 2222).

Examples

To illustrate the above I have adapted two articles from HMRC manuals to explain how the new rules work. Trivial commutation is a complicated issue so I have tried to set out each stage of the process for you to look at step by step:

Example 1 – Payment of a trivial commutation lump sum

Kim has uncrystallised (i.e. not cashed in) benefits held under three registered pension schemes A, B and C where each scheme is made up of three arrangements or policy segments (e.g. A1, A2, A3)). The total policies are worth £3,000, £2,500 and £4,000 respectively and Kim’s pension rights are therefore valued at £9,500.

She has no other benefits and is not in receipt of any pension in payment. She also has 100% of her lifetime allowance available - this is £1.75 million for 2009/10 (£1.8 million for the years 2010/11 until 2015/16).

She is aged 62 in the 2010/11 tax year. The rules of all three of her pension schemes allow the commutation of trivial pensions. She has the option of commuting her benefits, as her total pension rights are less than the commutation limit for that tax year (1% of £1.80 million, which is £18,000).

Kim wants to commute her benefits as soon as possible in the 2011 calendar year.

To do this her pension benefits must be valued within a 3 month period ending on the date the first trivial commutation lump sum is paid. The date this first payment is made will be the first day of the 12-month commutation period.

She must draw any further trivial commutation lump from her remaining registered pension schemes before this period ends.

Kim’s pension rights are valued on 1 January 2011. The valuation comes to £9,500. To be a valid valuation, the first trivial commutation lump sum payment must be paid before 1 April 2011 (within 3 months of the valuation).

She does not have to take her benefits as a trivial commutation lump sum from each scheme. She may choose to take her benefits under one or two of the schemes and not the other(s). But it must be an all or nothing decision in relation to each scheme, i.e. all the arrangements in a scheme must be paid as a trivial commutation lump sum, or none of them.

Kim decides to draw all her benefits under scheme A and B as a trivial commutation lump sum. The benefits under scheme A are paid out as a trivial commutation lump sum on 2 February 2011. Her commutation period starts from that date and runs to 1 February 2012.

Any payment from scheme B must therefore be paid by that later date, and that payment must represent all her rights under arrangements B1, B2 and B3.

The benefits under scheme B are paid on 5 March 2011(within the commutation period).

Kim decides to leave the benefits held under scheme C. She can change her mind and decide to fully commute these benefits up until 1 February 2012. But after this date the chance to commute those benefits is lost.

Example 2 – Payment of a trivial commutation lump sum

Mel has uncrystallised benefits held under scheme X, Y and Z worth £1,000, £2,000 and £3,000 respectively on 1 January 2012. She is also in receipt of two pensions from other registered pension schemes, treated as crystallised pension rights, as follows:

From scheme V, a pension of £2,200 per annum, which started in 2003 at the rate of £1,250 per annum and was payable on 5 April 2009 at the rate of £1,600 per annum, and from scheme W, a scheme pension of £1,000 per annum, which started in the 2009/10 tax year at the rate of £750 per annum. At the same time the scheme pension started Mel was also paid a pension commencement lump sum of £2,200.

Mel’s uncrystallised rights are valued at £6,000. Her relevant crystallised pension rights are valued as follows: Scheme V – £50,000 & Scheme W – £20,000

This means Mel’s total pension rights are worth £76,000 (£6,000 £50,000 £20,000) on 1 January 2011).

This is more than the commutation limit of £18,000 at that time (1% of the standard lifetime allowance of £1.80 million for that tax year).

So none of Mel’s benefits under scheme X, Y or Z may be commuted and paid as a trivial commutation lump sum. Nor can her pensions in payment be commuted.

New HMRC powers to trace debtors

HM Revenue & Customs (HMRC) has taken new powers to trace people working as sole traders or limited companies who owe it money.

A large amount of correspondence requesting payment from debtors is returned as the addresses held are out of date, HMRC say.

The powers, which were in the new Finance Act, enable HMRC to request the most up-to-date contact address from a third party such as a local council, a company or an association.

In a statement, HMRC said: "The new power creates the lawful means for third parties to provide information to HMRC. A third party that complies with a notice issued on these grounds has discharged its statutory duty, even if a later change in circumstances means that the debt is not due."

The body added that if an organisation chooses to not comply with the request then it could face a fine of £300.

HMRC's draft guidance on the operation of its new powers can be read at http://www.hmrc.gov.uk/finance_bill2009/Inf-powers-contact-det.pdf

Inheritance Tax - Combining Allowances

Can different inheritance tax allowances be used to make more substantial tax-free gifts to the same person?


I am thinking of combining the £3,000 annual exemption, the £5,000 marriage gifts exemption (plus £1,000 for my son’s future wife), and the £250 small gifts exemption. I would also like to make additional gifts out of surplus income of up to a few hundred pounds a month to him. Do these IHT-free gifts require any paperwork?


Answer


While gifts made within seven years of death are usually included in the donor’s estate for inheritance tax (IHT) purposes, the exemptions mentioned here allow gifts to be made with no liability to IHT even if the donor should die within this period.


The annual exemption can be used in combination with the exemptions for marriage gifts to make a larger gift, but the £250 exemption cannot be applied to the same recipient/s. It can only be used for other individuals, where the total gift to each person does not exceed £250 in any year.


Any unused part of the £3,000 annual exemption can be carried forward one year. So if you did not make any gifts in the last tax year, then you will have an annual exemption of £6,000 available this year. The marriage gifts should be made before or at the time of the marriage, otherwise they will not qualify for the exemption.


The rules for gifts from surplus income are more complex. For these to be immediately IHT-free you must have sufficient income over that required to maintain your usual standard of living. The gifts must be made directly from that income and be “normal expenditure”, ie part of a pattern of gifts that you intend to make on a regular basis.


It is important you document your intention regarding the gifts from surplus income and also the basis for your other gifts. If you die within seven years of making the gifts, your executors will need to include them on the IHT return made on your death and claim the exemptions. It is advisable to keep good records of the gifts so it is clear which exemption is being claimed.

Liecheinstein Disclosure - FAQ

What is the Liechtenstein Disclosure Facility (LDF)?

The government of Liechtenstein is committed to introducing a five year taxpayer assistance and compliance programme under which financial intermediaries in Liechtenstein need to be satisfied that, where appropriate, clients are declaring their Liechtenstein investments to HMRC.

If you are a UK taxpayer – or if your Liechtenstein Financial Intermediary thinks you may be – they will be in touch with you about this.

HMRC has launched the LDF to help UK taxpayers make a disclosure where appropriate.

However, there is no need to wait for your financial intermediary to get in touch. You can contact HMRC  to make a disclosure under the LDF from 1 September 2009 but you will need to tell the financial intermediary that you have done this. 

You may wish to consult your financial advisor about this.

What is a financial intermediary?

A financial intermediary is a person subject to supervision by Liechtenstein's Financial Markets Authority who provides a service to those holding investments in Liechtenstein.

What do I have to do if a financial intermediary tells me I may be liable to UK tax?

You will have to provide the financial intermediary with one of the following:

• written confirmation from a legal, tax or accounting adviser that you have complied with UK tax obligations for your Liechtenstein investments or have applied to disclose under another HMRC tax disclosure facility
• evidence to prove you have already met UK tax obligations for your Liechtenstein investments
• a certified or notarised copy of your Self Assessment tax return showing that your Liechtenstein investments have been declared to HMRC
• evidence that you are not a UK taxpayer
• registration and disclosure certificates which HMRC will send to you if you register and make a full disclosure under LDF .

Alternatively, you can provide permission for your Financial Intermediary to provide HMRC with all your details that they hold.

What do I do if I have investments in Liechtenstein but do not receive a notice or do not know who my financial intermediary is?

It is your responsibility to report any interest in relevant investments to HMRC and to satisfy your liability for all taxes due under UK law. If you do not know who your financial intermediary is, you should contact the financial institution in which you have your Liechtenstein Investments to obtain their contact details.

Once you have these details, or if you have Liechtenstein investments but have not received a notice, you should contact your financial intermediary and tell them of your intention to register for LDF. You should also contact HMRC's Liechtenstein helpdesk as to complete the LDF registration process.

How do I register for the Liechtenstein Disclosure Facility?

You should contact the HMRC Liechtenstein helpdesk to register your details. You can do this by telephone or in writing. You will need to provide the following information:

• name
• address
• National Insurance number (if you have one)
• Unique Tax Reference (if you have one)
• date of birth
• your financial intermediary's name and address 
• the name, reference and contact details of your agent if you have one

Will HMRC provide information about me to the financial intermediary?

No.

HMRC has a duty of confidentiality to all its customers and taking part in LDF does not change that.

What is special about the Liechtenstein Disclosure Facility?

The facility has been introduced to help UK taxpayers with undeclared investments in Liechtenstein to come forward and get their past and future tax affairs on the right footing. By coming forward under LDF, they will be able to take advantage of a number of special terms:

• a 10 per cent fixed penalty on the underpaid liabilities (full interest will have to be paid)
• no penalty where an innocent error has been made
• assessment period limited to accounting periods/tax years commencing on or after 1 April 1999
• the option to choose whether to use a single composite rate of 40 per cent or to calculate actual liability on an annual basis
• assurance about criminal prosecution
• a single point of contact for disclosures

What is the advantage of a single point of contact?

This provides a specific service HMRC has introduced to support people taking part in LDF. It recognises that people with investments in Liechtenstein often have specific needs due to the complexity of their financial affairs.

How does the composite rate of tax work?

The composite rate is a single rate of 40 per cent which can be used as a means of calculating an amount which HMRC will accept in satisfaction of past tax liabilities. The amount will cover all UK taxes (including UK Inheritance Tax, Income Tax, Corporation Tax, Capital Gains Tax, Stamp Duty and Value Added Tax and, without limitation, National Insurance contributions). 

The rate will be applied to all income, profits, gains and other sums chargeable with no reliefs or other deductions to be allowed. Interest and penalties will be due in addition to the composite rate.

The only exception to this is that tax withheld under the European Union Savings directive or under the Agreement on the Taxation of Savings between the EU and Liechtenstein may be offset.

You do not have to use the composite rate. You can choose to calculate your liability using the normal rules, which will mean you are able to claim any reliefs and deductions due.

You may want to seek advice from your tax agent or advisor about whether the composite rate will be of benefit to you.

How is interest calculated?

Interest is calculated from the date tax should have been paid until the date you actually pay that tax to HMRC. HMRC's published rates of interest will apply within LDF.

Could I be criminally investigated by HMRC if I take part in the Liechtenstein Disclosure Facility?

HMRC will not start a criminal investigation for a tax-related offence if you make a full and accurate disclosure to us and the source of the funds is not from 'criminal activity'. Criminal activity, in this respect, does not include tax evasion.

What are my obligations under the facility?

You should contact the HMRC Liechtenstein help desk to notify your intention to make a disclosure as soon as you are contacted by your financial intermediary.  You can register by writing or telephoning HMRC using these contact details.

Write to:

HM Revenue & Customs
Liechtenstein Desk
7th Floor, The Triad
Stanley Road
Bootle
Merseyside
L75 2EE

Telephone:

Tel: 0845 600 4680
Tel: +44 151 300 2750 (for calls from outside the UK)

Lines are open 8:30 am to 5:00 pm (UK local time), Monday to Friday

If you are eligible HMRC will send you a registration certificate within 60 days of receiving your notification. You need to send the certificate (or a notarised copy of it) to your financial intermediary. You must do this within 30 days of receiving it. If HMRC do not accept you into the disclosure facility they will write to you explaining why and tell you what you should do next.

You should make your disclosure by sending the information required:

• seven months of the registration certificate date if you want to use the single composite rate
• ten months of the registration certificate date if you are going to calculate your liability on an actual basis

HMRC will send you a disclosure certificate within 30 days of receiving your disclosure providing it is complete. You need to send the certificate (or a notarised copy of it) to your financial intermediary. You must do this within 30 days of receiving the certificate. If HMRC have agreed to give you additional time to complete the disclosure, they will send you a letter confirming the extended time period. You will need to send this letter (or a notarised copy of it) to your financial intermediary within 30 days of receiving it.

You should provide any additional information in support of your disclosure HMRC may ask for in order to check accuracy and completeness.

Why do I need to send the certificates to the financial intermediary?

You must send the certificates to your financial intermediary to prove to them that you have satisfied the conditions of the LDF.

What do I have to include in my disclosure?

HMRC will provide a disclosure form, complete with guidance. It will explain that you will need to provide HMRC with sufficient information and evidence to show that you are properly reporting any UK liabilities payable under this facility.

The information needed may include but will not necessarily be limited to:

• Your full name, address and date of birth.
• A copy of your passport, birth certificate or other certified copy documentation to prove your identity.
• Your National Insurance number or any other Unique Tax Reference number (if you have one).
• Information and documentation showing you are eligible to use this facility.
• Full details of all previously undisclosed tax liabilities for each tax year since 6 April 1999, (or earlier if applicable) for a natural person, or accounting period since 1 April 1999 (or earlier if applicable) for a legal person, and ending with the UK tax year covered by the disclosure or an offer for tax based on estimated figures where you do not know the actual amount. You will need to supply suitable evidence to support your estimates.
• A statement saying whether you are to calculate your liability on the actual basis or use the composite rate.
• Information showing how you have calculated your overall tax liability.
• A declaration that your disclosure is correct and complete.
• Full contact details for your professional adviser (if you have one).
• A payment covering all your tax liabilities, interest and penalties. If you cannot pay this amount, you will need to provide HMRC with evidence you cannot pay at this time as well as a proposal for how and when you intend to make payment.

What are the time limits for LDF?

You will have 18 months from the date you receive notification from your financial intermediary to satisfy them that you have complied with your UK tax obligations. Within this period you:

• Must tell HMRC you have received a notice from the financial intermediary and that you intend to apply to take part in LDF. HMRC will issue you with a registration certificate within 60 days of you contacting them .
• Should send this certificate to the financial intermediary within 30 days of receiving it.
• Should send your full disclosure to HMRC within seven months (if you are using the composite rate) or 10 months (if you are going to calculate your liability on an actual basis) of the registration certificate date. HMRC will send you a disclosure certificate within 30 days of receiving your disclosure providing it is complete.
• Should send the disclosure certificate to your financial intermediary within 30 days of receiving it.

What if I cannot complete my disclosure within the time limits?

You must contact the Liechtenstein helpdesk immediately if you will not be able to make your disclosure within the time limits. 

HMRC will consider your reasons and where appropriate, agree to give you additional time to complete your disclosure. If they agree to extend the time limit they will send you a letter confirming the extended time period you have been given and you will need to send this to your financial intermediary.

Does the Disclosure Certificate mean that my disclosure is agreed?

No. 

The disclosure certificate allows you to satisfy the financial intermediary that you have complied with LDF so your investments can remain in Liechtenstein. 

HMRC will write to you separately to either confirm your offer has been accepted or to ask for further information if this is needed and aim to do this within six months of receiving your disclosure.

What happens if I do not comply with the financial intermediary's notice?

The financial intermediary will require you to move your investments out of Liechtenstein or exceptionally, will keep your investment but you will face sanctions.

What happens if I take part in this disclosure facility but later decide not to go through with it or I refuse to answer further questions from HMRC?

• You will not be able to satisfy or benefit from the conditions of the LDF.
• You will have to move your investments out of Liechtenstein (or exceptionally, keep your investment but face sanctions).
• HMRC may make an Exchange of Information request to the government of Liechtenstein for details of your investments which may lead to your name being published as deliberate tax defaulter as announced in the April 2009 Budget.

I have an offshore account outside of Liechtenstein that I opened though a UK branch or agency. I would like to take advantage of the 10 year limitation period, the fixed penalty, and the composite rate under the LDF in respect of the tax due from that account. Can I do so?

No. 

A person who participates in the disclosure facility and has as of date of signing of the MOU a bank account, including a financial (portfolio) account, outside the UK or Liechtenstein which is in his or her name and was opened through a UK branch or agency of that bank, will not, in relation to that account, be eligible for the shorter limitation period, the fixed penalty and the composite rate option under the LDF.

What if I close the offshore account and move the investment to Liechtenstein?

You will still not qualify for the 10 year limitation period, the fixed penalty, and the composite rate in respect of the tax due from the investment in the prior offshore account that you opened through a UK branch or agency. The words "in relation to that account" cover any unpaid taxes on that prior account. In other words, if you move the funds later, the unpaid back taxes prior to the move would still be "in relation to that account" and not in relation to the new account.

If I transfer my investment to Liechtenstein, how will HMRC determine from where my investment originated and the basis on which I qualify to participate in the disclosure facility in relation to that investment?

HMRC will examine all disclosures made under the disclosure facility to determine whether they are full and complete and whether they have been made on the correct basis.

How can the LDF that is established pursuant to the MOU be clarified, varied or terminated?

The MOU sets out the joint understanding of the Liechtenstein Government and HMRC as to how the LDF will operate. The terms of the MOU can be varied by agreement between the parties or terminated by either party. If and when appropriate, the parties will issue clarification regarding issues relating to the MOU in order to ensure the orderly running of the facility, in accordance with the joint understanding between the parties as to how the facility will operate. The parties will provide any necessary further clarification in the upcoming Second Joint Declaration.

What action should I take if I have any difficulties in understanding the terms of the disclosure facility?

Either you or, if applicable, your professional adviser, should contact the Liechtenstein Helpdesk at HMRC who will give you any necessary assistance. 

Must you repay overpaid tax credits?

Much of the success of tax credits in helping families has been largely overshadowed by the problem of tax credit overpayments.


Tax credits were introduced in April 2003 and are administered by HM Revenue and Customs (HMRC).


Many tax credit claimants will be surprised to find out that overpayments are a naturally-occurring part of the system and were built into its design. This means that even if a claimant, and HMRC, does everything correctly, they can still be overpaid.


Overpayments in these circumstances normally have to be repaid, but HMRC can use its discretion not to recover them if the claimant is in hardship.


Error or delay


Many overpayments are caused by error or delay. The sheer complexity of the system means that claimants can make mistakes which lead to overpayments, but often HMRC make the errors that lead to overpayments.


The tax credit system is exceptionally complicated.


Delays by claimants in reporting changes, or by HMRC in processing them, can also lead to overpayments.


It is likely that most tax credit claimants will be overpaid at some point, but it is not always easy to tell whether you have been overpaid.


Some claimants will have their continuing tax credit payments reduced to pay back an overpayment and this is often the first sign that anything is wrong.


Any overpayment should be set out on the award notice that is sent to you, although it is often difficult to understand.


Alternatively, if you no longer claim tax credits, or the overpayment is from an old claim, HMRC will write to you asking you to pay back the overpayment.


After the initial shock of reading what is in the brown envelope, the first question most claimants ask is: "Why do I have an overpayment?".


The difference between an appeal and dispute is often confusing for claimants and HMRC often get the distinction wrong themselves.


Unfortunately, this can be one of the most difficult questions to answer, partly because the overpayments can go back several years and partly because the system itself is very complicated.


If you are overpaid, what can you do?


You can ask HMRC for an explanation of how your overpayment occurred,
but doing so comes with a warning. HMRC will keep demanding the money,
even if you have asked for an explanation.


For that reason, some claimants will often benefit from "appealing"
against the overpayment or "disputing" it - or both - at the same time
as they ask for an explanation, as this stops the repayment demands
from coming.


However, assuming you have already received an explanation you need to
decide whether to accept it or whether you should appeal or dispute, or do both.


If you are in any doubt it is best to do both. 


Appeals eventually lead to an independent tribunal and are subject to strict time limits, whereas disputes are decided by HMRC and do not carry time limits.


Appeal or dispute


The difference between an appeal and dispute is often confusing for claimants and HMRC often get the distinction wrong themselves.


You have a right of appeal against the amount of tax credits you have
been awarded. 


If this is incorrect, substituting the right figure can result in the overpayment decreasing or disappearing altogether.


For example, if HMRC remove one of your children by mistake from your claim at the end of the year and think they have overpaid you by paying you through the year for three children instead of two, you can appeal and have your award corrected. The overpayment will then disappear.


If you have in fact been overpaid and you agree with the amount charged, you will probably want to use the dispute route. 


This is because you think the overpayment happened due to an HMRC error and it wasn't your fault.


If you can show that you did everything right, the overpayment will still stand, but HMRC will agree that you do not have to pay it back.

You can also use the dispute procedure if you feel that you cannot afford to repay the overpayment without experiencing hardship.


Paying it back


What happens if HMRC still say you have to pay the money back?


All is not lost, as you can ask HMRC to pay it back over a longer period or reduce the amount you are paying back. 


If you are left in hardship because of paying back the overpayment, you can ask HMRC to stop collecting it altogether.


If you are unhappy about how you have been treated by HMRC, you may
also want to use the complaints procedure.

Top tax tips for owner managers

Assess reward package

Aim for a tax efficient mix of salary, dividends, bonuses and benefits. With respect to share schemes, consider Enterprise Management Incentives and Approved share option schemes. These arrangements can prove tax efficient for both employers and staff.

Consider further pension contributions

Pension schemes represent one of the few Government sponsored tax saving vehicles where significant tax relief is still available.

Where the company makes a contribution on behalf of the employee, or the individual makes a net payment to the pension provider, it is now possible to receive tax relief on an amount equal to earnings (subject to a cap of £245,000 for 2009/10). 


Furthermore, where an employee agrees to sacrifice a portion of salary in exchange for an employer making an equivalent employer pension contribution, there can be NIC savings for both employee and employer. 


However, additional care is required for high earners considering additional pension contributions before 6 April 2011 over and above their usual monthly contributions (whether personal or employer paid) due to anti-forestalling rules introduced in Budget 2009. These rules could mean that additional contributions result in a tax charge on the employee. High earners for these rules are those with total income (note not just employment income) of £150,000 or more in the current tax year, or in one of the previous two tax years.

Maximise tax breaks on capital expenditure

Capital allowance claims permit the taxpayer to offset certain capital expenditure against their business income. These include, amongst others, the Annual Investment Allowance and Enhanced Capital Allowances for qualifying energy and water efficient expenditure, which are relevant for both corporate and unincorporated businesses. There is an additional temporary 40% rate of first year allowance available to all businesses for expenditure incurred on plant or machinery qualifying for the ‘general pool of expenditure’ in the 12 months from 1 April 2009.

Review loss relief claims

An extended loss relief facility was announced in November 2008 enabling businesses to carry back trade loss relief of up to £50,000 for up to three years instead of the usual one year limit. Budget 2009 announced an extension to this relief, to cover an additional £50,000 of trade losses incurred in the year following that announced in November 2008.

Furnished holiday letting properties

Overseas furnished holiday letting properties located outside the UK, but within the European Economic Area, can qualify for the furnished holiday lettings regime. This treats the furnished holiday lettings business as a trade rather than an investment activity, with favourable capital allowance, loss relief and capital gains consequences. A review of this area by corporates and individuals is imperative as the regime is to be withdrawn from April 2010. Additionally, all claims for previous periods where claims can be amended had to be submitted by 31 July 2009.

Landlords : Will HMRC target you?

Introduction

The main purpose of this article is to highlight HMRC's pursuit of the landlord.

Newspapers as a Research Source

Primarily, HMRC's main source of landlord information is newspapers. 

The local newspaper will showcase planning applications for flat conversions: if the planning application was for a series of flats in one house, they try and ascertain if the landlord was filing a tax return. They would check for a UTR, Unique Taxpayer's Reference, which is a 10 digit number and would then see if the taxpayer was declaring the letting income: if he/she was, they would be entered on the "Not Worth Further Pursuit" database.

Check to See if Income Undeclared and Extent of Underdeclaration

However, if the landlord was Self Assessment registered, and was not declaring the income, the fun starts. 

They will send a 116, under TMA 1970 s 18A(3), requesting information from the Distrcit Valuer telling them how much the landlord paid for the property, the date of purchase and from whom the landlord purchased it.

When this is received, they may access Experian to see if any further linked addresses were available: if so, they will send more 116s, and see if more properties were undeclared. More often than not, this yields spectacular results.

If unsuccessful with linked addresses via Experian, they may ask the District Valuer for a Covosearch, a historical list of properties, purchased by the landlord, or in some cases members of the landlord's family, or friends and associates. If the family member was a minor, they will suspect the landlord of attempting to limit his tax liability, and that non-compliance was taking place.

Once the landlord's non-compliance was ascertained the case would be subject to a full enquiry. If, however, the landlord was not on Self Assessment, he would be referred to the Hidden Economy Team, where he would be requested to complete returns with the letting income contained therein.

Other Sources of Information

Apart from the local newspaper another source of locating non-compliant landlords is via a Gangmasters' project, which had offshoots of properties owned in which an incredible amount of tenants were placed in just one room. More often than not, a family member would be acting as a landlord, leaving the Gangmaster to exploit the workforce, although some Gangmasters dabble in non-declaration of rental income.

A further way of locating non-compliant landlords is to establish via the London Information System (LIS) database how much housing benefit was paid to a landlord by a local council for the tenants. Under 18A(3) of the Taxes Management Act, local councils are duty-bound to place this information on the LIS database for HMRC.

Finally, they can also locate, via LIS, rental income submitted to HMRC from letting agents.

Loans and Capital Losses

Tax relief for losses has  become a major issue in the recession.Securing loss relief is not always as straightforward as it should be. Fortunately, a recent tax case offers some assistance in some cases.


What Losses are Releivable?

• Capital Gains Tax (CGT) loss relief is available for loans to traders, if certain conditions are satisfied (TCGA 1992 s 253). 
• A capital loss may also be available to claim when an asset has become of negligible value (TCGA 1992 s 24). 
• If the asset in question is shares, that capital loss can often be turned into an income tax loss and offset against taxable income upon the making of a claim, again if the relevant conditions are satisfied (ITA 2007 s 132).

Conversion to shares


However, if a cash debt is converted into shares, the value of the shares is potentially restricted to the market value of the debt at the time of conversion (TCGA 1992 s 251(3)). So if, for example, the debt is irrecoverable because the company is insolvent, the value of the shares is likely to be negligible when the debt is converted into shares. This means that a negligible value claim may not be possible in respect of the shares.


Fletcher v HMRC [2008] SpC 711


In this case  a loan to a company was capitalised by  issuing of ‘B’ ordinary shares, with rights that were arguably worthless. The company failed, and a negligible value claim was made. The point at issue was the base cost of those shares. HMRC argued that there was no loss in respect of the ‘B’ shares, on the basis that they had no value when the loan was capitalised, by virtue of TCGA 1992 s 251(3).


Share issue was a ‘reorganisation’


The Special Commissioner allowed the taxpayer’s appeal.


 They held that if a loan is converted into shares, and the shares were issued as part of a reorganisation of the company’s share capital (within TCGA 1992 s 126), the transaction would not be treated as an acquisition, so that TCGA 1992 s 251(3) could not apply. 


The Commissioner also held that an increase in share capital could be a reorganisation even if it did not come within the precise wording of TCGA 1992 s 126(2), provided that the existing shareholders acquired the new shares because they were existing shareholders and in proportion to their existing beneficial holdings.


The potential effect of a debt conversion into shares being treated as a reorganisation for CGT purposes is that there is no disposal of the original shares and no acquisition of the additional shares. All the shares are treated as a single shareholding. The base cost of those shares is generally the consideration paid originally and also under the rights issue, provided that the capitalisation is an arm’s length bargain (TCGA 1992 s 128(2)). It represents a timely tax planning opportunity in the current economic climate.

Costs you can claim for working from home as an employee

Q My employer has closed its local regional office as a cost cutting measure and I now have to work from home. Are there any costs that I can claim as an allowable deduction against my tax?


A It is increasingly popular and feasible for employees to work from home and provided you meet specific criteria you can claim relief for certain home-related expenses.


HM Revenue and Customs (HMRC) stipulate that to qualify for this relief, the employee must have no option but to work from home. As your regional office has closed you should qualify, provided that the commute to the head office would be in excess of a ‘normal’ daily commute and the duties performed from home are those that must be completed in order to fulfil your job requirement.


The expenses you may claim are:

• business telephone calls;
• business use of ‘dial up’ internet;
• additional unit costs of gas and electricity;
• metered cost of water used in the performance of your duties;
• business mileage from your home; and
• any other expense incurred wholly, exclusively and necessarily for the purpose of your employment (e.g. stationery costs, printer and consumables if not supplied by your employer).

It is important that you retain any supporting documentation for these expenses as HMRC may challenge them and how they were calculated. However, you may claim £3 per week with out having to justify the expense to HMRC.


It is not possible to claim relief on any flat rate charges that would be paid regardless of whether or not you are working from home for example rates, rent, mortgage repayments or home insurance. If the expense incurred has another purpose, for example you need food to live rather than to work, then you will not be able to claim this expense as a deduction.


Please note, if you simply choose to work from home the above criteria are not met they and you will not be able to claim relief for any of the above expenses.