Tax-Efficient Investment In UK Property For Non-Residents

UK real estate, particularly prime property in London, has always attracted significant international investment. Now, as the UK property emerges from recession, there are renewed opportunities to benefit from significant capital growth and healthy rental streams.

Investment in UK real estate must be structured carefully to mitigate UK tax at source on income, gains and transactions. Taxes may be levied on rents, development profits and capital gains, and there also stamp taxes (see below) and inheritance taxes to consider.


I look at a number of common investment scenarios below, and particular structures which will help to shelter the investments from UK tax.

Individual purchase of one or more UK properties

Many purchasers simply look to buy a single UK property to use as a base.


Others wish to develop a portfolio of properties under single ultimate ownership. Many of these properties will be rented on the open market.

It should be mentioned at the outset that a non-resident is not subject to UK tax on capital gains, even where derived from UK assets. This includes a non-resident individual, partnership or company. Investment properties can therefore be sold on at a gain in the future without tax considerations (although note below that there may be different treatment where a property is acquired, developed and sold on in a relatively short period of time).

A private use property will not be subject to any taxes on (deemed) income in the UK whilst the owners remain non-resident for UK tax purposes. On the other hand, profits deriving from UK rental receipts are taxable in the UK in all cases, on the following basis:

• Non-resident individual owner: at a rate of between 20% and 50% on income depending on the level of profits
• UK resident company: 26% on income and gains
• Non-resident company: 20% on income only.

 Clearly, it is preferable for the investment(s) to be made through a non-resident company, preferably in a low tax jurisdiction.

An overseas landlord is required to register with HMRC under the Non-Resident Landlord Scheme. Strictly, 20% tax must be withheld by the tenant or agent from net rents. However, approval can be obtained from HMRC for rents to paid gross, providing an annual tax return is filed and tax paid on time.


To reduce net rents chargeable to UK tax, it is often advisable for the shareholder to loan the company funds to purchase the property. Interest is then paid as an allowable deduction from rents. The loan should be secured on the property in order to obtain a maximum deduction on arm's length principles under the UK transfer pricing legislation. There must also be a commercial level of equity contribution and a suitable interest rate.

Planning should be undertaken to ensure the interest paid has a non-UK source, to avoid UK withholding tax.

In many cases the shareholder advancing the loan will be a second BVI company which will not be chargeable to tax on its interest receipts.

A further advantage in using a non-UK company is that it eliminates exposure to UK inheritance tax (IHT).


UK IHT is levied on all UK-situate assets on the death of the owner, regardless of residence or domicile status. 


The tax is levied at a rate of 40% above a threshold value of £325,00 .


 By using a non-UK company (note the company must be incorporated outside the UK and its shares or register kept outside the UK, not merely a non-UK resident one) the assets comprised in the estate on death are then shares in the foreign company rather than the UK real estate. Such shares are exempt from IHT for a non-UK domiciliary.

Classic UK property ownership structure:

Collective Investment Schemes for UK Real Estate

Although there are many individual private investors in London real estate, a collective investment scheme or fund is often required to generate sufficient purchasing power and / or leverage. 


As such they have become popular over the last ten years at both the public and private level.

Authorised Funds with Diversity of Ownership

REIT

At the public level, the UK introduced the Real Estate Investment Trust (REIT) in 2006.


 The REIT is a listed fund undertaking a property rental business. It is  suitable for both personal and institutional investors. 


The advantage of a REIT is that income and gains are not taxed at REIT level, although withholding taxes often apply on distributions to investors and there is an annual requirement to distribute up to 90% of property income profits. 


Due to the listing requirement a REIT is not suitable for structuring a private property fund.


PAIF

As an alternative to the REIT, the Property Authorised Investment Fund (PAIF) was introduced to allow a tax-favoured property fund to be formed without a listing requirement. 


The tax benefits are broadly similar to the REIT, but again withholding taxes will often be levied on distributions from the fund. 


Despite the reduced scale of the PAIF, there is still a rigorous "diversity of ownership" requirement, meaning that smaller groups of investors will still not be able to benefit.

Authorised UK real estate fund:

Private Property Fund Vehicles

As a result of these restrictions some have been active in developing non-UK based fund structures able to provide similar, or more extensive, tax advantages without the ownership restrictions placed on UK-based schemes.


ICIS

In particular, the Cyprus Private Fund or ICIS is ideally suited as a private collective investment scheme for UK property. It combines the benefits of an EU-regulated fund which, when effectively structured, can achieve very low UK and overseas tax leakage.


Cyprus funds are a good on-shore alternative to the traditional unit trusts established in Jersey, Guernsey or the Isle of Man, or may be combined with a traditional tax-efficient offshore investment structure.

Carefully structured financing, in accordance with UK transfer pricing principles, can reduce the UK tax charge significantly, whilst the profits received in Cyprus as dividends are not subject to local taxes. 


Dividends and / or interest can then be paid out to the ultimate investors free of Cypriot withholding tax.

Cyprus Private Fund for UK Rentals:

Simple Co-Ownership Structures

 A group of investors looking  to invest in a particular project may consider forming a UK Limited Partnership, typically where they are not looking to attract further funds in the future from other investors. 


Each partner contributes funds to the partnership and takes an interest in the underlying partnership assets and income as a limited partner. As a limited partner, liability is limited to the sum invested and undrawn profits.

The partnership is transparent for UK tax purposes so that only income (not gains) arising in the UK will be taxable on the members. 


An unlimited partner, often an offshore company, is appointed to manage the assets but has no interest in underlying income or capital.

The advantage of a limited partnership structure is its flexibility, in that relations between partners are governed by a partnership agreement which can be altered at any time by agreement. 


The disadvantage is that the structure is relatively illiquid, unlike a fund where units or shares may be traded more easily. 


Care must be taken in structuring borrowings to reduce the UK tax charge, as there are restrictions applicable to partnership structures.

Limited Partnership Structure:

Planning for UK Property Developments

The UK property development market is picking up again and has been a popular investment choice for non-residents over the last 10 years.

Typically a site isacquired, developed and then sold on at a profit in a relatively short period of time. Such an activity is considered a trading activity in the UK, subject to income taxes on trading profits. As such the amount of tax at stake is often considerable and careful planning is required.


Short Term Development (Under 12 months)

Short-term developments may avoid UK tax altogether when the developer is a company based in a jurisdiction with which the UK has a suitable tax treaty. 


The treaty should state that a building site does not constitute a permanent establishment (PE) until the expiry of 12 months. 


This has typically involved the use of companies in Jersey, Guernsey or the Isle of Man.


Long Term Development (Over 12 months)

Most developments last longer than 12 months and therefore a PE in the UK is unavoidable. 


In such cases, planning can be undertaken to ensure that only profits directly attributable to the PE come into charge to UK tax. 


With careful planning, significant pre-development profits, such as increases in value on securing planning permission, can be kept out of the UK tax net.

Such an offshore development vehicle is particularly attractive when combined with a Cyprus private fund, allowing a bespoke group of investors to collectively finance a development. 


There will be no further tax on the dividends received in Cyprus from the Jersey company, as they derive from a trading activity

UK Property Development Structure:

Summary

UK real estate continues to represent an excellent investment opportunity for nonresidents. Structured carefully, the UK and international tax leakage can be minimised. There are also opportunities for collective investment in UK property within tax-efficient structures.


Note on Stamp Duty Land Tax
(This note is not exhaustive and appropriate professional advice should be taken before entering into transactions.)

Stamp Duty Land Tax rates and thresholds

Stamp Duty Land Tax (SDLT) is charged on land and and property transactions in the UK.


The tax is charged at different rates and has different thresholds for different types of property and different values of transaction.

The tax rate and payment threshold can vary according to whether the property is in residential or non-residential use, and whether it is a freehold or leasehold. 


SDLT relief is available for certain kinds of property or transaction.

SDLT rates for residential property
The table below applies for all freehold residential purchases and transfers and the premium paid for a new lease or the assignment of an existing lease. (If the property will be used for both residential and non-residential purposes the rates differ - please see the section 'SDLT for non-residential or mixed use property').

New leases

If the transaction involves the purchase of a new lease with a substantial rent there may be an additional SDLT charge to that shown below, based on the rent.

Residential land or property SDLT rates and thresholds


Purchase price/lease premium or transfer value                                                SDLT rate

Up to £125,000                                Zero


Over £125,000 to £250,000               1%


Over £250,000 to £500,000               3%


Over £500,000 to £1 million               4%


Over £1 million to £2 million                5%

Over £2 million from 22 March 2012    7%
Over £2 million from 21 March 2012
(purchased by certain persons
 including corporate bodies)               15%


If the value is above the payment threshold, SDLT is charged at the appropriate rate on the whole of the amount paid. 


For example, a house bought for £130,000 is charged at 1 per cent, so £1,300 must be paid in SDLT.


A house bought for £350,000 is charged at 3 per cent, so SDLT of £10,500 is payable.
£2 million threshold for wholly residential property

From 22 March 2012 SDLT on residential properties over £2 million is charged at 7 per cent 


It does not apply to non-residential or mixed-use properties.

If you exchanged contracts before the higher rate came into force on 22 March 2012) the 5 per cent rate will apply. 


This only applies where the contract is unconditional and unaltered on or after 21 March 2012.

Higher rate for corporate bodies

From 21 March 2012 SDLT is charged at 15 per cent on interests in residential dwellings costing more than £2 million purchased by certain non-natural persons.


This broadly includes bodies corporate, for example companies, collective investment schemes and all partnerships with one or more members who are either a body corporate or a collective investment scheme. 


There are exclusions for companies acting in their capacity as trustees for a settlement and property developers who meet certain conditions.

If you exchanged contracts before the higher rate charge came into force on 21 March 2012, the 5 per cent rate will apply. This only applies where the contract is unconditional and unaltered on or after 21 March 2012.




SDLT rates for non-residential or mixed use properties

Non-residential property includes:

• commercial property such as shops or offices
• agricultural land
• forests
• any other land or property which is not used as a dwelling
• six or more residential properties bought in a single transaction

A mixed use property is one that incorporates both residential and non-residential elements.

The table below applies for freehold and leasehold non-residential and mixed use purchases and transfers

If the transaction involves the purchase of a new lease with a substantial annual rent, there may be additional SDLT charge to that shown below, based on the rent. 

Non-residential land or property rates and thresholds

Purchase price/lease premium or transfer value (non-residential or mixed use)  SDLT rate
Up to £150,000
 - annual rent is under £1,000            Zero


Up to £150,000 
- annual rent is £1,000 or more             1%


Over £150,000 to £250,000                   1%


Over £250,000 to £500,000                    3%


Over £500,000                                      4%


Note that for the above purpose the annual rent is the highest annual rent known to be payable in any year of the lease.

Annual Investment Allowance

The annual investment allowance (AIA) provides 100% tax relief on qualifying expenditure on plant and machinery - not cars -  up to the maximum allowance available for each accounting period - for expenditure used in a trade or profession.

The AIA is a capital allowance, an amount you can write off against taxable profits for purchases of qualifying plant and equipment; not cars.


It is available alike to sole traders, partnerships and companies although some restrictions apply to companies in groups or those closely related to each other. It is not available to "mixed partnerships": where one or more of the partners are a company  

What counts as plant and machinery for AIA? 

• Machinery;
• Large Tools (small tools are usually written off as consumables);
• Furniture;
• Electrical equipment (televisions, radios, kettles, vacuum cleaners etc);
• Computers, printers;
• Telephones and telecommunication equipment;
• Other office equipment;
• Vans and other commercial vehicles;
• Fixtures and Fittings;
• Computer software with a life of more than two years.

What is the maximum AIA available?

The maximum AIA available depends on the accounting period of the business and its structure;

Companies

Accounting periods falling into the period:

• 1 April 2008-31 March 2010                    £50,000
• 1 April 2010-31 March 2012                  £100,000
• 1 April 2012 onwards                             £25,000

Other Businesses

Accounting periods falling into the period:

• 6 April 2008-5 April 2010                    £50,000
• 6 April 2010-5 April 2012                  £100,000
• 6 April 2012 onwards                           £25,000

The AIA is also restricted if the accounting period is less than 12 months and transitional rules apply to accounting periods straddling 1 or 6 April 2012.

Bonus for self-employed businesses.

Profitable self-employed business owners  face an additional 50% income tax charge on earnings in excess of £150,000. Judicious use of the AIA can have considerable benefits.

Consider a self-employed trader with taxable profits after all deductions, but before claims for capital allowances, of £200,000.

The 50% income tax charge, not the total tax charge, would be £25,000. (£200,000 - £150,000 at 50%) If the trader spent £25,000 on qualifying plant or equipment, that qualified for the AIA, he or she could write off the £25,000 against the £200,000 profits and half the 50% rate income tax charge would be eliminated! A tax saving of £12,500.

In cash terms that represents a 50% recovery of the £25,000 investment in the new plant or equipment.

Lobbying does pay!

In the past few days some national newspapers have been crowing about the part they and their readers played in getting the Government to back down on certain tax proposals.

This week the Government changed its mind about some of the VAT changes announced in the March Budget speech.

1)  The much derided so called ‘pasty tax’ rules have been revised to remove certain hot foods from the threat of VAT increases. For those involved in selling takeaway food it will now be necessary to pay close heed to the rules as they progress to the statute book to see what will and will not be affected by the changes.

2) There was also a ‘U-turn’ with regard to the proposed imposition of a 20% VAT liability on static caravans which has now been revised to 5%.

3) The £30 million the Government will contribute to a fund for churches to call on to help ease the burden of the VAT changes for alterations to listed buildings is argued by some to have also been as a result of fierce lobbying.

4) We will have to see whether the major concerns voiced by the charitable sector, with regard to the proposed ‘relief capping’ rules, will be encompassed in the consultation documentation we hope to see over the summer.

These developments raise two issues: lobbying can seemingly pay off; and the tax rules, proposed and existing, can change in an instant with the result that it always pays to be up to date with proactive input from all your professional advisers.

How much of my use of home as office can I set against tax?

With the recession, many people have become self-employed in the past couple of years.

Many of these start-ups have begun in bedrooms and study rooms.

Other, successful businesses are still being carried out from home after several years' trading.

H M Revenue & Customs (HMRC) provide a tax deduction for those who do not rent office space, or who rent office space and also carry out some business at home at the same time.

If the work carried out at home is a small proportion of the whole business activities, such as compiling the paperwork for the accountant or the bookkeeper or making some business phone calls in the evening and weekends, HMRC allow a reasonable estimate without having to provide much detail on the basis of the estimate.

However, if the business has all or the majority of the work being carried out at home, there is a rule tto be adhered to for an expense to be considered allowable for tax purposes.

The rule is that the expense must be ‘wholly and exclusively for the purpose of the trade’.

This does not mean that certain expenses, such as rent and utility costs, cannot be considered as business expenses because they are not wholly and exclusive to the business. In these cases, apportionment is required.

Factors to consider when apportioning costs such as utility bills are:

1. How much of the home is being used for business, is it one room in the house or a specific area of an open plan house?

2. For how long is this area in the house being used for business, is it 7 working hours like in an office, or more or less?

3. Can you separately measure the use of the utility or the rent? Sometimes if there is a meter, this can be simply measured.

Fixed costs, such as rent, mortgage payments, home insurance and council tax are allowable subject to certain criteria.

Rent and council tax can be apportioned according to the above factors, the apportioned business use is then not considered to be income for the individual.

Only the apportioned interest element of the mortgage payments are allowed. The capital element of the repayment  is not allowable..

If the business requires separate trade insurance distinct from the home insurance, the home insurance is not an allowable expense as the seperate business expense is wholly allowed. If there isn’t separate business insurance then the home insurance is apportioned. 

An apportionment of repair costs to the whole property is allowed. However if the whole house apart from the room/area used for business is redecorated then this cost is not allowed for business purposes, likewise, if only the room/area used for business is redecorated then the whole of this cost is allowable for business.

Various other running costs can be apportioned. However, the apportionment will differ according to the specific trade. For example, if a business uses  alot of electricity to carry out its trade then the apportionment of the electricity bill will be more business use than personal use. Similarly, the water charges may be apportioned so there is more personal use than business use.

Tags: business expense, home office, use of home

Salary sacrifices revisited

The tax and NIC savings of salary sacrifices have grown in popularity  as benefits providers have increased their products.  


Two recent cases underscore some key points to remember  to operate a "safe" salary sacrifice arrangement. 


Case 1 ( Reed Employment Plc v The Commissioners for HM Revenue and Customs - available to download here  . )


You should use the case to review your current salary sacrifice arrangements, making sure they are robust, but also consider additional areas where salary sacrifice could now be introduced with confidence.


The recent decision in the First-tier Tribunal  (FTT) case of Reed Employment plc (and other Reed Group companies) v The Commissioners for HM Revenue and Customs has now been issued. The case considered the employment tax treatment of a travel and subsistence arrangement that was purported to be a salary sacrifice arrangement.  Reed may well appeal against the ruling.

Reed made daily payments to cover lunch and commuting to around 500,000 temporary workers between 1998 and 2006, which they maintained was part of a salary sacrifice arrangement.  

The FTT found that the schemes operated did not constitute an effective salary sacrifice arrangement, as in reality no part of the salary was sacrificed.  The tribunal judges said “The salary was paid in full, even if there was a later manipulation”.  

In addition, it was ruled that the employed temps were engaged under a series of job-by-job contracts rather than under a continuing contract of employment.  Each assignment should therefore be treated as a separate engagement, and as a result the travel was therefore to a permanent workplace and the expenses were deemed to be ordinary commuting and non-deductible.

This decision turned on:

• the contractual arrangements in place,
• the clarity of the arrangement in place and
• the fact that a salary sacrifice was found not to exist. 

The tax and NIC, along with interest, has been calculated at £158m. 

The contractual arrangements were much discussed and show the need to carefully draft a contract of employment and to ensure the terms of the contract are fully understood by all.  In the present case there was much made of the fact the employees could not understand their pay calculation.

Comment The starting point for any successful arrangements is a correctly worded, understandable contract of employment which in this kind of an arrangement, to be acceptable to HMRC, should be an overarching contract of employment guaranteeing at least 336 hours.

The position put to the tribunal that a salary sacrifice existed was ultimately rejected partly on the basis of the confusing contractual arrangements in place but comment was also made on the small savings enjoyed by the workers as the arrangement was designed to deliver the bulk of the savings to the employer. 


The tribunal took the view that the employee could not understand what was happening to their pay from the payslip and that, in the tribunal view, a sacrifice by an employee should deliver a benefit to the employee.  


The tribunal went further to say that this purported sacrifice delivered no or little benefit to the worker and was an arithmetical exercise to deliver the maximum savings to Reed.


Comment In this case the tribunal reasoning that a salary sacrifice must deliver a benefit is potentially challengeable but the arrangement has to be transparent and to be understood and accepted by the employee if it is to be a valid sacrifice.  To avoid the view that ‘little or no’ benefit is made by the employee, an equitable sharing of the savings would also be advisable.


In this case the tribunal found that HMRC were entitled to issue a dispensation where they had a belief that no tax was payable (even if they were wrong).  However, as they found the expenses paid were a part of the employee’s wages, and there was no salary sacrifice in place, the expenses should have been subject to PAYE and NIC.  In addition, they considered the effect if a valid salary sacrifice was found to be in place but took a view that the assignments were all fixed term employments and as such the expense allowance would be taxable; that is, the employee did not travel to temporary workplaces which would attract relief from tax.


Comment When entering into these arrangements it is important not only to consider the contractual arrangements to be put in place but also important to ensure that the arrangement is communicated in a transparent way which demonstrates the worker was in agreement or had all the information to understand the arrangements affecting him/her.


The tribunal did not decide on the “Reed’s legitimate expectation” point as that will be left for any further proceedings at the Upper Tribunal.  However, the question they stated to be answered was “Can HMRC be required to apply a dispensation that Reed had a legitimate expectation was in place and covered the allowances paid, even where HMRC had no power to grant a dispensation”.  The tribunal commented that as the disclosures made did not provide the full facts to HMRC this helps support HMRC’s contention that Reed had no “legitimate expectation” as it did not fully disclose all relevant matters.


Comment In this kind of arrangement all the facts should be on the table and HMRC and other parties should fully understand the arrangements in place with this being supported by clear employee communications. If this had been the case here it would have aided the case that a legitimate view was held that the dispensation made the payment of expenses exempt from PAYE and NIC even if that dispensation was later found to be wrong.


What should you do next? This case will have possibly have far reaching implications for all employers entering into salary sacrifice arrangements (salary sacrifice arrangements can cover pensions, cars, bicycles, child care vouchers, flexible benefit schemes and many others).  We suggest that all these arrangements are reviewed to ensure they are compliant and importantly that the workers fully understand the arrangement they have entered into.  The Reed case highlights the pitfalls of getting it wrong. The employment contractual arrangements are also as important as the tax considerations.


I have experience of successfully implementing these arrangements with the agreement of HMRC on a fully disclosed basis. Therefore do not be put off by this case if you are considering implementing a salary sacrifice as they can be implemented successfully. These arrangements can realise considerable savings for both the employer and worker.


Case 2 Astra Zeneca UK Limited (AZUL) v HMRC (the opinion of the Advocate General can be found here   )

It seems to me the decision in this case was correct within the meaning of both EC and UK VAT legislation, but  it could have a significant cost implication for those employers who have provided discounted retail vouchers to their employees without accounting for output tax over the years.

The decision was important because it confirmed the principle that where an employee gives up part of his cash remuneration in return for a supply of goods or services which in themselves are liable to VAT, this represents a supply by the employer to the employee for a consideration. It means that the employer can recover as input tax the VAT paid on the purchase of the goods or services concerned, but must account for output tax on the cash value of the salary “sacrifice”.

VAT and employee benefits VAT and employee benefits have always been a bone of contention between HMRC and businesses. Over the years, we’ve had potential issues arising from staff discounts and company cars. More recently, things have been more interesting as most large private sector employers have introduced different types of “flexible benefit” remuneration packages that enable employees to choose from a wide range of goods and, mostly, services.

The concept is simple – each employee has a remuneration “pot” which can be taken in form of a basic cash salary and minimum holiday entitlement, or varied to include a smaller cash salary and a range of other benefits, which are usually provided at a discounted “price”. These include various types of insurance, such as medical or dental insurance, childcare vouchers, goods such as bicycles, personal computers and various types of retail vouchers.

The AZUL judgement was very important in that it established, beyond any doubt, how VAT should be applied on transactions between employer and employee.

The facts AZUL provided such retail vouchers as part of their staff remuneration scheme. In the particular case, employees could opt to receive vouchers with a face value of £10, although the cost to the employer was between £9.25 and £9.55, representing a discount of between 4.5% and 7.5% to the employee.

Under normal VAT rules, businesses who buy and sell retail vouchers, can claim the VAT paid on their purchase but must account for output tax when the vouchers are “sold”. The sale of the vouchers is regarded as a supply of services as it entitles the purchaser, in this case the employee, the right to purchase goods for the face value of the voucher from the retailer concerned.

HMRC believed that AZUL could recover as input tax the VAT paid on the purchase of the voucher, but should have accounted for output tax on the supply to its employees. This would basically mean that the correct VAT accounting would be neutral for the company, ie the input tax and output tax would be equal.

What actually happened was that AZUL didn’t do either, but submitted a claim for input tax on the purchase of the vouchers, but didn’t account for output tax, arguing that giving the vouchers to staff weren’t liable to VAT as transactions between employers and employees don’t represent supplies for VAT purposes. Their position was that the provision of the vouchers to the employees meant that the vouchers were used for a business purpose so there was no liability to output tax.. In essence, that giving the vouchers to the staff in return for a salary sacrifice meant that the vouchers were “consumed” by the business and there was no supply to the employee.

The relationship between employer and employee and whether there is a supply for VAT purposes The key issue was that AZUL argued that the provision of employee benefits represented use by the business and therefore there was no liability to output tax. The ECJ judgement – which at just 6 pages is one of the shortest and most readable – dealt with the issue by answering the first in a list of questions which were referred by the Tribunal:

In the circumstances of this case, where an employee is entitled under the terms of his or her contract of employment to op to take part of his or her remuneration as a face value voucher, is Article 2 of the [Sixth Directive} ... to be interpreted such that the provision of that voucher by the employer to the employee constitutes a supply of services for consideration?

Article 2 deals with one of the most fundamental of VAT issues, ie it defines the term “supply” for VAT purposes, while Article 4 of the Directive defines the term “taxable person”.

Based on these fundamental principles, the ECJ had no hesitation in supporting HMRC’s view that the provision of the vouchers in return for a salary sacrifice represented a supply for a consideration which was liable to VAT. The vouchers were not used in the business, but represented a supply of services from AZUL to its employees for their personal use.

What it means for supplies by an employer to an employee AZUL confirms that when it comes to the provision of goods or services for personal use, the employer and employee are treated as separate legal entities.

It doesn't affect the employer/employee relationship in so far as the employee is contracted to provide services, ie whenever an employee enters into a contract of employment, the employee and the employer enter into a relationship whereby in return for a salary, the employee is paid by the employer for providing his time and presence working in the employer’s business. Paid employment is not a business activity, so the salary does not represent consideration for a supply by the employee to the employer.

However, the provision of goods and/or services by the employer to the employee for non-business, i.e. personal, use in return for a proportion of the salary does represent a supply for VAT purposes. Such transactions between the employer and employee are liable to VAT in the same way as transactions between any two separate entities.

The judgement of the ECJ  simply confirms HMRC’s longheld viewpoint that wherever a business puts taxable goods or services to non-business use, any consideration that is charged for such use is liable to VAT. 

The ruling doesn’t affect the position of those benefits which are either available to all employees for no “charge”, or the VAT treatment of benefits which are “purchased” but are exempt from VAT or zero-rated, such as health insurance or nursery vouchers. But employers are advised to review their employee remuneration packages to see if they have any liability on positive rated supplies made to employees that should be disclosed to HMRC.

Cycle and save tax and the environment!

Cycling could be just the thing help you keep fit, save money and be kind to the environment.

HMRC like cyclists too, so what do you need to do to qualify for tax savings.

First you will need to get your employer to participate in the scheme, they can do this either by setting up their own scheme or by using www.cyclescheme.co.uk or http://www.bike2workscheme.co.uk/ .

The basic rules are:

You must use the bike and/or safety equipment mainly (more than 50 per cent of the time) for ‘qualifying’ journeys. This means a journey or part of a journey:

• between your home and workplace
• between one workplace and another
• to and from the train station to get to work

Taking part in the scheme means that you don’t have to pay a lump sum up front to buy a bike and/or safety equipment. Instead, you could borrow the bike and/or equipment from your employer, usually up to the value of £1,000.

Making loan repayments

Your employer may want to recover all or part of the cost of lending you the bike and/or safety equipment. If so, you would then make loan payments back to your employer over an agreed period (typically 12 to 18 months) to spread the cost.

The loan payments are usually taken out of your salary through a ‘salary sacrifice’ arrangement. This means you agree to accept a lower amount of salary in return for a benefit - the loan of a cycle and/or safety equipment. http://www.direct.gov.uk/en/TravelAndTransport/Cycling/DG_190101

Example of savings using Salary Sacrifice

              

Cost of bicycle:                                                                   £500

Cost of accessories                                                              £100

Total cost                                                                           £600

Income Tax 20%                                                                 £120

Employee National Insurance     12%                                       £72

Total Employee Saving                                                         £192

Your employer will save Employers National Insurance of 13.8%   on the salary sacrificed.

The Employee can buy the cycle from the company for a price set using the HMRC valuation table below

Age of cycle	Acceptable disposal value percentage
	Original price of the cycle less than £500	Original price £500+
1 year	18%	25%
18 months	16%	21%
2 years	13%	17%
3 years	8%	12%
4 years	3%	7%
5 years	Negligible	2%
6 years &; over	Negligible	Negligible

In addition you can claim an HMRC mileage allowance for Cycling of 20p per mile and if your employer doesn’t pay the allowance you can claim back the tax on the allowance using form P87 http://www.hmrc.gov.uk/forms/p87.pdf

If you have ‘Cycle to Work’ days your employer can provide free meals and refreshments for cyclists. http://www.hmrc.gov.uk/manuals/eimanual/eim21668.htm

So as the saying goes ‘get on your bike’

For UK residents it is one tax break that’s worth pursuing because the Cycle to Work scheme, can save you between 16 and 40 percent off the cost of a bike. 

Time the dividends from your company carefully

You have overdrawn your director's loan account (DLA).  This can land both you and your company with an unexpected tax bill. Your golf club chump(s)  suggest the company pays a dividend after the end of the company's financial year. Does this work? Is there a better option? 


Targeting loan accounts One of the first things HMRC does when checking the accounts of an owner-managed company, is to examine the directors' loan accounts (DLA) closely.


Your accountant should do the same thing when preparing the annual accounts. If he finds you owe the company money, he will usually suggest crediting your DLA with a bonus or dividend (more tax efficient) to balance the books. By the time HMRC see the figures everything appears to be in order. But is it?


Two problems - only one fix There are two tax charges which can bite from an overdrawn DLA:

• Your company will have to pay tax amounting to 25% of the amount you owe it;
• You can be taxed on a benefit-in-kind (BiK).

You can avoid the tax on your company by simply paying a bonus or dividend to clear the amount you owe. Provided you do this within nine months of your company year end , HMRC will be happy and the company will not have to pay tax on your loan. 


However, you may still have a personal tax charge on the BiK and there is yet a further potential trap.


TRAP 1 A taxable BiK arises where, you owe your company more than £5,000 even if only for just one day. Paying a post-year-end bonus or dividend will not remove the BiK charge.


TRAP 2 If you were not aware of the BiK problem, you will almost certainly have failed to declare it on your P11d form (return of benefits and expenses). This can attract a substantial penalty.



Incorrect P11D and P11D(b)returns:


Penalties are based on a percentage of tax that is due and might be uncollected as a result of the errors in the form. The percentage varies according to the circumstances and seriousness of the error:

• 0% (for a genuine mistake made having taken reasonable care to complete the form correctly)
• 30% (careless error)
• 70% (deliberate error but not concealed from HMRC)
• 100% (deliberate and concealed error).

Late submission

• Form P11D: £300 per return plus £60 per day until sent in
• Form P11D(b): £100 per 50 employees per month.  

Toolkit help HMRC warn of both these traps in their Director's Loan Account Toolkit which can be found here . This hows they are aware of the problem and gives you less excuse for ignoring it. So what is the fix?

Forestalling Obviously keep close track of your loan account balance and if it's likely to go over £5,000 clear ut immediately with a bonus or dividend.  Preferably, don't leave it until your year end.

Declaring and paying dividends

A dividend can be declared at any time by a company but will only be valid where it is made in accordance with company law - see s.829 to s.853 Companies Act 2006. Essentially these rules say that a dividend should be paid only from the company’s profit accumulated at the time the dividend is declared.

Where you intend to declare a dividend on the first day, or soon after the start, of an accounting period you won’t know for sure the results of the financial year just ended, but you will probably have a good idea. Producing regular management accounts, say quarterly, will help you keep tabs. Even without these you may know that the company has substantial profits built up over the years in which case declaring a dividend at the start of a year won’t be a problem. If, however, the level of profit is predictable you should estimate it before working out how much dividend can be paid.

It’s advisable to be cautious and not declare a dividend that exceeds profits. Where this happens and the recipient is a material shareholder, this usually means they own 5% or more of the ordinary share capital, they will be required to repay the dividend. And if the proper paperwork isn’t kept (see below) HMRC might argue that the excess is taxed and subject to NI as additional salary.

Paying a dividend

Declaring a dividend is the formal step needed before actually paying it. A declaration is just a statement that says how much and when the dividend will be paid. There’s no reason declaration and payment can’t happen on the same day.

The director/shareholders loan account can only be credited with a dividend on the date it’s payable - and not the date of the declaration.

Paperwork

Where the timing of a dividend is critical this makes the need to keep accurate documentation and records equally so. Companies should record the date the dividend is declared. This might be in the form of a minute of a board meeting, or for a single director company just a note kept with the company’s statutory records (company register etc.).

Other shareholders

A dividend declared will be payable to every holder of the same type of share. This can cause trouble if one shareholder wants a dividend paid early in the financial year while another wants to wait. To get round this problem you can issue additional classes of share for each director/shareholder in addition to their ordinary shares. This will allow you to declare dividends at different dates. It’s advisable to take professional advice before going down this route.