Tax measures coming into effect from April 2014 bring an array of reasons for accountants to call their clients. Some of the business tax measures may bring clients a degree of gain with the right preparation. Others might prompt reviews of existing employment arrangements or changed investment approaches. With the right input from advisers there may be opportunities to at least promote beneficial changes to clients – proof positive that taking the initiative will always pay dividends in the practitioner-client relationship.
One measure, however, is less than clear cut. Changes To the tax rules around LLPs, due to take effect in April, bring reforms that are understandable in their general direction, but are, say many, counterintuitive in practice.
The first part of HMRC’s draft legislation on partnerships is designed to tackle disguised employment within Limited Liability Partnerships (LLPs), whereby businesses, by structuring themselves as LLPs, might be seen to avoid payroll costs and secure tax advantage. HMRC’s reforming aim on this has been seen as broadly acceptable. However, its approach has confounded many in the profession.
You can see why mixed partnerships may be fair game for HMRC, but not unmixed ones, which of themselves are usually inoffensive
HMRC is providing a new statutory test for whether individuals are properly speaking to partners or employees instead of adopting established and well-understood case law tests. And the new test, which is similar to the case law test for employment, but not entirely the same, applies only to LLPs, not to general partnerships. “So two otherwise identical businesses with exactly the same relationship between the partner and the business will need to apply different tests,” says David Whiscombe, director of BKL Tax.
Businesses and their advisers will be looking closely at whether individuals who are currently partners within an LLP can be regarded as such once the new regime takes effect, he says. “People will be looking, if they have members who don’t meet the statutory test, at whether they can change the relationship so that they do meet the criteria.” This may include salaried members looking to put capital into the partnership. However, it seems likely that there will be some salaried members who won’t meet the criteria who will simply have to be added to the existing payroll, says Whiscombe.
The second change to the LLP legislation is in relation to “mixed partnerships” involving both individual and company partners.
“It is fair to say that ‘mixed partnerships’ have been used in a vast number of ways, ranging from the relatively benign (such as using a corporate member simply to allow tax-efficient provision of working capital) right through to aggressive and artificial tax avoidance schemes,” Whiscombe adds. He claims that the new approach is a very blunt instrument, which in an understandable attempt to counter unacceptable avoidance also catches relatively innocuous planning. But he says that the main problem arises from over-zealous anti-avoidance rules, which bring into the net not only partnerships that are in fact “mixed” but also ones HMRC believe it is “reasonable to suppose” might have been mixed but for the new rules.
“You can see why mixed partnerships might be fair game for HMRC,” says Whiscombe. “But not unmixed ones, which of themselves are usually inoffensive. Not only is it bizarre for HMRC to think it’s justifiable to attack a structure which is not of itself objectionable simply because an objectionable structure might otherwise have been chosen, it also introduces a ridiculous amount of uncertainty into deciding what structures are caught.”
This April also brings in changes to the headline corporation tax, property tax measures and a cluster of measures affecting employment.
The acceleration in the Chancellor’s staged cuts in the corporation tax rate brings it down to 21% from April this year. Paul Reynolds, tax partner at UK 200 Group firm Haslers, points out tax practitioners will have a short period to ensure that wherever possible expenditure is incurred and accruals correctly recorded during the higher rate period.
“Going forward, we know that corporation tax is to reduce further to 20%, so tax practitioners have an opportunity to look at sole trader clients for whom incorporation might now make sense and do those calculations afresh,” he says.
His one note of caution is that political winds, even in prolonged stagnant economic periods, are prone to change. “In the past the government has introduced a nil rate for corporation tax. There was a flood of incorporations as a consequence and the rate changed. So we should be mindful of that,” he says.
The introduction of the £2,000 National Insurance employment allowance similarly gives advisers an opportunity to help their clients review existing arrangements. Reynolds’s advice is to look closely at the legislation, make business clients aware of the changes and encourage them to ensure their software is up to date and capable of assisting them when it comes to making the claim. The allowance is a meaningful sum for smaller businesses especially and could enable clients to increase salaries cost-effectively.
“It may be that clients want to change their minds on employment,” says Reynolds. “Where historically someone has paid salaries below the NI threshold, they may want to look afresh at those calculations and potentially pay more in salary but benefit from the allowance.”
SAYE and SIPs
Also coming into effect from 6 April 2014 are increases in the limits for both share incentive plans and SAYE.
For SAYE schemes, the annual maximum that an employee can save per month increases from £250 to £500. Although this seems like largesse, the limit has been the £250 since the early 1980s, Reynolds points out, so the increase could be said to be long overdue.
Fiona Hotston Moore, tax and business advisory partner at Reeves & Co, believes this increase and the increased annual limits for SIPs – from £3,000 to £3,600 for free shares and from £1,500 to £1,800 for partnership shares free of tax and NI – while good moves in principle, are unlikely to promote a radical take up. They are good news for employers who already run schemes, but unlikely to prompt the setting up of many new ones. That said, proactive advisers should make a point of ensuring their clients are aware of the increases.
“You have to say there is an opportunity, albeit in a balanced way as the schemes may not be cost-effective. The big issue with these moves is that it is cash in hand that matters to most clients’ employees.
“Their income has been squeezed and is likely to be even more so with interest rate rises on the horizon and so they may not be overly excited by share ownership.”
Property tax changes
On the property front, a handful of measures are due to take effect. Business rates relief for small businesses has been extended for a year from April 2014. Food and drink retailers will qualify for a business rate discount and Real Estate Investment Trusts (REITs) are to be accorded institutional investment status.
Lynette Lackey, Greenside Solutions, who advises international businesses and high net worth individuals on real estate and other investments, says advisers need to think widely about measures and how they interact with other tax moves.
For instance, some individuals who plan to release equity from the disposal of their buy-to-let properties before the scaling back of CGT relief periods from three years to 18 months may be seeking an alternative home for their funds, she says. That may prompt individuals focused on property to widen their investment remit.
“While recognising it is a different risk profile, the continuing EIS and SEIS tax advantages make investment in small businesses attractive and the discounts to business rates, together with support on labour costs and promised increase in government loan funds, are all moves in the right direction to make investment in the right small growing business an attractive alternatives to traditional property,” says Lackey.
“If property is still the preferred route, the inclusion of REITs as institutional investors will allow REITs to hold majority shareholdings in other REITs without violating the non close company rule. This should attract further institutional capital to the sector, growing the opportunities and making investment in REITs a potentially attractive home for excess funds.”
PERSONAL TAX MEASURES
• The individual personal allowance reaches the landmark £10,000.
• Significant scaling back on relief for second home owners from three years to 18 months.
• Pension contributions limited to £40,000 annually and the maximum lifetime pot value falls from £1.5m to £1.25m.