In a presentation following the Chancellors statement yesterday, the IFS have claimed that the job of mitigating the debt caused by the governments current spending plans could be a job “for not just the current Chancellor, but also many of his successors”.
At a presentation of its findings on the Chancellor’s statement, IFS director Paul Johnson said that a “reckoning, in the form of higher taxes” would have to come eventually. It also suggested that the economy will not grow as large as it could have done if the Covid-19 crisis had not hit.
“If that’s the case, and it’s very likely to be the case, revenues will still be depressed, and if we want to try then to bring the deficit back to where it would have been absent the crisis, we will need to do some spending cuts, or given a decade of austerity, perhaps more likely some tax rises,” he said.
“It’s going to take decades before we manage that debt down to the levels we were used to pre this crisis.”
The IFS has also cast some doubt on the potential effectiveness of the Stamp Duty scheme and the 50% off dining initiative warning that the temporary stamp duty holiday, announced by Mr Sunak, may in fact increase house prices while deputy director Helen Miller raised doubts as to whether the meal discount scheme and VAT cut were driven by a problem with demand, or supply – with businesses unable to accommodate customers due to social distancing constraints.
Her concern lay in the fact that many businesses may not pass on the VAT savings to customers, thus negating the purpose suggesting that “the firms that benefit most would be those who have the highest sales, who are operating closest to normal”.
This isn’t the first time Rishi Sunak’s plans have been called into question. HM Revenue and Customs chief executive Jim Harra has also raised concerns about the Job Retention Bonus scheme which gives £1,000 to firms for each furloughed employee they bring back to work and whether it actually offers enough value and benefit.
In a letter to the Chancellor, he requested a ministerial direction which is a formal order to go ahead with a scheme despite the concerns.
Mr Harra said that while there was a “sound policy rationale” for the Job Retention Schems, but that “the advice that we have both received highlights uncertainty around the value for money of this proposal”.
Mr Sunak himself said he expected a “dead weight” cost to the JRS scheme, as many companies who already plan to retain staff will reap the benefit.
Speaking to BBC Radio 4’s Today programme he stated his feelings that “without question” there has been “dead weight in all of the interventions we have put in place”. However, many economists and even the leader of the opposition, Labour leader Sir Keir Starmer voiced concerns that Government could not in fact afford the “dead weight”, stated his belief that the scheme should have been a targeted initiative and not a one size fits all payout.
However, the government have since responded through a Treasury spokesman who stated that the Government is confident the Job Retention Bonus scheme is the “right policy” to help protect jobs.
What do US or UK citizens who live in Hong Kong or plan to move there need to be aware of and plan for?
If you’re a US citizen living outside the US, you will still need to file US tax returns and pay US tax on your worldwide income. Similarly, for UK citizens, if you’re a non-resident who owns UK property or has sources of income in the UK, you may still need to file UK tax returns, even if you have moved abroad. You will need to get to grips with your tax filing requirements in your home country and add the tax filing and payment deadlines to your calendar to avoid exposure to penalties. As well as compliance, you should consider whether your investments are tax favourable assets. Some investments can bring with them large tax bills. Some investments can bring with them large tax bills, so seek advice before you buy!
If you’re moving to Hong Kong for work, will you be on a local contract or paid through your home country payroll? There are pros and cons either way so you should seek advice to find out what this could mean for you, before signing on the dotted line. If you’re setting up your own business in Hong Kong, selecting the right structure is important in achieving the best tax result and minimising tax filing requirements, so you should loop in an adviser before you set up shop to get the most out of this new opportunity.
Are you familiar with the cost of living in Hong Kong? This may be higher than in your home country so find out how much you can expect to pay before you move - especially accommodation, which is notoriously expensive!
What are the advantages of speaking with an expatriate tax expert when moving abroad?
Your tax affairs are likely to be even more complex when you move abroad so the helping hand of an expert adviser can take away the burden, to leave you to enjoy your new home and embrace the culture. Even if you do have all of your tax filings up to date, there can be various opportunities for saving tax that you may not be aware of. An expatriate tax expert will make sure that you do not miss those opportunities in your home country and in Hong Kong. You will probably find that working with a tax adviser based in the same or similar time zone has some advantages over retaining an adviser located in your home country. Communication will be simpler; they will understand the tax issues faced by those living abroad and they are likely to have the necessary understanding of the local tax regimes that may impact you.
What are the key tax priorities to consider in the current uncertain times?
- Tax residence – if you are unable to travel, this could affect your residence status for tax purposes.
- Immigration status - if you stay abroad longer than planned, you may be in breach of your visa conditions.
- Government support schemes – you may be entitled to financial support or reliefs from tax filing deadlines under various government schemes.
The US and UK governments have released various guidance on the relief available for those affected by the above, so if you’re in this situation, be sure to find out what you are eligible for. If you’re stuck overseas, make sure you hold on to your passport with your original entry/exit dates, flight records, and anything else that proves your stay was extended due to the impact of COVID-19.
The tapering down of different initiatives will spark fresh concerns within many organisations, raising questions of whether they will be able to stand on their own two feet again.
The furlough scheme is at the heart of this subject. That is because it has been the most widely-used of all the financial support schemes available – around 8.4 million workers are having 80% of their salaries paid for by the Government at present (up to £2,500 a month). But at the end of May, the Chancellor Rishi Sunak confirmed that the furlough scheme is to end on 31 October 2020, and it will undergo some changes before then.
There are two key questions, then, that business leaders must address. Firstly, what do they need to know about the upcoming reforms to the furlough scheme? Secondly, what can they do if the curtailing of this initiative is likely to cause significant financial distress? Nic Redfern, Finance Director at KnowYourMoney.co.uk, offers his thoughts to Finance Monthly.
What are the changes to the furlough scheme?
Currently, it is estimated that the Government has spent £15 billion so far in covering the salaries of furloughed staff. By the end of the scheme, that figure is likely to reach £80 billion – that is £10 billion for each month the scheme was running.
While the Office for Budget Responsibility is set to publish more detailed costings in the coming days, what these approximated figures show us is that there are billions of pounds that is still yet to be paid for the initial four months of the furlough scheme.
This chimes with the findings of a recent study that KnowYourMoney.co.uk conducted among over 900 UK businesses. We found that as of April almost half (48%) of British companies had furloughed staff – this figure will likely be even higher now – but of those, 71% were still awaiting funds to be transferred to them from the Government.
Currently, it is estimated that the Government has spent £15 billion so far in covering the salaries of furloughed staff.
The Government must prioritise getting up to date with furlough payments to employers; businesses with many members of staff on furlough will not only be feeling the strain if they are not being reimbursed for their salaries, but they will also struggle to understand the real financial health of the business when some supports are yet to be issued.
Employers must do all they can to clearly track how much of their expenditure on salaries is likely to come back into the business. But they can only do so if they understand how the scheme is due to change in the months ahead.
Here are the key changes that were announced by the Chancellor on 29 May: from Wednesday 1 July, businesses using the Government's furlough scheme will be able to bring furloughed employees back part-time; from August, employers will have to pay national insurance and pension contributions; and from September, while employees on furlough will continue to get 80% of their salary, the proportion that the state pays will be reduced each month (government will only pay 70% in September and 60% in October).
The part-time furlough option may interest some employers. Let’s take a simplified example: a member of staff who earns £2,000 per month and works 40 hours a week, but has been furloughed and their employer is not topping up their salary beyond the 80% offered by the Government. If said member of staff returns part-time and work 20 hours per week throughout July, they will now receive 50% of their monthly salary from their employer as normal (£1,000). Meanwhile, the remaining 50% will be paid via the furlough scheme (80% of it – so £800). That means they employee will now earn £1,800 per month, which is higher than the amount they would be paid if they were furloughed full-time (£1,600).
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This solution could suit both employers and employees. Not only can it bolster the workforce and aid the transition back into work for some people who have been furloughed for many weeks, but financially it would ensure the part-time employees are better off. Plus, the business does not need to suddenly jump back to paying all of their salaries.
What are the alternatives?
For some businesses, though, they might not be in a position to bring furloughed staff back, even on a part-time basis. Yet they will need to do so once November arrives. So, what can they do to put themselves in a stronger financial position as they prepare to pay all of the employees’ full salaries again?
The important thing to remember is that there remain many options available for businesses requiring financial support.
For one, the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce-Back Loans initiatives are both still operational. Elsewhere, the Government is providing a Small Business Grant Fund (SBGF) to businesses that already receive Small Business Rates Relief (SBRR) or Rural Rates Relief (RRR).
Furthermore, it is worth remembering that any VAT payments due between 20 March and 30 June 2020 can be deferred to a later date. Also, any Income Tax Self-Assessment payments that are due by 31 July 2020 can be deferred until 31 January 2021.
The viability of these options will very much depend on each business’ circumstances. But importantly, if the tapering down – and eventual ending – of the furlough scheme is causing financial concerns within your organisation, remember that there are other forms of support in place.
What are the most common issues that your clients face in terms of tax preparation?
Common issues that our tax return clients face are varied. Tax codes are complicated and we are there to be able to make the complexity of preparing a return easier for our clients so that they do not incur needless penalties and interest. Issues that they face that can result in additional refunds of thousands of dollars are as follows: Do they qualify for child tax credits? If so, how much? What about earned income credits? In the case of divorce, separation or dependent of two non-married individuals, who gets to legally claim the dependents? Tax professionals such as us are spending numerous hours preparing a return that is complete and accurate and will meet the IRS due diligence requirements. Other common issues that clients face are connected to deciding if the off-the-shelf tax software is right for them or if they’re better off using a tax professional, staying up-to-date with the timing and amounts of deposits allowed for IRA contributions, HSA contributions, estimated tax payments, business income, and deductions.
What are the advantages of using professional help?
There are many significant advantages to using a tax professional overusing online software. One of the most common myths is that using online software will save people a significant amount of money when compared to hiring a tax professional. While at times this can occur, often this is not the case. Completing a tax return with online software does not mean the return was “correct”. For the software to file someone’s return correctly, the person using the online software would have to have an understanding of taxation; then know that the questions the software asks during preparation are correct for their situation; and also know that the answers the person uses are correct for their situation. I would be retired by now if I was given a dollar for every time I took a phone call from a person asking me to tell them how to answer a question from the online software they are using to prepare their return because they have no idea of what the answer should be. Tax professionals are educated in knowing about deductions and credits that most people are not aware of, and because of this, the cost of preparing a tax return can often be paid for by claiming one or more of these deductions or credits. Another advantage of using a tax professional is the ever-changing tax laws. Tax professionals are required to stay up-to-date with new and changing tax laws and do so by completing continuing education requirements which the general public does not have access to. Thus by using professional help, people will save themselves the time and money they’d need to research these changes.
Mistakes on tax returns are costly. Penalties and interest that the IRS or the state charge because of mistakes on tax returns are usually higher than the sum you’d pay a tax professional to prepare your return. Having a ‘trusted’ tax professional will usually pay for the costs of having the tax return prepared.
An example that illustrates this happened to me recently. I interviewed a new client that had been using a different firm to prepare their business and personal taxes. After our interview and reviewing the tax returns that had been prepared prior, I realized that this client would qualify for a special tax credit known as the Research and Development Credit; a little known, but a very powerful credit. I was able to amend their tax returns for the past three years, which resulted in them receiving a refund of over $1,000,000 (yes, you read that right) from the state and Internal Revenue Service – money that they have the freedom to spend however they please. One could certainly assume that these clients see the significance of using a tax professional!
How do you help your clients mitigate their tax liability whilst remaining fully compliant with tax laws?
Mitigating tax liability for clients and remaining compliant with IRS rules and regulations can be challenging. The main thing to know regarding this is the difference between tax avoidance and tax evasion. Tax avoidance is legal; tax evasion is criminal. Tax avoidance is the process of knowing the rules and regulations and using them to properly reduce or possibly eliminate any tax burden and is completely legal and wise. The definition of tax evasion is ‘an attempt to reduce your tax liability by deceit, subterfuge, or concealment’, and it is a crime. It is a tax professional’s job to educate the client why they should not deliberately underreport income, claim false or overstated deductions on a return, claim personal expenses as business expenses or hide assets or income. Although I like my clients and I’m friends with many of them, I will not risk losing my license to practice by committing tax fraud for them. It is better to lose a client who wants to falsify the information on a tax return than keep them as a client. The tax professional needs to be able to educate the client on the consequences of doing things in a non-compliant manner and explain why being honest is the best policy.
A couple of years ago, a client shared a story with me about our firm and my father which had occurred 40 years ago. The client was starting a new manufacturing business and had a meeting with my father to interview him about becoming his accountant. During the interview, something the client said caused my father enough concern to stop the interview and say: “Listen, if you are asking me to bend the tax laws for you, then you better go on down the street.” The client said he was taken aback, but found the utmost respect for my father. He understood that my father and our firm will do things right, yet use our education and knowledge to make sure the client is afforded every deduction and credit that is allowed by law and as a result, the client will not pay a penny more in tax than they are supposed to. That same person has been a phenomenal client of our firm ever since. He explained to me that the reason he has stayed with our firm is that I am exactly like my father and therefore, he has the same respect for me. This is the type of client that every tax preparer should want in their firm.
Mitigating tax liability for clients and remaining compliant with IRS rules and regulations can be challenging.
What have been any recent changes in tax legislation in Indiana?
As of 1st January 2019, Indiana has adopted Wayfair nexus for income tax, meaning income derived from Indiana would be taxable to the fullest extent permitted by the Constitution of the United States and Federal Law, regardless of whether the taxpayer has a physical presence in Indiana. Please consult your tax adviser regarding how this could impact you.
If you could, what would be the one thing you would change about Indiana’s tax legislation?
If I could change one thing regarding Indiana’s tax legislation, it would be the tax add-back for certain deductions on a Federal Return. The tax add-back is an item that needs to be added back on your Indiana return to properly calculate your Indiana Adjusted Gross Income. This creates the need to keep separate records for federal and state depreciation, net operating losses, excess federal interest and out of state municipal obligations. This creates questions and uncertainty about the validity of their tax return, as most taxpayers do not understand the reasons behind the add-backs.
In what ways has the COVID-19 pandemic impacted tax preparation in Indiana?
The COVID-19 pandemic has impacted the preparation of tax returns for the 2019 tax year in a myriad of ways. It has created delays in refunds from the IRS for taxpayers and has caused confusion as to new tax deadlines. In Indiana, the deadlines for a timely filed return is now 15th July, rather than the 15th April deadline. However, as of 13th April, more than a third of states kept their original 15th April deadline. Taxpayers should check with their tax professional what the date of filing in their state is. Our offices adopted a policy of staying open and preparing returns, but we have cancelled all face-to-face client meetings. Clients were asked to either drop off their documents through our mail slot, mail documents to us or send them to us via our secure portal. We then called or emailed them to consult about their returns and request any information that was still outstanding.
The biggest challenge we faced was the number of phone calls we received with people asking questions about the ever-changing Payroll Protection Program and the stimulus checks that were to be distributed. Due to the proliferation of misinformation on the internet, we were receiving hundreds of calls every day.
What do you think will be the broader impact of COVID-19 on the economy, both in Indiana and US-wide?
This is an excellent question, but I don’t believe that anyone will have the answer to this for years to come. Speaking for myself and basing it on my clientele, (which covers clients in over 30 states), I feel that the economy will be negatively affected for at least a decade. It will take years to bring businesses back to where they were because supply chains will need to be reorganised and many businesses will not survive the economic downturn. I also believe that we will see a real decrease in businesses hiring human workers as they turn to more automated systems to help stem costs and ensure that they will be in a better position in the case of the pandemic causing mass closures again.
The COVID-19 pandemic has impacted the preparation of tax returns for the 2019 tax year in a myriad of ways.
While I would hope that the current pandemic would show the United States that it needs to bring back manufacturing inside our borders so we are not so reliant on China and other countries, I feel that this will not be the case. Indiana and the rest of the United States will certainly emerge from the COVID crisis, but the question is, will we be better off or not? I for one am sceptical that we will ever fully recover.
Tell us about your work for the not-for-profit tax sector.
The not-for-profit tax sector makes up a small part of our overall business, but with 3,500 clients we still have numerous clients in the not-for-profit sector. I make every attempt to provide the sector with many benefits, such as reduced pricing and attending board meetings to educate members about the finances of the business. Many board members are volunteers who have no real background in business and I believe that our job is to explain the workings of their finances so they can be better prepared to make wise financial decisions. Not-for-profits have different tax rules, and board members need to be aware of these rules to stop needless penalties or worse yet, have the state or IRS take away their not-for-profit privileges.
Does your practice get involved in other services such as retirement and wealth planning?
I’m actually surprised by how much we’ve always have been involved in this area. So many of our clients seek our advice before they call their investment adviser. Other times they will call us after they have received a recommendation from them and get our opinion as to whether they should proceed or not with the recommendation. We even had an instance in which the investment adviser called us to propose their recommendation for the client before the meeting because they said: “I know they will call you after I meet with them to get your opinion anyway.” Due to the volume of questions we were receiving, we brought on Cory Reckard a few years ago to help assist with these questions and help clients. He also brings an additional layer of knowledge from his experience and connections that can be of benefit to our clients. We feel that we don’t have to know everything, but more importantly, we need to be able to recognise opportunities and have the connections and resources available to provide value to our clients.
Can you give us some examples of a scenario where you feel you provided significant value to a client in relation to retirement and wealth planning?
One fascinating story was when we were able to provide great value to a 100-year-old’s family. The family called us with some crazy ideas because they were trying to reduce their future estate tax liability. Because we recognised an opportunity for the clients, we used our connections to get the correct people involved and were able to save over $2,000,000 in estate tax for the heirs. As a result of this, we then took an inventory of our entire client base to find out who else may benefit from the same opportunity. We feel we have a responsibility to our clients to present them with opportunities that we feel fit their circumstances, and it is then their decision whether they want to move forward or not.
From what we see, it seems that quite often the tax preparer, who is the trusted adviser of the client, is not proactive. I remember a question that was asked at a seminar of mainly investment advisers: "How many people in the room have been called by their tax professional with ideas and opportunities?” Unfortunately, only a few were able to raise their hands. Because we understand that we are our clients’ trusted advisers, we need to take that role seriously and be more proactive for them.
Another example I can think of was from last fall when we recommended a strategy to a long-term client to save him and his family significant taxes on the assets in his C-Corporation. He liked the idea; however, he didn’t want to go forward with it at that time. This spring he called and apologised saying we were correct in what we presented to him and that he should have listened to us instead of taking the advice of someone else. Now we are working on getting the plan implemented, and we are pleased that we can offer him something of value that he appreciates and wants to do.
About John & Cory
John Emshwiller is an Enrolled Agent and has been granted unlimited practice rights to represent taxpayers before the IRS. With this designation, he is authorised to advise, represent and prepare tax returns for individuals, partnerships, corporations, estates, trusts and any entities with tax-reporting requirements in all 50 states of America. His role within the firm is all-encompassing; he prepares business, personal, estate and trust tax returns as well as payroll and bookkeeping for clients, while also doing business consulting for clients with an emphasis on Research & Development Credits.
Cory Reckard has been a Certified Public Accountant for over 25 years, which enables him to create specialised tax-driven plans for clients. He has extensive training and licenses in many investment-related areas, including his Chartered Adviser in Philanthropy designation and is also a Registered Investment Adviser. The training and licensing in all of these various areas help Cory create customised plans for each client and also help him bridge the gap between clients and their other professional advisers by translating the technical language and complex strategies so the client can see the value of the strategy; thus allowing them to be more confident in their decisions, whether it be increasing retirement income, saving significant taxes, leaving more money to charity or heirs, or elevating profits of their business.
That's because both corporate and personal finance jobs call for people with diverse skill sets, varied backgrounds, and open minds. So, if that sounds like you, find out how to break into this rewarding, growing segment of the modern economy. Here are three points to keep in mind before making the leap into the world of numbers, metrics, money, and all things financial.
You Should Enjoy Working with Numbers
In addition to being the type of person who pays attention to details, you should have a facility and at least a modest level of enjoyment when it comes to working with numbers. That doesn't mean you need to be a math genius or statistical expert, but if quantitative and math-related subjects are not your cup of tea, then this field is probably not for you. However, if you did well in high school and college math courses and have even a passing interest in banking, business, the stock market, economics, or similar subjects, then you'll easily find a home in the wide world of financial careers.
Degrees are Worth the Effort
One of the traditional aspects of the financial services sector is that college and graduate degrees are highly valued. There aren't a lot of freelancers for one very simple reason in that many state and federal laws regulate who can offer services as accountants, analysts, consumer counselors, and loan advisors. If you want to rise quickly in this area, it only makes sense to obtain a college degree. Even if you decide later on to go in alone as a sole proprietor, most of your prospective clients will want to know about your academic credentials.
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Getting a student loan to pay for your undergrad or graduate education is a wise investment. People who hold MBAs, master's degrees in business administration, CPAs, certified public accountancy licenses, and CFPs (certified financial planning certificates) all need to have college diplomas, at least, to get jobs in their line of expertise. But pay rates are high and opportunities are many, so it's no surprise that student loans are the primary way many of these skilled folks begin their educational journeys.
Government Work is Always Available
The organisation known as the IRS, or Internal Revenue Service, is a part of the US Treasury Department and are charged with seeing to it that working adults pay the right amount of taxes each year. Of course, the IRS gets its share of negative media attention every April, when the majority of citizens have to settle their tax bills. The good news, for working professionals anyway, is that the IRS regularly hires thousands of people with financial skills. The jobs offer very good pay, the chance to travel, excellent benefits, and one of the best retirement plans around. If you are averse to corporate or solo work, the IRS might be the place to ply your skills.
While it’s typical for the government to come after you for under-declaring your business income, you can bet it won’t give back money that should have been deducted from the corporate taxes you paid.
So, when paying corporate taxes to the IRS, you need to make sure you're calculating the right amount by keeping an eye out for these four tax credits:
1. Document expenses
Running a business requires managing a lot of paperwork. The good news is that the amount you pay to get documents printed can be deducted from your taxes. Acquiring or processing legal documents such as business plans and proposals is also tax-deductible. You might want to keep receipts for your document expenses and include the professional fees for attorneys or accountants tasked with preparing these documents. You will be surprised by how much you can save.
2. Cost of using vehicles
If you have a car you use to attend meetings with clients or transfer from one work location to another, your vehicle expenses are considered deductible. For this, you only need to measure the mileage the car has covered. There are apps that can help you measure your mileage so you have a better estimate of your deductibles. Take note that this is applicable only for business purposes, so personal travel should therefore be calculated as personal expenses.
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3. Research costs
Developing a new solution requires a lot of research and testing, which can drive up the cost of coming up with a new product. Luckily, you can offset these costs by using tax credits for research, especially if it is scientific. Under R&D credit rules, you can choose to deduct research costs immediately or amortize them. It is important to point out, however, that not all research activities are deductible. To be sure, you will need to refer to the IRS’s list of qualified research activities.
4. Miscellaneous fees
There are also other items you can write off. It’s this category that is the most neglected. You will have to be very detail-oriented in order to find these deductions, ranging from bank charges to payments in petty cash, from journal subscriptions to website maintenance expenses. It becomes manageable when you track your expenses closely using tools like tools like Hurdlr. The app can help you keep tabs on all your deductibles in real-time so you don’t have to waste time reviewing your expenses come tax season.
These are just some of the tax breaks you should look into if you want to save a lot of money. There are more than we’ve listed here, no doubt, so be sure that all your expenses are accounted for. You never know what routine expenses for your business can get you some money back on your tax return!
The precise shape of the UK’s post-Brexit taxation regime is yet to be decided; however, the indications are that radical changes are unlikely. Much will depend on the terms of the UK-EU trade deal, which is due to be negotiated this year. The EU has been abundantly clear that UK alignment in terms of taxation, labour and environmental regulation is the price for EU market access.
Yet, former Chancellor, Sajid Javid, warned that "There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union – and we will do this by the end of the year." It remains to be seen whether his successor, Rishi Sunak, will be as bold or soften in the face of the economic consequences of losing trade with the EU. Below, Miles Dean, Partner at Andersen Tax UK, offers Finance Monthly his predictions on what we are likely to see in terms of taxation as future trade deals are negotiated.
Given the scale of UK trade with the EU, it appears probable that substantial alignment will ultimately be seen as a wise trade-off in order to retain valuable market access to the EU. The EU remains the UK’s largest trading partner. 44% of all UK exports went to the EU in 2017, with 53% of all UK imports coming from the EU. The efficient operation of cross-border supply chains are vital to the UK’s automotive and aerospace industries. These largely depend on the free movement of goods across the Channel.
The Conservative Party’s clear majority in the 2019 general election makes the UK’s future tax policy somewhat more predictable. While some more excitable commentators feared that the Conservatives would slash corporation tax, deregulate and sell off the NHS, the party’s 2019 manifesto went in rather the opposite direction - deferring a scheduled cut in corporation tax to fund the NHS. Section 46 of the Finance Act, 2016 had pledged to reduce the rate of corporation tax from 19 percent to 17 percent from 1 April 2020. However, Prime Minister Johnson told the Confederation of British Industry’s annual conference on 18 November 2019 that the this planned reduction would be put on hold to fund the NHS and other “national priorities”.
44% of all UK exports went to the EU in 2017, with 53% of all UK imports coming from the EU.
To offset this disappointment to UK business, the Conservative Manifesto announced other business-friendly measures, including a review of business rates, an increase in the R&D tax credit rate from 12% to 13% and an increase in the structures and buildings allowance from 2% to 3%. Yet none of this amounts to anything resembling dramatic reform. Indeed, this cautious approach rather suggests that the government is heeding the EU’s bottom line in terms of alignment, and that it does not intend to radically alter the UK’s taxation regime.
The idea of the UK becoming a giant Singapore-style tax-haven after Brexit also appears to be on hold. Indeed, the government is even promising additional anti-tax avoidance measures and a new digital services tax, showing a commitment to maintaining and even expanding the UK’s tax base.
The new digital services tax may yet be influenced by trade negotiations – this time those with the United States, as regards a US-UK trade deal. The Government’s plans to introduce a 2% digital services tax from April 2020 would disproportionately affect US tech companies such as Google and Facebook. The US treasury secretary Steven Mnuchin has warned of retaliation by new US taxes on UK car imports, saying “If people want to just arbitrarily put taxes on our digital companies we will consider arbitrarily putting taxes on car companies.” Downing Street replied in turn, saying that such tariffs would “harm consumers and businesses on both sides of the Atlantic. We feel [the digital tax] is a proportionate step to take in the absence of a global solution. We made our own decisions in relation to taxation and will continue to do so.”
Despite the Government’s declaration of independence in terms of taxation policy, this incident illustrates that any greater independence in trade and taxation policy brought by Brexit has limits. There will inevitably be trade-offs and constraints. UK decisions on taxation do not operate in isolation, but can have broader political and economic consequences. The UK exports some £8.4 billion worth of cars to the US each year. The early agreement of a UK-US trade is a priority for the government. US pressure may well yet influence the government’s digital taxation plans.
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Nobody can predict the future. When it comes to Brexit, events are notoriously unpredictable. However, the actions of the UK government have been moderate – even if the rhetoric is sometimes less so. Mr Johnson came to power with the promise of keeping the credible threat of no-deal on the table, as a negotiating tactic. However, his aim was not to end up with no deal, but with a more favourable one. Having made the compromises required to achieve a withdrawal agreement, we can hope that a similarly reasonable approach will prevail in the UK-EU trade negotiations. No doubt the threat of no-deal will also remain on the table, for tactical reasons, as before. Therefore, while it is possible that the talks will collapse, resulting in a no-deal Brexit at the end of 2020, that outcome appears unlikely.
Even in a no-deal scenario, the Government’s no-deal Brexit tariff regime means that 88% of imports would not be taxed. The Confederation of British Industry estimates that 90% of the UK’s goods exports to the EU, by value, would face tariffs averaging 4.3%.
While the UK could theoretically abolish VAT after Brexit, the technical guidance for a no-deal Brexit indicated that the current VAT system would continue. Since it raises around £125 billion per annum, it is inconceivable that it will be abolished let alone restructured to any significant degree.
While the UK could theoretically abolish VAT after Brexit, the technical guidance for a no-deal Brexit indicated that the current VAT system would continue.
A no-deal Brexit would disproportionately impact sectors such as agriculture and manufacturing. Likewise many EU sectors would be badly affected. Since a deal is in the interests of both sides, it’s reasonable to hope that one will be achieved, even if it is imperfect.
The broad shape of a UK-EU agreement that would facilitate market access is already known. It will require sufficient UK alignment on key matters, including taxation. While the detail is undecided, in broad terms it means little change to the UK’s taxation regime. Perhaps, the government may seek some wriggle-room on VAT or corporation tax. Yet the fact that the government has shown no appetite for radical change in taxation is telling. Maintaining the status quo on taxation helps to keep a UK-EU trade deal within the government’s sights.
Miles Dean is Head of International Tax at Andersen Tax in the United Kingdom. He advises privately held multinational companies, entrepreneurs and high net worth individuals on a wide range of cross border tax issues.
Andersen Tax provides a wide range of UK and US tax services to private clients and businesses, helping them achieve their personal and commercial objectives in a tax efficient manner.
If you run a small business you may currently function as a sole trader – this can be a great way to work and can be very effective for many people. However, there is another: operating as a limited company.
“Most entrepreneurs who go into business this way work as sole traders for the sake of simplicity,” says Darren Fell. “After a while many freelancers decide to form a limited company for their business though, either out of personal preference or on the advice of their accountant.”
But this is not necessarily the ideal choice for everyone; starting a limited company can be complex and create a number of issues that you will need to deal with. Of course, it also comes with benefits such as a more favourable tax situation and a more professional appearance. Working as a limited company is becoming increasingly popular – there are now 4.2 million limited companies in the UK, up from 2.6 million in 2010.
In this article we will take a look at the pros and cons of setting up a limited company rather than being a sole trader. This will allow us to look at whether you would benefit from doing so and if this is the right choice for you.
The Advantages
Becoming a limited company can be hugely beneficial for a number of reasons. Some of the major positives include:
- Tax efficiency – the first major reason to become a limited company instead of a sole trader is the tax benefits. As the director of the limited company you would usually take the maximum tax-free income up to your personal allowance of £12,500 as salary (as of 2020), and then take the rest of your income in the form of dividends. This can be extremely beneficial as there is no National Insurance Contribution to pay on dividends. It is worth noting that limited companies do pay corporation tax of 19% on profits; this is lower than the 20-45% tax you would pay as income tax as a sole trader.
- Limiting your liability – another important reason that you might choose to become a limited company is due to the fact that you won’t be liable for the business, as you would as a sole trader. In practice, this means that if the business incurs debts, your personal finances and assets are protected.
- The business is its own entity - whereas a sole trader must be responsible for entering into contracts and having liability for business actions, the limited company is a separate legal entity, which can be hugely beneficial and allow much greater flexibility.
- A more professional look – operating as a limited company, even if you are only one individual involved, makes your business appear larger and more professional. This might not seem like it would be important, but it can genuinely make a difference to how other businesses and customers perceive you. It can even get you considered for jobs that may not have come your way as a sole trader.
if the business incurs debts, your personal finances and assets are protected.
The Disadvantages
Just as there are pros and cons with being a sole trader, there are negatives that come with being a limited company too. Some of the major disadvantages include:
- A more complicated setup – becoming a limited company can, of course, come with a huge range of benefits, but it is quite complicated to setup. A sole trader has a fairly easy time of this; simply registering with HMRC. Starting as a limited company means registering with Companies House and paying a fee to do so. This process can be daunting if you are doing it for the first time.
- Complex accounts – managing the accounts of a limited company comes with a range of additional challenges you won’t face as a sole trader. Small business accounts specialists PKB state that some of the accounts issues that limited companies need to deal with include payroll, bookkeeping, and tax planning – not to mention tax returns, business expenses, and keeping company accounts up to date. Additionally, failing to fill in tax returns correctly can result in fines and other punishments. “Picking the wrong structure could see you paying more tax than is necessary,” says Daniel Mepham, “it is important to identify early on if the wrong structure is being used so a plan can be put in place to change to something more suitable”.
- Issues with ownership – as a sole trader you make all of the decisions and only need to justify them to yourself. As a limited company it is not quite so simple, as you may have shareholders. These shareholders will be able to have a say in how the business is run and will need to be appeased. This can complicate matters significantly.
- Less privacy – as your business will be registered with Companies House you will share information about your company directors, as well as shareholders and accounts. These records are then available to anyone who wants to access them.
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Final thoughts
There is no ‘right’ answer here – it all depends on your circumstances. It’s a great idea to take independent advice from specialists in order to establish whether running a limited company is going to be the best solution for you.
The Uk's official budget statements is due on the 11th March, and we're exepcting to hear on a myriad of important topics. Below Finance Monthly hears from Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudson, on the potential tax reforms experts woudl like to see postively impact capital investment, renovations and retirement builds.
The green light for HS2 was good news and freeports would stimulate the construction sector if they end up being approved. On the other hand, the IR35 reform is going to bite hard in April and the general level of investment could still be improved.
A number of reforms to tax rates and reliefs are overdue and the budget would be as good a place as any to push them through.
It is never a bad idea to encourage investment in plant and machinery, particularly when the proposed immigration reforms will shrink the labour pool in certain parts of the country, so the Chancellor would be well advised to raise the Annual Investment Allowance (AIA) which currently stands at £200,000.
A reduction in Stamp Duty would also be welcome; the tax inhibits buyers in its current form. An exemption for older people looking to downsize could also stimulate the market for specialist retirement accommodation, where the UK still lags the likes of the US and Australia.
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VAT on renovations also ought to be reduced to 5% across the board. It is of course sometimes possible to pay at this lower rate, but this ultimately depends on the circumstances. HMRC could simplify this procedure and help bring older properties back into circulation by mandating that the rate should always be 5%, particularly if this helps towards energy saving.
Finally, Entrepreneurs’ Relief needs to be retained. It does aid business creation in the construction sector, but reducing the cap to say £3m from £10m and requiring the shares to have been held for a longer period would target the relief at smaller hard-working SME owners who have invested considerable time in their businesses.”
Despite the Confederation of British Industry (CBI) announcing a “welcome lift in business confidence” at the start of 2020, the Government can’t afford to neglect the needs of SME businesses, the backbone of the UK economy.
We hear from Richard Godmon, tax partner at accountancy firm Menzies LLP.
With many UK businesses trading internationally, certainty surrounding future trading arrangements with the EU and the rest of the world is urgently required. However, if this can’t be delivered in the short-term, then the Chancellor must step up to the plate and provide support in the form of clear fiscal incentives and allowances, to help businesses to improve their cash position and facilitate investment.
R&D relief
Among the Budget announcements, tax specialists at the firm are urging the Chancellor to confirm that the rate of R&D relief that large companies can claim under the Research and Development Expenditure Credit (RDEC) scheme will be increased by one % (from 12 to 13 %). The Chancellor should also take the opportunity to extend the scope of the scheme to include costs for investment in cloud computing and big data analytics.
Annual Investment Allowance
Further certainty is needed surrounding the Annual Investment Allowance, which is currently set at £1 million but is expected to revert to £200,000 from 1 January 2021.
Investment requires confidence, and this can’t happen in a climate of uncertainty. Businesses need to know what is happening to the AIA so they can understand the cost of new plant and machinery and invest in their growth plans. The Chancellor could address this by either increasing the allowance or extending the current limit until at least the end of 2022.
Alternatively, if a blanket increase in the AIA limit is considered too costly, the Chancellor could select specific areas of capital expenditure, which might qualify for enhanced tax relief (say, of up to 110 % of cost) – for example, investments in robotics, AI systems, data integration, 3D printers and other value-driving tech.
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Entrepreneurs’ Relief
This Budget may see the end of Entrepreneurs’ Relief (ER), which is intended to encourage business investment by providing a favourable rate of Capital Gains Tax (CGT) to business owners on the disposal of all or part of their business. The relief, which saves business owners an estimated £2.2bn per year, may be under threat following publication of a report suggesting that it may not be boosting entrepreneurialism as intended.
This Budget may see the end of Entrepreneurs’ Relief (ER), which is intended to encourage business investment by providing a favourable rate of Capital Gains Tax (CGT) to business owners on the disposal of all or part of their business.
While it would be a big step for the Government to completely remove the idea of rewarding owners and investors for risking their capital, we may see reform of the relief, designed to reduce the tax cost. This might involve reducing the £10m lifetime allowance, or limiting access to new businesses, or those who reinvest their sale proceeds within a limited window.
We hope that any restrictions to ER will be offset by measures to enhance incentives for start-ups and growth businesses. This would continue to communicate the message that Britain is open for business, helping organisations to plan their long-term investment strategy.
Digital Services Tax
The Government is also expected to deliver a final decision regarding the controversial UK Digital Services Tax, and there is still time to soften its impact or even defer it altogether. If it goes ahead, the tax could impact UK competitiveness significantly.
It’s important to bear in mind that the Digital Services Tax would operate solely within the UK, rather than being EU-wide. As such, the UK could find itself isolated and at odds with trading partners should other countries choose not to introduce a similar tax. This could leave the UK at a considerable disadvantage when it comes to attracting international orders and so could have a negative ripple effect on UK-based SMEs. Hopefully we will see this tax deferred for a year pending the outcome of the OECD work on taxation of the digital economy, which it is hoped will reach an agreement by the end of 2020.
Housing and Property
Finally, with Brexit uncertainty still negatively impacting property sales, the Government could do more to get the housing market, traditionally a key driver of economic growth, moving and improve housing supply.
After seven years of punitive tax changes, buy-to-let property investors are hoping for a period of relative stability and maybe even a fiscal ‘escape hatch’ too.
A temporary reduction in the rate of Capital Gains Tax (CGT) payable on gains from the sale of B2L properties, made unprofitable by recent tax changes, could help to release stock onto the market. The new 30-day payment rules for CGT also means the Treasury’s coffers would feel the financial benefit immediately.
Further housing changes could see the Stamp Duty Land Tax (SDLT) threshold raised to £500,000 for all buyers, the introduction of a 3 % SDLT surcharge for non-UK resident buyers of UK property, and the expected tightening of tax reliefs on the sale of individuals’ main residences.
The extension of IR35 payroll legislation is forcing the private sector to reassess employee bases and business structures, and the big question is whether businesses are ready.
The short answer is no. There’s still a lot of work to undertake, and failure to fully prepare could result in significant labour supply issues, business continuity challenges and liabilities for tax, national insurance contributions, interest and penalties.
We’re finding many businesses still don’t know exactly how many off-payroll workers they have, and some haven’t yet taken steps to prepare. There’s also still a lack of confidence in determining employment status for contractors.
At a sector level there’s confusion in construction in particular, stemming from the interaction between IR35 and the Construction Industry Scheme for tax deduction (CIS). Many people have assumed CIS is a way to avoid IR35, but HMRC is clear: IR35 takes precedence over CIS.
If companies are robust in their preparations the move to IR35 presents a wealth of opportunity. It’s a time for businesses to re-evaluate their current workforce and project delivery operating models to ensure they really deliver the best possible value for money. Is it time to bring some roles on-payroll, or to engage a third party? With this assessment companies can determine the optimum model for future business growth.
Below, Dr Michael Thoene delves into his own recent research to explain why many tax breaks governments offer as incentives can amount to little or no benefit to the intended purpose.
Tax breaks are when the government give you a reduction in your taxes. It can come in a variety of forms, such as claiming deductions or excluding income from your tax return, the main examples are pension contributions, charity donations and if you’re self-employed. They are an important, broadly applicable and potentially efficient instruments for creating incentives for private activities and promoting policy objectives, for example: transport policy environmental policy and many sectoral or horizontal areas of policy, however, I was intrigued to see how effective these tax breaks are because, firstly, tax breaks are not included in government budgets and secondly, have tend to exist for a long time.
I conducted a large-scale evaluation with the University of Cologne of 33 German tax breaks that add up to 7.4 billion euros, focusing on the reductions and exemptions provided for energy and electricity duty, car tax and income tax. These benefits have diverse objectives, including climate protection, housing, worker participation and more. Of these 33 tax breaks, 10 measures got an overall rating of ‘weak’ because they fell short of their expected objectives. These 10 measures add up to a total of just under one million to well over one billion euros per year.
When examining the weak tax benefits, my study found that the objectives of these measures are no longer appropriate in view of the current subsidy policy. In fact, nearly all of the weak tax benefits had been around for a while and it seems that they were introduced and more likely developed, despite it not working, rather than being replaced with a more effective system. Furthermore, the design of the concessions were not all suitable. If the tax benefits had existed for a long time, without explicit intervention, there will have been social and economic changes meaning that from an economic perspective there is no longer evidence to justify the need for state intervention and that these measures either no longer achieve the objectives of the benefits or were not the most cost-effective method.
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The study also looked into the transparency of the tax reliefs and found that they were not accessible as they should be to the public. Transparency is needed to provide pressure to justify and control options in the systems, it is a way to provide politicians and the general public with a good basis of information so that politicians can make informed choices regarding policies. Without transparency, the benefits became ineffective as there is no way to keep them in check. In addition, the tax benefits were evaluated on sustainability. The ones that performed badly were the benefits that had no effect on the UN’s 17 Sustainable Development Goals. Climate change is a very important topic and now people are becoming more aware, they want governments to do something, which is why this new assessment weighs very heavily in the overall score of each benefit.
In sum, the study highlights that if not monitored correctly, most of the benefits miss their purpose or lead to deadweight effects. A singular recommendation on how to improve these tax benefits would be impossible, each concession has their positives or negatives but what can be said is that they need to be reformed or abolished urgently. In their current state, these tax benefits will be very detrimental, losing billions of euros that could be used elsewhere.
