15 August 2011

Capital Allowances on purchase – Recent and forthcoming changes

By Graeme Lillywhite

graemel@gwypg.co.uk

In the last decade or so there have been considerable changes to the type and amount of initial capital allowances (CA) that are available upon the purchase of qualifying plant and machinery.

First Year Allowances (FYA's)

FYA's at 40% or 50% (the rates dependant on the financial year of purchase and size of business) were introduced in 2004 and they remained in place until 31st March 2008 at which point they were replaced by the Annual Investment Allowance (AIA).

Annual Investment Allowances (AIA's)

These provide 100% relief on qualifying purchases up to an annual limit* after which any remaining cost is subject to the prevailing rate of written down allowance (WDA) for that year; the exception to this was for 2009/10 when FYA's were temporarily reintroduced for one year.

*Since 1st April 2010, the annual limit for AIA's has been £100,000 which is a 100% increase on the amount available when they were first introduced.

It should be noted that where two or more companies are associated, the AIA annual limit is the total available across all the companies, not per company.

Those who have invested in qualifying assets will be aware of the above comments but they may not know that the level of initial allowances has diminished over recent years in the situation where the annual limits are exceeded; unfortunately this trend is set to continue.

For instance, AIA's will remain at £100,000 in 2011/12 but will reduce to £25,000 from 1st April 2012 after which only WDA's will be available on the excess cost.

WDA's have also been affected as these were reduced from 25%pa in 2008 to the current level of 20% and will reduce further to 18%pa from 1st April 2012.

The reduction in allowances are a likely consequence of the current economic climate faced and form part of the government's attempt to reduce national debt as the previous levels of allowances would have been too costly to maintain.

Cars

FYA's/AIA's do not apply to cars as they have only ever received WDA's; up to 31st March 2009 even the WDA's were capped at a maximum £3,000pa for 'expensive cars costing over £12,000'.

In light of environmental concerns, since 1st April 2009 CA's for cars have been based on carbon emissions per kilometre with bands of up to 110g/km-100% CA's, up to 160g/km-20% and over 160g/km-10%.

CA's on cars are also subject to change from 1st April 2012 as those emitting between 111-160g/km will receive 18%pa and those over 160g/km, 8%pa.

Further to this the 100% band is set to expire in 2013 and many view that the CA's available for cars producing emissions in-excess of 160g/km will reduce further (from 8%).

In summary

As well as the tax considerations of qualifying capital purchases, other aspects must also be taken into account such as the affect on cash flow, the finance deals that are available (i.e. repayment options) as well as the timing of purchase in view of when the asset can start to be utilised in the business.

We are able to advise on the likelihood of being able to claim capital allowances within your business along with the timing of CA's for all types of expenditure. Along with the details above, there are others to consider such as integral features, short and long life assets which attract different CA's when compared to plant and machinery.

Note:

• For non-corporates, any reference to 31st March and 1st April should be read as 5th April and 6th April respectively.
• All rates (%) of WDA specified are in respect of the reducing balance method.

26 May 2011

Potential Nasty Tax Shock For Non Doms When Selling Your Non UK Family Home. Can this tax be reduced as part of an international succession planning strategy?

By Fraser Lawrence

fraserl@gwypg.co.uk

During 2008, changes were introduced by the Inland Revenue concerning the taxation of non-domiciled individuals in the United Kingdom. These changes were in part a response to political pressure to tax the nasty investment bankers/hedge fund folks who come to our shores to make money without paying their fair share of tax!

Without delving too deeply here, the changes effect people who have been claiming non-domicile status ( ie only taxed in the UK on foreign income and gains actually remitted to the UK) in the UK for seven of the past nine tax years before the particular tax year. If this is you, then you could be liable to pay tax in the UK, on all sources of your worldwide income, but where the nasty shock comes in, is that this would include the profit, if any, on the sale of your family home if you have kept it in your home country or the country you lived in before coming to the UK to return to after finishing your working life in the UK. You could be liable to Capital Gains Tax (28%) on any profits ( ie difference between sale price and original cost) made from the sale of that property. How can this be?

The UK doesn't respect the fact the home was previously your main residence and so should be tax free. Nor does it give a step up in the cost base of the home to market value at the day you entered the UK.

As part of an international succession strategy, can this tax be avoided/reduced. There is the opportunity to avoid this charge if you claim what is known as the Remittance Basis Charge (RBC) and pay over to the Inland Revenue an annual charge currently of £30,000. But why should the HMRC get this tax when the asset has nothing to do with the UK?

Being liable to pay this tax is a frightening prospect for most, so if you think this tax may effect you and it is of interest to you to look at how to avoid the tax, maybe as part of your international succession planning strategy, then we have some suggestions to help avoid/minimize the tax which might appeal to you.

03 May 2011

INCIDENTAL DUTIES IMPACTING UK TAX RESIDENCE

By Peter Wilson

peterw@gwypg.co.uk

Many non-UK hedge/private equity/family funds are managed by Limited Partnerships formed in the United Kingdom. It is not unusual for many of the partners in the management entity to now wish they were tax resident outside the United Kingdom because of the increase in the personal tax rate to 50%. If these executives relocate then one of the very important questions remaining to be answered is how many days can they work in the UK in a tax year without those days having a negative effect on his newly established non UK tax residence.

HMRC has very recently confirmed that it will not necessarily reject non-UK residence if the executive works for more than 10 days in the UK each year. This is the "incidental duties" test. The position will usually be determined by how incidental those days work in the UK may be to the conduct of the full time employment outside of the UK.

HMRC accepts that an individual can break his/her UK tax residence if he leaves the UK under a full-time overseas employment contract which spans a complete tax year. It is clear that a person can become non-UK resident if he makes a break with the UK through working full time abroad.

‘Full time work abroad’ means a genuine, full time, foreign employment. This could be either a contract with a foreign employer or a formal secondment to a non-UK position of a UK employer.

To be able to demonstrate full time overseas employment, HMRC will want to be convinced the partner is working equivalent hours to full time foreign employees, at the same level in the same line of business, in the country concerned. It is expected that this will normally be a minimum of 35 hours a week. Usually structuring an employment contract through a foreign company owned by the UK management entity normally will be the way to go.

HMRC accepts that even if the partner is working abroad he may still be required to return to the UK to do some work in the UK. Where this is the case, it will be necessary to show that the amount and nature of any work carried out in the UK does not prevent the overseas work from satisfying the criteria required for it to be considered to be full time.

In order to successfully demonstrate the person is in full time work abroad it will be required that the person has evidence to confirm:

• A description of the nature of work and responsibilities
• The results of the work
• Timetables of activities, including time spent and nature of work done in the UK
• Reports made to the employer on his performance
• A record of the annual leave taken

How much work can be conducted in the UK depends upon the facts and circumstances relevant to each individual. However HMRC will generally accept that working in the UK for fewer than 10 days in a year will not by itself prevent an individual claiming they have made a break with the UK because they are working full time abroad. If more days than this are worked in the UK, whether an individual is working full time abroad will depend upon their particular circumstances.

At this stage, HMRC has confirmed that for 2011/12 year, this 10 day rule will continue. It will, however, be reviewed for future years having regard to the outcome of the consultation on a statutory residence test which is now underway.

21 April 2011

AUSTRALIAN TAXATION OF SOVEREIGN WEALTH FUNDS

By Peter Wilson

peterw@gwypg.co.uk

For many years the Australian Government has respected the concept of "SOVEREIGN IMMUNITY" so far as it relates to income and gains earned in Australia by Foreign Governments. Difficulties have arisen however where the income and or gains have been derived by a corporate entity, or fund owned by the Foreign Government rather than the Government itself.

Today the Australian Government has proposed design rules for new provisions covering Sovereign Wealth Funds investing in Australia.

Under these rules, two basic tests need to be met. Firstly, the entity is a qualifying entity and secondly, the investment is a qualifying investment.

Qualifying Entity:-

A qualifying entity is a foreign government agency and wholly-owned entities through which they invest in Australia.

The term "foreign government agency" is currently defined in the Australian tax law but the definition is proposed to be extended to include wholly-owned entities of the foreign government agencies such as wholly-owned companies or investment vehicles.

Qualifying Investment:-

Ordinary income, statutory income and capital gains made in respect of a Capital gains tax asset-CGT- (other than income from a direct interest in taxable Australian real property or an option or right to acquire such an interest) will be treated as effectively not subject to Australian tax ( either by assessment or by withholding tax) if the income or gain is derived by a foreign government agency or sovereign fund. If the income or gain is made in respect of a CGT asset that is a debt interest, then it will also have a similar treatment.

However, income or gains made in respect of a debt interest will be ineligible for this treatment if the debt interest includes a right (whether existing or contingent) to participate in a decision making processes of, or deal with assets of, the issuer of the debt interest (other than where the right arises as a result of a breach of the terms of the debt interest by the issuer). In other words, the debt interest holder must be a passive participant.

Further, the income or gain must be made in respect of a CGT asset that is an equity interest, where the income or gain relates to an investment of less than 10% in a corporate tax entity, fixed trust or partnership (the "safe harbour test").

Since income or gains in connection with Australia real property are likely to fall outside this exemption, special structuring will be required.