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Navigating the Non-Dom Landscape with Dixcart Group

Non-dom Tax

In today’s globalised world, the movement of individuals and families across borders has become increasingly common. For non-domiciled individuals in the UK considering a move abroad, navigating the complexities of tax, legal, and professional planning can be daunting. At Dixcart, we specialise in providing seamless, comprehensive support to ensure a smooth transition from the UK to your new destination, leveraging the extensive resources of the Dixcart Group.

Understanding the Non-Dom Status

Currently, non-domiciled individuals living in the UK currently enjoy tax advantages under the remittance basis of taxation. This allows non-doms to pay UK tax only on the income and gains they remit to the UK, while their offshore income and gains remain outside the UK tax net until they are remitted into the UK. However, the landscape is shifting and it is widely expected that many of these benefits will be reduced or removed in the coming years.

Seamless Transition: From Exit to Arrival

At Dixcart, we pride ourselves on offering personalised, expert advice tailored to the unique needs of non-dom clients. Our approach ensures that every aspect of your move is managed efficiently and effectively, providing peace of mind from the moment you decide to relocate until you are fully settled in your new country.

  • Pre-Move Planning: We provide guidance on the UK’s statutory residence test (SRT) and help you understand the implications of your tax residency status. We also assist in preparing for departure by advising on the timing of disposal of assets.
  • Exit Strategy: Our team works closely with you to develop a detailed exit strategy, ensuring all legal, and tax considerations are addressed. This includes understanding split-year treatment, managing ongoing UK obligations, and planning for any other tax implications.
  • Arrival Coordination: Upon arrival in your new country, Dixcart continues to provide support through our local offices. We assist with settling into the new tax regime, and ensuring compliance with local laws.

One Group, One Team

Dixcart UK is part of the larger Dixcart Group, a global network of offices providing specialized services to individuals, families, and businesses for over fifty years. Our international presence includes offices in Cyprus, Guernsey, Isle of Man, Malta, Portugal, Switzerland, and the UK. This extensive network allows us to offer a wide range of services and local expertise to support your move and ongoing needs in your new country of residence.

With Dixcart, no matter where you are, you will receive consistent, high-quality service from a dedicated team of experts. This integrated approach ensures that all aspects of your relocation are handled smoothly and efficiently, without the need to coordinate between multiple service providers.

Our International Services

The Dixcart Group offers comprehensive support across various jurisdictions, including:

  • Residence and Citizenship: Assistance in obtaining residence and citizenship in various countries, ensuring compliance with local regulations and optimizing tax benefits.
  • Corporate Services: Business formation and management, including accounting, corporate secretarial services, legal, and immigration support.
  • Private Client Services: Family office support, trust and foundation administration, and registration of aircraft, ships, and yachts.

Linking to Expert Guidance

For more detailed information on the implications of the UK non-dom status and how we can assist you, visit our dedicated page on Guidance for UK Non-Doms Considering a Move Abroad. This resource provides valuable insights and practical advice to help you navigate the complexities of relocating from the UK.

Contact Us

At Dixcart UK, we are committed to providing expert, personalized support to ensure a smooth and efficient transition from the UK to your new home. For more information on our services and how we can assist you, please contact us or reach out to one of our offices within the Dixcart Group.

By choosing Dixcart, you gain access to a wealth of expertise and a global network dedicated to supporting your needs every step of the way.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Understanding Tax Residence Certificates: A Guide by Dixcart UK

Tax Residence Certificate Tax

Tax residence is a fundamental aspect of international taxation, and understanding it is essential for individuals and businesses to effectively manage their tax obligations. One crucial document in this context is the Tax Residence Certificate (TRC). A TRC serves as official proof from a relevant tax authority of an individual’s or entity’s tax residency status in that jurisdiction, enabling them to benefit from tax treaties, claim tax refunds, and avoid double taxation. By establishing tax residency, individuals and businesses can navigate the complexities of international tax laws more efficiently, ensuring compliance and optimizing their financial positions.

In this article, we will delve into the concept of the Tax Residence Certificate, discussing its definition, significance, and common uses. Additionally, we will provide guidance on the application process, supported by a practical case study to illustrate the real-world application and benefits of obtaining a TRC.

What is a Tax Residence Certificate?

A Tax Residence Certificate (TRC) is an official document issued by the tax authorities of a country to confirm that an individual or entity is a tax resident of that country. This certificate is crucial for individuals and businesses involved in cross-border transactions as it helps in establishing the tax residency status for the purposes of Double Taxation Avoidance Agreements (DTAAs).

Key Uses of a Tax Residence Certificate

1. Avoidance of Double Taxation The primary use of a TRC is to avail benefits under DTAAs. These agreements are made between two countries to avoid double taxation on the same income. With a TRC, a taxpayer may claim tax relief or exemption on income earned in a foreign country.

2. Proof of Residency For individuals and businesses operating internationally, a TRC serves as proof of tax residency. This is particularly important when dealing with foreign tax authorities or financial institutions who need to hold such proof to comply with the Common Reporting Standards.

3. Reduced Withholding Taxes In many cases, the withholding tax on income such as dividends, interest, or royalties can be reduced if a valid TRC is provided. This ensures that the taxpayer does not pay more tax than necessary.

How to Apply for a Tax Residence Certificate

The process of applying for a TRC can vary depending on the country, but typically involves the following steps:

1. Determine Eligibility Ensure that you meet the residency criteria of the country in question. This often involves physical presence, permanent home, or significant economic ties.

2. Prepare Documentation Gather necessary documents such as proof of residency, tax returns, and any other required forms. The specific requirements will vary by country.

3. Submit Application Complete the application form and submit it along with the supporting documents to the relevant tax authority.

4. Await Approval The tax authority will review the application and, if satisfied, issue the TRC. The processing time can vary.

Case Study: John’s Journey to Obtaining a Tax Residence Certificate

To illustrate the importance and application process of a TRC, let’s consider the case of John, a UK-based entrepreneur who has expanded his business operations to France.

John has been living in the UK for the past several years and has established significant ties to the country. However, his business activities in France have grown, and he is now receiving substantial income from French sources. To avoid or mitigate double taxation on his French source income, John needs to obtain a TRC from the UK tax authorities.

Steps John Took:

1. Eligibility Check John confirmed his eligibility by reviewing the UK’s statutory residency test and ensuring that he meets the conditions for being considered a UK tax resident.

2. Documentation He collected his proof of residency, including his UK tax returns for the past few years, and details of his business operations in France.

3. Application Submission John’s accountant completed the necessary application form (available from HM Revenue & Customs) and submitted it along with the supporting documents.

4. Approval After a few weeks, John received his TRC, which he then submitted to the French tax authorities to claim relief under the UK-France DTAA.

Conclusion

A Tax Residence Certificate is a vital document for anyone engaged in cross-border financial activities. It helps in avoiding double taxation, proving tax residency, and reducing withholding taxes on income earned abroad. At Dixcart UK, we assist our clients in navigating the complexities of international tax laws, including obtaining TRCs. If you need help with your tax residency matters, feel free to contact us for expert guidance and support.

For more detailed information and assistance, please contact us

This article is intended to provide a general overview and does not constitute legal or tax advice. For specific circumstances, it is advisable to seek professional guidance.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Understanding UK Corporate Tax Residency: Key Points and Implications

Corporate Tax Tax

From a UK perspective, the determination of corporate tax residency is crucial for understanding a company’s tax obligations. A company is considered a UK tax resident if it is either incorporated in the UK or if its central management and control (CMC) actually resides in the UK. This residency status dictates the scope of the UK’s taxing rights over the company.

Criteria for UK Tax Residency

  • Incorporation in the UK: Any company incorporated in the UK is automatically deemed a UK tax resident.
  • Central Management and Control: A company not incorporated in the UK can still be considered a UK tax resident if its central management and control abides in the UK. This criterion involves determining where the company’s ‘paramount authority’ is exercised, which typically involves the board of directors.

Tax Implications for UK Tax Resident Companies

UK tax resident companies are subject to UK corporation tax on their worldwide income and gains. This means that all profits, regardless of where they are generated, are taxable under UK law. In contrast, non-UK tax resident companies are generally only subject to UK corporation tax on profits attributable to a UK permanent establishment. Additionally, they are liable for UK income tax on certain UK-source income.

Determining Central Management and Control

The question of where a company’s central management and control resides is a factual one. Key points to consider include:

  • Exercise of Paramount Authority: The central management and control is where the company’s paramount authority is exercised, usually by the board.
  • Influence vs. Control: Influencing the board does not equate to controlling it. The distinction is crucial in determining the true locus of control.
  • Rubber Stamping: Courts are vigilant against scenarios where the board merely rubber-stamps decisions made by others, which would indicate that the real management and control lie elsewhere.

Dual Tax Residency

A company can be dual tax resident, meaning it is considered a tax resident in two countries. In such cases, the corporate residency rules of both countries must be examined. If a dual residency situation arises, a tax treaty (if one exists) between the two countries will typically determine which country has the primary taxing rights. These treaties often provide mechanisms to resolve dual residency conflicts to prevent double taxation.

Conclusion

Understanding where a company’s central management and control resides is essential for determining its tax residency and, consequently, its tax obligations in the UK. Companies must carefully assess their management structures and operations to ensure compliance with UK tax laws and to navigate the complexities of dual tax residency effectively. This explanation is a simplified overview, and there are many additional factors that can come into play. Therefore, it is always advisable to contact a tax professional to obtain tailored advice and ensure all specific circumstances and nuances are properly addressed.

For more information from us, or if you wish to discuss corporate tax residency, enquire or contact us at hello@dixcartuk.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Anticipated Shifts in Company Size Classifications for 2024

Tax

Introduction:

Recent statements from the Prime Minister announced forthcoming changes to company size classifications, promising to streamline reporting obligations for businesses nationwide. These adjustments, stated to take effect later this year, aim to simplify both non-financial and financial reporting processes for Small and Medium Enterprises (SMEs), aligning with evolving post-Brexit regulatory freedoms.

Key Developments:

As of March 18, 2024, the government revealed plans for significant deregulatory measures, including a noteworthy 50% increase in the thresholds dictating company sizes. This adjustment is poised to redefine the classification of a substantial number of businesses, potentially granting relief to around 132,000 entities by alleviating certain non-financial reporting burdens.

Proposed Changes:

The proposed modifications to company size thresholds, stated for implementation for financial years starting October 1, 2024, are summarised in the table below:

Additionally, governmental initiatives will:

  • Streamline reporting obligations by eliminating redundant or outdated requirements from the Directors’ Report and the Directors’ Remuneration Report and Policy.
  • Facilitate the transition to digital annual reports for companies.
  • Address technical intricacies in the audit regulatory framework stemming from the integration of EU law into UK legislation.

Future Considerations:

Looking forward, the government plans to further engage in consultations regarding additional measures, with a particular focus on medium-sized companies. These discussions may encompass exemptions from producing strategic reports and potential adjustments to the employee size threshold, possibly raising it from 250 to 500 employees.

Conclusion:

The forthcoming adjustments to company size classifications underscore the UK government’s proactive stance in fostering a regulatory environment conducive to business growth post-Brexit. By simplifying reporting requirements and alleviating administrative burdens, these measures aim to bolster the resilience and prosperity of SMEs while ensuring regulatory compliance. As businesses brace for these impending changes, staying informed about updates and guidance will be paramount for navigating the evolving regulatory landscape effectively.

To find out how we can help your business, or if you have any questions regarding the changes in Company size classifications, please contact us.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Government U-turn on benefit in kind tax treatment of ‘Double Cab Pick Ups’

Tax

The Government has responded to the views of farmers and the motor industry who were potentially going to be negatively affected by the proposed change to the benefit in kind tax treatment of Double Cab Pick Ups (DCPUs).

What Was the Previous Guidance?

Following a 2020 Court of Appeal judgment, the guidance had previously confirmed that, from 1 July 2024, DCPUs with a weight load capacity of one tonne or more would be treated as cars, rather than goods vehicles for both capital allowances and benefit-in-kind purposes.

New Guidance

The government has recognised that the 2020 court decision and resultant guidance could have had an impact on businesses and individuals in a way that would be detrimental to the government’s wider aim to support businesses, including essential motoring, such as van drivers, and the farming industry. 

  • On 19 February 2024, HMRC announced that its previous guidance would be withdrawn, meaning that DCPUs will continue to be treated as goods vehicles rather than cars, and businesses and individuals can continue to benefit from its historic tax treatment.

The government has made it clear that it will be legislating to ensure that DCPU vehicles continue to be treated as goods vehicles for tax purposes and will consult on the draft legislation to ensure that this is achieved, before introducing it in the next available Finance Bill.

Tax Implications

The tax on the benefit-in-kind will now not increase, when employers provide such vehicles to their employees.

In addition, the capital allowances available in the first year of use will now not be reduced when a business purchases this vehicle for use in their trade.

The Exception

This update is only with reference to DCPUs with a payload of one tonne or more. DCPUs with a payload of less than one tonne will continue to be treated as cars.

Additional Information

If you would like to discuss any matters in relation to Double Cab Pick Ups, raised in this article, please contact Paul Webb: hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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The Spring Budget 2024 : Changes to the Taxation of non-UK Domiciled Individuals

Tax

From 6 April 2025 the existing non-dom regime will end and the concept of domicile as a relevant connecting factor in the current tax system will be replaced by a system based on tax residence. Currently, individuals who are UK resident but not domiciled in the UK can benefit from the remittance basis for their first 15 years of UK residence. This means they do not pay UK tax on non-UK income and gains unless remitted to the UK. Under the new system, individuals who opt into the new regime will not pay UK tax on any foreign income and gains arising in their first 4 years of tax residence, provided they have been non-tax resident for the last 10 years.

Who is eligible for new regime?

Individuals will qualify for the new regime if they have been non-UK tax resident for at least 10 consecutive tax years, regardless of their domicile status. The new regime will apply for their first 4 tax years of UK residence, so this will apply to returning UK domiciliaries.

Main summary of changes

Individuals will not pay tax on foreign income and gains (FIG) arising in the first 4 years after becoming UK tax resident, where a claim is made. They will be able to bring these funds to the UK free from any additional charges and there will be no need to segregate or trace funds during this period. They will continue to pay tax on UK income and gains, as is the case for non-domiciled individuals now. The individual will also lose their entitlement to personal allowances and the capital gains tax annual exempt amount.

Individuals who on 6 April 2025 have been tax resident in the UK for less than 4 years (after 10 years of non-UK tax residence) will be able to use the new regime for any tax year of UK residence in the remainder of those 4 years. For example, an individual who became resident in the UK in 2022/23, after a 10 year period of non-residence, will have been resident in the UK for up to 3 tax years on 6 April 2025. They will be able to claim under the new 4 year FIG regime for 2025/26 because this is their fourth year following a period of 10 years non-UK tax residence.

Transitional Provisions

As the new regime will represent a significant change for existing Resident Non-Domiciled individuals, there are a number of transitional arrangements that will be available as follows:

  • Individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the new 4 year regime, will for 2025/26 only pay tax on 50% of their foreign income. This applies to foreign income only and does not apply to foreign chargeable gains. For 2026/27 onwards, tax will be due on worldwide income and gains in the normal way.
  • Individuals who have previously claimed the remittance basis of taxation and are neither UK domiciled not deemed domiciled by 6 April 2025, will be able to elect to rebase assets held personally to their value at 5 April 2019, so they will only be taxed on capital gains since that date. This is in respect of disposals which take place on or after 6 April 2025.
  • Individuals who have previously been taxed on the remittance basis will be able to elect to remit foreign income and gains that arose before 6 April 2025 to the UK at a reduced rate of 12%. This is a new Temporary Repatriation Facility that will only be available for the 2025/26 and 2026/27 tax years. This facility will not apply to foreign income and gains generated within trusts and trust structures.

Taxation of assets held in Trust

From 6 April 2025, the protection from taxation on future income and gains that arise within trust structures (wherever established) will be removed for all current non-domiciled and deemed domiciled individuals who do not qualify for the new 4 year FIG regime.

Under the new regime, for as long as an individual qualifies for the new 4 year regime, they will not pay UK tax on the income and gains of the trust as they arise or on receipt of trust distributions.

Once the individual Is no longer eligible for the new 4 year FIG regime, they will be required to pay UK tax on all profits arising within a trust structure which they have established.

Inheritance Tax

Currently, an individual’s liability to Inheritance Tax depends on their domicile status and the location of the asset in question. From 6 April 2025, the government intends to move IHT to a residence-based system and this will be subject to consultation on how this is best achieved.

The timing of any legislation enacting the changes is unclear and the government has suggested that an individual’s worldwide assets would fall with the scope of UK inheritance tax once the individual has been UK resident for 10 years. It is suggested that once the individual is within the scope of UK inheritance tax they will remain as such for 10 years after the individual ceases to be UK resident.

Under the current rules, non-UK assets held in trust structures that were established by Resident Non-Domiciled individuals before they became deemed domiciled in the UK, are outside the scope of UK inheritance tax. The government has confirmed that the treatment of non-UK assets settled onto non-UK trusts before 6 April 2025 will continue to be outside the scope of the UK Inheritance Tax regime.

Conclusion

The announcements in the Spring 2024 Budget represent the biggest change to the way in which non-UK domiciled individuals are taxed in the UK. This is an area which is likely to continue to develop and further details will emerge in the coming months which will hopefully allow individuals time to prepare for the new regime well in advance of its implementation date of 6 April 2025.

If you would like any further information regarding the new measures outlined above, please don’t hesitate to contact your usual Dixcart UK contact or enquire at hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Budget 2024: The Key Announcements and What you Need to Know

Tax

Spring Budget 2024

In the budget of 6th March, Chancellor Jeremy Hunt has presented the much-anticipated Spring Budget for 2024. Building upon the foundation laid in the previous year’s ‘Four Pillars’ approach, the Budget outlines strategic measures aimed at further bolstering the nation’s economy.


Please download our detailed Budget Summary above for comprehensive details, but the headline measures announced were:

  • National Insurance contributions for employees reduced from 10% to 8% from 6 April 2024
  • National Insurance contributions for self-employed reduced from 9% to 6% from 6 April 2024
  • High Income Child Benefit Charge threshold will go up from £50,000 to £60,000 from 6 April 2024. Further changes expected from 2026
  • VAT Registration threshold increased to £90,000 from current £85,000 effective from 1 April 2024
  • Full expensing extended to cover leased assets in future when affordable
  • Non-dom tax regime reformed from 6 April 2025. A residency based system will arrive in 2025
  • Higher rate of Capital Gains Tax on property reduced from 28% to 24% from 6 April 2024
  • Stamp Duty Land Tax – Multiple Dwellings Relief abolished
  • Fuel Duty – Temporary 5p cut will remain for another year
  • Alcohol Duty frozen for another year
  • Windfall Tax extended until 2029
  • Furnished Holidays Lettings tax regime abolished from April 2025
  • Vape Levy introduced and Tobacco Duty increased
  • Introduction of a new ISA, currently labelled “British ISA”

To find out how we can help your business, or if you have any questions regarding the 2024 Spring Budget, please contact us.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Case Study: Navigating Inheritance Tax Pitfalls – A Costly Lesson Learned

Tax

Introduction

In this scenario a UK resident individual, let’s call him John who was in his early 70’s and a widower, found himself facing a significant Inheritance Tax bill. Having a UK property worth £500,000 and investments amounting to £600,000, John contemplated a strategy to mitigate the inheritance tax (IHT) impact without seeking professional advice.

The Risky Plan

In an attempt to sidestep inheritance tax, John considered selling his house to his son, who resides in Guernsey, a country with no inheritance tax. The plan involved his son, (who had recently sold his business for several million pounds) purchasing the property, and John sending the proceeds back to him as a gift but with John still living in the house. The goal was for John to live for another seven years, hoping to avoid hefty inheritance tax charges.

Professional Analysis

However, our team of expert quickly pointed out the flaws in this plan. The proposed scheme of “selling” the house to the son, only to later gift the proceeds  back would not be acceptable to HM Revenue and Customs. The Gift with Reservation of Benefit (GWR) rules state that if an asset is given away but the donor continues to benefit from it, it will still be taxed as part of John’s estate for IHT purposes.

Additionally, the Pre-Owned Assets Tax (POAT) which introduced an income tax charge on benefits received by the former owners of property could also have applied however a way around this is to pay a commercial rent for continuing to live in the house you have gifted.

Essentially, the plan would have been ineffective, and the value of the property would remain in John’s estate for inheritance tax purposes.

Additionally, the son’s residence in Guernsey did not exempt the property from UK-based IHT (since it was UK sited), potentially leading to complexities in the future.

Professional Advice

What if John had sought professional advice from Dixcart UK before embarking on this risky endeavour? Let’s walk through it.

  • Scenario Planning:

Dixcart UK, with its team of accountants, tax advisers, and lawyers, could have guided John through a comprehensive scenario analysis. By understanding John’s financial situation, Dixcart professionals could have illustrated the potential outcomes of various strategies, highlighting the risks and benefits associated with each.

  • Strategic Gifting:

Instead of opting for a convoluted plan that involved selling the house and repaying the proceeds, Dixcart could have advised John on more straightforward and legally sound methods of mitigating inheritance tax. One such approach might involve strategic gifting within the allowable limits set by legislation or making Potentially Exempt Transfers (PET’s) of the financial assets owned by John.  A gift of cash for example would be a PET and so if John was to survive for 7 years from making the gift then the PET escapes IHT altogether. PETs made out of the 7 year period will never be brought into the IHT calculation.  Gifts made out of excess income can also be an effective strategy.

  • Utilising Tax Allowances

Dixcart UK could have helped John leverage his nil-rate band (£325,000), his late wife’s nil-rate band (potentially up to £325,000), along with his own residence nil-rate band (£175,000) and his late wife’s (£175,000), making a total of £1 million in allowances. Exploring options like gifting a portion of his investments within this allowance could have been a more tax-efficient and transparent strategy.

  • Long-Term Planning:

Moreover, Dixcart UK could have assisted John in developing a long-term inheritance tax mitigation plan. By understanding John’s financial goals and family situation, the professionals could have provided guidance on how to structure his estate in a tax-efficient manner, ensuring a smoother transition of assets to the next generation.

Conclusion

John’s case serves as a powerful illustration of the pivotal role professional advice plays in navigating complex financial decisions. Seeking guidance from Dixcart UK could have potentially saved John from the complications and financial pitfalls he faced. The case underscores the importance of consulting professionals in accounting, tax advisory, and legal services to ensure individuals make informed decisions and avoid unnecessary financial burdens.

By exploring the hypothetical scenario where John had come to Dixcart UK first, we emphasise the proactive role professionals can play in securing a sound financial future and mitigating risks associated with inheritance tax. This case study aims to reinforce the value of expert consultation and strategic planning in safeguarding individuals from unforeseen financial consequences.

Get in Touch

If you have any questions regarding the tax implication and inheritance planning, please get in touch at: hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Minimum Global Tax on Multinational Businesses

Tax

As of 1 January 2024, Pillar 2 (BEPS 2.0) came into effect, as recommended by the OECD, where multinational companies are subject to a global minimum tax of 15% which will apply for the first time for certain large economies – agreed by more than 140 countries under the OECD Inclusive Framework.

In the digital age and face of globalisation, the global economy has transformed – with countries facing pressure to lower their corporate income tax rates to offer incentives to compete for capital and investment. Building on BEPS actions and placing a floor under tax competition, the OECD, together with member countries, have addressed the collective action problem for the so-called race to the bottom.

A series of interlocking rules apply to companies taxed below the 15% rate in one country (with the possibility of other countries being able to apply a top-up tax), which is summarised below in six steps:

Step 1: Determination of Multinational Groups in Scope

The following steps apply in determining which multinational groups are in scope:

  1. Internationally active groups – determination as to whether the group has entities or permanent establishments in more than one jurisdiction, is required;
  2. Groups with annual revenue of €750 million or more, in at least two out of the four prior years immediately preceding the fiscal year being tested; and
  3. Identify excluded entities from the application of the Pillar II rules (but note that these are not excluded from the revenue threshold calculation above).
    • Public interest entities, such as governmental and non-profit organisations, tax-neutral entities (such as pension and investment funds), and certain asset-holding companies are excluded.

Step 2: Allocation of Income to Constituent Entities on a Jurisdictional Basis

The multinational group needs to determine the income (abbreviated as FANIL for Financial Accounting Net Income or Loss – determined by accounting standards for financial reporting) and the location of each constituent entity, to identify the respective local tax treatment.

Step 3: Calculation of GloBE Income

Global Anti-Base Erosion (GloBE) income is calculated by making adjustments to FANIL to align the tax base for the global minimum tax with those that are typically applied for local tax purposes. Types of adjustments include:

  1. Adjustments to financial accounting income to better align with taxable income – net taxes, dividends (avoid double counting profits within a group), equity gains and losses (unrealized – no impact for GloBE; realized – may need adjustments for timing differences between accounting and tax), asymmetric forex gains and losses (differences in treatment between accounting and tax require reconciliation to align with taxable income), pension expenses (use of tax accounting principles), stock-based compensation (portion deductible for tax added to GloBE income);
  2. Correct allocation of income between jurisdictions is adjusted for – such as transfer pricing adjustments and intra-group financing;
  3. Policy-based adjustments – such as the disallowance of illegal payments such as bribes, or payments of fines and penalties (only allowed to a maximum of €50,000).

Step 4: Determination of Adjusted Covered Taxes

For each constituent entity, the GloBE income or loss is calculated. The tax associated with the income must then be calculated using the following steps:

  1. Determination of covered taxes – the current tax expense as shown in the financial accounts (includes incomes taxes, but does not include non-income-based taxes such as indirect taxes, payroll and property taxes);
  2. Adjustment to covered taxes – to consider taxes that are not recorded in the tax line of the profit or loss statement and exclude taxes not related to GloBE Income or Loss, addressing of temporary differences as well as tax credits;
  3. Cross-border allocation – adjustment to allocate certain cross-border taxes to the proper constituent entity (like taxes imposed under a CFC regime, distribution taxes, withholding tax on dividends paid, or other taxes paid);
  4. Post-filing adjustments – in the case of post-filing adjustments, generally an ETR recalculation is required for the relevant fiscal year (examples include audit or transfer pricing adjustments).

Step 5: Computation of ETR and Calculation of Top-Up Tax

GloBE income or loss and covered taxes (steps 3 and 4 above) from the same jurisdictions must be added together to determine the jurisdictional effective tax rate (ETR).

Note an exemption applies for multinationals that have limited operations, namely, below the de minimis thresholds of €10m for revenue and €1m for income.

From GloBE, a substance-based income exclusion is deducted to reduce the potential burden on multinationals with genuine operations and investments in a jurisdiction. A percentage of tangible assets and payroll expenses is applied for the purpose of the substance-based income exclusion.

The top-up tax percentage is due on the difference between the 15% minimum rate and the ETR in the jurisdiction – the delta which is applied to the GloBE income or loss in the jurisdiction, after deducting a substance-based income exclusion.

Each constituent entity, with GloBE income, is subsequently allocated top-up tax.

Step 6: Charge the Top Up Tax under QDMTT, IRR, or UTPR

A member jurisdiction has a liability towards a top-up tax for a multinational group under three types of provisions, in the following agreed rule of order:

  1. If your domestic tax already hits the global minimum, you won’t be hit with extra “top-up” taxes from other countries – referred to as the Qualified Domestic Minimum Top-Up (QDMTT);
  2. If the jurisdiction where the low-taxed constituent entity is located does not have a domestic minimum top-up tax, the ultimate parent entity, in proportion to its ownership interest, might collect the top-up tax under IRR (Income Inclusion Rule);
  3. If the ultimate parent entity is in a jurisdiction that has not implemented a domestic minimum top-up tax, then the top-up tax will be levied on the next entity in the ownership chain that is located in a jurisdiction with an IRR following a top-down approach;
  4. Where IRR does not apply, the Under-Taxed Payment Rule (UTPR) becomes applicable. UTPR acts as a back-up to the IRR, ensuring a top-up tax payment within jurisdictions applying this rule.

Specific Rules for Each Jurisdiction

Members will need to implement the GloBE rules in a way that is consistent with the outcomes provided in the agreed rule order, to ensure transparent and predictable outcomes across jurisdictions. Note that the legislative draft GloBE rules accommodate a wide range of multinational groups and tax systems. The OECD have recommended Pillar 2 rules to become effective in 2024.

Conclusion

The implementation of Pillar 2 marks a significant step towards creating a more level playing field and addressing tax challenges arising from the digital economy. Ultimately, Pillar 2 represents a critical step towards a more equitable and sustainable global tax system. Its impact will depend on effective implementation, addressing potential concerns, and continuous evaluation to ensure it meets its intended goals.

Additional Information

If you would like to discuss any of the matters raised in this article, please contact Paul Webb hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Mandatory Payrolling of Benefits from April 2026

Tax

The reporting of benefits in kind (BiK) has transformed over the past few years.  Gone are the days of paper based P11Ds, having been replaced by online reporting and the option of ‘payrolling’ BiKs through payroll systems.

On 16 January 2024, the government announced a package of measures to support its ambition to simplify and modernise the tax system, using the efficiencies of digital service to drive public sector productivity and to make the tax system simpler and fairer.

One of the measures announced was that the government will mandate the reporting and paying of Income Tax and Class 1A National Insurance Contributions (NICs) on benefits in kind, via payroll software from April 2026.

How it currently works

Currently, employers have two ways of reporting their BiKs:

  1. To report via P11D submission to HMRC, annually, before the deadline of 6 July following the tax year in which the employee received the benefit. Payment of Class 1A employer national insurance contributions (NICs) must be paid before 22 July (if paying electronically).  Using the information reported on the P11D, the employee pays the associated income tax through self-assessment, or it is collected by way of an adjustment to the employee’s tax code in the tax year after the benefits or expenses are received.

  1. To payroll benefits, allowing benefits to be reported in real time through pay as you earn (PAYE), meaning no mid-year changes to tax codes as tax is deducted throughout the year. Class 1A employer NICs still need to be reported on P11D(b) by 6 July after the end of the tax year.

One of the drawbacks of the traditional, or legacy, P11D submission is that an employee could wait over a year before seeing any tax related benefits they’re receiving being deducted from their pay.  Any change to an employee’s tax code being made so long after the benefit has been received often causes confusion.

Conversely, the payrolling of benefits allows for the tax on BiKs to be collected in real-time via the employee’s pay, reducing the confusion for the employee, however the system is currently not fool-proof and currently employer-provided living accommodation, and interest free/low interest (beneficial) loans cannot be payrolled.

What should employers consider now?

  • Less flexibility – employers will no longer have the option to payroll only certain BiKs or employees, with all benefits requiring to be reported.  This could have a direct cashflow impact on the employee.
  • Data management – employers will need to be able to easily access the reportable monthly data so they can provide it to the payroll department ahead of payroll processing cut-off dates. 
  • Increased PAYE risk – compulsory reporting of benefits increases the risk of monthly non-compliance and tax driven penalties.
  • Employee impact – the employee might experience a cashflow impact in 2026/27 when the mandatory payrolling of BiKs and PAYE code adjustments for the prior year overlap.
  • Employee communication – upcoming changes to the BiKs reporting system will need to be communicated to employees.
  • Payroll impact – can your current payroll software/outsources payroll provider cope with the change?  Will there be an increase in fees?
  • Process impact – it has yet to be determined how beneficial loans and employee-related accommodation benefits will be reported.  What will the impact be for leavers, if processed before payroll cut off?

Next steps

HMRC has confirmed that government ministers will not be putting the change out to public consultation, but instead will be liaise with key stakeholders such as the Chartered Institute of Payroll Professionals (CIPP), to discuss the forthcoming change at length, ahead of implementation come April 2026. 

CIPP are seeking to address the following key issues:

  • Ensuring calculation methods for employer-provided living accommodation and beneficial loans are updated and can be processed via payroll software.
  • Ensuring working sheets are available for employers and agents to help with calculating values to be used.
  • Being mindful of the changes required for payroll systems, and the time taken for software companies to implement the changes.
  • Pushing for real-time payments of Class 1A employer NICs, to eliminate the need for the P11D(b).

Let’s Talk

If you would like any further information on the changes and how they might affect you or your business, please do not hesitate to contact your usual Dixcart UK contact or enquire at hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Taxing Tactics: Navigating the Premier League and the UK Taxman – The Jordan Henderson Conundrum

Tax

There has been much written about Jordan Henderson in recent weeks.  He has expressed a desire to leave his current club in the Saudi Pro League and return to playing in Europe.  As the Liverpool captain to lift both the Champions League and Premier League trophies, obviously, the footballing side to the story is more likely to take the headlines.  However, even as a footballer, nobody can escape the UK tax rules!

The example in this article is only to highlight the considerations anyone leaving or returning to the UK should consider.  Whilst Jordan Henderson is a high-profile example of this, the facts analysed are only loosely based on his situation and not specifically him (although it might sound a lot like him!) and, if he happens to be reading this, should not be construed as formal advice.  As is always the case with UK tax or legal matters, please take advice at the earliest time possible when a move is being considered!

Statutory Residence Test

The UK tax year commences on 6 April each year (the reason for this is very boring but it involves the Pope and the Gregorian calendar) and runs to the following 5 April.  Whether someone is tax resident during that year is assessed in accordance with The Statutory Residence Test.  For additional articles on this test, please search here

It is a complex set of rules but essentially it considers both days spent in the UK, and other connecting factors.  A complete analysis of the rules is outside the scope of this article but let’s assume our protagonist is someone who has played Premier League football for over a decade and has ticked all the boxes to be tax resident in the UK right up until the time they look to move to another club in another country.

Leaving the UK

In the summer of 2023, as they are driving home from the last match of the season, they receive a phone call from their agent to be told they have been offered a lucrative contract to play in an emerging league in Saudi Arabia.  Not only will the wages be significant, but they will also be tax-free. 

They and their family are so excited, they decide to accept the contract, rent out their house and jump on a plane heading for warmer climes. It is, say, 83 days into the tax year, around half of which he has worked on. 

Given they have been UK tax resident in the years prior to them leaving and have been in the UK for those days leading up to the move (having not made it to the European cup final in Istanbul in May), they will be UK tax resident at least up until that point.  Fortunately, the UK does allow for a taxpayer to “split” a year into a resident and non-resident portion in some circumstances.

As they have moved to Saudi Arabia for the purposes of taking up a new job, we shall assume that the split year rules might apply in this case for illustrative purposes.

This being the case, they will have suffered UK tax on their earnings in the first part of the tax year, but once they have become non-UK tax resident, their ongoing earnings will no longer be subject to UK taxation.  Except there are a couple catches…..

  1. The Statutory Residence Test

A full analysis of the rules is outside the scope of this article but let’s assume with 83 days in the UK during the tax year, they have satisfied the residence rules for the year.  It is therefore important that the split year rules will apply.

  • Split year

Where one is looking to apply the split year rules, in a year you are looking to leave the UK, you must not only remain non-resident during the tax year in question, but also be non-UK tax resident in the following year.  This being the case, if they return to the UK in the January transfer window, the split year rules will not be applicable and their full year’s earnings will be taxable to UK income tax.

Conclusion

If our unidentified footballer is keen on playing European football to get back into his national team, they should not return to the Premier League and instead consider taking the contract on offer from another European club.  A word of caution though, don’t forget to take tax advice in the other country too. 

If you require additional information on this topic, further guidance regarding your possible entitlement to use the UK remittance basis of taxation, and how to properly claim it, please contact your usual Dixcart adviser in the UK office: advice.uk@dixcart.com.

Dixcart UK, is a combined accounting, legal, tax and immigration firm.  We are well placed to provide these services to international groups and families with members in the UK. The combined expertise that we provide, from one building, means that we work efficiently and coordinate a variety of professional advisers, which is key for families and businesses with cross-border activities.

By working as one professional team, the information we obtain from providing one service, can be shared appropriately with other members of the team, so that you do not need to have the same conversation twice!  We are ideally placed to assist in situations as detailed in the case study above. We can provide cost effective individual and company administration services and also offer in-house expertise to provide assistance with more complex legal and tax matters.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Maximising Profits, Minimising Headaches: Navigate the New Tax Rules for Side Hustles on Platforms like Airbnb, eBay, and Vinted.

Tax

In a move to tighten the tax net, HMRC has announced new measures affecting individuals engaged in online “side hustle” activities, such as selling clothes on Vinted, letting out spare rooms on Airbnb, or trading goods on eBay.

As of January 1, 2024, digital platforms like these are now obligated to collect and share transaction details with tax authorities, signalling a global effort to curb tax evasion. This article aims to provide insights into the implications of these changes and offer guidance on what online sellers need to do to ensure compliance with the new rules.

The Impact of New Rules

The new regulations require platforms to routinely report sellers’ income, covering various transactions such as; sales of handcrafted goods, second-hand clothes, taxi services, food delivery, freelance work, short-term accommodation lets, and more. This information will be shared among countries that have adopted the OECD tax rules, facilitating a concerted effort to clamp down on tax dodgers.

What are the Key Obligations for Online Sellers?

1. Tax-Free Allowances: Individuals already paying tax do not need to alter their current practices. There is a £1,000 tax-free allowance for income generated through property and a similar allowance for “trading” income, applicable to activities like tutoring, gardening, or selling new or second-hand items online.

2. Record-Keeping: While those earning below the specified thresholds may not be required to fill in a tax return, it is advisable to maintain detailed records in case they are requested by tax authorities.

3. Thresholds for Reporting: Platforms will report information to HMRC at the end of January 2025 for sellers whose activity is of significant size. The reporting obligation applies to sellers making more than 30 transactions or £1,735 a year. Sellers below these thresholds are not subject to reporting requirements.

Advice for Online Sellers

It is likely that only a small proportion of casual users of sites like Vinted and eBay will trigger the reporting thresholds, but individuals are required to assess their own tax situation.

If you believe that you may have surpassed the minimum £1,000 trading allowance, then the team at Dixcart can help.  We can also help you make contact with the tax authorities as it is advisable to contact them pre-emptively, if there is any income to declare. If you would like any further information on the changes and how this affects you, please don’t hesitate to contact your usual Dixcart UK contact or enquire at hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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How a Family Investment Company can be of Benefit: A Case Study

employment law Case Study

Background

Mr. Smith has been a client of Dixcart’s for many years and he wants to explore the options available to provide financial help to his children, as they get older and start their careers. The children are all in their teens, with the eldest just about to start university. Mr. Smith wants to ensure that they make considered future decisions financially and do not take the opportunity to have a series of ‘gap years’.

Mr. Smith runs his successful logistics company with his wife, who takes more of a background role. They have built up an investment portfolio and own four residential properties, acquisition of the final two was partly funded by borrowing. All of their assets are jointly owned.

Mr. Smith is already thinking about planning for the future and ways in which he might be able to mitigate future inheritance tax (IHT) obligations.

Family Investment Company – What Is It?

Family Investment Companies (FICs) are companies limited by shares (an “Ltd” or “Limited”) and often established by parents and/or grandparents (“Founders”) to benefit themselves and their family, as shareholders. The popularity of FICs has increased over recent years, and they are viewed as a corporate alternative to a discretionary trust.  

Summary of Current Status

A summary of the current situation and the assets owned by Mr. and Mrs. Smith are as follows:

  • Mr. Smith’s annual income is approximately £150,000. His wife is a higher rate taxpayer;
  • Company shares are held equally by Mr. and Mrs. Smith and will qualify for 100% business property relief;
  • In the event of a sale both Mr. and Mrs. Smith would qualify for business asset disposal relief;
  • The investment and rental properties portfolio are currently worth £3.5 million, their main residence is worth £1 million, and they have recently inherited £1.5 million.

What Are the Potential Advantages of a Family Investment Company?

At a high level the potential advantages of using a FIC can be summarized as follow:

  • Income retained within the FIC (primarily rental and dividend income) would attract lower rates of tax (up to a maximum of 25%), in comparison to Mr. Smith’s marginal rate of 45% (39.35% for dividends) and Mrs. Smith’s marginal rate of 40% (33.75% for dividends);
  • If the two rental properties that are subject to a mortgage can be transferred to the FIC, a significant advantage would be that full interest relief would be available although this would likely give rise to SDLT charges which would have to be considered;
  • Mr. and Mrs. Smith could make potentially exempt transfers of value that would become fully exempt if they survived for at least seven years, so that their estates on death would benefit from the full IHT nil rate bands;
  • Future increases in the value of the investments owned by the FIC would increase the value of the company’s shares. The children’s shares would therefore increase in value outside their parent’s estate. The application of minority discounts might also mean that the total monies subject to IHT were reduced;
  • Dividend payments could be directed to the children whilst they were still at university and likely to be non-taxpayers, or when they were basic rate taxpayers.

Mr. and Mrs. Smith would retain full control of the company’s assets and could decide on dividend payments.

Are There Any Potential Negatives in Using a Family Investment Company?

It must be remembered that there will be double taxation of income/gains paid out to shareholders, particularly where the shareholders pay tax at the higher rates.

In addition, care needs to be taken with dividends paid to children whilst they are minors such that they are not assessed to tax on Mr. and Mrs. Smith.

FICs do not qualify for many CGT and IHT reliefs.

Finally, that there will be administrative obligations and costs associated in running the company.

Agreed Action

Mr. and Mrs. Smith decide that they want their children to benefit from their recent inheritance of £1.5 million and the increases in value of certain of their investments. They therefore decide that they will use the inheritance to subscribe to shares in the company, most of which will then be given to the children, and that they will also transfer some of their assets to the company, leaving the consideration for those transfers outstanding on a loan account owed to them.

The assets to be transferred will be chosen to minimise tax liabilities and maximise future tax savings. The share portfolio has been managed carefully and investments have been bought and sold relatively frequently, partly to use the CGT annual exemption. It will therefore be possible to identify shares that can be transferred without giving rise to a capital gain. There will, however, be stamp duty payable at 0.5%.

Mr. and Mrs. Smith also decide to transfer the investment properties that are subject to a mortgage, so that full interest relief can be obtained. As they were recently acquired there will be no capital gain, but there will be stamp duty land tax to pay.

Structure of the Company

Mr. and Mrs. Smith will be appointed as directors, and will each be issued one ‘A’ ordinary share. This will mirror their current 50:50 ownership of assets.

Three further classes of ordinary shares (B, C and D) will be created for the three children, which will have no voting rights but entitlement to dividends, as declared on that particular class of shares, and ranking equally with the ‘A’ ordinary shares, as to entitlement to capital.

This will enable dividends to be paid to the children as required, once they reach 18, but will also mean that the capital value of their shares will increase, as the value of the company increases.

Mr. and Mrs. Smith, will initially subscribe to all of the shares but will then give the B, C and D shares to their children. The initial value of the company will be equal to the amount of cash subscribed, the other properties having been transferred to the company at full market value.

If the shares are transferred immediately there will be no CGT consequences, and no stamp duty as it is a gift.

In order to ensure that most of the initial value passes to the children, 100 shares of each class (B, C and D) will be created in order to swamp the A shares. This will ensure that value is transferred by way of a potentially exempt transfer. We would always recommend that  that professional valuation advice be taken before proceeding.

Additional Information

This case study examines one particular set of circumstances. The concepts would be the same in other situations but detailed professional advice should always be sought.

For additional information, please contact Paul Webb at Dixcart UK: hello@dixcartuk.com.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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Autumn Statement 2023: The Key Announcements and What you Need to Know

Tax

Autumn 2023

The Chancellor Jeremy Hunt unveiled on the 22nd of November the contents of his Autumn 2023 Statement in the House of Commons.  It contained “110 growth measures” aimed at helping to grow the economy and boost business investment by £20bn a year.

Our full Budget summary can be found here and we have set out below a summary of the main tax and related measures:


Please download our detailed Budget Summary above for comprehensive details, but the headline measures announced were:

  • Class 1 employees NI cut by 2% from January 2024.
  • Class 2 NI abolished for the self-employed and Class 4 NI cut by 1% from April 2024.
  • National living wage to increase by 9.8% to £11.44 an hour from April 2024.
  • Capital Allowances full expensing made permanent, which will allow companies to deduct expenditure on new equipment and machinery from profits.
  • R&D tax credit schemes to be merged from April 2024, lowering the rate for loss-making businesses in the merged scheme to 19%, and reducing the intensity threshold for loss making SMEs to 30%.
  • Extending Investment Zones and Freeports incentives.
  • Pensions triple lock – basic state pension increasing by 8.5% to £221.20 a week from April 2024.
  • 75% discount on business rates for retail, hospitality and leisure companies has been extended for another year.
  • Small businesses rates multiplier frozen for a year.
  • Universal Credit and other benefits to increase by 6.7% from April 2024.
  • Alcohol duty frozen until 1 August 2024, but not tobacco duty.
  • Changes to simplify the design of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA).

If you would like any further information regarding the new measures outlined above, please don’t hesitate to contact your usual Dixcart UK contact or enquire at hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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A Christmas Twist – Functions and Staff Gifts : Tax and VAT Implications

Tax

With the festive TV adverts appearing on our screens, thoughts inevitably turn to staff Christmas parties and gifts.   In this this article we look at the often misunderstood tax and VAT consequences of functions and staff gifts.

Entertainment

In general, the cost of business entertainment, e.g. treating a client to lunch or tickets to a football match, is not deductible for tax purposes. However, there is an exception for staff entertainment.

The cost of entertaining staff will be fully deductible for corporation tax purposes, as long as it is not merely a small part of the cost of entertaining non-staff. For example, if a company holds a lavish ball for 100 clients, and invites a few key staff along, the staff entertainment is merely incidental to the excluded business entertainment and the cost won’t generally be allowable. The crux is to ask ‘What is the main motive for incurring the expenditure?’. As long as the (honest) answer is to entertain staff, there is no problem.

There is no upper limit to what a company can claim for staff entertainment. This sometimes raises eyebrows, as some people will swear that they ‘know’ there is a £150 per head limit. But, this applies for income tax purposes from the perspective of each individual employees.

The £150 limit

Where people, including business owners, sometimes mix things up is the £150 exemption for benefit-in-kind purposes. It would slightly defeat the objective for employees to be invited out for a Christmas party with their employer, only to be told that they owe tax on it later on. To avoid this, there is an exemption as long as the cost per head does not exceed £150 (including VAT) each year. But again, there can be confusion as to how this operates.

Firstly, it is important to note that it is not an allowance. A company cannot spend £160 per head and deduct £150 from the employees’ taxable benefit in kind. If the per-head cost exceeds £150, it is all subject to income tax and Class 1A NIC.

Secondly, many owners are aware that the exemption can be spread across more than one event during the year. However, it is crucial to understand that these have to be annual events, e.g. Christmas parties, a summer ball, etc. It can’t be used for things like occasional drinks, or lunches. It is also sometimes incorrectly believed that the expenditure toward the limit is added on a cumulative basis. It is not, and the exemption can be used against whichever qualifying event suits best. For example, if a summer ball is held at a cost of £80ph, and a Christmas party is held at £125ph, the exemption can be claimed against the later event.

Thirdly, the event(s) in question must be open to all staff. It cannot just be for directors, managers, etc. However, it is permissible to restrict attendees by location, for example where there are multiple branches of a business, it is fine to hold separate branch-specific functions.

There can be a problem where a company is required to pay upfront. The £150ph limit applies to attendees, not invitees. So, if a number of staff are taken ill or do not attend for any reason, the average cost can increase.

Note that employees can bring guests and they will be included in the head count when checking if the £150ph has been exceeded.

If the limit is exceeded the employer has the ability to enter into a PAYE Settlement Agreement (PSA), whereby they agree to pick up the tax and NIC costs, but these do have specific compliance requirements and can in practice prove costly. 

VAT on entertainment

The position for reclaiming input tax is slightly different.

Generally, no input tax can be claimed on business entertainment costs, but there is an exclusion from this block, for employee entertainment. Recovery will be allowed in full, in respect of the cost of entertaining staff, including the directors, as long as all staff are entitled to attend. Unlike for income tax, there is no upper limit.

However, there is a different catch to consider with VAT. If there are non-staff guests attending, the company has to apportion the input tax between staff and non-staff attendees. So, if there are 30 staff and they each bring a partner, etc. that is not an employee, only half of the input tax will be recoverable.

This problem can be alleviated by making a token charge to the non-staff attendees. For example, if the true cost is £60ph, then making a charge of £10 for non-staff attendees means recovery will no longer be blocked, as the company is no longer providing the entertainment free, it is making a supply. It would account for output tax of £2ph but then claim £10ph as input tax (i.e. £60 × 1/6). It is important that this is a genuine charge, it cannot be a suggested amount or a donation – it has to be compulsory and collected and accounted for.

Gifts

Many companies will also make gifts to employees at Christmas time. In practice, there is no issue claiming a deduction for corporation tax purposes, but the income tax and VAT consequences must be considered.

If the value of the gift is no more than £50 (or £50ph on average, if it is provided to a group of employees), and it is not money or money’s worth (e.g. a cash voucher), it will probably qualify as a trivial benefit, so the company won’t need to report it, as long as it is not provided for in the employment contract and is not performance related. In short, it has to be a genuine non-cash gift. 

For VAT purposes, the problem is that the company has made a taxable supply to the employee, and so will need to account for output tax. It can also claim the input tax. However, if the value of all gifts to the same employee, in the twelve-month period ending with the date of the Christmas gift, does not exceed £50, there is no need to account for the output tax, while the input tax can still be recovered in full.

Get in Touch

If you have any questions regarding the tax implications of Christmas entertainment and/or Christmas gifts, please get in touch at: hello@dixcartuk.com


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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A Simple Guide to UK Inheritance Tax and Tax Efficient Gifting

Tax

The UK is often perceived to have one of the most punitive inheritance tax regimes in the world. Generally, individuals pay a 40% rate on the value of their taxable estate above a tax-free allowance of £325,000. In the case of a married couple this tax-free allowance can be passed onto a surviving spouse, which means that, following their death, the estate will enjoy a £650,000 tax free allowance.

Additional Nil Rate Allowance

Individuals, with an estate value greater than their tax-free allowance of £325,000, due to the value of their home, may be able to take advantage of an additional tax-free allowance known as the residence nil rate band (RNRB).  This additional tax allowance is worth up to £175,000 (2023/24) and is available when an individual’s main residence is passed to their children or grandchildren.

People with large estates may not see any benefit from the residence nil rate band, as it will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M.

This means that there is no RNRB available if the deceased holds assets of more than £2.35M.

Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.

Lifetime Gifts

If money is given away during an individual’s life it does not necessarily mean that the asset is, then outside his/her estate for inheritance tax purposes. This is the case when an asset is gifted away but the donor continues to benefit from the asset. An example would be – continuing to live in a property, even if the legal title has been gifted away (this is known as retaining a benefit).

Gifts, however, made more than seven years prior to death, without the retention of a benefit, will not be included in the deceased’s estate. Any gifts made within seven years will, in most circumstances, form part of the estate.

Business Property Relief APR (BPR) and Agricultural Property Relief (APR)

Business property relief (BPR) and agricultural property relief (APR) are IHT reliefs that may be available on the transfer of certain types of assets.  These two reliefs can often reduce the chargeable value of an asset by 50% or 100% and are extremely valuable tools for minimising the amount chargeable to IHT.

The rules are complex, and a detailed analysis is outside the scope of this article, however the main classes of assets that qualify are as follows: Business Property Relief

Assets eligible for 100% relief:

  • A sole-trading business
  • Partnership shares
  • Shares in an unquoted trading company.

Assets eligible for 50% relief:

  • Shares in a quoted trading company if the individual has voting control i.e. more than 50% ordinary (voting) shares
  • Land, buildings and machinery that is owned by the individual and used in a business where the individual is a partner or a controlling shareholder.

Agricultural Property Relief

Assets that qualify for APR include:

  • Agricultural land
  • Woodland
  • Farm buildings
  • Farmhouses/cottages (if occupied for the purpose of agriculture).

Activities that are specifically exempt from qualifying for APR include:

  • Land that is used for grazing horses
  • Land used by livestock that is not farmed for human consumption
  • Land that is used for sporting activities such as fishing and shooting

Gift Allowances

There are certain gift allowances that can be used year on year, where the seven-year rule is NOT applicable.

The six key gift options are detailed below. These options, if planned for properly across a number of years, can reduce the inheritance tax liability considerably.

Dixcart recommends that a record of all gifts made is kept with the Will.

Give away money each year

Each year an individual can give away up to £3,000. This gift can be to anybody or split across any number of people.

If this allowance is not used one year, it can be carried forward to give £6,000 the next year (it can only be carried forward one year).

Wedding presents

In addition to the annual allowance, parents can each give a wedding gift of up to £5,000 to their children. This gift allowance must be made before the ceremony.

If grandchildren marry, an individual can give up to £2,500 to each grandchild, and for friends or other relatives the wedding gift is up to £1,000 each.

Small gifts

Gifts of up to £250 per person each tax year are excluded from inheritance tax. Care needs to be taken, as anything over this sum could be classed as part of the £3,000 annual allowance. Individuals need to ensure that they have not used any other exemption for the recipient, or the allowance might not apply.

Charitable donations

Helping good causes with monthly donations can reduce the inheritance tax bill.

Charitable gifts are free from inheritance tax, if at least one-tenth of net wealth (calculated as a percentage of the death estate) is donated. The Government subsequently has the discretion to cut an individual’s inheritance tax rate from 40% to 36%.

Contributing to living costs

Money used to support an elderly person, an ex-spouse, and/or a child under the age of 18 or in full-time education, is not considered to be within the deceased’s estate on death, whatever amounts have been paid.

Payments from surplus income

An individual with surplus income should not ignore the opportunities provided by this provision. If the criteria, detailed below are met, the seven year period is not relevant. Such transfers are not deemed to be part of the taxable estate (except on death) and can therefore be exempt from inheritance tax.

The key criteria for a transfer of income to be exempt are:

  • it was made as part of the usual expenditure of the transferor; and
  • the transferor retains sufficient income to maintain his usual standard of living, having taken account of all the income transfers that form part of his usual expenditure.

Additional Information

If you require additional information regarding UK inheritance tax, gift allowances and/or the importance of having a UK Will, which reflects current wishes, please contact Paul Webb: advice.uk@dixcart.com or speak to your usual Dixcart contact.


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The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute accounting, legal or tax advice. Professional advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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