Whose Gain Is It Anyway?

Time after time, the Smart Frog is asked for advice on ways to reduce clients' capital gains tax libilities. He is often asked "could I simply transfer half the asset to my spouse in order to use up his (or her) CGT exemption?". The simple answer is usually "yes" but, surprise, surprise, it's a bit more complicated than that.

'Ownership' for CGT purposes is not based on 'legal' ownership, but on a concept known as 'beneficial' ownership. So, it is not necessarily in whose name an asset is legally held which determines who owns it, and thus who is taxed on it, for CGT purposes.

HMRC consider the following factors when determining who is the beneficial owner of a property:-

1. Who occupies the property?
2. Who receives any rental income?
3. Who provided the funds to purchase the property?
4. Who receives the sale proceeds on disposal?

Numbers 1, 2 and 4 might be easy to set up prior to a sale (but as far in advance of sale would be recommended). However, number 3 might not be so easy to plan for, dare we say even impossible, given that it is something which has already happened in the past.

The message? To take advice BEFORE taking action because in some cases it might be too late to undo what has already happened. Of course, this applies not only in the above example but across the whole of the tax spectrum.

You have been warned.....

My mate down the pub...

The Smart Frog was down the pub the other day and was asked by a fellow amphibian (not a tax expert) whether he should buy his next piece of artwork in his own name or in the name of his company. The immediate answer was to buy personally in order to avoid the infamous double-tax charge if acquired through the company.

The question was then posed: "Why?".

Usually, clients accept advice without wanting to know the in's and out's. But in this case, the Smart Frog's friend was curious to know exactly why. And so the Smart Frog talked it through with him, bit by bit, piece by piece.

This was a useful exercise because advice like this, which is "written in stone", is often a moving target and does sometimes change when tax rates and rules change. As we all know, capital gains tax has changed dramatically over the last 15 or so years - the abolition of indexation allowance, the introduction (and subsequent abolition) of taper relief, to name a couple of changes - but now with the 28% CGT rate it appears, in the Smart Frog's friend's case at least, that the tax savings of owning appreciating assets personally aren't necessarily as high as they used to be.

The advice given was very general, with the concluding comment "ask your accountant". Giving specific advice to friends is fraught with problems, and you can never charge the going rate anyway, so why put oneself in a vulnerable position without knowing the full facts? Impart a little advice, appear very clever, and your friend will be forever grateful.

But what has this really taught the Smart Frog? Be careful who you drink with - you might just spend the whole evening talking tax. Yawwnnnnn.....

Time for a Substitution?

It's a well-known fact in the UK tax system that a well worded contract can assist enormously when a person is challenged under the self-employment and IR35 rules. A recent tax case has now shifted the emphasis in favour of HMRC in such instances, but is the Smart Frog actually surprised? Nope.

Briefly, where a contract contains a "substitution clause" then HMRC have often shy'd away from challenging it because of an Employment Tribunal case some years ago which ruled that such instances could not create an employment situation, and so self-employed and personal service company clients have always been advised to include a substitution clause within their contracts.

HMRC have always stated, however, that a contract must actually reflect what happens in reality. So, where a contract includes a substitution clause then a substitute must actually be used. This point had not, however, been tested in the courts. Until now.

The recent ruling threw out the substitution clause because it didn't apply in practice. This means that HMRC's long-held view is now enshrined in tax law, and so the Smart Frog expects an influx of IR35 and self-employment status reviews to come flooding in.

Is anyone actually surprised? Surely not. HMRC have always stated their view clearly, it's just that they hadn't had the balls to test it in the courts. But now they have, and they have won.

But surely it leaves us in exactly the same position as we were before, and that is for clients to ensure that all aspects of their contracts actually apply in practice, and are not just inserted for tax "convenience". That's what the Smart Frog has always advised his clients. Perhaps other accountants have not adopted the same stance, and perhaps they're the ones who are now up in arms. Cynical Smart Frog? Maybe.

The Smart Frog's life mission is to ensure that clients do not pay more tax than is necessary, but at the same time they must stay within the letter of the law. If clients sail close to the wind, then that's fine, but they must expect to be challenged by HMRC one day and, when they are, they must expect to lose once in a while. That's life.

Rant over.

Planning to Avoid Evasion?

It's sometimes difficult to find the fine distinction between Tax Planning, Tax Avoidance and Tax Evasion, more so how far one can push a situation until it goes from Avoidance to Evasion. And, as we all know, the taxman doesn't like Tax Evasion (quite rightly so).

So, a quick lesson this week from the Smart Frog on the differences between the three.

Tax planning: When the legislation allows more than one possible treatment of a proposed transaction, tax planning takes place to compare various means of complying with tax law. It also includes ensuring that a client claims all allowances and reliefs clearly provided for by the law. Tax planning is completely acceptable.

Tax avoidance: Seeking to minimise a tax bill without deliberate deception, as this would amount to tax evasion or fraud. If the law provides that no tax is due on a transaction, then no tax can have been avoided by undertaking it. The term is now often used to refer to the practice of seeking to not pay tax, contrary to the spirit of the law. Tax avoidance is acceptable, but sometimes a bit iffy.

Tax evasion: The illegal non-payment or underpayment of taxes, usually by making a false declaration or no declaration to tax authorities. Tax evasion is a complete no, no.

So, dear reader, that's it. Sometimes the best tax advice is to plan to avoid evasion. The guy down the pub doesn't always know the difference, so don't listen to him. Listen to the Smart Frog. He knows best. As usual.

Edward the Accountantist - why the shame?

Edward Hunter was the first candidate 'fired' in the latest series of The Apprentice. As he left the Boardroom he was advised by Lord Sugar to remember: "There's no shame in being an accountant."

Edward himself made a number of related observations about his profession including:

"I'm the wheeler dealer who accidentally became a financial professional."

"I was trained at one of the biggest accountancy firms; but I don't fit the mould."

"I don't need to show off that I can work out margins; I'm an accountant."

"I'm mildly accountantist (anti accountants)."

"Whenever I'm introduced to anyone and I want to stop the conversation, I just say, 'I'm an accountant'."

All this reminded the Smart Frog of a joke he once heard: How can you spot an extroverted accountant? He's the one who's looking at YOUR feet when he's talking, instead of HIS OWN. In your esteemed author's opinion, that does have a ring of truth about it, so perhaps Edward the Accountantist did have a point.

That said, we can only wonder if the 'biggest accountancy firm' welcomed him back with open arms? We suspect not. Shame.

Complification - part 2

Continuing the theme from his last blog, the Smart Frog is pleased to announce that HMRC have announced a new, simpler (?), way for tax agents to register clients for Self Assessment. Judge for yourself.....

"HMRC have just altered the arrangement of hoops you need to leap through to get a new client registered for self assessment and on to your online client list. To register for self assessment the individual must complete form SA1, or if the individual is self-employed: form CWF1. The CWF1 form can be completed online or over the phone (0845 900 0444), if the individual already has an NI number. An individual who has become a member of a partnership should complete form SA401. If your new client is not yet registered for self-assessment, and hence has no UTR number, you can't complete an online agent authorisation so you need to resort to paper forms. Get the client to sign a paper authorisation form 64-8, staple it to the appropriate self-assessment registration form (SA1, CWF1 or SA401) and send both to the Central Agent Authorisation Team (CAAT) in Longbenton. Unless both forms are received together your client will not be set-up on the your online client list with HMRC. Alternatively get your client to register for self assessment first. When the UTR number comes through you can use the online agent authorisation procedure to officially register the individual as your client."

Simple then. Is it?

Just as well that the Smart Frog is a particularly SMART frog, otherwise he could get his webbed toes in a twist.

Complification

In recent times HMRC have promised a simplification of the tax laws in this country which should have led to many planning opportunities. Remember the so-called "tax simplification" of pensions in 2006. Not. The subsequent changes led to the coining of the expression "complification". And then there are the swings back and forth as chancellors rethink their predecessors' ideas. Boy oh boy.

Some of the key highlights in the small print from this week's Budget include some more complifications:

- The increase to £50,000 in the annual charge for UK non-domiciled individuals from April 2012 for those who have been UK resident for 12 or more years and who wish to benefit from the remittance basis. The definition of residence will be put on a statutorily defined basis. Then the likes of Green and Stelios should be left in peace for a bit.

- The reduction in the main rate of corporation tax to 26% from April 2011 and by 1% a year thereafter to 23% in 2014. That should help offset the impact of the proposed cuts in capital allowances.

- The increase in the personal allowance to £8,105 in 2012/13, with a corresponding reduction in the basic rate band to £34,370. That should add a big slew of higher rate taxpayers to those already paying 40% and 50% tax.

- The increase in the lifetime limit for CGT entrepreneurs' relief from £5 million to £10 million - which sounds good but won't actually affect too many people. Except maybe Green and Stelios.

- The possible integration of income tax and NICs. But how on earth will they do that without huge "complification?"

The Smart Frog makes no apologies for sounding cynical. Let's see if time proves him wrong.

Happy birthday, Son - have a brand new car!

Recently, The Smart Frog happened to jump across a rather neat and simple trick for family company businesses to fund their private car purchases for the family through the company in an extremely tax-efficient manner. So, he thought he'd share it with you, of course.

Try this for size.

Buy a car through the company for, say, £10,000 with CO2 emissions of, say, 100. Give said car to Son to use. Usual company car rules tax the car on the company director (i.e. Daddy). Taxable value (i.e. amount upon which tax is payable) is 10% of list price, therefore value is £1,000. Tax payable at, say, 40%, is £400 (or even lower if Daddy is a lower rate taxpayer). The car's running costs are claimable by the company in full in its accounts, and the purchase cost qualifies for 100% tax allowances because it is ozone-friendly.

All this, and the car doesn't have to be driven a single mile on company business. Little Johnny can happily drive around all day long wherever he wants. No need to keep a mileage log. No need even to work for the company. The company picks up the tab and gets full tax relief, Daddy pays the miserly company car tax bill, and Little Johnny can continue spending all day watching The Jeremy Kyle Show. Little Johnny is a very happy Little Johnny. Perfect.

Not sure the legislation was actually intended to produce this unlikely result. But it does. And so use it to your benefit, that's what we here at Smart Frog Towers recommend.

If The Smart Frog ever developed proper hands and feet then maybe he'd try out his own advice. Until then, it's jump, jump and away for him. See ya'...