Corporate Business. Newsletter. GAAR - a whole new world. Winter

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1 Newsletter Winter Corporate Business GAAR - a whole new world On 17 July 2013 a new tax rule came into force the general antiabuse rule known as GAAR. This is a fundamental change to the tax planning landscape and from now on must underpin all tax planning. The GAAR is a response to public (and HMRC) concerns that multinationals and wealthy individuals are paying less tax than they should. The current climate of anti-tax avoidance has resulted in tax becoming a moral issue in the minds of some. Previously, taxpayers were free to arrange their affairs by any lawful means to minimise their tax bill. However, the principle underpinning the GAAR is that all taxpayers should pay their fair share of tax and so it imposes a limit on the extent to which taxpayers can go in trying to reduce their tax liabilities. What is it and how does it work? The GAAR will enable HMRC to challenge arrangements which result in a tax advantage and which are abusive. The definitions are wide, so much tax planning will be caught under the first test of creating a tax advantage. The next test is to consider whether it is abusive and for this the double reasonableness test will be applied. It will be abusive if the arrangement cannot reasonably be regarded as a reasonable course of action. This is a highly subjective test and it will be a while before we know how this will be interpreted. As part of the GAAR, a panel has been appointed to consider whether the GAAR should apply to transactions where there is a dispute with HMRC. The panel is comprised of tax professionals and is designed to be independent. However, David Heaton was recently forced to resign from the panel following the recent Panorama exposé. This raises questions about its independence and casts doubt over whether this is a taxpayer safeguard after all. Will it tackle tax avoidance? To some degree, yes it will. It will tackle the more egregious tax schemes where contrived arrangements result in no substantive economic gain or loss. Commerciality is key planning which has sound commercial reasons is unlikely to fail the double reasonableness test. The GAAR, however, will not tackle the big name avoidance which uses tax treaties to shift profits around to low tax jurisdictions. This will require action at the international level. There is also criticism that a GAAR should be needed at all. If our tax legislation was better drafted and did not contain so many loopholes and uncertainties, then a GAAR would not be necessary. Combined with the current antiavoidance climate, the GAAR may change behaviour. There is now a reputational risk of being seen not to pay a fair share of tax. We now see some businesses trumpeting about how much tax they pay Justin King, the CEO of Sainsbury s recently pointed out at the CBI annual conference that their effective tax rate was 59%. It s a whole new world.

2 Crowdsourcing debt applicable to you? A report commissioned by Business Innovations and Skills ( BIS ) last year identified a funding gap for SMEs of up to 191bn. Crowdfunding is seen by many as a partial solution to this funding gap. Crowdfunding (including peer to peer lending) is a way of raising finance by asking a large number of people for a small amount of money each, via the internet. The report proposed that the sector becomes regulated by the Financial Conduct Authority ( FCA ) from April The Government have themselves introduced funds to coinvest in some platforms, including Funding Circle, which is believed to be the biggest player in the UK. Funding Circle loans now total 166m, compared to 45m last year. The sector is growing rapidly. To give a flavour of whether Crowdfunding debt (or Peer-to-Peer lending) could be relevant to your business, the following factors should be considered: Speed of securing finance - 58% of companies surveyed gave speed of securing finance as the main benefit of borrowing through Funding Circle. Size of loan - Funding Circle publish weekly statistics which show that some loans are between 150k - 450k. Interest rate - The mean interest rate was 8.02% and mean term was months. Loans are generally used for working capital expansion or asset purchases. Disclosure You will need to make financial information about the business available to the network and deal with questions from the potential lenders. Research indicates that the motivation of the funder is primarily financially motivated and their decision to lend or not will be made on the basis of interest rates and expectations of robustness of the borrower. The Owner Manager should therefore invest in the Business Plan and Financial Projections not only for their own benefit but also as a reference document for dealing with questions from potential lenders. Tax relief for fixtures in buildings The changes to the rules for claiming capital allowances on fixtures in commercial buildings are being implemented in two stages. The second change on pooling expenditure applies from 1 April Previous changes From 1 April 2012, those buying and selling commercial property will be familiar with the requirement to attribute a value to fixtures on sale. This is normally achieved by way of an election which is signed by both parties. What will the new changes mean to me? From 1 April 2014, it will be necessary for a vendor to have allocated expenditure to a capital allowance pool prior to sale in order for a purchaser to claim capital allowances. If the above requirements are not met then the ability to claim capital allowances on these fixtures will be lost to the purchaser and any future owners. The availability of these reliefs can have an impact on the sale price of a property. There are special rules for non-tax paying entities, such as pension funds, which may allow them to pass the benefit of such allowances to an onward purchaser. The new rules mean that more detailed information will be required on the tax history of fixtures in a building in advance of a proposed transaction. Advance planning is advisable to strengthen the tax and commercial position. How can Francis Clark help? Our tax team can assist with identifying capital allowance claims on existing properties as well as advising on buying and selling commercial property. There may be scope to make valuable claims over and above the amounts included in an election on purchase. If you would like further information or advice speak to your usual Francis Clark contact.

3 Auto-Enrolment Auto-Enrolment is a hot topic at the moment. It is the Government s attempt to encourage more people into saving for their retirement and, whilst the majority of the press articles are showing the importance of the pension scheme, what many are neglecting is the administrative burden that the employer is facing. Staff must be assessed every time they are paid, opt-outs must be monitored, the right amount of contributions paid within prescribed timescales and these records must be retained for 6 years. There are things that an employer can do to ease the workload at their staging date: Confirm your staging date this can be done via The Pension s Regulator Web page. If you had more than 30 employees on 1 April 2012 it will be based on the size of your workforce. If you had less than 30 employees it will be based on your PAYE reference. Assess your workforce not all your staff are likely to be automatically enrolled into a pension. Assess the workforce to see who the new legislation will be applicable to. Costing Analysis post 2018 there will be 4 options with regards to the level of contributions that an employer can make. It is worth spending some time calculating the cost of each and then deciding on the most cost effective option for your business. Decide on your scheme or schemes the pension world has evolved since Auto-Enrolment and there are a number of options available to employers. Selecting the right scheme or schemes is crucial. Look into cost saving options such as salary exchange salary exchange is a method whereby employees make pension contributions, saving both employer and employee national insurance. The employer can retain their saving, and the employee saving can be added to their contribution, thus boosting the amount going into their pension. Payroll systems are your payroll systems sufficient to meet the additional requirements? The onus will be on the employer to make sure they meet all the rules regarding Auto-Enrolment, so having confidence in your payroll software is essential. Learn the rules there are already 86 separate investigations by the Pensions Regulator into companies who have not fully complied with the rules. Make sure you know the rules to ensure that you do not suffer an investigation or fine. Give yourself time the over-riding feedback from companies who have staged is that they wished they had started planning earlier. Once you know your staging date you must start to plan at least 9 to 12 months in advance. If you are unsure of what to do next, please speak to your Francis Clark Financial Planning contact who will be happy to help.

4 Loans to participators the recent changes We reported last time on the changes to the tax position of loans from companies. Since then the rules have been amended and we now have the final version. These rules apply to any transactions made on or after 20 March Where a company is owned by its directors and the directors take a loan from the company there are special tax rules which apply to the loan. In these circumstances the director is known as a participator. Unless it is repaid within nine months of the year, the company must pay a tax charge of 25% of the value of the loan to HMRC. In the past, this would be repayable when the loan was repaid. This tax charge is known as section 455 tax (formerly known as section 419 tax). HMRC have always been concerned that many participators will repay the loan shortly before the nine month deadline to clear the balance and then withdraw the cash again shortly afterwards, thus avoiding a tax charge. There are now two new rules that have been introduced to counteract this bed and breakfasting which mean that the full repayment of the section 455 tax charge is not necessarily certain. Firstly, the 30 day rule. If within a period of 30 days a repayment of more than 5,000 is made to the company and then the participator takes a loan of more than 5,000 from the company, no repayment of the tax charge will be made to the extent of the lower amount. Secondly, the arrangements rule. This means that where a loan of at least 15,000 exists and a repayment is made, if there are arrangements to redraw the loan or part of the loan again, no repayment of the tax charge will be made to the extent of the lower amount. We do not yet know how broad arrangements may be and we await guidance from HMRC in due course. Neither of these rules will be triggered however, if the repayment is as a result of a dividend or salary/bonus payment. This will be a key exemption. It is important that the repayment does not leave the company. This means that it must be credited directly to the director s current account. If the funds leave the company and are reintroduced the exception will not apply.

5 Changes to annual reports The timing of recently announced changes to narrative reporting may take many by surprise. Intentions outlined in the Coalition Agreement back in May 2010, have now been implemented through The Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 which came into force in August and will apply for financial years ending on or after 30 September New Strategic Report Companies will now have to produce a Strategic Report as a stand alone report, and it will require approval from the board of directors, in the same way as it currently applies for the Directors Report. Key elements The Strategic Report must contain: a fair review of the company s business; and a description of the principal risks and uncertainties facing the company. Such a review should represent a balanced and comprehensive analysis of the development and performance of the company s business during the financial year and its position at the end of the year. It should also contain, where appropriate, analysis using financial key performance indicators. There are a number of additional disclosure requirements for quoted companies (which does not include AIM companies), but we shall not comment on these here. Is it additional disclosure? For most companies the content of the Strategic Report will not differ from that currently required for the business review. The change is in the location of that information now in this new report, rather than as part of the Directors Report. Are there any exemptions? Yes, small companies will continue to be exempt and medium-sized companies will, as previously, not have to provide analysis using non-financial key performance indicators. Other changes Other minor changes mean that companies will no longer need to disclose, within the Directors Report, information on: The principal activities of the company or group Charitable contributions Policy and practice on payment of creditors Asset values, i.e. where the market value of land differs significantly, in the opinion of the directors, from the amount included in the balance sheet.

6 FRS 102: transition date is fast approaching! In the Spring 2013 issue we outlined the key changes that will arise when companies start preparing their accounts under FRS 102. Companies are now starting to focus on those changes and are discussing with us various options as they approach their transition date. Reminder of your transition date The new reporting framework will be effective from 1 January Given the need for comparatives in the first set of FRS 102 statements, it means that, for example, those entities with December year-ends, will need to prepare a transition balance sheet as at 1 January 2014, although this will only appear in the year ending 31 December 2015 financial statements. What are we seeing? There is now greater recognition by companies that action needs to be taken in the lead up to their transition date. Impact assessments some clients are requesting that an exercise is performed prior to the transition date to identify the areas they need to address, so that the information is readily available. It can be very hard to calculate, say, a holiday pay provision two years after the event, and certain information from banks on interest rate swaps is not available retrospectively. An early audit another option that is gaining increased popularity is for companies to consider having an additional audit performed at the time of the transition date. So, under the 31 December year-end analogy above, as well as performing our audit on the 31 December 2013 Balance Sheet prepared under current UK GAAP, we will also perform an additional audit on that Balance Sheet with the numbers prepared under FRS 102. The attraction is that the work is performed on a timely basis and it provides comfort that there will be no problem on comparatives at the December 2015 audit. How can Francis Clark Help? Our corporate services team are fully briefed on the changes to narrative reporting and the options to consider in the lead up to FRS 102. If you would like further information or advice please speak to your usual Francis Clark contact. Please visit our website for your local office expert FRANCISCLARK.CO.UK If you would like to be added to, or deleted from our mailing list, please contact Martin Anderson martin.anderson@francisclark.co.uk or sign up online at: Francis Clark has seven offices in the South West: Exeter Plymouth Salisbury Taunton Tavistock Torquay Truro Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at The term Partner is used to refer to a member of Francis Clark LLP or to an employee or consultant with equivalent standing and qualification. This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of publication), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.