Lifetime ISA rules changed

The Lifetime ISA allows those aged between 18 and 40 to save for a new home or for their retirement. Under the scheme, the government provides a 25% bonus on yearly savings of up to £4,000 and once you start saving before you are 40, you can continue using the scheme until you turn 50. The money held in a Lifetime ISA can be used to purchase a first home worth up to £450,000 anywhere in the UK or withdrawn tax-free after your 60th birthday.

The money invested in a Lifetime ISA can be used for other purposes but is usually subject to a withdrawal charge. Under a temporary rule change, people whose income has been affected by Coronavirus and who want to access their Lifetime ISA funds early will no longer face this withdrawal charge. The only other exception is if a saver is terminally ill and given less than 12 months to live.

The Treasury will legislate for a temporary reduction in the Lifetime ISA withdrawal charge to 20% for the current tax year, from 6 March 2020 until 5 April 2021. This means you will only have to pay back any government bonus you have received but will not pay the additional withdrawal charge of 5%. This means that if you put £1,000 into the scheme and had £1,250 after the bonus then if you withdraw this amount you will lose the bonus but will receive your full £1,000 back.

The rule change will be backdated to 6th March, so anyone who has withdrawn their money early since that date and paid a 25% charge will have the difference refunded.

Gift Aid for cancelled charity events

HMRC has published new guidance on the scheme for charities that have had events cancelled due to coronavirus.

The Gift Aid scheme allows charities or Community Amateur Sports Clubs (CASC) to take a taxpayer’s donation and, provided all the qualifying conditions are met, to reclaim the basic rate tax. This allows for an extra 25p of tax relief on every pound donated to charity.

HMRC will accept that where a person due a refund decides to donate this to the charity, the charity can still claim gift aid subject to the following:

  • the individual does not receive a benefit as a result of their donation, agrees that the cost of their ticket becomes a donation and completes a Gift Aid declaration.
  • the charity must also keep an audit trail, including a copy of the agreement from an individual agreeing to the donation of the cost of the ticket.

The charity no longer has to physically refund the ticket price for the individual to re-donate. If a charity event has been postponed and not cancelled, any tickets for that event are not eligible for the temporary changes.

Tax-Free Childcare scheme

The Tax-Free Childcare Scheme (TFCS) is open to all eligible families with children under 12. It was announced as part of the Budget measures that a service improvement will be made to ensure the TFCS is compatible with school payment agents. This will allow parents of up to 500,000 school-aged children across the UK to access the TFCS and use it towards the cost of their wraparound childcare (such as breakfast and after-school clubs).

The TFCS helps support working families with their childcare costs. The scheme provides for a government top-up on parental contributions. For every 80p in the £1 contributed by parents an additional 20p or 20% will be funded by the government up to a maximum total of £10,000 per child per year. This will give parents an annual savings of up to £2,000 per child (and up to £4,000 for disabled children until the age of 17) in childcare costs.

The scheme is open to all qualifying parents including the self-employed and those on a minimum wage. The scheme is also available to parents on paid sick leave as well as those on paid and unpaid statutory maternity, paternity and adoption leave. In order to be eligible to use the scheme, parents will have to be in work at least 16 hours per week and earn at least the National Minimum Wage or Living Wage. If either parent earns more than £100,000, both parents are unable to use the scheme.

The earnings limit does not apply to newly self-employed who started their business in the last 12 months. In addition, as self-employed income can vary, profits can be averaged across the tax year if it is necessary in order to meet the minimum income requirement.

Junior ISAs

Junior ISAs were introduced to encourage parents to save money for their children and to provide an alternative to the Child Trust Funds (CTF) that were only available to children born after 31 August 2002 and before 3 January 2011. It is possible to transfer CTF funds to a Junior ISA.

Junior ISAs were made available in November 2011 after CTFs were phased out. However, unlike the CTF accounts, the government does not contribute any public funds. Investments are available in cash or stocks and shares and a child can have one or both types of Junior ISA.

The money in the account belongs to the account holder. The child can control their account from the age of 16, although any money saved cannot be withdrawn until they turn 18. Junior ISAs automatically turn into an adult ISA when the child turns 18.

Any income from CTFs or Junior ISAs is exempt from Income Tax and CGT on the child or the parent even where the invested funds came from the child’s parents. The current subscription limit for both CTFs and Junior ISAs is £4,368. It has been confirmed that the limit will increase to a generous £9,000 from 6 April 2020.

Tax treatment when transferring income streams

Special rules apply to transfers of income streams. The rules make it clear that the sale of an income stream – designed to turn economic income into a return that is treated by tax law as capital – is unlikely to work. For example, shareholders could sell the right to receive a large company dividend in exchange for an amount almost equal to the dividend, without selling the shares. Legislative is in place to ensure that the Income Tax payable on such a receipt cannot be avoided.

The transfers of income streams legislation ensure that receipts derived from a right to receive income (and which are economic substitutes for income) are to be treated as income for the purposes of Corporation Tax and Income Tax.

Where the transferee is a company, it is taxable on its accounting profit from acquiring the income stream. This will generally be the difference between the cost of the income stream and the amount of income it actually receives. There is no similar relief or special treatment for non-corporate transferees. The legislative provisions do not apply under certain limited circumstances.

Property rental income and bad debt

In most cases, property rental income must be brought into account in the year in which the income was earned, even if the invoice has not yet been paid. However, a deduction is allowed in respect of bad & doubtful debts.

These are debts which are either clearly irrecoverable (a bad debt) or a doubtful debt to the extent it is estimated to be irrecoverable. The deduction allowable for a doubtful debt is the full amount of the debt, less than any amount the taxpayer expects to recover.

Whilst HMRC does not usually seek proof of each bad debt for which a claim is made, it is clear that a deduction can only be made where a taxpayer has taken all reasonable steps to recover the debt and proper evidence should be held to demonstrate this.

If the debt is later recovered the taxpayer should account for the recovery as a receipt of their rental business in the year the debt is paid. Similarly, if a doubtful debt later looks as if it will be paid at some future date, the taxpayer should bring the debt back in as a receipt when prospects change.

No deduction is allowable if a debt is waived for reasons other than the financial position of the debtor, for example between connected parties or merely because the tenant is a habitual slow payer.

A reminder – badges of trade

The 'badges of trade' tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side-line to a hobby. Eventually, taxpayers may have to decide if their hobby has morphed into a trade – and therefore subject to tax. The badges of trade can be used at this time to help resolve this dilemma.

Both HMRC and the courts are clear that it is important to look at the whole picture rather than looking at each 'badge' in isolation when considering options.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

  • Profit-seeking motive
  • The number of transactions
  • The nature of the asset
  • Existence of similar trading transactions or interests
  • Changes to the asset
  • The way the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition

The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby without concerns about any tax complications. Even if HMRC considers that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby tax-free.

Importing from EU after 31 January 2020

HMRC has published a useful list to help businesses be prepared to import goods from the EU to the UK after the 31 January 2020 Brexit date. In the short-term there will be a transition period during which all rules remain the same. The Government expects to have a trade deal in place with the EU by the end of the year.

The six points of action listed below are likely to be relevant once a trade deal with the EU is in place or in the case that negotiations falter.

  1. Make sure your client has an EORI number that starts with GB. They will need an Economic Operator Registration and Identification (EORI) number starting with GB to continue importing goods.
  2. Decide who will make the import declarations. Your client can hire someone to deal with customs or if properly prepared, can do it themselves.
  3. Apply to make importing easier. Your clients can apply to use 'transitional simplified procedures' to reduce the amount of information they need to give at the border. They should also ensure they have a duty deferment account if they want to be able to make one payment of customs duties a month instead of paying for individual shipments.
  4. Check the rate of tax and duty they’ll need to pay. They will need to pay customs duties and VAT on all imports.
  5. Check what you need to do for the type of goods you import. There might be other things required, depending on what they are importing. For example, check if the import licences or certificates needed will change. Check the rules for importing alcohol, tobacco and certain oils. Check the labelling and marketing standards for importing food, plant seeds and manufactured goods.
  6. Get help and support. HMRC has setup a Brexit imports and exports helpline. The helpline can help with queries about customs declarations and procedures, duties and tariffs, importing and exporting different goods, transporting goods to and from the EU and product safety regulations.

There will be different rules if your clients are moving goods from Ireland to Northern Ireland.

Exporting goods to EU after 31 January 2020

In tandem with the list for importing goods, HMRC has published a useful list to help businesses be prepared to export goods from the UK to the EU after the 31 January 2020 Brexit date. In the short-term there will be a transition period during which all rules remain the same. The Government expects to have a trade deal in place with the EU by the end of the year.

The seven points of action listed below are likely to be relevant once a trade deal with the EU is in place or if negotiations falter.

  1. Make sure your client has an EORI number that starts with GB. They will need an Economic Operator Registration and Identification (EORI) number starting with GB to continue exporting goods. It is also important to ensure that the importer has an EU EORI number.
  2. Decide who will make the export declarations. Your client can hire someone to deal with customs or if properly prepared, can do it themselves.
  3. Check the rate of tax and duty. Your importer will need to pay customs duties and VAT on all imports.
  4. Check what you need to do for the type of goods you export. There might be other things required, depending on what they are exporting. For example, check if the export licences or certificates needed will change. Check the rules for exporting alcohol, tobacco and certain oils. Check the labelling and marketing standards for exporting food, plant seeds and manufactured goods.
  5. Find out how changes to VAT will affect you. This includes understanding how your clients will claim VAT refunds from EU countries and how they will pay VAT when selling digital services to EU customers.
  6. Deciding how to transport goods outside the UK. Your client can hire someone to do this or if properly prepared, do it themselves.
  7. Get help and support. HMRC has setup a Brexit imports and exports helpline. The helpline can help with queries about customs declarations and procedures, duties and tariffs, importing and exporting different goods, transporting goods to and from the EU and product safety regulations.

There will be different rules if your clients are moving goods from Ireland to Northern Ireland.

Transporting goods out of the UK by road to or through the EU

HMRC has published a useful list to help businesses transport goods commercially when driving from the UK to or through Europe. In the short-term there will be a transition period during which all rules remain the same. The Government expects to have a trade deal in place with the EU by the end of the year.

The six points of action listed below are likely to be relevant once a trade deal with the EU is in place or in the case that negotiations falter.

  1. Make sure the vehicle operator has applied for all relevant operator licences and permits.
  2. Make sure the driver is eligible to drive abroad. You must also ensure the driver has a valid passport, a valid Driver Certificate of Professional Competence (CPC) card and an international driving permit (IDP). An IDP will be required in some EU countries if there’s a no-deal Brexit.
  3. Check the rules for the goods being carried. There are rules for transporting certain goods. The driver may need to follow set routes or stop at specific check points if they are transporting mixed loads or specific types of goods.
  4. Make sure the driver has the right export documents.
  5. Find out what vehicle documents the driver needs to carry.
  6. Check local road rules.