The meaning of goodwill

Goodwill is a term we hear about often, but interestingly, is rarely mentioned in legislation. In fact, the term 'goodwill' is not defined for the purposes of the Capital Gains legislation in TCGA 1992.

Most definitions of goodwill are derived from case law. You could describe goodwill as the 'extra' value attributed to a business over and above a valuation of its tangible assets.

In the vast majority of cases when a business is sold, a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'

As the value of goodwill is likely to be a significant component of a businesses' net worth, consideration of valuation methods will need to be carefully considered should the business owners seek advice on a sale. 

Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

Taxation of miscellaneous income

There are special rules, known as the miscellaneous income sweep-up provisions, that seek to charge tax on certain income. This unusual provision, which is broad in scope, catches certain income that would not otherwise be charged under specific provisions to Income Tax or Corporation Tax.

Amongst the types of income covered are:

  • payment for a service where it was agreed that the service would be provided for reward;
  • income received under an agreement or arrangement and which is not otherwise taxable;
  • payment for the use of money that is not interest or does not fall within the loan relationships legislation.

HMRC is keen to stress that although the provisions are sweep-up provisions, this does not make all miscellaneous income taxable.

Specifically, the provisions do not tax:

  • capital accretions on isolated transactions in assets;
  • voluntary receipts such as gifts and gratuities;
  • gambling winnings from wagers and bets;
  • certain post-cessation receipts.
Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

When are scholarships taxable as benefits?

The holder of a scholarship is exempt from a charge to Income Tax on income from a scholarship when receiving full-time education at a university, college, school or other educational establishment.

Please note, that the provision of a scholarship to a member of the family or household (usually a son or daughter) of a director or employee by reason of the employment of that director or employee, will give rise to a taxable benefit. Fortuitous awards of scholarships are the only exception to this rule.

We have noted below the principal conditions and one exclusion, which together explain the basic position when a scholarship can be exempt from Income Tax.

Conditions

  1. The employer must require that the employee be enrolled at the educational establishment for at least one academic year and must attend the course for at least twenty weeks in that academic year. Or if the course is longer, the employee must attend for at least twenty weeks on average, in an academic year over the period of the course.
  2. The educational establishment must be a recognised university, technical college, or similar educational establishment and which is open to members of the public generally and offers more than one course of practical or academic instruction. For example, an employer’s internal training school or one run by an employer’s trade organisation will not satisfy the educational establishment condition for this relief.
  3. The payments, including lodging, subsistence and travelling allowances but excluding any tuition fees payable by the employee to the university etc, should not exceed £15,480.

Exclusion

  • This exemption does not apply to payments of earnings made for any periods spent working for the employer during vacations or otherwise. These payments would be taxable as earnings in the normal way.
Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

PAYE late filing penalties

There are late filing penalties in place for employers that don’t report payroll information on time. The size of the late filing penalties depends on the number of employees within the PAYE scheme.

Number of employees  Monthly filing penalty per PAYE scheme
1 to 9 £100
10 to 49 £200
50 to 249 £300
250 or more £400

Payments that are over 3 months late can be subject to an additional penalty of 5%.

HMRC has confirmed that having reviewed the effectiveness of the risk-based approach to late filing PAYE penalties, they have decided to continue with their same approach as for the 2019-20 tax year. This means that late filing penalties will continue to be reviewed on a risk-assessed basis, rather than being issued automatically. The first penalties for 2019-20 will be issued in September 2019.

This approach means, that penalties will not be charged automatically if Full Payment Submissions (FPSs) are filed late but within 3 days of the payment date and there is no pattern of persistent late-filing. This is not an extension to the statutory filing date, which remains unchanged, and HMRC has confirmed that employers who persistently file after the statutory filing date, but within three days thereof, will be monitored and may be charged a late filing penalty.

This move confirms that HMRC will continue to focus on penalising those who deliberately and persistently fail to meet statutory deadlines, rather than those who make occasional and genuine errors.

Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

When can you increase your rental income?

The ability to increase the rent on private rentals is driven by the tenancy agreement. This is an agreement between the landlord and the tenant. The agreement can be written down or oral.

The tenancy can either be:

  • fixed-term (running for a set period of time)
  • periodic (running on a week-by-week or month-by-month basis)

The type of tenancy agreement dictates when you can consider increasing your rents. For a fixed-term tenancy, you can only increase the rent if your tenancy agreement permits this, otherwise, you can only raise the rent when the fixed term ends. For a periodic tenancy, you can usually increase the rent once a year.

You should note, that any rent increase should be seen to be fair and realistic in line with reasonable rents on the open market. If your tenants think the rent increase is unfair, they can ask the First Tier Property Tribunal to adjudicate and decide the right amount.

Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

Tax if you work abroad

If you are leaving the UK to work abroad for at least one year (or permanently), there is a requirement to notify HMRC. This is done using a P85 form which should be completed and submitted to HMRC. You will also be required to submit a Self-Assessment tax return if you usually complete one, for example, if you are self-employed.

The completion of the P85 form will also ensure you can claim any tax refund you are entitled to and will also help HMRC decide how you should be treated for the purposes of UK tax. 

The P85 form can be found on the GOV.UK website. There is an online form available as well as a postal form. Your liability to Income Tax will depend on whether you are resident and / or ordinarily resident and / or domiciled in the UK. 

It is also important to consider the National Insurance (NI) implications of working abroad. In some cases, it can be beneficial to continue paying NI contributions whilst abroad as this should help you secure state pension credits.

Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

National Insurance if you work abroad

If you move abroad, it can often be advantageous to continue paying your UK National Insurance Contributions (NICs) in order to preserve your entitlement to the UK State Pension and other benefits. If you are working in the European Economic Area (EEA), the rules depend on your situation (see below). The EEA includes all EU countries as well as Iceland, Liechtenstein and Norway. The same rules apply in Switzerland.

The rules are as follows:

  • If you work for an employer in the EEA: You will normally pay social security contributions in the EEA country you work in instead of NICs. This means you will be covered by that country’s social security laws and may be entitled to benefits, but your entitlement to benefits in the UK (for example State Pension) may be affected as there’ll be a gap in your NICs.
  • If your UK employer sends you to work in the EEA: You might be able to carry on paying NICs if you are abroad for up to 2 years. This means you won’t have to pay social security contributions abroad. There is a special form which your employer must complete to notify HMRC.
  • There are special rules if you are self-employed or working in two or more EEA countries (including the UK).
  • Some countries have a Reciprocal Agreement (RA) or Double Contribution Convention with the UK. These countries include the USA and Japan. You will usually pay social security contributions in that country instead of NICs.
  • For all other countries. You can usually continue paying NICs for the first 52 weeks you are abroad and if you meet the qualifying conditions.

Of course, depending on the Brexit outcome, the rules for EU/EEA countries could be open to change.

Source: HM Revenue & Customs Tue, 20 Aug 2019 05:00:00 +0100

How do you calculate adjusted net income?

To calculate adjusted net income, you will need to look at a taxpayer’s total taxable income, before personal allowances, and then deduct any trading losses, gift aid donations, gross pension contributions and pension contributions where the pension provider has already provided tax relief at the basic rate.

Calculating the adjusted net income amount is necessary if any of the following apply:

  • A taxpayer is liable to an income-related reduction to the personal allowance – when their adjusted net income is over £100,000 (regardless of their date of birth);
  • A taxpayer is liable to the High Income Child Benefit charge – when their adjusted net income is above £50,000.

It is worth noting when reviewing a client's taxable income that if certain thresholds are exceeded the personal allowance may be withdrawn completely. For example, if a client decides to draw-down a significant lump sum from their pension pot, the payer may deduct 40% Income Tax, but this may not cover all the taxes due. If the amount tips their annual income over the required limit (£125,000 for 2019-20), perhaps for the first time, and their personal allowance is lost, additional taxes may fall due the following January.

Source: HM Revenue & Customs Wed, 14 Aug 2019 05:00:00 +0100

When are Class 1A NICs due

Class 1A NICs are paid by employers in respect of most benefits in kind provided to employees, for example, the use of a company car. There are no Class 1A employee contributions payable.

Class 1A NICs are due in respect of most benefits provided to:

  • directors and certain other persons in controlling positions,
  • employees,
  • members of the family or households of the above.

Where a benefit is provided as part of a salary sacrifice or other optional remuneration arrangement (OpRA), special rules apply and the Class 1A NICs are calculated as a percentage of the relevant chargeable benefit.

Certain conditions must apply before Class 1A NICs are due. These conditions are that the:

  • benefit must be from, or by reason of, an employee's employment and must be chargeable to Income Tax under ITEPA 2003 on an amount of general earnings as defined at Section 7(3) ITEPA 2003;
  • employment must be 'employed earner’s employment' under social security law and employment as a director or an employee;
  • benefit must not already attract a Class 1 NIC liability.

There is a statutory exemption for qualifying trivial benefits in kind costing £50 or less. The tax-free exemption (and therefore exemption from Class 1A NIC) applies to small non-cash benefits like a bottle of wine or a bouquet of flowers given to employees. It also applies to any other BiK classed as 'trivial' that falls within the exemption. An annual cap of £300 is applicable to directors or other office-holders of close companies and to members of their families or households.

Source: HM Revenue & Customs Wed, 14 Aug 2019 05:00:00 +0100

VAT and insurance claims

Insurance transactions are generally VAT exempt. However, there are many issues that can arise concerning the VAT liability of certain insurance transactions. One of these issues concerns the VAT treatment of insurance claims.

Insurers are unable to recover VAT incurred in obtaining replacement goods or having repairs carried out for a policy holder. This supply is treated as being made to the policy holder regardless of who makes the payment to the supplier.

However, a VAT registered insurance policy holder can, subject to the normal rules, recover the input tax incurred. For this reason, the insurer will normally pay the policy holder compensation exclusive of VAT. This is why most insurance claim forms ask the policy holder if they are registered for VAT. Where the insured party is able to recover the VAT charged the insurer will only be responsible for paying the net amount due.

There are scenarios, such as when a business is partly exempt, where the business may not be able to recover the input tax in full. This complication needs to be resolved between the policy holder and insurer. HMRC does not get involved in resolving issues that arise in this way.

Source: HM Revenue & Customs Wed, 14 Aug 2019 05:00:00 +0100