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Transition from FRS 105 to FRS 101

Transition from FRS 105 to FRS 101IntroductionThis would be a very unlikely transition in practice. It would mean an entity that was previously a micro-entity would have become a subsidiary of a parent company producing consolidated financial statements and elected to use FRS 101 because its parent produces financial statements under IFRS.Main effectsFRS 105 provides a very simple framework for accounting, for example:•it does not permit fair value accounting, including revaluations•deferred tax is not recognised•only the contributions payable (broadly) are recognised if the entity has a defined benefit pension scheme•development costs must not be capitalised

Allowable expenses for property businesses

Allowable expenses for property businessesThis guidance note applies to companies and individuals with commercial or residential properties and shows the contrasts in treatment between the corporate and individual tax regimes.General itemsMany of the principles applying to allowable expenses for property businesses are similar to those that apply for trading and the rules for individuals in a property business are generally the same as for companies with some exceptions which are highlighted in the detailed sections below. One notable difference in allowable property expenses between individuals and companies is the treatment of interest expenses. Details of the rules for income tax purposes are included in the Deduction of interest against property income ― income tax rules guidance note and the corporation tax rules are set out in the Taxation of loan relationships guidance note.Note that of the fixed rate deductions for expenses available for the self-employed carrying on trades, professions and vocations, only the fixed rate deductions for business mileage applies to those carrying on a property business. See ‘Travelling costs’ below. This is because the rules in ITTOIA 2005, ss 94H, 94I (deductions for the use of home for business purposes and premises used both as a home and business premises) are not included in the list of provisions that apply to profits of a property business by virtue of ITTOIA 2005, ss 272, 272ZA.The rule that expenditure must be ‘wholly and exclusively’ for the business applies. For more information, see the Wholly and exclusively guidance note. This guidance

Gifts with reservation ― land

Gifts with reservation ― landIntroductionQuestions concerning gifts with reservation (GWR) provisions are more likely to arise in connection with gifts of land than any other type of gift. A variety of factors contribute to this:•typically, land and buildings carry a high value and often comprise the major asset in an estate. Gifts of land, if effective for IHT, will result in a significant tax saving•although the land may be the most valuable asset in the estate, the property in question may be the donor’s home, or a second property which he is reluctant to give up entirely•often, there is an intention to keep land and buildings in the family when the owner dies, whereas other assets will be realised in cash. This makes it difficult to make a lifetime gift of the portion that is not needed•land and buildings which do not produce income, present an obvious candidate for disposal, enabling the donor to retain liquid investments•property, such as a house, cannot easily be divided up into separate physical units, but several parties can occupy it simultaneouslyFollowing on from the above, clients are often keen to pursue arrangements which will enable them to remove the value of land from their estate and at the same time continue to derive some benefit from it. As a result, the legislation contains specific provisions relating to land.Full considerationA gift of land is not a GWR if the donor pays full consideration in money or money’s worth for

Property investment or trading?

Property investment or trading?Outline of property investment vs tradingThis guidance note applies to both individuals and companies.The distinction between income and capital profits is crucial to many areas of tax law and is a common issue for property transactions. Often it will be quite clear cut as to whether the activity is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell (’flipping’) will most likely be trading as a property dealer or property developer. However, where is the line to be drawn between activity regarded as dealing and activity regarded as investment?First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the ‘badges of trade’ and considerations will include:•profit seeking motive•frequency and number of similar transactions•modification of the asset in order to make it more saleable•nature of the asset•connection with an existing trade•financing arrangements•length of ownership•the existence of a sales organisation•the reason for the acquisition or saleThe badges of trade are not a statutory concept but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of

Tax base

Tax baseRules for determining tax baseThe tax base under IFRS is defined by one of four rules. These are:•the tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset, or•if those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount (ie there is no temporary difference). See Example 3•the tax base of a liability is its carrying amount, less any amount that

Corporate interest restriction ― fixed ratio method

Corporate interest restriction ― fixed ratio methodThe fixed ratio method is the default method of limiting the deduction available under the corporate interest restriction (CIR) rules. For a general overview of the regime, see the Corporate interest restriction ― overview guidance note. The fixed ratio method restricts the deductibility of interest based on the lower of two figures. These are:•a proportion (30%) of the aggregate tax-EBITDA of the companies in the CIR worldwide group which are subject to UK corporation tax, and•the fixed ratio debt cap, which is generally the adjusted net group interest expense (ANGIE)An alternative method for calculating the restriction, known as the group ratio method, is available by election only. See the Corporate interest restriction ― group ratio method guidance note for details.The fixed ratio method is so-called as it uses a fixed ratio (30%) of tax-EBITDA. The fixed ratio debt cap looks at the external net group interest expense (sometimes referred to by the acronym NGIE) of the worldwide group based on the consolidated P&L. This is then subject to a series of further complicated adjustments to align the result more closely with UK tax principles, the result of which is the adjusted net group-interest expense (ANGIE). If a group has more external debt in the UK than in the worldwide group overall, then ANGIE may produce a lower cap than the fixed ratio of tax-EBITDA. The key steps in calculating the fixed ratio restrictionThe fixed ratio process involves a number of detailed

Weekly case highlights ― 29 November 2021

Weekly case highlights ― 29 November 2021These are our brief notes and thoughts on cases published in the last week or so which caught our eye and are likely to be of particular interest to tax practitioners. Full case reports and commentary on most of these cases will be included within our normal reference sources in the coming weeks.Income taxMark Dunsby v HMRCIt is always interesting when taxpayers attempt to use anti-avoidance legislation to their own advantage. This is a good example. The settlements legislation basically says that a person who sets up a structure can still be taxable on the income even if it is paid to somebody else. Here, matters were so arranged that the person who set up the structure was offshore but the person to whom the income was paid was onshore. The aim was that the income would be treated as that of the offshore person who, being non-resident, would not be taxable. The person receiving the income would therefore escape liability.The First-tier Tribunal went behind the structure and found that the true settlor was the UK individual and that therefore he was taxable on the income from the structure. On appeal, the Upper Tribunal has confirmed that analysis. It went further, however, and said that, even if the settlement provisions were ignored, the UK individual would be taxable on the dividends because he was the person entitled to the dividends, even though, because of the way that the structure had been set up,

Closing a company down ― members’ voluntary liquidation (MVL)

Closing a company down ― members’ voluntary liquidation (MVL)Why use a members’ voluntary winding up?If a company’s owners wish to cease to trade and cannot sell the company it may be possible to undertake a members’ voluntary liquidation (MVL) in order to extract the profit from the company as long as the company remains solvent after meeting any cessation costs. This could allow the company owners to control the process of winding up the business and thereby maximise any possible tax reliefs as described below.Owner managers can wind up their company through an MVL by passing a special resolution and swearing a statutory declaration of solvency (see below). A MVL requires a licensed insolvency practitioner to act as liquidator who will realise the assets, pay off all liabilities, and return the surplus to the shareholders. This may be an expensive process but, where the company has significant reserves, a MVL will normally be the preferred route for tax purposes. However, some liquidators are now prepared to offer competitive rates, particularly where the company's balance sheet is mainly cash.If, alternatively, the owner wishes to realise the assets in the company and then use the proceeds to funds investments for their future or those of their children / grandchildren it may not be appropriate to close the company down but instead a family investment company could be established.Extraction of reserves through MVLIt is generally more tax-efficient to extract the reserves of a company through an MVL as any distribution through the

Introduction to new UK GAAP

Introduction to new UK GAAPBackgroundIn this guidance note, references to the ‘old UK generally accepted accounting practice’ or ‘old UK GAAP’ are to the combination of UK accounting principles contained in the Financial Reporting Standards (FRSs), Statements of Standard Accounting Practice (SSAP) and Urgent Issues Task Force (UITF) abstracts.References to the ‘new UK GAAP’ are essentially to FRS 100, FRS 101, FRS 102 and FRS 105, which replaced the old UK GAAP for accounting periods beginning on or after 1 January 2015 (1 January 2016 for FRS 105).Companies that qualified as ‘small’ under the definition in CA 2006, ss 381–384 were eligible to use the FRS for FRSSE in preparing their financial statements for accounting periods beginning before 1 January 2016. The FRSSE was withdrawn for accounting periods beginning on or after 1 January 2016. Such companies have had to adopt either FRS 102 (with small company disclosure exemptions) or, if eligible, FRS 105 (as described below) for accounting periods on or after 1 January 2016.Since 2005, companies with a listing on a regulated market in the European Economic Area (EEA) have been required to prepare their group consolidated financial statements using the International Financial Reporting Standards (IFRS). Even the issuance of listed debt on such a market requires the issuer to produce consolidated IFRS accounts. This requirement is unaffected by the introduction of the new UK GAAP.From 1 January 2021, EU endorsed IFRS is replaced by UK endorsed IFRS as a result of the withdrawal of the United

Agricultural value and development value

Agricultural value and development valueThe value elements of agricultural propertyAgricultural Property Relief is limited to the agricultural value of agricultural property. The market value of the property may exceed the agricultural value.The definition of agricultural property as given by the legislation is explained in more detail in the HMRC Inheritance tax manual at IHTM24030 and subsequent pages. Agricultural property is:•agricultural land or pasture (IHTM24031)•woodland (IHTM24032) and any building used in connection with the intensive rearing of livestock or fish (IHTM24033) if the woodland or building is occupied with agricultural land or pasture, and the occupation is ancillary to that of the agricultural land or pasture•cottages (IHTM24034), farm buildings (IHTM24035) and farmhouses (IHTM24036) together with the land occupied with them, as are of a character appropriate (IHTM24050) to the agricultural land or pastureIHTA 1984, s 115(3)Agricultural value is defined as, ‘The value which would be the value of the property if the property was subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.’ In other words, it excludes any part of the value attributable to its potential for alternative use.Development (hope) valueDevelopment (hope) value is the difference between market value and agricultural value. It may be possible to sell agricultural land on the open market for a sum in excess of its agricultural value because of its development potential.For inheritance tax purposes, assets are valued at market value ― the price that would be achieved between willing buyer and willing seller. An example