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Archive for August, 2014

Are poker winnings taxable?

A tax case in 1925 established that winnings from gambling are not taxable. However, a recent court case challenged that.

The case was about paying forcing a father (Mr Hakki), who calls himself a professional Poker player, (and has no other source of income) to pay child maintenance.

The court agreed that they should follow the tax treatment. If his activities where regarded as “earnings” and liable to tax then he would be required to pay child maintenance.

The case was interesting because:

  • Mr Hakki had appeared on television where he won a prize
  • He appeared in poker magazines
  • He plays 3-4 days a week and travels to play
  • His target earnings are £200 a day
  • He reviews poker strategies on his Website

 

The court found that he exercises his skill, judgement and experience and believe his activities where different to people who place a simple bet. And, they thought it was like a job, more than a hobby and also different to a compulsive gambler.

As a tax specialist I would not have been surprised if the court decided that his winnings were taxable. However, they didn’t because they did not feel the activity had enough “organisation”.

This is different to a case in 1968 where a club owner had to pay tax on card winnings as they were treated as part of his overall profits. This is different again to a case in 1937 where a golf professional, who took bets on games and made money in addition to his teaching fees. This was held not to be taxable.

These cases show how thin the line is between tax winning and losing a tax case.  If you have any tax enquiries we can help.

New powers for the tax office

The 2014 Finance Bill received Royal Assent on 17 July 2014, which means it is now law.

Part 4 of the bill introduced “follower notices” and “accelerated payments”. These basically mean that the tax office can now force you to change your tax return and pay tax in advance of concluding a tax investigation. And, they are looking to extend their powers to be able take money out of your bank account!

The problem the tax office faced was that there are a large number of very similar tax schemes and it is more efficient for the tax office to investigate a ‘test case’.

If the tax office wins the case, unpaid tax is recovered from the taxpayer but there has been little incentive for those using the same or essentially similar arrangements, to accept the court’s findings and pay to any underpaid tax.

“Follower Notices” and “Accelerated Payments” make it much harder for people to participate in a tax scheme because they have to pay the tax in question and professional fees for the scheme upfront. And, it may take many years for the test case to be settled.

The legislation is very strong. There is no right of appeal, just a 90-day window to object. If your objection is unsuccessful you have 30-days to comply.

And, there is a maximum penalty of 50% of the tax due, if you fail to comply. The only saving grace is that this can be reduced if you co-operate and you do have the right of appeal against a follower notice penalty.

There a reported 65,000 tax cases outstanding at the moment. If you are caught up in any form of tax investigation or dispute we can help, even if it is representing you in the negotiations.

Whilst advanced tax planning has been very high profile in the general media, some commentators are of the opinion that the tax office is a “spin machine” portraying the impression that they always wins in Court.

The recent Rangers FC appeal which was won convincingly by the taxpayer is an interesting case. The judge was highly critical of the tax office’s “disengenious” approach and unsurprisingly, they have made almost no public comment.

It could be argued that the legislation is retrospective and a breach of human rights. There has been universal condemnation of the proposal to have the ability to take funds directly from taxpayers bank accounts. One wonders what the future will be.

 

The Reverse Charge

The reverse charge is a VAT accounting rule which is designed to simplify VAT.

The rule avoids the need for businesses to register for VAT (and complete VAT returns) in other EU Member States where they make sales.  VAT is a EU tax and the “place of supply” can be where the customer is.

So, if you sell to France and Germany you are technically trading for VAT purposes in those countries. Instead of you registering for VAT and completing French and German VAT returns, your customer will do that on their return. They will be the supply and the purchaser.

This is why when you buy from EU businesses you need to do the adjustments on your UK VAT return. But, the adjustments are different for goods and services.

Sales of goods to EU
Zero rate the supplies and enter the sales amount in boxes 6 and box 8.

Sales to services to EU
Zero rate the supplies and enter the total sales in box 6.

Purchase of goods from EU
If you buy goods you must notionally charge yourself VAT, by entering it in box 2.  Having ‘paid’ it, you can then reclaim the VAT by entering the same amount in box 4.

You must also include the cost of goods purchased that are subject to the reverse charge in box 7 and 9.

Purchases of services from EU
You must notionally charge yourself VAT, by including the VAT amount within box 1.  Having ‘paid’ it, you can then reclaim the VAT by entering the same amount in box 4.

You must also enter the value of the purchase in Box 7.

Xero software
The good news is that Xero software has made this easy – watch the video.

Tax and divorce

It is well know that there is always a rush to solicitors divorce after the summer holidays as couples realise, after spending time together, they can’t stand each other.

So, in advance of this I thought I’d write about tax planning opportunities with a divorce. 

Very briefly…in the UK we have independent taxation. This means people are treated separately for tax purposes and are responsible for the own tax on their income and gains.

When a chargeable asset (e.g. property or shares) is transferred from one person to another the transfer is treated as being sold at market value. This can trigger a charge to GCT.

Married couples
When a husband and wife live together they are regarded as “connected”. Any transfers between them are treated as a no gain/loss. This means they can transfer assets without triggering a tax bill.

However, if the person receiving the asset later disposes of it, he or she will be treated as if they had paid the original amount.

Year of separation
Provided a husband and wife were living together at some time in a tax year, they can transfer assets between them at any time in that tax year at no gain/no loss.

There is no requirement that they should be living together at the time of transfer.

This means that if you separate this summer you can make transfers before 5th April 2015 without a tax bill being triggered. If you make any transfers after 6th April 2015 there could be a significant tax liability.

This is because you will not be treated as “connected” from 6th April 2015 and the market value will be used to calculate the gain and tax due.

After tax value
This is why it is a good idea to know the amount of gain on each property before you agree to a settlement. You need to know the net worth of each property, after tax.

For example, you could have two properties worth £200,000 each but property “A” could have a cost of £180,000 and property “B” could have a cost of £50,000. The amount liable to Capital Gains Tax if these where sold would be £20,000 and £150,000 respectively.

Assuming an annual allowance of £10,900 and a tax rate is 28%, property “A” would be worth £197,452 after tax, whereas property “B” would be worth £36,400 less at £161,052.

Private residence
Your private residence is exempt from CGT. However, there are rules which potentially make the property taxable if it is not occupied.

Commercial property
CGT on commercial properties can be complex because of tax reliefs such as Holdover, Rollover and Entrepreneur’s relief.

Recommendations
If you are separating then think carefully about the date of separating, just after 5th April is best because it takes you into the next tax year.

Delaying a divorce settlement may cost you a considerable amount of tax. To avoid tax on transfers of assets you may be able to make transfers before 5th April 2015.

I recommend you consider the following actions:

Action 1 – valuations and tax estimates

Get all properties valued and work out the gain in each property. This will allow you to assess the after tax value of each property. You can then share the estate and arrange for any property transfers before 5th April 2015.

Action 2 – interim transfers

Explore making interim transfers before 5th April 2015 as part of the settlement agreement.

Action 3 – complete an in-depth personal financial review.

As some time you may want to consider completing a detailed personal financial review as this may give you peace of mind over your situation.

The idea with the review is that you look at your lifestyle expenditure, income and capital and forecast (based on assumptions) your financial future.