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THE USE OF so-called Alphabet shares has been a staple in the world of tax planning for some time. These types of shares generally allow for a flexible approach to how dividends are paid out to shareholders of a company, enabling a tailored distribution that can be adjusted according to the individual tax circumstances of the shareholders.

In today’s Shipleys Tax brief, we will cover the basic concept of Alphabet shares, their benefits and drawbacks, and the likely approach adopted by HMRC to their use.

What are Alphabet shares?

Alphabet shares are so named because they categorize shares into different classes, each denoted by a letter of the alphabet (e.g., Class A shares, Class B shares, etc.). This classification allows companies to assign different rights to each class, particularly concerning dividend payments. The flexibility in dividend allocation means that shareholders can be paid varying amounts, which can be adjusted to optimise their personal tax positions.

What are they used for?

Historically, Alphabet shares have been used as a popular method for family-run businesses to manage internal dynamics and tax liabilities. Families could allocate different dividend rights to members based on their involvement in the business or their financial needs, without altering the overall control or structure of the company.

They have also been employed in start-ups and growing businesses looking to reward key employees with a stake in the company without immediately giving away voting rights or an equal share in the distribution of profits. By issuing different classes of shares to employees, businesses could align staff interests with the company’s performance without giving away significant control.

In corporate fundraising they provided a means to attract investment by offering variable dividend rights while retaining management control. This aspect is particularly attractive to small and medium-sized enterprises (SMEs) that are keen on securing capital but wary of outside influence over business decisions.

This flexibility makes Alphabet shares a valuable instrument for companies to structure their equity in a way that satisfied a multitude of shareholder requirements.

Tax Planning and Tailoring to Specific Needs

For certain commercial transactions, tax planning with Alphabet shares can be particularly useful in the right circumstances. Generally, you would find the following potential benefits:

– Minimise personal tax liability: shareholders can receive dividends up to the higher-rate tax threshold, effectively reducing their income tax liability.

– Utilise allowances and rates: shareholders can make full use of their dividend allowance and lower tax bands.

– Planning for succession: Different classes can be allocated to future generations for long-term planning, without disrupting the current control of the company.

– Family estate planning: Alphabet shares can help in assigning income to family members in lower tax brackets where circumstances allow.

Not all a bed of roses…

While Alphabet shares offer flexibility as seen above, they come with a rack of potential drawbacks that can complicate their use.

– Administrative Burden: maintaining different classes of shares requires meticulous record-keeping and administrative oversight. Each class may have its own dividend schedules, voting rights, and restrictions, which must be managed and documented appropriately.

– Legal Challenges: alphabet shares can sometimes lead to legal challenges, especially if shareholders feel their rights are being impinged upon. Disputes may arise over the interpretation of rights attached to various classes, or if there are allegations of unfair treatment among shareholders.

– Corporate Governance: having multiple share classes can complicate corporate governance. The differing rights and privileges can lead to conflicts of interest and make decision-making processes more complex.

What sayeth the Taxman?

HMRC views Alphabet shares with a healthy degree of suspicion because they can be used to artificially manipulate income streams for tax advantages. One specific piece of anti-avoidance legislation (“the settlements legislation”) can apply if HMRC believes that Alphabet shares are being used to divert income to someone else and reduce tax liability.

In the context of family businesses, the use of Alphabet shares for estate planning must be done with caution. HMRC may challenge arrangements that appear to be designed to avoid inheritance tax, particularly if shares are rapidly transferred between family members in a way that seems to be timed to minimise tax liability for example.

As such, if not structured correctly, the arrangements can be easily challenged under these anti-avoidance regulations, leading to the tax advantages being negated, tax investigations and potential penalties.

Conclusion

Alphabet shares can be a useful tool for tax planning when used correctly. They allow for a high degree of flexibility and can be tailored to meet the specific needs of both the company and its shareholders. However, their use must be considered carefully, with a clear understanding of the potential pitfalls and the close scrutiny they attract from HMRC. As always, when considering the use of Alphabet shares, it is prudent to seek professional advice to ensure that they are implemented effectively.

For further assistance or queries, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking any action.

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WITH THE GROWING popularity of online selling platforms like TikTok and Etsy, HMRC has increased attention on the tax implications for those earning income from these sources.

In today’s Shipleys Tax note we briefly look at what’s happening and what you should do avoid falling foul of these new tax measures.

What’s the deal?

From the 1st of January 2024, digital marketplaces such as eBay, Vinted, Airbnb, and Etsy, have been mandated to gather and report details of seller transactions and income to HMRC. These platforms have until January 2025 to report sellers’ income from the previous year. This measure is part of a broader initiative to ensure tax compliance and to capture undeclared income from individuals who trade with the intention of making a profit but fail to report their earnings correctly.

The targeted platforms include:

• eBay
• Vinted
• Airbnb
• Etsy
• TikTok

These platforms will need to collect and report the following information:

• Seller Details: Identification of the sellers.
• Transaction Details: Information on the transactions made by the sellers.
• Income Information: The income generated by the sellers through these platforms.

This measure is part of the UK’s implementation of the OECD rules to improve international cooperation and tax compliance.

While there’s been talk in the media of a new ‘side hustle’ tax, it’s important to clarify that no new taxes have been introduced. However, understanding the existing tax laws and how they apply to online selling is crucial.

What should you do?

As an online seller in the face of HMRC’s focus on side hustles, it’s important to take proactive steps to ensure you’re on the right side of tax laws. Below we have summarised the key issues you need to consider.

Are you Trading or Hobby-ing?

First and foremost, determine whether your online selling activities constitute a hobby or a trade. This is tricky at best and HMRC considers several factors to make this distinction. These include the frequency of transactions, profit motive, nature of the goods, and sale method. Regular sales of new or self-made items with the intent of profit are typically considered trading, whereas selling personal, used items occasionally is generally seen as a hobby. For online sellers, understanding these nuances is critical to accurately ascertain tax obligations.

Trading Allowance

One key aspect is the trading allowance, which allows individuals to earn up to £1,000 annually from self-employment, including online selling, without the need to declare this income to HMRC. This is particularly beneficial for small-scale traders or those starting out. However, it’s vital to note that once your income surpasses this threshold, the entire amount becomes reportable.

For those earning profits exceeding £1,000 from online selling, income tax and National Insurance contributions may be applicable. These profits must be reported via a self-assessment tax return, even if no tax is due, such as when profits fall below the personal allowance (currently £12,570. This rule also applies if you are using online selling as a secondary income source, with the £1,000 limit still relevant.

If you have already received income over the £1,000 allowance, or if you have received a ‘nudge’ letter from HMRC indicating you may have undeclared income, take immediate action. Do not ignore these letters; they are a prompt for you to review your tax situation.

Record it

Maintain good records of all your online selling activities, including receipts, listings, and correspondence. This documentation will be invaluable for completing your tax return accurately. If your online selling is a side hustle in addition to your main job, remember that different rules might apply, especially if your main income already exceeds your personal allowance.

Consider the use of digital tools and accounting software that can assist in tracking your earnings and expenses, making the process of reporting to HMRC more straightforward.

Information Sharing by Online Platforms

It’s also important to be aware that online selling platforms may share information with HMRC, including seller identities, transaction volumes, and values. This increased transparency aims to ensure tax compliance and makes accurate self-reporting by sellers more important than ever.

Conclusion

If you’re unsure about your tax position or obligations, consult with a tax professional. A tax expert can provide clarity on your individual circumstances, help you understand your tax liabilities, and ensure you’re taking advantage of any allowable deductions or exemptions. This step is not just about compliance; it’s also about optimizing your tax situation.

For further assistance or queries, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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HMRC’s new Cryptoasset disclosure service – what it means for you

IN THE FAST-moving landscape of digital finance, HMRC has taken a significant step by issuing new guidance for individual to voluntarily disclose unpaid taxes on income or gains derived from cryptoassets. This development is crucial for taxpayers in the UK as it has significant implications for those not self-declaring any potential tax due on cryptoassets.

In today’s Shipleys Tax brief we look at HMRC’s new voluntary disclosure service for cryptoassets and why it’s important for taxpayers to consider their crypto tax affairs as timely disclosure can mitigate penalties and interest.

What is the new HMRC voluntary disclosure service?

Much like other voluntary disclosure campaigns (such as the Liechtenstein Disclosure Facility (LDF) and the Buy-to-Let campaign) HMRC’s new voluntary disclosure service for cryptoassets is designed to encourage taxpayers to come forward and disclose any unpaid tax on cryptoassets, providing an opportunity to settle their affairs while potentially facing lower penalties than if the underpayment were discovered by HMRC. It underlines the importance of being proactive in “fessing up” and looks to offer taxpayers more favourable terms compared to regular HMRC investigations.

Key Aspects of the Disclosure Service

1. What cryptoassets are covered? The voluntary disclosure service covers a range of cryptoassets for tax purposes, which typically includes exchange tokens like Bitcoin, utility tokens, and non-fungible tokens (NFTs). This encompasses assets used as a means of exchange, for investment, to access particular goods or services, or those representing ownership of a unique asset or content.

2. Reasons for Underpayment: HMRC categorises underpayment reasons into three distinct sections:
   • Innocent Error: This implies that reasonable care was taken, but an error still occurred. In such cases, the look-back period for underpayment is limited to four years.
   • Carelessness: If underpayment is due to carelessness, the look-back period extends to six years.
   • Deliberate Behaviour: This is the most serious category, involving intentional underpayment, and can lead to a maximum look-back period of 20 years.

3. Penalties and Reductions: In HMRC’s framework, penalties for inaccuracies in tax returns and failure to notify can be reduced depending on the quality of disclosure. If taxpayers proactively disclose with a high level of transparency and detail, they may be eligible for reduced penalties. The reduction is based on the principle of how much assistance the taxpayer provides to HMRC: telling them about the error, helping HMRC understand the disclosure, and giving access to additional information if required. The more forthcoming and cooperative the taxpayer is, the greater the potential reduction in penalties.

4. White Space Notes: A crucial recommendation by HMRC is the inclusion of “white space notes” in disclosures (i.e. in their personal tax returns pages). These notes should detail the taxpayer’s reasoning and calculations, providing transparency in their self-assessment process.

5. Payment Procedures: Lastly, HMRC has introduced comprehensive information on how and when to pay the owed taxes, simplifying the payment process for taxpayers.

Why This Matters for Taxpayers

Understanding HMRC’s new guidance is critical for individuals dealing in cryptoassets to ensure compliance before errors are discovered by the authorities. The advantages include potentially reduced penalties for disclosure, and the opportunity to rectify one’s tax affairs voluntarily.

However, it also implies increased scrutiny and a possible signal of stricter enforcement moving forward. Taxpayers must weigh the immediate costs of disclosure against the risk of higher penalties and interest if discrepancies are found later by HMRC. The service highlights the increasing focus on cryptoassets by HMRC and the importance for taxpayers to stay abreast of their obligations and take professional advice.

How Can We Help?

As a premier UK tax advisory firm, we specialize in guiding clients through the intricacies of tax laws, especially in emerging areas like cryptoassets. Our expertise lies in:

• Assisting in accurate self-declaration based on HMRC’s categories.
• Advising on potential penalties and how to minimize them.
• Helping clients understand the implications of their crypto transactions on their tax liabilities.

Conclusion

HMRC’s new guidance on voluntarily disclosing unpaid tax on cryptoassets marks a significant step towards clearer tax compliance in the digital age. For individuals engaged in crypto transactions, it is essential to understand these guidelines and consider seeking professional advice to navigate this complex area.

Although the process offers an opportunity to correct past oversights with potentially reduced penalties, the complexity of disclosure and the evolving tax landscape for cryptoassets demand professional guidance to navigate effectively. Individuals are encouraged to assess their circumstances, utilise the service if necessary, and seek expert advice to optimise their tax position.

For further assistance or queries, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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