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IN A RECENT tax spotlight report, HM Revenue and Customs (HMRC) has highlighted a supposed school fees tax planning scheme that has gained popularity among owner managed companies. HMRC suggests in this report that the particular scheme, which aims to fund education fees through dividend diversion to their minor children, does not work as the arrangements are caught by specific anti-avoidance legislation (https://www.gov.uk/guidance/dividend-diversion-scheme-used-to-fund-education-fees-spotlight-62).

In today’s Shipleys Tax brief, we look at school fees tax planning in light of HMRC report above and ask: is there still room for sensible school fees planning?

HMRC suggests that the particular scheme, which aims to fund education fees through dividend diversion to their minor children, does not work…

In a nutshell

In the report HMRC explain the arrangement involves a company issuing a new class of shares, which are then bought by a relative of the company owner for a sum considerably below market value. These shares are gifted to a trust for the company owner’s children. The trust then receives substantial dividend payments, which are taxed at a much lower rate due to the children’s personal tax-free allowance, dividend allowances, and basic tax rate eligibility.

However, HMRC state that this scheme is ineffective as it contravenes specific anti-avoidance legislation covering similar arrangements aiming to provide certain tax advantages. HMRC has strongly advised anyone involved in such schemes to withdraw from them and settle their tax affairs.

Those who have implemented such schemes now face the daunting task of untangling their financial affairs, rectifying their tax compliance status, and potentially confronting substantial HMRC penalties. This scenario underlines the complexity and risks inherent in engaging with such tax avoidance strategies.

So, school fees planning is dead?

Not quite.

Legitimate tax planning, which encompasses school fee planning, is still very much a viable and acceptable practice. This holds true as long as the planning is carried out in a non-artificial or non-abusive manner. Like all forms of tax planning, school fee planning should be grounded in genuine financial activity.

Those who have implemented such schemes now face the daunting task of untangling their financial affairs, rectifying their tax compliance status, and potentially confronting substantial HMRC penalties.

It is essential to understand that while attempting to optimise tax liabilities is acceptable, artificial or abusive arrangements is where the problem begins. As long as there is a genuine financial activity underpinning these plans, and not just contrived setups designed solely for tax avoidance, they are likely to be accepted by HMRC.

Next Steps

If you are involved in any school fee tax scheme you should take immediate professional advice which may include:

• cease, desist and withdraw from making any further distributions to fund school fees

• settling tax affairs which make include making unprompted disclosures to HMRC as this should mitigate the penalty position

• unwinding any structures/trusts, however, one will need to be alive to the tax consequences of doing so

• updating the trust register with HMRC, if applicable.

Future of School Fees Planning

Could there be situations where affluent families, non-parent family members, or relatives can genuinely transfer income-producing assets without falling foul of the anti-avoidance rules?

In short, yes – but with conditions.

In cases where families or relatives genuinely aim to fund a child’s education (excluding parents of minor children), there are still sensible and legitimate strategies which can mitigate taxes whilst steering away from the contrived and artificial arrangements which may be caught.

Also, one should note that the gifting of assets can lead to tax liabilities, exposing the donor to capital gains tax and inheritance tax. As such, it is prudent to seek professional tax advice before entering any planning.

In cases where families or relatives genuinely aim to fund a child’s education (excluding parents of minor children), there are still sensible and legitimate strategies which can mitigate taxes…

Final Words

When done ethically and transparently, sensible school fee tax planning can be effective for those aiming to support a child’s education. However, it is imperative to steer clear of artificial arrangements which carry considerable financial repercussions.

Always consult with a reputable tax adviser before making any decisions about school fees tax planning.

At Shipleys Tax, our tax planning strategies are always designed to be sensible, practical and transparent, giving you peace of mind that your tax affairs are fully compliant with all relevant legislation.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

NON-DOM TAX PLANNING has been a hot topic for a long time. Stirring up a whirlwind of controversy and used as a political football in intense debates. This special rule, which helps some UK residents with their permanent homes in another country to pay tax only on their UK earnings, has been under the spotlight many times. Seen as a nifty arrangement for individuals with substantial international income, it’s a hot topic that has both its staunch defenders and determined detractors.

However, all this might soon culminate in a massive change. The Labour Party, who are gearing up for the upcoming general election next year, have plans to do away with this rule entirely. They believe that this would make taxes fairer and could also fill up the government’s coffers a bit more. This looming possibility of change could drastically shift the way people with a lot of income from abroad handle their taxes.

This special rule, which helps some UK residents with their permanent homes in another country to pay tax only on their UK earnings, has been under the spotlight many times.

In this article, we’re going to simplify and demystify  the ‘non-dom’ tax issue. We’ll also explore how this potential change is driving a renewed urgency for strategic tax planning, and why engaging with tax professionals is now more crucial than ever.

Non-dom in a nutshell

In the UK, the non-domiciled (non-dom) tax status presents a unique opportunity for certain residents, especially those with foreign income and gains. Second and third-generation immigrants, whose parents were born outside the UK, can generally take advantage of non-dom status where it involves trade income, investment income, and salary.

Understanding Non-Dom Status

A non-dom is a UK resident for tax purposes with a “domicile of origin” outside the UK. Domicile is a complex legal concept that typically refers to an individual’s long-term or permanent home. Generally, an individual acquires their domicile of origin at birth, usually from their father. Non-dom status allows residents to use the remittance basis of taxation, which means they are only taxed on their UK income and any foreign income or gains remitted to the UK. This can result in significant tax savings for those with substantial foreign income or gains.

Second and third-generation immigrants, whose parents were born outside the UK, can generally take advantage of non-dom status where it involves trade income, investment income, and salary.

Taking Advantage of Non-Dom Status

For second and third-generation immigrants, the key to taking advantage of non-dom status lies in their domicile of origin. If their parents were born outside the UK and they can prove their domicile of origin is in another country, they may be eligible for non-dom status. Here are some examples of how they can benefit from this status:

1. Trade Income: A second or third-generation immigrant who runs an overseas business can opt for the remittance basis to avoid UK tax on profits earned abroad. By not remitting these profits to the UK, they will only be taxed on their UK-sourced trade income.
2. Investment Income: If a second or third-generation immigrant has foreign investments, they can use the remittance basis to avoid UK tax on dividends, interest, and other investment income generated outside the UK. By only remitting a portion of their foreign investment income, they can minimize their UK tax liability.
3. Salary: If a second or third-generation immigrant receives a salary from both UK and non-UK employers, they can use the remittance basis to avoid UK tax on the non-UK portion of their salary, provided they don’t remit this income to the UK.

Potential Pitfalls

While non-dom status offers tax advantages, there are potential pitfalls that second and third-generation immigrants should be aware of:

1. Annual Remittance Basis Charge (RBC): Non-doms who choose the remittance basis and have been UK residents for a certain number of years may be subject to an annual RBC. Currently, RBC amounts and residency thresholds are:

a. £30,000 per year for individuals who have been UK resident in at least seven of the previous nine tax years.

b. £60,000 per year for individuals who have been UK resident in at least 12 of the previous 14 tax years.

c. £90,000 per year for individuals who have been UK resident in at least 17 of the previous 20 tax years.

2. Loss of Personal Allowance and CGT Annual Exemption: Non-doms who choose the remittance basis lose their income tax personal allowance and CGT annual exemption for that tax year.

3. Increased Complexity and Administrative Burden: Non-doms must maintain detailed records of their foreign income, gains, and remittances, which can result in increased complexity and administrative costs.

The end is nigh…

However, the landscape of non-dom tax planning, which has served as an influential factor for many high-net-worth individuals choosing to reside in the UK, may potentially undergo significant transformations. The potential abolition of the non-dom status by the Labour Party, if they win the upcoming election, could dramatically change the tax planning strategies for those currently benefitting from the status. While this potential move may be aimed at ensuring greater tax fairness and equity, it may also necessitate an overhaul of current tax planning mechanisms.

The potential abolition of the non-dom status by the Labour Party, if they win the upcoming election, could dramatically change the tax planning strategies for those currently benefiting from the status.

Such potential reforms underscore the importance of proactive tax planning. Individuals and businesses impacted should closely monitor these developments and consider alternative tax planning strategies in case of any changes to the non-dom regime. Engaging with tax advisors will be essential to navigate the possible shifts and mitigate any potential adverse tax implications.

Conclusion

For second and third-generation immigrants in the UK, the non-dom status can offer significant tax advantages, particularly for those with substantial overseas income and gains, despite the potential pitfalls, such as the annual remittance basis charge, loss of personal allowances and exemptions.

However, with the potential policy shift on the horizon, it is essential to be mindful of the shifting sands of tax policy. The prospect of the Labour Party doing away with the non-dom status in the upcoming general election presents a moment of uncertainty.

In these times, it’s key to be aware of potential challenges that come along with change – possible increases in taxes, adjustments to personal allowances and exemptions, and the potential for increased administrative complexities.

In the end, while non-dom status has been a significant windfall for many, the potential abolition of this policy could cause a seismic shift in tax planning strategies. Navigating this change effectively will hinge on understanding the evolving landscape and seeking expert advice to adapt successfully to the potential new normal.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

WHILST NOT AS painful as the dreaded root canal surgery, managing tax as a self-employed associate dentist can be a challenging task – especially when it comes to understanding tax deductible expenses.

In today’s Shipleys Tax article, we will set out a basic guide to various deductible expenses, including travel, subsistence and accommodation: and we look at some problem scenarios.

Travel Expenses

Travel expenses can be a significant cost for associate dentists who need to visit different practices, attend professional courses, or participate in conferences. The good news is that these expenses can be tax-deductible if they are deemed necessary for the business. Here are some guidelines for deducting travel expenses:

a. Ordinary commuting costs between your home and a fixed workplace are generally not deductible. However, travel expenses between different workplaces or temporary work locations are deductible.

b. Expenses related to attending professional courses or conferences, including registration fees, can be claimed if they are relevant to your work as a dentist.

c. If you use your personal vehicle for business purposes, you can claim either the actual expenses incurred (such as fuel, maintenance, and insurance) or a standard mileage rate as set by HMRC.

Remember to keep accurate records of your travel expenses, including receipts, invoices, and a log of your business-related trips.

The good news is that these expenses can be tax-deductible if they are deemed necessary for the business.

Subsistence Expenses

Subsistence expenses, such as meals and beverages, can be deductible if incurred while away from your regular place of work for business purposes. Keep the following guidelines in mind:

a. The expense must be “reasonable” and not lavish or extravagant. HMRC have specific rules and limits on the amount you can claim for meals in certain circumstances.

b. The cost of meals during regular working hours is generally not deductible unless you are away from your usual place of work for a business purpose.

c. If you attend a professional conference or course that includes meals as part of the registration fee, you can claim the entire fee as a deductible expense.

Accommodation Expenses

Accommodation expenses incurred while traveling for business purposes can be tax-deductible. However, specific criteria must be met:

a. The trip must be primarily for business purposes, and the accommodation must be necessary for you to carry out your work-related duties.

b. The cost of the accommodation should be reasonable and not extravagant. HMRC have specific guidelines on the maximum amounts that can be claimed.

If you attend a professional conference or course that includes meals as part of the registration fee, you can claim the entire fee as a deductible expense.

c. Generally, if the trip includes personal activities or vacation time, you must allocate the expenses between the business and personal portions of the trip. Only the business-related portion of the accommodation expenses can be claimed as a deduction.

Some problem scenarios

Let’s look at a few oft recurring travel scenarios that self-employed associate dentists seem to encounter and how the rules for tax deductions might apply:

Scenario 1: Combined Business and Personal Travel

You plan to attend a three-day dental conference in another city. After the conference, you decide to stay for two additional days to explore the city and visit friends.

In this scenario, you must allocate the accommodation expenses between the business and personal portions of the trip. You can claim the accommodation expenses for the three days of the conference as a tax deduction, but the expenses for the additional two days of personal activities are not deductible.

Scenario 2: Accompanying Spouse or Family Members

You are invited to speak at a dental seminar in another country. Your spouse and children accompany you on the trip, but they do not participate in any business-related activities.

In this case, you can claim only the portion of the accommodation expenses attributable to your own stay. If you have to pay extra to accommodate your spouse and children, you cannot claim that additional cost as a tax deduction.

Scenario 3: Business Trip with Side Trips for Personal Reasons

You attend a week-long dental course in another city. During your stay, you decide to take a day trip to a nearby tourist attraction for personal enjoyment.

In this situation, you can still claim the accommodation expenses for the entire week as a tax deduction, as the primary purpose of your trip remains business-related. However, you cannot deduct the expenses related to your side trip, such as admission fees to the tourist attraction or additional transportation costs.

However, you cannot deduct the expenses related to your side trip, such as admission fees to the tourist attraction or additional transportation costs.

Scenario 4: Prolonged Business Stay with Periods of Personal Time

You need to work at a temporary dental practice in a different city for three months. During this time, you rent an apartment for accommodation. On weekends, you often engage in personal activities, such as sightseeing or visiting friends.

In this case, you can generally claim the full cost of the apartment rental as a tax deduction, as the primary purpose of your stay is business-related. The fact that you engage in personal activities during your free time does not disqualify the accommodation expenses from being deductible.

Computer says no…?

All good and well you may think. Not quite unfortunately. The UK tax system has a sneaky habit of throwing a rule or two to scupper your expenses claim, in this case the principle of “duality”. The duality principle refers to the idea that an expense can only be tax deductible if it is incurred wholly and exclusively for the purpose of the trade, profession, or vocation. HMRC frequently uses this rule to deny expenses claims.

The duality principle refers to the idea that an expense can only be tax deductible if it is incurred wholly and exclusively for the purpose of the trade, profession, or vocation. HMRC frequently uses this rule to deny expenses claims.

This principle emphasises the need to accurately allocate expenses between business and personal activities for complex travel and accommodation scenarios. Proper understanding of this rule will also help overcome HMRC challenges and maximizes tax deductions for your dental self employment.

Please note that the information provided in this article should not be considered tax or legal advice. It is always recommended to consult with a tax professional or accountant to receive personalized advice tailored to your specific circumstances and to ensure compliance with the latest tax regulations.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.