New figures show that the number of companies formed in the UK reached record levels in 2019.

Across the UK there were 690,763 companies formed last year, up from the previous record of 669,855 set in 2018.

Of the 613,316 formations in England, 222,468 were in London. A total of 33,843 companies were formed in Scotland, 18,635 in Wales and 8,657 in Northern Ireland. Each of the nations of the UK saw an increase in new companies formed compared to 2018 although there were big local variations.

Dissolutions

Although the number of new companies continued to rise, so did dissolutions of existing businesses. While UK company formations increased 3.1% between 2018 and 2019, dissolutions rose 5.8% in the same period, with a record 533,680 companies dissolved in 2019. It means that for every 100 new companies formed in the year, about 77 existing companies are closed. Naturally, many businesses will fail or not even get off the ground. However, the rising rate of dissolutions is a cause for concern and highlights the role accountants can play in offering solid business advice alongside supporting their clients to fulfil their statutory obligations.

Increase

The total number of UK companies now stands at 4,471,008, up 3.8% in a year.

This represents a 27% increase over five years, from 3,513,186 at the end of 2014. In every country of the UK and every county of England there are now more companies in existence than before. London continues to dominate the UK company population. Over 25% of active companies, a total of 1,204,778, have a registered office address in the capital.

Total companies 2019 league table

1st London                          1,204,778

2nd Greater Manchester    189,867

3rd West Midlands              173,134

4th Essex                                128,433

5th West Yorkshire               123,678

Edinburgh                                52,839

Cardiff                                       25,351

Belfast                                       17,982

This information is drawn from the annual Inform Direct Review of Company Formations, which includes a detailed regional analysis of companies formed and closed. You can read the report at www.informdirect.co.uk/company-formations-2019.

What are the tax and customs implications of new Withdrawal Agreement and non-binding post-Brexit Political Declaration? Richard Asquith (Avalara) reviews. 

On 17 October, the metaphoric white smoke plumed from the Brexit negotiations as a new deal materialised. There were no changes to many of the big-ticket issues in the binding Withdrawal Agreement (WA) and non-binding post-Brexit Political Declaration (PD). This included no movement on the exit bill and citizen’s rights.

However, the small number of clause changes to the thrice-rejected Theresa May WA belied a massive UK shift on Northern Ireland and future trade relations:

• The 2021 backstop EU customs union (CU) insurance policy was removed from the WA.
• It was replaced by a dual Northern Ireland customs, VAT and regulatory status from 2021. After this date, there will effectively be a border for these regimes between Great Britain (GB) and Northern Ireland (NI) in the Irish Sea.
• The DUP veto proposal on the NI measures was removed in favour of a ‘mutual consent’ simple majority vote at the NI National Assembly every four years.
• The transition period to 31 December 2020 remains, and the UK will continue to apply EU law until then. But it may now result in a new December 2020 Brexit no-deal cliff edge if no free trade agreement (FTA) on the future UK/EU relations is completed. In this case, the GB (not NI) will revert to WTO terms with the EU. There is an option to extend the transition period out to the end of 2022. But the UK must apply for this by 1 July 2020.
• There was a ‘kicking of the can down the road’ for the ‘level playing field’ provisions, including workers’ rights and state aid competition. They were shifted from the binding WA to the non-binding, aspirational PD. The level playing field issues will now be negotiated after Brexit in a future FTA.

Next steps: risk of a further postponement as no-deal prospects dwindle

The UK parliament must now ratify the WA and PD by 31 October to secure an orderly Brexit as planned. Ratification by the EU includes a consent motion by the EU Parliament, and final approval by the Council of the EU. Many hazards lie ahead for this strategy following the 19 October triggering of the ‘Benn Act’ request, sustained by the ‘Letwin amendment’, to the EU for a further Brexit extension. If the Bill does not pass or is subject to major parliamentary amendments requiring EU agreement, and there is a third delay to Brexit, then a general election or second referendum loom.

The changes and new burdens for business and HMRC

Below is a summary of the main changes in the new Brexit proposal. There are many risks and open-ended questions associated with them, including:

• businesses facing the loss of frictionless trade;
• traders having to track and comply with a NI dual customs and VAT regime;
• HMRC being tasked with designing and implementing the NI systems within 14 months;
• companies having to follow proof-of-origin rules for NI-destined deliveries; and
• last but by no mean least, the prospect of a new no-deal Brexit, this time on 31 December 2020, embedded in the revised WA if no agreement on a new FTA is reached within the next year.

Removing the backstop

Theresa May’s backstop clause agreed with the EU sought to avoid physical checks at the NI border. This envisaged a transition period until 31 December 2020, when the UK would remain within the CU whilst a new FTA was negotiated. If no deal could be found which prevented border checks, then the UK would have remained within the CU until a mutually acceptable border solution could be found. This was viewed by Leave supporters as the worst of all post-Brexit worlds: trapping the UK within the EU without a voice on the rules and thwarting it from negotiating FTA deals around the world.

The UK government has now secured the removal of the backstop to be replaced by a new status for Northern Ireland.

Northern Ireland’s dual customs, VAT and regulatory status

The new protocol proposes that NI will have an innovative economic status for customs, VAT and regulation of goods to avoid any physical border with Ireland. NI will remain within the rest of the UK (Great Britain, ‘GB’, which excludes NI) for these rules. However, NI will also administer the EU rules on behalf of the EU for goods passing between NI and Ireland.

The details across the three areas are as follows.

Customs:

• NI will remain within the UK customs union.
• However, it will apply the EU customs code on goods entering from outside of the EU (including the UK) to Ireland. This involves NI entry ports officials administering EU customs processes and tariff collections.
• The default position would be that goods coming into NI from GB will be liable to EU tariffs.
• Only if it can be demonstrated that the final customer for the goods is resident in NI will the goods be subject to UK tariffs.
• If EU tariffs are collected at the NI ports, but the goods eventually are sold to a NI customer, then the importer would be able to apply for a tariff refund on any difference. This would ensure NI businesses would be able to enjoy the benefits of future lower tariff rates agreed by the UK with other countries.
• Duties collected will be remitted to the EU.
• Goods shipped between Ireland and Northern Ireland would pay no tariffs at the border, and there would be no customs checks.
• Certain goods destined for Ireland will be exempted entirely from EU tariffs if they are determined as low risk. A new Joint Committee will be responsible for determining which goods are entitled to this status.
• Import and export declarations will be required on all goods moving between GB and NI to support the above procedures.
• Personal goods will be exempted from tariffs.
• Questions on state-aid limits to the UK, effectively subsidising businesses by settling EU duties, will need to be addressed and resolved.

VAT and excise:

• NI will remain part of the UK VAT and excise areas.
• However, it will continue to be subject to the EU VAT Directive, including the rulings of the CJEU, for goods passing from outside the EU, including GB, to Ireland. This includes collecting import VAT at the NI ports on affected goods. This VAT will not be remitted to the EU.
• Goods moving from Northern Ireland to Ireland will still be considered as intra-community supplies, and therefore not subject to import VAT. Businesses responsible for the intra-community supply will be required to complete current intrastat and EC sales (for goods) filings.
• The UK may decide to align reduced VAT rates and exemptions applicable in NI with those of Ireland. The aim is to prevent distortions of markets across the border. A key area will be tourism services where Ireland has a 13% reduced VAT rate.
• However, NI could not benefit from any GB exemptions or reduced rates introduced, e.g. VAT on women’s sanitary products or on heating fuel.
• Businesses will face complex VAT and excise rate tracking requirements.
• The NI VAT measure does not apply to services. However, many industrial supplies include a service support element. This will provide a complex burden on businesses to understand the services-only component of their supplies so as to apply UK VAT rules and rates.

Single market regulatory alignment:

• NI will remain within the EU single market to avoid the need for product standard and safety checks on the border with Ireland.
• NI goods will maintain regulatory alignment with the EU. This will be on the basis of a ‘limited set of rules’ on goods, agricultural supplies, food and manufactured products. Services are excluded.
• Goods moving from between GB and NI would face regulatory checks by UK officials at the NI ports. The EU may request for their officials to be present.
• There would be no regulatory checks on goods (including food and livestock checks) moving from NI to the rest of the UK.

The logistics challenges for HMRC for the above dual regime will be a considerable challenge. Back in 2018, when Theresa May’s ‘Chequers deal’ proposed a UK-wide CU administration arrangement, the chief executive of the HMRC, Jon Thompson, suggested an implementation period of five to seven years. And HMRC would be simultaneously conceiving the new post-Brexit reporting systems for the rest of the UK. That is quite a workload.

Consent on NI arrangements

The NI measures come into automatic effect on 1 January 2021. NI’s Assembly will vote on whether to continue the measures four years later at the end of 2025. This is a switch to ‘mutual consent’ from the effective DUP veto contained within the first Johnson government proposal from the start of October.

In the case of a rejection, the measures will only be withdrawn after two years. This means the measure will remain in place until at least the end of 2026.

The Assembly may then vote every four years on continuing the measures. There is an option for the Assembly to extend this to eight years.

Transition period: a new no-deal cliff edge, December 2020

If the WA is agreed, the transition period deadline remains 31 December 2020. Until then, the UK will continue to apply EU law as if it were a member state. But the UK will leave the political and institutional structures of the EU and will have no representation or say in decision making. The UK will remain subject to CJEU, including its interpretation of the WA.

What has changed from the Theresa May WA is that the UK’s default position will be a ‘hard Brexit’ on 31 December 2020. The UK will revert to World Trade Organisation terms, and most favoured nation status duties rates. This can only be averted if the UK and EU have agreed an FTA governing customs, VAT and other exit issues. This means if the WA passes, the UK could be refacing a no-deal Brexit scenario, with the stockpiling and other preparations, at the end of 2020. Alternatively, the UK may request a further two-year implementation period until December 2022. Importantly, the UK must decide on requesting this further extension by 1 July 2020.

‘Level playing field’ kicked down the road

The level playing field provisions have been swapped out of the legally binding WA into the non-binding PD. The provisions committed the UK to not undermining the EU on policies including: state aid, competition, climate change, environment, social, and employment standards.

The PD states the aims of both parties on this matter when they come to negotiate a further FTA. The EU conceded this change since it will be able to fully negotiate them as part of a full goods and services trade agreement.

Where does this leave us?

The new WA and PD are undoubtedly shrewd, compromising politics in terms of securing the government’s aim of an orderly Brexit this month. NI, instead of the whole UK, has been tied into the EU customs and single market rules to sidestep the physical NI border checks blocker that has prevented agreement for over three years.

But with the triggering of the Benn Act and Letwin amendment, the provisions of the WA lie open to amendments in the next week. A likely strong contender is reverting to membership of the CU for all the UK. UK and EU ratification of that would be impossible by 31 October. In which case, we will all be back on the Brexit roundabout for months ahead.

But the new deal has shown the likely landing ground of Brexit: it is a much looser affiliation to the EU than envisaged by Theresa May. Wish HMRC and business well with managing the multitude of new regimes it creates.

As originally announced at Budget 2017 there are important changes for the construction industry on the way VAT is handled.

Changes which apply from 1 October 2020 mean that main contractors will stop paying VAT to sub-contractors working on projects where the Construction Industry Scheme (CIS) applies. Instead the main contractor will pay the VAT directly to HMRC.

Who will it affect?

It will affect you if you work on any contract covered by the CIS and both you and your main contractor or sub-contractor are VAT registered businesses. If your sub-contractors are not registered for UK VAT, or your supplies are zero-rated, then the reverse charge will not apply.

What you need to do:

• check whether the VAT reverse charge might affect you and where it does, and payments are under a contract that will continue after 1 October 2020, ask your sub-contractors and/or contractors about their CIS and VAT registration status if you do not already know them
• decide how the change will affect your cash flow and if you need to make any changes to your business practises
• talk to the people that help you invoice for work or manage your VAT about the changes so they can make arrangements to update your accounting systems and apply the correct treatment from 1 October 2020

Further Information

You can find helpful information online at GOV.UK, by searching for ‘reverse VAT charge for building and construction services’. This page includes information on the services affected by the change, how it works, how to submit a VAT return, along with extensive guidance notes.

You can also attend a live webinar where you can find out more and ask questions. To find out dates of the next webinar or watch an existing webinar go to GOV.UK and search for ‘help and support for the construction industry scheme’.

Your accountant, bookkeeper or the person who manages your VAT returns for you may also be able to advise you on how this might impact on your business.

Major changes to the tax regime for gains made from the sale of residential property will take effect from April 2002. They will affect how and when your clients are required to report and pay capital gains tax. What’s the full story?

Current CGT deadlines

Currently, capital gains made by individuals are reported through self-assessment. This means, for example, if your client sells a property between 6 April 2019 and 5 April 2020 they must declare it on their tax return and pay the tax they owe no later than 31 January 2021. New rules will apply for 2020/21 onward meaning that the tax payable on certain types of gain will be due up to 21 months sooner. A recent report from HMRC shows that taxpayers likely to be affected by the new rules are not properly aware of the changes.

Earlier deadlines

The new rules apply where tax is payable for gains made from the sale of residential property located inside or outside the UK on or after 6 April 2020. Clients have just 30 days following completion to submit a provisional calculation of the gain and pay the estimated tax due. They will still be required to declare the gain on their self-assessment tax returns and pay, by the usual self-assessment deadline, any CGT due over and above the provisional payment.

Tip: The 30-day declaration and payment applies whether or not your client is in the self-assessment system. If they aren’t, HMRC says it will not require them to register for self-assessment just because they’ve made a capital gain. Instead, after the tax year in which they’ve made a gain ends they’ll be required to review the provisional calculation and make any changes needed.

Estimating the CGT

To work out the provisional CGT bill you’ll need to estimate your client’s taxable income for the year to determine how much CGT is payable at 18% and how much at 28%.

Tip 1: You’ll be allowed to reduce the gain liable to tax by capital losses brought forward from earlier years and those made in the same year as the gain up to when the provisional calculation was made.

Tip 2: If your client intends to sell assets which will make a loss, say shares, consider making the transaction before they make a gain reportable under the 30-day rule. That way you can take account of the loss when working out the provisional payment.

No going back

Once the provisional calculation has been submitted and the tax paid, it can’t be reduced, say because your client made a capital loss later in the year, until they submit their self-assessment return or year-end review. There will also be penalties (details aren’t yet known) for errors and for failing to meet the 30-day deadline for reporting a gain and paying the tax.

A wider net

The new reporting deadline coincides with the cuts in the reliefs for capital gains on the sale of residential property where it was your client’s home. This means there will be more taxpayers caught in the CGT net and so subject to the new 30-day deadline.

Many taxpayers are aware of a ‘seven-year rule’ for inheritance tax (IHT) purposes. They assume this rule to mean that if (for example) a parent gifts an investment property to their adult offspring, the gift will escape IHT if the parent survives at least seven years after making the gift.

Seven years…or is it? Very often, this assumption will be correct if the gift is an outright one with no strings attached (i.e. so that the ‘gifts with reservation’ anti-avoidance rules do not treat the property as remaining part of the donor’s estate). However, lifetime transfers can have IHT implications for a much longer period than seven years in certain circumstances – possibly up to 14 years,

In the above example, the outright gift of the investment property from parent to child (i.e. being a gift from one individual to another) was a ‘potentially exempt transfer’ (PET). A PET becomes an exempt transfer for IHT purposes seven years after making the gift. It would therefore only become chargeable to IHT if the parent dies within seven years of making it.

By contrast, if the parent gifted the investment property into a discretionary trust for family members, the gift would be an immediately chargeable lifetime transfer (CLT). A CLT is aggregated with any such transfers over a seven-year period. IHT is charged at the lifetime rate (i.e. 20% for 2019/20) on the transfer as the highest part of the aggregate total, to the extent that (after deducting any available reliefs and exemptions) it exceeds the ‘nil rate band’ (£325,000 for 2019/20).

IHT becomes chargeable at the ‘death rate’ (40% for 2019/20) on CLTs made within seven years of the transferor’s death. Thus on death the gift into the discretionary trust would be cumulated with CLTs and PETs in the preceding seven years, and IHT would be calculated accordingly (taking into account any lifetime IHT paid).

Looking back

As mentioned, in some cases it may be necessary to take into account transfers made more than seven years before the date of death, up to a maximum of 14 years. For example, if a PET is made six years and 11 months before death, it would be necessary to look back 13 years and 11 months prior to the death.

However, normally the only transfers made more than seven years before death which need to be considered are CLTs.

Example: Lifetime gifts and death

Mr Smith died on 1 November 2018. He had gifted an investment property worth £200,000 into a family discretionary trust on 31 December 2009.

He subsequently gifted another property worth £300,000 to his daughter on 1 January 2016. No other lifetime transfers were made.

(a) Lifetime gifts – The gift into the discretionary trust was a CLT, but no lifetime IHT was paid as the value of the investment property was within Mr Smith’s available nil rate band (£325,000 for 2009/10). The subsequent gift of a property to his daughter was a PET when made, so no lifetime IHT was payable.

(b) IHT on death – Mr Smith’s lifetime gift into the discretionary trust was made more than seven years previously, so no IHT is payable on death.

The gift to Mr Smith’s daughter was a PET made within seven years of death, which therefore becomes chargeable. The gift to the discretionary trust (although made more than seven years before death) is cumulated, as it was made within seven years of the PET.

Wait for it…

Consider the timing of lifetime gifts. If lifetime gifts are made at least seven years apart, it will not normally be necessary to look back more than seven years before death. Furthermore, making lifetime gifts up to the available nil rate band (after any available reliefs and exemptions) at least seven years apart can also be an effective way to mitigate IHT on the death estate.

It’s been a tense few weeks for payroll software developers and tax agents who are trying to prepare employers for the new tax year. The software development cycle for the last 18 years has worked on the basis of having key pieces of tax information announced as part of an autumn statement, rather than being left to a spring budget.

This year was very different. When parliament was dissolved in November 2019, the civil service went into a period of election purdah until mid-December which prevented any discussions about next tax year taking place with policymakers.

If there had been an early February budget, the timetable for revising software would’ve been tight, but just about deliverable. However, a Budget on the 11 March presents a problem.

February deadline

Some payrolls that pay on 6 April are run at the end of February. Without an announcement of the national insurance rates and thresholds, it wouldn’t be possible to pay people correctly on that first payday for 2020/21. The national insurance liability is not calculated cumulatively unless you are a director.

New NIC thresholds

It is now clear that employees will benefit from a primary class 1 threshold of £9,500, as promised in the Conservative party manifesto. But employers will start paying NIC sooner at £8,788 (a small increase in last year’s threshold of £8,632).

The primary and secondary thresholds for class 1 NIC have been aligned since 2017, which was a recommendation of the Office of Tax Simplification. Now we are back to more complexity as the two NIC thresholds split apart again.

The NIC thresholds for the most common pay frequencies are shown in table 1:

Table 1

There are no changes to NI table letters or percentages, as there was a commitment during the general election not to raise the rates of national insurance for the life of this parliament.

Income tax thresholds

The tax bands have not been announced. However, as the upper earnings limit for NIC has not increased, it is assumed this means that the 40% income tax threshold remains at this level too.

The expectation is that the personal allowance will remain at £12,500 as the announcement in Budget 2018 was to cover two years. The Conservatives also committed not to increase the rate of income tax during this parliament.

Termination payments

The introduction of Class 1A (employer only) NI on termination payments over £30,000 from 6 April 2020 is not handled via a table letter. The payment of a such a termination award requires the employer to complete a manual calculation and enter that in the Full Payment Submission (FPS).

Employment Allowance

The Employment Allowance will be withdrawn for employers (and connected employers) who have an employer national insurance liability of £100,000 or more for 2019/20.

No action is required to end claims for the employment allowance, as all claims will fall away at the end of this tax year.

Small employers who are still eligible to claim will have to answer numerous additional questions on the Employer Payment Summary (EPS). Restricting the allowance in this way has turned it into de minimus state aid, so the central government have to have a record to prove that the claimants have sufficient headroom in their sectoral de minimis state aid threshold over the two preceding years ahead of the year of claim to allow for the £3,000 of employment allowance.

As the state aid thresholds are quoted in euros (we have adopted the EU state aid regulations into UK law) employers have to convert any de minimis state aid received in sterling into euros using the exchange rate for March that HMRC will publish.

Auto enrolment

The final piece in the national insurance jigsaw is in respect to auto enrolment thresholds as the qualifying earnings for the and lower bands of pension contributions are currently aligned to the upper and lower earnings NIC limits. Hopefully DWP will be able to confirm these thresholds quickly too.

Statutory payments

We already have the statutory payment values for 2020/21:

Statutory parental bereavement pay will be introduced in Great Britain only (not Northern Ireland).

Student loan thresholds

Apprenticeship levy

As no announcement has been made in respect of the apprenticeship levy, it is assumed that the rate will remain at 0.5% and the levy allowance will remain at £15,000 a year.

Scottish rates

We are waiting for Scotland’s budget which takes place on 6 February, although the Scottish government has warned that it may need to make changes to reflect any announcements in the Westminster budget that impact Scotland’s finances.

Welsh rates

Wales has already published its draft budget with no changes for rates to thresholds from 2019/20 as currently drafted.