Summary
The Autumn Statement traditionally focuses on government spending rather than taxes, but George Osborne used this occasion to announce some tax changes which will take effect in 2014 and 2015. In particular, changes to capital gains tax on sales of homes, and NICs. There is also relief for small businesses in the form of capped or reduced business rates.
The tax law is being changed in some areas of employee benefits and stamp duties where tax cases have shown that the legal position is unclear. Tax avoidance schemes and those who sell them also come in for more scrutiny. HMRC is to be exempt from the 1.1% cap on spending by government departments to give it the flexibility and funding necessary to deal with tax evasion.
This newsletter is based on the documents released on 5th December 2013. It is possible that a different position will be shown by the draft legislation which will be published on 10th December 2013. We will keep you informed of any significant developments.
Employment
NIC Exemption for Young Employees
From 6 April 2015 employers will not pay class 1 employer's NICs on the wages of employees aged under 21, where the employee earns less than the upper earnings limit (£813 per week in 2015/16). The employee will pay NICs on their wages as normal, and both employers' and employee's NI will be due on any wages above the upper earnings limit.
Employee Ownership
The government wants to encourage employees to become part-owners of the organisations they work for, and this apparently improves productivity and happiness in the workforce. The following tax reliefs will be introduced in 2014 to smooth transfers of businesses to employee-ownership trusts:
- No CGT will apply on shares transferred which give rise to a controlling interest in the business passing to the employee ownership trust;
- No IHT will apply on shares or assets transferred to the employee-ownership trust; and
- Bonuses of up to £3,600 per employee per year will be tax free where the business is controlled by an employee-ownership trust.
NICs
The primary (employees') and secondary (employers') threshold for class 1 NICs have been aligned at £153 per week from 6 April 2014.
For 2014/15 the main rates and thresholds for NI contributions are:
Employer's class 1 above £153/week not contracted out - 13.8%
Employee's class 1 not contracted out from £153 to £805/week - 12%
Employee's additional class 1 above £805/week - 2%
Self-employed small earnings exemption - £5,885 per annum
Self-employed class 4 from £7,956 to £41,865 per annum - 9%
Self-employed class 4 additional rate above £41,865 per annum - 2%
Self-employed class 2 - £2.75 per week
Voluntary contributions class 3 - £13.90 per week
Sick Support
Currently employers can recover statutory sick pay (SSP) paid to their employees, where the total paid exceeds 13% of the class 1 NICs paid by the employer in the same tax month. This is called the percentage threshold scheme (PTS). Employers cannot reclaim SSP which does not reach the 13% threshold.
The PTS will be abolished from 6 April 2014, so SSP paid on and after that date will be an unrecoverable cost for all employers. However, employers will be able to reclaim SSP paid for periods up to 5 April 2014, if a claim is submitted by 6 April 2016.
The money saved by abolishing PTS will be invested in a new Health and Work Service, which will help sick employees get back to work by providing them with a return to work plan. Where the Heath and Work Service recommend a medical treatment for the sick employee, the employer can pay up to £500 towards this treatment with no tax charges for the employee. This tax exemption can also apply to medical treatments recommended by an occupational health service arranged by the employer.
Company Cars
Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to the fuel charge multiplier set at £21,700 for 2014/15 (£21,100 for 2013/14) . The maximum taxable benefit of receiving free road fuel for private use will increase to £7,595 for 2014/15 from £7,385 for 2013/14.
From 6 April 2014 the employee will be taxed on the provision of a car as a benefit when the employer leases a car to the employee. Also from that date if the employee wishes to make payments for the private use of the company car or van to reduce the taxable benefit those payments must be made in the same tax year in which the vehicle is provided for private use.
Vans
The taxable benefit for the private use of a company van has been fixed at £3000 per year for many years, but from 6 April 2014, this increases to £3,090. The taxable benefit when fuel is provided for private use in a company van will rise from £564 for 2013/14 to £581 in 2014/15.
Share Schemes
HMRC approved share schemes have strict limits on the value of shares which can be transferred to employees each year, and these limits have not been changed for some time. From 6 April 2014 the following limits are increased:
- monthly limit for employees who save to acquire shares through a SAYE scheme increases from £250 to £500;
- annual value of free shares given to employees in a Share Incentive Plan (SIP) increases from £3,000 to £3,600;
- annual value of partnership shares granted under a SIP increases from £1,500 to £1,800.
Business Taxes
Business Rates
From April 2014 businesses will be able to spread the payment of their business rates over 12 months instead of 10. The increase in business rates for the year to 31 March 2015 will be capped at 2%.
The high level of small business rates relief (SBRR) will be extended to 31 March 2015, and the SBRR rules will be relaxed to allow businesses to expand into an additional property and retain the SBRR for one year.
If a business moves into a retail premises which has been empty for 1 year or more, the business rates on that property will be charged at 50% of the full rate for the first 18 months. This relief will apply where the empty property is re-occupied between 1 April 2014 and 31 March 2016.
Associated Companies
The complicated rules for deciding which companies are 'associated companies' for corporation tax purposes will be scrapped from April 2015 when the corporation tax rates for all companies (excluding oil and gas sectors) are aligned at 20%.
Private Landlords
The government is desperate to increase the energy efficiency of homes, and has proposed two ways to encourage home-owners to make the investments required:
- £1,000 to £4,000 for each homebuyer to spend on energy-saving measures; and
- New scheme for private landlords to improve the energy efficiency of their properties.
Further details are expected to be announced later.
Corporate Losses
When a loss making company is taken over, tax relief for those losses may disappear because of the strict rules about changes in ownership. These rules will be changed from April 2014 to allow a holding company to be inserted at the top of a group of companies, and to allow more flexibility in the capital held in investment companies.
Individuals
Income Tax Allowances
The standard personal allowance will increase to £10,000 from 6 April 2014, but the age allowances for those born before 6 April 1948 are frozen.
Allowances for 2014/15 are...
Personal allowance (born after 5 April 1948): £10,000
Personal allowance (born between 6 April 1938 and 5 April 1948): £10,500
Personal allowance (born before 6 April 1938): £10,660
Minimum married couples allowance*: £3,140
Maximum married couples allowance*: £8,165
Blind person's allowance: £2,230
Income limit for allowances for age related allowances: £27,000
Income limit for standard allowances: £100,000
* given where one partner was born before 6 /4/1935, as 10% reduction in tax due.
Transferable Married Couples Allowance
From 6 April 2015 married couples and civil partners will be able to transfer up to £1,000 of their personal allowance to their spouse. This amount will increase if the total personal allowance increases year on year. However, the transfer can only take effect if both members of the couple are basic rate taxpayers or pay no income tax for the year.
Tax Rates and Thresholds
The income tax bands for 2014/15 are:
Savings rate* (10%) - 0 to £2,880
Basic rate (20%) - 0 to £31,865
Higher rate (40%) - £31,866 to £150,000
Additional rate (45%) - over £150,000
*The savings rate of 10% only applies if the individual's net non-savings income does not exceed the savings rate limit. The higher rate and basic rate thresholds can be increased by paying personal pension contributions or gift aid donations.
Interest Relief
Currently individuals can claim tax relief on interest paid on loans which are used to invest in UK companies in which they have a significant interest, employee-controlled companies and partnerships in which the individual is a partner. From 6 April 2014 this tax relief will also be available if the company is resident outside the UK, but within the European Economic Area. The interest relief will still be capped at the greater of £50,000 and 25% of the taxpayer's income for the year.
State Pension Age
The State Pension Age (SPA) is currently being aligned at 65 for men and women who are reaching that age in the next few years. The SPA will then rise for both men and women to 66, and increase to 67 for those that reach that age between 2034 and 2036. The government is reviewing how quickly the state pension age should be changed. It is likely to accelerate the SPA to age 67, 68 and then to 69 for people who are currently in their early 30's.
NI Contributions Over SPA
Individuals who retire today must have an NI contributions record showing 30 full years of contributions in order to receive the full state pension. However, once a person reaches state pension age (SPA) they are barred from making further NI contributions, even voluntarily.
From October 2015 the government will permit people who have reached SPA to make voluntary NICs to top up their NI contributions record for state pension purposes. This will apply to people who reach SPA before 6 April 2016.
ISAs
The tax free ISA investment limits for 2014/15 are as follows:
Shares and cash ISA - £11,880
Cash only ISA - £5,940
Junior ISA and Child Trust Fund - £3,840
Capital Taxes
Selling Your Home
When you sell your home, any gain you make is tax free if you have lived there for the entire period you owned it. If you occupied the property as your main home (or elected for it to be treated as your main home) for just part of the time you owned it, the gain made for that period is tax free, as is the gain made for the last 36 months of ownership. The Government believes this 36 month rule has been abused, so is cutting this tax free period to 18 months for disposals made after 5 April 2014.
Gains Made by Non-residents
If you are not resident in the UK for tax purposes, any gains you make on selling property located in the UK is not taxed in the UK, although the gain may well be taxed in the country where you are tax-resident.
From 6 April 2015, gains accruing from that point on homes located in the UK, will be taxed in the UK, where the owner is not resident in the UK. Anyone who emigrates and then sells their former UK home (or investment properties) after living abroad for a while needs to watch out for this.
Social Enterprise Investment
From April 2014 individuals who provide funds for investment in social enterprises will receive some income tax and capital gains tax relief. Further details will be announced later.
Tax Avoidance
Duel Employment Contracts
Where a person has an overseas domicile (usually because he was not born in the UK), and works overseas for part of their employment, it has been common practice to set up two parallel employment contracts for that person (duel contracts). One contract would deal with earnings taxable in the UK, the other contract would deal with overseas earnings. From 6 April 2014 HMRC will apply UK tax on earnings under both contracts, unless a higher amount of tax has been paid on the overseas earnings than would be paid in the UK.
Employment Intermediaries
Fresh anti-avoidance rules are to apply from April 2014 to organisations (often referred to as 'umbrella companies'), who manage contractors in a number of industries. The intermediary company may be based in an off-shore tax haven, and 'pay' the contractor by means of a loan. These loan-based schemes have been outlawed for employees, so now HMRC is to go after contracts which purport to supply the contractor as a 'self-employed' person.
Friday 6 December 2013
Tuesday 3 December 2013
Loans to Reduce IHT
Have you used a loan to reduce the inheritance tax (IHT) which may be due when you die? A common IHT planning technique has been to take out a mortgage on the family home and use those borrowed funds to invest in assets that qualify for 100% exemption from IHT, such as farmland or shares quoted on the AIM stock market. The loan reduces the value of home subject to IHT, and the assets acquired don't attract an IHT charge.
However, this plan has been undermined by a change in the law from 6 April 2013. If the mortgage was taken out, or replaced, on or after that date, the amount of the loan is first deducted from the value of the assets it was used to acquire, not the property it is secured on. This means the loan and the IHT-exempt assets cancel-out each other in the IHT calculation, and no tax is saved.
You need to be aware of this when changing the mortgage on your home. We should talk about inheritance tax planning if the net value of your assets is likely to exceed £325,000. Married couples and those in civil partnerships can hold twice that amount before IHT bites. There are still ways to reduce the potential IHT due, but any plan needs to be tailored to your specific circumstances.
However, this plan has been undermined by a change in the law from 6 April 2013. If the mortgage was taken out, or replaced, on or after that date, the amount of the loan is first deducted from the value of the assets it was used to acquire, not the property it is secured on. This means the loan and the IHT-exempt assets cancel-out each other in the IHT calculation, and no tax is saved.
You need to be aware of this when changing the mortgage on your home. We should talk about inheritance tax planning if the net value of your assets is likely to exceed £325,000. Married couples and those in civil partnerships can hold twice that amount before IHT bites. There are still ways to reduce the potential IHT due, but any plan needs to be tailored to your specific circumstances.
RTI Penalties Around The Corner
This tax year (2013/14) is the first year in which the majority of employers have submitted their PAYE data using real time information (RTI). HMRC has not yet imposed penalties for late RTI submissions made within the tax year, but that is about to change.
From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:
- filing a full payment submission (FPS) after the date of payment stated in that report;
- failure to file an employer payment summary (EPS) showing a nil payment when required; and
- failure to pay the PAYE due in full, and on time for a particular tax month.
Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.
The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.
Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as 'annual'. If no nil EPS is received this will give rise to a penalty.
Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.
You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.
Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.
From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:
- filing a full payment submission (FPS) after the date of payment stated in that report;
- failure to file an employer payment summary (EPS) showing a nil payment when required; and
- failure to pay the PAYE due in full, and on time for a particular tax month.
Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.
The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.
Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as 'annual'. If no nil EPS is received this will give rise to a penalty.
Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.
You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.
Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.
VAT Due Payment Date
When must your VAT payment reach HMRC? The correct answer is: seven days after the end of the month following the end of your VAT quarter. Not seven working days, seven calendar days.
If you get this wrong and pay your VAT late, you will receive one or two warnings from HMRC (two where the penalty would be under £400). If you pay late again within 12 months you will be charged a penalty of 2% of the late paid VAT. This percentage penalty increases every time you pay late, from 5% to 10% to 15% of the VAT due. Even paying one day late, counts as late for calculating those penalties.
Make sure you know exactly how long it will take your electronic payment to reach HMRC's bank account. Using the faster payment service (FPS) normally means the payment arrives within two hours, but there are monetary limits for FPS which vary between banks and for different types of bank accounts (corporate or retail). If the payment is too large to be sent by FPS, the bank will generally send it by BACS - which takes three working days.
If you have a direct debit set up to pay your VAT, HMRC will deduct the correct amount from your bank account three days after the due date for that VAT return, or three days after you submit your VAT return if that is later. So if you are late with filing your VAT return, the direct debit will be collected late, and you will have made a late payment of VAT, leading to a potential penalty.
If you get this wrong and pay your VAT late, you will receive one or two warnings from HMRC (two where the penalty would be under £400). If you pay late again within 12 months you will be charged a penalty of 2% of the late paid VAT. This percentage penalty increases every time you pay late, from 5% to 10% to 15% of the VAT due. Even paying one day late, counts as late for calculating those penalties.
Make sure you know exactly how long it will take your electronic payment to reach HMRC's bank account. Using the faster payment service (FPS) normally means the payment arrives within two hours, but there are monetary limits for FPS which vary between banks and for different types of bank accounts (corporate or retail). If the payment is too large to be sent by FPS, the bank will generally send it by BACS - which takes three working days.
If you have a direct debit set up to pay your VAT, HMRC will deduct the correct amount from your bank account three days after the due date for that VAT return, or three days after you submit your VAT return if that is later. So if you are late with filing your VAT return, the direct debit will be collected late, and you will have made a late payment of VAT, leading to a potential penalty.
Monday 4 November 2013
VAT and Indirect Exports Change
When you export goods to a country outside the EU the goods are 'zero-rated' for VAT purposes, which means you do not apply VAT to the value of the goods. However, you need to have the paperwork to prove that the goods left the UK.
If your customer does the physical exporting, in that they take possession of the goods in the UK and handle the shipping, this is called an 'indirect export'. HMRC has previously only allowed you to zero rate the goods in this situation if your customer was an 'overseas person' - they had no VAT registration in the UK and no business establishment here. Also the goods must leave the UK within three months of the handover date.
From 1 October 2013 the rules for indirect exports have been relaxed slightly. Now you can zero rate the goods for export to a country outside the EU even if your customer is VAT registered in the UK. However, the customer must still not have a business established in the UK.
This change in the rules has been brought about due to pressure on the UK to comply with EU rules. It is thus effectively back-dated for four years. If you believe you have applied VAT in the last four years when under this change of rule it would not apply, you can reclaim that VAT. However, HMRC will expect you to pay back any reclaimed VAT to your customers who original bore the VAT on the goods.
We can help you check that you have the VAT position on any exports 100% correct.
If your customer does the physical exporting, in that they take possession of the goods in the UK and handle the shipping, this is called an 'indirect export'. HMRC has previously only allowed you to zero rate the goods in this situation if your customer was an 'overseas person' - they had no VAT registration in the UK and no business establishment here. Also the goods must leave the UK within three months of the handover date.
From 1 October 2013 the rules for indirect exports have been relaxed slightly. Now you can zero rate the goods for export to a country outside the EU even if your customer is VAT registered in the UK. However, the customer must still not have a business established in the UK.
This change in the rules has been brought about due to pressure on the UK to comply with EU rules. It is thus effectively back-dated for four years. If you believe you have applied VAT in the last four years when under this change of rule it would not apply, you can reclaim that VAT. However, HMRC will expect you to pay back any reclaimed VAT to your customers who original bore the VAT on the goods.
We can help you check that you have the VAT position on any exports 100% correct.
Earn-out Payments on Business Sales
When you sell a business, you may receive some of the consideration up front and another payment later if the business meets certain targets, that later payment is called an 'earn-out'.
How this earn-out is taxed can be tricky to work out, as it depends on a number of factors. For example: is the earn-out to be paid in cash or as shares or bonds, or is there a cash alternative to the offer of shares/bonds? Can the value of the earn-out be determined at the time the business was sold, or not until some later event has occurred?
Determining or 'ascertaining' the value of the earn-out is crucial for your capital gains tax computation.
If the earn-out can be ascertained (even within a broad range of values) at the time the business is sold, both the up-front and earn-out payments must be taxed as if they were both received together at the business sale date.
This can work in your favour. If the business sale qualifies for entrepreneurs' relief, the up-front payment and earn-out which is taxed with it will also qualify for entrepreneurs' relief. This reduces the tax payable on the earn-out to 10%. However, if the earn-out can't be ascertained until it is received, it won't qualify for entrepreneurs' relief, so will be taxed at 28% (or your highest rate for CGT).
We should discuss all this before you finalise the sale of your business. There are numerous ways of structuring the payment for a business and they all have different tax implications.
How this earn-out is taxed can be tricky to work out, as it depends on a number of factors. For example: is the earn-out to be paid in cash or as shares or bonds, or is there a cash alternative to the offer of shares/bonds? Can the value of the earn-out be determined at the time the business was sold, or not until some later event has occurred?
Determining or 'ascertaining' the value of the earn-out is crucial for your capital gains tax computation.
If the earn-out can be ascertained (even within a broad range of values) at the time the business is sold, both the up-front and earn-out payments must be taxed as if they were both received together at the business sale date.
This can work in your favour. If the business sale qualifies for entrepreneurs' relief, the up-front payment and earn-out which is taxed with it will also qualify for entrepreneurs' relief. This reduces the tax payable on the earn-out to 10%. However, if the earn-out can't be ascertained until it is received, it won't qualify for entrepreneurs' relief, so will be taxed at 28% (or your highest rate for CGT).
We should discuss all this before you finalise the sale of your business. There are numerous ways of structuring the payment for a business and they all have different tax implications.
Using the SEIS
The seed enterprise investment scheme (SEIS) is designed to help small companies raise modest amounts of funding (up to £150,000). The investor must subscribe for new shares issued by the company (not buy them from another shareholder), and in return he can claim income tax relief equal to 50% of the cost of those shares.
If the investor has made a capital gain in the same tax year as he makes the SEIS investment, up to 50% of the amount invested in SEIS shares can be set against that capital gain to reduce the CGT payable. This CGT reduction was 100% for gains in 2012/13, but is only 50% for gains arising in 2013/14.
That sounds wonderful, but there are a lot of conditions for the investor and the company to comply with before the SEIS tax relief can be given.
The first hurdle is to check if the company's trade will qualify for SEIS relief. Many 'safe' financial trades such as banking, money lending, accountancy or legal services are excluded. Also any trade where the company is likely to hold valuable property doesn't qualify such as; running hotels or nursing homes, farming, woodland management, property development or property dealing.
Businesses which are related to any of the excluded trades need to be looked at very carefully. For example running a public house can qualify, but if it lets residential rooms it could be classified as a hotel which would mean it doesn't qualify. An estate agent business may qualify, but a large part of an estate agent's business can be arranging mortgages, which is a financial activity that doesn't qualify. HMRC are prepared to provide assurance in advance of issuing shares as to whether a particular trade will qualify.
The second major hurdle is that the SEIS investor must not hold more than 30% of the company either alone, or together with relatives or other associates. Other shareholders can hold 30% or more of the company, but those shareholders will not be eligible for the SEIS tax relief.
An SEIS investor can invest up to £100,000 in a single tax year on which tax relief can be claimed, which can be spread over a number of companies.
If the investor has made a capital gain in the same tax year as he makes the SEIS investment, up to 50% of the amount invested in SEIS shares can be set against that capital gain to reduce the CGT payable. This CGT reduction was 100% for gains in 2012/13, but is only 50% for gains arising in 2013/14.
That sounds wonderful, but there are a lot of conditions for the investor and the company to comply with before the SEIS tax relief can be given.
The first hurdle is to check if the company's trade will qualify for SEIS relief. Many 'safe' financial trades such as banking, money lending, accountancy or legal services are excluded. Also any trade where the company is likely to hold valuable property doesn't qualify such as; running hotels or nursing homes, farming, woodland management, property development or property dealing.
Businesses which are related to any of the excluded trades need to be looked at very carefully. For example running a public house can qualify, but if it lets residential rooms it could be classified as a hotel which would mean it doesn't qualify. An estate agent business may qualify, but a large part of an estate agent's business can be arranging mortgages, which is a financial activity that doesn't qualify. HMRC are prepared to provide assurance in advance of issuing shares as to whether a particular trade will qualify.
The second major hurdle is that the SEIS investor must not hold more than 30% of the company either alone, or together with relatives or other associates. Other shareholders can hold 30% or more of the company, but those shareholders will not be eligible for the SEIS tax relief.
An SEIS investor can invest up to £100,000 in a single tax year on which tax relief can be claimed, which can be spread over a number of companies.
New RTI Messages
Real time information (RTI) is all about one-way communications with HMRC. Your payroll software sends reports (called FPS or EPS) to HMRC about the deductions made from your employees' pay, and normally you hear nothing back.
That is starting to change. HMRC is now sending electronic messages to employers to inform them that not all is well with their RTI reports. The first messages concern late submitted FPS reports, but in future there will be messages about late paid PAYE and missing RTI reports.
It is important to get the FPS in on time as then HMRC know that the amount of PAYE paid for the month agrees with the deductions you have reported on the FPS. HMRC will not impose penalties for any late FPS submitted within 2013/14, although the final FPS for 2013/14 (which closes the tax year), can carry a penalty if that is significantly late. The messages about late FPS reports are thus just a warning from HMRC in this tax year, but may indicate there is something wrong with your systems.
From 6 April 2014 there will be automatic penalties for filing a FPS late within the tax year. 'Late' means it arrives with HMRC after the date on which the employees were paid. There will also be penalties for paying PAYE late.
In order to pick up these electronic messages from HMRC you need to use your payroll software, or log on to HMRC's PAYE online services, then look for notifications. The messages are also available using the HMRC's PAYE desktop viewer (PDV) software package. However, the PDV has just been updated so you may need to download the latest version first.
These electronic messages about FPS will be the first of many important messages concerning RTI, so you need to get used to looking for them.
That is starting to change. HMRC is now sending electronic messages to employers to inform them that not all is well with their RTI reports. The first messages concern late submitted FPS reports, but in future there will be messages about late paid PAYE and missing RTI reports.
It is important to get the FPS in on time as then HMRC know that the amount of PAYE paid for the month agrees with the deductions you have reported on the FPS. HMRC will not impose penalties for any late FPS submitted within 2013/14, although the final FPS for 2013/14 (which closes the tax year), can carry a penalty if that is significantly late. The messages about late FPS reports are thus just a warning from HMRC in this tax year, but may indicate there is something wrong with your systems.
From 6 April 2014 there will be automatic penalties for filing a FPS late within the tax year. 'Late' means it arrives with HMRC after the date on which the employees were paid. There will also be penalties for paying PAYE late.
In order to pick up these electronic messages from HMRC you need to use your payroll software, or log on to HMRC's PAYE online services, then look for notifications. The messages are also available using the HMRC's PAYE desktop viewer (PDV) software package. However, the PDV has just been updated so you may need to download the latest version first.
These electronic messages about FPS will be the first of many important messages concerning RTI, so you need to get used to looking for them.
Tuesday 1 October 2013
VAT on Sale of Commercial Buildings
When purchasing or selling a commercial property one of the first things to establish is whether VAT will be applied to the price of the property. Land and buildings are generally exempt from VAT, but 'new' commercial property (i.e. less than three years old) will have VAT applied. Otherwise VAT should only be charged on the sale of a commercial property where the seller has previously elected to apply VAT to the property. This election is known as the 'option to tax'.
There are circumstances where the option to tax may be disapplied by the seller, such as where the purchaser is going to use the building solely for charitable purposes or the building will be converted into residential use. If there is any question that VAT should not be applied to the sale, the seller must ask the purchaser for written confirmation of the intended use of the building.
When the purchaser plans to convert the building to residential use it must provide the seller with a VAT certificate (form VAT1614D) to confirm their intentions for the building. In other circumstances a written instruction from the purchaser should be sufficient.
Where VAT is applied to the price of the building, the stamp duty land tax (SDLT) charge will inevitably be higher, as SDLT is charged on the gross consideration paid, including the VAT charged. If you are planning to purchase a commercial property, or sell one, ask us to check the VAT implications before the price is agreed.
There are circumstances where the option to tax may be disapplied by the seller, such as where the purchaser is going to use the building solely for charitable purposes or the building will be converted into residential use. If there is any question that VAT should not be applied to the sale, the seller must ask the purchaser for written confirmation of the intended use of the building.
When the purchaser plans to convert the building to residential use it must provide the seller with a VAT certificate (form VAT1614D) to confirm their intentions for the building. In other circumstances a written instruction from the purchaser should be sufficient.
Where VAT is applied to the price of the building, the stamp duty land tax (SDLT) charge will inevitably be higher, as SDLT is charged on the gross consideration paid, including the VAT charged. If you are planning to purchase a commercial property, or sell one, ask us to check the VAT implications before the price is agreed.
Child Benefits When Turn 16
If you have a child aged 16, check whether you are still receiving all the child benefit and child tax credits you expect to.
Child benefit and child tax credit both stop automatically on 31st August on or after the child's 16th birthday, but where the child is in approved education or training, the parent who claims the child benefit is entitled to extend that claim until the child reaches their 20th birthday. 'Approved education' means at least 12 hours of supervised study per week, and the training can include an apprenticeship.
From September 2013 children who live in England (the rules are different in Wales, Northern Ireland and Scotland) are required by law to remain in education or training until the end of the academic year in which they turn 17. So there are a lot of families out there with 16 years olds who are in approved education, but who have lost their child benefit.
If you are one of those parents, and you want to continue to receive the child benefit, you need to contact the Child Benefit office at HMRC, to inform them that your child is still in approved education or training.
Similar rules apply for child tax credit. In that case the claimant must contact the Tax Credit office.
Although child benefit and child tax credit are both administered by HMRC, you need to inform them twice, as one section of HMRC cannot pass the relevant information to another part!
You may prefer not to receive the child benefit if you or your partner/spouse earns £50,000 or more. In that case all or part of the child benefit paid to your family is clawed-back through the operation of the high income child benefit charge (HICBC). HMRC has written to some of the parents who may be due to pay the HICBC, but not all, as they cannot correctly identify every person who may be liable to pay the charge.
If you are the highest earner in a family that has claimed child benefit since 7 January 2013, and your total income is £50,000 or more, you need to declare that child benefit on your tax return form. If you don't normally complete a self-assessment tax return form, you need to ask HMRC to set you up on the self-assessment tax return system. We can help you with that, but don't delay, as if you fail to complete the tax return form on time there will be automatic penalties to pay.
Child benefit and child tax credit both stop automatically on 31st August on or after the child's 16th birthday, but where the child is in approved education or training, the parent who claims the child benefit is entitled to extend that claim until the child reaches their 20th birthday. 'Approved education' means at least 12 hours of supervised study per week, and the training can include an apprenticeship.
From September 2013 children who live in England (the rules are different in Wales, Northern Ireland and Scotland) are required by law to remain in education or training until the end of the academic year in which they turn 17. So there are a lot of families out there with 16 years olds who are in approved education, but who have lost their child benefit.
If you are one of those parents, and you want to continue to receive the child benefit, you need to contact the Child Benefit office at HMRC, to inform them that your child is still in approved education or training.
Similar rules apply for child tax credit. In that case the claimant must contact the Tax Credit office.
Although child benefit and child tax credit are both administered by HMRC, you need to inform them twice, as one section of HMRC cannot pass the relevant information to another part!
You may prefer not to receive the child benefit if you or your partner/spouse earns £50,000 or more. In that case all or part of the child benefit paid to your family is clawed-back through the operation of the high income child benefit charge (HICBC). HMRC has written to some of the parents who may be due to pay the HICBC, but not all, as they cannot correctly identify every person who may be liable to pay the charge.
If you are the highest earner in a family that has claimed child benefit since 7 January 2013, and your total income is £50,000 or more, you need to declare that child benefit on your tax return form. If you don't normally complete a self-assessment tax return form, you need to ask HMRC to set you up on the self-assessment tax return system. We can help you with that, but don't delay, as if you fail to complete the tax return form on time there will be automatic penalties to pay.
Contractor Loan Schemes
Have you taken part in a contractor loan scheme? This is a tax saving scheme which was widely sold to workers in personal service industries, such as IT contractors.
To use the scheme the individual would sign an employment contract with an offshore employer, but work for customers in the UK. The individual would often receive a large proportion of their fee for that work as a loan from the offshore employer. They were told the loan was not taxable, except for a small benefit in kind charge on the unpaid interest on the loan, but that's not what the Taxman thinks.
The Taxman has publically announced that he is opening tax enquires into individuals' tax returns for periods during which they have used such loan schemes. In some cases the individual will receive a tax bill for the years 2008/09 to 2010/11, to collect the tax they think they avoided. There will be penalties and interest to pay on any tax found to be avoided.
If you have used a similar loan scheme to reduce UK tax, you should talk to us.
To use the scheme the individual would sign an employment contract with an offshore employer, but work for customers in the UK. The individual would often receive a large proportion of their fee for that work as a loan from the offshore employer. They were told the loan was not taxable, except for a small benefit in kind charge on the unpaid interest on the loan, but that's not what the Taxman thinks.
The Taxman has publically announced that he is opening tax enquires into individuals' tax returns for periods during which they have used such loan schemes. In some cases the individual will receive a tax bill for the years 2008/09 to 2010/11, to collect the tax they think they avoided. There will be penalties and interest to pay on any tax found to be avoided.
If you have used a similar loan scheme to reduce UK tax, you should talk to us.
New Employee Shareholder Status
The Government thinks that employees who own shares in their employing company feel more involved in that business and hence are happy and loyal employees. So it has introduced a new share scheme from 1st September 2013 which allows you, as an employer, to give your employees tax-free shares in your company, but in return the employees must give up some key employment rights.
How does this work?
The employee must sign a fresh employment contract called an 'employee shareholder' contract, then they must be issued with shares worth at least £2,000 (and up to £50,000) in their employing company. When the individual sells those shares any gain arising on that disposal is completely exempt from capital gains tax. However, any gain up to £10,900 (for 2013/14) would be tax free anyway.
Normally where shares are awarded to an employee their value is treated as taxable income for that employee, unless the shares are issued under an approved share scheme. In this case the first £2,000 worth of shares awarded will be free of income tax and NIC, but not any further shares.
The downside is the employee must surrender all of following rights to take up employee shareholder status and receive the free shares:
- compensation for unfair dismissal, apart from when this is automatically unfair or relates to anti-discrimination law;
- request for time off for studying or training;
- request for flexible working; and
- statutory redundancy pay.
Also the employee must give 16 weeks' notice (instead of 8 weeks) when returning from maternity or adoption leave.
This sounds like an attractive deal for an entrepreneur who doesn't care about his own employment rights. However, any person who holds 25% or more of the company (alone or with associates) can't take up employee shareholder status and enjoy the tax-free shares. So this share scheme can only be used to give shares to employees who don't already have a significant share in the company.
Before implementing this scheme you should take employment law advice, and specialist advice on how to value your company's shares. The employees should also take independent advice before signing away their employment rights, but you, as their employer, can pay for that advice with no tax consequences.
How does this work?
The employee must sign a fresh employment contract called an 'employee shareholder' contract, then they must be issued with shares worth at least £2,000 (and up to £50,000) in their employing company. When the individual sells those shares any gain arising on that disposal is completely exempt from capital gains tax. However, any gain up to £10,900 (for 2013/14) would be tax free anyway.
Normally where shares are awarded to an employee their value is treated as taxable income for that employee, unless the shares are issued under an approved share scheme. In this case the first £2,000 worth of shares awarded will be free of income tax and NIC, but not any further shares.
The downside is the employee must surrender all of following rights to take up employee shareholder status and receive the free shares:
- compensation for unfair dismissal, apart from when this is automatically unfair or relates to anti-discrimination law;
- request for time off for studying or training;
- request for flexible working; and
- statutory redundancy pay.
Also the employee must give 16 weeks' notice (instead of 8 weeks) when returning from maternity or adoption leave.
This sounds like an attractive deal for an entrepreneur who doesn't care about his own employment rights. However, any person who holds 25% or more of the company (alone or with associates) can't take up employee shareholder status and enjoy the tax-free shares. So this share scheme can only be used to give shares to employees who don't already have a significant share in the company.
Before implementing this scheme you should take employment law advice, and specialist advice on how to value your company's shares. The employees should also take independent advice before signing away their employment rights, but you, as their employer, can pay for that advice with no tax consequences.
Monday 16 September 2013
Universal Credit
If you or your partner currently receive any of the following then Universal Credit will eventually affect you:
• Working tax credit
• Child tax credits
• Income based job seekers allowance
• Income related employment and support allowance
• Income support
• Housing benefit
Universal credit is the government’s attempt to simplify the welfare system and to provide a greater incentive for people on benefits to work by ensuring they do not lose out financially. The government also hopes that it will reduce the amount of over/underpayment errors and fraud within the system.
It is already being trialed in parts of Greater Manchester and Cheshire and will be rolled out across the rest of the UK in phases between October 2013 and October 2017.
Claims for UC will be joint, as is currently the case for tax credits, but instead of weekly or fortnightly payments, under UC a single payment for the household will be made directly to a bank or building society account once a month. All claims will have to be made online.
The Department of Work and Pensions will receive information about earnings from HMRC (under Real Time Information reporting) and this will allow them to adjust the UC payment each month based on changes to income levels.
If you receive any of the benefits or credits listed above there is nothing you need to right now - continue to claim as normal and keep the DWP up to date with any changes to your circumstances.
• Working tax credit
• Child tax credits
• Income based job seekers allowance
• Income related employment and support allowance
• Income support
• Housing benefit
Universal credit is the government’s attempt to simplify the welfare system and to provide a greater incentive for people on benefits to work by ensuring they do not lose out financially. The government also hopes that it will reduce the amount of over/underpayment errors and fraud within the system.
It is already being trialed in parts of Greater Manchester and Cheshire and will be rolled out across the rest of the UK in phases between October 2013 and October 2017.
Claims for UC will be joint, as is currently the case for tax credits, but instead of weekly or fortnightly payments, under UC a single payment for the household will be made directly to a bank or building society account once a month. All claims will have to be made online.
The Department of Work and Pensions will receive information about earnings from HMRC (under Real Time Information reporting) and this will allow them to adjust the UC payment each month based on changes to income levels.
If you receive any of the benefits or credits listed above there is nothing you need to right now - continue to claim as normal and keep the DWP up to date with any changes to your circumstances.
Overdrawn Dividends
Under company law shareholders must not withdraw more dividends than the company has retained profits. So what happens if you find yourself in a position where you have done just that?
The overdrawn amount will be reclassified as a loan within the company accounts and where the loan is to a director, employee or related party the following rules apply:
• If the loan is more than £5,000 then there will be a benefit in kind (BIK) charge within the income tax return every year until the loan is fully repaid
• If there is a BIK then the company will suffer a Class 1A NIC charge every year until the loan is fully repaid
• If the loan has not been repaid to the company at the point that the company is due to make its corporation tax payment (i.e. 9 months and 1 day after the company year end) then it must pay a penalty tax charge in addition to its corporation tax.
The penalty tax is 25% of the outstanding loan amount. Whilst the penalty tax will be repaid to the company once the loan is repaid, beware; there are specific rules regarding when the repayment may be claimed and it will take time to recover the monies from HMRC which can have a serious effect on the company’s cashflow.
How can you ensure you do not end up in this situation? Well the obvious answer is not to withdraw more dividends than are available. To do that you need to ensure that the company’s records are updated regularly throughout the year so that you can keep track of your profit and the estimated corporation tax that will become due.
Defacto recommend records are updated a minimum of once per month.
If you think you may have overdrawn dividends or if you need assistance with record keeping and tracking company profits throughout the year, please contact us.
The overdrawn amount will be reclassified as a loan within the company accounts and where the loan is to a director, employee or related party the following rules apply:
• If the loan is more than £5,000 then there will be a benefit in kind (BIK) charge within the income tax return every year until the loan is fully repaid
• If there is a BIK then the company will suffer a Class 1A NIC charge every year until the loan is fully repaid
• If the loan has not been repaid to the company at the point that the company is due to make its corporation tax payment (i.e. 9 months and 1 day after the company year end) then it must pay a penalty tax charge in addition to its corporation tax.
The penalty tax is 25% of the outstanding loan amount. Whilst the penalty tax will be repaid to the company once the loan is repaid, beware; there are specific rules regarding when the repayment may be claimed and it will take time to recover the monies from HMRC which can have a serious effect on the company’s cashflow.
How can you ensure you do not end up in this situation? Well the obvious answer is not to withdraw more dividends than are available. To do that you need to ensure that the company’s records are updated regularly throughout the year so that you can keep track of your profit and the estimated corporation tax that will become due.
Defacto recommend records are updated a minimum of once per month.
If you think you may have overdrawn dividends or if you need assistance with record keeping and tracking company profits throughout the year, please contact us.
High Income Child Benefit Charge (HICBC)
You may recall we told you about the new HICBC in November 2012 tax tips. It came into effect on 7th January 2013 and as we prepare the 2012/13 income tax returns, many of you are beginning to see this new rule take effect.
If you and your partner’s joint income for the tax year is £50,000 or more and one of you receives child benefit then the HICBC could affect you: The charge is 1% of child benefit for every £100 above £50,000 and if household income exceeds £60,000 then the HICBC will be 100% of the child benefit for that period.
In 2012/13 the charge is based on the amount of child benefit you were entitled to receive for the period 7th January 13 to 5th April 2013 (i.e. 13 weeks worth). From April 13 the charge will be based on the full year’s entitlement to child benefit.
It is included within the self assessment income tax calculation and will be payable to HMRC along with any income tax due – so the HICBC for 2012/13 is payable by 31st January 2014.
You will be asked about child benefit on your Defacto self assessment income tax checklist – if you or your partner receives child benefit then you must answer yes to this section. We will then contact you regarding additional information needed. As HICBC is paid by the higher earner we may need to ask for details of your partner’s income so that we can establish who should incur the charge.
If you and your partner’s joint income for the tax year is £50,000 or more and one of you receives child benefit then the HICBC could affect you: The charge is 1% of child benefit for every £100 above £50,000 and if household income exceeds £60,000 then the HICBC will be 100% of the child benefit for that period.
In 2012/13 the charge is based on the amount of child benefit you were entitled to receive for the period 7th January 13 to 5th April 2013 (i.e. 13 weeks worth). From April 13 the charge will be based on the full year’s entitlement to child benefit.
It is included within the self assessment income tax calculation and will be payable to HMRC along with any income tax due – so the HICBC for 2012/13 is payable by 31st January 2014.
You will be asked about child benefit on your Defacto self assessment income tax checklist – if you or your partner receives child benefit then you must answer yes to this section. We will then contact you regarding additional information needed. As HICBC is paid by the higher earner we may need to ask for details of your partner’s income so that we can establish who should incur the charge.
Wednesday 31 July 2013
VAT Mistakes
If your company makes a deliberate VAT mistake, which results in less VAT being paid over to HMRC than is correctly due, you as the director of that company can be issued personally with a penalty. This very rarely happens, but the VATman does have the power to impose such penalties where he can show the underpaid VAT was due to the dishonest conduct of one or more of the directors.
Two recent cases illustrate the types of situations where a personal penalty can be imposed:
Mr Brookes is the sole director of a building company. A VAT inspection found suppliers' invoices to support VAT inputs were missing. Brookes obtained 'copy' invoices from the main suppliers, but those 'copies' were found to be very poor forgeries. Brookes was served with a personal penalty of £43,753 which was 60% of the over claimed VAT.
Mr and Mrs Walker failed to submit eight successive VAT returns for their company. The VAT office issued estimated VAT assessments to the company which were less than the VAT eventually found to be due, and the Walkers did not challenge those estimated assessments. The Walkers were served with personal penalties totalling £194,214.
If you are getting in a VAT mess, ask us to help you out before things get really serious!
Two recent cases illustrate the types of situations where a personal penalty can be imposed:
Mr Brookes is the sole director of a building company. A VAT inspection found suppliers' invoices to support VAT inputs were missing. Brookes obtained 'copy' invoices from the main suppliers, but those 'copies' were found to be very poor forgeries. Brookes was served with a personal penalty of £43,753 which was 60% of the over claimed VAT.
Mr and Mrs Walker failed to submit eight successive VAT returns for their company. The VAT office issued estimated VAT assessments to the company which were less than the VAT eventually found to be due, and the Walkers did not challenge those estimated assessments. The Walkers were served with personal penalties totalling £194,214.
If you are getting in a VAT mess, ask us to help you out before things get really serious!
RTI for Seasonal Workers
Have you taken on casual workers this summer? Perhaps you are paying piece-rates for the amount of produce picked or packed by each person. Reporting such small and variable payments under the new RTI system is a significant hassle.
The RTI rules require you to report each payment to workers on or before the date of the payment. Fortunately you may be able to use one of these two concessions to ease your RTI reporting burden:
a) Where you pay your causal workers daily or more than once a week, but the amounts paid are less than £109 per person per week, you can send RTI reports to HMRC weekly; or
b) Where the total number of your employees, including casual workers, is less than 50, you can send your RTI reports to HMRC on a monthly basis.
Concession b) will only apply for payments made before 6 April 2014.
Your casual workers are likely to have no set working hours for each week. In effect they will be on a zero-hours contract; paid for the hours they work, but otherwise not at all. In such cases you should choose option D of hours worked on the FPS report under RTI.
The Government wants employers to report data on the hours worked by employees in order to prevent fraud in the Tax Credits system. Under Universal Credit the hours worked will not be relevant to the employee's claim, so in time when all claimants are moved from Tax Credits to Universal Credit, the requirement to report hours worked should be dropped.
The RTI rules require you to report each payment to workers on or before the date of the payment. Fortunately you may be able to use one of these two concessions to ease your RTI reporting burden:
a) Where you pay your causal workers daily or more than once a week, but the amounts paid are less than £109 per person per week, you can send RTI reports to HMRC weekly; or
b) Where the total number of your employees, including casual workers, is less than 50, you can send your RTI reports to HMRC on a monthly basis.
Concession b) will only apply for payments made before 6 April 2014.
Your casual workers are likely to have no set working hours for each week. In effect they will be on a zero-hours contract; paid for the hours they work, but otherwise not at all. In such cases you should choose option D of hours worked on the FPS report under RTI.
The Government wants employers to report data on the hours worked by employees in order to prevent fraud in the Tax Credits system. Under Universal Credit the hours worked will not be relevant to the employee's claim, so in time when all claimants are moved from Tax Credits to Universal Credit, the requirement to report hours worked should be dropped.
Self-billing Change
The procedure of 'self-billing' is frequently used in the publishing and construction sectors, where a large business customer engages lots of smaller businesses as suppliers (eg authors or subcontractors). The customer issues self-billed invoices on behalf of the small suppliers, usually with the payment to each supplier.
If you are operating self-billing you must comply with the conditions set out in the VAT Notice 700/62: Self Billing. These conditions have recently changed, so make sure you download the latest version of the VAT notice from the HMRC website. In particular there is a new legal requirement to mark all self-billed invoices as 'SELF BILLING'.
The key requirement of self-billing is that the suppliers must actively agree to self-billing, and provide the customer with their VAT details (registration number and address). Those that do not sign a self-billing agreement must issue their own invoices to the customer.
When you operate self-billing you should review your self-billing agreements at least once a year. This involves checking with the supplier that their billing details are still correct, and whether their business is VAT registered or not. In the recent recession many businesses have deregistered for VAT but have carried on trading.
It is important to get the supplier's VAT details right, If you issue a self-billing invoice on behalf of a supplier, that includes VAT, when the supplier is not VAT registered, your business will over-claim VAT. This will result in penalties and interest for your business.
Your annual review of self-billing agreements does not have to be conducted all at the same time; the agreements can be reviewed on a rolling basis.
If you are operating self-billing you must comply with the conditions set out in the VAT Notice 700/62: Self Billing. These conditions have recently changed, so make sure you download the latest version of the VAT notice from the HMRC website. In particular there is a new legal requirement to mark all self-billed invoices as 'SELF BILLING'.
The key requirement of self-billing is that the suppliers must actively agree to self-billing, and provide the customer with their VAT details (registration number and address). Those that do not sign a self-billing agreement must issue their own invoices to the customer.
When you operate self-billing you should review your self-billing agreements at least once a year. This involves checking with the supplier that their billing details are still correct, and whether their business is VAT registered or not. In the recent recession many businesses have deregistered for VAT but have carried on trading.
It is important to get the supplier's VAT details right, If you issue a self-billing invoice on behalf of a supplier, that includes VAT, when the supplier is not VAT registered, your business will over-claim VAT. This will result in penalties and interest for your business.
Your annual review of self-billing agreements does not have to be conducted all at the same time; the agreements can be reviewed on a rolling basis.
My Tax Return Catch-up
The Taxman has launched a campaign to persuade tardy taxpayers to submit their over-due tax returns for 2011/12 or earlier years. If you have a personal tax return form (or notice to complete a tax return) sitting in a drawer, and have been putting off the tedious task of completing it, now is the time to act.
The Taxman's campaign is called: My tax return catch-up. It was launched in July and will run to 15 October 2013. It is not open to those who operate outside the tax system in the so-called 'black economy', and have never received a tax return form or notice to submit a tax return.
All the outstanding tax returns must be submitted by 15 October 2013, which is also the due date for paying any tax due. If you can't pay all your outstanding tax by that date, you can ask for a time to pay agreement to spread the tax payment over several months.
The incentives for joining the tax return catch-up campaign include lower penalties for late submission of returns and late payment of tax. Just how much lower those penalties will be is not specified, the actual discount will depend on your circumstances.
If you, or a friend or relative, want to take part in the tax return campaign, that taxpayer first has to tell HMRC they want to join. This can be done online, by phone or post and we can do this on your behalf. We can also help with completing the outstanding tax returns, calculating the tax due, and negotiating for time to pay outstanding tax with the tax office. Remember submitting an overdue tax return can sometimes result in a tax repayment!
The Taxman's campaign is called: My tax return catch-up. It was launched in July and will run to 15 October 2013. It is not open to those who operate outside the tax system in the so-called 'black economy', and have never received a tax return form or notice to submit a tax return.
All the outstanding tax returns must be submitted by 15 October 2013, which is also the due date for paying any tax due. If you can't pay all your outstanding tax by that date, you can ask for a time to pay agreement to spread the tax payment over several months.
The incentives for joining the tax return catch-up campaign include lower penalties for late submission of returns and late payment of tax. Just how much lower those penalties will be is not specified, the actual discount will depend on your circumstances.
If you, or a friend or relative, want to take part in the tax return campaign, that taxpayer first has to tell HMRC they want to join. This can be done online, by phone or post and we can do this on your behalf. We can also help with completing the outstanding tax returns, calculating the tax due, and negotiating for time to pay outstanding tax with the tax office. Remember submitting an overdue tax return can sometimes result in a tax repayment!
Monday 1 July 2013
RTI Relaxation Extended
The temporary relaxation of the RTI reporting requirements for small employers has been extended to 5 April 2014. It was due to apply only until 5 October 2013.
Under RTI you are supposed to send a full payment submission (FPS) report to HMRC every time you pay employees, on or before the date of payment. This could mean sending a FPS every week, or even every day if you pay some casuals daily.
The relaxation applies to employers with fewer than 50 employees who pay staff weekly, or more frequently, but who run their payroll once a month. These employers can submit their full payment submission (FPS) at the time of the payroll run. However, the FPS must reach HMRC by the end of the tax month (5th).
The Taxman's own figures show that one in six payments under RTI has been reported using the current relaxation. In spite of this strong evidence that the reporting relaxation is needed, HMRC has insisted that all employers will be required to make RTI reports on or before each payment day from 6 April 2014.
If you have still not sent any reports under RTI, you will shortly receive a letter from HMRC and possibly an estimated tax demand. Ask us for advice before paying any tax demanded!
Under RTI you are supposed to send a full payment submission (FPS) report to HMRC every time you pay employees, on or before the date of payment. This could mean sending a FPS every week, or even every day if you pay some casuals daily.
The relaxation applies to employers with fewer than 50 employees who pay staff weekly, or more frequently, but who run their payroll once a month. These employers can submit their full payment submission (FPS) at the time of the payroll run. However, the FPS must reach HMRC by the end of the tax month (5th).
The Taxman's own figures show that one in six payments under RTI has been reported using the current relaxation. In spite of this strong evidence that the reporting relaxation is needed, HMRC has insisted that all employers will be required to make RTI reports on or before each payment day from 6 April 2014.
If you have still not sent any reports under RTI, you will shortly receive a letter from HMRC and possibly an estimated tax demand. Ask us for advice before paying any tax demanded!
Research and Development Claims
Did you know there is a tax relief for companies which invent stuff? The process of inventing and solving the associated problems is called research and development (R&D). Companies can more than double the tax deduction given for the costs of R&D.
The new 'stuff' could be a product, a material or a process which has been changed or improved. For example if you find a way of speeding up a production line, or changing the process to cope with a new type of material, the work to achieve that aim is R&D which should qualify for the tax relief.
Many innovative ideas don't actually work. That doesn't matter. The costs expended when working on your new idea are tax allowable as R&D, if you can show you were pushing the boundaries of knowledge or capability in the fields of science or technology.
Working on some types of computer programming can count as R&D, particularly where you are making previously unrelated computer systems work together. The key is that no-one else has done what you are trying to, or if they have achieved it, they have kept their discovery to themselves.
Talk to us about your innovative work. Even small costs are worth claiming as there is now no minimum claim for each year.
The new 'stuff' could be a product, a material or a process which has been changed or improved. For example if you find a way of speeding up a production line, or changing the process to cope with a new type of material, the work to achieve that aim is R&D which should qualify for the tax relief.
Many innovative ideas don't actually work. That doesn't matter. The costs expended when working on your new idea are tax allowable as R&D, if you can show you were pushing the boundaries of knowledge or capability in the fields of science or technology.
Working on some types of computer programming can count as R&D, particularly where you are making previously unrelated computer systems work together. The key is that no-one else has done what you are trying to, or if they have achieved it, they have kept their discovery to themselves.
Talk to us about your innovative work. Even small costs are worth claiming as there is now no minimum claim for each year.
Expenses and Benefits Reporting
The deadline for submitting the annual returns of expenses and benefits (forms P11D and P9D) to HMRC is 6 July 2013.
The form P11D (P9D for those paid less than £8,500), is used to report the provision of benefits such as company cars or health cover to your employees, and to you where you are a director of your own company. Other benefits which may have to be reported include loans from the company to the employee/director, or the loan of assets such as a motorbike, boat or accommodation.
In theory all expenses paid to employees also need to be reported on the forms P11D. To avoid being taxed on those expense payments as income, the employee (or you on their behalf) has to make a claim for the amount paid to be treated as a valid tax deduction using a form P28 or P810, or by letter. This paper-chase can be avoided by applying for a dispensation from HMRC. We can help you with that.
Even if a dispensation is in place, any benefits provided such as; cars, fuel or health cover must be reported on the form P11D. Also class 1A NI must be paid by the employer at the rate of 13.8% on the value of the benefits provided, and reported on form P11D(b).
All of these forms can now be submitted online using an online service on the HMRC website. If you previously used the HMRC software: PAYE Basic Tools to submit forms P11D you now need to use this new online method, as PAYE Basic Tools does not include the P11D forms for 2012/13 or later years.
If you want to submit paper forms P11D and P9D you need to send them to:
HMRC (NIC&EO) Room BP2101
Lindisfarne House
Benton Park View
Longbenton
Newcastle upon Tyne
NE98 1ZZ
If you need and help or advice please contact us.
The form P11D (P9D for those paid less than £8,500), is used to report the provision of benefits such as company cars or health cover to your employees, and to you where you are a director of your own company. Other benefits which may have to be reported include loans from the company to the employee/director, or the loan of assets such as a motorbike, boat or accommodation.
In theory all expenses paid to employees also need to be reported on the forms P11D. To avoid being taxed on those expense payments as income, the employee (or you on their behalf) has to make a claim for the amount paid to be treated as a valid tax deduction using a form P28 or P810, or by letter. This paper-chase can be avoided by applying for a dispensation from HMRC. We can help you with that.
Even if a dispensation is in place, any benefits provided such as; cars, fuel or health cover must be reported on the form P11D. Also class 1A NI must be paid by the employer at the rate of 13.8% on the value of the benefits provided, and reported on form P11D(b).
All of these forms can now be submitted online using an online service on the HMRC website. If you previously used the HMRC software: PAYE Basic Tools to submit forms P11D you now need to use this new online method, as PAYE Basic Tools does not include the P11D forms for 2012/13 or later years.
If you want to submit paper forms P11D and P9D you need to send them to:
HMRC (NIC&EO) Room BP2101
Lindisfarne House
Benton Park View
Longbenton
Newcastle upon Tyne
NE98 1ZZ
If you need and help or advice please contact us.
Friday 31 May 2013
Inheritance Tax Loan Change
A change in the way loans are treated for inheritance tax (IHT) purposes could increase the taxable value of your estate on death, and the amount of IHT payable. This change will affect IHT calculated on deaths occurring after the Finance Act 2013 is passed, (expected mid-July 2013) but applies to loans which are already in place.
At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT of the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire.
Say in the past you increased the loan on your home to invest in your business, and that loan is still outstanding on your death. To calculate the IHT due that business part of the loan must be deducted from the value of your business and not from the value of your home. This reduces the value of your estate exempt from IHT under business property relief, and increases the taxable value of the remaining estate.
Also if the loan owing at death is not actually repaid by the estate to the creditor after death, that loan can't be deducted from the estate at all, unless there is some commercial reason for not repaying the loan.
Remember IHT is payable at 40% on the taxable value of your estate that exceeds £325,000. A lower rate may be payable if you leave at least 10% of your net estate to charity. There are other ways of mitigating IHT, but we need to discuss you individual circumstances to formulate a plan.
At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT of the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire.
Say in the past you increased the loan on your home to invest in your business, and that loan is still outstanding on your death. To calculate the IHT due that business part of the loan must be deducted from the value of your business and not from the value of your home. This reduces the value of your estate exempt from IHT under business property relief, and increases the taxable value of the remaining estate.
Also if the loan owing at death is not actually repaid by the estate to the creditor after death, that loan can't be deducted from the estate at all, unless there is some commercial reason for not repaying the loan.
Remember IHT is payable at 40% on the taxable value of your estate that exceeds £325,000. A lower rate may be payable if you leave at least 10% of your net estate to charity. There are other ways of mitigating IHT, but we need to discuss you individual circumstances to formulate a plan.
Letting Business Tax Reliefs
The tax treatment of businesses which involve the letting of property is not consistent across all taxes and tax reliefs. It's not logical, but just because the letting business qualifies for one tax relief it will not necessarily qualify for an apparently similar tax relief.
For example if you have a property letting enterprise which you wish to transfer into a company in return for shares in the company, a capital gain will arise in your hands when you transfer the properties to the company. This gain can be rolled into the value of shares of the company if the property enterprise is deemed to be a 'business'. This relief is known as incorporation relief, but it will only apply if the business owner is more than just a passive property investor. The courts have decided that the business must have some substance in terms of turnover, be conducted on sound business principles with a view to a profit, and be activity pursued with reasonable continuity.
The holding of let properties is considered to be a 'business' for the inheritance tax, but it is excluded from the IHT relief called business property relief (BPR), as letting is considered to be mainly the holding of investments (i.e. the let properties). In order to qualify for BPR the business owner has to offer the tenants additional services which would generally only be available in a holiday letting business, bed and breakfast, or hotel business. Even then the owners of self-catering holiday cottages have to jump through some hoops to get the letting business to qualify for BPR.
Losses made in a property letting business cannot be set against profits or income from other sources, such as other trading businesses, interest or dividends.
Check with us as to whether your property business qualifies for a particular tax relief and don't assume anything.
For example if you have a property letting enterprise which you wish to transfer into a company in return for shares in the company, a capital gain will arise in your hands when you transfer the properties to the company. This gain can be rolled into the value of shares of the company if the property enterprise is deemed to be a 'business'. This relief is known as incorporation relief, but it will only apply if the business owner is more than just a passive property investor. The courts have decided that the business must have some substance in terms of turnover, be conducted on sound business principles with a view to a profit, and be activity pursued with reasonable continuity.
The holding of let properties is considered to be a 'business' for the inheritance tax, but it is excluded from the IHT relief called business property relief (BPR), as letting is considered to be mainly the holding of investments (i.e. the let properties). In order to qualify for BPR the business owner has to offer the tenants additional services which would generally only be available in a holiday letting business, bed and breakfast, or hotel business. Even then the owners of self-catering holiday cottages have to jump through some hoops to get the letting business to qualify for BPR.
Losses made in a property letting business cannot be set against profits or income from other sources, such as other trading businesses, interest or dividends.
Check with us as to whether your property business qualifies for a particular tax relief and don't assume anything.
RTI Growing Pains
The Taxman is also causing RTI pains for employers and employees by issuing duff data.
Incorrect NI numbers
When you submit a FPS or NI number verification request (NVR), the Taxman should reply with any missing or corrected NI numbers. However, in some cases the NI numbers the Taxman has returned to employers have no suffix letter (A, B, C or D).
The Taxman says you should use the NI number he has sent to you in your payroll software, but to leave the last digit blank by typing a space using the space bar. This may not be a workable solution, because most payroll software will reject any NI number with less than nine characters. We're hoping for an HMRC update on this issue!
Sometimes a long standing NI number has been replaced, but the old NI number is quoted on official notices. This indicates a possible data corruption problem within the HMRC machine. You should exercise caution when amending any NI numbers notified by HMRC since 6 April 2013, and talk to us if in doubt.
Incorrect PAYE codes
Where you have submitted an FPS or employer alignment submission (EAS), which did not include all the employees normally on your payroll, without indicating that the EAS was a part submission, the Taxman has assumed that any missing employees have left your employment.
Subsequently when you submit a FPS including one of those missing employees, that employee is treated as a new starter, with a new employment record. Any details of benefits in the PAYE code belonging to that employee haven't been carried over to his new employment record. Thus his new PAYE code may be wrong.
The Taxman has advised employers in this position to use the old PAYE code for the employee. However, under the PAYE regulations employers are not permitted to take a view on which PAYE codes to apply and which to ignore. Many payroll software packages download the PAYE codes directly from HMRC and apply them automatically, with no human intervention.
The employer helpline will not discuss employee's tax codes with an employer, so the only way to straighten out the mess is to get the employee to contact the Taxman directly.
Incorrect NI numbers
When you submit a FPS or NI number verification request (NVR), the Taxman should reply with any missing or corrected NI numbers. However, in some cases the NI numbers the Taxman has returned to employers have no suffix letter (A, B, C or D).
The Taxman says you should use the NI number he has sent to you in your payroll software, but to leave the last digit blank by typing a space using the space bar. This may not be a workable solution, because most payroll software will reject any NI number with less than nine characters. We're hoping for an HMRC update on this issue!
Sometimes a long standing NI number has been replaced, but the old NI number is quoted on official notices. This indicates a possible data corruption problem within the HMRC machine. You should exercise caution when amending any NI numbers notified by HMRC since 6 April 2013, and talk to us if in doubt.
Incorrect PAYE codes
Where you have submitted an FPS or employer alignment submission (EAS), which did not include all the employees normally on your payroll, without indicating that the EAS was a part submission, the Taxman has assumed that any missing employees have left your employment.
Subsequently when you submit a FPS including one of those missing employees, that employee is treated as a new starter, with a new employment record. Any details of benefits in the PAYE code belonging to that employee haven't been carried over to his new employment record. Thus his new PAYE code may be wrong.
The Taxman has advised employers in this position to use the old PAYE code for the employee. However, under the PAYE regulations employers are not permitted to take a view on which PAYE codes to apply and which to ignore. Many payroll software packages download the PAYE codes directly from HMRC and apply them automatically, with no human intervention.
The employer helpline will not discuss employee's tax codes with an employer, so the only way to straighten out the mess is to get the employee to contact the Taxman directly.
No RTI Reports Made?
Employers were told that they had to use real time information (RTI) to report PAYE deductions from the first pay day on or after 6 April 2013. But what if there has been no pay day since 6 April, because no one has been paid? In that case RTI does apply from 6 April 2013 onwards. You need to make an RTI report for every tax month, unless your PAYE scheme has been registered as an annual scheme. Annual PAYE schemes can make just one RTI report for the month in which the salary is paid.
If you are within RTI you can't use the link on the HMRC website to report that no PAYE is due. You have to submit an employer payment summary (EPS) after the end of the tax month (5th) and before the payment date of the 19th.
Even if you pay your PAYE over to HMRC on a quarterly basis, you still have to submit an EPS or a full payment submission (FPS) for every tax month.
If in earlier tax years you had a history of paying PAYE to HMRC for every month or quarter, and you haven't submitted any RTI reports so far, HMRC may well send you an estimated PAYE demand called a specified charge. The only way to get out of paying a specified charge is to submit an EPS or FPS under RTI for the missing periods in 2013/14.
If you are within RTI you can't use the link on the HMRC website to report that no PAYE is due. You have to submit an employer payment summary (EPS) after the end of the tax month (5th) and before the payment date of the 19th.
Even if you pay your PAYE over to HMRC on a quarterly basis, you still have to submit an EPS or a full payment submission (FPS) for every tax month.
If in earlier tax years you had a history of paying PAYE to HMRC for every month or quarter, and you haven't submitted any RTI reports so far, HMRC may well send you an estimated PAYE demand called a specified charge. The only way to get out of paying a specified charge is to submit an EPS or FPS under RTI for the missing periods in 2013/14.
Wednesday 1 May 2013
Don't Rely on HMRC VAT Advice
If you are uncertain about whether you can make a claim for VAT you have incurred, or how to treat a certain transaction for VAT purposes, you could try searching the HMRC website for a solution to your query. Alternatively you may ring the HMRC VAT helpline but the adviser is likely to send you a copy of a VAT leaflet which is available on the HMRC website. This may, or may not, answer your query.
If you do get a straight answer out of the VAT helpline, be careful to record what you said, and exactly what the HMRC adviser to told you. This is important as if the advice from the helpline is later found to be incorrect you need to be able to prove you presented the full facts for the reply which you relied on. Even then a subsequent VAT inspection may determine you were wrong all along and charge you penalties and interest on any under-paid or over-claimed VAT.
The courts have recently decided that taxpayers cannot legitimately expect the advice given verbally by HMRC to be 100% correct, and this can include advice given in a VAT leaflet or online on the HMRC website. The only way you can count on advice given by HMRC is to apply for a written ruling known as a 'clearance'. To get a clearance you have to set out the full facts in writing, in a clear and unequivocal fashion.
We can help you with this clearance application, or we may be able to answer your VAT question ourselves.
If you do get a straight answer out of the VAT helpline, be careful to record what you said, and exactly what the HMRC adviser to told you. This is important as if the advice from the helpline is later found to be incorrect you need to be able to prove you presented the full facts for the reply which you relied on. Even then a subsequent VAT inspection may determine you were wrong all along and charge you penalties and interest on any under-paid or over-claimed VAT.
The courts have recently decided that taxpayers cannot legitimately expect the advice given verbally by HMRC to be 100% correct, and this can include advice given in a VAT leaflet or online on the HMRC website. The only way you can count on advice given by HMRC is to apply for a written ruling known as a 'clearance'. To get a clearance you have to set out the full facts in writing, in a clear and unequivocal fashion.
We can help you with this clearance application, or we may be able to answer your VAT question ourselves.
Beware Pension Liberation
Have you been approached by firms that promise you instant cash from your pension fund? This known as pension liberation, and involves taking cash from your pension fund before you reach the retirement age set by your pension scheme.
Unscrupulous firms persuade individuals to apply to move their pension funds out of their current scheme, in order to permit an early release of funds, either by a direct transfer out or by a loan. In some case the individual is told there are no tax implications - but there are.
If an individual gains access to their pension savings before their scheme-set retirement age, that individual will be liable to a 55% tax charge on the extracted funds. This tax rate applies to all taxpayers whatever their marginal rate of income tax. It also applies if the monies are repaid back to the pension scheme. It is the individual who must pay this tax charge, not the new or old pension scheme, or the firm that organised the switch of funds.
Pension funds can be safely transferred from one scheme to another, but if you want to do this you should get advice from a qualified financial adviser who is registered on the financial services register.
Unscrupulous firms persuade individuals to apply to move their pension funds out of their current scheme, in order to permit an early release of funds, either by a direct transfer out or by a loan. In some case the individual is told there are no tax implications - but there are.
If an individual gains access to their pension savings before their scheme-set retirement age, that individual will be liable to a 55% tax charge on the extracted funds. This tax rate applies to all taxpayers whatever their marginal rate of income tax. It also applies if the monies are repaid back to the pension scheme. It is the individual who must pay this tax charge, not the new or old pension scheme, or the firm that organised the switch of funds.
Pension funds can be safely transferred from one scheme to another, but if you want to do this you should get advice from a qualified financial adviser who is registered on the financial services register.
Sleeping Partners and NI
In the past sleeping partners and inactive partners didn't have to pay NI contributions on their partnership profits. However, HMRC changed its view on this in April 2013 and it now considers that all partners are liable to pay NICs in respect of their taxable profits, whatever their level of activity within the business. The implications for inactive and sleeping partners are:
- if not already registered as self-employed, the person must register with HMRC and arrange to pay class 2 NICs from 6 April 2013;
- exemption from paying class 2 NICs can be claimed if the taxable profits are low, or the individual has another employment; and
- class 4 NICs will be due on their profits from 2013/14 onwards and will collected through the normal self-assessment for 2013/14.
- if not already registered as self-employed, the person must register with HMRC and arrange to pay class 2 NICs from 6 April 2013;
- exemption from paying class 2 NICs can be claimed if the taxable profits are low, or the individual has another employment; and
- class 4 NICs will be due on their profits from 2013/14 onwards and will collected through the normal self-assessment for 2013/14.
Monday 29 April 2013
RTI - Frequently Asked Questions - Round 1
With RTI now being 3 weeks into operation we, in this blog, present a collection of the most common questions we have been asked about these new regulations and the new rules for processing payroll:
Q1 Why do I have to run my payroll at least 3 working days before my payslip/ payment date?
A1 Because the submissions to HMRC must be done on or before the date of payment, by processing your payroll at least 3 working days before the payslip/payment you ensure that there is sufficient time for your submission to be checked and sent by Defacto to HMRC.Q2 What if I need to pay myself while I am on holiday?
A2 If you know that you will be on holiday at the time you normally run your payroll you can run your payroll in advance and then diarise the payments to be made via online banking.Q3 Does my payroll need to be run EXACTLY 3 working days in advance?
A3 No. It must be run AT LEAST 3 working days in advance but can be run further ahead of time if you choose.Q4 Can I leave my payslip date as the day I process the payroll?
A4 No. You MUST change this date to the day the payment is actually made which is the date reported to HMRC in the RTI submission.Q5 What happens if I don't run it 3 working days in advance?
A5 We cannot guarantee that the submission will reach HMRC before the payment is made to you employees. If it is late you will receive a penalty.Q6 What happens if the RTI submission is late?
A6 You will receive a late filing penalty for each late submission in the year.Q7 I currently pay PAYE/NIC quarterly. Do I now have to pay it monthly?
A7 No you can continue to pay it quarterly. If you use Defacto's online system or Defacto process payroll for you, we will continue to notify you of the PAYE/NIC payments due by e-mail.Q8 Can I run payroll less frequently e.g. quarterly instead of monthly?
A8 Contact us if you wish to make any changes to your payroll frequency
Friday 29 March 2013
Cash Basis for Small Businesses
The cash basis was also mentioned in the 2013 Budget announcements, but now we have some more details.
In an attempt to simplify accounting and tax reporting for the smallest businesses, from 6 April 2013 small businesses can choose to calculate profits/losses on the basis of the cash received and expenses paid out. This is known as the cash basis, and it ignores debts owed by the business and amounts owing to the business, until those amounts are paid. The normal accounting method is known as the accruals basis.
The cash basis will only be available to businesses which operate as sole-traders or partnerships, and whose turnover is under the VAT registration threshold (£79,000 from 1 April 2013). Some other businesses will be barred from using the cash basis and these include:
- All companies and LLPs;
- Farmers using the herd basis;
- Any business using profit averaging over several tax years;
- Businesses in a mineral extraction trade; and
- Lloyd's underwriters.
Once a business is using the cash basis it can carry on doing so until its annual turnover is twice the VAT registration threshold (£158,000 from April 2013).
Although apparently simple, the cash basis will have some disadvantages:
- The deduction for loan interest paid will be limited to £500 per year; and
- Losses can only be carried forward to set against future profits, whereas under the accruals basis losses can be carried back in the first four years of the trade and set off against the trader's other income.
In addition any unincorporated business, whether or not they are using the cash basis, will be able to use flat rate expenses to replace the calculation of actual costs incurred in these categories of expenses from 6 April 2013:
- Motoring costs (mileage at 45p per mile);
- Use of home for business purposes (based on number of hours used per month); and
- Private use of part of commercial premises, such as a public house (based on number of occupants who are business owners or their immediate family)
As these flat rates are completely optional, and will vary in effect in each business, we need to discuss whether these flat rates will be suitable for your business.
In an attempt to simplify accounting and tax reporting for the smallest businesses, from 6 April 2013 small businesses can choose to calculate profits/losses on the basis of the cash received and expenses paid out. This is known as the cash basis, and it ignores debts owed by the business and amounts owing to the business, until those amounts are paid. The normal accounting method is known as the accruals basis.
The cash basis will only be available to businesses which operate as sole-traders or partnerships, and whose turnover is under the VAT registration threshold (£79,000 from 1 April 2013). Some other businesses will be barred from using the cash basis and these include:
- All companies and LLPs;
- Farmers using the herd basis;
- Any business using profit averaging over several tax years;
- Businesses in a mineral extraction trade; and
- Lloyd's underwriters.
Once a business is using the cash basis it can carry on doing so until its annual turnover is twice the VAT registration threshold (£158,000 from April 2013).
Although apparently simple, the cash basis will have some disadvantages:
- The deduction for loan interest paid will be limited to £500 per year; and
- Losses can only be carried forward to set against future profits, whereas under the accruals basis losses can be carried back in the first four years of the trade and set off against the trader's other income.
In addition any unincorporated business, whether or not they are using the cash basis, will be able to use flat rate expenses to replace the calculation of actual costs incurred in these categories of expenses from 6 April 2013:
- Motoring costs (mileage at 45p per mile);
- Use of home for business purposes (based on number of hours used per month); and
- Private use of part of commercial premises, such as a public house (based on number of occupants who are business owners or their immediate family)
As these flat rates are completely optional, and will vary in effect in each business, we need to discuss whether these flat rates will be suitable for your business.
SEIS Investment Extension
The Budget also included an announcement of the extension of capital gains tax (CGT) relief, where the gain is reinvested in new shares issued under the Seed Enterprise Investment Scheme (SEIS). This scheme started on 6 April 2012 and is due to run to 5 April 2017, but the CGT relief was due to apply only for investments made in 2012/13.
The legislation makes it clear that the CGT relief is to be extended for one year, for investments made in 2013/14.
Also the CGT relief for investments made in 2013/14 will be given at 50%, while investments made in 2012/13 are given CGT relief at 100% of the gain reinvested.
The legislation makes it clear that the CGT relief is to be extended for one year, for investments made in 2013/14.
Also the CGT relief for investments made in 2013/14 will be given at 50%, while investments made in 2012/13 are given CGT relief at 100% of the gain reinvested.
Loans to Participators Trap
The 2013 Budget announcements included a brief outline of how the law will be changed to tax loans taken out of owner-managed companies by the shareholders/directors (known as participators). We have now seen the draft legislation so we can give you further details of how the tax law will apply for loans or repayments made on and after 20 March 2013.
Where a participator borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.
However, where the loan is outstanding for longer, the company must pay 25% of the loan balance as corporation tax to HMRC. This corporation tax charge is then repaid when the loan is fully repaid.
Four changes may affect when or if this corporation tax is payable:
1. Thirty day rule
Where a loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the corporation tax charge.
2. Intention or arrangements in place
Where the loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.
3. Using a third party
Loans channelled from the company through LLPs or partnerships in which the participator is a member are treated as if the loan was made directly to the participator. This also applies if the loan is advanced to a trust of which a participator in the company is a beneficiary, or potential beneficiary.
4. Conferring a benefit
This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a participator is used to transfer value from the company to the participator. It is unclear how this will work in practice, but any partnerships involving a company and one of more individuals will have to be reviewed.
Where a participator borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.
However, where the loan is outstanding for longer, the company must pay 25% of the loan balance as corporation tax to HMRC. This corporation tax charge is then repaid when the loan is fully repaid.
Four changes may affect when or if this corporation tax is payable:
1. Thirty day rule
Where a loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the corporation tax charge.
2. Intention or arrangements in place
Where the loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.
3. Using a third party
Loans channelled from the company through LLPs or partnerships in which the participator is a member are treated as if the loan was made directly to the participator. This also applies if the loan is advanced to a trust of which a participator in the company is a beneficiary, or potential beneficiary.
4. Conferring a benefit
This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a participator is used to transfer value from the company to the participator. It is unclear how this will work in practice, but any partnerships involving a company and one of more individuals will have to be reviewed.
RTI Relaxation
The real time information (RTI) system for submitting PAYE information to HMRC must be used by small employers for all pay days on and after 6 April 2013. However, at the last minute the Government has agreed to a temporary relaxation of one of the RTI reporting requirements for employers with fewer than 50 employees.
If you fall into that category, and you pay some employees more frequently than once a month, you can send your RTI report known as full payment submission (FPS), to HMRC when you run your monthly payroll. You would normally have to send in a FPS every time you pay an employee.
However, there are conditions:
- The payroll run must be made before the end of the tax month, i.e. by 5 May for employees paid in April; and
- The relaxation also only applies for RTI reports submitted up until 5 October 2013.
Remember, this is not a postponement of RTI, it is a small and temporary change to one reporting rule. You still need to use new or updated payroll software to report payroll data under RTI for all pay dates on or after 6 April 2013.
If you fall into that category, and you pay some employees more frequently than once a month, you can send your RTI report known as full payment submission (FPS), to HMRC when you run your monthly payroll. You would normally have to send in a FPS every time you pay an employee.
However, there are conditions:
- The payroll run must be made before the end of the tax month, i.e. by 5 May for employees paid in April; and
- The relaxation also only applies for RTI reports submitted up until 5 October 2013.
Remember, this is not a postponement of RTI, it is a small and temporary change to one reporting rule. You still need to use new or updated payroll software to report payroll data under RTI for all pay dates on or after 6 April 2013.
Thursday 21 March 2013
VAT
Rates
The VAT rates remain unchanged at...
Lower rate: 0%
Reduced rate: 5%
Standard rate: 20%
The registration and deregistration limits from 1 April 2013 are...
Registration turnover: £79,000 (1 April 2012 - £77,000)
Deregistration turnover: £77,000 (1 April 2012 - £75,000)
The VAT rates remain unchanged at...
Lower rate: 0%
Reduced rate: 5%
Standard rate: 20%
The registration and deregistration limits from 1 April 2013 are...
Registration turnover: £79,000 (1 April 2012 - £77,000)
Deregistration turnover: £77,000 (1 April 2012 - £75,000)
Capital Taxes
Capital Gains Tax
The thresholds for capital gains tax (CGT) have increased slightly for 2013/14:
Annual exemption: £10,900 (2012/13: £10,600)
Annual exemption for most trustees and personal representatives: £5,450 (2012/13: £5,300)
Rate for gains within the basic rate band: 18% (no change)
Rate for gains above the basic rate band: 28% (no change)
Rate for gains subject to entrepreneurs' relief: 10% (no change)
Lifetime limit for gains subject to entrepreneurs' relief: £10 million (no change)
Selling to Employees
When a business owner sells his business, they can qualify for entrepreneurs' relief if they sell the whole business, or a significant part which can be operated as a separate business. This relief reduces the tax payable on the sale to 10%.
The Government is proposing a new capital gains relief to encourage business owners to sell a controlling interest in a business to the employees who have worked in the business. This new tax relief will not apply until April 2014.
Seed Enterprise Investment Scheme (SEIS)
The SEIS was introduced for investments made in small new trading companies from 6 April 2012, with a limit on investments under the scheme of £150,000 per company. Each investor can subscribe for up to £100,000 of SEIS shares per tax year and get 50% income tax relief.
If that investment is funded using a capital gain made in 2012/13, 100% of the reinvested gain is exempt from CGT. The CGT exemption was to be limited to investments made only in 2012/13, but it has been extended for two further years at the rate of 50% of the gain, not 100% of the gain. This is still a significant tax saving.
The original SEIS rules contained a serious trap for investors. A company acquired from a formation agent could not qualify; it had to be incorporated with individuals rather than another company as the original subscribers. This administrative niggle has been removed for shares issued from 6 April 2013, but not for companies formed earlier.
Inheritance Tax
The inheritance tax (IHT) nil rate band will remain frozen at £325,000 until 2017/18. This is the amount of a deceased person's estate that is free of inheritance tax.
The estate value is arrived at after deducting any debts owed by the deceased, and the value of any assets that qualify as business property, agricultural property or woodlands. A number of tax schemes exist to make use of these deductions for debts to reduce the value of the deceased's estate on death, and hence reduce the IHT payable. To block such tax avoidance schemes the deduction of debts from the value of an estate will be prevented where:
- the debt is not repaid to the creditor; or
- the loan was used to acquire property which is exempt from IHT.
These changes will apply from the date Finance Act 2013 is passed.
The thresholds for capital gains tax (CGT) have increased slightly for 2013/14:
Annual exemption: £10,900 (2012/13: £10,600)
Annual exemption for most trustees and personal representatives: £5,450 (2012/13: £5,300)
Rate for gains within the basic rate band: 18% (no change)
Rate for gains above the basic rate band: 28% (no change)
Rate for gains subject to entrepreneurs' relief: 10% (no change)
Lifetime limit for gains subject to entrepreneurs' relief: £10 million (no change)
Selling to Employees
When a business owner sells his business, they can qualify for entrepreneurs' relief if they sell the whole business, or a significant part which can be operated as a separate business. This relief reduces the tax payable on the sale to 10%.
The Government is proposing a new capital gains relief to encourage business owners to sell a controlling interest in a business to the employees who have worked in the business. This new tax relief will not apply until April 2014.
Seed Enterprise Investment Scheme (SEIS)
The SEIS was introduced for investments made in small new trading companies from 6 April 2012, with a limit on investments under the scheme of £150,000 per company. Each investor can subscribe for up to £100,000 of SEIS shares per tax year and get 50% income tax relief.
If that investment is funded using a capital gain made in 2012/13, 100% of the reinvested gain is exempt from CGT. The CGT exemption was to be limited to investments made only in 2012/13, but it has been extended for two further years at the rate of 50% of the gain, not 100% of the gain. This is still a significant tax saving.
The original SEIS rules contained a serious trap for investors. A company acquired from a formation agent could not qualify; it had to be incorporated with individuals rather than another company as the original subscribers. This administrative niggle has been removed for shares issued from 6 April 2013, but not for companies formed earlier.
Inheritance Tax
The inheritance tax (IHT) nil rate band will remain frozen at £325,000 until 2017/18. This is the amount of a deceased person's estate that is free of inheritance tax.
The estate value is arrived at after deducting any debts owed by the deceased, and the value of any assets that qualify as business property, agricultural property or woodlands. A number of tax schemes exist to make use of these deductions for debts to reduce the value of the deceased's estate on death, and hence reduce the IHT payable. To block such tax avoidance schemes the deduction of debts from the value of an estate will be prevented where:
- the debt is not repaid to the creditor; or
- the loan was used to acquire property which is exempt from IHT.
These changes will apply from the date Finance Act 2013 is passed.
Individuals
Personal Allowances
The standard personal allowance will rise to £10,000 from 6 April 2014, a year earlier than expected. The age related allowances are frozen until 2015. The allowances as they have been announced for 2013/14 are:
Personal allowance (born after 5 April 1948): £9,440
Personal allowance (born between 6 April 1938 and 5 April 1948): £10,500
Personal allowance (born before 6 April 1938): £10,660
Minimum married couples allowance*: £3,040
Maximum married couples allowance*: £7,915
Blind person's allowance: £2,160
Income limit for allowances for age related allowances: £26,100
Income limit for standard allowances: £100,000
* given where one partner was born before 6/4/1935, as 10% reduction in tax due.
Income Tax Bands and Rates
The income tax bands for 2013/14 are:
Savings rate* (10%) - 0 to £2,790
Basic rate (20%) - 0 to £32,010
Higher rate (40%) - £32,011 to £150,000
Additional rate (45%) - over £150,000
*The savings rate of 10% only applies if the individual's net non-savings income does not exceed the savings rate limit.
The additional rate was reduced from 50% in 2012/13.
The higher rate and basic rate thresholds can be increased by paying personal pension contributions or gift aid donations.
Pension Allowances
The annual allowance and lifetime allowance will both reduce in 2014/15 as shown below. The annual allowance can be expanded by unused amounts of allowance brought forward from the previous three tax years.
The lifetime allowance limits the amount of tax advantaged funds a person can draw on at retirement. If the pension fund is greater than the lifetime allowance when the scheme member starts to take his benefits, the excess is taxed at 55%. Individuals with funds that already exceed the lifetime allowance can apply for fixed protection of the existing value of their fund.
Annual allowance: 2012/13: £50,000, 2013/14: £50,000, 2014/15: £40,000
Lifetime Allowance: 2012/13: £1,500,000, 2013/14: £1,500,000, 2014/15: £1,250,000
Pension Drawdown
Some individuals can choose to drawdown amounts from their pension fund instead of buying an annuity with the funds on retirement. The maximum amount of the permitted drawdown is increased from 100% of the equivalent annuity value of the fund, to 120% of that same annuity value. This change comes into effect from 26 March 2013.
The standard personal allowance will rise to £10,000 from 6 April 2014, a year earlier than expected. The age related allowances are frozen until 2015. The allowances as they have been announced for 2013/14 are:
Personal allowance (born after 5 April 1948): £9,440
Personal allowance (born between 6 April 1938 and 5 April 1948): £10,500
Personal allowance (born before 6 April 1938): £10,660
Minimum married couples allowance*: £3,040
Maximum married couples allowance*: £7,915
Blind person's allowance: £2,160
Income limit for allowances for age related allowances: £26,100
Income limit for standard allowances: £100,000
* given where one partner was born before 6/4/1935, as 10% reduction in tax due.
Income Tax Bands and Rates
The income tax bands for 2013/14 are:
Savings rate* (10%) - 0 to £2,790
Basic rate (20%) - 0 to £32,010
Higher rate (40%) - £32,011 to £150,000
Additional rate (45%) - over £150,000
*The savings rate of 10% only applies if the individual's net non-savings income does not exceed the savings rate limit.
The additional rate was reduced from 50% in 2012/13.
The higher rate and basic rate thresholds can be increased by paying personal pension contributions or gift aid donations.
Pension Allowances
The annual allowance and lifetime allowance will both reduce in 2014/15 as shown below. The annual allowance can be expanded by unused amounts of allowance brought forward from the previous three tax years.
The lifetime allowance limits the amount of tax advantaged funds a person can draw on at retirement. If the pension fund is greater than the lifetime allowance when the scheme member starts to take his benefits, the excess is taxed at 55%. Individuals with funds that already exceed the lifetime allowance can apply for fixed protection of the existing value of their fund.
Annual allowance: 2012/13: £50,000, 2013/14: £50,000, 2014/15: £40,000
Lifetime Allowance: 2012/13: £1,500,000, 2013/14: £1,500,000, 2014/15: £1,250,000
Pension Drawdown
Some individuals can choose to drawdown amounts from their pension fund instead of buying an annuity with the funds on retirement. The maximum amount of the permitted drawdown is increased from 100% of the equivalent annuity value of the fund, to 120% of that same annuity value. This change comes into effect from 26 March 2013.
Business Taxes
Cash Basis
Unincorporated businesses will be permitted to calculated profits and losses for tax purposes using the cash accounting basis, rather than the standard accruals accounting basis. The cash basis ignores all creditors, debtors, prepayments and accruals, and includes flat rate amounts for certain expenses such as a motoring or use of home for business purposes.
This cash basis will be compulsory for anyone who claims Universal Credit, but it can only be used by businesses whose turnover, when they start to use the cash basis, is under the VAT registration threshold. The business will be required to continue using the cash basis until it is no longer suitable for them, perhaps when the turnover exceeds a certain threshold. This will prevent businesses from opting in and out of the cash basis to gain a tax advantage. The cash basis can be applied from 6 April 2013.
Partnerships
The taxation of partnerships can be very complex, so the Government has asked the Office for Tax Simplification to make suggestions to simplify tax for partners and partnerships.
Alongside this review the Government is considering changes to the self-employed status of the members of LLPs, and restrictions on the variation of profit allocations within the LLP. These changes may make the taxation of LLP members more like employees of companies for some members. Any changes to the taxation of partnerships or LLPs will not take effect until at least 2014. However, if your business operates as an LLP please talk to us about how the structure could be changed if the tax changes prove to be hostile to LLPs.
Corporation Tax Rates
The corporation tax rates for small and large companies will be aligned at 20% from April 2015. This will remove the need for the associated companies rule and the marginal rate of corporation tax will disappear.
The small companies rate is already at 20% and the main rate will be 23% for the year beginning 1 April 2013, 21% for the year beginning 1 April 2014 and then 20% for the year beginning 1 April 2015.
Loans to Participators
Where a company that is controlled by its directors or five or fewer shareholders, makes a loan to a participator (typically a shareholder/director), there are tax consequences. The company must pay 25% of the loaned amount to HMRC if the loan is not repaid within nine months of the end of company's accounting year. This rule is widely taken advantage of by company shareholder/directors who repay the loan just before the nine month deadline and immediately take out a replacement loan from the company. New tax avoidance rules will apply from 20 March 2013 such that:
- loans channelled through third parties to shareholders will be included in these rules;
- transfers of assets from the company will be treated as loans; and
- the immediate replacement of a repaid loan will not count as a repayment of the first loan.
If you have taken a loan from your own company we need to discuss whether you will be caught be these new tax avoidance rules.
Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for 2013/14:
Main pool: writing down allowance: 18%
Special rate pool: writing down allowance: 8%
Annual Investment Allowance (AIA) cap: £250,000
Expenditure within the AIA cap qualifies for 100% allowance in the year the asset is bought. The AIA cap was changed in April 2012 and January 2013, so great care is needed to calculate the available AIA for accounting periods which straddle the change. The AIA cap is due to revert to £25,000 on 1 January 2015.
Unincorporated businesses will be permitted to calculated profits and losses for tax purposes using the cash accounting basis, rather than the standard accruals accounting basis. The cash basis ignores all creditors, debtors, prepayments and accruals, and includes flat rate amounts for certain expenses such as a motoring or use of home for business purposes.
This cash basis will be compulsory for anyone who claims Universal Credit, but it can only be used by businesses whose turnover, when they start to use the cash basis, is under the VAT registration threshold. The business will be required to continue using the cash basis until it is no longer suitable for them, perhaps when the turnover exceeds a certain threshold. This will prevent businesses from opting in and out of the cash basis to gain a tax advantage. The cash basis can be applied from 6 April 2013.
Partnerships
The taxation of partnerships can be very complex, so the Government has asked the Office for Tax Simplification to make suggestions to simplify tax for partners and partnerships.
Alongside this review the Government is considering changes to the self-employed status of the members of LLPs, and restrictions on the variation of profit allocations within the LLP. These changes may make the taxation of LLP members more like employees of companies for some members. Any changes to the taxation of partnerships or LLPs will not take effect until at least 2014. However, if your business operates as an LLP please talk to us about how the structure could be changed if the tax changes prove to be hostile to LLPs.
Corporation Tax Rates
The corporation tax rates for small and large companies will be aligned at 20% from April 2015. This will remove the need for the associated companies rule and the marginal rate of corporation tax will disappear.
The small companies rate is already at 20% and the main rate will be 23% for the year beginning 1 April 2013, 21% for the year beginning 1 April 2014 and then 20% for the year beginning 1 April 2015.
Loans to Participators
Where a company that is controlled by its directors or five or fewer shareholders, makes a loan to a participator (typically a shareholder/director), there are tax consequences. The company must pay 25% of the loaned amount to HMRC if the loan is not repaid within nine months of the end of company's accounting year. This rule is widely taken advantage of by company shareholder/directors who repay the loan just before the nine month deadline and immediately take out a replacement loan from the company. New tax avoidance rules will apply from 20 March 2013 such that:
- loans channelled through third parties to shareholders will be included in these rules;
- transfers of assets from the company will be treated as loans; and
- the immediate replacement of a repaid loan will not count as a repayment of the first loan.
If you have taken a loan from your own company we need to discuss whether you will be caught be these new tax avoidance rules.
Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for 2013/14:
Main pool: writing down allowance: 18%
Special rate pool: writing down allowance: 8%
Annual Investment Allowance (AIA) cap: £250,000
Expenditure within the AIA cap qualifies for 100% allowance in the year the asset is bought. The AIA cap was changed in April 2012 and January 2013, so great care is needed to calculate the available AIA for accounting periods which straddle the change. The AIA cap is due to revert to £25,000 on 1 January 2015.
Cars, Vans & Fuel
Company Car Benefit
The taxable benefit of having the private use of a company car is based on a percentage of the original list price for the vehicle. For 2013/14 the percentage varies from 5% for vehicles with CO2 emissions up to 75g/km, 10% from 75 to 95g/km, and increases by 1% for every 5g/km of CO2 emissions, up to a maximum of 35%. This scale of percentages increases every year such that a higher amount of the list price of the same vehicle is taxed each year.
From 6 April 2015 cars with CO2 emissions in the band 0-50g/km will be taxed at 5% of list price, and those in the band 51-75g/km with be taxed at 9% of list price. Cars with CO2 emissions of 76g- 94g/km will be taxed at 13% of list price, with the percentage increasing in 1% steps for each additional 5g/km, up to a new maximum of 37%. Further increases in the percentages of list price have been published for the years 2016/17 to 2019/20.
Fuel Benefit
Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to the fuel charge multiplier set at £21,100 for 2013/14 (£20,200 for 2012/13). The maximum taxable benefit of receiving free road fuel for private use will increase from to £7,070 (2012/13) to £7,385 for 2013/14.
The taxable benefit when fuel is provided for private use in a company van will rise from £550 for 2012/13 to £564 for 2013/14. In future years the fuel benefit multiplier for cars and the van fuel benefit will increase in line with the rate of inflation as measured by the RPI.
The taxable benefit of having the private use of a company car is based on a percentage of the original list price for the vehicle. For 2013/14 the percentage varies from 5% for vehicles with CO2 emissions up to 75g/km, 10% from 75 to 95g/km, and increases by 1% for every 5g/km of CO2 emissions, up to a maximum of 35%. This scale of percentages increases every year such that a higher amount of the list price of the same vehicle is taxed each year.
From 6 April 2015 cars with CO2 emissions in the band 0-50g/km will be taxed at 5% of list price, and those in the band 51-75g/km with be taxed at 9% of list price. Cars with CO2 emissions of 76g- 94g/km will be taxed at 13% of list price, with the percentage increasing in 1% steps for each additional 5g/km, up to a new maximum of 37%. Further increases in the percentages of list price have been published for the years 2016/17 to 2019/20.
Fuel Benefit
Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to the fuel charge multiplier set at £21,100 for 2013/14 (£20,200 for 2012/13). The maximum taxable benefit of receiving free road fuel for private use will increase from to £7,070 (2012/13) to £7,385 for 2013/14.
The taxable benefit when fuel is provided for private use in a company van will rise from £550 for 2012/13 to £564 for 2013/14. In future years the fuel benefit multiplier for cars and the van fuel benefit will increase in line with the rate of inflation as measured by the RPI.
Employers
Employment Allowance
The big news for employers is a new Employment Allowance of £2,000 per year for all businesses and charities to offset against the cost of employer's class 1 NI contributions. This should provide a real reduction in the cost of employing workers by all types of businesses - not just new employees taken on by new businesses. The new employment allowance will reduce employer's NICs paid after 5 April 2014.
NI rates 2013/14
For 2013/14 the main rates and thresholds for NI contributions are:
Lower Earnings Limit (LEL) for Class 1 NICs - £109/week
Employer's class 1 above £148/week not contracted out - 13.8%
Employee's class 1 not contracted out from £149 to £797/week - 12%
Employee's additional class 1 above £797/week - 2%
Self-employed small earnings exemption - £5,725 per annum
Self-employed class 4 from £7,755 to £41,450 per annum - 9%
Self-employed class 4 additional rate above £41,450 per annum - 2%
Self-employed class 2 - £2.70 per week
Voluntary contributions class 3 - £13.55 per week
Contracting Out
Contracted out rates for NI are 10.6% for employees and 10.4% for employers, but those reduced rates only apply for members of salary-related pension schemes. All contracted out rates will cease in April 2016, when the new flat rate state pension comes into effect.
Employee Shares
Employee share schemes can be incredibly complex to set up and administer. However, the Government believes employee involvement in the companies they work for is a good thing, and employees owning shares in their employing company is the way to achieve this.
- Employee shareholder status. A new type of share scheme will permit employees to take up shares offered by their employer, in return for giving up certain employment rights such as the right to statutory redundancy pay. Normally an employee is taxed on shares received, like salary, but the first £2,000 of shares awarded to the employee under this scheme will be tax and NI free. The employer will be able to give up to £50,000 of shares to each employee, but any value of shares above £2,000 will be immediately taxable and subject to NICs.
When the employee sells those shares any gains they make will be tax free, even if the employee has taken up the full quota of £50,000 of shares initially. The company will be able to claim tax relief on the value of shares given to employees. This new scheme is due to apply for shares provided on and after 1 September 2013.
- EMI shares. The Enterprise Management Incentive scheme (EMI) is an existing share scheme that allows smaller companies to award up to £250,000 of share options to key employees. The shares are not tax free on disposal, but employees can now qualify for entrepreneurs' relief which applies a tax rate of 10% on any taxable gains made on the EMI shares. The employee must still work for the company at the time he sells the EMI shares and must have held those shares for at least one year.
That last condition can cause a problem, as the employee usually holds the EMI share options and sells the actual EMI shares as soon as they are acquired. The law will now be changed to allow the period of holding EMI share options to count as a period of holding the EMI shares. Also, if the company is taken over or re-organises its shares, any shares acquired in exchange for EMI shares count as if they were EMI shares.
- Other share schemes. Other tax advantaged share schemes normally have to be individually approved by HMRC, but the Government has proposed that employers will be able to self-certify share schemes from 2014. This will make it easier for companies to set up a share scheme for their employees.
Loans to Employees
Employees who take an interest-free or low-interest loan from their employer are treated as receiving a taxable benefit if the loan exceeds £5,000 at any point in the tax year. This threshold will rise to £10,000 from 6 April 2014. This increase is designed to allow employees take loans to buy annual rail tickets, which now exceed £5,000 in many areas, although applies to loans for any purpose.
The rules for loans made to company owners have been tightened up - see loans to participators below.
The big news for employers is a new Employment Allowance of £2,000 per year for all businesses and charities to offset against the cost of employer's class 1 NI contributions. This should provide a real reduction in the cost of employing workers by all types of businesses - not just new employees taken on by new businesses. The new employment allowance will reduce employer's NICs paid after 5 April 2014.
NI rates 2013/14
For 2013/14 the main rates and thresholds for NI contributions are:
Lower Earnings Limit (LEL) for Class 1 NICs - £109/week
Employer's class 1 above £148/week not contracted out - 13.8%
Employee's class 1 not contracted out from £149 to £797/week - 12%
Employee's additional class 1 above £797/week - 2%
Self-employed small earnings exemption - £5,725 per annum
Self-employed class 4 from £7,755 to £41,450 per annum - 9%
Self-employed class 4 additional rate above £41,450 per annum - 2%
Self-employed class 2 - £2.70 per week
Voluntary contributions class 3 - £13.55 per week
Contracting Out
Contracted out rates for NI are 10.6% for employees and 10.4% for employers, but those reduced rates only apply for members of salary-related pension schemes. All contracted out rates will cease in April 2016, when the new flat rate state pension comes into effect.
Employee Shares
Employee share schemes can be incredibly complex to set up and administer. However, the Government believes employee involvement in the companies they work for is a good thing, and employees owning shares in their employing company is the way to achieve this.
- Employee shareholder status. A new type of share scheme will permit employees to take up shares offered by their employer, in return for giving up certain employment rights such as the right to statutory redundancy pay. Normally an employee is taxed on shares received, like salary, but the first £2,000 of shares awarded to the employee under this scheme will be tax and NI free. The employer will be able to give up to £50,000 of shares to each employee, but any value of shares above £2,000 will be immediately taxable and subject to NICs.
When the employee sells those shares any gains they make will be tax free, even if the employee has taken up the full quota of £50,000 of shares initially. The company will be able to claim tax relief on the value of shares given to employees. This new scheme is due to apply for shares provided on and after 1 September 2013.
- EMI shares. The Enterprise Management Incentive scheme (EMI) is an existing share scheme that allows smaller companies to award up to £250,000 of share options to key employees. The shares are not tax free on disposal, but employees can now qualify for entrepreneurs' relief which applies a tax rate of 10% on any taxable gains made on the EMI shares. The employee must still work for the company at the time he sells the EMI shares and must have held those shares for at least one year.
That last condition can cause a problem, as the employee usually holds the EMI share options and sells the actual EMI shares as soon as they are acquired. The law will now be changed to allow the period of holding EMI share options to count as a period of holding the EMI shares. Also, if the company is taken over or re-organises its shares, any shares acquired in exchange for EMI shares count as if they were EMI shares.
- Other share schemes. Other tax advantaged share schemes normally have to be individually approved by HMRC, but the Government has proposed that employers will be able to self-certify share schemes from 2014. This will make it easier for companies to set up a share scheme for their employees.
Loans to Employees
Employees who take an interest-free or low-interest loan from their employer are treated as receiving a taxable benefit if the loan exceeds £5,000 at any point in the tax year. This threshold will rise to £10,000 from 6 April 2014. This increase is designed to allow employees take loans to buy annual rail tickets, which now exceed £5,000 in many areas, although applies to loans for any purpose.
The rules for loans made to company owners have been tightened up - see loans to participators below.
Tuesday 5 March 2013
Self-Employed Travel Expenses
If you are self-employed you may have a number of customers you go to regularly to work at their premises. This could apply to mobile hairdressers, cleaners, gardeners, and even medical professionals who work at private clinics. The miles you drive to reach each of your customers from your business base are used to calculate the amount of travel expenses you claim in your business accounts.
This is all good, but the Taxman has recently argued in a tax case that where the business is based at the person's home, that home-office can't be treated as the starting point for travel when the work is performed almost entirely at customers' properties. The Taxman has particularly challenged travel expenses claimed by doctors who work at private clinics and do not see patients at their home-office. The Taxman has tried to ignore the necessary preparation and report writing work the doctor has to perform at his home-office.
The Taxman has agreed that travel between customers is allowable, so the mobile hairdresser or cleaner who travels to several customers each day should be able to claim the majority of their travel expenses. However, travel from the home-office to say one private clinic and back home again is in question.
This doesn't mean you should stop claiming the cost of travelling to customers, but to head-off any challenge in the future, you should record every business related journey; where it started, number of miles and the reason for the journey - who were you seeing. Using an estimate of your total business mileage for the year is no longer an acceptable method of calculating your travel expenses. You should also record what part of your business you conduct at your home-office, such as preparing estimates or writing reports.
If you are concerned you may be affected, please contact us for advice.
This is all good, but the Taxman has recently argued in a tax case that where the business is based at the person's home, that home-office can't be treated as the starting point for travel when the work is performed almost entirely at customers' properties. The Taxman has particularly challenged travel expenses claimed by doctors who work at private clinics and do not see patients at their home-office. The Taxman has tried to ignore the necessary preparation and report writing work the doctor has to perform at his home-office.
The Taxman has agreed that travel between customers is allowable, so the mobile hairdresser or cleaner who travels to several customers each day should be able to claim the majority of their travel expenses. However, travel from the home-office to say one private clinic and back home again is in question.
This doesn't mean you should stop claiming the cost of travelling to customers, but to head-off any challenge in the future, you should record every business related journey; where it started, number of miles and the reason for the journey - who were you seeing. Using an estimate of your total business mileage for the year is no longer an acceptable method of calculating your travel expenses. You should also record what part of your business you conduct at your home-office, such as preparing estimates or writing reports.
If you are concerned you may be affected, please contact us for advice.
Room Hire and VAT
The letting of land is exempt from VAT unless it falls into one of the many exemptions from the exemption for VAT. One of those exemptions to the exemption is where accommodation is provided in hotels, inns, boarding houses and similar establishments, including rooms provided for the purpose of catering, i.e. an eating and drinking occasion.
If you hire a room in a hotel for a group function including a meal, and the hotel supplies the catering, the whole fee is subject to standard rate VAT. If the catering is supplied by an outside caterer, the Taxman used to take the view that the room hire would be exempt from VAT, whilst the catering cost would carry standard rate VAT (if the caterer was VAT registered). However, the Taxman changed his mind on this point in October 2011, and updated the VAT Notice 709/3: Hotels and holiday accommodation.
Unfortunately he didn't tell anyone he had released a new version of that leaflet so few businesses were aware of the change in practice, and confusion reigned. Now the Taxman has issued some more guidance as HMRC Brief number 02/13.
That guidance says where a room in a hotel is supplied for the purposes of catering, whether or not the catering is supplied by the same establishment, the room hire is subject to VAT at the standard rate. If you run a hotel, pub or similar place that hires out rooms, and have got this wrong in the past, the Taxman has said he will not pursue you for the VAT which should have been charged. However, you need to get the VAT treatment right from now on.
If you hire a room in a hotel for a group function including a meal, and the hotel supplies the catering, the whole fee is subject to standard rate VAT. If the catering is supplied by an outside caterer, the Taxman used to take the view that the room hire would be exempt from VAT, whilst the catering cost would carry standard rate VAT (if the caterer was VAT registered). However, the Taxman changed his mind on this point in October 2011, and updated the VAT Notice 709/3: Hotels and holiday accommodation.
Unfortunately he didn't tell anyone he had released a new version of that leaflet so few businesses were aware of the change in practice, and confusion reigned. Now the Taxman has issued some more guidance as HMRC Brief number 02/13.
That guidance says where a room in a hotel is supplied for the purposes of catering, whether or not the catering is supplied by the same establishment, the room hire is subject to VAT at the standard rate. If you run a hotel, pub or similar place that hires out rooms, and have got this wrong in the past, the Taxman has said he will not pursue you for the VAT which should have been charged. However, you need to get the VAT treatment right from now on.
Make the Losses Work
The value of shares quoted on the stock market has risen recently. This may encourage you to sell some investments before the end of this tax year (5 April 2013) in order to use your annual capital gains exemption and to soak up any capital losses. Any gains covered by the exemption (currently £10,600 per person) or capital losses are free of capital gains tax.
We can't advise you on what to sell, but we can help you calculate the level of your capital losses and potential gains. It is essential that you tell your financial adviser or stockbroker how much capital losses you have already realised, so future disposals can be made to meet the level of those capital losses.
If you have forgotten to declare a disposal which made a capital loss on your tax return form, there may be no harm done, but you need to submit a claim for the loss before it can be set against a later gain. The deadline for claiming capital losses is now four years from the end of the tax year in which the loss arose, so you can still claim for losses made in 2008/09 and later tax years. We can help you with these claims.
Don't forget you can crystallise a capital loss on shares which you still hold, but are now worth nothing or almost nothing. This is called a negligible value claim, and we can help you with that.
We can't advise you on what to sell, but we can help you calculate the level of your capital losses and potential gains. It is essential that you tell your financial adviser or stockbroker how much capital losses you have already realised, so future disposals can be made to meet the level of those capital losses.
If you have forgotten to declare a disposal which made a capital loss on your tax return form, there may be no harm done, but you need to submit a claim for the loss before it can be set against a later gain. The deadline for claiming capital losses is now four years from the end of the tax year in which the loss arose, so you can still claim for losses made in 2008/09 and later tax years. We can help you with these claims.
Don't forget you can crystallise a capital loss on shares which you still hold, but are now worth nothing or almost nothing. This is called a negligible value claim, and we can help you with that.
Annual Payroll and RTI
Under real time information (RTI) PAYE reporting, a Full Payment Submission (FPS) report is required to be made to HMRC every time an employee is paid, not just once after the end of the tax year as is currently the case. RTI will be compulsory for most employers from the first pay date following 6 April 2013.
Many one-person companies may wish to pay the director just once a year and avoid monthly RTI reporting. If you want to do this, you must first check that your payroll software will cope with an annual payroll, as many main-stream payroll software packages do not.
The second stage is to understand what reports HMRC will require under RTI. An annual payroll must be registered with HMRC. The current advice on the HMRC website says: "If all payments on which tax and NICs are due are paid to your employees annually in a single tax month, you can ask HMRC to be treated as an 'annual payer'. You must use the same month every year, so if this changes or you start paying your employees more frequently, you will need to tell HMRC."
There should be more guidance on the HMRC website about annual payrolls soon. If you do not register the payroll as being annual you will need to submit an Employer Payment Summary (EPS) to HMRC every month, which shows nil payments made to the employee.
Where an employee is paid irregularly, i.e. less often than once a month, it is essential that the irregular payment marker is made in the payroll software against that employee, as otherwise the HMRC computer system may delete that person from the payroll.
If you want to pay yourself a regular amount every month, and minimise the RTI reporting hassle, your payroll software may allow you to prepare all the FPS returns for the entire year in advance. However, you must check whether your particular payroll software will do this. You won't be able to prepare monthly FPS returns for the entire year in arrears, those FPS reports must be done in advance or at the time of payment.
If you need any advice about RTI please contact us.
Many one-person companies may wish to pay the director just once a year and avoid monthly RTI reporting. If you want to do this, you must first check that your payroll software will cope with an annual payroll, as many main-stream payroll software packages do not.
The second stage is to understand what reports HMRC will require under RTI. An annual payroll must be registered with HMRC. The current advice on the HMRC website says: "If all payments on which tax and NICs are due are paid to your employees annually in a single tax month, you can ask HMRC to be treated as an 'annual payer'. You must use the same month every year, so if this changes or you start paying your employees more frequently, you will need to tell HMRC."
There should be more guidance on the HMRC website about annual payrolls soon. If you do not register the payroll as being annual you will need to submit an Employer Payment Summary (EPS) to HMRC every month, which shows nil payments made to the employee.
Where an employee is paid irregularly, i.e. less often than once a month, it is essential that the irregular payment marker is made in the payroll software against that employee, as otherwise the HMRC computer system may delete that person from the payroll.
If you want to pay yourself a regular amount every month, and minimise the RTI reporting hassle, your payroll software may allow you to prepare all the FPS returns for the entire year in advance. However, you must check whether your particular payroll software will do this. You won't be able to prepare monthly FPS returns for the entire year in arrears, those FPS reports must be done in advance or at the time of payment.
If you need any advice about RTI please contact us.
Thursday 31 January 2013
Tax Schemes & Swiss Bank Accounts
Have you received a letter from the Taxman recently, inviting you to pay tax avoided by using a tax scheme or Swiss bank account?
The specific tax avoidance schemes involve one or more of the following:
- the manipulation of accounting rules;
- British film tax relief;
- artificial trading losses.
The Taxman believes these tax schemes don't work, but rather than go to the trouble and expense of proving this in the Courts, he is asking taxpayers to pay the tax they have avoided by using the scheme. This settlement offer does not include any attractive penalty terms or reduction in interest due. The only benefit to you is a quick resolution of your tax affairs without a drawn-out investigation which could potentially lead to a criminal prosecution. Only taxpayers who receive a specific invitation from the Taxman can take up this settlement opportunity.
The UK/Swiss tax agreement applies to bank accounts held in Switzerland by individual UK resident taxpayers which were open on 31 December 2010 and remain open on 31 May 2013. If the bank account holder does not instruct the bank to disclose details of the account to the UK tax authorities, the funds in that account will be subject to a one-off tax deduction that covers income tax, capital gains tax, inheritance tax and VAT liabilities, calculated on a formula based on the length of time the account was held and the rate the balance in the account increased over that period.
The taxman is writing to taxpayers who are known to hold Swiss bank accounts, to warn them that tax deductions will apply unless the relevant disclosures are made, and penalties of up to 150% of the tax due could be imposed. Note that if you opt for the one-off tax deduction, as opposed to full disclosure, you will not be protected from possible criminal prosecution.
If you have received either of these warning letters from the Taxman, please contact us immediately for advice.
The specific tax avoidance schemes involve one or more of the following:
- the manipulation of accounting rules;
- British film tax relief;
- artificial trading losses.
The Taxman believes these tax schemes don't work, but rather than go to the trouble and expense of proving this in the Courts, he is asking taxpayers to pay the tax they have avoided by using the scheme. This settlement offer does not include any attractive penalty terms or reduction in interest due. The only benefit to you is a quick resolution of your tax affairs without a drawn-out investigation which could potentially lead to a criminal prosecution. Only taxpayers who receive a specific invitation from the Taxman can take up this settlement opportunity.
The UK/Swiss tax agreement applies to bank accounts held in Switzerland by individual UK resident taxpayers which were open on 31 December 2010 and remain open on 31 May 2013. If the bank account holder does not instruct the bank to disclose details of the account to the UK tax authorities, the funds in that account will be subject to a one-off tax deduction that covers income tax, capital gains tax, inheritance tax and VAT liabilities, calculated on a formula based on the length of time the account was held and the rate the balance in the account increased over that period.
The taxman is writing to taxpayers who are known to hold Swiss bank accounts, to warn them that tax deductions will apply unless the relevant disclosures are made, and penalties of up to 150% of the tax due could be imposed. Note that if you opt for the one-off tax deduction, as opposed to full disclosure, you will not be protected from possible criminal prosecution.
If you have received either of these warning letters from the Taxman, please contact us immediately for advice.
Letting Relief Explained
If you have let a property which was once your main home, or was treated as your main home as you lived in job related accommodation, letting relief can help reduce the tax you pay on the eventual sale. This tax relief cannot apply to a buy-to-let property that has never been occupied by the owner.
The property must be let as residential accommodation, not as office space, or operated as a trade such as bed and breakfast. If only part of the property is let, that let part must not form a self-contained annexe such as a granny flat.
The tax relief for letting is given in addition to exemption from tax for gains arising in respect of any periods when you occupied the property as your main home. This exemption is also extended to cover the gain arising in respect of the last 36 months of ownership.
The letting tax relief is the lower of three amounts:
- The part of the gain exempt because it was used as your main home;
- the gain attributed to the let period; and
- £40,000 per owner.
Example
Julie owned a property for 13 years, but lived in it for only the first 18 months as her main home. After that it was let for ten years and remained empty before sale. The gain is £130,000 or £10,000 per year of ownership. The taxable gain is calculated as follows:
Capital gain before tax relief: £130,000
Exemption for main home for 18 months, plus last 3 years of ownership: £45,000
Relief for letting is £40,000 as is the lower of:
- £45,000 for period of residence or deemed residence
- 10 x £10,000 actual let period
- and £40,000 maximum lettings exemption
Net gain chargeable: £130,000 - £45,000 - £40,000 = £45,000
The property must be let as residential accommodation, not as office space, or operated as a trade such as bed and breakfast. If only part of the property is let, that let part must not form a self-contained annexe such as a granny flat.
The tax relief for letting is given in addition to exemption from tax for gains arising in respect of any periods when you occupied the property as your main home. This exemption is also extended to cover the gain arising in respect of the last 36 months of ownership.
The letting tax relief is the lower of three amounts:
- The part of the gain exempt because it was used as your main home;
- the gain attributed to the let period; and
- £40,000 per owner.
Example
Julie owned a property for 13 years, but lived in it for only the first 18 months as her main home. After that it was let for ten years and remained empty before sale. The gain is £130,000 or £10,000 per year of ownership. The taxable gain is calculated as follows:
Capital gain before tax relief: £130,000
Exemption for main home for 18 months, plus last 3 years of ownership: £45,000
Relief for letting is £40,000 as is the lower of:
- £45,000 for period of residence or deemed residence
- 10 x £10,000 actual let period
- and £40,000 maximum lettings exemption
Net gain chargeable: £130,000 - £45,000 - £40,000 = £45,000
Subscribe to:
Posts (Atom)
