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.
Friday 29 March 2013
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.
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