If you receive a VAT penalty, perhaps because you have submitted your VAT return late, the Taxman should offer an independent review of the penalty.
You should certainly take up this offer of a review, as this may be the first time that a human (rather than a computer) has looked at the circumstances under which the penalty was imposed. You should reply in writing to the Taxman accepting (or in rare cases rejecting), the offer of the review within 30 days of the date of the penalty notice. Don't delay, as the penalty notice may have been sitting in the Taxman's post area for weeks before it reaches you.
Where you believe the penalty is not due, because you have a reasonable excuse for submitting your form late (or whatever was the cause of the penalty), set out your reasons in the letter that accompanies the acceptance of the review. When the review department within the Tax Office looks at your case you have a chance of having the VAT penalty overturned. We can help you set out your reasons to the Tax Office.
Friday, 4 February 2011
Changes to Tax Credits
The system of Child and Working Tax Credits is due to be reformed over the next few years, and it is expected a new benefit called Universal Credit will replace the familiar Tax Credits from April 2014.
Before then there will be some significant cuts in the benefits paid to many tax credit claimants, phased in over the next three years. The following summarises the rates and thresholds that will be cut or frozen in 2011/12 compared to 2010/11.
Child Tax Credit
Family element: no change at £545
Baby element: decrease from £545 to nil
First income threshold: decrease from £16,190 to £15,860
Second income threshold: decrease from £50,000 to £40,000
Working Tax Credit
Childcare element:
Maximum costs for one child: no change at £175 per week
Maximum cost for all children: no change at £300 per week
Percentage of costs covered: decrease from 80% to 70%
First income threshold: no change at £6,420
First withdrawal rate: increase from 39% to 41%
Income disregard: decrease from £25,000 to £10,000
The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. The reduction in this threshold is likely to adversely affect families with fluctuating incomes, such as the self-employed. In the future, in order to avoid a claw-back of tax credits, the claimant will need to finalise their self-employed profit figures as close to the tax year end as possible.
Before then there will be some significant cuts in the benefits paid to many tax credit claimants, phased in over the next three years. The following summarises the rates and thresholds that will be cut or frozen in 2011/12 compared to 2010/11.
Child Tax Credit
Family element: no change at £545
Baby element: decrease from £545 to nil
First income threshold: decrease from £16,190 to £15,860
Second income threshold: decrease from £50,000 to £40,000
Working Tax Credit
Childcare element:
Maximum costs for one child: no change at £175 per week
Maximum cost for all children: no change at £300 per week
Percentage of costs covered: decrease from 80% to 70%
First income threshold: no change at £6,420
First withdrawal rate: increase from 39% to 41%
Income disregard: decrease from £25,000 to £10,000
The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. The reduction in this threshold is likely to adversely affect families with fluctuating incomes, such as the self-employed. In the future, in order to avoid a claw-back of tax credits, the claimant will need to finalise their self-employed profit figures as close to the tax year end as possible.
More PAYE Reconciliations
In October and November last year we told you the Taxman was issuing 6 million tax reconciliations (forms P800), for the tax years 2008/09 and 2009/10. This process is still not complete, but the Taxman has started to issue a further 450,000 forms P800 for the tax year 2007/08.
There are likely to be similar problems with inaccurate data for 2007/08 as have emerged for the later tax years, but you may not have the records to check against the Taxman's figures. If you do not run your own business you are only required to retain your tax records for 2007/08 until 31 January 2010. If you need some help checking a tax calculation for 2007/08, please contact us.
The Taxman has also discovered that the State Pension received by up to 250,000 pensioners in 2008/09 and 2009/10 has not been taxed as it should be. When a person retires they normally receive an occupational pension paid by their former employer, or an annuity paid from their personal pension scheme. In either case the payments will be subject to PAYE and will have some tax deducted by the payer. The pensioner may also receive the State Pension, which does not have tax deducted by the payer (i.e. Department of Pensions), but it is taxable.
The PAYE code applied to the occupational pension or annuity should take into account the amount of State Pension paid, but for up to 250,000 pensioners in 2008/09 and 2009/10 it did not! This meant those pensioners paid too little tax through no fault of their own. The Taxman will not collect the tax due in these circumstances, but only where he can identify the State Pension has been missed altogether.
If you receive a P800 tax reconciliation which shows tax has been underpaid due to an inaccurate figure of State Pension, you have good grounds for asking the Taxman to write-off the tax due under Extra Statutory Concession A19. This concession applies where the Taxman failed to make use of information (such as the State Pension figure provided by the Department of Pensions), to calculate the right amount of tax. We can help you apply for the A19 concession.
There are likely to be similar problems with inaccurate data for 2007/08 as have emerged for the later tax years, but you may not have the records to check against the Taxman's figures. If you do not run your own business you are only required to retain your tax records for 2007/08 until 31 January 2010. If you need some help checking a tax calculation for 2007/08, please contact us.
The Taxman has also discovered that the State Pension received by up to 250,000 pensioners in 2008/09 and 2009/10 has not been taxed as it should be. When a person retires they normally receive an occupational pension paid by their former employer, or an annuity paid from their personal pension scheme. In either case the payments will be subject to PAYE and will have some tax deducted by the payer. The pensioner may also receive the State Pension, which does not have tax deducted by the payer (i.e. Department of Pensions), but it is taxable.
The PAYE code applied to the occupational pension or annuity should take into account the amount of State Pension paid, but for up to 250,000 pensioners in 2008/09 and 2009/10 it did not! This meant those pensioners paid too little tax through no fault of their own. The Taxman will not collect the tax due in these circumstances, but only where he can identify the State Pension has been missed altogether.
If you receive a P800 tax reconciliation which shows tax has been underpaid due to an inaccurate figure of State Pension, you have good grounds for asking the Taxman to write-off the tax due under Extra Statutory Concession A19. This concession applies where the Taxman failed to make use of information (such as the State Pension figure provided by the Department of Pensions), to calculate the right amount of tax. We can help you apply for the A19 concession.
Tuesday, 7 December 2010
Personal Tax Changes 2011/12
Personal Allowances
The tax-free personal tax allowances for 2011/12 have not been announced but we do know that the tax free allowance for those aged under 65 will be at least £7,475, although the increase of £1,000 from the present limit will only benefit basic rate taxpayers.
Child and Working Tax Credits
Working and Child Tax Credits are to be withdrawn at the rate of 41% from families with total income of £40,000 or more from 6 April 2011. Families with income of over £40,000 may no longer be eligible for the family element of £545 per year. The baby addition to the family element (also £545) will be withdrawn completely at the same time.
The change in income that can be disregarded for a tax credit claim will be reduced from £25,000 to £10,000 with effect from 6 April 2011.
Pensions
From 6 April 2011 the state pension will be increased by the greater of: the annual increase in earnings or prices, or 2.5%.
The standard minimum income guarantee given under the Pension Credit will be increased by the same cash amount as the state pension.
From 2011/12 a member of a pension scheme can contribute up to £50,000 per year into registered pension funds, and receive full tax relief on those contributions. This £50,000 cap includes employer contributions and the deemed increase in value of defined benefit pension schemes. If contributions of less than £50,000 have been made for three immediate preceding tax years when the individual was a member of a pension scheme, the unused cap for each tax year can be carried forward up to three years.
Savings
The overall tax-free ISA limit for 2011/12 will be £10,680, of which £5,340 can be saved in a cash form such as a bank savings account.
The tax-free personal tax allowances for 2011/12 have not been announced but we do know that the tax free allowance for those aged under 65 will be at least £7,475, although the increase of £1,000 from the present limit will only benefit basic rate taxpayers.
Child and Working Tax Credits
Working and Child Tax Credits are to be withdrawn at the rate of 41% from families with total income of £40,000 or more from 6 April 2011. Families with income of over £40,000 may no longer be eligible for the family element of £545 per year. The baby addition to the family element (also £545) will be withdrawn completely at the same time.
The change in income that can be disregarded for a tax credit claim will be reduced from £25,000 to £10,000 with effect from 6 April 2011.
Pensions
From 6 April 2011 the state pension will be increased by the greater of: the annual increase in earnings or prices, or 2.5%.
The standard minimum income guarantee given under the Pension Credit will be increased by the same cash amount as the state pension.
From 2011/12 a member of a pension scheme can contribute up to £50,000 per year into registered pension funds, and receive full tax relief on those contributions. This £50,000 cap includes employer contributions and the deemed increase in value of defined benefit pension schemes. If contributions of less than £50,000 have been made for three immediate preceding tax years when the individual was a member of a pension scheme, the unused cap for each tax year can be carried forward up to three years.
Savings
The overall tax-free ISA limit for 2011/12 will be £10,680, of which £5,340 can be saved in a cash form such as a bank savings account.
Business Tax Changes 2011/12
Corporation Tax
The small profits rate of corporation tax will fall by 1% to 20% from 1 April 2011.This rate applies to profits of up to £300,000 if there are no associated companies. The corporation tax rate for large companies with profits over £1.5million will also fall by 1% to 27%, making the marginal rate for profits between those limits 28.75%. The main rate for larger companies will also fall by 1% in each of the following 3 years down to 24% in the year beginning 1 April 2014.
Capital Allowances
Capital allowances will be reduced with effect from 1 April 2012 (6 April 2012 for income tax purposes), as follows:
- Main pool writing down allowance - reduced from 20% to 18%
- Special rate pool writing down allowance - reduced from 10% to 8%
- Annual Investment Allowance (AIA) maximum investment - reduced from £100,000 to £25,000
Where expenditure on integral features, plant and equipment (excluding cars) is within the annual investment allowance, the business can claim a 100% deduction for those costs in the year bought.
NI
From 6 April 2011 the rates for NI contributions will be increasing by 1% and the new rates become...
- Employer's class 1 above secondary threshold: 13.8%
- Employee's class 1 above primary threshold and below upper earnings limit: 12%
- Employee's class 1 above upper earnings limit: 2%
- Self-employed class 4: 9%
- Self-employed class 4 additional rate: 2%
The reduced rates of NI for contracted out contributions for employers and employees have not been confirmed as yet.
From 6 April 2011 if you are self-employed you will be able to pay your class 2 NICs in two instalments on 31 January and 31 July, the same dates as your income tax payments on account are due. You can continue to pay your class 2 NIC by monthly direct debit if you wish, but there will be a break in DD requests by HMRC from April 2011 to August 2011.
The small profits rate of corporation tax will fall by 1% to 20% from 1 April 2011.This rate applies to profits of up to £300,000 if there are no associated companies. The corporation tax rate for large companies with profits over £1.5million will also fall by 1% to 27%, making the marginal rate for profits between those limits 28.75%. The main rate for larger companies will also fall by 1% in each of the following 3 years down to 24% in the year beginning 1 April 2014.
Capital Allowances
Capital allowances will be reduced with effect from 1 April 2012 (6 April 2012 for income tax purposes), as follows:
- Main pool writing down allowance - reduced from 20% to 18%
- Special rate pool writing down allowance - reduced from 10% to 8%
- Annual Investment Allowance (AIA) maximum investment - reduced from £100,000 to £25,000
Where expenditure on integral features, plant and equipment (excluding cars) is within the annual investment allowance, the business can claim a 100% deduction for those costs in the year bought.
NI
From 6 April 2011 the rates for NI contributions will be increasing by 1% and the new rates become...
- Employer's class 1 above secondary threshold: 13.8%
- Employee's class 1 above primary threshold and below upper earnings limit: 12%
- Employee's class 1 above upper earnings limit: 2%
- Self-employed class 4: 9%
- Self-employed class 4 additional rate: 2%
The reduced rates of NI for contracted out contributions for employers and employees have not been confirmed as yet.
From 6 April 2011 if you are self-employed you will be able to pay your class 2 NICs in two instalments on 31 January and 31 July, the same dates as your income tax payments on account are due. You can continue to pay your class 2 NIC by monthly direct debit if you wish, but there will be a break in DD requests by HMRC from April 2011 to August 2011.
It's Christmas Time Mr Taxman!
It's that time of year when staff parties abound, and you may be thinking of handing out small seasonal gifts to employees, customers or suppliers. Before you get too generous, make sure you know the tax implications.
Entertaining your staff is tax allowable as long as the entertaining is not part of an event aimed primarily at your customers. The cost of entertaining customers or potential customers or suppliers is not tax allowable for income tax or corporation tax. Your accounting records need to distinguish between the cost of hospitality such as the provision of food or drink, and significant gifts to customers, from your other marketing expenditure. The amount classified as non-allowable entertaining is added back to your profits to calculate the total tax due.
You can reclaim the VAT on the cost of entertaining your staff, but a proportion of the costs must be disallowed for VAT purposes where non-staff, such as family members, customers or suppliers also attend the event. However, where customers from overseas are present the VAT can be reclaimed on their portion of the costs. This is because the Tax Office recently removed the block on reclaiming VAT on entertaining overseas customers. Note the VAT block is only lifted for overseas customers, not suppliers, or UK customers, or other third-parties.
An event laid on free or below cost for employees would normally be a taxable benefit for those staff who attend, but it is tax free if it is designated as an 'annual event'. The other requirements are that the event is open to all staff and the cost does not exceed £150 per head, including VAT. If the cost exceeds this threshold, your employees will be taxed on the total cost of the event as a benefit in kind. You can pay this tax and NI on behalf of your employees using a payroll settlement agreement (PSA), which you need to agree with the Tax Office. So to avoid this hassle, keep the cost of the event, including all free transport and accommodation, below £150.01 per head.
Small seasonal gifts to staff, such as a bottle of plonk or a turkey, can be treated as 'trivial benefits'. These trivial benefits can be excluded from the report of benefits and expenses (form P11D) provided to staff, if you agree a dispensation for these gifts with the Tax Office. Don't push it with the Tax Inspector by trying to pass off expensive hampers or cases of champagne as trivial benefits.
Entertaining your staff is tax allowable as long as the entertaining is not part of an event aimed primarily at your customers. The cost of entertaining customers or potential customers or suppliers is not tax allowable for income tax or corporation tax. Your accounting records need to distinguish between the cost of hospitality such as the provision of food or drink, and significant gifts to customers, from your other marketing expenditure. The amount classified as non-allowable entertaining is added back to your profits to calculate the total tax due.
You can reclaim the VAT on the cost of entertaining your staff, but a proportion of the costs must be disallowed for VAT purposes where non-staff, such as family members, customers or suppliers also attend the event. However, where customers from overseas are present the VAT can be reclaimed on their portion of the costs. This is because the Tax Office recently removed the block on reclaiming VAT on entertaining overseas customers. Note the VAT block is only lifted for overseas customers, not suppliers, or UK customers, or other third-parties.
An event laid on free or below cost for employees would normally be a taxable benefit for those staff who attend, but it is tax free if it is designated as an 'annual event'. The other requirements are that the event is open to all staff and the cost does not exceed £150 per head, including VAT. If the cost exceeds this threshold, your employees will be taxed on the total cost of the event as a benefit in kind. You can pay this tax and NI on behalf of your employees using a payroll settlement agreement (PSA), which you need to agree with the Tax Office. So to avoid this hassle, keep the cost of the event, including all free transport and accommodation, below £150.01 per head.
Small seasonal gifts to staff, such as a bottle of plonk or a turkey, can be treated as 'trivial benefits'. These trivial benefits can be excluded from the report of benefits and expenses (form P11D) provided to staff, if you agree a dispensation for these gifts with the Tax Office. Don't push it with the Tax Inspector by trying to pass off expensive hampers or cases of champagne as trivial benefits.
2010 Autumn Statement
The Chancellor George Osborne delivered his Autumn statement on 29 November 2010, but this was NOT a Pre Budget Report full of tax information as we had come to expect from Gordon Brown.
George Osborne was primarily responding to the report from the Office of Budget Responsibility (OBR) which was released earlier the same day. The OBR report is a forecast of the UK's economic performance for the next few years. Previously this forecasting was performed by the Treasury and was not independently checked. The purpose of the OBR is to provide independent economic forecasts that are not influenced by political concerns.
The central message conveyed by George Osborne is that there is not going to be a double dip recession, as the UK economy is growing steadily at about 2% per year. Employment is forecast to grow, but the unemployment rate is expected to remain at around 8% for the next year. The apparent contradiction is due to more claimants being moved from long-term sickness benefit (Employment and Support Allowance) to unemployment benefit.
George Osborne mentioned tax only briefly in his speech, when he announced a series of consultations concerning the reform of corporation tax. Most of the areas under review are only relevant to multinational companies. However, there will be a review of the tax incentives for expenditure on research and development (R&D).
Currently enhanced R&D tax relief is available to large and small companies at different rates, but it can be very difficult to prove to HMRC that the work undertaken qualifies for the R&D tax relief. This system of R&D tax relief may be tweaked after this review to make it easier for small high-tech companies to claim the relief.
We are still waiting for a number of key tax figures to be announced for the tax year 2011/12, including the rates and allowances for income tax, and the thresholds for both NI and income tax. However, we do have details of a number of other tax changes in the pipeline which we have outlined below.
George Osborne was primarily responding to the report from the Office of Budget Responsibility (OBR) which was released earlier the same day. The OBR report is a forecast of the UK's economic performance for the next few years. Previously this forecasting was performed by the Treasury and was not independently checked. The purpose of the OBR is to provide independent economic forecasts that are not influenced by political concerns.
The central message conveyed by George Osborne is that there is not going to be a double dip recession, as the UK economy is growing steadily at about 2% per year. Employment is forecast to grow, but the unemployment rate is expected to remain at around 8% for the next year. The apparent contradiction is due to more claimants being moved from long-term sickness benefit (Employment and Support Allowance) to unemployment benefit.
George Osborne mentioned tax only briefly in his speech, when he announced a series of consultations concerning the reform of corporation tax. Most of the areas under review are only relevant to multinational companies. However, there will be a review of the tax incentives for expenditure on research and development (R&D).
Currently enhanced R&D tax relief is available to large and small companies at different rates, but it can be very difficult to prove to HMRC that the work undertaken qualifies for the R&D tax relief. This system of R&D tax relief may be tweaked after this review to make it easier for small high-tech companies to claim the relief.
We are still waiting for a number of key tax figures to be announced for the tax year 2011/12, including the rates and allowances for income tax, and the thresholds for both NI and income tax. However, we do have details of a number of other tax changes in the pipeline which we have outlined below.
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