In addition to the 50,000 letters being sent about keeping business records, the Taxman is writing to 12,000 self-employed people who claim Tax Credits, to check whether they have been understating their income.
As a self-employed person you can claim Child and Working Tax Credits just like an employee, but your self-employed income is likely to be more variable than a regular wage or salary. If the income from your self-employed business has fluctuated wildly during the past recession, you may well get one of those letters from the Taxman. You will be asked to supply evidence of your income, which will normally be your business accounts and possibly bank statements. We can help you compile the information requested.
The Taxman is also getting serious about tackling those who deliberately cheat the tax system, as opposed to those who make careless mistakes.
He is targeting individuals and businesses identified as deliberate tax cheats since April 2009, and will regularly monitor all aspects of that person's tax affairs. This will involve asking for further information to support figures on tax returns, and possibly making unannounced visits to business premises.
The monitoring will continue for two to five years, or as long as the Taxman thinks the person is a tax risk. Initially, about 900 people will soon be informed they are included in this monitoring scheme but this number may well increase in time.
Friday, 4 March 2011
Taxman Start Business Records Check
The Taxman is concerned that many small businesses are not keeping adequate records to support the entries on their tax returns. To encourage better record keeping he is taking a carrot and stick approach.
The carrot encouragement comes in the form of a number of new HMRC leaflets, and an online tool www.businesslink.gov.uk/recordkeepingcheck designed to help small businesses decide what records they must keep. These tools and leaflets contain quite a lot of jargon words and phrases, so we would recommend discussing your requirements with us.
The stick is a letter he is about to send to 50,000 small businesses, advising that they may be subject to a detailed records check.
Only a minority of these businesses will actually receive a visit from the Tax Office compliance check unit, and those visits will normally be arranged in advance. However, if your business is visited and your records are found to be inadequate you may receive a penalty of up to £3,000, which cannot be suspended even if you promise to keep better records in future.
The carrot encouragement comes in the form of a number of new HMRC leaflets, and an online tool www.businesslink.gov.uk/recordkeepingcheck designed to help small businesses decide what records they must keep. These tools and leaflets contain quite a lot of jargon words and phrases, so we would recommend discussing your requirements with us.
The stick is a letter he is about to send to 50,000 small businesses, advising that they may be subject to a detailed records check.
Only a minority of these businesses will actually receive a visit from the Tax Office compliance check unit, and those visits will normally be arranged in advance. However, if your business is visited and your records are found to be inadequate you may receive a penalty of up to £3,000, which cannot be suspended even if you promise to keep better records in future.
Friday, 4 February 2011
Clamp-down on Loan Schemes
There are a number of tax saving schemes marketed to freelancers and contractors, but these schemes can be sensitive to changes in the tax law. One such scheme that involves loans made though particular trusts (known as EBTs) has recently been taken off the market by various suppliers.
Under the EBT scheme the freelancer becomes an employee of the company in the scheme but receives only a small wage, which is subject to tax in the normal way. All his other income is provided as a loan through an EBT. The freelancer pays no tax or NI on the loan capital, but he is charged tax on the deemed interest on the loan, (i.e. on 4% of the value of the loan). The scheme assumes the loan will remain outstanding forever, so the capital value of the loan (which increases with each payment) is never taxed.
However, new tax legislation has been proposed that will apply a tax charge to loans provided under such schemes from 9 December 2010. The employer will be responsible for paying the tax due, as if the loan was regular salary. The tax and NI savings are thus eliminated.
This new tax legislation does not prevent shareholder/ directors taking loans directly from their own companies, or employees receiving season ticket loans from their employers. In both these cases the loan is not provided through a third entity such as an EBT, so it is not taxed as regular salary. However, tax charges can apply to both the company and the director when a director borrows from their own company.
Under the EBT scheme the freelancer becomes an employee of the company in the scheme but receives only a small wage, which is subject to tax in the normal way. All his other income is provided as a loan through an EBT. The freelancer pays no tax or NI on the loan capital, but he is charged tax on the deemed interest on the loan, (i.e. on 4% of the value of the loan). The scheme assumes the loan will remain outstanding forever, so the capital value of the loan (which increases with each payment) is never taxed.
However, new tax legislation has been proposed that will apply a tax charge to loans provided under such schemes from 9 December 2010. The employer will be responsible for paying the tax due, as if the loan was regular salary. The tax and NI savings are thus eliminated.
This new tax legislation does not prevent shareholder/ directors taking loans directly from their own companies, or employees receiving season ticket loans from their employers. In both these cases the loan is not provided through a third entity such as an EBT, so it is not taxed as regular salary. However, tax charges can apply to both the company and the director when a director borrows from their own company.
How to Challenge a VAT Penalty
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.
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.
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.
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