Have you used a loan to reduce the inheritance tax (IHT) which may be due when you die? A common IHT planning technique has been to take out a mortgage on the family home and use those borrowed funds to invest in assets that qualify for 100% exemption from IHT, such as farmland or shares quoted on the AIM stock market. The loan reduces the value of home subject to IHT, and the assets acquired don't attract an IHT charge.
However, this plan has been undermined by a change in the law from 6 April 2013. If the mortgage was taken out, or replaced, on or after that date, the amount of the loan is first deducted from the value of the assets it was used to acquire, not the property it is secured on. This means the loan and the IHT-exempt assets cancel-out each other in the IHT calculation, and no tax is saved.
You need to be aware of this when changing the mortgage on your home. We should talk about inheritance tax planning if the net value of your assets is likely to exceed £325,000. Married couples and those in civil partnerships can hold twice that amount before IHT bites. There are still ways to reduce the potential IHT due, but any plan needs to be tailored to your specific circumstances.
Tuesday, 3 December 2013
RTI Penalties Around The Corner
This tax year (2013/14) is the first year in which the majority of employers have submitted their PAYE data using real time information (RTI). HMRC has not yet imposed penalties for late RTI submissions made within the tax year, but that is about to change.
From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:
- filing a full payment submission (FPS) after the date of payment stated in that report;
- failure to file an employer payment summary (EPS) showing a nil payment when required; and
- failure to pay the PAYE due in full, and on time for a particular tax month.
Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.
The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.
Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as 'annual'. If no nil EPS is received this will give rise to a penalty.
Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.
You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.
Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.
From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:
- filing a full payment submission (FPS) after the date of payment stated in that report;
- failure to file an employer payment summary (EPS) showing a nil payment when required; and
- failure to pay the PAYE due in full, and on time for a particular tax month.
Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.
The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.
Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as 'annual'. If no nil EPS is received this will give rise to a penalty.
Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.
You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.
Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.
VAT Due Payment Date
When must your VAT payment reach HMRC? The correct answer is: seven days after the end of the month following the end of your VAT quarter. Not seven working days, seven calendar days.
If you get this wrong and pay your VAT late, you will receive one or two warnings from HMRC (two where the penalty would be under £400). If you pay late again within 12 months you will be charged a penalty of 2% of the late paid VAT. This percentage penalty increases every time you pay late, from 5% to 10% to 15% of the VAT due. Even paying one day late, counts as late for calculating those penalties.
Make sure you know exactly how long it will take your electronic payment to reach HMRC's bank account. Using the faster payment service (FPS) normally means the payment arrives within two hours, but there are monetary limits for FPS which vary between banks and for different types of bank accounts (corporate or retail). If the payment is too large to be sent by FPS, the bank will generally send it by BACS - which takes three working days.
If you have a direct debit set up to pay your VAT, HMRC will deduct the correct amount from your bank account three days after the due date for that VAT return, or three days after you submit your VAT return if that is later. So if you are late with filing your VAT return, the direct debit will be collected late, and you will have made a late payment of VAT, leading to a potential penalty.
If you get this wrong and pay your VAT late, you will receive one or two warnings from HMRC (two where the penalty would be under £400). If you pay late again within 12 months you will be charged a penalty of 2% of the late paid VAT. This percentage penalty increases every time you pay late, from 5% to 10% to 15% of the VAT due. Even paying one day late, counts as late for calculating those penalties.
Make sure you know exactly how long it will take your electronic payment to reach HMRC's bank account. Using the faster payment service (FPS) normally means the payment arrives within two hours, but there are monetary limits for FPS which vary between banks and for different types of bank accounts (corporate or retail). If the payment is too large to be sent by FPS, the bank will generally send it by BACS - which takes three working days.
If you have a direct debit set up to pay your VAT, HMRC will deduct the correct amount from your bank account three days after the due date for that VAT return, or three days after you submit your VAT return if that is later. So if you are late with filing your VAT return, the direct debit will be collected late, and you will have made a late payment of VAT, leading to a potential penalty.
Monday, 4 November 2013
VAT and Indirect Exports Change
When you export goods to a country outside the EU the goods are 'zero-rated' for VAT purposes, which means you do not apply VAT to the value of the goods. However, you need to have the paperwork to prove that the goods left the UK.
If your customer does the physical exporting, in that they take possession of the goods in the UK and handle the shipping, this is called an 'indirect export'. HMRC has previously only allowed you to zero rate the goods in this situation if your customer was an 'overseas person' - they had no VAT registration in the UK and no business establishment here. Also the goods must leave the UK within three months of the handover date.
From 1 October 2013 the rules for indirect exports have been relaxed slightly. Now you can zero rate the goods for export to a country outside the EU even if your customer is VAT registered in the UK. However, the customer must still not have a business established in the UK.
This change in the rules has been brought about due to pressure on the UK to comply with EU rules. It is thus effectively back-dated for four years. If you believe you have applied VAT in the last four years when under this change of rule it would not apply, you can reclaim that VAT. However, HMRC will expect you to pay back any reclaimed VAT to your customers who original bore the VAT on the goods.
We can help you check that you have the VAT position on any exports 100% correct.
If your customer does the physical exporting, in that they take possession of the goods in the UK and handle the shipping, this is called an 'indirect export'. HMRC has previously only allowed you to zero rate the goods in this situation if your customer was an 'overseas person' - they had no VAT registration in the UK and no business establishment here. Also the goods must leave the UK within three months of the handover date.
From 1 October 2013 the rules for indirect exports have been relaxed slightly. Now you can zero rate the goods for export to a country outside the EU even if your customer is VAT registered in the UK. However, the customer must still not have a business established in the UK.
This change in the rules has been brought about due to pressure on the UK to comply with EU rules. It is thus effectively back-dated for four years. If you believe you have applied VAT in the last four years when under this change of rule it would not apply, you can reclaim that VAT. However, HMRC will expect you to pay back any reclaimed VAT to your customers who original bore the VAT on the goods.
We can help you check that you have the VAT position on any exports 100% correct.
Earn-out Payments on Business Sales
When you sell a business, you may receive some of the consideration up front and another payment later if the business meets certain targets, that later payment is called an 'earn-out'.
How this earn-out is taxed can be tricky to work out, as it depends on a number of factors. For example: is the earn-out to be paid in cash or as shares or bonds, or is there a cash alternative to the offer of shares/bonds? Can the value of the earn-out be determined at the time the business was sold, or not until some later event has occurred?
Determining or 'ascertaining' the value of the earn-out is crucial for your capital gains tax computation.
If the earn-out can be ascertained (even within a broad range of values) at the time the business is sold, both the up-front and earn-out payments must be taxed as if they were both received together at the business sale date.
This can work in your favour. If the business sale qualifies for entrepreneurs' relief, the up-front payment and earn-out which is taxed with it will also qualify for entrepreneurs' relief. This reduces the tax payable on the earn-out to 10%. However, if the earn-out can't be ascertained until it is received, it won't qualify for entrepreneurs' relief, so will be taxed at 28% (or your highest rate for CGT).
We should discuss all this before you finalise the sale of your business. There are numerous ways of structuring the payment for a business and they all have different tax implications.
How this earn-out is taxed can be tricky to work out, as it depends on a number of factors. For example: is the earn-out to be paid in cash or as shares or bonds, or is there a cash alternative to the offer of shares/bonds? Can the value of the earn-out be determined at the time the business was sold, or not until some later event has occurred?
Determining or 'ascertaining' the value of the earn-out is crucial for your capital gains tax computation.
If the earn-out can be ascertained (even within a broad range of values) at the time the business is sold, both the up-front and earn-out payments must be taxed as if they were both received together at the business sale date.
This can work in your favour. If the business sale qualifies for entrepreneurs' relief, the up-front payment and earn-out which is taxed with it will also qualify for entrepreneurs' relief. This reduces the tax payable on the earn-out to 10%. However, if the earn-out can't be ascertained until it is received, it won't qualify for entrepreneurs' relief, so will be taxed at 28% (or your highest rate for CGT).
We should discuss all this before you finalise the sale of your business. There are numerous ways of structuring the payment for a business and they all have different tax implications.
Using the SEIS
The seed enterprise investment scheme (SEIS) is designed to help small companies raise modest amounts of funding (up to £150,000). The investor must subscribe for new shares issued by the company (not buy them from another shareholder), and in return he can claim income tax relief equal to 50% of the cost of those shares.
If the investor has made a capital gain in the same tax year as he makes the SEIS investment, up to 50% of the amount invested in SEIS shares can be set against that capital gain to reduce the CGT payable. This CGT reduction was 100% for gains in 2012/13, but is only 50% for gains arising in 2013/14.
That sounds wonderful, but there are a lot of conditions for the investor and the company to comply with before the SEIS tax relief can be given.
The first hurdle is to check if the company's trade will qualify for SEIS relief. Many 'safe' financial trades such as banking, money lending, accountancy or legal services are excluded. Also any trade where the company is likely to hold valuable property doesn't qualify such as; running hotels or nursing homes, farming, woodland management, property development or property dealing.
Businesses which are related to any of the excluded trades need to be looked at very carefully. For example running a public house can qualify, but if it lets residential rooms it could be classified as a hotel which would mean it doesn't qualify. An estate agent business may qualify, but a large part of an estate agent's business can be arranging mortgages, which is a financial activity that doesn't qualify. HMRC are prepared to provide assurance in advance of issuing shares as to whether a particular trade will qualify.
The second major hurdle is that the SEIS investor must not hold more than 30% of the company either alone, or together with relatives or other associates. Other shareholders can hold 30% or more of the company, but those shareholders will not be eligible for the SEIS tax relief.
An SEIS investor can invest up to £100,000 in a single tax year on which tax relief can be claimed, which can be spread over a number of companies.
If the investor has made a capital gain in the same tax year as he makes the SEIS investment, up to 50% of the amount invested in SEIS shares can be set against that capital gain to reduce the CGT payable. This CGT reduction was 100% for gains in 2012/13, but is only 50% for gains arising in 2013/14.
That sounds wonderful, but there are a lot of conditions for the investor and the company to comply with before the SEIS tax relief can be given.
The first hurdle is to check if the company's trade will qualify for SEIS relief. Many 'safe' financial trades such as banking, money lending, accountancy or legal services are excluded. Also any trade where the company is likely to hold valuable property doesn't qualify such as; running hotels or nursing homes, farming, woodland management, property development or property dealing.
Businesses which are related to any of the excluded trades need to be looked at very carefully. For example running a public house can qualify, but if it lets residential rooms it could be classified as a hotel which would mean it doesn't qualify. An estate agent business may qualify, but a large part of an estate agent's business can be arranging mortgages, which is a financial activity that doesn't qualify. HMRC are prepared to provide assurance in advance of issuing shares as to whether a particular trade will qualify.
The second major hurdle is that the SEIS investor must not hold more than 30% of the company either alone, or together with relatives or other associates. Other shareholders can hold 30% or more of the company, but those shareholders will not be eligible for the SEIS tax relief.
An SEIS investor can invest up to £100,000 in a single tax year on which tax relief can be claimed, which can be spread over a number of companies.
New RTI Messages
Real time information (RTI) is all about one-way communications with HMRC. Your payroll software sends reports (called FPS or EPS) to HMRC about the deductions made from your employees' pay, and normally you hear nothing back.
That is starting to change. HMRC is now sending electronic messages to employers to inform them that not all is well with their RTI reports. The first messages concern late submitted FPS reports, but in future there will be messages about late paid PAYE and missing RTI reports.
It is important to get the FPS in on time as then HMRC know that the amount of PAYE paid for the month agrees with the deductions you have reported on the FPS. HMRC will not impose penalties for any late FPS submitted within 2013/14, although the final FPS for 2013/14 (which closes the tax year), can carry a penalty if that is significantly late. The messages about late FPS reports are thus just a warning from HMRC in this tax year, but may indicate there is something wrong with your systems.
From 6 April 2014 there will be automatic penalties for filing a FPS late within the tax year. 'Late' means it arrives with HMRC after the date on which the employees were paid. There will also be penalties for paying PAYE late.
In order to pick up these electronic messages from HMRC you need to use your payroll software, or log on to HMRC's PAYE online services, then look for notifications. The messages are also available using the HMRC's PAYE desktop viewer (PDV) software package. However, the PDV has just been updated so you may need to download the latest version first.
These electronic messages about FPS will be the first of many important messages concerning RTI, so you need to get used to looking for them.
That is starting to change. HMRC is now sending electronic messages to employers to inform them that not all is well with their RTI reports. The first messages concern late submitted FPS reports, but in future there will be messages about late paid PAYE and missing RTI reports.
It is important to get the FPS in on time as then HMRC know that the amount of PAYE paid for the month agrees with the deductions you have reported on the FPS. HMRC will not impose penalties for any late FPS submitted within 2013/14, although the final FPS for 2013/14 (which closes the tax year), can carry a penalty if that is significantly late. The messages about late FPS reports are thus just a warning from HMRC in this tax year, but may indicate there is something wrong with your systems.
From 6 April 2014 there will be automatic penalties for filing a FPS late within the tax year. 'Late' means it arrives with HMRC after the date on which the employees were paid. There will also be penalties for paying PAYE late.
In order to pick up these electronic messages from HMRC you need to use your payroll software, or log on to HMRC's PAYE online services, then look for notifications. The messages are also available using the HMRC's PAYE desktop viewer (PDV) software package. However, the PDV has just been updated so you may need to download the latest version first.
These electronic messages about FPS will be the first of many important messages concerning RTI, so you need to get used to looking for them.
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