If you first received your state pension after 5 April 2010 you may have to pay an unexpected tax bill. This is because of yet another programming error with the Tax Office PAYE computer.
The state retirement pension is taxable but it is paid without tax being deducted. The amount of your state pension should be set against your personal allowance in your PAYE code. However, this adjustment to the PAYE code was not done by the PAYE computer for state retirement pensions that commenced in the tax year 2010/11.
Any pensions paid by your former employer, or as an annuity from a personal pension plan, are taxed under PAYE. Where the state pension has been set-off against your personal allowance in your PAYE code, any balance of your personal allowance is used against your occupational pension leaving the rest of your occupational pension to be taxed at your marginal rate. Where your state pension has not been included in your PAYE code, all of your tax free personal allowance will be set against your occupational pension and not enough tax will be deducted from that income under PAYE.
If you are in this position you will receive a PAYE reconciliation (form P800), at some time in the next 12 months, which will show you how much tax was deducted under PAYE and how much should have been deducted. If the difference is less than £2,000, the tax due will be collected through your PAYE code in the three years to 2013/14. However, where the amount owing is £2,000 or more the Tax Office may demand payment immediately. You should resist this, and ask for the tax due to be collected through your PAYE codes, as the tax underpayment is purely due to a Tax Office mistake.
This is not the first time the PAYE computer has made this error. Up to 250,000 pensioners had an incorrect amount of their state pension included in their PAYE codes for the tax years 2008/09 and 2009/10. In these cases the Taxman decided not to collect the underpaid tax and the pensioners were not informed of the mistake.
Wednesday, 6 April 2011
PAYE Notices are Coming
The Tax Office has started to issue electronic PAYE code notices (forms P9) to employers for 2011/12. If you have provided an email address for the Tax Office to contact you concerning PAYE matters, you should receive an email to inform you that new PAYE codes have been issued for your employees.
To view the PAYE codes you need to log on to the PAYE online service on the HMRC website (or through your Payroll software), and choose the option required (e.g. tax code notices). Change the option 'tax year' from 'current' to 2011/12 to see the notices for 2011/12.
Remember you can be held liable for under-deducted tax if an incorrect PAYE code is applied to your employee's wages, or a PAYE code is applied incorrectly.
If you have a large number of tax code notices to manage you may want to use the HMRC tool: PAYE Desktop Viewer (PDV). This is a free HMRC tool that allows you to search and sort tax codes, notifications and other reminders.
To view the PAYE codes you need to log on to the PAYE online service on the HMRC website (or through your Payroll software), and choose the option required (e.g. tax code notices). Change the option 'tax year' from 'current' to 2011/12 to see the notices for 2011/12.
Remember you can be held liable for under-deducted tax if an incorrect PAYE code is applied to your employee's wages, or a PAYE code is applied incorrectly.
If you have a large number of tax code notices to manage you may want to use the HMRC tool: PAYE Desktop Viewer (PDV). This is a free HMRC tool that allows you to search and sort tax codes, notifications and other reminders.
Changes to NIC Class 2 Payments
As a self-employed person you probably pay your class 2 NIC, (formerly known as 'NI stamp') by monthly direct debit, or when the quarterly bill arrives from the Tax Office.
From April 2011 the Tax Office is changing the way it collects class 2 NICs. The payment will be due in two equal instalments on 31 July and 31 January. The Tax Office will send out separate bills for the class 2 NICs in April and October that demand payment for the amounts due in the following July and January.
If you already have a monthly direct debit set up to pay your class 2 NICs, those direct debits will be suspended from April 2011 and will start again in August 2011. You can opt to pay your class 2 NIC bill when the payments become due in July and January, by telephone banking, Bank Giro, at the Post Office, by direct debit or by cheque.
From April 2011 the Tax Office is changing the way it collects class 2 NICs. The payment will be due in two equal instalments on 31 July and 31 January. The Tax Office will send out separate bills for the class 2 NICs in April and October that demand payment for the amounts due in the following July and January.
If you already have a monthly direct debit set up to pay your class 2 NICs, those direct debits will be suspended from April 2011 and will start again in August 2011. You can opt to pay your class 2 NIC bill when the payments become due in July and January, by telephone banking, Bank Giro, at the Post Office, by direct debit or by cheque.
Plumbers Tax Safe Plan
The Taxman has launched a new tax disclosure opportunity called the Plumbers Tax Safe Plan (PTSP). It is aimed at plumbers and heating engineers who have not fully disclosed all of their income on their tax returns in the past. However, anyone in any trade or profession can use this disclosure opportunity to make a full disclosure of previously undeclared income to the Tax Office.
If you use the PTSP disclosure opportunity to declare unpaid tax, you will be charged a low penalty on the tax due. If you delay and are later found out by the Taxman the penalty could be as high as 100% of the tax due, or 200% if funds have been hidden off-shore. You will also be subject to a full tax investigation and possibly charges under criminal law.
To take advantage of the PTSP you need to fully disclose all your additional tax liabilities by 31 August 2011, and pay all the tax, interest due on late paid tax, and penalties by that date as well. To start the PTSP process you must first notify HMRC by 31 May 2011 that you wish to disclose. We can help you do this and HMRC will respond with a disclosure reference number.
You will need the disclosure reference number to complete the PTSP disclosure form, which can be done online or by using a PDF of the form downloaded from the HMRC website. Most taxpayers will need some help with this disclosure form as the tax, interest and penalties all need to be calculated. It is up to you to decide which penalty rate should apply to your tax errors under the PTSP:
- Innocent mistakes have zero penalty;
- Careless errors attract 10% penalty; and
- Deliberate errors attract 20% penalty.
Think very carefully before admitting to a deliberate error, as this could lead to very strict sanctions in future.
If you think you will not be found out by the HMRC investigators, consider the information HMRC can collect from other sources. To back-up this PTSP scheme HMRC have obtained information concerning plumbers and heating engineers from the Gas Safe Register (formerly CORGI registered). They have cross-referenced this information to advertising directories to work out who was trading as a plumber or heating engineer but were not registered with HMRC.
If you would like some assistance in making a full disclosure of unpaid tax, or know someone who does need help, please contact us as soon as possible.
If you use the PTSP disclosure opportunity to declare unpaid tax, you will be charged a low penalty on the tax due. If you delay and are later found out by the Taxman the penalty could be as high as 100% of the tax due, or 200% if funds have been hidden off-shore. You will also be subject to a full tax investigation and possibly charges under criminal law.
To take advantage of the PTSP you need to fully disclose all your additional tax liabilities by 31 August 2011, and pay all the tax, interest due on late paid tax, and penalties by that date as well. To start the PTSP process you must first notify HMRC by 31 May 2011 that you wish to disclose. We can help you do this and HMRC will respond with a disclosure reference number.
You will need the disclosure reference number to complete the PTSP disclosure form, which can be done online or by using a PDF of the form downloaded from the HMRC website. Most taxpayers will need some help with this disclosure form as the tax, interest and penalties all need to be calculated. It is up to you to decide which penalty rate should apply to your tax errors under the PTSP:
- Innocent mistakes have zero penalty;
- Careless errors attract 10% penalty; and
- Deliberate errors attract 20% penalty.
Think very carefully before admitting to a deliberate error, as this could lead to very strict sanctions in future.
If you think you will not be found out by the HMRC investigators, consider the information HMRC can collect from other sources. To back-up this PTSP scheme HMRC have obtained information concerning plumbers and heating engineers from the Gas Safe Register (formerly CORGI registered). They have cross-referenced this information to advertising directories to work out who was trading as a plumber or heating engineer but were not registered with HMRC.
If you would like some assistance in making a full disclosure of unpaid tax, or know someone who does need help, please contact us as soon as possible.
Thursday, 24 March 2011
Budget 2011 - VAT
VAT Rates and Thresholds
There were few changes announced for VAT. The rates and thresholds are as follows from 1 April 2011:
Lower rate - 0%
Reduced rate - 5%
Standard rate - 20%
Registration turnover - £73,000 (up from £70,000)
Deregistration turnover - £71,000 (up from £68,000)
Low Value Consignments
Low value consignment relief allows goods to be imported into the UK by post from outside the EU, with no VAT or duties charged, if the value of the package is less than £18. This has encouraged suppliers of CDs, DVDs and other durable items, to supply goods via the Channel Islands and other non-EU territories to avoid VAT being applied on the sale price. The monetary limit for low value consignments will be reduced to £15 from 1 November 2011, and this limit will be reviewed in March 2012. The Government will also look at other ways of closing this loophole.
Online Filing
It will be compulsory for all VAT registered businesses to file their VAT returns online from 1 April 2012. At present only businesses who became VAT registered from April 2010 or those with turnover of £100,000 or more must file VAT returns online. Also from 1 August 2012 all requests to register or deregister for VAT will have to be made online.
There were few changes announced for VAT. The rates and thresholds are as follows from 1 April 2011:
Lower rate - 0%
Reduced rate - 5%
Standard rate - 20%
Registration turnover - £73,000 (up from £70,000)
Deregistration turnover - £71,000 (up from £68,000)
Low Value Consignments
Low value consignment relief allows goods to be imported into the UK by post from outside the EU, with no VAT or duties charged, if the value of the package is less than £18. This has encouraged suppliers of CDs, DVDs and other durable items, to supply goods via the Channel Islands and other non-EU territories to avoid VAT being applied on the sale price. The monetary limit for low value consignments will be reduced to £15 from 1 November 2011, and this limit will be reviewed in March 2012. The Government will also look at other ways of closing this loophole.
Online Filing
It will be compulsory for all VAT registered businesses to file their VAT returns online from 1 April 2012. At present only businesses who became VAT registered from April 2010 or those with turnover of £100,000 or more must file VAT returns online. Also from 1 August 2012 all requests to register or deregister for VAT will have to be made online.
Budget 2011 - Employers
NIC
When business owners and accountants are asked what single action could simplify the tax system, most suggest merging income tax and NI. This message has finally been heard by the Government, who will start consulting on how the operation of the NI and income tax could be combined.
This does not mean these two taxes will be merged. The Government has stated that NI will not be applied to savings, dividends or pensions. The likely changes will involve aligning the rules and mechanics of collecting the two taxes. However, don't expect big changes any time soon!
From 6 April 2011 the rates and thresholds for the main NI contributions were already known with most increasing by 1%. The main figures for 2011/12 are:
Lower Earnings Limit (LEL) for Class 1 NICs - £102/week
Employer's class 1 above £136/week not contracted out - 13.8%
Employee's class 1 not contracted out from £139 to £817/week - 12%
Employee's additional class 1 above £817/week - 2%
Self-employed class 4 from £7,225 to £42,475 per annum - 9%
Self-employed class 4 additional rate above £42,475 per annum - 2%
Self-employed class 2 - £2.50 per week
Voluntary contributions class 3 - £12.60 per week
Approved Mileage Rates
Where an employee uses his or her own car for business journeys their employer can pay them an approved mileage allowance payment (AMAP), free of tax and NIC.
This AMAP rate has been stuck at 40p per mile since about 2002, and at current petrol prices many employees who need to use their car for business cannot afford to do so. The AMAP will increase to 45p per mile from 6 April 2011 for the first 10,000 business miles per year, any additional miles can be reimbursed at 25p per mile. If the employer does not pay the full AMAP rate the employee can claim the additional amount in tax relief from HMRC.
The tax free AMAP can also be paid by charities to volunteers. The self-employed, who have profits below the VAT registration threshold (£73,000 from 1 April 2011), may also use the AMAP rate as a substitute for motor expenses claimed in their accounts.
Where an employee carries a fellow employee as a passenger on a business journey, an additional 5p per mile tax free can be paid. The rate will also now apply to volunteer drivers who take other volunteers on business/ charity related journeys.
Car Benefit
The tax charge for personal use of a company car is based on a percentage of the list price of that car when new.
From 6 April 2011 the percentages are all increased by 1% for those in the 15% to 35% range but with a 35% maximum kept. The taxable benefit of using a car with CO2 emissions of 121-129g/km is 15% of the list price. This percentage increases by 1% for each additional 5g/km of CO2 emissions to a maximum of 35% for cars with CO2 emissions of 225g/km or more.
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 a set value, currently £18,000. This value will increase to £18,800 from 6 April 2011. The maximum taxable benefit of receiving fuel for personal use will increase from £6,300 (for 2010/11) to £6580 (for 2011/12).
When business owners and accountants are asked what single action could simplify the tax system, most suggest merging income tax and NI. This message has finally been heard by the Government, who will start consulting on how the operation of the NI and income tax could be combined.
This does not mean these two taxes will be merged. The Government has stated that NI will not be applied to savings, dividends or pensions. The likely changes will involve aligning the rules and mechanics of collecting the two taxes. However, don't expect big changes any time soon!
From 6 April 2011 the rates and thresholds for the main NI contributions were already known with most increasing by 1%. The main figures for 2011/12 are:
Lower Earnings Limit (LEL) for Class 1 NICs - £102/week
Employer's class 1 above £136/week not contracted out - 13.8%
Employee's class 1 not contracted out from £139 to £817/week - 12%
Employee's additional class 1 above £817/week - 2%
Self-employed class 4 from £7,225 to £42,475 per annum - 9%
Self-employed class 4 additional rate above £42,475 per annum - 2%
Self-employed class 2 - £2.50 per week
Voluntary contributions class 3 - £12.60 per week
Approved Mileage Rates
Where an employee uses his or her own car for business journeys their employer can pay them an approved mileage allowance payment (AMAP), free of tax and NIC.
This AMAP rate has been stuck at 40p per mile since about 2002, and at current petrol prices many employees who need to use their car for business cannot afford to do so. The AMAP will increase to 45p per mile from 6 April 2011 for the first 10,000 business miles per year, any additional miles can be reimbursed at 25p per mile. If the employer does not pay the full AMAP rate the employee can claim the additional amount in tax relief from HMRC.
The tax free AMAP can also be paid by charities to volunteers. The self-employed, who have profits below the VAT registration threshold (£73,000 from 1 April 2011), may also use the AMAP rate as a substitute for motor expenses claimed in their accounts.
Where an employee carries a fellow employee as a passenger on a business journey, an additional 5p per mile tax free can be paid. The rate will also now apply to volunteer drivers who take other volunteers on business/ charity related journeys.
Car Benefit
The tax charge for personal use of a company car is based on a percentage of the list price of that car when new.
From 6 April 2011 the percentages are all increased by 1% for those in the 15% to 35% range but with a 35% maximum kept. The taxable benefit of using a car with CO2 emissions of 121-129g/km is 15% of the list price. This percentage increases by 1% for each additional 5g/km of CO2 emissions to a maximum of 35% for cars with CO2 emissions of 225g/km or more.
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 a set value, currently £18,000. This value will increase to £18,800 from 6 April 2011. The maximum taxable benefit of receiving fuel for personal use will increase from £6,300 (for 2010/11) to £6580 (for 2011/12).
Budget 2011 - Business Tax
IR35 Review
The Office of Tax Simplification was tasked with reviewing the operation of IR35, or the provision of services through intermediaries as the legislation is more correctly called. Unfortunately the Government does not agree that IR35 should be abolished. However, it has promised to improve the way HMRC provide guidance to businesses who are trying to operate IR35.
Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for the year from April 2012:
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) cap: reduced from £100,000 to £25,000
Short Life Assets
At present a business can elect for named assets (not cars) to be treated individually for capital allowance purposes rather than being included in the main pool or special rate pool. The assets subject to this election are called short life assets as they are deemed to have a useful life of less than 4 years. If the business sells or scraps the short life asset before the end of its deemed life, the business will get tax relief for the full cost of that asset while it is being used by the business. This would not apply when the asset is included in one of the capital allowance pools.
For assets purchased on or after 1 April 2011 (6 April 2011 for unincorporated businesses), the life of the short life asset will be deemed to be 8 years. This will benefit larger businesses that incurred expenditure on assets in excess of their Annual Investment Allowance cap for the year.
Enterprise Zones
The Government will create 21 Enterprise Zones around the country. Further details of the exact location and duration of these zones will be released later. All we know so far is that businesses within these zones will be able to apply for up to 100% discount on business rates.
Tax Reliefs to Go
The Office for Tax Simplification has suggested a list of more than 40 tax reliefs that could be abolished because they are rarely used, or are in fact obsolete. Most of these reliefs will be abolished after consultation. Reliefs on this list which may be of interest to small businesses include:
- Tax free meals for employees who cycle to work
- Tax free late night taxis for employees
- Additional tax relief for companies that clean up contaminated land or buildings (land remediation relief)
- Relief from CGT for grants for giving up agricultural land
Corporation Tax Rates
The small profits rate of corporation tax will be cut from 21% to 20% from 1 April 2011, and is expected to remain at that rate for the next four years, but this has not been confirmed. The small profits rate applies to profits of up to £300,000 where the company has no associated companies which are trading.
The main rate of corporation tax was due to be cut from 28% to 27% from April 2011, but that rate will now be 26%, reducing by 1% per year thereafter until the rate reaches 23%.
Research and Development Tax Credits
Small and medium sized companies could previously claim tax relief of 175% for qualifying revenue expenditure incurred on research and development (R&D) projects. This tax relief will increase to 200% for R&D expenditure incurred after 31 March 2011. A further increase in this tax relief to 225% is planned for qualifying R&D expenditure incurred after 31 March 2012.
The rules that govern what type of expenditure qualifies for this relief will also be revised with effect from 2012 to make it easier for small companies to claim this relief.
The Office of Tax Simplification was tasked with reviewing the operation of IR35, or the provision of services through intermediaries as the legislation is more correctly called. Unfortunately the Government does not agree that IR35 should be abolished. However, it has promised to improve the way HMRC provide guidance to businesses who are trying to operate IR35.
Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for the year from April 2012:
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) cap: reduced from £100,000 to £25,000
Short Life Assets
At present a business can elect for named assets (not cars) to be treated individually for capital allowance purposes rather than being included in the main pool or special rate pool. The assets subject to this election are called short life assets as they are deemed to have a useful life of less than 4 years. If the business sells or scraps the short life asset before the end of its deemed life, the business will get tax relief for the full cost of that asset while it is being used by the business. This would not apply when the asset is included in one of the capital allowance pools.
For assets purchased on or after 1 April 2011 (6 April 2011 for unincorporated businesses), the life of the short life asset will be deemed to be 8 years. This will benefit larger businesses that incurred expenditure on assets in excess of their Annual Investment Allowance cap for the year.
Enterprise Zones
The Government will create 21 Enterprise Zones around the country. Further details of the exact location and duration of these zones will be released later. All we know so far is that businesses within these zones will be able to apply for up to 100% discount on business rates.
Tax Reliefs to Go
The Office for Tax Simplification has suggested a list of more than 40 tax reliefs that could be abolished because they are rarely used, or are in fact obsolete. Most of these reliefs will be abolished after consultation. Reliefs on this list which may be of interest to small businesses include:
- Tax free meals for employees who cycle to work
- Tax free late night taxis for employees
- Additional tax relief for companies that clean up contaminated land or buildings (land remediation relief)
- Relief from CGT for grants for giving up agricultural land
Corporation Tax Rates
The small profits rate of corporation tax will be cut from 21% to 20% from 1 April 2011, and is expected to remain at that rate for the next four years, but this has not been confirmed. The small profits rate applies to profits of up to £300,000 where the company has no associated companies which are trading.
The main rate of corporation tax was due to be cut from 28% to 27% from April 2011, but that rate will now be 26%, reducing by 1% per year thereafter until the rate reaches 23%.
Research and Development Tax Credits
Small and medium sized companies could previously claim tax relief of 175% for qualifying revenue expenditure incurred on research and development (R&D) projects. This tax relief will increase to 200% for R&D expenditure incurred after 31 March 2011. A further increase in this tax relief to 225% is planned for qualifying R&D expenditure incurred after 31 March 2012.
The rules that govern what type of expenditure qualifies for this relief will also be revised with effect from 2012 to make it easier for small companies to claim this relief.
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