Monday, 29 April 2013
RTI - Frequently Asked Questions - Round 1
With RTI now being 3 weeks into operation we, in this blog, present a collection of the most common questions we have been asked about these new regulations and the new rules for processing payroll:
Friday, 29 March 2013
Cash Basis for Small Businesses
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.
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.
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.
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