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HMRC announce a 'pay in advance' scheme
HMRC provides Self Assessment customers whose payments and returns are up to date, the option to start a budget payment plan.
A budget payment plan allows customers to make regular advance payments towards their next Self Assessment tax bill. HMRC will collect payments by Direct Debit as instructed by the customer.
Customers can set up and manage their budget payment plan using their HMRC online account. They can:
decide the regular weekly or monthly amount they want us to collect
choose to amend their regular payment amount
choose to suspend payment for a period of up to six months
cancel it at any time
The budget payment plan does not mean customers can delay payment beyond the due date. They will need to ensure that any balance still owing (after subtracting their budget payment plan payments) is paid off by the due date. Any balance still owed after the due date will become liable for interest.
Government announces U turn to below mini budget
Please follow this link to the major policy reversals
Follow this link to the updated tax tables.
The new Chancellor's mini budget September 2022
Chancellor Kwasi Kwarteng has unveiled what he claims are the biggest tax cuts in a generation, so what is in his mini-budget
• Cut in basic rate of income tax to 19% from April 2023
• Government estimates 31 million people getting £170 a year more
• Currently, people in England, Wales and Northern Ireland pay 20% on any annual earning between £12,571 to £50,270 - rates in Scotland are different
• 45% higher rate of income tax abolished for England, Wales and Northern Ireland taxpayers
• One single higher rate of income tax of 40% from April next year
• Reverse recent rise in National Insurance (NI) from 6 November
• Workers and employers have paid an extra 1.25p in the pound since April
• New Health and Social Care Levy to pay for the NHS will not be introduced
• Cancel UK-wide rise in corporation tax which was due to increase from 19% to 25% in April 2023
As widely expected, Chancellor Kwarteng confirmed that the scheduled increase in the main rate of corporation tax (CT) to 25% will not be brought in from 1 April 2023. The current main rate of CT will remain at 19% at all profit levels.
Just over a year ago, in the March 2021 Budget, Chancellor Rishi Sunak proposed increasing the CT rates so companies with annual profits of over £250,000 would pay tax at 25%. Those with annual profits of less than £50,000 would continue to pay CT at 19%, but marginal relief would apply between £50,000 and £250,000, giving an effective tax rate of 26.5% on those profits.
Keeping corporation tax at 19% for all companies will simplify this structure, but the tax law will have to be changed to keep the rate at 19%, as the 2023 increase has already been legislated for in FA 2021, s 6.
According to Chancellor Kwarteng, this tax policy reversal will encourage private sector investment in the UK and a Treasury Factsheet provided a list of four research papers that support this theory. However, the Institute for Public Policy Research (IPPR) argues there is no correlation between corporate investment and lower tax corporate rates in other OECD countries.
Off-payroll working scrapped
From 6 April 2023, we will be back to the IR35 rules largely as they were introduced from 6 April 2000. The off-payroll working variants for the public sector (from 6 April 2017) and for large private sector organisations (from 6 April 2021) will be scrapped.
To be clear, the IR35 provisions will still exist. However, it will be up to the directors of intermediary companies to decide whether there would be an employment relationship between the worker and the engager, if all the intermediaries in the chain were ignored.
This is a surprising move as the off-payroll rules were introduced in 2017 and 2021 because HMRC was unable to adequately police the original version of IR35, and the cost of non-compliance was estimated to be £1.2bn per year. The chancellor said compliance will be kept under review, but the costings provided in table 4.2 of his Growth Plan 2022 indicate that the revenue lost per year from this change will be £1.1 bn in 2023/24 rising to £2bn in 2026/27.
The Enterprise Investment Scheme (EIS), which provides tax incentives for individuals to subscribe for shares in unquoted trading companies, was due to end in 2025. This scheme will now be extended for an undefined period.
The similar seed enterprise investment scheme (SEIS) which provides tax relief for investment in small trading companies is not due to expire, but the annual investment caps (£100,000 per investor, £150,000 per company) will be increased from April 2023.
The Annual Investment Allowance (AIA) provides a 100% tax deduction for up to £1m of plant and machinery purchased in a year. This cap was due to reduce to £200,000 on 1 April 2023, but will now be kept at £1m indefinitely, or until another Chancellor has a different idea.
The rates of super deductions will be adjusted from 1 April 2023 to take into account the corporation tax rate being maintained at 19%.
• Cut to stamp duty which is paid when people buy a property in England and Northern Ireland
• No stamp duty on first £250,000 and for first time buyers that rises to £425,000 - comes into operation today
• 200,000 more people will be taken out of paying stamp duty altogether, government claims
• Freeze on energy bills, which the government claims will reduce inflation by 5 percentage points
• Total cost for the energy package expected to be around £60bn for the six months from October
• Rules which limit bankers' bonuses scrapped
• Package of regulatory reforms to be set out later in the autumn
Infrastructure and investment zones
• Government discussing setting up investment zones with 38 local areas in England
• Tax cuts and liberalised planning rules to be offered to release land for housing and commercial use
• Investment zones offered measures such as no business rates and stamp duty waived
• New legislation to cut planning rules, get rid of EU regulations and environmental assessments in an effort to speed up building
Spring statement 2022
The Chancellor made his annual Spring Statement speech today where he set out the Government’s tax plan to support the UK economy, businesses and families in both the short and the medium term.
• A full list of the Spring Statement measures that will benefit UK businesses are set out below
Cutting fuel duty on petrol and diesel by 5p per litre for 12 months
• The cut takes effect from 6pm on 23 March 2022
• This the largest cut across all fuel duty rates ever
• This cut, plus the freeze in 2022-23, represents a £5 billion saving over the next 12 months worth around:
i. £200 for the average van driver
ii. £1,500 for the average haulier
Increasing the Employment Allowance from £4,000 to £5,000
• Employment Allowance is a relief which allows eligible businesses to reduce their employer National Insurance contributions (NICs) bills each year
• At Spring Statement we announced this would be rising by £1,000 from £4,000
• Around 495,000 businesses (30% of all businesses) will benefit from this increase, including around 50,000 businesses (3% of all businesses) which will be taken out of paying NICs and the Health and Social Care Levy entirely
• In total, this means that from April, 670,000 businesses will not pay NICs and the Health and Social Care Levy due to the Employment Allowance
Bringing forward an exemption on business rates for green technology
• Making green technology, including solar panels and heat pumps, exempt from business rates from April 2022 will save businesses an extra £35 million in 2022-23, and is expected to be worth around £170m over the next five years to support the decarbonisation of buildings
• A 100% relief for eligible low-carbon heat networks which have their own rates bill will also be available
• This is on top of reducing the VAT on energy savings materials (ESM) from 5% to 0%, further incentivising homeowners to buy ESMs from businesses as part of a wider package of Government measures targeted at improving energy efficiency
Reforming R&D tax credits to help drive innovation
• From April 2023, business will be able to claim relief on the storage of their vital data and pure maths research
• This is set to boost sectors where the UK is a world-leader, including AI, robotics, manufacturing, and design
• Draft legislation will be published this summer
Planning to encourage greater business investment once the super-deduction ends in 2023:
• We have announced a series of potential policy changes to the UK’s existing capital allowances regime, which the government will consider ahead of April 2023
• These policies will aim to encourage business investment once the super-deduction ends to drive forward productivity growth
• We will be engaging with business organisations and other interested parties from now until the Autumn
These announcements boost the existing business support package, which includes:
• From April 1, and as announced in Autumn Budget 2021, eligible businesses will now be able to receive a temporary business rates relief worth almost £1.7 billion, the biggest single-year cut to business rates in 30 years (outside of emergency Covid reliefs)
• Freezing the business rates multiplier for another year saving businesses £4.6 billion over the next 5 years
• Introducing the temporary super-deduction, the biggest two-year business tax cut in modern British history. Under the super-deduction, for every pound a company invests, their taxes are cut by up to 25p
• Increasing the Annual Investment Allowance to £1 million – the highest level of support for capital expenditure ever provided through the AIA and a generous incentive to invest for over a million SMEs, providing full expensing for all SMEs
• Extending the transitional relief for business rates and supporting small business schemes for 2022-23, which will restrict bill increases from between 15% to 25% for SMEs. The extension of these schemes is estimated to save businesses £30 million, protecting small businesses from significant bill increases before the 2023 revaluation
• Establishing Help to Grow, which is giving SMEs the tools they need to innovate, grow, and help drive our economic recovery. As a result of the scheme 90% of survey respondents have made changes or are planning to make changes to the way they manage, organise or operate their business
O% VAT on Energy Savings Materials (ESM) April 2022 GB-only*
Changes to Capital Allowances regime April 2023 UK-wide**
• *The Northern Ireland Executive will receive a Barnett share of the value of this relief until it can be introduced UK-wide.
• **The UK government is considering potential policy changes to the CAs regime ahead of April 2023. These are expected to be UK-wide.
A full review of the statement is available here.
Making tax digital - where are we now?
The subject of MTD now encompasses VAT and income tax. It is very important that businesses of all sizes are aware of what their current and forthcoming obligations are.
To keep up to date follow thse links:
Follow this link for our analysis of all the major announcements
National Insurance rise to help pay for social care
In September 2021, the Government announced the following changes: 1.25% rise in National Insurance Contributions (NIC) from April 2022 for employees, employers and the self-employed; ... Tax rates on dividends will increase by 1.25% in April 2022
Follow this link to the updated tax tables.
CGT: reduction in Entrepreneurs’ Relief lifetime limit
Significant cut to lifetime limit – but not quite abolition.
Effective immediately (from 11 March 2020) the lifetime limit on gains eligible for Entrepreneurs’ Relief (which offers a reduced 10% rate of CGT on qualifying disposals) will be reduced from £10m to £1 million.
The legislative detail will be introduced in Finance Bill 2020. It has been announced that Finance Bill will also provide that the lifetime limit must take into account the value of Entrepreneurs’ Relief claimed in respect of qualifying gains in the past. Therefore, any entrepreneurs who have already claimed this relief on past business disposals for gains in excess of £1m will no longer have access to this relief.
This is a significant reduction that was anticipated in some form, and comes in response to evidence that it has done little to incentivise entrepreneurial activity and that most of the benefit accrues to a small number of very affluent taxpayers.
The good news is that it has not been completely abolished and will still be available for small to medium sized business disposals, subject to the usual criteria for eligibility.
Corona virus dominates the budget 2020
To support SMEs in response to Covid-19, the Chancellor announced immediate measures for their employees.
Temporary return of Statutory Sick Pay claims
This offers immediate support for small and medium-sized businesses and employers by helping them cope with the extra burden of paying Covid-19-related SSP. Eligible costs will be refunded, with the criteria being as follows:
• this refund will be limited to two weeks per employee
• employers with fewer than 250 employees will be eligible. The size of an employer will be determined by the number of people they employed as of 28 February 2020
• employers will be able to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of Covid-19
• employers should maintain records of staff absences, but should not require employees to provide a GP fit note
• the eligible period for the scheme will commence from the day on which the regulations extending SSP to self-isolators come into force.
Prepare for changes to the employment allowance
Employers must make extra checks to work out whether they are eligible
You could get up to £5,000 a year off your National Insurance bill if you’re an employer but there are changes to the way it works.
Employment Allowance will continue to be claimed through your EPS, by making the claim you are confirming you’ve assessed your eligibility for EA, and won’t exceed the de minimis State aid threshold. You’ll need to advise your payroll administrator if you are eligible or not. If your business is undertaking economic activity, you’ll need to provide your business sector(s) on the EPS – Agriculture, Fisheries & Aquaculture, Road Freight Transport or Industrial for everyone else. If your business is not undertaking economic activity – you’ll need to advise that State aid rules do not apply.
Full details of the employment allowance can be found here.
Dont forget to claim the marriage allowance
The law has recently changed allowing heterosexual couples to enter into civil partnerships, and eligible civil partners are also able to claim the allowance.
HMRC is reminding couples they may be eligible for Marriage Allowance. Marriage Allowance lets one partner transfer ten per cent of their Personal Allowance – currently £1,250 – to their husband, wife or civil partner if they earn more than them. They can benefit from Marriage Allowance if all the following apply: • they’re married or in a civil partnership • they do not pay income tax (for example, their income is below the Personal Allowance – currently £12,500) • their partner pays income tax at the basic rate, which usually means their income is between £12,501 and £50,000 (£43,430 in Scotland). They can backdate their claim by up to four years, currently to include any tax year since 5 April 2015 that they were eligible for Marriage Allowance
How to claim.
Company car tax changes from April 2020
Be aware of the changes affecting diesel cars and low emission vehicles
Diesel cars which meet the levels of Nitrogen Oxide (NOx) emissions permitted by Euro standard 6d are exempt from the entire diesel supplement. For cars manufactured after September 2018, the online Vehicle Enquiry Service will help you identify whether a car meets Euro standard 6d. This is also available on the V5C form for cars registered after 1 September 2018 onwards. All cars shown as meeting Euro status 6AJ, 6AK, 6AL, 6AM, 6AN, 6AO, 6AP, 6AQ or 6AR, meet Euro standard 6d.
If you have registered to payroll the car and car fuel benefit charge in the 2019-20 tax year for a Euro standard 6d compliant diesel car, you will need to: calculate the cash equivalent using the appropriate percentage for ‘Fuel Type F’
From 6 April 2020 the car and car fuel benefit calculation is changing with the introduction of 11 new bands for ultra low emission vehicles (ULEVs) including a separate zero emissions band. This is to support the government’s commitment to improving air quality in towns and cities. If your company car has a CO2 emission figure of 1-50g/km, they will now need to provide the cars zero emission mileage. This is the distance that the car can travel in miles on a single electric charge.
Selling a property? get up to speed with tax changes
New rules for capital gains from April 2020
From April 2020 HMRC is changing the rules related to the submissions of information and payment of Capital Gains Tax (CGT) due on the disposals of a UK residential property (other than a principle private residence). The tax due must be reported and paid to HMRC within 30 days of completion of the disposal. Non-UK residents who currently report property disposals within 30 days can no longer defer payment.
To enable customers to report and pay any CGT liability arising from gains on the sale of a property HMRC are developing a new digital service accessible from GOV.UK, which will be available from April 2020 to make it easier for customers to report and pay their CGT property disposal liability. For many customers this will mean that if they have no other Self Assessment criteria, they will no longer need to register for Self Assessment to notify and pay for a ‘one-off’ property disposal to report the gain.
Full details of the changes are available here.
Is Buy to Let dead in the water?
Two tax changes coming up in 2020 might make buy to let much less tax efficient
Two tax changes coming up in 2020 might make buy to let much less tax efficient. Firstly the 'extra' 18 months CGT free period at the end of the ownership (PPR) will reduce to just 9 months. Secondly, and potentially worst of all, the £ 40,000 worth of letting relief that a landlord might benefit from will only apply if they actually live in the property. Add to this the restrictions on tax deductibility of finance charges, pure buy to let investors may want to reconsider their options.
Government consultation on Inheritance Tax reforms - Business owners beware!
Along with the other reforms under consultation, all in all this most unpopular of taxes seems set to be be more lucrative to the Treasury in the future rather than being abolished as most people would prefer!
Currently the rules on business property relief may reduce IHT on the estate. An important condition for BPR is that the business must not consist wholly or mainly of holding investments. While ‘wholly or mainly’ is not defined in the legislation, it is thought of as a greater than 50% test. Where mixed activities are carried on, it is possible for the whole business to qualify for BPR provided that the investment activity is not the main part.
This 50% test is a very valuable tool to reduce IHT but a new government consultation puts it in jeopardy. The ‘office of tax simplification’ is looking to consider whether it continues to be appropriate for the level of trading activity for BPR to be set at this low level, especially as it is set at a lower level than that for gift holdover relief or entrepreneurs’ relief.
See the full consultation here and give your views!
Gift aid for Charities - HMRC update their guidance
Many charities rely on gift aid for their income
Under HMRC's Gift Aid scheme, charities can reclaim an amount equal to basic rate tax (20%) on the amount of the donation, plus basic rate tax already paid by that taxpayer on that donation.
HMRC have recently updated their guidance to help charities make the correct claim within the deadlines. For more detaiuls follow this link.
Changes in VAT for builders
New reverse charge measures comes into effect on 1 October this year
The key aspects of the new reverse charges rules are:
• it will apply to standard and reduced-rated supplies of building and construction services made to VAT-registered business who, in turn, also make onward supplies of those building and construction services
• the scope of supplies affected is closely aligned to the supplies required to be reported under the Construction Industry Scheme, but does not include supplies of staff or workers • the legislation introduces the concept of “end users” and “intermediary suppliers”.
This covers businesses or groups of associated businesses that do not make supplies of building and construction services to third parties and as such are excluded from the scope of the reverse charge if they receive such supplies. Examples include landlords, tenants and property developers.
Further guidance can be found from HMRC in their initial guidance note.
Cyber essentials for your business
The National Cyber Security Centre have developed Cyber Essentials to help you protect your organisation
All businesses today face multiple threats to their IT systems and the data that they rely upon. Many businesses rely on a single control such as anti-virus as a protection, but is this enough against today’s threats?
Impacts from cyber-attacks include theft of confidential client, financial and staff records, loss of entire systems and databases as a results of ransomware attacks.
The Cyber Security Breaches Survey 2019 found that 32% of businesses in the UK had identified at least one cyber security breach in the previous 12 months. GDPR requires businesses to act swiftly in the event of a data breach. Introducing obligations to notify customers and fines
To assist UK businesses, the National Cyber Security Centre have developed Cyber Essentials to help you protect your organisation against the most common cyber-attacks. These simple steps recognise that not everyone has the time or resources to develop complex cyber security solutions and provide practical guidance that is easy to understand and put in place. Cyber Essentials Certification, using the self-assessment option, costs less than 10% of the average cost of a single data breach.
Adjustments to VAT returns - new HMRC rules announed
New rules from HMRC will affect how VAT returns are adjusted
Draft regulations are designed to ensure that businesses can only adjust their output tax where there has been a genuine price reduction and they have refunded money to customers.
What are the new regulations about?
This involves potential changes to VAT Regulation 38 which affects businesses making adjustments to their VAT liabilities after a sale has taken place for instance when a new price was negotiated. HMRC are seeking to tighten the use of the regulation, in particular requiring businesses to issue a credit note and give a refund to customers when a price reduction occurs before a VAT adjustment can be made.
At the moment Regulation 38 requires that an adjustment shall be made to the VAT return covering the period in which the change takes place. This changes the output tax the supplier is liable to pay to HMRC.
HMRC state that they have evidence that some businesses are attempting to abuse Regulation 38 by applying it to situations which should properly be dealt with under error correction provisions. They claim this enables them to make adjustments to their output tax even when no refund is given to the customer, and to circumvent the 4-year time limit.
Clearly where a business alters simply alters the VAT return rather than using the error correction method, there may be a financial advantage.
What are the proposed new regulations?
• Regulations 15, 24 and 38 of the VAT Regulations 1995 will be amended by Statutory Instrument. The changes will ensure that adjustments can only be made under Regulation 38 when the supplier has issued a credit note to the customer, and has given them a refund
• It will also ensure that errors resulting from a failure to make adjustments must be corrected in accordance with the existing error correction provisions under section 80 VATA
The consultation on the proposed changes closes on 15 April 2019.
The measure will be implemented by negative Statutory Instrument, coming into force on 1 September 2019.
Capital allowances for property are back!
Businesses spending money on property structures may soon be able to obtain tax relief
Traditional problems obtaining tax relief on property expenditure
A very common query that the ACCA Technical Advisory team answers relates to the availability or non-availability of capital allowances where a business spends money on the structure of a property.. There has traditionally been a difference in tax treatment where allowances might be available for integral features to property but not on an investment in the actual structural asset.
Accountants and businesses have long regarded this as a tax gap which is unfair and might discourage investment.
What is changing?
The Chancellor announced on 29 October 2018 the introduction of a new capital allowance for new non-residential structures and buildings (SBA). This was designed to address the tax gap and will be good news for businesses. A summary of the core tax relief and timing is:
a) relief will be given at a flat rate of two percent over a 50-year period
b) relief will be available for new commercial structures and buildings, including costs
for new conversions or renovations
c) relief is available for UK and overseas structures and buildings, where the business is within the charge to UK tax
d) relief will be limited to the costs of physically constructing the structure or building,
including costs of demolition or land alterations necessary for construction, and
direct costs required to bring the asset into existence
e) relief is available for eligible expenditure incurred where all the contracts for the
physical construction works were entered into on or after 29 October 2018
f) claims can only be made from when a structure or building first comes into use
g) land costs or rights over land will not be eligible for relief, nor will the costs of
obtaining planning permission
h) the claimant must have an interest in the land on which the structure or building is
i) dwelling houses will not qualify, nor any part of a building used as a dwelling where
the remainder of the building is commercial
j) sale of the asset will not result in a balancing adjustment - instead, the purchaser
takes over the remainder of the allowances written down over the remaining part of
the 50-year period
k) expenditure on integral features and fittings of a structure or building that are
currently allowable as expenditure on plant and machinery, will continue to qualify
for writing down allowances for plant and machinery including the Annual Investment
Allowance (AIA) up to its annual limit
l) SBA expenditure will not qualify for the AIA
m) where a structure or building is renovated or converted so that it becomes a
qualifying asset, the expenditure will qualify for a separate two percent relief over
the next 50 years.
The progress of the actual legislation is:
• 29/10/2018 – Technical note issued outlining the effects of the proposed legislation. Note that the above summary remains the same as per the original technical note.
• A number of meetings with interested groups were held which resulted in certain changes to the draft legislation
• An introductory note to draft secondary legislation was issued on 13 March 2019
The government invites comment by 24 April 2019 on the detailed draft secondary legislation. An overall response to consultation responses will be published in May 2019.
Tax relief for terminal losses - dont miss out
A sometimes overlooked loss relief is available to companies where they cease trading and have made losses in the last 12 months.
The normal rules
Without ceasing to trade, if your company makes a loss from trading, the sale or disposal of a capital asset or on property income, then you may be able to claim relief from corporation tax.
You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back, or it will be carried forward to another accounting period.
Terminal loss (TL) rules
The TL rules go much further than the normal rules above. Where a company has stopped trading and it has made a loss in its final 12 months of its trade the relief is extended as the company can carry back any trading losses that occur in the final 12 months of a trade and set them off against profits made in any or all of the three years up to the period when you made the loss.
The small print:
• For each year, you can only offset the loss against the profits in that year if your company or organisation was carrying on the same trade at some point in the accounting period or periods that fall in that year.
• If the accounting period end date has changed, or any of the earlier accounting periods in that three year period are less than 12 months, then you’ll have to apportion the profit.
• Any loss must be offset against the profits of most recent years first, before it can be carried back to earlier years. Losses must be made in the order they’re made, starting with the earliest.
Please follow this link for a detailed example of how the carry back works from HMRC's company taxation manual.
In addition to the above, the TL rules are also extended specifically for losses made since 1 April 2017. In this case the company may be able to claim Terminal Loss Relief for carried forward losses of that trade.
This is designed to give additional relief to companies and organisations that have been prevented from fully relieving profits of the final three years of a trade, due to restrictions on relief for carried forward losses.
The small print:
• Terminal relief for carried forward losses of a trade is not subject to the restrictions on amounts that can be relieved using carried forward losses in periods from 1 April 2017.
• Losses that can be used are trade losses carried forward to the final accounting period when the trade ceased. These losses can be used to reduce profits:
• of the final accounting period
• for earlier periods up to three years before the end of the final accounting period
Note that you can only use this relief to reduce profits of the three years ending with the end of the period in which trading stopped. This is not the same as the three year period that applies for losses that occur in the final 12 months of the trade.
If the final accounting period and final 12 months of trade begin on 1 January 2025 and end on 31 December 2025, the three year period for terminal relief for:
• losses of the trade incurred in the final 12 months will begin on 1 January 2022 and end on 31 December 2024
• carried forward losses of the trade will begin on 1 January 2023 and end on 31 December 2025.
In both cases, if one of the earlier accounting periods falls partly within and partly outside the three year period, then you’ll have to apportion the profit of that accounting period.
You cannot use terminal relief for carried forward losses of a trade to offset profits apportioned outside its particular three year period.
Any loss must first be offset against the profits of most recent years before being carried back to earlier years.
You can only claim this relief to reduce profits of periods from 1 April 2017.
You can only claim relief against profits for periods later than one when the loss you’re using was originally sustained, even if there are earlier periods within that three year period.
This applies to each amount of loss that’s been carried forward to the final period.
You cannot claim this relief to reduce profits for either:
• the period in which the loss you’re using was originally sustained
• any previous periods.
HMRCs company taxation manual giving full guidance on terminal losses.
Declaring rental income on jointly owned properties
A 50/50 split may not be tax efficient for your clients
What is the default position?
HMRCs default position is that where someone lives with a spouse or civil partner and has income from property which is jointly owned, then normally they will be taxed on an even split of the income.
However, where the beneficial interests in the property are different it may be possible to apply for the income to be taxed in a different ratio. Clearly this will be tax efficient in certain circumstances such as one of the owners being a higher rate tax payer.
For example, if the husband put in 60% of the capital to buy the property and the wife put in 40%, the couple could make an election for 60% of the interestto be assessed on the husband and 40% assessed on the wife. As the election must be aligned with the beneficialentitlement, it is not possible to choose a split purely based on the most tax efficient allocation (which may be 0% husband, 100% wife).
For 2017/18 tax returns a declaration now will be too late as it must be given to the Inspector within 60 days of the date of the declaration. However discussions with the client may mean that planning for 2018/19 needs to start now.
What is the catch?
The catch is that the beneficial interests need to be genuinely different to a straight forward even split. The reason behind the difference must also be evidenced. HMRC state:
Married couples and civil partners do not have a general option to have income taxed in any way they like. They can depart from the standard 50/50 split for tax purposes only where
each spouse or civil partner is in fact entitled to a share other than 50/50 in the property and
the share that a spouse or civil partner has in the income is the same as their share in the property
What evidence does HMRC accept regarding different beneficial interests?
Although HMRC do not specify an exact list, HMRC and most commentators refer to the evidence as normally being either a written declaration or a trust deed.
How is a declaration made by the tax payer?
The declaration is normally made online using this link.
Are there any other conditions?
There are a number of important issues to take into consideration before making a declaration. HMRC provides detailed guidancehereon the whole subject but some of the main points are:
No split other than 50/50 can be accepted until a satisfactory declaration is received.
A form 17 declaration must be made jointly. If one spouse or civil partner does not want to make a declaration both must accept the standard 50/50 split for jointly held property.
A married couple or civil partners who have separated would not be subject to the 50/50 rule, as it applies only to couples living together. They will be taxed on their actual entitlement in any event, and so cannot make a form 17 declaration.
Individuals other than spouses or civil partners cannot make a form 17 declaration, for example siblings. The 50/50 rule does not apply to them. Income is attributable to them on the basis of their entitlement.
A couple do not have to opt for a different split. A couple could accept the standard 50/50 split for jointly held property, even if one spouse or civil partner holds 90% of the capital and income and the other spouse or civil partner holds 10%.
A couple might declare that their interest in property is split 60/40. Later their interests change so that they hold it 80/20. If they wish they may make a fresh declaration to reflect the new split. But it must reflect the actual position.
There is no limit on the number of declarations.
Advice should be taken on the non-tax implications of changing the beneficial ownership. For instance the changes may have an unintended effect on the split of sale proceeds of the property.
Pensions for self assessment
Make sure you get the correct tax relief on your self-assessment
Pension contributions can be a complicated area but thankfully for self employed people with personal pensions it should be fairly straight forward. However many clients do not understand exactly how the tax relief works and so may give their accountants incorrect pension information for the tax return – or miss them out altogether.
There are also complicated rules governing the amounts that can be paid into a pension scheme annually which may – if exceeded – create additional tax liabilities.
So here is a quick recap to help with the tax return.
Basic rate tax payer
When a contribution is paid the pension scheme reclaims income tax at the basic rate on behalf of the tax payer and adds it to their pension pot. Therefore all of the relief is claimed and for a basic rate taxpayer the actual tax return entries will not affect the tax liability.Note that if the taxpayer’s rate of Income Tax in Scotland is 19% the pension provider will claim tax relief at a rate of 20%. The difference does not need to be repaid. Please see further information at the end of this article regarding Scottish and Welsh taxpayers.
Complication – the pension contributions need to be disclosed on the tax return even when the relief has been claimed at source by the scheme. In addition the amounts contributed must be put down gross, ie not the actual amount paid but grossed up for the tax relief claimed at source. Make sure that you client has given you the correct figures and whether they are gross or net.
Emma paid £700 into her pension scheme.
She puts £875 in box 1 (£700 divided by 80 and multiplied by 100), which is her net payment plus the tax relief of £175 (£875 at 20%).
The reason for the ‘gross’ entry is explained below.
Higher rate tax payer
Where the person is a higher rate taxpayer or additional rate taxpayer, additional tax relief may be claimed This is claimed through an extension in the basic rate band and higher rate band. Both bands are extended by the gross amount of the contribution. Hence it is important for the client not to get confused between net and gross payments as this may directly affect the tax liability.
Example (courtesy of Tolleys) ― illustrating higher rate tax relief given by extending the basic rate band
Mr Hubert is self-employed and lives in Birmingham. He pays £600 net per month into his pension scheme. He has taxable trading profits of £70,000 and receives bank interest of £7,500 each year.
Income tax calculation
Year ended 5 April 2019
Less: personal allowance
Taxable net income
£43,500 (W1) (N1)
(W1) Extending the basic rate band and savings basic rate band:
Basic rate band / savings basic rate band
Plus: gross pension contribution
Extended basic rate band
1) Non-savings income is first taxed at the basic rate of 20% using the extended basic rate band. The non-savings income is more than the extended basic rate band and therefore £14,650 (£58,150 – £43,500) of non-savings income falls within the higher rate band.
2) The amount of the savings nil rate band depends on the taxpayer’s marginal rate. Higher rate taxpayers, such as Mr Hubert, have a savings nil rate band of £500. The balance of the savings income, which amounts to £7,000 (£7,500 – £500), is taxable at the savings higher rate of 40%. See the Taxation of savings incomeguidance note.
3) As Mr Hubert is self-employed, it is likely that he would have already paid some of his tax liability under the payment on account regime.
Special pension contributions
There are some specific contributions that need to be treated differently so again the devil is in the detail:
Payments to a retirement annuity contract – These are becoming less common now. There is a specific box on the tax return for this as the (RAC) provider doesn’t use the ‘relief at source’ scheme and so they don’t claim the basic rate (20%) tax relief on behalf of the taxpayer. The total personal contributions to the RAC in the 2017 to 2018 tax year should be included in box 2.
Payments to your employer’s scheme which were not deducted from your pay before tax. There are various reasons why this might happen but again it may mean that basic rate tax relief has not been given and so needs claiming. The total unrelieved amount paid in the 2017 to 2018 tax year should be included in box 3.
Payments to an overseas pensions scheme – these my attract tax relief is they are eligible and were not deducted from pay before tax. The amount that directly qualifies should be included in box 4.
Company pensions schemes
Remember that normally the relevant entries on the tax return relate to personal pension contributions. So if a tax payer is part of a company pension scheme these contributions should not be confused with personal ones.
The maximum contribution to a pension fund that a taxpayer can obtain tax relief for in any one tax year is the higher of 100% of his ‘relevant earnings’ for that year and the basic amount (£3,600). In effect anybody can pay up to £2,880 per year into a pension scheme regardless of the level of his or her earnings. Up to this limit, the pension scheme will claim basic rate tax relief. Grossing up for 20% basic rate tax makes the gross contribution £3,600.
There is an annual allowance and if pension contributions go above this, tax may be payable. ‘Pension input’ broadly means employee’s plus employer’s pension contributions in the tax year. The allowance for 2017/18 is £ 40,000.
If the annual allowance for the current tax year (6 April to 5 April) is fully used, the tax payer can carry over any unused allowance from the previous 3 tax years. Carry over unused allowance from the earliest tax year first.
If the tax payer is already accessing the pension, the annual allowance may be reduced and tax payable when exceeded
Higher paid tax payers have a reduced annual allowance. Follow this linkfor HMRCs reduced allowance calculator
The annual allowance includes all pension schemes. This is an important planning/timing issue as the client needs to get all of the necessary information from each scheme they contribute to.
Further information regarding Scottish and Welsh taxpayers going forward
1. Scottish Budget
On 12 December 2018, the Scottish government published their Draft Budget setting out the Scottish Income Tax rates for the 2019 to 2020 tax year. The Scottish Income Tax rates are the same as for 2018 to 2019. For 2019 to 2020 the Scottish rates are as follows:
•the starter rate will be 19%
•the basic rate will be 20%
•the intermediate rate will be 21%
•the higher rate will be 41%
•the top rate will be 46%
For 2019 to 2020, the administrator of a pension scheme will be using the relief at source mechanism, and continue to claim tax relief at the rate of 20% for members who are Scottish taxpayers.
For pension scheme members who are Scottish taxpayers liable to Income Tax at no more than the Scottish starter rate of 19%, or who pay no tax, current tax rules will continue to apply. This means that scheme administrators will continue to claim relief at 20% in respect of these individuals, and HMRC will not recover the difference between the Scottish starter and Scottish basic rate.
Pension scheme members who are Scottish taxpayers liable to Income Tax at the Scottish intermediate rate of 21% will be entitled to claim the additional 1% relief due on some or all of their contributions above the 20% tax relief paid to their scheme administrators. We will not be able to put this directly into your scheme on behalf of your members, but we’ll adjust their tax code so that they get this tax relief through their pay.
Pension scheme members liable to Income Tax at the Scottish intermediate rate will also be able to claim the additional relief for 2019 to 2020 through their Self Assessment return or, if they do not already complete Self Assessment returns, by contacting HMRC.
These Scottish Income Tax rates announced in the Scottish government’s Draft Budget for 2019 to 2020 will be considered by the Scottish Parliament, and an agreed Scottish Rate Resolution will set the Scottish Income Tax rates and bands for the tax year 2019 to 2020. We’ll provide an update on this in a future pension scheme newsletter.
2. Relief at source for Welsh taxpayers
The Welsh government has confirmed that for 2019 to 2020 the rates of Income Tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers. Therefore the Welsh Budget does not appear to give rise to any changes for schemes operating relief at source.
Dissolving a small company – what needs to be included on the tax return
The final distribution of assets can cause a headache for tax practitioners
There are many reasons why a company is dissolved ranging from insolvency to simply having come to the end of its useful life.
Whatever the reason, it is essential that the correct advice is given by the company’s advisers and the correct decisions are taken by the directors. Get it wrong and it could mean the directors/shareholders lose money, incur unlimited fines and might need to restore the company.
In addition, the correct advice and planning is important from a tax efficiency point of view.
This guidance gives some pointers to the differing treatments of final distributions on the tax return.
Tax efficiency and the different disclosures in the tax return
Good tax advice is important where the company is solvent and the directors are looking for the most tax efficient way out. The default position is that a distribution by a company is, strictly speaking, an income distribution. Even where a distribution is capital for other purposes, it is treated as income for income tax purposes
So how can the distribution be treated more efficiently?
• Since 2012, where the assets of the company are below £ 25,000 a pre-dissolution distribution can be treated as a capital gain. Entrepreneurs relief (ER) may also therefore be available which in many cases would create a tax saving
• Where the assets are above this figure then the distribution will normally be treated as a dividend with no ER available. This could make the extraction of the final shareholders’ funds far less tax efficient depending on the shareholders personal tax situation
• If a liquidator is appointed on behalf of members or creditors, then the distributions made by the liquidator to the shareholders may still be subject to capital gains tax (and possibly benefit from ER) in the hands of the shareholders. This is because of s.829 of the Companies Act 2006 which states that:
The following are not distributions for the purposes of this Part—
(a)an issue of shares as fully or partly paid bonus shares;
(b)the reduction of share capital—
(i)by extinguishing or reducing the liability of any of the members on any of the company's shares in respect of share capital not paid up, or
(ii)by repaying paid-up share capital;
(c)the redemption or purchase of any of the company's own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter 3, 4 or 5 of Part 18;
(d)a distribution of assets to members of the company on its winding up.
So the correct use (and expense of) a liquidator could save the shareholders a considerable amount of money as Entrepreneurs Relief may be available. If a formal close down was not performed then the default is that the final distribution may well be income subject to income tax.
To illustrate the tax savings consider the following example (courtesy of LexisNexis):
Example of capital treatment on winding up
Mr and Mrs Brown own equal shares in Brown Ltd, a trading company they set up in 1996.
During 2018, Mr and Mrs Brown decided to retire and wanted to distribute the company’s post tax cash reserves of £1 million in the most tax efficient manner.
Mr and Mrs Brown are additional rate taxpayers and utilise their annual capital gains tax exempt amount every year. They are entitled to entrepreneurs’ relief and have utilised their dividend allowance.
Without CTA 2010, s 1030A, the entire £500,000 each paid to Mr and Mrs Brown would be treated as a dividend.
Mr and Mrs Brown would both have additional rate tax liabilities as follows:
Additional rate tax due at 38.1% 190,500
Applying CTA 2010, s 1030A, £25,000 of the distribution may be treated as capital proceeds on the sale of their shares. This is on the assumption that a dividend may be paid in advance of winding up and does not constitute “a distribution in respect of share capital in anticipation of its dissolution” under CA 2006, s 1003.
In this situation it may be difficult to argue that such a dividend is not with a view to winding up, but it may depend on the timing of payments.
The £25,000 cap is per company, not per shareholder, so initially a dividend would need to be paid that left only £25,000 in the company. This would be a dividend of:
£1,000,000 – £25,000 = £975,000
This means that Mr and Mrs Brown would each receive a dividend of £487,500. This is subject to income tax as usual and produces a tax liability as follows:
Additional rate tax due at 38.1% 185,737
Then, at a later point in time, the remaining capital would be distributed on an informal winding up. This provides Mr and Mrs Brown with a capital distribution of £12,500 each.
Capital distribution 12,500
Entrepreneurs’ relief applies
Tax at 10% 1,250
Because of the large amount of profits retained in the company it would certainly be more beneficial to incur the cost of a formal liquidation to secure a capital treatment.
Note also that ER (Qualifying capital gains) for each individual are subject to various life time limits.
Therefore directors will need to undertake some careful tax/operational planning if they are considering winding up the company especially where distributable reserves are more than £25,000.
For instance contrast the following example (courtesy of LexisNexis) where savings are ore marginal under an expensive formal liquidation and so other ways of reducing the reserves might be considered:
Example 2 ― marginal situations
The situation in Example 1 illustrates that where there are significant profits retained in the company, it will be far more beneficial to pay for a formal liquidation. Where the company has profits closer to the £25k threshold, the case for a formal liquidation diminishes.
Mr and Mrs Gray own equal shares in Gray Ltd, a trading company they set up in 1996.
During 2018, Mr and Mrs Gray decided to retire and wanted to distribute the company’s post tax cash reserves of £54,000 in the most tax efficient manner.
Mr and Mrs Gray are higher rate taxpayers and have not utilised their annual capital gains tax exemption for 2018/19. They are entitled to entrepreneurs’ relief and have utilised their dividend allowance.
There are essentially three options available to Mr and Mrs Gray:
• •use an informal winding up procedure and distribute all profits of the company as dividends
• •distribute excess profits and use an informal winding up procedure to distribute no more than £25,000
• •use a formal liquidation procedure
These produce net proceeds for Mr and Mrs Gray as follows:
Net position (each)
Income distribution £18,225
Income distribution with £25k as capital £22,208
Formal liquidation £22,770
The workings are shown below.
It can be seen that at this level of retained profits, the results are very close to each other. Utilising an informal winding up may secure a good position if the dividend paid in advance of winding up is not caught by CTA 2010, s 1030A(2)(b).
However, if the dividend paid before the informal winding up is considered to be a “distribution in respect of share capital in anticipation of its dissolution”, the position may be adjusted, following an HMRC enquiry, to give the worst outcome.
Furthermore there may be penalties due if it is considered that reasonable care has not been taken.
The formal liquidation produces the best outcome and it is also the safest.
It may be that the liquidator fees are less than the £6,000 estimated below. If the fees were dropped to £4,500, the formal liquidation would actually provide a much more efficient outcome too.
Informal winding up ― all income
Mr and Mrs Gray receive a dividend of £27,000 each. This gives them liabilities as follows:
Higher rate tax due at 32.5% 8,775
This means that Mr and Mrs Gray each receive proceeds net of tax of £18,225.
Informal winding up ― utilising section 1030A
Mr and Mrs Gray distribute £29,000 of the profits as a dividend. They receive £14,500 each.
Higher rate tax due at 32.5% 4,712
Then, at a later point in time, the remaining capital is distributed on an informal winding up. This provides Mr and Mrs Gray with a capital distribution of £12,500 each under CTA 2010, s 1030A. After utilising their annual exempt amount of £11,700, this produces capital gains as follows:
Capital distribution 800
Entrepreneurs’ relief applies
Tax at 10% 80
This leaves Mr and Mrs Gray with net proceeds each after tax of £22,208.
Mr and Mrs Gray pay £6,000 for a formal liquidation, leaving £48,000 of profit to distribute. This gives them each a capital distribution of £24,000. After utilising their annual exempt amount of £11,700, they each have liabilities as follows:
Capital distribution 12,300
Entrepreneurs’ relief applies
Tax at 10% 1,230
This leaves Mr and Mrs Gray with net proceeds each after tax of £22,770.
Treatment of distributions on the tax return
As discussed above, the treatment of receipts needs to follow the legal form and so the entries on the 2017/18 self-assessment are crucial. If the client has not taken proper advice or properly planned the winding up of the company it can have severe consequences on the personal tax paid by the shareholders.
Scottish rates of income tax
A recap on who, why, where
Who pays Scottish Income Tax?
For most, the issue will be quite straight forward in that you pay Scottish Income Tax if you live in Scotland. However there are some other factors to consider:
You may also pay Scottish Income Tax if you:
Scottish Income Tax applies if you move to Scotland and live there for more than half the tax year. HMRC must be informed of the new address of the move to or from Scotland. Otherwise tax may be paid at the wrong rate.
The new rate payable will be backdated to the start of the tax year (6 April) of the move. The tax taken from wages or pension will be adjusted automatically so the correct amount is payable across the whole year.
live in a home in Scotland and one elsewhere in the UK, for example for work
This is where the details get complicated.
The main home is usually where the taxpayers lives and spend most of their time. It doesn’t matter whether they own it, rent it or live in it for free.
But to complicate matters, the main home may be the home where less time is actually spent if that’s where:
most of their possessions are
the family lives, if married or in a civil partnership
the person is registered for things like a bank account, GP or car insurance
even if the taxpayer is a member of clubs or societies
An example of this is if you live away because of your work, for example a lorry driver, an offshore worker or in the armed forces.
The tax payer should contact HMRC to change which home counts as your main one.
Doubts about which is the main home?
HMRC has detailed information about working out which is the main home, including issues like students, mobile workers, no permanent residence, traveling etc
Directors’ loan account – a big issue for tax returns
Correct disclosure of DLA entries is vital
Directors’ loan account (DLA) adjustments are a constant theme in the accounts of SME companies. Members are often faced with the task of analysing SME transactions and explaining which credits should/should not go to the DLA. This is a particular problem in the tax return season when it comes to declaring/identifying dividends.
Often the directors/shareholders are rather keen to process entries which appear to benefit them but they do not understand the real implications. The directors of SMEs, mainly due to the size of the business, necessarily tend to concentrate on day to day activities and pay less attention to accounting and tax matters.
This often results in HMRC and the client having conflicting views. An example of their interest in this subject is a first tier tribunal victory for HMRC where an appeal against PAYE/NIC was dismissed. This is a case which demonstrates that HMRC are looking at the entries in DLAs and that they can/will assess tax when they see it as applicable.
Briefly the facts of the case were:
The appellant company is an SME which their own accountant described at the tribunal as ‘the appellant is a small business and is conducted very informally between the shareholder directors’. (Does this ring any bells for members?)
One of the directors had loaned the company a substantial amount of money a few years ago. This was on an informal basis and so it was not clear whether there was a loan agreement or if the loan was interest bearing.
The tribunal heard that it had been ‘agreed’ that on 30 September annually his loan account was to be credited with an annual salary of £16,000. By 30 September 2013 eight such sums had been so credited. HMRC carried out an employer’s record inspection and was told that:
the director was paid £16,000 at the end of each trading year but that the amount was credited to the loan account
no payments had in fact been made to him and accordingly, it was the appellant’s understanding that no PAYE or NICs were due by in respect of the sums credited.
The tribunal heard that on 2 January 2014 the appellant’s representative confirmed that the sums credited to the DLA had been voted upon but as they had not been paid it was proposed that in the 2013 corporation tax accounts all sums credited (£128,000) would be reversed by way of prior year adjustment (PYA). That adjustment was included in the 2013 accounts and provided to HMRC on 30 June 2014.
The appellant also told the tribunal that the entries were made ‘for good housekeeping reasons’, and were accrued by way of an ‘aide memoir’. It was claimed that the PYA undertaken in the 2013 annual accounts was simply to reverse out the accrual which was never really intended.
HMRC took the view that the annual sums had been accrued and any attempt to reverse the accrual by PYA or otherwise was ineffective and that the PAYE and NICs remained due. The company appealed against this.
The outcome of the tribunal was that PAYE/NIC was due on the entries and that it was not possible to avoid them by a prior year adjustment. The appeal by the company was dismissed.
Clearly the directors of this SME were not aware of the potential dangers that an ‘informal’ approach to their records might bring.
The points arising during the tribunal are very interesting and are useful to members when advising their clients on similar issues:
PAYE/NIC on deemed salary:
any salary, wages or fees obtained by an employee (or director) if it is in money or money's worth, that constitutes an emolument of the employment, is chargeable to income tax
the amount received by an employee (or office holder) will be taken to be the sum net of tax and the PAYE and NIC obligations will sit on top of the sum retained by the employee
the provisions of section 8 Social Security Contributions (Transfer of Functions) Act 1999 and regulation 80 Income Tax (Pay As You Earn) Regulations 2003 provide HMRC with the power to collect PAYE tax and NICs where it appears to them that there has been under payment by an employer.
by reference to the provisions of the Companies Act 2006 (ss393 and 454) HMRC contended that the accounts had been prepared on a true and fair view and that any attempt by the appellant to restate the accounts by way of the prior year adjustment was incorrect
there was limited evidence available to the tribunal
the entries credited to the loan account indicated the director was content for the cash to be continued to be used in the business and had he chosen to do so he could have called in the loan or otherwise enforced the debt he was owed by the company
the PYA did not appear to have been done properly and in any case although the director sought to absolve the company of its liability to him, he could not absolve it of its liability to HMRC
if the appellant had wanted to escape the charge to income tax under PAYE and the charge to NICs he needed to have indicated that he did not consider the annual fees payable to him in advance of each trading year end, before the vote for accruals in his favour and before the entries in the company.
HMRC has updated its directors’ loan account toolkit for 2017-18 which gives its guidance for agents (including a checklist). For more details on HMRC’s toolkits see our separate article in this newsletter.
HMRC also has guidance relating to overdrawn loan accounts
Useful tax elections and claims
Make sure tax reliefs are used in full!
Main residence nomination s222 (5a) Taxation of Chargeable Gains Act 1992 (TCGA 1992)
Taxpayers with two or more residences may choose which property is to be treated as their main residence for capital gains tax purposes by lodging an election under TCGA 1992, s222(5). The election must be made within two years of acquiring a second (or subsequent) residence unless there is a delay in occupation, in which case the date of moving into the residence is the trigger event. Once an election has been made it can be varied at any time and so even where the facts would suggest that a nomination is not necessary, it is prudent to make one to leave the door open for a variation at a later date.
Claim to reduce income tax payments on account – SA303
A claim to reduce tax payments on account can be made by a taxpayer at any time up to 31 January after the end of the tax year concerned if he believes that his tax liability will be lower than the previous year. The taxpayer must make the claim by notice, giving reasons why the payments on account should be reduced. If a taxpayer deliberately makes a claim to reduce the payment on account for the benefit of obtaining a cash flow advantage when he knows that his tax liability for the year would be higher than the amount paid then HMRC reserves the right to charge a penalty.
Deed of variation s142 Inheritance Tax Act 1984 (IHTA 1984) and s62 (7) TCGA 1992
If the variation includes a statement that the parties to the variation intend that the provisions of s142(1) Inheritance Tax Act 1984 and s 62(6) Taxation of Chargeable Gains Act 1992 are to take effect for inheritance tax, capital gains tax or both, the variation is treated as if the deceased had made it. In other words, the changes are treated as having been made by the deceased and as having taken effect from the date of death.
For a variation to take effect for inheritance tax, capital gains tax or both, it must be made within two years after the death, be in writing and signed by all the beneficiaries who would lose out because of it.
Negligible value claim s24 (2) TCGA 1992
Under this legislation a taxpayer who holds an asset which has become of negligible value may make a claim to be treated as though the asset had been sold and then immediately reacquired for an amount equal to its value. When a negligible value claim is made the taxpayer may wish to specify an earlier time, falling in the two previous tax years, at which to treat the deemed disposal as occurring. The taxpayer has to meet all the necessary conditions for the claim at that earlier time as well as at the time of the claim.
The effect of crystallising such a 'paper' loss, without actually selling the asset, can often be useful for reducing income tax, corporation tax or capital gains tax.
Form 17 (Declaration of beneficial interests in joint property and income)
Income and gains from jointly owned properties are usually taxed equally on spouses (or civil partners) regardless of the actual ownership of the property. Completion and submission of this form specifies a different apportionment for tax purposes (based on actual proportion of ownership), which can be useful where owners are subject to different rates of income tax.
Capital losses set off against income tax s131 ITA 2007
Under this section a taxpayer may be able to reduce his Income Tax liability by making a claim to offset losses on disposal of shares acquired by subscription in a qualifying trading company (or following a negligible value claim for such shares), against other income in the current or previous year.
Holdover relief claim s165 TCGA and s260 TCGA
Hold-over relief is available under s165 TCGA 1992. The gift must be of ‘business assets’. The transferor and the transferee must claim jointly within five years from transfer. The time limit for claiming gift hold-over relief is five years and ten months from the end of the tax year of disposal.
Hold-over relief is also available under s260 TCGA 1994 where the disposal is a chargeable transfer for inheritance tax purposes, but not a potentially exempt transfer. Cases where there is no liability to inheritance tax, because the value transferred is within the zero-rate band, qualify for hold-over relief.
Payment of capital gains tax by instalments s281 TCGA 1992
Where hold-over relief is not available, or only partial relief is available, and the asset is:
land and buildings
shares in unquoted companies
shares in a quoted company on which the donor had a controlling interest before the gift…
…the taxpayer can make a claim under s281 TCGA 1992 to pay tax in instalments. Also, under s280 TCGA 1992, if any of the consideration is payable more than 18 months after the date of the disposal, the tax due may be paid in instalments. The period over which the instalments are paid would be agreed with HMRC but cannot exceed the lesser of eight years and the point when all of the consideration is paid. The unpaid instalments carry interest.
Ten things you should know about money laundering
The authoritative guidance by which accountants and their firms may be judged, ultimately, by disciplinary tribunals and the courts of law is issued by Consultative Committee of Accountancy Bodies (CCAB) and can be accessed here.
What is a ‘money laundering offence’?
Money laundering – includes all forms of using or possessing criminal property, as well as facilitating the use or possession of criminal property – regardless of how it was obtained.
Proceeds of Crime Act 2002 s327 states that a person commits an offence if he: conceals, disguise, converts, transfers or removes ‘criminal property’.
What is ‘criminal property’?
Property is defined as any sort of property, wherever it is situated, including money, all forms of property (real, personal and intangible) and things in action. Property is ‘criminal property’ if it constitutes or represents a person’s benefit from criminal conduct AND the alleged offender knows or suspects that it constitutes or represents such benefit.
Examples of the offences that will be caught by anti-money laundering regulations (AMLR) are:
smuggling, including drug trafficking and illegal arms sales.
What are an accountancy firm’s compliance responsibilities?
Firms are required to implement in-house systems and controls that meet the requirements of the AML regime. These should include:
adoption and continual monitoring and assessment of detailed policies and procedures to manage their own compliance with the Regulations including setting out the practice risk assessment in writing
appointment of a Money Laundering Reporting Officer
training to relevant employees to ensure awareness of the law and ability to recognise suspicious transactions.
Firm have the following duties:
the duty to carry out client due diligence (CDD)
the duty to report known or suspected involvement in money laundering
the responsibility to seek consent to act in respect of actual or possible involvement in money laundering activity
the duty not to ‘tip off’
What is Client Due Diligence (CDD)?
Client due diligence (CDD) is the procedure whereby a practising accountant takes steps to identify a prospective client, the purpose of which is to ensure that the accountant is able to comply with the dictum ‘Know your client’ (KYC)
Accountants should not only know who their clients are but should also understand the nature of their business.
CDD checks are made expressly subject to the assessment of risk (please see below how to assess the level of risk). Based on this assessment, the accountant should determine the extent of information that is needed (and, indeed, whether or not they wish to act for the client). Note that the CCAB acknowledges that no system of checks will ever detect and prevent all money laundering issues but a risk-sensitive approach of this kind will provide a realistic assessment of the risks
Simplified or enhanced CDD checks?
SDD can be applied when a client is low risk, in accordance with the businesses’ risk assessment criteria. CDD measures are still required but the extent and timing may be adjusted to reflect the assessment of low risk, for example in determining what constitutes reasonable verification measures. Ongoing monitoring for unusual or suspicious transactions is still required.
Enhanced measures and enhanced ongoing monitoring is required:
in any business relationship or transaction with a person established in a high-risk third country
where there is a high risk of MLTF
if a client or potential client is a political exposed person (PEP), or a family member or known close associate of a PEP
if a client has provided false or stolen identification documentation or information
if a transaction is complex and unusually large, or there is an unusual pattern of transactions
if the transaction or transactions have no apparent economic or legal purpose
in any other case which by its nature can present a higher risk of money laundering or terrorist financing.
What are the enhanced due diligence measure?
The enhanced due diligence measures must include:
as far as reasonably possible, examining the background and purpose of the transaction
increasing the degree and nature of monitoring of the business relationship in which the transaction is made to determine whether that transaction or that relationship appears to be suspicious
seeking additional independent, reliable sources to verify information provided or made available to the relevant person
taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction
taking further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship
increasing the monitoring of the business relationship, including greater scrutiny of transactions.
Can reliance be placed on CDD carried out by others?
The 2017 Regulations (Part 4 s39) allow an accountant to rely on the CDD checks carried out by another person, such as, for example, the new client’s previous accountant. However, the new accountant must enter into arrangements with the third party which (amongst other things) enable them to obtain from the third party immediately on request copies of any identification and verification data and any other relevant documentation on the identity of the customer, customer’s beneficial owner, or any person acting on behalf of the customer.
The new accountant will remain fully accountable in case of any failure of compliance with the CDD requirements. Reliance can only be placed on certain classes of person, namely those that are covered by regulation 8 and Schedule 3 of the Money Laundering Regulations 2017.
For how long should CDD records be kept?
CDD records must be retained for a minimum of five years from the end of the business relationship or the date of any occasional transaction which might have been carried out.
What are the risk factors that should be considered?
When assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, the following factors should be considered:
(a) customer risk factors, including:
the business relationship is conducted in unusual circumstances
the customer is resident in a geographical area of high risk
the customer is a legal person or legal arrangement that is a vehicle for holding personal assets
the customer is a company that has nominee shareholders or shares in bearer form
the customer is a business that is cash intensive
the corporate structure of the customer is unusual or excessively complex given the nature of the company’s business
(b) product, service, transaction or delivery channel risk factors, including:
the product involves private banking
the product or transaction is one which might favour anonymity
the situation involves non-face-to-face business relationships or transactions, without certain safeguards, such as electronic signature
payments will be received from unknown or unassociated third parties
new products and new business practices are involved, including new delivery mechanisms, and the use of new or developing technologies for both new and pre-existing products
the service involves the provision of nominee directors, nominee shareholders or shadow directors, or the formation of companies in a third country
(c) geographical risk factors, including:
countries not having effective systems to counter money laundering or terrorist financing
countries having significant levels of corruption or other criminal activity, such as terrorism, money laundering, and the production and supply of illicit drugs
countries subject to sanctions, embargoes or similar measures issued by, for example, the European Union or the United Nations
countries providing funding or support for terrorism.
Further guidance and future developments
Further guidance on anti-money laundering for the accountancy sector can be found on the ACCA website, on Joint Money Laundering Steering Group (JMLSG) website, National Crime Agency (NCA) website and HM Treasury website
A specimen of anti-money laundering policies and procedure can be found her
Data encryption - what are the options?
Don’t put the security of your – or your clients’ – data at risk
How does encryption work?
Manual encryption has been used since Roman times, but the term has become associated with the disguising of information via electronic computers. Encryption is a process basic to cryptology – a science concerned with data communication and storage in secure and usually secret form. It encompasses both cryptography and cryptanalysis.
Cryptography is all about hiding the meaning of messages, and a digital signature is part of a scheme designed to do just this, by simulating the security of a handwritten signature in digital form. It can be used with encrypted and unencrypted messages, so a digital signature can authenticate the identity of the sender of a message or the signer of a document, and possibly ensure that the original content of the message or document that has been sent is unchanged.
Encryption secures data through protocols such as SSL, SSH, PKI and other digital signatures and certificates:
Secure Sockets Layer (SSL) – this is the standard security technology for establishing an encrypted link between a web server and a browser. This link ensures that all data passed between the web server and browsers remain private and integral. SSL is an industry standard and is used by millions of websites in the protection of their online transactions with their customers.
Secure Shell (SSH) – this is a network protocol that allows data to be exchanged using a secure channel between two networked devices. The encryption used by SSH provides confidentiality and integrity of data over an insecure network, such as the internet.
Public Key Infrastructure (PKI) – a public key infrastructure supports the distribution and identification of public encryption keys. It enables the users and computers to both securely exchange data over networks such as the internet and verify the identity of the other party. Any form of sensitive data exchanged over the internet is dependent on PKI for security. A certificate is issued by a certified authority to establish the authenticity of the identity of individuals, computers and other entities.
Digital signature and certificates – digital and handwritten signatures are very different. Digital signatures use an algorithm to produce two different but mathematically related ‘keys’ for an individual: one public and one private. These are then used to encode (or scramble) and decode data. Messages generated using the private key can be decoded and read by anyone with access to the public key. Similarly, anyone with access to the public key can use it to send a message, but it can only be decoded and read by the holder of the private key. It offers far more inherent security and solves the problem of tampering and impersonation in digital communications. It can provide the added assurances of evidence to source, identity and status of an electronic document, transaction or message. A digital signature provides an informed consent acknowledgement from the signatory.
Ignorance is not an excuse
In the current world, when technology has taken precedence over all our daily routines, accountants cannot hide behind a lack of knowledge about upcoming changes. It could be an expensive mistake to avoid digital security issues.
Managing cyber risks and attacks
With the risk of cyber-attacks growing, ensure you have a robust plan in place to minimise any business interruption and reputational damage.
Recent incidents point to accountants facing an increasing risk of their IT systems being hacked. Deloitte was recently the target of an attack that compromised the emails and plans of some of the firm’s blue-chip clients. So far, six of Deloitte’s clients have been informed that their information was compromised, but an internal review is ongoing.
Lines of defence
Accountants’ sensitive data makes them a prime target for hackers looking for data they can then monetise. Firms should split their cyber defences against such attacks between:
post-breach damage/crisis management.
To optimise your cyber risk management, it is vital to run the latest versions of software, in particular browsers and operating systems, and keep them up to date. This can be achieved by taking the following simple steps:
Identify all the software used on your systems – it’s easy to focus on Microsoft, but Adobe, Apache and so on must also be considered.
Monitor the release of new patches from vendors (specifically security patches, rather than feature patches) and apply them as soon as feasible. The software vendor will often assign a criticality that will help you identify the severity of the issue.
Deploy vulnerability scanning to ensure the patches have actually been installed.
It’s also important to train your staff to recognise the warning signs and avoid becoming victim to social engineering and other common cyber-criminal tactics. The following practices may help you to reduce security breaches that relate to human behaviour:
create a security policy that clearly outlines your company’s rules regulating the handling of data access and passwords, use of security and monitoring software and so on
make your employees aware of risks that their actions can pose to your company’s security, and educate them on how to best handle work in a secure manner
apply the principle of least privilege. Deny all data access by default and allow it whenever needed on a case-by-case basis.
Speed and accuracy
If you do incur a cyber breach, the speed and accuracy of your response can make all the difference.
The more planning your company does before a breach, the better your chances of minimising the business interruption and reputational damage that can ensue. Ensure any PR and comms resource you have plays an integral part in the pre-breach planning process.
Following a breach, a company invariably feels a tension between the need to communicate with customers quickly and the need to communicate accurately. To optimise the chances of striking the right balance, it’s vital for a company to involve a range of stakeholders in the pre-breach planning stages. (See ‘Cyber breach planning: building your A-team’ for more analysis of this matter.)
This should ensure that the timing and extent of your comms to third parties is a business decision that has factored in the various implications, and not just those of one or two divisions.
Typically you can retain customers’ business if they feel that you have communicated with them the cause and effects of the breach quickly, accurately and openly, and have put them first throughout this process.
Lockton has produced six posters which can be distributed within your practice or clients to help raise awareness of various risks. View these now
Keeping track of pensions
Pensions never seem to stand still. From the increase in state age to the growing number of schemes individuals may be enrolled in, clients increasingly have a range of queries for accountants.
State pension ages have been undergoing changes since April 2010. These changes have seen the state pension ages rise and are forecast to gradually increase further.
You can check the state pension age timetables online; you can also calculate how much state pension a person is eligible for and a person can obtain a forecast of their state pension entitlement.
The Pension Tracing Service explains how to trace a pension and request a pension forecast. It can also be used to find contact details of various employers and pension scheme administrators.
These may be pensions that were related to a current or previous employment or a personal pension scheme which the person is currently making contributions into or for those where contributions ceased to be made some time ago.
To trace a workplace pension the following could be contacted:
The employer who was responsible for the pension scheme
The pension scheme administrator (or pension provider); the employer may be able to provide the details
If unable to contact the relevant employer or pension scheme, then the Pension Tracing Service may be helpful.
The following information can help the pension scheme administrator trace a particular person’s pension scheme:
Name and address of person
National Insurance number
Date of birth
Name of employer (or previous employer)
Pension scheme plan number
The dates when contributions were made into the scheme.
The person may not know all this information, but the more information which can be provided the easier it will be to trace a pension.
Recap on dividends and the rules surrounding them
Before paying out dividends make sure you are within the rules
Where a dividend is declared in cash, but satisfied by a transfer of assets, it is called ‘dividend in specie’. This type of dividend falls under Article 34 of model articles for private companies limited by shares (see Schedule 1, The Companies (Model Articles) Regulations 2008 (SI 2008/3229)).
A distribution in specie occurs where a company makes a distribution of an identified non-cash asset, such as without first declaring an amount in cash. Distributions in specie fall under section 845 of Companies Act 2006. Most commonly such assets may be property or machinery or the benefit of a debt. A distribution in specie may also occur if an asset is transferred at below market value (for example, as part of an intra-group reorganisation), where the value of the transferred asset is subsidised partly or in full by the transferring company.
Both dividend in specie and distribution in specie must be made in accordance with Part 23 of Companies Act 2006.
The requirement of distributable reserves applies to both dividend in specie and distributions in specie in accordance with section 845 and section 846 of the CA 2006, by reference to a company’s most recent annual accounts, per section 836(2) of CA 2006.
If a company’s distributable reserves are NIL, no distribution is lawful. However, as long as distributable reserves exceed NIL, under section 845 a company can transfer assets, on condition that it receives consideration equal to the book value of the asset. Where the consideration is less than book value the shortfall must be covered by distributable profits.
The CA 2006 does not specify who shall declare dividends, including dividends in specie. The authority to declare a dividend in specie is likely to be defined in the articles which should be checked to ensure that the company is authorised to pay all or part of a dividend by transferring non-cash assets of equivalent value. Such authority should cover both interim and final dividends. In the absence of express authority, per or similar to article 34, the company must pay all dividends in cash (Wood v Odessa Waterworks Company (1889) 42 Ch D 636), or change the articles.
If articles allow payments of dividends in specie, they should also determine who has the authority to declare it (there is no reference in Companies Act regarding this). If the articles are silent on this point, dividends in specie could be declared by the directors, without the permission of shareholders.
The generally accepted practice, however, is that final dividend, including dividend in specie, is recommended by directors and declared by members, either at AGM or by way of written ordinary resolution. The value of the dividend declared by members cannot exceed the value recommended by the directors.
As the provisions in a company’s articles only apply to dividends, shareholder approval is not required for a distribution in specie (except in limited circumstances, for example, where the transfer amounts to a substantial property transaction under section 190 of the CA 2006). A distribution in specie does not have to be declared.
Accounting treatment – timing
FRS 102 fails to make specific reference to dividends or distributions in specie. Distributions and dividends in specie are recognised in the accounts when payment becomes a legal obligation of the entity to pay or the right to receive it.
There is no legal obligation to pay interim dividends, even when they have been approved by the directors, as the board can revoke its earlier resolution to pay an interim dividend at any time up to the time of actual payment. Unless steps have been taken to establish a legally binding liability through a deed of an acknowledgement of the liability to pay, interim dividend in specie should only be recognised when the asset is transferred.
Final dividend in specie is likely to meet the recognition criteria when it is declared.
Value of dividend / distribution in specie
A company making a lawful distribution in specie may consider making the distribution at a value, being:
actual consideration to be paid in respect of the transfer (if any)
book of the asset (as recorded in the accounts of the company selling the asset or, where the asset is not stated in the accounts at any amount, zero) (section 845(4))
market value of the asset.
If an asset is distributed for consideration equal to its book value, section 845 permits the transaction and treats it as a distribution of zero.
If an asset is transferred for a consideration of less than its book value, transaction is only allowed if distributable reserves before the transfer are sufficient to offset the net reduction in the reserves equal to the value of the asset transfer less the consideration received. For example the distribution of an asset with a book value of 10k for which the company receives £8k is only allowed if the reserves before the transaction amounted to at least £2k.
In a situation where the asset is transferred at book value for no consideration, company reserves before the transfer have to be at least equal to the book value of the asset.
Where to report
For companies preparing statement of changes in equity, the amount of dividend or distribution in specie will be shown in that statement.
Dissolving a small company
There are many reasons why a company is dissolved, ranging from insolvency to simply having come to the end of its useful life. This article examines the good, the bad and the ugly of the procedure.
Whatever the reason, it is essential that the correct advice is given by the company’s advisers and the correct decisions are taken by the directors. Get it wrong and it could mean the directors/shareholders lose money, incur unlimited fines and might need to restore the company.
This guidance gives some pointers to the good, bad and ugly issues which affect end of life companies.
Basically a company is insolvent when it can’t pay its debts. This usually means that it can’t pay its bills when they become due. It is very important that the directors monitor their company’s solvency and as soon as they realise that they are in this position the essential course of action is to seek advice from a qualified insolvency practitioner. A lack of action by the directors could lead to them personally being liable for some debts of the company. This might involve the allegation of ‘wrongful trading’ which refers to a company that continued to carry on their normal business trading when it was unable to pay its debts as they fell due. Directors must understand that ‘hoping for the best’ and carrying on trading is simply not an option.
Good tax advice is important where the company is solvent and the directors are looking for the most tax efficient way out. There are a number of issues to look at here:
since 2012, where the assets of the company are below £ 25,000 a pre-dissolution distribution can be treated as a capital gain. Entrepreneurs relief (ER) may also be available
where the assets are above this figure then the distribution will normally be treated as a dividend with no ER available. This could make the extraction of the final shareholders’ funds far less tax efficient depending on the shareholders' personal tax situation
if a liquidator is appointed on behalf of members or creditors, then the distributions made by the liquidator to the shareholders may still be subject to capital gains tax (and possibly benefit from ER) in the hands of the shareholders. Note that ER (qualifying capital gains) for each individual are subject to a lifetime limit as follows:
* for disposals on or after 6 April 2008 to 5 April 2010, £1m
* for disposals on or after 6 April 2010 to 22 June 2010, £2m
* for disposals on or after 23 June 2010 to 5 April 2011, £5m
* for disposals on or after 6 April 2011, £10m.
For detailed guidance on Entrepreneurs Relief, follow this link.
Get the legal procedure right
Many accountants are familiar with the strike off application. This might appear to be very straightforward but it’s important that the full legal procedure is observed. There is also some ‘small print’ on the application which needs to be considered.
The law relating to dissolving a company is found in part 31 of the Companies Act 2006. Some of the issues are very important and sometimes overlooked:
1. The company may not make an application for voluntary strike off if, at any time in the last three months, it has:
traded or otherwise carried on business
changed its name
engaged in any other activity except one which is necessary for the purpose of:
making an application for strike off or deciding whether to do so (for example, seeking professional advice on the application or paying the filing fee for the strike off application)
concluding the affairs of the company, such as settling trading or business debts
complying with any statutory requirement
made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business
For example, a company in business to sell apples could not continue selling apples during that three month period but it could sell the truck it once used to deliver the apples or the warehouse where they were stored.
2. An application for voluntary striking off can only be made on the company’s behalf by its directors or a majority of them.
3. A company cannot apply to be struck off if it is the subject, or proposed subject, of:
any insolvency proceedings such as liquidation, including where a petition has been presented but has not yet been dealt with
a section 895 scheme (that is a compromise or arrangement between a company and its creditors or members)
The directors may commit an offence if they breach these restrictions and be liable for a fine on conviction.
4. If you are a director you should not resign before applying for strike off as you must be a director at the time the Registrar receives the application.
5. From the date of dissolution, the company’s bank account will be frozen and any credit balance in the account will pass to the Crown. Any assets of a dissolved company will also belong to the Crown and so clearly forward planning is very important to avoid assets being lost.
If they are, the only way of reclaiming them is to have the company restored to the register which can be costly and complicated.
6. When the application is made the directors must make sure that, within seven days of sending the application to the Registrar, all interested parties have been sent a copy. Many companies miss this point and do not comply with the regulations. In a normal situation the parties would be:
members, usually the shareholders
creditors, including all existing and likely creditors such as:
former employees if the company owes them money
landlords or tenants (for example, where a bond is refundable)
personal injury claimants
HMRC and Department of Work and Pensions (DWP)
managers or trustees of any employee pension fund
any directors who have not signed the form
The company’s directors must also send a copy of the application to any person who, at any time after the application has been made, becomes a:
manager or trustee of any employee pension fund
Again the directors may commit an offence if they breach these restrictions and be liable for a fine on conviction.
7. The strike off procedures is generally not quick. If there is no reason to delay, the Registrar will strike the company off the register not less than two months after the date of the notice.
8. If the company changes its mind and no longer wants to be struck off, or if the company becomes ineligible for strike off, the directors must ensure the application is withdrawn immediately by completing the ‘Withdrawal of striking off application by a company’ form DS02
So the directors need to be very mindful of changes to the company once the application has been sent in. Mandatory withdrawal reasons are if the company:
trades or otherwise carries on business
changes its name
for value, disposes of any property or rights except those it needed in order to make or proceed with the application (eg the company may continue with the application if it disposes of a telephone used to deal with enquiries about its application)
becomes subject to formal insolvency proceedings or makes a section 900 application (a compromise or arrangement between a company and its creditors)
engages in any other activity, unless it was necessary to:
make or proceed with a striking off application
conclude affairs that are outstanding because of the need to make or proceed with an application (such as paying the costs of running office premises while concluding its affairs before disposing of the office)
comply with a statutory requirement
Offences and penalties
Directors need to be aware that the law provides for various penalties when the above (and other) rules are broken. Common offences to remember are:
to apply when the company is ineligible for striking-off
to provide false or misleading information in, or in support of, an application
not to copy the application to all relevant parties within seven days
not to withdraw application if the company becomes ineligible.
The penalties for these breaches include potentially unlimited fines.
For more information see:
Companies House strike off checklist
Preparing and filing FRS 105 accounts
Accounts prepared and filed under FRS015 are now a popular option for micro entities. In this article I look at the advantages and the pitfalls.
Accounts prepared under FRS 105 are now an accepted and popular option for micro-entities. However, there are a number of important points about their preparation and how the information is filed at Companies House that accountants and directors can easily miss.
This guidance gives a recap on some of the problem areas and how to address them.
1 Accounts for the members
Considerations to remember
The ‘full’ accounts have a different format to the information filed at Companies House
The ‘full’ accounts are for the members and these have to comply with the ‘complete accounts’ format as laid out in FRS 105. This may be in a different format to the information filed at Companies House due to the option of filleting.
Do I need to prepare both accounts for the members and accounts for filing?
A company cannot save time and merely prepare the filleted information for Companies House without first preparing the ‘full’ accounts
What is a ‘full’ set of accounts?
A complete set of financial statements of a micro-entity shall include the following:
(a) a statement of financial position as at the reporting date with notes included at the foot of the statement; and
(b) an income statement for the reporting period.
In accordance with section 414(3) of the Act, financial statements prepared in accordance with the micro-entity provisions shall on the statement of financial position, in a prominent position above the signature, contain a statement that the financial statements are prepared in accordance with the micro-entity provisions.
Note therefore that the major difference to the information filed at Companies House is that an income statement is needed in the correct format
Is a Directors report needed?
For accounting periods beginning on or after 1 January 2016, there is no statutory requirement to prepare a Directors report for the ‘full’ accounts or for filing
This FRS permits, but does not require, a micro-entity to include information additional to the micro-entity minimum accounting items in its financial statements
A common misconception is that FRS 105 accounts for the members are restricted to only containing the few statutory notes. The directors can in fact put in additional information if they want to. The only stipulation is that if additional information is included then the company needs to refer to any requirement of section 1A Small Entities of FRS 102 that relates to that information.
Accounts preparation software often includes ‘traditional’ notes such as a breakdown of debtors and creditors – are these needed?
As above the accounts can include additional disclosures if required. However, the disclosures actually required by the Companies Act and Small Companies Accounting Registration Regulation (Reg) which should be included at the foot of the balance sheet rather than a note are:
Details of any advances, credit and guarantees with directors (s413 CA2006)
Particulars of any charge of the assets to secure a liability (Reg Sch 1.57(1))
Information about contingent liability not provided for (Reg Sch 1.57(2))
The aggregate amount of contracts for capital expenditure not provided (Reg Sch 1.57(3))
Pension commitments (Reg Sch 1.57(4))
Any other financial commitment (Reg Sch 1.57(5))
The financial statements of a micro-entity that comply with FRS 105 are presumed in law to give a true and fair view of the financial position and profit or loss of the micro-entity in accordance with the micro-entities regime.
So what about going concern issues?
The concept is that, if the laid down format is followed and the statutory notes are included, the accounts automatically give a true and fair view.
However, many members have raised the issue of going concern and how this should be treated. Remember FRS 105 does not include accounting policies.
The standard answers the going concern issues by stating the following simple treatment:
When preparing financial statements using this FRS, the management of a micro-entity shall make an assessment of whether the going concern basis of accounting is appropriate. The going concern basis of accounting is appropriate unless management either intends to liquidate the micro-entity or to cease trading, or has no realistic alternative but to do so. In assessing whether the going concern basis of accounting is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, 12 months from the date when the financial statements are authorised for issue
FRS 105 does not require the accounts to show the accounting policies used. Therefore the effects of changes in accounting policies can be ignored
The FRS does require a specific treatment for prior year adjustments. Section 8 states the following:
A micro-entity shall account for all other changes in accounting policy retrospectively (see paragraph 8.10).
8.10 When a change in accounting policy is applied retrospectively in accordance with paragraph 8.9, the micro-entity shall apply the new accounting policy to comparative information for prior periods to the earliest date for which it is practicable, as if the new accounting policy had always been applied.
Note that a similar treatment to the above also applies to correction of fundamental errors
2 Information for filing
The main issue that has been raised with ACCA's Technical Advisory team concerns the completion of the template on Companies House for micro-entities.
The first issue is that the balance sheet is laid out in the required format but also includes certain questions which cause confusion. These relate to whether further analysis is needed. For instance examples are:
do you want to provide a fixed assets breakdown?
do you want to provide a current assets breakdown?
Care needs to be taken when giving further analysis as this information will be on public record and would not normally be needed under FRS 105.
The second issue is that at the foot of the balance sheet template there is the following question:
do you want to provide any footnotes to the balance sheet?
This question (in contrast to the above) may need completing as it relates to the statutory notes which are required at the foot of the balance sheet (referred to above). If this question is selected the template links to a further page which allows the proper disclosures to be made.
So it is very important that where statutory notes relating to guarantees, commitments etc are needed, these are properly disclosed using the tabs on the template.
The fact that the template contains links to a mixture of non-mandatory and possibly mandatory notes can cause a lot of confusion and lead to important information being omitted or in fact over-disclosure of other information.
Please follow the links below for more articles on FRS 105 from ACCA:
FRS 105 – a new reporting regime for micro-companies
The FRSSE is dead – long live FRS 105?
Changes to FRS 102
The FRC has issued various changes to Financial Reporting Standard 102 and these can be viewed here. For small companies the main changes are concerning directors loans.
The changes permit small entities to initially measure a loan from a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person) at transaction price. FRS 102 currently requires such loans to be initially measured at present value, with the discount rate being a market rate of interest for a similar debt instrument.
This simplifies matters for affected companies and refelcts the correct nature where a director is uspporting his/her company.
Fuel and mileage payments for employees
Understanding allowances for employees who use a company car.
Tax is chargeable on the cash equivalent of the benefit of provision of free fuel for private motoring in a company car.
If the employee is required to make good to his employer the cost of all company fuel used for private purposes, and in fact does so, the charge is reduced to nil. For 2017/18 onwards the payment for private use must be made on or before 6 July following the tax year for which the charge arises. Previously it had to be made in the tax year in question or without unreasonable delay thereafter.
HMRC will accept that there is no fuel charge where the employer uses the appropriate rate per mile from the table below to work out the cost of fuel used for private travel that the employee must make good or to reimburse the employee for business travel in his company car. These advisory rates are not binding where the employer can demonstrate that employees cover the full cost of private fuel by making good at a lower rate per mile.
The employer can reimburse business mileage at rates higher than the advisory rates if they can demonstrate that the fuel cost per mile is higher. If the employer cannot demonstrate that fact, there is no fuel benefit charge if the payments are solely for business mileage, but the excess will not be an allowable deduction in computing the employer’s profits.
View HMRC’s advisory fuel rates
Employee uses his/her car for business travel
If an employee (including office holders) uses his/her own car for ‘business travel’ then the employer can make mileage allowance payments up to the ‘approved amount’ and these payments will not be taxable on the employee.
The ‘approved amount’ for this purpose is obtained from the formula: M x R
Where M is the number of business miles travelled by the employee (other than as a passenger) using the kind of vehicle in question, in the tax year; and
R is the rate applicable for that kind of vehicle. The rates are as follows:
Per each of the first Per each mile over 10,000
Cars and vans 45p 25p
Motor cycles 24p 24p
Cycles 20p 20p
The 10,000 mile limit is applied by reference to business travel by car or van in all ‘associated employments’ (broadly defined as where the employments are under the same employer or the employers are under common control). These rates may alter in the future.
It is advisable to check allowances paid as some employers pay passenger payments. This is not reportable to HMRC. The allowance is available where an employee carries another employee in their own car or van on a business journey. The passenger payment is up to 5p per mile tax-free.
If the employer makes mileage allowance payments of less than the amounts shown above to the employee, then the employee (or office holder) is entitled to ‘mileage allowance relief’. The amount of the relief is the excess of the approved amount over any mileage allowance payments. The employee (or office holder) would normally claim this ‘mileage allowance relief’ on his/her self-assessment tax return in the relevant tax year.
Changes to PSC's - action required
New measures to help prevent money laundering and terrorist financing are on their way.
On 26 June 2017 changes will be made to UK anti-money laundering measures which are designed to help prevent money laundering and terrorist financing. These measures will increase the transparency of who owns and controls companies in the UK.
How does this affect ACCA members and their clients/companies?
Most companies will only have submitted their first confirmation statement. This normally involves firms incorporated prior to 30 June 2016 inputting details of PSCs and a full statement of capital with the confirmation statement. This was initially needed as Companies House would not have this information. Each year the company then needs to confirm those details.
Where changes had occurred in the year, affecting areas like the statement of capital, shareholder information and SIC codes, the current rules are that these could be updated on the confirmation statement.
The revised legislation will make changes to the current requirements relating to significant control (PSC) information and reporting. ACCA members who are involved in filing the statements need to be aware of the new rules to avoid late/inaccurate reporting.
The new rules mean that from 26 June changes to the PSC information cannot be updated on the confirmation statement (CS01). So effectively changes since the previous statement cannot be reported annually.
Instead forms PSC01 to PSC09 will need to be submitted detailing the changes. The company has 14 days to update their register and another 14 days to send the information to Companies House. This is a major alteration to the requirements so it is essential that clients understand their reporting responsibilities and inform their accountant of any changes on a timely basis.
To confuse matters slightly, the following should be noted:
There is no alteration to the existing rule that changes to a company’s officers, registered office address or the address where records are kept must be made separately.
Form PSC01 (alteration form) is already in use but used to notify Companies House of an individual with significant control when the company has elected to keep PSC register information on the public register. This election is voluntary and if made would normally mean that more personal information will be visible to searchers than would otherwise be the case