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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:

risk management
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 age rise to 65 for women between 2010 and 2018. Following 2018 this will gradually increase further until the state pension age is 68 for both men and women.

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.

The potential benefits of open banking

Understand how open banking could benefit you and your clients.

What is open banking?

Open banking is part of a piece of European legislation known as the Second Payment Services Directive, or PSD2. This requires banks to open up their data to third parties, designed to boost competition and the variety of products in the banking, credit card, and payments space.

Open banking is the UK version of PSD2. The UK's open banking regulations came into effect on 13 January 2018 and force UK banks to open up their data via a set of secure application programming interfaces (APIs). The aim is to improve SME access to finance, including improving the choices available and speed of an SME’s ability to change providers.

At the moment, only the UK’s nine largest banks and building societies must make data available through open banking. Other smaller banks and building societies can choose to take part in open banking. Those banks and building societies which currently offer open banking are:

Allied Irish Bank
Bank of Scotland
Barclays
Danske
Halifax
HSBC
Lloyds Bank
Nationwide
NatWest
Santander
The Royal Bank of Scotland
Ulster Bank.
Other banks and building societies which will be joining open banking soon include Bank of Ireland, First Direct and M&S Bank.

Benefits

Let’s look at five major benefits of open banking:

Easy management

Open banking will allow the individuals that use different banks to see all their bank accounts at the same time, which should make it easier for them to manage their money. As well as being able to see all bank accounts in one place, banks are looking to add value for customers with a range of smart features such as spending analysis and 'balance after bills', which shows how much the customer has left in their current account until payday, once their regular bills have been taken into account. Other features may include savings rule suggestions to customers based on their spending habits.

Lending

Open banking will allow access to online income and spending history for the last 12 months, which should make it easier for an individual to take out a loan.

Payments

A ‘payment initiation service’ will allow providers to initiate a payment from an account held with another provider. Open banking should create a cheaper, more effective alternative to make payments. Open banking requires the UK’s big banks to support a new, simpler way of initiating payments bypassing payment gateways like Paypal or Worldpay and card processors like Visa and MasterCard. Because these middlemen take a cut of each transaction, the savings from direct bank payments might be passed along to consumers.

Integrated accounting

If explicit permission is given to a regulated app or website for small and medium business, open banking can bring the benefit of integrated accounting and tax services and fast access to capital by giving providers real time access to account information, instead of filing paperwork.

Safety

It is claimed that open banking is at least as safe as online banking. However, open banking necessitates that data can move around more freely than before and nefarious types will surely be scheming to get their hands on it. Customers will need to remain highly suspicious of emails, text messages, notifications, or any other correspondence which asks them to click a link or to provide personally identifiable data.

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.

Distributable reserves

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.

Approval process

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.

Insolvency

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.

Tax efficiency

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:
    • banks
    • suppliers
    • former employees if the company owes them money
    • landlords or tenants (for example, where a bond is refundable)
    • guarantors
    • personal injury claimants
    • HMRC and Department of Work and Pensions (DWP)
  • employees
  • 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:

  • director
  • member
  • creditor
  • employee
  • 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:

insolvency advice  

Companies House strike off checklist

GDPR for payroll

GDPR is fast approaching so this article looks at one of the 'awkward' issues - GDPR for payroll processors.

Under the Data Protection Act 1998, employers are required to provide employees and job applicants with a privacy notice, setting out certain information. Under the terms of the GDPR coming into effect on 25 May 2018, employers might now need to provide much more detailed information.

Recap on the main GDPR issues for employers

More detailed privacy notices

Under the current law, employers are required to provide employees and job applicants with a privacy notice setting out certain information. Under the GDPR, employers will need to provide more detailed information, such as:

  • how long data will be stored for
  • if data will be transferred to other countries
  • information on the right to make a subject access request
  • information on the right to have personal data deleted or rectified in certain instances.

Consent

Employees may have an enhanced right over any use of their data in a professional environment. Employers may need to take steps to ensure that employees have expressly consented to the use of their data. This may be via a separate consent form and not just included in an employment contract. ACCA has updated its employment law factsheets specifically for GDPR and these will be available to members shortly.

Reporting breaches

The employer must have suitable systems in place to notify the regulator (and, potentially any affected data subjects) if a data breach should occur. They must be able to inform their staff on the correct procedure and response when needed.

Generally there is a requirement for companies to issue notifications of data breaches within 72 hours of becoming aware of them.

Access rights

GDPR granted data subjects specific rights in relation to the data shared with controllers and processors. Some of these rights are absolute and have to be complied with, some only apply under certain conditions.

So how should a payroll bureau prepare for GDPR?

This is best answered in a questions and answers format:

Should we re-issue engagement letters?

First and foremost the bureau should update and re-issue its engagement letters to the client. This should be done as soon as possible. 

When agreed with the client, engagement letters define the terms and limitations of the engagement. In particular, the engagement letter will specify the relative responsibilities of the bureau and the employer to make it clear that the employee’s personal data will be provided to the bureau to process the payroll for the business and that the employer still has responsibilities under GDPR.

ACCA has updated its engagement letters/terms and conditions specifically for GDPR and these will be available to members shortly.

What are the divisions of responsibilities between the bureau and the employer?

Responsibilities of employers:

  1. Employers must provide employees and any job applicants with a privacy notice setting out certain details about how their information is managed.;
  2. A clear HR policy to determine the process of retaining PAYE records and setting the duration of record keeping (subject to legal requirements as stated above);
  3. The employers will need to inform their employees that they are sharing their personal information with a third party;
  4. Accountants/ Payroll bureaus do not need to seek consent from individual employees that the payroll is processed for and it should be clarified in their letter of engagement.
  5. All employers must ensure that their payroll bureau or accountant is taking action to protect their employees’ payroll information under GDPR.

Responsibilities of accountants/ payroll bureau:

Accountants/ payroll bureaus should keep only the personal data that is strictly required for the purpose of the payroll. This is referred to as data minimisation or privacy by default. They are legally obliged to protect payroll information on behalf of their clients where you must:

  • keep client and employee payroll information safe and secure
  • ensure client’s data is relevant and up-to-date for the purpose of processing the payroll
  • only hold information you need and for as long as you need it to manage the payroll
  • allow clients or their employees to view their personal information that is kept upon request
  • only collect information you need for the specific purpose of completing the payroll on behalf of your clients
  • review all the data they hold and on what grounds the data is held (by category). Following on from this, it will be easier to decide whether it is still appropriate for the data to be held and draft retention polices
  • put new engagement letters in place (see above) in place with all clients including GDPR requirements to set out your internal policies on:
  • stipulating time for the preservation of records;
  • procedure followed after the stipulated period for the secure disposal of the data.
  • the letters will also need to provide a schedule confirming data-processing details with the employer. These will typically include:
  • subject matter of processing
  • duration of the processing
  • nature and purpose of the processing
  • type of personal data
  • categories of data subjects
  • any additional instructions
  • approved international transfers
  • technical and organisational security measures such as encryption.

How long a client’s pay records should be retained?

The storage limitation principle under the GDPR (Art 5(1) (e)) isn’t materially different to the existing principle under the Data Protection Directive. Basically, personal data should not be retained longer than necessary, in relation to the purpose for which such data is processed.

Tax files and other papers that are legally the property of the client or former client shall be returned to the client (or former client) after 7 years or his/her specific authority obtained for their destruction.

Per HMRC guidance, all employers must keep PAYE records for three years from the end of the tax year they relate to. A typical PAYE record would generally include:

  • details of employee’s pay and the deductions;
  • reports and payments made to HM Revenue and Customs (HMRC)
  • employee leave and sickness absences
  • tax code notices
  • taxable expenses or benefits
  • payroll giving scheme documents, including the agency contract and employee authorisation forms.

Many employee records contain sensitive information so it’s crucial you ensure they are disposed of correctly, this may include the cross shredding of paper records and the secure disposable of hard drives, which should be destroyed rather than formatted. Specific recommendations on retention of records is contained within the soon to be issued ACCA engagement letters.

Can a former client request that their data is deleted?

This will depend on why the data was held originally. Where the bureau is holding data for taxation purposes then it can’t be deleted if this is before the end of the legal retention period. Remember that personal data should not be retained longer than necessary, in relation to the purpose for which such data is processed

However you should also ensure that you only retain that which you need to meet your contractual, legal or regulatory obligations.

We store client data on the cloud – does this matter

Yes – the bureau will need to ensure that the servers and storage is GDPR compliant. This is part of the compliance issues that the client would need to be aware of (see below).

What does the client need to know about our GDPR compliance

The bureau should be able to demonstrate to its client that they are GDPR compliant and all data is securely protected. As part of the data breach rules the bureau would need to be able to demonstrate that it was GDPR compliant and had procedures to protect all data.

Are there any issues with the client’s employees?

  • payroll bureaus do not need to seek consent from individual employees that the payroll is processed for
  • an  employer will need to inform their employees that they are sharing
  • their personal information with a third party
  • it employers responsibility to ensure that their payroll
  • bureau or accountant is taking action to protect their employees’ payroll information under GDPR
  • an employee cannot withdraw their consent for their personal data to be used as part of the payroll processing
  • bureaus should only keep the personal data that is strictly required for the purpose of the payroll. This is referred to as data minimisation or privacy by default.

Can we still email payslips to employees

Yes – but it is essential that there is strict security over employees passwords and email addresses and that they are up-to-date and are specifically chosen by the employee for this purpose. Encryption of the payslip should also be involved. The ICO has specific guidelines on this issue.

The cost of pension contributions

With various reliefs available, what is the true cost of pension contributions to individuals?

An individual under 75 years of age is entitled to tax relief on the contributions they make to a registered pension scheme during a tax year.

An individual is entitled to relief on contributions up to the total amount of their relevant UK earnings chargeable to income tax for the year. However, if the pension scheme operates tax relief at source, contributions of up to £3,600 gross will obtain tax relief even if total relevant UK earnings are less than that amount or even if they are £nil.

Tax relief at source

Most personal pension schemes operate relief at source arrangements, whereby tax relief at the basic rate is deducted from the amount of the contributions payable and the scheme administrator recovers the basic rate tax from HMRC. If the person is a higher rate taxpayer, they claim relief for the excess of the higher rate over the basic rate in their self-assessment tax return. The effect is that their basic rate limit for the year is increased by the gross amount of the contributions.

Example

Mr A is employed and his salary for 2017/18 is £90,000. During the year he paid £16,000 in cheques to his personal pension scheme.

The amounts paid of £16,000 are called the net contributions. The gross equivalent would be £16,000 x 100/80 = £20,000.

The pension scheme administrator will recover £4,000 from HMRC and this amount will be paid into the pension scheme by HMRC.

Mr A will enter £20,000 (the gross contributions) in his self-assessment tax return form SA100 in box for ‘payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider’.

Mr A’s basic rate band (which would normally be £33,500) is extended by £20,000 to £53,500 and he will pay tax on £53,500 of his taxable income at 20%. 

Tax computation                            Pension                                No pension

                                                        contribution                        contribution

                                                        of £20,000 gross

Salary                                              £90,000                                 £90,000

Personal allowance                        £11,500                                  £11,500

Taxable income                               £78,500                                 £78,500

Tax liability

Basic rate      £53,500 @ 20%        £10,700         

Higher rate    £25,000 @ 40%        £10,000

Basic rate      £33,500 @ 20%                                                          £6,700

Higher rate    £45,000 @ 40%                                                        £18,000

Total tax liability                                £20,700                                  £24,700

If a pension contribution of £16,000 net is paid the employee will receive £69,300 (£90,000 less tax of £20,700) less pension paid £16,000 being £53,300 ignoring National Insurance and have a pension pot of £20,000.

With no pension contribution the employee will receive £65,300 (£90,000 less £24,700) ignoring national insurance.

Employer contributions

Employer contributions to an employee's personal pension scheme would normally be paid gross. The employer would normally obtain tax relief in computing taxable profits for the period of account in which the contributions are made. The employee is not liable to income tax in respect of the contributions by their employer to the registered pension scheme. This exemption applies to contributions to the employee’s own registered pension scheme, as opposed to contributions paid to pension schemes set up for members of the employee’s family.

Annual allowance

Every member of a pension scheme may be liable to the Annual Allowance Charge. From 6 April 2014 the annual allowance has been £40,000. For 2013/14 it was £50,000.

A reduced annual allowance of £4,000 applies after 6 April 2015 when an individual has flexibly accessed their money purchase savings.

From 6 April 2016 for ‘high income individuals’ the amount of the annual allowance is tapered down to a minimum of £10,000. Broadly ‘high income individuals’ are those people with an ‘adjusted income over £150,000’. The annual allowance is then reduced by £1 for every £2 by which the ‘adjusted income’ exceeds £150,000 but it cannot be reduced to below £10,000. Therefore if the adjusted income is £210,000 or more the annual allowance for that year will be £10,000.

If the annual allowance is exceeded the individual will not receive tax relief on any contributions that exceed the limit and the individual will incur an annual allowance charge.

Broadly this annual allowance is compared to two figures each year. For ‘defined contribution schemes’ (DC schemes) the amount of contributions paid into the person's DC schemes in the year. For ‘defined benefit schemes’ (DB schemes) and cash balance arrangements the value of the person’s pension rights at the end of the year over the value at the beginning of the year. For this purpose, the value of an individual’s pension rights at a particular time is:

  • For a defined benefits scheme – the aggregate of any lump sum to which the individual would have been entitled (otherwise than by commutation of pension) if he had become entitled to payment of it at that time and 16 times the annual pension that would have been payable if the individual had become entitled to payment of it at that time
  • For cash balance schemes – the amount that would have been available for provision of benefits if the individual had become entitled to the benefits at that time.

Any unused part of the annual allowance for a tax year can be carried forward for up to three tax years. The current year’s annual allowance is deemed to be used first. If this is insufficient to avoid an annual allowance charge, any unused annual allowance from the three previous years can then be used with the earliest year’s unused allowance is used first and so on. This carry forward is automatic and does not need to be claimed.

Calculation of annual allowance charge

The annual increase in an individual’s rights under all registered pension schemes for which he/she is a member is compared with the annual allowance and any excess over the annual allowance is chargeable to tax. This excess is charged at:

  • the basic rate of tax in relation to the amount of the excess when added to the individual’s taxable income, that does not exceed the basic rate limit
  • the higher rate of tax in relation to so much of the excess as, when so added, exceeds the basic rate limit but does not exceed the higher rate limit
  • the additional rate of tax in relation to so much of the excess as, when so added, exceeds the higher rate limit.

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

Issue

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).

Retrospective application

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.

Further 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

                                                   10,000 miles

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.

Autumn Budget 2017

The budget message from the Chancellor was that ‘the economy that continues to grow, continues to create more jobs than ever before and continues to confound those who seek to talk it down’. You can read the individual measures and details of some of the numerous consultations below.

Tax tables

                   

2016/17

2017/18

2018/19

£

£

£

Income tax rates - (non-dividend income)

0% - starting rate for savings only note 1

Up to 5,000

Up to 5,000

 Up to £5,000

20% basic rate tax

11,001 - 43,000

11,501 – 45,000

 11,851 – 46,350

40% higher rate tax

43,001 - 150,000

45,001 to 150,000

 46,351 – 150,000

45% additional rate tax

Above 150,000

Above 150,000

 Above 150,000

1  If an individual’s taxable non-savings income exceeds the starting rate limit, then the starting rate for savings will not be available for savings income

Scottish rates of income tax                                                       

 note 2

0% - starting rate for savings only note 1

Up to 5,000

Up to 5,000

20% basic rate tax

11,001 - 43,000

11,501 - 43,000

40% higher rate tax

43,001 - 150,000

43,001 -150,000

45% additional rate tax

Above £150,000

Above £150,000

You pay the Scottish rate if you live in Scotland.

1  If an individual’s taxable non-savings income exceeds the starting rate limit, then the starting rate for savings will not be available for savings income.

2  The Scottish Parliament has voted to freeze the basic rate of income tax of 20 per cent, also freeze the higher and additional rates at 40 per cent and 45 per cent respectively, and maintain the higher rate of income tax threshold at £43,000 in 2017/18, as set out in the table above.  The Scottish Government budget will take place on 14 December 2017.

Income tax rates – (dividend income new rules from 6/4/2016)

Dividend allowance

£5,000

£5,000

£2,000

Dividend ordinary rate (for dividends within basic rate band)

7.50%

7.50%

7.50%

Dividend upper rate (for dividends within higher rate band)

32.50%

32.50%

32.50%

Dividend additional rate (for dividends above higher rate band)

38.10%

38.10%

38.10%

Child benefit/Guardian's allowance rates

Higher rate (eldest child only) (per week)

20.7

20.7

 20.7

Other children

13.7

13.7

 13.7

Guardian's allowance

16.55

16.7

 17.2

An income tax charge will apply to taxpayers with income exceeding £50,000 in a tax year, when child benefit is also received by them or their partner. The charge will reduce the financial benefit of receiving child benefit for those with income between £50,000 and £60,000 and remove it completely for taxpayers with income above £60,000.

Personal allowances

Personal allowance – note 2

11,000

11,500

 11,850

Dividend allowance

5,000

5,000

 2,000

Maximum Married couple’s allowance for those born before 6 April 1935 – note 3

8,355

8,445

 8,695

Married couple’s allowance – minimum amount – note 3

3,220

3,260

 3,360

Micro entrepreneurs allowance:

Individuals making property or trading incomes below the level of the allowance would no longer need to declare or pay tax, while those who exceeded the level from their can benefit by simply deducting the allowance instead of calculating their exact expenses.

n/a

Allowance- 1,000

 Allowance- 1,000

Income limit – note 1

100,000

100,000

 100,000

Income limit for Married couple’s allowance- born before 6 April 1935 

27,700

28,000

 28,900

Blind person's allowance

2,290

2,320

 2,390

Rent-a-room relief

7,500

7,500

 7,500

Transferable tax allowance for married couples and civil partners – note 4

1,100

1,150

 1,185

Personal savings allowance for basic rate tax payers – note 5

1,000

1,000

 1,000

Personal savings allowance for higher rate tax payers – note 5

500

500

 500

1  This allowance is subject to the £100,000 income limit which applies regardless of the individual’s date of birth. The individual’s personal allowance is reduced where their income is above this limit. The allowance is reduced by £1 for every £2 above the limit

2  From 2016-17 onwards, all individuals will be entitled to the same personal allowance, regardless of the individuals’ date of birth. This allowance is subject to the £100,000 income limit which applies regardless of the individual’s date of birth.

3. The individual’s married couple’s allowance is reduced by £1 for every £2 above this limit.

This transferable allowance is available to married couples and civil partners who are not in receipt of married couple’s allowance. A spouse or civil partner who is not liable to income tax; or not liable at the higher or additional rates, can transfer this amount of their unused personal allowance to their spouse or civil partner. The recipient must not be liable to income tax at the higher or additional rates.

The government will now allow claims in case where a partner has died before the claim was made. These claims will be able to be backdated up to 4 years.

5  Basic rate tax will no longer be deducted from personal savings interest.

National insurance

Lower earnings limit, primary Class 1 (per week)

112

113

 116

Upper earnings limit, primary Class 1 (per week)

827

866

 892

Apprentice upper  secondary threshold (AUST) for under 21s/ 25s

827

866

 892

Primary threshold (per week)

155

157

 162

Secondary threshold (per week)

156

157

 162

Employment allowance (per year per employer)

3,000

3,000

 3,000

Employee's primary Class 1 rate between primary threshold and upper earnings limit

12%

12%

 12%

Employee's primary Class 1 rate above upper earnings limit

2%

2%

 2%

Married woman's reduced rate between primary threshold and upper earnings limit

5.85%

5.85%

 5.85%

Married woman's rate above upper earnings limit

2.00%

2.00%

 2.00%

Employer's secondary Class 1 rate above secondary threshold

13.80%

13.80%

 13.80%

Class 2 rate (per week where profits are above small profits threshold)

2.80

2.85

2.95

Class 2 small profits threshold (per year)

5,965

6,025

6,205

Special Class 2 rate for share fishermen (per week)

3.45

3.5

 3.6

Special Class 2 rate for volunteer development workers

5.6

5.65

 5.80

Class 3 rate (per week)

14.1

14.25

 14.65

Class 4 lower profits limit

8,060

8,164

 8,424

Class 4 upper profits limit

43,000

45,000

 46,350

Class 4 rate between lower profits limit and upper profits limit

9.00%

9.00%

 9.00%

Class 4 rate above upper profits limit

2.00%

2.00%

 2.00%

The government had previously announced its intention to abolish “class 2” national insurance contributions (NICs) for the self-employed in April 2018, but has now said it will delay the move for a year.

Pensions

Annual allowance  note 1

40,000

40,000

 40,000

Lifetime allowance

1,000,000

1,000,000

 1,030,000

Money purchase annual allowance – note 2

10,000

4,000

 4,000

1  The Finance Bill 2015 provided that from tax year 2016/17 the annual allowance for those earning above £150,000 is to be reduced on a tapering basis so that it reduces to £10,000 for those earning above £210,000. For every £2 of income above £150,000, an individual’s annual allowance will reduce by £1.

2 This means that once a person has accessed pension savings flexibly, if they wish to make any further contributions to a defined contribution pension, tax-relieved contributions are restricted to a special money purchase annual allowance (MPAA).

Relief's and incentives

Enterprise Investment Scheme (EIS) - maximum

1,000,000

1,000,000

2,000,000

Venture Capital Trust (VCT) - maximum

200,000

200,000

200,000

Enterprise Management Incentive Scheme (EMI) - employee limit

250,000

250,000

250,000

Seed Enterprise Investment Scheme (SEIS) - maximum

100,000

100,000

100,000

Income tax relief on EIS schemes

30%

30%

30%

Income tax relief on VCT schemes

30%

30%

30%

Income tax relief on SEIS schemes

50%

50%

50%

Individual Savings Account (ISA):

ISA (NISA) annual limit

15,240

20,000

20,000

Junior ISA investment annual limit

4,080

4,128

4,260

Child value of Child Trust Fund annual limit

4,080

4,128

4,260

LISA- annual limit (for ages between 18 to 40)

n/a

4,000

4,000

Capital gains tax

Rate

- basic rate tax payer

10%

10%

 10%

- higher rate tax payer

20%

20%

 20%

Gain on sale of residential  property

- basic rate tax payer

18%

18%

18%

- higher rate tax payer

28%

28%

28%

Annual exemptions – individuals (per year)

11,100

11,300

11,700

Certain trusts for disabled persons (per year)

11,100

11,300

11,700

Other trusts (per year)

5,550

5,650

5,850

Entrepreneurs Relief lifetime limit

10,000,000

10,000,000

10,000,000

Entrepreneurs Rate

10%

10%

10%

Chattels exemption

6,000

6,000

6,000

Inheritance tax

Single persons nil rate band

1 - 325,000

1 - 325,000

1 - 325,000

Single persons 40% band

over 325,000

over 325,000

over 325,000

Residence nil rate band (RNRB) – maximum  -note 2

n/a

100,000

125,000

Reduced rate note 1

36%

36%

36%

IHT Rate (for chargeable lifetime transfers)

20%

20%

20%

Married couples or civil partnerships allowance nil rate band

650,000

650,000

650,000

Gifts to charities

Exempt

Exempt

Exempt

Small gifts to same person

250

250

250

General gifts- annual exemption

3,000

3,000

3,000

Wedding gifts from:

Parent

5,000

5,000

5,000

Grandparent/party

2,500

2,500

2,500

Other person

1,000

1,000

1,000

Business Property Relief

Business or interest in a business and transfer if unquoted shareholdings

100%

100%

 100%

1  The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.

2  The RNRB applies in addition to the existing nil rate band (NRB) or threshold (currently £325,000) if the individual and estate meet the qualifying conditions.

Taxation of trusts

Accumulation or discretionary trusts:

Trust income up to £1,000 – dividend type income- note 1

7.50%

7.50%

7.50%

Trust income up to £1,000 – all other income

20%

20%

20%

Trust income over £1,000 – dividend type income

38.10%

38.10%

38.10%

Trust income over £1,000 – all other income

45%

45%

45%

Interest in possession trusts:

Dividend type income

7.50%

7.50%

7.50%

All other income

20%

20%

20%

Corporation tax

All profits and gains (excluding determination agreements and diverted profits)

20%

19%

 19%

S455 tax on all loans made by close companies to participator

32.50%

32.50%

 32.50%

Capital Allowances

Main writing down allowance (reducing balance)

18%

18%

18%

Special rate writing down allowance (reducing balance)

8%

8%

8%

Motor Cars- if CO2 > 75g/km but do not exceed 130g/km

18%

18%

18%

Motor Cars- if CO2 > 130g/km

8%

8%

8%

Small pool write off where WDV is £1,000 or less

100%

100%

100%

 CO2 emissions are 75g/km or less (or car is electric)

100%

100%

100%

First year allowances for certain energy-saving/water efficient products

100%

100%

 100%

Annual investment allowance

100%

100%

 100%

1  AIA level set permanently from 1 January 2016 at £200,000 pa

Research and Development Tax Credit Rates

SME Rate

230%

230%

 230%

Research and development SME payable credit

14.5%

14.5%

14.5%

Research and development expenditure credit (RDEC) scheme

11%

11%

 12%

Patent Box

Patent box

10%

10%

 10%

The Patent box regime  was phased in from April 2013 with companies able to claim the benefit of

60% for 2013/14, 70% for 2014/15, 80% for 2015/16, 90% for 2016/17 and 100% from 2017/18 onwards

VAT

Standard rate

20%

20%

20%

Reduced rate

5%

5%

5%

Zero rate

0%

0%

0%

Flat rate of VAT on gross turnover (For Limited Cost Trader)

16.5%

16.5%

16.5%

Normal scheme registration threshold

83,000

85,000

85,000

Deregistration threshold

81,000

83,000

83,000

Cash accounting scheme  -maximum to join

1,350,000

1,350,000

1,350,000

Cash accounting scheme -  exit threshold

1,600,000

1,600,000

1,600,000

Annual accounting scheme – maximum to join

1,350,000

1,350,000

1,350,000

Annual accounting scheme – exit threshold

1,600,000

1,600,000

1,600,000

Flat rate scheme – maximum allowed to join

150,000

150,000

150,000

Flat rate scheme exit threshold

230,000

230,000

230,000

Annual Tax on Enveloped Dwellings (ATED)

More than £0.5m but not more than £1m

3,500

3,500

 3,600

More than £1m but not more than £2m

7,000

7,050

 7,250

More than £2m but not more than £5m

23,350

23,550

 24,250

More than £5m but not more than £10m

54,450

54,950

 56,550

More than £10m but not more than £20m

109,050

110,100

 113,400

More than £20m

218,200

220,350

 226,950

VAT round up

Changes made (or signalled) to thresholds, EU imports, vouchers and refunds.

Two-year threshold freeze 

In response to the announcement of a VAT simplification by the Office of Tax Simplifcation (OTS) earlier this month, the chancellor has decided to freeze the VAT threshold from April 2018 and will maintain its current level of £85,000. However, he has also indicated that these thresholds are far greater than in the rest of the world, so businesses should expect a reduction in the threshold after April 2020.

EU imports
Government will be looking at the options available for accounting for VAT when importing goods from the EU. This will be necessary for the benefit of UK businesses and economy after the Brexit negotiations conclude. At present, businesses postpone accounting for VAT when importing goods from the EU, which provides them with a significant cashflow advantage.

Vouchers
A consultation has been announced to bring vouchers into the VAT regime from 2018/19. Once this has been made law, businesses will be accounting for the same rate of VAT on payments made with vouchers. This would bring the UK into alignment with similar rules applicable across the rest of the EU.

Refunds
The government will make the following changes to VAT refunds:

  • Combined authorities
    The Finance Bill 2017/18 will amend legislation to ensure that UK combined authorities and certain fire services in England and Wales will be eligible for VAT refunds.
  • Accident rescue charities
    A grant will be provided to help accident rescue charities meet the cost of normally irrecoverable VAT.

 

Receipts
VAT receipts are expected to raise £145bn in 2018/19, the second largest source of income for the public sector. Once the thresholds have been reduced, VAT is expected to raise a further £1bn to £1.5bn a year.

Income tax tweaks

The chancellor made a number of tweaks to income tax rates, rules and allowances.
The following changes will be implemented from April 2018:
Personal Allowance increase
Personal allowance has been increased from £11,500 to £11,850. This means higher rate tax rates will now apply only when income net of personal allowance reaches 46,350. National Living Wage will rise from £7.50 an hour to £7.83.
Marriage allowance extension – deceased partners
Marriage allowance permitting a transfer of 10% of a spouse’s or civil partner’s personal allowance is now extended to personal allowances of deceased spouses or civil partners.
Mileage allowance for unincorporated property landlords 
The use of mileage allowance of 45p and 25p per mile will be made available to property rental businesses. Individuals and partnerships (with individual members only), running property business will now be given an option to choose between a mileage allowance or deducting actual running costs and claiming capital allowances. This will be available in respect of existing as well as newly purchased vehicles.
General mileage rates will not be available in respect of vehicles for which capital allowances have already been claimed, or for which expenditure in acquiring the vehicle has been deducted in a business using the cash basis. However, transitional arrangements will apply, allowing the preservation of capital allowances already claimed between years 2013/14 – 2016/17. Any further capital allowances will be denied. Instead, from 2017/18 onwards, landlords will be able to claim the mileage allowance.  
Benefit in kind exemption on charging electric cars
Electricity used as fuel for electric cars, paid for by employers, will not constitute a benefit in kind when there is an element of private use of such cars.
Increase in benefit in kind for diesel cars
The diesel supplement rate to calculate the benefit in kind arising on private use of company cars is increased form 3% to 4%. This applied solely to diesel cars (not hybrid cars) registered on or after 1 Jan 1998 with no NOx emission value or those which exceed RDE2 standard (80mg/km). The maximum percentage for cars including any diesel supplement will remain at 37%.
The diesel supplement charge is completely removed for diesel cars certified up to the RDE2 (80mg/km).  
Increase in benefit in kind for private use of company vans and fuel for private use of company cars  
From 2018 the value of the taxable benefit will rise in line with the September 2017 RPI to: 
•flat rate benefit charge will be increased from £3,230 to £3,350
•the flat-rate van fuel benefit charge will increase from £610 to £633
•the multiplier for the car fuel benefit charge will increase from £22,600  to £23,400.
Increase of the EIS and VCT personal investment limit and loosening of anti-avoidance 
Investment limit in EIS and VCT qualifying shares is increased from £1m to £2m, provided that amounts over and above £1m are invested in one or more knowledge-intensive companies (the maximum tax advantaged investments such companies can receive is £10m).
In addition a number of qualitative changes have been introduced to the EIS and VCT schemes. These largely relate to the qualifying conditions applying to companies which will be able to offer EIS tax reliefs to investors (for example the risk level of such investments) and anti-avoidance measures.
The anti-abuse rules are intended to prevent multiple claims of income tax relief on what is, in effect, the same investment. The current rules are that income tax relief is denied on a VCT share subscription if that investment takes place six months after a share disposal in the same VCT vehicle or another VCT, where those VCTs merge. This previously applied to all mergers, including those which take place several years after the subscription, or are carried out purely for commercial reasons and are not tax driven.
From 2018 the merger restriction on claiming income tax relief will not apply if merger takes place more than two years after the subscription, or less than two years if at the time of the subscription the individuals subscribing for the shares could not reasonably be expected to know that the merger or restructuring was likely to take place, or obtaining a tax advantage was not one of the main purposes of the merger.
Changes to the NIC system
Increase to Class 4 NIC rate from 9% to 10% and 11% in 2018 and 2019 respectively has been abandoned. The reform of the NIC system has been put on hold. The abolition of Class 2 NICs, reforms to the NICs treatment of termination payments, and changes to the NICs treatment of sporting testimonials are being delayed by one year.
Tax free accommodation allowance for members of the armed forces
Income tax exemption is granted for payments made to members of the armed forces to help meet the cost of private accommodation purchased or rented, in addition to the benefit-in-kind free accommodation provided by the ministry of defence.
Future changes announced in the budget and expected to be implemented following a consultation process
There has been no further news relating to the extension of the IR35 to the private sector. The outcome of an expected a consultation process and a research project commissioned by the government are expected to be announced in 2018.
Rent a room relief may be subject to changes; however, no specific details were given by the chancellor

New consultation on IR 35

HMRC announces consultation on extending the ‘off payroll working’ rules to the private sector.
The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017.
The Autumn Budget Report 2017 states that early indications show the rules have increased compliance. Not unexpectedly, the report states that a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. 
This will come as no surprise to many who saw the private sector as the next target.
The government will ‘carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018’

HMRC will not abolish Class 2 NIC - yet!

Threshold and contributions up before 2019 abolition.


It was announced earlier in November that the government has chosen to delay the abolition of class 2 national insurance contributions (NICs) by a year until 6 April 2019.

For 2018/19 the small profits threshold limit will be £6,205, with contribution rates above this threshold increasing by 10p to £2.95. The special classes of rates for share fishermen and volunteer development workers remain.
The proposed abolition of class 2 NICs and amendments to class 4 published in a policy paper of 2016 remain unchanged. The 2016 paper states that:


1.Legislation will be brought forward to abolish class 2 NICs by repealing sections 11,11A and 12 of the Social Security Contributions and Benefits Act 1992, and to restructure class 4 contributions to include the small profits limit. Changes will also be made to the benefit entitlement rules to allow class 4 contributions to count for benefit entitlement purposes.


2.Class 3 contributions, which can be paid voluntarily to protect entitlement to the state pension and bereavement benefit, will be expanded to give access to the standard rate of maternity allowance (MA) and contributory employment and support allowance (ESA) for the self-employed.


3.Transitional arrangements will be provided to enable certain people with low profits, share fishermen and volunteer development workers to rely on their contribution record in the two years prior to class 2 abolition for longer than usual when claiming contributory ESA and, where eligible, contribution-based jobseeker’s allowance (JSA). These arrangements will remain in place until 1 January 2022.

Failing to record directors’ loans can prove costly. 

Directors’ loan account (DLA) adjustments are a constant theme in the accounts of SMEs. Practitioners are often faced with the task of analysing SME transactions and explaining which credits should/should not go to the DLA.

Often the directors/shareholders adopt an informal approach and are rather keen to process entries which benefit them but often do not understand the 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 the recent first tier tribunal victory for HMRC where an appeal against PAYE/NIC was dismissed. This is a case which demonstrates that HMRC is looking at the entries in DLAs and that it can/will assess tax when it sees it as applicable.

Case summary
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 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.

Other issues:
by reference to the provisions of the Companies Act 2006 (sections 393 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 cannot 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.

Further information
HMRC has updated its directors’ loan account toolkit which provides guidance for agents (including a checklist).

Tax savings using the married couples allowance

Taxpayers living in the UK are entitled to a personal allowance and – if married or in a civil partnership – may also be able to claim marriage allowance or married couple's allowance too.

Below we examine rules regarding the allowance, what happens on year of eligibility and on death.

Married couple’s allowance
Married couple’s allowance is available to any married couple where at least one spouse was born before 6 April 1935. Entitlement to married couple’s allowance is extended to same-sex couples who are civil partners under the Civil Partnership Act 2004 if at least one partner was born before 6 April 1935. Unlike the age-related personal allowance the age reference to 1935 does not normally change from tax year to tax year.

For marriages before 5 December 2005, the husband’s income is used to work out married couple’s allowance. For marriage and civil partnerships after this date, it’s the income of the highest earner.

Married couple’s allowance applies as a reduction in the claimant’s income tax liability. The reduction is 10% of the amount of the allowance. This tax reduction (like other tax reductions) is restricted to the extent that it would otherwise exceed the individual’s remaining tax liability after making all prior reductions.

The couple should be living together during the tax year. It is possible that when an elderly taxpayer moves into a care home the couple may become separated for tax purposes and the married couple’s allowance may no longer be available.

Year of marriage
Where the marriage or civil partnership is entered into during the tax year (and in that year the person had not previously been entitled to the married couple’s allowance), the allowance is reduced by one-twelfth for each ‘fiscal month’ of the tax year ending before the date of the marriage or civil partnership.

For example, if marriage occurred on 3 October 2017, there would be five fiscal months (five months from 6 April 2017 to 5 September 2017) up to 3 October 2017. The reduction in the allowance is computed after applying any necessary restriction by reference to the income limit.

Year of death
Where either the husband or wife – or either civil partner – dies in a tax year then married couple’s allowance is available as if the marriage or civil partnership had continued until the end of that tax year. There is no reduction in the married couple’s allowance in the year of death.

The ‘higher married couple’s allowance’ and ‘income limits’ are as follows:

                        Basic married                        Maximum married                              Income
                        couple’s allowance                couple’s allowance                            limit  
2017/18                      £3,260                                    £8,445                                    £28,000
2016/17                      £3,220                                    £8,355                                    £27,700
2015/16                      £3,220                                    £8,355                                    £27,700
2014/15                      £3,140                                    £8,165                                    £27,000

The ‘higher married couple’s allowance’ is available where the claimant or his wife is at any time in the tax year aged 75 or over, or would have been but for his or her death in that year. In recent years this would apply as if one of the spouses was born on 5 April 1935 that person would be 80 years old on 5 April 2015.

Where the claimant’s adjusted net income exceeds the income limit, the maximum allowance is reduced by one-half of the excess, except that it cannot be reduced to less than the basic married couple’s allowance (ie the married couple’s allowance is reduced by £1 for every £2 of income over this limit).

Example – 2016/17 tax year
Mr A is a married man, born on 1 February 1934. He has a net income of £33,000 for 2016/17 and no dividend income or savings income. He and his wife were married before 5 December 2005 and they were living together for the 2016/17 tax year.

Net income                                                                                                    33,000
Less Personal Allowance                                                                                  11,000
Taxable income                                                                                              22,000
Tax payable at 20% on £22,000                                                                        4,400
Less Married Couple’s Allowance £5,705 @ 10%                                                    570
Tax payable                                                                                                     3,830

Workings to calculate £5,705 figure above
Maximum married couple’s allowance                                                                8,355
As income is over Income Limit of £27,700
Excess of Net Income over Income Limit
(£33,000 - £27,700) = £5,300
Maximum allowance reduced by half of excess £5,300/2                                    2,650
Reduced Married Couple’s Allowance                                                                5,705          

You can read HMRC’s guidance on this matter.

Marriage allowance
Marriage allowance was introduced from 2015/16. Subject to certain conditions an individual may transfer part of his/her personal allowance to a spouse or civil partner.

The transferable amount is:
(a)  For the tax year 2015-16 is £1,060 and
(b)  For the tax year 2016-17 and subsequent tax years is 10% of the amount of the personal allowance for the tax year to which the reduction relates. If the transferable amount so calculated would not be a multiple of £10 it is rounded up to the nearest amount which is a multiple of £10.

Relief is given to the transferee spouse/partner by means of a reduction in what would otherwise be the transferee’s income tax liability equal to tax at the basic rate for the year on the transferred amount.

Conditions for transferor to meet
The transferor is married to, or in a civil partnership with, the same person when the election is made and for at least part of the tax year in question
The transferor is entitled to the personal allowance for the year
The transferor would not be liable to income tax at the higher or additional rate or the dividend upper or additional rate (assuming that the marriage allowance election was successful)
For transferors who are non-UK residents they need to be eligible for a personal allowance.

Conditions for transferee to meet
The transferee is married to, or in a civil partnership with, a person who has made a marriage allowance election which is in force for the tax year in question
The transferee is not liable for that year to income tax at the higher or additional rate or the dividend upper or additional rate
The transferee is UK resident for the year or, if non-UK resident, is eligible for personal allowances
Neither the transferee nor the transferee’s spouse or civil partner makes a claim to married couple’s allowance for the year.

Election for Marriage Allowance
The election must be made by the transferor no later than four years after the end of the tax year to which it relates. Provided the transferor conditions are met the election, once made, continues for each subsequent tax year unless:

(a)  It is made after the end of the tax year to which it relates, in which case it has effect for that one year only; or
(b)  It is withdrawn by notice given by the individual by whom it was made; or
(c)  The transferor’s spouse or civil partner does not obtain a tax reduction in respect of a tax year for which an election is in force, in which case it ceases to have effect for subsequent tax years, although the person can make further elections.

Example – 2016/17 tax year
A married woman receives taxable income of £9,000 in 2016/17 from self -employment and she has no other taxable income. Her husband has employment income of £43,000 and no other taxable income. They are not eligible for married couple’s allowance. The wife has elected for ‘marriage allowance’ to transfer part of her personal allowance to her husband.

Husband
Employment income                                                           43,000
Less personal allowance                                                      11,000
Taxable income                                                                  32,000
Tax due          £32,000 @ 20%                                             6,400
Less transferable tax allowance £1,100 @ 20%                                         220
Tax due                                                                                              6,180                        

Wife
Husband
Self-employment income                                                                       9,000
Less personal allowance                           11,000
Less transferred tax allowance                   1,100
                                                                                                            9,900
Taxable income nil as income lower than Personal Allowance    nil                       

Tax Saving
If personal allowance was not transferred then husband would pay tax of (£32,000 at 20%) £6,400. Therefore the couple have saved £220 in tax by transferring part of the wife’s personal allowance.

You can read HMRC’s further guidance on this matter.

HMRC launches a growth support service

HMRC has launched a support service for businesses with a UK turnover above £10m or at least 20 employees.

It highlights that the business ‘may be able’ to get a dedicated specialist to help the business or their agent with tax for a specific period of time if the business is a growing mid-sized business (UK turnover above £10m or at least 20 employees).

It states that the ‘Growth Support Service will appoint a dedicated tax specialist to work with you (or your agent) and help you:
understand any new tax issues and reporting requirements
get your tax right before you file your return
consider reporting and governance risks caused by the growth of your business
access any financial incentives and reliefs you may be eligible for
access other HMRC specialists, services and guidance that are relevant to you.’

It has said that the Service will be available if the business is experiencing the following:

Significant increase in turnover
Turnover increased by 20% or more in the last 12 months, where this increase is at least £1m
Mergers and acquisitions – growth-related
Combining with, or buying, companies or other business organisations, or their operating units, resulting in growth of the business
Group reorganisation – growth-related
Reordering or changing the composition of a group of companies for the purpose of business growth (excludes insolvency)
Listing on stock market
Initial and subsequent offerings of shares on any stock exchange for public purchase
Significant introduction of capital
Introducing capital that increases the balance sheet total by more than 20% where that capital is at least £1m
Notifying HMRC and submitting a Senior Accounting Officer (SAO) certificate for the first time
First time notification of meeting Senior Accounting Officer (SAO) conditions and completion of the first SAO certificate
Making quarterly instalment payments for the first time
Paying corporation tax by quarterly instalments for the first time because profits are above the ‘upper limit’
Entering VAT Payments on Account (POA) regime
Making VAT Payments on Account for the first time, because in any period of 12 months or less you have a total liability of more than £2.3m
Exporting goods or services for the first time
Selling goods or services from the UK to another country for the first time
Establishing a presence in a new territory
Setting up a business operation in a new country.

FRS 102 simplifications will help small businesses

The triennial review of FRS 102 has taken place and the FRC is proposing a number of changes.

This review takes into account stakeholder feedback on the implementation of FRS 102. Of particular interest are the proposed simplifications to accounting for directors’ loans for small companies.

Current accounting treatment
Many small companies benefit from loans from the director/shareholder which:
are not repayable on demand
have either no interest/ very low rates of interest of interest charged.

The various versions of FRSSE which were traditionally used would simply account for these loans at the year-end balance at cost. So they might be treated as due within/after 12 months but the interest issue could be ignored.

FRS 102 had a requirement that, despite no interest being charged, the company still had to discount the loan from the director unless it was repayable on demand.  The complicated instructions were included in the FRC staff education note 16 and included the suggestion that the difference created by the discounting would be an ‘additional investment’ in the company. This treatment has caused many problems for small entities who see it as wholly inappropriate. Consequently this has resulted in a number of calls to the ACCA Technical Advisory helpline.

Proposed accounting treatment
The review has resulted in proposed changes to this contentious treatment and these are included in Financial Reporting Exposure Draft 67 (FRED 67) issued by the FRC.

The relevant changes in FRED 67 mean, for small entities, a more proportionate accounting solution for 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), which will permit the loan to be initially measured at transaction price rather than present value. Thus FRS 102 will no longer require an estimate to be made of a market rate of interest in order to discount the loan to present value.

Responses to FRED 67 should be provided to ukfrs@frc.org.uk by 30 June 2017.

The FRC aims to finalise the amendments in December 2017, with an effective date of accounting periods beginning on or after 1 January 2019. Early application will be permitted provided that all amendments are applied at the same time.

The proposed changes offer a sensible solution to small entities that receive non-interest-bearing loans from directors. However, the only disappointing element is the timeframe of the proposed changes which will leave small entities currently preparing accounts having to potentially account for the directors’ loans in a manner which is very likely to be changed in the near future.

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

Overdrawn directors loans - the tax man's view

HMRC has updated its agents’ tool kit relating to directors' loans.

This is aimed at helping and supporting tax agents and advisers by providing guidance on the errors which commonly occur. The guidance refers mainly to the effect on the individual’s tax return. However, it may also be helpful to anyone who is completing a company tax return.

Although it is not compulsory for ACCA members to follow this kit, it is very important that they are aware of its contents as it effectively gives HMRC’s ‘view’ on the risk areas. In other words it clearly shows the areas that HMRC is concerned about.

The update was released on 9 May 2017 so now is a good opportunity to review this important area in conjunction with HMRC’s publication.

The tool kit takes the form of a checklist which the agent is encouraged to fill in when they are dealing with a tax return for a relevant client. The relatively straightforward questions have a YES, NO or N/A answer which doesn’t provide too much of a problem. However, don’t switch off just because these seem to be obvious. The areas that are of most interest are contained in their guidance on risk areas. These make it clear that agents should be thinking about some general areas (guidance is set out before the checklist) and some specific areas (set out after the checklist).

We have summarised the major risk areas:

Wholly and exclusively
A company may not deduct expenditure in computing its taxable profits unless it is incurred wholly and exclusively for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur personal expenses. However, many companies, particularly 'close' companies, pay for personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense. In such circumstances it may be appropriate for these items to be set against the director's loan account. Establishing whether a payment forms part of a director's remuneration package can be complex.

The kit then directs the user to the enquiry manual which gives their opinion on the above. If you follow this link you will see that the language in the manual is suddenly more robust. For instance the enquiry manual starts off with the strong statement:

In close companies, there is a strong possibility that the business will be used to pay private expenses of the owners.So it’s clear that agents need to make sure that their clients are aware of the differences between private v business expenses and how these are declared.

Personal expenditure
The second risk area follows on from the above so this is clearly the focus. There are two points made:

It is important that any personal expenditure incurred by the director and paid by the company is allocated correctly. Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes should be paid.
Note that this emphasises the approach recently taken by HMRC to encourage employers to payroll benefits and personal expenditure.
A review of particular accounts headings may identify directors' personal expenditure that has not yet been allocated appropriately. Transactions should normally be recorded as they occur and a detailed transaction history maintained, so that it is possible to identify the director's loan account balance on any given date.
If transactions are not posted at the time they occur, for example if they are only posted at the year end, an overdrawn balance during the year may be overlooked.

Many small companies will only have their records ‘officially’ written up once a year as part of the annual accounts preparation. So HMRC is pointing out that the balance of the DLA should be known on any given date rather than once a year as part of a separate exercise.

It also highlights the risk that credits to the DLA need to be calculated properly as clearly these could be used to reduce any overdrawn balance:

If transactions are not posted at the time they occur, for example if they are only posted at the year end, an overdrawn balance during the year may be overlooked.

With the additional requirement of making tax digital coming our way soon, it is important that clients are aware of their record keeping responsibilities. Remember that the statutory accounting records that need to be kept are:Companies Act 2006 s.386 Duty to keep accounting records

Every company must keep adequate accounting records.
Adequate accounting records means records that are sufficient—
(a) to show and explain the company's transactions,
(b) to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
(c) to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
Accounting records must, in particular, contain—
(a) entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
(b) a record of the assets and liabilities of the company.
If the company's business involves dealing in goods, the accounting records must contain—
(a) statements of stock held by the company at the end of each financial year of the company
(b) all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and
(c) except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

Loan accounts
Commonly, but not exclusively, loans or advances are made to directors of close companies through their loan accounts. Where a director (who is also a participator) has a loan account that is overdrawn this should be reviewed to consider whether the company is liable to pay S455 tax.

The above sounds obvious but HMRC is emphasising the point that overdrawn loan accounts may be treated the same as direct loans. Again the record keeping may have a bearing on this.

Further guidance is available on participators and close companies. This is worth reviewing. Remember:
S455 tax does not apply to directors who are not also participators and
only applies if the company is a close company at the time the loan or advance is made.

Normally each director has a separate loan account; indeed each director may have more than one account. Where there are separate accounts for individual loans/indebtedness each account should be considered separately for S455 purposes even where the loans are to the same person. If accounts are aggregated inappropriately this can result in an underpayment of S455 tax. The position, however, is different if the facts show that there is genuinely a joint account. It would, though, be unusual to find two directors operating a genuine joint account unless they are spouses, civil partners or otherwise closely related individuals.

The clear risk being that one director’s DLA balance is offset against another to reduce/avoid S455. Agents should ensure that records are kept of all individual balances and that (where necessary) the directors should confirm these in writing to evidence agreement on contentious entries/issues.

Feedback
HMRC would like to hear about your experience of using the toolkits to help develop and prioritise future changes and improvements. HMRC is also interested in your views of any recent interactions you may have had with the department.

Send HMRC your feedback

IHT changes on the horizon

Inheritance tax threshold increased to £1m by 2020-21.

From 6 April 2017, a new inheritance tax Residence Nil Rate Band (RNRB) is available (in addition to an individual's own nil rate band (NRB) of £325,000), conditional on the family home being passed down to direct descendants (eg children, stepchildren, grandchildren and/or their spouses).

Clearly, the threshold changes, decedents and ‘main residence’ requirements need to be considered as part of any IHT planning with clients.

Maximum amount
It is phased in for deaths on or after 6 April 2017, at the maximum following amounts:

Year
Maximum residence nil rate band
2017-18
£100,000
2018-19
£125,000
2019-20
£150,000
2020-21
£175,000

For later years, the maximum additional threshold will increase in line with the consumer price index.

The headline £1m inheritance tax threshold is reached by a married couple or civil partners by combining their nil rate bands and their residential nil rate band (2X NRB of £325,000 plus 2x RNRB of £175,000).

The existing nil rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

Tapering the residence nil rate band
There is a tapered withdrawal of the additional nil rate band for estates with a net value of more than £2m. The withdrawal rate is £1 for every £2 over this threshold.

While the relief is calculated by reference to the value of the residential property transferred on death, it is applied across all of the chargeable estate.

The value of the estate is the total of all the assets in the estate less any debts or liabilities. When you work out the value of the estate for taper purposes, you do not deduct exemptions such as spouse exemption, or reliefs such as agricultural or business property relief. However, you ignore assets that are specifically excluded from IHT (excluded property).

Qualifying property
Only one residential property will qualify. It will be up to the personal representatives to nominate which residential property should qualify if there is more than one in the estate.

The residential property must have been occupied by the individual as a residence at some time, but does not need to have been their main residence. It is possible to choose which property obtains the relief via an election. A property which was never a residence of the deceased, such as buy-to-lets, cannot be nominated.

The additional nil rate band is also available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct descendants.

In those circumstances the RNRB will still be available, provided that:

a)    The property disposed of was owned by the individual and it would have qualified for the RNRB had the individual retained it
b)    The replacement property and/or assets form part of the estate and pass to descendants.

Unused additional threshold
For deaths prior to 6 April 2017, the surviving spouse will be able to claim the deceased person’s RNRB (as it would have been impossible for them to use it). So 100% of the additional threshold will be available for transfer unless the value of their estate exceeded £2m and the additional threshold is tapered away.

It is the unused percentage of the additional threshold that is transferred, not the unused amount. This is transferred in a similar way to the existing basic Inheritance Tax threshold. This ensures that if the maximum amount of additional threshold increases over time, the survivor’s estate will benefit from that increase.

It does not matter when the first of the couple died, even if the death occurred before the additional threshold was available.

Residence nil rate band and gifts
The additional threshold only applies to the estate of a person who has died. It does not apply to gifts or other transfers made during a person’s lifetime. This includes gifts that become taxable because they have been made within seven years of a donor’s death.

Where someone gives away their home and continues to benefit from it, for example, by living in the property, HMRC treats that home as being included in the estate (gift with reservation). So the additional threshold may be available for that home if it is given away to a direct descendant.

Residence nil rate band and trusts
The residence nil rate band may be lost if the property is placed into a discretionary will trust for the benefit of the children or grandchildren.

However, if the trust gives a child or grandchild an absolute interest or interest in possession in the property, the RNRB can still be claimed. The important point to note is that the trustees must use their discretionary powers within two years of the date of death to make the best use of the RNRB.

Other trusts such as Bereaved Minor Trusts, 18 - 25 Trusts and Disabled Persons' Trusts will also retain the additional nil rate band.

IHT planning
Those whose estates exceed £2m could consider making lifetime gifts, if appropriate, to bring their estates below the threshold. However, it will be necessary to consider the capital gains tax implications.

If a surviving spouse is the beneficiary of a life interest trust it may wish to check that the children will benefit on her/his death so as to qualify for the allowance.

For further guidance including case studies please see HMRC guidance

Model accounts for charities

The Charity Commission has updated its accounts pack for charitable companies with income under £500,000.

CC17 Charity accounting templates: accruals accounts (CC17) SORP FRS 102 for charitable companies provides templates, suggested notes and explanation, and highlights that they have been updated for Update bulletin 1, which applies for accounting periods beginning after 1 January 2016.

2017 budget updates guidance on making tax digital

Finance Bill 2017 will outline provisions of the new system.

The Budget gave one small concession on Making Tax Digital (MTD) for those below the VAT threshold for quarterly accounting, but we now await further detail.

Legislation will be introduced in Finance Bill 2017 that will set out:
digital record-keeping – how to keep records of trading and transactions digitally, and categorise expenses with help from prompts and guidance in the software
establishing taxable profit – in particular, exploring when businesses should record accounting and tax adjustments for the purposes of arriving at a taxable profit, and how businesses should reflect reliefs and allowances
providing HMRC with updates – how businesses (including sole traders and landlords) should provide HMRC with quarterly updates
end-of-year activity – how businesses might finalise their taxable profit for a period, including the activity they may need to undertake and how long they should have to do so.

Businesses, self-employed people and landlords will be required to start using the new digital service from:
April 2018 if they have profits chargeable to income tax and pay class 4 national insurance contributions (NICs) and their turnovers are in excess of the VAT threshold
April 2019 if they have profits chargeable to income tax and pay class 4 NICs and their turnovers are below the VAT threshold
April 2019 if they are registered for and pay VAT
from April 2020 if they pay corporation tax.

Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.

Those in employment who have secondary income of more than £10,000 per year through self-employment or property will also be required to use the digital service.

Businesses (including the self-employed and landlords) will be able to keep records of their income and expenditure digitally, and send summary updates quarterly to HMRC from their software (or app).

Those who genuinely cannot get online due to their individual circumstances, such as disability, geographical or other reasons, will be exempted from these obligations.

HMRC’s responses to the MTD consultations, which took place in 2016, were published on 31 January 2017. A summary can be accessed here.

The main issues identified previously by our practitioners are:

Transitional costs
HMRC’s estimate of £280 is way off the mark; the estimated transitional costs for an average self-employed client will exceed £650.

For an accountancy practice, the transitional costs will exceed £10,000 in additional software and staff training costs, which it is believed will be difficult to recover in fees.

It takes an accountancy firm an average of two years to find a member of staff who is capable of communicating with clients and understands clients’ needs.

Accountancy practices will need to disengage with low-earning fee clients. These clients will then be in the hands of unqualified bookkeepers or even trying to deal with their affairs themselves, which may make matters worse.

Some accountants are considering bringing forward their retirement date to avoid MTD.

Business threshold
Accountants feel that there should be a total exemption for any business under the VAT limit, as they will generally be one-man bands and use accountants.

Small business clients have suffered massively, both time- and cost-wise, from the imposition of auto-enrolment, business rate changes, constant changes to employment legislation (eg the horrendously complicated shared paternity leave), proposed changes to the VAT flat rate scheme, and now MTD. Many of them are seriously considering giving up as they cannot cope with any more bureaucracy and cannot afford further increases in compliance costs.

The imposition of quarterly reporting is a step too far. Many small businesses struggle to return information yearly and, if quarterly transaction reporting is required, this will lead to extra deadlines and no doubt more errors.

Practitioners believe that the threshold should be at least £150,000 and that the quarterly reporting should be voluntary for all sole traders, landlords and business with fewer than 25 employees.

There is an understanding of the need for change but MTD should be introduced gradually, starting with the largest businesses first as they are better equipped, having accounts departments.

MTD is not going to provide more accurate information to HMRC; it is going to cause additional confusion, work, costs and errors as clients cannot be relied upon to decide what is and isn't tax allowable.

In conclusion, the main issues for practitioners seemed to be:
increased costs for accountancy practices and business owners
mandatory form of record-keeping irrespective of the business’s needs or owner's capabilities
training requirements.

VAT thresholds and other changes

Increases could delay VAT registration for 4,000 small business.

From 1 April 2017 the VAT registration threshold will increase from £83,000 to £85,000 and the deregistration threshold from £81,000 to £83,000, in line with inflation. Also, the registration and deregistration threshold for relevant acquisitions from other EU member states will also be increased from £83,000 to £85,000.

It is estimated that these increased thresholds will prevent around 4,000 small businesses from having to register for VAT for another 12 months.

Making it consistent for everyone
VAT on telecoms for use and enjoyment provisions for business-to-consumer mobile phone services

The government will remove the VAT use and enjoyment provisions for business-to-consumer mobile phone services to individuals. This will resolve the inconsistency where UK VAT is applied to mobile phone use by UK residents when in the EU, but not when outside the EU. It will also ensure that mobile phone companies cannot use the inconsistency to avoid UK VAT. This will bring UK VAT rules into line with the internationally agreed approach.

Measures to put a stop cap on VAT evasion through missing trader fraud
The government will launch a consultation on 20 March on a range of policy options to combat supply chain fraud in supplies of labour within the construction sector. Options include a VAT reverse-charge mechanism so the recipient accounts for VAT. It will also consider other changes, including to the qualifying criteria for gross payment status within the Construction Industry Scheme.

Split-payments model
The government will publish a call for evidence on 20 March on the case for a new VAT collection mechanism for online sales. This would harness technology to allow VAT to be extracted directly from transactions at the point of purchase. This type of model is often referred to as split payment. 

Changes to VAT Flat rate scheme 

The VAT Flat Rate Scheme (FRS) is designed as a simplified accounting scheme for small businesses with a turnover no more than £150,000 a year, excluding VAT. Businesses determine which flat rate percentage to use by reference to their trade sector. Therefore they have to determine their own category. So far so good!

Changes announced in the Autumn Statement
From 1 April 2017, businesses using the scheme must also determine whether they meet the definition of a limited cost trader. The point of this change is that if affected, these businesses will need to apply a new, higher flat rate percentage. This could potentially make the FRS much more expensive and may even mean a switch to another method of VAT calculation. The Chancellor sees these changes as ‘tackling aggressive abuse of the VAT Flat Rate Scheme’.

What is a limited cost trader (LCT)?
The exact definition will be included in new legislation but a limited cost trader is deemed as one that spends less than 2% of its VAT inclusive turnover on goods (not services) in an accounting period.

When working out the amount spent on goods, it cannot include purchases of:
capital goods (such as new equipment used in a business)
food and drink (such as lunches for staff)
vehicles or parts for vehicles (unless running a vehicle hiring business).

A firm will also be a limited cost trader if it spends less than £1,000 a year, even if this is more than 2% of the firm's turnover, on goods. If the accounting period is not one year, the figure is the relevant proportion of £1000.

What is the new LCT flat rate scheme percentage?
Limited cost traders can still use the Flat Rate Scheme, but their percentage will be 16.5%. So if they sell £120 of work, including £20 of VAT, the flat rate amount is £19.80 (£120 x 16.5%).

Who will this affect?
The 16.5% rate may be quite a rise on the existing one used by many businesses.  An obvious example is the accountant in practice who may traditionally spend very little on ‘goods’ and currently uses a 14.5% rate. Labour intensive businesses may also include categories such as IT contractors, consultants, hairdressers and solicitors who all are currently using HMRC rates that are lower.

To complicate things further – there are transitional measures!
HMRC's explanation of these measures is:
Anti-forestalling provisions
Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation was published on 23 November 2016 and should be read alongside this guidance. This can be found in sections 8.2 and 9.7 of VAT Notice 733: Flat rate scheme for small businesses. It is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.
This will affect a business that supplies a service on or after 1 April 2017 but either issues an invoice or receives a payment for that supply before 1 April 2017.

Therefore the cut-off of the VAT calculations for any business affected needs to be considered carefully. For instance problems might occur where an invoice or payment that covers continuous supplies of services crosses this date and therefore must be apportioned.

Time to recap the FRS percentage you or your clients are using
The flat rate used depends on the business sector. The correct sector is the one that most closely describes what the business will be doing in the coming year. HMRC expects those concerned to use VAT Regulations 1995, Regulation 55K to ascertain what category best describes the business. There is full guidance at FRS7200 and FRS7300 of the Flat Rate Scheme Manual where HMRC has offered an interpretation of each sector.

When do the changes officially commence?
Draft secondary legislation will be published on legislation day 5 December 2016 and businesses will be able to comment on the draft legislation. HMRC has said that ‘To support businesses, we will introduce an easy-to-use online tool that will help determine whether they should use the new rate’.

The pitfalls of incorporating a letting business

Transferring properties to a limited company has tax consquences.

With 6 April fast approaching, many property landlords, especially those planning to expand their portfolios, will be wondering whether it is better to incorporate.

The obvious advantages of incorporation are lower than income tax corporation tax rates (set to fall even further in future), the continued tax relief on mortgage interest for companies (now restricted and eventually denied to private landlords), and much more flexibility regarding the timing of the extraction of profits and hence more tax planning opportunities, with the added benefit of a £5,000 extraction tax free in the form of dividends.

However, transferring properties to a limited company has a number of tax consequences on incorporation.

Capital gains tax
Like any transfer of assets between connected parties, the transaction is deemed to have taken place at market value (MV), hence the transfer of properties from a private landlord to his/her newly incorporated company will create taxable capital gain on the landlord.

Availability of capital gains tax reliefs
The recently introduced lower capital gains rates of 10% and 20%, the entrepreneur’s relief and gift relief are not available on incorporation of a rental property business.

However, incorporation relief is likely to be available in the following circumstances: 
The rental activity is a business. This condition is met as long as the property is let on commercial terms and the activity carried out in connection with the letting is at a level typical of business, rather than a passive holding of investments (please see the relevant tax case below).
Consideration is wholly or partly in shares (if partly, incorporation relief is available only on the proportion of the gain attributable to the share consideration). The assumption by the company of some or all debt outstanding, such as mortgages or loans to do with the letting business, is not taken to be cash consideration, so does not restrict the application of incorporation relief (statutory concession D32).
The business is transferred as a going concern.

The relief is also available to partners where the whole business of the partnership is transferred to a limited company.

The consequence of incorporation relief is that the cost base of its shares for capital gains tax purposes is reduced by the amount of the gain relieved on incorporation, hence deferring the tax liability until the company is sold. In theory, if the company is never sold, capital gains tax will be deferred indefinitely.

Incorporation relief applies automatically, so is not claimed. If incorporation relief is not beneficial, it can be disclaimed. This is highlighted in Elizabeth Moyne Ramsey v HMRC [2013] UKUT 266.

SDLT
Transfer of properties from an individual to a company
No special relief is available for property transferred on the incorporation of an individual proprietor’s existing business.

SDLT arises on the MV of the properties transferred (s53, FA 2003), irrespective of consideration actually paid. For companies, for transactions completed on or after 1 April 2016 on which contracts were exchanged after 25 November 2015, SDLT at higher rates (3% surcharge) apply if the chargeable consideration is £40,000 or more and where the dwelling is not subject to a lease with more than 21 years left to run.

In the event that the properties transferred to the company are short leaseholds (granted for 21 years or less), multiple dwelling relief (MDR) can reduce SDLT. If MDR is claimed, higher SDLT rates apply for the purposes of the calculation and at least two dwellings need to be transferred. The total SDLT payable is calculated on the mean consideration using the relevant higher SDLT rates multiplied by the number of dwellings. The actual SDLT payable is the higher of that amount, and 1% of the total consideration.

If the portfolio transferred is made of at least six dwellings, the company can choose whether to pay SDLT at the higher rates and apply MDR, or treat the properties as non-residential and apply relevant rates applicable to non-residential properties, but without MDR.

Transfer of properties from a partnership to a company
Companies incorporated from a partnership may significantly reduce or eradicate its SDLT bill altogether, thanks to special rules granting SLDT exemption in transactions between a partnership and persons connected with the partnership (Part 3 Schedule 15 FA 2003).

Applying CTA 2010, s1122, an individual who is a partner in a partnership, and a company controlled by that same individual, are connected parties.

Essentially, as long as the controlling shareholder(s) of the company created on the partnership’s incorporation have held all of the interest in the partnership before incorporation (taking into account the individual’s share in the partnership and any of his/her relatives who were also partners), the company will escape SDLT.

However, if an individual now holding majority of shares in the company has been in partnership with unrelated individuals, it is only a proportion of the share consideration issued by the company for the properties of the partnership which will escape SDLT.

What’s next?
Considering the complications of incorporation, some of which are discussed above, is it worth it?

A detailed comparison of tax costs impacting an incorporated vs unincorporated business throughout its life is deserving of much extended page space than available here.

However, tax impacts alone should not determine the final decision on incorporation or otherwise. Practical considerations, such as a lender’s consent to move properties to a company, potential need for refinancing following incorporation, its cost and additional bank requirements (such as personal guarantees demanded of shareholders), are likely to influence the final decision.

Chancellor announces relief from business rates rises

The Chancellor has announced a number of measures to help small businesses cope with potential business rates increases. The main measures are:

  • any firm coming out of Small Business Rate Relief will receive an additional cap next year on increases of no more than £50 a month. Subsequent increases will be capped at either the transitional relief cap or £50 a month, whichever is higher.  So effectively, no small business that is affected will pay more than £600 more in business rates this year than they did in 2016-17.
  • pubs with a rateable value of less than £100,000 will receive a £1,000 discount on business rate bills in 2017.
  • Local authorities will be allowed to provide £300m of discretionary relief to provide help to businesses most affected by the revaluation. 

Dividend allowance to be cut from 2018

Tax-free dividend allowance to more than halve.

The tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018.

The tax-free dividend allowance was introduced from April 2016 so that the first £5,000 of dividend income would be tax free.

Dividends received over £2,000 (over £5,000 to 5 April 2018) we assume will be taxed at the following rates:
7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band.

In the following examples the following limits are assumed for the year ending 5 April 2020.

Personal allowance:            £12,070
Basic rate limit;                    £33,500
Higher rate threshold:         £45,570

View two worked examples which provide more detail.

NIC for self employed to rise

Changes aim to align national insurance contributions and income tax.

One of the significant features of the Budget is the changes for the self-employed. The nod to national assurance alignment and increases in national insurance contributions (NIC) will be significant for entrepreneurs.

Current system
The self-employed pay class 4 national insurance at 9% between the lower profits limit (£8,060 in 2016-17) and the upper profits limit (£43,000 in 2016-17).

Currently, the self-employed also pay class 2 NICs at a flat rate of £2.80 per week (or £145.60 a year), although this is due to be abolished from April 2018.

New system
In the 2016 Budget it was announced that class 2 NICs would be abolished from April 2018. These determine entitlement to benefits for the self-employed. From April 2018, class 4 will become the replacement for determining entitlement to benefits.

The main rate of class 4 NICs will increase (from the current rate of 9%) to 10% from April 2018 and to 11% from April 2019.

This is how it will work:

Example 1
Assume lower profits limit for 2019/20 will be £8,582.
Assume personal allowance for 2019/20 will be £12,070.
Mr A is self-employed with profits of £17,500.
Class 4 NICs will be: [profits less (lower profits limit)] x 11%
This is (£17,500 - £8,582) x 11% = £980.98
Income tax will be: [profits less (personal allowance)] x 20%
This is (£17,500 - £12,070) x 20% = £1,086
Total tax and class 4 NIC will be £2,066.98

Before these changes (in 2015/16), Mr A, with profits of £17,500, would pay income tax of £1,380 [(£17,500 - £10,600) x 20%], class 2 NICs of £146 and class 4 NICs of £850 [(£17,500 - £8,060) x 9%], making a total of £2,376.

Example 2
Lower profits limit for 2019/20 will be £8,582.
Mrs B is self-employed with profits of £25,000.
Class 4 NICs will be: [profits less (lower profits limit)] x 11%
This is (£25,000 - £8,582) x 11% = £1,805.98
Income tax will be: [profits less (personal allowance)] x 20%
This is (£25,000 - £12,070) x 20% = £2,586
Total tax and class 4 NIC will be £4,391.98

Before these changes (in 2015-16), Mrs B, with profits of £25,000, would pay income tax of £2,880 [(£25,000 - £10,600) x 20%], class 2 NICs of £146 and class 4 NICs of £1,524 [(£25,000 - £8,060) x 9%], making a total of £4,550.

Business rates relief

Summarising the changes coming into effect in April. 

In 2015 the government launched a wide-ranging review of national business rates which was designed to pave the way for changes to how businesses across England pay the tax. The outcome of this review was to implement changes for businesses, particularly smaller ones. The following are the changes and reliefs for smaller business which come into effect from April 2017. 

Overview of business rates
Business rates are charged on most non-domestic properties, like: 

  • shops
  • offices
  • pubs
  • warehouses
  • factories.


Business rates are worked out based on the property’s ‘rateable value’. This is currently the open market rental value on 1 April 2008, based on an estimate by the Valuation Office Agency (VOA). This value is then multiplied by a figure (multiplier) which is set by central government and this calculation shows what the rates liability will be.

The rates bill can be reduced if your property is eligible for business rates relief. 

Business rates calculations prior to April 2017

  • Business rates are not payable on properties with a rateable value of £6,000 or less.
  • Where the rateable value of the property is below £12,000 business rates relief can be applied and goes down gradually from 100% to 0% for properties with a rateable value between £6,001 and £12,000.
  • Even if the business does qualify for small business rate relief, the business rates will be calculated using a small business multiplier instead of the standard one. This is the case even if the business uses more than one property. The multipliers (set by the government):

Year

2015/16

2016/17

Small business multiplier

48.0p

48.4p

Higher multiplier

49.3p

49.7p


Changes from April 2017
Small Business Rate Relief will be doubled (from 50% to 100%). This means that businesses with a property with a rateable value of £12,000 and below will receive 100% relief.

Businesses with a property with a rateable value between £12,000 – £15,000 will receive tapered relief. By raising the relief threshold to £15,000, the then Chancellor George Osborne said it would take 600,000 small businesses out of paying business rates entirely: ‘This is significant and is very, very welcome, given that SMEs account for some 50% of private sector value added in the economy and business rates are often a large outlay’.

The new rates for the small and higher multipliers is set at: 

Year

2017/18

Small business multiplier

46.6p

Higher multiplier

47.9p


The threshold for the standard business rates multiplier will be increased to a rateable value of £51,000. Therefore, businesses with properties with a rateable value below £51,000 will pay lower rates.

The Valuation Office Agency (VOA) sets the rateable values of all business properties. The new rateable values, released on 30 September 2016, are based on the rental value of properties on 1 April 2015. These will be used to calculate business rate bills from 1 April 2017.

Full guidance from the government including details of how to check the rateable value and how to appeal against a rates liability can be found here. There are also other reliefs for entities such as charities and rural businesses which are featured in this guide.

ACCA also issued the following press release yesterday (16 February):


Business rates regime needs to carefully consider the competitiveness of UK plc 

The Chancellor has an opportunity at the Spring Budget to reshape the future of the business rates system in England in order to prevent the catastrophic consequences for UK businesses of the planned revaluation measures due to come in to effect this April. 

Chas Roy-Chowdhury, head of tax at ACCA, says: ‘Linking the business rates regime to current property valuations—as outlined in the government’s Business tax road map — may seem at first glance to be a sensible proposition but actually requires careful consideration particularly given that ratable values have not been adjusted in almost a decade. The government should ensure that this is not introduced at the expense of the competitiveness of UK plc as a place to work and to locate a business.

‘The system also needs to take account of fairness when some high-street shops will be hit by hikes of over 400% on current rates, while online retailers will see rates cut in many instances.

‘For many of the productivity-boosting SMEs up and down the country, increases will eat into disposable income which could better be spent on investment, recruitment or research and development. This is particularly important given the low levels of confidence following the result of the referendum on the UK’s membership of the European Union and looking ahead to the longer term effect of the devaluation of sterling in increasing supplier costs.

‘The government should revisit these proposals and carefully consider if the revaluation is the best way to raise revenue from the UK’s thriving small and medium sized businesses in an era of high uncertainty for the future.’ 

New reporting rules for charities

From May, the CRS may require charities to make reports to HMRC. Will your charity clients be affected? 

The Common Reporting Standard (CRS) is a global network of legislation which aims to prevent individuals and entities using offshore structures to evade tax. Unlike the USA’s Foreign Account Tax Compliance Act (FATCA) – under which charities are exempt from reporting requirements – the CRS may require charities to make reports to HMRC. The CRS is the result of the drive by the G20 nations to develop a global standard for the automatic exchange of financial account information. 

The immediate assumption on reading the above is that this only affects large charities; however, the new rules could affect many smaller or less complex charities. 

We recommend any member involved with charities review whether or not they are affected as the first reports under the CRS are due in May 2017.

How might CRS affect smaller charities?
The CRS divides all entities into two broad categories – ‘financial institutions’ (FIs) and ‘non-financial entities’ (NFEs). If a charity is considered to be an NFE, it will not have its own reporting requirements under the CRS. So for instance a charity won’t need to provide its financial account information if its income is mostly from: 

  • gifts
  • donations
  • grants
  • legacies.


The issue for smaller charities is that most of them do not provide financial services, and so would not expect to be classed as an FI. The definition of FI under the CRS, however, is very broad and some charities – particularly endowed charities and those that receive a large proportion of their income from investments – may be categorised in this way.

So a smaller charity might be deemed to be an FI if it is managed by an FI and its gross income is at least 50% attributable to investing, reinvesting, or trading in financial assets. Note that ‘managed’ is also subject to a broad definition. It could be that a charity merely has to appoint a professional investment manager to manage all or part of its assets on a discretionary basis to make it ‘managed’.

An entity is not regarded as managed by a financial institution if that financial institution does not have discretionary authority to manage the entity’s assets either in whole or in part. If this is the case, charities should consider whether they are required to make relevant reports.

What needs to be reported?
This is where it gets even more complicated! 

Where the charity is deemed to be an FI it must collect data on ‘financial accounts’ for the calendar year to 31 December 2016 and report it to HMRC by 31 May 2017. For these purposes financial accounts are not the standard reports for each year-end but relate to charities where equity interests, bonds or other debt instruments are involved.  It also may include charities set up as trusts which make grants to beneficiaries. It would appear that many charities which are deemed to be FIs will not in fact have ‘financial accounts’ but it is not clear whether HMRC will require these charities to submit nil returns.

Where a report does need to be made, the charity must use the Automatic Exchange of Information Online Service. A full analysis of the report contents is beyond the scope of this article but basically it involves information on payments made to beneficiaries.

The CRS refers to these beneficiaries as account holders of an equity interest. This includes anyone who may receive a distribution, directly or indirectly. These account holders are reportable where they are tax resident outside the UK, in a reportable jurisdiction. Note that payments to suppliers for the provision of services are not included.

Further information
HMRC has published specific guidance for charities with AEOI reporting obligations, please see IEIM404700

Myths and truths about HMRCs investigative powers

Guidance for accountants – and clients – on HMRC’s investigative powers. 

One of HMRC’s responsibilities is to check that the correct amounts of tax have been paid at the right time. To do this, HMRC may need to: 

  • gather information and examine documents
  • inspect business premises and inspect business documents on those premises.


There are safeguards to ensure that HMRC acts reasonably and that any action it takes is appropriate to the circumstances, and to ensure that HMRC does not unreasonably interfere with a person’s rights under the Human Rights Act. 

The information and documents that an HMRC officer can request must be reasonably required in order to check a person’s tax position. Information can only be reasonably required where it could affect a person’s tax position. If the information could not affect a person’s current or future tax position, it is not reasonably required.

The restrictions on the types of documents and information that HMRC can require or inspect include the following: 

Old documents: these are usually documents created more than six years ago. However, HMRC can request documents older than that if they affect the current tax position (such as a purchase agreement, in order to determine the chargeable gain on a capital disposal). HMRC may also need to see an old document where they have reasonable grounds to suspect that there may have been a deliberate error, which means that the assessment time limit could be extended to 20 years.

Appeal material: these are documents that ‘relate to the conduct of a pending appeal’. Such documents are usually brought into existence as part of the preparation for the presentation of a tax appeal.

Personal records: these are records concerning any individual’s physical, mental, spiritual or personal welfare. Any document containing welfare information is very sensitive. It follows that there is a strong presumption in favour of personal privacy, and so there are restrictions on HMRC’s power to request information containing personal information. 

Journalistic material: these are materials acquired or created for the purposes of journalism. Material is journalistic material only if it is in the possession of a person who acquired or created it for the purposes of journalism, that is a journalist, or unsolicited material sent to a person with the intention of it being used for journalism.

Legally privileged information or documents: legal professional privilege is a very important common law rule that protects from disclosure certain communications between a legal professional and the person who is their client. This applies whether the communications are held by the legal professional or the client. Information is privileged if a claim to legal professional privilege could be maintained in legal proceedings. 

Auditors’ statutory audit papers: as a general rule, an auditor cannot be required to provide information or produce documents that belong to the auditor if they were created for the purpose of carrying out the audit. Audit papers in the hands of anyone other than the auditor who created them are within the scope of HMRC’s information and inspection powers.

Tax advisers’ papers giving advice: HMRC cannot require a tax adviser to provide information or produce documents that belong to the adviser if the purpose of the information or documents was to give or get advice about another person’s tax affairs. This protection only applies when the notice is given to a tax adviser. It does not apply when the notice is given to the person whose tax position is being checked.

Formal and informal enquiry: an HMRC officer has the power to either correct a return informally or open a formal enquiry (by issuing a formal enquiry notice), and each of these processes is discussed below.

Correcting a return - informal enquiries: an HMRC officer can, within nine months of receiving a self-assessment tax return, amend the return, without opening an enquiry, in order to correct an obvious error or omission. ‘Obvious’ means that there can be no doubt what the correct entry should be. This could include correcting arithmetical errors, transposition of incorrect figures and errors of principle. 

An HMRC officer can also amend the return if he has reason to believe it is incorrect based on information already held and where no more information is needed.

The taxpayer has no right of appeal against a correction, but does have the right to reject it by giving notice in writing within 30 days of the date it was issued by HMRC. If an appeal is made, it means that the correction has no effect and the self-assessment is put back to the original figures.

Even if the taxpayer does not reject the correction in the time allowed, he may be in time to amend the return. In such circumstances, an officer can only dispute the amendment by means of a formal enquiry into the amended return.

An informal request for information is not the same as formal enquiry. Not recognising the informal approach as an enquiry leaves the door open for the same or another inspector to open a formal enquiry later. Don’t forget that if the matter has been concluded under a formal enquiry it would prevent HMRC opening a new enquiry into the same matter. Essentially an HMRC officer is bound by the decision of the first officer and HMRC cannot change their minds on information previously available to them. This has been successfully argued by the taxpayer in Scorer V Olin Energy Systems Ltd.


Opening an enquiry
An HMRC officer can enquire into a return by giving written notice to the individual, sole trader, partnership or company concerned. For an enquiry to be valid, it should:

  • be given in writing
  • set out whether the whole of the return is under enquiry or just one or a few specific entries
  • explain what information and documents are required
  • contain a time deadline by which the information and documents must be submitted or made available.


HMRC should state the specific concerns identified in the case in question rather than asking for general papers.

The vast majority of enquiries are launched after a risk assessment has been undertaken, although some random enquiries also take place. Previously, when HMRC wanted to check one item in a tax return this was called an ‘aspect’ enquiry and when HMRC wanted to open an in-depth enquiry, this was called a ‘full’ enquiry. Now, however, HMRC no longer differentiates between full and aspect enquiries and both are referred to as a ‘compliance check’.

While the names have changed, the enquiry powers have not. Enquiries into self-assessment tax returns or amendments are launched under TMA 1970, s9A, within 12 months of the submission of the return.

The taxpayer should consider carefully how to respond to an enquiry because if there is an error, the way in which they co-operate with HMRC can affect the penalty that may be payable. For guidance about penalties and how they can be mitigated, please see our article Tax penalty regime - mitigation and suspension

Changes to property allowances for landlords

The wear and tear allowance for fully furnished residential properties was abolished from April 2016. 

This affected companies from 1 April 2016 and individuals and others (such as trusts and other unincorporated entities) from 6 April 2016.

Instead, for the current tax year all landlords of residential properties can deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property. For individuals this is domestic items relief. 

The relief available will be: 

  • the cost of a like-for-like (or nearest modern equivalent) replacement asset
  • plus any costs incurred in disposing of that asset
  • less any proceeds received for the asset being replaced.


The above deduction is not available for furnished holiday lettings because capital allowances continue to be available for these businesses. 

The above deduction is also not available if the person has rent-a-room receipts in respect of the property for the tax year and rent-a-room relief applies in relation to those receipts.

If the replacement asset is substantially better or different to the asset being replaced then the deduction available is so much of the expenditure incurred on the new item as does not exceed the expenditure which would have been incurred on an item which is the same or substantially the same as the old item.

The deduction relates to the replacement of furnishings, appliances and kitchenware and does not include anything that is a fixture. Fixture means:

(a)  any plant or machinery that is so installed or otherwise fixed in or to a dwelling-house as to become part of that dwelling-house, and
(b)  any boiler or water-filled radiator installed in a dwelling-house as part of a space or water heating system.

However, replacement of fixtures such as windows, doors, roofs etc. may still be allowable expenditure if they do not represent capital expenditure.

These changes were made by the Finance Act 2016 sections 73 and 74 which effectively made amendments to: 

  • Income Tax (Trading and Other Income) Act 2005 sections 311A introduced and repealed sections 308A to 308C [ITTOIA 2005] for Income Tax
  • Corporation Tax Act 2009 section 250A introduced and repealed sections 248A to 248C [CTA 2009] for Corporation Tax.

When is a car not a car ?

Examining the rules around cars and capital allowances. 

Members often ask questions on ACCA’s Technical Advisory helpline regarding what is/is not a car for capital allowances and other purposes. Here’s a timely recap on the rules and how they are applied.

Basics
A business can claim capital allowances on cars bought and used in the business. However, the first issue is – what is deemed to be a car?

Members are often approached by their clients who want to buy, for instance, a double cab pick-up and they have been assured by the salesman that it ticks all the tax boxes and so is deemed to be a van. So full allowances and VAT can be claimed? Unfortunately it is not always that straightforward:

HMRC’s basic guidance states the following:

For capital allowances a car is a type of vehicle that: 

  • is suitable for private use - this includes motorhomes
  • most people use privately
  • was not built for transporting goods.


However, HMRC’s instructions to its own staff in the capital allowances manual are much more detailed:

For PMA purposes a car is a mechanically propelled vehicle except a vehicle: 

  1. constructed in such a way that it is primarily suited for transporting goods of any sort, or
  2. of a type which is not commonly used as a private vehicle and is not suitable for use as a private vehicle.


Note that this uses somewhat subjective words – ‘primarily’, ‘commonly’ and ‘suitable’.

So perhaps to add some clarification, the manual has further very interesting guidance:

‘Treat a car that is capable of being used as a private vehicle as a car for PMA purposes no matter how the taxpayer actually uses it (Roberts v Granada TV Rental Ltd 46TC295).’

So clearly the word ‘capable’ is meant to override the above subjective issues?

Conversely. the manual continues:

‘Do not treat the following vehicles as cars for PMA purposes: 

  • a car that it is illegal for a taxpayer to use as a private vehicle even if the taxpayer sometimes uses it as a private vehicle (Gurney v Richards 62TC87)
  • cars used by a driving school and fitted with dual control mechanisms (Bourne v Auto School of Motoring (Norwich) Ltd 42TC217)
  • emergency vehicles. A vehicle equipped with a fixed blue flashing light on the roof which can only be used on the road by a fire officer or police officer is an emergency vehicle
  • hackney carriages ( traditional ‘London black cab’ type vehicles)
  • double cab pick-ups with a payload of one tonne or more. (Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight.)’


The final point will be of interest to many. Many of these pickups are capable of being used as, and suitable/commonly used as, cars but according to the guidance they will not be treated as cars.

Capital allowances for cars
For expenditure after April 2009 the Finance Act 2009 introduced new rules that were designed to both encourage businesses to purchase cars with lower carbon dioxide emissions and reduce their administration costs. 

The capital allowances treatment of expenditure on a car depends on the carbon dioxide emissions of the car rather than its cost. Expenditure after 2009 will be treated in different pools.

A summary of the current treatment dependent of the CO2 figure is: 

Cars bought from April 2015

Description of car

What you can claim

New and unused, CO2 emissions are 75g/km or less (or car is electric)

First year allowances

New and unused, CO2 emissions are between 75g/km and 130g/km

Main rate allowances

Second hand, CO2 emissions are 130g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions are above 130g/km

Special rate allowances


Cars bought between April 2013 and April 2015

Description of car

What you can claim

New and unused, CO2 emissions are 95g/km or less (or car is electric)

First year allowances

New and unused, CO2 emissions are between 95g/km and 130g/km

Main rate allowances

Second hand, CO2 emissions are 130g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions are above 130g/km

Special rate allowances

New and unused, CO2 emissions are between 110g/km and 160g/km

Main rate allowances

Second hand, CO2 emissions are 160g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions above 160g/km

Special rate allowances


Things to remember: 

  • if there is an element of non-business use of the car then the expenditure will still need to be allocated to a single asset pool (see HMRC manual CA27005) but the rate at which WDA are given will depend on the car’s CO2 emissions
  • the old rules relating to ‘expensive’ cars are only applicable to expenditure pre 2009 – see HMRC manual CA23520
  • certain cars with low CO2 emissions (see above) will still qualify for 100% FYA as described in CA23153
  • if your business provides a car for an employee, capital allowances can normally be claimed on the full cost. However, this may need to be reported as a benefit if they use it personally.


Further information
Watch this recent HMRC webinar on this subject now

Small earnings income allowance

2017 sees the introduction of two new tax allowances that have so far gone ‘under the radar’. 

From April 2017 the government is introducing two new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. These were announced in the 2016 Budget but have largely gone ‘under the radar’.

Overview
The allowances cover individuals with small amounts of income from providing goods, services, property or other assets. The government sees this as ‘providing simplicity and certainty regarding income tax obligations on small amounts of income’.

When it was announced commentators initially assumed this was largely aimed at regularising the taxation of small income where the recipients habitually did not declare it. It was also dubbed ‘the eBay allowance’ as it was designed to ‘reduce the complexity for some individuals who will no longer have to decide if the activity amounts to a trade or not.’

However, the measures also introduce a new way of taxing income which is over the £1,000 limit.

The trading allowance – how does it work?
The basics are that if the allowance covers all of an individual’s relevant income (note this is before any relevant expenses) then they will no longer have to declare or pay tax on this income. Therefore this provides for full relief where the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year are up to £1,000. The effect of the relief will be that the profits from the trade will be nil. 

There will be an equivalent rule for certain miscellaneous income, chargeable under Chapter 8 of Part 5, of the Act. This will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.

Receipts of over £1,000 potentially have a new profits calculation basis
Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes. 

Note that this is instead of the usual rules that would otherwise apply in calculating the profit of a trade or of a property business or miscellaneous income. The election for the trading allowance is made independently and applies for each particular tax year.

The election will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000, where the individual has both sources of income.

Does the trading allowance apply to all businesses?
The quick answer is no! The new allowances will apply to all types of trading income of an individual but not to partnership income from carrying on a trade or profession where special rules in Part 9 of ITTOIA 2005 apply. 

How does the property allowance work?
This operates in a very similar manner to the trading allowance. This will provide for full relief where the income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses will not be brought into account when calculating profits of a property business. 

There will be also be an optional alternative method for calculating profits where the deductible receipts of a property business are more than £1,000. This will take the form of an election which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought into account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought into account. In calculating the profit a deduction is allowed for the £1,000 property allowance.

Does the property allowance apply to all income?
As above, the new allowance does not apply to partnership income. In addition, it does not apply to relief given under the Rent-a-Room Relief legislation.

Landlords responsibilities under the new didgital reporting regime

How will landlords be affected by making tax digital?

Below are extracts from the options for landlords under MTD which impact the 2017/18 tax year.

Landlords with under £150,000 turnover will use the cash basis rather than generally accepted accounting practice (GAAP) as the default method of calculation, ‘unless a landlord opts out or has rental receipts for the business in excess of the threshold in which case they will continue to use GAAP’. It is stated that the measure will have effect for the ‘tax year starting 2017 to 2018 onwards’.

The taxable profits for property business income is calculated in accordance with GAAP and is adjusted for income tax purposes. The proposed change will see the cash basis being the default option where the cash basis receipts of that business don’t exceed £150,000. HMRC’s notes highlight that landlords ‘will continue to be able to opt to use GAAP to prepare their profits for tax purposes’.

Landlords with more than one property business will be able to choose the ‘cash basis or GAAP for each of their property businesses’. It is also highlighted that landlords who have ‘overseas property businesses alongside a UK property business will be able to make the decision about whether using GAAP is more appropriate for either’. It is also stated that landlords ‘other than spouses or civil partners who jointly own a rental property will be able to decide individually’.

The note also highlights that: 

  • capital allowances are not available
  • landlords will be able to claim the upfront cost of capital items used in the business
  • interest expense will be treated consistently between those using the cash basis and those using GAAP

The new lifetime ISA allowance

LISA is potentially a valuable savings option. But how does it work and who is it aimed at? 

From April 2017 a new savings product called LISA (Lifetime ISA) is available. It is designed to help young people save flexibly for the long-term throughout their lives. However, as with most financial ideas, the devil is in the detail.

The main benefits of the LISA are: 

  • it is designed to work with existing ISA products and will be simple for savers to use
  • as with existing ISAs investment growth on savings and future withdrawals are tax-free
  • savers will be able to make LISA contributions (up to £4,000 in each tax year) and receive a bonus from the age of 18 up to the age of 50. Where the maximum is saved, this could mean a  £1,000 bonus each year from the government
  • there is a one-off 2017/18 bonus for those who also use the help to buy ISA – see below for more details.


Who is it aimed at?
To use the LISA the saver must be aged 18 or over but under 40. 

How does the LISA differ from existing ISAs?
The Lifetime ISA is designed for two specific purposes: 

  • for first-time buyers to use towards a residential property situated in the UK. This can be done at any time, provided the Lifetime ISA has been held for 12 months or more. However, it needs to be emphasised that the tax-free funds, including the government bonus, can only be used to buy a first home worth up to £450,000 at any time
  • to take out and use in retirement once the saver is aged 60. Once that age is reached the tax free funds can be used for ‘any other purpose’.


So the government is stressing the long term nature of the savings.

So far so good? Now for the complicated bit
As mentioned above, the devil is in the detail. Perhaps unsurprisingly the government has surrounded the LISA with rules and restrictions. These are important and need to be considered before an application is made: 

  1. Any contributions to a Lifetime ISA will sit within the overall £20,000 ISA contribution limit. However the government bonus will only be paid on contributions of up to £4,000 per tax year.
  2. Individuals will be able to transfer savings from other ISAs as one way of funding their Lifetime ISA. In line with existing rules, transfers from previous years’ ISA contributions do not affect that year’s £20,000 overall ISA limit.
  3. Savers will be able to contribute to one Lifetime ISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA, within the new overall ISA limit of £20,000 from April 2017.
  4. Saving into a Lifetime ISA will be similar to saving into any other ISA. Qualifying investments in a Lifetime ISA will be the same as for a cash or stocks and shares ISA. Individuals will be able to transfer their Lifetime ISA within 30 days between providers to get the best deal, in line with the existing ISA rules.


Withdrawing money for a first time purchase – how does it work?
In addition to the details above, there are also some interesting points to note when the funds are withdrawn: 

  • If the saver is buying their first home with someone else they can each use a Lifetime ISA and each benefit from their government bonus.
  • The detailed rules are based on those for the Help to Buy ISA. This includes that the withdrawal must be for a deposit on a property for the first time buyer to live in as their only residence and not buy-to-let.
  • The saver has to inform their ISA manager of the house purchase, who will claim any additional bonus due from HMRC, and then the withdrawal will be paid direct to the conveyancer. If a purchase falls through after a withdrawal has been made then the funds will be returned to the same ISA manager by the conveyancer and will not count against the annual contribution limit.


Interaction with the existing help to buy ISA
The existing help to buy ISA will be open for new savers until 30 November 2019, and open to new contributions until 2029. However, they are not stand-alone and can be used alongside the LISA.

Savers will be able to save into both a Help to Buy ISA and a LISA, but will only be able to use the government bonus from one of their accounts to buy their first home. This gets complicated but is worth exploring. For example:

If an individual holds a Help to Buy ISA and a LISA they may:

  • use their Help to Buy ISA with its government bonus to purchase their first home, and save their LISA with its government bonus for retirement
  • use their LISA with its government bonus to purchase their first home, and withdraw the funds held in their Help to Buy ISA to put towards this purchase without the government bonus
  • use their Help to Buy ISA, including its government bonus, to purchase their first home and withdraw funds from their LISA to put towards the purchase. In this instance the government bonus on the LISA savings would be returned to government and the individual would be required to pay a charge


One off bonus for 2017/18
During the 2017-18 tax year only, those who already have a Help to Buy ISA will be able to transfer these funds into a LISA and receive the government bonus on those savings.

What is the overall impact of the LISA for savings?
The LISA is potentially a very valuable savings tool, mainly due to the government bonus. However, for a long-term saver the LISA would need to be compared to a normal pension to see which is best for them.

The comparison of the two products is a complex issue beyond the scope of this article and has different outcomes depending on things like self-employment, auto-enrolment etc. So we strongly advise that members should recommend to their clients that they visit an Independent Financial Adviser for more 

New tax allowance for pensions advice

From April, an individual can claim a £500 allowance from their DC pension scheme for advice.

The government is to introduce an allowance for advice in relation to defined contribution pension savings from April 2017. This will allow individual members of a defined contribution pension scheme to withdraw up to £500 tax-free from their pension schemes on up to three occasions during their lifetime, but only once in a tax year, to pay for retirement advice.

The allowance will be available in addition to the exemption for employer-arranged pensions’ advice to be introduced in Finance Bill 2017.

In summary: 

  • the allowance will be available at any age
  • the allowance will be up to £500 on each occasion
  • the allowance will be restricted to three occasions in the person’s lifetime
  • the allowance will be restricted to one occasion for each tax year
  • the allowance can be withdrawn from defined contribution pension schemes and hybrid pension schemes with a money purchase or cash balance element
  • the payment of the allowance can only be made directly from the pension scheme to the adviser
  • the adviser must be a regulated financial adviser
  • the allowance can be used alongside the proposed tax exemption for employer-arranged pension advice.

Chancellor's Autumn Statement 2016

The Chancellor announced his proposals on 23 Novemeber 2016.  Although there wree no earth shattering announceents we have put together a summary of the main measures here.

Fundamental HMRC tax changes loom closer

The fundamental tax changes announced by HMRC in its consultations (see below) are looming ever closer.  Through work with ACCA we now think that these 'consultaions' are in fact merely a PR exercise and that the main area of change will be forced through by HMRC with few changes. Although the main issue for self employed people is the need to send HMRC quarterly returns of their records, there are also other areas of concern which will impact our clients.

We will be closely monitoring the situation and as soon as the consultations have been closed and HMRC have announced the final plans, we will let all clients have an action plan so that they can start to get prepared for the new regime.

A summary of what we think the impact will be is:

HMRC’s Making Tax Digital (MTD), means a new joined up systems for HMRC and the majority of businesses and landlords will have to use software and apps in order to complete new tax obligations. The Roadmap is the document outlining HMRC’s vision for reform and the end of the Tax Return by 2020.


HMRC has identified its ‘four foundations’ which will result in the transformation of the tax system and enable them to remove the requirement for Tax Returns to be filed. [ note: tax returns will still be filed under MTD, they are to be called reports and declarations, instead of returns].


• Tax simplified: taxpayers should not have to give HMRC information it already has or can get elsewhere and it should be easy to check the information HMRC has received.
• Tax in one place: taxpayers will be able to see a full ‘tax picture’ of what taxes they pay and owe online, in their ‘digital account’ with HMRC. They will be entitled to set off overpayments of one tax against liabilities of another.
• Making tax digital for businesses: businesses will update HMRC quarterly with accounting information prepared digitally and HMRC will use this to enable accurate interim tax calculations. [ note: businesses will have to make an end of year submission, which essentially means preparation of annual accounts that will need to reconcile to the quarterly returns. The quarterly reporting system attracts penalties for late submission and payment of tax] .
• Making tax digital for individual taxpayers:  enabling digital interaction with HMRC at any time and giving individuals a personalised picture of their tax affairs, along with prompts, advice and support.


Timeline
HMRC have proposed the following timeline for implementing the digital tax system:


January - June 2016
• Initial consultation on options to simplify the payment of taxes.
• Taxpayers can see how their National Insurance contributions affect their State Pension through their digital account.
• All of the UK’s 5 million small businesses and every individual taxpayer will have access to their own digital tax account, seeing information HMRC holds about them.
• Webchat introduced to support PAYE taxpayers in their digital tax account.
• Public consultation on the scope and operation of more frequent reporting of information by businesses to HMRC using digital tools.
• Public consultation on third party information.
• Testing starts for secure messaging between taxpayers and HMRC in their digital tax account.
• Public consultation on simplifying HMRC’s tax administration.


July - December 2016
• Testing starts for digital reporting of accounts by small businesses.
• Bank and building society interest above the personal savings allowance included in tax codes for employees and pensioners.
• Authorised agents able to manage their clients’ digital tax accounts.
• Testing starts on using real-time information to show taxpayers how their personal allowances are shared between jobs and pensions.
January - June 2017


• Testing starts for digital reporting of income from letting property.
• New online billing system begins.
• Taxpayers able to report additional sources of income through their digital tax account.


July - December 2017
• Digital tax accounts show taxpayers an overview of their tax liabilities in one place.
• Automatic tax code adjustments prevent PAYE under and overpayments.


January - June 2018
• Interest paid by banks and building societies starts to be shown in digital tax accounts.


July - December 2018
• Most businesses, self-employed and landlords start updating HMRC quarterly for income tax and National Insurance obligations through their accounting software.
• Taxpayers who currently report their Child Benefit to HMRC no longer need to do so.


2019
• Most businesses, self-employed and landlords start updating HMRC quarterly for VAT obligations through their accounting software.
• Capital Gains Tax on the disposal of residential properties needs to be paid within 30 days.


2020
• Most companies start updating HMRC quarterly for Corporation Tax obligations through their accounting software.
• The full range of HMRC services are available through digital tax accounts.

HMRC outlines details of its digital tax strategy

HMRC has outlined the details its digital tax strategy in a series of consultation documents, published today.


The six consultation documents, which seek views on HMRC’s Making Tax Digital programme to digitalise the tax system, are being unveiled as HMRC also announces that 1.3 million small businesses will be able to benefit from Making Tax Digital without needing to update HMRC quarterly or keep their records digitally.


The government is also considering deferring digital record-keeping and quarterly updating for a further group of small businesses and will explore options to assist businesses with the transition. Finally, the consultation documents confirm that those who cannot go digital will not be required to.


Jane Ellison, financial secretary to the Treasury, said: “We are committed to a transparent and accessible tax system fit for the digital age, and Making Tax Digital is at the heart of these plans. This new system will make the UK’s tax administration more efficient and straightforward, and will offer businesses greater clarity when it comes to paying their tax bills.
“By replacing the annual tax return with simple, digital updates, businesses will be able to concentrate on putting people and profit, not paperwork, first.”


The documents on Making Tax Digital look at:
1. Making Tax Digital: Bringing Business Tax Into the Digital Age – This consultation considers how digital record keeping and regular updates should operate including exemptions.
2. Business Income Tax: Simplifying Tax for Unincorporated Businesses – This consultation seeks views on: changing how the self-employed map accounting periods onto the tax year (basis period reform); extending cash basis accounting; reducing reporting requirements; and reducing the need to distinguish between capital and revenue for businesses using cash basis accounting.
3. Business Income Tax: Simplified Cash Basis for Unincorporated Property Businesses – This consultation considers the extension of cash basis accounting to landlords.
4. Making Tax Digital: Voluntary Pay As You Go – This consultation: looks at options for business customers covered by the requirement for digital record-keeping to make and manage their voluntary payments; considers how voluntary payments will be allocated across a customer’s different taxes; and explores the best way of dealing with the repayment of voluntary payments. It also broaches the opportunity regular updating provides to make earlier repayments of withheld taxes.
5. Making Tax Digital: Tax Administration – The consultation covers aspects of the tax administration framework that need to change to support Making Tax Digital. It also sets out proposals to align aspects of the tax administration framework across taxes, including the simplification of late filing and late payment sanctions.
6. Making Tax Digital: Transforming the tax system through the better use of information – This consultation focuses on how HMRC will make better use of the information we currently receive from third parties to provide a more transparent service for customers that reduces end of year underpayments and overpayments. It also explores our future ambition for the use of third party information from 2018 onwards, which will enable us to deliver the end of the tax return by 2020.

Beware - HMRC are paying close interest in how you extract funds from your limited company

Extracting funds from a limited company  – HMRC renew their interest!

A common scenario at any stage in the life of a private limited company would be shareholders contemplating retirement and therefore extraction of funds is on the agenda.

Sounds straight forward enough?  Accountants advising clients know that this issue is far from straight forward with various options all of which are subject to HMRC rules and regulations.

To complicate matters further, HMRC have recently introduced Targeted anti-avoidance rules (TAARs) in the 2016 Finance bill which seek to address what they see as tax avoidance relating to certain aspects of the retirement process.

A normal retirement case

Although the distributions rules are complicated, a simple scenario might be where a company is wound up and a distribution is made.  Depending on the details the shareholder would pay capital gains tax at either 10% or 20% on the distribution as it would be treated as capital. This may work to the tax payers advantage as treating the distribution as a dividend might incur a higher income tax charge.

However consider the following examples:

1              The shareholder quickly starts up a new company, accumulates wealth in it, and then winds up the company again. Potentially the tax savings are the same each time he does this.

2              The shareholder genuinely retires but quickly realises that he does not like the sedate life so starts up as a sole trader involved in the same trade.

The effect of the new TAARs

HMRC refer to the above as’ pheonixism ’ where the company is wound up and yet the same trade is then carried on either in a new company or in a different vehicle. The TAAR will treat a distribution from a winding-up as if it were an income distribution for the purpose of section 1000 CTA 2010 where certain basic conditions are met.

These conditions are:

  • an individual (S) who is a shareholder in a close company (C) receives from C a distribution in respect of shares in a winding-up
  • within a period of two years after the distribution, S continues to be involved in a similar trade or activity
  • the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage

(note that the above provisions do not apply to minority shareholders)

The ‘grey’ areas

Clearly the legislation is aimed at repeat ‘Phoenix’ companies where a tax advantage is planned for. However HMRC have not clarified what they mean by a ‘similar’ trade.  If it is exactly the same this would be obvious but where a client decided to try his hand at something different but broadly related, how would this be treated. 

In addition they use the phrase ‘involved’. Clearly if the former shareholder was the owner of a new company then they would be caught under the above provisions. But for instance would helping a friend or relative set up a new business and retaining a minority interest be caught?

The third contentious area is the type of business vehicle to be used after the winding up.  The legislation does not necessarily only apply to a new limited company.  It could also potentially apply to a part time sole trader business in the same trade.

The intention to gain a tax advantage

Fortunately the ‘get out of jail free card’ is that if the intention is clearly not to avoid tax then the TAAR is not effective. But again this is confusing as normal tax planning for the winding up of a company would naturally be targeted at obtaining a tax advantage. So HMRC could claim the actual planned winding up process as being caught by the 3rd point above.

Conclusion

HMRC in their efforts to tackle tax avoidance have created confusion and uncertainty for business owners who are thinking of retiring.  As usual, members advising clients on these issues need to ensure that their clients plan ahead.  In particular applying for advance clearance may be useful.

ACCA made formal comments to HMRC on the implications of the company distribution clauses of the Finance Bill 2016 and these can be viewed here with the Government’s response to ACCA here

Changes to rent a room relief

The annual Rent a Room limit has been increased for the tax year 2016/17 from £4,250 to £7,500 starting from 6 April 2016

The Rent a Room scheme allows owner occupiers and tenants to receive tax-free rental income if you provide furnished accommodation in your only or main home.

If the gross receipts are less than £7,500 (or £3,750 - it is halved if the income is shared), automatic exemption occurs.

If receipts are significantly less that the limit it may be better to pay tax in the normal way, but HMRC will need to be informed within the time limit (31 January).

If gross receipts are more than £7,500 (or £3,750), there is the option available to choose how to work out the tax.

The first option is to pay the tax on the actual profit - total receipts less any expenses and capital allowances.

The second is to pay tax on the gross receipts over the Rent a Room limit - gross receipts minus £7,500 (or £3,750). Expenses or capital allowance cannot be deducted using this method. Tax payment automatically stops if the rental income drops below the limit.

Gross receipts include rental income (before expenses), any amounts received for meals, goods and services and any balancing charges.

A person is eligible for the scheme if they are a resident landlord or if they run a bed and breakfast or a guest house.

You cannot use the scheme if the accommodation is:

  • not part of your main home when you let it
  • not furnished
  • used as an office or for any business - you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
  • in your UK home and is let while you live abroad
  • the whole of your home, rather than a part of it

Beware the rising cost of borrowing money from your company

Recap on the tax implications of a ‘directors’ loan

HMRC introduced provisions a number of years ago which targeted company directors who tool loans from their personal companies. Prior to these provisions they could effectively avoid income tax and national insurance charges charges by paying themselves through loans or advances instead of taking dividends or salary.

The tax charge introduced was well known originally as ‘section 419’ and later as ‘section 455’. The tax charge was set at 25% of the loan to ‘participators’.

As part of the 2016 Budget (introduced through the Finance Bill 2016) , the Chancellor announced that close companies which make loans to their participators, or make certain other arrangements through which participators extract value, would pay a higher tax charge.

Where the loan is not repaid within 9 months of the company’s accounting period The rate of tax charged on loans to participators and other arrangements will increase to 32.5%.  The Chancellor has specifically chosen this %age to align it to the dividend upper rate.

Effect of the increase

Remember that the s.455 ‘charge’ is not actually a corporation tax charge similar to that on year end profits. The company pays it due to the loan but if the loan is repaid within then allotted time then the amount is repaid.  So the real effect is an increase in cash outflow which may hit struggling companies. s455 tax comes back.

The new tax on dividends may also impact on a director’s decision as to repaying their loans by way of distributions.

Points to remember:

·         It is often assumed that a director is also a participator – not necessarily so.  There are some exemptions for a director’s loan where that person does not have a material interest in the company.  The full exemption details are available here

·         The S. 455 tax is due 9 months and one day after the end of the accounting period in which the liability arises.  This means that if the accounts are prepared, and the CT 600 produced, towards the end of the nine month filing deadline there will be a much higher cash outflow due to HMRC – made up of the normal corporation tax charge and also the s.455 charge.  This might put a strain on the finances of the company

·         If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, there will be a taxable benefit for the director and a P11d will be need to be filed.  This will also mean additional entries on the director’s personal self assessment return

·         When the loan is either repaid in full or in part, the s455 tax is fully or proportionally repayable.  The bad news is that this is not due back until after 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You won’t be repaid before this. This means that the charge paid to the government may be out of the companies working capital for many months

·         For accounting periods which straddle 6 April 2016 different rates will be applied to separate loans made or benefits conferred before, and on or after, 6 April 2016.

·         Reclaiming the charge is not always straight forward.  If the company is reclaiming within 2 years of the end of the accounting period when the loan was taken out, the details can be included on form CT600A when they prepare a Company Tax Return for that accounting period or amend it online.

Form 2LP can also be used with the Company Tax Return instead if either:

Ø  the tax return is for a different accounting period than the one when the loan was taken out

Ø  the company is amending the tax return in writing

If the company is reclaiming 2 years or more after the end of the accounting period when the loan was taken out, you will need to fill in form L2P and either include it with your latest Company Tax Return or post it separately.

Questions on the subject asked by members:

1          Why not repay the loan just before the deadline then immediately re-take the loan shortly into the new accounting period ?

Where a loan is repaid and then a similar sum advanced shortly after, there are measures that apply from 2013 that mean that the repayment may be matched to the later advance, the effect being that there is no actual repayment

2          If there are two directors with one loan in credit and the other in debit can we amalgamate the two to avoid a charge ?

Two directors (possibly spouses) may agree between them to allow an offset so that one's loan credit is set against the other's loan debit: However,  HMRC may not accept the offset unless there is evidence to prove the intention to create a joint loan account. Typical forms of evidence to use would be formal agreements and also board meeting minutes.

 Note that any agreements and minutes should be made at the time of the decision to offset and should not be back dated.

In addition, if one individual has two loan accounts that are accounted for separately for reporting purposes and one is overdrawn HMRC may try to resist aggregating them for tax and so will not treat the two as one net balance.

Summary

Due to the increased cost of borrowing and the interaction with the new dividends tax, companies and its participators must plan ahead so that they are aware of the tax liabilities and when they need to be paid.

HMRC stance on issuing payslips for tax due

HMRC will issue a paper statement and a payslip (providing the person has not opted for digital only communications from HMRC) to individuals who file a self assessment return before midnight on 31December

They will not be issued for returns filed after this date. 

Available payment options are highlighted here

Will tax returns cease after 2016 ??

Is January 2016 the last date for tax returns - watch this space !!

The government has announced that ‘by early 2016 five million small businesses and ten million individuals will have access to their own digital tax account, and by the end of the next Parliament every individual and small business in the UK will have one. The digital accounts will be simple, secure, personalised to the taxpayer — and accessible through the digital device of their choice.’  
The government has also said that it 'plans to transform the tax system' and will consult on the details in 2016. The Chancellor has highlighted that most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account. 
The Chancellor’s stated aim is to ‘transform HMRC into one of the most digitally advanced tax administrations in the world, with access to digital tax accounts for all small businesses and individuals by 2016-17, delivering an additional £1bn of tax revenue by 2020-21 and sustainable efficiencies.’ 
This is all under the banner of ‘tax simplification for businesses’, yet so far there seems minimal detail on any true tax simplification measures to support businesses and reduce cost. There is little planned to simplify tax measures and reliefs. The measures highlighted seem to suggest more regular quarterly reporting responsibility for businesses and an implied acceleration of tax payments by business to the government. 
So, rather than tax simplification for business, the result seems to be that businesses will have one tax reporting date replaced by four tax reporting dates. There is, however, benefit for businesses in being able to access a digital tax account and presumably manage all taxes and correct HMRC errors. 
We will keep you informed !!

Clarification on the impact of the new 'dividends' tax

Salary or dividend?

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The impact of new tax legislation relating to dividend income on owners of SMEs. 

Until now the most business efficient way of extracting company profits by its director-shareholder was to draw a minimal salary and have the cashflow flexibility to draw dividends (assuming availability of reserves). 

For most owner managed businesses this meant that salary was set at the level of personal allowance of £10,600 (2015/16) or up to the NI threshold of £8,059 (2015/16). Most tax conscious directors reluctant to go into the 40% tax rate typically paid themselves a dividend up to the basic rate tax rate, thus drawing total cash of £35,060 without incurring any personal tax or NIC. 

From 6 April 2016 tax rates applied to dividend income will change significantly. In summary: 

  • the effect of the change is that any distribution of profits over £5k will now be taxed
  • an equivalent scenario of a salary at below tax and NIC thresholds and a dividend up to the basic tax rate, will now cost £1,429 in dividend tax
  • tax free income is reduced from £35,060 in 2015/16 (min salary of 8,060 plus net tax free dividend of £27,000) to only 16,000 in 2016/17 (personal allowance + dividend tax free allowance).


The legislation changes effectively mean that from 2016/17 the following will apply in an income tax computation: 

  • a 0% band of 5,000 applied to dividend income. This allowance reduces the basic tax rate band, rather than being applied in addition to it  
  • up to basic rate band: 7.5%
  • higher rate: 32.5%
  • additional rate: 38.1%
  • dividend tax credit will no longer apply
  • dividend income in the tax computation will not be grossed up.

Two examples will illustrate the differences between the current and 2016/17 tax computations relating to remuneration drawn as a combination of salary and dividend.   


These examples aim to provide only a very simple illustration of the mechanics of a personal tax calculation, the tax cost and net funds available to an owner of a small business. The illustrations do not address the issue of the cost of extracting profits at the respective levels mentioned in the scenarios to the company, as this aspect remains unaffected by the new legislation.

Overall the impact of the changes is negative – the new legislation increases tax due on dividends, reduces post tax funds available to the individual, and reduces a tax free amount available by some £19,000.

Whilst even with the introduction of these dividend tax rates from 2016/17, drawing a dividend is still significantly more beneficial than drawing a salary at the same level and the recent change is likely to discourage some tax driven incorporations. 

Whether this marks the beginning of the Chancellor’s transition towards a philosophy of one ‘business tax’ applied to business profits, rather than different legal structures the business is able to assume, remains to be seen

Further guidance on interest relief for landlords

Mortgage interest deduction

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Understanding the impact on taxpayers of the Chancellor’s move to offset mortgage interest at basic rate only. 

In his summer budget George Osborne announced that landlords will only be able to offset mortgage interest at the basic rate of tax (20%) by 2020. This will be introduced gradually from 6 April 2017. The restriction will not apply where the property meets all the criteria of a furnished holiday letting. Guidance about accommodation that qualifies as a FHL can be found here

Current situation
Landlords pay income tax on their rental profit by declaring the amount they earn on a self-assessment tax return. The landlord can deduct mortgage interest (plus associated costs like arrangement fees) along with all other costs before determining the taxable profit. Tax is then charged on the rental profit applying the normal income tax bandings – 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers. 

New rules
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their rental profits. The relief in respect of finance costs will be restricted as follows: 

2017/18

75% allowed

25% basic rate

2018/19

50% allowed

50% basic rate

2019/20

25% allowed

75% basic rate

2020/21

Nil

100% basic rate


Example:

Rental income £10,000

·         allowable expenses not including finance cost £2,000

·         finance cost £3,000.


The tax position for a basic rate taxpayer will be as follows: 

Profit before finance cost

Finance cost allowed

Taxable profit

Tax at basic rate

Tax relief on finance cost

Total tax due

Current

8,000

3,000

5,000

1,000

Nil

1,000

2017/18

8,000

2,250

5,750

1,150

(150)

1,000

2018/19

8,000

1,500

6,500

1,300

(300)

1,000

2019/20

8,000

750

7,250

1,450

(450)

1,000

2010/21

8,000

Nil

8,000

1,600

(600)

1,000


While the total amount of tax due has not changed, this does not mean that the landlord’s tax position is unaffected. As taxable profit has increased from £5,000 to £8,000, it is possible that a taxpayer who is currently at the limit of the basic rate band might find himself in a higher rate tax position when nothing else has actually changed. 

The tax position for a higher rate taxpayer will be as follows: 

Profit before finance cost

Finance cost allowed

Taxable profit

Tax at 40% rate

Tax relief on finance cost (20%)

Total tax due

Current

8,000

3,000

5,000

2,000

Nil

2,000

2017/18

8,000

2,250

5,750

2,300

(150)

2,150

2018/19

8,000

1,500

6,500

2,600

(300)

2,300

2019/20

8,000

750

7,250

2,900

(450)

2,450

2010/21

8,000

Nil

8,000

3,200

(600)

2,600


As expected, a higher rate taxpayer ends up paying more tax as relief for finance costs is restricted to the basic rate. 

The company option
As companies continue to benefit from the full relief, it might be possible for landlords to consider transferring properties into limited companies. While corporation tax is due to fall to 19% in 2017 and 18% in 2020, when investing through a company income can only be paid out to the shareholders as a dividend. 

From next April, directors can receive £5,000 annually tax-free, with higher rate taxpayers paying a 32.5% dividend tax on any income above this amount. If you're considering this option, proceed with caution.

HMRC guide to disputes resolution

As part of their ongoing learning programs, HMRC have released an online course on how to handle/resolve a tax dispute.  Please don't forget to contact us for assistance if you are in the unfortunate position of being involved in an enquiry/investigation involving HMRC.

New VAT guides

HMRC have re-issued their guidance on accounting for input and output VAT via their series of 'toolkits'.  To use these as a refresher please follow Input VAT and Output VAT.

Update on the new dividend tax for small business owners

Following changes to dividend tax announced in the Summer Budget, which capped the annual dividend allowance at £5,000, HMRC has produced a factsheet (18/8/2015) on the new tax-free dividend allowance, which will hit the majority of owner managers who currently use a low salary/high dividend approach.

The rules will come into force in April 2016 and replace the current dividend tax credit, along with changes to the headline rates of dividend tax.
Under the new rules, no tax is payable on the first £5,000 of any dividend income, which is a boost for the majority of small investors, but will hit owner managers.
However, this would require a significant change in current preferred practice where owner managers frequently use a low salary/high dividend profit extraction model to pay themselves instead of keeping more retained profits within the company. This could happen in light of the proposed reduction in corporation tax rates to 18% per 2020.

The government estimates that the changes to dividend tax rates will raise an additional £2bn a year.
From April 2016 tax rates payable on any dividends over £5,000 are:
• 7.5% on dividend income within the basic rate band;
• 32.5% on dividend income within the higher rate band; and
• 38.1% on dividend income within the additional rate band.

Dividends received by pension funds that are currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA), will continue to be tax free.

HMRC’s factsheet includes a number of examples showing how the new approach will affect different categories of taxpayer, depending on income levels and whether or not dividends come from shares held inside or outside an ISA.
The HMRC guidance states: ‘Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.’
The new rules on dividend taxation will increase the tax bills of most owner managers, but it will still be cheaper in tax terms (looking at both the company paying you the income and you receiving the income) to declare a dividend in 2016/17 rather than pay yourself a bonus subject to PAYE.

Therefore most owner managers will be able to pay themselves up to £48,000 in 2016/17 and still avoid paying higher rate tax.

This comprises an £11,000 personal allowance, a £5,000 dividend tax allowance and the (slightly increased) basic rate band. Assuming that the small salary remains the same, tax at 7.5% on £32,000 of dividend income will be £2,400 (which is 5% of £48,000).

Owner managers will still need to keep their total income below £100,000 in order to retain the personal allowance intact. At that level, assuming that the vast majority of this is dividend income, their tax bill could be as low as £19,300 (an effective tax rate of 19.3%) in 2016/17.

HMRC’s dividend allowance factsheet is here

Summer budget 2015 - important changes for small business owners

The Chancellor announced a radical shake up of the way that small business owners will be taxed on thir dividends. He said “The dividend tax system was designed partly to offset double taxation on profits. But the system has not changed despite sharp reductions in corporation tax. Lower rates are creating rapidly growing opportunities for tax planning.”

Therefore Mr Osbourne is now seeing the payment of dividends to owner/managers of small businesses as some sort of tax planning 'opportunity' rather than a legitimate way to award the strain and long hours of being in business. Although the details are still to be confirmed in the Finance Act, this may mean around £ 1,700 extra tax for business owners who pay a small salary and dividends up to the basic rate limit.

These changes will  reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities and will - surprisingly - create additional revenue for the government.

Removal of tax relief on incorporation

In addition to the above changes, HMRC have restated its intention to remove tax relief where goodwill is purchased by a company.  This will affect all self employed people who incorporate and sell their business to a new limited company where they are director and shareholder.  This is another blow to small entrepreneurs looking for some incentives from this government.  The full details are available here.

Commentary on the new Small Business Act

On 26 March 2015, The Small Business, Enterprise and Employment Act 2015 received royal assent and forms the part of the government’s ‘Transparency and Trust’ proposals.

The overarching objective of this piece of legislation is to deter illegal activity in business (such as money laundering and tax evasion).  A staging timetable has been introduced to implement the act and unfortunately is going to cause an element of upheaval among firms.

The new legislation brings about changes in the law and implementation dates which are as follows:

Change in the law

Implementation date

Prohibition of ‘bearer shares’

26 May 2015, with a nine months’ transitional period for existing holders of bearer shares

Prohibition of corporate directors (although some exceptions are allowed)

October 2015 with a 12 months’ transitional period for existing corporate directors

A public register of people with significant control for unlisted entities

January 2016 with details of such people being provided to Companies House from April 2016

Abolishment of the annual return

April 2016 (this will be replaced with the annual ‘confirmation statements’)

Retention of statutory registers at Companies House

April 2016

     

Register of persons with significant control


The area which is likely to be most controversial with the new legislation is that the act requires those individuals with ‘significant control’ over an entity to be named on a public register.
A person holds significant control when they hold or control more than 25% of the company’s voting rights.  In addition, they can also hold significant control where they have the power to appoint, or remove, a majority of the board (this can also be achieved directly, or indirectly, through a majority stake in another company).
Problems have become apparent where an individual may have significant influence over an unlisted company or exercises such control through a partnership or trust and hence the government is expected to provide additional guidance on how they define ‘significant control’ by October 2015.
An unlisted company will be legally obliged to identify and keep up-to-date a register of persons with significant control.  In addition, those with significant control will have to disclose their identities to the company (although this should be relatively easy in practice for many unquoted companies).
To start with, the requirement to provide information about persons with significant control to Companies House will be on an annual basis (from April 2016).  However, there are plans to increase the frequency of reporting to Companies House so as to bring the new rules in line with the EU Fourth Money Laundering Directive.
While the information contained on the register of persons with significant control will be similar to those currently on the register of directors, the residential address of a person with significant control will be protected.  Other information relating to the person with significant control may only be withheld in certain (limited) circumstances; such as where the person may be at risk of serious violence or intimidation due to the nature of the company’s business.  Final details concerning such circumstances have yet to be published.
Listed companies (including AIM-listed companies) are exempt from the requirements on the grounds that the disclosure requirements in DTR 5 already apply to shareholders of listed companies.


Failure to comply
Where a person with significant control does not comply with their disclosure obligations, the company can impose sanctions which can include a loss of voting rights and transfer obligations.
In addition, where a company fails to comply under the new law, criminal penalties can be imposed which will also extend to the company’s directors and (where applicable) company secretary.


Bearer shares


While ‘bearer shares’ are fairly uncommon nowadays, from 26 May 2015 companies will no longer be able to create such shares.  From this date, existing holders of bearer shares will have nine months’ to swap their shares and be listed on the register of shareholders.
If they fail to swap their shares after the nine months’ have elapsed, the shares will be cancelled.  Therefore, for companies that have holders of bearer shares, they will need to inform the holders of these shares as soon as possible.


Corporate directors


The new act prohibits companies (and other corporate entities) from becoming directors.  The reason the government have legislated for this is to stop corporate structures from hiding illegal activity.  This is expected to come into force from October 2015 and for those entities which already have corporate directors, they will have a one-year transitional period in which to appoint replacement directors.
The government are providing for some exemptions to the prohibition of a corporate director and they are consulting on whether a corporate director should be permitted if all of its directors are natural persons and those natural persons have their details on a public register (e.g. the one held at Companies House).


Shadow directors


The general duties of directors under sections 170 to 177 of the Companies Act 2006 will apply to shadow directors.  The change takes effect from 26 May 2015 but it is not clear as to how this will operate in practice.  Current advice is to avoid “crossing the line” between board engagement and board control.


Disqualification of directors


The Act has been drafted in such a way that it will make it easier to pursue directors who have not complied with their legal obligations.
It will essentially allow liquidators and administrators to bring legal cases against directors where there have been acts of wrongful or unlawful trading (which will also include the ability to apply for creditor compensation orders against directors that have been disqualified).
The regime which deals with disqualified directors has also been updated and the powers given to the Secretary of State have been extended to disqualify directors for misconduct in connection with companies that are overseas.
Finally, in respect of disqualification of directors, the Secretary of State will have three years (instead of two years) to bring disqualification action against a director following formal insolvency of a company.


Annual return


The annual return lodged at Companies House is being abolished and replaced with an annual “check-and-confirm” confirmation statement.  There are going to be simplifications to this confirmation statement in respect of the statement of capital because the requirement for companies to include the amount paid up and unpaid on each share is removed.  Companies will, instead, be required to specify the total amount unpaid on the total number of issued shares.
These changes are scheduled to come into effect in April 2016.


Company registers


Unlisted companies will have the choice of maintaining certain information (e.g. information on shareholders, directors, secretaries and persons with significant control) on the register held at Companies House as opposed to statutory registers.
Companies House will charge for this service and hence companies should consider whether they should maintain their own registers (which may be more beneficial if there are infrequent changes).


Days of birth of directors


To combat fraud, the day that a director was born will not be made public.  The public register will only display the month and year the director was born and this is expected to come into force from October 2015.  However, the new rules do not appear to require historic data to be removed and therefore there will be little benefit for existing directors.  These new rules will also extend to those persons with significant control.


Registered office disputes


On appointment, a director will no longer have to countersign the appointment forms to indicate their consent.  Companies House will inform the director that they have been appointed and this will then give the director the opportunity of objecting if the appointment has been made in error, or if it has been done fraudulently.  These new rules are also expected to come into force in October 2015 and will also allow Companies House to amend the registered office of a company where the use of the address is disputed.


Striking off


The time it takes for a company to be voluntarily or compulsorily dissolved is reduced to two months (from three months) after publication of the notice in theGazette.  This new timeframe is expected to come into force in October 2015.


Companies House changes


The three services offered by Companies House (Webfiling; Webcheck and Companies House Direct) will be replaced by one online service which will be called The Companies House Service.  During the implementation phase of the new service, the three existing services will run in tangent.  Other changes will include:
• removing the subscription-based Companies House Direct service to a free of charge service;
• the grant of access to all document images free of charge (including mortgage charges);
• a “click and confirm” process to replace the form-based filing which will make it simpler to maintain company information; and
• an updated and more user-friendly interface to enable searching for information at Companies House more easier and quicker.

New guide to tax relief for companies involved in research and development

As part of its trade, a company may also be involved in activities related to research and development of its products.  There are various tax reliefs available to qualifying companies and in conjunction with ACCA we have provided a guide on the basic operation of these reliefs.  Please follow this link foir more details.

Government announce married couple 'tax breaks'

Married couples are now able to register for a new tax break which could save them up to £212 per year, the Treasury has confirmed.

From 6 April 2015, more than four million married couples and 15,000 civil partnerships will be eligible for the tax break.

The allowance means a spouse or civil partner who doesn't pay tax, or doesn't pay tax above the basic rate of income tax  can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner - as long as the recipient of the transfer doesn't pay more than the basic rate of income tax.

Couples can register their interest to receive the allowance now at gov.uk/marriageallowance.

One person in a couple will apply online to transfer the allowance to their spouse or civil partner, and HMRC  will tell the recipient about the change to their PAYE tax code.

Chancellor George Osborne said: "We made a promise to introduce a recognition of marriage into our tax system - and now we're delivering on that promise.
"This includes updating the tax system so that it recognises marriage and civil partnerships. Our new marriage allowance means saving £212 on your tax bill couldn't be simpler or more straightforward."

State pension forecasts now available for 55 year olds

The Department for Work and Pensions (DWP) has expanded its free State Pension statement service to include people aged 55 or over.

The statements give individuals eligible for the new State Pension an estimate of how much they'll be entitled to when they reach State Pension age, based on their current National Insurance (NI) contributions record. They also provide information explaining how their position might change with further NI contributions or credits.

Those who reach State Pension age on or after 6th April 2016 will qualify for the new State Pension, which will pay a single flat rate per week. You'll need at least 10 qualifying years of National Insurance contributions or credits to get any of the new State Pension, and 35 years to get the full amount.

The State Pension statement service, which launched in September last year, has issued 76,000 statements so far, but until now was only available to those aged 60 or over. Under the new rules around 5.5 million people will now be able to request a State Pension

How to get a State Pension forecast

The State Pension forecast statements won't be sent automatically, so you'll need to make a request for one if you want to see what you'll qualify for.

You can make a request online at www.gov.uk/state-pension-statement or call the Newcastle Pension Centre on 0345 300 0168 Money to Friday, 8am to 6pm.

Alternatively you can apply for a statement by printing out and filling in the BR19 form and posting it to:

The Pension Service 9
Mail Handling Site A
Wolverhampton
WV98 1LU
United Kingdom

Re-think on penalties for late tax returns

HMRC has launched a discussion document on the future of penalties for late tax returns.  It is suggesting dropping the mandatory fines when a return is filed after 31 January but if you want to comment you need to be quick as the closing date for comments is 11 May 2015.

For full details follow this link

HMRC target 'white collar workers'

HMRC has launched a new campaign targeting white collar professionals as it continues its high profile clampdown on underpaid taxes. Solicitors are now being urged to come forward and voluntarily declare any unpaid tax before a June deadline or face hefty penalties.


Many accountants have reported that HMRC is broadening its range of targets. The Solicitor’s Tax Campaign, announced in December, is another reminder that HMRC is now scrutinising taxpayers from all walks of life. It is not focusing solely on those working in traditional cash-in-hand businesses such as electricians or taxi drivers.
As most people will know, HMRC now possesses sophisticated technology to justify its widening lines of inquiry. The £45 million database system ‘Connect’ gathers real time data to help it identify groups where tax avoidance may be an issue. It draws data from multiple public and private sources, including: banks, local councils, Legal Aid data and even social media.
A notable proportion of solicitors are self-employed and it is the smaller, owner-managed practices which are likely to form the main focus of this particular clampdown.
HMRC will be aware that many smaller legal practices are currently under considerable financial strain because of the reduction in Legal Aid spend.
HMRC say they have collected a total of £1 billion from voluntary disclosure campaigns focused on specific job sectors since they began in 2011. The campaigns mean that a wide range of taxpayers are being scrutinized. Conventional targets- as well as white collar professionals- are increasingly coming under the spotlight. Past schemes have targeted doctors, plumbers and personal tutors.
Penalties for those who fail to participate can be severe. In this latest campaign, offenders can expect to pay a fine of 100% or more of the amount of tax owed. In the very worst cases, criminal prosecution may follow.  Taxpayers who take part and meet deadlines can expect more attractive settlement terms.
Recent HMRC activity makes it clear that any client who is self-employed or from a job sector targeted faces an increased risk of investigation. HMRC is apparently following all possible leads as it strives to increase revenue.

Landlords - 60 second refresher of key tax points

If you rent out furnished or un-furnished accomodation please follow this link for a 60 second refresher on some key taxation points.

Reminder ! Child benefit tax charges

The high income child benefit tax charge is a unique tax, in that it seeks to claw back a state benefit, namely child benefit through the self-assessment tax system. This is hitting tax payers that previously did not need to file tax returns.

If you are a higher earner and still claim this benefit please follow this link for more details

Reminder ! Changes to state pensions

As part of tax return discussions, forthcoming state pension changes may need to be considered.


We will see the current system replaced with the new State Pension from April 2016 and entitlement and contributions will need to be considered.
The new State Pension will be for:
• men born on or after 6 April 1951, and
• women born on or after 6 April 1953


To be eligible an individual will require a minimum of 10 qualifying years to receive any State Pension from 6 April 2016. National Insurance contributions paid before 6 April 2016 will be recognised in the new system.


State Pension top-up is available for people who are already receiving their pension or who will reach State Pension age before 6 April 2016.  This allows those without the required contributions a chance to make voluntary contributions - Class 3 NIC. The Pensions Act 2014 introduced Class 3A contributions and set two entitlement conditions:
• contributors must have entitlement to a UK State Pension;
• contributors must reach State Pension age before 6 April 2016.

Those eligible will be able to pay Class 3A contributions from 12 October 2015 and 5 April 2017.

As always, if you are affected or would like further information please contact us.

Potential savings in NIC for employers

From the 6 April 2015, for certain employees under the age of 21, an employer will no longer need to pay employer Class 1 secondary NICs for them.

The  rate of employer Class 1 secondary NICs for employees under the age of 21 will be 0% up to the new ‘Upper Secondary Threshold’ (UST) which, for the tax year starting 6 April 2015, will be the same as the Upper Earnings Limit (UEL). Class 1 secondary NICs will however continue to be payable on all earnings above this threshold. The basic rules and calculations of National Insurance including how  Class 1 NICs are assessed will not be changed by this measure. Class 1A and Class 1B NICs are not affected by this change and should be collected and reported as normal.

For employees who are at, or over the age of 16 and under the age of 21 there will be a range of new NI category letters to use when assessing secondary NICs in respect of the earnings paid to these employees. From 6 April 2015, when submitting PAYE information for employees under the age of 21 you will need to use the new category letter appropriate to the individual

Owners of high-end horseboxes are targeted by HMRC

HMRC is focusing on horsebox owners as it perceives that certain farmers, rural businesses and equine enthusiasts may be either incorrectly claiming expenditure relating to these high value assets or failing to declare personal use as a benefit in kind.


We undersatnd that HMRC are currently in the process of identifying discrepancies between personal and company tax records and also in the process of obtaining information from external third parties.

Changes to Entrepreneurs relief on incorporation

As part of the Autumn Statement, the Chancellor announced some radical changes to the way tax relief is given when a person incorporates their business.  Traditionally there were major tax breaks on the sale of the goodwill.  However the following changes are now being made:

Who is likely to be affected?


Individuals, trustees and members of partnerships who transfer their business to a close
limited company in relation to which they are a ‘related party’, and receive consideration in
the form of cash or debt.

General description of the measure

The measure will mean that entrepreneurs' relief (ER) will not be available to reduce capital
gains tax (CGT) on disposals of the reputation and customer relationships associated with a
business (the ‘goodwill’) to a close company to which the seller is related. This change is
made alongside a measure to restrict corporation tax deductions when goodwill is acquired
from a related party on incorporation

This is an important change and any business considering incorporation should contact us for the latest advice.

Comprehensive tax guides

In conjunction with ACCA we can now offer a complete set of business guides covering all aspects of business and personal taxation, VAT, payroll and many other tax areas directly affecting small and medium size businesses.  To access these guides simply follow this link.

Please let us know if you would like any further information on any issues raised.

Annual taxpayer summaries

From October 2014 the government will be sending out a personal annual tax summary to millions of taxpayers.The tax summary will show the individual how their income tax and National Insurance contributions (NICs) have been calculated for the previous tax year and give an indication of how their taxes have been spent by Government. Please follow this link for more information.

Late filing penalties - new guidance from HMRC

HMRC have released a new guidance helpsheet on the new penalties regime for late filing of PAYE and other taxes. The new rules commence in Octber 2014 and the guide aims to explain the penalties and help tax payers and employers avoid them.

VAT on cars and motoring expenses

HMRC have updated its advice on VAT notice 700/64:

This notice explains:

  •  what a car is for VAT purposes
  •     the VAT treatment of motoring expenses incurred by your business
  •     what vehicles qualify and whether you can claim back all or some of the VAT charged (this is because the reclaiming of some input tax on motoring expenses is not allowed or ‘blocked’)
  •     when you must account for VAT
  •     how to work out your output tax
  •     the records you must keep, and
     what you can and cannot treat as input tax

VAT on food

HMRC have updated its advice on VAT and food - VAT notice 701/14.

This notice explains when food can be zero-rated. It has been updated from the 2011 version to include information about the liability of sports nutrition drinks.

You should read this notice if you are a food:
 producer
 manufacturer
 wholesaler; or
 retailer

Charities and tax: the basics

HMRC have issued new guidance on the tricky subject of charities and their tax status.

If your organisation is recognised as a charity for UK tax purposes, it may qualify for a number of tax exemptions and reliefs on income and gains, and on profits for some activities. In order to claim these you'll need to apply on form ChA1 to HM Revenue & Customs (HMRC) Charities for recognition as a charity for tax purposes.

This doesn't mean that charities never pay tax. If your charity receives taxable (non-exempt) income or gains you need to let HMRC know and complete a tax return - either Self Assessment or Company Tax Return depending on whether you're set up as a charitable trust or company.

If your charity has business activities the VAT rules will apply to you just as they do for any other business. You may, however, qualify for certain VAT reliefs and exemptions.

Warning on self assessment PPI pitfalls

Hundreds of thousands of extra people are expected to complete a self-assessment tax return for the first time by the end of this month, including people who have won compensation for mis-sold payment protection insurance (PPI) who are at particular risk of making errors on their returns, according to ACCA.

ACCA is warning taxpayers who have been paid any of the estimated £10bn paid out so far in PPI compensation should pay close attention to how they fill in the forms, which must be filed by 31 October.

Chas Roy-Chowdhury, ACCA head of taxation, said:’ 'While the PPI compensation itself is not taxed, any interest element awarded on that sum is taxable. Failure to declare that in the self-assessment form could lead to a knock at the door from HMRC. It’s not obvious at all in completing the necessary forms.'The institute says changes to the child benefit system and a rise in the number of self-employed are behind a predicted substantial rise in the numbers of individuals who self-assess. High earners with incomes over £50,000 who continue to claim child benefit but do not complete a self-assessment form could be liable, not only to repay part of all of the benefit claimed by way of a tax charge on the highest earner of the couple, but also interest and penalties on the tax unpaid. Roy-Chowdhury said: ‘Even those who have gone through the self-assessment process before will see some new elements to it, making what was originally meant to be an easy process much more complicated and vulnerable to mistakes. It’s not just completing the form that’s tough, its knowing what can and can’t go in that could trip you up.’

Child benefit changes may affect pensions

HMRC has published a guidance note explaining who is affected by the High Income Child Benefit Charge (HICB), how it works and how HMRC administers the new charge.  However, anyone considering opting out should be aware of the potential impact on state pension rights.

From 7 January 2013, taxpayers earning more than £50,000 in a tax year who receive Child Benefit, or live or lived with a partner receiving Child Benefit are now liable to pay an income tax charge on that benefit. The charge payable depends on their ‘adjusted net income’ (ie, the total taxable income less certain tax reliefs, including pension contributions), and amount of Child Benefit the claimant is entitled to. Child Benefit has been withdrawn for taxpayers earning over £60,000 per annum.

For those with income between £50,000 and £60,000, the tax charge will be less than the child benefit entitlement. They will pay 1% of the child benefit entitlement for every £100 of their income above £50,000. For those with income of over £60,000, the charge will effectively reduce the child benefit to £nil. The changes are expected to affect 1.2m families, 70% of which will lose the benefit in full.

Non-working individuals who receive child benefit for a child under 12 are entitled to receive national insurance (NICs) credits which build entitlement to the state pension. Where a decision is taken not to receive child benefit payments as a result of the introduction of the new charge, it is important that a child benefit claim form is still completed. The entitlement, rather than the payment, of child benefit will ensure that NI credits continue.

So some thought is needed before a decision is made.  Please contact us if you need any furher help.

The guidance note from HMRC is found here.

HMRC help for small businesses

Starting and running a business is challenging and HM Revenue & Customs (HMRC) recognises that its customers sometimes need help to understand their tax affairs. They have set up a dedicated page with information about the wide range of help and support they offer to help handle your responsibilities to HMRC easily and effectively.
As always please contact us if you would like any further information on starting in business.

HMRC target un-declared property sales

The Property Sales campaign is an opportunity for taxpayers to bring their tax up to date if they have sold a residential property, in the UK or abroad, that’s not the main home. If they made a profit but have not told HM Revenue & Customs (HMRC), they might not have paid the right amount of tax. To take advantage of the best possible terms a voluntarily disclose of the income or gains and tax payment must be made by 6 September 2013.
After 6 September, HMRC will use the information it holds to target those who should have made a disclosure under this campaign and failed to do so.
Please let us know if you would like any help with any of the issues raised.

HMRC want taxpayers to get up to date

HM Revenue & Customs (HMRC) are offering you a quick and straight forward way to bring your tax affairs up to date. This campaign is for you if HMRC have sent you a Self Assessment tax return or notice to complete a tax return for any year up to 2011-12 and you have not yet taken any action. By taking part you will receive the best terms available (apparently !).  Follow this link for more details.

Get ready for the new UK Accounting rules (UK GAAP)

New UK GAAP is approaching: see how we can help you prepare for the change
The new UK GAAP framework has been ushered in with the publication by the Financial Reporting Council of three Financial Reporting Standards that replace virtually all the extant standards and UITF Abstracts, with the exception of the FRSSE and FRS 27:
•FRS 100 Application of Financial Reporting Requirements – establishes what the applicable financial reporting standards for different entities are
•FRS 101 Reduced Disclosures Framework – allows certain qualifying group entities to apply a number of disclosure exemptions when preparing individual accounts under EU-adopted IFRS
•FRS 102 The Financial Reporting Standard Applicable in the UK and the Republic of Ireland – the single financial reporting standard, based on the IFRS for SMEs, that replaces the existing standards and abstracts.
The new standards will be applicable for accounting periods beginning on or after 1 January 2015, with the current standards and abstracts being withdrawn from the same date.
FRS 100 also includes consequential amendments applicable to the current version of the FRSSE which will become effective from January 2015.
Although the new UK GAAP framework is mandatory from 2015, early adoption is allowed and accountants should start gaining an understanding of the changes involved in the transition and of how they will affect their clients and organisations.
In order to support clients in preparing for the switch to the new financial reporting framework, we will provide a number of articles throughout 2013.
Our future articles will provide  more detailed comparison of topical areas between the current and the new UK GAAP framework, including analysis of the potential tax impact of the new accounting requirements, the adoption timeframe and first-time adjustments and options available to different entities.
A full suite of factsheets and guides on the new UK GAAP will be completed by the end of July 2013 in conjunction with ACCA.

New data protection legislation on the horizon

The Data Protection Act 1998 is the main legislation which relates to data protection and includes the powers of the Information Commissioner’s Office (ICO) and duties placed on organisations and their data controller. The main aspects of the legislation cover:

•an obligation on certain organisations to register with the Information Commissioner’s Office (ICO)
•the rights of individuals
•rules relating to sending personal data outside the European Economic Area
•the right to compensation
•exemptions
•rules on use of cookies and similar technologies.

New draft regulations were issued in January 2012 and it is expected that the draft regulations will be finalised around the end of 2013. They are likely to come into force in 2016. These regulations are due to be implemented directly by every country in the EEA with the regulations being the same in each country. These new regulations are likely to be more onerous than the legislation currently in place.

Main changes
Some of the main changes proposed by the new Data Protection Regulations are as follows:

•only data controllers were subject to the Data Protection Act 1998 whereas data processors will also be liable under the Data Protection Regulations
•the potential fines will be increased
•security breaches will need to be documented and notified to the regulator within a short period of time
•data processors will need to alert controllers immediately of any breaches
•global transfers of personal data will be more restricted
•non-EEA data controllers will be subject to the new regulations.

The Information Commissioner’s Office also has various guides on this subject, including this specific guide.

Tax credits - why it pays to renew early

HMRC is asking employers to encourage staff to renew their tax credits claims both accurately and as early as possible. The sooner employees do this, the sooner we can process their claims and prevent the risk of their tax credits stopping or overpayments occurring.
From April 2013 almost six million tax credits customers will start to receive packs through the post inviting them to renew their claims. Last year over half a million people lost their tax credits payments because they didn’t renew their tax credits on time.
Although 60 per cent of these customers did subsequently renew after the deadline, it was often too late to avoid a break in their tax credits payments. In most cases, this situation can easily be avoided as tax credits can be renewed by phone or post as soon they receive their Renewal Pack. Unfortunately, people may hold off renewing until it’s too late and the effects can be two-fold.
As well as suffering financially whilst waiting for their payments to be restored, people could also be paid too much money which they would have to pay back.
How can employers help?
If you want to help make sure your employees renew early and receive the correct tax credits, we have produced some simple promotional material that you can download and use:
• messages which can be used on payslips ww.hmrc.gov.uk/paye/employer-bulletin/eb44/taxcreditspayslip.pdf
• an article to use if your company produces a newsletter for employees www.hmrc.gov.uk/paye/employer-bulletin/eb44/taxcreditsarticle.pdf
• a poster which can be displayed in the workplace www.hmrc.gov.uk/paye/employer-bulletin/eb44/taxcreditsposter.pdf
Why will HMRC contact employers?
The annual renewal of tax credits is one of HMRC’s largest campaigns. As in previous years, we will educate customers to claim the right money at the right time by renewing early. We will continue to follow the principle of Get It Right First Time, based around a programme of customer education and checks. This means we ‘check first, pay later’ to significantly reduce the amount of erroneous and fraudulent tax credit claims.
As part of this approach, we may contact your organisation to confirm the earnings or hours worked by some of your employees. Contact will normally be by telephone between April and October and will relate to one specific employee per call.
Further information
To find out more about tax credits visit this link

Tax rates and allowances

For details of all HMRC's official tax rates follow this link

Start-up loans for young entrepreneurs

To encourage young entrepreneurs to start businesses, the government has expanded its ‘start-up loan’ scheme.


The funding applies to individuals who are interested in starting a business or who have a business in its ‘initial phase’. While the amount of loan available remains unchanged at £2,500, the age range of applicants has changed and is now between age 18 and 30 (previously 18 to 24 years old). To support the increased age range the funding available has increased from £82m to £112m.
Launched in May 2012, by the end of December 2012 the scheme had lent only a fraction of its total fund: £1.5m to 3,000 applicants. The target is to lend the total fund amount by April 2015 and to benefit 45,000 applicants. The company responsible for start-up loans is chaired by James Caan.
The scheme was created by Lord Young and was seen as a way of reducing unemployment as well as creating an environment to encourage entrepreneurialism similar to that in the US. The expansion of the scheme was announced by David Cameron, who stated: ‘The government’s role has to be to try to do everything we can to encourage more start-ups and then to help them grow, to get finance and take people on.’
The loans must be repaid within five years with an interest rate of RPI plus 3%. The applicant must be an individual and the guidance states ‘when you apply through "start up loans" we will identify the right loan provider (delivery partner) for you, serving in your region. The delivery partner will then work with you to identify what stage you’re at in your idea process, and help you present your business proposal to a panel where you will pitch for a loan. If successful, you will receive the funding for the loan, which will be administered by the delivery partner directly. Mentoring will be provided with the loan and often during the pre-pitch process as well, giving you additional support and guidance as you go through an entrepreneur’s journey.’
Further details, the conditions and how to apply are available on the start up loans website.

Cyber security

BIS has published a short guide called Small businesses: What you need to know about cyber security.

The guide provides a starting point to help establish a protection plan by highlighting a number of key questions that the business should ask.

There is also an ‘innovation voucher’ available from the Technology Strategy Board. Applications can be made from now until 17 August. The website states that ‘innovation vouchers for cyber security can be used to secure specialist consulting and services to help businesses looking to:

•protect new inventions and business processes
•‘cyber audit' their existing processes
•move online and develop a technology strategy
•develop an idea into a working prototype and needing to build cyber security into the business from the very beginning.’

Simpler income tax system for small businesses

 HMRC has published draft legislation which includes the transitional rules for the cash basis and simplified expenses rules for small businesses.


It appears that the new rules are aimed at reducing the administrative burden of a business and shows the government’s intention to make it easier for small businesses to calculate their taxable income, as well as providing them with more certainty over their tax affairs.


The cash basis
From the 2013/14 tax year, self employed individuals or partnerships carrying on a small trading business will be able to choose to be taxed on the cash basis rather then being asked to do accounting adjustments designed for more complex businesses.
However, the new rules will not be available for every small business. The excluded persons are companies, limited liability partnership, Lloyd’s underwriters, a person with a section 221 ITTOIA profit averaging election or a business with a current herd basis election.
Also excluded from the cash basis are certain trades such as dealers in securities, lease premiums, managed service company, waste disposal, intermediaries treated as making employment payments, ministers of religion, pool betting, cemeteries and crematoria.
Businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £77,000) or twice that (currently £154,000) for recipients of universal credit. Businesses must leave the cash basis after their annual receipts exceed twice the amount of the VAT registration threshold (currently £154,000).

The key aspects of the cash basis are that:
• it is an optional scheme which small unincorporated businesses can elect to use
• it will work on cash received (including all amounts received in connection with the business such as disposal of non-durable assets and VAT refunds)
• cash spent on expenses that are wholly and exclusively for the purpose of the trade, including capital expenditure on non-durable assets (but excluding business entertaining and purchase of property or other ‘investment’ assets). However, interest payments are allowed up to a limit of £500 without the need to establish that the borrowing is financing capital employed in the business
• there is a mandatory requirement to use a fixed allowance for business mileage (rather than deductions for actual expenditure on purchasing, maintaining and running a motor vehicle or motor cycle, apportioned between business and private use). This is mandatory for the use of cars or motorcycles by businesses using the cash basis
• expenses are inclusive of VAT and include payments of VAT
• business losses may be carried forward to set against the profits of future years but not carried back or set off 'sideways' against other sources of income
• there is an optional flat rate allowance for business use of home (rather than deductions for actual amounts, apportioned between business and private use)
• there is an optional three tier banded rate for the adjustment for private use of business premises (rather than a deductions for actual amounts apportioned between business and private use)
• the legislation provides the framework for transitional rules on entering or leaving the cash basis, the purpose of which is to ensure that income and expenses are only taxed/allowed once. The transitional rule also includes the usual adjustment of spreading the income over the following six tax years when the business leaves the cash basis.


Simplified expenses
The draft legislation includes the framework for three types of simplified expenses. Under the new rule the allowable expenditure may be calculated using a simple flat rate allowance rather than a potentially more complex apportionment of actual expenditure.
Businesses that do not elect to use the cash basis will have the option to use any or all of the simplified expenses as they wish. The simplified expense rule is entirely optional and outside the cash basis. The three types are highlighted below.


Expenditure on vehicles
Businesses that do not use the cash basis have the option to use the mileage rate for cars and motor cycles. Businesses using other vehicles, such as vans, can use the mileage rate if they wish or can claim the purchase, lease and running costs as a deduction, as they do currently.

Use of home for business purposes
Businesses that use the home for business purposes can opt to use a standard monthly deduction (of £10(for 25-50 hours per month), £18 (for 51-100 per month) or £26 (for 101 or more per month)) based on the amount of time spent working at home. Alternatively businesses can choose to claim an allowable portion of actual expenses.

Premises used both as a home and for the business
Where business premises are used partly for private purposes as a home a standard monthly adjustment (of £350 (one occupant), £500 (two occupants) or £650 (three or more occupants)) can be made based on the number of occupants using the premises as a home. Alternatively businesses can choose to identify the allowable portion of actual costs if they prefer.

Beware of the new rules for High Income Child Benefit

Child Benefit claimants earning more than £50,000 and over, face a confusing January 2013 when new rules come into place where the taxman will charge these high earners tax to recover the Child Benefit they receive.
Letters to this group of people - estimated at one million families - will be sent out by HM Revenue & Customs from 3 November 2012 and a new website, has launched today to help those who think they may be affected by the imminent rules.
From 7 January 2013, the taxman will charge individual taxpayers who have a net income over £50,000 in a tax year, where either they, or their partner, is in receipt of Child Benefit for the year.
If both partners – whether married or not, or living together or not - have adjusted net income over £50,000, the partner with the higher income will be liable for the tax charge. The definition of 'income' has a specific meaning for the tax charge, which taxpayers can check themselves on Gov.uk's tax calculator.
There are two choices to be made under the new rules:
1. Keep receiving Child Benefit payments – which means they will have to pay a tax charge on the Benefit they or their partner gets; and they will have to declare the Child Benefit by filling out a tax return.
2. Or stop receiving Child Benefit payments. This clearly means no tax charge, and no need to complete a tax self-assessment return.
The fact is that tax self-assessment could be the new norm for many families from January 2013 if they choose to keep receiving the benefit – worth £20.30 a week for the eldest child and £13.40 a week for each of someone’s other children. Taxpayers can reduce the relevant income, and the tax charge if they earn less than £60,000, by making extra pension contributions from taxed income, or giving to charity under the Gift Aid scheme.
There’s been a lot of comment about how confusing these new rules are, mainly because Child Benefit can be received by someone even if they don’t live with the children for which they are claiming benefit, as Child Benefit can be paid to someone if they pay for the upkeep of their child.
Please let us know if you need help to decide whether or not to claim child benefit and hw this will affect you.

Opting out

As a reminder, if a partner’s income is in excess of £60,000, it may be preferable to disclaim the benefit in order to avoid the charge. This election takes effect in relation to weeks beginning after the election is made.
The way that the charge works is that the child benefit is effectively clawed back by way of the high income child benefit tax charge once the higher-income partner’s income exceeds £50,000. Once income hits £60,000, the full child benefit is effectively withdrawn via the tax charge. Families with one parent earning more than £50,000 will lose part of the benefit. It will be fully withdrawn where one parent earns above £60,000. However, unless parents opt out of receiving it, the higher earner will still get the benefit and will have to pay it back later.


When to opt out
Approximately 200,000 people opted out of receiving child benefit, in advance of the commencement of the charge on 7 January 2013. Elections not to receive child benefit for higher rate tax payers will need to be considered soon for the 2013/14 tax year.
Families with one member earning more than £60,000 should certainly consider opting out of receiving the child benefit, otherwise they will face:
• full clawback of the child benefit by way of a tax charge
• the prospect of being brought within self-assessment.
Additionally, families with one member with income approaching the £60,000 mark may also wish to consider opting out of receiving the child benefit, to avoid a future tax charge and the burden of having to complete a self assessment tax return.
It is the benefit claimant who must disclaim the tax charge and not the affected taxpayer. This raises potential for conflict between partners, for example, if the claimant wishes to continue receiving the benefit but the high income partner wishes to avoids a tax charge and self assessment.

Opting out
In CBTM03120 – Payments: High Income Child Benefit Charge election HMRC states that ‘A person’s election will take effect once it is treated as made that is, both after Her Majesty’s Revenue & Customs receive it and
• on the Monday after a person’s most recent Child Benefit payment; or
• where a person’s Child Benefit payment has already been issued, the Monday after the week(s) this payment relates to; or
• on the day a person requests if later than either Monday’.
It provides the following example:
A person is paid child benefit 4-weekly, three weeks in arrears and one week in advance. Where a payment is due for the period 6 May 2013 - 2 June 2013, the date a person’s election takes effect depends on when HMRC receive that election. If the election is received on:
• 14 May 2013, the election will take effect from 6 May 2013
• 28 May 2013, the person will already have received their child benefit payment for the period up to 2 June 2013 and so their election will take effect from 3 June 2013
• 24 May 2013, although the payment for the period up to 2 June 2013 will not have been paid into the person’s account, it will have already been issued and so the election will take effect from 3 June 2013.
If you provide advice on this area to your clients you should review existing engagement letters and consider amending the letters to include where you provide services to a couple.


How to opt out
Opting out is achieved via submission of an online form

VAT 'grey areas'

Following the 2012 budget there was a lot of crticism of the Chancellor's handling of certain VAT changes.  This resulted in some 'u' turns by the government and so just to clarify matters HMRC have published details of the current situation in the disputed areas:

·         hot food and premises
·         caravans
·         sports nutrition drinks
·         listed buildings
·         hairdressers’ chairs
·         self storage
·         anti-forestalling (relating to the listed buildings and self storage changes).
All of the changes will be effective from 1 October 2012 apart from the changes concerning caravans which will change from 6 April 2013. To supplement the information available on each change HMRC has issued seven new VAT Information sheets covering each issue.
Hot food and premises
Due to the uncertainty of the VAT liability of take away food there will be five tests introduced to help determine the VAT liability of hot food take away. Under the new rules sale of food if the food is hot at the time that it is provided to the consumer and satisfies one of five tests is standard rated:
·         test 1 – it has been heated for the purposes of enabling it to be consumed hot
·         test 2 – it has been heated to order
·         test 3 – it has been kept hot after being heated
·         test 4 – it is provided in a packaging that retains heat
·         test 5 – it is advertised or marketed in a way that indicates that it is supplied hot.
The other main aspect of the VAT change in regard to the definition of ‘premises’, as food sold for consumption on premises is standard rated irrespective of whether it is hot or cold. The definition of premises will be extended to include any area set aside for the consumption of food by the food retailer’s customers, whether or not the area may also be used by the customers of other food retailers.
See HMRC’s VAT Information sheet 12/12 for further details.
Caravans
The sale of caravans is currently either standard rated if they are less than 7m in length and 2.55m in width or zero rated if larger then either of these dimensions.
From 6 April 2013 sale of caravans will be either:
·         standard rated if the caravans does not exceed 7m in length and 2.55m in width
·         reduced rate if the caravan is longer than 7m in length or 2.55m in width and is not manufactured to standard BS 3632:2005
·         zero rated if the caravan is longer than 7m in length or 2.55m in width and is manufactured to standard BS 3632:2005.
The same rules will apply to other types of supplies of caravans, eg leasing and deemed supplies. Removable contents such as white goods, carpets, curtains and furniture will continue to be a standard rated supply.
See HMRC’s VAT Information sheet 11/12 for further details.
Sports nutrition drinks
Most sports drinks are treated as beverages (designed to rehydrate, quench thirst or give pleasure) and therefore they are standard rated. In some cases as a result of court decisions some sports drinks were found not to be treated as beverages due to their high nutritional content. This has led to anomalies about the VAT treatment of sports drinks hence the change from 1 October 2012.
Sports drinks will be all be standard rated if they are advertised or marketed as products to enhance physical performance, accelerate recovery after exercise, or build bulk. This will include:
·         syrups
·         concentrates
·         essences
·         powders
·         crystals
·         other products for the preparation of such drinks.
See HMRC’s VAT Information sheet 15/12 for further details.
Listed buildings
There is currently an anomaly between approved alterations of a protected building which is zero rated and their repair and maintenance which is standard rated. Not only has this been a point of contention between the taxpayer and HMRC leading to much confusion, there has always been an incentive to alter rather than repair a listed building.
The zero rating for approved alterations to listed buildings will be removed from 1 October 2012. There will be a transitional period where certain conditions are met operating until 30 September 2015, together with anti-forestalling provisions to prevent suppliers avoiding VAT.
See HMRC’s VAT Information sheet 10/12 for further details and further information on the transitional conditions.
Hairdressers’ chairs
Hairdressers’ chair rental is an often confusing and mis-interpreted area of VAT that has lead to businesses in the same industry applying different VAT rates. From 1 October 2012 renting out a chair in a hairdressers’ will be a standard rated supply, which in HMRC’s opinion has always been the case.
HMRC has regarded this as not a licence over land rather a provision of chair rental together with services relating to hairdressing, the scope of the legislation has been extended to include a fuller definition.
See HMRC’s VAT Information sheet 13/12 for further details.
Self storage
HMRC believes that there is an anomaly between the VAT treatment of storage supplied by self store providers and those supplied by traditional storage suppliers like removal companies. The changes will also address the unfair advantage some self storage suppliers have over other self storage suppliers due to some being exempt supplies and some standard rated. From 1 October 2012 the provision of space under for self storage of goods in structures such as:
·         containers
·         units
·         buildings.
will be a standard rated supply. There will be special provisions for supplies that straddle 1 October 2012 together with anti-forestalling provisions to prevent suppliers avoiding VAT.
See HMRC’s VAT Information sheet 14/12 for further details.
Anti-forestalling
As mentioned in the approved alterations to listed buildings and the supply of self storage, details of the anti-forestalling provisions can found in HMRC’s VAT Information sheet 09/12.

Get an estimate of your state pension before you retire

In these uncertain times it is important to be able to plan for the future. With this in mind you can now apply for a state pension estimate before you retire. The details are a bit complicated but its well worth taking a few moments to work through the information below to get the results you need:

Some changes to the State Pension forecasting services have been introduced whilst essential updates are being made to The Pension Service computer systems. These updates are necessary to reflect important changes in the State Pension rules that are now law.
How you get an estimate of your State Pension will depend on whether you are a:
·         woman born before 6 April 1953 or a man born before 6 April 1951
·         woman born on or after 6 April 1953 or a man born on or after 6 April 1951
Women born before 6 April 1953: men born before 6 April 1951
You are not affected by the latest changes to the State Pension rules. There are two ways you will be able to get an estimate of your State Pension. You can use the State Pension profiler or get a State Pension forecast.
State Pension profiler
The State Pension profiler can help you plan your retirement. It uses information you provide to quickly give you an estimate of how much basic State Pension you may get based on your National Insurance contributions to date. It will also tell you the earliest date you may get it.
·         State Pension profiler
State Pension forecast
A State Pension forecast gives you more detailed information on the State Pension you may get when you reach State Pension age. It is based on your NI contributions record, and will give you estimates of your basic and,additional State Pension and, if appropriate, your Graduated Retirement Benefit (Grad).
If you have recently received an Activation Code from the Government Gateway, to allow you to use the on-line forecasting service, please select the following link.
Women born on or after 6 April 1953: men born on or after 6 April 1951
The Pension Service is making essential updates to its computer systems, to reflect recent changes to the State Pension. Until these updates have been made there are two ways you can get personalised information about your State Pension. The quickest and easiest way is to use the State Pension profiler to get an estimate of how much basic State Pension you may get based on your National Insurance contributions.
Alternatively, you can get an estimate of your State Pension by asking for a State Pension statement. The statement will be based on your National Insurance contributions record.
State Pension statement
A State Pension statement will give you estimates of how much basic and additional State Pension and, if appropriate, any Graduated Retirement Benefit you may get. It is based on your National Insurance record as it stands on the date the statement is prepared. It is not a forecast of how much State Pension you will get when you reach State Pension age
You can ask for this statement by telephone or post.
What if you are already over State Pension age?
If you are already over State Pension age and have put off claiming you can still get an estimate of your State Pension. This will be based on the date you intend to claim in the future. You can either:
More useful links
·         Claiming the State Pension
·         The Over 80 Pension

A guide to Financial Management for small and medium sized businesses

As part of its Business in You campaign, the government is working with ACCA and other accountancy organisations, banks and business representative bodies to create a sustaining resource for businesses looking to build on their financial fitness.
Having the right finances in place, and planning financial matters before they reach crisis point, are critical to any successful business. Yet research demonstrates that many small and medium sized businesses would benefit from help and support in this area:
·   only 25% of small businesses consider themselves strong at accessing external finance
·   15% didn’t apply for finance despite wanting it
·   only 20% seek advice before applying for a loan
·   only one in three has a business plan
·   four out of five financial decision makers have no formal training in financial matters.

Help with finding the right finance

Finding finance is one of the hardest issues facing small businesses at the moment.  We can explain the problems that you may face and help you source the correct finance for your needs whether you are a start up or an established business.  Please contact us to discuss your individual finance forecasts.  As a basic guide to what finnance is available please follow this link to access Business Link's finance finder database.

Apply online for details of your National Insurance record

If you are resident in the UK and want to check your National Insurance record you can apply online to HM Revenue & Customs (HMRC) for a statement of your National Insurance account.

If you are resident abroad or have been abroad, read the section 'If you are resident abroad' to find out how to get a statement of your account.

To apply follow this link

Another update to HMRC's tax dodger campaign

Expected to recover more than £19.5 million from tax dodgers, the taskforces will target those who do not pay the right amount of tax in

The legal profession in London

Grocery and retail in South and North Wales, the North West and the South West

Hair and beauty in the North East

Restaurants in the South East and Solent

The motor trade in Scotland

Taskforces are specialist teams that undertake intensive bursts of activity in specific high risk trade sectors and locations in the UK. The teams will visit traders to examine their records and carry out other investigations.

David Gauke, the Exchequer Secretary, said:

“We have made it clear that we will not tolerate tax evasion and we are determined to crack down on the minority who choose to break the rules. Everyone needs to pay the taxes they owe in full. It is not fair that at a time when most hard-working people are paying the right tax, others are trying to get out of paying what they should.”

HMRC’s Mike Eland, Director General Enforcement and Compliance, said:

“These taskforces bring together specialists from across HMRC to find people who are not paying what they should. If you have paid all your taxes you have nothing to worry about. But for those deliberately evading tax, be warned that HMRC is coming after you.

“This is not an empty threat - HMRC can and will track you down if you choose to break the rules. We are on target to collect more than £50 million as a result of taskforces launched in 2011/12.”

HMRC has launched 30 taskforces since May 2011.

Taskforces are a result of the Government’s £917 million spending review investment to tackle tax evasion, avoidance and fraud from 2011/12, which aims to raise an additional £7 billion each year by 2014/15.

If you are aware of someone who is evading their taxes you can tell HMRC via the Tax Evasion Hotline by phone, on 0800 788 887, email or by post. Full details can be found here

More from HMRC's tax evasion campaign

HMRC has announced its latest tax campaign. This time, rather than being aimed at an industry specific group, it is a more general opportunity aimed at higher rate taxpayers helping them bring their tax affairs up to date, called the ‘tax return initiative’.  
  
Previous campaigns targeted offshore investments, medical professionals, private tutors and coaches, plumbers, electricians, VAT defaulters and online traders. According to HMRC, these campaigns have so far yielded nearly £510m from voluntary disclosures and over £120m from non-compliance follow-up from a large number of civil interventions, including over 18,000 completed investigations. HMRC said: ‘There are also 23 criminal cases underway, and one man, a plumber, was recently sentenced to jail.’ 
This campaign again adopts a ‘carrot and stick’ approach, with the carrot of reduced penalties if the taxpayer makes a disclosure and payment by 2 October and a stick of the full weight of the penalty provisions and the possibility of criminal prosecution if it is not taken up. 
Who is the campaign aimed at?
The main target is higher rate taxpayers in employment or self-employment, who should have returned other forms of income, such as taxed bank interest or dividends and paid higher rate tax accordingly through self assessment, but who have not done so. 
It applies for tax years up to and including 2009/10. The campaign targets both taxpayers who have been asked to submit returns and those who have not. It is interesting to note that the scheme applies to non-submission of returns already issued to the taxpayer for submission. This is a new feature which we have not seen in previous campaigns. 
To take part in the tax return initiative, taxpayers will need to notify HMRC  either electronically or by post. The outstanding returns, together with any outstanding amounts due, need to be submitted to HMRC by 2 October 2012. If a taxpayer cannot pay the full amount due, they are encouraged to call a special helpline on 0845 601 8818 to enter into a ‘time to pay’ arrangement. 
Advantages of the scheme
The main advantage of the scheme is that it offers a degree of protection from tax-geared penalties. HMRC is advising that:
 
• the fixed filing penalties of £100 which become due if the return is return is more than six months late, plus any interest and late payment surcharges will remain due
 
• with regard to tax-geared penalties, which can be as high as 100% of the unpaid tax due, HMRC will offer ‘the best terms on offer and HMRC expects that most will not have to pay this penalty’. Interestingly, previous campaigns offered a guaranteed level of penalties, whereas this one simply offers the ‘best terms on offer’.
 
What are the consequences of not taking up the opportunity?
 
HMRC advises that it is reviewing its records and identifying individuals who have failed to comply with their obligations to submit their tax returns and that:
 
• HMRC will use its powers to issue best judgement determinations and seek payment of the determined tax through tax demands, telephone calls, personal visits and ultimately using the courts

• HMRC will also seek tax geared penalties of up to 100% of the tax due for late returns where individuals do not take advantage of this opportunity

• HMRC may also consider a criminal investigation, in line with its criminal investigation policy.
 

HMRC's tax evasion targets

Tax Return Initiative
If HM Revenue & Customs (HMRC) have sent you a Self Assessment tax return or notice to complete a tax return for 2009-10 or earlier and you have not yet taken any action, HMRC are offering you a quick and straight forward way to bring your tax affairs up to date. There is also a dedicated telephone helpline to support

You can instantly submit your notification form online to HMRC using the 'submit by email' option in the form.
Alternatively, you can complete and post your form to:
HM Revenue & Customs
Tax Return Initiative Team
Holland House
20 Oxford Road
Bournemouth
Dorset
BH8 8DZ
Download the Tax Return Initiative form (PDF 170KB

Completing your tax returns
Once you have notified HMRC you want take part in this initiative, you will need to complete and submit your tax returns by 2 October 2012. The quickest way is to submit your tax returns online. You will need to register for HMRC Online Services if you have not already done so. If you need to register you should do so without delay in order to meet the 2 October closing date. If you are unable to complete your tax returns online, you can complete paper returns and send them to HMRC at the address shown above.

Paying what you owe
Once you have submitted your outstanding tax returns, you will need to pay the tax and National Insurance contributions that you owe or claim any repayment that is due before 2 October 2012. There are a variety of payment methods that you can use including Debit or Credit Cards and through your own bank or building society. Whichever method of payment you use, please make sure you quote your Unique Taxpayer Reference (UTR) when you make a payment.
If for some reason you cannot pay the full amount please ring the Tax Return Initiative Helpline on Tel 0845 601 8818. Lines are open Monday to Friday 9.00 am to 5.00 pm. You still need to send your completed tax returns to HMRC by 2 October.
If you have paid too much tax this will be reviewed following receipt of your returns and repaid to you if appropriate.

What's in it for the tax payer?
If you send in your completed tax returns for years 2009-10 or earlier and pay any tax you owe before 2 October 2012:
• If your returns are late you will already have been told if any fixed penalties are due. £100 is charged when a return is late with another £100 for returns that are still outstanding six months later. Interest and surcharges are also payable on any tax paid late.
• HMRC can also charge a penalty based on the amount owed. This can be as much as 100 per cent of the tax, however in some circumstances this can be reduced to nothing. By taking part in the campaign, people will receive the best terms on offer and HMRC expects that most will not have to pay this penalty. It is always better to come to HMRC before they come to you.
• If you cannot afford to pay what you owe all at, once don’t worry. If your circumstances warrant it, you will be able to spread the payments. 

  Tax credits renewal

You can’t renew until you have received your renewal pack. Once you've got your pack, if you need to renew don’t delay.

The final deadline for renewing is usually 31 July but check if your pack shows a different deadline.
You can renew in one of the following ways:
• completing the Annual Declaration form (TC603D or TC603D2) and returning it to the Tax Credit Office in the reply envelope provided
• calling the Tax Credit Helpline
You can't renew online.

If you're renewing by post and have lost your reply envelope, the address to return your form to is:
HM Revenue & Customs Tax Credits
Comben House
Farriers Way
Netherton
L75 1WB


For a full guide on tax credits and renewing generally please follow this link

Tax crackdown: HMRC targets electricians for unpaid tax

HM Revenue & Customs (HMRC) is writing to 50,000 electricians warning them that they could face criminal charges if they do not get their tax affairs in order.
Electricians who take advantage of this "disclosure opportunity" via the Electricians Tax Safe Plan will face a penalty rate of only 10pc-20pc of the tax owed, in addition to the tax itself, rather than the usual rate of up to 100pc. Those who don’t come forward could face criminal charges, HMRC warned.
Marian Wilson, head of HMRC campaigns, said: "Our aim is to make it easy for electricians to contact us, make a full disclosure of income and face a reduced penalty.

Details about the new Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) was announced by the government towards the end of 2011 and the draft provisions are included in the draft 2012 Finance Bill.
SEIS is an extension of the existing Enterprise Investment Scheme (EIS), with enhanced tax benefits. The scheme is intended to encourage investment in start-up business and the main details of the scheme are as follows:
Investor
• Taxpayers who invest up to £100,000 in a qualifying new start-up business will be eligible for income tax relief of 50% of the amount invested. This is compared to the normal 30% tax relief available under EIS.
• The 50% tax “reducer” applies irrespective of the rate at which the investor pays tax.
• It will run from 6 April 2012 until 5 April 2017 and is available to both individual and corporate investors.
.
• Capital gains arising on the disposal of an asset in 2012-13 and invested through the SEIS in the same year will be completely exempt from CGT. This is more attractive than EIS, under which reinvested gains are merely held-over until the EIS shares are sold.
• Disposals of SEIS shares will also be exempt from CGT after a three year qualifying period.
Company
• The maximum amount that a company may raise under the scheme is £150,000 in total.
• Investors will not be able to claim relief until the company has spent 70% of the money raised.
• The company must use SEIS investment money within three years.
• To be eligible, the company must also meet the following criteria:
o Have less than 25 employees
o Have gross assets of less than £200,000
o Be less than 2 years old
o Not have raised any money from EIS or VCT investors
o Carry on a genuine new trade.

Are you a member of a school fundraising committee ?

HMRC has issued a guide highlighting when school charities can recover gift aid. It includes a number of simple examples highlighting activities that qualify and those which will not qualify.
The examples include
  • appeals to fund extra lessons
  • non-uniform days
  • schools fees
  • appeals towards school running costs
  • educational school trips
  • sponsored events
  • building appeals
  • auctions.

Warning from HMRC about scam e-mails

Clients will no doubt have seen the recent publicity relating to over/underpaid PAYE.  HM Revenue & Customs has announced that it will be contacting millions of taxpayers over the coming months in connection with PAYE tax bills.

Taxpayers should be aware of internet scams trying to exploit those who think they may be eligible for a rebate. Emails claiming to be from HMRC are advising people that they are in line for a windfall, inviting them to provide personal details. HMRC's position is clear - they only ever contact customers who are due a tax refund in writing by post. HMRC don't use telephone calls, emails or external companies in these circumstances.

If you receive an email claiming to be from HMRC, please send it to phishing@hmrc.gsi.gov.uk before deleting it permanently. HMRC are working closely with other law enforcement agencies to target the criminals behind this serious crime and see them brought to justice

Advice on the taxation of solar panels

The installation of solar panels may make environmental sense but HMRC also have their own views on the matter !

‘A tax-free, index-linked return of 10% a year, guaranteed for 25 years’ or an energy efficient scheme that will reduce carbon and consequently the impact on the environment, or-maybe the installation of solar panels can be both these things?
It is, of course, not as simple as that. First, there are two types of solar panel.  A solar thermal system will heat water, but is not included in the special government scheme as yet. The type of panel that does have interesting possibilities in terms of generating income is the photovoltaic panel, or solar PV for short. This type of panel generates electricity from sunlight.
The government has scrapped the grants that used to be available for the installation of solar panels, and replaced them in 2010 with the Feed in Tariff scheme (FITS). This scheme pays system owners a set price for all electricity that their system generates, even if they use the electricity themselves. The rate is currently 43.3p per kWh. This is called the generation tariff. If the system produces more electricity than the owner uses, the surplus is sold back to the national grid at 3.1p per kWh. The rate is fixed by statute to increase in line with the retail price index for the next 25 years. It is estimated that a 3.5kW system should bring in around £1500 a year every year.
If the solar panels are fitted to a private residence, this income will be tax free, but businesses and landlords that rent out the accommodation need to be aware that their payment will been seen as taxable income, subject to income tax or corporation tax as appropriate.
Solar PV systems are not included in the enhanced capital allowance (ECA) scheme (although solar thermal systems are). However if a solar PV system is at a business premises, it will fall under the normal annual investment allowance. Even when the annual investment allowance is reduced from £100,000 to £25,000 in April 2012, this should be sufficient to cover the costs of a medium sized solar installation. As well as being able to claim the capital allowances, up to possibly 100% of the cost, the business will benefit from savings in costs for electricity and also receive income from the FITS scheme. Businesses can install systems up to 50kW and still claim FITS payments.
VAT on solar panels is at the lower rate of 5%. If a trader is registered, VAT is fully recoverable on the equipment and installation costs. There is no VAT on generation tariff income, but if the trader is registered, VAT of 5% should be charged on the export tariff.
In order to encourage early take up of the scheme, the rates offered now will be reduced next year, so a household or business having a system installed now, will benefit from higher rates of FITS payments, than will be received for an installation in 2012.
Further information is available on the Department of Energy and Climate Change's website

Changes to the employers right to force staff to retire

The default retirement age (DRA) will be scrapped on 1 October 2011 under proposals announced by the Government today (29 July).
Currently employers can force staff to retire at the age of 65 regardless of their circumstances.
The new plans allow for a six-month transition from the existing Regulations, following the announcement in the budget that the DRA would be phased out from April 2011.
The proposals state that from 6 April 2011, employers will not be able to issue any notifications for compulsory retirement using the DRA procedure. Between 6 April and 1 October, only people who were notified before 6 April, and whose retirement date is before 1 October can be compulsorily retired.

Bank interest and the VAT Flat Rate Scheme (FRS)

In the Tribunal cases of Thexton Training Limited and Fanfield Limited, the ruling was that where the receipt of bank interest is derived from the taxable activity of a business:
                       
  • such interest is a relevant supply for the purposes of the FRS
Conversely, where the receipt of bank interest is not a direct result of the taxable activity of a business:
                       
  • such interest falls outside the scope of VAT and is not a relevant supply
This gives rise to the potentially confusing situation where FRS users will need to determine whether or not to include bank interest in their flat rate turnover.
Therefore HMRC has decided that, for simplification purposes, all FRS users can exclude interest from their flat rate turnover. This is good news for any business where thias type of investment income is material.

Bribery Act 2010 guidance is released

The UK Bribery Act was passed by Parliament in April 2010, and following a review by the Justice Secretary, it is scheduled to be fully implemented from 1 July 2011. Businesses will need to have undertaken risk assessments and should have policies and plans in place for 1 July.

Although most small businesses should have nothing to fear, it is important that all entities are aware of the Act and how to address its issues.

A 'quick start' guide has been released by the Ministry of Justice.  Follow this link

Full guidance is also available.  Follow this link

New campaigns targeting VAT defaulters, private tutors and e-marketplaces will be launched by HM Revenue & Customs (HMRC) over the next year.

 HMRC will use cutting-edge tools such as “web robot” software to search the internet and find targeted information about specified people and companies. Using the software, the department can pinpoint more accurately people who have failed to pay the right tax. The “web robot”, used with the department’s Connect computer system, also helps find people who are trading without telling HMRC.
Connect alerts HMRC to previously invisible tax evasion by matching a vast amount of HMRC and third-party data, enabling a fast and focused response to tax evasion. It shines a light onto previously hidden relationships, uncovering anomalies between such elements as bank interest, property income and lifestyle indicators before homing in on unexplained inconsistencies.
Before designing and launching the campaigns, the department will seek input from interested parties.
HMRC announced last month that a campaign targeting VAT rule-breakers trading above the £73,000 turnover threshold but who have not registered for VAT will be launched in the summer.
Other campaigns that will be launched in 2011/12 will focus on:
* Those who provide private tuition and coaching. This addresses the risk posed by all professionals who, because of their field of expertise, are able to earn money from providing tuition and coaching – either as a main or a secondary income. It covers people providing private lessons, regardless of whether they have a teaching qualification, and could include, for example, fitness/dance/lifestyle coaches through to national curriculum subject tutors and others.
* E-marketplaces. This will cover those who are using e-marketplaces to buy and sell goods as a trade or business and who fail to pay the tax owed. People who only sell a few items and who are not traders are unlikely to be liable to tax and will not be targeted by this campaign.
* Trades. This will build on HMRC’s plumbers’ campaign and give an opportunity to another group of tradespeople to come forward and declare unpaid tax.

Mike Wells, HMRC's Director of Risk and Intelligence, said:
“We want to make sure HMRC listens to as many informed views as possible for our future campaigns. We want the views and experience of people and organisations outside the department to play a fuller part in the campaigns that we design for customers.
“By being open about our areas of interest for the coming year we hope to maximise that exchange of information and ensure we reduce the tax gap and help customers pay what they owe.
“We will use the information we gather to pursue people who choose not to use the opportunities we provide for them to put their affairs in order on the best possible terms. It will be more expensive if we come and find people, so I urge them to come forward and disclose voluntarily.”
So far, more than £500m has been raised by HMRC from voluntary disclosures and a further £100m from follow-up activity. Previous campaigns have targeted offshore investments, medical professionals and people working in the plumbing industry.
Information on campaigns for 2011, including how people can work with HMRC to influence their development, will appear on the HMRC campaigns pages shortly (http://www.hmrc.gov.uk/ris/hmrc-campaigns.htm).

How good are your business records?

HM Revenue & Customs are of the opinion that 40% of small business enterprises do not keep adequate records.

Business record checks

Against this background, HMRC has announced that it is to implement a programme of business record checks .
Once examined, it is expected that the records will be ‘graded’ by HMRC staff and this grade would determine subsequent action and any potential penalties. Helpfully, HMRC have not exactly clarified what they mean by adequate!
HMRC have issued two fact sheets on the type of accounting records that they expect to see.  please follow the links below:

Factsheet one

Factsheet two

Stourton Accountancy has always advised its clients when we see areas of their accounting records that need major improvement.  From 2011 we will be peforming this service (where needed) in the form of a written memo so our clients can protect themseles, as far as possible, if they are randomly selected for a business records check.

HM Revenue & Customs (HMRC) has launched a campaign to target and crack down on suspected fraudulent tax credit claims from the self-employed.

We understand that letters have started to land on the doorsteps of 12,000 self-employed people who are claiming tax credits. HMRC teams have been examining tax credit awards being paid to the self-employed and are writing to any whose claims may not be genuine or accurate. They are asked to contact the department and supply evidence to support their claims.
Failure to tell HMRC promptly of any changes in income can result in overpayment, which means that claimants have to pay back the money. They could also face a penalty and, in the case of deliberate fraud, criminal prosecution and imprisonment.
As part of a wider government crackdown, HMRC and the Department for Work and Pensions (DWP) have published a strategy designed to tackle error and fraud in benefits and credits.
Exchequer Secretary to the Treasury David Gauke said:
“HMRC is determined to take a tough approach to targeting possible fraud among tax credit claimants. Last year the Government launched radical proposals to reduce the billions lost to tax credit error and fraud every year. These losses are unaffordable and unacceptable.”
HMRC will now use credit reference agencies and data-matching to spot patterns of fraud. The department is also employing additional investigators and are examining each claim in high-fraud areas.

As previously reported on this website, it is essential that all changes to income , and any other necessary information, is disclosed to HMRC as soon as possible.

Changes to the state pension age for women

The age at which women reach SPa is rising gradually to 65. The changes will be phased in on a sliding scale (see below) between 6 April 2010 and 5 April 2020 and will affect women born between 6 April 1950 and 5 April 1955. Women born on or after 6 April 1955 but before 6 April 1959 will reach SPa at age 65.
Recording National Insurance contributions
Any employees over SPa do not have to pay employee’s National Insurance Contributions (NICs). However, employers still pay Class 1 category C rate NICs.
If you employ any women over 60 you will need to continue deducting Class 1 NICs up to their new SPa. Ensure that you have accurate dates of birth for all employees to determine when they no longer need to pay Class 1 NICs.
Women’s SPa dates 2010-11

Female Date of Birth
State Pension age date
SPa (in years and months)
06/04/50 – 05/05/50
06/05/2010
60.1
06/05/50 – 05/06/50
06/07/2010
60.2
06/06/50 – 05/07/50
06/09/2010
60.3
06/07/50 – 05/08/50
06/11/2010
60.4
06/08/50 – 05/09/50
06/01/2011
60.5
06/09/50 – 05/10/50
06/03/2011
60.6

Enterprise finance guarantee

The Government has recently announced a revised package of measures to aid businesses having difficulty in raising finance.  We provide help and guidance for any business who are interested in pursuing this help.  Please contact us for an informal chat about the measures.

For more details follow this link

British Bankers guide to providing finance

The BBA have recently provided a guide to their criteria for providing loans etc to companies.  This is an interesting way of finding out how they rate companies and may help to access that elusive finance.

To download follow this link

Help in paying your tax bills

If you're worried about being able to meet tax, National Insurance, VAT or other payments owed to HM Revenue & Customs (HMRC), or you anticipate that payments coming due will cause you problems, you can call the Business Payment Support Line  seven days a week.

For further information follow this link

Working from home

HMRC has announced that it will increase the tax and NIC free guideline rate employers can pay home working employees without keeping records from £2 to £3 per week with effect from 6 April 2008.
This does not prevent an employee being paid more but records will need to be kept of the expenses incurred.  For more details follow this link

Buying a business vehicle

Business Link have produced a handy guide to buying the right vehicle for your business. This includes CO2 and fuel consumption guides.

 
For further details follow this link
 

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