2019/20 Salary Dividend Planning – Save Tax !

It is a long established practice that small businesses who are structured as a Limited Company might pay themselves a small salary and dividends to potentially save tax.

However in the run up to this tax year there have been multiple legislative changes that have affected the most tax efficient way of doing this. So all small Limited Companies should be reviewing their remuneration strategy with their accountant to check that it is still the best way forward.

Salary Level:

  • The abolition of the Employer’s Allowance for one Director Companies has actually simplified the issues around what is the best salary to take.
  • There is no point in paying additional National Insurance in order to save a smaller amount of tax.
  • Therefore in the majority of cases small business owners should be paying themselves a salary of £8,632 a year.

The advantages of this are:

  • No National Insurance,
  • A year’s credit toward the State Pension (now need 35 years)

Dividends:

  • The Dividend Tax allowance has been reduced to £2,000 from April 6th 2018

New Scottish Tax Bands:

  • There are new Scottish tax bands from the 5th April 2018 which along with the dividend allowance and the savings allowance make planning remuneration even more complex than it was before.

There are a number of ways of mitigating dividend tax including transferring shares to your spouse, Company Pension contributions and employing members of your family where they are actually doing proper work for your business.

Give us a call if you would like a review of your remuneration strategy.

Self Assessment Returns For Directors

We always recommend that Directors of Limited Companies do a self assessment return every year and ensure that our clients do so. If you go here: https://www.gov.uk/check-if-you-need-a-tax-return and tick the box that you are a Director HMRC will tell you that you need to do so.

However occasionally we take on a Company Client where the Directors for whatever reason haven’t been completing a Self Assessment return. If they have never done so then they need to fill in one of these to obtain a Unique Tax Reference (UTR) https://www.gov.uk/government/publications/self-assessment-register-for-self-assessment-and-get-a-tax-return-sa1

Unfortunately on this form you need to state when you became a Director, and if it was say 10 years ago then HMRC are keen on issuing all the intervening Self Assessment forms with associated penalties. Even if the Director only had for example PAYE income that was taxed at source.

HOWEVER:

HMRC are being a bit disingenuous. The law does not say that a Director has to submit a tax return. Indeed this tribunal case http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j9898/TC05929.pdf has just upheld that fact. A person should submit a self assessment return if they have taxable income or get a notice to file from HMRC.

So whilst we are not going to change our advice on Directors submitting self assessment returns, there is definitely a case for arguing about missed returns that had no taxable income on them.

If you need any help getting your tax affairs in to order please do not hesitate to get in contact.

 

 

 

Budget Update

Here are the highlights from a fairly content free budget. The main budget is moving to the Autumn from this year.

 

TAX FREE DIVIDEND ALLOWANCE TO BE REDUCED TO £2,000
The Chancellor also announced measures to limit the rise in tax-driven incorporation. The £5,000 tax free dividend allowance introduced by George Osborne will be reduced to just £2,000 from 6 April 2018. Mr Hammond claimed that many smaller owner-managed businesses have incorporated as limited companies mainly for tax reasons. Typically the director/shareholders of such businesses have paid themselves in dividends and paid less tax than similar unincorporated businesses.

Currently, once the dividend allowance has been used the remaining dividends are taxed at 7.5%, 32.5% and then 38.1% depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. There are rumours that these dividend rates may also be increased in future years.

Although the cut in the tax-free dividend allowance is clearly aimed at owner managed companies, it will also impact on those with substantial share portfolios. Mr Hammond reminded us in his speech that the annual ISA investment limit increases to £20,000 from 6 April 2017 and that dividends on shares held within an ISA continue to be tax free.

START OF DIGITAL REPORTING DELAYED FOR SMALLER BUSINESSES

The Government is committed to the “Making Tax Digital” (MTD) project which is scheduled to start in April 2018 with the first quarterly updates being submitted by the self-employed and property landlords in July 2018.

Many business owners, professional advisors and the Treasury select committee had expressed concerns about the timescale for the introduction of MTD. The Chancellor announced that there will be a one year deferral in the start date to 2019 for self-employed businesses and property landlords with gross income below the VAT registration limit.

CORPORATE TAX MEASURES

The Chancellor announced that the Government is committed to continue to have the lowest corporate tax rate of the G20 major trading nations.  As already announced the corporation tax rate reduces to 19% from1 April 2017 and then to 17% from 1 April 2020.

The corporation tax rate for small and medium sized companies trading in Northern Ireland will be reduced so that such companies can compete with those in the Republic where the rate is 12.5%.

The Government is also keen to continue to encourage investment in research and development (R&D) and the Chancellor announced that the R&D tax credit claim procedure would be simplified.

TAX FREE CHILDCARE SCHEME STARTS 2017

The chancellor also announced that the new tax-free childcare scheme is due to start in 2017.

The scheme will provide up to £2,000 a year in childcare support for each child under 12 where the parents save in a special account. If they save £8,000 the government will top up the account with 20% to a total of £10,000 which can then be used to pay for childcare costs.

VAT Flat Rate Scheme – Limited Cost Traders

As noted before in summary a change to the Flat Rate VAT scheme was announced in the Autumn Statement. This change comes in to effect on the 1st of April 2017.

This change is intended to target businesses on the Flat Rate Scheme who would only be reclaiming a minimal amount of VAT if they were calculating VAT as normal. Thes businesses will be classed as Limited Cost Traders. A new rate of 16.5% for the flat rate scheme will be introduced which potentially means that people will be better reverting to the standard VAT schemes.

HMRC has defined a Limited Cost Trader as:

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

So as you can see this is definitely targeted at contractors and the like who are operating through Limited Companies with low costs.

If you are on the Flat Rate Scheme and would like some help transitioning please do not hesitate to contact us. We will be writing to HMRC on behalf of our clients who are affected and helping them transition if they need to.

HMRC reference is here: https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note

 

 

2017 is here. Tax Changes Coming.

Happy New Year to everyone.

2017 has started and is going to be a busy year. There are many tax changes arriving this that we will be helping our clients to negotiate. Some of the highlights (if you can call them that) are:

So as you can see there are quite a few changes that will affect small business owners. If you would like advice on any of these please let us know.

Autumn Statement Update 2016

Welcome To Our Autumn Statement Update

Many of the changes below were already flagged up. The change to Flat Rate VAT however was a bit of a bombshell. We will be in contact with all our clients on Flat Rate VAT to see if the change affects them. If you have any queries about anything in this newsletter please don’t hesitate to give us a call.

GETTING THE UK “MATCH FIT” FOR BREXIT


The Chancellor Philip Hammond announced that his first Autumn Statement will also be his last.  In future the main Budget announcements will be made in the autumn rather than the spring. We were not expecting that many tax announcements and many that were made we already knew about. He could not afford too many give-aways as he expects the economy to have a bumpy ride during the BREXIT transition.
 
There will still be a Budget next March but thereafter the annual Budget will be in the Autumn to allow longer consideration of the announcements and draft legislation before enactment the following summer.

KEY TAX ANNOUNCEMENTS:

Remember that come of the key Personal Tax thresholds are being devolved to Scotland from April 2017 so may not follow these limits.

  • Personal allowance to increase to £11,500 in 2017/18, rising to £12,500 by 2020/21
  • Higher rate tax threshold to increase to £45,000 in 2017/18, rising to £50,000 by 2020/21
  • National Insurance threshold to be raised to £157 a week for employees and employers
  • Corporation tax rate to reduce to 17% in 2020
  • Business tax “roadmap” to continue, in particular new rules for company losses
  • Insurance premium tax to increase from 10% to 12% from 1 June 2017
  • More anti-avoidance measures, in particular a new VAT flat rate percentage for “limited cost traders”
HELP FOR THOSE JUST ABOUT MANAGING (JAM)
 
The Chancellor made a number of announcements that were intended to help those families that a just about managing, given the acronym – JAM. Raising the personal allowance to £11,500 and higher rate threshold to £45,000 will mean they pay less income tax and keep more of what they earn, however remember that these thresholds will be devolved to Scotland from April 2017.
 
This group will also benefit from the increase in the National Living Wage to £7.50 an hour and the changes to Universal Credit.
 
The Universal Credit taper rate will be cut from 65% to 63% from April  2017 which will mean that fewer benefits will be clawed back as claimants’ income increases. The planned reductions in the overall benefits caps will however go ahead.
 
CORPORATE AND BUSINESS TAX CHANGES

 
Many of the corporate tax changes had already been announced and are set out in the business tax “roadmap” which details the government tax strategy for the life of this Parliament and beyond.
 
The currently 20% corporation tax rate is planned to fall to 19% from 1 April 2017 and then to 17% on 1 April 2020. The government is committed to keeping the UK corporate tax rate the lowest in the G20 and there is talk of a rate as low as 15% in the future.
 
The Chancellor raised concerns that there continues to be a rise in tax-driven incorporations as there are still tax savings compared to unincorporated businesses operating at a similar level of profit. That may suggest that the government is still considering the introduction of a new “look through entity” suggested by the Office of Tax Simplification so that the tax treatment will be the same, thereby creating a level playing field.
 
The new flexible corporate tax loss rules announced in the spring budget have been subject to consultation and will go ahead from 1 April 2017.

CAPITAL ALLOWANCES

From 23 November 2016 to 31 March/ 5 April 2019, businesses will be entitled to a 100% First Year Allowance (FYA) for the cost of installing electric charge-point equipment for electric vehicles. This measure is intended to complement the 100% FYA available for low CO2 emission vehicles and to encourage their uptake.
 

HIGHER RATE TAX RELIEF FOR PENSIONS CONTINUES

 
There has been much speculation that the government would further limit tax relief for pension contributions by removing higher rate tax relief. That measure would save the country £34 billion in tax but the only change announced concerns a new lower limit on amounts that can be saved in a pension when individuals have started drawing down from their private pension.
 

Currently the net effect of pension tax relief for a higher rate taxpayer is that saving £10,000 in a pension costs £6,000. The taxpayer pays £8,000 into their pension and the government tops this up by £2,000 with a further £2,000 deducted from the individual’s income tax liability, reducing the net cost to £6,000. For additional rate taxpayers the net cost would be just £5,500.
 
Remember that there is currently an annual pension input limit of £40,000 which caps the combined contributions by an individual and his or her employer. For those with high income this is tapered and can be as low as £10,000.
 
One new pension restriction that was announced was a measure to limit pension “recycling”. Those individuals who have started drawing down their personal pension will in future only be able to reinvest up to £4,000 in their pension.  Please contact us if you want to discuss pension planning further.
 
SALARY SACRIFICE RULES TO BE TIGHTENED UP
 
Many employers now provide flexible remuneration packages that allow employees to give up some of their contractual salary in exchange for benefits in kind. This can have the effect of saving tax and national Insurance contributions for both the employee and employer, particularly where the benefit provided is exempt from tax.
 
These tax and NIC advantages are to be withdrawn from 6 April 2017. Arrangements involving pensions, childcare, Cycle to Work and ultra-low emission cars will be excluded; existing arrangements will be protected for a transitional period until April 2018, and existing arrangements for cars, accommodation and school fees will be protected until April 2021.
 
The Chancellor has announced a wider review of the taxation of benefits, with the intention of making this area ‘fairer and more coherent’. This appears likely to have a significant effect on any employee who is in receipt of benefits from their employer.
 
OTHER EMPLOYEE BENEFIT CHANGES

MAKING GOOD

An employee who repays to their employer, or ‘makes good’, the cost of a benefit, avoids a tax charge. As previously announced, from April 2017 such making good will have to take place by 6 July in the following tax year if it is to be effective.
 
CHANGES TO TERMINATION PAYMENTS TO GO AHEAD
 
As announced in March, from April 2018 termination payments over £30,000, which are subject to Income Tax, will also be subject to employer’s NIC. Tax will only be applied to the equivalent of an employee’s basic pay if their notice is not worked. The first £30,000 of a genuine termination payment will remain exempt from tax and NIC.
 
“ABUSE” OF THE VAT FLAT RATE SCHEME
 
The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that from total output tax on sales in the period. HMRC believe that the scheme is being abused by certain traders who have minimal costs who charge 20% VAT to their customers and then pay a lower percentage over to HMRC.
 
The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers. A new 16.5% rate will apply from 1 April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel. Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. If you are currently using the flat rate scheme please contact us to check whether this change is likely to affect your business.

Dont Miss Out on Tax Relief on R&D

DON’T MISS OUT ON TAX RELIEF ON R&D

The government is concerned that many small companies are missing out on generous R&D tax credits.  For the last year HMRC have been offering companies an advance assurance scheme to check whether or not their activities qualify before they make a claim. So far over 200 applications for advance assurance have been made.

There is a general misconception that R&D involves scientists in white coats but it should be remembered that R&D may be necessary to resolve a problem with a product or a process.

So some of the work by your engineers or technical staff may qualify as R&D. For Small and Medium-sized Enterprises (SMEs) the tax credit is 230% of the expenditure on qualifying R&D, and where the company incurs a trading loss, HMRC will provide an immediate cash refund rather than waiting until there is a profit in a future period.

By applying for advance assurance the company’s R&D claim will not be subject to an HMRC enquiry and HMRC will then accept the first three years of claims.

Companies eligible to apply for advance assurance:

  •      turnover below £2m
  •      fewer than 50 employees
  •      no previous R&D claims

So don’t hestitate to get in contact if you think you may have a claim.

Christmas is Coming – New Rules for Gifts to Staff

CHRISTMAS IS COMING! – NEW RULES FOR GIFTS TO STAFF

From 6 April 2016 new rules were introduced to allow employers to provide their directors and employees with certain “trivial” benefits in kind, tax-free.

The new rules are a simplification measure so that certain benefits in kind will not need to be reported to HMRC, as well as being tax free for the employee. There are of course a number of conditions that need to be satisfied to qualify for the exemption.

CONDITIONS FOR THE EXEMPTION TO APPLY:

• the cost of providing the benefit does not exceed £50
• the benefit is not cash or a cash voucher
• the employee is not entitled to the benefit as part of any contractual obligation such as a salary sacrifice scheme
• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

So this exemption will generally apply to small gifts to staff at Christmas or on their birthday.
Prior to this change in the rules, the benefit in kind would have had to be reported on the employee’s P11D form at the end of the year, or alternatively the employer would have dealt with the tax and national insurance under a PAYE settlement agreement. Under such an arrangement a £50 Christmas turkey to a higher rate taxpayer could end up costing the employer nearly £95!
Note that where the employer is a “close” company and the benefit is provided to an individual who is a director or other office holder of the company, the exemption is capped at a total cost of £300 in the tax year.

Please feel free to contact us if you are considering taking advantage of this new exemption.

New tax rules around liquidating or striking off a Company

 
LIQUIDATING A COMPANY – IS IT A CAPITAL GAIN?

One of the anti-avoidance measures being introduced by the latest Finance Bill potentially changes the way that certain payments to shareholders will be taxed. This may result in payments following some company liquidations being taxed as dividends instead of capital gains.

The Government is concerned that the new  higher rates of income tax that have applied to dividends since 6 April 2016 may tempt some shareholder / directors to extract value built up within their companies in a capital form, rather than paying out the retained profits as dividends. This is because capital gains are generally taxed at a lower rate than income, possibly as low as 10% where entrepreneurs relief is available. 

For example, a higher rate taxpaying shareholder receiving £100,000 on the liquidation of his company would pay £32,500 (32.5%) if the anti-avoidance applies, whereas CGT would be just £10,000 (10%) if entrepreneurs relief is available.  Consequently, new stricter rules are being introduced to apply to transactions on or after 6 April 2016.

When is a liquidation taxed as income?

For the new anti-avoidance rules to apply, the company being wound up must firstly be a close company and the individual must have held at least a 5% interest in the company (ordinary share capital and voting rights).

A further condition is that the individual (or connected person) continue to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution.

It must also be reasonable to assume, having regard to all of the circumstances that the arrangements appear to have a tax advantage as one of the main purposes.

Can we obtain clearance prior to the liquidation?

Accountants and tax advisors requested that the new anti-avoidance rules should provide a formal clearance procedure prior to the transaction, thus providing certainty as to whether or not the payment would be taxed as income or capital.  Unfortunately, there is no formal clearance procedure. HMRC have however received a number of clearance requests from taxpayers and have confirmed that it is not their general practice to offer clearances on recently introduced legislation with a purpose test.

HMRC have therefore drafted a standard reply that sets out a small number of examples and they are working on more detailed guidance, which should be published before the end of this year.

This is a very complex area and we suggest that you contact us before you consider liquidating or striking off your company.

Buy to Let Tax Changes in Full

NEW RULES FOR BUY-TO LET LANDLORDS

The 2016 Finance Bill sees the introduction of important tax changes for property investors that were originally announced in the 2015 Budget.

From 6 April 2016 onwards there are important tax changes affecting the replacement of furnishings for buy to let landlords. 6 April 2017 will see the start of mortgage interest being restricted to basic rate only.

Wear and tear allowance abolished

Until 5 April 2016 landlords who were letting residential property on a fully furnished basis were able to claim a 10% “wear and tear” allowance towards the cost of the depreciation of furnishings.

This simple allowance was an alternative to claiming a deduction for the actual cost of replacing furnishings which was a concession that applied up until April 2013.

So for example, where the gross annual rent was £9,000 there would have been an allowable deduction of £900.

This change seems to be inconsistent with the government’s stated desire to simplify the tax system.

The new relief for replacement of furnishings in property businesses

Up until April 2013 it used to be the case that where furnishings were replaced in a property rental business there was deduction for the cost of the replacement items in arriving at rental profits.

This was never a statutory deduction and was accepted by HM Revenue and Customs on a concessionary basis. That concession was controversially withdrawn at relatively short notice in 2013 so for a three year period, unless landlords were eligible for the “wear And tear” allowance there was no relief for furnishings.

As the result of extensive lobbying by the accounting profession, and the residential landlords association, the relief has been restored on a statutory basis from 6 April 2016 by the latest Finance Bill.

The new relief provides a deduction for the actual cost of replacing furniture, furnishings, appliances and kitchenware for the use of the tenant in the let property.

Note that there is no allowable deduction for the initial fitting out of the rental property, just the cost of replacement Items. Furthermore the allowable tax deduction applies on a like for like basis so if there is any significant Improvement then the tax relief will be restricted. So, for example, where a washing machine is replaced with a washer/dryer costing £600, tax relief would only be available for the cost of the equivalent washing machine costing say £400.

No renewals relief for other businesses

Although the renewals basis has been reintroduced for rental businesses from April 2016, it has been withdrawn for other trading business. This relief was previously referred to as the “loose tools” deduction.

Consequently there is no longer relief for the replacement or alteration tooling. In future HMRC would expect such expenditure to be dealt with through the capital allowances rules, most likely by making a short life asset claim.

No change for Furnished Holiday Lettings

The above changes to the renewals basis do not apply where the property rental business falls within the definition of a qualifying furnished holiday lettings (FHL) business.

Such businesses continue to qualify for capital allowances when plant and machinery used In the course of that business is acquired and would benefit from the 100% write off under the Annual Investment Allowance rules.

There are strict conditions for the property business to qualify as FHL, the most important condition being that the property is let for at least 105 days (15 weeks) in the tax year, and comprises a series of short term lets.

Note that under the capital allowances rules, relief is not just available for replacing assets but also for the initial furnishing of the holiday property.

Interest relief restriction starts 6 April 2017

As previously announced the current deduction available for mortgage interest and other finance costs starts to be phased out from 6 April 2017.  In 2017/18 only 75% of finance costs will be deductible in arriving at rental profits, the remaining 25% will only qualify for basic rate tax relief. 

In 2020/21 there will be no deduction against rental profits for finance costs, just a basic rate tax reduction. This will not only affect higher rate taxpayers but will also have the effect of pushing some landlords into higher rates of tax.

Currently where a buy to let landlord has £10,000 a year net rental profits after deducting £30,000 mortgage interest, in

2020/21 his rental profits would increase to £40,000.

If his other income is £25,000 a year, the rents would currently be taxed at basic rate 20%. Assuming his other income stays the same, his taxable income would increase to £65,000 with a significant portion being taxed at the 40% higher rate. The £30,000 mortgage interest would only qualify for a £6,000 (20%) set off against the 2020/21 tax liability.

Note again that the restrictions do not apply to any part of the amount borrowed for the commercial letting of furnished holiday accommodation. Furthermore, the restriction does not apply to loans for property development trades, or loans secured on a let dwelling house which are applied for the purposes of a trade.

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