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  • Autumn Statement – Spreadsheets, Surprises, Simplicity?

    Spreadsheets

    Spreadsheets have presumably told the Chancellor the following can no longer be afforded:

    Employee Shareholder Status

    As often is the case, a new tax relief to help encourage good behaviour is taken on by some advisers, packaged up and sold to large employers in such large numbers it becomes unaffordable for the Treasury to provide it. The interest and take up by SMEs was rare in my experience so few will suffer from this change.

    VAT Flat Rate Consultants Clampdown

    HMRC has presumably reported on some large profits being made under Gordon Brown’s simplification scheme. In exchange for not claiming VAT back on costs, small businesses pay over a Flat Rate % of Turnover including VAT. Consultants have few VATable costs so lose less from using this scheme and usually overall make a VAT profit. From April 2017, if they want to continue using this scheme the % is set at such a high amount it’s unlikely to be worthwhile for consultants to carry on using it. 

    Incorporation Of Employees

    Presumably the Chancellor was referring to IR35 and the continuing need to ensure ‘true’ employees pay the full national insurance due. He cannot afford to have an economy where the ‘correct’ national insurance isn’t paid. 

    Surprises

    Autumn Budgets

    Next March’s Budget might be the last Spring Budget but it does mean there will be two Budgets in 2017. Expect this opportunity not to be wasted until we settle into a proper annual Autumn Budget cycle from 2018. 

    Insurance Premium Tax Increase

    In a higher inflation environment an increase from 10% to 12% will add to businesses’ general inflationary pressures.

    Partnership Profit Allocations

    There is reference to ensure profits are more ‘fairly allocated’. A consultation is on its way, so the details need to yet be reviewed. 

    Simplicity?

    VAT Flat Rate Consultants Clampdown

    If the VAT Flat Rate was deemed no longer fit for purpose there must have been easier ways to deal with it. Instead we have a calculation looking at the amount spent by a small business on ‘Goods’ (defined differently to usual) which if it’s too low means a higher 16.5% rate will apply. This will add several pages of legislation to an already overstretched statute book.

    Benefits In Kind 

    Simplifications will be introduced to make it easier for employers to pay the tax due on Benefits on behalf of their employees. This is a lump sum payment known as a Payroll Settlement Agreement or PSA and means separate entries aren’t needed for each employee. Also some Benefits can be reduced by employees making late contributions after the end of the tax year. There will be a time limit of 6 July to make this payment so very late payments can’t be made if HMRC later catches up with you! Arguably, withdrawing Salary Sacrifice for many benefits simplifies the whole employment package.

    Productivity 

    That elusive prize for dozens of Prime Ministers seems to be a particular UK problem. SMEs are often more productive than their larger counterparts partly because they can’t afford to suffer the cost of inefficiencies. Another reason for the government to focus on this sector and offer ever more incentives in a post-Brexit UK.

    Other 

    There were many sundry other announcements confirming those already made such as the reduction to corporation tax to 17% by 2020. There are also a few consultations to keep in mind such as valuation of benefits in kind many of which need updating such as living accommodation but more worryingly a review of business expenses particularly when not reimbursed by your employer. Responses from HMRC to Making Tax Difficult (Digital) consultations will arrive in January 2017 during the busiest time of the year for many self employed people!

     

  • Brexit – Three Recommended Business Responses

    1. Be responsive, not reactive

    As markets and currencies move around consider if this might be a short term movement or a longer term trend. Volatility is the only certainty! Know the stresses your business can take and change course if needed. For example, perhaps as an importer you’ll need to start entering forward exchange contracts to help take out the uncertainty in currency movements. Build in the extra cost of doing this. If inflation starts to build up make sure you maintain your gross margins. Check with your IFA about the timing of any employer pension contributions and the assets invested in.

    2. Revisit your business model and plans

    Might you need to look at different customers and suppliers? Different pricing plans? Different staffing levels appropriate for your revised plan such as different skills or experience. For example, with a lower pound, exporting might be a new area for you to explore or focus on more. If wages increase, how will you react? Stress test this in your pricing and quotes to customers. If interest rates rise, how does this affect your pricing and cash flow? Perhaps ‘cash is king’ again and you’ll want to encourage your customers to pay you earlier.

    3. Consider possible tax changes

    With a possible election and probable Budget, there will be changes. VAT has always been controlled by the EU so expect some changes in this area which may help or hinder you. For example, if 5% VAT on electricity is taken away this might reduce your costs. However, with VAT eventually being charged on EU imports, allow for some adverse cash flow movements. Any government should want to encourage investment and growth so expect S/EIS incentives, corporation tax and capital allowances to remain supported. However, expect income tax and national insurance to increase. If so, you may want to take dividends out of your company sooner rather than later subject, as always, to its profits and cash flow needs.

    This is new territory and the trick is to navigate it well.

    We’ll continue to keep our clients up to date with developments and if you have any questions please do contact any of the On The Spot team.

  • Top Five Most Common Tax Queries

    1. Pool Car – Can my car be a company pool car?

    Unfortunately, probably not. If the car is taken home overnight by any member of staff, or you, it’s unlikely to be a pool car. If it’s taken to your staff’s home overnight ready for an early start to get to a meeting away from the office, this is acceptable but it’s not expected to be a regular predictable event. It’s probably more tax efficient to keep the car in your personal ownership and charge your company 45p per business mile.

    2. Home Office – Will this mean capital gains tax is charged on my home when I sell it?

    Probably not. If your home office is a room also used for some personal reason eg storing personal files or books, or having a sofa bed for visitors, there is no effect on the tax free status when selling your home later, as long as your home is your main residence throughout.

    3. Lunch – Can I claim the cost of lunch when working away from my office on business?

    Yes, as long as the journey is for business and you’re away from your office base long enough to need a meal, the rule of thumb being 5 hours away, then all costs associated with that journey are business costs as a sole trader or limited company. This might be coffees or meals, such as lunch. There’s no actual upper limit that may be spent, after all your business will still suffer most of the cost, but be prepared for it to be viewed as a private event if you have oysters and champagne!

    4. Salary – What salary should I take from my Limited company?

    For the last tax year, a common salary was £671 per month. This is the maximum that can be paid before national insurance is due, but at the same time still accrues a state pension credit plus some S2P credit. Overall, a very good deal. Where clients don’t have any other income and few staff  so they have enough of their £2k Annual Employer Allowance available, it’s been tax efficient to take a higher salary of £883 per month. There’s still some employee national insurance due but overall it saved £203 per director during the year. For the new tax year, similar considerations apply except the now £3k Annual Employer Allowance is only available if there’s more than director. 

    5. VAT – If I become a Limited company will I have to be VAT registered?

    No, as long as your turnover is less than £82k (now £83k). Similarly, being a sole trader doesn’t exempt you from being VAT registered. The VAT registration threshold applies in exactly the same way to sole traders, partnerships and limited companies. However, depending on your business, you may want to be voluntarily registered. And if you sell electronic services eg Apps or automatic downloads to the EU the £82k threshold is irrelevant when selling into other countries and local VAT (not UK) has to be paid. We therefore make sure we understand your business to ensure opportunities and obligations aren’t overlooked.

  • Budget2016 – Restoring Localism Within A Global Economy

    Small businesses

    Corporation tax rate reduction from 20% to 17% in 2020/21

    This helps restore the balance from the new dividend tax although you’d need to earn £57k more annual taxable profit to recover the additional £1,700 annual dividend tax many are paying from this April.

    It might make other low tax jurisdictions look less attractive, such as Ireland, and encourage international companies to have more valuable taxable activity in the UK.

    Increased higher rate tax threshold to £45k from April 2017

    This has other implications such as on capital gains tax and the dividend tax rate, so is another way to offset the higher dividend tax you’re paying from April 2016.

    Increased tax if you borrow from your company from 25% to 32.5% from April 2016

    It may be worth considering whether you should take more dividends from your company before 6 April 2016 to clear any loans from your company. Paying 25% tax may be preferable to suffering 32.5% later until you do repay the loan. This is an area which has seen many recent changes and is a source of constant irritation to HMRC. With more tax at stake, it makes it more worthwhile for an Inspector to look into this area.

    IR35 changes for the public sector

    If you’re a service provider on longer term contracts with few clients, such as an IT contractor, the plan is to ask public sector clients to decide if you’re an employee in disguise. If they do, you might decide you prefer to work for the private sector. Surely this runs the risk of encouraging good suppliers to no longer work for the public sector. 

    Abolition of Class 2 national insurance from April 2018

    However, no mention of Class 4 national insurance, the real cost of being a sole trader or partner, so we’ll wait and see whether that needs to increase from 9%.

    Business rates and commercial SDLT reduction  

    This helps small retailers compete with the internet, although more so in the Northern and Midlands ‘power houses’ than in the South East.

    Encouraging investment from external investors

    An extension to entrepreneurs relief where new money is invested from tomorrow in an unquoted company and the shares are owned for at least 3 years from 6 April 2016, capital gains tax of only 10% will be due, as it is for many officers and employees.  

    Pensioners

    Reduced capital gains tax to 20% and 10% from April 2016 (except residential property)

    This may be the group most likely to benefit from the reduced capital gains tax. if you own shares in quoted companies or unquoted companies where you’re ineligible for entrepreneurs relief, you may now wish to consider selling these investments after this April.  

    Parents

    Sugar tax

    When children are mentioned Chancellors can get away with a lot but increased prices do also affect adults on low incomes. Introducing a sugar tax on drinks and keeping duty on beer the same may have the unintended consequence of making alcoholic drinks look relatively more attractive! 

    Lifetime ISAs

    A possible alternative or complement to normal pension savings. Together with pensions auto enrolment, ‘putting the next generation first’ may turn out to be true.

    For those on low incomes benefiting more proportionately from tax free personal allowances, combined with saving (possibly with parents’ cash) in a lifetime ISA which receives a 25% uplift from the government, may be a very welcome mix of valuable government subsidy.

     

    This trend of appealing to the many rather than the few, may turn out to be a successful strategy for the Chancellor. It may also help grow the economy as long as the new dividend tax doesn’t increase any further.

     

     

  • Tax Checklist – Use It or Lose It – March 2016

    1. Pensions – up to £80k tax relief

    There is a one off opportunity to get tax relief for up to £80k pension contributions (usually £40k) for this tax year only. Check whether you might be eligible. 

    2. Pensions – earnings over £150k reduced tax relief

    A tapered annual allowance is being introduced so that tax relievable pension contributions will start to fall for people earning £150k from £40k to £10k when earnings are at £210k.

    3. Stamp Duty Land Tax – increases of 3% for second residential properties

    If you exchanged after 25 November 2015, remember to complete before 1 April 2016 to pay the current lower SDLT rates.

    4. Rented Furnished Property – wear and tear allowance abolished

    If you’re planning to replace furnishings, you can save tax by claiming the last wear and tear allowance in this tax year and claiming for actual spend in the next tax year after 6 April 2016.

    5. New Dividend Tax – owner managed companies increased income tax charge 

     You may find it makes sense to bring forward some dividends so they are paid by 5 April 2016 to save the higher 7.5% charges applying after that.

    Many people are affected by at least one of the above, so looking into the details before the end of the month will be time well spent.

     

     

     

     

     

  • (Residential) Property Is Dead! Long Live (Commercial) Property!

    If you are a basic rate taxpayer, be prepared to be taken into a higher rate tax bracket or child benefit to be taken away, effectively another tax charge.

    If we assume you’re an employee, with two children, earning a £47k salary and property profits of £3k, your gross income is £50k. Assuming your spouse isn’t earning more than £50k, you get to keep all your child benefit.

    Your £3k property rent is calculated as follows:

    Rental income  £7,000

    Interest            (£3,000)

    Agent fees          (£400)

    Insurance           (£100)

    Other eg repairs (£500)

    Profit                  £3,000

    On which you’re paying 40% tax of £1,200. If your property is worth £120k, you’re receiving a modest after-tax return of 1.5%. 

    However, this picture changes when the new rules, starting next April 2017, are fully in place in 2020. The interest of £3k above is no longer deductible and your taxable property profit doubles to £6,000.

    Your gross taxable income is now £53k. So what?

    1. More of your income is now taxed at 40%, rather than 20%.

    2. Your child benefit now starts to be withdrawn.

    On these figures the additional tax due on top of the £1,200 is:

    Child benefit withdrawn           £536

    Additional higher rate tax      £1,200

    Less 20% interest tax relief    (£600)

    Additional tax                         £1,136

    Your modest after-tax return is now reduced to £664 (£3,000 profit – £1,136 new tax – £1,200 current tax) of £120k which is 0.5%!

    Similar considerations apply for taxpayers near to the £100k gross income level as you’ll start to see your tax free personal allowance allowance withdrawn at income above £100k. 

    If you rent out a furnished property you’re currently enjoying an additional tax deduction of 10% of £7,000 saving you £280 of tax. This will be withdrawn from this April 2016, reducing your net of tax returns even further.

    You may ask yourself whether it’s worth the hassle! 

    If you do still benefit from capital growth, remember that when you sell the property HMRC will require the capital gains tax within 30 days of exchange, so make sure the gap between exchange and completion isn’t longer than 30 days so you have the funds available. Please remember to include your accountant before exchange!

    You may want to look at transferring or putting new purchases into a limited company which doesn’t suffer all these changes. However, currently, banks seem reluctant to lend to these companies. 

    Commerical Property

    Comparatively speaking, commercial property is now looking very attractive. It isn’t going to suffer from any changes and also enjoys lower stamp duty rates. It can be held within a pension wrapper and benefit from those tax advantages. This may be enough to entice you to look at something different and compare the returns. After taking appropriate advice of course.

     

     

     

     

     

     

     

     

  • 2015 Autumn Statement – Your First Christmas Present?

    Instead it feels as though there have been giveaways. Is this genuine?

    It looks as though some reforecasting from the Office Budget Responsibility, including higher tax receipts, allowed George Osborne some flexibility. 

    In that case:

    What presents do we want to return to the shop?

    1. Second homes and buy-to-let properties increased stamp duty from April 2016

    Although, according to the Chancellor We Are The Builders, the Chancellor added to the pain announced in the summer, making buy-to-let properties look less and less like viable investments for many people. If you’re happy with the interest tax relief restriction going forward, the obvious action is to complete your buy-to-let property purchase before April 2016 to keep your stamp duty bill down.

    2. Capital gains tax on residential properties due by up to 21 months earlier from April 2019

    When you sell a taxable residential property, such as a buy-to-let, you’ll be paying any tax due within 1 month of completion. In practice this will involve a lot of cooperation between accountants and solicitors. Presumably if you have a capital loss to use you can include that loss in your tax calculation to reduce your tax bill? Or will you have to fund a higher tax bill until you submit your year end tax return? Or perhaps it will simply be included in your quarterly digital account? 

    3. Quarterly reporting to HMRC if you’re in business, self employed or a landlord

    Modernisation of tax administration through the planned digital accounts will require you to give quarterly figures to HMRC. This could be seen as an extension of the quarterly VAT return system. Having said that, VAT annual accounting was introduced specifically to help small businesses with turnover under £1.35m to reduce their administration costs. This and the possible further intervention required by accountants during the tax year, isn’t consistent with the message that small business red tape needs reducing and they should have less need for accountants.

    As we know these gifts are wrapped up very well, but the reality is a new real time tax return system which will require some managing. 

  • New Dividend Tax – How Will You React?

    £5,000 For Free?

    Everyone will receive £5k of dividend income at a zero rate. Your basic rate band or tax free personal allowance still gets used, but you pay £Nil tax on dividends up to £5k. Your final tax bill varies after this with the introduction of a 7.5% tax charge for a basic rate taxpayer, and a 32.5% tax charge for a higher rate taxpayer.

    Assuming a tax free personal allowance of £11k and a higher rate tax band of £43k for comparisons:

    • If you earn a salary of £43k and receive £6k of grossed up dividends (net cash received of £5.4k), your tax bill this year would be £1,350.
    • Happily, in the next tax year, £5k of the net cash dividends of £5.4k will be tax free and your tax bill will only be 32.5% of £400, or £130.
    • A fall of over £1.2k.
    • However, if you are an owner director taking a small £11k salary and grossed up dividends of £32k (net cash received of £29K), a total £43k of taxable income, your personal income tax bill this year would be £Nil.
    • Unhappily, in the next tax year your income tax bill based on the net cash dividend of £29k, after taking off £5k of tax free dividend, will be 7.5% of £24k, or £1.8k.
    • An increase of £1.8k. 

    On a £43k salary, employees are paying high national insurance, of course, which shareholders don’t pay, and this helps close that difference.

    It’s interesting to note that pensioners may also receive taxable pensions at this level, but as they don’t pay national insurance either, they receive a benefit without the national insurance downside of being an employee. 

    High Income Child Benefit Charge – £50k to £60k Taxable Income

    As the HICBC will now only refer to the net cash received without any ‘grossing up’ of dividends, those near to £50k of gross income may find their child benefit increased.

    Shareholder-directors taking a salary of £11k and net cash dividends of £40k receive a reduced child benefit in this tax year based on gross income of over £55k. Fortunately, in the next tax year, their gross income for this purpose will only be £51k. 

    Loss of Personal Allowances – £100k to £122k Taxable Income

    Similarly, the Taxable Income where the tax free personal allowance is taken away will also be based on the net cash dividend received and not the grossed up version, saving some tax for people near to these thresholds.

    How Might Shareholder-Directors Respond to this New Dividend Tax?

    Having seen how shareholder-directors are adversely affected, how might you react to this new tax?

    1. Sell your business sooner? You’re likely to pay only 10% capital gains on a lump sum, rather than be burdened with 7.5% and 32.5% on your dividends every year.
    2. Pay employer pension contributions? These save 20% corporation tax and aren’t taxed on you. Beware the limits, but they may have a place in your financial strategy.
    3. Give some shares to your spouse to at least use the £5k tax free amount, if it’s not used elsewhere.
    4. Pay more dividends in this tax year, even some higher rate ones, if you’re likely to need that level of cash for the foreseeable future, and if your company has sufficient profits after tax.
    5. Invest in more ISAs if their returns and charges warrant it, keeping as much of the £5k tax free dividends available for your own company dividends.
    6. Disincorporate and revert to a sole trader or partnership? You may find at profits of £30k to £40k the additional administration isn’t worth the reduced tax savings. The current Class 4 national insurance is 9%, but you might want to wait to see what the new Class 4 rate will be when Class 2 national insurance is abolished. And remember that at least with a company you can choose when you pay your personal income tax whereas sole traders and partners are taxed at higher tax levels in the year the profits are earnt.
    7. Revisit any home office rent charge to see whether you may still have a net £Nil profit after a rent increase. Or use up your tax free personal allowance fully, if it’s not used by salary or other income such as buy to let profits.
    8. Use your directors loans account more often? Despite both temporary and permanent tax charges, these may be a cost effective tool if you need some cash temporarily so you don’t suffer a permanent dividend tax charge.

    Conclusion

    Odd that the Office for Tax Simplification was made permanent in the same Summer Budget, when the need for accountants to work through this complexity and advise on the specific response for each client, has never been stronger.

     

     

     

     

     

     

     

     

     

     

  • How To Make Profits And Pay No Tax – Case Study #2

    If the asset originally cost £100k in 2012 was depreciated in the accounts by £95k, the accounts would show a ‘book value’ of £5k as the company expected it to be obsolete pretty quickly. Happily they happened to find a buyer in eastern Europe willing to pay £90k for this particular model. Therefore, proceeds of £90k – ‘book value’ of £5k = a profit of £85k in the company’s accounts.

    For corporation tax purposes, in this year the 100% tax allowance was low and had been used on other assets. This asset could only claim tax allowances of 18% reducing balance, the ‘normal’ rate at the time. The ‘tax value’ is therefore £54k (£100k – £18k – £15k – £13k).

    When the asset is sold, the £90k proceeds are offset against the £54k so that overall the company only claims allowances on its net spend of £10k (£100k – £90k). Some of its earlier capital allowances are reversed and £36k (£90k – £54k) is charged on the company. Happily the company can offset this by claiming 100% allowances on the replacement asset costing £60k.

    Overall, the company has made a large profit but its tax bill is £Nil:

    • Profits in the accounts are £100k, but taxable profits have become tax losses of £9k
    • (£100k profits – £85k asset book profit + £36k reversal of tax allowances – £60k new tax allowances).

    By looking at the accounts you’d expect its tax bill to be:

    • 20% of £100k = £20k tax due.

    After these adjustments there is a tax refund of:

    • 20% of a £9k loss = £2k refund from the year before.

    These are a very particular set of circumstances to illustrate that the profit in your accounts isn’t always a good indication of the tax that’s due.

     

     

     

     

     

     

  • #Budget2015 – Game, Set and Match

    Aces

    There were a few aces served up on behalf of small businesses during the ‘game’. These include:

    • The reduction in corporation tax to 18% always welcome by all businesses.
    • Permanency of 100% capital allowances for spend of up to £200k each year provides certainty in investment decisions and supports the recurring poor UK productivity conversations taking place recently.
    • The widely touted IHT (inheritance tax) saving when passing on the family home to direct descendants helps business owners who invest their profits into their family home.

    Double Fault

    However, small businesses may not be impressed with the double fault:

    • Increasing dividend tax from 0% to 7.5% on dividends over £5k within the 20% basic rate income tax band is a classic example of extending the reach without increasing the rate.
    • Add on the 32.5% rate on dividends within the higher rate band which looks the same as it is today, but is an increase from a net 25%, and you have a disincentive to incorporate, at least until the lower corporation tax rate kicks in.
    • This looks like a way to recover more tax from consultancy/freelance companies who are genuinely self employed and can arrange their remuneration tax efficiently in the same way as any other owner-director.

    Deuces

    A further disadvantage for consultancy/freelance companies but bringing some advantage to small businesses with staff:

    • Increasing the Employment Allowance from £2k to £3k saving more employer’s national insurance could encourage a small business to employ a person on a £30k salary or 3 people on a £15k salary. With part timers, under the £8k threshold, it’s not unusual for small business to have quite a few employees but no employer NI bill.
    • On the other hand the Employment Allowance will not be available at all to 100% owner-director companies who have been able to save about £200 by increasing their salary slightly. This simply revises their salary back to pre Employment Allowance levels, currently about £8k.
    • With the dividend rate changes, owner-directors will use their remaining tax free personal allowance, currently about £2k, to save some of the new 7.5% or 32.5% income tax rate on dividends above £5k.
    • They may also tip the balance to taking more dividends out this year, perhaps with employer pension contributions while you can.

    Five Setter

    It was a long game going to five sets covering other important areas such as:

    • Buy-2-let property owners by their sheer numbers are a relatively easy target to help raise more tax by restricting interest relief on buy-2-let loans to to basic rate tax and taking away the 10% wear and tear allowance.
    • Encouraging more rent-a room use of your own property by increasing the tax free income from £4,250 to £7,500, a 76% increase! Coupled with the IHT improvement is telling us to live in bigger homes and rent a room out rather than invest in a buy-to-let!
    • Bringing in non-Doms to the ‘normal’ tax net when they have either been borne to UK parents or have lived in the UK for 15 out of 20 years. Another example of extending the reach without increasing the rate.
    • Withdrawal of corporation tax relief on goodwill on acquisition of a business but allowing a lesser, non trading loss, relief on ultimate sale. An interesting way to provide a net relief, and will keep tax advisers and commercial lawyers very busy in future business sales.
    • Ensuring that when stock is sold it’s sold at market value and not a more tax efficient value agreed between both parties has clearly been identified as an area with some tax leakage.

    Winners and Losers

    Losers continue to be higher and additional rate taxpayers including consultants/freelancers. This means any future increase in the higher rate income tax threshold is very welcome providing a whole host of knock-on effects such as for dividend tax, capital gains tax, and pension reliefs. Winners continue to be trading businesses employing staff, low paid earners and many basic rate taxpayers. 

    Whether the Chancellor can continue to serve at this pace into the next Budget in March 2016, we will soon find out.