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Author: Rick_admin

  • How To Make Profits And Pay No Tax – Case Study #1

    Imagine you’re a consultancy business with a few staff. After receiving tax efficient investment funds under SEIS (not available to large companies) you purchased top quality computer equipment for £80k for your staff to use and spent £120k on research & development into groundbreaking consultancy software.

    Your profit for last year was made up of:

    Sales             £400,000

    Costs           (£220,000) (£120k R&D + £100k salaries/other costs)

    Depreciation (£20,000)

    PROFIT         £160,000

    If you know the corporation tax rate is 20%, you might expect your company tax bill should be £32,000.

    However, a few adjustments are required to know how much tax you should pay.

    Profit            £160,000

    Depreciation  £20,000 (Ignored for tax purposes)

    AIA                (£80,000) (Capital allowances which replace the Depreciation – 100% of the computer equipment cost)

    R&D             (£156,000) (Tax enhancement available to small businesses)

    TAX LOSS    (£56,000)

    Your profit of £160,000 has become a tax loss of £56,000! You’ve become a tax avoider!

    This and other tax avoidance is perfectly legal. 

  • #Budget2015 – Sugar and Spice and All Things Simplification?

    Sugar

    Pensions, ISAs and Savings again featuring as good things deserving of encouragement and flexibility.

    If, despite the increased cash ISA thresholds, you still have some interest in a normal bank account, from April 2016 you can earn up to £16,800 and not pay any tax on the interest you earn. If you earn more than this and less than £42,700, interest over £1,000 is taxed. Therefore if you earn £1,500 of interest you have a mixed picture of £1,000 not taxed and £500 taxed which could result in too little or too much tax paid. This may be more easy to deal with in the proposed new digital tax accounts announced today – see Simplification below.

    The AIA 100% tax relief for capital investment will continue to be generous covering most small business capital expenditure requirements.

    Spice

    The large pension pots threshold subject to tax is falling to £1m. This equates to 25 years of paying the new maximum £40,000 current tax free contribution threshold, ignoring investment returns. Therefore, if you pay the maximum for most of your working life you’re likely to exceed the new threshold. 

    With Entrepreneurs Relief potentially worth £1.8m of tax during a taxpayer’s lifetime, it’s perhaps inevitable the Government needs to tie up perceived loopholes. Today, these were identified as property used in a business but owned personally benefiting from the 10% tax that now require a 5% share disposal at the same time. And those having an indirect holding in a trading group through a joint venture or partnership must also own 5% of the trading entity.

    With higher tax free income tax personal allowances, more Gift Aided donations are likely to be taxed on the donor. Donors who don’t pay income tax need to know not to Gift Aid their donations as they make them.

    Simplification

    We all thought RTI was a way of making sure benefits paid are as accurate as possible. It now seems it was the groundwork for major reporting and tax online simplifications.

    Digital tax statements are proposed for many taxpayers by pre-populating an online record with PAYE income, bank interest, pensions for the taxpayer to disagree or agree with. HMRC’s record in similar areas isn’t 100% accuracy so taxpayer checking is highly recommended.

    Partnerships can’t currently file online using HMRC software, so presumably they won’t be included in this simplification.

    Accounting information from software could be directly fed into HMRC’s digital portal so HMRC can populate your tax record during the tax year. This might fit in with VAT cash accounting and small businesses who choose to cash account. They will have most value if the end result can be fed in, after the agent has reviewed the records and included any other claims. For businesses with losses, claims would still need to be considered and made by the taxpayer. Perhaps another area for simplification later on?

    Class 2 NICs are the mechanism for the self employed to get a credit towards the build up of their state pension. By abolishing Class 2 NICs there will need to be another route, presumably through the online digital form.

    Abolishing the need for PAYE Dispensations, taxing employment benefits through RTI, and allowing non-cash benefits of up to £50 per person to be made without any tax effect [EDIT: This hasn’t yet been legislated], are all very welcome administration savings for small businesses. 

    HMRC will look very different in a few years time where most staff will need to be focussed on being helpline/online friendly, rather than exchanging polite hard copy letters. 

     

     

     

     

     

  • Are You A #Tax Avoider?

     1. Did you pay £50,000 or more to an accountant/adviser/bank to set up a scheme or provide funds?

    2. Have you set up an additional company or are you carrying out an additional transaction that you wouldn’t otherwise have done?

    3. Are you really a second-hand car dealer? Or do you have another very full time job such as a Radio 1 DJ?

    4. Does a large amount of money move around in a circle and come back to you, minus fees paid to the accountant/adviser/bank?

    5. Are you spending a lot of time changing how you run your business or personal life just because you’ve been told to?

    6. Do your advisers talk about Tax Counsel’s opinion?

    Probably out of these, 2. is the most problematic.

    If you’re a shareholder and a director in your own company, and you pay yourself dividends out of taxed profits, but could have taken a salary instead, is this included? No. You really are a shareholder. Your company really made profits. And you really decided to take a dividend. Paying a dividend is one of several normal choices available to a shareholder-director.

    Different to all of the above is tax evasion which is simply not telling HMRC about income you’ve earned or pretending you’ve spent more money. This has and always will be illegal and often confuses the debate!

     

     

     

     

  • 5 Reasons To Submit Next Year’s #Tax Return In April 2015

    Here are some good reasons to get next year’s tax return in quickly:

    1. You may be due a tax refund. If so, don’t you want that cash in your account rather than HMRC’s? Refunds do occur quite often even for employees. Often the tax code was wrong or you paid more tax deductible costs such as charitable donations than the year before.

    2. If HMRC need to ask questions, they have 12 months from the date you file the return. So, if you submit it on the 6 April 2015, HMRC have to ask questions by 5 April 2016. Firstly, HMRC is likely to regard an early filing as a good thing. Secondly, they need to be very organised to get their notice to you that early in the tax calendar. Thirdly, you have more certainty that your tax bill is an agreed thing.

    3. With more time far away from a deadline, the job isn’t rushed and fewer errors are likely to arise.

    4. More time also allows you and your accountant to not only review your tax position, discuss your business and your future plans, any resultant advice, such as making tax efficient investments, can be made at the beginning of the next tax year, in good time with proper consideration.

    5. You can enjoy the summer and Christmas, for once!

     

     

     

  • The Good, The Bad & The Ugly – Autumn Statement 2014

    Public opinion has played a strong role in the Chancellor’s statement today and perhaps his announcements made at the Commons film set today can be summarised into the Good, the Bad and the Ugly.

    The Good – Property Owners, Savers

    At last the stamp duty system has been modernised, so it doesn’t distort the property market with a more logical % being charged in each band rather than on the whole property price.

    Savers can enjoy passing on their ISAs on death to their spouse who can continue to receive interest and dividends free of tax. With the higher cash threshold introduced recently, and previous years’ build up of balances, the tax potentially saved will be very welcome.

    Low and middle income earners enjoying a further £100 tax free personal allowance than previously announced or was that an excuse to repeat the Good news?

    The Bad – Non-Doms, Google/Amazon etc.

    These groups continue to be on the hit list. The charge a Non-Domiciled resident pays for the privilege of living here without paying tax on income kept abroad eg footballers will increase.

    If Google/Amazon etc are found to have moved profits abroad, tax at 25%, higher than the normal 20% charge, will apply. This doesn’t mean the UK will get 25% of what it thinks these profits are. It seems there’s a lot to discuss before that happens.

    The Ugly – Taking ‘Too Much’ Tax Relief

    This isn’t just about aggressive schemes, but now includes routine tax planning and use of reliefs when the government sees them becoming too successful or it’s a good soundbite in an election year.

    Sole traders when incorporating their business into a limited company have often enjoyed a good result all round from little capital gains tax on the sale to their company and the company getting tax relief on the amount paid to the owner. HMRC have presumably pointed out this is wrong and the Chancellor has agreed for all transactions effective from today.

    Banks can’t escape their past wrong doings and although restricting their losses to 50% when offsetting them against future profits sounds good now, I wonder what sort of precedent this sets for an arguably retrospective change because all companies have this expectation at the time they make the loss. Perhaps none of us, if the country’s finances don’t improve sufficiently, can rely on losses being offsettable in the future.

  • 3 Reasons Halloween Is More Scary Than The TaxMan

    1. Children (and adults) come to your door demanding treats.

    OK, I agree that HMRC does the same for cash and more of it, but at least there there are some rules in place as to what they can take and when.

    There’s no limit to the number of sweets which have to be handed out, and only sweets or chocolate are the acceptable currency. Don’t try fruit which I did one year…..it didn’t end well.

    2. You can be taken by surprise.

    OK, HMRC can do this too. However, with good advice and taking some care over the details, this shouldn’t happen.

    Whereas with Halloween you don’t know who’ll be at your door next, asking for what, and there are no letters in advance giving you time to gather your thoughts.

    3. You can’t complain.

    If HMRC get it wrong, there are ways to complain, appeal and even involve your MP.

    Tonight none of us can complain to anyone. Not even the parents who are often hiding round the corner encouraging Johnny to demand his treats.

    Happy Halloween?!

  • Open Letter To #HMRC – Why Taxpayers Need Accountants

    Dear HMRC

    Taxpayers have benefited from recent changes allowing cash accounting for sole traders and simplified company reporting. The press releases accompanying these changes talk  a lot about simplification, with the sub-text that enterprise Britain enables small businesses to deal easily direct with HMRC and companies house. There is no need to pay an accountant so say the politicians.

    The reality for small business owners is very different.

    Start ups are continually surprised that they need several different tax references for one business.

    Can’t the PAYE, corporation tax, income tax, VAT, companies house references be linked up. Why do I have to set up all these different Gateway links? How do I know if I’ve missed anything? Do I really have to file a PAYE return every month showing no tax due on separate software? I didn’t receive my corporation tax reference. Why doesn’t HMRC provide software for partnerships? Do I really have to find a private partnership software provider, pay for it and download that separately?

    Once we’ve set ourselves up online, does there need to be a screen requiring attention every time just to tell me when I last logged in? And to see my tax return on screen, do I have to attend to two screens stating Privacy Guidelines and Download Speeds, every time I log in?

    If you get past that, try filling in a Corporation Tax return (CT600).

    Clearly prepared by 3 different departments, but then stuck together afterwards. Why else would you need to enter your Turnover to the software 3 times? Can’t there be a pick up? Taxpayers don’t know what a Participator is. Can’t you just say Shareholder? Do you really care about small charitable donations when I’m making a profit and does a whole page have to be devoted to it? I’ve been told I can claim tax relief for goodwill, but there’s no sign of the write off in the deductible expenses. Small businesses can be in the VAT flat rate scheme but the income/costs this scheme generates aren’t mentioned in the expenses. Although apparently we’re all trying to take a deduction for salaries paid more than 9 months after the year end.

    Many small companies have a share premium account (or should have) but the CT600 doesn’t allow this. You have to go to the companies house version to get that included.

    Apparently lots of small companies have Franked Investment Income (they don’t) which requires my attention if I want to pay the correct 20% corporation tax rate. And don’t forget you have to notice the question requiring you to claim the 20% corporation tax in the first place. The software doesn’t want to make that leap on its own. If you don’t know the capital allowances rules, good luck relying on the software. It can’t work out £Nil brought forward, spend, allowance and then a £Nil carried forward. You have to pretend you have an opening balance to get the correct result.

    Latest complication

    Simplification can’t be a priority when new VAT rules – from the EU – require start ups with any turnover at all (including below the UK £81k threshold) trying to provide e-services to other EU countries to register for VAT in each of those countries. Definitely one for penalties down the line.

    Enterprise Britain is good at software and e-services but in the throws of setting up and trying to earn exports for the UK, it has to remember to deal with this. Governments expect gratitude for the MOSS simplification but forget that the rule in the first place is too complicated! These returns are required quarterly so businesses can’t make the most of VAT annual accounting specifically designed for them.

    Summary

    It’s simplification for governments and HMRC, for their benefit. It’s not simplification for the taxpayer. The taxpayer still needs an accountant to navigate through the rules. You don’t know the result until you go through the hoops and after that there might be a change such as the MOSS rules which take you by surprise.

    Yours sincerely very tired

    Tax Payer

    Director of The Coal Face Limited

  • #Budget2014 (Small) Makers. Doers. Savers. + Investors?

    The Chancellor chose this headline, but I think Investors also get a look in.

    (SMALL) MAKERS

    I take this to be businesses. In fact, it’s largely small to medium companies that benefit from today’s announcements being the changes to AIA, SEIS and R&D.

    What are AIA, SEIS and R&D?

    AIA – Enables all businesses to spend up to £500k on plant & machinery and to receive a 100% tax allowance on all that expenditure. The effective date is this April 2014, but take care with the unnecessarily complex transitional rules.

    Companies should also take care about the effect on deferred tax which will restrict the ability of your company to pay tax efficient dividends.

    SEIS – This has now become a permanent feature. Your start up company can continue to attract tax efficient investment in your company shares.

    R&D – The Research & Development repayable tax credits for small companies have been increased from 11% to 14.5%. This is very welcome for small companies desperate for cash at the beginning of the investment cycle. It’s now time to bring this into the main stream tax consideration, and ensure you aren’t eligible, rather than think this is for other companies. And make sure you are a company as this doesn’t apply to sole traders/partnerships.

    Please note this applies from 1 April 2014, so you might want to delay some expenditure if this is possible at this late stage.

    DOERS

    I presume these are employees. Acknowledging that there are too many 40% taxpayers by getting the tax thresholds closer to April 2012 levels wef from April 2015, helps the hard hit middle income earners.

    The childcare costs announced several times helps employees but doesn’t help owner-managed businesses, where the current voucher scheme is more valuable. Make sure you set up a voucher scheme now, so you can continue to use it after the new scheme comes in.

    SAVERS

    A big nod to savers that the government is On Your Side.

    From 1 July 2014, the ISA threshold is £15,000 whether it’s cash, shares or a mixture. This will save higher rate taxpayers a lot of tax over several years. As interest rates increase, this becomes more valuable.

    From April 2015, allowing £5,000 of interest income to be taxed at 0% is worth up to £2,250 per year if it applies to a 45% taxpayer. This might encourage small business owners to charge their companies interest on a director loan in credit. The company saves 20% corporation tax, but the owners may not be taxed on the interest income.

    With the higher personal allowance and basic rate band effective from April 2015, small business owners might benefit from delaying a few dividends this year to benefit from a 0% net tax rate, which might otherwise have been taxed at a net rate of 25%.

    INVESTORS?

    Perhaps this includes pensions, as these are more like investment vehicles than any other. A massive improvement to the flexibility of defined contribution schemes fits in with a modern working pattern where many people no longer retire fully at a certain age.

    SEIS – This is very valuable for high net worth individuals looking for a better return than bank deposits and quoted shares. It’s good to see it’s a permanent part of the investor’s options.

    As many of today’s favourable announcements apply from April 2015, we can only speculate what will be announced in the March 2015 Budget, a few months before a general election.

  • Autumn Statement – AKA The Pre-Budget Budget

    Today’s Autumn Statement was more of a mini Budget than usual. Presumably due to the recent pressure being applied by the opposition.

    The good news for businesses is that taking on an under 21 year old won’t cost you any national insurance, but only from April 2015. In the meantime, if you can’t wait, you can employ anyone on up about £22k (or more than one person on lower salaries) from April 2014, and, under a previously announced measure, this won’t cost you any national insurance either. Both rules will continue into April 2015, so you could arrange your workforce to cost you no national insurance at all.

    It has at last been recognised that small retailers need help in competing against the Internet. Potentially, the most valuable relief is a 50% reduction in rates when re-occupying an empty property. Being able to pay rates in monthly instalments may also be helpful for some.

    Despite the stated aim to simplify tax, we now have another class of national insurance: Class 3A. This is nothing to do with employment or business, but it’s worth knowing that there’s another route to topping up your additional state pension, if necessary.

    A surprise change to the capital gains rules on homes means that the 3 year rule helping to exempt many homes from some/all of its capital gains tax, is being reduced to 18 months. This means that if you no longer live in your residence and you let it out before selling it, you can only have the last 18 months of the letting period tax free, together with the actual period of your residence. This indicates a certain amount of impatience with second home owners and the reduced tax they pay.

    It’s also worth noting there are now plans to make inheritance tax returns online. This will save executors a lot of time and hopefully speed up the whole process with HMRC.

    HMRC might need this help too, seeing as they are under a lot of pressure to continually find more tax from new anti avoidance measures. Identifying, challenging, and retrieving this tax due isn’t easy, particularly within these time frames. Expect a more aggressive attitude in certain areas.

  • #Tax Myth 13 – Your Income Is The Same For All #HMRC Purposes

    #Tax law is set up by different politicians at different times to achieve different aims, so we often end up with a strange mix of outcomes.

    You may know what your Income is for income tax & national insurance purposes, but what about pension purposes? Child benefit high income charge? Childcare vouchers?

    Here’s a list of the main sources of income and when they’re applicable when dealing with #HMRC:

    Salary, Bonuses & Benefits

    • Income tax
    • National insurance – Class 1
    • Employee pension contributions
    • Childcare vouchers
    • High income child benefit charge
    • Working tax credits

    Sole Trader/Self Employed Profits

    • Income tax
    • National insurance – Class 2
    • National insurance – Class 4
    • High income child benefit charge
    • Pension contributions
    • Working tax credits

    Dividends – Gross

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Interest Income – Gross

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Property Profits

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Pensions Received, Including State Pensions

    • Income tax
    • High income child benefit charge
    • Working tax credits

    Points To Note

    1. The gross dividend is the amount you received plus the tax credit of 1/9. So for a £100 dividend, you use the higher non-cash figure of £111.11.
    2. The £300 is deducted only once from this income added together.
    3. The tax free personal allowance is not deducted when considering thresholds such as the £50k-£60k adjusted net income for the high income child benefit charge.

    Strange Mix Of Outcomes

    1. When calculating your/your partner’s adjusted net income for the high income child benefit charge, or your working tax credit income, remember to deduct self employed losses, gross gift aid and gross pension contributions (a net £100 gift or contribution becomes £125 gross), but not most property losses! And not in the same way as for income tax purposes!
    2. The childcare voucher thresholds ignore dividends, so you may be able to pay more tax free childcare vouchers from your own company than you thought.
    3. Pension contributions paid by employees are restricted according to salary, bonuses and benefits, but employer contributions don’t have the same limitations (there are others). Your own company may therefore prefer to pay employer pension contributions (after seeing an IFA).
    4. With the new simplified cash accounting for unrepresented self employed sole traders effective from April 2013, these cash based profits are presumably the ones to use for working tax credits and other #HMRC purposes? They will probably be the same for the new universal credit system as we already know that requires monthly reporting of cash based profits.
    #taxisfun