Inaccuracy penalties, Scottish tax bands, The Santa clause

Even in the middle of the SA tax return season, HMRC continue to issue penalties for errors in past returns. In many cases those penalties can be suspended, and we have some tips to help you achieve the best outcome for your client. We also explain how the Scottish income tax bands for 2017/18 will work. Finally, in case you have not completed your Christmas shopping, we have a reminder of the “Santa clause” regarding tax-free gift vouchers for employees.

What follows is an extract from our weekly tax tips as explained in the box at the side (or below if you’re viewing this on a mobile device)

The Santa clause

If your clients are feeling generous towards their employees this Christmas, you can advise them to provide each employee with a gift voucher worth up to £50. These vouchers are tax and NI free, if certain conditions are met, and a company can even give tax-free vouchers to its directors.

This tax-free gift possible due to the new statutory exemption for trivial benefits, which applies from 6 April 2016 (see page 4 of Employer Bulletin). The vouchers must not be exchangeable for cash, so if the shop allows the customer to receive change in cash when using the voucher, it doesn’t qualify as a tax-free trivial benefit.

Also, the gift vouchers (or other non-cash benefit) must not be given as reward for services. So the employer can’t say to his staff; “If you finish all the orders by 24 December I’ll give you each a voucher”. He has to surprise them with the gifts, but he doesn’t have to give the same amount to everyone in order to make it tax-free.

The company can also be generous to its management, but the directors and their families can only receive up to £300 of tax-free trivial benefits per tax year. There is no limit to the number of tax-free vouchers an employer can give to other staff members, as long as each gift is not worth more than £50.


VAT flat rate scheme, Pensions recycling, Employee shareholder scheme

The Autumn Statement included three announcements which may have an almost immediate impact on your clients. You need to talk to all those clients who use the VAT flat rate scheme, as changes from 1 April 2017 may make it uneconomic to use. Individuals who have drawn some pension benefits, but who are still employed, could be caught out by changes to the pensions recycling rules. Investors who are planning to use the Employee Shareholder Scheme need to be aware that the rules have changed from today.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Employee shareholder scheme

Under the employee shareholder scheme (ESS) employees can receive shares in their employing company if they sign an employee shareholder agreement under which they surrender a set of statutory employment rights, including redundancy pay. The employee receives up to £2000 worth of shares free of tax and NIC, and the company can claim a tax deduction for the cost of supplying those shares.

When the taxpayer disposes of his ESS shares the first £100,000 of gains are exempt from CGT. If the ESS shares were awarded under an employee shareholder agreement signed before 16 March 2016, the CGT exemption was restricted to £50,000 of ESS shares, as valued on acquisition. This effectively gave an unlimited CGT exemption on disposal of the shares, as £50,000 was a huge amount of ESS shares to acquire.

There has been no restriction on who could receive the ESS shares; the shares could be awarded to existing shareholders, even those who hold a material interest in the company. So rather than being a way to incentivise ordinary employees, the ESS has been used by equity investors to award themselves tax-free shares in fast growing companies. Those investors are not concerned with surrendering their employment rights, as they generally have control of the company they invest in.

The Government has finally realised that the ESS has not been used for the purpose it was intended. It has removed the income tax, NIC and CGT reliefs for employees, but only in respect of ESS shares awarded under employee shareholder agreements entered into on or after 1 December 2016. Where the employee had already taken advice regarding the employee shareholder agreement before 1.30pm on 23 November 2016, that agreement can go ahead with the tax relief in place if it is signed by 2 December 2016.

The corporation tax deduction for the employing company remains in place. Also the CGT exemption for ESS shares already issued remains.


Misleading gov.uk, Class 2 NIC back payments, Employment allowance

Oxford Dictionaries has declared the 2016 word of the year to be: ‘post-truth’. Bear this in mind when searching for information on gov.uk, or advising clients about what they may have read. Our tax tips this week include a number of ‘post-truth’ examples from gov.uk that could impact advice you give clients. We also have tips on how to deal with a deficiency in class 2 NIC, and some practical advice for claiming the employment allowance.

As usual we have summarised below one of the 3 tax tips we shared by email with our general practice accountant subscribers last week. Further details are in a box on the right.

Class 2 NIC back payments

From 2015/16 onwards the self-employed are due to pay class 2 NIC alongside their self-assessment. This has caused all sorts of problems with the HMRC computer.

The correct amount of class 2 NIC for 2015/16 is normally £145.60 (52 x £2.80), but in some cases the computer thinks it should be £179.40 (52 x £3.45) which is the special rate for share fishermen.

Occasionally the tax computation includes a nil liability for class 2 NIC, although the self-employed profits exceed the small profits threshold of £5,965. When questioned HMRC say the taxpayer hasn’t been registered for class 2 NIC. Where the taxpayer can prove he has paid class 2 NIC for earlier years, the HMRC position should be challenged without delay. If HMRC’s record of class 2 NIC payments for the taxpayer is incorrect he will not receive the level of state pension he is expecting.

There are taxpayers who haven’t paid class 2 NIC for many years, as the underpayment was never chased up, or they didn’t realise they had to pay class 2 and class 4 NIC. For those cases the taxpayer should be advised to pay the class 2 NIC due for as many years as HMRC will accept. This will be a minimum of six years, and the payment will generally need to be paid by 6 April 2017, but the deadline may be longer if the taxpayer is close to retirement age.

If the taxpayer has decades of unpaid class 2 NIC, look at the case of Richard Thomas. He won the right to pay voluntary class 2 NIC back to 1976 as he had been badly advised, and HMRC had not chased for payment.


Effective date for CGT, VAT on pre-registration assets, New deemed domicile rules

Last week we drew a lesson from an accountant who should have known the law when advising a client about CGT. HMRC has back-tracked on claims for repayment of VAT relating to assets acquired before registration. Also, just in case your American clients are thinking of staying the UK, we have a brief review of the changes to the deemed domicile rules from April 2017.

This is an
extract from our topical tax tips newsletter dated 10 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

New deemed domicile rules

All the rules you know about domicile and deemed domicile for UK tax purposes will be rewritten with effect from 6 April 2017. The new law will extend the deemed domicile treatment to all UK taxes, not just IHT.
UK residents who enjoy non-dom status will be deemed to be UK domiciled, if they have lived in the UK for at least 15 of the preceding 20 tax years. Also any UK residents who were born in the UK with a UK domicile (former domiciled resident or FDR), but have chosen to adopt a foreign domicile, will have their domicile of choice ignored for tax purposes. Those FDR taxpayers are treated as UK domiciled from 6 April 2017 however long they have been UK tax-resident.
These changes mean the remittance basis will no longer be available to many people who live in the UK, so those individuals will be taxed on all their worldwide income and gains, whether or not the offshore funds are remitted to the UK. The remittance basis remains (and doesn’t have to be claimed) for individuals with less than £2,000 per year of unremitted foreign income or gains.
The years to count for the 15/20 test are all years of UK residence, including split years and years when the individual was aged under 18. To shake off the deemed domicile treatment for income tax and CGT the taxpayer will have to become non-resident for six entire tax years. However, only four tax years of non-residence will be required to shift deemed domicile for IHT purposes.

You need to talk to all your non-domiciled clients about these changes as soon as possible, as transactions undertaken before 6 April 2107 could undermine transitional reliefs available from that date. Our expat taxation experts can help you understand the implications for your clients.

This is an
extract from our topical tax tips newsletter dated 10 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Simple assessments, NI for offshore workers, Professional conduct

Every week we endeavour to find three practical tax points which are relevant to your practice. This week we have uncovered a new form of tax assessment which can be issued for 2016/17 onwards, and changes to the NIC regulations for overseas and offshore workers. We also alert you to a new version of the tax advisers’ code of conduct: Professional Conduct in Relation to Taxation (PCRT).

This is an
extract from our topical tax tips newsletter dated 3 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Simple assessments 

Do you remember how personal tax worked before self-assessment? The Inland Revenue would raise an estimated tax assessment; the taxpayer would appeal, a taxreturn would be submitted and eventually the figures would be agreed, then the taxwould be paid. HMRC seem to have turned the clock back to pre-SA days with a new power to raise ‘simple assessments’, from 15 September 2016 (FA 2016, Sch 23, s 167). 
A simple assessment is made by HMRC not by the taxpayer, so it is the opposite of a self-assessment made alongside a SA tax return. HMRC can raise a simple assessment when it has information that the taxpayer has received income or gains which are not taxed under PAYE, but that taxpayer hasn’t submitted a SA tax return for the year, and is not due to submit a SA tax return. 
HMRC envisage that simple assessments will be used where the taxpayer’s main source of income is taxed under PAYE, but he also has up to £10,000 of other taxable income or gains. This income threshold is not set in the legislation. 
The taxpayer will have 60 days to query the simple assessment or such longer period as HMRC allow. The tax due will be payable by 31 January after the tax year end, or if the simple assessment is issued after 31 October following the tax year, the tax will be payable three months after the date of the assessment. The taxpayer will not have to make payments on account after receiving a simple assessment, as would be the case when making a SA tax return. 
It is likely that any explanation of the tax demanded on a simple assessment will only be available in the taxpayer’s personal digital tax account, which you may not have access to. There is no guidance available from HMRC about how simple assessments will work in practice, but HMRC does have the power to raise them for 2016/17 and later years. 
If you come across a simple assessment, do contact one of our personal tax experts for guidance.

This is an
extract from our topical tax tips newsletter dated 3 November
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


IHT nil rate band, Statutory maternity pay, Errors in PAYE accounts

Tax reliefs and benefits have to be targeted, in order that the tax advantage is restricted to the class of taxpayers whom Parliament intended should be the recipients. The complex rules sometimes create unexpected outcomes, as can be seen with the residential nil rate band for IHT, and the calculation of statutory maternity pay. In last week’s newsletter we also highlighted a problem with certain online PAYE accounts maintained by HMRC.

IHT nil rate band

The IHT nil rate band (NRB) has been frozen at £325,000 per person since 6 April 2009, and is set to stay at that level until 6 April 2021. However, to meet an election promise to increase the IHT exemption to £1m, a separate residential nil rate band (RNRB) is available to set against the value of the family home for deaths from 6 April 2017.

The RNRB starts at £100,000 per person in 2017, and increases by £25,000 each year to £175,000 in 2020 (coinciding with the next general election). When the RNRB is combined with the NRB of £325,000, the individual has £500,000 of IHT-exempt wealth, or £1m for a married couple.

HMRC has recently published guidance on the RNRB, which is worth reading, as taxpayers could miss out on this relief if they make gifts in the wrong order, or to the wrong people.

The RNRB only applies to a home (or its value) given to one or more direct descendants on death, either under a will, by intestacy, or via a deed of variation. The executors of the estate can sell the home and pass the value to the descendants, and the RNRB still will apply.

If the home is held in a trust, you need to check who the beneficiaries of the trust are, as the home must be treated as part of the deceased’s estate on death to qualify for RNRB. A home caught by the ‘gift with reservation of benefit’ rules (ie the donor lives there after giving it away) will qualify for RNRB, as the home is treated as part of the deceased’s estate although it may be legally owned by another person.

The RNRB does not apply if the home:

  • was given to the relative during the deceased’s life, so is a potential exempt transfer (PET);
  • is transferred into a trust on death to be held until the beneficiaries reach a certain age;
  • is given to someone who is not a direct descendant, such as a niece or god-child;
  • has never been a home of the deceased (eg is an investment property).

There are further complicated rules that apply where the home was sold on or after 8 July 2015 in order to downsize, or for the owner to move into rented property such as a care-home. Please ask one of our IHT experts for advice on this tricky area.


Trivial benefits, VAT on market stalls, Taxable employee expenses

There are many influences which add to the constant changes for the UK tax system, but the top three are; new tax legislation, rulings in tax cases, and alterations in HMRC practice. We had examples of each of these last week; new rules about trivial benefits enacted by FA 2016, VAT treatment of market stalls decided by an Upper Tax Tribunal, and changes to the P11D proceeds effective from 6 April 2016.

This is an
extract from our topical tax tips newsletter dated 27 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Trivial benefits 

For years HMRC has applied a concessionary tax exemption for trivial benefits provided by employers to their employees. This exemption has been given statutory backing in ITEPA 2003, ss 323A-323C, introduced by FA 2016, s 13 with effect from 6 April 2016. 
The new rules are actually very generous. The employer can provide a trivial benefit to any employee without having to justify his reason, on as many days in a tax year as he wishes, although there is a cap on the value of benefits provided to close company directors and their families (see below). 
If the benefit meets the following three conditions it can be paid with no tax or NIC for employee or employer, and business can claim tax deduction for the cost. The benefit must: 
a) cost no more than £50; 
b) not be a reward for services or in any way contractual; and 
c) not be cash or voucher which can be exchanged for cash. 
In theory the employer could provide a £50 gift voucher to every employee on every working day of the year, but that is likely to be seen as a reward for services, so it would break condition b) above. 
HMRC have provided some detailed guidance on these new rules which includes examples of the wide range of situations in which the trivial benefit exemption can be used. It is certainly worth reading to help answer clients’ questions in this area. 
Directors and office-holders of close companies are only permitted to receive up to £300 of trivial benefits per tax year. That total includes the value of trivial benefits provided to the director’s family members. This allows the company to buy six £50 gift vouchers to give to the director/shareholder at intervals (they must be separate gifts), who is then free to spend or distribute those gift vouchers as he wishes.

This is an
extract from our topical tax tips newsletter dated 27 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Maternity Allowance, Intermediaries reporting, VAT on meals

Last week we had three examples of how ordinary people and businesses are not well served by our incredibly complex tax system. We explained how self-employed women may lose their entitlement to the maternity allowance, and how employers can be fined for not telling HMRC that nothing was paid. We also had a cautionary tale of a business which was set up to help housebound individuals but was hit with a VAT bill.

This is an
extract from our topical tax tips newsletter dated 20 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Intermediaries reporting 
Since 6 April 2015 employment agencies and employment intermediaries have been required to report payments to workers they place with third parties, or find work for, if those workers are not paid under PAYE. We outlined the conditions for this reporting requirement in our newsletter on 9 July 2015. 
Note that personal service companies (PSC) who supply only one worker are not considered to be employment intermediaries for this purpose, so don’t have to report. If the PSC supplies more than one worker it will fall under this reporting requirement, if it also doesn’t operate PAYE on all the workers’ payments. 
The report must include details of: 
  • The agency’s name, address and postcode; 
  • The worker’s name, address, NI number (if held) UTR number; 
  • The worker’s engagement and payment details, including the customers’ details in most cases; and 
  • why PAYE was not applied 
The report must be submitted online using a report template provided by HMRC, which essentially is a spreadsheet in the form of a ODS or CVS file. There may be commercial software available which can do this. 
The report can be submitted for periods to suit the agency, but it must be supplied at least for every quarter in the tax year, within one calendar month of the end of the reporting period. For the quarter to 5 October 2016 the report must arrive with HMRC by 5 November 2016. 
If the agency has not supplied any workers in the period it must submit a nil report by the deadline. Many employment intermediaries are not aware of this requirement. 
HMRC has the power to issue stiff penalties for late reports.
Our employment tax experts can advise on how to appeal these penalties and how to meet the reporting requirements.

This is an
extract from our topical tax tips newsletter dated 20 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


MTD: quarterly reporting, MTD: software and costs, State pension top-ups

We generally don’t discuss tax proposals which are still at the consultation stage in this practical tax update, but we are making an exception this week to answer some key questions about the Making Tax Digital (MTD) proposals. We also have some good news about topping-up a state pension.

This is an
extract from our topical tax tips newsletter dated 13 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

State pension top-ups

Only individuals who have paid sufficient NIC for the requisite number of tax years can qualify for the maximum state pension. The number of tax years required depends on when the individual attained state pension age (SPA). Those that reach SPA on or after 6 April 2016 need to have paid NIC for 35 full years, but where the individual was contracted out for any part for their working life they may receive less state pension than they were expecting.
You can help your clients budget for their retirement by using the online state pension checker facility. Where NICs have been missed for certain tax years, the missing amounts can often be replaced using voluntary NIC payments, as detailed in the excellent guide from Royal London.

This top-up facility is particularly useful for individuals who have retired before they reach SPA or have missed contribution years by living overseas. Spouses and civil partners of members of the armed forces, who accompanied their partners when posted overseas, can apply for NI credits toward their state pension for tax years back to 1975/76.

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Requirement to send HMRC leaflet, CGT for non-residents, VAT responsibilities of online markets

We live in an interconnected world; your UK-based clients may have investments in other countries, and non-resident clients may have invested in UK property. We have tips on actions required in respect of both categories of investor. Clients who run online marketplaces also need to know about new VAT rules, which will impact their businesses.

This is an
extract from our topical tax tips newsletter dated 6 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

VAT responsibilities of online markets 
From 15 September 2016 online marketplaces (such as Ebay and Etsy) can be held jointly and severally liable for VAT which remains unpaid by overseas businesses which sell through those sites. 
The basic VAT rule is that overseas retailers must pay UK VAT on goods they sell which are stored within the UK at the point of sale. This rule has always applied, but it has not been enforced effectively. Hence overseas suppliers have been able to undercut UK traders on price. 
In VAT terminology an overseas supplier which has no place of business in the UK is referred to as a non-established taxable person (NETP). The NETP must register for VAT from its first sale in the UK, as there is a zero VAT registration threshold for such supplies. 
Any NETP whose home base is outside the EU can now be required to appoint a UK-based VAT representative, which may in turn be made liable for any unpaid VAT due by the NETP. However, the online marketplace through which the NETP sells its goods can also be made liable for the VAT due to be paid by the NETP. HMRC say it will normally pursue the overseas business first before issuing a notice for joint and several liability for VAT to the online marketplace. The marketplace business will be given a 30-day warning to allow it to take action against the errant trader to either secure the VAT due, or ban the trader from the site. 

Businesses who run online marketplaces need to ensure that all traders who are based outside of the UK provide evidence of their VAT registered status. 

This is an
extract from our topical tax tips newsletter dated 6 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>