VAT and care homes, Tax on dividends, Tax services go online

This week we examined a change in HMRC’s approach regarding services provided by care homes. Those residential care homes which occupy relatively new buildings may be able to reclaim some overpaid VAT. We also looked ahead to 31 January 2018 and the tax due in respect of dividend income. Finally, we had news of more tax services moving online, and how this will affect you as a tax agent.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Tax on dividends

Directors and shareholders of micro-companies generally take significant dividends from their companies. In past tax years the practice has been to take a dividend payment sufficient to cover the taxpayer’s basic rate band, as before 6 April 2016 dividend income lying within the basic rate band attracted no further tax.

If this pattern of dividends continued after 5 April 2016, there may be tax to pay for 2016/17, as dividend tax at 7.5% will be due once the taxpayer’s total dividend income for the year exceeds £5,000.

Where the taxpayer also receives a salary or pension taxed under PAYE, HMRC will have adjusted their PAYE code to collect an estimated amount of dividend tax. HMRC will have used the dividend income received by the taxpayer in 2014/15 to estimate the level of dividends received in 2016/17.

Where the salary is very small, or non-existent, HMRC won’t be able to collect sufficient dividend tax through PAYE. In those cases, the taxpayer will have to pay the dividend tax as their SA balancing payment for 2016/17 by 31 January 2018. A balancing payment due on that date will also trigger a payment on account for 2017/18, so the taxpayer will receive a bill which is 50% bigger than they have expected. You need to prepare your clients for these large tax bills.

Where a non-earning spouse has received a large dividend, he or she may have a tax liability for the first time, and should report that dividend income on an SA tax return. Check that all the shareholders in your client companies are submitting tax returns for 2016/17 to declare dividend income which exceeds £5,000.


Student loan deductions, Login for HMRC accounts, Dividends and deceased estates

Employers inevitably have to shoulder the administration burden of payroll deductions, and so it is with student loan repayments. We have an update on the new loan repayment structure effective from April 2016, and additional changes expected later this year. Accessing the HMRC online accounts is becoming more complicated as we explain below. There is also a difficulty with dividends received by estates of deceased persons.  

This is an
extract from our topical tax tips newsletter dated 4 August
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
  
Dividends and deceased estates 
All dividends are now taxed in the hands of individuals and trustees at 7.5%, 32.5% or 38.1% depending on the taxpayer’s total level of income. This applies to estates of deceased persons as well as to living taxpayers. 

The problem is that estates in administration (and trusts) are not entitled to the dividend allowance of £5000, so all dividends received after 5 April 2016 must be taxed at 7.5% at least. There is no de-minimise amount which can be ignored, as applies to interest received (see our newsletter 5 May 2016). 

When the dividend income received by the estate is distributed to a beneficiary, the cash amount must be grossed up at 7.5% and carry a repayable credit for the tax deducted at that rate. The form R185 (Estate Income) will be revised shortly, but meanwhile Box 18 on the current form may be used to show the position. 
  
The situation is more complicated where the estate has received dividend income in 2015/16 or earlier, and distributes that income in 2016/17 or later. HMRC’s current position is that the 10% non-repayable tax credit for earlier years may be used to frank the 7.5% tax due in 2016/17. 
 
This is an
extract from our topical tax tips newsletter dated 4 August
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>>>


Dividend allowance, CIS issues, Tax Credits

Last week we examined how shares held in a micro-company can be used to spread income among family members and save tax. We also analysed the current problems with the HMRC online service for CIS, and the fixes available. Finally, we had a reminder about tax credit claims which need to be renewed this month.  

This is an
extract from our topical tax tips newsletter dated 21 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
  
Dividend allowance 
From 6 April 2016 every individual can receive up to £5,000 of dividend income per year, tax free, whatever their marginal rate of tax, by using the dividend allowance. Spreading dividends among family members can save tax, but only if the correct company secretarial procedures are followed. 

The spouse, child, or other relative of the company owner, can only receive a dividend from the company if they hold a share which entitles them to receive the dividend. In last week’s newsletter (14 July 2016) we examined what can go wrong if dividends are paid to someone who is not a shareholder. 

Your first step should be to examine the authorised and issued share capital for the company. Many micro-companies operate for years with only one share in issue. If the company owner wants to divide their shareholding with their spouse, the owner needs to hold sufficient shares in order to pass some shares on. 

This may mean more shares have to be issued. Different categories of shares will permit dividends to be paid at different rates and at varying times to each shareholder. To avoid the settlements legislation applying, the new shares should carry full rights to capital on a winding-up as well as variable dividends. 

A gift of shares between spouses or civil partners will be a no gain no loss transfer for CGT. Gains arising on gifts of shares to other individuals will be taxable, but small gains may be covered by the donor’s annual exemption (£11,100) or could be held-over under TCGA 1992, s 165. 

Shares given to employees of the company can subject to income tax as employment-related securities, but there is a general exemption from that legislation for gifts made as part of a family relationship. As an alternative to gifting shares, family members could subscribe directly for their shares. 

Although the dividend allowance taxes up to £5,000 of dividends at 0%, that dividend income is counted for the high income child benefit charge, and for £100,000 threshold that withdraws personal allowances. The tax effect on the recipient of the dividend should be calculated before the dividend is declared or paid. 

This is an
extract from our topical tax tips newsletter dated 21 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The
full newsletter contained links to related source material for this
story 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>>>


Who holds the shares, Payroll pains, Paying HMRC

For the first time in over 6 years the UK has a new Chancellor of the Exchequer. Let’s hope he takes a considered approach to any tax changes, as there are many problems to fix with our tax system, before adding new complications. We have three examples of such problems with payroll systems this week, and two issues found when trying to pay HMRC. But first we examine the mess created by sloppy work when setting up a personal service company.

This is an
extract from our topical tax tips newsletter dated 14 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Who holds the shares 
When you take on a new client do you check the Companies House record for their personal service company, if they have one?  The reality of who holds the shares may not agree with the client’s understanding. 

A mismatch can be very expensive, as Terrance Raine discovered. He was landed with a tax and penalty bill of £41,450 because he believed what he was told by the firm who set up his personal service company.    

Mr Raine was advised by a recruitment consultant to open his own limited company in order to gain work as an interim or locum manager. Raine and his partner Ms Hamilton met with Giant Accounting Limited, who offered them an off-the-shelf company (Linkdrive Solutions Ltd), and agreed to deal with all accounting, payroll and company secretarial requirements. Raine and Hamilton were told that they would hold one share each, and would be appointed as company director and company secretary respectively. 

However, Giant never completed the paperwork to allot shares to Hamilton or Raine, and technically the one subscriber share remained in the name of the formation agent. The annual returns for Linkdrive Ltd filed at Companies House, showed Raine as the only shareholder with two shares, and this continued for 10 years to 2011. The statutory accounts for Linkdrive also reflected that position.     

From 2004 to 2011 Giant prepared dividend vouchers showing equal amounts of dividend payable to Raine and Hamilton, which were declared on their respective tax returns. 

When HMRC investigated the mismatch between dividends shown on Raine’s tax returns and the shareholdings declared at Companies House, Giant initially denied there was a problem. 

The Tax Tribunal decided that Raine must have realised that all the shares were in his name as he signed the company accounts, and he should have realised that dividends can only be paid to shareholders. The tax and penalties due were confirmed.    

This is an
extract from our topical tax tips newsletter dated 14 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story 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>>>


Dividend tax, CIS and payrolled benefits, Warning about tax avoidance schemes

The 2016/17 tax year will see the introduction of new tax on dividends, and the elimination of more paper tax return forms, this time for CIS. We have advice on how to talk to clients about both of these changes. You may also want to discuss payrolling of benefits, and the latest warnings from HMRC about tax avoidance schemes. 

This is an
extract from our topical tax tips newsletter dated 11 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Dividend tax 
We explained the mechanics of the new dividend tax in our newsletter on 20 August 2015, but that was before the draft Finance Bill was published on 9 December 2015. We now have a better idea of who will be affected, and which clients you need to talk to before 6 April 2016.

Company owners 
Shareholder/directors may want to advance a dividend payment into 2015/16 to save the additional 7.5% dividend tax that will payable on the same dividend in 2016/17. However, you need to work with each client to ensure they won’t lose their personal allowances in 2015/16 (income over £100,000), or have their child benefit clawed-back (income over £50,000). 
  
The company must also have the distributable profits available to pay the accelerated dividend, so you may need to draw up management accounts to prove there are adequate profits. 
  
Some PAYE coding notices issued for 2016/17 include an estimated amount of tax in respect of the 7.5% dividend tax. It makes sense for HMRC to collect the extra tax due through PAYE rather than wait until the balancing amount of SA tax is paid on 31 January 2018. You should discuss with your client whether the level of estimated tax is reasonable and in line with the dividends they expect to receive in 2016/17. 
  
Basic rate taxpayers 
Shareholders with income within the basic rate band may not complete an SA tax return, as there currently is no additional tax to pay on their dividend income. If those shareholders receive more than £5,000 of dividends in 2016/17 there will be tax to pay, and they will have to register for self-assessment. Check the tax profile of the non-director shareholders in your family company clients, who don’t currently file an SA return.     
  
Generous donors 
The dividend tax credit is counted as part of the tax paid in respect of donations made under gift aid. When the dividend tax credit disappears on 6 April 2016 taxpayers need to check that their total tax bill actually covers the tax they have declared they pay when making gift aid donations. Those same taxpayers may also receive significant amounts of interest taxed at 0% from April 2016, so their total tax bill may be close to zero.

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

The
full newsletter contained links to related source material for this
story 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>>>


Liquidate the company, Renewals allowance, Payrolling of benefits

The Government
issued another 645 pages of draft tax legislation and notes last week.
We have picked out two issues from the draft Finance Bill 2016 which may
be relevant to your clients: whether to liquidate their dormant
companies and the new renewals basis for items used in let residential
properties. HMRC has also set a ridiculous deadline of 21 December 2015
to inform them about payrolling of benefits.

This is an
extract from our topical tax tips newsletter dated
17 December 2015 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Liquidate the company


Where a company is
liquidated the proceeds received by the shareholders are treated as
capital, after the costs of the liquidation are deducted. The
shareholders pay CGT on those proceeds at: 18%, 28%, or 10% where
entrepreneurs’ relief applies. This is a huge tax saving compared to the
dividend tax rates of: 7.5%, 32.5% and 38.1% which will apply to
distributions from a company in 2016/17.


 


The Government
wants to prevent business owners from achieving a “tax advantage” (tax
saving), by liquidating their company and starting up the same or
similar business in another vehicle. There are already anti-avoidance
rules which can be used against such phoenixing, which are explained in
HMRC’s Company Tax Manual at CT36850.


 


The draft Finance
Bill 2016 includes a new targeted anti-avoidance rule (TAAR) that goes
further than the current rules. If the TAAR comes into effect as drafted
it will tax the proceeds from the liquidation as income rather than as
capital, where all these conditions are met:


a)     a close company is wound-up and an individual (S) receives proceeds from the shares;


b)     within two years of that distribution S continues to be, or becomes, involved in a similar trade or activity; and


c)     one of the main purposes of the winding-up is to obtain a tax advantage.


 


Condition b) will
apply where the same or similar business is continued as a company, or
as a sole-trader or as partnership, even on a much diminished scale.


 


The TAAR is due to
apply to distributions made on or after 6 April 2016. Thus to be sure of
falling outside of the TAAR, the liquidation must be completed before
that date. Liquidations can take many months. If your client has a
company which he intends to liquidate to pay CGT on the funds it has
accumulated, he needs to act fast to avoid being caught by this new
TAAR.


 


Our tax experts can
advise you on whether a proposed transaction involving a company’s
shares will be affected by the draft anti-avoidance rules in Finance
Bill 2016.

This is an
extract from our topical tax tips newsletter dated
17 December 2015 (5 days before we publish an extract on this blog). it was the last one of 2015. You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story 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>>>


Dividend tax and allowance, Incorrect P11D penalty letters, VAT advice

Since the Summer Budget small company owners and their accountants have been worrying about the proposed new dividend tax and allowance. HMRC has just released some brief guidance on these proposals, which changes our understanding of how they will work, as we explain below. We also have warnings about incorrect P11D penalty letters and where to source your VAT advice. 

Dividend tax and allowance 
From 6 April 2016 the taxation of all dividends received by individuals will change significantly – pension funds, ISAs and companies will not be affected. There are still outstanding questions about the taxation of dividends received by trusts and non-resident individuals. 

There are three key facts to understand about the new dividend tax regime: 

1. The cash amount of dividend received will be the amount subject to tax – there will be no grossing up for tax purposes. 
2. The first £5,000 of dividend income per year will be taxed at 0% – whatever income tax band it falls into. 
3. Dividends received in excess of £5,000 will be taxed at 7.5%, 32.5% or 38.1%, depending on whether they fall into the basic, higher, or additional rate income tax band. 

The HMRC factsheet on the dividend allowance explains how this “allowance” will apply. It won’t work like the personal allowance, which was the impression given by the Summer Budget announcement, it will be a zero tax rate. 

Dividend income will be taxed as the highest slice of income (as now), so it will fall within the highest tax band for the taxpayer. However, within that tax band the first £5,000 of dividends will be subject to tax at 0% rather than at the rate applicable to dividends.  

Example 

In 2016/17 Harry takes dividends of £60,000 from his own company, but no salary. The personal allowance is £11,000 and basic rate band: £32,000.
Income
Tax payable
Dividend received
£60,000
£
Personal allowance
(11,000)
49,000
Basic rate band :
(32,000)
Dividend ”allowance”
5,000 @0%
0
Residue of basic rate band
27,000 @7.5%
2,025
Higher rate band:
17,000
17,000 @32.5%
5,525
Total tax payable:
7,550

It is possible that the dividend “allowance” – or zero rate for dividends – to give it a more accurate name, will fall into two income tax bands, as is illustrated in example 6 in the HMRC factsheet.  

The total amount of dividend income received will count as part of the taxpayer’s net adjusted income when calculating whether the £100,000 threshold for withdrawing the personal allowance is breached. Also parents need to count all their dividend income to test whether the £50,000 threshold for the high income child benefit charge is breached. Although the dividend income included in those calculations is the amount received, not a grossed-up amount.

This is an
extract from our tax tips newsletter dated 20 August 2015
(5 days before we publish an extract on this blog). Try it
for free by registering here>>>

Last week’s newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.