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.


Owner managed company, Alcohol wholesalers and producers, Labour providers warning

Now is a good time to help your clients plan their taxable income in 2016/17. The rules for NIC, and tax on dividends are changing, so all arrangements for extracting profit from owner-managed companies must be reviewed. Clients who sell alcohol wholesale need register with a new Government scheme, which you can help them prepare for. Finally, we pass on a warning about VAT fraud in labour supply chains.

This is an
extract from our topical tax tips newsletter dated 4 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Owner managed company 
The combination of tax and regulation changes coming into effect in 2016/17 mean that every small company should review the remuneration strategy for its owners. Let’s look at each factor briefly: 
  
Salary 
Paying a salary just below the NIC primary threshold of £8060 will preserve entitlement to the state pension, and incur no employee or employer’s NIC. Any payment above the secondary threshold (£8112) will incur employer’s NIC, but where the company has only one employee the employment allowance won’t be available to cover that NIC.   
  
Dividends 
Any dividends received by a shareholder in excess of £5,000 will create a tax charge for that person being 7.5% more than they paid on the same cash dividend in 2015/16. As the 10% dividend tax credit is abolished, the shareholder will be able to receive more cash as a dividend before tipping into higher rates of tax (32.5% on dividends). 
  
Rent 
Rent is taxed at the normal rates of: 20%, 40% and 45%, but without NIC. Where the premises the company trades from are owned personally by the shareholders, a payment of rent should be considered as an alternative to some dividends. The company will receive a tax deduction for the rent paid. But entrepreneurs’ relief on the gain arising on the premises could be restricted, if the building is sold alongside company shares in the future.     
  
Pensions 
As a person aged 55 and over has complete flexibility to withdraw cash from their pension fund (subject to charges), employer pension contributions are a very attractive option for the older director. The contribution is tax deductible for the company and attracts no tax or NIC for the employee, as long as the individual’s pension annual allowance is not exceeded. This favourable treatment of pension contributions may not last.   
  
The ideal combination of these factors will vary for each owner/ director, according to their personal income needs and the profitability of their company. Our personal tax advisers will be happy to talk through the implications of each type of payment in greater detail. 

This is an
extract from our topical tax tips newsletter dated
4 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.
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