Payrolling of benefits in kind, Public sector contracts, Pension scheme surcharges and IR35

In our most recent tax tips note we examined two more issues which you may need to discuss with your clients before 6 April 2017: payrolling of benefits, and contracts for services provided to the public sector. We also looked at traps concerning pension savings and how to access them. Don’t let your clients get tripped up by the complex rules in this area.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every month.

Payrolling of benefits in kind

Some employers have been taxing certain benefits in kind through the payroll (known as “payrolling”) for some years. From 6 April 2016 payrolling became a statutory choice for all employers, as we explained in our newsletter on 11 February 2016.

When benefits are payrolled they don’t have to be reported on the form P11D after the end of the tax year, and the employee’s PAYE code doesn’t have to be altered during the year. Where a company car is payrolled the employer is not required to submit a P46(car) during the tax year.

As employees are likely to be in receipt of benefits in kind before payrolling of the benefit starts, HMRC need to know which employees and which benefits are to be payrolled before the start of the tax year. HMRC will then amend the PAYE codes of those employees to take out the benefit in kind, otherwise the employee would be taxed twice on the same benefit.

To inform HMRC of the detail of which employees and which benefits are to be payrolled, this data needs to be submitted to HMRC using an online service set up for this purpose. The employer has to do this, as facilities for agents have not been built into this service. Ideally this information needs to reach HMRC well in advance of the beginning of the tax year, to allow sufficient time for the 2017/18 PAYE codes to be altered.

HMRC are hosting three short interactive webinars to explain payrolling on 16, 17 and 21 February. Please note that the article on payrolling in the latest Employer Bulletin (issue 64) contains some inaccuracies. Our employment tax experts are happy to answer any of your questions regarding payrolling.

Pensions protection and advice, MTD: Accounting periods and commencement, Scottish tax bands

In last week’s tax tips email we noted that you had just under eight weeks to review all the tax elections which need to be submitted by 5 April 2017. One of those elections is required to protect the taxpayer’s pensions Lifetime Allowance, which can be expensive if ignored. Now is also a good time to review your client’s accounting year end. Would they be better off changing their accounting date to 31 March to prepare for MTD reporting obligations? Finally, we reviewed the Scottish tax bands for 2017/18. Below we provide an extract of the second of the 3 tax tips we shared last week:

MTD: Accounting periods and commencement

Let’s take a closer look at exactly when MTD reporting requirements will start. We know the Government is insisting that unincorporated businesses, who are not exempt from MTD (turnover £10,000 or less – not confirmed), or permitted to defer for a year (turnover limit TBA) will commence MTD reporting from April 2018.

The draft legislation makes it clear that commencement of MTD reporting will be tied to the business accounting period (see new TMA 1970, Sch A1, para 14). This says that the regulations will not impose a requirement on a person or partnership…in respect of any period of account beginning before the tax year 2018/19.

This means a business with an accounting period that starts on 1 April will not be required to make MTD quarterly reports until the period that starts 1 April 2019. Its first quarterly report covers the three months to 30 June 2019 and will have to be submitted by 31 July 2019.

Conversely, an unincorporated business which draws up accounts to align with the tax year, will have to commence MTD quarterly reporting from 6 April 2018. Its first quarterly report will cover the three months to 5 July 2018 and will be due to be submitted by 5 August 2018. Perhaps your clients want to consider changing their accounting date to 31 March. The business will need to comply with the rules for changing accounting basis period (see BIM81045), but this could be an opportunity to use any overlap relief which arose on commencement of the business. Unincorporated property lettings businesses are required to draw up accounts to the tax year end.

What to do if you missed the tax return filing deadline

The Tax Advice Network is warning taxpayers that they will need a ‘reasonable excuse’ to avoid penalties and interest charges if they missed the 31st January filing deadline for personal self-assessment tax returns.

You are legally obliged to file a tax return if you received an official notice to complete one. You are also obliged to tell the taxman if you had any untaxed income or capital gains that are subject to tax.  The deadline of 31st January 2017 was the filing deadline for tax returns in respect of the tax year that started on 6 April 2015 and ended on 5 April 2016.  If you have had untaxed income or capital gains since then you will need to report these on a tax return for the current tax year that ends on 5 April 2017.

The minimum penalty for filing late is £100 even if you do not have to pay any tax. The penalties increase over time and interest will be charged on any late paid tax.

Chairman of the Network, Mark Lee, explains that “Whatever your reason for missing the deadline, the taxman’s computer will charge the penalty and you will need to pay this unless HMRC later accept that you have a ‘reasonable excuse’.  HMRC are known to have very strict rules as to what they will accept is ‘reasonable’ in this context.”

HMRC’s guidance means they do not accept the following excuses for late filed tax returns:

  • you found the HMRC online system too difficult to use or you left it to the last minute and couldn’t quite work it all out under pressure
  • you didn’t get a reminder from HMRC
  • you made a mistake on your tax return which means you need to correct things after the filing deadline

Excuses that ‘may’ be accepted tend only to be where something outside of your control prevented you from filing ahead of the deadline. For example:

  • your partner or another close relative died shortly before the tax return or payment deadline
  • you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
  • you had a serious or life-threatening illness
  • your computer or software failed just before or while you were preparing your online return
  • you had provable service issues with HMRC’s online services
  • a fire, flood or theft prevented you from completing your tax return

Mark Lee warns that before accepting your excuse, “HMRC will require two things:

1 – Proof or evidence that your excuse is true and not made up.  This might include confirmation from doctors or hospitals re medical issues, and technical reports from IT consultants re computer issues.

2 – Proof or evidence that you made every effort to file your tax return asap after the deadline.”

What to do now?

Whether or not you have a ‘reasonable excuse’, you should aim to file your tax return as soon as you can.

If you need help and can afford to pay for any accountant or tax adviser to help you, you can choose from any of the 100 members of the Tax Advice Network – which is spread across the UK. Members of the Network can also advise you as to the merits of your ‘excuse’ and give you advice to ensure that you don’t pay too much tax. Simply use the search facility on the home page here >>>

Alternatively if you do not want to pay for help and advice you can talk to HMRC by calling their Self Assessment Helpline on 0300 200 3310 (open 8am-8pm Monday to Friday and 8am-4pm Saturdays).  Make sure you have your Unique Taxpayer Reference (UTR) number to hand.



What we know about MTD, New cash basis, VAT on failed venture

The changes required to comply with reporting under making tax digital (MTD) will have a significant impact on your clients over the next five years. IN last week’s tax tips email we summarised what we know about the MTD plans, and what is still to be clarified. The Government has also announced new rules and thresholds for the cash basis, to take effect from 6 April 2017. Finally, we had a useful lesson about reclaiming VAT on business costs. It is just the cash basis point we have summarised below:

New cash basis

Reporting under MTD is going to be so much simpler if the business uses the cash basis rather than the accruals basis to draw up accounts. Hence the Government wants to widen the scope of the cash basis, and extend a version of the cash basis to landlords.

Currently any unincorporated trading business (not LLPs or property businesses) with turnover under the VAT registration threshold (£83,000) can start to use the cash basis. The business does not have to switch to the accruals basis until the turnover reaches twice the VAT threshold. This entry threshold will be increased to £150,000, and the exit threshold will increase to £300,000 from 6 April 2017.

When advising clients to use the cash basis remember that deductions for interest payments are prohibited, for amounts exceeding £500 per year. Also, there is no sideways relief or carry back of losses when using the cash basis.

The extension of the cash basis to landlords will apply by default to all unincorporated landlords from 6 April 2017, who have an annual turnover of no more than £150,000. Landlords, particularly of furnished holiday lettings, may want to opt out of the cash basis and use accruals accounting, in order to claim capital allowances. The landlord will be able to opt of the cash basis on a property by property basis.

The version of the cash basis for landlords will permit deductions for interest paid using the same rules as for individual landlords who use the accruals basis. Thus, the interest restrictions for individual landlords due to apply from April 2017 will apply equally for all individual landlords in the cash basis or not.



Time to pay, PAYE liabilities, Jointly held property

At the end of January many people are worried about their tax bills. We have some tips on how to agree a time to pay arrangement with HMRC. If a company has failed to pay PAYE, we explain the circumstances in which that debt can be transferred to the company’s directors. Looking forward to April, we discuss how couples may want to rearrange their holding of joint property.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every month.

PAYE liabilities

When a company goes into liquidation leaving PAYE debts, HMRC can pursue the company directors for the unpaid tax and NIC. They do this by issuing “directions” against named directors under reg 72 of the PAYE regulations 2003 and reg 86 of the Social Security regulations 2001.

If your client is faced with such a direction, check whether these three pre-conditions for the direction have all been met:

  • The employer did not deduct PAYE
  • The failure was wilful and deliberate
  • The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax.

For NIC the director has to know that the employer wilfully failed to pay the NIC, rather than just to deduct it.

Where the PAYE debt has arisen because the director’s overdrawn loan account has been discharged by the crediting of salary, the PAYE may have been calculated but not necessarily deducted, as the bookkeeping entries alone do not constitute a deduction of PAYE. This was the conclusion of the judge in the case of S West v HMRC who decided in favour of the taxpayer.

In a similar case: P Marsh & D Price, the directors were found to be personally liable for the PAYE debt as they were aware that the company did not have the funds to pay the PAYE liability. Our employment tax experts can help you assess whether your client has a good defence against a PAYE or NIC direction.

Don’t rush to file your tax return before 31st January this year

The UK’s 9-year-old Tax Advice Network has controversial advice for anyone rushing to complete self-assessment tax returns this weekend. “It’s better to file right and late than on time and wrong”. This advice follows the release of figures via an FOI request that HMRC fined almost 30,000 people for filing incorrect tax returns last year.

Chairman of the Tax Advice Network, Mark Lee, explains “As the annual self-assessment tax return filing date looms so does the pressure to file your return before the deadline. But it is rarely a good idea to rush things.  If you beat the 31st January deadline and it later transpires that your tax return was wrong you could be liable to a sizeable penalty. If you file a complete and correct tax return at the start of February you will only be charged £100.”

Last year over a million tax returns were filed over the final weekend before the 31 January deadline and 8% of self-assessment tax returns were filed late.

Hundreds of accountants talk of new clients asking for help in January so that they can avoid the late filing penalty. Other accountants are doing their best to complete the tax returns for long-standing clients who leave things to the last minute.

Lee continues: “A good accountant will do their best to help you but they are not miracle workers. It takes time to collate all relevant data, check for inconsistencies, clarify issues and complete a tax return so as to keep tax bills to the legal minimum.”

If HMRC considers you were careless they will charge a penalty of upto 30% of the extra tax even when a tax return is filed ahead of the 31 January deadline . The penalty can be upto 70% of the tax at stake if HMRC determines that you have deliberately underestimated your tax. Much better therefore to pay the £100 and to take the extra time to ensure that your tax return is correct when you file it a little late.

Separate to these fines is the interest that HMRC charges on late paid tax. Lee advises: “Pay an estimate of the tax you will owe before 31st January. This will reduce the interest you will pay on any late paid tax. You can do this even if your tax return is not ready to file by the deadline”.

If you need help to prepare or finalise your tax return; or if you want advice on what you can do to reduce your tax bill, use the Tax Advice Network website to find a local tax specialist or accountant to help you. You may even find someone who will help you beat the deadline!

Not registered for SA, Negative earnings, New ATED rates

There are always people who turn to you in January when they suddenly realise they need to submit a tax return for the first time. We have tips below on how to cope with those new clients. We also look at HMRC’s new guidance on negative earnings for employees, and the new ATED rates which are due to apply from 1 April 2017.

What follows is just an extract from last week’s tax tips for accountants – see more details in the side box and sign up to get your 3 timely, topical and commercial tax tips.

Not registered for SA

Every January one or two come knocking on your door (or land in your inbox) asking for help with their tax return. If the taxpayer has been issued with a tax return (or notice to submit one) and has a UTR number, you should be able to help him submit the return online.

However, where the taxpayer hasn’t registered with HMRC and doesn’t have a UTR number, his tax return can’t be filed online. It is now too late to apply for a UTR number to activate it by 31 January.

The errant taxpayer should have notified HMRC by 5 October 2016 that he needed to submit a tax return for 2015/16. HMRC can issue a penalty for late notification, but that penalty is tax-geared. If the taxpayer pays all the tax due for 2015/16 by 31 January 2017, no penalty is due. Also, if all the tax is paid within 12 months of the due date, any late notification penalty should be reduced to nil, if a full disclosure has been made without prompting from HMRC.

The problem is; how pay this tax and make the full disclosure if the online route is blocked. You can submit a paper tax return. Where the taxpayer hasn’t been issued with an SA return or notice to submit a return, a late filing penalty can’t apply.

The tax return submitted must include the taxpayer’s NI number, and be accompanied by a form SA1 to register for self-assessment. If the taxpayer has started a new self-employment, form CWF1 should be completed, but you can do this online, you don’t need the UTR number for that form.

The tax can’t be paid online without a UTR, but it can be paid by cheque posted to: HMRC, Direct, BX5 5BD. Write the taxpayer’s NI number on the back of the cheque and include a specific HMRC payslip, created using the link below. Allow at least three days for the cheque to arrive, and get a proof of posting certificate from the Post Office.

You may have to chase HMRC by phone to get the tax allocated to the right account, but that can wait until February.

Missing child benefit, Missing interest, Payments on account

When rushing to complete the last few tax returns, it is tempting to skip that vital stage of thinking what could be missing. Two examples of missing items are: child benefit, and interest paid as part of a PPI settlement. We explained the implications of such omissions in last week’s tax tips email. We also had news of a fault in HMRC’s computer system which affects reductions in payments on account for 2016/17.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device).

Missing interest

Three years ago we advised you about the taxation of settlements of payment protection insurance (PPI) claims – see our newsletter on 13 February 2014. Many thousands of people received such payments, and most believed that the entire payment was tax free, so it would have no effect on their tax liability.

In reality the settlement will have included interest calculated at 8% on the PPI premiums refunded. That interest is taxable, and some banks deducted basic rate tax, but other lenders did not, see examples in HMRC’s savings and investment manual. In either case the interest portion of the PPI settlement should be declared on the taxpayer’s return for the year in which it was received.

HMRC have now woken up to the fact that many taxpayers forgot about the PPI interest when completing tax returns, so they have written to around 10,000 individuals asking them to check the interest entries on their 2014/15 returns. You won’t have received a copy of this letter, as it was not copied to tax agents, even where an agent was appointed to act.

A statement from HMRC said the letters were targeted using information from banks, financial institutions, third party intermediaries and social lenders. However, this data could only be matched to taxpayers using names and addresses, as NI numbers were not recorded by the interest payers. It is possible that some of the letters will have been mis-directed.

HMRC’s letter does not mention PPI, so it may fail to jog the memory of the recipient. If your client has received such a letter, certainly double check whether their regular bank interest was correctly recorded, but also ask them about any PPI settlement they may have received.

The 2014/15 SA tax return can be amended online until 31 January 2017. Corrections for earlier years will have to be notified to HMRC by letter.


CGT on overseas properties, Paying PAYE, NMW traps

As you finalise the last of the SA tax returns for 2015/16, pay close attention to any capital gains relating to overseas property. The correct computation of such gains is not obvious, as we explain below. We also have tips for paying PAYE, and a warning for employers concerning the next scheduled increase in the national minimum wage.

What follows is an extract from last week’s tax tips email for general practitioner accountants – see side box for more info.

CGT on overseas properties

Calculating the CGT due on the disposal of a property is not easy; you need to know which expenses can be deducted, and if any tax reliefs are due. If the property was located overseas, the computation is complicated by the fact that the consideration, and possibly the purchase, are likely to have been made in a foreign currency.

If your client has sold an overseas property you should check that the gain has been calculated in line with HMRC guidance and case law, as any deviation from the approved method will leave the taxpayer open to penalties for errors.

Mr & Mrs Knight calculated the gain on the disposal of their property in Switzerland in Swiss francs, and translated the resulting gain into sterling at the exchange rate applicable on the date of disposal. This appeared logical, as they purchased the property in 1988 in Swiss francs, and sold it in 2010 for consideration received in Swiss francs.

However, it was established in Capcount Trading v Evans [1993], that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.

This method of calculation pulls in any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-gain also subject to CGT. This may appear unfair, but that is how the computation must be done.

Whenever a client disposes of an overseas property, you also should check that any income received from letting the property has been correctly declared on their earlier tax returns. This is the first question HMRC will ask when they see the gain from the property disposal reported.

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.