Marriage allowance, Indexation allowance, and Business rates

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The headline above is taken from our latest tax tips email for accountants in which we said:

The Budget contained little meat for small businesses, as there were few major tax changes. However, there are three important issues which you should discuss with your clients. These are; a change to the marriage allowance rules; freezing of the indexation allowance for companies, and correcting an unfortunate Supreme Court decision regarding business rates, aka the “staircase tax”.

Below is just an extract from our latest 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)

The capital gains indexation allowance adjusts the base value of an asset by general inflation, as measured by the retail price index (RPI), over the period of ownership, or since 31 March 1982 if the asset was acquired earlier. The effect is to reduce the taxable amount of the capital gain on disposal of the asset.

Indexation allowance was frozen for individuals and trustees from 6 April 1998, and was removed completely from the CGT computations of those taxpayers from 6 April 2008. The Budget announced that indexation allowance will be frozen for companies from 1 January 2018, so the last month for which indexation will be calculated on the disposal of an asset is December 2017.

It is telling that the policy paper on this issue talks about “removal” of the indexation allowance, not the freezing of the allowance, so this Budget change could be the first step to removing indexation allowance from capital gains calculations completely.

Indexation allowance can mean a company pays much less tax on a gain than an individual would pay on the same disposal.

For example, when disposing of a residential property a company would pay tax at 19% on the gain after indexation, and an individual would pay tax at 28% on the unindexed gain. If the individual is a basic rate taxpayer he would pay CGT at 18% on the portion of the gain which sits within his available basic rate band, but a significant property gain is likely to quickly use up the basic rate band. The individual can set their annual exempt amount (£11,700 for 2018/19) against the unindexed gain, which is not available to the company.

Where your client is planning to sell properties, or any other assets, out of their company it may be better to sell sooner rather than later, to take advantage of the indexation allowance while it is still available. However, transferring the ownership of a property purely to crystallise the indexation allowance may not be worthwhile, as the legal costs and SDLT (LBTT in Scotland) will eat into any tax saving.

Remember that this is just an extract from  our weekly email for accountants. 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)

Welsh taxes, Disguised remuneration settlements, and Interest rates

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In our latest tax tips email for accountants we said:

Every week we endeavour to bring you three nuggets of new tax knowledge, or at least a timely reminder. This week we have details of two new taxes to be imposed in Wales from 1 April 2018, and new guidance from HMRC about settling disputes relating to disguised remuneration. We also have a reminder that the interest rates HMRC charges on late paid tax are increasing.

Below is just an extract from that 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)

Disguised remuneration settlements

For years thousands of taxpayers took income in the form of loans from their employer, or through a less direct route such as an employee benefit trust (EBT). Many of those individuals did not understand the full implications of being taxed on the benefit of a loan, and were told the tax saving was totally legal.

Now the world is a different place, and HMRC views any “loan in place of salary” arrangement as disguised remuneration, and will seek to tax it as salary, whenever it was provided.

For arrangements entered into in 2011/12 and later years, taxpayers (or their employers) are encouraged to settle with HMRC to pay tax, NIC and interest, under ITEPA 2003, pt 7A. Where the employer has already settled the tax arising due the operation of an EBT scheme there should be no further tax or NI due from the employee.

In other cases where the loan remains outstanding at 5 April 2019, HMRC will impose a loan charge, as specified in schedules 11 and 12 of F(no.2) A 2017 (due to be passed today). This tax charge may well bankrupt some individuals, as the total of the outstanding loans will be treated as income in 2018/19. This means the majority of the loan will be taxed at higher rates than would have applied than if the loan had been taxed as salary at the time it was provided. There is no top-slicing relief mechanism. The amount of loan outstanding will be estimated by HMRC, which could be much higher than the actual amounts provided as loans.

To avoid the loan charge in 2019 the taxpayer (individual or employer) needs to settle with HMRC before 30 September 2018. HMRC has produced guidance notes for taxpayers, and separate guidance for tax agents, which explain how a settlement can be arrived at, including a payment plan.

The first step is to talk to your clients about this problem before they receive a nasty bill from HMRC. The next stage is to seek specialist advice, and our tax investigation experts will be happy to help. This is a very complex area, and the amounts of tax involved, even for one individual taxpayer, can be very large.

NIC continues, Tax repayments, and Trust registration service

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In our latest tax tips email for accountants we said:

This week we have news about two matters which may be particularly relevant for your lower-earning clients: payment of class 2 NIC and tax refunds, although all self-employed clients will be affected by the national insurance developments. We also have an update concerning access to the trusts registration service.

Below is just an extract from that 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 repayments

The first tax returns to be submitted in the tax return season are normally those which are likely to generate tax refunds for taxpayers who really need to money. However, the tax may not be repaid in the manner requested, due to HMRC’s policy regarding credit and debit cards.

Where the most recent tax payment was made by a credit card, the tax refund will be made to the same card, even if that card is not held in the taxpayer’s name. This is in line with banking industry standards for making refunds, for example when returning purchased goods to a shop.

The tax refund will be directed to the card only if tax has been paid using that card within the last nine months. Also, the total value of the tax refunds (if more than one) cannot exceed the amount of tax paid with the card.

Where the taxpayer has requested that the tax is refunded into his bank account, that request will be ignored by HMRC if the conditions for a repayment to a credit or debit card are met. This means that where the taxpayer has an outstanding debt on their credit card the tax refund will be set against the amount outstanding, and won’t be available to be spent on other things.

You need to advise your client of HMRC’s tax refund procedure, as the cash may not be available to pay your fees where the repayment goes directly to a credit card.

Tax return online filing, NRCGT penalties, and Money laundering supervision

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In our latest tax tips email for accountants we said:

Halloween normally marks the end of the paper tax return filing season, but this year that may not be the case. HMRC has amended its software to allow more tax returns to file online, but problems remain. We have some good news concerning late submission of NRCGT returns. Finally, the fees for supervision under the money laundering regulations are increasing, which may impact your practice and some of your clients.

Below is just an extract from that 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 return online filing

HMRC implemented an in-year fix to the official 2016/17 personal tax calculation on 23 October, and all tax return filing software should now have been updated to align with the new version of that tax calculation.

Contact your software provider if you haven’t received a notice to update since 23 October, but beware of links in emails which may be spoofs from software companies. The fraudsters are keen to gather login details from accountants in this way.

The revised tax calculation should allow SA tax returns to be submitted online which fell into exclusions numbered: 48 to 56 and 58 to 59 (see exclusion list version 7). This should cover the majority of the excluded tax returns. However, the exclusion list has been extended by four more categories which came to light due to work on the tax calculation fix.

There are also significant problems with exclusion number 68 which concerns the reallocation of the savings rate band and personal allowance where there is significant dividend income. Software providers have found it very difficult to program this wide exclusion. As a result, their software may block online filing of tax returns based on exclusion 68, when in fact the revised tax calculation would produce the correct result, and online filing should be permitted.

For most of the live exclusions HMRC has provided an estimate of the amount of tax which would be overpaid if the tax return is submitted online. This is useful as you can have a sensible conversation with your client about the amount of tax at stake versus extra costs for submitting a paper tax return.

Where tax returns have already been filed on paper or online, HMRC will review the tax computation and amend it where necessary to align with the fixed version of the tax calculation. If an adjustment is needed, the taxpayer, and you as their agent, should receive a revised SA302 computation and a letter advising of the correction.

Paying HMRC, Tagging accounts for iXBRL and SEIS forms

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In our latest tax tips email for accountants we said:

This week we highlight three tax compliance issues which can trip-up taxpayers and tax advisers; how to pay HMRC, how to submit company accounts to HMRC, and when you need to use a specific form to claim tax relief. The approved methods for submitting payments and company accounts are changing in the next three months, so please warn your clients.

Below is just an extract from that 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)

Paying HMRC

An essential part of your tax return service is telling your clients how much tax they have to pay and by what deadlines. This year you should also advise clients to consider how they plan to pay their tax bill, for instance by; cheque, credit/debit card, or electronic transfer.

Taxpayers who normally pay their tax liabilities due on 31 January by personal credit card, will need to pay before 13 January 2018, as HMRC won’t accept payments by personal credit card after that date. Payments by corporate credit cards will continue to be accepted.

This change is required to comply with the EU Payment Services Directive 2, which comes into effect on 13 January 2018. This Directive prohibits all organisations who accept credit card payments, including HMRC, from recharging the associated fees back to their customers, or in this case – taxpayers. There are fees for paying by credit card which vary considerably according to the type of card used (see link to schedule).

Some taxpayers prefer to pay their tax by cheque, either by sending a cheque in the post with an appropriate payslip to HMRC, or by paying at a Post Office counter with a pre-printed payslip from HMRC.

The Post Office counter service is being withdrawn from 15 December 2017. This will particularly affect small companies who pay their corporation tax in this way, as HMRC’s official position has been not to accept cheques in the post for corporation tax, although cheques that arrive are usually cashed.

Taxpayers will still be able to pay their tax liabilities at a bank or building society branch by cash or cheque, but they need the HMRC printed payslip to do this. The facility to print a payslip still exists on HMRC archived pages (see below), but this DIY payslip can only be used for cheque payments sent by post, not those made by at the bank counter.

Accounting for an APN, Flat rate scheme for Farmers, and Trust Registration Service

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In our latest tax tips email for accountants we said:

Tax solutions generally have to be found to solve issues arising from accounting transactions, but when an Accelerated Payment Notice (APN) is received, an accounting solution must be found for this tax-generated problem, as we explain below. There is good news for farmers who use the special VAT flat rate scheme for their industry, and further good news for tax advisers who are trying to register trusts with HMRC.

Below is just an extract from that 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)

Flat rate scheme for Farmers

If you have clients in the farming or forestry sectors you should be familiar with the VAT agricultural flat rate scheme (AFRS). It’s an alternative to regular VAT for farmers, and is designed to compensate farmers for the VAT they suffer on purchases by simplifying the cashflow.

Under the AFRS the farming business is not VAT registered, so it can’t reclaim VAT on its input costs. Instead the business charges a flat rate addition (FRA) at 4% on its qualifying sales to VAT registered businesses, who reclaim the FRA as if it was VAT. The farmer keeps the 4% FRA he charges on his sales. The scheme has been around for years, but HMRC don’t publicise it.

HMRC has routinely cancelled farmers’ entitlement to use the AFRS where their earnings under the scheme substantially exceed the input VAT which they would have been able to deduct if they were subject to normal VAT arrangements. This is not one of the conditions which precipitate compulsory cancellation of the AFRS set out in the VAT regulations.

Shields and Sons is a farming partnership which was removed from the AFRS by HMRC in 2012, as it had benefited from the scheme by approximately £375,000 over seven years. Shields challenged HMRC’s decision, and eventually won their case when it reached the European Court of Justice (CJEU).

The CJEU confirmed that the UK doesn’t have a general discretion to remove individual farmers from AFRS where they are simply recovering more using the scheme than they would under standard VAT accounting rules. The European VAT Directive does allow the exclusion of “categories” of farmers, but not those who are simply good at working the system.

The CJEU also said that a farmer must be able to objectively assess, in advance, if he can legitimately expect to meet the criteria to access and to remain in AFRS. Excluding successful farmers from the AFRS on the basis that their reward from the scheme is “substantially more” than that of another farmer does not meet the objective criteria of being a “category” of farmer.

If you have farming clients who have been incorrectly removed from the AFRS, they may now be entitled to a repayment of VAT, or compensation, from HMRC. The Government could decide to lower the FRA from 4% to another percentage, or once the UK has left the EU, scrap the scheme altogether.

MTD update, VAT option to tax and Directors’ loans

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In our latest tax tips email for accountants we said:

This week we examine the available information about MTD for VAT, and which businesses will be affected. HMRC has made some changes to the procedure for opting to tax a property for VAT purposes, which we describe below. Finally, we have good news about accounting for directors’ loans, and a reminder of the tax treatment.

Below is just an extract from that 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)

Directors’ loans

Loans to and from directors in close companies can cause all sorts of tax problems, but since the accounting standard FRS 102 came into effect for accounting periods starting on and after 1 January 2016, such loans can cause accounting problems as well.

The good news is that the Financial Reporting Council has proposed an amendment to FRS 102 (FRED 67) to apply to loans to a small company from a director/shareholder or a close family member of that director/shareholder. In such cases the value of the loan should be measured at transaction price rather than at net present value, which would be calculated using a market rate of interest. This amendment will have retrospective effect from 1 January 2016. In essence the amended FRS 102 treatment means those loans are accounted for as they were traditionally, at historical cost.

Remember where the director lends a significant sum to the company, those funds need to be used for a trading purpose, before the company can claim a tax deduction for the interest paid. There is a danger that if the cash sits in the company’s bank account doing little, company’s activities may be regarded as making investments rather than trading, and its shares will not qualify for entrepreneurs’ relief on disposal.

PPR – No minimum period, Livery business qualified for BPR, and Still entitled to child benefit?

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In our latest tax tips email for accountants we said:

This week we take a look at the private residence relief and whether a minimum period of residence is necessary to secure the relief. We also take a look at the factors which enabled a livery business to qualify for business property relief. Finally, there is a reminder to update HMRC’s of the educational status of a child’s age 16 or over so that child benefit is not lost.

Below is just an extract from that 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)

Still entitled to child benefit?

Practitioners with clients in receipt of child benefit may want to remind them to update their child’s educational status if their child is age 16 or over and is continuing in full-time education or undertaking an apprenticeship. Child benefit can continue to be claimed in respect of teenagers aged 16 to 19 who are in approved education of training. This must be full-time (more than 12 hours a week) and will include study for A levels, Scottish Highers, NVQs up to level 3 and traineeships in England. However, it does not include higher education, such as study for a university degree or a BTEC Higher National Certificate. Approved training includes foundation apprenticeships.

If HMRC are not told that a child is staying in education or training, child benefit will crease automatically. Details can be updated through the taxpayer’s personal tax account.

Where a client (or client’s partner) is liable for the high income child benefit charge (which bite where income is at least £50,000 and claws back all child benefit once income reaches £60,000), it may be preferable to stop receiving the benefit than to receive it initially only to have to pay it back.

Simple assessments, Insurance policy gains, and Reliance on an accountant

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In our latest tax tips email for accountants we said:

We take no pleasure in knocking HMRC, but shoddy work has to be called out. This week we highlight the very poor HMRC guidance concerning simple assessments, and a fault in HMRC’s tax calculation software which means taxpayers who receive insurance policy chargeable event gains may pay the wrong amount of tax. However, accountants can also make mistakes, and we have a brief summary of where the taxpayer stands if his accountant fouls up.

Below is just an extract from that 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)

Insurance policy gains

When the taxpayer has cashed in a premium life insurance policy or bond, this may create a “chargeable event gain”. This lump sum is taxed as the highest slice of the taxpayer’s income not as a capital gain.

Top slicing relief attempts to put the taxpayer in the position he would have been in, had the lump sum been paid in equal amounts in each year of the bond’s life. It doesn’t exactly achieve that, but it’s a good approximation.

The relief is arrived at by comparing two tax computations:

A. Add the chargeable event amount to other income received in the year, and tax it at the highest marginal rate, less basic rate tax.

B. Divide the chargeable event by the number of years of the bond, calculate the tax due for one year using current year’s tax bands, allowances and rates, deduct basic rate tax and then multiple that answer by the number of bond years.

The top slicing relief is: A – B, which is deducted from the actual tax liability for the year.

However, when HMRC do calculation B the software ignores the savings allowance and any applicable savings rate band. In some cases the HMRC calculation also ignores the taxpayer’s personal allowance. This is incorrect, and leads to understated top slicing relief.

If your client has received a chargeable event gain in the last few years do not rely on your tax return software to calculate the gain, or on HMRC’s figures. The correct result will only be achieved by going back to first principles and following the tax law to the letter. Our personal tax experts can help you with that.

Support for mid-sized businesses, Employment expenses and Investors’ relief

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Our latest tax tips email for accountants started:

HMRC is apparently stepping into the business advice arena this week with a new service aimed at mid-sized businesses. We explain what advice this will cover, and whether you should be worried. We also have an update on the latest HMRC guidance concerning employee expenses involving salary sacrifice, and investors’ relief.

Below is just an extract from that 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)

Investors’ relief

This form of capital gains tax relief was launched in the 2016 Spring Budget as an extension of entrepreneurs’ relief (ER). It allows the investor to qualify for the 10% rate of CGT on the disposal of unquoted shares, like ER. The lifetime cap for the amount of gains which can be covered by investors’ relief is £10 million, the same as, but in addition to the lifetime cap for ER.

The conditions for investors’ relief must generally be met for the entire period for which the shares are held, unlike the ER conditions which only have to be met for the last 12 months of share ownership. The investor must have the investors’ relief conditions in mind when he subscribes for his shares, and he must understand how changes in his relationship with the company could jeopardise his ability to qualify for the relief on disposal of those shares.

It is thus disappointing that HMRC took until this week to release detailed guidance on investors’ relief, which is now found in their Capital Gains manual at CG63500.

An individual or trustee can qualify for investors’ relief if they subscribe for ordinary shares on or after 17 March 2016, and hold those shares for a continuous period of at least three years to date of disposal, which cannot be before 6 April 2019.

The investor mustn’t be an employee of the company when he acquires the shares, but he can become an employee of that company at least six months later, as long as that employment was not a condition of acquiring the shares. The investor can be an unpaid director of the company, as long as he had not transferred his own self-employed trade into that company.

The investor must not receive any significant value from the company in a four-year period that starts one year before he subscribes for the shares. The definition of value in this context is tight and mirrors the strict conditions for EIS shares.

If your client would like to take advantage of investors’ relief you should read the detailed guidance in the HMRC manual, or speak to one of our capital gains tax experts.