New £1000 allowances, Car or Van, and Trusts

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In our latest tax tips email for accountants we said:

This week we look at what you need to know about the two new £1,000 trading and property income allowances, which are due to take effect retrospectively from 6 April 2017. We also look at the definition of a commercial vehicle for income tax purposes, which could be useful for clients who drive what they believe are vans. Finally, we share news about the new trusts registration service, and why clients should be cautious of income trusts.

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)

New £1,000 allowances

The second Finance Bill for 2017 is on its way through Parliament, and it’s expected to be passed by Christmas. This Bill contains almost all the provisions which were cut out of the first Finance Bill 2017 before the General Election, including the provisions for £1,000 annual allowances for property and sundry income.

These two allowances work in a very similar way. The default position is that the allowance covers gross income before expenses of up to £1000, and that income is treated as nil, in the taxpayer’s tax computation.

The taxpayer is not required to claim the allowance, but he can elect for the allowance not to apply, by first anniversary of normal SA filing deadline. In this case the allowance is not is not given, and the taxpayer deducts allowable expenses in the normal way, and pays tax on any net profits.

The taxpayer can also elect for partial relief of the allowance, in which case the £1000 allowance is treated as a flat deduction, and any gross income over that amount is taxable.

Neither allowance can be set against income that would qualify for rent-a-room relief, or against partnership income. The property income allowance can’t be set against income from residential property where the interest restriction applies from 6 April 2017.

Also, neither allowance can be used against payments to the taxpayer from his employer or from the employer of his spouse or civil partner. Similarly, the allowance can’t be set against payments from a close company, where the taxpayer is a participator in that company or an associate of a participator. This prevents the allowances being exploited to extract a further £2,000 pa tax free out of the taxpayer’s own company.

CIS Support, Corporation Tax payments and HMRC Communications

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HMRC are gradually forcing all communications with the department to be performed electronically. There is a new online CIS-repayment system, and a new two-step security process to follow before tax returns can be filed. HMRC is also nudging companies to pay electronically by taking away alternative means to pay CT. We also have news of changes to the way corporate losses can be relieved.

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)

Corporation tax payments

Companies with an accounting period ending on 31 December need to pay their corporation tax for 2016 by 1 October 2017. HMRC has made that task more difficult this year by ceasing its practice of issuing a reminder containing a CT payslip to those companies. HMRC has also refused to make a blank payslip available either on gov.uk or through commercial software.

If the company requires a payslip to pay their tax they should look for the most recent CT603 Notice to file form, and use the blank payslip attached to it. Any older payslips will contain incorrect bank and accounting period details.

The method preferred by HMRC is for taxpayers to pay all tax liabilities electronically

Exclusions for online filing, PAYE late filing penalties and What HMRC won’t provide

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We end this summer not with a bang but a whimper of frustration over HMRC’s changing practices which affect you and your clients. First, we have a work-around for one of the software errors which is blocking online filing of the SA tax return. We review the circumstances in which PAYE penalties will be issued in 2017/18, and finally we have an update on the information which HMRC refuses to provide to tax agents.

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).

PAYE late filing penalties

We summarised the position for late filing PAYE penalties in our newsletter on 20 April 2017. This information related to the 2016/17 tax year, but we now have a further statement from HMRC regarding how they will assess PAYE penalties for 2017/18.

The full payment submission (FPS) report is supposed to be filed on or before the day which is the earlier of:

  • the day on which employee actually gets paid;
  • date on which employee becomes entitled to his pay.

Say the employee becomes entitled to his pay on 28th of each month, but in August the payroll was run and payment was made on 29th as 28 August was a bank holiday. In that case the FPS sent on 29 August is deemed to be late as it was submitted after the day on which the employee became entitled to his pay. This rule applies even if the employee was actually paid late, i.e. on 29 August.

In 2016/17 HMRC introduced a three-day grace period for filing the FPS, and in the Employer Bulletin issue 67 they explain that this three-day grace period will continue to be applied for the whole of 2017/18. This is not an extension of the filing period. That “on or before” deadline remains as described above. It represents HMRC turning a concessional blind-eye to marginal and occasional lateness by the employer. If the employer persistently files the FPS late, but within 3 days of the due date, he will receive an online penalty warning from HMRC and be considered for a penalty.

It’s worth reminding clients that late filing penalties start at £100 per month for the smallest payrolls, and rise to £400 per month for payrolls with 250 or more employees. One late filing within the tax year is permitted before any penalty is assessed.

The first PAYE penalties for 2017/18 will be issued in September 2017 for the PAYE periods ending in the quarter to 5 July 2017. Penalties are sent to employers by letter, not by email or GNS message (the electronic messaging service within PAYE online). However, an appeal against the penalty can be submitted through PAYE online, or by letter.

You can appeal on behalf of your client, but don’t forget to take a screen-print of the appeal including the reasons given as there is no print function in the online appeals mechanism.

Offshore assets disclosure letters, Failure to prevent tax evasion and R&D Claims and disclosure

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We had some serious topics to discuss in our latest email; first the obligation to write to clients about their offshore interests, and HMRC’s action in this area. Secondly; the introduction of the corporate criminal offence of failure to prevent tax evasion, which could impact your firm and your clients. Finally, a new deadline for submitting revised R&D tax relief claims and disclosure of information about companies which use that scheme.

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)

Offshore assets disclosure letters

In our newsletter on 13 July 2017 we reminded you about your obligation to write to selected clients about declaring their overseas interests. The deadline for sending this letter is 31 August 2017.

Many financial advisers and banks have found it difficult to identify exactly which individuals they should write to, so they have sent a standard letter to all clients. This means your clients may have received a missive (possibly by email) from another adviser which contains some vaguely threatening text, as specified by HMRC. Those clients may come to you feeling alarmed or indignant.

This is a good opportunity to explain that the trigger for these letters is the introduction of the common reporting standard (CRS). This is an international initiative for tax authorities in over 80 countries to automatically exchange financial information in a common form, in a bid to catch tax evaders. The UK is an early adopter of the CRS, and has required financial institutions to report specified information to HMRC by 31 May 2017. HMRC is now starting to exchange that relevant information internationally.

As a result of receiving international data HMRC has written to certain individual UK taxpayers, asking them to make a declaration of competence with regard to their overseas income. These letters do not suggest that the taxpayer has failed to declare his overseas interests, but that is how the individual may interpret it.

Where your client has received such a letter from HMRC, you need to consider whether using the worldwide disclosure facility (WDF) is appropriate.

Director’s loan account, Business tax account and Money laundering cash

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When a director lends money to his company, you would expect amounts credited against that loan to be free of tax. However, that is not how HMRC interpret the situation, as we explain below. HMRC have changed what employers will see on their business tax accounts, which may resolve some PAYE payment mismatch problems. Finally, you should warn your clients about tighter regulations for businesses which receive or pay large amounts in cash.

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).

Money laundering cash

Most accountants realise that they need to be registered and supervised by a professional body under the money laundering regulations. If you are not a member of a professional body you need to register with HMRC to be supervised by that department.

If you have clients who are: estate agents, currency exchangers, bill payment providers, trust or company service providers, or high value dealers, you should keep them informed about their money laundering obligations.

High value dealers (HVD) are businesses which receive cash payments of €10,000 or more for goods acquired in single transaction. As the Pound is now almost at parity with the Euro, that means making a sale at around £10,000 or more where the customer pays in cash, even over several instalments.

This receipts threshold has always been set at €10,000, but a business is also a HVD if it pays for goods in cash worth €10,000 or more. This threshold used to be €15,000, but was reduced to €10,000 with effect from 26 June 2017. The business must not accept such cash payments or make such large cash payments until it has registered with HMRC as a high value dealer.

There is a fee to pay with the registration, and an annual renewal fee. If the business does not comply with the money laundering regulations HMRC can levy a penalty, and if non-compliance persists they will consider criminal prosecution.

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

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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.

Myths about letting, Reclaiming overseas VAT and Simple Assessments

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The summer is a popular time to move house, and in the current market property owners may decide to let rather than sell their former home. We explore some of the myths about letting property. We also have a reminder about the deadline for reclaiming overseas VAT, which is less than two months away. Finally, there is some news concerning Simple Assessments which are about to be issued by HMRC.

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)

Myths about letting

HMRC has released some examples of common errors made by property owners when they let out their property. Many of these people do not consider themselves landlords as they did not set out to make a profit from their property. Your clients could fall into any one of these situations:

Posted abroad

People serving in the armed forces, or who work for multinational companies, may be required to relocate to another country for significant periods. Where their UK home is let out the rent should have tax deducted by the letting agent, or tenant, under the non-resident landlord scheme, unless the landlord has been granted gross payment status under that scheme. The landlord also needs to declare the rental income on their UK tax return.

Pub tenants

Pub landlords who live above their pub may let out their former home. Even if the rent income only covers the mortgage payments on the property, the whole amount of income and expenses must be declared on the owner’s tax return.

Student house

Parents may buy a property for their offspring to live in while at university. Where the property is also let to other students, who pay rent to the parents, that income must be declared on the parents’ tax returns. As the property is not the main home of the parents the rental income does not fall under the £7500pa rent-a-room relief exemption.

Care home

An individual partly funds the cost of their room in a residential care home by letting their former home. Although all the rental receipts are used to pay for the care home fees, the rent must be declared on the recipient’s tax return, and tax will be payable on the profits.

Inheritance

A property is inherited by siblings, and one of those individuals organises for it to be let out. The rent received belongs to all the siblings in proportion to their beneficial interests in the property, and should be reported on their tax returns as such. It is possible for the siblings to change the ratio in which the rental income is divided between them, if a declaration is made.

Under declarations

If the property owner has not declared their rental income correctly they can make a full disclosure using the let property campaign disclosure service. Where the under declaration applies only to the last tax return, that return can be amended within one year of the filing date. Our tax investigation experts can advise on the best course of action.

Fix for SA filing problems, Exempt or zero rated, Tax credits renewal

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Last week we offered an update on the online filing issues for self-assessment tax returns. We also looked at a case where the taxpayer was confused about zero rating and exempt goods for VAT, and took advice from his suppliers. Finally, don’t forget the tax credits renewal deadline is 31 July; your clients may need you to provide some estimated figures of profit for 2016/17.

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)

Exempt or zero rated

Do your clients and your staff understand the difference between goods which are zero rated for VAT, and goods which are exempt? Sales which are zero rated must be included within the turnover which counts towards the test for compulsory VAT registration, exempt sales are not included.

This distinction is particularly important for e-bay traders whose turnover may quickly exceed the VAT threshold (now £85,000). This happened to Nathaniel Hendrickson who sold motorbike protective clothing online, including helmets. He didn’t think he had to register for VAT as his supplier had assured him that the protective clothing was exempt from VAT. In fact, VAT notice 701/23 make it clear that motorcycle helmets and certain safety boots are zero rated (not exempt), but all other clothing for adults is standard rated.

Hendrickson claimed his accountant had told him in 2015 that all the clothing he supplied would not be subject to VAT. He took this as meaning that he wouldn’t have to register for VAT. However, the accountant changed her advice, and apologised for her oversight, once HMRC started to enquire into Hendrickson’s tax affairs.

Hendrickson had to pay VAT of £23,962 in respect of sales made in the period for which he should have been VAT registered, plus a penalty of £4,792, which was the minimum penalty chargeable at 20% of the late paid VAT. The tax tribunal did not accept that his ignorance of the law, or his reliance on advice from his accountant was a reasonable excuse.

Making Tax Digital, PAYE codes and P800s, IHT and holiday cottages

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Just as we published last week’s tax tips the Government made the stunning announcement that MTD is to be delayed; we have more details below. HMRC’s PAYE computer appears to be programmed with the wrong tax law, so there will be errors in PAYE codes and P800s computations to look out for. Finally, a recent case busts the myth that you can get IHT relief on the value of furnished holiday accommodation.

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)

IHT and holiday cottages

Years ago, tax advisers would say that an active holiday lettings business should qualify for IHT business property relief (BPR), if the owner died whilst running the business. This would allow the value of the holiday accommodation to be covered by the 100% BPR exemption.

However, HMRC changed their view on the availability of BPR in late 2008, and have been challenging estates where BPR is claimed for holiday lettings ever since. The first notable case since this change of approach was Pawson, which the taxpayer won at the First-tier Tribunal, but was defeated at the Upper Tribunal. Leave to appeal to a higher court was refused.

The Pawson case concerned just one let property, and although it was actively managed, the Upper Tribunal decided that the property was held mainly as an investment, so it didn’t qualify for BPR.

The latest case of Marjorie Rose, concerned 11 properties owned by a partnership, of which the deceased held a two-thirds share, valued at over £1m. Significant services were provided to the guests in the holiday cottages, by the nearby hotel (owned by the same family) such as internet, parking, administration, personal guest services, food services, ordering milk and newspapers. However, the tribunal decided that all 11 properties were held mainly to obtain rental income, and hence they were investments that do not qualify for BPR.

Where your clients run holiday lettings businesses it would be prudent to review their IHT planning in light of this case.

Trust tax returns and registration, Winding-up a company, Advising clients with overseas interests

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Last week we warned you about problems with filing SA returns online, this week an additional problem has come to light concerning trust tax returns. We look at the new HMRC guidance on anti-avoidance rules which may apply to distributions made on the winding-up of a close company. We also have a reminder of your obligations to write to clients about offshore accounts and investments.

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)

Winding-up a company

From 6 April 2016 distributions made to individuals on the winding-up of a close company can be subject to a targeted anti-avoidance rule (TAAR). This TAAR seeks to charge income tax rather than CGT on the distribution if four conditions are met, as we outlined in our newsletter on 25 August 2016.

The four conditions are briefly:

A. The individual holds at least a 5% interest in the ordinary share capital and voting rights of the company;

B. The company is close company or has been within the last two years before the winding-up;

C. The individual who receives the distribution is directly or indirectly involved in the same or similar trade or activity as the company, within two years after the distribution; and

D. The main purpose of the winding-up, or one of the main purposes, is to reduce income tax payable.

The difficulties in applying the TAAR lie with identifying in Condition C what constitutes; “directly or indirectly involved with” and “same or similar trade or activity”.

HMRC has just published guidance on this TAAR in its Company Taxation Manual at CTM36300 – CTM36350, but the examples given do not clearly define the scope of the phrases in Condition C.

HMRC say that “similar trade or activity” is deliberately wide, and provide an example of a landscape gardener who switches to providing gardening services, which is a similar activity.The guidance on the meaning of “involved with” is even less helpful, as the activities of people connected with the person who receives the distribution must also be considered.

In all cases condition D (the tax-saving motive) must also be met for the distribution to becaught by the TAAR, so if you can show there was no intention to reduce income tax, the TAAR doesn’t bite. Our corporate tax experts can help you advise your clients on this point.