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.

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>>>
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
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