VAT flat rate scheme, Cash basis for landlords, Tax tables and rates corrected

HMRC has announced further restrictions for limited cost traders who use the VAT flat rate scheme, as we explained in our most recent tax tips. Individual landlords could suffer an additional restriction on loan interest, if they don’t opt out of the new cash basis for property businesses. Finally, beware of inaccurate tax tables – HMRC has corrected two tables recently concerning tax thresholds and mileage rates.

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 week.

VAT flat rate scheme

We are not suggesting that HMRC are making up the rules as they go along, but their webinar on the flat rate scheme (FRS) included an additional condition, which isn’t in the new version of the FRS leaflet (Notice 733).

Limited cost traders (LCT) must use a FRS percentage of 16.5%, rather than the normal flat rate for their trade sector. To avoid being categorised as a LCT, the business must purchase at least £250 of relevant goods in the VAT period, and the value of those goods must also be equal to or exceed 2% of the gross sales for the same period.

The draft legislation excludes the following from “relevant goods”:

  • Capital items (which HMRC say is anything expected to have a useful life of more than one year).
  • Road fuel and motor parts (except for businesses in the transport sector e.g. road haulage and hire cars).
  • Food and drink for employees and business proprietor.
  • The three new exclusions from relevant goods are:
  • Goods for resale, leasing, letting or hiring out if the main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods.
  • Goods that the trader intends to re-sell or hire out, unless selling or hiring is the main business activity.
  • Goods for disposal as promotional items, gifts or donations.

The first two bullet points are set out in paragraphs 4.4 to 4.6 of the latest version of Notice 733, but the third one was announced in the HMRC webinar on 1 March 2017.

The new conditions are designed to prevent businesses buying goods, which are not related to its main trade, just to avoid being categorised as a LCT. These new rules may generate lots or arguments about what is the trader’s “main business activity”. Our VAT experts will be happy to discuss how these new conditions will apply to your client.

Apprenticeship levy, Immigration skills charge, Appealing penalties

Two new levies come into effect on 6 April 2017: the apprenticeship levy and the immigration skills charge. These can apply to smaller employers as well as larger ones. In our latest tax tips we outlined the principles for both of these new taxes. There are also two developments relating to how penalties can be calculated and appealed.

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 week.

Appealing penalties

The tax penalty system contains two broad categories of penalties; those for late filing or late payment which increase according to the delay in filing or payment, and behavioural penalties which relate to errors in documents, failure to notify and under-assessment by HMRC.

Late filing or payment

These penalties are based on the period of delay of the filing or tax payment, which is easy to quantify. The second element of the penalty is either a fixed charge or the tax liability. It is always worth checking that both of these elements have been correctly measured before they were included in the penalty calculation, as HMRC does make mistakes.

If the calculation is correct, the taxpayer must demonstrate a reasonable excuse for the delay as grounds for an appeal against the penalty. You can help your client frame their story which supports the reasonable excuse, and suggest which documents need to be retained to send to HMRC, should they undertake an internal review of the appeal.

The factors making up the reasonable excuse can include the actions or inactions of HMRC, as demonstrated in the VAT surcharge case of MOC (Scotland) Ltd v HMRC. In that case the company received such poor service from HMRC that the tribunal decided the taxpayer did have reasonable excuse for late payment.

The taxpayer can now make an online appeal against late filing or late payment penalties relating to their 2015/16 SA return. You can’t submit an online appeal on behalf of your client, as the online mechanism hasn’t been opened up to tax agents. However, you can still submit a paper appeal for your client using the form SA370.

Behavioural penalties

The first element of a behavioural penalty is a percentage based on whether the taxpayer’s mistake was careless, deliberate, or deliberate and concealed, which is further adjusted depending on how the error was disclosed. This percentage is multiplied by the potential lost revenue (PLR).

Our tax enquiry experts can help you check whether penalties for tax return mistakes can be challenged or reduced.

Business rates, Changes to VED, VAT flat rate scheme

Our latest tax tips considered three tax changes which will come into effect on 1 April 2017. They are: revaluations for business rates, new rates of VED (car tax), and new rules for limited costs traders who use the VAT flat rate scheme. There is still time to plan for all of these changes, and to advise your clients to take action before April, if necessary.

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.

Business rates

Where a property is used for business purposes, the local authority assesses the property for business rates. The amount of tax payable for each property is a combination of its rateable value, and the applicable multiplier for the area where the property is located, less any special reliefs.

Although the tax is paid to the local authority, the multiplier (rate per pound of property value), is determined by national governments. Business rates are a devolved issue, so different multipliers are set in; England, Greater London, Scotland, Wales and Northern Ireland.

The multipliers due to apply from 1 April 2017 have generally been reduced compared to 2016/17. This is to off-set the effect of increases in rateable values from the same date. The revaluation exercise was undertaken in April 2015, and is based on the amount the property could be let for. As the previous revaluation was untaken in 2008, just before the recession, some rateable values will have changed significantly.

In the next few weeks your clients should receive notices of their new business rates for 2017/18. You should first check whether a relief is due, such as for; small premises, essential services in a rural area, agricultural or religious buildings, used by a charity, or used by start-up in an enterprise zone. If a relief hasn’t been given where it is due, the business should contact the local authority which issued the rates bill.

Where the rateable value of the property seems to be wrong, the business can appeal to the Valuation Office Agency, which is a branch of HMRC.

Stamp duty tax avoidance schemes are like dodos

The Tax Advice Network is warning property purchasers to beware of false promises if they hope to avoid stamp duty land tax (SDLT).

The avoidance schemes that were popular when stamp duty land tax was first introduced, declined in popularity as loopholes were closed by HMRC. But recent tax increases mean that some providers of tax avoidance schemes are still making promises they cannot keep.

Mark Lee, Chairman of the Tax Advice Network, says “It’s natural that people buying expensive properties will want to find ways to avoid having to pay tens of thousands of pounds in tax on top of the purchase price. And this makes them susceptible to the snake-oil salesmen who promise the unattainable in exchange for a hefty fee but with no guarantee of success. This fee than just becomes an additional cost on top of the tax and interest where the tax is paid late.

The only simple way to reduce the stamp duty charge is to pay less for the property you are buying. This seems to be happening at the top of the market. A report by PwC suggests that recent increases in the rates of SDLT led to a fall in the number of top-end properties being sold and a decline in income for the exchequer.

The tax take from homes worth more than £1.5 million is reported to have fallen by the equivalent of almost £500 million a year.

The situations in which you can legitimately reduce the tax otherwise payable are very few and far between. Simply buying a replacement main residence rarely affords you any opportunity.

Lee advises that those who are tempted by assurances from slick salesmen should ensure they are aware of the reality of the situation. “The occasions on which you can legitimately reduce the tax otherwise payable are very few and far between. The loopholes are gone and key reliefs apply automatically if you satisfy the relevant rules. By all means take advice re the planning opportunities that may be available but avoid salesmen promoting tax avoidance schemes.”

Notes for editors:
1. The PwC research is reported in The Times 23 February 2017: “Treasury loses £500m in tax raid on luxury homes

2. Stamp Duty rates are now:
Nil on properties costing up to £125,000
2% on the portion from £125,000 to £250,000
5% on the portion from £250,000 to £925,000
10% on the portion from £925,000 to £1.5 million and
12% on the portion over £1.5 million
An additional 3% is payable on the acquisition of second properties that are not the purchaser’s main residence.

3. HMRC guidance for anyone tempted by tax avoidance schemes:

4 – The Tax Advice Network was established at the end of 2007 and is now in it’s tenth year of operations. It has dozens of members including a number who can give legitimate tax planning advice re stamp duty land tax.

5 – Chairman, Mark Lee, is a former tax partner at BDO and a former chairman of the ICAEW Tax Faculty.

6 – The Tax Advice Network website is highly ranked by search engines eg: for ‘tax advice’, and attracts thousands of enquiries a month.

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!