Expenses and benefits, Single-tier state pension, End of contracting-out

As we start a new tax year, we look at some of the changes that come into effect from the start of the 2016/17 tax year. We explore the new-look expenses and benefits regime and examine the single-tier pension and the implications of the end of contracting out. 

This is an
extract from our topical tax tips newsletter dated
7 April 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Single-tier state pension 
Individuals who reach state pension age on or after 6 April 2016 will receive the new single-tier state pension rather than the two-tier pension (comprising the basic state pension and the earnings-related second state pension) which is payable to people who reach state pension age before 6 April 2016. Those individuals who are of state pension age on 6 April 2016 will continue to receive their state pension under the two-tier system. They will not switch to the new single-tier state pension. 

The single-tier state pension is set at £155.65 per week for 2016/17 (slightly above the standard minimum guarantee, which is £155.60 per week). The basic state pension is £119.30 per week (but this may be topped up by the pension credits). 

To qualify for the full single-tier state pension, individuals need a minimum of 35 qualifying years. A reduced pension is payable where an individual has less than 35 qualifying years but at least ten. By contrast, only 30 qualifying years were needed for the basic state pension where state pension age was reached between 6 April 2010 and 5 April 2016. A person who contracted-out prior to 6 April 2016, may receive less than the full single-tier state pension, even if they have 35 qualifying years. 

It is possible to make up for missed years by paying voluntary Class 3 contributions. Also, individuals who reached state pension age before 6 April 2016 have until 5 April 2017 in which to pay a Class 3A contribution. Each Class 3A contribution increases the basic state pension by £1 per week and individuals can `buy’ up to £25 per week extra from Class 3A contributions. The amount of a Class 3A contribution depends on the individual’s age at the time that the contribution was made. 

Before deciding whether to pay voluntary contributions, individuals should get a pension forecast so that can assess whether or not such contributions are worthwhile.

This is an
extract from our topical tax tips newsletter dated 7 April
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
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Investors’ Relief, Contractor loan schemes, Employee expenses

In last week’s newsletter we were enthusiastic about the new investors’ relief which was promoted in the Budget as a version of entrepreneurs’ relief for longer-term investors. Unfortunately the draft Finance Bill 2016 paints a different picture as we explain below. We also have a warning of some grim implications of leaving contractor loans outstanding, and an update on changes for employee expenses. 

This is an
extract from our topical tax tips newsletter dated
31 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Investors’ Relief 
The new investors’ relief is not a form of entrepreneurs’ relief, as claimed in the Budget, it has more in common with the enterprise investment scheme (EIS). The conditions needed to qualify for the new relief are more restrictive than we expected. 
  
Last week we encouraged you to look at investors’ relief a means for individuals to benefit from a reduced rate of CGT, if they subscribe for shares in companies owned by family or friends. Unfortunately the new investors’ relief won’t be available to the relatives of employees or directors of the company. A key condition for investors’ relief (revealed in the draft Finance Bill 2016), is the investor must not be an employee or officer of the company or connected to such an employee or officer. 
  
Investors’ relief has also been saddled with conditions lifted directly from the EIS rules relating to value received from the company. Under EIS the investor losses a portion of their income tax relief, and associated CGT exemption, if he receives significant value from the EIS company within a four year period; (one year before the shares were issued to three years afterwards). This prevents the investor, or anyone connected with the investor, receiving anything worth more than £1,000 from the company in that period. 
  
Although there is no income tax relief available under investors’ relief, and the CGT relief amounts to a halving of the top CGT rate, similar rules to disqualify shares from investors’ relief will apply when value is received from the company (TCGA 1992, Sch 7ZB). This will limit investors’ relief to people completely unconnected with the company, such as “angel investors”. It will also prevent those investors taking any guiding role with the company such as a non-executive director.

This is an
extract from our topical tax tips newsletter dated 31
March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
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Director’s loan, Relaxed Entrepreneurs’ Relief, Online Access

The dust-up over the Budget has settled, for now, but you should expect more tax changes to be announced in the Autumn Statement. In the meantime there are two Budget-related issues to discuss with your micro-company clients: directors’ loans and entrepreneurs’ relief. We also have an update on some new security measures for accessing HMRC’s online services. 

This is an
extract from our topical tax tips newsletter dated
24 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Directors’ loans
When a close company makes a loan to its directors or shareholders, or associates of those people, it must pay a corporation tax charge set at 25% of the loan. This is the charge under CTA 2010, s 455 (formerly ICTA 1988, s 419), and it will increase to 32.5% on 6 April 2016. 
  
All your client companies are likely to be “close” (an old meaning of “secret”), as the legal definition is: a company controlled by its directors or by five or fewer participators. The participators are the shareholders, and certain creditors. The s 455 charge is only payable when the loan remains outstanding nine months and one day after the company’s year end. The new rate of 32.5%, will apply to loans made and benefits conferred (under CTA 2010, s 464A) on or after 6 April 2016. 
  
Where your clients have taken loans from their companies before 6 April 2016, the s 455 charge will apply at 25%. However, it will require some careful accounting to prove exactly when a new loan is taken out in respect of directors’ accounts that wander in and out of credit on a day to day basis. 
  
On 20 March 2013 anti-avoidance rules were introduced that treat a loan as continuing if £5,000 or more is repaid and borrowed again within 30 days. Where the loan is £15,000 or more the 30-day rule doesn’t apply, and the loan is treated as continuing if there are arrangements in place for the repaid loan to be replaced. We will have to check the details of the new legislation to see if those anti-avoidance provisions will be over-ruled in favour of taxing the new loan at 32.5% rather than at 25%. 
  
This increase in the tax charge is to discourage directors who pay higher rate tax from taking a loan instead of a dividend from their company. It will not apply to loans made to a charity.

This is an
extract from our topical tax tips newsletter dated
24 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
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Digital accounting records, Entrepreneurs’ relief, S codes revisited

Last week’s Budget contained a lot of promises and vague statements, which we will distill down for practical advice next week. In the meantime the pressure to move towards digital tax reporting can’t be ignored, so we examine how you can prepare your clients. We also have advice about shareholdings which qualify for entrepreneurs’ relief and an update on the issue of S codes
 

This is an
extract from our topical tax tips newsletter dated 17 March 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Digital accounting records 
The Government wants all businesses to send HMRC a summary of their accounting records every quarter. This data will update the “digital tax account” for that business held by HMRC, and will enable the taxpayer to see what tax they should be paying much earlier than would be the case when submitting an annual tax return.    
  
This is not a fairy tale, but a representation of the vision set out in the HMRC document: Making Tax Digital. There is no appreciation in that document of the effort involved to turn raw accounting data into accounts which show a taxable profit or loss. HMRC believe that all such issues will be solved by accounting software and the submission of data to HMRC will be as easy as one click. 
  
To enable this future fantasy to become a reality, every business, and every landlord who receives more than £10,000 of income, will have to maintain their accounts using software that can communicate directly with HMRC. That excludes electronic spreadsheets, and of-course paper based accounting records. 
  
An ICAEW commissioned survey has found that only 25% of businesses use accounting software to maintain their accounting records, and just 18% of sole-traders use such software. So to achieve the Government’s target of businesses making quarterly updates to HMRC, some 75% of businesses, and 82% of sole traders will have to change the way they keep their accounting records. The small businesses need to convert to digital accounting within two years, as businesses with turnover below VAT threshold will be required to submit quarterly updates from April 2018. 
  
You need to start conversations with those clients who are not currently using accounting software, and persuade them that the Government is serious about this digital future. You will also have to examine the processes within your own practice and make some decisions about which forms of accounting packages you will deal with. For some businesses “cloud accounting” will provide the answer, others will need bespoke accounting software.

This is an
extract from our topical tax tips newsletter dated
17 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Apprentices, Scottish rate of income tax, PAYE penalties

As we head into a new tax year there are two payroll issues to address; the new NIC rate for apprentices and the Scottish rate of income tax. We also have a heartening story about PAYE penalties that shows you can win against HMRC if you read the legislation really carefully. 

This is an
extract from our topical tax tips newsletter dated 10 March 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Apprentices 
This week (14 – 18 March) is National Apprentice week, and it is also Budget week, so you may well be having conversations with your clients or sending them newsletters. The employment of apprentices is promoted by Government but it is surrounded with misunderstandings. 
  
Apprentices are employees who must be paid the NMW, but there is a special lower NMW rate for apprentices who are aged under 19 or in the first year of their apprenticeship. There is no age limit for an apprentice, but Government grants are normally only available for those aged 16 to 18. When the individual is aged 19 to 24 the adult NMW must be paid, and when they reach age 25 the living wage rate must be paid for pay periods starting on or after 1 April 2016. 
  
Where the apprentice is aged under 25, and is paid less than £43,000 per year, a zero rate of employer’s class 1 NI will be due from 6 April 2016. An employer can’t designate all his employees who are under 25 as “apprentices”, to qualify for the zero rate of class 1 NIC, the employee must be enrolled in a statutory apprenticeship. Note that the rules for statutory apprenticeships are different in England, Scotland, Wales and Northern Ireland, as it is a devolved issue. 
  
If you like the idea of taking on a young apprentice in your own practice, there is help and guidance available through Associate of Tax Technicians (ATT) – see link below. 
  
The Apprenticeship levy will add an extra 0.5% to the employer’s payroll costs with effect from 6 April 2017. The levy will be relieved by a £15,000 allowance per employer, which will work much like the current employment allowance. Where the total payroll cost is less than £3 million the effect should be that no apprenticeship levy is paid. 
  
However, where the employer runs several payroll schemes or is part of a group, only one £15,000 allowance will be given, so some levy will end up being paid. Groups of companies may have to reorganise their payrolls so that all employees across the group are paid through one company. You have a year to sort out that little problem.

This is an
extract from our topical tax tips newsletter dated
10 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Planned dividends, Death penalties, HMRC bank accounts

Last week we returned to the topic of the new dividend tax, as without forward planning many shareholders will see their tax bills increase in 2016/17 by at least 7.5%. We also explored the problems that can arise from errors in a deceased person’s tax return, and updated accountants about the new HMRC bank accounts.

This is an
extract from our topical tax tips newsletter dated 3 March 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

HMRC bank accounts 
HMRC is moving it’s bank accounts again, for the third time in 15 years. This is part of the open tendering policy under which key Government contracts are regularly reviewed. For banking facilities this appears to occur every seven years. 
  
This time the accounts are moving from the RBS and Citi Banks to Barclays Bank, but most taxpayers won’t have to do anything different. The account numbers and sort codes of the HMRC accounts are moving to the new bank, so all UK electronic payments will proceed as normal. Also all cheques sent to HMRC will be processed as normal. 
  
However, taxpayers who pay HMRC from a bank account situated outside the UK will have to use a new IBAN number, the details of which are shown in the links below. Overseas HMRC “customers” are being informed about this bank account change via a personalised letter, but you could tell your non-resident clients by email rather quicker. 
  
The next big tax payment date which will be important to overseas residents is 30 April 2016 when the ATED charge for 2016/17 is due. ATED is payable by companies or other non-natural persons who hold UK residential properties which are worth over £500,000 (threshold reduces from £1 million on 1 April 2016). This can include companies or partnerships with corporate members which are resident outside the UK. 
  
To pay the ATED charge the taxpayer must quote their ATED reference number. However, to get an ATED reference number the taxpayer must first submit an ATED return, which is due on the same day: 30 April 2016. So if this is the first year the taxpayer is due to pay the ATED charge, the ATED return must be submitted early in order to get a reference number to pay the ATED charge on time. 

This is an
extract from our topical tax tips newsletter dated
3 March 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Paying interest to the director, Pensions lifetime allowance, RTI reporting

Last week we explored the tax implications of paying interest to a director of an owner-managed company. We looked ahead to the reduction in the pension lifetime allowance from 6 April 2016, which may catch-out those who plan to retire shortly after that date. The reporting requirements for RTI are also changing for micro businesses on 6 April 2016.

This is an
extract from our topical tax tips newsletter dated 25 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

RTI reporting 
HMRC believe that all employers should be familiar with the RTI reporting system now, so they are removing the relaxation for late filing of the FPS (full payment submission) by micro businesses. This was expected, but you may need to remind your clients about the detailed rules for reporting on or before the date of payment. 

Employers with fewer than 10 employees, who were registered for PAYE before 6 April 2014, are currently permitted to submit their FPS on or before the last payment date in the month, rather than on or before each day employees are paid in the month. Thus this relaxation only affects small employers who pay their employees more frequently than monthly. From 6 April 2016 those employers will have to submit an FPS for each payday in the month, on or before those payment dates. 

There are other RTI relaxations that continue after 6 April 2016 (see link below), including for casual employees such as harvest workers who are paid according to their efforts on the working day. If the FPS is submitted later than the payment day it’s important to include a code in the late reporting reason field. For the harvest workers this would be code F. 

The latest Employer Bulletin (no. 58) explains what the law determines to be the payment date for PAYE (ITEPA 2003 s 686 rules 1&2). This is the earlier of:
  • the time the payment is made; and
  • the time the employee becomes entitled to the payment.
This means that if the employee is paid later than the day they are entitled to be paid, the regular pay day should still be reported. Bank holidays that fall around the end of the month, such as Christmas and Easter, can mess-up payment dates. Page 3 of Employer Bulletin no. 58 includes a handy grid to determine the reportable payment date, when employees are paid just before or just after the Easter holiday. 

This is an
extract from our topical tax tips newsletter dated
25 February 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


PAYE coding notices, The right structure for entrepreneurs’ relief, Changing domicile rules

The PAYE coding notice for 2016/17 contains a nasty shock for taxpayers who receive interest or dividends, as we explain below. A recent tax case illustrates that capital gains arising from business deals may not qualify for entrepreneurs’ relief. Finally we have advanced warning of a change in the domicile rules, which could affect your clients earlier than you think. 

This is an
extract from our topical tax tips newsletter dated 18 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

PAYE coding notices 
When your owner/director clients receive the form P2 that sets out their PAYE code for 2016/17, they are likely to be confused by the following new deductions: 
  
Untaxed interest 
All bank interest will be “untaxed” in 2016/17 as tax won’t be deducted by the bank. However, basic and higher rate taxpayers will have a savings allowance of £1,000 or £500 which should be set against the interest received. Only interest exceeding the savings allowance should be set against the personal allowance in the PAYE code. 
  
Dividend tax 
The notes on the back of the P2 say this deduction: “is to collect the basic rate of tax due on your dividend income.” However, dividends won’t be taxed at the basic rate of tax: 20%, the tax rate will be 7.5% for a basic rate taxpayer. For higher rate taxpayers the P2 notes may refer to higher rate tax. 
  
To check the dividend tax deduction multiple it by the taxpayer’s highest marginal tax rate. This how much dividend tax HMRC believes the taxpayer will be due to pay in 2016/17. Perform your own calculation of the taxpayer’s dividend tax for 2016/17 based their expected dividend income for 2016/17. If the two figures are approximately the same, the PAYE code is roughly correct. 
  
The taxpayer can object to having dividend income or interest included in their PAYE code. To get the PAYE code changed you can ring HMRC, or complete the online form on behalf of your client. 

This is an
extract from our topical tax tips newsletter dated
18 February 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Dividend tax, CIS and payrolled benefits, Warning about tax avoidance schemes

The 2016/17 tax year will see the introduction of new tax on dividends, and the elimination of more paper tax return forms, this time for CIS. We have advice on how to talk to clients about both of these changes. You may also want to discuss payrolling of benefits, and the latest warnings from HMRC about tax avoidance schemes. 

This is an
extract from our topical tax tips newsletter dated 11 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Dividend tax 
We explained the mechanics of the new dividend tax in our newsletter on 20 August 2015, but that was before the draft Finance Bill was published on 9 December 2015. We now have a better idea of who will be affected, and which clients you need to talk to before 6 April 2016.

Company owners 
Shareholder/directors may want to advance a dividend payment into 2015/16 to save the additional 7.5% dividend tax that will payable on the same dividend in 2016/17. However, you need to work with each client to ensure they won’t lose their personal allowances in 2015/16 (income over £100,000), or have their child benefit clawed-back (income over £50,000). 
  
The company must also have the distributable profits available to pay the accelerated dividend, so you may need to draw up management accounts to prove there are adequate profits. 
  
Some PAYE coding notices issued for 2016/17 include an estimated amount of tax in respect of the 7.5% dividend tax. It makes sense for HMRC to collect the extra tax due through PAYE rather than wait until the balancing amount of SA tax is paid on 31 January 2018. You should discuss with your client whether the level of estimated tax is reasonable and in line with the dividends they expect to receive in 2016/17. 
  
Basic rate taxpayers 
Shareholders with income within the basic rate band may not complete an SA tax return, as there currently is no additional tax to pay on their dividend income. If those shareholders receive more than £5,000 of dividends in 2016/17 there will be tax to pay, and they will have to register for self-assessment. Check the tax profile of the non-director shareholders in your family company clients, who don’t currently file an SA return.     
  
Generous donors 
The dividend tax credit is counted as part of the tax paid in respect of donations made under gift aid. When the dividend tax credit disappears on 6 April 2016 taxpayers need to check that their total tax bill actually covers the tax they have declared they pay when making gift aid donations. Those same taxpayers may also receive significant amounts of interest taxed at 0% from April 2016, so their total tax bill may be close to zero.

This is an
extract from our topical tax tips newsletter dated
11 February 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Owner managed company, Alcohol wholesalers and producers, Labour providers warning

Now is a good time to help your clients plan their taxable income in 2016/17. The rules for NIC, and tax on dividends are changing, so all arrangements for extracting profit from owner-managed companies must be reviewed. Clients who sell alcohol wholesale need register with a new Government scheme, which you can help them prepare for. Finally, we pass on a warning about VAT fraud in labour supply chains.

This is an
extract from our topical tax tips newsletter dated 4 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Owner managed company 
The combination of tax and regulation changes coming into effect in 2016/17 mean that every small company should review the remuneration strategy for its owners. Let’s look at each factor briefly: 
  
Salary 
Paying a salary just below the NIC primary threshold of £8060 will preserve entitlement to the state pension, and incur no employee or employer’s NIC. Any payment above the secondary threshold (£8112) will incur employer’s NIC, but where the company has only one employee the employment allowance won’t be available to cover that NIC.   
  
Dividends 
Any dividends received by a shareholder in excess of £5,000 will create a tax charge for that person being 7.5% more than they paid on the same cash dividend in 2015/16. As the 10% dividend tax credit is abolished, the shareholder will be able to receive more cash as a dividend before tipping into higher rates of tax (32.5% on dividends). 
  
Rent 
Rent is taxed at the normal rates of: 20%, 40% and 45%, but without NIC. Where the premises the company trades from are owned personally by the shareholders, a payment of rent should be considered as an alternative to some dividends. The company will receive a tax deduction for the rent paid. But entrepreneurs’ relief on the gain arising on the premises could be restricted, if the building is sold alongside company shares in the future.     
  
Pensions 
As a person aged 55 and over has complete flexibility to withdraw cash from their pension fund (subject to charges), employer pension contributions are a very attractive option for the older director. The contribution is tax deductible for the company and attracts no tax or NIC for the employee, as long as the individual’s pension annual allowance is not exceeded. This favourable treatment of pension contributions may not last.   
  
The ideal combination of these factors will vary for each owner/ director, according to their personal income needs and the profitability of their company. Our personal tax advisers will be happy to talk through the implications of each type of payment in greater detail. 

This is an
extract from our topical tax tips newsletter dated
4 February 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>