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

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

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?

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

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

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.

New £1000 allowances, Car or Van, and Trusts

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

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 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

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

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

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.