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.