Covid-19 Bounce Back Loans

From 4 May 2020 a number of UK banks are taking part in the government sponsored Bounce Back Loan Scheme (BBLS). This is the name given to the policy announced by Rishi Sunak on 27 Apr 2020 whereby small loans to qualifying businesses are subject to simpler rules than the Coronavirus Business Interruption Loan Scheme (CBILS) and these BBLs are underwritten 100% by the government.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

You cannot apply for a BBL if:

  • You’re already claiming under CBILS; or if
  • Your business was an “undertaking in difficulty” as at 31 December 2019.

In short:

  • There is no cap on turnover for a micro business applying for a BBL;
  • Loans will be from £2,000 up to 25 per cent of a business’ turnover or £50,000, whichever is the lower;
  • Banks will no longer require forward financials or business plans;
  • You should have access to the funds within days;
  • Loans will be interest free for the first 12 months; and
  • Thereafter the annual rate of interest is capped at 2.5%.

The loans will be easy to apply for through a short, standardised online application, and you will be required to self-certify that you are eligible for a Bounce Back Loan.

The government announcement is here.

A list of participating banks is here and that page will also lead you to a summary page about your bank which leads you to the start of loan application.

Apply directly to your bank. This is a Government initiative and not an HMRC initiative. Consequently, Proactive can not apply on your behalf.

Self Assessment Tax Return

A Checklist

Self assessment tax returns require an extensive amount of personal information.

They encompass income, capital gains, outgoings, residence status, student loans, child benefit and more. They are no longer called income tax returns and you need to take care to include everything that a self assessment tax return requires.

With very few exceptions, the self assessment tax return requires a full disclosure of your worldwide income. There are checks and balances to ensure that you are not subject to double taxation. As your accountant, we need you to make a full disclosure of everything. We would rather have too much information than not enough. Nobody wants HMRC to start an enquiry because something was omitted from a tax return.

You should remember that in UK law the final responsibility for submitting a full and complete tax return (and for paying the tax on time) rests with you, the taxpayer.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

Tax Return Notice

In order that we can keep track of tax offices and reference numbers, please let us have either a copy of page one of your tax return, or the “Notice to File”.

Student Loans

A copy of the Student Loan account statement showing the transactions between 6 April last and 5 April just gone.

Tell us if an old loan has been fully paid off since 5 April just gone as we will need to make an adjustment to ensure that you do not overpay.

Residence and Domicile

Is your Domicile outside the UK?

In UK law the word “domicile” does not mean your address, it means your natural home. This is especially important for people who were not born in the UK or whose parents were not born in the UK, or for people have moved away from the UK and have permanently elected (and proven) that they have established a natural home elsewhere.

There are complex tax rules for people who have a non-UK domicile and who have foreign income or gains. Regardless of your “domicile”, UK residents are taxed on their worldwide income or gains. However, if you do have a non-UK domicile, you may be entitled to claim tax relief on foreign income which is not remitted into the UK. If this applies to you please discuss the situation with us.

If you are not resident in the UK, then we need to consider the Statutory Residence Test which determines residence status for tax purposes. This link is just for information . . .

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt

. . . and we will work through the process with clients who are affected.

Bank Interest and other Investment Income

Please provide copies of certificates of Bank Interest Received, dividend vouchers and other documents showing amounts of investments received.

Some banks pay “rewards” and do not pay interest. Check the year end certificate from your bank to see precisely what sort of income you have. Some deduct tax at source, whilst others do not. Different rules, rates and allowances apply to different types of investment income so it’s therefore vital that you provide full and accurate information for every different account and every different type of investment.

Employees and Directors

A copy of form P60 for all roles held as at 5 April.

A copy of form P45 for all roles that ended during the tax year.

Employers are required by law to issue forms P60 by 31 May following the relevant 5 April. Forms P45 are issued when you leave an employer, normally within 7 days of your leaving date.

Student Loan Repayments via Payroll

As the forms P45 and P60 do not always show student loan repayments, we need a copy of the final payslip for each employment.

That means the 31 March payslip for jobs you had at the year end, or the last payslip they gave you if you left any job(s) part way through the tax year.

Benefits in Kind and Expense Allowances

If you have a company car or van, or if your salary package includes private medical insurance or gym membership, then you will always be issued with a form P11d. These are taxable benefits in kind.

There are a few other cases where forms P11d are issued to employees who receive expense allowances. This is less common than it used to be, because HMRC has introduced more exemptions.

For example, a situation where you have paid for business travel, claimed the exact figure, and were reimbursed the exact figure, is exempt from the P11d reporting rules. However, round sum allowances are reportable. Check with your employer if you are not sure about the expense allowances you received.

We will need a copy of form(s) P11d issued “as at” 5 April for all roles held in the last tax year (whether they were still active on 5 April, or not).

Employers are required by law to issue forms P11d (to relevant employees) by 6 July following the relevant 5 April. However, if a P11d is not relevant to you, the employer is under no obligation to tell you that you’re not going to get one. Check!

Receiving an Occupational Pension or a Private Pension Annuity

A copy of the form P60 (or other statement from your pension provider) as at 5 April, showing the gross pension received by you, and the tax deducted.

Pension providers (other than the State Pension) are required by law to issue forms P60 by 31 May following the relevant 5 April.

Receiving a State Pension

Letters detailing State Pension rates and entitlements are normally issued in March and April setting out what your individual rate is. Almost no-one gets the standard rate of State Pension as it is often enhanced by the level of your national insurance contributions. Hence we cannot rely on headline rates, and we need a copy of that letter setting out the rate specific to your case.

Child Benefit

Please let us know how much Child Benefit was received during the tax year. Child Benefit may be restricted in some cases where your income exceeds £50,000 and in all cases where your income exceeds £60,000.

If you (or your spouse/partner) have children aged 18 or younger then,  regardless of whether you receive Child Benefit or have disclaimed it, please let us have a note of each date of birth for those who were aged 18 or below on 5 April just gone. Child Benefit may still be paid in connection with 18 year olds until 30 September following their 18th birthday. Having this information allows us to accurately establish two types of situation:

– Claimants where a claw back becomes due;
– Non-claimants who may now become entitled to claim.

There are complex rules in cases where you or your partner move out or move into the family home part way through a tax year. If this applies to you, please talk to us on a one to one basis.

Self Employed Trades and Partnership

Please consider the Annual Accounts Checklist

Rental Income

Please consider the Lettings Accounts Checklist

Personal Pension Contributions

By “personal pension” we mean a pension policy agreed by you directly with a Pension Provider and paid for using your own private funds.

Personal pensions agreed with a Pension Provider because you are a company director (and your company pays the contributions) are not reportable on a personal tax return – ignore these.

Pension Providers normally issue a certificate PPPC (for each policy) just after 5 April each year.

Please provide a copy of each certificate PPPC or set out an analysis of dates and amounts paid under each separate pension policy, stating whether these were paid gross or paid net.

Auto-enrolment Pension Contributions

Under auto-enrolment in the UK, you may have an employer pension where contributions are taken by deduction at source from your pay. There are four ways of doing this and your employer will have elected for one of them when the pension scheme started.

Check with you payroll office, and tell us which “Pension Contribution Basis” applies to these deductions:

• After tax and NI with basic rate tax relief
• After tax and NI with no tax relief
• Before tax and NI
• Before tax and after NI

Please provide us with copies of all your payslips for the tax year as that’s the only way to see the full pension deductions for the year.

Gift Aid Contributions

Please provide two analyses showing the name of each gift aid scheme, the commencement date, and the amounts paid. One list is for your regular contributions. The second list is for one off payments for that year only.

Sundry

Lastly, please consider if any of the following items need looking at more closely:

• New sources of income in that tax year.
• Job Seekers Allowance or other taxable benefits.
• New stock options.
• Capital gains or losses on shares, securities and other assets.
• Purchases and sales of “second” properties.

If you are unsure about any of these points please feel free to call us.

Covid-19 Support For Freelancers

The details below are given in good faith based on the prevailing information as at 12.30pm on 27 Mar 2020.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

This report should be one big flow chart, but in order to make it fully accessible, a numbered list is more straight forward. Please follow the instructions line by line, and follow “go to” instructions as soon as you meet them. Stop at the first mention of “stop” that you come across.

Update 15 April 2020 – owing to recent changes in HMRC guidance, lines 1000 and 1010 have been renumbered and repositioned as lines 1033 and 1034.

1020 Do you have limited liability protection because you operate as a limited company?

1030 Yes – go to 3020

1033 Did your freelance work commence on 6 Apr 2019 or later?

1034 Yes – go to 7000

1040 Has your self employment (or partnership) income declined directly as a result of the Covid-19 crisis?

1050 No – go to 7000

1060 Take care with this double barrelled question, and check your tax return if you are unsure . . .

1070(a) Are you a partner in a traditional partnership and have a page P1 on your last tax return?
1070(b) Are you a sole trader with self employed accounts and a page SE1 on your last tax return?

1080 If you answered “no” and “no” go to 7000

1090 Annual income includes all earnings, all investment income and rent received etc. Is your self employed profit (or partnership share) less than 50% of your annual income?

1100 Yes – go to 7000

1110 Has your self employed trade (or partnership) ceased in 2019/20?

1120 Yes – go to 7000

1130 Will you (or but for the effects of the Covid-19 crisis, would you) continue to trade in 2020/21?

1140 No – go to 7000

1150 Work out the annual average of your net profit between 6 Apr 2016 and 5 Apr 2019 (or pro rata annual profit for businesses that commenced between those two dates). Is your annual average net profit greater than £50,000?

1170 Yes – go to 7000
1180 No – go to 2000

2000 Based on your response, you are eligible for support under the 26 Mar 2020 measures “for the self employed”. HMRC has this info already (from your tax returns) and will contact you. They have asked that you do not contact them. The plan is set out here and grants are expected to be paid in June 2020.

2010 From 13 May 2020 claims can be made here. Look for the “Start Now” button in the middle of the page. There’s also a big warning saying “You must make the claim yourself. Your tax agent or adviser must not claim on your behalf as this will trigger a fraud alert, and you will have to contact HMRC. This will cause a significant delay to you receiving your payment.“. Moreover, you will need the start date that HMRC sent to you by email, SMS or letter. They definitely don’t want to let accountants get involved for some reason!

2020 Stop

Update 15 April 2020 – owing to recent changes in HMRC guidance lines 3000 and 3010 have been renumbered and repositioned as lines 3033 and 3034.

3020 Do you have a proper contract of employment with your own company?

3030 No – go to 6000

3033 Does your company have a PAYE account with HMRC?

3034 No – go to 5000

3040 Has your company’s income declined directly as a result of the Covid-19 crisis?

3050 No – go to 5000

Update 15 April 2020 – owing to recent changes in HMRC guidance lines 3053 and 3054 have been added.

Update 17 April 2020 – HMRC guidance has changed (again) – different conditions for qualifying employees have been added to a new line 3053.

3053 Were you on your employer/company PAYE records on 28 Feb 2020? Friday 28 is the key date, even though there were 29 days in February in 2020. If you officially left before 28 Feb or officially started after 28 Feb, then you should answer no.

3053 Were you on your employer/company PAYE records on 19 Mar 2020? If you officially left before 19 Mar or officially started after 19 Mar, then you should answer no. If your first ever payslip from this employer is dated after 19 Mar 2020 then you should answer no. The criteria require that HMRC was notified of this employment via any payroll RTI submission by 19 Mar 2020 at the latest.

3054 No – go to 5000

3060 Have you been laid off with no work (officially termed “furloughed”) owing to the Covid-19 crisis?

3040 Yes – go to 4000
3050 No – go to 5000

4000 Based on your response, your employer is eligible for support under the 18 Mar 2020 “Job Retention Scheme” and ultimately you should receive some Government funded income through your employer’s payroll system. It is the responsibility of the employer to make a claim to HMRC using an online tool which they say is due to be available “at the end of April 2020”. More details are given here. Office holders should note that this applies only to salary and not to dividend income.

4010 Stop

5000 No support under the 18 Mar 2020 “Coronavirus Job Retention Scheme”.

5010 Stop

6000 As a director, your salary is usually paid to you for the responsibility involved in “holding the office of director” and not for “work done”. This causes two issues.

6010 A director cannot be furloughed according to the Companies Act 2006. The Act does not say that exactly, but the combination of rules means that a director is always active on company affairs. Update 11 April 2020 – HMRC guidance has been adjusted, go to 6080.

Update 11 April 2020 strike out lines 6020 through 6070

6020 Furthermore, a director is not an employee in a strict sense even though the words employee and employment are often used in everyday dialogue about directors. There is no definition of “employee” in Statute. Sometimes case law helps, but there is still no definition of “employee”.

6030 What is clear is that to qualify for support under the 18 Mar 2020 “Coronavirus Job Retention Scheme” the employee must be engaged to do work “under a contract of employment”. Unfortunately “holding the office of director” is not the same thing as “doing work” and you don’t need “a contract of employment” in order to hold an office.

6040 This Government web page has ignored these fine points of detail and professional bodies are seeking clarification from HMRC. To be honest, some of the dialogue on that page demonstrates clearly that the civil servants who authored it have no idea what the legal definition of “self employed” is!

6050 Arguably, this is just legalistic torture but the law is the key issue in all of our interactions with Government. It could be hoped that Rishi Sunak will soon be hauled back to announce further measures. The thing many people want to hear is something like “irrespective of the provisions of the Companies Act 2006, for the purposes of the Coronavirus Job Retention Scheme HMRC will permit directors without contracts of employment to be deemed as furloughed provided that all the other conditions of the Scheme are satisfied”.

6060 And then what would you get? Possibly your company will get 80% of your salary. And nothing extra on account of your dividend income. Go back now and look at line 4000 if you want to, but read the rules carefully, it’s about salary only.

6070 Unless Rishi Sunak suddenly reverses the Government’s attitude to freelancers who operate as small limited companies you currently stand to get nothing. Maybe there will be movement on directors’ salaries. A change of heart on dividend income is highly unlikely given that HMRC has previous form with the original IR35 legislation and later additions to those rules.

6080 Update 11 April 2020 – the desired text (at line 6050 above) has in effect been published here. Office holders may be entitled to claim JRS.

Update 15 April 2020 modify line 6090

6090 Go to 4000

6090 Go to 3033

6100 Stop

7000 No support under the 26 Mar 2020 measures “for the self employed”.

7010 Stop

Footnote

We know where Boris Johnson lives if you want to write to him.

Covid-19 Measures in General

Disclaimer

This report was published, in good faith, based on the prevailing information, at 1.00pm on 23 Mar 2020. The situation is changing on a daily basis and any updates to this report will be clearly marked with a date time stamp.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

Overview

The Government measures are designed to target employees and businesses which are directly affected by the Covid-19 issue. We can argue that we are all affected, but having had dealings with HMRC for 35+ years they can be tricky, and so we suggest that you keep evidence in case you need to (at a later date) show how you have been affected. That includes:

• Medical correspondence for those worst affected.
• Employer correspondence for those laid off.
• Business correspondence for those who experience a downturn.

Do not routinely delete those emails. If somebody cancels a piece of work (or worse) please keep a copy of that email for 6 years beyond the end of your trading year (or tax year).

VAT Registered Taxpayers

VAT due for quarters ended 29 Feb 2020 through to 30 Jun 2020 inclusive will not become due until 7 Aug 2020 at the earliest. This right is automatic and (Government says) no action needs to be taken. If you have VAT to pay, you can pay it on your normal due date if you wish, or hold on to the cash and pay on 7 Aug 2020. No interest will be charged. If you are due a VAT repayment these will be processed as normal.

If you pay quarterly VAT by Direct Debit and want to delay your payments then we recommend cancelling the Direct Debit now. We know from experience (foot-and-mouth disease in 2001 and the farming sector) that “this right is automatic” may not be enough to stop HMRC Direct Debit collections.

Apparently a further announcement is to be made which will allow accumulated VAT debts to be paid over time, and you are to be given until 5 Apr 2021 to bring things up to date.

Irrespective of actual payment dates, VAT returns must still be submitted within the correct time frames.

Mainstream Businesses

Most of the best measures that have been announced are contingent on you being a mainstream business, that is to say, one which:

• has commercial premises subject to business rates; and
• is eligible for either Small Business Rate Relief or Rural Rate Relief.

In these cases you will qualify for grants of up to £10,000 (originally the announcement was £3,000). Whichever local authority deals with your business rates will be in contact you and will automatically initiate the process for you.

All Businesses

Loan scheme – talk to your bank. The Government has agreed to underwrite 80% of any loan capital advanced by your bank under these emergency measures. Theoretically that makes you a lesser risk today that you were a few weeks ago. However, nothing really changes between you and the bank, your application still needs to be well founded and your repayments need to be affordable. The protection is for the bank in case your business goes bankrupt.

Employers and Employees

The Chancellor announced a new a grant from HMRC to employers to cover furloughed workers and keep people on payroll rather than laying them off. The coronavirus job retention scheme would pay up to 80% of employees’ salary to a maximum of £2,500 a month.

The job retention scheme will be backdated to 1 March, with no limit on the amount of funding, and The Chancellor stated that it will be open initially for “at least three months” but didn’t take off the table the option to extend the scheme for longer if necessary.

HMRC will implement a process to fund employers. However, HMRC is in the business of collecting tax and has less experience of handing out grants. The infrastructure to do this is currently a work in progress. Nobody knows when the first grants will be paid.

27 Mar 2019 12.30pm Update – strike out this headingSelf Employed Trade or Partnership

27 Mar 2019 12.30pm Update – new heading – All Self Assessment Cases

Self assessment tax instalments due on 31 Jul 2020 have been postponed, without interest etc, and will now become due on 31 Jan 2021. This is automatic and no action needs to be taken.

27 Mar 2019 12.30pm Update – strike out this para – Apparently you need to be in a self employed trade or be a partner in a traditional partnership to take advantage of this. That means (until we hear otherwise) that self assessment tax instalments due on 31 Jul 2020 on account of your rental income or dividend income, etc, are still due.

Freelance Limited Company

Other than claiming the 80% job retention scheme figure (see “employers” above) there are no specific provisions for small freelance limited companies.

27 Mar 2020 12.30pm update – even the eligibility for this 80% has been questioned by some legal experts. Please see this newer blogpost.

The Government is still addressing this issue and has called for submissions to made by 5pm GMT on 23 Mar 2020.

https://twitter.com/CommonsTreasury/status/1240620040803803136

Use the email address specified in that tweet and (in meaningful words) spell out precisely what you want The Cabinet Office to help with.

Other Resources

Well respected tax lecturer Giles Mooney has posted a 17 min video on YouTube:

Although we have covered key points above, clients of Proactive may be interested in the following sections:

• 10min02 – 10min40 – statutory sick pay
• 10min41 – 11min30 – the self employed
• 14min10 – 15min25 – loan guarantee
• 15min25 – 15min59 – claiming on business insurance

The Government Support for Business page is here:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

The Coronavirus helpline: 0300 456 3565

This telephone number has been rebranded as the Coronavirus Helpline. It’s not a new service as some claim. It has been in existence for many years and is also known as the Business Support Helpline. As far as we know, it is mainly of use to taxpayers who wanted to negotiate “time to pay” arrangements.

Director shareholder payments 2020/21

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2021.

Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit then you can pay no dividends. If most of your income is from dividends then you will need a personal income tax reserve as well. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Follow this system precisely. Ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. You definitely do not want that to happen.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. In most cases that means setting up 4 separate payments at end of every calendar month. As Proactive does not hold any authorities on client bank accounts, it’s up to you to make the correct transfers at the correct time.

Basic rate taxpayers

For people whose monthly income does not exceed 4,165.

Basic rate taxpayers year ended
5 Apr 2021
Monthly figures
Salary 732
Primary “Tax Free” drawings (personal allowance) 309
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings (max) liable to 7.5% tax 2958

Provided always that the monthly income does not total more than 4165
Put aside 7.5% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,165 and 8,333.

Higher rate taxpayers – 40% year ended
5 Apr 2021
Monthly figures
Salary 732
Primary “Tax Free” drawings (personal allowance) 309
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2958
Supplementary drawings (max) liable to 32.5% tax 4168

Provided always that the monthly income does not total more than 8333
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45% year ended
5 Apr 2021
Monthly figures
Salary 0
Primary “Tax Free” drawings (personal allowance) 0
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2958
Supplementary drawings liable to 32.5% tax 5209

Additional drawings liable to 38.1% tax excess over 8,333.00
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.
And put aside 38.1% of your additional drawings as a personal tax reserve.

Director shareholder payments 2019/20

If you wish to follow the small salary big dividend method of rewarding yourself from your own company, this simple guide can help.

As a matter of routine, your company should prepare its own corporation tax reserve. You will probably need to prepare a personal income tax reserve as well. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends. Do not pay out all of the profit as dividend, only the post tax profit. That means that the company tax reserve stays in the company.

Follow this system precisely, and ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. Moreover:

  • You must be a director of a UK limited company.
  • Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
  • You must also be a shareholder in the company.
  • All shareholders must receive dividends in direct proportion to their shareholding.
  • Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.

Basic rate taxpayers

For people whose monthly income does not exceed 4,165.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,165 and 8,333.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

Director shareholder payments 2018/19

Since the introduction of the Dividend Allowance and the Interest Allowance in 2016, compounded by the new Scottish rates of tax in 2017, there is no easy way to work out the optimum pattern of salary and dividends for directors of small UK companies.

Here’s a rough guide to what you might want to pay yourself and what sort of personal income tax reserve you may need to keep. Remember, that this is in addition to your company preparing its own corporation tax reserve. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends.

In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to a (later) deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any tax and National Insurance is being paid late.

  • You must be a director of a UK limited company.
  • Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
  • You must also be a shareholder in the company.
  • All shareholders must receive dividends in direct proportion to their shareholding.
  • Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear and the exact “dividend” can be calculated.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.

Basic rate taxpayers

For people whose monthly income does not exceed 3,861.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,861 and 8,333.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

Dynamic coding for PAYE

HMRC has recently (late summer 2017) introduced a system for issuing “dynamic tax codes for PAYE cases”. It is intended, from their point of view, to be more accurate and thereby give taxpayers the most suitable code on a regular basis. Indeed it does seem to issue regular updates to coding notices (a bit too regular by some standards) and it does seem to get some things wrong! So in that respect it’s no better than the system they had before.

Every time your employer runs a payroll, and submits one of the “real time information” (RTI) reports, the Dynamic Coding system evaluates what should happen to your tax code. If the evaluation predicts a change next month, of anything more than a few pounds, then it issues a new code.

This presents no problem for people who have a salary fixed at the start of a tax year, have a salary review which coincides with the end of the tax year, and have 12 monthly payments which are near identical. No need for any changes to your tax code and Dynamic Coding does the maths and leaves everything as it was.

If that’s not you, then there are going to be one or more changes throughout the tax year. It gets particularly irritating when you get a bonus early on in the tax year, or in any month before about tax month 11 (which is February).

For example, if your salary is 36,000 then you’d have the code calculated according to monthly income of 3,000. However if it’s 36,000 with a 6,000 bonus, and that bonus is paid at the end of every April, HMRC will think that your April pay (being 9,000) is typical for the year. It scales that up to 9,000 every month, assumes an annual salary of 108,000, and works out (because you’re apparently earning more than 100,000) that you’re no longer entitled to the annual personal allowance of 11,500 and imposes a restriction. That results in enormous wodges of tax being taken off your pay in May!

How can we fix it? Accountants can’t!

In their wisdom, HMRC has decided that (a) you can only change it by logging in to your online personal tax account or (b) by calling them. That’s “you” the taxpayer, and not the accountant. HMRC has designed the system to exclude accountants and we have no access to personal tax accounts unless we’re sitting next to you when you log in!

So, you need a personal tax account (which requires two factor authentication) and that means you need a UK mobile phone. We have non resident clients who are UK taxpayers, and who do not have a UK mobile phone! HRMC’s advice to them – buy a UK mobile phone!

We know where Theresa May lives if you want to write to here!

Anyway, sign up for a personal tax account here https://www.gov.uk/personal-tax-account or phone HMRC on this number 0300 200 3300 (and expect a bit of a wait) and tell them what you think is wrong with your newly issued dynamic tax code.

By all means check with us first, and let us have a copy of your latest coding notice, because we don’t always get them. The HMRC Self Assessment portal which we do have access to is separate to the PAYE system. There is some cross pollination, but it’s 50 50 whether we get a PAYE coding notice or not. If we can see what the notice says, then (subject to no unforeseen events) we can make an intelligent guess as to what the code should be for the rest of this tax year. Or at least until next month when Dynamic Coding decides to change it again!

Making Tax Digital

“Making Tax Digital” is a new system of filing your tax data quarterly, and it will eventually replace the Self Assessment system.

In effect, you will have to file a quarterly tax return if you fall into one of these categories:

  • self employed
  • partnership
  • landlord

And having filed all four quarterly tax returns, you will also be required to complete a fifth tax return with any year end adjustments (or simply to confirm that the earlier four were correct and that there are no year end adjustments). So that’s five tax returns every year, instead of one.

“Making Tax Digital” (or MTD for short) is being rolled out from 6 Apr 2018 and is currently being tested by a sample of taxpayers in a one year trial.

The timetable is staggered and looks like this:

  • 6 Apr 2018 – landlords and any unincorporated businesses which are VAT registered (the self employed and partnerships)
  • 6 Apr 2019 – any other self employed and partnership businesses earning more than 10,000 per year.

MTD will be extended further to include limited companies, probably from 1 Apr 2020 but no definite date has been announced.

This means from 6 Apr 2018 that landlords and unincorporated businesses will be required to:

  • Maintain their records digitally, through software or apps
  • Report summary information to HMRC quarterly through their ‘digital tax accounts’
  • Make an end of year declaration through their digital tax accounts

You can set up a personal “digital tax account” now. It requires two factor authentication, so you will need a UK phone number which is capable of receiving an SMS text message each time you log in to your account. That also means that your accountant will be able to prepare records, but will not be able to submit them. They will be passed back to you for you to submit . . . five times per year!

We’d love to do it all for you, but it would be impractical for us to keep rows and rows of mobile phones and to do the logging in and the quarterly submissions! We’ve looked at using virtual mobile numbers from Nexmo and Twilio, but these services are barred from working with two factor authentication systems.

Hence, the emergence of the “Making Tax Difficult” meme!

A digital record is a record of data for each transaction of “the business”. The proposed minimum required data will be:

  • Date rentals due and payment received date if using cash basis of accounting
  • Rental value
  • Invoice date and value for expenses
  • expense category
  • deducted amount/percentage for expenses (allowing for any duality of purpose)

We already use professional software which does this, but HMRC expect all businesses and landlords to possess and to use their own software. Digital records can be maintained using software which will be available from third party software providers. HMRC have confirmed there will also be some products which are free of charge.

If these “free products” are anything like HMRC’s free payroll program then they will have limitations. For example, HMRC’s free payroll program will generate all the reports that HMRC wants, but it does not generate payslips, which is what employers and employees want!

If you rent out multiple properties there is a mix of “separate” and “joint” rules. It will be easier to keep separate records for each property, and to combine the totals in order to file a single report. You won’t need to file supporting receipts (though the original MTD plans wanted that) but you will be required (as now) to keep all your supporting receipts so that HMRC can see them if requested.

In the case of a jointly held property, each owner has a separate obligation to file their own figures – their share of each total.

In the case of an unincorporated business, operating as a partnership, a nominated partner is required to submit a full set of totals for all five returns over a year. The nominated partner is required to notify each partner at the year end, of each partners’ totals, and has an option (but not a requirement) to do that for each quarterly report.

There will be an overlap between Self Assessment and Making Tax Digital:

  • 2016/17 Self Assessment Return – due 31 Jan 2018
  • 2017/18 Self Assessment Return – due 31 Jan 2019
  • Apr, May, Jun 2018 MTD report – due 31 Jul 2018
  • Jul, Aug, Sep 2018 MTD report – due 31 Oct 2018
  • Oct, Nov, Dec 2018 MTD report – due 31 Jan 2019
  • Jan, Feb, Mar 2019 MTD report – due 30 Apr 2019
  • 2019/19 Self Assessment Return – due 31 Jan 2020

This means that your Apr, May, Jun 2018 MTD report will be due in long before your 2017/18 Self Assessment Return is due. The Apr, May, Jun 2018 figures will also appear in the 2017/18 Self Assessment Return.

We are all going to have to get used to updating our records more frequently, and to submitting returns more frequently. Will this lead to HMRC asking for more frequent tax payments? Quarterly? Currently, they say “no” but who knows how that may change?

Will it lead to more work for you and I? Yes! And what will that mean for fees? Good question.

Director shareholder payments 2017/18

Since the introduction of the Dividend Allowance and the Interest Allowance in 2016, compounded by the new Scottish rates of tax in 2017, there is no easy way to work out the optimum pattern of salary and dividends for directors of small UK companies.

Here’s a rough guide to what you might want to pay yourself and what sort of personal income tax reserve you may need to keep. Remember, that this is in addition to your company preparing its own corporation tax reserve. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends.

In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to a (later) deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any tax and National Insurance is being paid late.

  • You must be a director of a UK limited company.
  • Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
  • You must also be a shareholder in the company.
  • All shareholders must receive dividends in direct proportion to their shareholding.
  • Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear and the exact “dividend” can be calculated.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.

Basic rate taxpayers

For people whose monthly income does not exceed 3,749.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,749 and 8,332.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,332.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.

Let us know if we can help.