The New Marriage Allowance

The new Marriage Allowance is set to come into force on 6 Apr 2015 when the new tax year starts. It was announced in last year’s Budget when David Cameron and George Osborne made a big deal about it . . .

  • Prime Minister David Cameron: “I made a clear commitment to the British people that I would recognise marriage in the tax system.”
  • Chancellor of the Exchequer George Osborne: “Our new Marriage Allowance means saving £212 on your tax bill couldn’t be simpler or more straightforward.”

However, it is not as simple as that. My wife and I have been married a long time and we will not save a single penny, because the new Marriage Allowance does not apply to two spouses who are both taxpayers. You have to have one spouse with income of less than £10,600 in order to benefit That’s the tax threshold for 2015/16 and so this new allowance only works when there is one spouse who is not a taxpayer.

In this context, marriage includes all of the recent forms of civil partnership and such like.

The rule applies to income as a whole, not just “earnings” so you have to take into account wages and interest received and rent received and all manner of income. And there is another, less trumpeted, rule which says “if the higher income spouse is a higher rate taxpayer, the allowance is not available” so some of you can stop reading now!

If you are in a situation with one spouse with income of less than £9,540 and the other with income of more than £11,660 (but less than £42,385) then you will get the maximum benefit, and you need to claim the allowance. I don’t think there are any clients on my books with that precise set of circumstances, but please do correct me if I’m wrong.

In the right circumstances the lower income spouse can elect to transfer up to 10% of the annual personal allowance to the higher income spouse. That’s a maximum of £1,060 for 2015/16. Then, if the other spouse has sufficient taxable income with repayable tax credits (note that dividend income whilst taxable, does not have repayable tax credits) then the higher income spouse stands to gain £212 (that’s 1,060 x 20%).

Claims can be made online https://www.gov.uk/marriage-allowance

The social impact of this is what the Government wants to shout about. It will put £4.08 per week into the pocket of a few poorer couples in the UK. The cost of the tax saving measure is small and the percentage of UK taxpayers who will benefit is small. However, with an election coming up, you can be sure that the Government will be repeating this, a lot!

Call me a cynic, but David Cameron’s and George Osborne’s words (above) do not “recognise marriage” across the board and they do not make UK taxation “simpler or more straightforward”. It just means that accountants have to ask more personal questions in order to complete your Self Assessment tax returns. More work for accountants and (wishful thinking) higher fees for us? Maybe I should be grateful?

Dividend Vouchers

The retained profits generated by UK companies of all sizes can be distributed to shareholders. For professional workers (such as contractors, consultants, and freelancers), dividends make up the bulk of income drawn down from small limited companies.

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If a limited company has made a profit, it is free to distribute these funds to its shareholders. This is the money the company has remaining after paying all business expenses and liabilities, plus any outstanding taxes (such as Corporation Tax and VAT). Even if the year end has not yet been reached, quarterly dividends can be paid on account of the profit which the company anticipates it will make.

‘Retained profit’ may have been accumulated over a period of time, and any excess profits not distributed as dividends simply remain in the company’s bank account. If you choose to distribute all of the available profit then it is likely that you have 80% of the company profits in your hands, whilst the company keeps 20% as a tax reserve.That’s how it looks from the company’s point of view.

As there is very little logic in tax law, your net dividend (prior to 6 Apr 2016) is deemed to have a 10% notional tax credit attaching to it. From an individual point of view, your net dividend is therefore 90% of some notional gross figure. These are the figures shown on the dividend voucher and these are the figures that go into a personal tax return (up to 5 Apr 2016).

Working via a limited company is a tax efficient way to operate, as National Insurance Contributions (NICs) are not payable on company dividends, whereas they are payable on salaried income.

Dividends must be distributed according to the percentage of company shares owned by each shareholder, i.e. if you own half the company’s shares, you will receive 50% of each dividend distribution.

In order to check how we calculate the dividend figure, our clients are provided with a 488120 ledgers report each quarter. Under the heading Creditor – YourName you can see how we have matched any periodic drawings to the quarterly dividends. This section of the 488120 report may also show idiosyncratic figures, adjusting your dividend for any personal expenditure made on behalf of an individual from a company bank account.

Invoicing foreign clients

All invoices must show the same information as your letter headed paper, business address, registered number and that sort of thing (to comply with The Companies Act 2006). The following rules also apply:

  1. The word “Invoice” must appear and be abundantly clear.
  2. Invoices must be sequentially numbered and the numbering must be purely numeric.
  3. The date of the invoice must be shown.
  4. The name and address of the person being invoiced must appear. This is the name of your customer and not the name of the individual in their head office. If your customer is a business called XYZ Trading Ltd then the invoice should be addressed to XYZ Trading Ltd. You can for example also mark the invoice “F.A.O. Mr Jones” if you wish, but if you address it directly to Mr Jones then (in law) it looks like your are charging the fee to Mr Jones and making him personally liable for the debt.
  5. If your UK business is VAT registered, the invoice must show a proper analysis of how the VAT has been calculated. A sub-total row, followed by a VAT calculation row which includes both the applicable VAT rate and the VAT payable, and finally a total row.
  6. VAT invoices must show your VAT registration number.
  7. VAT invoices to all UK customers must charge VAT at the current standard rate. There are a very few limited exceptions to this rule – talk to us if you sell “advertising space” to registered charities.
  8. If you sell downloadable eServices from your website please read about VATMOSS  first and then come back and read this! Normally, VAT invoices to EU customers (for services) must charge VAT at the current standard rate (as of 4 Jan 2011 that’s 20%) unless that customer is VAT registered in their State of origin.
  9. VAT invoices (for intellectual services) to VAT registered businesses in the other 27 EU States must show the customer’s VAT number (usually below their address) and charge VAT at a special rate of 0%. The phrase “intellectual services” means the services of people like accountants, lawyers, teachers etc where what you are paying for is primarily knowledge and/or skill. It may or may not include advertising and sponsorship, and conferences and catering, when any of these services are performed in the UK. Talk to us if this applies to you.
  10. If you cannot verify the VAT number of your EU customer on the Europa website then you must assume that they are not VAT registered and that means charging them 20% VAT!
  11. VAT invoices to customers outside the EU vary depending on what you supplied and where you supplied it. If you supply intellectual services to a non-EU customer then the services are “outside the scope” of VAT and the VAT calculation row on the invoice should simply state “outside the scope”. In all other cases you may want to check the “place of supply” rules with us, and the meaning of “intellectual services” before you invoice your non-EU customer.
  12. VAT invoices must be in GB Pounds. If you wish, you can show a different currency in the narrative within the “description of product/service”. It has to be done like this to comply with Reg 14(1)(i) The Value Added Tax Regulations 1995 and that allows VAT officers to quickly identify the right figures when they carry out a records inspection. If your client objects tell them you have to do it in GBP and the law is set out here.
  13. Your policy on preparing currency conversions must have a reasonable basis, and be consistent each time. Our policy is to use average monthly rates as per the HMRC published figures and that way there is never any dispute over the authenticity.

You cannot charge VAT to clients until your VAT registration is confirmed. If in doubt, please consult your accountant before charging anybody VAT.

If you are in the habit of billing your clients with local currency figures in your narrative, then you will get used to the fact that the remittance you receive is normally less than the amount you invoiced. You may want to bear this is mind when generating your invoices so that you can figure in a little extra for bank charges and exchange rate losses.

When you pass your records to the bookkeeper, we will check for bank charges and exchange rate losses (or gains). If the bank charges are clearly shown, then we will record them as such. If that still leaves a small exchange rate loss (or gain) the we will record that separately as an allowable expense (or other income) and so your business will be taxed correctly on the amount that it has actually received. There is no need to for you to prepare any other documentation to show the loss (or gain) and we will calculate it using the monthly exchange rates published by HMRC.

Your invoice to your foreign client should fit one of these three examples.

Example 1 of 3

Non UK client in the EU with an EU VAT number

Example 2 of 3

Non UK client in the EU without an EU VAT number

Example 3 of 3

Non UK non EU client with a “rest of the world” billing address