Wriggle Room and Late Filing Penalties

Do you have a penalty notice from HMRC relating to the late filing of a 2013/14 or 2014/15 Self Assessment tax return?

Then you may be interested in a working practice which HMRC introduced recently, because they don’t have enough staff to check “reasonable excuse” claims. And whatsmore, they have extended the meaning of “reasonable excuse” which used to be limited to things like . .

  • Death of a close relative
  • Burglary
  • Flood

. . . to include a number of lesser reasons which they previously refused to accept. So “reasonable excuse” now includes . . .

  • Computer failure
  • Service issues with HMRC online services
  • Postal delays

However, these new concessionary rules apply only to 2013/14 and later penalties. Furthermore, you will not secure the cancellation of such a penalty notice until the following two conditions have been satisfied:

  1. The SA tax return for that year has been received by HMRC.
  2. The taxes due for that year have been paid.

Quite why they arbitrarily draw the line between 2013/14 and older years we don’t know. There’s a bit of recent case law which may help though. It’s about being treated fairly by HMRC and if you have an older penalty which might be cancelled under the new working practice, let us know and we’ll try to help.

Dividend Tax 2016/17

Significant changes to the taxation of dividends will take effect from 6 April 2016

Planned changes:

  • 10% notional tax credit being scrapped
  • Introducing a tax free Dividend Allowance of £5,000
  • Then, dividends tax rates will be set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

In short, this means that the majority of owners of small limited companies, who take a small salary and large dividend, will see a significant increase in their personal tax bill. With the exception of the first £5,000 tax free band, the tax rate on dividends, whatever your income level will increase by 7.5%.

  • First £5,000 – 0%
  • Balance of basic rate band– increase from 0% to 7.5%
  • Higher rate – increase from 25% to 32.5%
  • Additional rate – increase from 30.6% to 38.1%

There are discussions in accounting circles about the best ways to minimise the impact of this, but it’s generally accepted that anybody who currently takes a small salary and a large dividend (which takes them exactly to the threshold of the higher rates of tax) is going to see their income tax bill increase by about £1,800 per year.

Self Assessment Tax Returns for all

This will also mean that some company directors who have so far escaped having to complete a Self Assessment tax return (because there was never any personal tax to pay under the old regime) will now be required to file a personal return every year. That’s a separate service which we offer, and whilst you can do your own return if you choose, you may wish to opt for the peace of mind that comes from having it done professionally. We offer two levels of service for this, with the premium service providing you with quarterly updates, tax planning and forecasts, so that you are always forewarned about future bills.

Let us know if this is something that you’d be interested in.

Buy To Let – new tax rules

Two new sets of rules come into force over the next few years.

No more “10% Wear and Tear” allowance

The allowance is being abolished. Starting on 6 Apr 2016, landlords who rent out furnished accommodation will no longer be able to claim the flat rate 10% allowance every year, and instead will be permitted only to claim the actual costs of like-for-like renewals and replacements.

Restriction of loan interest relief

Over a three year period, starting on 6 Apr 2017, the amount of tax relief you can claim for loan interest paid, will be gradually reduced so that by 6 April 2020 landlords who let out residential property (in their own name) will no longer be able to claim the full amount of loan interest relief.

Taken to extremes this may mean that you end up paying tax based on your gross rents, rather than on your rental profit. Let’s consider this hypothetical case of a property being let out in the 2020/21 tax year. We’ll assume that there is an annual income from rent of £25,000 and that the loan interest on an enormous mortgage also comes to £25,000 per year. For simplicity’s sake we will assume that there are no other allowable costs.

Under the current 2015/16 rules the loan interest of £25,000 is set against the rental income of £25,000 leading to a taxable profit of NIL and a tax bill of NIL.

Under the 2020/21 rules the loan interest of £25,000 is disallowed in full, meaning that the rental income of £25,000 (and the absence of other costs) will lead to a taxable profit of £25,000. Assuming a tax rate of 40% that potentially means an income tax bill of £10,000. And having used up your £25,000 of rental income to pay the lender the interest of £25,000 you are faced with a real profit of NIL on which HMRC can still legally demand tax. To soften the blow, there is a restricted relief (see table below) equivalent to basic rate tax relief. However, the result is a real tax bill of £5,000 on a real profit of NIL.

Nobody knows how you’re going to find a £5,000 tax payment if all the income was spent on loan interest!

Beware that some property web sites are saying that the “restricted interest relief” means that basic rate taxpayers won’t be affected. However, they will be affected if the amount of the “Taxable profit”, not the “Real profit”, takes them into the higher rates of tax (see table below). In the past, tax computations used the “Real profit” figure in order to work out which rate band you were in. From now on the legislation is changing so that the tax computations will use the “Taxable profit”.

That’s a subtle but important difference which some property web sites have failed to understand. To put it another way (and subject to transitional rules) your tax rate bands are now established before loan interest is factored in, rather than after loan interest is factored in.

Look carefully at the “real profit” line and the “taxable profit” line in this five year projection:

OK, so this is all hypothetical, but substitute your own figures into that table and you’ll see that almost all residential property landlords will end up paying more tax. The exception will be for landlords who already own a property outright and pay no interest. They will presumably already be used to paying tax on their rental income and will notice no material difference. And, any landlords with pitiful rental income and pitiful other income (who stay wholly within the basic rate band) will also be unaffected.

In the three intervening years 2017/18 and 2018/19 and 2019/20 the 100% withdrawal of the allowably of loan interest will be phased in, in 25% tranches, meaning that in:

  • 2017/18– 25% of the loan interest is disallowed, with a basic rate tax reduction applied to that 25%
  • 2018/19– 50% of the loan interest is disallowed, with a basic rate tax reduction applied to that 50%
  • 2019/20– 75% of the loan interest is disallowed, with a basic rate tax reduction applied to that 75%
  • 2020/21– 100% of the loan interest is disallowed, with a basic rate tax reduction applied to that 100%

There is no similar rule for companies which let out residential properties, and the current incarnation of the new rules applies only to individual landlords. As a result, landlords with an existing portfolio and who are likely to have additional tax to pay under the proposals have to consider how best to cope with this measure – whether to:

  • Sell up, or
  • Transfer the property into a limited company (which would involve paying Stamp Duty Land Tax and potentially Capital Gains Tax on the sale – as well as arranging a new mortgage), or
  • Do nothing and pay any additional tax.

Beware that a number of Property Websites may now be offering solutions which lead to you incorporating a limited company. As things stand, that will mitigate the problem, but as things stand, there is nothing to prevent The Chancellor from applying similar rules to limited companies in his next Budget!

Lastly, with effect from 6 Apr 2023, landlords will have to provide quarterly reports of their income and expenses. That creates the paradoxical situation where the 2022/23 SA return will not be due until 31 Jan 2024 but the later “first quarter report” for 6 Apr – 5 Jul 2023 will presumably be due sooner, and most likely within one calendar month of the quarter end, meaning that it becomes due on 5 Aug 2023. That’s how quarterly VAT returns work, and we’re guessing that’s how “quarterly lettings returns” will work too.

Footnote 1

This report was modified on 4 Dec 2015 to show how the restricted interest relief works.

We also learnt on 4 Dec 2015 that major banks (and finance houses) are sufficiently worried by these new rules (and a possible loss of business), that they are looking at ways to facilitate landlords to move from private ownership to corporate ownership of residential properties. There are no “products” on the market yet, but they may come.

Footnote 2

This report was modified on 22 Jul 2020 because HMRC has delayed the implementation of MTD for landlords to 6 Apr 2023.

 

Where is BX9 1BX? What happens to HMRC post?

Have you had a letter from HMRC with the new BX9 1BX address? Did you write back to it? What happened to your letter?

BX9 1BX is an artificial post code and it’s not on the Royal Mail database. It’s a mail handling facility operated by HMRC in Bexley, Kent. Letters are opened and scanned and electronically dispatched to other HMRC offices. Occasionally, bulky items are forwarded as originals (using internal mail) to the HMRC office which is to deal with them.

In Jun 2006 we adopted a policy of sending all communications to HMRC by Special Delivery, because they fail to handle phone calls well, and they tend to lose ordinary mail. They also routinely fail to sign for Recorded Delivery letters so it has to be Special Delivery. When all of the offices consolidated a few years back, we resorted to using this main address for nearly all the mail we send to HMRC:

HM Revenue and Customs
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ

That’s another mail handling facility just like the one in Bexley. Interestingly, the HMRC web site tells couriers to always use the Newcastle address.

You can check that web page here. Incidentally, the NE98 1ZZ postcode is on the Royal Mail database.

So this letter really amused us:

Perhaps somebody should let Mrs L Whittle know?

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.

201502011555div002

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 clients with VAT

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. This item relates only to invoices for work done before 1 Jan 2021 – it is here (in italics) just in case you are working on older records. 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. This item relates only to invoices for work done before 1 Jan 2021 – it is here (in italics) just in case you are working on older records. 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 UK vary depending on what you supplied and where you supplied it. If you supply intellectual services to a non-UK 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-UK 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 4

This example relates only to invoices for work done before 1 Jan 2021 – it is here just in case you are working on older records Non UK client in the EU with an EU VAT number

Example 2 of 4

This example relates only to invoices for work done before 1 Jan 2021 – it is here just in case you are working on older records Non UK client in the EU without an EU VAT number

Example 3 of 4

Non UK client

Example 4 of 4

Standard UK invoice to a  UK client

Director shareholder payments 2014/15

There is an established working practice whereby directors of small limited companies (typically “one man” limited companies) reward themselves with a combination of small salary and big dividend. The point of doing this is to stay within the law, and to hand over the smallest possible sum of money to HM Revenue & Customs. In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to the imposition of a deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any taxes are being paid late.

Most importantly, you must consider all of your personal income in order to determine the optimum level of income from your own company. This report assumes that you have no other income and are seeking the most efficient arrangement for your director shareholder payments in 2014/15 whilst still staying within the law.

You must be a director of a UK limited company to do this. Your salary is paid to you for the responsibility involved in holding the office of director.

You must also be a shareholder in the company in order to receive dividends. It follows that all shareholders shall receive dividends in direct proportion to their shareholding. Where you are the sole shareholder and have 100% of the shares, that’s relatively straightforward. Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

The company may only pay dividends if it has a profit. If you are paying yourself sums of money out of investor funding (and not out of profit) then you are borrowing from your own company. This is a bad thing! HMRC may impose financial penalties on you for doing this – twice. There is one penalty for the company and a separate one for each overdrawn director.

Hold a monthly or quarterly meeting of the shareholders and decide what dividend can be paid. Prepare minutes of that meeting.

You need to know what the profits are, what the corporation tax bill is likely to be, and what is left over to distribute to the shareholders. Dividends are paid out of post tax profits, so you must ensure that the company has an adequate tax reserve. To allow for some flexibility you may choose to describe these amounts as “drawings” until the “dividend” is calculated.

Dividends are personal income and are subject to income tax in your hands. Owing to peculiar rules about tax credits and the taxation of dividend income, you may pay no additional income tax if you are a basic rate taxpayer. If you are likely to reach the threshold for higher rate tax you may need to prepare an additional personal tax reserve as set out below.

The pattern for basic rate taxpayers is this:

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By combining a monthly salary of 663and a dividend of 2,543 your personal income (totalling 3,206) will be on the threshold of the 40% higher rate band for income tax. If you have sufficient funds and are prepared to suffer higher rates of income tax, then you may choose to follow this pattern.

622615pic20150405pic002

There are graduated changes for annual incomes between 100,000 and 150,00 and the 45% rate of income tax also kicks in. The personal allowance is also withdrawn after 100,000 and so if you fit this picture, this final table is for you.

622615pic20150405pic003

If you are a 40% rate or 45% rate taxpayer, then you will need to set aside a proportion of your income in order to pay your income tax bill under Self Assessment. For example, in this final table, for every secondary amount of £8,860 which you take, put 25% of that into your personal tax reserve. Then for every tertiary amount of £1,000, put 40% of that into your personal tax reserve.

Pre-Trade Expenses

I’ve only just registered my business. Can I claim pre-trade expenses which I’ve paid for personally? And can I claim back old VAT?

The short answer is “it depends”.

The basic principal is that “if you paid for something in the knowledge that you were starting a business, and the prime motive for buying this something was to enhance that business, then it is a business expense” and you can normally claim for it. That applies to both goods and services, and in order to claim the full cost you must satisfy both parts of this test, that (a) there was a business prime motive and (b) the purchase was within the three years preceding day one of the business.

Alternatively, if (for example) you bought your desktop computer and printer four years ago, and you introduced them into the business on day one, then you can claim their “fair market value” on day one as an allowable expense. This applies to goods only. If you cannot claim them under the three year rule mentioned above, then claim them under the fair market value rule, and use eBay or GumTree to work out what a fair market value for your something is. You can also claim for (for example) a CamCorder which you bought for the family two years ago, but then introduced into the business – it may fail the “business prime motive” test at the date of purchase, but it could still qualify under the “fair market value” rule as long as it is now a business asset and is not a family asset!

In either case, you need to submit a claim form to your business and have the precise amount reimbursed from the business account to your personal account. This applies, even if you are the only director/employee/worker. Documentation and adequate evidence are required in support of all claims.

If you’re thinking of introducing your car into your new limited company, you probably shouldn’t. The costs of tax and national insurance, on the benefit in kind of having a company car, usually mean that it’s actually more cost effective to run the car personally and to claim a business mileage allowance from your company.

Before doing the claim form, any VAT registered businesses should consider these additional rules. You can claim for the VAT on goods (and in limited circumstances on services too) provided that they:

• were purchased within the three years preceding the date of your VAT registration
• are still in the possession of the business on the date of your VAT registration
• are actually used in the course of the business; and
• satisfy the business prime motive test

Note that three years preceding the date of your VAT registration is only the same as three years preceding the commencement of the business if you were VAT registered from day one. There’s a subtle difference for businesses which waited a few months (or a few years) before applying for their VAT registration!

There are further guides on this site which may help you:

What is a business expense?
A Pre-Trade Expenses Flowchart
The mechanics of how to claim back expenses (current & pre-trade)

Child Benefit is now a Tax Return issue

New rules governing the entitlement to child benefit come into force on 7 Jan 2013.

Until now, child benefit has never been means tested and has always been paid to the mother of the child. If your household income exceeds £50,000 then the chances are that the child benefit will be clawed back from you, in stages, so that by the time your household income exceeds £60,000 the whole amount of your child benefit may be reduced to Nil.

The rules (as you might expect) are not quite as simple as that, and what is going to happen in some cases is that a man may have to repay child benefit which their spouse/partner has received, even if the child in question is not his child. That also means that as accountants we will have to ask you a few searching personal questions after 5 Apr 2013 in order to be able to work out which figures go into which box on your tax return. And your spouse/partner may need to give you the details so that you can give them to us!