VAT Flat Rate Scheme – The New Rules from 1 Apr 2017

The VAT Flat Rate Scheme changes from 1 Apr 2017 when new rules come into force in a heavy handed attempt to combat abuse of the system. The FRS differs from standard VAT accounting because you pay a percentage of your business turnover rather than paying the actual VAT arising on the difference between sales and purchases.

You continue to charge clients the headline rate of 20% VAT and you can potentially benefit by remitting a smaller percentage to the taxman. The FRS rates differ from sector to sector, but for IT contractors the norm used to be a rate of 14.5%. That’s changing to 16.5%.

Generally speaking, the new rules are awful! If you want to see what HMRC said about this (in Nov 2016) the press release and draft legislation are here.

Let’s consider three examples of a software developer with net annual sales of £50,000 and net VATable costs of £5,000.

Standard VAT
accounting
Old FRS Rules
2002 – 2017
New FRS Rules
2017 et seq
Sales 50,000.00 50,000.00 50,000.00
VAT 10,000.00 10,000.00 10,000.00
Total 60,000.00 60,000.00 60,000.00
Gross sales 60,000.00 60,000.00
VAT Flat rate 14.5% 16.5%
VATable costs 5,000.00
VAT 1,000.00
Total 6,000.00
VAT in 10,000.00
VAT out (1,000.00)
HMRC remittance 9,000.00 8,700.00 9,900.00
“Standard” variation NIL £300 better off £900 worse off

Double those annual sales to £100,000 (some of our clients operate at that level) and you can see that the difference could be either £600 better off or £1,800 worse off.

And do the sums the other way around, under the new FRS rules the VAT of £9,900 represents a rate of 19.8% on the sales of £50,000. That’s a bit like saying “pay all the VAT to HMRC and claim back practically nothing”. This makes the new Flat Rate Scheme nigh on useless!

You may suggest that the software developer in the example should simply deregister because the sales of £50,000 are below the VAT registration threshold of £83,000. Yes, that’s true. And then the VAT recovered would be NIL (instead of getting £1,000 back) and so the business would still be worse off, but to a greater extent!

Wiggle Room

There is not much wiggle room, unless you incur a reasonable amount of cost on “relevant goods”. The new rules are designed to impair only “limited costs” traders. That’s nearly everyone! However, try out the formula below to see if you can escape being labelled as a “limited costs” trader. This calculation has to be done every VAT quarter (so you may find that you alternate between FRS Old Rules and FRS New Rules).

The Formula

Work out your total for VAT inclusive sales.

Calculate a figure for 2% of your VAT inclusive sales.

Work out your total for VAT inclusive costs on “relevant goods”. Goods are tangible things, so be sure to ignore costs for services like office rent, freelance workers, accountants, insurance, travel, telephone calls, etc.

For the purposes of the VAT FRS rules (unless you’re a retailer of these goods) the expression “relevant goods” excludes the following:

  • Items of a capital nature
  • Cars
  • Computers
  • Printers
  • Scanners
  • Mobile phones
  • Furniture, etc
  • Fuel for motor vehicles
  • Spare parts for motor vehicles
  • Food
  • Drink
  • Anything which has a dual personal/business use (like bicycles and parts for their upkeep)

Question 1

Is your expenditure on “relevant goods” less than £250?

Yes > the new FRS rules apply > use a rate of 16.5%
No > go to Question 2

Question 2

Is your expenditure on “relevant goods” less than 2% of your VAT inclusive sales?

Yes > the new FRS rules apply > use a rate of 16.5%
No > the old FRS rules apply > use the old rate from the table of approved rates

Conclusion

If you spend more than £250 (or more than 2% of your VAT inclusive sales – whichever is the greater) every quarter, on . . .

  • pencils
  • envelopes
  • toner cartridges
  • traditional books and magazines

. . . then you may be in with a chance. In any case, you will have to give your bookkeeper a full analysis of all the goods you buy as “stuff from Amazon for £39” is not enough to tell us if these are “relevant goods”.

In a few cases, where you’re on a really low flat rate (teachers and trainers are on a 12% flat rate under the old rules) it might be worthwhile buying a few toner cartridges every quarter and then chucking them in a cupboard until you retire from business. You might then pass the test “more than 2% of your VAT inclusive sales” and you would still get your old flat rate. This has to be assessed on a case by case basis, but I have at least one lecturer who makes so much bounty on the 12% flat rate that it’s worth his while using some of that bounty to buy “relevant goods” which will languish unused, and he will still win overall!

In all other cases, we recommend leaving the Flat Rate Scheme on 31 Mar 2017 and adopting the standard approach to VAT from 1 Apr 2017. We are writing to all affected clients with a proforma letter which needs a real ink signature and which needs to be returned to us by 28 Feb 2017 so that we can get it submitted, agreed by HMRC, and implemented at midnight on 31 Mar 2017.

A withdrawal from the Flat Rate Scheme does not change the way that you bill your clients. If you’re company is VAT regsitered then it will still be VAT registered, and we will look after your VAT for you using the standard method and not the flat rate method.

Lastly

Beware of trying to fiddle the system. Any attempt to invoice in advance for services to be provided on or after 1 April 2017, to capture that invoice within the old FRS rates, will be treated as if the invoice was issued on 1 April 2017 (paras 8.2 and 9.7 of VAT notice 733).

Public Sector Bodies and Freelancers and IR35

On Saturday 21 Jan 2017 the National Audit Office in Victoria opened its doors to a range of geeks and devotees, both within and beyond Government, for the now annual unconference called UKGovCamp. This one was special, the 10th event, and there was a considerable buzz among the 220 participants.

Somehow, my session ended up in a very early slot (one of eight concurrent streams) and a small, intense discussion of IR35 took place.

This is an extremely complex subject. I have recently concluded an IR35 enquiry for a client. It took over 4 years and we won. One firm in Bristol who specialise in IR35 enquiries proudly claim to have won 1,498 out of 1,500 cases they’ve worked on. At the moment I’m happy with “played one, won one” and a tentative claim to a 100% success rate! HMRC are (allegedly) working 600 cases per year, and that’s as much as they can do with the staff at that section.

Anyway, you cannot rely on one session from UKGovcamp, nor this one blogpost, to tell you the full story. And every case is different so you need to get specialist advice. What I am going to focus on here is the changes which are due for 6 Apr 2017 and which relate to freelancers who work in Public Sector Bodies.

The Scales of Justice

The law on this comes from two pieces of legislation:

These rules are collectively known as “IR35” because that was the number of the 1999 press release which foretold this nightmare.

The relevant bits that you need are sections 48 to 61 of ITEPA and all of the Social Security Regs (fortunately that has only 11 sections). The most salient detail is to be found at s49 of ITEPA and s6 of the Social Security Regs. The dialogue is almost identical in each piece of legislation, and I will explain the subtle difference later on. For now, you just need to read the rules below and where it says “intermediary” think “freelance limited company”.

The bullet points

Here’s what you need from the Social Security Regs:

6–(1) These Regulations apply where–

(a) an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (“the client”),

(b) the performance of those services by the worker is carried out, not under a contract directly between the client and the worker, but under arrangements involving an intermediary, and

(c) the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner’s employment by the client .

The Case Law

It’s sub section (c) above about “the circumstances” which leads to the inevitable debate about whether a freelancer is truly freelance or is in “disguised employment” and is caught by the IR35 rules.

The most poignant piece of case law which helps us interpret sub section (c) is:

  • Ready Mixed Concrete(South East) Ltd v Minister of Pensions and National Insurance 1968

This case came out in favour of the worker who was truly freelance, and in his judgement Justice MacKenna set out three tests of how we are to decide if somebody is an employee or not. The three tests in the Ready Mix case can be summarised as . . .

  • Personal service must be provided by the worker; and
  • The engager has a right of control of the worker; and
  • Mutuality of obligation must exist.

If you can show that any one of these three tests is failed, then you are not an employee.

What’s changed as at 6 Apr 2017?

The core legislation hasn’t changed and the case law hasn’t changed. If you were not caught by IR35 before 6 Apr 2017 then, in theory, you are not caught by IR35 from 6 Apr 2017.

What has changed is the decision maker, but only in cases where the worker is working on the premises of a Public Sector Body. Will this later be extended to the private sector? Officially HMRC says they have no plans to do so. The accountancy profession respond to that with a collective and cynical “oh yeah?”

If HMRC can make these rules work in the Public Sector Body then I have no doubt that they will be extended to all engagements involving freelancers.

Under the old rules, it was the responsibility of the freelance worker who decided if the IR35 rules applied. Usually that involved a discussion with his or her accountant, but in law, the responsibility remained that of the freelance worker.

Under the new proposed rules “a person at the Public Sector Body” where the worker is working, will have to make the decision. Somebody on the premises! The rules commence at s.6 Finance Act 2017 and are set out in detail at Schedule 1 to that Act.

The new rules on the decision maker are set out in a new Chapter 10 to be added to Part 2 to of ITEPA 2003. It’s not in the 2003 Act on the legislation.gov.uk web site so the only place we can read about the new section 61T is in The Finance Act 2017. In effect s.61T(1) says that the engager (referred to as “the client” in the legislation) has to tell the end worker that “a conclusion” on status has been made and what that conclusion is.

That is what is changing. It’s not the freelancer, not the recruitment consultant (if there is one involved) but somebody in a payroll office or finance department of a Public Sector Body who will have to “certify” that the freelancer is genuinely freelance, otherwise they will have to operate PAYE on all the income of the freelancer. Early discussions of these changes indicated that the recruitment consultant will make the decision. Later discussions show that this has changed, as the recruitment consultant will not have first hand knowledge of what precise arrangements exist in the workplace. It’s going to be a government worker on government premises who makes the decision.

To help them there will be a new online “status checker” tool. It’s being written by HMRC, so you can guess what sort of bias it’s going to have, and apparently it will be available by the end of January 2017. [Update – then they said “on 20 Feb 2017” then they said “end of Feb 2017” . . . ]

The online tool was finally released at 4pm on 2 Mar 2017. Instead of the clear Yes/No answer that we were all expecting, it sometimes gives a “don’t know”. It has been tried out with a number of famous “stated cases” and it does not always give the same answer that the Tax Tribunals arrived at! Try it if you wish:

https://www.tax.service.gov.uk/check-employment-status-for-tax/setup

In short, somebody at your school, your GP practice, your library, or your ministry is going to understand all of this and certify that you are truly freelance. Yeah? Pull the other one! Whether it’s a smaller or larger Public Sector Body I allege that nobody will risk their own role by making “a wrong decision” and upsetting the powers that be.

This is going to prove very tricky for any freelancer who was “truly freelance” before 6 Apr 2017 and who discovers that apparently they are now not “truly freelance” and therefore presumably were not “truly freelance” before! Quite a few more tax office enquiries will start later this year!

Here’s a suggestion, if you have to make that decision in your public sector body you might decline to do so, on the grounds that you have insufficient legal training to make such a complex decision.

The New Scales of Justice

Where is the new legislation? I can’t find it!

It’s not in the Finance Act 2015 nor the Finance (No. 2) Act 2015 following George Osborne’s announcement of these rules in the 2015 Budget.

It’s not in the Finance Act 2016 which would have had it firmly in place by 6 Apr 2017. And although, in his 2016 autumn statement, Philip Hammond talked about Public Sector workers paying proper taxes, there is no sign of a Finance (No. 2) Act 2016.

We shall have to wait until after the 2017 Budget on 8 Mar 2017 and the Finance Bill 2017 in order to see the rules in black and white. In a normal year the Finance Bill secures Royal assent in about August and then becomes the Finance Act. That assumes that it gets through the committee stages and The Lords without amendment. If you’re unhappy about the proposed new rules contact your MP now.

As the date of UKGovcamp on 21 Jan 2017 all we have is a “consultation process” and an 87 page PDF from HMRC dated 26 May 2016. And a lot of newer memos circulating in the accounting sector and on “paid for” subscription services.

But there is no clarity.

What will I be paid?

Yep! Good question! And even the payroll software industry doesn’t know. I buy payroll software every March, as I need the upgrade before the March payrolls are run, in order that the April payrolls start correctly.

Software houses need to ship the product by mid March at the latest, but nobody knows exactly what the new rules are. What we do know is that:

  1. payroll software pays individuals
  2. payroll software has never before had to pay freelance limited companies
  3. freelance contracts with limited companies provide no date of birth and no national insurance number
  4. payroll software requires either a date of birth or a national insurance number otherwise it won’t work – it won’t know which National Insurance table to use!
  5. workers with relevant student loans have their student loan repayments taken under PAYE
  6. “deemed workers” under these new rules will be liable for income tax and National Insurance under PAYE but will be liable for student loan repayments on their own Self Assessment tax returns and not via PAYE.
  7. payroll software to date has never had to distinguish between liable and not liable for student loan repayments on the basis of “deemed worker” status.
  8. any payroll clerk who gets a form SL1 for you just logs it into the software, because that’s what the rules say.
  9. payrolls are subject to Real Time Information – HMRC gets a packet of data on the day the payroll is run – so this all has to work by pay day in April 2017.
  10. the first weekly payrolls of 2017/18 will be run on or before Friday 7 Apr 2017.
  11. salaries are outside the scope of VAT, but many freelancers are VAT registered and add 20% on to their invoices
  12. payroll software has never had a mechanism to handle VAT because salaries are outside the scope of VAT!
  13. it seems that finance depatments automatically know this and will now just pay you the 20% VAT without paying the net figure from your invoice, because they are naturally clairvoyant!

And, some low paid payroll clerk in some Public Sector Body is not going to worry too much about how accurate the payroll calculations are, they’re just going to somehow do it. In my own experience of working in the Public Sector and in the Private Sector, no payroll clerk has ever taken much interest in getting anything exactly right, other than making sure that their own net pay is correct!

And what will it cost the Public Sector Body? An extra 13.8% in employer’s National Insurance. So whatever their budget is now, they will have to find an extra 13.8% in order to pay their freelance workers (or “deemed workers”). Wait a moment! No! There’s VAT on top of that! So an extra 20% of 13.8% effectively makes the employer’s National Insurance bill 16.56%.

This is moving from the ridiculous to the sublime!

Maybe the recruitment consultancy (if there is one) will cover that extra National Insurance bill! You bet! And they will increase the fee to the Public Sector Body proportionately.

And by the way, “deemed workers” will not be entitled to SSP, SMP, holidays and all the other trappings that you get from being an employee. Just all the taxes with none of the advantages.

The perverse nature of all these rules means that Public Sector Bodies will have all of their workers on an equal footing when it comes to PAYE costs (but no employment obligations). The big problem is that it will cost Public Sector Bodies an extra 20% to engage any freelancer who is VAT registered. And that’s because Public Sector Bodies are not businesses that “make taxable supplies” and are not able to recover the VAT. Have you been told that? Have you included that in your departmental budget for the next year?

Yeah, well thought out George Osborne and Philip Hammond!

Appeals

The good news is that if you’re unhappy with a decision that treats you as a “deemed worker” and not a freelancer, you can appeal . . . to an Employment Tribunal. That’ll take time! The “tribunal stage” of the IR35 case that I recently won took 18 months.

The bad news is that if you want to appeal to a Tribunal, then you will have to wait until after the end of the tax year. So, no appeals on these new rules until April 2018 at the earliest! And based on my expereince no ruling until 18 months after that, making it October 2019 by the time you get an answer to your April 2017 question!

Wiggle room

What scope is there for steering the decision making process? Colin Bishopp points you to some wiggle room. The minor difference between . . .

  • s.49 Income Tax (Earnings and Pensions) Act 2003
  • s.6 Social Security Contributions (intermediaries) Regulations 2000

. . . is that section 6 of the Social Security Regs gets a specific mention in another stated case which was heard before Colin Bishopp, a Special Commissioner for HMRC.

  • Usetech Ltd v HM Inspector of Taxes [2004]

Colin Bishopp said:

“when that analysis shows that those two sub-paragraphs are satisfied sub-paragraph (c) involves an exercise of constructing a hypothetical contract which did not in fact exist”.

And what that means for us is that, in order to come up with a decision about status under IR35, somebody has to prepare a hypothetical contract.

Your first questions about any new freelance engagements in the Public Sector should now be:

“Can I please have a copy of the hypothetical contract that was drawn up in order to evaluate Reg 6.(1)(c) of the Social Security Contributions (intermediaries) Regulations 2000?”

“Who drew it up, and on what date, and what position do they hold in which organisation?”

Let me know how you get on with that. I genuinely would like to know! It’s the sort of document that you’ll need at Tribunal.

Sledgehammer Policy

The Government doesn’t do joined up thinking.

The conversation in the room at the end of the session can be summed up by saying:

  1. give up on freelancing in the public sector
  2. move to the private sector
  3. let that particular public sector body suffer from under staffing
  4. the more they suffer the better, it will make government rethink the rules
  5. some public sector bodies would seize up if all the freelancers left
  6. alternatively, just take a PAYE job directly with the public sector body (with the added safeguards of all the employee law)

The worst thing that can happen is that the freelancer community succumbs to the new rules, accepts lower take home pay and signals to the Government that the policy works. That will lead to the imposition of similar rules on the private sector within a year or two. This is another “poll tax” moment and requires a commensurate reaction.

And if you are inclined to just “go on payroll” you will need a large salary to give you the same disposable income you were accustomed to as a freelancer.

We’ll take the example of a software developer on a day rate of £500 who worked a full year. That’s 233 work days allowing for weekends off, bank holidays off, and 4 weeks holiday. The equivalent annual income at £500 a day is £116,500. The equivalent PAYE salary, to give you the same net as a freelance worker would be £242,700.

Do you work in finance in a public sector body? Here are the figures for you:

  • Freelancer: 116,500 plus 20% VAT plus the recruitment agency fees
  • Equivalent employee: 242,700 plus 13.8% employer’s National Insurance

In short, think of a number and double it. I want £500 a day as a freelancer or £1,000 a day as an employee.

To date, budgets in public sector bodies have been based on the premise that you can get freelancers much more cheaply than you can get staff. I can’t believe that George Osborne and Philip Hammond did not already know this. Or have they secretly been plotting to destroy the NHS and other public sector bodies, whilst trying to deflect the blame onto “greedy” freelancers who want ridiculous salaries?

Makes you think? Doesn’t it? The government appear to be trying to crack a nut with a sledgehammer. They’re more likely to be shooting themselves in the foot.

I suppose we could all emigrate?

I really enjoyed UKGovCamp this year!

Can my business claim for a Christmas party?

There is no specific tax deduction for a “Christmas party” but HMRC does allow a measure of tax relief for “an annual event”.

Staff entertainment is normally treated as a “Benefit in Kind”, and directors and employees have to pay tax and national insurance on the amount of the benefit.

Here’s the one way to avoid a “Benefit in Kind”.  As a company director, you are entitled to provide an annual event for yourself, any staff you employ, and your partner, and to reclaim the costs against the company. Proved that the cost per head does not exceed £150 (including VAT) then you can claim it. If it’s one penny more then the whole amount does not qualify, so be sure to stay within the limit.

It can be any one event, or a combination of events, and it doesn’t have to relate to the Festive Break. However, you do actually have to hold an event in order to reclaim the costs against your company. You can’t simply make a cash claim for £150.

For a detailed explanation of the annual event expense rules, check the HMRC site here or get in touch with us.

Auto Enrolment – the Basics

Proactive is not authorised to give pensions advice, and the comments here are a guide to complying with new legislation. It is not a guide to pensions! The figures below relate the tax year 2016/17 and may change every April as each new tax year starts.

Do I need to comply?

You may not need to offer auto enrolment if your business employs no regular staff, but only directors, and none of those directors have a contract of employment. If that’s the case then check this report.

For everybody else, the key points are listed below.

What is a staging date?

The Pensions Regulator writes to all new employers telling them their staging date, the date from which auto enrolment must be in force for qualifying employees. The staging date varies depending on the age of your business and the number of employees. The Government would be unable to handle everything all at once and so this policy is being phased in for existing employers over the period 1 Oct 2012 to 5 Apr 2017. New employers will be assigned a staging date by 28 Feb 2018 at the latest.

You can start earlier if you wish.

Who qualifies?

If all of your staff are already in a workplace pension scheme, then you have no additional duties under auto enrolment.

Staff aged between 22 and state pension age who earn more than £8,105 a year, must be offered a workplace pension scheme and the employer must make contributions. Staff can opt out if they wish, but you must offer a workplace pension scheme!

Staff who do not meet the criteria above, and who are older than 15 and younger than 75, and who earn more than £5,564 a year, can opt in to a workplace pension scheme. If they choose to do so then the employer must provide one, and make contributions.

Employers will also need to enrol any workers aged 16-74 who earn less than £5,564 a year, and who ask to opt in to the scheme, but you don’t need to pay contributions for them.

Employers are prohibited from offering incentives or perks to encourage staff to opt out.

What contributions need to be paid?

It depends!

As time goes by, you will be required to make greater contributions and so will your staff. The timing and the amount of the contributions depends on your staging date.

Here is a broad overview, and the highest level of contributions will be in force by 31 Oct 2018.

The minimum contribution will start at 2% of a worker’s gross earnings (of which at least 1% must be paid in by the employer).

By 31 Oct 2018 the minimum will have risen to 8%, made up of at least 3% from the employer, up to 4% from the employee, and 1% in tax relief.

These percentages don’t apply to all of an individual’s salary, but only to what they earn over a minimum (currently £5,564 for 2016/17) up to a maximum limit (currently £42,475 for 2016/17).

What do I have to do now?

Establish a workplace pension scheme through either a commercial business of your choice or through the Government’s NEST scheme (National Employment Savings Trust). The choice is entirely yours.

The NEST web site sets out key steps in the process of implementing a workplace pension.

Once you have a workplace pension scheme in place, let us know and we will log the details in our payroll system. We need one month’s notice of this in order that payrolls comply with the Real Time Information rules implemented back in 2013.

Call us on 020 3051 2462 if you need to chat more about this.

HMRC System Borked

Late on Thursday 23 Jun 2016, we tried to submit a number of Corporation Tax returns for clients. The data went in (apparently), but the normal response did not come back. We tried again early on Friday with the same blank result.

According to Acorah, our software supplier, this issue (experienced by many accountants) was raised with HMRC on Friday, and whilst the data has arrived on the HMRC systems, it is only the “result” message which is failing. We checked the HMRC status page on both Thursday and Friday and it said the systems were all working normally. It still says “full service available” even though there is clearly something wrong.

https://www.gov.uk/government/publications/corporation-tax-service-availability-and-issues/corporation-tax-service-availability-and-issues

So we tried again on Monday, and again just now (approx 11.30am on Tuesday 28 Jun 2016). This time Acorah has provided an alert window to put us in the picture.

Anyway, HMRC haven’t updated us or Acorah and so we don’t know when we can return to normal patterns of work. Apologies if you’re waiting on a confirmation of submission! So are we!

Credit Notes

“I need to issue a Credit Note. What should I do?”

Never delete an invoice or amend an invoice after it has been issued. If the figures need to be changed use a Credit Note.

A credit note is simply a negative invoice. It replicates the original invoice in almost every way, though instead of the word “Invoice” it says “Credit Note”. That tells everybody that all the figures are to be recorded as negative amounts. The date on the credit note is normally the date that you prepared it, unless there are compelling reasons to use a different date.

Use the next number in your unique number sequence for credit notes. Invoices follow one number sequence, and credit notes have a separate number sequence of their own. They do not need to be inter-related but within each set the document number does need to be unique. Invoice numbers and credit note numbers must be purely numeric, purely sequential and include no letters and no punctuation. If you need to add a reference put that in a separate reference box and do not combine it with the credit note number.

As with an invoice, your credit note must be on your letterheaded paper.

In order to avoid any confusion, ensure the the words “Credit Note” are displayed boldly at the top of the document.

When your bookkeeping is done, and when your customer does their bookkeeping, the original invoice and the subsequent credit note will cancel each other out.

We will know what is happening, but only if you follow the system.

 

National Insurance Contributions and the UK State Pension

We are accountants and tax advisers, and we do not get involved in pension matters. However, this is what we know about the interaction between National Insurance Contributions and the UK State Pension.

If you are following our recommended director shareholder payments pattern, then your salary should be high enough to give you a National Insurance credit, even though you don’t pay Class 1 National Insurance.

A full year at this level is a “qualifying year”. This page https://www.gov.uk/state-pension/eligibility used to say:

“You might not pay National Insurance Contributions because you’re earning less than £XXX a week. You may still get a qualifying year if you earn between £YYY and £XXX a week from one employer.”

However, the rules keep changing and at the moment the “eligibility” explanation on the Government site takes you round in circles and no longer explains the position for paid employees and directors on low salaries.

If you want the relevant information, the best thing you can do is a twofold approach:

Firstly

Write (with your NI number) to . . .

National Insurance Contributions Office
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ

. . . and ask for a copy of your National Insurance record for all years since [date of your sixteenth birthday] showing contributions paid and any credits received.

Secondly

Complete a Form BR19 and send it to . . .

The Pension Service
Newcastle Pensions Centre Futures Group
Mail Handling Site A
Wolverhampton
WV98 1LU

Once you have the two replies, check that the number of “qualifying years” is the same on both documents. If there is anything that you think needs attention, write to the National Insurance Contributions Office again seeking help, particularly if credits are missing for qualifying years.

Lastly, you won’t get your State Pension automatically, you have to claim it. You should receive a letter 4 months before you reach State Pension age, telling you what to do. Put a note in your diary now, for 3 months before you reach State Pension age, in case that letter doesn’t turn up.

Director shareholder payments 2016/17

In the good old days there was an easy way to work out the optimum pattern of salary and dividends for directors of small UK companies. With the advent of the Finance Bill 2016 the situation has become hopelessly complex and that prompted AccountingWeb to publish a critical blogpost. Here’s the first bit with the all important table:

201604081128accountingweb001

If you want to see the blogpost in full you’ll have to sign up for membership of AccountingWeb. It’s a free resouce for accountants!

And, as we said in our 30 Nov 2015 blogpost, in 2016/17 we are going to have to get used to new tax bills on dividends which have not been around for donkeys years.

Back to the question of “optimum”

All things being equal (and they are probably not equal this year) we have set out below a standardised process for trying to maintain the established working practice of giving yourself a tax efficient combination of small salary and big dividend. 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.

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 and not for “work done”. 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 or the corporation tax reserve or the VAT reserve (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 penalty 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 exact “dividend” is calculated.

Dividends are personal income and are subject to income tax in your hands. The pattern is different for different levels of income. Dividends no longer have a notional tax credit, what you get is what you’re taxed on and (unlike prior years) there is no reduction in your tax bill for notional tax credits.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings (lest HMRC allege that it’s all salary). It makes life easier if you use separate bank transfers for primary, secondary (etc) drawings as well.

Basic rate taxpayers

For people whose monthly income does not exceed 3,582.

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Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,582 and 8,332.

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

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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 (for residents in Wales and Scotland) your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

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.

Budget Day Bombshell?

We are indebted to Richard Dyson of The Daily Telegraph for this news on pensions. Though we stress that it’s a forecast and not an absolute certainty.

A tax break set to be axed within weeks

And at the same time, we need to remind you that we are not authorised to provide pensions advice, but we can tell you about tax law and possible changes to it. If we are to believe everything which we read in the Press, which we hear in Accounting Bulletins and which we learn on our CPD courses, then the March 2016 Budget is going to squeeze middle Britain like never before.

201601240504mattCartoonPensionAdviceMatt Cartoon
Pension adviser: “Have you considered befriending a wealthy despot?”

George Osborne has already announced that new punitive tax rates will be applied to dividend income from 6 April 2016 and that buy to let landlords will be hit with restrictions on tax relief. Now, it seems that higher rate taxpayers who have private pensions will also be hit.

If you’re a higher rate tax payer investing in pensions, and you’re used to getting 40% (or 45%) tax relief on pensions, then you may be shocked to see that tax relief reduced to 20%. Let’s assume you’re a 40% taxpayer. Up to now, for every £1,000 you added to your private pension, you gained an instant 20% boost as The Exchequer would add £250 to your pension pot, and your pension provider would then have £1,250 to invest on your behalf. Then, a few months down the road, you do your Self Assessment Tax Return, you get back (in your hand effectively) another 20% (being another £250), because your tax bill is reduced by that amount.

That means that your pension provider has a pot of £1,250 which cost you £750 of your money. That’s how 40% tax relief works.

Now if, as seems likely, the Chancellor changes the rules on 16 March 2016 then you may find that your tax relief is restricted to 20% and thus your pension provider will have a pot of £1,250 which in future costs you £1,000 of your money.

Richard Dyson of the Telegraph suggests you pour your money into pensions now, before this forecasted measure is introduced. Our view is that, if you were going to be investing in your pension anyway, in 2016/17 and later years, then you could potentially get more tax relief by bringing forward that investment and doing it in 2015/16 and preferably before Budget Day on 16 Mar 2016.

Is there any alternative? Well perhaps yes! For those of you who are a director and shareholder of a UK limited company, get your company to invest in a pension, rather than do it yourself. All things being equal, your company will get tax relief at its company rate, and your personal income from the company can come down to match the contributions. That way, you’ll find that rather than funding your pension out of your own taxed income, you’ll have a lower income, a lower tax bill, and your company will have a lower tax bill too!