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.

Director shareholder payments 2015/16

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 2015/16 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:

By combining a monthly salary of 671 and a dividend of 2,574 your personal income (totalling 3,245) 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 a pattern, which takes your income to £100,000 an no more (so as to preserve your entitlement to the personal allowance).

Using a combination of a monthly salary of 671 and a dividend of 6,965 your personal income will total 7,636 (grossed up for tax purposes that’s 8,333) and that will bring you to an annual income of £100,000. Out of the 7,636 you will need to set aside a personal tax reserve of 1,097 for some future tax bill. As personal taxes are calculated by reference to all of your annual income, and as many people have to comply with a regime of six monthly payments on account, it is necessary to prepare individually tailored tax forecasts. We do this (included in the fee) for clients who opt for “Self Assessment – Higher Rate Taxpayers” on our prices page. It is not included in the “Self Assessment – Simple filing service”.

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.

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 £8,866 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.

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?

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. 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 3

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 3

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 3

Non UK client

Correcting mistakes

“One of my invoices to my customer is wrong. What should I do?”

In cases like this the easiest solution is to reverse the invoice using a credit note, and then issue a completely new invoice (and hopefully get it absolutely right). A credit note is basically a negative invoice. It should replicate the incorrect invoice in every respect, except that the heading is “Credit Note” and not “Invoice” and all the figures should be preceded by a minus sign. The date on the Credit Note is normally the date you prepared it, unless there are compelling reasons to use a different date.

Let’s say that this is the incorrect invoice . . .

201406241008inv001

Use whatever the next number is (in your normal invoice number sequence) for the credit note. If your software forces you to use a different number sequence for credit notes, then we will live with that! We prefer a single number sequence if at all possible.

201406241008inv001

When your bookkeeping is done, and when your customer does their bookkeeping, these two documents will cancel each other out.

Then use the next number in your normal invoice number sequence for the new invoice.

201406241008inv003

Make your corrections like this every time and then you, your customer and your accountant will always know exactly what is going on. Thanks!

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:

622615pic20150405pic001

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.

Dissolve a company or put it on ice?

Hopefully, running your own business has been a good experience. When business comes to an end, we know that the double barrelled question “should I dissolve my company or put it on ice” is often asked.

If you have finished with the company and no longer need it, then dissolve it. Keeping it will only add to your costs. A simple dissolution guide is here.

It is not possible to ever make a traded company become truly dormant again. There will always be things to do. A dormant company is one which has been incorporated and which has never traded. So if you want to put your traded company “on ice” you should be aware that Companies House will still want a Confirmation Statement every year, and you will still have to file statutory accounts. You cannot use the Companies House form DCA (Dormant Company Accounts) to do this, because there will be legacy figures which are carried forward each year.

So it’s up to you. Keep the company alive and do the annual submissions yourself to keep costs down. Or keep paying the accountant (a reduced fee) to stay on side with the government.

We know from experience that people who “put the company on ice” normally keep it there for about three years, keep paying professional fees, and then go and dissolve the company anyway. If that’s going to be you, then maybe you should take the easy option and just dissolve it now? You can always incorporate a new company later.

If you do want to keep the company on ice (and not use it at all) we will discount our fees by 50%. However if the company is used, even if it’s for just one project earning one fee, then normal accounts are needed and normal fees will apply. OK, if it was genuinely only one project and one fee then you may not need to pay exactly 100% of our standard costs, but it will be something nearer to 100% than to 50%.

What’s wrong with online accounting software?

Since 2005 when we were first introduced to NetSuite, we have had a look at all of the major online accounting packages. There is nothing particularly wrong with them if you’re a bookkeeper.

If you’re not a bookkeeper, then you either need to get yourself trained up as a bookkeeper before using any of the online accounting packages, or simply don’t use them!

Alternatively, you could look upon these packages as being a glorified invoice generator and then give the records to a real bookkeeper so that the job can be done properly.

The reason we say this is that (even with the best will in the world) most untrained users will categorise things wrongly in their online package. That leaves us with a jigsaw puzzle to unpick and redo. And it’s a jigsaw puzzle which comes with no picture on the box! That means that we spend twice as long on these jobs, unpicking the damage and putting it right again.

At the end of the day, an online accounting package is not going to give you a set of Statutory Accounts and as that’s what Companies House wants, then you may want to think twice about the cost/benefit analysis of going this route. If all you want is an invoice generator then you could use one of the free open source ones. Don’t take this as a recommendation, but we can tell you that some of our clients used (the now defunct) Bamboo Invoice. Currently WaveApps offers a free invoicing tool (and more “paid for” tools).

The simpler way to generate your invoices is to use a Word or Excel document or a similar tool. Make a master template and reuse it, as long as you never overwrite your original template!

If you are using some major online accounting package to give you the VAT figures and the Corporation Tax figures, you might have realised that getting some of your categorisation wrong will invariably lead to getting the tax figures wrong. Is that what you want?

Lastly, you cannot rely on any of the platforms to import all your bank statements all the time. We’ve had trouble with more than one platform, and when they go wrong it is impossible to get them back to normal. That’s why we always ask for copies of bank statements regardless!

201610181238hsbcbankfeedproblem

When they have gone wrong we know from experience that you either abandon that platform and use another (equally mediocre) platform, or you set up a new account on the same platform and start again.

What should I do about foreign currency expense receipts?

If you’re an international traveller we recommend that you use your business bank account and your business credit card for all business activity. If you really have to use personal cash or a personal credit card for business costs, then you will need to prepare a separate claim form for each currency involved. It therefore makes sense to keep business items business and personal items personal and you wouldn’t need to do this exercise.

If you wish to add your own conversion rates and show the column totals in GBP you can. When we work on theses documents we will use your GBP figures if they are present, and if not we will use the HMRC approved rates given here http://customs.hmrc.gov.uk/channelsPortalWebApp/ and log the details in GBP.

If you ever need to draw cash from foreign ATMs please remember that we will treat that as “drawings” in the same way as we treat cash drawn from UK ATMs. Getting foreign cash either at an airport or from an ATM is not an “expense”, it’s just a conversion of one form of funds into another form. It’s the receipts for expenses which are needed to substantiate any purchase of goods or services.

VAT invoices – the fine details

All businesses need standardised documents for their correspondence and invoices. An invoice is basically a standard letterhead with the addition of a number of billing points. The examples set out here assume that your business is a limited company.

VAT invoices must show:

  1. Your address and the address of your company registered office. If your company registered office and your principal place of business are one and the same, you only need to show the address once, provided that it is clear that they are one and the same!
  2. Your company registration number.
  3. Your VAT registration number.
  4. The date of the invoice.
  5. The invoice number. Invoices must be sequentially numbered, using a plain and simple, and purely numeric system. Do not skip numbers. Invoices must run in number order and also in date order. Do not use a number on draft invoices if that results in the sequence becoming broken. Draft invoices should only be given a number when they are finalised and issued.
  6. The name and address of the person being invoiced. This is the name of your client and not necessarily the name of the individual who works there. You can for example mark the invoice “F.A.O. Mr Jones”, but it should be addressed to the client, for example “London Time Machines Ltd”.
  7. The amounts in GB Pounds. If you wish, you can show a different currency within the dialogue within the invoice, but not where it’s likely to confuse a VAT officer. In the event of a records inspection, the VAT officer must be able to clearly see the GBP figures, and especially the ones at the foot of the invoice.
  8. A sub total line, showing the net figure excluding the VAT.
  9. A VAT line, showing the applicable rate and the VAT amount in isolation.
  10. A total line, showing the sum of the net amount and the VAT.

Example Letterhead
Example Invoice (non-VAT)
Example Invoice (VAT)

Once an invoice has been issued to a client, it should never be amended. If there is anything wrong with an invoice the correction must be done in the way we have set out here https://www.proactive.ly/news/?p=353