Proactive – Page 3

Making Tax Digital

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

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

self employed
partnership
landlord

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

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

The timetable is staggered and looks like this:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Director shareholder payments 2017/18

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

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

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

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

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

Bank transfers

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

Basic rate taxpayers

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

Higher rate taxpayers

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

Top rate taxpayers

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

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

Tax Planning

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

Let us know if we can help.

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.

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 to the client. 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 the credit note (not the original invoice), unless there are compelling reasons to use a different date.

Use the next number in your separate, 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 client 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.

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:

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.

Higher rate taxpayers

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

Top rate taxpayers

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

There are graduated changes for annual incomes between 100,000 and 150,00 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.

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.

Meal allowances

It’s long been a policy of ours that all employee expense claims (and directors’ expense claims) should be supported by receipts, proving that the relevant expenditure has taken place, and that employee’s claim is for a legitimate business expense. That’s set out in our guide:

Claiming back expenses from your own Limited Company

We don’t need to see every receipt from Pret a Manger for £2.99 sandwiches, but we want the reassurance that you the client make a point of keeping your staff (and yourself) within the rules.

So, here is something that we hadn’t expected, “The Income Tax (Approved Expenses) Regulations 2015” which became law in Dec 2015.

The new regulations give a set of maximum reimbursement rates for meals which will qualify for tax exemption. These come into effect from 6 Apr 2016 and (broadly) apply when the employee is travelling on business.

They are in addition to the cost of the travel and (within limits) do not require supporting receipts. The regulations provide that a sum is calculated and paid or reimbursed in an approved way if it is paid or reimbursed to an employee in respect of meals purchased by the employee in the course of qualifying travel (a ‘meal allowance’).

One meal allowance per day can be paid in respect of one instance of qualifying travel, where that amount does not exceed:

• £5 where the duration is five hours or more;
• £10 where the duration is ten hours or more; or
• £25 where the duration is fifteen hours or more and is ongoing at 8pm.

An additional meal allowance not exceeding £10 per day can be paid in the first two situations where the qualifying travel (in respect of which that allowance is paid) is ongoing at 8pm.

What does this mean?

For a start, it means being away form your normal place of work for “five hours or more” rather than enduring travel of “five hours or more”.

It also means that I am going to continue to keep all my receipts for subsistence and claim the actual amount I incur. That can often be more than £25, given the places where I tend to go and eat. My annual visit, from London to Brighton for dConstruct every September leads to a lot of subsistence costs, so I will continue using what is known as the “receipted basis”, keeping my restaurant receipts and claiming back what I actually spend. If you and your staff want to use the flat rate allowances set out above, then you need to ensure there is a system where travel away from the office is diarised, times are noted and the correct amount is claimed.

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:

The SA tax return for that year has been received by HMRC.
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.

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.

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?