Archive for November, 2016

Tax changes announced last week

Tuesday, November 29th, 2016

Last week, Philip Hammond presented his first Autumn Statement to parliament.

In some respects, it was a bit of a damp squid as there were no stand-out revelations. However, there were a few tax changes that are worthy of note:

Pension pot reinvestment

The over 55s have been making good use of George Osborne’s facility to flexibly access their pension savings. Many have also reinvested their pension pots in further pension arrangements and reaped the benefit of additional tax savings. To temper enthusiasm for this strategy the Money Purchase Annual Allowance (MPAA) was introduced. This effectively limited tax relief on reinvested funds to £10,000.

The government now believes this is too generous, and from April 2017 this MPAA will be reduced to £4,000.

Check with your pensions advisor to see how this change may affect your pension opportunities if you are considering, or have recently completed, flexible access to your pension pot(s).

VAT Flat Rate Scheme (FRS)

In order to curb what HMRC sees as aggressive use of the FRS, registered traders with limited costs subject to VAT may have to use a compulsory 16.5% FRS rate in place of their existing FRS rate from April 2017.

In certain circumstances, traders using FRS can make a cash “profit” from using the FRS. In particular, this benefits businesses who have low purchases of goods and overheads subject to VAT – HMRC describes these FRS users as a “limited cost trader”.

Businesses using the FRS will need to see if they are affected as continued use of the special scheme may be cash negative from April 2017.

The end of tax-free perks?

HMRC aim to limit the number of benefits provided by employers from April 2017, that are effective from a tax point of view.

The only benefits that will be exempt from the new reclassification are: pensions, pensions advice, childcare, cycle to work schemes and the use of ultra-low emission cars.

The idea is to curb the use of benefits as a means to sacrifice salary for tax perks, and save tax and National Insurance.

We may be witnessing the end of tax-free use of mobile phones and other benefits, although HMRC have said that benefits in place before April 2017 will be protected for at least one year, and in some cases, for four years.

Autumn Statement wish lists

Wednesday, November 23rd, 2016

Organisations across the UK have been publicising their wish lists for Philip Hammond’s first autumn statement later this week.

Amongst tax practitioners there seems to be a preference for increases in the Inheritance Tax threshold and the merger of income tax and National Insurance.

Northern business leaders are keen to see investment in roads and infrastructure, and incentives to invest and grow job opportunities.

There is a general consensus that we need to step up investment to improve access to super-fast broadband. Manufacturers would also like to see plant and machinery removed from business rate calculations.

Greens are hoping for investment incentives for green energy development and carbon capture.

In order to meet the increasing costs of care for the elderly, there is an expectation that a scheme will be announced to promote long term saving to meet these costs.

According to the pensions industry, less is more. They are hoping that Mr Hammond will leave them alone and resist the temptation to make the pensions’ tax rules ever more complicated.

Underlying all of these concerns is the uncertainty generated by the effects of our withdrawal from the EU. No doubt the Chancellor will aim smooth the transition, and on Wednesday this week we will finally see what number 11 is going to offer.

Buy to let lenders subject to new regulation

Tuesday, November 22nd, 2016

Just when it looked as if things couldn’t get any worse for prospective buy-to-let investors – in particular the gradual withdrawal of higher rate tax relief for finance charges – the Bank of England’s Financial Policy Committee (FPC) will be granted new powers by the government to help it protect the financial system from future risks in the buy-to-let mortgage market.

The FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks in the financial system. The new powers of direction will enhance the FPC’s existing macro-prudential toolkit – the tools it has at its disposal to head off potential threats to financial stability should they arise.

From early 2017, the FPC will be able to direct the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to require regulated lenders to place limits on buy-to-let mortgage lending in relation to:

  • loan-to-value (LTV) ratios
  • interest coverage ratios (ICRs)

It follows the FPC recommending that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market in September 2014. The government granted the FPC powers over the residential mortgage lending market in April 2015. The government consulted on the FPC’s recommended powers relating to the buy-to-let market from 17 December 2015 to 11 March 2016.

The consultation noted the positive impact of buy-to-let landlords in the economy, and the role they play in widening and balancing the overall housing market. They provide good quality accommodation for those who cannot at this point afford to buy a home, or who do not wish to commit to home ownership for personal or employment reasons. At the same time, the consultation set out the financial stability risks that buy-to-let lending may pose and how the FPC’s recommended tools would address these risks and ensure long-term economic stability.

The Chancellor of the Exchequer, Philip Hammond, said:

It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible.

Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability.

The season to be merry

Thursday, November 17th, 2016

If you are involved in planning the staff Christmas party for your firm don’t forget to consider the income tax consequences. Here’s a short reminder of the points you should add to your check list.

The cost of an annual staff party or similar function is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of unincorporated organisations.

Also, as long as the criteria below are followed there will be no taxable benefit charged to employees:

1.      The event must be open to all employees at a particular location.

2.      An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the overall average cost per head of the functions does not exceed £150 p.a. (inc VAT). The guests of staff attending are included in the head count when computing the cost per head attending.

3.      All costs must be taken into account, including the costs of transport paid to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.

4.      VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

 

If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.

Making tax digital – nothing to worry about

Wednesday, November 16th, 2016

Readers will be relieved to note that their professional advisors and other interested organisations, have recently lobbied HMRC to temper their agenda for making tax digital (MTD).

In case you have not heard of MTD, HMRC intend to require businesses with income over a de minimis limit (presently set at £10,000), to upload summary accounting data on a quarterly basis from April 2018. The idea is to abolish the annual tax return and “push” all of the information that is required to work out our tax liability to our MTD account with HMRC.

This will involve all affected businesses (including those that let property) to keep their accounting records electronically, and more particularly, in a form that will allow data to be uploaded to HMRC.

Advisors have lobbied for an increase in the £10,000 limit, and a rethink on the quarterly upload of data.

The potential for lumbering small businesses and landlords with yet more red tape is one concern, as is the virtual enforcement of digitising accounting records – many clients prefer to use spreadsheets or manual record keeping.

A HMRC spokesperson, Jim Harra, published the following rebuttal in the Financial Times on 10 November:

HM Revenue & Customs will not be asking anyone to file accounts five times a year, nor will we be introducing in-year quarterly payments. Businesses will simply send in-year updates to HMRC using information collated automatically by the same software used to record day-to-day transactions. This will help businesses pay the right amount of tax, taking away the need to put things right at a later date.

Businesses already keeping their records digitally should see no additional costs at all. Free software will be there for businesses with the most straightforward affairs, and we are looking at additional assistance with transitional costs.

We fully recognise that this is a significant change for some businesses, which is why we’re introducing it gradually as well as exempting some of our smallest businesses, but at the heart of digital transformation is a simpler, more efficient tax system that frees business people from red tape and form-filling.

Based on past experiences of HMRC’s digitalisation of systems, there may well be delays in the implementation of MTD, but HMRC do seem to be resolute in their intention to scrap the annual tax return and have us upload data in order to quantify annual tax liabilities.

Annual Investment Allowance (AIA)

Friday, November 4th, 2016

From 1 January 2016, the AIA was increased to an annual limit of £200,000. Unlike previous changes, this is a permanent increase.

The AIA allows businesses to write off 100% of expenditure in qualifying assets and equipment, up to the appropriate limit, against their tax liabilities. In effect, qualifying expenditure is treated as any other business expense: it reduces taxable profits.

There have been a number of changes to the £200,000 limit in recent years and where the AIA ceiling has changed, there are transitional considerations that need to be taken into account.

The following example illustrates how these transitional arrangements work in practice:

Where a business has a chargeable period that spans 1 January 2016, the maximum allowance for that business’s transitional chargeable period comprises 2 parts:

(a) the AIA entitlement, based on the temporary £500,000 annual cap for the portion of the period falling before 1 January 2016

(b) the AIA entitlement, based on the £200,000 cap for the portion of the period falling on or after 1 January 2016.

Example

A company with a 12-month chargeable period from 1 April 2015 to 31 March 2016 would calculate its maximum AIA entitlement based on:

(a) the proportion of the period from 1 April 2015 to 31 December 2015, that is, 9/12 x £500,000 = £375,000, and

(b) the proportion of the period from 1 January 2016 to 31 March 2016, that is 3/12 x £200,000 = £50,000.

The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) (b) = £375,000 £50,000 = £425,000, although in relation to (b) (the part period falling on or after 1 January 2016) no more than £50,000 of the company’s actual expenditure in that part period would be covered by its transitional AIA entitlement.

The AIA remains a valuable tax allowance, especially for smaller businesses. It will be interesting to see if Philip Hammond announces a further boost to investment by increasing this relief as part of his autumn statement November 2016.

Tax Diary November/December 2016

Thursday, November 3rd, 2016

1 November 2016 – Due date for Corporation Tax due for the year ended 31 January 2016.

 

19 November 2016 – PAYE and NIC deductions due for month ended 5 November 2016. (If you pay your tax electronically the due date is 22 November 2016.)

 

19 November 2016 – Filing deadline for the CIS300 monthly return for the month ended 5 November 2016.

 

19 November 2016 – CIS tax deducted for the month ended 5 November 2016 is payable by today.

 

1 December 2016 – Due date for Corporation Tax due for the year ended 29 February 2016.

 

19 December 2016 – PAYE and NIC deductions due for month ended 5 December 2016. (If you pay your tax electronically the due date is 22 December 2016)

 

19 December 2016 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2016.

 

19 December 2016 – CIS tax deducted for the month ended 5 December 2016 is payable by today.

 

30 December 2016 – Deadline for filing 2015-16 Self Assessment tax returns online to include a claim for under payments to be collected via tax code in 2017-18.

Limits on certain claims for tax relief

Thursday, November 3rd, 2016

From 6 April 2013, the total amount of certain Income Tax reliefs that can be used to reduce your total taxable income is limited to £50,000, or 25% of your adjusted total income, if higher.

The main reliefs subject to this limit are:

  • trade loss relief against general income and early trade losses relief – claimed on the self-employment, Lloyd’s underwriters or partnership pages
  • property loss relief (relating to capital allowances or agricultural expenses) – claimed on the UK property or foreign pages
  • post-cessation trade relief, post-cessation property relief, employment loss relief, former employee’s deduction for liabilities, losses on deeply discounted securities and strips of government securities – claimed on the additional information pages
  • share loss relief, unless claimed on Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) shares – claimed on the capital gains summary pages
  • qualifying loan interest – claimed on the additional information pages

These restrictions do not apply to Gift Aid relief; nor pension contributions which have their own limits.

It is worth considering these restrictions as they may limit your ability to recover a proportion of cash lost by claiming a reduction in tax payable on future or past income and/or gains.

How long do you need to keep tax records

Thursday, November 3rd, 2016

The length of time you need to keep tax records depends on the types of income you earn and the types of tax you are paying. A list of time limits is set out below:

Income Tax and Capital Gains Tax

1.    If you are not in business
One year from the 31 January following the end of the tax year. For 2016-17, you would need to keep your records until 31 January 2019.

2.    If you are in business – which includes rental income

Five years from the 31 January following the end of the tax year. For 2016-17, you would need to keep your business and other tax records until 31 January 2023.

3.    A company subject to Corporation Tax

Six years from the end of an accounting period. For the year ending 31 December 2016 you would need to keep records until 31 December 2022.

4.    VAT

You should keep records for at least six years.

5.    PAYE

You should keep payroll records for three years after the end of a tax year. For 2016-17 this would be until 5 April 2020.

 

These deadlines can be extended. For example, if:

  • You file your return late.
  • A return is subject to an enquiry or compliance check.
  • Records relate to a transaction spanning more than one year.
  • An asset is bought which is expected to have a life longer beyond the time limit.

Deferring taxable gains until future sales

Thursday, November 3rd, 2016

It may be possible to delay paying Capital Gains Tax (CGT) if you sell a business asset that is subject to a charge to CGT, but you use all or part of the proceeds to buy new business assets. The relief you can claim is called Rollover Relief.

This relief means you won’t usually pay any CGT until you sell the new, replacement asset. Depending on the circumstances of the replacement asset sale, you may then need to pay CGT on the gain from the original asset.

You can also claim provisional Rollover Relief if you are planning to buy new assets with your proceeds of sale, but haven’t done so as yet, or if you use the proceeds to improve assets you already own.

To qualify for Rollover Relief, the following circumstances must apply:

  • you must buy the new assets within 3 years of selling or disposing of the old ones (or up to one year before)
  • your business must be trading when you sell the old assets and buy the new ones
  • you must use the old and new assets in your business

You can claim relief on assets including land and buildings, fixed plant or machinery – and space stations! The old and new assets don’t have to be the same kind.

Different rules apply if you only reinvest part of the proceeds from selling the old assets, if the old were only partly used in your business, or if you use the proceeds to buy ‘depreciating assets’ (fixed plant or machinery, or assets expected to last for less than 60 years when acquired).

The devil as always is in the detail. If you are considering the sale of an asset that would normally be subject to a CGT charge, and you are aiming to replace the asset, we would suggest that you call to discuss the transactions to make sure you make the most of this relief.

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