Business And Private Use – What Can Be Deducted, If Anything?
 

As a general rule, if you operate as a sole trader or unincorporated business you can deduct expenses incurred ‘wholly and exclusively’ for the purposes of the trade. Where an expense in incurred solely for the purposes of the business, this test will be met.
However, what happens if there is some private use? Will this mean that the test is not met and that no deduction is allowed, or is it still possible to claim a deduction for the business part?
In the real world it is not possible to separate everything into neat boxes labelled ‘business’ and ‘private’; business and private use collides and overlaps.

Consider, for example, a sole trader who needs a car for the purposes of his or her business and who also needs a car for personal use.  Clearly, it would be slightly ridiculous for the sole trader to have one car solely for business use and another for private use in order to claim a deduction for the costs incurred in relation to a business.

HMRC recognise this, and consequently the extent to which it is possible to claim a deduction where there is both business and private use depends on whether it is possible to identify the business element.
Identifiable proportion

The wholly and exclusive test does not have to be applied to the expense as a whole. If the expense can be split into ‘business’ and ‘private’ elements and the wholly and exclusively condition is met in relation to the business part, a deduction will be allowed for that part. The split between business and private can be made using any reasonable basis for apportionment. What is appropriate will depend on the nature of the expense.

Telephone

Suppose that Chris uses his mobile for business and private calls. He receives an itemised bill each month and can split his bill between business and private calls, claiming a deduction in respect of the business calls.

Car

Mary is a mobile hairdresser. She has a car which she uses for both business and private travel. She keeps a log of all her business miles in the year, her private mileage and her total mileage. She keeps a record of motor expenses for the year (petrol, insurance, servicing, etc.) and claims a deduction based on the proportion of business miles in the year. In one particular year, she drove 12,000 business miles and 8,000 private miles. As her business mileage is 60% of her total mileage, she is able to claim 60% of her motor expenses for the year.

Working from home

Many small businesses are based at home. It is possible to claim a deduction for the costs of maintaining a home office. For example, household bills could be apportioned by reference to the number of rooms.
Caroline provides exam tuition from home and uses one room solely for this purpose. She has eight rooms in the house and claims a deduction for one-eighth of her household bills, such as electricity, gas, rates, mortgage interest, etc. Other ways of apportioning the costs that she could have used would include floor area or time spent on the business.

Keep it simple

To save the need to keep detailed records and perform an apportionment calculation, simplified expenses rules can instead be used to determine the permitted business deduction. Simplified expenses can be used to claim a deduction for motor expenses based on the number of business miles or for office use of home by reference to the number of hours worked on the business each month. Simplified expenses can also be used to disallow the private element where business premises are also used as a home. For further details on simplified expenses see www.gov.uk/simpler-income-tax-simplified-expenses-overview.

Tip:

Use simplified expenses to claim a deduction for business costs to make life easier.

Dual purposes

Where expenditure has a dual purpose and cannot be split between business and private elements, the wholly and exclusive test is not met and consequently no deduction is allowed. Examples of expenditure with a dual purpose include food a drink taken for sustenance, and ordinary clothing which provides warmth and decency (even if designed as ‘work clothes’). Deductions are, however, permitted for subsistence and for special work clothes (such as protective clothes) and uniforms.

Practical tips
Even if there is private use, if you can identify a business element, a deduction can generally be claimed to the extent that the expenditure relates to the business part.
 
24/10/2016

Up To £23,100 Tax-Free For 2016/17!
 
An individual taxpayer has a number of allowances at his or her disposal for 2016/17. These include the personal allowance, the personal savings allowance and the dividend allowance.

Personal allowances

The personal allowance is set at £11,000 for 2016/17. The allowance is available to all taxpayers, but it reduced by £1 for every £2 by which adjusted net income exceeds £100,000. This means in reality that anyone with adjusted net income of £122,000 and above for 2016/17 does not receive the personal allowance.
Personal savings allowance
The personal savings allowance is new for 2016/17. It is set at £1,000 for the basic rate taxpayers and at £500 for higher rate taxpayers. Taxpayers paying tax at the additional rate do not receive personal savings allowance. The allowance is available to set against taxable savings income.
              
Savings nil rate band

A nil rate band of £5,000 is available for savings income for 2016/17, in addition to the personal savings allowance. However, this is only available to the extent that taxable non-savings income does not exceed £5,000. Where a taxpayer has taxable non-savings income of less than £5,000 the savings nil rate is reduced by the amount of the taxable non-savings income.

Dividend allowance

As part of the reforms of the taxation of dividend income with effect from 6 April 2016, a dividend nil rate (or ‘allowance’) is available for 16/17 onwards. The allowance which is set at £5,000, is available to all taxpayers regardless of their margjnal rate of tax. Although it is termed an allowance, it is really a nil rate band, which works to tax the first £5,000 of taxable dividend income at 0%. Unlike a true allowance, the dividend allowance is treated as forming part of band earnings.

Marriage allowance

The marriage allowance is available to married couples and civil partners and allows a person to transfer 10% of their personal allowance to their spouse or civil partner, provided neither party pays tax at the higher or additional rate. This beneficial where one spouse or civil partner is not able to fully utilise their personal allowance and their spouse or civil partner is a basic rate taxpayer.
For 2016/17, the marriage allowance is £1,100 (being 10% of the personal allowance of £11,000).

Putting it all together

Depending on the nature of your income, it is possible to receive up to £23,100 tax-free by making the most of the allowances and nil rate bands outlined above. However, this is only possible if the taxpayer:
  • Has taxable non-savings income of no more than £11,000;
  • Has savings income of at least £6,000;
  • Has dividend income of at least £5,000;
  • Does not pay tax at the higher or additional rate; and
  • Benefits from the marriage allowance.
Where this is the case, it is possible to use the personal allowance of £11,000, the personal savings allowance of £1,000, the marriage allowance of £1,100 and the dividend allowance of £5,000  to shelter income while taking advantage of the £5,000 savings starting rate – a total of £23,100.
 
Example: Making the most of allowances, etc.

For 2016/17, Brenda receives a pension of £9,000, interest of £8,000 and dividends of £6,100. Her husband Chris receives a pension of £8,000. As Chris is unable to fully utilise his personal allowance for 2016/17 of £11,000, the couple claim the marriage allowance and transfer 10% (£1,100) of Chris’s personal allowance to Brenda.
Brenda’s tax computation for 2016/17 is as follows:
Total
  (£)
Non savings income Savings Income Dividend income
23,100         9,000       8,000      6,100
Personal Allowance (11,000)        (9,000)      (2,000)
Personal Savings Allowance (1,000)     (1,000)
Dividend ‘allowance’ (5,000)     (5,000)
Marriage allowance (1,100)     (1,100)
Taxable income 5,000             0       5,000           0
Taxed at savings starting rate of 0%           0
 
The remainder of the savings income of £5,000 not sheltered by allowances is taxed at 0% savings starting rate, so no tax is actually payable.
This means that Brenda has received £23,100 tax-free in 2016/17.
Other allowances – even more tax free?
If the taxpayer is able to benefit from other allowances such as blind person’s allowance or the married couple’s allowance (either party to marriage must be born before 6 April 1935), it may be possible to receive even more tax-free.
 
Practical Tip:
Allocate your personal allowance in the most beneficial manner to maximise your tax-free income.

20 September 2016
 


The 3% SDLT Surcharge For Residential Properties: Are You Caught?
 
Buy-to-let landlords have received more than their fair share of fiscal bashing from the Chancellor. Individual landlords will see their restrictions in their loan interest tax relief from 6 April 2017. Before then – since the 1 April 2016 – they have also been hit with 3% stamp duty land tax (SDLT) ‘surcharge’.

This ‘surcharge’ broadly applies to individuals purchasing ‘dwellings’ where they already own at least one dwelling, unless they are ‘replacing’ their main residence. The 3% SDLT surcharge will also apply to all dwellings purchased by companies.
Why are landlords being singled out for harsher tax bills? It would appear that they are being blamed for pushing up property prices and locking-out first-time buyers from the property market. The 3% surcharge is intended to act as a disincentive to the purchase of buy-to-let properties, thus freeing up property stock for home-owner occupiers.

SDLT on residential property and ‘dwellings’

SDLT on residential property is calculated on a progressive sliding scale, with the SDLT being determined by reference to the SDLT rate for each relevant band – or ‘slice’ – of the chargeable consideration (Scotland has a different system for taxing the purchase of properties  - known as the Land and Buildings transaction tax (‘LBTT’) – which mainly adopts the SDLT rules).
Since 1 April 2016, the current SDLT rates on residential properties are as follows:
 
Chargeable consideration Normal Rate With 3% SDLT surcharge
Up to £40,000      0%           0%
£40,001 to £125,000      0%           3%
£125,001 to £250,000     2%           5%
£250,001 to £925,000     5%           8%
£925,001 to £1,500,000    10%         13%
Excess over £1,500,000    12%         15%
 
The status of a residential house or flat is normally clear-cut. In HMRC’s view, the status of the property is based on its use at effective date of transaction. This overrides any past or intended future use.
The 3% surcharge only applies to (major interests in) dwellings, which are defined in FA 2003, Sch 4ZA, para 17. The main part of the definition is as follows:
17(2) A building or part of building counts as a dwelling if:
  1. It is used or suitable for use as a single dwelling, or
  2. It is in the process of being constructed or adapted use.
17(3) Land that is, or is to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure on that land) is taken to be part of that dwelling.
17(4) Land that subsists, or is to subsist, for the benefit of a dwelling is taken to be part of that dwelling.

 The legislation refers to transactions that are subject to the 3% surcharge as ‘higher rate transactions’
Purchases by individuals – Conditions for ‘higher rate transactions’
The purchaser will be subject to the 3% surcharge where they are acquiring a major interest in a dwelling and (broadly):
  • The chargeable consideration is £40,000 or more (Condition A);
  • It is not a reversionary interest on a lease that has more than 21 years to run (Condition B);
  • At the end of the day of purchase, the purchaser already has a ‘major interest’ in one or more dwellings (Condition C); and
  • The acquired dwelling is not a replacement of the purchaser’s main residence (Condition D).
For the purposes of Condition C, a major interest is one with a market value of more than £40,000, which is not reversionary on a lease with more than 21 years left to run.

Condition D ensures that the 3% surcharge does not bite if the purchased ‘new’ dwelling is (or is intended to be) a main residence, which replaces an existing main residence. However, this ‘exemption’ only applies if the purchaser (or their spouse/partner):
  • Has sold their previous main residence in the last three years before the new main residence is acquired; or
  • Subsequently sells their existing main residence in the three years following the purchase of the ‘new’ (replacement) main residence.
This article is based on the current Finance (No 2) Bill 2016, which may be subject to change before it receives Royal Assent.

22 August 2016

 


Get Ready For The National Living Wage

From 1 April 2016, workers in the UK aged over 25 earning the minimum rate of £6.70 per hour will see a 50 pence increase in their minimum hourly rate, which is set to rise to £7.20 per hour.
NLW and NMW
The national living wage (NLW) will be enforced by HMRC alongside the minimum wage (NMW), which they have enforced since its introduction in 1999.
The NMW is the minimum pay per hour most workers are entitled to by law. The rate to which they are entitled depends on a worker’s age and whether they are an apprentice.
The rate from 1 October 2015 are:
  • £6.70 for workers 21 and over:
  • £5.30 for those aged 18-20:
  • £3.87 for those aged 16-17, who are above school leaving age but under 18: and
  • £3.30 for apprentices under 19, or 19 or over who are in the first year of apprenticeship.
There are a number of people, who are not generally entitled to the NMW, including:
  • Self-employed people:
  • Volunteers and voluntary workers:
  • Company directors (unless they have a contract of employment): and
  • Family members or people who live in the family home of the employer who undertakes household tasks.
All other workers, including piece workers, home worker, agency workers, part-time workers and casual workers must receive at least the NMW.
The compulsory NLW is the national rate set for people aged 25 and over. Whilst the NMW rates for those aged under 25 normally change on 1 October every year, the NLW rate for those aged 25 and over will change (where applicable) every year on 1 April. As mentioned, the rate for the NLW has been set at £7.20 per hour from 1 April 2016. The NMW for those under the age of 25 will continue to apply from 1 April 2016.
The NMW is reviewed annually by the Low Pay Commission, and any changes to the rate are normally introduced in October each year.
As with the NMW, the NLW will be reviewed annually by the Low Pay Commission, who will recommend any future rises.
Generally, all those covered by the NMW, and are 25 years old and over, will be covered by the NLW. These include:
  • employees:
  • most workers and agency workers:
  • casual workers:
  • agricultural workers: and
  • Apprentices who are aged 25 and over.
 
Compliance

The government is continuing to raise the awareness of businesses to make sure they are ready to pay the new wage on 1 April 2016. As part of this, a four-step guide for businesses has been published on a new dedicated website (www.livingwage.gov.uk), which asks firms to:
  • check they know who is liable in their organisation:
  • take the appropriate payroll action in advance of the commencement date:
  • let employees know about their new pay rate: and
  • check that staff under 25 are earning at least the right rate of NMW.
The penalty for non-payment of the NLW will be 200% of the amount owed, unless the arrears are paid within 14 days. The maximum fine for non-payment will be £20,000 per worker.
Employers need to take action over the coming weeks to ensure they are ready for the launch of the NLW on 1 April 2016.

Practical tip:

Following the recent Spanish case of Federacion de Servicios Privados del sindicato Comisions Obreras v Tyco Integrated Security SL (Tyco) (Case C-266/14), there could potentially be NMW claims if, taking into account travelling time, a mobile worker’s hourly pay rate falls below the minimum rate. The UK’s professional bodies are currently assessing the impact of the European Court of Justice (ECJ) decision in the case on the NMW, and further guidance is expected in due course.

11/04/2016


Inter-Spouse Transfers: Problem Areas

Basic Exemptions

No capital gains tax or inheritance tax liabilities arise on inter-spouse transfers. This enables tax planning to be carried out to mitigate either tax.
Thus, for example, if a husband wishes to sell his shareholding in XYZ Ltd but has utilised his exempt annual exempt amount (i.e. £11,100 for the tax year 2015/16) he is able simply to transfer the shares to his wife to sell who can then make use of her otherwise possibly wasted annual exempt amount. In addition, no inheritance tax liability arises on the transfer.

Estate equalisation for inheritance tax

If the husband’s and wife’s estates are very unequal, in order to offer flexibility and mitigate inheritance tax on both deaths it may be appropriate to equalise their estates by effecting inter-spouse transfers precipitating neither capital gains tax nor inheritance tax charges.
Exemptions conditional on satisfaction of conditions
Conditions must be satisfied if exemptions from such tax charges on inter-spouse transfers are to apply: otherwise it is likely that both capital gains tax and inheritance tax charges will arise.
The conditions are not identical with respect to both taxes.
Exemption from capital gains tax requires that the spouses are living together. Exemption from inheritance tax has no such requirement: marriage, per se, is sufficient. Thus, if the spouses are separated but not divorced, inter-spouse transfers between them continue to benefit from the inheritance tax exemption. However, such transfers will precipitate capital gains tax charges as the inter-spouse exemption will no longer apply for capital gains tax purposes (following the year of separation.

‘Living together’: what it means

Living together (basically means what it says) but if, for example, a wife resides in the UK whilst the husband resides and works abroad the capital gains tax exemption still applies (assuming the couple are not separated i.e. no longer functioning together as a married couple).
Different domiciles: inheritance tax issues
Domicile very broadly refers to where an individual resides and intends to reside permanently/indefinitely.
For capital gains tax purposes, inter-spouse transfers are exempt, irrespective of the domicile status of each spouse. This, however, is not so for

inheritance tax purposes.

Where a UK domiciled spouse effects transfers to a non-uk domiciled spouse (but not vice versa) there is a limit above which such transfers fall liable to inheritance tax. Assuming no lifetime transfers have been made by the UK domiciled spouse, on death, if everything is left to the surviving non-uk domiciled spouse the first £325,000 is exempt; the next £325,000 (albeit at 0%) with any excess is taxed at 40%.
Example: inter-spouse transfers and inheritance tax charges
John Smith, a UK domiciled individual, Sophia Moren, an Italian domiciled individual.
Mr Smith dies leaving his estate of £700,000 to Sophia.
£325,000 is exempt, the next £325,000 taxed at 0%; and the balancing £50,000 taxed at 40% giving an inheritance tax charge of £20,000
 
If, on the other hand, Sophia died leaving all her estate £700,000 to John no inheritance tax charge arises.
Matrimonial home: joint tenant inheritance tax danger
If spouses have different domiciles and own their own home as joint tenants, on the death of one spouse their interest automatically passes to the non-UK domiciled spouse, which may cause an inheritance tax charge to arise, depending upon the figures involved.
Practical Tip:
Before making any inter-spouse transfers ensure that the conditions for both capital gains and inheritance tax are satisfied if nasty tax charges are to be avoided.
   
15/10/2015 

One-Man Companies To Lose Employment Allowance
 
The National Insurance employment allowance was introduced from April 2014 and provides employers with a reduction in their secondary Class 1 National Insurance bill up to the amount of the allowance. The allowance was set at £2,000 for 2014/15 and 2015/16.
In his summer 2015 Budget the Chancellor announced that the allowance is to be increased to £3,000 a year from April 2016. However, from that date, companies where the director is the sole employee will no longer be able to benefit. The loss of the allowance will affect the calculation of the optimal salary calculation for personal companies.

Optimal salary – 2015/16

It is generally efficient for a tax and National Insurance perspective for the director of a one-man company to pay a small salary to preserve the director’s entitlement to the state pension and certain contributory benefits and to withdraw any remaining profits as dividend. To preserve pension entitlement the salary must be a t least equal to the lower earnings limit for National Insurance purposes. For 2015/16 this is set at £112 per week. This means that the annual salary must be at least £5,824 for this tax year.
As employee Class 1 National Insurance contributions are payable at a notional zero rate, it is possible to pay a salary of up to £8,060 (the annual level of primary threshold) for 2015/16 free of both tax and National Insurance, as long as the director’s personal allowance remains available.
 
Once the salary level exceeds £8,060 the director will have to pay Class 1 National Insurance contributions of 12%. Normally, employer contributions of 13.8% would also be payable once the salary exceeds the level of the secondary threshold, set at £8,112 for 2015/16. However, as a one-man companies can currently claim the employment allowance, the employer does not pay any contributions until the NIC bill for the year exceeds £2,000. The impact of the allowance means that as the personal allowance is available, for 2015/16 it is better to pay a salary of £10,600 and pay employee’s National Insurance of £304.80 than to pay a salary of £8,060 and take the rest of the profits as dividends. At this salary level, no employer National Insurance is due as it is covered by the annual allowance. However, as the salary is deductible for corporation tax purposes, the additional salary of £2,540 paid above the primary threshold saves corporation tax of £508 (£2,540 @ 20%) for the cost of the employee’s NIC of £304.80 – a net saving of £203.20.
It is not worth paying a salary in excess of the personal allowance, despite the employment allowance, as any salary above this level will be taxed. The combined effect of the income tax and employee’s NIC will outweigh the corporation tax deduction.

Optimal salary – 2016/17

For 2016/17, the employment allowance will not be available to one-man companies where the director is the sole employee. Where this is the case, the benefit of paying a salary in excess of the primary threshold is lost (other than to the extent that the secondary threshold is higher than the primary threshold) as the combined employee and employer National Insurance cost will outweigh the corporation tax deduction.

Tip:

From April 2016, in one-man companies where the director is the sole employee, the loss of employment allowance means that the optimal salary 2016/17 is one equal to the higher of the primary threshold and the secondary threshold. The loss of the employment allowance from 2016/17 means that it is no longer beneficial to take a salary once both primary and secondary contributions are payable, the NIC hit is offset by the corporation tax deduction.
However, for companies that have other employees the employment allowance remains available next year and it will continue to be beneficial to pay a salary up to the personal allowance (set at £11,000 for 2016/17) as long as this remains available.
Practical Tip:
If the director is under 21, it will remain beneficial to pay a salary equal to the personal allowance, as where the employee is under 21 no employer’s NIC is payable at this level.

Note:
The rules for taxing dividends are reformed from 2016/17  and this will impact on the dividend strategy.
      
01.10.2015


Simply More Expensive – New Dividend Rules
 
The changes to dividend rules were clearly a late addition to the summer budget as the lack of detailed analysis then or since confirms. But the proposal is so simple that we can work out who will pay more tax and who will not: the short conclusion is that if you own your own company you will pay more if your income from the business is more than £15,000.
First, the basics:
  • The non-repayable dividend tax credit will be abolished:
  • Instead there will be a £5,000 dividends allowance which looks likely to be additional to the annual personal allowance:
  • The published tax rates will apply to the actual dividends received: and
  • Dividends will be treated as the ‘top slice’ of income.
The tax rates on dividends
Income within the basic rate band                                           7.5%
Income within the higher rate band                                        32.5%
Income above the higher rate band                                        38.1%
So, all of the effective tax rates outside the £5,000 are increased by 7.5%.
 
In 2016/17, a one-man company owner will be able to take a salary covered by the personal allowance of £11,000. That salary will reduce the company’s corporation tax profit, so it will effectively be tax free. NICs ‘rate bands’ are due to be aligned more closely with income tax, but we have not seen the actual earnings limits and thresholds for 2016/17 announced yet.
 
The £5,000 dividends allowance means that the next £6,250 of company profits will only be taxed at 20% corporation tax, leaving £5,000 available to draw without paying income tax.
 
The next thing to take into account is your taxable benefits in kind and non-business income. After that threshold all dividends will pay more tax than before.
 
Dividends within the basic rate band will then be taxed at 7.5%. So on a further £20,000 you will pay £1,500 where in 2015/16 you pay no tax.
 
The only small benefit of the change is that you don’t have a tax credit to add on to the dividend to work out when you’ll hit the higher rate: £32,000 means £32,000 whereas under the 2015/16 rules, adding tax credits would have meant only £28,000 fell within the basic rate band: the other £3.200 would fall into the higher rate band.
 
Once you get into higher rate tax the £5,000 allowance should still apply, but once you have used that up you’re again paying an extra 7.5%.
 
Husband and wife companies
 
If you set up your company to share business income with your spouse you’ll be hit hard too if your spouse’s income exceeds £16.000, because she’ll pay the extra 7.5% on her dividends too.
 
  
Time to take stock

The new dividend rules won’t remove all the advantages of incorporating your business, as even the Government acknowledged when it started yet another consultation on IR35, but you should take a look at your likely tax increase and factor in all the other factors like accountancy fees.
 
Practical tips:
 
If your income sits below the top end of a tax rate band this year it’s probably worth maximising your dividends before 5 April so that you only pay this year’s lower rates of tax. The Chancellor has not announced any anti-avoidance measures in the regard and may secretly be looking forward to a little boost in his cash flow.
 
The other possibility is that you may decide this is a good time to dis-incorporate your company if it is not saving you too much and especially if you have built up significant undistributed profits. A couple who qualify for entrepreneurs’ relief could spread the winding up distributions over two tax years and take over £44,400 between them tax free, only paying 10% on the balance. And if the company owns chargeable capital assets there’s no tax in the company on distributing them to you due to disincorporation relief.
 
All in all a lot to think about as your summer holiday tan slowly fades. 

09/09/2015


All Change! Pensions and Planning Opportunities
 
Before the changes in April, there was limited scope for inheritance tax (IHT) planning relating to pensions, and In many cases there were more problems than opportunities where pensions where concerned. Pension funds do not form part of your estate for IHT purposes, but they have their own system of tax charges on your death.

Out with the old…………………..

In the case of personal pensions, there might be a substantial cash sum within the pension fund, and under the old rules, this could only be passed to the heirs free of tax if you died before reaching the age of 75, and you had not started to draw down any of the money in the pension fund.
 ‘Drawing down’ a pension is the alternative to buying an annuity – it involves taking money out of the fund and it being treated as income for tax purposes. Until April 2015 there were limits on how much you could draw per year, but now the only limit is that what you draw will be treated as taxable income.
If you had drawn down anything from the fund, what was left was subjected to a tax charge of 55%.
In the case of ‘dependants’, this could be avoided by them receiving income (taxable on them in the normal way) instead of them taking the money as a lump sum, but for someone of pensionable age the only dependent they were likely to have was their spouse – and once they were gone, their surviving spouse would normally have no ‘dependants’.
If you died after reaching 75, the 55% charge applied even if you had not started to draw down the pension, though if you had any ‘dependants’ they could take income instead of capital as described above.
 
………………. In with new
 
Under the new rules that apply from April this year, if you die before the age of 75, your pension pot can be passed tax-free to your heirs, whether or not you have started to draw down on it. If they wish your heirs can leave the money in the pension fund, where it will continue to grow in a tax-free environment, and draw on it without limits. The money they draw will be free of tax in their hands. Assuming they can resist the temptation to draw the entire fund out at once, they will be getting tax-free income from an investment that is itself also tax-free.
The treatment is not confined to ‘dependants’ – it is available to any heir who is left the pension pot. This, incidentally, is finally the nail in the coffin of the much hated annuity, because these generous rules only apply if the pension is untouched or is in drawdown, not if it has been used to purchase an annuity. The income from an annuity will be taxable in the normal way.
If you live beyond 75, your heirs will suffer a 45% tax charge if they take the cash lump sum, but they can instead elect to receive the fund as income as via drawdown – though this time the amounts drawn will be taxable as income.

Practical tip:

Those without the significant pension pots are constrained by the annual limit on pension investment of £40,000, but if you have a significant pension pot, and you have sufficient income not to need to draw down on it, you no longer need to try to reduce it in order to avoid a 55% tax charge. The fund will be a tax-free legacy if you die before 75; or a source of taxable income if you survive for longer. Pension advice from a suitably qualified specialist based on your own personal circumstances is recommended.     
27 June 2015          


Incorporating The Business: Where Are We Now?
 
Business owners, both sole traders and partnerships, were dealt a blow in the Autumn Statement of December 2014 when the option of selling goodwill to a connected company and claiming entrepreneurs’ relief (ER) was removed. The change also saw companies lose the chance to claim corporation tax relief on goodwill acquired from connected individuals. So what’s left for a business thinking of incorporating?
 
Restriction only applies to goodwill

The restriction doesn’t stop other chargeable assets used in the business being sold and entrepreneurs’ relief claimed, but you have to consider carefully what the effect of selling will be in the long term as well as the short term.
The most likely asset for selling into a company is the property used in the business but that carries two additional costs as well as the 10% capital gains tax (CGT) rate. First is stamp duty land tax (SDLT) at up to 4% on non-residential property (on properties over £500,000). If that price is worth paying to get value into your company remember that the company is now liable for corporation tax on any gain it makes on selling the property: that’s 20% on the gain and paying another 10% on winding up the company makes your overall tax rate on future gains 28% at best, and only if your company still qualifies for entrepreneurs’ relief by then.
Once you get past property and goodwill the number of assets that actually qualify for entrepreneurs’ relief is relatively small. If you make a profit from selling: commercial or technical know-how; unregistered trademarks or designs; copyright; or usually, patents, you will pay income tax which means that entrepreneurs’ relief is irrelevant. Registered trademarks and designs, some patent rights and franchises are subject to CGT and so may attract entrepreneurs’ relief, but you are still facing double taxation on eventual sale. Intellectual property rights also, like any other asset, need a value to be established and the benefit of the tax saving will be diminished if HMRC dispute your value.
 
How can I incorporate now?

If you are incorporating a business with substantial goodwill you have two options for doing so without paying tax on the goodwill transfer.
You can incorporate in exchange for shares, which requires the entire business to be transferred to the company in one go. Usually this is a straightforward process unless there are assets that you want to keep out of the company. You can only hold back cash when transferring the assets of the business. This means that if you own the business premises they must be transferred in too. If that’s the case you will have SDLT to pay on the property transferred in and may have to reorganise any borrowings on the premises by transferring them to the company. This option has the benefit that the company is treated as acquiring all of its CGT assets at their current market value, so counting as base cost for when the company sells, even if the sale comes along immediately afterwards.
The CGT ‘base cost’ of your shares, the price allowed as their cost, is usually the current market value of the assets transferred in (reduced by older gains rolled over against them), so you do not lose out on the costs you have already incurred.
The other way of incorporating is to transfer the assets that you want the company to own to it by way of gift. This is usually less favoured because the company does not get any ‘uplift’ on the assets’ value, and if it sells them only the original cost to you, plus any improvement costs etc., is deductible. Also you only count the actual amount subscribed for your shares as their base cost CGT cost.

Practical tip:

If you want to incorporate your business but keep an asset such as the business premises in your ownership, this could be a good time to bring your spouse into the business. If you form a partnership and keep the premises ‘off balance sheet’ they don’t count as assets of the business and you can still incorporate shares.
4 May 2015





Take Advice From HMRC At Your Peril

Should you rely on advice given by HM Revenue & Customs? Not when you are aware of the highlights of an unfortunate recent tribunal case for the taxpayer.

You think it was obvious – if you have a problem or a question about tax, why not ring up HMRC? They run the system, after all, so they ought to be able to answer your question.
Unfortunately, the reality is that the technical competence of the average person answering HMRC’s phones is likely to be very poor, and your chances of getting the right answer (or best answer anywhere, as so often with tax, there is more than one) are very slim.
There is worse to come. If you get the wrong advice from HMRC and act on it, you will not be protected from the consequences of your actions if they result in extra tax payable or a mistake in your tax return.

Incorrect advice

A recent tribunal case (Rotberg v HMRC (2014) UKFTT (TC) showed how worthless HMRC advice can be, and how dangerous it is to follow it. The case concerned a lady who made a large capital gain, and who was advised by her accountant that she could ‘roll over’ this gain by buying shares in a limited company. There are circumstances where this is possible, but the company concerned has to be a special type of company and must have been authorised by HMRC to issue shares under the enterprise investment scheme (EIS). Unfortunately for Mrs Rotberg, the company she invested in was not an EIS company, so in fact the tax on her gains remained payable.
Mrs Rotberg had been advised by her accountant (whom the tribunal described as ‘negligent’) that she could roll over the gains, but the accountant had based his incorrect advice on a telephone conversation with a local inspector of taxes, who had confirmed (incorrectly) that Mrs Rotberg’s investment would enable her to defer paying capital gains tax. This is not the taxation equivalent of rocket science, and it is hard to see why the accountant and the tax inspector were both so ignorant of basic tax rules.

Legitimate expectation

Part of the case for Mrs Rotberg, therefore, was that as a result of her accountant’s advice, based on the advice given to him by the tax inspector, she had a ‘legitimate expectation’ that the gains could be rolled over. ‘Legitimate expectation’ is a legal concept and in many cases it can result in a person who has been misinformed escaping the consequences of that misinformation, but the tribunal decided (‘without enthusiasm’, as they put it) that they had no jurisdiction to consider the doctrine of ‘legitimate expectation’, and so Mrs Rotberg had to pay the tax.

If she had been given proper advice at the right time, the gain could have been ‘rolled over’ into EIS shares, but by the time the case came to the tribunal, the time limit for this had passed.
Of course, we sympathise with Mrs Rotberg, but the most important lesson lies in the fact that her accountant was described by the tribunal as ‘negligent’ in the advice he had given her. In other words he was ‘negligent’ to rely on advice given by a tax inspector. If a tribunal considers it to be ‘negligent’ to ask a tax inspector for advice and then act on what he tells you, it is clear what they think of the typical level of competence in HMRC.

Practical tip:
Never rely on HMRC for their advice. The answers you get will probably be wrong, and if they are, relying on them will not protect you from the consequences. Take advice from a competent qualified accountant.








Tax Saving Tips For Families

Consider “Equalising Your Income” To Save Up T0 £15,000 Per Year

One of the most important tax planning devices within the family is to “equalise income”.
Very often you have one spouse who earns a lot more money while the other earns little or none at all.

If you are in this type of situation then as far as possible you need to shift income to the one who earns less.
Also, don’t forget that this applies not only to husbands and wives but also to people of the same sex who are in a civil partnership.

An example of the sort of income you can shift easily is where you own a property, which is let out. You can give it to your spouse or your civil partner.
If you have investments in shares you could give those to your spouse or your civil partner and thus transfer the income to them.
And if you start from the situation of somebody earning a high income paying 40% tax with your spouse or a civil partner who is earning nothing you can save up to just over £10,000 a year in tax by transferring sufficient income to the spouse or civil partner to use up their tax allowances and  their lower rate of tax. In the case of a 45% taxpayer the saving could be over £15,000.
Income from family businesses can also be shifted in this way by making the low-income spouse a partner in the business or a shareholder in the family company, but this is more complicated and needs expert advice.
 
Employ Family Members To Reduce Your Tax Bill

Do not overlook the possibility of employing family members of your family in your business.

Remember everyone has personal allowances, which is income they can have tax-free.
Then there is the lower rate of tax of 20% and if you’re paying 42% or even 47% tax and NIC on the profits of your business it makes a great deal of sense to employ members of your family to work in that business to justify the amount that you pay them.

A word of warning here – the employment has to be genuine in the sense that they have to do enough work for the business to justify the amount that you pay them.

However, in any typical family business, in practice the spouse in particular is usually involved whether or not they are formally part of the business. Therefore, it makes sense to recognise this by paying them a salary, which will also transfer income and uses up allowances and their basic rate tax bands.  





You’ll Be Given A Fair Trial And Then Shot!
HMRC ‘Accelerated Payment’ and ‘Follower Notices’


The Finance Bill made it through Royal Assent in July 2014, HMRC now have the power to demand tax and to close cases with no effective right of appeal for the taxpayer.
The recent cleverly managed PR campaign against tax avoidance has produced a climate of opinion that has made it possible for HMRC to be given the power to decide the outcome of certain tax disputes without the taxpayer concerned being allowed to have their view tested in the courts. The new ‘dictatorship’ comes in two forms –‘Accelerated Payment Notices’ and ‘Follower Notices’

Accelerated payment notice

At present, if there is a dispute between HMRC and the taxpayer about how much tax is due, broadly speaking HMRC must wait for their tax until they can get a court to say they are correct and the tax should be paid. It has to be admitted that some of the more disreputable tax avoidance schemes actually used this as a selling point – if there are millions at stake, a delay of a year or two in payment is not as good as avoiding the tax completely, but it is certainly worth having.
In certain cases HMRC can issue an ‘Accelerated payment notice’ requiring the disputed tax  to be paid within 90 days. The taxpayer has no right of appeal, beyond “making representations“ to HMRC. If HMRC do not back down, the tax is payable and it is not possible to appeal to the courts against such a notice.
These notices can be issued in three situations:
  • Where the tax avoidance scheme is one disclosed under the Disclosure Of Tax Avoidance Schemes (DOTAS) rules (which apply to most tax avoidance schemes on the market): or
  • HMRC are using the new GAAR (“General Anti-Abuse Rule”) to challenge the scheme: or
  • The dispute is sufficiently similar to one decided in HMRC’s favour by the courts – see below.
Note the rules apply to existing disputes as well as ones arising after this July, so if you are currently arguing about a DOTAS scheme, you may well get such a notice.

Follower notice

These are even more sinister. Where HMRC believe that there is a ‘final’ decision by the tax tribunal or the Courts which, if applied to the dispute they are having with you, would mean that they would win the argument, they can require you, effectively, to give up and agree with them, either by amending your tax return or withdrawing your appeal, as the case may be.

The requirement that  a court decision be ‘final’ does not mean it must have been made by the Supreme Court – it could have been made by a lower court or even the tax tribunal if the taxpayer concerned could not afford to take it any further.

Once again, the only appeal is to HMRC themselves, not to the courts, and if you refuse to comply, and continue your litigation and lose, you will face a penalty of between 10% and 50% of the tax that was in dispute – and you will already have had to pay that tax anyway because of the ‘accelerated payment’ powers.

You cannot appeal (except to HMRC), so we shall be relying on HMRC being fair and objective in how they compare the decided case with yours.
Of course, they assure us that they will be benevolent dictators. However, past experience leaves me with little confidence in their assurances.

Practical tip:

Given the draconian powers now available to HMRC, do not have anything to do with “off the peg” tax avoidance schemes – most of them do not work and now they will not even postpone payment of the tax.









Claiming Vat Bad Debt Relief – Do’s and Don’ts

Any Vat registered business that has not been paid by a customer can claim its VAT back once the debt is overdue for payment by six months. This is a useful cashflow measure for businesses with bad debt problems, but the only trouble is that you have to wait six months before you can make the claim.

Points to remember

There are a number of points to remember when you make a bad debt relief (BDR) claim.
  • The debt must be older than six months after the due date for payment, not the invoice date. So if your payments terms are one month you can make the claim seven months after the invoice date.
  • Claims are made on the VAT return for the period they become due; they are added to the input tax claimed in box 4 of the VAT return, not subtracted from the output tax in Box 1.
  • You need to keep a separate VAT BDR account to record the BDR claimed in each period. This need only be a manual record of the amounts claimed and the dates the VAT on the invoices were originally accounted for.
 
Tips and traps for claims
  1. The debt does not need to be written off in the statutory accounts and you do not need to have given up chasing it – it just needs to be more than six months overdue for payment.
  2. Claims should be made in the Vat quarter that you become entitled to make a claim. However, if you forget to make a claim at the right time you can still make it up to four years after the period when the claim could originally have been made.
This means that the invoice could be up to four years seven months (assuming a one month payment period). Also remember that if a late claim for bad debt relief is made and it comes to more than £10,000 you will need to make a voluntary disclosure. Claims that are made on time are not an error and so a separate error is not required.
  1. If you have a dispute with a customer over whether VAT should be charged and the VAT remains outstanding six months after it was due, you cannot claim back all the of the VAT outstanding. HMRC views the part payment as being VAT inclusive so you can only make a claim for part of it.
 
Example: Calculating the relief

You issue a bill for £1,000 plus £200 VAT. The customer disputes the VAT amount, and does not pay it.
The £1,000 is treated as VAT inclusive so you can only claim back £33.33 (£1,000/6 = £166.67 VAT still due).
Part payments are treated in the same way as above  - VAT BDR can only be reclaimed on the outstanding amounts.
Even if a customer goes bankrupt you still have to wait until the payment is six months overdue before you can make a BDR claim.
  1. Remember you can’t claim BDR if you are on cash accounting – there is already built in BDR as you only pay the output tax when you get paid!
  2. If a customer eventually pays, or makes part payment, after you have claimed BDR, you need to make an adjustment and pay HMRC the VAT due on the amounts received. This is a favourite check for HMRC and if you forget to do it you will get an assessment plus VAT and penalties.
Practical tip:

Remember to check for outstanding sales invoices that are overdue for payment every VAT quarter and make a claim. If you receive late payments do not forget to pay back HMRC and VAT due.
 





Tax-Free ‘Perks’ For Employees

Employers often make up a total employment package by providing extra benefits on top of salary. This article looks at some of the more common tax-free perks currently available.
Making the most of mileage
Mileage is probably the most common expense incurred by employees. Where an employer reimburses business mileage in the employee’s car at less than HMRC-approved rates, the employee can claim the balance (but not the 5p per mile passenger extra) against their taxable income. The approved rates are currently:
  • 45p per mile for the first 10,000 miles:
  • 25p per mile for each subsequent mile:
  • 24p per mile for motorcycles:
  • 20p per mile for bicycles: and
  • 5p per mile extra for each passenger carried on work-related journeys.

Example: Michael claims a tax repayment for business mileage

In 2013/14 Michael travelled 9,000 miles on company business and his employer reimbursed him at the rate of 40p per mile. The tax-approved tax rate is 45p per mile, which means Michael can claim the 5p a mile shortfall against his taxable income. This equates to £450 (9,000 x 5p).
If Michael is liable to tax at the higher 40% rate, he will be able to reclaim a tax repayment of £180 (£450 x 40%).

Other travel-related expenses

Free or subsidised work buses – The bus has to seat at least nine passengers. Any number of employers can join together and provide a works bus or minibus service for their joint workforces. The bus has to be used mainly for commuting or travel between workplaces, but employees and their families can use it occasionally for other trips.
 
Cycles and safety equipment made available for employees will not give rise to a tax or NIC charge. Employees can use cycles and safety equipment for leisure as long as the main use is for commuting.
Employers can provide taxis for employees going home after 9pm as long as no public transport exists or it would be unreasonable for the employee to use it (for example, if they had to walk a mile down an unlit street to catch a bus). This does not apply if employees have to regularly or frequently work past 9pm (no more than 60 times a year).

Other tax-exempt benefits

Other benefits that can be made tax-free include:
  • The cost of meals when away from home on business;
  • the cost of travel to a temporary workplace for up to 24 months;
  • personal expenses when away from home on business of up to £5 per night in the UK and £10 per night abroad. This is to cover the cost of incidental living expenses such newspapers, telephone calls home etc;
  • unreceipted payments of up to £4 per week if required under the terms of an employment contract to work at home;
  • the cost of two return journeys a year for a spouse/civil partner and children to a location outside the UK if the employee is required to work overseas for a continuous period of at least 60 days;
  • long service awards are tax free as long as the recipient has at least 20 years with the same employer and there has been no similar gift in the past 10 years. The gift can be worth as much as £50 for each year of service but cannot be in the form of cash;
  • financial/pensions advice worth up to £150 per year;
  • eye checks for staff who use computer screens and any fixed amount given towards buying glasses; and
  • medical treatment if incurred overseas on business.
Practical tip:

From April 2014, employers can offer employees tax-free cheap loans of up to £10,000 per year. This is a cost effective way of (for example) helping employees purchase season tickets for travel. Provided the full amount of the loan is repaid to the employer and total loans outstanding do not exceed £10,000 at any time, no tax or NIC will be payable. It is worthwhile for employers and employees to discuss interest-free or cheap loans, as it may be beneficial to both.
  






Can You Now Take Your Pension Funds As Cash?

Budget 2014 was revolutionary, in that it heralded a sea change in retirement planning, with far greater flexibility in how you take your pension funds. You need never take an annuity now, and changes will allow you to take your defined contribution pension pot as cash.

However, this new total flexibility will only take effect from 6 April 2015, with interim measures announced from 27 March 2014. One must bear in mind that the Budget 2014 announcements and Finance Bill 2014 are subject to Parliamentary approval, and much of the small print is probably yet to come.

The current system has been completely overhauled. It affects trivial communications, the taking of ‘stranded’ small pension pots as cash or drawdown income with more generous limits. At present, only a defined contribution pension schemes (personal pensions, retirement annuity funds, money purchase schemes) are affected. Defined benefit pension schemes will still be subject to the rules of the scheme, but these may change, depending on future consultation. The taxation of pension fund cash after 25% tax free pension commencement lump sum (tax free cash) will be taxed at marginal rates, as opposed to the previously more penal 55% ‘unauthorised payment’ tax.

Taking pension cash
Pre 27 March 2014 position
  • Take 25% of your pension pot tax-free from age 55. The maximum tax free cash is 25% of the lifetime allowance (£312,500). Any cash taken over the authorised amount is taxed at 55%.
  •  Trivial communication – if age 60 or over and have overall pension savings of less than £18,000, you can take them all in one lump sum.
  • Regardless of total pension wealth and age over 60, you can take any pot worth less than £2,000 as a lump sum ‘small pot’. You can take two small pots.
  • Income drawn capped at 120% (if the income is taken as cash).
  • Flexible income drawn down – minimum other retirement income is £20,000 (including any state pension).
From 27 March 2014
  • Small pension pot that can be taken regardless of pension wealth increased from £2,000 to £10,000.
  • The number of pension pots increased from 2 to 3. Three pension pots can be taken worth up to £10,000 each as cash (as opposed to two at £2,000 each).
  • Trivial communication is increased from £18,000 to £30,000 (25% tax free, 75% taxable at your marginal rate). Up to £30,000 can only be taken once.
  • Income drawdown capped is at 150% (if income taken as cash) and other retirement income is below £12,000.
  • Flexible income drawdown where other retirement income above £12,000 (including any state pension) is unlimited, and can be taken as cash with tax payable at marginal rates.
From 6 April 2015
  • If aged over age 55, you can take your entire pension fund as cash (25% is tax free and 75% is taxable at your marginal rate). You can phase the taking of it, and do not need to take it all at once.
Comment

The new pensions regime has done much to restore confidence in the pensions  system, and opened up how people take their pension benefits. Knowing that you no longer need to take an annuity (although for some, this may still be preferable), can take all defined contribution pension benefits as cash after April 2015, as well as the new rules on taking trivial communication and small pots, make for a tidier retirement plan, and are to be welcomed.
Practical Tips:
  • Make maximum pension contributions. HMRC adds 20%, so each contribution has a guaranteed return of 20% initially. The fund grows tax-free. At any time after age 55, you can take 25% tax free (which includes yours and HMRC’s contributions), and depending on your circumstances and timing, the balance of 75% can also be paid to you, but will be taxable.   
  • Find out if you have any stranded small pension pots – you could be in for a windfall!
  • As always, you should seek expert advice based on your personal circumstances.
 








Working From Home: What Expenses Can Be

Claimed?


No tax liability arises where employers make payments to employees for reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home under ‘homeworking arrangements’.

What are home working arrangements?

These are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. There is no requirement for any or part of the employee’s home to be used exclusively for the purposes of the employment – in fact, if any part of the home is used exclusively for work, problems could arise on the future sale of the house as part of the capital gains tax exemption for gains on private residence could be lost.

HMRC have stated that they will accept that homeworking arrangements exist where:
                -There are arrangements between the employer and the employee: and
                - The employee works at home regularly under those arrangements.
HMRC guidance also advises that:

“the arrangements need not be in writing but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings. It applies where an employee works at home by arrangement with the employer instead of working on the employer’s premises.

HMRC accept that the ‘regularly’ conditions met if working at home frequent or follows a pattern. The fact that the days spent at home vary from week to week is not a bar to claiming the exemption.

Reasonable household expenses
‘Household expenses’ are defined as expenses connected with the day-to-day running of the employee’s home. The exemption applies to additional household expenses, and HMRC have given guidance:
“Typically this will include the additional cost of heating and lighting the work area or the metered cost of increased water use. There might also be increased charges for internet charges, home contents insurance or business telephone calls. Where working at home leads to a liability for business rates the additional cost incurred can also be included.

The additional household costs must be reasonable and must be incurred in carrying out  the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent and rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations or the cost of furniture or office equipment ”
 
Amount of exemption

To minimise the need for record-keeping, employers can pay up to £4 per week (£208 per year) without supporting evidence of the costs of the employee has incurred. If an employer pays more than that amount, the exemption will still be available but the employer must provide supporting evidence that the payment is wholly in respect of additional household expenses incurred by the employee in carrying out his duties at home.
If an employer wishes to pay more that the guideline rate per week tax-free, then it recommended that the employer should agree in advance with HMRC a scale rate. Failing that, records will need to be kept of the actual additional costs incurred by each employee.

Practical tip:

If you are an employee and you work from home, you need to consider your tax position if your employer agrees to pay for your home telephone bills. You can claim tax relief only for the cost of your business calls, and not on the line rental or other fixed charges. If your employer reimburses you for the cost of your private telephone calls, this money is classed as a taxable benefit and you may end up having to pay tax on it.






Do Minors Pay Tax?

A ‘minor’ is an individual who is below the age 18, commonly described as ‘child’.

A child is liable to the same taxes as an adult; thus a baby, one day old, may have a potential tax liability!
A child is entitled to a personal allowance (£9,440 for the tax year 2013/14).
However, because a child is unable to carry out certain transactions in their own name an adult may need to be involved. This involvement typically uses the concept of a bare trust.

Income Tax
Example1 – Sam, the baby


Sam is one week old. He is the first grandchild of Tom and Tina.

Tina would like to give a sum of money to Sam, but Sam is unable himself to open a bank account.
Tina therefore opens the bank account in her own name but ‘as bare trustee for Sam’. This means the money in the account once deposited immediately belongs to Sam. Tina cannot take it back. She deposits £5,000 in the account.

In the tax year 2013/14 interest of £150 is credited to the account.
The £150 belongs to Sam; it is income which is in principle taxable but in fact is offset by his personal allowance of £9,440 (and hence no net tax liability).

Capital Gains

Capital Gains Tax (CGT) is also payable by Sam.

Example 2 – Sam and CGT
Two years after the gift of £5,000 by Tina, she withdraws the £5,000 and purchases some shares on behalf of Sam which she sells six years later for £14,000, making a capital gain of £9,000. Tina deposits the £14,000 back into the bank account as the share proceeds belong to Sam.
Sam is in principle subject to a CGT charge on the £9,000 gain, but only after taking into account his annual exempt amount (£10,900 for the tax year 2013/14).
Inheritance tax
Example 3 – Sam and death
Sam’s grandparent, Tom dies when Sam is ten years old and leaves Sam £350,000.
Unfortunately, two years later Sam dies. On his death, Sam’s assets amount to £350,000 plus the £14,000 in

Example 2 i.e. £364,000.
His estate has an IHT liability of 40% of £364,000 less the nil rate band of £325,000 i.e. £15,600.

Trap:
Parental gifts


In the above examples, it is Sam’s grandparents who are making the gifts to a grandchild. Where it is the parent affecting the gifts the tax position is slightly different.
Although the CGT and IHT consequences are the same as those set out above, this is not the case with respect to income tax. Where a parent makes a gift to a child any income which arises from that gift is subject to income tax, not on the part of the child, but on the parent who made the gift.

Example 4 – Sam and a parental gift
Sam’s dad, Bert, owns some shares on which dividends are paid. He transfers the shares to Sam.
In the following tax year, Sam receives £300 dividend income on the shares.
Although the dividend income belongs to Sam, and not his dad, it is his dad who has to pay any income tax on the dividends (although he can claim the tax paid from Sam).
There is, however, a de-minimis exception under which if the aggregate income of the child on a parental gift(s) is £100 or less for a tax year the income tax liability is that of the child and not that of the parent.

Practical Tip:
If a parent is liable to income tax at the higher (40%) or additional (45%) rate of income tax it is better to gift an asset to a son/daughter which may show capital growth rather than one which generates income.
 




When To Claim Back Input Vat

The basic rule is that a business should claim back its Vat on the Vat return for the period the purchase invoice is dated in.

What about late invoices?

If a business receives an invoice late, but it is dated within the Vat period and the return has not been submitted, then it can still be included on that Vat return. So if an invoice is received on 25 April 2014 that is dated 31 March 2014, it can still be included on the 03/04 Vat return.

But what happens if you receive an invoice after you have closed down your purchase ledger? HMRC accepts that a business can reclaim input tax late at any time up to four years after the date of the invoice. But HMRC guidance only refers to claiming Vat late because the business did not have the necessary evidence at the right time.

Presumably, on the grounds of practicality, HMRC would not usually object to claiming Vat back on a return within the four-year limit if the invoice had been held, but was overlooked or, perhaps, if the Vat had been incorrectly thought to be irrecoverable on an individual invoice.

Technically, if the Vat amount was over £10,000 or 1% of turnover as declared on the Vat return for the period in which the errors were found, subject to an upper limit of £50,000, a separate voluntary disclosure may be necessary using the form Vat 652.

Exception to the 4 year rule

If you have a supplier that was not registered for VAT and HMRC subsequently finds out that it should have been and backdates a VAT registration, the supplier may raise a VAT only invoice for the VAT it should have charged. In that case, if the supplies back date more than 4 years HMRC will still allow VAT recovery as you were not in possession of a valid VAT invoice at the time.

Input tax accruals

The right to claim back input VAT arises when the VAT was charged, the tax point. The vast majority of businesses post purchase invoices onto their accounting systems only when they have been approved for payment. Therefore, at the end of a VAT period there could be a number of invoices dated within the period but not yet entered into the accounting system and the VAT not claimed. You can make a manual accrual of this input VAT without asking HMRC’s permission.

Beware a possible trap. Don’t forget to adjust it on your computer system at the end of the next period so that you don’t claim it twice!

Don’t forget bad debt relief

If you claim back the VAT on an invoice but they don’t pay it, if for example you have a dispute with the supplier, then you have to repay the input tax that you have claimed if the invoice has gone unpaid for a period of 6 months. If you subsequently pay the invoice then you can reclaim the VAT again at that time.
If you make a part payment of a disputed invoice you only need to adjust the VAT on the element that remains unpaid.

Practical Tip:

You should claim back your VAT in the period that you incur it, but HMRC will allow you to reclaim VAT up to four years after the invoice date. If you don’t pay an invoice don’t forget to make a bad debt relief adjustment. 
 





A ‘Sickener’! End OF The SSP Percentage Threshold Scheme

The statutory sick pay (SSP) scheme provides employees who are absent from work through sickness with a minimum level of income as long as they satisfy certain qualifying conditions. The weekly rate of SSP is £86.70 for 2013/14, increasing to £87.55 for 2014/15.
 
Statutory sick pay is initially paid by the employer. However, the percentage threshold scheme allowed employers who have a high percentage of their workforce off at any one time to recover some or all of the the SSP that they have paid. The percentage threshold scheme is being abolished at the end of 2013/14 tax year.
 
Recovery under the percentage threshold scheme
 
Unlike recovery of other statutory payments (statutory maternity, paternity and adoption pay), there is no automatic recovery of SSP, and the extent of any recovery is not dependent on the size of the employer. The same scheme applies to all employers, irrespective of size. Unless the employer qualifies for recovery under the scheme, it is not possible to recover any SSP paid.
 
To recover SSP under the percentage threshold scheme, the total amount paid out in the form of statutory sick pay in the month must be more than 13% of the total (employer and employee) National Insurance Contributions (NICs) liability for the tax month. The amount of SSP which can be recovered under the scheme is the amount by which the SSP paid in the month exceeds 13% of the NICs liability for the month. The calculation is performed for each tax month, even if the employer pays PAYE and NICs over to HM Revenue & Customs (HMRC) on a quarterly basis.
 
Example – Calculation of amount recoverable
 
Tulip Ltd has paid out SSP of £173.40 in a tax month in 2013/14. Its total NICs bill for the month (employers and employees) is £544.14, of which 13% is £70.73.
 
The SSP paid in the month exceeds 13% of the NICs bill for the month, so Tulip Ltd can recover the excess of £102.67 (£173.40 - £70.73).
 
 
 
Method of recovery
 
Where recovery is permitted under the scheme, the recovery is made by deducting the amount to be recovered from PAYE, Class 1 NICs, student loan deductions and construction industry scheme deductions payable to HMRC. If it is not possible to recover all the SSP paid out in the month in question, any balance can be recovered the following month. If the employer does not have sufficient deductions from which to fund payment of statutory payments, a claim for funding can be submitted to HMRC to cover the shortfall.
 
 
End of recovery
 
The percentage threshold scheme comes to an end at the end of the 2013/14 tax year. This means that from 6 April 2014, employers will not be able to recover SSP paid to employees and will need to meet this cost themselves. The obligation to pay SSP to eligible employees remains.
Employees will have until the end of the 2015/16 tax year (i.e. 5 April 2016) to recover any recoverable SSP paid before the end of the 2013/14 tax year.
 
New health and work scheme
 
The government have committed to using the money saved by the abolition of the percentage threshold scheme to set up a new health and work service. The new service will comprise two elements – advice and assessment.
 
Employees, employers and GPs will be able to access a phone and web-based health and work service. After an employee has been sick for four weeks, they will be able to be referred by their GP (or by their employer in the absence of a GP referral) for an assessment by an occupational health professional.
 
The scheme aims to provide support to enable employees to return to work more quickly thus saving employer’s money in terms of reduced sickness absence costs.
 
Other changes
 
The current SSP record keeping requirements associated with the percentage threshold scheme are also abolished from 6 April 2014. However, employers will still need to keep sickness records for PAYE purposes, and to produce them if requested to do so by HMRC.
 
Practical tip:
Review SSP payments prior to 6 April 2014 for any missed recoveries, and ensure that where SSP can be recovered, the recovery is made by 6 April 2016.
 





Tax Saving Tips For Families

Consider “Equalising Your Income” To Save Up T0 £15,000 Per Year

One of the most important tax planning devices within the family is to “equalise income”.

Very often you have one spouse who earns a lot more money while the other earns little or none at all.

If you are in this type of situation then as far as possible you need to shift income to the one who earns less.

Also, don’t forget that this applies not only to husbands and wives but also to people of the same sex who are in a civil partnership.

An example of the sort of income you can shift easily is where you own a property, which is let out. You can give it to your spouse or your civil partner.

If you have investments in shares you could give those to your spouse or your civil partner and thus transfer the income to them.

And if you start from the situation of somebody earning a high income paying 40% tax with your spouse or a civil partner who is earning nothing you can save up to just over £10,000 a year in tax by transferring sufficient income to the spouse or civil partner to use up their tax allowances and  their lower rate of tax. In the case of a 45% taxpayer the saving could be over £15,000.

Income from family businesses can also be shifted in this way by making the low-income spouse a partner in the business or a shareholder in the family company, but this is more complicated and needs expert advice.
 
 
 
 
Employ Family Members To Reduce Your Tax Bill

Do not overlook the possibility of employing family members of your family in your business.

Remember everyone has personal allowances, which is income they can have tax-free.

Then there is the lower rate of tax of 20% and if you’re paying 42% or even 47% tax and NIC on the profits of your business it makes a great deal of sense to employ members of your family to work in that business to justify the amount that you pay them.

A word of warning here – the employment has to be genuine in the sense that they have to do enough work for the business to justify the amount that you pay them.

However, in any typical family business, in practice the spouse in particular is usually involved whether or not they are formally part of the business. Therefore, it makes sense to recognise this by paying them a salary, which will also transfer income and uses up allowances and their basic rate tax bands.  








Relevant Life Cover

Limited companies can take life cover on employees (including directors) and receive tax relief on the premiums.

See attached example  Relevant Life Policy Illustrated Savings #

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