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Personal savings allowance update
From 6 April 2016, the personal savings allowance (PSA) will allow basic rate taxpayers to receive up to £1,000 of savings income tax-free. For higher rate taxpayers, this limit will be £500. HMRC have published guidance setting out details of what counts as savings income and how the allowance will be calculated, including some useful examples.
Savings income includes account interest from:
– bank and building society accounts;
– accounts with providers like credit unions or National Savings and Investments.
It also includes:
– interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts;
– income from government or company bonds; and
– most types of purchased life annuity payments.
Interest from Individual Savings Accounts (ISAs) does not count towards the PSA as it is already tax-free.
Practical implications of the dividend tax allowance
The new rules governing the taxation of dividends are set to take effect in relation to dividends received after 5 April 2016. The changes include:
– a £5,000 dividend nil rate (also known as the ‘dividend tax allowance’ (DTA)), which will effectively tax at the nil rate, the first £5,000 of taxable dividend income (i.e. after deducting the personal allowance, but treating dividends as the top slice of income, so the personal allowance is used last against dividends). Any dividends above the first £5,000 will be taxed as if the £5,000 used up either the basic rate band or the higher rate band;
– dividends exceeding the dividend nil rate will be taxed at:
– 7.5% in the basic rate band (the ordinary rate);
– 32.5% in the higher rate band (the upper rate); and
– 38.1% in the additional rate band (the additional rate);
– the tax credit, which currently attaches to dividends paid by UK companies, will be abolished from 5 April 2016, which means that the dividend paid will no longer be grossed up by one-tenth when calculating the shareholder’s taxable income; and
– dividends will not be set off by either:
– the personal savings allowance (PSA) (from 2016/17); or
– the £5,000 savings allowance (from 2015-16),
which are both used only against savings income (generally interest).
The PSA is £1,000 for any saver whose highest rate of income tax in the year is the basic rate (20%), but only £500 for any saver whose highest rate of income tax in the year is the higher rate (40%). If any of an individual’s income is liable to tax at the higher rate, then the higher rate PSA will apply. The PSA and the DTA do not reduce total income for tax purposes and still count towards basic or higher rate bands.
Over recent years, since the 10% tax credit has covered all their income tax liability, some basic rate taxpayers have had no assessable income and have therefore had no reporting obligations to HMRC. However, some dividends received after 5 April 2016 may not be fully covered, e.g. by the personal allowance and DTA, so taxpayers in this position will now have to notify a liability to pay tax to HMRC for the first time for 2016-17. There has been speculation within the tax and accountancy professions that this change can be regarded as a new form of ‘stealth’ tax.
It is also worth noting that the withdrawal of the tax credit for dividends may create a liability to pay the income tax relating to donations under the Gift Aid Scheme. There is no income tax liability on dividends taxed at the nil rate, so such dividends cannot frank the income tax on a Gift Aid donation made after 5 April 2016.
Assuming the provisions in the Finance Bill 2016 are enacted, practitioners should advise certain clients promptly, so they can plan to transfer shareholdings if appropriate, and, where possible, time dividends to best effect.
Anarchy in the UK . . . . the tax system
The referendum is due to take place in Sept 2014 & then the face of the UK could change. But from a tax perspective it already differs.
Following the Scotland Act 2012 various changes are already due to take place on 1st April 2015.
- In Scotland “stamp duty” is set to be replaced by “land & buildings transaction tax” – the latter working on the excess over a given threshold, rather than the whole amount when a threshold is exceeded.
- Scottish landfill tax will replace UK landfill tax for disposals in Scotland.
- Income tax will be made up partly of a Scottish variable rate, with that part going to Scotland & the rest going to the UK. The tax liability will depend on where you are domiciled – Scotland or the rest of the UK.
But what if Scotland receives the “Yes” vote & splits from the UK? In that case its taxation will not be governed by HMRC but by Revenue Scotland & there will be a completely different Scottish tax system.
Complicated? It probably will be!
Charity or Charitable Incorporated Organisation?
The Charitable Incorporated Organisation was created by the Charities Act 2006. It is similar to a company limited by guarantee (the form of organisation frequently used by charities) in that it affords the protection of limited liability and is a legal entity in its own right, but is differentiated from them in requiring only to be registered with the Charity Commission and not also with Companies House. This avoids dual filing.
The Charities Commission is working to an implementation timetable with the Cabinet Office and applications are being accepted depending on the turnover of the organisation. However, currently a charitable company cannot convert to a CIO. However, it is hoped that legislation will enable this in the near future.
So what are the pros & cons?
The most obvious advantages are:
- Limited liability, so that normally the trustees and members will be protected from personal liability.
- Separate legal personality, so that the CIO becomes the other party to any contract.
- The CIO can have vested in it any permanent endowment held by an unincorporated charity. This can be done by a simple vesting declaration.
- The CIO’s annual return and accounts need only be filed with the Charities Commission
- Two simple model constitutions have been developed for CIOs: (1)the foundation model, where the only voting members will also be the trustees; (2) the association model, where the charity will have a wider membership of voting members other than the trustees.The former will be akin to an incorporated charitable trust; the latter akin to a company limited by guarantee.
- The CIO must be incorporated using one of the simple forms of constitution published by the CC (or as near to those forms as circumstances allow). It should therefore be relatively inexpensive and easy to register a CIO electronically using the CC’s website. Provided there is no conflict with the constitution, it can also make its own Rules and Bye-Laws.
However, there are some important disadvantages to be borne in mind before deciding whether to opt for this structure.
- An exempt charity cannot be or become a CIO, because all CIOs must register with the CC.
- A charity with an annual income of less that £5,000 does not have to register with the CC at all, but every CIO, irrespective of its income must register (subject to the implementation plan referred to above).
- Unlike Companies House, the CC is not operating a searchable register of charges. Although a CIO can register a mortgage on land at the Land Registry, there will be no register of any debentures issued by CIOs. Banks often require such forms of security for lending to limited liability organisations, and in the absence of a register of such charges for CIOs, it remains to be seen whether they will be willing to make advances to a CIO.
- Correspondingly it is unlikely, when the conversion becomes possible, that a company limited by guarantee which is considering converting to a CIO would be allowed to do so by any bank or other lending institution to which it had issued a debenture by way of security.
- If an existing charity is essentially a grant making charity, making grants from the income derived from its endowments, there is unlikely to be any major advantage in becoming a CIO.
- If any existing unincorporated charity is, however, providing services to the community – such as a school, or care home – then the CIO would be an advantageous way of securing limited liability for the charity trustees, and for the members, particularly since the form of incorporation documents is simple, and returns and accounts need be filed only with the CC.
- However, if the service providing charity is likely to need to issue debentures over its fixed and floating assets as a condition of receiving bank finance to fund its operations, the lack of any register for such instruments is likely to make the proposition unattractive to such a lender.
- The only advantage to a charitable company limited by guarantee (which has not borrowed monies against such security) in converting to a CIO (when the implementation plan permits) would be the marginal accounting and filing costs of filing returns and accounts only with the CC.
Acknowledgment: Charles Russell LLP
Loans to Directors of Close Companies
New rules announced in Budget 2013 discourage participators in close companies from taking loans from their own companies, previously legislated under s.419 ICTA 1988, currently s.455 CTA 2010.
The basis of s.455 CTA 2010 is that, where a close company makes a loan to a participator (or associate of a participator) then it is required to pay to HMRC a tax equal to 25% of the value of the loan. The tax is due for payment 9 months and 1 day after the end of the accounting period in which the loan was made. However, if the participator repays the loan before that date, then the requirement to account for the ‘s.455 tax’ is cancelled, by virtue of s.458 CTA 2010. Where the loan is repaid after that date then HMRC repay the ‘s.455 tax’ 9 months and 1 day after the end of the accounting period in which the loan is repaid.
This brings us to one of the measures brought in by budget 2013. With effect from budget day (20th March 2013) ‘bed and breakfasting’ is no longer possible. ‘Bed and breakfasting’ is a commonly used loophole where the loan is repaid to the company before the day 9 months and one day after the year end to prevent the ‘s.455 tax’ charge becoming due, then soon after the trigger date has passed, the participator re-loans the money from the company. Or indeed, where loans are repaid after the ‘s.455 tax’ has been paid to HMRC, but again the participator soon afterwards re-loans the money from the company and reclaims the ‘s.455 tax’ from HMRC.
HMRC have long tried to challenge these cases. Their manual instructs inspectors to “obtain as much factual evidence of the transactions and the accompanying arrangements as possible” where they think they have found a case of ‘bed and breakfasting’ for referral to the Corporation Tax International and Anti-Avoidance technical team.
However, the new rules now give HMRC a statutory basis to deny relief in circumstances where s.455 tax has been paid if, within a 30 day period, repayments of more than £5,000 are paid to the close company in respect of amounts which have given rise to a charge which are then redrawn either via a loan, advance or ‘extraction of value’ – something else new to watch out for!
In addition, where the 30 day rule does not apply, relief will also be denied if there are amounts outstanding of at least £15,000 and, at the time of the repayment, there are arrangements or there is an intention to redraw an amount again through a loan, advance or an extraction of value.
There has been some discussion amongst tax commentators over whether there is a possibility that ‘s455 tax’ may never be repaid in the circumstances where a participator makes regular withdrawals from their company which are treated as debits to the director’s loan account and then are cleared via a payment of salary or a dividend before the nine-month cut off because there is an intention to continue withdrawing funds in this way in future; a common practice in many owner-managed companies. However our view is that s464C(5) will, in almost all cases, overcome this problem, as it is clear from the draft legislation that the restriction on repayment of ‘s455 tax’ will not apply in relation to a repayment which gives rise to a charge to income tax on the participator (or associate) by reference to whom the loan, advance or benefit was a chargeable payment i.e. where they are charged to income tax on the dividend or salary used to clear the outstanding loan account balance. Without the inclusion of s464C(5) this new legislation could have caused an awful lot of headaches for accountants, tax advisers and owner-managed companies the length and breadth of the UK, so this sensible, well thought through paragraph is really a saving grace in what could have been an extremely burdensome piece of legislation.
Watch out for the references to “extractions of value” in the revised s455 rules. This is an extension of the rules to cover less traditional arrangements where, instead of providing loans the close company seeks to extract and transfer value to a participator in some other way which would have been neither chargeable to tax nor within the s.455 charge before the introduction of this new wording.
Finally, there is a further new rule which puts beyond doubt that fact that loans made via a partnership, LLP or trustees of a settlement are caught by the s.455 tax charge!
For further advice – see your local CIMA qualified accountant.
VAT on sponsoring amateur sports clubs
As accountants we learn the various concepts that ensure that accounts are correctly presented & we learn tax legislation that helps us to keep our clients compliant. Then something comes out of the blue which seems odd, but appears to be common. A case in point is sponsorship on clothing in non VAT registered sports clubs.
In reality what should happen is that the clubs buy clothing & sell sponsorship. There is an expense & there is income. But then a helpful sponsor volunteers to pay the clothing cost direct & so claim the VAT. But think about the implications:
- The accounts of the club could become misrepresented, with income from sponsorship being offset against the costs of clothing.
- As a result of (1) the sports club could be running at above the VAT threshold without realising.
- The organisation reclaiming the VAT has effectively purchased the sponsored clothing, eventhough they may not have been invoiced.
- Given the above the sponsoring organisation should then make a gift of the clothing to the club, where VAT will need to be declared . . . thereby closing the loop. However, it may not do so. Therefore, it may be under-declaring its VAT.
When something seems too good to be true, it often is!
Whistleblowing & tip offs – fight against occupational fraud
Tip-off is by far the most effective way of uncovering a fraud & this goes hand in glove with establishing a clear fraud policy & stating this in the staff handbook. But how is the employee protected & what about non employees?
Whistleblowers are protected by the Public Interest Disclosure Act 1998 (PIDA) if they make a disclosure which is in the public interest, which includes reporting:
- Where someone’s health & safety is in danger.
- There is damage to the environment.
- A criminal offence has been committed.
- The company isn’t obeying the law.
- The company is covering up a wrongdoing.
Employees should tell their HR department or manager, if they can. Otherwise they should report the incident to a prescribed person – such as governing body. A list is available from www.gov.uk.
Employees & workers are protected if they make a qualifying disclosure (see above) which they believe is in the public interest. Employees rights are covered by claiming constructive dismissal. However, workers who are not employees are also protected & can claim “detrimental treatment”.
Encouraging tip offs is important in combatting occupational fraud & all businesses should be open to the fact that fraud doesn’t just happen to others. In many businesses it is a significant yet invisible overhead.
If your business supplies some goods or services which carry VAT, and other items which are exempt from VAT (such as charitable events and financing), the business is likely to be partly-exempt for VAT purposes. Being partly-exempt means you may not be able to reclaim all of the VAT on your purchases (input VAT).
Where the input VAT that relates to your exempt sales is no more than £625 per month, and it is also less than half of your total input VAT, you can reclaim all of the input VAT. In other cases you can only reclaim the input VAT which relates to the supplies that carry VAT. There are various methods to apportion input-VAT which can be agreed individually with HMRC, or you can use the standard method.
Whichever method you use to allocate input VAT, this should be reviewed at least once a year, to see if it still gives the best outcome for your business. We can help you with this.
If you pay VAT on road fuel used for private journeys, based on the road fuel scale charges published by HMRC, you need to be aware that the concession for partly-exempt businesses is withdrawn from 1 January 2014. Under this concession the business is permitted to reduce the output VAT due on the road fuel scale charges in line with its partial-exempt position. If you have been using this concession we definitely need to review the methods you use to apportion input VAT from 1 January 2014.
New RTI Relief
Have you been struggling to send full payment summary (FPS) reports under RTI to HMRC on or before the days on which your employees are paid? This is particularly difficult when your workers receive irregular amounts of pay on varying dates. In such cases you may not know the amounts of wages and deductions to report until the workers have finished their shifts.
The concession for small employers with fewer than 50 employees has helped. This allows you to submit all the figures on one FPS report when you make your last payroll run in the month, but this must be no later than the end of the tax month. However, this concession is due to end on 5 April 2014.
The good news is that until 5 April 2016, employers with fewer than 10 workers will be able to send in the FPS covering all payments by the last pay day of the tax month. This new relaxation will only apply to existing employers. Any new PAYE scheme commencing on or after 6 April 2014, or any scheme with 10 or more employees will have to report all the wages and deductions on or before each day the employees are paid, even if that is multiple times in the month.
If you have 10 to 50 employees on your payroll, and have been using the small employer concession to cope with multiple pay dates in a month, you need to talk to your CIMA Accountant about how to adjust your systems from April 2014.
Is your photocopier secure?
So you have a list of procedures in place to ensure that your electronic data is fully secure? But have you ever considered hardware other than your computers? How about your trusty photocopier which sits innocently in the corner of the office? Did you know that since 2002 many contain hard drives which store items that were printed, copied or faxed?
A recent study was conducted in the US on second hand photocopiers. In the study 3 were purchased from a warehouse which deals in second hand office equipment. The hard drives were then checked using software found free on the web.
The machines contained tens of thousands of images from a sex offenders database, detailed design plans of a new development, & 300 pages of medical records. All of this information was highly confidential & potentially very damaging.
So what do you do? Check that your printer includes software which automatically clears the images. If not take this up with your supplier. They should be able to advice on how your hard drive can be cleared. Whatever you do, ensure your hard drive is clear before you sell or dispose of your printer. You never know – your business may depend on it!