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A SRIT idea
Will Scottish taxpayers pay less?
From 5th April 2016 a new Scottish Rate of Income Tax (SRIT) will come into force in Scotland. Although is it currently anticipated that taxpayers in Scotland and the rest of the UK will pay the same rate of tax next year, it is likely that the regions will diverge in coming years as more power is devolved to Scotland.
Who is Scottish?
The criteria applied to determine Scottish taxpayers are based on where the individual lives, and not where they work or their feeling of national identity. All of the following would be classed as a Scottish taxpayer:
- WILLIES (Working In London Living In Edinburgh)
- Scottish Parliamentarians (regardless of where they live)
- People living and working in Scotland
- People living in Scotland and working across the border in Carlisle / Newcastle etc
Who decides?
HMRC are responsible for assessing whether or not someone is a Scottish taxpayer. Anyone that HMRC deems to be Scottish based on their principal residence will be issued with a new S tax code. Your payroll software should automatically process the SRIT for anyone with a new S code. As with student loans, it is not for the employer to use their own judgement about applying the SRIT. If an employee disagrees with their tax code, it for the employee to resolve this with HMRC. Employers must act on instructions from HMRC.
Do English employers need to do anything?
Even if your business operates exclusively in England (or any other region of the UK outside Scotland) you will need to comply with regulations as they apply to any of your employees who live in Scotland. Surprisingly, there is no legal obligation to inform HMRC if you move and although employers really ought to know where their employees live, it might not always be obvious, especially if an employee has more than one residence.
Common misconceptions
It is common to think that any of the criteria below qualify for Scottish taxpayer status, but it isn’t the case.
- National identity
- Place of work
- Where income is generated (eg property income in Scotland)
- Regular travel to Scotland
Will Scots benefit?
The costs of the SRIT are to be borne by the Scottish Government. HMRC currently estimates that the total costs of implementing SRIT will be in the range of £30 million to £35 million over the seven-year period from 2012-13 to 2018-19. This is split between IT expenditure of between £10 million and £15 million, and non-IT expenditure of £20 million. The additional annual costs of operating the SRIT will be between £2m and £6m. The lower estimate corresponds to a SRIT where Scots pay the same rate as the rest of the UK. If the SRIT diverges from the neutral rate of 10%, the costs rise in administering the tax regime in the UK including pensions, gift aid and disputes over residence.
Why is the SRIT being introduced?
Scotland as a whole is likely to be worse off as any difference in tax raised is offset by an adjustment to the block grant from Westminster. It is estimated that 2.6m people will be issued with an S tax code. The annual running costs are therefore less that £3 per taxpayer but it is a valid question to ask if it is a good use of taxpayer’s money if tax rates are the same across the UK. It is anticipated that after additional powers are introduced in 2017 the SRIT could be more progressive, meaning that wealthier individuals would pay a higher proportion of tax. For anyone thinking about their residence status and still had a choice, now is a good time to get advice on the best situation for you!
More information
For more information on the SRIT and for guidance on operating your payroll scheme, please contact Alterledger.
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R&D – impact on director remuneration
Example
You are the sole director in a company that undertakes some R&D. The annual profit is estimated at £140,000 for the year ended 31 March 2016 before taking into account the director’s remuneration.
You might think that the most tax-efficient remuneration package is £10,600 for 2015/16 to cover the personal allowance and then net dividends of £28,606 to take the director up to the basic rate band. You also need to consider whether the company can make an R&D relief claim and, if it can, how this might affect your decision.
Salary vs Dividends
If the director takes a typical remuneration package, then the net tax and NI savings over taking a salary of £39,206 would be £5,265, assuming the £2,000 employment allowance is available. This saving is made because dividends received within the basic rate band attract no further income tax plus no NI for the director or the company. This more than outweighs the additional corporation tax suffered on profits retained for dividends.
Taking R&D relief into account
From 1 April 2015 the R&D tax credit for SMEs increased from 225% to 230%. There is no R&D uplift on dividends received – only on salary. This means that paying a £39,206 salary would actually result in a saving over taking a small salary and dividends of £1,208.
What about a larger salary? In fact, if the client wanted to take out more than the basic rate band, then the salary may become even more tax efficient. A £70,000 salary would result in net tax/NI due of £1,366 after the R&D relief (assuming there was sufficient profit to offset the CT relief), whereas a salary of £10,600 and net dividends of £59,400 would result in net tax/NI of £5,883 – so the saving by taking a salary over dividends is £4,517.
HMRC will generally not accept 100% of a director’s salary costs within the R&D claim unless it can be clearly demonstrated that the director was exclusively involved in R&D activity.
Pension contributions
While dividends don’t qualify as eligible staff costs for R&D claims, company pension contributions do. New pension freedoms make pension contributions a much more attractive option, so you might want to consider this as part of your remuneration package.
If a company makes pension contributions of £40,000 for the director and they spend 60% of their time on R&D, the R&D relief on this will be £55,200 (£40,000 x 60% x 230%). This means that the overall CT saving on the pension contribution will be £14,240 (((£40,000 x 40%) + £55,200) x 20%). As there’s no NI due on pension contributions, this is an even more efficient option than taking additional salary.
Get the best deal for yourself
For advice on the best split between salary and dividends or help with setting up a limited company and registering for VAT, please contact Alterledger.
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VAT for sole trader start-ups
How to maximise your VAT reclaim
Plan ahead and reclaim everything
If you are setting up a business and can ahead, you can register for VAT from the date your business will start. For most traders there is not any restriction on the date the business can start, but for some professional services eg barristers and advocates, no trade exists until they qualify. To maximise the VAT to be reclaimed, the sole trader can register for VAT in advance of date of commencement, effective the date they are due to qualify. This means that the VAT registration will be in place from the 1st day of trading and all sales invoices can be issued as VAT invoices.
Pre-registration VAT
There are specific rules allowing pre-registration VAT to be reclaimed, but any claims to recover pre-registration VAT must relate to the same trade and made by the same person. A sole trader who incorporates the business is not the same legal person as the new company. Any VAT suffered by the (unregistered) sole trader can’t be claimed as pre-registration VAT by the new company.
Get help with registering
Your accountant will be able to register you for VAT and recommend the best scheme for you. It can take a few weeks for HMRC to process applications, but accountants who are registered as agents with HMRC are likely to have a quicker turnaround time. For advice on registering for VAT and setting up your invoices, please visit the Alterledger website.
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New Childcare Vouchers from Autumn 2015
Childcare vouchers to be withdrawn for new employees
The existing benefits available in the form of childcare vouchers to employees will be withdrawn to new entrants in the Autumn of 2015. The current scheme saves National Insurance contributions for both employers and employees. Employees also save income tax.
English: British National Insurance stamp. (Photo credit: Wikipedia)
New scheme to start in Autumn 2015
The new scheme for childcare vouchers will not be as good for many employees who currently benefit from the current scheme, but where both parents work and are self employed, they can get the government to pay £2,000 towards registered childcare.
How do I set up childcare vouchers?
Childcare vouchers are set up through your payroll scheme and must be available to all eligible employees to receive the tax benefit.
Alterledger can help
For more information on saving employer’s national insurance and preparing for changes to childcare vouchers, contact Alterledger or visit the website alterledger.com.
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Letters for under 21s
Changes for employees under 21
From 6th April 2015 employer national insurance contributions will be abolished for under 21s. If you employ anyone over 16 and under 21 years old you will need to use one of the new letters for under 21s in the national insurance category setting of your payroll software.
English: British National Insurance stamp. (Photo credit: Wikipedia)
Secondary contribution rates
This table shows how much employers pay towards employees’ National Insurance for tax year 2014 to 2015. The contribution rate calculated by your payroll software is set by the category letter.
| Category letter | £111 to £153
a week |
£153.01 to £770
a week |
£770.01 to £805
a week |
From £805.01
a week |
|---|---|---|---|---|
| A | 0% | 13.8% | 13.8% | 13.8% |
| B | 0% | 13.8% | 13.8% | 13.8% |
| C | 0% | 13.8% | 13.8% | 13.8% |
| D | 3.4% rebate | 10.4% | 13.8% | 13.8% |
| E | 3.4% rebate | 10.4% | 13.8% | 13.8% |
| J | 0% | 13.8% | 13.8% | 13.8% |
| L | 3.4% rebate | 10.4% | 13.8% | 13.8% |
National insurance categories
Most employees will have a category letter of A or D depending on whether or not they are in a contracted-out workplace pension scheme. There are categories for mariners and deep-sea fisherman; the more common categories are shown below:
Employees in a contracted-out workplace pension scheme
| Category letter | Employee group |
|---|---|
| D | All employees apart from those in groups E, C and L in this table |
| E | Married women and widows entitled to pay reduced National Insurance |
| C | Employees over the State Pension age |
| L | Employees who can defer National Insurance because they’re already paying it in another job |
Employees not in contracted-out pension schemes
| Category letter | Employee group |
|---|---|
| A | All employees apart from those in groups B, C and J in this table |
| B | Married women and widows entitled to pay reduced National Insurance |
| C | Employees over the State Pension age |
| J | Employees who can defer National Insurance because they’re already paying it in another job |
Employees in a money-purchase contracted-out scheme
This kind of scheme ended in April 2012 but some employees might still be part of one.
| Category letter | Employee group |
|---|---|
| F | Tax years before 2012 to 2013 only: all employees apart from the ones in groups G, C and S in this table |
| G | Tax years before 2012 to 2013 only: married women and widows entitled to pay reduced National Insurance |
| C | Employees over the State Pension age |
| S | Tax years before 2012 to 2013 only: employees who can defer National Insurance because they’re already paying it in another job |
How to claim zero rate of employer contributions
You should already have proof of age for all your employees. A copy of a passport, driving licence or birth certificate will be required to show that your employee qualifies for the new zero rate of employer’s contribution. The seven new categories are valid from 6th April and must be applied from the first salary payment after 5th April 2015 to benefit from the new zero contribution rate for employers.
What does this have to do with Auto Enrolment?
You need to have proof of age for all your employees aged under 21 to claim the zero contribution rate for employer’s National Insurance. By the time of your staging date you must assess all your workers, based on their earnings and age. To help you prepare for Pension Auto Enrolment you can make sure that all your employee records are up to date and that your payroll software has the full details for all workers including their date of birth. This is a good opportunity to clean up all your employee data.
Alterledger can help
For more information on saving employer’s national insurance and preparing for Pension Auto Enrolment, contact Alterledger or visit the website alterledger.com.
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Say goodbye to small earnings
Say hello to small profits
HMRC has changed the name of the threshold for paying Class 2 National Insurance from the Small Earnings Limit to the Small Profits Threshold. If you earn less than £5,965 in 2015-16 you won’t need to pay Class 2 NI, but if you do, it will be calculated as part of your 2015-16 tax return and due with the rest of your tax by 31st January 2017.
English: British National Insurance stamp. (Photo credit: Wikipedia)
Alterledger can help
For more information on filling in your tax return, contact Alterledger or visit the website alterledger.com to see if you can organise yourself better and cut your tax bill.
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What a difference a day makes
How about three extra days?
HMRC has relaxed the rules on “Real Time Information” for payroll reporting. UK employers are required to send electronic reports to HMRC with each payment of wages to employees. HMRC are now saying that you can submit your RTI report up to three days after the payment date without incurring a penalty.
Any employer who has received an in-year late filing penalty for the period 6 October 2014 to 5 January 2015 and filed within three days, should appeal online by completing the “Other” box and add “Return filed within 3 days”.
Outsource your payroll
Despite the relaxation provided by three extra days, the burden on employers is only likely to increase over the coming months. Auto enrolment is being rolled out to all UK employers over the next couple of years. With the new payroll year about to start on 6th April, now is a good time to consider using a payroll bureau – or at least checking that your current systems will deal effectively with auto enrolment pensions. For more information please and see how Alterledger can help please click here.
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Self Employed National Insurance
Changes to payment of National Insurance
HMRC has announced changes to the way that the self-employed will pay their Class 2 and Class 4 National Insurance Contributions (NIC). This is not the first time the process has changed. Some people still refer to paying their stamp – in days of old you had to buy special stamps for your NIC!
English: British National Insurance stamp. (Photo credit: Wikipedia)
No new direct debits
Until recently I would have encouraged the self-employed to set up a Direct Debit Instruction (DDI) with HMRC to pay their Class 2 NIC. From April 2015 HMRC will calculate the NIC due from your self-assessment tax return.
Deferment of National Insurance Contributions
If you currently defer NIC, you don’t need to re-apply to do so. HMRC will be sending out letters in December to everyone who currently defers NIC to confirm this. Any new applications to defer NIC will not be processed. For more information on National Insurance for the Self Employed please go to my blog post here: Class 2 NIC.
Alterledger can help
For more information on filling in your tax return, contact Alterledger or visit the website alterledger.com to see if you can organise yourself better and cut your tax bill.
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Will HMRC help you get over the Floods?
Will it ever stop raining!
But help is at hand, HMRC launched their helpline (12/2/14)
The helpline will enable anyone affected to get fast, practical help and advice on a wide range of tax problems they may be facing.
HM Revenue and Customs (HMRC) will also:
- agree instalment arrangements where taxpayers are unable to pay as a result of the floods;
- agree a practical approach when individuals and businesses have lost vital records to the floods;
- suspend debt collection proceedings for those affected by the floods;
- cancel penalties when the taxpayer has missed statutory deadlines.
The helpline is in addition to other HMRC telephone contact numbers.
The helpline is 0800 904 7900. Opening hours are Monday to Friday, 8.00 am to 8.00 pm; Saturday and Sunday, 8.00 am to 4.00 pm, excluding bank holidays.
I hope the weather improves soon and your business can keep going and survive the storms.
steve@bicknells.net
What fees does a barrister need to declare?
Special rules for barristers and advocates
Barristers are not permitted to provide their services through a limited company. All barristers have to register as self-employed and submit business accounts as a sole trader to HMRC. There are special provisions relating to cash accounting and the rules have changed in recent years meaning there are three different regimes that can apply. There are time limits for the cash accounting schemes so if you are in your first few years of practising you will need to make sure that you are reporting the correct figures to HMRC. Guidance is available from the Bar Council here.
A barrister on a mobile phone outside Southwark Crown Court.
(Photo credit: Wikipedia)
Cash Accounting
The Finance Act 2013 introduced the possibility of cash accounting for most unincorporated business including sole traders from 6th April 2013. Barristers already had a cash scheme available when they started their practice with permission to continue the same cash accounting principles for up to 7 years under the Finance Act 1998. This old cash scheme is no longer available to new barristers, but anyone who started preparing accounts under the old cash basis by 5th April 2013 can continue to do so until their seven years is up or they transfer voluntarily to another scheme. Once you have left the old cash scheme there is no turning back.
Barristers can join the new cash scheme where fee receipts do not exceed the VAT registration threshold (currently £79,000 per year). If receipts are more than twice the VAT registration threshold (currently £158,000) the barrister must leave the scheme.
The advantages of the cash schemes are that they are easier to administer so there is less need to engage an accountant to prepare your accounts. You only pay tax on fees received and you do not have make calculations at the year-end for work that is incomplete or invoiced and not yet paid by your clients. This means that your tax payments are delayed compared to the earnings basis below and will improve your cash flow. There are other aspects of the cash schemes which are explained in more detail here.
A barrister on the old cash scheme can elect to leave the scheme early, but the new cash scheme does not allow exit unless there is a “change in commercial circumstances”.
Earnings based accounting
UITF 40 requires that long term contracts are recognised in the year-end accounts to the extent that partly performed work is recognised as taxable income. This requires barristers to calculate the value of any Work In Progress (WIP) at the end of their financial year and include this in their total income.
Materiality is a key concept in accounting, but the materiality of the total WIP must be considered not just the materiality of each individual contract. It is not permitted to disregard a number of immaterial amounts if when considered together they are material to the accounts. In practice this means that almost all WIP is chargeable to tax under the earnings method. One of the few clear cut exceptions is a no fee no win case, where no WIP is to be recognised.
Transitional arrangements
When changing from either cash accounting scheme to the earnings based scheme a calculation of the WIP must be made which will increase the taxable income for the year. The old cash method allows the closing WIP at the time of the change to the earnings method to be recognised over a period of up to 10 years. The provisions under the new cash scheme have a reduced timeframe of 6 years. It is normally the case that anyone transferring from the old cash scheme to the new cash scheme would not need any adjustment to the annual accounts. There are corresponding adjustments for barristers transferring from the earnings scheme to the new cash scheme – explained in more detail here.
For more information on an accountancy firm that can set you up with online accounting and deal with all your business accounts and VAT – contact Alterledger or visit the website alterledger.com.
Useful links
| Bar Council Guidance | practice-updates-and-guidance/remuneration-guidance/ |
| Faculty of Advocates | http://www.advocates.org.uk/ |
| HMRC crackdown on barristers | http://www.bbc.co.uk/news/business-19635051 |
Business Accountant 