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Does your tax agent ask for too many refunds?
High Volume Agents (HVAs) deal with large numbers of clients, often for a short time only, and make repayment claims or submit returns that generate repayments.
HVAs usually
- provide services on a commission or ‘no repayment no fee’ basis
- target clients in a specific trade or industry, for example the construction industry
- submit high numbers of repayment claims relating to expenses incurred in their clients’ employment or trade
- receive the tax repayment as a nominee for their client
- are not members of a professional taxation accountancy body, although some of their staff may hold professional qualifications
- have little or no face to face contact with their clients as much of their business is carried out electronically.
A repayment claim can be made using any of the following
- P87
- stand alone claim by correspondence
- Self Assessment tax return
- unsolicited return.
The range of expenses claimed that results in a repayment usually include
- travel
- subsistence
- overnight accommodation
- cost of food
- use of home
- wife, civil partner or relative’s wages
- cost of tools
- protective or specialist clothing
- laundry
- telephone costs.
Further details in CH820000
HMRC have targeted firms with as few as 30 clients! so don’t think it only applies to large scale operations
HMRC are particularly interested in claims where the expenses are more that 10% higher than the income.
An agent’s poor technical ability that puts tax at risk will generally fall into one or more of the following categories
- bookkeeping or accounting errors
- computational errors
- lack of tax knowledge or expertise
- unreasonable or untenable technical views.
HVA’s are asked to enter into a memorandum of understanding agreements which are designed to check clients are paying the correct tax, in general this is likely to result in higher tax payments.
So be careful who you ask to be you agent! your tax saving might be short lived.
steve@bicknells.net
Have you been over taxed on your pension withdrawal?
You should be able to withdraw 25% of your pension tax free, but your pension provider will tax you on payments above this level.
If they don’t hold a current P45, the pension provider will apply an emergency tax code on a month 1/week 1 basis, which could mean you pay too much tax.
You will need these forms to reclaim the tax
Form P50Z – if the client has chosen to empty all their pension pot in one go and they have no other PAYE or pension income (other than the state pension);
Form P53Z – if the client has chosen to empty all their pension pot in one go and they do have other PAYE or pension income other than the state pension;
Form P55 – where the client has taken a lump sum payment which doesn’t use up all of their pension pot, they have only taken a single payment and don’t intend to take further payments in that tax year.
steve@bicknells.net
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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Hobby Trading Losses
Losses and profits
You might think that HMRC is being unfair in refusing loss relief, but if your activity is a hobby you won’t have to pay tax on profits either. This rule can be tricky as revealed in the case of P, when HMRC dismissed his claim for loss relief.
Trade or personal loss?
HMRC challenged P’s claim at a tribunal because in its view it related to non-business transactions and so was a personal financial loss and not one arising from a trade. Non-trading losses can’t be set against taxable income and it’s not just HMRC being difficult.
Trading tests
HMRC and tax specialists refer to the so-called “badges of trade” to decide if a trade exists. These tests were set out in a court judgment decades ago, but remain valid today. One of the tests to establish if a trade exists is that there must be an intention to make profit from a business. In P’s case the tribunal extended this test a little further.
Incapable of making a profit
P started two “businesses”, neither of which made a profit because, in the tribunal’s view, he was inexperienced and couldn’t devote enough time to them. Neither venture was capable of making a profit without P reducing the hours he spent in his main job. In essence P didn’t have the business acumen or time to devote to making his business profitable.
Putting the boot on the other foot
The ruling in P’s case is useful, not just for guidance on when losses are deductible, but for countering HMRC if it claims money you make from a hobby is taxable. Its view has always been that if you advertise your hobby in a newspaper or online you’re probably trading. But the tribunal’s judgment, supported by HMRC, dispelled that idea. If you don’t have the time or intention to carry on a trade, profit you make from isolated sales isn’t liable to income tax.
Turn your hobby into a business
For advice on converting your hobby to a profitable business, including help with setting up a limited company or 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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How does Principle Private Residence Relief work?
Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence, but how does it work, lets take a basic example
Property Purchase Date 30/04/2001
Property Purchase Price £100,000
Date Moved Out 30/10/2010
Letting Start Date 01/11/2012
Date Sold 31/10/2014
Sale Price £200,000
Capital Gains tax calculation
Sale proceeds 31/10/2014 £200,000
Cost (assuming no improvements) -£100,000
Gross capital gain £100,000
Reliefs available
Principle Private Residence Relief
Actual Occupation 9.5 Years
Started 30/04/2001
Ended 30/10/2010
Plus last 18 Months of Ownership 1.5 Years
The Property was empty prior to letting
Up to 18 months could be by ‘absence for any reason’
Total period where private residence relief is
available 11.0 Years
Total Period of ownership 13.5 Years
Principle private residence relief
£100,000 x (132 mths/162 mths) £81,481
Gain after principle private residence relief £18,519
Letting Relief
01/11/2012 to 31/10/2014 2.0 Years
Lettings relief is to lower of
£40,000 statutory maximum
£81,481 the principle private residence relief in this example
The gain for the letting period
Gain attributable to letting 2/13.5 x £100,000 £14,815
This is the lowest figure
Capital gain after reliefs £3,704
Annual Exemption for 2014/15 £11,000
So in this example there is no tax to pay
For further details see the HMRC Helpsheet 283
For gains on sales prior to 6 April 2014, PPR is available for the last three years of ownership of a property that has been a main residence at any time. This is the case regardless of whether or not it has been occupied during the last three years of ownership.
But as a result of the 2014 Budget, from 6 April 2014 the automatic exemption from tax on gains in relation to the final years of ownership is now restricted to cover the last 18 months rather than three years.
steve@bicknells.net
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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The end of Tax Returns and start of ‘Digital Tax Accounts’
In last months Budget, the Chancellor George Osborne announced that during a 5 year period starting in 2016 we will see the end of tax returns and the introduction of Digital Tax Accounts.
According to Citywire
By the end of 2016, five million small businesses and the first 10 million individuals would use the new ‘digital tax account’.
‘Millions of individuals will have the information the Revenue needs automatically uploaded into new digital accounts,’ said Osborne. ‘Tax really doesn’t have to be taxing, and this spells the death of the annual tax return.’
Around 85% of those who complete self-assessment forms already do them online. But HMRC said the new accounts, unlike the current system, would be pre-populated with data HMRC already holds and that from third parties.
Those who pay tax using the pay-as-you-earn system will have their income tax, national insurance contributions and pension position already shown in their accounts, alongside any interest from banks and building societies.
HMRC said that small businesses using the system should also be able to use accounting software to feed data straight into their account.
In order for this to work, small businesses will need to keep their accounts up to date.
The top 5 common accounting problems accountants deal with are:
1. Not doing any accounts – the shoe box approach to business
This is the most common mistake, book keeping is best done as you go along, putting all the paperwork in a shoe box or carrier bag is a really bad idea as you have no idea how your business is performing.
2. Not keeping receipts. Often small business miss out on claiming all their expenses because they fail to keep receipts and lose track of their spending
3. Not reconciling. Reconciling your bank statements to your cash book is vital to make sure that all of your income and expenses have been recorded in your accounts.
4. Using the wrong accounting system. For some businesses a manual cash book and records are fine but for many accounting software such as Debitoor will be needed to keep track of debtors, creditors and VAT. Make sure you understand your accounting system and operate it correctly.
5. Mixing business and personal expenses. Some sole traders even mix up business and personal bank accounts and in extreme cases don’t even have a business bank account. This can cause errors and often means that a sole trader will either claim to many expenses or to few.
Will small businesses be able to overcome these problems or will they end up in a tax mess with Digital Tax Accounts?
steve@bicknells.net
How will FRS102 affect your tax position?
FRS102 will affect us all, even small companies will be subject to a version of FRS102.
Its not just a reporting standard it will affect your tax position too, for example
Intangible Assets and Goodwill
Under FRS102 these assets will have a maximum life of 5 years where as UK GAAP allowed them to have an infinite useful life.
Distributable Reserves
There are various FRS102 changes that can effect these but one specific one is deferred tax which will be calculated on investment properties.
Operating Leases
Leases incentives will be spread over the entire life of the lease rather than to first break clause.
Asset Reclassification
Some assets such as Websites and software development could be reclassified as Intangible
Have you assessed the changes for your business?
FRS 102 is effective for periods beginning on or after 1 January 2015.
steve@bicknells.net
New Tax Break for Couples – Register Now
A new tax break will start from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.
The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.
Applying online is straightforward. Couples can register their interest to receive the Allowance now at gov.uk/marriageallowance.
The maximum saving is 20% x £1,060 = £212
However, the partner giving up the allowance must not be earning and the partner getting the allowance must not be a higher rate tax payer.
steve@bicknells.net
Business Accountant 