Self-employed tax payments

Self-employed persons and other individuals who submit a self-assessment (SA) tax return should bear in mind that there are only three months until the electronic filing and payment deadline for 2016-17, 31 January 2018.

If you have not filed the 2016-17 SA return yet, or at the very least crunched the numbers to work out if you owe any arrears of tax for 2016-17, you may want to attend to this as soon as possible. Otherwise, you will be shortening the period when you have time to consider gathering funds together to meet any tax payment on 31 January 2018.

On the same date, 31 January 2018, you will also need to make a payment on account for the following tax year, 2017-18. In the first instance, this will be based on fifty percent of your liability for 2016-17 with a similar payment July 2018. And so again, knowing what the earlier year’s liability is will provide the information you need to save for this additional tax payment.

As we have outlined in previous newsletters, if your income is reducing during the current year (2017-18) you can elect for payments on account to be reduced.

This is all part of the basic self-assessment planning we undertake for clients. If you have previously managed your own tax filing, and would like to out-source this annual chore, we would be delighted to help.

What are tax-free transfers for Inheritance Tax purposes

There are many reliefs for IHT purposes. They include:

  1. Business Property Relief – 100% relief for business assets including an interest in a business, a controlling interest comprising unquoted shares including AIM listed shares, and unlisted shares in a private company.
  2. Agricultural Property Relief – 100% relief (occasionally 50%)
  3. A controlling interest in a listed company – 50% relief.
  4. Certain personal assets used in a business – 50% relief.

Additionally, there are other, smaller reliefs that can be claimed:

  • An annual exemption of £3,000. An unused allowance can be carried forward for one year.
  • Small gifts exemption of £250 per person.
  • Gifts on a marriage or civil partnership: £5,000 from a parent, £2,500 from a grandparent, £1,000 others

There is also an exemption for annual gifts made from income. Basically, a gift will not count as a gift for IHT purposes, if you can demonstrate that the donor’s annual income is at a level to make the gifts without affecting their ability to cover their usual monthly costs.

Gifts to an individual within the nil rate band, and with no strings attached, may still be made without any charge to IHT if the donor lives for 7 years after making the gift.

Changes to the taxation of trusts and non-domiciled persons have complicated IHT planning in recent years. If you haven’t considered your options recently we recommend a review. All you need to do is compile a list of your assets, let us have sight of your Will(s) and we can consider changes you might make to reduce your exposure to this tax.

Tax legislation

Readers may be forgiven for finding the recent rash of announcements by HMRC, regarding possible changes to tax legislation, rather confusing.

On 8th September, we were informed that the remaining sections of the March 2017 finance bill, that were deferred due to the May election, were back in circulation and being dealt with by the appropriate committees and debates. Eventually, they will find their way onto the statute books unless amended by the parliamentary processes.

Changes reintroduced include:

  • Ability to reimburse employers for certain benefits and avoid a tax charge.
  • A reduction in the money purchase pension allowance, once crystallised, from £10,000 to £4,000.
  • A reduction in the tax-free dividend allowance, from £5,000 to £2,000; effective from 6 April 2018.

In all there are seventy-two clauses and eighteen schedules.

It was then announced the government will publish its next Budget on Wednesday 22 November 2017. The November Budget will include further legislation to introduce digitisation of business tax.

It will be interesting to see how the political realities – a much slimmer majority in parliament – affect the progress of these changes in the coming weeks.

Self-employed and using your own car

There are two options if you use a car in your self-employed business for business and private purposes.

You can buy the car through your business, claim a capital allowance, and write off the costs of running the car as a business expense, and in both instances, you will need to adjust your claims to eliminate any private use. In practical terms, this will mean recording your total and private mileage (or business mileage) and reducing the capital allowance and expenses claims accordingly.

Alternatively, you could keep a written record of your business mileage and claim expenses from your business using the approved flat rates. Presently, these are:

  • The first 10,000 business miles at 45p per mile,
  • Over 10,000 business miles at 25p per mile.

For example, if your business mileage for a year amounted to 12,000 miles you could claim up to £5,000 (10,000 miles at 45p and 2,000 miles at 25p). This amount would be a legitimate business cost for tax purposes and is a tax-free receipt that you can use to defray the actual purchase and running costs that you will be paying personally, outside the business.

This simplified method for claiming relief for the use of your car can only be used if you are not claiming capital allowances for the vehicle or charging any actual running costs to your business.

Also, you do not have to use the simplified method for all your business vehicles, you can pick and choose. Once you have elected to use the simplified claims process you must continue to do so for as long as you use the vehicle in your business.

This simplified option for the use of a car does not affect your ability to claim other travel costs, train fares etc., or parking costs.

To decide which may be the best choice for your business you will need to consider the car purchase price, annual running costs, and your estimated business and private mileage. Please call if you would like our help with the calculations.

What can you do with tax losses

Tax losses can arise due to a difficult trading period. They can also be created if you invest in qualifying equipment and you are able to set this cost against your trading profits – if the cost of the assets exceeds your profits you will have a tax loss.

There are three ways you can utilise these losses:

  1. Against income or possibly against capital gains of the same year or an earlier year.
  2. Against profit of the same trade.
  3. Against income from a company to which you transferred your trade.

Not all losses may be claimed in these ways and sometimes the amount of loss you claim is restricted or limited. Loss relief is one of the reliefs where there is a limit, it is the higher of £50,000 and 25% of the adjusted total income of the year. HS227 Losses (2017)

Additionally, the amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:

  1. have worked for less than 10 hours a week on average on commercial activities of the trade,
  2. are a Limited Partner or a member of a Limited Liability Partnership,
  3. have a trade which is carried out wholly overseas,
  4. have claimed certain capital allowances,
  5. have income from oil extraction activities or oil rights.

You can also claim relief for losses in the final 12 months of the trade, against profits in the trade during the three previous years.

Another key planning objective when considering the best way to use losses is to aim to reduce your income, and therefore tax liability, in a year when tax was paid. In this way, the loss relief claim will result in a tax refund.

Calculation and utilisation of losses is not a simple matter. As discussed above, the aim should be converting the loss into a cash flow boost – a tax refund. We would be happy to discuss your options.

What is subject to Stamp Duty Land Tax

Most of us are aware that we pay Stamp Duty Land Tax (SDLT), or the regional equivalents, when we buy a property, but that is just the tip of the iceberg. For example, if you give something of value in exchange for land or property, it will also count towards the chargeable consideration and therefore the amount of SDLT payable.

As well as money, you can exchange property for: goods, works or services, release from a debt, or transfer of (taking on) a debt. Another example where a mix of money and other consideration is taken into account is when two people, who own a house together, then split up and one pays the other for their share of the equity and also takes on their outstanding mortgage liability.

The chargeable consideration includes anything paid for assets that form part of the land or property. These can include:

  • buildings and structures that are part of the land, for example farm buildings

  • fixtures and fittings, including bathroom and kitchen fittings

  • intangible assets, for example the value of goodwill attached to the land

  • the estimated value of a commitment to do work or services, for example a promise from the seller to repair the property.

  • any VAT you pay on the transaction.

Chargeable consideration does not include carpets, curtains, free-standing furniture or other household consumables. When the sale price includes a payment for items that aren’t part of the chargeable consideration, they must be valued at a rate reflecting their fair market value.

For example, if the seller includes carpets in the sale, the buyer and seller must agree a fair price bearing in mind their age and quality. Subtract this from the price paid to find the chargeable consideration.

New Data Protection Bill

The Government has published the long-awaited Data Protection Bill that will incorporate most of the provisions set out in the EU General Data Protection Regulation. This will apply from 25 May 2018, and many businesses will need to update their data security arrangements to comply with the new regulations.

  • The Bill will introduce safeguards to prevent and detect fraud, protect the freedom of the press, allow scientific research and maintain the integrity of professional sports
  • Specifically include measures to allow action against terrorist financing, money laundering and child abuse
  • Processing done for legitimate interests will be allowed if it achieves a balance with individuals’ rights

With individual data rights being strengthened, it is the Government’s view that, as far as possible, existing lawful data processing should be allowed to continue. Consequently, the Bill assures specific UK businesses and organisations the vital data processing they undertake for legal or public interest reasons can continue uninterrupted.

It will preserve existing tailored exemptions that have worked well in the Data Protection Act 1998, carrying them over to the new law.

The Bill will include exemptions for data processing in the following areas:

  • Processing of personal data by journalists for freedom of expression and to expose wrongdoing is to be safeguarded
  • Scientific and historical research organisations such as museums and universities will be exempt from certain obligations which would impair their core functions
  • National bodies responsible for the fight against doping in sport will continue to be able to process data to catch drug cheats
  • In the financial services sector, the pricing of risk or data processing done on suspicion of terrorist financing or money laundering will be protected
  • Where it is justified, the Bill will allow the processing of sensitive and criminal conviction data without consent, including to allow employers to fulfil obligations of employment law

Under the new regulations individuals will have more control over their data by having the right to request that their personal data be erased. This will also mean that people can ask social media channels to delete information they posted in their childhood. The reliance on default opt-out or pre-selected ‘tick boxes’, which are largely ignored, to give consent for organisations to collect personal data will also become a thing of the past.

Businesses will be supported to ensure they are able to manage and secure data properly. The data protection regulator, the Information Commissioner’s Office (ICO), will be given more power to defend consumer interests and issue higher fines, of up to £17 million or 4 per cent of global turnover, in cases of the most serious data breaches.

Data protection rules will also be made clearer for those who handle data but they will be made more accountable for the data they process with the priority on personal privacy rights.

Claiming for employment related expenses

If you are employed, and this will include most directors, you can claim for expenses that you have paid for personally, to be set against your income liabilities for the relevant tax year.

You must keep records of the amount you have spent and make a claim to HMRC within four years of the end of the tax year that you spent the money.

For every £100 of expenses that you can claim you will receive a refund of:

  • £20 if you are a basic rate taxpayer,
  • £40 if you are a higher rate taxpayer, and
  • £45 if you are a higher rate tax payer.

What qualifies for tax relief?

  1. Uniforms, work clothing and tools
  2. Business mileage claim for use of your own car on company business (does not include home to work journeys)
  3. Other travel and overnight costs
  4. Professional fees required by your employment
  5. Certain costs for working from home
  6. Buying work related equipment
  7. Any other expenditure you have incurred for work purposes only

You can’t make a claim if these costs have been reimbursed by your employer.

For claims more than £2,500 you will need to submit on a self-assessment tax return.

For claims less than £2,500 you have three choices:

  1. If you already complete a self-assessment tax return use this to make the claim.
  2. Complete a form P87 and file online or by post.
  3. You make a claim by phone if you have made a successful claim in previous years and your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions).

If your employer gives you a contribution towards any of these expenses, but does not cover the full cost, claim the difference.

And finally, if you make a claim you will only receive a tax refund if you have paid tax in the relevant tax year.

When is a replacement an improvement

We are often asked by landlord clients to clarify the difference between a replacement item of furniture, furnishing, household appliances or kitchen ware, and a purchase that may be considered an improvement. The difference is critical, as from April 2016, the 10% wear and tear allowance was scrapped and the new Domestic Items Relief (DIR) introduced. To qualify for the DIR the following points need to be considered:

• Unlike the Wear and Tear allowance, for the Replacement of Domestic Items relief to apply the dwelling house can be unfurnished, part furnished or fully furnished.

• An expense must be incurred on purchasing a replacement domestic item, ‘the new item’.

• The new item must also be solely provided for use by the tenants in a dwelling house and the old item must no longer be available for use in that dwelling house.

• The initial cost of purchasing domestic items for a dwelling house isn’t a deductible expense so no relief is available for these costs. Relief is only available for the replacement item.

It is then necessary to consider if the new item is an improvement of the replaced item. HMRC have outlined the following points:

• If a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference.

• When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or isn’t, the same or substantially the same as the old item.

• Changing the functionally (from a sofa to a sofa bed for example) means the replacement isn’t substantially the same as the old item.

• If you later purchase a replacement sofa bed for use in that dwelling house, you would be able to claim the full cost of this new sofa bed. This is if there was no improvement on the old sofa bed and the old sofa bed is no longer available for use in that dwelling house.

• Changing the material or quality of the item also means the replacement isn’t substantially the same as the old item. If you upgrade from synthetic fabric carpets to woollen carpets, the replacement isn’t substantially the same as the old item so there has been an improvement.

• If the replacement item is a reasonable modern equivalent, for example a fridge with improved energy efficient rating compared to the old fridge, this isn’t considered to be an improvement and the full cost of the new item is eligible for relief.

One final point. When you first purchase a property to let, make sure that a figure is included in the contract to cover any domestic items included. In this way, when you replace these items at a future date you will be able to claim the DIR. 

Tax free dividend squeeze confirmed

The government reintroduced the remainder of the March budget last week, it’s the part that was held-over to accommodate the May 2017 general election.

It confirms two items that will be of interest to smaller business owners.

Firstly, that businesses with turnover below the current VAT registration threshold (£85,000 for 2017-18) will not be required to keep digital records – although they may choose to do so – and will not be required to upload quarterly returns of their trading results to HMRC. This is a sensible approach to the Making Tax Digital (MTD) agenda.

Traders that are registered for VAT will need to ensure that they are using compatible software from 1 April 2019, when the obligation to file VAT returns using the new MTD platform commences. If we file VAT returns for you, we will make sure that our software applications are compliant. If you file your own returns we can help you select appropriate software.

Secondly, the Bill confirms that the £5,000 tax-free dividend allowance is being reduced to £2,000 from April 2018.

Small companies, with spare reserves, should ensure that shareholders consider a minimum £5,000 dividend for the current tax year (2017-18). From April 2018, a £5,000 dividend will cost a basic rate income payer £225 in tax. If cash flow is an issue, the dividends can be transferred into a loan account and drawn down when funds are available.

For the present, dividends are a return on capital and not remuneration subject to NIC. While this remains the case, it will still pay to adopt the high dividend, low salary approach.