30 hours free childcare for working parents

The Department for Education released the following press release last week regarding the new childcare support offer that commences from 1 September 2017. They said:

Parents of three and four-year olds who have registered for a place will join the 15,000 families benefitting in the 12 areas of the country that introduced the offer early.

The offer should save families around £5,000 per year on childcare, helping them to balance their jobs and family lives, and around 390,000 working families are eligible to benefit. The latest evaluation shows 8 out of 10 childcare providers were willing and able to double their current 15 hours offer.

The providers in the 12 areas across the country that implemented the offer early have helped to share examples of best practice for other providers to follow. This has been bolstered by the work of local authorities across the country in supporting their local early years sector to deliver the offer.

To be eligible for the 30 hours the following conditions apply:

  • You, and any partner, must each expect to earn (on average) at least £120 a week (equal to 16 hours at the National Minimum or Living Wage).
  • If you, or your partner, are on maternity, paternity or adoption leave, or you're unable to work because you are disabled or have caring responsibilities, you could still be eligible.
  • You can't get 30 hours free childcare if you, or your partner, expect to earn £100,000 or more.
  • Available to parents of age 3 and 4-year-olds born on or after 1 September 2012.

The scheme can be accessed at:

  •  
  • Nurseries and nursery classes
  • Playgroups and pre-school
  • Childminders
  • Sure Start Children's Centres

If eligible, you would be entitled to an extra 570 hours of free childcare a year to use flexibly, so 1140 hours in total.

The first eight Early Implementer areas were Hertfordshire, Newham, Northumberland, Portsmouth, Staffordshire, Swindon, Wigan and York, launching 30 hours in September 2016. Dorset, Leicestershire, North Yorkshire and Tower Hamlets joined the scheme in April 2017.

The Childcare Choices website provides information on the government’s childcare schemes and explains how parents can pre-register or apply. It also includes a childcare calculator to show eligible families how much they could receive. https://www.childcarechoices.gov.uk/

Tax Diary September/October 2017

1 September 2017 – Due date for Corporation Tax due for the year ended 30 November 2016.

19 September 2017 – PAYE and NIC deductions due for month ended 5 September 2017. (If you pay your tax electronically the due date is 22 September 2017)

19 September 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 September 2017.

19 September 2017 – CIS tax deducted for the month ended 5 September 2017 is payable by today.

1 October 2017 – Due date for Corporation Tax due for the year ended 31 December 2016.

19 October 2017 – PAYE and NIC deductions due for month ended 5 October 2017. (If you pay your tax electronically the due date is 22 October 2017.)

19 October 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 October 2017.

19 October 2017 – CIS tax deducted for the month ended 5 October 2017 is payable by today.

31 October 2017 – Latest date you can file a paper version of your 2017 Self Assessment tax return.

Evidence of earning for mortgage purposes

If you are a client, and registered to submit a Self Assessment tax return, we can provide you with a statement that you can use as evidence of earnings for mortgage purposes.

If you are not a client, there are many ways you can obtain this data direct from employers and other sources. For example, you could use the following as evidence of earnings:

  • A P60 from your employer, you should receive this on or before the 1 May following the end of each tax year.
  • Alternatively, you can contact HMRC and request a tax year overview. This will take approximately two weeks to arrive so you should possibly request this information before you apply for your mortgage or loan.

If you submit your own tax return using HMRC’s online portal, you should be able to download and print the evidence you need.

The evidence of earning that you should request from HMRC is called an SA302. You should be able to obtain copies for up to four years in this format.

Claiming back professional subscriptions

If your employment requires that you obtain and maintain membership of a professional organisation, you can make a claim to set the cost against your taxable earnings for income tax purposes. As you would expect there are a few hoops you will need to jump through to claim this relief. They are:

  • You must have the professional membership to do your job or if membership helps you with your work.
  • You can only claim back subscriptions to organisations approved by HMRC.
  • You cannot claim back fees for life membership subscriptions.
  • You cannot claim subscriptions you have not paid yourself, for example, your employer has paid them for you.

 

To see the full list of professional organisations and other learned societies that are approved by the tax office visit this page on the GOV.UK website:

https://www.gov.uk/government/publications/professional-bodies-approved-for-tax-relief-list-3/approved-professional-organisations-and-learned-societies

VAT bad debt relief

If you use standard VAT accounting – pay VAT on sales when invoiced and claim back VAT on purchases when invoiced – you may have availed yourself of the six months claim for bad debt relief on unpaid invoices. This would have allowed you to claw back VAT paid to HMRC on invoices that are more than six months old and still unpaid.

This is a welcome relief, as it returns to your bank account VAT you have paid to HMRC, but never received from your customer.

Unfortunately, this is not the whole story.

As indicated above, you will also need to take a careful look, prior to completing your periodic VAT return, to see if there are old invoices in dispute on your purchase ledger – invoices that you receive from suppliers. If they are more than six months old you will have to pay any VAT input tax you have previously claimed back to HMRC.

Accordingly, vetting your sales and purchases in this way should be part of the process you undertake before submitting a VAT return.

An alternative approach to VAT accounting may be available to you. If your turnover, before VAT, is £1.35 million or less, you could change to the VAT cash accounting scheme. Using this scheme, you will only pay output VAT, or claim back input tax, when payment is received from a customer or paid to a supplier. This generally works best if your business is consistently owed more from its customers than it owes to suppliers.

Please call if you would like more information about the VAT special schemes, or help more generally with completing your VAT returns.

Common misconceptions about tax and letting property

HMRC has published a list of popular misconceptions that taxpayers have about letting property. We have listed below a summary of situations where you will need to declare rental earnings to HMRC:

  • If you inherit property and let it out.
  • If you buy a property as an investment and let it out.
  • Divorcing partners, who decide to let out their jointly owned property, will need to declare their share of any rental profits on their individual tax returns.
  • You may move to a new house due to employment considerations and let out the house you are moving from.
  • You may move into a care home and let out your present home to help pay for the fees.
  • You may buy a property for your son or daughter to use while at university, and they may sub-let to friends on an informal basis and charge a nominal rent, which you use to defray costs. Any surplus monies received from this sort of arrangement will still need to be declared.
  • Moving to tied accommodation can create problems if you keep your existing home and let it out. If the rents you receive cover your mortgage repayments (capital and interest) you may consider that you have not made a profit, but the capital part of your mortgage repayments are not an allowable deduction for income tax purposes.

Also, watch out for the effects of the changes to the rules for repairs and finance costs (interest) that we have covered in recent issues.

If you are concerned that you may be required to declare your rental income, and you have not yet done so, we can help. There is a tried and tested process to bring matters up-to-date. Please call for more information.

Beware self employed contributions trap

To qualify for the full, new State Pension you will need to have 35 years of contributions. At present, the self-employed pay Class 2 (a fixed weekly amount of £2.85) and Class 4 contributions (9% of profits between £8,164 and £45,000, and 2% of profits over £45,000), but only the Class 2 payments contribute towards your 35 years.

From April 2018, Class 2 contributions are being abolished.

It is likely that from April 2018, if you are self-employed and earn more than the small profits limit (SPL), currently £6,025 for 2017-18, but less than the current lower profits limit (LPL), £8,164 for 2017-18), you will not have to pay Class 4 NIC but you will still receive credits towards your new State Pension entitlement.

Thus far good news for the lower paid self-employed.

Unfortunately, the news is not quite so good if you earn less than the SPL threshold. Up to April 2018, you could top up your State Pension contributions by making Class 2 contributions, at £2.85 per week. From April 2018, you would need to make Class 3 voluntary contributions, and these are currently £14.25 a week.

The annual cost of protecting your State Pension rights would therefore increase from £148.20 to £741.

Self-employed with income below the SPL may be able to achieve the same result if they are claiming other benefits: for example, tax credits, child benefit or Universal Credit. If this is the case they would not need to pay the Class 3 contributions and would still receive credits towards their State Pension entitlement.

Self employed taxed on profits not drawings

We are often asked by self-employed clients to explain why their tax bills are high in proportion to the amount they withdraw from their business as “wages”.

In truth, the self-employed do not take a wage, this would imply that the cost of their “wages” is a deduction for tax purposes, and this is not the case. What happens is that self-employed traders draw down against the profits they have made, after any tax and NIC charges have been deducted.

On this basis, a thrifty self-employed person may find that their annual income tax bill is a significant amount if compared to their annual drawings from the business.

For example, if your profits are £75,000 this will create a tax and NIC bill of almost £23,000. This would leave after-taxed profits of £52,000. You now have a choice: to take less than £52,000 as drawings and retain the difference in your business, or, withdraw the £52,000. If you can manage on an annual draw of say £30,000 this would leave £22,000 in your business, but your tax bill would almost be as high as your drawings.

Of course, there is a third choice, you could draw more than your after-tax profits as drawings. Commercially, this is not a good idea especially if you have no retained profits to draw against, in effect you would be on a one-way road to insolvency.

However, if you have built up capital reserves over many years, and they are no longer required to finance future trading, or if you are winding down, it is perfectly fine to withdraw these funds. Drawing on retained profits from past years will not create additional income tax liabilities, the profits you are drawing against are already tax paid.

Planning for profit withdrawal is often overlooked by self-employed business owners. If you have never considered these issues before we could help you adopt a strategy that suits your goals.

Pension scams

The government has proposed a wide-ranging ban to prevent pension scams. The consultation listed the sorts of phone conversations that the government intends to fall within the scope of the ban. These included:

  • offers of a ‘free pension review’, or other free financial advice or guidance
  • assessments of the performance of the individual’s current pension funds
  • inducements to hold certain investments within a pensions tax wrapper including overseas investments
  • promotions of retirement income products such as drawdown and annuity products
  • inducements to release pension funds early
  • inducements to release funds from a pension and transfer them into a bank account
  • inducements to transfer a pension fund
  • introductions to a firm dealing in pensions investments
  • offers to assess charges on the pension

The government intends to work on the final and complex details of the ban on cold calling in relation to pensions during this year. This will ensure, according to government sources, that we get draft legislation to ban cold calling in relation to pensions right. The government will bring forward legislation when Parliamentary time allows.

In the consultation, the government also proposed limiting the statutory right to transfer:

  • transfers in to personal pension schemes operated by firms authorised by the Financial Conduct Authority (FCA)
  • transfers in to authorised Master Trust schemes
  • transfers where a genuine employment link to the receiving occupational pension scheme could be evidenced.

The government therefore proposes to require all new pension scheme registrations to be made through an active company, except in legitimate circumstances, where HMRC will be given discretion to register schemes with a dormant sponsoring employer. This requirement will extend to existing pension schemes if they are registered with a dormant sponsoring employer, with the same discretion so that HMRC can decide not to de-register a scheme in legitimate circumstances. This change will be legislated for in a Finance Bill in 2017. The existing right of appeal if HMRC rejects a scheme registration will apply to this new requirement.

Where is my profit, it is not in the bank

This is a question we are regularly asked by clients. Usually, the conversation is triggered when we discuss the end of year accounts.

Before we explain why profits are not always represented by cash in the bank, we need to define the term “profits”. Profits are the difference between what you sell and the costs associated with making those sales.

Consider Jeremy, who runs a small shop selling clothing. He started his businesses by introducing £5,000 of his own money and at the end of his first trading year his summarized results were as follows:

  • Sales £100,000
  • Goods purchased and sold in the year £60,000
  • Other costs paid for in the year £15,000
  • Stock at end of year valued at cost £7,000
  • Drawings for personal use £16,000
  • Bank balance £7,000

His accounts show profits of £25,000 (This is made up of sales of £100,000, less cost of goods sold of £60,000 and less other costs £15,000).

So why, Jeremy asks, is there only £7,000 in his bank account?

The answer is that at the end of the year Jeremy had withdrawn £16,000 for his own private use and he had purchased £7,000 of stock that was unsold at the end of the year. We also need to consider that Jeremy introduced £5,000 of his own cash when the business started.

The reconciliation of his profit and the bank balance is therefore: Profit for the year £25,000, less personal drawings £16,000, less stock £7,000, plus own capital introduced £5,000, equals £7,000 – his business bank balance.

We can deduce from this explanation that to reconcile profit and cash flow you need to factor in receipts and payments that are not considered when calculating profit. In Jeremy’s case: his capital introduced, stock at the end of the year, and his personal drawings.