Dividend tax set-back

The final matter we want to showcase for this month is the proposed reduction in the dividend allowance from April 2018. At present, shareholders with dividend income below £5,000 will pay no Income Tax on their dividend income. From April 2018, Mr Hammond looks set to reduce this to £2,000.

The average dividend yield for FTSE 100 shares is anticipated to fall to 3%. Based on this rate of return, investors would need a portfolio amounting to some £167,000 to create an annual dividend income of £5,000. From April 2018, only £67,000 would create tax-free income if the allowance drops to £2,000.

Affected investors should therefore consider other tax advantages options, including ISAs. From April 2017 the ISA limit is creased to £20,000.

Shareholders of non-listed private companies will face a tax increase due to this change. The present advantage posed by the low salary high dividend approach to profit extraction will still apply, but the overall Income Tax due will increase from April 2018.

Combined with changes to the taxation of benefits in kind, shareholder directors of smaller companies would be advised to revisit tax planning options for 2018-19.

Class 4 NICs

The Chancellor announced two increases in Class 4 NI contributions for the self-employed in his budget and in the following week withdrew the increases for the term of the current parliament.

His original notion was to start the process of equalising the NI contributions made by the employed and self-employed now that State Benefits, particularly the new flat-rate State Pension, are available to both groups.

The first rate increase, from April 2018, was set to coincide with the abolition of the self-employed Class 2 contributions on this date. However, it would appear that manifesto promises carry more weight than fiscal necessity and the increases have been abandoned.

Class 2 contributions are still being withdrawn, which means that the scope of Class 4 contributions will need to be adjusted to counter any loss in benefits presently provided by Class 2.

Legislation in this area has been thrown wide open to change by the apparent U-turn since the budget announcements. As and when the intentions of government become more certain we will update readers accordingly.

Simplified cash basis

For some time now, unincorporated businesses have been able to submit simplified accounts in order to settle their tax liabilities. The main advantage of using this system is that income and expenditure is based on money received from customers and money paid to suppliers. In other words, the accruals basis, where income and outgoings are based on the value of invoices sent and received, is not applied.

Prior to 6 April 2017, the turnover threshold for the scheme was set at the VAT registration limit, £83,000 for 2016-17. In the budget this limit was increased to £150,000.

Adopting the cash basis does simplify the recording of transactions, but there are disadvantages and complications. For example:

  • It is not possible to carry losses, accounted for using the cash basis, against previous year’s earnings or sideways against other income in which the loss was made. Losses can only be carried forwards.
  • It is not clear how VAT registered businesses using the simplified cash scheme for accounts purposes, will prepare VAT returns from April 2017. Certainly, they would be eligible to use the separate Cash Accounting Scheme for VAT purposes and this may be the best solution.
  • Interest costs are restricted to a maximum £500 per annum rather than the actual amount paid.
  • Cash basis accounts do not give a true picture of business performance and this can be problematic for supporting loan applications.
  • Flexibility in varying claims for capital allowances is lost, this can lead to wasted personal allowances in certain circumstances.

The use of the simplified cash basis does imply a saving in the time taken to record transactions for tax purposes, but as we have set out above there are possible complications and significant drawbacks.

Will the new one pound coin affect your business

The new, 12 sided coin became legal tender from 27 March 2017. Businesses that deal in cash transactions, or use equipment that accepts the £1 coin should take note of the following:

The 28 March 2017 to 15 October 2017 is nominated as the co-circulation period for the new £1 coin. What this means is:

  • You can accept both old and new coins during this period.
  • When you take coins to the bank you will need to separate into old and new varieties.
  • Equipment vendors should reconfigure machines to accept both coin types.

In any event you will need to advise customers which coin or coins can be used.

From the 16 October 2017, the old coins will no longer be legal tender. Accordingly:

  • all your coin handling equipment should be able to accept the new £1 coin.
  • you are under no obligation to accept the round £1 coin from your customers and you should not distribute the round £1 coin.
  • the round £1 coin can continue to be deposited into a customer’s account at most High Street banks and the Post Office. Best to check with your bank for more details, including deposit limits.

Time to empty your piggy banks. According to the Royal Mint more than 1.5 billion new coins will be produced, and presumably, 1.5 billion old coins removed from circulation.

 

Working from home

Clients often ask if working from home is going to create issues from a tax point of view. There are a number of scenarios to consider.

Employers’ obligations to employee homeworkers:

Equipment, services and supplies

Employers that provide equipment, services and supplies to an employee who works from home, don’t have to report or pay anything if they’re only used for business purposes, or any private use is insignificant.

Additional household expenses

If employers cover the cost of additional household expenses for an employee who works from home, there are no tax complications if all the following apply:

  • Employees need to work from home, either because equipment they need isn’t available at your workplace, or their work means they have to live too far away from your workplace to travel there every day.
  • The amount you give employee homeworkers is not more than their additional household expenses, and the amount you give them isn’t more than the current weekly limit (£4 a week or £18 a month – 2016-17).

Self-employed homeworkers:

This group can claim for the additional running costs of working from home based on the actual costs and space used, or a flat rate basis if you work more than 25 hours a month from home.

The current, published HMRC flat rates are:

  • 25 to 50 hours a month £10 per month
  • 51 to 100 hours a month £18 a month
  • Over 100 hours a month £26 per month.

As long as the room(s) you use in your home have duality of use – i.e. that they have a private as well as a business function – you will be unlikely to suffer any capital gains tax charge when you sell your property.

Business rates:

According to HMRC, you don’t usually have to pay business rates for home-based businesses if you:

  • use a small part of your home for your business, e.g. you use a bedroom as an office
  • sell goods by post

You may need to pay business rates as well as Council Tax if:

  • your property is part business and part domestic, e.g. if you live above your shop
  • you sell goods or services to people who visit your property
  • you employ other people to work at your property
  • you’ve made changes to your home for your business, e.g. converted a garage to a hairdresser’s

Contact the Valuation Office Agency (VOA) to find out if you should be paying business rates. In Scotland, contact your local assessor.

One week to go

Next week sees the end of the 2016-17 tax year. On the 6 April 2017, any action you take to minimise your tax liabilities for 2016-17 will be largely ineffective. So what, if anything, can you still action this week?

Capital gains tax (CGT)

The amount of tax free gains you can make during 2016-17 is £11,100. This exempt allowance is available to all UK resident tax payers, accordingly, married couples and civil partners both qualify.

If you have no gains chargeable to CGT thus far during 2016-17, there is still an opportunity to crystallise gains during this coming week, up to the annual exemption limit, and no tax will be payable. For example, if you have a shareholding that you have been considering for disposal, and you could sell a sufficient quantity of shares before 6 April 2017, the disposal would utilise your allowance without creating a tax liability.

The important matter to note is that this annual exemption is lost if you don’t use it; it cannot be carried forward and used in later years.

Inheritance tax (IHT)

There are a number of annual reliefs that you can use without creating a chargeable event for IHT purposes. For example, the exempted annual gifts you can make are:

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

Company car users

If your employer pays for your private fuel this will create a fairly significant income tax charge for 2016-17. You may save money if you calculate the cost of the fuel provided and reimburse your employer. For 2016-17, you need to do this before 6 April 2017. (For 2017-18, the rules are being relaxed slightly and you will have until 6 July 2018 to make an equivalent reimbursement for 2017-18).

To make the calculation you will need your private mileage for 2016-17 and multiply this by the advisory fuel rate for your vehicle. These range from 7p to 22p per mile. See the published list at https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016

These are just a few of the actions you could take to minimise your tax payments during what’s left of 2016-17. If you are unsure what your options may be, please call, we would be delighted to help.

New childcare funding choices

The government have launched a new website aimed at parents who may be able to claim for support with childcare costs.

The web address is https://www.childcarechoices.gov.uk/.

How Tax-Free Childcare works

Working parents will be able to apply, through the childcare service, to open an online childcare account. For every £8 that families or friends pay in, the Government will make a top-up payment of an additional £2, up to a maximum of £2,000 per child per year (or £4,000 for disabled children). This top up is added instantly and parents can then send electronic payments directly to their childcare providers.

All registered childcare providers – whether nannies, nurseries or after school clubs – can sign up online now to receive parents’ payments through Tax-Free Childcare. Once childcare providers have signed up they will appear on the Childcare Provider Checker. This allows parents to check whether childcare providers have already signed up for Tax-Free Childcare.

How 30 hours’ free childcare works

Eligible parents will be able to apply online through the childcare service. They will receive a code – this will allow parents to arrange their childcare place ahead of September 2017. Parents can take their code to their provider or council, along with their National Insurance Number and child’s date of birth. Their provider or council will check the code is authentic and allocate them a free childcare place.

Parents can quantify the amount that they may be able to claim using the Gov.uk childcare calculator at https://www.gov.uk/childcare-calculator

Follow companies for free

If you want to keep an eye on documents filed with Companies House for a particular company, you can register for a new service that will do just that at Companies House. The new service is called “Follow” and it allows you to receive email alerts.

Follow lets you receive email alerts of company transactions. The alert tells you instantly what has been filed as soon as it has been accepted. The email will contain a link to the filing history of the company where you’ll be able to download a copy of the document for free.

You will also receive an email alert when Companies House remove a transaction.

Follow this link to register for the Companies House Service if you want to be advised of new filings for specific company transactions.

Who to follow

You can follow any company registered at Companies House. For added security, you could choose to follow your own company.

How to follow

To begin following companies:

  • sign in once you’ve registered an email address and password
  • search for a company to follow
  • select the company
  • click on ‘Follow this company’

To see all the companies, you have chosen to follow click ‘Companies you follow’. To stop receiving email alerts for a company choose to ‘Unfollow’.

 

 

Reduction in the dividend allowance

Unless there are further political objections, one of the few remaining revenue raising changes in the recent spring budget was the reduction in the £5,000 dividend allowance from April 2018.

From this date the allowance will drop to £2,000.

This measure will increase the tax charge for investors with significant, quoted share portfolios and the director/shareholders of private companies who minimise their tax and National Insurance by taking a low proportion of their remuneration as salary and any balance as dividends.

A person with annual dividends of £5,000 may see the following amounts added to their tax bill for 2018-19, dependant on where the dividends sit in their basic, higher and additional rate income tax bands:

  • Basic rate tax payers – an increase of £225.
  • Higher rate tax payers – an increase of £975, and
  • Additional rate tax payers – an increase of £1,143.

The current average dividend yield for FTSE 100 companies is close to 3%. Based on this estimate, holders of portfolios in excess of £67,000, may see an increase in their tax bill next year. There has been speculation in the press suggesting that affected investors (in quoted companies) may be able to use ISAs to shelter some of their dividend income from an income tax charge.

Director/shareholders who have adopted to the low salary high dividend approach will suffer a tax increase, but it is likely that the benefits of this strategy will still outweigh the tax and NIC cost of being self-employed.

 

Making Tax Digital – a step closer

Another matter that received some clarification last week was the government’s move to implement MTD for the self-employed from April 2018.

When the scope of MTD was first published it was proposed that the self-employed (including unincorporated property businesses) would need to commence the quarterly upload of summarised accounts data, direct to HMRC’s digital accounts, from April 2018.

In the budget last week, a relaxation of this deadline was introduced. Only self-employed businesses with taxable income in excess of the current VAT registration limit (£85,000 for 2017-18) will be required to comply with MTD uploads from April 2018. Those with income below the VAT threshold will now have until April 2019 to comply.

Whilst this is a welcome reprieve for smaller businesses, none of the other regulations regarding MTD have been relaxed. In particular, the need to comply with the quarterly uploads if income exceeds £10,000.

It was hoped that government would increase this threshold as it does require very small businesses into a compliance regime that seems out of proportion with their size. For example, a self-employed person with taxable income of just over £10,000 will have to comply with MTD from April 2019 even though their personal tax allowance will eliminate any tax liability for the year.

Clearly, MTD is a major change in the assessment of tax, probably the most impactful since the introduction of self-assessment 20 years ago. Readers affected, should ensure that they are ready to comply and in particular have identified a suitable format for keeping their business records that will facilitate the electronic transfer of data to HMRC.

If you are unsure which software or process to use, please contact us, we can help.