Tax Diary July/August 2017

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

6 July 2017 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2017 – Pay Class 1A NICs (by the 22 July 2017 if paid electronically).

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

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

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

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

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

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

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

McLaren racing team lose tax appeal

It is a well-established feature of previous judgements that a fine imposed to punish an organisation should not be treated as tax deductible – the tax relief secured would effectively share out the burden of the punishment with the rest of the taxpaying community.

Which is why the First Tier Tribunal (FTT) decision, allowing McLaren racing to deduct a £32m fine for being in possession of documents belonging to Ferrari, was seemingly out of step with this point of view.

HMRC appealed the FTT ruling and the Upper Tribunal reversed the decision.

In some respects, this addresses issues of common sense as well as the law. If the FTT ruling had held, would we have seen footballers claiming tax relief on fines for bad behaviour? Or tennis players for swearing?

Landlords bear the brunt of recent tax changes

Recent budgets have done little to improve the financial position of landlords. One change stands out above the rest: the loss of higher rate tax relief on finance charges.

Many landlords have concentrated on growing their property portfolios in recent years and, taking advantage of the low interest rates, have borrowed heavily to maximise property acquisitions. In accountant speak, they are highly geared.

This strategy will come back and haunt many followers of this path as the tax relief for loan interest starts to reduce in the coming years. The changes will be:

  • From April 2017, 25% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2018, 50% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2019, 75% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2020, only a basic rate tax credit will apply.

Landlords who only pay basic rate (20%) Income Tax on their property business may think these changes will have no effect on their tax bills, after all, the reduction in the deduction in finance charges is matched by a basic rate tax credit, but they may be mistaken. It all depends on the amount of loan or mortgage interest payments they presently pay and claim against their tax. Consider the following example:

Jo, whose rents for 2016-17 are £100,000 and loan interest is £80,000, will have taxable profits for the year of £20,000. Once the finance costs are fully disallowed, Jo’s taxable income will be £100,000 (not £20,000), Income Tax will be calculated accordingly and much will be taxed at higher rates. She will be able to deduct a tax credit, based on finance charges disallowed, but only at basic rate Income Tax.

If rental profits were her only income, and with no increase or decrease in her rental income and costs, Jo’s tax bill would increase from £1,800 for 2016-17, to £11,500 by the year 2020-21.

This sort of outcome would be disastrous for many landlords in a similar situation. They may be faced with selling property to reduce “leverage” and restore some sense of cash flow sanity to their tax affairs.

Clearly, there is a need to re-examine your investment strategy if your property business is similar to the above example. We can help. There may be possible changes you could make short of outright disposal. The key is to consider your options now.

Self-employed combined liability

Whether you pay Income Tax or National Insurance, the effect on your cash flow is the same. The payments are a necessary part of our obligation to fund the activities of State, but the self-employed are often surprised that their bi-annual tax payments cover Income Tax and National Insurance.

The weekly Class 2 contribution is included, presently £2.85 per week, and also Class 4 contributions: these amount to 9% of taxable income in excess of £8,164 and up to £45,000, and 2% on earnings above £45,000.

Accordingly, the combined rate of State dues on self-employed earnings in excess of £8,164 is potentially 29% – 20% basic income plus 9% Class 4 NIC – and over £45,000 a combined rate of 42%. Although in practice some of the income over £8,164 may be covered by other personal tax allowances, these combined rates illustrate the true impact of Income Tax and National Insurance to be paid.

The lower Class 2 contribution is due to be withdrawn from April 2018.

In his first stab at a budget in March this year, Philip Hammond wanted to increase the Class 4 NIC rates from 9% to 10% (April 2018) and from 10% to 11% (April 2019). These increases were subsequently withdrawn. Whether the new, minority government will seek to re-introduce these changes remains to be seen.

Self-employed traders with significant taxable earnings should therefore expect to pay more than the usual rates of Income Tax when they contemplate settlement of their annual Self Assessment bill, and have funds in reserve to meet these combined liabilities.

Making Tax Digital – are we making progress

There is evidence that HMRC’s Making Tax Digital (MTD) implementation team are working with advisors and their clients to beta test the computer systems that will drive the quarterly upload process when it is timed to begin April 2018.

For those readers who may have missed our previous updates on this topic, MTD aims to have taxpayers’ income and other relevant details uploaded to a personal digital account. When completed, this new system will eventually remove the necessity of a formal tax return each year.

Banks, employers, pension providers and business owners (including landlords) will have an obligation to upload data to HMRC. The information gathered will allow for the estimation of future tax liabilities in real time.

For business owners and landlords this is quite a change from the present annual tax return. At various implementation dates they will be required to make quarterly, summarised uploads of their accounts data and undertake an annual online check.

At present, HMRC is not providing direct access to taxpayers to comply with their MTD obligations; instead, business owners will need to use accounting or other software that is authorised for this purpose.

The present timetable, when businesses will need to start uploading data, is:

  • April 2018 – the self-employed, including landlords, with turnover in excess of the VAT registration threshold, presently £85,000.
  • April 2019 – the self-employed, including landlords, with turnover below the VAT registration threshold.
  • April 2019 – submission of VAT returns
  • April 2020 – companies and other organisations subject to Corporation Tax.

Businesses with income below £10,000 will be excluded from the MTD quarterly upload processes.

Incredibly, the legislation setting out the rules and regulations for MTD has still not reached the statute books. It was included in the Finance Bill 2017, but the relevant sections and schedules dealing with MTD were deferred for consideration until after the recent election. Professional advisors, software providers, and the business community looks forward to some progress in this area. Presumably, the deferred legislation will reappear in a summer Finance Bill. The intention, we would assume, is to tidy up these loose ends before members of parliament break for their summer recess.

Sole trader or limited company

We are often asked to judge whether it’s better for a business to be run as a sole trader, or incorporated as a limited company.

The risk argument is fairly straight forward. If your trade or service provided involves risk, and a risk that it is difficult to fully insure, then the limited company is the best route. The only assets at risk will be those owned by your company. Your personal assets will be safeguarded.

If there is no significant risk, the next criteria to test is taxation. Which option generates the lower tax and NIC bill and provides you with more take home pay?

At the lower end of the spectrum, say taxable profits up to £20,000, it is probably better to be a sole trader, as any perceived tax benefit will likely be eliminated by the increased costs of running a limited company.

In the mid-range, profits between £20,000 and £200,000, you will save tax and NIC by being limited. Above £200,000 you may be better off being a sole trader.

However, these assumptions only apply if you withdraw everything you earn from your business. If you want to retain profits in your business, then the picture changes dramatically.

For example, if your company made £200,000 trading profit and you drew out £50,000 in salary and dividends and paid any corporation tax due, the company would be able to retain £114,000. This is cash that the company would be able to use to invest in the business. The combined take home pay and retained funds in the business would now be some £42,000 more than if you had paid tax and NIC as a self-employed person. The reason; as a self-employed sole trader you would pay tax at income tax rates on all your profits, even those you left in the business, whereas the company would only pay corporation tax at the lower 19% rate (2017-18).

There is no substitute for looking at this number crunching process on a case by case basis. If you are contemplating a new business venture and you are unsure what structure you should choose, please call so we can look at the options taking all of the above options into account.

Investing in your business is still tax effective

If you crunch the numbers, and decide that investing in new technology, a new van, or other equipment will make a positive difference to your bottom line profits, and in a reasonable time-frame, the next question to ask is – what difference will the initial purchase make to your tax bill?

As long as the asset you are buying qualifies, the maximum write off is provided by the Annual Investment Allowance (AIA). Currently, you would be allowed to write off 100% of your assets purchases up to a value of £200,000 against your taxable profits for the accounting year during which you make the investment.

Assets that are specifically excluded from the AIA are:

  • cars
  • items you owned for another reason before you started using them in your business
  • items given to you or your business

Also, you cannot claim the AIA in a final period of trading.

This allowance is particularly useful for self-employed business owners who may be paying income tax at the higher 40% or 45% rates. A qualifying investment of £200,000 would reduce their self-employed income tax bill by a significant amount.

For example, a self-employed sole trader, James, with profits of £220,000 and investing in qualifying plant of £200,000 during 2017-18, would see their income tax bill reduce from £85,200 to £1,700.

In addition to the income tax savings, James’s graduated Class 4 NIC payment would also reduce, from £6,963.44 to just £1,213.44.

The AIA is a generous allowance and whilst it is inadvisable to let the tax tail wag the dog, if there is a strong indication that a proposed investment will make a difference to your business, then the tax incentive is a useful bonus.

Finally, as with all tax planning, taking a hard look at the figures prior to any firm commitment to invest is paramount. Please call if you are planning an acquisition in the near future – essential if you want to get your tax ducks all in a row.

When do NIC contributions stop

You are required to make National Insurance Contributions on your earnings, whether employed or self-employed, until you reach the State Retirement Age.

The only exception is if you qualify for exemption from contributions if your salary or business profits are below a certain minimum amount. For 2017-18 these lower limits are:

  • Below £157 a week if you are employed,
  • Below annual profits of £6,025 to claim exemption from Class 2 self-employed contributions, and
  • Below annual profits of £8,164 to claim exemption from Class 4 self-employed contributions.

It is worth noting that claiming these exemptions, whist this will save you money in the short-term, may reduce the credits you acquire in order to qualify for the State Pension. Currently, you need to have 35 years of paid up NIC contributions in order to qualify for the new full State Pension if you have no contributions record prior to April 2016. If you have contributions before this date the sums are more complicated.

To recap, at State Pension age, you will no longer have to pay have to pay the following NIC contributions if you continue working:

  • Class 1 NIC if you are employed;
  • Class 2 NIC if you are self-employed;

Class 4 contributions for the self-employed are slightly different. If you continue in self-employment beyond the State Pension age, you will pay contributions in the tax year during which you reach the pension age, but in future years you will be exempt from contributions.

Under current legislation, women’s State Pension age will increase more quickly to 65 between April 2016 and November 2018. From December 2018 the State Pension age for both men and women will start to increase to reach 66 by October 2020.

Need help joining the digital age

Computers are not everyone’s cup of tea. In fact, there are very few of us who can declare with some confidence that we are computer literate.

Unfortunately, there does seem to be a drive to increase their effective use in business and the offices of HMRC. Gone are the days when HMRC’s offices were populated by human beings checking hand written tax returns and transferring the data to foolscap folders. Racks and racks of these files flanked by rows of desks. The data is now pushed along underground cables, from your PC, or by your advisors’ desktop, and seamlessly integrated into your personal tax account on some distant server. Or at least that’s what we are led to believe.

If HMRC’s current ambition, to forward this process by requiring business owners to upload – essentially send information to HMRC via computerised process – quarterly, summarised data, then any non-computerised accounts process will become extinct.

Where does this leave smaller businesses, especially those who have no great desire to become computer literate, are content with the annual chore of dumping everything: invoices, bank statements, cheque stubs etc., into a carrier bag, and leaving this with their accountant?

We seem to be moving into an age where computer software is taking over the computational activity previously undertaken by accounts clerks and bookkeepers, bent double over ledgers and calculators.

The message we need to communicate to readers today is that this digital process seems to be unstoppable. HMRC’s Making Tax Digital for Business endeavours aim to make this digital upload a legal requirement, starting April 2018.

We can help. We have already crossed the computer Rubicon. Our staff are trained and ready to go. We have software that we can use on your behalf, or if you fancy having a dabble, we can recommend and show you how to use software to meet these new obligations, in house.

The clock is ticking. If you are still unsure whether to embrace these new challenges, or consider our support in dealing with them for you, can we suggest that you call to discuss your options.

National Insurance exemption

Employers, or more specifically, the persons in charge of processing their payroll, are hopefully checking the box to claim the National Insurance Employment Allowance (EA)?

The EA reduces the employers’ (secondary) Class 1 NIC bill. If your employers’ NIC charge is normally more than £3,000, then this is as good as £3,000 additional cash in the bank. If your employers’ NIC bill is less than £3,000, then the EA will wipe out this employment cost for your business.

So far, so good. Why is there always a but…?

You can’t claim this allowance if:

  • You are the director and the only paid employee in your company.
  • You employ someone for personal, household or domestic work (like a nanny or gardener) – unless they’re a care or support worker.
  • You are a public body or business doing more than half your work in the public sector (such as local councils and NHS services) – unless you’re a charity.
  • You are a service company working under ‘IR35 rules’ and your only income is the earnings of the intermediary (such as your personal service company, limited company or partnership)

If you or your company have more than one registered payroll reference with HMRC, you can only claim the EA against one of them.

The first bullet point will no doubt be the most applicable exclusion, the owner managers of one-person companies, but if you can claim, a simple tick in the correct box of your payroll software should do the trick – your NIC payments should be automatically reduced until the £3,000 EA has been fully claimed.

Please note, the EA is only available to set off against employers’ Class 1 NIC, you cannot use this allowance to reduce employees’ contributions.