Changes to the VAT Flat Rate Scheme

As we have noted in previous blog postings, Philip Hammond announced a significant change to the VAT Flat Rate Scheme (FRS) from 1 April 2017.

To join this scheme, businesses need to have turnover excluding VAT of under £150,000. VAT payable to HMRC is based on a fixed percentage of turnover including VAT. The percentage rates vary for different business sectors, and obviously the lower the rate, the lower the quarterly VAT bill.

Many users of the FRS have discovered that using the scheme means that they make a cash profit. This happens when the appropriate FRS rate produces a VAT bill that is lower than the cash collected from the VAT output tax added to sales (which FRS traders are required to do), less any input VAT added to goods and services purchased.

HMRC have decided that this is not the outcome they intended when setting up the scheme.

Accordingly, from 1 April 2017, users of the FRS scheme will be obliged to use the higher rate of 16.5% if they are classified as a “limited cost trader” (LCT). The LCT classification will apply to users of the FRS whose VAT inclusive costs are:

  • lower than 2% of their VAT inclusive turnover in an accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

These exclusions are required to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2% and thus continue to pay VAT at a rate lower than 16.5%.

Existing users of the FRS are advised to seek advice before 1 April next year to determine if they are affected by these changes. In some cases, traders may need to discontinue use of the FRS and switch to the use of the standard VAT scheme.

Carry back gift aid donations

For a number of years, it has been possible to make gift aid donations and carry them back to the previous tax year. This is a useful tax planning facility if earnings were higher in the previous year, and in some cases it may mitigate loss of personal allowances and tax at higher rates.

 

There are, however, two conditions that need to be complied with:

  1. Firstly, you cannot claim to carry back gift aid donations once you have submitted your tax return for the current year. Consequently, if it would be beneficial to carry back gift aid contributions you have made since 5 April 2016, as if paid during 2015-16, you will need to make the claim when you file the 2015-16 return. This means that the latest date to action this type of claim is 31 January 2017.
  2. Secondly, you will need to have paid enough Income Tax or Capital Gains Tax in the earlier year to cover the tax that the charities reclaim on those donations.

For higher rate tax payers, especially those with taxable income in excess of £100,000 this strategy is a useful device to reduce tax payments in a year by utilising transactions made after the end of the tax year. In fact, this is the only readily accessible carry-back planning tool available to most tax payers.

What is a power of attorney

A lasting power of attorney (LPA) is a legal document that lets you (the ‘donor’) appoint one or more people (known as ‘attorneys’) to help you make decisions or to make decisions on your behalf. There are two sorts of LPA. They can cover personal issues (health and welfare) or financial issues (property and financial affairs).

An LPA allows you to nominate who has control over what happens to you if, for example, you have an accident or an illness and can’t make decisions at the time, or if you for other reasons, ‘lack mental capacity’ to make prudent decisions on your own behalf.

You must be 18 or over and have mental capacity (the ability to make your own decisions) when you make your LPA. You can choose to make one type or both.

Please note that there are different process for registering LPAs in Scotland and Northern Ireland.

How do you make an LPA?

This is a three stage process:

1.      First, you must choose your attorney – the person who will have control over your affairs – and you can have more than one.

2.      Secondly, you will need to complete the relevant forms to appoint them as an attorney, and finally

3.      Register your LPA with the Office of the Public Guardian (this can take up to 10 weeks).

It costs £110 to register an LPA unless you get a reduction or exemption.

Unfortunately, you will need to register both LPAs if you want to cover all your risks so the above costs are doubled.

If you want to find out more about the process you can contact the Office of the Public Guardian at:

Office of the Public Guardian
customerservices@publicguardian.gsi.gov.uk
Telephone: 0300 456 0300
Textphone: 0115 934 2778
 

Or, you can take professional advice.

Tax Diary December 2016/January 2017

1 December 2016 – Due date for Corporation Tax due for the year ended 29 February 2016.

19 December 2016 – PAYE and NIC deductions due for month ended 5 December 2016. (If you pay your tax electronically the due date is 22 December 2016.)

19 December 2016 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2016.

19 December 2016 – CIS tax deducted for the month ended 5 December 2016 is payable by today.

30 December 2016 – Deadline for filing 2015-16 Self Assessment tax returns online to include a claim for under payments to be collected via tax code in 2017-18.

1 January 2017 – Due date for Corporation Tax due for the year ended 31 March 2016.

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

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

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

31 January 2017 – Last day to file 2015-16 Self Assessment tax returns online.

31 January 2017 – Balance of Self Assessment tax owing for 2015-16 due to be settled on or before today. Also due is any first payment on account for 2016-17.

Changes to NLW and NMW from April 2017

From April 2017, the National Living Wage (NLW) for the over 25s is being increased to £7.50 per hour. This is an increase from the current NLW rate set in October 2016 of £7.20 an hour. For the over 25s, this will represent a wage increase of just over 4%.

The National Minimum Wage (NMW) will also increase from the same date to:

·         For 21 to 24 year olds – from £6.95 to £7.05 per hour

·         For 18 to 20 year olds – from £5.55 to £5.60 per hour

·         For 16 to 17 year olds – from £4.00 to £4.05 per hour

·         For apprentices – from £3.40 to £3.50 per hour

The government will also be spending an additional £4.3m to ensure that employers are complying with their legal obligation to pay the NMW.

Are you affected by changes to the VAT Flat Rate Scheme (FRS)

HMRC is to introduce an additional test that will determine the flat rate percentage used by traders. It would seem that HMRC presently considers the benefits obtained by certain businesses to be excessive and not in accord with the intentions of Parliament.

Traders that meet the new definition of a “limited cost trader” will be required to use a fixed rate of 16.5%. This will include traders who are already using the FRS scheme, and many at rates lower than 16.5%.

From 1 April 2017, FRS traders who meet the following definitions will be considered “limited cost traders” and will be obliged to use a new 16.5% rate. A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

Businesses using the FRS will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

VAT traders using the FRS should review their position before April 2017 to ensure that there are still advantages to using the scheme.

Salary sacrifice under the microscope

Salary sacrifice is a term applied to benefits taken in place of salary. In many respects these benefits provide employees with higher “take home” value than if the benefits were treated the same as cash income. Mr Hammond is mindful to curb this practice as it is intended that the change will add £1bn a year to tax revenues by 2020.

No definitive list of benefits affected has been published, but benefits that may no longer be tax effective are:

·         Mobile phones and tablets

·         Car parking

·         Gym membership, and possibly

·         Health check-ups

There are a number of benefits that will not be affected by these changes. They are:

·         Pensions

·         Child care

·         Cycle to work schemes

·         Ultra-low emission cars (CO2 emissions up to 75g/km)

Benefits in place before April 2017 will be protected from restrictions for 1 year, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected for up to 4 years.

For those who contribute towards or make-good their benefits to reduce the taxable amounts, they will have until the 6 July after the tax year to do so – starting 6 July 2017. This only applies to benefits not already taxed as income through payroll.

Readers who are concerned they will be affected by these changes should consider a review of their salary sacrifice/benefits arrangements prior to the April 2017 cut-off date.

Autumn budgets from 2018

Mr Hammond surprised listeners to his autumn statement speech when he said:

This is my first Autumn Statement as Chancellor. After careful consideration, and detailed discussion with the Prime Minister, I have decided that it will also be my last.

And then quickly followed with:

Mr Speaker I am abolishing the Autumn Statement. No other major economy makes hundreds of tax changes twice a year, and neither should we. So the spring Budget in a few months will be the final spring Budget.

Starting in autumn 2017, Britain will have an autumn Budget, announcing tax changes well in advance of the start of the tax year.

From 2018 there will be a Spring Statement, responding to the forecast from the OBR, but no major fiscal event. If unexpected changes in the economy require it, then I will, of course, announce actions at the Spring Statement, but I won’t make significant changes twice a year just for the sake of it.

This change will also allow for greater Parliamentary scrutiny of Budget measures ahead of their implementation.

Mr Speaker, this is a long-overdue reform to our tax-policy making process and brings the UK into line with best practice recommended by the IMF, IFS, Institute for government and many others.

Accordingly, 2017 will be a busy year for legislation. In effect, there will be two budgets, one in April 2017, and one in the autumn.

This is a welcome change as it will provide Parliament and tax advisors with time to absorb changes announced each autumn, before most of the changes become law in the following April – though this won’t stop them being effective from the date of announcement as is often the case, now.

Philip Hammonds last Autumn Statement

Philip Hammond surprised MPs when he ended his Autumn Statement by saying:

This is my first Autumn Statement as Chancellor. After careful consideration, and detailed discussion with the Prime Minister, I have decided that it will also be my last.

This was quickly followed by:

Mr Speaker I am abolishing the Autumn Statement.

No other major economy makes hundreds of tax changes twice a year, and neither should we.

So the spring Budget in a few months will be the final spring Budget.

Starting in autumn 2017, Britain will have an autumn Budget, announcing tax changes well in advance of the start of the tax year.

From 2018 there will be a Spring Statement, responding to the forecast from the OBR, but no major fiscal event.

If unexpected changes in the economy require it, then I will, of course, announce actions at the Spring Statement, but I won’t make significant changes twice a year just for the sake of it.

This change will also allow for greater Parliamentary scrutiny of Budget measures ahead of their implementation.

So there we have it, from 2017, Budgets will be announced in the autumn, and economic forecasts in the spring.

Tax changes announced last week

Last week, Philip Hammond presented his first Autumn Statement to parliament.

In some respects, it was a bit of a damp squid as there were no stand-out revelations. However, there were a few tax changes that are worthy of note:

Pension pot reinvestment

The over 55s have been making good use of George Osborne’s facility to flexibly access their pension savings. Many have also reinvested their pension pots in further pension arrangements and reaped the benefit of additional tax savings. To temper enthusiasm for this strategy the Money Purchase Annual Allowance (MPAA) was introduced. This effectively limited tax relief on reinvested funds to £10,000.

The government now believes this is too generous, and from April 2017 this MPAA will be reduced to £4,000.

Check with your pensions advisor to see how this change may affect your pension opportunities if you are considering, or have recently completed, flexible access to your pension pot(s).

VAT Flat Rate Scheme (FRS)

In order to curb what HMRC sees as aggressive use of the FRS, registered traders with limited costs subject to VAT may have to use a compulsory 16.5% FRS rate in place of their existing FRS rate from April 2017.

In certain circumstances, traders using FRS can make a cash “profit” from using the FRS. In particular, this benefits businesses who have low purchases of goods and overheads subject to VAT – HMRC describes these FRS users as a “limited cost trader”.

Businesses using the FRS will need to see if they are affected as continued use of the special scheme may be cash negative from April 2017.

The end of tax-free perks?

HMRC aim to limit the number of benefits provided by employers from April 2017, that are effective from a tax point of view.

The only benefits that will be exempt from the new reclassification are: pensions, pensions advice, childcare, cycle to work schemes and the use of ultra-low emission cars.

The idea is to curb the use of benefits as a means to sacrifice salary for tax perks, and save tax and National Insurance.

We may be witnessing the end of tax-free use of mobile phones and other benefits, although HMRC have said that benefits in place before April 2017 will be protected for at least one year, and in some cases, for four years.