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Reduced Dividend Allowance Makes a Return

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Reduced Dividend Allowance Makes a Return

One of the main discussion points from Budget 2017, the proposed cut contractors’ tax-free dividend allowance by £3,000 has been officially re-tabled by the government.

But unlike last week’s re-tabling of Making Tax Digital, where a delay has been put in place, the cut in the allowance will go ahead from April 2018, as planned.

The absence of a delay not only means — in officials’ words — that “those affected” by the cut “should continue to assume” that their dividend tax-mitigation strategies will still be needed.

It also means that there will be limited scope to debate or revise the proposal (due to raise £1billion extra by 2020), because the bill to pass it will come at a busy time, partly due to Brexit.

This will result in tax hits of £225, £975 or £1,143 for basic, higher and top rate tax payers.

Overall tax strategies will remain virtually the same but as with recent changes to the way dividends are taxed, increase the tax burden on small businesses.

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The worlds of business and accounting are already digital, and with HMRC’s Making Tax Digital (MTD) programme, doing nothing is no longer an option.

With a myriad of accountancy and business software, cloud packages, Apps and portals – digital has become confusing.

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Entrepreneurs’ Relief – shares in trading companies

Capital Gains Tax (CGT) has a main rate of 20% (reduced from 28% in April 2016) other than for basic rate taxpayers who now have a rate of 10%. However, a higher rate of 28% continues for the disposal of residential properties.  Importantly, Entrepreneurs’ Relief (ER) can allow a tax rate of 10% to apply for ‘qualifying business disposals’ on the first £10 million of capital gains in an individual’s lifetime.  ER is an important relief; so how does it work for shares?

What is a ‘qualifying business disposal’?
In order to qualify for ER there must be a qualifying business disposal. The following are qualifying business disposals:

  • A material disposal of business assets
  • A disposal of trust business assets
  • A disposal associated with a relevant material disposal

What is a material disposal of business assets?

  • A disposal of the whole or part of a business – where the individual has owned the business for the year leading up to the date of disposal
  • A disposal of assets in use for the purposes of the business where the business ceases to be carried on – if the disposal is made within three years and the individual owned the business for the year preceding the cessation
  • A disposal of shares or securities of a company – if one of the following conditions is met:

Condition A – throughout the year preceding the disposal (ie 12 months):

  • The company is the individual’s ‘personal company’
  • The company is a trading company or holding company of a trading group, and
  • The individual is an officer or employee of the company or trading group.

Condition B – where the company has, within the three years preceding the disposal, ceased to be either a trading company or a member of a trading group, the terms of Condition A above must be satisfied throughout the year preceding the cessation.

For the purposes of ER, an individual’s personal company is one in which they hold at least 5% of the ordinary share capital of the company and have at least 5% of the voting rights in the company. These conditions are relaxed for members of qualifying share option schemes.

A trading company or trading group is defined as one which carries on trading activities and does not carry on other activities to a substantial extent. This is the same as the definition that applied for holdover relief and substantial shareholding exemption purposes.

What is a trading company?
HM Revenue & Customs’ (HMRC) must be satisfied that the strict “trading company” definitions are met. In the case of a single company, it must be “a company carrying on trading activities, whose activities do not include, to a substantial extent, activities other than trading activities”. In practice, HMRC applies a 20% benchmark to determine a substantial level of non-trading activities. HMRC will look at the factors affecting each case but, as an example, it may review contribution to profits, assets employed, expenses and management time (see HMRC manuals at CG64090). As this is a subjective area, it is necessary to consider each case on its own merits.

In terms of a trading group, the definition is much the same as a sole trading company. A trading group is a 51% group of companies where the activities of the group do not include any non-substantial, non-trading activities. Any intra-group transactions are ignored.

Can I get guidance as to the company’s trading status?
A non-statutory clearance can be requested from HMRC and guidance can be found in the HMRC manuals at CG64100 which states:

“The company itself may have genuine doubt or difficulty as to its trading status. There is no statutory clearance procedure under which companies can have their status confirmed. However, in such circumstances a company can seek from HMRC an opinion under the terms of the Other Non-Statutory Clearance service as to its trading status for the purpose of a shareholders Entrepreneurs’ Relief claim.”

Advisers may wish to consider obtaining a tax clearance if there is doubt about the trading status of the company to underpin a subsequent for ER on the disposal of shares.

As with all such tax situations, advice should also be sought before proceeding.  For further details contact us on 0113 2461007 or enquiries@dynamoaccounts.co.uk

P11D forms: What you need to know

The statutory P11D form is used by HMRC to ask UK employers to outline the cash equivalents of expenses, allowances and other benefits given over the tax year to directors and staff members or members of their family or household who earn over £8,500 per year.

Essentially, this form is all about reporting benefits in kind, from private healthcare to interest-free loans, season ticket loans or company cars, to name just a few.

Because these benefits, in effect, enhance your salary, National Insurance contributions may have to be paid on them (by the employer, not the individual staff member concerned).

Equally, the employer is responsible for filing this documentation.

P11D forms must be filed by the 6th July after the relevant tax year. So, for instance, you’d file the one for the 2016-2017 tax year on July 6 2017.

Make sure you include:

– Healthcare insurance

– Company cars

– Self-assessment fees a company has paid

– Non business-related travel and entertainment expenses

– Assets given to an employee which have significant personal use

– Any payments that would normally be paid by the employee but for which you have paid

Before April 2016, you could get dispensation from HMRC to omit expenses from P11D forms.

An exemption system is now in place under which most business expenses company staff members incur personally no longer have to be recorded.

These include:

– Travel (as well as subsistence costs incurred during business travel)
– Credit cards used for work purposes
– Business entertainment expenses
– Subscriptions and fees

HMRC imposes penalties for late filings and wrong filings. If the 6th July deadline is missed, there’s a two-week penalty-free window for filing, but after 19th July, a £100 monthly penalty applies per 50 employees.

You’ll receive a reminder and details of incurred penalties if you haven’t settled by November.

Making Tax Digital – On Hold

The forthcoming snap election has forced the government to drop its Making Tax Digital (MTD) plans from the Finance Bills due to lack of parliamentary time.

The MTD initiative attracted considerable criticism primarily due to the unrealistically short timescale and lack of clarity in regards to implementation.

However, while the news to drop MTD has been welcomed by many, this should be seen more as a delay than an abandoning of the proposed initiative. What is clear is that there is broad parliamentary support for a digital tax system in the near future and that at some point HMRC will no longer accept paper records. This will prove a challenge for those who have always kept their records manually and given them to their accountant once a year. In the future everyone will be required to use software of some sort and keep records in real time.

AT DYNAMO OUR ADVICE IS TO GET AHEAD OF THE GAME 

Whilst it is not yet compulsory to update your tax information electronically, getting into the habit of using the appropriate software now will save you considerable time and stress in the future.

We are already working with all our clients to put in place digital record-keeping systems through moving to a Cloud based system. As Freeagent Premium Partners, Certified Xero and Sage advisers we are in a strong position to offer topical and relevant advice to all our clients.

However, we will always advise on the best package for your business which is why we can also discuss the suitability of both all options.  We will work with you to ensure an efficient transition and provide ongoing advice and training.

In addition to facilitating the change to digital reporting, moving to the Cloud brings with it a number of additional benefits, saving time, unnecessary paperwork and increased efficiency.

For more details contact us on enquiries@dynamoaccounts.co.uk

Are you one month away from bankruptcy?

How much does it cost you to live?

Do you know what your essential expenditure costs each month?

Mortgage, Food, Gas, Electric, Water, Phone, Council bills, Car, Children …?

Add to this your non-essential items like holidays, going out, club membership fees etc. What does it come to then?

How long could you survive on your savings if you were unable to work due to ill health?

Which? Magazine said the one protection policy every working adult in the UK should consider is Income Protection. Yet more people in the UK insure their pets, cookers, TV’s and phones, forgetting to insure the very thing that pays for it all – their income.

Recent research conducted by Aviva has found that around 25% of families in the UK have no savings to fall back on.

It also found that nearly half of families couldn’t support their lifestyles for more than a single month if the main breadwinner was unable to work.

A further report by the Policy and Public Affairs conducted by the CII, Building Resilient Households, found that 1 million people in the UK suffer a prolonged absence from work due to sickness each year, but only 1 in every 10 have some form of insurance.

As a result, the report stated: “Many families suffer financial hardship and lasting damage when there is a prolonged absence from work due to sickness.”

Moreover, the report found there were several factors that could exacerbate the financial hardship of being out of work due to illness, all the while the mortgage, bills, household expenses, school fees and other associated costs of living have to be met each month. Sometimes worrying about the financial hardship could actually prolong the recovery process.

Despite this, the majority of people have no form of income protection in place.

What would you do you do if you were unable to work long term due to ill health?

How will the bills be paid if income stops?

State benefits have been greatly reduced in recent years and could be reduced even further as the Government looks to tackle the welfare budget.

In the event of ill health, most people have to rely initially on Statutory Sick Pay of £89.35 a week.

Statutory Sick Pay is not available to the self-employed.

Dependent on the illness or disability, further benefits may be payable, but often the payments aren’t enough to help them meet inescapable household commitments.

You may also be able to get assistance with your mortgage interest payments, but a waiting period applies.  *Do you know how long that is?

What can I do to protect my income in the event of ill health?

Income Protection covers your income if you are unable to work and earn a living due to illness or injury and will normally pay benefit monthly, usually after a pre-determined waiting period. It is a long-term plan providing cover all the way up until the age you expect to retire, meaning that these plans can pay out for many years if you are not well enough to return to work.

You will receive your benefit and can use it to meet your essential outgoings like bills, mortgage and food.

*The waiting period for mortgage interest payments is 39 weeks!

Talk to us if you would like to find out more. Contact Kim or Mal at our Wealth Management team on 0113 234 0000

NHS U-turns on blanket IR35 tax crackdown

Anything to do with mass contractor walkouts?

The NHS has repealed its blanket decision to shove contractors inside the IR35 tax clampdown by default.

Last month the government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency. The Treasury says it hopes to raise £185m for 2017/18 by bringing public sector contractors within the scope of the legislation.

In an update [PDF] NHS Improvement, which is responsible for overseeing foundation trusts, said it had previously “anticipated that providers would need to ensure that all locum, agency and bank staff were subject to PAYE and on payroll for the new financial year”.

However, it has admitted that blanket IR35 determinations were “not accurate” and now plans to carry out those decisions on “a case-by-case basis” rather than by a broader classification of roles.

In a letter sent to NHS providers in February, seen by The Register, NHS Improvement said: “There is still far too much use of Personal Service Companies (PSCs) to avoid tax. New HMRC rules coming into effect in April will have a material impact on this.

“HMRC will treat all public sector ‘self-employed’ contractors using a PSC as falling under IR35 and therefore treated for tax purposes as an employee. As a result of these new rules, we anticipate that providers will need to ensure all locum, agency and bank staff are subject to PAYE and on payroll from 1 April 2017.”

The final IR35 legislation clearly stated that ‘reasonable care’ had to be taken when making decisions over the IR35 status of public sector contractors. Put simply, this means that public sector employers and agencies should not make blanket determinations.

If public sector bodies fail to take take reasonable care over the rule changes, they will be responsible for deducting PAYE and National Insurance, and for paying Employer National Insurance rather than the contractor.

Earlier this year, Contractor UK reported that 30 contractors abandoned an overrun £16.5m health service IT project after an NHS trust said it would declare them all inside IR35 from 6 April.

Dave Chaplin, chief exec of ContractorCalculator, said that many public sector firms have discovered that blanket rules have had a hugely negative impact and highly skilled contractors have been leaving the public sector in droves.

“We have heard countless stories of private firms trying to lure locums to the private sector only for the NHS to increase the locum’s rates to counter the effects of blanket decisions. The IR35 reforms have been tantamount to a massive extra tax on the NHS and have led to utter chaos.”

Tax Credit Deadline – Renew Online

HMRC is urging anyone who needs to renew their tax credits claim to use its digital services rather than phone of post which you must do before 31 July 2017.  Failure to register on time could mean that you permanently lose the right to some credits.  If you don’t receive your pack before 27 June 2017, you’ll need to call the tax credits helpline on 0345 300 3900 for a duplicate.

So, what are you options?

Online Option

HMRC are piling on the pressure for tax payers to manage their affairs online.  It is a natural reaction to resist any changes by HMRC but in this instance, we would recommend it.  Renewing your tax credits online is pretty quick, even if you have to report any changes to your circumstances.  If you try by phone or post, there is the potential for delays or not even getting through.

This year, online renewal can be done via the Gov.uk “Your Account” service which HMRC claims makes the process even easier.  You will need to register for an account if not already able to do so.  Should a new account be required, you will need to allow extra time for PIN codes to arrive and complete the registration process but once through this barrier, the services are pretty good.  For example, as well as using the tax credits service, you can also request pension forecasts, manage self assessment and other taxes.  It’s worth a look and will speed up any claims.

Is your building project zero or standard rated

Rebuilding a residential property and naturally want to keep the costs down.  If you’re a private customer, VAT is a significant factor in the costings so can you zero rate the supply?

Different Rates

When you make supplies to a private customer, or a business that is wholly or partly exempt (e.g. a charity), VAT is a significant part of the cost.  Even for businesses that can reclaim the VAT charged it can make a significant dent in the cashflow and borrowing requirements, especially if it’s a large project.  It’s therefore to your advantage to zero rate your supplies if you can.

Build or rebuild

An example of where VAT is a significant factor is when a building has or will be demolished and a new one constructed.

Trap – subject to conditions, constructing a new residential building is a zero rated supply but rebuilding one is standard rated.  You shouldn’t apply the standard rate as the easy option you must zero rate as the easy option; you must zero rate whenever the rules say so.

What the law says

HMRC in it’s usual way tends to be economic with its general guidance on zero rating.  It says that a new building only applies to a rebuild where “any existing buildings on the site have been demolished completely to ground level”.  However, the legislation explains that a building counts as demolished where “the part remaining above ground level consists of no more than a facade or where a corner site, a double facade, the retention of which is a condition or requirement of statutory planning consent”.

Tip – when considering the VAT rate to apply, check the planning permission for the work.  If it only requires one or two facades to be retained then it is probably that zero rating can apply.

Tribunal Case

Just to reinforce the point about HMRC’s somewhat narrow approach to zero-rating, the First Tier Tribunal (FTT) made an interesting ruling in May 2016.  J3 Building Solutions Ltd had virtually demolished an existing residential property but kept two walls, which wasn’t a requirement of the planning consent.  Naturally, HMRC decided that the building that took its place was a “reconstruction” (rebuild) which didn’t meet the zero rating conditions.  However, the FTT decided that the building wasn’t a reconstruction at all, but actually a completely new building and therefore zero rating applied.

Revisiting the past

This was the second similar ruling in three years, which throws into doubt over HMRC’s ability to objectively consider how the law applies based on the facts.  It’s approach is often to see the position as it wants rather than starting with an open mind.

Tip – you can ask HMRC for an opinion in advance regarding whether a build should be zero or standard rated.  Where you think zero rating applies, emphasise to HMRC the facts that point to this.  If you can persuade it on zero rating, it might giv you the edge when quoting for work.

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