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UK Dividend tax rates and thresholds for 2018/19

Category: Company Tax

UK Dividend tax rates and thresholds for 2018/19

As the end of the current financial tax year is fast approaching it’s a good time to think about whether you have fully maximised the amount you can withdraw from the company tax free and at the basic rate of dividend tax.

Assuming your company makes sufficient profits the total tax free amount you can withdraw, not including other sources of income and using our recommended low wage/higher dividend split, is £13,850 per financial tax year (personal allowance of £11,850 + £2,000 dividend allowance). You can take a further £32,500 of dividends, at the 7.5% dividend tax rate and before the higher rate of 32.5% is charged. This would usually breakdown as £8,424 salary for the year (£702 per month) and dividends of £37,926.

In most scenario’s it makes sense to withdraw as much money from the company at the lower tax rates rather than let any reserves build up for a future year as your circumstances can easily change, as can the tax rates and allowances.

There are certain things that will reduce or restrict this tax free allowance of £13,850 and the additional basic rate dividends of £32,500:

– You have other sources of income such as rental property, interest, dividends from shares, benefit in kind or any other taxable income.

– You only started working through your company after 6th April 2018 and have earned wages from a previous job or have another employment.

– Your company does not have sufficient profits available.

Any of these mentioned above will restrict the amount you can take out as dividends before being taxed. If you have received any of the above income or unsure of what you can take please get in touch with us in advance of the year end (5th April 2019) and we’ll be happy to help.

Important note: Final dividends MUST be paid prior to the 5th April 2019 or they will not be included in the current financial years calculations and you may lose certain allowances.

If you are a Scottish tax-payer, please be aware that your tax rates and allowances are different to the rest of the UK – if you need a bespoke illustration of this please don’t hesitate to ask.

Making Tax Digital – What You Need to Know

Making Tax Digital (MTD) for VAT is the Government’s first phase in what they believe is making tax administration more effective, efficient and easier for taxpayers.

Will it affect me?

If you are a VAT registered business with an annual turnover above the VAT threshold (currently £85,000), you will be required to keep digital records and submit VAT returns using MTD-compatible software from 1 April 2019.

The digital records, which need to be kept for at least six years, must include:

– The business name, place of business and VAT number
– The VAT account including the audit trail from the primary records to the VAT return
– Details on supplies made and received

My VAT return straddles the 1 April 2019 – how to I comply?

If your VAT quarter does not start on 1 April 2019, then the first VAT return beginning after 1 April will be the first return you need to be MTD compliant. So for example  if your VAT quarter ends on 30 April, then from 1 May 2019 onwards, your VAT returns must comply with MTD.

Will the deadlines for submissions and filings be changing too?

The deadlines for filing the VAT return and payment of VAT due will be exactly the same as they are now, they will not be changing.

Will my current spreadsheet count as a digital record?

Spreadsheets will not be classed as a digital record for MTD purposes unless they can be connected to an Application Programming Interface (API) via a bridging link to enable the transmission of information to HMRC. Specific software will be needed to submit the relevant information to HMRC.

I am VAT registered but my turnover is below compulsory registration limit, what should I do?

If your turnover is below the VAT threshold you may voluntarily join MTD for VAT if you wish, but it will not be compulsory to do. If your turnover was over the threshold and you are subscribed to MTD for VAT once 1 April 2019 passes, and it then subsequently drops below the threshold you must remain MTD compliant until you deregister from VAT.

Future plans for MTD

The Government’s plan is to role MTD out across all aspects of tax but as and when dates for compliance are announced, we will be sure to keep you informed.

How we can help

In due course MTD will impact all businesses. As accountants we are proactively ensuring we are ahead of the changes to give you the best possible advice at all times. We’re here to help you with whatever the future brings for your business so if you need any further information, please free feel to contact us.

Autumn Budget 2017: IR35 private sector rollout – consultation announced

The changes to IR35 currently plaguing the public sector look set to be extended into the private sector, after the Chancellor announced a consultation into off-payroll working in the private sector in the Autumn Budget.

Introduced into the public sector in April 2017, the reforms have caused unprecedented damage. With many contractors preferring to seek opportunities elsewhere rather than risk being incorrectly classed as ‘inside IR35’, public sector bodies have been starved of critical skills.

The fallout has led to delayed and cancelled projects, and the deterioration of public services such as the NHS. With the proposed private sector rollout, the Government threatens to further hamper flexible working in the UK, causing damage to UK plc on a far grander scale.

From the Budget document:

3.7 Off-payroll working in the private sector – The government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. Early indications are that public sector compliance is increasing as a result, and therefore a possible next step would be to extend the reforms to the private sector, to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. It is right that the government take account of the needs of businesses and individuals who would implement any change. Therefore the government will carefully consult on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reforms, including through external research already commissioned by the government and due to be published in 2018.

What are the IR35 reforms?

Traditionally it has been the contractor’s responsibility to evaluate their IR35 status for each contract and deduct tax accordingly. However, the reforms – already in effect in the public sector – require end clients to carry out an IR35 assessment for each contractor they engage.

If the contractor is supplied via a recruitment agency, the agency is responsible for deducting tax via Pay As You Earn (PAYE) if the contractor is judged to be caught by IR35. If the client engages the contractor directly, the client is required to make the tax deductions.

The tax liability risk also shifts further up the supply chain. If HMRC investigates and finds that a contractor has been paying tax as ‘outside IR35’ where it believes they are caught, the agency can be targeted for backdated tax, penalties and interest. This is unless it can be proven that the client hasn’t taken ‘reasonable care’ when assessing the contractor’s status, in which case they then become liable.

This creates a huge incentive for clients and agencies to assess contractors as caught by IR35, which contractors are well aware of. Extending these rules could mean many contractors will struggle to ever secure a fair IR35 assessment.

IR35 reforms – what contractors must do now!

The Government may have announced a consultation into the proposed changes, but if the public sector changes are anything to go by, the recommendations already look predetermined. Nonetheless, there is plenty that you can be doing to help protect the livelihood of flexible working in the UK.

IPSE WARNS OF “NIGHTMARE” PRIVATE SECTOR IR35 SCENARIO

The Association of Independent Professionals and the Self Employed (IPSE) has intensified its opposition to a planned government rollout of “disastrous” new public sector IR35 rules to the private sector by detailing major shortcomings in HMRC’s online employment status tool. The flaws, IPSE argues, effectively vitiate the instrument.

IPSE’s Director of Policy and External Affairs Andy Chamberlain explains why the Revenue’s Check Employment Status for Tax (CEST) tool is unfit for purposes. His criticisms are shared by many other organisations including the Association of Professional Staffing Companies (APSCo) and the Freelancer and Contractor Services Association (FCSA) — an umbrella company trade association.

There are many reasons for the pervasive lack of faith in the tool, including:

-The rules are too complex to be captured by a simple online tool. The interpretation of IR35 requires a deep familiarity with case law as well as informed, human interpretation of each contract. As Chamberlain puts it: “Any online tool will lack the nuance required to get it right in every instance”.

-HMRC concedes that the tool fails to make determinations in 15% of cases, which it considers an acceptable hit rate. However, for the 15% affected it is of no use whatsoever. These are almost certainly borderline cases much in need of guidance, Chamberlain observes, meaning that the tool “fails to those who need it most”.

-The tool omits any test for Mutuality of Obligation (MOO), which is a central determinant in case law as to whether IR35 applies to a contract. HMRC recently revealed that it omitted this test as obligations are part of all contracts. But for contracting professionals, the degree of MOO is crucial: employees are far more obliged to perform tasks for employers than contractors are for clients. The omission of this test is a critical flaw.

-The person applying the CEST tool may have a biased or inaccurate view about the nature of the engagement. Believing that certain conditions apply doesn’t make that true — some managers mistakenly think that they have control over how the work is done, but the contract’s details may demonstrate that this is entirely inaccurate. There are no means of challenging how the tool has been completed so, inevitably, determinations are reached based on contentious or simply wrong answers.

Chamberlain writes: “The problem will be multiplied many times over if all private sector clients are forced to make IR35 determinations for each of their engagements. As IPSE has long argued, IR35 is a complete nightmare to wrestle with.”

IPSE is urging all contracting professionals and others concerned about the proposed rollout to write to their MPs. A sample letter is available here.

Autumn Budget: IR35 in private sector more ‘foolhardy’ than ‘fair’

The extension of IR35 regulation has quickly become a topic no business relying on a contract workforce can ignore

Financial secretary to the Treasury Mel Stride was quoted saying that extending IR35 regulation of contract workers from the public to the private sector was “a matter of fairness”, and that there had been “no evidence of significant impact on attrition rates of contractors working in the public sector”.

This has put the market on alert that the government will be applying the controversial changes to private sector businesses far sooner than many had hoped, and seemingly in complete disregard for the serious and ongoing impact it is having in the public sector.

The reaction from organisations close to the situation has been strong and largely uniform. The Association of Professional Staffing Companies (APSCo) predicted the move “will have a devastating impact on the flexible labour market”. The Association of Independent Professionals and the Self Employed (IPSE) has described HMRC as “in denial about the fallout from the public sector reforms”.

As a business that places hundreds of contractors with both public and private companies every year, we’ve been actively advising businesses about what to expect and how to react to the changes.

Expect higher contractor costs…

When the regulation was first applied we saw a widespread movement of contractors from public sector contracts to avoid the burdensome regulation. This ‘boom’ in available contractors may soon turn to ‘bust’, as the increased burden on clients and candidates evens out across markets. Businesses must plan for an increase in contractor rates, particularly from areas where the workers are highly-skilled and business-critical.

…and shorter contract lengths

IR35 puts additional burden on contractors to prove that they are ‘genuinely’ self-employed and not beholden to one employer. This will apply pressure on contractors to seek shorter contract times so they can engage with multiple clients. For major projects this will require businesses to consider alternative resourcing, and will potentially increase the onboarding of permanent staff.

Status questions are coming

One of the most perplexing challenges set by IR35 is making it the hiring business’s responsibility to determine the tax status of its specialist skilled workers. Beyond having to hire or train in the skills to make such an assessment, companies can reasonably expect that their contractors may not always agree with the status they are given – which may cause frustration and delays.

The ambition for an effective consultation on IR35 is to encourage the creation of a more effective and easier to apply set of ‘tax statuses’; placing greater burden for clarity and categorisation on HMRC where it rightly belongs.

Get more consultancy from your recruitment consultants

As these changes come in it’s understandable that businesses will be looking to their recruitment partners for answers, solutions and support. IR35 is bringing significant new challenges to recruitment companies as well, and will fundamentally alter how they can provide candidates and manage their contracts. IR35 adds the need for recruitment companies to administer tax deductions on behalf of HMRC, and provide reports on the earnings and company details of self-employed workers.

The pressures this will add to recruitment companies will have a significant impact on the business and operating models of many. The age of ‘pile them high’ placement is quickly coming to an end, creating the environment for experienced, innovative and consultancy-focused recruitment to return.

Much of the above is based on a ‘worst case’ scenario where the lessons of IR35’s painful implementation in the public sector go unlearned. However, there remains reason to be hopeful. We, along with a number of our peers and leading industry bodies, will remain active in petitioning HMRC and the Treasury to accept consultation and advice from those who are closest to the impacts of this regulation. We are also encouraging our clients to join our calls for a better, more effective set of rules.

A healthy, thriving, flexible workforce is essential to the UK. It’s imperative for all organisations to become aware of IR35, and take an active role in ensuring business is not robbed of the skills, flexibility and power of a thriving contractor environment.

Why the axe keeps hovering over Entrepreneurs’ Relief

“The thing that’s wrong with the French is that they don’t have a word for entrepreneur.”  Well, whether or not it’s true that George W Bush actually said it, it’s too good a line not to quote.

But the more important point for our purposes is that UK tax legislation doesn’t have a word for it either, in the sense that it isn’t a defined term.

Yes, you get Entrepreneurs’ Relief — not because you pass some objective test of being “an entrepreneur,” but because you meet a set of pretty arbitrary conditions laid out in the statute.

And that might be why government has, over the years, seemed to have been uncertain at quite what it was aiming to achieve with Entrepreneurs’ Relief and why, despite regular tinkering over the years, it might be in line for further changes.

Entrepreneurs’ Relief (‘ER’) is essentially a special low (10%) rate of Capital Gains Tax which applies to gains on the disposal of trading businesses (including shares in trading companies).

If it applied only on the sale of a business (or a company) as a going concern to a third party, it probably wouldn’t be of great relevance to most contractors. Sure, you do occasionally see the sale of a contractor business which has developed specially valuable intellectual property or a saleable niche business, but most contractor businesses are never sold.

Yet ER also potentially applies to a capital gain on shares on a winding-up of a company following “retirement,” including packing up as a contractor and going to regular, 9-to-5 employment. In that circumstance, the main (often the only) asset coming out in the winding-up is cash. And given a choice between taking surplus cash out as a dividend during the company’s active trading lifetime and paying Income Tax at up to 38.1% or leaving the cash in until winding-up and paying CGT at 10%, guess which most people choose?

HMRC are on record as saying that they have two related problems with that. The first is “phoenixism” — periodically winding-up a company, taking the cash out at a 10% tax rate and then starting over again. “Phoenixism” is what is intended to be countered by the new(ish) Targeted Anti-Avoidance Rule (though the scope of the rule is a whole lot wider than that; another article for another time).

Less well-known is HMRC’s second issue — “money-boxing,” the deliberate leaving of cash in a company until the business is finally closed down on “retirement”. So far, there’s no specific legislation countering that. If the amounts are large, and especially if the retained profits are invested rather than simply being held on short-term deposit, HMRC might try to deny ER on the basis that the company is no longer a “trading company” — though, depending on the facts, HMRC may struggle to get that over the line.

Back in the day, there was targeted legislation which effectively discouraged money-boxing by deeming you to have divided out any cash which was surplus to business requirements, and requiring you to pay Income Tax on the deemed dividend accordingly. But the legislation was horribly subjective and hugely labour-intensive for HMRC to police: we can’t really see that being dusted off and brought back.

However what is worth noting is that the tax law of many countries doesn’t differentiate at all between dividends during the lifetime of a company and dividends in a winding-up: all distributions are charged to Income Tax. Could it happen here?

No reason to suppose not. It would certainly penalise money-boxing — especially if you were unlucky enough to be winding-up your company just as a left-wing government had introduced new higher rates of tax on dividend income! Less drastically, though, it would be relatively simple to amend the ER legislation so that it applied only to sales of shares and not to proceeds in a winding-up, thereby doubling at a stroke to 20% the rate of tax payable on a winding-up. Will it happen in this Autumn Budget 2017?  Nothing’s been leaked. But in the longer-term, who knows?

VIDEO GAMES TAX RELIEF WINS AN EXTENSION

A pre-Budget boost for one of the creative industry’s most vibrant sectors — gaming — has been welcomed.

On behalf of both games developers and digital publishers, TIGA said it backed a re-notification of video games tax relief to the European Commission.

It means state aid clearance of the relief, introduced in 2014, has been extended from April 2018 to April 2023.

“[The] announcement by the EU Commission is excellent news, not just for the video games industry but also for the wider economy,” said TIGA’s Richard Wilson.

“[The] relief will continue to promote investment, job creation and business growth in our high technology, high skills, export focused industry.”

He says the relief continues to be justified on three grounds. Firstly, because it allows the UK video games industry to compete “on a more level playing field” with overseas rivals, who benefit from similar forms of relief.

Secondly, the relief promotes the production of culturally British video games. And thirdly, it encourages economic growth.

In fact, TIGA says in the three years before it was announced, the UK’s development headcount declined on average by 3.6% each year, whereas in the four years after the announcement, it grew on average by 7.1% each year.

“With all the uncertainties around at the moment it’s comforting to have this major asset for the UK games industry confirmed for another five years,” reflected TIGA chairman Jason Kingsely.

“This will allow companies involved in the export-focused, highly-skilled and creative pursuit of making games, to plan well into the medium term. This should in turn, increase employment and bring more investment into the sector, and be very positive for the UK trade balance.”

Taylor Review suggests protection for ‘Dependent Contractors’

The independent Taylor review into modern employment practices has highlighted seven principles to achieve ‘good quality work for all’.

Matthew Taylor, who was commissioned last year by the Prime Minister to carry out this review called for a fresh look to be taken at employment laws to make it easier for workers to understand and access their rights.

Among its key recommendations is that there should be protection for those working through the ‘platform based model, such as Uber. It renames these ‘workers’ as ‘Dependent Contractors’, and flags up that it should be clear how they are distinguished from ‘legitimately self-employed’.

The seven principles are:

1. A national strategy for work should be explicitly directed toward the goal of ‘good work for all’. It is something for which Government needs to be held accountable, but for which everyone needs to take responsibility. It says: “The same basic principles should apply to all forms of employment in the British economy – there should be a fair balance of rights and responsibilities, everyone should have a baseline of protection and there should be routes to enable progression at work. Over the long term, in the interests of innovation,fair competition and sound public finances we need to make the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people.”

2. Platform-based working (a business model which provides exchanges between two or more groups, usually consumers and producers), offers opportunities for genuine two way flexibility and can be beneficial for those who may not be able to work in more conventional ways (companies Uber operate like this). It says: “These should be protected while ensuring fairness for those who work through these platforms and those who compete with them. Worker (or ‘Dependent Contractor’ as the Taylor review suggests renaming it) status should be maintained but we should be clearer about how to distinguish workers from those who are legitimately self-employed.

3. The law, and the way it is promoted and enforced, should help firms make the right choices and individuals to know and exercise their rights. The ’employment wedge’ (the additional, largely non-wage costs associated with taking on an employee) is already high and increasing it further should be avoided. It says: “Dependent contractors are the group most likely to suffer from unfair, one sided flexibility and therefore there should be additional protections for this group and stronger incentives for firms to treat them fairly.”

4. The best way to achieve better work is not national regulation but responsible corporate governance, good management and strong employment relations within an organisation, which is why it is important that companies are seen to take good work seriously and are open about their practices and that all workers are able to be engaged and heard.

5. It is vital to individuals and the health of our economy that everyone feels they have realistically attainable ways to strengthen their future work prospects and that they can record and enhance the capabilities developed in formal and informal learning and in on-the-job and off-the-job activities.

6. The shape and content of work and individual health and well-being are strongly related. For the benefit of firms, workers and the public interest ‘we need to develop a more proactive approach to workplace health’.

7. The National Living Wage needs to be accompanied by sectoral strategies engaging employers, employees and stakeholders to ensure that people – particularly in low-paid sectors – are not stuck at the living wage minimum or facing insecurity but can progress in their current and future work.

The Government will now be engaging with stakeholders across the country, including those who represent employers and employees, to understand their views ahead of publishing a full Government response later in the year.

IR35 Reforms Blamed for Public Sector Decline

Two large IT recruiters have blamed IR35 reform in the public sector for taking the shine off their performances in the last six months.

Parity Group, an AIM-listed agency hiring for state bodies, and Hays, a FTSE-listed firm with public clients like TfL, each cite the off-payroll rules in trading updates up to June 30th.

Hays, which reported first, said its temp business was “negatively impacted” by factors including “uncertainties created by the recent implementations of the IR35 regulations.”

‘Uncertainties’

These IR35-induced uncertainties, the firm explained, served to drag its public sector gross profits down 17%, on top of a nine per cent drop in temp recruitment fees as a whole.

A few days later in its update, Parity said its staffing unit had turned over “slightly lower” revenues in 2017’s first half than a year ago, due to “lower public sector contractor volumes.”

The dip in the number of contractors was not specified by the group, but it was blamed — at least in part — on the “transition required to deal with the IR35 taxation reforms.”

‘Familiar story’

With two recruiters in about as many days each pointing an accusing finger at the April framework, “a familiar story” is unfolding, say IT analysts TechMarketView.

Yet Parity hinted that an end is in sight, as its affected unit (‘Professionals) “appears to have weathered the [IR35 reform] process more favourably than some other staffing businesses”.

Alan Rommel, group chief executive said: “Hays [is] a recent example but others [too] have declared unfortunate drops.”

The Parity CEO also said that, despite the IR35 reform’s initially downward impact on contractor volumes, “client demand has been restored post-implementation.”

“Client demand is high both public and private, and both contract and perm — we are working hard to replace churn on contract,” he said. “Demand is there.”

‘Tight ships’

No restoration in demand was noted by Hays, which told Bloomberg in a video interview that all its UK clients were exercising “very tight cost control.”

This financial restraint seems to add to the growing list of pressures that a growing list of contract IT staffing agencies seem to be facing.

“Hays, this month cited a tough public sector market and also pointed to IR35 issues,” TechMarketView said. “And [another recruiter] PageGroup pointed to Brexit, political uncertainty and a late Easter for its poor UK performance.”

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