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P11D forms: What you need to know

Category: Personal Tax

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.

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.

Pension Scheme Members

There are limits on how much can be invested in a pension scheme before a tax charge is payable. To qualify for tax relief, a contribution must be a relievable pension contribution made by or on behalf of a relevant UK individual.

A relevant UK individual is someone who:

– has relevant UK earnings chargeable to income tax for that tax year

– is resident in the UK at some time during the tax year

– was resident in the UK at some time during the immediately preceding five tax years and also when joining the pension scheme.

The maximum amount of contributions on which a member can claim relief is the lower of 100% of annual earnings or £40,000 (this is referred to as the annual allowance). 

The annual allowance reduces where income, including company pension contributions exceeds £150,000. The allowance of £40,000 is tapered at a rate of £1 for each £2 of income over the limit, to a minimum of £10,000.

Individuals who do not earn or earn less than £2,880 a year can contribute to certain types of pension and receive basic rate income tax relief. 

Individuals who don’t pay income tax can get tax relief on at the basic rate of 20% on the first £2,880 they pay into a pension each tax year. This relief is only given if the pension scheme claims relief at source (RAS).

A registered pension scheme must operate RAS unless the scheme rules specifically provide that it can operate net pay arrangements or accept contributions gross from members. Under RAS, premiums are paid net of basic rate tax, which is claimed back by the scheme administrator. 

Higher rate relief can be claimed through the member’s self assessment tax return.

With net pay arrangements, the employer deducts the relievable pension contribution from employment taxable income before operating PAYE (so tax relief is obtained by paying the contribution out of pre-tax income). A member making payments in full (that is, out of after-tax income) has to claim the tax relief from HMRC, generally through self assessment or PAYE code.

Employers

Any employer of a member of a registered pension scheme, including all schemes established under auto-enrolment, may make contributions to that registered pension scheme. 

Unlike scheme members, there is no set limit on the amount of tax relief that an employer may receive in respect of its contributions, although the amounts contributed still count towards the annual allowance for the year.

Other persons

A person other than a scheme member or employer may make a contribution to a registered pension scheme on behalf of someone else. 

The scheme member will automatically get 20% tax relief if the contribution is paid under PAS. The member can claim higher rate relief in the normal way.

To discuss your pension requirements or any questions on your current provisions, talk to a member of our Wealth Management team today 

Tax Aspects of your Home

One of the most popular subjects we’re asked concerns the tax apsects of your home so we address many of the queries that have been put forward recently.

MORTGAGE INTEREST

Tax relief is not available on interest for loans used to buy your home.

LETTING PART OF YOUR HOME

Under the ‘rent a room’ scheme, income from letting furnished rooms in your home will be exempt from tax if the gross annual rent does not exceed £7,500 (£3,750 if you share the income).

If you are letting to lodgers who live as part of the family, there will be no loss of capital gains exemption. Otherwise, there may be some restriction.

CAPITAL GAINS

Your main residence is exempt from capital gains tax when you sell it. Please seek our advice if you have not occupied the house as main residence throughout the period of ownership.

Various rules allow periods of temporary absence to be disregarded.

If you have more than one house

– You may elect which house is to be your main residence (i.e. exempt for capital gains tax) within two years of acquiring the additional residence. Otherwise the question must be decided on the facts at the time of disposal. Once made, the election can be varied at will.

– So long as a house has at some time been your main residence for capital gains tax, the last 18 months of ownership are counted as owner-occupied.

– It may be beneficial for a married couple to own the non-exempt residence jointly as each will be entitled to the annual capital gains tax exemption.

Partial use for business

– If you use part of your home exclusively for business, interest on the relevant portion of the borrowing will be allowed as a business expense.

– In these circumstances, a similar proportion of the capital gains exemption will be lost. However, if you use no rooms exclusively for business purposes, the full exemption will normally be preserved.

Selling adjoining land

The capital gains exemption extends to grounds not exceeding half a hectare (about 1.2 acres). A larger area may be exempted if it is appropriate to the size and character of the house. Exemption is lost if the house is sold first and the land later.

INHERITANCE TAX

Unfortunately, the favourable concessions for income tax and capital gains tax do not extend to inheritance tax.

The main problem is that it is very difficult for a person to give away property but still continue to occupy it.

You could consider moving to a smaller home, creating a tax free gain that can be given away, or to reduce the value of the home by increasing the mortgage and giving away the proceeds.

Clearly these are drastic steps, and underline the fact that inheritance tax planning is better directed at assets other than the family home.

In the future there will be additional Inheritance tax nil rate band available to cover part of the value of the family home, or the proceeds of sale if the deceased had sold the property to “downsize”. The home or funds must be left to direct descendants (including step- and adopted children).

Please contact us if you would like more help or advice in this area.

What HMRC’s latest raid means for contractors

You don’t have to be one of the “UK individuals” to have their name contained in materials seized last week by the taxman to be thinking about recourse if you’ve used an offshore trust.

Concern about schemes that make use of such trusts (and loan arrangements) actually goes much wider. But it’s fair to say that those exposed in the HMRC raid – three “advisers” and their UK clients whose details are on the seized computers – will be the most concerned.

To the unaffected however, the HMRC raid will appear like just another offshore scheme being picked off. The unscrupulous characters sentenced in court, and contractors footing the bill in long term.

The unsympathetic might point out that HMRC have advised for a long time that they intend to hit these schemes; the exchequer needs it and the political spectrum widely signs off on it. But the potential for users to take legal action against the promoters if they advised them that such schemes were ‘fit for purpose’ has not diminished. The fallout from the collapse of this scheme, and its variants, therefore has far-reaching possibilities for bringing a large number parties to account.

With the debt transfer provisions in force, such scheme implosions could have an impact on advisers, promoters, intermediaries and engagers. In addition, although the incentive for former disguised remuneration scheme users to come clean has been extended to March 2017, recruitment agencies too aren’t sheltered, and are turning more and more risk averse.

Unfortunately for scheme users though; HMRC won’t necessarily go directly for the advisers/promoters/engagers of the scheme – ‘the big fish’ perhaps, because their officials will want the maximum return with the minimum effort. So they’re likely to pursue the scheme itself in the first instance, before targeting contractors among its other users. Whether that then results in a criminal investigation into the scheme is a separate issue and likely to depend on the findings of the initial HMRC enquiry.

Remember, the taxman’s view is that each taxpayer (or each company) is responsible for their own tax affairs and he will pursue on that basis, only subsequently looking at other options (e.g. via debt transfer provisions) once the initial option is exhausted. As even the unsympathetic will admit, the fallout from using this type of scheme is potentially life-changing for contractors, who in some circumstances will have simply fallen foul of bad advice.

If that’s you, then as a scheme user (whether it was an offshore trust and/or loan arrangement) you may have the right of recourse to the promoter/engager who sold you the scheme in the first place. Ultimately, this question of recourse is one to pose to a solicitor, although the likes of compliance specialist Qdos and contractor body IPSE can help too.

In a nutshell and oversimplified, the guidance from these parties will likely be that:

– if a contractor has been advised that such a scheme is compliant, AND

– the advice is documented; AND

– it can be demonstrated that the contractor has relied on this advice,

…then the contractor (and any other user who meets all of the above conditions) may have a case for recourse, assuming that they could not reasonably have expected to know that their scheme was potentially unlawful.

If you’re struggling to meet the above conditions, but are still affected by such schemes or have received an APN, it is imperative that you strongly consider professional, tailored advice at the earliest opportunity. Ignoring any notices or paperwork received from HMRC when in these waters could have perilous consequences.

An Introduction to Tax Planning

Tax planning is the legal process of arranging your affairs to minimise a tax liability. There is a wide range of reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather more challenging area known as tax avoidance.

Examples range from simply choosing a year-end date early in the tax year to maximise the period from earning profit to paying tax, to arrangements to shelter an appreciating asset from inheritance tax.

Tax evasion is different, it is illegally reducing your tax, such as falsifying figures or not disclosing income. This carries serious penalties which can include a criminal prosecution.

A problem arises when the law is unclear, so it is not obvious whether a tax planning scheme is within the law or not. For this reason, there have been several significant developments.

1. We have seen an ongoing approach to artificial tax avoidance which stands between avoidance and evasion. This was probably most accurately defined by one Paymaster General who said that: “Artificial avoidance schemes are those where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair or arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament”.

These must be disclosed and are closely examined to see if they are legal. Even if they are, it is likely they will be closed in the next Finance Act, sometimes with retrospective effect.

2. A list of ‘hallmarks’ of tax avoidance schemes has been published. If any of the following are found in a scheme, it is likely to be challenged as artificial tax avoidance:

– It sounds too good to be true

– Artificial or contrived arrangements are involved

– It seems very complex for what you want to do

– There are guaranteed returns for apparently no risk

– There are secrecy or confidentiality agreements

– Upfront fees are payable or the arrangement is on a no win/no fee basis

– The scheme is said to be verified by a top lawyer or accountant but no details of their opinion(s) are provided

– The scheme is said to be approved by HMRC (it does not follow that this is true)

– Tax benefits are disproportionate to the commercial activity

– Offshore companies or trusts are involved for no sound commercial reason

– A tax haven or banking secrecy country is involved without any sound commercial reason

– Tax exempt entities, such as pension funds, are involved inappropriately

– It contains exit arrangements designed to sidestep tax consequences

– It involves money going in a circle back to where it started

– Low risk loans to be paid off by future earnings are involved

– The scheme promoter lends the funding needed.

Businesses promoting schemes with these “hallmarks” must notify HMRC about the scheme and register it, obtaining a “DOTAS” number for the scheme. They must then notify those who have used the scheme at their suggestion, who must then disclose this on their tax return. There are some very onerous obligations on promoters of tax avoidance schemes, including providing HMRC with a regular list of their clients and customers.

3. There is a General Anti Abuse Rule (GAAR)which enables HMRC to take action to counter any abusive avoidance activities without making specific legislation to close the schemes down individually. Where HMRC wish to challenge an arrangement under the GAAR, the detail will be considered by a GAAR panel of tax professionals to advise whether the arrangements are abusive or not.

4. Where a taxpayer has participated in a scheme which reduces or defers their tax liability, once HMRC are notified of the scheme they will issue an accelerated payment notice. Essentially this undoes the cash effect of the scheme until the case goes to court which may be many years later, so the benefit of using the scheme is significantly delayed.

Please ensure that you seek our advice with regard to all aspects of tax planning.

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