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The basics

Inheritance Tax is basically a tax on wealth when it is passed on depending on various circumstances, being chargeable on the global assets of individuals domiciled in the United Kingdom and on the United Kingdom assets of non-domiciled individuals.

Domicile is a complex issue and it is different from nationality or residence. A person can have one domicile only at any one time. They are domiciled in the country which is their permanent home, basically the country where they come from and in which they intend to live later on in life.

The amounts of Inheritance Tax

When someone dies, the value of their estate above a certain amount, usually the nil rate band, is liable to Inheritance Tax. Currently, the nil rate band is £325,000 and the rate of tax is 40%. Some gifts which they make during their lifetime can also be liable to Inheritance Tax immediately, or potentially liable later on.

If the value of a person’s estate exceeds £325,000, Inheritance Tax is charged at 40% on the excess. If they give a legacy of at least 10% of their estate to charity, the rate would be reduced to 36%. However, it would be necessary to ensure that the charity gets the amount that is intended; wills need to be worded carefully.

Definition of estate

The value of a person’s estate comprises all their residential properties, investment properties, contents and personal effects, cash, cars, monies on deposit including in ISA accounts, stocks and shares, certain insurance policies.

Exemptions

There are various exemptions available and, with careful planning, Inheritance Tax can be reduced further as will be mentioned below.

An individual can make various gifts during their lifetime which are either completely exempt from Inheritance Tax, or potentially exempt.

The completely exempt gifts are as follows:

1. Gifts of any amounts to exempt beneficiaries or “donees”, for example to a husband, wife or civil partner who has a permanent home in the United Kingdom, to a qualifying charity, some national institutions such a museums, or to a UK political party. There is a restriction on transfers from a UK domiciled person to their non-UK domiciled spouse or civil partner. From 6^th April 2013, transfers of up to the nil rate band only, which is currently £325,000 are exempt; prior to that date the limit was £55,000.
2. Gifts worth up to £3,000 in total per tax year.
3. Wedding or civil partnership ceremony gifts; £5,000 by each parent, £2,500 by each grandparent or great grandparent, £2,500 by the groom to the bride and vice versa, and £1,000 by anyone else.
4. Small gifts up to the value of £250 to as many individuals per tax year.
5. Regular gifts or payments that are part of the normal expenditure. This means regular gifts such as birthday presents and maintenance payments made out of after-tax income, but not from capital.

Potentially exempt transfers

A potentially exempt transfer is any gift made to an individual as long as the donor lives for seven years after making the gift. This must be an outright gift where the donor does not keep an interest in it. If the donor dies within seven years after making the gift, it would become chargeable to Inheritance Tax. If the death occurs between three and seven years after making the gift, and the total value of gifts made are above the nil rate band threshold mentioned above, any Inheritance Tax due would be reduced on a sliding scale.

Gifts which are not either completely exempt or potentially exempt will utilise a person’s nil rate band. Therefore, it is imperative to take reasonable care not to waste the nil rate band as, once it has been used up, Inheritance Tax could be chargeable on further transfers.

Business property and agricultural reliefs

Subject to the qualifying conditions, certain assets can be passed on free of Inheritance Tax, or at a reduced rate, while a person is still alive or through their will. Those assets include the following:

• business assets, for example shares in a private company, a building or equipment used in the business;
• agricultural property, for example a working farmhouse;
• woodland timber; and
• National heritage property, and famous and important works of art.

Planning

The creation of a trust can be an effective way of reducing Inheritance Tax. Although, gifts into a trust are chargeable lifetime transfers, if the gift can be kept below the nil rate band, it would not normally be taxable. Furthermore, the gift would not be included in the donor’s estate if they survive seven years after making the gift.

When planning for Inheritance Tax, a person needs to take a long-term view of their own situation, particularly their future financial needs.

Entrepreneur’s relief is one of the Capital Gains Tax (CGT) reliefs currently available on the disposal of business assets. The relief allows a reduced rate of tax to be charged on qualifying gains arising on the disposal of business assets, providing the relevant conditions are met.

Who qualifies?

The relief may be claimed by the following:

– Individuals who are in business as a sole trader or as a partner in a trading business;

– Individuals who hold shares in their personal trading company where at least 5% of the ordinary shares are held which gives them at least 5% of the voting rights.

Some trustees may also claim the relief.

The relief is not available to the following:

– Companies;

– Personal representatives of deceased persons;

– Trustees of discretionary settlements.

Lifetime limits

Capital gains which qualify for Entrepreneurs’ Relief are subject to a lifetime limit as follows:

–  For disposals on or after 6 April 2008 to 5 April 2010, £1 million;

–  For disposals on or after 6 April 2010 to 22 June 2010, £2 million;

–  For disposals on or after 23 June 2010 to 5 April 2011, £5 million; and

–  For disposals on or after 6 April 2011, £10 million.

If the qualifying gains together with all previous gains on which Entrepreneurs’ Relief has been claimed should exceed the lifetime limit applying at the time of disposal, the whole of the excess gain will be taxed at the normal CGT rates.

Conditions

To claim the relief, a number of conditions must be met throughout a “qualifying period”.

A “qualifying period” would be the one year period either up to the date of disposal or the date the business ceased.

The qualifying conditions depend on the type of disposal made:

Disposal of the whole or part of a business

The business must have been owned directly as a sole trader or owned by a member of a partnership. Entrepreneurs’ relief cannot be claimed on the disposal of assets of a continuing business unless the assets are disposed of together with a distinct part of the business.

Disposal of assets following the cessation of a business

The business must have been owned directly as a sole trader or as a member of a partnership throughout the qualifying period ending on the date the business ceased. In addition, the date of cessation must be within the period of three years before the date the assets were disposed of.

Disposal of shares or securities in your personal company

The conditions are that throughout the qualifying period of one year, the company in which you dispose of the shares/ securities must be:

–          Your personal company in which you hold at least 5% of the ordinary shares which gives you at least 5% of the voting rights, and

–          It is either a trading company or a holding company of a trading group, and

–          You must be either an officer or employee of the company or a company/ companies who are is a member of a trading group.

Associated disposal

An associated disposal takes place in association with your withdrawal from a business carried on by either:

–          A partnership of which you are a member, or

–          Your personal trading company in which you are an officer or employee.

Therefore the relief will be due only where a disposal of an asset is associated with a reduction of your interest in the assets of the partnership or a disposal of shares in your personal company.

How to claim

A claim must be made as follows:

–          By the individual (spouses and civil partners may each make a claim);

–          Jointly by the trustees of settlements and the qualifying beneficiary.

The claim should made in writing by one year and ten months from the end of a tax year in which the qualifying business disposal occurs. If this occurs in the 2013/14 tax year, the claim must be made by 31 January 2016.

The claim should be made in the Tax Return. If this cannot be done, then the claim may be made separately by writing to HMRC or by submitting a form which can be obtained from HMRC’s website.

How relief is given

Relief is given by reducing the rate of capital gains tax to 10% for disposals occurring on or after 23 June 2010. (For disposals made on or before 22 June 2010, the qualifying gain would be reduced by 4/9 and the net amount charged to CGT at 18%.)

Qualifying gains and qualifying losses in a tax year are aggregated to produce a net figure. The CGT annual exemption, where is has not been utilised,may be deducted and the balance of the gains will be taxed at 10%.

Entrepreneur’s Relief may be claimed on more than one qualifying disposal as long as the lifetime limit has not been exceeded at the time of disposal. It is therefore necessary to keep a record of the gains against which a claim for relief has been made previously.

The above give an outline of Entrepreneurs’ Relief under the current regime. There are detailed rules relating to trusts which have not been covered above. Professional advice should be sought if you are considering claiming the relief.

Viva la Pension Revolution?

Changes were announced in Budget 2014 that will have significant implications for those coming to retirement age. Pensioners are being given greater choice over what to do with their savings but what will be the tax implications when they exercise these newly found freedoms?

Pre April 2015

The biggest changes to defined contribution pension savings will occur in April 2015. Between 27 March 2014 and April 2015, a set of transitional rules have been put in place which will lessen the restrictions on withdrawal which were applicable before the Budget announcement:

1.    Trivial lump sums (for those aged 60 or over)

a.    Those with total pension savings up to £30,000 (was £18,000) may take the entire amount as cash
b.    Those with total pension savings above £30,000 (was £18,000) may take up to three pensions worth £10,000 (was £2,000) each as cash.

2.    Purchase an annuity which provides a guaranteed monthly income for life
Compulsory purchase of an annuity by the age of 75 was abolished in April 2011 but the earliest age you can do this is 55.

3.    Capped income drawdown (for those aged 55 or over)

Taking a gradual income whilst leaving the remaining assets invested. The capped drawdown limit has been raised from 120% to 150% of an equivalent annuity.

4.    Flexible income drawdown (for those aged 55 or over)

Flexible income drawdown is an option that allows you to take unlimited, taxable withdrawals from your pension. The level at which a person qualifies for flexible drawdown has been reduce to receiving £12,000 (was £20,000) each year from ‘secure pensions’.

All of these withdrawals are taxed at marginal rates, subject to the initial 25% tax-free pension lump sum.

Post April 2015

Post April 2015, individuals aged 55 or above (rising to 57 from 2028) will be able to take the whole of their pension pot as a cash lump sum subject to income tax at marginal rates on 75% of the money withdrawn. This is in contrast to the current 55% charge for full withdrawal. The 25% tax-free pension lump sum will continue to be available.

A rush to access this cash could therefore increase the income tax payable by pushing pension income into the higher rate bands. Currently income falling into the level of total income above £41,865 is taxed at 40% and above £160,000 is taxed at 45%.

By taking smaller annual lump sums it will be possible to stay within the basic rate tax (20%) or even the tax free personal allowance currently set at £10,000. There is a need for careful tax planning to ensure tax isn’t paid needlessly when there is the possibility of splitting receipt of pension funds between tax years.

Individuals may still purchase an annuity should they so wish.

Individuals will also still be able to purchase a drawdown product. However, there will be no limits on the amount someone can withdraw from their drawdown arrangement each year, and there will be no minimum income requirement which people have to satisfy in order to withdraw from their pension.

After Withdrawal of Pension Funds

From July 1 2014, all ISAs will become New ISAS (NISAs). You can put up to £15,000 a year into a NISA and this can be cash, all in investments, or a mixture.

Those with significant pension funds may wish to consider the Enterprise Investment Scheme (EIS). The potential benefits can include gains free from capital gains tax, generation of a tax-free income and exemption from inheritance tax after two years.

Looking Forward

The 2015 proposals are still in consultation which is being run for the full 12 week period with a shut off date for responses of 11 June 2014. Although changes are not expected, holding off acting on pension withdrawal until the Finance Bill 2015 is published should provide further clarity.

The new system will see no changes to tax relief during the accumulation phase of pension saving (the maximum relief going into a pension fund is determined by annual allowance and lifetime allowance which have been reduced to £40,000 and £1.25 million respectively on 6 April 2014).

Giving greater access to pension savings will be widely seen as a positive move but without thorough tax planning in advance to decide how and when to extract the funds and where to place them afterward, some individuals will undoubtedly forfeit the tax benefits already stored up from years of prudent saving and investment.

For more advice, either on your own status or that of someone working for your business, speak to your accountant.

This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here.

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk  

Changes to Residence Rules 

The New Tax Residence Rules

From 6 April 2013 the UK introducedlegislation which created a statutoryUK residence test for individuals to replace earlier case law and practice.

The legislation applies for domestic purposes only and so could be overruled by a double taxation agreement.

This article considers the concept of UK tax residency for individuals only. It does not cover the issue and effect of “domicile”.

What is the impact of UK tax residency?

UK tax residents are subject to UK income tax on their worldwide income and gains, whereas non-residents only pay tax on UK sources of income and in some cases gains. It also creates a number of filing requirements in the UK.

For internationally mobile persons, it is important that they have clarity about their tax residency so that they can plan their affairs with certainty.

4-step process

The legislation works by applying the statutory rules in 4 steps:-

Step 1 – an individual will be UK tax resident is they spend more than 183 days in the UK

Step 2 – if step 1 does not apply, the individual needs to consider if they meet one of three automatic overseas residence tests.

Step 3 – if steps 1 and 2 does not give an answer, consider if the individual meets one of the two remaining automatic UK residency tests.

Step 4 – if steps 1 to 3 do not produce a result, the individual needs to see if they have sufficient ties to the UK. If not, then that person will not be UK tax resident here.

Step 2 – Automatic overseas residence tests

You will be deemed automatically overseas resident if:

(i) you were in the UK for one or more of the three tax years preceding the tax year, and you spend fewer than 16 days in the UK in the tax year.

(ii) You were resident in the UK for none of the three years preceding the tax year and you spent fewer than 46 days in the UK in the tax year

(iii) You work full time overseas over the tax year, without any significant breaks during the tax year from overseas work and you spend fewer than 91 days in the UK in the tax year, and you spend less than 31 days working for more than three hours a day in the UK.

Step 3 – Automatic UK residence tests

You will be deemed to be automatically UK resident if:

1. There is a continuous period of 91 days in which your only home is in the UK and your spend more than 30 days in that home during a tax year
2. You work full time in the UK for any period of 365 days, with no significant break from UK work and

(a) all or part of that 365 day period falls within the tax year

(b) more than 75% of the days when you do more than three hours’ work are days when you do such work in the UK

(c) at least one day in the tax year is a day you do more than three hours of work in the UK.

There is no simple definition of “home” and therefore this is one of the areas where there is a degree of subjectivity around the application of these rules.

Step 4 – Sufficient Ties to the UK

In the case of an individual who has more complex affairs and does not automatically qualify as either non-UK resident or UK resident under these tests, it will be necessary to consider the combination of days spent in the UK and any ‘sufficient ties’ they have to the UK.

There are five UK ties that must be considered:

• Family Tie(where your spouse and minor children are resident)
• Accommodation Tie (this is interpreted very broadly and does not apply merely to ownership of property)
• Substantive Work Tie(at least 40 UK workdays where more than 3 hours work takes place)
• 90 days Tie(at least 90 days spent in UK in either or both preceding years)
• Country Tie (Where you are present in the UK for the most number of nights)

The number of days needed to establish UK residency under the sufficient ties test is as follows:-

What is a day?

A day is normally counted where a person is here at midnight. However there are some circumstances where any presence in the UK during a day counts towards the day count.

Conclusion

The new UK statutory residency test is welcome because it brings clarity to what had become an area of uncertainty following recent caselaw.

Saying that the test is complex and convoluted and persons who are considering emigrating or coming to the UK should seek advice on their tax status when planning their future personal and business affairs.

The Chancellor’s 5th budget on the 19 March2014 contained good news for savers on ISA’s and pensions, with increased allowances for capital expenditure for business but also proposed expansion of HMRC collection powers.

2014 Budget proposals will become law on receipt of the Royal Assent -expected in July 2014.

Income Tax rates and allowances

The following changes were announced

*The removal of the personal allowance for those whose gross income exceeds £100,000 remains unchanged

Adult (N)ISA and child trust (N)ISA’s

Capital Gains tax

• No change in tax rates of 10%, 18% or 28% .Increased annual 2015/2016 exemption limits to £11,000 (2014/2015) &£11,100 (2015/2016) for individuals

Inheritance tax

• No change to 40% rate or exemptions but proposed exemptions for service personal that die as a result of their duties.

Companies and unincorporated business

*For companies rate change effective from 1.4.2014

*For unincorporated business rate change effective from 6.4.2014

VAT-effective from 1 April 2014

• VAT registration taxable turnover threshold limit has increased from £79,000 to £81,000

• VAT deregistration taxable turnover threshold limit has increased from £77,000 to £79,000

National insurance contributions

• Class 1, Class 1A and Class 1B rates are unchanged

• From 6 April 2014 Class2 weekly rate increased from £2.70 to £2.75. Exemption limit increased from £5,725 to £5,885.

• Any class 2 liabilities unpaid for earlier tax years where self-employment has now ceased, to be collected via PAYE coding notices

• From 6 April 2016 Class 2 contributions will no longer be collected via direct debit but will be included in taxpayers’final Self–Assessment liability together with income tax and Class 4 National insurance.

• Class 3 voluntary weekly contributions rate increased from £13.55 to £13.90

• Class 4 Contributions –lower profit limit increased to £7,956 from £7,755

-9% rate applies on profits between £7,956 and £41,865

-2% rates applies on profits over £41,865

Corporation tax

Main Corporation tax rate from 1 April 2014 reduced from 23% to 21% for companies with profits exceeding £1,500,000.

Corporation tax rate for small companies with profits up to £300,000 remains unchanged at 20%.

From 1 April 2015 rate for all companies will be unified to a single rate of 20%

Employers and employees

• Inflationary increases in taxation rates for company cars, van and provision of private fuel costs to employees.

• Increases in annual value of shares awarded and savings limits for authorised Share Incentive Plans (£3,000to £3,600) and SAYE schemes (£250 to £500 per month) from 6 April 2014.

Pension changes

All tax restrictions on pensioners’ access to their pension pots to be removed ending the compulsoryrequirement to use funds to buy an annuity.

Tax rate on taxable part of pension pot taken as cash on retirement, decreased from 55% to 20%

Increase in total pension savings which can be taken as a lump sum to £30,000

Tax collection proposal

2014 Budget -Accelerated collection of disputed tax-In outstanding tax cases involving HMRC enquiries or open appeals into tax reductions arrangements registered under DOTAS or in violation of the General Anti Avoidance Rule ( GAAR), taxpayers be required to pay the disputed tax upfront before any legal ruling has been made on the validity of the scheme under enquiry. Penalties will apply to late payments.

Direct recovery of debts –2015 Budget proposal for HMRC to recover tax and overpaid tax credits debts exceeding £1,000 directly from taxpayers’ bank accounts (subject to various safeguards).

 6^th April 2014: A New Tax Year

By the time you read this article, a new tax year will have started and so now is the time to think about how to ensure that your everyday personal tax affairs will run smoothly. Fortunately, this article will help you do that.

2014 Personal Tax Return forms

HMRC will be issuing 2014 Tax Return forms, or notices to complete them, in early April 2014. All such Tax Return forms need to reflect a complete record of income, outgoings and capital gains for year ended 5^th April 2014. The filing deadline dates are 31^st October 2014for paper filers, and 31^st January 2015 for electronic and internet filers. These deadlines also apply to Tax Returns for Partnerships and Trusts.

If you file your own Tax Return, and wish to do so electronically, please ensure that you are registered with HMRC and receive your User ID andactivation PIN to enable you to do this. You can find help on this at: www.hmrc.gov.ukand will need to do this in advance of the final filing date.

What you need to do

You will need to start gathering together your tax information at an early stage.

• Directors and Employees need to ensure they keep the forms P60 (pay and tax details from employment), and P11D (benefits and expenses) plus the Section 336 Expenses claim. Your employer is obliged to provide you with your P60 by 31/5/2014 and the P11D/S336 claim by 06/07/2014. If you left an employment during the year, and were not employed for the rest of the year, you will still have the formP45 your former employer will have provided you with, summarising your pay and tax at the date of leaving. Pensions and annuities amounts and tax deductions will also be summarised on forms P60.
• Self employed and rental accounts will need to be prepared to support the Tax Return at an early stage, so review your books and records to your preferred accounting date, and ensure that supporting invoices and receipts are available for your accountant to prepare your accounts.
• Dividend vouchers will have been sent to you by the companies during the tax year, and interest details will be available from your bank or building society, either via your regular statements, or online. Investment portfolio statements will be made available to you by the investment houses after the year-end, and should contain full details of all income, and assets bought and sold within the portfolio.
• If you receive Trust Income, this will be informed to you by the Trustees on a form R185, after the 5^th April.
• Contract notes in respect of assets bought and sold privately will have been provided by the broker during the tax year.
• Details of any tax deductible loan interest paid should be available in certificate form from your lender after the end of the tax year.
• Details of any charitable contributions made will need to be collated. You may make them via regular direct debits or standing orders, or one-off payments by cheque of cash, via the Gift Aid scheme. You should always preserve the Gift Aid certificates, especially in the case of cash payments.
• Details of pension contributions will be available from your pension provider, although possibly not on the fiscal year-end of 5^th April. Please ensure that you bear in mind any changes to contributions made after the provider’s year-end.

Advantages of filing ‘early’

Those who file the Personal 2014 Tax Return form before 31^st July 2014 will have the advantage of knowing their tax liability for 2013/14 well in advance of the due date for the 2013/14 balancing payment and the 2014/15 1^st interim Payment, of 31^st January 2015. If their total tax liability for 2013/14 turns out to be lower than the Interim Tax Payments set by reference to the 2012/13 tax liability, they will have the cash flow advantage of being able to make a postponement application to reduce their 2013/14 interim tax payments in time for the 2^nd interim tax payment on 31^st July 2014, and recover any overpayment of tax on the 1^st interim tax payment.

Notices of Coding

Directors and employeeswill already have started receiving notices of coding from HMRC for the year 2014/15. They will typically consist of Personal Allowances (£10,000.00 for 2014/15, unless your gross income exceeds £100,000.00, in which case the Personal Allowance reduces by £1 for every £2 over the limit) plus allowances such as qualifying loan interest, but less taxable benefits, small amounts of untaxed income, national insurance retirement pension and deductions representing underpayments of tax from previous tax years. HMRC have also begun to make deductions from coding allowances representing arrears of other debts, such as Class 2 National Insurance Contributions. Personal Allowances increase, subject to the income limit of £27,000.00, if you were born before 5^th April 1949 and again if born before 6^th April 1939.

Experience tells us that many coding notices are often based on out of date information and containexcessive deductions from allowances. A few moments checking the coding notice could save you a considerable over deduction of tax.

Student Loans

Do you still have an income-contingent student loan? Is the balance small enough to be paid off during the current tax year? You will still need to declare it on the 2014 Tax Return form, and if you overpay as a result of this, you will need to seek repayment from the Student Loans Company.

Standard, reduced, zero-rated and exempt
VAT at the standard rate – currently 20% – is charged on the sale or provision of most goods and services. A VAT registered business charges VAT on its sales (output VAT) and is able to reclaim the VAT it has paid on goods and other expenses incurred for its business (input VAT).

A reduced rate of 5% applies to a few goods and services. Some goods and services – such as prescriptions dispensed by a registered pharmacist – are zero-rated, meaning that while their supply is strictly liable to VAT, the rate at which the VAT is charged is 0%. Suppliers of reduced and zero-rated goods and services are still able to reclaim the VAT paid by them on their business purchases.

VAT is not charged on the provision of exempt goods and services – such as health services provided by registered doctors, dentists, opticians and pharmacists – and generally the VAT paid on expenses incurred in the provision of those goods and services cannot be reclaimed.

The VAT paid on goods and services that are used for non-business activities cannot be reclaimed.

Registration requirements
A business providing goods or services to which VAT applies has to register for VAT if its turnover from taxable supplies – including standard, reduced and zero-rated supplies – has exceeded the VAT threshold (currently £79,000) in the previous 12 months or if its turnover is expected to exceed the threshold in the next 30 days.

A business making taxable supplies may choose to register for VAT, even if it is not obliged to, in order to be able to reclaim the VAT on goods and services purchased for its business.

To register for VAT, the business submits form VAT1, although most businesses can now register for VAT online. Where an existing VAT-registered business is taken over, the new owner must register if his turnover plus that of the business taken over exceed the threshold (or are expected to exceed it). The new owner can apply to keep the existing VAT registration number if the seller agrees.

If a business registers late for VAT, it will be liable to account for VAT from the correct date and in addition may be charged a penalty.

VAT administration
VAT returns detail output VAT charged on supplies and input VAT suffered on purchases and other expenses. The excess of VAT charged over VAT reclaimed is payable to HMRC. VAT returns and payment are generally due quarterly and almost all businesses are now required to file their VAT returns online and pay their VAT electronically.

You may choose to have an accountant or other adviser dealing with your VAT on your behalf, otherwise if you are dealing with your own VAT, then before you can use HMRC’s VAT online services, you will need to sign up with HMRC Online Services – see www.hmrc.gov.uk/vat/start for instructions. You can also sign up for email reminders to let you know when your VAT returns are due.

Simplified VAT schemes
Several schemes exist to make accounting for VAT easier.

The annual accounting scheme is open to businesses whose turnover is not more than £1.35m. It involves making either 9 monthly or 3 quarterly instalments of VAT, based on the previous year’s liability, and one annual VAT return, showing the whole year’s figures, plus a balancing payment (a refund is made of the instalments paid are more than the actual figure). The scheme is not advantageous for businesses which usually reclaim VAT each quarter as a refund would only be made annually.

Usually VAT is payable on sales in the quarter when the invoice is issued. Under the cash accounting scheme, however, VAT is payable only when the business receives payment; similarly, VAT can only be reclaimed when purchases are actually paid for. Again, the cash accounting scheme is open to businesses whose turnover is not more than £1.35m.

A business may join the flat-rate scheme if its turnover is less than £150k and may stay in the scheme until its turnover reaches £230k. The business pays VAT on its turnover at a fixed rate depending on the type of business and VAT is then not reclaimed on purchases. The scheme may not be suitable for businesses which make exempt or zero-rated supplies in addition to standard-rated supplies as the flat rate is applied to total turnover.

There are various detailed conditions attaching to each scheme – for more detail on these and all the points covered here go to www.hmrc.gov.uk/vat .

This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here.

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

If you have to file a 2013 tax return and have not already done so, now is the time to think about preparing your return and paying your tax.

Filing deadlines

If you are submitting a hard copy tax return then it must be with HMRC by midnight on 31 October 2013. For online filing of returns the deadline for the 2013 tax return is midnight on 31 January 2014.

If you are filing your return online yourself, you must be registered at www.hmrc.gov.uk for online services. When you register, you will receive, by post, your User ID and an activation PIN. Once you have activated your account you will be able to prepare and submit your return online.

Preparing your return

Whether you are filing your return yourself or compiling information for your accountant, below are some of the more common information that you (or your accountant) will need to complete your 2013 return, which covers the tax year ended 5 April 2013 (6 April 2012 – 5 April 2013):

Business income

If you are a sole trader or in a partnership you will need the accounts which ended during the tax year 2012/13, for instance accounts for the year ended 31 December 2012 or 31 March 2013.

If your business started recently or ceased during the tax year the position will be more complex and your accountant will advise you further.

If you trade through your own limited company, or are someone’s employee, then you will need your P60 and P11D for 2012/13, showing your earnings and any benefits/expenses. Dividends paid to you by your company in the year ended 5 April 2013 will also be included in your 2013 return.

Unearned income

Unearned income received between 6 April 2012 and 5 April 2013 will be shown on your 2013 return, whether from UK or overseas sources – e.g. interest, dividends, rental income (less associated expenses) and pension income, so you will need statements, tax certificates and dividend vouchers. Where an investment is held jointly, only your share of the income is shown on your return – the holder of the other share should declare his/her share on his/her tax return.

If you are non-UK domiciled, you can choose each year whether to be taxed on your worldwide income or on the remittance basis (i.e. only on that overseas income which you have brought to the UK). Choosing the remittance basis may result in loss of entitlement to the UK personal allowance and may, in certain circumstances, require you to pay a £30k or £50k “remittance basis charge”. This is a complex area and your accountant will be able to provide more details.

Capital gains

Details of the sale of capital assets – e.g. property, investments – during the tax year will be needed for your return i.e.: the cost and sale proceeds, and any associated expenses.

The sale of your home will generally be exempt from capital gains tax as long as the property was your main residence throughout the time you owned it, so any gain (or loss) will not be included on your return.

Other matters

Tax relief is given for charitable payments made in the tax year under gift aid or covenants and for pension contributions paid by you; investments qualifying under the Enterprise Investment Scheme will also reduce your tax liability.

Paying your tax

As well as being the deadline for the submission of your 2013 return, 31 January 2014 is also the deadline for payment of your tax liability for 2012/13 – if you have already made payments on account towards the year, you may have to pay a balancing payment; if your payments on account exceed your actual liability the overpayment will either be refunded to you or set against future payments. If you are required to make payments on account towards your 2013/2014 liability, the first of these will also be due on 31 January 2014.

It is worth considering now whether the funds you need to pay your tax will be readily available, in case it is necessary to give notice on an account or otherwise make funds available.

Interest and penalties

If your return is submitted after 31 January 2014, you will be charged a £100 penalty; where a partnership return is submitted late, the penalty is £100 per partner. Penalties increase steeply if the return is more than 3 months late.

Interest will also be charged from 1 February 2014 on any unpaid tax (the current rate is 3%, but could change). If any part of your balancing payment remains unpaid as at 28 February 2014, a surcharge of 5% of the unpaid tax will be added to your liability, with a further 5% surcharge added on 31 July 2014 on any tax remaining unpaid at that date.

Keeping your records

You should keep your 2012/13 records for a year after the online tax return deadline of 31 January 2014, in case HMRC enquires into your return. The same date applies even if you have sent in a paper tax return.

HMRC enquiries

If you submit your return before the deadline, HMRC have 12 months from the day after your return was submitted to raise an enquiry into it. However, if your return is submitted after the deadline, HMRC’s period for raising an enquiry is extended.

 With interest rates remaining low, many people are turning to property as an investment and this month we look at the tax implications of renting out property.

The renting of property – whether one property or several – is treated as a “property business”.

The profit or loss of a property business is calculated essentially in the same way as that of a trade. Profits will normally be computed on a tax-year basis, to 5 April each year. The amount of rental income to be included is the amount receivable for the tax year, which may not be the same as the amount actually received.

The expenses which can be deducted are those which are incurred by the landlord “wholly and exclusively” in relation to the letting, i.e. letting agent’s fees, management charges, service charges, repairs, mortgage interest, insurance, accountancy fees, utilities (where paid by the landlord). Where rent due is not received, bad debt relief can be claimed. The cost of capital improvements made to a property – i.e. the cost of a new kitchen or extension – cannot be claimed, tax relief is given on these costs when the property is eventually sold, by deducting them from the sale proceeds.

Where a property is let furnished, the landlord will incur additional costs of furniture and furnishings. These costs can be dealt with in one of two ways – the actual costs can be deducted in the year they are incurred or alternatively the landlord can claim an annual “wear and tear allowance”. The wear and tear allowance is intended to cover the cost of renewing the furniture or furnishings that tenants would provide for themselves if the accommodation was let unfurnished, including furniture, linen, crockery, cutlery, cookers, washing machines, dishwashers etc. Where the allowance is claimed, no further deduction is available for the cost of such items. However, the cost of renewing fixtures which are an integral part of the building (e.g. baths, toilets, washbasins) can still be claimed, provided they are replacements and not capital improvements.

The wear and tear allowance is calculated as 10% x (A – B) where A equals rents receivable and B equals tenant’s expenses – tenant’s expenses are those expenses which, although borne by the landlord, relate to utilities, council tax or any other expense which are normally paid for by the lessee.

Income and expenses from all properties within the “property business” are aggregated and declared on the individual’s tax return for the tax year in question. A profit is taxable income of the tax year; a loss is carried forward and set against future profits from the property business.

Although profits are computed similarly to those of a trade, the income remains investment income. However, profits from properties which qualify as “furnished holiday lettings” are treated as trading profits. A property qualifies as a furnished holiday letting (FHL) if:

(a)     it is available for commercial letting to the public generally as holiday accommodation for at least 210 days in a twelve-month period (generally a tax year); and

(b)     is so let for at least 105 such days (averaging may be applied to the number of let days of any or all of the holiday accommodation let by the same person).

Wear and tear allowance is not available on FHLs – instead, capital allowances can be claimed on furniture and furnishings as well as on plant and machinery used outside the property.

One of the main tax advantages of FHLs has been removed, in that since 2011/12, a loss on FHLs can no longer be set against the landlord’s general income for the same tax year but must be carried forward against future profits of the FHLs.

However FHL profits are treated as “relevant earnings” for the purposes of tax relief for pension contributions and the capital gains tax reliefs available on the sale of a trade also apply on the sale of an FHL – such as Entrepreneur’s Relief, which reduces the rate of tax payable on a gain on sale to 10%.

A final area to look at is the rental to lodgers of furnished rooms in an individual’s own home. Where total rental receipts from lodgers in an individual’s own home in a tax year do not exceed £4250, the income is exempt from tax.

If the rent exceeds this amount then the individual’s taxable rental profit can be computed in one of two ways – the individual is either taxed as normal on rental income less allowable expenses or an election can be made such that only the excess income over £4250 is taxable (with no deduction for expenses). The election then applies to future years unless it is withdrawn.

Personal Pension Contributions
Although there is now a single regime governing all “tax-privileged” schemes, which replaced the various rules governing personal pension contributions, retirement annuities and employer pension schemes, pension contributions can still be a complex area.

To qualify a pension scheme must be registered with HMRC and, once approved, it is exempt from income tax on its investments and from capital gains tax on the disposal of its investments.

Tax Relief on Contributions
Contributions to a registered scheme are no longer limited by reference to the payer’s earnings and there is no earnings cap. A UK resident individual aged under 75 can make unlimited contributions and is entitled to tax relief on contributions up to the amount of his or her earnings in the tax year of payment.

Method of relief
How tax relief is given depends on the way in which the contributions are made and the type of scheme.

In the case of employer schemes, tax relief may be given under “net pay” arrangements, where the gross amount of the contribution is deducted from the employee’s earnings before tax is deducted, so giving full tax relief at source.

In the case of some schemes (generally retirement annuity schemes), contributions are paid gross in which case tax relief is given either by an adjustment to the individual’s tax code or through his tax return, by deducting the amount paid the individual’s total income in calculating his income tax liability for the year.

Most personal pension/stakeholder schemes operate basic rate tax relief at source. This means that the individual obtains tax relief at the basic rate by paying the net amount to the pension provider; where higher rate relief is available this is claimed through the individual’s tax return as an reduction to his tax liability for the tax year of payment (or by an adjustment in his PAYE tax code).

Where a scheme operates tax relief at source and an individual’s earnings are less than £3,600 in a tax year, net contributions of up £2,880 (£3,600 – 20% x 3,600) will also attract tax relief at the basic rate.

Pension contributions can no longer be carried back or forward to tax years other than the year of payment.

Annual and Lifetime allowances
Each individual has a Lifetime Allowance, which is £1.5 million from 2012/13 and £1.25m from 2014/15 (reduced from £1.8 million previously). When a pension begins to be paid, the amount in the scheme is measured against the individual’s lifetime allowance and any excess taxed at 55% if taken as a lump sum and 25% in other cases. Any tax due may be deducted by the administrator from the individual’s benefits

There is also an Annual Allowance reduced from £255,000 to £50,000 from 2011/12 and to £40,000 from 2014/15. To the extent that the annual increase in an individual’s rights under all registered schemes of which he is a member exceeds the annual allowance, the excess is treated as being the “top slice” of the individual’s income for that year and is taxed accordingly.

If the annual allowance for any year exceeds the amount of pension contributions for that year, then the excess “unused” annual allowance can be carried forward for up to three years and used against contributions made in those later years.

Taking a pension
The minimum pension age rose from 50 to 55 with effect from 6 April 2010. Subject to some specific exemptions and transitional provisions, a pension cannot be taken before the minimum age and must be taken by the age of 75.

An individual will generally have the option to take part of his pension fund as a tax-free lump sum, with the rest payable as a monthly pension. The maximum lump sum is generally the lower of 25% of the total value of the individual’s pension scheme(s) and 25% of the remaining unused £1.5 million lifetime allowance.

Pension income, including the state pension is taxable; in many cases, the state pension is set against the individual’s personal allowance as an adjustment in the tax code to be operated against other pension income.

Although one regime exists for all forms of pension scheme, this remains a complex area and professional advice should be sought when planning for retirement.

Budget 2013

Following the 2013 Budget on 20 March 2013 we look at the main provisions, some of which were announced previously and confirmed in the Budget.

Income Tax Rates and Allowances

The following were announced:

Allowances:

Income Tax Rates:

Income tax bands:

Savings and investments

Pension contributions:

The Annual Allowance for tax relief on pension contributions has been £50,000 since 5 April 2011 but will be reduced to £40,000 from 2014/15. Unused annual allowance from the three previous years can be carried forward and added to this annual allowance. The Lifetime Limit is £1.5 million for 2012/13 and 2013/14 but will be reduced to £1.25m from 2014/15. If an individual accrues pension benefits in excess of this limit, the excess is charged to income tax at 25% if taken as a pension and at 55% if taken as a lump sum.

Seed Enterprise Investment Scheme (SEIS):

Last year’s Budget announced the SEIS which applies from 6 April 2012 to shares issued in a company less than two years old, with fewer than 25 employees and gross assets of less than £200,000 before the investment. The investor obtains a tax reducer at 50% on the cost of the shares up to a maximum of £100,000 and as long as his investment is less than 30% of the company’s shares.

For 2012/13 an investor can shelter a gain made on any asset by reinvesting the gains in shares that qualify for SEIS relief. The sum invested is exempt from capital gains tax up to a £100,000 limit.

The above has now been extended to gains arising in 2013/14 if the gain is reinvested in SEIS shares in 2013/14 or 2014/15, up to a limit of half the qualifying re-invested amount.

ISAs:

From 6 April 2013, the ISA limit rises to £11,520, up to £5,760 of which can be in cash.

Businesses and Employers
Corporation tax:

As previously announced, the main rate of corporation tax drops to 23% from 1 April 2013 and to 21% from 1 April 2014. It has now been announced that the rate will be reduced to 20% from 1 April 2015, aligning it with the small companies’ rate which remains at 20%.

National Insurance Contributions: employment allowance:

The Budget announced an allowance of £2,000 per year for all businesses to be offset against their employer Class 1 NIC liability from April 2014.

Employee shareholder status:

In October 2012, the new “employee shareholder” status was announced whereby employees adopting this status could receive between £2,000 and £50,000 of capital gain tax exempt shares. The Budget confirmed that the first £2,000 of share value received will also be free from income tax and NICs.

Capital Gains Tax (CGT) and Inheritance Tax (IHT)
The CGT annual exemption rises to £10,900 in 2013/14, with CGT rates staying at 18% and 28% depending on income levels.

The nil-rate band for IHT remains frozen at £325,000 until April 2018. Transfers between spouses/civil partners are exempt IHT, although transfers to a non-UK domiciled spouse/civil partner are exempt only up to a lifetime limit of £55,000. From 6 April 2013 that cap will be abolished and non-UK domiciled spouses/civil partners can elect to be treated as UK domiciled for IHT purposes.

VAT
From 1 April 2013, registration and deregistration limits increase to £79,000 and £77,000 respectively. The rate of VAT remains unchanged at 20%.

Childcare costs
A new scheme will be phased in from autumn 2015 to support working families with children. For childcare costs of up to £6,000 per year, in respect of children up to 5 years old initially, support of 20% (£1,200) will be available.

ARE YOU READY FOR THE NEW PAYE REGIME?

From April 2013, HM Revenue & Customs (HMRC) is introducing a new way of reporting PAYE, known as Real Time Information, or RTI. The new system will see fundamental changes to the way in which employers and pension providers must report the payments and deductions they have made under PAYE. Umesh Modi explains…

This guide provides an overview of the RTI regime, and how the new requirements affect you.

WHAT IS RTI?
Real Time Information (RTI) is a new system of reporting details of pay and deductions to HMRC. It is also referred to by HMRC as “operating PAYE in real time”.

Under RTI you will be required to provide details of your employees’ pay and deductions to HMRC electronically each time they are paid. The information must be provided in a specified format within a certain timescale. You must make the report to HMRC online using RTI compatible payroll software. RTI is mandatory for all employers and will be implemented from 6^thApril 2013.

Currently the PAYE data is sent only once a year to HMRC e.g. forms like Employer annual return (P35), P14’s at the end of tax year. From April 2013 and under new scheme of RTI, information will be submitted every time an employee is paid, be it weekly, fortnightly, four weekly or monthly.

GETTING READY FOR RTI
There are a number of steps you must take to prepare for the move to RTI and to ensure you are ready to start reporting in real time from April 2013. All employers will be using the RTI service by October 2013.

The following checklist summarises the key tasks associated deadlines necessary to ensure you are RTI-ready.

FULL PAYMENT SUBMISSION (FPS)
A Full Payment Submission is the main type of document, and contains details of all employee payments and deductions, including income tax, NICs and student loans, together with details of any new employees and those who have left the business. It is particularly important to obtain accurate information for new starters. Without the complete basic data, you will not be able to file any of your employees’ pay details. In other words you are not permitted to ignore one employee and file for everybody else.

An FPS is required each time an employer makes a payment to an employee, either at or before the time of payment, whether this is weekly or monthly, and it includes those whose income is below the lower earnings limit for NICs.

The first FPS should include all employees who have been employed during the current tax year, including starters and leavers, or those who have not yet received a payment, together with the hours normally worked.

Subsequent FPS’ will contain pay and deduction details only for those employees that are actually being paid on that payday.

When you send your final submission for the tax year, you must indicate that this is the case and answer the relevant questions and declarations.

TIDYING UP EMPLOYEE DATA
For RTI to work properly it is important that the personnel data you hold on your employees is correct and complete. It is also vital that the details held by both of you and HMRC are identical.

Please use the following table to check that the data you hold about your employees meets HMRC’s RTI standards.

If you or your partner is entitled to receive Child Benefit you may be affected by the new High Income Child Benefit Charge (HICBC) which was introduced in the 2012 Finance Act and which comes into effect on 7 January 2013.

Child benefit is generally paid to the mother; however if either her income or her partner’s income exceeds £50,000, the HICBC will be payable by the one with the higher income.

No HICBC will be payable where both partners’ income is below £50,000.

For the purposes of the HICBC, two people are “partners” if they are married, in a civil partnership or cohabiting as a couple; if a couple is separated either under a formal separation or in circumstances which are likely to be permanent then they cease to be partners.

The HIBC is calculated as follows. Where the taxpayer’s income is between £50,000 and £60,000, then the HICBC is 1% of the amount of child benefit to which the taxpayer (or partner) is entitled to in the tax year for every £100 of income over £50,000. If the taxpayer’s income is greater than £60,000, then the tax charge will equal the amount of the child benefit.

Examples:

A taxpayer has income of £54,000; his partner is entitled to child benefit of £1,752.

£54,000 exceeds £50,000 by £4,000.

The HICBC is 1% for every £100 that income exceeds the threshold i.e. 40%.

The HICBC is 40% of £1,752 i.e. £700.

A taxpayer has income of £60,000; his partner is entitled to child benefit of £1,752.

£60,000 exceeds £50,000 by £10,000.

The HICBC is 1% for every £100 that income exceeds the threshold i.e. 100%.

The HICBC is 100% of £1,752 i.e. £1,752.

Since the charge is only being introduced in January 2013, the HICBC for the current tax year (2012/13) will only be payable on the amount of child benefit for the period 7 January – 5 April 2013.

The HICBC will be payable as part of the individual’s total income tax liability, on 31 January after the end of the tax year in question.

The HICBC is based on the amount of child benefit a claimant is entitled to receive – whether or not that amount is actually received – so in order to avoid the charge a claimant can elect to “disclaim” entitlement to child benefit. .Once entitlement to child benefit ceases, the HICBC no longer applies, so the partners with the higher income will no longer have to file a tax return to pay the charge.

Making the election may therefore be convenient if one or both partners’ income is over £60,000, so that without the election the full amount of child benefit received would simply be repayable as HICBC; however, if the individuals’ circumstances change, such that their income falls, the disclaimer can be revoked so that entitlement to child benefit is restored. The revocation can be backdated by up to two years in certain circumstances.

However, claimants should think carefully before making the election to disclaim child benefit if the following circumstances apply. An individual needs sufficient “qualifying years” of national insurance contributions to qualify for the full state pension. A mother who does not work but stays at home to look after children is eligible for credits towards her NIC history under Home Responsibilities Protection. However one of the conditions to qualify for HRP is that the woman is claiming child benefit. According disclaiming child benefit could affect a woman’s entitlement to HRP and thus reduce her eventual state pension.

The introduction of the HICBC is creating many headaches, both for taxpayers and for the taxman. Many taxpayers who have previously not had to complete a tax return will now be brought into the Self Assessment system as they will have to complete a tax return in order to pay the HICBC, creating an extra burden of work for the individuals and for HMRC.

Since the HICBC is payable by the partner with the higher income, for some taxpayers, this may create issues regarding privacy, when determining which partner has the higher income – it is over 20 years since independent taxation was introduced so concerns have been raised that partners will no longer be able to keep their affairs confidential. While for many this will not be an issue, it is not hard to envisage situations where problems could arise.

At this stage, the new system poses many potential problems and it will be interesting to see how HMRC deal with and police the new regime.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

…is his castle, so they say. Castles may be scare these days but your home is still likely to be your most valuable asset, so should you want to sell it, it is worth considering the tax implications.

If you sell a property, the whole of which has been your only residence throughout the period that you have owned it, then the position is simple – the gain will be exempt from capital gains tax (CGT), so no tax will be payable on it. This is called the “principal private residence” (PPR) exemption which covers the house plus garden, a total area of up to ½ a hectare.

So far, so straightforward – however, if you have used part of the property for a purpose other than as your residence, or if you have not occupied the property for the whole period of ownership then the position becomes more complicated.

If any part of the property is used exclusively for business purposes – such as a treatment room – then the gain attaching to that part of the property (apportioned by area) will not be covered by the PPR exemption and will be taxable. This rule doe not catch the “home office”, as long as the room is also used for non-business purposes.

Similarly if you have not lived in the property during the entire period of ownership, part of the gain (on a time-apportioned basis) is potentially not covered by the PPR exemption. However certain periods of non-occupation are treated as periods of “deemed occupation” so continue to be covered by the exemption – as follows:

1. The last 3 years of ownership of a property will be covered by the PPR exemption even if you did not occupy the property during that time as long as the property was, at some time, your main (or only) residence. This will apply even if during that period you are living in another property for which you will claim the PPR exemption.
2. A period (or periods) of non-occupation not exceeding 3 years in total
3. A period (or periods) of up to 4 years when occupation of the property was prevented due to employment elsewhere in the UK
4. A period (or periods) of non-occupation for any length of time due to employment outside the UK

In the case of b) – d) the property must have been your only (or main) residence both before and after the period(s) of non-occupation in order for these periods to be deemed occupation.

If after the above there is a period to which the PPR exemption does not apply then that part of the gain will be taxable unless the property was let out at some point, in which case, “lettings relief” applies, the amount of which is the lowest of:

• The amount of gain remaining chargeable after the PPR exemption has been applied
• An amount equal to the PPR relief
• £40,000

But what if you have more than one property? If you in fact reside in more than one property – perhaps one in the week and one at weekends – then you can make an election to determine which property is your “main” residence for the purposes of applying the PPR exemption on a sale. An election cannot be made in respect of a property which is not your residence – ownership of the property is not sufficient.

In the absence of an election HMRC will determine, when you sell a property, whether that one was – or was not – your main residence, for the purpose of applying the exemption, based on the circumstances. Spouses are treated as having the same main residence as long as they are not separated.

An election must be made within 2 years of first having that particular combination of residences; once made it will apply to that property until the property is sold or until the election is varied. If the property is sold, the PPR exemption will exempt the gain for the period for which the election applied. If the remaining property is then the only residence, then the PPR exemption will apply automatically to that property, but if another property is purchased then there is a new two-year period on which a new election can be made.

Used carefully, the PPR election can minimise or even completely avoid CGT on more than one property.

This article is based on current legislation and is of general interest only. Specific professional advice should be taken before acting on matters mentioned here.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

Dispensations – Making record-keeping easier

If you are an employer then you will recently have had to submit your P11D forms, showing any expense payments and benefits paid to yourself and your employees.

A form P11D declares to H M Revenue & Customs details of any payments (other than those taxable through the company’s payroll) made to or on behalf of an employee, such as travel expenses, payment of medical insurance for an employee, reimbursement of expenses paid by an employee while on company business. Any item shown on the P11D is then declared by the employee on his/her tax return and the employee can make a claim to deduct any amount that was incurred in the performance of the duties of employment, so that the amount is not taxed.

Where an employer pays expenses on which no tax is charged, because the employee is able to claim a deduction on the basis that the expense was for business, there can be a way to simplify this process.

The employer may be able to obtain a dispensation from HMRC; this is a notice that removes the requirement for the employer to report certain expenses on the forms P11D, on which it is agreed that no tax charge arises. The employee then does not show those expenses, or make the associated claim, on his/her tax return.

The main expenses routinely covered by a dispensation are:

• travel, including subsistence costs associated with business travel
• fuel for company cars
• hire car costs
• telephones
• business entertainment expenses
• credit cards used for business
• fees and subscriptions

In order for HMRC to grant a dispensation, the employer must have an independent system in place for checking and authorising expense claims, so that HMRC can be satisfied that only those expenses covered by the dispensation will be left off the forms P11D – any expenses not covered must still be shown.

This system generally means having someone other than the employee who is claiming the expenses checking that the:

• amount claimed is correct
• claim only includes items covered by the dispensation

If it is not possible to operate an independent system for checking and authorising expenses claims – e.g. because you are the sole director of your company and you have no other employees – a dispensation will only be given if:

• all expenses claims are supported by receipts for the expenditure
• it can be demonstrated that the claim relates to expenditure that can be covered by a dispensation

You can apply for a dispensation using HMRC’s online form by following the link at: http://www.hmrc.gov.uk/paye/exb/schemes/dispensation.htm#1 or by post. In either case, HMRC aims to respond within 15 working days. Alternatively your accountant will be able to handle the application for you.

In either case, you will need to supply details of the types of expenses and benefit payments to which you want the dispensation to apply.

You can apply for a dispensation at any time. In general, a dispensation takes effect from the date on which it is issued by HMRC ; however, HMRC may agree that your dispensation can take effect from the beginning of the tax year in which you applied for it.

Once granted, dispensations last indefinitely. However, HMRC reviews them regularly (usually at intervals of five years or less) to make sure that the conditions under which they were issued still apply.

PAYE Settlement Agreements (PSAs)

A PSA is an arrangement with HMRC whereby employers can settle the tax/NIC liability of their employees on three types of items – minor items, irregular items and items on which it is impractical to operate PAYE. Commonly, PSAs will apply to the tax due on the benefit arising on a staff party or outing, where the employer does not wish the employees to bear the tax, but other examples include a present for an employee, the cost of a spouse accompanying an employee on a business trip or on a benefit shared by several employees (such as non-business taxi fares) where it is impractical to attribute the cost to any one person.

The employer applies to HMRC giving details of the expense to be covered; if HMRC agree, the employer submits a calculation of the PSA payment – this is made up if the tax on the expense, grossed up to include the tax due from the employee for having his/her liability paid by the employer, plus Class 1B NIC.

An application for a PSA for a particular tax year can be made at any time during the tax year or even after, but HMRC’s agreement must be obtained by 6 July following the end of the tax year. The tax is due for payment on 19 October after the end of the tax year to which the PSA relates.

If you would like further information on dispensations or PSAs speak to your professional adviser.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

With income tax rates of up to 50% but a top rate of capital gains tax (CGT) of just 28%, it is worth knowing about CGT.

CGT is charged on gains made on the disposal of some capital assets. Gains (or losses) are broadly calculated as the sale proceeds minus the original cost of the asset and any incidental costs of both purchase and sale. Where shares are sold out of a larger holding of the same shares, strict rules determine which shares have been sold so that their original cost can be determined.

Where a disposal is a gift by one person to another or a sale between connected persons (other than between spouses), the market value of the asset is substituted for the actual proceeds – this can create a CGT liability where the donor has received nothing, so advice should be taken before making a gift other than of cash (which is exempt from CGT).

Where transfers are made between spouses, these are deemed to take place at nil gain/nil loss. If a couple separate, this treatment applies until 5 April after the separation – after that, until they formally divorce, the couple are treated as connected persons as above.

Gains and losses arising in the same tax year are aggregated and where a net gain arises of less than the annual exemption (currently £10,600 for 2012/13), no CGT is due. Where an overall loss arises in a tax year, that loss is carried forward and set against future years’ gains.

Where total net gains in the tax year exceed the annual exemption, the excess is taxable – at 18% for basic-rate taxpayers and at 28% for higher-rate and top-rate tax payers. However, a rate of 10% CGT is payable on some business disposals.

Exempt assets

As well as cash, certain other assets are also entirely exempt from CGT – cars, personal possessions worth up to £6,000 (e.g. jewellery, paintings or antiques), shares held in an ISA, certain UK government securities (e.g. gilts, premium bonds, national savings certificates), winnings (from betting, gambling or lottery), personal injury compensation and foreign currency held for personal use. Assets with an expected useful life of less than 50 years when acquired are also exempt, unless they have been used in your business. Shares qualifying under the Enterprise Investment Scheme (EIS) and the new Seed Enterprise Investment Scheme (SEIS) introduced in the 2012 Budget are also exempt, if various conditions are met.

Your home

A gain on the sale of your home is not automatically exempt, but under the “principal private residence exemption” will not be subject to CGT if the whole of the property has been used as your residence for the whole time that the property was owned.

Where a property was not your residence for the entire period of ownership, then a proportion, on a time-apportioned basis, of the gain arising on its sale may be liable to CGT, but various periods of non-occupation can be treated as periods of “deemed occupation” for the purposes of time-apportioning the gain – most importantly, where a property has been your residence at some time, then the final 3 years of ownership will always be treated as a period of occupation. Similarly, CGT issues can arise if part of the property was used exclusively for business purposes, in which case again a proportion of the gain on sale may be taxable.

If you have more than one property where you live at some time, then you can nominate which one will be treated as your “main” residence for the purposes of the above exemption. You can change the nomination as your circumstances change and with careful planning it can be possible to minimise or even completely avoid a CGT liability on two properties.

Sale of a business – Entrepreneurs Relief

When you sell a business asset – i.e. your business, your share in a trading partnership or shares in a trading company (or the holding company of a trading group) – then, provided certain conditions are met, the gain (up to a lifetime limit of currently £10m) is taxed at 10%. Relief also applies to certain “associated disposals” of assets used in the business.

The conditions are broadly that the asset being sold has been held for at least 12 months before sale and, in the case of shares in a company, that the holding was at least 5% of the company.

Trading profit or capital disposal?

Finally a word of caution – while a one-off or occasional disposal of assets should be liable to CGT, regular or frequent sales may attract the attention of H M Revenue & Customs and could be seen as a trading activity, the profits of which are liable to income tax and not CGT.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

After the Budget: planning strategies to implement now

George Osborne’s 2012 Budget proved to be his most controversial to date, with widespread furore over the so-called ‘granny tax’, the ill-fated ‘pasty tax’ and the future cut in the 50p top rate of income tax.

Umesh Modi examines some of the Budget measures in more detail, along with the corresponding tax planning opportunities that may be available to you and your business.

Increase in the personal allowance

Further to the recent increase in the personal income tax allowance to £8,105, the allowance will rise again in April 2013, to £9,205 for those born after 5 April 1948. The advantage to higher rate payers will be countered by a lowering of the higher rate threshold, to £32,245.

In a bid to simplify the tax system, the Chancellor also announced that from 2013/14, the age-related personal allowances will be frozen. Their availability will be restricted to people born on or before 5 April 1948:

All individuals with adjusted net income of over £100,000, regardless of their age, will have their personal allowance (PA) reduced by £1 for every £2 that it exceeds £100,000, until it reaches nil.

The withdrawal of the PA produces a marginal tax rate of 60% (in 2012/13 the band is between £100,000 and £116,210), making it essential to have in place a robust financial planning strategy.

Key planning strategies

Maximise personal allowances

You should consider taking action to ensure that you are making the most of the PA, particularly if you will be affected by the forthcoming freeze in the age-related allowances.

If your spouse or partner has little or no income, you might want to consider transferring income (or income-producing assets) to them to ensure that they are able to make full use of their personal allowances.

Similarly, it is costly for one spouse or civil partner to be paying tax at 40% or even 50% while the other pays tax at only 20%. Equalising income where possible ensures that you will both pay tax at the lowest possible rate, thereby reducing the overall combined tax bill.

Reduction in the additional rate of income tax

From 6 April 2013 the additional rate of income tax, which is levied on those with incomes over £150,000, is set to fall from 50% to 45%. Consequently, the dividend additional tax rate will be reduced in line with this from 42.5% to 37.5% and trust rates will mirror these changes.

Giving careful consideration to the timing and structure of your income could significantly reduce your tax bill.

Key planning strategies

Consider deferring income

If you are likely to be subject to the 50% tax rate in 2012/13, you might want to consider deferring your income into the following tax year (beginning 6 April 2013). This could mean that you would benefit from paying income tax at the lower rate of 45%.

There are a number of ways to defer your income, including:

• Delaying dividend payments: By electing to make dividend and bonus payments after 5 April 2013 and taking advantage of the lower tax rate, you could make significant tax savings.

• Salary versus company loan: Taking a company loan in place of a salary during 2012/13, and then repaying the loan in the following tax year could also afford tax savings. However, consideration must be given to the broader tax implications of such action. Deferring income requires careful planning.

Maximise your pension contributions

For higher earners, maximising pension contributions (within limits) during 2012/13 will allow you to obtain relief at the higher rate of 50%. However, it is essential to seek professional advice before taking such action.

Corporation tax cut

The Chancellor doubled the reduction in corporation tax in the Budget, bringing the main rate down to 24% in April 2012.

The rate will be further reduced to 23% for the financial year commencing 1 April 2013 and to 22% for the financial year commencing 1 April 2014.

Key planning strategies

Consider the timing of expenditure…

While there is often a tendency to delay incurring expenditure to save money or aid cash flow, this might not be the most tax-efficient option. By incurring expenses shortly before the year end rather than after, relief for those expenses is obtained 12 months earlier. With the main rate of corporation tax set to fall further over the coming years, incurring expenses earlier rather than later may also provide relief at a higher rate.

… and the timing of income

These days there is little scope for deferring sales as businesses must include in their turnover the sales value of incomplete work, of unpaid bills (debtors) and of work completed but not yet billed. Under current guidance it does not matter when invoices are raised and, apart from the requirement to take account of the time value of money and the risk of default, it certainly does not matter when amounts are actually received.

Changes to the EIS & VCTs

The employee limit for both the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) is now fewer than 250 employees (previously fewer than 50), while the gross asset limit has risen to £15m before the investment and £16m afterwards. The maximum annual amount that can be invested in a company has also increased to £5m and the maximum annual amount that an individual can invest under the EIS is now £1m.

Meanwhile, a new Seed Enterprise Investment Scheme (SEIS) offers income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and a cumulative investment limit for companies of £150,000. In addition, the scheme offers a capital gains tax ‘holiday’ for investments made.

Tax planning strategies

Review your investment strategy

Following the recent changes to both the EIS and VCTs, now could be the ideal time to review your investment strategy. Aimed at helping smaller riskier UK companies to compete for equity finance, the recent reforms may make this tax-favoured asset class much more attractive. If you are considering investing under either of these schemes, the changes could mean that you benefit from a considerable tax saving.

Smaller companies, meanwhile, may want to consider the possible benefits of the new SEIS.

This article is based on current legislation and is of general interest only. Specific professional advice should be taken before acting on matters mentioned here.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

This time of year is very busy for employers with the filing deadlines for various forms.

Employer year-end return – form P35

The deadline for the submission of the Employer Annual Return (P35) was 19 May 2012 and most companies are now obliged to file their return online. If you are an employer and have not filed your Employer Annual Return yet then you should now do so as soon as possible as penalties can be charged for late submission.

Return of expense payments and benefits – form P11D

The next deadline is for 2011/12 forms P11D which are an employer’s return of expense payments and benefits paid to employees and which must be submitted to H M Revenue & Customs (HMRC) by 6 July 2012.

Class 1A National Insurance Contributions at 13.8% are payable by the employer on certain benefits and this liability is due for payment on 19 July 2012.

There is a common misconception that business-related expenses paid to a director/employee do not have to be shown on a P11D. This is not the case, unless the company has a dispensation – see below. If there is no dispensation in place then all expenses and benefits paid or provided to or on behalf of a director/employee must be shown on a P11D. This will include:

• Amounts paid to an employee

• Amounts paid on the employee’s behalf, whether in cash or on a company credit card

• Expenses incurred by the employee and reimbursed to him

The amounts declared on the P11D will be taxable on the employee, but the employee can make a claim to HMRC that any business-related expenses/benefits paid to him or on his behalf should be deducted from the amount declared and so not be taxable on him; this is done by way of either a claim on a Self Assessment tax return or by an adjustment in the individual’s PAYE code.

Common expenses and benefits which you may need to consider are as follows:

Travel expenses: paid either to or for your employee must be declared – if these relate to business a claim may be made by the employee as above; home to place of business travel is not considered to be business-related.

Entertaining: both client and staff entertaining must be included; an employee can generally make a claim to deduct business-related entertaining; staff entertaining is exempt from tax and does not have to be declared if it is an annual event (such as a Christmas party), which is open to all staff and the cost of which is less than £150 per head – if the cost is over £150 per head then the whole amount is taxable on the employees.

Mileage allowance for use of employee’s own car – this will be tax-free, and therefore does not have to be declared, if the amount paid is within HMRCs authorised mileage rates which are available on www.hmrc.gov.uk . If the amounts paid exceed the allowed rates, then the excess will be taxable.

Private medical insurance – the amount paid to or on behalf of each employee must be shown.

Subscriptions – the amount paid must be declared – the employee may make a claim to deduct work-related subscriptions and HMRC publish a list of professional bodies, subscriptions to whom are accepted as being business-related.

Company cars – where any private use is allowed, the taxable benefit is calculated by reference to the car’s CO2 emissions and its cost. Where fuel is also provided an additional taxable benefit will arise.

Telephone expenses – where the company pays for an employee’s home or mobile telephone, the amount paid must be declared; a claim by the employee for business-related use can be made.

Where a company regularly pays expenses – such as travel or entertaining – all of which are business-related so that claims by the employees are allowed, the company can apply to HMRC for a dispensation from the need to report these expenses. If HMRC are satisfied that the company’s systems ensure that only business expenses are paid, then a dispensation will be granted and the expenses covered by the dispensation no longer need to be declared on the P11D.

Return of Employment-Related Securities – Form 42

Where any transactions have taken place involving the company’s shares, a form 42 may be required. This form discloses to HMRC any transactions involving directors/employees and which have taken place by reason of employment with the company. The issue of shares on incorporation or the transfer of shares between family member swill not generally have to be declared. The deadline for the submission of From 42 for 2011/12 is 6 July 2012.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

Following the 2012 Budget on 21 March 2012 we look at the main provisions, some of which were announced previously and confirmed in the Budget.

Income Tax Rates and Allowances

Up to and including 2012/13, the amount of an individual’s personal allowance depends on age and income in the tax year. From 2013/14, the amount of an individual’s personal allowance will depend on date of birth and income in the tax year.

Allowances:

Income Tax bands:

The top rate of tax comes down to 45% from 6 April 2013.

The above rates apply to non-dividend income – dividend income is taxable at 32.5% in the higher-rate band and 42.5%/37.5% in the top-rate band (2012/13 and 2013/14 respectively).

There is a 10% starting rate for saving income only – available if an individual’s taxable non-savings income (after deducting the personal allowance) is less than the starting rate limit (£2,710 for 2012/13).

Child Benefit

The proposal to withdraw Child Benefit from higher-rate taxpayers was announced in the Spending Review 2010 but the Budget announced modifications – a new income tax charge will apply to individuals earning over £50,000 and receiving Child Benefit (or whose partner receives Child Benefit). For those earning between £50,000 and £60,000 the charge will be 1% of the Child Benefit for every £100 of income over £50,000; for those earning over £60,000 the charge will be the full amount of Child Benefit.

Non-domiciled individuals

A higher charge of £50,000 will apply to non-domiciled individuals choosing to be taxed on the remittance basis when they have been resident in the UK for at least 12 out of the 14 previous tax years.

Non-domiciled individuals will be able to remit overseas income/gains without a UK tax liability in order to make qualifying investment in unlisted companies (or those listed on AIM).

Savings and investments

Pension contributions:

The Annual Allowance for tax relief on pension contributions was reduced from £255,000 to £50,000 from 5 April 2011 and the Lifetime Limit is reduced to £1.5 million from 5 April 2012.

Seed Enterprise Investment Scheme (SEIS)

While changes to various conditions attached to the Enterprise Investment Scheme were announced in last year’s Budget to encourage investment, this year’s Budget announced the SEIS which applies from 6 April 2012 to shares issued in a stand-alone company which is less than two years old, with fewer than 25 employees and gross assets of less than £200,000 before the investment. The investor obtains a tax reducer at 50%, regardless of his actual tax rate on the cost of the shares up to a maximum of £100,000 and as long as his investment is in less than 30% of the company’s shares.

ISAs

From 6 April 2012, the ISA limit rises to £11,280, up to £5,640 of which can be in cash.

Businesses and Employers

Corporation tax:

From 1 April 2012, the main rate of corporation tax will drop to 24%, with further falls to 23% and 22% from 1 April 2013 and 2014 respectively. The small companies’ rate remains at 20%.

Capital allowances:

As previously announced, capital allowances reduce from April 2012 – the 20% writing-down allowance becomes 18% and the 10% rate which applies to certain assets (most notably high-emission cars) reduces to 8%.

The Annual Investment Allowance, which provides 100% tax relief on expenditure is reduced from April 2012 from £100,000 per annum to just £25,000.

Research and development expenditure:

The planned increase in R&D relief goes ahead – from 1 April 2012, relief will be 225%, with a small reduction in the repayable tax credit from 12.5p to 11p.

Employment Management Incentive Schemes (EMIs)

The maximum value of options which can be held by an employee under an EMI scheme is to be increased from £120,000 to £250,000.

Company car and fuel benefits:

Changes were announced which will take effect in 2014/15 and the following two years – there will be a 2% increase in car benefit with a new maximum of 37% of list price. From 6 April 2016 the minimum car benefit will be 15% but the 3% excess for diesel will be abolished.

Capital Gains Tax and Inheritance Tax

The CGT annual exemption remains at £10,600 in 2012/13, with CGT rates staying at 18% and 28% depending on income levels.

The nil-rate band for IHT remains at £325,000, with the IHT rate at 40%, but where at least 10% of an estate is left to charity, the IHT rate on the remaining estate will be reduced to 36%. .

VAT

From 1 April 2012, registration and deregistration limits increase to £77,000 and £75,000 respectively. The rate of VAT remains unchanged.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk

Prepare for the unexpected and protect your company

The success of any company is often determined by the skills and efforts of key/essential individuals. Those efforts translate into a rewarding and successful business, so in essence the key individual and the business are inextricably linked.

What happens though, if something goes wrong? That is, what would happen to the business if anyKeyperson were to die or were diagnosed with a critical illness? Clearly the financial security of your company, your co-directors and families involved could be jeopardised.

The death or critical illness of a key person in your company could also threaten everything you have worked so hard to achieve.

This paper considers the impact that a critical illness, disabilityor death would have on the business directly and the individual’s family as a consequence and outlines some of the steps you could take to limit those effects.

1. 1. Protecting the business

If you die or are diagnosed with a critical illness that results in you being unable to work, what would happen to your shares in the company?

If your family inherits your shares on your death, it might be impossible for them to take over your role in the company. Even if your co-directors, those who control and run the company,are prepared to buy your shares, they may not have the funds available to be able to buy your shares.

Typically for a company your family will have a number of options: –

• Take a share of the company’s profits, but this could amount to very little if the company is struggling because of your absence.

• Insist on winding up the company and receive a share of its value.

• Sell your shares to remaining co-directors.

• Sell the business in the open market– but this relies on finding a buyer who is prepared topay that price. This can be a potentiallylong and difficult process.

These options may not give you or your familythe full financial value of your shareholding. It may not give themthe security you might have wanted. However, with some forwardplanning you could create a much more attractive alternative.

The solution
One solution is for each director to take out life assurance and critical illness plans to cover their life, which are then put in trust for the other directors.

Then if you die or are diagnosed with one of the critical illnesses covered by a plan, the remaining directors will have the money to buy you or your family out of the company. This will also supplement any personal protection plans you have already made. This helps to ensure continuity and stability for the business and helps to provide financial security for your family.

1. 2. Protecting your profits

It is most likely that not only would you provide the foundation of your company you are also likely to be make a vital contribution to its success.Therefore if you die, were diagnosed with a critical illnesses or were off work for an extended period due to illness or injury, then this could have a detrimental effect on your company’s ability to trade profitably now and in the future. The loss of a key person can cause far-reaching problems for a business such as: –

Loss of relationships– people like to deal with people they know and losing a key person can mean losing customers to your competitors and may lead to lower profits.

Loss of professional expertise– specialist skills and experience of your business can be difficult to replace and their loss could seriously affect your competitiveness.

Cost of recruitment– competitive job markets mean finding and training a replacement can be expensive and time-consuming. All of these issues could affect the profitability of your partnership – unless you’re financially prepared in advance.

The solution
One solution is for your company to take out life assurance and critical illness cover on the lives of its keypeople. This will help to compensate thecompany for any loss of profits, should akey person die or be diagnosed with acritical illness.

An income protection plan may also beestablished on the same basis. This will providethe business with a regular income if akey person is absent for an extended period due to illness or injury.

Conclusion
It is recommended that you take independent financial advice on these matters to ensure that you have considered the possible implications of losing a key person. It is also possible for the policies to be arranged quite tax-efficiently.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk