Welcome to September's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you abreast of the latest developments in taxation.
May’s newsletter includes some timely advice for small limited companies with only one or more directors on the payroll, who wish to opt out of Pension Auto-enrolment.
If you need further assistance just let us know or you can send us a question for our Question and Answer Section.
We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.
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Tax-efficient savings for children
There are a number of ways to save or invest for children - some accounts are tax-efficient but rigid, others are often flexible but liable to tax. Interest earned from CTFs and Junior ISAs is paid tax-free, but the money is effectively locked in until the child is 18, at which time it belongs to the child. Standard savings accounts usually offer lower interest rates and the interest is likely to be taxable, but there will be flexibility on withdrawals and transfers, enabling the parent to keep a tight rein on the money.
Junior ISAs operate in much the same way as ordinary 'adult' ISAs. The maximum investment limit for 2015/16 is £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Until April 2015 it was only possible for children who did not hold child trust funds (CTFs) to invest in Junior ISAs, which meant that many young savers were trapped in accounts yielding poor interest rates. From April 2015 all children (under-18s) who are UK resident should be able to hold a Junior ISA and transfers from CTF accounts to Junior ISAs will be allowed. This change is important as it allows parents to look for a better return on their investment, pay lower charges and have more choice of products.
Whether a CTF should be transferred to a Junior ISA greatly depends on whether the child currently pays tax, and whether they will save enough to pay tax on their savings when they're 18. If it is likely that the child will save more than £15,240 (the annual ISA limit from 6 April 2015) in their first 18 years, then it is probably worth considering a Junior ISA, as these convert to full cash ISAs when the child turns 18.
Just like adults, children are also entitled to an annual personal allowance (£10,600 for 2015/16). Although Junior ISAs (and CTFs) are tax-free, unless the child stands to earn interest of more than £10,600 from other types of investment accounts, he or she should not pay tax on the interest earned in any case. Therefore, for those with modest savings, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment.
The future for intermediaries
The Summer Budget 2015 contained an announcement that the government is to consult on proposals to improve the effectiveness of the existing intermediaries legislation, commonly known as IR35. The reason for this review was given as the perceived unfairness that two people could be doing the same job and pay very different levels of tax depending on how they are engaged. A consultation document has now been published (Intermediaries Legislation (IR35): discussion document), which sets out the rationale for change, the options to be discussed and the likely next steps.
Because of the interaction between allowances available and rates paid in the corporate and personal tax systems, and the absence of NICs on investment income, including dividends received from personal service companies (PSCs), people who work through their own limited company can often pay a lower effective rate of tax and NICs than either the self-employed or employees. The government estimates that there were around 265,000 PSCs in 2012-13, an increase of 65,000 on the previous year alone. This number is expected to continue to increase over the coming years, particularly given the changes announced at the Summer Budget on the taxation of dividends. The Exchequer estimates that current non-compliance in this area is costing some £430m in tax and NIC receipts each year.
Broadly, the IR35 legislation requires individuals working through an intermediary to pay the same tax and NICs as any other employees, where they would have been an employee if they were providing their services directly. One of the main concerns is that currently HMRC have to enquire into each individual PSC for each individual engagement, even where several PSCs are working for the same engager, often under what appear to be the same terms. Several parties may be involved in the contractual chain in each case and reaching agreement with all of them on their understanding of the contractual arrangements can be complex. HMRC also believe that there is insufficient clarity concerning each party's responsibility for cooperation with any intervention.
The consultation document indicates that the government is not looking to abolish the IR35 legislation, but reform is needed to protect the Exchequer and level up the current playing field for those who are directly employed and those who would be employed directly if they were not operating through their own company.
Reading between the lines in the consultation document, it seems that the most likely change is that the onus to verify the employment status of an individual will be put on the shoulders of the 'engager'. This means that those who engage a worker through a PSC would need to consider whether or not IR35 applies, and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees. However, the government recognizes that this would increase the burden on engagers and this option is therefore up for (no doubt heavy) discussion.
There is a great deal of complexity associated with identifying whether or not IR35 applies and the consultation document picks up that clarification is required. One option set out in the consultation document is to consider aligning the IR35 test with that used for temporary workers in the agency rules, which is based on supervision, direction or control. Another option could be to introduce a rule that an engagement must last a certain minimum amount of time to be considered one of employment. Again, these options are going to be considered over the coming months.
The consultation closes at the end of September 2015, so we could see further announcements on this subject as early as the 2015 Autumn Statement.
When tips are taxable
Confusion often arises regarding tips and gratuities as the tax and NIC treatment depends on how they are paid to the recipient.
Cash tips handed to an employee, or left on the table at a restaurant and retained by that employee, are not subject to tax and NICs under PAYE, but the employee will need to declare the income to HMRC - HMRC often make an adjustment to the employee's PAYE tax code number to reflect the amount likely to be received during a tax year so any liability is collected via the payroll. By contrast, if an employer passes tips to employees that are either handed to him (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made.
Tips will also be subject to PAYE if they are included in cheque and debit/credit card paymentsto the employer, or if they pass service charges to employees.
Amounts paid by a customer as service charges, tips, gratuities and cover charges count towards National Minimum Wage (NMW) pay if they are paid by the employer to the worker via the employer's payroll and the amounts are shown on the pay slips issued by the employer. Tips given directly to the worker by a customer do not count towards NMW pay.
Paying inheritance tax
Various rules exist for determining the time for payment of inheritance tax (IHT). In certain circumstances it will be possible to pay in instalments, and it is even possible to settle a liability by transferring ownership of assets to the Crown (for example, a valuable painting may be donated to a national museum in lieu of an inheritance tax bill).
Unless it can be paid in instalments, IHT is generally due for payment as follows:
- Chargeable lifetime transfers: Tax is due six months after the end of the month of the transfer. But if the transfer is made between 6 April and 1 October in any year, the tax is due at the end of April the following year.
- Estates: The personal representatives must pay the tax at the time that the IHT account is sent to HMRC, and this depends on the length of time it takes to sort out the estate.
- PETs: Tax due on a potentially exempt transfer (PET) that becomes chargeable because of the transferor's death within seven years needs to be paid six months after the end of the month in which the death occurs.
IHT is often due to be paid before the cash and assets left in a will are released to the beneficiaries. This means that the beneficiaries have to find the money to pay the tax elsewhere. The most obvious way to solve this problem is to take out a loan to pay the tax owed. The loan can then be paid off after cash from the estate is received or, in the case of assets, the assets are sold to raise the funds needed.
It may be worth considering a life insurance policy that will pay out on death and so cover any IHT arising on an estate. Remember, though, that HMRC may consider a life insurance policy to form part of an estate, so the plan should be set up under a trust. A fringe benefit of this is that all proceeds of the policy are paid free of tax.
September Question and Answer Section
Q. I have recently registered for VAT. What is the difference between 'normal' and 'cash' accounting?
A. Under the normal method of accounting for VAT, you account for the output tax on your sales as they take place or as soon as you issue a VAT invoice, even if your customer hasn't paid you. Then you can reclaim input tax on purchases you make as soon as you receive a VAT invoice, even if you haven't paid your supplier. This method can cause cash flow problems if you have to pay a VAT bill before your customer pays you.
The cash accounting scheme, which is available to most businesses with an annual taxable turnover up to £1.35m, turns this normal method upside down. In cash accounting, you account for the output tax when you receive payment for the sale, rather than when the customer received the goods or service. So this way, you have the money from your customer to pay the VAT you charged on his bill. However, this scheme cuts both ways because you can only reclaim the input tax once you pay your supplier, which means that when your VAT bill is due you can't offset the VAT you owe suppliers against your total bill.
The cash accounting scheme can help your cash flow because in general you don't have to pay VAT until your customers have paid you. The scheme is especially helpful if you give your customers extended credit or suffer a lot of bad debts. However, the scheme may not give you any benefit if you:
- are usually paid as soon as you make a sale;
- regularly reclaim more VAT than you pay; or
- make continuous supplies of services.
Q. I bought my flat in 2008 and lived in it until 2013 when I moved into my now wife's house. The flat was in negative equity so we kept it and rented it out. Now that the housing market has improved we have decided to sell it. We plan to use the proceeds to buy my wife's parent's house jointly with my wife's sister and her husband. If we reinvest the profits on the sale of my flat in my wife's parent house, will we avoid paying any capital gains tax?
A. Unfortunately rollover/holdover/reinvestment relief is not available for residential investment property, unless it relates to furnished holiday lettings, or where there is a compulsory purchase order. However, as you lived in the property from 2008 until 2013 and then rented it out, you should be able to claim some relief from capital gains tax via a combination of principal private residence relief, lettings exemption and the capital gains tax annual exemption.
Q. I am thinking of starting my own business and can't decide whether to incorporate straight away or not. I will need to make a substantial investment in my business so it is likely that I will make a loss in the first, and maybe even second, year of trading. Is loss relief the same for sole traders and limited companies?
A. Taking all the pros and cons of incorporation into account, you may come to the conclusion that you're best to carry on your business as a sole trader in the early years. This situation may be particularly relevant if you envisage making losses in the early years of trading, because you can carry back losses made in the first four years against personal income of the three preceding years, often resulting in a substantial refund of tax becoming due. However, don't miss out on the opportunity of forming a limited company later on when the benefits of company status may be more valuable.
September Key Tax Dates
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/9/2015
30 - Closing date to claim Small Business Rate Relief for 2014/15 in England