Taxing Times – February 2015

Welcome to the second edition of this new monthly newsletter for 2015. In this edition we’ll look at:

 

Taxing Times

  • Patent Box – an update

  • Annual Investment Allowances – a reminder

  • Holiday pay – time for a review?

  • Real Time Information Penalties

  • What’s new in the world of tax?

 

 

Dotted LineEC forces UK Patent Box changes 

As a reminder, the Patent Box is a tax regime into which companies can elect under which profits generated from patents are taxed at a lower corporation tax rate than other profits.  It is a fairly new regime (available since 1 April 2013) and aims to reward innovation.  Patent Box is, if you like, the big brother of Research & Development (“R&D”) tax relief…….R&D tax relief provides tax breaks while the company is developing a new system/product/process and Patent Box provides tax breaks once the R&D activity is finished and the new system/product/process is patented and up and running commercially.  When a company is in the Patent Box regime, profits which are generated from patents are taxed at less than the standard corporation tax rate (which is a flat 20% from  1 April 2015).  Patent Box is being phased in but ultimately come April 2017, profits from patents will effectively be taxed at only 10%.

20238682_mThe changes

Despite being a new(ish) relief and despite not even being completely phased in yet, the Patent Box regime is going to change.  It has been under scrutiny from the European Commission ever since it was introduced on the grounds that in its current form it is anti-competitive (despite other European countries such as Spain and France having their own versions of Patent Box the UK one is seen as too generous……).  The good news is that a version of UK Patent Box will remain, although it will not be as generous as it is now.  And any company which elects into the current regime can continue to use Patent Box as it currently stands without any changes up to 2021.  The bad news is that companies only have until June 2016 to make the election to get into the current Patent Box. If they elect after June 2016 they’ll be in the new “EC approved” regime  – and we don’t quite know how that will work yet although it’s clear it won’t be as valuable as the current regime and will probably be more administratively onerous.

As companies can effectively only elect into Patent Box if they own or exclusively licence patents or have a patent pending, the timing might be a bit tight for some to get their ducks in a row within the next  15 months.   So companies should take this limited window of opportunity to review their patent activities and consider electing into the Patent Box before everything changes!

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Watch out, Annual Investment Allowances about

We have all become used to the very generous Annual Investment Allowance (“AIA”).  This gives 100% tax relief on capital expenditure in the year the spend is incurred, effectively allowing capital purchases to be treated as revenue to obtain tax relief in Year 1 rather than spread out across a number of years.  The current AIA level is £500K p.a.  However, as they say, familiarity breeds contempt, and we should not forget that the £500K AIA is only a temporary measure and is due to plummet to £25K on 1 January 2016 (now only 11 months away and counting!)

At present we just don’t know if the AIA limit of £500K will be extended past 1 January and while we can hope, it is by no means something that can be relied on.

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As a reminder, the way the AIA limits work is that they are apportioned according to your financial year end.  So if your business draws up its accounts for a 12 month period from 1 April 2015 to 31 March 2016 it will “straddle” the 1 Jan change date for AIAs.  9 months (from 1 April 2015 to 31 December 2015) will relate to the existing AIA of £500K p.a.  This is time apportioned, so from 1 April 2015 to 31 December 2015 the maximum amount of AIA is 9/12 x £500k = £375K.  The remaining 3 months (from 1 January 2016 to 31 March 2016) will relate to the much reduced AIA of £25K p.a., which gives a time apportioned amount of £6,250 (3/12 months x £25K).  This produces a total maximum AIA of £381,250 for the year to 31 March 2016.  BUT an important point to remember – and one that you could fall foul of – is that any expenditure which falls into the period 1 January 2016 to 31 March 2016 will  be limited to the maximum AIA claim of only £6,250!

So the timing of planned expenditure starts to become crucial.  It would be a huge disappointment, not to mention a serious tax timing issue,  if you spent say £300K on say 3 January 2016 in your accounting period ended 31 March 2016 and instead of getting the £300K AIA you were expecting, you could only claim £6,250 instead…………

Bringing forward spend into an earlier accounting period and certainly before 1 January 2016 should be seriously considered in light of the upcoming AIA change.

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Real Time Information Penalties – Be prepared

April 2013 saw the introduction of Real Time Information (“RTI”) which was an HMRC directive designed to improve and streamline the flow of payroll, National Insurance and tax information between employers and HMRC by requiring information to be submitted before each payday.

RTI was intended to make the Pay As You Earn (“PAYE”) process simpler and less burdensome for employers and HMRC for example by removing the need for the end of year return (P35 and P14) and simplifying the employee starting and leaving processes.  It was also set up to ensure HMRC could pursue late payments more effectively and reduce errors and fraud.

Late filing penalties for larger PAYE schemes, which are those with 50 or more employees, have been in operation since 6 October 2014. Those schemes which have fewer than 50 employees will be subject to monthly penalties for late filing of RTI submissions from 6 March 2015.  This means that employers with up to 9 employees will face a new monthly penalty of £100 for failure to comply and employers with between 10 and 49 employees will face a new monthly penalty of £200 if they don’t embrace their RTI responsibilities.

penalty

And if employers are over 3 months late they can be charged an additional penalty of 5% of the tax and National Insurance that they should have reported.

Larger employers who have incurred these penalties will start to receive quarterly penalty notices from the beginning of February 2015.  If you use a payroll provider such as Dodd & Co to process your payroll for you then they will NOT automatically be sent a copy of the penalty notice.

So how can you avoid getting a penalty?

Whether you run your own payroll or outsource the burden to someone else, the responsibility is at the end of the day, yours and yours alone, so it is important to know what your responsibilities are;

Your payroll must be correct and submitted on time and the RTI must be sent on or before the day that you pay your staff.  You must ensure that you check your figures are accurate before paying your wages and if you are sending us the information, we must have plenty of time to process it on your behalf and let us know any changes which include any starters, leavers or pay rises.

Get into good habits now to ensure you don’t receive a submission penalty. And let us know if you need any assistance.

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Holiday Pay – How does your employment contract stack up?

You may have heard on the news over the last few months that a recent Employment Appeal Tribunal (“EAT”) ruled in favour of an employee who argued that his holiday pay should reflect his overtime pay as well as his basic wages.  The decision caused concern and confusion for employers who were worried about any potential claims for breach of contract or unlawful deduction from wages.

An employee’s holiday rights and their annual leave entitlement should be agreed when an employee starts work and the terms should be set out either in a Written Statement of Employment Particulars or a Contract of Employment.  The written statement or contract is required by law and must be given to employees by the employer no later than two months after the start of employment. The document should contain sufficient detail to enable the employee’s entitlement to be precisely calculated, including any entitlement to accrued holiday pay on termination of employment.

hol payFull time employees are legally entitled to 5.6 weeks paid holiday per year and can include bank holidays.  Part-time employees are also entitled to a minimum of 5.6 of their working weeks paid holiday each year.  An employer can choose to offer more holiday entitlement than the legal minimum.  Either way an employee’s holiday entitlement should be clearly set out.  For each week of their entitlement employees are entitled to be paid a week’s pay.  The calculation of what constitutes a week’s pay can be complicated.  If a worker’s employment ends, they have a right to be paid for the leave due and not taken.

The EAT ruling clearly has widespread implications for all employers who currently pay overtime to their workers.  Many employers may look to reduce the availability of overtime to their staff to avoid increased holiday pay.  The EAT considered whether other allowances and travel time payments should also be included in holiday pay calculations.

The above is a brief summary of the rules which can be complex.  Holiday pay concerns are a matter for your lawyer (rather than your accountant).  Employers should therefore review their Written Statement of Employment Particulars or Contracts of Employment and seek legal advice from a solicitor or employment law specialist.

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What’s new in the world of tax?

Horsing around

Horsing AroundIt seems HMRC are troubled over purchases of luxury high-end horse boxes and are concerned that some buyers are failing to pay the correct tax on equipment which can cost hundreds of thousands of pounds.  It appears that HMRC suspects some farmers and rural business owners of buying horseboxes through their company and claiming it (incorrectly) as a business expense or failing to declare it as a benefit in kind for personal use.  And there are even suggestions that HMRC has been monitoring horseboxes listed for sale in the classified advertisements of country magazines.  It may therefore be a sensible idea for horse box owners to make sure they have the correct documentation to support their purchase and use of the equipment, just in case HMRC decide to challenge it.

Hmmmm. It’s of course absolutely right that people don’t claim what they aren’t entitled to, but using it as an excuse to browse through Country Life? Perhaps attentions would be better focussed elsewhere…….

HMRC back down over direct recovery of debts powers

The Direct Recovery of Debts (DRD) powers give HMRC the ability to recover cash directly from the accounts of debtors who owe £1,000 or more in tax OR tax credits debt.  Banks, building society accounts and ISA accounts will be accessible to HMRC.  However a consultation revealed strong criticism of these proposals and HMRC have bowed to pressure to provide additional safeguards for their new plans to recover debts in this way. These include guaranteed visits to debtors from an HMRC officer to meet them face-to-face, and extensions to the time allowed for appeals from 14 days to 30 days.  These extra safeguards are in addition to the existing guarantees to always leave a minimum of £5,000 across debtors’ accounts (note – across all accounts, not per account, so splitting funds between a number of different accounts wont mitigate HMRC’s DRD powers).

HMRC also say they will be setting up a new specialist unit to deal with cases involving vulnerable members of society as well as providing a dedicated DRD team and helpline. It will “add further new safeguards relating to transparency, governance and a phased implementation of the DRD powers”.  Really………….?

Some would say these “safeguards” are still not enough to protect taxpayers against such a frightening idea.

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Finally – HMRC issue list of Top 10 worst late tax return filing excuses

You think completing your January tax return in time was tough?  Spare a thought for those who tried – and failed – to convince HMRC that they had a good excuse for not filing their return on time:

1. My pet dog ate my tax return…and all the reminders.

2. I was up a mountain in Wales, and couldn’t find a post-box or get an internet signal.

3. I fell in with the wrong crowd.

4. I’ve been travelling the world, trying to escape from a foreign intelligence agency.

5. Barack Obama is in charge of my finances.

6. I’ve been busy looking after a flock of escaped parrots and some fox cubs.

7. A work colleague borrowed my tax return, to photocopy it, and didn’t give it back.

8. I live in a camper van in a supermarket car park.

9. My girlfriend’s pregnant.

10. I was in Australia.

9th Jan marked the 216th anniversary of the introduction of income tax by William Pitt the Younger in 1799 – thanks William, you make January fun!

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