Taxing Times – January 2016

Welcome to 2016! Let’s hope it is a good one.

January, the month all accountants and tax advisers love is upon us – don’t forget your 31 January personal tax return deadline!! We’re sure you (and of course we) have it all in hand but just a gentle nudge that it’s only 25 days to go! So if you haven’t yet got all your final paperwork gathered up and sent in, NOW is the time to do it!

To get us started off this January we’ll have a look at the following: 

Tax Opps

  • Reminder – important changes to the taxation of dividends
  • Consultation on company distributions – what might it mean?
  • Property taxes –lots of forthcoming changes
  • Grant scheme for businesses affected by floods
  • Auto Enrolment updates
  • What’s new in the world of tax?

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Changes to the taxation of dividends

From 6 April 2016 the taxation of dividends received by individuals will change.  The first £5,000 of dividends received by an individual will be taxed at 0%. Thereafter, for basic rate taxpayers the rate of tax will be 7.5%, with a rate of 32.5% for higher rate taxpayers, and a rate of 38.1% for additional rate taxpayers. 6791947_s

This means that for many businesses owners, tax liabilities on dividends and other distributions from companies will increase. Companies may consider accelerating the payment of dividends in the current tax year, although this means paying income tax considerably earlier! Or it may be appropriate to look at alternative means of extracting profits from the company.

Please contact us if you wish to discuss this important change and your options in more detail.

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Consultation on Company Distributions – what might it mean?

In the Autumn Statement the Chancellor announced changes to the taxation of distributions from companies.  Comments have been sought in a consultation document.

There has been anti avoidance legislation in relation to distributions for many years, designed to ensure that if amounts are taken out of a company in a capital form that could have been paid out as dividends and there is a tax avoidance motive, income tax is charged instead of the lower rate of capital gains tax.  However, HMRC have put company distributions on their agenda once more and the proposals are wide ranging.

HMRC seem to be concerned about situations where, for example, the vendor has retained profits in the company with a view to selling those profits in a capital form.  HMRC are also concerned about situations where there is a partial sale to a third party, but the original shareholders continue to have a significant interest in the company following the sale.

Distributions made on a winding up are of particular concern to HMRC where, for example, the shareholders retain profits in excess of the company’s commercial needs so as to receive those profits in capital form; or where a company goes into liquidation but the same or a similar trade is carried on by the shareholders or by a new company owned by the shareholders.  Therefore, the proposals extend the type of transactions that are caught. From 6 April 2016, it will no longer be possible, for example, to use a separate company vehicle for property development projects, unless it can be demonstrated that the arrangements do not have a main purpose, or one of the main purposes, of obtaining a tax advantage (and that could be quite difficult to evidence). 22175861_s

A repayment of share capital is usually not taxed as a dividend, and this will continue to be the case where the share capital represents money injected into the company. However, HMRC are also seeking to counter situations where share capital is created by means of a share for share exchange, and that enhanced share capital is then returned to the shareholders.

Under current rules it is possible for a company to buy back a shareholder’s shares but for that shareholder to retain a significant interest in the company. The government is considering whether the rules regarding purchase of own shares should be changed so that a shareholder would have to sell a larger proportion of their shares in order to get capital gains tax treatment for the sale to the company.

The proposed changes are wide ranging, and will have a significant impact on the taxation of a wide range of transactions involving shares in a close company (that is to say, one controlled by 5 or fewer shareholders or by its directors). We have seen in the past that legislation can be used rather like a “sledgehammer to crack a  nut”, that is, catch lots of transactions that weren’t the focus of the changes, in order to catch the ones that were intended.  So companies contemplating any transaction involving their shares might want to consider doing so in good time, before 6 April 2016 where possible, “just in case”.

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Property Taxes

Landlords planning to quit over SDLT and interest relief changes

George Osborne announced in the Autumn Statement that buy-to-let landlords (and second home owners) would face a higher level of stamp duty (SDLT) from April .  The Residential Landlords Association says one in ten landlords are planning to leave the buy to let market following this announcement, coming hard on the heels as it does to changes which will restrict the amount of interest relief on finance costs.

22801064_sAlan Ward, from the association, said: “By stopping landlords from deducting their borrowing costs from their tax bill, the chancellor has broken the important principle that you only pay tax on your profit rather than your turnover.”

As a reminder, from 2020/21 rental profits will be  assessable on landlords at their marginal rate of tax, but the finance costs will only be allowable as a “tax reducer” at 20%. This will have significant tax implications, including pushing many basic rate taxpayers into the higher tax brackets. This change is being phased in from 2017 to 2020.

The government will consult further on the proposal with the additional 3% SDLT coming into force from 1 April 2016.

 

Changes to property transaction payment dates

The government will also consult in 2016 on changes to the SDLT filing and payment process, including a reduction in the filing and payment window from 30 days to 14 days. These changes will come into effect in 2017/2018.

From April 2019, a payment on account of any Capital Gains Tax due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief (PPR). The government will publish draft legislation for consultation in 2016.

 

Reform of the Wear and Tear Allowance

A well known deduction for a “wear and tear” allowance is available for landlords letting fully furnished properties at a rate of 10% of rents less rates.

However, the wear and tear allowance will be repealed with effect from 1st April 2016 for Corporation Tax payers and from 6th April 2016 for Income Tax payers.  Instead a deduction for the replacement of furnishings will be available against rental income. The new provisions will not be available for furnished holiday lettings.

The removal of a general allowance and the implementation of a deduction for expenditure will prevent landlords from obtaining a tax deduction without incurring a cost. It may also encourage landlords to replace furnishings at an earlier date to obtain tax relief.

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Grant scheme for businesses affected by floods

Funding is now available to support businesses severely affected by the recent flooding – whether flooded directly or affected less directly through, for example, extended road closures.

Grants are available to non-farming small and medium sized businesses (up to 250 full time equivalent employees). Support for farming businesses is being arranged separately through DEFRA’s Farming Recovery Fund.

Flood TT

Grants can be used for a wide range of activities to support survival and recovery such as marketing, interest payments on new and existing loans, specialist advice, training, equipment and other activities supporting implementation of a recovery action plan.

Growth Hub advisers are available free of charge to assist with development of action plans and help put together the application. All applications must be reviewed and signed off by a Growth Hub adviser.

They can also provide other practical advice and support and link businesses into other advice, support and funding available to them.

Commenting on the scheme, Suzanne Caldwell, Cumbria Business Growth Hub says, “Similar schemes have proved invaluable in supporting small and medium sized businesses in the county to recover successfully in previous crises – from earlier flooding to Foot & Mouth – not only helping businesses survive but also encouraging and supporting proactive improvements. Many businesses in the past have, for example, enhanced their marketing and tried new methods of promoting themselves. Alongside this practical advice from our experienced team can really help businesses to make the most of the funding on offer and support business recovery and competitiveness.”

Cllr David Southward, County Council Cabinet member with responsibility for businesses, added, “This money will be essential to getting our businesses back up and running. It was a lesson learnt from our earlier floods that the sooner we can get financial help out there to businesses the better. We are committed to getting any Cumbrian business affected back on their feet as soon as possible and this money is essential to help us do that. It is essential that we get the message out that despite this extreme flooding Cumbria is still ‘open for business’.”

Application packs, including guidance notes on the scheme, are available to download at www.cumbriagrowthhub.co.uk

The application process is simple and 75% of the grant will be paid up front within days of approval. To apply contact Cumbria Business Growth Hub, 0844 257 8450 or info@cumbriagrowthhub.co.uk

This funding is made available through the Department for Business Innovation and Skills and is delivered by Cumbria Business Growth Hub, Cumbria County Council and Cumbria Chamber of Commerce working together.

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Auto Enrolment Updates

Will ‘Workie’ work?

A new animated multi coloured character has been introduced by the government with the launch of a campaign which aims to change the country’s perception of pensions in the workplace.

WorkieOver the next few months you will see ‘Workie’ appear on TV adverts and other media channels, trying to deliver a quirky but serious message that all employers need to get ready for automatic enrolment.

An awareness campaign is definitely a good idea as numerous  employers are still ignoring The Pension Regulator letters asking them to “ACT NOW” but many are saying that the £8.4m price tag for the adverts would have been better spent on more direct communication and assistance for employers having to deal with the administration burden.

The latest statistics show that between July and September 2015, The Pension Regulator issued 2248 non compliance notices; 145 unpaid contribution notices and 582 fixed penalty notices (£400 each).  As more and more small and micro employers are required to take action, no doubt these figures will increase unless employers start to prepare.

Meanwhile the National Audit Office has reported that over the last three years since the introduction of automatic enrolment employee opt-out rates have been between 8% and 14%, much lower than expected and certainly much lower than employers were anticipating.

 

Auto Enrolment Contribution Rates

George Osborne announced in his Autumn Statement on 25 November that he has decided to delay the increase in the default contribution rates for auto enrolment by six months.  The current minimum contribution rates based on Qualifying Earnings is 2% with a minimum of 1% contribution by the employer.  This was due to rise in October 2017 and then a further rise in the percentage in October 2018.  The rises will now be aligned with tax years, with the first increase due in April 2018.

 

Workplace Pension Scheme Set up Fees

The Peoples Pension have recently issued a press release launching their enhanced service which gives the employer an extended telephone support of 8am to 10pm by their dedicated support team plus they will tell the regulator the employer has complied.  14969151_s The cost for this enhanced service is a one off set up charge of £500 + VAT for all the support they’ll need for the life of the scheme or a reduced charge of £300 plus VAT if the employer is introduced through an intermediary.

NOW Pensions have announced that they will charge from the start of next year and they are going to be charging a monthly fee for employers based on the number of employees they have but they say as auto enrolment is an ongoing duty and not a one off task they will charge their fee every month rather than the one off upfront fee.

This leaves the NEST scheme as the only one of the big three master trusts left to not charge for a set up.

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What’s new in the world of tax?

Baah Humbug 2015

On Christmas Day about 2,000 people found presents, turkey, sherry and the kids all a bit too much – and sat down to do their tax returns instead.  This is an increase on 2014, when only 1,773 people chose to file their self assessment tax returns online!

 

Quarterly tax returns criticised

Professional advisers say George Osborne’s announcement that tax returns will have to be filed quarterly will place a huge burden on the self-employed and small businesses. Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants (ACCA), says: “These changes are going to be very onerous… it is going to be a real burden. Workers will have to make sure their books and records are up to date at least four times a year in case the taxman decides something is amiss and investigates them.”

Let’s see where this one goes as quarterly reporting does seem as if it will create a huge amount of extra administration.

 

fb smallThe “dark side” of social media – HMRC is using Facebook to pursue non-payers

HMRC has a new Connect tool it can use to identify those who may owe tax through assessing information on their Facebook and Twitter accounts. “If you’ve paid a suspiciously low amount of tax, HMRC will know full well if you are lying if the evidence is splashed all over Facebook,” said Richard Morley of BDO. The Revenue is also using social media itself to shame those who underpay by £25,000 or more.

 

HMRC’s Lin Homer heads New Year honours list

The New Year’s Honours list included a top award for Lin Homer, HMRC’s chief executive, in recognition of her ‘public service particularly to public finance’. This has attracted some criticism, given that the award was made at the end of a year which saw HMRC heavily criticised for poor customer service, with both the National Audit Office and the Public Accounts Committee (PAC) highlighting continuing problems with telephone helpline response times.

 

In space, you still have to pay tax

Although astronaut Major Tim Peake may be working in space he will not escape his UK tax obligations as he is not working in another country!

 

Finally – creative tax return submissions are not a good idea!

Denis Lunn, an accountant to famous clients such as Sadie Frost and Sean Pertwee and TV presenter Fiona Bruce, is facing jail after being convicted of cheating the public revenue between March 2003 and December 2011. Southwark Crown Court heard that Mr Lunn employed inexperienced staff who were encouraged to fill out inflated fees and expenses on tax returns to reduce clients’ taxable profits.

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