Taxing Times – November 2015

Welcome to the November edition of Taxing Times.  In this edition we’ll look at: Taxing Times

  • Succession planning – some reflections
  • PAYE updates
  • Hopes for a fairer tax penalty system
  • What’s new in the world of tax?

Taxing Times will be taking a break in December and will return in January 2016. 

We will of course bring you the latest news and tax updates immediately following the Autumn Statement so watch out for those.  The Autumn Statement could be the point in time at which George Osborne brings to bear his plans to scrap tax relief on pension contributions and potentially replace it with a tax upon retirement. Or will he decide that tampering with pensions at this point in time would be just too much of a risk given the current political storm created by the changes to tax credits?  It’s also possible that fuel taxes will rise, possibly spurred on by the emissions rigging scandal (see more below).  And from a personal and owner managed business perspective, hopefully we’ll receive further clarification on the new dividend tax.  We’ll update you as soon as it happens!

In the meantime, if you can bear us mentioning the “C” word already, have a great Christmas and New Year!

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Succession Planning

Building a business takes years of your life, so what happens when you are ready to hand it on?

In this article we will talk about businesses in the form or companies or partnerships, as they can continue even after you retire or die, unlike a sole trade business.  The crux of this article is that we are talking about ensuring the business continues even when you do not and that takes some planning…

You spend your working life building up your business.  It is part of who you are.  It’s built on your blood, sweat and tears and sometimes it has taken over your life!  So what happens to the business you’ve created when you are no longer at the helm?  Who would you want to see at the head of your company (or as the key person in the partnership)?

Statistics from the Institute for Family Business shows that there are three million family businesses in the UK and each year approximately 100,000 family firms pass from one generation to the next.  Bearing that in mind, succession planning should be a priority in every family owned business!

There are three key elements to succession planning:

  • Who will own the business? 
  • Who will manage the business?
  • Tax planning.

2587751_xxlWho will own the business is a VERY different thing to who will manage the business.  Huge issues can arise when they are considered to be the same thing.  That is not the case.  A person can have ownership without being involved in the day to day running of the business.  And vice versa.  it’s often a trap that second or third generation family business owners fall into;  thinking that they have to manage the business because it is “theirs”; and also thinking that the level of money they extract from the business is linked to them working day to day in the business.  But it is important to appreciate the difference and “unravel” the two roles. Dividends (or profit share for partnerships) are what owners get.  A remuneration package (including salary) is what managers get.  They can be different!

Also take into account your skill sets – if you’re not cut out to  be a manager, don’t try and wedge yourself into that role just because you are the business owner.  It is ok (and may well be much better for the business) to bring in a professional manager from outside the family, or even that second generation cousin who you wouldn’t dream of giving shares to but is a wizard MD and would be happy with salary!

As to tax planning – absolutely vital but complicated because there are so many ways you can pass the business on, not to mention ways to extract the value that you as the founder have built up in that business.

All of the key elements require proper advice because there are so many variants and getting the interaction between the elements right is crucial.  After all, it’s no good sorting out your ownership and management structure if you’ve done it in such a way as to create a tax liability which is double what it could have been had you approached things slightly differently!  And sometimes it’s really helpful to have an outsider look objectively at your position and what you are trying to achieve, because they are not so emotionally entangled in the process and WILL be able to see the wood for the trees.

Please contact us if you need help dealing with your succession plans.

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PAYE Updates

If you have any queries on any of the following PAYE updates please give Julie Campbell a call.

Parental Leave to be Extended

crying baby

The Chancellor has announced that he will extend shared parental leave and pay to working grandparents.  Consultation will begin in the first half of 2017 with the aim of implementing the policy by 2018.

Evidence suggests that nearly 2 million grandparents have given up work, reduced their hours or have taken time off work to help families who cannot afford childcare costs.   The government recognises the crucial role that working grandparents play in providing childcare and supporting working families and more than half of mothers rely on grandparents for childcare when they first go back to work after maternity leave.  In total, some seven million grandparents are involved in childcare and the new system should provide flexibility in working arrangements for grandparents without fear of losing their job.

Changes to HMRC Bank Accounts

From February 2016, HMRC will move its bank accounts to Barclays. Most taxpayers paying their bills electronically will be unaffected and do not need to do anything.

Clients who currently pay using Bank Giro credit slip or Transcash payslips should consider alternative ways to pay such as electronic payments.

This will be published on GOV.UK prior to February 2016 and any client likely to be affected by the changes will be contacted directly.

The Scottish Rate of Income Tax

The Scottish Rate of Income Tax (SRIT) is the amount of income tax Scottish taxpayers will have to pay and will come in to force from 6 April 2016.

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A Scottish taxpayer is someone who is resident in the United Kingdom (UK) for tax purposes and who has their sole or main place of residence in Scotland for more of the tax year than in another part of the UK.  The location of an employer  is not of any relevance; it is the location of the individual’s main place of residence that is the key factor in deciding Scottish taxpayer status.

HMRC will identify those individuals who will be Scottish taxpayers.  The employer will not have to make any assessments on taxpayer status.  HMRC will issue PAYE coding notices to Scottish taxpayers prefixed with the letter “S”.

Although there is currently no legislation in place that states employees need to keep HMRC informed of a change in address, it would in their best interest to tell them about any changes in personal circumstances, as soon as possible, as this could potentially amend the taxpayer status and tax code.

HMRC say they will be letting individuals know about the importance of notifying HMRC if they change their address but have said they would be grateful if employers could also reinforce this message with employees!

Monsoon Accessorize shamed

Monsoon Accessorize has been “named and shamed” for failing to pay some of its UK workers the national minimum wage. HMRC said the retailer topped a list of 115 companies that collectively owed workers more than £389,000 in arrears after failing to comply with regulations.

Hopes for a fairer tax penalty system

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Penalties are a tricky and emotive subject.  Of course, most of us would agree that those who deliberately try to do something wrong with their tax returns, and deliberately omit information, include wrong information or fail to submit their returns/pay their tax should face penalties.  But there is an issue about what should be done in terms of penalties for those people who genuinely try to comply with the rules but fail due to misunderstandings or a real inability to understand the system.  The Low Income Tax Reform Group (LITRG) has long contended that it is unfair and counterproductive to penalise those who are willing to comply with their tax obligations but fail to do so because of misunderstanding or struggling with the system. As previously reported briefly in Taxing Times, HMRC are consulting on reforming tax penalties, which is  most welcome.

HMRC’s response to the initial consultation so far shows that they recognise many of the problems with the current penalty regime and are committed to reforming it. They have promised to consider in more detail some important factors, including:

  • Looking at the problem in the current regime of a penalty being incurred where no tax is due.
  • Considering the taxpayer’s overall HMRC relationship and tax compliance history. LITRG, for example, have long argued that this is an important factor, for example a previously compliant taxpayer might unexpectedly not submit a return because of circumstances such as ill-health. Their existing good compliance record should be an indication to HMRC that the taxpayer might require support rather than punishment.

HMRC have said that they might look at non-financial sanctions for non-compliant taxpayers – one idea being that HMRC might reduce the time to comply with the next tax obligation. LITRG notes that this potential solution should be approached with caution. For example, it would hardly be helpful to give less time to comply to someone who has made an innocent or careless mistake, or to someone struggling to get to grips with HMRC systems. This would simply put more pressure on them and perhaps even increase the likelihood of error or default next time, so would have the opposite effect to that which HMRC intend.

What happens next? 

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HMRC have said that they will consider all of the responses to the first round of consultation when designing proposals for a new penalty system, but they cannot promise that all suggestions will be taken forward. In which case hopefully they will explain why note and invite further suggestions and amendments.

Hopefully, the consultation will ultimately lead to a fairer penalty system.  A robust penalty system is essential to deter the deliberately non-compliant.  But hopefully this can be balanced with a bit of common sense about working with those who want to do the right thing but just can’t figure out how to do it given the hugely complex tax regime we have in this country!

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What’s new in the world of tax?

Praise for HMRC’s online tax system

A least one member of the public out there thinks HMRC’s online system works well.  The author of a letter to the FT last month disagrees with another member of the public’s opinion that  “the system deprives users of a paper trail, as one can print off copies of a tax return” and does not think that HMRC is adopting a “one size fits all simplification”.

….but don’t try and talk to them!

Yet another letter in the FT responding to the same criticisms of HMRC’s self-assessment procedures points out that HMRC uses only a postcode to identify its address, which when searched in Royal Mail’s online address finder identifies only a small business in suburban London.  Additionally, HMRC’s number for overseas residents “plays, apparently permanently, a recorded message stating that callers can currently expect a 35-minute delay.” The author blames HMRC’s “ economic indifference to the customer and lack of competition.”

New Personal Savings Allowances – how will it work?

Money bags 2The Low Incomes Tax Reform Group (LITRG) believes that all savings income should be paid without deduction of tax at source when the new personal savings allowance (PSA) is introduced in April 2016.  It feels that this would automatically give the correct tax due in the majority of cases and reduce the administrative burden on many taxpayers.

In a submission to HMRC on this subject, LITRG acknowledges that a potential drawback of not deducting tax at source is that some individuals will have to notify HMRC if their savings income is high enough to generate a tax liability. However, it believes that many of those affected will either be already in the habit of filing a tax return or will be able to deal with the tax through the new proposed digital tax accounts.

We will have to wait and see exactly how the new PSA will work in practice.

So much for a “compassionate society”…

Alex Wild of the Taxpayers’ Alliance has suggested that ministers should waste no time in making unpopular cuts to pensioner benefits, as many of those hit by a cut to the winter fuel allowance might “not be around” at the next election and others “would forget” which party had done it. “So on a purely practical basis I would say do it immediately. That might be one of those things I regret saying in later life but that would be my practical advice to the government,” added Mr Wild.

Jaws dropped – to say that’s a bit brutal is putting it mildly.

Government confirms no extra VED due on VW diesels

Following the VW emissions scandal, in which VW admitted fitting millions of cars with software designed to provide false readings when diesel emissions assessments were carried out, the Government has confirmed that UK taxpayers will not incur higher Vehicle Excise Duty (VED) if their existing VW vehicles are found to be fitted with the illegal software.

However, no comment has been made on the knock-on effect on P11d company car Benefits in Kind.

Company car benefits are calculated based on the list price and the approved CO2 emissions of the car, plus a 3% supplement for diesel cars. For any VW cars fitted with the illegal software, which suppressed the level of emissions, the taxable value of the benefit as shown on the employee’s P11d is therefore likely to have been incorrect.  It seems highly unlikely that HMRC would take retrospective action to correct prior year Benefit in Kind calculations, but what about forthcoming calculations, now the scandal has been uncovered?

It may be the case that company car benefits will need to be re-computed using the updated CO2 emissions figures, which would result in higher taxable benefits for employees. How a change in the CO2 emissions of cars will be treated by HMRC in this regard is as yet unclear.

And the final “tax thought of the month” for 2016….

There is no such thing as a good tax – Winston Churchill

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