Please note this content was written contemporaneously, and may well now be superseded
Whitefield Technical Issues Briefing
March 2016
A regular briefing to clients on technical issues as been on my to do list for a while. The unprecedented complexity in small business taxation has hastened this, and todays budget provides a suitable deadline for me.
I use the term unprecedented with some authority – this summer it will be 30 years since I started as a trainee accountant. I can honestly say I have never known the tax regime for small businesses and their owners be more complex.
To facilitate the Dividend Tax and the new Savings Allowances into our templates and models has required almost complete re-writing with about 250 lines of code in excel for one persons tax, along with a major overhaul to many pages on our website.
I suspect there is more to come, as you will see below there are big issues on the horizon.
I aim to try and update this briefing quarterly for people.
If there are queries please direct them to Susan or Julie in the first instance.
Contents
- Dividend Tax
- PSC travel expenses
- Other travel issues
- IR35
- Employment Allowance
- Auto Enrolment
- Savings
- Entrepreneurs Relief on Closing a Company
- Class 2 NI
- Residential Landlords
- Pension Savings
- Flat Rate VAT sector choice
- Office of Tax Simplification – Small Business Tax Review
- Making Tax Digital
- Persons with Significant Control
- Financial Reporting Standard 102 and 105
- Other Budget Highlights:
- CGT reductions
- Small Business rates reform
- 17/18 increase in Personal Allowance and Basic Rate tax band
- Soft Drinks Industry Levy
- 5% Rise in Insurance Premium Tax
- Help to Save Scheme
- Reform of Stamp Duty on Commercial Properties
- 3% Stamp Duty Surcharge on all residential properties other than main home
- Employers NI on termination payments over £30k
- Alignment of S455 tax on loans to participators with new Dividend Tax
- Anti avoidance on disguised remuneration
- £1,000 exemption on reporting rents and small self employments
Dividend Tax
Announced last summer and applying from next month, Dividend Tax increases the personal tax charge on dividends by a headline rate of 7.5% – in reality as grossing up is being removed the real increase in marginal rates is less, and the increase in average rates is mitigated by the £5,000 Dividend Allowance. Also small comfort to some people, any unused Personal Allowance can now go against dividends as well.
After removal of grossing up the headline 7.5% comes out as 6% for 16/17 and will fall in future years as the Corporation Tax rate falls.
For a general explanation of dividend tax:
https://www.whitefieldtax.co.uk/tax-on-savings/
For illustrations on how tax is calculated and tax home rates:
For a calculator to play with (this experimental – embedding excel to a website is a new trick for me):
Analysis that I carried out last summer still holds true – the final enactment of Dividend Tax was as predicted:
https://www.whitefieldtax.co.uk/web/guide-to-summer-budget-2015/
PSC travel expenses
New for 16/17, two changes:
First, for Personal Service Company users who are caught by IR35 T&S from home to workplace is no longer deductible. Site to site and ad hoc journeys, eg courses, are still OK.
There is no change for PSC users operating outside of IR35.
Secondly, even with overarching contracts and other exotic structures, there is no home to workplace T&S allowed for people using Umbrella companies or MSCs. Many commentators believe this will be the death of Umbrellas; I think not but there will be a flight away towards people using PSCs and taking an outside IR35 stance.
If you work with Umbrella users who are thinking of changing, please put in a good word for us. I expect there will be mass migration schemes offered by some Umbrellas with attendant risks under MSC rules; better independent advice.
Other travel issues
First in the budget today, an announcement that the Government is dropping taking forward a wider review of travel and subsistence rules for businesses and employees, apparently they are “complex but well understood”.
Secondly, for the self employed HMRC, are having lots of tribunal wins on travelling especially for doctors who mix private and NHS work, but more generally for any self employed worker with regular travel patterns (cf an itinerant worker based at home). So the doctor who regularly travels to 2 or 3 hospitals for private work is caught, the doctor who travels across the country doing work where contracted isn’t.
The key case on this recently is Samadian and following cases. There is a good summary at http://www.taxation.co.uk/taxation/Articles/2014/02/05/320041/wholly-inarticulate
The rules are wider than just doctors, eg for my Yoga teacher colleagues it effects regular journeys to studios, but not peripatetic cover or private work.
IR35
For the last two budgets there have been rumours of major changes; in the autumn budget there was nothing to speak of.
Today we have widely leaked rules around tightening up on use of Service Companies in the Public Sector, but nothing for the Private Sector.
So for the Private Sector, contracting and IR35 is “as you were”.
For the Public Sector, from April 2017, the engager or agent will be responsible for:
- Making decisions on IR35 status
- Deducting Income Tax and Employees NI from payments under caught contracts even though the payment is to a company
- Bearing the Employers NI costs
This could go various ways:
- Engagers could take the initiative and transform working practices, contracts and evidencing to keep the status quo – saving them the costs of Employers NI
- Engagers could simply drive down contract rates to cover the costs
- All contracts could be payrolled / let to temporary workers (no use of PSCs)
HMRC have published a technical briefing on the changes:
Watch this space – doubtless market forces will dictate the solution. The Public Sector issue is sometimes called a “Paxman” tax after the newsreader employed via a PSC at the BBC, but ironically a big hitter like Mr Paxman could almost certainly structure his affairs around this.
If you use a PSC please, please, please, make sure you have Professional Fee Protection cover through us or someone else. It really is a false economy not too.
Employment Allowance
It was announced last year that this would go up from £2,000 to £3,000 for 16/17 but it would not be available for companies where the only employee paying NI is a director.
A simple solution – but provocative – is to pay the Company Secretary (aka Spouse / Civil Partner) a little more to trigger the allowance. HMRC have anti avoidance legislation to counter this, but its not known at this stage how they will approach this in practice.
For PSCs for want of £500 a year or so, its probably not worth the risk.
For other companies and employers the allowance follows the payroll process – so long as there are is at least one non director or two directors being paid over the NI threshold (technically the Employers NI threshold which is £100 or so higher than the Employees threshold).
Remember Employment Allowance only covers Employers NI not Employees NI, and once you qualify its an automatic process via the payroll.
Auto Enrolment
A reminder this rolls on in the background. Its been frustratingly painful to establish the nature and practicalities of exemptions for small proprietorial controlled companies with no external employees, and you get the feeling that the Pension Regulator is making the rules up as they go along.
The only change of late is to align the employer contribution increase dates with tax years.
https://www.whitefieldtax.co.uk/psc-guide/workplace-pension-reform-and-auto-enrolment/
Savings
On the radar are some fiendishly complicated rules for tax of savings income – basically bank and building society interest.
- First off from April 2016 banks won’t stop tax at source on the interest they pay you.
- Next, if you are a Basic Rate tax payer you get and exemption on £1,000 of interest; £500 if you are a Higher Rate taxpayer and £nil if you are an Additional Rate tax payer.
- Finally if your income (16/17) is less than £17,000 then you pay no tax on your savings. This is a combination of the Personal Allowance £11,000, the Personal Savings nil rate of £5,000 at 0% (not Dividend Allowance – same figure by co-incidence, completely different thing) and the £1,000 exemption for a Basic Rate tax payer. I suspect only a few thousand people nationwide will benefit from this in full, it really is a bribe to pensioners.
The £5,000 Personal Savings band tapers off £ for £ to the extent that pension, salary or dividend exceeds the normal Personal Allowance, so its only of interest to people with other income below £17,000 a year and a lot of savings income.
https://www.whitefieldtax.co.uk/tax-on-savings/
Entrepreneurs Relief on Closing a Company
ER gives a 10% tax rate on closing a company, on gains up to £10m.
Its been a popular for PSC users to extract money from their companies on retirement or return to permanent work, but remember its on the balance after Corporation Tax – so its not a 10% tax rate per se, just 10% compared to the Dividend Tax rates. Its also been common place in the Construction sector to use a company for each project and close it on completion.
From April 2016 there is a restriction that applies if a company is closed and ER claimed and:
- Within two years the individual is involved in the same trade or activity; and
- The closure was tax motivated
Its difficult to call how hard HMRC will enforce this. It may be they just have the most egregious cases in their sights, but they always had the ability to challenge them anyway.
On the other hand could this be triggered if you closed a business and took a job in the same sector? Certainly it would effect a serial property developer using a separate company for each project.
A walk away retirement isn’t an issue; PSC users closing companies for a move to permanent work may be at risk.
Class 2 NI
Class 2 NI is paid by the Self Employed. Two changes.
First, from April 2015 rather than being collected by quarterly direct debit its being collected via Self Assessment. We’ve known about that for a while.
Secondly, announced in the budget today, from April 2018 Class 2 will be abolished and merged into class 4.
Residential Landlords
A number of changes happening:
First, the 10% wear and tear allowance on furnished properties goes from April 2016, to be replaced with a deduction for actual repairs and replacement costs incurred.
Secondly, starting from 17/18 and tapering over four years, relief for mortgage interest is being restricted to Basic Rate tax. This is more complex than it seems:
Suppose someone currently earns £30k elsewhere, £40k of rents and pays £25k of mortgage interest and £5k of other expenses. Currently their tax is all at Basic Rate based on £30k earned income and £10k rental profit. Under the new regime their tax is worked out without the interest, so £30k earned income and £35k rents = £65k, and well into Higher Rate tax. The rent is then given at Basic Rate only 20% x £25,000 = £5k.
So someone who was originally a Basic Rate tax payer is now well into Higher Rates, and their net income from the property, maybe being used to pay capital on the loans down, drops from £5,000 to £600.
Of course for many landlords the problem is exacerbated by the risk of rising interest rates, a perfect storm that will tip many properties into negative cash flow.
There are three further changes for Residential Landlords and second home owners:
- For sellers – whereas everyone else has enjoyed an 8% cut in CGT in the budget, its unchanged on sale of a residential property (other than main home)
- For sellers – from April 2019 the CGT payment date on the sale of a residential property will be accelerated from Self Assessment timescales (ten months after end of tax year) to 30 days after the sale transaction. Main home tax free still.
- For buyers – 3% surcharge on purchases of residential properties other than own home from April 2016
Pension Savings
A reminder the Lifetime Allowance drops to £1m from April 2016. This effects how much you can pay into a pension scheme. It doesn’t immediately impact tax relief on your pension savings, but if, on retirement, the fund is worth more than lifetime allowance then there is a punitive tax charge on the fund – 25% of anything taken as regular pension, 55% on a cash lump sum.
It was widely touted there were to be cuts in tax relief on pension contributions in the budget today, but nothing transpired. What we do have is the “Lifetime ISA”, available to under 40 year olds, with a top up from the Government that can be used only for buying their first home or retirement at 60 – whether this will take off or not, who knows. History is full of failed Help to Buy schemes and similar.
Flat Rate VAT Sector Choice
Just a warning for businesses using Flat Rate Vat.
HMRC historically said that if they disagreed with your choice of percentage, but your choice was reasonable, they wouldn’t retrospectively assess you although they may direct you as to the sector and percentage going forward.
Alas “reasonable” is an open term, and there have been a spate of tribunal cases recently with HMRC trying to retrospectively change peoples percentages, presumably on the grounds they were unreasonable choices.
If there is any doubt over your choice of sector is worth either calling HMRC and getting a call reference (you probably won’t get a sensible answer though, just be told that its your responsibility to make a reasonable choice) or write to them and explain what sector you are using and why.
Office of Tax Simplification Small Business Tax Review
The OTS small business tax review was published a couple of weeks ago:
https://www.gov.uk/government/publications/small-business-tax-review
There are some radical suggestions around aligning the taxation of small companies with the taxation of sole traders, and also around creating a new form of sole trader entity with limited liability.
With Dividend Tax the difference between having a company and withdrawing everything by dividend versus a sole trader with Income Tax and Class 2/4 NI isn’t that great now, so in some respects fiscally the proposals are not major. However the loss of profit deferral (rolling up money in a company rather than drawing it) would increase effective tax rates and make the business internal investment environment less attractive.
An issue to watch, but possibly not as dramatic as it sounds.
Making Tax Digital
We were expecting some further detail in todays budget but were disappointed.
These are the proposals to do away with Self Assessment returns and for everything to be filed via a digital account. This will include in year updates of business profits, giving some concern that self employed tax payers would need to do four tax returns a year.
Its proposed to roll this out between 2018 and 2020.
There are many questions:
- What will be the dataset for quarterly transmission. HMRC have said its not full accounts, but what is it? All transactions? A summary? Vat return plus?
- How will annual adjustments like stock and depreciation be accounted for?
- Does this affect companies as well as sole traders?
- What are the mooted proposals requiring all accounting information to be readable by HMRC – format? Must it be cloud based? Will HMRC have to ask to access it? Is a transaction detail summary to be sent to HMRC routinely.
And that’s just a starter.
We do know that HMRC have said there will not be four tax returns a year, and people in employment will be exempted on up to £10k of other income (presumably dividend, rents or self employment).
A major concern is the costs of this. HMRC and the Government won’t pay for your software, and software developers won’t work for free. Already the days of buying an accounts programme like QuickBooks or Sage outright are gone and you are all but forced into costly rolling direct debit contracts, with inertia and resistance to change keeping you there. It looks like a significant cost and time burden for business.
Of course HMRC will say it will save businesses cost and time – standard spiel. But looking behind the scenes for HMRC the proposals are all about cost saving, efficiency and access to better and quicker data from taxpayers equating to increased yield; if HMRC are looking to save costs it can only be by moving tasks, responsibility and hence costs out to others, which has been the creeping agenda for many years.
I’m afraid 30 years in accounting makes me both cynical about HMRCs/HMGs motives, and cynical about the smoothness of execution.
Watch this space and wait for the consultations.
Meanwhile, as a practice we are looking at how we need to migrate clients away from spreadsheets or manual bookkeeping and onto a cloud based system in due course; it is almost inevitable this will be a requirement across the board.
HMRCs publications are at:
Persons with Significant Control
The Persons with Significant Control regime came in earlier this year. It requires companies to ascertain who controls their shares and keep a register. Of course in many cases – most – it’s the shareholder but if there is a nominee or trustee type issue then the person with ultimate control need to be registered. The register can be kept privately by the company, and subject to inspection, or most companies are expected to let Companies House hold it for them.
Of most interest is that this means a change to the Annual Return procedure at Companies House from summer this year onwards. Watch this space, all we know at present is:
Confirmation statement
A requirement to ‘check and confirm’ the company information by filing a ‘confirmation statement’, and notify changes if necessary at least once every 12 months. This will replace the current obligation to file an annual return.
More detail:
Confusingly this requirement is often called a PSC register, but that’s Person with Significant Control not Personal Service Company.
Financial Reporting Standard 102 and 105
There has been a lot of noise about the new standards.
FRS 102 is the omnibus reporting standard for UK entities, with exemptions for small entities paragraph 1a – in this context small means turnover less than £10.2m
FRS 105 is the simplified reporting for micro entities, turnover less than £632k.
FROS 105 will be appropriate for all but a handful of our clients, and our software should cope automatically. You will probably see your annual accounts get a bit shorter and simpler, with less notes. There are some changes to what gets filed at Companies House as well, in essence Abbreviated Accounts are no more, but a simplified version of the full accounts are filed instead.
Budget 2016 – other highlights
- CGT reduced from 18%/28% to 10%/20% on most assets. Residential property – BTLs and second homes still 18%/28%. NB the 10% standard rate only applies to gains in Basic Rate tax band, and doesn’t render obsolete the 10% Entrepreneurs Relief rate.
- Doubling of Small Business Relief thresholds for NNDR (business rates)
- Roadmap set for increase of Personal Allowance to £11,500 for 17/18 and the Basic Rate Band to £33,500, meaning Higher Rate Tax cuts in at £45,000
- Soft Drinks Industry Levy on sugary drinks from April 2018
- 5% Rise in Insurance Premium Tax from 9.5% to 10% from 1 October 2016
- Help to Save Scheme topping up regular savings by those on WTC or UCReform of Stamp Duty on Commercial Properties – reductions at the lower end, increases on higher value transactions
- 3% Stamp Duty Surcharge on all second home transactions, including holiday homes, buy to lets, second homes and properties bought for refurbishment. B&B provisions to allow transfer from one main residence to another.
- Employers NI on termination payments over £30k
- Alignment of S455 tax on loans to participators with new Dividend Tax
- Anti avoidance on disguised remuneration, in particular EBTs not already shut down.
- £1,000 exemption on reporting rents and small self employments
- Annual rise in VAT registration threshold by inflation