Could your generosity end up costing you? - Make sure you don’t lose out writes Jono Wilson of Barnett & Turner.

If you’ve given some money or household items to a charity recently, the chances are you’ve been asked whether you’d like to ‘Gift Aid’ your donation. The representative of the charity will have told you that this claim increases your gift by 25%.  So, for every £80 donated, the charity receives £100 – made up of your own donation of £80 and £20 of tax reclaimed from HMRC.

On the face of it, the Gift Aid option may seem like an obvious choice, but there is a potential downside.  If you have not paid sufficient income tax or capital gains tax during the year to cover the reclaimed tax, HMRC will require you to make up the difference, which may result in an unexpected tax bill due to your generosity!

It’s an issue which is likely to take on a greater prominence, as recent changes to the way in which investment income is taxed will result in many individuals ceasing to be taxpayers:

• Prior to 6 April 2016, dividends were received with a notional credit which was included when calculating tax paid for Gift Aid purposes, but the notional credit has now been abolished and the first £5,000 of dividend income (decreasing to the first £2,000 from 6 April 2018) is taxed at a rate of 0%; and

• The savings rate of income tax offers another 0% tax band available to individuals with interest income falling within the first £5,000 in excess of their personal allowance.

These changes will disproportionately affect pensioners with modest incomes and owners of companies who remunerate themselves in the most tax-efficient way.

Many of the individuals that will be impacted by this change are not required prepare tax returns each year. It does seem likely, however, that because of HMRC’s digital and information gathering powers, they will soon be able to identify non-taxpayers who have made Gift Aid donations and pass on an unexpected bill to the donor.

It’s therefore worth considering your own position, as well as that of those close to you. You may have some options to ensure that neither you nor the charity lose out.

If you feel that you might be caught out, but your spouse would not, it’s worth considering getting them to make the donation instead.

If you are the owner of a small company, it may be possible to make the charitable donations through the business, rather than on an individual level.  Although a company cannot make donations through the Gift Aid scheme, it should receive corporation tax relief on the donations and there may be scope to increase the amount you give to reflect this.

If you believe that you may be adversely affected by these changes, it’s worth having a chat with your accountant.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

TEN TIPS TO SAVE YOU TAX

Whatever the level of your tax liability, there are some simple ways you can minimise the pain. Here are 10 suggestions from Jonathan Wilson of Barnett & Turner, Chartered Accountants & Chartered Tax Advisers, for making your next bill slightly more manageable.

1. Check your tax code each year. Your tax code is used by your employer or pension provider to work out how much income tax to deduct from your pay.  If your code is wrong, you may be paying too much (or too little) tax.  Your tax code can be found on your payslip and a breakdown of how it has been calculated will have been sent to you by HMRC.

2. Claim the marriage allowance. The marriage allowance lets you transfer 10% of your tax- free personal allowance, or £1,150 in 2017/18, to your spouse, if they earn more than you.  To benefit as a couple, the lower earner must have income of £11,000 or less in the tax year.

3. Make the most of each personal allowance and basic rate band. The personal allowance is £11,500 and the basic rate tax limit is £33,500 in 2017/18. If you are married, it may be possible to transfer income-generating assets (e.g. rental properties) to a spouse to take advantage of their lower tax brackets.

4. Take advantage of the CGT annual exemption. Capital gains under the annual exemption (£11,300 in 2017/18) are tax-free.  Where you have already used up your annual exemption, you may wish to consider deferring any further disposals until the following tax year if practically possible.  If you are married, owning assets jointly also ensures that each spouse’s annual exemption is used (assets can be transferred tax free between spouses).

5. Claim tax-deductible expenses. If you are self-employed, you can claim a tax deduction for expenses which are incurred “wholly and exclusively” for the purposes of your business.  This includes office running costs and the salaries of any employees, including your spouse.

6. Use the annual investment allowance. If you are self-employed, the annual investment allowance currently provides a 100% tax deduction on the first £200,000 spent on eligible plant and machinery.

7. Consider incorporation. The corporation tax rate, of 19% from 1 April 2017, (previously 20%), is significantly lower than income tax rates, which are currently up to 45%.  You will of course need to pay income tax when you take money out of the company, in the form of salary and/or dividends.  However, if you don’t require the income, you have the opportunity to accumulate profits within the lower corporate tax environment.

8. Take advantage of the dividend allowance. The recent changes to the taxation of dividends saw the introduction of a £5,000 tax-free dividend allowance, which reduces to £2,000 in April 2018.  Whilst there will be winners and losers from the new dividend regime, this allowance should not be overlooked.

9. Maximise pension contributions. If you contribute to a workplace pension scheme, any pension contributions you make will be deducted from your salary before income tax is calculated.  If you contribute to a personal pension scheme, your pension provider will claim tax relief at 20% on your behalf and add it to your pension pot.  If you are a higher or additional rate taxpayer, you can then claim tax relief on the extra 20% or 25% in your self-assessment tax return.

You currently pay tax if savings in your pension pot go above the annual allowance of £40,000 a year.  However, this limit has recently been reduced for those with income (excluding any pension contributions) over £110,000, and there is doubt over the future of pension tax reliefs, so they should not be taken for granted.

10. Use your tax-free ISA allowance. From 1 April 2017 you can save up to £20,000 (previously £15,240) a year tax-free in an Individual Savings Account (“ISA”).  This can be saved as cash, shares, or a combination of the two. 

If you’re interested in investigating any of these suggestions and how they could fit in with your own personal circumstances, make sure to speak to your accountant.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

When is a van not a benefit?

Many employers provide company vans to their employees for work purposes, but whether a van benefit in kind charge arises depends on the private use element says Tracy Henson of Barnett & Turner, Chartered Accountants & Chartered Tax Advisers.  Where no van benefit is declared on a Form P11D or processed via payrolling of benefits, HMRC’s 2016 guidance includes a new paragraph, not included in previous versions of the same guidance, which states that employers must be able to demonstrate that there has been no significant private use in theory and in practice.

It has always been difficult to get HMRC to accept “in theory” only anyway, but in light of the changes above, employers may want to rethink their current record keeping as HMRC continue to crackdown on companies with vans in their accounts but no corresponding P11D reporting. This blog will outline good record keeping which will satisfy HMRC’s requirements.

If we start by looking at the requirements to be met in order for no van benefit in kind charge to apply, these are:

1. The van must only be available to the employee for business travel and commuting and must not be used for private purposes except to an insignificant extent
2. The van must be available to the employee mainly for use for the employee’s business travel

The term insignificant is not specifically defined, so takes the New Oxford English Dictionary meaning of ‘too small or unimportant to be worth consideration.’  HMRC’s guidance states that private use is considered insignificant in the following instances:

• If it is insignificant in quantity in the tax year as a whole (that is, a few days at most)
• If it is insignificant in quality (for example, a week’s exclusive private use is clearly not insignificant)
• If it is intermittent and irregular (the weekly supermarket shop is not insignificant, an annual trip to the rubbish tip would be)
• If it is very much the exception in terms of the pattern of use of that van by that employee (or their family or household) in that tax year

If an employer does not report a company van benefit but cannot prove that the above requirements are met, HMRC will insist that the van is a chargeable benefit, and this can result in a significant tax bill and hefty penalties.

HMRC can charge a £3,000 penalty for poor record keeping and a penalty of up to 100% of the tax due as well as collecting the tax and national insurance due on the benefit on a grossed up basis.

Furthermore, HMRC can backdate tax, with interest, and penalties for up to six years.  If HMRC cannot be convinced that the requirements are met, the amount at stake can quickly become detrimental to a business therefore it is vitally important that sufficient records are kept.

HMRC suggest that useful information/records for demonstrating that the necessary criteria have been met include the terms and conditions on which the van is made available to the employee and mileage records showing actual use.

The terms and conditions should state that the van is to be used by the employee for business purposes only and should not be used for private purposes. Such terms and conditions could be included within the employee’s employment contract, a separate agreement could be signed or it could even be that these are included within a staff handbook and employees sign to confirm they have read and understood this.  Any of these would prove that there is no private use in theory.

In terms of proving no private use in practice, HMRC will insist that driving records will be required.  This could be from a GPS logging system or manually entered mileage records.  This is not necessary per the legislation, although the guidance detailed above would suggest it is. We have won many cases on behalf of clients who have not had van mileage records, however it is always easier if these are available and we would suggest detailing the dates, start and finish locations, mileage and reasons for all trips as a minimum.

Other procedures that can help to further evidence no significant private use would include the keys being kept at the business premises and access being restricted. If the van insurance documentation also states that only business use is insured then HMRC will accept this as meaning no significant private use, and therefore no van benefit in kind charge, applies.

If you would like further guidance on record keeping for company vans, or if you think it would be beneficial for a review of your current procedures to be carried out to identify any improvements, please telephone or email your usual HPH contact.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Do all the government’s noughts and ones add up?

PETER WILKINSON of Barnett & Turner’s Associate firm, Langtons has been closely involved in discussions of the government’s plans to digitise the tax reporting system. Here he gives his own perspective on a number of the questions accountants and their clients are asking. Is the whole ‘Making Tax Digital’ project actually going ahead?

Yes. A number of related consultations were launched in November last year, but it’s pretty clear the plans will proceed, albeit with a few fairly minor concessions. We were hoping to get the final shape of it in the Finance Bill. However, this is light on detail and it is clear that a lot of the rules are going to be made by regulations, which will minimise parliamentary scrutiny.

The plans are controversial, aren’t they?

Again, yes. The Treasury Select Committee, chaired by Andrew Tyrie MP, supports the principle of digitisation. At the same time, they’ve gone through the proposals in forensic detail, taken evidence from a variety of people including the Federation of Small Businesses, and concluded that a year’s lead time for the project just isn’t enough. At the moment, their feeling is the supposed benefits just aren’t proven. They recommend pilot schemes to see how the idea works in practice.

What will the new regime actually mean for businesses?

Effectively, you’ll be making five tax returns a year. HMRC doesn’t see it that way, but you’re going to be expected to report quarterly on your income, expenditure and taxable profit. If that’s not a tax return, then what is? You can paint stripes on a horse, but that doesn’t make it a zebra!

You’ll then have to put in a further return at the end of the year, making corrections as appropriate to your earlier submissions. You will need software to upload the relevant data to the Revenue.

Will smaller businesses be able to cope?

That’s a good question. HMRC assumes that everyone will use business software and it will be a straightforward data dump. But a lot of small businesses don’t have the correct level of sophistication. Can their software deal with debtors and creditors, for instance? With stock and work in progress? We’ve been told that it will be possible for very small companies to submit three-line accounts – their turnover, expenses and profit.  But if that’s it, there does really seem little point to the whole exercise.

Are there any exemptions?

Practically none. Your turnover would have to be lower than £10,000 per annum to stay outside the new digital system.

Could it be that we’ll have to pay tax quarterly?

For the moment, the answer is no, although many people have speculated that this may be the long-term goal of the government.

What are the cost implications for business?

It seems very likely that larger accountancy bills will become the norm. And although there’s some suggestion that companies may be able to continue using Excel spreadsheets with some kind of technological bolt-on, the chances are you’ll need some new software. The government is trying to persuade developers to offer this for free, but whether that comes to fruition remains to be seen. There is bound to be expense in setting the new system up, training people in its use and so on.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Making sure a break-up doesn’t break the bank

Divorce can be very painful at many levels. That’s why you don’t want the additional burden of being unnecessarily penalised by Capital Gains Tax (CGT), writes Jonathan Wilson of accountancy firm Barnett & Turner.  During the emotional upheaval of a divorce, tax considerations are generally the last thing on your mind.  By taking advice early in the process though, you may be able to avoid unnecessary tax liabilities.

The general rule is that a married couple (or civil partners), who are living together, can transfer assets between each other without paying capital gains tax, until the end of the tax year following the date of separation.

After the 5^th April following your separation, these inter-spouse “no gain/no loss” transfers no longer apply.  At that point, even if you are still married, the transfer of an asset between you and your partner will be treated for tax purposes as if the spouse who is giving up their interest in the asset has received market value for that interest.  This may give rise to a capital gains tax bill if the asset has increased in value since it was acquired.

Of course, if you have limited cash resources, the CGT can be particularly unwelcome.  It’s therefore a sensible idea to consider transferring assets before the end of the tax year of separation, even if an overall financial settlement is still some way off.

But what if the separation takes place in March?

You would have less than a month to decide whether or not to transfer an asset before the end of the tax year in order to avoid a capital gain.  Unfortunately, this is just an anomaly of the regulations and does indeed create a lot of pressure.

By contrast, a couple who separate in May have eleven months to make these decisions, which might well be enough time to negotiate and implement an overall settlement.

In summary, if you are considering separation – or are in the process of separating – you should take advice on potential capital gains tax liabilities which might be triggered on a division of your assets. You should also start to think, as early as possible in the process, about how these might be mitigated.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Glimpsing a post-Brexit world of R&D

Jonathan Wilson of Barnett & Turner explains the current system for tax credits and thinks business may benefit eventually from a more relaxed regime. There’s little doubt that Brexit has created a great deal of uncertainty. But whatever your view about the likely impact on business overall, there’s speculation that the decision to leave the EU might be good news from the point of view of R&D tax credits.

Under the state-aid rules drawn up by Europe, there are limits to how far governments can support industries with tax breaks. Some people glimpse a world of greater freedom and generosity once ties with Brussels are cut.

The background here is that over 22,000 companies submitted claims for R&D corporation tax relief in 2014-5, which is a 12% increase on the numbers recorded in the preceding tax year. So the tax break is certainly popular. What’s more, the total value of the expenditure across these companies was a whopping £21.8 billion.

Who can claim this relief?

You might think that it’s the province of, say, big pharmaceutical businesses, but that’s really not the case. Any company has been potentially able to qualify for a 130% extra corporation tax deduction after April 2015 (effectively 230% tax relief on qualifying costs).

To claim the relief you must have a qualifying project, which seeks to:

• Achieve an advance in overall knowledge in a particular field
• Resolve a scientific or technological uncertainty

The systematic approach must be documented by the company and, according to government guidelines, you must prove you are:

• Extending overall knowledge or capability in a field of technology
• Creating a process, material or device, product or service which incorporates or represents an increase in overall knowledge or capability
• Making an appreciable improvement to an existing process, material, device, product or service

 What other criteria apply?

The technical challenges you face must be ones which can only be overcome by bespoke and unique methodologies. If there is already a standard solution in the public domain, then you won’t be able to claim. You also need show that you have taken a systematic, investigative and experimental approach to the problem – drawing on scientific knowledge and practical experience.

This may involve:

• A technical analysis and documentation of the requirements
• The specification of a solution
• Development of the solution against the documented requirements
• Implementation and integration of the solution
• Documentation of trials and tests to record actual behaviour against expected
• Correction of any significant deviations in behaviour

What costs count towards the claim?

Qualifying costs include those of staff, subcontracted staff, consumables and heat and light. You can also count the costs of software used directly in the R&D process. Remember that you will need to apportion staff time between the R&D and regular work.

Capital Expenditure

If you use plant and machinery capital expenditure solely for R&D, you will gain 100% writing down allowances.

How can HCWA help?

Firms in the HCWA association can:

• Ensure that you are maximising your claim
• Advise on the best option available if a choice arises between surrendering a loss or carrying it forward
• Ensure that the claim is valid (there can be particular difficulty in assessing whether consumables’ costs are qualifying expenditure)
• Assisting with the narrative of the accompanying R&D Report

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Has flat rate fallen flat?

Accountant Jonathan Wilson of Barnett & Turner explains why the new flat rate regime may have effectively spelt the end of the flat-rate scheme for many small businesses. For a number of years now, many businesses with a turnover of less than £150k have opted to make use of the flat-rate VAT scheme.  Rather than balance the VAT they charge with the VAT they incur through purchases, they are given a percentage figure to apply to the gross sales over a three-month period. This rate will depend on the industry they are in and can vary quite considerably. In compensation for the beneficial repayment rate, they are not allowed to claim back VAT they have been charged, the only exception being capital items above £2,000.

In December 2016, the government entered into consultation on the flat-rate scheme which makes it much less attractive to many small businesses. Originally, it was effectively possible for small companies to gain from the charging of VAT, by retaining a proportion of the money collected as taxable profit. HMRC seems determined to close off what is now seen as a loophole, but which may have been presented originally as a benefit to encourage registration and growth rather than supressing sales to stay below the VAT threshold.

From 1^st April 2017, a large proportion of businesses on the flat-rate scheme have had to apply the figure of 16.5% to their gross sales. So with £100,000 in sales and £20,000 in VAT on top, charged out to customers, the payback rate becomes £19,800. As a result, many small business owners currently on the flat-rate scheme may have chosen to opt out and record VAT in the traditional way.

There is, however, one way in which you can stay on the flat-rate scheme and retain its more favourable terms. That is if you can prove you are not a ‘limited cost trader’.

The definition of the limited cost status is that your expenditure on goods is less than 2% of your VAT-inclusive turnover. In some circumstances, it may be more than 2% but less than £1,000 per annum.

The issue giving accountants sleepless nights is over the precise definition of goods. We know that it excludes capital expenditure, food and drink and any type of vehicle maintenance or fuel (unless you’re running a taxi service). Where things become more complex would be, for instance, over the purchase of something like a software subscription. It seems that if the software is bespoke to your business, it will probably count as a service not goods.

It’s these kinds of assessments that small businesses will need to make and it’s important to take professional advice, as the situation is still fluid and everyone is racing to interpret what exactly the new regime will mean. HMRC will be writing to all affected companies in due course, but as April has come and gone, it may be worth having another conversation with your accountant if you haven’t already.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

We all gain from thinking before selling shares

Jono Wilson of Barnett & Turner gives some valuable advice if you’re planning on realising the value of your shares. Whenever you sell or dispose of certain types of asset, you may find that you owe Capital Gains Tax (CGT). The tax is based on the ‘chargeable gain’ – or, in simple terms, the difference between your proceeds and the original cost.

CGT is payable on the disposal of property which isn’t your main home. It’s also charged on company shares. You can, however, make a gain of up to £11,100 before you reach the threshold at which you have to pay tax.

• Before the 2016 Budget

Two rates of CGT existed for individuals prior to the 2016 Budget: a standard rate of 18% and a higher rate of 28%.

• After the 2016 Budget

Following the Budget announcement, the two rates were reduced to 10% and 20% respectively, although different figures apply to certain residential properties.

With regard to shares, here are some questions to think about when considering your liability:

How are the shares held?

If they’re held in an Individual Savings Account (ISA), they are exempt from CGT.

What type of shares are they?

Are the shares held in a large PLC or a family-owned trading business? If they are in a trading business in which you work (and hold at least 5% of the shares and voting rights), you may qualify for Entrepreneur’s Relief, which provides for a rate of 10% on the whole gain. If you’re unable to claim Entrepreneur’s Relief, some or all of the gain may be taxed at 20%, depending on the level of your other income.

Are you planning on disposing of a number of assets around the same time?

If you want to take full advantage of your annual allowances, it probably won’t make sense to dispose of a number of assets at a similar time. It’s certainly worth taking professional advice before proceeding.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Tougher penalties for tax avoiders – summary of the new ‘STAR’ by Jonathan Wilson of Barnett & Turner.

In the 2016 Budget, the then Chancellor, George Osborne, signalled an intention to introduce harsher penalties for those who take part in tax avoidance schemes. As part of this the Government confirmed that clarification would be given on the definition of ‘reasonable care’ in relation to the penalty provisions where a person uses tax avoidance arrangements which HMRC later defeats. The Finance Act 2016 introduced a new ‘Serial Tax Avoidance Regime’ (STAR). Whilst the legislation uses the word ‘serial’, it is not only aimed at frequent users of avoidance schemes, but also includes any taxpayer who has used any scheme which is later defeated by HMRC.

STAR will apply to any tax avoidance schemes entered into after 15 September 2016, as well as any schemes entered into before that date which HMRC defeats on or after 6 April 2017. HMRC have, however, confirmed that the regime should not apply to schemes entered into before 15 September where either:

• the taxpayer advises HMRC before 6 April 2017 of their firm intention to relinquish their position and settle their case; or
• where ‘full disclosure’ has been made before 5 April 2017.

The schemes or arrangements caught under this regime include those:

• disclosed or disclosable under Disclosure of tax avoidance schemes (DOTAS) or VAT Avoidance Disclosure Regime (VADR);
• arrangements for which HMRC have given a follower notice to the taxpayer;
• arrangements counteracted under the General Anti-Abuse Rule (GAAR).

 Following the first defeat, HMRC will issue the taxpayer with a warning notice saying that if the taxpayer participates in any further tax avoidance schemes within the next five years, which are defeated by HMRC, any penalties levied will be at a higher rate and the warning period will be extended.

During the warning period, the taxpayer will also be required to send details to HMRC about any tax avoidance schemes entered into.

If HMRC defeat three tax avoidance schemes while the taxpayer is on warning, the taxpayer’s names and other details will be published.

In addition to the above measures, HMRC released a consultation document in August 2016 called ‘Strengthening tax avoidance sanctions and deterrents’.

The Government’s proposals set out in this document were to:

• introduce penalties for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC; and
• to look at modifying the way the penalty regime works for those whose tax returns are found to be ‘inaccurate’ as a result of using such arrangements, by defining what does not constitute the taking of ‘reasonable care’ and placing the requirement to prove ‘reasonable care’ on to the taxpayer.

The legislation, included in the 2017 Finance Bill, introduces a penalty for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC, and focuses on abusive schemes rather than reasonable commercial arrangements.

By introducing these measures, the Government is sending a clear message of much tougher sanctions to not only those who get involved in such schemes, but also to those who promote the arrangements.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

A streamlined new system for employee benefits

Tracy Henson of Barnett & Turner explains how the world of taxable benefits has changed since April 2016. As accountants & tax advisers, one of our many jobs is to prepare P11D forms on behalf of clients. It’s the way in which we inform HMRC about the taxable benefits to employees that go beyond their salary.

At the start of the 2016-17 tax year, a number of changes came into force, which in theory make the process a little more streamlined.

First, the distinction between the P90 form and the P11D has been removed. The P90 existed for lower-paid employees, but it’s been decided that two systems running alongside each other is rather inefficient.

The second change is that the P11D was always compulsory if you were paying expenses related to employment. You’d show any payment on the form and then it could be reclaimed on a tax return. There’s now, however, an exemption for certain expenses – predominantly related to travel. (It’s important to note that you still need to keep full records though, as you must be able to provide proper documentation if HMRC raise a query.)

Third on the list of new rules is the option to pay tax through the payroll, where a P11D would previously have been used. This relates to all benefits not covered by the exemptions discussed above, with the exception of accommodation, loans, credit tokens and vouchers.

Finally, there is now an exemption for trivial benefits. If the cost doesn’t exceed £50 – and the employee isn’t receiving cash or cash vouchers – there’s no requirement for it to be filed in the P11D.  The exemption is capped at a total of £300 a year and includes any member of an employee’s family or household.

The net result of the changes is that we’re now in a rather simpler and more straightforward environment. But it’s certainly worth talking to your accountant about your own specific circumstances and the impact the new rules will have.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk