Archive for March, 2014

Business Structures – Which Should I Use?

Monday, March 31st, 2014

Having made the decision to be your own boss, it is important to decide the best legal and taxation structure for your enterprise. The most suitable structure for you will depend on your personal situation and your future plans. The decision you make will have repercussions on the way you are taxed, your exposure to creditors and other matters.

The possible options you have are as follows.

 

Sole trader

This is the simplest way of trading. There are only a few formalities to trading this way, the most important of which is informing HMRC. You are required to keep business records in order to calculate profits each year and they will form the basis of how you pay your tax and national insurance. Any profits generated in this medium are automatically yours. The business of a sole trader is not distinguished from the proprietor’s personal affairs so that if there are any debts, you are legally liable to pay those debts down to your last worldly possession.

 

Partnership

A partnership is an extension of being a sole trader. Here, a group of two or more people will come together, pool their talents, clients and business contacts so that, collectively, they can build a more successful business than they would individually. The partners will agree to share the joint profits in pre-determined percentages. It is advisable to draw up a Partnership Agreement which sets the rules of how the partners will work together. Partners are taxed in the same way as sole traders, but only on their own share of the partnership profits. As with sole traders, the partners are legally liable to pay the debts of the business.  Each partner is ‘jointly and severally’ liable for the partnership debts, so that if certain partners are unable to pay their share of the partnership debts then those debts can fall on the other partners.

 

Limited company

A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability. Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.

There are many advantages as well as disadvantages to operating through a limited company. We have a separate factsheet on ‘Incorporation’ which considers the relative merits as well as the downsides of operating as a company.

New companies can be purchased relatively cheaply in a ready-made form – usually referred to as ‘off the shelf’ companies. There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. A big advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.

 

Limited liability partnership

A limited liability partnership is legally similar to a company. It is administered like a company in all aspects except its taxation. In this, it is treated like a partnership. Therefore you have the limited liability, administrative and statutory obligations of a company but not the taxation and national insurance flexibility. They are particularly suitable for medium and large-sized partnerships.

 

Co-operative

A co-operative is a mutual organisation owned by its employees. One example of such an organisation is the John Lewis Partnership. These structures need specialist advice.

 

How we can help

We will be happy to discuss your plans and the most appropriate business structure with you. The most appropriate structure will depend on a number of factors including consideration of taxation implications, the legal entity, ownership and liability.

 

Tax Diary April/May 2014

Monday, March 31st, 2014

 

  • 1 April 2014 – Due date for Corporation Tax due for the year ended 30 June 2013. 
  • 19 April 2014 – PAYE and NIC deductions due for month ended 5 April 2014. (If you pay your tax electronically the due date is 22 April 2014.)
  • 19 April 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2014. 
  • 19 April 2014 – CIS tax deducted for the month ended 5 April 2014 is payable by today.
  • 19 May 2014 – PAYE and NIC deductions due for month ended 5 May 2014. (If you pay your tax electronically the due date is 22 May 2014)
  • 19 May 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2014.
  • 19 May 2014 – CIS tax deducted for the month ended 5 May 2014 is payable by today.
  • 19 May 2014 – The payroll forms P35 and P14s must be filed by this date – employers late in filing these forms may receive a penalty.
  • 31 May 2014 – Ensure all employees have been given their P60s for the 2013-14 tax year.

State Pension and tax

Monday, March 31st, 2014

If you have recently started to receive your State Pension, you may, or may not, have noticed that it is paid without deduction of tax. This can have a number of unforeseen tax consequences:

  • If your total income including your State Pension is less than your personal tax allowance then there is no tax to pay and you can spend your pension, no problem.
  • If you are still in business and self-employed, and if your self-employed earnings exceed your personal allowance, then you will need to save part of your State Pension to cover tax due. The amount you will need to put by depends on your marginal rate of tax.
  • If you are employed, or if you receive private pension payments, HMRC may adjust your code number(s) to recover tax due on your State Pension. However, this process does not always recover the correct amount and you may receive a bill after the end of the tax year for any arrears. And occasionally, you may have overpaid and you will receive a rebate.

 If you are concerned that you may be overpaying tax, or should be reserving for future tax and are unsure how much to put by, please contact us.    

HMRC is changing the way they charge interest on late paid PAYE

Monday, March 31st, 2014

Employers should note that HMRC is changing the way they charge interest on unpaid PAYE from 6 April 2014. We have reproduced below HMRC’s recent Helpsheet:

 For the tax year 2014-15 onwards:

 HMRC will charge in-year, rather than annual, interest on all unpaid:

  • PAYE tax and Class 1 National Insurance, including specified charges (estimates HMRC makes in the absence of a PAYE submission)
  • Construction Industry Scheme charges
  • In-year late filing penalties, which start from October 2014
  • In-year late payment penalties, which will be charged automatically from April 2015

HMRC may also charge interest on underpayments that arise because of adjustments reported on Earlier Year Updates submitted in respect of tax year 2014-15 onwards.

For annual payments such as Class 1A and Class 1B National Insurance Contributions (NICs), HMRC will continue to charge interest on any amount which remains unpaid after the due date.

 Will HMRC also pay interest on overpayments in-year?

Yes. HMRC will apply repayment interest where an employer makes a payment and the charge is then reduced, and this results in an overpayment which is:

  • reallocated to a later charge
  • repaid

 How will interest be calculated?

 HMRC will charge interest from the date a payment is due and payable to the date it is paid in full.

 For 2013-14 HMRC will charge interest on any amount outstanding for month 12 starting from 19/22 April 2014. Interest will only be charged on any month 12 late payment amounts and not all outstanding late payment amounts for 2013-14.

 For 2014-15 HMRC will charge in-year interest each month on any late payment, starting from 19 May 2014.

What has not changed since the Budget?

Monday, March 31st, 2014

  

  • Entrepreneurs’ Relief 

As long as the ownership of your business is structured correctly, and for a minimum time period, then lifetime disposals not exceeding £10m will only be taxed at 10% for Capital Gains Tax purposes.

 

  • Cap on tax reliefs 

Don’t forget that certain tax reliefs are capped at £50,000 or 25% of your income. The reliefs affected are predominantly tax losses. There is no cap on charitable donations.

 

  • Loss of personal allowance 

Care should be taken if your taxable income is likely to exceed £100,000 in the current tax year. For every £2 your income exceeds £100,000 your Personal Allowance (PA) will be reduced by £1. For 2014-15, this means that your PA will be withdrawn completely if your income exceeds £120,000.

 

  • Carry back charitable donations 

It is possible to carry back charitable donations made in the tax year 2014-15 to the previous year, 2013-14. The claim to carry back must be made before or at the same time as you complete your tax return for the earlier year. The latest date you can make a claim is the statutory filing deadline. For the 2013-14 return this is 31 October 2014 if you file a paper return, or 31 January 2015 if you file your return electronically.

 

  • Inheritance Tax (IHT) lifetime gifts

It is still possible to make lifetime gifts of any amount to an individual as long as there are no strings attached. The amount of the gift that will be included in your estate for IHT purposes may gradually reduce over time. If you live for more than seven years after the gift was made, then it will be excluded completely from IHT. If the gift becomes taxable on your death, then any tax payable on it is reduced if you survive it by at least 3 years.

 

These are just a few of the existing planning matters that you could or should consider. However, everyone’s circumstances are different and if your financial affairs are complex you should consider a formal tax planning consultation, which we would be delighted to undertake for you.

What has changed since the Budget?

Monday, March 31st, 2014
  • For those born after 5 April 1948 the personal tax allowance is £10,000. It was also announced that from 6 April 2015 this would increase to £10,500.
  • The much publicised change to the taxation of salaried members of Limited Liability Partnerships is confirmed. Ongoing vigilance is required to ensure that salaried members’ tax status does not change from self-employed to PAYE by default.
  • All partnerships will be affected by new rules that will allow HMRC, in certain circumstances, to reverse profit or loss sharing between partners if one or more of the partners is a “non-individual” – for example a limited company.
  • From April 2014 employers can claim the new £2,000 Employment Allowance that can be used to set off against their employers’ secondary National Insurance Contributions.
  • From 27 March 2014 and ongoing throughout the 2014-15 tax year, a number of relaxations are being introduced to make the withdrawal of benefits from pension funds more flexible. Any person who is eligible to draw from their pension funds should now take advice as a matter of urgency to determine their best course of action.
  • The Annual Investment Allowance is increased from 6 April 2014 (1 April if a company) to £500,000 (previously £250,000). The new ceiling will apply until 31 December 2015 when the limit could reduce to £25,000. Careful planning is required as, clearly, this measure is intended to encourage businesses to bring forward capital investment during this generous tax relief window. Again planning is required as transitional measures may reduce your entitlement to relief if your business year end date straddles the 6 April 2014 (1 April if a company).
  • Loans provided by an employer to an employee, that are interest free or low cost, did not generate taxable benefits if they were below £5,000. From April 2014 this limit is increased to £10,000.
  • Child care support is increased to 20% of costs capped at a maximum total cost per child of £10,000. All age groups will be brought into this scheme by autumn 2015.
  • From 6 April 2014 the Private Residence Relief final period exemption for Capital Gains Tax purposes is reduced to 18 months, previously it was three years.

Pensions – Tax Reliefs

Friday, March 28th, 2014

Types of pension schemes

There are two broad types of pension schemes from which an individual may eventually be in receipt of a pension:

  • Occupational schemes
  • Personal Pension schemes.

An occupational pension is an arrangement an employer can use to provide benefits for their employees when they leave or retire. The number of occupational pension schemes has declined in recent years in part due to the regulations imposed upon the schemes.

A Personal Pension scheme is a privately funded pension plan but can also be funded by an employer. In many cases the employer may organise the establishment of pension plans for their employees through a Group Personal Pension scheme.

A stakeholder pension is a personal pension plan but has restrictions on the amounts that may be charged by the pension provider (typically a pension company).

We set out below the tax reliefs available to members of a Personal Pension scheme.

It is important that professional advice is sought on pension issues relevant to your personal circumstances.

 

What are the tax breaks and controls on the tax breaks?

To benefit from tax privileges all pension schemes must be registered with HMRC. For a Personal Pension scheme, registration will be organised by the pension provider.

A Personal Pension scheme allows the member to obtain tax relief on contributions into the scheme and tax free growth of the fund.  If an employer contributes into the scheme on behalf of an employee, there is, generally no tax charge on the member and the employer will obtain a deduction from their taxable profits. Self employed and employed individuals can have a Personal Pension.

When the ‘new’ pension regime was introduced from 6 April 2006 no limits were set on either the maximum amount which could be invested in a pension scheme in a year or on the total value within pension funds. However two controls were put in place in 2006 to control the amount of tax relief which was available to the member and the tax free growth in the fund.

Firstly, a lifetime limit was established which set the maximum figure for tax-relieved savings in the fund(s) and has to be considered when key events happen such as when a pension is taken for the first time.

Secondly, an annual allowance sets the maximum amount which can be invested with tax relief into a pension fund.  The allowance applies to the combined contributions of an employee and employer.  Amounts in excess of this allowance trigger a charge.

There are other longer established restrictions on contributions from members of a Personal Pension scheme (see below).

Key features of Personal Pensions

  • Contributions are invested for long-term growth up to the selected retirement age.
  • At retirement which may be any time from the age of 55 the accumulated fund is generally turned into retirement benefits – an income and a tax-free lump sum.
  • Personal contributions are payable net of basic rate tax relief, leaving the provider to claim the tax back from HMRC.
  • Higher and additional rate relief is given as a reduction in the taxpayer’s tax bill. This is normally dealt with by claiming tax relief through the self assessment system.
  • Employer contributions are payable gross direct to the pension provider.

Persons eligible

All UK residents may have a Personal Pension. This includes non-taxpayers such as children and non-earning adults. However, they will only be entitled to tax relief on gross contributions of up to £3,600 per annum.

 

Relief for individuals’ contributions

An individual is entitled to make contributions and receive tax relief on the higher of £3,600 or 100% of earnings in any given tax year. However tax relief will generally be restricted for contributions in excess of the annual allowance.

Methods of giving tax relief

Tax relief on contributions are given at the individual’s marginal rate of tax.

An individual may obtain tax relief on contributions made to a Personal Pension in one of two ways:

  • a net of basic rate tax contribution is paid by the member with higher rate relief claimed through the self assessment system
  • a net of basic rate tax contribution is paid by an employer to the scheme. The contribution is deducted from net pay of the employee. Higher rate relief is claimed through the self assessment system.

In both cases the basic rate is claimed back from HMRC by the pension provider.

A more effective route for an employee may be to enter a salary sacrifice arrangement with an employer. The employer will make a gross contribution to the pension provider and the employee’s gross salary is reduced. This will give the employer full income tax relief (by reducing PAYE) but also reducing National Insurance Contributions.

There are special rules if contributions are made to a retirement annuity contract. (These are old schemes started before the introduction of personal pensions).

 

The annual allowance

The level of the annual allowance is £50,000 for 2012/13 but in order to determine whether the allowance has been exceeded a pension input period needs to be determined for the scheme.  A pension input period does not have to be the same as the tax year. In addition, each scheme can have a different pension input period, so special care is required in this area.

Any contributions in excess of the £50,000 annual allowance are potentially charged to tax on the individual as their top slice of income. Contributions include contributions made by an employer.

The stated purpose of the charging regime is to discourage pension saving in tax registered pensions beyond the annual allowance. It is expected that most individuals and employers will actively seek to reduce pension saving below the annual allowance, rather than fall within the charging regime.

For the tax year 2014/15 onwards the annual allowance will be reduced to £40,000.

The rate of charge

The charge is levied on the excess above the annual allowance at the appropriate rate in respect of the total pension savings. There is no blanket exemption from this charge in the year that benefits are taken.  There are, however, exemptions from the charge in the case of serious ill health as well as death.

The appropriate rate will broadly be the top rate of income tax that you pay on your income.

Example

Anthony, who is self employed, has taxable income of £120,000 in 2012/13. He makes personal pension contributions of £50,000 net in 2012/13. He has made similar contributions in the previous three tax years.

The charge will be:

Gross pension contribution                         £62,500

Less annual allowance                                (£50,000)

Excess                                                             £12,500 taxable at 40% = £5,000

 

Anthony will have had tax relief on his pension contributions of £25,000 (£62,500 x 40%) and now effectively has £5,000 clawed back. The tax adjustments will be made as part of the self assessment tax return process.

 

Carry forward of unused annual allowance

To allow for individuals who may have a significant amount of pension savings in a tax year but smaller amounts in other tax years, a carry forward of unused annual allowance is available.

The carry forward rules apply if the individual’s pension savings exceed the annual allowance for the tax year (i.e. £50,000). The annual allowance for the current tax year is to be treated as increased by the amount of the unused annual allowance from the previous three tax years.

Unused annual allowance carried forward is the amount by which the annual allowance for that tax year exceeded the total pension savings for that tax year.

This effectively means that the unused annual allowance of up to £50,000 per year can be carried forward for the next three years.

Importantly no carry forward is available in relation to a tax year preceding the current year unless the individual was a member of a registered pension scheme at some time during that tax year.

An amount of the excess for an earlier tax year is to be used before that for a later tax year.

As the annual allowance has been far higher than £50,000 before 2011/12 when the new rules were introduced, when looking at whether there is unused annual allowance to bring forward from 2008/09, 2009/10 and 2010/11, the annual allowance for those years is deemed to have been £50,000.

Example

Bob is a self employed builder. In the previous three years Bob has made contributions of £40,000, £20,000 and £30,000 to his pension scheme. As he has not used all of the £50,000 annual allowance in earlier years, he has £60,000 unused annual allowance that he can carry forward to 2012/13.

Together with his current year annual allowance of £50,000, this means that Bob can make a contribution of £110,000 in 2012/13 without having to pay any extra tax charge.

 

The lifetime limit

The lifetime limit sets the maximum figure for tax-relieved savings in the fund and has been reduced from £1.8 million to £1.5 million for 2012/13. For the tax year 2014/15 onwards the lifetime limit will be reduced to £1.25 million.

If the value of the scheme(s) exceeds the limit when benefits are drawn from the scheme there is a tax charge of 55% of the excess if taken as a lump sum and 25% if taken as a pension.

 

How we can help

This information sheet provides general information on the making of pension provision. Please contact us for more detailed advice if you are interested in making provision for a pension.

Investing in plant and equipment?

Thursday, March 27th, 2014

If expenditure on plant and equipment qualifies for the Annual Investment Allowance (AIA) 100% of the cost can be written off against taxable profits.

The amount that can be written off as AIA expenditure has changed a number of times in the past few years.

  • Immediately before 31 December 2012 the (AIA) was set at a maximum spend of £25,000.
  • From 1 January 2013 the £25,000 limit was increased to £250,000 for a temporary period of two years to 31 December 2914.
  • The Budget 2014 has increased the limit again, to £500,000 from 6 April 2014 (for unincorporated businesses) and 1 April 2014 (for companies). This further, temporary increase will end 31 December 2015 when it is assumed the limit will return to £25,000.

According to the Office for Budget Responsibility the increase to £500,000 will bring forward business investment decisions amounting to £1bn, from 2016 and 2017 to 2014 and 2015.

Readers who are contemplating significant business investment in plant and machinery should seek tax advice before making any buy decisions. Depending on your accounts year end date, the amount of tax relief you may qualify for may be reduced if the date straddles the 1st or 6th April 2014.

Capital Gains Tax

Wednesday, March 26th, 2014

A capital gain arises when certain capital (or ‘chargeable’) assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price (including acquisition costs).

What are the main features of the current system?

  • Capital gains tax (CGT) at the rate of 18% applies to gains (including any held over gains coming into charge) where net total taxable gains and income is below the income tax basic rate band of £32,010 for 2013/14  (2012/13  £34,370). Gains or any parts of gains above this limit will be charged at 28%.
  • Entrepreneurs’ relief may be available on certain business disposals.

 

Entrepreneurs’ Relief

ER may be available for certain business disposals taking place on or after 6 April 2008 and has the effect of charging the first £10m (from 6 April 2011) of gains qualifying for the relief at an effective rate of 10%. The lifetime limit has previously been £5m, £2m and £1m since the introduction of the relief.

The relief will apply to gains arising on a disposal of:

  • the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership;
  • shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company;
  • assets used by a business or a company which has ceased;
  • assets used in a partnership or by a company but owned by an individual, if the assets disposed of are ‘associated’ with the withdrawal of the individual from participation in the partnership or the company.

 

A trading business includes professions but only includes a property business if it is a ‘furnished holiday lettings’ business.

 

Restrictions on obtaining the relief on an “associated disposal” are likely to apply in certain specific situations. This includes the common situation where a property is currently in personal ownership, but is used in an unquoted company or partnership trade in return for a rent.  Under ER the availability of relief is restricted where rent is paid from 6 April 2008 onwards.

 

What is clear is that careful planning will be required with ER but if you would like to discuss ER in detail and how it might affect your business, please do get in touch.

 

Simplification of the share identification rules

All shares of the same class in the same company are treated as forming a single asset, regardless of when they were originally acquired. However, ‘same day’ transactions are matched and the ‘30 day’ anti-avoidance rules will remain.

Example

On 15 April 2013 Jeff sold 2000 shares in A plc from his holding of 4000 shares which he had acquired as follows:

1000 in January 1990

1500 in March 2001

1500 in July 2005

Due to significant stock market changes he decided to purchase 500 shares on 30 April 2013 in the same company.

The disposal of 2000 shares will be matched firstly with later transaction of 500 shares as it is within the following 30 days and then with 1,500/ 4000 (1000+1500+1500) of the single asset pool on an average cost basis.

 

CGT annual exemption

Every tax year each individual is allowed to make gains up to the annual exemption without paying any CGT. The annual exemption for 2013/14 is £10,900 (2012/13 £10,600).  Consideration should be given to ensuring both spouses/civil partners utilise this facility.

 

Other more complex areas

Capital gains can arise in many other situations. Some of these, such as gains on Enterprise Investment Scheme and Venture Capital Trust shares, and deferred gains on share for share or share for loan note exchanges, can be complex. Please talk to us before making any decisions.

 

Other reliefs which you may be entitled to

And finally, many existing reliefs continue to be available, such as:

  • private residence relief;
  • business asset roll-over relief, which enables the gain on a business asset to be deferred until a point in the future;
  • business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
  • any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.

 

How we can help

Careful planning of capital asset disposals is essential. We would be happy to discuss the options with you. Please contact us if you would like further advice.

 

Budget highlights

Tuesday, March 25th, 2014

We have reproduced two of the more surprising changes announced in the Budget notes published immediately following George Osborne’s presentation last week.

  1. HMRC to be given powers to raid bank accounts:

 “The government will modernise and strengthen HMRC’s debt collection powers to recover financial assets from the bank accounts of debtors who owe over £1,000 of tax or tax credit debts, have the financial means to pay, and have been contacted multiple times by HMRC to pay. A minimum of £5,000 will be left across debtors’ accounts. This brings the UK in line with many other tax authorities which already have the power to recover debts directly from an individual’s account, such as France and the US.”

 We hope that this does not include rights to recover unpaid tax on estimated assessments!

  1. A number of relaxations were announced that are intended to give tax-payers more control over their “pension pots”.
  • Increased Pension Flexibility – The government will legislate to allow those with a defined contribution pension to draw down after age 55- from April 2015, subject to their marginal rate of income tax.
  • Financial guidance – The government will ensure that, from April 2015, all individuals with defined contribution pension pots are offered free and impartial face-to-face guidance at the point of retirement and will make available up to £20 million in the next 2 years to develop this initiative.
  • Capped drawdown – From 27 March 2014, the government will allow people with defined contribution pension wealth more flexibility to access their savings by increasing the capped drawdown limit to 150% of an equivalent annuity.
  • Minimum income requirement change – From 27 March 2014, the government will allow people with defined contribution pension wealth more flexibility to access their savings by reducing the minimum income requirement for accessing flexible drawdown to £12,000, subject to their pension scheme rules.
  • Small pension pots – From 27 March 2014, the government will increase the amount for small individual pension pots that can be taken as a lump sum regardless of total pension wealth from £2,000 to £10,000.
  • Increase the number of small pots that can be taken as lump sums – The government will increase the number of small pension pots that can be taken as lump sums from 2 to 3.
  • Trivial commutation (small pension wealth) – From 27 March 2014, the government will allow people with defined contribution pension wealth more flexibility to access their savings by increasing the total pension wealth that people can have before they are no longer entitled to receive lump sums under trivial commutation rules to £30,000.

Clearly, these amount to significant changes in the way in which we can access our pension savings at retirement. Readers who are approaching pensionable age should consider their options carefully, and should certainly seek tax advice.