Tax E-News October 2016

REPORTING TO HMRC EVERY QUARTER TO GO AHEAD IN 2018

The Government and HMRC remain committed to the “Making Tax Digital” project with more information being sent online to HM Revenue and Customs (HMRC) by employers, pension funds, banks and other institutions.

The next big step will be the introduction of quarterly reporting of income and expenditure by businesses and landlords from 2018. HMRC are currently consulting on a number of proposals to make radical changes to facilitate the introduction of the new regime. We accountants have serious concerns about the timescale; HMRC say “you will not need an accountant to fill out the information on the new system.” They are expecting businesses to use new Apps on their Smart phones and Tablets to transmit their data to HMRC.

Overview of main proposals 

Small businesses and landlords will be encouraged to prepare their accounts on a cash basis with the threshold for using thIS basis significantly increased. The current basis period rules for unincorporated businesses to be reformed. A new voluntary Pay As You Go (PAYG) system to be introduced to help businesses budget for their tax payments.

Extending the cash basis

About 1 million small businesses currently prepare their accounts on a cash basis. The present threshold for using the cash basis is the VAT registration limit £83,000 and HMRC are consulting on the limit being significantly increased, possibly double the VAT threshold of £166,000, the current limit for leaving the scheme.

What is the cash basis?

The current cash basis for preparing accounts was introduced as a simplification measure from 6 April 2013. Using the cash basis means that businesses merely need to calculate their profits based on receipts and payments. There are no adjustments at the end of each period for accrued expenses and amounts prepaid, and no adjustment for stock or bad debts at the end of the period.

Another simplification is that the cost of equipment bought for the business, except for motor cars, can be deducted directly in arriving at the profit without the need for a capital allowances claim. One disadvantage of the current cash basis rules is that interest on money borrowed to finance the business is limited to £500 a year and a similar restriction is likely to be incorporated into the new rules.

Proposals to simplify basis periods

The current basis period rules are complex, and many unincorporated business owners find them difficult to comprehend.  Where the business makes up accounts to a date other than 5 April the accounts and profits have to be made to “fit” into the tax year. There are particular problems at the commencement of trading as some of the initial profits are taxed twice and the “overlap” profits are then deducted on cessation.

One proposal is for businesses to prepare accounts for a period that aligns with the tax year (6 April – 5 April) or even prepare accounts for shorter periods such as each quarter to align with their VAT quarters and submissions to HMRC.

Pay as you go 

Another complication of the current self-assessment regime is that where tax has not been collected under PAYE or at source, primarily on self-employed profits and rental income, the taxpayer is required to make payments on account. These payments on account are due on 31 January and 31 July based on 50% of the outstanding liability for the previous tax year with a balancing payment the following 31 January.

This can make budgeting cash flow for the self-employed and landlords difficult for some to manage. The government is proposing to introduce a new voluntary Pay as You Go (PAYG) system for the self-employed and landlords to make payments towards their income tax, national insurance and VAT liabilities monthly with a reconciliation at the end of the year.

Many of these proposals may have significant implications for your business. We will update you on further details once we see the outcome of the various consultations. We can then discuss how we can assist you with your quarterly obligations.

PAYING 20% INSTEAD OF 28% ON THE SALE OF PROPERTY 

The latest Finance Act has retained the 28% CGT rate for sales of residential property, whereas the general rate was reduced to 20% for higher rate taxpayers.

It has been suggested that it is possible to reduce the rate from 28% to 20% by deferring the gain temporarily into qualifying EIS company shares. The tax planning opportunity arises because reinvesting the property gain in Enterprise Investment Scheme (EIS) company shares defers the gain until the shares are sold when the gain comes back into charge at the general rate of CGT, currently 20% for a higher rate taxpayer.

There is no minimum holding period for EIS deferral relief, however where the investor is seeking income tax relief and CGT exemption on the sale of the shares they need to be an unconnected investor and retain the EIS shares for at least 3 years. The reinvestment in EIS shares must take place during the period of 12 months before to 36 months after the date of disposal of the property.

Shares in EIS qualifying companies are risky investments and specialist investment advice should be taken. There is also a chance that HMRC may block this tax planning strategy in the future.

ADVISORY FUEL RATE FOR COMPANY CARS

These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 September 2016. Where there has been a change the previous rate is shown in brackets.

You can continue to use the previous rates for up to 1 month from the date the new rates apply.

Vat implications of employee mileage claims

Note that where employers reimburse their employees 45p per mile for using their own cars they are able to reclaim input VAT based on the amounts shown in the table. In the case of a 1600cc diesel car that would be 1.5 pence per mile.  (9p x 20/120). Such a claim needs to be supported by a receipt from the filling station.

NEW NATIONAL MINIMUM WAGE RATES FROM 1 OCTOBER

National minimum wage rates went up with effect from 1 October 2016. The National Minimum Wage (NMW) applies to all workers aged 16-24, including apprentices. The new rates of pay are:

• £6.95 for thos aged 21-24
• £5.55 for 18-20 year olds
• £4.00 for under 18s
• £3.40 for all apprentices in their first year. If apprentices are aged 19+, second year pay should be in-line with the NMW rates for their age group (£5.55 if they are aged 19 or 20, £6.95 if they are 21 to 24).

National Living Wage (NLW):

The National Living Wage rate, which applies to workers aged 25 and over, is not changing in October. However, beginning in 2017, future upratings of the NMV and NLW will occur once annually in the April of each year.

LIQUIDATING A COMPANY – IS IT A CAPITAL GAIN? 

One of the anti-avoidance measures being introduced by the latest Finance Bill potentially changes the way that certain payments to shareholders will be taxed. This may result in payments following some company liquidations being taxed as dividends instead of capital gains.

The Government is concerned that the new  higher rates of income tax that have applied to dividends since 6 April 2016 may tempt some shareholder / directors to extract value built up within their companies in a capital form, rather than paying out the retained profits as dividends. This is because capital gains are generally taxed at a lower rate than income, possibly as low as 10% where entrepreneurs’ relief is available.

For example, a higher rate taxpaying shareholder receiving £100,000 on the liquidation of his company would pay £32,500 (32.5%) if the anti-avoidance applies, whereas CGT would be just £10,000 (10%) if entrepreneurs’ relief is available.  Consequently, new stricter rules are being introduced to apply to transactions on or after 6 April 2016.

When is a liquidation taxed as income? 

For the new anti-avoidance rules to apply, the company being wound up must firstly be a close company and the individual must have held at least a 5% interest in the company (ordinary share capital and voting rights).

A further condition is that the individual (or connected person) continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution. It must also be reasonable to assume, having regard to all of the circumstances that the arrangements appear to have a tax advantage as one of the main purposes.

Can we obtain clearance prior to the liquidation? 

Accountants and tax advisors requested that the new anti-avoidance rules should provide a formal clearance procedure prior to the transaction, thus providing certainty as to whether or not the payment would be taxed as income or capital.  Unfortunately, there is no formal clearance procedure. HMRC have however received a number of clearance requests from taxpayers and have confirmed that it is not their general practice to offer clearances on recently introduced legislation with a purpose test.

HMRC have therefore drafted a standard reply that sets out a small number of examples and they are working on more detailed guidance, which should be published before the end of this year. This is a very complex area and we suggest that you contact us before you consider liquidating your company.

DIARY OF MAIN TAX EVENTS OCTOBER/NOVEMBER 2016