The season to be merry

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The season to be merry

Thursday, November 17th, 2016

If you are involved in planning the staff Christmas party for your firm don’t forget to consider the income tax consequences. Here’s a short reminder of the points you should add to your check list.

The cost of an annual staff party or similar function is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of unincorporated organisations.

Also, as long as the criteria below are followed there will be no taxable benefit charged to employees:

1.      The event must be open to all employees at a particular location.

2.      An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the overall average cost per head of the functions does not exceed £150 p.a. (inc VAT). The guests of staff attending are included in the head count when computing the cost per head attending.

3.      All costs must be taken into account, including the costs of transport paid to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.

4.      VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

 

If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.

Making tax digital – nothing to worry about

Wednesday, November 16th, 2016

Readers will be relieved to note that their professional advisors and other interested organisations, have recently lobbied HMRC to temper their agenda for making tax digital (MTD).

In case you have not heard of MTD, HMRC intend to require businesses with income over a de minimis limit (presently set at £10,000), to upload summary accounting data on a quarterly basis from April 2018. The idea is to abolish the annual tax return and “push” all of the information that is required to work out our tax liability to our MTD account with HMRC.

This will involve all affected businesses (including those that let property) to keep their accounting records electronically, and more particularly, in a form that will allow data to be uploaded to HMRC.

Advisors have lobbied for an increase in the £10,000 limit, and a rethink on the quarterly upload of data.

The potential for lumbering small businesses and landlords with yet more red tape is one concern, as is the virtual enforcement of digitising accounting records – many clients prefer to use spreadsheets or manual record keeping.

A HMRC spokesperson, Jim Harra, published the following rebuttal in the Financial Times on 10 November:

HM Revenue & Customs will not be asking anyone to file accounts five times a year, nor will we be introducing in-year quarterly payments. Businesses will simply send in-year updates to HMRC using information collated automatically by the same software used to record day-to-day transactions. This will help businesses pay the right amount of tax, taking away the need to put things right at a later date.

Businesses already keeping their records digitally should see no additional costs at all. Free software will be there for businesses with the most straightforward affairs, and we are looking at additional assistance with transitional costs.

We fully recognise that this is a significant change for some businesses, which is why we’re introducing it gradually as well as exempting some of our smallest businesses, but at the heart of digital transformation is a simpler, more efficient tax system that frees business people from red tape and form-filling.

Based on past experiences of HMRC’s digitalisation of systems, there may well be delays in the implementation of MTD, but HMRC do seem to be resolute in their intention to scrap the annual tax return and have us upload data in order to quantify annual tax liabilities.

Annual Investment Allowance (AIA)

Friday, November 4th, 2016

From 1 January 2016, the AIA was increased to an annual limit of £200,000. Unlike previous changes, this is a permanent increase.

The AIA allows businesses to write off 100% of expenditure in qualifying assets and equipment, up to the appropriate limit, against their tax liabilities. In effect, qualifying expenditure is treated as any other business expense: it reduces taxable profits.

There have been a number of changes to the £200,000 limit in recent years and where the AIA ceiling has changed, there are transitional considerations that need to be taken into account.

The following example illustrates how these transitional arrangements work in practice:

Where a business has a chargeable period that spans 1 January 2016, the maximum allowance for that business’s transitional chargeable period comprises 2 parts:

(a) the AIA entitlement, based on the temporary £500,000 annual cap for the portion of the period falling before 1 January 2016

(b) the AIA entitlement, based on the £200,000 cap for the portion of the period falling on or after 1 January 2016.

Example

A company with a 12-month chargeable period from 1 April 2015 to 31 March 2016 would calculate its maximum AIA entitlement based on:

(a) the proportion of the period from 1 April 2015 to 31 December 2015, that is, 9/12 x £500,000 = £375,000, and

(b) the proportion of the period from 1 January 2016 to 31 March 2016, that is 3/12 x £200,000 = £50,000.

The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) (b) = £375,000 £50,000 = £425,000, although in relation to (b) (the part period falling on or after 1 January 2016) no more than £50,000 of the company’s actual expenditure in that part period would be covered by its transitional AIA entitlement.

The AIA remains a valuable tax allowance, especially for smaller businesses. It will be interesting to see if Philip Hammond announces a further boost to investment by increasing this relief as part of his autumn statement November 2016.

When is a hobby a trade

Thursday, November 3rd, 2016

We have received enquiries from a number of clients, concerned that HMRC is going to try and tax them for the small amounts of cash that they make from pursuing hobbies. For example, buying and selling on eBay or setting up stalls at their local drive in markets – car boot sales.

If you establish a regular pattern of making money in this way, and in fact turn in a profit, then you probably need to consider if your hobby is a business that you need to declare to HMRC. Each case needs to be considered on its own merits.

HMRC follows a number of guidelines called “the badges of trade” that help them reach a conclusion: is a part-time hobby, that creates an income stream, a business that needs to be declared on an annual tax return? These badges of trade are listed below:

1.    An intention to make a profit supports trading, but by itself is not conclusive.

2.    Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give ‘pride of possession’, for example, a picture for personal enjoyment?

3.    Transactions that are similar to those of an existing trade may themselves be trading.

4.    Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?

5.    Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?

6.    Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?

7.    Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.

8.    An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.

These criteria are not the only aspects of activity that will be considered. Please call if you are concerned that your hobby may be considered a trade.

Also, please note that from April 2017, the government is to introduce a new £1,000 allowance for property income and a £1,000 allowance for trading income. Individuals with property income or trading income below £1,000 will no longer need to declare or pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance. So, if your hobby does not produce income above £1,000, it can be ignored for tax purposes after 5 April 2017.

Deferring taxable gains until future sales

Thursday, November 3rd, 2016

It may be possible to delay paying Capital Gains Tax (CGT) if you sell a business asset that is subject to a charge to CGT, but you use all or part of the proceeds to buy new business assets. The relief you can claim is called Rollover Relief.

This relief means you won’t usually pay any CGT until you sell the new, replacement asset. Depending on the circumstances of the replacement asset sale, you may then need to pay CGT on the gain from the original asset.

You can also claim provisional Rollover Relief if you are planning to buy new assets with your proceeds of sale, but haven’t done so as yet, or if you use the proceeds to improve assets you already own.

To qualify for Rollover Relief, the following circumstances must apply:

  • you must buy the new assets within 3 years of selling or disposing of the old ones (or up to one year before)
  • your business must be trading when you sell the old assets and buy the new ones
  • you must use the old and new assets in your business

You can claim relief on assets including land and buildings, fixed plant or machinery – and space stations! The old and new assets don’t have to be the same kind.

Different rules apply if you only reinvest part of the proceeds from selling the old assets, if the old were only partly used in your business, or if you use the proceeds to buy ‘depreciating assets’ (fixed plant or machinery, or assets expected to last for less than 60 years when acquired).

The devil as always is in the detail. If you are considering the sale of an asset that would normally be subject to a CGT charge, and you are aiming to replace the asset, we would suggest that you call to discuss the transactions to make sure you make the most of this relief.

How long do you need to keep tax records

Thursday, November 3rd, 2016

The length of time you need to keep tax records depends on the types of income you earn and the types of tax you are paying. A list of time limits is set out below:

Income Tax and Capital Gains Tax

1.    If you are not in business
One year from the 31 January following the end of the tax year. For 2016-17, you would need to keep your records until 31 January 2019.

2.    If you are in business – which includes rental income

Five years from the 31 January following the end of the tax year. For 2016-17, you would need to keep your business and other tax records until 31 January 2023.

3.    A company subject to Corporation Tax

Six years from the end of an accounting period. For the year ending 31 December 2016 you would need to keep records until 31 December 2022.

4.    VAT

You should keep records for at least six years.

5.    PAYE

You should keep payroll records for three years after the end of a tax year. For 2016-17 this would be until 5 April 2020.

 

These deadlines can be extended. For example, if:

  • You file your return late.
  • A return is subject to an enquiry or compliance check.
  • Records relate to a transaction spanning more than one year.
  • An asset is bought which is expected to have a life longer beyond the time limit.

Limits on certain claims for tax relief

Thursday, November 3rd, 2016

From 6 April 2013, the total amount of certain Income Tax reliefs that can be used to reduce your total taxable income is limited to £50,000, or 25% of your adjusted total income, if higher.

The main reliefs subject to this limit are:

  • trade loss relief against general income and early trade losses relief – claimed on the self-employment, Lloyd’s underwriters or partnership pages
  • property loss relief (relating to capital allowances or agricultural expenses) – claimed on the UK property or foreign pages
  • post-cessation trade relief, post-cessation property relief, employment loss relief, former employee’s deduction for liabilities, losses on deeply discounted securities and strips of government securities – claimed on the additional information pages
  • share loss relief, unless claimed on Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) shares – claimed on the capital gains summary pages
  • qualifying loan interest – claimed on the additional information pages

These restrictions do not apply to Gift Aid relief; nor pension contributions which have their own limits.

It is worth considering these restrictions as they may limit your ability to recover a proportion of cash lost by claiming a reduction in tax payable on future or past income and/or gains.

Tax Diary November/December 2016

Thursday, November 3rd, 2016

1 November 2016 – Due date for Corporation Tax due for the year ended 31 January 2016.

 

19 November 2016 – PAYE and NIC deductions due for month ended 5 November 2016. (If you pay your tax electronically the due date is 22 November 2016.)

 

19 November 2016 – Filing deadline for the CIS300 monthly return for the month ended 5 November 2016.

 

19 November 2016 – CIS tax deducted for the month ended 5 November 2016 is payable by today.

 

1 December 2016 – Due date for Corporation Tax due for the year ended 29 February 2016.

 

19 December 2016 – PAYE and NIC deductions due for month ended 5 December 2016. (If you pay your tax electronically the due date is 22 December 2016)

 

19 December 2016 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2016.

 

19 December 2016 – CIS tax deducted for the month ended 5 December 2016 is payable by today.

 

30 December 2016 – Deadline for filing 2015-16 Self Assessment tax returns online to include a claim for under payments to be collected via tax code in 2017-18.

Good news for Sunderland

Tuesday, November 1st, 2016

Prime Minister Teresa May was full of praise for the announcement from Nissan, and its continuing investment in their Sunderland plant, earlier this week. She said:

This is fantastic news for the UK. Nissan is at the heart of this country’s strong automotive industry and so I welcome their decision to produce the Qashqai and a new model at their Sunderland plant.

It is a recognition that the government is committed to creating and supporting the right conditions for the automotive industry so it continues to grow – now and in the future. This vote of confidence shows Britain is open for business and that we remain an outward-looking, world-leading nation.

The government will continue to work closely with employers and investors in creating a global Britain, a country where there are new opportunities for jobs and rewarding careers. Families across the north-east will be delighted at this news today and I share in their enthusiasm for what this means not just for them, but for the whole of the UK.

Nissan, as well as other major investors in the UK, have been watching the progress of the Brexit process with keen interest, and in particular, how will a hard Brexit affect their export sales from the UK, to the EU.

No UK trade agreement with the EU, post Brexit, would leave Nissan facing a 10% World Trade Organisation tariff. In any event, Nissan seem to have been reassured that the UK government is backing the UK automotive industry. What is not clear, is if any financial risks for Nissan are being underwritten.

Other players in the UK’s automotive sector will no doubt be queuing up to receive the same “reassurances”. 

Why is 30 December an important filing date

Thursday, October 27th, 2016

If you are obliged to file a self-assessment tax return for 2015-16, and if you have underpaid tax for this year, and if some of your income (including private pension receipts) is taxed under PAYE, then you can apply to have your tax code number adjusted downwards in a future tax year to repay this underpayment by instalments. In effect, your future income tax deductions will be increased.

Many tax payers will find this a palatable option as HMRC would be collecting the underpaid tax sometime in the future. For example, if you had an underpayment for 2015-16 of £2,400 HMRC would adjust your code number for 2017-18. Consequently, instead of paying the underpayment in one amount, on or before 31 January 2017, your income tax deductions from April 2017 would be increased by £200 a month until March 2018.

There are certain conditions that must be met in order to secure this deferred repayment option. HMRC will not allow the coded out payment process if this would unduly reduce your take home pay. There are also graduated limits on the amount of tax that can be recovered in this way.

What is certain, is that you must file your 2015-16 self-assessment tax return, online, before 30 December 2016 otherwise HMRC will not accept a claim to settle income arrears using this method.

Tax payers who have not yet filed their 2015-16 returns have the best part of two months, if they anticipate tax underpaid for the year, and want to spread the repayment cash flow over the tax year 2017-18.

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