Archives for 2018

The gradual restriction of tax relief for buy-to-let mortgage interest has received much publicity since the process commenced 5 April 2017. From that date, tax relief is converted from a straight forward deduction against business profits into a basic rate tax deduction.
If you continue to be a basic rate taxpayer as these changes roll-out, you will see no increase in your income tax liabilities. You may see an increase if you are, or become, a higher rate or additional rate income tax payer.
The changes have and will occur as follows:
• 2017-18, relief for 75% of interest costs was given by deduction from rents, the remaining 25% given as a basic rate tax deduction.
• 2018-19, relief will be given on 50% by deduction from rents and 50% as a basic rate tax deduction.
• 2019-20, relief will be given on 25% by deduction from rents and 75% as a basic rate tax deduction.
• 2020-21, and from then on, relief will be given on 100% of interest payments as a basic rate tax deduction.
Buy-to-let landlords need to quantify how these changes will impact their income tax liabilities in the coming years and we can help.
A final planning note, it is possible to borrow money by extending the mortgage on your own home. This makes sense from a cost saving point of view as the arrangement costs of the re-mortgage will likely be less as will the rate of interest charged. However, be sure to take the following into account:
• You will be allowed tax relief on interest on loans up to the value of the property when it was first let, and
• The mortgage will likely be secured against your home and the funds to repay the mortgage (or part of it) will come from letting income. This means that if the rental income dries up, and you are unable to sell the rental property to clear the additional loan, you may be faced with selling your home.
Planning is a must-do for prospective, and existing, buy-to-let landlords. Please call if you would like to consider your options. There are no short-cuts. Creating a well rounded business plan that considers the tax changes highlighted above are a prerequisite to achieving success in your property business.

If a business owner makes a loss as a self-employed person, they can set off the losses against any other earnings of the same year. In effect, the business losses are moved side-ways against other earnings.
However, in order for loss relief to be allowed, the loss making business must be able to demonstrate that it was managed on a commercial basis and with a view to making profits.
Many cases have come to the courts when HMRC has not been satisfied that a business venture does demonstrate commerciality, and accordingly, losses have not been allowed as a set off against other earnings.
In a recent case, Beacon v HMRC, Beacon purchased a property in Tuscany. In the first two years of active trading the taxpayer made losses amounting to £218,967 and £139,936. These losses were claimed in Beacon’s tax return against their other earnings in the relevant years.
HMRC disputed the loss relief claims on the basis that the letting business was not run on a commercial basis and the matter was taken to the First Tier Tribunal.
The court disagreed with HMRC. They pointed to a number of factors that suggested a commercial basis, including:
• The property refurbishment had been financed by bank loans and these were backed up by detailed business plans and projections.
• The fact that the business was blown off-course was due in part to the financial crisis of 2008.
The court were also critical of HMRC’s evidence on several other fronts that suggested a lack of commerciality.
The loss relief claims were therefore allowed as claimed

 

1 July 2018 – Due date for corporation tax due for the year ended 30 September 2017.

6 July 2018 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2018 – Pay Class 1A NICs (by the 22 July 2018 if paid electronically).

19 July 2018 – PAYE and NIC deductions due for month ended 5 July 2018. (If you pay your tax electronically the due date is 22 July 2018)

19 July 2018 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2018.

19 July 2018 – CIS tax deducted for the month ended 5 July 2018 is payable by today.

31 July 2018 – Deadline for payment of second instalment self-assessment for 2017-18.

1 August 2018 – Due date for corporation tax due for the year ended 31 October 2017.

19 August 2018 – PAYE and NIC deductions due for month ended 5 August 2018. (If you pay your tax electronically the due date is 22 August 2018)

19 August 2018 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2018.

19 August 2018 – CIS tax deducted for the month ended 5 August 2018 is payable by today.

 

A reminder that from April 2019, HMRC’s much vaunted Making Tax Digital (MTD) scheme will apply to certain businesses.

The April 2019 launch will only apply to VAT registered traders. More specifically, MTD will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can choose to do so voluntarily.

Live pilot studies are already being carried out and the first businesses have started keeping digital records and providing updates to HMRC to test and develop the MTD service for income tax and NICs. HMRC is keen to expand this pilot.

HMRC announced in 2017:

We will start to pilot Making Tax Digital for VAT starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are mandated to use the system. No business will be mandated before 2019.

From April 2019, businesses above the VAT threshold will be mandated to keep their records digitally and provide quarterly updates to HMRC for their VAT.

We will keep an eye on the results of the pilot studies and monitor the progress of accounting software providers to create the necessary links with HMRC’s digital systems.

If you are registered for VAT, have annual turnover above the current £85,000 limit, and have not yet considered how you are going to cope with MTD, please call so that we can help you research your options.

It would seem, that HMRC is keen to plug the apparent drain from VAT receipts when contractors and sub-contractors charge their customers VAT and then go missing, keeping the VAT for themselves. This is described in legislation as “missing trader fraud”.

Their preferred method for dealing with this abuse is to make customers responsible for accounting for the relevant VAT charge rather than the supplier of construction services. This is an extension to the reach of the “reverse charge” scheme.

It has been used in the past to tackle similar VAT avoidance tactics. For example, a reverse charge was introduced for:

• mobile telephones and computer chips with effect from 1st June 2007
• emissions allowances with effect from 1st November 2010

Further reverse charge measures were introduced for gas and electricity with effect from 1st July 2014 and for electronic communications with effect from 1st February 2016.

The government are considering this extension of the reverse charge process to the construction sector from 1 October 2019.

According to HMRC:

The risk of fraud in the construction industry is principally centred around the supply of construction services between construction businesses in the supply chain and this instrument, therefore, does not require other types of business to apply the reverse charge when receiving construction services and there is also no reverse charge requirement in relation to building and construction materials that are supplied separately and independently of construction services.

They conclude:

Reverse charge accounting makes it impossible for fraudsters to perpetrate missing trader fraud because the customer rather than the supplier accounts for the VAT direct to HMRC. The introduction of the reverse charge in this business sector will mean that businesses will need to adapt their systems and manage their cash flow differently. Due to the large number of small businesses potentially affected by a reverse charge for construction services the government has given a long lead-in time to help businesses adjust, having announced in Autumn 2017 the intention to introduce legislation which will come into force in Autumn 2019.

Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NIC), and in some cases Income Tax.

The planning strategy is to pay a salary at a level that qualifies the director for state benefits, including the state pension, but does not involve payment of any NIC contributions.

For 2018/19 the NIC rate is set at 0% for annual earnings in the range of £6,032 to £8,424 inclusive. Earnings in this band range qualify for NIC credit for state benefit purposes. At up to £116 per week (£6,032 p.a.) no NIC credit is obtained for state benefit purposes. At over £162.01 per week (£8,424 p.a.) employees’ NIC starts to be paid at the rate of 12%.

Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band that depends on the actual date appointed. Care needs to be taken in these circumstances not to incur an unexpected liability to pay NIC.

Directors resigning during the year still have the full annual earnings band quoted above, and so care is needed to ensure that earnings for the whole tax year are within the range of £6,032 to £8,424.

Careful planning is also required to ensure that any impact of the National Living Wage regulations is considered, this may be particularly important for women who would like to claim statutory maternity benefit at some future date.

Directors considering their planning options for the first time are advised to take professional advice when setting the most tax/NIC efficient salary. We, of course, would be delighted to help.

Whether you pay Income Tax or National Insurance, the effect on your cash flow is the same. The payments are a necessary part of our obligation to fund the activities of State, but the self-employed are often surprised that their bi-annual tax payments cover both “taxes” – NIC and Income Tax.

The weekly NIC Class 2 contribution is included, presently £2.95 per week, also Class 4 contributions: these amount to 9% of taxable income in excess of £8,424 and up to £46,350, and 2% on earnings above £46,350.

Accordingly, the combined rate of State dues on self-employed earnings in excess of £8,424 is potentially 29% – 20% basic income plus 9% Class 4 NIC – and over £46,350 a combined rate of 42%. Although in practice some of the income over £8,424 may be covered by other personal tax allowances, these combined rates illustrate the true impact of Income Tax and National Insurance to be paid.

Self-employed traders with significant taxable earnings should therefore expect to pay more than the usual rates of Income Tax when they contemplate settlement of their annual self-assessment bill and have funds in reserve to meet these combined liabilities.

1 June 2018 – Due date for Corporation Tax due for the year ended 31 August 2017.

19 June 2018 – PAYE and NIC deductions due for month ended 5 June 2018. (If you pay your tax electronically the due date is 22 June 2018)

19 June 2018 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2018.

19 June 2018 – CIS tax deducted for the month ended 5 June 2018 is payable by today.

1 July 2018 – Due date for Corporation Tax due for the year ended 30 September 2017.

6 July 2018 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2018 – Pay Class 1A NICs (by the 22 July 2018 if paid electronically).

19 July 2018 – PAYE and NIC deductions due for month ended 5 July 2018. (If you pay your tax electronically the due date is 22 July 2018)

19 July 2018 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2018.

19 July 2018 – CIS tax deducted for the month ended 5 July 2018 is payable by today.

In a recent press release, HMRC urged underpaid workers to complain as figures show that the number of workers getting the money they’re owed by employers has doubled after interventions by HMRC.

According to latest figures, in 2017-18, HMRC investigators identified £15.6 million in pay owed to more than a record 200,000 of the UK’s lowest paid workers.

HMRC launched its online complaints service in January 2017, and this has contributed to the 132% increase in the number of complaints received over the last year and the amount of money HMRC has been able to recoup for those unfairly underpaid.

The figures are published as the government launches its annual advertising campaign designed to encourage workers to act if they are not receiving the National Living Wage or the National Minimum Wage.

Industries most affected include restaurants, bars, hotels and hairdressing.

Further information:

• People not receiving at least the minimum wage can fill in an online pay and work rights complaints form.
• It is the responsibility of employers, no matter how big or small, to pay the correct wage to their staff, and failing to do so can result in fines of 200% of the arrears, public naming and, for the worst offences, criminal prosecution.

From 1 April 2018, the government’s National Living Wage rate increased by 33p to £7.83 per hour for those aged 25 and over.

The National Minimum Wage increased:

• by 33p to £7.38 per hour for those aged 21 to 24;
• by 30p to £5.90 per hour for those aged 18 to 20;
• by 15p to £4.20 per hour for those aged 16 to 17;

by 20p to £3.70 per hour for apprentices.

Reforms are being considered that will ensure that Scottish Limited Partnerships continue to be used as a legitimate vehicle for investment in the UK.

Measures to crack down on the abuse of a specialised financial arrangement to launder foreign money through the UK was unveiled at the end of April 2018. This is part of a package of government reforms.

Scottish Limited Partnerships (SLPs) and Limited Partnerships (LPs) are used by thousands of legitimate British businesses, particularly the private equity and pensions industry, to invest more than £30 billion a year in the UK. SLPs and LPs are business entities created by two or more partners where at least one partner is liable for what they invest.

However, evidence published shows the growing evidence that SLPs have been exploited in complex money laundering schemes, including one which involved using over 100 SLPs to move up to $80 billion out of Russia. They have also been linked to international criminal networks in Eastern Europe and other locations and have allegedly been used in arms deals.

Figures published, as part of the launch of the government consultation on this issue, show that just 5 frontmen were responsible for over half of 6,800 SLPs registered between January 2016 and mid-May 2017. By June 2017, 17,000 SLPs, over half of all SLPs, were registered at just 10 addresses.

New proposals would make it clearer who runs limited partnerships to enable British investors to continue to use them legitimately and invest in the UK, while cracking down on their use in unlawful activities. These include:

• Requiring a real connection to the UK, including ensuring SLPs do business or maintain a service address in Scotland.
• Registering new SLPs through a company formation agent, this will ensure that frontmen will be subjected to anti-money laundering checks.
• New powers for Companies House to remove limited partnerships from the company register if they are dissolved or are no longer operating.

The reforms being proposed will apply to all limited partnerships in the UK and will also include new annual reporting requirements for limited partnerships in England and Wales and Northern Ireland, all of which will help Companies House ensure they comply with the law.

Last year, the government introduced laws requiring SLPs to report their beneficial owner and make their ownership structure more transparent, this resulted in an 80% reduction in the number of SLPs registered. Recent, additional reforms seek to raise standards further.