Tuesday 31 May 2016

RTI penalties, Class 2 NIC errors, SEIS investments

Seven weeks into the 2016/17 tax year and HMRC finally tell us what is happening with RTI late filing penalties, and we explained the the details in last week's newsletter. We also had alarming news about the mistakes HMRC are making with class 2 NIC liabilities, and a lesson to learn when applying for approval for investments under SEIS.

This is an extract from our topical tax tips newsletter dated 26 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Class 2 NIC errors 
From 2015/16 class 2 NIC should to be collected through the taxpayer's self-assessment, rather than paid separately by direct debit or cheque. Most commercial tax return software has been amended to incorporate this change for the self-employed, but it appears the HMRC computer has not. 

If you submit a 2015/16 tax return, your commercial software will calculate the class 2 NIC liability if the taxpayer's self-employed profits exceed £5,965 for the year. HMRC's computer will then “correct” the tax calculation and strip out the class 2 NIC liability, and it may repay that amount to the taxpayer.   

The HMRC computer is wrong, but you will be wasting your time arguing with the HMRC operative who answers the phone at the call centre as they can't override the computer. The call-centre person may also tell you that your client is not registered for class 2 NIC, which is also likely to be incorrect. The problem apparently stems from HMRC's NIC computer and SA computer not talking to each other, and this situation should be fixed soon.    

In the meantime, your client may have received an unexplained tax refund of £145.60, which he has forgotten to tell you about. It's important the taxpayer's NIC record is corrected and that he pays the class 2 NIC due for 2015/16 in order to build up qualification for the full state pension. 

Where your client has been paying class 2 NIC on a voluntary basis because he lives outside the UK, he should still be billed for the class 2 NIC in late 2016 for payment by 31 January 2017. Problems occur where the individual returned to the UK part way through 2015/16 and thus should pay class 2 under self-assessment for part of the year. The HMRC computer can't cope with that situation.

This is an extract from our topical tax tips newsletter dated 26 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>

Tuesday 24 May 2016

VAT flat rate scheme, Repayment claims, Members of the armed forces

Last week we had good news about revised HMRC guidance concerning the VAT flat rate scheme, and a prompt to think about clients submitting repayment claims. We also highlighted some special situations that apply to members and former members of the armed forces.

This is an extract from our topical tax tips newsletter dated 19 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Members of the armed forces 
Individuals who serve in the armed forces are highly motivated, but some leave the forces carrying burdens of illness or disability. The UK tax and benefits system can present a barrier, as there are many rules which don't fit easily with the usual situations faced by current and former members of the armed services. For instance: 

Residence 
Serving personnel may be posted to other countries, but their residence for tax purpose must be worked out using the statutory residence test (SRT). Individuals are not deemed to be UK resident for tax purposes when serving - although they may be treated as UK resident for tax credit purposes. Earned income from the armed forces will always be subject to UK income tax. The SRT will have to be applied to family members of serving personnel who also live abroad.    

Tax credits 
Serving personnel and their families can claim tax credits, even if they are serving in another country. The serving claimant is treated as if they were present in the UK, as long as they were ordinarily resident in the UK before their overseas posting began. 

Non-taxable income 
There are a number of travel and operational allowances that serving personnel receive which are not taxable and are disregarded for tax credits. Former members may receive war pensions and mobility supplements which are not treated as pension income. Also the armed forces independence payment is not treated as income.    

All of these issues, and much more, are covered in the LITRG guide for armed forces. There is also a very handy leaflet covering the same topics that can be printed out.  


This is an extract from our topical tax tips newsletter dated 19 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>

Tuesday 17 May 2016

PAYE codes, CIS returns, ATED returns

RTI was supposed to produce more accurate PAYE codes, but the evidence so far is quite the opposite, as we explain below. We have an update on compulsory online filing for CIS returns and the subcontractor verification process. Finally, a warning about ATED returns, which are now overdue for 2016/17. 

This is an extract from our topical tax tips newsletter dated 12 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

PAYE codes 
It's been a bumper year for PAYE coding errors. Here is summary of all the known issues, and what to do resolve them. 

Allowances 
In spite of an application to transfer 10% of the allowance to a spouse, PAYE codes have not been altered for the couple. 
  
The personal allowance should be restricted where the taxpayer's income exceeds £100,000. However, the RTI system estimated 2016/17 income from February 2016 year to date figures which excluded any year-end bonuses. Thus the taxpayer's total income for 2016/17 is underestimated and allowances are not restricted. 
  
Dividend income 
This will be estimated based on the 2014/15 tax return. Taxpayers can ask for dividend income to be excluded from their code, in which case they will need to pay any dividend tax due by 31 January 2018. 
  
Interest received 
Interest is also estimated from the 2014/15 tax return. The personal savings allowance of £1000 or £500 may have been ignored.   
  
Ceased job 
The date of leaving can't be reported under RTI until the FPS for the last employment period is submitted. The taxpayer may be recorded as starting new job before the notice of his leaving date filters through to the RTI computer. 
  
Benefits in kind 
All benefits included in payroll and taxed as income should be removed from the code, but this is not happening. Some taxpayers are seeing random benefits appearing in their code which they have never received. 
  
Pension withdrawals 
Where the taxpayer has taken a one-off cash withdrawal from their pension fund, this may be incorrectly treated as a regular recurring withdrawal. 
  
Scottish taxpayers 
Taxpayers who don't use the word “Scotland” in their residential address logged with HMRC may not be registered as Scottish taxpayers, and thus don't receive a S prefix to the code, as they should do. 
  
All of the above issues can be reported to HMRC using the PAYE code notice correction form (see below). But the Scottish address issue may need to be corrected using the change in personal details form. For the 'old' address use that on the P2 notice of coding form.

This is an extract from our topical tax tips newsletter dated 12 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 
 
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>

Tuesday 10 May 2016

Dividend myth, Interest received by estates, Share loss relief

The changes in the taxation of dividends and interest from 6 April 2016 have shaken up practice in those areas, and given birth to a few myths. We debunk one of the dividend myths, and outline a new HMRC extra-statutory concession which may ease administration for deceased's estates. We also look at share loss relief claims which are regularly challenged by HMRC.

This is an extract from our topical tax tips newsletter dated 5 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Dividend myth 
We came across a dangerous idea on Linked
in last week concerning the backdating of dividends to avoid the dividend tax that applies from 6 April 2016. The writer suggested that if a dividend is paid within nine months of 5 April 2016 it could be treated as a dividend for 2015/16. This is of-course total nonsense. [Since publishing our newsletter the article on Linkedin has been revised]

To be clear: a dividend can't be backdated. Under company law the dividend must be approved by the directors and paid out at some point after that vote. There is no time limit on the period in which the dividend must be paid out after approval. In deed the dividend need not be paid in cash, it can be credited to the shareholder/ director's account within the company. 

However, the dividend is taxed at the date it is paid to the shareholder or credited to the shareholder's account within the company, not by reference to the date it is declared and voted on. 

If a dividend was approved before 6 April 2016, and paid out after that date it would be taxed in 2016/17 not in 2015/16 and it would be subject to the dividend tax. The only way that a cash dividend received in 2016/17 escapes the dividend tax is if it was credited to the shareholder/ director's account within the company before 6 April 2016, and the individual then drew from that account an amount equivalent to the dividend. 

The company must have distributable reserves at the time it approves the dividend. The ICAEW provides a useful factsheet on distributable reserves, which has been updated for the FRS 102 financial reporting regime. The directors must obey company law and ensure they are not paying a dividend out of capital. The decision to approve a dividend should be based on relevant accounts, not simply on cash balances in the company's bank account. 

If the company does not have distributable reserves any dividend declared will be illegal, and any shareholder who receives such a dividend will be obliged to repay it to the company. This was explored in the insolvency case: It's a Wrap(UK) Ltd v Gula & another. HMRC tend to treat illegal dividends as earnings under ITEPA 2003, s 62, or alternatively as a director's loan, if the amount is repaid to the company eventually. 

 
This is an extract from our topical tax tips newsletter dated 5 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>

Tuesday 3 May 2016

CIS repayments, VAT returns, Employee expenses

Last week's tax tips addressed three topics from the nitty-gritty of tax compliance work you undertake for your clients. First - good news concerning the CIS tax repayment claims for 2015/16. Next - a warning about checking whether VAT returns tie up to the turnover declared in the accounts. Finally, some clarification on how to operate the new regime for employee expenses in 2016/17.

This is an extract from our topical tax tips newsletter dated 28 April 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Employee expenses 
Taxation of employee expenses changed on 6 April 2016. If the amounts paid are valid business expenses, they are tax and NI exempt, and don't have to be reported on a P11D for 2016/17. This also applies to subsistence allowances, but within limits. 
  
The allowances for meals taken while travelling have been reformed (SI 2015/1948), as we reported in our newsletter on 10 December 2015. The employer can choose whether to reimburse meal costs at those rates or use a special method as agreed with HMRC (ITEPA 2003, s 289B). To agree a special method the employer must show that the rates chosen are a valid estimate of the actual costs, by undertaking a sampling exercise. The employer must also make appropriate checks that expenses are only paid where they are due. 
  
By “sampling exercise” HMRC mean obtaining a random selection of expenses actually incurred by employees, to determine what a reasonable subsistence rate would be. Guidance on how to do this is given in the HMRC Employment Income Manual at para EIM30250. Employers who use the benchmark rates set out in SI 2015/1948 don't have to do a sampling exercise. 
  
Appropriate checks should be done by all employers (ITEPA 2013 s 289A(3)). The employer should periodically check that a random selection of employees has actually incurred some expenditure if they have claimed as business expense. A receipt is not necessarily required, but some contemporaneous record would be needed. Detailed guidance is given in the HMRC Employment Income Manual para EIM30270. 
  
The lesson for micro-companies is - keep the receipts to show that some expense has been incurred, but use the scale rates for meals and travel, for simplicity. Mileage records should always be kept for business journeys, together with a note of the destination and reason for each journey, to prove it was business related. 
 
This is an extract from our topical tax tips newsletter dated 28 April 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>