Tuesday 26 July 2016

Dividend allowance, CIS issues, Tax Credits

Last week we examined how shares held in a micro-company can be used to spread income among family members and save tax. We also analysed the current problems with the HMRC online service for CIS, and the fixes available. Finally, we had a reminder about tax credit claims which need to be renewed this month.  

This is an extract from our topical tax tips newsletter dated 21 July 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
  
Dividend allowance 
From 6 April 2016 every individual can receive up to £5,000 of dividend income per year, tax free, whatever their marginal rate of tax, by using the dividend allowance. Spreading dividends among family members can save tax, but only if the correct company secretarial procedures are followed. 

The spouse, child, or other relative of the company owner, can only receive a dividend from the company if they hold a share which entitles them to receive the dividend. In last week's newsletter (14 July 2016) we examined what can go wrong if dividends are paid to someone who is not a shareholder. 

Your first step should be to examine the authorised and issued share capital for the company. Many micro-companies operate for years with only one share in issue. If the company owner wants to divide their shareholding with their spouse, the owner needs to hold sufficient shares in order to pass some shares on. 

This may mean more shares have to be issued. Different categories of shares will permit dividends to be paid at different rates and at varying times to each shareholder. To avoid the settlements legislation applying, the new shares should carry full rights to capital on a winding-up as well as variable dividends. 

A gift of shares between spouses or civil partners will be a no gain no loss transfer for CGT. Gains arising on gifts of shares to other individuals will be taxable, but small gains may be covered by the donor's annual exemption (£11,100) or could be held-over under TCGA 1992, s 165. 

Shares given to employees of the company can subject to income tax as employment-related securities, but there is a general exemption from that legislation for gifts made as part of a family relationship. As an alternative to gifting shares, family members could subscribe directly for their shares. 

Although the dividend allowance taxes up to £5,000 of dividends at 0%, that dividend income is counted for the high income child benefit charge, and for £100,000 threshold that withdraws personal allowances. The tax effect on the recipient of the dividend should be calculated before the dividend is declared or paid. 


This is an extract from our topical tax tips newsletter dated 21 July 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 19 July 2016

Who holds the shares, Payroll pains, Paying HMRC


For the first time in over 6 years the UK has a new Chancellor of the Exchequer. Let’s hope he takes a considered approach to any tax changes, as there are many problems to fix with our tax system, before adding new complications. We have three examples of such problems with payroll systems this week, and two issues found when trying to pay HMRC. But first we examine the mess created by sloppy work when setting up a personal service company.

This is an extract from our topical tax tips newsletter dated 14 July 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Who holds the shares 
When you take on a new client do you check the Companies House record for their personal service company, if they have one?  The reality of who holds the shares may not agree with the client's understanding. 

A mismatch can be very expensive, as Terrance Raine discovered. He was landed with a tax and penalty bill of £41,450 because he believed what he was told by the firm who set up his personal service company.    

Mr Raine was advised by a recruitment consultant to open his own limited company in order to gain work as an interim or locum manager. Raine and his partner Ms Hamilton met with Giant Accounting Limited, who offered them an off-the-shelf company (Linkdrive Solutions Ltd), and agreed to deal with all accounting, payroll and company secretarial requirements. Raine and Hamilton were told that they would hold one share each, and would be appointed as company director and company secretary respectively. 

However, Giant never completed the paperwork to allot shares to Hamilton or Raine, and technically the one subscriber share remained in the name of the formation agent. The annual returns for Linkdrive Ltd filed at Companies House, showed Raine as the only shareholder with two shares, and this continued for 10 years to 2011. The statutory accounts for Linkdrive also reflected that position.     

From 2004 to 2011 Giant prepared dividend vouchers showing equal amounts of dividend payable to Raine and Hamilton, which were declared on their respective tax returns. 

When HMRC investigated the mismatch between dividends shown on Raine's tax returns and the shareholdings declared at Companies House, Giant initially denied there was a problem. 

The Tax Tribunal decided that Raine must have realised that all the shares were in his name as he signed the company accounts, and he should have realised that dividends can only be paid to shareholders. The tax and penalties due were confirmed.    


This is an extract from our topical tax tips newsletter dated 14 July 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 12 July 2016

CGT relief on incorporation, VAT flat rate scheme, Fake HMRC contacts

Many businesses still want to incorporate for non-tax reasons, so last week we reviewed the reliefs which can postpone or reduce CGT due on incorporation. We also examined a problem found when applying for the VAT flat rate scheme, and we had a warning about convincing tax repayment scams which may catch-out your clients. 

This is an extract from our topical tax tips newsletter dated 7 July 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 

VAT flat rate scheme
The VAT flat rate scheme (FRS) for small businesses is very useful. It reduces the work needed to complete a VAT return, as generally only the sales income is considered. Many businesses can also make a small profit purely from using the scheme. 


However, that profit depends on the trade category the business opts to use. This category determines the FRS percentage which must be applied to the gross sales income to calculate the VAT payable to HMRC each quarter. 


When the business applies to use the FRS it should pick the trade category which best fits a plain English description of the majority of its trade. For example, a mechanical engineer would not pick the category "architect, civil and structural engineers", as a mechanical engineer (dealing with machines) is a very different job to a civil engineer (dealing with buildings and structures). If there is no category which is a good fit, the business should choose one of the catch-all categories such as "business services that are not listed elsewhere". 


You can apply for the FRS online as part of the process of registering the business for VAT. This allows the business to benefit from a reduction in its FRS percentage by 1% point during the first 12 months in which it is VAT registered. However, the HMRC computer may not register the business category which you have picked. 


As part of the FRS application you can enter a free text description of the business activity. If that doesn't match one of the trade categories, you can use the more precise Standard Industrial Classification (SIC) code. The computer then matches the SIC code to one of the trade categories, but not always as you would expect. An online message should tell you which trade category has been selected. 


If you are not happy with the computer's choice of trade category your only option is to cancel the online application, and use the stand alone form VAT600FRS to apply for the FRS. This is an interactive form, but it doesn't try to guess the trade category for you. It must be completed then printed out for signing and submission to HMRC.


This is an extract from our topical tax tips newsletter dated 7 July 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 5 July 2016

Planning to leave, Loans to report on P11D, Rent-a-room relief

Some of your clients may be deeply affected by the result of EU referendum, and are looking for advice on how close or move their business interests in order to leave the UK. We have some practical tips on planning for such a move. We also look at which directors' loans to report on the P11D form. Finally, HMRC has updated its guidance on rent-a-room relief, we highlight the key points.

This is an extract from our topical tax tips newsletter dated 30 June 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Planning to leave 
Selling or moving a business is not a simple as moving home. It needs to be planned carefully, with as much notice as possible. The first thing to clarify is: how strongly is the business connected with the individual owner. 

If the business is essentially the individual trading on their own account as a sole-trader or company, then it may not be possible to sell the business without the current owner's continued involvement. In that case the only solution may be to wind-down the business and extract the cash in a tax-efficient manner. 

Pension contributions can be used to do this, as withdrawals from a pension fund can now be made from age 55. However, if the cash is required quickly locking value into a pension fund may not be advisable. The taxpayer should always take independent financial advice before making a large pension contribution. 

If the business is to be sold for a significant profit, check whether the conditions for entrepreneurs' relief will be met for at least 12 months ending with the date of sale. Where owner's the spouse or civil partner holds less than 5% of the ordinary share capital, a transfer of shares between the spouses/partners may allow two people to claim entrepreneurs' relief up to the maximum lifetime limit of £10 million.      

The levels of unutilised cash and investment assets held within the company should be reviewed. Where the cash has not been ear-marked for a business purpose (even paying a dividend), HMRC could regard it as a non-trading asset, which could scupper a claim for entrepreneurs' relief. 

Every business will need a different exit plan. Our tax experts are happy to cast a second eye over your client's plans, to check for possible problems.    

This is an extract from our topical tax tips newsletter dated 30 June 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>>>