Tag Archives: HMRC

Save for Children but save tax where you can Reply

Accounting, Bicknell Business Adviser • Tags: , , , , , , ,

Mother and daughter with piggy bank

Many parents, grandparents and other family members like to save for children but are you paying tax on the interest?

The £100 Rule

HMRC Form R85 is used to claim interest tax free but what you might not realise is that despite your child having a personal tax allowance from birth there is a maximum of £100 per year which can earned tax free in interest and dividends earned on parental/family gifts.

So for 2 parents that’s £200 plus grandparents have the same exemption, but if the interest exceeds the limit even by a small amount, the exemption is lost and whole amount of interest becomes taxable.

Junior ISA

Children can have an ISA in their name, the maximum annual contribution limit is £3,720 (2013/14) in cash or shares but the money will be locked in until the child is 18. The £100 rule doesn’t apply to ISA’s.

Pension

Yes, crazy as it might sound your baby can start a pension plan.

You can receive 20% tax relief even if you don’t pay tax. The maximum you can contribute is £3,600 gross – a payment of £2,880 to which the taxman adds £720. This is the case even for people who don’t pay tax, such as children and non-earning spouses.

steve@bicknells.net

HMRC reconsider the NI status of self employed entertainers Reply

Accounting, Bicknell Business Adviser • Tags: , , , ,

Entertainer

On the 15th May HMRC issued a consultation document ‘National Insurance and Self-employed Entertainers‘ comments are invited until 6th August 2013. The object of the consultation is to simplify National Insurance for Entertainers and for the recommendations to be rolled out from 6th April 2014.

The consultation is relevant to:

  • Actors
  • Singers
  • Musicians
  • Performers

Its not relevant to individual employed under a ‘contract of service’ as they are employed.

Since 1998 self employed entertainers have been deemed to be employed earners for National Insurance purposes in order that they could access earnings related contributory benefits. This requires contributions from the entertainer and secondary contributions from the producer of the entertainment.

But its complicated because entertainers often receive ‘additional use payments’ such as royalties, the payments can be complex and paid years after the original engagement.

In addition there is evidence that the 13.8% employers NI has made some producers look outside of the UK for entertainers.

Some amendments to the rules were made in 2003 replacing the ‘wholly or mainly by way of salary’ with a revised definition of ‘salary’

“Salary“means payments:

(a) made for services rendered;

(b) paid under a contract for services;

(c) where there is more than one payment, payable at a specific period or interval;

and

(d) computed by reference to the amount of time for which work has been performed.

 

But this hasn’t help, computed by reference to time is too broad and entertainers don’t work on this basis.

So far HMRC have sought the views of groups representing 80,000 entertainers and 23,000 engagers.

Currently there are two options within the Class 1 regime for amending legislation which HMRC believe would simplify the NICs treatment of entertainers’ earnings:

  • Option 1: Provide for separate secondary contributors for NICs due on Initial Performance Payments (IPPs) and NICs due on Additional Use Payments (AUPs);

or

  • Option 2: Provide that IPPs are subject to Class 1 NICs, but AUPs are subject to Class 4 NICs

Alternatively all of the entertainers earnings could be moved into class 2 and class 4 NI.

Do you have any suggestions for HMRC?

steve@bicknells.net

How HMRC use IT systems to seek out tax evaders Reply

Accounting, Bicknell Business Adviser • Tags: , , , , ,

There is no doubting the resolve of HMRC to track down and prosecute tax evaders.

The Government has committed to spend £917m to tackle tax evasion and raise an additional £7bn each year by 2014/15.

HMRC are using 2,500 staff to tackle avoidance, evasion and fraud, there is also a website to help those who want to declare income https://www.gov.uk/sortmytax

In the search for tax evaders, HMRC have a £45m computer system called Connect which in 2011 delivered £1.4bn in tax revenue and the system is getting bigger and better all the time. According to Accounting Web:

It uses a mathematical technique to search previously unrelated information and detect otherwise invisible ‘relationship’ networks. Using Connect, HMRC sifts through information on property transactions at the Land Registry, company ownerships, loans, bank accounts, employment history, voting and local authority rates registers and compares with self-assessment records to spot taxpayers who might be under-declaring or not declaring income.

Last year Connect made links between tax records and third party data from hospitals, pharmaceutical companies, insurers and even gas SAFE registrations. DVLA records and the shipping and Civil Aviation Authority registers help identify owners of cars and planes who declare income that the computer suggests cannot support such purchases.

In addition HMRC have also identified 200 accountants, lawyers and professionals who advise on tax avoidance structures and its currently unclear how HMRC will be dealing with them and their clients.

It is important to remember that most people pay the correct tax, in fact HMRC calculate that 93% of tax due is paid correctly, its only a small minority who try to evade tax.

steve@bicknells.net

How to avoid the Pitfalls of Dividend Waivers Reply

Accounting, Bicknell Business Adviser • Tags: , , , , ,

business man in a crisis

Dividends always need to be handled with care and its a topic I commented on in my blog “Things you need to know about Dividends…..” but you should also be aware:

  1. Dividends are paid at the same rate for each category of share in accordance with the number of shareholdings held
  2. CTA10/S1168(1) specifies that dividends are treated as paid for the purposes of the Corporation Tax Acts ‘on the date when they become due and payable’
  3. Never be tempted to backdate board minutes and dividend vouchers, as the documents will be legally void and can constitute a criminal offence.

There are times when, for good reasons, a Shareholder may wish to waive their right to a dividend, but HMRC are well aware that often waiving a dividend can have tax implications (bounty and settlement) and they have the following advice in TSEM4225

Not all dividend waivers are vulnerable to challenge. Where a company with few shareholders declares a dividend when one or more of the shareholders has waived their right to a dividend in circumstances where other shareholders may benefit, it is possible the Settlements legislation could apply. You should look out for the following factors, which would indicate that the Settlements legislation is likely to apply.

  • The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
  • Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
  • There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
  • The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
  • The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

So if you are thinking of waiving dividends, bare the following in mind:

  1. A formal Deed of Waiver is required, the Deed will say that the Dividend is Irrevocably Waived, it must be dated before the right to dividend arises, it must be signed and witnessed and filed with the company statutory records
  2. You should have a good commercial reason for the Waiver which could be to retain funds for a specific purpose and this could be stated in the Deed
  3. Don’t make a habit of waiving dividends as it will increase the risk of questions from HMRC
  4. Don’t give inducements to encourage Dividend Waivers
  5. Make sure your dividends are legal – see my Blog “Things you need to know about Dividends…..”

steve@bicknells.net

 

What can you include in a PAYE Settlement Agreement (PSA P626)? Reply

Accounting, Bicknell Business Adviser • Tags: , , , , , ,

Businessman looking at a small present with a magnifying glass

 

 

PAYE Settlement Agreements (PSA’s) are requested by Employers and subject to agreement with HMRC. Under this agreement the employer will be responsible for accounting for any tax and national insurance liabilities arising. Any items covered by a PSA will not need to be shown on forms P35 and P11D at the end of the tax year.

 

 

Applications for PSA’s should be made before 6th July 2013 if you want to use them for the tax year ended 5th April 2013, once approved by HMRC payment of the Tax and NI is due by the 19th October (payments by cheque) or 22nd October (payments online).

The tax due is grossed-up at the employee’s marginal rate. For example, £5,000 of benefits provided to higher rate taxpayers (40 per cent) would be grossed-up as follows:

Benefits of £5,000 x 40 per cent = £2,000 tax

Grossed-up tax = £2,000 x 100/100-40 = £3,333.33

Benefits plus grossed-up tax = £8,333.33 x 13.8 per cent Class 1B = £1,149.99

Total due to be paid £3,333.33 tax plus £1,149.99 Class 1B = £4,483.32

.
PAYE Settlement Agreements can only be created for:

 

Minor Benefits

HMRC (PSA1060) examples (not exhaustive) of what may constitute a minor item.

  • incentive awards
  • reimbursement of late night taxi fares outside s248 ITEPA 2003
  • personal incidental expenses in excess of the statutory daily limit
  • present for an employee in hospital
  • staff entertainment, for example a ticket for Wimbledon
  • use of a pool car where the conditions for tax exemption are not satisfied
  • subscriptions to gyms, sports clubs etc
  • telephone bills
  • gift vouchers and small gifts

Irregular Expenses

HMRC (PSA 1070) examples (not exhaustive) of what may constitute an irregular item.

  • relocation expenses where the amounts concerned exceed the £8000 tax exempt threshold (Section 287 ITEPA 2003)
  • occasional attendance at an overseas conference where not all the expenses qualify for relief
  • expenses of a spouse occasionally accompanying an employee abroad
  • occasional use of a company holiday flat
  • one off gifts which are not minor.

Impracticable Items

HMRC (PSA 1080) examples (not exhaustive) of what may constitute an impracticable item

  • free chiropody care
  • hairdressing services
  • Christmas parties and similar entertainment provided by the employer which do not already qualify for relief
  • cost of shared taxis home which do not satisfy s248 ITEPA 2003
  • shared cars.

Gov.uk has guidance on How to get a PSA

steve@bicknells.net

 

Private Medical Insurance – Tax Facts 2

Accounting, Bicknell Business Adviser • Tags: , , , , , , , , , ,

3d rendered illustration - runner anatomy

 

Private Medical Insurance accounts for 21% of the value of all benefits in kind and 60% of employees with benefits have Private Medical Insurance, based on HMRC statistics.

HMRC have an A to Z list of benefits and expenses which gives guidance on most benefits and Helpsheet 207 which provides details of non-taxable benefits.

 

 

But did you know some medical benefits are tax free:

  1. Periodic medical check-ups or health screenings (maximum of one per tax year)
  2. Eye tests required under health and safety legislation and the cost of corrective glasses or contact lenses
  3. Medical treatment provided outside the UK when the employee is working overeseas
  4. Medical treatment or insurance solely related to injuries or diseases arising from the employee’s work
  5. Welfare Counselling

If you do have Private Medical Insurance provided by your employer it will be reported on the P11D in Section I (if you are not a Director or earn below £8,500 (P9D employees) Private Medical Insurance is not taxable).

Simply Health have produced a Fact Sheet which sets out the tax implications of:

  • Private Medical Insurance (PMI)
  • Health Cash Plan
  • Cost Plus Insurance Plan
  • Healthcare Trust
  • Scheme Agreement

The Fact Sheet shows the tax for both basic and higher rate taxpayers and the Employers NI.

The Money Advice Service sets out some of the Pros and Cons of PMI:

Pros

  • Specialist referrals. You can ask your GP to refer you to an expert or specialist working privately to get a second opinion or specialist treatment.
  • Get the scans you want. If the NHS delays a scan, or won’t let you have one, you can use your cover to pay for it.
  • Reduce the waiting time. You can use your insurance to reduce the time you spend waiting for NHS treatment, if your wait time is more than six weeks.
  • Choose your surgeon and hospital. You can (in theory) choose a surgeon and hospital to suit your time and place – which isn’t possible on the NHS.
  • Get a private room. You can use it to get a private room, rather than staying in an open ward which might be mixed-sex.
  • Specialist drugs and treatments may be available. Some specialist drugs and treatments aren’t available on the NHS because they’re too expensive or not approved by the National Institute for Health and Clinical Excellence in England and Wales (NICE) or the Scottish Medicines Consortium (SMC).
  • Physiotherapy. You get quicker access to physiotherapy sessions if you have insurance than you would through NHS treatment.

Cons

  • You might get better care on the NHS. If you have a serious illness such as cancer, heart disease or stroke, you’ll get priority NHS treatment. NHS hospitals can be as good as or better than private hospitals.
  • It’s expensive – and the price will go up. A typical family premium (two adults in their 40s and two children under 10) can vary from £700 to £1,650 per year. Premiums will rise every year, and with age – so by the time you’re older, and more likely to need hospital treatment, you may not be able to afford it.
  • Chronic illnesses aren’t usually covered. Most policies don’t cover chronic illnesses which are incurable, such as diabetes and some cancers.
  • There may not be any local treatment options. If you choose a policy with an approved list of consultants and hospitals this may not include the expert consultant you want to see or a convenient location for treatment.

As an alternative to PMI, I think it might be worth looking at Insurance Policies that are tax free such as Income Protection, the following is an example from Willis Insurance:

Group Income Protection pays a proportion of employee’s salary if they are off work due to accident or illness for a prolonged period.

Group Income Protection can be set up with a deferred period of 13, 26, 28, 41, 52 and 104 weeks. The longer the deferred period the lower the premium will be.   Typically the cost of providing Group Income Protection is usually between 0.5% -1.5% of payroll but largely depends on the type of business.

The premiums for the policy enjoy tax relief on contributions and no Benefit In Kind Tax

Employers could then support employees by paying for specific health care as necessary, the employees would then only be taxed on the care that they required.

steve@bicknells.net

The missed opportunity of Self Billing in e commerce Reply

Accounting, Bicknell Business Adviser • Tags: , , , ,

e commerce

I think e commerce and EDI has focused too much on billing clients and consumers (mainly B2C rather that B2B) and not enough on improving the efficiency of processing supplier invoices.

According to research and analysis group, Gartner, typically the cost of processing an invoice in the UK averages between £4 and £25, and in some cases even up to £50, per individual invoice.

You can check the costs for yourself using pay streams calculator.

A typical purchase invoice goes though these stages:

  1. Its checked against the purchase order
  2. Its entered as unauthorised to the accounting system
  3. Its copied and sent to the manager to check the goods were received and were in good order
  4. The manager signs the invoice off
  5. Its status is changed to approved or in query
  6. Queries are sent to the supplier
  7. Authorised invoices are scheduled for payment
  8. Payment is made with a remittance advice
  9. Supplier statements are reconciled to the accounts system

The more suppliers you have and the bigger the volume of either invoices or transactions on invoices, the more complicated and long winded the process becomes.

Although all invoices contain the same basic information they are all formatted and laid out differently.

In some systems invoices are scanned and given a bar code to help index them to accounting system entries.

But it seems to me that many businesses have overlooked what should be a simple solution, Self Billing.

With Self Billing you generate the tax invoice for your supplier and send it to them with the payment.

The following is an extract from HMRC Self-billing:

Putting in place a self-billing arrangement with your suppliers can bring certain advantages for your business:

  • it can save time and money – you can send self-billed invoices electronically so long as you can set up suitable systems
  • purchase invoices are produced to a standard format, making life easier for your accounts department
  • you retain control of how much you’re invoiced for – this can be helpful if your business is responsible for determining the value of the goods or services it receives
  • flexibility – you can outsource the production of the self-billing invoices to a third party if you want to

Your suppliers don’t have to be based just in the UK. You can self-bill businesses in other EU countries or in countries outside the EU.

Advantages for suppliers

If you’re a supplier, entering into a self-billing agreement with your customers can be helpful for your business because:

  • your customer is responsible for making sure that the VAT details on the invoices are correct
  • as part of the agreement with your customer you may be able to specify when you’ll receive payment – this can help with your cash flow

Self billing has been used by the Construction Industry for many years, in fact I created a Self billing system when I worked at Rollalong in 1994, the key issues are:

  • Getting suppliers to agree to join the self billing scheme
  • Getting approval from HMRC
  • Keeping your VAT registration records up to date

But the cost and time savings are significant, the whole process changes and could become:

  1. Purchase Order Sent
  2. Goods received and matched my the manager
  3. Value of Goods received entered to accounting system – this could be automated on matching
  4. Payment made and remittance changed to Self billing invoice

The number of queries are reduced because you aren’t invoiced for things you haven’t had, there is no need to copy and distribute invoices for sign off as this is replaced with stronger goods inward systems.

Why aren’t more businesses adopting self billing?

steve@bicknells.net

Do you use an HMRC suggested record keeping phone app? Reply

Accounting, Bicknell Business Adviser • Tags: , , , ,

Now we have started a new tax year why not use a phone application to keep track of income and receipts? HMRC suggest the following:

Software supplier Product Platform
Forbes Computer Systems Ltd (Opens new window) Forbes Receipt Keeper Android
FreeAgent Central Ltd (Opens new window) Earnest iPhone, iPod touch, iPad
Immagini Ltd (Opens new window) ZipZipBooks Android
Intuit (Opens new window) MyBizTracker iOS (iPhone, iPod touch)
Mr Tax Software Ltd (Opens new window) Text 2 Save Tax Android.
Quick File Ltd (Opens new window) Quick File All – free web-based application
Sage (Opens new window) Sage Record Keeper iPhone, iPad iOS
123 Tax (Opens new window) 123 Tax application Windows Phone

I have been trying out the Sage Record Keeper Mobile on my iPhone, its pretty good for free, here is an overview:

  • Record cash in and cash out
  • See your balances at a glance and track CIS deductions – Standard or Higher Rate
  • You can even take photos of your receipts – no longer worry about losing them- multiple photos if needed
  • Estimate the current year’s tax and refer back to previous ones (up to 6 years)
  • Quick links to record income and expenses in seconds
  • Enter details, specify type of payment used and add notes
  • Add and customise tags for transactions to group them into categories
  • Add several tags to each transaction
  • Search and filter by category, supplier / customer, amounts or other details
  • Backup your information using iCloud

For use outside of the app you can export all or just a selection of transactions and photos as CSV and image files. They’re automatically attached to an email for sharing with anyone.

So no excuses, use your phone and stay organised.

SA 2012-13 Jan Outdoor poster 1

 

steve@bicknells.net

Salary Sacrifice has been “clarified”, its time to check that you comply Reply

Accounting, Bicknell Business Adviser • Tags: , , ,

Staff Benefits

Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI

HMRC decided on 9th April 2013 that it was time to “clarify”  in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….

You (HMRC) may get requests for advice:

  • on how to set up a salary sacrifice arrangement, or
  • on whether draft documentation will achieve a successful salary sacrifice.

You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.

The specific updates are:

EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes

EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions

  • If the scheme involves childcare or childcare vouchers then the conditions for exemption must be met. (See EIM21905 and EIM16057). Is the agreement to provide childcare between the employee and the childminder or nursery. If so the employer by paying the cost directly is meeting the employee’s personal liability. (See EIM00580).
  • For a registered pension scheme the amount which can be contributed to the scheme is normally linked to the employee’s chargeable earnings. In consequence if the salary sacrifice results in some of the employee’s income no longer being taxable, then the amount of contribution, which can be made to the scheme, will also drop.

EIM42778 – Exemption from Tax/NIC – basically stating that exemption may require that the sacrifice may be available to all employees but that the sacrifice must not reduce the employees wages below National Minimum Wages

The following is an example of an unsuccessful Childcare Salary Sacrifice:

The pay slip for the month ended 31 July 2006 gives monthly pay as £2000 plus overtime of £100, deductions for tax of £355 and NIC. The pay slip for the following month shows monthly pay of £2000 plus overtime of £100, deductions for NIC, childcare vouchers of £200 and tax of £310. The code number operated on the salary has not changed.

The situation is not clear from the payslip. When asked, the employer explains that for August, because childcare vouchers of £55 a week are exempt, £220 of vouchers has been deducted from the gross pay of £2100 and tax charged on the net figure of £1880. Further information is needed, for example a copy of the employment contract and any variations agreed by the employer and employee to that contract.

It is established that in July the employee bought childcare vouchers. The employer was not involved. The employer accepts that as the childcare in July was not provided by him, no tax exemption is available. In August the employee asked the employer to buy the childcare vouchers to take advantage of the exemption. The employer did this and deducted the cost from the monthly salary. The contract of employment shows that the employee is entitled to a base salary of £24000 to be paid monthly. This contract has not been varied. As the employee’s entitlement has remained the same, this is not a successful sacrifice. (See EIM42766).

If you operate salary sacrifice schemes its worth checking that your schemes comply, the tax consequences of failure to comply could be substantial.

steve@bicknells.net

 

Cash Accounting has arrived, but will it reduce your tax bill? Reply

Accounting, Bicknell Business Adviser • Tags: , , ,

Stress business woman

You can use the cash basis for Self Assessment Tax Returns (starting from 6th April 2013) if you:

  • are a small self-employed businesses (sole traders and partnerships but not Limited Liability Partnerships)
  • have an income of £79,000 or less a year (this is the threshold when you have to register for VAT)

You can choose to record your business income and expenses over the tax year in 1 of the following ways:

  • using cash basis – record money when it actually comes in and goes out of your business (all money counts – cash, card payments, cheque, any other method)
  • using traditional accounting (accruals basis) – record income and expenses when you invoice your customers or receive a bill

Cash basis might suit smaller businesses because, at the end of the tax year, you won’t have to pay Income Tax on money you haven’t received yet.

You must keep records of:

  • business income received
  • business expenses paid

Depending on what you use simplified expenses for, you need to record business miles for vehicles, hours you work at home and how many people live on your business premises over the year.

Sounds simpler so far, doesn’t it.

But what about …..

  • Suppliers – if you have trade accounts with suppliers then you will have creditors, many small businesses get paid quickly for example a shop or a window cleaner, they don’t have debtors, so the cash basis may not be the best option
  • Capital Allowances – many small businesses will claim capital allowances for their car (and claim most of the running costs too), with the cash basis you can only claim a set mileage allowance https://www.gov.uk/simpler-income-tax-simplified-expenses/vehicles-
  • Equipment Finance – Under cash accounting money you owe isn’t counted until you pay it (unlike traditional capital allowances) and interest and charges are limited to £500 https://www.gov.uk/simpler-income-tax-cash-basis/income-and-expenses-under-cash-basis

Cash accounting may be simpler but will it reduce your tax bill?

steve@bicknells.net