Month: April 2013

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

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

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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

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

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?

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

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?

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

Tax Planning v’s GAAR and the “Double Reasonableness Test” – Will GAAR stop tax avoidance abuse?

UK tax return form

The general anti abuse rule (GAAR) has now been adopted by many advisers in the UK.

The GAAR will apply to Corporation Tax (and amounts treated as Corporation Tax), Income Tax, Capital Gains Tax, Petroleum Revenue Tax, Inheritance Tax, Stamp Duty Land Tax, and the annual tax on enveloped dwellings.

Heather Self, Pinsent Mason commented.  “Many of the examples are complex and contrived – we need more examples of ‘normal’ tax planning, to help show where the boundary will lie.”

The key changes to the legislation relate to the “double reasonableness test”. Nearly all the respondents to the consultation expressed concern about this test. The stated purpose of the GAAR is to counteract “tax advantages” arising from “tax arrangements” that are “abusive”. The tests of “tax advantage” and “abusive” both use concepts of reasonableness and this has been referred to as the “double reasonableness test”.

Accountancy Age reported on the 3rd April 2013:

A LACK OF CLEAR DEFINITION within the incoming General Anti-Abuse Rule is likely to cause “considerable uncertainty”, advisers have warned.

The GAAR, designed to catch and prevent contrived tax avoidance schemes, was included in the 2013 Finance Bill and will take effect once it has received Royal assent in July, although many practitioners have been treating it as if it came in on 1 April.

Chair of the House of Lords committee on the Finance Bill Lord MacGregor said : “There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills.

“This is wrong and the government needs to explain that to the public. GAAR is narrowly defined and will only impact on the most abusive of tax avoidance.”

There are other concerns too….

The Institute of Chartered Accountants in England and Wales (ICAEW) has reiterated its criticisms of draft legislation for a General Anti-Avoidance Rule, claiming that the proposed GAAR is confusing and that it could be in breach of international obligations by overriding double taxation treaties.

The ICAEW draws attention to Article 27 of the Vienna Convention, which the UK signed in 1971 and which states that “a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.” ICAEW argues that the GAAR may therefore be unlawful, particularly in the case of around 100 agreements with non-OECD countries.

http://www.tax-news.com/news/UK_Accountants_Warn_On_Legality_Of_General_AntiAvoidance_Rule____60365.html

HMRC will be monitoring for GAAR by:

  1. Reviewing DOTAS (Disclosure of Tax Avoidance Schemes) for abusive schemes, in general DOTAS are reported by the scheme promoter or scheme user – HMRC have a number schemes under the spot light
  2. Intelligence via other sources or disclosure
  3. Records of successfully litigated or settled by agreement GAAR cases
  4. Regular communication with taxpayers and their advisers

DOTAS penalties fall into three categories:

  • Disclosure penalties: apply to failure to disclose a scheme. There are variations in cases where a Tribunal has issued a disclosure order.
  • Information penalties: apply to other failures to comply with DOTAS.
  • User penalties: apply to failure by a scheme user to report a Scheme Reference Number (SRN) to HMRC.

In all cases apart from user penalties (which are up to £1,000) the initial and daily penalty is determined by a Tribunal and could be up to £5,000 per day. Ross Martin have full details on penalties and reasonable excuses.

Its important to note:

Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning.

So will GAAR work? does it need to be clarified so that we can understand it? I am sure we all agree that everyone should pay their fair share of tax but is GAAR the best way to achieve this?

steve@bicknells.net

HMRC have a surprise for your sleeping partner…. it’s a bill for National Insurance

sleeping partner

Until now if you were a sleeping partner – that is, you took no active part in running the business and only supplied capital and took a share of the profits then you were exempt from National Insurance.

But HMRC have changed their mind, in an announcement on 4th April 2013 they said:

HMRC now considers that Sleeping and inactive Limited Partners are—and have in the past been—liable to pay Class 2 National Insurance contributions (NICs) as self employed earners and Class 4 NICs in respect of their taxable profits. “Inactive Limited Partners” are Limited Partners who take no active part in running the business. This view represents a change from that previously held by HMRC and the Department for Work and Pensions.
Sleeping or inactive Limited Partners who have not paid Class 2 or Class 4 NICs for a past period will not be required by HMRC to pay those contributions.
Sleeping and inactive Limited Partners who are not already paying Class 2 NICs should register on form SA401. Such partners should record the nature of the business being carried out at box 15 on the form as either Sleeping Partner or inactive Limited Partner.
Not good news if you’re an investor who wants a share of the profits, sounds like a good reason to convert to a limited company and pay dividends.
steve@bicknells.net

New reporting regime for Micro Companies – is it a crazy idea?

A donut store, bakery, fish and chips store and a pet shop

On the 21st February 2012, the European Union defined a new category of company, the ‘micro-entity’. Micro-entities are very small limited liability companies and qualifying partnerships.

Micro companies are those not exceeding two out of three of:
  1. Balance sheet total: £289,415 (€350,000)
  2. Net turnover: £578,830 (€700,000)
  3. Average number of employees during the financial year: 10 (or fewer)
Subject to certain conditions, the Micros Directive permits Member States to relieve micro-entities, from the obligations to:
  •  present “prepayments and accrued income” and “accruals and deferred income”
  •  recognise certain types of “prepayments and accrued income” and “accruals and deferred income”
  •  draw up notes to the accounts
  •  prepare an annual report
  •  publish annual accounts provided the financial data information contained in balance sheet items is filed with a designated competent authority.
The UK Government (Department for Business Innovation and Skills) issued a consultation document ‘Simpler financial reporting for micro-entities: the UK’s proposal to implement the ‘Micros Directive” the consultation period closed on 22nd March 2013.
The Government is seeking to make changes to the Companies Act 2006, and to the accounting regulations made under that Act and under EU law to implement the EU Directive 2012/6/EU of the European Parliament and of the Council (“the Micros Directive”). It would also make comparable changes to the accounting framework for Limited Liability Partnerships.

The ICAEW believes the lack of transparency and dearth of financial data would lead to more rejections of credit to these smaller organisations.

“We have a number of concerns about the suggested changes, as they may result in less transparency and less useful financial information. This, in turn, can over time have a negative impact on market confidence and on micro businesses’ ability to access finance, at least at the margins,” says Dr Nigel Sleigh-Johnson, head of the ICAEW’s Financial Reporting Faculty.

What do you think?
steve@bicknells.net

Goodbye UK GAAP, bring on FRS 102….

Accounting Standards

Generally Accepted Accounting Practice in the UK, or UK GAAP, is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom. This includes not only accounting standards, but also UK company law. (Wikipedia)

UK GAAP was over 3,000 pages, but in March 2013 the new Financial Reporting Standard – FRS 102 – was finalised. It’s a mere 342 pages and will succeed UK GAAP and bring the UK closer to International Financial Reporting Standards (IFRS).

FRS 102 will be mandatory for periods beginning on or after 1st January 2015 but you can adopt it for periods ending after 31st December 2012.

It will apply to all entities with the main exceptions being:

  • Those small companies who have adopted FRSSE (Financial Reporting Standard Small Entities)
  • Those companies applying IFRS (International Financial Reporting Standards)

The Financial Reporting Council (FRC), in an article in Financial Director Magazine April 2013, claim:

  1. UK GAAP provided inadequate guidance on accounting for financial instruments
  2. There were inconsistencies in standards between IFRS and older standards
  3. Trainee accountants now learn IFRS so knowledge of UK GAAP is being lost
  4. FRS 102 allows for benchmarking which could lead to reduced borrowing costs

There are a number of key areas which you should start to consider now so that you can prepare for FRS 102:

Financial Instruments (FI) – FRS 102 deals with FI in two chapters:  Chapter 11 deals with basic FI such as debtors, creditors and simple loans, chapter 12 deals with more complex FI such as forward contracts, interest rate swaps and derivatives.  Basic FI will continue to be recognised at amortised cost, however, the more complex transactions that fall into Chapter 12 will need to be measured at fair value with movements being recognised in P&L a/c.

Business Combinations – For most acquisitions accounted for under FRS 10 intangible assets such as brands, customer lists etc are mainly rolled into the goodwill figure rather than recognised separately.  Under FRS 102 it is more likely that intangible assets will be recognised separately from goodwill and each might well be amortised over different useful lives.

Investment Property – FRS 102 requires revaluation gains and losses on investment properties are recognised directly in P&L a/c rather than the current procedure under UK GAAP which is for gains and losses to be held in the Statement of Total Recognised Gains and Losses (STRGL) until realised.  This is likely to lead to more volatility in the P&L a/c.

Deferred Tax – changes to the deferred tax treatment of revaluations of property, plant, equipment and investment property, fair value adjustments under business combinations, unremitted earnings of overseas associates and joint ventures are likely to result in more deferred tax entries in the future.

http://community.cimaglobal.com/blogs/nick-topazios-blog/key-changes-uk-accounting-requirements

steve@bicknells.net