- NATIONAL INSURANCE 09th March 2020
Return of the two-tier NI threshold
New rates. The government has announced the rates and thresholds for NI contributions for 2020/21. There’s nothing startling about them with one important exception; there will be two NI earnings thresholds (ETs). While in 2017 the government committed to aligning the ETs for employers and employees to simplify employment taxes, from 6 April 2020 they will diverge again, this time by a significant amount. Employers will start to pay for NI on workers’ salaries which exceed the rate of £8,788 per year, while the workers won’t start to pay until their salaries exceed the rate of £9,500 per year. As a company owner manager be aware of the different ETs when working out the most tax-efficient salary to take from your business.
From 6 April 2020 employers will be liable to NI on salaries they pay if they exceed the rate of £8,788 per year while the trigger point for directors is £9,500. Make sure you take account of the different thresholds when working out the most tax/NI efficient salary to take.
- Missed the filing deadline – is a penalty avoidable? 11th February 2020
If you missed the 31 January deadline for self-assessment HMRC will fine you £100 and more if you continue to delay. It will cancel the penalty if you have a reasonable excuse but if you don’t have one is there another way to dodge a fine?
Must you file a tax return?
It’s a common misunderstanding that if you owe tax you’re required to submit a tax return. The correct position is that you only need to file a self-assessment return if you’re asked to do so by HMRC. It does this by issuing a “notice to file”. However, to prevent you and any individual from dodging tax simply by not declaring income, you’re required to notify HMRC within a time limit if you believe you owe tax but haven’t received a notice to file – it’s then up to HMRC to issue one. If it doesn’t do so you won’t be penalised for not submitting a tax return by the normal deadline.
Notice to file received
Once issued, there is no appeal procedure against a notice to file even if you have no income, gains or other tax liability to declare. This position was recently confirmed by the Upper Tribunal (UT) in HMRC v David Goldsmith 2019
Trap. If you receive a notice to file but don’t submit a return within the time limit the initial penalty is £100. However, even if you don’t owe any tax this can rise to £1,600.
Appealing a penalty
You can appeal against a penalty but HMRC will only cancel it if you have a reasonable excuse such as you or a close member of your family being seriously ill and this was a significant factor in you missing the deadline
Tip. HMRC has the power to withdraw a notice to file. If it does so any penalties for late filing will be withdrawn. This option is only open to HMRC if you haven’t yet submitted the tax return in question and is entirely at HMRC’s discretion.
HMRC will usually agree to withdraw a notice to file a tax return if for a year you don’t meet its criteria for being within self-assessment. This can apply in far broader circumstances than you might think. For example, you can be a director, have annual income of up to £100,000, including savings and investment income of up to £10,000, and be entitled to claim expenses linked to your job of up to £2,500. There are, as you would expect, circumstances in which HMRC insists on self-assessment. For example, if you have income from self-employment or you or your partner receive child benefit and one of you has annual income exceeding £50,000.
Tip 1. For a definitive opinion on whether self-assessment applies to you, use HMRC’s online tool. Keep a copy of the result.
Tip 2. If you’ve missed the deadline for submitting one or more tax returns, still haven’t sent them to HMRC and don’t meet the conditions for being in self-assessment, then don’t submit the form(s). Instead write to HMRC and ask it to withdraw the notice(s) to file. Include a copy of the result produced by HMRC’s online tool showing that self-assessment isn’t applicable.
If you don’t meet criteria for self-assessment for a year and haven’t yet submitted the corresponding tax return you can ask HMRC to withdraw the requirement to submit one. It has the discretion to refuse your request but if it agrees it will also cancel the late filing penalties. Use HMRC’s online tool to check if self-assessment applies.
- When is providing food and drink to customers deductible? 07th January 2020
Income tax, corporation tax and VAT legislation each contain a similar rule which blocks a tax deduction for “business entertainment” costs. This includes hospitality of any sort.
A common example is where a business provides food and drink for an individual, say a customer. However, not all such supplies are business entertainment.
Tip. The exception to the rule is staff entertainment. This cost is always tax deductible because it’s part of the cost of employing workers. However, there are usually tax consequences for the employees who are entertained.
Part of the business
The cost of food and drink is, of course, a deductible expense where it’s part of your business to provide it, e.g. restaurants, cafés, etc. The food is provided in the course of the business and not supplementary to it and is clearly not hospitality. The trouble is the further removed from catering your business is the more problematic claiming a tax deduction for this type of cost becomes.
Not part of the business
At the other end of the spectrum is, say, a manufacturing company which wines and dines its customers to keep them sweet. It’s done to promote the business but clearly is not part of it. Providing hospitality is the motive. In between this situation and the one set out above are businesses such as our subscriber’s.
Our subscriber puts on lifestyle courses and seminars. These last between two hours and a full day (around eight hours including breaks). She provides tea and biscuits for those on short courses. For those who attend for a full day there’s a lunch. HMRC didn’t object to the tax deduction claimed for the light refreshments but it did for the lunches, on the grounds that it was hospitality.
Tip. In practice HMRC has always accepted that the cost of light refreshments (tea, soft drinks biscuits, etc.) at a business meeting or event is tax deductible in all circumstances except where the motive is hospitality, e.g. taking a prospective client for a drink at a café or pub.
All part of the service
Our subscriber’s response to HMRC’s argument is that she provides lunch as part of the courses she runs. While not directly connected with the services she is selling, the lunches are part and parcel of what she charges for. In essence when customers pay for a seminar they are also paying for the food and drink. This is our subscriber’s intention and it would be difficult for HMRC to successfully dispute it if the case went to tribunal.
Tip. To put the matter beyond doubt, where you provide food and drink which is more substantial than light refreshment as part of what you’re selling, mention it in your advertising and invoices. It doesn’t change the facts but it does make them clearer.
- VAT 04th November 2019
Separating from your spouse (for VAT purposes)
You and your spouse run separate businesses, each trading below the VAT registration limit. The trouble is HMRC can argue that the businesses should be treated as one. What did a recent First-tier Tribunal have to say about this?
VAT registration can be unattractive
Avoiding VAT registration can be advantageous where you sell to the general public or you don’t make many purchases on which you pay VAT (input tax). By keeping your turnover below the VAT registration limit you can make your prices more competitive compared with those who are registered. One way to avoid registration and so gain this advantage is to run parts of your business separately. Naturally, HMRC doesn’t like this.
One business or two?
HMRC is always on the lookout for cases where businesses have been kept separate artificially. It has the power to issue a notice that treats them as a single entity for VAT (but not other tax) purposes. This can mean that the “single” business needs to register and thereby lose the no-VAT advantage it had over its competitors.
Divide and rule
HMRC considers financial, commercial and organisational links before issuing an aggregation notice. It did this in the case of CJ Caton and HMRC (2018) . CJ Caton (C) ran a café and his wife (KC), an adjacent restaurant. Given the similar nature of their businesses and their close proximity HMRC was confident it was correct in issuing an aggregation notice. C and KC took a different view and asked the Tribunal to cancel the notice from its inception.
The key factors
C and CK’s businesses had different opening hours and separate tills. They put in separate orders for supplies but used the same supplier and ordered at the same time. Each business had its own staff. Originally, the premises were separate but alterations gave customers access to the same toilets and the café and restaurant shared a washing up area. There were two leases but both in Cs name. KC’s restaurant had an alcohol licence in C’s name. KC’s restaurant sold “specials” through C’s café. KC didn’t have a bank account so card takings went in C’s bank.
HMRC accepts there can be closer than usual links between genuinely separate businesses where they are run by spouses without the need to aggregate them. But it argued that in this case the links were too close. In particular there was only one website for the two businesses and HMRC pointed to the TripAdvisor site where C had responded to comments as the “owner” of both.
Tip. HMRC officers check reviews and similar websites for VAT and other tax purposes. Therefore avoid having a common online presence for your separate businesses.
Decision and advice
The Tribunal ruled in favour of C and KC saying that the evidence “strongly” indicated two separate businesses and not a single entity. The victory was welcome but it cost C and KC a lot in professional fees and hassle from HMRC. They could have avoided this by being more rigorous in maintaining their independence especially when it came to their online activity. Forewarned is forearmed!
While HMRC accepts that two or more businesses run by the same couple can have more links than if they were operated by unconnected individuals, there’s still a risk they can be aggregated for VAT purposes. To avoid this keep those aspects you can control as separate as possible, e.g. websites, record keeping, etc.
- What does a soft landing for MTD digital links mean? 11th March 2019
Making tax digital for VAT legislation requires you to have “digital links” between your financial data and the quarterly VAT reports. What changes might you need to make to your record keeping to achieve this?
Why digital links?
VAT law offers no explanation of what it means by “digital links”, nevertheless all VAT-registered businesses will be required use them in their bookkeeping processes. HMRC says digital links are “connections that allow details to automatically be transferred from the point a transaction is made until it is included as part of your quarterly report.”HMRC hopes digital links will make VAT reports more accurate and less open to accidental or deliberate errors.
No manual links
Manual links aren’t acceptable under Making Tax Digital for (MTDfV). For example, “Noting down details from an invoice in one ledger and using that handwritten information to manually update …” your software is a no no. However, this doesn’t mean you have to create invoices, delivery notes or other primary business records electronically. Paper documents are acceptable, despite what current TV ads for bookkeeping software imply, it’s what you do with the data on them which matters, i.e. how the information gets from an invoice to your VAT return.
What is a digital link?
Sticking with the example of an invoice, it’s OK to enter the data manually into a bookkeeping app or a spreadsheet, e.g. Excel, but from there the data must flow automatically to your quarterly VAT return. Tip. If you use a bookkeeping app which HMRC has approved for MTDfV, you can be certain that the data will digitally link when you press the button to produce and send your VAT return.
You might need to transfer your raw bookkeeping data to another person to work on, say your accountant. Sending the data by e-mail, saving it to a USB drive or any other electronic storage and handing it to your accountant are all acceptable.
If you use spreadsheets instead of an HMRC-approved bookkeeping app, the data must still link digitally. For example, a cell which shows the total of other cells, or another app, by using a formula is OK, but manually cutting and pasting from one or more cells to another isn’t.
Tip. Whether you use an app or spreadsheets, you’re allowed to make manual adjustments to your data if necessary. For example, if your business is partially exempt you’re allowed to manually work out the fraction of VAT you can reclaim.
For the first twelve months that MTDfV applies to you, at least, HMRC won’t enforce digital linking. This means you can wholly or partly use manual bookkeeping. However, as your VAT return data must be submitted electronically at some stage in your record keeping, you’ll need to use digital links. Tip. Our advice is to ignore the soft landing period and get to grips with digital links for all your data as soon as possible to avoid last minute changes when the soft landing ends.
- HMRC’s new self-assessment tool 14th December 2018
HMRC has launched an online tool which allows you to check if you need to submit a tax return for 2017/18. It’s easy to access, simple to use but very misleading. What’s the full story?
Tax return required? HMRC’s latest online tool, launched on 28 November 2018, aims to help individuals decide if they need to complete a self-assessment tax return for 2017/18. As the normal submission deadline is 31 January 2019, it seems like a sensible idea. The trouble is if you follow its guidance you can easily land yourself in hot water with HMRC, plus receive a £100 fine.
Notice to file. At no point does the tool tell you that if you have already received a notice to complete a tax return you must do so even if the tool indicates that it’s not necessary. HMRC’s notice will usually have been sent to you in April 2018 via your online personal tax account or in the post. Check your records and if you’ve received a notice you’ll need to complete and submit your self-assessment return online by no later than 31 January or you’ll be fined.
Note. If HMRC sent you a notice to complete a tax return for 2017/18 after 31 October, the deadline for submitting it (on paper or online) is three months from the day after the notice was issued.
Misleading. If you haven’t received a notice to submit a self-assessment tax return for 2017/18, but think you owe tax and haven’t told HMRC about it, its tool might indicate that you don’t need to submit a self-assessment return. This is because it uses broad criteria to make its decision. It’s possible to owe thousands in tax and for the tool to say you don’t need to do anything. This is dangerous advice and should be ignored.
- BUDGET 2018 – the small print 16th November 2018
As usual, the more interesting Budget changes didn’t feature in the Chancellor’s speech but in the documents produced by HMRC. What important changes might you have overlooked?
Hidden agenda. These days the Budget speech is more of a media show than an explanation of changes to government finances. Several important changes were hidden in the fine print and we’ve summarised a few of them that you might have missed.
Capital allowances. There’s bad news relating to the capital allowances deductions for several types of asset, including thermal insulation of buildings and integral features. The rate of writing down allowances will reduce from 8% to 6% from 1 April 2019 for corporation tax and 6 April 2019 for income tax.
Private residence relief. The Chancellor announced two unexpected and unwelcome changes to private residence relief which apply when you sell your home for more than you paid for it. Both will come into force from 6 April 2020. The changes are:
o the exemption which applies to gains attributable to the final 18 months you own your home will only apply to the final nine months
o lettings relief, which currently exempts up to an extra £40,000 of gain if you let your home at any time, will only be available where you occupied the property at the same time as the tenant.
HMRC to consult. Hopefully this will prevent any unfair loss of tax relief for those affected by the new restrictions. We’ll report on the consultation when HMRC makes it available.
Relief. There is to be a brand new tax relief for expenditure on construction, improvement and renovation of commercial buildings contracted for on or after 29 October 2019. The finer details will be hammered out through consultation – we’ll keep you informed. However, we can tell you that the “structures and buildings allowance” will be given as an annual deduction on a straight-line basis at the rate of 2% of the qualifying expenditure.
- Change to VAT on service charges 02nd October 2018
From 1 November 2018 property service companies will no longer be able to use HMRC’s concession to exempt certain types of supply. As a landlord how might this affect you?
Service charges. If as a landlord you’re responsible for the upkeep of common areas, e.g. hallways, gardens, drives, etc., of a building or an estate which contains more than one dwelling, e.g. a block of flats, you’ll probably add a service charge to rents to cover your costs. HMRC’s view is that the services you provide are part of the charge for letting the properties. As letting residential accommodation is exempt so is the service charges you levy. HMRC says that in some situations the exemption is being misapplied.
HMRC’s concession. HMRC has issued a statement clarifying when a service charge is exempt and when it’s not (If the common areas you’re responsible for maintaining also include dwellings owned by freeholders, you can exempt the service charge to your tenants but should apply standard rate VAT to that for the freeholders. However, HMRC applies a concession that means you can also exempt the service charge for the freeholders. If you use the concession to exempt service charges you aren’t entitled or may need to restrict the VAT you reclaim on related costs.
- MTD VAT 11th September 2018
Vague legislation. For VAT periods which start on or after 1 April 2019 you’ll be required to use HMRC’s Making Tax Digital for VAT (MTDfV).The legislation was published in early 2018, but details about how it will work in practice were not forthcoming. Not a moment too soon, HMRC has gone some way to rectify this by publishing a new VAT Notice 700/22
Key dates. The Notice confirms that MTDfV will apply for all businesses where their turnover exceeded the registration limit, which is set to remain at £85,000, in the previous twelve months. This means that even where your business is VAT registered and has turnover below the registration limit, you won’t need to file your returns through MTDfV.
Tip. As MTDfV is only a little over six months away, if you think that it will apply to you we recommend that you read HMRC’s new Notice sooner rather than later.
HMRC has a new notice about Making Tax Digital for VAT which will apply to all businesses with a turnover of £85,000 or more from 1 April 2019. All business with turnover around this mark should read the notice without delay.
- EMPLOYMENT STATUS 02nd July 2018
Pimlico Plumbers status decision
The Supreme Court has upheld earlier decisions confirming an individual’s claim that he was a “worker” and not self-employed. What are the tax and NI consequences of this ruling?
Employment status. The long-running battle between Gary Smith (GS) and a well known plumbing firm (Pimlico Plumbers Ltd and another v Smith 2018) about his employment status finally came to an end on 13 June 2018 when the Supreme Court ruled that he was a “worker” and not self-employed, as Pimlico claimed.
Worker or employee. The worker status is a little short of being an employee, but conveys many employment rights such as the minimum wage, holiday and sick pay. The worker status has been around for quite a while, but has come to the fore recently because of the growing concern over workers in the so-called “gig economy”, such as Uber drivers.
Tax and NI. The difference between a worker and an employee is significant for PAYE tax and Class 1 NI purposes. The legislation specifically refers to income of “employees” and “employed earners” and not “workers”. This means that as the law stands HMRC can’t go after businesses which use the services of individuals under worker contracts.
Worker status? Like employee status, a worker is an individual who personally carries out work, i.e. not via a company or other intermediary. The same status tests of control, i.e. the right to send a substitute worker, and the obligation of the employer to provide work and the individual to do it, apply. If the last condition isn’t met, but the others are, the individual probably won’t be an employee, but is likely to be a worker.
- The big IR35 consultation 15th June 2018
HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?
Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35. This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.
Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.
Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.
No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.
When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments.
- MTD development on a go-slow 16th May 2018
HMRC’s CEO has announced that the MTD process for individuals is slowing down to free up resources for work on Brexit. How might this affect you?
No change, almost. According to HMRC’s CEO, the go-slow “means halting progress on simple assessment and real time tax code changes” . He added that this doesn’t mean no changes at all. Anything that frees resources for other work, namely Brexit, will go ahead, but no details of what this might involve were given.
New. Simple assessments were supposed to play a big part in Making Tax Digital (MTD), and HMRC’s initial claim was that it would be a “New way of collecting tax that will make life easier for millions of customers” within self-assessment. However, so far HMRC has only used them sparingly and so you’re unlikely to notice any change because of the go-slow. In practice, this probably means that if you’re currently within self-assessment you’ll remain in it for a while longer.
What about businesses? MTD for VAT is still on course for April 2019. And while HMRC admits that the introduction of a single online account for businesses will be delayed, there’s no suggestion that the April 2020 date for MTD for business will be put back… watch this space!
- New scale charges for VAT on fuel 14th May 2018
New rates. HMRC has released details of the flat rate charges (also known as the scale charges) for car fuel. If you’re VAT registered you can use the scale charges to work out the VAT payable where your business pays for fuel for private journeys, e.g. for your employees. You should use the new rates from the start of the first VAT return period that begins on or after 1 May 2018.
- Business records checks to go 05th December 2015
HMRC has decided to scrap its controversial business records checks. What implications might this have for your business?
Just checking! In 2011 HMRC started its business records checks (BRCs) claiming it wanted to help businesses identify shortcomings in their bookkeeping. It suggested that this was the root cause of many incorrect tax returns and so wanted to help businesses get it right.
Suspended. BRCs came under fire from the accountancy and taxation professions because it was seen as a backdoor way for HMRC to start investigations. To make matters worse, it soon became clear that its officers were inadequately trained to carry out the checks. Because of these problems BRCs were put on hold while HMRC refocused. They were subsequently restarted later in 2012.
Scrapped. On 20 October 2015 HMRC announced that it was scrapping BRCs, although checks that were already scheduled will go ahead. The reason given for the cancellation of the scheme is that it wasn’t cost effective and didn’t identify as many problems as expected.
What now? HMRC says that it will continue to strive to ensure businesses improve their record keeping where needed, although it doesn’t state how it will do this.
- Celebrity Tax Avoidance 02nd June 2015 Yet another TV celebrity is being criticised for using a tax-saving scheme. What’s involved, is it legitimate and might it be something worth considering?
BBC tax dodger. In March 2015 the press revealed that BBC presenter Jeremy Vine was using a tax-avoidance arrangement. As is often the case the reports were wide of the mark and, frankly, almost certainly inaccurate in their accusations.
What’s the plan? We can’t be sure what Mr Vine or his advisors had in mind, but what’s got the press hot under the collar is that his wife and daughter own shares in his company Jelly Vine Productions. What the reports we saw fail to mention is that several years back the Law Lords confirmed that share ownership by a spouse as a means of saving income tax was legitimate. Plus, as far as the daughter’s shares are concerned it’s unlikely these involve income tax avoidance but rather shrewd and entirely legitimate financial planning.
Spouse’s shares. Income received by Jelly Vine from Mr Vine’s activities could be diverted to his wife by paying her dividends on her shares in the company. If she pays tax at a lower rate than Mr Vine, income tax would be saved.
Daughter’s shares. Firstly, we can explain why we don’t think income tax avoidance is involved in the arrangement. Where a parent gives or buys shares in their company for their child who’s aged 18 or under, any income generated by those shares, i.e. dividends, will be taxed on the parent as if it were theirs. This is a well known anti-avoidance rule that Mr Vine’s advisors would be very familiar with.
Tax planning. The tax advantage Mr Vine’s advisors might have had in mind was to create a ready source of tax-efficient income when his daughter reaches 18.Shares in the presenter’s company are owned by his wife and daughter. This is entirely legitimate and is a safe way to shift income to a spouse and child, but only after the offspring reaches 18.
- Mortgages – proving your income 02nd June 2015
Proof of income. Anyone who has a mortgage will know that lenders require proof of income before they approve a loan. If you can’t quickly put your hands on the required documents it can lead to delays.
Documents. Directors and employees must usually provide a P60 for the last tax year, but if all or part of your income is from self-employment you’ll need a statement from your accountant. If you don’t have one or don’t want to incur the expense of them writing to the lender, you can instead provide details of income plus an HMRC statement known as an SA302 . This can take weeks to obtain.
Tip. In January 2015 HMRC created a new service for those who file their tax returns online. You can log in and print your own HMRC statement of income. It’s not an SA302 , but the Council of Mortgage Lenders recommends its members accept it in place of one.If you need to prove your income for the purposes of a mortgage, and all or part of it comes from self-employment, you can now print an HMRC statement using its online service. This will be accepted by most lenders instead of HMRC’s SA302, which can take weeks to obtain.
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- NATIONAL INSURANCE Return of the two-tier NI threshold New rates. The government has announced the rates and thresholds for NI contributions for 2020/21. ... read more
- Missed the filing deadline – is a penalty avoidable? If you missed the 31 January deadline for self-assessment HMRC will fine you £100 and more if you continue to ... read more
“The information in this blog is provided ‘AS IS’ with no warranties, and confers no rights. Yes, we are accountants, but if we are not your accountant this article does not create a client relationship. This blog is technical/ tax information and should not be seen as advice. All circumstances are different – you should consult with an accountant/ tax adviser before you rely on this information.