Businesses urged to review Christmas party tax plans

As the decorations go up and the opening of advent calendar doors begins, Pierce Chartered Accountants suggests that Lancashire businesses should review their Christmas party plans to avoid tax hangovers!

Party time

Employees are exempt from tax on the cost of an employer provided annual party where the cost is less than £150. This event can be a Christmas party or other annual function, such as a summer BBQ, and can cover more than one occasion if it doesn’t exceed £150 per head in total across eligible events.

When calculating the cost of the event this should include food, drink, entertainment, venue hire, transport and overnight accommodation as well as VAT in arriving at the total cost per attendee.

The amount of £150 is a limit, not an allowance. If the cost is £151 per person attending, then the whole benefit becomes taxable.

The event should be primarily for entertaining staff and be open to all employees. If guests are invited, then the total cost should be divided by each attendee (including non-employees). If a business is spilt over various locations, then separate events can be held, so long as all members of staff have the option to attend one party.

The employer will also be able to claim a tax deduction for the cost of the staff party even if it exceeds the £150 per head limit.

Staff Gifts

Generous employers who give their staff a gift at Christmas should also consider the tax implications for their employees.

If you give your employee a non-cash gift worth no more than £50 the employee does not have a tax liability on the benefit in kind.  For example retail vouchers, flowers or a hamper would be eligible,  but the gift must be no strings attached such as a performance award and must not be a contractual entitlement.

Companies who give their employees a cash bonus will have to pay the bonus through the payroll and deduct tax and National Insurance as normal.

For further information about tax pitfalls during the Christmas period, call Pierce on 01254 688 100.

Tax Returns – Clock is Ticking

Don’t forget that the deadline for filing your 2015/16 self-assessment tax return is 31 January 2017.  If the return is filed between 1 day and 3 months late the penalty is £100.  If it is filed more than 3 months late the penalties begin to rack up very quickly to £900.  If the return is still outstanding after six months tax related penalties are chargeable even where the tax has been paid on time,  if your liability is substantial the penalty could be very expensive indeed.  If you have not provided the information to us to prepare your tax return please let us have as quickly as possible.

HMRC may not issue you with a payslip to pay your tax on 31 January 2017 but you must still pay any tax liability on that date, if the tax liability is still outstanding after 28th February an automatic 5% late payment penalty will be raised in addition to interest.  If you have not received a payslip you can either go to   https://www.gov.uk/pay-self-assessment-tax-bill  and when making a payment you should quote your full 10 digit self-assessment reference followed by K.  If you prefer to pay by cheque then we can prepare a payslip for you.   

Fair shares for all

Anne Wilson, senior tax manager at Pierce Chartered Accountants looks at the wisdom of giving away company shares in order to reduce your tax liability and the potential savings.

A quick recap before elaborating: in April 2016, changes to the taxation of dividends came into effect, resulting in an increase in tax liabilities going forward. Previously, if you took a salary up to the personal allowance and a gross dividend up to the basic rate band then you would have no tax liability. Since these changes came into play, under the same scenario you would have a tax liability of just over £2,000.

The first thing that I want to do is to bust the myth of giving shares to your minor children. If a parent makes a gift of an asset, including shares, to their minor child then any income in excess of £100 is taxable on the parent whilst the child is under 18, making the tax saving void.

What about other gifts of shares to spouses, partners or adult children?

In order for a gift to be effective for tax purposes it must be an outright gift, with no strings attached and be more than a gift of income. For example, you cannot create a special class of shares with no rights other than the payment of a dividend as that would be a settlement for tax purposes and the dividend would continue to be taxed on the donor.

The problem with many contractor companies is whether the shares in question actually have any underlying capital value in any event. However, comfort can be taken from the decision in Arctic Systems where a spouse was permitted to subscribe for a share in a company, the income of which derived from the husband’s skills. HMRC argued that the dividends should be taxed on the husband because the wife’s shares were no more than a right to income (the company had no apparent underlying capital value).

However, the House of Lords found that the wife’s share was more than just a right to income, it was an ordinary share conferring the right to vote and to participate in the distribution of assets on a winding-up and to block a special resolution. Following the decision, despite HMRC’s initial intention to change the legislation, this has not happened and at the present time it is still possible for contractors to transfer shares carrying full rights to their spouse (or partner or adult child) and not fall foul of the settlement regime.

Transfers between spouses are exempt from capital gains tax. Where the shares are gifted to partners or adult children the same issues apply regarding the settlement rules, although a capital gains tax hold-over relief claim would be needed to hold-over the gain on the gift of shares. However, a note of caution about gifts of shares to parties other than spouses, once the shares have been transferred they are very difficult to get back in the event of a breakdown in the relationship. I always recommend that a shareholders agreement should be signed in conjunction with the gift. The desire to save tax should never override sound commercial decision making.

I also recommend that dividend waivers are avoided and if it is intended to pay different levels of dividend, alternative classes of share should be created.

What are the tax savings of a gift?

That depends very much on the levels of income received by each party. For example if the spouse has no other income they would be able to receive a dividend of up to £16,000 free of tax. If the spouse making the gift would have been taxable at the higher rates on the same dividend then the tax saving would be £5,525! If the donee spouse had other income but would be within the basic rate band then the saving would only be £4,700, in each case it would be important to do the sums as the savings may not always be so generous.

Giving some shares to adult children who are at university could be a good way of funding their education as they can receive £5,000 of dividend tax free.

In conclusion, there is still scope to make a transfer of shares to spouse or partner to save tax but the gift must be an outright gift and professional advice should always be taken.

Bleak House

Hand-holding-House

It came as no surprise that there were record Stamp Duty Land Tax (SDLT) receipts in March this year as buy- to-let landlords rushed to beat the deadline for increases in SDLT from 1 April 2016.

However increased SDLT costs on the purchase of additional residential properties is not the only nasty surprise in store for residential property investors.

In March the Bank of England announced its proposals for much tougher buy-to-let mortgage lending criteria.   The rules will require lenders to carry out stricter “stress tests” on prospective borrowers or those wishing to re-mortgage to ensure that they have sufficient capital to cover repayments if interest rates increase to 5.5%.

In future there will also be changes to the way that tax relief for interest payments on the purchase of residential lettings will be given in the tax computation.  This will affect individuals, partnerships and limited liability partnerships which let out residential properties.  At present there are no proposals for this restriction to apply to furnished holiday lettings nor to companies with residential lettings.

Currently, rental profits are reduced by any loan interest paid and therefore a top rate taxpayer could receive tax relief at 45% on their finance costs.  Under new legislation the loan finance costs will be relieved by way of a reduction of the tax liability, rather than a reduction in the rental profits, and is restricted to relief at the basic rate of income tax.  Those with substantial rents and interest costs, thus with low net profits, who are currently basic rate taxpayers, could see their income pushed into the higher rate band as the interest costs will be added back to the rental income. For example an individual whose only income is  rents of £50,000 and interest costs of £20,000 would have net income of £30,000, and so  within the basic rate tax band. Under the new rules the same individual would be a higher rate taxpayer because their income would be £50,000 with a deduction for interest relief given at the basic rate only.

As a result of the way in which the net rent will be calculated those whose income is close to the £50,000 threshold for the withdrawal of child benefit, and those with income near £100,000 for the withdrawal of personal allowance could be adversely affected even though their income has not actually increased.

To “soften the blow” these measures will be phased in gradually over four years and will apply to 25% of the interest costs in the 2017-18 tax year, 50% in the 2018-19 tax year and 75% in the 2019-20 tax year before being implemented in full in the year to April 2021.

If you have a relatively modest portfolio of properties which are let out as residential lettings it maybe that you will simply have to accept that your income tax liability in respect of those lettings may increase in future as taking any steps to mitigate the interest restriction could be costly.  Sharing income with family members or family trusts may be worth considering but capital gains tax issues will need to be addressed.

If you have a substantial portfolio of residential lets you may wish to consider incorporating your business however there could be a substantial capital gains tax liability if you incorporate your property portfolio because moving the properties into a company could trigger capital gains tax. However if you have a large property portfolio that you devote a substantial amount of time to managing, it may be possible to claim capital gains tax roll-over relief on incorporation of a business to mitigate the capital gains tax liability arising.  If you have no gains in your property portfolio it may be possible to transfer the properties into a company without triggering capital gains tax.

However there is likely to be a substantial SDLT liability on the property transfers to a company, unless specific reliefs are available, and incorporation of a property business should not be undertaken without specialist advice.

It would be necessary to weigh the costs of incorporating an existing property business, including administering a company, against the additional cost of the new interest rules.  Also the new “stress test” rules could see the cost of your borrowings increase.

The residential property investor is entering a whole new world and it remains to be seen if George Osborne’s  efforts to help first time buyers onto the property ladder, which is a laudable aim in itself, are helped or hindered by the various measures he has introduced.

For more information please contact Anne Wilson today on 01254 688100 or email enquiries@pierce.co.uk

Contractors, accelerate dividends to before April

How to bring forward a distribution; why and where to safeguard against HMRC.

Even if a TV entrepreneur does get his way against the new dividend tax, it will still be more financially beneficial for PSC contractors to accelerate a dividend payment to before April 5th 2016, writes Anne Wilson, senior tax manager at Pierce Chartered Accountants.

All £5,000+ dividend recipients to get stung

Before elaborating on this strategy, here’s a quick refresher: from April 6th 2016 all taxpayers in receipt of dividends in excess of £5,000 will see their tax liability on dividends rise. A basic rate taxpayer will pay tax at 7.5% on dividends over £5,000; a higher rate taxpayer will pay tax at 32.5% and an additional rate taxpayer at 38.1%. This compares with current rates of 0%, 25% and 30.5%.

Revenue realises it’s the last chance

So there is now a last chance opportunity for all Owner-Managed Businesses (OMBs) such as PSC contractors to draw dividends before the current tax year finishes on April 5th 2016 and benefit from the current rates of tax. Because it is likely that many shareholders will take extra dividends in the 2015/16 tax year, HM Revenue & Customs may wish to review dividends paid late in the current tax year. If your company is one which is selected for such an enquiry, what can be done to safeguard against a challenge by HMRC?

  1. Firstly, decide if your company can actually pay a dividend; to be able to do this a company must have distributable reserves, otherwise a dividend cannot legally be paid. Distributable reserves are the company’s accumulated profits, which have not already been paid out – these appear on your balance sheet. Therefore if each year you have taken all the company’s profits out, you may not have reserves to pay any further dividends. You should check with your accountant who will be able to help you.
  2. The dividend paperwork must be drawn up correctly, so minutes and dividend vouchers should be prepared.

How much, and how many?

When considering how much in dividends to pay before April 5th, in addition to ensuring that your company has sufficient profits, you should also potentially consider the impact on the child benefit high income charge if it takes your income over £50,000 and on the loss of personal allowance if it takes your income over £100,000.

Multiple dividends can be paid to individual OMBs, but again this needs to be weighed up against the impact on child benefit (if this affects you) and the distributable reserves held by the company. If multiple dividends are to be paid, ensure all the paperwork is completed for each one – a time-consuming effort, but one that will safeguard challenges made by HMRC.

Caution and care

Of course some contractors might not have distributable reserves. If that’s you, can you still benefit from accelerating the tax liability on a payment that is treated for tax like a dividend?  If you have an overdrawn loan account with the company you may wish to write this off before April 5th 2016. This is because the write-off of a loan account is, in some circumstances, taxed in the same way as a dividend. Care should be taken with this strategy, as it could give rise to a national insurance liability and advice specific to your circumstances should always be taken from your accountant before you proceed.

One final point for PSC contractors to carefully consider is that by accelerating the payment of a dividend, the tax on that dividend will be payable a year earlier. It is therefore important to ensure that provision is made to pay any liability arising on January 31st 2017. This will be the case even in the event that the dividend tax rate is more than cut in half, as Dragons’ Den success story Neil Westwood wants but is unlikely to see.

Don’t miss once in a lifetime opportunity to reduce your tax bill

Dividend

Don’t miss once in a lifetime opportunity to reduce your tax bill, says Anne Wilson, senior tax manager of the tax department at Pierce Chartered Accountants

Chancellor George Osborne’s July 2015 budget contained bad news for the many business owners who pay themselves a low wage, complemented by a dividend payment, in order to minimise their personal tax bill.

As of 5 April 2016, the rules are changing. The notional 10% tax credit on dividends will be abolished, and the rates at which dividends are taxed will increase.

Basic rate taxpayers currently pay no additional tax on their dividends, while higher-rate taxpayers pay tax equivalent to 25% of the net dividend and additional-rate taxpayers pay tax equivalent to 30.55% of the net dividend.

Window of opportunity

From April 2016, the first £5,000 of dividend income in each year will be tax-free, with sums above that taxed at 7.5% for people who pay tax at the basic rate.

Higher rate taxpayers will pay 32.5% and additional-rate taxpayers 38.1% per cent.

Although it will still be more tax efficient to draw a low salary and top up with dividend income, the benefits will not be as significant as at present.

That leaves a window of opportunity that is closing fast.

Accelerated Dividends

We will be discussing with our clients whether they should take the opportunity to accelerate their dividend payments to before the end of the current tax year.  The dividend can be left on a loan account with the company and drawn down in future years.  However it should be noted that this will also accelerate the tax liability on the dividend to 31 January 2017, so each client’s circumstances need to be considered.

As a rule of thumb it will be more beneficial to accelerate a dividend payment to before 5 April 2016.

Soften the blow

The truth is that most director-shareholders will be worse off as a result of this change. Business owners should draw as much as possible in dividends before the new rules take effect. Time is running out if you want to soften the blow.

PIERCE VIEW: Pensions

Yet more tinkering with pensions, as expected the lifetime allowance will reduce to £1m from April 2016 but with transitional protection available.

Tax relief on pension contributions for high earners will be restricted. The annual allowance of £40,000 will be tapered by £1 for every £2 of income over £150,000 subject to a minimum of £10,000 from April 2016. Anyone likely to affected by these changes should consult with their IFA as soon as possible and consider maximising pension contributions in the current year.

There will be rules to prevent the manipulation of income, and to provide a safeguard for individuals whose income is normally below £150,000 but in a single year goes above that amount as a result of a one off payment.

The current system of pension tax relief is considered unsustainable and a consultation will begin on wider reforms to pensions. It is thought that something akin to ISAs will be suggested with no tax relief on the contributions into the pension but the pot being taken out tax free.

PIERCE VIEW: HMRC Powers

HM20130926 HMRC logo PF-hmrc-logo_1379417fRC are to be given powers to collect tax debts of over £1,000 directly from a debtor’s bank account, this even extends to joint accounts although the other parties share of the account will be ring fenced. The powers will enable all direct taxes, VAT and excise duties to be collected. The measure is aimed at “can pay won’t pay” debtors who have the money to settle their debt but are unwilling to do so. There will be anti-hardship measure to leave a minimum credit balance of £5,000 across all the debtor’s accounts. These will be powers of last resort and a number of safeguards have been factored in.

HMRC are being allocated additional funds to enable them to focus on tackling avoidance and evasion with a “special measures” regime to target businesses that persistently enter highly aggressive tax planning arrangements.

PIERCE VIEW: Inheritance Tax & Non Domiciled Individuals

Inheritance Tax

No surprises here as the new exemption for the family home had been widely trailed before the budget.

The new allowance to exempt the main residence will apply for deaths after 6 April 2017 and only where the residence is left to lineal descendants including step-children adopted children and foster children. It can be passed to the spouse where it is unused on the first death. It will be phased in as follows

  • 2017/18 £100,000
  • 2018/19 £125,000
  • 2019/20 £150,000
  • 2020/21 £175,000

Where the deceased’s estate is worth more than £2m it will tapered away by £1 for every £2 so once the estate is worth more than £2.35m the allowance will not be available. There is also protection for those wishing to downsize.

Now is a good time for revisit your will.

UK Non Domiciled Individuals

Changes to the current rules have been on the radar for some time now and the Chancellor has chosen to take a direct method of tacking the issue.

With effect from April 2017 anybody who has been UK resident for more than 15 out of the last 20 years will be deemed to be domiciled in the UK thereby losing the benefit of the remittance basis and the measure will also apply to inheritance tax.

PIERCE VIEW: Business Taxes

Employment Taxes and National Insurance

The NIC employment allowance will increase to £3,000 from April 2016 however where the director is the sole employee this will not be available. The increase is intended to cover the NIC costs of four full time workers earning the new national living wage. From April 2016 the national living wage (for over 25’s) will replace the national minimum wage and will be set at £7.20 an hour.

 

There will be a review of employee benefits and expenses and also the IR35 process.

Capital Allowances – Annual Investment Allowance

The permanent level of the AIA has been set at £200,000 for qualifying plant and machinery for expenditure from 1 January 2016. It is welcome that this is a permanent rate as the annual investment allowance has changed numerous times over the last few years leading businesses to make decisions about capital expenditure based on the prevailing rate of the allowance rather than on commercial grounds.

 

Corporation Tax

The corporation tax rate will be reduced to 19% in 2017 and go down to 18% in 2020.

The rules regarding relief for business goodwill amortisation will change as companies will no longer be able to write off the cost of purchased goodwill although relief will be available where the goodwill is sold. This measure only relates to accounting periods beginning on or after 8 July 2015 in respect of acquisitions made after 8 July 2015. This may mean that share acquisitions will become more attractive for purchasers as well as vendors.

There are now 3 different sets of rules regarding goodwill, the “old” regime where the goodwill existed pre 2002, the regime that was introduced in 2002 and these new rules.

Corporation tax payment dates will be changed for companies with annual taxable profits of £20m or more (for groups the limit will be divided by the number of companies in the group) and they will be required to make quarterly payments for accounting periods starting on or after 1 April 2017.

Other corporation tax measures that may be of interest to some of our larger clients are a clarification of the tax treatment of transfers between related or connected parties of trading stock and intangible fixed assets and rules aimed at simplifying the tax treatment of corporate debt.