Leonherman Blog

The end of the Tax return – Making Tax Digital is coming

Ticking Time

What is “Making Tax Digital”? 

Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. The key focus is that all of your tax information will be in one place (your digital account) and you will be able to pay tax based on your business activity during the year. Enabling you to upload and update your tax account in real time.

Will it affect me? 

If you own a business, are self-employed and pay income tax, national insurance, VAT or corporation tax then it is likely you will be affected. Meaning you will be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your digital tax account. Eventually this will abolish the annual tax return. This will be the law and there will be penalties for non-compliance.

What do I have to do? 

You will need to open and log into your digital account. Everyone will be allocated one through a Government Gateway. Then you will need to ensure your accounting software can update this account at least quarterly. For most businesses, this means a move away from desktop and onto Cloud based accounting software.

You are required to choose digital software to maintain your business records and to provide updates of information to HMRC. You will be prompted to send summary updates directly to HMRC – quarterly updates will need to be submitted within a month of quarter end, and an end of year activity report will be due within nine months of the end of the accounting year. As your accountant, we are here to advise you on the software you will need and how to comply with the new quarterly reporting requirements.

When is all this happening? 

MTD starts with businesses above the VAT threshold limits (currently £85,000) for accounting periods commencing on or after 6 April 2019. Those affected will be required to keep digital records for VAT purposes. By 2020 it is most likely all other businesses will have to comply. 

So, what’s the good news?

We work with a number of Cloud software providers to find the best solution for you, ensuring you have a fully compliant accounts package, the benefits of using an online accounts package include:

  • It’s in the Cloud so you can get a clear view of your finances any time any place;
  • Run your business from work, home or on your mobile;
  • It automatically grabs bank receipts and payments in real time; and
  • You can use your mobile to photograph purchase invoices and expenses and upload these to the software;

What’s next?

We will be contacting all of our clients throughout 2018 to prepare you and get you ready for Making Tax Digital. There are many software options available to you, please get in touch to allow us to find the best solution for you and to help you with this transition by calling us on 0161 249 5040.

Useful links from HMRC:

https://www.gov.uk/guidance/agents-use-software-to-send-income-tax-updateshttps://www.gov.uk/guidance/help-and-support-for-making-tax-digital
https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat

Posted in Ask the Expert, News

IR35 rules being reviewed for the Private Sector

Business people walking in the city

As mentioned in the Autumn Budget, the Government has opened a consultation into a possible extension of the rules that currently apply to “off-payroll” workers in the public sector to the private sector. This consultation is being undertaken at the same time as the consultation into employment status.

The IR35 rules introduced in 2000 are intended to ensure that people working through a Personal Service Company (PSC) who would have been employees if they had been engaged directly, pay broadly the same Income Tax and National Insurance Contributions (NICs) as if they were employed. However, it is estimated by HMRC that only 10% of individuals working in this way apply the rules properly, costing the Exchequer hundreds of millions of pounds in lost tax revenues every year.

Is it working in the public sector?

In April 2017, the Government reformed the rules for engagements in the public sector, and early indications are that this has resulted in an increase in public sector compliance. The April 2017 change requires the public sector body or agency, not the worker, to decide whether or not the IR35 rules apply and then deduct income tax and national insurance from payments to the worker.

There are however concerns that many of such workers are being treated as quasi-employees incorrectly. The consultation document states that there is evidence that some public authorities did have difficulties implementing the reform, both understanding the new rules and resolving disputes with contractors. HMRC have introduced the Check Employment Status for Tax service (CEST) software on their website to assist employers in reviewing workers’ contracts.

Options being considered for the private sector

As well as the possible extension of the rules that currently apply to the public sector, the consultation is requesting views on other options.

One alternative would be to require engagers to carry out due diligence into labour providers in their supply chain to ensure that they are compliant with employment and tax laws. This is already a requirement for gangmasters and other labour providers.

One suggestion apparently rejected was to create a new corporate structure referred to as a “freelance limited company” that would offer a simplified tax treatment, limited liability, a restriction on the frequency of dividend payments, and a requirement for the worker to be paid a minimum salary.

Another proposal rejected was to introduce a flat-rate withholding tax, similar to the Construction Industry Scheme for off-payroll engagements.

The consultation period ends in August and it is anticipated that the Chancellor will make an announcement about future proposals in the Autumn Budget.

We recommend that you seek the advice from a qualified accountant before making any tax planning decisions to ensure you have a tax plan that suits you.

Please get in touch if you wish to discuss whether these changes will affect you and your workforce or call 0161 249 5040

Posted in News

June Newsletter – Time to look to the future….

News

Read all about our latest news at Leonherman, including business advice, information on the services we offer to make your life easier and any internal news here:

June 2018 Newsletter – Time to breathe again

If you would like to receive our newsletters directly to your inbox get in touch or call 0161 249 5040

Posted in News, Office News

Managing your strategic objectives

Information Overload

Now that we are already half way through 2018, perhaps it’s time to revisit your list of goals and objectives.

Before you think about adding any new objectives to your list, think about what you’re going to stop doing and what you may have already achieved. We all have limited bandwidth and increasing demands on our time. Consider whether your initial list of goals for 2018 was a little bit too ambitious. Perhaps you can cut your list down by delegating a few objectives to other team members within your business. Maybe there are a few objectives from last year that you have carried over to this year. Failing to take old activities off your to-do list can prevent you from having the time to focus on achieving your new objectives. 

Consider all of your work commitments
In most businesses, projects and tasks get added to your to-do list throughout the year. Now might be a good time to take a look at that list of commitments and re-evaluate what you’re doing and why you are doing it. Take a step back and look at the bigger picture. Does your current to-do list still fit within the context of the market in which your business is operating? Maybe an ongoing project from last year is no longer relevant. 

How much capacity do you have?
Time is a fixed asset. We cannot make more of it but we can spend it differently. Now that you have assessed your list of priorities, you should focus on how you are actually going to achieve your objectives within the time that you have available. A good way to do this is to reduce time spent in meetings. Question whether you need meetings for certain projects as well as their frequency. 

Create a business case for any new objectives
During the year things will change. Inevitably new objectives will be added to your to-do list. In order to avoid becoming overwhelmed, be strategic in terms of new projects that you accept.

Leonherman has many years of experience working with businesses of all shapes and sizes; we work with you to ensure you stay on track and stay one step ahead get in touch or call 0161 249 5040

Posted in Ask the Expert, News

HMRC lose IR35 case

Self-employed

In the March we reported that the House of Commons Work and Pensions Committee published a report calling on the Government to close the loopholes that allow “bogus” self-employment practice, following the Tax Tribunal decision involving Christa Ackroyd Media Ltd, a company set up by a TV presenter to supply her services to the BBC, where it was held that the IR35 personal service company rules applied to the arrangements.

In a recent case involving a night manager on a building site, another tribunal decided that the IR35 rules did not apply. The facts of the recent case involve a Mr Daniels supplying his services via his company MDCM Ltd. These are entirely different from those in the Christa Adcock case but it indicates that the current rules are very unclear and open to interpretation by the courts.

For the IR35 rules to apply it must be inferred that under the hypothetical contract between “worker” and client that worker would be regarded as an employee if directly engaged. There are numerous factors taken into account, but the most important factor considered by the courts is the extent to which the “worker” is under the control of the client.

Please get in touch if you wish to discuss whether these recent cases impact on your particular circumstances.

Posted in News

Salary v Dividend – What is the best profit extraction strategy?

Balance

How much salary should you pay?

From 6 April 2018 (and not before) you can pay a salary of £702 per month without paying any tax or national insurance contributions (“NIC”).

If you choose this option you:

  • Do get National Insurance Credits towards some benefits for example state pension.
  • Must be registered as an employer.
  • Have to file an RTI (real time information) return each pay period – RTI fines will apply for late filing.

No income tax or national insurance is due on a salary at this level.

This is a perfectly legal and an acceptable way of paying yourself from your company; in fact HM Revenue & Customs (“HMRC”) have been known to state that they do not have a problem with this approach.

 

Dividends – from April 2018

Any dividends paid over £2,000 will attract dividend tax.

The rates of tax will be:

  • First £2,000 of dividends – tax free
  • 7.5 % for dividends falling within basic rate tax (caution on how this is calculated)
  • 32.5% for dividends falling within higher rate tax (i.e. where total income exceeds £46,350)
  • 38.1% for dividends falling within the additional rate of tax with income over £150,000.

How to work out your dividend tax

The calculations assume that you have no other income.

You would pay a salary of £702 x 12 from the company = £8,424

You can then pay £2,000 plus the remainder of your personal allowance as dividends without any tax = £2,000 + (£11,850 personal allowance less the salary of £8,424) = £5,426.

So a total of £13,850 will be tax free (dividend allowance + personal allowance). 

Note – this is per person.

You will pay tax after £13,850! 

Tax at 7.5%

For the next £32,500 of income you will pay tax at 7.5%.

So you can take:

  • a salary of £8,424
  • dividends of £5,426 + £32,500 = £37,926 

Total income of £46,350 

Dividend tax due on this will be (£32,500 x 7.5%) £2,437.50 

Tax at 32.5%

Dividend income over £37,926 will attract tax at 32.5%.

If your income exceeds £100,000 your personal allowance is restricted by £1 for every £2 of income over £100,000 and so will reduced to nil at an income level of £123,700.  

 

Dividend tax rule of thumb

The dividend tax rule of thumb to use is:

  • take a salary of £8,424
  • tax free dividends of £5,426 to use up the remainder of your personal allowance
  • £75 of tax per £1,000 of dividends from £5,427 up to total dividends of £37,926
  • £325 of tax per £1,000 of dividends over £27,927

If your income exceeds £100,000 obtain a personalised quotation as it gets really complicated!

Payments on Account and the new Dividend Tax

The dividend tax puts most people into payments on accounts.

Notes/disclaimer
Dividends are paid out of post tax profits.

Failure to process your payroll and submit the correct RTI (Real Time Information) returns could result in fine or penalties.

Disguised employment issues aside, operating as a limited company is perfectly legitimate and is purely a business choice.

Salary is an allowable business cost and will reduce the profit subject to corporation tax.

Everyone has different tax affairs; this fact sheet is for illustration purposes only and should not be relied upon for your tax planning or tax affairs.

We recommend that you seek the advice from a qualified accountant before making any tax planning decisions to ensure you have a tax plan that suits you.

Posted in News

Pension funds can be an effective way of estate planning

pension-changes

We have covered the tax efficiency of pension funds in a number of previous blog posts. As well as the increased flexibility in terms of drawdown arrangements that were introduced in April 2015. There were some important changes to what happens to the undrawn funds on death. These changes mean that your pension fund can be passed to your beneficiary’s tax efficiently.

In the case where the pension scheme member dies under age 75, certain lump sum death benefits are now tax-free. In particular a drawdown or flexi-drawdown pension fund lump sum death benefit or an uncrystallised funds lump sum death benefit.

If however the pension scheme member at the time of their death was age 75 or older, the special lump sum death benefit charge on the fund will be 45%. But if a nominated beneficiary wants to draw down income each year rather than take the lump sum the amounts drawn would be taxed at their marginal income tax rate. It has recently been reported that there are currently £2 billion of pension assets in drawdown where the beneficiary is aged under 55, suggesting that a significant number of individuals have taken advantage of these new rules.

Note that cash and quoted shares, including those held within an ISA, are subject to inheritance tax on death whereas pension fund assets are generally free from inheritance tax. It may therefore be more tax efficient to spend or give away cash and shares rather than draw on the pension fund.

Please get in touch if you would like to discuss estate and inheritance tax planning in more detail.

Posted in Ask the Expert, News

The UK’s Requirement to Correct (RTC)

Deadline

What is the Requirement to Correct?

As a result of tax transparency HMRC is more likely than ever to ‘spot’ non-compliance – be it as a result of genuine mistakes, carelessness or deliberate action.

The Requirement to Correct (‘RTC’) is a statutory obligation for taxpayers with overseas assets to correct any issues with their historic UK tax position.  Those who fail to do so face punitive financial penalties and other severe sanctions.

The RTC applies to any person with a potential undeclared UK income tax, capital gains tax and/or inheritance tax liability, i.e. individuals, partnerships, trustees or non-resident landlord companies.

What is the deadline?

The RTC period started on 6 April 2017.  Taxpayers must correct their UK tax position by 30 September 2018.

What does HMRC want taxpayers to do now?

HMRC wants all taxpayers who have or who had any offshore financial connections (including those who consider themselves to be non-UK domiciled and/or non-UK resident) to review their UK tax affairs to ensure that all tax returns are correct. Additionally, taxpayers should ensure they submitted tax returns for all years for which they owed tax on income or gains.

This includes checking implementation of planning and technical opinions (e.g. that someone is non-UK domiciled are correct) and whether advice taken in the past was refreshed when the law or the client’s circumstances changed. Offshore structures, anti-avoidance legislation and remittances should also be reviewed.

Those who identify errors or failures to submit/notify in the past must rectify the situation before 30 September 2018.  Some may decide to submit disclosures where there is doubt over a technical position in order to protect their position against failure to correct sanctions in case HMRC later decides that additional tax is due.

What happens if an error is not corrected by 30 September 2018?

After this date, the ‘Failure to Correct’ (‘FTC’) regime will start, with punitive penalties, including:

  • A tax geared penalty of between 100% and 200% of the tax not corrected
  • A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • Potential “naming and shaming” where over £25,000 of tax per investigation is involved
  • A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC

Anyone who fails to correct their position despite knowing that they should do so may also face:

  • A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • Potential “naming and shaming” where over £25,000 of tax per investigation is involved

No penalty will be chargeable where the taxpayer has a reasonable excuse for failing to correct the position.  A ‘health check’ of a taxpayer’s position during the RTC period is likely to provide a strong, defence.

How can Leonherman help?

We can assist clients with Tax Health Checks, reviewing both their historic position and, where appropriate, approaching HMRC with a disclosure call 0161 249 5040

Posted in Ask the Expert, News

Bag a boost from your business’s research – and stay in control

R&D

Big benefits are being shared by many SMEs which have switched on to the financial advantages of claiming R&D tax credits – but we believe many more could be due a slice of the cake.

In the last 12 months alone, Leonherman has helped clients identify R&D expenditure of in the region of £1.44million – resulting in corporation tax savings for those clients of in excess of £365,000.

Example successful claims include:

  • Company A – A supply chain and warehouse management specialist, benefited to the tune of £69,355, for work leading to the implementation and customisation of new bespoke warehouse management systems for a number of clients, which integrated with other systems already in use.
  • Company B – A digital marketing agency, received £76,879 for work which integrated psychological behaviour and data analytics to its conversion rate optimisation services, and so improved the way a major customer’s website works. This has enabled greater efficiency for the customer and led to a more customised user experience increasing revenues.

The Oxford Dictionary defines ‘research’ as ‘the systematic investigation into and study of materials and sources in order to establish facts and reach new conclusions.’

So provided the conclusion your research reaches hasn’t already been publicly revealed elsewhere, and can be shown to have contributed to achieving a specific benefit to your working practices and productivity, then your project is likely to qualify for some direct funding.

And the best part of it is, those savings can be channeled into any part of your business, so in theory, you can use them, for example, to employ extra staff to capitalise on your research efforts, or to publicise your work.

Such funding can even be the catalyst for your business to diversify, without the need to resort to venture capital, ‘angel’ funding or mainstream sources, so enabling you to control the scope of your research, its outcome, and of the future destiny of your business.

You’re also likely to see other benefits from this approach, such as:

  • Enabling you to carry out your research, and evaluate it, at your own pace:
  • Remaining sharply focused on the issues you want to address, and being better able to do this without outside influence, and last but not least:
  • Being able to share the benefits among the staff directly responsible for your pioneering work (and who wouldn’t appreciate some of that?).

With a little help, you can quite easily claim back about one-third of the amount spent on direct research and development and all the supporting efforts and time you put into it.

In our experience we have often found that companies are not necessarily aiming for major breakthroughs, but more to make tweaks and small improvements, often building upon already-available technology, to achieve tangible results which can be applied in a specialised and individual setting.

We will apply tried and tested measurement criteria to determine whether your business has a valid R&D tax credits claim, and will then support you in gathering all the evidence needed to ensure that it is lodged successfully – an approach which has so far yielded a 100% success rate.

So get the due credit for what makes your business unique – by contacting us on 0161 249 5040, or emailing partners@leonherman.co.uk

Posted in Ask the Expert, News

Demand for digital Tax advice

MTD

Research by HMRC has shown that the demand for digital tax advice has increased following a survey of 2,900 small businesses and landlords.

With the majority of small businesses and landlords expecting to consult an accountant in order to comply with Making Tax Digital.

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions.

Of those 2,900 surveyed, 72% will ask an accountant for advice, 15% will use the HMRC website, 13% will use the HMRC helpline with others saying they will ask family and friends first.

If you’re considering changing your accounting software or currently use a manual system you will need to check your chosen method will meet MTD requirements.

We work with a number of different accounting software from Xero, to Quick Books and Sage.  If you want to know more about Making Tax Digital and how it will affect you, get in touch with our Tax team on 0161 249 5040.

 

Posted in Ask the Expert, News