Robin Brown

Tax Tips and News for November 2014

This issue … Pensions Death Tax, Taskforce at Large, National Insurance Contributions, Mini One Stop Shop (MOSS), November Questions and Answers, November Key Tax Dates

Pensions Death Tax

Currently, if you die before you have started to draw your pension, the value of your pension fund will not usually be subject to inheritance tax (IHT) at 40%, as it is excluded from your estate. However, there can be a 55% tax charge where your pension fund is passed to someone else under your will, especially if you die aged over 75.

From 6 April 2015 the 55% tax charge will be abolished. If you die before you reach age 75 you will be able to pass on your pension fund on death to any one you choose without a tax charge. The new owner of the pension fund will have no tax to pay when he or she makes withdrawals from the fund, whether those withdrawals are in the form of a lump sum or as income drawdown.

If you die aged 75 or more the person who receives your pension fund will pay tax at their marginal income tax rate on income drawdowns they withdraw from that fund, and there will be no restriction on the amount that person can withdraw from the fund. However, if the beneficiary of the fund wants to take all the value out as a lump sum, there will be 45% tax charge, although that may change from April 2016.

If you die after you have bought an annuity with your pension savings, the value of your pension can't be passed on, unless the annuity contract provides for a lump sum to be paid on your death.

These changes mean that tax planning for older people needs to be re-thought from the bottom up to take into account the ability to pass on tax-free a significant pension pot. Talk to us about your options.

Taskforce at Large

HMRC has set up specialist tax investigation teams to concentrate on recovering unpaid tax from particular business sectors or as a result of tax fraud.

The latest HMRC taskforce teams are looking at:

• fraudulent VAT repayments in the West Midlands and Nottingham areas; and
• property tax evasion in South West England and South Wales.

The property taskforce is using data gathered about property transactions by the Valuation Office in order to target taxpayers who may have sold properties but not declared a capital gain on their tax returns. The same data set will be analysed for possible non-declaration of rental income.

Where rental income has been under-declared the taxpayer can use HMRC's Let Property Campaign to make a full disclosure, and pay a minimum amount of penalties. This involves registering with HMRC to make a disclosure then paying all the tax, penalties and interest due within three months. However, once the HMRC taskforce is at your door, it's too late to take up the generous terms offered under the Let Property Campaign.

If you receive a letter or visit from one of these HMRC taskforces, early intervention from one of our tax investigation experts could save you a considerable amount of stress, and possibly penalties.

National Insurance Contributions

It seems that HMRC is trying to gather every penny in tax and national insurance contributions (NIC), from every possible source. Recently it has been demanding payment of class 2 NICs from landlords and investors in investment partnerships. If you get a bill for back-dated class 2 NICs should you pay it?

The annual class 2 NI liability is a relatively small amount (£143 for 2014/15), but it can provide you with an entitlement to the UK state pension. At least ten full years of NI contributions will be required to receive any state pension if you reach state pension age (SPA) after 5 April 2016. Note that SPA is gradually being increased up from age 65. If you are currently aged under 54 you will not become entitled to your state pension until you reach at least 67.

If your main source of income is rents or investments, paying class 2 NICs for past tax years could provide you with some state pension entitlement. On the other hand if your main income is from an employment, you are probably paying sufficient class 1 NICs in each tax year to gain your pension entitlement. We can help you decide what is best for your circumstances.
 

Mini One Stop Shop (MOSS)

This sounds like a friendly retail outlet where you might buy a pint of milk on a Sunday evening. In fact it is short-hand for the online portal which UK businesses should use from 2015 to account for VAT they owe in respect of digital services provided to customers in other EU countries.

We mentioned this new rule in our July 2014 newsletter. "Digital services" includes a multitude of products such as:

• music downloads;
• video on demand;
• electronic books;
• online games;
• anti-virus services;
• software purchased by download;
• charges by online auction sites;
• sales of data or images online; and
• automated learning or exams.

From 1 January 2015, if you sell a digital service to someone in another EU country, who is not a business (ie an individual, Government body or perhaps a charity), you must account for VAT in the country where that customer belongs. This means you need to charge VAT on your invoice to your overseas customer at the rate that applies in the customer's country, and then pay that VAT to the tax authority of that country.

As there are 28 EU countries it would be an administrative nightmare to complete a quarterly VAT return in every country in which you have customers. Hence the need for an online portal (MOSS) to do all the VAT accounting and payment in one go.

The VAT MOSS portal is now open for businesses to register, but it's not going to solve all the admin nightmares. For instance:

• you need to know the VAT rates that apply to your products in all the countries you sell to;
• your VAT invoices to customers in other countries must comply with the local regulations - which are NOT the same across the EU;
• VAT-MOSS returns must be made for calendar quarters irrespective of the periods for which you draw up your UK VAT return;
• VAT due under MOSS must be paid electronically by the 20th of the month following the end of the quarter, but payment can't be made by direct debit;
• the tax authorities for every EU country you sell to can inspect your sales records, which must be retained for 10 years.

You also need to be VAT registered in the UK before you can use the MOSS system. Contact us and let's talk about what you need to do.
 

November Questions and Answers

Q. Last year I bought a run-down pub and converted it into a restaurant. I registered for VAT after the work was done, but before the restaurant opened. Can I reclaim any of the VAT paid on the costs of converting and fitting out the restaurant?

A. It is easy to see with hindsight, but you should have registered for VAT at the point you started the conversion work. You can claim back VAT charged on services incurred in the six month period that ends with the date you registered for VAT, which might not cover all of the conversion costs.

There is more flexibility for the assets you purchased to use in your restaurant business, such as tables and kitchen equipment. We need to look at each asset purchase individually, but if you still held the assets at the date your VAT registration took effect, the VAT on those purchases should be reclaimable.

Q. HMRC has sent me a tax calculation for 2013/14 which says I owe over £5,000. I don't understand how this much can be due as all my tax is dealt with under PAYE and I don't have any other significant income. What should I do?

A. You will have received a form P800 showing the tax deducted from your pay under PAYE, and the amount of tax due based on your total income for the year. HMRC has admitted that a large number of the P800 forms sent out in recent weeks are incorrect. In many cases part of the taxpayer's income has been double counted, but the tax deducted has not, leading to an apparent underpayment of tax.

Your first step should be to compare the P800 calculation with the P60 form given to you by your employer in May 2014. Where the total income shown on the P60 is less than your employment income shown on the form P800, there may be a problem. Also check if any of the figures on the P800 are estimated, such as rents or interest received. If the HMRC figures appear to be wrong, we can help you get the tax calculation corrected.

Q. My personal service company stopped trading on 31 August 2014, after a good run of 10 years. There is about £22,000 available to distribute to me as the only director/ shareholder. Can I claim entrepreneurs' relief on that pay-out and do I need to show it on the tax return?

A. Distributions from an informal winding-up of a company of no more than £25,000 are treated as capital gains, so you should be within that total with a final distribution of £22,000. If the total distribution from the company made in anticipation of the winding-up exceeds £25,000, then the whole distribution is taxed as income, unless the company is formally liquidated by a liquidator.

As the company has been trading for more than a year and you have held at least 5% of the shares for that time, as well as working for the company, entrepreneurs' relief should apply. This reduces the tax rate payable on the gain to 10% after deducting your annual exemption of £11,000 (for 2014/15), it doesn't eliminate the gain. You need to claim entrepreneurs' relief on your tax return and include a computation of the gain. We can help you with that.
 

November Key Tax Dates

2 - Last day for car change notifications in the quarter to 5 October - Use P46 Car

19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/11/2014

We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

If you need further assistance just let us know – we're here to help!

Contact us today on 020 8780 2349 to discuss how any of the above affects your personal or business finances or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

by Robin Brown

Tax Tips and News for October 2014

This issue … Creating Extra Cash-flow, Understanding the CIS, VAT on International Services, Scottish Taxes, October Questions and Answers, October Key Tax Dates

Creating Extra Cash-flow

Could your creative company benefit from a boost to its cash flow? If it produces computer games, films, high-end TV or animation programmes, it may qualify for a new payable tax credit.

All of these products can qualify for extra tax relief if they can be certified as culturally British, and at least a quarter of the core production costs are incurred in the UK. There are some other conditions:

• only businesses trading as companies can qualify for the tax relief, not individuals or partnerships; and
• the product must be intended for release to, or to be broadcast to the general public, not produced for training or advertising purposes.

High-end TV programmes are essentially quality drama; not news, current affairs or quiz shows. Unfortunately producing original music doesn't qualify as a creative product for these tax reliefs.

There are separate tax relief schemes for the different categories of products, so it is important to look at the detail for your particular sector. However, they all work in broadly the same way: the company can claim an extra 100% deduction for up to 80% of the core production costs. Say the company spends £100,000 in the UK on producing a TV animation programme, if the tax relief applies it would claim an enhanced deduction for those core costs of £180,000.

If your company makes a loss after this deduction, that loss can be surrendered for a payable tax credit. Our tax experts can guide you through the detail of these new tax reliefs.

Understanding the CIS

If you are a contractor in the construction industry it is essential that you deduct the right amount of Construction Industry Scheme (CIS) tax from payments you make to subcontractors.

A common misunderstanding about the CIS is that deductions of CIS tax only have to be made from labour costs. This is not the case, but it may work out like that in practice.

HMRC's instructions are clear, the contractor must deduct the following cost items as listed on the subcontractor's invoice before applying the appropriate rate of CIS tax (20% or 30%) to the net amount:

• VAT charged;
• CITB levy paid;
• materials;
• consumable stores;
• fuel used - except for travelling;
• plant hire; and
• manufacturing or prefabricating materials.

If the contractor does not deduct the right amount of CIS tax they remain liable for that tax to HMRC, unless the contractor can persuade HMRC to demand the CIS tax directly from the subcontractor.

In a recent case the judge was very critical of the company directors and internal accountant for not taking the trouble to read the CIS regulations and taking care to apply them. This is a bit harsh, as the regulations are not easy to understand. However, you should at least make sure that anyone who operates the CIS within your company reads the guidance concerning CIS on the HMRC website. If you are unsure about any aspect of the CIS ask us for clarification.

VAT on International Services

When you sell services to businesses in other countries, the sale will generally be outside the scope of UK VAT. You don't charge VAT on your invoice, but you need to report the value of that sale as part of the total in box 6 on your VAT return. There are exceptions to this general rule for services connected to land, live performances, catering or passenger transport.

If the sale is to a VAT registered business in another EU country the sale must also be reported on your EC Sales list. If your customer is not a business, or is not VAT registered, the sale should not be included on the EC sales list. However, from 2015 sales of various electronic services, broadcasting or telecoms to non-business customers could affect your liability to register for VAT in the customer's country.

If your customer is located outside of the EU, you don't report the sale on the EC sales list, but the value of the sale must still be added to the total to be declared in box 6 on your VAT return.

These distinctions are easy to get wrong, so do ask us if you have any doubts about how to report international sales.

Scottish Taxes

The Scottish people have spoken and the majority have decided they want Scotland to remain part of the UK. However, that doesn't mean everything will remain the same. We already know there will be two new taxes in Scotland from 1 April 2015, and a variation to income tax rates for Scottish taxpayers from 6 April 2016.

If you are planning to buy land or buildings in Scotland, you should be aware that the tax you will pay on top of the purchase price is currently uncertain for completion dates on or after 1 April 2015. This is because Stamp Duty Land Tax (SDLT) will be replaced by Land and Buildings Transaction Tax (LBTT) for sales of land and buildings in Scotland from that date.

The LBTT will have different rules to the SDLT, which will continue to apply to land transactions in England, Wales and Northern Ireland. For example, LBTT will have a nil rate band as well as at least two other bands, but probably different bands and rates for residential and non-residential property. The rates and thresholds for the new LBTT are expected to be revealed as part of the Scottish Government's budget in October 2014.

The other new tax from 1 April 2015 is a Scottish replacement for landfill tax. The rates and thresholds for the Scottish landfill tax will also be announced as part of the Scottish Government's Budget for 2015/16 in October 2014.

From 6 April 2016 the Scottish Government will be able to replace 10p out of each tax band with the Scottish Rate of Income Tax (SRIT). This will apply to all individuals resident in Scotland including pensioners, who fall into a new definition of "Scottish taxpayer". However, the SRIT will have to apply within the tax bands imposed by the UK Government, and the personal allowances will not change.

As currently agreed (and this could change following negotiation for further powers) the rate of the SRIT must be the same for all the tax bands. For example, if the SRIT is set at 10p, the total tax rates will remain where they currently stand for the whole of the UK: 20%, 40%, and 45%. If the SRIT is set at say 15p, Scottish taxpayers will pay income tax at 25%, 45% and 50%.

A new tax authority: Revenue Scotland, has been set up to administer the new Scottish taxes, and any other devolved taxes that may follow. Income tax, including SRIT, will continue to be administered by HMRC.

October Questions and Answers

Q. My consulting company holds a significant amount of cash and I would like it to buy a piece of artwork as an investment, what are the tax implications?

A. If the artwork is kept at your home there will be a taxable benefit in kind, which needs to be declared on the annual form P11D.
Say the artwork cost £30,000:
You will pay income tax on 20% x £30,000 = £6,000 at your marginal rate, each year. The company must also pay class 1A NICs of 13.8% x £6,000 = £828 per year.

If the artwork is to be kept in a bank vault as a pure investment, there won't be a benefit in kind charge for you. However, the business must pay the insurance and storage costs, for which there will be no tax deduction. There is also no tax deduction for the cost of buying the artwork as it is not an item used for the business.

If the company closes, any creditors will be able to access the value of that art, just as if it was cash. If the business is solvent when it closes holding significant investments, it may not qualify for entrepreneurs' relief, which would otherwise reduce the tax you pay on any gain made on the liquidated asset of the company down to 10%.

Q. I am currently aged 57 and while I have been out of the country, I have paid voluntary national insurance contributions to allow me to qualify for the state pension. I recently asked the Pensions Service whether I need to carry on paying voluntary NICs but I'm very confused about the answer. Do I need 10, 30 or 35 qualifying years, to get the full state pension?

A. The rules for qualifying for the State Pension will change for anyone who reaches state pension age after 5 April 2016, so that includes you. A person currently needs 30 years of NICs to achieve full entitlement to the state pension, but that is to increase to 35 years for people who reach state pension age from April 2016. You will need a minimum of 10 qualifying years to get any of the new state pension, which will be paid at a flat rate.

Q. How can I easily calculate a total amount to claim for the self-employed business I run from my home, for example, the total amount of usage for rent, gas, insurance, council tax, internet usage and broadband?

A. There is an easy way to calculate the deductible amount of your home expenses, you simply record how many hours you work at home each month and claim the appropriate flat rate:

• Working 25 to 50 hours at home allows a £10 claim for the month
• Working 51 to 100 hours at home allows a £18 claim for the month
• Working 101 or more hours at home allows a £26 claim for the month

This rate covers the cost of power, telephone, internet access, but it doesn't cover council tax, insurance, rent or mortgage interest. Those other costs should be apportioned according to the space you use for your business in the property, and how many hours you use that space. We can help you with the calculation.

October Key Tax Dates

1 - Due date for payment of Corporation Tax for the year ended 31 December 2013

5 - If a Tax Return has not been received, individuals and trustees must notify HMRC of new sources of income and chargeability in 2013/14

14 - Return and payment of CT61 tax due for quarter to 30 September 2014

19 - Tax and Class 1B national insurance due on PAYE settlements for 2013/14

19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/10/2014 or quarter 2 of 2014/15 for small employers

31 - Deadline for 2013/14 self-assessment paper returns to be filed for HMRC to do the tax calculation. If a paper return is being filed also the deadline for tax underpaid to be collected by adjustment to your 2015/16 PAYE code (for underpayments of up to £3000 only)

We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

If you need further assistance just let us know – we're here to help!

Contact us today on 020 8780 2349 to discuss how any of the above affects your personal or business finances or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

by Robin Brown