March Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re 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.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue - March 2013.

Under real time information (RTI) PAYE reporting, a Full Payment Submission (FPS) report is required to be made to HMRC every time an employee is paid, not just once after the end of the tax year as is currently the case. RTI will be compulsory for most employers from the first pay date following 6 April 2013.

Many one-person companies may wish to pay the director just once a year and avoid monthly RTI reporting. If you want to do this, you must first check that your payroll software will cope with an annual payroll, as many main-stream payroll software packages do not.

The second stage is to understand what reports HMRC will require under RTI. An annual payroll must be registered with HMRC. The current advice on the HMRC website says: "If all payments on which tax and NICs are due are paid to your employees annually in a single tax month, you can ask HMRC to be treated as an 'annual payer'. You must use the same month every year, so if this changes or you start paying your employees more frequently, you will need to tell HMRC."

There should be more guidance on the HMRC website about annual payrolls soon. If you do not register the payroll as being annual you will need to submit an Employer Payment Summary (EPS) to HMRC every month, which shows nil payments made to the employee.

Where an employee is paid irregularly, i.e. less often than once a month, it is essential that the irregular payment marker is made in the payroll software against that employee, as otherwise the HMRC computer system may delete that person from the payroll.

If you want to pay yourself a regular amount every month, and minimise the RTI reporting hassle, your payroll software may allow you to prepare all the FPS returns for the entire year in advance. However, you must check whether your particular payroll software will do this. You won't be able to prepare monthly FPS returns for the entire year in arrears, those FPS reports must be done in advance or at the time of payment.

If you need any advice about RTI please contact us.

Newsletter issue - March 2013.

The value of shares quoted on the stock market has risen recently. This may encourage you to sell some investments before the end of this tax year (5 April 2013) in order to use your annual capital gains exemption and to soak up any capital losses. Any gains covered by the exemption (currently £10,600 per person) or capital losses are free of capital gains tax.

We can't advise you on what to sell, but we can help you calculate the level of your capital losses and potential gains. It is essential that you tell your financial adviser or stockbroker how much capital losses you have already realised, so future disposals can be made to meet the level of those capital losses.

If you have forgotten to declare a disposal which made a capital loss on your tax return form, there may be no harm done, but you need to submit a claim for the loss before it can be set against a later gain. The deadline for claiming capital losses is now four years from the end of the tax year in which the loss arose, so you can still claim for losses made in 2008/09 and later tax years. We can help you with these claims.

Don't forget you can crystallise a capital loss on shares which you still hold, but are now worth nothing or almost nothing. This is called a negligible value claim, and we can help you with that.

Newsletter issue - March 2013.

The letting of land is exempt from VAT unless it falls into one of the many exemptions from the exemption for VAT. One of those exemptions to the exemption is where accommodation is provided in hotels, inns, boarding houses and similar establishments, including rooms provided for the purpose of catering, i.e. an eating and drinking occasion.

If you hire a room in a hotel for a group function including a meal, and the hotel supplies the catering, the whole fee is subject to standard rate VAT. If the catering is supplied by an outside caterer, the Taxman used to take the view that the room hire would be exempt from VAT, whilst the catering cost would carry standard rate VAT (if the caterer was VAT registered). However, the Taxman changed his mind on this point in October 2011, and updated the VAT Notice 709/3: Hotels and holiday accommodation.

Unfortunately he didn't tell anyone he had released a new version of that leaflet so few businesses were aware of the change in practice, and confusion reigned. Now the Taxman has issued some more guidance as HMRC Brief number 02/13.

That guidance says where a room in a hotel is supplied for the purposes of catering, whether or not the catering is supplied by the same establishment, the room hire is subject to VAT at the standard rate. If you run a hotel, pub or similar place that hires out rooms, and have got this wrong in the past, the Taxman has said he will not pursue you for the VAT which should have been charged. However, you need to get the VAT treatment right from now on.

Newsletter issue - March 2013.

If you are self-employed you may have a number of customers you go to regularly to work at their premises. This could apply to mobile hairdressers, cleaners, gardeners, and even medical professionals who work at private clinics. The miles you drive to reach each of your customers from your business base are used to calculate the amount of travel expenses you claim in your business accounts.

This is all good, but the Taxman has recently argued in a tax case that where the business is based at the person's home, that home-office can't be treated as the starting point for travel when the work is performed almost entirely at customers' properties. The Taxman has particularly challenged travel expenses claimed by doctors who work at private clinics and do not see patients at their home-office. The Taxman has tried to ignore the necessary preparation and report writing work the doctor has to perform at his home-office.

The Taxman has agreed that travel between customers is allowable, so the mobile hairdresser or cleaner who travels to several customers each day should be able to claim the majority of their travel expenses. However, travel from the home-office to say one private clinic and back home again is in question.

This doesn't mean you should stop claiming the cost of travelling to customers, but to head-off any challenge in the future, you should record every business related journey; where it started, number of miles and the reason for the journey - who were you seeing. Using an estimate of your total business mileage for the year is no longer an acceptable method of calculating your travel expenses. You should also record what part of your business you conduct at your home-office, such as preparing estimates or writing reports.

If you are concerned you may be affected, please contact us for advice.

Newsletter issue - March 2013.

Q. The Taxman has sent me a new PAYE code for 2013/14, which includes about £1000 of savings income taxed at 40%. I don't know how he got that figure as I don't have any savings, and I only draw dividends from my company up to the limit of the 20% tax band.

A. The Taxman has looked at the income reported on your tax return for 2011/12, of say £7,475 wages plus £35,000 gross dividends (total £42,475), and assumed you will continue to receive the same amounts of wages and dividends in 2013/14. However, in 2013/14 your tax free personal allowance will be £9,440 and the limit of the 20% tax band will be £32,010 (total £41,450). If you draw the same amounts from your company in 2013/14 as you did in 2011/12, you will be taxed on £1,025 at the higher rate (40% for salary, 32.5% for dividends). To avoid the higher tax rate you will need to restrict the amount you draw from your company in 2013/14, and tell the Taxman to amend your PAYE code on the basis of your estimated salary and dividends for the year.

Q. I run a small B&B which has three let bedrooms, my family uses the other two bedrooms of the property. How should I calculate how much of the property's running costs relate to the B&B business?

A. The answer is to include all of the property's running costs (power, rates and repairs) in your B&B accounts and take out, or 'disallow', an amount that relates to your family's use of the property. This is called a private use adjustment. In many towns the private use adjustment for B&Bs has been agreed locally with the Inspector of Taxes as a monthly or annual rate. However, from 1 April 2013 national rates of private use adjustment have been set by the Taxman as follows:

• 1 family member living in the premises: £350 per month
• 2 family members living in the premises: £500 per month
• 3 or more family members living in the premises: £650 per month

Q. My family business is very traditional; the factory-floor workers are paid weekly, the management are paid monthly and the senior directors are paid quarterly. How will I report all these different pay dates under real time information (RTI)?

A. This is a problem, as the RTI system was designed on the basis that all employees on the same payroll are paid at the same time. Under RTI you must submit a report for the entire payroll called a Full Payment Summary (FPS), every time the employees are paid. Running the FPS with only say the weekly employees receiving pay will cause errors unless adjustments are done for those employees who are not being paid on that particular pay date. A solution may be to segment your payroll into weekly, monthly and quarterly runs, but you need to talk to your payroll software provider to check if that is possible, before you start to implement RTI.

Newsletter issue - March 2013.

19/22 - PAYE/NIC and CIS deductions due for month to 5/3/2013

31 - Last minute tax planning for the 2012/13 tax year. Ensure you use up all exemptions to which you are entitled.

George Osborne announced a number of tax breaks and incentives for small businesses and employers in his Budget Statement, but many of these changes are not due to come into effect until April 2014 or later. The tax rates and thresholds for most taxes for 2013/14 were announced in December 2012.

As always there are new rules to prevent tax avoidance, some of which may impinge on small businesses.

This newsletter is based on the documents released on 20 March 2013. It is possible that a different position will be shown by the draft legislation which will be published on 28 March 2013. We will keep you informed of any significant developments.

In this analysis we have concentrated on the main measures that will directly affect individuals, employers and small businesses.

Employers

Employment Allowance

The big news for employers is a new Employment Allowance of £2,000 per year for all businesses and charities to offset against the cost of employer's class 1 NI contributions. This should provide a real reduction in the cost of employing workers by all types of businesses - not just new employees taken on by new businesses. The new employment allowance will reduce employer's NICs paid after 5 April 2014.

NI rates 2013/14

For 2013/14 the main rates and thresholds for NI contributions are:

Lower Earnings Limit (LEL) for Class 1 NICs - £109/week
Employer's class 1 above £148/week not contracted out - 13.8%
Employee's class 1 not contracted out from £149 to £797/week - 12%
Employee's additional class 1 above £797/week - 2%
Self-employed small earnings exemption - £5,725 per annum
Self-employed class 4 from £7,755 to £41,450 per annum - 9%
Self-employed class 4 additional rate above £41,450 per annum - 2%
Self-employed class 2 - £2.70 per week
Voluntary contributions class 3 - £13.55 per week

Contracting Out

Contracted out rates for NI are 10.6% for employees and 10.4% for employers, but those reduced rates only apply for members of salary-related pension schemes. All contracted out rates will cease in April 2016, when the new flat rate state pension comes into effect.

Employee Shares

Employee share schemes can be incredibly complex to set up and administer. However, the Government believes employee involvement in the companies they work for is a good thing, and employees owning shares in their employing company is the way to achieve this.

• Employee shareholder status. A new type of share scheme will permit employees to take up shares offered by their employer, in return for giving up certain employment rights such as the right to statutory redundancy pay. Normally an employee is taxed on shares received, like salary, but the first £2,000 of shares awarded to the employee under this scheme will be tax and NI free. The employer will be able to give up to £50,000 of shares to each employee, but any value of shares above £2,000 will be immediately taxable and subject to NICs.
  
  When the employee sells those shares any gains they make will be tax free, even if the employee has taken up the full quota of £50,000 of shares initially. The company will be able to claim tax relief on the value of shares given to employees. This new scheme is due to apply for shares provided on and after 1 September 2013.
  
  
• EMI shares. The Enterprise Management Incentive scheme (EMI) is an existing share scheme that allows smaller companies to award up to £250,000 of share options to key employees. The shares are not tax free on disposal, but employees can now qualify for entrepreneurs' relief which applies a tax rate of 10% on any taxable gains made on the EMI shares. The employee must still work for the company at the time he sells the EMI shares and must have held those shares for at least one year.
  
  That last condition can cause a problem, as the employee usually holds the EMI share options and sells the actual EMI shares as soon as they are acquired. The law will now be changed to allow the period of holding EMI share options to count as a period of holding the EMI shares. Also, if the company is taken over or re-organises its shares, any shares acquired in exchange for EMI shares count as if they were EMI shares.
  
  
• Other share schemes. Other tax advantaged share schemes normally have to be individually approved by HMRC, but the Government has proposed that employers will be able to self-certify share schemes from 2014. This will make it easier for companies to set up a share scheme for their employees.

Loans to Employees

Employees who take an interest-free or low-interest loan from their employer are treated as receiving a taxable benefit if the loan exceeds £5,000 at any point in the tax year. This threshold will rise to £10,000 from 6 April 2014. This increase is designed to allow employees to take loans to buy annual rail tickets, which now exceed £5,000 in many areas, although applies to loans for any purpose.

The rules for loans made to company owners have been tightened up - see loans to participators below.

Cars, Vans & Fuel

Company Car Benefit

The taxable benefit of having the private use of a company car is based on a percentage of the original list price for the vehicle. For 2013/14 the percentage varies from 5% for vehicles with CO2 emissions up to 75g/km, 10% from 75 to 95g/km, and increases by 1% for every 5g/km of CO2 emissions, up to a maximum of 35%. This scale of percentages increases every year such that a higher amount of the list price of the same vehicle is taxed each year.

From 6 April 2015 cars with CO2 emissions in the band 0-50g/km will be taxed at 5% of list price, and those in the band 51-75g/km with be taxed at 9% of list price. Cars with CO2 emissions of 76g- 94g/km will be taxed at 13% of list price, with the percentage increasing in 1% steps for each additional 5g/km, up to a new maximum of 37%. Further increases in the percentages of list price have been published for the years 2016/17 to 2019/20.

Fuel Benefit

Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to the fuel charge multiplier set at £21,100 for 2013/14 (£20,200 for 2012/13). The maximum taxable benefit of receiving free road fuel for private use will increase from £7,070 (2012/13) to £7,385 for 2013/14.

The taxable benefit when fuel is provided for private use in a company van will rise from £550 for 2012/13 to £564 for 2013/14. In future years the fuel benefit multiplier for cars and the van fuel benefit will increase in line with the rate of inflation as measured by the RPI.

Business Taxes

Cash Basis

Unincorporated businesses will be permitted to calculate profits and losses for tax purposes using the cash accounting basis, rather than the standard accruals accounting basis. The cash basis ignores all creditors, debtors, prepayments and accruals, and includes flat rate amounts for certain expenses such as a motoring or use of home for business purposes.

This cash basis will be compulsory for anyone who claims Universal Credit, but it can only be used by businesses whose turnover, when they start to use the cash basis, is under the VAT registration threshold. The business will be required to continue using the cash basis until it is no longer suitable for them, perhaps when the turnover exceeds a certain threshold. This will prevent businesses from opting in and out of the cash basis to gain a tax advantage. The cash basis can be applied from 6 April 2013.

Partnerships

The taxation of partnerships can be very complex, so the Government has asked the Office for Tax Simplification to make suggestions to simplify tax for partners and partnerships.

Alongside this review the Government is considering changes to the self-employed status of the members of LLPs, and restrictions on the variation of profit allocations within the LLP. These changes may make the taxation of LLP members more like employees of companies for some members. Any changes to the taxation of partnerships or LLPs will not take effect until at least 2014. However, if your business operates as an LLP please talk to us about how the structure could be changed if the tax changes prove to be hostile to LLPs.

Corporation Tax Rates

The corporation tax rates for small and large companies will be aligned at 20% from April 2015. This will remove the impact of associated companies on the amount of tax due and the marginal rate of corporation tax will disappear.

The small companies rate is already at 20% and the main rate will be 23% for the year beginning 1 April 2013, 21% for the year beginning 1 April 2014 and then 20% for the year beginning 1 April 2015.

Loans to Participators

Where a company that is controlled by its directors or five or fewer shareholders, makes a loan to a participator (typically a shareholder/director), there are tax consequences. The company must pay 25% of the loaned amount to HMRC if the loan is not repaid within nine months of the end of the company's accounting year. This rule is widely taken advantage of by company shareholder/directors who repay the loan just before the nine month deadline and immediately take out a replacement loan from the company. New tax avoidance rules will apply from 20 March 2013 such that:

• loans channelled through third parties to shareholders will be included in these rules;
• transfers of assets from the company will be treated as loans; and
• the immediate replacement of a repaid loan will not count as a repayment of the first loan.

If you have taken a loan from your own company we need to discuss whether you will be caught be these new tax avoidance rules.

Capital Allowances

The rates and thresholds of the main capital allowances will apply as follows for 2013/14:

Main pool: writing down allowance: 18%
Special rate pool: writing down allowance: 8%
Annual Investment Allowance (AIA) cap: £250,000

Expenditure within the AIA cap qualifies for 100% allowance in the year the asset is bought. The AIA cap was changed in April 2012 and January 2013, so great care is needed to calculate the available AIA for accounting periods which straddle the change. The AIA cap is due to revert to £25,000 on 1 January 2015.

Individuals

Personal Allowances

The standard personal allowance will rise to £10,000 from 6 April 2014, a year earlier than expected. The age related allowances are frozen until 2015. The allowances as they have been announced for 2013/14 are:

Personal allowance (born after 5 April 1948): £9,440
Personal allowance (born between 6 April 1938 and 5 April 1948): £10,500
Personal allowance (born before 6 April 1938): £10,660
Minimum married couples allowance*: £3,040
Maximum married couples allowance*: £7,915
Blind person's allowance: £2,160
Income limit for allowances for age related allowances: £26,100
Income limit for standard allowances: £100,000

* given where one partner was born before 6/4/1935, as 10% reduction in tax due.

Income Tax Bands and Rates

The income tax bands for 2013/14 are:

Savings rate* (10%) - 0 to £2,790
Basic rate (20%) - 0 to £32,010
Higher rate (40%) - £32,011 to £150,000
Additional rate (45%) - over £150,000

*The savings rate of 10% only applies if the individual's net non-savings income does not exceed the savings rate limit.

The additional rate was reduced from 50% in 2012/13.

The higher rate and basic rate thresholds can be increased by paying personal pension contributions or gift aid donations.

Pension Allowances

The annual allowance and lifetime allowance will both reduce in 2014/15 as shown below. The annual allowance can be expanded by unused amounts of allowance brought forward from the previous three tax years.

The lifetime allowance limits the amount of tax advantaged funds a person can draw on at retirement. If the pension fund is greater than the lifetime allowance when the scheme member starts to take his benefits, the excess is taxed at 55%. Individuals with funds that already exceed the lifetime allowance can apply for fixed protection of the existing value of their fund.

Annual allowance: 2012/13: £50,000, 2013/14: £50,000, 2014/15: £40,000
Lifetime allowance: 2012/13: £1,500,000, 2013/14: £1,500,000, 2014/15: £1,250,000

Pension Drawdown

Some individuals can choose to drawdown amounts from their pension fund instead of buying an annuity with the funds on retirement. The maximum amount of the permitted drawdown is increased from 100% of the equivalent annuity value of the fund, to 120% of that same annuity value. This change comes into effect from 26 March 2013.

Capital Taxes

Capital Gains Tax

The thresholds for capital gains tax (CGT) have increased slightly for 2013/14:

Annual exemption: £10,900 (2012/13: £10,600)
Annual exemption for most trustees: £5,450 (2012/13: £5,300)
Rate for gains within the basic rate band: 18% (no change)
Rate for gains above the basic rate band: 28% (no change)
Rate for gains subject to entrepreneurs' relief: 10% (no change)
Lifetime limit for gains subject to entrepreneurs' relief: £10 million (no change)

Selling to Employees

When a business owner sells his business, they can qualify for entrepreneurs' relief if they sell the whole business, or a significant part which can be operated as a separate business. This relief reduces the tax payable on the sale to 10%.

The Government is proposing a new capital gains relief to encourage business owners to sell a controlling interest in a business to the employees who have worked in the business. This new tax relief will not apply until April 2014.

Seed Enterprise Investment Scheme (SEIS)

The SEIS was introduced for investments made in small new trading companies from 6 April 2012, with a limit on investments under the scheme of £150,000 per company. Each investor can subscribe for up to £100,000 of SEIS shares per tax year and get 50% income tax relief.

If that investment is funded using a capital gain made in 2012/13, 100% of the reinvested gain is exempt from CGT. The CGT exemption was to be limited to investments made only in 2012/13, but it has been extended for two further years at the rate of 50% of the gain, not 100% of the gain. This is still a significant tax saving.

The original SEIS rules contained a serious trap for investors. A company acquired from a formation agent could not qualify; it had to be incorporated with individuals rather than another company as the original subscribers. This administrative niggle has been removed for shares issued from 6 April 2013, but not for companies formed earlier. There was previously an unpublished practice by HMRC of bending the rules by getting the formation agent to write a letter to HMRC to confirm the company was effectively formed by individuals.

Inheritance Tax

The inheritance tax (IHT) nil rate band will remain frozen at £325,000 until 2017/18. This is the amount of a deceased person's estate that is free of inheritance tax.

The estate value is arrived at after deducting any debts owed by the deceased, and the value of any assets that qualify as business property, agricultural property or woodlands. A number of tax schemes exist to make use of these deductions for debts to reduce the value of the deceased's estate on death, and hence reduce the IHT payable. To block such tax avoidance schemes the deduction of debts from the value of an estate will be prevented where:

• the debt is not repaid to the creditor; or
• the loan was used to acquire property which is exempt from IHT.

These changes will apply from the date the Finance Act 2013 is passed.

VAT

Rates

The VAT rates remain unchanged at...

Lower rate: 0%
Reduced rate: 5%
Standard rate: 20%

The registration and deregistration limits from 1 April 2013 are...

Registration turnover: £79,000 (1 April 2012 - £77,000)
Deregistration turnover: £77,000 (1 April 2012 - £75,000)

Benedicts Accountants are based in London, offering local business owners and individuals a wide range of services.

All clients are entitled to fixed fees, work delivered on time and unlimited phone support. Visit our website jbenedict.co.uk for more information.