Welcome to the Clive Owen LLP tax articles – more can be found on our News section.
CONSTRUCTION SERVICES DOMESTIC REVERSE CHARGE (CSDRC)
The CSDRC is being implemented to remove any risk that there may be an amount deducted, which is disguised as input tax, but which has never been paid over as output tax.
Last month we highlighted the restricted annual pension allowance for those with high income, such as doctors. Note that the deadline for requesting for the additional tax to be paid out of the fund for 2017/18 is 31 July 2019.
There is a further complication for those individuals who have started drawing income from certain money purchase pension schemes. A new £4,000 limit introduced from 6 April 2017 restricts the amount that they can save in their pension and receive tax relief. Our concern is that many taxpayers may unwittingly trigger a tax charge due to this rule change.
USING A PAYE SETTLEMENT AGREEMENT TO PAY SOME OF YOUR EMPLOYEE’S TAX
PAYE settlement agreements (PSAs) are arrangements under which an employer can settle the income tax and National Insurance liabilities on benefits in kind and expenses payments provided to employees and officeholders.
Setting up a PSA avoids passing on an unexpected, and potentially demotivating, tax charge to employees. Where a PSA has been agreed with HMRC, this will obviate the need for any reporting on the individual’s P11D.
The items that can be included in the PSA must meet one of three criteria: minor, irregular or impracticable to apply PAYE or apportion between the employees receiving the benefit.
Although reporting will eventually go online, applications for a PSA are currently made in writing to HMRC. The Revenue will then issue a P626 contract, which states that the employer will pay the tax and National Insurance liability on agreed benefits.
BUT NOT TRAVEL COSTS FOR NON-EXECUTIVE DIRECTORS IN PUBLIC SECTOR
Until recently, HMRC allowed taxable travel expenses to be included in public sector PSAs in respect of normal commuting costs for Non-Executive Directors (NED). The Department of Business (BEIS) wrote to the bodies it oversees on 30 May 2019 instructing them that any payments for commuting made to non-executives and other office holders, will now have to be paid through payroll, with tax and National Insurance deducted at source.
Note also that fees for NED roles in the public and private sectors are always required to be subject to tax and NI through the payroll, as this is income for the holding of an office so it cannot be invoiced and paid gross to the NED.
DOCTORS LOBBYING FOR PENSION TAX CHANGES
Hospital doctors and GPs are lobbying the government to amend the pension tax rules as the current system of restricting tax relief on pension contributions means many doctors paying almost all of the extra salary back in tax if they take on additional responsibilities or work additional shifts. This is an issue that doesn’t just affect doctors as it potentially restricts the tax relief available to other individuals with high income.
The NHS Pension Service have alerted members of the NHS Pension Scheme that they could receive a tax bill if their pension savings exceed limits set by HM Revenue and Customs (HMRC). These limits are known as the annual allowance, which is calculated each year, and the lifetime allowance, which is calculated based on overall pension savings.
The normal annual pension allowance is currently £40,000 each tax year and limits the amount of pension contributions which qualify for tax relief. The limit covers the combined contributions paid by the taxpayer and their employer. A tapered annual allowance was introduced in April 2016 with the intention of reducing pension tax relief for high earners.
It applies to those with adjusted incomes of over £150,000 and threshold income in excess of £110,000. The rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000 at £210,000. This is a complex calculation and we can help you plan to minimise the impact of the rules as the individual is taxable on the excess pension contributions over the annual limit.
SOME CARS ONLY QUALIFY FOR 6% TAX RELIEF NOW
The latest Finance Act has reduced the tax writing down allowance for motor cars that emit more than 110 grams of CO2 to just 6% on a reducing balance basis from April 2019. In the case of company cars the vehicle is included in the “special rate” pool which means that even when the car is sold the proceeds are deducted from the pool and the 6% allowance continues until the balance is written off. It may be more advantageous to lease such a vehicle – check with us.
P11D FORMS DUE SOON
As set out in the following table employers need to submit details of benefits in kind provided to directors and employees by 6 July 2019. Remember that reimbursed expenses no longer need to be reported where they are incurred wholly, exclusively and necessarily in the performance of the employee’s duties. Dispensations from reporting are no longer required.
Remember also that trivial benefits of no more than £50 provided to employees need not be reported.
REPORTING THE ISSUE OF SHARES OR OPTIONS TO STAFF
Gifts and awards of shares in companies, often known as employment related securities (ERS) are commonly used by employers to reward, retain or provide incentives to employees. They can be tax advantaged or non-tax advantaged.
You must notify HMRC of all new ERS schemes including one-off awards or gifts of shares by 6 July following the end of the tax year in question or you may have to pay a penalty.
Once you have registered the share scheme you need to submit an ERS return (or nil return) even if there have been no transactions in the year otherwise the company may be liable to a penalty.
Please contact us if you need assistance dealing with these reporting obligations.
EXTRACTING PROFIT FROM THE FAMILY COMPANY
The start of the new tax year means that shareholder/ directors may want to review the salary and dividend mix for 2019/20. The £3,000 employment allowance continues to be available to set against the employers national insurance contribution (NIC) liability which means that where the company has not used this allowance it may be set against the employers NIC on directors’ salaries.
Thus, where the only employees are husband and wife there would generally be no PAYE or employers NIC on a salary up to the £12,500 personal allowance.
There would however still be employees NIC at 12% on the excess over £8,632 (£166 per week) which would be £464 on a £12,500 salary, leaving £12,036 net.
Taxation of Dividend Payments in 2019/20
Traditional advice would then be to extract any additional profits from the company in the form of dividends. Where dividends fall within the basic rate band (now £37,500) the rate continues to be 7.5% after the £2,000 dividend allowance has been used. Thus where husband and wife are 50:50 shareholders they would each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving £34,837 net of tax.
So a combination of £12,500 salary and £37,500 in dividends would result in £46,873 (93.7%) net of income tax and NICs.
Ensure dividend payments are legal
The Companies Act requires that companies may only pay dividends out of distributable profits. This means that in the absence of brought forward reserves the company would need to provide for 19% corporation tax in order to pay the dividends and thus there would need to be profits of £92,593 in order to pay dividends of £75,000 (after providing corporation tax of £17,593).
Overall the combination of salary and dividends suggested above would result in net of tax take home cash of £93,746 for the couple out of profits before salaries and corporation tax of £17,593 (20.3% overall tax). This still compares very favorably with the amount of tax and NIC payable if the couple were trading as a partnership.
TAX PLANNING TO MINIMISE THE HIGH INCOME CHILD BENEFIT CHARGE
The substantial increase in the higher rate threshold to £50,000 is good news for many taxpayers. However, that same figure is the point at which child benefit starts being clawed back and there has been no increase in that threshold since the High Income Child Benefit Charge was introduced in 2013/14.
The charge applies if you have adjusted net income over £50,000 and either:
• you or your partner get Child Benefit
• someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep
It does not matter if the child living with you is not your own child. Adjusted net income is your total taxable income before any personal allowances and less things like Gift Aid and pension contributions.
The charge is 1% for every £100 that adjusted net income exceeds £50,000 multiplied by the child benefit claimed in respect of the children. Child benefit continues to be paid at the rate of £20.70 a week for the eldest child and £13.70 for each additional child.
A couple with 2 children would receive £1,789 a year in child benefit. If the husband, a sole trader, made a profit of £55,000 (also his adjusted net income) after paying his wife a salary of £12,000 he would have to pay the high income child benefit charge of £894 (for 2018/19) in addition to his normal income tax and NIC bill.
If he brought his wife into partnership and they shared profits equally their income would be £32,500 each and there would be no high income child benefit charge. Similarly, if the business was a limited company they would be able to equalize their income so that the charge would not be payable.
“RENT A ROOM” RELIEF TO CONTINUE FOR AIR BNB LANDLORDS
Last year HMRC carried out a review of rent a room relief and it was proposed that the availability of this generous relief would be restricted to situations where the taxpayer was resident for at least part of the time when the “lodger” was paying rent. The scheme currently exempts from tax gross rents up to £7,500 where rooms within the taxpayers’ main residence are rented out.
HMRC were concerned that the relief was being “abused” by letting out the entire property using websites such as Airbnb and living elsewhere temporarily whilst the tenants were in the property. An example would be renting out a house in south London during Wimbledon fortnight and potentially receiving up to £7,500 tax free.
Note that the Autumn Budget announced that the proposed restriction was not now being introduced.
BUT POSSIBLE CHANGES TO CGT PRIVATE RESIDENCE RELIEF
The government is currently consulting on important changes to private residence relief that are likely to be introduced from 6 April 2020.
The two possible changes, announced in the Autumn 2018 Budget are:
Firstly to limit to just 9 months the period prior to disposal that counts as a period of deemed occupation. The second is to limit “letting relief” to periods where the taxpayer is in shared occupation with the tenant.
Final period exemption to be reduced
The final period exemption was for many years three years and was always intended cover situations where the taxpayer was “bridging” and waiting to sell their previous residence. However, 36 months was felt to be too generous and was allegedly being abused by a strategy known as “second home flipping”. As a result the final period relief was restricted to the current 18 month period of deemed occupation a couple of years ago. The latest proposal is to restrict still further to 9 months although it will remain at 36 months for those with a disability, and those in or moving into care.
Possible Lettings Relief Changes
Lettings relief currently provides a further exemption for capital gains of up to £40,000 per property owner. The additional relief was introduced in 1980 to ensure people could let out spare rooms within their property on a casual basis without losing the benefit of PRR, for example where there are a number of lodgers sharing the property with the owner.
In practice lettings relief extends much further than the original policy intention and also benefits those who let out a whole dwelling that has at some stage been their main residence. It is those situations that the government appear to be attacking under the proposed changes.
Note that those who are renting their property temporarily whilst working elsewhere in the UK or working abroad are unlikely to be affected by this change as there are alternative reliefs available under those circumstances.
Please check with us if you are likely to be affected by the proposed changes as it may be worth considering disposing of the property before the new rules are introduced from 6 April 2020.
CAPITAL ALLOWANCE ON HIGH CO2 CARS AND ASSETS IN SPECIAL RATE POOL REDUCES TO 6%
One of the capital allowance changes announced in the Autumn Budget was the reduction of the writing down allowance on assets in the special rate pool from 8% to just 6% per annum reducing balance from April 2019.
The assets included in this pool include long life assets, such as aircraft, integral features within buildings and cars emitting more than 110g CO2 per kilometre.
A claim for the 100% AIA referred to above can be made for expenditure on these assets, (except for motor cars) and this will result in faster tax relief.
This means that where a company buys a motor car that emits more than 110g CO2 per km it will take many years to get relief for the expenditure as even when the car is sold the proceeds are deducted from the special rate pool and continue to be written down at 6% reducing balance.
For example, Global Ltd which makes up accounts to 31 March each year buys a new Mercedes E220d AMG line for the managing director Mr Global for £40,000. As the CO2 emissions are 127g per km the WDA would be 8% for year ended 31 March 2019 = £3,200 leaving a tax written down value of £36,800. The 6% WDA would then apply for year ended 31 March 2020 = £2,208 leaving £34,592. If the car was sold for £25,000 in the following year then the remaining balance of £9,592 would continue to be written down at 6% per annum, hence a very long write off period.
It may be more tax efficient to lease such a vehicle as, although 15% of the lease rentals are disallowed for tax purposes for such high CO2 vehicles, this may nevertheless be more beneficial.
Note that the above rules operate differently where the motor car is acquired by a sole trader or a partner for his business as the car is not included in the pool and a balancing adjustment occurs when the car is sold.
TERMINATION PAYMENT CHANGES DELAYED TO 2020
HMRC have announced that the changes to the national insurance (NIC) treatment of termination payments and sporting testimonials have been delayed to 6 April 2020.
From 6 April 2020 Employer class 1A NIC will become payable on termination payments more than £30,000 and on sporting testimonials that exceed £100,000 (lifetime limit). The changes are intended to align the NIC treatment with the treatment for income tax although there is no NIC liability for the employee on such payments.
Whether or not the £30,000 exemption applies on termination of employment is a complex area and specialist advice should be obtained.
NOTIFY HMRC OF EBT AND SIMILAR LOANS BY 30 SEPTEMBER
In order to settle on preferential terms before the outstanding loan charge arises on 5 April 2019, taxpayers must register with HMRC and provide all of the required information by 30 September 2018.
WHAT IS THE 2019 LOAN CHARGE?
The most common schemes were Employee Funded Retirement Benefit Schemes (EFRBS) and Employee Benefit Trusts (EBT). When used for tax avoidance, both involved the diversion of employment income to a trust; the trust would then ‘loan’ the employment income to the individual (meaning no PAYE/National Insurance tax was paid) who sought to benefit from the Scheme.
It is the responsibility of the employer/company to pay the 2019 Loan Charge under PAYE legislation. The employer is then expected to pass this cost on to the individual. Whilst the initial liability falls to the employer, it can be passed to the individual beneficiary of the scheme by HMRC if unpaid.
By contacting HMRC to settle your tax affairs now, you can obtain certainty of what you owe and if required, arrange a payment plan.
Please contact us if you are considering setting up a trust or wish to discuss estate planning more generally.
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