Pension lump sum

If you have received a lump sum payment from your pension fund you may have had excess tax deducted from it. This happens, for example, because the pension provider tends to use an emergency PAYE code for the first payment you take from your fund.

If you have had tax incorrectly deducted from a lump sum payment, you will get it back from HMRC if the pension scheme doesn’t refund it. However, there are several different claim forms, depending on the circumstances. We can help you with those forms.

If you do expect to take further pension payments in the same year, the tax repayment should be made when you receive the next pension instalment. However, for this to work, your PAYE code needs to be adjusted.

You can request a new tax code from HMRC through your online personal tax account. Alternatively, you can phone HMRC to ask for the code to be changed.

We can do this on your behalf if you have authorised our firm to act for your personal tax affairs.

SEIS investments

The Seed Enterprise Investment Scheme (SEIS) is specifically designed for young companies to raise relatively small amounts of start-up capital. The investors receive 50% income tax relief on the amount they subscribe for new shares, and those shares are exempt from capital gains tax (CGT) when they are sold after three years or more.

There is no minimum amount the company may raise, and no minimum each equity investor is required to commit, but there are maximum limits. The company is permitted to raise up to £150,000 over a three-year period, and the maximum SEIS investment per taxpayer is capped at £100,000 per tax year.

Companies which use SEIS tend to be risky ventures. Investors who subscribe for SEIS shares balance the chance that they will lose their money, with the possibility of making tax-free gains when the company is a success, and they can sell their shares at a large profit.

If you have made an SEIS investment, however small, you should claim the income tax relief due. Don’t miss out this step, as when you sell your shares you must show that you have claimed the income tax relief in order to benefit from the CGT exemption.

Inheritance tax on your home

The total amount of inheritance tax (IHT) paid to the UK Treasury increases by around 10% per year. This is largely due to rising residential property values and is frozen at £325,000 per person. IHT is payable at 40% above the nil band.

If you have children (step or adopted children count) some IHT may be saved by leaving an interest in your family home to one or more of your direct descendants. Such bequests allow the residential nil rate band (RNRB) to come into play, which is currently worth £125,000 per person, increasing to £175,000 from 6 April 2020.

The RNRB is added on to the normal nil band, to provide a total exemption of £500,000 per person (from 6 April 2020). This total exemption can be passed to the surviving spouse on death.

However, there are lots of conditions surrounding the RNRB. The interest in the property must pass to your direct descendant on death and not as a lifetime gift. If your total estate before exemptions and reliefs is worth over £2 million, the RNRB is tapered away by £1 for every £2 over that threshold. It therefore pays to plan to reduce the value of your estate down to £2 million, if that is possible.

Talk to us about planning to reduce the tax which will be payable on your death.

Preparing for Brexit

There are now less than six months until the UK leaves the EU, and we still don’t know the terms of the withdrawal agreement. It is possible that the UK will leave the EU without a deal, which would have wide implications for many UK businesses.

Whichever side of the leave or remain fence you stand, it is now essential that businesses prepare for the potential disruption which Brexit could bring.

The European Commission has published detailed notices to advise businesses of the effects of the UK leaving the EU. These notices cover topics from e-commerce to VAT, and are available in English on https://ec.europa.eu.

The UK Government’s guidance on how to prepare for a no deal Brexit can be found on gov.uk. This guidance suggests that there may be disruption to supply chains due to congestion at ports.

Some large businesses are starting to stockpile goods and raw materials in the UK, to cover for two to three months of disruption. Certain manufacturers are bringing forward their planned annual shut-down from Summer to Easter 2019, to avoid unplanned stoppages to production lines should parts fail to arrive on time.

Smaller businesses also need to prepare. Examine your supply chain to identify the risks which delays in delivery would pose to your business. How much stock can you hold of materials and finished goods?

Your suppliers won’t want to stockpile goods which they are not certain of selling. If you will need particular products delivered or printed in April or May 2019, get your order in early so the items needed for your business are reserved.

We can help you model the effects on your cashflow and profits which disruption to supply chains could impose on your business, but the time to start planning is now.

VAT annual accounting

The VAT annual accounting scheme seems like a good idea, as you don’t have to submit quarterly VAT returns. Instead you pay your VAT by monthly or quarterly instalments during the year, and make a final balancing payment with a single VAT return for the whole accounting year.

If you choose to pay monthly instalments, these will be set at 1/10th of your previous year’s VAT liability. Nine monthly payments are made (starting in the fourth month of your VAT year), plus a balancing amount for the year paid in the second month of the next year.

However, the discipline of reviewing your accounts every quarter is lost. When you don’t have time to monitor your accounts, the final balancing payment may be a lot more than you expect.

When you use the VAT annual accounting scheme, you have two months to submit the annual VAT return after the end of the accounting year. If that return is late, HMRC will send you an estimated VAT bill which may be less than the true liability. If insufficient VAT is paid, penalties will be due.

Annual accounting can suit businesses which have regular predictable income; those with very variable income can end up paying too much or too little VAT.

 

Missing trader fraud

There are so many risks in business nowadays. You need to know your customer to check they aren’t trying to launder money through you, but you also need to know your suppliers to protect yourself from VAT fraud.

If your supplier goes missing and deliberately fails to pay its VAT liability for taxable supplies in the UK, you could end up liable for the VAT. This can apply when you knew, or should have known, that a transaction was connected with VAT fraud. HMRC may refuse your claim for the VAT you paid in respect of that purchase.

In determining whether your business should have been aware of the VAT fraud, HMRC will consider whether you took reasonable steps to verify the integrity of your supply chain. Such reasonable steps would include asking these questions:

  • What is your supplier’s history in the trade?
  • Are high value deals offered by a newly established supplier with minimal trading history?
  • Do those high value deals have no formal contract?
  • Are you asked to make payments to a third party or to an offshore bank account?
  • Has the supplier referred you to a customer who is willing to buy the goods?
  • Has a prospective buyer contacted you shortly after you made contact with the seller, offering to buy the very same goods?
  • Are you offered deals that have a consistent or pre-determined profit, regardless of date, quantities or specifications involved?
  • Have you been notified by HMRC that previous deals with the supplier were connected with VAT fraud?

You should always check that the goods exist in the quantity and specification offered and that they are in good condition. Also, beware of large quantities of goods with non-UK specifications offered for supply in the UK, and check what remedies are available if the goods turn out not to be as described.

 

VAT on exported goods

When you export goods to a customer in a country outside the EU, the sale is zero-rated for VAT if, and only if, seven different points of supporting evidence can show what went from A to B, what it was worth, how it moved, and who received it.

The seven categories of evidence set out in section 6.5 of VAT Notice 703 are:

  • the supplier
  • the consignor (where different from the supplier)
  • the customer
  • the goods
  • an accurate value
  • the export destination
  • the mode of transport and route of the export movement

If any of those points are not detailed on documents retained in the UK, HMRC will conclude that the goods were not eligible for zero rating and it will demand 20% of the value of the goods exported.

The goods have to be described in some detail, such as ‘make XZ and model number AB17856’. A general description along the lines of ‘various electrical goods’ will not be acceptable. To prove the goods have been moved out of the country, the original bills of lading, air-waybills, or sea-waybills must be retained. Photocopies won’t be acceptable to HMRC unless they have been authenticated by the shipping or airline company.

HMRC also has the power to impose penalties for a careless or deliberate error, of up to 100% of the VAT which should have been paid.

 

VAT on hot food

The general rule is that food for human or animal consumption is subject to zero rate VAT. However, where food is supplied as part of a catering contract, standard rate VAT (20%) must be applied to the cost of all the food whether it is served hot or cold. This covers restaurant meals, and any prepared food to be eaten on the premises.

Where the takeaway food is intended to be eaten hot, like fish and chips, VAT should be applied at 20%. Where the food is to be eaten cold (or at least ‘not hot’), such as sandwiches, zero rate VAT should be applied.

Difficulties arise when a café or takeaway outlet cooks the food item and allows it to cool before selling it. This issue was the basis of the infamous ‘pasty tax’ in 2012, but food sellers are still getting the rules wrong and ending up with huge VAT bills.

In a recent case, a market stall selling Caribbean curries prepared each curry in the morning and kept it warm in a bain marie until it was served to customers at lunch time or later. As the food was served above the ambient room temperature, HMRC regarded the food as ‘hot’, hence 20% VAT should have been added to the price.

The VAT rules for food and drink can be very tricky to apply correctly, but we can help check whether your business is getting it right.

 

Paying employees on sleep-in shifts

Certain care workers undertake sleep-in shifts while on duty overnight. Such workers were commonly paid a flat amount for each sleep-in shift, which would be less than the hourly National Minimum Wage (NMW) rate.

An employment tribunal has now ruled such workers must be paid at least the NMW for time spent on sleep-in shifts. HMRC is enforcing that ruling with the penalties applied for periods from 1 November 2017. However, employers may be required to pay arrears of underpaid wages for sleep-in shifts from an earlier date, such as 1 April 2017.

If you are one of those employers, you should register for the government’s social care compliance scheme, which will give you further assistance to comply, such as:

  • PAYE guidance on NMW arrears
  • a template spreadsheet to record the amount of arrears paid
  • a template letter to issue to workers when arrears payments need to be made
  • guidance on what employee pension contributions are due in respect of arrears of pay

We can help you work out the tax and pension deductions due and submit the necessary updates to HMRC.

 

Understanding IR35

If you work on projects for larger businesses through your own Personal Service Company (PSC), both you and that larger business can save tax and National Insurance (NI) costs. Your savings arise if you extract funds from your PSC as dividends rather than as salary, and your customer saves employer’s NI by not paying you as an employee.

The IR35 tax avoidance rules came into effect in April 2000 to prevent individuals from gaming the system and paying less tax by working through their own PSC, when in reality they should be taxed as employees. You, as the director of the PSC, decide whether IR35 applies to your contracts. If it does, you should pay the net proceeds of the contract out of the company as a salary; if you don’t, HMRC will demand the PAYE and NI on an equivalent deemed salary.

To check that IR35 is operated correctly, HMRC has to review the detail of how each contract is performed by a particular PSC, as the law must be applied per contract, not per company. This is very time consuming and expensive, so HMRC want to change the way the IR35 rules are applied.

In the public sector, it is the end customer (the public body) which decides whether IR35 applies to a contract. If it does, the public body instructs the fee-payer in the chain to deduct tax and employee’s Class 1 NI from the amount the PSC invoices. The individual contractor doesn’t get a say in the matter.

HMRC is consulting on extending these public sector rules for IR35 to the private sector. An alternative option is to ask all businesses to record much more information about each contractor they use.

These changes may take effect from 6 April 2019. If you are negotiating contracts which run over that date, include a break clause to allow you to renegotiate your prices.