Requirement to correct

New tax law places a requirement on the taxpayer to correct their past tax position in relation to tax due on overseas assets and transactions, rather than on HMRC to discover the facts.

If you make the correction on or before 30 September 2018, and pay any tax due, you will face the normal level of penalties (up to 100% of the tax). If the disclosure is made after that date, the penalties can be up to 200% of the tax due and, in addition, you could be subject to additional penalties based on the value of any assets which you hold overseas.

If you have any doubts about accounts you hold offshore, or deals you have made with overseas entities, now is the time to talk to us about them.

 

Capital allowances and cars

The most expensive piece of equipment most small businesses use is a car, but the Government generally doesn’t allow you to claim a deduction for the full cost of a car in the year of purchase. The acquisition cost of most cars must be spread over several years using Capital Allowances, the rate of which varies depending on the vehicle’s CO2 emissions.

Cars with higher emissions qualify for a Capital Allowance deduction of 8% of the reduced cost per year, and cars with lower emissions qualify for an annual deduction of 18% of the remaining cost. The boundary between higher and lower CO2 emissions is 110g/km for cars purchased from April 2018 onwards, reduced from 130g/km for cars purchased in 2015/16 to 2017/18.

Cars with very low CO2 emissions do qualify for a 100% deduction in the year of purchase, but only if the car is brand new and unused when acquired. Very low CO2 emissions is now defined as no more than 50g/km; for cars purchased in 2015/16 to 2017/18 this threshold was CO2 emissions of 75g/km.

New electric cars qualify for 100% first year allowances. The cost of installing charging points for those electric cars also qualifies for a 100% deduction where the expense is incurred by 31 March 2019. Gas refuelling stations for vehicles also qualify for 100% allowances in the first year, if the cost is incurred by 31 March 2021.

All Capital Allowances must be claimed within the tax return for the period in which the cost was incurred, or in an amendment to that return, which can be made up to a year after the filing date for the return.

 

Scottish income tax rates

Scottish taxpayers have a Government which has a different approach to income tax and spending. It has increased tax rates for higher earners and inserted new tax bands from 6 April 2018.

Unfortunately, the Scottish tax bands don’t align with the thresholds for National Insurance Contributions (NIC), which are set by the UK Government. The Scottish tax rates and bands also don’t apply for savings and dividend income, nor for Capital Gains Tax.

The Scottish Income Tax and NIC bands for 2018/19 are shown in the table.

Tax bands for 2018/19

Income in band £ Scottish tax rates Class 1 NIC rates % Total rate on band
0 – 8,424 0 0 0
8,425 – 11,850 0 12 12
11,851 – 13,850 19 12 31
13,851 – 24,000 20 12 32
24,001 – 43,430 21 12 33
43,431 – 46,350 41 12 53
46,351 – 100,000 41 2 43
100,001 – 123,700 61.5* 2 63.5
123,701 to 150,000 41 2 43
Over 150,000 46 2 48

* The rate between £100,000 and £123,700 is an effective rate that applies due to the withdrawal of the personal allowance above £100,000.

You are classified as a Scottish taxpayer if your main home is in Scotland, in which case you should have a PAYE code that starts with ‘S’. HMRC use your correspondence address as the indicator of your main home, unless you inform them otherwise.

If you are a self-employed Scottish taxpayer, you will pay the Scottish Income tax rates as per the table, plus NIC at 9% instead of 12% paid by employees.

Tax relief on pension contributions is given at 20%, even for Scottish taxpayers who pay tax at only 19%. Any additional tax relief due for pension contributions at 21% or higher rates will have to be claimed in your tax return, or by contacting HMRC.

 

Childcare support

Tax free childcare accounts can now be opened by all eligible parents who have children aged under 12, or under 17 if the child is disabled. For every £8 the parent deposits in the account, the Government will contribute £2, up to a maximum of £2,000 of Government support per child per year. Those limits are doubled for disabled children.

Parents who open a tax free childcare account are not supposed to double-up their childcare support by also receiving childcare vouchers or directly paid-for childcare from their employer. The parent should tell their employer in writing that they have opened a tax free child care account within 90 days, and the employer should take that employee out of the childcare scheme.

All employer-provided childcare voucher schemes were due to close to new entrants in April 2018, but this deadline has been extended to October 2018. This is good news, as the tax and NIC-free childcare vouchers can be given to parents whose youngest child is aged 12 or more, and hence don’t qualify for the tax free childcare account. Employer-provided childcare vouchers can be used to provide care for any child under school leaving age.

Many families ask the child’s grandparents to provide childcare on an informal or formal basis. Where those grandparents are under state pension age, and they care for a child aged under 12, they can claim adult childcare National Insurance (NI) Credits.

The person providing the care must be a relative of the child and mustn’t be paying NIC on another job at the same time.

The child’s parents must be entitled to child benefit for the child (but don’t have to be actually receiving that benefit). This type of NI credit has only been available since 2011 and it is not widely advertised by HMRC.

 

Timing is everything

The end of the accounting period for your business is a key point for tax planning. You can save or delay tax by moving income and expenditure between accounting periods.

For instance, advancing the acquisition of assets to just within your current accounting period will mean the capital allowances associated with those assets can be claimed earlier.

All of the cost of qualifying assets which fall within your Annual Investment Allowance (AIA) is relieved as a capital allowance in the year of purchase. The AIA is worth up to £200,000, but it cant be claimed for the last period the business trades, or by partnerships where a member is a company.

Cars dont qualify for the AIA, but new cars with CO2 emissions under 76g/km qualify for 100% allowances until 31 March 2018. Thereafter, new cars purchased before April 2021 will qualify for 100% allowances where their emissions are no more than 50g/km. Charging points for electric cars also qualify for 100% allowances until until 31 March 2019.

If you have acquired a commercial property within the last two years, you should check whether the value of the fixtures within that building have been formally agreed with the buildings previous owner. Without this formal agreement you could lose the right to claim capital allowances on those fixtures.

If your current year profits are looking very healthy, you may want to advance the payment of repairs, training costs, bonuses or pensions contributions.

An accrued salary payment, such as a bonus voted before the year-end, is deductible for the period if it is actually paid within nine months after that year end. However, a pension contribution must be paid within a companys accounting period to be deductible for that period.

Action Point!
Review spending plans and likely profit levels before your year-end.

 

Stick or split on VAT

The VAT registration threshold will be held at £85,000 until at least April 2020. This may bring more businesses into the VAT fold if they increase their prices with the rate of inflation.

Say your annual sales are £83,000. If you increase your prices by 3% in January 2018, by 2019 your turnover will be £85,490, and you will have to register for VAT within 30 days.

You could restrict your price increase so your turnover remains under £85,000, but if your purchase costs are increasing this will cut your profit margins. Alternatively, you could restrict your sales by taking longer holidays, if you can afford it.

Another idea is to hive off a part of your business into a separate legal entity, so each new business has turnover under £85,000. However, this must be done with great care, as HMRC can challenge any artificial split.

The two businesses should have a bank account each, keep separate business records, and file separate tax returns. Ideally the businesses should provide different services or goods to separate groups of customers. There must be separate contracts with any common suppliers.

Action Point!
Will your business be able to stay under the VAT threshold from April 2018?

 

VAT goes digital

The Governments aspiration for the UK tax system is that all taxpayers should submit their accounts information to HMRC directly from accounting software. The first step towards this brave new digital world will be taken by VAT registered businesses.

From 1 April 2019, VAT registered businesses will have to submit their VAT returns via accounting software, not as now, by inputting figures on to a form on the HMRC webpage. There will be exceptions for business owners who cant use computers due to age, disability or religious reasons. Businesses that are VAT registered on a voluntary basis will be able to choose whether to use accounting software to submit their returns or not.

The figures submitted by the software will be the same totals as are currently reported on quarterly VAT returns, but the business will have the option to submit more detailed supplementary information. We will be able to submit your VAT figures on your behalf as now, but the law will require you to keep your accounting information in a digital form.

The best way to prepare for this digital revolution is to get into the habit of recording your income and expenses using accounting software. We can help you choose and implement the right software for your business.

Action Point!
Are you geared up for the digital tax revolution?

 

Elect in good time

Events dont always turn out as expected. For example, you may need to wait for a later profit or loss to arise before you can judge whether its right to elect to change the tax treatment of an earlier transaction.

This is why the law allows you extra time, after you have submitted your tax return, to submit a tax election or claim. The elections you may need to make by 31 January 2018 for the 2015/16 tax year include:

  • to set trading losses against your other income
  • to average the profits made from farming, or as an author or artist
  • to treat a property as continuing to qualify as commercial Furnished Holiday Letting if it qualified as such in 2014/15, but otherwise would not

You need to wait for a certificate to arrive before making a claim for your investment under the venture capital schemes  EIS, SEIS or SITR  so the claim period for those schemes is five years after the tax return submission date.

Corporate tax claims generally need to be made within two years of the end of the accounting period in which the transaction occurred.

We can help you check what claims or elections you need to make.

Action Point!
Have you made all the necessary tax claims?

 

Cash and finance costs

Individual landlords of residential properties are subject to two new tax rules from 6 April 2017: a restriction on deducting interest costs, and the cash basis for accounts where the property business has a turnover of no more than £150,000.

The cash basis has the effect of taxing income in the year it is received and expenses in the year they are paid. It may benefit you if your tenants tend to pay late. You can opt out of the cash basis if you wish.

In 2017/18 individual landlords are permitted to deduct 75% of their interest and finance charges for tax purposes, and from 6 April 2020 all such finance costs will be disallowed. In place of the blocked interest the landlord receives a 20% tax credit to set against his income tax bill. This adjustment to interest deductions doesnt apply to corporate landlords.

Where the property business is supported by borrowing, the increased taxable income can push the landlords total income into higher tax bands, leading to the loss of personal allowances or the claw-back of child benefit.

The example compares an English landlords tax position in 2017/18 (when he deducts 75% of the £32,000 interest paid) with his position in 2020/21 when all interest is blocked. The amounts of personal allowance (£12,500) and basic rate band (£37,500) are estimated for the later year. The figures will be different for Scottish taxpayers.

 

2017/18 2020/21
Salary £35,000 £35,000
Rents less running costs 34,000 34,000
Interest deduction (24,000) nil
Total net income 45,000 69,000
Personal allowance (11,500) (12,500)
Taxable income 33,500 56,500
Tax charged at 20% 6,700 7,500
Tax charged at 40% 7,600
Tax credit on interest at 20% (6,400)
Total tax payable 6,700 8,700

 

If your residential property business is supported by significant borrowings you need to urgently consider whether to restructure that business to avoid significantly higher tax bills. Your choices may include:

  • selling one or more residential properties to reduce borrowings
  • selling all residential property and reinvest in commercial buildings (the interest restrictions dont apply)
  • let the homes as Furnished Holiday Lettings (which are not affected)
  • transferring the properties into a company

The last option is not easy as the lender will have to agree to transfer your property loans to the company. The transfer of properties is likely to incur land tax charges for the company, and may well generate a taxable capital gain in your hands.

We can help you model the financial future for your residential property lettings.

Action Point!
Review your borrowings to ensure a sustainable future for your lettings business.

 

Money for miles

If you use your own car for a business journey, perhaps to travel to a customer, you can claim mileage expenses for that journey. Many employers pay the full taxfree amount of 45p per mile, which drops to 25p for miles in excess of 10,000 in one tax year.

If your employer doesn’t pay the full rate, you can claim tax relief on the shortfall, either on your tax return or on form P87. You need to submit your claim within four years of the end of the tax year in which you made the business journey. Claims for 2013/14 must reach the tax office by 5 April 2018.

Once HMRC has accepted your mileage claim for one tax year, subsequent claims for up to £1,000 per year can be made by phoning the tax office on 0300 200 3300.

Action Point!
Are you due a tax refund for business journeys?