Interest from PPI claims

There was a time when you couldn’t turn on the radio, or your phone, without getting an advert for PPI (Payment Protection Insurance) refund claims. If you made a successful claim, you may have banked the money thinking it was tax free.

That is not entirely true. Each PPI settlement includes interest calculated at 8% on the refunded premiums, which is taxable. Some banks deducted 20% tax from the interest, but other lenders didn’t.

The interest portion of the PPI settlement needs to be declared on your tax return for the tax year in which you received the settlement. You may have additional tax to pay on that interest if insufficient tax was deducted by the payer.

Each year HMRC receives a bulk download of data from the banks relating to PPI payments, which it attempts to match to individual taxpayers. However, the PPI data only includes a name and address, which could be years out of date, so the matching exercise is not perfect.

If you receive a letter from HMRC which mentions undeclared interest, this could relate to the PPI claim you forgot you made. Check whether you declared the interest portion of your PPI settlement on your tax return.

If you didn’t declare the interest, you may need to amend a tax return for an earlier year. We can help you do this.

Claim for the right journey

It’s easy to estimate your business mileage, but HMRC wants to see accurate figures recorded as close to the time of the journey as possible. There are a number of apps which can help you with this.

To achieve the precision HMRC is looking for, you need to know where your business journey starts and finishes. That is not necessarily at your home if you are self-employed.

HMRC will argue your work starts when you reach your customer’s site, and any activities performed at your home-office are irrelevant. This prevents you from claiming expenses for travelling from your home to the first customer of the day, but does allow you to claim for journeys between customers.

To claim for business journeys starting from your home, you need to prove your business is truly based there. To support this argument, record the time you spend on working in your home-office, and what you were doing, e.g. contacting suppliers, or drawing up quotes.

Once you have established the number of miles which qualify as business journeys, you can claim 45p for each mile driven up to the first 10,000 miles, and 25p per mile for any additional miles in the tax year. Alternatively, you can claim a proportion of your total motoring expenses that relate to business miles, compared to the total distance you have driven in the year.

VAT will be digital

The new making tax digital (MTD) rules will require most VAT-registered businesses to keep all their VAT data as digital records, and submit VAT returns to HMRC using MTD-compliant software. This will apply for VAT periods starting on and after 1 April 2019.

In theory there should be no human cutting and pasting, or retyping figures, at any stage between the initial recording of the transaction and the submission of the VAT return. All transfers of data between different software packages should be via digital links, which can be as complex as a suite of accounting software, or as simple as spreadsheet figures automatically read into an accounting package.

The digital links can stretch between your business and our firm using cloud-based software. Transferring the VAT data as a spreadsheet attached to an email, or on a data stick, will also count as a digital link.

HMRC realise that there is not enough time to redesign all accounting systems to insert digital links where there are currently manual stages, so the use of digital links will not be compulsory until April 2020. However, it will be necessary to use accounting software to submit the VAT return to HMRC using an application programme interface (API) for VAT periods starting from April 2019.

An API is like a delivery van which carries data to HMRC and back to the business. HMRC’s computer will receive the VAT return, then send an acknowledgment back to the business through the API.

VAT-registered businesses with annual turnover under the VAT registration threshold (currently £85,000) won’t have to enter the MTD regime until their annual turnover reaches that threshold. If your business will be required to use MTD for VAT you should shortly receive a letter from HMRC setting out what you need to do.

Please talk to us if you are concerned about how to comply with the digital recording and the VAT return submission processes required under the MTD regime.

Paying HMRC without penalty

Paying your taxes should be easier now that HMRC accepts funds transferred through the Faster Payments System (FPS). This means you can pay your tax on any day of the year, 24 hours a day, if your banking allows that.

Its worth checking the maximum value your bank permits for an FPS transaction as this can be as low as £10,000 for certain business accounts. Also check exactly when the bank will process the FPS transaction, as some banks won’t accept advance payments to be made on a weekend.

If you have a large tax payment coming up, such as VAT, the payment will fail if your bank’s FPS limits are not sufficient, even if you have the cash available in your account. A failure to pay VAT on time can generate a penalty of between 2% and 15% of the late paid VAT, even if the payment arrives with HMRC only one day late.

When you need to pay HMRC from an overseas bank account, you must give the International Bank Account Number (IBAN) and bank identifier code for the HMRC bank account. See gov.uk for details. But be careful to pick up the IBAN for the bank account specific to the tax you are paying, as there are different accounts for different taxes.

 

Union Customs Code

If you import or export goods, you need to be aware of the new Union Customs Code (UCC) which came into effect across the EU on 1 May 2016.

The most important change is the requirement to provide a financial guarantee (known as a security) to HMRC for the potential customs duty due. Businesses who hold Authorised Economic Operator (AEO) status do not have to provide that guarantee. Also under the UCC, shipments for AEO businesses are given priority clearance, so fewer customs inspections are required.

The AEO is a trusted trader status. It already exists, but in the past not many businesses have bothered to apply. It will now be worthwhile applying for AEO status.

If you already hold AEO status that authorisation will remain in place until its expiry date, which is normally three years from the date it was granted.

 

Tax on savings

Savings income includes all types of interest from banks and companies, and payments from insurance bonds, but not dividends. It is not easy to work out what tax rate your savings are taxed at.

Banks no longer deduct tax from the interest you receive, but if a company pays you interest, say on money it owes you, the company will deduct tax at 20%.

Where your savings income is covered by your savings allowance, personal allowance or your savings rate band, it is taxed at 0%. In that case, there is no tax to pay and you can reclaim any tax which has been deducted from that income. Any savings income not covered by those allowances is taxed at your marginal income tax rate: 20%, 40% or 45%.

The savings rate band is a maximum of £5,000, but non-savings income (salary, pension, profits and rent) eats into that. So if you have non-savings income in excess of your personal allowance (£11,000 for 2016/17) your savings rate band is reduced.

The level of your savings allowance is determined by the amount of your net taxable income after deduction of your personal allowance.

Taxable income Savings allowance
Up to £32,000 £1,000
No more than £150,000 £500
Over £150,000 Nil

You can expand your taxable income threshold by making gift aid donations or personal pension contributions, which can give you access to a large savings allowance.

Example

Colin has a net taxable income of £32,050 including interest of £1,000, so he has a savings allowance of £500. The first £500 of his interest is taxed at 0%, and the next £500 of interest is taxed at 20%. So Colin pays tax of £100 on his savings income.

Colin makes a gift aid donation of £40 net (£50 gross) within 2016/17, so his net taxable income threshold is now £32,050. As his taxable net income now lies within that threshold, his savings allowance is set at £1,000. All of Colin’s interest is covered by his savings allowance and he pays no tax on that interest. By making a gift aid donation of £40, Colin has reduced his tax bill by £100.

 

Tax on inherited pension pots

The taxation of pensions has changed significantly in the last two years. In particular, the facility to pass on a pension entitlement, known as a ˜death benefit, has been reformed.

For deaths before 6 April 2015, the situation was quite complicated. Now the tax treatment depends how old the deceased was when they died.

Essentially, if the deceased was aged 75 or over, the person who is entitled to receive the pension fund after death (the beneficiary), is taxed on the amount they receive as if it was part of their income. If the deceased was under 75, a lump sum or pension income paid to the beneficiary is paid free of income tax.

This is straightforward, but HMRCs computer has not caught up with the new rules. Sometimes tax is deducted from a pension payment to a beneficiary when no tax is due. If this happens to you, please talk to us so that we can help you get a refund.

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Wages – plan ahead

nl_autumn_15_14With luck the employees you take on now will stay with your business for at least six months, so you need to look ahead to the payroll charges and discounts that will apply to wages from April 2016 onwards.

The wages of young workers aged under 21 are already free of employer’s National Insurance Contributions (NIC), as long as they earn no more than £815 per week.

The wages paid to apprentices will also be free of employer’s class 1 NIC from 6 April 2016, while the individual is aged under 25. There will be a similar cap for the NIC exemption on the apprentice’s pay of around £800 per week.

As announced in the Summer Budget, the National Minimum Wage (NMW) for those aged 25 and older will be set at £7.20 per hour from April 2016. All other NMW rates increase from 1 October 2015. The main NMW rate, for those aged 21 and over, rises from £6.50 to £6.70 per hour.

It is essential that you identify when an employee has moved into a new age band in order to pay the full NMW due from that point, as the maximum penalty for failing to pay the right amount is now £20,000 per worker.

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Replacing the furniture

Currently, landlords with fully furnished properties can deduct the ‘wear and tear’ allowance from their rental income before tax. This is worth 10% of the rents every year, and can be claimed irrespective of whether they have replaced any of the furnishings.

Landlords who let partly or unfurnished properties can’t claim this allowance, and are prevented from claiming a deduction for replacing loose items such as curtains and floor coverings.

From 6 April 2016 the wear and tear allowance will be abolished. In its place will be a new rule allowing a deduction for the actual cost of furnishings replaced in all let properties. This will align the tax rules between furnished and unfurnished properties.

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Stamp Duty Land Tax now due

When you buy a new home your conveyancing solicitor will normally handle the land registration and Stamp Duty Land Tax (SDLT) forms. In the past some conveyancers offered schemes to help purchasers avoid paying the SDLT.

If you took up such an SDLT avoidance scheme it is advisable to contact HMRC without delay and pay the SDLT liability due. There is likely to be interest due on any late paid SDLT, and possibly penalties. The quicker you contact the tax office, the lower the level of penalties that are likely to be charged.

You may believe you were sold a ‘watertight’ SDLT avoidance scheme, so you shouldn’t pay up until HMRC have proved that your particular scheme doesn’t work. Unfortunately, the Government can change the tax law with retrospective effect, and a recent case has shown that taxpayers have no grounds on which to argue against that where SDLT is at stake.