Staff Tax Tips – 23 August 2018

specialist accountancy services

Staff tax tips for this week are listed below. We have added links to more detail as appropriate. We will be adding a least two posts a month under this heading so please ask your staff to add their names to our newsletter distribution list that will link to these articles.

Phishing emails

If clients ask you what to do if they have received strange emails from HMRC, generally, those emails should be ignored, and clients should never part with personal information or bank details. Latest details of genuine instructions from HMRC can be viewed here.

CGT – 30 day window to make payments on account

The government seem keen to introduce payments on account within 30 days of the disposal of affected residential property. This change will likely apply from April 2020. Link to recent update. 

Do you know how long clients need to keep their tax records?

For companies its:

6 years from the end of the last company financial year they relate to, or longer if:

  • they show a transaction that covers more than one of the company’s accounting periods
  • the company has bought something that it expects to last more than 6 years, like equipment or machinery
  • you sent your Company Tax Return late
  • HMRC has started a compliance check into your Company Tax Return.

And for the self-employed:

You must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.

 

Are your self-employed clients solvent?

There is a significant difference between the Balance Sheets of limited companies and sole traders and partnerships.

Limited company accounts

When you produce company accounts it is a fairly simple task to calculate the corporation tax due for the accounting period, and you are required to add this as a short-term liability in the accounts, reducing reserves accordingly.

Accounts of sole traders and partnerships

As profits are chargeable to income tax, and as other sources of personal income may not be known when the accounts are prepared, it is not unusual for accounts to be prepared without any deduction for unpaid income tax or Class 4 National Insurance based on business profits to the year end date.

And so…

Are your self-employed clients solvent?

Many self-employed traders tend to withdraw any available cash flow not required to maintain their business requirements, forgetting that from those withdrawals they need to meet any future tax liabilities based on past accounting periods. Depending on their accounting year-end, they may have a payment on account included as drawings, but any balance of taxes due are generally met from the profits of future trading periods.

Could be interesting to calculate any balancing income tax and Class 4 NIC liability at the balance sheet date and deduct this amount from the sole trader’s or partner’s capital account?

Those self-employed traders who are used to withdrawing profits before adjusting for any outstanding taxes, may actually, be overdrawn on their capital accounts.

No doubt most practitioners are making these adjustments, all-be-it after the accounts are prepared, to ensure that clients will have the funds to meet future tax bills and keep their self-employed businesses solvent.

Not a level playing field

This issue does flag up an obvious contradiction, that it is not really possible to compare the net worth of incorporated and unincorporated businesses without adjusting for any unpaid, future tax liabilities of the self-employed that are relevant to profits earned up to the Balance date. Wonder if banks take this into account?

Need to remind clients? A neat solution using Outlook.

I was scratching my head, trying to figure out how to remind myself to send a forgetful client to pay their SA tax next year, January and July 2019. I don’t have a large client list these days and I have most of my clients pretty well trained to pay up on time. I was about to cop-out, and make myself a diary reminder in Outlook to email my client on the due dates, when it occurred to me that I could create an email now (in Outlook) and delay sending it until a future date. And you can…

The process is quite straight forward, and many thanks to support.outlook.com for the tip. It is (for later versions of Outlook):

Delay the delivery of an Outlook email

  1. While composing a message, select the More options arrow from the Tags group in the Ribbon.
    Select More Options to set a delivery delay.
  2. Under Delivery options, select the Do not deliver before check box, and then click the delivery date and time that you want.
    Set a date and time to deliver your message.
  3. Click Close.

  4. When you’re done composing your email, click Send.

After you click Send, the message remains in the Outbox folder until the delivery time.

Review email reminders in the Outlook, Outlook folder

How easy was that? And I can review emails not sent by simply opening the Outlook folder. This might be a good post to direct to your team if you don’t have a solution working in-house already.

The OTS proposes far-reaching tax changes

I received a number of emails from the Gov.uk website earlier this month outlining proposals for far-reaching changes to various aspects of UK tax by the Office for Tax Simplification (OTS).
I have summarised these changes with links to the support documentation. They make for interesting, and in parts, chilling reading. Where relevant I have flagged opportunities that I feel the OTS comments open up for practitioners.

And let’s not forget that the OTS are not a legislative body – changes proposed will need the approval of ministers and the Treasury before we would need to grapple with their impact.

Simplification of the corporation tax (CT) computation.

In their report the OTS conclude:

The conclusion the OTS has been drawn to is that for all but the very largest companies, and particularly for smaller ones, the simplest solution is surely that tax should follow the accounts, without adjustments being required.

The changes we can expect

  1. The OTS aim for CT – easier to understand and engage with and reduce the cost of compliance.
  2. Principles – tax follows accounts and commercial reality.
  3. Micro companies – simple accounts equals simple tax.
  4. All companies: a roadmap for Corporation Tax reform to align with Making Tax Digital, enhanced stability and certainty for complex businesses, relief for capital expenditure closer to accounts, potentially using depreciation, capital/revenue definitions aligned with accounting, deductions aligned across income streams, leading to Scheduler reform.
  5. Outcome – CT is simpler, compliance is easier and cheaper.

My observations

There are a few stand out points raised:

  1. The aim is to simplify and reduce the cost of CT compliance.
  2. CT to be based more on the accounts with fewer adjustments in the computation.
  3. For the smallest companies, the OTS seems to imply that CT will be based on the accounts, depreciation no CAs?
  4. When MTD rolls out to the collection of accounts data, it makes sense to base CT on accounting profits with as few add back and hybrid deductions as is possible.

Firms that rely on compliance activity to generate fees will not be enamoured of these proposals. If the OTC’s outcome is to make CT compliance “easier and cheaper” this translates to lower CT compliance fees.

Time to reposition ourselves as tax tacticians rather than tax technicians?

The formal OTS report can be downloaded here (123 pages).

Accounting depreciation or capital allowances?

The OTS summary includes the following quote:

If we were devising a system from scratch, depreciation could work perfectly well and would make eminent sense. However, our analysis has shown that the undoubted potential benefits are not worth the upheaval involved. Such an extension of the scope of relief would come with a big price tag, require lengthy transition periods, and involve all businesses in process change even though only around 30,000 businesses claim capital allowances in amounts exceeding the present Annual Investment Allowance of £200,000. That said, we consider there are important improvements to capital allowances which should be considered, alongside those we recommended in last year’s report, in particular that the scope of the Annual Investment Allowance be widened.

This is underlined on page 11 of the report:

This report also includes new recommendations on the simplification of CAs, which could be delivered in a cost neutral way:

  • the scope of the Annual Investment Allowance (AIA) should be widened
  • the scope of CAs generally should be widened
  • a more radical reform of the structure of CAs should be considered if the scope of CAs cannot be widened, leveraging information used in accounts but not based on depreciation.

What can we expect?

It seems likely that the scope of the AIA will be widened, perhaps to make it easier for taxpayers to identify what is covered by the relief and what is not covered.

There may be future changes to the structure of CAs. It will be interesting to see if the OTS can devise a way to do this without replacing one complex set of rules with another equally complex arrangement.

The full report and conclusions can be downloaded here. (88 pages)

Lookthrough taxation

For practitioners unfamiliar with the term “lookthrough” the opening paragraph of the OTS report says:

As noted above the basic premise of lookthrough taxation for a small company is that direct profits taxes are not levied on the company; rather one looks through the company and levies taxes directly on the shareholders on their allocated share of the profits. Shareholders would be subject to income tax and class 4 NICs; however, all other requirements of the company will remain. This includes VAT compliance (if the company is registered) and accounting requirements.

If implemented, this would require a complete rethink of tax planning for smaller companies presently benefitting from the low salary, high dividend approach to avoid NIC.

How would lookthrough work in practice?

The OTS conclusion as to how profits would be allocated to proprietors is:

The working assumption that we have tested is that all profits – including trading income, investment income and capital gains – would be allocated according to shareholdings. There would be nothing left in the company to tax. Some prior items that we identified in our discussion paper, such as preference share dividends, would stand, but all remaining profits would be allocated. This implies some form of additional return being required, presumably a schedule along the lines of a partnership allocation which would be centrally generated by the company or its advisers and given to each shareholder to help with their tax return.

Thankfully sanity is likely to prevail

In their conclusion the OTS say (and in bold):

Our conclusion is that lookthrough does not offer sufficient simplification to justify its introduction. On balance we feel that it would actually be more complicated than the current corporation tax system, given the additional rules that would be needed.

And so, thanks but no thanks…

The full report and conclusions can be downloaded here. (88 pages)

The closer alignment of income tax and national insurance – a further report

This further report on the old chestnut of income tax and NIC alignment is best summarised by quoting the OTS summary at the beginning of their report:

Our March report concluded that alignment was both possible and desirable and set out a 7-stage programme to achieve it:

  • move to an annual, cumulative and aggregated (ACA) assessment period for employees’ NICs on employment income, similar to PAYE IT
  • base employers’ NICs on whole payroll costs to make it easier to understand and reduce distortions created by the current system,
  • more closely align the NICs position for the UK’s 4.8 million, and rising, self-employed with that of employees
  • to help make closer alignment possible, NICs needs to be a more transparent system, better understood by taxpayers
  • align the legislation for IT (relating to employment income) and NICs so that the scopes of the charges are the same, and taxpayers benefit from identical reliefs for IT and NICs purposes
  • bring taxable benefits in kind (BiKs) into Class 1 NICs and abolish Class 1A NICs
  • a fully joined up approach to the two taxes across policy and administration with alignment of legislation and procedures, and where possible the matrix of rates and thresholds.

Given the scale of this programme, which we have always been clear would be a long term project, there were many aspects that would require further investigation. We were asked to do more work on the first two of them by the Chancellor, under formal terms of reference (see Annex E), and this report now sets out our findings on those two areas:

  • moving employees’ NICs to an annual, cumulative and aggregate basis (ACA)
  • changing employers’ NICs to a payroll levy.

We have been particularly focussed on analysing in fuller detail the impacts of such reforms. For ACA this has meant a great deal of digging into the numbers affected and the monetary impacts. On employers’ NICs we have developed further options beyond the simple flat-rate payroll levy we showed in the March report. For both aspects we have been probing the administrative implications: what costs and savings could result?

What changes can we expect?

The OTS recent report underscores the recommendations in their previous March report on this topic, that the time is ripe for change. Considering all the other changes our government needs to attend to, and in the case of Brexit with some urgency, don’t hold your breath on this one being adopted any time soon.

The full report and conclusions can be downloaded here. (94 pages)

Sole Enterprise with protected assets (SEPA)

The principle behind SEPA is that it will allow an individual to continue to trade as a sole trader whilst offering protection for their primary residence against claims arising from the business. The primary residence will not be protected from personal claims nor will any other asset be protected.

In essence, SEPA offers a limited, limited liability vehicle for sole traders.

In conclusion the OTS report says:

The case for SEPA’s introduction is not by any means cast iron. But our work indicates that SEPA has the potential to be a useful simplification for those that would otherwise consider incorporation. Furthermore, it could provide a boost to enterprise.

Accordingly, we recommend that it should be developed into a formal proposal. While doing so, one would have to address some of the issues that we have raised in this report as well as fully assessing any impact on the creditor and debt collection markets.

Will we see a change in the law?

Maybe is perhaps the most appropriate response. Oddly, this OTS report is not a commentary on tax change. No doubt, if enacted, the ability to ring-fence your home from creditor claims would tend to encourage the risk-averse to give their business ideas a go. We shall see.

The full report and conclusions can be downloaded here. (30 pages)

My conclusions summarised

If the OTS recommendations eventually impact legislation, the drive towards simplification of tax compliance – especially as the impact of MTD develops – are likely to continue. In which case tax compliance as a realistic and significant income stream for practitioners will be diminished.

As quoted in the body of this piece, we need to become tax tacticians (tax planners) rather than tax technicians.

Should accountants embrace change?

Image highlighting change as an opportunity

A good place to start is to consider which side of the fence you sit. Do you treat change with despair or does it trigger the itch to connect the change with opportunity?

Accountants, especially those of us in practice, are constantly dealing with the consequences of change. Examples are legion: changes to the UK tax code, to company law, to data protection regulation, to accounting standards and keeping up with evolving software and hardware issues.

Could these changes offer practitioners opportunities?

For example:

  • Could Making Tax Digital open up the possibility of digitising clients’ record keeping that might otherwise stay in the dark ages of plastic bags and paper. This should offer opportunities to provide these clients with accessible data to help them grow their businesses?
  • Could the advent of GDPR – we assume your practice is compliant (?) – mean that you could use your newly acquired skills to help your new and existing business clients become compliant?

And there must be numerous occasions when a change in tax legislation opens up new tax saving opportunities for clients?

As part of my Taxing Times service I provide a 7,000 word booklet that includes fifteen ideas for making the most of recent changes in legislation to offer one-off consultancy or ongoing, recurring support activity with clients. Topics covered include recurring audits to comply with the NMW and NLW regulations, compliance with the Criminal Finances Act and regional opportunities.

Are there downsides to change?

And there are downsides to change. Services that we have considered sacred to our patch, accounts preparation, filing tax returns, can now be accommodated by less qualified service providers who simply follow software instructions. Even here, opportunity raises its head, to morph these repetitive services into something altogether more useful: periodic business development reviews, tracking progress towards the exit sign, benchmarking, out-performing or acquiring competitors, the list is virtually endless.

Why not add new income streams to your fee base?

Perhaps the next time you spot a change that affects the advice you provide clients, you could pause for a second and contemplate the opportunity this might offer to improve client service, and as a consequence, add new income streams to your fee base? What have you got to lose?

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