September 2014 Newsletter

RTI late filing penalties from October

Employers should be aware that automatic penalties will apply if their RTI submissions are not up-to-date by Sunday, 5 October 2014 – and thereafter kept up-to-date. These penalties will be in addition to the automatic interest charge which has applied to late payments since April this year. Penalties will be imposed:

  • Where a Full Payment Submission (FPS) is filed late – that is to say, is not filed by the day the employees are paid or, if the employer qualifies for the concession for some employers with nine or fewer employees, by the last pay day in the tax month; and
  • Where an employer fails to file a nil Employer Payment Summary (EPS) – for a month in which no payments to employees were made – by the 19th day of the following month (so by 19 October for the tax month to 5 October).

The monthly penalty will be £100 if the employer has less than ten employees; £200 if he has between ten and 49; £300 if he has between 50 and 249; and £400 if he has 250 employees or more. However, the first default each tax year will be ignored.

Penalty notices will only be issued every three months. It appears that the first penalty notices will be issued in October 2014, to cover any defaults for the current tax year that were not rectified by Sunday, 5 October.

Where a submission is three months late, HMRC will additionally be able to impose a 5% surcharge on the tax and National Insurance contributions payable. They say that this will be used only for the most serious and persistent failures.

From April next year, the screw will be tightened yet further, with the existing penalties for late payment of monthly or quarterly PAYE remittances being made automatic and applied in all cases. The penalty will be between 1% and 4% of the tax due, depending on how many times, in the tax year, the employer pays late.

Tax free childcare

The Government has announced further details of the Tax Free Childcare scheme, first announced in the March 2013 Budget and due to be launched in Autumn 2015. The current childcare tax reliefs – for workplace nurseries and for childcare vouchers – apply only to childcare provided, or partly paid for, by an employer. What is new about Tax Free Childcare is that it will provide direct help with childcare costs, without involving the employer. Accordingly, it will be available without the co-operation of the employer, and to self-employed people on equal terms with employees.

How will Tax Free Childcare work?

Shortly put, the concept is that the parent(s) will open a special account with National Savings & Investments. If there is more than one qualifying child in the family, a separate account may be opened for each. Children will qualify until their twelfth birthday, or until their seventeenth, if they are disabled. It is possible that the scheme will be phased in – applying first to nurseries and playschools for very young children, and then being extended to after-school clubs, etc, for older children.

The parent(s) may pay up to £8,000 a year into each account, and for every £8 paid in, the Government will add another £2, so the overall effect is identical to giving tax relief at 20%. The parent(s) will then use the money in the account to pay their childcare provider. All payments into and out of the account will be made electronically.

There will be no additional relief for higher-rate taxpayers. Also, there will be no reduction in National Insurance contributions.

Will everyone be entitled to Tax Free Childcare?

Three groups will be excluded from the scheme:

  • Tax Credit and Universal Credit claimants, who will continue to receive help with childcare costs as part of their Tax Credit claim. Universal Credit will cover 85% of childcare costs, compared with 70% for Tax Credit
  • Families which include a parent who is not earning (at least) an amount equal to eight hours a week at the National Minimum Wage (about £50 a week, at present).
  • Families which include a parent with an annual income of £150,000 or more.

Once Tax Free Childcare is launched, parents already receiving childcare vouchers from their employer will be able to choose either to continue doing so, or to claim Tax Free Childcare. But the voucher scheme will close to new entrants.

However employers will be able, if they wish, to continue to operate a workplace nursery and their subsidy to the nursery will continue to be disregarded for both income tax and National Insurance purposes.

Class 2 NIC on property income

Individuals who trade on a self employed basis, either as a sole trader or partner, are liable to pay Class 2 national insurance contributions, unless they apply for exception if they have low profit levels.  However, it has generally been the belief amongst tax professionals that property income does not give rise to any such liability as although one may operate a property business, it is not a trade.

Apparently some HMRC officers have been writing to individuals with property income stating that they have a liability to pay Class 2 national insurance contributions.  If any client receives such a letter will you please let us have it immediately, as although we are appointed as the taxpayers agent, HMRC are not sending copies of these letters to us as it relates to national insurance. We agree with the general view of the tax profession that there is no such liability to pay national insurance contributions on property income and any attempt by HMRC to impose this charge incorrectly should be resisted.

Pension planning update

On Budget Day, the Chancellor announced that, from April 2015, pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. No one will have to buy an annuity.

So far, so good, but in some cases pension savers will need to take care to protect their new-found right not to buy an annuity. For example, some pension plans provide that, if the plan holder does not give alternative instructions by a fixed date (usually the default retirement date specified in the pension plan documentation), his or her savings will automatically be used to buy an annuity. Cases have been reported of companies ignoring telephone conversations with plan holders and then, citing the lack of written instructions, using their money to buy unwanted annuities. There is a 30-day cooling off period, but after that it can be difficult or impossible to unscramble the situation, so we would recommend all pension savers to check what their plans actually say.

Another point is that although pensioners will by statute be given complete freedom to draw down as much or as little of their pension pot as they want, anytime they want, individual pension plan providers will not be required to provide this facility (on the grounds that they may find it expensive and burdensome to set up the necessary systems to do so). So if your existing pension plan provider is unwilling to offer flexible drawdown, you will have to transfer your funds to one that will. No doubt a charge will be levied. And it appears that the transfer will have to be made before you reach the normal retirement age set by your existing scheme.

Final details of the new regime will not be available for another few months, but once they are, most people should probably be reviewing their pension planning arrangements.

Increasing your National Insurance Retirement Pension

It is possible to defer your State Pension, and in return receive a higher pension later. At present, the rule is that for every five weeks you defer your pension, it will increase by one per cent. After one year, the pension will have increased by ten per cent, and after five years, by just over 50 per cent. The State Pension is index-linked, so if you defer now, in 2019 you will receive 152% of whatever the pension is for that year (including any entitlement you have under the State Second Pension, SERPS or Graduated Pension schemes), and so on in future years.

Especially considering the promise of index-linking, there is an argument for deferring if you can afford to do so, even if this means dipping into capital to pay living expenses in the meantime.

Last month some newspapers reported that the rate of increase is to be halved, with effect from April 2016. However, this was itself only half true. In fact, the rate of accrual is to be reduced from one per cent every five weeks, to one per cent every nine weeks, but only for those who reach State Pension age on or after 6 April 2016 – this means men born on or after 6 April 1951 and women born on or after 6 April 1953. Anyone born before those dates will continue to qualify for the one per cent every five weeks rate of accrual, even after April 2016.

Your home and capital gains tax

The Government seems to have a policy of whittling away at the traditional capital gains tax exemption for a homeowners own principal private residence. In April this year, the rule that the last three years of ownership qualified for exemption, even if the homeowner no longer lived in the property, was amended to halve the qualifying period to eighteen months. And from April next year, the homeowners right to elect which, of two (or more) properties he owns, shall be treated as his principal private residence is to be abolished. Instead, there will be a factual test – which property really was his main home? – but quite how this will work is not yet clear.

A homeowner should therefore bear in mind that circumstances may arise in which there will be a chargeable gain on what he now considers to be his main, or indeed only, home. That gain may be minimised by ensuring that records are kept of all allowable expenditure. For example, the base cost for capital gains tax purposes includes not only the price paid for the house, etc, but also the stamp duty, legal costs and survey fee. If the house was bought in a dilapidated condition, the cost of putting it right will also qualify, as improvement expenditure. Building an extension or a conservatory would also be an improvement; refreshing a tired kitchen or bathroom can be a grey area, but it doesnt cost anything to keep the invoices in case they come in useful later.

Expenditure which enhances the owners legal interest in his home also qualifies – the most common example is where a leaseholder pays a capital sum to extend his lease.

Finally, additional relief from capital gains tax may be due if the house, etc, was at any time let to a tenant, so a record should be kept of the dates of any letting(s). This relief may seem paradoxical, but was originally introduced to encourage homeowners to rent out their properties, rather than let them stand empty.

Two tax deadlines

Two of the more obscure tax deadlines are coming up. First, Tuesday, 30 September 2014 is the last day for submitting a claim for repayment of VAT paid in another European Union country during 2013. Examples might include VAT paid on hotel bills while on a sales trip, or on the cost of attending a trade fair or professional conference.

Second, Friday, 31 October 2014 is the last day for an individual to ask HMRC to send him a Tax Return to complete for 2010/11. This may seem an odd thing to want to do, but it is the only way an individual can formally challenge his or her PAYE deductions for that year. So if anyone in your family or social circle has an outstanding dispute about his or her tax position for 2010/11, you may wish to mention it to them.

We shall of course be pleased to help with either type of claim.

Fuel Rates – from 1 September 2014

Where an employer provides a company car, but the employee pays for the fuel, the employer may pay a mileage allowance for business journeys.  HMRC accepts that payments not exceeding the advisory fuel rates are reimbursements of expenses, not subject to income tax or Class 1 National Insurance contributions.

The advisory fuel rates (AFRs) are now reviewed quarterly and the AFRs for journeys taking place on or after 1 September 2014 can be found on the website below.

These rates may be used to reclaim input VAT in respect of fuel used for business journeys (remembering that VAT receipts to cover the amount claimed are required).These rates are scheduled to change quarterly and the current rates can be found at http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm.

National minimum wage – to rise 3%

With effect from 1 October 2014 the national minimum wage will be as follows:

Adult rate (age 21 and over)                       £6.50           £6.31 (current)     3.0% (increase)

Development rate (18 to 20 year olds)       £5.13            £5.03                      2.0%

16 and 17 year olds                                     £3.79           £3.72                      1.9%

Apprentices *                                               £2.73           £2.68                     1.9%

Accommodation offset (per day)                 £5.08           £4.91                       3.5%

*Aged 18 or under, or 19 and over but in the first year of their apprenticeship otherwise the development or adult rate applies according to age.

Holiday pay saga

Traditionally where employees have taken annual leave employers would have paid them the equivalent pay based on their basic salary for the period of leave.  However, there are cases being heard by the employment tribunal that may ultimately lead to the rate of pay for annual leave having to have to take in to account regular additional payments, such as overtime.  At present there appears to be no firm conclusion as to how payments for annual leave should be calculated, but it is likely that at some point soon the Court decision will result in the position being clarified with, potentially, the employees entitlement being increased.  It might, therefore, be sensible when considering annual pay reviews to update any policies in respect of additional payments such as overtime, commissions, bonuses, etc.

Business clients who have taken out our Taxsafe policy have access to a free employment law helpline and further information and advice may be obtained from this.  For business clients who have not taken out the Taxsafe policy but wish to do so, please contact us.