We won’t know if you don’t tell us!
The first and most important message we have for all clients is that it is vitally important for you send us a copy of any letter or form you receive from HMRC unless it is something you routinely deal with yourself, or it clearly states that a copy has been sent to us. This is because, as part of their economy drive, HMRC are no longer sending copies of important documents to accountants and other tax advisers. It also follows, of course, that if you telephone us as soon as you receive a letter or form, we won’t have seen it and it may be difficult for us to be very helpful. It really would be better for you to send us a photocopy of whatever HMRC has sent you, and we will then contact you as soon as possible.
Tax and other changes
This year, there was no Pre-Budget Statement, the new Government appears to have abandoned Mr Brown’s policy of two Budgets a year but there was an announcement about tax relief for pension contributions, which we explain below. Proposals for simplifying small business taxation and for the future of the IR35 legislation have been promised for the Spring 2011 Budget. However it is unlikely that any major changes will come into force before April 2012
One proposal that has been finalised is to increase the State Pension Age. At present, men become entitled to a National Insurance Retirement Pension at age 65. For women, the qualifying age was traditionally 60, but since April this year has been rising by one month for every two months (odd days always rounded up) that their birth date fell after 5 April 1950. Mathematically, this means that State Pension age for women would rise to 65 by April 2020.
However, the Government has now decided that, by April 2020, the State Pension age for both men and women should rise to 66. This will be done, for women, by accelerating the rate at which Pension Age increases from April 2016, so that it reaches 65 by November 2018 and 66 by April 2020. For men, the one-year increase will be phased-in between December 2018 and April 2020. These changes will affect women born on or after 6 April 1953 and men born on or after 6 December 1953.
Nor is that the end of the bad news, as the Government is now developing plans to raise the State Pension age, for both men and women, to 68.
Before the General Election, the former Labour Government had made plans to withdraw higher rate tax relief from pension contributions made by people earning more than £150,000 a year. The new Government has abandoned those plans and decided instead to cap tax-allowable pension contributions at £50,000 a year.
At first sight, one might think that £50,000 is a lot of money and so very few people indeed are likely to be affected by the new cap. However, the cap will apply to the total of contributions paid by the individual himself and by the employer on his behalf, so that an employer’s contribution in excess of the cap will create a benefit-in-kind charge on the employee. This will, for example, affect a private companys ability to make large contributions towards the end of a shareholder-directors working life, and so make it more important to think about pension provision long before retirement.
There is also a trap for members of final salary pension schemes. Here, the £50,000 cap will be applied to a notional contribution equal to 16 times the amount by which the prospective pension has increased. For example, Albert is entitled to a pension, equal to one-sixtieth of his final salary for every year he has worked. After working for the company for 30 years, he is promoted and his annual salary rises from £40,000 to £50,000. His notional pension contribution for that year will be:
|Prospective pension at end of year||31/60 x £50,000||£25,833|
|– at beginning of year||30/60 x £40,000||£20,000|
|Increase in prospective pension||£5,833|
|Notional pension contribution||16 x £5,833||£93,3238|
|Tax payable on||£43,328|
|Tax at 40%||£17,331|
In practice, Albert may be helped by the fact that if his notional pension contribution in any of the three immediately preceding years was less than £50,000, the balance may be carried forward. Also, the Government is developing proposals to allow all but the first slice of the tax, a figure of between £2,000 and £6,000 has been mooted to be paid by way of a deduction from the pension fund, rather than as a cash payment.
Finally, one abstruse technical point may be very important in practice. It has been widely reported that the £50,000 cap takes effect for the tax year 2011/12, so that individuals have until 5 April 2011 to make additional pension contributions. In fact, the cap applies for the pension schemes accounting year which ends in 2011/12 and that year will, in many cases, already have begun.
More generally, the rules governing the tax treatment of pension contributions are complex in the extreme, and so we would advise taking expert professional advice before making significant decisions.
For parents and grandparents
In October, the Chancellor of the Exchequer announced that, from January 2013, Child Benefit will no longer be paid to families with a higher-rate taxpayer. At present, higher rate tax becomes payable when income exceeds £43,875, but this figure will be lower by 2013. That is because the Government intends to increase the income tax personal allowance each year, but to claw back the tax saving from higher earners by reducing the point at which higher rate tax becomes payable.
The higher-rate taxpayer test means that a couple who are both working could each earn (say) £35,000 and keep their Child Benefit, while a couple where one earns £45,000 and the other is a full-time parent would lose it.
There has been no mention of any kind of marginal relief for those whose income marginally exceeds the higher rate threshold at present, it seems that if £1 of income is chargeable at the higher rate, all entitlement to Child Benefit will be lost, which for a large family could amount to thousands of pounds a year.
The good news is that the Chancellor confirmed that there will be no other changes to Child Benefit, there had been speculation that it would be withdrawn from 17- and 18-year-olds.
National insurance credits for family carers
On a brighter note, the Government has also proposed that, from 6 April 2011, grandparents and other relatives who look after children under 12 years old while their parents are working should be entitled to
National Insurance credits, to protect their entitlement to a State Retirement Pension and other benefits. Final details of exactly who will qualify are still awaited.
Savings plans for children and grandchildren
One of the Coalition Governments first announcements was that it will not be issuing Child Trust Fund vouchers for children born on or after 1 January 2011.
Even though the voucher for a child born between August and December 2010 is only £50, it is well worth opening the Child Trust Fund account because it acts as a Childrens ISA and interest credited to the account is tax free until the child’s eighteenth birthday. And parents, grandparents and anyone else may add money to the account to a total of £1,200 a year. If the parents saved for the child in an ordinary bank or building society account, the interest would be taxable as their income.
The Government has also said that it will be introducing a new Junior ISA for babies born on or after 1 January 2011. No Government contribution will be made to a Junior ISA, but savings will be tax-free, as in a regular ISA. All money invested in such an account will become the childs own property but will not be available for withdrawal until his or her eighteenth birthday. However, the Junior ISA will not be launched until Autumn 2011 and there is as yet no indication of the maximum permissible investment.
One possibility for people wishing to make gifts to a child before then is the Childrens Bonus Bond offered by National Savings. This offers an annual interest rate of 2.5% (providing the bond is held for five years), completely tax free, even if the gift is from the child’s own parents. The minimum investment is £25 and the maximum (per child) £3,000.
As a longer term savings strategy, it is also possible to commence a personal pension policy for a child or grandchild and this is often used in conjunction with inheritance tax planning. If you would like further details regarding this, please contact us.
Fuel only rates from 1 December 2010
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 every six months and the AFRs for journeys taking place on or after 1 December 2010 are as follows (old rates in italics):
Engine sizeRate per mile
|* Including petrol hybrid cars|
|Up to 1400cc||13p||12p||12p||11p||9p||8p|
|1401cc to 2000cc||15p||15p||12p||11p||10p||10p|
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 on the HMRC website.
Class 2 National Insurance Contributions
Self-employed people need to be aware of two forthcoming changes to the arrangements for administering and collecting Class 2 National Insurance contributions (the weekly contribution, currently £2.40).
Paying Class 2 contributions
Until now HMRC has issued quarterly bills for Class 2 contributions (in January, April, July and October), or alternatively payment could be made by monthly direct debit. However, from April 2011, the arrangements will be:
- For people not paying by direct debit, bills will be issued half-yearly rather than quarterly. The final quarterly bill, issued in April 2011, will cover contributions for the last three months of the 2010/11 tax year. The first half-yearly bill, issued in October 2011, will cover the first 26 weeks of 2011/12 and be payable by 31 January 2012. The second, issued in April 2012, will cover the final 26 weeks of 2011/12 and be payable by 31 July 2012 and so on in future years. This timetable has been designed firstly, to align Class 2 payment dates with those for self-assessed income tax and secondly, to maintain the existing practice of always billing Class 2 contributions in arrears.
- Existing arrangements for people paying by monthly direct debit will not be disturbed, except that, after the final payment for 2010/11 is taken on 15 April 2011, there will be a three month payment holiday until the first payment for 2011/12 is taken in August 2011. Thereafter contributions will be taken monthly (with the last direct debit for 2011/12 not being taken until July 2012). This timetable ensures that the last payment for (say) 2011/12 is made in July 2012, whether the individual chooses to pay by half-yearly bill or monthly direct debit.
- There will also be a new option to pay contributions half-yearly (on 31 January and 31 July, as above), but by direct debit.
Part-time earnings and hobby businesses
The second change affects those with very small earnings from self-employment (typically from a parttime business or paying hobby). For many years there was a concession under which Class 2 contributions were not charged if the taxable profit did not exceed £1,300 a year. However, for 2010/11 and future years, Class 2 contributions are chargeable unless the individual formally applies for Small Earnings Exception, which is available where earnings are less than £5,075 a year. Applications (which may currently have retrospective effect to the beginning of 2010/11, and possibly for longer) are made on HMRC Form CF10 Self-employed people with small earnings.
PAYE electronic payment dates
To avoid paying late you must make sure HMRC have cleared funds by the due date. If you pay electronically this is the 22nd. However when the 22nd falls on a non-banking day (weekend or bank holidays) HMRC must have cleared funds by the last bank working day before the 22nd.
VAT change in rate
Hopefully those of you running businesses that are VAT registered will have successfully coped with the change of VAT rate from 17.5% to 20% on 4 January 2011. In many cases it will be clear which rate will apply, however some are not entirely straightforward. Included in these are services that span the change of rate where the business may charge the new rate when the invoice is issued, or alternatively split the invoice in two parts and charge the old rate for services provided up to 3 January 2011 and the new rate on the value of services on or after 4 January 2011. The invoice has to be split on a fair basis. Credit notes also need to be carefully considered as if they are issued on or after 4 January 2011 for goods supplied before that date at the old rate, the credit note must also be issued using the old 17.5% rate. There is more detailed guidance on this and other issues on the HMRC website.
The period during which, as a concession, smaller businesses have been able to continue to file VAT returns in paper form will shortly expire and if you have not already done so, you should now be registering for online filing of VAT returns. Although there is still a while before this becomes mandatory, as the registration process can take a little while, and we envisage that if there is a last minute rush from many small businesses this delay might increase, it would make sense to ensure that everything is in place well before the first VAT return has to be filed electronically. We would also strongly recommend that as well as filing online, a direct debit authority is given so that HMRC will collect the VAT due based upon the VAT return that has been filed and this collection is around 10 or 11 days after the normal payment date.
HMRC record checks
HMRC have announced that they intend to begin a programme of checking, each year, the financial records kept by 50,000 small and medium enterprises. They anticipate raising a significant amount of extra tax from this activity and it is likely that this will come from two areas; additional tax due to errors found within the records and, secondly, penalties for failure to keep proper accounting records. The penalties have recently been introduced at a maximum level of £3,000 and although it is too early to see what level HMRC will be seeking, it is likely that they may be asked by a Government under pressure to cut the deficit to look for a higher level of penalty to raise extra cash.
Loans to directors of limited company
Although it is a breach of the Companies Act for limited companies, other than lending institutions, to advance loans to directors, this situation does occasionally occur. There are two tax aspects to such a loan, the first is that if it exceeds £5,000 there is a potential benefit in kind tax charge on a notional interest figure, and secondly, if the loan is still owing to the company at its financial year-end and then not subsequently repaid within the following nine months, the company has to pay extra corporation tax on the amount of the loan outstanding. This is at a rate of 25% of the loan.
There are also company law and accounting considerations. The loan has to be disclosed within the company accounts and under the latest Companies Act the amount of disclosure has increased so that rather than just showing the opening balance, closing balance and maximum balance within the year, there now needs to be shown individual advances that are significant. For example, if during a company’s accounting year a director borrowed £15,000 on four occasions and then repaid these, each of these individual transactions would need to be disclosed.
It should also be noted that if a loan of £10,000 or more is advanced there has to be a board of directors resolution to authorise the advance.
The other aspect that must be considered is if the paperwork does not support the fact that a loan has been made, then HMRC may well seek to argue that money advanced is not a loan, but is in reality an advance of salary which would then need to be grossed up for tax, employees and employers national insurance. This would represent a significant additional cost to the company.
If you have any concerns regarding directors loans, please do not hesitate to contact us.