Micro-company profit extraction

F(No.2) A 2017 received Royal Assent on 16 November 2017. Section 8 of that Act reduces the dividend allowance from £5,000 to £2,000 from 6 April 2018. This will affect the amount of tax payable by your shareholder/ director clients for 2018/19.

Where the company’s shares are held by a number of family members, to take advantage of the dividend allowance, this share structure may need to be reviewed, and amended if necessary before 6 April 2018.

Dividend income that exceeds the dividend allowance will still be taxed at lower rates than apply to salary, and there’s no class 1 NIC to pay. Thus, extracting funds in the form of dividends is likely to be more tax efficient than as a salary, where the company has sufficient distributable profits. A salary will provide the company with tax relief at 19% and be taxed in the individual’s hands at 20% or more.

Traditionally an owner/ director has paid himself just enough salary to accrue a NI credit for the year, but is this necessary for clients in their mid-fifties? Such individuals need to accrue 35 years of NI credits to receive the full flat rate state pension on reaching state pension age (SPA).

If our client logs into their personal tax account at gov.uk/personal-tax-account they will be able to see how many years of NI credits they need to accrue to reach this 35-year target. Tax agents still don’t have access to our clients’ personal tax accounts, so we will have to look over our client’s shoulder.

Some people will discover they have accrued 35 years of NI credits, but they still don’t qualify for the maximum state pension (£159.55 per week), as they had contracted out of the state pension for some years. Those individuals can carry on accruing NI credit to increase their state pension entitlement.

Those who have achieved the maximum pension entitlement could stop paying themselves a salary, and if there are no other employees, close down their PAYE scheme. We will advise on the downsides of taking no salary, such as; reduced income profile for borrowing, and losing access to jobseekers’ allowance, maternity or sick pay. But for people who work for themselves those state benefits are largely irrelevant.

 

Written by the Tax Advice Network

 

Evidence required for VAT

Any accountant who advises VAT registered businesses will have a well-thumbed copy of VAT Notice 700 within reach at all times and there have recently beem extensive updates. One area which has been clarified is the evidence required to support a claim for input tax if a valid VAT invoice is not available (para 16.8). Of-course the trader should always ask his supplier for a VAT invoice, but if the supplier has gone bust, or can’t be contacted, evidence from the following list can be used:

• bank statement clearly showing payment of the supply to the supplier;
• purchase order;
• evidence of how the trader identified the supplier and the negotiations with them;
• contracts between trader and supplier;
• delivery note evidencing the transportation and delivery;
• documents supporting storage or insurance of the goods;
• supplier statement that shows a supply took place between the trader and supplier.

The trader needs to prove to HMRC that all of the following conditions were met:

• the supply took place in the UK;
• it was taxable at the standard rate or a reduced rate of VAT;
• the supplier was registered for VAT in the UK, or was required to be registered;
• the supply was made to the person claiming the input tax (the trader);
• the trader who received the supply was a taxable person when the VAT was incurred; and
• the trader has used, or intends to use, the goods or services for business purposes.

In rare circumstances, for example where a trader has lost some or all of his accounting records, HMRC will permit the trader to use estimated figures on his VAT return. Permission to use estimated amounts must be applied for in writing from the VAT written enquiries team, and the request must set out how the estimated figures will be corrected.

Where approval for using estimated figures is given, and the VAT is paid on time in respect of those estimates, the trader will not be in default. Any correction to the estimated amounts should be made on the VAT return for the next period, or the following period where HMRC agree the earlier correction is not possible.

Written by the Tax Advice Network

 

Corporation tax changes

As we mentioned, F(No.2)A 2017 was passed on 16 November 2017, and it brought in changes to the corporation tax rules which take effect from 1 April 2017 in the areas of:

• offshore property developments;
• relief for losses;
• interest restrictions;
• substantial shareholdings exemption (SSE); and
• employer’s payments into EBTs.

Also the corporation tax rules regarding appropriation of assets (usually property) to trading stock were changed with effect from 8 March 2017.

If any of our clients have already filed a corporate tax return for a period that ended on or after 1 April 2017, or 8 March 2017 where it made appropriations to stock, that tax return may need to be amended.

The easiest way to make that amendment is to do so online, but bear in mind the corporation tax computation may need to be redrawn and re-tagged for iXBRL. HMRC will accept an amendment by letter to the HMRC office which deals with the company’s tax affairs.

Written by the Tax Advice Network