News & Updates

Welcome to our latest monthly tax newswire. We hope you enjoy reading this newsletter and find it useful. Contact us if you wish to discuss any issues further.

EXTRACTING PROFIT FROM THE FAMILY COMPANY

The start of the new tax year means that shareholder/ directors may want to review the salary and dividend mix for 2019/20. The £3,000 employment allowance continues to be available to set against the employers national insurance contribution (NIC) liability which means that where the company has not used this allowance it may be set against the employers NIC on directors’ salaries.

Thus, where the only employees are husband and wife there would generally be no PAYE or employers NIC on a salary up to the £12,500 personal allowance.

There would however still be employees NIC at 12% on the excess over £8,632 (£166 per week) which would be £464 on a £12,500 salary, leaving £12,036 net.

Taxation of Dividend Payments in 2019/20

Traditional advice would then be to extract any additional profits from the company in the form of dividends. Where dividends fall within the basic rate band (now £37,500) the rate continues to be 7.5% after the £2,000 dividend allowance has been used. Thus, where husband and wife are 50:50 shareholders they would each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving £34,837 net of tax.

So, a combination of £12,500 salary and £37,500 in dividends would result in £46,873 (93.7%) net of income tax and NICs.

Ensure dividend payments are legal

The Companies Act requires that companies may only pay dividends out of distributable profits. This means that in the absence of brought forward reserves the company would need to provide for 19% corporation tax in order to pay the dividends and thus there would need to be profits of £92,593 in order to pay dividends of £75,000 (after providing corporation tax of £17,593).

Overall the combination of salary and dividends suggested above would result in net of tax take home cash of £93,746 for the couple out of profits before salaries and corporation tax of £117,593 (20.3% overall tax). This still compares very favorably with the amount of tax and NIC payable if the couple were trading as a partnership.

TAX PLANNING TO MINIMISE THE HIGH INCOME CHILD BENEFIT CHARGE

The substantial increase in the higher rate threshold to £50,000 is good news for many taxpayers. However, that same figure is the point at which child benefit starts being clawed back and there has been no increase in that threshold since the High Income Child Benefit Charge was introduced in 2013/14.

The charge applies if you have adjusted net income over £50,000 and either:

• you or your partner get Child Benefit
• someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep

It does not matter if the child living with you is not your own child. Adjusted net income is your total taxable income before any personal allowances and less things like Gift Aid and pension contributions.

The charge is 1% for every £100 that adjusted net income exceeds £50,000 multiplied by the child benefit claimed in respect of the children. Child benefit continues to be paid at the rate of £20.70 a week for the eldest child and £13.70 for each additional child.

Example

A couple with 2 children would receive £1,789 a year in child benefit. If the husband, a sole trader, made a profit of £55,000 (also his adjusted net income) after paying his wife a salary of £12,000 he would have to pay the high income child benefit charge of £894 (for 2018/19) in addition to his normal income tax and NIC bill.

If he brought his wife into partnership and they shared profits equally their income would be £32,500 each and there would be no high income child benefit charge. Similarly, if the business was a limited company they would be able to equalize their income so that the charge would not be payable.

“RENT A ROOM” RELIEF TO CONTINUE FOR AIR BNB LANDLORDS

Last year HMRC carried out a review of rent a room relief and it was proposed that the availability of this generous relief would be restricted to situations where the taxpayer was resident for at least part of the time when the “lodger” was paying rent. The scheme currently exempts from tax gross rents up to £7,500 where rooms within the taxpayers’ main residence are rented out.

HMRC were concerned that the relief was being “abused” by letting out the entire property using websites such as Airbnb and living elsewhere temporarily whilst the tenants were in the property. An example would be renting out a house in south London during Wimbledon fortnight and potentially receiving up to £7,500 tax free.

Note that the Autumn Budget announced that the proposed restriction was not now being introduced.

BUT POSSIBLE CHANGES TO CGT PRIVATE RESIDENCE RELIEF

The government is currently consulting on important changes to private residence relief that are likely to be introduced from 6 April 2020.

The two possible changes, announced in the Autumn 2018 Budget are:

Firstly to limit to just 9 months the period prior to disposal that counts as a period of deemed occupation

The second is to limit “letting relief” to periods where the taxpayer is in shared occupation with the tenant.

Final period exemption to be reduced

The final period exemption was for many years three years and was always intended cover situations where the taxpayer was “bridging” and waiting to sell their previous residence. However, 36 months was felt to be too generous and was allegedly being abused by a strategy known as “second home flipping”. As a result the final period relief was restricted to the current 18 month period of deemed occupation a couple of years ago. The latest proposal is to restrict still further to 9 months although it will remain at 36 months for those with a disability, and those in or moving into care.

Possible Lettings Relief Changes

Lettings relief currently provides a further exemption for capital gains of up to £40,000 per property owner. The additional relief was introduced in 1980 to ensure people could let out spare rooms within their property on a casual basis without losing the benefit of PRR, for example where there are a number of lodgers sharing the property with the owner.

In practice lettings relief extends much further than the original policy intention and also benefits those who let out a whole dwelling that has at some stage been their main residence. It is those situations that the government appear to be attacking under the proposed changes.

Note that those who are renting their property temporarily whilst working elsewhere in the UK or working abroad are unlikely to be affected by this change as there are alternative reliefs available under those circumstances.

Please check with us if you are likely to be affected by the proposed changes as it may be worth considering disposing of the property before the new rules are introduced from 6 April 2020.

DIARY OF MAIN TAX EVENTS

MAY/JUNE 2019

Date	What’s Due
01/05	Corporation tax payment for year to 31/07/18 (unless quarterly instalments apply)
19/05	PAYE & NIC deductions, and CIS return and tax, for month to 5/05/19 (due 22/05 if you pay electronically)
01/06	Corporation tax payment for year to 31/08/18 (unless quarterly instalments apply)
19/06	PAYE & NIC deductions, and CIS return and tax, for month to 5/06/19 (due 22/06 if you pay electronically)

 

The First-tier tribunal has allowed an appeal against a late filing penalty for a non-resident capital gains tax return. The tribunal found that a taxpayer does not have an obligation to keep up with the law. The taxpayers’ ignorance of the law was a reasonable excuse as HMRC had led them to believe that they could declare the disposals in their self-assessment tax returns.

The case involved a married couple, Mr and Mrs Kirsopp, who had been resident outside the UK since 2003, but who had retained residential property in the UK. After hearing of proposals to introduce a charge to capital gains tax on the sale of UK residential property by non-residents, they phoned HMRC to see if the charge would apply to them on the sale of their former main residence in the UK. They were told that it would and that they should report it on their self-assessment tax return. They sold their former main residence in July 2015 and two other UK properties in March and August 2016. They only became aware of the need to file a non-resident capital gains tax return (NRCGT return) and the need to make a return within 30 days in August 2016 when providing tax return details to their accountant. A NRCGT return in respect of all three properties was filed in September 2016. HMRC charged a late filing penalty.

The taxpayer appealed contending that their ignorance of the law was a reasonable excuse. Income from the properties was included on their self-assessment returns submitted to HMRC’s centre for non-residents, and it was reasonable to assume disposals should also be reported on the return.

HMRC contented that ignorance of the law was not a reasonable excuse and that the taxpayers had an obligation to stay up to date with the law.

The tribunal found in favour of the taxpayers.

This case illustrates that taxpayers who are ignorant of the law may have a reasonable excuse where they have relief on HMRC guidance, particularly where the failure is remedied promptly when it came to light.

Written by the Tax Advice Network

Under the company car tax rules, a supplement applies to increase the appropriate percentage for diesel cars which fail to meet certain standards. The diesel supplement was increased from 3% to 4% from 6 April 2018 and now applies to cars that are not certified to Real Driving Emissions 2 (RDE2) standard. The supplement applies to cars that were registered on or after 1 January 1998 which have a registered Nitrogen Oxide (NOx) emissions value is excess of that permitted by the RDE2 standard. It also applies to diesel models (not diesel hybrids) registered on or after 1 January 1998 which do not have a registered NOx value. The appropriate percentage is capped at 37% and the application of the supplement cannot take the appropriate percentage above this level.

It is all very well knowing about the diesel supplement, but how does one ascertain in practice whether a particular car has emissions meeting the RDE2 standard?

Diesel cars that meet Euro standard 6b satisfy the RDE2 standard and qualify for exemption from diesel supplement. For all cars manufactured after September 2018, the Vehicle Enquiry Service provides details of the Euro status of the car – simply go to the website and enter the car registration number. Cars with Euro status of 6AJ, 6AK, 6AM, 6AN, 6AP, 6AQ or 6AR meet Euro standard 6d and are exempt from the diesel supplement. Where the car was registered on or after 1 September 2018, this information is also shown on the vehicle registration document V5C.

For 2019/20 onwards, when reporting a car change on P46(Car) or the FPS, or payrolling a diesel car meeting Euro Standard 6b, fuel type F should be used (rather than fuel type A as previously).

Written by the Tax Advice Network

Business rates are charged on non-domestic properties such as shops, offices, factories and warehouses. They are based on the rateable value of the property, set at in the form of pence per pound of rateable value.

The current system of business of rates in England came into effect from 1 April 2017, based on valuations as at 1 April 2015. The rateable value is the annual rent that the property would fetch in the open market.

There are two multipliers in England – the standard multiplier and the small business multiplier. The standard multiplier applies where the rateable value is £51,000 or more and the small business multiplier applies where the rateable value is less than £51,000. For 2019/20 the standard multiplier is 50.4p outside London and 51p in the City of London and the small business multiplier is 49.1p outside London and 49.7p in the City of London.

There are various reliefs available which may reduce or even eliminate the business rates bill, including small business rate relief. This is available where the rateable value is £15,000 or less where the business only has one property. Full relief of 100% is available where the rateable value is £12,000 or less, with taper relief applying where the rateable value is between £12,000 and £15,000, such that the relief gradually reduces from 100% for a property with a rateable value of £12,000 to nil for a rateable value of £15,000.

If the business has more than one non-domestic property, small business rate relief is available as long as none of the other properties has a rateable value in excess of £2,899 and the total rateable value of all properties is not more than £20,000 (or £28,000 in London).

However, there is a sting in the tail in that the relief is not given automatically and must be claimed. This is something that is often overlooked and clients may unwittingly be paying significantly higher business rates than they should be. It is advisable to check clients’ business rates business, and where small business rate relief has been missed make a claim (to the relevant Council). Claims can be made retrospectively, from 1 April 2017 under the current rules, which may trigger a welcome refund. Once a claim has been made, the relief should be given automatically going forward – there is no need to make a separate claim each year.

Written by the Tax Advice Network

This relief is needed when a taxpayer cashes in a premium life insurance policy or bond. The lump sum (chargeable event gain) is taxed as the highest slice of income, and as a result the taxpayer may pay more tax in one year than would have been the case if they had received regular amounts of income over the life of the bond.

Top slicing relief attempts to put the taxpayer in the position he would have been in, had the lump sum been paid in equal amounts in each year of the bond’s life. It doesn’t exactly achieve that, but it’s a good approximation.

In our newsletter on 28 September 2017 we warned that HMRC’s software was not calculating top slicing relief correctly in every case. This suspicion has now been supported by the case of Marina Silver, when the tax tribunal found that HMRC’s calculation of her top slicing relief was not in line with the legislation.

In 2015/16 Mrs Silver cashed in a bond with a 21-year term which created a chargeable event gain of £110,721. When this amount was added to her other income for the year, her total net income exceeded £121,200, so she lost the use of her personal allowance for 2015/16.

Silver’s top-slicing relief computation took 1/21 of the chargeable gain (£5272), added this to her other income for 2015/16 to work out the tax payable on that slice, making use of her personal allowance in the process. HMRC said she shouldn’t use her personal allowance in that top-slicing calculation. The judge agreed with Mrs Silver, and the difference in the methodology resulted in an extra £20,000 of tax.

We will review all clients where a top slicing relief calculation has been performed for years 2011/12 onwards, when the personal allowance was restricted for total income over £100,000. Overpayment relief claims can be made for the years 2015/16 onwards, and claims for earlier years can be made using ESC B41.

Written by the Tax Advice Network

If our corporate clients own residential properties which are each worth over £500,000, we will check whether the company has completed an ATED return, or made an ATED relief declaration for 2019/20. This is due by 30 April 2019. If full relief is not claimed for the year an ATED charge may also be payable by 30 April 2019.

There are three things to check before completing the ATED return:

1. Property valuation – for the years 2018/19 to 2023/24 the ATED charge is based on the open market value of the property at 1 April 2017, or as at the purchase date if that is later.
2. Banding – the ATED charge is levied according to the valuation band the property falls into. We can ask HMRC to complete a pre-return banding check for a property if we believe its value lies within 10% of an ATED band threshold, but it will take HMRC some time to respond to this request.
3. Correct year – the tax is payable by 30 April within the chargeable year, so make sure the right amount is paid for the right year. The 2019/20 charge ranges from £3,650 to £232,350.

ATED returns are generally submitted online through the government gateway. We can submit ATED returns online for our clients, but we must first register as an agent with the online ATED service. Once registered we can add our clients to our ATED account, but each client must then appoint us as their agent when they receive a unique authorisation number.

Written by the Tax Advice Network