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Budget 2014

With many forecasters predicting a quiet budget, you would think there’s not much to report. Think again. There is a vast amount of change incorporated. This blog sets out the main changes, and some of the points for action that SMEs may want to consider….

  1. General taxation

1.1 Tax thresholds

The tax free threshold rises to £10,000, with a further increase to £10,500 in April 2015. The NIC threshold for both employee and employer contributions increases to £153 per week (£663 per month or £7,956 per annum)

Action: If you have adopted the traditional low salary/ dividend reward structure you’ll need to adjust the amounts to keep to the most efficient split.

1.2 Savings rate

From 2015, the Chancellor has abolished the 10% rate for the first £2,880 of savings income, has made it tax free. He has also extended the band to £5,000.

From April 2015, company owners may be able to take up to £15,500 a year tax free, by careful planning of their reward between interest on a DLA, salary and/or rent. This would save over £3,000 a year at current corporation tax rates.

1.3 Transferable allowances

Also in April 2015, it will be possible to transfer up to £1,050 of allowance from a non-taxpaying spouse or civil partner. The maximum amount is set at 10% of the basic personal allowance, so should rise each year.

Action: It becomes easier to maximise tax free income, but a fully transferable allowance would have addressed the current unfairness for families where one partner stays at home and doesn’t earn an income. Now would be a good time to review the current structure of a business to see if it facilitates the tax minimisation offered.

  1. Employment taxes

2.1 Employment allowance

The new employment allowance is worth up to £2,000 per year. It is limited to the amount of employer NICs payable by an employer, and has several conditions attached but will be a valuable boost to cashflow.

Action: Employers must claim the allowance on their first EPS under RTI. It will then be deducted automatically by HMRC from the amount due.

Failure to do this could lead to a delay or even total loss in getting the relief. As someone who has spent a large part of the last year correcting errors made by HMRC under the new RTI system, I face this change with more than a little dread

2.2 Low interest/ interest free loans

The limit is being doubled to £10,000 from April. Essentially to help South East commuters with the cost of their season tickets, there’s no reason why the rest of us cannot look to motivate staff by offering this as part of their deal.

Funding a new car for them may be one idea, but remember, they have to pay it back from taxed income, and you should ensure you can get the loan back should they leave your employment.

And if they have personal debts, on which they are paying interest, you could save them money in their household budget, in lieu of a pay rise.

Action: Review remuneration packages for all staff to see if this could be a tax free way of boosting their personal finances.

2.3 New child care scheme

This has received a lot of press, although it doesn’t start until April 2015. Employees are going to be able to claim tax relief on up to £10,000 of child care costs, but only if both spouses are working. If one stays at home, then you won’t qualify.

Action: Employers should review the new scheme and advise employees of the forthcoming changes. Employees should work out if they are going to better off, and if not, perhaps look to enter a scheme now before the changes are implemented.

2.4 NIC for under 21s

April 2015 will see the abolition of NICs on wages paid to under 21s, provided they don’t earn above the Upper Earnings Limit (£805 for 2014/15). While this may be welcome, it may make over 21s too expensive by comparison. For example, a 21 year old on minimum wage will cost over £273 per week from April 2015. A younger person would cost only £205 for the same working week.

Mind you, there is a 33% increase in cost on that person’s 21 birthday, so it may not be “Many Happy Returns” from employers.

Action: Employers will need to cost very carefully to ensure that the extra maturity/experience of older staff outweigh the considerable increase in costs.

2.5 Employee share schemes

The value of “free shares” that can be acquired under the Share Incentive Plan (“SIP”) is to double to £3,600. There is a similar increase in the value of partnership shares that can be bought under the scheme.

Action: review the available share schemes as part of a wider reward package review ahead of auto-enrolment. With the right product, you can actually secure savings for both employer and employee. Contact us for details.

2.6 Benefits in kind

Car and van fuel benefits are to increase in line with inflation for the next few years. Car benefit scale rates are increasing substantially, and could be as much as 37% of the car’s list price by 2016/17. Tax could be over £3,000 per year for each vehicle.

Action: review all company vehicles and work out whether you and/or your employee might be better off with a privately owned vehicle, particularly if the employer can lend up to £10,000 towards the purchase price. (See para 2.2 above).

  1. Pension taxation

Perhaps the biggest surprise in this year’s budget were the changes to pension funds. The cut in limits had been announced in advance, but the extra flexibility on taking the pension was a welcome surprise.

3.1 Contribution and fund limits

The annual amount of tax relieved contributions is cut from £50,000 to £40,000 from April 2014. The lifetime limit is also cut, by 1/6th, from £1.5M to £1.25M. The cut in annual limit might affect those who have a final salary scheme and who receive a big pay rise or a promotion to a higher paid post. A pay rise of as little as £2,500 could result in a tax charge that takes away some of the pleasure of getting it in the first place.

If you have a final salary pension scheme, ask your employer to find out if you’ll have to pay the tax on the deemed annual increase in fund value, when offered any significant pay rise.

3.2 Taking your pension

The Chancellor made so many proposals today (19 March 2014), that he needs a separate Act of parliament to legislate it all. On the whole, it is very good news. You will no longer have to take an annuity on or before the age of 75. Neither will you face the penal tax charge of 55% if you choose to take more than the tax free lump sum. You’ll be taxed at your marginal rate, which will be much lower for most people.

3.3 Small pension posts

If your pension savings total less than £30,000, you will be able to take the whole amount tax free. The current limit is about £18,000. If your total funds are worth more than £30,000, you’ll still be able to take up to three in total if individually, they are worth less than £10,000 each. The previous limit was £2,000.

3.4 Income drawdown

The limits have been improved here as well, with a reduction in the income needed to qualify (to £12,000 from £20,000) and an increase in the amount you can take (from 125% of the equivalent annuity to 150%).

Action: Although the changes take effect from 27 March 2014, legislation is required. In any event, it is even more important to take independent advice, as the breadth of options has increased significantly.

We can recommend a good financial adviser from our panel.

4 Business taxation

4.1 Capital allowances

Up to £500,000 of qualifying capital investment can be written off against profits in the year in which it is incurred. The increase (from £250,000) takes effect from April 2014. Previously, we were expecting the limit to drop back down to £25,000, but this is not enough to make major investments.

Action: Review your investment plans, and if tax relief is a vital factor in affordability, consider making the investment before April 2015, when the relief may be cut. 

4.2 R&D tax credits

Most businesses invest in R&D, most without realising it. The amount of expenditure that can be offset against profits (current or future) is 200% of the actual amount that qualifies. This can be surrendered for a cash payment. In the 2014 budget, the percentage cash refund is increased from 11% to 14.5%, for expenditure incurred on or after 1 April 2014.

Action: Review your business to see what, if any, expenditure qualifies, or ask us to conduct the review for you.

4.3 Corporate tax rates

The “main” rate of Corporation Tax drops from 23% to 21% from 1 April 2014. Having an inefficient group structure, or a series of associated companies has thus become less expensive. The marginal rate of tax will fall from 23.75% to 21.25%.

Action: There is now very little “damage” in terms of extra tax in setting up numerous companies all controlled by the same individual or group. A review of business strategy should be done to identify whether the “hiving off” of activities into separate companies may be of benefit.

4.4 Other changes

Improvements to various investment schemes (e.g. SEIS) have been made.

Action: Review these schemes as part of your overall investment/tax mitigation strategy. We hold joint meeting for clients with an IFA to cover the broadest possible spectrum of options, so call if this is of interest.

4.5 Partnership taxation

Although this is termed as anti-avoidance, the imposition of employment taxes on salaries partners in LLPs, and the cancellation of tax motivated profit share allocations in all partnerships, may hit innocent partnerships. Where profits have been allocated on a commercial basis, perhaps in line with a partnership agreement, HMRC should hold back from imposing a tax charge.

Action: review your partnership profit sharing arrangements and structure to ensure it is commercially defensible. Review the new legislation when it is published and make amendments if you feel vulnerable.

4.6 VAT registration limits

These are increased to £81,000 (from £79,000), with the deregistration limit increasing by £2,000 as well, to £79,000.

Action: Review your business transactions to see if you still need to be VAT-registered, or if you can gain an advantage by using one of the Vat schemes available (e.g. flat rate scheme, cash accounting or annual accounting).

  1. Future changes

There’s a lot of changes already planned in for 2015 and 2016, so watch our social media output for details!

Numbers (UK) Limited

19 March 2014

Work ON, not IN!

[Originally a guest post on www.owenjonesdesign.com]

 Introduction

It is a real problem when you are doing something you love isn’t it?

You set up your business because you are good at something, or you are passionate about it, or both, but you never seem to make progress. You are busy doing what you love, but somehow it’s not as rewarding as you’d thought it would be.

Very often, that is because you are working IN, and not ON your business.

What’s the difference?

If you are going to reap the rewards of your hard work, then you’ll need to balance these two aspects. Before you can do that, you need to understand what they are.

Working in the business

This is basically doing the stuff for clients/customers that the business was set up to do. For Owen, this is producing high quality design ideas, and implementing them as part of the branding strategy. It involves meeting with the clients, getting to understand both what the client does, and the ethos underpinning that work. Similarly, we follow the same process of understanding the client and their objectives, whether we are preparing a succession plan and managing the process, preparing an Inheritance Tax planning report or discussing a business issue with a client as part of our PMI program (“The Numbers”).

Working on the business is different

This aspect makes the business, or more accurately its owner, the client. It may seem odd, but businesses are merely means to achieve the ends of their owners. If not, the owners become employees of their business, and will often earn more, with less stress, by finding employment with someone else!

Working ON the business involves taking a step away from the day-to-day tasks, and asking yourself strategic questions, like:

What things are important to me?

What does my life need to look like in five years’ time if I can count them a success?

What kind of work/clients do I want for my business?

What things do I need to change to get to those goals?

So, if it’s so important, why doesn’t it get done?

There are several reasons why not, and each requires a different remedy. Here’s a few ideas to get started. (But contact Owen and give him your own ideas!)

1.   The tyranny of the urgent.

So, you have a client deadline fast approaching, and it’s not going too well. The client is demanding a proposal/finished product/sample/presentation…….. and you’re running out of time. This happens to us all, but if you find it happens more than three times a year, ask yourself these questions.

  •  Am I overpromising?

Most clients will be relaxed about an extended deadline if they know about it early enough. Estimate a completion date, and then add an extra week/fortnight to give yourself time to do a quality job.

  •  Is this client worth busting a gut for?

If they are always hassling you, slow in responding, and unreasonable in demanding late changes to your brief, then the answer may well be “no”.

  •  Is the fee worthwhile?

Remember, a large fee is not always a good thing. Think about the time commitment, (including the initial marketing time) and work out an effective hourly rate. You will earn more by taking on two smaller jobs with a higher effective rate.

2.  It can wait.

Of course, long term planning is exactly that, long term, but what will you say in five years’ time? Can it still wait? There’s an old Chinese proverb that states “The best time to plant a tree was twenty years ago; the second best time is now.”

The problem is, every year you delay it puts you back another year in achieving your goals.

3. It’s not what I set up my business to do.

This goes back to my introduction. We get excited about the work the business does, and most of us do not run strategic planning businesses. Therefore, it doesn’t give us that same “buzz” as a well-executed project.

How to make it happen

  1. Schedule your “blue sky” thinking time.

I have a fixed Friday morning appointment in my diary. This 3 hour slot is split between working ON my business, and doing a specific marketing task, such as recording a video for our YouTube channel, or writing a blog. (That doesn’t mean that I don’t do marketing at any other time of the week).

Studies have shown that scheduling a task makes it 20 times more likely to happen. It is much easier to say to a client that you have a commitment if it’s in your diary, than being caught unprepared when the phone rings.

2.  Appoint a business coach or financially literate outsider to work with you.

In this way, you have an accountability partner, and you will make more effort to avoid letting them down. You are far more likely to get out of bed and go for that morning run, if you are meeting a friend, than if you plan to go alone.

A good business coach will earn you far more than their cost, by helping you achieve your goals.

3.  Tell as many people as you can that you are going to do this.

While you are not as accountable under idea 2 above, it is very embarrassing to tell a lot of people that you haven’t done what you promised yourself you would do!

4.  If you cannot afford a business coach, find a fellow business owner, (not a competitor), with whom you can share ideas, problems and your thoughts.

Again, scheduling a regular meeting will benefit both of you. You’ll be surprised how clearly you see solutions to problems that are not your own. Conclusion

Working ON your business is crucial to achieving your goals, but it is not easy to create the sense of urgency or the time to do it. Finding people to help is almost as essential.

If you’d like further advice or ideas, or want Owen or I to help you achieve your goals, get in touch. We’d be delighted to help.

How do I pay a dividend?

Introduction

Director/shareholders of privately owned companies have long been able to reduce their tax and NIC bills by adopting a remuneration structure consisting of a low salary, topped up with dividend payments.

The attraction

A typical family company might make £50,000 a year in profits. At this level, the combined income tax and NIC bill would exceed £13,300. Running the business as a limited company would cut the tax on business profits to less than £8,500. The saving of over £4,800 could be used to enhance the living standards of the owner’s family, reduce the length of their working week, or provide funds for investment in the business.

So what has changed?

On 13 April 2013, HMRC announced that PA Holdings had abandoned its appeal in a complex tax avoidance case, involving the payment of dividends. It also announced that there was no change in policy towards OMBs and their dividend planning.

So that sounds OK but…..

They can still challenge dividends and treat them as remuneration if they are not voted properly.

The legal background

Dividends can only be voted from distributable reserves. These are measured using the accounting rules. It can be a particular problem in the first year of a business, if no accounts have been drawn up. How can you prove that profits have been earned before you have accounts?

Many of our clients employ us, or other bookkeepers, to keep them up to date. In this case, it is easy to prepare a simple, interim, statement, to show an up to date profit position. In fact, if the previous accounts show insufficient profits accumulated, it is ESSENTIAL to have management accounts drawn up, before a dividend is voted.

If the dividend is deemed illegal, the shareholders can be forced to repay it, and HMRC can treat the payment as a loan on which notional corporation tax (the S455 Liability) and income tax (on a beneficial loan) may be levied.

Interim vs final dividends

Most companies now pay interim dividends, which are proposed by the directors without reference to their shareholders. In private companies, there tend to be the same people, so it isn’t an issue, but it is not always the case. Interim dividends are taxed when they are paid. “Payment” in this case can mean being credited to the directors loan account, transferred to an account as requested by the director/shareholder or otherwise made available to spend (by paying down a personal credit card bill for example).

Final dividends can only be authorised by the shareholders in general meeting. They cannot approve more than is recommended by the directors (who have a duty to ensure that the company is managed prudently and in the interests of various stakeholders). As most private companies no longer hold AGMs, it is increasingly rare for final dividends to be voted. The main implication is that dividends are taxed on the date it is declared, unless a later date is specified on the resolution.

General practice

Most reward payments run on a monthly cycle, so you would expect dividends to reflect that. However, it is not always practical, or cost effective, for businesses to prepare the necessary financial reports, and hold a Board meeting to approve dividend payments on such a regular basis. In this case, dividends are usually paid, and later formalised after the company’s year end.

HMRC’s guidance

HMRC state (at EIM 42280) that, a payment cannot be earnings if there is an obligation to repay it. Furthermore, they state they “in the absence of specific evidence to the contrary, the amounts drawn do not actually belong to the director.” Problems can still arise where the later credit to the DLA is a mixed bag of dividend and/or salary/fees/bonus.

So what should we do?

Do check your Articles of Association to ensure interim (or any) dividends are allowable.

Do ensure that each dividend is properly supported with Board Minutes, vouchers and an appropriate resolution.

As far as possible, make sure you actually pay the dividend by bank transfer, rather than credit to the DLA, as this makes the payment date clear. If necessary, the cash can be reintroduced later.

Avoid dividend waivers, as thee are easily attacked under tax avoidance case law.

Remember, dividends can also be paid by the transfer of assets (“in specie” is the legal term), if cash is not readily available.

Conclusion

A low salary/ dividend top up reward package is still available for owner managers who are not subject to national minimum wage legislation. However, care is still needed to ensure dividends are properly paid and documented. Contact your adviser, or us, if you are unsure you comply. Don’t make yourself an easy target by getting the basics wrong.

 

A Government give-away (with conditions)

Introduction

One of the goods things to come out of recent budgets is the new holiday for Employer National Insurance Contributions (“NIC”). The Employment Allowance allows small and medium enterprises (“SME”) to deduct up to £2,000 from their employer NIC payments.

The details

The holiday is worth up to £2,000 per annum. This starts on April 6th 2014, and must be claimed by qualifying employers. HMRC are expecting employers to take the deduction as early as possible, so many will see the benefit on 19 May 2014 (when the first payment is NOT made.

You can only claim it once, even if you run more than one PAYE scheme. If you are part of a group, only one company can claim the allowance.

Who cannot claim?

The main exclusions are companies and organisations that provide “public sector” services. These include:

  • NHS services
  • General Practitioner services
  • the managing of housing stock owned by or for a local council
  • providing a meals on wheels service for a local council
  • refuse collection for a local council
  • prison services
  • collecting debt for a government department

but also includes those;

  • who employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
  • already claim the allowance through a connected company or charity
  • are a public authority, this includes; local, district, town and parish councils

How do we claim it?

The claim is made using your own payroll software, or by using HMRC’s own Basic PAYE Tools. You can check how much of the allowance you have claimed by logging on to HMRC’s online service and “Viewing PAYE Liabilities and Payments’.

Arrangements have been made for those employers who are exempt from online filing, and more detailed guidance is available on HMRC’s website.

Other issues

If you have more than one payroll, you can only claim against one of them. At the end of the tax year, if you have not claimed the whole £2,000, you can apply to HMRC to have the balance refunded on the second PAYE scheme.

If you do not apply for a refund, and have an unused balance (i.e. you have paid Employer NIC that you haven’t covered with the EA), you can set the balance off against future PAYE liabilities. Please note, you cannot generate an unused balance in any other way. Neither can employer NIC in excess of £2,000 per annum cannot be used to generate an unused balance.

You can claim EA up to four years after the tax year has closed, but HMRC will set off the refund arising against future or existing PAYE liabilities, unless you specifically ask for a refund.

So what will you do with the extra cash?

A maximum saving of £166.66 per month is not life-changing, but it can be put to good use.

You could give a pay rise to a lower paid worker. Passing on part of that could mean a significant increase (in percentage terms) for that employee. It can also help to head off any discontent. Pre-empting the rise in the National Minimum Wage (“NMW”) can present you as a caring employer, rather than one who has to be forced into giving pay rises.

However, you should consider taking the opportunity to remind them of the difficulties faced by small businesses, and their critical part in making you’re a success.

Alternatively, you could just bank the savings. Cash is king, and particularly when the banks are still not providing enough finance to the SME sector. £2,000 a year may not sound like much, but it can help as a source of free funding.

Perhaps a better alternative would be to use it to invest in updated equipment. If your credit rating is good enough, there are sources of cheap funding around. Replacing older computers, perhaps on a lease or HP contract, will increase productivity, and boost morale. It will also address the need to move on from Windows XP machines, following Microsoft’s withdrawal of support for that operating system.

Words of warning

It is unlikely, but you could lose eligibility part way through a tax year. If that happens, you have to make the appropriate change to your payroll software, and repay the Employment Allowance previously given!

If you use an outside payroll agency, you will need to advise them if you qualify, and of you cease to qualify. Some payroll agencies do not know enough about your business to determine whether you qualify.

If you change payroll software, you may need to file another EPS, to activate the Employment Allowance within the software, although HMRC will roll forward the entitlement each year.

Some employers run a separate payroll for paying senior staff, to maintain confidentiality. If you have more than one payroll, perhaps run by different providers, YOU will have to decide which one gets the EA, and advise all providers accordingly.

You can only deduct the EA from the Employer NIC, not the employee NIC and/or PAYE deducted. Make sure your payroll staff or provider know this, as there are now penalties for late payment of PAYE/NIC.

You will need to maintain records proving entitlement and the amounts claimed, for three years after the end of the tax year to which they relate. You cannot rely on HMRC to record the amounts claimed, and proof of entitlement.

What should we do next?

So there are a few thoughts for consideration. If we can help in your decision-making, please let us know.

Can I avoid a tax investigation?

Introduction

So the return is in, and we can breathe a sigh of relief, but is it all over?

We are often being asked this question “What chance is there that I get investigated by HMRC?” The truth is that you cannot entirely eliminate the risk of getting investigated, but you can minimise it.

Some clarification

First we need to tidy up the terminology! The word “investigation” is emotive. It suggests that the person selected is guilty of some misdemeanour, or even a crime!

HMRC use various words on their website, and in their literature to describe the same thing. You might have a “check”, an “enquiry” or a “review”. All of these simply mean HMRC want to check that you are paying the correct amount of tax, and at the correct time.

Time limits

Generally, HMRC have 12 months from the date the return is filed to open an investigation into your return. The deadline can be extended if you file your return late, amend a previous return, or they can prove that you have deliberately misled them.

So I could get a random check, but how do I minimise the risk?

Submit your returns on time

Some people may be tempted to submit returns late, particularly if they have liabilities that they cannot afford to pay. It is much better to submit the return on time, and ask for time to pay. While the response can vary, you are much less likely to get a positive response if you have a history of filing later returns. This applies not only to tax returns, but VAT, PAYE and corporation tax returns as well.

Use the “white space” or attach additional documents (where possible)

Many investigations are raised simply so HMRC can understand figures that fall outside the “norm” expected. Using the white space to explain significant variations from previous years, or from industry averages, can help HMRC to accept the figures without opening an enquiry. If they still open an enquiry, it can help to minimise any penalties if you can show “that we have already told you about….”

Don’t fall out with your staff, spouse or lover!

Many investigations start with a simple tip off to HMRC, usually from someone with a grudge against the taxpayer. The people closest to you often know more than you care to think, and know “where the skeletons are”. While HMRC don’t always take up these leads, they can tip the balance. The worst case we handled was where a landlord fell out with his girlfriend who happened to be his boss’s daughter! He lost his relationship, his job and got a tax investigation all in one week!

Use a good accountant

HMRC will never admit it, but they do know which accountants are professional, and which ones are, shall we say, less than competent.  Using a reputable firm should ensure that your return is correct (assuming you’ve told the accountant everything). Even if it’s not, you may not have to pay a penalty, as using a good accountant demonstrated that you took “reasonable care” over the return, which is one of the main grounds for appealing against a penalty.

Fee protection

Most accountants also offer insurance against their fees if your return is selected for a “check”. Like most policies, they are always conditions, but generally claims are met.

Some accountant’s policies also give them access to free advice lines, so they can clear any difficult or contentious points before your return is submitted.

The policies are not expensive, and can often be part of a membership (e.g. FSB) or as part of your general business insurance.

It helps avoid that irritating position where you have to accept HMRC’s opinion, even though it’s wrong, because “it’s cheaper to pay the tax.”

In summary

You cannot eliminate the risk, but using a good accountant, and paying a small insurance premium, can put you in the best position to defend yourself.

Don’t be frightened by the prospect of an HMRC investigation, be prepared!