Yes Accounting

CAPITAL GAINS TAX – Private Letting Relief

admin — Tue, 09 Feb 2016 11:28:42 +0000

Properties that are used as your principal private residence and also let out to tenants may qualify for one further relief. Private letting relief, as its name suggests, is available for lettings to private individuals who use the property as their home. Lodgers are normally exempt (unless you are running a boarding house), so it usually applies to people who have stopped living in a property themselves and are letting it out to others.
To qualify for Letting Relief you must have occupied the property as your main residence yourself at some time. It doesn’t matter when or for how long – even a week may be enough. However, if you have a second home, you must elect for the property to be your principal private residence within 2 years of starting to occupy it in order for this relief to be available. If you miss this deadline, you are then at the mercy of HMRC who will decide which property is your principal private residence and when according to the facts presented. If you are in this situation, you would be well advised to either live in the property long enough for its status as your main residence to be beyond dispute or sell the other property first.
For the property to qualify as your main residence, you will need to do more than just move in for a short period. You will need to show that you intended to make it your main residence and not just a temporary stay before returning to your other property. This normally rules out holidays although you could make a holiday home your main residence if you can show that you are now using it for more than just another holiday. Some degree of permanence must be present. You can normally do this by changing your address on things like bank statements, driving licenses or pensions. You could also send your children to a local school for a while. Even a week could be enough if you are between homes.
How does Letting Relief work? It is always the smallest of the following 3 figures:
• the chargeable gain (attributable to lettings)
• the exempt gain (attributable to PPR relief)
• £40,000 per owner
Void periods should be excluded from this calculation. If a property is not let out for the whole time it is excluded from PPR relief, you must split the chargeable gain between the let period and the void period, based on the exact number of days.
The following example will illustrate this. Mike and Alison bought a house for £150,000 on 1st May 1999. The house is in Mike’s sole name. On 30th April 2008 they moved out and let the house to Paul, who lived there until 30th April 2014 when Mike sold the house for £650,000.
His unrelieved capital gain (ignoring buying and selling expenses) is £500,000. He is entitled to PPR relief for 10.5 years as it was his main residence for 9 years and the last 18 months are exempt. He owned the house for 15 years so only 30% is chargeable. This reduces the gain to £150,000.
Now we need to calculate letting relief. This will be the smallest of the following 3 figures:
a) The exempt gain = £350,000
b) The non-exempt gain = £150,000
c) The maximum relief = £40,000
Letting relief is £40,000 so the chargeable gain is £110,000. Mike deducts his 2013/14 annual CGT allowance of £11,000 and pays tax on £99,000. His CGT bill will be at a combined rate of 18% and 28%.
Let’s assume Mike earns £25,000 per annum and has no other income. His personal allowance for 2013/14 is £10,000 and the higher rate threshold is £31,865. That means £16,865 of his basic rate tax band is unused. That part of the gain is taxed at 18%. The balance of £82,135 is taxed at 28%. His total CGT bill is £26,033.
Assume now that Mike put half the house in Alison’s name shortly before they moved out. She is also entitled to the maximum relief of £40,000 so it doubles to £80,000. The smallest of the 3 figures is now £80,000 and the chargeable gain falls to £70,000 between them. Moreover, Mike and Alison can now use both their annual CGT allowances so the taxable gain is only £48,000.
If we assume Alison also earns £25,000 and has no other income, only £14,270 of their combined gains is taxed at 28%. This produces an overall CGT bill of £10,067 – a saving of £15,966 just for having the property in joint names. That is a reduction of over 61%.
However, this does not work if the house is only put into joint names after they move out. If it was not in joint names before, they would need to go and live there again (for maybe a year or so) for the PPR exemption to be backdated for Alison. Even then, she would not get Letting Relief if she was not joint-owner when the house was let out, so it is best for transfers between spouses and civil partners to take place a) whilst they are living there, and b) before tenants move in.
Of course, Mike could have avoided Capital Gains Tax completely, even with the house in his own name, if he had sold it within 3 years of letting it. The final period of ownership only went down to 18 months on 6th April 2014 so any disposals before then still enjoy the 3 years.
And if he had sold the house on 1st October 2012 (just 18 months earlier) there would only have been a taxable gain of £4,955 (assuming he could have sold the house for the same price) which would have produced a CGT bill of just £892 – even if the house was in his name only.
This illustrates how much Letting Relief can save you just by living in a house for a few years, but it also illustrates how fast a Capital Gains Tax liability can build up when you start letting a house or a flat that was previously your home. Once the 18 months are up, a tax bill may start to clock up very quickly, even if property prices are relatively stable.
The main problem is that the £40,000 maximum relief has been frozen since 1991. Once intended to act only as a ceiling, it now restricts Letting Relief in most cases. Unless the Government puts it up, it will eventually wither on the vine and become increasingly irrelevant. For the time being, however, Letting Relief remains a valuable tax-planning tool for so-called “accidental” landlords.
One last point – if you let residential property and you are hoping to make use of this relief, make sure none of your tenants run a business there too otherwise you will lose some of it.

The post CAPITAL GAINS TAX – Private Letting Relief appeared first on Yes Accounting.

Crackdown on personal service companies could raise £400m in tax

admin — Wed, 11 Nov 2015 10:36:22 +0000

The end of Freelance Limited Companies?

An extra £400m could be raised in tax under a plan by ministers to crack down on a loophole exploited by as many as 100,000 people. Ministers are understood to be examining whether to severely tighten the rules of personal service companies before George Osborne’s autumn statement on 25 November.

The special companies are often used to avoid income tax and employee national insurance contributions, costing the exchequer about £400m in lost revenues. Professionals in the media, IT and nursing set up a company to cut their tax to about 20% by offsetting a series of expenses against their earnings.

The Treasury has been examining ways of closing the loophole after publicity surrounding BBC presenters who reduced their tax bills by arranging to be paid through personal service companies. The BBC changed its practices in 2012 after the Commons public accounts committee warned that the corporation could be “complicit” in tax avoidance after it emerged that up to 1,500 presenters, including Fiona Bruce and Jeremy Paxman, were paid through personal service companies. The PAC warned that the BBC could have reduced its employer national insurance contributions (NICs).

The government is examining ways of tightening the rules to ensure that as many as 90% of beneficiaries from personal service companies follow the example of the BBC presenters who were forced to be paid in more conventional ways after a backlash. In 1999 Gordon Brown ordered a clampdown on what are known as “disguised employees” through a scheme known as IR35.

Amid fears that business will complain of fresh regulations, the government is proposing that a consultant using a personal service company would be obliged to move on to the payroll if they work for a business for more than a month. Businesses, rather than the individual, would be responsible for overseeing the rules. An agency would be responsible if they provide consultants to businesses.

The changes would mean that anyone who is not allowed to be paid through a personal service company would have to be paid by PAYE – pay as you earn. They would also pay employee NICs while the company would pay employer NICs.

A government source said: “This is about fairness in the tax system. It is just not fair to have people in the same company doing the same jobs paying different levels of tax.”

The government acknowledges that a small number of professionals will still legitimately use personal service companies. Some IT workers might work for a company for a short period or they might work for multiple companies at the same time. In that case they would not be seen as an employee. Builders doing one job on a private house would be exempt.

But there are understood to be examples of professionals such as lawyers working for one company for a short period of two months. Ministers believe that in these circumstances they should be counted as employees and should pay income tax.

Ministers have yet to make a final decision on whether to introduce the change. They will want to see how businesses respond to the proposal at next week’s annual conference of the CBI.

The post Crackdown on personal service companies could raise £400m in tax appeared first on Yes Accounting.

Deadlines for sending in your tax return

admin — Tue, 21 Jul 2015 14:48:40 +0000

31 January: online returns – Your online tax return must reach HMRC by midnight on 31 January

You only have longer than this if you received the letter, telling you to send a tax return, after 31 October.

In this case you’ll have three months from the date you received that letter.

There’s an earlier deadline of 30 December if you want HMRC to collect any tax due through your PAYE (Pay As You Earn) tax code. You can only ask for this if you owe less than £2,000.

Although HMRC will try to collect the tax due through your code, they can’t always do so.

Be aware that there are new stiffer penalties that HMRC can impose for late returns.

Our friendly consultants, will be happy to help with any questions that you have, free of charge.

The post Deadlines for sending in your tax return appeared first on Yes Accounting.

Limited Company Directors’ responsibilities

admin — Tue, 21 Jul 2015 14:46:40 +0000

As a director of a limited company, the law says you must:

* try to make the company a success, using your skills, experience and judgment
* follow the company’s rules, shown in its articles of association
* make decisions for the benefit of the company, not yourself
* tell other shareholders if you might personally benefit from a transaction the company makes
* keep company records and report changes to Companies House and HM Revenue and Customs (HMRC)
* make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
* register for Self Assessment and send a personal Self Assessment tax return every year – unless it’s a non-profit making company and you don’t get any pay or benefits, like a company car

You can employ an accountant to manage these things for you, but you are still legally responsible for your company’s records, accounts and performance.

The post Limited Company Directors’ responsibilities appeared first on Yes Accounting.

Flat Rate VAT scheme

admin — Tue, 21 Jul 2015 13:58:25 +0000

Businesses can register to join the FRS scheme where turnover is expected to be less than £150,000 (excl VAT per annum). You can register voluntarily where your turnover does not exceed the current £82,000 threshold and take advantage of the Flat Rate Scheme.

There are different FRS rates depending on the nature of trade.

The following is an example of how the Flat Rate VAT scheme would work for an IT Consultant. If turnover is £90,000 then VAT would be charged to customers at the standard rate of 20% – £18,000. In the first year of being registered for the FRS scheme, the business would pay 13.5% of sales plus VAT to HMRC – £108,000 x 13.5% = £14,580.

Therefore, the year 1 FRS profit is £3,420 (VAT Collected less VAT Payable – £14,580).

IT Consultant
FRS Rate	14.50%
FRS Rate Year 1	13.50%

Annual Sales Excl. VAT	£50,000	£70,000	£90,000	£110,000	£130,000
VAT Charged to clients @ 20%	£10,000	£14,000	£18,000	£22,000	£26,000
Sales plus VAT (Gross)	£60,000	£84,000	£108,000	£132,000	£156,000
Vat Payable (year 1) @ 13.50%	£8,100	£11,340	£14,580	£17,820	£21060
FRS PROFIT	£1,900	£2,660	£3,420	£4,180	£4,940

The Flat Rate Scheme Profit for year 2 and subsequent years would reduce to £2,340.

Xero, the online accounting system, manages FRS VAT accounting and FRS Cash Accounting.

Please note the business will not be able to reclaim VAT on expenses such as accounting fees. The FRS scheme rate already incorporates this.

Any capital Expenditure in excess of £2,000 would be eligible for VAT recovery, but there are important rules to comply with.

Tips

There is a VAT Cash Scheme where you only pay VAT you have collected from your clients.
You have to compare this to claiming back VAT on your purchases. If you have a lot of VATable purchases then it may not be worth registering for the flat rate scheme.
Flat rates do vary from 4% to 14.5% so this calculation should be used as a guide only and reworked for the rate specific to your industry and your circumstances.
You can find out the rate for your industry at the HMRC web site, Flat Rate Scheme guide or contact us for more information.
In your first year of operating the scheme you can reduce the flat rate percentage by a further 1%.
Once you join the scheme you can stay in it until your total business income is more than £230,000.
Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT including standard, reduced rate or zero rate sales or other supplies
‘Profit’ made on the flat rate scheme is subject to corporation tax

If you need any guidance specific to your business, then please feel free to get in touch.

The post Flat Rate VAT scheme appeared first on Yes Accounting.

VAT Registration – when to register

admin — Tue, 21 Jul 2015 13:38:29 +0000

Compulsory registration

You must register for VAT when you go over the threshold, or know that you will.

The VAT threshold is currently £82,000

For example, if after 3 months your business turnover is £24,000, as this equates to £84,000 per annum, you should register for VAT.

Late registration

You must register within 30 days of your business turnover exceeding the threshold. If you register late, you must pay what you owe from when you should have registered.

Voluntary registration

You can register voluntarily if your business turnover is below £82,000. You must pay HMRC any VAT you owe from the date they register you.

You may wish to voluntarily register, to take advantage of the VAT Flat Rate Scheme which offers you a percentage of the VAT you collect.

The post VAT Registration – when to register appeared first on Yes Accounting.

Summer Budget 2015 at a glance

admin — Tue, 21 Jul 2015 13:13:53 +0000

Well that was unexpected…

A lot of changes in the first Conservative budget since 1996 that set the tone of their government term. Big hitters are the introduction of the National Living Wage, the changes in dividends tax and the comprehensive welfare changes.

George Osborne was clear from the start, positioning this Conservative government to take Britain from “high welfare, high tax, low wage” to “low welfare, low tax, high wage society”, producing a “bold budget” with “big ambitions” that fits the economic forecast

General Economy

The economy grew 3% last year, the fastest in the G7. The forecast for 2015 is 2.4%, faster than many countries including US and France.

Two million more people are in work with a million more expected in next 5 years according to the Office of Budget Responsibility (OBR) but Osborne wants to create two million.

Increased tax receipts and the sale of government assets higher than 1987 all enable us to slow the pace of deficit reduction. A surplus is now expected in 2019/20 of 0.4% – the largest in 40 years.

HMRC will have extra funding to support their work tackling tax avoidance – tax fraud, offshore trusts, hidden companies and disguised employment.

Autumn Charter: government will be required to keep a surplus budget in ‘normal conditions’. Growth of less than 1% means the chancellor and the OBR will work together to create a budget that is responsible, tested by government, with the aim of achieving a surplus as soon as possible.

Spending/Cuts

£17 billion to be found: £12bn from welfare and £5bn from tax avoidance/evasion measures. Spending review in autumn for a further £20bn to be found from government spending.

NHS is a priority and the Stevens Plan will be funded, receiving £10bn in real terms by 2020 and the government has committed to the NATO pledge to spend 2% of GDP on defence.

Cars and Roads

Our road network is rated lower than Puerto Rico and Namibia! Though spending was increased in 2014/15 from 2017 all Vehicle Excise Duty (VED) will be put in to a Roads fund that will once again be used only on improving Britain’s roads.

Funding for this has been secured by changing the VED banding on new cars from 2017. Whilst rates for existing cars will stay the same, new cars will be taxed on emissions for the first year and will then go in to one of three set bands at set rates:

* Zero emissions: £0
* Standard: £140
* Premium: £450 (£310 surcharge)

Fuel duty will remain frozen this year.

Personal

Pay

The personal allowance will be increased to £11,000 in 2016/17 with a view to making it £12,500 by the end of the parliamentary term. Legislation will be put in place to ensure this rises in line with the minimum wage in future.

The higher rate tax threshold will increase to £43,000 in 2016/17, intending to increase this to £50,000 by the end of the term, helping 29million people pay less tax.

A new National Living Wage will be introduced from April 2016 of £7.20/hour for those who are 25 years old or over, to increase to £9/hr by 2020.

Dividend Tax

A surprising but very significant reform to dividend taxes is not a welcome one! From April 2016 the tax credit that currently accompanies all dividends is to be scrapped. It will be replaced with a new £5,000 dividend allowance and new dividend tax rates, these are:

* Basic rate tax on dividends 7.5%
* Higher rate tax on dividends 32.5%
* Additional rate tax on dividends 38.1%

Under the current regime basic rate tax payers have no additional income tax to pay on dividends but this will all change under the new rules.

This is a major change to the tax system and one that requires further investigation therefore we will be releasing a separate blog article dedicated to this issue shortly.

Residence

Permanent non-domicile tax status is being abolished from April 2017 if you live in the UK but consider your permanent home to be elsewhere, so all income will be taxable in the UK.

Finance

Regulations of claim management companies (i.e. PPI) will be reviewed and charges capped, whilst Insurance Premium Tax will be raised to 9.5% from 6% with increases applicable to most policies and administration fees.

Education

Three million more apprenticeships will be created, but the quality will be reviewed.

The SMA grant will be replaced with a loan from 2016/17, but the amount available will increase to £8,200/year. The loan will be repayable once earnings go above £21k and this threshold will be held frozen for five years.

Home

The Help-To-Buy ISA will be introduced as planned, allowing first time buyers to build a deposit with the government contributing £50 for every £200 deposited.

Rent a room relief will be increased from £4,250 to £7,500 per annum.

Higher-rate tax payers with rental properties who offset the interest on their buy-to-let mortgage against their rental will have the relief restricted to the basic tax threshold. This is a big change that will be introduced over four years.

Inheritance tax

A personal allowance of £175k will be introduced from 2017 to allow family homes to be left to your children, in addition to the current £325k inheritance tax threshold. Both allowances will be transferrable to your spouse, meaning you can leave family homes up to £1m to your children completely free on inheritance tax.

Pensions

Tax relief on pensions contributions for those earning over £150,000 will be gradually reduced at a rate of £1 for every £2 earned above £150,000, until the tax-free allowance reaches £10,000.

Welfare

Among the many welfare changes:

* Free childcare for 3-4 year olds from Sept 2017 up to 30 hours/week for working parents

* Support for those with health challenges to get back to work

* Disability support won’t be means tested or taxed

* There will be what Osborne’s termed a “youth obligation” – earn or learn. Between the ages of 18 and 21 housing benefit will be lost between as well, unless you’re vulnerable

* Working age benefits will be frozen for four years, to allow the salary increases to catch up with benefit increases since the crash.

* Total benefits will be capped to £23k in London and £20k elsewhere, reduced from a £26k cap

* Support for the Mortgage Interest Payments benefit will be turned in to a loan

* Many changes around tax credits for children, including restricting support to two children

Business

IR35

The government announced they are continuing to review the effectiveness of IR35 legislation and tackling non-compliance. Personal Service Companies (PSC’s) should make sure they review their situation and be comfortable in how they’re treating each individual contract.

Employment Allowance

The Employment Allowance is being scrapped next year for sole director Limited companies, meaning PSC’s will no longer be able to make use of this. Our advice for next year’s salary will be to reduce this down to the NI threshold following what was common practice two years ago before the Employment Allowance existed.

The Employment Allowance for the remaining qualifying companies will be increased from £2,000 to £3,000.

Corporation Tax

The 20% main rate of CT is being reduced to 19% in 2017 and then to 18% in 2020 – “Britain is open for business” says Osborne.

For those companies with profits over £20millon the due date for Corporation tax is being brought closer to the year end.

Apprenticeships

3 million new apprenticeships will be created by 2020, funded by a levy on large employers.

Annual Investment Allowance

This was due to fall to £25k on 01/01/2016 but will instead be set at £200,000.

Enterprise Zones

More enterprise zones will be created, building on the 24 in place already. These can be really beneficial for growing business and more information can be found here http://enterprisezones.communities.gov.uk/.

Summary

A lot of changes in this budget with the average full-time employee likely to gain, but incomes of those with PSCs and small business owners are drastically reduced. They’re unlikely to agree with George Osborne that it is a budget supporting aspirations, which keeps promises and continues to reduce the deficit providing stability for future generations.

Businesses as a whole have gained from lower CT (the lowest in the G20) and more reliefs available, though the impact of the living wage is yet to be seen. The Budget of Office Responsibility think it will mean 60,000 fewer jobs that are offset by the creation of a million jobs over five years; given the message the introduction of the living wage sends the government will happily accept this.

At the end of the day, the big news for company owners and investors is the change in dividends, they are very unlikely to be getting the pay rise promised in the closing moments of the budget announcement.

See our article on how this budget impacts small business owners: The Conservative government kick small business owners in the teeth

The post Summer Budget 2015 at a glance appeared first on Yes Accounting.

Summer 2015 Budget – The Conservative government kick small business owners in the teeth

admin — Tue, 21 Jul 2015 13:08:17 +0000

The negative impact of the budget on freelancers and contractors

We recently witnessed the first Conservative-only budget in 19 years and it was not great news for contractors, in fact it felt like a direct attack on the country’s temporary work force.

Below we cover the four areas the budget negatively impacts contractors and freelancers.

Dividend Tax Reform

From April 2016 the dividend tax credit is to be removed and instead replaced by a £5,000 dividend tax free allowance. On dividends over £5,000 the following new tax rates will apply:

* Basic rate tax on dividends 7.5%

* Higher rate tax on dividends 32.5%

* Additional rate tax on dividends 38.1%

The impact this could have on a contractor’s personal tax bill is potentially huge. Contractors who fall into the basic rate tax bracket would previously have had no personal tax to pay whereas now dividends of £42,385 would attract a personal tax bill of £2,009 at the current tax rates.

Those who fall into the higher rate tax bracket and already had a personal tax bill will see an increase in the effective rate of tax by around 6%.

As this is a major change we will publish another article shortly covering these changes in more details along with any recommendations we have to try to combat this as much as possible.

Employment Allowance

This has allowed contractors to increase their annual salary up to the personal allowance (£10,600 for 14-15) and still avoid paying any employer National Insurance.

From next year this will be scrapped where the director is the sole employee, which will be the majority of Personal Service Companies (PSC’s). This will cost directors around £203 per year.

What remains unclear for now is whether this applies to those companies who have their spouse on the payroll.

IR35

The chancellor made a brief but very important comment on IR35 in his speech

“We’re consulting today on how to deal with the increasing abuse of the rules around disguised employment when working through a personal service company.”

Looking through the full budget report the government issued this statement “The government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015. “

These statements show that HMRC do not think that the IR35 legislation is currently working and that this topic remains very much on their radar. Rather than offering the clarification many were hoping for this has cast further doubt over IR35.

This means that it is more important than ever to take a very thorough look at your employment status and ensure you do everything possible to protect yourself. For more help and advice on how to do this speak to one of our contractor accountants.

Expense Rules

A consultation document has now been released following the announcement made in the March 2015 budget to disallow travel & subsistence expenses for those working through umbrella companies or those working through PSC’s who are “supervised, directed and controlled”.

We will keep you updated on this as the consultation progresses.

What should I do?

Even with the above changes a Limited company still remains the most tax efficient legal way to manage your finances for the vast majority of contractors and freelancers, if you are in any doubt then feel free to get in touch to discuss your situation with our expert contractor accountants.

There is some good news though with the main positive being the reduction in Corporation Tax rates over the next 5 years to 18%, although this will only make a small improvement to the hefty tax rises above.

If you would like to discuss how the budget will affect you, please get in touch.

The post Summer 2015 Budget – The Conservative government kick small business owners in the teeth appeared first on Yes Accounting.