“June, she’ll change her tune. In restless walks she’ll prowl the night”. For sure Simon and Garfunkel weren’t singing about the uncertainty following the 8 June General Election. The first couple of articles in this Square Circular specifically mention tax uncertainty.
The following articles focus on companies, not individuals, but keep reading because towards the end (no, not the “and finally” bit) there’s a fascinating piece about tax software.
If you want more details about any of the matters we’ve mentioned in this issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.
You probably, already, know that quite a few draft clauses were dropped from the Finance Bill 2017. These were measures considered “controversial” and the purpose of dropping them was to allow these measures to be subject to the necessary scrutiny before being passed into law. It includes things like MTD (come on, you know, by now, what that stands for) loss relief carry forward, an end to permanent non-dom status and the reduction in dividend allowance.
Presumably we’ll see these measures re-introduced in a new Finance Bill but whether there are going to be any changes remains to be seen. Changes were always a possibility, even given a Conservative majority government, but given the circumstances at this time of writing there’s all kind of speculation that some of the original proposals will be dropped. We won’t have to wait long until the “Summer Finance Bill 2017”.
Wasn’t she the one that sang Que Sera Sera? The future’s not ours to see. You’re probably in full voice by now, or, if not, at least admit that you’re humming along.
It’s June already and by this time of year we can usually give you a good indication whether that new business of yours should be conducted in individual names or through a corporate vehicle. And, if the latter, how best do you get your profits out of the company and into your pocket. Salary or dividend? The uncertain political situation makes the tax situation uncertain. Ah well, que sera sera.
Individual or company? The bare figures (ignoring whatever changes there may be later this year) suggest that the benefit of a company increases but peaks at about £50,000 profit but below £30,000 it’s questionable whether the annual compliance costs of a company make it worthwhile anyway. But that’s not the full story. Apart from non-tax considerations there are quite a few “tax breaks” given to companies but not to individuals. On the other hand if you’re a sole trader or partner and your financial model indicates initial losses there are all kinds of clever things you can do with the loss as an individual that you can’t do as a company. Often people starting up in business assume they have to form a company as a first step. But that’s not the first step. The first step is to discuss the matter in full with one of our partners or tax advisers.
Salary or dividend? Years ago the answer was definitely “dividend”. More recently the answer has been “just about, dividend”. That’s probably still the answer although it’s going to depend on what’s in the next 2017 Finance Act (how many Finance Acts d’you reckon we’re going to have in 2017?). Que sera sera. But as with the company or sole trader question, there are also non-tax considerations to take into account. Our advice in both cases is the same. Speak to us first.
DORIS DAY – MOVE OVER DARLING
If you can remember as long ago as 1963 (if you were even born then) Doris Day starred in the film Move Over Darling. Senior citizens are probably singing again.
Recently, probably the most frequently asked question put to us is whether a personally owned property portfolio should be moved over to limited company ownership. Queries centre on CGT relief or SDLT relief or both. We’ve mentioned something about this issue in every Square Circular since time immemorial – well, Spring 2016, anyway.
The guidelines are simple. If your level of income makes you a higher rate taxpayer, or close to it, and you pay mortgage interest, talk to us about putting your property venture in a company. We may tell you, no, don’t move over your properties because it’s not worth the hassle in the short term or long term. But, if we tell you yes, move them over, we’ll also tell you about the options open to you to reduce your tax liabilities so as to make it worthwhile. It’s worth talking to Simon, or John, or Chris, or Rob, or Paul (what a line up!) to get that yes or no.
R & D
Most people have heard of R & D. Just in case you haven’t, it stands for Research and Development. The trouble is that despite having heard of it we’re not always aware that we’re doing it.
In a nutshell, if your business – sorry, company, it must be a company – spends money on R & D the deduction you claim for that expenditure is enhanced. That super deduction reduces your company’s profit in a super manner. What’s more, if you already have losses, instead of just having to carry forward those extra losses generated by R & D you can claim a tax credit and actually get money back.
Here’s the problem. How d’you know whether what you do counts as qualifying R & D expenditure? The official definition of what counts is stuff “that attempts to resolve technological or scientific uncertainty”. Maybe the official definition is not that smart because it conjures up an image of laboratory work but it can apply in almost any sector. If you’ve done something particularly challenging, or something which distinguishes you from others operating in that sector or if you employ very skilled technical staff, give R & D a thought.
We know we’ve mentioned this before but we feel it’s worth a reminder. If you think you may be doing R & D but you’re not sure, it must be worth a chat with one of the gurus in our tax department.
Here’s something else we’ve mentioned before but, again, it’s worth a reminder. That is if you’re a company and you own residential property worth over £500k. ATED is the Annual Tax on Enveloped Dwellings.
ATED was introduced a few years ago. If a non-natural person, such as a company, owns a residential property it should pay an annual levy. Originally, the starting point for joining the ATED club was much higher than £500k, but guess what? As time has gone by the starting point has gone south while the amount of the annual levy has gone north. So, pity the poor controlling shareholder/director of the company who just happens to live in luxurious accommodation owned by his company. Not only does he have a benefit in kind if he lives there rent free, but his company also has an ATED charge.
Now for some good news. Who said tax was all sad? Suppose you’re a property rental company and you own properties having a value of over £500k which you rent out on a commercial basis. No ATED. Brilliant! There’s a relief for commercially rented residential accommodation.
Now for the bad news. We know you’re waiting for it and you won’t be disappointed. You still should do an annual ATED Return. You can’t just assume that if you have no ATED liability you need do nothing. If you don’t do a return to say you have ATED value properties but are claiming relief because they’re commercially rented out you have to pay a penalty for not filing.
There are lots of rules about when you have to make a return and how and when to value properties. We won’t go into that just now because we acknowledge that ATED is something of a minority interest. But, if you’re that minority interest, don’t get caught out.
BACK TO THE 20TH CENTURY
That’s the good old days when tax returns were prepared and submitted on paper. Well those days may be coming back for some people.
The problem is that HMRC software isn’t getting it quite right when it comes to calculating 2016/17 tax liabilities. When this was pointed out to them it was too late to change things. So why not send in a tax return using software that does get it right? Because if you do, it’ll be rejected because your correct return and calculation doesn’t tally with HMRC’s incorrect one. So, the suggested solution is to go back to good old paper returns.
It would appear that the problem centres on how the HMRC software deals with the dividend tax allowance and the personal savings allowance. There are three main groups of tax payers affected and whether or not you fall into one of those groups depends upon your sources of income and the level of those sources on income. Obviously, we can’t tell whether you’re in one of those groups until you’ve sent us details of your 2016/17 income.
Just one more point. What’s the filing deadline for submitting your 2016/17 tax return? January 2018; everyone knows that. Yes, but, that’s the deadline for online filing. The paper filing deadline is October 2017. So, what if you send us your tax return “stuff” in say November 2017 and we tell you that you need to file a paper return by – ooops – October 2017. Will you be the proud recipient of a £100 late filing fee penalty if a paper return is filed after 31 October.
Apparently not, if you use the defence of “reasonable excuse”. We just wonder if you’ll still have a reasonable excuse if you send us the info to complete your tax return late in the day and submission of the tax return is delayed beyond 31 January because we need to file a paper return for you.
Better to not go there.
We have to admit we’ve run out of news items from the church notice board. On the assumption that you didn’t read the Square Circular 15 years ago or have forgotten what was in it we’re starting all over again. Maybe it’ll raise a grin, if not a guffaw.
A purportedly genuine letter to a tax inspector read:
“Please send me a claim form as I have had a baby. I had one before but it got dirty and I burnt it”.