Tis the Season – to file your tax return

December 1, 2014

Last Christmas 1,566 returns were filed on Christmas day

Bonfire night has been and gone and Christmas is fast approaching. It will very soon be 2015 and the 31 January Tax return deadline will be upon us. For most accountants this is the busiest time of the year.

If you need to submit a return and are planning to do this yourself then the following tips may be helpful.

Returns need to be filed online, so make sure you have registered to file a return. Can you remember your password from last year? It can take 10 days to register so don’t leave this until the end of January.

Set aside plenty of time to prepare the return as it can be time consuming and you may need to get more information to complete the return.

Read the HMRC notes that are relevant to your return. Income tax rules change and what might have been an allowable expense last year might not be this year. This is especially the case for self employment and rental income.

The self employed are now able to declare their self employment income on the Cash Basis – income is declared in the year received and expenses deducted when paid. In the past many people preparing their own tax returns were probably incorrectly using this method anyway and so it is a case of the tax law now making this an acceptable practice. In previous years the tax law required accounts to be prepared under the accruals basis which recognises income and expenses when earned rather than received. The new cash basis is not available to everyone and only applies to businesses below the VAT threshold of £81,000. Alongside the introduction of the cash basis there are a number of new flat rate reliefs that are available such as an allowance for working from home and finance costs. If you are self employed and preparing your own return then look carefully at the HMRC notes in their Helpsheet 222. It’s a 16 page document so probably not a light bedtime read.

Rental Income rules have changed as well and now restrict tax relief on the cost of replacing furnishings, furniture and white goods. These changes may have minimal impact on properties let fully furnished as a 10% wear and tear allownce continues to be available. But owners of unfurnished or partly furnished properties will now be denied relief on the cost of replacing such items as carpets, curtains and non integral kitchen applances. The 2013 tax return notes contained the following “you can claim the costs of replacing furniture, furnishings and machinery supplied with your property. You can also include the costs of renewing small items such as cutlery“, but the 2014 notes state “Include the costs of renewing small items such as cutlery, …….The renewals allowance for the cost of replacing furniture, furnishings or machinery is no longer available for 2013–14 and the years that follow.”

Anyone unsure about preparing their own return should seek advice. Yes, there are costs involved, but do you want to risk getting it wrong which can lead to penalties.

Remember that there are also penalties for filing a late return. A few years ago these started at £100, with a further £100 after 6 months, but importantly the penalty could never exceed the liability, so if you were due a refund then the penalty would be nil. Under the current rules, in the same period the penalty would be £1,300, even if you owed no tax.


Pension Lifetime Allowance

September 16, 2013

The Government want us to save enough so we can each draw an adequate pension in retirement, but if you save too much you will be stung with a 55% tax charge when you draw your pension. The boundary between ‘enough’ and ‘too much’ savings is set in law by the lifetime allowance, which is a value of your total pension savings at retirement. This allowance will be reduced from £1.5 million to £1.25 million on 6 April 2014.

To give you an overview on these seemingly high numbers: an annual pension of £75,000 for a man aged 65 at retirement, today requires a pension fund of roughly £1.5 million. A pension fund of £1.25 million would deliver an annual pension of about £62,500 to the same person. If you contribute to a defined contribution pension scheme (the most common type), the value of your pension fund will be shown on your annual pension scheme statement.

If you are a member of a final salary pension scheme it will promise to pay you a pension equivalent to a percentage of your final salary. That could be as much as 2/3rds of your final salary. Work backwards from your current salary to get a rough idea of how much your pension fund may be worth. Your pension scheme trustees will be able to give you more accurate figures.

Once you have those figures, you can judge whether you need to elect to fix your lifetime allowance at its current level of £1.5 million, where your pension fund already exceeds £1.25 million. This is known as ‘fixed protection 2014’, and you need to apply to HMRC to do this before 6 April 2014.

Once fixed protection 2014 is obtained you won’t be able to make any further pension contributions to a registered pension scheme. If you are a member of an occupational pension scheme which receives automatic contributions on your behalf, you will have to opt out of that scheme or lose the fixed protection.

After 6 April 2014 there will be another way of protecting your pension fund, called ‘individual protection 2014’. This will fix your lifetime allowance at the value of your pension rights as at 6 April 2014, up to a maximum of £1.5 million. You should discuss with your financial adviser which type of pension protection is best for you.


Cash Basis for Small Businesses

August 14, 2013

In an attempt to simplify accounting and tax reporting for the smallest businesses, from 6 April 2013 small businesses can choose to calculate profits/losses on the basis of the cash received and expenses paid out. This is known as the cash basis, and it ignores debts owed by the business and amounts owing to the business, until those amounts are paid. The normal accounting method is known as the accruals basis.

The cash basis will only be available to businesses which operate as sole-traders or partnerships, and whose turnover is under the VAT registration threshold (£79,000 from 1 April 2013). Some other businesses will be barred from using the cash basis and these include:

– All companies and LLPs;
– Farmers using the herd basis;
– Any business using profit averaging over several tax years;
– Businesses in a mineral extraction trade; and
– Lloyd’s underwriters.

Once a business is using the cash basis it can carry on doing so until its annual turnover is twice the VAT registration threshold (£158,000 from April 2013).

Although apparently simple, the cash basis will have some disadvantages:

– The deduction for loan interest paid will be limited to £500 per year; and
– Losses can only be carried forward to set against future profits, whereas under the accruals basis losses can be carried back in the first four years of the trade and set off against the trader’s other income.

In addition any unincorporated business, whether or not they are using the cash basis, will be able to use flat rate expenses to replace the calculation of actual costs incurred in these categories of expenses from 6 April 2013:

– Motoring costs (mileage at 45p per mile);
– Use of home for business purposes (based on number of hours used per month); and
– Private use of part of commercial premises, such as a public house (based on number of occupants who are business owners or their immediate family)

As these flat rates are completely optional, and will vary in effect in each business, we need to discuss whether these flat rates will be suitable for your business.


My Tax Return Catch-up

August 8, 2013

The Taxman has launched a campaign to persuade tardy taxpayers to submit their over-due tax returns for 2011/12 or earlier years. If you have a personal tax return form (or notice to complete a tax return) sitting in a drawer, and have been putting off the tedious task of completing it, now is the time to act.

The Taxman’s campaign is called: My tax return catch-up. It was launched in July and will run to 15 October 2013. It is not open to those who operate outside the tax system in the so-called ‘black economy’, and have never received a tax return form or notice to submit a tax return.

All the outstanding tax returns must be submitted by 15 October 2013, which is also the due date for paying any tax due. If you can’t pay all your outstanding tax by that date, you can ask for a time to pay agreement to spread the tax payment over several months.

The incentives for joining the tax return catch-up campaign include lower penalties for late submission of returns and late payment of tax. Just how much lower those penalties will be is not specified, the actual discount will depend on your circumstances.

If you, or a friend or relative, want to take part in the tax return campaign, that taxpayer first has to tell HMRC they want to join. This can be done online, by phone or post and we can do this on your behalf. We can also help with completing the outstanding tax returns, calculating the tax due, and negotiating for time to pay outstanding tax with the tax office. Remember submitting an overdue tax return can sometimes result in a tax repayment!


RTI for Seasonal Workers

August 5, 2013

Have you taken on casual workers this summer? Perhaps you are paying piece-rates for the amount of produce picked or packed by each person. Reporting such small and variable payments under the new RTI system is a significant hassle.

The RTI rules require you to report each payment to workers on or before the date of the payment. Fortunately you may be able to use one of these two concessions to ease your RTI reporting burden:

a) Where you pay your causal workers daily or more than once a week, but the amounts paid are less than £109 per person per week, you can send RTI reports to HMRC weekly; or

b) Where the total number of your employees, including casual workers, is less than 50, you can send your RTI reports to HMRC on a monthly basis.

Concession b) will only apply for payments made before 6 April 2014.

Your casual workers are likely to have no set working hours for each week. In effect they will be on a zero-hours contract; paid for the hours they work, but otherwise not at all. In such cases you should choose option D of hours worked on the FPS report under RTI.

The Government wants employers to report data on the hours worked by employees in order to prevent fraud in the Tax Credits system. Under Universal Credit the hours worked will not be relevant to the employee’s claim, so in time when all claimants are moved from Tax Credits to Universal Credit, the requirement to report hours worked should be dropped.


Loans to Participators Trap

August 1, 2013

The 2013 Budget announcements included a brief outline of how the law will be changed to tax loans taken out of owner-managed companies by the shareholders/directors (known as participators). We have now seen the draft legislation so we can give you further details of how the tax law will apply for loans or repayments made on and after 20 March 2013.

Where a participator borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.

However, where the loan is outstanding for longer, the company must pay 25% of the loan balance as corporation tax to HMRC. This corporation tax charge is then repaid when the loan is fully repaid.

Four changes may affect when or if this corporation tax is payable:

1. Thirty day rule
Where a loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the corporation tax charge.

2. Intention or arrangements in place
Where the loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.

3. Using a third party
Loans channelled from the company through LLPs or partnerships in which the participator is a member are treated as if the loan was made directly to the participator. This also applies if the loan is advanced to a trust of which a participator in the company is a beneficiary, or potential beneficiary.

4. Conferring a benefit
This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a participator is used to transfer value from the company to the participator. It is unclear how this will work in practice, but any partnerships involving a company and one of more individuals will have to be reviewed.


Annual Payroll and RTI

April 16, 2013

Under real time information (RTI) PAYE reporting, a Full Payment Submission (FPS) report is required to be made to HMRC every time an employee is paid, not just once after the end of the tax year as is currently the case. RTI will be compulsory for most employers from the first pay date following 6 April 2013.

Many one-person companies may wish to pay the director just once a year and avoid monthly RTI reporting. If you want to do this, you must first check that your payroll software will cope with an annual payroll, as many main-stream payroll software packages do not.

The second stage is to understand what reports HMRC will require under RTI. An annual payroll must be registered with HMRC. The current advice on the HMRC website says: “If all payments on which tax and NICs are due are paid to your employees annually in a single tax month, you can ask HMRC to be treated as an ‘annual payer’. You must use the same month every year, so if this changes or you start paying your employees more frequently, you will need to tell HMRC.”

There should be more guidance on the HMRC website about annual payrolls soon. If you do not register the payroll as being annual you will need to submit an Employer Payment Summary (EPS) to HMRC every month, which shows nil payments made to the employee.

Where an employee is paid irregularly, i.e. less often than once a month, it is essential that the irregular payment marker is made in the payroll software against that employee, as otherwise the HMRC computer system may delete that person from the payroll.

If you want to pay yourself a regular amount every month, and minimise the RTI reporting hassle, your payroll software may allow you to prepare all the FPS returns for the entire year in advance. However, you must check whether your particular payroll software will do this. You won’t be able to prepare monthly FPS returns for the entire year in arrears, those FPS reports must be done in advance or at the time of payment.

If you need any advice about RTI please contact us.


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