cpd webinar tax planning 2020 webinar february 2018 page 2 1. corporation and business income tax,...

Year-end tax planning

2020 Webinar February 2018

CPD WEBINAR

Tax Planning for 5 April 2018

19 February 2018

Presented by:

Rebecca Benneyworth MBE BSc FCA

No responsibility for loss occasioned to any person acting or refraining from action as a result

of material in this document can be accepted by the author or 2020 Innovation Training Limited.

2020 Innovation Training Limited 6110 Knights Court Solihull Parkway

Birmingham Business Park Birmingham B37 7WY

Tel: +44 (0) 121 314 2020 Fax: +44 (0) 121 314 4718 Email: [email protected]

Website: www.the2020group.com

mailto:[email protected]

http://www.the2020group.com/



1. Corporation and Business income Tax, dividend and salary planning............................. 3

1.1 Rates of National Minimum wage and living wage ............................................................. 3 1.2 Scottish Rate of Income Tax ............................................................................................... 4 1.3 Employment allowance ....................................................................................................... 5 1.4 EA restriction – director only companies ............................................................................ 5 1.5 Directors’ salary under Employment Allowance ................................................................. 6 1.6 Other remuneration issues – interest on director loan ........................................................ 8 1.1 Trivial benefits provided by an employer .......................................................................... 10 1.7 Incorporation advice.......................................................................................................... 10

2. Personal Income Tax and savings ...................................................................................... 12

2.1 Tax rates and thresholds 2016/17 .................................................................................... 12 2.2 National Insurance contributions 2018/19 ........................................................................ 12 2.3 Cars – the appropriate percentage ................................................................................... 13 2.4 Finance Act 2017 .............................................................................................................. 14 2.5 Taxation of benefits – assets made available for private use ........................................... 14 2.6 Benefits in kind – pensions advice .................................................................................... 15 2.7 Restriction of tax relief on interest in respect of let domestic property ............................. 15 2.8 Pensions – annual allowance ........................................................................................... 19 2.9 Restriction of annual allowance for high income individuals ............................................ 21 2.10 ISA and JISA limits ..................................................................................................... 22

3. Off-Payroll working in the public sector ............................................................................. 24

3.1 Overview ........................................................................................................................... 24 3.2 Legislation ......................................................................................................................... 24 3.3 In practice - the contractor company ................................................................................ 26 3.4 In practice - the worker ..................................................................................................... 27 3.5 Example ............................................................................................................................ 27 3.6 Further points .................................................................................................................... 29

4. Capital and property taxes ................................................................................................... 30

4.1 CGT annual exemption ..................................................................................................... 30 4.2 ATED - Valuation dates .................................................................................................... 30

5. Making Tax Digital ................................................................................................................. 31

5.1 July 2017 announcement .................................................................................................. 31 5.2 Income tax implementation ............................................................................................... 31 5.3 Legislation ......................................................................................................................... 31 5.4 VAT implementation .......................................................................................................... 31 5.5 What does MTD for VAT involve? .................................................................................... 32 5.6 What should we do? ......................................................................................................... 32



1. CORPORATION AND BUSINESS INCOME TAX, DIVIDEND AND SALARY PLANNING

1.1 Rates of National Minimum wage and living wage

The National Minimum Wage (NMW) rates per hour increase on 1 April 2018 so that NMW applicable to pay reference periods starting on or after 1 April 2018 are as follows:

the main adult rate (for workers aged 25 and over – also known as the National Living Wage) is £7.83

the rate for workers aged between 21 and 24 is £7.38

the rate for workers aged between 18 and 20 is £5.90

the rate for workers aged under 18 (but over school age) is £4.20

the rate for apprentices is £3.70*.

*This rate is for apprentices aged 16 to 18 and those aged 19 or over who are in their first year. All other apprentices are entitled to the National Minimum Wage for their age.

1.1.1 Penalties

The Government has increased the penalties imposed on employers that underpay their workers in breach of the National Minimum Wage (NMW legislation. For pay reference periods starting on or after 26 May 2015 the basis for the maximum NMW penalty has changed from £20,000 per notice to £20,000 per worker. Further legislation is proposed to prescribe a prison term under certain circumstances. 1.1.2 Minimum wage – common errors

Employer Bulletin December 2016 included a useful “Top 5 errors” article, explaining the most common NMW errors. Rates Are you paying the right rate? If not, you run the risk of underpaying workers. This can happen when employers fail to implement the annual rate increases, miss workers’ key birthdays as they move from one age band to another, or fail to apply the apprentice rates correctly. Deductions Are you making deductions from pay that take a worker’s pay below NMW/NLW rates? This can happen when you make deductions for items connected with the job such as uniforms, deductions for services provided by the employer such as meals or transport, or deductions for accommodation beyond the permitted accommodation off-set amount.



Additional pay Are you including top ups to pay that do not count as pay for NMW/NLW purposes? This can happen when you include payments such as shift allowances under certain circumstances or customer tips or bonuses when calculating a worker’s pay for NMW/NLW purposes. Status of the worker Are you engaging people who should be classed as workers? This can happen when employers mistakenly treat workers as volunteers, interns or self-employed. Please see – Who gets the minimum wage – to help you decide if an employee should be classed as a worker and therefore is entitled to the National Minimum Wage. Working time Are you including all the time a worker is working? If not you run the risk of unpaid working time, additional hours worked but not paid. These could be short but regular periods of time, for example time spent helping to shut up shop or clear security after a worker’s shift has ended, or could be longer periods of time spent training or ‘down time’ waiting. Other working time errors can occur with travelling time if it’s in connection with the worker’s job, such as between assignments, and sleeping time. 1.2 Scottish Rate of Income Tax

1.2.1 Identifying Scottish taxpayers

Scottish taxpayers have a prefix ‘S’ on their PAYE code. The determining factor is where the taxpayer lives (rather than works). There was a significant number of errors in April 2016 in the codes issued by HMRC to Scottish taxpayers, but it is understood that this has now been rectified. However, it is most important that employees keep their address details up to date. If they have enrolled for a personal tax account, they can change their details online through this. 1.2.2 Scottish rates and bands 2018/19

Scottish income tax rates Scottish Bands Scottish starter rate 19% Scottish Basic rate 20% Scottish intermediate rate 21%

Over £11,850* - £13,850 Over £13,850 - £24,000 Over £24,000 - £44,273

Scottish Higher rate 41% Over £44,273 - £150,000 Scottish Additional Rate 46% Over £150,000 and above** * Assumes you are in receipt of the Standard UK Personal Allowance which is not a devolved power ** Personal Allowance reduced by £1 for every £2 earned over £100,000



1.3 Employment allowance

The allowance provides relief for up to £3,000 from employer NIC. It is claimed by submitting an EPS showing the employment allowance of £3,000. This can be done at the start of the tax year, whether or not the full amount is used at that time or not. Existing claims are carried over from year to year, but you will need to confirm that your client remains eligible for the allowance. The EPS effectively sets the allowance off against NIC’s due by the employer. The allowance is not available to employers if they:

employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener. It is, however, available in respect of care support workers employed by their client.

already claim the allowance through a connected company or charity are a public authority, this includes; local, district, town and parish

councils carry out functions either wholly or mainly of a public nature (unless they

have charitable status), for example: o NHS services o General Practitioner services o the managing of housing stock owned by or for a local council o providing a meals on wheels service for a local council o refuse collection for a local council o prison services o collecting debt for a government department

A business does not carry out a function of a public nature, if it does the following:

providing security and cleaning services for a public building, such as government or local council offices

supplying IT services for a government department or local council HMRC has issued guidance on these issues, and the position is a little more complex when the business makes the majority of its supplies to public bodies. These businesses are not permitted to claim employment allowance.

Practical Tip : Ensure that clients are aware of the issues which may affect availability, including the issue of connected companies. Guidance is available on the HMRC web pages.

1.4 EA restriction – director only companies

The July 2015 Budget announced that from 2016 employers who are director only companies will be excluded from Employment allowance. The test is that for a tax year, a company employer has only a single paid employee and that person is a director. If a second employee is taken on at any time in the year, employment allowance will apply, as it will if there are two paid directors.



However, HMRC’s guidance indicates that the second employee must be paid sufficient to trigger a secondary liability to bring the employer within the scope of Employment Allowance. Although many commentators disagree with this, it is unlikely that any employers will take a case to Tribunal based on the amount of allowance available. Note that if the “second” employee is a director, they must exceed the relevant secondary threshold on an annual or pro rata (if appointed during the year) basis. 1.5 Directors’ salary under Employment Allowance

There are two issues which affect what level of salary produces the best overall outcome,

Whether the director is over state pension age or not – this would mean that no employee NIC contributions are payable, and

Whether or not the individual has other income or not 1.5.1 Salary at NI threshold, no other income, 100% distribution

£ Profit 50,000 Salary (8,424) Taxable profit 41,576 Corporation tax 7,899 Net profit 33,677 Dividend 33,677 Tax liability on dividends Total income £42,101 so no higher rate liability. £2,000 at 0%, £28,251 @ 7.5% £2,119 Total tax liability on £50,000 profit £10,018 (20.03%) 1.5.2 As above but salary £11,850

£ Profit 50,000 Salary (11,800) Taxable profit 38,150 Corporation tax 7,249 Net profit 30,901 Dividend 30,901 Total income £42,751 so no higher rate liability. £2,000 at 0%, £28,901 @ 7.5% £2,168 Employee NIC on salary £405 Total tax liability on £50,000 profit £9,822 (19.6%)



The saving of £196 is only available where the individual concerned has no other income. If the individual is above state pension age, no employee NIC is payable, providing a further saving of £400 per annum. 1.5.3 Salary at NI threshold, other income of £5,000, 100% distribution

£ Profit 40,000 Salary (8,424) Taxable profit 31,576 Corporation tax 5,999 Net profit 25,577 Dividend 25,577 Tax liability on dividends Total income £34,001 Basic rate on dividends of £23,577 1,768 Tax on non savings income £315 Total tax liability on £40,000 profit £8,082 (20.2%) 1.5.4 As above but salary of £11,850

£ Profit 40,000 Salary (11,850) Taxable profit 28,150 Corporation tax 5,348 Net profit 22,802 Dividend 22,802 Tax liability on dividends Total income £34,652 Basic rate on dividends of £20,802 1,560 Tax on non savings income £1,000 Employee NIC on salary £405 Total tax liability on £40,000 profit £8,313 (20.8%)



1.6 Other remuneration issues – interest on director loan

Where a director takes a low salary – say £10,000 and the remainder of his profits by way of dividend, the starting rate for savings is still available to him. Now that the starting rate band is £5,000 and the rate is NIL, it is worth considering paying interest on loans made by directors to their companies. If interest is paid it will need to be subject to basic rate tax deduction, and the income tax accounted for to HMRC on form CT61, in a quarterly basis ( calendar quarters, plus year end period if this does not co-incide). Obviously, you will wish to consider whether the interest will be an allowable expense in the company before committing to this course of action. The following comparisons ignore any NIC implications as that is static. These numerical examples ignore the availability of the personal savings allowance, which is dependant on overall taxable income. 1.6.1 Low profits : Salary £11,850 no interest

£ Profit 40,000 Salary (11,850) Taxable profit 28,150 Corporation tax 5,348 Net profit 22,802 Dividend income 22,802 Total Income 34,652 Tax liability on dividends £1,560 Total tax liability on £40,000 profit £6,908 1.6.2 Low profits : Salary £11,850, £5,000 interest

£ Profit 40,000 Interest charge (5,000) Salary (11,850) Taxable profit 23,150 Corporation tax 4,398 Net profit 18,752 Dividend income 18,752 Total income 35,602 Tax liability on dividends £1,256 Total tax liability on £50,000 profit £5,654



Tax saved £1,254 1.6.3 High profits : Salary £11,850, no interest

£ Profit 60,000 Salary (11,850) Taxable profit 48,150 Corporation tax 9,148 Net profit 39,002 Dividend income 39,002 Total Income 50,852 Higher rate liability on 4,502 Tax liability on dividends £3,901 £2,000 @ 0% £32,500 @ 7.5% £4,502 @ 32.5% Total tax liability on £50,000 profit £13,049 1.6.4 High profits: Salary £11,850 £5,000 interest

£ Profit 60,000 Interest charge (5,000) Salary (11,850) Taxable profit 43,150 Corporation tax 8,198 Net profit 34,952 Dividend income 34,952 Total income 51,802 Higher rate liability on 5,452 Tax liability on dividends £3,834 £2,000 @ 0% £27,500 @ 7.5% £5,452 @ 32.5% Total tax liability on £50,000 profit £12,032 Tax saved £1,017



1.1 Trivial benefits provided by an employer

Section 13 FA 2016 sets out the exemption from tax as a benefit in kind which applies to trivial benefits provided from 6 April 2016. This was originally intended to apply from 2015 but was delayed. No tax is due on a benefit provided to an employee or a member of his household if certain conditions are met. There are four basic conditions (A to D) with a fifth condition, E applying if the employer is a close company and the employee is a director or officeholder of the company or a member of the family or household of such a person. 1.1.1 Conditions

Condition A – the benefit is not cash or a cash voucher (as defined by s 75, ITEPA 2003)

Condition B – the benefit cost (either the cost of providing the benefit, or the average cost where provided to multiple recipients and it is impractical to calculate the individual cost) does not exceed £50

Condition C – the benefit is not provided pursuant to relevant salary sacrifice arrangements or any other contractual obligation

Condition D – The benefit is not provided in recognition of particular services performed by the employee as part of his duties, nor in anticipation of such.

Condition E – the benefit cost does not exceed the recipient’s available exempt amount – the annual amount being £300, and the available exempt amount is the amount so far unused.

1.7 Incorporation advice

1.7.1 Marginal rates on income

The combined marginal rate on income which is subject to corporation tax and then distributed as dividends in each rate band are as follows:

Basic Higher Additional

Profit 100 100 100

Corporation tax 19 19 19

Net profit 81 81 81

Dividend tax 6.07 26.32 30.38

Net retained 73.93 53.62 49.62

Tax rate % 26.07% 46.4% 50.38%

When compared to the rates applying to self-employed profits in each marginal band, the profit ranges where savings on incorporation can be made become apparent. For the sole trader the effective rates are 29% in the basic rate band, 42% in the higher rate band and 47% in the additional rate band, although there is a band of income which suffers 62% between £100,000 and £123,700 in 2018/19 (£123,000 in 2017/18).



Once the profits are sufficient that dividends are taxed at the higher rate in 2017/18, any tax savings accumulated through the basic rate band are eroded at a rate of 4%, until profits reach £100,000, when the sole trader starts to bear 62% on additional profits. The equivalent total marginal rates on income in 2017/18 and 2020/21 are

2019/20 2020/21

Basic Higher Additional Basic Higher Additional

Profit 100 100 100 100 100 100

Corporation tax 19 19 19 17 17 17

Net profit 81 81 81 83 83 83

Dividend tax 6.07 26.32 30.86 6.23 26.98 29.96

Net retained 74.93 54.68 50.14 76.77 56.02 53.04

Tax rate % 25.07% 45.32% 49.86% 23.23% 43.98% 46.96%



2. PERSONAL INCOME TAX AND SAVINGS

2.1 Tax rates and thresholds 2016/17

The level of allowances and tax rates were confirmed in November 2017 Budget. Table : rates and limits for tax 2016/17 and 2017/18

2018/19 2017/18

Personal allowance 11,850 11,500

Income limit for personal allowance 100,000 100,000

Basic rate band (20%) 34,500 33,500

Higher rate limit (40%) 150,000 150,000

Additional rate 45% 45%

Practical Tip Check whether transfer of allowance to spouse is appropriate in either 2017/18 or 2018/19. Election can be made up to two years after the end of the appropriate tax year and relates only to the year elected if done retrospectively. In year elections are effective until the year after the date of withdrawal. You should also monitor whether clients have made the election and it cannot be used because one of them has a higher rate liability.

2.2 National Insurance contributions 2018/19

Rates and limits for Class 1 contributions were announced in the November 2016 Autumn Statement. The following rates and limits will apply from 6 April 2017. Table : rates and limits for NIC 2018/19 and 2017/18

2016/17 2017/18

Lower earnings limit £116 £113

Primary threshold (employee) £162 £157

Secondary threshold (employer) £162 £157

Upper Earnings Limit £892 £866

Primary main rate 12% 12%

Primary residual rate 2% 2%

Secondary rate 13.8% 13.8%

Secondary rate – workers under 21 0% 0%

Secondary rate – Apprentices under 25 0% 0%



2.3 Cars – the appropriate percentage

Table : Main table of benefit in kind rates Each Budget announcement includes details of the company car tax structure for several years hence. Rates for almost all cars continue to rise, and will from April 2017, rise more rapidly than hitherto.

The following Table indicates the level of benefit as a percentage of list price. The diesel supplement has now risen to 4% for cars which do not meet the RDE2 emissions test standards. Table 1 – main car benefit table based on list price

Emissions (g/km) 2017/18 2018/19 2019/20 2020/21

Zero 9% 13% 16%

See below 1 - 50

51 -54 13% 16% 19% 15%

55

17%

19%

22%

16%

60 17%

65 18%

70 19%

75 23%

80

85

90

95 18% 20% 23% 24%

100 19% 21% 24% 25%

105 20% 22% 25% 26%

110 21% 23% 26% 27%

115 22% 24% 27% 28%

120 23% 25% 28% 29%

125 24% 26% 29% 30%

And then in increments of 5g = 1% until

170 33% 34% 35% 36%

175 34% 36% 36% 37%

180 35% 37% 37% 37%

185 36% 37% 37% 37%

190 and above 37% 37% 37% 37%

Table 2 – cars with no emissions rating

Engine size 2017-18 2018-19 2019-20

1400cc or less 18% 20% 23%

1400 cc to 2000 cc 29% 31% 34%

Over 2000 cc 37% 37% 37%



Table 3 – cars registered before 1 January 1998

Engine size 2017-18 2018-19 2019-20

1400cc or less 18% 20% 23%

1400 cc to 2000 cc 29% 31% 34%

Over 2000 cc 37% 37% 37%

2.4 Finance Act 2017

Benefits in kind on very low emission vehicles will reduce in 2020/21 according to the provisions in the second Finance Act of 2017. The following will apply from that year :

Emissions rating

Electric range % of list price

0 2%

1 - 50 130 or more 2%

70 - 129 5%

40 - 69 8%

30 – 39 12%

Under 30 14%

51 - 54 15%

55 – 59 16%

60 - 64 17%

65 - 69 18%

70 - 74 19%

The electric range is the number of miles which is the equivalent of the number of kilometres specified in an EC certificate of conformity, an EC type-approval certificate or a UK approval certificate on the basis of which a car is registered, as being the maximum distance for which the car can be driven in electric mode without recharging the battery. 2.5 Taxation of benefits – assets made available for private use

Section 8 of Finance Act 2017 sets out new tax rules applying where an asset which continues to be owned by an employer, is nevertheless made available to an employee or a member of his family or household for private use. It applies only to those arrangements where the “annual value” is used to tax the benefit – normally arrived at by taking 20% of the cost or market value of the asset when first provided as a benefit in kind. The current legislation does not recognise periods when the asset is unavailable for private use, so the modified rules allow for the taxable amount to be reduced when the asset is unavailable for private use, on a pro rata basis. This replaces HMRC practice in calculating the benefit. The definition of days on which an asset is “unavailable for private use” has been carefully constructed to avoid it being exploited, and is as follows:



The day falls before the day on which the asset is first made available to the employee

The days falls after the day on which the asset is last available to the employee

For more than 12 hours during that day the asset: o Is not in a condition fit for use o Is undergoing repair or maintenance o Could not lawfully be used o Is in possession of a person who has a lien over it (who is not the

employer, employee or a person connected with either), or o Is used in a way that is neither use by, nor use at the direction of

the employee or a member of his family or household, or o On that day the employee uses the asset in the performance of

his duties and for no other purpose. 2.6 Benefits in kind – pensions advice

The second Finance Act of 2017 includes a provision to exempt from tax the provision of or payment for pensions advice to a current, former or prospective employee up to the value of £500 in a tax year provided conditions A or B are met:

Condition A – the provision is available to all employees, or employees at one particular location

Condition B – the provision is available to all employees who have reaches a qualifying age or are suffering for ill health.

The qualifying age is 5 years before the individual’s normal pension age under the scheme. The exemption applies from 6 April 2017. 2.7 Restriction of tax relief on interest in respect of let domestic

property

From April 2017, tax relief on interest in property businesses (including single buy to lets) is restricted so that by 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. The legislation is in the Finance (No 2) Act 2015, and introduces new ss 272A, 272B and 274A into ITTOIA 2005, plus similar restrictions for partnerships at 399A and 399B. The change does not affect furnished holiday lettings. The change will be phased in as follows:

2017/18 2018/19 2019/20 2020/21

% of interest allowed as a deduction (by new s 272A)

75 50 25 0

% of interest given as a relief at 20% (by new s 274A)

25 50 75 100

The effective interest deduction will therefore be:

2016/17 – 100%



2017/18 – 80%

2018/19 – 60%

2019/20 – 40%

2020/21 – 20% A similar restriction applies to the cost of raising loan finance. 2.7.1 Finance Act 2016 changes

Section 26 makes further changes to the relief for interest incurred in relation to let residential property. Multiple property businesses, including estate income

New section 274A of ITTOIA 2005 recognises that an individual’s “relievable amount” (the amount of interest for which basic rate relief is sought) might have more than one component. The individual may have more than one property business – including an overseas property business – and may also be in receipt of estate property income. Accordingly, the legislation already included in Finance Act 2015 is revisited to reflect this, allowing for current year amounts and brought forward amounts. The current year estate amount is kept separate from the relievable amounts for the current year in respect of one or more property businesses. The structure is therefore:

Current year amount, comprising o A relievable amount in respect of a property business, or o Two or more relievable amounts each in respect of a different

property business (note that furnished holiday lettings are not subject to this restriction and so will not be a separate business producing a relievable amount)

Current year estate amount

Brought forward amount The relievable amount is the total of these three elements. There is a finer definition of the amounts where the individual is taxed on only part of the property business or estate income. Relief is available on L, the lower of the amount for which relief is sought and the total profits of the property businesses (or share of those profits) plus the relievable amount of the current year estate amounts. Where part of the property business profits fall within the personal allowance, the relief is further restricted to taxable property business profits; for this purpose, personal allowances must be set against income other than savings and dividend income. The balance of the relief not given is carried forward and becomes the brought forward amount in the following year. This restriction relies on the definition of adjusted total income, which is the total net income excluding savings income and dividends less any personal allowances.



Trustees

New section 274B sets out the detail of the rules as they apply to trustees. These rules follow the protocol set out above in relation to individuals. Commentary A letting activity that has a low level of interest in relation to the borrowings will not be too badly affected, but larger property businesses using debt to expand the portfolio will find that their business model has been severely undermined. Some examples follow. The primary solutions (where appropriate) include:

Full incorporation – move properties and loans

Partial incorporation – personal borrowing to invest in shares in a property letting company (but this may well be closed as a “loophole)

Pay down borrowings

Sell up Example 1 – single buy to let Jo is a teacher and is 49 years old; he is a 40% taxpayer. He has purchased a buy to let property as an investment. As he has owned the property for some time, the outstanding debt on the property is relatively low. Here is the effect of the change:

2016-17 2020-21 Gross rents 7,200 7,200 Repairs and other tax deductible costs 1,000 1,000 Interest on mortgage 2,500 - Net rental profit 3,700 6,200 Tax at 40% £1,480 £2,480 Less interest relief at 20% on £2,500 500 Net tax liability on rental income £1,480 £1,980 Tax Increase £500 Effective rate on “real” rental profit 40% 53.5% If Jo decided to increase his borrowings to allow him to buy a second buy to let, he would see his tax rate rise still further, as his interest costs will be higher initially, and his net return lower. Example 2 – substantial property portfolio John and Julie are married and together run a sizeable rental property business. They have not run this through a limited company due to the difficulty in obtaining finance for purchases with limited company status.



2016-17 2020-21 Gross rents 600,000 600,000 Repairs and other tax deductible costs 200,000 200,000 Interest on mortgage 350,000 - Net rental profit 50,000 400,000 Personal allowances (x2) 22,000 - Taxable income 28,000 400,000 Basic rate tax (2 taxpayers) 5,600 12,800 Tax at 40% - 94,400 Tax at 45% - 45,000 152,200 Less interest relief at 20% on £350,000 - 70,000 Net tax liability on rental income £5,600 £82,200 Tax Increase £76,600 Effective rate on “real” rental profit 11.2% 164.4% Although John and Julie spend at least 35 hours a week on the business (and their cash return is modest) that is because they have ploughed most of their profits back into building up the portfolio, and taken risks to allow them to grow their business. Their current business structure is now unsustainable. Example 3 – increase in interest rates Finally we return to Jo, who has presently got borrowings of £50,000 on his property which has a current market value of £160,000. His interest rate is 5%. If his debt was £100,000 he would see the following change:

2016-17 2020-21 Gross rents 7,200 7,200 Repairs and other tax deductible costs 1,000 1,000 Interest on mortgage 5,000 - Net rental profit 1,200 6,200 Tax at 40% £480 £2,480 Less interest relief at 20% on £5,000 1,000 Net tax liability on rental income £480 £1,480 Tax Increase £1,000 Effective rate on “real” rental profit 40% 123.3% Advice point Many buy to let owners happily complete their own tax returns, but there is a market for advice to these potential clients to help them decide what they should do regarding the changes.



2.8 Pensions – annual allowance

The Finance (No 2) Act 2015 enacts proposals to restrict the annual allowance for individuals with income (as defined) in excess of £150,000. The allowance will be tapered to a minimum of £10,000. In order to achieve this a number of changes are also necessary. 2.8.1 Pension input periods (PIPs) changes

Legislation came into force on 8 July 2015 to align pension input periods (PIPs) for all contributors to tax approved scheme with the tax year. This is necessary to make the changes described above (restricting annual allowance for high earners) possible. The change is made by clause 23 and Part 1 of the proposed Schedule 4 of the second Finance Bill. All PIPs came to an end on 8 July. New PIPs started for all contributors on 9 July and will run to 5 April 2016. All future PIPs will be aligned to the tax year, and there will be no possibility of electing for a change in PIP. So contributors will have either two or three PIPs falling in the tax year 2015-16, depending on when their previous PIP end date was. This is best illustrated by some examples. In all cases, unused relief brought forward is ignored.

Example 1 Lewis has a single pension arrangement with a PIP end date of 30 June. His contribution of £40,000 made in March 2015 is a pension input for the 2015/16 tax year as regards the annual allowance charge. Lewis would expect to be able to make a further contribution of £40,000 in March 2016, this falling into the 2016/17 year for annual allowance purposes. However, the PIP starting on 1 July was brought to an end on 8 July, and a new PIP started on 9 July, which will run until 5 April 2016. This means that Lewis’ contribution in March 2016 will also fall into the 2015/16 year for annual allowance purposes. Lewis has three PIPs in the tax year 2015/16.

2.8.2 Annual allowance for 2015-16

To protect people in Lewis’ position there will be an annual allowance of £80,000 for all pension savings made in PIPs ending in 2015/16. So Lewis will be able to save a further £40,000 in March 2016 without incurring an annual allowance charge. Part 2 of the proposed Schedule 4 to the second Finance Bill 2015 sets out the rules as follows.



The tax year 2015-16 is to be regarded as two separate tax years, the first beginning on 6 April 2015 and ending on 8 July 2015 (pre-alignment tax year), and the second running from 9 July 2015 to 5 April 2016 (post alignment tax year).

Separate annual allowances charges cannot arise for 2015-16. Amounts calculated by reference to the two notional tax years will be aggregated and taxed as the annual allowance charge for the whole year.

The annual allowance limit for the pre alignment tax year is £80,000

The annual allowance limit for the post alignment tax year is nil, but the balance of allowances in the pre alignment tax year may be carried forward to the post alignment tax year (subject to a maximum of £40,000). This provision only applies to a person who was a member of a scheme in the pre alignment tax year. Otherwise the normal annual allowance of £40,000 applies.

This will allow Lewis to make his full £40,000 contribution in March 2016 and obtain full relief for it. His contribution of £40,000 in March 2015 falls into the pre-alignment tax year, and he has £40,000 to carry forward to the post alignment tax year. 2.8.3 Carry forward of unused allowance from 2015-16

For the purposes of the carry forward of unused relief provisions the annual allowance for the pre alignment tax year is deemed to be £40,000, and carry forward is only possible if this amount was unused in the post alignment tax year. The pre alignment surplus must be used up in the post alignment tax year before older brought forward amounts can be used.

Example 2 Lily’s pension arrangement also has a PIP end date of 30 June. Lily contributed £40,000 to this arrangement in March 2015, and a further £20,000 on 4 July 2015 which would otherwise have been used within her 2016/17 annual allowance. Both are covered by her enhanced allowance of £80,000, of which there is £20,000 to carry forward. The periods ending 30 June and 8 July are known as the pre-alignment periods. Lily has a further allowance for the post alignment period – the period from 9 July to 5 April 2016. This is the balance of the £80,000 allowance unused (£20,000), subject to an overall maximum of £40,000. So Lily can contribute a further £20,000 by 5 April 2016.

Example 3 Luke also has a pension input end date of 30 June. He contributed £15,000 to his pension in March 2015. He has made no further contributions. His allowance of £80,000 is used in part by the £15,000 contributions, and he has £65,000 of it available to carry forward. However, the maximum he can carry forward is £40,000. This will give him £55,000 of contributions in the tax year for annual allowance purposes, but no annual allowance charge.



Example 4 Leonora has a PIP end date of 30 September, and usually makes a contribution to her PIP in August. She has not yet made a contribution in 2015. She can make a contribution of up to £40,000, which will fall into her PIP running from 9 July 2015 to 5 April 2016. However, as Leonora’s income in 2015/16 is extremely high, she was planning to make a further contribution of £40,000 in March 2016 which would otherwise have been set against her 2016/17 annual allowance. This would give her tax relief on £80,000 in the tax year without breaching the annual allowance in either year. However, her PIP now comes to an end on 5 April, and she only has the post alignment allowance of up to £40,000 to use, so her plan cannot be carried out unless she has available brought forward relief.

2.8.4 Calculation of pension inputs – defined benefit arrangements

Part 3 of proposed Schedule 4 to the second Finance Bill includes instructions for computing the defined benefit pension inputs for the 2015-16 tax year. This requires the calculation of a single increase in benefit value from 6 April 2015 to 5 April 2016, which is then time apportioned to the pre and post alignment periods. The uprating of the opening benefits is to be done at 2.5% rather than CPI. (New s 237ZA FA 2004 introduced by para 8 of the proposed Schedule). 2.9 Restriction of annual allowance for high income individuals

The pensions annual allowance will be restricted for high income individuals from April 2016. New s 228ZA in introduced into FA 2004. 2.9.1 High income individuals

An individual is a high income individual if

The individual’s adjusted income for the year is more than £150,000, and

The individual’s threshold income for the year is more than £150,000 minus the annual allowance amount before taper

Adjusted income is the net income at Step 2 in section 23 of ITA 2007, plus:

Relief under s 193(4) or 194(1) FA 2004 deducted in arriving at Step 2 (relating to pension arrangements)

Any deductions made from employment income for that year in respect of pension contributions made under net pay arrangements

The total pension input amount for the tax year less any contributions made by the individual as a member of any scheme

Taxable lump sums received under pension schemes Threshold income is the Step 2 net income as before, plus



Salary sacrifice amounts in relation to pension contributions where the agreement was entered into on or after 9 July 2015

The amount of contribution paid in the year in respect of which the individual is entitled to be given relief under s 192 FA 2004 (relief at source), and

Taxable lump sums as above. The annual allowance of £40,000 will be tapered by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum of £30,000 taper, which will arise at income of £210,000, leaving the taxpayer with an annual allowance of £10,000. There are anti avoidance measures associated with this measure in new s 228ZB which is part of para 10 of the proposed Schedule.

Example Roger is the chief executive of the local authority, on a salary of £140,000 per annum. His employer also contributes to a 2/3 (40/60) final salary pension arrangement on his behalf (lump sum element ignored for simplicity). His pension contribution for 2016/17 tax year is calculated as follows: (assuming that his salary is unchanged) 1/60 x £140,000 = £2,333 x valuation factor of 16 = £37,328 So Roger’s income for the purpose of this change is £177,328, and his net income is over £110,000, so the restriction on his annual allowance applies. Note that Roger is not in fact an additional rate taxpayer. Roger’s annual allowance is £40,000 – (£177,328-£150,000)/2 = £26,336 So Roger is facing an annual allowance charge on his excess contributions of £10,992, which will be taxed at Roger’s marginal rates. The tax charge is therefore (assuming that Roger has no other income) £4,446. Roger will be able to elect that his fund bears the additional tax charge.

2.10 ISA and JISA limits

From 6 April 2016 the limits for annual subscriptions will be:

ISA limit £15,240

Junior ISA £4,080 (limit also applies to Child Trust Funds)



Practical point You should exercise care when advising in this area if you are not authorised to give investment advice. However, the availability of ISA’s, the nil rate band for savings income and the new personal savings allowance and the interaction between these, and with the spousal income for married couple and civil partners should all be considered.



3. OFF-PAYROLL WORKING IN THE PUBLIC SECTOR

The intermediaries’ legislation (IR 35) requires individuals working through an intermediary (usually a person’s own company) to pay broadly the same tax and National Insurance contributions (NICs) as employees, where they would have been an employee if they had provided their services directly. In the Autumn Statement in November 2016 the Chancellor confirmed that the reforms to off-payroll working in the public sector will be going ahead, and will be implemented from April 2017; the legislation is included in Finance Act 2017 at Section 6 and Schedule 1. The changes do not introduce a new liability, but are designed to increase compliance with the existing rules. From April 2017 individuals working through their intermediary in the public sector will no longer be responsible for deciding whether the intermediaries’ legislation applies and then paying the relevant tax and NICs. This responsibility will instead move to the public-sector employer, agency, or third party that pays the worker’s intermediary. The employer, agency or third party will decide if the rules apply to a contract and if so, make sure the relevant income tax and NICs are deducted and reported through PAYE in real time. 3.1 Overview

When a person working through an intermediary (usually a company, but can also be a partnership) is providing their services to an end user which is a public body, the party paying the contractor company must check whether the IR35 status is in point, and if so, to deduct PAYE and NIC from the invoice amount (net of VAT). This is achieved by putting the worker on the payroll of the paying organisation, using the worker’s NI number and details, reporting payments as normal through RTI. The new rules apply to payments made on or after 6 April 2017, whether the work was carried out before that date or not. There are anti-forestalling rules intended to prevent forward billing and payment. 3.2 Legislation

Schedule 1 of the Finance Act 2017 starts by amending existing legislation which is affected by this new provision. Essentially this excludes contracts affected by the new rules from falling within the existing intermediaries rules (both the original IR 35 rules and the managed service company rules, Chapters 8 and 9 of Part 2 of ITEPA 2003). The new legislation is then introduced as Chapter 10 of Part 2 of ITEPA 2003. Existing provisions affecting agency workers (Chapter 7 of Part 2) and visiting performers (s 966 ITEPA 2003) are excluded from the scope of payments covered by the new rules.



3.2.1 Public authority

A public authority is defined by new s 61L, largely by reference to the Freedom of information Act 2000, and equivalent legislation in Scotland, even where FoA does not apply to every aspect of the organisation’s activities. A primary healthcare provider only comes within this legislation if

It has a registered patient list for the purposes of relevant medical services regulations, and

Is within the FoA by reason of providing primary dental services. 3.2.2 Affected contracts

The trigger to the legislation applies to certain engagements, under which:

An individual (the worker) personally performs or is under an obligation personally to perform services for another person (the client)

The client is a public authority

The services are performed not under a contract directly between the client and the worker, but under arrangements involving a third party (the intermediary),and

The circumstances are such that o If the services were performed under a contract made directly

between the client and the worker, the worker would be regarded (for tax purposes) as an employee or holder of an office of the client, or

o The worker is an office holder who holds that office under the client and the services relate to the office.

So the trigger is the same as that for IR35. The third party can be a partnership or unincorporated association of which the worker is a member. The office of statutory auditor is excluded from the office holder definition by s61M(4). 3.2.3 Payments affected

Section 61N sets up the architecture to deal with situations where the intermediary is paid through a chain of different organisations, the highest in the chain being the client and the lowest the intermediary. The person responsible for dealing with the tax and national insurance on an affected payment is the final payer in the chain who makes the payment to the intermediary (normally the worker’s company). This payment is known as the “deemed direct payment”. The amount of the payment subject to tax and NIC is arrived at by deducting any VAT on the payment and further deducting any amount of the payment that represents direct costs to the intermediary of materials used or to be used in the performance of the services( note that this is materials only). A further deduction is made for expenses which would have been deductible from the earnings of the worker had he been employed directly by the client.



If the worker would not have been taxable on the payment as a payment of earnings in employment by the client, then no tax arises on the deemed direct payment. This is only likely to affect workers who are non resident or non UK domiciled and services performed outside the UK. 3.2.4 Information requirements

Sections 61T to 61V set out information requirements to support the legislation and penalties for failure to provide necessary information, or the provision of fraudulent information. There are obligations on both the client (who determines the status of the worker for these purposes) and the worker to provide certain information. 3.2.5 Prevention of double charge to tax

Section 61W excludes from a charge to tax the payment onwards of remuneration or dividends made out of net deemed direct payments. They may also deduct any payments made in respect of pension contributions to registered schemes and capital allowances that would have been deductible under the employment income provisions. However, such deductions cannot result in a negative amount, so it is likely that for may end workers, the deemed direct payments will be made across as net remuneration intact. 3.3 In practice - the contractor company

There is very little that the contractor company can do to avoid this – some may seek to alter the terms of the contract under which they are engaged, but if the public body has decided that all contractors will be payrolled (as many have) then there is very little the contractor company can do about this. There is a right of appeal, but this is likely to be an expensive and time consuming option. The company will continue to issue invoices, plus VAT as appropriate, and will be paid the invoiced amount less PAYE and primary NI contributions, plus VAT. VAT will be paid over to HMRC as normal, and HMRC’s guidance indicates the following treatment in the accounts of the company:

The company should declare the net amount received as turnover in the accounts. It is not presently clear whether this complies with company law and accounting standards.

The company will not be liable to corporation tax on the amounts after deduction. Other income of the company would be liable to tax as normal.

If payments are made to the director shareholder these can be treated as salary or dividend. In any event, payment of the net amounts to the director/shareholder will not be taxable in the hands of the recipient.



If payments are treated as pay (employment income) these should be reported through RTI as payments which are free of tax and NIC – note that an FPS should be filed in respect of payments made, even though there is no tax or NIC to account for. There is no secondary liability on the company as this has already been accounted for.

If the company distributes the whole of the net payments to the director/shareholder, there will be no income to cover administrative costs of the company – even if funds are retained in the company, the expenses will effectively be paid out of “net profits” – there being no tax free income unless the contractor has work outside the public sector.

3.4 In practice - the worker

The director / shareholder who has effectively been taxed to PAYE and NIC is instructed to declare the income on his personal tax return as if it were employment income. He should show the gross pay as the invoiced fees, and the tax deducted – to this end he will be provided with a P60 at the end of the tax year. No payslips are required for individual payments. The paying party (the party making the deductions, which might be an agency) is to be shown as the employer. As noted above, the individual will not be liable to any further tax or NIC on the amounts paid to him by his company – it is not yet clear whether these must also be declared on the personal tax return. The director/shareholder will also need to consider the payment of expenses of running the company – whether it be annual accountancy fees or other expenses such as mobile phone etc. These will be met out of taxed income – whether by the company retaining funds or the director lending funds to the company to cover payments. In that case, accounting losses will be declared for as long as the company exists, supported by a director loan account. 3.5 Example

This is extracted from HMRC’s guidance for agents which was published in early March 2017. https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-information-for-agents, or use the search for ‘off-payroll guidance’ and follow the first link. The guidance for agents is referred to at the very bottom of this page.

Assume a worker invoices, through their PSC, an amount of £7200 (including VAT)

per month to the end client and the off-payroll measures at Chapter 10 apply. No

materials and / or expenses are included.

Invoiced amount £7,200.00

VAT (£1,200.00)

Deemed Direct Payment (DDP) £6,000.00

https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-information-for-agents






The fee payer will deduct:

PAYE (£1,458.00)

Primary Class 1 NIC (£413.00)

£1,871.00

The fee payer will also account for Secondary Class 1 NIC £645.13

The payment made by the fee payer to the PSC will therefore be:

DDP £6,000.00

PAYE £1,458.00

Primary Class 1 NIC (£413.00)

£4,129.00

Plus VAT £1,200.00

£5,329.00

The sum deducted from the fee is paid over to HMRC. The fee payer sends the relevant

information to HMRC through its PAYE reporting processes.

Invoiced amounts (12 x £6000 - fees) £72,000

This reflected as

Less statutory tax & NICs deducted by fee-payer (12 x £1871) (£22,452)

Turnover £49,548

(the PSC receives relief against employment income, tax and NICs costs) £22,452

£0

The PSC can pay the worker up to £49548 (the DDP, net of tax / NICs) without any

further deduction of tax and NICs. The PSC can retain an amount that is not greater

than the sum of the net fees less salary / dividend costs without further liability to tax.

Let us suppose the PSC receives some other income, say £20,000 in that same period;

Invoiced amounts (12 x £6000 - fees + £20000) £92,000

This should be reflected in the company as turnover £69,548

Less income (12 x £4129 - DDP net of tax/NICS) (£49,548)

Less tax & NICs deducted by fee-payer (12 x £1871)

(the PSC receives relief for employment income, tax and NIC costs) £22,452

£20,000

If the PSC pays the worker more than £49,548 (the DDP, net of tax / NICs), further tax

and NICs will be chargeable. If the PSC retains an amount that is greater than the sum

of the net fees less salary costs, it will incur further tax liability.



3.6 Further points

The view of colleagues is that it is not correct to regard the net amounts received by the company as turnover for company law purposes. The view is that turnover should be regarded as the gross amount – in the example above £72,000. The deductions made are a tax charge – corporation tax is shown as nil and the tax and NIC are shown as “other taxes” in the tax note.



4. CAPITAL AND PROPERTY TAXES

4.1 CGT annual exemption

The annual exempt amount for 2017/18 is £11,300 The amount for most trustees is therefore £5,650

Practical point Where appropriate, remind clients about using their annual exempt amount effectively by timing the disposals of assets and sharing with spouse. Bed and breakfasting is no longer possible, but where disposals are intended, advice can be given about the most tax effective approach.

4.2 ATED - Valuation dates

The next revaluation of all property subject to ATED is due on 1 April 2017, at which all enveloped properties should be revalued to check whether they now come within the rules, and which valuation band applies to them. Finance Act 2015, s 71 changes to rules to make 1 April 2017 a valuation date only for periods from 1 April 2018 – otherwise there would have been practical difficulties in making returns by 30 April 2017 with a new valuation. The same change applies to each subsequent 5 year valuation date.

Practical point Ensure that clients affected by the reduction in the threshold for ATED are ready to complete their ATED returns. These are due by 30 April 2018 for the year ended 31 March 2019, based on the uprated valuations.



5. MAKING TAX DIGITAL

5.1 July 2017 announcement

Following the general election there has been a change in emphasis relating to the MTD project.

MTD will now commence for VAT with mandation of VAT reporting for those businesses over the VAT threshold required to submit their returns through MTD software for the first VAT period starting on or after 1 April 2019.

Businesses which are subject to mandation will also be required to keep digital records of their transactions.

The VAT submission must be made by an end-to-end digital process. It is not permitted to print out from one software package and re-key the data into another package.

The main challenge will be in moving software providers forward technically so that there is a good range of software which can cope with various VAT schemes and requirements.

5.2 Income tax implementation

The undertaking given is that income tax will not be mandated into MTD until April 2020 at the earliest. Meanwhile, HMRC continues to develop and test the process, and will be encouraging income tax businesses and landlords to join the pilot early to help with testing. 5.3 Legislation

The enabling primary legislation is included in the September Finance Bill. This covers the income tax requirements and the VAT requirements. HMRC has also issued guidance on the content of the secondary legislation for VAT. 5.4 VAT implementation

It is important to note that clients who previously were not within scope of the implementation now may be required to file under MTD from April 2019. The key types of client previously excluded are:

Companies, which were perhaps not expecting to come into MTD until 2020. In fact they would always have been mandated into VAT from April 2019, but were mainly unaware of that fact.

Charities, which may have been lulled into a false sense of security by the exemption from MTD for income tax awarded to them. Where a charity is VAT registered and above the VAT threshold they will have to comply from April 2019.



So any client which is VAT registered and has taxable supplies in excess of the VAT threshold on 1 April 2019 will be required to file their VAT returns through MTD for the first VAT period starting on or after that date. 5.5 What does MTD for VAT involve?

The requirements are not, on the face of it, very different from the existing requirements. But looking in more detail we find that:

Affected businesses will be required to keep digital records of their accounting transactions

The period for which they file VAT returns will not be altered

The mandatory data filed is limited to the existing 9 boxes on the VAT return

There will be an option for businesses to file additional data which will demonstrate compliance; this might be the breakdown of supplies between the various rates of VAT. If businesses choose not to provide this voluntary information they may receive more compliance attention. It is not clear as yet how long that might last – whether it would be every return period or not.

HMRC’s current web-based VAT100 will be withdrawn

Returns must be filed from within the software in an “end to end digital process”.

It is the last of these requirements which poses the greatest challenge. Almost 90% of VAT returns are currently filed through the online VAT 100, by entering the figures produced by various calculations. It is likely that almost no software in existence can currently meet these requirements, and it is known that many very large VAT groups have complex spreadsheets which together produce the VAT data. Often the raw data from the accounting system is manually input into these spreadsheet tools, and the result is then manually transcribed into HMRC’s web-based return. So the challenge here is really a technical one for software providers, in relation to smaller businesses, and internal programmers for those businesses large enough to use bespoke software. It is not clear whether this challenge can be met. 5.6 What should we do?

Identify affected clients and those which are likely to exceed the VAT threshold through growth

Focus initially on affected businesses which do not have a digital record keeping system. They will need digital records to get things rolling.

Concentrate first on businesses with “simple” VAT affairs. Where there is a single VAT rate applying to supplies, and input tax is fully recoverable, it is reasonable to assume that well known branded software will be capable of filing returns by 2019.

Where clients have special VAT schemes such as the second hand margin scheme (for cars, and antiques), or are partially exempt, or in the



case of charities also have non business activities, it is by no means certain that common software packages will suffice. It is probably wise to await further developments for those clients.

Most accounting packages are likely to be able to cope with the flat rate scheme. The current proposal is that purchases will not need to be recorded in detail by users of a flat rate scheme, but as those records will be needed for income or corporation tax, it is unlikely that the benefit will be real.

Very large clients and VAT groups with bespoke VAT systems will need reassurance and may wish to start thinking about the end to end digital solution. Passing data between software applications electronically will be acceptable, so it may be possible to “bolt together” an end to end digital solution during the next 18 months.

cpd webinar tax planning 2020 webinar february 2018 page 2 1. corporation and business income tax,...

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