Archive for July, 2017

Life in the Cloud

Wednesday, July 12th, 2017

There seems to be a trend supporting the movement of our computer software and data to the “cloud”. Not the fluffy white variety, but servers that are based off-site.

Even our tax system is pushing us in that direction. If and when the government’s objective to Make Tax Digital is finally realised, each of us registered to pay tax in the UK will have an online Personal Tax Account, and all our income sources and other details will be connected to it. So instead of waiting for us to submit an annual tax return to gather data, HMRC will receive everything it needs to know about our business and personal financial affairs via a direct, computer link.

Making Tax Digital for Business is just one aspect of that gradual change process.

Based on current plans, HMRC aim to require all businesses to link up their accounts data with its computer servers during the next three to four years. These data transfers will be required quarterly rather than annually. The aim is to provide you with an estimate of future tax payments based on real time data rather than prior year figures.

Although this process will eventually mean that annual tax return submissions are abandoned, the actual process of maintaining and checking records, and then making the data transfers, will create more work for business owners and their advisors, not less.

Initially, business owners (and this will include landlords) will have to consider how they are going to record their business transactions in a format that can link to HMRC’s computer networks. Most accounting software providers now offer a cloud based solution that will eventually have the functionality to cope with the demands of Making Tax Digital.

And there are other advantages to using cloud based software. For example, as advisors, it is a simple process for us to login to your software and help you with any queries you may have, or to keep an eye on your trading situation. This could be extended in due course to monitoring your accounts data before uploading summaries to HMRC.

If you are still considering your software options, we would be happy to help. The old maxim “be prepared” is still relevant, in fact more so in this electronic age.

What is tax free these days

Thursday, July 6th, 2017

Surprisingly, there is quite a lot. As long as you are resident in the UK for tax purposes you will probably qualify for the following tax reliefs and allowances for the 2017-18 tax year:

  • The first £11,500 of your personal taxable income is free of income tax, although you will pay 12% NIC on earnings above £8,164 per year.
  • The first £5,000 of dividend income is tax free.
  • The first £11,300 of capital gains are also tax free.
  • There are various savings allowances that you may be able to claim.

Apart from these basic allowances, there are a number of income types and gains that are exempt from income tax and capital gains tax. Currently, they include:

Tax-free income:

Tax-free capital gains:

  • Gifts to your spouse, a civil partner or a charity
  • Gains when cashing in ISAs or PEPs.
  • Sale of government gilts and premium bonds
  • Betting lottery or pools winnings
  • Any profit on the sale of your car, unless you have used it in a business
  • Any personal assets that have a limited lifespan, less than 50 years, and the sale proceeds are below £6,000.
  • In most cases, the sale of your own home

Also, when you inherit an asset, any inheritance tax is usually paid by the estate. So you will get the use of the asset tax free, but you may have to pay capital gains tax if you subsequently sell it.

Tax Diary July/August 2017

Wednesday, July 5th, 2017

1 July 2017 – Due date for Corporation Tax due for the year ended 30 September 2016.

6 July 2017 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2017 – Pay Class 1A NICs (by the 22 July 2017 if paid electronically).

19 July 2017 – PAYE and NIC deductions due for month ended 5 July 2017. (If you pay your tax electronically the due date is 22 July 2017)

19 July 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2017.

19 July 2017 – CIS tax deducted for the month ended 5 July 2017 is payable by today.

1 August 2017 – Due date for Corporation Tax due for the year ended 31 October 2016.

19 August 2017 – PAYE and NIC deductions due for month ended 5 August 2017. (If you pay your tax electronically the due date is 22 August 2017)

19 August 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2017.

19 August 2017 – CIS tax deducted for the month ended 5 August 2017 is payable by today.

McLaren racing team lose tax appeal

Wednesday, July 5th, 2017

It is a well-established feature of previous judgements that a fine imposed to punish an organisation should not be treated as tax deductible – the tax relief secured would effectively share out the burden of the punishment with the rest of the taxpaying community.

Which is why the First Tier Tribunal (FTT) decision, allowing McLaren racing to deduct a £32m fine for being in possession of documents belonging to Ferrari, was seemingly out of step with this point of view.

HMRC appealed the FTT ruling and the Upper Tribunal reversed the decision.

In some respects, this addresses issues of common sense as well as the law. If the FTT ruling had held, would we have seen footballers claiming tax relief on fines for bad behaviour? Or tennis players for swearing?

Landlords bear the brunt of recent tax changes

Wednesday, July 5th, 2017

Recent budgets have done little to improve the financial position of landlords. One change stands out above the rest: the loss of higher rate tax relief on finance charges.

Many landlords have concentrated on growing their property portfolios in recent years and, taking advantage of the low interest rates, have borrowed heavily to maximise property acquisitions. In accountant speak, they are highly geared.

This strategy will come back and haunt many followers of this path as the tax relief for loan interest starts to reduce in the coming years. The changes will be:

  • From April 2017, 25% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2018, 50% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2019, 75% of finance charges will be disallowed and replaced with a basic rate tax credit.
  • From April 2020, only a basic rate tax credit will apply.

Landlords who only pay basic rate (20%) Income Tax on their property business may think these changes will have no effect on their tax bills, after all, the reduction in the deduction in finance charges is matched by a basic rate tax credit, but they may be mistaken. It all depends on the amount of loan or mortgage interest payments they presently pay and claim against their tax. Consider the following example:

Jo, whose rents for 2016-17 are £100,000 and loan interest is £80,000, will have taxable profits for the year of £20,000. Once the finance costs are fully disallowed, Jo’s taxable income will be £100,000 (not £20,000), Income Tax will be calculated accordingly and much will be taxed at higher rates. She will be able to deduct a tax credit, based on finance charges disallowed, but only at basic rate Income Tax.

If rental profits were her only income, and with no increase or decrease in her rental income and costs, Jo’s tax bill would increase from £1,800 for 2016-17, to £11,500 by the year 2020-21.

This sort of outcome would be disastrous for many landlords in a similar situation. They may be faced with selling property to reduce “leverage” and restore some sense of cash flow sanity to their tax affairs.

Clearly, there is a need to re-examine your investment strategy if your property business is similar to the above example. We can help. There may be possible changes you could make short of outright disposal. The key is to consider your options now.

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