Archive for December, 2019

What constitutes profit for tax purposes?

Thursday, December 5th, 2019

There is no simple answer to this question. We have listed below some of the matters that need to be are considered. As self-employed business owners’ profits are subject to income tax and National Insurance – and limited companies to corporation tax – we have divided our comments accordingly.

Before making this distinction it is important to state that profit shown on your accounts is not the figure that is used by HMRC to work out taxes due. Your published figures are adjusted to reflect the following (this is not a comprehensive list):

  • Depreciation of assets is always added back and replaced with a capital allowance. Generally, capital allowances claimed will reduce your tax bill and on some occasions the amount claimed can be more than any depreciation charge shown in the accounts.
  • Certain business expenses are not allowed for tax purposes. A common example is business entertaining.
  • Payments to the owners of the business are treated differently if the business is incorporated or self-employed. Some of these distinctions are set out below.

Self-employed – income tax and Class 4 NIC

Sole traders and partners in trading partnerships (including Limited Liability Partnerships) are subject to income tax and Class 4 NIC. Profits adjusted for tax purposes are treated as the income of the business owner.

The self-employed are not taxed on the funds they withdraw from the business but the profits they earn.

They will pay income tax at 20%, 40% or 45% depending on the amount of profits earned. Additionally, the self-employed pay Class 4 NIC of 9% on profits between £8,632 and £50,000. This 9% rate drops to 2% for profits earned in excess of £50,000.

This exposure to potentially high rates of income tax and NIC is the main reason for considering the incorporation of successful self-employed business.

Limited companies

In the majority of cases limited companies pay corporation tax on their adjusted trading profits at a fixed rate. Currently, corporation tax is charged at 19%.

However, if director/shareholders withdraw money from the company they are taxed separately on those withdrawals. The most common director shareholder rewards are:

  • A salary – taxed under the PAYE rules. Salaries and employer NIC charges are an allowable deduction for corporation tax purposes.
  • A dividend – dividends are a distribution of taxed profits (company trading profits less corporation tax paid). They are not a cost to the business and do not reduce the company’s corporation tax bill. Any dividends received by shareholders in excess of £2,000 are taxed at hybrid rates of income tax (7.5%, 32.5% or 38.1%) the rate you would pay depends on the level of your overall income.
  • A benefit, company car etc – most benefits are treated as income and will increase a beneficiary’s income tax charge. Additionally, companies will be charged extra NIC based on the total value of benefits provided.

Planning note

Working out the best structure for your business should take the above into account. However, there are a range of other “risk” considerations that should be examined. If you are concerned that you may not be operating in the most tax efficient way please call so we can help you work through your options.

Tax Diary December 2019/January 2020

Tuesday, December 3rd, 2019

1 December 2019 – Due date for Corporation Tax payable for the year ended 28 February 2019.

19 December 2019 – PAYE and NIC deductions due for month ended 5 December 2019. (If you pay your tax electronically the due date is 22 December 2019)

19 December 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2019.

19 December 2019 – CIS tax deducted for the month ended 5 December 2019 is payable by today.

30 December 2019 – Deadline for filing 2018-19 self-assessment tax returns online to include a claim for under payments to be collected via tax code in 2020-21.

1 January 2020 – Due date for Corporation Tax due for the year ended 31 March 2019.

19 January 2020 – PAYE and NIC deductions due for month ended 5 January 2020. (If you pay your tax electronically the due date is 22 January 2020)

19 January 2020 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2020.

19 January 2020 – CIS tax deducted for the month ended 5 January 2020 is payable by today.

31 January 2020 – Last day to file 2018-19 self-assessment tax returns online.

31 January 2020 – Balance of self-assessment tax owing for 2018-19 due to be settled on or before today. Also due is any first payment on account for 2019-20.

Obtain proof of employment history

Tuesday, December 3rd, 2019

If you need evidence of employment for a claim, the following notes published by HMRC may help.

You can ask HMRC for a record of your employment history, for example if you are making a compensation claim for:

  • an industrial injury (for example asbestosis or industrial deafness)
  • a road traffic accident
  • medical negligence
  • hardship (for example you’re claiming through a benevolent fund or charity)

How to get your employment history

Fill in the application form that is available on the gov.uk website and send it to HMRC. The address is on the form.

Apply for an employment history on behalf of someone who has died

You can also apply to get the employment history of someone who has died if you are legally entitled to claim damages on behalf of their estate.

If you are wary of undertaking the task, we can help.

Christmas gifts

Tuesday, December 3rd, 2019

You don’t have to pay tax on a benefit (gift) to your employee if all of the following apply:

  • it cost you £50 or less to provide
  • it isn’t cash or a cash voucher
  • it isn’t a reward for their work or performance
  • it isn’t in the terms of their contract

Gifts that fall into this category are known as a ‘trivial benefit’; and whilst they may be much more than trivial in substance, you don’t need to pay tax or National Insurance or let HMRC know you are making the gift.

Any gifts that do not meet this definition will likely be taxable.

Gifts to directors are treated in a similar fashion with one over-riding condition: a director cannot receive trivial gifts of more than £300 in total each tax year. This restriction only applies to the directors of “close companies”. A close company is a limited company with five or fewer shareholders.

Watch out for VAT charge

If you recover the input tax charged when you buy gifts for employees, and if the total value of gifts given to an employee in a tax year exceeds £50, then you will have to account for VAT on the total value of gifts provided. If this is the case, you may be advised to avoid recovering the VAT in the first place.

Flood support

Tuesday, December 3rd, 2019

The government announced 13 November that it will extend its Farming Recovery Fund to support farmers badly affected by the recent flooding across Yorkshire and the Midlands. Through this scheme, farmers and land managers who have suffered uninsurable damage to their property will be able to apply for grants of between £500 and £25,000 to cover repair costs – whether that’s clearing debris or recovering damaged land.

Householders affected will need to contact brokers and insurers – if supplied direct – to start the weary process of claims for flood damage. This in addition to dealing with the distressing upheaval caused by extensive water damage.

In the past HMRC has been supportive if tax-payers cannot make returns or pay tax due to flood disruption. They will also be sympathetic if business or tax records are lost due to water damage.

There is a pretty comprehensive flood alert service on the Gov.uk website and it is possible to register for a flood alert. These can be sent to your mobile, email address or landline. The service is free to use.

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