The recent report by the House of Commons’ Public Accounts Committee (PAC) on "off-payroll" engagement in the public sector makes interesting reading. It transpires that we have all been over-egging the risks of IR35.
HMRC investigated just 23 cases in 2010/11. Does that not amount to state aid for IR35 insurers? They must think that they have won the lottery but it does not end there. Thanks to the intervention of the PAC HMRC is now carrying out a "risk based review" of the 27,000 personal service companies identified in the report. 2,400 of these relate to management posts. I would imagine that the small number (and I am guessing about numbers) of cases that will be found to be within IR35 will be settled outside of the Tribunal and so the deterrent effect of investigating these potential IR35 cases remains extremely low.
October 8, 2012Are you better off as a sole trader or a limited company?
As a general rule, working as a sole trader is the more tax-efficient way of operating, however, once your profit rises above £25,000 per year, you are better off becoming a limited company. You’d pay about £1,500 per year less in tax, and there are other benefits of going limited too.
Save money to pay your tax bill: When it comes to putting money aside, set up a separate bank account so it’s easy to keep track of what money is not yours to spend.
August 9, 2012How To Avoid The Tax Man From Beyond The Grave
The law currently grants four major 100% exemptions from IHT:
- Spousal transfers - subject to your spouse being domiciled or deemed domiciled in the UK
- Business Property Relief
- Agricultural Property Relief
- Gifts to charities
Everything else - subject to a nil rate band of £325,000 - is chargeable at 40%, and your inheritors must pay any tax to HMRC six months from the month of your death.
If it isn’t paid, it collects interest - proving that HMRC can get blood out of a stone!
If there are insufficient liquid assets in your estate to pay the tax, then your Executors will be required to personally borrow capital before being granted probate. It’s only when probate is granted that they will have power of assets in the estate chicken and egg situation - and in some cases, a nasty surprise for the Executors.
If, when you die, you plan to pass your estate to your spouse tax free, there is a little known threat lying like an unseen reef just beneath the surface, ready to rip a hole in the side of your IHT strategy. Be aware that the spousal 100% exemption does not apply if the surviving spouse is not domiciled or not deemed domiciled in the UK at the date of your death (i.e. resident in the UK for 17 of the previous 20 years). Instead of a 100% exemption, the exempt amount of the legacy is reduced to £55,000, with anything above that figure being charged at a massive 40%. So if you’re married to a non-UK national and he or she does not qualify under the 17/20 year rule, you are heading for that reef. Domicile is a very complex topic, so if you think you have a problem you should seek specialist advice.
Business Property Relief (BPR) and Agricultural Property Relief (APR) are mutually exclusive reliefs; you can’t have both on the same assets, but you can have them both on different values or parts of assets. Imagine a farmer obtains planning permission on 20 acres of his 500 acre farm and then dies without disposing of the 20 acres. The actual value of 500 acres is £3.25 million, but the development value of 20 acres would be £10 million. His estate could rely - subject to certain conditions - on getting APR on £3.25 million and BPR on £10 million, resulting in the full value of £13.25 million being received by the estate’s beneficiaries free of tax. Those same beneficiaries could, if they wished, then sell the development land at full market value (£13.25 million) and pay no Capital Gains Tax - not a bad result and totally legal.
Making regular cash gifts to family and friends throughout your lifetime is another way to reduce the overall net worth of your property, and so prevent a mammoth IHT bill. You can, under current legislation, gift £3,000 a year (as one or several gifts). If you fail to use this exemption in one year you are allowed to carry it forward to the next year, allowing a gift of up to £6,000. Additionally, you can give small gifts of up to £250 as often as you like to as many people as you like. Parents can gift up to £5,000 to their child as a wedding or civil partnership gift, and grandparents can give £2,500. So being generous with cash gifts to your loved ones throughout your lifetime will not only benefit them in the short term, but will also serve to help reduce your own future exposure. However, be careful if considering ‘gifting’ your private residence to your children as this has many complicated tax implications - make sure you seek specialist guidance first and foremost.
IHT is a legislative minefield, and proper tax advice, on all but the simplest estates, could produce huge savings for your loved ones. If in doubt, seek help from a specialist who will advise you on the best ways to minimise the sum you will be gifting to the taxman on your death.
Fresh Business Thinking
March 30, 2012Child benefit tax charge
From 7 January 2013 child benefit will still be paid to parents who currently receive it, or who make new claims. However, where one or both of the parenting couple has net income over £50,000 a tax charge will apply equivalent to 1% of the child benefit received by the family. This will result in a tax charge equal to 100% of the child benefit when net income reaches £60,000 per year.
Net income for this purpose is income after deduction of losses, pension contributions and gift aid payments but before personal allowances. So there is some scope for reducing the taxpayer’s net income below the £50,000 by paying pension contributions, or gift aid donations, or simply taking a smaller dividend.
This tax charge will apply to the taxpayer with the highest net income of the couple 2012/13, but the child benefit included in the calculation will be that paid from 7 January 2013 onwards.
Later in 2012 HMRC will write to every taxpayer with income of £50,000 or more, irrespective of whether they have children or not, to explain the new rules.
The child benefit claimant will be given the option of declining to receive child benefit if they or their partner do not wish to pay the tax charge.
The parenting couple for this purpose do not have to be married, they only have to be living together as though they were married or in a civil partnership, which is a definition taken from benefit law. So one person could be taxed on income received by another person.
HMRC says the child benefit tax charge will be collected through PAYE and self-assessment, but it is hard to see how the net income for 2012/13 can be accurately assessed for PAYE before the end of the tax year. This new tax charge could require up to 500,000 more taxpayers to submit self- assessment forms.
March 29, 2012Tax credits withdrawal
HMRC have written to about 1.3 million tax credits claimants telling them they will be taken out of the tax credits system unless they contact the Tax Credit Office by 31 March 2012. But this standard letter is very misleading.
It is true that many families will no longer be eligible for tax credits from 6 April 2012, as a result of changes in the required working hours and income thresholds. But due to the complexity of the tax credits system, the level of family income that reduces a tax credit award to nil varies for every family.
The standard letter from HMRC has not been personalised to the recipient. It does not explain the changes to the tax credit system and quotes income ceilings for tax credit claims that are almost certainly wrong for the majority of claimants. For example, the income limit for child tax credit claims is given as £26,000, but where the family has more than one child, or has a disabled child, or pays for childcare, the income limit for positive claims will be much higher, perhaps as much as £50,000.
If your are registered for Tax Credits you may want to contact HMRC and stay in the tax credits system, at least until your income for 2012/13 is more certain. The reasons for doing this are:
A new tax credits claim can now only be back-dated for one month.
A nil award provides protection should the family circumstances change in the year, such as a trading loss, new baby, or redundancy. The revised tax credits claim will be based on the income for the full year
Any tax credits overpayments generated in earlier years will become immediately payable on leaving the tax credit system.
Claims for the disability element of working tax credits may not be able to be renewed if they lapse.
If tax credits claimants do nothing on receipt of the HMRC letter they could lose thousands of pounds in benefits.
October 27, 2011Mortgage Verification Scheme
Launched by the Council of Mortgage lenders on 1 September 2011, allows the mortgage provider to send HMRC details from the mortgage application directly using a secure electronic platform. HMRC have set up a specialist unit to deal with this scheme, so the request from the mortgage provider should be dealt with promptly.
HMRC will cross check the income details declared to lender against information provided in the taxpayer’s income tax and employment returns. It will then advise the lender whether or not the details correspond. The mortgage lender will take this into account when making subsequent lending decisions.
That sounds great. However, the mortgage provider is only supposed to use the mortgage verification scheme when they have inadequate evidence of the applicant’s declared income, and they suspect mortgage fraud. This is a serious charge, and as HMRC know that suspicions about the taxpayer have been raised by the very use of the mortgage verification scheme, the taxpayer’s file will certainly be marked for further investigation.
Be warned that if your mortgage application is tested using the mortgage verification scheme, it will significantly increase your risk rating with HMRC, and may lead to a tax investigation.
September 5, 2011Payment of Private Company Dividends
A dividend without the correct supporting minutes is not only be in breach of the Companies Act 2006, but also unacceptable to HMRC and therefore it is essential dividend paperwork is correctly dealt with. This position is likely to be more relevant following the taxpayer’s success in the Arctic Systems case with HMRC considering alternative ways in which to challenge dividend payments.
August 16, 2011Give your House to your children to avoid IHT
This is a great example of the sort of Popular Misconceptions About Tax.
The simple idea is to ensure that the house isn't owned by the parents when they die and IHT becomes payable. It should come as no surprise that the tax rules are wise to this idea.
Firstly the gift would be ignored for IHT purposes if the parents continue to live there. So the House gets caught by 'Gift with a Reservation Of Benefit' rules and is still subject to IHT.
But the position is now probably worse than it was. For example:
When the house is sold by the children the gain will be subject to Capital Gains Tax (CGT) unless they happen to live there with Mum & Dad. If no gift had been made there would no CGT if the property was sold shortly after the parents death.
The parents security of tenure in what is no longer 'their' property is now vulnerable to any court rulings that follow if their children divorce or become bankrupt.
It's also worth noting that under the current rules no IHT is payable unless someone's taxable estate when they die is more than £325,000 (£650,000 for married couples and registered civil partners).
So if anyone acted on this PMA Tax idea they would simply have created more problems and more tax liabilities than if they'd done nothing. Far preferable to seek out professional advice from someone who really understands the IHT rules and gives this sort of advice on a daily basis.
Tax Advice Network
June 30, 2011HMRC increase late filing penalties
People who submit their tax return after the 31 January deadline will face significantly higher penalties, HMRC has announced.
Previously, returns filed after the deadline would attract a £100 fine. However under the new framework, which first applies to 2010/11 tax returns, taxpayers who file their returns late will be charged £100 on day one and further daily penalties of £10 after three months.
It means that a tax return filed six months late could attract a penalty of at least £1,300.
According to HMRC, the old £100 penalty failed to act as a deterrent. It hopes the new harsher penalty system will therefore encourage people to ‘submit returns as soon as possible’.
‘HMRC spends a lot of time pursuing late returns and getting involved in unnecessary appeals work. We want to focus our resources on more productive work such as catching criminals and collecting tax,’ said a HMRC spokesperson.
June 13, 2011Buying a car with the taxman's help
Buying a car for a family member is often a necessity, and with recent rises in VAT an expensive one.
There are however several little known options that can ease the pain on your pocket (and the environment), with the help of none other than the taxman.
With the government now basing tax charges solely on CO2 emissions, a more eco-friendly car will greatly reduce the overall cost, whoever you are.
But if you own your own company, the benefits can be even greater.
Consider the following scenario. Your 18-year-old daughter is off to university, and you want to get her a £10,000 car so that she can visit home.
You have two options: pay for it personally or get your company to buy it.
If it is bought via the company, then in the normal course of events you will be taxed on what is called the benefit-in-kind that you are receiving.
A company car with no CO2 emissions - such as an electric car - accrues no benefit-in-kind tax charge at all.
As emissions rise, so does the value of the taxable benefit, on a scale set by the Revenue.
So cars with emissions of up to 75g per km result in an annual taxable benefit of only 5% of the list price of the car when new.
Emissions between 76g and 120g per km will result in a taxable benefit of 10%.
And those between 121g and 130g are deemed to produce a benefit worth 15% of the list price when new.
After that, there is an additional 1% rise in the taxable benefit for each 5g of CO2 and a further 3% if the car is diesel.
The cash cost
So if you are a 40% taxpayer - and company owner - the true cash cost to you of supplying your daughter with a £10,000 car, with emissions between 121g and 130g, will be only £600 (£10,000 x 15% x 40%) per annum.
Remember, the car has been bought by the company and the cash that you pay is the tax for receiving a benefit-in-kind.
This charge covers all expenses paid by the company, other than fuel, and specifically includes inexperienced driver motor insurance for your 18-year-old, which is also paid by the company.
The cost of supplying the car in the lower emissions brackets mentioned previously would be nil, £200 per year and £400 per year respectively.
Meanwhile, your company will be able to claim full corporation tax relief for it too, making the deal even sweeter.
Husbands and wives
Those in a sole trader business or partnership also have options open to them.
Family members often help out with the running of the business.
If they do, providing them with a low-emission car on business expenses can prove very economical.
Let us suppose a wife is receiving a modest salary of £5,000, and her husband - a sole trader or partner - chooses to buy her a car.
If the wife’s remuneration package, including the car benefit, is under the lower limit of £8,500 per year she remains outside the scope of benefit-in-kind taxation.
As the husband is a partner or sole trader - rather than a director or employee - he cannot be taxed either, making his wife’s car completely tax free.
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