Tuesday 25 August 2015

Dividend tax and allowance, Incorrect P11D penalty letters, VAT advice

Since the Summer Budget small company owners and their accountants have been worrying about the proposed new dividend tax and allowance. HMRC has just released some brief guidance on these proposals, which changes our understanding of how they will work, as we explain below. We also have warnings about incorrect P11D penalty letters and where to source your VAT advice. 

Dividend tax and allowance 
From 6 April 2016 the taxation of all dividends received by individuals will change significantly - pension funds, ISAs and companies will not be affected. There are still outstanding questions about the taxation of dividends received by trusts and non-resident individuals. 

There are three key facts to understand about the new dividend tax regime: 

1. The cash amount of dividend received will be the amount subject to tax - there will be no grossing up for tax purposes. 
2. The first £5,000 of dividend income per year will be taxed at 0% - whatever income tax band it falls into. 
3. Dividends received in excess of £5,000 will be taxed at 7.5%, 32.5% or 38.1%, depending on whether they fall into the basic, higher, or additional rate income tax band. 

The HMRC factsheet on the dividend allowance explains how this “allowance” will apply. It won't work like the personal allowance, which was the impression given by the Summer Budget announcement, it will be a zero tax rate. 

Dividend income will be taxed as the highest slice of income (as now), so it will fall within the highest tax band for the taxpayer. However, within that tax band the first £5,000 of dividends will be subject to tax at 0% rather than at the rate applicable to dividends.  

Example 

In 2016/17 Harry takes dividends of £60,000 from his own company, but no salary. The personal allowance is £11,000 and basic rate band: £32,000.
Income
Tax payable
Dividend received
£60,000
£
Personal allowance
(11,000)
49,000
Basic rate band :
(32,000)
Dividend ”allowance”
5,000 @0%
0
Residue of basic rate band
27,000 @7.5%
2,025
Higher rate band:
17,000
17,000 @32.5%
5,525
Total tax payable:
7,550


It is possible that the dividend “allowance” - or zero rate for dividends - to give it a more accurate name, will fall into two income tax bands, as is illustrated in example 6 in the HMRC factsheet.  

The total amount of dividend income received will count as part of the taxpayer's net adjusted income when calculating whether the £100,000 threshold for withdrawing the personal allowance is breached. Also parents need to count all their dividend income to test whether the £50,000 threshold for the high income child benefit charge is breached. Although the dividend income included in those calculations is the amount received, not a grossed-up amount.

This is an extract from our tax tips newsletter dated 20 August 2015 (5 days before we publish an extract on this blog). Try it for free by registering here>>>

Last week's newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. Published weekly since 2007, every week it's clearly written and focused on precisely what accountants in general practice need to know about that week.

Tuesday 18 August 2015

HMRC performance, Incorrect APNs, Direct recovery of debts

Mid-August, and it appears that most of HMRC is on holiday as processing times have slowed down to a crawl. This has implications for your clients who are waiting for tax repayments, but it doesn't stop the HMRC machine from spewing out incorrect tax demands as we explain below. We also have an update on the direct recovery of debt rules which will be arriving at a bank near you this Autumn. 

HMRC performance

When you send a letter or tax return to HMRC you expect it to be dealt within a reasonable time. HMRC's target for dealing with post is to clear 80% within 15 working days, and 95% within 40 working days, but its quarterly performance reports show those targets are not being achieved.

In fact accountants are reporting that HMRC taking over 15 weeks to deal withletters. Repayment claims for tax deducted under PAYE, or under self-assessment,are taking at least six months to be paid, and the HMRC call centre says thatclaims submitted in April 2015 will not be processed until January 2016 - that's aneight month delay!

So what can be done? Not a lot if your claim or letter is already in the system. You can raise the issue as a complaint with HMRC and suggest your client writes to their MP (who is also on holiday). You may consider lodging the delay on a tax issues forum such as operated by CIOT or ICPA. However, HMRC is aware that its post handling is not up to scratch as it reports in the Working Together in the latest Agent Update (no. 49). It says it is recruiting more staff to deal with thebacklog.

In the future the only way to get a response within a reasonable time from HMRC is to submit tax repayment claims online. If the claim relates to CIS tax there is a list of tips to follow which may speed-up the repayment (see below). Your letters regarding PAYE or self-assessment may get a quicker response if you use standard headings as suggested by HMRC, this allows the staff to send the letter to the right place in the organisation.  

This is an extract from our tax tips newsletter dated 13 August 2015 (5 days before we publish an extract on this blog). The newsletter itself contained links to related source material for this story and the other two topical, timely and commercial tax tips. It's clearly written and extremely good value for accountants in general practice. Try it for free by registering here>>>

Tuesday 11 August 2015

Dividend tax, Dentists and VAT, Employment intermediaries

As a tax adviser you have to look forwards and sideways for your clients, and well as cushioning the burden of stifling regulations, as we illustrate this week. The new dividend tax requires some predictions to assess the tax saving or cost comparing this year to next. A VAT case concerning a dental practice may be relevant to a wide range of healthcare providers. Reporting under the employment intermediaries is an unnecessary burden, but HMRC is trying to make it as easy as possible for those affected.

Dentists and VAT

Many dentists have incorporated their businesses since 2006 when the rules were changed to allow this. However, a stumbling block has often been the contract between the local NHS trust and the dentist's firm, which may not be possible to transfer to the new company.

A solution is to run the new company alongside the old dental practice which continues to operate the NHS contract. The company employs the staff and undertakes the dental work subcontracted from the old unincorporated practice.

Dental work is classified as the provision of medical care, so is exempt from VAT under VATA 1994, Sch 9, gp 7. The new dental company should be able to rely on this exemption to avoid having to register for VAT. However, HMRC may take the view that the old dental practice is carrying on the dental work and the new company is merely providing staff, not medical care.

This was their argument in City Fresh Services Ltd, where HMRC said the company should be VAT registered. The Tax Tribunal disagreed with HMRC, saying that the legal form of the person providing the medical care is irrelevant so long as the essential nature of the supply being made does not change. The Tribunal also noted that there was no need for supplies of medical care to be made directly to the final patient.

This case is significant for any business that provides medical care or medical services via a company. Our VAT experts are happy to advise where the VAT exemption can be utilised. 

This is an extract from our tax tips newsletter dated 6 August 2015 (5 days before we publish an extract on this blog). The newsletter itself contained links to related source material for this story and the other two topical, timely and commercial tax tips. It's clearly written and extremely good value for accountants in general practice. Try it for free by registering here>>>

Tuesday 4 August 2015

Pensions, Employers, Employment Allowance

Last week we examined the changes to pension tax relief announced in the Summer Budget, and the increase in the NMW which employers will need to pay from October 2015 and April 2016. There were also some issues concerning the employment allowance, which we discuss below.



Employment Allowance
The employment allowance was supposed to be easy for all employers to claim;just tick box on the EPS and the allowance would apply for the current and allfuture tax years. But we know it hasn't been that straightforward.

Certain employers aren't eligible to claim the allowance if more than 50% of the business income is deemed to be public sector work - such as medical doctors(GPs) who work predominately for the NHS. Also where employees work in a domestic capacity in the employer's home the allowance is blocked. This covers;nannies, gardeners and domestic cleaners, but not carers who can qualify for the allowance from 6 April 2015 (not for 2014/15).

Some employers have found that their claim for the employment allowance for2015/16 has been ignored or removed by the RTI computer. Where the employer pays the amount of PAYE they believe is due, excluding the employers NIC covered by the employment allowance, HMRC have chased for the unpaid NIC. If this happens to your clients there is no alternative but to phone the HMRC employer's helpline to get the employment allowance reinstated.  

In the Summer Budget we learnt that the employment allowance will increase to £3,000 from 6 April 2016. This good news was tempered by a further block on the allowance for companies where the director is the sole employee.

We have no further information on this other than the announcement in the Budget red book. We hope that HMRC will provide clear guidance as to whether partnerships and sole-traders who employ a single worker will be affected by this block on the employment allowance - we assume not.

Where a company employs someone other than the director, perhaps the director's spouse, we assume the employment allowance will be claimable.However, there is no indication yet as whether the second employee will be required to be paid at a level that attracts employer's NIC. We will keep you informed when more details are released.

This is an extract from our tax tips newsletter dated 30 July 2015. The newsletter itself contained links to related source material for this story and the other two topical, timely and commercial tax tips. It's clearly written and extremely good value for accountants in general practice. Try it for free by registering here>>>