RTI double trouble, Marriage allowance, Tax errors

Do you ever feel you have jumped through the tax looking glass? Words mean what HMRC want them to mean, and systematic problems are the fault of the user not the system designer. The week we have two examples – the RTI system and the new marriage allowance. We also take a serious lesson from a silly tax mistake – how you can help clients climb out of similar rabbit holes.

Tax errors

Do you read questions posted on tax forums by confused taxpayers? Sometimes the mistakes made by the unrepresented can be quite amusing, and educational. 

One taxpayer was under the impression that he is “self-employed” as he is the sole shareholder and director of his own company. It’s an understandable mistake.

Unfortunately he completed the self-employed pages of his tax return instead of the employed pages, and including his P60 earnings as his self-employed income. Not surprisingly HMRC want to know why he hadn’t paid class 4 NIC!    

That taxpayer was lucky as he hasn’t received an inaccuracy penalty for his mistake, but that may be on its way. HMRC are now issuing inaccuracy penalties for errors made in the 2013/14 tax returns, typically at the rate of 15% of the understated tax, although the penalty can be up to 100% of the underpaid tax. Strangely they don’t provide the taxpayer with a bonus for making a mistake in HMRC’s favour.

If your new client has received an inaccuracy penalty as a result of an error on a tax return they completed, the first thing to do is appeal the penalty. This should be done within 30 days of the appeal notice, but HMRC will normally accept a late appeal, especially if you explain that you have just been appointed as the tax agent.

The key to removing an inaccuracy penalty is to show the taxpayer took reasonable care when he completed the tax return, in which case the penalty should be reduced to nil. HMRC take into account the background, experience and personal circumstances of the taxpayer when deciding whether he took reasonable care. 

For example a qualified accountant or a person who works in the finance industry, such as a banker, will be expect get everything right and to ask for missing information where the employer has failed to supply it. On the other hand an elderly person, who may be easily confused, may be forgiven for putting income in the wrong box. HMRC won’t know the circumstances under which the taxpayer completed their return until you tell them. 

You can also ask HMRC to consider a “special reduction” for the special circumstances of the taxpayer outside the formal appeals process. Do this by asking for an internal review, and give as much detail about the taxpayer’s sorry story as possible.

Do ask one of our personal tax experts for guidance on claiming a special reduction for inaccuracy penalties if this is the first time you have encountered such a penalty.

This is an extract from our tax tips newsletter dated 26 February 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>>>

Really Timely Intervention, Rentals and renewals, Pension Freedoms

Groundhog Day is celebrated on 2 February in Pennsylvania, but HMRC thinks it falls on 17 February in the UK, as once again they have changed the conditions for RTI penalties, as we explain below. We also re-examine the application of the renewals basis to the cost of valuable items in unfurnished let properties, and supply words of warning for clients who are getting excited about accessing their pension savings.

Really Timely Intervention

In our newsletter on 11 September 2014 we said that RTI is a SNAFU mess, and so it continues. The fact that HMRC have introduced yet another penalty concession is evidence that the system still is not working as it should. 

Late filing penalties for RTI returns came into effect for employers with 50 or more employees from 6 October 2014, and are due to apply for all other employers from 6 March 2015. Those dates still apply but HMRC has said it will not issue a late filing penalty if the FPS is submitted within 3 days of the payment date (the date the employees are contractually due to be paid), or there is another valid reason for submitting a late FPS.  

If a late filing penalty notice has already been issued, for a period since 6 October 2014, the employer (or you or their behalf) can ask for the penalty to be removed. Do this by logging an appeal via the online appeals system. Complete the “other” reason box with the statement “return filed within 3 days”, the penalty should be cancelled.  

Late payment penalties were also due to apply automatically from 6 April 2015. However, HMRC is now going to hold-back on the automatic button and issue late filing penalties on a risk-assessed basis. We assume this means HMRC will only issue a late filing penalty when it is very clear that PAYE was deliberately paid late. This should avoid penalties being issued for the many disputed amounts showing up on employers’ business tax dashboards (online accounts) as underpaid or estimated PAYE.  

This is an extract from our tax tips newsletter dated 19 February 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>>>

Company cars, Business rates, More problems with HICBC

How can you add value to the service you provide to clients - to go beyond the expected norms of filing every tax return on time? One way is to anticipate future tax charges and help your clients make the changes necessary to minimise those taxes. Two areas in which you can help are; the provision of company cars, and business rates, as we discuss below. We also have news of more problems concerning child benefit claw-back.

 

Company cars

How many of your clients still have a company car? Do they understand how much it costs them and their company in tax and NI charges? Perhaps you need to have that conversation again in light of the proposed increases in tax charges in the years ahead.

From 6 April 2015 all company cars will generate a benefit in kind charge, even electric cars will be taxed on 5% of their list price. The taxable benefit for other low emission vehicles (51-75g/kg) will leap up from 5% to 9% of the vehicle’s list price. The taxable benefit for all other cars will also increase by two percentage points, even for high emission cars, as the maximum taxable benefit is increasing to 37% of the list price.  

In 2016/17 a similar hike in taxable benefit will be applied, as the appropriate percentage of list will increase by two percentage points for all cars, except for those which are already taxed at the maximum of 37%. These changes were introduced by FA 2014, s 24. 

However, company car drivers are set to get royally stuffed in 2017/18 and beyond in the proposals in the tax and impact note released on 10 December 2014 come to pass. In that year and in 2018/19 each 5g rise in CO2 emissions will mean a two percentage point increase in the taxable benefit. Thus the table of appropriate percentages of list price will go up in 2% steps not 1%, as has previously been the case. “Classic” cars with no recorded CO2 emissions will also be hit with increased taxable benefit charges. 

  

Say your client’s company has just provided him with a new Lexus NX 300 H Sport, list price: £40,000, CO2 emissions: 121g/kg. In 2014/15 he will be taxed on 17% x £40,000:  £6,800 (reduced by the proportion of the year when the car was not available). In 2015/16 he will be taxed on £7,600. In 2016/17 the taxable benefit increases to £8,400, but in 2017/18 the taxable benefit leaps up to £11,600 (29% of list price)! If he keeps the company car for more than 4.5 years he will be taxed on the full price of the car.

 

This is an extract from our tax tips newsletter dated 12 February 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>>>

Minimising CGT, HICBC strategies, PAYE codes for 2015/16

Now that January is over it’s a good time to think about tax planning and benefit protection strategies for your clients. Those who are looking to sell their business need to plan to minimise CGT, and there is a new way to do this using EIS. Clients with young children want to protect their child benefit so need advice on how to keep their net income below the relevant thresholds for 2014/15. Finally we review the new features to watch out for in the 2015/16 PAYE codes.

Minimising CGT

Until recently individuals who wanted to minimise their exposure to CGT on the sale of a business had to choose between paying 10% CGT by claiming entrepreneurs’ relief (ER), or to defer the gain using the Enterprise Investment Scheme (EIS) or the new Social Investment Tax Relief (SITR).

The gain subject to the ER claim can’t be deferred, as it has already been taxed. When the gain is deferred by investing in shares issued under EIS, or shares or debt issued under SITR, no CGT is payable immediately. But that gain becomes subject to CGT when the EIS or SITR investment is disposed of, or when the investment conditions are broken. At that stage it is normally too late to claim ER, and anyway a claim for ER would mean 10% CGT becomes payable retrospectively based on the date of the sale. 

However, for investments in EIS or SITR made on after 3 December 2014 the individual can choose to defer a gain, and then claim ER when that investment is disposed of. Thus your client can defer a gain that qualifies for ER, and then take advantage of the 10% rate of CGT by claiming ER when the deferred gain falls back into charge.

Remember a gain can be deferred by investing in EIS/ SITR up to three years after the date the gain was made, or one year before that date. So even if your client has already made a large gain, it is not too late to use the EIS instead of ER. 

This is also a useful mechanism for splitting a large gain into smaller gains that can be covered by the taxpayer’s annual exemption. The EIS shares can be disposed of in small tranches over a number of years, and at each disposal a relevant proportion of the deferred gain falls back into charge for CGT.

Do talk to one of our CGT experts if you would like further details on how this CGT planning works.

This is an extract from our tax tips newsletter dated 5 February 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>>>

Paying HMRC, VAT invoices, NICs for young people

It's the eleventh hour and the SA tax returns are almost done, but have your clients' managed to pay their tax on time? This year HMRC has thrown hurdles in their way as we explain below. We also have news of changes coming into effect from April 2015 for VAT invoices and NICs. In both cases clients need to be warned in advance to budget for different payments and receipts.

Paying HMRC

In a break from previous practice, this year HMRC has not sent out SA reminder letters to individuals that include a paying-in slip. This has left many clients waiting for the payslip as a prompt to pay their tax and to complete their tax returns.    

The pixies behind the GOV.UK website think that everyone has internet access and uses online or telephone banking, so those factors are prerequisites for almost all the methods of payment suggested on the ìhow to pay your self-assessment tax billî page.  But there are a large number of people who donít bank online either because they donít have a computer or they simply donít trust online banking.  

For those off-line taxpayers paying a tax bill generally means writing a cheque and sending it through the post with a payment slip, or taking the cheque to a bank, building society or post office with a payment slip. Note the taxpayer needs the payment slip as printed by HMRC and attached to a SA statement -which many people have not received this year.  

You can help your clients by printing a personalised payslip from the GOV.UKwebsite, but that payslip can only be used to accompany a cheques sent through the post to HMRC collector of taxes in Bradford. It is now technically too late for a cheque to arrive by 31 January, as HMRC says it takes three working days for a cheque to reach them and be processed. 

Where the taxpayer has a debit card, they can use that card at a Post Office to pay the tax due, but a payment slip is still needed. However, the payment must be made by close of business on Friday 30 January 2015 to count as being received by HMRC by 31 January 2015. Also the maximum payment that can be made through the Post Office in one transaction is £10,000. 

A debit or credit card can be used to pay HMRC directly, though the internet or by telephone, but there is a 1.4% charge for using a credit card. To pay by debit card the taxpayer needs to have the funds required in the bank account attached to that card. The bank may also set a daily limit on the amount that can be paid using a debit card, on via online or telephone banking. 

Taxpayers can pay HMRC over the phone by calling 0300 200 3402. This number is not advertised anywhere on the GOV.UK website. 

This is an extract from our tax tips newsletter dated 29 January 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>>>

RTI spaghetti, Holiday pay, Auto-enrolment

The frantic personal tax season is almost over so this week we are looking at issues relating to payroll and pensions. RTI late filing penalties are starting to arrive with large employers for the quarter beginning 6 October 2014. Claims for unpaid holiday pay are also a worry for some employers. Auto-enrolment a nightmare you have tried not to think about, but those staging dates are just around the corner, so action is needed now.

RTI spaghetti

The good

RTI was supposed to make the PAYE reporting ìinstantî i.e. in ìreal timeî. So why do we still have to answer those end-of-year questions on the final FPS or EPS submitted for the year? Surely HMRC have all the information they need as it has been reported during the tax year.

Thatís true and HMRC have admitted they donít use the data provided by the end-of-year questions for compliance purposes, so those questions have been scrapped (by SI 2015/02). Thus when you submit a final FPS or EPS after 6 March 2015 in theory you shouldnít have to answer those annoying questions.

However, this change was announced too late to be included in most payroll software for 2014/15. Even HMRCís free Basic PAYE Tools software will not be updated for this change to the end of year procedures until July 2015. So it looks like you will have to answer those pointless questions for 2014/15 although HMRC will do nothing with the information.

The bad 

RTI requires every employer to report to HMRC at least once per tax month by the ìpayment dateî for the employeesí salary, unless the PAYE scheme has been registered as ìannualî. This creates 12 filing deadlines for the tax year instead of one end-of-year deadline.

If a filing deadline is missed there is a potential late filing penalty. From 6 October 2014, large employers (50 or more employees) have been charged penalties for late filed RTI reporting deadline, although those employers are permitted one late filing per tax year. The penalty notices for October to January will start to arrive with employers this month. But HMRC are not sending copies tax agents, so you should remind your clients to tell you if they receive a penalty notice.

Smaller employers (up to 50 employees) will be charged penalties for missing RTI filing deadlines from 6 March 2015. Those smaller employers are not granted one late filing in 2014/15, so if the RTI report due in the period 6 March 205 to 5 April 2015 is late, it will generate a late filing penalty. 

The ugly 

There is a new online system to appeal against RTI penalties. The penalty notice includes an ID number to use to log the appeal. You should be able to do this for your clients using PAYE online. However, remember to take a screen print of the information you have keyed-in with the appeal ñ ie the reasons for appeal, as there is no prompt to print a copy for your records.

This is an extract from our tax tips newsletter dated 22 January 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>>>

Benchmarking of profits, Clients' expense records, Directors' loans

Back in the day the Inland Revenue trained their officers to understand that different taxpayers required different approaches, and to use their discretion to smooth out the difficulties which real life throws up. Nowadays their approach is: one penalty fits all, and business profits are compared to standard benchmarks as we explain below. We also question how deeply you should delve into a client’s expenses, and have news on how to reclaim s 455 tax paid on directors’ loans. 

 

Benchmarking of profits

In our newsletter on 17 April 2014 we explained how the HMRC “transparent benchmarking team” was writing to sole-trader businesses in selected trade sectors to nudge them into reviewing their reported net profit ratios. The trades targeted were: painters and decorators, driving instructors, taxi drivers and pharmacists.

The HMRC benchmarking team has now turned its attention to car mechanics and furniture shops. However, this time it is looking at the VAT returns of up to 7500 businesses, rather than the gross profit figures reported on the SA tax returns. 

The HMRC letter asks the trader to work out its VAT mark-up ratio by comparing the difference between sales and purchases (ie gross profit), as a percentage of all purchases as reported on the VAT return. It provides a range of mark-up ratios which HMRC say are standard for the trade.

HMRC ask the business to compare its VAT mark-up ratio for the last 12 months of VAT returns to the standard mark-up ratios. If it’s mark-up ratio falls outside the standard range, it should review the figures to be included in boxes 6 and 7 on its next VAT return.  

This is where you come in. In spite of asking some fairly complicated questions about profits and mark-up, HMRC has decided not to copy the letter to the tax agents of the businesses they have selected for this experiment. Fortunately the HMRC letter does not require a reply, so it can be safely ignored if you are confident that your client’s VAT returns are correct. 

However, the HMRC letter will certainly generate some alarm the business owners who receive it, so be prepared for some panicky phone calls - just what you need at this busy time of year.

 

This is an extract from our tax tips newsletter dated 15 January 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>>>