“If You Don’t Ask, You Don’t Get…”

Is an adage that HMRC probably knows all too well at the moment. Due to a failure of the HMRC self-assessment system, some taxpayers haven’t been informed of the amount of tax to pay on account by 31 January 2019. This problem won’t be fixed before 31 July 2019.

It’s not a new problem, though. The same thing happened when in July 2018, payments due for 31 July 2018 were not being notified. Anyone in self-assessment with less than 80% of their tax collected at source, for example through PAYE, paying more than £1,000 through their tax return per year needs to make a payment on account.

This will apply to most self-employed individuals but also possibly landlords and increasingly company directors who take out a lot of income from their company as dividends.

Let’s Consider a Typical Self-Assessment Case

For example, Barbie, a self-employed marriage guidance counsellor, paid income tax of £9,000 for 2017/18, of which £7,500 had been paid on account in two equal instalments on 31 January 2018 (£3750) and 31 July 2018 (£3750).

She had to pay the balancing payment of £1500 by 31 January 2019. However, she should also make a payment on account for 2018/19 of £4,500 by 31 January 2019, equal to half of her 2017/18 total tax liability (£9000).

Still With Us? Hang On: It’s Worth It

The professional tax and accountancy bodies have complained to HMRC and apologies have been received but there is apparently no way HMRC can identify those affected and remind them!

HMRC has said it cannot resolve the problem of missing tax demands in time for the 31 July 2019 payment date. If you did not receive a tax demand for 2018-19 due by 31 January 2019 you may have only paid the balance of tax due for 2017-18.

Going back to Barbie, she would have therefore incorrectly paid just the £1500 instead of £6000 (£1,500 plus the first £4,500). If Barbie fills out her own tax return now for 2018-19 it will not show she has paid the £4500 in January 2019 and also another £4500 due for July 2019.

But it Only Delays the Inevitable

The result of this is that Barbie will have a much larger tax bill to pay in January 2020 when the balance of tax due is payable. You are probably saying … “why not just pay the amounts without a demand”. It is possible that the payment will be accepted but also likely that it will be returned by the HMRC computer as “not due”.

HMRC has confirmed that if the demands for payments on account have not been made the taxpayer will not be charged interest as long as full payment of all the tax due for 2018/19 is made by 31 January 2020.

In these circumstances, it may be wise to park the money in a savings account until HMRC can sort themselves out. If you do get charged interest, your tax agent can take this up with HMRC to get the situation reversed.

This is the latest of a long list of errors with HMRC’s computer systems. Earlier this year we learned that penalty notices for not submitting the 2017-18 tax returns on time were going to be delayed until April 2019. Normally they are issued in February.

Because of this, some taxpayers will be unaware they’ve clocked up additional penalties for continuing failure to submit returns. So, HMRC will probably have to wait longer for those tax returns.

Now, we don’t condone not sending in your tax return on time, but the lesson again to HMRC is “If you don’t ask, you don’t get”!

If you were hoping to get Entrepreneurs’ Tax Relief when you make a Capital Gain on business assets there are new rules coming in if you make a disposal after 5 April 2019. These could make a substantial difference to what you take home after a successful share sale.

The Ownership Period Lengthens

The ownership period to qualify, will rise from one to two years. So at present, a disposal of shares in a company trading from say 1 January 2018 could qualify if sold. From 6 April 2019 to 31 December 2019, they will not.

One key trigger here is when the business actually started to trade. This can be before any income is received, but it can’t start until mere preparations to trade have ended. If you are in a dilemma about this, contact us but it is essential to keep records of everything you do leading up to getting that first payment at your bank.

Not only that, the October 29th, 2018 Budget adds two new conditions immediately to change the definition of a “personal company”. This restricts relief to shareholders to those who have a genuine material stake (at least 5%) in the company.

To get back to basics, a claim to the relief on shares or business asset gains needs the company to be the taxpayer’s “personal company”. They must be an employee or officer of that company, or of another company in the same trading group.

So, what is a “Personal Company”, Then?

Under the old rules you must hold at least 5% of the ordinary share capital and you must hold at least 5% of the voting rights which are exercisable by virtue of that shareholding.

These rules will stay but now you must also have a right to at least 5% interest in the distributable profits and you must have a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.

Unfortunately the people responsible for writing this in to law have caused confusion that will be very difficult to match with what the Chancellor said in his statement. This is important because what the Chancellor intended needs also to be what the law actually says. The law trumps the Chancellor!

A New Government Amendment on Entrepreneur’s Relief

The Government has now made an amendment and this adds a much clearer alternative test for a “personal company” based on the shareholder’s entitlement to proceeds. In the event of a hypothetical sale of the whole company by asking if the shareholder is entitled to at least 5% of the proceeds in the event of the disposal of the whole company.

It assumes that the entire company is sold for its market value on the date of disposal of the shares/ assets which are the subject of the claim. This is important because in reality this is not what happens, quite often. This new test can be used instead of asking if you have a right to at least 5% interest in the distributable profits and a right to at least 5% of the net assets due to the equity holders on a winding-up of the company.

This Already Applies to Disposals

Unfortunately if you made a disposal between 29 October 2018 and 20 December 2018 you must still apply the criteria: “Do I have a right to at least 5% interest in the distributable profits and a right to at least 5% of the net assets due to the equity holders on a winding-up of the company?”

Those who have built up their own company by way of ordinary shares with full voting rights and full rights on a winding-up should not be affected.

Employees who have acquired shares through employee share schemes, particularly EMI shares, may find they have suddenly lost their right to entrepreneurs’ relief, as employee shares tend to be issued with restricted rights, though not always.

Restricted rights often apply to directors and managers taking shares from a management buyout because often the financiers of the deal will have a different class of shares.

If uncertainty remains, then let’s talk about it. Simply pick up the phone and speak to the Maven Team on 023 8061 4404 or contact us via the website and we can help you navigate any uncertainty.

With Less Than 4 Months To Go, Making Tax Digital for VAT is Looking Like a Car Crash Waiting to Happen….

These aren’t our works. Making Tax Digital (‘MTD’) for VAT is in a mess! The ‘car crash’ reference was uttered recently after the House of Lords economic affairs finance bill sub-committee had heard from tax experts and business representatives. Surely the people in the know are businesses and tax experts rather than civil servants?

The former expressed concerns about the way that the programme has been implemented and communication between HMRC and small businesses. Committee member Lord Lee was heard to say:

‘The evidence we have had is absolutely overwhelming in that there is huge under-preparedness. The firm impression we have at the moment is that we are heading for a giant car crash.’

The Committee said it should be delayed by at least one year and the government should wait until April 2022 before extending it to other taxes so that lessons can be learned.

The Lords Assert Themselves

The Lords may enjoy that “Marmite” status with the public but there’s no denying that many of them are seasoned business owners, lawyers and experienced politicians. They say that many businesses will not be ready for the introduction of MTD for VAT in April 2019. They believe that HMRC has inadequately considered the needs and concerns of smaller businesses.

They conclude that neither the government nor HMRC have listened to the warnings in the committee’s report on MTD for business in March 2017, now over 20 months ago.

The Chairman Lord Forsyth of Drumlean said:

“HMRC has neglected its responsibility to support small businesses with MTD for VAT. It is not listening to small businesses, while offering a six-month deferral for many in the public sector.

“Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier. The government must delay its introduction.”

And There’s More

Other report findings include:

• Only HMRC is confident that all one million businesses will be ready for MTD for VAT in April.
• The costs to businesses of MTD for VAT will be far more than HMRC’s impact assessment.
• HMRC must publish how its communication and support systems will meet the needs of taxpayers and agents across different levels of digital capability and skills.
• So far, no free software products have been offered.
• The penalties regime could be fairer and encourage taxpayers to remedy defaults promptly. For example offering a longer grace period before fines for late payment are applied.

According to one survey by a large firm of Accountants, only 36% of businesses are prepared for the new regime and 48% have no plan in place. The rest do not even know about it.

Small Businesses are Completely Unprepared

Small businesses are the most unprepared, having used spreadsheets for many years. They often use a self-employed or part time employed book keeper who may hand back the figures to the business owner. They often file VAT returns themselves using HMRC software.

As mentioned previously, this HMRC software will start to disappear from next April. Does your book keeper know about MTD and have they put plans in place for you?

Bridging software provides “Digital Links” between the spreadsheet and the HMRC computer that receives your return over the internet. The digital link will read your spreadsheet electronically and you do nothing more.  Digital link software is now in development, but when will it be ready?

The more robust long term way forward may be cloud accounting because this produces business accounts “as you go”, not just a VAT return.

To discuss being ready for MTD VAT do give us a call for a chat without obligation.

“The hurrier I go, the behinder I get!”
Alice In Wonderland, Lewis Carroll

HMRC is currently piloting Making Tax Digital (MTD) for VAT but this is by invitation only. Once HMRC is satisfied that things are working as expected, it proposes to allow business to join the pilot without invitation. It will be interesting to see when this happens, which will be the true litmus test.

There are now less than six months before MTD proper is supposed to go “live” on the 1st April 2019. When will piloting be opened up to everyone?

If your business turns over more than £85,000 and is required to register for VAT, you’re going to be in the MTD club. Once you’re in this position, you can’t leave if your turnover drops below £85,000.

All this means that right now, if you think you will soon be a member of the MTD club, you should be looking round for a suitable provider of software to get you over the MTD line.

So, how do you find a supplier?

We’re not talking about the person, firm or company preparing or reviewing your VAT return. The MTD provider’s software will submit your VAT return. Initially it’ll be every quarter or year, as it is now. But, the preparation and reviewing of your VAT business is no longer going to be separate. It will be an inseparable part of the whole VAT submission process. The MTD software must be used to record and reflect your transaction from the outset.

We don’t think many people have cottoned on to this yet. This is why MTD is such a monumental big deal. We think Lewis Carroll got it right, it’s important to not rush.

The HMRC Notice 700/22 Making Tax Digital highlights some important issues. Data transfer between VAT software or applications must use “digital links”. In other words, electronically. This, thankfully, does provide for spreadsheets. But it does not allow you to print a spreadsheet, then re-input the details manually to MTD.

There will be a “soft landing” period for digital links. This means you can “copy and paste” (the best way of describing it) up until 31 March 2020.

Is this because the technology for digital links is not proven as yet?

You must use software that records and preserves digital records and provides HMRC with the data via HMRC’s Application Programme Interface (“API”). API is something you will hear a lot more of, if you are joining the MTD club.

HMRC has published a list of software suppliers offering product that is now developed, at: https://www.gov.uk/guidance/software-for-sending-income-tax-updates#VAT. This list will show you whether they service Business or Tax Agents too, and what the software does.

The ideal situation is to find a supplier that supports Agents as well as the business itself. That’s just our opinion, but we think this is advisable for small and many medium business enterprises. These businesses are not staffed by hundreds and very often the owner is also the manager of everything that happens. Or indeed doesn’t happen.

With agent access, your agent can log in to your records, review your VAT entries, or help in making them. Next? Choose the range of functions that you want. The full range of functions are:

• Digital record keeping
• Submit the VAT Return
• View the VAT Return
• View the VAT liabilities
• View VAT payments

Not all of the existing suppliers are offering all of these functions. You don’t have to have all of the functions, but if you use spreadsheets you’ll need Digital Records to go with the Submit Vat Return.

Changes You Will Miss (If You’re Not Careful)

Remember, the HMRC VAT screens will disappear from our view for returns that commence from 1 April 2019. If you are a user of the Flat Rate or Capital Goods Schemes, or Partially Exempt calculations, manual adjustments also will be required.

Maven Accountants Ltd are Certified Advisors for Xero and Quickbooks. But this isn’t a sales pitch. We can work with any HMRC approved software provider of MTD for VAT.

Has your accountant or tax agent spoken to you yet about MTD for VAT? If not, then you’re welcome to talk to us.

 

Keep Calm and Carry On Contracting? But, are you a Personal Service Company?

“IR 35” was the 1999 Inland Revenue pamphlet that explained to companies they could be liable for paying a kind of payroll tax. This was for any “one-man” or “one-woman” Director business providing personal services to a main business contractor, through their own Personal Service Company (PSC). After 18 years, most people still know it and refer to it as “IR35”. It’s a bit like the good old “Radio Times” except the latter is much more entertaining. IR 35 still does apply, but HMRC haven’t had anything near the success with it that was hoped for. This is mainly due to muddled thinking and an ignorance of complex and unpredictable leading tax cases on employment status.

A Change is Coming

In April 2017, HMRC introduced changes to “off payroll working” in the public sector, which removed the decision process from the individual operating through their PSC and stipulated that the public sector body must decide about the engagement. Those bodies affected included the NHS, BBC and MOD to name but a few. The decision all public sector bodies had to make when they engaged a PSC was whether there was a quasi-master/servant relationship. In other words, if you took out the PSC, was it the same as paying an employee for doing the job? That’s an oversimplification but you get the point. If there was this situation, or in many cases the merest whiff of it, the public body will operate a kind of payroll tax when it pays the PSC.

A New Approach Has the Potential For New Headaches

We were also handed a new concept of the ‘fee-payer’, which is the body which pays the PSC. Where the engagement was with the public sector body direct, that body would be liable for any incorrect status decisions. But, if there were agencies in the chain, that agency immediately above the PSC in the chain becomes responsible. The fact that agencies did not want to get caught out, and public bodies likewise, has been the major reason why from April 2017 to February 2018, around £500 million in revenue collections has been estimated as thanks to “off-payroll working” rules. PSCs in the public sector also suffered the removal of the flat rate 5% deduction from the PSCs income for general expenses incurred in the running of the PSCs business. If you were a PSC supplying only public sector customers, then all of your income would be accounted for as either tax/NICs or net pay. Your overheads suddenly became a tax loss without a home. Because of this (in the main) , many PSC’s closed down and their owners became umbrella employees or left to service the private sector.

New PSC Rules Are Coming, It’s Time to Plan

Perhaps due in no small part to the impending impact of Brexit, the Government has decided that the rules will come into that same private sector,. This will not be until April 2020 and then only for so called “large and medium” Contractors. Smaller Contractors that engage PSC’s will not be affected by the 2020 change. The 2018 Autumn Budget Brief also clarified that the reform will not be retrospective and “HMRC will focus its efforts on ensuring businesses comply with the reform rather than focus on historic cases”.  It says further that HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. This will follow the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years. This has to be a good thing. It will incentivise businesses to comply. HMRC should not be penalising soft targets that comply voluntarily. There is to be “further consultation on the detailed operation of the reform” to be published in the coming months, which will “inform the Draft Finance Bill legislation expected to be published in Summer 2019”. This is good news for small businesses that are Contractors of PSC’s. The estimate is that they number about 1.5 million. But, here’s the important thing – if you own a PSC and you service medium or large Contractors (i.e. not end users) , the writing seems to be on the wall, for a bit of a showdown some time in 2020. From that date, those Contractors may be obliged to tax your PSC income under a type of PAYE approach. Regardless of industry type, who are your company Contractors and how big are they? Could you shift your client base over the next year or two? This may be the price to pay for some PSC’s that want to endure. We can help you navigate this change, just call the team on 023 8061 4404 or send us an email.

The Reverse Charge Mechanism is Coming

HMRC is planning to introduce new rules to combat construction fraud. The changes are a long way off, but we want to tell you about this now in case you haven’t heard about this yet. The really fine detail won’t be decided by HMRC until October 2018. The changes will apply from October 2019. Why such a long delay? The reason is that these changes will affect thousands of VAT (small to medium) businesses, and HMRC doesn’t have a good record on getting things right first time.

What will happen?

Even this bit is pretty complex, although it doesn’t affect everyone using building services, for example domestic consumers and only designated businesses. Those designated businesses falling in this plan will not collect VAT on their sales to their specified customers.  Instead their customer will account for the output VAT under the reverse charge mechanism. Reverse charge is where the specified customer prepares a special invoice for the supply of work. Let’s choose a random example and say a VAT registered groundworker supplies 2 days of services valued £1000. The groundworker’s customer is “Acme Groundworks Ltd”. “Acme” is going to invoice Builder for £300,000 to prepare the site and install roads and utilities etc. The groundworker has to make an Invoice to “Acme” for only £1000 and it will contain the normal information required on a VAT invoice, except the VAT. The invoice must also include a reference to the reverse charge – for example one of the following:

• reverse charge: VAT Act 1994 Section 55A applies
• reverse charge: S55A VATA 94 applies
• reverse charge: Customer to pay the VAT to HMRC

“Acme” makes out a special invoice for say £1,000 plus £200 VAT and refers to reverse charge and groundworker’s VAT number. It shows £1,000 input value and £200.00 VAT on its VAT return. On the same return is shown £200.00 as sales VAT but no entry for the £1,000 as sales value. Using reverse charge, “Acme” get their £200 VAT allowed but also HMRC know that the £200.00 groundworker services VAT has been covered. The net cash effect on “Acme” is just the £1000 it pays to the groundworker. Without reverse charge, if the groundworker did not put the £200 on their VAT return, and went missing, HMRC would have been out of pocket by £200.00. By the way, we are not casting aspersions about groundworkers, just giving an example! Of course, you could say that this can happen in any VAT situation, construction or not, and you’d be right. HMRC are saying that fraud in construction is particularly prevalent. As to how much tax will be recovered , that is being debated. The types of construction services affected are based on those to which the construction industry scheme applies. If goods are supplied with the affected services, the goods would also be subject to the reverse charge. (There are several very complex examples of exceptions from the reverse charge mechanism involving intermediaries. Without getting too technical the most common one will be at the end of the chain –  Retail customers such as a Builder selling a freehold or leasehold to an owner or occupier) Going back to our example, our Builder would not apply reverse charge to the “Acme” bill of £300,000 because Builder will sell houses direct to freeholders or long leaseholders. “Acme” will issue their invoice in the usual way.

Simple?

Is it ever simple when it comes to changes in VAT from HMRXC? If you are confused, or just need some help, contact us and talk to us about VAT and let us help you handle it better.

If you are an employer, important deadlines are looming on a number of topics for the tax year 2017-18. Thursday 5 July 2018

• Receipt by HMRC of PAYE Settlement Agreement document.

Friday 6 July 2018

• Receipt by HMRC of P11D’s and declaration for benefits in kind, including Nil Returns.
• Online filing of Employee Related Securities annual return
• Giving forms P11d to your staff including leavers during 2017-18

PAYE Settlement Agreements – What You Need to Know

PAYE Settlement Agreements are an effective way of dealing with tax and NIC when you give certain types of benefits in kind to your staff and this avoids your staff paying tax on the benefit value. It doesn’t cover all types of benefits but it can be a good work incentive because the employer pays the tax and NIC due on the benefit and this doesn’t affect the employee PAYE tax code. It does involve a little more tax and NIC doing it this way but many situations can be suitable. The agreement has to be in place by 5 July and tax and NIC is then payable by 22 October if paying electronically (our preferred and a more secure method). A “PSA” can be for what are termed Minor Benefits (for example subscriptions that are not job related), Irregular Expenses (for example one off gifts that are not minor) and Impracticable Items (such as multiple car “sharing”, but not “Car Benefits”) Please get in touch with us if you would like some help and further advice on a “PSA”.

What is an Employer Related Security and How Does it Work?

An Employer Related Security is a rather grandiose description for a share scheme. If your Company issued shares to your staff or made changes to an existing scheme during the tax year, an “ERS” return will probably be due and it has to be made online by 6 July after the tax year end. The good thing is that once the record has been set up properly with HMRC, your tax agent can make this return on your behalf. The return itself uses a type of spreadsheet layout but is relatively complex. In conjunction with this, it may be necessary for your new shareholders to make a tax return to show the new shares. Please call us on 023 8061 4404 if you would like some help with “ERS” or advice about Share Schemes.

Are you late with RTI?

Under Real Time Information the payroll team should be telling HMRC when someone is paid either before they get paid or on payday itself, but no later. There are penalties for being late but HMRC have announced they’ll extend the “three day period of grace” up to 5 April 2019. They’ll only do this if the payrolling is not regularly late. Ideally, arrange to tell HMRC about payments before they are made. If the payments do not in fact occur, this can be confirmed to HMRC without penalties being incurred.

When penalties are charged

You can get a penalty if:

• Your Full Payment Submission (FPS) was late
• You did not send the expected number of FPSs
• You did not send an Employer Payment Summary (EPS) when you did not pay any employees in a tax month

HMRC will not charge a penalty if:

• Your FPS is late but all reported payments on the FPS are within 3 days of your employees’ payday (this applies from 6 March 2015 to 5 April 2019), however employers who persistently file after the payment date but within 3 days may be contacted or considered for a penalty
• You’re a new employer and you sent your first FPS within 30 days of paying an employee
• It’s your first failure in the tax year to send a report on time (this does not apply to employers who register with HMRC as an annual scheme)

How much you pay

What you pay depends on how many employees you have. Number of employees Monthly penalty 1 to 9 – £100 10 to 49 – £200 50 to 249 – £300 250 or more – £400 If you’re over 3 months late you can be charged an additional penalty of 5% of the tax and National Insurance that you should have reported. If you run more than one PAYE scheme, you can be charged penalties for each. So if you need to ensure that your PAYE is in order, then email Maven Accountants.