Should I buy machinery and equipment before the accounting year ends?

As another financial year draws to a close, you might be wondering if now’s the time to make a last-minute capital purchase.

No matter how much money your business is turning over, purchasing new equipment is a big call and one that shouldn’t be solely dictated by the time of the year. Depending on the industry you’re in, machinery can cost tens – or even hundreds – of thousands of pounds, and along with operational and maintenance costs, a single purchase could significantly alter your bank account and balance sheet.

That being said, if you know you need new machinery, there is an argument for making the purchase before the accounting year ends.

Why Timing Your Purchase Matter

With a plan in place to purchase new equipment, it makes sense to incur the expense before the accounting year ends. That way you’ll receive the tax relief one year earlier than if you were to wait until the new accounting year begins.

An expense incurred entirely for business purposes can be deducted from your income, lowering your taxable profit, and in turn lowering the amount of tax you will be required to pay.

Which items are eligible?

Capital purchases are assets that offer a benefit to your business lasting more than a year. In addition to new machinery, you can also include computers, printers, smartphones, and tablets.

What’s more, other necessary business-related purchases such as print cartridges, stationery, web design, logo design, or office furniture should be ordered prior to the end of the accounting year to ensure you benefit from the earlier tax relief.

However, it’s vital that these purchases are made as part of a wider business plan, and not as a tax saving gambit. Otherwise, you run the risk of depleting funds and causing cash flow problems in exchange for superfluous items.

What Does HMRC Say?

HMRC offers a definition of ‘plant and machinery’ for items on which you can claim capital allowances. This covers a wide range of items, and the costs associated.

Using the Annual Investment Allowance (AIA), you can deduct the full value of a qualifying item from your profits before tax. You can claim AIA on most plant and machinery up to the AIA amount.

What doesn’t count as plant and machinery?

As per the HMRC website, you cannot claim capital allowances on:

  • Things you lease – you must own them
  • Buildings, including doors, gates, shutters, mains water and gas systems
  • Land and structures, eg bridges, roads, docks
  • Items used only for business entertainment, eg a yacht or karaoke machine

And you can’t claim AIA on:

  • Cars
  • Items you owned for another reason before you started using them in your business
  • Items given to you or your business

Always Seek Advice

These allowances can change from financial year to financial year, so it’s vitally important that you monitor the situation closely, or seek expert advice before making a significant business purchase.

We recommend sitting down with your accountant and planning the purchase of your next piece of machinery to ensure you see the full tax benefit.

Need Some Advice? Let’s Talk

Saint & Co has long worked with businesses operating in industries reliant upon heavy machinery, so we know a thing or two about planning and making major purchases.

If you’re not quite sure if and when to pull the trigger on a new piece of equipment, we can guide you through the important considerations, and explain the various tax implications.

Simply fill out our contact form, or call us on 01228 534371 to get started.

Blog, Business News, Tax

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New Tax-Free Childcare Scheme

New Tax-Free Childcare Scheme

At the end of April 2017, the new Tax-Free Childcare scheme was launched by the government. The government has started inviting parents to apply for Tax-Free Childcare beginning with parents of the youngest children and parents of disabled children.

This may be of interest to you as:

  • if you are an employer, you may be asked questions about the new scheme by your employees
  • you may be interested in using the scheme yourself, particularly if you are self-employed, as this is the first childcare scheme providing a tax break for the self-employed.

What is Tax-Free Childcare?

Eligible parents will open an online childcare account. When a parent pays into the account, the government will pay in an extra 25%. So if £80 is paid into the account, the government will automatically add £20. The maximum government payments are £2,000 per child per year. This means annual childcare costs of £10,000 per child can be met by £8,000 of payments by the parents and £2,000 by the government.

For a disabled child, the maximum top-up payments are £4,000.

How much parents pay into their Tax-Free Childcare account, and when, is up to them.

Who can qualify for Tax-Free Childcare?

Parents need to be ‘working parents’ paying for ‘registered childcare’ for children under 12 (or under 17 for disabled children). If parents are not living together, the qualifying parent depends upon with whom the child usually lives.

The main criteria for a parent are:

  • earns on average at least £120 a week
  • earns less than £100,000 a year
  • not receiving other support for childcare such as Child Tax Credit or Universal Credit.

The self-employed parent can average self-employment income across the year to meet the minimum income requirement.

If the parent has a partner, he/she also needs to be working and satisfy the criteria above.

It is possible for an individual who is not the parent to qualify if the child usually lives with them. The income criteria would apply to that individual (and their partner).

Partners are people who are:

  • married or in a civil partnership, and live together in the same household, or
  • a couple who live together as if they are married or in a civil partnership.

Registered childcare

Only childcare providers registered or approved by a UK regulator can sign up to receive Tax-Free Childcare payments. HMRC has written to childcare providers, asking them to sign up online for Tax-Free Childcare. Parents will be able to check online who is registered for the Tax-Free Childcare scheme.

Parents will send payments online from their Tax-Free Childcare account to the bank account of the registered childcare provider. Therefore when a provider receives a payment from a parent, this will include both their payment and the government contribution.

What if you have an Employer Supported Childcare scheme?

As an employer, you may have set up and still run an Employer Supported Childcare scheme. Employer supported childcare, commonly by way of childcare vouchers, has provided tax and national insurance efficient benefits for many employers and employees. Many schemes have been set up under a salary sacrifice arrangement. The employee receives a childcare voucher which, within certain limits, provides income tax and national insurance savings.

An employee cannot benefit from both an Employer Supported Childcare scheme and the Tax-Free Childcare scheme. However, employees are free to choose between the schemes if already in an Employer Supported Childcare scheme or join such a scheme before April 2018.

This choice is, of course, dependent on you continuing to offer a scheme. If you do continue to run a scheme, your employees will need to decide what to do. There are winners and losers when the two schemes are compared. For some, this will be a difficult choice to make.

The government has provided a ‘childcare calculator’ which provides an estimate of the financial support parents may be able to receive after they have answered a number of questions on their childcare costs and income. The calculator is available at www.gov.uk/childcare-calculator

Your childcare voucher provider should also be able to supply information to your employees to help them decide what is best for them.

30 hours free childcare (please note that this applies to England only)

The government is introducing an extension to the current schemes available in England for free childcare for three and four-year-olds. The current scheme provides 570 hours of free early education or childcare over 38 weeks of the year (typically taken as 15 hours a week over 38 weeks). It is available for all three and four-year-olds. The 30 hours scheme potentially extends the entitlement to an additional 570 hours. However, not all children will be entitled to receive the extra hours. The criteria for the extension are similar to the criteria that apply for the Tax-Free Childcare scheme – for example the requirement for parents to be working and not earning above £100,000 a year.

The scheme will begin in September 2017 but eligible parents can apply for the Tax-Free Childcare and the 30 hours schemes through one online application. See the link below.

New government website – Childcare Choices

The government has recently launched a website – Childcare Choices – which guides parents through the various ways help is, or will be available. Please see: www.childcarechoices.gov.uk

The childcare calculator which has been referred to above in the section ‘what if you have an Employer Supported Childcare scheme?’ is also useful.

Currently, parents with a child under four on 31 August 2017 or disabled can apply through the Childcare Choices site. Parents will be able to apply for all their children at the same time when their youngest child becomes eligible.

Other parents can request to receive an email from the government as to when they are able to apply. The link is also available on the Childcare Choices site. All eligible parents will be able to join the scheme by the end of 2017.

Information sheets for employees

If you would like to provide information to your employees about Tax-Free Childcare we can supply you with an information sheet. Please contact us and we will supply you with a digital version.

We hope you find this information useful. Please do not hesitate to contact us if you have any questions.

Blog, Business News, Tax

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Should we give shares to children and pay £5,000 dividends tax free?

SHOULD WE GIVE SHARES TO CHILDREN AND PAY £5,000 DIVIDENDS TAX FREE

The introduction of the £5,000 tax-free dividend allowance has tempted many family company shareholders to give shares to other family members so that they can be paid £5,000 a year tax-free. (Note that this allowance reduces to £2,000 from 6 April 2018).

Such a strategy needs to be carefully structured as there can be Capital Gains Tax on the gift of shares, and HMRC may also seek to tax the dividend as employment income under certain circumstances. The dividend will also be taxed on the parents if received by a child who is a minor.

If you are considering giving shares to other family members and then paying dividends, please come and talk to us first so that we can deal with this correctly.

Blog, Tax

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Lorry Driver Overnight Allowance – Changes from 6 April 2017

lorry drivers overnight allowance

HMRC have recently announced that from 6 April 2017, in order to pay the overnight allowance free of tax and national insurance, operators are required to apply for an Approval Notice from HMRC.  If operators wish to pay amounts in excess of these rates they will need to apply for a Bespoke Agreement.

When applying, the operator must be able to show the presence of a checking system, which they will use on a random basis to ensure that expenses claimed are actually being incurred.

The Approval Notice and Bespoke Allowance Agreement may be applied for online here. Note that both applications may be made on the same Bespoke Allowance Agreement application form.

The approval will last for up to five years.

Checking systems

Employers must have a system in place for checking that payments to employees are only made on occasions where the employee would be entitled to a deduction from earnings in respect of that payment and had incurred and paid an amount in respect of expenses on that occasion.

HMRC will accept evidence in the form of a sampling exercise based on the expenses incurred:

  • By a random sample
  • Of 10 per cent of all eligible employees
  • Over a one-month period.

These checks should cross-reference driver work schedules and time sheets to demonstrate that drivers were away from base in the performance of their duties on the days that payments were made. A further check on driver receipts should be carried out to ensure that costs were incurred.

Further details of the checking model are available from HMRC document EIM30275 which is available here.

The documentary evidence needed to support the checking system may include the following.

  •   Receipts – e.g. for hotels or parking
  •   Drivers’ log sheets or tachograph records/data
  •   Drivers’ expense claims.

Operators may need to make further enquiries to be satisfied that a tax-free payment is justified.

Operators will need to retain evidence to show that they have undertaken checks in accordance with the checking system that they proposed when making their application fora bespoke agreement. This evidence may also be required when the employer is subject to an HMRC employer compliance review.

Meal Allowances

If meal allowances are also paid then it is advisable to obtain HMRC approval at the same time as the overnight allowance on the Bespoke Allowance Agreement application form.

 

Tax

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Making Tax Digital

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These changes apply to everyone including you: 

HM Revenue & Customs (HMRC) are making revolutionary changes to the tax system which will be launched in 2018. These changes are named Making Tax Digital (MTD). But what does Making Tax Digital mean for businesses and you?  In practical terms Making Tax Digital impacts on your business by requiring the mandatory keeping of digital records in a format acceptable to HMRC and the submission to HMRC of quarterly accounts figures.

What is it? 

  • HMRC is rolling out Digital Tax Accounts and with that, digital record keeping for businesses and landlords. The self-employed, companies and some individuals will need to submit details of income and expenditure on a quarterly basis plus a final year-end update.
  • New businesses will need to make a first return within four months of start-up.
  • MTD is intended to improve the accuracy of business records and minimise errors through the use of new technology.
  • At present, there are no plans to change the tax payment dates although a voluntary ‘pay as you go’ system will be introduced.

Who does it affect?

  • MTD will affect all businesses, including landlords; very few will be exempt. The main exemption will be for landlords and the self-employed with turnover below £10,000.
  • Some businesses may apply for an exemption on the grounds of insufficient internet infrastructure (however, HMRC expects this to be minimal), religion or medical conditions (these will be checked rather than accepted at face value).
  • Charities and community amateur sports clubs will also be exempt, but can voluntarily comply.

What does this mean? 

  • Businesses will have to submit details of their income and expenditure electronically on a quarterly basis, with a month to do this from the end of each quarter.
  • The quarterly updates and the year-end adjustments will be compulsory, and there will be penalties for non-compliance.
  • You will have to start keeping your accounting records and books digitally to allow the transfer of the data to HMRC in the prescribed format.
  • HMRC will not provide software; businesses will need to buy their own MTD compatible software. It is expected that free software will be available to the smallest businesses only.
  • MTD will apply for most unincorporated businesses and landlords for income tax and National Insurance from April 2018. There will be a one year delay for small businesses and landlords where the annual turnover is less than the VAT threshold.
  • MTD will apply from April 2019 for VAT and from April 2020 for corporation tax.

The Solution

  • The revolutionary changes to the tax system mean that the partners and staff of Saint & Co are actively involved in MTD, including attending courses to keep up-to-date with the latest HMRC legislation & guidelines. We are also working with our accounting software suppliers so that we can provide clients with the accounting package necessary to enable you to keep your ‘Digital Accounting Records’ as required by HMRC.
  • As yet HMRC have not issued the final definitive guide to MTD but we do have an outline of the new system. We will over the next year provide further information and discuss with you, the improvements or necessary changes required to your accounting systems and records so that you conform with HMRC requirements.
  • Should you wish to discuss MTD sooner then please do not hesitate to contact the partner looking after your affairs.

Tax

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Reducing your exposure to inheritance tax – the value of working with a tax specialist

inheritance tax

Inheritance tax (IHT) has become an increasingly thorny problem for many individuals, and especially property owners over the past few decades. So it’s a topic that many of us will benefit from understanding in more detail.

In our last blog post, I helped to explain a little around how IHT works – and to iron out some of the more common misconceptions around the impact it can have on your wealth and tax planning. You can read more on these popular IHT misunderstandings here.

In this post, I’m going to grab the bull by the horns and show you how – with proper forethought, careful planning and the expertise of a professional tax adviser – you can reduce your exposure to inheritance tax and make sure you’re doing the best for your wealth, and the wealth of future generations.

The value of working with a professional adviser 

So, what IHT tax-planning tips should you be aware of? As a Saint & Co partner and tax specialist, I deal with a wide range of clients, all of whom want to know their exposure to IHT is as low as possible.

Every person’s tax position will be unique, and that’s why a big part of my job is sitting down with you to learn about your situation, your financial background and your other business and investment interests. Based on the many years of experience we have of helping private individuals to maximise the efficiency of their tax planning, here are my ten top tips for minimising your IHT costs.

10 important ways to minimise your IHT costs

  1. Summarise your assets and liabilities to see where there are planning opportunities. No two estates are the same and what may be suitable planning for one individual may not be suitable for others. For example, there are some financial products available which can give an immediate discount once invested – with the outcome that the balance of the investment falls outside of your estate after the seven-year threshold.
  2. Review your IHT investments regularly. Wealth planning has to be constantly monitored to make sure your plan is still effective and working as hard as possible for you. For example, if you’ve invested in shares with the Alternative Investment Market (AIM) or have applied for the Enterprise Investment Scheme (EIS), you need to ensure that you’re still eligible for Business Property Relief (BPR) – companies are taken over and can be listed on another stock exchange, which can result in you losing your eligibility to relief.
  3. Review life assurances and pensions. It’s important to review any life assurance policies or pension entitlements to ensure they’re written under trust. If they’re not, this can potentially create an additional inheritance tax problem, which you’d be best to avoid.
  4. Review your wills. Once you’ve created a will (or wills), it’s vital to review this document on a regular basis to make sure the will is still tax efficient and fully meeting your needs. This is especially important following the introduction of the residence nil rate band as a trust may result in this relief being lost.
  5. Look into a trust or family investment company. Once you’ve reviewed your situation, it’s worth considering whether a trust or family investment company should be part of your planning. By putting your assets and investments into this structure, it’s possible to limit some of your tax liability and cut your final tax bill.
  6. Spend all your money above your nil-rate band (NRB). Obviously, this will be totally impractical for the majority of people as we all need some assets to produce income for us to live on a day-to-day basis. But it’s available as an option and the theory should not be forgotten. Wherever possible, it’s sensible to gift assets down a generation – or maybe two generations – where your life expectancy is more than seven years.
  7. Set up power of attorney. The future can be uncertain, so it’s advisable to have a power of attorney in place with a relative or friend. With this power of attorney, they can then deal with your financial affairs and healthcare affairs, should you become incapable of doing so yourself.
  8. Consider the implications of paying for long-term care. If you need to pay for long-term care (should you require it at any point in the future) the assets in your estate will be taken into consideration by the local council when assessing your liability to pay for care. Investments should be reviewed to ensure they’re not only tax efficient but also council efficient.
  9. Don’t look at IHT in isolation. As with most taxes, it’s very important not to look at your IHT liabilities and planning in isolation from other taxes. You will always need to consider the effects of any planning, both on capital gains tax and on your own personal income tax liabilities.
  10. Work with a professional tax adviser. This may seem obvious, but you’ll achieve the best possible tax position by working with a tax adviser that has the experience and insights needed to plan your taxes effectively. It’s not just a case of minimising tax: there’s the ever-present need to make sure tax planning achieves your personal and business goals as well – and that’s where professional advice really is invaluable.

Talk to us about your IHT planning

At Saint & Co, our aim is always to help you achieve the best possible outcomes from your tax planning and wealth management. If you think you’re likely to be affected by any of the IHT issues we’ve highlighted, please do come and talk to us.

Get in touch with us to arrange a coffee and a chat with our Tax team.

Tax

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Getting the correct view of inheritance tax – and how to reduce its impact

35757702 - a farm in the lake district national park, cumbria, england, uk.

Property prices have been on the rise in the UK for some time – although figures published in the recent Spring Budget do suggest that this stratospheric price rise is gradually beginning to slow. But the huge increases in house prices we’ve seen over recent decades have been one of the main reasons why inheritance tax has started to hit more and more ordinary people.

Inheritance tax (IHT) is the money you pay to HM Revenue & Customs on assets in your estate – and with property prices so high, a good deal more of us have been getting stung for IHT.

So, if you’re likely to be hit by inheritance tax, what will the impact be? And how can you reduce that impact as much as possible through clear tax planning?

Paying the right amount of IHT

No-one wants to pay any more tax than is necessary. But we’re all duty bound to pay the right amount of tax for our circumstances. So what I’ll be talking about in this post is focused around legitimate and wholly legal tax planning – I’m not looking at the kinds of convoluted tax schemes you may have heard about in the news, and I’m certainly not going to talk about using any offshore planning in Panama!

There’s a very clear and immovable mantra when it comes to tax:

We can plan to avoid tax but not to evade tax!

Tax planning that helps you avoid certain tax liabilities is completely legal, above board and acceptable. Tax evasion, where you knowingly make plans to evade paying taxes you’re liable for, is illegal activity.

Firstly, I just want to be clear that inheritance tax is payable by UK domiciliaries – basically, if you were born in the UK you’re likely to be domiciled in the UK. If you were born overseas it’s possible that you may have a non-UK domicile, but its possible to become domiciled based on residence within the UK.  If you are non-UK domiciled, you may still be liable for tax on UK assets.

So, with our foundations clearly outlined, what I’m going to do in this blog post is look at a few of the common IHT misunderstandings I’ve come across when dealing with clients over the last few years – and help you avoid the same challenges.

Misunderstanding 1: I’m leaving all of my estate to my family, so there won’t be any inheritance tax to pay

This is actually only true in part. If you’re a married couple or in a civil partnership, you can leave your estate to each other and there won’t be any inheritance tax on those assets.

The reason for this is that there’s a specific IHT relief for assets passing between spouses. However, where your estate exceeds the nil rate band of £325,000 and those assets are left to other family members or friends, inheritance tax will be payable at a rate of 40% – which could amount to a fairly hefty tax bill.

Misunderstanding 2: I won’t have any inheritance tax to pay on my property overseas

This is actually false – IHT is payable on any worldwide assets. In fact, you may even have tax to pay in the country in which the property is situated.

So, taking this into account, it’s essential to make sure you take legal advice in the country where your overseas assets are located. Some overseas properties are owned in a company to ensure they’ll pass to the beneficiaries you intend – and in many cases to reduce any potential overseas tax. Even so, they’re still taxable in the UK.  In addition a foreign Will should be used to ensure your assets pass in the manner that you’ve planned.

It’s probably helpful at this point to outline what makes up an estate. Here’s a quick overview of the main assets that are likely to appear in your estate:

  • All property – wherever these properties are situated in the world
  • The contents of these properties
  • Jewellery
  • Cars
  • Life assurances
  • Stocks and shares
  • Bank and building society accounts, including ISA’s
  • Current accounts in a sole trader or partnership business
  • Directors loan accounts in a personal company
  • Life interest in a trust
  • Less any liabilities such as funeral expenses, mortgages, loans etc

It’s worth noting that some of the above may have reliefs or exemptions available, so it’s always sensible to check with a professional adviser.

Misunderstanding 3: My joint estate is less than £1m, so I won’t have any inheritance tax to pay

This statement is based on the announcement in Budget 2015 that a married couple will be eligible to a new residence nil-rate band, which when added to the existing nil rate band of £325k will give each of you £500k – £1m between both of you.

But the intricacies of the new legislation mean that, in certain circumstances, the full £1m may not be available. Let’s take a quick look at this in more detail:

  • Firstly, the new relief is only being introduced from April 2017. It starts at £100k, increasing to £125k from 2018, £150k from 2019 and £175k from 2020.
  • The relief only applies where your property is left to one or more lineal descendants – so that will include your children, stepchildren, adopted children or grandchildren. If it’s left to a sibling there won’t be any relief available and those with no children won’t be able to benefit from the relief.
  • If the value of your residence is less than the resident nil-rate band (RNRB) then the relief is restricted to the value of the property.
  • Where more than one property is owned, executors can nominate which property to allocate the relief against – but only where it’s been used as a main residence. So buy-to-let properties and furnished holiday lets won’t qualify. Also, if you’ve made a capital gains tax election for principle private residence relief, this won’t apply for IHT purposes.
  • If the value of your estate exceeds £2m before any reliefs then the relief will be tapered until after £2.2m in 2017/18 no relief will be available. The figure in 2020 will be £2.35m.  This is likely to affect many business people who are likely to qualify for BPR on the value of their interests in their business – whether that be a company, sole trader or partnership, but when their estate is totalled before the relief they could end up losing it altogether.
  • If you’ve downsized the scale of your property, there are provisions to enable the relief to continue. But, again, the small print needs to be checked if you’re going to do this to make sure you don’t jeopardise the relief.

Misunderstanding 4: I’ve given away assets so I wont have IHT to pay on them

This is true in the right circumstances. Provided that you survive seven years after making a gift, the value of the asset will fall outside of your estate.

However, you need to be very careful where gifts are made which you continue to benefit from. These are known as gifts with reservation of benefit (GROBS) and will continue to form part of your estate. An example of this may be a property that you gift to a child but where you continue to occupy the residence.

This kind of scenario wouldn’t be effective for inheritance tax as the value would still be brought into your estate upon your death. That isn’t to say that you shouldn’t make such gifts as they may be useful for other reasons, but you must remember that it won’t reduce your inheritance tax liability unless you pay a market rent for the use of the asset/property.

Misunderstanding 5: I can only give away £3,000 per annum tax free

There are several inheritance tax reliefs available for gifts, and the complexity of this can end up confusing people. So let’s take a look at the main available reliefs.

  • The first one is that you can give away up to £3,000 IHT-free each year.  However, that doesn’t mean this is the maximum you can gift. It just means that if you don’t survive seven years and the gift comes back into your estate that the first £3,000 of the gift won’t be taxable.
  • If one year’s £3,000 gift allowance isn’t used, it can be carried forward for one year only. If you’re a married couple, or in a civil partnership, you can gift away £6,000 per annum.
  • There’s an IHT exemption of small gifts of £250 or less that you make to individuals.
  • Gifts that you make in connection with a marriage are also potentially exempt
  • £5000 for parents
  • £2500 for grandparents
  • £1000 for all others.
  • Gifts out of income – if you can show that you have surplus income, and that this is used to make regular gifts, then these will fall immediately outside of your estate and won’t be dependent on the seven-year rule. Examples of this include paying regular contributions towards your grandchildren’s education, or the running of cars etc.

Now you understand inheritance tax

Having ironed out the popular misconceptions around inheritance tax, I hope you’re now feeling more confident about the possible impact of this tax and the importance of long-term tax planning.

In the next part of this blog series, I’ll be running you through some of the most effective ways to plan to reduce your inheritance tax liabilities – and to make sure you’re protecting as much of yours and the next generation’s wealth.

If you’d like to talk to our Tax team about your inheritance tax, please do get in touch to arrange a chat over a coffee.

 

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