Did you get a big tax bill and now want some back?

Many of you will have just paid your 2016/17 tax bill before the 31 January 2018 deadline, and some of you will also have paid 50% of next year’s tax on account. Here are a couple of tax planning ideas that can help you obtain a tax refund.

Invest in EIS or Seed EIS qualifying companies

Before 6 April 2018, individuals may invest in companies that qualify under the Enterprise Investment Scheme (EIS) and treat that investment as having been made in 2016/17. The tax relief is 30% of the amount invested.  So a £20,000 investment can reduce the 2016/17 tax liability by £6,000. Investing in a Seed EIS qualifying company is even better as there is a 50% tax relief.  Such companies tend to be riskier than EIS qualifying companies. You should therefore obtain specialist advice from an IFA if you are considering such investments.

Investing in an EIS qualifying company can also enable you to defer capital gains tax. In order to do so you must reinvest the amount of the gain within the 3 years following the date of the disposal giving rise to the gain. (The investment could also be within 12 months prior to the disposal).

Increase your Pension Savings before 6 April 2018 to reduce payments on account

Unfortunately investing more in your pension now will not reduce your 2016/17 tax liability, however if you invest before 6 April 2018 that payment can be taken into consideration in computing your 2017/18 liability and hence you might be able to claim to reduce your payments on account, if you make them.  The maximum pension contribution is generally £40,000 each tax year, although this depends on your earnings. It is also possible to add to this any unused relief brought forward from the previous three tax years.

New Year resolutions to save tax

new year resolutions to save tax

At this time of year we think about New Year’s resolutions. It is also a good time to start planning your tax affairs before the end of the tax year on 5th April.

An obvious tax planning point would be to maximise your ISA allowances for the 2017/18 tax year (currently £20,000 each).

You might also want to consider increasing your pension savings before 5 April 2018 as the unused annual pension allowance is lost after three years.

For those looking to do some inheritance tax planning it would be a good time to review (or make) your Will in the light of the recent change in the inheritance tax nil rate band.

Finance cost restrictions for residential landlords

Net profits from residential property (after deducting allowable expenses) are liable to income tax at your marginal rate:

  • For basic rate taxpayers 20%
  • For higher rate taxpayers 40%
  • For additional rate taxpayers 45%

The amount of tax relief for any finance costs is being restricted to the basic rate of tax. Meaning if you are a higher or additional rate tax payer with interest costs being incurred on let property your tax liability may be higher. This is being phased in gradually over 4 years from April 2017.

Finance costs will no longer be allowed as a deduction when computing taxable residential property profits. Instead once all your income has been assessed the finance costs will act as a tax reducer at 20%. Previously you would have got tax relief at your marginal rate.

Over the next four years you will be able to use some of the finance costs to deduct from your property profits, while some will be only used as a basic rate tax deduction. This is up until April 2020 when the basic rate tax deduction will be fully phased in.

 

Tax year

Percentage of finance costs deductible from rental income Percentage of basic rate tax reduction
2017 to 2018 75% 25%
2018 to 2019 50% 50%
2019 to 2020 25% 75%
2020 to 2021 0% 100%

If your total income, including residential property profits with no deduction for finance costs, is still within the basic rate you will not be affected by these changes. Please note there are some restrictions when finance costs exceed rental profits. However if your total income exceeds the basic rate and is in higher or additional rates your tax liability will be affected in the future.

Example – Higher rate tax payer

Jake owns a mortgaged property that he lets out. He has a mortgage on the property and he claims interest on this as an expense against his rental income each year. Jake also has a job where he earns £49,000 a year. The interest on his mortgage is approximately £3,000 per year. Below is a table showing increase in his tax liability between now and 2020/21:

Tax Year Increase in Tax liability
2016/17 £0
2017/18 £150
2018/19 £300
2019/20 £450
2020/21 £600

Please contact us regarding the above if you would like any advice or if you want your personal circumstances evaluated to see how the changes affect you.

Must own 5% of ordinary shares for capital gains tax entrepreneurs relief

In order for a shareholder to qualify for capital gains tax (CGT) entrepreneurs relief on the disposal of their shares, they must be an officer or employee of the company (or group) and hold 5% or more of the company’s ordinary share capital and voting rights for 12 months prior to the disposal. The company must also be a trading company or the holding company of a trading group throughout the same 12 month period.

In a recent tax case, the judge agreed with HM Revenue and Customs that in determining whether or not the shareholders held the required 5% of the ordinary share capital, all of the company’s shares should be considered except those with a fixed rate of dividend (preference shares). A lower court had previously decided that shares with no entitlement to dividends and voting rights could be disregarded.

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.

 

Saint & Co’s tax expert’s views ahead of next week’s Budget

Pauline Jackson, Saint & Co’s tax partner said Inheritance changes being phased in over the next four years were an issue for her clients.

She also mentioned the ‘Making Tax Digital’ scheme, which will result in any business with a turnover of more than £10,000 needing to file quarterly returns online.  “It is the complexity that I do not like”, she said.  “It is meant to be easier”.

She also called for the Government to help landlords.

To find out how next week’s Budget will affect you, our detailed analysis of the changes and their impact on you, your family and business will be available to download after the Chancellor announces his Budget.

 

Proactive planning for your business’s year-end

Closeup of a personal agenda setting an important date written with pen. The words Deadline written on a white notebook to remind you an important appointment.

When you set up a business, you choose the accounting period that will work best for your business. But whatever accounting period you are working to, it is absolutely vital that you have clear planning in place to ensure that your financial loose ends are all tied up and your documentation is ready for the end of your own financial year.

In short, you need to proactively plan for your year-end, and you need to start doing this as early as possible!

Read more →

Advisory HMRC Tax Free Fuel Rates from 1 September 2016

COMPANY OWNED VEHICLES

HM Revenue and Customs have announced revised tax free advisory fuel rates from 1 September, 2016 which may be paid for business journeys in a car owned by the business. Rates for the previous quarter are shown in brackets.

Engine size Petrol Diesel LPG
1,400 cc or less 11p (10p) 7p (7p)
1,600 cc or less 9p (9p)
1,401 cc to 2,000 cc 13p (13p) 9p (9p)
1,601 cc to 2,000 cc 11p (10p)
Over 2,000 cc 20p (20p) 13p (12p) 13p (13p)

These rates may be used in the following circumstances:-

  1. Where employers reimburse for business travel in company cars.
  2. Where employers provide fuel for company cars but employees are required to reimburse the cost of fuel for private use.

INPUT VAT CLAIMS ON MILEAGE PAID FOR COMPANY CARS OR EMPLOYEE OWNED VEHICLES

HM Revenue & Customs will accept the above figures for claiming input VAT on fuel for company cars, provided a VAT receipt is available to cover the cost of the fuel. They will also accept use of the above rates by the employer when calculating input VAT on the fuel element for employees using their own vehicles and claiming mileage under the tax free approved mileage rates for business travel of 45p for the first 10,000 miles and 25p thereafter.

If you have any queries regarding the above or require any further information please  contact us.