October 2015 Tax Tips & News
To October’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
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Changes to NICs for the Self-employed
From 2015-16 onwards, the collection of Class 2 contributions will be through the self-assessment system. This means that Class 2 NICs can now be paid together with income tax and Class 4 NICs in one chunk on the 31 January following the end of the relevant tax year. In the past, most people have paid Class 2 contributions monthly by direct debit. Following the final payment in July 2015, HMRC have cancelled such direct debit payments, ready for the switch over to the new system of payment under self-assessment. However, those who wish to continue paying their contributions more regularly can set up a Budget Payment Plan (assuming they are up to date with their self-assessment payments) and make payments weekly or monthly by direct debit in advance of the payment deadlines. Further information on Budget Payment Plans can be found on the Gov.uk website herehttps://www.gov.uk/pay-self-assessment-tax-bill/budget-payment-plan.
At the spring Budget 2015, the government announced its intention to abolish Class 2 NICs. Although few details have been announced to date, it appears that after the abolition of Class 2 NICs, the self-employed will continue to pay Class 4 NIC, but this will be subsequently reformed to include a contributory benefit test. The proposed changes raise a few issues – in particular, whilst abolishing Class 2 NIC will be a welcome simplification to the current system, it is essential that a self-employed individual’s contributory benefits entitlement is not eroded by the change. For example, for 2015-16, it is not possible for a sole-trader to pay Class 4 NIC unless their profits exceed £8,060; however, they can still make Class 2 NIC payments, even if their profits are below the small earnings exception threshold (£5,965 for 2015-16), and this, in turn, will retain entitlement to various contributory state benefits. For those who do not opt to use a Budget Payment Plan, the payment date for the 2015-16 liability (£145.60) will be due on 31 January 2017. Self-employed traders will need to budget for this lump sum payment accordingly.
Spotlight on Contractor Loan Schemes
According to recent guidance published by HMRC, contractors and freelancers have been bombarded by promoters who make claims that they can help individuals take home up to 90% of their income using a contractor loan scheme. Broadly, promoters have been using this type of scheme to reduce the amount of tax paid on income by making payments which purport to be ‘loans’ from a trust or a company. Normally, a contractor would receive the contract income directly and pay tax on it. These arrangements artificially divert the income through a chain of companies, trusts or partnerships and pay the contractor in the form of a ‘loan’. The ‘loans’ are claimed to be non-taxable because they do not form part of a contractor’s income. However, in reality the ‘loans’ are not repaid and the money is used by the contractor as if it were his or her income.
HMRC are adamant that these schemes do not work and are strongly advising contractors and freelancers to keep well away from them. Individuals who have been using the schemes are being encouraged to withdraw and settle their tax affairs as soon as possible to avoid substantial penalties and interest charges being incurred.
HMRC have confirmed that this type of scheme must be declared under the Disclosure of Tax Avoidance (DOTAS) legislation, which means that the promoter is required to pass the scheme reference number (SRN) to all the users who must declare it on their tax return.
HMRC have added a new module entitled Contractor loan schemes – too good to be true (Spotlight 26) to their Spotlight series, which covers various tax avoidance schemes that HMRC consider to have wide tax implications. The module, which can be found herehttps://www.gov.uk/government/publications/spotlight-26-contractor-loan-schemes-too-good-to-be-true/spotlight-26-contractor-loan-schemes-too-good-to-be-true, may be of interest to anyone using, or considering using, a contractor loan scheme.
Tax Credit Changes Approved
The government has recently confirmed that the draft Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2015, which were laid before Parliament on 7 September 2015, are compatible with the European convention on human rights. Following a lengthy parliamentary debate, the draft regulations have been approved and are expected to apply from 6 April 2016. The implication of these regulations means that most tax credit claimants will have their working tax credit (WTC) and child tax credit (CTC) reduced from April 2016, but the impact of these changes may have passed many people by.
Following the announcement in the Summer 2015 Budget, there has been much debate over the draft regulations and their impact. In particular, there is concern about how the introduction of the national living wage will affect the proposals; whether there are likely to be any behavioural impacts brought about by the proposals; and the degree to which the proposals are likely to impact upon the successful transition of tax credits to universal credit.
Two changes – the increase in the taper rate from 41% to 48%, and reduction in the income threshold from £6,420 to £3,850, will affect many existing claimants and mean that they are likely to see a fall in the amount of tax credits received.
Currently, tax credits are reduced (tapered) by 41p for every £1 that income rises above the following thresholds:
– For WTC only claims, the threshold for 2015-16 is £6,420
– For CTC only claims, the threshold for 2015-16 is £16,105
– For WTC and CTC claims, the threshold for 2015-16 is £6,420
Although not directly announced, these changes, combined with the freeze on some elements of tax credits, mean that the CTC-only threshold will also reduce as a consequence down to £12,125. Broadly, this means that people with incomes above the new thresholds will see their tax credits reduced lower down the income scale and at a much faster rate.
The Low Incomes Tax Reform Group (LITRG) has produced guidance and a useful table, which shows the maximum loss of tax credits, at various levels of income, from the changes set to take effect from April 2016. The table can be found here. http://www.litrg.org.uk/News/2015/150917-How-will-tax-cuts-2016-affect-you
IHT on Main Residence Nil-rate Band and Downsizing Proposals
HMRC have published a technical note covering the proposals, announced in the Summer Budget 2015, to phase in a new residence nil-rate band (RNRB) from 6 April 2017 when a residence is passed on death to a direct descendant.
The proposed rate bands are:
– £100,000 in 2017-18
– £125,000 in 2018-19
– £150,000 in 2019-20
– £175,000 in 2020-21
It is proposed that from 2021-22 the band will rise in line with the consumer price index (CPI).
Broadly, the proposals mean that where part or all of the RNRB might be lost because the deceased has downsized to a less valuable residence, or has ceased to own a residence, the lost RNRB will still be available, providing certain qualifying conditions are met (see below). The intention is that an estate will be eligible for the proportion of the RNRB that is foregone as a result of downsizing or disposal of the property as an addition to the RNRB that can be used on death.
If the proposals are enacted, the qualifying conditions for the additional RNRB will be broadly the same as those for the RNRB, that is the:
– individual dies on or after 6 April 2017;
– property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it;
– less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased’s estate (this includes assets which are deemed to be part of a person’s estate);
– less valuable property, and any other assets of an equivalent value, are inherited by the individual’s direct descendants on that person’s death.
In addition, under current proposals, the following conditions will also apply:
– the downsizing or the disposal of the property occurs after 8 July 2015;
– subject to the condition above, there will be no time limit on the period in which the downsizing or the disposals take place before death;
– there can be any number of downsizing moves between 8 July 2015 and the date of death of the individual;
– downsizing will also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it;
– where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants;
– the value of the property will be the net value i.e. after deducting any mortgage or other debts charged on the property;
– the additional RNRB will be tapered away in the same way as the RNRB if the value of the estate at death is above £2m;
– the additional RNRB will be applied together with the available RNRB, but the total for the two will still be capped so that they do not exceed the limit of the total available RNRB for a particular year; and
– a claim will need to be made for the additional RNRB in a similar way that a claim is made to transfer any unused RNRB to the estate of a surviving spouse or civil partner.
The technical note, entitled Inheritance Tax on main residence nil-rate band and downsizing proposals provides further details of the proposals and gives some useful examples to illustrate how they will apply. Responses to the note, which are requested by 16 October 2016, will inform the draft legislation to be included in the Finance Bill 2016.
The technical note can be found here. https://www.gov.uk/government/publications/inheritance-tax-on-main-residence-nil-rate-band-and-downsizing-proposals-technical-note/inheritance-tax-on-main-residence-nil-rate-band-and-downsizing-proposals-technical-note
October Questions and Answers
Q. I am a VAT-registered sole trader, owning a cycle shop in my local town. I am thinking of opening a second shop in another town and am wondering how I will deal with this for self-assessment and VAT. Will I need to register the new shop for VAT separately and complete two VAT returns – one for each business?
A. I presume you are going to be selling similar goods and providing similar services in the new shop. If that is the case, you will be able to do one self-assessment for the two businesses by amalgamating the figures for both shops. For VAT purposes, the HMRC state that it is the ‘person’, not the business, who is registered for VAT. A person can be either an individual or a legal person or entity and each VAT registration covers all the business activities of the registered person. This means that even if your new business has a different name, you will only need one VAT registration number.
Q. I own a rental property and let it out on a fully-furnished basis. Can I claim a tax deduction for the cost of replacing items as and when needed?
A. The government withdrew the ‘renewals basis’ capital allowance for furnishings in rental properties from April 2013, which means that currently only the 10% wear and tear allowance for a fully furnished rental property is available to you. Note that the wear and tear allowance is not available to those property businesses that rent part-furnished or unfurnished property.
The good news, however, is that in the Summer 2015 Budget the government announced that, as from April 2016, the 10% wear and tear allowance will cease and will be replaced with a new ‘replacement allowance’. Broadly, the new relief will enable all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings in the property. The relief will apply to landlords of unfurnished, part-furnished and furnished properties (but not to ‘furnished holiday lettings’ (FHLs) or commercial properties).
Under the new replacement furniture relief, landlords of all non-FHL residential dwelling houses will be able to claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:
– movable furniture or furnishings, such as beds or suites,
– fridges and freezers,
– carpets and floor-coverings,
– linen, and
– crockery or cutlery.
The new replacement furniture relief will only apply to the replacement of furnishings. The initial cost of furnishing a property will not be included.
Q. I am a higher-rate taxpayer. My wife currently works part time and pays tax at the basic rate. We have a second property that we rent out but the deeds are held in my sole name. Is it worth putting the property into joint names, or even transferring it to my wife outright, so that we pay tax on the rental income at the basic rate?
A. If you live with a spouse or civil partner and have income from property you jointly own, you will normally be taxed on an even split of the income between you. In your particular circumstances there are two options available:
1. Under what is known as the ’50:50 rule’, you can simply make your wife a partial owner of the property, which means you will each be taxed on 50% of the rental income. For the purposes of these rules, the actual amount she owns is not relevant – it could be 99%, 50% or even 1%, as long as she is a partial owner.
2. You can make your wife a partial owner of the property and notify HMRC of the proportion she holds accordingly. You do this by submitting Form 17 to HMRC to record your actual shares of ownership. You will both then be taxed on the rental income according to the proportion you both actually own in the property (known as the ‘actual basis’). You will need to provide HMRC with evidence that your beneficial interests in the property are unequal, for example a declaration or deed. You can complete Form 17 online here. https://public-online.hmrc.gov.uk/lc/content/xfaforms/profiles/forms.html?contentRoot=repository:///Applications/SpecPersTax_iForms/1.0/17&template=17.xdp
October Key Tax Dates
1 – Due date for payment of Corporation Tax for the year ended 31 December 2014
5 – If a Tax Return has not been received, individuals and trustees must notify HMRC of new sources of income and chargeability in 2014/15
14 – Return and payment of CT61 tax due for quarter to 30 September 2015
19 – Tax and Class 1B national insurance due on PAYE settlements for 2014/15
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/10/2015 or quarter 2 of 2015/16 for small employers
31 – Deadline for 2014/15 self assessment paper returns to be filed for HMRC to do the tax calculation. If a paper return is being filed also the deadline for tax underpaid to be collected by adjustment to your 2016/17 PAYE code (for underpayments of up to £3000 only)