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To August's Tax Tips & News, our
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August 2019
· Dividend allowance
· HMRC consultation on Partial Exemption
and Capital Goods Scheme
· The correct way with directors' NICs
· Changes in accounting for VAT after
prices are altered
· August questions and answers
· August key tax dates
Dividend allowance
Many family-owned companies allocate
dividends towards the end of their financial year and/or the tax year, which
means that the impact of the reduction in the dividend allowance from £5,000 to
£2,000 from 6 April 2018 is only now starting to come to light. Many other
taxpayers may not become aware of the change until they complete their 2018/19
tax return, which in most cases, will be due for submission to HMRC by 31
January 2020.
The amount of tax payable on a dividend
will primarily depend on which tax band the first £2,000 falls in. The tax
rates on dividend income, above the allowance, remain at 7.5% for basic rate
taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate
taxpayers.
For a basic rate taxpayer, the reduction
in the allowance means an increase in tax paid on dividends of £225. For a
higher rate taxpayer, the reduction increases the annual tax bill on dividends
by £975, and for additional rate taxpayers, the increase is £1,143. Note that
if dividend income falls between multiple tax bands, these figures will be
different.
The allocation of various rate bands and
tax rates can be complicated, even in situations where straight-forward
dividend payments are made. Family business structures may be particularly
vulnerable to the impact of the reduction in the dividend allowance, especially
where multiple family members take dividends from the family company.
HMRC consultation on Partial Exemption
and Capital Goods Scheme
At Spring Statement 2019, the government
announced that it would launch a call for evidence exploring ways to improve
the operation of Partial Exemption (PE) and the Capital Goods Scheme (CGS),
following the findings of the 2017 Office of Tax Simplification (OTS) VAT
review.
HMRC have now published the consultation
document covering both subjects. These are two areas of VAT which can involve a
significant amount of administration for businesses, with complex calculations
often being required for some businesses to determine the amount of input tax
that they are entitled to recover.
The call for evidence is split into
three sections:
- the first section looks at the process
for applying Partial Exemption Special Methods (PESMs) and the possible ways in
which this might be improved to reduce burdens for taxpayers and HMRC alike;
- the second section explores how the
current PE de minimis limit could be changed to aid simplification; and
- the third section considers possible
policy solutions to issues caused by the CGS.
The consultation will run until 26
September 2019, with further announcements on proposals for future changes
expected in time for the Autumn 2019 Budget.
The correct way with directors' NICs
In certain situations the non-cumulative
nature for calculating employee Class 1 National Insurance Contributions (NICs)
makes it possible to manipulate earnings to reduce the overall amount payable
by taking advantage of the lower rate of primary Class 1 contributions payable
once the upper earnings limit has been reached.
This means that that an employee who is
paid £2,000 each month of the year will pay considerably more in primary
contributions than someone who is paid £600 for 11 months and £23,400 for one
month, even though their total earnings for the year are the same.
Company directors often have greater
scope to influence the amount and timing of payments, so to prevent
manipulation of the rules, special provisions apply to all directors for NIC
calculation purposes. Broadly, directors' NICs are calculated on a cumulative
annual basis. This applies even where they are paid, say, monthly or leave the
company during the year.
The only exception to this rule is where
a director is first appointed during the course of a tax year. Where this is
the case, the earnings period is the period from the date of appointment to the
end of the tax year, measured in weeks. The calculation of the earnings period
includes the tax week of appointment, plus all remaining complete weeks in the
tax year (i.e. week 53 is ignored for this purpose). This is known as the pro
rata earnings period.
Example
George becomes a company director in
week 44 of the 2019-20 tax year.
For NIC purposes, the primary threshold
and upper earnings limit are calculated by multiplying the weekly values by 9,
because the earnings period starts with the week of appointment.
In 2019-20, George will pay NIC at the
main rate of 12% on his director's earnings between £1,494 (9 × £166) (the
primary threshold) and £8,658 (9 × £962) (the upper earnings limit), and at the
additional 2% rate on all earnings above £8,658 paid up to 5 April 2020.
The significance of being a company
director is that an annual earnings period must be applied for NIC purposes. It
is therefore important to be clear as to who the directors of a company
actually are. For example, there may be persons within the organisation who are
called directors, but for whom that is just an honorary title.
Companies can save time and money by
calculating directors' NIC in a similar way to other employees. Instead of
paying very high levels of NIC on a short-term basis, directors who are paid
regularly (e.g. directors who have contracts of service with their companies)
can spread their contributions evenly throughout the tax year. The earnings
period remains an annual earnings period, but contributions are made on account
throughout the tax year. A recalculation on an annual basis is performed when
the last payment is made and any outstanding National Insurance due is paid at
that time.
Changes in accounting for VAT after
prices are altered
HMRC have published Brief 6 (2019),
which explains changes to the rules on accounting for VAT, where the amount
paid changes after the VAT has been accounted for to HMRC from 1 September
2019.
The prices businesses charge for goods
and services can be reduced after VAT has been accounted for on a supply, for
example when a business delivers goods, some of which are faulty, and it agrees
with its customer that the price should be reduced.
When this occurs a business normally
sends its customer a credit note and gives a refund. The VAT rules specify
that, where this happens, the suppliers must reduce their output tax, and their
VAT-registered customers must adjust their input tax.
Businesses may also increase the price
of a supply, for example, when more work is required to complete a task than
was originally anticipated. In these cases, businesses normally issue debit
notes for the increased amount and account for the additional VAT. Their
VAT-registered customers may then recover the additional input tax, subject to
the normal rules.
Price adjustments may occur long after
goods or services have been supplied. Regulation 38 of the VAT Regulations
applies to cases where the price change occurs after the supplier has already
accounted for the output tax on the original supply in a VAT return.
The current rules do not impose a time
limit for making VAT adjustments when price adjustments are made, but it is a
requirement that the VAT must be adjusted. Failure to do so is an error which
must be corrected in accordance with requirements, and within time limits set
out in the statutory provisions.
HMRC state they have seen evidence that
some businesses are trying to use the current VAT rules to gain a tax advantage
by making VAT adjustments for reductions in price without refunding their
customers. There is litigation on this topic and recent court decisions support
HMRC's view of how the law applies.
To put the matter beyond doubt, the VAT
Regulations are being amended to the effect that Regulation 38 may only be used
to reduce the amount of VAT paid to HMRC when a refund is actually made.
Revised rules will also clarify when and how VAT adjustments must be made.
Broadly, under the new rules:
- the time an increase in price occurs
is when the change is agreed by both the supplier and the customer - a debit
note must be issued no later than 14 days after the price increase - the
supplier must account for the increase in VAT in the VAT period in which the
change occurs;
- a decrease in price occurs when a
supplier makes a refund to a customer, or other person entitled to receive the
payment - a supplier has 14 days to issue a credit note from the time the
decrease occurs - a supplier must account for the decrease in the VAT period in
which it takes place - a VAT-registered customer must reduce the amount of VAT
it has claimed by the same amount, this does not prevent a supplier issuing
credit notes in advance of refunds being made, but ensures that it is issued no
later than 14 days after the payment.
For further information, see HMRC Brief
6 (2019) here.
August questions and answers
Q. A few years ago I bought an antique
chair for £3,500. I have recently been offered £8,000 for it. Will I have to
pay capital gains tax if I accept the offer?
A. A useful capital gains tax exemption
exists for tangible moveable property (a chattel) which is not a wasting asset
(broadly, an asset with a predictable life not exceeding 50 years).
A gain on disposal of a chattel is
exempt if the disposal consideration is £6,000 or less. Where disposal proceeds
exceed the exemption limit, the gain is limited using the following formula:
5/3 x (disposal consideration - £6,000)
In relation to your chair, the capital
gain would be:
Disposal consideration - £8,000
Less: allowable cost - (£3,500)
Gain before chattel exemption - £4,500
Less: chattels exemption:
amount by which gain exceeds 5/3 ×
(£8,000 - £6,000):
£4,500 - £3,333 = £1,167
Chargeable gain - £3,333
Q. I am a VAT-registered trader and use
the flat rate scheme for working out my VAT payments. I receive a small amount
of rental income each month which I include in turnover to calculate the VAT
due to HMRC. The rental income is managed by a letting agent. Should I include
the gross or net rent in my VAT?
A. HMRC's Notice 733, section 6.2 sets
out what must be included for the purposes of calculating flat rate turnover,
which includes the value of exempt income, such as any rent or lottery
commission.
In addition, section 9.4, which deals
with cash-based turnover, confirms that if a net payment is received, the full
value before any deductions is included in the scheme turnover.
Q. I am the director of a family-owned
company. My wife and my two children are employed by the company. If the
company provides a mobile phone to each of us, what will the tax implication
be?
A. No tax charge arises where an
employer provides an employee with a mobile phone, irrespective of the level of
private use. The exemption applies to one phone per employee.
A taxable benefit will however, arise if
the employer meets the employee's private bill for a mobile phone or if top-up
vouchers are provided which can be used on any phone.
If the company takes out a contract for
four mobile phones and the bills are paid directly to the phone provider by the
company, the bills will be deductible in computing profits. Each family member
will receive the use of a phone tax-free, which means they do not need to fund
one from their post-tax income.
August key tax dates
2 - Deadline for PAYE settlement
agreement for 2018/19
19/22 - PAYE/NIC, student loan and CIS
deductions due for month to 5/8/2019
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