Category Archives: Income tax

Why do we have to pay tax? Are we overtaxed?

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These questions always seem to arrive as a pair.

Paying tax

The requirement to pay income tax (if we focus on just one tax) is a combination of Income Tax Act 2007, section 4 and (for this year) Finance Act 2022, section 1.

HMRC are given their collection and management powers under Taxes Management Act 1970, section 1.

Links to the legislation are here:

https://www.legislation.gov.uk/ukpga/2007/3/section/4

https://www.legislation.gov.uk/ukpga/2022/3/enacted

https://www.legislation.gov.uk/ukpga/1970/9/section/1

Overtaxed?

You may think so. Even if you are taxed less than the equivalent incomes in many other countries.

Here is an excellent blog by Dan Neidle on this topic: https://www.taxpolicy.org.uk/2022/10/10/employee-tax-comparison/

5 April 2020 year end tax planning – in three minutes

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A quick checklist before 5 April (and before the 11 March Budget, where lots of things may change!)

  1. Maximise ISA savings
  2. Review pension contributions
  3. Consider pension tax breaks for your children (even minors)?
  4. Use your capital gains tax allowance
  5. Use your £2k dividend 0% tax band
  6. 30% income tax relief, using EIS/VCT investments?
  7. Review and note gift aid tax relief
  8. Pay any outstanding 31 January 2020 tax before the end of February, to avoid a penalty
  9. Check your PAYE coding notice and benefits package
  10. Will your tax on rental income rise, due to the interest restrictions?
  11. Use personal allowances of spouse, children and grandchildren
  12. Are you paying high marginal rates of tax?
  13. Business – extract cash in a tax efficient way (salary, loan, dividend, rent, pension?)
  14. Trusts – create new ones; distributions from existing ones; close down old ones; do you need to complete the trusts register and keep sufficient records?
  15. Inheritance tax – gifts, update will or letter of wishes, create lasting power of attorney
  16. Get a fixed fee quote for your 2020 tax return
  17. Are you a Scottish or Welsh taxpayer?
  18. Are any overseas assets or income taxed correctly in the UK and overseas?
  19. Have you set up your online personal tax account with HMRC?
  20. Do you have a tax payment on account to make on 31 July 2020?

These are prompts rather than fine detail – for further information please contact me.

Worried about an EBT loan?

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The Finance Bill 2017 contains provisions enabling HMRC to tax outstanding EBT loans made since 6 April 1999 as if they were disguised pay.

The charge will not apply if the loan* is repaid before 5 April 2019 or has otherwise been fully taxed.

Update: in my view this means the legislation is not retrospective (unless the taxpayer knows it was a “pretend” loan, ie low or untaxed remuneration, rather than a real loan).

Those affected should take advice. That advice should be independent from that given by the scheme promoter or adviser who introduced them into the planning. There is a settlement opportunity available with HMRC and it can be possible to arrange time to pay agreements for the tax.

A bigger problem?

Some will struggle to pay the tax but is there a potentially bigger problem: what if the EBT trustees call in the loan for repayment?

In either case you may also need to take advice from an insolvency practitioner.

Also keep an eye on the leading tax case in this area, relating to Rangers FC https://www.supremecourt.uk/cases/uksc-2016-0073.html

Win or lose*, existing loans that remain unpaid will be taxable one way or another.

*update: the taxpayer lost

Thoughts on the 2017 Spring Budget – with later updates

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Rather than a full analysis, here are quick points of interest:

  1. The NIC rise hit the headlines and broke a manifesto commitment but is in the (right?) direction of travel on levelling the taxation of employment v self employment v disguised employment v investment income; (Edit: The class 2 NIC issue continues to change – eg summer 2018 – perhaps we’ll see a final firm change in the 2018 Autumn Budget).
  2. Making Tax Digital may be a bigger cost for the self employed than NIC rises;
  3. The dividend 0% tax band reduction from £5k to £2k in 2018 is an example of previous changes impacting taxpayer behaviour;
  4. Anti-avoidance and financial information sharing continues, so the disingenuous “how will HMRC find out?” should (thankfully) cease to be a question advisers are asked;
  5. Some important 6 April 2017 changes previously announced include:
  • £1k Trading and Property income personal tax allowances
  • Lifetime ISAs
  • IHT main residence nil rate band begins to taper in
  • “Non dom” tax changes
  • Interest restrictions for buy to let landlords
  • Although not an area on which I advise…Flat Rate Scheme VAT users (with low costs on goods) – stay in or leave? (Edit: this impacted my business – I left the Flat Rate Scheme)

Family Investment Companies to save income tax and inheritance tax – problems ahead?

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Family investment companies (“FIC”) are popular for three reasons. For clients, (i) they can reduce or defer taxes on income from 45% to 19% or less and (ii) give away wealth for IHT purposes but retain some element of control. For advisers, (iii) there are large fees, as such structures are complex and require detailed advice.

Advantage (i) is as a result of the continued fall in corporation tax rates, compared to higher income tax rates. Advantage (ii) is a response to the restriction on the use of trusts via the tax system in 2006. Advantage (iii) may tempt some to “sell” as many FICs as possible to clients, rather than it being part of an adviser’s toolkit, suitable in only some circumstances.

What could go wrong?

The challenges FICs face are:

  1. complexity – in many cases there is a more simple and cheaper solution than a FIC
  2. future tax rates change (companies were a very bad idea for private assets several years ago and may be again in the future)
  3. company law changes
  4. targeted legislation (see-through legislation taxing the income / apportionment rules?)
  5. existing settlement anti-avoidance legislation (if there is an element of bounty eg uncommercial loans) or transactions in securities (there are rumours of HMRC attack in this area)
  6. costs, administration and reporting requirements can be expensive or burdensome
  7. they are difficult to unravel (more so than trusts)
  8. publicity, unless an unlimited or offshore company is used to limit that
  9. will the press see them (rightly or wrongly) as the next tax dodge, resulting in penal taxes in response?
  10. double tax charge on assets that grow in value and are extracted
  11. family/shareholder disputes (getting the bespoke company articles and shareholder agreement right first time)
  12. unknown unknowns (FICs are a very young idea compared to the tested ground of trusts)

These should all be considered in detail before putting a FIC into place, ie not just the advantages now but how future-proof are they, what stress tests and “what ifs?” should be considered?

With that, a fully informed decision can be made. FICs can be very useful in specific limited circumstances but beware having one just because it is in fashion or that somebody wants to earn a nice fee selling you one.

[This note was drafted in December 2016, updated in March 2017 and February 2018]

Common tax return errors

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In my experience, the most common tax return errors made by taxpayers are in ten areas:

  1. selling a property or other asset
  2. one-off interest on deposits (eg when long term investments mature)
  3. new bank accounts or investments
  4. payments/benefits/expenses from other company directorships
  5. temporary employments
  6. accrued income scheme interest on government gilts
  7. joint ownership of rental properties or other assets
  8. assuming low bank interest is the same as nil
  9. not realising child benefit can have a tax impact
  10. pension contribution misunderstandings

Good ways to spot or prevent these are:

  • using the checklist of 10 items above, as a prompt
  • getting the tax return done early (eg August to November, not December and January)
  • checking your personal bank statements for unusual credits
  • giving your adviser a full list of your assets, including non-income producing ones
  • regular updates to your adviser of activity and transactions during the year
  • not relying on just checking comparatives with last year – instead ask “what might have changed?”
  • reconciling the tax due: why is it that figure? (eg PAYE overpayment due to benefit in kind change = £A; higher rate on dividends = £B; gift aid tax relief = £C; £A+B+C = tax due)

These help prevent unexpected tax, interest and penalties.

If you have submitted your tax return with an error, speak to us about how to correct this before HMRC spot it and to help minimise potential penalties.

Tax interim payments on account – a simple guide?

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Those making payments on account for the first time on 31 January may be confused by the system. I hope that the explanation below is simple – but questions and suggestions are welcome:

A summary

Employment taxes collect most of your tax immediately. The tax on other sources of income (eg self employment) can take many months to collect, so the system attempts to collect it by using estimates. The first interim payment may seem to to be doubling up on your tax or paying in advance but you are actually still paying slightly in arrears.

A bit more detail

  1. If you are employed and suffer tax at source under Pay As You Earn (“PAYE”), you are paying tax immediately – an amount earned in May 2018 is taxed in May 2018;
  2. If you have non-employment income (rents, investment income, self employed income) the delay before paying tax can be many months – the tax on an amount earned in May 2018 would not be paid until 31 January 2020 (20 months later);
  3. The interim payments on account system attempts to reduce that delay, if that source of income is regular;
  4. In the first year of assessment, as well as collecting tax for that year, it also collects an estimate for the current year;
  5. Half of that estimate is payable on 31 January and half on 31 July;
  6. If the tax due on the income source is £6,000 for the year, as well as paying that on 31 January 2019, you also pay an extra £3,000 on that date and another £3,000 on 31 July;
  7. The first time that happens, that may feel as if you are paying a lot of tax on the income, perhaps double the amount or even paying in advance (you are not!);
  8. By the time of that interim payment on 31 January 2019, you will have earned income from that source in the year to 5 April 2018 and also for most of the year to 5 April 2019;
  9. In doing so, you will (I hope) have budgeted for tax as it is earned;
  10. If your income, tax rates and allowances stayed exactly the same year on year the tax  payments would then settle down (eg £3,000 twice a year covering your liability in full);
  11. Instead, if things change, you will have a balancing payment on 31 January or repayment adjustment each 31 January;
  12. The tax on the income source for the year to 5 April 2019 is being paid half (estimated) on 31 January 2019 (during the year), half on 31 July 2019 (slightly after the year) and a balancing payment or repayment on 31 January 2020 (several months later);
  13. If your source of income rises each year, you will be paying slightly in arrears compared to someone taxed under PAYE. If your source of such income drops or ceases you should consider reducing your payments on account (but speak to your tax adviser first);
  14. Ask your adviser how to budget for your tax payments.

(To keep this simple, I’ve ignored some of the other complexities that arise, eg accounting periods for the self employed and the “80% test”.)

 

“January” tax returns – our policy

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January is traditionally thought of as the busy season for tax professionals.

Many taxpayers and advisers default to January. The 2016 HMRC statistics showed “…29 January was the busiest day with 513,271 returns completed – that’s more than 21,386 returns received per hour…”

It doesn’t need to be this way.

In my view, leaving it to January creates additional tax risk. Fortunately almost all of my clients wish to submit theirs before November.

My policy on January tax returns

Before we begin work on a tax return in January, our requirements are:

  • a copy of last year’s submitted tax return
  • a signed engagement letter
  • full details of all income and gains, with supporting evidence
  • a note of all assets, including non-income producing ones
  • my fee paid in advance and with a 25% premium on my normal rates
  • agreement to approve the tax return electronically on or before 25th January
  • all the above to be provided before 20th January

Avoiding the January rush

Other tips before getting near January are:

  • offer a discount for payment of fees in advance or in instalments
  • meet your client before August (go and see them, where their papers are kept)
  • encourage them to do the return themselves (the HMRC software is really good, although does not cover all taxpayers)
  • explain why their tax bill is that amount and how it might be reduced
  • cease to act
  • book a January holiday

If you require help in preparing and submitting your tax return in any month before January, and on making the process as quick and simple as possible, please contact me for my tips and advice.

Discretionary trusts and the new dividend tax rate

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The nature of an income source changes as it passes through a discretionary trust. Dividend income loses its character and so doesn’t qualify for the £5,000 nil rate income tax band in the hands of the beneficiary when distributed.

A better result may be to create a revocable interest in possession for the beneficiary, if that meets the trustees’ wider objectives to give the beneficiary a regular income stream. The income then does remain dividend income and they are left with an increased net of tax amount of income.

Following the 2006 changes to IHT and trusts the revocable interest shouldn’t create any other tax problems for the trust.

As ever, care is required over the drafting of the deed of appointment, completion of the tax returns and the practical consequences for the trustees and beneficiary.

Another factor to consider, at the time of writing, is that s498 ITA 2007 appears to need amendment in the 2016 Finance Bill to allow full credit for the dividend tax in a discretionary trust tax pool. (Edit: this issue has now been corrected.)