Small
Business Tax & Finance
DIVIDEND ALLOWANCE
The current regime for taxing
dividends has been in place since 6 April 2016. Under the rules, all taxpayers,
regardless of the rate at which they pay tax, are eligible for a ‘dividend
allowance’. Although termed an ‘allowance’, in reality the dividend allowance
is a nil rate band and dividends sheltered by the allowance are taxable at a
zero rate. The allowance is set at £5,000 for 2016/17 and 2017/18, enabling all
taxpayers to receive dividend income of £5,000 tax-free (on top of any
dividends that are covered by the personal allowance). Once the dividend
allowance (and the personal allowance) have been used up, dividends are taxed
at 7.5% to the extent that they fall within the basic rate band, 32.5% to the
extent that they fall within the higher rate band and 38.1% to the extent that
they fall within the additional rate band.
The dividend allowance is to fall to
£2,000 from 6 April 2018. This will impact on anyone who receives dividends,
either from investments or as part of a profit extraction strategy from a
personal or family company.
Dividends are a popular and
tax-efficient method of extracting profits from a personal or family company.
Where profits are extracted in this way, it is sensible to plan ahead to ensure
that the higher dividend allowance available for 2017/18 is not wasted. Where
shareholders in personal or family companies have taken dividends of less than
£5,000 in 2017/18, and where retained profits are sufficient, consideration
should be given to paying a dividend before 6 April 2018 in order to mop up any
unused dividend allowance for 2017/18. For 2018/19 onwards, the allowance is
only £2,000.
Paying a
dividend after 6 April 2018 rather than before may mean (depending on the size
of the dividend) that it is taxable where previously it was tax-free. Assuming
that dividends of at least £5,000 continue to be paid in 2018/19 (and the
personal allowance is utilised elsewhere), the reduction in the dividend
allowance will increase the tax payable by a basic rate taxpayer by £225, a
higher rate taxpayer by £975 and an additional rate taxpayer by £1,143.
Talk to us about tax-efficient profit
extraction policies and the benefits of planning ahead.
TERMINATION PAYMENTS
The rules on the tax and National
Insurance treatment of termination payments is changing from 6 April 2018.
Payments made on the termination of
an employment are treated differently depending on whether the payment is a payment
of earnings, such as normal wages and salary, or a compensation payment, such
as damages for loss of office. Payments taxed as compensation payments benefit
from a £30,000 tax-free exemption and are only taxable to the extent that they
exceed £30,000. The £30,000 exemption does not apply to payments taxed as
earnings.
It is not always easy to determine
whether a payment is one of earnings or a compensation payment benefitting from
the £30,000 exemption. In particular, payments referred to as ‘payments in lieu
of notice’ cause difficulty in practice, not least because the term is used to
describe payments that differ in nature. Under the current rules, payments in
lieu which the employee is contractually entitled to receive, or which the
employee has an expectation of receiving (for example, where there is a long
standing company practice of making payments in lieu of notice), are taxed as
earnings and do not benefit from the £30,000 exemption. By contrast, payments
for which there is no contractual entitlement or expectation and which take the
form of damages for the failure to give proper notice, benefit from the £30,000
exemption.
The treatment of payments in lieu of
notice is to change from 6 April 2018 onwards. From that date, the payment is
compared to the pay that the employee would have received had the employment
continued throughout the notice period. Where the termination payment is not
more than the pay that the employee would have received in the notice period
had the employment not been terminated, it is taxable in full. Any excess over
what would have been payable had the employment continued is treated as a
compensation payment and will benefit from the £30,000 exemption. Essentially,
any earnings payable until the end of the notice period are taxed in full as
earnings from the employment.
The way in which compensation
payments are treated for National Insurance purposes is also changing from 6
April 2018. Prior to that date, no National Insurance is payable on termination
payments treated as compensation payments rather than as earnings. However,
from 6 April 2018, employer National Insurance contributions will be payable on
compensation payments made on the termination of employment to the extent that
they exceed the £30,000 tax-free threshold – although the payments will remain
free of employee’s National Insurance. The employee will pay tax on
compensation payments in excess of £30,000 (as now) and the employer will pay
employer’s National Insurance.
Please contact us to discuss the structuring
of tax-efficient termination packages.
PAYE SETTLEMENT AGREEMENTS
A PAYE Settlement Agreement (PSA) is
an agreement that an employer makes with HMRC under which the employer agrees
to pay the tax and National Insurance on certain benefits and expenses provided
to employees. The tax and National Insurance due under the PSA is paid in a
single payment by 22 October after the end of the tax year to which it relates
where payment is made electronically. An earlier date of
19 October applies to payments that are made by cheque.
A PSA can be useful to save work and
also to preserve employee goodwill. Benefits and expenses included in the PSA
do not need to be notified to HMRC on form P11D.
However, not all benefits are
suitable for inclusion within a PSA – a PSA can only be used for payments that
are made irregularly, payments which are minor (although this category is
largely irrelevant following the introduction of the exemption for trivial
benefits costing £50 or less) or where it would be impracticable to operate
PAYE. For 2017/18 and earlier years it is necessary to agree a PSA with an
officer of HMRC before 6 July following the end of the tax year to which it
relates. However, HMRC are simplifying the PSA process and as part of this, it
will no longer be necessary to agree the terms of the PSA in this way. Further
reforms are planned. The current PSA process largely relies on paper forms but
HMRC are to develop an automated PSA process as part of their digital strategy.
Please contact us to discuss whether
a PSA would be suitable for your employees and whether it would save work for
you at the year end.
CASH BASIS FOR LANDLORDS
Under the cash basis, accounts are
prepared simply by reference to money received and money paid out. By contrast,
under Generally Accepted Accounting Practice (GAAP) profits must be worked out
using the accruals basis (sometimes referred to as the ‘earnings basis’) which
recognises income earned in a period and expenditure incurred in a period,
regardless of when the income is received or the payment made.
From 6 April 2017 onwards, the cash
basis will be the default basis for most unincorporated landlords where rental
income is less than £150,000 a year. However, if the landlord wishes to
continue to prepare accounts on the accruals basis, he or she will need to
elect to do so. By contrast, property letting companies will need to continue
to use the accruals basis to prepare accounts.
The rules for the treatment of
capital expenditure under the cash basis have also been reformed from 6 April
2017 onwards. The new rules allow landlords using cash basis accounting to
deduct most capital items from rental income when computing profits. However, a
deduction is not available in this way for all capital expenditure – notable
exceptions include land and cars.
Contact us to discuss what cash basis
accounting means for your property rental business.
VAT FLAT RATE SCHEME
The VAT Flat
Rate Scheme for small businesses is a simplified scheme which allows eligible
traders to calculate the VAT that they pay over to HMRC by reference to a fixed
percentage applied to gross
(i.e. VAT-inclusive) turnover. Businesses with VAT taxable turnover of £150,000
a year or less can join the scheme.
Prior to 1 April 2017 the flat-rate
percentage was determined solely by reference to the trade sector in which the
business operated. From 1 April onwards, it is also necessary to consider
whether the business meets the definition of a ‘limited cost trader’. Where a
company is a ‘limited cost trader’ the VAT that must be paid over to HMRC is at
worked out using a higher rate percentage of 16.5% of gross (VAT-inclusive)
turnover for the period, rather than the percentage for the relevant business
sector.
A limited cost trader is one that
spends less than 2% of its VAT-inclusive turnover on ‘relevant goods’ or one
which spends more than 2% of its turnover but less than £1,000 a year on
relevant goods. The 2% test must be applied for each VAT quarter. The test is a
harsh one as it only takes account of expenditure on goods, not on services.
Consequently, if a business spends a lot on VATable services but not much on
goods, it may be classed as a limited cost business and may lose out in terms
of recovering the VAT incurred on services.
If you use the flat rate scheme,
contact us to arrange a review as to whether this is still beneficial.
COMPANY CARS
Despite rising tax bills, company
cars remain a popular benefit. The rules for taxing company cars reward
employees driving cheaper low emission models with a lower tax bill.
Until 5 April 2015, it was possible
to drive an electric company car tax-free. However, after that date, electric
cars have been taxed according to the appropriate percentage for the 0 to
50g/km emissions band (9% for 2017/18, rising to 13% for 2018/19).
Technological advances mean that
electric cars are becoming a more viable alternative to petrol and diesel
options. In recognition of this, new appropriate percentage bands are to be
introduced from 2020/21 onwards for electric and other ultra-low emission
vehicles. Under the new structure, the percentage applying to cars with
emissions of 1 to 50g/km will depend on both the level of the car’s CO2
emissions and also its electric range, which is the distance that the vehicle
can travel in pure electric mode. For vehicles with CO2 emissions of 51g/km and
above, the appropriate percentage depends solely on the level of CO2 emissions.
The bands for ultra-low emission cars
for 2020/21 onwards are as follows:
CO2 emissions
|
Electric range
|
Appropriate percentage
|
0g/km
|
2%
|
1–50g/km
|
130 miles or more
|
2%
|
70 to 129 miles
|
5%
|
40 to 69 miles
|
8%
|
30 to 39 miles
|
12%
|
Less than 30 miles
|
14%
|
51–54g/km
|
15%
|
55–59g/km
|
16%
|
60–64g/km
|
17%
|
65–69g/km
|
18%
|
70–74g/km
|
19%
|
Thus, a lower tax charge will apply
to electric cars with a greater electric range.
When planning ahead for company car
changes, it is important to consider the tax implications of any policy and of
the models chosen for the car fleet. Please contact us for more information.
This
newsletter deals with a number of topics which, it is hoped, will be of general
interest to clients. However, in the space available it is impossible to
mention all the points which may be relevant in individual cases, so please
contact us for personal advice on your own affairs.
