Category: Tax

  • Are legal and professional fees tax deductible?

    Fees related to a trade are often allowable but it depends on the nature of the fees. Generally, fees related to the purchase or sale of property/assets and to do with raising equity finance are disallowed for tax purposes.

    “Capital” expenditure: not deductible

    Legal and professional fees are “capital” if they relate to an asset’s:

    • acquisition
    • improvement
    • elimination

    And the asset is of an enduring nature and will yield benefits to the business for a number of years in the future.

    For example, property, computer/office equipment, fixtures and fittings, licences (eg FCA) and other assets are all capital items. So legal and professional fees incurred in relation to these are also of a capital nature.

    Fees related to leasing a property/asset, raising shares and share options are also capital.

    Therefore, these kinds of fees would all be  disallowed for tax purposes.

    Fees to arrange loans are generally also capital however incidental costs of loan finance are allowable.

    Although fees for intangible assets are disallowed initially, there may be an amortisation expense that is allowable, for example when licences or IPR are written off over their useful lives.

    “Revenue” expenditure: are deductible

    If fees don’t relate to capital then they can normally be deducted if they relate to the trade.

    So fees for a non-business purpose wouldn’t be allowed.

    Examples of allowable legal/professional fees include:

    • advice on employment issues
    • terms and conditions for a website
    • accountancy fees to prepare accounts
    • lease renewal fees
    • taking a debtor to court

  • Loss relief

    Trading losses

    If your company makes a loss from its trading operations then it can claim relief against corporation tax.

    Current year

    If you make a trading loss, you can offset the loss against profits/gains from other trades or sources in your company in the current year.

    Carry back against previous year

    If you can’t use up all your losses in the current year, you can also  carry them back against the total profits of the previous year. If you already paid tax for the previous year, then you could get a cash refund from HMRC.

    To do this, you’d need to enter the loss to be carried back in your current year’s tax return, tick a repayment is due and then either amend the previous year’s tax return or make a claim under s.37 of CTA. If not amending the previous year, you can try to make the claim by making a note in the trading losses section of the tax computation and if this doesn’t work you’d need to write to HMRC.

    There is a time limit of making the claim within 2 years of the end of the accounting period when the loss was made. Eg a loss in YE 31/12/2021 needs to be claimed by 31/12/2022.

    There is also a temporary rule due to Covid-19 to carry back losses for upto 3 years.

    Carry forward

    If you can’t use the losses in the current/previous year, you can also carry them forward to be offset against future profits relating to the same trade.

    For example, if you make a loss in a consulting trade, this can’t be offset against a new trade in future relating to e-commerce.

    Key legislation: CTA 2010 s.35 onwards

    Property income losses

    If you have a loss from renting out a property (eg house/flat or shop/office) then it can be offset against trading profit or other income (from the same property business) in the current year or in future years.loss

    But it cannot be carried back.

    Capital losses

    If you make a capital loss, for example from selling shares or property at a loss, then these can only be offset against capital gains arising in the current year or in the future.

    They cannot be carried back and they cannot be used against trading profits or other income.

    Key legislation: TCGA92/S8

  • Can tax deductions be claimed for bad debts?

    Bad debts can receive tax deductions if they are:

    • bad debts that definitely cannot be recovered (eg debtor has already closed down)
    • specific bad debts that are doubtful/unlikely to be received
    • debts released by the creditor as part of a statutory insolvency arrangement

    Bad debts won’t receive tax deductions if they’re general provisions against overall trade debtors. For example, total trade debtors are £10,000 and a general bad provision is created for £1,000.

    Specific bad debt provisions

    Before the accounts are finalised the trade debtors are normally reviewed for recoverability. If there a debt which is unlikely to be paid then a specific bad debt provision is usually created. For example, Company X Ltd’s debt of £595 is written off.

    This reduces trade debtors in the balance sheet and involves a bad debt expense in the P&L.

    This bad debt expense will be included in the tax return as an allowable deduction.

    Timing

    The ability of the debtor to pay has to be evaluated as at the year end. So if the debtor only ran into financial difficulties after the year end, then the bad debt expense wouldn’t be allowed as a tax deduction.

    Slow payer

    HMRC do not consider that a debtor being a slow payer is grounds for a debt being doubtful.

    Waiver

    If a debt is written off for reasons other than the debtor facing financial difficulties then HMRC could challenge any tax deduction, for example, if the debtor is related to the business (family connections or parent/subsidiary).

    Evidence required

    The business should retain evidence supporting a specific bad debt provision such as:

    • correspondence with the debtor
    • legal letters
    • credit reports
    • board minutes reviewing aged debtors

    If HMRC challenge a bad debt, they would seek to establish the following details about individual bad debts:

    • how the extent of its doubtfulness was evaluated, and
    • when this was done, and
    • by whom, and
    • what specific information was used in arriving at that valuation.

    Key legislation

    S35, S259 Income Tax (Trading and Other Income) Act 2005, S55, S303, S479 Corporation Tax Act 2009

  • Is entertaining tax deductible?

    Business entertainment means the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.

    We’ve broken it down into 3 categories:

    1) Clients and potential customers

    Client entertainment usually isn’t allowable for tax purposes. Examples may include:

    • taking clients out for meals/drinks
    • tickets to sporting or cultural events
    • holidays, flights or hotel accommodation

    Promotional events arranged to advertise products are not in themselves business entertainment but the cost of any food, drink or other hospitality provided as part of the event is disallowable.

    Sponsoring a sporting or cultural event is allowable if the business receives publicity, but the cost of giving free tickets or private boxes etc to clients isn’t allowable.

    Business gifts are only allowable if they incorporate a conspicuous advert for the company, such as a logo, and the cost is below £50 per person per year. However, the gift cannot be food, drink, tobacco or vouchers.

    The cost to a business of giving away its own goods or services for the purpose of advertising those goods or services to the general public is not business entertainment expenditure. Examples include  a manufacturer giving out free sweets to the general public or a trial run of hotel facilities to a bulk buyer or a free meals to restaurant critics.

    2) Staff

    Staff entertaining such as a Christmas party or sporting event is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers.

    So if a business takes out a client to a restaurant, the cost for the staff who also attend won’t be allowed.

    But if the only attendees are employees, then the cost will usually be allowable. Also allowable are costs for subcontractors or self employed “workers”.

    However, there may be additional P11D taxes for benefits in kind (payable by both the company and staff) unless the entertaining relates to one or more annual events that are open to all staff and cost less than £150 per person in total.

    3) Directors

    A business meeting that involves significant food/drink and is only between directors and doesn’t involve any other employees may still qualify for a corporation tax deduction. However, it will then usually be subject to P11D taxes and so it isn’t usually efficient to claim a corporation tax deduction.

    Incidental expenditure

    In addition to the examples mentioned above, costs that are incidental to entertainment are also disallowed for tax purposes. For example, travelling costs to a client meal are also barred. As would the costs of maintaining an asset, such as a yacht, used for business entertainment.

    The law

    The key legislation is S1298 Corporation Tax Act 2009 and S45 Income Tax (Trading and Other Income) Act 2005.

  • Pension contributions tax savings

    Pension contributions can be a great way to save tax.

    Disclaimer

    Decisions about whether or not to make pension contributions should normally be led by investment considerations and our clients generally use financial advisers to decide whether or not to contribute as the money will usually be locked away and there can be various risks involved as well.

    We can only comment on the tax side. We are able to recommend a financial adviser if needed.

    Tax relief

    There are 2 main forms of tax savings that are usually relevant to our clients:

    1) personal contributions: tax relief at source to increase the pension pot and also an increase in the 20% tax band will reduce the amount of 40% or 45% tax paid and result in a tax refund in the self assessment.

    2) corporation tax: employers pension contributions are tax deductible, so the company will save tax at 19% (in 2021) on the amount of contributions paid.

    Allowances

    There is an annual allowance of £40,000 that is eligible for tax relief and this includes both employer contributions and also amounts that clients contribute personally, based on the tax year upto 5 April each year.

    Clients can also carry over unused allowances from the previous 3 years if they need to invest more.

    However, it should be noted that personal contributions are limited to an individual’s earnings, although the company can contribute an extra amount to utilise the £40k allowance. If there are no taxable UK earnings, the limit is much less (£2,800 gross in 2021/22).

    There are some other circumstances, please check HMRC to confirm, for example if individuals earn more than £200,000 a year.

    Personal contributions

    Personal pension contributions are typically made from net pay (after tax) via payroll into a company scheme or from paying separately into a personal plan (eg SIPP).

    Our clients will generally receive 20% “relief at source” on their pension contributions automatically by their pension scheme as the provider adds 20% to the pension pot.

    When completing their self assessment, we need to enter the gross payments into the tax return, which is the actual contributions paid plus 20%.

    If they’re a 40% or 45% taxpayer they’ll also then receive a tax refund as the higher rate tax band will be increased by the gross contributions.

    For example:

    Pension statements show personal contributions of £8,000 in the tax year. This is declared in the tax return as the gross value £8,000 /80%*100% = £10,000. This will result in a tax refund of £10,000*20% = £2,000 if they’re a 40% taxpayer or £10,000*25%= £2,500 if they’re a 45% taxpayer.

    Employer contributions

    The company will get a corporation tax deduction on its contributions into registered pension schemes and there will not be any income tax or NIC payable on employer contributions.

    There needs to be a contractual arrangement/obligation for the company to make a separate contribution to the client’s personal contributions, whether its into a company pension scheme or a personal SIPP or pension plan.

    So to save corporation tax, the client has to show that the company is making an employer’s contribution.

    Our clients usually explain to their pension provider that they want to make an employer’s contribution before making the payment. This is important because we need some documentation from the pension provider to prove that its an employer’s contribution.

    The contributions can be made throughout the accounting year or as a lump sum, but the company will obtain the corporation tax deduction in the accounting period in which the company pays the contributions.

    The pension contributions cannot be accrued or backdated.

    The contributions can also be included R&D tax credit claims (for the proportion of time spent on eligible R&D projects)

    For example:

    Director salary is £8,000 and has a personal SIPP and no auto enrolment. Although the salary is low, the company can still pay £40,000 into the SIPP as long as the correct forms are filled in to show its an employer’s contribution. Tax relief in 2019 would be £40,000*19%.

    If the company year end is 31 December, £40k could be paid in March and another £40k in December to maximise contributions in this particular accounting year, as it straddles the 5 April tax year end used for the £40k allowance.

    Income from state & other pensions: 

    These are usually taxable and need to be included in the self assessment tax return.

    State pensions: the client should have a letter with their weekly State Pension amount

    Other pensions: the client should have a P60 or similar annual statement, the total gross amount before tax needs to be declared in the self assessment.

    Other circumstances

    Pensions can be very complex. Further advice should be sought from a partner at MAH if dealing with:

    • something different to the examples and explanations above
    • early/flexible access to pension pots & lump sum payments/refunds
    • overseas pension schemes

    (Notes from HMRC manuals are below)

    BIM46035:

    A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.

    contributions are paid wholly and exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) is comparable with that paid to unconnected employees performing duties of similar value.

    NIM02716:
    Section 308 ITEPA 2003 provides that an individual is not liable to income tax where an employer makes a payment to a registered pension scheme (“RPS”; NIM02715). Where that section applies, such a payment is disregarded in the calculation of earnings for Class 1 NICs purposes.

    EIM01570:

    registered personal pension scheme arrangements made by an employee (or director) may provide for employer contributions as well as employee contributions. Where, under such arrangements, the employer pays employer’s contributions the contributions are not chargeable on the employee as earnings of the employment (Section 308 ITEPA 2003).

    RPSM05400020:

    a deduction can only be given for the period in which the contribution is paid.

    I make regular accruals regarding pension costs in my company accounts, can relief be given in respect of these accrued amounts?
    No. Tax relief can only be given on contributions that have actually been paid. The amount shown in the profit and loss account in respect of obligations in respect of defined benefit schemes may be substantially different from the amount of contributions paid to the scheme. But it is only the amount actually paid that can be considered for tax relief.

  • Can VAT on entertaining be reclaimed?

    You cannot usually reclaim input VAT on business entertainment however you can sometimes reclaim it for staff entertainment.

    The notes below primarily come from VAT Notice 700/65 and VIT43200.

    1) What is entertainment?

    Entertainment involves hospitality of any kind, such as:

    • provision of food and drink
    • provision of accommodation (such as in hotels)
    • provision of theatre and concert tickets
    • entry to sporting events and facilities
    • entry to clubs and nightclubs
    • use of capital assets such as yachts and aircraft for the purpose of entertaining

    2) Business entertainment

    VAT incurred for the purposes of business entertainment is specifically blocked from recovery under the Value Added Tax (Input Tax) Order 1992 (SI 1992/3222), art. 5. Case law defines business entertainment as: the free provision of hospitality to persons who are not employees of the business, employees including directors of limited companies.

    For example, hosting or taking clients to the entertainment below cannot be reclaimed for VAT:

    • golf days
    • track days
    • trips to sporting events
    • lunch/evening meals at a restaurant
    • trips to nightclubs

    Exception: Meetings

    VAT can be reclaimed if basic food and refreshments such as sandwiches and soft drinks are provided at a meeting held in the office to help it continue without interruption.

    However, the VAT cannot be reclaimed if a meeting is held at a restaurant and the meal is classed as lavish. If no office is available, HMRC could potentially argue that it could have been held at location such as a meeting room for hire or a coffee shop.

    Potential Exception: Overseas customers

    HMRC mention:

    The term ‘overseas customer’ means any customer not ordinarily resident or carrying on a business in the UK, including the Isle of Man.

    VAT incurred on the entertainment of overseas customers may be recoverable when incurred for the purpose of the business if it’s reasonable in scale and character. However, there will be an output tax charge if there is a ‘private benefit’ to the individual enjoying the entertainment which will cancel out any recoverable input tax.

    There is usually a private benefit when business entertainment is provided. However, in cases where the expenditure is necessary and for strict business purposes the private use may be ignored. Hospitality provided because it would be polite, because it’s expected, or because it would improve relationships is not for strict business purposes.

    The rules on overseas customers relate to the joined Danfoss/Astra Zeneca ECJ case and this involved basic working lunches provided to customers free of charge.

    Our policy is not to reclaim VAT if the entertainment involves any overseas customers unless it involves basic refreshments which are not lavish. So restaurant meals cannot be reclaimed.

    Rare exceptions: hospitality with obligations

    To be non-recoverable expenditure, the hospitality must be free of charge or obligation. In the case of C & E Commrs v Kilroy Television Co Ltd [1997] BVC 422, the participants in the talk show were provided with a buffet meal. The court found that the company had put itself in a contractual position to provide the buffet, which was the only payment the participants received for taking part in the show. Therefore, there was no business entertainment provided. In a similar case, a market research company provided sandwiches at product trials where the public were invited to sample alcoholic beverages and complete questionnaires on them. HMRC accepted that the alcoholic beverages were not business entertainment but assessed the VAT recovered on the provision of food. The tribunal found that the food was a necessary part of supplying the drinks and was not business entertainment (DPA (Market Research) Ltd [1997] BVC 4,071).

    3) Staff entertainment

    Staff entertainment relates to providing employees with entertainment wholly for business purposes, such as to incentivise them and to foster team spirit.

    The VAT can be reclaimed on staff entertainment, for example team meals/drinks, parties and other events.

    Staff and employees do not include 3rd parties such as prospective employees, shareholders, former employees or pensioners, self-employed subcontractors, relatives or partners or friends of employees.

    Travel & Subsistence

    This is separate from entertainment if the primary purpose is not for entertaining. If an employee or director has to travel for business purposes then the input VAT of meals and accomodation can be reclaimed. HMRC generally use a five-mile radius from the office as an unofficial guide.

    Entertaining involving only the Directors/partners

    If no staff are included and the cost cannot be claimed as subsistence, then the VAT cannot be reclaimed. For example, the directors have a general lunch at a restaurant or attend a sporting event without any other staff.

    If the directors work in separate locations far away from each other and decide to meet in person to discuss business matters then the VAT could potentially be reclaimed as subsistence.

    4) What if entertainment is held for both staff and clients/customers?

    Meals/subsistence

    If staff/directors are working from their usual place of working (eg home or their office) and then they meet with a client some distance away specifically for that meeting, then the primary purpose would appear to be entertainment, so the VAT cannot be reclaimed for the staff/directors.

    If the staff/directors are working away at a client site for the day or travelling, then they have to eat. So if a client were to join them for the meal and the entertainment is secondary to the primary business purpose of the meal, then the VAT for the staff/directors can be reclaimed.

    Our general policy is not to reclaim VAT on UK restaurants unless we are specifically informed that it includes subsistence and the number of proportion of the meal being claimed, to confirm the non-staff VAT is reclaimed.

    General entertaining

    If the staff are not acting as hosts for the clients/customers, then the VAT can potentially be reclaimed for staff. However, this is such a grey area and difficult to prove, our policy is not to reclaim VAT if the entertainment involves any clients or customers unless we are specifically informed that the staff were not acting as hosts.

    5) Why does MAH take a conservative approach to reclaiming VAT on entertainment?

    Although we have dealt with a number of VAT investigations and enquiries and have a lot of experience in the kinds of things HMRC ask for, we don’t feel that its worthwhile trying to fight HMRC over entertainment as the rules about what is allowed or not are so grey.

    When we look at the VAT court cases we find that event the Big 4 accounting firms KPMG and EY have lost cases against HMRC when they aggressively reclaimed VAT on entertaining.

  • Autumn Budget 2021 update

    We have analysed the Autumn Budget 2021 for the key changes relevant to small and medium businesses (SMEs). Please find below the key points which we feel may be of interest to our clients.

    1) Payroll taxes / NIC

    From April 2022 there will be a new employment tax of 1.25% for the Health and Social Care Levy to fund investment in the NHS and social care. This will increase both employee and employer NICs (class 1) and also the self employed will have to pay higher Class 4 NIC. From April 2023 it will also apply to the earnings of individuals working above the State Pension age.

    2) Income tax / dividends:

    The personal allowance threshold will not change and will stay at £12,570 per year and the higher rate tax will also still start at £50,270.

    From 6 April 2022 the dividend tax rates will all increase by 1.25%.

    To avoid higher rate of income tax in 2022-23, we would recommend a salary of £9,100 and dividends of £41,170. There will be £2,945 tax on total income of £50,270.

    Please refer to our separate post for further details and calculations about the most tax efficient level of salary and dividends for 2022-23.

    3) R&D tax credits

    The previously delayed cap on the cash refund for R&D tax credits has now come into effect from 1 April 2021. The new cap is that a company can claim upto £20,000 plus 3 times its PAYE/NIC bill for the period. However, a company is exempt if its employees are creating/managing IP and it doesn’t spend more than 15% of qualifying R&D expenditure on subcontracting or externally provided workers to connected persons. Accounting periods commencing before 1 April 2021 will need to be split/apportioned into 2 periods before and after this date so that the new rules can be applied.

    Data and cloud costs can also be claimed from April 2023.

    4) Corporation tax

    Reminder from the March 2021 budget:

    An increase in the UK corporation tax rate from 19% to 25% was substantively enacted in May 2021 and will take effect from 1 April 2023. A new small profits rate of 19% will also apply to profits below the lower limit of £50,000 and profits exceeding the upper limit of £250,000 will be charged at 25%. Where a company’s profits fall between the lower and upper limits, it will be able to claim an amount of marginal relief, providing a gradual increase in the corporation tax rate.

    5) Capital allowances / company cars

    The government will legislate in Finance Bill 2021-22 to extend the temporary £1,000,000 level of the Annual Investment Allowance until 31 March 2023. So there is a tax deduction on 100% of qualifying expenditure on plant and machinery.

    Company car tax: no significant changes, although the technical system for  approving CO2 levels is being updated due to Brexit. Reminder that electric vehicles benefit in kind is scheduled to rise to 2% from April 2022. The cost of purchasing a brand new electric vehicle (not second hand) will have 100% tax deduction.

    6) Other issues

    Business rates: A new temporary business rates relief for eligible retail, hospitality and leisure properties for 2022-23. Eligible properties will receive 50% relief, up to a £110,000 per business cap. This won’t usually apply to office leases.

    Capital gains tax property payment window: From 27/10/21 UK and non-UK residents selling UK residential property will have to report and pay CGT within 60 days of completion. For mixed use properties the deadline will also be 60 days for the residential element of the property gain.

    Online sales tax: there may be a tax in future for E-Commerce sites, the government is consulting on it.

    Pensions: There will be an increase to the earliest age at which most pension savers can access their pensions without incurring an unauthorised payments tax charge, the normal minimum pension age, from 55 to 57. This increase will have effect from 6 April 2028.

    Making tax digital for Self Assessment:
    Sole traders and landlords with income over £10,000 per year (doesn’t include rental properties held through a LTD company) will have to file through MTD from 6 April 2025. Every 3 months a tax return will need to be sent to HMRC showing the summary of business income and expenses. At the end of the year another final tax return will need to be submitted. The timing of the usual July/January payments is not currently expected to change.

    Clampdown on promoters of tax avoidance
    We generally advise our clients not to use aggressive tax avoidance schemes as these have regularly been found to fail, even when designed by tax barristers and large accounting firms. Companies or individuals can then find themselves with large tax bills to pay, even many years after they used the scheme.

    There will be new penalties for anyone promoting or supporting tax avoidance schemes.

    Recovery Loan Scheme – The Recovery Loan Scheme will also be extended until 30 June 2022 to ensure that lenders continue to have the confidence to lend to small and medium-sized businesses. Finance will be available up to a maximum of £2 million per business, supporting their recovery and growth following the pandemic. The government guarantee will be reduced from 80% to 70% to encourage the lending market to move towards normality as the economy continues to recover

    Work Visas
    Not a tax issue but many of our clients employ staff from overseas:

    High-Skilled Migration – The government is implementing changes to the UK’s immigration system to attract highly-skilled people to the UK. This includes a new Scale-up Visa, launching in spring 2022, that will help the UK’s fastest-growing businesses to access overseas talent. The visa will be open to applicants who pass the language proficiency requirement and have a high-skilled job offer from an eligible business with a salary of at least £33,000.

    Global Talent Network – Alongside immigration system reforms, the government will launch a Global Talent Network to bring highly skilled people to the UK in key science and technology sectors. This network will work with businesses and research institutions to identify UK skills needs and source talent in overseas campuses, innovation hubs and research institutions to bring to the UK. A concierge service will also be available to support people moving to the UK. The Global Talent Network will launch in 2022 in the Bay Area and Boston in the US, and Bengaluru in India. The government will also maintain the expanded Department for International Trade (DIT) Global Entrepreneur Programme.

    The full text of the Autumn Budget 2021 can be found here. The Government have also published guidance about the changes to tax legislation which can be found here.

  • Tax efficient director salary and dividends 2022/23

    THIS ARTICLE NEEDS TO BE UPDATED FOR THE NEW NIC THRESHOLDS ETC

    Compared to 2021/22, the personal allowance threshold will not change and will stay at £12,570 per year and the higher rate tax will also still start at £50,270.

    From 6 April 2022 the dividend tax rates will all increase by 1.25% :

    First £2,000 of dividends: no tax due to dividend allowance

    Dividends at basic rate (total income below £50,270): 8.75%

    Dividends for total income above £50,270 and below £150,000: 33.25%

    Dividends where total income is above £150,000: 39.35%

    Many of our clients prefer to keep cash in their company until they need it and to avoid higher rate of income tax. In this case, from April 2022 onwards we would recommend a salary of £9,100 (it is £8,840 for 2021/22) and dividends of £41,170.

    So for a company owner with total income of £50,270, their income tax for 2022/22 will be £2,945:

    IncomeTax
    Dividends:
    Personal allowance left after salary £9,100£3,470£0
    Basic rate dividends subject to dividends allowance£2,000£0
    Basic rate dividends taxed at 8.25%£35,700£2,945
    Total for dividends£41,170£2,945
    Salary£9,100£0
    Total income and tax£50,270£2,945

    If a director/owner takes dividends above this level, they will need to pay tax at 33.25% on the excess dividends above total income of £50,270 and 39.35% for excess dividends above total income of £150,000.

  • 2018 Autumn Budget Update

    As usual there are many changes to the 2018 Autumn Budget, however they’re not all relevant to our clients. So here we have set out the important changes that may affect our clients. The 2 main issues are IR35 changes for contractors and limits on R&D cash refunds. We’ve also added a reminder about the changes in property taxes and an update for MTD for VAT registered clients.

    1) Income tax / dividends: good news from company owners
    The personal allowance threshold has increased to £12,500 per year and the higher rate tax will start at £50,000.

    This means that more dividends can be taken out at the lower rate of 7.5%. We’ll soon advise on the monthly amount of salary and dividends that can be taken without paying the higher rate from April 2019 onwards.

    2) R&D: bad news for cash refunds
    Currently many of our clients are claiming R&D tax credits to reduce their corporation tax bill if they are profit making, or to receive a cash refund if they are loss making.

    Many do not have any staff or have very low payroll costs as the majority of development is outsourced or directors are not drawing salaries.

    However, under the new rules that may come into play from 1 April 2020, companies will only be able to receive a cash refund of upto 3 times the total PAYE/NIC bill for that year.

    So for example, a client who has outsourced 100% of its R&D will not receive any cash refund at all.

    Although the rule change has not yet been confirmed as HMRC will consult on this change, many of our clients are claiming cash refunds every year and so forecasts/cash burn and run rate calculations will need to consider that R&D refunds may be restricted in future.

    Clients who use R&D tax credits to reduce their tax bill and don’t normally receive cash refunds will not be affected.

    3) IR35: bad news for contractors
    Private sector engagers (agency or “hiring” company) will now have to be responsible from April 2020 for deciding if contractors are within IR35 or not.

    Currently, the contractor can setup a limited company and when they start a contract they can decide themselves if they’re inside or outside IR35. They then invoice the engager their daily rate under both circumstances, but if they’re inside IR35 the contractor’s limited company has to pay NIC and PAYE.

    The agency/employer isn’t affected either way. (our clients are all outside IR35 and so currently avoid NIC/PAYE)

    But under the new rules, engagers will have to decide if the contractor is inside or outside IR35. If they’re inside IR35 because they’re basically like a shadow employee, then the agency/employer will have to pay them via payroll and deduct PAYE/NIC. The contractor can only be paid via an invoice if they’re outside of IR35.

    What we saw last year with public sector engagers such as the NHS, is that they generally deemed most contractors to be inside IR35 and so paid them via PAYE.

    Its not clear at this time what medium and large private companies such as banks and IT companies will do, buts its possible that our contractor clients may end up being paid via PAYE. In this case, it may not be worth continuing to use their limited company other than for investment purposes or to withdraw profits.

    Small engagers will be exempt, but the majority of our contractor clients seem to work for medium and large engagers.

    4) Other changes
    Training costs may no longer be tax deductible – but we’d need to look into the circumstances, please check with us if the tax deduction is a factor in deciding to undertake training.

    Employment allowance: the £3k NIC allowance will no longer be available to employers with an employers NIC bill greater than £100,000 per year. This won’t affect most clients, but there a few with large wage bills. We/you’ll need to ensure that its not claimed from April 2020.

    Entrepreneurs’ Relief: the minimum term to hold qualifying business investments is increasing from 1 year to 2 years. Although practically speaking, most clients with a capital gain on selling their business will have held it for more than 2 years anyway, so this may not have much of an impact.

    Annual investment Allowances: increased to £1m temporarily. Some of our clients invest significant amounts in computer hardware or software which is capitalised as tangible fixed assets. Previously the tax deduction was limited to £200k.

    Digital services tax of 2% on revenues for online marketplaces > £25m per year: we’re mentioning this as we have a number of tech startups with online marketplaces but their revenues are currently below the limits. Maybe something to consider if future growth plans are met.

    5) MTD from 1 April 2019 for VAT registered businesses with > £85k turnover

    We have been a bit quiet on Making Tax Digital as the Government kept delaying the start date and its only recently been confirmed that it will kick in from 1 April 2019 (although it could possibly be delayed again as this is straight after Brexit).

    The first phase of MTD will only be compulsory for VAT registered businesses with > £85k annual taxable turnover.
    Records will need to be kept digitally and submitted to HMRC in a different way than before.

    Xero will be MTD compliant but for clients who currently use spreadsheets, we are currently trialling different solutions to find the easiest/cheapest way to deal with MTD.

    In the past we haven’t charged extra for dealing with new laws/regs eg flat rate VAT changes or auto enrolment pensions, but MTD is likely to increase our time spent working on jobs and there will be a cost for this.

    Once we’ve estimated the extra time that we’ll need to spend on Xero and non-Xero clients we’ll inform you of the extra costs that we’d need to charge if you’d like us to deal with MTD. As usual, we’ll try to keep these fees as low as possible and for some clients we may not need to charge extra if it doesn’t take us long to deal with.

    6) Property tax restrictions for mortgage interest
    As discussed previously, mortgage interest will only be tax deductible at 20%. There were no changes mentioned in this 2018 Autumn Budget, but we’d like to remind our clients about the reductions in tax relief as 2017-18 was the first tax year that the restrictions started and its being gradually implemented by 2020 at which time there will be no 40% relief available.

  • MiFID II and VAT on Research – still in the dark!

    MiFID II and VAT on Research – still in the dark!

    MiFID II

    31 October 2017

    Although the MiFID II regulation has been published since 2014 (delayed implementation date – 3rd January  2018), it is surprising that H M Revenue & Customs has not yet provided any firm guidance on the VAT treatment of research work.

    Recent press states that HMRC is now meeting with industry groups and is set to publish guidance on the VAT treatment of research work carried out from 3 January 2018 onward under MiFID II.

    Commission sharing agreements  (CSA)

    Currently, any research work paid via a CSA is potentially an exempt supply for VAT purposes as it is normally bundled with a payment for execution services. Execution commissions are exempt supplies for VAT and if research is part and parcel of the execution services, then the bundled research services are also exempt from VAT. MiFID II seeks to separate research from commissions as part of a larger aim to reduce the research data being fed to fund managers.

    Fund managers

    Firms that manage funds are generally not eligible to register for VAT as they mainly deal in financial products, which are exempt from VAT.

    MiFID II requires that the payment for research work is done separately and independently from the payment of commissions for execution services. Research Payment Accounts (RPA) are now going to be used by many fund managers.

    VAT position after MiFID II?

    If research is to be identified as a separate supply from that of execution services, HMRC rules could deem the supply of research services as VATable services at the standard rate of 20%.

    HMRC

    The disadvantage here would be felt by research providers as:

    • Fund managers will not be willing to increase their budgets for research given that they are unable to reclaim any VAT suffered on research costs,
    • Research providers would be pricing themselves out of market (against providers outside Europe) should they try and increase their prices by 20% in order to accommodate the possible new VAT burden, and
    • as a result, UK based research providers will be forced to absorb the 20% VAT burden and accept lower fees than what they are receiving now.

    We are keenly following this issue for our clients. If you require any assistance with your company’s VAT or tax position in respect of work in the Financial Services industry, please contact us.

    Also read…

    VAT and financial services

    Financial services