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Making Tax Digital

Tax on residential property is changing!

The New Pension Freedoms

Mini One Stop Shop

Compulsory pensions - auto enrolment

National Living Wage

 

Making Tax Digital (MTD)

Making Tax Digital (MTD) is HMRC's proposed new reporting system to replace the current self assessment system for individuals, partnerships and companies. It aims to improve HMRC's internal systems to create one account for each taxpayer for all their different taxes within HMRC. Via their 'digital tax account' taxpayers will be able to view all their payments, and offset overpayments in one tax against underpayments in another. 

Making Tax Digital will impose new quarterly digital filing and potentially payment obligations for businesses and landlords. 

It is currently proposed that:

  • this will affect small unincorporated sole traders and partnerships as well as landlords - from April 2018.

  • from 2019 VAT returns will be submitted using the same mechanism.

  • Finally it will affect companies from 2020.

A new late filing and payment penalty system will eventually apply to quarterly returns and annual declarations.

Although HMRC claims that the annual tax return will be a thing of the past, businesses will still need to prepare year end accounts in order to reconcile their quarterly payments and claim various reliefs and make accounting adjustments.

They will be required to file a year end declaration, instead of a Self Assessment or Corporation Tax return in addition to the quarterly returns. The key difference between the year end declaration and a tax return, seems to be that HMRC will pre-populate some of the return figures, e.g. bank interest, income from employment, pension income and so forth.

For the self employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures but this is not yet clear. In the meantime a business will need to reconcile their quarterly returns to their year-end accounts and then to the end of year declaration. In the future all taxpayers will need to check that pre-populated data is correct.

HMRC has consulted on changing the way that tax assessments interact with accounting basis periods. This is still under review. It is also reviewing simplification of cash accounting for both businesses and landlords. Businesses that do not currently use smartphones, software or computers will almost certainly be obliged to do so but free software has been promised by HMRC.

MTD is likely to be expensive for many micro and small businesses. HMRC have already indicated that any business with a turnover below £10,000 annually will be exempt from the new regime and following the consultation they have agreed to further review this limit. 

The new rules are still very much under review and HMRC are more than likely going to change some of the timescales and thresholds, although they seem clear that the start date of April 2018 for small businesses will remain.

You can read more about their proposals at:

https://www.gov.uk/government/collections/making-tax-digital-consultations 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/484668/making-tax-digital.pdf

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Tax on residential property is changing!

There have been substantial changes to the taxation of rental properties and second homes and there are further changes in the pipeline.  Please consider each point and, if you feel any may be relevant to you and you have any queries, please call Liz to make an appointment to discuss your particular circumstances.

Rent-a-room relief  
If you rent out a room or rooms in your own home, there is a tax free allowance per year. From 6th April 2016 this allowance increased to £7,500 per year.

Wear and tear allowance  
From 6th April 2016 this allowance has been abolished. It has been replaced by ‘Replacement Furniture Relief’ - a system allowing all landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the tax year. There will be no allowance for the original purchase, only for the replacement.

Stamp Duty Land Tax  
It was announced in the Autumn Statement that from 1 April 2016, an additional 3% SDLT will be charged on purchases of residential properties over £40,000, that are intended for use as buy to let properties or second homes. There are provisions for those buying a new main home before they have sold their current home, but the additional stamp duty will have to be paid and then reclaimed when the original main home is sold.

Mortgage Interest Relief  
From 6th April 2017 residential landlords will no longer be able to deduct their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs. This will be introduced gradually over 4 tax years and will be fully implemented by 2020-21. This will have a significant effect on landlords with high finance costs, and will push some basic rate taxpayers into higher rate tax. It may also affect tax credit claims and the child benefit charge. This measure will not affect Furnished Holiday Lettings. Individual advice on this measure is advised.

Capital Gains Tax  
It is proposed that, from 2019, capital gains tax will have to be paid within 30 days of selling a property.

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Pension Freedoms


Here we give the basic facts and explain how they might affect you:

Freedom over how investors take tax-free cash

Most people can take up to 25% tax-free cash from their pension. You can either take the tax-free cash all in one go or have a portion of any withdrawals you make paid tax free. So, someone with a pension worth £100,000 will have the choice of:

a. Taking the £25,000 tax-free cash all at once, with any subsequent withdrawals taxed as income;
b. Making a series of withdrawals over time and receive 25% of each withdrawal tax free.

The second option could be attractive because it could help you manage your tax liability. 

In addition, whilst your money is in the pension, it can remain invested. So, if your investments perform well you could end up with more money available to withdraw over time. Conversely, if your investments perform badly you could end up with less money available to withdraw. 

Anybody with a defined contribution pension – e.g. individual or group personal or stakeholder pensions, Self Invested Personal Pensions (SIPPs), some Additional Voluntary Contribution (AVC) schemes, etc. – could benefit. However, option b (above) will not be available when using the pension fund to buy an annuity. Investors aged 55 or over who have not yet taken their pension should be able to take advantage of the increased flexibility. 

Flexible access to pensions from age 55

From April 2015 pension investors aged at least 55 have had total freedom over how they take an income from their pension, over and above any tax-free cash. They can choose to: 

a. Take the whole fund as cash in one go;
b. Take smaller lump sums, as and when they like; 
c. Take a regular income via income drawdown – where they draw directly from the pension fund, which remains invested d. Take a regular income via an annuity – where they receive a secure income for life but lose access to the capital.
Any withdrawals in excess of the tax-free amount will be taxed as income at your marginal rate. So, if you are a basic-rate (20%) taxpayer, any income you draw from your pension will be added to any other income you receive (e.g. your salary) and this could push you into the higher (40%) or even additonal rate (45%) tax bracket.

Choosing to take the pension out in stages, rather than in one go, could help you manage your tax liability. It should also be possible to take the tax-free cash straightaway and the taxable income via income drawdown at a later date.


Restrictions on how much you can contribute to private pensions 

Pension contributions are subject to a £40,000 annual allowance and specific contribution rules. However, if you make any withdrawals from a defined contribution pension in addition to any tax-free cash, further contributions to defined contribution plans could be restricted to £10,000 (£4,000 from April 2017). Please contact your pensions adviser for further information on the exceptions.

55% pension ‘death tax’ abolished 

This tax charge has been abolished. The tax treatment of any pension you pass on will depend on your age when you die.
 
If you die before age 75, your beneficiaries can take the whole pension fund as a lump sum or draw an income from it tax free, using income drawdown or an annuity. 

If you die after age 75, your beneficiaries have three options:
a. Take the whole fund as cash in one go: the pension fund will be subject to the beneficiary’s or beneficiaries’ marginal rate of income tax.
b. Take a regular income through income drawdown or an annuity : the income will be subject to income tax at your beneficiary’s or beneficiaries’ marginal rate. 
c. Take periodical lump sums through income drawdown: the lump sum payments will be treated as income, so subject to income tax at your beneficiary’s or beneficiaries’ marginal rate.

Anybody who has a defined contribution pension – e.g. individual or group personal or stakeholder pension, Self Invested Personal Pensions, Additional Voluntary Contribution schemes, etc. will be affected. 

Access to impartial guidance 

Everyone taking pension benefits will be entitled to free, impartial pensions advice, which will be provided by impartial organisations. Your pensions adviser will be obliged to tell you about the impartial guidance.

Transferring a 'final salary' scheme

Anyone with a 'final salary' pension scheme outside the public sector will be able to transfer the benefits to a defined contribution scheme (ie a SIPP) and then take advantage of the flexibility of the new rules. However, valuable benefits of the final salary scheme may be lost and independent financial advice must be sought.

Retirement age set to increase

The minimum age at which you can draw your pension is currently 55. This will rise in 2028 to 57 and then rise in line with any rise in the state pension age. It will therefore remain 10 years below the state pension age. This does not apply to Firefighters, Police or the Armed Forces.

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Mini One Stop Shop (MOSS)

This is the HMRC online portal which UK businesses should use to account for VAT they owe in respect of digital services provided to customers in other EU countries. 

"Digital services" include products such as:
- music downloads;
- video on demand;
- electronic books;
- online games;
- anti-virus services;
- software purchased by download;
- charges by online auction sites;
- sales of data or images online; and
- automated learning or exams

If you sell a digital service to someone in another EU country, who is not a business (ie an individual, Government body or a charity), you must account for VAT in the country where that customer resides. This means you need to charge VAT on your invoice to your overseas customer at the rate that applies in the customer's country, and then pay that VAT to the tax authority of that country.

As there are 28 EU countries it would be an administrative nightmare to complete a quarterly VAT return in every country in which you have customers. Hence the need for an online portal (MOSS) to do all the VAT accounting and payment in one go.

The VAT MOSS portal for businesses to register is:
 https://www.gov.uk/vat-on-digital-services-in-the-eu 

However:
You need to know the VAT rates that apply to your products in all the countries you sell to.

Your VAT invoices to customers in other countries must comply with the local regulations - which are NOT the same across the EU.

VAT-MOSS returns must be made for calendar quarters irrespective of the periods for which you draw up your UK VAT return.

VAT due under MOSS must be paid electronically by the 20th of the month following the end of the quarter, but payment can't be made by direct debit.

The tax authorities for every EU country you sell to can inspect your sales records, which must be retained for 10 years.

You also need to be VAT registered in the UK before you can use the MOSS system.

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Compulsory Pensions

Another set of regulations is set to fall on the shoulders of all employers. This time it's a compulsory pension scheme for all employees.

The largest employers (120,000 or more employees) are already signed up. Those who employ fewer than 50 workers will be required to take part in the scheme from a date sometime in 2015 to 2017. The exact staging date will depend on your PAYE reference number. 

Click to Find out your staging date

Only one employee/director companies will be exempt from setting up a scheme but will still have to register, otherwise every employer who has workers in the UK will be required to enrol those workers in a pension scheme. There will be exceptions for workers aged under 22, over state retirement age or paid less than £10,000. Employees will have to take an active decision to opt out and sign a form to do so. The employer will not be permitted to induce employees to opt out, or to screen out potential employees who do not wish to opt out of the pension scheme.

Employers and employees will be required to make contributions to the pension scheme totalling 8% of the workers earnings, including tax relief given on the employees' contributions. The employer must contribute at least 3% of the workers' earnings. This level of compulsory contributions will be introduced gradually over a few years until fully implemented in April 2019.

Employers can use an existing pension scheme, set up a new one, or use the new low cost pension scheme established by the Government called NEST (National Employment Savings Trust). Where an existing scheme is used the employer will have to certify that it meets all the requirements for compulsory pension saving. Every employer will also be required to register with the pensions regulator.

To prepare for these new regulations talk to your pension scheme provider, if you have one. If you don't have a workplace pension scheme already you need to plan to set one up as this can take sometime to implement, and to start budgeting for the costs. If you are one of our payroll clients we will have already told you your staging date but please contact us if you have any further questions.

More information:

  http://www.thepensionsregulator.gov.uk/employers/the-essential-guide-to-automatic-enrolment.aspx 

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National Minimum Wage Changes

In the current economic climate you may have been forced to freeze or even reduce wages. If your workers are low paid you must be careful that you continue to pay at least the national minimum wage rate (NMW).

The hourly NMW rate for 21-24 year olds has increased on 1 October 2016 to £6.95 and increases again on 1st April 2017 to £7.05. 

The hourly National Living Wage for adults, aged 25+, will increase on 1 April 2017 to £7.50 (currently £7.20). 

The Taxman can impose penalties of up to £5,000 if you do not pay the statutory NMW rate, and you may even be tried in the Crown Court for non-compliance with the NMW rate regulations, leading to an unlimited fine. You must also pay any arrears of wages owed (for the previous 6 years), based on the current NMW rate, not the rate in force when your employee was underpaid. 

More information at  https://www.gov.uk/national-minimum-wage-rates 

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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.

 

BullockWoodburn Limited  
Registered in England & Wales No: 6479910

Registered Office:  Norfolk House, Hardwick Square North, Buxton, Derbyshire, SK17 6PU

Tel: 01298 22108/9          Fax: 01298 72484          E-Mail: admin@bullockwoodburn.co.uk