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Fee Protection Service

Posted by: edwinsmith on November 29th, 2010

The way H.M. Revenue and Customs (HMRC) operates is changing since the passing into law of the Finance Act 2008, which gives inspectors far greater powers than previously. HMRC are more determined to claw back money from taxpayers and are using more efficient methods of checking for non compliance.

The discovery of a simple, unintentional error causing an underpayment of tax may lead to penalties as well as the tax deemed owing plus interest. Disputes with HMRC can quickly spiral into time consuming and costly affairs. Even if no tax is found as owing, the professional fees incurred in handling the case will still need to be paid.

We at Edwin Smith are able to offer to all our clients a fee protection service which can significantly reduce the financial burden that you would face if you became the subject of an investigation by HMRC. For a small annual subscription, the scheme will provide you with the equivalent of up to £100,000 worth of our time in the event of a written intervention by the tax authorities and enables us to dedicate as much time as necessary to get the best result for you, without worrying about spiralling costs. For all business clients, included in the service at no extra cost, is access to a Business Support Helpline that you can call to help you through the legal minefield of today’s business environment.

If you are interested in taking up cover, please contact us.

Filed under: PAYE, Tax, VAT

Tax on Christmas Gifts and Parties

Posted by: edwinsmith on November 22nd, 2010

There are various tax implications to consider on gifts and parties that you may be providing to your employees at this time of year. The points detailed below are a general overview and cover the most common situations that arise.

Cash gifts or bonuses - These are treated as normal pay and subject to PAYE and Class 1 National Insurance contributions (NIC) in the normal way. The payment should be put through the payroll. This also applies to any vouchers you give that can be exchanged for cash (see below for PSA arrangements for small cash gifts).

Gifts to employees - Gifts that can be considered trivial benefits such as a turkey, ordinary bottle of wine or box of chocolates will not need to be declared on form P11d. There is no set monetary limit below which benefits are deemed to be trivial but common sense and judgement needs to be applied in assessing these items. For the purposes of gifts then probably any amount less than £20 per employee would be considered trivial.

Any gifts of a higher value (and classed as non trivial) such as cases of wine/hampers would be subject to tax and NIC and declarable either as a benefit on form P11d or the tax/NIC could be paid on these gifts by arranging a PAYE settlement agreement (PSA).

If declared on P9d or P11d (directors and employees earning over £8,500 pa) forms then non trivial gifts are subject to tax (for the employee) and Class 1a NIC is payable by the employer on items declared on the P11d.

A PSA is voluntary arrangement that on the part of the employer made with HMRC to account for tax/NIC for minor, irregular or impractical items subject to tax/NIC.

If a PSA is arranged then the employer effectively pays the tax due and relieves the employee of any tax liability on the gift. Although there is the extra cost of the tax/NIC a PSA cuts down on the paperwork and record keeping.

Money’s worth benefits such as Store gift vouchers (exchangeable for goods) cannot be treated as trivial benefits. For practical purposes small cash and money’s worth benefits can be included in a PSA. If not dealt with on PSA then Store gift vouchers should be declared on form P9d or form P11d (if employee earns over £8,500) to account for tax. For NICs the cost of providing the vouchers should go through the payroll at the time given to employee.

Christmas parties (and summer events) - Tax and NICs are not due on any annual function if the cost to you is less than £150 per head (including employees partners). The cost per head is the total cost of putting on the function – accommodation, food, drink etc divided by the total number of guests including the non-employees.

If the cost per head is greater than £150 then the whole amount would be subject to tax and Class 1a NICs and should be declared on form P11d in section N e.g. if the cost of an event is £175 per head the employee (with a partner) is taxed on a benefit of £350.

Please contact us for any further advice.

Filed under: PAYE, Tax

Employment Status – Employed or Self Employed?

Posted by: edwinsmith on November 8th, 2010

Where there is doubt on the employed/self employed status of someone being paid by an employer then HMRC may attempt to reclassify the payee (worker) from self employed to employed.  If this were to happen, the employer must then account for tax and NIC on such payments. These situations can arise in businesses from PAYE audits being carried out by HMRC.

Remember the onus is on the employer to obtain the correct treatment of the workers engaged be they employed or self employed. An incorrect determination of a worker’s status (someone treated as self-employed when they should be employed) can lead to significant amounts of PAYE/NIC being paid by the employer going back several years. Penalties and interest could also be charged.

If employers are unsure of the status for any worker or wish to confirm the status before making any payments to a new worker then HMRC have an online tool named the Employment Indicator Status (ESI) tool which can be found at the following link HM Revenue & Customs:Employment Status Indicator (ESI). It is available for all employers to use although the tool was initially brought in to determine employment status for workers engaged in the construction industry where these issues are common.

The ESI tool will lead the employer through a series of questions in connection with the worker and although the tool does not as yet provide a legally binding result on a workers status in practice HMRC will normally accept the results provided by the tool. This will be dependent on reasonable answers being provided to the questions and the answers must be what happen in practice and not just theory.

It is important that the employer takes note of the ESI reference number and prints out the enquiry details in case a workers status is challenged by an HMRC officer. HMRC will only be bound by the ESI outcome if these copies can be produced.

Please contact us if you require any further advice in this area.

Filed under: PAYE, Tax

Illegal Dividends

Posted by: edwinsmith on October 29th, 2010

It is common that companies, particularly ‘one man band’ companies, exceed the allowable amount of dividends that are paid to the company shareholders.

The amount of a dividend is restricted to the reserves available in the company.  Reserves are the current profit or loss, after considering Corporation Tax, plus the profit reserves from the previous years. Another consideration is the available cash if the dividend is to be paid when it is declared.

If a dividend is paid where there are insufficient reserves, it is deemed an illegal dividend.

It is important to be able to read and understand the company’s current profit and loss account and balance sheet to ensure that sufficient reserves are available before paying a dividend.

If an illegal dividend is paid, the creditors of the company can request that the shareholders repay the dividend to the company. This is because the cash used to pay the dividend should be used for the trading of the company and paying the creditors instead of paying a dividend that shouldn’t exist.

Having illegal dividends in the company accounts can also make the company look insolvent having negative balances on the balance sheet. This can affect the company’s ability to gain credit from a lender or suppliers and may breach current agreements with lenders or supplier.

There are tax consequences to consider if illegal dividends are paid:

 

  • It may provide HMRC with source to start enquiry.

 

  • It is also possible that HMRC may state that the dividends should be reclassified as loans instead of dividends due to the insufficient reserves.  This could potential lead to the company having overdrawn directors’ loan accounts if the directors are the shareholders.

 

  • If dividends are reclassified as loans, there are more considerations:

 

The shareholders will need to approval the loans if the loans are more than £10,000, even if the directors are the shareholders.

P11D forms will need to be completed to account for the ‘beneficial interest’ on loans of more than £5,000. This is because it is unlikely that interest will be paid to the company on the ‘beneficial loans’ - a loan received by way of your position with the company.  The current HMRC interest rate for beneficial loans is 4%. 

As with all P11D benefits, class 1A National Insurance will need to be paid by the company on the benefit.

The company will also have to pay HMRC tax of 25% on the overdrawn directors’ loan balances that still exist 9 months after the accounting period in which the loan was paid. This tax relates to s455 of CTA 2010 formerly s419 of ICTA 1988.  Once the loans are repaid, the tax will be repaid to company 9 months after the accounting end date in which the repayment is made.  Partial repayments attract a pro rata refund.

It is possible to write off directors’ overdrawn loans in the accounts but adequate reserves are required to do this.  The write off is treated effectively as dividend income, if the correct procedures are carefully followed.  There is also a chance that Corporation Tax relief will be given on the write off but again the correct procedures must be followed and the correct paperwork must be completed.  This however, is a contentious issue with HMRC. Please contact us before considering this option.

Please contact us if you would like to discuss this further.

Filed under: Tax

Company Tax Returns & Company Accounts To Be Filed Online With HMRC

Posted by: edwinsmith on October 22nd, 2010

From 1 April 2011, company tax returns for accounting periods ending after 31 March 2010 must be filed online with HMRC using a format called iXBRL.  The accompanying computations will also need to be filed online in iXBRL with the company tax return.

There are only two situations where a company or unincorporated organisation may be exempt from online filing with HMRC. These are:

 

  • If the directors and company secretary are all practising members of a religious society or order whose beliefs are incompatible with the use of electronic methods of communication. If this applies to you, you should write to your Corporation Tax Office providing full details and they'll advise you whether the exemption applies. 
  • If your company or organisation is subject to a 'winding-up order', is in administrative receivership or is being managed by an administrator you don't need to file your return online and can adopt the approach currently allowed in these circumstances. If you need to know more about this, please contact your Corporation Tax Office.

 

There will be penalties charged by HMRC if the company tax return, computations and accounts are not filed online and in the correct format by the due date.

Also, from 1 April 2011, payment of Corporation Tax must be made electronically.

HMRC and Companies House have a joint online filing system.  The principle of joint accounts filing is that companies will be able to enter their accounts data once, before submitting separate accounts to HMRC and Companies House.

The joint filing service is aimed at smaller companies with relatively simple tax affairs, who prepare accounts under the Companies Act 2006. It is not suitable for companies who are required to have an audit.

Also, you will not be able to use the joint filing service if you need to prepare group accounts or accounts for a company that is a member of a group, or if your accounts need to show any of the following:

 

  • turnover over £6.5 million
  • cash flow statements
  • foreign income and currency transactions
  • prior year adjustments
  • profit or loss on disposal of fixed assets of a material nature. 

 

You can use the joint filing service to submit the following types of company accounts, for accounting periods starting on or after 6 April 2008:

 

  • Statutory accounts to HMRC and/or Companies House.
  • Abbreviated accounts to Companies House.
  • Accounts to Companies House for dormant companies.

 

As the deadline dates for filing accounts with HMRC and Companies House are different, the service allows you to submit your accounts to Companies House at a different time to the accounts you submitted to HMRC with your Company Tax Return.

The company accounts you submit to HMRC as part of your company tax return must always be the statutory accounts required by company law and not the abbreviated accounts some companies are allowed to file with the Registrar of Companies. The abbreviated accounts option is therefore only available for submitting accounts to Companies House.

Online filing with Companies House isn’t mandatory at present, so paper filing is still accepted.

Our accounting and tax software is already compliant with iXBRL so we are able to file company tax returns and company accounts online.

Please contact us if you would like to know more.

Filed under: Tax

Additional self assessment deadline to consider

Posted by: edwinsmith on October 7th, 2010

In addition to the self assessment tax return filing and payment deadline of 31 January 2011 for the year to 5 April 2010, there is a further deadline to consider.

If the tax due to HMRC for the year to 5 April 2010 is less than £2,000 then the amount can be collected through your PAYE code number for 2011/12, providing that you have active employment or pension income. This will spread the tax over the year to 5 April 2012 by increasing your monthly PAYE deductions, effectively paying the 2009/10 tax monthly from April 2011.

If you would prefer the option to pay this way then your tax return must be submitted electronically to HMRC by 30 December 2010 (or manually by 31 October 2010).

Please contact us if you have any questions or to discuss this further.

Filed under: Tax

Please tell us, because the taxman won’t be

Posted by: edwinsmith on September 30th, 2010

As part of a cost cutting measure, HM Revenue & Customs (HMRC) have reviewed the forms it sends to tax agents (accountants) and advisers and decided that some forms will no longer be issued to agents and the issue of some other forms will be suspended in the meantime and reviewed further.

The most important form changes are listed below.

Being withdrawn September 2010

  • P800 - Tax Calculation form

 

Being withdrawn October 2010

  • SA 250 - Letter telling the customer about their Unique Taxpayer Reference (UTR) and detailing the requirement to complete an annual Self Assessment tax return

 

  • SA 251 - Letter to advise a client that HMRC will no longer require future Self Assessment tax

 

Being withdrawn December 2010

  • P2 - PAYE Coding Notice - before the 2011/12 annual coding run

 

We recommend that if you receive any of the above forms to forward a copy to us as soon as you receive it so that we can review the form, making any corrections and have the records on file.

Please see the HMRC’s website for a full list of agent form changes and please contact us if you would like to discuss these changes further.

Filed under: Tax

Revised tax calculations issued by HMRC

Posted by: edwinsmith on September 8th, 2010

HM Revenue and Customs (HMRC) are currently issuing letters to tax payers who they believe have under or over paid tax during the tax years 2008/09 and 2009/10. 

The revised calculations are based on information provided by employers and pension providers who have paid income to the individual after deducting PAYE and National insurance at source.

Most individuals will have paid the correct tax and therefore should not expect to receive a letter, but those who do should check the tax calculation carefully to ensure the details are correct.

In order to check that a revised tax calculation is correct, you should

  • Agree the amounts shown on the calculation to your forms P60, P11d or annual certificates for each source of income. 
  • Ensure that the correct allowances have been applied to your calculation based on your age, marital status and any other circumstance affecting personal allowance.

If you agree that your calculation is correct then you do not need to take any action as any repayment will be made to you within seven days and any payment due under £2,000 will be collected from your future income using your PAYE coding notice which will be applied to your future salary or pension. Payments due over £2,000 will be collected separately and HMRC will tell you how to make this payment.

If you believe that your calculation is incorrect then you should contact HMRC as soon as possible to inform them of the error.

In some cases, where the underpayment should have already been collected by HMRC based on information already provided, it may be possible to be granted an extra statutory concession so that you do not have to pay back the amount.  This is a rare situation and is at the discretion of HMRC, so any individual who believes this is the case should contact HMRC as soon as possible.

If you would like assistance with checking your revised tax calculation or understanding future PAYE coding notices, please contact us to arrange a consultation.

Filed under: PAYE, Tax

When was the last time you checked your PAYE tax code?

Posted by: edwinsmith on August 17th, 2010

Receiving a bonus, a pay rise or increasing your income in any way, could increase your tax bill by much more than you think.

Most people in the UK are entitled to a personal allowance, the amount of which depends upon your age. The personal allowance allows you to earn a specific amount of income without having to pay tax. Income in excess of your personal allowance is taxed at a variety of rates depending upon your level of income and the type of income received. From 6 April 2010, the personal allowance is reduced as your earnings increase over the current threshold of £100,000. For every £2 of adjusted net income above £100,000 you will lose £1 of your personal allowance. This means that once your net income reaches £112,950, you will not be entitled to receive a personal allowance for the current tax year.

Your adjusted net income is generally found to be your gross income from all sources less pension contributions and gift aid donations but specific advice should be taken to assess this figure.

If you are employed then your tax liability is generally deducted each month by your employer under pay as you earn (PAYE) and so most people would expect the correct tax to be paid. However, to calculate the tax, the employer uses your tax code which could be incorrect for a variety of reasons resulting in you under or overpaying tax.

If your tax code is incorrect due to an excessive personal allowance being given, a 40% taxpayer with one employment and no other income could easily have an underpayment of up to nearly £2,600 despite their salary being taxed at source.

Tax codes are generally issued by HMRC around the start of the tax year. To calculate how much personal allowance to give you in the code, HMRC base their calculations on the level of income which you received in the previous tax year. If you earned over £100,000 in the previous year, then it is likely that your personal allowance has already been reduced to an appropriate level. If you earned less than £100,000 last year and expect to earn in excess of that amount this year, then you should check your PAYE tax code. If you have a personal allowance of £6,475, then you should contact your tax office to provide them with an updated income estimate. They should then provide an updated tax code if appropriate. You may then pay more tax for the rest of the tax year.

If you complete a self assessment tax return, then any underpayment will be collected through self assessment. If you do not do so, then any underpayment will be assessed by HMRC and you may receive an unexpected tax bill.

It is in your interest to keep an eye on your level of income and the personal allowance that HMRC may have allocated you for this year and future years.

If you are worried that your tax code may be incorrect or have any more questions, then please contact us.

This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this article.

Filed under: PAYE, Tax
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