Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Category Archives: Small businesses

HMRC launch further Help-to-Save consultation

Following an earlier period of consultation, HMRC have published draft legislation along- side a further technical consultation document, setting out proposals for the main features, processes and requirements of the new Help-to-Save accounts scheme, which is set to commence in 2018.

Help-to-Save will be targeted at working families on low incomes to help them build up their savings. The scheme will be open to around 4 million individuals who either receive universal credit and have minimum weekly household earnings equivalent to 16 hours at the national living wage, or receive Working Tax Credit (WTC).

Help-to-Save will work by providing a 50% government bonus on up to £50 of monthly savings into a Help-to-Save account. The bonus will be paid after two years, with savers able to continue saving for a further two years, meaning people can save up to £2,400 and benefit from total government bonuses worth up to £1,200. Along similar lines to Lifetime ISAs, bonuses on Help-to-Save accounts will be exempt from income tax.

Accounts will be available through the government’s chosen account provider, National Savings and Investments (NS&I). Customers will register for an account through the gov.uk portal. HMRC will carry out the necessary eligibility checks (using Tax Credits and Universal Credits data) and will pass the customers through to NS&I to set up an account if they are eligible. Eligibility queries will be handled by HMRC.

Help-to-Save accounts will usually mature after four years. Once an account matures it will automatically rollover into a successor account which will not attract a further Help-to-Save bonus. However, an account may mature earlier if the account holder dies or becomes terminally ill, with the bonus paid at this point.

The consultation will run until 27 October 2017. Responses will then be reviewed and the draft regulations will be revised as appropriate before they are laid before Parliament.

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Getting ready for GDPR

The new General Data Protection Regulation (GDPR), which will replace the existing Data Protection Act (DPA), takes effect from 25 May 2018. UK organisations that process the personal data of EU residents need to ensure systems are in place by then to enable compliance with new requirements.

The GDPR is more extensive in scope and application than the current DPA. The Regulation extends the data rights of individuals, and requires organisations to develop clear policies and procedures to protect personal data, and adopt appropriate technical and organisational measures.

The GDPR introduces a number of key changes for organisations including:

  • the definition of personal data is being widened, which in turn will bring more data in the regulated perimeter
  • parental consent will be required for processing personal data of children under 16
  • revised rules for obtaining valid consent
  • mandatory appointment of a data protection officer (DPO) for certain companies
  • mandatory data protection impact assessments
  • new requirements for data breach notifications
  • new restrictions on international data transfers
  • new requirements for data portability

The government has confirmed that the UK’s decision to leave the EU will not affect the commencement of the GDPR. Enforcing GDPR in the UK will be the responsibility of the Information Commissioner’s Office (ICO).

The GDPR applies to ‘controllers’ and ‘processors’. The definitions are broadly the same as under the DPA – i.e. the controller says how and why personal data is processed and the processor acts on the controller’s behalf. Organisations that are currently subject to the DPA, are also likely to be subject to the GDPR.

Tough penalties can be imposed for non-compliance – organisations found in breach of the Regulation may be fined up to 4% of annual global turnover or 20m euros, whichever is the greater.

Further information on the GDPR, including details of the compliance requirements, can be found on the ICO website.

MTD VAT regulations to be available by April 2018

The government has confirmed plans to publish and consult on draft VAT regulations for Making Tax Digital (MTD), with the aim to have the regulations in place by April 2018 to give businesses and software developers at least twelve months to prepare.

In July 2017 the Government announced that MTD is being delayed. MTD will be not be mandatory until April 2019, and then only for VAT. From that date, businesses with a turnover above the VAT threshold (currently £85,000) will be required to keep digital records for VAT purposes.

The VAT regulations will specify the information a business needs to maintain in digital format and will include:

  • The business name, principle place of business and VAT registration number, along with information about VAT accounting schemes used;
  • the VAT account that each VAT registered business must keep, by law – this is the link between primary records and the VAT return; and
  • information about supplies made and received.

Those reporting under the VAT flat rate scheme will not have to report under MTD except for purchases relating to capital goods with a VAT inclusive value of £2,000 or more.

Impact on businesses

Quarterly reporting for VAT is already mandatory for most businesses. Although 99% of VAT returns are filed online, only around 12% are currently filed via software. The majority of returns are therefore (presumably) manually entered onto the government gateway page and submitted to HMRC- requiring manual input and intervention. Under MTD, businesses will not be able to keep manual records.

Currently, spreadsheets are commonly used – not only to maintain records, but also to convert the information from accounting software into the VAT return figures. MTD requires spreadsheets to interact directly with software. Overcoming these issues may be challenging for businesses.

MTD applies for VAT return periods commencing on or after 1 April 2019. This is the same time that the UK will leave the EU. VAT is likely to be significantly impacted by Brexit, particularly in relation to the VAT treatment of transactions between the UK and EU.

Preparation

By April 2019, businesses will need to:

  • understand the tax-technical changes to the UK/EU VAT rules; and
  • ensure that their accounting systems and processes can deal with such changes correctly.

These changes will need to be implemented via the new reporting requirements of MTD. Businesses and their advisers are in for a busy time in 2019 – Early planning and preparation will be the key to a successful transition.

October 2017 Q&A

Q. My mother gave my daughter £5,000 on 1 May 2013. She had not made any other gifts in previous years. Unfortunately my mother passed away on 1 September 2017. How much of the gift she gave to her granddaughter is chargeable to inheritance tax?

A. Since your mother did not make any other gifts, the gift she made to your daughter will be covered by inheritance tax annual exemptions – £3,000 for 2013/14 plus her unused exemption brought forward from 2012/13 (£3,000 available).

Q. I am a self-employed builder. I carried out a job for a customer and invoiced him for £750. The customer did not pay the invoice and I have since discovered that he has been declared bankrupt. I included the £750 in my turnover figures. Can I claim tax relief for the unpaid bill?

A. A deduction can generally be made for a bad or doubtful debt in the year in which the debt becomes bad or doubtful. The HMRC Business Income Manual (at BIM42701) states:

‘A deduction is not allowed for a debt owed to a trader except:

  • a bad debt;
  • a doubtful debt to the extent estimated to be bad. In the case of the bankruptcy or insolvency of the debtor this means the debt except to the extent that any amount may reasonably be expected to be received on the debt;
  • a debt or part of a debt released by the creditor wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement.’

You should be able to write off the debt and claim a deduction of £750 in your accounts.

Q. I purchased a buy-to-let property in 2000 and rented it out straight away. I lived there myself for two years between 2006 and 2008, but since then it has been rented out again. I am now selling the property. Will I qualify for lettings relief?

A. Since the property was your qualifying principal private residence for a period of time during your ownership, you should be eligible for a certain amount of lettings relief when you sell it.

HMRC’s Capital Gains Manual (at CG64710) states:

‘Relief is due under TCGA 1992, s. 223(4) where:

  • a gain to which TCGA 1992, s. 222 applies accrues to an individual; and
  • part or all of the dwelling house has at some time in the individual’s period of ownership been let as residential accommodation; and
  • a chargeable gain arises by reason of the letting.

The amount of the relief is the lowest of:

  • the amount of private residence relief given by TCGA 1992, s. 223(1) to (3); or
  • £40,000; or
  • the amount of the chargeable gain arising by reason of the letting.’

Making Tax Digital for Business: update

In July, the Government confirmed that the Summer Finance Bill would be published in September, with the measures dropped from the pre-election Finance Bill being reintroduced in more or less the same form, from the initially planned commencement dates. Clauses dropped from the pre-election bill and expected to be brought back include those on Making Tax Digital (MTD), although the implementation date for income tax is being postponed.

There is widespread agreement that Making Tax Digital for Business is the right approach for the future. However a number of concerns about the pace and scale of change have been raised. As a result the government has announced that the roll out for Making Tax Digital for Business has been amended to ensure businesses have plenty of time to adapt to the changes.

Businesses will not now be mandated to use the Making Tax Digital for Business system until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can choose to do so voluntarily.

This change means that no business will need to provide information to HMRC under Making Tax Digital for business more regularly than they do now. VAT has been online since 2010 and over 98% of VAT registered businesses already file electronic returns.

HMRC have confirmed that they will start to pilot Making Tax Digital for VAT by the end of this year, starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are mandated to use the system. No business will be mandated before 2019.

From April 2019, businesses above the VAT threshold will be mandated to keep their records digitally and provide quarterly updates to HMRC for their VAT.

Double glazing salesmen was self-employed

Employment status tax cases often make the headlines in the professional press and the June 2017 case of Tomlinson was no exception. In this case, the First-tier Tribunal found that a double glazing salesman (Mr Malcolm Tomlinson) was self-employed and not an employee as he had claimed.

As with most employment status cases, this case focused on the details of the terms on which Mr Tomlinson was engaged with the company.

Many facts of the case pointed towards a self-employed status, including the fact that there was no written contract in place and Mr Tomlinson was not required to give notice of leaving. He was paid on a commission-only basis and did not receive holiday pay, sick pay or pension contribution payments. He provided his own car, mobile phone and other equipment. However, many other factors emerged which tended towards employed status. These included authority to sign initial customer contracts on behalf of the company; an expectation for working in the company showroom approximately two days a week; an expectation to complete a holiday request form; appearances in company advertisement; and an expectation that Mr Tomlinson would not work for competitors.

The First-tier Tribunal (FTT) worked its way through various factors which have historically been used to determine employment status cases. Such factors include control, equipment, financial risk and payment terms, personal service and exclusivity, mutuality of obligation, benefits provided, integration within the company’s business, and intention.

In concluding its review of the overall effect of all such factors, the FTT found that the details of this case did not clearly point towards either employment or self-employment. However, looking at the overall picture, the FTT’s view was that Mr Tomlinson was in business on his own account and was not therefore, an employee. The FTT concluded that it was decisive that both Mr Tomlinson and the company intended and believed that Mr Tomlinson was self-employed and had operated on that basis for almost 25 years.

As Mr Tomlinson had not discharged the burden of proof showing on the balance of probabilities that, during the period in question, he was employed under a contract of service, the decision that Mr Tomlinson was self-employed stood good.

Paying Class 2 NICs

Whether or not Class 2 National Insurance Contributions (NICs) can be paid depends on whether an individual falls within the definition of a ‘self-employed earner’ for NIC purposes, and if so, whether profits are in excess of the existing small profits threshold (£6,025 for 2017/18).

The definition of a self-employed earner is defined as someone ‘who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment)’ (SSCBA 1992, s 2(1)(b)). A person who is regarded as self-employed for income tax purposes, and who is taxed on the profits from their trade, profession or vocation, is generally, but not always, regarded as a self-employed earner for NIC, which means they will be required to pay Class 2 and Class 4 NICs where applicable. By contrast, a person who receives investment income is not liable to pay NICs on that income.

Being liable to pay Class 2 NICs can be quite advantageous as contributions give access to certain contributory-based benefits for a relatively low outlay – £2.85 per week for 2017/18. For example, where NICs are not otherwise payable, it may advantageous for a landlord to consider turning ‘investment’ letting into a business to bring it within the scope of Class 2 NICs, which in turn will enable him to build up an entitlement to state pension.

Self-employed people are currently required (subject to certain conditions) to pay both Class 2 and Class 4 NICs. Class 4 NICs are, broadly, calculated by reference to the payee’s profits. For 2017/18 they are payable at the rate of 9% on profits between £8,164 (the Lower Profits Limit (LPL)) and £45,000 (the Upper Profits Limit (UPL)), and at 2% above £45,000.

From April 2018, however, Class 2 contributions will be abolished and the Class 4 contributions system will be reformed to include a new threshold (the Small Profits Limit (SPL)). Although we do not yet know what the individual thresholds will be, we do know that people with profits between the SPL and LPL will not be liable to pay Class 4 contributions, but will be treated as if they have paid Class 4 contributions for the purposes of gaining access to contributory benefits. All those with profits at or above the Class 4 SPL will gain access to the new state pension, contributory Employment and Support Allowance (ESA) and Bereavement Benefit. Those with profits above the LPL will continue to pay Class 4 contributions.

The abolition of Class 2 will have adverse consequences for those with profits below the current small profits threshold, who are not obliged to pay Class 2 but are doing so voluntarily in order to build up their contributions record. If they wish to continue to secure contributory benefits by paying NICs after April 2018, they will instead have to pay voluntary Class 3 contributions, currently payable at the rate of £14.25 per week – five times the Class 2 contribution rate, and a difference of £592.80 based on 2017/18 rates.

Self-employed individuals should be encouraged to check their NIC record for the last few years – this can be done online through the Gov.uk website. Those wishing to protect their state pension entitlement should ensure that they have paid, and continue to pay, as many Class 2 contributions as they need to before abolition in April 2018. A total of 35 years of contributions paid or credited are currently needed to secure entitlement to the full state pension. The minimum needed to secure any state pension is 10 years.

New anti-money laundering regulations take effect

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Pay) Regulations 2017 (SI 2017/692) took effect from 26 June 2017 and replace the previous 2007 Regulations with new statutory requirements for systems and procedures. Broadly, the regulations require firms undertaking certain financial activities to apply risk-based customer due diligence measures and take other steps to prevent the firm’s services from being used for money laundering or terrorist financing.

The regulations apply to a number of different business sectors, including financial and credit businesses, accountants and estate agents. Every business covered by the regulations must be supervised by a supervisory authority.

The 2017 Regulations stipulate that firms must appoint a money laundering compliance principal (MLCP) and that individual must be on the board of directors (or equivalent management body), or a member of senior management, where appropriate to the size and nature of the business. Firms must also appoint a nominated officer (i.e, the individual nominated to receive internal suspicious activity reports and who assesses whether a suspicious activity report should be made to the National Crime Agency (NCA)). The MLCP and the nominated officer can be the same person but the identities of each need to be communicated to the supervisory body within 14 days of first appointment.

Firms were required to have a money laundering reporting officer (MLRO) under the 2007 regulations, but they now need to make sure that the equivalent individual under the 2017 Regulations (the MLCP) is on the board of directors (or equivalent management body), or is a member of senior management, and that they have responsibility for compliance with the regulations.

HMRC supervises the following seven business sectors:

  • high value dealers
  • trust or company service providers
  • accountancy service providers
  • estate agency businesses
  • money service businesses
  • bill payment service providers
  • telecommunication, digital and IT payment service providers

Where a business falls into one of these business sectors, it must be registered with HMRC. Failure to comply constitutes a criminal offence.

September 2017 Q&A

Q. I have two small businesses which are treated as a group for VAT purposes, so we only submit a single VAT return covering both entities. Are we eligible to use the Flat Rate Scheme?

A. Unfortunately not. If you are part of a VAT group, or are eligible to join an existing VAT group, then you cannot use the Flat Rate Scheme (FRS).

There is also a rule which stops ‘associated’ businesses joining the FRS.

A business is ‘associated’ with another business if:

  • one business is under the dominant influence of another;
  • two businesses are closely bound by financial, economic and organisational links; or
  • another company has the right to give directions;
  • in practice, a company habitually complies with the directions of another. The test here is a test of the commercial reality rather than of the legal form.

If a business has been associated in this way with another in the last two years, but is not associated at the time an application to use the FRS is made, HMRC may allow the FRS to be used, if they agree in writing, that the former association is not a risk to the revenue.

Q. I am a sole trader and I run my business from home. I am using the cash basis for preparing my accounts for tax. Can I claim expenses for running my business from home?

A. Under HMRC’s ‘simplified expenses’ regime, if you work more than 25 hours a month from home, you should be able to claim flat rate expenses based on the number of hours you work. Current rates are as follows:

  • between 25 and 50 hours worked per month: £10 per month
  • between 51 and 60 hours worked per month: £18 per month
  • 101 hours or more: £26 per month.

If you claim the flat rate, you don’t have to work out the proportion of personal and business use for your home, e.g. how much of your utility bills are for business.

Q. I work for a sandwich delivery company and I use the company’s electric van to do my round each day. I take the van home with me at night and I am allowed to use it in the evenings and at weekends if I so wish. What is the currently tax position for electric vans?

A. The tax charge on zero-emissions vans is currently going through a period of change. From 2015/16 to 2017/18 inclusive, a rate of 20% of the van benefit charge for vans which emit CO2 applies to zero-emission vans. The taxable charge for conventionally-fuelled vans is £3,230 for 2017/18.

This means that if you are liable to the van benefit charge, for 2017/18:

  • if you are a basic rate taxpayer, you will pay tax of £129.20 (£3,230 x 20% x 20%); and
  • if you are a higher rate taxpayer, you will pay tax of £258.40 (£3,230 x 20% x 40%).

The charge will rise to 40% of the van benefit charge for conventionally-fuelled vans in 2018/19; it will be 60% in 2019/20, 80% in 2020/21 and 90% in 2021/22. From 2022/23, the van benefit charge for zero emission vans is 100% of the van benefit charge for conventionally fuelled vans.

Paying voluntary NICs

There are various reasons as to why gaps may arise in an individual’s national insurance contributions (NIC) record, for example, because that person has been on low earnings for several years, they have been living abroad, or because they have been unemployed and have not been claiming benefits. In certain circumstances therefore, it may be possible, and beneficial, to pay voluntary Class 3 National Insurance Contributions (NICs) as this can safeguard entitlement to a future state retirement pension and certain other state benefits.

Broadly, voluntary contributions may be paid for any tax year in which the individual is aged over 16 and is:

  • employed, but not liable to pay Class 1 and/or Class 2 contributions (because earnings are too low to qualify for paying NICs);
  • excepted from paying Class 2 contributions (because earnings from self-employment have not reached the entitlement threshold);
  • not working;
  • resident in the UK but living or working on secondment abroad; or
  • self-employed.

An individual may get national insurance credits if there are unable to work, entitled to certain benefits, or in other specific circumstances, for example being on an approved training course or attending jury service. In addition, someone who cares for a child, or a sick or disabled person, payment of Home Responsibilities Protection (HRP) may cover gaps in a NIC record.

Topping up

Class 3 NICs are voluntary, so if a gap in contributions is discovered, the choice of whether to make good the shortfall is entirely up to the individual concerned. However, if the individual wishes to obtain full entitlement to benefits such as the state pension, contributions should be topped up in good time.

Voluntary contributions are payable at the rate of £14.25 per week for 2017/18. There are two main ways of paying Class 3 NICs:

  • monthly: by direct debit – download application form CA5603 from the GOV.uk website;
  • quarterly: HMRC will issue a bill every 13 weeks (if the individual lives in the UK), which can be paid at a bank, Post Office, or by Girobank.

Generally, the shortfall must be made up within six years. For example, Class 3 contributions for the 2011/12 year would need to be paid by 5 April 2018. Whilst the contributions do not need to be made until that date, the rate may increase, so it may be cheaper to do it sooner rather than later.

A self-employed individual may be exempt from paying Class 2 contributions because their income is below the small profits threshold (£6,025 for 2017/18), but he or she can currently pay voluntary Class 2 contributions to maintain their NIC record. These amounts are considerably cheaper than Class 3 contributions (the rate for 2017/18 is £2.85 per week) and they protect entitlement to more benefits. Class 2 NICs will be abolished from April 2018, so it may be worth checking NIC records before then.

In certain circumstances it is possible to pay up to an additional six years of voluntary Class 3 NICs to enhance entitlement to a basic state retirement pension. This is over and above those allowed under the usual time limits outlined above. See the GOV.uk website for further details.