Did you know there is a government scheme available that can help contribute towards childcare costs which may mean fewer of your employees will need time off at the same time this summer.
Tax-Free Childcare is a scheme available to working parents with children from 0-11 years and many parents are not taking advantage of the scheme. HMRC would thus welcome help from employers in changing that, so please tell your employees about Tax-Free Childcare and how it can reduce their childcare costs.
Eligible parents can get up to £2,000 per child, per year to spend on qualifying childcare (effectively a 25% top up). Note that Tax-Free Childcare isn’t just for everyday childcare costs, such as childminders and nurseries, parents can also use it to pay towards the cost of:
- after school clubs
- summer camps
- school holiday activities
Your organisation may have an annual Christmas party for staff, but the tax rules also allow staff parties at other times of the year which are a tax-free benefit if certain conditions are satisfied.
The exemption applies to an annual party (for example, a Christmas party), or similar annual function (for example, a summer barbecue), provided for employees and is available to all employees or available to all employees at that location, where the employer has more than one location. If the employer provides two or more annual parties or functions, no tax charge arises in respect of the party, or parties, for which cost(s) per head do not exceed £150 in aggregate. For each function the cost per head should be calculated. The cost per head of subsequent functions should be added. If the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt, the other is taxable.
Traditional advice would then be to extract any additional profits from the company in the form of dividends. Where dividends fall within the basic rate band (now £37,500) the rate continues to be 7.5% after the £2,000 dividend allowance has been used. Thus where husband and wife are 50:50 shareholders they would each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving £34,837 net of tax.
So a combination of £12,500 salary and £37,500 in dividends would result in £46,873 (93.7%) net of income tax and NICs.
Ensure dividend payments are legal
The Companies Act requires that companies may only pay dividends out of distributable profits. This means that in the absence of brought forward reserves the company would need to provide for 19% corporation tax in order to pay the dividends and thus there would need to be profits of £92,593 in order to pay dividends of £75,000 (after providing corporation tax of £17,593).
Overall the combination of salary and dividends suggested above would result in net of tax take home cash of £93,746 for the couple out of profits before salaries and corporation tax of £117,593 (20.3% overall tax). This still compares very favorably with the amount of tax and NIC payable if the couple were trading as a partnership.
On the 7 November the Office for Tax Simplification (OTS) issued a report on VAT. The report suggested 23 steps that could be taken to make VAT simpler.
The detail of the report can be found here.
Whilst these reports get highlighted in the accountancy press it’s unusual for them to be discussed more widely. It has been suggested however, that one recommendation might have been paving the way for an announcement in this tomorrows budget.
Chapter One discusses the benefits of reducing the VAT registration threshold, currently £85,000. This is one of the highest in the world and £65,000 higher than the EU where it is around £20,000. Apart from the c. £1.5bn a reduction might raise for the Treasury it is suggested that the current limit stifles growth.
“…there is clear evidence from academic analysis of HMRC data and from submissions to this review that the high level of the threshold is having a distortionary impact on business growth and activity”
This is because of the belief that small business owners choose to stay below the registration threshold partly to avoid the admin burden that registration causes but also to remain price competitive against others who are not registered. In my experience most of the unregistered small businesses will be the last in the chain, consumer facing. We’re talking of trades, independent retailers, health & beauty and other small consumer services.
Reducing the threshold would therefore either reduce the profits of small businesses that need to register or increase prices for consumers.
I can’t disagree with the conclusion drawn by the OTS as I’ve had conversations with clients about the pros and cons of breaching the threshold. A lower threshold would reduce these conversations and might encourage some business owners grow. It would however add an extra worry and administrative burden for many business owners.
There’s another factor that might encourage the Chancellor to consider reducing the limit. With VAT registered businesses reporting into the Making Tax Digital (MTD) programme from 2019 it would mean an accelerated implementation for many businesses.
It might be a huge amount of hot air but there are some interesting debates to be had and the Chancellor might just start them off on Tomorrow… we will see!
One of the headlines from March 2017’s Budget was news that the government was planning to increase the amount of tax self-employed people have to pay on their earnings. But with the move proving unpopular, Chancellor Philip Hammond has decided to scrap the measure.
Hammond initially announced he would be increasing Class 4 National Insurance Contributions for the self-employed. The plan was it would rise from 9% to 10% in April 2018, and then to 11% the year after. Hammond initially defended the measure on account of a rising number of people becoming self-employed; and the fact they currently pay a lower level of National Insurance contributions than employed people.
However, widespread outrage at the measure – which would have cost every self-employed person an average of 60p a week – and the fact it went against the Conservative Party’s own manifesto lead to Hammond scrapping these plans a week later. This is great news for self-employed people, who no longer face a tax hike on their earnings.
When speaking to people eight weeks ago it seemed almost impossible that anything other than a significant Conservative win would be the result of the General Election. But I guess Harold Wilson was right when he said “A week’s a long time in politics” and now there is a hung parliament what does that mean for micro, small and medium sized business owners?
Making Tax Digital
I think this is going to be something left in the “in tray” of, Chancellor, Philip Hammond. It’s almost certain to be introduced at some point but I think it’s likely to be postponed whilst other more pressing matters are covered off. Business owners should still be planning for this as I don’t think the postponement will be for long, with the best planning focusing on introducing digital accounting systems. Systems like XERO will help deal with the obligations of Making Tax Digital but also give the opportunity to build efficiencies into systems and procedures.
Brexit and a weak supply and confidence agreement with the DUP mean that further shocks in the economy are likely. How these issues effect the pound, consumer confidence, inflation and growth in the economy is unknown but with a “weak and wobbly government there is sure to be some uncertainty. Whilst it’s a cliche that business hates uncertainty the wheels in the economy will continue to turn. As business owners we need to remain prepared to act if “shocks” effect our business. I wouldn’t advocate preparing 18 month plus plans but keeping a focus on the now and immediate future, watching key measures of performance for your business and monitoring cash.
Key questions around Brexit remain unanswered and the muddled political picture is not likely to help negotiations. I think it unlikely that the DUP effect will significantly influence the stance on the key issues however, I do think that there may be a softening in approach to try and align it with public opinion. I don’t think there is much we can do to protect against the negative effects of Brexit because we don’t know there will be any yet. For me focus should be on business as normal with close monitoring of performance and cash.
So whilst the result of the election might seem a disaster I’d not focus on the macro uk view. Instead I’d be focusing on good business disciplines; monitoring performance, controlling cash flows and keeping abreast of changes in the external environment that might impact on the business.
As all landlords will by now be aware, the income tax, Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) changes brought in by George Osbourne are starting to be felt across the market.
From 6th April 2017, tax relief on interest paid on borrowings by individuals on their property portfolios will start to be restricted to the basic rate of income tax, which is 20%. In the past, full tax relief at up to 45% has been available. This restriction in tax relief is being introduced gradually over the next 4 tax years, and will be fully in force by the tax year beginning on 6th April 2020. Those who will be hit the hardest will be those who are highly geared, with little equity in their properties.
Those buying rental properties either themselves or through companies are likely to be hit with the additional 3% rate of SDLT, which came into force in April 2016.
Those selling residential properties that are not their main residence will be subject to CGT at rates of 18% or 28%, depending on the level of their other income. The CGT rates on the sale of most other assets are 10% or 20%.
Not content with hitting landlords hard with the above tax changes, HMRC is pressing ahead with quarterly tax reporting from next year under the Making Tax Digital (MTD) programme. All landlords with rental turnover above £10,000pa will need to report their income quarterly to HMRC using approved software or spreadsheets, At the time of writing, the fine details are still being finalised, but this will be another onerous task for landlords to comply with. The operative date will be from 6th April 2018 for landlords with turnover above the VAT limit (£85,000), and 6th April 2019 if turnover is above £10,000 but below £85,000. Whilst income and expenses will have to be reported online on a quarterly basis, tax payment dates don’t change, nor does the requirement to submit an annual Tax Return, yet! Eventually, the Tax Return will disappear for most taxpayers, but there might be a lot of pain before we reach that point!
If you have any concerns, or would like more information about MTD, please contact us for further information.