Summary of Tax news and tips – December 2013
· Loans to Reduce IHT
· EFRBS Settlement
· VAT Due Payment Date
· RTI Penalties Around The Corner
· December Question and Answer Section
· December Key Tax Dates
Loans to Reduce IHT
Have you used a loan to reduce the inheritance tax (IHT) which may be due when you die? A common IHT planning technique has been to take out a mortgage on the family home and use those borrowed funds to invest in assets that qualify for 100% exemption from IHT, such as farmland or shares quoted on the AIM stock market. The loan reduces the value of home subject to IHT, and the assets acquired don’t attract an IHT charge.
However, this plan has been undermined by a change in the law from 6 April 2013. If the mortgage was taken out, or replaced, on or after that date, the amount of the loan is first deducted from the value of the assets it was used to acquire, not the property it is secured on. This means the loan and the IHT-exempt assets cancel-out each other in the IHT calculation, and no tax is saved.
You need to be aware of this when changing the mortgage on your home. We should talk about inheritance tax planning if the net value of your assets is likely to exceed £325,000. Married couples and those in civil partnerships can hold twice that amount before IHT bites. There are still ways to reduce the potential IHT due, but any plan needs to be tailored to your specific circumstances.
If you have used an ‘EFRBS’ (employer financed retirement benefit scheme) since 2006, you should shortly expect to receive a letter from the Taxman. This will allow you to pay tax which may have been avoided by using the ERFBS.
Various versions of EFRBS have been used by companies to make contributions into a trust for employees, for which the company has claimed a deduction against its taxable profits. The employees apparently did not suffer a taxable benefit in respect of the money held within the trust on their behalf. The Taxman is firmly of the opinion that this combination of tax allowable cost, and tax free benefit, does not legally stack-up.
He is now writing to all companies known to have used an EFRBS to offer them the choice of:
a) giving up the tax deduction for the contribution made into the EFRBS, and any deduction claimed for professional fees connected with setting up the EFRBS; or
b) paying PAYE and NICS due on the amounts contributed to the EFRBS.
These options relate to contributions made to an EFRBS from 6 April 2006 onwards. Where additional tax is due for an earlier year, interest will also be payable. Option a) may cost less now but in the future when the funds are paid out of the EFRBS to employees, those payments will be subject to PAYE.
We need to discuss which option, if any, will suit your company, and whether you want to reject the Taxman’s offer in favour of fighting your case through the courts.
VAT Due Payment Date
When must your VAT payment reach HMRC? The correct answer is: seven days after the end of the month following the end of your VAT quarter. Not seven working days, seven calendar days.
If you get this wrong and pay your VAT late, you will receive one or two warnings from HMRC (two where the penalty would be under £400). If you pay late again within 12 months you will be charged a penalty of 2% of the late paid VAT. This percentage penalty increases every time you pay late, from 5% to 10% to 15% of the VAT due. Even paying one day late, counts as late for calculating those penalties.
Make sure you know exactly how long it will take your electronic payment to reach HMRC’s bank account. Using the faster payment service (FPS) normally means the payment arrives within two hours, but there are monetary limits for FPS which vary between banks and for different types of bank accounts (corporate or retail). If the payment is too large to be sent by FPS, the bank will generally send it by BACS – which takes three working days.
If you have a direct debit set up to pay your VAT, HMRC will deduct the correct amount from your bank account three days after the due date for that VAT return, or three days after you submit your VAT return if that is later. So if you are late with filing your VAT return, the direct debit will be collected late, and you will have made a late payment of VAT, leading to a potential penalty.
RTI Penalties Around The Corner
This tax year (2013/14) is the first year in which the majority of employers have submitted their PAYE data using real time information (RTI). HMRC has not yet imposed penalties for late RTI submissions made within the tax year, but that is about to change.
From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:
– filing a full payment submission (FPS) after the date of payment stated in that report;
– failure to file an employer payment summary (EPS) showing a nil payment when required; and
– failure to pay the PAYE due in full, and on time for a particular tax month.
Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.
The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.
Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as ‘annual’. If no nil EPS is received this will give rise to a penalty.
Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.
You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.
Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.
December Question and Answer Section
Q. In September 2013 I started working through my own company but I haven’t drawn a salary yet. Can I award myself tax free childcare vouchers as an employee of my company? I was previously on a salary of £50,000 with my former employer. Would that affect the amount of childcare vouchers I can receive tax free in this tax year?
A. As an employee of your company you can receive childcare vouchers. The other conditions of a childcare voucher scheme must also be met, For example, all other employees of your company should be offered childcare vouchers on the same terms. Your previous salary is not relevant to the amount of tax free childcare vouchers you can receive from your current employer. If your expected salary for this tax year (don’t include dividends or bonuses you may receive), will be less than the basic rate band – pro rata over the rest of the year, you can receive the maximum of £55 of tax free childcare vouchers per week.
Q. I act as a DJ for parties and other events. For themed parties (e.g. Halloween, 1970s) I wear clothes to suit the occasion. Can I claim the cost of those clothes as an expense in my self-employed accounts?
A. The Taxman will not allow a deduction for the cost of ordinary clothes which are required ‘for warmth and decency’. However, where the item is needed for safety purposes, like a hard-hat on a building site, the cost is allowable. The same applies for the cost of a costume worn to identify the person in a role, such as a barrister’s legal wig and gown, then the cost is normally allowable.
However, if you also wear those clothes as part of your everyday wardrobe for warmth and decency then the cost is not allowable. Try asking yourself: ‘would I wear this when I am not working as a DJ’. If the answer is ‘yes’, the cost is not allowable.
Q. My company is considering purchasing a VW Caravelle for me to use as my family vehicle. It is sold by the commercial van centre rather than the VW car dealer. Does that mean the company can claim back the VAT on it?
A. VAT can only be reclaimed on commercial vehicles such as; lorries, vans, buses, or cars used for daily rental to customers or as demonstration vehicles in the motor industry. Irrespective of who sells the vehicle, if it is designed to carry people rather than goods it is a car not a van, unless it’s a bus designed to carry 12 or more people. To qualify as a van it must have a payload of at least 1000Kg.
December Key Tax Dates
19/22 – PAYE/NIC and CIS deductions due for month to 5/12/2013
30 – Deadline for 2012/13 self assessment online returns to be filed if you are an employee and want tax underpaid to be collected by adjustment to your 2014/15 PAYE code (for underpayments of up to £3000 only)