Do Dentists need Accountants?

Do Dentists need Accountants?

The short (and unbiased) answer is yes. The more detailed answer is based on the premise that dentists need an accountant that understands the intricacies behind dental funding, pensions, and general practice.

Associate dentists tend to find themselves in a unique spot when it comes to accounting. The majority are in fact self-employed dentists who make payments to practices (or providers) in return for use of the premise, equipment, materials and staff. In this case, there may be a question mark over whether IR35 rules apply to associate dentists.

To summarise, the IR35 changes brought about in April 2021 meant that larger NHS dental practices pay extra tax if they engage with someone treated as an employee through a limited company. These rules apply to larger practices. They might apply to your practice if two of the following conditions are met

  1. Annual turnover exceeding £10.2 million
  2. The balance sheet total exceeds £5.1 million
  3. More than 50 employees

It isn’t all doom and gloom though, as associate dentists are at little risk from the effects of these changes – so long as the associate is not working in a manner that is consistent with being an actual employee of the provider. To be considered self-employed you must:

  • Have clinical freedom – You can choose your own hours
  • Can be involved in complaints lodged against you
  • Are able to affect your own income, such as providing private services
  • Are able to arrange a locum to do some work for you
  • Can decide on your own fees

The employment status of being an associate dentist also means the National Insurance class is different to a full-time employed dentist. As income is considered to arise from the trade of services, associates will be subject to Class 2/4 NICs. This means NI rates of £3.05 per week for Class 2, or 2/9% Class 4 NIC depending on your yearly profits.

Will I save if I incorporate?

You can make large tax savings if you incorporate to operate as a limited company. However, this process can actually result in huge pitfalls for you and your financial status, most notably loss of your membership to the NHS pension scheme. Providers are also affected by this loss too, as they can only make pension contributions equivalent to the salary and dividend payments, as opposed to the conventional 43.9% of the NHS contract value. So, in some instances, you could be left with tax losses. In this case, we recommend that you take expert advice and carry out thorough tax planning with a credited accountant to decide on incorporation.

What do I do next?

You, the dentist, should go to an accountant who can answer the following questions:

  • Has my ARR form been completed and filed correctly?
  • Is my lab bill percentage reasonable? Should my associates be expected to contribute to these fees?
  • What would happen if I incorporated my practice?
  • How do I pay off my VDP?

At WIM Accountants we can assist you, and we are confident in advising clients about incorporation. We only advocate incorporation when there are clear benefits to the client. If you would like accurate and up to date advice about incorporation, then please contact us.

 

 

 

Tax Reducers – Fact or Fiction?

Tax Reducers – Fact or Fiction?

I wish I was paying less tax” is probably a thought that has crossed the minds of many of us at least once in our lifetimes, and it would not be a surprise at all if many were resigned to that thought. It may come as a welcome surprise for those same taxpayers to learn that something that is designed to reduce your tax is in fact not a mythical concept, but rather something very real and claimable. Enter ‘tax reducers’, forms of reliefs that are designed to lower income tax through the means of deductions.

But before we get into the intricacies of tax reducers, let us quickly skim through the process of income tax calculation. So:

How is my Income Tax calculated?

The entire income tax calculation can be summed up well in 7 distinct steps:

  1. Identifying the amount of component income that is liable to tax in the relevant tax year. This is mainly income from employment, self-employment, dividends, and savings.
  2. Deductions are made from the component income or the total income. Unless underlying reliefs apply; typically arising for trading losses, business property losses and qualifying loan interests.
  3. Personal Allowances are deducted.
  4. Tax bands and rates are applied to the taxpaying individual’s income for the tax year.
  5. These amounts are then totalled to produce the total tax liability for the year.
  6. To find the total amount of tax payable in the tax year, tax reducers are deducted – which we will focus on shortly.
  7. Any additional tax charges (say, annual allowance) are added, and tax already paid in relation to the relevant tax year is deducted.

More detailed information on the income tax calculations can be found in ITA 2007, s.23.

 

Types of Tax Reducers

If we go back to the income tax calculation above, you may notice deductions being made during Step 2. Interestingly, tax reducers approach deductions differently by reducing the total tax liability directly instead of being deducted from the component or total income at source.

The following tax reliefs are the main ‘tax reducers’ you should be aware of:

  • Married Couple’s Allowance (MCA) and Marriage Allowance (MA) – Excess MCA relief can be transferred to the partner at tax year-end in the interests of preventing the tax reducers from going to waste. Claims can also be made to give at least half the min. MCA tax reducer (calculate at 10% x £3,450 = £345) to partner at tax year-end.
  • Enterprise Investment Scheme (EIS) – If a taxpayer subscribes to EIS shares (ie. their employer offers them new shares prior to the date of official issue) a tax reducer is awarded which is based on a percentage (currently 30%) on the lower of the amount invested or £1 million. The latter option actually doubles to £2 million if subscribed shares are for “knowledge intensive companies”.
  • Seed Enterprise Investment Scheme (SEIS) – The tax reducer here works roughly similar to the EIS with key differences being that the tax reducer percentage is 50% and applies to the lower of the amount invested or £100,000. Note that “Seed Enterprises” often relate to smaller and younger companies than those qualifying for EIS and must have traded for a short period of time.
  • Social Investment (SI) – If a taxpayer subscribes for shares or makes a qualifying debt investment in a social enterprise, a tax reducer of 30% is given on the lower of the investment amount or £1 million. In this instance, qualifying debt investments must be in the form of a debenture that offers no return other than at the commercial rate and carries no charge over assets. It must also rank equally amongst other shares.
  • Venture Capital Trust (VCT) – A taxpayer subscribing to VCT shares is given a reducer of 30% on the lower of the invested amount or £200,000.

 

Order of application

In the event of more than one reducer being applicable (which is not a rare occurrence), there is a prescribed order to which the tax reducers must be deducted. The general rule of thumb is that the tax reducers be structured in order of favourability to the taxpayer. Favourability in this context being whichever order allows for the lowest tax due.

The order is as follows:

  • VCT
  • EIS
  • SEIS
  • SI
  • Maintenance payments
  • MCA/ MA

 

How much tax can I reduce?

There is a limit to the total tax reduction applied during Step 6 of the income tax calculation to prevent the deductions from creating a tax repayment. In layman terms, the total amount of reductions is limited to the tax liability incurred. HMRC also stress that where a taxpayer has EIS, SEIS, SI and/or VCT and has made donations to a charity via gift aid, the tax liability cannot be reduced to a zero figure. Income tax must be due which covers the basic rate tax relief at source for gift aid donations. ‘Wasted’ tax reducers (unused tax reducers in the tax year as a result of insufficient income) are determined in accordance with the order described above and may be taken into consideration when discussing the possibility of carrying back or forward tax reducers.

Consider a taxpaying individual who has a tax liability of £35,000 at Step 5 of the income tax calculation. They also have EIS relief of £26,000, SEIS relief of £9,000 and have made net donations of £1,200 to a charity using gift aid. The amount of income tax due from this individual is:

  £

Tax liability (Step 5)

35,000
Less: Step 6 tax reducers  

EIS relief

(24,000)

SEIS relief (limited)

(8,700)

Total

300

 

The individual in this scenario would otherwise have their tax reduced to nil if it were not for the gift aid donations. Therefore, the total amount of tax reducers is limited to the amount of basic rate tax at source. As the basic rate is at 20%, the amount of tax payable is calculated by multiplying the donation total by 20 and then dividing by 80 (ie. £1,200 x 20/80). In this case, SEIS is limited as EIS relief is deducted first under the prescribed rules of ordering (ITA 2007, s.27). The unused SEIS income tax relief can be recovered by claiming it on a previous year.

Your guide to EMIs

Your guide to EMIs

Enterprise Management Incentive (EMI) schemes are great for keeping and encouraging employees by awarding significant tax benefits to both company and worker. Typically, you may see EMIs being used as a tax-efficient tool to aid with a company’s internal growth (such as bringing up key workers to have a stake in the business).

The scheme itself is quite flexible in that it can be fashioned to suit the targets of a company, such as allowing companies to allow options to qualifying employees on an efficient tax basis (for example, the right to subscribe to shares). Private or small companies can take great advantage of this to gain access to select grants for selected employees or even their entire workforce.

EMIs can only be awarded to companies with a permanent establishment in the UK, but if your company has overseas shares, you can rest assured as EMI options are still available to you. There are a few other requirements to qualify for an EMI, namely the company itself must:

  • Have gross assets less than £30m
  • Operate in a qualifying trade, which does not include financial & legal activities, leasing, farming, and property development

The options available through EMI also have conditions attached:

  • Ordinary shares issued must be fully paid and not redeemable
  • EMI treatment is only applied to shares not exceeding £250,000 per individual
  • Options can be awarded at discount (even nil price) at the risk of tax consequences
  • These options must be exercised within 10 years

Employees are also subject to eligibility requirements, namely:

  • EMI options are only available to employees working more than 25 hours a week, or who spend 75% or more of their time working for the company
  • The employee must not have more than 30% of the company share capital before options are awarded to them

 

What are the benefits?

EMIs can be tailored to help a company achieve their commercial objectives, and have benefits for both employer and employee alike:

For employers:

  • No tax cost
  • No employer NIC on grant or options exercised
  • Corporation Tax Relief on the difference between the market value of shares at the time of acquisition and the price paid
  • HMRC validation of share valuation, allowing for tax certainty in the interest of the company and workers.

For employees:

  • Only tax payable is CGT arising when shares are sold
  • Lower tax costs compared to non-EMI schemes or even cash
  • No Income Tax or NIC payable on grant or options exercised
  • Reduced CGT rate – EMIs will cause a 12-month holding period for Entrepreneurs Relief to accrue, resulting in a reduced 10% CGT rate. This rate can be achieved even with minority holdings in Growth Shares

 

Disqualifying events

There are several changes or developments within a company that could lead to disqualification from EMI. Also known as “disqualifying events”, they include the following:

  • Loss of independence – Namely when a company becomes a 51% subsidiary of another company
  • No longer meeting the trading requirements – When the company’s activities become primarily focused on a non-eligible trade. It could also occur when the intent to carry out a qualifying trade was never realised.
  • Employees are no longer eligible – Usually, if they no longer work at the company or meet the required hours
  • Share capital is altered
  • If Company Share Option Plans (CSOPs) are granted – This means the amount of unexercised options exceed £250,000

You may want to heed caution to this as if your company is subject to a disqualifying event, you may be liable to a tax charge. This is usually imposed when the EMI option is exercised after 90 days of a disqualifying event, causing income tax and NICs to become payable on the increase in share value from when the disqualifying event occurred and when the option was exercised.

 

How can I register for EMI?

You can report your options to HMRC electronically within 92 days of receiving the grant. It is advised that you agree upon the share market value in advance with HMRC.

WIM Accountants can also help you in dealing with all aspects of your EMI plan and will endeavour to make sure it truly reflects the commercial objectives of your business.

Get in touch with us to find out more.

Tax-Exempt Benefits: What are they and how do they work?

Tax-Exempt Benefits: What are they and how do they work?

 

A significant number of employees will find that they receive non-cash benefits as a part of their remuneration often in the form of company cars, loans, mobile phones, private medical insurance, or contributions to a pension scheme. For the most part, an employee will pay tax on these benefits as these are benefits that were provided to them or “a member of their family or household” – meaning that if the employee managed to get their employer to provide the benefit to his/her spouse or children, they would still have to pay taxes.

 

The actual list of tax-exempt benefits is long, but here we will take a look at the ones which may be more familiar to our eyes:

Employer contributions to pension: Tax exemption is dependent on the pension scheme being registered. So, if the employer pays into the employees personal or occupational pension scheme, no taxable benefit arises irrespective of the employer’s level of contribution.

Company issued phones and calls.

Reimbursement of removal expenses: If, for example, an employee is transferred to another site with the employer covering expenses, no taxable benefit is incurred so long that the expense does not exceed £8,000. This exemption is actually well-defined by HMRC and can be read in further depth here. (ITEPA 2003, ss.277-285)

Workplace parking: Note that this provision also includes the cost of a ‘season ticket’ to a public car park within reasonable proximity to the workplace. Bicycle and motorcycle spaces also operate in this provision.

Subsidised staff canteens: Tax-exempt only if the canteen facilities are available to all employees and if the provision did not arise out of a salary sacrifice or other related arrangement.

Incidental expenses: Employees working away from home are exempt up to a daily limit. Currently, they are £5/night if working in the UK and £10/night abroad.

Work-related training.

Christmas (or other annual seasonal events) parties where the cost per head does not exceed £150. Note that if the cost per head exceeds this amount, the individual is taxed on the full amount and not just the excess over £150. For example, a cost per head of £250 will result in the employee being taxed on the entire £250.

Awards from a staff suggestion scheme provided the award is no more than £5,000.

Rewards for loyalty or service: Up to £50 per year of service given an employee has served at least 20 years with the employer. Gifts given to a long-serving employee on retirement is also exempt.

Reasonable additional costs incurred from working at home (ITEPA 2003, s.316A). Employers should note that no records are required to be kept if expenses do not exceed £6/week or £312/year. This is actually a hugely relevant exemption in the current climate and has warranted a more in-depth discussion.

Other tax-free benefits can be found in HMRC’s online manual (ITEPA 2003, s237-324).

 

Trivial Benefits

Trivial benefits are a bit different to the tax-exempt benefits listed above in the sense that they come with a few strings attached to them. HMRC are very rigid in their definition of a trivial benefit, meaning you (the employer) don’t pay tax on a benefit provided all the following criteria are met:

  • The cost of the benefit is £50 or less
  • It is not cash or a cash voucher
  • It is not a performance-based reward
  • It is not an incentive included in the employee’s contract terms

Trivial benefits don’t need to be reported to HMRC via annual P11D/(b) forms and are exempt from taxable income and Class 1 NICs. So, if you’ve made plans to take employees for dinner (or to celebrate an occasion) you won’t need to worry about tax – as long as you make sure the total is £50 or less.

Generally speaking, there is no limit to the number of trivial benefits that can be provided in a tax year (6 April – 5 April) unless in the case of an individual in a close company where a £300 annual cap is enforced. For reference, a close company is a limited company of 5 or fewer shareholders who are all directors.

It is becoming increasingly common to find companies that offer a range of optional benefits to employees as part of their remuneration package, often at the cost of utilising the salary sacrifice. The reasoning behind such a method was that the amount of tax imposed on the benefit would be lower than the taxable amount on the salary given up, which would obviously be extremely favourable if the benefit was tax-free. This results in less income tax and NICs being paid.

Trivial benefits arising from a salary sacrifice are not eligible for exemption, and the employer will have to pay income tax, National Insurance, and report to HMRC on employee P11D.

HMRC introduced the Optional Remuneration Arrangement (OpRA) which reduces tax-saving using the salary sacrifice. The OpRA applies to two arrangements:

  • Type A: Where the employee gives up the right to receive earnings in return for a benefit.
  • Type B: Where the employee opts to receive a benefit in place of salary.

The amount declared is also the higher of either the salary sacrificed or how much was paid for the trivial benefit.

 

For more information, or if you’d like to have a chat about our services feel free to contact us.

 

 

 

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

 

A sole trader or an individual in a partnership making a loss has zero taxable profit for the year. Keeping in mind that losses are calculated in the same way as profits, loss relief is an option for businesses that are run on a commercial basis and have the means of realising their profits. As a result, the relief claims available depend on the length of time the trade has been active; if it has started within the last four years, is a continuing trade or if the trade is no longer operational. This blog will focus on the opening years of the trade (ie. trading losses in the last four years).

 

Carrying back losses

Losses incurred within the opening four years of trade, in the interests of continuing trade or profession, can be relieved against other sources of income of the three tax years which precede the year of loss. For example, if trade starts 18 February 2021 (so in the 2020/21 tax year) the loss relief will be available off losses incurred in 2021/22, 2022/23, 2023/24, as well as the tax year trade commenced. Trading losses in each of these tax years can be carried back up to 3 years.

But keep in mind that the relief is not administered automatically, instead, a claim is required to be made on the first anniversary of 31 January succeeding the year in which the loss arose (ie. if a loss was incurred in the 2021/22 tax year the claim must be made by 31 January 2023).

What is HMRC’s view?

HMRC hold the stance that, when carrying back losses to earlier years the past tax returns are not amended. Rather relief is provided by calculating the tax adjustment and Class 4 NIC liability if relevant for the previous years. This figure is then included in the tax return for the year of loss.

To illustrate this case, consider a loss arising in the tax year 2020/21 which is then carried back to 2019/20 to produce a repayment of £1,500. This figure of £1,500 is entered into box 15; page TC2 of the tax return 2020/21.

A partial claim is not allowed. If a claim is desired then the carried bac loss is offset against earlier years first, which provides relief on all income for each year until the loss is exhausted. Take care as this could lead to waste of Personal Allowances or losses being offset at lower rates than usual.

 

Can I carry forward losses?

Absolutely. Trade losses incurred early on qualifies for a relief claim. Remaining losses after an opening year loss relief are permitted to be relieved in alternative methods, namely, losses carried forward.

 

For example, Serena began her trade in 2020/21 and realised a loss of £45,000. If her total income for each of the previous tax years was £10,000 Serena can make a loss relief claim. She also does not need to worry about the income tax relief cap as her total amount of tax reliefs does not exceed £50,000.

This also means that her net income for the previous three tax years is zero and her remaining loss is (£45,000 – (3 * £10,000)) = £15,000 which is permitted to be carried forward to offset future profits.

Suppose Serena then made a £50,000 profit in 2021/22 and other income of £5,000. Her net income would then be ((£50,000 – £15,000 = £35,000) + £5,000) = £40,000.

 

Are there any restrictions on claiming loss relief?

There are restrictions that may be applicable when claiming opening year loss relief, so it is imperative to be aware of such restrictions before beginning a new trade, more so if there are high upfront costs expected. The loss must arise from a trade, which is an important factor to consider as the business has only just started operation.

 

  • Commerciality test: Loss relief is only available if the business is run on a commercial basis and profits can be reasonably expected in the period or appropriate time afterwards. Holding evidence of business plans that could support the claim of profit expectation is essential, even if losses are big and can be relieved at high tax rates. This also applies to instances where a partner leaves and then rejoins a partnership at a later time.
  • Simplified cash basis: Not available for trades operating with the simplified cash basis. If losses can be utilised it is advised to not opt into this scheme.
  • Cap on unlimited tax reliefs
  • Non-active traders
  • Tax-generated losses
  • Farming or gardening businesses

 

How can I plan for the relief?

When planning for loss relief it is important to consider the following factors:

  • Personal Allowances and Annual Exempt Amount: Aim to maintain these allowances
  • Marginal tax rates: Prioritise offsetting losses against income taxed at higher rates for maximum savings
  • Cash flow: Consider if it is worthwhile to claim relief for earlier tax years for cash repayment, or to claim relief at the highest marginal rate
  • Income tax relief caps: Consider if reliefs will be lost if not claimed in the following year which they may arise

 

Class 4 NICs

HMRC consider losses as ‘negative earnings’ for Class 4 NIC purposes, so trading losses can only be set against trading profits. If otherwise (ie. set against non-trading income common in early trade loss relief), in the interests of Class 4 NIC this section of the loss is carried forward and will be set against future profits.

 

Overlapping losses

In the event the trader chooses to not end the year on the regular Financial or Tax year (31 March and 5 April respectively), trading profits could be taxed twice according to basis period rules. This amount is known as the ‘overlap profit’ and is only relieved if the accounting date changes or trade terminates. However, a loss is only identified on the earliest period so a double relief cannot be claimed.

 

For more information or if you’d like to discuss our Sole Trader services, feel free to contact us.

Car Benefits: Your 2021/22 Tax Guide

Car Benefits: Your 2021/22 Tax Guide

 

Car benefits are a topic which is often brought up in enquiries with our clients, so this article will go over some concepts in the interest of tax planning for the acquiring cars through businesses.

 

Generally, when a business owner uses their own car in the interests of their business, they can be reimbursed by their own company and will not incur tax liability – as long as they are classed as a qualifying expense by HMRC.

If they were to use a company car instead, they would have to pay income tax on the benefit received. This varies on the CO2 emissions and listing price of the car. The company would also then be liable to Class 1A NIC on the benefit.

The company will, in most scenarios, pay for the ownership (or lease) of the car and its concurrent costs provided it satisfies HMRCs golden rule when it comes to expenses, that it must be done “wholly and exclusively” for the purpose of paying the business owner. These costs will allow deductions for Corporation Tax purposes. Car depreciation also enables corporation tax relief in the form of capital allowances.

As a result, when deciding between the acquisition of a car via lease or buying it outright, one must consider the effect of the capital contributions, company contributions, business mileage, capital allowances and the factors listed beforehand amongst others.

 

What are the charges?

Car Benefit:

Car benefit charges are calculated from the product of the listing price of the car and the current percentage rate set by the Chancellor, which can be found on our tax rates page. The rates are determined by car CO2 emissions which are measured in grams per kilometre (g/km).

Fully electric cars are subject to this tax, currently at 1% and are set to rise to 2% for the successive tax years. This percentage varies with the range at which an electric car can cover. A pure electric range above 130 miles will also be subject to the benefit in kind rate.

2021/22 1%
2022/23 – 2024/25 2%

Fully electric cars have low benefits in kind, qualify for 100% capital allowances and the anti-avoidance rule for salary sacrifice is applicable. Therefore, businesses may want to consider exploring electric cars as a tax-efficient option for a company car in the future as corporation tax rates are set to increase to 25% by 2023.

Fuel Benefit:

Fuel benefits can be calculated by multiplying the same percentage rate used for the car benefit and the current set figure for the tax year:

Year Fuel Benefit
2019/20 £24,100
2020/21 £24,500
2021/22 £24,600

In an instance where an employee has to reimburse the entire expense incurred by their employer for the provision of private fuel, no fuel benefit will arise. If the employee makes a partial reimbursement, then the benefit will be calculated to the method described above.

 

Business Mileage

Employees can be reimbursed for business mileage carried out in their own cars (i.e., miles travelled wholly and exclusively for the business) at 45p per mile for the first 10,000 miles and 25p for every subsequent mile. If a fellow employee is also carried in the same car a further 5p per mile is added to the reimbursement if and only if the travel is a work journey.

This rate also applies to fully electric cars.

A director that does not receive fuel benefit but drives a company car can claim an allowance for the business mileage at a lower rate than if they were to use a car in their ownership.

 

Capital Allowances

Eco-friendly cars are encouraged by HMRC, indicated by the numerous associated incentives which have a considerable positive impact on the cash flow of a business.

  • Writing down allowances (WDAs). Cars emitting less than 50g/km of CO2 in the 2021/22 tax year are included in the Plant and Machinery pool at an 18% WDA. Cars emitting more than the aforementioned amount is in the Special pool with 6% WDA. Hence, there is no balancing allowance on the disposal of these vehicles.
  • 100% first-year allowances (FYA) on expenditure for new low emission electric cars. The car must be purchased between 16 April 2002 and 1 April 2025 and have zero CO2 emissions.
  • 100% FYAs on brand new equipment installed for the purpose of electrically charging vehicles.
  • 100% FYAs on new goods vehicles with no CO2 emissions.

Note that the FYAs are not available to businesses in “difficulty” or are deemed to be recovering.

15% of the leasing costs of a car are also available to claim as a reimbursement provided its emissions are less than 50g/km from 6 April 2021.

 

HMRC also has a company car and car fuel benefit calculator which is a useful tool to help with tax planning.

 

If you have any further queries or are interested in our services, feel free to contact us and have a quick chat.

Your Pension Obligations as an Employer

Your Pension Obligations as an Employer

 

Pensions are an essential resource for individuals as a reliable source of income to live on when they retire from working. A recent investigation found that the average pension pot savings across the UK are £61,897 which tends to also come with an extra £12,000 annually in retirement income. This is a significant amount to allow an individual to have a basic retirement lifestyle, but this money doesn’t appear out of thin air. As an employer, it is your duty to attend to an employee’s enrolment in a pension scheme to help facilitate this lifestyle post-retirement, which will be the focus of this piece.

What do I need to contribute?

Before we delve into what your obligations are, let’s run through the actual rates an employer and employee need to contribute to the pension pot.

The amount contributed to the pension depends on the type of workplace pension scheme the employee is enrolled in, or whether the employee has opted into a scheme or has been automatically enrolled. Make note of the auto-enrolment, as this is an important system every employer should be aware of and will be discussed in depth further on. Additionally, it is common for the government to apply a tax relief to a pension provided that the person pays income tax and pays into a personal or workplace pension.

If an employee is auto-enrolled, you as an employer must contribute at least 3% of an employee’s earnings towards the pension scheme. The employee then makes up the reminder to make the total minimum contribution of 8%. These rates only apply if the person earns between £6,240 and £50,270 a year pre-tax (also known as “qualifying earnings”) and may also be influenced by the type of private pension scheme they are enrolled in.

What is auto-enrolment?

Auto-enrolment moves away from the archaic method workplace pensions used to operate. In the old system, a burden was placed on the employee to enrol into a pension scheme but now the process is automatic provided the employee earns above £10,000 per year and is over the age of 22. This pension pot can only be accessed once the employee is 55 years old, otherwise, it is held by the company.

The reason for this change is to increase the number of people saving for retirement, which has produced positive results with 78% of UK employees enrolled in a workplace pension – up from less than 50% in 2012 when auto-enrolment came into effect.

You must also let them know when they’ve been auto-enrolled as well as:

  • The date they were added to the scheme
  • The type of pension scheme and who runs it
  • Employer and employee contributions
  • How to leave the scheme. Note that you must refund money if the employee opts out within a month
  • How tax reliefs apply

You must notify them in writing of their right to join the pension scheme and of its associated details. They also have a right to rejoin a scheme at least once a year and you must auto-enrol them every 3 years if they’re still eligible and have previously opted out. It is your duty to inform an employee of these details and you cannot refuse a request to join a pension scheme. An exemption lies if, and only if, your employee earns less than the following amounts:

  • £520/month
  • £120/week
  • £480 over 4 weeks

But you don’t always have to auto-enrol your staff if they don’t meet any of the above criteria or the following conditions:

  • They have already provided notice to leave, or you have provided notice
  • They have evidence of “lifetime allowance protection”
  • They are already on an arranged pension with you
  • They have taken a lump sum payment from a closed pension scheme, and have left and rejoined the same company within 12 months of payment received
  • They opted out of an arranged pension scheme more than 12 months before the auto-enrolment start
  • They are from an EU member state and in an EU cross-border pension scheme
  • They are in a Limited Liability Partnership (LLP)
  • They are a director without an employment contract and employ at least one person

Do I have to enrol immediately?

You are not actually required to auto-enrol your employee as soon as they are eligible. A 3-month delay period is allowed but you must inform your employee of the delay. 

You can also delay the first 3 months of pension contributions, and instead pay it as a lump sum on the 22nd of the fourth month from the start of enrolment.

There are also tax saving incentives via usage of the ‘salary sacrifice’. Also known as a ‘SMART Scheme’ the salary sacrifice works by paying a portion of the salary an employee gives up directly to the pension pot. This may be desirable as it means you and your employee pay less tax and NI.

What happens if I don’t auto-enrol?

To keep things simple, you will be penalised, and in some cases heavily. The typical process involves fines being noticed, which must be paid online. In the event you are late in payment, missed contributions are expected to be paid to staff and may include the need to backdate contributions. You may also be expected to pay your staffs own contributions on top of your own. Further action involves court proceedings to recover debts which could end with a maximum of 2 years imprisonment.

Fines tend to range between £400 for non-compliance with notices to as much as £10,000 daily depending on the size of your company and staff numbers. 

If you have further questions regarding your obligations as an employer towards pensions feel free to give us a call and have a chat. Find our contact details here.

 

Remittance Basis for Non-Domiciles in the UK

Remittance Basis for Non-Doms in the UK

 

What does the term ‘Remittance Basis’ mean to you? If you are a domiciled UK resident it probably won’t mean much, but if you are non-domiciled (or non-dom) this is a concept which you should familiarise yourself with as it could be a huge advantage in your favour. In short, if you are eligible for Remittance Basis you are only taxed on your non-UK income and Capital Gains if they were brought into the UK.

So if you do not have UK income and Capital Gains, as well as having no need to bring in non-UK income to sustain your living, you can be deemed as a UK tax resident and pay no tax. This is a huge prospect that many overseas individuals living in the UK are unaware of.

 

What is meant by tax residence?

Tax residence is defined by how many days an individual spends in the UK. For an individual to be considered a UK resident for tax purposes, the must have spent a minimum of 183 days in the UK during any tax year.

Certain factors can actually affect how many days spent in the UK qualify you as a tax resident, such as having family living in the UK. As the number of factors connecting you to UK stay increases, the fewer days you can spend in the UK without gaining tax residency status.

 

What is meant by domicile?

Domicile is a concept of common law, and an individual can only ever hold one domicile at any point in their life. In this regard it is very distinct from residency, as you cannot be domiciled in more than one country at a time, nor can you be domiciled nowhere. In most cases, you are domiciled in the country you have permanent residence in.

A non-dom has limited exposure to the UK tax rules due to the fact they have less of a connection to the UK than say someone who was born and domiciled in the UK. As a result, a non-dom has thrice the tax advantage of an average taxpayer:

  • Being able to benefit from the Remittance Basis of tax
  • Restricted Inheritance Tax to UK assets
  • The ability to create a non-resident trust where the individual can benefit. The individual is exempt from IHT, CGT, Income Tax and anti-avoidance rules being placed on the trust’s assets

 

 

What is ‘Remittance Basis’?

If you are a UK resident but non-domiciled (ie. you are living in the UK but plan to return to your homeland in the future) your foreign income is taxed on an arising basis. This means your worldwide income is taxed whether or not it is brought and spent in the UK, however you can apply for a claim under the Remittance Basis.

This claim is not automatic, as you must apply for the Remittance Basis via your UK tax return and it can only be claimed in some tax years.

The number of years you have resided in the UK also determine the Remittance Basis Charge (RBC) you pay when you bring foreign income to the UK:

  • In the first 7 tax years of residency in the UK, the Remittance Basis is free of charge, at the downside of losing some minor CGT and income tax allowances.
  • When at least 7 of the previous 9 tax years have been spent as a UK resident (ie. you are in your 8th year of continuous UK residency), the annual RBC payable is £30,000.
  • If you have been a UK resident for at least 12 of the previous 14 tax years, the RBC rises to £60,000 per annum.
  • From the 15th tax year onwards no RBC is imposed on you as you will be deemed domicile in the UK, and you will no longer be able to benefit from the Remittance Basis.

It is also worth noting that an individual considered a minor during the duration of a tax year is exempt from RBC.

 

Pre-Arrival advice

Funds that you bring into the UK before gaining tax residency is considered to be ‘clean capital’ – which is exempt from income tax and CGT. This also includes:

  • Income/gains which were taxable on an arising basis (income was from a UK source or gains were attributed to a UK asset)
  • Gifts or inheritances
  • Income/gains received during relief from a ‘split year’ treatment under the scope of the statutory residence test
  • Income/gains received from dual residency under a double taxation treaty

 

If you are planning on moving to the UK, you need the best advice and specialists. The UK tax system is strict, and it is important that you plan your lifestyle funding well in advance. WIM Accountants can help you make your claim and will endeavour to guide you every step of the way. This blog post aims to serve as a basic introduction to non-domicile status in the UK, but if you have more queries or would like to have a chat about our services feel free to contact us.

Stamp Duty Land Tax: Understanding the new rates and extensions

Stamp Duty Land Tax: Understanding the new rates and extensions

The Stamp Duty Land Tax (SDLT) holiday was launched to stimulate the property market and encourage growth in first-time buyers as a response to the drastic downfall in property transactions following the first lockdown period due to the pandemic. There have however been calls to amend this holiday to see tax benefit on contract exchange, rather than the current completion model following concerns over rising house prices trapping people into not being able to buy or even complete sales. Over 13,500 people signed a petition to push for this to change but were met with a firm stance of no change from the government quoting SDLTM07950 FA03/S44(5)(b), where a contract is considered substantially performed when the purchaser takes possession of property or at least 90%. Instead, the government’s solution was that as part of the Budget 2021 announcement, the Chancellor revealed that the current duration of the SDLT holiday was to be extended until 30 June 2021. After this period the nil-rate band (NRB) will be at a decreased rate until 1 October 2021 where it will then operate at its usual threshold.

 

What is SDLT?

SDLT is the tax that must be paid when you buy property or land, provided the value of the sale exceeds a certain amount in England or Northern Ireland. Scotland and Wales have different rates but will not be included in this article. There also exists some exemptions from paying SDLT, such as being a first-time buyer of a property or in situations where the property is changing ownership without payment. Generally, SDLT will be applicable to you if you buy: a freehold property, a new or existing lease, a shared ownership property or receive property for money. Regardless of whether a mortgage is taken out or cash payment is made SDLT may still apply.

 

The SDLT Holiday

Under the SDLT ‘holiday,’ the NRB for residential properties was increased from £125,000 to £500,000 and will end on 30 June 2021 after being extended from 31 March 2021 as part of the Budget 2021 announcements. After this date, the NRB will fall to £250,000 until 1 October 2021 whereupon the usual rate will then apply.

This could be seen as a breath of fresh air for those buying property first-time or otherwise, with reported savings up to £15,000 which would then tail off to £2,500 by September. Larger investors in real estate could also find some benefit from this as relief can be claimed on Property Redress Schemes (PRS), student accommodation and retirement homes; suggesting that the extension may have a positive effect on the property market as a whole.

Non-UK residents however should bear in mind that from 1 April 2021 a surcharge of 2% is to be imposed on all residential bands. This includes companies and other overseas entities.

The usual rates

The typical rates for SDLT on residential property is as follows:

Consideration (£) Rate (%)
0 – 125,000 0
125,001 – 250,000 2
250,001 – 925,000 5
925,001 – 1,500,000 10
1,500,001 and above 12

Note that these rates will resume from 1 October 2021. An extra 3% is also added for each threshold where additional properties of cost exceeding £40,000 are purchased.

Until 30 June 2021, the following temporary rates will apply:

Consideration (£) Rate (%)
0 – 500,000 0
500,001 – 925,000 5
925,001 – 1,500,000 10
1,500,001 and above 12

 

The following rates will apply in the period 1 July 2021 to 30 September 2021:

Consideration (£) Rate (%)
0 – 250,000 0
250,001 – 925,000 5
925,001 – 1,500,000 10
1,500,001 and above 12

 

First-time Buyer Relief is disapplied until 1 July 2021 where the current SDLT extension ends. This relief only applies on thresholds within the £500,000 NRB.

SDLT is usually handled by specialist agents or advisors, so you the buyer don’t need to worry about anything but what you owe for the purchase of the property. If you are unsure if you qualify for these reliefs or are a landlord seeking advice on taxes involved, feel free to contact us at info@wimaccountants.com or call us for a free consultation.

What is the Film Tax Relief and can I claim it?

What is the Film Tax Relief and can I claim it?

Filming is an expensive trade which probably does not come as a surprise to those involved with the creative industries. But there is a lifeline for those in the business via the government Film Tax Relief (FTR). No matter how small your business may be, this is something that will be of interest to you.

 

What is the FTR?

The FTR was introduced in January 2007 as a means to promote the British film industry. To date, there have been over 1,000 films that have benefitted from the FTR with total claims exceeded £1bn. As a result, this relief has been recognised as one of the main reasons many large film production companies choose to film in the UK.

This relief provides additional tax deductions for companies making profit and payable tax credit to those making losses. The FTR aims to mitigate the filming and other core costs that productions companies may incur in the interests of attracting British consumers.

 

So how does this tax credit work?

The main rundown is that you, as an independent or co-production, must provide evidence that your final work will be a British (very important condition) film by passing the BFI Cultural Test. More on this shortly.

When you apply for the FTR, the production company has to prove that the film in production meets the following criteria:

  • The film passes the Cultural Test, and thus qualifies as a British film. This test examines four key areas of the film: cultural content, contribution, hubs and practitioners. A film is required to score at least 18 out of 35 points to pass. For more information on the scope of this test and additional information, read the summary on the BFI website here
  • The film must be intended for public theatrical release in the UK. If the final film is released in any country but the UK, or is for private viewing only, it will be disqualified from the Tax Credit.
  • At least 10% of the core expenses of the film must be UK expenditure. In this scenario, core expenditure refers to what is spent on core processes, such as pre-production, principal photography and post-production. Development, distribution and non-production activities are not considered to make up the core expenses.

 

Unfortunately, if you have employees on furlough their expenses incurred will not count towards the qualifying conditions for the FTR, as HMRC considers a furloughed employee to have not worked in their furlough period.

 

What can I claim?

You can claim a cash rebate of up to 25% of the expenditure incurred within the UK.

The total tax relief you are awarded is limited to 80% of your total core expenditure. So if you spend £1,000 on your film you will have a payable tax relief up to £800. The cherry on top is that there is no cap on your budget and the amount of tax relief you can claim.

Additional deductions can also be claimed if you would like to reduce profits or increase your losses for a tax year in the interests of reducing Corporation Tax payable. Your losses can be carried back up to three years (if the trading period in question is between 1 April 2020 and 31 March 2022), but only for losses no larger than £2m. If a loss is made, part or all of your loss can be claimed for at the 25% rate (Core expenditure x 80% x 25%) and the additional relief is the lower of either:

  • 80% of the total core expenditure or;
  • The actual UK core expenditure incurred.

For example, your film incurs a core expenditure of £5m. If the entire expense was incurred in the UK, your claim would be for £4m. However, if only 20% of the expenses were in the UK the claim would be for (20% x £5m = £1m x 80%) £800,000.

 

How can I claim the Film Tax Relief?

You can claim the FTR using the Company Tax Return, where you must calculate the additional deduction and your payable credit due. You also need to provide the BFI Culture Certificate, the core UK and non-UK expenditure statements as well as a categorical breakdown of your expenditure.

Keep in mind that you cannot actually claim the relief until the culture test has been passed and you receive a certificate confirming this. In the event the film is still in production at the time of the test, an interim certificate is issued, with the final certificate awarded upon project completion.

 

This post only serves to provide a brief overview of the Film Tax Relief. If you are still not completely sure about the amount you can claim for your production, we would love to speak to you and provide our advice on this area of interest. Contact us here or call our Tax Specialist Naveed at 0741 4880 884 or mail naveed.ikhlaq@wimaccountants.com

Are you missing out on potential tax reliefs?

Are you missing out on potential tax reliefs?

What is tax relief?

Tax relief enables you to deduct the amount you pay to the government during a tax year from your tax payable to HMRC. Essentially meaning there is less tax for you to pay and we also call them tax reducers.

Tax reliefs can be claimed alongside any additional personal tax allowances you may be entitled to, allowing you to reduce your overall tax liability. There is a range of tax reliefs available which you can claim, subject to eligibility. This article will explore the reliefs that can be claimed through pensions and marriage allowances.

Typically, you can make arrangements with your employer to make payment before tax is deducted from your salary, so you save on tax as there is a reduced salary to be taxed on. You can also claim tax back from HMRC, usually in the case of charitable donations where you can also opt for Gift Aid.

You can also view the tax rates and allowances for the current and recent tax years here.

 

Tax relief on Marriage Allowances for basic-rate taxpayers

Married couples and/or civil partners can take advantage of the Marriage Allowance (MA). The MA allows individuals who are married or in a civil partnership to transfer a fixed percentage of their personal allowance to their significant other, by means of an election.

The amount that can be transferred to the receiving party is 10% of the personal allowance. Note that rounded up to the nearest £10. For example, 10% of the personal allowance of £12,570 is £1,2570 which will be rounded up to £1,260.

This is of particular benefit to a couple where one party has no taxable income, or their income is not enough to use their personal allowance. For example, an individual whose income falls entirely within the starting rate band.

If the MA is claimed by election, the relinquishing party has their own personal allowance reduced by the amount they transfer to the recipient.

The recipient on the other hand does not have their personal allowance increased and will remain at £12,570 for the 2021/22 tax year. However, the recipient does instead get a reduced tax liability imposed on them (or a “tax reducer”) equalling 20% of the transferred amount. For the tax year ending 5 April 2022, this tax reducer is computed at £1,260 x 20% = £252.

There are qualifying factors to determine whether the marriage/ civil partners can claim the MA, as follows:

  • The individual who is relinquishing their personal allowance and the individual receiving must be married or in a registered civil partnership for all or part of the tax year when the election is being made. The couple does not need to be living together.
  • The couple must not have claimed the Married Couples Allowance (an important distinction, find out more information on the MCA here. If the individuals qualify for MCA it is advised that they claim the MCA rather than the MA.
  • The individuals must have been married or in a civil partnership during the tax year in which they are making the election for and at the time the election is made. Claims can also be made after the death of one individual by the surviving party, provided that marriage/partnership was active at the time of death.
  • Importantly, neither individual is taxed above the basic rate bands. If any individual is taxed at higher or additional rates, they are not eligible.
  • The election must happen no more than four years after the end of the tax year which corresponds to the claim. The election does apply to all subsequent years until conditions are no longer valid or withdrawn. You can go back up to 3 years to use the MA and save up to £1,000.

 

Consider the case of Samantha and Ali, who are a married couple. Samantha has an income of £35,000 per year through employment, and Ali has an income of £9,500 per year.

Ali decides to make a MA election. His personal allowance for the 2021/22 tax year is:

£
Personal allowance
12,570
Less: MA transferred to spouse (max.)
(1,260)
Remaining personal allowance for Samantha
11,310

 

As we can see, Ali’s personal allowance after transferring MA exceeds his income by £1,810 which is wasted as personal allowances are not carried over to the next tax year.

 

On the other hand, Samantha will have the following tax liability on her income:

£
Employment income
35,000
Less: Personal allowance
(12,570)
Taxable income
22,430
Tax
Tax reducer: (£22,430 x 20%)
4,486
Less: MA (1,260 x 20%)
252
Tax liability
4,234

 

Tax relief on Pensions

Tax reliefs on pension contributions are available for up to 100% of the annual earnings. This means if you earn £30,000 annually, you can get a relief of £30,000 paid to your pensions in the same tax year.

This is however capped at £40,000, which is the designated annual allowance for pension savings. You may like to avoid exceeding this limit, as any amount over this cap will be taxed as income and will be taxed at the highest rate applicable to you.

Super high earners, such as individuals earning more than £150,000 are exempt from this pension annual allowance. Instead, the maximum that an individual can contribute is reduced by £1 for every £2 earned over the limit, capped at £10,000. This applies to you if you earn at least £210,000 per year.

Keep in mind that you can also carry forward any unused allowances from the three previous tax years, given that you were part of the pension scheme in those years.

Tax relief is also provided based on the type of pension you have:

  • Employer pension scheme
    • If you are part of a pension scheme provided by your employer, in the majority of cases your contribution to the pension is deducted from your salary pre-tax.
    • You are then subject to full tax relief on contributions at your highest tax rate immediately.
  • Personal/ Stakeholder pension scheme
    • The relief claim for this scheme operates different, as your premium is paid as a net of your basic rate tax. Your pension provider instead claims the balance from HMRC.
    • Non-taxpayers can still contribute to pension and get a tax relief of 20% on the first £2,880 set aside for pension. The remaining £720 is contributed by the government giving a total of £3,600 net gross contribution.

 

Claiming tax relief

There are two main methods of claiming tax relief, as the claim is dependent on the type of pension the contributions are being saved into:

  • Relief at source

Typically applies to private or self-employed personal pensions (SIPP). If the pension is paid through the employer, the employer takes 80% of the contribution from salary, with an extra 20% being provided by HMRC.

In this system, higher and additional rate taxpayers must complete a Self-Assessment for extra relief.

  • Relief from “net pay”

In this case, the tax relief is claimed automatically and considered to be relief from “net pay”.

Contact us for more information on how you can claim tax relief as a basic-rate taxpayer.

May 2021: Updated HMRC guidance on COVID support

May 2021: Updated HMRC guidance on COVID support

Agent Update: Issue 84 provided useful insight into the latest guidance and changes HMRC have implemented over the recent months to help mitigate the financial damage caused by the pandemic to businesses. Below is a summary of the points which caught our eye and may have usefulness to agents and advisors.

CJRS

Currently, the UK Government is paying 80% of furlough employees wages for unworked hours, capped at £2,500 per month. However, by July 2021 this rate will decrease to 70% to a cap of £2,187.50. This rate will again fall to 60% in August and September 2021 to a cap of £1,875. 

Please note that with the introduction of the 70% rate, employers will have to pay the difference of at least 80% on unworked hours, capped at £2,500.

The deadline for CJRS claims for May is 14 June 2021, and can be claimed before, during or after a client’s payroll had been processed. Knowing the exact number of hours the employees work is important to avoid further processing and amendments. Clients should also ensure to pay employee tax and NIC, else they will have to repay the entirety of the CJRS grant they claimed back to HMRC.

HMRC also have a handy tool to help calculate how much you can claim from the CJRS, which can be found here.

SSP

The Statutory Sick Pay Rebate scheme is continuing to provide financial support to SMEs. Businesses (with employee numbers less than 250) who have paid SSP to employees for COVID-19 related sickness may be entitled to support. The rebate covers a maximum of 2 weeks of the appropriate SSP rate.

VAT deferral payment scheme

A new VAT deferral payment scheme is now available to all businesses that deferred VAT from 20 March 2020 to 30 June 2020, they must also have not been able to pay in full by 31 March 2021. Luckily, these payments can be made in instalments. Note that the later a business signs up to this scheme, the fewer instalments they can make:

  • Join by 19 May 2021 – 9 instalments
  • Join by 21 June 2021 – 8 instalments

Businesses must also have a VAT registration number, a Government Gateway account, submitted outstanding VAT returns in the last 4 years, be aware of what is exactly owed and correct errors on VAT returns (if any).

A 5% penalty and interest will be imposed on businesses that fail to pay or sign up by 21 June 2021, so encouraging your client to sign up is highly recommended.

WFH Tax Relief

The golden rule when claiming expenditure set by HMRC is that the expense must have been incurred “wholly, exclusively and necessarily”, and for those working from home expenses claimed are not exempt from this rule. Employees working from home can claim tax relief on additional costs, such as metered water, heating bills or business calls but the employee must prove that this expenditure satisfies the aforementioned rule. Note that costs that would remain the same had the employee worked in the office are not eligible. Relief for these claims is open until the end of the current tax year, 5 April 2022.

WIM Accountants are here to help businesses with their accounting and taxation needs.

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