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Autumn Statement 2016

Whitefield Technical Issues Briefing

November 2016

Here is our latest Technical Issues Briefing.

Since our last briefing in March, certain hot topics, such as the new changes to FRS and Making Tax Digital, have gathered pace, and more information is becoming available. We will of course keep you informed of further developments as and when they become available.

The really hot news of course is Brexit, and everyone is waiting to see how this will impact on the economy, and UK life in general.

If there are any queries on the contents of this briefing, please direct them to Susan or Julie in the first instance.

29 November 2016

Contents

Autumn Statement Highlights

  • Important changes to the Flat Rate Scheme were announced. From 1st April 2017 a new 16.5% rate will be introduced for businesses with limited costs, such as many labour only businesses. The purpose of this is said to be anti-avoidance and to “level the playing field”.It means that many businesses (e.g. contractors) currently using rates up to 14.5% will be required to move to 16.5% with a corresponding increase in the VAT due. The use of the Flat Rate Scheme by contractors is now being described as “aggressive abuse” by HMRC. Contractors should check their records to see if FRS will still be viable
  • Other VAT changes are afoot, but unlikely to impact on Whitefield clients
  • Personal allowance increases to £11,500 from April 2017
  • Higher rate tax threshold increases to £45,000 from April 2017
  • Certain salary sacrifice schemes to be removed from April 2017, however ultra low emission vehicles, pensions, childcare and cycle to work schemes unaffected
  • Increase of 30p to the National Living wage

VAT Flat Rate Scheme Changes

We reported in March 2016 that HMRC were being aggressive in challenging sector rate choices in the Flat Rate Scheme.

The latest salvo were some unexpected and arguably unnecessarily complex changes to apply from April 2017 for so called “Limited Cost Traders” – this will effect most of our PSC clients using the VAT Flat Rate scheme.

Heres whats proposed:

From 1 April 2017, FRS traders who meet the following definitions will be considered “limited cost traders” and will be obliged to use a new 16.5% rate. A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

Businesses using the FRS will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage.

16.5% gives only 20p in each £100 for VAT input tax, so anyone hit by this rate – probably most of our PSC clients – would be advised to revert to normal VAT from next April to get credit for VAT input tax on overheads.

Making Tax Digital

HMRC’s consultation on digitising the tax system (MTD) ended this month, and their detailed proposals for the new system, which will do away with Self Assessment returns and require everything to be filed via a digital account, will be published January 2017.

What we know so far:

  • The proposals for MTD will include in year updates of business profits, including a quarterly report.
  • HMRC proposes to roll MTD out between 2018 and 2020. All businesses (Self employed/Partnerships/Limited companies) and landlords will be required to comply with MTD
  • We do know that HMRC have said there will not be four tax returns per year, and people in employment will be exempted on up to £10k of other income (presumably dividend, rents or self employment)
  • Businesses will be required to invest in, and use, cloud based accounting software, which must be compatible with HMRC systems. HMRC will be consulting with major software providers towards achieving this.

A major concern is the cost of this.  HMRC and the Government won’t pay for your software, and software developers won’t work for free.  Already the days of buying an accounts programme like QuickBooks or Sage outright are gone and you are all but forced into costly rolling direct debit contracts, with inertia and resistance to change keeping you there.  It looks like a significant cost and time burden for business.

Of course HMRC will say it will save businesses cost and time – standard spiel.   But looking behind the scenes for HMRC the proposals are all about cost saving, efficiency and access to better and quicker data from taxpayers equating to increased yield; if HMRC are looking to save costs it can only be by moving tasks, responsibility and hence costs out to others, which has been the creeping agenda for many years. So for now the message is: watch this space.

Meanwhile, as a practice we are looking at how we need to migrate clients away from spreadsheets or manual bookkeeping and onto a cloud based system in due course; it is almost inevitable this will be a requirement across the board, and as soon as we know exactly what will be required, how frequently, and the timing of the changes, we will be looking at just how this can best be managed between ourselves and clients .

Our Making Tax Digital Zone is here

https://www.whitefieldtax.co.uk/making-tax-digital/

Dividend Tax

A reminder that this applies from April 2016, and increases the personal tax charge on dividends by a headline rate of 7.5% – in reality as grossing up is being removed the real increase in marginal rates is less, and the increase in average rates is mitigated by the £5,000 Dividend Allowance.  Also small comfort to some people, any unused Personal Allowance can now go against dividends as well.

After removal of grossing up the headline 7.5% comes out as 6% for 16/17 and will fall in future years as the Corporation Tax rate falls.

For a general explanation of dividend tax:

https://www.whitefieldtax.co.uk/tax-on-savings/

For illustrations on how tax is calculated and tax home rates:

https://www.whitefieldtax.co.uk/psc-guide/example-of-tax-liability-for-a-contractorpsc/

https://www.whitefieldtax.co.uk/psc-guide/tax-rates-and-take-home-percentages-at-differing-income-levels/

For a calculator to play with:

https://www.whitefieldtax.co.uk/psc-guide/tax-tax-calculator/

PSC travel expenses

Again, a reminder of two changes for 2016/17:

First, for Personal Service Company users who are caught by IR35, Travel from home to workplace is no longer deductible.  Site to site and ad hoc journeys, eg courses, are still deductible.

There is no change for PSC users operating outside of IR35.

Secondly, even with overarching contracts and other exotic structures, there is no home to workplace travel allowed for people using Umbrella companies or Managed Service Companies

Other travel issues

In the March 2016 budget was an announcement that the Government is dropping taking forward a wider review of travel and subsistence rules for businesses and employees; apparently they are “complex but well understood” – nothing further on this at present.

However the ramification of recent HMRC tribunal wins on travelling for the self employed are settling down, and its clear the regime is more restrictive than it was where there are regular journeys in the course of a self employment.

There have been 3 key cases on this and each have resulted in a victory for HMRC .  There is a good summary of these cases at:

https://www.taxation.co.uk/Articles/2015/12/08/334086/unfortunate-hat-trick

The rules are wider than just doctors; eg for our Yoga teacher colleagues it affects regular journeys to studios, but not peripatetic cover or private work.

IR35

It was announced in the Autumn Statement that the proposed changes to IR35 in the public sector are going ahead from April 2017

Briefly this requires the Public Sector Engager to run IR35 status tests, and if these fail deduct Tax and NI from the payment to the PSC as if the underlying worker was employed – in essence for the Public Sector IR35 compliance shifts from the PSC/Worker to the Engager.

Given the risk of penalty for getting this wrong, and the political climate, its expected that Engagers will be erring on the side of caution and bringing most contractors inside IR35 – how this effects the supply and quality of contractors for Public Sector work remains to be seen, and with the very large change agenda in Government with Brexit and MTD, it may yet prove to be a foolhardy move.

New in the Autumn Statement as well was the announcement that on Public Sector contracts the IR35 5% allowance would no longer be available.

See more detail in our IR35 zone:

https://www.whitefieldtax.co.uk/help/ir35-resources/ir35-public-sector-contracting/

Finally, if you use a PSC please, please, please, make sure you have Professional Fee Protection cover through us or someone else.  It really is a false economy not to.

Employment Allowance

A reminder – this increased this year from £2,000 to £3,000 for 16/17 but now it is no longer available for companies where the only employee paying NI is a director.

A simple solution – but provocative – is to pay the Company Secretary (aka Spouse / Civil Partner) a little more to trigger the allowance.  HMRC have anti avoidance legislation to counter this, but it’s not known at this stage how they will approach this in practice.

For PSCs, for want of £500 a year or so, its probably not worth the risk so this is not something we have encouraged.

For other companies and employers the allowance follows the payroll process – so long as there are is at least one non director or two directors being paid over the NI threshold (technically the Employers NI threshold which is £100 or so higher than the Employees threshold).

Remember Employment Allowance only covers Employers NI not Employees NI, and once you qualify its an automatic process via the payroll.

https://www.whitefieldtax.co.uk/psc-guide/tax-employment-allowance/

Auto Enrolment

This continues to roll out.  Most single director companies have chosen exemption and for those with one director and a part time spouse on the payroll, most have gone with declining to join and we have taken care of the necessary declaration to The Pension Regulator.

The largest number of our clients have a staging date within the 2017 tax year so we will be contacting clients and assisting where necessary:

https://www.whitefieldtax.co.uk/psc-guide/workplace-pension-reform-and-auto-enrolment/

Savings

As well as the new Dividend Tax there are changes to the taxing of savings income that came into force this April, including most interest being paid gross and a “Savings Allowance”

Details are here: https://www.whitefieldtax.co.uk/tax-on-savings/

Entrepreneurs Relief on Closing a Company

A reminder that from April 2016 there is a restriction that applies if a company is closed and ER claimed and:

  • Within two years the individual is involved in the same trade or activity; and
  • The closure was tax motivated

Its difficult to call how hard HMRC will enforce this.  It may be they just have the most egregious cases in their sights, but they always had the ability to challenge them anyway.

On the other hand could this be triggered if you closed a business and took a job in the same sector?  Certainly it would affect a serial property developer using a separate company for each project.

A walk away retirement isn’t an issue; PSC users closing companies for a move to permanent work may be at risk. HMRC have given some guidance on how they expect it to apply:

https://www.whitefieldtax.co.uk/psc-guide/out-of-contract/#april2016

Class 2 NI

Class 2 NI is paid by the Self Employed.

Starting from April 2015, rather than being collected by quarterly direct debit, Class 2 is now collected via Self Assessment.

As announced in the March 2016 budget, and reaffirmed in Autumn Statement, with effect from April 2018 Class 2 will be abolished and merged into class 4.

Residential Landlords

A reminder of number of changes happening:

First, the 10% wear and tear allowance on furnished properties disappeared April 2016, to align with unfurnished property rules whereby there is a deduction for actual costs incurred.

Secondly, starting from 17/18 and tapering over four years, relief for mortgage interest is being restricted to Basic Rate tax.  This is more complex than it seems, and we gave some figures in our Budget 2016 briefing:

https://www.whitefieldtax.co.uk/budgets/spring-budget-2016

There are three further changes for Residential Landlords and second home owners:

  • For sellers – whereas everyone else has enjoyed an 8% cut in CGT in the budget, its unchanged on sale of a residential property (other than main home which is generally exempt)
  • For sellers – from April 2019 the CGT payment date on the sale of a residential property will be accelerated from Self Assessment timescales (ten months after end of tax year) to 30 days after the sale transaction. Main home tax free still.
  • For buyers – 3% surcharge on purchases of residential properties other than own home from April 2016

Persons with Significant Control & changes to Companies House reporting

The Persons with Significant Control (PSC) regime came in earlier this year.  It requires companies to ascerta who controls their shares and keep a register.   Of course in many/most cases its the shareholder(s) but if there is a nominee or trustee type issue then the person with ultimate control needs to be registered.  The register can be kept privately by the company, and subject to inspection, or most companies are expected to let Companies House hold it for them.

Of most interest is that this has meant a change to the Annual filing procedure at Companies House from 1 July 2016 onwards, with the familiar Annual Return being replaced by a Confirmation Statement, similar in presentation, but enhanced so as to include a declaration of the PSC(s).

Unlike the old style annual return, which only had to be filed annually, the confirmation statement must be filed once a year as a minimum, but additionally must be refiled every time there is a change to the PSC(s). There is still only one annual filing fee, but you can/must file as many times as is necessary to keep the PSC register details up to date.

We have detailed guidance on this at:

https://www.whitefieldtax.co.uk/psc-guide/companies-house-web-filing-and-annual-returns/

Financial Reporting Standard 102 and 105

For accounting periods commencing on or after 1 January 2016 the Financial Reporting Standard for Smaller Entities (FRSSE) has been withdrawn and been replaced by a new standard, Financial Reporting 102 (FRS102). FRS 102 is, from 1 January 2016, the reporting standard for UK entities, with some reporting exemptions for Small Entities, under Schedule 1a – “Small Entities” in this context small means turnover less than £10.2m

Micro Entities, with turnover of less than £632k, may report under the simplified FRS 105 regime.

FRS 105 will be appropriate for all but a handful of our clients, and following a recent change, is also available for LLP’s who originally were obliged to adopt FRS102. Our accounting software should cope automatically with the new standard.  You may find that your annual accounts get a bit shorter and simpler, with less notes.  There are some changes to what gets filed at Companies House as well, in essence Abbreviated Accounts are no more, but a simplified version of the full accounts are filed instead.