Month: May 2018

DMS Posts

HMRC phishing and scam advice

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HMRC have updated their list of examples of websites, emails, letters, text messages and phone calls used by scammers and fraudsters to obtain individual’s personal information.

The guidance can be used to help you decide if a contact from HMRC is genuine, this guidance provides examples of the different methods that fraudsters use to get individuals to disclose personal information.

You can also read about how to recognise genuine contact from HMRC, and how to tell when an email is phishing/bogus.

HMRC Phishing

DMS Posts

Making Tax Digital (update)

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The government has published proposals concerning the introduction of MTD-VAT. This new information outlines how it expects the new system to operate, including details of voluntary data businesses can submit to support their VAT returns and calculations.

The government has set out some proposed changes to legislation to regulate the new VAT-MTD system and to make it mandatory for certain businesses. The deadline for responses is 10 November, with the government aiming to have new regulations in place by next April.

When will the new rules come into force?

The new regulations will come into effect on 1 April 2019. So the businesses affected (i.e those registered for VAT with turnover above the VAT registration threshold) will be required to keep certain information in digital format from that date. They will also be required to submit any VAT returns starting on or after 1 April 2019 via the MTD system.

What information will businesses be required to keep in digital form?

Businesses will be required to keep their “designatory data”, information about supplies made and received, and details of the VAT account in digital format.

The designatory data is the business name, principal place of business and VAT registration number, plus details of membership of any VAT schemes.

The information about supplies will include details of individual sales and purchases, including relevant tax dates, splits between different VAT rates or treatments (i.e. standard rate, reduced rate etc), and a breakdown of invoices and the VAT rates charged.

The VAT account provides an audit trail between the primary data and the values in the VAT submission. It will include adjustments such as corrections from previous returns, changes in consideration and relief for bad debts. Only the totals for each item are required to be kept digitally.

What information do businesses need to submit to HMRC?

Businesses are only required to submit the same (nine-box) information contained on the current VAT return. The VAT return frequency will remain the same, and those submitting monthly or annual returns can continue to do so. The deadlines for submission and payment will remain unchanged, although the government may review this if and when quarterly reporting becomes mandatory.

Can businesses submit additional information?

Businesses will be able to submit two new pieces of voluntary information – periodic updates and supplementary data to support their VAT submissions.

Periodic updates are additional VAT submissions, covering say one or two months, that can be submitted between mandatory VAT returns. The chances of businesses wanting to do this are low as the rules stand now, although these submissions will be a way of notifying HMRC of changes in designatory data such as a new address. These voluntary submissions won’t create a VAT liability or refund, and the mandatory VAT submissions will still be required in the normal way.

Businesses can also submit supplementary data, on a voluntary basis, to support the calculations behind a VAT return. The government will set out more details in the legislation, but it envisages this data being the relevant items from the VAT account (see above).

What about businesses below the VAT threshold?

Businesses with turnover below the VAT threshold can opt into MTD, and then opt back out again later. In both cases they will need to inform HMRC in writing.

What happens if turnover rises above the VAT threshold?

Under the current proposals, businesses under the threshold must monitor their income (i.e. the rolling total for the previous 12 months) and will remain outside the MTD requirements in say, March, if income was below the threshold in the twelve months to the end of February. Once a business is mandated to use MTD it cannot drop out again, even where turnover falls back below the registration threshold.

So do we need to press for any changes?

While many accountants have objections to MTD in general, there are some specific areas of the government’s proposals that raise concerns.

One is what happens when a business breaches the registration threshold part way through a VAT period? The digital record keeping requirements seem to start immediately, and the current VAT return (some of which would cover the period before MTD became mandatory) may also need to be submitted using MTD software. This could force the business to change software overnight, and possibly copy data from the old system to the new.

Another concern is a lack of clarity on what software businesses can or will be required to use. The condoc says a business caught by the new requirements must use “a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)”. Would using a spreadsheet to maintain the records, and then manually typing the nine VAT values into the HMRC portal, be considered a “set of compatible software programs” meeting this requirement?

DMS Posts

Making Tax Digital

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A HM Treasury statement from Paymaster General Mel Stride on 13th July confirmed that the requirements for digital quarterly reporting were being stripped back to cover only VAT in a revised roadmap for Making Tax Digital (MTD).

Those above the VAT threshold will have to start filing with MTD-compatible software from April 2019, but small businesses below the threshold “will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020,” the Treasury said.

Until today, the government’s public stance was that mandatory quarterly reporting under MTD would come into force from April 2018 for businesses over the VAT threshold that paid income tax. The requirement for all unincorporated businesses to join MTD at the same time was delayed by 12 months as part of the Budget announcements in March.

Introducing MTD under the original timetable was becoming increasingly improbable ever since late April when Theresa May called the general election and sent the civil service into purdah. The MTD clauses were stripped out of the Finance Bill to ensure it could be passed before Parliament dissolved, and the post-election chaos left no time to reintroduce them.

On the software side of the fence, HMRC has continued to work on the infrastructure and data exchange standards to make digital tax filing possible, but progress has been painfully slow. Reports from specialist accountants working in the sector suggest that significant numbers of freelance computer programmers have stopped working for HMRC because of the public sector IR35 rules that were introduced in April.

The MTD pilot scheme started with the new tax year, but only a few of the application programming interfaces are available for commercial software to share data with HMRC’s computers. HMRC is now indicating that these may be ready for testing by December 2017, but that would not leave a suitable gap for testing the system before the original deadline.

As the new financial secretary to the Treasury, Paymaster General Stride inherited responsibility for MTD and has “listened to concerns raised by parliamentarians, in particular the Treasury Select Committee, businesses and professional bodies about the pace of change”, the Treasury said.

As a result, “All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes,” the Treasury said. Those below the VAT threshold will be able to choose when to move to the new digital system.

Under the revised timetable:

Only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
They will only need to do so from 2019
Businesses will not be asked to keep digital records or to update HMRC quarterly, for other taxes until at least 2020
Small businesses will be able to file digitally on a voluntary basis for other taxes.
MTD timetable
The Treasury thinking – previously explained by numerous AccountingWEB members and professional representatives – is that VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly than they do now.

Making Tax Digital for VAT will go into a public beta test in the spring of 2018 and from April 2019, businesses above the VAT threshold will have to file their VAT returns with MTD-compatible software.

DMS Posts

Dividends and Interest

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Dividend income

When dividends are received by an individual the amount received is the gross amount subject to tax. The availability of the Dividend Allowance (DA), introduced from 2016/17 onwards, means that the first £5,000 of dividends are charged to tax at 0%. Dividends received above this allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £5,000 allowance.

Dividends are treated as the top slice of income and the basic rate tax band is first allocated against other income.

It was announced in Budget 2017 that the DA will be reduced to £2,000 from 6 April 2018.

Example
Mr A has non-dividend income of £41,000 and receives dividends of £9,000. The non-dividend income is taxed first. Of the £41,000 non-dividend income, £11,500 is covered by the Personal Allowance, leaving £29,500 to be taxed at the basic rate.

The basic rate band for 2017/18 is £33,500 so this leaves £4,000 of dividend income that is within the basic rate limit before the higher rate threshold is crossed. The DA covers the £4,000, leaving £1,000 of the DA to be used for the dividends in the higher rate band.

The remaining £4,000 of dividends fall in the higher rate tax band and are therefore taxed at 32.5%.
Savings income
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

The Savings Allowance (SA), available from 2016/17 onwards, taxes savings income within the SA at 0%. The amount of SA depends on the individual’s marginal rate of tax. An individual taxed at the basic rate of tax has an SA of £1,000 whereas a higher rate taxpayer is entitled to a SA of £500. Additional rate taxpayers receive no SA.

Savings income includes:

interest on bank and building society accounts
interest on accounts with credit unions or National Savings and Investments
interest distributions from authorised unit trusts, open-ended investment companies (OEICs) and investment trusts
income from government or corporate bonds
most types of purchased life annuity payments.
Is savings income received net or gross of tax?
This is much more complicated than you may think. The government has removed the requirement (from 6 April 2016) for banks and building societies to deduct tax from account interest they pay to customers.

Some types of interest have always been received without tax deduction at source and will therefore continue to be paid gross. Interest on corporate bonds listed on the London Stock Exchange is paid gross for example. However, in 2016/17 basic rate tax continues to be deducted at source from some forms of savings income such as interest distributions from unit trusts and OEICs. This requirement is removed from April 2017.

Switching investments
Given the lower amount of SA, higher and additional rate taxpayers could seek to maximise their use of the DA by moving investments out of interest bearing investments to ones which pay out dividends. This could be through direct shareholdings or through dividend distributing equity funds in unit trusts or OEICs.

In addition, assets held for capital growth could be transferred to dividend paying investments. Any gains realised by the investors on the sale of assets would be exempt up to the CGT exemption which is £11,300 for 2017/18. Further gains over this amount are only charged to tax at 20% for higher and additional rate taxpayers following the reduction in CGT rates from 6 April 2016.

Interaction between DA and SA
If the amount of dividends an individual receives is covered by the DA but those dividends would have meant that they were higher rate taxpayers without the DA, then this would affect the amount of SA they would receive.

Example
Mrs B has a salary of £42,000, interest income of £1,000 and dividends of £5,000. Although the dividends are covered by the DA, Mrs B’s total income is £48,000 so she is a higher rate taxpayer. She would therefore only receive £500 of SA against the £1,000 of interest income.
Check your coding
Where savings income exceeds the SA, there will be tax to pay on the excess. HMRC have indicated that they will normally collect this tax by changing individual’s tax codes. To allow them to do this they will use information from banks and building societies. However in some cases HMRC have been overestimating the amount of interest people are likely to earn and adjusting their coding accordingly. So it is worth checking coding notices when they come through.

 

Gift Aid donations
Take care if you make Gift Aid donations. A charity can reclaim the tax on a Gift Aid donation only if the individual has paid the amount of tax being reclaimed. Prior to April 2016 this tax would have included dividend tax credits and tax deducted at source on interest income.

Following the introduction of the SA and DA, any income within these allowances is not taxed so the tax reclaim by the charity does not relate to tax paid. Where this happens the individual is responsible for ensuring that the donation is covered and HMRC have powers to recover any shortfall from the taxpayer.

So people with lower levels of income and dividends or savings below the DA or SA amounts who make Gift Aid donations could be affected. Individuals will need to withdraw any Gift Aid declarations that they have made to ensure that they do not get hit with a tax bill.

 

Planning for spouses
The introduction of Dividend and Savings Allowances may also mean it is time to consider the allocation of investments between husband and wives or civil partners. If just one partner has investments generating dividends or savings it could be beneficial to transfer part of the investments to the other partner to ensure they receive income which utilises their DA or SA. Any transfer of assets between husbands and wives or between civil partners who are living together can be made without any capital gains tax being charged.

With savings rates generally being at about 1.5% – 2% utilising the £1,000 basic rate SA would mean having interest earning assets of between £50,000 and £66,667. For dividends, assuming an average yield of 3%, the investment level would be £166,667 to fully utilise the £5,000 DA.