RTI and Directors Loan Accounts

The new RTI regime (Real Time Information) is just around the corner now and payroll is about to change for ever. Accountants and payroll agencies are getting to grips with the new reporting requirements and trying to iron out all the quirks and anomalies that are bound to surface once the new system is in regular use.

One of these is undoubtedly how to operate RTI for people who run their own companies. Such people normally take a notional salary of around £7,500 per annum to avoid tax and NI and only pay themselves quarterly or annually. How will this new regime affect them?

Well they still need to report their salary under RTI even though no PAYE is due. They also need to report their working hours (as this is to pave the way for Universal Credit when it comes in). Importantly, they will need to use payroll software from now on if they are not already doing so, even if they are the only person on the payroll.

Fortunately there will be an option to make RTI submissions on a quarterly or annual basis, so hopefully it will be a fairly pain free process. Most payroll software handles RTI automatically so it should entail no more than the click of a button.

The real problem is with overdrawn loan accounts. If you take money out of your company’s bank account in advance of the next dividend or expense claim, or even just as an ordinary loan, how do you prove it was for this and not salary?

HMRC may well try to say that it was salary and impose penalties for not making a Full Payment Submission on or before the date the money was actually taken. The trouble is that a director is deemed to have been paid salary on the earliest of 4 dates:

a) when he/she becomes entitled to the money;
b) when the salary is recorded in the accounts;
c) when he/she is actually paid the money; or
d) when the money is made available by the company

Normally you would use d) as this is when the salary is credited to the director’s loan account, but what if your loan account is in the red? You cannot then claim that you were only taking money that the company already owed you. In that case, c) would become the earliest date.

True, you could say that it was a loan (or a further loan) but would that wash if there was no paperwork? It would be your word against theirs. If you lose the argument, you could face penalties for not complying with RTI.

Not only that, but under the Companies Act 2006 a company needs the approval of its members before it can lend more than £10,000 to a director, even if that director happens to be the sole shareholder. Has the necessary resolution been passed? Has the correct procedure been followed to pass the resolution? Do the Articles even allow it?

Directors who take large sums out of their company willy nilly would be well advised to get the paperwork in order from April onwards if they wish to avoid repercussions under the new RTI regime.

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Silly season for tax codes

It’s that time of year when HMRC dish out new tax codes and it seems that half the time they get them wrong. One of their most common errors is to deduct investment income or property rentals from your code when you are already making payments on account twice a year.

Left uncorrected, you will end up paying tax on this income twice, first with your payments and secondly via the PAYE system. You will then have to request a tax rebate for the overpayment, which may take a while to turn up if it is delayed for “security checks”.

You can stop them doing this by ticking a box on your tax return, but if you leave this right to the last minute, it may not be early enough to stop your tax code getting messed up. Then you will have to write to them or spend ages trying to get through on the phone.

Another common error they make is to deduct expenses reported on your P11D, even though they are not taxable. Most employers have a dispensation from HMRC allowing them to ignore expense claims when they prepare your P11D. However, a lot of small firms never bother to request these, meaning that expense claims must be reported too, even if they are just routine travelling expenses.

Now fair play here, HMRC do not adjust your tax code for any expenses reported as travel & subsistence, business entertaining or professional subscriptions. However, a lot of genuine business expenses do not fall under these headings. These get picked up under the Other Expenses heading on your P11D and treated as taxable unless you officially claim them as employment expenses on your tax return.

It tends to be people running their own companies from home who fall foul of these incorrect tax code adjustments, and as an accountant, I can tell you it is very annoying. Perhaps one day HMRC will see sense and stop automatically treating these items as taxable.

Better still, perhaps they will stop insisting on expenses being reported on P11Ds full stop.

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When the boot is on the other foot

Politicians are always moaning about all those nasty tax avoiders and how we should all pay “the right amount of tax” regardless of what the law says. Well here’s a case where the boot was on the other foot and the taxman could easily have ended up getting more than “the right amount of tax”.

It was the case of Julian Martin v HMRC which was heard at the First Tier Tribunal in December 2012 (so very recently). Basically, it was about a “golden handcuffs” bonus that was subsequently clawed back.

Mr Martin was paid £250,000 by JLT Risk Solutions Ltd for committing himself to them for 5 years. Mr Martin paid tax and NI on this lump sum amounting to £102,500.

For whatever reason, Mr Martin left within 2 years and had to pay 65% of the money back. This is where the taxman often gets lucky, as there is no legal obligation on HMRC to refund tax on income derived from a bonus that is clawed back in a later tax year.

The case was notable in that HMRC were almost apologetic to Mr Martin in opposing his appeal (if you can imagine such a thing) and apparently went to great lengths to explain that they were merely upholding the law.

Fortunately, there was a happy outcome Mr Martin as the Tribunal agreed that the claw-back was deductible against his other income that year as “negative earnings”, thus making his taxable income zero. So at the end of the day, he did get most of his excess tax back.

However, that was only due to the fact that he happened to have earned enough money that year to “soak up” the claw-back. Had he been out of work and not earned anything, he would have been totally shafted and paid more tax on the bonus than he actually received.

To me, the moral of this story is that politicians and tax officials should not bang on about tax avoidance and moralise about people gaming the system when they are more than happy to play hardball with the rules when it suits them.

By all means close down the abusive schemes if they drive a coach and horses through what Parliament intended, but please, spare us all the preaching and moralising. It might make us think that they are total hypocrites!

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The new tax on Child Benefit – What you can do about it

As most parents now know only too well, the new tax on Child Benefit kicked in on 7 January for all families where someone has income of more than £50,000 a year. We are told you can either pay the new tax or opt out of Child Benefit altogether.

But there are other options – namely to arrange your financial affairs so that neither of you have income exceeding £50,000. For ordinary employees, you can always make pension contributions to keep you below the £50,000 threshold.

Not only do you get the 25% Government top-up and save higher rate tax, you will now get to keep your Child Benefit too (or at least some of it).

If you pay enough into your pension already, you might like to consider salary sacrifice. This is an arrangement with your employer whereby you give up salary in exchange for a contribution by the employer to your pension scheme.

If it saves you paying into your pension yourself, you could well end up with even more disposable income than you have now. However, this depends on how generous your employer is with their own National Insurance savings.

One of the more perverse features of the new tax is that it does not relate to family income. Consequently, a single parent on £60,000 loses all their Child Benefit whereas a couple on £50,000 each lose none of it. It makes good sense to arrange matters so that neither partner gets more than £50,000 a year.

For the self-employed, this can be done by splitting income with your spouse or partner in a more equitable way. The ease with which you can do this depends on the legal form of your business.

For couples in a partnership business it is easy because all they have to do is vary their share of the profits. The taxman cannot attack this, no matter how little work one partner does. So long as you can truthfully state it was so agreed, even verbally, it is up to you how you split the profits.

For limited companies, the owner could gift some shares to his/her spouse and split the dividends. Again, the taxman cannot attack this so long as the shares are an outright gift and bestow voting rights as well as dividends.

For sole traders it is more difficult as spouse wages must always be proportionate to the work done. You cannot pay your spouse more than anyone else would for the same work, at least not for tax purposes.

However, there is nothing to stop a sole trader from working through a limited company instead and gifting shares. In fact, trading via a company would be tax-efficient for many other reasons too.

The other thing you can do is retain profits in your company so your income does not exceed the £50,000. This may mean restricting how much money you take out of the company, although former sole traders and partnerships could alleviate this by drawing down on the money owed to them by their company for the sale of their business.

Finally, there is another somewhat drastic solution, and that is to live apart (most of the time) and keep your financial affairs totally separate. Not perhaps what our family friendly Government envisaged when they dreamed up this new tax. However, it may appeal to live-in boyfriends who don’t fancy paying tax at eye-wateringly high rates on the mother’s Child Benefit, especially if they don’t expect the relationship to last much longer anyway.

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Tax Avoidance – Shades of Grey

Amidst the current furore over tax avoidance by both corporate giants and wealthy individuals, little has been said about the actual nature of tax avoidance. The difference between avoidance and evasion was well understood once. Avoidance was legal, evasion was illegal, and that was about all there was to it. As former Chancellor Denis Healey once put it, the difference between avoidance and evasion was the thickness of a prison wall.

Now, according to some politicians, we have good tax avoidance (e.g. pensions and ISAs) and unacceptable tax avoidance such as the aggressive and highly artificial schemes that some well known celebrities have been involved with, which may not even turn out be legal in some cases.

However, in between these 2 extremes lies a whole range of avoidance mechanisms, ranging from sensible tax planning that anyone can do to certain practices that are frowned on by the authorities but grudgingly accepted as part of the tax landscape.

The trouble is that by branding tax avoidance as “morally repugnant” but being less than forthcoming about what exactly they are referring to, politicians and the media have tarred all tax planning with the same brush. It is hard to know these days what (in their eyes) is morally acceptable and what isn’t.

Sensible tax planning would include things like using up your annual allowances for inheritance tax and capital gains tax. For example, why sell all your shares at the same time when by waiting a few weeks you could save yourself a big tax bill?

Most reputable tax planning is, like this, based around the optimal timing of transactions and using up all your allowances.

Next step up the ladder would be things like putting investments in your wife’s name to save higher rate tax, or nominating a second home as your principal private residence.

These are not unintended loopholes exploited by the unscrupulous but hard and fast rules laid down by Parliament for that very purpose. There is nothing dodgy about them.

Then you get to things like paying your wife perhaps a tad more than anyone else would and claiming it against tax, or by gifting her shares and splitting the dividends. The last Labour Government was annoyed enough by that one to propose new legislation on family businesses, but it proved unworkable and had to be dropped.

The point is, you cannot think of tax avoidance as a single nefarious activity. True, you have the disreputable schemes which deserve to be stamped out, but there are a huge number of other tax planning techniques that are open to everyone and, for the most part, are generally accepted to some degree or other.

In short, tax avoidance is not black and white – it comes in many shades of grey.

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Personal Service Companies – Time for some Truth

Another subject that dominated the front pages for a while was personal service companies, as used by senior civil servants and BBC celebrities to save tax on their earnings. This caused quite a stir when it was exposed by the media and led to new rules being introduced for those working “off-payroll” in the public sector.

Again, this has led to all personal service companies being tarred with the same brush, thanks to a lack of understanding. The truth is that many temporary staff have no choice but to work through their own companies. The Government Departments or Local Authorities they work for don’t want them on the payroll for obvious reasons but will not hire them on a self-employed basis either. The top bosses and TV stars may well insist on being paid that way but the ordinary worker often has no say in the matter.

In fact, many of these one man bands are genuine businesses in their own right, or are at least have ambitions to be. Also, we should not forget that if you work through your own company you have absolutely no employment rights with the client. For example, there is no pension scheme, no sick pay, no holiday pay, no redundancy pay and no rights against unfair dismissal.

A lot of rubbish was written in the media about the huge tax savings to be made by working through your own company. The main point they all missed (or chose not to mention) is that if you withdraw funds from your company as dividends, you have to pay another 25% tax on them if you are a higher rate taxpayer, and that’s on top of the 20% corporation tax paid by your company. Somehow, that small fact got overlooked in all the hullabaloo about tax savings.

And nothing was said at all about IR35. This is a tax rule that was introduced nearly 13 years ago in April 2000 precisely to stop people using their own companies to avoid being taxed as employees. Ever since then, the Revenue has been hounding ordinary contractors with the IR35 rules, but appears to have done nothing to stop the same thing happening in the Civil Service and the BBC. Makes you wonder why, doesn’t it?

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