March’s Tax Tips & News, our blog post designed to bring you tax tips and news to keep you one step ahead of the taxman.
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Read on for…
- Changes to IR35 rules confirmed
- Tax-free access to pension advice
- Salary v dividend
- Changes to company carry-forward of losses confirmed
- March questions and answers
- March key tax dates
Changes to IR35 rules confirmed
HMRC have recently announced changes to the way the intermediaries legislation (known as the ‘IR35 rules’) will be applied to off-payroll working in the public sector. In particular, contractors who provide their services to a public authority through an intermediary will need to be aware for the changes, which take effect from 6 April 2017.
Broadly, from 6 April 2017, responsibility for deciding whether the legislation should be applied will move from the worker’s intermediary to the public authority the worker is supplying their services to.
Where the rules apply, the fee-payer (the public authority, agency, or other third party paying the intermediary) will be responsible for calculating income tax and primary National Insurance contributions (NICs) and pay them to HMRC. These amounts will be deducted from the intermediary’s fee for the work provided. The worker’s intermediary will be able to offset an amount equivalent to the income tax and NICs deducted from payments to it from the fee-payer against its own income tax and NICs liability in the tax year.
The changes will apply to:
- public authorities who hire off-payroll contractors;
- public sector tax managers, payroll managers, human resources managers and procurement managers;
- agencies and third parties who supply contractors to the public sector; and
- contractors who provide their services to a public authority through an intermediary.
Before the changes take effect, public authorities, agencies and third parties supplying contractors will need to consider existing contracts and make the appropriate preparations. Whilst it is for the public authority to determine whether off-payroll working rules apply when engaging a worker through a personal service company, anyone who believes they may be affected should seek further advice.
Tax-free access to pension advice
The Treasury has confirmed details of the new Pension Advice Allowance, which will take effect from April 2017, and which will enable people to withdraw £500, on up to three occasions, from their pension pots tax-free to put towards the cost of pensions and retirement advice.
Following an eight-week consultation period, the Economic Secretary to the Treasury, Simon Kirby, confirmed that the £500 allowance:
- can be used a total of three times, only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing pension or just prior to retirement;
- will be available at any age, allowing people of all ages to engage with retirement planning;
- can be redeemed against the cost of regulated financial advice, including ‘robo advice’ as well as traditional face-to-face advice; and
- will be available to holders of ‘defined contribution’ pensions and hybrid pensions with a defined contribution element, not ‘defined benefit’ or final salary type schemes.
According to recent research, UK savers with a pension pot of £100,000 save an average of £98 more every month and receive an additional income of £3,654 every year of their retirement if they take financial advice.
Salary v dividend
The questions surrounding the issue of how best to extract profits from a company in a tax-efficient manner remain as popular as ever. Despite the introduction of the dividend allowance, and the personal savings allowance, extraction by as remuneration and by way of dividend remain the two most widely used methods. The tax effects of these methods may be broadly contrasted as follows:
- Provided the amount is justifiable, remuneration is generally allowed as a deduction in arriving at the taxable profits of the company. The recipient is taxed on the remuneration through the PAYE system at the date of payment including a charge to NIC.
- Dividends are not deducted in arriving at the taxable profits.
The main point to note is that the question of how best to extract profits from a company is rarely straightforward and will be different in nearly every case. Seeking advance professional advice is always highly recommended.
It must be remembered here that payment of a salary will give rise to a liability to National Insurance Contributions (NICs), whereas payment of a dividend does not.
In considering the options, a number of other factors should also be taken into account:
- A full NIC contribution record must be maintained to ensure maximum social security benefits. Therefore, a reduction in salary may have the knock-on effect for reducing future entitlement to certain earnings-related social security benefits.
- The lack of a salary charge in the accounts may increase the value for capital gains tax (CGT) and inheritance tax (IHT) purposes of holdings valued on the basis of earnings. In addition, a higher dividend payment will increase the value of a holding calculated on a dividend yield basis, although it is unlikely to affect the valuation of a major interest.
- Dividends are payable rateably to shareholders in proportion to their holdings in the company, which may not necessarily correspond to the relative efforts of the directors in earning the profits. Dividend waivers may assist in these circumstances, but care must be taken – always seek advice on such matters.
- Dividends can only be paid out of distributable profits whereas, in theory, salaries may be paid out without reference to the level of profits.
- The national minimum wage legislation should be considered, as this applies equally to directors under contracts of employment as it does to employees.
Given that dividends are treated as distributions of profits (after taking into account payments of salaries and wages), payment of a reasonable salary may be considered before thinking about a potential dividend payment. The situation will vary from company to company and there is no set rule. Seeking professional advice is recommended before any action is taken.
In deciding how profits are to be extracted, the following aspects should be considered:
- The rates applicable to dividend income are currently the 7.5% ordinary rate, which applies up to the basic rate limit, the 32.5% dividend upper rate, and the dividend additional rate of 38.1% on dividends above the higher rate limit.
- From 6 April 2016, 10% tax credit attaching to dividends was abolished and the new dividend allowance took effect. This means that the first £5,000 of dividends will be tax-free in the hands of the recipient. Whilst these changes mean that most taxpayers will thereby pay less tax, people receiving dividend income over about £140,000 a year will pay more. This forms part of the government strategy to reduce the incentive to incorporate businesses and take remuneration in the form of dividends.
- Individual needs of shareholders may differ – some may require income, others may be more interested in capital appreciation. These conflicting interests may be met by the issue of separate classes of shares with differing distribution rights.
- For the financial year 2017, the main rate of corporation tax is 19%, which means that the rate of tax payable on retained profits is potentially lower than current income tax rates.
For income tax purposes, and within family-owned companies, it is generally desirable to spread income around the family to fully utilise annual personal allowances and to take full advantage of nil and lower rate tax thresholds, wherever possible. The term ‘family’ includes all individuals who depend on a particular individual (e.g. the owner of the family company) for their financial well-being. This may include not only the spouse, civil partner and children but also aged relatives, retired domestic employees, etc. Care must be taken in this area not to fall foul of the ‘settlements’ legislation and other anti-avoidance measures in force at the time. Once again, professional advice is always recommended in advance of making any payments.
Distributions (usually dividends) from jointly owned shares in close companies are not automatically split 50/50 between husband and wife, but are taxed according to the actual proportions of ownership and entitlement to the income.
Possible methods of spreading income around the family include employing a spouse and/or children, waiving salary (to increase profits available as dividends) or dividends (to increase the amounts available to other shareholders), and transferring income-producing assets.
Some distributions of income to family members will not be beneficial for tax purposes. The following points require careful consideration:
- salaries and wages paid to spouse, civil partner, children or other dependants will be a tax deductible expense of the company only if they can be justified in relation to the duties performed;
- a salary paid to spouse, civil partner, children or other dependants will attract a liability to NIC if it is above the lower earnings limit; and
- the investment income of an infant child (i.e. an unmarried child below the age of 18) is taxed on his parents, where it arises from a gift by them.
In the longer term, there is a risk that, at some future date, the relative advantages of each extraction method might be reversed at a time when the flexibility to switch between the two methods is restricted. Currently though, using a mixture of salary, benefits and dividends, which can be varied according to individual circumstances, remains the most sensible option.
Changes to company carry-forward of losses confirmed
Initially announced at the time of the 2016 Budget and following a period of consultation, Finance Bill 2017 contains provisions to reform the tax treatment of certain types of carried-forward loss for corporation tax purposes with effect from 1 April 2017.
Losses arising from 1 April 2017, when carried forward, will have increased flexibility and can be set against the total taxable profits of a company and its group members (referred to as the ‘loss relaxation’).
For all carried-forward losses, whenever they arose, companies will be able only to use the losses against up to 50% of profits (known as the ‘loss restriction’). Each standalone company or group will be entitled to a £5 million annual allowance. Profits within the allowance will not be restricted, ensuring 99% of companies are unaffected by the restriction.
Both the loss restriction and loss relaxation will apply to:
- trading losses;
- non-trading deficits on loan relationships;
- management expenses;
- UK property losses; and
- non-trading losses on intangible fixed assets.
Whilst pre-April 2017 trading losses will not be relaxed, companies will have the flexibility to choose whether or not to use pre-April 2017 trading losses before other available losses.
If a company’s trade ceases and the company has unused carried-forward losses of that trade, those losses can be set without restriction against profits arising in the final 36 months of the trade. Post-April 2017 losses will be able to be set against total profits, whilst pre-2017 losses trading losses will only be able to be set against profits of the same trade. The profits on which losses can be carried-back against will be limited to those generated from 1 April 2017.
The legislation contains loss buying rules which will mean that where a company or group of companies is acquired, any post-April 2017 carried-forward losses that arose before the company or group’s acquisition will not be available to the purchaser’s group for five years.
The legislation also contains a targeted anti-avoidance rule which will prevent any arrangements being entered into with a main purpose of obtaining a benefit from the loss reform rules.
March questions and answers
Q. Will I have to pay stamp duty land tax on a property I am about to inherit?
Q. I run a small business but I am registered for VAT. What are the advantages and disadvantages of using the annual accounting scheme?
Q. I live in a leasehold flat in a property in which there are six other leasehold flats. The opportunity has arisen for the leaseholders to buy the freehold reversion from the landlord and all of the leaseholders have agreed to contribute equally towards the purchase. Our solicitor has advised a limited company should be set up to buy the freehold. Are there any tax consequences involved here?
March key tax dates
8 – Spring Budget 2017
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/3/2017