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We are reading in the press that HMRC is under attack for issuing incorrect tax codes. Obviously they insist that nothing is wrong but some investigations in to this area seem to suggest otherwise………………..

There have been many reports of HMRC sending out incorrect coding notices and despite this they seem happy that there is nothing wrong with the system used to calculate the codes.

There is some merit there but with so much of the information at their disposal being out of date it really does pay to keep a close eye on what your code is and what it encompasses.

Possible system glitch

HMRC currently adjust your code to collect tax which is not covered within the PAYE system, Investment Income for example.

If you receive £8,000 in bank interest each year this will usually have been subject to tax at basic rate before it reaches your account, i.e. £10,000 interest less 20% tax of £2,000 taken by the bank leaving £8,000 to you.

But, if you are liable to pay higher rate tax at 40% then HMRC usually collect their extra 20% by adjusting your tax code and collecting it through your salary.

As the tax rate is rising to 50% for some people in April you would expect HMRC to increase the adjustment to account for this.

However, they have admitted that their current system cannot cope with the new rate so they are only collecting up to the 40% through PAYE codes. The rest will be demanded through Self Assessment (SA) in a lump sum. This could add half as much to your tax bill which you would not be expecting!!!

Good news??

Although you may end up paying a higher SA tax bill, the tax ends up being paid later than if it were collected as a result of the coding adjustment.

I.e. For 2010/11 a coding adjustment would collect tax in your salary from April 2010, whereas under SA system the same tax will not be payable until 31 January 2012. Therefore, if you can afford to pay a lump sum then you can defer your tax for up to 18 months!

Final hint

You can instruct HMRC to remove all your adjustments from your code so that you have a normal pay. This will mean your SA payments go higher but you will have longer to pay the tax. Overall you will pay the same amount of tax, but you will merely be deferring it as long as possible.

Should you wish to discuss this, or anything else surrounding tax codes, in more detail then please contact us at Accountancy Services Direct.

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To sell or not to sell

If you own shares that have increased in value then you could have a CGT liability to pay when you come to sell them. This may be why you are hanging on to them, or, you may be thinking that they will continue to grow in value so you want to benefit from the continued rise in the future.

Let us look at an example dealing with someone holding on to shares for future share price increases.

The taxman allows you to make some tax exempt capital gains each year and for 2009/10 this is £10,100. So, for example, if you own shares worth £20,000 that cost you £11,000, you may think that you do not need to worry about CGT. It is only a £9,000 gain and within the exemption. BUT!! In five years’ time, the gain could have ballooned to a value far in excess of your exemption. This could leave you lumbered with an unexpected tax bill.

Example part 1

Enzo bought shares in IML Ltd costing £11,000 in 1997. In March 2010 IML Ltd is taken over and Enzo receives £25,000 for his shares. He has already used his annual CGT exemption against other gains and so the whole of the £14,000 gain on the IML Ltd shares is taxable at 18%. Thus giving a tax liability of £2,520.

But it could have been avoided entirely.

Uplifting the cost

In years where Enzo had not utilised some or all of his CGT exemption he could have sold IML Ltd shares and bought them back shortly afterwards. This would have uplifted the cost of the shares and so ultimately reduced his tax bill.

Example part 2

In 2008/09 Enzo sold all of his shares for £20,000 (cost was £11,000) making a gain of £9,000. He had no other gains in that year so his CGT exemption covered the gain and there was no tax. A month later he bought back the shares for £20,200. When the takeover happens in 2009/10 his gain will only be £4,800 an d the tax on this is just £864, saving him £1,656.

Potential issues to consider

When doing this you need to consider the following:

• Brokers fees – for selling shares these start from around £15 per transaction.
• Stamp Duty – there is also SD on repurchasing the shares at 0.5% of the cost.

These expenses will eat slightly in to your tax saving but not greatly.

There could be another problem though!

No uplift available

If you sell shares and repurchase them within 30 days the Taxman ignores the original cost. Instead, the gain or loss is treated as the difference between the sale and subsequent repurchase price. That means the original cost uplifting scheme will not work. But if you wait 31 days or more to buy them back, then the price could have leapt. What are your options?

Hint 1 – Married

On the day that you sell your shares your spouse can purchase an identical shareholding to the one you are disposing of. After 31 days he/she can transfer them to you and you will be treated as buying them at the same price as your spouse. The 30 day trap will then not apply and you will have boosted the cost of your shares without ever being out of the market.

Hint 2 – Not married

Sell the shares and buy others in the same industry sector, as these are likely to perform similarly. You can then sell these and buy back the original type of shares after 31 days.

If you have share or other investments and would like to speak to someone about potential tax savings then please call us at Accountancy Services Direct.

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If you were late with your 2008/09 self-assessment tax return, you will soon be receiving a notice from HMRC charging you a £100 penalty.

But, if you had paid all the tax you owed for 2008/09 by 31 January, or you didn’t owe any tax in the first place, the penalty can be reduced to nil. HMRC should do this automatically, but our experience shows they don’t.

Hint

If you receive a late filing penalty notice but had paid all tax by 31 January 2010, write to HMRC and point this out. They MUST reduce the penalty to nil, even if you were late with your tax return.

Haven’t paid

Whether or not you have submitted your 2008/09 tax return, if you still owe tax for that year and don’t pay it before 1 March, HMRC will hit you with a surcharge equal to 5% of the tax due. Even if he doesn’t know how much tax you owe, it wont stop them issuing a legally enforceable estimated demand.

Hint

If you’re late with your tax return and don’t know how much you owe for 2008/09, it’s still not too late to avoid a surcharge. Pay your best estimate of the amount due. Whatever you pay will go towards reducing the amount you owe and will also reduce the surcharge levied against you.

If you are late with your 2008/09 tax returns and need help in bringing your affairs up to date then please contact us at Accountancy Services Direct.

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Solution

To avoid being caught by the new higher rates of income tax for 2010/11 the solution is simple, reduce your income for that year.
But who would want to reduce their income???

Having it all

The idea of cutting income is rather drastic and only worthwhile if you can recoup it later on when, hopefully, the tax rates will drop again. But, that could leave you waiting a long time.

An alternative is to shift your income to either:
The current tax year where the top tax rate is 40% and not 50-60%; or
To someone whose top tax rate will be 40% (or less) even after the April 6 2010 increases.

Benefits

From 6 April 2010 those with taxable income of more than £150,000 are liable to pay tax at 50% on income above that level. While those with income of between £100,000 and £113,000 are worse off, they will pay up to 60%.
Shifting, say, £5,000 of income from 2010/11 to 2009/10 can save you up to £1,000 (£5,000 x (60% – 40%)). But how?

Keep it simple

As mentioned earlier there have been some complex schemes put forward, but why make things complicated if you don’t have to?

Closing a bank or other interest producing account before 5 April 2010 can shift interest that would have been paid in 2010/11 in to the current tax year. This works best with accounts which pay interest only once or twice a year, or ones with lots of money in them.

Example

On 1 May 2009 Dave invested £75,000 in a fixed 4.8% twelve month account. This is due to pay him out £3,600 on 30 April 2010, ie in the 2010/11 tax year. He closes the account on 31 March 2010 and the bank pays him interest of £3,300 on that date. By advancing himself the interest in to 20009/10 he has saved himself up to £660 of tax (£3,300 x (60%-40%)).
One downside to this could be if banks etc charge any penalties for early closures of these types of accounts. You would need to compare the costs against what you would save in tax.

Give it away?

For investment assets other than deposit accounts the way to simply dodge the new higher rates may be even more simple. The new higher rates have breathed new life in to the idea of asset shifting.

Example

Billy is a company director with earnings of £95,000 per year after personal tax allowance. HE also receives income from stocks and shares etc totalling £15,000. Ava, his wife, is also a director and has a total income of £50,000 per year. It has never been worth shifting income between them before as they both paid tax at the higher rate of 40%. But now, if Billy transfers sufficient investments to Ava, so that his taxable income falls below £100,000, then they will save £2,000 of tax per year (£10,000 x (60% – 40%)).

Note – the spouse making the gift is deemed to sell the asset to the other spouse at a value that does not produce a capital gain or loss, ie will not trigger any Capital Gains Tax.

So, to surmise, if your taxable income will be more than £100,000 for 2010/11 but your spouses will be below that then transferring income producing investments will cut your joint tax bill.

We at Accountancy Services Direct can analyse your income and investment portfolio and determine what your tax liability will be for 2009/10 and 2010/11 to see if there are any potential savings which can be made. Contact us for more details.

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If you supply goods or services to overseas businesses, other EU countries or you reclaim VAT incurred in another EU country then you need to know about the changes to Cross-border trading VAT rules which take effect from 1 January 2010.

The main issues are as follows:

Place of supply rules for cross-border services to business customers will now be in the country of the customer. When these supplies are made within the EU then the customer will account for VT under the reverse charge mechanism;

The time at which the customer accounts for VAT under the reverse charge mechanism is also changing;

New requirements to file an EC Sales List (ECSL) for supplies of services that are taxable in the customers country. These must be filed every calendar quarter, within 14 days for paper returns and 21 days for online filing;

The same new deadline for ECSL’s will apply to goods supply also. Monthly ECSL’s need to be filed if the value of goods exceed £70,000 (excluding VAT) in the current or any of the previous 4 quarters;

New online service is to be introduced for reclaiming VAT incurred in other EU states to replace the current paper based claims system. You first need to register and enrol for online VAT services at http://online.hmrc.gov.uk/registration. At Accountancy Services Direct we recommend you doing this before 1 January 2010 so you can be ready for when the changes to take effect.

Should you need any further help or guidance with any of the VAT issues we have dealt with then please do not hesitate to contact us at Accountancy Services Direct.
 

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VAT is having an update and we are going to look at a few key areas.

This part will deal with the rate changes.

The VAT rate is reverting back to 17.5% from 1 January 2010.

There are some anti-avoidance rules to be aware of, www.hmrc.gov.uk/VAT/forms-rates/rates/anti-forcestall-guidance.pdf, but the general principles affecting the switch are pretty straightforward.

Tax Point (TP)

The VAT charged is calculated at the rate applicable when a TP occurs.

A basic TP is when goods or services are actually supplied. So if you supply or deliver goods or services before 1 January 2010 then the 15% rate applies, afterwards it will be 17.5%.

One way you could improve cash flow is to encourage customers to pay early for post 1 January purchases. The incentive for them is the 2.5% cash flow benefit they will receive in terms of VAT.
For this to work you need to have invoiced them or they need to have paid pre 31 December 2009, even if the supply is made later.

What about Overlapping?

If you make supplies which start in December but end in January or later, eg a builder carrying out a job which straddles the turn of the year, then all the goods and services provided pre 31 December 2009 can be charged at 15%, thereafter 17.5%.

If you need to do this then you must show each element separately on your invoice.

Continuous Servicing

If you are providing a continuous service, eg bookkeeping, where you bill 31 January for services in November, December and January then, again, you need to split your VAT charge at 15% or 17.5% according to the periods covered on your invoices.

To discuss this or any other VAT issue then please contact us at Accountancy Services Direct.

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Check out the story here http://news.bbc.co.uk/1/hi/business/8337699.stm from the accountancy services news section of the BBC website.

And of course if you are interested in social media, please check out our social media pages:

Accountancy Services Direct Facebook Page – http://www.facebook.com/pages/Window-Cleaning-Window-Cleaner/201651766048?created#/pages/Accountancy-Services-Payroll-Services-Clear-Guidance-For-Your-Business/158112443098?ref=nf

Accountancy Services Direct Twitter – http://twitter.com/accountinguk

Accountancy Services Direct Youtube Channel – http://www.youtube.com/user/AccountancyServices

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It is also charged on goods and some services (even accountancy services!) which are imported from countries outside of the European Union (EU) and brought in to the UK from other EU countries.

VAT is charged when a VAT registered business sells their goods or services to another business or non-business individual.

When VAT registered businesses purchase goods or services then they are generally able to reclaim the VAT they have paid from HM Revenue and Customs.

VAT registered businesses must add VAT to their sales figure if:

• Their turnover in the previous 12 months has gone over a specified limit (currently £68,000);
• They think their turnover will soon exceed this limit;
• They have voluntarily registered for the scheme which any business can do if they think it is going to be a benefit to them.

There are three rates of VAT depending on the type of goods or services which the business provides, they are:

• Standard – 15% (to become 17.5% from 1 January 2010): This rate is charged on most goods and services unless specifically defined as reduced or zero;
• Reduced – 5%: Examples are domestic fuel and power, the installing of energy saving materials, sanitary hygiene products and children’s car seats among others;
• Zero – 0%: Examples are food (not restaurant meals or hot take aways), books and newspapers, children’s clothes/shoes and public transport among others.

Some goods or services can also be defined as:

• Exempt from VAT – These can be insurance, credit provision and members subs for example;
• Outside of UK VAT system – For example non-business activities (selling some of a personal collection), fees which are fixed by law (statutory fees) like MOT’s or the congestion charge.

There are many more issues surrounding VAT including how to administer it, how to complete and submit your VAT form, how to register and what scheme you should be registering for (Cash Accounting, Annual Accounting or Flat Rate Scheme).

These points will be discussed in detail in later help sheets that we at Accountancy Services Direct will be producing.

Should you wish to discuss your VAT requirements then please get in touch with us at Accountancy Services Direct, we are always happy to help.

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