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Caris Brook Ltd

Accountancy bodies have welcomed the news that Making Tax Digital and other proposed tax changes have been put on hold because of the general election.

Last week, the Government dropped more than half of the measures announced in the April Budget from the Finance Bill, in order to rush the legislation through Parliament ahead of the general election on 8 June. It leaves question marks over the future of HMRC's proposed Making Tax Digital (MTD) scheme, which was due to be introduced from 2018. The plans had been widely criticised and commentators now say it could now be delayed or even scrapped altogether.

There has been no Government comment about the future timetable for MTD. The Chartered Institute of Taxation has called on the Government to make a clear statement about whether (if re-elected) all of the clauses dropped will be reintroduced on the original timetable.

Making Tax Digital represents the biggest change to tax and accounting administration in a generation and currently it is not understood if the measures will come in at the next Finance Bill, post-election, be deferred until the Autumn Budget, or be dropped altogether. There needs to be certainty.

Also removed from the Finance bill were plans to cut the tax-free dividend allowance from £5,000 to £2,000 from April 2018. This news is to be welcomed, but many predict the measure will resurface after the general election, so any celebrations may be premature.
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Directors’ bonuses avoiding the PAYE trap

HMRC applies special PAYE rules to directors’ bonuses. These aim to collect tax and NI at the earliest opportunity, even before the directors get paid. Is there a legitimate way to dodge the rules and defer paying HMRC?

Delayed pay
Not so many years ago it was possible for a company to vote a director a bonus or extra salary and claim a corporation tax (CT) deduction for it, but not actually pay the director (and thereby trigger PAYE tax and NI bills). Understandably, HMRC wasn’t keen on the arrangement and anti-avoidance rules were eventually introduced to prevent companies from taking advantage.

What are the current rules?

The position now is that where your company votes one or more directors a bonus etc., which isn’t paid within nine months after its financial year end, it isn’t entitled to claim a corresponding CT deduction. What’s more, a further anti-avoidance rule brings forward the date on which PAYE tax and NI must be paid on the director’s salary or bonus by redefining, for tax purposes, the meaning of “paid”.

PAYE is due when a bonus is paid

To most people, being “paid” means having the cash in your hand or in the bank, but HMRC’s definition means that a director is treated as paid for tax and NI purposes when the company reports a bonus in its records. This rule applies even if the board makes a resolution saying that the directors in question aren’t allowed to draw the money until a later date (see The next step ).

Example. At Acom Ltd’s AGM held on 1 March 2017, the draft accounts for the year ended 31 December 2016 were considered and approved. They include directors’ bonuses payable on 31 August 2017. The minutes of the AGM are duly prepared on 3 March. Because the bonuses are recorded in the company’s records they are treated as paid on 3 March and Acom must pay PAYE and NI on them for the tax month ending 5 March 2017, which is due by 19 March. Any cash-flow advantage Acom hoped for by delaying payment of the bonuses is therefore substantially reduced.

Problem: The RTI rules require Acom to report PAYE tax and NI due on or before the date that the bonuses are paid. This means it needs to act quickly after the AGM to make an RTI report on time or potentially it could face a fine. However, HMRC automatically allows employers three days’ grace in which to submit an RTI report, which gives Acom a little breathing space.

Advice: The trouble caused by the deemed date of payment rule can easily be avoided. Instead of voting bonuses to each director in specific amounts, enter the total value for all bonuses in the company’s records without allocating it to individuals. HMRC accepts that the bonuses won’t count as paid until actually paid or allocated to specific directors.

Single director companies

Naturally, the advice above won’t work if you’re the sole director because even if you don’t name yourself as the recipient of the bonus, the implication is that it must be for you.

Advice: You could get around this by appointing, say, your spouse or partner as a director.

HMRC’s rules require companies to account for PAYE tax and NI on directors’ bonuses for the month in which they are entered in their records. Defer the tax and NI by recording a total figure for bonuses, i.e. not allocated to specific directors. Only allocate the money when the company decides to actually pay the bonuses.
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The trouble with the “marriage allowance”

Latest statistics show that many couples are overlooking their entitlement to the marriage allowance which allows the transfer of unused personal allowances between them. HMRC’s guidance might be partly to blame. What’s the full story?

The marriage allowance

In April 2015 the government introduced the Marriage Allowance (MA) to meet its election promise to reward traditional family values. However, it turned out to be somewhat less generous than expected. It allows one partner to transfer 10% of his or her personal allowance to the other (£1,060 for 2015/16 and £1,100 for 2016/17), who’ll receive a tax reduction on it at the basic rate (20%). It sounds simple but in practice it’s not.

HMRC’s practice and guidance

The first problem was the excessive time it took HMRC to create a claims procedure and so claims were held up. The next barrier was, and still is, HMRC’s questionable guidance which indicates that to be eligible for MA the transferring spouse must have income of less than the personal allowance (£11,000 for 2016/17), and the other spouse income of less than £43,000. That’s incorrect, or at best economic with the facts.

What the law says

Strictly, the only condition linked to income is that the recipient of the transferred allowance must not be liable to tax at a rate higher than the basic rate. However, in practice a transfer will only save tax where the transferring spouse has income (other than dividends and savings income) less than their personal allowance, and there are further complications.

All or nothing

Contrary to popular belief, the MA is not a variable claim, it’s all or nothing.

Example. Say, for 2016/17 your spouse’s only income is a salary of £10,200. They therefore elect to transfer the MA to you. They can’t just transfer the unused part of their personal allowance (£800), the whole £1,100 must go. That means their personal allowance is reduced to £9,900 resulting in a tax bill of £60 ((£10,200 - £900 = £300) x 20%). Nevertheless, overall there’s a tax saving because you receive MA of £1,100 which reduces your tax by £220 (£1,100 x 20%). Tip. Don’t make a claim during the tax year in which you first suspect an MA election can be made. Wait until after the end of the tax year when you can check that it will be tax efficient.

The claim traps

Just to complicate matters further there are quirks in the claims procedure to watch out for:

a claim made during the tax year to which it applies stays in force until either the conditions cease to be met or the transferor withdraws the claim. But if the claim is made after the end of the tax year it only applies to that year - so remember to renew your claim
even where a claim becomes tax inefficient, only the transferror can withdraw it. This is another reason for making claims only after the end of each tax year
if the recipient tells HMRC they no longer require the MA, it will cancel it, not just for the current tax year, but right back to the year it was first transferred, up to four years.
The bottom line is that while you shouldn’t overlook this modest tax break (worth around £200 per year) you need to take care when claiming it.

HMRC’s guidance suggests that you can only claim the marriage allowance where one spouse’s income is less than the personal allowance (£11,000 for 2016/17). Actually, they can have dividend or savings income in excess of this and still make a claim. Make sure you understand HMRC’s tricky claims procedure.
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