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April 2018
RAYMOND CARTER & CO: APRIL 2018 TAX UPDATE FOR CLIENTS

RAYMOND CARTER & CO: APRIL 2018 TAX UPDATE FOR CLIENTS

 

 

As we have done for the last couple of years, I wanted to take this opportunity to set out some of the changes you will see in your tax return for 2017-18 and some of the changes to tax coming in from April 6th 2018.

 

This note is by no means comprehensive – Finance Bills, which are introduced every year after the Budget statement, run to hundreds of pages – but it hopefully covers some key points affecting many taxpayers.  As always if you have any questions about anything in this note or any other taxation matters, feel free to call us.

 

1.    Changes in your 2017-18 Tax return

 

Before highlighting potential changes in your 2017-18 Tax Return, I wanted to remind you of the significant changes that arose in the 2016-17 tax returns.

 

Taxation of Interest & The Dividend Allowance

 

For many the most material changes in 2016-17 were in the taxation of dividends and interest.  As a reminder of those:

 

·        Interest is now paid gross and tax is only payable for basic rate taxpayers if interest income is more that £1,000, and more than £500 for higher rate taxpayers;

·        The old 10% tax credit on dividends was withdrawn and replaced by a stepped approach, where the first £5,000 of dividend income is tax-free, and after that dividends are taxed at 7.5% for basic rate taxpayers.

These new rules resulted in some taxpayers with large share portfolios paying more in tax in 2016-17 than previously, as the old tax credit system had meant that 10% of dividend income was effectively tax free.  When the changes to the taxation of dividends were announced, the main focus was the additional tax that Owner-managed businesses would have to pay.  These Owner-managers have typically used a combination of low salary and higher dividend income to minimise tax, especially where total income was less that the higher rate tax threshold (£43,000 in 2016-17; £45,000 in 2017-18).  The tax-free dividend allowance will fall to £2,000 in 2018-19, so the increases in tax bills will continue.

One area where investment income is not taxed so prohibitively is where taxable income is £17,000 or less, or where non-savings income is £5,000 or less.  In those circumstances the Savings Rate of 0% on the first £5,000 of interest and dividend income on top of the personal allowance can mean little or no tax.

Landlords & property

 

The main change in the 2017-18 Tax Return will see the introduction of the next step of higher taxation on landlords..  After the withdrawal of 10% Wear and Tear Allowance and the additional 3% Stamp Duty on the purchase of second homes, comes the ‘restriction of relief of finance costs on residential properties to the basic rate of Income Tax’.  This means that higher rate taxpayers cannot deduct all mortgage interest as an allowable cost offsetting rental income.  It is not a complete withdrawal of tax benefit, however; the interest deduction is being withdrawn in steps over four years, and a deduction at the basic rate will be permitted.  This makes the calculation of the tax very complicated.

 

IR35 for Public Sector contractors

 

Self-Employed contractors in the public sector, including the NHS, are now being taxed at source, rather than accounting for the tax themselves, which has often been done using ‘umbrella’ companies or Personal Service Companies, where payment tends to be low salary, high dividend, and very little National Insurance.

 

2.    Tax changes for 2018/19

 

As I noted earlier, there are not many dramatic tax changes being introduced on 6 April 2018.  That is not to say that HMRC are not keeping us busy!  There is continued pressure to bring in additional tax revenue by clamping down on tax avoidance, and there is the onward march to digitalisation.

 

The impact of digitalisation at this point is more on accountants and tax agents than individual taxpayers, but that puts the onus on us to keep you informed of what is going on.

 

There is an intention to eliminate the tax return in its current form and replace it with a digital tax return.  Some aspects of this make sense.  If HMRC already have your employment and/or pension income sent to them by Employers and Pension Schemes, why not pre-populate a tax return with that information?  That is clearly progress!

 

The more sinister and/or realistic aspect of “digitalisation” is the ‘Making Tax Digital’ project where sole traders and those with rental properties will need to report profits in a digital format on a quarterly basis.  This initiative has been delayed for now with only VAT registered businesses with turnover above £85,000 being in scope for the first wave of the project, due for launch in April 2019.

 

Ahead of that Agents like ourselves have had to re-register our online permissions in a new “Agent Services Account” which was rolled out with little fanfare alongside an initiative to register all tax-paying Trusts last autumn.  The lack of fanfare may have been because the technology did not work, which meant the deadline for registering Trusts was pushed back three times.

 

The Trust Registration fiasco comes on top of another little-reported issue from 2016-17, where HMRC’s own IT team was unable to properly code some of the changes in Income Tax treatment properly, which resulted in a series of “exceptions” being published.  If your personal tax situation meant that you fell within one of these exceptions, then we as agents had to file a paper rather than an online return.  This only happened to a couple of our clients, but once again demonstrates problems that automation can bring if it is not managed properly.

 

The message, therefore, is that change is coming.  The hidden message is that the change will be bumpy and exasperating and there will be delays.

 

Personal Allowance, Basic Rate Taxation, EIS, Stamp Duty, etc.

 

Onto the mundane stuff.  There is some positive news to bring you!  The Government have declared that they want the Personal Allowance to be £12,500 by 2020.  In 2018-2019 it rises to £11,850 while the level at which higher rate tax applies rises to £46,350.

 

For investors, the ISA limit remains at a generous £20,000 per annum.  The Junior ISA and Child Trust Fund limits increase to £4,260.  The Enterprise Investment Scheme (EIS), which offers 30% Income Tax relief and Capital Gains Tax incentives on applicable investments, have been extended for investment in ‘knowledge-intensive’ companies.

 

Stamp Duty has been abolished for first-time buyers, although a cynic might note that estate agents will simply hike house prices up by the amount saved.

 

Most of the changes in the November 2017 budget were aimed at businesses rather than individuals.  ‘Highlights’ include:

 

·        The abolition of Indexation allowance, which permitted inflation adjustments to reduce capital gains for companies, bringing corporate taxation into line with personal taxation;

·        The Corporation Tax rate, now at 19%, will be reduced to 17% (although for small businesses that benefit will be offset by the reduced dividend allowance).

Class 2 National Insurance for Sole Traders

 

HMRC no longer collects Class 2 National Insurance Contributions (NIC) from those who are registered as Self-Employed via a monthly direct debit.  The abolition of Class 2 NIC has been put back a year to April 2019 and so £148.20 will still be collected, alongside Income Tax and Class 4 NIC, as part of the year end Self-Assessment payment. However, Class 2 NIC will be abolished from April 2019, unless the Government change their mind (again).

 

Overseas Income – ‘Requirement to Correct’

 

‘Requirement to Correct’ for taxpayers with taxable overseas assets (for example holiday properties that are rented out) can be a misunderstood area.  For UK Residents with taxable overseas assets, any income from those overseas assets are subject to UK Tax, although that can be reduced if any tax has been paid overseas.

 

The ‘Request to Correct’ allows taxpayers to come forward and disclose taxable income from previous years without receiving punitive penalties of 100% and interest for unpaid tax.

 

Scottish Income Tax

 

The devolved Scottish Government has had the ability to set income tax rates for Scottish taxpayers since 2017-2018.  In 2018-19, we see divergence of income tax rates for the first time.  The Scottish Government have introduced incremental rates of 19% and 21% as well as the 20% basic rate.

 

That raises the issue of who qualifies as a Scottish taxpayer.  Things are fairly straightforward if your only residence is in Scotland and if you work in Scotland – you are clearly a Scottish taxpayer.  Things get more complicated if you move in to or out of Scotland during a tax year, or if you have more than one residence, so that you reside both in and out Scotland in a tax year. 

 

 


 

3.    What we as agents can do for you

 

In previous years, I have included a ‘Frequently Asked Questions’ section at this point.  This year I want to make a quick note of some specific examples of how we as agents can interact with HMRC on your behalf, once we have filed an “authority to act” form with HMRC.

 

·        Agent Hotline – we have access to an HMRC Agent Helpline where calls tend to be answered much quicker than the more public helplines.  Depending on the type of request, it is often easier for us to call directly

 

·        Amend and Update PAYE Codes – HMRC are more proactive than ever with the amendment of PAYE codes, often amending codes mid-year once the prior year tax return has been filed.  The stated intention of amending PAYE codes is to “collect the right amount of tax”.  This now includes the collection of tax on rental income and property income.  For those who have been in Self-Assessment for many years and are happy with the routine of paying Self-Assessment every six months on 31 January and 31 July, we can push back on changes on your behalf.

 

·        Negotiate payment of taxation in instalments – HMRC are entitled to impose penalties and interest when tax is unpaid beyond the due dates of 31 January and 31 July.  We can step in and help to negotiate repayment plans so that penalties and interest are minimised.

 

·        Reduction in payments on account – Sole traders and Property Owners are used to the six monthly cycle of paying tax on 31 January and 31 July.  Where taxpayers have more than £1,000 in Income Tax and Class 4 National Insurance in a given tax year that is not deducted at source, they will be asked to pay 50% of that tax as a payment on account or prepayment of tax for the next tax year.  Where you believe that your income in the next tax year will be lower, then we can agree a lower payment on account with HMRC, which can ease cash flow issues come the end of January and July.

 

·        Assisting you in HMRC Investigations – Where HMRC have an enquiry into a submitted tax return, they will copy us in on any correspondence that they have with you, so that we can assist in the drafting of the response.

 

 

 

4.    GDPR – Global Data Protection Regulation

 

New regulations, known as Global Data Protection Regulation or GDPR, governing the protection of personal data come into force on 25 May 2018. 

 

The ‘theft’ of personal data is an increasing risk as the advance of technology creates further opportunity for misuse.  As I am drafting this note in mid-March 2018, newspapers are reporting that personal data about Facebook users may have been misused by technology firms in favour of particular sides in the 2016 Brexit referendum and US Elections.

 

While businesses like ours must protect the data of our clients – postal addresses, e-mail addresses, National Insurance numbers, and other information included on tax returns and supporting schedules, GDPR demands that there are processes in place to protect that data, and those processes are properly documented.

 

The things that we need to consider are:

 

·        Consent for the use of personal data – we will be updating our engagement letters to take account of GDPR

·        The protection of client data – ensuring there is appropriate security over client data held in IT systems, as well as physical controls over hard copy data stored in our office

·        Deletion of unnecessary personal data – we do not need to keep client data longer than is necessary for the completion of our work, for example deleting data older than 6 years

·        The Reporting of Breaches of data, if these were to occur

 

Penalties for the failure to comply with GDPR are potentially extremely high – running into millions for larger firms, stressing the importance that personal data is used properly.

 

In the light of these new GDPR rules, we have reviewed our data processing controls and we are confident that we will be compliant with the new rules when they are introduced in May.

 

 

 


5.     

Key Tax Rates for 2017/18 and 2018/19

 

In these tables we are publishing some key tax rates for both 2017/18 and 2018/19.  The 2017/18 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2019.  The 2018/19 rates will be relevant for any income and expense you have from 6 April.

 

 

2017/18

2018-19

Notes

 

Your upcoming tax return

This tax year

 

INCOME TAX

 

 

 

Personal Allowance

£11,500

£11,850

£12,500 by 2020/21

20% Basic Rate Upper Limit

£45,000

£46,350

£50,000 by 2020/21

 

 

 

 

Dividend Tax Rates

First £5,000:        0%

Basic Rate:     7.5%

Higher Rate:   32.5%

Highest Rate:   38.1%

First £5,000:        0%

Basic Rate:     7.5%

Higher Rate:   32.5%

Highest Rate:   38.1%

Unused Personal Allowance can increase the 0% band

 

 

 

 

Personal Savings Allowance

(‘PSA’)

First £1,000 0%

£500: High rate taxpayers

First £1,000 0%

£500: High rate taxpayers

 

 

 

 

 

LANDLORDS

 

 

 

Rent-a-Room

£7,500

£7,500

Deduction from rental income

 

 

 

 

COMPANIES

 

 

 

Employment Allowance on Employers

£3,000

£3,000

per Company

NI thresholds:

-        Class 1 Employee

-        Class 1 Employer

 

12%  -   {between £676 &

13.8%   { £3,583 per month

 

12%  -   {between £702 &

13.8%   { £3,863 per month

 

National Living Wage

£7.50 per hour

£7.83 per hour

if 25 or over

Corporation Tax

20% to 19%

19%

19% from April 2018

 

 

 

 

VAT

 

 

 

VAT Threshold for registration

Over £85,000

Over £85,000

De-registration: below £81,000

Flat Rate Scheme

(VAT a fixed rate of turnover)

 

Register if turnover is below £150,000

Up to £230,000 turnover

 

 

 

 

CAPITAL GAINS TAX

 

 

 

Annual Allowance

£11,300

£5,650 for Trusts

£11,700

£5,850 for Trusts

 

CGT Rates

20% higher rate

10% basic rate

Except Property

20% higher rate

10% basic rate

Except Property

18% basic / 28% Higher rate for property sales

 

 

 

 

INHERITANCE TAX

 

 

 

IHT Rate

40%

40%

 

Nil Rate Band

£325,000

£325,000

 

Residence Nil Rate Band

£100,000 from April 2017

£125,000 from April 2018

Rising by £25,000 per annum for the next 2 tax years

STATE PENSION

 

 

 

Basic State Pension

£122.30 per week

£125.95 per week

 

Single-Tier State Pension

£155.15 per week

£159.55 per week