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Self assessment tax advice

Posted by Wellden User

Self assessment returns – Don’t miss the deadline !

As you probably know under the self assessment regime as an individual you are responsible for ensuring that your tax liability is calculated, with any tax owing paid on time. We can provide self assessment tax advice if you need help.

The self assessment cycle

Tax returns are issued shortly after the end of the fiscal year. The fiscal year runs from 6 April to the following 5 April, so 2015/16 runs from 6 April 2015 to 5 April 2016.

Tax returns are issued to all those whom HMRC are aware need a return, including all those who are self employed or company directors. Those individuals who complete returns online are sent a notice advising them that a tax return is due. If a taxpayer is not issued with a tax return but has tax due they should notify HMRC who may then issue a return. A taxpayer has normally been required to file his tax return by 31 January following the end of the fiscal year. The 2015/16 return must be filed by 31 October 2016 if submitted in ‘paper’ format. Returns submitted after this date must be filed online otherwise penalties will apply.

Penalties

We provide our clients with self assessment tax advice, handling all the hassle and headaches along the way.

However, for those not so fortunate (i.e. our ‘non-clients’ the prospect of late filing penalties can sometimes loom large.

Late filing penalties apply for personal tax returns as follows:

£100* penalty immediately after the due date for filing (even if there is no tax to pay or the tax due has already been paid)

* Previously the penalty could not exceed the tax due, however this cap has been removed. This means that the full penalty of £100 will always be due if your return is filed late even if there is no tax outstanding. Generally if filing by ‘paper’ the deadline is 31 October and if filing online the deadline is 31 January.

Additional penalties can be charged as follows:

Over 3 months late – a £10 daily penalty up to a maximum of £900

Over 6 months late – an additional £300 or 5% of the tax due if higher

And over 12 months late – a further £300 or a further 5% of the tax due if higher. In particularly serious cases there is a penalty of up to 100% of the tax due.

Calculating the tax liability and ‘coding out’ an underpayment

The taxpayer does have the option to ask HMRC to compute their tax liability in advance of the tax being due in which case the return must be completed and filed by 31 October following the fiscal year. This is also the statutory deadline for making a return where you require HMRC to collect any underpayment of tax through your tax code, known as ‘coding out’. However if you file your return online HMRC will extend this to 30 December. Whether you or HMRC calculate the tax liability there will be only one assessment covering all your tax liabilities for the tax year.

Changes to the tax return

Corrections/Amendments

HMRC may correct a self assessment within nine months of the return being filed in order to correct any obvious errors or mistakes in the return. An individual may, by notice to HMRC, amend their self assessment at any time within 12 months of the filing date.

Enquiries

HMRC may enquire into any return by giving written notice. In most cases the time limit for HMRC is within 12 months following the filing date. If HMRC does not enquire into a return, it will be final and conclusive unless the taxpayer makes an overpayment relief claim or HMRC makes a discovery.

It should be emphasised that HMRC cannot query any entry on a tax return without starting an enquiry. The main purpose of an enquiry is to identify any errors on, or omissions from, a tax return which result in an understatement of tax due. Please note however that the opening of an enquiry does not mean that a return is incorrect. If there is an enquiry, we will also receive a letter from HMRC which will detail the information regarded as necessary by them to check the return. If such an eventuality arises we will contact you to discuss the contents of the letter.

Keeping records

HMRC wants to ensure that underlying records to the return exist if they decide to enquire into the return. Records are required of income, expenditure and reliefs claimed. For most types of income this means keeping the documentation given to the taxpayer by the person making the payment. If expenses are claimed records are required to support the claim.

Checklist of books and records required for HMRC enquiry

Employees and Directors

Details of payments made for business expenses (eg receipts, credit card statements)
Share options awarded or exercised
Deductions and reliefs
Documents you have signed or which have been provided to you by someone else:
Interest and dividends
Tax deduction certificates
Dividend vouchers
Gift aid payments
Personal pension plan certificates.

Personal financial records which support any claims based on amounts paid e.g. certificates of interest paid.

Business

Invoices, bank statements and paying-in slips
Invoices for purchases and other expenses
Details of personal drawings from cash and bank receipts

How we can help

We provide extensive self assessment tax advice and can prepare your tax return on your behalf. We will advise on the appropriate tax payments to make.

Furthermore if there is an enquiry into your tax return, we will assist you in answering any queries HMRC may have.

 

Want to avoid the settlements trap?!

Posted by Wellden User

Owner managed companies often seek to minimise the tax position of shareholder-directors by involving members of the same family and using personal reliefs and lower rate tax bands of each person. Income is therefore diverted from the higher rate taxpayer. However, anti-avoidance rules need to be considered as to whether a diversion is effective. This is particularly relevant for spouse scenarios such as husband and wife.

Where it is considered that arrangements have been made by one spouse which contain a gift element, often referred to as ‘an element of bounty’ then the ‘settlements’ rules may apply. A key purpose of these rules is to ensure that income alone or a right to income is not diverted from one spouse to the other. Genuine outright gifts of capital or a capital asset from which income then wholly belongs to the other spouse are not caught by the rules because of a specific exemption from the settlement rules.

Family company shares and the dividend income derived therefrom have frequently been the subject of challenge from HMRC on this matter. An example of a structure which will be challenged is the issue of a separate class of shares with very restricted rights to a spouse, with the other spouse owning the voting ordinary shares. An area of potential risk is the recurrent use of dividend waivers particularly where the level of profits is insufficient to pay a dividend to one spouse without the other waiving dividends. In a recent tax tribunal case dividend waivers executed by two appellant husbands in favour of their spouses constituted a settlement for income tax purposes. The dividends therefore became taxable on the husbands.

The basic facts were that two directors of a company each owned 40% of the shares in the company. Their wives each owned 10% of the shares. However equal dividends were paid to each of the shareholders by the two directors waiving part of their entitlements to dividends and thus allowing larger dividends to be paid to the wives. This had been done for a number of years from 2001 to 2010.

The arguments…

HMRC argued that the taxpayers had waived entitlement to dividends as part of a plan which constituted an arrangement with an intention to avoid tax by seeking equalisation of their dividend income. The appellants’ arguments included the contention that the waivers had been executed to maintain the company’s reserves and cash balances in order to accumulate sufficient of each to fund the purchase of the company’s own freehold property.

The Tribunal preferred the submissions of HMRC that had this been the case the aim could have been achieved by other means, such as voting a lower dividend per share. The Tribunal determined that the waivers would not have been made if the other shareholders were a third party and therefore there was ‘an element of bounty’ sufficient to create a settlement.

Basic tax planning is still an activity that many will seek to use to mitigate tax liabilities but care has to be taken in the current anti avoidance environment to avoid the traps. If we can be of assistance in reviewing your position please do not hesitate to contact us.

Tax planning still available for two homes through Principal Private Residence relief

Posted by Wellden User

The UK tax regime provides an important relief from the capital gains tax charge (CGT) on the gains made by an owner-occupiers on the sale of their private homes. This is known as Principal Private Residence relief (PPR).

The general principle is that only one home can count as  PPR at any one time. However, prior to 6 April 2014, where a private home qualified for PPR at any stage during the period of ownership, the last three years of ownership qualified for PPR, even if the property was not lived in during that three year period. That period was reduced for most individuals to 18 months for disposals made on or after 6 April 2014.

Although the period has been reduced there is still useful tax planning that can be achieved for someone who has recently acquired an additional property which will also be a home, for example a property ‘in the country’ which will be lived in at various periods in the year. The example shows the potential advantages of making a ‘PPR election’.

Example

Mr and Mrs White have lived in a property in Leeds for a number of years . They are now semi-retured and acquire a second property in Wales in which they intend to also reside. They start to occupy the Welsh property on 1 June 2015.

As the Leeds propery already qualifies for PPR up to 1 June 2015 the gains accruing on a time apportioned basis to the last 18 months of ownership will be relieved even if they nominate the other property to be their PPR.

They therefore elect for the Welsh property to be their PPR on 1 December 2016. This means this property will also benefit from PPR for the last 18 months of ownership.

They may vary that nomination back to the Leeds property at any time. If the variation is made within a short period of time then any resulting gain on the Leeds property will likely be covered by their annual exemptions.

If they want to change their minds again about the nomination, they can do so. However none of this flexibility is available if the first election has not been made to HMRC within two years of the time when the second property became available to live in.

Last year the government issued proposals to remove the ability for everyone to make an election but it has changed its mind. Instead the government has implemented changes which affect non-resident individuals with property in the UK and UK residents with property abroad.

Prior to 6 April 2014, an indivdual who was not resident in the UK was not subject to UK CGT on residential property so could sell property free from UK CGT for non-UK resident persons.

Further changes restrict the availability of nominating a property for PPR. Examples of the individuals affected by these changes are:
• UK residents who go to work abroad and acquire an overseas second home in the country in which they work
• individuals who retire overseas but keep their homes in the UK.

They may be entitled to PPR for the period prior to 6 April 2015 but will have difficulty in getting the PPR to apply to the UK property after that date. However the last 18 months of ownership may continue to qualify for PPR.

Our tax experts are always on hand to assist you with your personal tax planning and accounting services, so please feel free to contact us if you consider these changes affect you or you wish to consider making an election for PPR where you have two homes in the UK.