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NEW RULES FOR DIVIDENDS FROM 2016/17

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In the Summer Budget Newsletter we outlined the new rules for the taxation of dividends that will apply from 6 April 2016. Further guidance has now been published by HMRC setting out how the new rules will operate and it seems the rules don’t work as many people expected.  As previously reported, there will be no 10% credit against the tax on dividends which means there will be a 7½ % increase in the rate of tax on dividends once the £5,000 dividend allowance has been used up. Currently dividends falling into the basic rate band are effectively tax free.

However the £5,000 allowance needs to be taken into consideration in determining the rate of tax on your dividends. For example if you have salary and other non- dividend income of £40,000 next year and £9,000 in dividends, the £4,000 of taxable dividends are taxed at 32.5%, not £3,000 at 7.5% then £1,000 at 32.5%. This is because the £5,000 is added to the £40,000 income pushing the taxable dividends into the higher rate band.

If you own your own company it may be beneficial to bring forward dividend payments from next year to save the additional 7½ %. However, it would be important to consider all of the tax implications of such actions so come and talk to us to discuss your options.

Standing back and looking at your business

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The 80/20 Rule

The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto who, while at the University of Lausanne in 1896, published his first paper “Cours d’économie politique.” Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that 20% of the peapods in his garden contained 80% of the peas.  In business, it is usually applied as follows: 80% of your company’s profits will come from 20% of your customers. In essence, 80% of whatever outcome you’re expecting will come from 20% of whatever you put into your project.

Why is it so important?

Using the 80/20 rule allows you to focus your business planning in a way that will allow you to maximise profit, production, or any other aspect of your business, with a minimum of effort.

80% of profit comes from 20% of customers

It would make sense to focus on making sure that 20% of your customer base is happy before expending resources on the rest. The same thing can be applied to any situation. While it doesn’t always come out to 80/20, the basic concept still applies: there is no 1 to 1 balance of input to output.

This same rule can be applied to marketing, profit predictions, and many other business aspects can also be applied to time management and other things that you use every single day, whether you realise it or not. 80% of your results should come from 20% of your effort.

It’s easy to be pulled into projects around your business that aren’t going to be terribly productive in the end. Sure, you may be able to fix the light bulb in the back office, but is it really worth spending that time fixing the light bulb when you could instead do a sales call? If it takes you 2 hours to fix a problem that would have taken a professional maintenance technician 20 minutes, then you’re losing out on that 2 hours. Instead of using 20% of your effort to obtain 80% of your results, you’ve managed to turn the rule on its head, spending 80% of your effort for only about 20% in terms of results.

One Final Note

The 80/20 rule is a great rule of thumb but it isn’t set in stone. It’s a very useful guideline, but it should only be used as such. Don’t try to lock everything you do into that 80/20 ratio or you’ll find yourself striving for something that is impossible to achieve. That said, take a look at the various aspects of your business, and see how you could benefit from the application of such a guideline. You’ll be surprised at the amount of extra time and productivity you can obtain with a little change of perspective.

Bank reconciliation made easy with Xero and Liric

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 Xero is designed to automatically import your bank, credit card and PayPal transactions using bank feeds to make reconciling your bank accounts faster and easier.

Before now, you had to take your bank statement and manually entered the transactions into your desktop accounting software. Then you needed to perform a reconciliation to make sure the two balances agreed.

Xero has simplified this process. Your bank statement is already in your software. Login and see your imported statement on the left, waiting to match your accounting transactions on the right.

What’s more, should you ever get stuck, you can easily collaborate with your accountant. Xero gives you the option to leave a question for them, which they’ll see the next time they log in.

This video tutorial shows you how easy it is to perform bank reconciliation using Xero accounting software.

http://ow.ly/TOuP3
The Liric team can help you with transferring your accounting system to Xero and provide training. Please contact us to find out more.

 

Auto enrolment exemptions

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Have you received  letters from The Pension Regulator (TPR) telling you to “ACT NOW” to prepare for auto enrolment? An initial letter asks you to nominate a contact to receive communications about auto enrolment, a second one will be asking for details about your chosen scheme.  There will also be threats of fines or prosecution if you don’t take action.

The “staging date” for your business will be stated in the letter which is  the date by which you must have a pension scheme ready for your employees to join.  However, not every business will need a scheme.

A large number of small companies will be exempt from auto enrolment, if they don’t technically have any “workers” at their staging date. A company director is not a “worker” if he or she does not have a contract of employment with the company. A company with no staff other than directors has no obligations under auto enrolment if any of the following apply:

  • It has only one director; or
  • It has a number of directors, but none of those have an employment contract; or
  • It has a number of directors, only one of whom has an employment contract.

TPR doesn’t know which directors in which small companies have employment contracts.

If you are satisfied that your company meets the exemption provisions then The Pension Regulator does need to be advised.  This can be done direct on The Pension Regulator website

http://www.thepensionsregulator.gov.uk/employers/what-if-i-dont-have-any-staff.aspx

You’ll need your letter code , PAYE reference  and Companies House number  You can re-request the letter code if you have lost it by following the link and entering the PAYE  and Accounts office references.

Liric will be contacting all our clients whom we think are eligible for this exemption.

If your company does have staff other than its directors, we should talk about what preparations you need to make to get ready for auto enrolment.

How do new interest rules affect my buy to let property?

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Changes announced in the Summer Budget may  significantly increase your tax liability if you have a property business – including a single buy to let – read on….

Now

At present, full tax relief is available for interest on a loan used in a property business.  The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business.

From April 2017

From April 2017, tax relief on interest in property businesses ( including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profit of the business, but instead will attract tax relief at 20%. The change does not affect furnished holiday lettings.  The change will be phased in as follows:

 

2017/18 2018/19 2019/20 2020/21
% of interest allowed as a deduction 75 50 25 0
% of interest given as a relief at 20% 25 50 75 100

A letting activity that has a low level of interest in relation to the borrowings will not be too badly affected, but where there is a higher level of borrowing, individuals will find that the business model has been severely undermined.

So how will this work?

Example 1

Jo is a 40% taxpayer. He has purchased a buy to let property as an investment. Here is the effect of the changes:

 now  2020/21
 Gross rents 7,200 7,200
 Repairs, agents fees and other tax deductible costs 1,000 1,000
 Mortgage interest 2,500
 Net rental profit 3,700 6,200
 Tax at 40% 1,480 2,480
 less interest relief at 20% 500
 Net tax liability on rental income 1,480 1,980
tax increase 500
effective tax rate on “real” rental profit 40.0% 53.5%

   

Example 2

In this case Jo has a bigger mortgage and hence more interest:

 now  2020/21
 Gross rents 7,200 7,200
 Repairs, agents fees and other tax deductible costs 1,000 1,000
 Mortgage interest 5,000
 Net rental profit 1,200 6,200
 Tax at 40% 480 2,480
 less interest relief at 20% 1,000
 Net tax liability on rental income 480 1,480
tax increase 1,000
effective tax rate on “real” rental profit 40.0% 123.5%

 

The tax due is more than the net funds available from the rental surplus by £280.

The new rules may also push a tax payer into the higher rate band, result in reduction of personal allowance or trigger the repayment of child benefit.

What are your options?

  1. Incorporation – has tax and other cost implications and borrowing often not easy
  2. Reduce borrowing so impact is less
  3. Sell property
  4. Accept the increase if expected capital gain on property makes it worthwhile

 

Please contact us to find out how this will impact on you.

01763 – 853633

enquiries@liricaccountants.com

“Reconsider the new Dividend Tax for small businesses”.

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Uproar amongst business owners, the entrepreneurs of now and the future  has resulted in a petition being put to the Government to which there is now an official response :

“The Government is committed to supporting entrepreneurs and a fair tax system. Dividend tax reform allows further cuts in Corporation Tax and reduces the incentives for tax motivated incorporations.

The Government is fully committed to supporting business and entrepreneurship. As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates.

Owners of small companies will also benefit from a range of other measures announced at the Summer Budget, including an increase in the National Insurance Employment Allowance to £3,000 from April 2016 and a permanent increase to the Annual Investment Allowance to £200,000 from January 2016. They will also pay less tax as a result of the increases to the tax-free Personal Allowance to £11,000 and to the Higher Rate Threshold to £43,000 in April 2016. We also have a commitment to go much further, taking the Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of this Parliament.

However, it is not possible to continue to reduce the Corporation Tax rate without looking at the overall balance of the tax system, including taxation of dividends. Lowering the Corporation Tax rate without action elsewhere increases incentives for individuals to set up a company and pay themselves through dividends to reduce their tax bill (also known as tax motivated incorporation). Therefore the Government is reforming dividend taxation. These reforms, which will also simplify the dividend tax system, will significantly reduce the incentives for people to set up a company and pay themselves through dividends rather than wages simply to reduce their tax bill. Taxpayers and the Exchequer will now be £500 million better off as result of reduced incentives for tax motivated incorporation. Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed. But the reforms move the overall tax rates for the self-employed and those incorporated closer together, making the system fairer overall.

HM Treasury”

Click this link to view the response online and register your name:

https://petition.parliament.uk/petitions/106525?reveal_response=yes

 

The Petitions Committee will take a look at this petition and its response. They can press the government for action and gather evidence. If this petition reaches 100,000 signatures, the Committee will consider it for a debate.

 

Are you paying enough?

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From the 1st October 2015 the new National Minimum Wages (NMW) will come into force

Year 21 and over 18 to 20 Under 18 Apprentice
2015 (from 1 October) £6.70 £5.30 £3.87 £3.30
2014 (current rate) £6.50 £5.13 £3.79 £2.73

 

With a further increase in April 2016 for over 25’s to £7.20 per hour. The April 2016 wage will be called the Living Wage.

Penalties for non compliance are already harsh and as reported by the BBC on 1st September 2015 they are getting tougher…

These include doubling penalties for non-payment and disqualifying employers from being a company director for up to 15 years.

The government also announced plans to double the enforcement budget for non-payment and to set up a new team in HMRC to pursue criminal prosecutions for employers who deliberately do not pay workers the wage they are due.

Penalties for non-payment will be doubled, from 100% of arrears owed to 200%, although these will be halved if paid within 14 days. The maximum penalty will remain £20,000 per worker.

​Are you paying enough?

Summer Budget 2015

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Following the General Election, the Chancellor presented a second Budget to the House of Commons on 8 July 2015. The Budget contained some important announcements and confirmed a number of changes planned for the coming years. Some unexpected changes in the extraction of profits from Limited Companies will mean that dividend policy needs to be carefully reviewed.

We have put together a PDF newsletter Second-Budget-2015.pdf (753 downloads)  which contains the latest tax and financial information, which we trust you will find useful. For more information on how the changes may affect you, please contact us.

HMRC fails to answer more than a quarter of phone calls

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We all know its very frustrating trying to get through to HMRC on their phone lines – this weeks news reveals how bad things really are  – according to BBC news :

HMRC fails to answer more than a quarter of phone calls – BBC News 

More than a quarter of phone calls to HM Revenue and Customs went unanswered in the last year, figures have shown.

Of the 64.7 million calls made by taxpayers between April 2014 and March 2015, 27.5% – 17.8 million – were either unanswered or resulted in a busy tone.

HMRC’s chief executive apologised for the figures and said the revenue’s service had not been “up to scratch”.

The service has pledged to invest £45m in about 3,000 customer services staff.

Another 2,000 staff will be moved temporarily from within the HMRC to help with the tax credits deadline and letters and forms, it said.

HMRC set a target to answer 80% of calls.

But the figures showed that in some months only about two in three (65.5%) of phone calls were answered.

In September 20.8% of people heard busy tones and could not join a phone queue when they called, while 13.7% of calls were not answered.

In total 7.2 million calls made to the HMRC last year – 11% of all calls – ended with people hearing a busy tone.

Lin Homer, HMRC chief executive, said: “Despite our best efforts, our call performance hasn’t been up to scratch and we apologise to all those customers who have struggled to get through to us.”

Ms Homer said the HMRC had already invested in new telephone equipment and online services.

The new £45m investment will come from current HMRC funding rather than from additional revenue from the Treasury, the HMRC added.

HMRC Target online sellers

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Thousands of online sellers will need to get their tax affairs in order as HMRC wields its expanded powers to get user information from online marketplaces like Amazon, Gumtree, Ebay and Etsy. The Revenue has sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns. Of these, 1,000 letters are being sent to people where the taxman has already identified a shortfall on their self-assessment forms.The new crackdown was launched on the back of extensive new powers introduced last year enabling HMRC to download people’s account information. It was reported in theTelegraph that eBay, Etsy, Amazon and Gumtree are being forced to hand over customer account details, including their selling activity, as part of the taxman’s legal powers that were extended last year.

The HMRC also avoided stating exactly what the threshold is where an online seller becomes an online trader. Instead, the Revenue uses the badges of trade as their guiding principle.. The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

Some of the 14,000 targeted thus far had made as little as £100 profit online.

“Anyone just selling the occasional item has nothing to worry about. This is about making sure on-line traders pay the right tax – wealthy or otherwise. We will make contact with those that we are aware might need our help to get it right,” said a HMRC spokesperson.

The spokesperson went on to confirm that those continuing to avoid the Revenue’s overtures, could face penalties and that the taxman “will determine the amount of tax due based on the information we have available”.

HMRC have some great examples to help you decide, for example:

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality. She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT. Many traders start off in a small way and assume their activity will be treated as a hobby. They don’t realise that if it grows into a business they need to register with HMRC. You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money! 

If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you. If you need any help with registering as Self Employed just drop me an email or book a free call with me at www.liricaccountants.com