from A newsletter for proactive planning... In this edition... Are you trading? Take advantage of the dividend allowance Paying PAYE by recurring direct debit Transferring assets between spouses Help if you are struggling to meet your tax bills 10 Questions with... Maddie Client Focus- Material Things September 2022 Issue www.compassaccountants.co.uk
PAGE 4 2 It will not always be apparent when a hobby tips over into a trade and the point at which you need to declare your income to HMRC. There is no statutory definition of a trade beyond that a trade includes a ‘venture in the nature of a trade’. Consequently, in deciding whether a trade exists, HMRC look to the ‘badges of trade’. These are indicators of trading developed from case law. The badges of trade There are nine badges of trade. 1. Profit-seeking motive: an intention to make a profit support trading but is not by itself conclusive. 2. The number of transactions: systematic and repeated transactions will suggest a trade. 3. The nature of the asset: is the asset of a type than can only be turned to advantage by sale, does it yield an income or does it provide ‘pride of possession’ (for example, a picture for personal enjoyment). An asset which is acquired for sale would suggest trading, whereas an asset acquired to yield an income would suggest an investment. 4. Existence of similar trading transactions or interests: transactions that are similar to those of an existing trade may themselves be trading. 5. Changes to the asset: has the asset been repaired, modified or improved to make it more easily saleable of saleable at a greater profit? 6. The way in which the sale was carried out: was the asset sold in a way that was typical of a trading organisation, which would suggest the existence of a trade, or did it have to be sold to raise cash in an emergency? 7. The source of finance: was money borrowed to buy the asset and could the funds only be repaid by selling the asset? 8. The interval between the purchase and the sale: assets that are the subject of a trade will normally (but not always) be sold quickly. Consequently, the intention to sell an asset shortly after sale will suggest trading. However, where the intention is to hold the asset indefinitely, it is less likely to be the subject of a trade. 9. Method of acquisition: an asset that is acquired by way of inheritance or as a gift is less likely to be the subject of a trade. It is important to note that the above is not a checklist and it is not necessary for every badge to be present for there to be a trade. Further, no particular badge is conclusive evidence of a trade. Rather, it is a case of considering each badge and whether it is present or absent to form an overall impression of whether a trade exists. Telling HMRC If you are earning a small amount of money from your hobby, for example, making and selling occasional birthday cakes, it is unlikely that you will need to tell HMRC. The trading allowance means that if the income from your selfemployment is less than £1,000 you do not need to report it to HMRC. However, it should be noted that each person is only allowed one trading allowance across all sources of self-employment. Consequently, a person who is already self-employed and earning more than £1,000 will need to pay tax on any income from a hobby business, even if the income from the hobby is less than £1,000 a year. If your income from your business for the tax year is more than £1,000, you will need to register for self-employment by 5 October after the end of the tax year.
PAGE 3 Take advantage of the dividend allowance Where a business is operated as a family company, it is necessary to extract the profits from the company in order to use them outside the company for personal use, such as to meet living expenses. Extracting profits may trigger further tax and National Insurance liabilities, and when formulating a strategy, it is advisable to extract profits in as tax-efficient manner as possible. What this will look like will, to a certain extent, depend on individual circumstances. However, that said, a popular and taxefficient profit extraction strategy is to take a small salary and extract further profits as dividends. For 2022/23, assuming the personal allowance is not used elsewhere, the optimal salary is equal to the primary threshold of £11,908 where the employment allowance is not available and equal to the personal allowance of £12,570 where the employment allowance is available to shelter employer’s National Insurance. Dividend allowance The dividend allowance is not an allowance as such. Rather, it is a zero-rate band. Where dividends fall within this band, they are taxed at a zero rate so that they are free of tax in the hands of the shareholder. The dividend allowance is available to all taxpayers, regardless of their marginal rate of tax. For 2022/23, the dividend allowance is set at £2,000. Dividends are taxed as the top slice of income and the dividend allowance uses up part of the tax band in which it falls. Dividend policy In a family company scenario, the availability of the dividend allowance can be used to drive dividend policy. However, when paying dividends to utilise available dividend allowances, it should be remembered that dividends can only be paid out of retained profits and must be paid in accordance with shareholdings. This can be overcome by the use of an alphabet share structure by which each shareholder has their own Class of shares, e.g. A ordinary shares, B ordinary shares, C ordinary shares, etc, and which provides flexibility to tailor dividends to individual circumstances. Dividends are paid from posttax profits and have already suffered corporation tax. To prevent dividend allowances being wasted and optimise the opportunity to extract profits without triggering further tax liabilities, in a family company scenario it makes sense to make family members shareholders, even if they have other income and do not work in the company. The benefits are illustrated by the following case study. Case study Dave is the director of a family company DJ Ltd. His wife and two grown-up daughters are shareholders in the company. Dave has 100 A ordinary shares, his wife has 100 B ordinary shares and his daughters, Delia and Diane, have, respectively, 100 C ordinary shared and 100 B ordinary shares. The company has made a post-tax profit of £20,000 that Dave wishes to extract. Dave has received a salary of £12,570 from the company, as does his wife, Debbie. Both Dave and Debbie have income from property and pay tax at the higher rate. If a dividend of £200 per share is declared for A class shares, Dave will receive a dividend of £20,000. After deducting the dividend allowance of £2,000, the balance of £18,000 is taxed at 33.75% -- a tax bill of £6,075. If, instead, the company declares a dividend of £1,400 per share for A class shareholders and a dividend of £20 per share for B, C and D Class shareholders, Dave will receive a dividend of £14,000 and his wife and daughters will each receive a dividend of £2,000. In this scenario, Dave will pay tax of £4,050 on his dividend (33.75% (£14,000 - £2,000)). However, his wife and daughters will receive their dividends tax-free as they are sheltered by their dividend allowances. By using an alphabet share structure and taking advantage of family members’ dividend allowances, the combined tax bill has been reduced by £2,025. If his daughters have not fully utilised their basic rate bands, changing the dividend mix to make use of this can produce further savings.
PAGE 4 Paying PAYE by recurring direct debit Employers must act as a tax collector for HMRC, deducting However, this is changing, and from 19 September 2022, tax, National Insurance and, if applicable, student loan employers will be able to set up a recurring direct debit to deductions, from their employees’ pay and pay these over to HMRC with their employer’s National Insurance contributions. The payments must reach HMRC by 22nd of the following tax month where payment is made electronically, and by the earlier date of 19th of the following tax month where payment is made by cheque. As penalties are charged if the payments are made late for more than one month in the tax year, it is important that these deadlines are not missed. A new recurring direct debit facility may help employers to meet the payment deadlines and avoid penalties. Payment options There are currently a range of payment options available to employers to pay their PAYE. Payment methods include online banking, using a debit card or a corporate credit card or at a bank or building society. Cheques can also be sent in the post, but an earlier payment deadline applies. It has been possible to pay by direct debit, but only as a one off. pay their PAYE. Payment via variable direct debit Employers wishing to pay by direct debit each month will need to set this up through their business tax account and the Employer’s PAYE Online service. A new option will be added to the employers’ liabilities and payments screens, which will feature the option to ‘set up a direct debit’. This will provide HMRC with authorisation to collect the PAYE and NIC that they owe, as shown on their RTI payroll submission, direct from the employer’s bank account. Once the employer has set up a recurring direct debit facility, the link will change to ‘Manage your direct debit’. This will allow the employer to view, change or cancel their direct debit online. It should be noted that only the employer can set up, amend and cancel the direct debit; this is not something that can be done by their agent on their behalf.
PAGE 5 Transferring assets between spouses Although spouses and civil partners are taxed independently, there are some tax breaks available. One of these is the ability for spouses and civil partners to transfer assets between them at a value that for capital gains tax gives rise to neither a gain nor a loss. This can be very useful from a tax planning perspective. No gain/no loss rule The no gain/no loss rule essentially means that where an asset is transferred from one spouse to another, the value of that asset is equal to the transferor’s base cost. This is the case regardless of whether there is any actual consideration and the amount of that consideration. Unlike other transfers between connected persons, the market value rule does not apply. The effect of this rule is that any gain that has accrued while the transferor has owned the asset is passed to the transferee and is not chargeable on the transferor. The gain does not crystallise until the asset is disposed of outside the marriage or civil partnership. Example Peter purchased a painting in 2013 for £6,500. In 2018, he transferred the painting to his wife Pauline. At that time, the painting was worth £9,000. Pauline sells the painting at auction in August 2022 for £12,000. When Peter transfers the painting to Pauline in 2018, it is deemed to be transferred at a value of £6,500. This is the Peter’s base cost and the value that gives rise to neither a gain nor a loss. Pauline assumes Peter’s base cost of £6,500. There is no capital gains tax to pay on the increase in value of £2,500 during Peter’s period of ownership. When Pauline sells the painting in 2022, the full gain of £5,500 is chargeable (£12,000 - £5,000). Pauline is liable for the full gain, not just the increase in value since she acquired the painting. Pauline realises no other gains in the tax year, and the gain is sheltered by her annual exempt amount. If the painting had fallen in value to below £6,500, Pauline would have the benefit of the loss. Tax planning opportunities This rule opens up a number of tax planning opportunities. 1. Access unused annual exempt amounts Transferring an asset or a share in an asset prior to disposal can access a spouse or civil partner’s unused annual exempt amount. The annual exempt amount for 2022/23 is £12,300. Using this strategy can save the couple up to £2,460 in tax (£12,300 @ 20%), or £3,444 for residential property gains (£12,300 @ 28%). 2. Make use of a lower tax band Where a gain cannot be fully sheltered by available annual exempt amounts, if the spouses/civil partners have different rates of tax, the no gain/no loss rule can CONTINUED ON PAGE 6
PAGE 6 be used to share the chargeable gain so that it is taxed at the lowest rate of tax. For example, by taking this route, it may be possible to reduce the tax paid on some or all of the gain from 20% to 10%, or for residential property gains, from 28% to 18%. 3. Change income allocation Income from an asset owned jointly by spouses and civil partners is taxed 50:50 regardless of the actual ownership shares, unless a Form 17 election is made. However, to ensure that income is taxed at the lowest possible marginal rates, the no gain/no loss rules can be used to change the underlying ownership to the desired shares. A Form 17 election can then be made so the individuals are taxed on the income by reference to those shares. 4. Access business asset disposal relief Business asset disposal relief reduces the rate of capital gains tax to 10% on qualifying gains up to the £1 million lifetime limit. Each spouse or civil partner has their own limit. To access each partner’s limit, assets or shares can be transferred from one spouse or civil partner to the other prior to the disposal of the business or its shares. However, remember the conditions must be met for two years prior to the disposal meaning it is necessary to plan ahead. Help if you are struggling to meet your tax bills Inflation is at a ten-year high and the ensuing cost of living crisis means that many people may be struggling to pay the tax that they owe. If this is you, what can you do about it? While it may be tempting to bury your head in the sand and hope that the bill will magically disappear, this is a really bad idea. Ignoring the problem will in this instance make it worse; HMRC will eventually want their money and have a range of tools available to them to help them achieve this. It is far better to take control of the situation. Rather than having to pay everything in one go, you may be able to pay in manageable instalments. Set up an online plan If you are struggling to pay a self-assessment tax bill you may be able to set up an instalment plan (known as a Time to Pay arrangement) online. To do this, you will need to log in to your Government Gateway account. A Time to Pay agreement can be set up online if: ·you have filed your latest tax return; ·you owe less than £30,000; ·you are within 60 days of the payment deadline; and ·you plan to pay your debt off within the next 12 months or less. Call HMRC If you are not able to set up an instalment payment plan online, for example, because you owe tax of more than £30,000 or need longer to pay, you can call HMRC’s SelfAssessment helpline to see if you are able to agree one over the phone. The Self-Assessment Payment Helpline number is 0300 200 3822. The helpline is open from 8a.m. to 6p.m. from Monday to Friday. CONTINUED ON PAGE 7
PAGE 7 Information required You will need certain information to set up a Time to Pay arrangement, including: ·your unique tax reference (UTR) number; ·your bank account details; and ·details of any payments you have missed. HMRC will ask you whether you can pay in full (if you can, they will expect that you do), how much you can repay each month, if you owe other taxes, how much you earn, what your monthly outgoings are and what savings and investments you have. If you have assets or savings, HMRC expect that you will use these to pay any tax that you owe. Stick to the plan Once you have agreed a Time to Pay arrangement, it is important that you make the payments in accordance with the plan, If you miss a payment HMRC will normally contact you to find out why, and where possible will restore the plan. However, if you continue to fault, HMRC will seek to collect the debt in full. If further tax liabilities arise that you cannot pay, it may be possible to amend the plan to include these. 10 Questions with ... Maddie! Maddie Le-Moignan has joined the Compass Accountants team as an Apprentice- Here we ask her 10 Questions about herself... 1.What is the first thing you would buy if you won the lottery? I would buy into property. 2.How did you get into accounting? I’ve only just began my journey here at Compass after finishing my A levels. 3.What is your favourite film? My girl – 1991 4.What was your first ever job? A Saturday girl at Treat Your Skin at 15. 5.If you could invite anyone (dead or alive) to your dinner party, who would you invite? My nana, she would have loved to have seen how things have turned out. 6.What do you like most about working for Compass Accountants? The positive and friendly environment. 7.Which superpower would you most like to have and why? I would like to have super memory so that I could never forget anything. 8. What is your favourite place in the world that you have been? Canal Lock Staircase, England 9. What did you want to be when you were growing up? I used to want to be a teacher. 10. Tell us one strange or unique fact about yourself! I don’t like tea or coffee.
PAGE 8 Client Focus- Material Things In this Client Focus feature, we catch up with Compass client, and owner of Material Things, Malcolm Gingell. Based in Farlington in Hampshire, Material Things has been creating high quality handmade, custom furnishings for over 47 years. Occupying a huge 20,000 sq ft showroom, the business offers everything from bespoke sofas, furniture, re-upholstery services, blinds, curtains, carpets, interior design and flooring. However, the company came from very humble beginnings as owner Malcolm Gingell explains: “Not long after I gained my degree in Furniture Production & Management, I started a job with a large furniture manufacturer to gain practical experience before starting my own business at 25 from inside my father’s garage. The business has come a long way since then!” Fast forward almost half a century, and Material Things is a successful provider of high-quality furnishings that employs 28 people, including Malcolm’s son and daughter. “Over time we gradually grew and grew, and as the business expanded, we opened more shops. At one point we had six outlets. However, we realised it would be better, and more cost-effective to have one very large showroom, with a car park, that allowed people across the southern region to come and visit and experience all of our products. Now, we have over 50 suites on display, as well as our carpets, blinds, furniture, flooring and so on.” As well as occupying a large showroom, Material Things also owns a similar sized building on the same site, that is used for manufacturing & re-upholstery, plus a large warehouse as the business is a stockist for prestigious brands including Parker Knoll, Stressless, Himolla, G-Plan and Luxaflex Blinds. The showroom 20 years ago As members of official bodies such as the Association of Master Upholsterers, the Material Things team has a member of staff with an expertise in every area it works in, from blinds to upholstery, curtains to flooring. “Our upholstering & re-upholstering services accounts for 40% of our work,” said Malcolm. “We are able to upholster sofas in any fabric, whether it’s from our wide collection of designer sofa fabric brands, or even a fabric you’ve found elsewhere. Many people like their sofas to be a certain size and so, we can create that bespoke item specifically for them. Whether they have a curved wall, or even an area within a luxury yacht, we are able to provide them with exactly what they need.” CONTINUED ON PAGE 9 CONTINUED ON PAGE 9
PAGE 9 The showroom today “Almost 70% of Material Things’ clients are returning customers, due to the satisfaction they experience which means, when our clients travel, our services are often required further afield. As a result, we have worked in many different countries, such as the US, Portugal, South Africa, and we have even worked with a few celebrities, which of course, I can’t name!” Working with Compass Accountants As a well-established business, finding a trustworthy and dependable accountant has been of great importance to Malcolm. “Like Lawyers, we tend to find a good accountant and stick with them.” Malcolm said. “Our last accountant we had for 30 years, but he recently went into retirement. Before he retired, he recommended Compass, as did people we knew who were Compass clients, so they naturally seemed to be the right choice to make. And we weren’t wrong. “The way they go about business and the new ideas they have brought to us have been exceptional. They are amiable people and very approachable- but above all we feel we can trust them and that’s important as you want to be able to talk to your accountant openly and have a good relationship. We’ve already recommended Compass to associates and friends of ours.” If you would like to learn more about Material Things, or you would like to visit the show room in Farlington go to www.materialthings.co.uk CONTINUED ON PAGE 9
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