from A newsletter for proactive planning... In this edition... Utilise the deduction for paid and reimbursed expenses Have you declared your dividends correctly? Beware the new VAT late submission penalties Giving away money free of IHT Preserving the personal allowance Client Focus- Ian Henry's Barbers June 2023 Issue www.compassaccountants.co.uk
PAGE 2 Utilise the deduction for paid and reimbursed expenses Employees often need to incur expenses when undertaking their jobs. The nature of the expense may vary depending on the job, but typical expenses include travel and subsistence expenses and fees and subscriptions. It will often be the case that the employee initially incurs the expense and then reclaims the cost from their employer via an expenses claim. The employer may also choose to pay expenses by making scale rate payments. Reimbursed expenses As long as certain conditions are met, reimbursed expenses are tax neutral – the employer can ignore the payment to the employee – there is no need to tell HMRC about it or deduct tax or National Insurance. Likewise, the employee does not have to pay tax on the reimbursed amount or claim a tax deduction for the expense that they met initially. The exemption applies if the employee would be entitled to a deduction if they incurred the expense personally. However, the exemption does not apply where the payment is made under a salary sacrifice arrangement. An expense will be deductible if incurred by an employee if the employee incurs it wholly, necessarily and exclusively in the performance of the duties of the employment. A deduction may also be permitted under a specific legislative provision, such as that governing travel expenses or fees and subscriptions. Example Angela is employed as a dentist. She is required to be a member of the British Dental Association by her employer. She pays her annual subscription, which she reclaims from her employer. The exemption applies and the reimbursement is ignored for tax purposes. Scale rate payments The exemption will also apply where scale rate payments are used to reimburse travel and subsistence expenses, as long as the amount has been calculated in an approved way and the employer is satisfied that the employee has undertaken the travel in respect of which the expense has been claimed. The employer can pay subsistence expenses using HMRC’s benchmark rates set out in regulations or agree bespoke rates with HMRC. The exemption does not apply if the payments are made under a salary sacrifice scheme. Example Brian is required to visit a supplier as part of his job. He undertakes seven hours of qualifying travel and is entitled to claim a meal allowance. His employer pays the statutory amount of £5. The exemption applies and the meal allowance is ignored for tax purposes. Employer meets the expense The exemption also comes into play if the employer meets the cost of an expense which would be deductible if incurred by the employee personally, such as the cost of a train ticket for an employee to visit a customer for a meeting. The amount paid is simply ignored for tax purposes. Example Catherine is required to attend a meeting with a supplier. Her employer purchases her train ticket. The exemption applies and Catherine’s employer does not need to tell HMRC about the expense or account for tax on it.
PAGE 3 Have you declared your dividends correctly? Dividends are a popular and tax-efficient way to extract profits from a personal or family company once a small salary has been paid. However, the rules surrounding dividends are strict and failure to comply may mean that HMRC will tax payments purporting to be dividends as employment income rather than as dividends. This will mean a higher tax bill, plus National Insurance. Paid from retained profits Dividends are a distribution of profits and can only be paid if a company has sufficient retained profits from which to pay the planned dividend. Before paying a dividend, the director(s) must consider the company’s financial position, particularly if it has changed since the last set of accounts was prepared. Any dividend paid in excess of the retained profits is an illegal dividend. Paid in proportion to shareholdings Where more than one person holds shares of a particular class, dividends must be paid in proportion to shareholdings. In a family company, this restriction may be overcome by using an alphabet share structure to provide the flexibility to tailor dividend payments to the shareholder’s personal circumstances. Types of dividends There are two types of dividends – interim dividends and final dividends. Interim dividends are paid throughout the year, for example, to a director to meet their living expenses. A final dividend is paid annually after the end of the accounting period. Declaring dividends Dividends must be properly declared in accordance with company law requirements. While the directors can simply decide to pay an interim dividend, a final dividend must be declared in accordance with the procedure set out in the Articles of Association. Where the Model Articles have been adopted, a final dividend should be declared by ordinary resolution. The directors must recommend the amount of the dividend and this must be agreed by the shareholders in a general meeting. This normally happens at the AGM. The company should prepare Board minutes. These should contain: ·The name of the company. ·The date that the dividend was approved. ·The name of the director(s). ·The company’s address. The minutes should set out the amount of the dividend (per share), the type of shares in respect of which it is being paid, the date it is being paid and the date on which shareholders need to be registered at Companies House in order to be eligible to receive the dividend. Dividend voucher Whenever a dividend is paid, the shareholder should be given a dividend voucher. The dividend voucher should contain: ·The name and address of the shareholder receiving the dividend. ·The company’s name, registered office and registration number. ·The date of issue. ·The amount of the dividend paid. ·The signature of the company director(s) or a company officer. The shareholder should retain the dividend vouchers as these will be needed when completing their personal tax return.
PAGE 4 A new penalty regime was introduced for VAT from 1 January 2023. The new regime comprises late submission penalties and late payment penalties. Here we look at the penalty regime for late returns. Late VAT returns The late submission penalty regime kicks in whenever a VAT return is filed late. It applies regardless of whether VAT is owed to HMRC or whether the business is reclaiming VAT back from HMRC. For repayment traders this is a new concept as they have not previously had to worry about penalties for filing their VAT returns late. Penalty points The penalty regime works on a penalty point system. A VAT-registered business will receive a penalty point each time they file their VAT return late. Once the number of penalty points that they have been given reaches a certain level, the business will receive a financial penalty of £200. The penalty threshold depends on how frequently the business files VAT returns. The thresholds are as follows: ·Annual returns: 2 penalty points. ·Quarterly returns: 4 penalty points. ·Monthly returns: 5 penalty points. Penalty points have a lifetime of two years, after which they expire. Once the penalty threshold has been reached and a penalty charged, the clock will only start again once the business has achieved a period of compliance. To do this, they must meet all submissions in their compliance period, which is 24 months for businesses filing annual VAT returns, 12 months for businesses filing quarterly returns and 6 months for businesses filing monthly returns. They must also have made all the submissions that were due for the preceding 24 months (regardless of whether the submissions were initially late). Once these tests have been met, the penalty points total is reset to zero. HMRC have the discretion not to charge a penalty if they consider this to be appropriate. Time limits also apply during which penalty points must be levied, and points cannot be issued outside this window. The window runs from the date the return was due and is set at 48 weeks where VAT returns are submitted annually, at 11 weeks for quarterly returns and at 2 weeks for monthly returns. HMRC must also issue a financial penalty within two years of the failure that took the penalty points to the penalty threshold.
PAGE 5 Giving away money free of IHT Most people do not want to give money to the taxman when they die. However, while it is said that inheritance tax (IHT) is a voluntary tax that can be avoided by giving away money during your lifetime, there is the practical issue that people need money to live on while they are alive. This is compounded by the fact that most people do not know when they are going to die, making planning with any certainty difficult. portion can be claimed by the estate of the deceased’s spouse or civil partner. Residence nil rate band A separate nil rate band applies where a main residence is left to a direct descendant, such as a child or grandchild. This is set at £175,000. However, it is reduced by £1 for every £2 by which the deceased’s estate exceeds £2 million (so not available where the value of the estate is at least £2.35 million). As with the standard nil rate band, any unused Inter-spouse exemption There is no IHT to pay on anything left to a spouse or civil partner. The ability to transfer any unused nil rate band eliminates worries about leaving the surviving spouse or civil partner provided with sufficient funds for the remainder of their life while passing on the estate in a taxefficient manner. Both parties’ nil rate bands can be used when the estate is passed on following the death of the Gifts from income The gifts from income exemption is a very useful exemption. It allows an individual who does not need all their income to make regular gifts of that income free of IHT, rather than simply letting it accumulate in a bank account and attracting a potential IHT charge if passed on when the individual dies. Despite these limitations, there are some simple steps which There are conditions. The gift must be made regularly and must leave the individual with enough to meet their can be taken to allow money to be given away IHT-free. outgoings. The gifts must be made from income rather than depleting the individual’s capital. Nil rate band Everyone has a nil rate band – set at £325,000 and This exemption could be used by a parent to help a child remaining at this level until at least 5 April 2028. Any with their rent or mortgage payments – here it is usually unused portion of the nil rate band can be used by the advisable to set up a regular standing order. Alternatively, a deceased’s spouse or civil partner’s estate on their death. grandparent can pay a grandchild’s school fees. There is no IHT on gifts sheltered by the nil rate band. Cont on page 6
PAGE 6 surviving spouse/civil partner. Other exemptions There are a number of small exemptions that can be useful. The first is the annual exemption set at £3,000 a year. Where it is not used one year, it can be carried forward to the next year and used once the exemption for that year has been used. Over 20 years, this exemption allows £60,000 to be given away IHT-free, saving IHT of up to £24,000. There is also a specific exemption for wedding gifts – set at £5,000 for a gift to a child, £2,500 for a gift to a grandchild and £1,000 for other wedding gifts. There is also an exemption for small gifts of up to £250 per person (as long as they have not benefitted from another IHT-free gift, such as a wedding gift). Seven-year rule Gifts made at least seven years before death fall out of account for IHT purposes. Where the gift is made at least three years before death, a taper applies. Making early lifetime gifts can save IHT, but the donor cannot continue to benefit. Trusts Trusts can be effective at saving IHT; however, consideration of trusts is outside the scope of this article. Professional advice should be sought. Preserving the personal allowance The personal allowance is set at £12,570 for 2023/24. However, not everyone is able to benefit from the personal allowance. A taper applies which gradually reduces the personal allowance until it is lost. The taper applies when adjusted net income exceeds £100,000. It operates by reducing the personal allowance by £1 for every £2 by which adjusted net income exceeds £100,000. Example William has an adjusted net income of £110,000 for 2023/24. As his adjusted net income exceeds £100,000, his personal allowance is reduced. At £110,000, his income exceeds £100,000 by £10,000. The taper reduces his personal allowance by £1 for every £2 of the excess – a reduction of £5,000. Consequently, William will only receive a personal allowance of £7,570 for 2023/24 (£12,570 – £5,000). The personal allowance is lost in its entirety once adjusted net income reaches £125,140. The taper threshold has remained unchanged at £100,000 since its introduction, bringing more people within its scope as wages rise due to inflation. Cont on page 7
PAGE 7 60% marginal rate of tax The combined impact of the personal allowance taper and the higher rate of tax (at 40%) applying in this band means the marginal rate of tax between £100,000 and £125,140 is 60%. It drops to 45% (the additional rate) once income reaches £125,140. A 60% marginal rate of tax is a high rate. However, when National Insurance contributions, pension contributions and student and post-graduate loans are taken into the mix, the marginal rate of deduction in this zone can climb to 80%. Preserving the allowance There are some steps that can be taken to preserve the personal allowance where income falls in the abatement zone. Option 1 – timing Where it is possible to control the timing of payments, as may be the case in a personal or family company, consideration can be given to deferring income so that it is received in 2024/25 instead. This will be useful if it will reduce income in 2023/24 such that either the personal allowance is preserved or less of it is lost, without triggering the taper in 2024/25. Deferring £15,000 of income so that adjusted net income is £105,000 in 2023/24 rather than £120,000 will mean that the personal allowance is £10,070 in 2023/24 rather than £2,570. Option 2 – pension contributions Making pension contributions can be tax-efficient, with the added benefit of building up funds for retirement. The increase in the annual allowance to £60,000 for 2023/24 and the abolition of lifetime allowance charges pave the way for making higher pension contributions in 2023/24. Making a pension contribution of £30,000 to reduce adjusted net income from £130,000 to £100,000 will recover the personal allowance in full. The contribution will also attract tax relief. Option 3 – donations to charity Individuals who want to make charitable donations can take advantage of the gift aid rules to make charitable gifts while reducing their adjusted net income and preserving their personal allowance.
PAGE 8 Client Focus Ian Henry's Barbers In this client Focus we catch up with Compass Client, and co-owner of Ian Henry Barbers, Curtis Lavell… Established in 1928, Ian Henry’s is one of the longest running barber shops in Portsmouth. Based on Spur Road, ownership of the barbershop has traditionally been taken on by the staff that have worked there, all of whom have maintained the traditions and community spirit the barbershop was founded on. After Ian Henry himself worked at the barbers from the age of 18, he took it over and worked as a barber for 60 years. Ian eventually sold it to another staff member, who most recently sold it to the current owners, Curtis and Lawrance Lavell in September 2022. “It’s a great honour to own a barbershop that has been a staple of the community since the late twenties.” Says Curtis, who continues to work as a barber alongside staff members Amy and Katie. They also support an apprentice who is currently in full time education, for one day a week, who is in preparation for working at the barbers after leaving school. Curtis owns Ian Henry’s with his husband Lawrance who looks after marketing, finance and general day to day running of the business. “After working here for many years, I made a joint decision with Lawrance to buy the shop. We were adamant that we didn’t want to change the name as it has been Ian Henry’s for so long, and we wanted to keep that tradition alive.” Approaching its 100th birthday, the barbershop has been serving generations of customers, many of which have been clients for decades. “We have older customers that have been coming here for years,” adds Curtis, “Some of which actually went to school with Ian Henry himself! There are many generations of clients, young and old, men that came as boys, that now bring their sons in. We’ve even seen older clients bring their great grandsons in and both have their hair cut together.” The heart of a strong community “Portsmouth is generally smaller than the bigger cities and so, in our community, many people are familiar with each other. On a busy Saturday you really see that. There’s a big rush for kick off on football days, the lads rush over to the Cont on page 9
PAGE 9 pub and watch the game with a few drinks, mums come in with the kids. We really are a part of a local traditional atmosphere, and quite a well-known within in the community.” “Recently, one of our young customers tragically passed away. We had been the family’s barber for years, so it was really important for us to contribute, help out in any way and support the family. Things like that hit you hard. They make you realise, you really are part of a wider community.” Meeting Compass When Curtis and Lawrance first took over Ian Henry’s, Lawrance researched different accountants in Fareham, and looked for one that had experience with barbers. “We were looking for a local accountant that could best suit our needs.” Said Curtis. “And then we came across Compass. "We had a chat and got on really well. They have been a massive help in getting started and helping to set the business up for us. They are always Curtis at work with a client helpful, always there to help us, guide us through things -especially when we ring up and say – ‘I don’t get it?!’ It always feels like they are there for us, whatever we need, which is great.” If you would like to visit Ian Henry’s, head to Spur Road in Portsmouth or call 023 9232 4022
Fleepit Digital © 2021