Welcome to February’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.

If you need further assistance just let us know or you can send us a question for our Question and Answer Corner.

We are committed to ensuring all our clients don’t pay a penny more in tax than is necessary.

Please contact us for advice in your own specific circumstances. We’re here to help!

New Companies House Late Filing Penalties

It’s more important than ever to get your books and records into us on time because from 1st February 2009 private companies that fail to file their accounts on time will face increased fines. The maximum fine will be imposed after 6 months rather than the current 12 months. The fines will also start to increase after just one month’s delay instead of three months. The new penalties for private companies are as follows…

Less than 1 month late: £150

More than 1 month but less than 3 months: £375

More than 3 months but less than 6 months: £750

More than 6 months: £1,500

The permitted time limit for filing accounts also comes down from 10 months after the year end to 9 months for accounting years starting on or after 6 April 2008. In addition where there was a failure to comply with filing requirements in relation to the previous financial year (and the previous financial year had begun on or after 6th April 2008), the penalty will be double that shown above.

Companies House can expect its late filing penalty income from private companies to soar to £100 million in 2010, up from the 2007 figure of £47.4 million.

Sharing Family Rental Income

In these difficult times it makes sense to share out the family income as much as possible so all the family’s tax free allowances are fully used. You can’t redirect some of your pre-tax salary to your family members, but you can give your spouse or grown up children assets that will generate income. A let property is ideal for this.

First check how your let property is owned. Is it held…

– just in your name, as ‘joint tenants’ meaning the owners hold equal shares in the property, or
– as ‘tenants in common’, when the owners may hold different proportions of the property, say 30% and 70%.

Generally property owners are taxed on the proportion of the property income that relates to their interest in the property. However, married couples are automatically taxed on half the income each, unless the Taxman is told otherwise.

Half the profits from the property may not use up all of your spouse’s personal allowance. To put more of the property income in their hands to help save tax you need to change the way the property is owned so your spouse owns a larger proportion of the property. To do this you can ask a solicitor to change the ownership so the property is held as tenants in common in the shares you want.

Once this is done you need to tell the Taxman who owns what share in the property by completing Form 17 and sending it to your tax office. The new ownership proportions will apply for tax purposes from the date of change as long as the Taxman receives the signed Form 17 within 60 days of the change in ownership.

You won’t have to pay capital gains tax when you transfer a share in the let property to your spouse if this is done in a tax year when you are living together.

If you are not married to your partner, the gift of a share in property is treated as a sale at market value and you may have to pay capital gains tax on that deemed sale. The same applies if you give a share in a property, or a whole property, to your children.

If the mortgage secured on the let property is also transferred from the name of one person into the names of both of the owners, the new owner may need to pay some Stamp Duty Land Tax if the amount of mortgage transferred is above stamp duty limits. However, the new owner needs to be included on the mortgage deed so they can claim part of the mortgage interest as a deduction on their tax return against their portion of rents received from the property.

Dividend Planning

If you run your own company one way to share the dividend income around the family is to ensure that each family member owns some shares in the company, so they can receive dividends voted on those shares. This can help to reduce tax bills.

The individuals need to use their own money to subscribe for the shares, or they must receive the shares as a gift from another shareholder. However, if you give shares to your children who are aged under 18, the income the children receive from those shares will be taxed as your own (unless income isn’t over £100/year). If the children use their own money to acquire the shares it must be clear that the funds did not come from you. Even if this is clear, the Taxman may argue that as the controlling directors of the company you have placed the dividends in the hands of your children by arranging for shares to be issued in their names. In that case the dividend income will still be taxed on you rather than on your children.

Giving shares to your spouse can be effective for tax purposes, although the Government is determined to clamp down on the manipulation of dividend income by family companies, which they see as tax avoidance. However, the proposed income shifting legislation that was to deal with family dividends has been shelved. So for now this type of planning can work but it may re-emerge as an issue in the future.

It may be you want family members to receive dividends in proportion to the effort they put into the business, perhaps to guard against income shifting legislation should it come into force. One way to try to do this is to issue various classes of shares, such as: A-shares, B-shares, and C-shares, known as alphabet shares. A different level of dividend is voted for each class of shares. The shares may also have different rights with regard to voting and assets allocated on the winding up of the company. However, issuing alphabet shares is not completely straight-forward, particularly if the shareholders also work for the company, so please ask our advice.

Save Tax on Winding up a Company

It is often not quite as easy to close down a limited company, as it is to set one up. Where a company has surplus assets it is often beneficial for tax purposes for those assets to go back to the shareholders in the form of a capital gain rather than as dividend income to take advantage of CGT exemptions and reliefs. The formal way of doing this to appoint a licensed insolvency firm to deal with the assets and liabilities but this can be expensive. However, an alternative to consider is an informal procedure called Extra Statutory Concession C16 (ESC C16) that can be used.

This is a concession applied by HMRC, which allows the remaining assets and cash in the company to be distributed to the shareholders without a liquidator being involved.

Where ESC C16 is used the distributions made to the shareholders are treated as capital, so capital gains tax is payable on any gains. In many situations, the amounts are small so the gains are covered by the individual’s annual capital gains exemption (£9,600 for 2008/09) so no tax is payable at all.

However, before the Taxman will give permission for ESC C16 to be used the company secretary and its shareholders must give HMRC the following assurances:

The company:

– does not intend to trade or carry on a business in future;
– intends collecting its debts, paying off its creditors and distribute any balance of its assets to its shareholders; and
– intends to ask Companies House to strike it off the register of companies.

The shareholders and the company must agree to:

– provide all information to HMRC such as company tax returns and accounts to determine any tax liabilities, and pay any corporation tax due on income or chargeable gains and
– the shareholders will pay any tax due in respect of any amounts distributed to them out of the company.

One word of warning; any aggrieved creditors of the company can object to the company being struck-off and may ask for it to be reinstated if it has already been struck-off. Thus if there are any live claims against the company, a formal liquidation is usually the best way to solve the problem.

Question and Answer Corner

Q. I run two separate businesses (A Ltd and B) that have separate VAT registrations, as only one is a limited company. Both A and B use the cash accounting scheme which means the VAT due on sales is only accounted for when the payment is received. However, sometimes customers make payments to A which are due to B. I correct this by transferring funds from the bank account of A to B, or by setting-off the amounts owing between the businesses. When should I treat the payment due to B as being paid for my VAT records?

A. As your businesses have separate VAT registrations they are independent for VAT accounting purposes. Business B is only treated as receiving the payment when the money arrives in its bank account from an electronic transfer, or a cheque is received, as long as that cheque subsequently clears. It is irrelevant that the money has come via A’s bank account. Where the payment to B is made by you off-setting the amounts owing between A and B, you should treat B as receiving the money on the date you made this set-off.

Q. My husband died in 2007 and I have recently received a large tax demand in his name for the tax year 2007/08. I calculated there was no tax to pay, as his age adjusted personal allowance covered his pension income, and all the bank interest had taxed deducted by the bank. What should I do?

A. This tax demand is probably incorrect. Ring the tax office and ask them to check their figures against what you put on your late husband’s tax return. In particular query the amount of state retirement pension. The Tax office may have altered your husband’s state pension figure to the amount due for the full tax year, ignoring the fact the pension stopped at his death. The tax office should have told you they were ‘correcting’ the pension figure. If they didn’t do this send them a letter of complaint.

Q. I’ve been out of the country so I won’t be able to finalise my accounts and submit my tax return for 2007/08 until mid February 2009. I don’t think I owe any tax as I have made a loss for the year. Will I be charged the £100 penalty for a late tax return?

A. You will be sent a penalty notice if the tax office has not received your 2007/08 tax return by 1 February 2009. When you do submit your return and it shows you had no tax to pay at 31 January 2009 the penalty should be reduced to nil. However, do not delay completing your return as the Tax Inspector can ask the Tax Tribunal to impose a penalty of up to £60 per day to encourage you to file your outstanding tax return. This penalty will not be reduced even if you owe no tax.

Key Tax Dates for February 2009

2 – Last day for car change notifications in the quarter to 5 January – Use P46 Car

19/22 – PAYE/NIC due for month to 5/2/2009

28 – Talk to us about year end and pre-budget planning.
First 5% penalty surcharge on any 2007/08 outstanding tax due on 31 January 2009 still unpaid.