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.
The personal tax return season has finished, with all tax returns successfully filed. We are encouraging clients to file as early as possible this year (2011/12) as this enables clients to budget in advance for their tax bill or receive a potential rebate asap.
Don’t forget to book for our February networking event at Porsche Centre Reading; we are really looking forward to it and it should be a great evening.
Our blog section is filled with excellent articles essential for the business owner, if there are any topics that you think would be really useful just let us know.
Please contact us for advice in your own specific circumstances. We’re here to help!
Table Of Contents
Closing Down Your Company
If your company contains significant value, you will want to extract the cash and assets in the most tax efficient manner. Until now you could ask the Taxman to apply concession C16 to the payments made during an informal winding-up up of the company. Concession C16 allows the payments made to shareholders (known as distributions) to be taxed as capital gains. Shareholders who were also officers or employees of the company may be able to claim entrepreneurs’ relief on those gains, which means the gain is taxed at just 10%.
Concession C16 is generally granted when the company has paid all its creditors, including the Taxman, and the owners promise not to start-up the same business in a different company. Concession C16 will cease to apply from 1 March 2012, and will be replaced by a new law as follows:
- Where the distributions are more than £25,000 in total, all those distributions will be subject to income tax (at rates of 25% or 36.11%), in the hands of the shareholders.
- Where the total value of the distributions to the shareholders of the company is no more than £25,000, the entire amount will be taxed as capital gains (at 10% where entrepreneurs’ relief applies, or at 18% or 28% otherwise).
- Payments made as part of an informal winding-up on or after 1 March 2012, will be subject to the new law even if permission to use concession C16 was previously given.
- It doesn’t matter on what date the company is finally dissolved or struck-off, it is the date on which the distribution is made that counts.
If your company holds significant value and you want to close it down, you can opt to use a formal liquidation. This will allow all the distributions to be treated as capital gains and for the lower tax rates to apply. However, a registered liquidator may charge a fee of £5000 or more to undertake the liquidation.
Penalties for Late Payment of PAYE
If you use the faster payments service (FPS) to make your PAYE payment, the amount transferred will clear the Taxman’s bank account on a Saturday, Sunday and on most bank holidays (not Christmas day or New Years day). However, there are limits on the amounts that can be transferred per day and per transaction using FPS, which vary from bank to bank. So check what limit your bank applies.
Late payments of PAYE will result in an automatic penalty of up to 4% of the PAYE that was paid late. You are permitted to make one late payment of PAYE during the tax year, but two or more late payments will mean that a penalty will be charged after the end of the year.
In addition, if you have still not paid after six months you may have to pay a further penalty of 5 per cent. A further penalty of 5 per cent may be charged if you have not paid after 12 months. These apply where only one payment in the tax year is late.
The Taxman has already issued many penalties for late payment of PAYE in 2010/11, and some of these penalties have been calculated incorrectly. If you receive a penalty notice, please ask us to check it as soon as it arrives. Any appeal must be submitted with 30 days.
Confessing to Tax Fraud
If you receive a letter offering the CDF, it is a very serious matter. The Taxman has taken a view that he could launch a criminal investigation into your tax affairs, but has decided that a criminal case is not cost-effective. Instead he is offering you a binding agreement to come clean, with the promise of low penalties.
You only have 60 days to decide whether to accept the CDF. If you don’t reply in that period, the Taxman will start a formal investigation into your tax affairs, which could result in a criminal case. The CDF letter will also contain a denial letter, which you can sign and return if you believe you have no involvement in tax fraud.
Before you make any response to a CDF offer, please discuss the matter with us in confidence.
Reporting EU Sales to HMRC
The ECSL is generally submitted quarterly, but businesses that export goods totalling more than £35,000 (excluding VAT) per quarter must complete an ECSL every month. If your business only sells services to other EU countries you can continue to submit a quarterly ECSL, but you can opt to submit monthly ECSL forms.
When you complete box 8 on your VAT return, the Tax Office will automatically send you an ECSL form to complete. The paper ECSL form must be submitted within 14 days of the end of the reporting period. You can complete the ECSL online, in which case you have 21 days from the end of the period to submit the form. Note that this deadline is well before the deadline for your regular quarterly VAT return.
We can help you submit ECSL forms, either on paper or online. Talk to us about the work involved.
February Question & Answer Section
A. You should record the date, destination and distance of each business journey you drive in your own car. It is good practice to record the total on your car’s milometer at the start and end of each journey. Your employer can pay you up to 45p per mile for each business related journey you drive. Business journeys do not include normal commuting between your home and your permanent workplace. If your employer is VAT registered it will be able to reclaim VAT on part of the mileage allowance you receive, if you provide VAT receipts to the value of the fuel used. The VAT receipts do not have to exactly match the dates of your journeys. When travelling by public transport keep the receipt for the ticket.
Q. I’ve always calculated my business income for a full year to 30 April. On my tax return for 2010/11 I’ve recorded my business profits, income and expenses for the year to 30 April 2010. But when I rang the Tax Office with a query the adviser told me that my accounts should always be drawn up to 5 April. Have I been doing it wrong for 20 years?
A. The adviser at the tax office is wrong. You can draw up your business accounts to any date you please. The year end of 30 April gives you a long delay between the end of your accounting year and the date on which you need to pay tax on the profits for that period.
Q. A friend told me I’d pay less tax if I held my let properties through a company. Is that true?
A. The answer depends on whether you need to get your hands on the proceeds from your lettings business and your current highest tax rate. Let’s assume you need the cash and your highest tax rate is 40%.
If the properties are in a company, the company will probably pay tax at 20% on the rental profits. But it’s tax rate could be up to 27.5% if the annual profits exceed £300,000, or you control a number of companies. When you extract the profits from the company as dividends you will pay a further 25% income tax. So for rental profits of £100, you will end up with £60 in your hands.
If you hold the properties personally, and pay tax at 40%, for every £100 of rental profits you will receive £60 in your hands. No different to holding the properties in a company. However, if you had not extracted the profits from the company until a later year when you are a basic rate tax payer you would then be paying less tax. It can also be beneficial to keep the profits in the company to re-invest in further properties. The company may pay tax of 20% on the gain it makes when it sells the let properties. If you sell the properties you will probably pay tax at 28%, but you will be able to set-off a tax-free allowance of £10,600 against the gain, which is not available to the company. You may have to also pay further tax when extracting the profits out of the company.
February Key Tax Dates
- Last day for car change notifications in the quarter to 5 January – Use P46 Car
- PAYE/NIC and CIS deductions due for month to 5/2/2012
- Talk to us about year end and pre-budget planning
First 5% penalty surcharge on any 2010/11 outstanding tax due on 31 January 2012 still unpaid
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