Month: November 2016

Frost Wiltshire

Operating through a company – managing the IR35 risk

What Is IR35?

There is a lot of information about IR35 and urban myths of which many aren’t true. IR35 came into effect in April 2000 and was designed to stop contractors working as disguised permanent employees i.e. benefiting from the tax advantages of being a contactor without accepting the increased responsibilities of company ownership. This means working with the same level of responsibility, control and liability expected of directors of other limited companies. For example an IT worker may resign from their permanent role on a Friday, but return on Monday doing the same job, at the same company, same desk with the same manager. The only difference is they are now doing the job as an IT Contractor working through their own limited company.

Due to the increased work, risks and responsibility there are certain tax advantages, for example dividend payments (profits taken from your company) though a limited company do not attract National Insurance contributions, which is fair enough as you wouldn’t be able to benefit from all the standard employee benefits such as holiday pay, sick pay, pension etc.

What is inside and outside IR35?

Essentially if you have the same benefits, responsibilities and control as a permanent employee, then you would more than likely be classed as inside IR35 (caught by IR35). Some of the key factors that determine if you’re inside or outside IR35 are control, financial risk, substitution, provision of equipment (sometimes, especially in secure sites you may have to use a client side equipment), right of dismissal and employee benefits.
Many of the above will be detailed in your contract. However, it is best to remember that although HM Revenue and Customs will more than likely want to see your contract, your working practices must reflect what is in your contract.

IR35 can be a complex issue, but it can be managed.

The underlying message emerging from the HMRC is that there is considerable IR35 under-compliance. HMRC want to tackle the issue with legislative changes and also alterations in approach. It is now more important than ever to understand whether your arrangement is IR35 compliant – there is a lot of money at stake! We can perform comprehensive IR35 Contract Review and look at both your contractual terms and working practices to offer you a clear opinion on your IR35 status.

So, don’t wait until HMRC start taking an interest. Simply call us on 0117 304 8455 to discuss your requirements.

Frost Wiltshire

Changes to tax on savings and dividends

From 6 April 2016, there have been a number of changes in the way that savings income, including interest and dividends, is taxed. As with all tax changes, there will be new opportunities for taxpayers to reduce their tax burden by ensuring that their affairs are structured efficiently. The changes have been billed as a simplification which would lift many taxpayers out of self-assessment. However, whilst the changes will bring simplification for some, they will also mean that others need to complete a tax return, where they did not before. Whether you benefit from these new changes or are penalised by them will depend on your individual circumstances. For example, if a basic rate tax payer receives dividends of more than £5,000 per annum, they will have a tax liability on these dividends for the first time under the new rules and will need to complete a tax return.

So, what’s changed in the taxation of interest?

Since 6 April 2016, every taxpayer has a new ‘personal savings allowance’ (PSA). For a basic rate taxpayer, the first £1,000 of savings income will be taxed at 0% and for a higher rate taxpayer, the first £500 of savings income will be taxed at 0%. No PSA is available for an additional rate taxpayer. The PSA is actually a nil rate of tax rather than an ‘allowance’ in the truest sense. This means that it does not reduce net income for the purpose of determining whether a personal allowance is available or whether the high income child benefit charge applies; it is therefore not quite as generous as it seems. As a result of this, from 6 April 2016, banks and building societies no longer deduct tax from interest, this is now paid gross.

What about dividends?

From 6 April 2016, there were also major changes to the rules on dividend taxation. There were three main changes:

Firstly, the 10% notional tax credit was removed. Secondly, the tax rates on dividends have substantially increased at all levels; to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. The new rates with their comparatives are shown below.

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The third change mirrors the PSA above. Each taxpayer will receive a £5,000 Dividend Allowance (DA). Like the PSA mentioned above, this is also a nil rate of tax rather than a true allowance.

Making the most of these changes

In light of these changes, some of the areas that taxpayers should be considering are:
• Spouses/civil partners should ensure that one party is not wasting their PSA or DA. Assets can be transferred between them to maximise their tax free allowances.
• It may not be essential to invest in cash ISAs or stocks and shares ISAs in light of the new allowances, as the first slice of savings or dividends will be tax free.
• For the business owner, it may be worth considering whether it would be more tax efficient to incorporate the business. (This will depend on individual circumstances).
• Shareholders/directors of owner managed companies need to consider the most efficient tax structure for their rewards. For example, ensuring they make use of their DA by taking dividends of at least £5,000 per annum and by charging interest on loans they make to their companies to make use of their PSA.

For a more detailed discussion of how the new rules can affect you and what you might be able to do to improve your tax position, please contact Mel Hackney or Steve Wiltshire on 0117 304 8455.

Frost Wiltshire

Residential property income – tax changes are upon us

Buy to let landlords of UK residential properties have been bombarded with tax changes in the last year.

In the past, letting residential property (even by individuals) was treated as a ‘property business’ for the purposes of calculating the taxable profit. Therefore, on normal business tax rules, interest paid on a loan used to purchase a property which is let, was deducted from the rental income received in the property business. For individuals who are landlords, the Government has changed this longstanding rule. In future, instead of deducting the interest from the letting profit, before that profit is taxed, the individual will only be allowed an income tax deduction at the basic rate (20%) on the interest paid.

What is changing?

This is a major change for landlords which will be phased in from 2017/18, with transitional rules until 2020/21. During the transitional years, the amount of the tax deduction from rents will reduce and the proportion of loan interest that will only qualify for basic rate tax relief will increase. In the transitional years, landlords will be able to claim:
• 2017/18 – 75% of the interest against rents, 25% basic rate tax relief
• 2018/19 – 50% of the interest against rents, 50% basic rate tax relief
• 2019/20 – 25% of the interest against rents, 75% basic rate tax relief.
• from 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.

However, as now, any unrelieved interest can be carried forward to future years. HMRC has confirmed that the change will have no effect where a property meets all the criteria to be a furnished holiday letting.

The consequences

With interest rates expected to rise over the next few years, landlords will need to consider these issues carefully when setting rent levels in future.
The change could significantly affect higher and additional rate taxpayers who let out highly geared residential properties. Individuals who currently pay tax at 40% or 45% on letting profits will pay more tax as a result of this change, although the increases planned for personal allowances and the basic rate band up to 2020 will mitigate the impact a little. However, as relief will be given after an individual’s personal allowance has been calculated, many individuals who let properties will find that their personal allowance is restricted in future.
Conversely, where the personal allowance is not fully used in 2016/17 but is fully used in 2017/18 and later years, some unrelieved loan interest may be carried forward in those years.

Ownership through a company

This change will have no direct impact on those who own and let residential properties through a company: companies will continue to deduct loan interest as a business expense and get effective relief at up to 20% (although this will fall in future as the rate of corporation tax falls). The ability to take income flexibly in the form of dividends will be more attractive to landlords who might otherwise lose their personal allowance. Of course, the effective rate of tax on dividend income changed from 6 April 2016. Those taking low levels of dividends may suffer a lower effective rate because of the new £5,000 allowance, but those taking higher dividends may pay more as the rate of tax on dividends rises.
As there are many other issues to consider, deciding on the most efficient way to hold buy-to-let properties is not straight forward – the best option will depend on individual circumstances and long term objectives. Incorporation of an existing property letting business may not be practicable in many cases, including where this would result in a large stamp duty land tax liability.

Wear and tear allowance

Wear and tear allowance is abolished for 2016/17 onwards for income tax purposes. This will remove the established system of allowing a fixed annual deduction for wear and tear on soft furnishings and moveable furniture used in a furnished letting business (10% of the rents less costs normally paid by the tenant) from April 2016. For 2016/17 onwards, landlords may only claim expenses actually incurred during the tax year, excluding any element of replacement expenditure that represents an improvement.
For furnished lettings, this change may benefit landlords letting high value properties where their annual costs for replacement of soft furnishings and moveable furniture are high. Conversely, landlords at the lower end of the market will need to carefully consider the impact that this will have on their rental profit in future years.
The change could also benefit landlords of partly furnished properties, as the new relief applies to all landlords of residential dwelling houses, no matter what the level of furnishing.

Rent a room relief
The annual amount that landlords can receive from letting a room in their own home before tax becomes payable increased from £4,250 to £7,500 (£144 per week) from April 2016 onwards. There are no proposals to change the other rules for the relief, so the new £7,500 limit is available as an exemption or, where rents are higher, as a fixed deduction from rents.

Next steps
For a more detailed discussion of how the new rules can affect you and what you might be able to do to improve your tax position, please contact Mel Hackney or Steve Wiltshire on 0117 304 8455.