Author: Frost Wiltshire

Frost Wiltshire

Set a reminder..your tax return is due by 31 January.

With the summer behind us, and the arrival of autumn’s shorter days, we’ve started thinking and planning ahead.

Christmas is on the horizon and so also, inevitably, is the 31 January midnight deadline for filing your online Self Assessment tax return for the tax year ending 5 April 2017.

It’s important to understand that submitting your tax return late could cost you much more than failing to pay on time, so don’t miss the deadline for filing.  A late tax return usually means an immediate fine of £100, and then subsequent penalties if you continue to delay. If you pay your tax bill late, you’ll be charged interest on the amount you owe.

If your Tax return is currently outstanding and you would like to know what you owe HMRC by 31 January, in advance of the Christmas season, please get in touch with us at Frost Wiltshire and we’d be delighted to meet you and discuss your requirements.

 

 

Frost Wiltshire

We’re hiring – exciting new full time role available

Are you an enthusiastic, ambitious and self-motivated accountant looking for an exciting full time role in a small, dynamic and friendly practice in South Gloucestershire?

Frost Wiltshire are looking to fill a new role, developed as a result of growth in our client base. We focus on providing high quality, value for money tax and accountancy services with a fresh and down-to-earth approach. We’re aiming to continue growing our business, so there will be opportunities for promotion for the right candidate.

Minimum qualification and experience requirements for applicants are as follows:

• At least 2 years’ experience working in practice is required
• AAT qualified, part qualified or fully qualified ACCA/ACA
• Experience in statutory accounts preparation is essential.
• Experience in payroll, personal and corporate tax return preparation is desirable
• A working knowledge of Excel and Microsoft Word is essential
• Experience of managing others in a team is desirable
• Experience of Sage and Xero accounting systems is also desirable

You should be extremely well organised, with the ability manage several different client tasks alongside each other, and prioritise your time effectively. There will be a requirement to meet and deal with clients on a regular basis, and as such a professional and personable character is also essential.

Starting salary is dependent on experience.

To apply, please email hello@frostwiltshire.co.uk with an up to date CV and covering note.  Closing date for applications: 16 August 2017.

Frost Wiltshire

Changes to the Flat Rate VAT Scheme

Flat Rate Scheme changes – Limited Cost Traders

Our latest blog post will advise you of changes that are being made to the Flat Rate Scheme (FRS) which may mean that the scheme is less attractive to some businesses and this may result in these businesses deciding to no longer operate under the FRS. It is important to understand these changes especially if you already operate the scheme or are considering using the FRS.

Background to the FRS

Under the FRS a set percentage, determined by the business trade sector, is applied to the VAT inclusive turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase the business makes. Turnover will include any exempt supplies and it is therefore not generally beneficial to join the scheme where there are significant exempt supplies.
The aim of the FRS for small businesses is to reduce the administrative burden imposed when operating VAT, however many small businesses who use the scheme are also better off as they are effectively able to keep some of the VAT charged to customers.

How the scheme operates

The percentage rates are determined according to the trade sector of the business and currently range from 4% to 14.5%.
In addition there is a further 1% reduction in the normal rates for businesses in their first year of VAT registration. If a business falls into more than one sector it is the main business activity as measured by turnover which counts.
Although those operating the FRS pay VAT at the FRS percentage they are still required to prepare invoices for customers showing the normal rates of VAT. This is so that their customers can reclaim input VAT, if appropriate.

Example

Build-it-right is a labour only building contractor. If its results are as follows:
Standard rated building work
£70,000 plus VAT of £14,000 = Total VAT inclusive turnover £84,000
Purchases £2,700 (inclusive of VAT of £450)
VAT due under the FRS say 14.5% x £84,000 = £12,180
By operating the FRS, Build-it-right charges customers £14,000 of VAT but only pays over £12,180 of this VAT to HMRC. Build-it-right is unable to recover the input VAT suffered on purchases of £450 under the FRS. Input VAT on purchases is not generally recoverable by traders operating the FRS. The purchase of capital assets consisting of goods and costing more than £2,000 (including VAT) may be dealt with outside the scheme.
If they had operated the normal VAT rules then the amount due to HMRC would be £13,550 (being £14,000 output less input of £450).

Flat Rate benefits for those trading below the VAT registration scheme

For some very small businesses including those trading below the annual VAT registration threshold of £83,000, it has been worthwhile registering for VAT and operating the FRS. Effectively these traders charge their customers VAT at 20% on the services they supply but only pay over VAT at an effective maximum rate of 17.4%. They are therefore able to keep a minimum of 2.6% of the VAT paid by their customers. This is set out in the following example:

Amount billed to customer

Amount due to HMRC under FRS using the current highest percentage of 14.5%
Effective rate on VAT exclusive amount billed to customer
VAT which can be retained by trader £1,000 plus VAT at 20% = £1,200
£1,200 x 14.5% = £174
£174 / £1,000 = 17.4%
£200 – £174 = £26 (2.6% of £1,000)

Where the relevant FRS percentage is lower than 14.5% the effective percentage of VAT which can be retained could be significantly more.

The change to the FRS

The change, described as an anti-avoidance measure, introduces a new 16.5% rate from 1 April 2017. This rate will be applicable for businesses with limited costs, such as many labour-only businesses. Businesses using the scheme, or considering joining the scheme, will need to decide if they are a ‘limited cost trader’.

So, taking the example above, if the trader is caught by the new anti-avoidance rules then they will be in the following position:
Amount billed to customer

Amount due to HMRC under FRS using the limited cost trader percentage of 16.5%

Effective rate on VAT exclusive amount billed to customer

VAT which can be retained by trader £1,000 plus VAT at 20% = £1,200

£1,200 x 16.5% = £198

£198 / £1,000 = 19.8%

£200 – £198 = £2 (0.2% of £1,000)

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

● less than 2% of their VAT inclusive turnover in a prescribed accounting period
● greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000 so for someone who completes their VAT return quarterly the limit is £250).

The technical note states that there will be exclusions from the calculation to prevent attempts to inflate costs above 2%. Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

● capital expenditure
● food or drink for consumption by the flat rate business or its employees
● vehicles, vehicle parts and fuel, except where the business is one that carries out transport services, for example a taxi business, and uses its own or a leased vehicle to carry out those services.

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.
Businesses using the FRS will be expected to ensure that, for each VAT return period, they use the appropriate flat rate percentage, so the check to see whether a business is a limited cost trader will have to be carried out for each VAT return.
The government estimate that of the 411,000 businesses using the FRS, 123,000 have limited costs and will be affected by these changes. According to the statistics produced by the government the changes which are being introduced to the FRS will result in it no longer being beneficial to some current users of the scheme.

What happens now?
The introduction of the 16.5% rate for limited cost traders will result in affected businesses having to reconsider their position and may result in different outcomes. Some businesses will:
● continue to use the flat rate scheme, checking for each VAT return period, whether they are affected by the 16.5% limited cost trader percentage and paying VAT at the 16.5% rate if appropriate
● decide to leave the FRS. In order to leave the FRS you must write and let HMRC know. Generally businesses choose to leave at the end of an accounting period. However, you may leave voluntarily at any time during an accounting period. HMRC will confirm the date you left the scheme in writing. If you are considering this option we can advise the most appropriate time to leave the scheme but this will generally be before 1 April 2017
● decide to deregister for VAT where the business turnover is below the VAT deregistration threshold. A business effectively leaves the FRS the day before they deregister for VAT.

We can advise you of the best course of action for you and your business. Please contact Steve Wiltshire on 01454 279886.

Frost Wiltshire

Residential property interest from April 2017

Residential property interest from April 2017

The restrictions on residential property interest will soon start to apply. As the legislation introducing these changes is now fully in place, our latest blog post will illustrate to you how the restrictions will work and what to particularly watch out for.

To whom do the interest relief restrictions apply?

The main group affected are UK resident individuals that let residential properties in the UK or overseas. Other people affected are:

• non-UK resident individuals that let residential properties in the UK
• individuals who let such properties in partnership
• trustee or beneficiary of trusts liable for income tax on the property profits.

Who won’t be affected?

UK and non-UK resident companies are not affected nor landlords of ‘Furnished Holiday Lettings’.

How do the restrictions work?

From 6 April 2017, landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability for these finance costs. Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying loans or mortgages.

The restriction will be phased in with 75% of finance costs being allowed in 2017/18, 50% in 2018/19, 25% in 2019/20 and be fully in place for 2020/21. The remaining finance costs for each year will be given as a basic rate tax reduction but can’t create a tax refund.

Example 1 in the Appendix to this blog post (below) shows how the restrictions affect the tax payable over the next four tax years for an individual with mortgage interest which equals 40% of his rental income (after deduction of other tax allowable costs).

How much extra tax will this mean?

The additional amounts of tax arising will depend on the marginal rate of tax for the taxpayer. Basic rate taxpayers should not be substantively affected by the proposals. A higher rate taxpayer will, in principle, get 20% less relief for finance costs.

However the calculation method may mean that some taxpayers move into higher rate tax brackets. For example, individuals who consider themselves basic rate taxpayers as their total net income before deduction of income tax is below the higher rate threshold (£45,000 in 2017/18), may find that if interest is not fully deductible they would have total net income above the higher rate threshold.

Example 2 in the Appendix illustrates this effect.

Other thresholds to watch out for include:

• The threshold from which Child Benefit is clawed back (may apply if ‘adjusted net income’ of a person with children is above £50,000).
• The threshold from which personal allowances are reduced (applies if ‘adjusted net income’ is above £100,000).
• The threshold over which an individual’s pension annual allowance of £40,000 is tapered (applies if an individual’s ‘adjusted income’ is more than £150,000).

Highly geared property investments

There are special points to note if mortgage interest costs are substantial in relation to rental income.

Example 3 in the Appendix illustrates an individual, Derek, who will have an effective 100% tax rate on his rental income in 2020/21 when the full extent of the interest restrictions come into play. This applies where interest is equal to 75% of Derek’s property income after deduction of non-interest expenses.

If Derek’s interest to income percentage is higher than this, he will find the position gets even worse as he will not get immediate tax relief at 20% on all his interest. Example 4 illustrates this further restriction.

Is a property investment company the answer?

The new rules on finance costs do not apply to companies so it may be more attractive for landlords to acquire their new property investments in a company. Corporation tax rates are low compared to personal tax rates and so more funds may be available for reinvestment in additional properties.

Historically, mortgage finance for a company investing in residential property has been more expensive and more difficult to obtain but there is evidence that banks are becoming more amenable to the concept of corporate ownership of such properties.

There are however other tax issues to consider when holding investments in a company which include:

• The income tax charges if a significant amount of the rental profit will be distributed to the shareholders.
• A potential double tier of capital gain on any sale of a property. Corporation tax is payable on the capital gain (although the gain is reduced by an inflation adjusted base cost of the property). Then, if the gain is distributed to shareholders as a dividend there would be an income tax charge on the dividend paid.
• The different treatment of the assets held by the individual on death may affect the tax paid on subsequent capital gains if the properties are eventually sold. If properties are held directly by an individual, inheritance tax (IHT) liabilities will be based on the value of the properties at death and the value of the properties are uplifted to market value for calculating future capital gains. If the individual has a property investment company, the shares in the property company are valued for IHT purposes at market value but the properties themselves remain at their original base cost.
Transferring an existing property portfolio into a company requires even more careful consideration as it could result in capital gains and stamp duty liabilities arising on the transfer of the properties.

We would be happy to provide further advice on the impact of running a property investment company or any other aspect of the new rules. Please contact Steve Wiltshire on 01454 279886.

APPENDIX – examples of the operation of the interest relief restrictions

Annabel pays higher rate tax on all her income. Her net rental income before deduction of interest is £20,000. She has £8,000 of interest payments per year.

[table id=2 /]

Example 2 – how basic rate taxpayers can become higher rate taxpayers

Consider the 2020/21 tax year when the transitional period is over. Assume that the personal allowance is £12,000 and the basic rate band is £38,000 meaning that the higher rate band starts at £50,000.

Brian has a salary of £35,000, rental income before interest of £23,000 and interest on the property mortgage of £8,000.

Under the current tax rules, taxable rental income is £15,000. He will not pay higher rate tax as his total income is £50,000 – the point from which higher rate tax is payable.

With the new rules, taxable rental income is £23,000 and so his total income is £58,000. £8,000 is taxable at 40% – £3,200. Interest relief is given on £8,000 at 20% – £1,600. So an extra £1,600 tax is payable.

Example 3 – an individual with high interest costs relative to rental income

Derek pays higher rate tax on all his income. His net rental income before deduction of interest is £20,000. He has £15,000 of interest payments per year.

[table id=3 /]

Example 4 – an individual making a loss but taxed on a ‘profit’

Relief for finance costs may be restricted further where either of the following are less than the restricted finance costs:

• property profits – the profits of the property business in the tax year (after using any brought forward losses)
• adjusted total income – the income (after losses and reliefs, and excluding savings and dividends income) that exceeds an individual’s personal allowance.

For example, Derek in 2020/21 replaces a fitted kitchen on one of the properties and much of this expenditure qualifies as repair expenditure and is tax deductible. His net property income falls to £13,500 before interest of £15,000. He has therefore made a £1,500 loss.

Despite recording a loss the £13,500 is taxable. Tax at 40% is £5,400. Some relief for the interest is given but is restricted to £13,500 at 20% rather than £15,000 at 20%. The unrelieved interest (£1,500) is carried forward and may get tax relief in a later year.

So the tax liability is £5,400 less £2,700 (£13,500 at 20%) = £2,700.

Frost Wiltshire

Research & Development relief: Are you an Innovator?

There is a variety of tax reliefs available to small companies which are advocated by HMRC and can be used to save tax through clear and authorised methods. One such scheme is Research and Development (R&D) tax relief. This is a government incentive designed to encourage innovation by UK businesses. R&D tax relief can be equivalent to up to 33p for every £1 spent on qualifying expenditure.

This can be an extremely attractive taxation relief which is available to many trading companies which participate in activities meeting the definition of research and development. Many business owners have heard of this, but fewer actually realise that costs which have been incurred are eligible for relief.

What counts as R&D?
Whatever its size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you could qualify.

This means you might be:
• Creating new products, processes or services
• Changing or modifying an existing product, process or service

R&D doesn’t have to have been successful to qualify, and you can include work undertaken for a client as well as your own projects.

What costs can I claim for?
An R&D tax credit claim might include staff costs, subcontractor costs, materials and consumables and even some software costs.

Is my business eligible?

There are various tests which are applied in determining whether a company has incurred R&D expenditure. Crucially, R&D activity is distinguished by the test of whether there is presence of an appreciable element of innovation. If the activity breaks new ground it is likely to be included. However, if the activity follows an established pattern it is normally excluded. If expenditure does qualify as R&D, and the company is eligible, the tax relief available is extremely generous. 230% of the total eligible expenditure is deductible for corporation tax purposes. In addition to this, if the company is loss making, the company can claim a tax credit immediately, thus improving cash flow. Here at Frost Wiltshire, we can talk through the company expenditure with you and establish whether we believe the company is eligible for R&D relief. We can then prepare and submit your claim for you, which will include a full report plus calculations.

We offer a range of services alongside R&D tax credit claims, and as such can take on all your business and personal compliance needs alongside this more specialist area if you would like us to. If you are interested, please contact Mel Hackney or Steve Wiltshire on 0117 304 8455 to arrange a free initial consultation.

Frost Wiltshire

Employee Pensions – Are you ready for Auto-Enrolment?

Auto-enrolment is the term for the automatic enrolment of employees into workplace pension schemes. By 2018, all businesses must operate a pension scheme for qualifying employees, with employee and employer contributions. It’s called ‘automatic enrolment’, because it is automatic for staff – they don’t have to do anything to be enrolled into a pension scheme. Whilst 2018 may seem a long way off, the Centre for Economics and Business Research (CEBR) is predicting that SMEs will face set-up costs of up to £28,300 per business to meet pension auto-enrolment requirements. They also estimate that it could take businesses up to 103 working days to implement, therefore it is vital to start planning as soon as possible.

Here at Frost Wiltshire we are encouraging small employers to undertake a review of their payroll procedures to ensure that they understand the changes in law, on workplace pensions. Under the changes introduced by the Pensions Act 2008, every employer with at least one member of staff now has new duties; these include enrolling staff members who are eligible, into a workplace pension scheme and contributing towards it. Since the introduction of automatic enrolment, five and a half million employees have already been put into a scheme by the UK’s large and medium employers, but the vast majority of small employers have yet to reach the date their automatic enrolment duties start – this is called their ‘staging date’. During 2017, around half a million small and micro employers will reach their staging date. For many of these employers, meeting their new workplace pension duties represents a cultural change – it will be the first time they have provided a pension for their staff. Employers can choose to implement automatic enrolment themselves, but many will decide to ask their accountant or payroll provider to help them with some or all of their duties.

At Frost Wiltshire, we understand that many small employers are concerned about what they need to do to in order to comply with the law. We can help employers avoid non-compliance by assisting with issues that may arise from the introduction of auto-enrolment, as well as general payroll matters. Employers who need to set up a pension scheme should have one in place at least six months before their staging date. The scheme selected needs to be suitable for automatic enrolment and suitable for their employees. Due to the penalties that can arise for non-compliance, it is essential for employers to understand exactly what is required of them. We recommend getting your plans together as early as possible before your staging date to make sure you’re fully prepared.

How can we help?

We can assist you with:
Identifying who will be affected – and who will need to be auto-enrolled.
Communicating with your staff – as to how they will be affected.
Planning for your staging date – to ensure your payroll is ready for auto-enrolment.
Selecting the appropriate pension advisor – based on your requirements/people.
Explaining the financial impact of auto-enrolment – on your profit/cash flow.
Advising on salary sacrifice – and how you and your staff could benefit from salary sacrifice schemes such as employee benefits.

Together, we can offer an all-encompassing solution to include payroll processing, the on-going administration of auto-enrolment, advice on salary sacrifice, employer savings, and the implementation of a pension scheme compliant with the auto-enrolment legislation. To discuss how we can help your business with auto-enrolment, please contact us on 0117 304 8455.

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.

[table id=1 /]

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.

Frost Wiltshire

The new UK GAAP – are you ready?

FRS 102 is a single standard that replaces existing UK GAAP for entities that are not entitled to report as small, and is applicable for periods commencing on or after 1 January 2015. For small companies, the FRSSE will be removed for periods ending on or after 1 January 2016, bringing small companies within the scope of FRS 102. At the same time, a new, simplified financial reporting standard applicable to micro-entity companies (FRS 105) will be introduced.

Companies must be prepared for changes arising on first implementation of new UK GAAP. Adoption of the new standard could mean a change in reported profits, and the balance sheet position could be significantly affected. In addition, the format of the accounts themselves will be different. On the plus side, transition to FRS102 presents some opportunities to overhaul accounting policies and address existing practices which may be irksome.

Companies will need to assess the impact of changes affecting their reported profits and communicate to affected stakeholders. Where entities pay bonuses out of profit or have profit-related pay schemes, the basis of these calculations may need to be reconsidered. With FRS 102 adopters seeing changes in fair value reflected in the profit or loss for the period, entities will need to take more care when determining taxable profits and companies will need to ensure that dividends are paid out of distributable profits too. And, as FRS 102 requires more items to be included at fair value in the accounts with movements reflected in the profit and loss account, entities will need to establish whether their budgets and management accounts should reflect these movements or whether they will be dealt with as period end adjustments only.

From a balance sheet perspective, changes to the recognition criteria for assets and liabilities, as well as profits and losses could have an impact on the credit rating of an entity. Where loan covenants are calculated based on profit or balance sheet measures, a move to FRS 102 could have an impact on the headroom of those covenants.

It is likely that companies will need to gather more information for the preparation of their financial statements, both on an on-going basis, but also as at the date of transition to cover the comparative period in the first set of financial statements. Companies will also need to consider whether their current systems and software will be sufficient to prepare accounts under the new UK GAAP.

The key thing to remember is that departure from the old UK GAAP standards is mandatory, and will require restatement of prior period comparatives in the transition year, so considering the impact should not be delayed. We can support you through the transition, from evaluating the impact, through calculating the required adjustments to preparing the first set of financial statements under the new standard.

If you would like to discuss this subject and how we might be able to help, please get in touch with Steve or Anna.