How do we prepare for Brexit when so much is undecided?

It is hardly surprising that Brexit is fast becoming as big a turnoff as tax. How on earth are we supposed to react or adapt to such far-reaching changes when the exact details of our exit are still undecided just a few weeks before the March 2019 deadline?

Businesses that buy or sell goods to the EU must be pulling their corporate hair out – just how will their supply lines be affected?

A new government website covering possible Brexit consequences

The government has already published a bunch of documentation setting out the consequences of a no-deal outcome and they have now doubled up this resource by creating an EU exit website aimed at advising UK businesses.

The HM Government site’s URL is https://euexitbusiness.campaign.gov.uk/

The main points of focus are:

  • Employing EU citizens
  • Importing, exporting and transporting
  • Operating in the EU
  • Regulations and standards for products and goods
  • Using personal data
  • European and domestic funding
  • Intellectual property
  • Energy and climate, and
  • Public sector procurement.

If you have neither time or inclination to for this level of detail what can be done to safeguard your situation and have ongoing benefits for your business?

Action to take now to avoid downside risks of Brexit

It would seem to make sense to take a hard look at supply line issues by undertaking a formal impact assessment and we are aware that many importers and exporters already have this process underway.

The other action you could consider is to work on your business fitness. If, as has been suggested by the pundits, Brexit does create a slowdown in economic activity, then being in good financial shape will not be wasted effort.

If you think this is an idea with traction please call so we can discuss your options.

HMRC plea to tackle online VAT fraud

According to government sources HMRC are asking online market places to sign an “agreement” to keep their users the right side of the law. In a recent announcement HMRC said:

“… the agreement will help online market place platforms meet their responsibility to ensure their sellers understand the tax rules, and prevent fraud taking place on their watch.”

We assume that the intention is to discourage users setting up shop and avoiding their VAT dues by avoiding registration.

 

An online marketplace is defined in VAT legislation as a website, or any other means by which information is made available over the internet, through which persons other than the operator can offer goods for sale (whether the operator also does so).

Since the 25 April 2018, HMRC is asking all online marketplaces operating in the UK to sign an agreement to help tackle online VAT fraud and errors taking place on their platforms.

Online marketplaces have transformed the way people shop and helped millions of businesses to sell their products and services.

 

As far as HMRC are concerned, the platforms have a responsibility to ensure their sellers understand the tax rules and prevent fraud from happening on their watch.

 

The agreement asks online marketplaces to commit to:

 

  • educating online sellers from the UK and abroad about their VAT obligations in the UK either via their own help and support or by directing them to HMRC’s GOV.UK guidance;
  • responding swiftly when notified by HMRC that sellers are not playing by the VAT rules, and setting up a system to take appropriate action; and
  • finding a suitable and lawful way to provide HMRC with information about their sellers, when requested.

 

The last bullet point is interesting. We assume that “lawful” alludes to the data protection rules as eBay, and the like, would be required to share the personal data of their customers to comply? Will the market places be obliged to “report” their customers in some sort of de facto Money Laundering Reporting obligation?

 

Can’t help wondering if HMRC are shifting their workload, their eyes and ears, elsewhere?

 

Be interesting to see if the market place organisations will comply. Apparently, the only down side to not complying is that HMRC will not publish their name on a list of platforms that have signed the agreement.

 

However, about 27,550 applications to register for VAT from overseas online retail businesses have been made since HMRC started to become active in dealing with this issue. This compares with about 1,650 for 2015.

Damage limitation

The phrase “in-limbo” comes to mind when describing the present outlook for businesses in the UK. What will be the outcome of the June election? What will be the outcome of the withdrawal from the EU?

We will all likely be affected. If not directly involved in trade with Europe, we are possibly part of the downward supply chain.

What to do?

First of all, damage limitation planning may be appropriate. If part of your export sales are with Europe, or with firms who supply goods or services to Europe, there is an increased risk that your future prospects may be negatively affected post Brexit. Accordingly, you could:

  • See what opportunities there are to seek out new markets outside the EU.
  • Collaborate with customers who are dependent on EU sales to make joint approaches to non-EU markets.
  • What government assistance is available?
  • Take a fresh look at investment decisions to see if it would be more prudent to retain liquidity, or reduce borrowings to meet any future financial challenges.

It would also be illuminating to prepare realistic financial forecasts based on various what-if criteria.

There are compelling reasons for being prepared and the present hiatus may be that quiet period before the storm that gives us the space to do just that. Businesses that have concerns should face their anxieties head-on, and we can help.

What is the current tax position when dividends are taken

One of the most useful ways for owner directors of small companies to reduce their overall tax and NIC costs is to pay themselves a reduced salary – just enough to maintain their State benefits entitlements – and take any balance of remuneration in the form of tax efficient benefits and dividends.

Government has changed the rules regarding the sacrifice of salary in exchange for benefits, so this particular tax planning strategy has shorter legs, however, the advantages of dividends as a tax efficient remuneration strategy remains; albeit with reducing benefits in future tax years.

Why is this?

Dividends are not a cost. They don’t reduce the amount of profit assessable to corporation tax. Rather, dividends are a distribution of profits after corporation tax has been deducted. Presently, company reserves available for distribution in this way have already suffered a potential 19% corporation tax charge. Accordingly, only 81% remains. This can be retained to finance future investment, or accumulated as a rainy-day fund to see you through more difficult trading periods, or it is available to distribute to shareholders as dividends.

Consequently, the withdrawal of dividends creates no tax consequences for the company, but it can create income tax bills for shareholders.

For 2017-18, the following rules apply. Shareholders will pay:

  • No tax on the first £5,000 of dividends received from all sources.
  • 7.5% tax on any dividends that form part of their basic rate band.
  • 32.5% tax on any dividends that form part of their higher rate band, and
  • 38.1% tax on any dividends that form part of their additional rate band.

If the missing parts of the Finance Bill 2017 are reintroduced after the June election, the £5,000 tax-free allowance is being reduced to £2,000 from April 2018.

The arguments in favour of the low salary high dividend approach for owner directors of small companies is well known and in most cases, an appropriate, and acceptable, tax planning strategy. Unfortunately, every person’s tax affairs are unique, and whilst the generalisations made above hold good for most shareholder directors, what is less clear – and should not be generalised – is the best-fit strategy to suit your particular circumstances.

The tax regime for dividends looks to be hardening in future years, so if you haven’t discussed your options recently, a conversation is probably overdue; and of course, we can help.

Lifetime ISAs

A reminder that from 6 April 2017 Lifetime ISAs are available as an alternative tax-free investment.

The lifetime Individual Savings Account (ISA) is a longer term tax-free account that receives a government bonus.

Details published 17 February 2017 are:

You can open a lifetime ISA if you are aged 18 or over but under 40. You must be either:

  • resident in the UK
  • a Crown Servant (for example a diplomat or civil servant)
  • the spouse or civil partner of a Crown Servant

As with other ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within your lifetime ISA.

Saving in a lifetime ISA

You can save up to £4,000 each year in a lifetime ISA. There is no maximum monthly savings contribution, and you can continue to save in it until you reach 50. The account can stay open after then but you can’t make any more payments into it.

The £4,000 limit, if used, will form part of your overall annual ISA limit. From the tax year 2017 to 2018, the overall annual tax limit will be £20,000.

For example, you could save:

  • £11,000 in a cash ISA
  • £2,000 in a stocks and shares ISA
  • £3,000 in an innovative finance ISA
  • £4,000 in a lifetime ISA in one tax year

Your lifetime ISA won’t close when the tax year finishes. You’ll keep your savings on a tax-free basis for as long as you keep the money in your lifetime ISA.

Lifetime ISAs can hold cash, stocks and shares qualifying investments, or a combination of both.

Government bonus

When you save into your lifetime ISA, you will receive a government bonus of 25% of the money you put in, up to a maximum of £1,000 a year.

Withdrawals

You can withdraw the funds held in your lifetime ISA before you’re 60, but you’ll have to pay a withdrawal charge of 25% of the amount you withdraw.

A withdrawal charge will not apply if you are:

  • using it towards a first home
  • aged 60
  • terminally ill with less than 12 months to live

If you die, your lifetime ISA will end on the date of your death and there won’t be a withdrawal charge for withdrawing funds or assets from your account.

Transferring a lifetime ISA

You can transfer your lifetime ISA to another lifetime ISA with a different provider without incurring a withdrawal charge. If you transfer it to a different type of ISA, you will have to pay a withdrawal charge.

Saving for your first home

Your lifetime ISA savings and the bonus can be used towards buying your first home, worth up to £450,000, without incurring a withdrawal charge. You must be buying your home with a mortgage.

You must use a conveyancer or solicitor to act for you in the purchase, and the funds must be paid direct to them by your lifetime ISA provider.

If you are buying with another first time buyer, and you each have a lifetime ISA, you can both use your government bonus. You can also buy a house with someone who isn’t a first time buyer but they will not be able to use their lifetime ISA without incurring a withdrawal charge.

Your lifetime ISA must have been opened for at least 12 months before you can withdraw funds from it to buy your first home.

If you have a Help to Buy ISA, you can transfer those savings into your lifetime ISA or you can continue to save into both – but you will only be able to use the government bonus from one to buy your first home.

Buy-to-let and the changing tax landscape

Buy-to-let property owners have been singled out in recent budgets for some quite draconian tax changes.

One of the most pervasive starts 6 April 2017. From this date, tax relief for the cost of borrowing – predominately interest charges – will be progressively withdrawn and replaced with a basic rate tax credit.

Between now and the 6 April 2020 relief will be tapered as follows:

 

2017-18 The deduction of allowable finance costs will be restricted to 75%, with 25% being available as a basic rate income tax deduction.
2018-19 The deduction of allowable finance costs will be restricted to 50%, with 50% being available as a basic rate income tax deduction.
2019-20 The deduction of allowable finance costs will be restricted to 25%, with 75% being available as a basic rate income tax deduction.

 

A worked example: consider the case of Linda, who has a buy to let with an annual mortgage interest charge of £10,000. Up to April 2017 she will be able to deduct the full amount, £10,000, from her property income before she pays tax. Obviously, the higher her rate of income tax the more tax relief she will currently receive.

 

The table below sets out the effective loss of tax relief if Linda is a higher rate or additional rate taxpayer. If Linda only pays tax at the basic rate there is no change in her income tax position.

 

  2016-17 2017-18 2018-19 2019-20 2020-21
Finance cost allowed 10,000 7,500 5,000 2,500 0
If additional rate taxpayer:
Additional rate 45% relief 4,500 3,375 2,250 1,125 0
Basic rate deduction 0 500 1,000 1,500 2,000
Total tax relief 4,500 3,875 3,250 2,625 2,000
Net finance costs paid 5,500 6,125 6,750 7,375 8,000
If higher rate taxpayer:
Additional rate 40% relief 4,000 3,000 2,000 1,000 0
Basic rate deduction 0 500 1,000 1,500 2,000
Total tax relief 4,000 3,500 3,000 2,500 2,000
Net finance costs paid 6,000 6,500 7,000 7,500 8,000

 

Because the amount of tax relief is gradually reduced, from April 2017 to April 2020, the cash flow impact is progressively negative for higher rate or additional rate tax payers. In our example, if Linda is a higher rate taxpayer her net finance costs (after deduction of tax relief) increase from £6,000 in 2016-17, to £8,000 in 2020-21.

A further consequence of this change is that the rental income for tax purposes increases with no increase in rents: the finance costs are added back. In some circumstances this may mean that basic rate taxpayers become higher rate tax payers.

Buy-to-let property owners who have not yet considered how this change will affect their property business should set aside some time with their advisors as soon as possible. We would be delighted to help.

Tax Free Pension Advice

People planning their retirement will be able to withdraw up to £1,500 from their pension pots tax-free to pay for financial advice, under recent plans unveiled by the government.

 

The new Pension Advice Allowance, first announced at Autumn Statement 2016, will enable people to withdraw £500 up to three occasions from their pension pots tax-free to put towards the cost of pensions and retirement advice from April 2017.

 

Following an 8-week consultation, the Economic Secretary to the Treasury, Simon Kirby, has today confirmed that the £500 allowance:

  • can be used a total of three times, only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing pension or just prior to retirement
  • will be available at any age, allowing people of all ages to engage with retirement planning
  • can be redeemed against the cost of regulated financial advice, including ‘robo advice’ as well as traditional face-to-face advice
  • will be available to holders of “defined contribution” pensions and hybrid pensions with a defined contribution element, not “defined benefit” or final salary type schemes

 

Pension providers will be able to offer the allowance to their members from April 2017.

 

Research has found that when approaching retirement only 22% of people know the value of their pension pot and only 14% of people would be confident planning their retirement goals without financial advice.

 

According to Unbiased, UK savers with a pension pot of £100,000 save an average of £98 more every month and receive an additional income of £3,654 every year of their retirement if they take financial advice.