In May 2016, the National Audit Office (NAO) published a report into the quality of HMRC service for personal taxpayers. The report highlighted serious shortcomings in the service which could have meant some taxpayers paying the wrong amount of tax.

In 2010, HMRC set out on a plan to reduce costs with a main focus on reducing the annual running costs of personal tax operations by £193m. As part of its charter, HMRC pledges to provide taxpayers with a helpful, efficient and effective service with an obligation to provide an acceptable standard of service. The NAO looked at whether HMRC managed to maintain this level of service whilst implementing their cost cutting changes.

The report found that up to 2013/14 HMRC succeeded in reducing costs by £111m but also maintained or improved their customer service performance. HMRC began introducing new digital services from 2011/12 and expected that this would reduce demand for contact with taxpayers so personal tax staff were cut by a quarter in 2014/15. But the fall in demand did not happen and HMRC did not have contingency plans to deal with the high levels of customer service requests.

To try and improve the service on the tax helpline, back-office staff were moved to call centres. These back-office staff had been maintaining PAYE tax records and investigating outstanding discrepancies in these records. The reduction in staff dealing with these reviews meant that the cases of outstanding discrepancies nearly doubled from 2.4m in March 2014 to 4.6m in March 2015. The NAO report highlighted that 3.2m of these were high priority cases which therefore meant there was a risk that these taxpayers would have paid the wrong amount of tax. The end result was that HMRC had to recruit 2,400 additional staff in the autumn of 2015.

HMRC are introducing more digital services in the next few years but the NAO report states that HMRC have learnt from their experiences of the past.

If we do not currently manage your personal tax affairs and you have had problems dealing with HMRC or believe that your tax may have been calculated incorrectly then please contact us on our contact page for further assistance. To find out more about the services that we offer, visit our Services page.

On 6 April 2016 a new allowance – the Savings Allowance – was introduced into our tax system. The Savings Allowance applies a new 0% rate for up to £1,000 of interest receipts for a basic rate taxpayer and up to £500 for a higher rate taxpayer. This has meant changes to the taxation of interest receipts.

A consequential change to the machinery of tax deduction by the entity paying the interest has been made. The introduction of the Savings Allowance will mean that the majority of taxpayers will not pay tax on their interest. The government has therefore removed the requirement (from 6 April 2016) for banks and building societies to deduct tax from account interest they pay to customers.

However, in 2016/17 basic rate tax will still be deducted at source from some forms of savings income such as interest distributions from unit trusts and OEICs. The government proposes to remove this requirement from April 2017.

Of course if your interest income exceeds the Savings Allowance, there will be extra tax to pay and if you are a higher rate taxpayer, you are more likely to be in this position as the Savings Allowance is only £500.

If you require any further advice or information then please contact us on our contact page for further assistance. To find out more about the services that we offer, visit our Services page.

It has taken a long time to sort out but after several years of lobbying by professional accountancy bodies and others, the government has provided a sensible set of rules on the question of whether directors are required to be enrolled into an employer provided pension auto enrolment scheme. The latest development has been the issue of legislation to provide the company with the ability to opt to exclude directors from auto enrolment. This will provide comfort for many employers; particularly small employers who have yet to go through the auto enrolment process.

Prior to the latest change, directors could be removed from the requirement to be auto enrolled if they did not have a written or implied contract of employment. Many directors of small companies do not have written contracts but it is difficult to be definitive as to whether an implied contract exists.

If there are only directors in the company and it is not clear whether they have contracts of employment, there are two alternatives to choose if the company wants to minimise its auto enrolment duties:

Alternative A

The company could conclude there are no implied contracts of employment. There is no requirement for the company to have an auto enrolment pension scheme as there are no workers.

Although there are no auto enrolment duties the company should confirm with The Pension Regulator that the company has no workers using the following link goo.gl/vPyag8. This will ensure the Pension Regulator (TPR) will stop issuing reminder letters (and threatening penalties) about the auto enrolment duties of the company.

Alternative B

If there might be contracts of employment, the new exception could be used. The company can choose to have an auto enrolment scheme and enrol the directors but is not required to. If it chooses not to have an auto enrolment scheme, the company would need to complete a ‘declaration of compliance’ after the date the company was required to have set up an auto enrolment scheme (the staging date) has passed. The declaration would show the directors as workers but that they had not been auto enrolled due to the exception.

What if the company has employees as well as directors?

If the company has employees, it will have a duty to set up an auto enrolment scheme. If the company concludes that neither director has a contract of employment, the directors are not enrolled as they are not workers. If the company concludes the directors have contracts of employment, the company can decide to not enrol them by applying the exception.

Take care

Employers need to take care if they advise TPR that they have no workers or no-one to enrol and then take on an employee in the future. If the staging date has passed, auto enrolment duties may apply for that new worker from the date of their employment.

We can, of course, help you to decide what is appropriate for your circumstances  and contact us on our contact page for further assistance. To find out more about the services that we offer, visit our Services page.

Is Research and Development tax relief available?

Research and Development (R&D) tax relief can provide additional tax deductions and enhanced cash flow for companies. HMRC have introduced ‘Advance Assurance’ which enables small companies to confirm their entitlement to R&D tax relief.

R&D tax relief can allow a company to claim an additional corporation tax reduction of 26% of the expenditure incurred. Alternatively the company can surrender a loss for a cash repayment. A surrendered loss could give a repayment of up to 33.35% of the expenditure. This could significantly improve cash flow for new companies.

To claim R&D tax relief a company must meet several qualifying conditions. Reviewing whether these are met can be expensive and time consuming for small companies. HMRC have therefore introduced Advance Assurance whereby a small company will have access to an HMRC specialist who will discuss whether the activities of the business meet the qualifying requirements.

In order to access Advance Assurance, the company must:

• not have claimed R&D tax relief before
• have an annual turnover of £2 million or less
• have less than 50 employees.

We can apply for Advance Assurance on your behalf but any discussions about the business will be carried out with a main contact in the company (appointed by the company in the application). HMRC state that most applications are dealt with by a short telephone call. We will be able to contribute to the discussions if there are any difficulties.

If HMRC agree that the company qualifies to claim R&D tax relief they will then allow the claim for the next three accounting periods without further queries. If you’re planning to carry out R&D at a future date, Advance Assurance can still be applied for. HMRC will contact you after you’ve submitted your first claim to check that the R&D matches the details supplied in the Advance Assurance application.

If you think your company may carry out research and development activities please contact us on our contact page to talk about the available tax reliefs. To find out more about the services that we offer, visit our Services page.

Minimum Wage rates increases rescheduled

The National Living Wage (NLW) came into effect in April 2016 for workers aged 25 and over and has caused many businesses to consider their remuneration policies for employees. The initial rate of £7.20 is a 50p increase in the rate that used to apply. In terms of detailed rules, the NLW is really just a new category rate for the National Minimum Wage (NMW).

However there is an important difference of principle in the setting of the rates. Changes to the NMW rates have been recommended by the Low Pay Commission in an annual report. Amongst the 368 pages of the latest report are the recommendations for changes to the NMW rates to apply from 1 October 2016. The rate for 21 to 24-year-olds will increase by 25p to £6.95 for example. The Commission will continue to recommend rates for those aged under 25 and apprentices that will not damage the employment prospects of these groups. It will also recommend rates for NLW but focused on the government target of reaching 60% of median earnings by 2020 (on latest forecasts this would mean £9 in 2020).

The government has announced that the NMW and NLW cycles will be aligned with effect from April 2017 so that both rates are amended in April each year.

If you need any further advice do not hesitate to get in touch on our contact page for any further assistance. To find out more about the services that we offer, visit our Services page.

Salary sacrifice and Auto Enrolment

With pension auto enrolment applying to more and more employers, we look at the options for using a salary sacrifice scheme to deliver tax savings for the employer and the employee.

Salary sacrifice takes place when an employee gives up the right to part of their remuneration in return for the employer providing the employee with some form of non-cash benefit.

As announced in the 2016 Budget, the government is considering limiting the range of benefits that attract income tax and National Insurance advantages when they are provided as part of a salary sacrifice arrangement. However, the government’s intention is that pension savings, childcare and health related benefits will continue to attract these reliefs. One option therefore is that employees sacrifice part of their salary in return for the employer paying a sum to a registered pension scheme for the employee’s benefit.

Conditions for effective salary sacrifice

The recent Reed Employment tax case illustrated that it can be costly to implement a salary sacrifice scheme incorrectly. To be effective the arrangement has to reduce the employee’s contractual right to cash remuneration. This requires two conditions to be met:

1. the employment contract must be effectively varied before the changes are implemented ie the employee must give up their salary before they are entitled to receive the remuneration and
2. the revised contractual arrangement must show that the employee is entitled to lower cash remuneration and a benefit.

In addition, the employee should not have the right to give up the non-cash benefit and revert to the higher cash salary within 12 months.

In practice, the variation of the contract can be achieved by rewriting the contract, setting out the changes in a separate document attached to the contract or by giving employees an ‘opt out’ option. An ‘opt out’ clause would specify a time limit by which time employees would have to opt out of the salary sacrifice arrangement. Failure to do so would be regarded as an ‘opt in’. Employees would need to be fully informed of the proposals.

It should be noted that the cash wage cannot fall below rates set in the National Minimum Wage and the National Living Wage following salary sacrifice. Salary sacrifice can affect an employee’s entitlement to certain state benefits such as Maternity Allowance and Incapacity Benefit. Therefore consideration should be given to excluding lower paid employees from the scheme.

Effects of successful salary sacrifice

Where salary sacrifice is implemented with a pension payment being provided by the employer then the employee will pay income tax and NICs on the lower cash salary. There is no charge to income tax or NICs on the amount of the pension payment made by the employer.

The effect of using salary sacrifice for employee’s pension payments would therefore be a saving of up to 12% for the employee and up to 13.8% for the employer.

Example

Using a salary of £30,000 and 2016/2017 tax rates. An employer contribution of 2%, employee contribution 4% before tax relief.

The employee’s net pay would fall by £144 and the cost to the employer would fall by £166.

HMRC approval

HMRC will not comment or advise on any proposed salary sacrifice arrangements as they do not want to be involved in employment agreements. They will, however, give assurance after the arrangements are in force. To allow HMRC to do this they will require sight of all relevant documentation.

The requirements of salary sacrifice schemes can be complex and if you need any further advice do not hesitate to get in touch on our contact page for any further assistance. To find out more about the services that we offer, visit our Services page.

Are you aware of the changes to Gift Aid?

The Gift Aid scheme is now 25 years old. In its first year charities benefitted with £10 million of tax savings. In 2014/15 the savings were worth nearly £1.2 billion.

The tax savings arise because Gift Aid donations from individuals are deemed to be paid by those individuals net of basic rate income tax. The charity then claims the tax back from HMRC as it is exempt from tax on donations received (subject to the detailed rules for Gift Aid being satisfied).

In addition, higher rate taxpayers can claim tax relief on their Gift Aid donations amounting to 25% of their donations. Additional rate taxpayers effectively receive 31.25% tax relief on their donations.

Given the longevity of the scheme, amendments have been made to its conditions from time to time. In April 2016, the Gift Aid declaration underwent a change. The declaration is the means by which the taxpayer agrees that the donation comes within the scheme and allows the tax reliefs to flow through to the charity and the taxpayer.

HMRC has simplified and shortened the model Gift Aid declaration. However, in doing so it has clarified that if an individual has not paid sufficient tax to cover the tax reclaimable by the charity on the donation, the individual is responsible for paying the difference to HMRC. 

Action required by charities

The new style declarations should have been in use from the 6 April 2016.However:

• if an individual has signed an old style declaration form which covers multiple donations, there is no need for that individual to make a new declaration
• if a charity holds stocks of printed materials that were ordered and printed before 21 October 2015, that stock can continue to be used.

A declaration by a donor can alternatively be made verbally or online (eg via a website). Whichever format is used, charities need to ensure the updated format is used.

But some individuals need to revoke their declarations

Individuals who expect to pay little or no tax in 2016/17 need to be aware of the dangers of signing new declarations as well as the effects of having signed declaration forms which cover multiple donations. The standard wording on many declarations state ‘I want to Gift Aid my donation of £  and any donations I make in the future or have made in the past 4 years’. Note the italicised words. Due to various changes in the personal tax regime in recent years – in particular the increases in the personal allowance and the introduction of a £1,000 savings allowance in 2016/17, there are many more individuals who will not be paying income tax in 2016/17. So, for example, if a non-taxpaying individual makes £80 of donations this tax year, the charity(ies) will claim £20 and the individual has a £20 liability to HMRC. Such individuals need to get in touch with the charities to cancel the Gift Aid declarations. Cancellation will not affect Gift Aid donations already made but any further donations will not qualify.

There are also many higher or additional rate taxpayers who have signed declarations but have not claimed the difference between the rate they pay and basic rate on their donations. It is quite straightforward to do this, either through a Self Assessment tax return or by asking HMRC to amend their tax code.

If you would like advice on any of the above then please contact us our contact page for any further assistance. To find out more about the services that we offer, visit our Services page.