How much tax do you pay on your dividends?

If you own a small limited company your shares entitle you to draw a return on your shareholding – in common parlance these returns are called dividends.

A company can only pay dividends if it has current or accumulated tax-paid reserves. For most smaller companies this will be described as reserves or retained profits on your company balance sheet.

As these reserves are made up of retained profits after corporation tax has been paid, if you take a dividend the underlying profits have already been taxed at 19% – the current corporation tax rate. Unfortunately, when you receive the dividend this is deemed to be taxable income; and will be subject to further, hybrid rates of Income Tax.

For the tax year 2019-20 the rates of dividend tax applied are:

  • The first £2,000 of dividends received are tax-free.
  • Dividends that fall to be taxed as part of your basic rate Income Tax band are taxed at 7.5%.
  • Dividends that fall to be taxed as part of your higher rate Income Tax band are taxed at 32.5%, and
  • Dividends that fall to be taxed as part of your additional rate Income Tax band are taxed at 38.1%.

For shareholders whose income, including dividends, falls into the higher or additional rate bands, the additional dividend tax payable can be significant.

However, dividends are not subject to National Insurance and if you need to take funds from your company, withdrawing the bulk of your remuneration package as dividends can still be an attractive option. The key, as always, is in the planning. Every person’s tax affairs are to some extent unique and for this reason care needs to be taken when considering the way you take funds from your company.

If you are keen to minimise the amount of tax you pay on your earnings, please call so we can find the best-fit planning option for you.

Does your employer pay for your private petrol?

A reminder that you can avoid the hefty car fuel benefit charge if you drive a company car and your employer pays for your private fuel.

One way to achieve this is to repay your company for the private petrol provided.

Many employers have an arrangement with their company car drivers to obtain reimbursement of any private fuel provided. Usually, the employee must reimburse the employer for private fuel included in petrol bills paid by the employer. Otherwise, the employee may face a tax charge.

Consider the following example:

If your private mileage for the year to March 2020, is estimated to be 600 miles a month, and you drive a 1900cc diesel engine car, the rate per mile to cover fuel charges, as quoted in the latest rates published by HMRC, is 12p per mile. Accordingly, you should repay £864 to your employer (£72 per month).

In order to exempt yourself from the car fuel benefit charge you must be able to demonstrate that the refund was actually made in the relevant tax year, in this example before 6 April 2020; although in practice, HMRC may give you more time.

Based on the above example, if the vehicle’s list price when new was £30,000, and the car benefit charge rate was 34% (based on a 130g/km CO2 rating) the benefit in kind charge for 2019-20 would be £10,200. With no repayment of private fuel, there would also be a £8,194 car fuel charge. Both these amounts would be added to your taxable income for the year. If you were a higher rate tax-payer, the car fuel charge would cost you £3,277 a year in additional tax (£8,194 x 40%). This amounts to £273 per month.

If your actual private mileage proved, on average, to be 600 miles a month, you would therefore save £201 per month (£273 – £72).

It is worth crunching the numbers. Obviously, the lower your private mileage, the more likely a repayment system will save you money.

Unclaimed estates

There is nothing more intriguing that the notion we may be due untold riches from undisclosed sources. For example, do you have any premium bonds, and did you notify the registrar the last time you moved to a new house?

And did you know that the estates of deceased persons whose beneficiaries or family cannot be traced are held by the government for 30 years?

It is possible to download the unclaimed estates list in a digital format that you can search to see if remote relatives have unclaimed estates that you might be eligible to claim.

Not a task for the faint hearted.

The department that manages the list is known as the Bona Vacantia division. In a recent update posted on the Gov.uk website they said:

The Division publishes a list of unclaimed estates which have been recently referred, but not yet administered, and historic cases which have been administered but not yet been claimed within the time limits for doing so.

The list is published in a Comma Separated Values (CSV) file format. This acts like a spreadsheet and although it can be opened in any text editor it is best viewed in a spreadsheet application, such as Microsoft Excel, Google Docs or OpenOffice Calc.

If you are looking for a particular estate you can search by using Ctrl-F in your browser, text editor or spreadsheet application.

Any estates where the Bona Vacantia division (BVD) no longer has an interest, for example, when a claim to an estate has been admitted, will be removed daily. Estates where the 30 year time limit from the date of death has expired are also removed.

The following notes explain more about the claims process:

If someone dies without leaving a valid or effective will (intestate) the following are entitled to the estate in the order shown below:

  1. husband, wife or civil partner
  2. children, grandchildren, great grandchildren and so on
  3. mother or father
  4. brothers or sisters who share both the same mother and father, or their children (nieces and nephews)
  5. half brothers or sisters or their children (nieces and nephews of the half blood or their children). ‘Half ’ means they share only one parent with the deceased
  6. grandparents
  7. uncles and aunts or their children (first cousins or their descendants)
  8. half uncles and aunts or their children (first cousins of the half blood or their children). ‘Half’ means they only share one grandparent with the deceased, not both

If you are, for example, a first cousin of the deceased, you would only be entitled to share in the estate if there are no relatives above you in the order of entitlement, for example, a niece or nephew.

If your relationship to the deceased is traced through someone who survived the deceased but has since died, you will need to confirm who is entitled to deal with that person’s estate. The person entitled to deal with someone’s estate is known as their ‘legal personal representative’. They are the person entitled to make the claim to the deceased’s estate.

For example, children are only entitled to share in an estate if their parent died before the deceased, in which case they take their parent’s share of the deceased’s estate. If their parent survived the deceased but has subsequently died, then whoever is dealing with their estate should claim.

The unclaimed estates list can be downloaded at https://www.gov.uk/government/statistical-data-sets/unclaimed-estates-list

Do you have a December year end?

December is probably the second most popular trading year end for businesses; the most popular being the 31 March.

Your end of year planning should include a review of your results – prior to your year end – so that there is an opportunity to make any advantageous changes. From our perspective, there is nothing quite so depressing as being made aware of these “opportunities” after the year end date has passed and when there is no way to incorporate possible tax saving strategies.

For traders with a December year end, a good time to do this is from October 2019, when the results for the nine months to 30 September are available.

Apart from your management accounts we could also discuss the following matters and if any investment be considered before or after your year end:

  • Are you contemplating the purchase of new equipment or vehicles?
  • Are you considering significant repairs or improvements to plant or buildings?
  • Could you write off or consider a sale of redundant stock?
  • We could estimate your business taxes based on trading for the current year and plan for savings to fund the future payment.
  • If you have made trading losses are there opportunities to set off these losses against past profits and recover tax to aid cash flow?

With all the uncertainties that the exit form the EU has caused in the past two years there has never been a more opportune time to invest in planning. Business fitness could be the key issue for 2020 and beyond.

Accordingly, if we have not already organised a review, and your trading year end is imminent, please call so that we can discuss your options.

Do you have a December year end?

December is probably the second most popular trading year end for businesses; the most popular being the 31 March.

Your end of year planning should include a review of your results – prior to your year end – so that there is an opportunity to make any advantageous changes. From our perspective, there is nothing quite so depressing as being made aware of these “opportunities” after the year end date has passed and when there is no way to incorporate possible tax saving strategies.

For traders with a December year end, a good time to do this is from October 2019, when the results for the nine months to 30 September are available.

Apart from your management accounts we could also discuss the following matters and if any investment be considered before or after your year end:

  • Are you contemplating the purchase of new equipment or vehicles?
  • Are you considering significant repairs or improvements to plant or buildings?
  • Could you write off or consider a sale of redundant stock?
  • We could estimate your business taxes based on trading for the current year and plan for savings to fund the future payment.
  • If you have made trading losses are there opportunities to set off these losses against past profits and recover tax to aid cash flow?

With all the uncertainties that the exit form the EU has caused in the past two years there has never been a more opportune time to invest in planning. Business fitness could be the key issue for 2020 and beyond.

Accordingly, if we have not already organised a review, and your trading year end is imminent, please call so that we can discuss your options.

Construction industry VAT changes 1 October 2019

Just one month to go until the so-called “Domestic Reverse Charge” will apply to VAT registered traders who are also registered to use the Construction Industry Scheme.

There has been an awful lot of commentary in the press claiming that from 1 October, building contractors will be lumbered with paying their sub-contractors’ VAT.

Perhaps a brief summary of the reason for this change would be useful.

HMRC has noted that a growing number of sub-contractors are registering for VAT, adding 20% VAT to their invoices, collecting this VAT charge from their customers and then disappearing without passing on the VAT collected to HMRC. Needles to say, HMRC are not too pleased with this trend.

And so, from 1 October 2019, VAT registered subcontractors invoicing their work to other CIS registered firms will not charge VAT on the supply. Instead they will advise the main contractors that their supply is subject to the reverse charge process.

Prior to 1 October, contractors would simply pay the VAT inclusive amount to their VAT registered sub-contractors and then claim back the input VAT paid on their VAT return.

After 1 October, contractors will pay the net of VAT amount to their sub-contractors and then make two adjustments to their VAT return: firstly, adding the sub-contractors VAT to their output tax, and at the same time, claiming back the same amount as input VAT.

Accordingly, contractors will pay their sub-contractors VAT, but in the same breath they will claim it back – subject to the usual rules.

The mechanics of accommodating the accounting entries to cope with the new process can be programmed into your bookkeeping software. However, there could be complications if you use one of the VAT special schemes, such as the cash accounting or flat rate scheme.

We recommend that you take professional advice before 1 October, to make the changes required to your invoices and accounts software and to make sure that you do not need to change your present VAT scheme.

Please call if you would like our help to do this.

Tax-free annual party

If you are starting to look forward to the forthcoming end-of-year and Christmas celebrations, and we could all do with a bit of festive cheer, you may find the following article useful: it sets out the rules and regulations that qualify such events for a tax-free status: no benefits in kind, tax or NIC consequences.

The cost of an annual staff party or similar function is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of an unincorporated organisations. Also, it does not include ex-employees.

If the criteria below are followed there will be no taxable benefit charged to employees:

  1. The event must be open to all employees at a specific location.
  2. An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the average cost per head of the functions does not exceed £150 p.a. (including VAT). The guests of staff attending are included in the head count when computing the cost per head attending.
  3. All costs must be considered, including the costs of transport to and from the event, accommodation provided, and VAT. The total cost of the event is divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.
  4. VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax should be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

Are you making the most of Trivial Benefits

Earlier this year we highlighted the tax concession afforded by the so-called Trivial Benefit rules.

We said:

It is possible to make small tax-free payments to employees, including directors…

Employers and employees don’t have to pay tax on such a benefit if all of the following apply:

  • it cost you £50 or less to provide,
  • it isn’t cash or a cash voucher,
  • it isn’t a reward for their work or performance,
  • it isn’t in the terms of their contract.

HMRC describes these payments as a ‘trivial benefit’.

You can’t receive trivial benefits worth more than £300 in a tax year if you are the director of a ‘close’ company. A close company is a limited company that’s run by 5 or fewer shareholders.

Readers who manage a business may want to integrate a formal process into their benefits strategy to take advantage of this opportunity.

Every little helps.

Autumn Budget 2019

If there was a measure of stability in UK politics, we would be expecting the usual dispatch-box presentation by the Chancellor before Christmas. The annual budget is usually presented November each year.

This may still happen this year, but present uncertainties regarding the Brexit outcome, and the present government’s slim majority may scupper that timetable – we may have two budgets this Autumn or none at all.

Never-the-less, we will advise if and when a date is agreed. If we do leave the EU with no-deal, gripping the sides of your chair may be in order as the fiscal changes required (changes to taxation) to meet the resulting economic consequences, may be significant.

We will keep you posted.

Why you may need an EORI number

The end of next month, 31 October 2019, is the latest deadline for our exit from the EU and the recent hiatus seems to be pushing the UK ever closer to a no-deal outcome.

Accordingly, if you are involved in buying or selling goods to EU countries, you should apply now for an Economic Operator Registration and Identification (EORI) number.

Without an agreed withdrawal with the EU, you will need an EORI number that starts with GB to move goods in or out of the UK. Additionally, if you want to trade with an EU country you will also need an EU EORI number. It will start with the country code of the EU country you got it from. You should apply for one from the customs authorities in the EU country you will trade with.

Apparently, you do not need an EORI number if you are only moving goods between Northern Ireland and Ireland.

If you do not apply, you may be faced with increased costs and delays. For example, if HMRC cannot clear your goods you may have to pay storage fees. Clearly, these delays could have serious repercussions if your exported goods are mired in red-tape at border crossings – your EU customers may look elsewhere for supplies – or your production and delivery in the UK may be affected if you cannot affect delivery of supplies from the EU.

There is a simple online application process to apply and there is no obligation to use the number if by some miracle we agree withdrawal terms with the EU before 31 October.