Potts & Co - Accountancy & Business Advice

Earlier Year Underpayments

By | HMRC, PAYE, Potts & Co Accountancy & Business Advice News

Tax calculations are now largely automated. When your tax return is submitted the HMRC computer calculates how much tax you owe, or whether a tax repayment is due, and issues a tax statement. If HMRC’s result agrees with the tax figure the software came to, everyone is happy and your tax file can be closed for another year.

However, sometimes the HMRC computer tries to be too clever for its own good. It compares your self assessment tax return to data it has collected from other sources such as interest reported by banks. Sometimes this third-party data may not be accurate, nor even relate to your own tax affairs. Once the computer has made a connection it raises a flag to indicate that the tax payable for the current year is too low, or the tax repayment too high. It will add in an ‘earlier year underpayment’ to your tax statement or PAYE code.

If this happens to you we need to get your tax statement or tax code amended. This can be done through your personal tax account or by ringing HMRC. Please let us know if any strange adjustments appear in your PAYE code.

Potts & Co - Accountancy & Business Advice

Interest From PPI Claims

By | HMRC, Personal Tax, Potts & Co Accountancy & Business Advice News, PPI Claims

Thousands of people have claimed and received refunds of payment protection insurance (PPI). Most people believe that the entire payment is tax free and hence does not have to be declared on their tax return. This is not the case. Each PPI settlement includes interest calculated at eight percent on the refunded premiums and that interest is taxable. Some banks deduct 20% tax from the interest paid, but other lenders do not.

In all cases the interest portion of the PPI settlement must be declared on your tax return for the year in which it was received. There may be additional tax to pay on this interest depending on when you received it and the level of other interest received in the same year.

HMRC receives a bulk download of data from the banks relating to PPI payments, which it tries to match to individual taxpayers. But this matching is tricky as the PPI data only includes a name and address which could be years out of date. If you receive a letter from HMRC which mentions undeclared interest, this could relate to the PPI claim you have forgotten you made.

Check whether you declared the interest portion of your PPI settlement on your tax return. If you did not declare the interest you can amend your 2016-17 tax return online until 31 January 2019.

If you need to correct an earlier year you should notify HMRC by letter, or we can do this for you.

Potts & Co - Accountancy & Business Advice

Travel Expenses For Self-Employed Taxpayers

By | HMRC, Potts & Co Accountancy & Business Advice News, Travel Expenses

As a self-employed trader, do you diligently record the mileage for every business journey you take? This attention to detail is necessary to convince HMRC that the cost of the journey is tax deductible. There are several apps which can help you with this.

The question is: where does your business journey start? HMRC will argue that your work only starts when you reach your customer’s site and any business activities performed at your home-office are irrelevant. This would restrict your allowable travel costs to journeys between your customers and deny travel expenses for traveling from your home to the first customer of the day.

The key to claiming for journeys commencing at your home is to show that your business is truly based there. Are there business activities which can only be done at your home-office? It is a good idea to record the time you spend on activities at your home-office and what you were doing, eg contacting suppliers or drawing up quotes.

Once you have established the number of miles which qualify as business journeys you can claim 45p for each mile driven up to the first 10,000 miles and 25p per mile for any additional miles in the tax year. Alternatively, you can claim a proportion of your total motoring expense that relates to business miles compared to total mileage driven in the year.

Potts & Co - Accountancy & Business Advice

Claw-Back of Child Benefit

By | Child Benefit, High Income Child Benefit Charge (HICBC), HMRC, Potts & Co Accountancy & Business Advice News

The high income child benefit charge (HICBC) was introduced in January 2013 to claw back child benefit where the highest earner in the family has total net income of £50,000 or more. The full amount of the benefit is clawed back if one of the parents has income of £60,000 or more.

If this applies to your family you must tell HMRC that you need a tax return in order to self assess the HICBC. Although HMRC manages claims for child benefit, it does not know who the higher earning partners of those claimants are.

Many parents are not aware of the need to pay the HICBC. If your income rises above £50,000, HMRC does not prompt you to pay it. Some parents were issued with penalties for failing to notify HMRC of the need to pay HICBC and one taxpayer challenged his penalty and won.

HMRC has now decided to refund some parents for the penalties they were charged for failing to notify their liability to pay the HICBC for the tax years 2013-14 to 2015-16. To qualify for a refund your family must have started to receive child benefit before 7 January 2013. The penalty will be refunded automatically; you don’t have to contact HMRC.

If you need to pay the HICBC for 2016-17 or a later year you still need to inform HMRC of this liability. You can amend your self assessment tax return online for 2016-17 and 2017-18 to pay the charge, or we can do this for you.

Potts & Co - Accountancy & Business Advice

Retain Your Entrepreneurs’ Relief

By | Capital Gains Tax, HMRC, Potts & Co Accountancy & Business Advice News

Entrepreneurs’ relief allows you to pay capital gains tax at ten percent on gains made on the disposal of shares issued by your personal company, or assets used by that company.

The company must qualify as your personal company for a full 12 months ending on the earlier of the disposal date and the date it ceases to trade. This period will double to 24 months for disposals made after 5 April 2019, so bear this in mind if you are planning to sell next year.

For the company to qualify as your personal company you must hold at least five percent of the ordinary share capital and at least five percent of the voting rights, plus have a right to five percent or more of the net assets of the company and at least five percent of its distributable profits. These rights are normally attached to full ordinary shares, but they might not to apply to holders of preference shares or shares with other restricted rights.

You need to keep an eye on new share issues as they can dilute your own shareholding. If new shares are issued to investors after 5 April 2019 which dilute your holding to below five percent, your right to claim entrepreneurs’ relief on a future disposal will disappear. However, you can make an election to cash-in your entrepreneurs’ relief at that time to avoid losing it.

Do not forget to tell us if your company is issuing more shares or converting debt into shares, as there is a time limit for making the relevant elections.

Potts & Co - Accountancy & Business Advice

Making Tax Digital Software

By | HMRC, Potts & Co Accountancy & Business Advice News, VAT


Most VAT registered traders will be required to file their VAT returns using MTD-compliant software for VAT periods beginning on and after 1 April 2019. If your VATable turnover is likely to be over £85,000 for the year to 31 March 2019 it is crucial to understand this software issue.

If you already use accounting software to send your VAT return to HMRC automatically, without a human typing the figures into HMRC’s online form, you are probably OK. Check with your software provider when they will upgrade their package to be MTD-compliant.

If you use a spreadsheet or other software to compile the VAT figures you are half way there. There are several low- cost forms of ‘bridging software’ available that will pull numbers from spreadsheets or certain accounting packages and pump them through an application programme interface (API) into HMRC’s system. Job done until at least 2020.

Businesses with entirely paper- based accounting records have a bigger mountain to climb. You do not have to leap straight into a cloud-based accounting package; there are other solutions we can discuss with you.

The second requirement of MTD is to have end-to-end digital accounting records. Many businesses retype figures at some stage of the accounting process, but that will not be permitted for VAT periods beginning on and after 1 April 2020. We have a little over a year to work out how to completely digitise your accounting system.

Let’s discuss your options.

Potts & Co Accountancy

Tax Data 2019-20

By | Budget Update, Corporation Tax, HMRC, Inheritance Tax (IHT), Personal Tax, Potts & Co Accountancy & Business Advice News, VAT

All figures are annual amounts Tax

Personal allowance £12,500
Allowance withdrawn from £100,000
Transferable marriage allowance £1,250
Trading income £1,000
Property income £1,000
Rent-a-room £7,500
Tax on earnings
Earnings to £34,500 20%
£34,501 to £150,000 40%
Over £150,000 45%
Tax on earnings for Scottish residents
Earnings to £37,500 20%
£37,501 to £150,000 40%
Over £150,000 45%
Thresholds and rates for Scottish taxpayers TBA
Tax on interest
First £5,000 0%
20% taxpayers £1,000 @ 0%
40% taxpayers £500 @ 0%
Balance taxed at marginal rates
Tax on dividends
First £5,000 0%
Balance in band to £37,500 7.5%
£37,501 to £150,000 32.5%
Over £150,000 38.1%
National insurance
Class 1 employers 13.8% over £8,632
Under 21 (apprentices 25) 0% to £50,000
Class 1 employees 12% on £8,632 to £50,000;
2% above £50,000
Class 4 self-employed 9% on £8,632 to £50,000;
2% on profits above £50,000
Class 2 self-employed
Voluntary if profits under
Class 3 voluntary £780
Employment allowance
Set against employer’s Class 1 NIC
(Not available for one-person companies)
Pension contributions
No earnings £3,600 gross
Otherwise 100% of earnings
Annual contribution caps:
No pension taken
Some pension taken
Adjusted income over £150,000:
annual cap tapered to
Lifetime pension fund cap £1,055,000
Corporation tax
All profits 19%
Registration turnover £85,000
Deregistration turnover £83,000
Standard rate 20%
Reduced rate 5%
Inheritance tax
Nil rate band £325,000
Residence nil rate band £150,000
Excess taxed at 40%
Where 10% left to charity 36%
Capital gains tax
Within basic tax rate 10%
Higher tax bands 20%
Surcharge for residential property
and carried interest
Entrepreneurs’ relief 10%
Investors’ relief 10%
Annual exempt amount £12,000
Potts & Co Accountancy

Relief For First-Time Buyers

By | Budget Update, HMRC, Potts & Co Accountancy & Business Advice News, Property, Stamp Duty Land Tax

Stamp duty land tax (SDLT) is payable at rates ranging from 2% to 12% when you buy a residential property for £125,000 or more. Higher rates apply to the purchase of second homes and property acquisitions by companies.

If a residential property worth up to £500,000 is purchased by one or more first-time buyers, the first £300,000 of the purchase price is exempt from SDLT. This exemption applies for property purchases completed on and after 22 November 2017.

Many younger people buy their first home through a shared ownership scheme. In such cases, the buyer can choose whether to pay SDLT on the entire market value of the property or only on the share of the property they have acquired. If they elected to pay the tax on the full market value they could claim the exemption from SDLT, otherwise, the exemption for first-time buyers did not apply.

The law will be changed to allow the exemption for first- time buyers to apply even where they elect to pay SDLT only on the initial share acquired, as long as the market value of the whole property is no more than £500,000. This change in the rules will be back-dated to cover acquisitions completed on and after 22 November 2017.

Where excess SDLT has been paid since November 2017 it can be reclaimed by amending the SDLT return before 28 October 2019.

Scotland and Wales impose their own versions of SDLT for properties located in those countries.

Potts & Co Accountancy

New Capital Allowances

By | Budget Update, Capital Allowance, HMRC, Potts & Co Accountancy & Business Advice News

The government wants to encourage businesses to invest in plant and equipment to help them grow their operations and operate more efficiently. Where the cost of those items qualifies for the annual investment allowance (AIA), 100% of the expenditure is set against profits in the year of purchase, so the business gets an immediate benefit.

The AIA is currently capped at £200,000 per company or group. However, the cap will be raised to £1 million per year for equipment purchased in 2019 and 2020. When investment is made in buildings, the cost cannot be set against business profits, as there are no capital allowances available for commercial buildings other than those used for R&D.

The Chancellor has bridged that gap by introducing new structures and buildings allowance (SBA) to apply to the cost of constructing non- residential buildings on and after 29 October 2018. The allowance will allow 2% of the building’s cost (excluding land) to be deducted each year.

If the building is sold during its 50-year “tax life”, the unclaimed allowance will be available to the purchaser. The cost of the building’s fittings and integral features (such as lifts) can be claimed as part of the AIA, up to that annual limit. Any excess expenditure must be claimed through the special rate pool which currently provides an 8% allowance. This special rate allowance will be cut to 6% from 1 April 2019.

The 100% capital allowances for expenditure on energy or water efficient equipment will cease from 1 April 2020. However, the 100% allowance for electric vehicle charging points will apply for costs incurred up to 31 March 2023.

Rollout of IR35 Rules Postponed

By | Budget Update, HMRC, Potts & Co Accountancy & Business Advice News

Where an individual works through his or her own personal company to provide services, such as IT consultancy, that company must abide by the “IR35” rules, which HMRC calls “off-payroll working”.

IR35 requires the individual to check whether he would be treated as an employee of his customer if his personal company and any other intermediaries did not exist in the supply chain. If the relationship with the customer is effective employment, the income from the contract should be treated by the personal company as the individual’s salary, subject to PAYE and NIC.

For contracts in the public sector, the final customer (the public body) makes the decision about the IR35 status of the contractor. Where IR35 applies the fee-payer in the supply chain should deduct income tax under PAYE and employees’ NIC at 12% from the amount invoiced by the personal company. Some public bodies have also incorrectly deducted employer’s NIC at 13.8% from the invoiced amount.

HMRC is convinced that many small companies in the private sector do not follow the IR35 rules to the letter, as by remaining outside of IR35 the individual retains more income from his company. HMRC has proposed that large businesses in the private sector should make the IR35 status decision on behalf of their contractors.

This switch will apply from 6 April 2020, but only where the final customer is a medium-sized or large business. If you contract through your own company, you should start planning for this change now.