Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

Latest from OTS

The Office of Tax Simplification (OTS) is to review its future role and how it will address ‘tax simplification. 

The OTS has published a scoping document in response to a recent Treasury five-year review, seeking to evaluate the benefits of simplification and explore the range of ways in which tax complexity is experienced’ and the impacts it can have on individuals, businesses, agents, and HMRC. The review will also measure the ways that it can assess changes in policy, legislation, guidance, digital systems or administration.

The OTS will use the review to ‘set out its priorities’ for the coming years. But don’t expect your taxes to get simpler any time soon.

HMRC Loses 1491 devices

HMRC has recorded 1,183 devices as lost, while 308 were stolen. This included 881 missing phones, 570 tablets, and 40 lost laptops.

Around a third of the lost devices went missing after the pandemic first struck and HMRC staff began to work from home with the tax authority stating that there had been a spike in items disappearing in the last nine months due to a ‘bulk IT refresh’.

The tax authority also claimed that a number of items had gone missing due to being lost by couriers while in transit, rather than by employees.

HMRC confirmed that it had deactivated all the items once they were reported. Each device is securely encrypted which enables HMRC to close down devices if they are lost or stolen, ensuring that no taxpayer data has been lost.

IHT – Business Property Relief

Business property relief is intended to apply to businesses, rather than investments and there are further restrictions relating to the type of business.

Although the restriction targets ‘investment-type’ businesses, it can also raise issues for businesses that would not normally be thought of as purely investment businesses, such as the commercial letting of serviced offices and holiday lettings.

Problem areas can arise where the business operations are diverse and perhaps only one is excluded from BPR.

In determining which assets qualify for BPR, one method is to examine which are being used in a qualifying trade. If they are not being used in that way, then they may well be excluded say as investments.

So, even in a regular trading business, it may be difficult to make the case for assets such as cash and bank accounts if they exceed what is required for day-to-day working capital. They may however qualify for BPR if a case can be made for their necessary future use in the business.

A holding company may well not itself carry on any trade, but this is permitted where its activities are wholly or mainly holding shares in one or more companies whose business qualifies for BPR.

However, when looking at the value of the group for IHT you must exclude the value of any individual company that does not itself qualify for BPR such as a company wholly or mainly holding investments, unless those investments are land utilised by other group members.

4 Million More Higher Rate Taxpayers

In the next three years, the number of people paying the higher rates of tax will almost double to 8.1m because of the freeze on tax thresholds.

At the same time, 5m more people, who are on the lowest earnings and do not currently pay income tax, will start paying tax at 20% of their earnings.

Overall, the freeze will increase the number of UK taxpayers from 32.2 million to 37.2 million. 

The Treasury defended the decision by saying that the UK has the most generous basic personal tax allowance in the G20 and that freezing the threshold is progressive and will ensure nobody’s take home pay will be less than it is now in cash terms.

Basically, the government needs more money.

However, the threshold freeze is practically reversing the policy of the coalition government, which took 2m low-paid taxpayers out of the tax net altogether by raising the personal allowance threshold.

The Office for Budget Responsibility (OBR) predicted that the freeze was expected to take a lot more out of the pockets of taxpayers than was initially predicted in the March 2021 budget.

HMRC is already seeing an increase in its tax take with tax receipts for April 2021 to January 2022 being £123.8bn higher than in the same period a year earlier. One of the notable rises was in Inheritance tax (IHT) receipts which saw another increase of 16% with HMRC collecting £5bn.

Directors Loan Accounts

Each director’s loan account is a record of the net position between the company and the director. It is essential that the information is up-to-date, and the terms of any loans recorded.

Many directors use their loan account as a short-term, low-cost finance source for various personal expenses. On the other hand, many directors lend money to their company, and this can provide a source of immediate short-term, low-cost finance.

There are various ways in which you can extract funds from your company:

• salary;
• dividends;
• rent;
• expenses;
• director’s loan – everything else..

In theory, all directors’ loans need shareholder approval and should be formally noted in company records. As many directors who use this option tend to be the only directors of the company, ‘approval’ is a foregone conclusion.

Because of the tax ramifications, any director’s loan account with a deficit should be cleared within nine months and one day of the company’s year-end. There are several ways in which this can be repaid.

Dividend – To pay a dividend, a company must have retained profits not yet paid out to shareholders. The dividends must be paid no later than nine months after the company’s year-end. If there are no distributable reserves, then a dividend cannot be paid. Also, if a director believes that the company may be insolvent, they cannot declare dividend payments because, if the company was liquidated within two years of a dividend payment, this could be reclaimed by the liquidator.

Salary – The salary would not be paid to the director but instead transferred as a credit to the director’s loan account. The company would need to pay income tax and National Insurance contributions and the net amount credited to the director’s loan account.

Expenses – Where a director has spent their own money on company business, this can be reclaimed as expenses but not paid out in cash. It would be offset against the overdrawn loan account balance.

Personal funds – A director with an overdrawn director’s loan account can make a payment from personal funds to offset the deficit.

If a director’s loan account deficit is not addressed within nine months and one day after the company year-end, there are potential tax repercussions.

HMRC will apply a s455 tax charge which is a specific tax charge against an outstanding director’s loan account. The rate currently stands at 32.5% of the outstanding balance on a director’s loan account.

This is a temporary charge, as once the director’s loan account has been repaid the company can apply for repayment of the s455 tax charge. This will form part of the company’s tax return in the year the director’s loan account is repaid.

The debit on a director’s loan account may also be treated as a benefit in kind if the following conditions are met:

• the loan deficit is at least £10,000;
• no interest is being paid on the loan; or
• interest falls below the HMRC average official rates.

This will be recorded on a P11D form and also be entered on the director’s self-assessment tax return.

The company directors can agree to write off a director’s loan account, although this must be recorded in writing. This would then be treated as a dividend but no distributable reserves are required, and the dividend does not need to be paid to other shareholders.

If a company is liquidated with outstanding director’s loan account deficits, these are classed as an asset. Consequently, the liquidator is obliged to pursue directors to repay debts in full and these will form part of the assets available to repay the company’s creditors.

Umbrella Companies

The umbrella company industry has been growing steadily for the last 20 years but, with the introduction of the off-payroll working rules (IR35) in 2017 and 2021, there has been a marked increase in their usage.

There has also been a marked increase in the abuses that are seen in rogue umbrellas and, finally, the government is taking notice and has issued a call for evidence on umbrella companies.

There are many skims and scams but the main priority for the government needs to be transparency.

One aspect coming under scrutiny is the use of an assignment or contract rate alongside the wages and this sometimes leads to the employers’ NICs being deducted from the worker.

The employment status of the worker needs to be clarified, especially so the worker knows their rights.

There is also large-scale tax evasion in the umbrella market worth up to £4.5bn according to a recent article in the Guardian.

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.