National insurance contributions merger for self-employed postponed

The proposed merging of classes 2 and 4 national insurance contributions (NIC) has been postponed for a year. The merger was originally to take place from 6 April 2018 with class 2 NIC abolished from that date.The merger will now take place from 6 April 2019.

The need to have more in-depth consultations with interested parties in respect of the effects of the abolition of class 2 NIC on lower earners, was cited as the reason for the delay.

Important changes to the way customers can pay HMRC

HMRC are making changes to the way customers can make payments to them.

From 15th December 2017 the pay at the Post Office service will be withdrawn and from 13th January 2018, HMRC will no longer be accepting payment by personal credit card.

Debit cards and corporate credit cards will continue to be accepted.

Payments can still be made via:

Direct Debit

Online or telephone banking

Debit/corporate credit card

HMRC reveal the top tax scams that are catching people out

HMRC has listed examples of the websites, emails, letters, text messages and phone calls used by scammers to obtain your personal information.

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Rise in number of high earners caught in 60% “tax trap” predicted

Projections have shown that the number of high earners caught in a hidden 60% "tax trap" is set to double by the end of the next tax year.

Under rules announced in 2010, personal allowances are reduced by £1 for every £2 adjusted net income rises above £100,000 a year. Individual’s lose their tax-free personal allowance and face a marginal rate of 60 per cent on earnings between £100,000 and £123,000.

Data from the Institute for Fiscal Studies has shown that at least £800,000 people will be affected this year, up from 588,000 in 2010-11. It is expected that a million people will be affected by the end of the next tax year.

This is due to wage inflation raising incomes above the tax threshold and the tax band widening in line with the increasing tax-free personal earnings allowance.

As an example, the allowance has risen from £6,475 in 2010 to £11,500 today. This has resulted in the upper limit of the band in which 60 per cent tax rising from £112,950 to £123,000.

People earning above £123,000 lose 100 per cent of their personal allowance.

Tina Riches, partner at accountancy firm Smith & Williamson, said: “This tax band is rarely flagged up by the Government and political parties, yet it is one of the highest rates of tax we have in this country.

People don't understand how it works or its effects because its conveniently described as 'losing your personal allowance, which is very confusing."

Making Tax Digital (MTD) dropped from Finance Bill 2017

Legislation to implement the Making Tax Digital policy has been dropped from the 2017 Finance Bill ahead of the bill being debated in the House of Commons before Parliament adjourns for the General Election. The scheme which would result in millions of self-employed people and businesses filing multiple tax returns each year was due to hit large businesses from 2018 and small businesses from 2018. It has been predicted that the decision to drop the legislation could delay the policy by at least a year or it could be scrapped altogether. The move comes after significant opposition against the proposals from taxpayers, business groups and senior political figures across all parties. The reduced Finance Bill will be read by the House of Lords on 26 April 2017 after it was revealed that 72 of the original 135 clauses had been scrapped. No amendments of the Bill can be made once it has passed its report stage in the House of Commons. The Finance Bill is expected to receive Royal Assent to become Finance Act 2017 by 28 April.

The scrapped clauses include:

Digital reporting and record keeping (MTD) for income tax and VAT;

Dividend tax rate for 2018/19;

£1000 tax free allowances for property and sundry income;

Power to tax capital gains made from UK land as income tax not CGT;

Changes to substantial shareholding exemption;

Restrictions on corporation tax losses.

Head of tax at ACCA calls for delay in the implementation of HMRC’s MTD

Chas Roy-Chowdhury, head of tax at ACCA (the Association of Chartered Certified Accountants) has called for a delay in the implementation of HMRC’s Making Tax Digital strategy, in response to Prime Minister Theresa May’s call for a snap election.

Mr Roy-Chowdhury says, 'It has been clear for some time that the proposed timescale for introducing the reforms under the Finance Bill 2017 (known as Making Tax Digital) will cause particular challenges for small businesses, especially with regards to the practicalities and costs of digital quarterly reporting.

'The prospect of a snap General Election will further complicate the implementation of the proposals, as well as creating far more uncertainty for businesses during a profoundly difficult economic cycle.

'ACCA have long called for a full deferral of Making Tax Digital until 2020 to fully allow both HMRC and businesses to prepare and minimise disruption. In light of yesterday’s announcement there should be at least an agreement to delay any further action until the next parliament.'

Small businesses still not embracing accounting software despite MTD plans

Many small businesses are in danger of not being ready for the Making Tax Digital (MTD) reforms, according to a recent survey by the leading association of chartered accountants and law firms.

The UK200Group survey revealed that 65% of its members’ small business clients do not currently use software to manage their accounts, despite HMRC plans to make all businesses file tax returns electronically every three months from next year.

Even more surprisingly, the survey revealed that 16% of small business (SME) owners do nothing to record business transactions, preferring to leave their accountant to fill in details prior to their tax return each year. The UK200Group called this the “Shoebox Method”

The survey did show that 27% of small business owners used computers for their bookkeeping, but it is thought that many of these use Microsoft Excel or another spreadsheet-based application.

Richard McNeilly, chair of the UK200Group digitalisation taskforce, said: "The shoebox method users will have to learn how to keep records, invest in software and then spend time inputting the data they collect into it.

“Making Tax Digital represents the single most significant change to the UK’s system of taxation in recent times, and many of our smaller business clients are simply not ready for it.

“If the Revenue stays committed to having businesses report and pay tax digitally by 2018, small firms have only a short time to update their systems.”

HMRC writes to all traders registered for the VAT Flat Rate Scheme

HMRC has sent out a letter to all traders who are registered to use the flat rate scheme, informing them of the new 16.5% flat rate for limited cost traders which will come into force from 1 April 2017. HMRC has also sent out an email to those for which it has an email address.

The letter to Flat Rate Scheme traders from HMRC says: “You are a limited cost business if the cost of your goods is below 2% of your turnover, or below £1,000 per year.”

To determine whether a trader is a limited cost trader they must review what they spend on “relevant goods”. Regulations passed on 8 March 2017 list those goods which would not be considered “relevant goods”. These include goods which are not used exclusively for the business and the following:

Vehicles, vehicle parts and fuel except where the trader is in the transport sector and owns or leases a vehicle for his business;

Food or drink for consumption by the trader or his employees;

Capital expenditure (of any value);

Goods acquired for the purpose of resale, leasing, letting or hiring out except where the main business activity trader ordinarily consists of selling, leasing, letting or hiring out such goods;

Goods for disposal as promotional items, gifts or donations;

There is concern that when taxpayers receive the letter they may read “your goods” as meaning the cost of the goods which they sell or create, and interpret “cost” as being the price at which the business sells the item for. The correct interpretation of “cost of your goods” is the gross amount paid for the goods purchased by the business, and this is clear if the taxpayer continues to read to page two of HMRC’s letter.

Reminder: UK Corporation Tax to fall to 19% from 1 April 2017

The rate of corporation tax is to reduce from 20% to 19% from 1 April 2017.

The government in the Summer Budget 2015 announced legislation plans that would set the Corporation Tax main rate at 19% for the tax years starting 1 April 2017, 1 April 2018 and 1 April 2019. The rate would be further reduced to 18% for the tax year starting 1 April 2020.

In the 2016 Budget the government announced a further reduction to the rate from 18% to 17% for the tax year starting 1 April 2020.

Landlords hit hard by changes to mortgage interest tax relief changes

In 2015 former Chancellor George Osborne announced plans that landlords would no longer be able to deduct the cost of their mortgage interest from their rental income when calculating the amount of profit on which to pay tax.

The changes are being phased in from April 2017 and will be fully implemented by 2020. From April 6, just 75pc of mortgage interest can be deducted against rental income to calculate profits. This figure decreases by 25pc each year until it is fully wiped out in the 2020-21 tax year.

The changes mean that:

• Tax will now be due on turnover, rather than profit. If mortgage rates rise, but rents don't, landlords could end up out of pocket paying more tax than the amount of profit they make.

• Any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.

• For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.

• It is thought that some basic-rate taxpayers will also pay more tax as the change could push them into the higher-rate tax bracket.

Currently tax is due on profits at your highest rate of income tax. But between 2017 and 2020 this system will be replaced. All landlords will pay tax on the full amount less tax relief fixed at 20pc.

As a result every mortgaged landlord who pays 40pc or 45pc tax will pay much more - but so will some basic-rate taxpayers too, because the change will push them into the higher-rate tax bracket.

HMRC corrections leading to errors on people’s tax returns

Leading accountants have claimed that HMRC is creating errors in self-employed individuals’ tax returns, resulting in their failure to pay sufficient National Insurance.

The errors relate to changes to the National Insurance system that were announced by the previous government, which stated that from April 2015, workers’ “Class 2” National Insurance contributions (NIC) have been declared on self-assessment tax returns. Previously they had been paid to HMRC by direct debit.

The £2.80 per week charge which is to be paid by all self-employed individuals and partners in partnerships counts towards individuals’ entitlement to state pension and maternity leave.

However, many taxpayers are now finding that where they submitted tax returns that correctly reported their Class 2 NIC liability, HMRC is actively “correcting” such returns by removing the Class 2 NIC liability. This appears to be “because the self-assessment system does not expect it to be paid”, accountants speculated.

George Bull, from accounting firm RSM, said he and his colleagues initially detected a few cases of this error and were now seeing new incidences emerging on a “daily basis”. It was not affecting every self-employed individual’s return, Mr Bull said.

HMRC have acknowledged the errors to accountants, and say they are due to a “technical fault” with HMRC systems that has been “reported internally”.

The main concerns are that individuals will either not spot the “correction” made by HMRC or falsely believe that the removal of NI contributions from their return is correct. There is a risk that if the NIC record is amended to show zero contributions for a year, people could face losing benefits as their record will become incomplete. Individuals need 35 years of NI contributions to be entitled to the full state pension.