Glasgow Accountancy

In the UK it is reckoned that more than 60 per cent of UK businesses are family owned. Whilst it has its downsides over the sunday dinner table, employing family members means that it should be possible to take advantage of lower tax rates and personal allowances that may be available to spouses, civil partners, and/or children. In turn, this arrangement can help reduce the household’s overall tax bill.

A few rules, however, do need to be kept in mind when taking on family members:

•  The relative has to be hired to do real work at a proper commercial rate. HMRC are likely to query payments of £50 per hour to a 10 year old who is ‘employed’ to take telephone messages.
• Local authorities have rules on children working. The rules do not usually apply to a few hours working at home, say, stuffing envelopes. However, if you want to employ a child under 16 in other circumstances, you will need to check with the council first.
• Family members (over 16 years of age) who earn more than the National Insurance contributions (NIC) primary threshold of £146 (for 2012/13) in any week are liable for NICs. In addition, the employer will also have to pay NICs on their behalf.
• The money does actually have to be paid to the employee. HMRC may ask to see evidence that the money has gone from the business to the family member concerned. It is important, therefore,  o keep proper records of all payments made.

 Example 

Hugh has a carpet cleaning business and his 16 year old daughter Fiona helps him out for five hours a week at £7.00 per hour, earning a total of £35 per week. This amount equates to £1,750 a year, allowing for school holidays and some overtime. Hugh can offset the £1,750 he pays Fiona against his profits for income tax purposes. Provided Fiona has no other income, he doesn’t have to pay any tax on the money because he falls well below the annual tax-free personal allowance (£8,105 in 2012/13). If Hugh had done the work himself and not employed his daughter, that £1,750 would remain part of his taxable profits for the year and he would be liable to pay tax on it. If he was liable to income tax at the higher rate of income tax of 40%, the household would have received only £1,050 (£1,750 less 40 per cent) instead of the full £1,750.

Employing a spouse or partner can be particularly tax-efficient where trading is undertaken through a limited company. If a spouse or civil partner is a shareholder in the company, and is also employed in it, they can be paid a mixture of salary/bonuses, benefits, and dividends, thereby reducing  everyone’s overall tax bill quite considerably. If Hugh also wants to (and has the means to) take £50,000 a year from his limited company, regardless of whether the amount is paid as salary or dividends, a 40 per cent tax bill will apply to the top slice of his income.

Contrast this with George and Mildred who own 1 per cent and 99 per cent respectively of the shares in a business. They do not have income from other sources. They wish to (and have the means to) take £50,000 a year from the business. If George receives say, £30,000 in salary, he will only pay income tax at the basic rate along with NICs. The remaining £20,000 can be paid out as dividends. Mildred receives £19,800 (in relation to her 99% shareholding), whilst George receives only £200. Mildred’s income is well within the basic rate threshold so she doesn’t have to pay any additional tax on the dividend received. George’s share of the dividend won’t push him into the 40% bracket either. An alternative would be to pay Mildred £20,000 in salary. She would have to pay total tax and NICs of £4,038 (in 2011/12). Although this method leads to more tax being paid than going the dividend route, it still works out a good few thousand pounds less than paying the £50,000 salary straight to George.

Summary

Employing family members in a family-run business often means that it is possible to structure things so as to take advantage of lower tax rates and personal allowances, which in turn will reduce the household’s overall tax bill. A careful eye needs to be kept on the specifics of the relevant tax legislation and as always, taxpayers need to look at the wider picture and never do anything for the sole purpose of avoiding tax.

Contact our tax team on 08450507613 to see what savings there are for you.

Even thought the SA tax filing deadline has passed, if you haven’t lodged your return, don’t fall into the age old situation of worrying and not sdoing anything about it.

Get in contact with us today and we can lodge returns quickly for you.

To make sure taxpayers are not disadvantaged if they cannot get through to HMRC’s call centres on the 31st January, due to threatened industrial action by its staff, HMRC have announced that they will not impose any late filing penalties for taxpayers who file their self-assessment returns on the 1st or 2nd February.

The self-assessment deadline remains midnight on the 31st January. However, HMRC will treat all returns that come in by midnight on the 2nd February as though they were submitted by the 31st January. No customer will have to pay interest on payments due on the 31st January that are paid on the 1st or 2nd February.

Acting Director General Personal Tax, Stephen Banyard, said: “We’ve always been very clear that we want the returns – not the penalties. For that reason, we don’t want anyone who can’t get through for help and advice on 31st January to be disadvantaged in any way.”

31 January 2012 as well as being deadline for submission of SA Tax Return is also deadline for renewal of Tax Credits if estimates where used for 2010/2011 income.

HMRC have published the latest fuel rates which will apply for all journeys after 01 Dember 2011. The only change from preious is that LPG in cars with capacity 1400cc or less has gone down to 10p per mile from 11p per mile.

We thought readers might appreciate a last minute reminder about the new interest and penalty rules which we have previously advised. Obviously you will not require this as you will have sent in information but as we appreciate things do not always run smoothly at this time of year but please remind yourself of the following.

Even if no tax due and you file return late, the £100 penalty is not reversed. You still need to pay this.

If return still late after 90 days, you then pay £10 per day upto a maximum of £900.

If still not lodged at six months a further penalty of 5% or £300 whichever is greater..

After twelve months anither 5% or £300 whichever is greater. After twelve months a further 100% of tax due can be levied as a penalty.

As you will agree if you have anything you are unsure of, please contact me on 08450507613.

In an attempt to keep taxpayers up to date, HM Revenue & Customs have this week issued the following as a reminder of the late filing penalties for Self Assessment Tax Returns for the 2010/11 years and onwards.

Clients should take note of the changes in particular the initial £100 penalty applying regardless of whether the taxpayer has paid their tax on time or not!

HM Revenue & Customs (HMRC) is reminding individuals and businesses about new Self Assessment penalties for late returns and late payments, which come into effect this autumn.

The changes will affect Self Assessment returns for 2010/11, and all future financial years. The new penalties for late Self Assessment returns are:

* an initial £100 fixed penalty, which will now apply even if there is no tax to pay, or if the tax due is paid on time;

* after 3 months, additional daily penalties of £10 per day, up to a maximum of £900;

* after 6 months, a further penalty of 5% of the tax due or £300, whichever is greater; and

* after 12 months, another 5% or £300 charge, whichever is greater. In serious cases, the penalty after 12 months can be up to 100% of the tax due.

New penalties for paying late are 5% of the tax unpaid at:

* 30 days;

* 6 months; and

* 12 months.

Interest will also be charged on top of these penalties. The tax return deadlines remain unchanged – 31 October for paper and 31 January for online returns. The deadline for paying any tax due also
remains the same at 31 January.

If a taxpayer, claims input tax in relation to the purchase of a motor vehicle, entertainment expenditure, clothing expenditure, and meals/trips expenditure and if they claimed the vehicle/expenses were used solely for the purpose of business HMRC may argue it is not sufficient for the taxpayer to purchase a vehicle for the purpose of business use. They may claim for VAT purposes but the car must not be ‘available for private use’ and they would suggest there had to be a specific insurance or contractual restriction to prevent private use. With regard to a claim in respect of the clothing and meals/trips, the taxpayer would have to show the expenditure was on goods or services used or to be used for the purposes of the business. The argument that input tax can be claimed on a car has been tested on many occasions in the courts. The only time when input tax can be claimed is if the vehicle is a tool of trade, for a car-hire business, driving school or taxi firm, or when it is a genuine pool car not linked to any particular employee and not kept overnight at the home of employees.

So if there are any clients who may have this scenario please contact me and we can discuss the impact of this on your tax affairs

HMRC are testing a scheme to ‘understand how email could be used more effectively’. In response to requests from taxpayers, the Revenue is offering to communicate electronically while it assesses how the medium could improve tax services and the taxpayer experience.

The pilot covers corporation tax, VAT, and employer-compliance issues with taxpayers who have a customer relationship manager or a customer co-ordinator.

HMRC say they see email ‘as an alternative channel of communication’ and there is no intention of making use obligatory for taxpayers, who are free to opt out at any time. They are asked to tell the Revenue in their consent message about any restrictions as to with whom the department should exchange emails.

Information about the test scheme includes the sentiment that taxman hopes to ‘conduct most of business with you, and/or your agent if appropriate, electronically’. It adds the caveat that sometimes the tax authorities will have to use paper communications ‘for legal reasons’