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Have you done your tax return? Do you even need to do one? Well don’t panic… a lot of people haven’t. Here is what you need to know

Posted on: 10 Jan, 18

It’s January, and lets face it - the party is over and it’s time to get that tax return filed. Oury and Clark consider a friend in a similar position to highlight the key matters that need consideration.

I woke up on the 1st January 2018 after a fantastic New Year’s eve party, well actually it wasn’t fantastic - they never are, it was okay, ruined mostly by it’s focus on a moment of time that comes and goes in a literal second before we stand around and wonder what the hell are we doing with our lives. Anyway - I woke up to a text from a concerned friend wondering if they have to do a tax return?

Clark says...
Oury says...

Of course, after Christmas comes New Year, and after New Year comes TAX RETURN TIME. Oh I get all excited at this time of the year - it’s like Christmas but with more number puzzle games… So The Tax Return deadline for the 2016/17 tax year (6th April 2016 to 5th April 2017) is the 31st January 2018. And it follows on, the deadline for paying tax on the money you are currently earning during January 2018, falls in the tax year 17/18 and needs to be declared on the 31st January 2019…

Okay Oury, sure thing. But - We need to talk about your tax issues when January is over.

Clark says...
Oury says...

Yes well, anyway – tis the season to do your tax! If you need to do a tax return… so tell me what he said so we can work out if he needs to file one.

Right, okay - so my friend moved out of their 1 bedroom flat in London and bought a much larger 4 bedroom detached property in the Thames Valley on 31st March 2016. He then became a Landlord, renting out his London flat and started his own limited Company in June 2016, using one of his bedrooms as a home office.

Clark says...
Oury says...

Arh… clever chap, he has bought a new property before* the additional 3% Stamp Duty surcharge on second homes came into effect. (*prior to 6th April 2016 - see stamp duty quick guide for further information).

Yes, he was very pleased with himself but I think he has now become a little stuck! He tells me HMRC have not sent him a request to complete a tax return and his new Company is less than 1 year old, does that mean he does not have to do one?

Clark says...
Oury says...

Unfortunately not, the “tax return” is an abbreviation for “Self-Assessment Tax Return” (SATR). The clue to notifying HMRC of a potential tax liability is in “SA” ( self-assessment), the taxpayer has an obligation to inform HMRC they may have a tax liability, HMRC will then send the taxpayer a “tax return” request. The deadline HMRC impose for informing them of a potential tax liability is 6 months after the tax year end (i.e. by 5th October) however HMRC do accept late registrations without imposing a fine. Should your friend not have registered they can do so online by following this link

It’s actually a fairly complicated question whether you need to do a tax return – surprisingly if he or anyone else, is in doubt as to whether they need to register for self-assessment HMRC has an interactive questionnaire which can assist.

Excellent interactive tool!

Ok, so it’s the individual’s obligation, what about the fact his Company is less than 1 year old?

Clark says...
Oury says...

The age of the Company makes no difference to the Tax Return, the Company is an entirely different entity, which has a different reporting cycle to the individual. Your friend will have to complete both Company Tax Returns and Personal Tax Returns at different points in the year. HMRC believe all Company directors are under an obligation to file a personal Tax Return however that is not entirely true. Should the director have received no salary, dividends or benefits from the Company it is possible no Return is due. But if HMRC send a request for a Tax Return you need to complete one or face the penalties:

  • Late Filing Penalties
  • £100 : 1 day late
  • £10 per day for 90 days if the Return is more than 3 months late (£900)
  • 5% of the tax liability or £300 if the Return is more than 6 months late (£300)
  • Additional 5% of the tax liability or £300 if the Return is more than 12 months late (£300)

Total possible penalties where no tax is due but a Return has been requested by HMRC: £1,600

Crickey, that is steep, it’s worth meeting the deadline! He turned up at my house in his new Tesla on boxing day saying he had bought it through his Company and he thinks it’s tax efficient however he wasn’t sure how he should be extracting cash from the Company, so I guess he will need to complete a Return?!?

Clark says...
Oury says...

Great car, super quick and efficient, and yes, also tax efficient from both a business perspective and an individual, (see our Capital Allowances and P11d guidance)

Yes, it sounds like he will need to complete a Personal Tax Return as he is 1) a Landlord 2) a director receiving benefits (at least) from his limited closed Company

Oury says...

As you can see a lot of information needs to go onto the Return so it is best to start collating all of the information now. But having said all of that…if you are not VAT registered, and if you can’t find half of your expense receipts, then you can use your bank statement and credit card statement as a base for the information. If you really can’t find an item and time is running out you can use an estimate, submit the return on time to avoid a penalty and amend the return within a year.

It will take some time to gather all that information. I’ve read a great deal about all these budget changes recently but to be honest I can’t quite remember which tax year each change falls into

Clark says...
Oury says...

Yes, there have been a number of drastic, complicated and varying changes coming into effect over the last 18 months.

Landlords

Prior to the 6th April 2016 landlords who rented their properties furnished were able to claim a 10% wear and tear deduction (based on rental income) to offset against property income, even if no maintenance had occurred. From 6th April 2016 (2016/17) this has been abolished, landlords are now only allowed to claim the exact cost of maintenance which they can prove has taken place.

Shareholders / Company directors 

Prior to the 6th April 2016, director shareholders, would extract a mixture of salaries and dividends with a higher skew towards dividends as these have a much lower tax rate of tax with a generous 0% band and also do not attract national insurance (which is effectively just additional income tax under a different name. The result was the ability to extract approximately £40,000 from a Company without having to pay any personal tax.

These dividend rules have now been changed, from 6th April 2016 (2016/17) the tax rates for dividends have been increased. Now there is a £5,000 tax free dividend allowance but dividends in the basic rate tax band are taxed at 7.5%, and upwards from there as you earn more to 32.5%, 38.1%. See here

Wow, the law makers have been busy, so what does this mean for director shareholders who many traditionally have taken a basic salary of around £10/11k, and the rest in dividends.

Clark says...
Oury says...

Unfortunately, like most things in tax, it  depends! As a very rough guide the same director shareholder who was extracting approximately £40,000 tax free will now have to pay approximately £1,500 income tax on the same money. But what is interesting is that it would seem that this well trodden route, is now on the attack somewhat. And that having a Limited company to reduce your tax, isn’t as true as it used to be. It tips the balance to say maybe it’s easier just to be self employed (not employed through your limited company) and just submit a tax return to HMRC.

Right, so my friend needs to get his affairs in order! Is there any action he can take now in relation to the 2016/17 tax year?

Clark says...
Oury says...

Well… it is not possible to retrospectively change Company accounts or move dividends into different accounting and tax years, this would be tax evasion / “cooking the books” and is illegal. However individuals can make tax efficient investments, such as SEIS or EIS ( see guidance note) which act as income tax reducers by up to 50% of any tax due, this can be carried back to earlier tax years.

Ok, so it’s too late to do anything about salary and dividend timing for the 2016/17 tax year but some planning now could help for the 2017/18 tax year? Have there been any further changes that he should be aware of?

Clark says...
Oury says...

Yes that’s right, any directors or landlords that were not aware of the changes in the 2016/17 tax year can now plan and make tax efficient decisions for the current tax year (2017/18).

However there have been further changes that took effect from 6th April 2017 (2017/18).

No way! I just got my head around what you were talking about for 2016/17!

Clark says...
Oury says...

Yes, sorry… like you said the law makers have been busy… the focus seems to be on owning a second home and making it less efficient - so as to free up property for more first time buyers - it’s not like they’ve had anything better to do #brexit.

Landlords

The main change that came into effect on 6th April 2017 (17/18) is the restriction of the ability to offset the full amount of mortgage interest against rental income before calculating tax due. The reduction in relief is replaced with a 20% tax credit. This only affects higher rate taxpayers and the restriction is being phased in over 3 years to 2020.

Ok, so what does that mean?!?

Clark says...
Oury says...

A Landlord, such as your friend, who is also a higher rate taxpayer, which broadly equates to gross earnings in excess of £45,000, will only be able to offset 75% of the actual mortgage interest cost incurred on the rental property. They will receive a 20% tax credit for the remaining 25% mortgage interest not offset, this switches to:

50%/50% in 2018/19
25%/75% in 2019/2020
0%/100% in 2020/2021

It is not just current higher rate tax payers that are affected, the addition of rental income to a basic rate taxpayer’s total income could push them into the higher rate band. This would have a knock on effect and reduce personal saving rate bands

Gosh, that’s a huge change - I didn’t realise that - and it sounds complicated and could likely impact on savers, such as pensioners who have a single rental property. Will it mean that some are worse off and is there any planning landlords can action?

Clark says...
Oury says...

Yes Clark, some Landlords (including pensioners) may be worse off, paying tax on rental income which does not materialise into profits.  There are certain actions some Landlords can take now.  The interest rate reduction does not (at present) apply to Companies, it is possible to incorporate a property business and benefit from incorporation relief (meaning the conversion from private ownership to a Limited company owning the property is not taxed) however taxes such as Stamp Duty would need to be paid when transferring the property to the Company. This is generally only a viable option when a Landlord owns 4 or more properties.

In terms of maximising tax efficient profit extraction from a limited Company there are various methods such as Company pension contributions which benefit both the individual and the Company.

Your friend should really speak with a Chartered Tax Adviser to help register him for self-assessment, prepare his 2016/17 tax return and analyse his situation before the end of the current tax year (5th April 2018).

I think you are right Oury but don’t Chartered advisers cost a fortune, can’t you just use a normal accounant?

Clark says...
Oury says...

Good question Clark, there are a number of “accountants” who will prepare a tax return for £200 or so, however should you chose this route two words of warning.

  1. Check their qualifications the three most common are icaew.com, www.accaglobal.com, or the crème de la crème www.core.tax.org.uk.
  2. You must make sure you understand the figures yourself, and they make sense to you. There are plenty of cowboys who miraculously lower your tax liability by some “creative accounting”. But be clear – no matter what they do, you are ALWAYS liable for your actual tax liability. So if you get an enquiry and it turns out going back years you owe a lot of tax, even if your “accountant” lied – you are still the one liable for the tax.

No way ! - Oh right, so how much can I expect to pay a crème de la crème Chartered Tax Adviser?

Clark says...
Oury says...

How long is a piece of string Clark? It all depends on the level of complexity, as a rough guide a Chartered Tax Adviser can charge from £500 for a basic tax return to up to £3,500 for a more complex return (all plus VAT).

Ok, thanks Oury, best not to get on the wrong side of HMRC’s penalty regime, I’ll tell my friend time to start the New Year with some decent tax planning from a Chartered Adviser!

Clark says...

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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.

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