We’ve had a lovely few days of weather and summer is around the corner. As the weather heats up this time around we talk about the hottest topic at the moment. By now you probably have heard everyone mention about General Data Protection Regulations (GDPR).

The regulation has been passed to protect an individual’s privacy. If you hold a person’s name, email address, address or contact details, you will now need their permission to hold these types of data. If you do not have permission, then you will have to delete the data you hold. This will be law by the end of this week (25^th May 2018) and there are fines that will be imposed for any sort of breach. If you are worried about GDPR you can read up about it here.

Here at Cross Accounting, we are currently password protecting documents containing sensitive information when sending internally and externally. Since the document has an individual’s data on this ensures we are complying with GDPR rules. All our clients will have their own unique password to open their documents. This ensures privacy in case it is sent to an unintended recipient or a breach in security from hackers. Encryption is the key to adhering to the regulations.

25^th May is when all this starts to kick off, there are companies that can help and provide training for GDPR but it is making sure you’re being responsible with the data you hold. People have the right to be forgotten, so any contacts that you do not have their permission, you cannot keep. If you take car in to applying security to your business, then your are ready to tackle GDPR.

1. Stamp duty will be cut for 98% of people who pay it 

only the highest value residential properties will pay more Under the old rules, you would have paid Stamp Duty Land Tax at a single rate on the entire property price. Now, you will only pay the rate of tax on the part of the property price within each tax band – like income tax. Under the old rules, if you bought a house for £185,000, you would have had to pay 1% tax on the full amount – a total of £1,850. Under the new rules you don’t start paying tax until the property price goes over £125,000, and then you only pay tax on the price of the property within the tax bands over that price. Under the new rules, you’ll pay nothing on £125,000 and 2% on the remaining £60,000. This works out as £1,200, a saving of £650. This will make the system fairer, and means stamp duty will be cut for 98% of people who pay it. Our stamp duty factsheet explains this policy in more detail. You can also access our infographic which gives some examples of how the new system will work.

2. The tax-free personal allowance is being increased by a further £100 in April 2015, to £10,600 The personal allowance

the amount you earn before you have to start paying income tax – will be increased again from £10,000 to £10,600 in 2015 to 2016. Typically, someone earning between £10,600 and £42,385 will be £825 better off by 2015-16 as a result of increases in the tax-free personal allowance since 2010. Even while making difficult decisions to fix the economy, since 2010, the government has cut income tax for 26.7 million taxpayers. Read the Chancellor’s Autumn Statement speech in full.

 3. Children will be exempt from tax on economy flights This will apply for under 12s on flights from 1 May 2015, and for under 16s from 1 March 2016 

saving an average family of four £26 on a flight to Europe and £142 on one to the US. The government expects these changes should be clear to consumers, and will consult on making sure that the tax is displayed on ticket prices.

4. Spouses will inherit their partner’s individual saving account (ISA) benefits after death

Currently, if someone passes away they can’t pass on their ISA to their spouse, even if they have saved the money together. 150,000 people a year lose out on the tax advantages of their partner’s ISA when their partner passes away. From 3 December 2014, if an ISA holder dies, they will be able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance which they will be able to use from 6 April 2015. The surviving spouse or civil partner will be allowed to invest as much into their own ISA as their spouse used to have, in addition to their normal annual ISA limit.

5. Business rates will be cut and capped

with extra Help for the High Street To support small businesses in local communities, the ‘high street discount’ for around 300,000 shops, pubs, cafes and restaurants will go up from £1,000 to £1,500, from April 2015 to March 2016. This is in addition to doubling Small Business Rate Relief for a further year which means 380,000 of the smallest businesses will pay no rates at all. The government will also continue to cap the annual increase in business rates at 2% from April 2015 to March 2016 – this will benefit all businesses paying business rates. Finally, the government will extend the transitional arrangements for smaller properties that would otherwise face significant bill increases due to the ending of ‘transitional rate relief’. Access our infographic on full employment, and the government’s long term economic plan.

6. No more employer National Insurance contributions (NICs) on apprentices under 25

To make it cheaper to employ young people, from April 2016 employers will not have to pay National Insurance contributions (NICs) for all but the highest earning apprentices aged under 25. This is in addition to the announcement made at Autumn Statement last year that employers won’t have to pay NICs on under 21s from April 2015. These are part of the government’s wider ambition to have the highest employment rate in the G7.

7. Creative sector tax reliefs will be extended to children’s TV

Following on from the success of the film, high end TV, animation, video games and theatre tax reliefs, a new children’s TV tax relief will be introduced from April 2015. This will counteract a decline in investment in children’s TV in the last decade. Eligible companies will be able to claim 25% of qualifying production spending back through the relief. The government will also consult on introducing a new orchestra tax relief in April 2016.

A couple of updates on the Budget released in July 2015

Please see a couple of articles with links to the website below.

Buy-to-let investments

The other major property-related changes in the Budget statement will affect “buy-to-let” investors in residential property (whether in the UK or overseas). Investors in commercial property are unaffected; as are investors in properties which meet the criteria to be treated as furnished holiday lettings. There are two separate changes.

Wear and Tear

The first change relates to the “Wear and Tear” allowance for furnished lettings. It applies to companies as well as to individual landlords (but not to furnished holiday lettings). At present, the costs of replacing furniture and fittings are not tax-deductible. Instead, a notional deduction is given for tax purposes equal to 10% of rents. HMRC seem to consider that in many cases this is over-generous and from April 2016, it is intended that the 10% deduction will be abolished and instead tax relief will be given for the actual costs of replacements. Note that this change does not affect tax relief for expenditure on routine repairs to the property, including furniture and fittings in it, which will continue, as now, to be tax-deductible in full.

Financing costs

The second change is in relation to “finance costs” such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. Starting from 6 April 2017 (and phased in over 4 years from then) tax relief for these costs will be restricted the basic rate of Income Tax. This restriction will apply to individuals (presumably including individual members of partnerships or LLPs) only. It will not affect companies, but the position of trusts is not yet clear. No Income Tax relief is of course in any event available for capital repayments of a mortgage or loan.

Instead of deducting finance costs from rents to arrive at taxable profits, landlords will instead receive relief in terms of tax by deducting an amount equal to tax at the basic rate on the finance costs from the tax otherwise chargeable on the profits. If the tax deduction for finance costs exceeds the tax otherwise payable on the profits the excess can be carried forward and used in subsequent years.

The change will be phased in so that for 2017/18 the new rule will apply to 25% of the finance costs (with the other 75% being deducted in computing taxable profits as now); for 2018/19 the restriction will apply to 50% of the finance costs; for 2019/20 to 75%; and from 6 April 2020, 100% of the finance costs will “disallowed” and dealt with under the new rule.

Although its impact is ameliorated by the delayed and phased introduction, this change will significantly change the economics of some buy-to-let portfolios. Since the change does not affect companies, one response may be to consider adopting a limited company structure. But there are many factors to consider in choosing the right structure, summarised in our recent briefing note and the position is further affected by the change from April 2016 of the way in which dividends are taxed, also announced in the Summer Budget. The tax credit attaching to a dividend will be abolished and dividends will be taxed as normal income albeit at special rates of tax (with exemption for the first £5,000 of dividends). Broadly, this will increase the effective rates of tax on

http://www.bkl.co.uk/resources-and-publications/budget-insights/summer-budget-2015/summer-2015-budget-effect-on-property-investors/

Small firms face another taxation shake-up

KEY POINTS

• The changes to dividend tax are the start of a process to reduce the tax advantages of incorporation.
• For existing companies dividends are still generally more tax efficient that salary, though the advantage are reducing.
IR 35 and personal service companies are back on the government’s agenda.
• The OTS has been asked to look again at the alignment of tax and NIC and at small company taxation generally.
• There will be much to talk about with clients – many of them could face significantly higher tax bills next year.

• Employed versus self-employed.
• Incorporated versus unincorporated.
• Dividend versus salary

Seeing the bigger picture

So what is happening? After a couple of days reflecting on the Budget announcements I am starting to see what I think are the overall themes, although many of the details need to be firmed up. I’m writing this in advance of the publication of the Finance Bill so what follows will need to be reviewed against the small print.

The most obvious change is in the taxation of dividends. From next year dividends will have no tax credit attached (thus removing the often confusing distinction between “gross” dividends and “net” dividends) and the amount received will be all that matters.

Dividends will be taxable at 7.5%, 32.5% and 38.1% respectively, depending on the marginal rate. As we will no longer have to take into account the grossed-up amount of the dividend in determining which rate band somebody falls into there are likely to be some odd results close to the rate band changes.

Those rates represent real increases in tax. The blow is, however, softened by the introduction of a £5,000 dividend allowance for all taxpayers. The assumption is that this will mean that an individual who receives total dividends in a year of £6,000 will be taxable on £1,000.

I did see some commentators suggest that it meant something different: that if the dividends were less than £5,000 no tax was paid, but once they got to £5,001 tax was paid on the whole amount.

I don’t think that that can be right but, until we see the legislation, we can’t be certain. I will assume in the rest of this article that the former reading is the right one.

What’s the objective?

Why has he done things this way? First, I believe that the £5,000 limit is all linked with digital tax accounts. Just as we saw earlier in the year with savings income, taking out small amounts from tax should reduce the compliance burden considerably.

A typical self-assessment taxpayer whose dividend and interest income are small should have little to enter onto his digital account (I say should because we don’t yet know the mechanics of all this).

Second, the changes will raise more tax from those few extremely wealthy people with massive dividend portfolios. But third, and this is the key change, it will directly affect small businesses.

The Budget Red Book is clear on this. It says at 1.189:

“These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019-20. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of corporation tax.”

There are two limbs to this: incorporation and dividend versus salary. Let’s take them in reverse order. A low-salary, high-dividend route still looks to be more tax-efficient even after these changes. Everybody has a different way of doing the comparison.

I like to keep it simple and look at a basic rate taxpayer who has used up his personal allowance against salary and is looking to take another £10,000 out of his company.

This confirms that the dividend route is still more efficient. This is consistent with what is said in the Red Book with its reference to “start to reduce the incentive”. I can only read that as a very strong hint that dividend tax rates will eventually be ratcheted up to align salary and dividends.

The chancellor hasn’t done it by putting National Insurance on dividends – with all of the problems that would have caused elsewhere in the tax system – but the new dividend tax is in some ways a back door way of doing the same thing.

So, the message to clients is: expect to pay more tax next year. If, as a result, they question the chancellor’s triple-lock announcement about no increases in tax rates, this query might be passed to 11 Downing Street.

Tax-motivated incorporation

What about the other element – the tax-motivated incorporation? Many people incorporated their businesses at the time of the 0% corporation tax band and, to an extent, all actions taken since have been trying to close the stable door after the horse has bolted. But these new changes are intended to discourage individuals from incorporating purely to obtain a tax advantage.

The computations here are trickier because we do not yet know the National Insurance bands for next year and therefore complete precision is not yet possible.

But the tipping point at which incorporation starts to deliver significant tax systems has clearly gone up. It looks as if incorporation at earnings even as high as £30,000 will now deliver a very marginal benefit.

I think of it this in the following broad terms. The advantage of incorporation has been that much of the income could be received as a tax-free dividend. Of that £30,000, something like £20,000 could be taken as dividend (using the personal allowance to cover salary).

Next year that £20,000 will create additional tax of £1,125 (£15,000 x 7.5%). That is a significant increase whereas, broadly speaking, the self-employed will see little change. Additional tax at that level would make incorporation much less attractive.

In our heart of hearts we all know some taxpayers who could not cope with operating through a company. The additional hassle of dealing with benefits in kind, loans to participators and company returns is often a nightmare for them, and hence for advisers.

With the tax benefits of incorporating being reduced (and I expect them to be further reduced in the coming years) there is a lot to be said for them to remain as self-employed.

Other changes

The dividend tax was not the only small business measure. Personal service companies are back on the agenda.

There is not only the decision to withdraw the employment allowance for one-person companies, but yet another review of the IR35 provisions to “find a solution which protects the Exchequer and improves fairness in the system”.

So where does this leave us? As I have said many times over the years the system for taxing small businesses lacks any coherence.

What we have is the result of various strands of the tax system designed for different purposes all crashing together on the small businesses that are the lifeblood of the economy.

This creates complexity and administrative burdens. We need a system designed specifically for small businesses and which addresses the triangle of tensions outlined above.

http://www.taxation.co.uk/taxation/Articles/2015/07/13/333367/all-change