Last week the Treasury issued draft clauses for the forthcoming Finance Bill (to be published after the Autumn Budget later this year). These will set the scene for tax matters 2019-20 and beyond.

The aim of the advance notice is to give interested parties a chance to comment on the contents before government starts the formal process of processing the legislation through Parliament.

The draft clauses include numerous technical changes to legislation that are outside the scope of this article, but a cross-section of the more “interesting” disclosures are set out below:

• Technical changes to various benefit arrangements for cars and vans.
• Exemption from benefit charges if employees provide free vehicle-battery charging facilities for employees at work.
• HMRC are to remove requirement for employers to check receipts for subsistence claims by employees using approved HMRC rates.
• Employees will be able to nominate beneficiaries outside their close family members to receive their death in service benefits.
• Non-UK resident property businesses will be subject to UK corporation tax and not income tax as at present.
• The rent-a-room relief is to be amended to include a non-exclusive residence clause. This will mean that to continue to qualify for the £7,500 tax-free allowance, persons letting a room in their home will have to be in residence when they let.

Bear in mind that these are suggested clauses and are subject to change before the formal Finance Bill is published later this year.

It would seem, that HMRC is keen to plug the apparent drain from VAT receipts when contractors and sub-contractors charge their customers VAT and then go missing, keeping the VAT for themselves. This is described in legislation as “missing trader fraud”.

Their preferred method for dealing with this abuse is to make customers responsible for accounting for the relevant VAT charge rather than the supplier of construction services. This is an extension to the reach of the “reverse charge” scheme.

It has been used in the past to tackle similar VAT avoidance tactics. For example, a reverse charge was introduced for:

• mobile telephones and computer chips with effect from 1st June 2007,
• emissions allowances with effect from 1st November 2010.

Further reverse charge measures were introduced for gas and electricity with effect from 1st July 2014 and for electronic communications with effect from 1st February 2016.

The government are considering this extension of the reverse charge process to the construction sector from 1 October 2019.

According to HMRC:

The risk of fraud in the construction industry is principally centred around the supply of construction services between construction businesses in the supply chain and this instrument, therefore, does not require other types of business to apply the reverse charge when receiving construction services and there is also no reverse charge requirement in relation to building and construction materials that are supplied separately and independently of construction services.

They conclude:

Reverse charge accounting makes it impossible for fraudsters to perpetrate missing trader fraud because the customer rather than the supplier accounts for the VAT direct to HMRC. The introduction of the reverse charge in this business sector will mean that businesses will need to adapt their systems and manage their cash flow differently. Due to the large number of small businesses potentially affected by a reverse charge for construction services the government has given a long lead-in time to help businesses adjust, having announced in Autumn 2017 the intention to introduce legislation which will come into force in Autumn 2019.

A reminder that from April 2019, HMRC’s much vaunted Making Tax Digital (MTD) scheme will apply to certain businesses.

The April 2019 launch will only apply to VAT registered traders. More specifically, MTD will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can choose to do so voluntarily.

Live pilot studies are already being carried out and the first businesses have started keeping digital records and providing updates to HMRC to test and develop the MTD service for income tax and NICs. HMRC is keen to expand this pilot.

HMRC announced in 2017:

We will start to pilot Making Tax Digital for VAT starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are mandated to use the system. No business will be mandated before 2019.

From April 2019, businesses above the VAT threshold will be mandated to keep their records digitally and provide quarterly updates to HMRC for their VAT.

We will keep an eye on the results of the pilot studies and monitor the progress of accounting software providers to create the necessary links with HMRC’s digital systems.

If you are registered for VAT, have annual turnover above the current £85,000 limit, and have not yet considered how you are going to cope with MTD, please call so that we can help you research your options.

Whether you pay income tax or National Insurance, the effect on your cash flow is the same. The payments are a necessary part of our obligation to fund the activities of State, but the self-employed are often surprised that their bi-annual tax payments cover both “taxes” – NIC and income tax.

The weekly NIC Class 2 contribution is included, presently £2.95 per week, also Class 4 contributions: these amount to 9% of taxable income in excess of £8,424 and up to £46,350, and 2% on earnings above £46,350.

Accordingly, the combined rate of State dues on self-employed earnings in excess of £8,424 is potentially 29% – 20% basic income plus 9% Class 4 NIC – and over £46,350 a combined rate of 42%. Although in practice some of the income over £8,424 may be covered by other personal tax allowances, these combined rates illustrate the true impact of income tax and National Insurance to be paid.

Self-employed traders with significant taxable earnings should therefore expect to pay more than the usual rates of income tax when they contemplate settlement of their annual self-assessment bill and have funds in reserve to meet these combined liabilities.

Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NIC), and in some cases income tax.

The planning strategy is to pay a salary at a level that qualifies the director for state benefits, including the state pension, but does not involve payment of any NIC contributions.

For 2018/19 the NIC rate is set at 0% for annual earnings in the range of £6,032 to £8,424 inclusive. Earnings in this band range qualify for NIC credit for state benefit purposes. At up to £116 per week (£6,032 p.a.) no NIC credit is obtained for state benefit purposes. At over £162.01 per week (£8,424 p.a.) employees’ NIC starts to be paid at the rate of 12%.

Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band that depends on the actual date appointed. Care needs to be taken in these circumstances not to incur an unexpected liability to pay NIC.

Directors resigning during the year still have the full annual earnings band quoted above, and so care is needed to ensure that earnings for the whole tax year are within the range of £6,032 to £8,424.

Careful planning is also required to ensure that any impact of the National Living Wage regulations is considered, this may be particularly important for women who would like to claim statutory maternity benefit at some future date.

Directors considering their planning options for the first time are advised to take professional advice when setting the most tax/NIC efficient salary. We, of course, would be delighted to help.

1 July 2018 – Due date for corporation tax due for the year ended 30 September 2017.

6 July 2018 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2018 – Pay Class 1A NICs (by the 22 July 2018 if paid electronically).

19 July 2018 – PAYE and NIC deductions due for month ended 5 July 2018. (If you pay your tax electronically the due date is 22 July 2018)

19 July 2018 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2018.

19 July 2018 – CIS tax deducted for the month ended 5 July 2018 is payable by today.

31 July 2018 – Deadline for payment of second instalment self-assessment for 2017-18.

1 August 2018 – Due date for corporation tax due for the year ended 31 October 2017.

19 August 2018 – PAYE and NIC deductions due for month ended 5 August 2018. (If you pay your tax electronically the due date is 22 August 2018)

19 August 2018 – Filing deadline for the CIS300 monthly return for the month ended 5 August 2018.

19 August 2018 – CIS tax deducted for the month ended 5 August 2018 is payable by today.

In a landmark decision, the Supreme Court has ruled that discriminating on the basis of sexual orientation, or a decision to live together rather than marry, is a breach of human rights.

Presently, couples need to be in a formal civil partnership or married to be able to claim the raft of tax benefits available. These advantages include:

• Transfers of chargeable assets between civil partners and married couples is free of capital gains tax and inheritance tax.
• In appropriate circumstances spare personal allowances can be transferred from one partner to the other.

In the case taken to the Supreme Court, a heterosexual couple who had decided not to marry considered that denial of rights given to same sex couples (via civil partnership arrangements), and married partners, was an infringement of their basic human rights, and the Supreme Court agreed.

Readers interested in this topic can watch a video recording of the Court’s decision here: https://www.youtube.com/watch?v=Ehyuer1AxFw

Although the case does not directly impact changes to the tax system it will be interesting to see how the government responds to this ruling. It would be a fairly simple matter to grant heterosexual couples to right to enter into a civil partnership, and therefore gain access to the present tax status of same-sex civil partners and married couples.

According to HMRC, around three million couples across the UK have boosted their finances by claiming the Marriage Allowance, but more than a million married and civil partnered couples are still eligible for the free tax break worth up to £238 a year.

Thanks to the start of the new tax year couples can backdate their claim and boost a potential tax refund to a possible £900.

HMRC further announced:

Applying for Marriage Allowance is quick and easy and once an application is complete it’s processed immediately. The new online form takes fewer than ten minutes to fill out and eligible customers will receive backdated claims of up to £662 as a lump sum. Over 300,000 couples have signed up for the Marriage Allowance tax break since March 2018.

Which is all very well, but if HMRC can estimate the numbers of couples that are still eligible to make a claim – the 1 million referred to above – then why don’t they simply re-allocate the allowances automatically? Obviously, HMRC would need the permission of the partner who was transferring their spare personal allowance but HMRC could set up a much slicker digital process to cope with the formalities?

Surely most of the one million taxpayers will not have access to HMRC’s press releases, and this is precisely why there are still one million couples who have not claimed?

Perhaps the department that is tasked with developing the Making Tax Digital technology should get involved?

If you are reading this post and either you or your civil partner/spouse have income below the personal tax allowance (£11,850 for 2018-19, and equivalent amounts for earlier years) then follow this link to make a claim: https://www.gov.uk/apply-marriage-allowance.

When your income exceeds £100,000 for income tax purposes your entitlement to a personal allowance (£11,850 for 2018-19) is reduced by £1 for every £2 that your income exceeds this threshold.

Which means, when your income reaches £123,700, you no longer qualify for a personal allowance.

The effect on the income tax rate you pay in this band – £100,000 to £123,700 – is alarming. As well as paying tax at the higher rate of 40%, income up to the value of your lost personal allowance £11,850 that was previously exempt from tax is now due to be taxed at 20%. Accordingly, your combined income tax rate is 60%.

This process may catch some individuals unaware. For example, say you take a drawdown from your pension pot for £50,000 and your other income is say £80,000 – below the £100,000 cut-off point. Your pension provider has likely deducted tax at 40% from the payment made to you and you may believe that what’s left is yours to spend or invest. Not so. When your total income position is calculated at the end of the tax year this will have breached the £100,000 limit and the effect of the loss of personal allowance will create an additional tax bill.

Readers who are concerned that they may be on route for an income of more than £100,000 for this current tax year, may we respectfully suggest that they call to discuss their options. There are still planning opportunities that can be utilised but decisions on what needs to be done, and action to be taken, needs to happen before 5 April 2019.

The Supreme Court has ruled in favour of Gary Smith, a self-employed contractor with Pimlico Plumbers, who considered he was due worker’s rights and has now had his assertion rubber stamped by the highest court in the land.

There are no win-win outcomes following this case, in fact the status of all sides in the so-called “gig economy” is up for reinterpretation. Let’s hope that government is up to the task and is able to draft clearer instructions on this fractious area of tax law so that we can all proceed to negotiate future arrangements between companies and their self-employed contractors or employees within clear guidelines.

The court has issued a press release concerning the background to the appeal, the judgement and the reasons for the judgement. For those readers who are interested in the detail of this case the release is reproduced in part below:

BACKGROUND TO THE APPEAL

The Respondent, Mr Gary Smith, is a plumbing and heating engineer. Between August 2005 and April 2011 Mr Smith worked for the First Appellant – Pimlico Plumbers Ltd – a substantial plumbing business in London which is owned by the Second Appellant, Mr Charlie Mullins. Mr Smith had worked for the company under two written agreements (the second of which replaced the first in 2009). These agreements were drafted in quite confusing terms.

In August 2011 Mr Smith issued proceedings against the Appellants before the employment tribunal alleging that he had been unfairly dismissed, that an unlawful deduction had been made from his wages, that he had not been paid for a period of statutory annual leave and that he had been discriminated against by virtue of his disability. The employment tribunal decided that Mr Smith had not been an employee under a contract of employment, and therefore that he was not entitled to complain of unfair dismissal (a finding that Mr Smith does not now challenge), but that Mr Smith (i) was a ‘worker’ within the meaning of s.230(3) of the Employment Rights Act 1996, (ii) was a ‘worker’ within the meaning of regulation 2(1) of the Working Time Regulations 1998, and (iii) had been in ‘employment’ for the purposes of s.83(2) of the Equality Act 2010. These findings meant that Mr Smith could legitimately proceed with his latter three complaints and directions were made for their substantive consideration at a later date. The Appellants appealed this decision to an appeal tribunal and then to the Court of Appeal but were unsuccessful. They consequently appealed to the Supreme Court.

JUDGMENT

The Supreme Court unanimously dismisses the appeal. Lord Wilson gives the judgment with which Lady Hale, Lord Hughes, Lady Black and Lord Lloyd-Jones agree. The tribunal was entitled to conclude that Mr Smith qualified as a ‘worker’ under s.230(3)(b) of the Employment Rights Act 1996 (and by analogy the relevant provisions of the Working Time Regulations 1998 and the Equality Act 2010), and his substantive claims can proceed to be heard.