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Tax Advice

Student Loans – make sure you tell your accountant!

If you or your staff have a student loan – it is very important to let your accountant and payroll company know! Fines are out there if you don’t!

Why you need to tell your accountant and payroll company

There are 2 reasons:

  1. So that any amounts to be repaid are calculated correctly and deducted through PAYE
  2. So that at the end of the tax year, your accountant can include the required information on your self assessment tax return and you then pay any additional amounts due on time

The fines quickly stack up if you don’t do this and start at 15% of the amount you owe, up to 40%, not to mention interest charges.

Further essential reading:

https://www.gov.uk/repaying-your-student-loan

 

Electric Car – a most tax efficient company car – for more than one reason

The way in which company car benefits are calculated is changing from April 2020. There will be two parallel car benefit tables for cars registered before 6 April 2020 and those registered on or after that date.

Electric Cars

However, the position for purely electric cars is slightly different. From 6 April 2020 the taxable benefit for all electric cars will be reduced to zero, irrespective of when the car was registered.

In 2019/20 the taxable benefit for an electric car is 16% of list price, so drivers of electric cars will be delighted that their taxable benefit for 2020/21 will be zero! This won’t last, as in 2021/22 the taxable benefit will rise to 1% of list price, then 2% of list price in 2022/23. This assumes that this tax policy will remain in place under the new government.

Tax Tip

If you want to take advantage of these low company car benefit rates and purchase (rather than lease) an electric car through your Ltd company, wait until April 2020 to make the purchase. The 100% first year allowance for new cars (with CO2 emissions of no more than 50g/km) is available for purchases made before 1 April 2021.

This means there is a sweet spot in 2020/21 where the company gets 100% capital allowance on the purchase of an electric car and the employee has a zero taxable benefit for using the car.

Example

Your Ltd company purchases an electric car for £30,000 and then provides it to you (as Director) as a company car.

Buy it after 6 April 2020 and before 1 April 2021 and your Ltd company will save £5,700 in corporation tax (£30,000 x 19%), and you will not pay any income tax on it, since it is classed as a 0% benefit in kind.

HMRC impose fines for submitting your tax return late. We look at how they can quickly stack up.

You should submit your self assessment tax return on time and pay any amounts due by the deadline of 31st January each year. If not, you could be liable to fines.

Not one of our Clients but reported recently, we look here at how HMRC issued fines to Mr P and how it was calculated.

Real Case example

HMRC issued Mr P with a notice to file his 2016/17 self-assessment tax return on 6 April 2017 – which would have been due by 31st January 2018. However, this return was eventually filed electronically on 31 August 2018, seven months after the filing deadline.

Late-filing penalties applied

Penalties for filing a self-assessment tax return late increase the longer a return remains unfiled.

HMRC initially issued Mr P with a total of £1,300 in penalties in February and August 2018, made up of:

  • £100 initial late filing penalty (FA 2009, Sch 55 para 3)
  • £900 in daily penalties (£10 per day under FA 2009, Sch 55 para 4)
  • £300 penalty as the return had still not been filed 6 months after the penalty date (FA 2009, Sch 55 para 5)

The law (FA 2009, Sch 55, para 5) permits a penalty to be imposed at the higher of £300 or 5% of any liability to tax which would have been shown in the return, in cases where the return remains unfiled six months after the filing deadline.

Thus, once Mr P’S return was filed, HMRC increased the total six-month late filing penalty to £943, this being 5% of the tax liability shown on his return (£18,858.74).

This resulted in total late filing penalties of £1,935! And this, on top of any taxes he was due to pay anyway.

Queen’s Speech | 19.12.19 | any news for salon and barbershop owners?

The Queen’s Speech sets out the government’s agenda at the usual State Opening of Parliament following an election. The second Queen’s speech in the space of nine weeks produced few surprises  relating to tax issues were short on detail.

The key points included:

  • An increase in the national insurance threshold,
  • An increase to the national living wage,
  • Changes to business rates
  • Measures to encourage flexible working

Several policy areas only received passing comment, such as climate change policy and it also promised cross-party consensus on the future of social care in the UK.

Salonfrog Comment

Announcements on key tax changes are normally reserved for the chancellor to make during the budget but the next one is not expected until February, so it was left to the Queen this time.

The Prime Minister had said, during the run up to the general election, that the cut in corporation tax to 17% from April 2020 would be shelved but this was not mentioned in the speech. So we wait and see.

Full transcript here: https://www.gov.uk/government/speeches/queens-speech-december-2019

HMRC CEST Tool | make sure your salon or barbershop check is up to date

If you have self employed individuals in your salon or barbershop (for example chair renters or room renters, or even use contract staff), this is an important update from HMRC for you.

Background

HMRC has just enhanced its CEST tool and published new guidance notes intended to provide users with greater clarity on the factors used to decide if someone really is self employed or not for tax and NIC purposes.

HMRC developed some time ago a tool which you can use to check whether anyone who you consider as self employed in your salon or barbershop, really would be considered the same by HMRC.

If HMRC considers a self-employed person to actually be employed, they can look to you as salon owner for PAYE and NI back pay, as well as possible fines.

CEST Update

The CEST tool has just been enhanced and includes more questions than the previous version, including:

  • substitution: CEST uses a more sophisticated logic when asking questions on substitution;
  • business on own account: questions are asked about how rather than just whether the contractor interacts with customers of the client, whether the contract is part of a wider series of contracts with the same client and the extent to which the contractor provides services to other clients; and
  • provision of equipment: more detail is requested on the provision of equipment including specific questions on paying for materials, vehicles and other costs.

It also contains more links to HMRC guidance.

Salonfrog tried it

We’ve tried running it for a few scenarios specific to chair and room renters and often we got a result of ‘self employed’. However, the tool’s decision often sited the reason for this because “they will have to fund costs before your client pays you” and also in one of the critical questions there was no option to say that all the income was that of the self employed person and that they simply paid a flat rate rent to the salon.

Run it for each of your self employed people

We strongly recommend you run the tool for each of your self employed people as HMRC say they will stand by the tool’s decision! Once you run it, you have the option to save the results as a PDF, which you should do.

https://www.gov.uk/guidance/check-employment-status-for-tax

Salon owners (and their staff) should check their NI Qualifying Years

Although it may seem a long way off for some, you should check your NI Qualifying Years regularly. We tell you why & how here.

Background

To get the full basic State Pension when you reach retirement age, you need to have earned 30 “qualifying years” of National Insurance contributions or credits.

A Qualifying Year is credited to you when you pay enough national insurance during that year, or for some reason you can claim a ‘free’ credit for that year.

If you have fewer than 30 qualifying years when you retire, your basic State Pension will be less than the full rate (currently £129.20 per week). However by checking your position regularly, you can ensure you earn the required 30 years (or at least close to it). For example, you might be able to top up ‘missing years’ or claim ‘credits’ to add to your total score – but there are time limits to do this. So read on…

What to do:

1st: Check what you have

Check how many years’ credits you have. You can do this on line and you’ll need you Government Gateway user ID:

https://www.gov.uk/check-national-insurance-record

2nd: See if you have any ‘free’ credit years you can add on

You may be able to get National Insurance credits even if you’re not paying National Insurance, for example when you’re claiming benefits because you’re ill or unemployed, or have taken time off to raise children. Have a look here to see if you can claim any missing years:

https://www.gov.uk/national-insurance-credits

3rd: Decide if you need to plug the gap

If you have any gap years, decide whether you want (or need) to make additional contributions or claim credits to plug the gap.

For example, if you already have 26 credit years and you plan to work for at least another 4 years, then there’s little need to plug any gaps. However, if you have 10 credit years and only plan to work for another 4 years, it may be worth catching up.

You can make voluntary contributions to plug the gap, but you need to check your eligibility here:

https://www.gov.uk/voluntary-national-insurance-contributions/who-can-pay-voluntary-contributions

Final points

Remember to tell your staff, family and friends to do the same! Feel free to pass them the link to this Article.

Feel free to contact us should you have any questions.

Corporation tax may not now reduce!

The PM announced to the Confederation of British Industry (CBI) this week that if re-elected, the Conservative Party will back down from its pre-election pledge to reduce corporation tax.

A reduction in the current rate of 19% to 17% on 1 April 2020 is actually already law – it was enacted by section 26 of the Finance Act 2016.

This will presumably be officially announced in a post-election budget if the Conservatives win the general election to be held on 12 December 2019.

The Green Party plan to raise corporation tax

In the latest 2019 election promises, the Green Party has pledged to invest £100bn a year to fund its climate policy over the next decade, if it wins the election.

They say that the bulk (£91.2bn a year) would come from borrowing, with the rest from tax ‘changes’.

One of these tax changes would be a rise in corporation tax (the tax Ltd companies pay on their profits each year) from the current 19% to 24%.

The 19% rate is due to fall to 17% from April next year, so the Green’s increase  would be a double whammy for Salon and barbershop owners.

So from a financial point of view only, not great.

Promised tax cuts in next month’s budget scrapped

Chancellor Sajid Javid is planning to scrap promised tax cuts in next month’s budget, according to a report in the Financial Times.

This Tuesday’s U.K. public-sector borrowing figures showed the budget deficit between April and September totalled £40.3b, 22% higher than the same period last year.

The FT says that as a result of the tightening economic realities, Boris Johnson’s promise to cut tax for those earning over £50,000 is expected to be scrapped (his plan was to move the higher rate tax band from £50,000 to £80,000) as it is now thought to cost the Treasury £8b.

Other tax breaks in areas such as Inheritance Tax and Death Duties are also expected to be jettisoned.

Tips!

Introduction 

It’s always great when your Client is good enough to pay a tip on top of the price of the service they’ve just received!

In this Article we look at both the income tax and national insurance aspects of tips – for both the Salon/Barbershop Owner and their employees. 

It’s not as easy as you’d think 

HMRC consider that an employee should pay tax on any tips they receive. Easy so far. 

However there are a number of ways in which a tip could be handled before ending up in the hands of the Stylist – and it is this route which determines whether the tip is subject to National Insurance Contributions (NICs), whether they are subject to Income Tax (PAYE) and whether it is the Salon or Barbershop Owner who needs to put it through the PAYE system (or whether the employee needs to pay any tax due themselves). 

Understanding the requirements is essential, since getting it wrong can be costly for the Owner if they don’t should HMRC come a calling.

So along with a handy flow diagram at the end, we examine below the 3 main routes a tip can take before reaching the Stylist – and as such what tax becomes due (and who needs to pay it to HMRC):

Route 1: Tip given directly to the Stylist 

The most straightforward case is where a Client tips the Stylist directly. In this case the Owner is not involved in the process and it is the Stylist who is responsible for telling HMRC about the amount of tips received and paying the associated tax. If this is how the salon or barbershop is set up, the Owner should make it clear to the Stylist that such tips are outside PAYE, that it is their responsibility to pay any taxes due and advise them to contact HMRC (as they may collect that tax by adjusting the employee’s tax code). 

There is no NIC payable on the tip in this route since the tip is not ‘touched’ by the Owner at any point. 

In summary – the Stylist is responsible for paying any tax (and there is no NIC).

Route 2: Tip given to the employer and subsequently distributed to the stylist 

Where a Client adds a tip to their bill and then pays (say) by card, the tip has effectively been given to the Owner in the first instance (who may then pass it on to the Stylist or pool all such payments to share out between staff members). Another example of this route is where the Owner requires that all cash tips are centrally pooled for distribution on a basis decided by him/her. 

As HMRC see it in this route, the tip is distributed to the Stylist by the Owner and so forms part of their ‘earnings’ and as such the Owner is responsible for putting them through the existing PAYE system (along with the Stylist’s salary & commission).  

In this route, NICs will also be due, so both the Stylist and the Owner are worse off. 

In summary – the Owner is responsible for paying the tax and NIC.

Route 3: Tips under a tronc system 

Not as common as Routes 1 and 2, a system under which tips are pooled and distributed to staff by someone who is not the Owner is known as a ‘tronc’ system. The person responsible for administering the system is known as a ‘troncmaster’ (usually one of the employees – often the senior Stylist or Salon Manager). 

As in Route 2, tips distributed to each Stylist by the troncmaster are treated as earnings but instead of the Owner, it is the troncmaster who is responsible for operating a PAYE system on the tips – totally independently of any PAYE system operated by the Owner. 

For NICs, it depends whether the tronc has its own rules for allocating the pooled tips (usually by agreement of the Stylists) or whether the Owner decides. 

Where it has its own rules, no NICs are due because although the tip may have been previously paid to the Owner, he/she cannot be said to be involved with who gets what. 

Where the Owner has a say in how the tips from the tronc are allocated then NICs will be due. 

In summary – tax is paid by the tronc, with NICs only due if the Owner has any say in how the pooled tips are distributed.

Tips and the National Minimum Wage 

Importantly, tips do not count towards the employee’s total wages and so cannot be used to ‘bolster’ them when ensuring minimum or living wage rules are met. 

Tips, income and VAT 

Tips are not recorded as income but as amounts owed on the balance sheet since they are not the income of the business (but rather it has collected them on behalf of its employees). 

Since tips are voluntary they remain outside the scope of VAT. 

Further reading
Feel free to contact us should you want to discuss anything!

HMRC also have Booklet E24 which is also useful and can be found here:
https://www.gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs 

 

The various routes are described below and summarised in the attached flowchart. 

 

 

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