What are alphabet shares and why do contractors need to be aware of them?

What are alphabet shares?

 

Limited Companies are traditionally formed with a nominal number of ordinary shares. As the company grows and more shareholders are added, alphabet shares are certainly something to consider.

 

In this blog our Director of Operations, Laura Hepworth explores what alphabet shares are and how they could be of benefit to you as a Limited Company contractor.

 

Dividend waivers vs alphabet shares

Dividends are received by all the shareholders of a Limited Company, in proportion to their personal shareholdings. Should one shareholder be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.

 

  • If you believe you’ll use dividend waivers on a regular basis to distribute company profits disproportionately to the same class of shareholder, then it’s advised to use alphabet shares as a permanent alternative method.
  • HMRC are more likely to question dividend waivers.
  • Waivers can be seen as unreliable as all shareholders must give their consent each time. Alphabet shares do not need the consent of all shareholders, as they are already pre-agreed.
  • Voting and other rights or restrictions are possible for alphabet shareholders (redeemable and non redeemable) to be assigned to the different classes of shareholders as required.
  • Alphabet shares allow the freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder. If your Limited Company’s shareholders are taxed at higher rates than one another (if at all) then alphabet shares are a particularly good idea.

 

Settlement Rules

Whether you decide to use dividend waivers or alphabet shares, it’s important to understand whether either is caught by the Settlement Legislation.  In short, the Settlement Legislation is designed to expose and punish anyone who uses dividend waivers or alphabet shares purely to divert income from one person to another, thus resulting in a tax advantage.

 

For alphabet shares it’s particularly important to understand that a lack in voting rights (for example) could result in being caught by the Settlement Legislation.

 

To ensure you do not fall foul of the Settlement Rules, we advise you do the following:

 

  • Any new shares made under the alphabet scheme must be an outright gift and have exactly the same rights as the original ordinary shares. Restrictions cannot apply (such as being non-voting, carrying lesser rights to capital, or promise to return shares on demand). You must not make the shares redeemable preference shares.
  • If you decide to gift shares to spouses, it’s recommended to show that they have an active interest in the running of the company, such as becoming a director, the company’s secretary or even an administrator.
  • Only pay dividends into a bank account that holds the recipient’s name (such as joint accounts) to ensure you don’t attract unwanted HMRC attention.
  • Remember that in order to claim Entrepreneur’s Relief should you decide to sell the company, a 5% share is required.
  • Pay some dividends to each type of share, so as to minimise the risk of HMRC claiming that dividends should not be paid, unless one class of share was not allocated any dividend.

 

Should you have any questions about alphabet shares and how they could compliment your Limited Company, speak to one of our expert advisers today.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Understanding the Self-Assessment Tax Return

Understanding the Self-Assessment Tax Return

We don’t like to be a scrooge here at Intouch, but after the Christmas festivities have ended it’ll be time for you to submit your Self-Assessment Tax Return (SATR). After all the Christmas chocolates have gone and the New Year celebrations seem like a distant memory, you will need to take stock from the past tax year and pay what is due to HMRC.

 

It’s a good idea to get on with your SATR as soon as possible so that it’s one less thing to worry about, especially over the festive period. If you are an Intouch client your Personal Accountant will have already been in touch to guide you through this process and make you aware of what needs to be submitted.

 

But if you’re not yet a client of ours and need to understand what the assessment is and if you need to fill one out, read on…

 

What is the Self-Assessment Tax Return?

It’s HMRC’s way of accounting for the incomes that may not all be taxed through permanent employment. Paper self-assessments must have been received by HMRC by the 31st of October and online submissions must be made by January 31st.

 

The assessment itself is a series of questions which all must be filled out. If you’re struggling with the answers, or need advice on claiming for your business expenses, then enlisting the services of a trusted accountant will be one of the best moves you can make.

 

If you have received only PAYE income since April 6th of this year, you may not have to complete an assessment. Exemptions may include if you have received any Child Benefit in your household and one receives an income in excess of £50,000, or if your income has exceeded £100,000 whilst in PAYE.

 

Who has to fill one out?

If you have received non PAYE income then you may need to fill out a Self-Assessment Tax Return. This includes (but is not limited to) the following types of people:

  •  self employed
  • if you are a company director
  • if you have accommodation or land that you receive payment for from tenants (unless covered by the rent-a-room scheme threshold of £4,250)
  • if you receive other income which is not taxed before you receive it
  • if you are subject to paying more tax as a result of Child Benefits and a member of your household is receiving more than £50,000 in income
  • if you are a pensioner who receives a higher amount than your tax-free personal allowances

 

If you’re unsure whether you need to complete a return, take a look at HMRC’s website.

 

What happens if you don’t return your self-assessment or tax due to HMRC?

If you miss the submission deadline for your return and / or tax payment, HMRC will issue you with a fine. The fines range from £100 for the first three months after missing the submission deadline and interest if the tax payment is late, with penalties enforced if more than 30 days late.

 

HMRC do allow you to pay your tax bill throughout the year with the use of their budget payment plan. Your Personal Accountant will be able to advise you on the best way to ensure you retain the correct amount of tax and when it’s due to HMRC.

 

What happens if you make a mistake on your SATR?

Many people make mistakes on their SATR, but it’s worth remembering that HMRC will not accept it if you’ve included incorrect information. If you do make a mistake you’ll have twelve months to correct it (which is called an amendment). However, if HMRC find an error in which they have had to prompt you, there could be a minimum 15% penalty charge on the total tax owed for each mistake that HMRC classes as a careless error. So make sure that you check it, check it again – then check it once more before you submit it!

 

How can Intouch Accounting help?

We ask our clients to submit their assessment details to us by November 30th, so there’s still time to join Intouch and have your self assessment submitted for this year. Please be aware that if you do join us now, there will be a charge for your SATR to be completed, as you have not been a client for the past tax year.

 

Alternatively if you’ve tried to go it alone and seen first hand the amount of time (and potential stress) it can cause, it might be time to look into appointing a contractor accountant.

 

At Intouch we include a personal self assessment tax return as part of our all inclusive monthly fee of £98+VAT. But that’s not all, take a look at our full service inclusions to see just how much we include in our monthly charge with no nasty hidden charges. Ready to join us? Great! Give our team a call on 01202 375 562 to talk through the joining process.

 

Missed our twitter chat with IPSE on the Self-Assessment Tax Return? Catch the full Q&As here.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Mr Newspaperman: detention for shoddy homework

One month then payroll

Dear Mr Newspaperman,

 

Your recent article in the Guardian reminds me of an essay I wrote at school in Year 10. I too failed to do proper research and thought that sensationalism would save me from the wrath of people who know better. Alas in Year 10 the consequences were that I got a grade D for some shoddy work. You on the other hand have caused needless criticism of hardworking freelancers and contractors, who for a number of important reasons choose to operate their businesses through small companies.

 

Claiming tax relief for business expenses as a flexible worker is not exploiting a loophole, any more than your using any form of tax relief is a loophole. For your article to be taken seriously it needs to be factually and emotionally accurate.

 

Ever since I was born Her Majesty’s Government has given me an annual Personal Allowance to be used before I start paying income taxes, but does my accepting or using this allowance in times of austerity make me a tax dodger? Am I a bad person for using my tax free allowances? So what is the difference?!

 

If you or the other hacks in offices along the corridor, can show me that you don’t claim tax relief on items you are perfectly entitled to, for the reasons they exist in the first place, I will send you £1.

 

The other thought that struck me is that rather than reporting a ‘scoop’ from an unnamed government source you are being used as puppet. A scaremonger designed to upset the economy and create unfair, unjustified, unwarranted, unhelpful, unnecessary and undefended animosity between different categories of worker. Well I am sorry to disappoint you. The UK contractor and freelancer workforce is stronger than that, they are bold and proud and like many others have placed their trust in Cameron’s boys and girls to steer the economy further into the Black.

 

If the flexible workers of the UK are let down it is not because they shirk hard work, neither is it because the vast majority do not fully respect tax legislation. It will once again be because the people advising David and George have failed to do their homework properly.

 

If I read your article as a Year 10 assessment, my advice would be to make sure you do more research in future, don’t get your words mixed up and worst of all don’t be so easily influenced by the other boys. The only level playing field they are used to is the topography in the grounds of their public school! 4/10.

 

Paul Gough

Another flawed proposal

 

This latest reported plan for ‘one-month-then-payroll’ has already received huge amounts of criticism from IPSE, FCSA and the contractor community at large. Of course, with the Autumn Statement less than two weeks away we will be posting our reactions and summaries with the issues affecting contractors. Now is a good time to make sure you have a contractor accountant you can trust – with Intouch Accounting you get everything you need to run your company efficiently, including unlimited advice from your Personal Accountant to make sure you’re up to date with everything you need to know and do.

 

Everything you need for one fixed fee. Call 01202 375 562 or email enquiries@intouchaccounting.com

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

“No giveaways, no gimmicks, a Budget for the long-term” – but will the 2015 Red Box budget for contractors and freelancers?

Will the Red Box budget for contractors and freelancers?

The Budget is this Wednesday and in true pre-Election fashion it is unlikely it will be full of radical announcements.

I predict it will consist of Osborne telling us what he thinks we need to hear and not what he really intends to do, if he still has his job in the second week of May.  Could we be looking at two Budgets in one year?

The Conservatives billed themselves as being ‘the party of small business’ but, in reality, very few independent professionals will have felt any benefits from policy changes. In fact, the Government could be criticised for not delivering enough to empower freelancers and contractors. In the final pre-Election Budget it is uncertain, but also unlikely, that contractors will see significant changes in Osborne’s statement.

A number of tax changes have been announced already and have been under discussion. To the extent that they are not contentious, or at least acceptable to the other major political parties, they will be included in the Finance Bill and will be enacted before the end of this month.

The main, eye catching, announcements are likely to be changes which the Chancellor would like to make in the next Parliament if the Conservatives are in power, or are a member of a Coalition, in that Parliament; as there will then be less than six weeks of campaigning before the Election on Thursday 7 May.

The tone, and content, of the Budget is going to be highly political and will have a strong influence on the campaign not least because the Chancellor is the key strategist of the Conservative party. We know that contractors and freelancers are the lifeblood of the UK economy and they have an important role in rebuilding the economy. Inevitably there won’t be many people whom the Budget doesn’t affect one way or another so we’ve picked out some of our predictions that will be of particular interest to freelancers and contractors.

What is likely to come up in the Budget 2015 specifically affecting contractors and freelancers?

More measures to tackle tax evasion and tax avoidance

We can definitely expect that more tough measures will be announced, for next Parliament, to provide criminal sanctions for tax evaders and their advisors, whatever their role. Initiatives such as a ‘diverted profits tax’ targeting multinational companies who have been judged to have shifted profits overseas to avoid tax are expected to be implemented.

Support for key industries

It is expected that Osborne will unveil measures to support the North Sea oil and gas industry which will be welcome to many contractors who work in this industry, from engineers to IT specialists and finance professionals. It is hoped that a boost to British manufacturing will help rebalance the economy and protect the livelihood of contractors already in the industry while creating demand for their skills.

Tax simplification

The Office of Tax Simplification (OTS) has suggested many changes in a variety of areas that have previously been adopted but it has suffered from a lack of resources and is due to wind up at the end of this Parliament. The Chancellor may decide to put the OTS on a more permanent footing and properly resourced if the Conservatives win the election. If so we can expect more changes to arise in the coming Parliament to simplify taxation especially for small businesses and individuals.

Travel and subsistence claims for Umbrella workers

This is still high on the political agenda but the highly anticipated clampdown on travel and subsistence (T&S) expenses may not happen in this Budget. The concern was originally raised by MPs accusing Umbrellas of exploiting workers but FCSA disagree and have plead to MPs that imposing these proposals would threaten the £2.8bn of income tax and National Insurance Contributions generated by Umbrella service providers  HMRC have already stated that “any proposed measure to address this misuse will not come into effect until 2016 at the earliest”.

We can expect a restriction rather than a removal of tax relief for workers, with a curtailment of T&S expenses more likely from April 2016. The Chancellor’s statement last Wednesday, following the closure of HMRC’s consultation, will “inform the government’s decisions at Budget ‘15 on how best to address this avoidance.”

Personal Allowances and income tax thresholds

The Allowance for the average person went up from £6,475 to £10,000 over this Parliament, and the Autumn Statement announced an increase to £10,600 from 6 April 2015. A further increase is possible, perhaps by an additional £200, but unlikely, although there are hints that the Chancellor may announce future target increases.

It’s possible that the Chancellor may extend the basic rate threshold so that, allowing for allowances that the basic rate band moves closer towards an intended goal, announced in the Autumn Statement, of £50,000.

Inheritance Tax

Inheritance Tax is currently levied at 40% on estates worth £325,000 and above. There are hints of a return to the promise of increasing the Inheritance Tax nil rate band to £1 million and clarifying if the limit is per person or per married couple or civil partnership. It is thought Osborne will announce plans which involves the person inheriting rather than the deceased’s estate, being taxed. This would be popular among high earning professionals including contractors who may currently view Inheritance Tax as an inhibitor to aspiration and ambition.

Entrepreneurs’ Relief

The cost of Entrepreneurs’ Relief (ER) in 2013/14 is £2.9bn: three times higher than HMRC’s estimated cost. Unexpected changes were announced in the Autumn Statement and it is possible that further announcements on ways to limit ER will arise.

Capital allowances

The Annual Investment Allowance is currently £500,000 but is due to fall back to just £25,000 on 1 January 2016. It is possible that the Chancellor may promise to extend the £500,000 limit if the government is re-elected.

Research and development tax credits

Changes to the system for claiming research and development R&D tax credits were announced in the Autumn Statement introducing a new advance assurance service for small companies from the autumn. Further assistance may be announced to help small companies undertaking R&D perhaps in simplifying the definitions of applicable costs.

Pensions and pensioners

The Prime Minister has announced that he wants to protect pensioner benefits. But there may be announcements about tax relief for pension contributions and limiting the contributions possible or the scope to only basic rate tax relief.

Watch this space

It is hoped that the 2015 Budget will finally address the realities faced by the freelancer and contractor community.The Federation for Small Business has been calling for policies to help small businesses grow, through tax reforms and sensitive changes to Minimum Wage rules. Of course Osborne needs to leave some rabbits in the hat for Wednesday and it may be that initiatives such as a further reduction to Corporation Tax (which would be welcomed by Limited Company contractors) are saved for the Conservatives’ Election manifesto.

Whatever happens in the 2015 Budget, we’ll publish our views on what it means for contractors after the announcement. Make sure you follow us on social media for the latest updates:

https://www.facebook.com/intouchaccountinglimited  https://plus.google.com/b/110212747959978702656/+Intouchaccounting/posts  https://www.linkedin.com/company/intouch-accounting-limited  https://uk.pinterest.com/intouchacc/  https://twitter.com/InTouchAcc   https://www.youtube.com/user/InTouchAccounting1

What do you hope to see in this year’s Budget?

While we wait for the Budget, are you ready for the 2014/15 tax yearend? Download our new guide and get the most from being a contractor.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Main residence election

Main residence election

The 2013 Autumn Statement contained details about the extension of capital gains tax (CGT) to non-residents when they dispose of residential property held in the UK, and the Government and have now issued a Consultation document entitled “Implementing a capital gains tax charge on non-residents”.

The main changes proposed aren’t a massive surprise as they reflect the way things work in most other countries, which is to charge tax based on the location of the property rather than the location of the seller.  But the consultation document also contains a global proposal to alter the ability to elect which of several properties you own is your main residence, and thus exempt from CGT upon sale. The motivation behind this change is to remove the ability for a non-resident to simply elect the UK property as their main residence and therefore avoid UK tax entirely, so it is understandable and fair to make such a change. But it will also have a knock on effect on UK residents who own more than one property…

Under the current system you can elect, for any specific period, which property is your main residence and it will then quality for tax relief.  The Consultation document sets out two ways the new rules could work:

  • Remove the ability to elect which property is your main residence and instead determine it based upon the balance of evidence – where does any immediate family live, where is mail sent, what address is used for electoral roll purposes etc.  This is the way the law currently works when someone has not made an election and there is any dispute.
  • Replace the ability to elect which property is your main residence with a fixed rule – for example which property the person has been present in for the most days in the tax year.

Both of these suggestions will require additional records to be maintained by the taxpayer to support their case, which could be quite onerous if they regularly swap between two or more properties.  The Consultation does mention the possibility of allowing the current election process to be retained in some circumstances, but unfortunately does not expand on what those circumstances may be.

How these changes will work in practice has not yet been disclosed, but the Institute of Chartered Accountants in England & Wales have promised to make strong representations as they foresee many difficulties is establishing which property is a taxpayer’s main residence in various circumstances.

The slight saving grace for non-residents is that if they do have to pay CGT on their UK property, which will likely be collected via a withholding tax mechanism, then they will also become entitled to an Annual CGT Allowance, reducing the gain by £10,900.  CGT rates will then apply at the normal 18% or 28%.

Due to the complexity of the proposed changes they won’t be effective until April 2015, but the Consultation deadline is 20th June, so we’ll update when we know more.  Read the full document, including the changes discussed above in section three.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.