SA302 Forms & Applying For a Mortgage

If you want to apply for a mortgage and you have income in the form of dividends, or you are self-employed, for many years mortgage lenders have requested copies of SA302 forms. These forms were provided by HMRC showing a breakdown of income and the tax paid in each tax year.

HMRC has stopped providing these forms from 5 September 2017. HMRC has said for some time that many mortgage providers should be accepting tax overviews* but we have often continued to request SA302 forms, as we know that some mortgage lenders will not accept tax overviews.

*A tax overview is taken directly from the HMRC website and shows the tax liability in each tax year and the payments towards each liability. 

Now HMRC have stopped providing the SA302 forms, they have published a list of lenders who will accept a tax overview here. We can provide this tax overview breakdown to clients if you are applying for a mortgage.

IR35 in the Public Sector

New rules mean that the responsibility for deciding the correct IR35 status from 6 April 2017, will lie with public sector bodies, rather than individual companies. Accordingly, the liability to account for the correct taxes will transfer from the individuals company to the public sector body.

If the public sector body decide that IR35 legislation does apply, they will deduct tax and national insurance from fees and pay net amounts to the company, as they would do for employees. It will also mean that public sector bodies will need to pay any employers national insurance that is due at 13.8%.

HMRC have provided guidance to check if the engagement falls within these rules here.

You can read more on the new rules here.

VAT Flat Rate Scheme Changes

Back in November, it was announced that changes will be made to the Flat Rate VAT Scheme, due to what was termed aggressive abuse of the scheme. The changes will take effect from 1 April 2017.

The flat rate scheme was introduced to simplify VAT returns for businesses that fall within the scope (turnover limit) to use the scheme. The changes will mean that any businesses registered to use the flat rate scheme will have to consider if they are “limited cost businesses” and whether the new flat rate percentage of 16.5% will need to be used.

This change will affect businesses that are mostly “labour only,” which a number of contractors will be.

 

VAT Notice 733 has sections that gives more information on who is considered a limited cost business.

Sections 4.4 says;

You’re a limited cost business if the amount you spend on relevant goods including VAT is either:

  • less than 2% of your VAT flat rate turnover
  • greater than 2% of your VAT flat rate turnover but less than £1000 per year

If your return is less than one year the figure is the relevant proportion of £1000. For a quarterly return this is £250.

 

The notice goes on to describe what is and what is not a relevant good;

Examples of relevant goods

This isn’t an exhaustive list:

  • stationery and other office supplies to be used exclusively for the business
  • gas and electricity used exclusively for your business
  • fuel for a taxi owned by a taxi firm
  • stock for a shop
  • cleaning products to be used exclusively for the business
  • hair products to use to provide hairdressing services
  • standard software, provided on a disk

Relevant goods are goods that are used exclusively for the purposes of your business, but don’t include:

  • vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
  • food or drink for you or your staff
  • capital expenditure goods of any value, see paragraph 15.1
  • goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
  • goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
  • any services

Examples of supplies that aren’t relevant goods

This isn’t an exhaustive list:

  • accountancy fees, these are services
  • advertising costs, these are services
  • an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
  • food and drink for you or your staff, these are excluded goods
  • fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
  • laptop or mobile phone for use by the business, this is excluded as it is capital expenditure see paragraph 15.1
  • anything provided electronically, for example a downloaded magazine, these are services
  • rent, this is a service
  • software you download, this is a service
  • software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically

 

As services are not considered a relevant good, it will likely mean that a number of businesses will be caught by the change. For example, a business that has high sub-contractor costs may fall in to the limited cost business definition, as sub-contractors costs are considered services.

For businesses that use the flat rate scheme, it may be more beneficial to move to another scheme. We can advise on the other VAT schemes that are available and what needs to be done to change.

Landlord Tax Update

There have been a number of changes recently to tax for the purchase of a second residential property and expense claims against rental income for landlords. There are a number of considerations to be made when looking at these changes.

What Has Changed? 

Stamp Duty changes mean that if you purchase a second residential property, that is not your main residence, you will pay an additional rate of 3% on top of the normal rates of stamp duty. You may be eligible for a refund of the additional rate of Stamp Duty paid, if you sell your previous main residence within 36 months.

Another consideration is with regards to a change to expense claims against rental income. A group of landlords lost their court case in October 2016, which means that from April 2017, there will be new rules on how mortgage interest relief is calculated. This will apply to individuals that receive rental income from properties of which a mortgage or form of finance has been taken out to purchase the property.

Using a Company

There are a number of articles online that suggest that transferring property to a company can help to save tax, if the mortgage interest relief changes will lead to a higher personal tax liability. A company is currently still entitled to claim all mortgage interest costs against rental income, but we would always recommend speaking to us before deciding to transfer a property, as there can be a number of potential tax implications to consider.

When you transfer a property from personal ownership or beneficial ownership (through a deed of trust) to a related company, it will trigger a capital gain or loss. The gain or loss is calculated at the market value of the property at the time it is transferred to the company, less the cost of purchase and any enhancement expenditure on the property. This should be considered before you decide to do this. Any gain in the value of the property up to the date it is transferred is still tied up in the property, which could lead to a potential tax liability on transfer before any gains on the final sale have been realised. 

One other consideration is stamp duty, which may be due if the property is transferred to a company that is controlled by the same individuals that owned the property before the transfer took place.

It may still be beneficial to use a company, but it is always best to seek advice before making any decisions. There are some reliefs that could potentially be available.

We can advise on the best solutions with property investments and whether it will be beneficial to purchase property with a company, or transfer property to a company.

Please feel free to contact us for a free initial consultation.

 

 

 

 

 

OTS to review gig economy

The office of tax simplification has released details of a focus paper which will look in to tax issues surrounding the gig economy.

The gig economy is a term that has been used a lot recently to describe working patterns and conditions. It has mainly been used to describe individuals who are currently classing themselves as self-employed and provide services to tech companies, such as Uber and Deliveroo. There are positives and negatives to each treatment for workers, which will vary depending on individual circumstances.

HMRC have a particular interest in this, as ultimately the tax receipts they receive are affected by the treatment. Usually HMRC consider the overall picture in each case to decide on whether someone is self-employed or employed.

One difference with companies such as Uber and Deliveroo is the scale on which individuals have classed themselves as self-employed. When drivers were treated as self-employed it meant they were not entitled to holiday pay or the national minimum wage.

All self-employed individuals can claim allowable business expenditure against their income on their tax returns.  If HMRC rules that drivers should be given employment status, this may mean they disallow a number of expenses that have been claimed, which may ultimately lead to higher tax liabilities for drivers and Uber for unpaid Employers NIC`s.

It may also affect other cases, as HMRC will need to consider facts of the case that lead them to apply the employment status. The principles that drive each decision may be considered in deciding whether the overall picture is one of employment or self-employment.

If HMRC decide that Uber drivers should be treated as employed, it will also affect customers. It may even ultimately force Uber to consider the business model it uses in the UK. If the drivers are employed by Uber and the customer is provided a service by Uber, VAT will be charged on the fare, whereas currently they receive the service from the driver. This means if the driver is not over the VAT threshold (or registered for VAT) then no VAT will be charged on the fare.

We can advise on the correct status of employment or self-employment to make sure the treatment given is correct. HMRC can go back and challenge the treatment for previous tax years if they believe the wrong treatment has been applied.

Court case update – mortgage interest relief

A group of landlords have lost their High Court attempt to force a judicial review of legislation to reduce tax relief on buy-to-let interest payments starting in April 2017. The groups hearing took place yesterday at the royal court of justice, London.

The group named the new measure on restricting mortgage interest relief the “tenant tax” and claim that tenants will see rent increases as a result.

The group argued that as the legislation applies to individuals and not corporate landlords, it is unlawful as it could result in a grant of state aid to corporate landlords.

This loss signals the end of the legal route but the group intend to continue their campaign to put pressure on MPs to amend tax policy.

Property expenses changes in 16/17 tax year

Changes to the way in which landlords deduct costs for replacing furniture and fittings in rented properties from 6 April 16:

 

Who is likely to be affected

Companies, individuals and others, such as trusts or collective investment schemes that let residential properties.

General description of the measure

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

Detailed proposal

Operative date

The measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for Income Tax payers.

Current law

Current law providing for the Wear and Tear allowance is contained in sections 308A, 308B and 308C of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) for Income Tax and at sections 248A, 248B and 248C of the Corporation Tax Act 2009 (CTA 2009 for Corporation Tax).

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to repeal the Wear and Tear Allowance provisions and make new provision for a deduction for the replacement of furnishings.

The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling.

The amount of the deduction is:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
  • the incidental costs of disposing of the old item or acquiring the replacement less
  • any amounts received on disposal of the old item

This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.

 

Considerations – previously payments towards white goods, such as fridges and freezers for rented properties did not gain any tax relief; the only allowance available was the wear and tear allowance. We believe this is a good change, as it encourages landlords to replace items in rented properties and also gives the fair amount of tax relief for this expenditure.

One area of caution is that the new relief from 6 April 16 is available on replacement of items, not on new items purchased.

 

Please feel free to ask us any questions you have about the changes.

 

Class 2 National Insurance changes

The way class 2 national insurance is paid has changed. If you are self-employed, you will likely have been paying class 2 national insurance monthly, quarterly, or half yearly. The amounts were collected through direct debits to HMRC (equal to £2.80 per week). 

Now this has changed and the direct debits have all stopped, the class 2 national insurance will be collected in January following the end of the tax year. The first year this will apply to, is the tax year ended 5 April 2016. For self-employed individuals who have stopped paying class 2 national insurance by direct debit, the 31 January 2017 payment due for the tax year ended 5 April 2016 will now include the class 2 national insurance of £145.60.

Please feel free to ask us if you have any questions about this. 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/331758/tiin-class2-nic.pdf

https://www.gov.uk/self-employed-national-insurance-rates

 

 

HMRC extend data gathering powers

HMRC have focused on extending their data collecting powers to keep up with changing technology and payment methods.

Legislation gives HMRC the power to collect a wide range data about taxpayers financial affairs. Since 2014 HMRC has been able to collect data on credit and debit card transactions to help them identify traders who are not registered for VAT and should be, or traders who are not declaring income on their tax returns. HMRC also have powers to issue separate information notices to individuals and third parties who hold data on tax payers.

 

HMRC are now seeking to extend their bulk data collection powers to cover new payment methods and will also collect data from

  • Electronic payment providers and
  • Business intermediaries who facilitate transactions, usually online.

Data which HMRC can require includes the account holder’s

  • Name
  • Address
  • Telephone number
  • Email address
  • Website address
  • National Insurance number
  • VAT number
  • Unique Tax Reference (UTR)
  • Other identifying information
  • Bank account details
  • Status as individual, partnership or limited company