Clients should not overlook next month’s quarterly payment deadlines of the 19 and 22 October 2010. I find that my clients handle the normal monthly payments without much trouble (other than when they have cash flow difficulties) but they can overlook the quarterly payments. I am always concerned about clients who are Contractors in the Construction Industry where they have no PAYE and little or no CIS deductions collected from payments to subcontractors. It is fairly easy to notify HMRC of any nil payments through the online system and it is a lot less hassle than having to deal with the reminders from the Accounts Office, when inevitably their computers register that no payment has been made and that no notification has been received.

Some good news for the low paid, although perhaps not such good news for clients who are struggling to keep afloat. Increases that have been announced to the National Minimum Wage (NMW) rates. These take effect from Friday 1 October 2010. There are different levels of NMW, depending on the age of the worker and a significant change this year is that the main rate is being extended to adults over the age of 21, instead of 22. Please remember that NMW rates apply to most adult workers who are working legally in the UK and are not ‘genuinely’ self-employed. Workers of compulsory school age are not entitled to NMW.

There is a new minimum wage rate of £2.50 per hour for apprentices, which will apply to under and over 19’s but only in the first year of their apprenticeship.

Don’t forget the regulations introduced in October 2009 in relation to tips, gratuities, service and cover charges, which can no longer count toward the National Minimum Wage. It is irrelevant how the tips etc. are paid (cash, payroll or a Tronc System).

Clients need to be reminded that since 6 April 2009 employers may incur a penalty if HMRC compliance officers discover that the employer has failed to pay the national minimum wage. The workers will be entitled to have the arrears of wages repaid at the current rates.

I have been spending a lot of time on PSA’s over the last few weeks with the time rapidly approaching to submit computations to HMRC. I have mainly been reviewing nominal ledger accounts to extract taxable costs from staff entertaining, meals and travel and subsistence expenses, usually also taking a look at business entertaining expenses to satisfy myself that costs have been correctly posted and dealt with.

What is a PSA?

A PSA is a an annual agreement with HMRC whereby the employer agrees to accept the liability for certain taxable expenses payments and/or benefits in kind that would otherwise have to be:
• reported on an employees form P9D or P11D or
• included in the employees gross pay and put through the payroll.

Only certain taxable expense payments and benefits can be included in a PSA. The rules provide for the inclusion of minor items such as any taxable Long Service Awards given to employees working for the same employer. Next we have major items of expenses or benefits in kind that can be included in the PSA if they are made irregularly. For example taxable relocation costs where the allowable costs exceed the £8,000 exemption limit.

The most common type of expense payment or benefit in kind to be included will be something where it is impractical to apportion the costs between individual directors and employees. This could be the cost of a non-qualifying company party or other taxable event.

What do you need to do before submitting your client’s computations to HMRC?

This has to be done in time to meet the 19th October 2010 payment deadline.

We should start by looking at the actual P626 agreement. What has HMRC agreed can be included in the PSA? Many PSA’s include staff entertaining, staff functions, staff gifts and incentives. We then decide where the information has to come from, remembering not to overlook less obvious nominal ledger accounts, such as staff welfare. I never assume that everything posted to staff entertaining is taxable and that everything posted to meals, travel and subsistence, etc. is non-taxable.

I often find ‘staff entertaining’ meals that qualify as subsistence because they are taken away from the permanent place of work. Employees often misunderstand the rules and treat away subsistence meals as staff entertaining because one employee pays the bill for two or more employees. Another common error is treating minor and trivial costs, such as coffee and biscuits as taxable because someone pays for a group of people.

I have spotted the cost of eye tests that were to be included in the PSA but the costs are exempt and do not need to be included. Other costs that are exempt are birthday cakes or flowers for a birthday, christening, and an employee or family member in hospital. Flowers given as a reward are taxable benefit to be included in the PSA.

I always review the invoices for larger events and costs and check the number of attendees at a function to be included in the PSA. The exemption is based on the cost per attendee, not the number of employees and the exemption may apply without the client realizing that. However, I sometimes find errors where the numbers are overstated, being based on the number of employees on the payroll, not the number of attendees. I always check the number of ‘covers’ or meals booked and I check that all costs, including VAT, have been included in the calculation. We must assume that HMRC’s employer compliance officers would carry out similar checks when reviewing an employer’s procedures.

The VAT treatment of expenses payments and benefits in kind is important. The full cost must include VAT, irrespective of any VAT recovery, but our client systems usually report VAT exclusive costs. That means that we have to add VAT to the amount included in the PSA. I always use a reasonable estimate of the VAT to be added, knowing that a lot of the costs may have been incurred without VAT receipts being provided and where the VAT has not been reclaimed.

Welcome to this month’s update.

There is a statutory requirement to submit forms P9D and P11D by 6 July 2010 but there are no automatic penalties for late submission of these returns.

Interest and penalties will be charged if there is a Class 1A National Insurance Contributions liability on any taxable expense payments or benefits that are included on any late submitted P11Ds. If the returns of Class 1A NICs and Employer Declaration are received by HMRC by the 19 July 2010 Class 1A payment deadline penalties will not be automatically charged.

Providing payment of Class 1A NICs due is made by the 19 July 2010 (or 22 July for an acceptable method of electronic payment) no interest will be charged. If your client has cash flow problems and cannot pay on time then contact HMRC’s Business Support Service (0845 302 1435) and get an agreement for payment of the arrears.

If your client submitted the P11Ds and P11D (b) online last year HMRC will not have issued a paper P11D (b) this year and the employer should have received an online notification of the requirement to complete a P11D (b) return. If you are not submitting online this year and it isn’t compulsory, you can download a P11D (b) from the HMRC website to complete and submit.

‘Nil’ P11Ds are not required by HMRC but if the box on the form P35, Employer’s Annual PAYE Return was noted that P11Ds are to follow, you should contact HMRC to confirm that no P11Ds are due. If you do nothing HMRC may issue a penalty notice.

It is too late to get a P11D dispensation for 2010/11 but having just gone through the process this is a good time to apply for a dispensation for the current tax year.

Application can be made online or by post to the Employer Support Team at HMRC, Bowback House, 299 Silbury Boulevard, Witan Gate West, Milton Keynes, Buckinghamshire, MK9 1NG.

HMRC has announced a change for next year to the P46 (car) procedure reversing its decision not to accept replacement company car notifications. There are no plans to change the paper form P46 (car), but HMRC will accept electronic notifications of replacement cars from April 2011.

What are the circumstances in which you should consider a buy-back and how do you go about it? See Penny Bates’ First Principles article in this month’s Tax Adviser.

Welcome to this month’s update.

HMRC’s new “Advisory Fuel Rates” have been announced. These are not statutory rates. There is no compulsion to use them but they are ignored at your peril. My advice to clients is either to follow these rates or ensure that you keep good evidence of your own calculations to justify reimbursing a higher rate to employees or more importantly to satisfy an HMRC officer that you have recovered the ‘full cost’ of any private fuel.

It is important to keep accurate mileage records. Any established failure to do so will result in company car fuel scale charges being imposed by HMRC Employer Compliance Officers. I am currently advising clients where limited records were kept by the directors and employees and HMRC has been demanding tens of thousands of pounds in tax, Class 1A NICs, interest and penalties. Another common problem is where mileage records are in very rounded amounts (50, 100, 200, 300 etc.) making it difficult to prove that no private fuel was ‘enjoyed’ and where fuel scale charges would be sought.

The notional value used for calculating the fuel scale charge benefit for a company car has increased in the current tax year (2010/11) from £16,900 to £18,000. This means an increase in the lowest fuel scale charge to £1,800 for a ‘qualifying low emissions car and an increase in the highest company car fuel scale charge to £6,300. This represents payment of £210 per month income tax on the fuel benefit and £806.40 per annum Class 1A NIC. This is why it is important to avoid incurring fuel scale charges where private fuel is not intentionally provided as a perk, or where the amount of private fuel/mileage does not justify the cost. You have been warned!

Next some reminders on your client’s 2009/10 P11Ds, where the statutory deadline of 6th July 2010 is getting ever closer. Do we need to submit P11Ds at all and what box was ticked on the P35? Was it P11Ds are not due or P11Ds to follow? If we ticked the box to say that P11Ds are to follow and now find that none need be submitted, we should tell HMRC that no P11Ds are to be submitted because there is nothing to report. HMRC guidance tells us that if “HMRC has sent a form P11D(b) to you - if this occurs and you have no P11Ds to submit, tick the box in section 2 that says no P11Ds are due for the year.” Be careful to avoid a penalty notice being issued, so if in doubt write to HMRC or telephone the Employer Helpline to confirm that no P11Ds are due.

We also need to think ahead to the very important deadline for payment of the Class 1A NICs declared on form P11D(b). Payment must reach HMRC by 22 July 2010 for electronic payments, or by 19 July 2010 if your client pays by cheque.

HMRC has issued more guidance about the new Late Payment Penalties, which apply for all employers and contractors from May 2010 and HMRC is now issuing penalty warning letters. HMRC may send your client a warning letter if they do not pay on time. The guidance says that they may do this the first time in the tax year they think your PAYE payment is late. The letter is issued about two weeks after the payment date. The letter is only to let you know that HMRC think you have made a PAYE payment late and that a penalty could be charged. It is not a penalty notice and you can’t appeal against it. The obvious advice is to avoid making late payment and when a warning letter is received, pay up quickly and contact the Business Support Service (0845 302 1435) if having difficulty making payment.

From 1 June 2010 individuals no longer need to complete form P86 to tell HMRC that they have come to the UK. Employees who are not on secondment, perhaps coming to work directly for a UK employer, will have to rely on the standard P46 and you as their advisor may have to contact HMRC to obtain a proper tax code.

The late payment penalties apply also to Contractors in the Construction Industry and clients continue to have problems with penalties that are out of proportion to the offences. There may be some light at the end of the tunnel as HMRC are looking at changes to the penalties, which may make them more proportionate. This is an argument that I have been using to seek a reduction in penalties where appropriate.

Next month, I will comment on the Emergency Budget and live in hope that it will not create a lot more work for employers and contractors.

The tax treatment of chargeable event gains on life assurance policies can cause difficulty. In a Tax Basics feature in Taxation Magazine, I explained the differences between qualifying and non-qualifying policies and the circumstances in which a chargeable event gain is likely to arise. The full article can be found in Taxation’s 27 May edition but a very brief summary is presented here.

Gains may arise on various policies including UK life assurance policies but not all polices give rise to taxable gains. Where a policy gain is taxable there are a number of different events that may give rise to a gain e.g. payment at maturity of the policy, a partial surrender or for example a withdrawal in excess of 5% annual cumulative allowance.

Broadly, the gain on such an event is the difference between the amount received from the life company and the initial premium paid less any withdrawals that have been made.

Where a gain arises, even though it is referred to as a chargeable event gain, it is subject to income tax not capital gains tax. The gain is brought into charge after ‘top slicing’ relief has been applied which effectively means the gain is spread back over the number of years since the policy started or, the last chargeable event date. This slice is then added to income to discover the amount of tax payable and if only basic rate liability arises no further tax is due. If higher rate tax is due a basic rate credit of 20% of the gain is allowed against the liability.

The calculations can be complex and are explored in the article as are some of the planning areas that should be considered to defer higher rate tax liabilities or to retain the benefit of other reliefs for example tax credits.

The current 18% flat rate of capital gains tax (CGT) gives a clear incentive to those who can convert income into gains to avoid the new highest income tax rate of 50%.

The LibCon coalition has stated that it will seek to look at moving CGT rates on non business assets closer to income tax rates with suggestions being made by commentators that gains may be treated as being taxed at 40% for higher rate tax payers, or even being treated as the top taxable slice and being subject to 50% for those with incomes in excess of £150,000.

The biggest question being posed is when would any possible increase take effect from? The budget is set for 22 June 2010 and there is speculation that any increase would be effective from midnight but a mid-year change could lead to practical difficulties. Alternatively, any change could be made from the following 6 April 2011 giving time for taxpayers to take advantage of the current low rate of CGT. It is also not beyond the realms of possibility that any change could be made retrospectively from 6 April 2010!

It has also been suggested that the current CGT annual exemption of £10,100 could be cut to as low as £2,000 bringing many more gains within the charge to tax.

Despite this uncertainty many clients are wondering if they should sell assets now to take advantage of the 18% tax rate potentially buying them back after the 30 day period required to avoid a matching of a sale with a subsequent reacquisition. Alternatively, sales to family trusts or other family members are being considered to bank the current 18% rate. However, if there is a retrospective increase in rates, such planning will land the taxpayer with an unexpected high CGT bill!

Perhaps one should step back and look at the wider picture. CGT raises a relatively small amount of tax. The top tax ‘earners’ for the government are income tax, national insurance and VAT. With the back lash from the middle classes and within the coalition itself on the possible CGT increase we may not see a change in CGT rates at least this time round!
Difficult times; as this new government is an unknown quantity. Clients who really feel they would like to do something now, ahead of the emergency budget, need to be aware of the risks and the various opportunities that may be available to them based on their individual circumstances.

You are all well aware of the 19 May deadlines and at this point in the cycle I am focusing on recent announcements and the first Budget of 2010.

HMRC has announced a welcome reduction in the ‘Official Rate’ of interest for beneficial loans, down to 4% and effective from 6 April 2010. The additional charge for employer provided living accommodation where the cost exceeds £75,000 is also being reduced to 4% of the excess over £75,000 for 2010/11.

HMRC has produced a March 2010 CD-ROM Update to fix some problems that have arisen, including:
• the total amount of tax and NIC due sometimes being carried forward incorrectly to the 2009-10 P35
• problems transferring data from the 2009 CD-ROM
• problems opening PDF forms (Windows users only).

HMRC suggests that we install the update even if we haven’t encountered any of these problems. There is a link on the website that you can select to install the update and more guidance on what to do.

HMRC has reminded us that a new normal four-year time limit for assessments and claims kicked in from 1 April 2010 following Finance Act 2008. This affects PAYE, as well as Capital Gains Tax, Corporation Tax, Income Tax and VAT. For people outside Self Assessment, the new time limits for repayment claims don’t take effect until 1 April 2012. Their claims for 2004-05 and 2005-06 can still be made up to 31 January 2011 and 31 January 2012 respectively. The new limits from 1 April 2010 for PAYE etc are:
• Normal time limit - four years
• Careless behaviour - six years
• Deliberate behaviour - 20 years
from the end of the relevant tax period.

The new time limits are just part of HMRC’s use of new powers which it says will make the tax system more consistent and easier to understand. Its theme is supporting people who try and get their tax right, while coming down hard on those who don’t comply. Included within this are the new inaccuracy penalties and late payment penalties for PAYE, NICs, and Student Loan and CIS deductions. HMRC has published a guide to the new Late Payment Penalties on its website.

The first Budget of 2010 had a limited number of changes that will affect employers or contractors. Finance Bill 2010 will introduce powers for HMRC to require a financial security from employers with a history of serious non compliance in paying late or not paying their PAYE Income Tax. HMRC says that the measure will affect those who are determined not to pay and will not affect those who need time to pay and who make payment arrangements with HMRC.

More company car tax changes, but not until April 2012, will introduce new CO2 grams per kilometre (g/km) emissions limits. The current graduated table of Company Car Tax bands will be extended down to a new 10 per cent band and all CO2 emissions thresholds will be moved down by 5 g/km on 6 April 2012. The 10 per cent band will therefore apply to company cars with CO2 emissions up to 99 g/km. Two earlier changes, effective for five years from 6 April 2010 to 5 April 2015, will provide full relief from the chargeable benefit in kind on company cars and vans which cannot produce more than 0 gm/km CO2 engine emissions under any circumstances when driven and a second change reduces the chargeable benefit in kind on company cars which have an approved CO2 emissions figure of exactly 75 g/km or less.

A welcome relaxation will be made to the ‘available to all’ conditions applicable to childcare voucher and directly contracted childcare schemes delivered through salary sacrifice arrangements for those employees at or near the national minimum wage. The amendments will have retrospective effect for the tax year 2005-06 and subsequent tax years.

Not so welcome is the confirmation of the restriction on tax relief for workplace canteens, where salary sacrifice or flexible benefit schemes are involved. Also unwelcome to employers and employees was the confirmation of next year’s 1% increase in Class 1 NIC rates, although the new Coalition Government has now announced it will scrap the increase for employers.

The remaining employer issues include proposals for simplification of the rules on commutation of small pension pots, where somebody has to come up with something brilliant that doesn’t add to the costs of the Exchequer or HMRC and cannot be manipulated; so don’t hold your breath!
Finally, there will be some new anti-avoidance legislation covering share schemes and the use of Employee Benefit Trusts. More on these perhaps when we have a Finance Bill to digest?

As usual, interesting times.

That authoratitive source The Metro reports that the most common “legitimate” businesses fronting criminal activity are pubs; clubs; car dealers; solariums; nail bars and massage parlours. No great surprises there but you have been warned.

Today’s news was full of the UK banning 500 euro notes with the expert describing the Brussels bureaucrats as “idiots” on the basis that there was never any legitimate reason for such high denominational notes which have proved a godsend to criminals and money launderers.

So we professionals get landed with a complex and time consuming reporting system whilst the law makers ensure the stable and barn doors are wide open. Now that’s what I call criminal.