Tax Connect – November 2016
Gift Aid and Tax Changes to Dividends
With effect from 6 April 2016 there have been changes to the taxation of dividends. While the introduction of the £5,000 tax-free dividend allowance may be welcome to some taxpayers, there may be consequences for charitable donations that need to be considered.
Under the old rules (up to 5 April 2016) dividends paid to individuals had a notional tax credit of 10% attached. This meant that on a net dividend of £900, the taxable income was treated as £1,000 consisting of the dividend of £900 plus a tax credit of £100.
If the individual then made a charitable donation the tax credit attached to the dividend meant that they should have paid sufficient tax to cover any donations made under the gift aid provisions. The charity receiving the donation could then legitimately recover tax on that donation from HMRC.
However, from 6th April 2016 dividends no longer have this notional tax credit attached and individuals will not have to pay tax on the first £5,000 of any dividend income received, irrespective of any non-dividend income they may have. This may result in charity donors with low levels of income, who have completed gift aid declarations for charities on the basis that they are taxpayers, finding that these declarations are no longer valid.
For example, if an individual is in receipt of a state pension amounting to £11,000 in 2016/17 plus dividend income of £5,000, they will be treated as having a total income of £16,000 but the tax liability will be nil. This is because the personal allowance of £11,000 for 2016/17 is available to cover the value of the state pension and the new £5,000 dividend allowance covers the dividend income.
As a consequence, there is no tax to cover the gift aid “basic rate tax’ requirement for the donor and individual is therefore potentially exposed to a small tax liability arising from their charitable giving. The changes in the taxation of dividends may affect the tax position of many individuals who regularly donate to charities under the gift aid provisions.
In addition, the charity could potentially reclaim tax from HMRC to which it is not entitled, if it has checked the tax paying status of the donors.
It is important that the individual considers the tax consequences of claiming gift aid on charitable donations. Charities themselves should also be aware of these changes and may want to consider how they should best communicate with their donors so that these changes do not have an adverse effect on them or on the charity itself.
HMRC widens APN applications
Accelerated payment notices (APNs) have been coming in thick and fast over the past few weeks in relation to EFRB planning and with HMRC raising over £3 billion from these types of demand since 2014, it doesn’t look as though this method of collecting tax is set to change any time soon.
APNs demand upfront payment of disputed tax before the matter is settled. Anyone receiving an APN has 90 days to either pay the tax bill or make representations to HMRC if they consider the notice to be incorrect. There is no right of appeal in respect of an APN.
HMRC has recently added another 15 tax planning schemes to the list of those subject to the measures which brings the total to 1,181.
It is important that those in receipt of APN’s check the calculations involved as a written representation can be made to HMRC where the APN is incorrect. This can have the effect of delaying the payment for several months until they issue a correct calculation.
Anyone who suspects that an arrangement which they have entered into constitutes avoidance should be wary as it appears that HMRC are issuing the APNs first and asking questions later. Henderson Loggie can help with any concerns that you may have about this matter.
Over recent years, salary sacrifice arrangements have become increasingly popular. HMRC are currently consulting on limiting the range of benefits that attract income tax and NIC advantages via salary sacrifice. In particular, HMRC may seek to change the rules including regarding salary sacrifice for individuals with company cars.
Under current salary sacrifice arrangements, the equivalent cost of leasing the car is deducted for the employee’s gross salary (i.e. the salary sacrifice), reducing the amount on which income tax (PAYE) and National Insurance is calculated. Although the employee will still pay PAYE on the car’s P11D value, the P11D value is often much less than the salary sacrificed amount due to the system being designed to encourage the use of environmentally friendly cars, which benefit from low P11D values. Under the plans, workers would be taxed on the full amount of the salary sacrificed rather than the lower P11D value of the car, thus increasing the amount of tax paid by the employee and employer.
In addition to cars, the proposed changes may also affect the following benefits: accommodation, workplace gyms and car parking spaces. However, salary sacrifice schemes involving employers’ pension contributions, employer provided pension advice (from 6 April 2017), childcare and workplace nurseries and also cycles and cyclists safety equipment are not expected to be affected so salary sacrifice is still worthwhile considering.
At Henderson Loggie we are monitoring these proposals and will keep you apprised of any developments under review. In the meantime, if you wish to discuss your own position please contact us on firstname.lastname@example.org
Are you a small business owner? Do you employ workers?
If so, you may be one of the 64,000 employers in Scotland yet to comply with the Pensions Act 2008 and set up a Workplace Pension Scheme. If you don’t know your staging date, grab a hold of your PAYE reference and head over to the Pensions Regulator site to check when you must start complying with the legislation. http://www.thepensionsregulator.gov.uk/en/employers/
If you employ anyone over the age of 22 (and below state pension age) and they earn £192 or more per week, you’ll certainly have some employer duties to consider. You’ll be required to complete a Declaration of Compliance online with the Pensions Regulator to confirm that you are compliant, five months after your staging date, and it probably won’t come as any shock to find that this is the most common employer failure. However, if you’ve done all the hard work in assessing your workforce and setting up a pension scheme, it’s also the easiest part of the process to complete.
We recommend that our clients consider what’s required of them six months before their staging date. We help them with selecting a pension scheme that works in line with their budget and existing payroll processes. We identify potential problems with existing systems or pension schemes (and in the case of many employers, individual pension plans already in place); will recommend whether the client will use qualifying earnings for their contribution basis, or whether they would be best using one of the Self Certification tiers.
Don’t leave it until it’s too late.
Latest HMRC Scam
There has been a recent increase in phone calls from HMRC chasing for outstanding tax that is not due. Often these are with the threat of legal action and can be quite intimidating. If you do receive a phone call like this, do not give any details over the phone, hang up and if you are still concerned please phone us and we can check through official HMRC channels to confirm whether it is a scam.
To discuss any of the issues highlighted within this newsletter, or any other matter you require our help with, please contact any member of our tax team.
Alan Davis – Partner & Chairman
Barbara McQuillan – Partner