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June – Monthly Round up

Feel the benefit: have a party!

Most employers are aware that they can throw a staff party for their employees at a cost of up to £150 per head without this being treated as a taxable benefit, but there are conditions to watch out for.

The exemption can apply to any type of party, such as a summer barbeque or Christmas party, provided the party is held annually. Therefore, a one-off event, such as a 25th anniversary party, does not qualify.

Another requirement is that the party is open to staff generally, although it is possible to have an event for employees at one location or put on separate parties for different departments. A function should not just be for directors, unless of course there are no other employees.

The £150 per head is not an allowance, so the entire benefit is taxable if the per head cost just exceeds £150 by a pound or two. Along with expenditure on room hire, food, entertainment and prizes, cost includes VAT and any transport or overnight accommodation provided. Two or more annual parties can be exempt as long as the £150 limit is not exceeded.

Example – the summer party

A company throws an annual summer barbecue for its employees. For the summer 2019 party, the total cost is £11,200, with 40 staff attending. Each staff member can bring one guest. The cost per head is £140 (£11,200/80), so there is no taxable benefit for employees.

It may be impossible to establish the exact number attending a large function, but an estimate is permitted based on the number budgeted for or booked.

Smaller occasions can be funded tax-free by making use of the £50 trivial benefit exemption. There is quite a bit more flexibility here, since the only relevant condition when it comes to throwing a party is that the per head cost does not exceed £50. The function therefore does not need to be open to all employees or be held annually.

Let’s get this party started!

Business rates savings for small retailers

Small retailers in England should now be enjoying 33% off their business rates bills. However, businesses need to check their accounts as some councils are not giving the discount automatically.

The business rates retail discount scheme, in place from April 2019, applies to occupied retail properties with a rateable value of less than £51,000, and will operate for the years 2019/20 and 2020/21. The relief applies where a property is being wholly or mainly used as a shop (whether selling goods or providing services), restaurant, café or drinking establishment. Some of the less obvious types of establishment that qualify include:

  • display and show rooms;
  • second-hand car lots;
  • markets and garden centres;
  • funeral directors;
  • car hire.

Each local council can, based on Government guidance, determine for themselves which particular properties are eligible or ineligible, so the exact definition will differ around the country. Property used to provide certain businesses and services are ineligible for the discount, including: financial services (such as bureaux de change, payday lenders, betting shops and pawn brokers), other services (such as estate agents and employment agencies), medical services (such as vets, dentists, doctors, osteopaths and chiropractors) and professional services (such as solicitors, insurance agents, financial advisers and tutors).

The discount is one-third of the rates bill after deducting other reliefs such as small business rate relief. Therefore, there will be no discount if 100% small business rate relief is available. Some councils are insisting that the discount is applied for rather than it being applied automatically.

Example – the reduced bill

The rates bill for a shop with a rateable value of £13,500 and eligible for small business rate relief of 50% will be £2,210, that is:

  • normal rates of £6,629 (£13,500 x 0.491) less
  • small business rate relief of £3,314 (£6,629 x 50%) and
  • the one-third discount of £1,105 ((£6,629 – £3,314) x 1/3)).

If you need help with working out your situation, please pop in to our offices or give us a call.

Investors’ relief restriction runs out this tax year

Investors’ relief, effectively an extension of entrepreneurs’ relief for external investors, is now only available for disposals made during 2019/20 because of a three-year holding period requirement.

Like entrepreneurs’ relief, investors’ relief (introduced in 2016) gives a reduced rate of CGT of 10% for gains on qualifying share disposals by individuals or trustees. There is the same, but entirely separate, £10 million lifetime limit. However, investors’ relief is squarely aimed at external investors in unquoted trading companies. One of the requirements is indeed that the investor (or an individual connected with them) must not be an employee or a director of the company whilst owning the shares (although there are certain exceptions to this, such as being an unremunerated director).

The relief is intended to encourage and reward new investment, so there are conditions to ensure that the shares are subscribed for with new money that benefits the company.

As is often the case with tax reliefs, these conditions are quite complex. Broadly, shares must be:

  • Ordinary shares in a trading company which are not listed on a stock exchange.
  • Issued on or after 17 March 2016 (the date the relief was announced).
  • Acquired by subscription (rather than purchased from another shareholder) and fully paid up for cash.
  • Owned for at least three years after 6 April 2016.

Example – the relief in practice

On 1 June 2016, an investor subscribed for 250,000 £1 ordinary shares in ABC Ltd, an unquoted trading company, at their par value. The investor has never been an employee or director of the company. The shares were sold for £880,000 on 5 July 2019.

The conditions for investors’ relief are met, including the three-year holding period. After deducting the annual exempt amount, the investor’s CGT liability for 2019/20 in respect of the shareholding will be £61,800 ((£880,000 – £250,000 – £12,000) at 10%).

We’re still early in the tax year, but if you may benefit from investor relief in 2019/20, some forward planning might come in useful.

Pension flexibility: too taxing for many

Recent HMRC statistics highlight the over-taxation of some pension benefits.

More than one million people have received flexible pension payments thanks to the rules introduced just over four years ago. HMRC’s most recent statistics, to the end of March 2019, show that 1,113,000 people have withdrawn over £25,600m from their pensions, across 6,136,000 payments. The amounts withdrawn and the number of payments have both increased each tax year – in 2018/19 there were over 2,400,000 payments totalling £8,180m.

However, the system is causing some problems for HMRC. In the first quarter of 2019 HMRC refunded £31.1m of overpaid tax to over 12,500 people who had used pension flexibility. The over-collection is a result of HMRC’s insistence on using emergency tax codes where a pension provider does not have a current tax code for the individual, which is usually the case on a first withdrawal. More often than not, emergency tax codes create too high a tax deduction, as the example shows.

Emergency, Emergency!

Graham, who lives in England, expects to have an income of about £28,000 in 2019/20. He decided to draw £24,000 from his pension plan as an uncrystallised funds pension lump sum (UFPLS). He knew that a quarter of this would be tax free, with the £18,000 balance taxable. As that would still leave him comfortably below the £50,000 higher rate threshold, he expected to receive £20,400 as a net lump sum (£24,000 – £18,000 @20%).

In fact, he received £17,619 because an emergency tax code was applied to the taxable element of his UFPLS.

The excess tax can be reclaimed and HMRC has created dedicated forms to speed up the repayment process. In theory if no reclaim is made, the tax should eventually be refunded once HMRC undertakes its end of year reconciliation – but that could mean waiting over 12 months if the payment is taken early in the tax year.

If you are thinking about using pension flexibility, it pays to take advice before asking for the payment. In some circumstances the emergency code issue can be sidestepped, but if it cannot, then you need to be aware of what you will receive initially and the process of tax reclaim.

Tax-free childcare – highlighting the choices

HMRC is running a marketing campaign to raise awareness of its Childcare Choices website and the financial support available to parents. With tax-free childcare, the government will contribute up to £2,000 a year towards the costs of childcare.

For every £8 paid to a childcare provider, the government will add another £2, which is equivalent to 20% basic rate tax relief. The government’s contribution is limited to £2,000 per child each year (increased to £4,000 for a disabled child), which means that up to £10,000 (£20,000 for a disabled child) of childcare costs can qualify. Payments are made via an online childcare account, and must be used for approved childcare, such as:

  • childminders, nurseries and nannies;
  • after school clubs and play schemes;
  • home care agencies.

The childcare provider must also be signed up to the scheme.

Tax-free childcare is aimed at working parents of children aged under 12, earning less than £100,000 per parent, with both earning at least the national minimum/living wage for 16 hours a week on average over the next three months (this is £131.36 a week for those aged 25 and over).

Self-employed parents can use an average of how much they expect to make over the current tax year, and the minimum earnings test is ignored altogether if the business commenced within the previous 12 months.

Parents: Although both parents normally need to be working, there are certain exceptions such as one parent being on parental, maternity, paternity or adoption leave.

Children: A child stops being eligible on 1 September after their 11th birthday, or up to age 16 for disabled children. Adopted children are eligible, but foster children are not.

Check: Tax-free childcare is not available at the same time as working tax credit, child tax credit, universal credit or childcare vouchers, so parents need to run the government’s childcare calculator to make sure this is the right option for them.