As the new year approaches, many people turn their minds to resolutions, healthy eating, exercise and filing their tax return!
However, in the view of Lee Watson, tax director at Clive Owen LLP, tax should not be a once a year consideration before the January filing deadline.
Lee said: “Whilst many people will think about tax in January, due to the tax return deadline, tax is constantly evolving through changes in government policies, case law and annual Budgets. It may be a relief for some people to have their tax return filed before the 31 January deadline, but it is worth bearing in mind that this is the tax return for an earlier tax year. Therefore, consideration should be given to tax planning for the current tax year and the new tax year that approaches in April 2020.”
Some of the upcoming changes to taxation include:
1. Changes to capital gains tax reporting for disposals of residential properties
From 6 April 2020, disposals of residential properties that realise a taxable capital gain, will need to be reported to HMRC within 30 days of completion. In addition, the capital gains tax liability will need to be paid at the same time. This represents a major change in capital gains tax reporting and payment, which is normally by 31 January following the end of the tax year of disposal. The changes mean that individuals, trustees and personal representatives will need to be prompt in relation to gathering the information required to complete the report to HMRC and ensure that the accountants are aware of the disposal. It is likely that penalties will apply for late reporting.
2. Further cuts to income tax and capital gains tax relief for landlords
From 6 April 2020, it will not be possible for individual landlords to claim any loan interest or associated finance charges as an expense against their rental income from the normal letting of residential properties. This was part of a government strategy which intended to stop higher rate taxpayers achieving 40% tax relief on such costs. Whilst some tax relief will still be given for such costs, it will be a maximum of 20% of the costs. Therefore, the government anticipates that tax receipts from landlords will increase. It should not be ignored that this, potentially, has a further impact by increasing an individual’s earnings for the purposes of calculating any child benefit to be repaid or any personal allowance withdrawal. Indeed, it can also impact upon capital gains tax liabilities.
In addition, a valuable capital gains tax relief for landlords that have let out an old home, will be abolished. Lettings relief is worth up to £11,200 per person so any landlord considering selling a property that they have previously lived in, needs to take urgent tax advice.
3. Changes for employers
A change that will impact many businesses that use the services of off-payroll workers, will be introduced in April 2020. Whilst such workers have traditionally been paid without the “employer” deducting any tax or national insurance, it will be necessary from April 2020 for the “employer” to assess whether the worker could be regarded as an employee, despite the worker not being an official employee on the payroll. Tax advice should be considered in respect of this determination as there is significant case law in this area of taxation. If the conclusion is that the worker would be deemed to be an employee, then tax and national insurance will need to be deducted from the payments made to the worker. It is important that all off payroll workers are considered well ahead of April 2020.
These changes will only apply to medium and large businesses (essentially those that require a statutory audit) but there is a raft of anti-avoidance measures in place to consider the turnover, value and employee numbers of associated companies. It is vital that advice is sought sooner rather than later.
4. Tax relief for investing in plant and equipment
As things stand, a business can potentially purchase up to £1m of plant and machinery (not cars or other excluded assets) for its trade and claim the entire cost as a tax-deductible cost in the year of acquisition. Expenditure above £1m is then relieved over several years – either at 18% or 6% per annum depending upon the plant or machinery acquired.
It is expected that the £1m annual investment allowance (AIA) will decrease to £200,000 at the end of 2020. Therefore, the timing of buying machinery is critical as a one-day delay could mean a drop in a tax-deductible cost of £800,000. The AIA calculations do have many complexities and several factors that affect the AIA levels include the year end of the business, associated businesses and the type of asset being acquired. Again, tax advice should be sought well in advance of purchases to ensure that the relief is maximised.
5. Check the 10% tax rate still applies
There have been many changes to the qualifying rules for the 10% entrepreneur’s capital gains tax rate, over the last few years. It would be worth reviewing your personal circumstances to ensure that you still qualify. If you don’t qualify as a result of the changes in the rules, then advice should be sought, particularly as the qualifying time period is now two years. So, the sooner the clock is restarted, the better.
Lee added: “It is often the case that people seek advice too late or after a transaction has occurred and frustratingly for advisers, the phrase “if only” is often at the forefront of minds. I would urge anyone who has a tax issue or is considering the sale of a business or property to seek tax advice at the outset. Sometimes it can be the case that the cost of that tax advice pales into insignificance compared to the tax saving from that advice.”
Lee continued: “Of course, the above are just some measures that are coming into force. Due to the political uncertainty, the Autumn Budget was cancelled. We expect that there will be a Budget early in the new year, which may introduce further tax changes to be considered. Indeed, undertaking tax planning ahead of the election (if possible) may be worth considering whilst the tax rates are certain.”
Lee concluded by adding that, sadly, divorce is another item on agendas for the new tax year and this can cause unexpected tax consequences. Lee said “Legal experts tell us that a significant number of divorces take place in the early part of the new year, perhaps down to the amount of time spouses spend with each other over the festive period. Whilst this is not a tax planning tip, it is important that divorcing spouses consider capital gains tax issues that can arise on the transfer of assets between them upon divorce, at an early stage. Sadly, we have seen recent new client cases where business assets and properties are transferred between divorcing spouses, after the tax year of separation, leaving the transferor spouse with significant tax bills.”