Forget the Lamborghini. Park yourself in front of an IFA

New pension rules aren’t just about people acquiring fancy sports cars, they also have big implications for financial planning. 

Much of the coverage in the press about the new pension reforms has been a little bit caricatured. There has been a lot of focus on the ability of savers to cash in and buy a Lamborghini, which probably won’t be top on the list for most people approaching retirement. Considerably less has been said, however, about how the new rules affect financial planning.

In the past, when advising clients on retirement and how to structure income, we have been confronted with a restrictive set of rules. The key factors were the tax implications – both during the retirement period and at death. We didn’t have a great deal of flexibility. There might have been situations where it would have been appropriate to strip out the pension to reduce the pot before the client died, but this action had serious income tax implications.

Things have now moved on, as a worst-case scenario at death is now perhaps a 45% charge, where the figure might once have been as high as 82% or lost entirely with annuity purchase. So leaving your money in your pension pot is not necessarily such a bad thing anymore. Pensions should be considered as part of mainstream unencumbered assets, which you can use as an income source and valuable tax planning ‘wrapper’.

Using your pension fund alongside other investment wrappers such as ISAs, you’re able to maximise net spendable income for the smallest amount of capital spend. Since the advent of the new rules, we may choose to take less out of a fund in many circumstances and make use of other assets for income, protecting the pension fund to pass it on to the next generation.

In short, we’re being presented with a great opportunity to maximise client assets. We can now plan more efficiently in relation to tax, capital preservation, succession planning and income. So if you’re keen to live a better lifestyle and pass on more to beneficiaries, then it’s definitely important to start a conversation with one of our independent financial advisers.

Back to the future

The best way to avoid end-of-year panic is to think about reverse planning.

Planning your tax year in reverse sounds like a strange idea, but that’s exactly what I advise my clients to do if they want to avoid unnecessary stress. Very often, they’re trying to do things at the last minute, when they really should have thought about them a lot earlier e.g. making best use of tax allowances, reliefs and exemptions. 

Take married couples, for example. On 6th April, new rules came into force that allow one spouse or civil partner to transfer 10% of their personal allowance to their other half, providing that neither of them pays tax above the basic rate. It’s a good opportunity in a situation where one partner has a low income and would otherwise have wasted their allowances. It does involve contacting HMRC immediately though and asking for the allowance to be transferred and tax codes to be updated.

And what about the child benefit charge? When one member of the family has an ‘adjusted net income’ of £50,000 or more, the benefit starts to reduce. And once the income exceeds £60,000, you lose it altogether. That could mean a gap of up to £1,800 a year if you have two kids. But if you think ahead and plan, the limits can be extended – through personal pension contributions, for instance, or gift-aid donations.

There’s another planning opportunity worth mentioning too. In April, the starting-rate tax band increased to £5,000 and the rate went down to zero. If you are a married couple or civil partners and you have relatively low pensions or earnings, but a higher amount of investment income, you need to consider your options. You could for example receive pensions to the value of around £10,600 and another £5,000 in gross interest without paying tax.

If you talk to your accountant at the earliest possible stage, you’re always better prepared to take advantage of opportunities. So don’t end up with a last-minute scramble. 

When you're saving, look for extra savings

Whether we’re young or old, the government is keen to encourage us to save. Interest rates, however, are at a record low, so it’s important to look for every possible advantage or tax break you can find. We explore the potential of the new savings allowance.

Many people know about the NISAs or new ‘super’ ISAs that have been introduced, which should allow people to save up to £15,240 a year tax free in 2015-16. Savings allowances tend to receive rather less coverage in the press and on the TV and radio, however. While it’s true to say that the amounts involved are relatively small, they’re certainly not insignificant. Particularly if you’re someone who is on a modest income.

Up until the end of the 2014-15 tax year, some people with savings income of up to £2,790 would have it taxed at 10% rather than 20%. In a bid to boost savings, the government has pledged a £5,000 gross savings allowance for people with an income of up to £15,600 (the combined total coming from the savings and the personal allowance of £10,600).

To put this in tangible terms, this takes you from a maximum saving of £279 in the last tax year, to a £1,000 in the year head. Certainly not be sniffed at.

If you’re someone with earnings of, say, £12k, all your savings could be taxed at zero per cent, provided the combination of your salary and/or pension and your savings is under the £15,600 limit. On the other hand, someone who earns more than £15,600 can’t benefit at all.

In a scenario in which you have a £14k income, but your savings take you above the threshold to perhaps £18k, it’s possible to claim a tax rebate on the sum between £14,000 and £15,600, but this has to wait until your self-assessment tax return, or form R40. If you fall neatly under the cap, however, you can register to receive interest paid gross.

All in all, it’s important to make the most of the allowances that are available and maximise the amount that’s due to you. If you’re trying to make a retirement income stretch further, for instance, it’s vital to keep up to date with the changes that are taking place. They’re definitely to your advantage.

Don’t let customer debt get you down

You've identified a potential bad debt. You've sent the friendly reminder, the follow up letter seven days later. You've then phoned two or three times and sent a final notice. Still no joy. Where does it go from here?

It’s a familiar scenario for lots of business people. What seems like a slightly overdue payment is starting to turn into a troublesome debt. You don't particularly want to start formal legal proceedings, as they've been a customer for some years but you're getting increasingly frustrated. 

The phone rings. It’s the customer telling you about their cash flow problems. Things will apparently be resolved next week, so you agree to give them more time. But next week rolls around… nothing. The following week... still nothing.

You are now getting increasingly worried. You might be a key supplier and of course you could place their account on hold, but that could make the situation worse and actually reduce the prospect of payment. What you need is for the customer to engage with you. 

A good first step in this scenario is to speak to your accountant. If they are not themselves an insolvency practitioner, the chances are they will have a good working relationship with one. When they are instructed by a creditor, they will write to the debtor to advise that they have been consulted. The message is usually that failure to either make payment, or provide an acceptable and deliverable payment plan, may result in the creditor taking matters to the next stage, which could ultimately be an insolvency event.

By issuing an unambiguous statement of intent, you make your position clear to the debtor and in doing so you'll invariably find they'll try to prioritise payments to you.

The involvement of a third party in these circumstances will often produce the desired result. If not, then an assessment would have to be made to ascertain whether it's financially viable to pursue matters further.

If you find yourself in this situation and would like to discuss your options, the best thing is to contact your accountant initially. Appropriate action can then be advised on a case-by-case basis.

Invest now and reap the reward

With the general election just around the corner, there’s an element of uncertainty over how the tax regime will change. Now may be an excellent time for businesses to make investments in fixed assets.

 

In their Green Budget published earlier in 2015, the Institute for Fiscal Studies analysed the growth in overall tax take following general elections. Perhaps unsurprisingly, the think-tank found that there was a strong tendency for taxes to be hiked in the period following the poll.

 

One area which may come under scrutiny when a new government is formed in May is the Annual Investment Allowance (AIA), which gives qualifying businesses 100% tax relief on the purchase of qualifying fixed assets. The allowance covers most items of capital expenditure although two notable exceptions are building structures and cars. 

 

The AIA is an allowance which has never been so good, as the cap is currently at £500,000 – a figure many small businesses are unlikely ever to approach and which offers a lot of scope for larger enterprises too. 

 

The policy is understandable in the aftermath of the recession, as it’s an excellent way of stimulating investment and boosting the wider economy. But the increase is only temporary and is due to expire in December 2015. The Chancellor announced in his Budget speech, delivered on 18 March 2015, that it “would not be remotely acceptable” for the AIA to reduce to the previous limit of £25,000 and that a new limit will be set at “a much more generous rate”. 

 

This leaves business owners with uncertainty as to the level of revised AIA commencing January 2016. The Chancellor indicated a better time to address this relief will be in the Autumn Statement. So we are all left waiting…

 

The UK economy is generally a lot stronger now than two or three years ago. It’s a time when investment is on a lot of people’s agendas. Our strong suggestion is that if you are considering making capital investments in the near future, it might be best to move ahead now, while you can maximise your tax advantage within the published regime. 

 

You may be one of the many business people who is familiar with the idea of the AIA, but not necessarily keeping a close track of the changes in the cap rate. If so, it’s time to talk to your professional adviser about getting the most out of your allowances while the rules are stacked in your favour.

Self Assessment: don’t leave it all to the wire

If you’re relying on your accountant to help you with your self-assessment tax returns, the earlier you’re able to get organised the better.

As accountants, we always like to be proactive and remind clients of the need to get their records, receipts and other relevant information ready as far as possible in advance of their filing deadlines. Inevitably though, pressures of business and life can get in the way and the records only arrive as January 31st looms.

 

Of course, any professional accountancy firm will do their best to turn things around speedily, but it’s not an ideal scenario from anyone’s point of view for things to be done last minute. At that point, for some clients, will come the realisation that cashflow isn’t good enough to cope with the imminent tax demand and there is no time left to budget for the liability. 

 

If you’re able to get ahead of the game, you’ll not only avoid last-minute panics and the danger of possible surcharges and interest for late payment of tax, but you may well have the opportunity to spend some time discussing tax planning options with your accountant too.

 

Another issue is that a last-minute rush may mean your accountant can’t always plan resources effectively. If your tax affairs aren’t that complex, it might be that a relatively junior member of staff can happily take on the work but if they’re already allocated to other projects, a more senior accountant may be needed. Many firms like DNG will do their best to avoid penalising clients financially and even discount senior rates but you want to be certain about the fee level you’re going to pay and help yourself avoid any nasty surprises.

 

So the message is to think ahead and give your accountant a call. See if you can get your adviser the information they need early enough to recalculate any payment on account you have to make in the summer. It may well be that reducing your July payment is worth considering, especially if your income is down on the previous year and accounts have been prepared early which confirm this. For employees who file self-assessment returns, your reminder to take action could be as soon as you have received your P60. 

 

We can then consider the tax that will be due the following January and you can start to budget based on your cash-flow projections. It’s a common sense approach, which will allow both you and your accountant to sleep that little bit easier each New Year. 

A new start with the one-stop shop

VAT rules changed on 1st January this year and there are important implications for businesses supplying digital services to consumers outside the UK. DNG Dove Naish’s Business Edge Manager, ROB BURNELL, brings us up to date.

 

As part of a strategy to create a level playing field across Europe, rules about VAT on digital services have recently changed. 

 

Instead of accounting for VAT in this country when selling to consumers, you need to account for it in the country the customer is based. And while in the UK there’s generally no obligation to register for VAT unless your turnover is £81k or above, there is no lower threshold when you’re supplying services to consumers in another EU member state.

 

The change has led to a considerable amount of commentary on social media, particularly as many people thought that they might need to account for VAT on everything they sold, just because of one or two incidental sales of digital services supplied overseas. This isn’t, in fact, the case. 

 

It’s true that a UK VAT registration number will be needed, as this allows you to sign up for the new VAT Mini One Stop Shop (VAT MOSS) platform. But once you’re on the VAT MOSS system, you can account for the tax in any European country via one return and you don’t need to pay VAT on sales within the UK unless you go over the £81k turnover figure.

 

A statement was issued by HMRC in December 2014, attempting to make the situation crystal clear:

 

“If you make taxable supplies of digital services to customers in other EU member states, and your UK taxable turnover is below the UK VAT registration threshold, you may use the VAT MOSS to account for the VAT due in other EU member states but you do not need to account for and pay VAT on sales to your UK customers.”

 

It’s important to remember that the new rules only apply if your services are being bought by consumers. There are different regulations in place to account for VAT in business-to-business transactions.

 

The term ‘digital services’ is obviously fairly broad and covers everything from telecommunications and broadcasting and e-services. It’s the latter category that is perhaps most likely to affect smaller businesses, which may be involved in selling apps, music downloads, e-books and games. (The definition of an e-service is one which is fully automated and requires little or no human intervention.)

 

If you’re supplying a service of this type, there’s an onus on you to identify the country in which your customer is based, so if your website currently doesn’t gather this information, it’s something you need to address. 

 

You then have to account for VAT at the rate applicable in the customer’s location. That’s where the VAT MOSS system is going to prove useful, as it simplifies the process and means that you don’t have to register numerous times in different jurisdictions. 

 

Although your accountant can’t take responsibility for the actual registration on VAT MOSS, they’ll be able to guide you through the process and can file returns for you once you’re set up.