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Year-end tax planning tips

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12th Mar 2012
Partner Rebecca Benneyworth Training Consultants
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With April looming AccountingWEB tax editor Rebecca Benneyworth outlines a comprehensive document of year-end tax planning tips.

Tip 1 – advise clients to mop up any available AIA before the end of the tax year.

Why?

Because of a finer point in the legislation clients with year ends early in the new tax year (or financial years for companies) will lose out if they delay their planned capital expenditure until after the 1 or 5 April. Here’s an illustrative example.

For a period spanning 1 or 6 April 2012 the AIA limit is time apportioned as follows:

Year ended 30 June 2012 (income tax)

Period 1 Jul 2011 to 5 Apr 2012:

280 days / 366 x £100,000                      £76,503

Period 6 April 2012 to 30 June 2012:

86 days / 366 x £25,000                            £5,874

Total AIA for the period                            £82,377

However, the allowance in respect of expenditure after the date of change is restricted to the amount calculated for that part of the period. This means that the maximum AIA in relation to expenditure between 6 April 2012 and 30 June 2012 in the example above is £5,874. If the client spent £85,000 in the period up to 5 April, the AIA would be £82,377.

Tip 2 – make sure that clients have taken advice about the reduction in lifetime allowance for pensions

Why?

The reduction in lifetime allowance which takes effect on 6 April 2012 will reduce the allowance from £1.8m to £1.5m. It is possible to elect for the old limit to continue to apply to your pension savings, but clients must do so by the end of the tax year. This is by no means a simple decision, as there can be no investment in pensions after 5 April 2012, and no increases in benefits other than those permitted by the legislation, so his pension pot effectively closes. As you can see, this is investment, rather than tax advice, so you need to ensure that your client takes advice from an appropriate person and notifies HMRC of his election, if appropriate.

Tip 3 – changing cars? Remember that the car benefit rules are tightening up considerably from 2012.

Why?

A planned restructuring of the company car benefit table leaves those who have chosen more fuel efficient models facing a big hike in their tax bill this April, and these increases will continue, although the change in 2012 is a one-off hike. For example, a driver with a car emitting 120g/km will see his tax rise from 10% of list price to 15% of list price as we move from 2011/12 to 2012/13 – a 50% increase! Anyone driving a car emitting between 105g/km and 120g/km will be affected by a larger rise than other drivers, the remainder of whom will see once again a 1% of list price increase in their benefit in kind. Drivers looking at changing a company car now should think carefully – the secret is to balance a low emissions rating with a modest list price. Paying double for a car with emissions that are very low may not benefit the driver as the benefit may still end up larger. Of course they might choose to opt for electric cars which are zero emissions and zero benefit in kind for four more years… but they are very expensive to buy.

Tip 4 – start preparing now for tax credit renewals

Why?

The change in the income disregard for 2011/12 (reducing the amount of increase in income which is ignored for a tax credit renewal) has potentially catastrophic results for some claimants. The later the renewal is completed, the more the overpayment will rise. If clients are likely to have a substantial increase in income in 2011/12 over 2010/11 (possibly as a result of big capital allowance claims the year before) then this could affect them. Making clients aware of this now (and if necessary implementing tax planning steps now) means that the records can be prepared early so that the renewal is filed as soon after 6 April as possible to stop debt increasing further.

Here is another example showing the problem.

Bob the builder had income for 2010-11 of £15,000 after capital allowances. In 2011-12 his income increased to £35,000. Bob works full time and has two children. Bob’s wife is not in paid work.

Provisional award for 2011-12

                                                                 £                            £ 

WTC     

                Basic rate                                                           1,920

                Couple                                                                1,890

                30 hours                                                                790

CTC

                Two children                                                       4,600

Total tax credits                                                               9,200

Taper:  provisional income                 15,000

                Threshold                           (6,420)

                Income for taper                   8,580 @41%

                                                                                           (3,518)

                Family element                                                        545

                Net award                                                           £6,227

The net award would have been paid to Bob during 2011-12 as a provisional award, pending renewal and income declaration in 2012-13. The renewal needs to be completed by 31 July, but in fact the self employed often defer the declaration of income until January, when the tax return is complete. The award paid for the precious year will normally continue in payment until the renewal is finalised.

Final award for 2011-12

                                                                      £                         £  

                Gross award as above                                         9,200

                Actual income                         35,000

                Provisional income                  15,000

                Increase                                  20,000

                Disregard                              (10,000)

                Balance used for taper            10,000

                Income for taper                     25,000

                Threshold                               (6,420)

                Income for taper                     18,580  @41%

                                                                                             (7,618)

                Family element                                                          545

                Net award                                                             £2,127

The award paid was £6,227, so Barney is facing a repayment for the previous year of £4,100, and in addition as his tax credit award for 2012-13 will have continued at the same rate until renewal, he may be facing a further repayment as follows:

2012-13

                Annualised award in provisional payment      £6,227

                Actual award due (annualised)

                Gross award as above (plus family element)*  9,745

                Taper : provisional income                             35,000

                Threshold                                                       (6,420)

                Income for taper                                             28,580  @41%

                                                                                                               (11,718)

                Net of taper – award made                                                          NIL

* - no separate taper for the family element from April 2012.

                Payments made to July 31 say                      £2,076

                Payment should be                                           NIL

                Total tax credit debt – current year               £2,076

                                                      - previous year       £4,100

                Tax credit debt                                             £6,176

As there is no longer an award in payment, the debt cannot be collected by deduction from a subsequent award, so Bob will be sent a request for payment. If the final award and income declaration for 2011-12 is delayed until January 2013, the total debt would be:

                Total tax credit debt – current year               £5,189

                                                      - previous year        £4,100

                Tax credit debt                                              £9,289

Tip 5 – look at fuel costs

Why?

The increases in the fuel scale benefit each year have not kept pace with fuel price inflation, so it is possible that your clients would be better off reverting to free fuel from their company, and accepting payment of the tax on the fuel benefit. The decision depends on quite a number of variables, but is not mathematically challenging, so you may be able to give some useful advice. Remember that the scale benefit (currently £18,800) will be updated on Budget day, so that is a good time to prompt with advice, ready for the start of the new tax year.

What are your tips for end of year tax planning? Feel free to post below for the benefit of other AccountingWEB members.

Replies (13)

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By david5541
13th Mar 2012 10:48

tax credits

fortunately due to the cost/benefit f clients we never really got envolved in tax credit claims

 

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
13th Mar 2012 11:46

Tax Credit letters

I heard yesterday that HMRC has again sent letters to loads of tax credit claimants stating that if they wish to remain in tax credits they must notify HMRC by 31 March. Those of you who have self employed clients claiming tax credits should prompt your clients to respond to this by the date given as it affects next year's claim which can only be backdated by one month now (from April 2012). So if they drop out and then realise later they may lose out. Important to self employed as their income is more likely to vary, so they may have a back claim at the end of the year - which can only happen if they have a live claim (albeit for NIL).

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By steve marsland
13th Mar 2012 11:49

Tax Credits - Tip 4

Good example Rebecca, but the rates for 2011/12 are incorrect.  You've used the 2010/11 rates in the example.  However, if you take a simplistic view of the calculation, profits have gone up £20K, £10K of this is disregarded and therefore the tax credits on the other £10K at 41% gives £4,100 which is the amount to clawback. 

What we are advising at the moment is for clients that may not be entitled to anything in 2012/13 is to advise the Tax Credit Office by the end of this month that they would like to stay in the system for 2012/13 just in case an entitlement arises, but also advising them of an income figure for 2012/13 where the client does not get paid any Tax Credits in 2012/13.  That way any underpayments brought forward that would be repaid by them falling out of the system are at least delayed by 12/18 months.  Times are hard enough for a lot of clients at the moment so giving them that extra 12 to 18 months to prepare for paying back the tax credits  helps them to plan for this.

Also, as for being overpaid in the 2011/12 tax year, if the Accountant was aware of their clients tax credit position, they should have been advising them of this possibility 12 months ago.  Unfortunately we know that a lot of Accountants don't deal with their clients tax credit affairs or even know if they are in the system!!!!

 

Steve Marsland - The Tax Credits Team

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By The Black Knight
13th Mar 2012 12:01

tax credits

I bet if HMRC cross checked in their mirror departments they would find the two figures do not match in quite a lot of cases.

Luckily they are not allowed to speak to each other for data protection reasons.

I expect if we offered to check a clients tax credit claim this would have to be done for free and we would not be popular for suggesting that they had over claimed from not understanding or reading the rules. Then we would have to report them too.

We explain we do not advise on tax credits as it is not cost effective but give the clients the income figures for their use in making their own claim. It is great when they earn enough profits to keep them in poverty, and your only problem is fighting off Mr HMRC collection so they can continue to pay their tax and fund the better off. Sorry but the whole system is a pigs ear.

Will be interesting to watch if manipulating the income figures (proposed new cash basis accounting for this claimant group) will result in increased claims using perfectly acceptable creative accounting (delaying or accelerating payments and receipts).

Again we are unlikely to be involved as there is an expert on every estate that can maximise all your benefit claims, and having four children by four different absent fathers (one with asbo disabilities) is far more effective income planning. LOL That's why all the clever people opted for this route.

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Replying to sacox1960:
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By steve marsland
13th Mar 2012 13:58

Charging for tax credit work

You are quite wrong to suggest that it isnt cost effective to advise on tax credits.  Our standard fee for dealing with the compliance aspects of our clients tax credit claims is in most cases more than we charge for doing their tax return.  In addition to this where we talk to them about general tax planning this can have  a massive effect on their tax credits claims which in most cases far outweighs the income tax savings.  We value price this by charging them a % of the extra tax credits they get awarded whihc to date I can say we have never had a problem with.  By ignoring tax credits you are leaving fees on the table.  By offering a service to your clients not only does it it increase your GRF your clients will see you as taking a proactive approach to what is a complicated area.

I also note that you say you dont advise clients on tax credits but give them the income figures for making their claim.  Presumably from that you understand what income is included for tax credit purposes?  Be aware that not all income is included for tax credit purposes and certain deductions can be made before arriving at a household income figure such as:

Certain BIK's are not included (van benefit in kind and in practically all cases any interest charged on overdrawn directors loan accounts)Deductions can be claimed for grossed up pension contributions and gift aid paymentsExclude SMP,SPP and SAP up to certain limitsTrading losses.  They can be used against a fellow claimants income in the year of the loss with the balance being carried forward to the follow year to offset against the individual making the losses future profits from the same trade.  This is in addition to the income tax treatment.  I havent yet come across a client that gets this right.   or to that matter an Accountant that actually understand tax creditsddsssdjbsdfj

Tax Credits are complex for most accountants to understand let alone our clients.  As accountants we are unlikely to act for the individual that survives just on benefits and I agree that those people do know how to work the system to their benefit.  But our clients are the ones that really do need help when things don't go well and we should be there to help them. 

Tax Credits are being replaced with Universal Credit from October 2013, but there will still be people get tax credits possibly even as late as 2017 until they have transferred over to Universal Credit.  I do hope that Accountants don't make the mistake they did in 2003 when tax credits were introduced by ignoring it and including a line in the LOE stating ' we do not offer any advise on Universal Credit'

Steve Marsland - The Tax Credits Team

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
13th Mar 2012 12:08

@steve

Thanks Steve, yes I haven't updated the rates, I just moved it on a year. Darn it. However, it still ilustrates the point, but is irritating to have missed it. Thanks for spotting it. Grrr to self.

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By The Black Knight
13th Mar 2012 15:01

We are barred

from charging a % fee due to professional rules.

I do agree that to keep up to date with tax credit work that you are never asked to perform is a head ache and that is why it is not cost effective.

HMRC are quite happy for clients to fill in the forms however they see fit.

Interesting the directors loan interest as certain tax avoidance schemes pay salary by way of a supposedly repayable loan account, so perhaps those clients are missing a trick.

I will take your comments on board however and perhaps take another look at this.

Perhaps offering a set fee will either get us some work or absolve ourselves by a confirmed that's too much ! Much in the same way as inheritance tax advice works.

But adding on the tax credits advantages of using the OTS accounting methods may be the future to maintain accountancy fees.

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By Marion Hayes
14th Mar 2012 09:36

Minimum award

I see above a suggestion that an estimated income figure is given which does not create a tax credit award. As the level of award is taken as an indicator for other types of assistance please make sure this does not cancel out the £545 family element.

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By shortland
14th Mar 2012 11:00

Tax credits - Re If HMRC Cross checked in the mirror departments

 Re Black Knight,s posting …..think they do… because we had a client whose taxable partnership income for Tax Return  2010/11 was higher compared to declared on Tax Credits purposes 2010/11. Tax Credit Office increased the house hold income from partnership  as seen on Tax Return figure 2010/11. The difference was due to excess losses, ie unrelieved losses b/f from 2009/10. However for tax purposes the losses were carried back to 2008/09. We have appealed against the decision….  

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By The Black Knight
14th Mar 2012 11:14

must be

Just the missing dividends they don't notice then. ( was some time ago I had that argument to be fair )

That is reassuring to hear some evidence of some control in the HMRC giveaway.

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By Ermintrude
19th Mar 2012 12:21

My Library

Since the website upgrade, I can't add this to my "library"/saved articles, so will shove a comment in so I can retrieve the article.  Good post thanks.

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By Suntree
20th Mar 2012 10:56

My Library

Ditto

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By djw090
23rd Mar 2012 16:15

We have had problems where we give clients a statement of there income laid out to fit with the claim form but they then phone up in an atempt to provide the data over the phone.

Sometimes the HMRC call staff refuse to take the figures for, say, salary because the client has not got the P60 in front of them. Its as if HMRC are doing an adhoc check that the client has picked information off the source documents properly.

I suspect some people on salary plus divs forget the divs when providing the data themselves. Especially when divs are worked out afterwards to clear the directors current account.

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