The Fizz! Blog

A mistake accountants often make

In fact, accountants and other professionals too.

The other day I was talking to someone who was disgruntled with their accountant.  The biggest trigger for it was a conversation they'd had about their tax return.  The client was told by the accountant that they had to make a small tax payment for the year.  Normally, the client received a refund, so quite reasonably asked - why is it a payment this year, rather than a refund?  The answer they were given was - because that's what our software says.

Lots of professionals think that the only thing that matters is that work is technically accurate - and in this case, it turns out that the return was right, and because of an erroneous PAYE code during the year a small payment was due.  But whether the return is right is not the only thing that matters.  It's equally important that you can explain why things are the way they are, and make sure your customers feel comfortable and confident.  A client who feels like they understand and are comfortable with a return that's actually inaccurate is going to be miles happier than one who is confused by a return that's absolutely accurate.  Of course, the aim is for the return to be accurate AND for it to be understood by the client!  But from a purely business perspective, the explanation of the thing is more important than the thing itself.

One of the checks that we make sure is done on every tax return is that, if a payment or refund is due, the person who prepared the return knows exactly why and can explain it to the customer (and it does get explained to them, as a matter of course).  That's where lots of the value in the process lies - perhaps most of it.  It seems like such a basic thing, but we so often come across cases where people are unhappy with the excellent work that their accountant has done because they don't understand it.  It's probably the single biggest issue we hear about from people who move to us from another firm.  It's such a shame that the accountant has gone 95% of the way to doing an excellent job, but hasn't done that last little bit.

I do have sympathy with accountants and other professionals who do good work and then present it for approval by the customer without explaining it properly in a way that the customer can undestand (or, in the case described above, without even being able to explain it in any way at all).  If you're not careful you can become quite nonchalant about telling people to pay large amounts of tax, because you see big tax payments all the time.  But it's so important to consider how things look from the client's end of things.

www.fizzhq.com

HMRC can now check what debit and credit card payments you've received

A minor provision in this year's Finance Act enables HMRC to check with merchant service providers (i.e. the people who enable you to receive card payments) to see how much they've passed on to you.

They're not allowed to see the detail of which individual customers have paid you, and how much they've paid.  They'll just be able to find out monthly totals.  They'll then be taking those figures away and tracing them back to your accounts to see if it's consistent with the income you've been reporting to them and paying tax on, and with VAT you've been handing over to them.

Of course, most businesses will be reporting with complete honesty the amounts customers are paying them via card (and all other payment methods too).  But no doubt there will be some who will be caught out by this check - HMRC know that and so have sought the powers.  Hopefully it'll contribute, even in a tiny way, to levelling the playing field between honest businesses and dishonest ones.

www.fizzhq.com

Bigger tax bills for for residential property landlords?

On 6 April 2013 there was an important change to tax rules for residential property landlords (both individuals and companies).

HMRC have made quite a significant change to the rules around claiming tax deductions for the cost of furniture, equipment etc that landlords buy for residential property that they let out.  Until April this year, there were two alternative ways to claim for these costs:

• 10% wear and tear allowance – landlords could claim a deduction of 10% of their rental income, which was designed to cover the depreciation of things like furniture, fridges, washing machines, carpets, curtains, linen, crockery, cutlery etc., or;
• Renewals basis – instead of claiming the wear and tear allowance, landlords could claim the cost of replacing an item, but not for its original cost.  So although they couldn’t claim for buying a washing machine when they first bought one, they could claim for a replacement when it broke.

Landlords letting furnished property could choose between these two methods.  For unfurnished or partly-furnished property, only the renewals basis was allowed.

However, HMRC have now withdrawn the renewals basis, meaning that:

• For furnished property – landlords have no choice but to use the wear and tear allowance
• For unfurnished or partly-furnished property – relief is no longer allowable for odd bits of furniture, fridges, washing machines etc.

Whilst landlords with furnished property shouldn’t see too much of an impact (the wear and tear allowance is still available), anyone letting unfurnished or partly-furnished property will no longer get any tax relief for this kind of expenditure.

The other thing to watch for is that HMRC are indicating that they will be reviewing carefully whether let properties meet their definition of “furnished”.  In HMRC’s view, a furnished let is one where the tenant can move in bringing only food and clothes with them.  So they would expect to see the property being fully furnished including things like curtains, linen, crockery and cutlery!

So, if you let a furnished property, we’d suggest that you review the furniture and other contents you’re providing, to minimise any risk of HMRC arguing that it fails to meet their definition of “furnished” if you’re claiming the wear and tear allowance.  If your property is let unfurnished, partly furnished, or doesn’t meet the HMRC definition of furnished, then be aware that any expenditure on equipment and part furnishing won’t be tax deductible.

Having said all that, the rules on “repairs” have not been changed.  So if you’re replacing old kitchen units, for example, you should still be able to claim for the cost as a repair.  Some costs that landlords have taken for granted as tax-deductible no longer are, though.

www.fizzhq.com

What's this fuss about Child Benefit?

Until this year, Child Benefit was universally available; it wasn't means-tested.  As of January, that changed.

Now, if the higher earner in a household has an income over £50,000, then the household loses some of its child benefit, and if their income is over £60,000 it's all lost.  You lose the housing benefit on a sliding scale - if the higher earner's income is £51,000 you lose 10%, if it's £52,000 you lose 20% and so on.

For last year, only three months' Child Benefit is at stake (payment made to families between 7 January and 5 April 2013), so the financial loss isn't great.  For the current year, a whole year's Child Benefit stands to be lost, so it's a much bigger deal.  When you take into account income tax and the loss of Child Benefit, then the higher earner in a four-child family this year could suffer an effective tax rate of 73% on income between £50,000 and £60,000.  Of that £10,000 of income, they'll only get to keep £2,700!

There are ways round it for some people.  If you're on £60,000 you can bring your income for these purposes down to £50,000 by contributing to a pension, in which case the household won't lose any Child Benefit.  Effectively for the higher earner in that four-child household it will cost £2,700 for to get £10,000 into a pension.  That's potentially a great option - if you can do without the cashflow right now.

If you're resigned to losing all of your family's Child Benefit, you must either a) put details of it on a Self-Assessment Tax Return or b) just ask the government not to pay the Child Benefit in the first place.  For anyone who doesn't have to do a Self-Assessment Tax Return already, the first option is the path of least resistance - though if your circumstances change and your income decreases, remember to ask the government to restart the payments sharpish!  If you already have to do a Self-Assessment Tax Return, you could ask to not receive the payments, or you may prefer to receive them then give them back via the return, for reasons we've previously outlined.

If you're only going to lose some of the benefit, and you don't already have to submit a Self-Assessment Tax Return each year, you unavoidably have to register with HMRC to submit returns, which is a real pain.  And that's what all the fuss has been about in the last few days.  5 October was the technical deadline for registering, and supposedly 150,000 such people have failed to register so far.  In reality, it seems really unlikely that HMRC will impose any penalties for missing that date.  It's not a special date for these purposes, it's just the date that you have to notify HMRC of *any* new taxable source of income so that they can issue you with a return for last year (so the same deadline applied to, for instance, someone who bought a rental property during the last tax year and will have to submit tax returns to show the income).  We've never, ever seen a penalty issued for late notification for Self-Assessment and we've not heard of it anecdotally either.  So if we were in the position of suddenly realising we needed to register for Self-Assessment and having just missed the deadline, we'd personally be relaxed about it.

However, anyone who leaves it much longer might genuinely find themselves with a problem (leaving aside the problem of having to find the money to repay the benefit.  The deadline for submitting a return for the year ended 5 April 2013 is the end of January (assuming you're doing it online or an accountant is doing it for you).  To submit a return you need a 10-digit Unique Taxpayer Reference number (UTR).  You get the UTR once you've registered for Self-Assessment - but HMRC can be really slow at processing registrations, and occasionally seem to miss them entirely.  So if you need to register for Self-Assessment for last year but didn't do it by the 5th October, there's probably no need to panic - but do get a move on, because you need to register miles in advance of 31st January to be sure of getting that UTR in good time.

There's not much accountants can do to accelerate this process - most clients of accountants already have to submit a return (hence having an accountant!) so shouldn't be among the 150,000.  So we can only be interested spectators for the time being.  We'll be ready for a few calls in January from people who've just realised what's going on, though!

www.fizzhq.com