David Newton & Accountants

ISSUE 23 - November 2003 to February 2004

3.MONEY LAUDERING

5. JOINT MORTGAGES

1. PAYE FILING ON-LINE

All clients will soon be able to benefit from up to £825 tax free if they file their End of Year PAYE forms on-line.

This is due to a new Inland Revenue incentive to encourage employers to file their forms online earlier than the proposed Government enforced deadline of 2009/10.

The incentives will not come into force until the 2004/05 tax year. The incentives will be paid by reducing the PAYE payable in the 2005/06 tax year.

How the incentives accrue to the maximum:

File your 2004/05 end of year return on-line and get £250

File your 2005/06 end of year return on-line and get £250

File your 2006/07 end of year return on-line and get £150

File your 2007/08 end of year return on-line and get £100

File your 2008/09 end of year return on-line and get £75

Maximum tax-free = £825

The End of Year forms for this year are due by 19th May 2005.

OUR ADVICE:

We will contact all of our payroll clients during the 2004/05 tax year, and will arrange for them to complete the necessary forms which will enable us to submit the returns electronically on the client’s behalf.

2. NEW TAX CREDITS

The new tax credits have been up and running since the start of the current tax year on 6th April and awards are now being made.

There are two types of tax credit - the Child Tax Credit and the Working Tax Credit. Each tax credit is different but there are two common features, as follows:

To qualify for either tax credit you must be aged 16 or over and usually live in the United Kingdom. However, there are a number of exceptions in relation to the rules relating to residence.

A couple must make a joint tax credit application so if you are a couple you cannot make a single person application. A "couple" is defined as a man or a woman who are married and living together or a man and a woman living together as if they are married.

Child Tax Credit

This tax credit is given to people who are responsible for at least one child or qualifying young person. A "child" is defined as a person aged under 16 or until the 1^st September after that child’s 16th birthday. A "young person" is a person aged 16, 17 or 18 who is in full time education, normally studying at school or college for at least 12 hours a week for a qualification, at or below NVQ Level 3, A level or Scottish Highers.

The Child Tax Credit is paid direct to the person who is mainly responsible for caring for the child. If you are a single parent you will receive the payment.

Working Tax Credit

This tax credit is paid to people who are either employed or self-employed. If you are self employed it does not matter whether you are a sole trader of a partner in a partnership.

In order to be eligible for the Working Tax Credit you must usually work for 16 hours or more a week, be paid for that work and expect to work for at least four weeks. In addition you must:

be aged over 16 and be responsible for at least one child; or
be aged over 16 and be disabled; or
be aged 25 or over and usually work at least 30 hours a week

If you are not working you cannot receive the Working Tax Credit. The tax credit is paid to the person who is working 16 hours a week. If you are a couple and are both working 16 hours a week, you must decide which of you is to receive the tax credit.

As part of the Working Tax Credit you may qualify for extra help towards the cost of childcare. This is known as the "childcare element" and the amount you will receive will depend on your income, but the limits are set out below…

The maximum payable will be 70p for every £1 you spend on childcare costs.
There is an overall limit of £135 per week for one child and £200 for two or more children.
Therefore the maximum you can receive in your childcare element is £94.50 if you have one child (i.e. you spend the maximum amount of £135 and receive 70p in the pound = £94.50) or £140 if you have two or more children (i.e. £200 @ 70p = £140).

How much will you receive?

With both the Child Tax Credit and Working Tax Credit, this will depend on your annual income.

How do you apply?

Contact your local Inland Revenue Office to obtain an application form or apply on-line at : www.inlandrevenue.gov.uk .

OUR ADVICE:

Many people are eligible to receive either or both of the two new tax credits and if you feel that you are eligible you should apply. If you need further advice or assistance with your application please contact us.

3. MONEY LAUDERING

Over the past few years the subject of money laundering has reared its head with alarming and increasing regularity. Originally this subject related solely to the ill gotten gains from drug trafficking. However, more recently legislation relating to money laundering includes the funding of terrorism and under new legislation introduced in the United Kingdom and a number of other countries, the proceeds of any criminal activity are included.

In this country we have recently seen the commencement of new legislation concerned with money laundering - the Proceeds of Crime Act 2002 and the Money Laundering Regulation 2003. This legislation will have far reaching effects for a number of businesses and will specifically impact on accountancy practices and similar business, e.g. solicitors. This, in turn, will mean that we are now obliged to obtain personal information about their individual clients and those who run businesses for whom they act.

We need to have on file: a copy of passport / driving license and proof of private address.

The sole purpose of the exercise is to ensure that those who accountants and solicitors deal with are, in fact, the people that they claim to be and that they are carrying out a legitimate business which does not involve the laundering of money obtained from the proceeds of crime.

If you receive a request from us asking for details about you or your business we hope that you will bear with us as we try to carry out those duties imposed upon us by the new legislation.

4. INLAND REVENUE'S NEW ATTACK

The Inland Revenue has attacked dividend payments made to individuals who play little or no active role in the company paying the dividend, this has been particularly painful for small family businesses. The crux of the Revenue attack centres around what are known as "settlement provisions" - settlements giving an individual the right to income but not the right to the capital which creates the income. The example illustrates the particular settlement provision being targeted by the Revenue:

A husband starts up a company in which, apart from staff, he carries out all or most of the day to day work. The company’s issued share capital is 1,000 ordinary shares held as to 500 in the name of the husband and 500 in the name of his wife. The husband pays himself a small salary (probably sufficient to cover the entitlement to state pension) and the remaining profits are paid to him and his wife in the form of dividends on their respective shareholding.

The purpose of the above arrangement is that the husband will save paying higher rate tax on the part of the dividend that is paid to his wife if she pays tax at the standard rate.

Enter the Revenue. It could (it argues), using anti avoidance legislation contained in the Taxes Act, reallocate the dividend received by the wife to the husband’s income and reclaim the tax saved. In addition, the Revenue is entitled to go back 6 years to reclaim the underpaid tax, together with interest and penalties.

Just what will be the outcome of this situation remains to be seen. The Revenue is convinced that it is correct in its approach, whilst a number of taxation experts argue that it will not be successful if challenged. The problem is one of uncertainty. To date the Revenue has apparently raised assessments for underpaid tax on relatively few companies but this might just be the tip of the iceberg. Until a challenge goes to court, we will not have a definite answer.

5. JOINT MORTGAGES

If you are thinking of taking out a joint mortgage with your spouse or partner to secure a loan on your house, be careful to read the wording of your mortgage agreement carefully. There are many such agreements which state that each borrower shall be jointly and severally liable for "other debts and liabilities", although sometimes these are not explained clearly in the agreement.

For example, a couple take out a mortgage with their bank secured on their house. The relationship ends and one of the parties has run up personal debts with the bank without informing the other party and then becomes bankrupt. There is a distinct possibility that the bank will be able to repossess the house from the innocent party despite the fact that he or she has kept up to date with the mortgage repayments. Once the house has been repossessed the proceeds will be used to pay the trustee in bankruptcy of the bankrupt party in relation to the other debts he or she has incurred.

The Mortgage Code states that both parties to a joint mortgage should have the terms and conditions explained to them in plain language and the agreement itself should contain no hidden agenda and should be able to be easily understood by a lay person. This is all well and good in theory, unfortunately it does not always happen this way.

OUR ADVICE:

We are available to advise all our clients when arranging their mortgages. For more information or to arrange a mortgage or re-mortgage, please contact Bruce Harrison.