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Xero on the Digitisation of Tax

Starting as soon as 2019, UK businesses will have to start transitioning to a digital tax system – where tax is filed online every quarter. It’s a big change all. Here are Xero’s tips to help you prepare.

What does it mean to you?

You will need to use some form of software to keep your VAT records and file your VAT returns.

For other forms of tax, businesses will likely be required to submit their accounts every quarter, so they’ll need to use the services of your firm more often. Some clients may feel it’s a burden. In reality, frequent interactions should be a lot more efficient because there won’t be big backlogs of work to get through.

More frequent submissions will also help your clients avoid nasty surprises. Big tax bills can accumulate over the course of a year but when tax is calculated quarterly, things are far less likely to get out of hand. The new system will also create more opportunities for advisors to help with tax planning.

If your clients choose to use accounting software, they should make sure it has online capabilities. Desktop accounting software hasn’t traditionally been able to submit tax online.

As a bonus, online accounting software also allows you and your client to:

  • access the business’s accounts from anywhere there’s internet
  • create ‘bank feeds’ so transaction data flows straight into the ledger
  • collaborate online by leaving and receiving messages within the software

Online accounting software can also sync with other online services such as POS software, inventory management software, or time-recording apps.

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Paying National Insurance at State Pension Age?

The State Pension age has been increasing since April 2010. The changes will see the State pension age gradually rise to 65 for women between 2010 and 2018, and then to 66, 67 and 68 for both men and women by 2039.

There are now many taxpayers that have reached the State Pension age and continue to work. In most cases they no longer need to pay any National Insurance Contributions (NICs).

At State Pension age, the requirement to pay Class 1 and Class 2 NICs ceases. However, you will remain liable to pay any NICs due to be paid to you before reaching the State Pension age. If you continue working, you need to provide your employer with proof of your age.

Your employer remains liable to pay secondary Class 1 employer NICs. If you would rather not provide proof of age to your employer you can request a letter (known as an age exception certificate) from HMRC confirming, you have reached State Pension age and are no longer required to pay NICs.

Planning note if self-employed

If you are self-employed you will need to pay Class 4 NICs for the remainder of the year in which you reach State Pension age but will be exempt from the following year. We can help you check if you think you may have overpaid NICs and arrange for a refund of any overpaid NICs.

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Tax on property, money and shares you inherit

As a general rule, someone who inherits property, money or shares is not liable to pay tax on the inheritance. This is because any Inheritance Tax (IHT) due should be paid out of the deceased’s estate before any cash or assets are distributed to the heirs. However, the recipient is liable to income tax on any profit earned after the inheritance, such as dividends from shares and to capital gains tax on the increase in value on assets after the date of inheritance.

The main exception is if you received a gift during a person’s lifetime. These lifetime transfers are known as Potentially Exempt Transfers (PETs). These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within 3 years of making the gift, then the IHT position is as if the gift was made on death.

Planning notes

A tapered relief is available if death occurs between three and seven years after the gift is made. There are insurance products such as a seven-year term assurance policy that can be used to reduce the amount of IHT due should the taxpayer pass away within seven years of making a gift.

The situation is more complicated if the person giving the gift does not fully give up control over the assets concerned. A common example is a person giving their house away but continuing to live in it rent-free. Such gifts are known as ‘gifts with a reservation of benefit’. These gifts can remain subject to IHT even if the taxpayer dies more than 7 years later.

A liability to IHT can also arise if an inheritance you receive is placed into a trust and the trust can’t or doesn’t pay any IHT due.

If you have concerns regarding any past gifts or inherited items you may have received, please call for more detailed advice.

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Born before 6 April 1935?

The married couple’s allowance (MCA) is available to elderly married couples or those in a civil partnership where at least one member of the couple were born before 6 April 1935. The allowance provides for tax relief by deducting 10% of the allowance from the amount of tax due on taxable income. The MCA can reduce a tax bill to zero but cannot result in a refund of tax.

For the current tax year, the maximum amount of allowance is £8,445. This means that qualifying claimants can receive a maximum deduction of £844.50 from their income tax bill. The allowance will increase to £8,695 in 2018-19.

The MCA should not be confused with the Marriage Allowance (MA) which came into force on 6 April 2015 and allows lower earning couples (of any age) to share part of their personal tax-free allowance. The MA allows the lower earning partner to transfer up to £1,150 (2017-18) of their personal tax-free allowance to a spouse or civil partner.

Planning note

There is also an allowance, known as the maintenance payments relief (MPR) which reduces a taxpayers’ income tax bill for maintenance payments made to an ex-spouse or civil partner. Again, this relief is only available where at least one of the ex-spouses or partners were born before 6 April 1935. There are certain conditions that must be met in order to claim this relief. For example, that the ex-partner can’t have re-married or formed a new civil partnership. The MPR works in the same way as the MCA with a maximum deduction of 10% of £3,260 i.e. £326 in the current tax year.

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