Regulatory Updates in the UK Taxation

In 2017, HMRC have designed a new plan relative to fiscal policies with the aim to introduce several new tax rules and rates that could have an impact on UK companies and self-employed persons from 2017 onwards.

With regard to this, below a brief summary is provided detailing some of the changes that have been introduced this April.

Flat Rate VAT Scheme

HMRC designed this system for small-sized companies in order to facilitate easier book keeping related to their purchases and sales. The system permits a fixed flat rate to be applied to gross business volume. This Flat Rate is the rate of VAT that businesses are liable to HMRC for, applying different rates to different sectors.

Given that, the system is applicable to small-sized companies, each company must request their inclusion, and will only be included should their VAT volume be less than or equal to £150,000 (before VAT)

In case a company applies for this system and HMRC granted it, instead of reclaiming the VAT applied to purchases, they will retain the difference between Input VAT and the Output VAT liable to HMRC.

From April 2017 on, it is not foreseen an amendment to the tax rate applicable to the rest of the companies. Notwithstanding, the VAT paid by Limited-cost traders will be 16.5% of gross turnover.

Limited-cost traders are those whose VAT, inclusive expenditure on goods, is either

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period;
  • greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

Lastly, professional advice should always be sought, prior to seeking inclusion in the scheme as Flat Rate VAT schemes may not be equally as cost effective for all companies.

Corporation Tax Reduction

From 1st April 2017 on, the corporation general tax rate was reduced to 19%. The not taxed at the general tax rate are known as ring fence companies, and are dedicated to the extraction of and/or production of oil and gas in the UK and UK Continental Shelf.

With a view to promoting inward investment in the UK, and assisting growth and development of business, HMRC plans to maintain corporate tax rate at 19% until 2020, after which, a reduction to 17% is to take place.

Buy to Let Tax Relief

With regard to Buy to Let properties, changes have been introduced from 2017 in the calculation of the tax liability.

The income earned by the owners will remain taxable and must be recorded in their Income Tax Return. Tax is in turn charged in accordance with the owner's income tax band (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate).

Previously, the taxpayer was entitled to deducted certain business expense from the taxable income such us:

  • Interest on buy to let mortgages and other finance charges;
  • Council tax;
  • Insurance;
  • Property repairs and maintenance;
  • Professional fees such as letting agency and management fees.

Due to the new rules individuals, who have a mortgage, can no longer deduct the interests from their pretax income, hence, the individuals tax band could be increased.

After the individual’s income tax has been calculated, those who have a mortgage can apply a 20% tax allowance with respect to mortgage interest before the payment.

No other deductible expenses are affected by this rule change (Council tax, maintenance etc.) and the reduction in mortgage interest allowance will be gradually phased until 6 April 2020 (25% in 2017-18, 50% in 2018-19, 75% in 2019-20, 100% in 2020 and beyond).

Taking into consideration that limited companies with their own properties are currently not affected by the above rule, regarding mortgage interest; individuals are considering that type of company as an effective opportunity to invest. (Property holding companies)

Before transferring the ownership of any property, it is advisable to contact with a tax advisor in order to analyze it, since, for example, transferring assets to a company may result in a significant capital gains tax liability being due to HMRC.

Summary

Taking into consideration the above amendments to the UK tax law, if you or your company are affected by them, you should seek for tax assistance before attempting to wealth restructuring and/or filling your next tax return.

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