It’s unkind that HM Revenue and Customs (HMRC) should pick July and January as the dates when self-employed people must pay their tax. One date blights plans for the summer, the other coincides with the arrival of bills to pay for Christmas. Missing these dates, however, means penalties and interest charges.
As the January date approaches it’s probably too late to take steps to alter the amount of tax due. But with the threshold rising for when tax and national insurance become payable, it’s important in family farm situations that all possible is done to minimise the tax liability of the household.
A typical situation is that of a sole trader, with the tax due falling on the individual. Here it’s important that a spouse is paid up to the level of the basic personal allowance, currently just under £9,500. This is the amount anyone can earn before they pay tax or NIC. If children are working on the farm or in any part of the business they can also be paid up to that amount. This will reduce the tax liability of the business, cutting the overall tax bill.
For the 2014-15 tax year, beginning in April, the personal allowance rises to £10,000. For payment to family members you must have proof that it’s for specific work done. That can be on an hourly basis for specific tasks or projects, or could be a set amount for specific tasks, for example doing the accounts and paperwork.
To minimise challenges if your accounts are inspected it’s better if this money is paid monthly, and payments must be shown to have moved from one bank account to another. Ideally it should also be paid at regular intervals, as wages would be, rather than in a lump sum. The approach should be based around being able to prove to the HMRC that the payment was a legitimate business expense.
Although the threshold where tax and NIC begin has been pushed up under the current government, the point where tax is paid at 40% has been pulled steadily downwards. The figure for the current tax year is just over £32,000, but that will drop to £31,866 next year. This is described officially as higher rate tax, but it’s no longer tied to a high income. It’s therefore worth trying to minimise this by using up personal allowances and sharing income to minimise the amount taxed at higher rates.
With limited companies the position is more complicated. In the past dividends could be used to minimise tax liabilities, but this is increasingly being challenged by HMRC. The Arctic Systems case involving a husband and wife and the use of dividends in a company they owned was thought to have settled this, when it was eventually lost by the Revenue in the House of Lords. But HMRC is taking a very narrow interpretation of that ruling and is challenging dividend payments unless it can be proved they’re in return for actual work done, rather than a way to minimise tax liabilities.
This is a complex area – but even in a limited company the same approach of paying a salary below the personal allowance and minimising the proportion taxed at 40% still holds true.
This isn’t tax evasion, but taking legal steps to minimise tax liabilities.