Month: February 2023

Do I need an accountant?

Why you need to hire a qualified accountant to handle your affairs

Tax rules are complex and handling tax matters can be a stressful experience.

Few reasons for hiring a qualified accountant:

  • A qualified practicing accountant has number of years of experience before starting his own practice.
  • He/she will know about many reliefs and rules available on various income and gains, lowering your tax bills.
  • If a mistake happens after taking advise from a qualified accountant, HMRC considers it an error after taking reasonable care, resulting in lower penalties
  • A qualified accountant will also ensure all tax calculations and procedures are properly followed.
  • A qualified accountant can take an independent view of the matter, as both tax payer and HMRC’s judgement can be skewed by their incentives.
  • A qualified agent is a good emotional barrier between you and HMRC.

Why you should hire us ?

Our commitments to you

  • We will provide information in a clear and understandable way.
  • We abide by the Golden Rule – we will treat you as we wish to be treated.
  • We will provide a high level of service.
  • We will endeavour to make our service flexible to meet your needs.

What we ask of you

  • We request you to be mindful of our time as that is our `Stock in trade`.
  • We request you to be forthright and succinct in your communication with us.

How to change name, address, telephone number or email address with HMRC

HMRC calls these `designatory details`

For Agent see Link Agent Update 105

For Client see the same link, scroll down a bit and read,
Updating your client’s designatory details
re PAYE – guidance says to call HMRC but this seems incorrect, as changing address on Companies House website automatically updates PAYE records on HMRC website.

How to compute and maximize Double Taxation Relief aka Foreign Tax Credit Relief on overseas income and gains

How to calculate Double Taxation Relief (DTR). Excel example where tax payer has more than one source of overseas income.

There is a relief available called Foreign Tax Credit Relief (DTR) basic guidance given in Helpsheet 263

DTR given is lower of:
a – Overseas tax suffered ; or
b – UK tax on overseas income.

a – Overseas tax figure is taken from Tax Deducted certificates client provides, but it is restricted by the ‘treaty rate’ as per DTAA which is 15% (in case of India). This means in case a client earns £5,000 and tax is deducted off him at 20% say £1,000, he can only put the figure as £750 (15%) for overseas tax suffered.

He needs to approach Indian Tax authorities to get a refund of remaining tax.

b – UK tax on overseas income.

I have enumerated the steps to calculate this figure from ICAEW textbook below.

Step 1: Calculate the tax (before DTR) including all sources of income. Say £A

Step 2: Calculate tax but exclude overseas income, Say £B

Step 3: Deduct £A – £B. This is UK tax on overseas income.

Once DTR is determined we need to put it in box 2 of form SA 106 to ensure correct tax liability is calculated.

Example: Tax year 2018-19

Miss Amrita Sher-Gill (in case she is still alive!) lives in the UK and earns employment income of £30,000 and has interest income of £5,000 from India on which £1,000 tax has been taken off @ 20%.

Step 1:  Tax £4,430
Step 2:  Tax £3,630

Step 3: Tax on overseas income £4,430-£3,630 = £800

Compare:
a – Overseas tax taken off £1,000 but maximum allowed 15% : £5,000 x 15% = £750.
b – UK tax on overseas income £800.

DTR lower of a and b that is £750.

Calculation of DTR if overseas income is from more than one source

Please note in case taxpayer has more than one source of income say interest income and rental income, DTR is calculated on a source by source basis, to ensure tax deducted at source of one income is not utilized against another income.

DTR – Excel example more than one source of overseas income

More examples in ICAEW Tax text book Chapter 15 (simple examples) and Tolley Tax Computations Chapter 8 (complex examples).

Points to remember to maximize DTR relief and minimize tax bill

  • Overseas income – In case of more than one source of overseas income , income suffering the highest rate of overseas tax should be excluded first.
  • Overseas gains – Annual exemption allowance and basic rate band should be set off first against UK gains.

Deduction relief

Lastly, there is another method claiming relief by directly deducting the tax suffered from Income earned and pay tax on the remaining in the UK.

Using the above example Amrita can just add £5000 minus £1000 = £4000 as interest income to her tax return and pay tax on it. See example 5 in Help sheet 263.

 Note:

Tax payer is free to choose whichever method is most beneficial to them.

 Which exchange rate should be used to convert the income from foreign currency income to GBP?

If the sums involved are material, take the exchange rate for the day on which the interest is credited in client’s bank account, if sums are not material then go for average rates.

HMRC publishes exchange rates, see link

Bonus:
1. Where a claim for foreign tax credit is made for a state whose fiscal year is different from that of the UK, we should apportion the overseas income and the foreign tax to arrive at the amounts falling into the UK reporting year. INTM161220. This will not be applicable for India as it’s fiscal year closely corresponds to UK. Other countries could follow different fiscal year.  Wikipedia has a very good chart illustrating it.