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Month: October 2024

Making way for E-invoicing

Written by admin on . Posted in VAT. No Comments on Making way for E-invoicing

The government wants businesses to make more use of electronic invoicing to combat VAT fraud and enhance tax collection.

E-invoicing is where invoices are created, sent, received and processed in a digital format, with the e-invoice containing exactly the same information as a traditional invoice.

With more than half of the Organisation for Economic Co-operation and Development (OECD) countries having mandated e-invoicing, the UK is seriously lagging and even still allows paper invoices. The government plans to carry out a consultation, the details of which are scarce.

Benefits of e-invoicing

Even though UK mandation almost certainly remains some way off, you will probably need to use e-invoicing if your business operates internationally. Even if this is not the case, there are still benefits to early adoption:

  • With a standardised and structured format, e-invoices can be processed faster and with fewer errors. Invoices sent to a buyer can be tracked in real time, and the number of invoice rejections and disputes considerably reduced.
  • Duplicate invoices are avoided, and fraudulent activity will be largely prevented since it will not be possible to intercept invoices to change bank details.
  • Invoices, both sent and received, will be processed immediately, so cashflow forecasting will be improved and working capital requirements better managed. Faster payment of invoices received will ensure prompt payment discounts are taken advantage of.

Apart from the more obvious benefits, the relationship between buyer and supplier should improve, leading to higher customer retention and satisfaction.

Implementation of e-invoicing

Based on what has happened in other countries that have adopted e-invoicing, the implementation process can take at least three years. The usual approach is for a phased roll-out, with larger businesses required to comply first.

With mandatory e-invoicing likely for the UK, businesses should start preparing as early as possible. Rather than developing their own e-invoicing solution, many businesses will prefer to work with an e-invoicing service provider. Take care in the selection process to ensure that future e-business needs will be fully met.

Guidance on selecting the right e-invoicing service provider can be found here.

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How to raise £10,000,000,000

Written by admin on . Posted in Budget, Pensions, Retirement. No Comments on How to raise £10,000,000,000

With a ‘black hole’ of £22 billion to fill, there are plenty of groups giving Rachel Reeves advice.

The Fabian Society published a report on taxation on August Bank Holiday Monday. While their main audience is in Scotland, which has its summer bank holiday at the start of August rather than at the end, the timing was unusual. Nevertheless, that was the date chosen by the Fabian Society to release Expensive and Unequal. The case for reforming pension tax (2024).

The Fabian Society is one of the Labour party’s original founders and remains an affiliate to this day. Like several other left-leaning think tanks, post-election what it says has suddenly started to attract more attention. This is especially true on the issue of tax ahead of the Budget on 30 October.

The Society’s pension proposals are wide-ranging, but all of them have appeared before in one form or another. Taken together, the Society suggests that they could raise £10 billion a year. To put that in context, the controversial decision to means-test Winter Fuel Payments will save about £1.5 billion a year in 2025/26.

The most significant element of the proposals is the introduction of a flat rate tax credit to replace income tax relief on pension contributions. This idea was once allegedly considered by George Osborne, the former Conservative chancellor. For example:

  • At present, a higher-rate taxpayer (42% in Scotland, 40% elsewhere in the UK) pays £60 (£58 in Scotland) to add £100 to their pension.
  • Alternatively, the Fabian Society suggests a personal contribution of £75 from net income would receive a £25 government tax credit, bringing the total to £100. This is similar to a Lifetime Individual Savings Account.

Such a reform would benefit most taxpayers, who would see the net cost of their pension contributions drop. It would also reduce the tax benefit given to higher and additional rate taxpayers, who according to the most recent HMRC calculations (for 2022/23) receive just over half of all pension contribution tax relief.

Most of the Fabian Society’s tax-raising ideas were likely already under consideration by the Treasury. Regardless of whether they are included in the Budget on 30 October, they are worth noting if you are contemplating topping up your pension.

Find out more about the Fabian Society’s report here.

Photo by Mark Timberlake on Unsplash

Capital gains tax receipts

Written by admin on . Posted in Budget, Capital Gains Tax. No Comments on Capital gains tax receipts

Raising tax rates is a traditional government strategy to increase tax receipts for HMRC, but this may not be the case for capital gains tax (CGT). This is because taxpayers generally have more control over when gains are realised.

The upcoming Budget at the end of October is widely expected to see a hike in CGT rates. However, recently published data from HMRC suggests that the 4% higher rate reduction from 6 April 2024 (28% down to 24%) on residential property disposals may have helped to increase tax receipts as landlords could be taking a good opportunity to sell up.

For the five months to 31 August 2024, CGT receipts increased by nearly 10% compared to the year before.

Take care to plan ahead

Compared to landlords, those with an investment portfolio have more opportunity for CGT planning since they have considerable flexibility over the timing of disposals. However, there is now somewhat less scope for basic CGT planning with the annual exempt amount cut to just £3,000:

  • With an investment portfolio, disposals can be spread over several years to make use of multiple annual exempt amounts and basic rate tax bands. Couples can also make use of the annual exempt amounts and basic rate tax bands of a spouse or civil partner. Such strategies should be used with care, however, as this type of planning will unravel if CGT rates increase in the future.
  • Making personal pension contributions in the same year as a disposal will increase the basic rate tax band.
  • More sophisticated investors might consider investing in a seed enterprise investment scheme. With 50% income tax relief and CGT exemption on 50% of a reinvested gain, a landlord could currently benefit from total tax relief of 64%. This relief will increase in line with any future uplift of CGT rates. These investments are high risk and advice should be taken before engaging in them.

Longer term, those with a large investment portfolio might be able to avoid any tax liability if they retire overseas. This option does not work for landlords because UK property remains subject to CGT regardless of the owner’s residence status.

HMRC’s guide to capital gains tax (what you pay it on, rates and allowances) can be found here.

Photo by Mathieu Stern on Unsplash

Unclaimed child trust funds

Written by admin on . Posted in High Income Child Benefit Charge, Wealth. No Comments on Unclaimed child trust funds

With around 670,000 child trust fund (CTF) accounts sitting unclaimed by Generation Z adults aged between 18 and 22, HMRC is concerned.

CTFs were opened for every child born between 1 September 2002 and 2 January 2011, with each account started off with a £250 voucher (£500 for low-income families). A similar amount was added for any child who turned seven by 31 July 2010. That means all CTFs hold some money; in fact, each unclaimed account has an average of £2,200.

Given that nearly 30% of CTFs were set up without any parental involvement, it’s no surprise so many account holders are unaware of a CTF’s existence.

Tracing a CTF

A CTF will be held by a bank, building society or other savings provider. The number of providers has shrunk, with some merging and others exiting the market, meaning many CTFs will now have a different provider to when the account was set up. There are two free tracing options for anyone who does not know their CFT provider:

  • HMRC’s tool; or
  • The approved tool from The Share Foundation.

Only a few details are required for either tool, although anyone searching for a CTF provider will need the account holder’s National Insurance number and date of birth.

HMRC are advising account holders to avoid the use of third-party agents who offer to search for missing CTFs. They will always charge for this service, even as much as 25% of the value of the account.

Fund options

Funds remain in the CTF account until the holder reaches 18, with no one else having access. At age 18, the account holder can either:

  • Withdraw the funds; or
  • Transfer the money to an individual savings account (ISA).

If the funds are not immediately required, there are currently some attractive interest rates on offer for two- or three-year fixed rate cash ISAs. ISA charges will normally be lower than those for a CTF, with higher rates of interest available. HMRC’s guide to child trust funds can be found here.

Photo by Liane Metzler on Unsplash

Tips and troncs – what does it mean for your business?

Written by admin on . Posted in Employment Tax, National Insurance Contributions, PAYE. No Comments on Tips and troncs – what does it mean for your business?

Since July, it has been illegal for employers to withhold tips from staff. The payment of tips will probably result in a national insurance contribution (NIC) cost for both employer and employees, but this extra cost can be circumvented if a tronc arrangement is used to distribute tips.

The new legislation applies mainly to those operating in the hospitality sector, and covers all tips, gratuities and service charges. It also brings the law into line with modern payment practices as it covers tips left via card payment.

NICs

Tips paid to employees are subject to both income tax and employee NICs. The NIC cost is at a rate of 8% where tips – when added to normal earnings – fall between £1,048 and £4,189 monthly. Employers pay NICs once a monthly threshold of £758 is reached, although their liability is normally reduced by the annual £5,000 employment allowance.

For example, if a restaurant pays out £25,000 worth of tips, the employer will probably be facing an additional NIC cost of nearly £3,500. The cost for the staff could be up to £2,000. This is where a tronc arrangement comes into play.

Troncs

A tronc is an arrangement used to distribute tips. It is run by a troncmaster.

Provided it is the troncmaster who decides how tips are to be distributed among staff, there are no employee or employer NICs on amounts paid out. It is still possible, however, for the tips to be included on the employer’s payroll.

The troncmaster will typically be a member of staff, although larger businesses might prefer to use the services of a specialist provider. There is no problem if the employer makes the decision on who to appoint as troncmaster; what is important is that the employer plays no part, directly or indirectly, in the allocation of tips.

HMRC’s detailed guidance on tips, gratuities, service charges and troncs can be found here.

Photo by Dan Smedley on Unsplash

Will increased capital gains tax (CGT) mean less tax gets paid?

Written by admin on . Posted in Budget, Capital Gains Tax, Wealth. No Comments on Will increased capital gains tax (CGT) mean less tax gets paid?

Capital gains tax: a minority sport?

The Labour Party’s 2024 manifesto said, ‘We will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.’ The absence of any comment on CGT meant that Rachel Reeves received persistent questions during the election campaign about a possible increase. Unsurprisingly, there was no definitive answer.

At the beginning of August, HMRC published new data about how much CGT had raised. The figures were for 2022/23, when the annual exemption was £12,300 of gains, as opposed to the current £3,000. Nevertheless, they provide some interesting information about who pays how much:

  • Only 348,000 people made enough capital gains to pay the tax. That is about 1% of the number of income taxpayers.
  • The total amount of CGT paid by individuals was £13.63 billion, with trusts accounting for another £0.797 billion.
  • 2,000 taxpayers – less than 1% of all CGT payers (who realised at least £5 million of gains) – paid 41% of all CGT collected from individuals. Another 4,000 taxpayers with gains between £2 million and £5 million paid 16% of the total.
  • There was more tax paid in the previous two tax years. Between 2021/22 and 2022/23 the Exchequer’s receipts fell by 15%.

That final bullet point deserves an explanation, because it is unusual for tax receipts to fall year-on-year, yet alone for two years. In July 2020, the then chancellor Rishi Sunak, commissioned the now-defunct Office of Tax Simplification (OTS) to review CGT. The move prompted speculation that CGT would be increased, a sentiment that was reinforced when the OTS suggested aligning CGT rates with income tax and sharply reducing the annual exemption. The predictable result was a pre-emptive rush to realise gains, boosting CGT payments.

In the event, Mr Sunak ignored the OTS proposals, although subsequently one of his many successors did take up the idea of cutting the annual exemption. As we wait to see what will be in Rachel Reeves’ Budget on 30 October, the story of CGT receipts may have provided her with an interesting lesson: hints of raising the tax are enough in itself to generate extra revenue.

Source HMRC