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Annual inflation in 2022 was 10.5%, but not all components rose by double digits.

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Annual inflation, as measured by the Consumer Prices Index (CPI), was 10.5% in 2022 against 5.4% in 2021. The official CPI calculator, the Office for National Statistics (ONS), says that the last time inflation was as high was in 1981. But what drove the inflation indices to four-decade highs last year? As is often the case, a simple economic question does not lead to a straightforward answer.

The hierarchy graph above offers a visual response:

  • The ONS CPI inflation ‘basket’ contains 12 categories, each with different weights (see figures in brackets) based on typical household expenditure. In 2022, the second largest category of spending, Housing, water, electricity, gas and other fuels, recorded an increase of 26.6%. Unsurprisingly, the star performer was gas prices, which rose 128.9% across 2022. That alone was worth a 1.8% rise in the CPI. Electricity prices jumped by 65.4%, adding another 1.3% to the CPI.
  • The next largest contributor to inflation, with a slightly smaller weighting in the basket, was Food and non-alcoholic beverages, which rose by 16.8% over the year. The ONS says this category’s annual inflation has increased for 17 consecutive months (from -0.6% in July 2021) and is now at 1977 levels. It accounted for 1.95% of CPI inflation.
  • In 2022, the category with the largest weighting in the CPI basket, Transport, played a less significant role in terms of overall inflation (0.9% on the CPI) than it did last year. Over the year, the category’s inflation was 6.5%. In June, annual transport inflation was nearly 15%, driven by the rise in petrol and diesel prices. As these fell back, so too did the transport inflation rate.
  • The category with the lowest inflation (2.0%) was also the one with the second lowest basket weighting – Communications – so did little to counter the sharp rises elsewhere.

The two main causes of 2022 inflation – food and gas prices – help to explain why inflation is expected to drop sharply in 2023. Both rose in response to the war in Ukraine and as that is now a year ago, prices should start to stabilise – indeed wholesale gas prices have fallen from their peaks.

The consensus is for the annual CPI number to end the year around 5%, less than half of 2022’s level but still enough to mean any long-term financial plans need to build in the value-eroding effects of inflation.

Source: ONS.

21st century Revenue – HMRC’s app and new texting service

Written by admin on . Posted in Income Tax, Making Tax Digital, self-assessment. No Comments on 21st century Revenue – HMRC’s app and new texting service

HMRC’s app was launched a year ago and is gaining in popularity as it is being used to pay self-assessment tax bills. A more recent HMRC innovation is a new service for texting replies to taxpayers who make contact by mobile phone.

Using the app

The HMRC app can be downloaded from either the App Store (Apple devices) or the Google Play Store (Android devices). It is then just a matter of:

  • Following the instructions to complete the app settings; and
  • Signing in using your Government Gateway (only required for first-time use).

In addition to paying self-assessment tax bills, the HMRC app can be used to claim a refund if too much tax has been paid. Other uses include:

  • Tax credits: Changes can be reported, and the annual renewal completed. The app shows the amount of tax credit payments and when they will be made.
  • References: You can check your tax code and easily find your national insurance (NI) number and unique taxpayer reference (UTR).
  • Update: You can let HMRC know if you change address.
  • Tax details: You can get an estimate of tax payable and use HMRC’s tax calculator to work out take-home pay after income tax and national insurance contributions.

Despite some negative reviews, the HMRC app currently has a 4.5 rating on the App Store, and a 4.7 rating on the Google Play Store.

New texting service

Only launched 19 January, HMRC is trialling the sending of text messages to taxpayers who call their helplines about a routine matter that could be better resolved using HMRC’s digital services.

Although some callers will be given the choice of holding for an adviser, other calls will be automatically disconnected after a message explaining a text message has been sent. The message might point towards information on the gov.uk website, which can help with the enquiry, or to the webchat service.

The HMRC app can be found here for Apple users and here for Android users.

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Tax warnings for online sellers, influencers and content creators

Written by admin on . Posted in Income Tax, self-assessment, Self-Employed. No Comments on Tax warnings for online sellers, influencers and content creators

HMRC’s latest wave of ‘nudge letters’ ­– used to prompt a response from the recipient – has been targeted at online sellers, influencers and content creators warning them that they may not have paid enough tax.

It is likely HMRC has obtained information from various online platforms and is using this as the basis for the nudge exercise. The wide range of recipients illustrates the scope of HMRC’s data analytics capabilities, as they have managed to identify people running blogs or social media accounts that include sponsorship.

Although any profit from online activity is taxable, there is an exemption if annual gross trading income does not exceed £1,000.

Certificate of tax position

Any online seller who receives a nudge letter is asked to complete a certificate of tax position within 30 days.

If the seller has undeclared income, HMRC recommends making a voluntary disclosure using its online Digital Disclosure Facility. Once HMRC is informed of the intended disclosure, they will send an acknowledgement letter. Outstanding tax must be paid within 90 days from the date of this letter.

If the seller does not need to inform HMRC of any additional income, they either have to declare that all income from online marketplace sales has been correctly declared or explain the reason why income need not be declared. This could be because of the de minimis £1,000 exemption, or if income is less than the personal allowance of £12,570.

Tax position alternatives

Unlike the self-assessment tax return, there is no legal requirement to complete and return the certificate of tax position. However, non-completion will inevitably attract more attention from HMRC.

If an online seller’s tax affairs are not straightforward, it will probably be better to respond by letter instead. A more detailed explanation of the seller’s tax affairs can then be given. Professional tax advice, is, of course, essential.

A step-by-step guide for any online sellers, influencers and content creators who need to set themselves up as self-employed can be found here.

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Profit withdrawal changes for 2023/24

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Owner-managers have historically benefited by withdrawing profits by way of dividends, rather than taking director’s remuneration, due to the national insurance contribution (NIC) saving. However, tax changes taking effect from April 2023 will mean this approach may no longer be such an attractive option.

From 1 April 2023, the current 19% rate of corporation tax will only be available for the first £50,000 of profits. On profits between £50,000 and £250,000, the effective rate will be 26.5%, with 25% payable thereafter. As far as personal tax is concerned for 2023/24:

  • The tax-free dividend allowance will be cut from £2,000 to £1,000; and
  • Dividend tax rates are not reduced by 1.25% in line with the reduction to NIC rates.


Case study

The profit withdrawal decision will differ from owner-manager to owner-manager, but let’s take the situation where company profits are forecast to be £150,000 for the year ended 31 March 2024 and the owner-manager wants to withdraw £50,000 either as dividends or director’s remuneration (this will be their only income). The company does not have any other employees.

  • Dividend: After allowing for corporation tax, a dividend of £36,750 can be taken. Income tax on this will be £2,028, so net of tax income is £34,722.
  • Remuneration: After allowing for employer NICs, gross remuneration of £45,040 will be paid. After income tax and employee NICs, the net of tax income is £34,650.

There is virtually no difference between the two options. However, the remuneration option would be better if some or all of the £5,000 employment allowance was available to set against employer NICs. At higher levels of income, dividends have the advantage – for example, some £1,793 more in net of tax income for a £100,000 withdrawal – but again, the availability of the employment allowance could swing this around.

The employment allowance is not available if a director is the sole employee. This can be rectified by employing a family member and paying them at least £9,100 a year. The salary must of course be justified.

Forecast

Directors who want to take regular monthly or quarterly dividend payments will need a fairly accurate forecast of company profits. This might be difficult, but directors – assuming they have sufficient funds to live on – have the option of waiting until towards the end of the tax year before deciding on a profit withdrawal strategy, as the tax position will not change.

Higher Scottish rates of income tax mean the remuneration option is more expensive for Scottish taxpayers. It is assumed that rates of NIC will remain unchanged for 2023/24.

Tax rates and allowances for 2023/24, along with some useful tax calculators, can be found here. Scottish income tax information can be found here.

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New energy bill support scheme for businesses

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A new business energy support scheme is set to run from 1 April 2023 to 31 March 2024 but will be less generous than the scheme currently in effect. Businesses with energy costs below £107/MWh for gas and £302/MWh for electricity will not receive any support.

The current scheme runs until 31 March 2023 and is based on fixed prices. The new scheme will instead provide a discount on wholesale prices.

The new discount

Businesses will receive a unit discount of up to £6.97/MWh unit discount on gas bills, with a discount of up to £19.61MWh on electricity bills. The discounts only apply above a threshold level of £107/MWh for gas and £302/MWh for electricity.

  • At first glance that might not seem too bad, but energy billing is in kWh. When converted ­– two pence off a kWh of electricity and just over half a penny for gas – the reduction can be seen as much less generous.
  • Many smaller firms are struggling to pay energy bills even with existing support. For a typical retail store, the total reduction over the 12 months under the new scheme will be just £400.
  • As for the current scheme, the discount will not be available to businesses on existing fixed-price contracts agreed prior to 1 December 2021.

Although businesses do not need to take any action or apply for the new scheme, they should be aware of how the changes from 1 April 2023 will impact their cash flow forecasts.

Energy and trade-intensive businesses

A higher level of support will be provided to businesses in sectors identified as being the most energy and trade intensive. Similar to the current scheme, the discount for these businesses will reflect the difference between government-supported prices and wholesale prices.

Businesses may need to register for this additional support.

A full list of eligible energy and trade-intensive sectors can be found here.

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Company cars: not-so-free fuel

Written by admin on . Posted in benefit-in-Kind, Company Car Tax, Employment Tax, self-assessment. No Comments on Company cars: not-so-free fuel

If your employer pays for the fuel in your company car, it may cost you more than you expected.

As the Autumn Statement was not a Budget, detailed publications that would normally emerge as the Chancellor sat down have taken time to appear. For example, the HMRC projections of how many more capital gains tax (CGT) payers there would be because of the much-reduced annual exemption (another 570,000 by 2024/25) did not appear until the Monday after the Autumn Statement, missing the weekend personal finance pages.

One even later arrival – three weeks after the Autumn Statement – was an HMRC bulletin on the fuel benefit charge for company cars in 2023/24. For some years the basis has been an increase in line with September annual CPI inflation (published in mid-October), so there was no explicit reason for HMRC’s procrastination. The number that was eventually revealed was the current figure, increased by 10.1%, as had been expected.

Taxable value for 2023/24

That means for 2023/24 if you have ‘free’ fuel, its taxable value will be assessed by multiplying £27,800 by your car’s percentage scale charge. For example, if you have a petrol-engine car with CO2 emissions of 130–134 g/km, your scale charge is 31% and £8,618 (£27,800 x 31%) will be added to your income for tax purposes. In terms of hard cash, that is an extra £3,447 going to the Exchequer if you are a 40% taxpayer.

At this point you are probably wondering how far £3,447 of petrol would take you. Assume a price of £1.60 a litre and 40 miles a gallon and the answer is about 19,000 miles. In 2019, before the pandemic disrupted travel, the average car covered 7,400 miles a year. If that figure still applies – and it is probably less because of increased working from home – then the ‘free’ fuel break-even point is more than 250% of typical use.

Not all benefits are so harshly taxed – electric cars can be an attractive option – but the large cost of ‘free’ fuel is a reminder that when it comes to anything financial, ‘free’ is a word to be treated with great caution.

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Tax implications for the bank of mum and dad

Written by admin on . Posted in Capital Gains Tax, Property, SDLT, Stamp Duty. No Comments on Tax implications for the bank of mum and dad

With property prices expected to fall during 2023, parents may be thinking about getting their children onto the property ladder. However, although help with a deposit does not raise that many tax issues, joint ownership can have expensive tax consequences.

Nearly half of first-time property buyers aged under 35 have received help from the bank of mum and dad. However the following implications should be considered alongside generous intentions.

Help with a deposit

  • Outright gift: This will be treated as a gift for inheritance tax (IHT) purposes. There is no immediate tax cost, but it could mean more IHT is payable if the parent subsequently dies within seven years.
  • Loan: An interest-free loan arrangement avoids any IHT implications, but it could impact on mortgage affordability calculations.


Stamp duty

Joint ownership is likely to mean upfront stamp duty consequences.

  • In England and Northern Ireland, first-time buyers can benefit from a nil-rate threshold of £425,000, saving a potential £8,750 compared to a normal purchaser. However, with joint ownership, all purchasers need to be first-time buyers to qualify for relief; parents are unlikely to qualify.
  • There is a similar, although much lower, relief for Scottish first-time buyers.
  • Furthermore, the inclusion of parents will probably mean that the stamp duty surcharge on second homes is payable. For property in England and Northern Ireland, this is 3%, with higher surcharges for Scottish and Welsh property.

The surcharge can mean an extra cost of £9,480 for a property purchase in England at the latest published average price (October 2022) of £316,000.

Capital gains tax (CGT)

CGT exemption on property disposal only applies if a property has been the seller’s main residence, and this again is unlikely to be the case for a joint owning parent. The tax charge will probably be mainly, or wholly, at 28%. The future reduction of the CGT annual exemption to just £3,000 will not help.

A useful guide on helping a child buy their first home can be found here.

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Making Tax Digital delayed once more

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With the self-employed and landlords facing a challenging economic environment, the government has again delayed the introduction of the Making Tax Digital (MTD) scheme for income tax self-assessment (ITSA) – this time by two years until April 2026.

Although the introduction of MTD ITSA prompted the basis period reform, no corresponding postponement for this has been announced. The tax year 2023/24 is therefore still the transitional year.

Income reporting threshold

Along with the two-year delay, the minimum income reporting threshold has also been raised.

  • Rather than an income threshold of £10,000, MTD ITSA will now initially only be mandated – from April 2026 ­– for a self-employed individual or landlord who has income of more than £50,000.
  • Those with income between £30,000 and £50,000 will join a year later from April 2027.
  • The government will review the needs of smaller businesses – particularly those with income under the £30,000 threshold – before making further decisions.

Given the low level of awareness of the MTD reporting requirements, the entry point U-turn will be widely welcomed, especially by landlords for whom MTD will have few benefits. Previously, the introduction of MTD ITSA was going to impact on some four million taxpayers, but only 700,000 will now be involved from April 2026, with a further 900,000 included a year later.

Partnerships and companies

General partnerships (those with only individuals) were previously set to start reporting under MTD ITSA from April 2025.

  • With the revised timetable, there is no set mandation date for general partnerships.
  • Non-general partnerships (such as those with a corporate partner) and limited liability partnerships were previously excluded from the MTD timeline, and this remains the case.

A self-employed individual who wishes to avoid MTD reporting requirements can easily (at least initially) do so by converting to a partnership with the addition of a spouse, partner or other family member as a partner.

The government announcement makes no mention of MTD for corporation tax, so this is unlikely to be introduced any time soon.

Information for those who wish to voluntarily sign up for MTD ITSA before 6 April 2026 can be found here.

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Associated company rules changing 1 April

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Small company owners should by now be aware of the corporation tax changes taking effect from 1 April 2023, but with the associated company rules being introduced at the same time, don’t be caught off guard.

From 1 April 2023, there will be two rates of corporation tax:

  • A small profits rate of 19% where profits are below £50,000; and
  • A main rate of 25% where profits exceed £250,000.

Where profits are between £50,000 and £250,000, marginal relief applies so that the rate of tax is gradually increased from 19% to 25%. The effective tax rate on this band of profits is 26.5% ­– slightly higher still if a company receives dividend income.

Impact of associated companies

The profit thresholds are divided between associated companies. For example, if two companies are associated, they will respectively only benefit from the 19% tax rate on profits up to £25,000. This means each company pays around £1,875 more in corporation tax each year than if the full £50,000 limit had been available.

  • Overall, this may make little difference if both companies have profits in excess of £25,000 – the full £50,000 limit being utilised – but it will if one company has minimal profits.
  • Should this be the case, business owners may wish to consider running just the one company.


Meaning of associated

The basic rule is that companies are associated if they are under common control – this means a shareholding of more than 50%. For example, two companies are associated if two people both have 30% shareholdings in each company.

  • Companies only associated for part of an accounting period count as associated companies for the whole of that period.
  • Overseas resident companies can be included.
  • Dormant companies (not carrying on a trade or business) do not count as associated companies.

Determining whether or not a company is associated can get quite complex because shareholdings of associates can, in certain circumstances, be included.

The associated company rules almost certainly prevent the hiving off of profits to another company controlled by a spouse or civil partner in order to benefit from two £50,000 limits.

A detailed explanation of the associated company rules can be found here.

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High Income Child Benefit Charge: penalties and defaults

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New data reveals that penalties issued by HMRC for not paying the High-Income Child Benefit Charge (HICBC), or paying the incorrect amount, have fallen significantly. However, the number of individuals still in default is estimated at more than 60,000.

If the HICBC is payable, an individual is required to submit a self-assessment tax return each year even if all of their income is taxed through PAYE.

  • Such individuals are unlikely to receive professional advice, so there is a lack of awareness.
  • Salary increases can lead to someone becoming subject to the charge, especially as the income limit has remained at £50,000 since the charge was introduced.

Complications

The HICBC can apply if either partner has income over £50,000. The definition of a partnership for this purpose includes people living together.

The charge falls on the partner with the higher income, and in many cases, one partner will not know what the other partner’s income is, especially if they have separated.

Although child benefit is normally paid to the person the child is living with, it is possible for the other partner to make the claim if they are contributing at least as much as the amount of the child benefit towards the child’s upkeep.

Moving in or out

Where a partner (B) moves in or out (with partner A) the position is:

  • Partner B moves in: Partner A could become liable to the HICBC, but only from when partner B moved in. Partner B will take over partner A’s HICBC if they have the higher income.
  • Partner B moves out: If partner A has the higher income, they will only be liable for the HICBC up to the date partner B moves out.

Self-assessment

Given the 31 January deadline for filing the 2021/22 tax return, individuals should urgently review their situation to ensure any HICBC is correctly declared. This is also the deadline for amending the 2020/21 return without the need to write to HMRC.

Failure to pay the HICBC, or paying the incorrect amount, will mean backdated assessments, often for considerable sums, plus, if no reasonable excuse, late notification penalties.

HMRC’s basic guide to the HICBC can be found here.

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