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The next step for Making Tax Digital

Written by admin on . Posted in Making Tax Digital, MTD. No Comments on The next step for Making Tax Digital

Making Tax Digital (MTD) for VAT has been in place for three years, but this first phase excluded voluntarily registered businesses beneath the registration threshold. From 1 April 2022, all VAT-registered businesses must implement MTD regardless of turnover.

The vast majority of businesses registered voluntarily under the scheme will have done so because they can recover input VAT without suffering any, or much, in the way of output VAT   – typically where customers are VAT registered or sales are zero-rated. Most new entrants will therefore not be using the flat rate scheme and will have to keep full digital records.

There are limited exceptions from MTD, but voluntarily registered businesses can simply deregister if the amount of VAT recovered doesn’t warrant the time and/or cost involved with MTD compliance.

Signing up

Those businesses now coming into the scope of MTD must use it for their first VAT return starting on or after 1 April 2022. There could therefore be quite a delay if submitting returns annually. For example, with an annual accounting period to 31 December, MTD will not need to be used until the year beginning 1 January 2023.

Businesses need to sign up for MTD, but this should be done only after the final non-MTD return has been submitted. If paying by direct debit, sign up needs to be at least a week before the first MTD return is due.

Software

Compatible software has to be in place for the start of the first MTD VAT return period. The easiest option will be if records are currently kept on a spreadsheet. Free bridging software can then be used to pick up relevant details and submit VAT returns to HMRC. Bridging software is necessary because any transfer of data must be done using a digital link; cutting and pasting is not a digital link.

Even if full VAT record-keeping software is required, there are some free versions available.

Smaller businesses will invariably be wary of change, but MTD should improve accuracy. HMRC figures show that for 2019/20, a reduction in errors brought in some £195 million in extra VAT revenue.

Details of MTD software that has been through HMRC’s recognition process can be found here.

 

NICs boost for the self-employed

Written by admin on . Posted in National Insurance Contributions, self-assessment, Self-Employed. No Comments on NICs boost for the self-employed

Prior to the March Spring Statement, most self-employed individuals were facing increased national insurance contribution (NIC) bills this year. However, those with profits up to and just over £28,000 will now see a fall in the amount they pay compared to last year. What’s more, low earners can benefit from deemed contributions.

Class 4 NICs

The introduction of the 1.25% health and social care levy from 6 April put up the rates of profit-related class 4 NICs to 10.25% and 3.25%. However, the rate increase has been mitigated by a substantial uplift to the starting threshold. It was going to be set at £9,880 but will now be £11,908 across the 2022/23 tax year. For 2023/24, the threshold will be fully aligned with the income tax personal allowance of £12,570.

Although the freezing of the upper threshold at £50,270 is pushing more people into higher rate income tax, it is actually beneficial for NIC purposes. Extra profits are subject to NICs at 3.25% instead of 10.25%.

Class 2 NICs

The threshold at which fixed-rate class 2 NICs become payable was due to increase from £6,515 to £6,725. However, this threshold has also now been set at £11,908, and will be aligned with the personal allowance for 2023/24.

The £6,725 threshold has not, however, been discarded. In a big change for class 2 NICs, self-employed people with profits between £6,725 and £11,908 for 2022/23 are deemed to have made contributions without actually having to pay them. They will therefore continue to build up their contribution record. This is particularly important for State pension purposes where 35 qualifying years are required to obtain the maximum.

The deemed contribution threshold might mean a useful tax planning opportunity. For example, if profits for 2022/23 are set to be £12,000, spending £200 on, say, a new telephone before the year end will avoid the cost of class 2 NICs, and also save some income tax and class 4 NICs.

Overall impact

The table shows the overall impact of the Spring Statement changes at different profit levels:

Profit 2021/22 2022/23 (Original) 2022/23 (Now)
£10,000 £197 £176 Nil
£15,000 £647 £689 £481
£20,000 £1,097 £1,201 £923
£30,000 £1,997 £2,226 £2,018

The Spring Statement factsheet explaining the changes can be found here.

Protecting the normal minimum pension age

Written by admin on . Posted in Pensioners, Pensions. No Comments on Protecting the normal minimum pension age

The normal minimum pension age (NMPA) will increase from 55 to 57 on 6 April 2028, although a protected pension age regime will be introduced. This will allow those who meet the rules to take benefits based on their existing normal minimum pension age.

Protected pension age

Protection will apply to members of registered pension schemes who before 4 November 2021 had the right to take their pension entitlement earlier than 57.

  • There will be no need to apply to HMRC for protected pension age.
  • The regime will apply to all types of UK-registered pension scheme.
  • A person with protected pension age will be able to take benefits in stages without losing protection.
  • Moving jobs, a change of pension scheme, making a transfer to a new scheme or taking benefits could all have an impact on the NMPA that will apply.

The age was previously increased from 50 to 55 in 2010, and anyone who has protected pension age from that transition will see no change when the threshold increases to 57.

No protected pension age

The impact of the higher NMPA will depend on when a person was born:

Born before 7 April 1971 Will be 57 by 6 April 2028, so not affected by the change.
Born between 7 April 1971 and 5 April 1973 Will be 55 by 5 April 2028, so not affected if pension benefits fully taken by then. However, if a person still has benefits to take at 6 April 2028, they will have to wait until 57 before the remaining benefits can be taken.
Born on or after 6 April 1973 Will not be 55 by 5 April 2028, so will have an NMPA of 57.

The new protected pension age regime is wide-ranging and complex, providing both opportunities and risks. Professional advice is therefore essential.

HMRC’s policy paper on increasing normal minimum pension age can be found here.

Photo by Alan Billyeald on Unsplash

 

 

What is a ‘reasonable excuse’ for tax penalties?

Written by admin on . Posted in Capital Gains Tax, COVID-19, Income Tax, self-assessment, Self-Employed. No Comments on What is a ‘reasonable excuse’ for tax penalties?

Having a reasonable excuse can be a get-out-of-jail-free card if you are charged a tax penalty. However, there is no statutory definition of the term, and what might constitute a reasonable excuse for one person may not for another. With more individuals and businesses incurring tax penalties due to Covid-related disruptions, HMRC has recently updated its guidance.

The use of a reasonable excuse only removes the penalty – it does not absolve the taxpayer from the tax or any late-payment interest.

Covid-related disruptions

HMRC will usually accept the use of a reasonable excuse for a return or late payment because of the impact of Covid-19. As is always the case with reasonable excuse, the excuse must have existed on or before the date on which the obligation should have been met.

It is also essential that the failure to meet the conditions is rectified without unreasonable delay once the reasonable excuse ends.

For example, if a business is late submitting its quarterly VAT return because the person responsible had to isolate – this should be accepted as reasonable excuse provided the return is submitted as soon as possible after the person returns to work.

What doesn’t count

HMRC’s updated guidance provides some examples of what will not usually amount to a reasonable excuse:

  • Pressure of work;
  • Lack of information; and
  • Lack of a reminder from HMRC.

Lack of funds and reliance on a third party also do not normally count, although there are exceptions. For example, the First-Tier Tribunal held that a taxpayer had a reasonable excuse for the late payment of a capital gains tax liability because the sale proceeds had not been received.

Illness

Illness and domestic problems do not count as valid excuses unless very serious. HMRC expects suitable arrangements to be put in place if a person knows in advance that they will be in hospital or convalescing.

Similarly, the illness of a partner or a close relative will only be accepted as an excuse if the situation took up a great deal of time and resources.

HMRC guidance on what to do if you disagree with a tax decision – including reasonable excuse – can be found here.

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Keeping it in the family – tax saving salary strategies

Written by admin on . Posted in Employment Tax, Income Tax, Law, PAYE, Self-Employed. No Comments on Keeping it in the family – tax saving salary strategies

An easy way to reduce a business’s tax bill – and also increase the amount of funds withdrawn from the business – is to put a family member on the payroll. Of course, the salary must be for genuine work (emphasis on this point!!), with any tax saving dependent on the overall tax position.

Such salary arrangements are most beneficial if they are in place from the start of a tax year, so right now is a good time to be looking at 2022/23.

When does this work?

Paying a salary to a spouse, partner or child at university makes sense if the recipient is not using their personal allowance. A tax-free salary can be paid, with the business or company receiving a corresponding deduction in calculating their trading profit. For a sole trader, the saving could be as high as 63.25% if caught in the personal allowance tax trap.

However, there will also be a saving if the recipient is using their personal allowance but has a lower marginal tax rate than their self-employed spouse, partner or parent. With a company, there is currently no advantage to taking a salary in this situation, but there will be from April 2023 when higher corporate tax rates come into effect.

One important point to remember is that the salary must actually be paid out for the work, so it should be payrolled and transferred into the family member’s personal bank account.

How much to pay?

There are two main restrictions:

  • The amount of salary must be commensurate with the work done; HMRC will refuse a tax deduction if no work or little work is undertaken. Work will obviously depend on the recipient’s skill set, but bookkeeping, payroll, marketing, or website maintenance might be options; and

 

  • Keeping the national insurance contribution (NIC) cost to a minimum. With employee and employer NICs set to be 13.25% and 15.05% respectively from April, these can easily wipe out any tax saving. An annual salary for 2022/23 of between £6,396 and £9,880 will mean no employee NICs and will also give the recipient a year’s contribution towards the State pension. Paying up to the annual personal allowance of £12,570 can work if employer NICs are covered by the employment allowance.

HMRC’s approach to allowing a deduction for salary paid to dependents and close relatives can be found here.

A caveat to anyone interested in this article’s content: do make sure you seek professional advice before embarking on this strategy, as getting it wrong could have severe consequences for you and/or your business.

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The patchwork effect of rising inflation

Written by admin on . Posted in Uncategorized. No Comments on The patchwork effect of rising inflation

2021 ended with inflation sitting at 5.4%, but it may not have felt like that to you. 

You may have caught the food campaigner Jack Monroe on TV and radio interviews recently highlighting how the uneven effects of inflation on the most basic foodstuffs can have a disproportionate effect on lower income groups. Her intervention has prompted the ONS to look beyond the average in more detail at ‘individual inflation rates’.

Annual CPI inflation in the UK for 2021 was 5.4%, a sharp increase from a year earlier, when it was just 0.6%. The jump, which took the inflation measure to its highest level in almost 30 years, was by no means unique to the UK. Across 2021, in the US, inflation rose from 1.4% to 7.0% while in the Eurozone the change was from –0.3% to +5.0%.

Sectors

Whether inflation felt like 5.4% to you is another matter. The hierarchy chart above shows how the dozen price categories that make up the CPI contributed to that headline inflation figure. The standout sector, accounting for nearly a third of overall inflation, was transport. Drill down into that and you will find three sub-sectors with annual inflation exceeding 25%: fuel and lubricants; second-hand cars and air flights. If you did not buy a second-hand car and did not fly in 2021 – as many people did not – then two of those three passed you by.

The second largest inflation driver was what might be described as the home sector – housing, water, electricity, gas and other fuels. It was those last three that were the main problem, with household fuel bills rising by 22.7%. If you were lucky enough to have a fixed-term contract for your utilities – and your supplier survived 2021 – then again, the change recorded by the CPI statisticians would have been irrelevant to you. On the other hand, if your bargain fixed-term deal (or its supplier) ended in 2021, then your utility bills might have risen much more than implied by the CPI.

Each to their own

The lesson to learn from all this data is that inflation as measured by the CPI is unlikely to be the inflation that you experience. Your mix of spending probably does not match the CPI ‘shopping basket’ and will change over your lifetime. For example, in retirement, expenditure on commuting will generally disappear but outlays on recreation activities may well increase.

Your financial planning should always take account of inflation. The unexpected jump in 2021 could mean that it needs to be reviewed – either based on the CPI or your personal circumstances.

Source: Office for National Statistics.

Business rates loophole on second homes closing

Written by admin on . Posted in Business Rates. No Comments on Business rates loophole on second homes closing

Owners of holiday lets and second homes in England have been able to avoid council tax by registering their properties as businesses. However, from April 2023, small business rates relief will only be available if a property is let out for a minimum of 70 days a year. If you let out a second home, you may want to start planning now.

In the vast majority of cases, registering a property as a business has meant that small business rates relief is available, meaning no business rates are payable. Business registration has been possible for properties available to let for 140 days or more in a year, even if little or no realistic effort is made to attract lettings.

Changes from 1 April 2023

To benefit from business rates after next April, owners will have to:

  • Prove that a property is available as self-catering accommodation for 140 days a year, with this test met for the coming year and also the previous year; and
  • Actually rent out the property as self-catering accommodation for a minimum of 70 days a year.

It will be necessary for property owners to provide evidence, such as the website or brochure used to advertise the property, letting details and receipts.

Wales already applies similar criteria, with Scotland making changes from April 2022.

For the purpose of accounting for those 70 days, both council and business rates look at the property’s status at the end of a day. For example, if a property is let from Friday evening to Sunday morning, it is treated as let for two days using the occupancy for the Friday and Saturday nights.

New lets

There are no special rules being introduced for newly available lets, so a new let will be liable to council tax until the property has been available for 140 days and actually rented out for 70 days. Business rates will not be available until both criteria are met, subject to the property being advertised as self-catering accommodation for 140 days in the coming year.

The government’s press release on closing the tax loophole on second homes can be found here.

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Focus on tax year-end planning

Written by admin on . Posted in Benefits, Capital Gains Tax, Inheritance Tax, Pensions. No Comments on Focus on tax year-end planning

With Christmas and New Year behind us, tax year-end planning should now be on your radar.

The 2021/22 tax year will end on Tuesday 5 April. This year there is no Spring Budget and Easter arrives on 15 April, so no obstacles stand in the way of year-end tax planning. Nevertheless, the sooner you start the better, as some decisions cannot be made quickly. There are some key areas to consider.

Pensions

Making pension contributions is one of the few ways that you can receive full income tax relief and reduce your taxable income. The second benefit matters in a world where your level of taxable income can determine whether you suffer the High Income Child Benefit tax charge or retain entitlement to a full personal allowance. The end of the tax year is a good time to assess how much you can contribute as you should have a good idea of your income for the year.

Inheritance tax

Now that we know the Chancellor does not have any plans for major reform of inheritance tax (IHT), there is a stable framework on which to plan. As ever, first on the list to consider is use of your annual exemptions, such as the £3,000 annual gifts exemption. With the nil rate bands currently frozen until April 2026, it is more important than ever not to let these go to waste.

Capital gains tax

As with IHT, the Chancellor has recently clarified his plans for capital gains tax (CGT). The annual exemption, which currently allows you to realise CGT-free gains of up to £12,300 each tax year, will not be slashed, nor will the tax rates be raised to income tax levels. That has simplified the year-end planning process, as there is now no point in realising gains above your annual exemption in case there would be more tax to pay in the near future.

If you think your personal finances could benefit from year-end planning, do not wait until the last moment to seek advice from a professional. Calculations will often need data that can take time to collect, particularly on the pensions front.

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Sick pay rebate returns to help relieve pressure on businesses

Written by admin on . Posted in Employment Tax, PAYE, Sick Pay, Tax. No Comments on Sick pay rebate returns to help relieve pressure on businesses

The Statutory Sick Pay Rebate Scheme (SSPRS), which ended on 30 September 2021, was reintroduced from 21 December 2021, with employers able to make retrospective claims from mid-January. The scheme’s return is in response to heightened levels of staff sickness due to the Covid-19 Omicron variant.

Statutory sick pay is not normally recoverable, but the SSPRS means that small and medium-sized businesses can reclaim SSP paid to employees affected by Covid-19.

What is covered?

The SSPRS only covers Covid-related absences (someone who has symptoms, is self-isolating or is shielding) for up to two weeks of SSP for each employee. The rate of SSP is currently £96.35 a week.

The two-week limit has, however, been reset, so an employer can make a fresh claim of up to two weeks regardless of whether a claim was made under the previous scheme. More than one claim can be made for an employee, subject to the two-week maximum.

There are no details indicating when the SSPRS will end, although the government will keep the scheme under review.

Qualifying employers

The most important condition is that the SSPRS is only available to employers with fewer than 250 employees. This test must be met on 30 November 2021. The employer must also:

  • Be UK based;
  • Have a PAYE payroll system that started on or before 30 November 2021; and
  • Have already paid the employee’s Covid-related sick pay.

To make a claim, an employer will need the Government Gateway login used when they registered for PAYE Online.

Record-keeping

Employers must retain records of any SSP they have claimed back under the SSPRS for three years from the date repayment is received.

The records should include the reason an employee said they were off work due to Covid-19.  Employees are now able to temporarily self-certify absences for 28 days, rather than the usual first seven days only.

Further guidance and the starting point for making a claim under the SSPRS can be found here.

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Debt evading directors face new Insolvency Service powers

Written by admin on . Posted in Company Director, Director Disqualification, Insolvency. No Comments on Debt evading directors face new Insolvency Service powers

Directors who abuse the company dissolution process in order to evade debts, including the repayment of government-backed Covid-19 business loans, will be subject to stronger powers given to the Insolvency Service.

These new powers were included in the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act enacted on 15 December last year. Previously, the Insolvency Service could only investigate directors of companies entering insolvency but can now also look at directors of dissolved companies.

Phoenixism

Complaints regarding dissolved companies often relate to new companies that have taken over the business of the dissolved company. The new company will invariably have the same directors, take over assets – such as vehicles – but with creditors left unpaid. In some cases, this happens multiple times.

Sanctions

If misconduct is found, a director of a dissolved company can be disqualified as a company director for up to 15 years. In more serious cases, the director could be prosecuted.

It is also possible for a court order to be made requiring a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour. This aspect applies retrospectively, so former directors can be held liable to creditors despite the fraudulent conduct taking place prior to the Act’s commencement.

Business rates

Along with the changes aimed at former directors, the Act has a business rates aspect. The Act makes it clear that Covid-related changes cannot be used as grounds for a business rates appeal on the basis of “material change of circumstances”.

Businesses that have seen their operations severely curtailed as a result of Covid-19 restrictions will likely be disapproving of this response; they are expected to keep paying business rates on the basis of rateable values set in a different world before the current Coronavirus pandemic.

The only consolation is the £1.5 billion provided for business rates relief to sectors that have suffered the most economically but are not eligible for existing support.

The government’s original press release for the Bill and more detailed information can be found here.

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