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Some ‘new’ tax year opportunities

Written by admin on . Posted in Budget, Capital Gains Tax, Employment Tax, self-assessment, Self-Employed. No Comments on Some ‘new’ tax year opportunities

“A bit late in the day, Femi” I hear you thinking. But is it? Some tax planning should happen before the end of the tax year; but the start of a new tax year also presents opportunities. With many people experiencing a drastic change to their circumstances due to the pandemic, it is more important than ever to keep on top of your tax affairs.

If your income is now at a different level than pre-pandemic, you need to re-evaluate any previous tax planning. For example:

  • Child benefit – A claim may now be worthwhile if income is below £60,000. Act soon to benefit from a full claim for 2021/22.
  • Marriage allowance – A claim may now be possible if neither you nor your spouse/civil partner is a higher rate taxpayer. You can claim for 2021/22 or backdate a claim for three years.
  • Working from home – Employees can claim a £26 per month deduction if required to work from home. Claim for 2021/22 or backdate a claim to 2020/21. Although the tax year 2020/21 has ended, some carry backs are possible. Gift Aid donations and SEIS/EIS investments made during the current tax year can all be carried back.

Investments

Savings rates hit record lows last year, and many companies cut their dividend payments. You may also have used up savings to replace lost income. Therefore, make sure you and your partner are making the best use of the savings and dividend allowances, and decide whether any ISA saving is still the best option.

You might also have had to realise investments during 2020/21. If you are now facing a CGT bill, it might be possible to crystallise some capital losses to offset against the gains. This is done by making a negligible value claim for assets that have become virtually worthless.

Tax payments

Some simple procedural checks can make a difference:

  • Employees – Check your PAYE codes for 2021/22. Your allowance might be too low if deductions have increased (such as professional subscriptions) or taxable investment income has fallen.
  • Self-employed – If profits have fallen, you might be able to reduce payments on account. This will reduce the payment coming up in July, as well as obtain a refund from this January’s payment.

A good starting point when reviewing your tax affairs is HMRC’s income tax webpage. This contains many useful links and can be found here.

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HMRC’s April interest rate cut

Written by admin on . Posted in Benefits, Employment Tax, Self-Employed, Tax, VAT. No Comments on HMRC’s April interest rate cut

HMRC’s official rate of interest has been cut from 2.25% to 2% from 6 April 2021. This will affect any directors or employees who have a beneficial loan from their employer, as well as directors who have an overdrawn current account with their company. The official rate is also used in some other tax calculations.

Beneficial loans

Assuming no change to the official rate throughout 2021/22, the cut will reduce the tax payable by a higher rate taxpayer with an employer-provided interest-free loan, of, say, £50,000 from £450 to £400. Alternatively, the director or employee will need to pay interest of £1,000 rather than £1,125 for 2021/22 to avoid the tax charge.

Where an employer-provided loan is cheap rather than interest-free, the benefit charge is based on the difference between the official rate and the amount of interest actually paid. There will be no benefit if:

  • The balance of beneficial loans provided to a director or employee throughout 2021/22 does not exceed £10,000.
  • The loan is for a qualifying purpose, such as buying shares in a close company.

 

Directors should be particularly careful to not let an overdrawn current account go just over £10,000 at any point during the tax year.

Other uses

The official rate is also used in regard to employer-provided living accommodation and pre-owned assets tax (POAT).

  • Living accommodation – There is an additional benefit charge on the excess of the cost of the accommodation over £75,000. For example, if living accommodation cost £250,000, then the additional benefit charge for 2021/22 will be (£250,000 – £75,000) at 2% = £3,500.
  • POAT – There is an income tax charge on certain inheritance tax planning arrangements. Where chattels and intangible assets are concerned, the amount of deemed income subject to tax is the value of the asset multiplied by the official rate.

More detail on beneficial loans from an employer’s perspective can be found here.

 Photo by M. B. M. on Unsplash

Freeport tax incentives

Written by admin on . Posted in Budget, Business Rates, Employment Tax, Tax. No Comments on Freeport tax incentives

Among the development measures the Chancellor announced in the March Budget were eight new freeports in England. These are due to enter operation in late 2021, with each freeport including a defined tax site within which a range of tax incentives and reliefs for businesses will apply. These tax breaks will mostly last for five years.

Discussions are ongoing regarding the creation of freeports in Scotland, Wales and Northern Ireland. Businesses operating within a freeport’s tax site will benefit from several incentives:

  • Enhanced capital allowances – Investment in plant and machinery that is new and unused will qualify for a 100% deduction against profits, regardless of whether the expenditure falls into the main or special rate capital allowances pool. The assets purchased must primarily be for use within the freeport tax site. Relief will be available from when a site is designated until 30 September 2026.
  • 10% rate of structures and buildings allowance – This enhanced rate will mean that investment in non-residential structures and buildings within a freeport tax site will be written off over ten years rather the usual 33⅓-year period. To qualify, the structure or building will have to be brought into use by 30 September 2026.
  • Relief from stamp duty land tax – Land and property purchased in an English freeport tax site and used for a qualifying commercial purpose will benefit from 100% relief, with relief available from designation until 30 September 2026.
  • Business rates relief – Full relief will be available for all new businesses and certain existing businesses where they expand. Relief will apply for five years from the point at which relief is first given.
  • Employer NICs – Still to be confirmed, but the intention is to give full relief from employer NICs for employees working in a freeport tax site. Relief will run from April 2022 (or when a site is designated) to April 2026 but could be extended until April 2031.

The government published a series of questions and answers following the freeport bidding process which can be found here.

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Missing out on tax-free childcare?

Written by admin on . Posted in Benefits, Law, self-assessment, Self-Employed, Tax. No Comments on Missing out on tax-free childcare?

By setting up an online childcare account, you can get a government top-up to help with the costs of childcare. However, thousands are missing out on this payment.

Tax-free childcare is worth up to £500 every three months (£2,000 a year) for each of your children, which doubles if a child has disabilities. Despite the impact of lockdowns, nearly 250,000 families saved money using the scheme in December 2020, an increase of more than 40,000 compared to a year earlier.

How tax-free childcare works

Your child must be aged under 12, with eligibility ceasing on 1 September after their 11th birthday (under 17 if a child has disabilities).

For every £8 you pay into your childcare account, the government will pay £2. These amounts can then be used to pay for approved childcare, such as:

  • childminders, nurseries and nannies;
  • after school clubs and play schemes; and
  • home care agencies.

The childcare provider must also be signed up to the scheme, but there is no other reason why childcare cannot be provided by a relative.

You can only get help paying for care outside of normal school hours, so, for example, private music lessons during school hours don’t count. Money can be saved during term time, earning the government top-up, and then used for summer camps or play schemes during school holidays.

Restrictions

There are certain restrictions on eligibility:

  • Other benefits – You cannot have tax-free childcare and also receive universal credit, tax credits or childcare vouchers, so it is worth checking if tax-free childcare is the right option.
  • Minimum income – Both parents must normally earn at least the national minimum/living wage. However, you may still be entitled if temporarily earning less as a result of Covid-19.
  • Maximum income – Both parents must earn less than £100,000. If previously ineligible, you might now qualify if income has fallen, for example due to being furloughed.

You can check if you’re eligible for tax-free childcare, find out how to apply and how to pay your childcare provider here.

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Brain teaser: should you incorporate?

Written by admin on . Posted in self-assessment, Self-Employed, Tax, VAT. No Comments on Brain teaser: should you incorporate?

The planned increase in corporation tax has changed some of the mathematics on incorporation.

The Budget announced a significant change to corporation tax from 2023:

  • Small companies, with profits of up to £50,000, would continue to pay the tax at the current rate of 19%, subject to adjustments for associated companies and financial periods of other than 12 months.
  • Large companies with profits of over £250,000 will pay corporation tax at a rate of 25%.
  • For companies whose profits fall between £50,000 and £250,000 HMRC have said that there will be “marginal relief provisions”, which have now been set out in the Finance Bill. As under previous corporation tax regimes, the marginal relief is given by applying the lower rate up to the small companies limit and then applying a higher than standard marginal rate to profits above that threshold. With the new rates from 2023, the £200,000 band of profits above £50,000 will suffer a marginal tax rate of 26.5%.

At present, from a tax viewpoint, it can be better to run a business via a company rather than on a self-employed basis. This is mainly because a company will allow the bulk of earnings to be received as dividends, thereby avoiding national insurance contributions (NICs). While this approach will still work for businesses with profits that would attract only the 19% small companies’ rate, it is a different picture for higher profits, as the example below shows.

Higher corporation tax rate bites

Phil’s business generates £100,000 of profit. If he has no other income, the tax situation as self-employed or as a company now and in 2023/24 is:

Self-employed Company 2021/22 Company 2023/24
Gross profit £100,000  £100,000  £100,000
Salary N/A £8,840 £8,840
Taxable profit £100,000 £ 91,160 £ 91,160
Corporation tax (£17,320) (£20,407)
Dividend  £73,840  £70,753
Income tax (£27,432) (£13,211) (£12,207)
NICs (£ 4,816)    
Net income 67,752 £69,469 £67,386

If Phil decides to incorporate, then the tax savings will turn into a tax loss after two years.

The decision on business structure should never be made based on tax alone as there are many other factors involved. However, the deferred tax changes announced in the Budget may tip the scales for some. As ever, advice based on your personal – and business – circumstances is essential.

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Changing tax payments for SMEs

Written by admin on . Posted in Making Tax Digital, MTD, Tax. No Comments on Changing tax payments for SMEs

As making tax digital extends to businesses and landlords from April 2023, the government is considering whether to increase the frequency of tax payments, both for the self-employed and companies.

The recently published consultation is part of the government’s ten-year strategy to build a modern tax administration system.

Current problems

The newly self-employed can go up to 22 months after commencement before their first tax bill, which can lead into debt. A similar problem arises if there is a large increase in profits from one year to the next.

The consultation is only concerned with companies outside the quarterly instalment regime. The normal due date for such companies to pay their corporation tax is nine months and one day following the accounting period end, so again a significant time lag. It is all too easy for funds to have been spent if a year of high profits is followed by one with much lower income.

Spreading payments

One option likely to be available soon is an improvement to HMRC’s budget payment plan, making it easier for taxpayers to voluntarily budget for future tax payments.

The consultation considers a move to quarterly or even monthly tax payments and points out that the majority of taxpayers already pay monthly or weekly under PAYE. However, a move to quarterly or monthly tax payments will mean more time spent on calculation and reporting, increasing the administrative burden on SMEs. More frequent tax payment also throws up other issues:

  • The funds available to a business in-year will be reduced.
  • The chosen frequency may not be appropriate for different trades or sectors.
  • Income tax and corporation tax are designed to be calculated on an annual basis, with reliefs, allowances, adjustments, and certain deductions factored in at the year-end.

The closing date on the call for evidence on the consultation is 31 July.

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Shaping the future for business rates

Written by admin on . Posted in Business Rates. No Comments on Shaping the future for business rates

A comprehensive review of business rates is underway in England. The government recently published an interim report, with the final report delayed until autumn. One definite change coming is the closing of a loophole that has allowed people to avoid rates on holiday lets.

The current economic uncertainty has seen the government extending full relief through to the end of June for eligible retail, hospitality and leisure properties in England, as well as freezing the business rates multiplier in 2021/22. From 1 July 2021 to 31 March 2022 the rate falls to 66% in England. The governments of Scotland, Wales and Northern Ireland have extended business rate relief for twelve months. However, many high-street businesses want a more permanent overhaul to business rates to help them cope with the competition coming from online retailers.

Interim findings

The initial consultation, published as part of ‘Tax Day’ on 23 March, found the idea of replacing business rates with a capital value tax is not popular. Responses instead focused on improvements to the current system. For example:

  • Reliefs and exemptions are too complicated.
  • Small business rates relief can be a deterrent to expansion.
  • Empty property rates unfairly penalise landlords.
  • The current system, based around the business rates multiplier, is too inflexible and unresponsive to economic fluctuations.

A common view expressed by respondents is that the complexity of reliefs and the high overall burden create an incentive to attempt avoidance.

Holiday let loophole

Owners of holiday lets and second homes in England have been able to avoid council tax by registering their properties as businesses and therefore subject to business rates. In the vast majority of cases, small business rates relief then means no business rates are payable.

Business registration has been possible if a property was available to let for 140 days or more in a year. This is open to abuse when little or no realistic effort is made by landlords to attract lettings. New legislation will change the criteria so a property must actually be let out for 140 days to receive relief, somewhat stricter than the 105-day furnished holiday letting condition.

The interim report was published alongside a call for evidence, open until 31 October, and both can be found here.

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“Hear it Not, Duncan……..

Written by admin on . Posted in Employment Law, Employment Tax, IR35, Tax. No Comments on “Hear it Not, Duncan……..

….for it is knell that summons thee to heaven or to hell.”

I know: not quite the cheerful entry to a blog, however, those immortal words from my favourite Shakespeare play: uttered by Macbeth on his way to his dastardly deed, the murder of King Duncan, seems an appropriate proclamation to make regarding the introduction in less than a fortnight, of the new Off Payroll rules.

The cause of much debate, the controversial rules will see a marked change in the approach adopted by both business and HM Revenue and Customs, and not wanting to add to the massive body of arguments published and circulated to date, I thought I’d merely summarise the new rules for those who’ve recently arrived from Pluto (is it or isn’t it a planet: I forget!?), so here goes:

From 6 April 2021, any medium or large-sized organisation engaging a worker operating through an intermediary will be responsible for determining the worker’s employment status. This status must then be communicated to the worker and to any party contracted with for the supply of the worker, such as an agency.

Although the client (the medium or large-sized organisation) is responsible for determining employment status, it is the fee-payer who will have to operate PAYE if the determination means the worker falls within the off-payroll working (IR35) rules. The fee-payer, as the name implies, is the organisation paying the intermediary, and will often be different to the client. The intermediary will typically be a personal service company, but could also be a partnership, LLP, a managed service company or even an individual.

Status determination statement

Regardless of the outcome of the status determination, the client must provide a status determination statement (SDS) confirming the conclusion and the reasons behind it.

If there is a labour supply chain involved, the SDS must be passed down each stage of the chain until it reaches the fee-payer. This is extremely important, because if an agency receives the SDS but then doesn’t pass it on down the supply chain, the agency will be treated as the fee-payer, with responsibility for deducting taxes and paying them over to HMRC. The same for the client, who will be treated as the fee-payer until the SDS is carried out and communicated.

There are other situations where the client can end up being treated as the fee-payer:

  • Failure to take reasonable care when making a determination; and
  • Failure to respond within 45 days to a disagreement regarding a determination.

The issue of status will have to be re-checked if the working practices of the engagement change or a new contract is negotiated with a worker.

HMRC’s guidance to off-payroll working for clients changes in April 2021. Details, along with several useful links, can be found here.

So, as we march towards the end of the current tax year and into the change to current IR35 arrangements, it remains to be seen whether or not Macbeth’s knell will apply to the critical and valuable contribution made by Personal Service Companies to the UK economy.

As for me, it’s Friday, so “I go and it is done” – this piece that is!

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The Clock’s Ticking: Covid VAT deferral – new payment scheme

Written by admin on . Posted in COVID-19, Tax, VAT. No Comments on The Clock’s Ticking: Covid VAT deferral – new payment scheme

Businesses that deferred VAT payments due between 20 March and 30 June 2020, and cannot afford to pay by 31 March 2021, have the option of joining a new scheme allowing them to pay the deferred VAT over a longer period. The VAT deferral new payment scheme opened on 23 February and will close on 21 June 2021.

The scheme lets a business pay any outstanding deferred VAT in equal instalments without incurring interest or penalties. The number of instalments can be between two and 11, depending on when a business joins the scheme.

Instalment options

To benefit from the maximum 11 instalments, a business needs to join the scheme by 19 March 2021. For later joining dates:

Join by Maximum instalments
21 April 10
19 May 9
21 June 8

 

Of course, fewer instalments than the maximum can be selected. The first instalment is payable at the time of joining, with a direct debit set up required for subsequent payments. All instalments must be paid by 31 March 2022.

How to join

A business has to opt in to the new scheme. This is done using the business’ Government Gateway account, and one will need to be created if not already set up. Before joining, a business must:

  • Be up to date with its VAT returns;
  • Correct errors on VAT returns as soon as possible;
  • Make sure they know how much VAT was originally deferred, and how much is still outstanding;
  • Decide on the number of instalments to pay; and
  • Be able to make the first instalment.

 

Because of the direct debit requirement, the new scheme cannot be set up by an agent. If a business is unable to use the online service or pay by direct debit, then they should contact the COVID-19 helpline on 0800 024 1222. The starting point to join the VAT deferral payment scheme can be found here.

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Businesses prepare for long term tax hike

Written by admin on . Posted in Budget, COVID-19, Tax. No Comments on Businesses prepare for long term tax hike

The 3 March Budget provided an immediate sweetener for businesses in the form of a temporary extension to carry back of trading losses, plus, for companies only, a temporary super-deduction for investment in plant and machinery. However, in two years’ time, the main rate of corporation tax will rise to 25%.

Trading losses

The period over which businesses can carry back trading losses has been extended from one year to three years:

  • For the self-employed, a maximum £2 million of trading losses made in either 2020/21 or 2021/22 can be set against trading profits of the three previous tax years.
  • For companies, carry back against total profits is extended to 36 months for loss making accounting periods ending between 1 April 2020 and 31 March 2022. The £2 million cap applies to claims beyond the normal 12-month carry back.

Super-deduction

From 1 April 2021 to 31 March 2023, companies investing in qualifying plant and machinery will benefit from a 130% super-deduction. This means that for every £10,000 spent, there will be a £13,000 deduction against profits, saving corporation tax of £2,470. Currently, the tax saving would be just £1,900 within the annual investment allowance. The super-deduction is for those assets that would normally qualify for the 18% writing down allowance. However, only expenditure on new plant and machinery qualifies; motor cars are also excluded.

There is also a 50% first-year allowance for expenditure falling into the special rate pool, but this is less generous than the 100% annual investment allowance.

Corporation tax

From 1 April 2023, there will be two rates:

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

 

Where profits are between the lower and upper limits, a marginal taper will apply so that the rate of tax is gradually increased from 19% to 25%. However, this means the rate on this band of profits will be an even more punitive 26.5%.

Some examples of how the temporary loss relief extension will apply for both the self-employed and for companies can be found here.

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