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Second Tax Day brings change and consultation

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The second ever Tax Administration and Maintenance Day (Tax Day) took place on 27 April, with the government publishing a range of technical proposals and consultations.

The Tax Day announcements were grouped around simplification and modernisation of the tax system, tackling the tax gap and general policy and administrative issues. A total of 23 technical tax updates were published, although only a few of them will be directly relevant to the average taxpayer.

Definite changes

National insurance credits: Some parents will not have received credits if they have not been claiming child benefit, mainly because of the impact of the High Income Child Benefit Charge. This affects future entitlement to the state pension, so the government is going to correct the problem on a retrospective basis.

Repayment agents: Some businesses specialising in making repayment claims from HMRC have been criticised due to the speculative nature of claims being made. From 2 August 2023, repayment agents must be registered with HMRC.

Consultations

A range of consultations were also announced on Tax Day, including:

  • How the Help to Save scheme might be simplified. The scheme, which offers a 50% government bonus for low-income savers, is set to run in its current form until April 2025. The government wants to encourage take-up in the target group.
  • Non-compliance with the off-payroll working rules can result in tax and national insurance contributions being paid twice on the same income – by the deemed employer and also by the personal service company. The government is looking at a potential change so that the tax paid by the personal service company can be set off against the duplicate liability payable by the deemed employer.
  • Umbrella companies are coming under further scrutiny, with initial replies to a 2021 consultation to be published shortly, alongside calls for options for additional regulation to tackle non-compliance.
  • Even though the Construction Industry Scheme has been reformed several times since its inception, some further changes are being considered. In particular, VAT could be added to the list of taxes to be taken into account when deciding whether a company qualifies for gross payment status.

A summary of the Tax Day announcements, along with links to the related consultations, can be found here.

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Pay attention to tax codes

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Most directors and employees will already have been issued a tax code for the 2023/24 tax year, and it is important to check the figures as a very large proportion of codes will be incorrect. If you’ve been subject to an error, this could mean a future corrective tax bill.

Common errors

A tax code will typically take into account allowances, allowable expenses, taxable benefits (those not payrolled) and untaxed income, so there is plenty of scope for error.

  • Allowances: The code can often assume the incorrect level of income when it comes to the amount of available personal allowance.
  • Allowable expenses: Deductions for subscriptions and professional fees will be based on what was claimed previously, yet these will invariably increase annually.
  • Taxable benefits: For most benefits, HMRC will be unaware of any changes from the previous year.
  • Untaxed income: Figures for bank and building society interest can be too high where, for example, an account has been closed.


Emergency codes

A particular problem can be the use of an emergency code. These can be applied if there is a change in circumstances, such as:

  • A new job;
  • Taking on an additional part-time job; or
  • Starting employment after being self-employed.

The emergency code is used because HMRC will often not receive the employee’s income details in time after the change. Although use of the code is temporary, it can cause a cashflow problem for the employee.

Those starting a new job should give the new employer their P45 as soon as possible. Those moving from self-employment should complete the starter checklist.

Checking and correcting codes

The easiest way a person can check and correct a tax code is by logging onto their personal tax account using their Government Gateway user ID and password. HMRC can be notified of any changes that affect the tax code, and employer details can be updated.

The starting point for checking or correcting a 2023/24 tax code can be found here.

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HMRC sets its sights on hidden electronic sales

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It wasn’t that long ago that HMRC was paying particular attention to businesses understating large cash sales. Now, the decline of cash, especially since Covid-19, has led to a proliferation of software used to suppress electronic sales records.

An electronic sales suppression (ESS) tool manipulates electronic sales records to hide individual transactions, whilst producing a credible audit trail. For example, only one out of every four sales might be recorded, resulting in lower reported turnover.

Penalties, taxes and interest

A penalty can be charged for simply being in possession of an ESS tool, regardless of whether it is actually used to suppress sales. Possession doesn’t just mean owning an ESS tool, as it also includes having access to, or even trying to access, an ESS tool.

For possession of an ESS tool, the initial penalty can be up to £1,000. A penalty of up to £75 a day will then be charged if possession or access to the ESS tool continues. The daily penalty is subject to a £50,000 maximum.

  • HMRC takes a much harsher approach if a similar penalty has already been charged.
  • The initial penalty will not be charged if – within 30 days of receiving the penalty notice ­– a taxpayer can satisfy HMRC that they are no longer in possession of the ESS tool.
  • Similarly, the daily penalty ceases once HMRC is satisfied the taxpayer is no longer in possession of the ESS tool.

And of course, any VAT, income tax or corporation tax avoided will be payable, along with the appropriate interest and penalties.

Typically, card payments for missing sales are routed through an offshore bank account, so it will be difficult to argue such sales suppression is not deliberate and concealed.

Clearly any software designed to facilitate the under reporting of sales is essentially a tax evasion tool as well and should always be avoided.

HMRC guidance on ESS can be found here.

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

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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

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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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Cohabitation law reforms rejected

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The government has rejected proposals to modernise cohabitation laws in England and Wales, leaving it up to individuals to arrange their financial affairs for partners and dependents.

In August, the House of Commons Women and Equalities Committee published The rights of cohabiting partners for England and Wales (Scotland and Northern Ireland have their own laws). Amidst all the other political excitement of that month, the report received little coverage.

The lack of media attention was a pity, as the Committee made some important recommendations about a significant proportion of the population – the one in five couples who have chosen cohabitation rather than marriage or civil partnership. The report noted that “Whereas married couples and civil partners have certain legal rights and responsibilities upon divorce or death, cohabitants receive, in general, inferior protections”. This fact is compounded by what the report called the “common law marriage myth” – the erroneous belief that after a certain amount of time of living together, the law treats cohabitants as if they were married.

The report made six recommendations for action, only one of which was accepted in full by the government. The following three proposals were rejected outright:

  • Family Law should be reformed to better protect cohabiting couples and their children from financial hardship in the event of separation. A potential structure for such reform was proposed by the Law Commission in 2007, which having ignored for so long the government now says is too old to be implemented without a review or fresh consultation.
  • The intestacy rules should be immediately redrawn to recognise cohabitation. The Committee again supported ideas put forward by the Law Commission (this time from 2011). The government’s rejection of any intestacy reform was largely predicated on the notion that cohabiting couples could make wills to deal with their estates.
  • The inheritance tax regime should be the same for cohabiting partners as it currently is for married couples and civil partners. This was rejected by the Treasury – the responsible government department – which said it “has no plans at present to extend the longstanding treatment of spouses and civil partners to cohabiting partners.”

If you are cohabiting, the government’s message is clear: make your own legal and financial arrangements – and don’t believe that common law marriage myth.

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Tackling rising employment costs

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The 9.7% uplift to the National Living Wage from April 2023 should be welcome news for lower-paid workers, but could present problems if their employer simply cannot afford the increased cost of employing them.

The cost of living crisis is impacting many businesses, especially those in the hospitality sector. Some will cope with rising employment costs by reducing their headcount, but others may have no choice but to close up shop. Small businesses owned by self-employed people are likely to be hit particularly hard.

On top of this, the freezing of the employer national insurance contribution (NIC) threshold until April 2028 will also mean an increased NIC cost for many businesses.

Wage increase

The National Living Wage is paid to employees aged 23 and over, with similar percentage increases to the rates payable to younger employees. The percentage increase for 21- to 22-year-olds at 10.9% is even higher.

  • For each full-time worker aged 23 and over, the increase will see employers having to pay nearly £2,000 more a year in gross salary, with pension, holiday pay and NIC costs on top.
  • There will probably be a knock-on effect higher up the pay scale, with other employees looking for an equivalent salary boost.

Some employers might be tempted to try and cut their wage bill by turning to ‘self-employed’ workers. However, employment status is not simply a matter of choice, and incorrect categorisation can have serious implications.

NIC threshold

The employer threshold is to be frozen at its current level of £9,100, although the annual employment allowance of £5,000 will shield smaller employers (with just two or three employees) from the impact of this decision.

Larger employers will see a stealthy increase to their NIC cost as wages increase, but the starting threshold for NIC remains unchanged.

The minimum wage rates from April 2023 can be found here.

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The effects of fiscal drag on your tax position

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Fiscal drag is the stealthy way in which governments pull more and more taxpayers into higher tax brackets without the backlash that comes with increased tax rates. This is something taxpayers can probably live with when inflation is negligible, but it’s another matter entirely with inflation at over 11%.

Inheritance tax

One of the starkest examples of fiscal drag is the freezing of the inheritance tax (IHT) nil rate band that has been set at £325,000 since April 2009. Combined with soaring property prices, it is no surprise the government’s IHT receipts have nearly doubled in the ten years to 2021/22, with current year receipts set to see a further significant increase.

The nil rate band had previously been frozen at £325,000 until 2026, but the Autumn Statement has now extended the freeze until 2028.

IHT bills can sometimes be mitigated with careful lifetime planning, although people should be careful not to leave themselves short of funds later in life.

Income tax thresholds

The personal allowance (£12,570) and the basic rate tax threshold (£37,700) are unchanged since 2021/22, and, like the IHT nil rate band, are now set to remain frozen until 2028. Other thresholds are subject to fiscal drag because the government simply ignores them from year to year.

  • The £100,000 income limit at which the personal allowance starts to be withdrawn is unchanged since withdrawal was introduced in 2010. Personal allowance withdrawal leads to a 60% marginal tax rate, and an estimated one million more taxpayers could be caught if nothing changes over the next five years.
  • The High Income Child Benefit Charge income limit of £50,000 is unchanged since the charge was introduced in 2013. Around one in five families are now affected by the limit, compared to one in eight when the charge was first introduced.

To mitigate the impact of these frozen thresholds, some income tax planning may be possible for spouses and civil partners. Pension contributions can also reduce the amount of income counting towards the various income limits.

Details of income tax rates and personal allowances for the current tax year can be found here.

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Dividends vs remuneration: the corporation tax quandary

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For owner-managed companies, bonuses, dividends and remuneration will become yet more complex in the new tax year.

With the corporation tax increase and dividend rates now confirmed by the Government, the dividend vs remuneration decision for owner-managed companies is likely to become more complicated in 2023/24, particularly when it comes to bonuses.

Historically, it was preferable to extract company profits through dividends rather than through director’s remuneration. This is because of the national insurance contribution (NIC) cost attached to remuneration.

However, from 1 April 2023, there will be a substantial increase to the rate of corporation tax once profits hit £50,000. On profits between £50,000 and £250,000 the rate will be 26.5%, with the 19% rate only available for the first £50,000 of profits.

The bonus decision

The tax position will differ in each case, but let’s take a situation where a higher rate taxpayer wants to take a bonus of £40,000 from their company, which is in the 26.5% corporation tax bracket. The director has already used their tax free dividend allowance.

Dividend
After allowing for corporation tax, a dividend of £29,400 can be taken. Income tax on this will be £9,923, so the net income is £19,477.

Remuneration
After allowing for employer NICs (assuming the rate does not increase next year), the gross remuneration would be £35,149. After income tax and employee NICs are applied, the net income is £20,386.

In this case, remuneration is the beneficial option (and would be better still if some or all of the employment allowance was available). Without the corporation tax increase, the situation would have been reversed.

Of course, the situation could change if the Government decides to reinstate the additional 1.25% percentage points to NIC rates (albeit, in this particular example, the remuneration option would still be marginally better).

Other factors to consider

There are several other advantages to paying remuneration rather than dividends to consider too:

  • Dividends must be paid to all shareholders.
  • A dividend has to be covered by a company’s profits.
  • Dividends do not always count as income when applying for a mortgage.

As these examples illustrate, the corporation tax landscape has become more complicated. Although a Government guide clarifies things somewhat, it’s always best to seek professional advice rather than risk losing valuable income.

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The rise of mini umbrella company fraud

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The rise of mini umbrella company fraud continues to concern HRMC which has recently updated its guidance for businesses that either place or use temporary labour. Mini umbrella companies can be used to abuse the VAT flat rate scheme and the national insurance contribution (NIC) employment allowance.

The VAT flat rate scheme can only be used if a business’s turnover is no more than £150,000, and the NIC employment allowance covers the first £5,000 of employer NIC liability each tax year.

Fraud

Mini umbrella company fraud is where multiple limited companies are created, with only a small number of temporary workers employed by each one.

Businesses should be aware of the potential dangers in their labour supply chain – apart from the impact on reputation, the business’s workers may end up receiving less than they are entitled to.

Workers are often unaware of the arrangements, may not even know who their employer is, and might be regularly moved around between different mini umbrella companies. The use of the mini umbrella company model can mean the loss of some employment rights.

Warning signs

Mini umbrella companies will normally be low down in the supply chain, so it can be challenging to spot them. Warning signs include:

  • Unusual company names: The companies are often set up around the same time and given a similar or unusual name.
  • Unrelated business activity: The business activity listed at Companies House may not relate to the services provided by the worker.
  • Foreign national directors: Foreign nationals – who have no previous experience in the UK labour supply industry – are often listed as directors.
  • Movement of workers: Employees are moved frequently between different mini umbrella companies.
  • Short-lived businesses: Mini umbrella companies typically have a relatively short lifespan – often less than 18 months – before being dissolved by Companies House for not meeting filing obligations.

HMRC’s updated guidance on mini umbrella company fraud can be found here.

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