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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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Don’t forget to include Covid-19 payments on self-assessment returns

Written by admin on . Posted in COVID-19, Income Tax, self-assessment. No Comments on Don’t forget to include Covid-19 payments on self-assessment returns

With the 2021 self-assessment tax return deadline on 31 January, HMRC has been busy reminding taxpayers to declare any Covid-19 grant payments they might have received. This is the first year they need to be included.

Most self-employed taxpayers will have received Self-Employment Income Support Scheme (SEISS) grants during the Covid-19 pandemic, and now must include the following related grants and payments in their tax returns:

  • Business support grants (from local authorities or devolved administrations);
  • Furlough payments;
  • Eat Out to Help Out;
  • Coronavirus statutory sick pay (SSP) rebates; and
  • Test and trace/self-isolation payments.

All grants are taxable.

Reporting

There is a separate entry on the self-assessment tax return to report SEISS grants. All other grants and payments should be shown in the “any other business income” box.

The tax-return process is a bit more complicated for partnerships; other grants and payments go on to the partnership tax return, with each partner’s respective SEISS grants included on their personal returns.

If you have already submitted your 2021 tax return and omitted any Covid-19 grants or payments, then amend the return as soon as possible.

Which SEISS grants?

The first three SEISS grants should be included in your tax return, with the fourth and fifth grants not due to be reported until next year. The payment windows for these three grants were:

Grant Payment window
First 13 May to 13 July 2020
Second 17 August to 19 October 2020
Third 29 November 2020 to 29 January 2021

If you cannot pay

If you are unable to pay your self-assessment tax bill in full by 31 January, you can use HMRC’s self-serve time to pay facility. This online payment plan lets a taxpayer create a bespoke monthly payment plan based on how much tax is owed and the length of time needed to pay.

The facility can only be used if the tax owed does not exceed £30,000, the 2021 tax return has already been filed, you are within 60 days of the 31 January payment deadline and the debt will be paid off within 12 months.

On owing tax that does not exceed £30,000, HMRC recently outlined that taxpayers will no longer be liable for late penalties if bills are paid in full, or set up a Time to Pay arrangement, by 1 April. In the same announcement, HMRC said taxpayers who cannot file their return by the 31 January deadline will not receive a late filing penalty if they file online by 28 February.

You will need to call the self-assessment helpline should you owe more than £30,000 or need longer to pay.

HMRC guidance on reporting Covid-19 grants and payments can be found here.

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Universal Credit eligibility expands to higher rate taxpayers

Written by admin on . Posted in COVID-19, Income Tax, self-assessment, Self-Employed, Tax. No Comments on Universal Credit eligibility expands to higher rate taxpayers

Autumn Budget reforms have created a surprising clash of benefits and income tax.

The Covid-19 pandemic was the first time many people utilised Universal Credit (UC) for the first time – between February and May 2020, the number of households claiming UC rose by 1.7 million to 4.2 million. In March 2020, the UC standard allowance was temporarily increased by the equivalent of £1,000 a year, but in October 2021, that extra payment came to an end. In its place, the Budget contained announcements of two UC improvements that are now in effect:

  • All working elements were increased by £500 a year, meaning that an extra £500 of net income can be earned before any clawback of UC started; and
  • The rate of clawback was reduced from 63% to 55%. As a result, if an extra £100 of net income is received and this leads to a reduction in UC payments, the loss of UC will be £55 rather than the previous £63.

So what?

The Institute for Fiscal Studies (IFS) has looked at this question and produced a surprising answer. The lower taper rate, applying to a higher starting point, now means that it is possible for higher rate taxpayers to be eligible for UC, a situation that once only applied in Scotland, where the higher rate threshold is £6,608 lower than in the rest of the UK.

One example the IFS gave is that a single earner couple with two children and monthly rent of £750 could have earnings of up to £58,900 a year in 2020/21 before losing all their UC entitlement – £9,600 more than before the Budget announcement. Not only is that ceiling well into the higher rate tax band, it is also above the £50,000 level at which the notorious High Income Child Benefit Tax Charge begins to take effect.

There are many assumptions underlying that IFS calculation, not the least of which is that the couple are not disqualified from any UC entitlement by having savings of above £16,000. In practice, the IFS calculates that 26% of all families will be entitled to UC, a proportion that rises to 84% for lone parents.

The interaction of the tapering of UC, higher rate tax and child benefit tax is complex. If you think you might be caught by that trio, make sure you understand the ramifications – you might find an extra £100 of gross earnings are worth less than £10 net.

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Cryptoassets tax confusion

Written by admin on . Posted in Capital Gains Tax, Cryptocurrency, Income Tax, Tax, Wealth. No Comments on Cryptoassets tax confusion

HMRC is sending letters to taxpayers who they believe hold cryptoassets, advising them of the potential capital gains tax (CGT) implications and linking to relevant guidance. Many taxpayers will be unaware that simply exchanging one type of token for another is a disposal for CGT purposes.

It is estimated that more than two million people in the UK hold cryptoassets. Although certain transactions will be taxed as income, most are subject to CGT.

HMRC is particularly concerned that people wrongly believe their crypto transactions to be tax free. The buying and selling of crypto assets is not considered to be the same as gambling.

What is a disposal?

There is a CGT disposal if you:

  • Sell tokens (even if the proceeds are not withdrawn from the exchange);
  • Exchange one type of token for a different type of token;
  • Use tokens to pay for goods or services; or
  • Make a gift of your tokens to another person (unless it’s to your spouse or civil partner).

There is no disposal if, for example, you simply move tokens between different wallets.

CGT treatment

For CGT purposes, tokens are treated similarly to shares, so each type of token is pooled.

If tokens are exchanged, an appropriate exchange rate must be established in order to convert the transaction to pound sterling. With more than a few transactions, things can easily become complicated. Software is available to help work out your tax bill.

Example

An investor purchases a new token using some of their Ether tokens. The new token increases in value, so the investor converts the new token back to Ether. Both transactions are disposals, so CGT will be due if the £12,300 annual exemption is exceeded. There may be no funds to pay this bill, but any further sale of Ether to realise cash will be another disposal, meaning more tax.

The guidance highlighted in HMRC’s letters, which was set out three years ago, can be found here.

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New tipping rules to come into force within months

Written by admin on . Posted in Employment Tax, Income Tax. No Comments on New tipping rules to come into force within months

Five years after carrying out a consultation, the government is going to make it illegal for employers to withhold tips from workers. The change to legislation, due to take effect over the next 12 months, is not just for staff in restaurants, hotels and bars, but also anyone employed in industries such as hairdressing, casinos and private car hire.

With some 80% of tipping now occurring by card, the change is considered urgent. Cash tips to workers are already protected, but for card tips, an employer can either choose to keep tips or pass them on to staff. This new change to legislation will bring consistent treatment regardless of how a tip is paid.

Legislation

The legislation will mean that employers will have to:

  • Pass on all discretionary card tips to workers without any deductions. Employers have typically made deductions to cover card processing costs, payroll, staff food and drink, recruitment and training.
  • Distribute tips fairly and transparently, have a written policy on tips, and record how tips have been dealt with.

Workers will have the right to make a request for information relating to an employer’s tipping record, enabling them to bring an employment tribunal claim for compensation if the rules have not been followed.

Tronc scheme

A tronc is a separate organised pay arrangement used to distribute tips, gratuities and service charges. The troncmaster runs the related payroll and reports information to HMRC.

A tronc scheme run by an independent troncmaster will be the most effective way for many employers to comply with the new requirements.

A tronc, if run independently, will meet the fair and transparent requirement, and workers can have a say in how tips are shared, which should help improve staff motivation. Another benefit is that tips shared from a tronc are free of NICs, but this is not the case where the employer decides how tips are shared out.

HMRC’s guide to how tips are taxed can be found here.

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Maxing Tax Digital delayed until 2024

Written by admin on . Posted in Income Tax, Making Tax Digital, MTD. No Comments on Maxing Tax Digital delayed until 2024

In recognition of the challenges to many businesses due to the pandemic, the government has delayed the introduction of Making Tax Digital (MTD) for income tax self-assessment (ITSA) by a further year.

MTD will not be mandatory for self-employed individuals and landlords until accounting periods commencing on or after 6 April 2024. The start date for general partnerships (those with only individuals as partners) will now be from April 2025, with the date for other types of partnerships still to be confirmed. The planned April 2026 commencement date for MTD for corporation tax now also seems uncertain.

Knock-on effect

The one-year delay means that:

  • The reform of the basis period rules for unincorporated businesses has been pushed back until at least April 2024, with the transition year no earlier than 2023 – so yet another change that now appears less certain than previously.
  • The new penalties for late payments and late submissions will now no longer apply to the self-employed and landlords (mandated to use MTD for ITSA) until April 2024, with other ITSA taxpayers included a year later.

No change

Although the delay will be welcomed by the majority of businesses, a delay is all it is. There is no change to the entry point (taxable turnover from self-employment and/or income from property over £10,000), nor to the requirement to keep digital records and provide quarterly returns using third-party software to HMRC.

HMRC has estimated the average transitional cost of becoming digital as £330, with an annual cost of £35 per business, although that assumes no new hardware will be required.

The delay will mean that more software packages are available before MTD for ITSA comes in, and there will be more opportunity to join the pilot scheme. If you are self-employed or a landlord, you should make the most of the extra time to ensure your business is ready come April 2024.

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Are you ready for MTD?

Written by admin on . Posted in Income Tax, Making Tax Digital, MTD. No Comments on Are you ready for MTD?

Making Tax Digital for income tax self-assessment may still be 18 months away, but if you are self-employed or a landlord, it is time to get ready for digital record keeping, ahead of the deadline.

MTD ITSA (as it’s known) is set to begin on 6 April 2023, and it looks like businesses will need to enter the new regime from the first accounting period commencing on or after 1 April 2023; the proposed basis period rules deem an accounting period ending on 31 March as ending on 5 April.

More than four million taxpayers are set to start MTD ITSA from 6 April 2023, and the current timetable has met fierce opposition. The limited nature of the pilot scheme has not helped.

How MTD ITSA will work

MTD ITSA will initially apply to the self-employed and landlords with total annual turnover exceeding £10,000. There is no exclusion if you have, say, £6,000 of trading income and £6,000 of rental income.

  • Income and expenditure will have to be recorded digitally. Spreadsheets are fine, but, if you do it yourself, MTD-compatible software will be needed to submit quarterly updates.
  • A quarterly summary of income and expenses must be sent to HMRC, with a final declaration replacing the self assessment tax return.
  • There will be a new penalty system and no soft landing. However, a late filing penalty will not apply until four quarterly submissions are late.

The biggest impact will be for those currently maintaining paper records. A move to spreadsheets should not be too onerous, however, and it will then be fairly straightforward to use these as a basis for the filing requirements.

If you are thinking of moving to a software package, be warned there are currently only seven providers of suitable software. HMRC has issued guidance on MTD ITSA and of course we’re here to help.

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Changes afoot for Basis period tax rules

Written by admin on . Posted in Income Tax, MTD, National Insurance Contributions, Pensions, self-assessment, Self-Employed. No Comments on Changes afoot for Basis period tax rules

Although it looks like the next Budget will be pushed back to spring 2022, several tax changes are already on the cards, some more certain than others. The government’s fast progress with reform of the basis period rules for unincorporated businesses has taken some by surprise.

Basis period rules

The basis of taxation for sole traders and partnerships looks like it will change to a tax year basis from 2023/24 onwards. The government’s plan is to simplify the rules by the time MTD for income tax becomes mandatory.

This will not impact on you if you already draw up accounts to 5 April (or 31 March), but for others 2022/23 will be the transition year.

Example

A partnership prepares accounts to 30 June. The profits assessed for 2022/23 will be those from 1 July 2021 to 5 April 2023 (or 31 March 2023), less any unused overlap profits. For 2023/24, profits assessed will be from 6 April 2023 to 5 April 2024 (or 1 April 2023 to 31 March 2024). Profits for the years ended 30 June 2023 and 2024 will have to be apportioned.

Any unused overlap profits can be offset in 2022/23, although some will find themselves taxed on up to 23 months of profits with little overlap profits to offset. In this case, an election will be possible so that the additional profits are spread over five tax years.

The need to apportion profits in future will mean having to estimate figures (with a subsequent amendment) where the second set of accounts is not prepared in time for the 31 January self- assessment deadline.

The simplest solution will be to change to a 5 April (or 31 March) accounting date. Making that change in 2021/22 could be a good option if current profits are low due to Covid-19.

Another change already on the cards is the increase to the normal retirement age for registered pensions from 55 to 57 in April 2028, which will be legislated in the Finance Act 2021/22. Less certain is a proposed 1% increase in NICs for the employed and self-employed to fund social care.

The Government’s policy paper on basis period reform can be found here.

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MTD income tax pilot

Written by admin on . Posted in Income Tax, Making Tax Digital, MTD, Tax. No Comments on MTD income tax pilot

The pilot scheme for Making Tax Digital (MTD) for income tax is now open for self-employed workers and landlords. The scheme becomes mandatory for accounting periods commencing on or after 6 April 2023, so those who join now will get ahead of the game.

The first phase of MTD for income tax will be mandatory if your taxable turnover from self-employment or income from property is above £10,000. If you want to be one of the early adopters in the pilot scheme, there are various conditions that you will need to meet.

Who can join?

You can only join if you are a sole trader with income from just one business, a landlord renting out UK property, or both. If you need to report income from other sources, such as employment, pensions, or capital gains, then you cannot currently join. The other conditions should not be a problem for most:

  • UK resident;
  • registered for self assessment, and
  • up to date with tax returns and payments.

Your accountant can sign you up if you make a request.

Digital records

To join the pilot, you will need to use software that is compatible with MTD for income tax. Be warned that only five fully compatible products covering both self-employment and property are currently listed by HMRC, although this includes two with free versions.

You’ll need to keep digital records of all your business income and expenses, starting from the beginning of the accounting period you sign up for, and send updates to HMRC. At the end of the period, you will submit a final declaration instead of a self-assessment tax return.

If you’re already using software to keep records, you should almost certainly wait for your provider to update their product to be compatible with MTD for income tax rather than switching providers just to join the pilot scheme. HMRC’s list of software compatible with MTD for income tax can be found here.

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