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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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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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CGT reporting and payment deadline extended

Written by admin on . Posted in Budget, Capital Gains Tax, Property, self-assessment, Tax. No Comments on CGT reporting and payment deadline extended

I’ve taken a few calls recently, from a number of clients, on CGT on disposal of UK residential property, and although information on this is already in the public domain, here’s a brief summary in case anyone else (non-tax professionals that is) needs clarification on the new regime.

For disposals of UK residential property completed on or after 27 October 2021, the reporting and capital gains tax (CGT) payment deadline has been extended from 30 days after completion to 60 days. The previous 30-day time limit has proved to be quite challenging for taxpayers.

For UK residents, the government has clarified that where a gain is made on the disposal of a mixed-use property, the 60-day time limit only applies to the residential element.

Non-residents

The new deadline also applies to non-UK residents who have to report and pay CGT on the disposal of any type of UK property, whether it is residential or commercial.

Non-UK residents have faced particular problems because a Government Gateway login is required in order to set up a CGT on UK property account. Activation codes are sent by post, so they are often received outside the 30-day time limit. The alternative means having to complete a paper reporting form. The extra 30 days to report and pay should help but setting up a Government Gateway could still be problematic for those living overseas.

Ongoing issues

One of the biggest ongoing issues is that taxpayers are simply not aware of the reporting and CGT payment requirement when they make a property disposal.

  • It seems that solicitors and estate agents are not mentioning the requirements.
  • Accountants are often not informed until the tax return submission comes round. This could be up to 22 months after the completion date.

There is also a problem for self-assessment taxpayers who find they have overpaid CGT via their property account. In theory, the refund should be included within the self-assessment calculation, but this is not happening. It might be possible to obtain a CGT refund by amending the original property return, but otherwise it means having to phone HMRC.

If you believe you are affected, please get in touch with us as soon as possible so we can help you process your requirements. The start point for reporting and paying CGT on UK property can be found here.

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HMRC: Upper Tribunal deems child benefit discovery assessments invalid

Written by admin on . Posted in Benefits, High Income Child Benefit Charge, self-assessment, Tax. No Comments on HMRC: Upper Tribunal deems child benefit discovery assessments invalid

A discovery assessment can be made by HMRC where income, which should have been assessed, has not been assessed for tax purposes. A recent decision in an Upper Tribunal case, however, found that neither child benefit, nor the related charge, is defined as income, thereby restricting HMRC’s use of discovery assessments to collect underpaid tax.

The high income child benefit charge (HICBC) applies to anyone who receives child benefit when their income, or their partner’s income, exceeds £50,000. Many have been caught out thinking the charge doesn’t apply to them or because they are unaware of their partner’s finances.

Individuals who pay tax under PAYE may never have needed to fill in a tax return. However, they are required to do so just to report the HICBC.

The decision

Jason Wilkes owed around £4,200 in unpaid taxes as a result of being subject to the HICBC for the tax years 2014/15 to 2016/17. Crucial to the decision was that Wilkes had not filed returns for these years or been issued with a notice to file.

HMRC raised discovery assessments to collect the tax due. However, since no income as such was ‘discovered’, the assessments raised were invalid.

Refunds all round?

The answer, sadly, is no. Discovery assessments are valid if tax returns have been submitted but the HICBC omitted; there is then ‘income’. This will be the case for many taxpayers.

It seems unfair that those complying with the law are at a disadvantage to those who have not. However, this is down to HMRC relying on discovery assessments rather than issuing a notice to file tax returns.

If you have been required to pay the HICBC for prior years then check to see if you fit the refund criteria: tax returns not filed, with discovery assessments used to collect the tax due.

Details of the high income child benefit charge can be found here. Let me know if you’d like to know more – or require assistance in this space.

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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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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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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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Get Ready for 2021-2022

Written by admin on . Posted in Budget, self-assessment, Self-Employed, Tax. No Comments on Get Ready for 2021-2022

Taking some time to start planning for the 2021/22 tax year might be worth the effort. 

While there is often a focus on planning for the end of the tax year, much less attention is paid to the start of the tax year. The lack of an obvious deadline is probably one reason – deadlines tend to concentrate the mind. Nevertheless, some planning at the beginning of the new tax year can be a rewarding exercise.

  • Estimate your total income for 2021/22 – If you have a rough estimate of what your income will be, it will give you an idea of what to watch out for and what each extra £1 of gross income will be worth. For example, if your estimate is around £50,000, that means you are on the borders of higher rate tax (or well into the 41% band if you are resident in Scotland). £50,000 is also the threshold at which the child benefit tax charge comes into play.
  • Check whether you will cover your allowances – The allowances to which you are entitled often depend upon your income, although the £2,000 dividend allowance applies universally. Couples have the opportunity to cover two sets of allowances, possibly by transferring investments between each other or changing from single ownership to joint ownership.
  • Check your PAYE code – If you have received a 2021/22 PAYE coding, check that it is correct. The wrong code could mean you pay too much tax during the year.
  • Top up your ISA – If it makes tax sense for you to invest in an ISA because of the potential income and capital gains tax savings, then the time to do so is as soon as possible, not just as the tax year end approaches.
  • Consider making pension contributions – The sooner your contribution is invested, the longer it benefits from a tax-favoured environment and the less likely it is to be ‘lost’ in other expenditure.

For more 2021/22 tax planning, get in touch now, and get ahead of the curve.

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