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Take Two on Wealth tax…………

Written by admin on . Posted in Inheritance Tax, Tax, Wealth. No Comments on Take Two on Wealth tax…………

Hard on the heels of May’s Sunday Times Rich List, will new proposals for a wealth tax gain any traction?

In 2020, a group of economic research bodies set up the Wealth Tax Commission to examine the options for a wealth tax to cover the huge costs then being incurred to handle the Covid-19 pandemic. The Commission produced a comprehensive report at the end of the year that suggested:

  • A one-off wealth tax (as opposed to annual);
  • A rate of 5%, payable at 1% a year for five years; and
  • The tax to be payable on all wealth above £500,000, including pensions and main residences.

The tax would have produced £260 billion in total, almost as much as income tax is projected to raise in 2023/24. While the proposals received considerable attention at the time, they were given the cold shoulder by the government and soon disappeared from view.

About two and a half years later, a new wealth tax proposal has been put forward by a group of three tax-campaigning organisations. Their launch came shortly after the latest Sunday Times Rich List was published, showing that 350 individuals and families together hold combined wealth of £796.5 billion.

The new wealth tax was substantially different from the Commission structure:

  • It would be an annual tax;
  • The rate would be 2%; and
  • It would only be payable on all wealth above £10 million.

The high threshold means that the annual amount raised each year would be less than the previous proposal – the campaigners suggested up to £22 billion, although the Commission’s 2020 research suggested a figure of around £17 billion for a similar structure– there are only around 22,000 individuals with wealth of greater than £10 million, according to the Commission.

Polling for one of the three organisations, undertaken by YouGov, showed 74% public support for the 2% wealth tax. Such a result is hardly surprising – most people are in favour of a tax from which they could only benefit.

This latest wealth tax proposal seems destined to suffer the same fate as its predecessor. Were the government to provide a counter argument, it could point out that the freezes it has made to the personal allowance and higher rate threshold alone will raise an extra £21.9 billion in 2023/24, rising to £25.5 billion by 2027/28. This seems unlikely however……………

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Tax gap at all-time low

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The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. For 2021/22, the gap was at an all-time low of 4.8% (or £35.8 billion), although in monetary terms the gap increased by some £7 billion from 2020/21.

Small businesses

Recently published figures from HMRC show that small businesses now account for the largest share of the tax gap, at 56% of the total or just over £20 billion. This percentage has grown steadily from 40% in 2017/18. By comparison, the share for mid-sized and large businesses has fallen from 18% to 11% over the same period.

There isn’t sufficient information to understand what is happening here, but there are a couple of possibilities:

  • Having endured the challenges of the Covid-19 pandemic and now facing an equally tough economic climate, small businesses may be under-declaring income or, more likely given most sales are now done electronically, overclaiming on expense deductions.
  • At the same time, HMRC now lacks the resources to carry out extensive tax investigations.

And, of course, having an extremely complex tax system doesn’t help.

The whole concept of the tax gap has been subject to criticism, especially as HMRC does not explain how figures are calculated.

Making Tax Digital (MTD)

HMRC has been accused of using the tax gap to push their own agenda, in particular, making a case for MTD.

MTD for the self-employed and landlords is now not set to start until April 2026. MTD for VAT has been introduced in stages since April 2019, with virtually all VAT-registered business now included. The tax gap for VAT, although showing some improvement since 2018/19, doesn’t exactly support the need for MTD – the VAT gap fell from 6.4% in 2018/19 to 5.4% in 2021/22.

HMRC’s press release on the latest tax gap figures, along with more detailed information, can be found here.

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Tax and your home solar panel system

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With continuing high electricity prices, now could be a very good time to install solar panels at your property. Unless a solar battery is part of the system, it makes sense to sell excess electricity back to the national grid. Normally such sales are free from tax, but there is an exception you should be aware of.

Exemption rules

The sale of excess electricity – from what is known as microgeneration system – is exempt provided the intention is to match the individual’s own home consumption needs.

  • The system must be installed at or near an individual’s home, e.g. rooftop solar panels; and
  • The amount of electricity generated by the system should not significantly exceed domestic needs – HMRC allow a 20% margin here, so the system can generate 120% of domestic needs before sales to the grid become taxable.

Even if electricity sales to the grid are taxable, they might still be covered by the £1,000 trading allowance. If income exceeds the allowance, a £1,000 deduction can be claimed.

Unless a solar battery is used, around half of the electricity generated may end up being sold back to the grid. Install too large a system and these sales will be taxable. This will extend the typical eight-to-ten-year payback period for solar panels, especially if higher rates of tax are involved.

Smart export guarantee

Larger energy suppliers have to pay for excess electricity that is exported to the national grid under the smart export guarantee (SEG) scheme. Any energy company can be chosen, but care should be taken as rates vary significantly – from 1p/per kWh up to a potential 15p/per kWh. Even higher rates might be available if a variable tariff is chosen.

The best SEG rates are normally only available when the same energy supplier is used to supply electricity.

Details of the best SEG available rates can be found here .

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Self-assessment threshold rises from 2023/24

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There is a long list of reasons why it is necessary to complete a self-assessment tax return, but PAYE taxpayers are generally exempt from the requirement. Previously, exemption was subject to a £100,000 income ceiling, but the threshold has been increased to £150,000 for the current tax year onwards.

The £150,000 threshold applies to total income – not just gross salary – and also any taxable benefits and income from savings and investments.

Other reasons to file a return

There are a number of other reasons why an employee with income below £150,000 will still be required to complete a tax return. For example, where the taxpayer also has:

  • Income from property rental;
  • More than £10,000 in either dividend income or savings income;
  • Income from a trust;
  • To pay capital gains tax (more likely now with the exempt amount reduced from £12,300 to £6,000);
  • Income from self-employment or partnership income; or
  • To pay the High Income Child Benefit Charge.

When a return is not required

Employed taxpayers with income between £100,000 and £150,000 for 2022/23 ­– and with no other reason for completing a return – should receive a self-assessment exit letter from HMRC confirming that they do not need to complete a return for 2023/24.

In other situations, it will be necessary for taxpayers to contact HMRC and inform them why a return is no longer necessary.

Taxpayers can ask for a return to be withdrawn even after HMRC has charged late filing penalties. Subject to HMRC agreement, the penalties will then be waived.

Even if a tax return is not strictly required, there are some situations where a taxpayer might want to complete a return anyway. The main reason will normally be to claim a relief, such as pension contributions or donations to charity.

If a tax return is not submitted, it will be more important than ever to check your tax code, which will typically be used to collect tax on taxable benefits and savings income.

To check if a self-assessment tax return is required, use HMRC’s online tool found here.

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Government’s tax take on growth trajectory

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Analysis of the projected outcomes of the government’s tax policies show an expected increase to the number of higher rate personal taxpayers, with the corporate tax yield expected to grow substantially.

Income tax

The default policy for income tax has generally been to increase thresholds in line with inflation. This is currently not happening, in particular for the personal allowance and the basic rate band, which are frozen at 2021/22 levels until 2027/28. The latest costing of these two threshold measures will mean:

  • Additional tax receipts of £13.1 billion for 2023/24, with over £20 billion in additional receipts for each of the four following years.
  • Some 2.2 million taxpayers having to pay tax for 2023/24 who would not otherwise have had to do so, with an extra 1.3 million having to pay higher rate tax.

The exception to the frozen rule is the additional rate threshold, which was cut from 2023/24, pushing more taxpayers into that higher bracket. Not surprisingly, income tax now accounts for 28% of the government’s tax take, up 2% from a few years ago.

VAT registration

The VAT registration threshold has stayed at £85,000 since April 2017, so it should come as no surprise that there are now around 300,000 registrations annually, although a disproportionate number of traders are avoiding registration by keeping turnover just below £85,000.

Corporation tax

The government’s yield from corporation tax was just over 8% in 2021/22, but the new main rate of 25% means this is expected to increase to about 10%. In actual figures, this is an increase from £68 billion to £112 billion.

Although there are around 1.5 million SMEs, they only contribute 45% of the total collected corporation tax. The other 55% comes from 18,000 large companies.

By 2027/28, the tax burden is forecast to reach a post-war high of 37.7% of GDP, with the highest ratio of corporation tax receipts to GDP since this tax was introduced nearly 60 years ago. Keeping on top of tax planning and how businesses and individuals can minimise their tax burden is more important than ever.

The Office for Budget Responsibility’s detailed economic and fiscal outlook can be found here.

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Potential benefits from directors’ loans

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Business owners could seek to earn interest on directors’ loans with little-to-no tax implications, although only patient directors willing to meet the reporting requirements will benefit.

Even though the rate of interest charged by HMRC on late tax payments is currently 6.75%, the rate charged on a beneficial loan for 2023/24 is much lower at 2.25%. Therefore, taking a company loan could be an attractive option for directors.

There will be no taxable benefit for 2023/24 if a director’s beneficial loans do not exceed £10,000 at any point throughout the year.

Company charge

The tax treatment of a director’s loan is complicated because there is also a company tax charge if the director is (very basically) also a shareholder and their company is a close company. For owner-managed companies, this will generally be the case.

  • The tax charge is at the rate of 33.75% on the amount of loan should the loan still be outstanding nine months and a day after the end of the company’s accounting period in which the loan is made.
  • However, this tax charge is refunded to the company if the loan is subsequently repaid by the director.


An opportunity

Given that high street banks are currently offering one-year fixed rate ISAs with an interest rate of around 4.2%, opportunistic directors could therefore:

  • Take a £20,000 interest-free loan from their company;
  • Invest this for one year, receiving tax-free interest of £840; and
  • Repay the £20,000 company loan.

Depending on the timing and the company’s accounting period, there might not be a tax charge on the company. Even if the tax charge is payable, it will be repaid once the company loan is refunded. The director will have a taxable benefit of £20,000 at 2.25% = £450 (pro-rata according to the days outstanding during the tax year). Even for an additional rate taxpayer, the tax cost will just be a little over £200.

The downside will be the various reporting requirements for both the director(s) and the company.

HEALTH WARNING: Please do not take the above as advice. These are the mere meandering thoughts of a sad old man. If anything you’ve read is of interest then please seek professional guidance from your accountant or tax adviser (you’ve been warned!!!!).

HMRC guidance on director’s loans can be found here.

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2023/24 – the 23-month tax year?

Written by admin on . Posted in Budget, Income Tax, self-assessment, Self-Employed, Tax. No Comments on 2023/24 – the 23-month tax year?

If you are self-employed, the new tax year may be longer than you think.

If you are self-employed, until 2023/24, you have normally been taxed on the profits made in the accounting year that ends in the tax year. For example, if your accounting year ran to 30 April, then in the last tax year, 2022/23, you are taxed on the profits for your accounting year ending on 30 April 2022 – a few weeks after the start of the tax year.

Some while ago, the government decided that it would speed matters up by forcing all the self-employed (including partners in partnerships) to pay tax on the profits earned in the tax year. As is obvious from the example above, moving from the accounting year system to a tax year one implies a catch-up exercise that theoretically results in more than 12 months’ profits being taxed in a single tax year.

Unless your accounting year ends on 31 March or 5 April, that is what will start happening in this tax year. Taking the 30 April year end again, in 2023/24 the default position will be that your taxable profits are:

  • The “normal” calculation of profits for the accounting year ending 30 April 2023, plus
  • One fifth of a catch-up element equal to:
    • Your profits from 1 May 2023 to 5 April 2024 (341/366ths of the profits in your account year ending 30 April 2024), less
    • Any overlap relief because of double taxation that occurred earlier (typically when you started trading).

In the following four tax years (during which the personal allowance and higher rate threshold are frozen), your taxable profits will be those earned across the 12 months of the tax year (with pro-rated calculations, if necessary), plus that one fifth catch-up element. As an alternative, you can opt for any amount more than a fifth up to the full catch-up element to be taxed in 2023/24 with corresponding adjustments for later years.

If your head is hurting, you are not alone. At least you have the remainder of the tax year to consider the implications and prepare for what is likely to be a larger tax bill (as more income is being taxed) come January 2025. Make sure you take advice about the planning opportunities that arise – 2023/24 could be the right time to make a large pension contribution.

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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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Making Tax Digital delayed once more

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With the self-employed and landlords facing a challenging economic environment, the government has again delayed the introduction of the Making Tax Digital (MTD) scheme for income tax self-assessment (ITSA) – this time by two years until April 2026.

Although the introduction of MTD ITSA prompted the basis period reform, no corresponding postponement for this has been announced. The tax year 2023/24 is therefore still the transitional year.

Income reporting threshold

Along with the two-year delay, the minimum income reporting threshold has also been raised.

  • Rather than an income threshold of £10,000, MTD ITSA will now initially only be mandated – from April 2026 ­– for a self-employed individual or landlord who has income of more than £50,000.
  • Those with income between £30,000 and £50,000 will join a year later from April 2027.
  • The government will review the needs of smaller businesses – particularly those with income under the £30,000 threshold – before making further decisions.

Given the low level of awareness of the MTD reporting requirements, the entry point U-turn will be widely welcomed, especially by landlords for whom MTD will have few benefits. Previously, the introduction of MTD ITSA was going to impact on some four million taxpayers, but only 700,000 will now be involved from April 2026, with a further 900,000 included a year later.

Partnerships and companies

General partnerships (those with only individuals) were previously set to start reporting under MTD ITSA from April 2025.

  • With the revised timetable, there is no set mandation date for general partnerships.
  • Non-general partnerships (such as those with a corporate partner) and limited liability partnerships were previously excluded from the MTD timeline, and this remains the case.

A self-employed individual who wishes to avoid MTD reporting requirements can easily (at least initially) do so by converting to a partnership with the addition of a spouse, partner or other family member as a partner.

The government announcement makes no mention of MTD for corporation tax, so this is unlikely to be introduced any time soon.

Information for those who wish to voluntarily sign up for MTD ITSA before 6 April 2026 can be found here.

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The marshmallow paradox – VAT or no VAT?

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The biggest marshmallows are in fact VAT free.

The intricacies of VAT continue to delight or inflame, with marshmallows the latest food product to come under the spotlight. The outcome of a recent First-Tier Tribunal case means that VAT classification can now differ between miniature, regular and mega-sized marshmallows, highlighting again the importance of accurate understanding of the rules.

The tribunal case dealt with the VAT liability of mega-sized marshmallows and whether, unlike regular-sized marshmallows (of around half the size), they should be zero-rated for VAT purposes.

A recipe for confusion

The mega-sized marshmallows had been sold between 2015 and 2019, and were treated as zero-rated. HMRC raised VAT assessments on a wholesale company for £473,000 on the basis that marshmallows are confectionery and should therefore have been standard rated.

However, although the packaging of the product said the mega-sized marshmallows could be either roasted or eaten as they were, the marshmallows were actually intended to be roasted, and the packaging contained specific instructions for roasting over a campfire or barbecue. Therefore, most retailers displayed the mega-sized marshmallows in their barbecue sections.

Outcome

Even though the mega-sized marshmallows didn’t need to be cooked in order to be consumed, the tribunal decided that, on balance, they were not within the definition of confectionery as they were being sold and purchased specifically for roasting.

This case continues a trend which places increasing importance on the way a product is marketed or sold for its VAT treatment.

The correct VAT treatment of marshmallows would now appear to be:

* Miniature marshmallows Zero-rated if marketed as being for baking use;
*Regular-sized marshmallows Standard rated as confectionery;
*Mega-sized marshmallows Zero-rated if marketed for roasting;

Of course, this could all change should HMRC appeal the decision.

The case highlights just how important it is to make sure products and services are correctly rated for VAT. An investigation from HMRC can prove to be very expensive and also time consuming for the parties involved. HMRC’s guidance on the VAT treatment of food products can be found here.

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