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Missing out on tax-free childcare?

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

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

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

How tax-free childcare works

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

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

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

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

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

Restrictions

There are certain restrictions on eligibility:

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

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

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Brain teaser: should you incorporate?

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

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

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

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

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

Higher corporation tax rate bites

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

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

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

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

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Changing tax payments for SMEs

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

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

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

Current problems

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

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

Spreading payments

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

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

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

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

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“Hear it Not, Duncan……..

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

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

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

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

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

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

Status determination statement

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

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

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

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

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

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

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

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

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

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

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

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

Instalment options

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

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

 

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

How to join

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

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

 

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

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Businesses prepare for long term tax hike

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

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

Trading losses

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

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

Super-deduction

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

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

Corporation tax

From 1 April 2023, there will be two rates:

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

 

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

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

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Covid-19 relief measures extended again

Written by admin on . Posted in Budget, COVID-19, Self-Employed, Tax. No Comments on Covid-19 relief measures extended again

The latest, and hopefully last, lockdown is not due to be completely lifted until at least 21 June, so it was no surprise to see Covid-19 relief measures extended in the Budget on 3 March. The furlough scheme will now run until 30 September and there will be two more self-employed grants, plus various other measures.

Furlough (CJRS)

Furloughed employees can continue to receive 80% of their wages for hours not worked, up to a cap of £2,500 per month, until 30 September. By continuing for a few months after restrictions end, the scheme will help businesses slowly recover from the disruption they have faced.

The current level of support will continue until 30 June. In July, the scheme will then only cover 70% of wages for the hours not worked, up to a cap of £2,187.50. This will reduce to 60% for August and September, with a cap of £1,875. Employers will need to pay national insurance contributions and pension contributions throughout.

Self-employed grants (SEISS)

There are to be two more grants; a fourth grant in late April, and a fifth grant in late July. However, extra conditions will apply for the fifth grant.

  • The fourth grant will again be worth 80% of three months’ average profits (now including results reported for 2019/20 but capped at £7,500.
  • The fifth grant will be similar if a business’ turnover has dropped by 30% or more. However, if less, the grant will only be worth 30% of average profits (capped at £2,850).

 

Other measures

A range of additional loans and grants were also extended to provide ongoing relief ahead of the gradual easing of lockdown measures:

  • VAT: The temporary reduced rate of 5% for businesses in the tourism and hospitality sectors has been extended until 30 September 2021, with a rate of 12.5% then applying until 31 March 2022.
  • Recovery loan scheme: The government will guarantee 80% of loans between £25,000 and £10 million.
  • Restart grant: Hospitality and leisure businesses in England will receive a grant of up to £18,000 per premise; up to £6,000 for non-essential retail businesses.
  • Business rates relief: The 100% relief for eligible retail, hospitality and leisure properties in England will continue to 30 June 2021, followed by 66% relief until 31 March 2022.

Details of the levels of CJRS support can be found here or get in touch with us for further guidance.

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The Spring 2021 Budget – still some surprises

Written by admin on . Posted in Budget, Business Rates, Capital Gains Tax, Tax, VAT. No Comments on The Spring 2021 Budget – still some surprises

A quiet turning of the tax screw.

Just before the Budget arrived on 3 March, it seemed as if the Chancellor would have nothing to say that was not already public knowledge. However, while some of the torrent of leaks were confirmed, none of the pre-Budget pundits correctly predicted the Chancellor’s strategy. Instead of cutting borrowing, Mr Sunak increased it sharply in 2021/22 over the estimates produced just four months earlier in his Spending Review.

The Chancellor’s approach was:

  • To stimulate investment in the next two years with extremely generous allowances. In effect, for every £1,000 a company invests in new plant and machinery, the government will reduce their corporate tax bill by £247.
  • To pay for this largesse and start to repair public finances:
    • From April 2023, when the enhanced investment allowances end, the rate of corporation tax for companies with profits of at least £250,000 will jump by 6%, from 19% to 25%.
    • Many personal tax thresholds, bands and allowances will be frozen until the end of 2025/26.

The big freeze of everything from the pensions lifetime allowance to the inheritance tax nil rate band counts as a stealth tax. Look at the raw numbers and there is no increase in tax – everything stays the same. In practice, the effect of inflation will take its toll. As incomes and wealth rise, thresholds are crossed and tax bands filled more quickly. More people become taxpayers and all taxpayers pay more tax.

A good (or possibly bad) example is the inheritance tax nil rate band, which was set at its current £325,000 level (now running through to 2026) way back in April 2009. Had the band been linked to the CPI inflation index, it would be about £90,000 higher in 2021/22. That difference equates to an extra £36,000 in inheritance tax at the standard 40% rate.

In other words, you may think you were spared higher tax bills by the Chancellor, but that is not necessarily the case. Tax planning is still important and will become more so as the freeze drags on to 2026.

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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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CIS: VAT Reverse Charge: Rules from March 2021

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The VAT domestic reverse charge will finally apply to most supplies of building and construction services from 1 March 2021. The rules, whose implementation have been postponed twice, cover standard and reduced rate VAT supplies between VAT-registered sub-contractors and contractors where reporting is required under the construction industry scheme (CIS).

The definition of construction services is based on the CIS definition, with various professional services excluded. However, unlike the CIS, the reverse charge applies to the total supply if any element in the supply is within the definition, subject to a 5% disregard.

Sub-contractors

The reverse charge applies if the following conditions are all met:

  • The supply is within the scope of the CIS.
  • The supply is standard or reduced rated (zero-rated supplies are excluded).
  • The customer is VAT registered.
  • The customer is CIS registered.
  • The customer is not the end user (the final customer who does not make an onward supply – typically, the property developer).

Sub-contractors will no longer charge or account for output VAT, and invoices must state that the reverse charge applies.

Cashflow is likely to be affected for sub-contractors who will no longer benefit from retaining VAT before paying it over to HMRC. Moving to monthly VAT returns could be the best option for managing repayments.

Main contractor

The main contractor accounts for the VAT on the services of sub-contractors as output VAT, but can also usually claim a corresponding input VAT deduction.

The end user will then be invoiced as normal. The main contractor will therefore now be responsible for accounting for the full amount of VAT in the chain.

The VAT reverse charge means adjustments for subcontractors and contractors. Detailed technical guidance from HMRC, including supplier and buyer flowcharts, can be found here.

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