Author: Femi Ogunshakin

Potential benefits from directors’ loans

Written by Femi Ogunshakin on 8 June 2023. Posted in Benefit-In-Kind, Benefits, Employment Tax, Tax. No Comments on Potential benefits from directors’ loans

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.

Photo by Loic Leray on Unsplash

2023/24 – the 23-month tax year?

Written by Femi Ogunshakin on 5 June 2023. 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.

Photo by Ivan Aleksic on Unsplash

Neglected Child Trust Funds lying unclaimed

Written by Femi Ogunshakin on 2 June 2023. Posted in Insights. No Comments on Neglected Child Trust Funds lying unclaimed

A recent investigation into Child Trust Funds (CTFs) by the National Audit Office (NAO) has revealed that, disturbingly, nearly £400 million in matured CTFs remain unclaimed.

CTFs were opened for some 6.3 million children born between 1 September 2002 and
2 January 2011 into which the government paid £2 billion.

Unclaimed funds

The first CTFs began maturing from 1 September 2020 onwards as children reached 18. By
5 April 2021, some 175,000 18-year-olds had either withdrawn or reinvested the funds from their matured CFTs, but 145,000 (45%) matured CTFs went unclaimed. A more up-to-date estimate shows the situation improving, but 27% of CTFs maturing at least one year earlier are still unclaimed.

There are various reasons for this:

28% of CTFs – 1.7 million accounts – were set up by HMRC when parents did not do so. Without parental involvement, it is no surprise that account holders may be unaware of a CTF’s existence.
The number of CTF providers has shrunk to 55, compared to 74 in 2011. Some have merged, with others exiting the CTF market. This means many CTFs will now have a different provider to when the account was set up.
Although HMRC has begun publicising the fact that a child might have a CTF, such as writing to 15-year-olds with their National Insurance number, the NAO is generally unimpressed with HMRC’s performance. Much of HMRC’s statistical data is incomplete, with several active CTF providers not providing annual return data.

Tracing lost accounts

As a result of government contributions, every CTF has between £100 and £500 invested, even if no family contributions have been made. So, it is worthwhile tracking down lost accounts.

If the provider is known, then they should be contacted directly.
If the provider is not known, HMRC provides a tracing service for parents and guardians, or for those aged at least 16 and looking after their own CTF. There is an online form that can be used, although details can also be requested by post.

HMRC will usually respond with details of the CTF provider within three weeks.

The starting point for HMRC’s CTF tracing service can be found here.

Photo by Volodymyr Hryshchenko on Unsplash

Second Tax Day brings change and consultation

Written by Femi Ogunshakin on 18 May 2023. Posted in Income Tax, National Insurance Contributions, Self Assessment. No Comments on Second Tax Day brings change and consultation

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

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

Definite changes

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

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

Consultations

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

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

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

Photo by Product School on Unsplash

Cash basis reform: potential turnover threshold changes

Written by Femi Ogunshakin on 12 May 2023. Posted in Capital Gains Tax, Self Assessment, Self-Employed, VAT. No Comments on Cash basis reform: potential turnover threshold changes

With basis period reform now underway, HMRC is looking at further tax simplification for sole traders and partnerships by increasing the cash basis turnover threshold. The cash basis scheme removes complexities such as accruals and most capital allowances.

The cash basis can only be used currently if a business’s annual turnover does not exceed £150,000, although the business can then remain in the scheme until turnover reaches £300,000.

Income threshold

HMRC is considering two alternatives to expand the availability of the cash basis:

The turnover limit could be set at £1.35 million, with businesses not required to leave until turnover reaches £1.6 million. These are the same limits that apply for the VAT cash accounting scheme.
The turnover threshold could be removed so that any business, regardless of size, can join.

HMRC is also looking at making the cash basis the default method of calculating trading income for eligible businesses, so the scheme would become ‘opt out’, rather than the current ‘opt in’.

Other proposals

Two reasons why a business may currently choose not to use the cash basis are because of restrictions on relief for interest costs, and the use of losses. HMRC is looking at changes here, although nothing definite has been announced:

Interest and bank charges are restricted to a maximum deduction of £500. This limit might be increased, possibly as high as £1,000. With the rise in interest rates, the £500 restriction means the cash basis is currently not beneficial for many businesses.
If the cash basis is used, any losses can only be carried forward – they cannot be relieved against other income or carried back. A number of options are being considered, but it does look as if loss relief rules will be relaxed, just not to the extent that relief is available where normal accounting rules are used.

HMRC’s guide to the cash basis can be found here.

Photo by Eden Constantino on Unsplash

Childcare support extended to children over nine months

Written by Femi Ogunshakin on 11 May 2023. Posted in Benefits, Employment Tax, High Income Child Benefit Charge, Self Assessment. No Comments on Childcare support extended to children over nine months

The government is extending the provision of 30 hours of free childcare for 38 weeks to now include all pre-school children over the age of nine months.

Phased introduction

The extended childcare provision will be of benefit to parents with newborns – or those planning a family – but parents with children currently aged one or two years old will not see the full benefit of the changes because of the phased introduction of the support:

From	Free childcare extended to	Amount of childcare
April 2024	Children aged two years	15 hours
September 2024	Children aged nine months to two years	15 hours
September 2025	Children aged nine months to two years	30 hours

Children can take up their childcare place in the term after they meet the age requirement (subject to having received a code to give to the childcare provider), with terms typically beginning on 1 January, 1 April and 1 September.

To be eligible, both parents must work at least 16 hours a week at the National Minimum/Living Wage, and neither can earn more than £100,000 a year.

Challenges and shortfalls

Government-funded childcare entitlement is currently only available for a total of 1,140 hours a year, which works out to 30 hours over 38 weeks, so the new rules may spur some adjustments by children providers.

Providers may simply offer fewer hours a week to stretch the funded hours over the whole year; or
They may provide 30 hours for the whole year with parents paying for the shortfall of unfunded hours.

In theory, the changes will help parents who want to go back to work but finding an available childcare space will likely continue to be problematic, even with the September 2023 child-to-staff ratio increase from four to five. Many nurseries are encountering financial difficulties, and the childcare extension will mean providers cannot make up shortfalls by charging more for younger children.

There are different schemes in Scotland, Wales and Northern Ireland.

Government guidance on help with paying for childcare can be found here.

Photo by Gautam Arora on Unsplash

The demise of paper tax returns

Written by Femi Ogunshakin on 8 May 2023. Posted in Benefits, Capital Gains Tax, Making Tax Digital, Self Assessment. No Comments on The demise of paper tax returns

More than 12 million taxpayers file self-assessment tax returns, but less than 3% do so using a paper return. Given this low demand, HMRC is reviewing the current paper filing service.

HMRC stopped sending out paper tax returns three years ago, with any taxpayer wishing to file by paper required to download a blank version of the form. That move brought a further 3% of taxpayers to the online service. HMRC has now announced that self-assessment tax returns will not be available to download for the 2022/23 tax year.

Alternatives

Subject to a limited exception, anyone who still wants to file offline will have to obtain a tax return form by phoning HMRC.

The limited exception is for visually impaired taxpayers and those aged 70 or over who have not previously submitted online. HMRC will continue sending them paper returns to complete.
As an alternative to contacting HMRC, a blank tax return can be printed using commercial software.

There are some taxpayers who, because of the complex tax calculations involved, simply cannot file online. This is the case even if commercial software is used, which means they will have to print their completed tax return and file it by post.

Online filing

HMRC has written to some 135,000 taxpayers who file on paper to encourage them to complete returns online in the future. In many cases, this may now be the most sensible option, and there is a wide range of commercial low-cost software available if anyone does not wish to use HMRC’s offering.

Filing online has two distinct advantages:

Not having to use the postal system when a return might be lost; HMRC will sometimes deny having received a mailed return even when there is a record of delivery.
An additional three months to file each year – the online filing deadline being 31 January following the tax year, rather than 31 October.

Capital gains tax (CGT)

Going somewhat in the opposite direction, HMRC has made a downloadable version of its CGT UK property return available on a four-month trial basis. The intention is that the downloadable form can be used by those taxpayers who cannot report and pay tax using the online service.

HMRC guidance on self-assessment tax returns can be found here.

Photo by Christin Hume on Unsplash

Energy support boost for home-based businesses and employees

Written by Femi Ogunshakin on 8 May 2023. Posted in Budget. No Comments on Energy support boost for home-based businesses and employees

The energy price guarantee of £2,500 was extended in the March Budget for a further three months, which is welcome news for employees and any small business owners who work out of residential accommodation.

The extension of the energy price guarantee runs from 1 April to 30 June and should bridge the gap to the lower prices predicted for the summer.

The three months of additional support is somewhat less generous than that being given to business customers, who will benefit until 31 March 2024.

Price guarantee

The guarantee is a temporary government subsidy that limits the annual energy costs for a typical household. The scheme covers households in England, Scotland and Wales.

An important point is that the price guarantee is based on a typical household but can be more or less depending on energy usage.
The price guarantee was set to increase to £3,000 from 1 April, but this increase has now been postponed until 1 July.
Household energy prices are currently set at the lower of the price guarantee and a price cap. The price cap is set by Ofgem, the energy regulator, and is forecast to be as low as £2,000 for the second half of 2023. So this figure would then apply, rather than the higher £3,000 price guarantee.

Despite the continuance of the price guarantee, many households will still see higher energy bills from April onwards. This is because the £400 government support scheme came to an end in March, which was given as a monthly credit of £66 or £67 against energy bills.

Fixed deals

Those on fixed energy deals should keep a watchful eye on energy prices. A fixed price tariff could well be higher than the price cap from July onwards, so it might then be beneficial – if permitted – to move to an energy supplier’s standard tariff.

Details of the energy price guarantee can be found here.

Photo by Doris Morgan on Unsplash

The Budget surprise: changes to the pension tax rules

Written by Femi Ogunshakin on 8 May 2023. Posted in Budget, Pensioners, Pensions. No Comments on The Budget surprise: changes to the pension tax rules

New measures affecting pension allowances announced in the March Budget could mean your retirement planning strategy needs to be reviewed.

If Jeremy Hunt did produce a ‘rabbit-out-the-hat’ in his Spring Budget, it was the announcement of the effective abolition of the pensions lifetime allowance (LTA) from 2023/24. Since 2006, the LTA has been a cornerstone of the pension tax rules, effectively setting a ceiling on the tax efficient value of all your pension benefits.

In its pre-Budget guise, for most people the LTA was £1,073,100, a figure that was due to be frozen until April 2026. That may sound more than enough, but a 65-year-old non-smoker using that sum for an inflation-proofed annuity would only generate an income of about £45,000 a year (before tax).

In his speech, Mr Hunt made clear that one of the main aims of the abolition was to discourage doctors from retiring early to avoid a pension tax charge. However, the beneficiaries of the change will stretch far beyond the medical profession. The LTA was £1.8 million in 2011/12, but since then has been frequently cut or frozen. Consequently, an increasing number of higher earners have reduced or stopped pension contributions for fear that they too would face a tax charge (at up to 55%) when they drew their benefits.

Additional pension measures

There were three other pension measures in the Budget:

The annual allowance, which sets a limit on the tax-efficient total contributions in a tax year, was increased to £60,000, but remains subject to taper rules for the highest earners.
The money purchase annual allowance, which applies if you have drawn pension income flexibly, was also raised, from a constraining £4,000 to a less restrictive £10,000.
A new total cash limit of £268,275 will apply on the tax-free pension commencement lump sum, unless they are covered by some form of LTA protection. The strangely specific figure is based on the effective 2022/23 limit – 25% of the then LTA of £1,073,100.

Mr Hunt’s reforms could offer an opportunity to boost your retirement fund, particularly if you are one of those people forced to halt pension contributions some years ago. In those circumstances, you may be able to contribute up to £180,000 in 2023/24. However, before taking any action, advice is essential – not all the pension tax traps have disappeared.

Photo by Julius Yls on Unsplash

Winding-up petitions on the rise in HMRC squeeze

Written by Femi Ogunshakin on 17 April 2023. Posted in Bankruptcy, Company Insolvency, Litigation & Dispute Resolution, Winding Up Petitions. No Comments on Winding-up petitions on the rise in HMRC squeeze

With HMRC under pressure to collect more tax owed, it is moving away from the tolerance shown during the pandemic and back towards a normal level of debt enforcement activity. As a result, the number of company winding-up petitions being instigated by HMRC is rising rapidly.

HMRC’s use of winding-up petitions to actively chase the money it is owed comes at the worst possible time as many companies struggle to cope with inflationary pressures, higher interest costs and reduced consumer spending. HMRC’s aim is to recover tax owed from a company’s liquidated assets.

Although the tax gap (the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid) has declined in recent years, it is still 5.2% or £32bn.

Time-to-pay arrangements

For a company experiencing difficulty paying its tax liabilities, the best way forward is to agree to a time-to-pay arrangement with HMRC. This avoids the possibility of a winding-up petition, although early engagement with HMRC is essential.

An affordable, regular monthly payment will be agreed based on the specific financial circumstances of the company. A good approach is to not be overambitious with the monthly repayment value, so there is less chance of being unable to meet future payments.
HMRC will want to know about the company’s financial prospects (cashflow forecasts and budgets may be required), what efforts have made to raise funds, and what has been done to try and pay tax liabilities.
The arrangement is designed to be flexible, so the monthly payment can be adjusted over time.

Prior to agreeing to a time-to-pay arrangement, HMRC may want to see company assets released, with the funds raised used to repay tax. This might mean selling vehicles, increasing business borrowing or directors putting personal funds into the company.

HMRC’s guidance to paying a debt with a time-to-pay arrangement can be found here.

Photo by Melinda Gimpel on Unsplash

New points-based penalties for late VAT returns

Written by Femi Ogunshakin on 24 March 2023. Posted in VAT. No Comments on New points-based penalties for late VAT returns

A new points-based penalty applies to late VAT returns for VAT periods beginning on or after 1 January 2023. The first monthly return to be affected was the one due by 7 March 2023, with the first affected quarterly return due 7 May 2023.

This new returns penalty regime joins the completely separate new penalties for late payments in replacing the old system of default surcharges.

The points-based penalty revolves around a points threshold and a compliance period. These vary according to the length of the VAT period:

VAT period	Points threshold	Compliance period
Monthly	5	6 months
Quarterly	4	12 months
Annually	2	24 months

Points threshold

All traders start on zero points, including those who are on a default surcharge. One penalty point is then charged for each late VAT return, even for returns with a nil liability or where a repayment is due.

A £200 penalty is charged once the points threshold is reached.
Subsequent late VAT returns after the threshold is reached also incur the £200 penalty.
No penalty point is charged where a first or final VAT return is late.

Compliance period

If the penalty threshold has not been reached, points will expire after two years. However, once the threshold is reached, a trader has to submit returns on time throughout the compliance period for their points total to be reset back to zero.

For example, if a trader has submitted four consecutive monthly VAT returns late, then the £200 penalty will be charged for any subsequent late returns (the points threshold being reached). To reset to zero points, the trader must submit six consecutive returns on time.

The new regime for late returns does not penalise those who occasionally file late, but consistently late filers may find their points tally difficult to significantly reduce without clear-sighted guidance and planning.

HMRC guidance on the new penalty points system can be found here.

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Pay attention to tax codes

Written by Femi Ogunshakin on 22 March 2023. Posted in Benefit-In-Kind, Benefits, Budget, Employment Tax, Income Tax, Self Assessment. No Comments on Pay attention to tax codes

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

Common errors

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

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

Emergency codes

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

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

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

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

Checking and correcting codes

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

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

Photo by Alexandre Debiève on Unsplash+

HMRC sets its sights on hidden electronic sales

Written by Femi Ogunshakin on 16 March 2023. Posted in Budget, Income Tax, Tax. No Comments on HMRC sets its sights on hidden electronic sales

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.

Photo by Alexandre Debiève on Unsplash

Annual inflation in 2022 was 10.5%, but not all components rose by double digits.

Written by Femi Ogunshakin on 15 March 2023. Posted in Insights. No Comments on Annual inflation in 2022 was 10.5%, but not all components rose by double digits.

Annual inflation, as measured by the Consumer Prices Index (CPI), was 10.5% in 2022 against 5.4% in 2021. The official CPI calculator, the Office for National Statistics (ONS), says that the last time inflation was as high was in 1981. But what drove the inflation indices to four-decade highs last year? As is often the case, a simple economic question does not lead to a straightforward answer.

The hierarchy graph above offers a visual response:

The ONS CPI inflation ‘basket’ contains 12 categories, each with different weights (see figures in brackets) based on typical household expenditure. In 2022, the second largest category of spending, Housing, water, electricity, gas and other fuels, recorded an increase of 26.6%. Unsurprisingly, the star performer was gas prices, which rose 128.9% across 2022. That alone was worth a 1.8% rise in the CPI. Electricity prices jumped by 65.4%, adding another 1.3% to the CPI.
The next largest contributor to inflation, with a slightly smaller weighting in the basket, was Food and non-alcoholic beverages, which rose by 16.8% over the year. The ONS says this category’s annual inflation has increased for 17 consecutive months (from -0.6% in July 2021) and is now at 1977 levels. It accounted for 1.95% of CPI inflation.
In 2022, the category with the largest weighting in the CPI basket, Transport, played a less significant role in terms of overall inflation (0.9% on the CPI) than it did last year. Over the year, the category’s inflation was 6.5%. In June, annual transport inflation was nearly 15%, driven by the rise in petrol and diesel prices. As these fell back, so too did the transport inflation rate.
The category with the lowest inflation (2.0%) was also the one with the second lowest basket weighting – Communications – so did little to counter the sharp rises elsewhere.

The two main causes of 2022 inflation – food and gas prices – help to explain why inflation is expected to drop sharply in 2023. Both rose in response to the war in Ukraine and as that is now a year ago, prices should start to stabilise – indeed wholesale gas prices have fallen from their peaks.

The consensus is for the annual CPI number to end the year around 5%, less than half of 2022’s level but still enough to mean any long-term financial plans need to build in the value-eroding effects of inflation.

Source: ONS.

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

Written by Femi Ogunshakin on 1 March 2023. Posted in Income Tax, Making Tax Digital, Self Assessment. No Comments on 21st century Revenue – HMRC’s app and new texting service

HMRC’s app was launched a year ago and is gaining in popularity as it is being used to pay self-assessment tax bills. A more recent HMRC innovation is a new service for texting replies to taxpayers who make contact by mobile phone.

Using the app

The HMRC app can be downloaded from either the App Store (Apple devices) or the Google Play Store (Android devices). It is then just a matter of:

Following the instructions to complete the app settings; and
Signing in using your Government Gateway (only required for first-time use).

In addition to paying self-assessment tax bills, the HMRC app can be used to claim a refund if too much tax has been paid. Other uses include:

Tax credits: Changes can be reported, and the annual renewal completed. The app shows the amount of tax credit payments and when they will be made.
References: You can check your tax code and easily find your national insurance (NI) number and unique taxpayer reference (UTR).
Update: You can let HMRC know if you change address.
Tax details: You can get an estimate of tax payable and use HMRC’s tax calculator to work out take-home pay after income tax and national insurance contributions.

Despite some negative reviews, the HMRC app currently has a 4.5 rating on the App Store, and a 4.7 rating on the Google Play Store.

New texting service

Only launched 19 January, HMRC is trialling the sending of text messages to taxpayers who call their helplines about a routine matter that could be better resolved using HMRC’s digital services.

Although some callers will be given the choice of holding for an adviser, other calls will be automatically disconnected after a message explaining a text message has been sent. The message might point towards information on the gov.uk website, which can help with the enquiry, or to the webchat service.

The HMRC app can be found here for Apple users and here for Android users.

Photo by Neil Soni on Unsplash

Tax warnings for online sellers, influencers and content creators

Written by Femi Ogunshakin on 22 February 2023. Posted in Income Tax, Self Assessment, Self-Employed. No Comments on Tax warnings for online sellers, influencers and content creators

HMRC’s latest wave of ‘nudge letters’ – used to prompt a response from the recipient – has been targeted at online sellers, influencers and content creators warning them that they may not have paid enough tax.

It is likely HMRC has obtained information from various online platforms and is using this as the basis for the nudge exercise. The wide range of recipients illustrates the scope of HMRC’s data analytics capabilities, as they have managed to identify people running blogs or social media accounts that include sponsorship.

Although any profit from online activity is taxable, there is an exemption if annual gross trading income does not exceed £1,000.

Certificate of tax position

Any online seller who receives a nudge letter is asked to complete a certificate of tax position within 30 days.

If the seller has undeclared income, HMRC recommends making a voluntary disclosure using its online Digital Disclosure Facility. Once HMRC is informed of the intended disclosure, they will send an acknowledgement letter. Outstanding tax must be paid within 90 days from the date of this letter.

If the seller does not need to inform HMRC of any additional income, they either have to declare that all income from online marketplace sales has been correctly declared or explain the reason why income need not be declared. This could be because of the de minimis £1,000 exemption, or if income is less than the personal allowance of £12,570.

Tax position alternatives

Unlike the self-assessment tax return, there is no legal requirement to complete and return the certificate of tax position. However, non-completion will inevitably attract more attention from HMRC.

If an online seller’s tax affairs are not straightforward, it will probably be better to respond by letter instead. A more detailed explanation of the seller’s tax affairs can then be given. Professional tax advice, is, of course, essential.

A step-by-step guide for any online sellers, influencers and content creators who need to set themselves up as self-employed can be found here.

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Profit withdrawal changes for 2023/24

Written by Femi Ogunshakin on 17 February 2023. Posted in National Insurance Contributions, PAYE. No Comments on Profit withdrawal changes for 2023/24

Owner-managers have historically benefited by withdrawing profits by way of dividends, rather than taking director’s remuneration, due to the national insurance contribution (NIC) saving. However, tax changes taking effect from April 2023 will mean this approach may no longer be such an attractive option.

From 1 April 2023, the current 19% rate of corporation tax will only be available for the first £50,000 of profits. On profits between £50,000 and £250,000, the effective rate will be 26.5%, with 25% payable thereafter. As far as personal tax is concerned for 2023/24:

The tax-free dividend allowance will be cut from £2,000 to £1,000; and
Dividend tax rates are not reduced by 1.25% in line with the reduction to NIC rates.

Case study

The profit withdrawal decision will differ from owner-manager to owner-manager, but let’s take the situation where company profits are forecast to be £150,000 for the year ended 31 March 2024 and the owner-manager wants to withdraw £50,000 either as dividends or director’s remuneration (this will be their only income). The company does not have any other employees.

Dividend: After allowing for corporation tax, a dividend of £36,750 can be taken. Income tax on this will be £2,028, so net of tax income is £34,722.
Remuneration: After allowing for employer NICs, gross remuneration of £45,040 will be paid. After income tax and employee NICs, the net of tax income is £34,650.

There is virtually no difference between the two options. However, the remuneration option would be better if some or all of the £5,000 employment allowance was available to set against employer NICs. At higher levels of income, dividends have the advantage – for example, some £1,793 more in net of tax income for a £100,000 withdrawal – but again, the availability of the employment allowance could swing this around.

The employment allowance is not available if a director is the sole employee. This can be rectified by employing a family member and paying them at least £9,100 a year. The salary must of course be justified.

Forecast

Directors who want to take regular monthly or quarterly dividend payments will need a fairly accurate forecast of company profits. This might be difficult, but directors – assuming they have sufficient funds to live on – have the option of waiting until towards the end of the tax year before deciding on a profit withdrawal strategy, as the tax position will not change.

Higher Scottish rates of income tax mean the remuneration option is more expensive for Scottish taxpayers. It is assumed that rates of NIC will remain unchanged for 2023/24.

Tax rates and allowances for 2023/24, along with some useful tax calculators, can be found here. Scottish income tax information can be found here.

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New energy bill support scheme for businesses

Written by Femi Ogunshakin on 8 February 2023. Posted in Insights. No Comments on New energy bill support scheme for businesses

A new business energy support scheme is set to run from 1 April 2023 to 31 March 2024 but will be less generous than the scheme currently in effect. Businesses with energy costs below £107/MWh for gas and £302/MWh for electricity will not receive any support.

The current scheme runs until 31 March 2023 and is based on fixed prices. The new scheme will instead provide a discount on wholesale prices.

The new discount

Businesses will receive a unit discount of up to £6.97/MWh unit discount on gas bills, with a discount of up to £19.61MWh on electricity bills. The discounts only apply above a threshold level of £107/MWh for gas and £302/MWh for electricity.

At first glance that might not seem too bad, but energy billing is in kWh. When converted – two pence off a kWh of electricity and just over half a penny for gas – the reduction can be seen as much less generous.
Many smaller firms are struggling to pay energy bills even with existing support. For a typical retail store, the total reduction over the 12 months under the new scheme will be just £400.
As for the current scheme, the discount will not be available to businesses on existing fixed-price contracts agreed prior to 1 December 2021.

Although businesses do not need to take any action or apply for the new scheme, they should be aware of how the changes from 1 April 2023 will impact their cash flow forecasts.

Energy and trade-intensive businesses

A higher level of support will be provided to businesses in sectors identified as being the most energy and trade intensive. Similar to the current scheme, the discount for these businesses will reflect the difference between government-supported prices and wholesale prices.

Businesses may need to register for this additional support.

A full list of eligible energy and trade-intensive sectors can be found here.

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Company cars: not-so-free fuel

Written by Femi Ogunshakin on 3 February 2023. Posted in Benefit-In-Kind, Company Car Tax, Employment Tax, Self Assessment. No Comments on Company cars: not-so-free fuel

If your employer pays for the fuel in your company car, it may cost you more than you expected.

As the Autumn Statement was not a Budget, detailed publications that would normally emerge as the Chancellor sat down have taken time to appear. For example, the HMRC projections of how many more capital gains tax (CGT) payers there would be because of the much-reduced annual exemption (another 570,000 by 2024/25) did not appear until the Monday after the Autumn Statement, missing the weekend personal finance pages.

One even later arrival – three weeks after the Autumn Statement – was an HMRC bulletin on the fuel benefit charge for company cars in 2023/24. For some years the basis has been an increase in line with September annual CPI inflation (published in mid-October), so there was no explicit reason for HMRC’s procrastination. The number that was eventually revealed was the current figure, increased by 10.1%, as had been expected.

Taxable value for 2023/24

That means for 2023/24 if you have ‘free’ fuel, its taxable value will be assessed by multiplying £27,800 by your car’s percentage scale charge. For example, if you have a petrol-engine car with CO₂ emissions of 130–134 g/km, your scale charge is 31% and £8,618 (£27,800 x 31%) will be added to your income for tax purposes. In terms of hard cash, that is an extra £3,447 going to the Exchequer if you are a 40% taxpayer.

At this point you are probably wondering how far £3,447 of petrol would take you. Assume a price of £1.60 a litre and 40 miles a gallon and the answer is about 19,000 miles. In 2019, before the pandemic disrupted travel, the average car covered 7,400 miles a year. If that figure still applies – and it is probably less because of increased working from home – then the ‘free’ fuel break-even point is more than 250% of typical use.

Not all benefits are so harshly taxed – electric cars can be an attractive option – but the large cost of ‘free’ fuel is a reminder that when it comes to anything financial, ‘free’ is a word to be treated with great caution.

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Tax implications for the bank of mum and dad

Written by Femi Ogunshakin on 2 February 2023. Posted in Capital Gains Tax, Property, SDLT, Stamp Duty. No Comments on Tax implications for the bank of mum and dad

With property prices expected to fall during 2023, parents may be thinking about getting their children onto the property ladder. However, although help with a deposit does not raise that many tax issues, joint ownership can have expensive tax consequences.

Nearly half of first-time property buyers aged under 35 have received help from the bank of mum and dad. However the following implications should be considered alongside generous intentions.

Help with a deposit

Outright gift: This will be treated as a gift for inheritance tax (IHT) purposes. There is no immediate tax cost, but it could mean more IHT is payable if the parent subsequently dies within seven years.
Loan: An interest-free loan arrangement avoids any IHT implications, but it could impact on mortgage affordability calculations.

Stamp duty

Joint ownership is likely to mean upfront stamp duty consequences.

In England and Northern Ireland, first-time buyers can benefit from a nil-rate threshold of £425,000, saving a potential £8,750 compared to a normal purchaser. However, with joint ownership, all purchasers need to be first-time buyers to qualify for relief; parents are unlikely to qualify.
There is a similar, although much lower, relief for Scottish first-time buyers.
Furthermore, the inclusion of parents will probably mean that the stamp duty surcharge on second homes is payable. For property in England and Northern Ireland, this is 3%, with higher surcharges for Scottish and Welsh property.

The surcharge can mean an extra cost of £9,480 for a property purchase in England at the latest published average price (October 2022) of £316,000.

Capital gains tax (CGT)

CGT exemption on property disposal only applies if a property has been the seller’s main residence, and this again is unlikely to be the case for a joint owning parent. The tax charge will probably be mainly, or wholly, at 28%. The future reduction of the CGT annual exemption to just £3,000 will not help.

A useful guide on helping a child buy their first home can be found here.

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Making Tax Digital delayed once more

Written by Femi Ogunshakin on 27 January 2023. Posted in Making Tax Digital, MTD, Tax. No Comments on Making Tax Digital delayed once more

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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Associated company rules changing 1 April

Written by Femi Ogunshakin on 20 January 2023. Posted in Insights. No Comments on Associated company rules changing 1 April

Small company owners should by now be aware of the corporation tax changes taking effect from 1 April 2023, but with the associated company rules being introduced at the same time, don’t be caught off guard.

From 1 April 2023, there will be two rates of corporation tax:

A small profits rate of 19% where profits are below £50,000; and
A main rate of 25% where profits exceed £250,000.

Where profits are between £50,000 and £250,000, marginal relief applies so that the rate of tax is gradually increased from 19% to 25%. The effective tax rate on this band of profits is 26.5% – slightly higher still if a company receives dividend income.

Impact of associated companies

The profit thresholds are divided between associated companies. For example, if two companies are associated, they will respectively only benefit from the 19% tax rate on profits up to £25,000. This means each company pays around £1,875 more in corporation tax each year than if the full £50,000 limit had been available.

Overall, this may make little difference if both companies have profits in excess of £25,000 – the full £50,000 limit being utilised – but it will if one company has minimal profits.
Should this be the case, business owners may wish to consider running just the one company.

Meaning of associated

The basic rule is that companies are associated if they are under common control – this means a shareholding of more than 50%. For example, two companies are associated if two people both have 30% shareholdings in each company.

Companies only associated for part of an accounting period count as associated companies for the whole of that period.
Overseas resident companies can be included.
Dormant companies (not carrying on a trade or business) do not count as associated companies.

Determining whether or not a company is associated can get quite complex because shareholdings of associates can, in certain circumstances, be included.

The associated company rules almost certainly prevent the hiving off of profits to another company controlled by a spouse or civil partner in order to benefit from two £50,000 limits.

A detailed explanation of the associated company rules can be found here.

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High Income Child Benefit Charge: penalties and defaults

Written by Femi Ogunshakin on 12 January 2023. Posted in High Income Child Benefit Charge, Self Assessment. No Comments on High Income Child Benefit Charge: penalties and defaults

New data reveals that penalties issued by HMRC for not paying the High-Income Child Benefit Charge (HICBC), or paying the incorrect amount, have fallen significantly. However, the number of individuals still in default is estimated at more than 60,000.

If the HICBC is payable, an individual is required to submit a self-assessment tax return each year even if all of their income is taxed through PAYE.

Such individuals are unlikely to receive professional advice, so there is a lack of awareness.
Salary increases can lead to someone becoming subject to the charge, especially as the income limit has remained at £50,000 since the charge was introduced.

Complications

The HICBC can apply if either partner has income over £50,000. The definition of a partnership for this purpose includes people living together.

The charge falls on the partner with the higher income, and in many cases, one partner will not know what the other partner’s income is, especially if they have separated.

Although child benefit is normally paid to the person the child is living with, it is possible for the other partner to make the claim if they are contributing at least as much as the amount of the child benefit towards the child’s upkeep.

Moving in or out

Where a partner (B) moves in or out (with partner A) the position is:

Partner B moves in: Partner A could become liable to the HICBC, but only from when partner B moved in. Partner B will take over partner A’s HICBC if they have the higher income.
Partner B moves out: If partner A has the higher income, they will only be liable for the HICBC up to the date partner B moves out.

Self-assessment

Given the 31 January deadline for filing the 2021/22 tax return, individuals should urgently review their situation to ensure any HICBC is correctly declared. This is also the deadline for amending the 2020/21 return without the need to write to HMRC.

Failure to pay the HICBC, or paying the incorrect amount, will mean backdated assessments, often for considerable sums, plus, if no reasonable excuse, late notification penalties.

HMRC’s basic guide to the HICBC can be found here.

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Cohabitation law reforms rejected

Written by Femi Ogunshakin on 29 December 2022. Posted in Income Tax, Inheritance Tax. No Comments on Cohabitation law reforms rejected

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

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

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

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

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

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

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Tackling rising employment costs

Written by Femi Ogunshakin on 19 December 2022. Posted in Budget, Employment Tax, Income Tax, National Insurance Contributions, PAYE. No Comments on Tackling rising employment costs

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

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

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

Wage increase

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

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

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

NIC threshold

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

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

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

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Business rates revaluation in 2023

Written by Femi Ogunshakin on 13 December 2022. Posted in Business Rates. No Comments on Business rates revaluation in 2023

From 1 April 2023, business rates in England and Wales will be updated to reflect changes in property values since the last revaluation in 2017. Although many businesses will see increased bills, others will see reductions. A package of targeted support will help with the transition.

The revaluation is based on April 2021 rental values, a time when the property market was seeing significant turbulence. Not surprisingly, there will be considerable fluctuation between areas. For example, in London, the estimated change in rates bills payable across sub-markets range from a decrease of 11% in Victoria, to an increase of 34% in Clerkenwell and Farringdon.

The changes target the ‘bricks vs. clicks’ tax imbalance between physical and online businesses by substantially raising the business rates bills for big warehouse operators, but limiting rises for many high street retailers, restaurants and pubs.

Business support package

A support package has been announced to help business rate payers affected by the revaluation.

Business rates multipliers will be frozen for a further year, keeping them at 49.9p (small business) and 51.2p (standard) for 2023/24.
For 2023/24, retail, hospitality and leisure properties not qualifying for small business rates relief will receive a 75% business rates discount, subject to a cash cap of £110,000 per business. Relief is only 50% for the current year.
The downwards transitional relief caps will be abolished so that a business with a decreased rates valuation for 2023/24 immediately benefits from the full reduction on their bills.
For businesses with higher rates bills for 2023/24 as a result of the revaluation, upwards transition caps will limit the increase – these are set at 5%, 15% and 30% for small, medium and large premises respectively.
There will be protection for small businesses who lose eligibility (or see reductions) for either small business or rural rate relief due to the updated valuations. Bill increases will
be capped at £600 for 2023/24.

The government’s business rates valuation service, which shows a business’s updated rateable value for 2023/24, can be found here. Any revisions for Scottish businesses are expected in the Scottish Budget on 15 December.

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The effects of fiscal drag on your tax position

Written by Femi Ogunshakin on 10 December 2022. Posted in High Income Child Benefit Charge, Income Tax, Inheritance Tax, Self Assessment. No Comments on The effects of fiscal drag on your tax position

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

Inheritance tax

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

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

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

Income tax thresholds

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

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

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

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

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Meandering thoughts on Capital gains chop in Autumn Statement

Written by Femi Ogunshakin on 10 December 2022. Posted in Capital Gains Tax, MTD, Self Assessment. No Comments on Meandering thoughts on Capital gains chop in Autumn Statement

It should have come as no real surprise that the Chancellor took the axe to relief on capital gains tax (CGT) in the government’s Autumn Statement. The changes are expected to raise some £1.6 billion over the next five years by cutting the annual exempt amount (AEA) to £6,000 for 2023/24, and following this by a further, drop down to £3,000 from 2024/25.

The AEA is currently £12,300, so someone with, for example, gains of £20,000 to £25,000 from the sale of shares will have been advised to spread the disposals over two tax years to benefit from two AEAs. With an AEA of just £3,000 from 2024/25 onwards, a disposal would need to be spread over seven or eight years to fully eliminate the gain.

Instead, many investors may prefer to take the full tax hit from an early disposal, especially if they have concerns that CGT rates could be the next target. For a higher or additional rate taxpayer disposing of a buy-to-let property, for example, the reduction of the AEA to £3,000 will mean an additional £2,604 in CGT.

The AEA available to trustees is half the normal level, so for 2023/24 they will have an AEA of £3,000, with £1,500 available from 2024/25.

Reporting requirements

With a lower AEA, more individuals and trusts will find themselves having to report gains to HMRC. The estimate is that by 2024/25, an additional 260,000 people will be brought into the scope of CGT for the first time.

This will mean filing a self-assessment tax return or making use of HMRC’s real-time CGT service. Dealing with CGT can be a challenge given the complex computational rules and reliefs, plus the one-off nature of the tax.

CGT planning

The reductions to the AEA make planning around capital gains more important than ever.

Consider utilising the current, more generous, AEA by 5 April 2023.
Make use of ISAs to shelter gains from CGT.
Ensure the best use is made of any capital losses – these can be wasted if crystalised in a later tax year to gains.
Spouses and civil partners can transfer assets between themselves to make the best use of exemptions and capital losses.
Look at whether holding buy-to-let property in a company structure is beneficial.

HMRC’s guide to reporting and paying CGT can be found here. For detailed guidance on your options, please get in touch.

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Dissecting inflation: what a difference a year makes

Written by Femi Ogunshakin on 6 December 2022. Posted in Insights. No Comments on Dissecting inflation: what a difference a year makes

Annual CPI inflation hit 10.1% in September, but that does not mean every price is showing a double-digit increase.

The September Consumer Prices Index (CPI) inflation reading is probably the most important inflation metric in a given year. Traditionally, this number is the one used by the Government as the basis for increasing tax allowances and bands, as well as benefits – including the state pension.

In recent years the significance of September’s CPI reading has waned, as the Government has chosen to freeze or restrict increases to limit the cost to the Exchequer of these benefits. The most obvious recent example is the freeze to the personal allowance (£12,570) and higher rate threshold (£50,270 outside Scotland), which would be £14,270 and £57,170 from April 2023 had the first two years of a four-year freeze not happened.

This year, the September 2022 annual inflation rate of 10.1% is more significant and not all it seems. The graph above shows the annual inflation rate in the 12 categories that make up the CPI ‘shopping basket’ of goods and services.

Variable effects

Only a third of those categories registered inflation above 10%. And another third recorded rises of no more than 5%. All the categories experienced higher inflation in September 2022 than September 2021, when the annual inflation rate was a more modest 3.0%, but the changes brought about over the intervening twelve months have had significantly varied effects across the different categories:

Housing, water, electricity, gas and other fuels inflation has increased from 1.9% to 20.2%, due to the war in Ukraine, resulting in soaring energy bills.. This category is shortly expected to see another jump, as the Government’s new energy price guarantee took effect from 1 October.
Food inflation jumped from 0.8% in 2021 to 14.5% in 2022. This can also be largely attributed to war in Ukraine. Not only has the war affected the production of grain and sunflower oil, directly increasing their prices, but the higher cost of fossil fuels – used in transportation and in fertiliser manufacture – has exacerbated the price increase.
At the other end of the scale, however, the communications category, primarily telecoms, is experiencing only 2.4% inflation (albeit in 2021 the corresponding figure was 1.5%). Health (medical, hospital and outpatient services) has also seen a modest rise, from 1.3% to 3.5%.

These large variations help explain why your experience of inflation may seem, at different times, better or worse than the headline figure.

The Office for National Statistics (ONS) recognises this fact and has recently introduced an online personal inflation calculator which is worth exploring.

It is important to build the impact of inflation into your planning, and wise to seek professional advice to better understand how these figures affect you personally

Source: ONS

The marshmallow paradox – VAT or no VAT?

Written by Femi Ogunshakin on 29 November 2022. Posted in Marshmallow, Tax, VAT. No Comments on The marshmallow paradox – VAT or no VAT?

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.

Photo by Richard Bell on Unsplash