Author: Femi Ogunshakin

Finding the right mix in mixed use properties

Written by Femi Ogunshakin on 21 November 2022. Posted in SDLT, Stamp Duty, Tax. No Comments on Finding the right mix in mixed use properties

A recent tribunal found in HMRC’s favour when a residential property was questionably deemed mixed use.

On the purchase of a mixed use property, stamp duty land tax (SDLT) is paid at non-residential rates rather than residential rates. This is the case regardless of the relative size of the residential and non-residential areas of the property.

Currently, it is beneficial to pay residential rates on a property purchase in England or Northern Ireland costing up to £965,000. However, mixed use treatment is advantageous on more expensive properties, or if the 3% surcharge on additional residential properties would otherwise be payable.

What is mixed use?

It can be quite complicated deciding on the appropriate SDLT treatment when a building is used partly as a dwelling and partly for other purposes, but HMRC does make a clear distinction.

A building where certain rooms, which could otherwise be used as part of the residential area, are used for work purposes – is not mixed use. (For example, where someone has an office at home).

A building that is divided into separate residential and non-residential areas, with the non-residential part adapted for use as commercial or business premises – can be mixed use. (For example, where part of a building is converted into a surgery).

The actual use is irrelevant. The key factor is the degree of conversion required and the degree of separation from the residential area.

A cautionary tale

A recent First-Tier Tribunal case on the meaning of ‘mixed use’ went in HMRC’s favour.

A couple had purchased a property for £2.9 million. They wanted to classify it as mixed use on the basis that the land encompassed a public footpath, arguing that the footpath was used for a separate commercial purpose – namely access to a neighbouring farm. The couple were responsible for ensuring ditches and drains on their side of the path remained clear, but the house itself was entirely residential.

The tribunal held that the shared path was like any other public right of way, and simply formed part of the grounds of the property. It was not a separate non-residential area.

This case involved a tax refund company, and HMRC has said the decision should serve as a warning to those considering getting involved with such agents.

HMRC has consulted on changes to the way SDLT applies to mixed use property, for the future, but no proposals have yet been forthcoming. In the meantime, HMRC’s guidance on how the tax can be found here.

Photo by Towfiqu barbhuiya on Unsplash

First time buyers: time to act?

Written by Femi Ogunshakin on 8 November 2022. Posted in Budget, Wealth. No Comments on First time buyers: time to act?

The increased stamp duty relief for first time buyers has not been reversed by the new Chancellor, but it may not survive beyond the tax year.

One of the few tax cuts to survive from Chancellor Kwarteng’s September’s Growth Plan is the uplift to stamp duty land tax (SDLT) relief for first time buyers. This has gone up from £300,000 to £425,000, potentially saving qualifying first-time buyers up to £8,750.

The current SDLT nil-rate threshold for property purchases in England and Northern Ireland is £250,000, but first-time buyers now benefit from an enhanced threshold of £425,000. The additional £175,000 of nil-rate threshold saves SDLT at the rate of 5%.

In Wales the starting threshold for main residential Land Transaction Tax was lifted from £180,000 to £225,00 from 10 October, which should also help first time buyers. Scotland has not yet made any changes to land taxes.

Eligible properties – mind the gap

The maximum eligible property value in England and Northern Ireland has also been increased from £500,000 to £625,000.

If a property costs between £425,000 and £625,000, SDLT (at the rate of 5%) is paid only on the excess over £425,000.
However, where the cost of a property exceeds £625,000, normal rates of SDLT are paid on the full purchase price
This means there will be quite a jump in the amount of SDLT if a first-time buyer just exceeds the £625,000 limit. For example, SDLT on a property purchased for £625,000 is £10,000, but goes up to £18,800 if the purchase price is merely £1,000 higher.

Eligible buyers

To qualify as a first time buyer, the individual must never have owned a freehold or leasehold interest in a residential property in the UK or anywhere else in the world. They must also intend to occupy the property as their main residence.

This can be problematic for joint purchasers, since all purchasers have to meet the qualifying conditions. First time buyer relief therefore does not generally apply if a parent helps their son or daughter get a foot on the property ladder by taking out a joint mortgage with them, if this also means joint ownership.

It would be no surprise if these SDLT relief increases are partly or fully reversed in April 2023. First time buyers planning to purchase a home in the near future might be advised to do so sooner rather than later to take advantage of this relief before it disappears – the relevant date is the point of completion.

To work out how much you could pay or save, see the Government’s online SDLT calculator, which will work for most types of property purchase.

Photo by Tierra Mallorca on Unsplash

Dividends vs remuneration: the corporation tax quandary

Written by Femi Ogunshakin on 4 November 2022. Posted in Income Tax, IR35, National Insurance Contributions, PAYE, Self Assessment. No Comments on Dividends vs remuneration: the corporation tax quandary

For owner-managed companies, bonuses, dividends and remuneration will become yet more complex in the new tax year.

With the corporation tax increase and dividend rates now confirmed by the Government, the dividend vs remuneration decision for owner-managed companies is likely to become more complicated in 2023/24, particularly when it comes to bonuses.

Historically, it was preferable to extract company profits through dividends rather than through director’s remuneration. This is because of the national insurance contribution (NIC) cost attached to remuneration.

However, from 1 April 2023, there will be a substantial increase to the rate of corporation tax once profits hit £50,000. On profits between £50,000 and £250,000 the rate will be 26.5%, with the 19% rate only available for the first £50,000 of profits.

The bonus decision

The tax position will differ in each case, but let’s take a situation where a higher rate taxpayer wants to take a bonus of £40,000 from their company, which is in the 26.5% corporation tax bracket. The director has already used their tax free dividend allowance.

Dividend
After allowing for corporation tax, a dividend of £29,400 can be taken. Income tax on this will be £9,923, so the net income is £19,477.

Remuneration
After allowing for employer NICs (assuming the rate does not increase next year), the gross remuneration would be £35,149. After income tax and employee NICs are applied, the net income is £20,386.

In this case, remuneration is the beneficial option (and would be better still if some or all of the employment allowance was available). Without the corporation tax increase, the situation would have been reversed.

Of course, the situation could change if the Government decides to reinstate the additional 1.25% percentage points to NIC rates (albeit, in this particular example, the remuneration option would still be marginally better).

Other factors to consider

There are several other advantages to paying remuneration rather than dividends to consider too:

Dividends must be paid to all shareholders.
A dividend has to be covered by a company’s profits.
Dividends do not always count as income when applying for a mortgage.

As these examples illustrate, the corporation tax landscape has become more complicated. Although a Government guide clarifies things somewhat, it’s always best to seek professional advice rather than risk losing valuable income.

Photo by Austin Distel on Unsplash

Over-65s set new employment record

Written by Femi Ogunshakin on 25 October 2022. Posted in PAYE, Pensioners, Pensions, Self Assessment. No Comments on Over-65s set new employment record

The latest data from the Office for National Statistics (ONS) reveals that more people than ever are working beyond age 65.

One of the stranger economic statistics of recent times has been the strength of employment markets on both sides of the Atlantic. For all the talk of an impending recession and the upward march of interest rates, employment has remained buoyant in both the UK and the US. The unemployment rate in both countries is under 4.0%, which is about as close to full employment as can be reached. The latest estimate for the UK is that unemployment numbers are 42,000 less than job vacancies, whereas in the US, job openings are double the unemployed numbers.

A notable feature of the UK employment market has been the increase in the population aged 65 and over who are in work. The latest data from the ONS – covering the period April to June 2022 – showed both a record quarterly increase and a record total of close to 1.5 million, of whom nearly three quarters were employed. Viewed another way, 15.5% of men and 9.2% of women aged 65 and over were in work during this period.

The longer-term ONS figures show that over the last ten years, while overall employment has risen by about a tenth, employment among those aged 65 and over is up by a little over a half. These senior workers are not labouring all week, but they are, on average, putting in nearly 22 hours. The recent joiners of the 65-and-over workforce are predominantly part-timers, both employed and self-employed, according to the ONS.

What the ONS statistics do not reveal is why employment is growing so rapidly in this sector of the population. There is a clue in the fact that, to quote the ONS, “The industries where informal employment is more common, such as hospitality and arts, entertainment and recreation, saw some of the largest increases.”

The combination of sharply rising inflation and the increase in state pension age to 66 is likely to be forcing some former retirees back into work to make ends meet. It does not help that the April 2022 increase in the state pension was 3.1%, less than a third the current (August) rate of CPI inflation.

If the idea of joining that growing band of those still working at 65 and over does not appeal, then make sure your retirement planning provides you with enough income when you need it.

Source: ONS 9/2022.

17 October 2022: ‘The Growth Plan’ – a further update

Written by Femi Ogunshakin on 17 October 2022. Posted in Budget. No Comments on 17 October 2022: ‘The Growth Plan’ – a further update

At 6.00 am on Monday 17 October, the Treasury issued a press release announcing that the (new) Chancellor, Jeremy Hunt, would making a statement “bringing forward measures from the Medium-Term Fiscal Plan”. The timing of the press release suggested that the Treasury was concerned it had not done enough the previous Friday to calm markets ahead of the end of Bank of England gilt purchase support.

The Chancellor’s statement was in two parts: firstly, a pre-emptive media statement in the morning, then an official statement to the House of Commons in the afternoon. He announced what amounts to a near total unwinding of Kwasi Kwarteng’s ‘fiscal event’ of 23 September.

Measures revoked

The cut to 19% in the basic rate of tax (outside Scotland) from 2023/24 will not take place. Instead, basic rate will remain at 20% “indefinitely”, meaning that even Rishi Sunak’s 2024/25 scheduled timing has been dropped.

The off payroll working rules in the public and private sectors (often referred to as IR35) will remain in place, reversing their removal at the start of the next tax year.

The 1.25 percentage points reduction in dividend tax rates, due from 2023/24, will be scrapped.

VAT-free shopping for overseas visitors will not be re-introduced.

There will now be no freeze on alcohol duty for one year from February 2023.

Under review

The Energy Price Guarantee (EPG), which was due to cap average domestic bills at £2,500 a year for two years from the start of October, will be scaled back to last only until April 2023. In the meantime, the Treasury will design “a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need”. Any support for businesses from April 2023 “will be targeted to those most affected”.

Measures retained

The reduction in national insurance contributions, which reached its third reading in the House of Lords on 17 October, will go ahead.

The stamp duty land tax cuts that took effect on 23 September will not be reversed.

The extension of the £1 million annual investment allowance beyond March 2023 remains, as do enhancements to the seed enterprise investment scheme (SEIS) and company share option plans.

Financing

The measures unwound today account for about £11 billion of the extra £45 bn of borrowing by 2026/27 created by the 23 September ‘fiscal event’. The U-turn on abolishing the top 45% rate of tax (outside Scotland) and Friday’s decision to keep the already legislated for corporation tax increases were worth about £21 bn, implying that over 70% of Kwasi Kwarteng’s planned borrowing spree has now disappeared.

Based on recent analysis by the Institute for Fiscal Studies, the 2026/27 financing black hole that remains after all the unwinding is about £32 bn, although press rumours at the weekend suggested that the Office for Budget Responsibility (OBR) could add another

£10 bn to the IFS’s debt projection.

The Chancellor stated that there will be “more difficult decisions” to come on both tax and spending. Government departments will be asked to find efficiencies within their budgets. In his initial statement Mr Hunt also said, “Some areas of spending will need to be cut.”

Further changes to fiscal policy to put the public finances on a sustainable footing will be announced on 31 October alongside the publication of the OBR’s Economic and Fiscal Outlook.

Photo by Zachary Kyra-Derksen on Unsplash

UK Prime Minister’s Statement – 14 October 2022

Written by Femi Ogunshakin on 14 October 2022. Posted in BREXIT, Budget, Tax. No Comments on UK Prime Minister’s Statement – 14 October 2022

On 14 October, as an important deadline loomed for Bank of England support of the government bond markets to expire, the government’s political turmoil ratcheted up as the fallout from the ‘fiscal event’ of 23 September claimed its first scalp.

A new Chancellor

Jeremy Hunt replaced Kwasi Kwarteng as Chancellor, making him the fourth Chancellor in as many months.

Chris Philp, the Chief Secretary to the Treasury, was also sacked. He was replaced by Ed Argar, formerly the Paymaster General and Minister to the Cabinet Office.

Corporation tax

At a press conference (the House of Commons was not sitting), the Prime Minister announced that the planned reversal of the increase to corporation tax would not go ahead. The rise from April 2023 to a main rate of 25%, with reduced rates for companies with profits below £250,000, was legislated for in the Finance Act 2021.

31 October remains the date when the Medium-Term Fiscal Plan will be announced. The Prime Minister said that the £18bn tax savings from the corporation tax reversal was a ‘down payment’ on this strategy. That still leaves a shortfall of about £24bn in 2026/27 stemming from September’s announcement.

Spending, said Liz Truss, would grow ‘less rapidly than previously planned’.

Timetable of reversals

Today’s announcements were the culmination of a series of statements and retractions over the last few weeks:

· On 26 September the previous Chancellor, Kwasi Kwarteng issued an ‘Update on Growth Plan Implementation’ revealing that his Medium-Term Fiscal Plan would be presented on 23 November, alongside a forecast from the Office for Budget Responsibility (OBR).

· The planned abolition of the 45% tax rate announced in September’s ‘mini-Budget’ survived just ten days before being reversed on 3 October.

· Seven days later, on 10 October, the Treasury announced that the Chancellor would bring forward the announcement of his Medium-Term Fiscal Plan from 23 November to 31 October.

This last date for the calendar is one of the surviving elements of Kwasi Kwarteng’s planning which Jeremy Hunt will now take forward.

Photo by Juli Kosolapova on Unsplash

Making Tax Digital: avoiding VAT penalties

Written by Femi Ogunshakin on 12 October 2022. Posted in Making Tax Digital, MTD, Tax, VAT. No Comments on Making Tax Digital: avoiding VAT penalties

From 1 November 2022, VAT-registered businesses that do not yet comply with the Making Tax Digital (MTD) requirements will face penalties. Businesses should also be aware of the new VAT penalty regime being introduced from 1 January 2023.

Although VAT-registered business should already be submitting their VAT returns using MTD compatible software, they have until now been able to continue using their VAT online account without incurring a penalty. However, for those businesses filing their VAT returns monthly or quarterly, this option will no longer be available, making it impossible to file other than by using MTD software.

HMRC has said that a business filing annual VAT returns can continue to use their VAT online account until 15 May 2023.

Around 10% of businesses filing returns using the correct MTD software have not yet signed up for MTD with HMRC but will need to do so to avoid a penalty.

Penalties

The maximum penalty for filing a VAT return using the incorrect method is £400, but only £100 if a business’s turnover is below £100,000.

Any business that is not signed up for MTD will also be at risk of incurring penalties under the new regime applicable for VAT return periods beginning on or after 1 January 2023:

Interest, currently set at 4.75%, will be charged from the due date.
Late payment penalties will kick in, initially at 2% of the outstanding VAT, once payment is more than 15 days late.
Late submission penalties will be charged under a points-based system, with an initial £200 penalty charged if four quarterly returns are late.

Having a reasonable excuse might provide a potential escape route, but failure to use MTD software is hardly likely to count.

HMRC’s guidance on how to avoid penalties for MTD for VAT can be found here.

Photo by Artyom Kabajev on Unsplash

The rise of mini umbrella company fraud

Written by Femi Ogunshakin on 3 October 2022. Posted in Employment Tax, Income Tax, National Insurance Contributions, PAYE, Tax. No Comments on The rise of mini umbrella company fraud

The rise of mini umbrella company fraud continues to concern HRMC which has recently updated its guidance for businesses that either place or use temporary labour. Mini umbrella companies can be used to abuse the VAT flat rate scheme and the national insurance contribution (NIC) employment allowance.

The VAT flat rate scheme can only be used if a business’s turnover is no more than £150,000, and the NIC employment allowance covers the first £5,000 of employer NIC liability each tax year.

Fraud

Mini umbrella company fraud is where multiple limited companies are created, with only a small number of temporary workers employed by each one.

Businesses should be aware of the potential dangers in their labour supply chain – apart from the impact on reputation, the business’s workers may end up receiving less than they are entitled to.

Workers are often unaware of the arrangements, may not even know who their employer is, and might be regularly moved around between different mini umbrella companies. The use of the mini umbrella company model can mean the loss of some employment rights.

Warning signs

Mini umbrella companies will normally be low down in the supply chain, so it can be challenging to spot them. Warning signs include:

Unusual company names: The companies are often set up around the same time and given a similar or unusual name.
Unrelated business activity: The business activity listed at Companies House may not relate to the services provided by the worker.
Foreign national directors: Foreign nationals – who have no previous experience in the UK labour supply industry – are often listed as directors.
Movement of workers: Employees are moved frequently between different mini umbrella companies.
Short-lived businesses: Mini umbrella companies typically have a relatively short lifespan – often less than 18 months – before being dissolved by Companies House for not meeting filing obligations.

HMRC’s updated guidance on mini umbrella company fraud can be found here.

Photo by J W on Unsplash

Six-fold increase on late payment interest rates

Written by Femi Ogunshakin on 20 September 2022. Posted in Income Tax, Self Assessment, Tax. No Comments on Six-fold increase on late payment interest rates

HMRC late payment interest rates have now been raised six times during 2022 – from 2.6% at the start of the year to a current rate of 4.25%. However, at least there’s some good news, with an uplift to the tax repayment rate.

The charge for late payment is set at base plus 2.5%. So, with the Bank of England base rate going up from 1.25% to 1.75%, HMRC’s late payment rate has correspondingly gone up from 3.75% to 4.25%. The increased rate applies from 23 August and covers almost all taxes and duties – the exception being quarterly instalment payments of corporation tax, for which the rate has risen from 2.25% to 2.75% since 15 August.

Unfortunately, current predictions have the base rate peaking at 2.25% or 2.5% by the end of 2022, so further late payment interest rate hikes should be expected.

Get up to date

The latest late payment rate increase will hit taxpayers who are not up to date with their tax payments. Many will be struggling to pay outstanding taxes -–particularly the latest self-assessment payment on account due on 31 July – against the backdrop of rising living costs.

Banks and building societies have generally not passed on the latest 0.5% base rate increase to savers, so it makes sense to use savings to repay, or at least reduce, tax debt.
For a tax liability of, say, £15,000, the annual late payment interest cost has already risen by nearly £250 to almost £650 during 2022.

Repayment rate

The one piece of good news is that the repayment rate on overpaid tax has gone up by 0.25% to 0.75%, being the first increase in over a decade.

However, the still meagre repayment rate means there is little incentive for HMRC to make prompt repayments, with taxpayers often encountering significant delays.

HMRC interest rates for late and early payment can be found here.

Photo by Markus Spiske on Unsplash

Getting in touch: HMRC’s new email facility

Written by Femi Ogunshakin on 16 September 2022. Posted in PAYE, Stamp Duty, Tax, VAT, Wills & Probate. No Comments on Getting in touch: HMRC’s new email facility

Although there is no general facility to contact HMRC by email, it is slowly moving into the 21st century by providing the option to receive an email response. But of course, this comes with a few conditions.

Dealing with HMRC by post can be a slow process. With resources having been spread more thinly than ever due to the Covid-19 pandemic and Brexit, HMRC has only recently been working its way through the built-up backlog of post.

Scam risks

Scammers can use fake HMRC emails as a way of obtaining personal information, although, with improved scam email detection, they have now largely switched to text messaging. Nevertheless, HMRC points out the risks associated with using email. Their guidance raises various concerns:

Emails sent may be intercepted and altered.
Attachments could contain a virus or malicious code.

To reduce the risk, HMRC will desensitise information, by, for example, only quoting part of a unique reference number.

Confirmation

Anyone who would like to be contacted by email has to confirm to HMRC in writing by post or email that:

They understand and accept the risks of using email;
They consent to financial information being sent by email;
Attachments can be used; and
Junk mail filters are not set to reject and/or automatically delete HMRC emails.

HMRC should also be sent the names and email addresses of all people to be contacted by email, such as business owners, staff and the business’s tax agent.

Confirmation will be held on file by HMRC and will apply to future email correspondence, with the agreement reviewed at regular intervals to make sure there are no changes. The use of email can be cancelled at any time by simply letting HMRC know.

HMRC publish a list of recent emails it has sent out to help people determine if an email is genuine. This list can be found here.

Photo by Brett Jordan on Unsplash

Energy Costs Statement – 8 September 2022

Written by Femi Ogunshakin on 9 September 2022. Posted in Insights. No Comments on Energy Costs Statement – 8 September 2022

After a prolonged period of speculation, the new Prime Minister Liz Truss has announced preliminary details of how the government plans to deal with the energy price crisis.

In late May this year, the then Chancellor, Rishi Sunak, announced a range of measures to reduce the impact of the anticipated October 2022 Ofgem utility price cap increase. Mr Sunak’s announcement followed an earlier assistance package revealed in February, ahead of the April 2022 Ofgem price cap increase from £1,277 to £1,971.

Sunak’s measures, which included a flat £400 off all consumers’ bills, were made at a time when the price cap was projected to rise to £2,800 a year for the October 2022 – March 2023 period. Since then:

Ofgem has reduced the energy price cap review period from six months to three in an effort to bring more stability to energy markets.

The regulator has set a price cap for October – December 2022 of £3,549, an 80% rise on the current level.

Projections for the next cap reviews suggested the annual bill could exceed £6,500 by April 2023.

The problems created for the government by soaring gas prices are exacerbated by the fact that many businesses renew their fixed term energy contracts (typically for one or two years) in October.

The commercial sector does not benefit from any price cap and stories have emerged of small businesses seeing their utility costs jumping as much as tenfold or even being refused new contracts. Outside the commercial sector, there have been similar issues for schools and hospitals.

The Government plan

In yesterday’s announcement during a House of Commons General Debate on UK Energy Costs, the new Prime Minister announced that:

The government is introducing an Energy Price Guarantee (EPG) set at an annual £2,500 for the next two years from 1 October 2022. This will apply on the same basis as the existing Ofgem cap, i.e. a regional based limit on standing and unit charges in England, Wales and Scotland, not on total bills.

The £400 flat rate payment, spread over six months, announced in May will remain in place. This reduces October – December 2022 bills by £66 a month and January – March 2023 bills by £67 a month. Arguably this means the effective cap is £1,700 through to March and £2,500 thereafter.

Other assistance announced in May, such as the £300 additional payment for pensioners, remains in place.

Green levies are temporarily suspended, an adjustment included in the EPG.

Households using heating oil and LPG will receive discretionary payments.

The same level of support will be given to households in Northern Ireland.

The government ‘will also support all business, charities and public sector organisations with their energy costs this winter, offering an equivalent guarantee for six months’. After that period further support will be provided to vulnerable sectors, such as the hospitality sector.

Details of the funding for these measures will be announced by the Chancellor in his fiscal statement ‘later this month’, currently expected in the week of 19 September.

For more on the government’s announcements, see:

https://www.gov.uk/government/news/government-announces-energy-price-guarantee-for-families-and-businesses-while-urgently-taking-action-to-reform-broken-energy-market

Source: Ofgem, Cornwall Insights and DBEIS

Further information on different forms of assistance for households can be found at:

https://helpforhouseholds.campaign.gov.uk/

Confused on claiming residence band relief?

Written by Femi Ogunshakin on 6 September 2022. Posted in Inheritance Tax, Lasting Will & Testaments, Wealth, Wills & Probate. No Comments on Confused on claiming residence band relief?

Working through inheritance tax (IHT) requirements come at a difficult time. The provisions of the residence nil rate band (RNRB), which can be passed on between deceased spouses and civil partners, has caused some confusion.

Any unused RNRB from the first death of a spouse or partner can be relieved on the death of the second individual. The claim is based on the value of the RNRB at second death, but some executors are mistakenly using the value at the date of first death.

The RNRB was introduced from 6 April 2017 at £100,000, increasing by £25,000 a year until reaching its current value of £175,000.

The claim for RNRB is made on IHT form IHT436, with the confusion coming from the entry at box 11: the value of the RNRB enhancement at the spouse or civil partner’s date of death. However, the actual claim is based on the value entered at box 14. This should be the value of the RNRB at the date of second death, although it is easy to see why mistakes are being made given the confusing wording used by HMRC.

HMRC does not seem to be picking up the error, so if a mistake has been made a correction will have to be made by writing to the Revenue.

Conditions and transfer

Unlike the normal IHT nil rate band, the RNRB comes with various conditions. It is only available:

At death (not against lifetime gifts).
Against the value of a home (only one property can qualify).
Where the home is inherited by direct descendants (including step, adopted and foster children).

Any unused RNRB can be transferred in the same way as the nil rate band, with a claim required within two years of second death. It doesn’t matter if first death was before the introduction of the RNRB on 6 April 2017.

The unused RNRB of more than one spouse or civil partner can be transferred, but the overall total cannot exceed one full RNRB (£175,000).

Detailed HMRC guidance on working out and applying the RNRB can be found here.

Photo by Joel Moysuh on Unsplash

Pension top-ups for lower-paid employees

Written by Femi Ogunshakin on 24 August 2022. Posted in Income Tax, Pensioners, Pensions. No Comments on Pension top-ups for lower-paid employees

Employees who contribute to an occupational pension scheme under a net pay arrangement do not currently benefit from any tax relief if their earnings are below the personal allowance. This anomaly will be rectified from 6 April 2024 when HMRC will start making top-up payments.

A net pay arrangement is where pension contributions are deducted from pay before tax is calculated. The anomaly arises because someone in a similar situation, but making contributions with relief given at source, benefits from 20% relief. The change will mean low earners benefiting from the same tax relief regardless of earnings.

Top-up payments

HMRC’s top-up payments will be introduced from tax year 2024/25 onwards, with the top up not paid until after the end of the tax year. The implementation delay is due to the significant HMRC system changes required.

The intention is that HMRC will notify those who are eligible and invite them to provide the necessary details for the top-up to be paid direct to their bank account. The requirement to claim the top-up, however, runs the risk of non-take up.
As an example, someone qualifying with savings of £500 into an occupational pension scheme for a tax year should receive a subsequent top-up from HMRC of £500 at 20% = £100. The same rate will apply for Scottish taxpayers.
If part of a person’s pension savings already benefits from tax relief due to earnings exceeding the personal allowance, a top-up payment can still be given for the proportion not benefiting.
Top-ups will be taxable, although this will not mean any additional income tax for many recipients given their level of earnings.

Although top-ups are only estimated to be an average of just over £50 a year, more than a million employees should benefit – the vast majority of them women.

The government’s policy paper explaining the change can be found here.

Photo by Egor Myznik on Unsplash

Help to Grow: Digital scheme expanded

Written by Femi Ogunshakin on 19 August 2022. Posted in Making Tax Digital, MTD. No Comments on Help to Grow: Digital scheme expanded

The government’s Help to Grow: Digital scheme has just been expanded to businesses with at least one employee. Previously, only businesses with five or more employees were eligible. The scheme provides a 50% discount towards the cost of software.

The extension of the scheme’s eligibility criteria means that some 1.2 million businesses can now benefit. The scheme has also been expanded to include:

Additional software in the form of eCommerce software that can help businesses sell online and reach new markets; and
One-to-one advice on how best to adopt digital technology, although this service will not go live until later this year.

The discount

The 50% discount is worth up to £5,000 (excluding VAT) on approved software, which is purchased for the first time. Only one software product can qualify for the discount, and only the first 12 months of software costs are covered. The business has to be incorporated and trading for at least 12 months.

The types of software covered are:

Customer relationship management software that allows a business to store its customer contact and order data all in one secure, central location.
Digital accounting software that makes essential business finance tasks like raising invoices, expense tracking, and sharing information easier to manage.
eCommerce software that helps a business sell its products and services online.

On average, using customer relationship management software boosts productivity by 18%, with digital accounting software increasing employee sales by nearly 12% over three years.

There are currently 14 approved technology suppliers listed on the Help to Grow: Digital website, which also provides a considerable amount of guidance. Business owners can learn about the different types of software available, how to identify their business needs, and use step-by-step guides to embrace new ways of working.

More information about the Help to Grow: Digital scheme can be found here.

Photo by Mo on Unsplash

Setting new taxpayer records

Written by Femi Ogunshakin on 14 August 2022. Posted in Employment Tax, High Income Child Benefit Charge, Income Tax, Inheritance Tax, Lasting Will & Testaments, Self Assessment. No Comments on Setting new taxpayer records

New data from HMRC reveals there are now over six million people paying higher or additional rate tax in the UK.

In recent years, the end of June has been the time for HMRC to issue its annual statistics on taxpayer numbers. This series is more up to date than some of HMRC’s releases and includes a projection for the current tax year.

The latest set of data received more press attention than usual for several reasons:

The number of income tax payers jumped by 1.3 million (4%) for 2022/23, the largest increase since 2004/05.
Higher rate taxpayer numbers rose by 750,000 (16%), an increase unmatched in over 30 years of HMRC data.
The population of additional rate taxpayers grew by 66,000 (12%). When the additional rate of tax was introduced in 2010/11, only 0.75% of taxpayers were in this lofty band, a proportion that has since grown to 1.75%.
Add together higher and additional rate taxpayers and the total exceeds 6.1 million, over one in six of all income taxpayers.

This means there are more taxpayers than ever before and more of them are paying higher and additional rates due to a combination of two main factors:

The then Chancellor Rishi Sunak’s decision in March 2021 to freeze the personal allowance, higher rate and additional rate thresholds from 2021/22 through to 2025/26. In fact, the additional rate threshold has never moved from its initial £150,000.
Inflation has been vastly higher than anticipated back in March 2021, when the CPI rate was running at 0.7% (a year, not a month) and the Office for Budget Responsibility (OBR) was projecting that it would not reach 2% until 2025. The OBR’s projection for total inflation over the four years from the start of 2022 to the end of 2025 was 7.7%, a figure that is almost certain to be below what 2022 alone will deliver.

The winner in all of this is the Treasury, so much so that there is now talk of tax cuts being announced in the Autumn Budget, if not sooner. As with July’s ‘tax cut’ in National Insurance contributions, any new income tax cut will be a reduction in the size of the previously planned increase.

Meanwhile, if you have become a higher rate taxpayer this year, you should make sure you are using all available reliefs and allowances to the full. The one piece of good news is that tax relief on your pension contributions has potentially doubled.

Source: HMRC.

Planes, trains and automobiles – managing employees’ transport challenges

Written by Femi Ogunshakin on 4 August 2022. Posted in Benefit-In-Kind, Benefits, Employment Law, Employment Tax, PAYE. No Comments on Planes, trains and automobiles – managing employees’ transport challenges

With strikes and cancellations affecting trains, the underground and flights, employers need to decide how they are going to treat employees who cannot get into work or are stuck overseas.

Commuting

Although inconvenient, there is generally plenty of notice when it comes to train, tube and tram strikes, and therefore the chance to make contingency plans. With hybrid and homeworking now commonplace for many offices, this will be the simple and obvious answer to discuss with employees on affected days.

Employees who are required to attend work in person may face a longer and/or more expensive journeys than normal – especially if an alternative mode of transport is required. So employers should consider offering help with some financial assistance. Some absences may be avoided by rearranging work patterns or promoting car-pooling for instance.

Stuck overseas

The treatment of employees who cannot return to work after a holiday because they are stuck overseas due to a cancelled flight is somewhat more problematic.

If an employee can resume work as usual while abroad then they should obviously be paid as normal. It is unrealistic, however, to expect most employees – especially if not in a senior position – to have travelled with their work laptops.
Assuming sufficient annual leave is available, extending a holiday may be an answer where an employee is unable to work remotely. Or the employee may be happy to take unpaid leave.
Although there is no requirement to otherwise pay an employee who is stranded overseas, the employer might consider treating it the same as an emergency situation and remunerating on a similar basis to other emergencies, especially if the employee is taking all reasonable steps to return home.

Employees may not be able to leave the UK for their holiday in the first place and so need to rearrange their dates. Employers do not have to agree to this, especially given short notice, but a flexible approach is advisable where possible.

The Government’s guide to holiday entitlement for employers and employees can be found here.

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Has a 60% income tax rate reappeared?

Written by Femi Ogunshakin on 29 July 2022. Posted in Employment Tax, Gift Aid, High Income Child Benefit Charge, Income Tax. No Comments on Has a 60% income tax rate reappeared?

The high marginal tax rates created by phasing out the personal allowance are back in the news.

‘A million to pay 60% income tax within years,’ ran a recent headline in The Sunday Telegraph. The next day The Times picked up on the same story with the article ‘Inflation may leave million more workers paying 60% tax’.

How the 60% tax rate happens

In 2022/23, Yasmin expects to have an income of £100,000 and is therefore entitled to a personal allowance of £12,570. If she receives an unexpected bonus of £10,000, her total income will be £110,000 and her personal allowance will be reduced by half of the amount by which her total income exceeds £100,000 – i.e. £5,000. As a result, she will not only pay tax of £4,000 on her bonus (at 40% outside Scotland), but she will also have to pay £2,000 of tax on the £5,000 of her income no longer covered by the personal allowance. The result is:

Total extra tax = £4,000 + £2,000 x 100% = 60%
Total extra income £10,000

If Yasmin received a bonus of over £25,140, she would lose all her personal allowance.

Whether either article counts as ‘news’ is debatable. The 60% income tax rate (or 61.5% on earnings in Scotland) has been around, in one form or another, since 2010/11. It is not, as The Times suggested, the result of ‘a glitch in the personal allowance regime’ but was the product of a carefully crafted piece of legislation. At the time, the aim was to raise extra revenue while keeping the threshold for the newly introduced 50% additional rate tax at £150,000.

The newspaper articles indirectly highlighted that:

The £100,000 threshold at which the personal allowance is tapered has been unchanged since 2010; and
The personal allowance has almost doubled since 2010, resulting in a £25,140 band of income in which the 60% rate can bite.

Both factors mean that more taxpayers are being caught as incomes rise over time.

The one piece of good news is that if you are hit by 60% income tax you may also be able to claim 60% tax relief on pension contributions or gift aid.

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Defining ‘period of ownership’ on residence disposals for CGT purposes

Written by Femi Ogunshakin on 21 July 2022. Posted in Capital Gains Tax, Litigation & Dispute Resolution, Self Assessment. No Comments on Defining ‘period of ownership’ on residence disposals for CGT purposes

The disposal of a private residence is exempt from capital gains tax (CGT) if used as a main residence throughout the period of ownership. A recent case heard in the First-Tier Tribunal has come up with a very favourable interpretation of what this means.

The facts

In the case heard by the Tribunal:

A married couple purchased a plot of land.
Over the next two and a half years the land was redeveloped, with the original house demolished and a new house built.
The couple then moved in before selling the new house a year later.
The sale resulted in a gain of over £500,000 for each spouse.
The couple claimed private residence relief for the total amount gained, but HMRC argued that full exemption was not available as the house had not been lived in for the entire period from when the land was originally purchased.

The decision

The question for the First-Tier Tribunal to decide was whether the period of ownership covered just the new house (one year) or whether it went back to when the land was bought (some two and half years earlier).

Both parties put forward detailed arguments to support their respective positions, but in the end the decision was simply that the natural reading of the legislation was the ‘period of ownership’ means the period of ownership of the house being sold – so the couple’s gains were fully exempt.

It is of course possible that HMRC might chose to appeal the decision.

There may be tax planning scope for anyone sitting on a plot of land representing a potential substantial gain if they can build a house on the land and live in it for a few years before a sale to claim private residence relief.

However the other important caveat to bear in mind is that First-Tier Tribunal decisions do not set a precedent. View HMRC’s guidance on private residence relief here.

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Tax implications of no fault divorce

Written by Femi Ogunshakin on 13 July 2022. Posted in Capital Gains Tax, Income Tax, Litigation & Dispute Resolution, Wealth. No Comments on Tax implications of no fault divorce

No fault divorce became a reality in April this year. Although it brought no associated changes to the tax rules, divorcing couples should now be in a better position to focus on financial issues – particularly important if not using a lawyer or solicitor.

Capital gains tax

For most couples, the main tax issue will be the capital gains tax (CGT) consequences of transferring assets as part of the divorce settlement.

The basic rule is that transfers only escape CGT (on a ‘no gain, no loss’ basis) if made by the end of the tax year in which the couple are no longer living together – the year of separation.

After the end of the year of separation, but before the divorce is finalised, any transfers of assets will be treated as made at market value, so CGT can be payable – but with no proceeds to fund the tax liability.

Couples dissolving a civil partnership can now also do so on the same no fault basis.

Private residence relief will generally mean there are no – or few – CGT implications if transferring the family home, but someone with a portfolio of property and investments could face a large, unnecessary, CGT bill without careful planning.

Timing

With a no fault divorce, the applicant is required to wait 20 weeks from the start of the divorce proceedings until a Conditional Order (previously the Decree Nisi) is made. This is the time for reaching a financial agreement on how assets are to be divided. There is then a further wait of six weeks until the Final Order (previously the Decree Absolute) can be made.

This is a minimum of six months. Add on possible paperwork processing delays, and a separation in the second half of the tax year means a straightforward transfer of assets will not be possible until the next tax year, making CGT an issue.

HMRC has provided an updated help-sheet on the CGT implications of divorce, dissolution and separation here. During such a stressful process, it’s more important than ever to ensure you have the right expert guidance, so let us know if we can help.

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Are you on top of Making Tax Digital’s latest developments?

Written by Femi Ogunshakin on 6 July 2022. Posted in Making Tax Digital, MTD, National Insurance Contributions, Self Assessment, Self-Employed, VAT. No Comments on Are you on top of Making Tax Digital’s latest developments?

The widening scope of Making Tax Digital (MTD) is highlighting several issues, including the limited availability of the MTD for income tax pilot scheme, and low awareness of the recent expansion of MTD for VAT to all VAT registered businesses.

Pilot scheme

Although the functionality of the MTD for income tax pilot scheme is constantly evolving, HMRC is still restricting sign-up to small numbers, citing the need for detailed, individual guidance for users.

From this month, taxpayers can join the pilot if they have the following types of income:

self-employment, even if there is more than one business;
UK property;
employment income; or
UK savings and dividend income.

Functionality to be added over coming months will mean that pilot scheme users will be able to claim relief in respect of personal pension contributions and the marriage allowance, and it will also be possible to report capital gains, pay voluntary class 2 NICs and make student loan repayments.

The scope of the pilot scheme is still quite restricted, with taxpayers only able to sign up through their software provider.

MTD for VAT

MTD for VAT was extended to all VAT registered businesses from 1 April. Previously, it only applied to those above the £85,000 VAT registration threshold.

Some new entrants will currently be in the process of preparing their first MTD compliant VAT return – although research indicates considerable misunderstanding as to how MTD for VAT differs from the previous electronic VAT return filing requirement. Some 30% of responders thought they had already signed up to MTD, when in fact they had not.

There will be something of a delay for those businesses who submit VAT returns annually. For example, with an annual accounting period running to 31 March 2023, the first MTD return will not need to be submitted until 31 May 2023.

As MTD progresses, stay up to date with HMRC guidance here.

Please take professional advice if you require assistance with your MTD transition.

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Charitable giving pitfalls

Written by Femi Ogunshakin on 5 July 2022. Posted in Gift Aid, Income Tax, Self Assessment. No Comments on Charitable giving pitfalls

Many individuals donate to charity simply for altruistic reasons, but this doesn’t mean the tax benefit should be ignored. With Gift Aid donations saving tax at an individual’s marginal rate, donors need to watch out for any pitfalls that might preclude relief.

If a Gift Aid donation helps to preserve a person’s entitlement to the personal allowance, the tax saving is 60%. For example, a gross donation of £1,000 costs just £400.

Benefit received

Any benefit received in return for making a donation must be minor. An acknowledgement of the donor’s generosity – such as a plaque – is permitted but should not take the form of business advertisement or sponsorship.

When it comes to right of admission, such as a National Trust membership fee, the donation must be at least 10% more than the normal admission cost. For example, £11 would need to be paid for entrance that would otherwise cost £10. Alternatively, admission rights can be for at least 12 months during public opening hours.

Other pitfalls to be aware of include:

Gifts: Tax relief is not available for an individual membership or subscription gifted to someone else, such as a spouse or parent. However, this restriction doesn’t apply where a donor’s minor child is the recipient.
Double counting: Where charitable giving is via a Charities Aid Foundation account, tax relief is given on donations to the account – not when donations are made from the account to charities. Therefore, be careful not to double count when claiming relief. The advantage of using a centralised charity account like this is that only one Gift Aid declaration need be completed.

Tax planning

If a donor’s income varies from year to year, donations can be made in the tax years when the tax saving is greatest.

The ability to treat donations as being made in the previous tax year is a great help here because – unlike pensions – tax planning can be done retrospectively once the donor’s tax position is established.
The same approach should be followed for spouses or partners. If a donation comes from a joint bank account, the donor who will benefit the most should make the Gift Aid declaration.

Detailed guidance from HMRC on Gift Aid for individuals and companies can be found here.

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Off-payroll mistakes now penalised

Written by Femi Ogunshakin on 24 June 2022. Posted in Employment Law, Employment Tax, Income Tax, IR35, Litigation & Dispute Resolution. No Comments on Off-payroll mistakes now penalised

The private sector off-payroll working rules have been in place since April 2021, but for the first 12 months businesses have benefitted from HMRC’s relaxed stance on penalties. HMRC will now, however, penalise mistakes made in applying the rules.

HMRC will charge penalties for any inaccuracies relating to the operation of the off-payroll working rules that occur from 6 April 2022 onwards.

Medium and large-sized private sector contracting companies are responsible for determining the employment status for any contractors they use.

Size check

Small private sector contractor companies are not subject to the new off-payroll working rules. Size classification is based on the Companies Act definition and should be checked each year.

This is particularly the case if a business has grown in size or been bought by another organisation.
It is good idea to confirm small company status with contractors as they will be responsible for determining their employment status.

Compliance

There would be no problem complying with the rules if there was a clear definition of employment as opposed to self-employment. Unfortunately, HMRC’s Check Employment Status for Tax (CEST) tool falls well short of what is required, and even government departments have found themselves liable for millions in additional tax after erroneously relying on the CEST tool.

Two recent Court of Appeal cases (both pre-dating the change in rules) show how difficult determining employment status can be:

Paul Hawksbee, a regular presenter for TalkSport Radio, prevailed at the First-Tier Tribunal, but HMRC was successful at the Upper Tribunal. This has been confirmed by the Court of Appeal, resulting in a tax cost of over £140,000.
Kaye Adams, a presenter for BBC Radio Scotland, was successful at both the First-Tier Tribunal and Upper Tribunal, but the Court of Appeal felt the Upper Tribunal had erred in making its decision. The case has therefore been sent back to the Upper Tribunal to be reheard. Tax of over £124,000 is at stake, with Adams’s legal costs outweighing this amount.

Guidance on the off-payroll working rules for contractor companies, along with some useful links, can be found here.

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Company insolvencies on an upward trend

Written by Femi Ogunshakin on 17 June 2022. Posted in Bankruptcy, Director Disqualification, Insolvency, Litigation & Dispute Resolution, Restructuring & Insolvency. No Comments on Company insolvencies on an upward trend

Although showing a slight improvement from March, the number of company insolvencies in April of this year was more than double the number from April 2021. This shows just how important it is to get advice sooner rather than later if your company is experiencing problems.

The majority of insolvencies were creditors’ voluntary liquidations (CVLs):

	Total insolvencies	CVLs
April 2019	1,429	1,024
April 2020	1,199	933
April 2021	925	815
April 2022	1,991	1,777

Figures already available for May show no improvement. The government’s support measures kept insolvencies at bay during the Covid-19 pandemic, but the expected post-pandemic boom has not materialised for many businesses, followed instead by other damaging economic factors such as high inflation, the Ukraine war and supply chain challenges due to continuing Chinese lockdowns.

The insolvency figures suggest many directors lack confidence in their company’s ability to continue trading in the current climate possibly pre-empting later forced closure by bringing forward a difficult decision. Directors who have any doubts about their business are advised to seek advice as soon as possible. There are two tests which can act as a warning sign of insolvency:

Cash flow test: Signs that a company is failing this test include late payment of suppliers and falling behind with payments to HMRC.
Balance sheet test: Where a company’s liabilities exceed the value of its assets.

For small businesses and the self-employed, free advice can be obtained from the Business Debtline charity.

Avoiding insolvency

Two recently introduced measures might help a company avoid formal insolvency procedures.

A moratorium period gives a struggling business a formal breathing space from creditors to explore rescue and restructuring options.
A new type of restructuring plan can be implemented even if certain classes of creditors vote against it.

Guidance on tell-tale signs of potential insolvency, and how managing an insolvent company incorrectly can lead to personal liability and/or being disqualified as a director, can be found here.

Please get in touch with us sooner rather than later if you believe you may need help.

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HMRC withdraws P11D PDF alternative

Written by Femi Ogunshakin on 10 June 2022. Posted in Insights. No Comments on HMRC withdraws P11D PDF alternative

HMRC has decommissioned its interactive PDF that businesses have been using to submit up to 150 P11Ds. For 2021/22, former users will instead have to turn to HMRC’s PAYE online service or use commercial payroll software.

The deadline for filing P11Ds to report taxable benefits and expenses for 2021/22 is not due until 6 July, so there is still time to go with one of the alternatives.

P11Ds are not required if all taxable benefits have been payrolled, although it is still necessary to submit the employer declaration (form P11D(b)) to confirm that all the required P11Ds have been filed.

Paper returns Although there is no requirement to file P11Ds online, paper returns will only be an option for those employers with just a few returns to file.
PAYE online HMRC’s PAYE online service may be the natural choice for businesses that can no longer use the interactive PDF – it can be used for submissions for up to 500 employees. The online service provides more functionality than the decommissioned PDF, such as the ability for an employer to check what is owed, pay bills, see payment history and provide company car details.

The same Government Gateway details can be used as for the interactive PDF service.

Payroll software

Since software must be used for payroll purposes, it makes sense to also use the same software to file P11Ds. However, not all payroll software has this feature. If you are moving from using the interactive PDF it might be a good time to look at changing providers but keep an eye out for what improved software will cost.

Those employers that need to make more than 500 submissions have no choice but to do so using payroll software.

Payrolling

Although not an option for 2021/22 or 2022/23, looking further ahead, the P11D obligation can be avoided by payrolling taxable benefits. However, payrolling might not be as simple as it appears:

Registration is required before the start of the tax year;
The payroll software used must be able to deal with the payrolling of benefits; and
Benefit information has to be available for each pay period.

The starting point for using HMRC’s PAYE online service can be found here.

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Chancellor’s May economy statement: all about energy

Written by Femi Ogunshakin on 10 June 2022. Posted in Budget, Tax. No Comments on Chancellor’s May economy statement: all about energy

In late May, the Chancellor announced new measures to counter the rising cost of living, in particular energy prices.

Initial measures for 2022

In early February 2022, the Chancellor announced a package of measures to reduce the impact of the £693 April 2022 increase in Ofgem’s energy price cap. These were primarily:

A £150 council tax rebate for those with properties in bands A–D in England, with corresponding funding for Scotland, Wales and Northern Ireland under the Barnett formula;
An Energy Bills Support Scheme to provide a £200 reduction in utility bills for the year starting in October 2022. This was effectively a loan, to be repaid by £40 a year added to bills from April 2023. The scheme applied throughout the UK apart from Northern Ireland, which again received Barnett formula cash; and
Extra discretionary funding of £500 million under the Household Support Fund for English councils to allow them to provide support for vulnerable people and individuals on low incomes, again with Barnett money for the UK’s other constituents.

The package, which has had problems with the distribution of the council tax rebates, had a value of about £9 billion. However, with the suggestion from Ofgem that the October price cap will be around £2,800 and inflation already running at 9%, February’s measures looked increasingly inadequate under widespread criticism.

Source: Ofgem

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Making Tax Digital Update

Written by Femi Ogunshakin on 7 June 2022. Posted in Making Tax Digital, MTD. No Comments on Making Tax Digital Update

Making Tax Digital (MTD) will become mandatory for the self-employed and landlords in 2024. Although there is no major news, a recent webinar co-hosted by HMRC has shed more light on the sign-up process, the use of spreadsheets and joining the pilot scheme.

MTD will come into effect for accounting periods commencing on or after 6 April 2024. For general partnerships (those with only individuals as partners), the start date is 6 April 2025.

Large partnerships with 20 or more partners are not included within the definition of a general partnership, and for them – along with other non-general partnerships – there is still no start date.

Signing up

It is going to be necessary for each taxpayer to sign up individually, but tax agents will be able to do this on behalf of clients. Agents will be able to sign up clients up to 12 months in advance of needing to comply with MTD.

Unfortunately, no further details have been provided, although HMRC did say the process will be different to the current MTD pilot sign-up process, which requires a substantial amount of information, plus a Government Gateway account.

Spreadsheets

HMRC has made it clear that spreadsheets can be used to fulfil the record-keeping requirement of MTD. However, when it comes to the filing requirement, MTD-compatible bridging software will be necessary.

The bridging software will need to be more advanced than that used for MTD for VAT. That is because for VAT returns, information is only sent in one direction – to HMRC. For income tax submissions, the software will also receive data from HMRC.

Pilot scheme

The scope of the pilot is still quite restricted, with taxpayers only able to sign up through their software provider.

Anyone who needs to report income from other sources, such as employment income, cannot join.
Only sole traders and landlords with a 5 April accounting date (not 31 March) can join.
Anyone who is not up to date with their tax payments (so excluding those who have set up a time to pay arrangement) or tax return submissions cannot join.

HMRC’s list of software that is compatible with MTD for income tax can be found here.

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More disclosure on the cards for businesses

Written by Femi Ogunshakin on 31 May 2022. Posted in Insights. No Comments on More disclosure on the cards for businesses

A downside to running a limited company is that financial information is publicly available. However, micro-entities and small companies do not have to file a profit and loss account, so available information is somewhat restricted. This situation is set to change.

The information currently filed by a micro-entity at Companies House can be as little as just three figures: total fixed assets, current assets and current liabilities. If a company provides services, with profits largely withdrawn as remuneration, these figures might all be negligible.

Thresholds

For a company to be classed as either a micro-entity or small company, it needs to be below any two of three thresholds for turnover, balance sheet total (total of fixed and current assets) and average number of employees:

	Micro-entity	Small company
Turnover	£632,000	£10.2 million
Balance sheet total	£316,000	£5.1 million
Employees	10	50

A company can continue to qualify under either definition if it temporarily fails to meet the criteria for just the one year.

Changes

The key change in the government’s white paper, Corporate Transparency and Register Reform, published in February – setting out its final position on reform ahead of introducing legislation – is that micro-entities and small companies will have to file their profit and loss account. This means that sensitive commercial information will be readily available to a company’s competitors. Employees, customers, family members and any other interested parties will also be able to see how profitable a company is. In addition, small companies:

will lose the option of preparing abridged accounts, so a full balance sheet will be required; and
will have to file a directors’ report.

Although it will be some time before the extended filing requirements come into effect, they are an additional consideration when setting up a new business or deciding whether to incorporate an existing business.

Companies House accounts guidance can be found here.

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Zero rated food confusion

Written by Femi Ogunshakin on 23 May 2022. Posted in Tax, VAT. No Comments on Zero rated food confusion

The distinction between zero-rated food and standard VAT confectionery is a crucial, and complex, one – not helped by what may appear to be apparently arbitrary rulings. Despite its predecessor losing a notorious ruling over the zero-rating of Jaffa Cakes more than 30 years ago, HMRC refuses to give ground on marginal cases. The latest target was the simple flapjack.

As an example of the complexity, tap water is zero-rated, but a bottle of water is not (although a bottle of milk is). It ‘logically’ follows that ice is zero-rated if made from tap water, but not if from bottled water – although good luck telling the difference. Baked goods are a similar minefield.

Flapjacks

There might be little obvious difference between a flapjack and a cereal bar, but flapjacks benefit from zero-rating, being classed as cakes, simply because they were around first. The more recent cereal bars are classed as VAT-able confectionery.

Not surprisingly, HMRC is not at all happy with the distinction, and define flapjacks as narrowly as possible.

HMRC only allow zero-rating of ‘standard’ flapjacks, along with minor variations, such as the addition of dried fruit or chocolate chips.
HMRC will not accept any alteration to a flapjack that takes it into the category of being a cereal bar.

In two cases, HMRC pursued these distinctions to the detriment of the companies involved.

Glanbia Milk

This company was recently on the wrong side of a First-Tier Tribunal decision. Compared to a ‘standard’ flapjack purchased in a cafe or at a supermarket, the flapjacks produced by Glanbia Milk had fewer calories, about 10 times less sugar, and very low levels of fat. The products were not baked like traditional flapjacks, and contained significant amounts of protein, an ingredient not traditionally associated with cakes.

DuelFuel

This small start-up has hit a similar problem with its range of flapjacks and protein cake bars, and may have to close as a result. HMRC is not permitting zero-rating for their products because of issues similar to the Glanbia Milk case. Based on the taste, texture, ingredients, packaging and marketing, the products produced by DuelFuel are not considered to be cakes.

If you are tempted to embark on a baking career, be warned. HMRC guidance on the VAT treatment of food products (VAT Notice 701/14) can be found here.

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Small business: double hit from rising prices

Written by Femi Ogunshakin on 17 May 2022. Posted in Insights. No Comments on Small business: double hit from rising prices

Rising prices hurt just about everyone, but small business owners face a double hit: the impact on their own spending power, but also less revenue coming in from cash-strapped customers.

The volume of retail sales fell 1.4% in March, with spending on food dropping by 1.1%. These are the first signs of the effect of high inflation, which for March was measured at 6.2%.

Managing your spending

The well-publicised drop in the number of streaming subscriptions is just one example of how household budgets are being slimmed down to cope with the cost-of-living crisis. Suggestions from government ministers to change shopping habits to own brand items may not have been well received, but there are other potential ways to make much larger short-term savings:

At the immediate personal level, cancelling or suspending gym memberships and other exercise-related subscriptions could produce valuable savings.
If you have time on your side, regular personal pension contributions can be put on hold or revised down until your finances are back to some sort of normality. Although it is also possible to opt out of workplace pension contributions, this is generally not advisable because the free employer contributions will be lost.
If you are facing serious difficulty, it might be possible to temporarily stop or reduce monthly mortgage repayments. The decision will depend on the lender and mortgage contract and is not a decision to be taken lightly.

Business owners

Some small business owners may have actually seen improved sales, with the amount spent on DIY and furniture increasing. However, most retailers will need to ensure their prices remain competitive to retain customers who are trimming household spending and cutting products seen as superfluous.

For small businesses providing services on credit, managing cashflow is essential, especially as clients might be tempted to delay payment for weeks or even months. The human touch is always important, and any potential non-payers need to be dealt with swiftly and decisively.

And of course, the business’s own costs need to be kept under review, especially fuel costs in the coming months. Budgeting for increased prices needs to be factored in to your planning.

If you’re walking this tightrope, the MoneySavingExpert website has a useful cost of living survival guide across a range of issues which can be found here.

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Sharp rise in higher rate taxpayer numbers…….

Written by Femi Ogunshakin on 12 May 2022. Posted in Employment Tax, Income Tax, IR35, Self Assessment, Self-Employed, Tax, Wealth. No Comments on Sharp rise in higher rate taxpayer numbers…….

……and if that’s you, then advice is now more important than ever.

There was once a time when paying tax at more than the basic rate made you a member of a somewhat select club. In 2010/11, the first year in which additional rate tax was introduced, the proportion of taxpayers who were taxed at more than the basic rate was 10.4%.

Five years later, a dose of austerity pushed the figure close to 16%. Then it began to drop as higher rate thresholds were raised, so that by 2019/20 it was down to 13.6%. From that low, the upward path was resumed.

Alongside the Chancellor’s Spring Statement in March, the Office for Budget Responsibility (OBR) issued estimates that the freeze in the personal allowance and, outside Scotland, and basic rate bands through to 2025/26 will mean by that year almost 19% of taxpayers will be liable for higher rate tax.

The number of taxpayers will also be increasing too because of the personal allowance staying at £12,570. The rising taxpayer numbers explain why the Chancellor could announce a 1p cut in basic rate tax in 2024/25 at the same time as the OBR calculated that income tax revenue for the year would increase by £12 billion. Scotland already has a starter rate of 19%.

If your head is spinning from all the numbers, there is a simple message you: you are likely to pass more of your income to HMRC in the coming years. To limit just how much extra the Exchequer gains and you lose, there are plenty of actions to consider wherever you are in the UK:

If you are married or in a civil partnership, make sure you are maximising the benefits of independent tax and, if you are eligible, claiming the transferable marriage allowance.
Check your PAYE code – it could be wrong.
Ensure you are claiming full tax relief on the pension contributions you make. Do not assume this will be given automatically, especially if you pay higher rate tax.
Consider an ISA first for any investment as it is free from UK income tax and capital gains tax.
Choose any employee perks with care. Some are highly tax efficient, while others carry a heavy tax burden.

Remember that if you are or likely to become a member of the ever-expanding higher rate taxpayer club, the value of taking independent financial advice rises with your tax rate.

Source: ONS data, OBR projections.