shutterstock_745087123

Tax News – Winter 2023

NATIONAL INSURANCE RATES CUT

The Chancellor has announced cuts to national insurance contributions (NIC) for self-employed taxpayers and employees

The headline news from the Autumn Statement was the reduction of primary Class 1 and Class 4 NIC and the removal of compulsory Class 2 NIC.

The main rate of primary Class 1 NIC paid by employees on earnings between £12,570 and £50,270 per year will be reduced from 12% to 10%. Instead of waiting until the start of the next tax year, this change will be effective from 6.1.24, so you will need to update your payroll software before the January pay run to ensure the correct rate of Class 1 NIC is deducted from employees.

For self-employed taxpayers the main rate of Class 4 NIC will be reduced by 1% from 9% to 8% from 6.4.24.

In addition to this, self-employed traders with profits above £12,570 will no longer pay Class 2 NIC but will continue to receive access to contributory benefits including the state pension. Those with profits between £6,725 and £12,570 will continue on this basis. Those with profits under £6,725 who choose to pay Class 2 NIC voluntarily to protect their entitlement to contributory benefits including the state pension will continue to be able to do so.

According to the Chancellor these NIC reductions will amount to a saving of £350 per year for the average self-employed taxpayer and £450 for the average employee.

CASH BASIS TO REPLACE ACCRUALS

Cash basis to replace accruals for the self-employed as standard tax reporting method for 2024-25 (first year of tax year accounting)

From April 2024, as part of a move to simplify calculation of taxable profits for Making Tax Digital, all self-employed taxpayers and partnerships will by default report their taxable profits under the cash accounting basis.

Currently, the default position is for businesses to calculate taxable profit using the accruals method (accounting for income and expenses when earned and incurred, not when cash is actually received or paid) but most businesses with total receipts below £150,000 are eligible to elect to use the cash basis.

The new measures will reverse that presumption, making the cash basis the default position for all self-employed taxpayers and partners, with an option to elect for the accruals basis.

This is a fundamental change with the potential to create very different profits for a lot of businesses currently using the accruals basis. Although the cash basis should in theory result in simpler calculations of taxable profits, the transition from accruals to cash accounting could be complicated.

MTD SIMPLIFICATION

A dramatic simplification of the MTD processes to be introduced in 2026 including no EOPS; cumulative submissions each quarter; and restrictions for complex situations

Taxpayers with turnover over £50,000 will be brought into MTD ISTSA from April 2026. The £50,000 threshold applies to gross total self-employment and property income, so we need to include all of your self-employment and property income sources when determining whether MTD ITSA will apply to you.

Taxpayers with turnover over £30,000 will be brought into MTD ISTSA from April 2027.

HMRC has confirmed that self-employed taxpayers and landlords with turnover under £30,000 will not be brought into MTD ITSA in April 2027. This decision will be kept under review so affected taxpayers may be brought into MTD ITSA at some point in the future.

To simplify year-end reporting, the requirement for taxpayers to file an end of period statement (EOPS) in addition to the final declaration has been removed. The EOPS will instead be built into the final declaration process, which pulls together the information that would have been reported on the EOPS as well as other data to calculate the final tax position.

New MTD ITSA exemptions have been announced for foster carers and those unable to get a national insurance number.

Quarterly updates produced under MTD ITSA will be cumulative. This means that any errors in previous quarterly submissions can be corrected in the next quarter, rather than having to go back and resubmit earlier reports.

Finally, the expansion of the cash basis for calculating taxable profits should result in simpler reporting for MTD purposes.

NLW AND NMW INCREASED

The national living wage (NLW) will increase by 9.8% to £11.44 per hour from April 2024. The higher rate will also apply to 21 and 22-year-olds for the first time

The NLW currently applies to workers aged 23 and above and stands at £10.42 per hour. Workers under the age of 23 and apprentices are entitled to the national minimum wage (NMW) instead.

The age above which workers qualify to receive the NLW will be lowered as planned from 23 to 21 from 1 April 2024. It was previously lowered from 25 in April 2021.

The NLW will be increased by £1.02 to £11.44 per hour from 1 April 2024, an increase of 9.8%. The NMW is also set to increase by more than £1 per hour.

The NLW and NMW rates effective from 1 April 2024 are shown below:

21+ (NLW)       £11.44 
18-20 (NMW)  £8.60 
16-17 (NMW)  £6.40 
Apprentice      £6.40 

This is the largest ever increase to the statutory hourly minimum and is forecast to result in a boost to annual earnings worth over £1,000 for those working under full-time contracts. Since its introduction in April 2015, successive increases to the legal minimum hourly rate mean that a full-time worker on the NMW in 2024 will be over £9,000 better off than they would have been in 2010.

The Government has estimated that there are over 2 million taxpayers currently eligible for the NLW who will benefit from this increase.

OVERLAP RELIEF ONLINE TOOL

The online form for requesting overlap relief information for basis period reform is now live

Overlap profits normally arise in the first two tax years of a new trade where the accounting date of the business does not align to the tax year end and – under the old opening year rules – profit for the period of overlap fell into tax twice. Details of overlap relief should be brought forward each year on the self assessment tax return and can be deducted either in the final year of trading, or if the accounting date is changed. Overlap relief will now be used to reduce additional taxable profits in the tax year 2023-24 due to basis period reform.

Under basis period reform, from the year 2023-24 taxpayers are required to report their taxable profits to HMRC in line with the tax year end. Where the accounting year end falls outside the period 31 March to 5 April this will result in additional profits being taxed between the end of the accounting period in 2023-24 and 5 April 2024.

Any overlap relief included on the 2024 tax return will be automatically deducted from the additional profits and the remaining ‘transitional part’ spread over the five tax years 2023-24 to 2027-28. You have the option to accelerate the taxation of the transitional part if you prefer and there are various circumstances where this may be beneficial.

Details of any overlap relief brought forward should be entered on the 2023-24 tax return. If this information has not been retained, we can obtain it from HMRC using the new online tool.

HMRC can only provide historical information on overlap profits if it was reported on past tax returns. If that data is not available in the system, do not worry. HMRC should be able to provide enough data for us to calculate the overlap relief available.

It usually takes around 3 weeks for HMRC to respond to requests for details of overlap relief, but complex cases can take longer so it is important to get the ball rolling and apply for any missing information now.

SUBMIT VAT CLAIMS DIGITALLY FOR DIY HOUSE BUILDS

Individuals who build their own home, or complete part of the build project themselves, are entitled to reclaim the VAT paid on materials under the VAT homebuilders scheme

When engaging builders and contractors to build your home, their labour and materials are zero-rated, so the VAT homebuilders scheme puts the individual homebuilder in the same position for VAT purposes as if they had contracted the work to a third party.

The current process is that a paper claim must be submitted using a form which asks a series of questions to confirm that the conditions for reclaiming have been met, along with many pages on which to record individual purchase invoice details. Each transaction must be listed and supported by invoices or receipts which also need to be sent to HMRC.

In order to speed up the process and minimise errors, HMRC will accept claims digitally from 5 December 2023. The requirement to submit invoices with the claim will also be removed from this date.

Only one claim can be made for each house build. Currently the deadline for submitting that claim is three months after the building is completed. HMRC is extending this deadline to six months for claims submitted on or after 5 December 2023. This will give us more time to collate the required information and should lead to fewer claims being rejected due to errors or omissions.

The paper form will still be available for taxpayers who cannot submit claims digitally.

TWO NEW R&D FORMS

HMRC has introduced two new measures to tackle the rise in fraudulent research and development (R&D) claims

Claim notification form
For accounting periods beginning on or after 1 April 2023, a digital pre-notification form is required to inform HMRC in advance of R&D claims.

This will be mandatory for all those intending to claim R&D tax reliefs if:       

• they are claiming for the first time; or
• their last claim was made more than 3 years before the last date of the claim notification period.

The claim notification window starts on the first day of the accounting period and ends six months after the end of the accounting period.

To complete the claim notification form you will need: 

• the company’s Unique Taxpayer Reference (UTR);
• the main senior internal R&D contact responsible for the R&D claim;
• the contact details of any agent involved in the R&D claim;
• the accounting period start and end date for which you are claiming;
• the period of account start and end date; and
• a summary of the high-level planned activities.

Additional information form
From 8 August 2023 all R&D claims must be accompanied by an additional information form (AIF). This must be submitted online, or in some cases via email, before the company tax return (CT600) is filed. If a CT600 includes a claim for R&D relief and no AIF has been submitted, HMRC will automatically remove the R&D claim from the return.

The information required on the AIF is extensive, including details for each R&D project; what baseline level of science or technology the project plans to advance; and whether you intend to claim R&D relief, expenditure credits or both. Full details of the information required can be found within the guidance on GOV.UK.

If either of these forms is not submitted on time, or is incorrect, HMRC may reject the claim for R&D relief.

CHARGING YOUR ELECTRIC COMPANY CAR AT HOME

HMRC has updated its Employment Income Manual to bring the guidance on charging electric company cars at home in line with the legislation

Until now, the guidance in the Employment Income Manual (EIM23900) has contradicted the legislation in advising that if an employer reimburses an employee for charging their company car at home this would be a taxable benefit.

The taxable benefit on a company car is, broadly speaking, calculated as a percentage, based on the CO2 emissions of the car, applied to the list-price. There is no further taxable benefit in respect of maintenance, insurance or other running costs reimbursed by the employer, with the exception of fuel.

As is widely recognised, electricity, for tax purposes, is not fuel. Therefore the cost of domestic electricity incurred charging the company car at the employee’s home is, in tax law, indistinguishable from these running costs.

HMRC has now updated the guidance in EIM23900 to confirm that home-charging company cars and vans is not a separate taxable benefit as long as the employer ensures that the electricity reimbursed is solely used for charging the company car.

This is a change to the guidance but not the 20-year-old legislation. Taxpayers who have followed the guidance may be entitled to claim overpayment refunds.

LOOKING FOR HELP?

We have a team of experts within West & Berry who can advise you and your business.  Please get in touch to set up a no obligation consultation.

bearded hipster

Tax News – Spring 2023

PLANNING DIVIDENDS IN 2023

Owners and directors of family businesses often take a small salary from the company and any extra funds as dividends

The first £2,000 of dividends received by each taxpayer is currently tax-free but that dividend allowance will be cut to £1,000 on 6 April 2023 and £500 in April 2024. Your company may wish to review how and when it pays dividends to family shareholders this year.

Taxpayers who receive dividends in excess of their dividend allowance need to inform HMRC of that income and, in many situations, will have to complete a tax return to declare their taxable dividends.

Dividend income is treated as falling into the taxpayer’s highest tax band where it is taxed at these rates in 2022-23:
• basic rate band: 8.75% (other income taxed at 20%);
• higher rate band: 33.75% (other income taxed at 40%); and
• additional rate band: 39.35% (other income taxed at 45%).

COPING WITH AN HMRC NUDGE

Marketing companies know that personal letters sent directly to customers are more powerful than broadcast or printed adverts. HMRC are using this technique to recover unpaid tax

HMRC match data from a wide range of sources to tax returns and will write to individual taxpayers where an anomaly is found. These ‘nudge letters’ cover a wide range of topics from holiday lettings to online sales. Companies may also receive nudge letters about R&D claims or taxes due on residential property.

The letter will often enclose a certificate of tax position to complete and return but there are good reasons why you should not do this. If you receive a nudge letter from HMRC which says that you may have additional tax to pay, please contact us without delay.

MTD FOR INCOME TAX DELAYED AGAIN

Making tax digital for income tax self-assessment (MTD ITSA) was set to take effect from 6 April 2024. This has been postponed until 6 April 2026

The new regime will require sole traders and individual landlords to keep their business records digitally and to send summaries of business income and expenses to HMRC at least quarterly.

For the first year, only businesses with annual turnover of over £50,000 will need to follow the MTD ITSA rules and from 6 April 2027 that turnover threshold will be reduced to £30,000. No date has been set for partnerships to enter the MTD ITSA regime and the expansion of MTD to corporation tax now seems a very distant ambition.

The Government has said that it will review the MTD ITSA service to see how MTD ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their income tax obligations. Only when that review is complete and after consultation with businesses, tax agents and others will the Government set out plans for any further mandating of MTD ITSA beyond 2027.

Regardless of the MTD ITSA start date all unincorporated businesses including partnerships will have to report profits to HMRC for a period that aligns with the tax year from 6 April 2024.

If your business uses an accounting period which does not end on 31 March; 5 April; or a day between those dates there will be some complicated calculations to undertake for 2023-24. Certain partnerships and seasonal businesses could be adversely affected by this change.

LARGEST EVER NMW RISE

The national minimum wage (NMW) and national living wage (NLW) rates are due to rise significantly for pay periods starting on and after 1 April 2023

These increases – the largest since the NMW began – are being introduced because inflation is running at around 10%.

• £10.42  23 & above
• £10.18  21 – 22
• £7.49  18 – 20
• £5.28  under 18

Employers should be careful not to make deductions which reduce workers’ wages below the relevant NMW rate. For example withholding money through the payroll for employee uniforms; staff meals; or subsidised childcare could break the NMW rules.

If you run a salary sacrifice scheme for childcare, check that the amounts paid after the salary reduction still meet the NMW rate for the employees in the scheme. It may be necessary to redesign the childcare scheme so that it is run outside of the payroll. 

Where you provide accommodation for your workers you can charge rent and this deduction is permitted under the NMW rules but only if it does not exceed £8.70 per day. This permitted accommodation off-set will rise to £9.10 per day from 1 April 2023.

Where the NMW rules are broken HMRC can impose penalties of up to 200% of the amount of NMW underpaid up to £20,000 per worker.

NEW VAT LATE-FILING PENALTIES

All VAT returns must now be submitted digitally using MTD compatible software (unless the business has an exemption) so the VAT penalties have been revised to fit with this new regime

If you submit a VAT return late for a period starting on or after 1 January 2023 the HMRC computer will automatically allocate a late-filing ‘point’ but not a monetary penalty. Only when you have collected several points will you receive a flat £200 penalty.

The penalty threshold depends on how regularly you file your VAT returns:
• quarterly returns: 4 points;
• monthly returns: 5 points; and
• annual returns: 2 points.

Businesses that file quarterly VAT returns become liable to pay a £200 penalty when they file the fourth VAT return late. Each subsequent late VAT return triggers another £200 late-filing penalty until the points slate is wiped clean by a period of perfect compliance.

Perfect compliance is achieved by completing all outstanding VAT returns and filing all VAT returns on time for twelve months. Annual and monthly filers have different periods to meet for perfect compliance.

It does not matter whether the VAT return shows a repayment or VAT owing – if it is delivered late a point or penalty is charged. There is no soft-landing for the new system of late-filing penalties.

The old system of surcharges for late paid VAT does not feed into the new late-filing penalty system.

NEW VAT LATE-PAYMENT PENALTIES

In addition to the new penalties for late VAT returns there is also a new system of penalties for late paid VAT

For VAT periods beginning on and after 1 January 2023 you will have up to 15 days to pay your VAT – or arrange a time to pay agreement – before HMRC charge a penalty. In 2023 this 15-day grace period will be stretched to 30 days while traders get used to the new system.

From 2024 onwards the penalties are calculated as 2% of the unpaid VAT at day 15 and a further 2% of the unpaid VAT at day 30. If no payment is made until after day 30 the first penalty will be 4% of the amount due. However if full payment is made between days 15 and 30 the first penalty will be set at 2%.

From day 31 a second penalty is charged daily based on an annual rate of 4% of any outstanding VAT due.

In addition to the penalties charged for paying late, interest is charged on any late payment at the Bank of England base rate plus 2.5%. If you are due a VAT repayment which HMRC do not pay on time you will receive repayment interest at the Bank of England base rate minus 1%.

This is a much fairer system than the old VAT default surcharges which could see traders hit with penalties of up to 15% of the late paid VAT for paying just one day late. There is no carry forward of default periods or surcharge levels from the old VAT penalty system into the new late-payment regime.

RECOGNISING CAPITAL LOSSES

The annual capital gains exemption may cover most of the capital gains that you make on your share portfolio

However that exemption will be cut to £6,000 on 6 April 2023 and £3,000 in April 2024.

If you are planning to make large capital gains in the future you may be able to supplement your annual capital gains exemption with capital losses brought forward from earlier tax years.

To do this you must first claim the capital loss, either on your tax return for the year in which the loss arose or as a separate claim made within four years of the end of the tax year of the loss. For example any capital losses made in 2018-19 must be claimed by 5 April 2023.

You may have potential capital losses from holding cryptocurrencies following the crypto market crash in November 2022 or you may hold shares which now have little or no value. If those assets still exist you may wish to make a negligible value claim to create a capital loss in this tax year. Where the company in which you hold shares has already been dissolved a capital loss will have crystallised in respect of those shares on dissolution.

MIND THE NIC GAP

Do you know whether your national insurance contributions (NIC) record is complete and correct?

You can check the NIC record over your entire working life on your online personal tax account. This will also provide an estimate of the state retirement pension you should expect to receive when you retire.

You need 35 complete years of NIC (payments or credits) in order to receive the maximum state retirement pension and at least ten complete NIC years to receive any state retirement pension.

A gap in your NIC record can occur if you were out of work, studying or caring for children. In most cases this period should be covered by NI credits which are given automatically if you claim universal credit or similar benefits.

A parent who stays at home with young children should receive NI credits if they claimed child benefit for the child. However in some circumstances (eg fostering a child) you need to apply for NI credits.

If you find a gap in your NIC record, investigate why this may have occurred. It is not uncommon for HMRC to miss NI credits that were due.

LOOKING FOR HELP?

We have a team of experts within West & Berry who can advise you and your business.  Please get in touch to set up a no obligation consultation.