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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.

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Tax News – Winter 2022

DIVIDEND TAX

Dividends are taxed at much lower rates than other forms of income and they are not subject to national insurance contributions

This can make taking income from your own company in the form of dividends far more attractive than paying yourself a bonus.

All taxpayers are currently entitled to a dividend allowance of £2,000 in addition to the personal allowance which is gradually withdrawn where annual income exceeds £100,000.

The dividend allowance effectively applies a zero rate of tax to the first slice of dividends received in the tax year. The Chancellor has decided to cut the dividend allowance to £1,000 per year for the tax year 2023-24 and then to £500 from 6 April 2024. 

In 2023-24 the cut in the dividend allowance will cost a basic rate taxpayer £87.50; a higher rate taxpayer £337.50; and an additional rate taxpayer £393.50 assuming that these individuals would use the full allowance.

The rates of tax applicable to dividend income have not been changed for 2023-24.

INCOME TAX

The main income tax thresholds and allowances had already been frozen at the 2021-22 levels until 2026 and that has been extended to 6 April 2028

The main income tax rates are unchanged for 2023-24 at: 20%, 40% and 45%.

Individuals in England, Wales and Northern Ireland will start to pay 40% tax on income above £50,270. The 45% tax rate currently applies to income above £150,000 but that threshold will be cut to £125,140 (the level at which a taxpayer’s personal allowance will have reduced to zero) from 6 April 2023.

The freeze or reduction of income tax thresholds and allowances coupled with inflation of over 11% will drag many more people into higher rates of tax every year. Once a taxpayer’s income strays into the 40% band their personal savings allowance (the amount of interest that is tax free) drops from £1,000 to £500 per year. Taxpayers who pay tax at 45% have no personal savings allowance.

Taxpayers who are resident in Scotland pay income tax on their earnings, profits and rental income at different rates and from different thresholds to people in the rest of the UK. However capital gains, savings and dividends are taxed at the same rates across the UK. The Scottish income tax rates for 2023-24 are due to be announced by the Scottish Government on 15 December 2022.

The high income child benefit charge threshold remains unchanged at £50,000 and families where the higher earner has total relevant income over £50,000 have some of their child benefit clawed back. This catches some people whose highest marginal rate is only 20%.

CAPITAL GAINS AND INHERITANCE TAX

Capital gains made by individuals are generally taxed at lower rates to income and taxpayers benefit from a separate annual exemption that covers the first £12,300 of gains made per year

This exemption will be reduced to £6,000 for the tax year 2023-24 and then to £3,000 for 2024-25. Any annual exemption unused in a tax year cannot be carried over to the next year.

The lowering of the annual exemption will mean that many more individuals will have to report capital gains on a self assessment tax return.

When the gain arises from the disposal of a residential property in the UK it must be reported using the UK property service within 60 days of completion of the sale and the tax paid by the same deadline. This 60-day report is required in addition to the annual tax return.

The main rates of capital gains tax (CGT) remain at 10% for gains within the basic rate band and those subject to business asset disposal relief and 20% for other gains. However gains made from residential property are taxed at 18% within the basic rate band and 28% at higher rates.

The inheritance tax threshold (nil-rate band) has been fixed at £325,000 per person since 2009 and it will now be kept at that level until at least April 2028.

Where an individual leaves an interest in their main home to one or more children or other direct descendants they can also benefit from the residential nil-rate band worth a further £175,000 per person. That amount is also frozen until April 2028 although the value of residential properties has increased significantly since 2020-21 when it was introduced.

HOME BUYERS PAY LESS STAMP DUTY

When buying a residential property in England or Northern Ireland you must pay stamp duty land tax (SDLT) if the purchase price exceeds a minimum threshold set at £125,000 since 2006

In September’s mini-Budget the then Chancellor announced that the entry threshold for SDLT payable on residential properties would double to £250,000 for deals completed on or after 23 September 2022. This higher threshold will apply until April 2025.

Where all the purchasers of the property have never owned a property they can take advantage of a first-time buyer minimum SDLT threshold of £425,000, increased from £300,000. If the property costs more than £625,000 (previously £500,000) the first-time buyer threshold does not apply.

The rates of SDLT were not changed in the Budget other than removing the lowest rate.

TAX ON DWELLINGS HELD BY COMPANIES

The annual tax on enveloped dwellings (ATED) applies where a residential property worth over £500,000 is held by a company and is not commercially let out or used for some other qualifying purpose. This tax currently starts at £3,800 per year but that starting rate will rise to £4,150 from April 2023.

Be aware that the ATED charge for 2023-24 to 2027-28 must be based on the property’s open market value on 1 April 2022 and it is up to the property owner to provide that valuation.

BUSINESS RATES

Properties subject to business rates will be revalued in 2023. Where the value has reduced compared to the last valuation point in 2017 that will translate to a rates reduction from April 2023. Where the rateable value has risen the increase in rates bill will be capped at 5% for small; 10% for medium; and 15% for large properties.

CORPORATION TAX UP

When the current Prime Minister was Chancellor he announced an increase in the main rate of corporation tax to 25% to apply to profits above £250,000 from 1 April 2023

Under the previous administration this decision was reversed but the 25% rate will now apply next year.

Companies with profits up to £50,000 per year will continue to pay corporation tax at the small profits rate of 19%. A company with total profits between £50,000 and £250,000 will pay 19% on the first £50,000 and a marginal rate of 26.5% on the rest.

Contractors who work through their own personal service companies will not be happy that the off-payroll working rules – which the previous administration vowed to repeal – are staying in place. These rules require large private sector businesses and all public sector bodies to decide whether the contractors they engage should be taxed as employees under the IR35 rules. Any agencies or intermediaries in the hiring chain are ignored for this decision.

Contractors can ask their ultimate customers whether they are categorised as a large company. Contractors working for a small or medium sized business must make their own decisions about whether the IR35 rules apply to the contract.

VAT CHANGES

The VAT registration threshold has already been frozen at £85,000 since April 2017 and it will now be fixed at that level until April 2026

The Chancellor made the point that the UK’s VAT registration threshold is more than twice as high as the average in OECD and EU countries so be prepared for this threshold to be cut in the future.

The VAT threshold freeze will drag many more businesses into compulsory VAT registration if they increase their prices with inflation which is now running at over 11%.

Once a business is registered for VAT it must keep digital records and submit VAT returns using making tax digital (MTD) compatible software unless the business owner can show that they are digitally excluded.

There have been some teething problems with the new VAT registration process and it can take many weeks to receive a new VAT number. You need to act quickly to register for VAT once your turnover for the previous 12 months exceeds £85,000 or it is expected to exceed that level in the next 30 days. There are significant penalties for late registration.

PAYROLL MATTERS

The Chancellor has decided to freeze the Class 1 NIC thresholds and rates for 2023-24 at the amounts that have applied since 6 November 2022 – the date of the latest rate changes

The health and social care levy which was due to take effect from 6 April 2023 will not be introduced.

The rates of statutory sick pay; maternity; paternity; and adoption pay have not yet been announced. As state benefits and pensions have been uprated by 10.1% in general it is reasonable to assume that statutory payments will be similarly uprated.

The national minimum wage rates are increased in line with the rate of inflation for pay periods starting on and after 1 April 2023. From 2024 the living wage age threshold of 23 will be reduced to 21 meaning that there will be only one adult rate.

INVESTMENT INCENTIVES

Companies can currently claim super-deduction allowances set at 130% of the cost of new plant and machinery or 50% of the purchase cost of certain fixtures and fittings for buildings

These super-deductions will expire on 31 March 2023.

The annual investment allowance (AIA) cap was due to be reduced from £1m to £200,000 on 1 April 2023 but will now be fixed at £1m permanently. The AIA can be claimed by any form of business and can apply to second hand equipment as well as items purchased brand new. Some 99% of businesses will be able to claim a full deduction for the cost of plant and machinery using the AIA.

The rates of deduction available under the R&D schemes for SMEs are being reduced partly to take into account the changes in corporation tax rates from 1 April 2023 but also because of perceived widespread abuse of the schemes.

Companies using the SME scheme will see the allowable deduction reduced from 130% to 86% and the payable tax credit reduced from 14.5% to 10%. Large companies that use the R&D expenditure credit scheme will be able to deduct an increased credit of 20% instead of 13%.

The investment zones proposed by the previous administration will go ahead in a limited number of areas but they will not attract tax reliefs such as reductions in business rates or employers’ NIC.

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.