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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.

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Autumn Budget 2021

NATIONAL MINIMUM WAGE RATES RISE

The national living wage (NLW) will rise to £9.50 per hour for pay periods starting on and after 1.4.22 along with the other national minimum wage rates

The apprentice rate will rise significantly by 11.9% to £4.81 and will be aligned with the rate for employees aged 16 and 17. This will help employers who will not have to have a formal apprenticeship agreement in place for trainees under 18 to pay the correct amount of NMW. Older apprentices do need a formal apprenticeship agreement. Keep a sharp eye on your employees’ birthdays to ensure that any rise in the NMW rate is implemented for the pay period that begins after they move into a different age category.

You can claim a £3,000 incentive for each apprentice hired before midnight on 31.1.22.

Anyone employed through the Kickstart scheme must be paid the NMW relevant to their age. Employers must apply for funding to pay employees on the Kickstart scheme before 17.12.21 but the start date for new employees on the scheme has been extended to 31.3.22.

 

UNIVERSAL CREDITS CLAIMANTS TO KEEP MORE WAGES

Many employed and self-employed people claim Universal Credit as they have low or unpredictable levels of income

It provides a much needed top-up to their earnings but the benefit is reduced as the worker earns more due to the Universal Credit taper rate.

Currently the taper rate is 63% which means that for every extra £1 earned the individual will keep only 37p. In the Budget the Chancellor announced that the Universal Credit taper rate will be cut to 55% so that for every extra £1 earned the worker will keep 45p for earnings received from 1.12.21. Those figures are calculated after deductions for tax and NIC.

Universal Credit claimants who have children or a limited capacity for work are granted a ‘work allowance’. This is the amount that they can earn which is not reduced by the taper rate and is set at £293 or £515 per month depending on whether the Universal Credit award also covers some of their rent. This work allowance will increase by around £42 per month or £500 per year from the same date.

 

CAPITAL INVESTMENT ENCOURAGED

In the March 2021 Budget the Chancellor announced a superdeduction scheme that provides a 130% deduction for the cost of new plant or equipment if it is purchased by a company before 1.4.23

Expenditure on other new assets such as fixtures and integral features in buildings can also qualify for a 50% first year deduction if purchased before 1.4.23.

There are two major restrictions to these attractive investment reliefs:

• the assets must be purchased new (not second hand); and

• the super-deductions can only be claimed by companies. 

An alternative to these reliefs is the Annual Investment Allowance (AIA) where up to £1m of the cost may be relieved. This AIA cap was due to reduce to £200,000 per year from 1.1.22 but will now stay at £1m until 31.3.23.

This offers a unique window for investing in business equipment including commercial vehicles but please talk to us before agreeing the deal to check the tax implications.

 

INCREASES IN INCOME TAX

The tax payable on dividends is set to rise from 7.5% to 8.75% for basic rate taxpayers from 6.4.22

Higher rate taxpayers will pay 33.75% on dividends and additional rate taxpayers must budget for dividend
tax of 39.35%. These rates will apply to all dividends taken from all companies where the total dividend income exceeds the dividend allowance which has been held at £2,000 for 2022-23.

This tax increase is significant. A shareholder/director who takes a salary of £12,570 and dividends of £37,700 per year will see their personal tax and NIC bill increase by £442.44 in 2022-23. That is an increase in the amount of tax and NIC paid of nearly 14.5%.

If you borrow from your company and leave the loan outstanding for more than nine months after the
accounting year end the company must pay a tax charge of 32.5% of the loan. This tax rate may well also
increase in April 2022 to match the dividend tax rise but this is as yet unconfirmed.

 

INCENTIVES FOR RESEARCH AND DEVELOPMENT

Research and development (R&D) tax reliefs can be very generous for small companies, giving a deduction of 230% of qualifying costs

However the categories of expenditure which qualify for R&D relief were defined over 20 years ago and do not include costs of a typical internet based business.

From April 2023 cloud computing and data costs will be qualifying expenditure categories for R&D relief. These are both very broad concepts and we will have to wait for guidance from HMRC and the new law to determine exactly what will be allowed.

The R&D tax relief scheme has unfortunately been the target of abuse and fraudsters and the Government intends to clamp down on such abuse and improve compliance through various measures, including limiting the R&D tax relief to work undertaken in the UK.

More detail on the new conditions for R&D tax relief is expected to be announced in the coming weeks.

 

BUSINESS RATES RELIEFS

High street shops, hospitality and leisure businesses were some of the hardest hit during the Covid-19 pandemic and many have not fully recovered

These businesses were granted 100% business rates relief during 2020-21 which continued until 30.6.21 for properties in England. Different rates reliefs apply in Scotland and Wales.

From 1.7.21 the English business rates relief was capped at £105,000 per business and restricted to 66% of the rates payable. For the year 2022-23 retail and hospitality businesses will be able to claim 50% business rates relief, capped at £110,000 per business.

In addition the automatic increase in the level of business rates which was suspended in 2021-22 will also be frozen for 2022-23.

From April 2023 the Government will allow businesses in England one year’s grace before they must pay business rates on any improvements that they make to their properties. There will also be a complete exemption from rates for eligible heat networks and plant used for renewable energy generation and storage.

 

CAPITAL GAINS REPORTING PRESSURE EASED

If you sell a UK residential property subject to capital gains tax (CGT) you must report the gain and pay the tax within 30 days of the completion date of the deal

The report generally has to be done online through a UK property account which needs to be activated for that purpose. The reporting must be repeated in your self assessment tax return after the end of the tax year. We can help you with CGT reporting.

Property investors who live outside the UK must report within 30 days gains from all types of UK property – commercial and residential – held directly or indirectly. However getting through HMRC’s security systems to set up the online property account can be very difficult and sometimes impossible.

HMRC has listened to complaints and extended the period for reporting and paying CGT on relevant property disposals from 30 to 60 days for deals completed on and after 27.10.21. Property deals completed before that date still need to be reported within 30 days if tax is payable.

Where gains are made by UK residents from mixed-use properties – commercial and residential – for example a shop with a flat above, only the residential part of the gain should be reported on the UK property account.

 

HOW TO DECLARE YOUR CHILD BENEFIT

Child benefit is not taxable but sometimes needs to be declared on tax returns

Since 2013 the high income child benefit charge (HICBC) claws back some or all of the child benefit paid to families where the highest earner in the family has total income of £50,000 or more. It is not necessarily the person who receives the child benefit who must pay the HICBC.

If your income is around £50,000 and you or your partner receives child benefit, the benefit received must be declared to HMRC on your tax return. If you do not currently complete a self assessment tax return you should ask for one. We can help you with that.

HMRC can also look at your tax affairs for earlier years to check whether you should have paid the HICBC in those periods. Interest and penalties will be charged where the correct declarations have not been made.

 

NIC RISES FOR ALL

Two areas in the public sector that desperately need funding are the NHS and social care

To pay for these services the Government is raising a new tax: the health and social care (HSC) levy. This will be charged at 1.25% of income or profits for the employed and self-employed respectively from 6.4.23 as it takes time to adjust computer systems to collect a new tax.

In the meantime national insurance contributions (NIC) will rise by 1.25% for all working people below retirement age. Employees will pay 13.25% NIC on earnings between £9,880 and £50,270 per year and 3.25% above that threshold. Employers will pay 15.05% on all employees’ wages above £9,100 per year.

This temporary increase in NIC for 2022-23 will be replaced by the HSC levy from 6.4.23. However that levy will also apply to individuals who are still working and aged over state retirement age. The Government hopes that the HSC levy will be shown separately on payslips to make it clear what taxes people are paying.

Employers with small payrolls can offset up to £4,000 per annum of their employer’s Class 1 NIC against the employment allowance. It is still not yet clear whether the employment allowance will cover the HSC levy from 6.4.23.

 

CHANGES FOR SELF-EMPLOYED TAX RETURNS

Making tax digital for income tax self assessment (MTD ITSA) will replace the self assessment tax return for unincorporated businesses from April 2024 for sole traders and from April 2025 for most partnerships

The MTD ITSA regulations will require you to keep records of your business transactions in a digital format and use those records to send a summary of income and expenses to HMRC each quarter. You will also have to submit an end of period statement (EOPS) after the tax year end and a finalisation statement reporting all other non-business income. These reports will have to be submitted using MTD-compatible software. We can help you with those tasks.

The Government has decided that all unincorporated businesses will need to report profits or losses for periods that align with the tax year: 6 April to 5 April. Business that currently draw up accounts to a different date may have to submit estimated figures in their EOPS. Accounting periods ending between 31 March and 5 April will be treated as ending on 5 April.

If your business uses an accounting period that does not end on 5 April we need to talk about what profits or losses will need to be reported in the transition year 2023-24. It is likely that some profits will be reported earlier and you may have a larger tax bill for 2023-24. In such cases it may be possible to spread the extra tax due over five years.

All this will take some planning, so let’s talk soon.

 

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.