March Tax Tips & News

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Newsletter issue - March 2022

IR35

TV presenter Adrian Chiles has cleared the first hurdle in his battle against HMRC's insistence that his working arrangements with ITV and the BBC amounted to an employer-employee relationship in all but name. The First-tier Tribunal ruled that, considering all factors, Mr Chiles was clearly building a business via his company (Basic Broadcasting Ltd). It then considered whether the activities with the two broadcasters would lead to a conclusion that Mr Chiles was carrying on a business in his own right in the absence of the company. It held that this was the case, and the appeal was upheld. However, it is likely that HMRC will appeal given the reported size of the tax at stake.

Basis period rules amended

In response to criticism of the draft basis period reform provisions of the Finance Bill, an amendment has been made. To recap, 2023/24 will be a transitional year - taxing profits from both the standard basis period, and a transition component from the end of that period to 5 April 2024. This will lead to a long period of account for tax purposes for many unincorporated businesses. The original draft excluded the transition component from net income in order to avoid artificially inflating it above key thresholds, e.g. for the high income child benefit charge. However, this had a further consequence in that certain reliefs could not be used to reduce the tax on that component, including EIS relief. This has been addressed in the amended version.

Late payment interest

Following the Bank of England's decision to raise the base interest rate by 0.25%, HMRC has followed suit. The new rate of 3% applies to late payments from 21 February.

Student loan repayment thresholds

The level of income graduates and postgraduates can earn before needing to make repayments of student loans for 2022/23 have been confirmed as follows:

MTD for VAT

Although the new penalty regime to replace the default surcharge has been delayed until January 2023, the expansion of compulsory compliance with MTD for VAT to voluntarily registered businesses is going ahead from 1 April 2022. Businesses will need to be compliant from their first VAT period starting on or after 1 April 2022.

Marriage allowance

HMRC has issued a reminder that married couples may be missing out on up to £252 per year by failing to claim the marriage allowance. As the claim can be backdated for four previous years, a claim can lead to a significant repayment which may be very useful given the forthcoming energy price rises.

Newsletter issue - March 2022

There are a number of VAT schemes aimed at smaller businesses that help to simplify reporting, and in turn reduce the amount of administration time spent on compliance. One is the annual accounting scheme (AAS). But what is this, and when might it be beneficial?

Under the AAS, HMRC permits a business to make one VAT return for a year-long period, instead of the usual four quarterly returns. The business makes advance payments toward the VAT liability for the year, and then reconciles any difference on the annual return. For this reason, a business that usually receives a repayment of VAT (i.e. the input tax exceeds the output tax) won't benefit, as there will be a delay in receiving the repayment.

A business can join if:

• it's a VAT-registered business
• the estimated VAT taxable turnover is £1.35 million or less in the next 12 months.

There are some exceptions. A business that meets these conditions can't join the AAS if:

• it left the scheme in the last 12 months
• the business is part of a VAT registered division or group of companies
• it's not up to date with VAT Returns or payments
• it's insolvent.

To join the scheme, the business must complete form VAT600AA, which can be done online. HMRC will confirm a successful application and specify the 12-month VAT period. The annual return is due two months after the end of that period.

In terms of payments, these are based on the VAT liability for the previous 12 months (or estimated where the business is new to VAT) and are payable either monthly (nine per period) or quarterly (3 per period). The final payment is due within two months of the end of the period. If too much VAT has been paid a refund will be issued.

Advantages

The obvious advantage is the requirement to file a single return in a 12-month period rather than four. It also makes budgeting easier, as the payments are known in advance. The scheme is particularly useful for seasonal businesses, as it provides a means of "spreading" the VAT payments over the whole year, which can help cash flow.

Disadvantages

Where large purchases are made, the delay in being able to reclaim the input tax can present liquidity problems. This will be particularly true for purchases made in the early part of the 12-month period. Additionally, the payments may be excessive - e.g. if the business knows that taxable turnover has decreased. However, it is possible to request changes to the amounts due.

A further disadvantage may arise if the business doesn't keep up to date with its record-keeping. If the VAT liability increases significantly, but the business owner doesn't notice until the end of the period, a large increase in payments may come as a surprise - though of course this is a problem due to record-keeping, not with the scheme itself.

Newsletter issue - March 2022

Generally, the time limit for amending a tax return is one year from the due date. But sometimes, it transpires that the tax calculation is excessive later on. For example, the individual may have mistakenly over declared income. Where the deadline for amending the tax return has passed, the return cannot be amended. However, it may be possible to claim overpayment relief so that the individual isn't penalised financially.

Overpayment relief cannot be claimed in situations where a person has made a choice between tax treatments that, in hindsight, turn out to be sub-optimal.

Example

Simon is a sole trader who runs his business from an office in his home. Under the simplified expenses rules he used a flat rate deduction to cover the use of his home for business purposes in his 2017/18 return. After the deadline for amending his return passed, Simon realised that if he had worked out the business proportion of his actual household running costs and used these figures instead, he would have paid less tax. Simon cannot claim overpayment relief. The fact that he could have paid less tax if he had made a different choice does not mean the tax he paid was not due.

Instead, the relief aims to provide recourse to assessments which are excessive.

Example

Andy completed his return for 2018/19 and included a large capital gain of £5,920. However, three years later he realises he had entered £29,520, i.e. he had made a transposition error. This is a case where overpayment relief may be available.

Overpayment relief must be claimed within four years of the end of the tax year the claim relates to, e.g. by 5 April 2022 for the tax year 2017/18.

The claim must be made in writing, and contain information specified by HMRC in the Self-Assessment Claims Manual. The claim:

• must clearly state that the person is making a claim for overpayment relief;
• identify the tax year or accounting period for which the overpayment or excessive assessment has been made;
• state the grounds on which the person considers that the overpayment or excessive assessment has occurred;
• state whether the person has previously made an appeal in connection with the payment or the assessment;
• if the claim is for repayment of tax, documentary proof of the tax deducted or suffered in some other way;
• include a declaration signed by the claimant stating that the particulars given in the claim are correct and complete to the best of their knowledge and belief;
• state the amount that the person believes they have overpaid.

Newsletter issue - March 2022

In most cases, it is beneficial to offset trading losses against income - whether that means sideways loss relief against general income or carrying forward to offset future profits of the same trade. However, sometimes the trader's circumstances mean that the loss is effectively wasted.

Example

Sara starts a new business in 2021/22. In her first accounting period, she records a loss of £8,000. She expects to make a profit in 2022/23, of approximately £15,000. Assuming Sara has no other income in 2021/22 (or 2020/21) to offset the loss against, it will automatically offset the £15,000 profit from 2022/23. Unfortunately, £12,570 of this would be offset by her personal allowance. There is no scope to restrict the loss to preserve the allowance, so effectively she will only receive tax relief on £2,430, but the loss will be completely used up.

In these circumstances, further options should be considered. Firstly, as Sara's business is new, she can claim early years' loss relief. This effectively extends the window for sideways relief to the three previous tax years. If she were, for example, an employee in that time a tax refund could be secured.

If this is not possible, an often-overlooked option is to offset the loss against capital gains arising in the same, or previous, tax year as the trading loss. As such, it can be useful in situations where chargeable assets have been sold to fund the start up. Alternatively, if it is apparent that a trading loss will arise, the individual could look to trigger gains before the relevant tax year end to ensure the loss isn't wasted. In the Sara example above, she would be able to trigger gains of up to £20,300 (including the CGT annual exemption) without paying any tax.

While this is very much a last resort, as the gains are likely to be subject to tax at just 10%, it is often better than doing nothing. One condition of offsetting losses in this way is that any available sideways relief must be claimed first, even if this is inefficient due to the personal allowance issue discussed above.

If this option is used, the loss should be noted and carried forward for Class 4 NI purposes in the same way as it is with a sideways relief claim.

Newsletter issue - March 2022

Q. After several years of successive growth, my wife and I have decided to incorporate our partnership. We have a number of assets used in the trade for which we have claimed relief using the annual investment allowance. As the trade is being effectively disposed of to the new company, do we have a problem with capital allowances?

A: You are correct to be concerned. As you and your wife will be connected to the company, the default position is that assets are deemed to transfer at market value. If the AIA has been claimed, a balancing charge can arise under the capital allowances regime. Note, this is not a CGT issue as incorporation relief should be available as long as the trade is being transferred wholesale.

In order to prevent a charge arising in this situation, you can make a claim under section 266 CAA 2001. This treats the assets as transferred at their written down value, i.e. nil where the AIA has relieved the cost in full. You need to make the claim jointly with the new company, and in writing within two years of the date of the transfer.

Q. In the wake of COVID-19 pandemic, I have been reviewing my books in an effort to more accurately review unpaid sales invoices. I have identified a relatively high number of these from the end of 2021, as may be expected in the circumstances. Am I right in thinking I have to wait six months before I can write these off for tax purposes?

A: The six-month statutory time limit actually applies to VAT, rather than income tax. There is no minimum time you need to wait before you can write off a debt for tax purposes in theory. However, HMRC does require reasonable steps to have been taken in order to recover payment before you do so. It is not sufficient to make a provision for bad debts, as it is under accounting rules. In practice, you need to identify debts that are unlikely to be paid on a case-by-case basis.

For smaller debts, HMRC is likely to accept a couple of reminders to demonstrate that you have made an effort to recover the monies owed to you. For larger debts, it's more likely that more formal action would be needed in order to secure the deduction, e.g. appointing a debt collection service, or applying to a court to assist with recovery. There are no hard and fast rules, although HMRC is likely to accept a claim for bad debt relief if you have evidence that a debtor is in administration, or subject to insolvency proceedings. HMRC's guidance in the business income manual is a helpful reference.

Q. Our business has been struggling with VAT compliance for a number of years. Admittedly, this has largely been down to us, particularly the misconduct of a former employee who was responsible for the reporting (they have been dismissed as a result) but we are keen to put things right and have employed the services of a local accountant who will be dealing with things for us going forwards. However, I have now received a letter from HMRC saying that they will be issuing a demand for security payment in respect of VAT liability. As I understand it, this will not be offset against future liabilities, and instead will be refunded after a period of good compliance. My issue is that this will not be easy to fund. Can I refuse on the grounds that the company has already appointed an agent, which will mean vastly improved compliance going forward?

A: HMRC does have the power to ask for the security in respect of certain taxes if it perceives there is a risk to the public revenue. Whatever you do, do not ignore a notice when it comes through - failure to pay it within the statutory time frame makes it a criminal offence to continue to trade. As you have clearly made a commitment to improving your compliance, it may be worth sending a copy of your engagement letter with the new accountant and asking for an internal review emphasising your commitment. Also stress that the employee responsible for the previous problems has been removed. There is no guarantee that this will remove the requirement for security, but you really have nothing to lose.

Newsletter issue - March 2022

1 - Due date for payment of Corporation Tax for accounting periods ending 31 May 2021

7 - Electronic VAT return and payment due for quarter ended 31 January 2022

19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/3/2022

31 - Deadline to pay self-assessment liability or agree time to pay arrangement without incurring late payment penalty following reprieve announced in January

The economy and headline figures

The Spring Statement was presented by the Chancellor, Rishi Sunak, on 23 March 2022.

When the Chancellor stood up in the Houses of Parliament to deliver his Spring Statement it was against the backdrop of what the Office of Budget Responsibility has called 'the biggest hit to household finances since comparable records began in 1956-57'. Five months ago the tone was upbeat and optimistic with a 'better than expected post-pandemic recovery' on the horizon. Now the country is facing a debt interest bill of £83bn in the next financial year - the highest on record and four times the amount spent last year. To put this amount into context this figure 'exceeds the budgets for day-to-day departmental spending on schools, the Home Office and the Ministry of Justice combined (totalling £78.3 billion in 2022-23)'. With domestic interest rates already at a 30 - year high, inflation at 6.2% (and set to rise more sharply in April when regulated energy prices are to increase) the Chancellor set out a 'three-part plan' aiming to strengthen the economy over the remainder of the Parliament.

The first part of the Plan was for immediate tax cuts and measures to help families with the increased energy bills coming next month when the energy 'price cap' is increased. The second part confirmed the introduction of measures intended to promote growth and productivity within the economy with the third part as a reaffirmation of future tax cuts intended to increase the amount of money people have to spend.

Tax Measures

Fuel Duty

Although this measure had been widely expected, the main 'headliner' was the cut in fuel duty. The announcement was for a temporary 12-month cut to duty on petrol and diesel of 5p per litre, representing a tax cut of around £2.4 billion over the next year. The RAC has said that this cut would reduce the cost of filling up a typical 55-litre family petrol car by around £3 but, although welcome, 'will only take prices back to where they were just over a week ago'.

National Insurance Contributions

Despite calls by many back benchers to scrap the NIC/NHS levy due to come in next month, the Chancellor decided instead to increase the NIC Primary Threshold and Lower Profits Limit from £9,880 to £12,570 to align with the single personal allowance. This measure will come in for the July payroll run but with the planned 1.25 percentage point increase in NIC for health and social care still going ahead in April, the Chancellor will be receiving two months of increased NIC receipts. The delay is to give payroll software providers the time to accommodate the change into their systems.

The realignment of the NIC and the tax starting point is a long overdue measure but note that the personal allowance has remained the same for two years now and is intended to be so for another three years which will result in more tax receipts as wages increase.

The self employed have not been left out, however, because as from April 2022, the Lower Profit Limit has been increased to align with the personal allowance. Therefore self-employed individuals with profits between the Small Profits Threshold (£6,725) and the (increased) Lower Profit Limit (£12,570) will no longer pay Class 2 NIC. Although no Class 2 NIC payments will actually be paid, the year will still count towards state benefits such as the state pension. For the year 2022/23 the Lower Profit Limit will be £11,908 comprised of the pre-July weekly Primary Threshold of £190 and the new, post-July threshold of £242.

Employment Allowance

The Employer's NIC Secondary Threshold will remain at the same level although the Employment Allowance will increase to £5,000 from £4,000 from April 2022. The Chancellor confirmed that this would benefit 'around half a million businesses with a tax cut worth up to £1,000 each'. However, the measure will not benefit the many SME company directors who withdraw a small salary with the balance as dividends as the Employers Allowance is not available to companies where only one employee is paid above the Secondary Threshold and that employee is the director of the company.

Capital investment

R&D tax relief

In the previous 2021 Autumn Budget the Chancellor announced that the system for claiming relief for investment in Research and Development (R&D) was to be reformed. This reform was confirmed in this Spring Statement; meanwhile, all cloud computing costs associated with R&D, including storage, will now qualify for tax relief as from April 2023. The definition of R&D for tax reliefs is also to be expanded to include pure mathematics as a qualifying cost. The intention is to include support for investment by companies that work with artificial intelligence, quantum computing and robotics.

Capital Allowances

From 1 April 2021 to 23 March 2023 the 'super-deduction allowance' enables companies investing in qualifying new plant and machinery assets to claim:

• a 130% super-deduction capital allowance on qualifying plant and machinery investments
• a 50% first-year allowance for qualifying special rate assets

The Chancellor noted that this relief is to cease in a year's time and confirmed that he would be looking at 'fixing that' in the Autumn 2022 Budget.

Energy saving measures

The Chancellor is still looking to the future of energy saving measures by extending the 0% VAT relief available for installing such items as heat pumps, solar panels and insulation in people's homes for the next five years. The government estimates that 'a typical family having roof top solar panels installed will save more than £1,000 in total on installation, and then £300 annually on their energy bills'. Complex eligibility conditions for this relief are to be removed, making the measure available to more households however, not every 'typical family' will be able to afford to install these alternative energy sources.

Other measures

Household support fund

The Chancellor confirmed that he would double the amount made available to the Household Support Funds operated by local Councils. The fund provides short-term financial support to vulnerable households struggling to afford household essentials.

Business rates relief and exemptions

It was announced that the business rates multiplier is to be frozen in 2022-23 and the retail, hospitality and leisure industry is to be allowed a 50 per cent cut on business rates up to £110,000.

Further business rates measures included the introduction of targeted business rate exemptions from 1 April 2022 until 31 March 2035 for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible low-carbon heat networks with their own rates bill, to support the decarbonisation of non-domestic buildings.

Fraud

As part of an increased initiative to prevent fraud, the Chancellor announced the creation of a new Public Sector Fraud Authority with the remit 'to tackle waste and inefficiency across the public sector'. The authority is to work with counter-fraud work being undertaken by the British Business Bank and the National Intelligence Service.

Apprenticeship levy

The take-up of the Apprenticeship Levy has been disappointing. Calls from employers' representatives for a more flexible scheme resulted in the Chancellor announcing that the current scheme is to be reviewed to see what can be done to encourage employers to invest in adult training.

The future

Unusually, the Chancellor made a point of reaffirming his promise that before the end of this parliament in 2024 the basic rate of income tax is to be cut from 20 per cent to 19 per cent. The hope is that when that time comes the economy is in a stable enough position to make that promise a reality.

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