November Tax Tips & News

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Newsletter issue – November 2022

Making Tax Digital - should your business change its year-end now?

Making Tax Digital for Income Tax (MTD ITSA) is due to start on 6 April 2024 with the first year being 2024/25. In preparation, the rules that determine which profits of a non-company business are charged to tax for a particular tax year are also being reformed.

Which businesses will be affected?

It is important to note that not all unincorporated businesses will be affected. Basis period reform will only affect those businesses that do not have a 31 March - 5 April accounting year-end. Though MTD ITSA does not include partnerships initially, basis period reform affects all unincorporated clients without 31 March - 5 April year ends, sole traders, and partnerships alike.

What is changing?

The existing rules, which tax profits of an unincorporated business on a current year basis, are being abolished. Instead, profits will be taxed on a tax year basis. Therefore a tax return will show results for the tax year (6 April to 5 April) whatever the actual accounting date. An accounting date anywhere between 31 March and 5 April will be treated as being coterminous with a tax year.

Transition from one method to another

The 2023/24 tax year will be a transitional year to enable the change. For this year only, all businesses will be required to complete a tax return showing results for a period from the end of the basis period in 2022/23 to 5 April 2024. This change means that any business that does not prepare accounts on a tax year basis (6 April to 5 April) will declare and be taxed on profits of more than 12 months. The practicalities are that where the accounting date falls early in the tax year, the number of additional months to bring into account will be more than where the accounting date is later in the tax year.

For example, where a business prepares its accounts to 30 June each year, for 2023/24, the basis period will run from 1 July 2022 to 5 April 2024, i.e. 21 months. The tax bill will be based on results from the year to 30 June 2022 plus 9/12 of results from the year to 30 June 2024. Businesses with an accounting date of 30 April will potentially be worse hit reporting nearly two years' profits on one tax return for 2023/24. The basis period will run from 1 May 2022 to 5 April 2024 i.e. 23 months which means reporting the year to 30 May 2023 plus 11 /12ths of the year to 30 May 2024.

Importantly this change will also mean a shift in timing of the tax payment, which will be due nine months after the accounting year end instead of 21 months. Any relief for overlap profits will be given in the transitional year only.

Do you have to change your year end?

Businesses are not being forced to change their accounting period to align with the tax year as it is only the method of reporting that is changing. However, many may find it easier and less complex to do so not least because otherwise the profit or loss will be apportioned from two sets of accounts into two tax years on a pro-rata basis.

Will the change result in a higher tax bill?

Declaring more than 12 months on one tax return may result in a higher tax bill (even potentially being taxed at higher tax rates) in 2023/24. However, to prevent this happening the 'transition component' will not be taxed in full in 2023/24. This 'component' comprises the profit attributable to the period running from the date of the last years' accounts in 2022 to 5 April 2023 (the end of the 2022/23 tax year). Instead, the additional amount will be automatically spread over five years starting with 2023/24. The business can elect for spreading not to apply if it would be more tax efficient to be taxed in full in 2023/24. This will usually be the case where losses are available or if the personal allowance may otherwise be wasted. However, no spreading relief will be available should a business change its accounting date to align with the tax year before 5 April 2023. Any unrelieved relief for overlap profits can also be utilised.

Should you act now?

Any unincorporated business that does not already have a 31 March or 5 April year-end should consider the implication of the reform possibly by changing year ends before 5 April 2023 ahead of the transition year, or even incorporating.

Newsletter issue – November 2022

The tax rules for entertaining businesses are clear. Whether payment for lunch with a customer or tickets for a sporting event -- whatever the reason, with few exceptions, any cost incurred for entertaining is not an allowable expense for tax purposes. The amount can still be paid out of the business bank account and deducted from arriving at the accounting profit but will be added back in the tax computation and taxed.

One of the exceptions to this rule concerns staff entertainment. Staff entertaining is allowable, so long as it is 'wholly and exclusively' for the purposes of the trade and is not merely incidental to entertaining customers. The 'rider' is that although allowable against tax for the business, this may give rise to a taxable benefit in kind on staff unless falling within the trivial benefits exemption. To ensure that no charge falls on employees, all employees (or all those at one branch or department) must be invited to the event and the total spend per head cannot be more than £150 annually. Any amount higher is a benefit in kind to the employee and tax will be payable on the total cost not just the spend above £150. A business will also be liable to pay Class 1A NI on the taxable amount if deemed a benefit in kind.

Businesses usually use this annual allowance for Christmas parties. However, it can also be used for other annual events such as a summer party. These events must be regular rather than 'one offs'. Companies with just one director/employee would find it hard to justify a £150 a head as tax-deductible however those companies with two or more directors would be able to claim. If the cost per head of two events together exceeds the limit (i.e. with one being £80 and the other being £90) only one could qualify for the tax relief, with the other being fully taxable.

The cost of the function includes VAT and the cost of transport and/or overnight accommodation if these are provided to enable employees to attend.

It hardly seems fair on the employee to be taxed on something that the business provides for enjoyment and therefore if the £150 limit is exceeded many employers pay any chargeable income Tax and NIC on behalf of their employees by entering into a PAYE Settlement Agreement (PSA) with HMRC. To obtain a PSA the business needs to write to HMRC describing the benefits and expenses to be covered. A single payment is made of the amount of tax and NIC due on a grossed up basis at the appropriate rate of tax. The deadline for applying is 5 July following the end of the tax year, tax is due by 22 October.

VAT to claim

Should a business want to host an event where both clients and employees can attend, the making of a small charge to non-employees will enable input tax to be claimed on related costs because 'free hospitality' is no longer being provided. However, it will mean that a small amount of output tax will be payable on the money received. For companies registered under the flat rate scheme, no VAT can be reclaimed.

Overseas customers

The situation is different for costs incurred on entertaining overseas customers/clients carried out at a reasonable scale, undertaken only for business purposes. This is because HMRC deems an overseas customer as someone who is not an ordinary UK resident or who performs business in the UK (including the Isle of Man).

Newsletter issue – November 2022

The children are gone and there is an unoccupied 'spare' room. Apart from using the room as extra storage, renting it out is another option that can enable use of the space as well as bringing in some extra cash. The trend for letting spare rooms is increasing with websites such as Easyroommate, Gumtree and Hosts International making it easy to find someone to use the spare room on a long-term basis. There are tax implications, but you may find that there is no or little tax to pay.

Rent a room relief

'Rent-A-Room' relief allows property owners who let out spare furnished rooms in their only or main home to receive up to £7,500 per annum gross and not be subject to tax. The relief is automatic where the rental income is less than the threshold.

If the rent received exceeds £7,500, the first £7,500 is tax free, income tax being paid on the balance. However, the limit is not reduced if the room is let for less than 12 months, or if rented for only one month or just rented out in term time.

To claim the relief, the owner and lodger must occupy the property for at least part of the letting period in each tax year of claim. A comparison can be made year on year and the method changed to cater for whichever produces the better result. The claim is made by a tick in a box on the tax return.

Property Allowance

The Property Allowance is only available to individuals, and provides full tax relief if an individual's property income for the year is less than £1,000. If the allowance covers the income, a tax return is not required unless the landlord has other income subject to self-assessment. However, landlords who qualify for relief in one year need to monitor their property income year on year as if it goes above £1,000 they will be required to register and submit returns.

A partial relief claim is available where the property income exceeds £1,000. Under this claim a landlord can choose either to:

• Deduct actual property business expenses from the income in the usual way; or
• Elect for the £1,000 property allowance to be given as a deduction from income instead.

Mixture or both?

A 'rent-a-room' property business cannot also qualify for the Property Allowance nor is it available should the landlord qualify for 'rent-a-room' relief but chooses not to claim. Therefore should the income exceed the £7,500 'rent a room' limit a claim for Property Allowance cannot be claimed instead. As such, the Property Allowance is most likely to benefit landlords of commercial property lettings or holiday homes with minimal expenses. The 'rent a room relief' is more likely to be tax efficient for those with a 'spare room to fill.

Newsletter issue – November 2022

When the time comes to close a company the usual method by which this is done is via a process known as 'Striking off'. The procedure is an informal, voluntary way of closing a company which is no longer required either because the company has ceased trading, or the director wants to retire or because the directors just want to close the business. However, strike off can be undertaken compulsorily, typically by a disgruntled creditor or by Companies House for non-submission of annual accounts. Importantly, a company can only be struck off if the business is solvent, i.e. has no debts that cannot be paid, and, most importantly -- no one objects including HMRC, otherwise the formal liquidation route must be undertaken.

Distributions

At the end of a company's life there is usually an amount still held in the bank account that needs to be withdrawn. As 'striking off' is not a formal winding up procedure, distributions of money or assets by a company to its shareholders are usually taxable as income. However, if certain conditions are met, such distributions can be treated as capital being taxed under the potentially more tax effective capital gains tax (CGT) rules rather than higher income tax rates.

For the conditions to apply the company must have collected, or intends to collect, its debts and has paid off or intends to pay off its creditors at the time of distribution. There is also a limit to the amount that can be withdrawn which is set at £25,000. Distributions less than this amount are charged to CGT although may be covered by Business Asset Disposal Relief (BADR). BADR is where the percentage tax levied for CGT is 10 per cent rather than the usual 20 per cent for higher rate taxpayers. Therefore, depending upon the amount of accumulated profits, it may be preferable for the capital treatment to be used if the tax rate is lower, which it should be if BADR is available. Where BADR is not available it may be preferable for at least some of the withdrawals to be taxed as dividends rather than as salary or bonus.

Should the £25,000 limit be exceeded, the whole distribution is treated as a dividend, making extraction of the final shareholders' funds potentially expensive, depending on the shareholders' tax situation. In addition, where the distribution is of assets other than cash, the valuation of those assets could assume significance in determining whether the £25,000 threshold is breached. Companies that have higher than the limit in assets but wish to have the distributions treated as capital, must go down the formal liquidation route.

Practical point

Where a company has in excess of £25,000 in assets it might be tempting to distribute profits by dividend before applying to be struck off leaving less than £25,000 in the company and then claim the remainder as capital. However, be aware that the dividends could be considered by HMRC to be a 'distribution made in respect of share capital in a winding up' and therefore not be a distribution at all. HMRC could argue that the intention was always to make an application to 'strike off' and so tax the whole amount as income. Intent is also likely to be inferred should the company dispose of any remaining assets, leaving only cash prior to the application.

If it is intended to pay a dividend to reduce the remaining funds it is important that appropriate board/shareholder resolutions are in place. A meeting should take place after the dividend has been paid giving formal agreement to the strike off application and a minute to that effect must be prepared as evidence of when the intention to apply for striking off was agreed.

Finally, if a company has applied to be 'struck off' but within two years of making a distribution has still not been dissolved or has failed to collect all its debts or pay all its creditors, then the distribution is automatically treated as a dividend.

Newsletter issue – November 2022

Q. I live in a semi-detached property and am in the process of purchasing my neighbor's property with the intention of converting the two houses into one. Therefore, the new property will be our main residence alongside our existing property as they will become one. In this situation, are we liable for the 3% stamp duty land tax (SDLT) surcharge?

A: The extra 3% SDLT charged on a second property will apply. After the purchase, you will own additional residential property, and you are not replacing your main residence therefore the higher rate is due.

Q. I am self-employed and receive a small pension. My accounts show that for the tax year 2021/22 I have a self-employment profit of £6,538 and a pension received of £9,305, giving a total income of £15,843. I have available losses brought forward from the previous year of £4,127. Do I need to utilize whole loss in this year against the profit from self-employment, or can I use only £3,273 to bring my taxable profit to nil (the rest would be covered by the personal allowance of £12,570)? Can I carry forward the remaining loss of £854 to the next year?

A: Such losses must be set off against the first year in which a profit arises and any balance in the next tax year. Therefore, the loss must be used as far as possible in 21/22 (i.e., £4,127) leaving no losses available to be carried forward, even if the result is that personal allowances are wasted.

Q. I currently let out a flat and the tenants have approached me with an offer of buying the flat on a monthly installment plan instead of getting a mortgage and paying at point of sale as would be the usual situation on a sale of a property. What are the tax implications?

A: From a capital gains tax (CGT) perspective the sale is treated as selling the whole property on the date of the exchange of contracts, even though the sale proceeds will be received over a period of time. However, you do have the option of paying the CGT in installments on application to HMRC.

Newsletter issue – November 2022

1 - Corporation Tax payment 31 January 2022 year-end

All VAT-registered businesses must be signed up to Making Tax Digital (MTD).

6 - The 1.25% increase in NICs rates which has applied since 6 April 2022 is reversed.

7 - Electronic VAT return and payment due for VAT quarter ended 30 September 2022.

19 - CIS return for payments made to subcontractors in the month to 5 November 2022.

22 - PAYE, NIC and CIS payment (electronic): month-end 5 November 2022

31 - Corporation Tax returns submission: 31 November 2021 year ends

Autumn Statement 2022

The Autumn Statement on 17 November 2022 contained several significant tax announcements, which we have summarised below.

However, it was not presented as full Budget, so HM Treasury did not release the full schedule of tax rates and allowances which we are used to receiving on such fiscal occasions. This leaves the opportunity open for the Chancellor to introduce further tax changes in his Spring Budget, which is expected to be held in early March 2023.

Income tax

The main income tax rates unchanged for 2023/24 at: 20%, 40% and 45%. The higher rate threshold was set at £37,700 for 2021/22 to 2025/26, and Chancellor Hunt has extended that freeze until 2027/28.

With the personal allowance also fixed at £12,570 until April 2028, but the blind person's allowance and the married couples' allowance (where at least one person was born before 6 April 1935), have been increased:

The additional rate of tax (45%) currently applies to income above £150,000, but that threshold will be reduced to £125,140 from 6 April 2023. Taxpayers have their personal allowance tapered away at £1 for every £2 above £100,000, which means their personal allowance completely disappears at £125,140.

The freeze or reduction of income tax thresholds and allowances, coupled with inflation of around 10%, will drag many more people into higher rates of tax every year. Once a person's income tips them into the 40% band (over £50,270) their savings allowance drops from £1,000 to £500 per year. Additional rate taxpayers have a zero savings allowance.

A trap to watch out for is the high income child benefit charge ( HICBC), which starts to claw back the child benefit received by the family where the highest earner has total relevant income over £50,000. This means that some taxpayers who pay tax at the basic rate (20%) will be subject to the HICBC and need to submit a tax return to declare that liability.

Taxpayers who are resident in Scotland pay income tax on their earnings, profits and rental income at different rates and from different thresholds from taxpayers in the rest of the UK. However, capital gains, savings and dividends received by Scottish residents 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.

Dividend tax

Chancellor Hunt has decided to cut the dividend allowance (effectively a zero-rate band) from £2,000 to £1,000 from 6 April 2023, and halve it again to £500 for the tax year 2024/25.

Once that allowance has been used up, any additional dividends received are taxed as the top slice of income as they fall within the highest tax band for the taxpayer:

In 2023/24 the reduction in the dividend allowance will cost a basic rate taxpayer £87.50, a higher rate taxpayer: £337.50 and an addition rate taxpayer: £393.50, if those individuals would otherwise fully use the allowance.

Capital Gains Tax

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 from residential property are taxed at 18% within the basic rate band and 28% at higher rates.

The annual capital gains exemption had already been frozen at £12,300 from 2021/22 to 2025/26. Chancellor Hunt has decided to cut this exemption to £6,000 for the tax year 2023/24 and cut again to £3,000 for 2024/25. Any annual exemption unused in a tax year cannot be carried over to the next year.

The Office of Tax Simplification has estimated that lowering the exemption to £6,000 will mean a further 235,000 individuals will have to complete a self-assessment tax return to declare their gains. Where the gain arises from the disposal of a residential property in the UK the taxpayer also has to report the gain within 60 days of the completion date of the deal, using the UK Property service.

Inheritance tax

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 descendent, they can also benefit from the residential nil rate band worth a further £175,000 per person. That exempt amount has also been also frozen until April 2028, although the value of residential properties has increased significantly since 2020/21 when it was introduced.

National Insurance Contributions

The NIC rates and thresholds have been tossed up and down by the last three Chancellors, so thankfully Hunt has decided there should be no further changes in this area, for now.

The increased NIC thresholds as applied from 6 July 2022 are still in place. The rates across classes 1 and 4 of NIC were increased by 1.25 percentage points on 6 April 2022, then reduced by the same amount from 6 November 2022. However, classes 1A, 1B and 4, which are calculated annually are charged at hybrid percentages for 2022/23.

The freezing of thresholds until April 2028 also applies to NIC. The primary threshold (PT) where an employee starts to pay the main rate of class 1 NIC is frozen at £12,570. The upper threshold of the main rate is also fixed at £50,270 to tie-in with the basic rate band for income tax.

The secondary threshold (ST) where employers start to pay secondary class 1 NIC is fixed at £9,100. However, the government claims that 40% of employers will not pay employers NIC as their liability will be covered by the employment allowance, which is held at £5,000 per year.

The NIC rates and thresholds for class 1 NIC 2023/24 will be:

The rates and thresholds of NIC classes 2 and 4 paid by the self-employed, and the voluntary rate (class 3), have not yet been announced for 2023/24.

National Minimum wage

The national minimum wage rates are increased in line with the rate of inflation for pay periods starting on and after 1 April 2023. The new hourly rates will be:

From 2024 the Living Wage age threshold of 23 will be reduced to 21, meaning there will be only one adult rate.

Health and Social Care Levy

The health and social care levy proposed by Chancellor Sunak, and scrapped by Chancellor Kwarteng, will not be imposed from April 2023.

Corporation Tax

When Sunak was Chancellor, he increased the main rate of corporation tax to 25% to apply on profits above £250,000 from 1 April 2023. Companies with profits below £50,000 per year will continue to pay corporation tax at the small profits rate of 19%.

Where total profits lie between £50,000 and £250,000 the company will pay a marginal rate of 26.5% in that band calculated by a marginal relief formula.

Capital Allowances

The super deduction allowances set at 130% or 50% of new qualifying expenditure will expire on 31 March 2023. These allowances can only be claimed by companies, not sole traders or partnerships.

The annual investment allowance (AIA) limit was due to reduced to £200,000 on 1 April 2023, but Chancellor Hunt has decided to make the £1m cap permanent. The AIA can be claimed by any form of business and may apply to second hand equipment as well as items which are purchased brand new.

Businesses can continue to claim a 100% first year capital allowance for the cost of installing charging points for electric vehicles, until 31 March 2025.

R&D

The rates of deduction for qualifying R&D expenditure available under the R&D schemes for SMEs and large companies are adjusted to take into account the changes in corporation tax rates from 1 April 2023.

Companies using the SME scheme will see the allowable deduction reduced from 130% to 86%, This translates into almost 13% less tax relief for small companies undertaking R&D. However, the most significant changes will be felt by companies that make losses after the R&D deduction has been taken into account, as they will have a significantly reduced payable tax credit, down from 14.5% of the loss to 10%.

Large companies that use the R&D expenditure credit scheme will be able to deduct 20% in their tax computations instead of 13%.

Company Cars

The Chancellor has set out the taxable benefits for all company cars which will apply until April 2028.

Drivers of electric and low emission cars will see their taxable benefit increase by one percentage point of the vehicle's list price each year. By 2027/28 the taxable benefit for electric cars will be 5% of list price, and for low emissions cars (emissions of less than 75g/km) it will be 21% of list price.

The taxable benefit for other company cars will rise by 1 percentage point in 2025/26 only, after which the benefit rate will be frozen. No car will have a taxable benefit of more than 37% of list price.

The advisory fuel rate, used for reimbursing employees when they charging an electric company car for a business journey, will increase from 5p to 8p per mile from 1 December 2022.

Vehicle Excise Duty (VED)

All electric vehicles have been subject to a zero rate of vehicle excise duty (VED) or 'road tax' for many years, but that is about to change.

From April 2025 newly registered electric cars will be subject to the lowest first year VED rate of £10. From the second year the standard VED rate of £165 will apply to electric cars, unless the vehicle cost over £40,000, when the expensive car supplement applies to take the VED up to £520 per year.

Electric cars which were registered between April 2017 and 31 March 2025 will all pay the standard rate of VED, which is currently £165. Electric cars registered before April 2017 will pay VED for band 2 which is currently £20 per year.

Other electric vehicles such as vans, motorcycles and tricycles will also become subject to positive VED rates from April 2025.

The full rates of VED for 2023/24 and later years, have not been announced.

VAT

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.

Chancellor Hunt mentioned in his speech that the UK's VAT registration threshold more than twice as high as the average in OECD and EU countries. This could be an advance warning that the VAT registration threshold may be cut in future.

SDLT

On 23 September 2022 the lower band of stamp duty land tax (SDLT) was removed for residential properties, so that tax now starts at 5% on the acquisition of properties costing over £250,000. First time buyers can benefit from a nil rate band for SDLT of up to £425,000. Chancellor Hunt has put a time limit on these SDLT cuts, saying they will be removed on 1 April 2025.

SDLT only applies to property purchases in England and Northern Ireland. It will be up to the Welsh government to decide whether to follow the Chancellor's lead and to alter the Welsh land transaction tax (LTT), as it did in October. The Scottish government did not amend the thresholds of its land and buildings tax in September.

Annual tax on enveloped dwellings (ATED)

Thus tax applies where a UK residential property, which is worth over £500,000, is held by a company or other non-natural person (eg a trust) and it is not commercially let out or used for some other qualifying purpose.

All properties which are potentially subject to the ATED charge must submit an annual ATED return by 30 April with the chargeable year, which runs from 1 April to 31 March. If the ATED is not due because a relief applies an ATED relief return must be submitted. There are penalties for not submitting ATED returns on time.

The rates of the annual tax on enveloped dwellings (ATED) for 2023/24 have been increased by the rate of inflation (10.1%) for all bands:

Note that the ATED charge for 2023/24 to 2027/28 is based on the property's open market value at 1 April 2022 or at acquisition if later. It is up the property owner to provide that valuation or ask HMRC for a valuation band check.

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