News and Comments
Following the introduction of the Health and Social Welfare Levy (An increase in the rate of National Insurance to you and me), it is now confirmed that the dividend trust rate will also increase from 38.1% to 39.35%. The change also applies for charging tax under Corporation Tax Act 2010, s 455 on loans to participators in close companies.
If you have more than one employment or are employed and self employed? You could be due a refund of some of your National Insurance Contributions.
If you combined income is over the upper threshold of £50,270 then it would be worthwhile checking what you have paid. The overpayment occurs because National Insurance is calculated on a stand alone method for each employment. This means you could being paying the main rate rather than the upper rate on some of your income over the upper threshold.
The calculations are not straight forward but nonetheless worth the effort to look after those pennies!
There are a few COVID scheme and provisions that have or are coming to end over the next few weeks. Here are some of the most relevant that might affect you:
- Statutory Sick Pay (SSP) – Paying and claiming COVID related sick pay from the first day of absence ends today and final claims need to be made by 24th March. From now on we revert to the normal rules of eligibility for SSP starting on day four.
Employees’ home-office expenses — end of temporary easement on 5th April now that there is no legal requirement to work from home. https://www.gov.uk/guidance/check-which-expenses-are-taxable-if-your-employee-works-from-home-due-to-coronavirus-covid-19
Tax on UK income if you live abroad — easement ends on 5 April 2022. In 2020, HMRC introduced guidance for non-UK resident employees stuck in the UK because of coronavirus travel restrictions. This stated that those employees would not be taxed on earnings for duties performed in the UK after their planned departure date, provided they were taxed in their home state.
Cycle to work. Due to the impact of the coronavirus pandemic, in December 2020, the UK government announced a time-limited easement. This was for employees who had joined an employer-provided cycling scheme and received a cycle or cycling safety equipment on or before 20 December 2020. Employees who joined a scheme from 21 December 2020 would need to meet all the normal conditions of the Cycle to Work scheme. Where eligible, employees would not have to meet the ’qualifying journeys’ condition until after 5 April 2022. The rules of the scheme have not changed. From 5 April 2022, all employees on an existing cycling scheme will need to meet the normal conditions, including the ’qualifying journeys’ condition.
Many of the accounting packages available to businesses are of US origin so a lot of the terminology is US oriented – much to my irritation. So we have “Aged Receivables” rather than “Trade Debtors”, “Aged Payables” instead of “Trade Creditors”. Not the end of the world I agree but you will often find in the chart of accounts “Entertaining – 100% Business” and “Entertaining – 0%” or something similar. Clients often use 100% business for client entertaining as, as far as they are concerned, the payment is solely for the business but this is the opposite of the UK rules for income tax and VAT. Claims of error-checking within the software are unlikely to pick this up.
Income Tax / Corporation Tax
In the UK we generally differentiate entertaining between client/customers and staff. Within client entertaining there are also potential benefit in kind implications if that is purely for social reasons rather than for a genuine business purpose. To make things clearer in the chart of accounts, I would often edit the description to reflect the UK rules.
With certain exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against taxable profits, even if it is a genuine expense of the trade or business. One of the exceptions to the entertaining rule concerns the entertainment of employees. Staff entertaining is allowable so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment provided for customers – hence the reason why I would recommend amending the chart of account descriptions.
Gifts, which contain a conspicuous advertisement for the trader are generally allowed however, expenditure of this kind is not allowable if:
- the gift is food, drink, tobacco or a token or voucher exchangeable for goods, or
- the cost of the gift, together with the cost of any other gifts (except food, drink, tobacco or a token or voucher exchangeable for goods) to the same recipient in the relevant tax period, exceeds £50.
This is a complex area and some of the application of the rules subjective as can be seen from the Business Income Manual
Again with certain exceptions, you cannot recover input tax incurred on the provision of business entertainment expenses. This is important because software of US origin will typically default to standard rate VAT on “Entertainment – 100% business”. So these also need adjusting to avoid claiming input tax that is not allowable.
Where an employer provides entertainment for the benefit of employees for example, to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes. Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.
From the foregoing care needs to be taken as the rules for income tax / Corporation Tax and VAT are slightly different – nothing is straight forward and relying on the claims of the software provider that what you produce will be error-checked is very much dependent on transactions being recorded accurately so it would be risky to rely upon such claims.
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will be introduced from 6th April 2024. That might seem like a long time away but it will soon be upon us and early preparation will make it a smooth transition.
Who will be affected?
All sole traders, partnerships and residential landlords (including those with overseas properties) who have a gross income of £10,000 or more will have to register although partnerships get an extra year before registration is required.
What will it mean?
Not all the details are clear as yet but what we do know is that quarterly reports will need to be made to HMRC for each type of income. There will be 4 quarterly returns, an End of Period Statement (EOPS) and a Finalisation Statement that will replace the current Self Assessment Return. That means for a sole trader who also has residential property let out and the gross income from each is over £10,000, they will need to make 8 quarterly returns, 2 EOPS’s and a Finalisation Statement – 11 returns in total from the current single Self Assessment Return!
What other requirements are there?
As with MTD for VAT, it will be mandatory to keep digital accounting records and for there to be a digital link between those records and the submissions to HMRC. This is where early preparation will be invaluable as there will be new penalty regimes in place for non-compliance. We’ll be recommending moving to online accounting software but, like MTD VAT, spreadsheets and bridging software are likely to be acceptable but this is yet to be confirmed.
There will also be a move away from basis period accounting to tax year accounting – only announced in July last year. That means for those whose year end is not between 31st March and 5th April, adjustments will be needed for the returns or a change in the accounting date of the annual accounts – the latter probably being the most straight forward. There will be a transition year in 2023/24 to get prepared.
There are still known unknows but we’ll keep you updated and abreast of developments to ensure compliance.
As we approach the end of the current tax year, now is a good time to consider using up any unused annual allowances before you lose them.
The annual allowance is £20,000 and once we reach the 5th April, this year’s allowance will be gone. There is no provision to use up prior year unused allowances. The advantage of an ISA is that any interest or growth on investments are tax free. You can also withdraw funds from them at any time making them, not only tax efficient for future income, but also accessible. You will however be contributing to them out of net (taxed) income.
Pension contributions are another tax efficient way of putting funds away for future income. If you are running a limited company, company contributions are a great way of reducing your corporation tax bill without increasing what you have to report as income on your personal self assessment return. If you are employed speak to you employer about a salary sacrifice arrangement, particularly if you are a higher rate tax payer. This would be of particular relevance if you are marginally in higher rate taxes. You could use this arrangement to avoid losing any child benefit if you have children.
The annual limit on pension contributions is currently £40,000. Unlike ISA’s, you can use up previous years unused allowances up to three years. There are lower limits for high earners. Pension contributions are very tax efficient although the funds are tied up until you reach the minimum retirement age which, for many now will be 57 years old. They do require planning to avoid tax penalties if the lifetime allowance (£1,073,100) is exceeded but good to make regular, annual contributions that will not put too much astrain on personal or company finances.
HMRC have announced that there will be no penalties issued for returns filed late up to the end of February.
This does not mean the filing deadline has been moved. It is still 31st Jan and we’ll be working towards that date to get returns filed on time.
Check if your business is eligible for a coronavirus grant due to national restrictions (for closed businesses)
Businesses that were open as usual, but then required to close due to national restrictions imposed by government may be eligible for the LRSG (Closed) Addendum schemes:
from 5 January 2021 onwards
between 5 November and 2 December 2020
Eligible businesses may be entitled to a cash grant from their local council for each period under national restrictions.