Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.
While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.
Class 2 NIC credits
In his budget, the Chancellor changed the thresholds of national insurance contributions for NIC classes 1, 2 and 4. The class 2 and 4 thresholds are finally aligned albeit with some transitional rules until full alignment is achieved in 2023/24.
For 2022/23, self-employed individuals will only be required to pay class 2 and class 4 NIC on profits above £11,908 (2023/24 £12,570) per year.
Class 2 NIC is only charged at the flat rate of £163.80 per year (£3.15 per week), but paying it allows you to maintain a full NI contribution record and so build up entitlement to the UK state pension and certain other state benefits. Paying Class 4 NIC is a pure tax, and you get no benefits.
If you make a loss or very small profit you don’t have to pay a Class 2 stamp but if you do, it will preserve your entitlement to pension etc.
The government has now introduced a new class 2 NI credit. Where you have profits lower than £6,725, or a loss, you need to pay class 2 NIC on a voluntary basis. It seems crazy but below £6724 you actually have to pay contributions but between £6724 and £11907 for 2022/23 you pay nothing and you get a National Insurance credit.
Basis Period Reform
From 2024/25 onwards, owners of trading businesses will report the taxable profits of those businesses on a tax year basis, rather than reporting the taxable results for the accounting period that ends in the tax year. Transitional rules apply for 2023/24.
This change may cause difficulties for businesses that continue to account to a period end that differs to the end of the tax year. The profits for a particular tax year will be taken as a proportion of the profits for the two accounting periods that fall partially within the tax year.
This may make it impossible to know the profits for a tax year before your tax return has to be submitted.
Under existing rules, if estimates are used in a tax return which are then amended when the final results become known, businesses then have 30 days to pay any additional tax due after the date of the amendment. Late payment penalties are not due unless any additional tax liability is not paid within this 30-day window.
HMRC recognises that more businesses will need to include estimated figures in their returns going forward and it is consulting on alternative options for correcting estimated figures.
Option 1: Amending the estimated figure at the same time as filing the following year’s tax return
Option 2: Providing some form of extension to the filing deadline for the tax return
Option 3: Reflecting amendments to the results for the current year in the return for the following tax year
No doubt we will hear more about these options in due course.
More Dragged into Higher Rate Tax
Recent research has established that 1.3m people in London and across the southeast will be caught by the higher tax threshold by 2025-26.
The analysis was undertaken by the House of Commons Library, commissioned by the Liberal Democrats.
Three-quarters of a million more people, including 370,000 more Londoners and 280,000 more in the wider southeast, will be subject to the 40% income tax rate for the first time.
The reason is the Chancellor’s decision to freeze the income tax band until 2026, and the increasing rate of inflation which is currently at 7%. The results for the South East were then used to estimate the effects on the rest of the country.
The House of Commons Library’s analysis was based on the Office for Budget Responsibility’s (OBR) March 2022 Economic and fiscal outlook report, which estimated that the freeze on the thresholds would mean 2m more higher rate payers and 2.8m extra basic rate payers.
If the thresholds were to rise with inflation, then by 2025-26 the personal allowance would probably have risen from the current £12570 to £14,621. Other thresholds would similarly have increased.
The Spring statement predicted that by 2025-26, the government would be receiving an extra £8.1bn a year in income tax due to the freezing of the thresholds.
Apparently 55% of accountants have admitted to suffering from stress and burnout due to high workloads compared to 41% of other professions.
The survey of 795 accountants revealed that the most common reasons for the increased levels of stress in the profession were heavy workloads, long hours and complex work with no room for error.
The survey also found that working in the office caused more stress for accountants than working from home.
IR35: Lords Criticises Government Approach
A House of Lords Committee has heavily criticised the government’s approach to IR35 stating that they are promoting a system that is ‘uncompetitive, complex, burdensome, and unfair’
In a House of Lords Grand Committee debate on the 2020 Off-Payroll Working report by the Economic Affairs Committee, Lord Bridges of Headley stated that the Committee concluded that the approach to IR35 should be ‘certain, simple, supportive of growth, administratively straightforward, enforceable and, above all, fair’, however it found that the ‘current approach was lacking on all counts’.
The Lords did praise the government for commissioning the 2017 Taylor report into modern working practices, however stated that it had only been ‘consigned to the long grass’. It also agreed with the ‘wisely delayed’ introduction of IR35 to the private sector due to the Covid-19 pandemic.
The HMRC CEST tool also came in for heavy criticism as did the appeal procedure related to CEST decisions.
Lord Bridges is reported as saying that the ‘the tragedy and irony of this sorry saga’ was that IR35 had failed at its original purpose which was to tackle tax avoidance, and in fact ‘it seems that it is giving birth to a new cottage industry of tax avoidance’. The number of those working in umbrella companies had increased from 100,000 to 500,000 in the last 15 years and that the government’s ‘sole focus on collecting tax’ had caused this.
The Committee were concerned that ‘the off-payroll rules were encouraging the insertion of unnecessary intermediaries into the supply chain’ and ‘increasing the opportunities for rogue operators’.
Treasury Tax Priorities
Lucy Frazer, financial secretary to the Treasury spoke recently at a tax reform conference.
She said that central to our strategy is Making Tax Digital, designed to reduce taxpayer mistakes, and therefore the Exchequer losses resulting from them, but it also acts as a catalyst for businesses to become more digital.
Making income tax digital will come into force for landlords and sole traders with income over £10,000 from April 2024.
The digitisation of the tax reporting system should also reduce error levels, raising revenue levels as a result.
Clamping down on tax avoidance remains a priority for the government. MTD is one of the measures that have been introduced to cut down on avoidance.
Support for innovation, and research and development, was another area of focus. The government has an ambitious target to raise total investment in R&D to 2.4% of UK GDP by 2027. Lucy Frazer said ‘We’ve already set out a series of initial measures to reform the R&D tax relief system including the expansion of qualifying expenditures to cover data and cloud computing costs, as well as refocusing R&D relief on activity carried out in the UK and we’re reviewing R&D tax reliefs further – to ensure, among other things, that the UK remains a competitive location for world-class research – and we expect to announce our next steps in the Autumn.’
VAT and Private Tuition
Fees for private tuition qualify for a VAT exemption, provided the fees are charged in relation to tuition of a subject that is ‘ordinarily taught in a school or university’.
The private tuition lessons must be given by a sole trader, or a member of a partnership. This includes a member of a limited liability partnership.
When the private tuition is provided by employees or subcontractors on behalf of the business, it is always standard rated for VAT purposes.
Likewise, if the private tuition is provided by a limited company, it is also standard rated, including one man band personal service companies.
The subject must be ‘ordinarily taught in a school or university by an individual teacher acting independently of an employer’. This wording should produce a pretty clear-cut answer regarding most topics and situations. Accordingly, singing lessons, maths tuition and piano lessons will qualify for this VAT exemption.
HMRC accepts that school or university education includes education which is ordinarily provided by further education colleges.
HMRC’s view is that the subject must be taught regularly at a number of schools or universities.
Zero Growth this Year
A recent survey conducted by the Federation of Small Businesses (FSB) found that 55% of small firms out of the 1,200 surveyed are operating below capacity and do not expect any growth this year.
Factors identified by the respondents included the rising cost of operations (87% of respondents) fuel costs (60%), 58% utilities(58%) , labour costs (48%), and taxation (27%).
The FSB’s survey highlighted that the manufacturing and retail sectors have seen the biggest hit to their operations as supply chain disruptions continue.
Martin McTague, national chair of the FSB said: ‘It’s encouraging to see small business confidence back in positive territory, though the picture across sectors is distinctly mixed”.
‘The small business community shrank in size to the tune of hundreds of thousands over the pandemic. As things stand, spiralling costs are eroding small business margins at a rate that many have never experienced before, while workplace absences are making it hard to operate at full capacity in a tight labour market.
‘At the same time, new paperwork and supply chain disruption are weighing on our importers and exporters, and an endemic poor payment culture continues to destroy thousands every year.’
An Office National Statistics (ONS) survey of 9,000 businesses, revealed that one in seven businesses were not currently trading, one in three were having to pass rising costs onto customers, and one in 10 had been directly impacted by supply chain disruption.
The Insolvency Service recorded that there were more than 5,000 corporate insolvencies in Q1 of this year. This figure was more than double that recorded over the same period in 2021, and was 15% greater than in Q1 2019, before the Covid-19 pandemic hit.
Happy Birthday VAT!
It is 50 years since the Budget creating the Finance Act 1972 delivered a new, simple-to-operate tax to the UK.
Chancellor of the Exchequer Anthony Barber delivered the Budget creating the Finance Act 1972 on 21 March 1972 – 50 years ago. That Finance Act contained the original UK VAT legislation. This, together with many subsequent regulations enacted in 1972 and 1973, resulted in the introduction of VAT in the UK on 1 April 1973.
In his Budget speech, Barber said: “From the point of view of industry and commerce, it will be at least as simple to operate as in any of the eight European countries which now have a VAT, and much simpler than in most of those countries.”
Food for thought.
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