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.
Tax Freedom Day
This is not a day in the year when you do not pay tax on your earnings. It is the day that marks how long you have to work since 5 April to pay your share to the taxman. I was a week later in 2021 and looks to be going to be later each year for a while.
In 2021 it was 8 June. Effectively, on average, all your earnings in the tax year up to that date were just to pay HMRC. In 2020 it was a week earlier.
This means 8 June is the first day people start working for themselves.
This is the latest date for Tax Freedom Day since reliable records began in 1995 and compared to earlier (less reliable) data it is the latest since the mid-1980s.
As we all know the tax burden is moving in the wrong direction. Tax Freedom Day is projected to hit 24 June by 2026.
People are effectively forced to work two full days a week for the government, which is akin to serfdom. The government on average takes over 40% of their earnings in tax, and then it borrows because it still can’t keep its book balanced.
The jump of a whole week shows just how much this government has raised taxes in recent months.
MTD and the £10,000 threshold
If you have a turnover of £10,000 or less then you are not required to join Making Tax Digital for income tax self-assessment (MTD ITSA). The test is applied to the total of:
- turnover/gross income (not profits);
- turnover from property only – where there is income from jointly held property, your share of that gross income as shown on your tax return is what counts).
The test does not include partnership income or income from employment, pensions or dividends etc.
6 July 2022 – NIC Changes
The National Insurance threshold will increase by £2,690 from the current £9,880 to £12,570 from 6 July 2022, Which matches the income tax thresholds.
Remember that your total tax liability is the total of the income tax and the National Insurance charged on your income. NIC is just another tax.
This rise in the threshold will cut tax (NIC) by an average of £330 per worker in a full year. But the introduction of the health and social care levy, means that employees will pay National Insurance at 13.25%, representing a 1.25% surcharge on employees. Employers will also pay an extra 1.25%. So, the Government has increased the tax rate by almost 2.5% almost overnight.
The tax burden is now at its highest for 40 years and rising.
MTD and Corporation Tax
MTD for Corporation Tax is currently scheduled to start from April 2026.
However, with the advent of MTD for Corporation Tax, businesses will submit key accounting data on a quarterly basis, in addition to the existing annual return. Companies would be wise to align both VAT and corporation tax processes as closely as possible, as well as the reporting periods.
Separate data sources are typically used for VAT (based upon detailed transactions) and Corporation Tax (periodic accounts) and are accessed at different times. This means that people who handle corporation tax are not involved in the VAT return process and vice versa. Even in instances where they are carried out by the same person, they are typically done in different processes with no connection between the two.
Also, corporation tax filing is annual up to 12 months after the year end whereas VAT is quarterly or monthly, during the financial year and filing is approximately a month after the period end.
There is therefore limited overlap between the two processes.
With the arrival of MTD for Corporation Tax; the processes are going to have to become better aligned.
Another consideration is that typically 85% of corporation tax returns are outsourced to agents for calculation and filing whereas the number for VAT is significantly lower.
2026 is not that long away. What do you need to do?
Employment – Name Calling
Can simple office or factory banter lead to employment issues?
It may in the end depend upon whether one of the parties takes offence at what has been said. If, not, you may never get to hear anything about it.
However, if they do, then you need to take robust action, both in terms of the comment made, and in preventative action to ensure this does not happen again. A derogatory term, say concerning a physical characteristic, could be deemed as harassment.
Harassment occurs where behaviour is unwanted, such as where the comment is unwelcomed and uninvited, and has the effect of creating a degrading and humiliating environment for the individual. Should the person offended wish to pursue the matter, there is the potential for a successful claim.
Actions to consider:
- In relation to this specific incident, a thorough investigation will need to take place. If it is established that the comment was made deliberately to cause offence, or with no regard to the impact it may have, there may be grounds for disciplinary action followed by training.
- To minimise the risk of future claims, ensure you have appropriate equality policies in place and that these are communicated effectively to all staff. You should also introduce robust channels to report allegations, and training managers on how to effectively respond to such allegations.
HMRC Targeting Entrepreneurs Relief
If you sold a significant block of shares in 2020 you may receive a “nudge” letter from HMRC. These are likely to be focused on people who have made substantial gains during their lifetime and may have inadvertently exceeded their ‘lifetime allowance’ for entrepreneurs’ relief.
The purpose of the nudge letters is to establish whether more sale proceeds in the year to 5 April 2020 should have been taxed at the higher 20% capital gains tax (CGT) rate and to “nudge” you into making additional disclosures.
In March 2020 when the Chancellor reduced the lifetime allowance (i.e., the amount of gains that qualify for the relief during a taxpayer’s lifetime) from £10m to £1m.
At the time, many business owners were concerned about changes to entrepreneurs’ relief and the effective increase in CGT rates on a proportion of their sale proceeds from 10% to 20%.
Problems can arise where transactions involve earnout where it can be difficult to accurately value such consideration at the time a deal is done because the future performance of the business is unknown.
‘There is therefore a risk that business owners may have overvalued their earnout consideration at the time of a deal so that more of the consideration qualified for the entrepreneurs’ relief tax rate of 10%, rather than the standard CGT rate of 20%.
Can an Employer pay a tax-free Retirement Bonus
Any cash amount payable to a retiree would be treated as earnings and be subject to PAYE and NI and processed through the payroll in usual way. This is because it is their choice to retire, and no tax-free provision is in place to pay them a retirement bonus tax free as you would pay a tax-free redundancy amount of £30K.
One option for a retiree reward would be for the employer to buy the employee a gift upon retirement. To receive a gift tax free, the following conditions would need to be met.
- the gift must be something other than cash, a cash voucher, a credit token or shares except shares in a company (or group of companies) that employs the individual receiving the award.
- the employee must have at least 20 years of continuous service with the same employer
- a long service award cannot have been received by the employee from that employer in the previous 10 years.
- the value of the award must not exceed £50 for each year of service
MTD – Landlords Beware
In a recent survey of landlords 35% of respondents said it would be difficult to use MTD-compatible software while 39% said they would have trouble sending quarterly summaries of income tax to HMRC.
86%of the respondents had turnover ( property income or combined trading and property income) below the VAT threshold. Most therefore had no prior MTD experience.
However, unincorporated businesses and landlords with annual turnover or gross income above £10,000 will need to follow the rules for MTD for Income Tax Self-Assessment (ITSA) from their next accounting period starting on or after 6 April 2024.
A big problem is likely to be landlords with one or two properties who spend a minimal time and effort on their obligations. This group thought MTD would be more time-consuming and more expensive.
Only 17% of the respondents currently used accounting or record keeping software. 54% were already keeping records at least quarterly.
The largest and most complex businesses, which were largely partnerships were either already completing MTD for VAT or keeping digital records quarterly, and so felt the move should be easy.
It appears that the more confident taxpayers were about using technology to manage their finances, the easier they thought MTD would be, and the more they were able to recognise the benefits.
The survey results show an alarming lack of readiness and enthusiasm for MTD, fuelled largely by a lack of awareness that MTD for Income Tax begins in less than two years’ time.
HMRC will not be developing or providing any software for MTD for ITSA and taxpayers will have to use commercial software when they file their quarterly returns.
New VAT Business Activity Test
A change in approach by HMRC will affect charity organisations, non-profit making organisations, businesses providing nursery and crèche facilities, businesses that receive grants or subsidies and any organisation or business carrying out non-business activities.
A new 2 – stage test will be used in determining whether an activity constitutes a business activity.
The two-stage tests are:
Stage 1: The activity results in a supply of goods or services for consideration
This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.
Stage 2: The supply is made for the purpose of obtaining income (remuneration)
Where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic. Simply because a payment is received for a service provided does not itself mean that the activity is economic. For an activity to be regarded as economic it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.
Claiming Capital Allowance Super Deduction
Super-deduction and special rate first year capital allowances are temporary allowances that companies can claim on the cost of qualifying plant and machinery.
You can claim these allowances if all of the following apply:
- your company is subject to Corporation Tax
- you incurred the expenditure on or after 1 April 2021, but before 1 April 2023
- you did not buy the plant and machinery due to a contract you entered into before 3 March 2021
Plant and machinery are tools of the trade, kept permanently for the use of the business.
The plant and machinery must:
- be new and unused
- not be:
- given to you as a gift
- a car
- bought to lease to someone else (unless it is background plant or machinery within a building)
- purchased in the accounting period the business activity ceases
If your plant and machinery are bought on hire purchase you can normally make a claim if you:
- hire the plant and machinery for use in your business, without transfer of ownership, in return for regular payments
- are entitled to take ownership of the plant and machinery if the terms of the contract are followed
If the asset has not yet been brought into use for the business you can normally only claim allowances on the capital element of the instalments you have incurred. When you bring the asset into use, you can claim allowances on the whole capital cost.
Plant and machinery that may qualify for the super-deduction includes:
- machines such as computers, printers, lathes and planers
- office equipment such as desks and chairs
- vehicles such as vans, lorries and tractors (but not cars)
- warehousing equipment such as forklift trucks, pallet trucks and stackers
- tools such as ladders and drills
- construction equipment such as excavators, compactors, and bulldozers
- some fixtures such as kitchen and bathroom fittings and fire alarm systems
You can only claim special rate first year allowance for special rate plant and machinery. Plant and machinery that may qualify for the special rate first year allowance includes:
- integral features
- thermal insulation added to existing buildings
- solar panels
- assets with a useful life of at least 25 years
Integral features are:
- lifts, escalators and moving walkways
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems (but not toilet and kitchen facilities)
- electrical systems, including lighting systems
- external solar shading
If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at firstname.lastname@example.org.