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.
Landlords and MTD
Around 10% of people have income from property. Nearly 3 million taxpayers rent out houses and flats. According to some reports, there is a widespread ignorance of the new MTD reporting requirements and this is setting alarm bells ringing.
The latest Office for Tax Simplification (OTS) is calling for the threshold to be raised (currently £10000), and to introduce flexibility on reporting requirements in certain circumstances.
The new regime will be implemented from April 2024 and will affect anyone earning more than £10,000 from property rental (or property combined with self-employment if you have both).
Apparently, half of landlords were not aware of the upcoming rule change while only 17% felt they were aware and prepared for the changes. 31% were aware of MTD for Income Tax but ‘felt unprepared for the changes’.
It is estimated that 1m landlords whose property income exceeds £10,000 will be affected while a further 380,000 landlords will be brought within the rules because they have self-employment income as well.
Other tax advisers suggest that a turnover of £85,000 per year would be a reasonable level to start. HMRC has specified that taxpayers with turnover up to £85,000 can report three-line accounts i.e. not a detailed P&L.
If the threshold is exceeded, they will have to submit quarterly digital updates of their business income and expenses to HMRC, and an end of period statement on an annual basis, involving significant additional costs for the taxpayer.
Nearly half of landlords will be filing for jointly-owned property, and it is not clear how this will be possible under the current proposals. ‘HMRC have set out that each taxpayer has individual responsibility for their MTD for Income Tax filing obligations including filing quarterly updates on an individual basis even where there is a single set of underlying records. A further complication arises where one owner could be on the cash basis and another on the accrual basis. HMRC expects software developers to create products for joint owners of let properties, which will allow them to share the digital records and make MTD submissions for each owner.
Small general partnerships are scheduled to join the MTD ITSA regime from 6 April 2025, but there is no joining date yet for limited liability partnerships (LLPs), large partnerships (over 20 partners) or mixed partnerships with corporate members. It is possible that MTD for the larger partnerships may never happen.
The data requirements for furnished holiday lettings (FHL) are slightly different to other lettings, as FHL owners can claim relief for interest payments and capital allowances. Where the taxpayer reports quarterly on the assumption that the property will meet the FHL letting conditions, but at the end of the year it hasn’t, there is no clarity on how or when the records would have to be corrected.
A similar problem exists with the cash basis, which can only be used if the total rental income for the year does not exceed £150,000. Where rents exceed that level the accruals basis must be used.
Taking these and other issues into account the OTS recommends that MTD ITSA should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers.
It is possible that there will be an announcement regarding MTD ITSA in or around the Autumn Statement on 17 November.
Accountants and MTD for Income Tax
A report by ICAS (The Institute of Chartered Accountants of Scotland) reports that only around half (53%) of firms have already adopted software to prepare for MTD.
It is expected that around 4.4m self-employed taxpayers will have to adopt the new regime which will eliminate many of the existing paper-based processes used to file self-assessment returns.
The report goes on to identify that more accountants are adopting cloud-based systems to better prepare for the changes. Accountants cited using the cloud to improve efficiency (75%), compliance with regulations (62%) and save time on admin (52%).
However, nearly a third said they had experienced difficulties when adopting cloud-based software, with some finding difficulties in replacing or integrating with the current set-up (41%) and changes to organisational culture (34%).
Although 47% were yet to adopt any MTD software solutions, 81% believed that the accountancy profession would become more technology focused in the next five years.
The Stealth Tax Option
Sunak and Hunt appear to be committed to a combination of tax increases and spending cuts with pain for all guaranteed either way, in order to balance the governments books.
Tax increases are unpopular and so hiding them in plain sight is one option.
The best two stealth taxes have long been national insurance contributions (NIC) and stamp duty. It seems highly unlikely that the new team could get away with increasing employees’ NIC as previously proposed and the resulting publicity of yet another U-turn means this would be no stealth tax.
The other big stealth opportunity could be taking the cap away for higher earners.
They could increase the taxes onbooze, fags and gambling as such a move would be relatively uncontroversial.
They could also decriminalise cannabis and then work on a hefty tax charge as the price for doing so.
VAT is largely invisible for most people so they could increase the standard rate and possibly even tinkering with lower rates and exemptions as well.
CGT is charged at low rates and there is the option to re-unify rates of CGT with those of income tax, which was the case some years ago.
IHT could be another area where the tax take could be increased by increasing rates or reducing reliefs.
We have had stealth tax for a few years now, The freezing of allowances and rate band is effectively increasing taxes every year and particularly as inflation bites.
We’ll just have to wait and see what the 17th of November brings.
SEISS payments and Tax Returns
HMRC has warned taxpayers completing self-assessment that they must declare Covid-19 payments in their tax return for the 2021 to 2022 tax year
More than 2.9 million people claimed at least one self-employment income support scheme (SEISS) payment up to 5 April 2022. These grants are taxable and should be declared on tax returns for the 2021 to 2022 tax year before the deadline on 31 January 2023.
If taxpayers received other support payments during the 2021 to 2022 tax year, they may need to report this on their tax return if they are:
- in a partnership;
- a business.
Taxpayers can check which Covid-19 grants or payments they need to report to HMRC on gov.uk. This applies to payments received during the 2021 to 2022 tax year.
Companies House and Paper Accounts
Companies House reports that 89.6% of companies filed accounts online, with a hard core of companies still preferring paper based accounts.
However, regardless of whether accounts were filed online or on paper, the overwhelming majority filed their accounts online with only 1.6% of companies filing late.
Regardless of high compliance levels, a record number of penalties were charged as companies recovered from the pandemic. During the financial year 383,276 penalties were levied (2020/21: 181,410), an increase of 201,866 (111%) on the previous year.
Fines for companies that failed to file their accounts for two successive years ramped up to £71.1m from £40.7m with 78,132 double penalties issued.
Over the last year, the number of registered companies increased to 4,894,356.
Companies House is considering different ways to move towards mandatory digital filing of accounts, which it ‘will continue to explore in 2022/23’.
There is also a drive to reduce paper usage and postal costs. Companies House has stopped issuing paper-based reminders to carry out statutory filings, relying instead on the established digital reminder service.
New ways of working
The pandemic caused an explosion in the number of individuals working from home – even from different countries. Employers that didn’t previously allow remote working either chose or were forced to adapt.
This change to working patterns now seems to be a permanent feature of employment.
According to ICAEW the law and HMRC’s policies on hybrid and home working, benefits-in-kind (Bik) and expenses require updating.
In addition, clearer guidance is required.
International agreement via the OECD is probably necessary and perhaps HMRC could take the lead here.
According to ICAEW HMRC needs to do more to help businesses meet their compliance obligations efficiently and cost effectively, especially in relation to incoming and outgoing expatriate employees. This would make the UK a more attractive place in which to run and grow businesses.
Changing accounting dates
From 2024/25, business owners will be taxed on profits arising in the tax year. For businesses with an accounting period end that differs from 5 April (or any time between 31 March and 4 April), it will be necessary to calculate the profits of two (or potentially more) accounting periods to determine the profits attributable to a particular tax year.
Tax year 2023/24 will be the transition year. Businesses with an accounting period end differing from the tax year end will be taxed on more than 12 months’ worth of profit, reduced by deducting any brought forward overlap profits.
In most cases, the 2023/24 basis period will start immediately after the end of the basis period ending in the 2022/23 tax year and will end on 5 April 2024.
Some businesses cannot easily change their accounting date to 31 March or 5 April, but others may want to do so to simplify their tax reporting.
Can a change in accounting date be recognised for tax purposes?
Changes in the first 3 years can be complex. In the fourth and subsequent tax years, a change in accounting date is recognised for tax purposes only if:
- the period of account does not exceed 18 months;
- notice is given in a self-assessment return for the tax year of change before the filing deadline; and
- the latest change is made for commercial reasons if there has been a change of accounting date in the previous five years that resulted in a change of basis period. Those reasons must be set out in the self-assessment return.
Are there losses?
Either current trading or claiming capital allowances may result in tax losses.
Deducting overlap profits on a change in accounting date might also create or enhance a loss. Norma loss relief rules apply.
Special rules will apply in the transition year only so that if the deduction of overlap profit turns the overall result for 2023/24 into a loss, or increases a loss, the terminal loss relief rules can be applied. The amount that can be relieved under the terminal loss relief rules is the lower of the actual loss for 2023/24 and the amount of the overlap profits deducted in 2023/24.
Is it better to spread transition profit?
Changing accounting dates might mean that more taxable profits arise in the year of change, particularly if the business has become more profitable over time so that the additional profit to be charged exceeds overlap profits.
In the 2023/24 transition year only, if transition profit remains after the deduction of overlap profits, it is possible to spread some or all of this over five tax years. The amount that can be spread is the lower of:
- the overall profits for 2023/24; and
- the transition profit less the deduction for overlap profits.
It will generally be better for a business to have more than 12 months of profit assessed in the transition year because it is only possible to apply the spreading provisions in that year.
Pre-incorporation Trading Losses
When a trade is transferred to a company wholly or mainly for shares, any tax losses of the business that remain unused at that time are retained by the transferor and can be deducted from any income the transferor receives from the company. It doesn’t matter whether the income is in the form of remuneration or dividend (or even loan interest): nor does it matter that the income may have no connection whatsoever with the business transferred. All that really matters is that the company continues to carry on the transferred business (however minimal the extent) and that the transferor continues to hold the shares.
Recovery of SEISS Grants
A taxpayer had been self-employed as a fitness trainer, but incorporated in 2018 and traded through the company thereafter. His tax returns reflected the change in his employment circumstances. In May 2020, he applied for and received a SEISS grant, and a second in August.
HMRC started a compliance check in October.
The taxpayer argued that the need to be a sole trader was not clear from the claims process and that he should be allowed to keep the grants, as HMRC had paid them to him in the full knowledge, from his returns, that he was not self-employed at the relevant time.
The FTT found for HMRC. It was shown screenshots of the claims process, in which the eligibility criteria were clearly set out, but noted this was not that important. The taxpayer was never entitled to the grant, and HMRC had raised an assessment in good time. Although HMRC knew he was not trading, this did not matter. The assessment was upheld.
Christmas Spectacular – Theatre Tax Relief
The taxpayer put on a production consisting of various elements that was one dramatic production overall, so theatre tax relief was available, according to the Tax Tribunal.
Theatre tax relief, which was introduced in 2014 is available on theatre, ballet shows and other dramatic productions.
The taxpayer put on a show each year, which consisted of a number of elements such as dance, song, and shows. HMRC argued that this was essentially a variety show that had no consistent story. The tribunal watched a recording and heard extensive evidence as to how the show was put together and the roles of the performers.
The FTT agreed with the taxpayer that this fell within the category of other dramatic production, and that the performance was mainly given through the playing of roles. The dancers and singers were performing not as themselves, but were playing the role of a dancer or singer as required by the story, such as a chorister in some scenes.
The legislation on ‘other’ dramatic productions was amended with effect from April 2022.
Cost of living support provided in the form of a cash payment is taxable and for lower paid employees can impact universal credit payments.
However, by providing the support in the form of a non-cash voucher, employers are able to provide this support to their employees without impacting the employee’s UC payments. It is important that the provision of the non-cash vouchers is reported correctly.
Payrolled benefits also will not impact Universal Credits but employers need to ensure that payrolled benefits are correctly flagged in the system set up to ensure that they are not included incorrectly in an employee’s employed earnings.
Self-Assessment Filing “Super” Penalties
There are penalties for failure to file a self-assessment tax return on time (unless there is a ‘reasonable excuse’ for the failure):
- the initial penalty is £100;
- if the return remains outstanding after three months, penalties of £10 a day (up to a maximum of £900) start to kick in; and
- if it’s still not filed six months after it should have been, a penalty of 5% of the tax due (or a minimum of £300) is payable, with another 5% (or £300) if the delay reaches a year.
The 12-month penalty of 5% can be uplifted to 200% where you deliberately fail to file a return in order to deliberately withhold information which would enable or assist HMRC to assess a further tax liability..
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