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.
How healthy is your charity’s finances at the present time. How secure is your cash flow and can it be relied upon to carry through your present budget plan. Are any of your sources of income at risk of reducing or stopping and what would be the effect on your budget.
Understanding your charity’s “business”.
You need to dissect your finances, identifying those parts of the charity’s operations that generate income surpluses or are just draining available resources. The former may traditionally have financed the latter but get a clear picture of operations.
You also need to understand the impact on your finances of inflation including costs rising faster that you had previously budgeted. If you are grant funded, will these sources increase to compensate or are they going in the other direction in response to government cutbacks. Will you be able to keep your key personnel if you cannot afford to give them sufficient pay rises and how will this affect operations.
Major capital investment or new project development will need to take account of all these factors.
You may well have sufficient resources overall, but some cannot be utilised outside of the restricted use imposed by the donors or grant making bodies.
If you have any funding linked to performance, then you need to take particular care that you hit your targets / outcomes so that future funding is secure.
Your risk register should be taking all of these into consideration.
Cash is king
It is all very well having budgets that show that overall, you are in surplus but the cash flows may show significant cash deficits that will stop you in your tracks.
Project financing can often be received in advance or in arrears. Restricted project funding may also be cash in the bank, but not available for general purposes. Your cash figure should therefore clearly distinguish between restricted and unrestricted cash reserves.
You may have a good understanding of the charity’s business operations and be secure in the knowledge that cash flow is adequate but who controls the spending. Are your budget holders fully briefed on their role as part of the bigger picture and the importance of budgetary control.
Consider how engaged your budget holders are and establish if they are fully accountable for their budgets and understand the impact when budget variances occur.
Ensure you communicate clearly with trustees to address their concerns and give the board the assurance they need.
Personal Savings Allowance:
Individuals pay tax on interest they earn on cash savings that exceeds the personal savings allowance, which currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers get no exemption and pay tax on all cash interest they receive.
However, there are ways to preserve this allowance by organising your savings.
Individuals can protect their savings from the taxman using ISAs and a maximum of £20,000 can be saved in ISAs annually on a ‘use it or lose it’ basis, encouraging regular payments to an ISA over large single (i.e. over £20,000 pa) payments.
Premium bonds from NS&I offer a secure way to hold cash. Rather than a set interest rate, prizes of £25 to £1m are paid monthly. Prizes are free of tax. However, the return on Premium Bonds is not guaranteed and you might never win a prize.
Using your partner’s allowance
For some households it may be advantageous to split cash savings between a couple. If your partner has an unused personal savings allowance cash could be held in their name instead. The same applies if they have an unused ISA allowance. Equally, if one half of the couple is a lower taxpayer, it might make sense for them to have the bulk of the savings so you pay a lower tax rate on the savings interest.
Use your pension
If you have just tipped over into the next tax bracket, and seen your personal savings allowance halved or wiped out you can use your pension to bring you back down into the lower income tax bracket.
Individuals can invest £20,000 a year in a stocks and shares ISA. They can also put money in a cash ISA in the same tax year, although the combined contributions must not total more than the £20,000 limit.
In addition the annual allowance on pension contributions now stands at £60,000, allowing individuals with retirement in mind to set aside considerable sums and benefit from tax free growth, as well as up-front pension tax relief to boost their contributions.
Fewer Rental Homes
According to a report by CBRE, changes to tax and regulations affecting landlords has resulted in the loss of approximately 400,000 rental homes in the past seven years.
CBRE has warned that if the trend continues, the UK will lose almost 10% of its private rented households by the end of 2023.
MTD and Quarterly Reporting for Income Tax
HMRC is discussing how regulations can be redrafted, so businesses aren’t forced to report quarterly for three years after their turnover drops below the exit threshold.
The turnover threshold for businesses to be mandated into MTD ITSA is to be increased to £50,000, with a proposal that this would drop to £30,000 from 6 April 2027. .
HMRC will look at the turnover reported on the last tax return submitted before the start of the current tax year, to determine whether MTD ITSA reporting is required for that year. In the first tax year of trading, if the period is less than a year, the thresholds are reduced accordingly.
When a business ceases to trade and it has no turnover in the tax year, the taxpayer is not required to report under MTD ITSA for a year where there is nil turnover.
However, if the business turnover reduces while it continues to trade, and the taxpayer has been required to report digitally under MTD ITSA for each of the previous three tax years, they must continue to submit MTD ITSA reports until their reported qualifying income does not exceed £10,000 for three complete tax years.
Apparently HMRC is looking at this policy of requiring the taxpayer to report very small levels of turnover as part of a wider review of the existing MTD ITSA regulations.
In a recent case the dentist was a working as a surgeon at a hospital in London.
He was required to be on call two nights a week and every sixth weekend, as well as available for calls “most nights”.
He believed he needed to be within 30 minutes of the hospital while on call. This was not possible from his home in Southampton, so he found local accommodation in Colliers Wood where he stayed in the week and every sixth weekend.
The cost of this accommodation was not allowable for tax because:
- he was not obliged to incur the expenses by his employment. It was a choice.
- the expenditure was not wholly and exclusively incurred in the performance of the duties of his employment
A test of whether an employee is obliged to incur the expenditure would be is all persons employed in the same role would be obliged to incur similar expenditure. Clearly this would not be the case for an employee who lived locally.
Likewise the accommodation was partly for the purposes of his employment and partly for private benefit. The object of the accommodation was to provide living accommodation for both employment and personal purposes and so no deduction was allowed for any part of the cost.
If you are self-employed, the test od allowability for tax is different.
IR35 – Unfortunate Side Effects
The IR35 tax legislation, introduced over 20 years ago, was intended to crack down on tax avoidance, where firms hired contractors who provided services through limited companies.
However, IR35 in its newer form appears to be encouraging “employers” to treat contractors as “deemed employees” and so paying taxes like employees, but without providing employment rights or benefits.
Although taxed entirely like regular employees, these contractors do not receive employee rights, holiday or sick pay, notice periods, redundancy packages or other typical benefits. They are left entirely unprotected, despite paying the same tax.
The new off-payroll IR35 reforms have therefore facilitated a loophole for employers s to exploit, reducing costs by hiring contractors without any responsibilities as actual employers.
Rather than safeguarding contractor rights, the unintended consequences of the reforms have seen a surge in zero-rights employment. Engaging contingent workers under deemed employee rules appears to be a deliberate strategy to cut costs and increase control over contractors without the obligations of an actual employer.
£500k Charity Audit Threshold
ICAS has called for the Scottish government to urgently reassess the Scottish charity audit threshold as charities struggle to hire experienced audit firms
The current audit threshold for charities is only £500,000 and there is intense pressure to find auditors to complete the specialist work.
Increases to the company law audit threshold over many years has caused a fall in the number of accountancy firms being registered to undertake audit work. This continuing trend means there are fewer auditors available to take on audits, of not just companies, but other kinds of organisations, such as charities.
‘Scottish charities have a significantly lower audit threshold than companies. For example, a company needs to have turnover of more than £10.2m in a financial year before an audit is required, but a Scottish charity only needs to have gross income of £500,000 or more.
A recent report shows that around 10% of SMEs are struggling to pay tax bills with the average value of unpaid tax totalling more than £45,600, with a significant number struggling to pay off bills of more than £100,000.
Corporation tax seems to be the primary concern along with VAT.
One specialist lender, Premium Credit, saw a 68% rise last year in the amount it lent to fund VAT and a 53% increase in the amount of support for non-VAT related tax bills.
In addition, many SMEs were considering setting up a time to pay agreement with HMRC.
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.