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.
Wind Farm Capital Allowances Case
A case concerning the design and installation of a wind farm may have far-reaching consequences for taxpayers in relation to the interpretation of the extent of expenditure that qualifies for plant and machinery allowances.
The operator of the wind farm, had claimed £300m as expenditure qualifying for plant and machinery allowances. This amount included £48m incurred on studies and seabed surveys that impacted the design and installation of the windfarms.
The tribunal considered the concept of what constitutes expenditure “on the provision of plant”. and concluded that “on the provision of” may cover installation and transport costs (and in principle other similar expenditure). However, they decided that “on the provision of” is “applied strictly and narrowly” and “not interpreted generously”.
Design costs were preparatory work that did not constitute expenditure “on the provision of” plant. This was the case even where the studies fed into the design of unique foundations for individual wind turbines because the studies were just inputs into design. The costs were just “the provision of design”, which put the taxpayer in the position of providing plant (not the provision of plant). Neither the “process of design” nor “end product” design formed part of the cost of the provision of plant.
This case related to the specific circumstances of the design and installation of a windfarm. However, the implications of the decision, if not appealed and allowed to stand, may have far-reaching consequences for other taxpayers, especially those constructing real-estate assets. It has long been accepted by HMRC that professional fees and preliminary costs (those costs that are necessarily incurred to enable the delivery of a building project) are deemed to be expenditure “on the provision of plant”, usually apportioned to those costs of plant or machinery on a pro-rata basis.
The decision may not seem logical to most of us. But, this case could have far reaching implications for anyone incurring design costs or getting plans drawn up in connection with the provision of plant. However, it may go to a higher court yet.
Basis Period Reform, again ….
You can ignore this if you are a company, for the moment.
In the tax year 2023/24, which is the transitional year for basis period reform, many businesses will have additional taxable profits to report. The taxable profits for 2023/24 are split into two parts:
- the standard part: taxable profit for the accounting period (AP) ending in 2023/24, and
- the transitional part: taxable profit between the end of the AP in 2023/24 and 5 April 2024.
Any unused overlap relief will be included on the 2024 tax return and automatically deducted from the transitional part. The net transitional profit is then spread over the five tax years 2023/24 to 2027/28.
Although the default will be to allocate the transitional part evenly over those five years, this is not compulsory and there are various circumstances where an uneven allocation will be beneficial.
Some of you will face the prospect of being pushed into a higher or even additional rate bracket in some or all of the five years.
Transitional profits are also included in the £100k threshold above which the personal allowance begins to taper.
The way the transitional profits are allocated can also be key to cashflow. Over the five year spreading period, the amounts payable at 31 July and 31 January will fluctuate depending on how the transitional profit is spread.
However, transitional profits will not be included in the calculation for determining if your income is above £50000 for the Child Benefit clawback.
If you are considering cessation, or incorporation, whether that happens before or after 5 April 2024 could have consequences.
When a business ceases or incorporates on or before 5 April 2024, “old rules” apply. Any overlap relief brought forward will be deducted from the final year’s profits and there will be no spreading of the transitional part.
However, if you cease trading or incorporate on 6 April 2024, for example, one-fifth of the transitional profits are included in 2023/24 but the other four-fifths will be taxed in the year of cessation 2024/25 and benefit from an extra year of personal allowance and thresholds.
Basis period reform should, in theory, remove much of the headache and complexity around taxable profits, particularly in the initial and final years of trading.
Financial Fraud and Charities
The level of financial fraud suffered by charities is rising with half of detected frauds committed by staff members, volunteers or trustees
In a recent survey, most charities admitted to have suffered financial loss due to fraud.
Misappropriation of cash or assets is the most common followed by expense and subsistence fraud.
Internal controls remain the most common means for detecting fraud, with most charities giving internal controls the attention they deserve.
Two thirds of charities surveyed said they believed the cost of living crisis was having an impact on the number of fraudulent activities with fraud risks are at their highest. However, it seems likely that many frauds remain undetected and unreported.
Staff, trustees and volunteers are the eyes and ears of any organisation and it is important that they are able to recognise different types of fraud and understand its potential impact.’
Autumn Statement 2023 – MTD
Under MTD and quarterly reporting, there were to be 4 quarterly submissions followed by an End of period Statement.
The requirement for an end of period statement (EOPS) has been dropped, removing the fifth report of full year earnings. This means there will now only be four quarterly reports, reducing the administrative burden.
The government has also agreed to make changes to the quarterly submissions to make it easier to amend or correct errors throughout the tax year. Rather than a total for the three-month period, each update will be a cumulative total of income and expenses accumulated during the tax year to-date. This will remove the need for taxpayers to resubmit a previous update where corrections to previously submitted figures are required.
MTD will be introduced in two phases, starting with those earning over £50,000 from April 2026 and above £30,000 from April 2027.
The government is keeping an open mind on whether to extend mandatory MTD reporting for those earning less than £30,000 and said it would keep this ‘under review’.
Any further expansion of MTD is delayed until MTD for ITSA has had time to bed in, and gives HMRC, taxpayers, and their advisers, some much-needed breathing space to get used to the change.
When it is fully operational, up to 1.7 million sole traders and landlords will have to use compatible software to keep digital records and send quarterly updates to HMRC, so that tax records are kept up to date and reflect their current situation.
In addition, landlords with jointly owned property will be able to choose not to submit quarterly updates of their expenses which relate to jointly owned properties. These records will still need to be submitted before they finalise their tax position for the year. They will also be able to keep less detailed digital records in relation to these properties to simplify the transfer of records between joint owners.
Autumn Statement 2023 – Cash Basis
From April 2024, the cash basis will be the default for sole traders with an opt-out for those wishing to use the accruals basis.
The turnover threshold of £150,000 will be removed entirely, so even the higher earning self-employed people will be able to use the cash basis. Under current rules earners over £300,000 are not allowed to use the cash basis.
In addition, existing restrictions on interest deductions and loss relief under the cash basis will be removed.
The restriction on carrying forward losses will also be removed so that losses generated can be used in the same way as accruals basis losses. This means that cash basis losses will be able to be set sideways against general income of the same period, or carried back to earlier years, subject to the same general loss relief rules as accruals losses.
The cash basis allows self-employed people to calculate their profits based on when income is received or payments made, i.e., on a cash in and out basis. This is a simpler approach than traditional accruals-based accounting.
It is estimated that this will affect up to four million sole traders.
This measure will have effect from the tax year 2024 to 2025.
Accruals accounting provides a truer measure of the profitability and position of a business in a given period and is often required by banks for finance applications. The accruals basis may also be more suitable for seasonal or fluctuating businesses, or those that have high values of stock.
The cash bases may be more amenable to manipulation and to planning when you have to pay tax.
Autumn Statement 2023 – EIS
The government plans to legislate to extend the enterprise investment scheme (EIS) and venture capital trusts (VCT) to 2035. The current schemes were due to be withdrawn in April 2025.
Although the extension of the sunset clause was welcomed, questions are being asked why it had not been removed completely.
Payroll Risk for Clubs and Societies
HMRC is warning certain clubs and associations that they may be liable to pay the apprenticeship levy, and that they possibly should not be claiming the employment allowance.
The Apprenticeship Levy is an annual charge set at 0.5% of payroll costs, subject to an annual allowance of £15,000. This allowance ensures that only employers with annual payroll costs exceeding £3m will be liable to pay it.
This should mean that most small independent clubs and societies are exempt. However, the £15,000 allowance applies to all companies or charities that are connected with the employer.
The Employment Allowance is worth up to £5,000 per year to set against the employer’s class 1 national insurance contribution (NIC) liability. But there is also a size restriction on eligibility. Where the class 1 NIC liability of the employer and any connected employer was £100,000 or more in the previous tax year the employer is not eligible to claim the EA.
The catch for both Levy and Allowance is the requirement to look beyond the payroll of the immediate employer and add the value of total payroll or the secondary class 1 NIC liability of any connected employers.
The rules for whether two employers are “connected” are the same for both schemes.
Many local clubs, societies, religious bodies, amateur sporting bodies and even political parties, have a relationship with a national body in their own sector. For example, the various local associations may be bound by the general rules or constitution of a national body.
The rules relating to connected companies do not apply to sole traders, partnerships, or single companies.”
To determine whether two or more companies or unincorporated associations are connected one of them has control of the other, or both are under the control of the same person or persons.
A person is treated as having control if they:
(a) exercises,
(b) is able to exercise, or
(c) is entitled to acquire,
direct or indirect control over the entity’s affairs.
Control may not be through shares but be written into a body’s constitution.
Questions?
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 alan.long@thelongpartnership.co.uk.
