0 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.
Changing April 2024
A new financial year begins for companies on 1 April 2024 and a new tax year for individuals on 6 April 2024. Watch out for the tax changes taking place.
Perhaps just as interesting as what is changing in April, is what is not changing. For example, the income tax personal allowance and the thresholds for the rates of income tax set by the UK government continue to be frozen at the amounts for April 2021.
This decision not to update a wide range of tax allowances and thresholds means not just a higher tax bill for many, but also increased engagement with the tax system overall.
It is likely that more people will be brought within self-assessment and that many will encounter complicated tax rules for the first time. Issues to consider include whether ongoing claims to marriage allowance are still valid or beneficial, and the possibility of making gift aid donations or pension contributions where the taxpayer is above one of the cliff edge income tax thresholds (e.g., £100,000 for the abatement of the personal allowance).
HMRC – Tax Allowable Expenses for Sole Traders
If you are self-employed you can deduct training costs in calculating your trading profit where the following two conditions are satisfied:
- the expenditure is incurred wholly and exclusively for the purposes of the your trade; and
- the expenditure is not capital expenditure (i.e., it is revenue expenditure). The second test in particular can be difficult to apply in practice.
Training costs are revenue expenditures where the intention is to update current or provide new skills or knowledge in your existing trade, such as training to keep up with advances in technology and changes in practice in your business area. Depending on the circumstances, it may include training ancillary to your trade (e.g., a course on bookkeeping).
An expense will be capital, and therefore not deductible, for training that allows you to start a new business or expand into a new, unrelated area of business.
Here are some examples that have been provided by HMRC:
Expenses likely to be allowable
Example 1
A wedding photographer works part time. They want to improve their photo editing skills, so they attend an online refresher course on using photo editing software.
As they are updating their existing editing skills which are related to their business, the cost of the course is likely to be an allowable expense.
Example 2
A plumber runs their own business. They sign up to a beginners’ bookkeeping course at their local college. Although the course will not help them with the skills they need as a plumber, it will teach them how to keep accurate accounting records, which will help them to run their business better.
The course will improve their record-keeping knowledge and they will learn skills which they need for the purpose of running their business. The cost of the course is likely to be an allowable expense.
Example 3
A person is selling handmade pottery in their local town centre and now wants to sell their pottery online. They think this will help them reach more customers and increase their sales. They decide to complete an e-commerce course and then go on to complete a short, introductory course on website development.
Although the courses are not directly related to pottery, they will learn new skills so that they can move their business into online selling. The skills and knowledge they acquire will help them to keep up to date with the modern ways of selling. The costs of the course are likely to be an allowable expense.
Example 4
A website designer is completing a short course on using artificial intelligence (AI) technology so that they can add additional tools and functionality to the websites they design.
The course will give them new expertise in an upcoming area of technology related to their business. The costs are likely to be an allowable expense.
Example 5
A gas boiler fitter completes training to install heat pump systems. They think they will need these skills to future-proof their business, as heat pumps are new and upcoming technology and an alternative to gas boilers.
The cost of the training is likely to be allowed as an expense of the business as heat pumps will replace gas boilers and they are acquiring skills to keep up to date with modern technology.
Example 6
A personal trainer attends a course to improve their understanding of nutrition and gain a basic qualification in nutrition.
They want to learn about good nutrition as their clients expect them to have a basic understanding of nutrition. The knowledge that they gain will also help them to develop better training plans for their existing clients, so the cost of the course will be an allowable expense.
Example 7
An author runs an online store selling children’s storybooks that they also write. They want to start drawing the illustrations for their books because they think this will improve the books and save them the cost of paying for an illustrator to create the drawings. They decide to attend a beginners’ course on drawing illustrations.
The cost of the course is likely to be an allowable expense because they are using their skills to improve the children’s storybooks that they create.
Expense likely to be disallowable
Example 8
An unemployed person wants to become a driving instructor and start their own business. They complete a course so that they can become an approved driving instructor and want to claim the cost of the course as an expense.
They cannot claim the cost incurred on the course because the course provides new skills which will help them to start a new business that does not already exist.
Example 9
A shop owner runs a sportswear shop selling branded clothing. They enrol on to a sports science degree at their local university because they have an interest in the field and think it will help them to understand their customers better.
The costs associated with the degree course will not be an allowable expense because the knowledge they acquire will not specifically help them to sell sportswear. The costs are therefore unrelated to their business.
Example 10
A freelance makeup artist wants to move into the tattooing business and open their own tattoo studio. They undertake several tattooing courses and want to claim the costs as an expense.
The costs of the tattooing courses were not incurred for the purpose of their existing business and are unrelated to their makeup artist business, so the costs of the course are not allowed as an expense.
Example 11
A taxi driver wants to change their business and move into the painting and decorating industry. They complete a painting and decorating course at their local college and want to claim the costs of the course.
The cost of the course was not incurred for the purpose of their existing taxi driving business and is related to the painting and decorating business they plan to set up, so it is not allowed as an expense.
R&D Tax Relief
If a company is subject to UK corporation tax and is undertaking research and development (R&D), it can potentially claim R&D tax relief.
The R&D activities must be capable of being accounted for as such under generally accepted accounting practice. In addition, a claim must show that a project seeks to resolve specific uncertainties to achieve an overall advance in a qualifying field of science or technology.
The innovation does not have to be successful to claim R&D tax relief.
When making a claim for R&D tax relief, start by identifying the right work i.e. Which projects are technically challenging, The starting point is when R&D work begins to overcome an identified challenge and the endpoint is when a working solution is found or the process is aborted.
You then need to identify the associated costs. Who was working on the project during that timeframe? What other costs were involved?”
Not all costs will qualify for claims, and there have been several recent changes. For instance, for accounting periods beginning on or after 1 April 2023, cloud computing costs can be included, while for accounting periods beginning on or after 1 April 2024, overseas costs will cease to apply.
Once the costs are identified, the claim is compiled and submitted as part of the company’s tax computation.
From August 2023, companies must also submit an additional information form that, among other things, requires a technical description of the qualifying project or projects included in the R&D claim. This must be submitted before the corporation tax return using an online portal.
You need to be able to explain the innovation and the approach taken and identify the boundaries between existing technology and the innovation part.
Getting the technical description right has become even more important this year, as HMRC has stepped up its scrutiny. HMRC has a dedicated R&D anti-abuse unit – recruiting hundreds more R&D compliance inspectors to conduct checks.
Checks are now conducted on 20% of claims, compared with 1% previously. This can extend timeframes way beyond HMRC’s stated target of paying 85% of payable claims within 40 days.
Getting ready for new changes
The government announced several amendments to R&D tax relief, most notably the merger of the SME relief scheme and the R&D expenditure credits (RDEC) for large businesses. This should be simpler because there is now just one set of rules that is applicable for most companies.
UK’s Biggest Tax Failings
Hundreds of thousands of UK residents on modest incomes are currently paying marginal tax rates of 71% or higher, thanks to “well-intentioned” tweaks that at first had minor impacts.
For example, you have three children, you’re working 1,500 hours a year and you’re earning £50,000. That’s around £33 per hour before tax and £25 after tax. Fine. How would you like to work another 200 hours for the same rate? Sounds good. But how much will you see after tax? The answer is around £9.60 an hour. That’s less than the minimum wage. It’s equivalent to a tax rate of 71%.
The cliff edge VAT threshold is a disincentive for many small businesses to grow. Raising the does not eliminate it, but just moves it so that while you are not trapping smaller businesses, you are trapping slightly larger ones. Is the answer to take the threshold down to say £30000, which was considered a few years ago? Probably not in an election year!
Complexity has certainly increased in recent years. The government abolished the Office for Tax Simplification, possibly because they did not really understand the importance of their work, but also because they really don’t buy into the concept.
HMRC’s Single Customer Account
HMRC is actively encouraging taxpayers to use online services or the HMRC app to manage their tax affairs.
The single customer account (SCA) will underpin these services.
The aim is to deliver integrated, personalised accounts allowing people to view and engage digitally with all their tax affairs in one place.
There will be no big reveal or launch of the new account. HMRC plans to continually improve the design of the digital services it provides. Services that are currently online and in the HMRC app will be gradually integrated and improved and new services will be added.
The initial stages will deliver improvements for individuals. Delivery of services for businesses and agents is being considered but is a bit further down the track.
Behind-the-scenes work is ongoing to connect data held in a myriad of HMRC legacy systems and databases.
After income tax services for individuals (personal tax account users), HMRC will move on to business services, starting with sole traders with business taxes such as VAT, construction industry scheme, employer’s PAYE and national insurance contributions.
The tax system does not remain static so the SCA will need to keep pace with other developments. HMRC’s vision is that new and existing HMRC services will be made available through the account as they are introduced, upgraded, and digitalised. Development will need to work hand in hand with other changes that HMRC is working on, such as taxpayer registration for self-assessment, and possible changes to payment policy (timely payment). It is no accident that the first new service to be developed by the SCA programme is child benefit for which no digital service was previously available. It is easiest to start afresh in a discrete area.
It is essential that the SCA programme is closely aligned with HMRC’s agent strategy, with appropriate agent access to the services and information that clients can access through their SCA being built in from the beginning.
Inheritance Tax: Things to Consider
Thresholds
The inheritance tax (IHT) thresholds have been frozen until at least 5 April 2028. Even before that, the IHT nil rate band (NRB) has effectively been frozen since 2009 and would be worth around £475,000 if it had been uprated with inflation. But it will remain at £325,000 for the foreseeable future, with the residence nil rate band (RNRB) offering up to an additional £175,000 relief from IHT.
In the face of increased property values over the past decades, more estates are being pulled into the scope of IHT.
Residence Nil Rate Band and Downsizing Relief
The RNRB offers up to an additional £175,000 of relief for individuals who leave a qualifying residential property to their direct descendants, and whose death estate does not exceed £1m. A taper applies above that.
Downsizing relief involves a slightly complicated computation of calculating the percentage difference between the amount of RNRB that would have been available before the property disposal, and the amount of the RNRB that is used after the downsize.
Note that the Residence Nil Rate Band (RNRB) can only be applied on death, not to lifetime gifts. So in the event of a death within seven years of the gift, a previous disposal of the main home cannot be sheltered from IHT that way.
Gifting Main Residence – Gift with Reservation
If you are considering gifting your main residence while continuing to live in it, in most cases this will be considered a gift with reservation of benefit, and the value of the property will remain in your IHT estate. At the point of death, the greater of its value at gift or at death will be included in the calculation of the IHT estate.
You can get around this by doing things like paying a market value rent.
Liability and Domicile
For individuals domiciled in one of the countries of the UK, IHT will be due on their worldwide estate. However, for taxpayers who are not UK domiciled, only their UK assets will be subject to IHT. Once non-domiciled individuals have been resident in the UK for at least 15 out of the previous 20 tax years, they are ‘deemed domiciled’ and, broadly, their worldwide assets come into the scope of UK IHT.
Share relief
For quoted shares and holdings in an authorised unit trust relief can be claimed where the investments are sold for less than their value in the death estate. Qualifying shares and holdings must be sold within 12 months of the date of death.
Other reliefs
There are several other reliefs including Agricultural Property Relief and Business Property Relief. There are also several small exemptions available. The motes above are just a few interesting points.
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.
