Is it worth incorporating?

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.



650k “Give Ups”

Official figures suggest that the average wait time to get a call answered by HMRC is 24 minutes.

In February 2.9m people attempt to speak to HMRC via phone. January was 3.6m.

Only 1.3m callers managed to get through to an HMRC adviser. A quarter of callers gave up – 656,622 giving up waiting (January 841,000.)

HMR is trying to reduce reliance on phone lines. If you never answer the phone, people are going to stop calling.

The web chat facility is used but far less than those trying to use the phone. It is getting used more, but that is maybe because they are taking away the choice of how to contact them. However, speaking over the phone is clearly still the preference for most with almost three million calls in a single month. So far, from April 2023 to March 2024, HMRC received 33.48m phone calls, 33 times more than webchats submitted, with just over a million of these recorded.



Is it worth incorporating?

There have been a number of changes recently that seem to point away from incorporation. These include the national insurance contribution changes, dividend tax allowance changes and small profit rates for corporation tax.

You also would not want to set your plans in tablets of stone in the run up to a general election. If there is a change in government then there could be some significant changes to the tax system, albeit not immediately after the election.

But, in the light of recent changes to the Furnished Holiday Lettings regime, should these businesses incorporate before 6 April next year? Before then any Capital Gain would be taxed at 10% but after, it will rise to 24%.

It could be wise to crystallise the CGT at 10% on the gain to date and reset the base cost for future disposal. There may be ways to transfer your property or properties to a company and potentially result in no tax payable on the transfer.

However, you always have to look at the transaction costs including legal, LBTT and ADS.



Check Your Tax Code

Make sure you are on a ‘S’ tax code to ensure they are paying the correct tax.

Scottish rates are significantly higher for anyone earning over £43,663 with a 42% higher rate of tax, while those with incomes over £75,000 to £125,140 face a 45% rate.

Top earners are caught by a 48% rate on earnings over £125,140, the same threshold as the rest of the UK, but a 3% higher tax rate than colleagues south of the border.

Scotland has five tax bands and rates, and has also been hit by the UK-wide freeze in thresholds at £12,570, which would have seen tax liability hiked again, save for the two cuts in non-devolved National Insurance this year.

Anyone earning over £26,561 will pay a higher tax rate than the rest of the UK at 21%, compared to 20% for everyone else. The cut in National Insurance rates to 8% also applies in Scotland.

You should check your first payslip in April to make sure their address is correct and that their tax code starts with an ‘S’. This should ensure that you are paying the right amount of tax on your income.

Scottish income tax bands and rates 2024-25

2024-25 Band Rate
Starter £12,571 – £14,876 19%
Basic £14,877 – £26,561 20%
Intermediate £26,562 – £43,662 21%
Higher £43,663 – £75,000 42%
Advanced  £75,001 – £125,140 45%
Top Above £125,140 48%



Labour’s Tax Gap Plans

Although there has been and will continue to be much talk about closing the tax gap, filling black holes in budgets etc, one of the options much favoured by the House of Commons Public Accounts Committee and the National Audit Office is the strategy of re-building HM Revenue and Customs staffing closer to past levels.

Labour proposes to employ an additional 5,000 people to investigate tax avoidance and prosecute fraud using beefed-up IT systems that begin to incorporate artificial intelligence (AI).

It has been said that many of HMRC’s problems result from a 56% reduction over the past five years in the size of the unit that investigates offshore, corporate and wealthy taxpayers.

A recent report based on the latest HMRC data shows that for each £1 of compliance expenditure targeted at smaller individuals brings in £6.60, when directed at wealthy individuals £11.40, and when directed towards large businesses this goes up to £39.20.

That would seem to be a decent rate of return unless, of course, your political focus is cutting Government expenditure. But surely each of these £1s will result in a cash influx down the line to more than compensate for the additional spend.

We could therefore expect to see an increased headcount at HMRC but also other improvements such as further digitalisation) and would mean more compliance checks for larger businesses and a focus on offshore tax compliance.



800 Directors Banned

831 company directors were banned in 2023-24 for Covid support scheme abuse, up more than 80% on the previous year. The average disqualification period was 10 years.

The Insolvency Service has teams dedicated solely to investigating bounce back loan misconduct which are committed to taking action against those who provide misleading information to receive money they were not entitled to.

One such director was banned for Covid loan abuse for 12 years in June 2023.

He applied for three bounce back loans worth a combined £120,000 in the summer of 2020 on behalf of 3 separate trading companies, but none of them had any outcome before receiving the bounce back loans.

However, he transferred at least £105,000 of the funds to his own account for his personal use.

Another director, this time of a building company, was also banned for 12 years. He had obtained a £50,000 bounce back loan in 2020. He substantially inflated the turnover of his company, receiving almost £46,000 more than he was entitled to. He subsequently obtained a separate £40,000 bounce back loan from another bank. £80,000 out of the £90,000 was transferred to his personal bank account with no evidence that he used the funds for his business.

There are a lot of other quite blatant abuses of the scheme with many claiming significant bounce back loans even for dormant companies. This was achieved by declaring a false turnover.

In total 1,430 directors have been banned for stealing money from Covid support schemes since investigations into financial wrongdoing in this area kicked off in 2021.

Generally, enforcement action taken against those that have abused the support schemes has ranged from companies being wound-up in court to criminal convictions, compensation orders and director disqualifications.



Work-Related Stress

Whilst not all stress is a bad thing, for some, it’s a motivator, it can get too much and have serious consequences such as anxiety, depression, poor performance and productivity and lead to low retention levels.

It can also have physical symptoms such as heart disease, back pain and IBS, and absences from work. Each year, 13.7 million working days are lost in the UK because of work-related stress and poor mental health, costing the economy £28.3 billion. Managing stress is therefore beneficial all around.

Creating a culture that promotes mental and physical wellbeing and that enables individuals to recognise and control their own stress triggers can be the best defence against stress at work.

Workload monitoring can be important to ensure it is reasonable and achievable. Action should be taken where this isn’t the case. l

Other ways to manage stress can be discouraging excessive overtime or out-of-hours work, and by reminding employees to book and take annual leave.



How to Grow Your Pension

The state pension rose to £11,502.40 in April, just over £1,000 away from the £12,570 tax-free allowance which is set to stay put until 2028 under a Conservative government.

By the time the freeze is lifted an estimated additional 1.6m pensioners will be paying tax. 1.2m of these have been dragged in since the freeze on tax thresholds was enforced in 2022.

The triple-locked state pension increased by another 8.5% this month, taking the full flat-rate state pension to just over £11,500 a year not far short of the currently frozen personal allowance.

Ways to boost your income in retirement include:

  1. ISAs– a useful source of tax-free cash. The annual allowance is £20,000, but now you can spread this across multiple ISAs of the same type. ‘
  2. Contributions to pension schemes either personally, or the generally more tax-efficient, company contributions to your pension pot. There are restrictions on the limit of contributions on which you can get tax relief, the upper one being the annual allowance of £60,000 per annum, although you can utilise the allowance from earlier years in certain circumstances.

It is reported that according to Standard Life, ‘retirees hoped to have a pension pot of £250,000 – but on average have £131,000 in retirement savings’ leading to a monthly income of £527, where if the ideal £250,000 was met the income would be over £1,000 a month.



Director’s Loan Interest Remains at 2.25%

HMRC has confirmed that the official rate will not be increased for director’s loans outstanding throughout the tax year 2024/25 using the normal averaging method of calculation, keeping it at 2.25% for the second year running, despite a base interest rate of 5.25%.

This is a surprising move given that the HMRC interest rate for late tax payments has been 7.75% since August 2023.

So directors can benefit from a rather favourable tax environment if they opt for directors’ loans instead of dividends, where the tax-free threshold is now only £500.

For loans below £10,000 as long as the interest rate charged by the employer/company is not lower than the official rate of interest there is no additional tax liability.

Where a loan, in excess of £10,000, is provided by a company to an employee or director, a taxable benefit arises if the interest rate charged is less than the ORI. There is also an S45 charge by HMRC if that loan is not repaid within 9 months and one day before the end of the accounting period.



CIS changes

Gross payment status compliance test

Gross payment status allows the contractor to receive full payments without having to deduct CIS/tax. This obviously improves cash flow and simplifies transactions so gross payment status is what most contractors seek to achieve.

The previous compliance test required proof that the business:

  1. had filed and paid tax and national insurance/PAYE on time in the previous 12 months (the compliance test)
  2. falls under the CIS regime and has a bank account (the business test)
  3. would be reviewed by HMRC for the past 12 months, with a turnover of at least £30k if a sole trader, partnership/per partner or company (the turnover test).

New VAT compliance test

The new, additional test relates to VAT compliance. The contractor therefore needs to ensure their VAT returns are filed and paid on time in order to meet the new gross payment status tests.

The test is focused on compliance failings such as late filing/late payment and does offer some flexibility to avoid removing contractors from the scheme for minor non-compliance.

  1. The contractor can file up to three late submissions of VAT returns but only if no more than 28 days late, or
  2. the contractor can make a late payment but only where the VAT liability is less than £100 and paid no more than 14 days late.

The new rules apply from 6 April 2024 for all new applicants.

For existing contractors already operating gross payment status, the new rules apply from 6 April 2024, so as long as the contractor maintains compliance with the existing tax/PAYE and new VAT rules their status should remain unaffected.




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