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.
The Unfolding Story of 30 October
Chancellor Rachel Reeves has confirmed 30 October as the date of the Autumn Budget in a statement to MPs, setting expectations for a gloomy Budget after she described the public finances as being in their worst state since the Second World War.
She accused the previous government of covering up the true state of the public finances.
She outlined a number of examples of overspending hidden by the previous government which she said was not sustainable, risking economic instability.
Everyone will be bracing for the potential tax rises the Chancellor is likely to unveil in the Autumn Budget to fill the £22bn back hole in public finances.
What’s the latest expected rise?
Handcuffed by pre-election commitments, which make up more than two-thirds of UK tax receipts, Reeves will be forced to look at some of the minor taxes to balance the books.
So, an end to the VAT exemption for private school fees but what about VAT on the provision of boobs, generally zero rated and the provision of boarding facilities (if treated like hotels this would be largely exempt). The government only expects to raise £1.5bn from this measure.
Other measures included closing non-dom loopholes.
Other areas to alleviate the pressures on public finances might include fuel duty capital gains tax or inheritance tax.
Reeves is also expected to cancel road and rail projects as well as stop the government’s reliance on external consultants.
A new Office of Value for Money will be established to put an end to wasteful spending in government.
The Office for Budget Responsibility (OBR) has been given the go-ahead to prepare a forecast to coincide with the Budget.
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National Living Wage
The government has told the Low Pay Commission to take the cost of living into account when setting the next national living wage increase. This will be the first time that this has been used as a lever when setting rates for the national living wage.
The Low Pay Commission (LPC) will give the government recommendations on the proposed rise for 2025-26 in October with the increase coming into force from April 2025.
In addition, the Low Pay Commission will continue to take into account the impact on business, competitiveness, the labour market and the wider economy.
The government is also going ahead with plans to align rates across different age groups to stop employers from favouring younger workers to reduce payroll costs. Their intention is also to close the gap between the National Minimum Wage (NMW) and the National Living Wage (NLW)
R&D and Customer Service Problems
HMRC’s own accounts have yet again been qualified. The principal causes are the level of error and fraud in R&D tax reliefs, the tax debt remaining high and delivery and poor customer service.
Total tax revenues were £843.4bn, the highest on record for the third successive year, a 3.6% increase on the previous year.
The increase is largely due to the growth in income tax, where 2.1m people were brought into the tax regime as a result of frozen income tax thresholds in 2023/24.
The increasing level of error and fraud in research and development (R&D) tax reliefs remains one of the most difficult issues to resolve. HMRC estimates the level of error and fraud present across all R&D reliefs is £601m, equating to 7.8% of related expenditure. Recent changes are expected to reduce error and fraud by £444m with HMRC getting a lot tougher on R&D claims.
Also highlighted in the accounts is the level of fraud and error in personal tax credits and child benefit expenditure.
Tax debt has fallen marginally as a proportion of revenue from £45.9bn to £44.6bn, but it remains persistently high being 5.1% of total revenues.
However, one of HMRC’s biggest challenges continues to be its ability to deliver responsive customer service.
A Not Untypical Experience
While we have not experienced this particular problem, we have seen similar
In this case, an accountant took a new client from a previous agent. The only entries on the tax returns were a small salary, covered by personal allowances, and a dividend from his own company. The old accountant omitted the dividend from the 22/23 return but the new accountant corrected this and then proceeded to prepare the 23/24 return. However, in the meantime, HMRC’s systems had identified that the client did not need to file a self-assessment return because his income i.e. salary was all covered by his personal allowances. He was therefore removed from self-assessment.
HMRC said that they could not now issue a 23/24 return. We have had similar. The 23/24 return could be filed but it would be treated as a voluntary return.
In order to resolve this going forward, HMRC said the client has to re-register for SA even though there is no indication in his tax account that his SA record has been closed. HMRC said we could either write in by post or file a form SA1 to alert HMRC that dividends were received on 22/23. Only then will HMRC reopen the SA record.
The new accountants’ reaction “You would think it should be harder to get out of SA, not harder to stay in it.”
Beauty Therapist Claimed Wrong Covid Scheme
The taxpayer was a self-employed beauty therapist providing aesthetic treatments including lip filler and “liquid rhino” non-surgical nose straightening procedures.
She incorporated her business and was the sole director, employee and shareholder. She did not understand the effect of incorporation and continued believing she was self-employed.
Believing she was self-employed, she claimed assistance totalling £4,129 in three separate claims under the self-employed income support scheme (SEISS).
HMRC raised assessments on the basis that she was not entitled to these payments because she was not self-employed and she appealed to the first-tier tribunal.
She conceded that she did not qualify for the SEIS. However, she argued that had she claimed under the Coronavirus Job Retention Scheme (CJRS) instead, she would have been entitled to claim more. The tribunal concluded that she would not have qualified under the CJRS either.
With Rachel Reeves set to appoint a covid corruption tsar imminently we can expect a flurry of similar cases hitting the Tribunals in the coming months.
VAT Cash Flow Management
Here are some tips for effective VAT management.
- Monthly VAT Returns for Repayment Traders:
- Businesses that regularly receive VAT repayments from HM Revenue & Customs (HMRC) should consider filing VAT returns monthly instead of quarterly.
- Monthly returns speed up VAT refunds, thereby improving cash flow. The process is straightforward but requires an application to HMRC.
- Cash Accounting Scheme:
- For businesses with a turnover of £1.35 million or less, the cash accounting scheme can significantly enhance VAT cash flow. VAT is based on payments and receipts so you don’t need to account for output tax on sales till you get paid.
- No application to HMRC is required to use cash accounting but you need to watch out in the transition.
- VAT Bad Debt Relief:
- VAT bad debt relief can be claimed when debts exceed six months from the invoice or settlement due date.
- You don’t need to worry if you are on cash accounting. If you have not been paid, you have not paid over the VAT to HMRC.
- VAT Group Registration:
- Registering commonly controlled companies in a VAT group can eliminate the need to account for VAT on intra-group supplies, providing immediate cashflow benefits.
- VAT groups also help manage VAT leakage for entities involved in exempt activities.
- Land and Property:
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- Landlords can issue applications for payment instead of VAT invoices in certain circumstances, deferring VAT accounting until payment is received.
- Upon payment, a VAT invoice must be raised, creating more paperwork.
- Construction Sector:
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- The domestic reverse charge (DRC) requires contractors to account for VAT on supplies from sub-contractors, offering cashflow benefits. This method helps avoid upfront VAT payments to sub-contractors.
- Importers:
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- Postponed import VAT accounting (PIVA), effective from January 2021, allows importers to account for import VAT on their VAT returns, synchronising payment and reclaim. This boosts cash flow by eliminating the need to pre-fund import VAT.
CGT on Residential Properties
The capital gains tax (CGT) annual exempt amount has fallen from £6,000 in 2023/24 to just £3,000 for 2024/25,
Those disposing of residential property have the added complications of 60-day reporting and, depending on the circumstances, having to apply the rules for principal private residence relief.
Anyone reporting gains on UK residential property must report the gain on a special return, having previously set up a UK property account, and pay the tax due within 60 days of completion of the sale or disposal.
A person within self-assessment will also report the disposal on their self-assessment return for that tax year.
Payments of any tax due under the 60-day regime are dealt with separately from any other HMRC liabilities such as under self-assessment. The payment reference should be a 14-digit number starting with X – this will be found in your online UK property account, or in a letter sent to you by HMRC after you have submitted a paper return.
A penalty of £100 is charged if a return is filed after the deadline. A further penalty of either £300 or 5% of the tax due – whichever is higher – is charged if the deadline is missed by six months, and then that penalty is repeated if the failure continues after 12 months.
Before a property can qualify for relief as a main residence, it has to have been a residence in the first place. The ‘quality’ of the occupation is key to whether this test is satisfied, and the burden of proof falls on the taxpayer. The test referred to frequently in decisions is that the occupation had some degree of permanence, continuity, or expectation of continuity.
It is well known that if a property has been bought wholly or partly for the purpose of realising a gain from the disposal of it, then PPR will not be available
The tax rate on residential property gains for higher rate taxpayers reduced to 24% for disposals from 6 April 2024 (it remains 18% where gains are within the basic rate).
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.
