Welcome to our latest update.
I originally drafted this note sitting in my garden one Sunday afternoon in late August, sipping a cold beer in the sunshine, living on the edge as accountants often do!
How times have changed in the few months that have passed since then. As we enter the Carolean Era, we find ourselves in tumultuous times, with several changes in economic policy and Chancellor. Even before these extraordinary events, we probably all assumed that 2022 would be a quieter year once the threat of covid was behind us. As we can now see, this is very much not the case, with rises in inflation and interest rates and turmoil on the foreign currency markets. Whilst the electricity cap, even in a reduced form, is welcome and provides some relief, challenges remain for individuals and businesses. That said, we take some encouragement from the fact that demand seems to remain strong in most sectors and we hope that this will support the UK economy as we head into 2023.
Despite all the challenges that materialise, we continue to marvel at the agility and ingenuity of individuals and business owners, who constantly find new ways to operate and to prosper.
This briefing note provides updates and commentary on the following issues:
- Corporation tax
- Changes to the R&D tax relief scheme
- Changes to the NIC threshold
- NIC rates and dividend taxes
- Changes to tax reporting for self-employed and landlords
- Electric vehicles and mileage rates
- Income and mortgages
- Cash flow, credit control and 2023
- Stamp duty on commercial transactions
- Covid grants and RLS
- CGT on residential property
- Inheritance tax and wills
- “Help to grow” digital scheme
- Holiday pay
- Use of home as office/place of work
1. Corporation tax
It is unlikely that you will have missed the political events of the past few weeks. It now looks like the increase in corporation tax originally introduced by Rishi Sunak and reversed by Kwasi Kwarteng is now going ahead as originally planned.
So, from April 2023, we will be moving to a graduated tax system in which profits will be taxed at rates of between 19% and 25%. It is important to be aware that this system is not “banded” like personal tax; instead the rate of tax applicable at each level of profit will apply to all of those profits. For companies with profits of less than £50,000, the tax rate will be 19%, increasing to 25% for profits above £250,000. For profits falling between these two ranges, the tax rate will be between 19% and 25% depending on the actual profit for a financial year. Unfortunately, there are no precise thresholds (as there are in personal tax), instead the rate is determined using a marginal rate calculation.
This will make company and personal tax planning more difficult, especially in relation to capital expenditure and areas such as pension planning; any outlay will not only reduce the taxable profit but, if that profit falls below £250,000, it will also reduce the effective tax rate charged on those profits. It may result in a review of owners’ remuneration strategy, particularly if we see increases to dividend taxation at any point in the future.
In terms of timing, the new tax rates will be introduced with effect from 1 April 2023. The profits for any accounting period straddling this date will be split between the existing flat rate of 19% and the new “marginal” tax rate of between 19% and 25% on a time apportioned basis. This means that all companies with profits over £50,000 will see the impact fairly swiftly. Remember, though, that corporation tax is paid nine months after the year end; companies with year ends of 30 April 2023 will therefore be the first to see the impact although the increase for that year will be comparatively small given that only one month will be taxed at the new rate.
One other area of significant change is associated companies. This is where an individual or group of individuals control one or more companies. In future, any such companies will share the £50,000 and £250,000 tax “bands” under associated company rules. Some care therefore needs to be taken to ensure that there is no tax loss as a result of these changes. The new rules may act as a general disincentive to separating trading activities into different companies, which is often a sensible commercial and risk-based strategy. Although we would still expect to see multiple companies under common ownership, the decision to structure in this way will need to be much more carefully evaluated in the future. We have been discussing the merits of holding company structures with some clients this year and, although we have delayed implementation in some cases, this is likely to remain a valid and worthwhile strategy for some. Over the course of the next 12 months, we will be highlighting the impact of these changes on your company. If it is something you would like to discuss sooner, please let us know. In the meantime, just to give you an idea of how the changes might affect you, we summarise the “before and after” tax liability for different profit levels below:
In conclusion, all company business owners must now begin planning for the increases in corporation tax that will begin to crystallise towards the end of next year and beyond. We will do our best to assist in this planning process.
2. R&D relief
Many companies have benefitted from the rules relating to research and development expenditure. However, there has been some concern from HMRC that claims do always follow the spirit of the rules and what government had intended when the legislation was introduced. HMRC has stated that they intend to tighten up their approach to R&D claims from next year to prevent what they regard as fraudulent or speculative claims. We also understand that HMRC also plan to scrutinise claims more carefully; on this basis, it would not be unreasonable to expect claims to be challenged more frequently and on wider grounds.
If you have made claims for R&D relief in the past, do not let this discourage you from making a genuine claim in the future, but just be aware that you could face more scrutiny from HMRC.
3. Changes to the NIC threshold
From July 2022, the primary threshold for NI (the point at which employees start paying NI) was aligned with the tax personal allowance. As the government proudly noted at the time, this meant that many employees will no longer pay NI, as well as not having to pay income tax. At the same time, the secondary threshold (the point at which employers start paying NI) was not changed, so employers did not benefit from the new rules. This position has not been affected by recent government policy announcements.
As far as directors are concerned, this presented a change from the traditional policy of drawing a salary at the lower earnings threshold and not paying any NI at all. Directors can remain at the secondary threshold without any liability to NI as before or they can increase their salaries to the primary threshold. This latter route will trigger employers’ NI but, in our view, the corporation tax relief on the increased salary payments means that this strategy is marginally more beneficial and will be more so after April next year.
We have already contacted all our payroll clients with a recommended course of action. If we do not operate your payroll but you are interested in the issue, please let us know.
4. Changes to NIC rates and dividend taxes
We are sure that you will not have missed the announcement in the mini-budget that the additional 1.25% NI charge introduced in April 2022 is being removed for employees and employers. This change will be implemented from November 2022 and will remain for the rest of the tax year.
In April 2022, dividend tax rates were increased by 1.25% in line with the increase in NI. Unlike the change to NI, this increase will now remain in force indefinitely, rather than being reduced from 6 April 2023 as planned by the last Chancellor.
We draw attention to our comments above concerning corporation tax. One prominent tax mentioned by the Labour Party leader at his party conference was tax on dividends. It was probably not his intention to target small business owners, but rather large investors. However, as has so often happened in the past, changes aimed at the investor population inevitably hits business owners given that the legislation affects dividend income irrespective of where it originates. Although a little too early to start planning in response, it is our expectation that this will be an important issue for the next few years at least.
You may have seen some information in the media about changes to the off-payroll working rules known as IR35. These proposals have now been withdrawn and the existing rules will remain in force for public and private sector organisations.
Please also do bear in mind that, whatever the changes to legislation, it is always better for an engaging company to ensure that all contractors comply with the status requirements. We therefore recommend that determining status in every case remains best practice.
6. Tax reporting for self-employed and landlords
Over the past few years, VAT registered businesses have had to comply with new rules regarding the digitisation of accounting records and submission of VAT returns. This has been known by the catchy title of MTDfV (or making tax digital for VAT). You may even have seen adverts on the TV.
The reality is that, despite the many reports, surveys and statistics that say otherwise, HMRC remain convinced that tax digitisation is a good thing for businesses and taxpayers alike. The general rollout plan therefore carries on regardless.
The next initiative is known as MTD ITSA (or making tax digital for income tax and self-assessment). It will bring into MTD those self-employed individuals or partnerships not already caught by MTDfV. More significantly, it will also affect all private (non-company) landlords, including property partnerships and LLPs.
From April 2024, all non-VAT registered sole traders and partnerships and all non-company landlords will be required to maintain records in a digital form and to submit details of income and expenditure to HMRC on a quarterly basis. This will lead to a significant change in the way these individuals will have to maintain their accounting records, as paper records will no longer be acceptable.
The biggest area of concern is the impact on small sole traders and those private landlords who own a small number of rental properties. For these individuals, the compliance effort and cost is likely to be disproportionate. It is entirely possible that it may even lead to a form of social exclusion, especially in the case of elderly landlords. Unfortunately, for these individuals, there will inevitably be an increase in compliance costs if they are forced to turn to professional advisers such as ourselves for assistance and support.
Although the change is not being made mandatory until April 2024, we strongly recommend that anyone affected by the changes should start looking at the issue now and, ideally, to implement those procedures from April 2023 to give them time to bed in.
As always, we can help and advise on the right steps for you.
7. Electric cars and all that
Electric cars, whether purchased outright or leased under contract hire, remain one of the most tax efficient investments that a company director can make. Not only do companies benefit from 100% tax relief on a new car purchase but the annual benefit charge is still only 2% of list price. For an average electric car, the tax on the benefit in kind will typically cost around £150 per year, which is significantly less than the tax on non-electric cars. In most cases, we also expect that a director may be able to reduce dividends as the vehicle running costs are shifted from personal to company. This can be expected to provide the additional benefit of reducing personal tax liabilities. As an aside, for larger companies, electric cars could offer a cost effective incentive to help with staff morale and retention, especially in these times of wage inflation and staff shortages.
The position for electric vans is somewhat different, as the tax benefits are not as pronounced as for cars. However, we are told by companies that have made the change that there are still significant cost advantages to be gained.
We are also seeing companies install solar panels and batteries as a further defensive measure against the continuing increases in electricity prices. The tax position is straightforward for commercial facilities but less so for residential installations. Even though supply chains are under extreme pressure and the cost of equipment is rising, we understand that the pay back on an investment of this kind can now be as low as five years, even without taking account of the potential tax benefits of electric vehicle adoption.
It is worth remembering that, for companies, qualifying capital expenditure (including electric cars) will benefit from the corporation tax superdeduction until 31 March 2023. This superdeduction disappears after that date, when the new tax rates come into force. If you are thinking about capital expenditure, it is probably better to do so before the end of March 2023, but if in any doubt, please do give us a call.
8. Income and mortgages
The increases in interest rates and the rapidly changing mortgage market are presenting some unusual demand from clients needing to remortgage.
If you are self-employed or operate through your own company, please remember that for mortgage purposes, your taxable income forms the basis of your income for mortgage purposes. Any sensible measures you take for tax efficiency such as a company electric car or sacrificing salary/dividends for pension contributions are likely to reduce your taxable income. Although absolutely the right approach from a tax perspective, it could impact upon your mortgage borrowing capacity. Given the difficult conditions in the mortgage market, this issue may now have increasing importance.
If you think there is any possibility that you will need to remortgage or you might want to move house in the next few years, please make sure to alert us to this situation. We are always willing to work with your financial adviser to find the most suitable solution for you.
9. Cash flow, credit control and 2023
Those of us that expected an economic downturn in 2021 as a result of covid were confounded when the economy continued to prosper, driven predominantly by consumer led demand which filtered through to other areas of the economy. It now seems increasingly likely that the UK will spend much of 2023 in recession; the degree to which individual businesses need to prepare for this is an issue for many business owners.
History tells us that businesses understandably move to a more defensive position and often marketing and advertising expenditure is the first to be cut. Although a natural reaction, now may be the time to think carefully about marketing strategy and how to reach out to existing and new customers.
Clearly in these times of increasing inflation and price instability, it is critical to keep costs under review and, as budgets come under pressure, it is ever more important to ensure that funds are spent wisely. This does not mean, however, that any business should engage in false economies, so please do think carefully before taking action.
It is also even more important than ever to maintain good credit control procedures, the most obvious of which is to closely monitor outstanding invoices. We can provide guidance and support in this area, both in relation to implementing systems and procedures or actively supporting you on a regular basis. If this is of interest, please give us a call.
10. Stamp duty on commercial property transactions
We read that there are potential overpayments of stamp duty in relation to the transfer of commercial property into pension schemes. The issue is likely to affect comparatively few individuals but, if you think it may affect you, do look into it further.
Remember also that the stamp duty thresholds for residential property purchases have been increased, to £250,000 for all and to £425,000 for first time buyers.
Changes to trusts legislation in the UK means that most trusts are now required to be registered with HMRC. The rules are not straightforward but broadly speaking, if a trust has a liability to any form of taxation (including stamp duty) in the UK, it must be registered with HMRC.
It is important to note that this also applies to non-resident trusts that have a liability to UK taxes. This will usually be where the trust received UK income or owns UK assets.
In an additional change, effective from 1 September 2022, non-resident companies that own UK property must now register with HMRC and will be required to file corporation tax returns annually.
We suspect that these changes will have little relevance to most individuals. They are, however, worth noting as the penalties for non-compliance are significant.
12. Covid grants and RLS
In an unpleasant return to the recent past, we read that HMRC has received a substantial number of whistleblower reports of furlough compensation being claimed incorrectly. In response, HMRC has increased the number of investigators dealing with this issue.
On a similar vein, there are numerous reports of further action being taken by banks and HMRC in cases of failed companies that had taken Bounce Back or CBILS loans. Unfortunately, it is not the case that the government will automatically step in and pay 80% of the outstanding loan on behalf of a failed company. The government has made it clear that it will expect the lending bank to take all possible steps to recover funds from the company before honouring the blanket guarantee that was offered at the time. In some cases, this can lead to a liquidator being appointed and/or a detailed investigation of the company’s finances for several years prior to the point of failure. With loan defaults now exceeding £2bn, it is clearly an area of some importance to the UK economy.
On a more positive note, a new recovery loan scheme (“RLS”) was launched over the summer. We understand that the main banks are quite keen to promote this facility, so if you think you could benefit, please contact your bank manager or give us a call.
13. CGT on residential property
Just a very quick reminder that any sale of residential property needs to be reported to HMRC within 60 days of completion and any CGT liability paid within the same period.
The reporting procedure is somewhat different to the usual self-assessment filing regime and requires registration and reporting under a separate process. If you need any help in this area, please let us know.
14. Inheritance tax (IHT) and wills
With the media filled with discussion on cost of living increases and interest rate rises, it may seem strange to be highlighting this issue. Nevertheless, it is an area of increasing importance with the annual IHT tax take hitting a record £6.1bn. Whilst this is still fairly small beer compared to VAT (at £157bn) and business taxes (currently at £68bn), it is the annual increase in IHT that is most notable.
It is becoming less true that IHT is a tax that only affects the wealthy; more of us are now being caught by IHT, partly because of the rise in property prices and partly because the IHT exempt amount (the nil rate band or “NRB”) has been frozen at £325k for some time. Whilst a residence nil rate band of £175k, introduced in 2017, has helped to alleviate matters, there is no general “main residence” exemption as there is for capital gains tax, so increases in the value of your main home could have some impact on your IHT position. The increase in second property ownership and the rising values of those properties might also increase exposure to IHT.
“So what?”, you might say.
The two classic responses to any discussion on IHT are either: “it’s not my problem, I’ll be gone and the kids should be grateful for what they get” or “I don’t own enough, so it won’t affect me”.
In the case of the former, whilst it is true that you will not be around to worry about it, do you really want the state to benefit from IHT on your hard-earned assets? We often see situations where an estate is asset laden but has little cash. This can leave beneficiaries forced to sell an asset to pay IHT liabilities in circumstances where they may have preferred to retain that asset.
In the case of the latter, is it really true that you don’t own enough? The first step in any discussion on IHT is to list your assets and liabilities and to calculate the value of your interest in each. Many assets are jointly held which will mean your interest is proportionate but, even so, if the value of your assets exceeds £325,000, you may have some exposure to IHT.
In many cases, gifting assets is not necessarily the answer and nor is leaving all of your assets to your spouse, as this simply defers the problem. There may not always be a ready solution: if there is not, and IHT cannot be eliminated, it is better for you and your beneficiaries to be aware of the problem and to make plans for dealing with it with the minimum of disruption and stress when the time comes. That said, solutions can be available, some straightforward and some rather more complex and it is always better to investigate now before it is too late for action. Remember, your surviving family members will have enough to deal with, without the added stress of dealing with HMRC and IHT.
This brings us to another topic, slightly outside of our field but still extremely important: wills and lasting powers of attorney. Wills deal with the disposition of your assets when you die; lasting powers of attorney enable someone to step in and manage your affairs when you lose the capacity to do so yourself.
A survey from 2020 suggests that only 40% of adults in the UK have a will. What many of us forget is that a will is not simply about tax planning but also about making sure your assets (some of which will have immense sentimental value but little monetary value) are passed on in accordance with your wishes. Making a will is not expensive and is not difficult but is one of those jobs that we are all disinclined to deal with, not least because it reminds us that we are not immortal. However, there is really no excuse and we cannot stress how important it is, irrespective of your age or wealth, to have a valid will in place. If nothing else, it relieves your family members of the burden of having to anticipate your wishes and to make decisions on your behalf.
We note in passing that HMRC plans to bring in a change to the PAYE system which will allow businesses to pay PAYE and NIC via direct debit, much like it has been possible to do for VAT for some years. Whilst no business enjoys paying these liabilities, the regularly monthly payment instruction is an administrative burden to some. The direct debit system may help, particularly as there are now penalties for late payment.
On this subject, we have seen a recent case where a business was fined for late payment when, in fact, the PAYE liability was paid too early! HMRC lost at tribunal so common sense prevailed, although much cost and stress could have been avoided if a sensible view had been taken at an early stage. Although it sounds bizarre, payment before the 6th of each month will result in payments being allocated incorrectly meaning that HMRC’s system will show that month’s liability still being outstanding. Early payment is unusual but not unheard of, so please avoid putting yourself in a similar situation.
In passing, we have seen plans on the part of HMRC to collect data on working hours and job titles for employees and the self-employed. It is not clear what the thinking is behind this but, if nothing else, it will add further to the administrative burden for businesses. At this stage, it is only a proposal but we will keep you updated.
16. “Help to grow” digital scheme (and other schemes)
The government has expanded the Help to Grow Digital Scheme which provides firms with discounts worth up to £5,000 on software designed to boost productivity. This scheme is now accessible by firms with at least one employee, having previously been restricted to firms with more than five members of staff.
We note in passing that there is apparently still funding available for decarbonisation schemes. If you think who canthis would be good for your business, let us know and we can put you in touch with experts to help you.
17. Holiday pay
The Harpur Trust case recently decided at the Supreme Court will have significant implications for any companies that employ part time workers. The ruling affects the calculation of the amount of leave to which a part-time worker under a permanent contract is entitled. If you use the “12.07%” rule, this has now been ruled as unfair by the Supreme Court.
This is not our area of expertise but we mention it to highlight the issue. If you need specialist advice, please let us know and we will put you in touch with someone who can help.
18. Working from home allowance
You may already be aware but the blanket working from home allowance that was able to be paid to employees throughout covid has been withdrawn by HMRC. If you continue to pay any form of allowance to an employee, it must clearly be a reimbursement of a business cost paid personally and you must be prepared to justify it as such if asked.
A recent poll amongst small business owners recorded that 48% found it hard to talk to anyone about the stress of running a small business, with over two thirds not wanting to worry family or friends. Although we are not trained counsellors, we remain here to provide help and support as far as we can.
As always, we gratefully digest all feedback and contributions and use these as part of our regular updates so if you have any comments, please do let us know.
If you have found this briefing useful, do share it with anyone you think might benefit. Please do remember that it is provided as general guidance only; if anything covered is of particular interest, you must contact us for specific advice before taking any action.
As always, keep well, stay safe and remember, only 10 weeks to Christmas!