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Welcome...
To June's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
If you need further assistance just let us know or you can send us a question for our Question and Answer Section.
We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.
Please contact us for advice in your own specific circumstances. We're here to help!
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Overpayments of SEISS grants - HMRC are chasing repayments
The Self-Employment Income Support Scheme (SEISS) came as welcome support for many self-employed earners during the Coronavirus crisis. Initially, four grants were available with a fifth and final grant covering May to September 2021. Eight months later and some freelancers and small business owners are receiving a letter from HMRC requesting repayment of all or part of their fourth or fifth grant. The letters are being issued to those claimants whose tax returns have been amended either by HMRC or the taxpayers themselves after 2 March 2021 for the tax years 2016/17 to 2019/20 such that the amendment affects their SEISS entitlement.
If the amendment shows more than £100 overclaimed, the letter asks for that amount to be repaid. HMRC will also look at the turnover figures and if it is found that the taxpayer was eligible for the lower (30%) grant, but claimed the higher (80%) grant, they will also ask for the difference to be repaid.
The letter includes a formal assessment and shows how the amount being demanded has been calculated. Repayment must be made within 30 days otherwise interest will accrue. If the repayment has not been made by 31 January 2023, a 5% late payment penalty will also apply (unless a 'Time to Pay' arrangement has been set up which spreads the payments over an agreed extended period).
Are all grants being checked?
Only the fourth and fifth SEISS grants are being considered and only if there has been an amendment to the tax returns on which the grants were based which reduces the amount of grant that should have been paid. However, if you are aware that the turnover figure on any of the relevant returns was less than the amount declared initially, then just because a letter has not been received does not mean that HMRC do not need to be informed.
Can you appeal?
If you believe HMRC's calculations are incorrect, you have 30 days from the date on the letter to make your appeal - instructions are given in the letter. With your appeal you will need to include your calculations.
Practical Point
HMRC have online tools that can be used to calculate the amount potentially overpaid.
https://www.gov.uk/guidance/tell-hmrc-and-pay-the-self-employment-income-support-scheme-grant-back#check-how-to-tell-hmrc-and-pay-money-back
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Capital Gains Tax - your main residence may not be tax-free
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The sale of every property is potentially taxable under the Capital Gains Tax (CGT) rules. When an individual sells their only or main residence, generally the gain is exempt from CGT due to the Principal Private Residence (PPR) relief. However, we are so used to saying this that we are in danger of forgetting the two conditions that must be satisfied for a claim to succeed.
The property must:
- not have been purchased 'wholly or partly' for making a gain; and
- be the individual's only or main residence at some point of ownership or claimed to be so
Queries are most likely to arise in situations where a property has been bought and sold within a relatively short period; here HMRC will be looking at whether the taxpayer is, in reality, trading. If HMRC are not satisfied that the relief is due they will look at whether the owner had any intention of living in the property permanently and require proof that the property has been lived in as the PPR.
Recently HMRC have been targeting self-build builders, questioning as to whether the property has been built intending to be the main residence. If a self builder repeats the process of building, moving in, selling and rolling equity gains into subsequent houses, HMRC may take the view that the self builder has become a business and seek to tax the gains as income rather than as exempt under the CGT rules. Such a situation is more likely if the person has no other income or works in the building trade.
Proving 'permanency'
HMRC will require proof that the property has been lived in as the PPR. However, there is no set rule as to the number of days of residency and there will be some circumstances where the 'intention' has been to live 'permanently' but was not possible for some reason.
Practical Point
Should HMRC query a PPR claim the following may help in your appeal:
- Documentary evidence - home insurance, telephone bills, DVLA records or credit reference agency records, utility bills in the owners' name at the property address.
- The property address being on the electoral register in the owners' name.
- Receipts confirming purchase of furniture etc for the property.
- Bank accounts registered at the address.
A final suggestion is for the owner to introduce themselves to neighbours to let people know who lives there.
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Are you struggling to pay your tax bill?
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The last couple of years have been financially difficult for many and the coming year will bring increased costs - not least utility bills. The July 2022 payment on account tax bill needs to be paid in a few weeks' time and some taxpayers may find it a struggle to do so. In addition, some may still be owing tax from 2020/21 and have found an additional 5% penalty added to their tax bill.
Self assessment - 'Time to Pay'.
If you submit a personal tax return under self assessment and you know you will not make the 31 July payment then an application can be made to HMRC under what is termed a 'Time to Pay' arrangement. Such an arrangement is an agreement to pay the tax in instalments. For tax due under self assessment this can be set up online via the Government Gateway account if:
- tax return submissions are up to date (for current arrangements this will be the 2020/21 tax return)
- the tax bill is less than £30,000;
- the deadline for payment is within 60 days of the payment deadline (30 Sept 2022 for the 31 July 2022 payment); and
- it is intended to repay the debt over the next 12 months, or less.
Not eligible for 'Time to Pay'?
If you are unable to set up a 'Time to Pay' arrangement online (e.g. because the tax you owe is more than £30,000 or relates to your 31 Jan 2022 or prior tax bill, or the liability is for another tax such as corporation tax or VAT), you may still be able to agree to an instalment payment plan but this needs to be by phone via HMRC's Payment Support Service.
How much will each instalment be?
If you have any savings or assets, HMRC will expect these to be used/sold first and agree instalments to repay the remainder. The monthly payments will usually be set at approximately 50% of the money remaining each month after other bills have been paid. An 'income and expenditure assessment' form is used to record details and calculate the amount to pay.
What happens if I don't keep to the agreement?
Once a 'Time to Pay' or other instalment agreement is in place, it must be adhered to. Defaulting on the agreement means that the arrangement will be cancelled, the tax will be payable immediately in full and enforcement action may be taken. If HMRC refuses to set up an arrangement for any reason (e.g. because you have defaulted in the past), you will be asked to pay what is owed in full.
Practical Point
HMRC understand that some taxpayers may find payment difficult but they can only understand if they are kept informed. If you cannot pay your tax bill in full or on time then please contact us and we will advise.
Further detail on the questions HMRC may ask under a 'Time to Pay' arrangement can be found here:
https://www.gov.uk/guidance/find-out-how-to-pay-a-debt-to-hmrc-with-a-time-to-pay-arrangement
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Tax relief for losses - Coronavirus concession
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Those businesses that have struggled through the pandemic may find that when they come to do their accounts where usually there is a profit, the business made a loss. Whether and how that loss can be utilised depends on whether the accounts are prepared using the 'cash basis' (recording revenue when cash is received, expenses when they are paid) or the 'accrual basis' (recording revenue when earned and expenses when incurred).
The 'cash basis' is how many businesses with turnover of less than £150,000 prepare their accounts. This method might save time but unfortunately it severely restricts how a loss can be used as it usually can only be carried forward against future profits of the same business and not relieved against other income or carried back against past profits. If you have losses that you want to utilise other than by carrying forward, you will normally have to 'opt out' of the cash basis and use the 'accrual basis' instead. However for the year 2021/2 special Coronavirus concession rules allow carry back without the need to 'opt out'. Companies and Limited Liability Partnerships are required to use the 'accrual' basis.
'Sideways loss relief
Losses calculated under the 'accrual basis' of accounting can reduce the tax payable on any other income of the current tax year or tax that has been paid for the previous tax year. Tax relief can also be claimed by offsetting the loss against any capital gain incurred but only if offset is not possible against other income. Where a claim is made for both the current and the previous tax year, the taxpayer must specify which tax year takes priority. The loss must first be set against the first choice year, any balance remaining after profit for that year has been reduced to nil can be set against the second choice year - it is therefore not possible to make a partial claim, e.g. to preserve personal allowances.
Coronavius concession
As part of the measures to help businesses during the pandemic, the government introduced a temporary Coronavirus concession to allow the carry back of losses over a longer period with a view to enabling a tax refund, if available. This concession applies to trading losses made by unincorporated businesses for tax years 2020/21 and 2021/22 and companies in accounting periods ending between 1 April 2020 and 31 March 2022. The rules permit losses to be carried back for a period of three years to the extent that they have not already been fully utilised under the normal offset rules, with losses being carried back against later years trading profits first. For businesses using the 'cash basis' of calculation usually losses can only be carried forward; under the Coronavirus concession the losses can be carried back up to three years against trading profit only. Loss relief for the current tax year 2022/23 will revert to the normal rules.
The 'cap'
Under the usual offset rules, up to £50,000 or 25% of 'adjusted total income' of the loss can be claimed against general income (and capital gains) for either the current or previous tax years. 'Adjusted total income' is total taxable income before personal allowances but after taking into account Gift Aid contributions and pension contributions. There is no 'cap' on losses carried forward.
Under the 'Coronavirus concession' rules the 'cap' was increased to £2,000,000.
Practical Point
The time limits for claiming the 'Coronavirus concession' relief is 31 January 2023 for trading losses in the tax year 2020/21 and 31 January 2024 for trading losses in 2021/22.
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June questions and answers
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Q1. I am a basic rate taxpayer and a registered subcontractor having tax deducted at 20% from any income. I understand that I can register for CIS gross status to receive my pay with no deductions. How do I go about this and are there any disadvantages?
A: CIS gross payment status means that the contractor does not make tax deductions from payments made to a subcontractor. It is possible to arrange for payments to be made gross rather than having tax deducted but there are conditions. Importantly, your tax and NIC tax returns and payments must be up to date and a business bank account must be used. Turnover must be at least £30,000 if you are sole trader or £30,000 for each partner if operating as a partnership (or £100,000 for the whole partnership). The limits are different for companies depending on how many directors the company has. Application for gross status can be made online and at least one month should be allowed for the application to be approved.
The 'downside' is that you will have to ensure that you put aside enough money to pay any tax and NIC when due rather than claiming any tax refund that may usually arise.
Q2. I lost my job during the pandemic and intend to set up an arts and crafts shop. I will be incurring some expenses before I can open including the cost of setting up a website, buying business cards, equipment and stock, paying two months' rent in advance and insurance. I purchased a computer and printer five years ago and although it is now deemed to be 'ancient' in computer terms, it still works and I want to use it in my business as well as for home use. What expenses can I claim?
A: The tax rules state that expenses incurred before the start of the business (termed 'pre-trading expenditure') can be claimed:
- if incurred within seven years of the start of the trade;
- if they would have been allowed as a deduction had the expenditure been incurred after commencement;
- if they are not otherwise deductible in computing profits
For assets acquired specifically for the new trade, 'pre trading expenditure' is treated as if incurred on the first day of trading. Assets acquired initially for private use that are also going to be used in the business (such as the computer and printer) are also treated as if purchased on the first day of trading. Importantly, the amount that can be claimed is not the cost but the market value on the first day of trading (unless, exceptionally, the market value on the first day of trading is greater than the cost, in which case the cost figure is used). Where assets will be used for both private and business purposes, the claim is restricted to take account of the private use.
If you are also registering for VAT, then you can reclaim the VAT on goods, stock and assets for up to 3 years before registration; VAT on services can be claimed for up to 6 months prior to registration.
Q3. I incorporated a company in April 2021 but the company has not started trading for various reasons and possibly will not do so for another few months. Do I have to submit accounts and a corporation tax return?
A: The important point to remember with a company is that Companies House (CH) and HMRC have different submission dates for accounts and different definitions of 'dormant' and 'active'.
For CH accounts are required whether the business has commenced trading or not. If not, then the accounts to submit are 'dormant' accounts. CH considers a company as being 'active' if it has incurred expenditure and nothing else and therefore accounts must be submitted. The first accounts will be for the period from incorporation to the end of the month 12 months after incorporation and annually to the same date thereafter.
HMRC require formal accounts where the company:
- has business activity such as a trade even if it has not made any sales;
- has a bank account generating interest, even if none has been received as yet
- manages investments; or
- receives any other income.
When a company is formed CH notify HMRC who will issue a notice to file a Corporation tax return for the twelve-month period starting at the date of incorporation. HMRC will also expect a return to cover the remaining days of the accounting period. Even if the company is not 'active' until later, the return must be submitted unless HMRC say otherwise. However, you can contact HMRC, explain that the company is dormant and they will make a note on their file not to expect a tax return until you notify them that the company has become 'active'.
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1 - Deadline to confirm employees payrolled benefit information
1 - New Advisory Fuel Rates (AFR) for company car users apply from today
7 - Electronic VAT return submission and payment due for quarter ended 30 April 2022
10-12 - Direct debit payment for VAT will be taken during these dated for quarter ended 30 April 2022
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5 June 2022
30 - Final deadline for applying for the Government Covid Recovery Loan Scheme
30 - Submission of Corporation Tax returns: 30 June 2021 year end
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Please contact us if we can help you with these or any other tax or accounts matters.
In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.
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All new client consultations are provided free of charge and without obligation.
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Morgan Hemp Accountants are one of this area's leading accountants, serving businesses and professional practices across the UK.
Whether you are a large limited company or just starting out we can help you manage all your financial matters from book keeping and wages to annual accounts and raising finance. Visit our website https://www.morganhemp.co.uk for more information.
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Disclaimer
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.
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Copyright © Morgan Hemp All rights reserved.
103-104 Walter Road, Swansea, SA1 5QF
Morgan Hemp is a trading name of Morgan Hemp Ltd
Company Registration No. 03932737 Registered in England and Wales
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