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Welcome...
To March'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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IR35
TV presenter Adrian Chiles has cleared the first hurdle in his battle against HMRC's insistence that his working arrangements with ITV and the BBC amounted to an employer-employee relationship in all but name. The First-tier Tribunal ruled that, considering all factors, Mr Chiles was clearly building a business via his company (Basic Broadcasting Ltd). It then considered whether the activities with the two broadcasters would lead to a conclusion that Mr Chiles was carrying on a business in his own right in the absence of the company. It held that this was the case, and the appeal was upheld. However, it is likely that HMRC will appeal given the reported size of the tax at stake.
Basis period rules amended
In response to criticism of the draft basis period reform provisions of the Finance Bill, an amendment has been made. To recap, 2023/24 will be a transitional year - taxing profits from both the standard basis period, and a transition component from the end of that period to 5 April 2024. This will lead to a long period of account for tax purposes for many unincorporated businesses. The original draft excluded the transition component from net income in order to avoid artificially inflating it above key thresholds, e.g. for the high income child benefit charge. However, this had a further consequence in that certain reliefs could not be used to reduce the tax on that component, including EIS relief. This has been addressed in the amended version.
Late payment interest
Following the Bank of England's decision to raise the base interest rate by 0.25%, HMRC has followed suit. The new rate of 3% applies to late payments from 21 February.
Student loan repayment thresholds
The level of income graduates and postgraduates can earn before needing to make repayments of student loans for 2022/23 have been confirmed as follows:
Loan type
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Income threshold (£)
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Rate of deduction
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Plan 1
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20,195
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9%
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Plan 2
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27,295
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9%
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Plan 3 (PG)
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21,000
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6%
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Plan 4
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25,375
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9%
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MTD for VAT
Although the new penalty regime to replace the default surcharge has been delayed until January 2023, the expansion of compulsory compliance with MTD for VAT to voluntarily registered businesses is going ahead from 1 April 2022. Businesses will need to be compliant from their first VAT period starting on or after 1 April 2022.
Marriage allowance
HMRC has issued a reminder that married couples may be missing out on up to £252 per year by failing to claim the marriage allowance. As the claim can be backdated for four previous years, a claim can lead to a significant repayment which may be very useful given the forthcoming energy price rises.
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VAT - the annual accounting scheme
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There are a number of VAT schemes aimed at smaller businesses that help to simplify reporting, and in turn reduce the amount of administration time spent on compliance. One is the annual accounting scheme (AAS). But what is this, and when might it be beneficial?
Under the AAS, HMRC permits a business to make one VAT return for a year-long period, instead of the usual four quarterly returns. The business makes advance payments toward the VAT liability for the year, and then reconciles any difference on the annual return. For this reason, a business that usually receives a repayment of VAT (i.e. the input tax exceeds the output tax) won't benefit, as there will be a delay in receiving the repayment.
A business can join if:
- it's a VAT-registered business
- the estimated VAT taxable turnover is £1.35 million or less in the next 12 months.
There are some exceptions. A business that meets these conditions can't join the AAS if:
- it left the scheme in the last 12 months
- the business is part of a VAT registered division or group of companies
- it's not up to date with VAT Returns or payments
- it's insolvent.
To join the scheme, the business must complete form VAT600AA, which can be done online. HMRC will confirm a successful application and specify the 12-month VAT period. The annual return is due two months after the end of that period.
In terms of payments, these are based on the VAT liability for the previous 12 months (or estimated where the business is new to VAT) and are payable either monthly (nine per period) or quarterly (3 per period). The final payment is due within two months of the end of the period. If too much VAT has been paid a refund will be issued.
Advantages
The obvious advantage is the requirement to file a single return in a 12-month period rather than four. It also makes budgeting easier, as the payments are known in advance. The scheme is particularly useful for seasonal businesses, as it provides a means of "spreading" the VAT payments over the whole year, which can help cash flow.
Disadvantages
Where large purchases are made, the delay in being able to reclaim the input tax can present liquidity problems. This will be particularly true for purchases made in the early part of the 12-month period. Additionally, the payments may be excessive - e.g. if the business knows that taxable turnover has decreased. However, it is possible to request changes to the amounts due.
A further disadvantage may arise if the business doesn't keep up to date with its record-keeping. If the VAT liability increases significantly, but the business owner doesn't notice until the end of the period, a large increase in payments may come as a surprise - though of course this is a problem due to record-keeping, not with the scheme itself.
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Claiming relief for an old tax return error
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Generally, the time limit for amending a tax return is one year from the due date. But sometimes, it transpires that the tax calculation is excessive later on. For example, the individual may have mistakenly over declared income. Where the deadline for amending the tax return has passed, the return cannot be amended. However, it may be possible to claim overpayment relief so that the individual isn't penalised financially.
Overpayment relief cannot be claimed in situations where a person has made a choice between tax treatments that, in hindsight, turn out to be sub-optimal.
Example
Simon is a sole trader who runs his business from an office in his home. Under the simplified expenses rules he used a flat rate deduction to cover the use of his home for business purposes in his 2017/18 return. After the deadline for amending his return passed, Simon realised that if he had worked out the business proportion of his actual household running costs and used these figures instead, he would have paid less tax. Simon cannot claim overpayment relief. The fact that he could have paid less tax if he had made a different choice does not mean the tax he paid was not due.
Instead, the relief aims to provide recourse to assessments which are excessive.
Example
Andy completed his return for 2018/19 and included a large capital gain of £25,920. However, three years later he realises he had entered £29,520, i.e. he had made a transposition error. This is a case where overpayment relief may be available.
Overpayment relief must be claimed within four years of the end of the tax year the claim relates to, e.g. by 5 April 2022 for the tax year 2017/18.
The claim must be made in writing, and contain information specified by HMRC in the Self-Assessment Claims Manual. The claim:
- must clearly state that the person is making a claim for overpayment relief;
- identify the tax year or accounting period for which the overpayment or excessive assessment has been made;
- state the grounds on which the person considers that the overpayment or excessive assessment has occurred;
- state whether the person has previously made an appeal in connection with the payment or the assessment;
- if the claim is for repayment of tax, documentary proof of the tax deducted or suffered in some other;
- include a declaration signed by the claimant stating that the particulars given in the claim are correct and complete to the best of their knowledge and belief;
- state the amount that the person believes they have overpaid.
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Trading losses and CGT
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In most cases, it is beneficial to offset trading losses against income - whether that means sideways loss relief against general income or carrying forward to offset future profits of the same trade. However, sometimes the trader's circumstances mean that the loss is effectively wasted.
Example
Sara starts a new business in 2021/22. In her first accounting period, she records a loss of £8,000. She expects to make a profit in 2022/23, of approximately £15,000. Assuming Sara has no other income in 2021/22 (or 2020/21) to offset the loss against, it will automatically offset the £15,000 profit from 2022/23. Unfortunately, £12,570 of this would be offset by her personal allowance. There is no scope to restrict the loss to preserve the allowance, so effectively she will only receive tax relief on £2,430, but the loss will be completely used up.
In these circumstances, further options should be considered. Firstly, as Sara's business is new, she can claim early years' loss relief. This effectively extends the window for sideways relief to the three previous tax years. If she were, for example, an employee in that time a tax refund could be secured.
If this is not possible, an often-overlooked option is to offset the loss against capital gains arising in the same, or previous, tax year as the trading loss. As such, it can be useful in situations where chargeable assets have been sold to fund the start up. Alternatively, if it is apparent that a trading loss will arise, the individual could look to trigger gains before the relevant tax year end to ensure the loss isn't wasted. In the Sara example above, she would be able to trigger gains of up to £20,300 (including the CGT annual exemption) without paying any tax.
While this is very much a last resort, as the gains are likely to be subject to tax at just 10%, it is often better than doing nothing. One condition of offsetting losses in this way is that any available sideways relief must be claimed first, even if this is inefficient due to the personal allowance issue discussed above.
If this option is used, the loss should be noted and carried forward for Class 4 NI purposes in the same way as it is with a sideways relief claim.
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March questions and answers
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Q1. After several years of successive growth, my wife and I have decided to incorporate our partnership. We have a number of assets used in the trade for which we have claimed relief using the annual investment allowance. As the trade is being effectively disposed of to the new company, do we have a problem with capital allowances?
A: You are correct to be concerned. As you and your wife will be connected to the company, the default position is that assets are deemed to transfer at market value. If the AIA has been claimed, a balancing charge can arise under the capital allowances regime. Note, this is not a CGT issue as incorporation relief should be available as long as the trade is being transferred wholesale.
In order to prevent a charge arising in this situation, you can make a claim under section 266 CAA 2001. This treats the assets is transferred at their written down value, i.e. nil where the AIA has relieved the cost in full. You need to make the claim jointly with the new company, and in writing within two years of the date of the transfer.
Q2. In the wake of COVID-19 pandemic, I have been reviewing my company's books in an effort to more accurately review unpaid sales invoices. I have identified a relatively high number of these from the end of 2021, as may be expected in the circumstances. Am I right in thinking I have to wait six months before I can write these off for tax purposes?
A: The six-month statutory time limit actually applies to VAT, rather than corporation tax. There is no minimum time you need to wait before you can write off a debt for tax purposes in theory. However, HMRC does require reasonable steps to have been taken in order to recover payment before you do so. It is not sufficient to make a provision for bad debts, as it is under accounting rules. In practice, you need to identify debts that are unlikely to be paid on a case-by-case basis.
For smaller debts, HMRC is likely to accept a couple of reminders to demonstrate that you have made an effort to recover the monies owed to you. For larger debts, it's more likely that more formal action would be needed in order to secure the deduction, e.g. appointing a debt collection service, or applying to a court to assist with recovery. There are no hard and fast rules, although HMRC is likely to accept a claim for bad debt relief if you have evidence that a debtor is in administration, or subject to insolvency proceedings. HMRC's guidance in the business income manual is a helpful reference.
Q3. Our business has been struggling with VAT compliance for a number of years. Admittedly, this has largely been down to us, particularly the misconduct of a former employee who was responsible for the reporting (they have been dismissed as a result) but we are keen to put things right and have employed the services of a local accountant who will be dealing with things for us going forwards. However, I have now received a letter from HMRC saying that they will be issuing a demand for security payment in respect of VAT liability. As I understand it, this will not be offset against future liabilities, and instead will be refunded after a period of good compliance. My issue is that this will not be easy to fund. Can I refuse on the grounds that the company has already appointed an agent, which will mean vastly improved compliance going forward?
A: HMRC does have the power to ask the security in respect of certain taxes perceives there is a risk to the public revenue. Whatever you do, do not ignore a notice when it comes through - failure to pay it within the statutory time frame makes it a criminal offence to continue to trade. As you have clearly made a commitment to improving your compliance, it may be worth sending a copy of your engagement letter with the new accountant and asking for an internal review emphasising your commitment. Also stress that the employee responsible for the previous problems has been removed. There is no guarantee that this will remove the requirement for security, but you really have nothing to lose.
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1 - Due date for payment of Corporation Tax for accounting periods ending 31 May 2021
7 - Electronic VAT return and payment due for quarter ended 31 January 2022
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/3/2022
31 - Deadline to pay self-assessment liability or agree time to pay arrangement without incurring late payment penalty following reprieve announced in January
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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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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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