Author: ArecaSupport

Reforms to the ways in which unincorporated businesses pay income tax – known as basis periods – will go ahead, one year later than planned. 

Proposals and draft legislation were published in July 2021, suggesting the new rules would commence from 6 April 2023.

Instead, sole traders and most business partnerships will be subject to income tax on profits arising in a given tax year from 6 April 2024.

This will mean no change for self-employed businesses with an accounting year-end between 31 March and 5 April.

But for other businesses, this is likely to bring forward the date on which taxable income will need to be calculated and tax will need to be paid.

This new method of calculating taxable profit will apply from the 2024/25 tax year, rather than 2023/24 as previously planned.

The Government expects this will make it easier for the self-employed and small businesses to claim tax reliefs they are entitled to, but often do not take advantage of, due to confusing existing rules.

The Office for Budget Responsibility said the measure “generates the fiscal illusion of raising revenue when, in fact, it reduces it in the long-term” as it will have no effect on the amounts of profits taxed.

Special rules will apply to self-employed businesses that transition from the old to the new regime during a transitional 2023/24 tax year, during which time some businesses will experience double taxation.

Not only will they be taxed on 12 months of profits from the end of the basis period for 2022/23, there will also be transitional profit based on the period from the end of those 12 months to 5 April 2024.

On transition to the tax-year basis from 6 April 2023, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.

Get in touch to discuss the basis-period reform.

December 2021

Delving into recent changes that affect the CIS.

The construction industry remains one of the UK’s key sectors, which also helps to underpin the UK economy, despite experiencing the effects of the COVID-19 pandemic.

In September 2021, construction output grew by 1.3% on the previous month – placing the sector just 1% below its pre-pandemic level – and it’s still worth a decent share of UK GDP.

Despite this monthly fluctuation, the Government remains committed to delivering up to 300,000 new homes a year by the mid-2020s.

Major infrastructure projects like the HS2 railway line and Hinkley Point nuclear power station in Somerset are also edging closer to completion.

It’s easy to see how the sector employs “more than 9% of the UK’s total workforce”, roughly equating to around 3.1 million people.

Many of these will be familiar with the complexities of the construction industry scheme (CIS), which sets out rules for how payments to subcontractors for construction work must be handled by contractors in the industry, taking into account the subcontractor’s tax status.

From a tax perspective, there have been recent changes announced in the last 12 months which affect both the CIS and UK VAT. Not that many would know, given the lack of publicity.

Who does the CIS affect?

Under the CIS, all payments made from contractors to subcontractors must take account of the subcontractor’s tax status as determined by HMRC.

This may require the contractor to make a deduction, which they then pay to HMRC, from that part of the payment that does not represent the cost of materials incurred by the subcontractor.

The CIS covers all construction work carried out in the UK, including site preparation, alterations, dismantling, construction, repairs, decorating, and demolition.

Any type of domestic or overseas construction business – companies, partnerships, and sole traders – working in the UK must register for the CIS, regardless of whether they’re a contractor or subcontractor.

Contractors & subcontractors

‘Contractors’ and ‘subcontractors’ have special meanings that cover more than is generally referred to as ‘construction’.

A contractor is a business or other concern that pays subcontractors for construction work. They might be construction companies or building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’.

If a business or other concern spends more than £3 million on construction within the previous 12 months, they will be treated as a ‘deemed contractor’ and must monitor their construction spend regularly. Conversely, a subcontractor is simply a business that carries out construction work for a contractor.

In some cases, it’s possible for a business to be both contractor and subcontractor. This occurs when a business pays another firm for construction work, but also receives payment from another business.

When they’re working as a contractor, they must follow the CIS rules for contractors and when they’re working as a subcontractor, they must follow the rules for subcontractors.

How the CIS works

All contractors and subcontractors should register with HMRC for the CIS. Subcontractors will be subject to a higher-rate deduction if they have not registered.

Contractors deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments towards income tax and National Insurance, similar to PAYE.

A limited company will have deductions taken by the contractor from the income due to the company.

This deduction can then be offset against other company tax liabilities such as PAYE, VAT, corporation tax or can be refunded to the company after the end of the tax year.

Sole traders and partnerships will also have deductions made from the income they receive.

They are then required to report their gross income on their self-assessment tax returns, with contractor deductions also reported on the tax return and subsequently deducted from any income tax liability which is calculated as being due.

Contractors need to verify a subcontractor’s status with HMRC before payment is made to establish whether they are registered and the correct amount of tax to withhold. Tax can be deducted at source at 0%, 20% or 30%.

Contractors must report all of the payments they have made under the CIS to the tax authority, or report they have made no payments in the tax month, by the 19th of each month.

Penalties apply if the monthly return deadline is missed.

Recent changes to the CIS

Four new measures affecting the CIS came in for 2021/22, which aim to crack down on tackling labour fraud. An obvious example is where a contractor pays casual workers cash-in-hand.

First, HMRC can amend the CIS deductions suffered and reclaimed on real-time information via the employment payment summary to an amount matching any evidence it holds.

If there is no evidence, or a construction firm is not entitled to set-off in this way, HMRC can remove the claim completely and prevent you from submitting another set-off claim for the rest of a tax year.

Being on the wrong side of this change could cause significant cashflow disruption and detailed records should be kept to support any set-off claims.

The second change is aimed at subcontractors who claim the cost of materials on a project, and avoid a CIS deduction on this amount as a result.

It is only where a subcontractor directly incurs the cost of materials bought to fulfil a particular building contract that the cost in question is not subject to a CIS deduction.

Under CIS rules, contractors must ascertain both how much was spent and that it represents the direct cost to that subcontractor for the contract.

The third change updates the rules for operating CIS as a deemed contractor.

Businesses operating outside the construction sector need to apply the CIS when their total spending on construction operations exceeds £3 million over the past 12 rolling months.

Previously, a business only had to operate under the CIS if its average expenditure on construction operations exceeded £1m over the last three tax years.

Last but not least, HMRC has expanded the scope for imposing a penalty for supplying false information on payment applications under deduction or gross payment status.

The person or business to whom the registration applied could be penalised before last month, but now this also applies to anyone who exercises influence or control over a person registering for the CIS and either encourages that person to make a false statement or does so themselves.

The effects of reverse charge VAT

The VAT domestic reverse charge for building and construction services finally took effect on 1 March 2021.

It affects VAT-registered businesses, typically those who either take on contracts or subcontract others within a supply chain, that operate under the CIS.

Companies in the construction supply chain no longer receive their 20% VAT payment when they submit bills. Instead, the VAT is paid directly to HMRC by the ‘customer’ receiving the service.

The change is causing cashflow shortages for VAT-registered contractors, some of whom are owed repayments from HMRC at the end of each quarter dating as far back as last spring.

The tax authority said verification checks are slowing up the process, with some cases taking 30 days or longer while it waits for customers to supply the information required to verify the VAT return.

We can advise on the CIS.

December 2021

Salary-sacrifice arrangements could help employees negate the National Insurance contributions (NICs) rise during 2022/23. 

NICs will rise by 1.25% for employees, employers and the self-employed from April 2022 to fund the Government’s                 new health and social care levy.

In some scenarios, employees and employers can get around this by striking a salary sacrifice deal to reduce an employee’s gross pay in return for certain non-cash benefits, such as pension contributions.

This is a tax-efficient way to pay or boost pension contributions up to a limit, as the amount of salary exchanged is not liable for income tax or class 1 NICs.

Effectively, the non-cash benefit could become an employer pension contribution while reducing an employee’s NICs liability and also the employer’s NIC liability.

However, going down this route might lead to a reduction in some state benefits and could affect mortgage applications and employee benefits.

Kate Smith, head of pensions at Aegon, said:

“The 1.25% increase in NICs from next April increases employers’ payroll costs and will reduce employees’ take-home pay, making salary sacrifice even more attractive to dampen the increased costs.

“One way to offset the increased cost and to maintain current take-home pay, or increase pension contributions, is to use salary-sacrifice arrangements, although it may not be possible from April 2023.”

Talk to us about managing costs. 

November 2021

The temporary increase to the annual investment allowance has been extended by 15 months, just eight weeks before it was due to expire. 

The allowance offers 100% tax relief on qualifying plant and machinery up to a specified annual limit.

In 2019, the allowance was increased from £200,000 to £1 million – a rise that was scheduled to come to an end on 31 December 2021.

Chancellor Rishi Sunak has now extended the higher rate until 31 March 2023, when the UK’s main rate of corporation tax increases from 19% to 25%.

Speaking in his Autumn Budget 2021, Sunak said:

“Now is not the time to remove tax breaks on investment.

“So I can confirm that the £1m annual investment allowance will not end in December [2021] as planned, it will be extended all the way to [31] March 2023.”

The extension marks victory for the Association of Tax Technicians (ATT), which had previously campaigned for an extension to the allowance.

The ATT successfully lobbied for an extension last year, citing many firms had not been in a position to utilise the allowance in a way they otherwise might have done due to the pandemic.

The group said the latest extension “is good news for businesses whose annual capital spending exceeds £200,000, particularly if their profits are charged to income tax rather than corporation tax”.

But it wants the Treasury to resolve transitional provisions in order to help small businesses.

Jon Stride, co-chair of ATT’s technical steering group, said:

“More than 95% of UK businesses incur qualifying capital expenditure of less than £200,000 each year.

“The temporary limit of £1m could never benefit these businesses – but the transition back from £1m to £200,000 in 2023 could actively disadvantage them.

“We hope that the Government will take the opportunity in the forthcoming Finance Bill to introduce a simplification measure.”

Contact us about the annual investment allowance.

November 2021

Thousands of retail, hospitality and leisure firms in England will receive a short-term business rates reprieve in 2022/23, following Autumn Budget 2021.

Chancellor Rishi Sunak announced a temporary 50% cut in their business rates, up to a maximum of £110,000 per business.

Up to 400,000 businesses in these sectors – including pubs, music venues, cinemas, restaurants, hotels, theatres, and gyms – stand to benefit next year.

The Chancellor has also abandoned 2022’s planned annual increase in business rates for all firms in England for the second consecutive year.

The business rates multiplier usually determines this yearly rise and is tied to September’s inflation rate, as measured by the Consumer Prices Index.

But that would have resulted in a 3.1% increase for 2022/23, hammering many of these COVID-hit businesses that are still reeling from the effects of the pandemic.

In conjunction with the existing small business rates relief, Sunak said the move meant more than 90% of all retail, hospitality and leisure businesses in England would see a discount of at least half.

Business rates in these sectors have already been reduced during the 2021/22 tax year, following the rates holiday announced during the pandemic.

From April 2023, all businesses – not just in retail and hospitality – will be able to make improvements to their premises without having to pay extra business rates for 12 months.

The reforms also include a new relief for businesses that invest in green technologies, such as solar panels and heat pumps.

The British Chambers of Commerce (BCC) said Sunak’s five-point plan was “good news for many firms”.

Shevaun Haviland, director-general at the BCC, said:

“These changes will provide much-needed relief for businesses across the country, giving many firms renewed confidence to invest and grow.

“However, these changes must be the start, rather than the end point of the reforms to this broken system.”

Get in touch to discuss managing costs. 

November 2021

Understanding your early-access pension options.

Despite remaining complex, pensions offer you far more flexibility from the age of 55 (rising to 57 from 6 April 2028) than was once possible.

If you are approaching 55, you might be feeling a twinge of trepidation or excitement that you could soon become “a pensioner” as this is the age at which you are allowed to access some pension savings.

For some it may not be a moment too soon.

The economic burden of COVID-19 has raised the spectre of redundancy for more people, while inflation is on the rise and interest rates remain low. Fuel shortages and empty shelves add to the general feeling of uncertainty, and some fear a deep recession.

Others might be more relaxed, and might not really be thinking of drawing any pension income for many years, but still interested to know the current state of play.

One thing’s for sure – there have been many rule changes since you began saving into a pension. There’s generally far more flexibility than there once was but, as you would expect with pensions, there’s also the same old complexity.

Here’s what you can and can’t do from the age of 55, along with the pros and cons of drawing money from this age.

Pensions you can access at 55

There are still several main types of pension, each with its own rules. Broadly speaking, though, you can take money from all of them when you turn 55. The exception is the state pension, which is not accessible until age 66 at the earliest.

For defined-contribution workplace pensions – ones which are based on contributions and growth over time – you should be able to access money from 55 with your employer’s permission.

For defined-benefit pension schemes – pensions which guarantee you a certain level of retirement income – some early access is possible, although you might lose valuable benefits.

You can also access any personal pensions at the age of 55, but you’ll need to check and understand whether penalties will apply.

The main options

Gone are the days when your only choice was some form of fixed income.

In fact, you may be able to do as much or as little with your pension pot as you wish. But whatever you decide, there will be tax and investment considerations.

The latest round of major changes, made back in 2015, permitted people to withdraw 100% of their personal pension pots from age 55. The general rule is 25% is tax-free, while the remainder is subject to income tax.

So for anyone with hefty pension savings, it is unlikely to be wise to withdraw it all at once from a tax perspective. Instead, the following options for accessing your pension are available.

Tax-free lump sum

The first thing that springs to mind for many is the availability of a 25% tax-free lump sum. It’s one of the big selling points of saving in a pension, given that tax relief is provided on the way in.

You may have it lined up to pay off a mortgage, to fund that dream holiday, for reinvestment or something else. If you face financial difficulty due to COVID-19, it could even be a lifeline.

Annuities

Buying an annuity is the traditional way of enjoying an income from a personal pension. You would take some or all of the money you had saved, pay it to an insurance company, and in return they would promise to pay you an income for the rest of your (and, if agreed, your partner’s) life.

It provides welcome certainty, but as life expectancies have risen, the value of the annual income is often perceived to be low. You can still do this, and for some it might appeal.

Income drawdown

The flexible alternative to buying an annuity is income drawdown, if your pension provider offers it.

This is when you keep your pension invested and take a taxable income from it – either from the natural income your investments generate or from capital within the pension. It gives you freedom, but unlike an annuity, it comes with no guarantees.

Early retirement from a company pension

If your pension is a company scheme, you might be permitted early access in return for a reduced annual pension income.

The pros of accessing at 55

There are so many moving parts to pensions that we can only talk very generally. These points are intended to spark a conversation with an expert, rather than for you to act upon them directly.

First of all, it is a massive plus that you have the freedom to access your pension from the age of 55. If you have a plan or a pressing need for the money, quite simply, it is on the table for you.

This freedom does have to be balanced against future need, and may come with a cost which we will cover in the cons section next.

Once you’ve factored in the tax-free sum, the pros are largely lifestyle-related. For example, you may be able to reduce your working hours if your pension income can top up a lower salary. Or you may be able to pay off your mortgage and decrease your personal overheads, achieving a better lifestyle that way.

Because of the level of flexibility, you can keep some or most of your pension invested, so that it continues to grow for later life, and you could carry on paying into a pension if your circumstances allow it later on.

What are the cons?

As with the pros, the cons to accessing your pension at 55 are general in nature, and might be able to be adequately managed with good retirement planning.

The first and most significant con is that taking cash now may increase your chance of running out of money later on. This is really important to understand, because later in life you may have no means of generating income, depending on your circumstances.

Not only are you taking what you have, but you’re also limiting the potential of your pension to benefit from compound growth. This may disproportionately affect its future value.

Taxes

The mainstream taxes you will need to consider are income tax and, indirectly, inheritance tax and capital gains tax.

After the tax-free lump sum is exhausted, any excess drawings will be taxed as income. Depending on the sums involved, this means you could be pushed up into a higher-rate bracket.

While capital gains tax will not come into play directly, it is worth remembering that a pension is a tax shelter in which your money is protected from this tax. If you are withdrawing money from a pension to make further investment, you might not get the same protection.

The same goes for inheritance tax, which pensions also offer useful protection against before the age of 75.

Pension rules

Then there are some targeted pension rules, which may or may not affect you.

The questions to be asking are: “How much are your pensions worth now and in the future?” and “Are you likely to want to make future pension contributions?”

The lifetime allowance is a total cap on the pension value you can accumulate in your lifetime, and currently stands at £1,073,100. You can exceed it, but there will likely be extra tax charges. Withdrawing money from a pension at age 55 will trigger a test to see if these tax charges will apply at this point.

The annual allowance limits the amount you can pay into a pension each year. It is normally 100% of your pensionable earnings capped at £40,000. However, once you draw a taxable income directly from your pension, you may find yourself restricted by the money purchase annual allowance, which can reduce the cap to a flat £4,000.

Ask us about accessing your pension at 55. 

November 2021

How we can make your lives easier.

As a business owner, you will find that few things in your line of work are as precious as your time – time that would be better spent doing something other than accounting.

Many people come to us asking for help with tasks that usually result in time slipping through their fingers, because of their often onerous nature to the layman.

If that rings true with you, it might be time to consider offloading some of that work outside of your expertise in order to give yourself back the time you need.

For those who might be uncomfortable with that concept, consider the fact that even we outsource certain non-accounting tasks which allow us to spend more time helping you.

There is no shame in looking to lighten the load within your business. Here are some accounting tasks you should consider outsourcing to us and why.

Bookkeeping

The first rule of running a successful business is to keep accurate books. By this, we mean records of all your transactions, assets and debts.

Doing this means you’ll know precisely how much customers owe, how much you owe to suppliers, how profitable your business is and how much cash is available.

This enables you to make better decisions that can lead to improvements in cashflow and profitability.

We can become an extension of your business by offering a reliable, trustworthy and highly efficient bookkeeping service, giving you peace of mind that your finances are under control.

Company secretarial

‘Company secretarial’ doesn’t mean answering calls and managing your appointments for you; this service ensures corporate governance, administration and compliance with legislation, laws and regulations that govern companies.

Our company secretarial service abides by Companies Act 2006, while stringently maintaining records relating to the board, the company and its shareholders.

We can take care of incorporating your company with Companies House, offer a registered office and service address for the directors to ensure your details stay out of the public domain. All correspondence comes to us in this instance.

By outsourcing these responsibilities to our experienced team, you ensure your incorporated business is following sound business practices and fulfilling your legal obligations.

In our experience, company secretarial minimises risk of financial penalties for non-compliance, while businesses that outsource these tasks to us often save money on training costs and implementing technology.

Payroll

Around 1.4 million businesses in the UK had employees in 2020, and all of them have one thing in common: the legal requirement to run payroll.

Running payroll eats up large chunks of time each month, with many processes involved to comply with legislation and pay workers on time.

Many of the UK’s medium and large-sized employers have their own in-house human resourcing teams that take care of payroll.

But for the vast majority of small firms, those with 49 or fewer workers, removing this burden can free up time and resources.

Making deductions

Whether you pay your workers weekly or monthly, certain deductions need to be made from their gross pay packets.

We deduct income tax, workplace pension contributions, National Insurance contributions (NICs) and student loan repayments from their gross pay before paying them on time.

Our payroll service complies with legislation to ensure your workers all receive at least the national living wage, which for over-23s is £8.91 an hour until 5 April 2022. These hourly pay rates are uprated on an annual basis.

Class 1 NICs for both employees and employers are increasing by 1.25% from April 2022. Not only will we deduct these at source, we will pay them to HMRC via PAYE on your behalf.

Auto-enrolment

If you have any staff who are aged 22 or over and earn more than £10,000 a year, they need to be automatically enrolled into your workplace pension scheme.

Eligible employees must commit at least 5% of their pay packet, while you must contribute a minimum of 3% into their workplace pensions. However, workers can voluntarily opt out.

The national living wage is due to increase to £9.42 an hour for over-23s from April 2022, meaning a worker only needs to work for 20.4 hours a week to be enrolled.

Our payroll service will identify staff who qualify for automatic enrolment, enrol them into your workplace pension scheme, deduct contributions from their pay, and pay those deductions and the employer contributions into the pension scheme.

Taxable benefits

Each taxable employee benefit you provide to reward or incentivise employees is calculated differently and can be taxed through payroll, assuming you registered with HMRC before the start of the tax year on 6 April.

If you failed to meet that registration deadline, P11D and P11D(b) forms might need to be submitted to the tax authority for any member of staff who received taxable benefits.

This helps HMRC calculate how much you need to pay in class 1A employer NICs, as well as how much PAYE tax is due from the employee on the benefit. This is then normally collected from the employee by adjusting their tax code.

Tax affairs

There’s no legal obligation to appoint us to take care of your tax returns, but it’s often better to let us handle it unless you fully understand your tax obligations and the penalties regime.

What’s more, the Government is in the midst of digitising all of the UK’s major taxes. Making Tax Digital (MTD) for VAT is already in play, MTD for income tax is due to take effect from April 2024, followed by MTD for corporation tax in April 2026 at the earliest.

That means you will soon need to implement MTD-compliant software in your business if you haven’t already done so, regardless of whether you are liable for income tax, corporation tax or UK VAT.

We are ready to run you through your options, teach you how to use this software, and collaborate with you to ensure your taxes are paid on time, every time.

Self-assessment

If you’re self-employed, you need to file a tax return via self-assessment on or before midnight on 31 January each year. This is also the date by which you need to pay your tax bill.

By appointing us to fill in and send in your tax returns, you will be in the best possible hands. We deal with numbers every day, we know the rules inside out, what you are entitled to, and how to reduce your tax liability.

Corporation tax

If you run an incorporated business, you will need to file a company tax return and pay corporation tax on any profits your company makes in its accounting period.

We can also prepare your annual accounts, including all the paperwork, before submitting them to HMRC and Companies House to ensure total compliance.

VAT

All businesses with annual taxable turnover of more than £85,000 in the last 12 months need to register for UK VAT, and charge VAT on any sales of goods or services.

This is a complex area of our tax system. We can handle VAT registrations, help you choose the most suitable payment scheme, and manage your returns in line with MTD for VAT.

Get in touch to discuss any of the above. 

November 2021

VAT for pubs, restaurants, holiday accommodation and entry to certain attractions increased from 5% to 12.5% last month, following the end of a tax break.

A temporary cut first introduced on 8 July 2020 saw the standard rate of VAT for struggling businesses in the hospitality and tourism sectors fall from 20% to 5%.

That short-term relief was in place until 30 September 2021, at which point the rate for businesses in these sectors increased to 12.5% until 31 March 2022.

Under the Treasury’s current plans, VAT on hospitality and tourism sector purchases will return to its pre-pandemic level of 20% on 1 April next year.

A coalition of the UK’s biggest hospitality and tourism bodies fear returning the VAT rate to 20% risks “derailing the recovery while businesses are still recovering”.

In a joint letter, they said:

“Businesses are at a perilous stage of their recovery after what’s been a devastating 18 months. Costs are increasing and there are numerous operational challenges for them to deal with, specifically around labour and product supply.

“A reduction in VAT has helped many of our businesses survive to this point and was most welcome. However, the return of VAT to its pre-pandemic level next year would curtail investment, restrict growth, set back our tourism recovery and risk yet more painful job losses.”

The coalition wants the 12.5% rate to be in place permanently.

Speak to us about any aspect of VAT. 

November 2021