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Small and medium-sized businesses are underprepared for Making Tax Digital (MTD), according to new research by the Association of Chartered Certified Accountants (ACCA).

Working with the Corporate Finance Network (CFN), the ACCA’s SME tracker showed that 14% of accountants in the UK say their SME clients are “unprepared and will not be ready” for future phases of MTD.

In a survey of 8,900 accountants, 40% said their clients are “partially prepared” but are “not confident they will be ready”.

In comparison, only 22% said their clients are fully prepared for MTD and have the appropriate software set up.

Analysis also revealed a north-south divide between SMEs and their awareness of MTD, with half of London-based advisers saying businesses will be ready, compared to with just 17% outside of London.

MTD aims to remove paper-based filing and currently involves online submission of VAT.

From April 2024, MTD will apply to self-employment and property income over a £10,000 threshold, spelling the end of the self-assessment tax return as we know it, while MTD for corporation tax will arrive no sooner than April 2026.

The SME tracker also found that businesses are underprepared for other tax schemes, which could stump the Government’s plans for the future.

For instance, 42% of accountants said their SME clients have not asked about the ‘help to grow’ scheme or do not know what it is.

Instead, businesses are focused on immediate issues, according to the ACCA, such as tax compliance and access to finance.

Glenn Collins, acting head of ACCA UK, said:

“Government strategies to spur investment for the future are not cutting through with SMEs who seem to be taking a short-term approach, coupled with a belief that schemes are not applicable or relevant to them.

“SMEs outside of London also need a comms boost to ensure they’re part of the levelling up agenda – the Government can do this by working with intermediaries and the UK’s local authority infrastructure.”

Contact us to discuss the benefits of MTD.

Employees who claimed tax relief for working from home during the pandemic may no longer qualify in the 2022/23 tax year as HMRC changes its guidance for the scheme.

During the COVID-19 pandemic, people who could do their normal job at home were required to do so at various times and were allowed to apply for tax relief for the whole year.

The relaxed take on the system remains in place until the end of the current tax year but the rules for eligibility changed on 6 April 2022 now that there are no longer any legal restrictions on going into workplaces.

Tax relief can now only be claimed by workers who must work from home, as opposed to those who prefer to.

As a result, working-from-home tax relief can only be claimed if one of the following applies:

• there are no appropriate facilities for you to work on your employer’s premises
• the job requires you to live so far from the employer’s premises that it is unreasonable for you to travel there on a daily basis
• you are required, under Government restrictions, to work from home.

You may be able to claim for additional household costs when working from home, but only the element of the cost that relates to your work.

Speak to us about claiming tax relief.

HMRC has confirmed it will raise interest rates on late tax bills by 0.25 percentage points after the Bank of England increased the base rate of interest to 1%.

 The announcement means the late payment interest rate and corporation tax pay and file rate will increase to 3.5% from 24 May 2022 (16 May 2022 for quarterly instalment payments) after the Government increased it to 3.25% on 5 April – the highest rate since the height of the financial crisis in January 2009.

Late payment interest is payable on late tax bills including income tax, National Insurance contributions, capital gains tax, and stamp duty land tax..

HMRC interest rates are set in legislation and are linked to the Bank of England base rate, which the Bank increased from 0.75% to 1% on 5 May 2022.

There are two main rates:

 

• late payment interest, which is set at the base rate plus 2.5%
• repayment interest, which is set at the base rate minus 1% with a lower limit of 0.5%.

Corporation self-assessment interest rates relating to interest charged on underpaid quarterly instalment payments rose to 2% on 16 May 2022, up from 1.75%.

Meanwhile, the repayment interest rate remains unchanged at 0.5%, the same level it’s been set at since 29 September 2009.

Get in touch to talk about your taxes.

The Bank of England (BoE) has raised its base interest rate to 1%, marking the fourth rise in a row and the highest base rate in 13 years.

The Bank’s monetary policy committee (MPC) voted 6-3 to increase the base rate of interest by 0.25% percentage points from 0.75% on 5 May 2022.

The current rate of inflation as measured by the consumer prices index (7%) is creating an intense cost of living crisis, with rising electricity and gas putting a strain on households and business – and pressure on the Bank to act.

The MPC said inflation will rise to just over 10% in Q4 2022 before gradually falling to its target of 2% in 2024.

The UK base rate of interest sets the rate at which individuals and businesses pay for borrowing money and what banks will pay to people saving with them, and is often seen as the BoE’s main tool to stave off inflation.

Kitty Ussher, chief economist at the Institute of Directors (IoD), said:

“We welcome the BoE’s judgement that the need to tackle high expectations of inflation is of greater concern than the risk of curbing demand too fast in the short-term”.

On the other hand, Suren Thiru, head of economics at the British Chambers of Commerce said the Bank’s decision will cause “considerable alarm”, adding:

“Higher interest rates will do little to address the global headwinds and supply constraints driving this inflationary surge. It also raises the risk of recession by damaging confidence and intensifying the financial squeeze on businesses and consumers.”

However, Julian Jessop of the Institute of Economic Affairs (IEA) described the rise as the “bare minimum” and said it did not go far enough. Indeed, the IEA’s so-called shadow MPC voted to increase rates to 1.5%.

It seems the BoE does not plan on slowing down its plan to increase interest rates, having based its inflation projections on an assumption that the Bank rate would have increased to 2.5% by mid-2023.

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All VAT-registered businesses must comply with Making Tax Digital (MTD) rules, regardless of how much they make each year.

Kicking in from 1 April 2022, the changes mean all VAT-registered businesses must compile and submit VAT returns using software that connects to HMRC’s systems.

They can do that either through a bridging tool or by using an application programming interface (API) to connect non-compatible software, such as Excel spreadsheets, to HMRC’s systems.

Alternatively, businesses can adopt one of several HMRC-recognised and compatible MTD software solutions, including cloud accounting platforms.

Although MTD for VAT is not completely new, this is a significant change for smaller businesses, many of which do not digitally store business records and file VAT returns.

Since April 2019, businesses with an annual turnover of £85,000 or above have been required to meet MTD for VAT obligations.

MTD is the Government’s flagship policy to digitise and modernise the tax system, making it more understandable and efficient so less tax revenue is lost to mistakes and errors.

All VAT-registered businesses must follow MTD for VAT rules from either 1 April, 1 May or 1 June 2022 depending on their VAT return quarters.

Any trader who should be filing VAT returns under MTD but has not registered will be charged a penalty.

However, businesses can apply for an exemption if they are unable to use digital tools, for example because of remoteness or religious beliefs.

MTD for income tax is expected to come into force in April 2024 after being delayed by a year to give businesses more time to recover from the worst of the pandemic.

Corporation tax is not expected to come into effect until April 2026 at the very earliest.

 

May 2022

 

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The Government has at last increased National Insurance (NI) and dividend tax by 1.25 percentage points after months of anticipation.

The 1.25% uplift came into effect on 6 April 2022 and will apply until April 2023, after which a separate health and social care levy will apply on peoples’ income at 1.25%.

The Government said it expects the levy to raise £39 billion over the next three years to help reduce the Covid-induced NHS backlog and reform adult social care.

The change means employees will pay NI at 13.25% on their earnings above the primary threshold up to £50,270 a year and 3.25% of earnings above that in 2022/23.

Some employees are exempt from the uprate in certain circumstances, including apprentices under 25 years old, employees under 21 years old, armed forces veterans and freeport employees.

Employers will pay 15.05% on earnings above £9,100 and the self-employed will pay 10.25% above £11,908.

Some have criticised the Government for going ahead with the plan it first announced in September 2021, saying it is mistimed with the current cost of living crisis as inflation runs at 6.2%.

However, from July 2022, the point at which individuals pay NI will rise by £2,690 to £12,570 – equal to the income tax personal allowance.

The Government said this means around 70% of taxpayers will end up paying less in NI even when taking into account the 1.25% uplift.

However, Torsten Bell, chief executive of the Resolution Foundation, said lower earners will not benefit as much as others, commenting:

“Middle and higher income households will gain most from the rise in the National Insurance threshold, but only £1 in every £3 of additional support announced today will go to the bottom half of the income distribution.”

 

May 2022

 

Talk to us about your tax liability.

 

The Government has set up an arbitration system to help resolve outstanding commercial rent debts as the general moratorium on commercial eviction ends.

From 25 March, a legally binding arbitration process is available for eligible landlords and tenants who have not yet reached an agreement.

The Government hopes this will resolve disputes about pandemic-related rent debt and help the market return to normal.

The law applies to commercial rent debts of businesses that were mandated to close under Covid lockdowns and restrictions in part or in full from March 2020 until the date restrictions ended for their sector.

During the pandemic, commercial tenants received a moratorium on evictions, which ended on 24 March 2022 in England and Wales.

However, eligible businesses remain protected for the next six months, during which time arbitration can be applied for.

Business minister Paul Scully said:

“This new law will give commercial tenants and landlords the ability to draw a line under the uncertainty caused by the pandemic so they can plan ahead and return to normality.

“Landlords and tenants should keep working together to reach their own agreements where possible using our code of practice to help them, and we’ve made arbitration available as a last resort.”

 

May 2022

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IR35 Reform Landing Period Ends

Penalties now apply to businesses that make mistakes under new IR35 rules for the private sector.

The Government extended the off-payroll working rules reform to the private sector in April 2021, but promised to be lenient on mistakes in the first year.

The landing period has now ended, so employers caught within the reformed IR35 rules will have to pay a penalty of their unpaid tax between 30-100%.

Introduced in 2000, IR35 was designed to prevent tax avoidance by contractors who supply their services via intermediaries in a way so they enjoy the benefits of ‘employment’ and a lower tax rate than actual payrolled employees.

Known as ‘disguised employment’, this loophole was costing the Government millions of pounds in lost taxes each year.

Recent updates made the hirer, rather than the contractor, responsible for designating employment status and rolled out the new rules from just public sector businesses to medium and large private businesses.

After one year, some businesses seem to be struggling, with one YouGov survey suggesting the reform of IR35 has negatively impacted the finances of two in five companies.

Derek Cribb, chief executive of the Association of Independent Professionals and the Self-Employed, said:

“The changes to IR35 in the private sector in April 2021 have made it harder for [businesses] to hire contractors and has therefore made it even more difficult for them to grow during these turbulent economic times.”

 

May 2022

Talk to us about IR35.

How to prepare and protect your estate.

 We are all somewhat used to living with economic doom and gloom at present, from sky-high inflation rates to tax rises being splashed across the news headlines. But recent analysis from the Office of Budget Responsibility shows that you may also get stung harder after you are gone.

They estimate that HMRC inheritance tax takings are set to rase to £37 billion cumulatively over the next five years. That’s compared to £26.7bn for the previous five years to and including the 2021/22 tax year. The rise will be driven by inflation, and the freezing of the thresholds at which inheritance tax becomes payable.

This means that more people, and more of their wealth, get drawn into the scope of inheritance tax.

The good news is there are numerous planning strategies for managing inheritance tax liability. With a little savvy planning, many people are able to take themselves out of its scope completely, or at the very least reduce its impact significantly.

Inheritance tax rules

The standard rate of inheritance tax is 40%, but with careful planning it is possible to significantly reduce your potential IHT exposure thanks to a series of allowances and exemptions.

The most significant of these is your inheritance tax allowance, known as the nil-rate band. This allows the first £325,000 of your estate to be paid free from inheritance tax.

There is an additional nil-rate band for your primary residence of £175,000, if you leave it to direct descendants (including adopted, foster or stepchildren). Your total net estate must be valued at less than £2 million for this to apply. Above this, the additional nil-rate band will be tapered away by £1 for every £2 exceeded.

Furthermore, inheritance tax is not payable on anything left to a spouse or civil partner. Indeed, they can carry over your unused allowances, meaning a married couple (or rather their beneficiaries) enjoy a £650,000 inheritance tax allowance, or £1 million if the primary residence nil-rate bands are also available.

Anything left to charities or community amateur sports clubs is also exempt from inheritance tax.

 

Giving gifts

Once you understand the above allowances, gift giving is another effective tactic for reducing inheritance tax liability.

There is some smaller scale gifting around weddings (up to £5,000), annual gifts (up to £3,000) and small gifts (up to £250 per person per year) which you can use to reduce your liability.

But the bigger opportunity potentially comes from regular gifting, and utilising the seven-year rule.

Normally, if you give money away within seven years of your death and it does not fall within one of the above gift exemptions it is treated as if it remains within your estate for inheritance tax purposes. However, regular gifting rules say that if you gift money regularly out of your normal income after you have met all your own living costs, there is no limit to how much you can give tax-free.

The seven-year rule for non-income based gifts is a bit more involved. It refers to a taper system where the inheritance tax liability on a gift reduces in the years after you give it. If you survive for seven years, the liability reduces to zero, no matter the gift’s value. The tapering reduces the tax rate as follows:

 

• Zero to three years – 40%
• Three to four years – 32%
• Four to five years – 24%
• Five to six years – 16%
• Six to seven years – 8%
• Seven or more years – 0%

 

To qualify, you must give the gift without reservation. This means you have no right over the gift and cannot benefit from it unless you are paying a market value.

So, if you gift a house you cannot live in it unless you were to pay rent. If you gifted a painting, you could not continue to hang it on your wall. If you gifted money, you would have to make clear that it was not a loan which you expected to be repaid.

But other than this, there’s no limit. So, as part of a long-term strategy, gifting is a highly effective way to reduce inheritance tax liability.

 

Making a will

If understanding how inheritance tax works is one important piece of the puzzle, making a will is another.

While a good gifting strategy can help your estate sidestep inheritance tax while you are still alive, a will can help your estate manage the liability after your death.

It’s your opportunity to specify exactly how your estate is apportioned after you die. While the primary driver of this is usually to ensure assets go to the right people, there can be unwelcome tax consequences that are realised if you do not have a will.

If you do not have a will, your estate is subject to intestacy law. This is highly prescribed, and often assets are not distributed how you might imagine. We are focused on estate planning here, so won’t go into detail about the family arguments that might arise as a result.

But to illustrate just one consequence of intestacy, your spouse may not automatically get all your estate without a will in place – even if you wanted them to.

Intestacy says that a spouse gets all the personal belongings plus the first £270,000 of the estate. Then, if there are surviving children, the excess of the estate above £270,000 is split – with 50% going to the spouse and 50% to be shared equally amongst the children (including those from previous relationships if applicable).

Because any estate left to a spouse is not subject to inheritance tax, intestacy could yield a tax bill where none needed be due if it diverted assets away from a spouse.

 

Other considerations

We have already mentioned that anything left to charities is exempt from inheritance tax. It is also possible to pay a reduced rate of 36% inheritance tax on some assets if you leave at least 10% of the net value of your estate to a qualifying charity.

For some people, a life insurance pay-out may be made and become part of their estate. This could then be significantly reduced by inheritance tax. There is a simple way to avoid this, which is by making sure the life insurance policy is written in trust.

Most insurers give you the choice automatically when policies are taken out, so you can check if this was selected. Even if it wasn’t, you can put a policy into trust at any time, although you may need professional help.

Finally, consider that pensions can in some cases be passed on to beneficiaries without being subject to inheritance tax. This is not the primary purpose of a pension and they are subject to complex rules, but it may be useful to know for some.

May 2022

Talk to us about estate planning.

A New Approach to Employee Benefits

Balancing tax perks with desirability.

 Like most business owners, you have probably experienced the squeeze in recruitment and retention that has been prevalent for the last 12 months or so. It’s been so significant, it has even been dubbed “The Great Resignation”.

According to research from Ipsos, 26% of British workers have thought about quitting their job in the last three months, while 29% have looked for another one. This is an alarming thought when you are trying to run a business, grow, look after customers, and ensure those staff staying do not become overwhelmed.

It would be alright if you had the seemingly unlimited coffers of businesses like Google or Facebook. But the reality for most business owners is that you’ll be looking to invest smartly, rather than extravagantly.

And that’s where employee benefits come in. They allow you to stand out as an employer, without simply throwing money into ever-higher salaries.

A well-designed employee benefits scheme can offer a suite of highly desirable perks without sending you into the red. They could be the difference between a star candidate choosing you over another firm, or dissuading current employees from jumping ship.

Moreover, some carry valuable tax advantages to sweeten the deal further for employees and the business.

 

What is the tax treatment of employee benefits?

If a benefit is paid in cash, it is usually treated in the same way as salary. In other words, the employee pays income tax and national insurance on it, and you pay employer’s national insurance. This could be directly through PAYE, or as a benefit in kind.

Commissions and bonuses are simple examples of this, but the principle also applies to attractive non-cash perks which can be readily converted into cash.

Company cars which are available for private or family use also fall within the taxable benefit regime, the value taxed determined to a large extent by the emissions of the vehicle.

And then there are tax-efficient benefits. These will probably be your first port of call as they offer enhanced value through a tax saving and are often desirable in their own right. We’ll highlight a few, and outline the specific qualifying rules to ensure they qualify for the tax benefit.

 

Trivial gifts

The trivial gift rules are a great way to convey some personality in your business and show your team you care. You are permitted to give gifts of up to £50 per gift per employee, but they must be for a non-work reason – so not as a reward for good performance, for instance, and it cannot be cash or a cash voucher.

While this may appear restrictive at first glance, it opens up a great opportunity to offer a birthday gift to each employee, or mark special occasions like marriage or the birth of a child. Note that directors and members of their households are limited by a £300 annual cap.

 

Parties

On a similar theme, there is a separate tax perk for throwing work parties. You are permitted to spend up to £150 (including VAT) per employee per year, and another £150 on their partners.

To qualify, every employee must be entitled to go, and there must be an annual element to it, like a Christmas celebration or a summer barbeque. You can spread the allowance over multiple events as long as they stay under the £150 limit, or you can hold different events for different departments, as long as each member of staff can attend one of them.

If you go beyond the £150 per head limit, you will have certain National Insurance and reporting obligations.

As with the trivial gift allowance, you can really make this show the personality and generosity of your business, and perhaps gain some team-building benefits.

 

Cycle to work scheme

The cycle to work scheme is another great tax-efficient perk. As well as saving your business and employees tax, it ticks boxes for being green, promoting health and well-being and is super tangible to your employees.

Simply put, you register with the scheme and then make an interest-free loan to your employees for the purchase of the bike and related equipment. They repay that loan to you through a salary sacrifice arrangement, which means they save income tax and national insurance, and you save employer national insurance.

There may be a small final fee for the employee, but overall they should save somewhere between 26% to 29%  on the value of the bike through the tax breaks if they are lower rate taxpayers. Higher rate taxpayers can expect to save between 35% and 40%.

 

Other tax-efficient perks

The schemes we have highlighted are just a flavour of the tax breaks available for employee benefits. Other ideas include job-related training costs, death-in-service benefits, mobile phones, childcare and, of course, pensions – which each have their own rules.

But we must not overlook some employee benefits which do attract tax charges but are nevertheless desirable.

 

Company cars

Company cars have long been a desirable employee benefit. But over time they have become increasingly less tax efficient, to the point where they are often not worth offering. In other words, the tax the employee has to pay is so great it no longer offers value. There are some exceptions though.

The emissions determine a benefit in kind rate of between 2% (electric cars with zero emissions) and 37% (a highly polluting car) and this is applied to the list price. The exact rate depends on the CO2 emissions g/km the vehicle produces.

So let’s take a mid-range polluting vehicle attracting a 27% benefit-in-kind charge, and a list price of £30,000. The employee would pay either 20%, 40% or 45% tax through their payslip on £8,100 (27% of £30,000). This would be between £1,620 and £3,645 in additional tax every year they had use of the vehicle.

While few people will welcome that level of extra tax hit, you may already perceive that offering staff electric vehicles with just a 2% benefit-in-kind tax rate might still work really well as an employee benefit.

 

Private medical insurance

Private medical insurance is another go-to benefit. The tax it attracts is not as complicated as company car tax to work out – the employee just pays tax on the cost of the benefit to the employer – but it is still there to be paid.

However, employers purchasing group private medical insurance are often able to get far better deals than an individual would be able to achieve. This means the tax on a reduced-cost, feature-rich policy could represent a great deal for the employee, one which they highly prize for working for you.

 

Getting the balance right

What you can and should offer will depend on your budget and the nature of your workforce.

There are many other options, too, which we have not even touched upon. But a considered approach to employee benefits has the potential to help any business.

May 2022

Get in touch to discuss employee benefits.