TaxMatters with James Milne – December

TaxMatters with James Milne – December

Welcome to the December edition of TaxMatters. We hope that you find this informative. Please contact us if you wish to discuss any matters in more detail.

IT’S IMPORTANT TO HAVE UP TO DATE PROFIT FORECASTS FOR TAX

In order that we can help predict your taxable profits and tax liabilities we need up to date profit figures and projections. One of the advantages of keeping your business accounts in a computerised form, ideally on the Cloud, is that we can review your latest financial position and help you prepare more reliable profit forecasts to estimate your tax bills.

Unincorporated Businesses
Reliable profit forecasts are particularly important at the moment, with the changes to the taxation of sole traders and partnerships from 2024/25, and the complicated transitional rules that apply in 2023/24. The transitional rules may result in higher tax bills if your business does not have a 31 March or 5 April year end. If we have reliable profit forecasts for your business we can determine whether or not changing your business year end would be beneficial, and also determine the timing of that change.

Limited Companies
From 1 April 2023 the rate of corporation tax that a company pays depends on the level of the company’s profits and the number of “associated companies”. “Associated companies” are those under common control, which may include companies controlled by close relatives under certain circumstances.

Assuming a company has no “associated companies” then the 19% corporation tax rate continues to apply where profits are no more than £50,000 and the 25% corporation tax rate applies where profits exceed £250,000 a year. The £50,000 and £250,000 limits are divided by the number of “associated companies”.

In between the limits there is marginal relief to achieve the transition between 19% and 25%. The marginal tax rate between £50,000 and £250,000 is 26.5% and thus tax planning can be particularly effective.

For example buying new equipment or paying additional pension contributions on behalf of the directors would potentially save 26.5% corporation tax. Timing of expenditure is critical here, as the expenses would need to be incurred before the year end. We would recommend a review at least 2 months before the company’s year-end, with reliable profit forecasts available to allow time for pre-year-end planning.

WHEN ARE COMPANIES ASSOCIATED?


“Associated companies” for corporation tax purposes are those under common control. The most obvious situation is where one of the companies has control of the other, or both of the companies are under the control of the same person or persons. In determining control, the rights and powers of an individual’s associates, broadly close relatives, may be taken into consideration, but only where there is substantial commercial interdependence between the two companies. This could be financial, economic, or organisational interdependence and will depend on the facts of each case. An example would be where a brother and sister each have their own limited companies and there is a large loan or significant trading between them, such that one is dependent upon the other.

This is not a straightforward matter and we can of course advise you on whether or not it impacts your company.

LARGER COMPANIES ARE REQUIRED TO PAY TAX QUARTERLY


Although not a new measure, where a company has profits in excess of £1,500,000 a year it is required to estimate and pay corporation tax quarterly during the year, rather than 9 months after the end of its accounting period. What has changed since 1 April 2023 is that the £1,500,000 threshold is divided by the number of “associated companies” in the accounting period, as defined above. Thus, if a company has two associated companies, if any of them has profits in excess of £500,000, quarterly instalments of corporation tax will be required. If that company has a 31 March 2024 year end, it needs to pay its estimated corporation tax liability according to the following schedule:

  • 25% of its estimated liability by 14 October 2023
  • 50% of its estimated liability by 14 January 2024
  • 75% of its estimated liability by 14 April 2024
  • 100% of its corporation tax liability by 14 July 2024.

As mentioned above, accurate profit forecasts are required in order to compute the quarterly payments.

Note that this is a significant acceleration of tax payments compared to the normal 9-month payment interval. Consequently, there is a one year “grace period” that applies for the first year the threshold is breached. You might also wish to consider minimizing the number of associated companies to avoid this cash flow disadvantage.

ARE YOU DUE A NATIONAL INSURANCE REFUND ON CAR ALLOWANCES?


Recent tribunal decisions in favour of employing companies and against HMRC has caused many organisations in similar circumstance to make protective claims for the recovery of National Insurance Contributions (NIC) in respect of car allowances paid to employees using their own cars or vans for business journeys.

Many employers have a policy of only reimbursing the fuel costs associated with those business journeys (for example at 15p per mile) rather than paying the maximum HMRC Approved Mileage Allowance Payments (‘AMAP’) rates (currently 45p/25p per mile) on a tax and NIC free basis. The employee can then make a claim for the difference between the 45p allowance and the amount received from the employer as a deduction from their employment income.

The recent Upper Tribunal decisions (which HMRC have confirmed they will not appeal) have held that the amounts paid by the employer in respect of business mileage are exempt from NIC and consequently employers should consider making a claim for repayment from HMRC.

Please contact us if you think you may be entitled to make such a repayment claim.

DIARY OF MAIN TAX EVENTS – DECEMBER 2023 / JANUARY 2024

 

Date What’s Due
1/12/23 Corporation tax payment for the year to 28/2/23 (unless quarterly instalments apply)
19/12/23 Employer PAYE & NIC deductions, and CIS return and tax, for the month to 5/12/23 (due 22/12/23 if you pay electronically)
30/12/23 Submission of 2023/24 self-assessment return (if the taxpayer wants HMRC to collect the tax owed through their wages or pension)
1/1/24 Corporation tax payment for the year to 31/3/23 (unless quarterly instalments apply)
19/1/24 Employer PAYE & NIC deductions, and CIS return and tax, for the month to 5/1/24 (due 22/1/24 if you pay electronically)
TaxMatters with James Milne

TaxMatters with James Milne

Welcome to the Monthly Tax Newsletter for November 2023. We hope that you find this informative. Please contact us if you wish to discuss any matters in more detail.

SALARY OR DIVIDEND BEST IN 2023/24?

In recent years many accountants have advised their director/shareholder clients that the most tax efficient method of extracting profit from their family company was to pay themselves a low salary, at or around the £12,570 personal allowance, with the balance in dividends.

This strategy may need to be revisited with the introduction of higher corporation tax rates from 1 April 2023 as company profits in excess of £50,000 are taxed at an effective 26.5% rate. Where company profits exceed £50,000 it may be more tax efficient to increase the salary or put a bonus through the company accounts.

Other things to consider would be for the company to pay more into your pension or provide you with an electric company car, both of which can be tax efficient.

There are lots of factors to take into account, including the level of profit and how much you need to draw out of the company to live on. We would suggest that we set up a meeting with you a couple of months before the company year end so that we can give you the best advice.

YEAR END TAX PLANNING IDEAS FOR YOUR BUSINESS


As mentioned above it is always a good idea to set up a planning meeting with us a couple of months before your business year end so that we can advise you on the best actions to take to reduce your taxable profits. In addition to considering paying yourself a bonus from your company you might consider:

  • Bringing forward expenditure on equipment to take advantage of the 100% annual investment allowance (AIA) – up to £1 million a year on new and used equipment;
  • For limited companies, most new equipment qualifies for unlimited “full expensing” relief;
  • Where equipment is bought on hire purchase, make sure that it is brought into use by the year end to get tax relief on the full purchase price; and
  • Making additional pension contributions, taking advantage of the new £60,000 annual input allowance.

CHARGING ELECTRIC CARS AT HOME


HMRC has recently clarified their view of the tax treatment of the reimbursement of electricity costs where employees charge their electric company cars at home. HMRC now accepts that reimbursing part of a domestic energy bill, which is used to charge a company car or van, is exempt from income tax. Their previous view was that such reimbursements were taxable.

Note that the exemption will only apply provided it can be demonstrated that the electricity was used to charge the company car or van, which may be difficult to determine in practice. Employers will need to make sure that any reimbursement made towards the cost of electricity relates solely to the charging of their company car or van.

It should be remembered that where the employee uses workplace charging facilities there is no taxable benefit.

It should be noted that HMRC has still not revised their view on reclaiming VAT in respect of business miles driven by an employee who has changed their car at home. Regardless of whether the vehicle is a company car or the employee’s own, the employer cannot reclaim the VAT because the supply of electricity is made to the employee, not the employer.

RECLAIMING INPUT VAT ON THE SALE OF SHARES


The sale of shares is an exempt supply for VAT purposes, which means that input VAT on professional fees in connection with the transaction cannot be claimed. However, a recent tax tribunal decision has determined that, under certain circumstances, the input VAT may be claimed. The case concerned the sale of a subsidiary company in order to provide additional funds to complete the building of a new hotel within a hotel group. The taxpayer successfully argued that the costs had been incurred as part of raising funds for the group’s downstream activities generating taxable supplies.

HMRC may be appealing the decision, but in the meantime, companies in a similar position may seek to make protective claims to recover the input tax on professional fees.

DIARY OF MAIN TAX EVENTS – NOVEMBER / DECEMBER 2023

 

Date What’s Due
1 November Corporation tax for year to 31/01/2023, unless quarterly instalments apply
19 November PAYE & NIC deductions, and CIS return and tax, for month to 5/11/23 (due 22/11 if you pay electronically)
22 November Autumn Statement
1 December Corporation tax for year to 28/02/2023, unless quarterly instalments apply
19 December PAYE & NIC deductions, and CIS return and tax, for month to 5/12/23 (due 22/12 if you pay electronically)
30 December Deadline for filing 2022/23 tax return online in order to request that HMRC collect outstanding tax via the 2024/25 PAYE code
Basis Period Reform. A new era of taxation for the self-employed.

Basis Period Reform. A new era of taxation for the self-employed.

Basis Period Reform introduced by HM Revenue & Customs (HMRC) will change the timing of when trading profits are taxed. The change applies only to self-employed individuals, which includes partners of businesses. Limited companies are subject to different laws and reporting procedures and are not affected by these changes.

Introduction

In the 2021 Autumn Budget, the government declared its intention to reform the way trading profits are allocated to tax years for income tax purposes. This decision followed a consultation initiated by HMRC on 20 July 2021, which was later legislated in the Finance Act 2022.

The changes take effect, in full, from the 2024/25 tax year, with transitional rules applying for 2023/24.

The reform seeks to simplify the basis period rules for the self-employed. Under the new system, a business’s taxable profit or loss for the tax year will be the profit or loss that occurs in the same 12-month period, irrespective of its accounting date. This change aims to eliminate the existing complex basis period rules and prevent the creation of overlap relief.

Why the Change?

The existing system, known as the ‘current year basis,’ determines trading profits for the tax year based on the profits of the 12-month accounting period that ends in that tax year. This method can lead to complexities when calculating and recording overlap profits, especially in the opening and closing years of a trading business. In normal circumstances this causes delays in the timing of tax payments to HMRC.

Reform of the basis period rules will make it easier for businesses to understand and comply with tax regulations.

The New System

Starting from the 2024/25 tax year, the ‘tax year basis’ will be introduced where taxable profits will be determined based on profits falling within the tax year: 6th April – 5th April. This is regardless of when an accounting period ends.

This might seem straightforward, but for accounting periods that don’t align with the tax year, it may be problematic, especially when finalising accounts for the tax return deadline.

For example, where a business has a November year end, the tax year basis of 12 months will be based on eight months of profits from the from the first accounts and four months from the second.  The second period of accounts would have their year-end only two months prior to the tax return deadline date thus leaving too little time to prepare them. The second part could be estimated, with actuals reported, once known, or the accounting year may be changed.

Transition Period

There will be a transition period. For those with accounting periods not aligned to the tax year (31 March or 5 April only), their profits for 2023/24 will be based on the period from the end of the 2022/23 basis period to 5 April 2024, which will result in a period of greater than 12 months.  The transition may result in higher taxable profits in the transition year, however any additional profits, due to the change in rules, may be spread over the next five years to reduce the immediate tax impact.

Not all potential impacts are addressed by these provisions and those affected should seek professional guidance.

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA)

HMRC asserts that Basis Period Reform is essential for the implementation of Making Tax Digital for Income Tax Self-Assessment (MTD ITSA). Under MTD ITSA, businesses will have to send quarterly digital updates to HMRC and provide a digital ‘end of period statement’ to finalise the taxable profit for the tax year. This will be mandated for the self-employed with turnover exceeding £50,000 from 6 April 2026 and will expand to those with turnover over £30,000 from 6 April 2027. Partnerships will follow later at a date yet to be announced.

The reform’s goal is to simplify tax reporting for the vast number of small businesses and self-employed individuals in the UK.

For guidance on Basis Period Reform and what needs to be done to get ready for the transition, contact our tax specialists at James Milne Chartered Accountants.

James Milne to Sponsor Trio of Scotland’s Top Agricultural Shows

James Milne to Sponsor Trio of Scotland’s Top Agricultural Shows

As a proud sponsor, James Milne Chartered Accountants is gearing up for three of Scotland’s most prominent agricultural shows this month.

The New Deer Show, situated in the heart of Buchan, Aberdeenshire, is a two-day agricultural event that attracts between 8,000 and 10,000 visitors each year. The show is held on Saturday 15th and Sunday 16th July and features one of the largest horse shows in the region, the best in quality livestock, and hundreds of exhibitors showcasing their products and skills.

James Milne Chartered Accountants is also sponsoring The Banchory Show, organised by the Deeside Agricultural Association, another key event in Scotland’s agricultural calendar. The show, which will take place on Saturday, 22nd July features a range of competitions and exhibits, including crafts, cookery, floral art, and produce. It all starts with judging the area’s finest cattle, horses and ponies, and sheep.

Later in the month, the firm is sponsoring the Turriff Show on Sunday 30th and Monday 31st July, Scotland’s largest two-day agricultural show. The event, which has been held in the north-east town since 1864, attracts around 24,000 people and features over 300 exhibitor stands. The show awards over £85,000 in prize money across its 1,554 classes, which range from the best cattle, sheep, and horses, to working dogs, poultry, and vintage vehicles.

James Milne Chartered Accountants’ sponsorship of these three shows underscores the firm’s commitment to supporting the agricultural sector and local communities. The firm’s backing will help ensure the continued success of these events, which provide a vital platform for showcasing the best of Scotland’s agricultural industry.

Understanding HMRC’s Penalty Points for Late VAT Return Submission: A Guide for Business Owners

Understanding HMRC’s Penalty Points for Late VAT Return Submission: A Guide for Business Owners

As a business, it is crucial to stay up to date with the latest regulatory changes that can impact your financial obligations. One such change introduced by HM Revenue & Customs (HMRC) is the implementation of a new regime of penalty points and penalties for late submission of VAT Returns. Effective from 1 January 2023, these new rules have been put in place to ensure timely compliance. In this article, we will explore how the penalty points system works, how to avoid a £200 penalty, and how your accountant can assist you in meeting your VAT filing deadlines.

How Late Submission Penalties Work:

Under the new system, HMRC operates a points-based penalty system for late submission of VAT Returns. For each return that is submitted late, a penalty point is assigned. These penalty points accumulate until they reach the threshold for your submission frequency period. Once the threshold is reached, a £200 penalty is imposed. Subsequent late submissions while at the threshold will result in additional £200 penalties.

Penalty Point Thresholds:

The penalty point threshold for your business depends on your accounting period. Here’s a simple table to illustrate:

Accounting Period Penalty Points Threshold
Annually 2
Quarterly 4
Monthly 5

Example of a Penalty Calculation:

To illustrate the penalty calculation, let’s consider a business that submits VAT Returns on a quarterly basis. Suppose they already have 3 penalty points due to previous late submissions. If they submit their next return late and receive a fourth penalty point, they will reach the penalty point threshold of 4. As a result, a £200 penalty will be imposed. If they submit the next return on time, they will remain at the threshold but will not receive an additional penalty. However, if they submit the following return late while still at the threshold, another £200 penalty will be imposed.

Removal of Penalty Points

Penalty Points will be removed after both submission of all outstanding VAT returns and a period of compliance (6 to 24 months). The appropriate period of compliance will be based on the VAT submission frequency of your business and the date at which all outstanding returns are submitted.

Non-Standard Accounting Periods:

Different rules apply if you have an agreement with HMRC to use non-standard accounting periods:

Accounting Period Penalty Points Threshold Equivalent Standard Period
Over 20 weeks 2 Annual
Over 8 weeks and no more than 20 weeks 4 Quarterly
8 weeks or less 5 Monthly

Changes to Your Business and Penalty Points:

If you’ve agreed with HMRC to change how often you submit returns, your threshold and penalty points will be adjusted accordingly. For example, if you change from an annual to a quarterly accounting period, your penalty point threshold will increase from 2 to 4.

Taking Over a Business and VAT Groups:

If you’re considering taking over a VAT-registered business as a ‘going concern’, it’s important to note that any penalty points accumulated by the business will not be transferred to your VAT registration number. This remains true even if the VAT registration number is transferred from the previous owner to you. This means you can start fresh without the burden of the previous owner’s late submission penalties.

In the context of VAT groups, if the representative member of a VAT group changes, any penalty points they’ve built up are transferred to the new representative member. However, the total penalty points of the VAT group do not change if a person joins or leaves the group. For instance, if a joining member had penalty points, these will not be added to the group’s total. Similarly, a leaving member does not take points with them.

These rules ensure that businesses are held accountable for their VAT Return submissions without being unfairly penalised for changes in their structure or ownership. It’s crucial to understand these rules when planning changes to your business or considering taking over an existing business.

How to Avoid Penalties:

To avoid penalties for late VAT Return submission, it is essential to submit your returns on time. This means adhering to the deadlines set by HMRC for your accounting period. However, meeting these deadlines can be challenging, especially when running a busy business. This is where having a professional chartered accountant can make a significant difference.

How Your Accountant Can Help:

By working closely with your chartered accountant, you can ensure that your VAT Returns are submitted accurately and promptly. Your accountant will stay on top of the deadlines and assist you in meeting your compliance obligations. They will help you navigate the complexities of VAT regulations, ensuring that your returns are error-free and filed on time.

Conclusion:

The new penalty points system for late VAT Return submission is now in effect, and it is crucial to understand how these penalties work to avoid unnecessary financial burdens. By staying proactive and working with a knowledgeable accountant, you can ensure that your business remains compliant. Your accountant can guide you through the submission process, assist with accurate record-keeping, and help you meet your obligations on time. Don’t hesitate to seek their expertise to mitigate the risk of penalties and ensure your financial affairs are in order.

Remember, timely compliance is essential not only to avoid penalties but also to maintain a strong working relationship with HMRC.

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How to Manage your VAT Compliance

If you’re currently finding it challenging to manage your VAT compliance and meet the submission deadlines, it may be time to consider the benefits of working closely with a chartered accountant. Here are some ways your accountant can help:

  1. Compliance Assistance: Your accountant will ensure that you understand your VAT obligations and deadlines. They will help you gather the necessary information, prepare your VAT Return accurately, and submit it on time. By staying on top of your VAT compliance, your accountant can help you avoid penalty points and associated penalties.
  2. Timely Record-Keeping: Maintaining organised and up-to-date records is crucial for accurate VAT reporting. Your accountant can help you implement effective record-keeping systems and processes, ensuring that you have the necessary documents readily available when it’s time to submit your VAT Return. This will not only streamline the submission process but also minimise the risk of errors or omissions.
  3. VAT Planning and Advice: VAT regulations can be complex, and there may be opportunities for tax planning and optimisation. Your accountant can provide valuable advice on VAT matters, such as choosing the most appropriate VAT scheme for your business, identifying potential exemptions or reliefs, and ensuring that you’re not overpaying or underpaying VAT.
  4. Communication with HMRC: Dealing with HMRC can sometimes be overwhelming, especially if you’re facing penalties or have queries about your VAT obligations. Your accountant can act as a liaison between your business and HMRC, communicating on your behalf, and resolving any issues or concerns that may arise. This will save you time and effort while ensuring that your communication with HMRC is conducted professionally and effectively.

The introduction of penalty points for late VAT Return submission emphasises the importance of timely compliance for all businesses. It’s crucial to understand the penalty point thresholds for your accounting period and diligently submit your returns on time. By partnering with a qualified chartered accountant, you can ensure that your VAT affairs are managed efficiently, enabling you to focus on running and growing your business.

Remember, every business is unique, and the advice provided in this article is general in nature. It’s important to consult with a qualified accountant who can provide personalised guidance based on your specific circumstances. By working together, you can ensure that your VAT affairs are handled professionally and efficiently, minimising risks and maximising opportunities for your business’s success.