Implementation of MTD for ITSA delayed for two years

The Government has announced a two-year delay and further changes to the rollout of its Making Tax Digital for Income Tax initiative.

The delayed implementation of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) means it will now be phased in from April 2026 for a smaller number of taxpayers, rather than the original launch date of April 2024.

The move will give self-employed workers, sole traders and landlords more time to prepare for the upcoming changes.

What is changing? 

From the new start date, instead of MTD for ITSA applying to all self-employed workers and landlords with property and/or business income of more than £10,000, it will now only apply to those with income exceeding £50,000.

As per the original plan, they will have to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software.

Those with an income of between £30,000 and £50,000 will also need to comply with this from April 2027. However, all taxpayers will be able to join voluntarily beforehand if they wish to eliminate common errors and save time managing their tax affairs.

What about smaller businesses?

The Government has also announced a review into the needs of smaller businesses originally due to use the system in 2024, particularly those under the £30,000 income threshold.

The review will consider how MTD for ITSA can be shaped to meet their requirements and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further rollout of MTD for ITSA after April 2027.

MTD for ITSA will not be extended to general partnerships in 2025, as previously announced. However, the Government says it “remains committed to introducing MTD for ITSA to partnerships in line with its vision set out in the Tax Administration Strategy”.

Under the original plans, MTD would also be extended to Corporation Tax, but the Government is yet to confirm when this final phase will begin.

Take advantage of the super deduction allowance – before it’s gone

Businesses are being advised that time is running out to be able to take advantage of the Corporation Tax super-deduction capital allowance scheme. This allows businesses to claim back 130 per cent on investments made in plant or machinery.

The scheme runs until 31 March 2023 and with Corporation Tax rates set to rise in April 2023 for more profitable businesses, there’s not much time left to take advantage of this generous scheme.

The scheme was an incentive to invest in new assets to aid the recovery of companies after the pandemic.

The measure allows organisations to claim a super-deduction providing an allowance of 130 per cent on most new plant and machinery investments that ordinarily qualify for main rate writing down allowances.

They can also use the first-year allowance of 50 per cent on most new plant and machinery investments that ordinarily qualify for special rate writing-down allowances.

What is classified as plant and machinery?

There are many forms of ‘tangible’ assets used in the day-to-day running of a business. Some examples include:

  • Ladders, drills, cranes
  • Office furniture
  • Refrigeration units
  • Electric Vehicle charge points
  • Compressors

Certain expenditure is excluded, for example, the acquisition of company cars. To benefit from the relief the assets purchased must also be new and not second-hand or refurbished equipment.

How does it work?

A company incurring £1 million of qualifying investments decides to claim the super-deduction.

Spending £1 million will mean the company can deduct £1.3 million (130 per cent of the initial investment) in working out its taxable profits.

Deducting £1.3 million from its taxable profits will save the company up to 19 per cent of that – or £247,000 on its Corporation Tax bill.

What about unincorporated businesses?

The relief is only available to limited companies, but unincorporated businesses can continue to benefit from the Annual Investment Allowance (AIA), which permits a deduction of 100 per cent for qualifying plant or machinery expenditure up to the threshold of £1 million.

Improving your business finances in 2023 and beyond

Every business needs sound financial planning and oversight in order to thrive. With the new tax year just around the corner, now is the perfect time to start thinking about ways you can improve your business’s finances in 2023. Read on to learn some of our top tips for making sure your business’s finances are healthy and secure.

Develop a financial plan for the year ahead

The best way to ensure that your business is financially secure is by developing a detailed financial plan for the coming year. This plan should include projected revenue and expenses, as well as goals for sales, profits, cash flow, investments, debt reduction, and other key areas of your business. Setting out these targets will help keep you motivated and on track towards achieving them by providing a roadmap of where you want to be at each point in the year.

Analyse your cash flow regularly

It’s essential that you monitor your cash flow closely throughout the year. Doing so will help you identify any potential issues before they become major problems. To make this easier, create a spreadsheet that tracks all incoming and outgoing funds from your business over time so you can see if there are any patterns or trends emerging. If there are any discrepancies between expected income/expenses and actual figures, investigate why this is happening so that it doesn’t become a recurring issue.

Review your finances before making big decisions

Before making any big decisions about investing or expanding your business, it’s important that you review your current financial situation carefully. This will give you an accurate picture of where your business stands financially so that you can make informed decisions about how best to proceed without putting yourself at risk of overextending yourself or taking on too much debt.  It’s also good practice to run through “what-if” scenarios when making big decisions like hiring new staff or buying expensive equipment – what would happen if something unexpected occurred? Having contingency plans in place will help protect against possible losses down the line.    

Taking control of your small business’s finances requires careful planning and regular review – but it’s worth it! When done properly, developing a detailed financial plan for 2023 and beyond can help keep your business running smoothly while allowing room for growth and expansion without overextending yourself financially. As long as you remember to analyse your cash flow regularly and think carefully before making big decisions related to investments or expansion plans then you should be well on your way towards improving your business’s finances this year.

Tax considerations for gifting to grandchildren in the UK

For many individuals in the UK, gifting to grandchildren can be a great way to reduce their tax burden. But before entering into any gifting arrangement, it is important to understand the various tax considerations that come with it. In this blog post, we will discuss some of the key tax implications of gifting to grandchildren in the UK.

Inheritance Tax implications

In the UK, Inheritance Tax (IHT) applies when an individual passes away and leaves assets or property worth more than £325,000 (known as their “nil-rate band”). If this limit is exceeded, then IHT will be due at 40 per cent on anything above this threshold. One way that wealthy individuals can reduce their liability for inheritance tax is by gifting some of their assets or property to grandchildren during their lifetime; this could help them stay within the nil-rate band. However, there are a few things that need to be taken into account when considering making these gifts:

Gift exemptions

The first thing to consider is whether any of the gifts qualify for one of the gift exemptions available under UK law. These exemptions include gifts made out of normal income (up to £3,000 per year), small gifts up to £250 per person per year, wedding or civil partnership gifts up to certain thresholds depending on relationship and so on. It is important to understand which exemptions may apply before making any large gifts as this could significantly reduce your IHT liability.

Lifetime gifts

Another important point when considering making lifetime gifts is that these must be made absolutely and irrevocably – meaning that once you have gifted something you cannot reclaim it afterwards and neither can you attach any conditions or strings attached. You should also bear in mind that even if something qualifies for a gift exemption it may still need to be reported on your annual self-assessment form – so make sure you check all relevant rules and regulations before proceeding with any large-scale gifting arrangements.

Gifts with reservation of benefit rules

Finally, it’s important to note that certain types of lifetime gifting may fall under ‘gifts with reservation of benefit rules’, which means they are not exempt from IHT and may still need to be declared on your self-assessment form each year. For example, if you give a property but continue living in it as your primary residence then this would likely fall under these rules – meaning you would still have an IHT liability for any value over your nil rate band despite having gifted the property away. It’s therefore essential that you take professional advice before entering into any complex gifting arrangements as there could be significant tax implications if not done correctly.

Gifting assets or property during your lifetime can offer significant advantages when it comes to reducing your Inheritance Tax burden in the UK – but only if done properly and within all applicable laws and regulations. It’s therefore vital that anyone considering such arrangements takes professional advice beforehand in order to ensure they understand all relevant tax considerations and remain compliant at all times.

Should I take a salary or dividends as a small business owner?

If you own a small business and are also a shareholder director, you may be wondering whether to take a salary or dividends.

When it comes to paying yourself, there are both advantages and disadvantages to each option, including potential tax savings.

We’ll explore how taking salaries versus dividends for shareholder directors of small businesses in the UK may affect the money you take home. 

How should you remunerate directors? 

The UK tax system allows company shareholders to draw money from their companies in two ways – either by taking a salary via PAYE, which will be subject to Income Tax and National Insurance Contributions or by taking dividends, which is instead subject to a unique dividend tax rate and free of NICs. 

Why you should still take a salary

There are two primary reasons, beyond the earnings, for drawing at least part of your remuneration from a salary from your business. 

First and foremost, you will more than likely want to continue to accrue qualifying years towards your state pension.

To obtain the necessary National Insurance credits to receive this benefit your salary will need to be in excess of the current Lower Earnings Limit (£6,396 in the 2022/23 tax year).

When setting your salary, many directors choose a level between the Lower Earnings Limit and the Primary Threshold (£11,908 per annum for directors), as this will ensure you receive National Insurance credits, but will avoid having to make regular National Insurance Contributions.

Secondly, taking a salary counts as an allowable business expense, which can be offset against your profits to reduce the amount of Corporation Tax your company is liable for.

How should you set a salary? 

If you are planning on drawing money from your business but intend on maintaining contributions towards state pensions and other benefits such as maternity leave and job seekers’ allowance down the line, then it makes sense for you to take salary instead of dividends.

You will also need to consider how your salary affects your income tax position. Every UK taxpayer enjoys a personal tax allowance of £12,570 per annum (frozen until 2028).

Any earnings above this amount, including income from a salary, will be taxed at your marginal rate (basic, higher and additional).

If your salary exceeds the thresholds for these tax bands you will face a higher rate of tax, but this will also need to be considered alongside other earnings outside your salary, which could carry you over into higher rates of tax as well.

This will be particularly precarious from this April when the threshold for the additional rate of income tax (45 per cent) falls from £150,000 to £125,140.

Why take dividends instead of a salary? 

Dividends, unlike salary payments, do not attract National Insurance Contributions and the tax rates on dividends are lower than tax rates on salaries.

However, care must be given to ensure dividends are correctly voted on by all shareholders and the company has sufficient distributable reserves available.

However, if your annual dividend payments exceed £2,000 per year (based on the current dividend allowance), then you will need to pay some tax on those payments.

This dividend tax allowance will be reduced from April 2023 to £1,000 and halved again to just £500 in the following tax year, but dividend tax rates remain lower than the rates of income tax and, therefore, may offer a tax advantage to some directors.

For 2022/23 and into the new tax year, the dividend tax rates are:

  • Basic rate: 8.75 per cent
  • Higher rate: 33.75 per cent
  • Additional rate: 39.35 per cent

How to balance dividends and salary 

It’s important to consider both options carefully before deciding which one works best for you based on your current financial situation and future plans.

Usually, directors will choose a combination of both dividends and salary so as to manage their tax position and that of their company, without reducing their access to benefits, such as a state pension.

This is something that needs to be done regularly at tax rates and allowances change. In the year ahead there are several changes to these rates and allowances that we have outlined.

It’s important to weigh all these factors carefully before deciding on a remuneration approach for you and any other directors of the business. This is where seeking regular professional advice can be particularly beneficial, especially as your circumstances may change from one year to the next.

Understanding and improving your balance sheet

Keeping on top of your business’s financial health is critical to its success. A great place to start is by understanding what a balance sheet is and what it can tell you about the health of your business. Let’s look at what a balance sheet is, why it’s important, and how you can improve yours.

What is a balance sheet?

A balance sheet is an important financial document that provides an overall view of the financial position of your business. It shows how much money you have in assets (e.g., cash, accounts receivable) and liabilities (e.g., loans, accounts payable). When these two sides are balanced (i.e., when assets equal liabilities), the balance sheet reveals whether or not your business is operating at a profit or loss.

Why is it important?

Your business’s balance sheet tells you if you have enough money to pay for current expenses and future projects or investments. This information helps you make decisions about where to invest capital and whether or not to take on additional debt to finance growth opportunities.  The more informed decisions you make, the better off your business will be in the long run!

How can I improve my balance sheet?

The first step in improving your balance sheet is understanding exactly where your money is going each month – which means tracking all income sources and expenses with accuracy and consistency.

Additionally, it’s important to make sure that any debt on the books is managed responsibly; this means making timely payments so that you don’t accrue late fees or interest charges which can hurt your bottom line in the long run.

Finally, consider investing in new technology or resources that can help streamline processes within your business. This will allow for faster transactions which can help increase efficiency and save money over time.

Understanding and improving your business’s balance sheet are critical steps toward achieving financial success.

By tracking income sources and expenses accurately, managing debt responsibly, and investing in new technology or resources, small businesses in the UK can ensure they remain solvent while also creating an environment for growth opportunities down the road.

A new VAT penalty system is now in effect

A major overhaul of VAT penalties came into effect on 1 January 2023. This new approach changes how penalties are applied, as well as how interest is calculated and paid. In this article, we’ll break down what you need to know about the changes.

What is changing?

The biggest change that businesses can expect is a replacement of default surcharges with new penalties for late submissions and late payments. The objective of this shift is to reward businesses that comply with their VAT obligations on a timely basis. Additionally, the calculation of VAT interest has changed, including how it is calculated and paid.

Who is affected?

All businesses submitting VAT returns starting on or after 1 January 2023 are affected by these changes. It’s important for companies to note that these changes may also affect their tax planning strategy and potential savings from earlier payment dates.

How do the new penalties work?

HM Revenue & Customs (HMRC) has outlined a points-based system for late submission penalties intended to incentivise businesses to comply with their reporting obligations:

Up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

31 days or more overdue

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 plus 2 per cent on the VAT you owe at day 30.

You will receive a second penalty calculated at a daily rate of 4 per cent per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

The frequency-dependent thresholds for penalty points mean that more frequent non-compliance results in higher penalties. However, should a business meet its obligations within the given timeframe, all penalty points are reset back to zero and no further action will be taken against it.

Businesses should also take note of the benefits associated with paying sooner rather than later when it comes to VAT. Paying early means fewer late payment fees, as well as interest due on top of those fees if they are not paid within 30 days of filing a return or making an adjustment request after filing one’s return.

For those who do pay late but still manage to file their returns before the deadline, there are still ways they can reduce their overall financial burden by paying off any outstanding taxes before incurring additional costs in interest charges or late payment fees.

With the new year upon us already, businesses need to be aware of the possible consequences of late returns and payments.

Be prepared for changes to Capital Gains Tax thresholds 

The exemption for paying Capital Gains Tax (CGT) is changing.

The CGT annual exemption will fall from £12,300 to £6,000 from April 2023, before being cut in half again to £3,000 from April 2024.

CGT is what you pay on any gains that you make when you come to sell an asset, such as a second home or shares.

However, the annual CGT exemption allows you to make a certain value of gains before you pay tax on any additional gains.

Higher-rate or additional-rate taxpayers pay 28 per cent on gains from residential property and 20 per cent on gains from other chargeable assets.

If you are a basic-rate taxpayer, you will be charged 18 per cent on residential property and 10 per cent on other gains.

Steps that could reduce your CGT liabilities include:

  • Ensuring you use your allowance for the current year as soon as possible.
  • If you are married or in a civil partnership, you can utilise your partner’s unused allowance. You can transfer your assets into joint names if you are married or in a civil partnership without triggering a tax event. This doubles your £12,300 allowance to £24,600 in one year.
  • Utilise tax-efficient investments such as the Enterprise Investment Scheme and Venture Capital Trusts.
  • Using Business Asset Disposal Relief when selling a business.

Now is a great time for investors to review their portfolios and decide whether they should transfer or dispose of certain assets before these changes take place.

If you want to take advantage of the current CGT tax rate it is best to seek advice from a qualified tax adviser.

Companies House goes fully digital

Companies House has gone fully digital after the announcement of the closure of its office in London and all filing being transferred online.

It has also permanently shut the public counters in Cardiff, Belfast and Edinburgh.

Online services will be available 24 hours a day, seven days a week.

Changes have taken place with improved security features, which include:

  • Multi-factor authentication
  • The ability to link your company to your WebFiling account to give you more control over your filings
  • Being able to digitally authorise people to file on your behalf on WebFiling, and to remove authorisation
  • To view who’s digitally authorised to file for your company
  • An option to sign up for emails to help you with the running of your company

WebFiling is an online service that Companies House provides, designed to make the submission of official paperwork easier and paper-free.

Once you’ve linked your company to your account, you will not need to enter your authentication code every time you file online.

Key changes, which form part of the 2020 to 2025 strategy and part two of the Economic Crime Bill, are expected to go through Parliament this spring and will include:

  • Filing deadlines will not be shortened at the moment, but legislation will be introduced to facilitate future changes.
  • Small companies will no longer have the option to prepare and file abridged accounts and will be required to file both their profit and loss account and directors’ report.
  • Micro-entities will also be required to file their profit and loss accounts but will continue to have the option to not prepare or file a directors’ report.
  • Dormant companies will be required to file an eligibility statement.
  • All companies will be required to file accounts digitally, with full tagging.

R&D relief slashed – Time to plan

Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax credit regime, including a cut to the deduction and credit rates for the SME scheme. 

 

The R&D SME scheme enhanced deduction rate will be cut to 86 per cent from the current 130 per cent, and the payable tax credit rate cut to 10 per cent from 14.5 per cent.

 

However, the rate of the separate R&D expenditure credit – also known as RDEC – will increase significantly, from 13 per cent to 20 per cent. 

 

The changes to the SME scheme mean that if you are a loss-making company, you will now only receive £18.60 for every £100 spent from April next year, compared to £33.35 per £100.

 

These changes are intended to reduce abuse in the R&D tax system, particularly claims for SMEs, which have been the spotlight of several investigations by HM Revenue & Customs (HMRC).

 

They are scheduled to take effect from 6 April 2023, so there is still time to plan, and it may make sense to bring forward R&D expenditure, where possible, to benefit from more favourable deductions and credits.