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We are often asked why a self-employed person is paying so much tax when their drawings from their self-employed business are minimal.

The reason for this is that sole traders and partners (individuals) pay tax on the profits they earn not on the amount of cash they withdraw from their business.

For example, consider Sue, a self-employed electrician, who made a profit of £15,000 in her first year to 31 March 2021. As she also had a part-time employed job in the same year, that covered most of her living expenses, her drawing from her own business amounted to just £5,000.

Sue was expecting to pay £1,000 in tax; 20% of her drawings. She was shocked to receive a statement from HMRC that showed she owed £3,000 (£15,000 x 20%).

During a subsequent conversation with a tax adviser, she consulted to sort out this apparently excessive tax bill, she added that on 15 April 2021 she had invested £10,000 and bought a second-hand van for her business.

Imagine her further dismay when the tax adviser told her that if she had purchased the van a month earlier the £10,000 could have been deducted from her £15,000 profits as a capital allowance (Vans qualify for a 100% deduction under the Annual Investment Allowance rules).

Ironically, this would have reduced her tax bill for 2020-21 to £1,000.

We have sketched out this example to illustrate the value of tax advice. If you are new to business, it is important to consider how your future tax bills will be calculated and when these taxes are payable.

And, as Sue’s experience shows, if she had consulted with an adviser before her 31 March year end and requested advice on the best time to purchase her van, she would have saved £2,000 in tax: an effective 20% discount on her van purchase.

If you are considering a new business venture or have managed your own tax affairs to this point, please call so that we can help you explore any tax planning options that you may have missed.

The following definitions set out how property income is calculated and taxed:

• Rental income – includes rents, amounts received to cover use of furniture, cleaning of communal areas, hot water, heating and repairs to property.
• Allowable expenses – any expense that you have laid out “wholly and exclusively” for the purposes of renting out a property can be deducted when working out net property income subject to tax. Costs include:
  • general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
  • water rates, council tax, gas and electricity
  • insurance, such as landlords’ policies for buildings, contents and public liability
  • costs of services, including the wages of gardeners and cleaners
  • letting agent fees and management fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountant’s fees
  • rents (if you’re sub-letting), ground rents and service charges
  • direct costs such as phone calls, stationery and advertising for new tenants
  • vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs

• Expenses you cannot claim – include:
  • private phone calls
  • personal expenses
  • repayment of loan capital – you can only claim for interest on the loan but see following section.
• Interest paid on mortgages and loans – individuals that run a property business can only claim a 20% tax credit. The gross interest paid is no longer deductible as an expense. This means that tax relief is restricted to 20%. This does not apply if you have incorporated your property business.
• Incorporating your property business – if you run your property business inside a limited company structure, any profits and gains will be taxed at corporation tax rates, currently 19%. As indicated above, companies can deduct mortgage and loan interest as an expense.

 

Unsurprisingly, there are grey areas that you will need to consider. Before embarking on the acquisition or disposal of a rental property, perhaps for the first time, it is well worth investing in a planning session to consider the most tax efficient way to organise matters. We can help. Please call to discuss your options.

HMRC is responding to the pressures we all feel as the new COVID-19 variant, Omicron, makes normal life difficult once more.

The offer by HMRC is generous. Basically, they have announced that taxpayers who have still not filed their self-assessment tax returns for 2020-21, will be granted an extra month to file online without triggering a penalty, and an easing of late payment penalties if unable to meet tax payments falling due on 31 January 2022.

In a recent press release issued 6 January 2022, they said:

“HMRC is waiving late filing and late payment penalties for Self-Assessment taxpayers for one month – giving them extra time, if they need it, to complete their 2020 to 2021 tax return and pay any tax due.

“HMRC is encouraging taxpayers to file and pay on time if they can, as the department reveals that, of the 12.2 million taxpayers who need to submit their tax return by 31 January 2022, almost 6.5 million have already done so.”

This is a staggering admission by HMRC. Almost 50% of self-assessment returns due to be filed for 2020-21 – by 31 January 2022 – are still not filed.

In an admission of the pressures faced by tax practitioners and their clients, they go on to say:

“HMRC recognises the pressure faced this year by Self-Assessment taxpayers and their agents. COVID-19 is affecting the capacity of some agents and taxpayers to meet their obligations in time for the 31 January deadline. The penalty waivers give taxpayers who need it more time to complete and file their return online and pay the tax due without worrying about receiving a penalty.

“The deadline to file and pay remains 31 January 2022. The penalty waivers will mean that:

• anyone who cannot file their return by the 31 January deadline will not receive a late filing penalty if they file online by 28 February 2022.
• anyone who cannot pay their Self-Assessment tax by the 31 January deadline will not receive a late payment penalty if they pay their tax in full, or set up a Time to Pay arrangement, by 1 April 2022.

“Interest will be payable from 1 February, as usual, so it is still better to pay on time if possible.”

Businesses are reminded to take steps to prepare for Making Tax Digital for Value Added Tax (VAT) before it becomes mandatory for all VAT-registered businesses from 1 April this year.

Making Tax Digital is designed to help businesses eliminate common errors and save time managing their tax affairs.

Making Tax Digital for VAT is part of the overall digitalisation of UK Tax. In a recent independent study of over 2,000 businesses, 69% reported experiencing at least one benefit from Making Tax Digital. These included preparing and submitting returns faster and increased confidence that they were getting tax right. Sixty-seven percent of businesses also felt Making Tax Digital had reduced the potential for mistakes in at least one aspect of the record keeping, preparing and submitting returns process.

As of December 2021, nearly 1.6 million taxpayers had joined Making Tax Digital for VAT with more than 11 million returns successfully submitted. Around a third of VAT-registered businesses with taxable turnover below £85,000 have voluntarily signed up to Making Tax Digital for VAT ahead of April 2022, and thousands more are signing up each week.

Since April 2019, businesses with a taxable turnover above £85,000 have already been required to follow Making Tax Digital, keeping digital records and filing VAT returns using Making Tax Digital compatible software.

In July 2020, it was announced that all VAT-registered businesses must file digitally through Making Tax Digital from April 2022, regardless of turnover. HMRC is now reminding businesses below the £85,000 threshold of the steps which they need to take to be ready.

HMRC have issued the following guidance to taxpayers who may have received COVID-19 grants during the 2020-21 tax year.

“If you claimed Self-Employment Income Support Scheme (SEISS) or received Coronavirus Job Retention Scheme grants, you’ll need to include details of all the taxable coronavirus support scheme payments you received during the 2020 to 2021 tax year.

“If you are employed and received Coronavirus Job Retention Scheme (furlough) payments during the 2020-21 tax year, you will need to enter your earnings and Income Tax as stated on your P60. Your P60 will include any furlough payments you received up to 5 April 2021, so you do not need to include furlough payments on your tax return.

“If you are self-employed or in a partnership and received any coronavirus financial support, you will need to declare it on your Self-Assessment tax return.”

 

SEISS grants you may have received during 2020-21 include:

• SEISS 1: 13 May 2020 to 13 July 2020
• SEISS 2: 17 August 2020 to 19 October 2020
• SEISS 3: 29 November 2020 to 29 January 2021

Grants received after 5 April 2021 will need to be declared as taxable income in the current tax year, 2021-22.

 

Apart from the furlough and SEISS grants you will also need to declare grants received from the following support schemes:

You need to report grants and payments from COVID-19 support schemes. These include:

• test and trace or self-isolation payments in England, Scotland and Wales
• Eat Out to Help Out
• Coronavirus Statutory Sick Pay Rebate
• Coronavirus Business Support Grants

 

Coronavirus Business Support Grants

These are grants or payments made by one of the following:

• local authorities
• devolved administrations
• any other public authority

 

They are also known as local authority grants or business rate grants and in all cases are taxable.

 

Examples of these grants in England include:

• Small Business Grant Fund
• Retail, Hospitality and Leisure Grant Fund
• Local Authority Discretionary Grant Fund
• Fisheries Response Fund

Examples of these grants in Wales include:

• Welsh Government Business Grants (Grants 1 & 2)
• Economic Resilience Fund

 

Examples of these grants in Scotland include:

• Business Support Fund
• Newly Self-Employed Hardship Fund
• Creative, Tourism & Hospitality Enterprises Hardship Fund
• Pivotal Enterprise Resilience Fund
• Aquaculture Hardship Fund
• Sea Fisheries Hardship Fund

 

Examples of these grants in Northern Ireland include:

• Small Business Support Grant Scheme
• Retail, Hospitality, Tourism and Leisure Grant
• other business-related coronavirus emergency and hardship funds

 

If you need more advice regarding which grants need to be declared as income, please call. We can help.

£100,000 – Loss of income tax personal allowance

Your income tax personal allowance – £12,570 for 2021-22 – will be reduced by £1 for every £2 your adjusted net income exceeds £100,000.

If your projected earnings for the current tax year are expected to be in excess of £100,000, perhaps for the first time, you still have three months to consider planning options to help you avoid this potential reduction in your personal allowance for 2021-22.

It is worth considering ways to avoid this as the effective rate of income tax you will pay if your earning fall between £100,000 and £125,140 is 60%. This is because as your personal allowance reduces, you not only lose the tax relief this has previously afforded, but the increase in taxable income will be subject to higher rate tax.

If you estimate that you may be affected by this loss of personal allowance, please call so we can help you consider your tax planning options.

£50,000 – Payback of Child Benefit payments

If either parent’s taxable income exceeds £50,000, HMRC will be entitled to a full or part-repayment of any Child Benefits (CBs) they may have received during the current tax year.

CBs will be repayable at the rate of 1% of the amount received for every £100 of income in excess of the £50,000 limit. This means that once income is in excess of £60,000, all CBs received will be recovered.

If affected, you can cancel receipt of future CBs, but this may not be advisable for NIC reasons.

HMRC will make a tax charge called the High-Income Child Benefit Charge (HICBC) to recover any CBs repayable. The parent with the highest income in excess of £50,000 will have to declare their need to repay CBs by submitting a self-assessment tax return.

If you are affected by this HICBC and are usure what you need to do, please call, we can help with any filing obligations.

£37,700 – Income subject to tax at higher rates

If your taxable income, after deducting your personal allowance, exceeds this amount you may be subject to income tax at higher rates.

There are strategies that may reduce this higher rate tax charge and keep you within lower rates of tax.

Please call so we can help you consider your options.

Please note that regional differences may apply where assemblies set their own income tax rates.

We are now two years into the COVID-19 pandemic and the virus is showing a remarkable ability to adapt. In its latest form, the Omicron variant, it is proving to be more transmissible and successful at seeking out new hosts.

If we have learnt anything from the experience of the past two years of anxiety and disruption it’s that adaptability is a key response. Included in this newsletter are tips to stay ahead of these challenges from a business perspective.

Unfortunately, the need to safeguard the NHS means that our entertainment and hospitality trades will again be asked to bear the brunt of COVID-19 related disruption strategies.

It will be interesting to see, if in the coming year, government is again drawn into providing furlough or similar grants to sustain affected small business employers and the self-employed.

With inflation rising, currently 5.1%, Rishi Sunak will be scratching his head as printing money to fund further support is directly opposite to his Autumn Budget claims that he is now focussed on repaying government debt, and this largesse could fuel further inflationary pressures.

Resilience needs to be a worthwhile goal for 2022 but tempered with realism; we may be sometime away from relegating COVID-19 to the same nuisance value as the flu.

We have listed below a number of ideas that might ease your progress through any continuing COVID-19 related disruption during 2022.

The following comments are not advice. Every business is different so please call if you have concerns due to a reduction in trade this year.

• Mothball investment plans. Could you defer decisions on buying that new car or other equipment for your business. In a year’s time the economy may have had a chance for a more sustainable recovery that would make more productive use of your acquisition.
• Discuss a hiatus in pensions investments with your pension’s advisor.
• Agree an instalment plan with HMRC to clear any current or future Income Tax or Corporation Tax liabilities.
• Reduce stocks of goods. If turnover falls due to future lockdown activity, reducing stocks will ease pressure on cash-flow and release storage space.
• Negotiate a reduction in hours with your staff rather than laying people off. This may be a solution to keeping teams together.
• Consider your staff as a service option if they become under-employed by reduced activity. i.e., sell their time to firms who need periodic, additional support but don’t want to commit to taking on a full-time worker.
• Clear out under-utilised office or production space and offer to sub-let on short-term lease arrangements.
• Hire out under-utilised plant.
• Defer any expenditure that can be safely delayed for a year without unduly affecting your ability to trade.

 

Planning is key

As soon as you become aware of threats to your future trading, take time out to formally plan a survival process.

We can help. Don’t wait until cash resources are exhausted. Contact us as soon as you feel your hard-earned business is under threat.

Do you have half-completed plans to open an online-shop this year?

Even if you have never considered internet trading, could this be an option for 2022?

Business owners

If you are selling goods, creating a web-based sales platform will vastly expand your reach to willing buyers.

Combined with effective social media and other marketing activity this may be an effective hedge against future dips in the wider economy.

If you supply services, perhaps you could create online resources to be purchased and downloaded from your website.

Non-business individuals

Do you have a hobby that you could expand into a part-time business selling goods online?

It isn’t necessary to build your own website to do this. There are a number of ready-made sales platforms like Etsy.com.

You should be able to trial this, and see if the idea has legs, without giving up your day job.

We can help

Please call if you would like to brainstorm this option for your business or to develop additional income streams.

As you will see from the tax diary notes this month, there are two significant tax payment deadlines this month.

• 1 January 2022 – Companies with a 31 March 2021 year end date will need to settle their Corporation Tax payment on or before this date.
• 31 January 2022 – Taxpayers who are subject to self-assessment will need to pay any underpaid tax and NIC for 2020-21 plus any first payment on account for 2021-22.

Clients reading this reminder who need to know how much to pay or reference numbers to quote should contact us asap.

And if you cannot make payment in full, on the due date, you could contact HMRC to ask for more time.

You can make your own Time to Pay arrangement using your Government Gateway account, if you:

• have filed your latest tax return
• owe less than £30,000
• are within 60 days of the payment deadline
• plan to pay your debt off within the next 12 months or less

Call the Self-Assessment helpline if you cannot make your own Time to Pay Arrangement online, for example, if you owe more than £30,000 or need longer to pay.

Self-Assessment Payment Helpline
Telephone: 0300 200 3822
Monday to Friday, 8am to 4pm

For other taxes, contact the Payment Support Service, 0300 200 3835.