News

Whether you are self-employed or run your business through a company, the profits you produce are subject to tax less any reliefs for past losses or investments in assets that qualify for tax relief.

As most accounts software packages do not allow for these tax liabilities on a month-by-month basis, there is a tendency to see any cash balances as available for spending, when in reality, part of those cash resources will be needed to fund future tax payments.

How to make a realistic reserve

If you produce monthly or quarterly management accounts, it is possible to estimate corporation tax or income tax liabilities for the current accounting year or tax year.

You could then make a mental note to keep current year and any unpaid past-year tax liabilities in reserve or transfer sufficient funds to a separate deposit account.

In this way when you look at the balance on your core business account it should represent funds that are available to invest in your business or monies you could withdraw – subject to solvency restrictions.

We can help

Having access to up-to-date management accounts is an invaluable resource in these uncertain times.

Monitoring your trading results in real time will allow you to base business decisions on your current trading rather than past results.

Factoring-in reserves for taxation is the icing on the cake.

If you would like to discuss your options to produce regular management accounts and/or make realistic reserves for corporation tax or income tax, please call.

How do we plan for the unpredictability that is a recurring feature of our business lives?

Brexit, COVID-19, and now the war in Ukraine, all conspire to create trading conditions that can best be described as chaotic.

Present challenges include increasing energy and commodity prices, both of which are forcing up the cost of living and inflation.

It used to be the case that we could create a business plan for the coming year and still be using the same numbers at the end of our trading year. Prices were stable, there were no disruptive supply-line issues and no coronavirus, at least, not the variety labelled COVID-19.

But times have changed and to survive and flourish in these new trading conditions we too will need to be adaptable.

Flexible planning

One way to cope with unpredictability is to adopt a flexible planning approach. Instead of setting your budgets once a year, review them monthly or quarterly. In this way you can constantly see how changing the forecast numbers – to reflect new trading conditions – will affect your business in the coming year.

For example, if rising commodity prices increase your cost of production, you can consider your options to increase your prices before these changes start to exert downward pressure on your profits.

Flexing your budgets for changing costs will also provide you with the data to project forward the effects on cash flow and solvency.

Be prepared

We must all learn from the rising unpredictability of the past two and half years. The days of ‘steady as you go’ may be consigned to history. The new mantra will be to invest in planning for the unexpected.

If you would like to discuss the issues raised in this article and to see how flexible forecasting could empower your business in the coming year, please call.

Landlords are described by HMRC as a property business and yet their income, rents received, is treated as an exempt transaction for VAT purposes, i.e., landlords do not need to register for VAT and submit quarterly returns.

The only exception is if a let commercial property has been opted-in to VAT.

This means that the majority of landlords taxed under self-assessment have escaped the initial impact of HMRC’s drive to digitise reporting as determined by their Making Tax Digital (MTD) program – presently, all VAT registered businesses are required to submit their returns using software that can link with HMRC’s MTD servers.

However, from April 2024, MTD is being extended to cover income tax for self-assessment (MTD for ITSA). MTD for ITSA will apply initially to self-employed individuals and landlords who have business and/or property income of more than £10,000. If you have both property and business income, MTD applies if the total is over £10,000. Individuals to whom this applies will need to comply with MTD for ITSA from the start of the 2024/25 tax year (i.e., from 6 April 2024).

All other individuals within Income Tax Self-Assessment will be required to comply with MTD for ITSA from the start of the 2025/26 tax year (i.e., from 6 April 2025).

Quarterly updates are required for each business and each property business. This may mean that you need to make multiple submissions. Quarter end dates are set at 5 July, 5 October, 5 January, and 5 April. However, you will be able to elect to use calendar quarters instead and submit information to 30 June, 30 September, 31 December and 31 March.

If affected, landlords will need use software to record their property business transactions that is compliant with HMRC MTD for ITSA directives.

Aside from meeting HMRC’s requirements, to digitise your property business for MTD purposes, you will find that the reports you can extract from a digital accounts system will more than repay your investment in the conversion process.

Whilst 2024 may seem to be in the far distant future, we recommend that landlords who will be drawn into the MTD for ITSA net from April 2024 consider their options now. We can help you choose cost-effective accounting software and train you to use the software before the 2024 deadline.

PLANNING NOTE: If you have incorporated your property business, MTD for corporation tax purposes is planned to commence no earlier than April 2026.

Like so many of the regulations that govern our lives, the legislative processes underpinning these rules are anachronisms – things that belong to the past.

For example, the present tax year ends on 5th April 2022. The reason that our tax year ends on this obscure date started in 1582 when Pope Gregory ordered a change of calendar from the version named after Julius Caesar – the Julian calendar.

The British did not make this change in 1582, which the rest of Europe had adopted, and which meant that by 1752 GB was out of sync with Europe by 11 days.

Until 1752, the tax year in GB started on 25th March. To protect its revenue when the change to align with Europe was made, the Treasury extended the tax year to 4th April, the following tax year starting on the 5th April.

This was the position until a mis-match in leap years occurred in 1800 when the Treasury moved the tax year one more day to end 5th April, the current tax year end date.

Apart from these quirks, the UK tax code is also one of the largest and complex in global terms.

HMRC do offer copious notes on the GOV.UK website that explain the numerous reliefs and allowances that you may be able to claim in order to legitimately reduce your tax footprint. However, this would involve a degree of dedicated research the equivalent of a full-time job.

Which is why, if you answer yes to any of the following criteria, we should have a conversation about tax planning opportunities for 2022-23.

Are you:

• Setting up, running or selling a business?
• Have significant earnings?
• Have personal wealth/assets in excess of £325,000?
• Have assets you are about to sell that would be considered a chargeable gain?
• Required to submit a self-assessment tax return?

Every tax-payers’ personal financial arrangements are to some extent unique, which is why there is no one-fit solution. If you have concerns about your tax position for 2022-23, pick up the phone, we would be delighted to run through your options to save tax in the coming year.

1 April 2022 – Due date for Corporation Tax due for the year ended 30 June 2021.

19 April 2022 – PAYE and NIC deductions due for month ended 5 April 2022. (If you pay your tax electronically the due date is 22 April 2022).

19 April 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2022.

19 April 2022 – CIS tax deducted for the month ended 5 April 2022 is payable by today.

30 April 2022 – 2020-21 tax returns filed after this date will be subject to an additional £10 per day late filing penalty for a maximum of 90 days.

1 May 2022 – Due date for corporation tax due for the year ended 30 July 2021.

19 May 2022 – PAYE and NIC deductions due for month ended 5 May 2022. (If you pay your tax electronically the due date is 22 May 2022).

19 May 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2022.

19 May 2022 – CIS tax deducted for the month ended 5 May 2022 is payable by today.

31 May 2022 – Ensure all employees have been given their P60s for the 2021/22 tax year.

HMRC issued the following press release 8 March 2022:

“HMRC is warning customers not to share sensitive personal information online to avoid their identities being used to commit tax fraud.

“HMRC is aware that criminals are attempting to obtain customers’ Government Gateway logins and other personal details, enabling them to register for Income Tax Self-Assessment and submit bogus tax refund claims before pocketing the repayment.

“Individuals, ranging from teenagers to pensioners, are being targeted on social media platforms by fraudsters seeking to ‘borrow’ their identities. In return, the individual is promised a cut of the tax refund ‘risk-free’.

“Handing over sensitive personal information to criminals like this, even inadvertently, risks individuals involving themselves in tax fraud, and having to pay back the full value of the fraudulent claim.

“Customers should therefore only deal with HMRC directly or through their tax advisor in relation to their Self-Assessment tax refunds.”

Individuals with significant income – including the self-employed – are presently required to file one tax return a year.

From April 2024, HMRC’s Making Tax Digital program is being expanded to include self-employed individuals and landlords with business or rental income in excess of £10,000. This is described as MTD for ITSA (Income Tax Self-Assessment)

From April 2025, all other individuals subject to self-assessment will be drawn into the MTD for ITSA net.

Two points to consider:

Firstly, MTD directs that affected taxpayers will need to upload data to HMRC’s servers on a quarterly basis. This effectively increases the present, single reporting requirement to four separate filing events during each tax year.

Secondly, in order to upload data, taxpayers will need to keep their records in a digital format that has been programmed to synchronise with HMRC’s servers.

We would encourage all taxpayers who have not yet considered these changes to contact us as soon as possible. Although 2024 may seem to be some time away there is much to do to ensure you stay compliant.

In preparation for the introduction of Making Tax Digital for Income Tax Self-Assessment the basis period rules for unincorporated businesses are being abolished. Instead, unincorporated businesses will be assessed on the profits actually earned in the tax year.

The new rules take effect from 2024/25, with 2023/24 being a transitional year.

This will affect you if you run an unincorporated business (generally, if you are self-employed) and you currently prepare your accounts to a date other than one between 31 March and 5 April inclusive.

This change could create additional tax liabilities in the tax year that this realignment takes place. HMRC have agreed that these additional liabilities can be spread over five years.

Planning note: There is nothing in the legislation to stop self-employed traders considering this change and moving to an actual basis before the transitional year 2023/24. We recommend that a planning exercise be carried out to clarify the timing of the best-fit option to keep any tax increases to a minimum.

The present 19% rate of Corporation Tax applies to all companies whatever their size.

From 1 April 2023, this flat rate will cease to apply and will be replaced by variable rates ranging from 19% to 25%.

A small profits rate of 19% will apply to companies whose profits are equal to or less than £50,000.

The main Corporation Tax rate is increased to 25% and will apply to companies with profits in excess of £250,000.

Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25% reduced by marginal relief. The marginal relief acts to adjust the rate of tax paid gradually increasing liability from 19% to 25%.

Planning note: Unfortunately, these bands – the £50,000 and £250,000 limits – are reduced if a company has associated companies or an accounting period of less than 12-months.

An associated company is loosely defined as a company in common ownership.

For example, if you have one company with taxable profits of £40,000 and one company with taxable profits of £5,000, the company with the taxable profits of £40,000 will not benefit from the small profits rate as the profits are above the lower limit of £25,000 that applies to a company with one associate. Merging the companies will mean that there is only one company and the combined profits of £45,000 will be charged at the small profits rate of 19%.

Readers with a number of associated company businesses could benefit from a review prior to April 2023 to see if overall tax liabilities can be reduced by restructuring.

Self-Assessment taxpayers have until 1 April 2022 to pay their tax bill for 2020-21 or set up a payment plan to avoid incurring a penalty.

A payment plan, if agreed with HMRC, will allow a taxpayer to spread the cost of their bill into manageable monthly instalments.

The online Time to Pay service is available for businesses and individuals who have filed their Self-Assessment tax return and owe up to £30,000. They can set up a payment plan online at GOV.UK without speaking to HMRC.

If taxpayers owe more than £30,000, or need longer to pay, they can call the Self-Assessment payment helpline on 0300 200 3822.

The Self-Assessment deadline was 31 January but, this year, HMRC gave customers extra time to file and pay their 2020-21 tax return and not face penalties.

More than 11.3 million customers filed by 28 February, with one million of those taking advantage of the extra time by filing their tax return in February.

Customers can make secure Self-Assessment payments through the HMRC app by either connecting to their bank to make their payments or paying by Direct Debit, personal debit card or corporate/commercial credit/debit card.

A full list of the payment methods customers can use to pay their Self-Assessment tax bill is available on GOV.UK.

HMRC has urged everyone to be alert if they are contacted unexpectedly by someone asking for money or personal information. Taxpayers should always type in the full online address www.gov.uk/hmrc to get the correct link for filing their Self-Assessment return online securely and free of charge. HMRC sees high numbers of fraudsters emailing, calling or texting people claiming to be from the department. If customers are in doubt, do not reply directly to anything suspicious, but contact HMRC straight away and search GOV.UK for ‘HMRC scams’.

Further information:

Interest has been applied to all outstanding balances owing to HMRC since 1 February.

A 5% late payment penalty will be charged if tax remains outstanding, and a payment plan has not been set up, by midnight on 1 April 2022. Further late payment penalties will be charged at the usual 6 and 12-month points (August 2022 and February 2023 respectively) on tax outstanding where a payment plan has not been set up.