TAX BRIEFING SEPTEMBER 2021.
GOING DIGITAL IN ADVANCE OF MTD
From 6 April 2023 all unincorporated businesses will have to keep their
business records in a digital format and submit quarterly reports
derived from those records to HMRC using MTD-compatible software.
These are the basic obligations under making tax
digital for income tax self assessment (MTD ITSA).
The start date of MTD ITSA is less than two years away
so it is a good idea to start preparing now. However
this digitisation is not as daunting as you may think.
Spreadsheets qualify as a digital format and HMRC
will continue to accept them as a digital record for the
foreseeable future. A taxpayer who records all of their
business income and expenses on a spreadsheet and
uses bridging software to read the relevant totals from
that spreadsheet and submit them, without rekeying,
to HMRC will meet their MTD ITSA obligations.
More complex businesses may find that they need to
link several pieces of software to comply with the MTD
regulations.
Example: a car hire
firm has an automated
booking system that
generates the order
and sends the invoice
to the customer. It uses
a separate system to
record the expenses of
the business. Under MTD the booking system needs to
be digitally linked to the expenses recording system,
perhaps by both systems being digitally connected to
the accounts production software which also submits
the MTD reports to HMRC.
We can advise you on the different forms of accounting
software that can help your business get ready for
MTD when it starts in 2023.
We can advise you
on the different
forms of accounting
software that can
help your business
get ready for MTD
CHANGE TO TAX YEAR BASIS
Unincorporated businesses which draw up accounts to a
date other than on or between 31 March or 5 April may
need to prepare for larger than normal tax bills for 2022-23.
This is because the Government is proposing a change
to the basis on which profits are taxed, from the
'current year basis' to the 'tax year basis' in 2022-23,
ready for MTD for income tax to commence on 6 April
2023. This proposed change will not affect companies.
For example, the Hill Farm partnership's accounting
year ends on 30 September. In the tax year 2021-22
the Hill Farm partners are taxed on the profits for
the accounting year to 30 September 2021. For the
tax year 2022-23 the partners would have to report
to HMRC the profits arising in the 18-month period
from 1 October 2021 to 5 April 2023, the usual twelve
months to 30 September and the extra period to the
end of the tax year.
From this total, overlap profits can be deducted to
calculate a liability for the year. Where this
results in extra profits
being taxed compared to what would have been
taxed in a normal year, those excess profits can be
spread over a maximum of five years.
HMRC is not asking businesses to change their
accounting year end. But where the accounting period
does not match the tax year, an apportionment of
profits from two sets of accounts will be needed to
calculate the figures required for each tax year. It may
therefore be easier to draw up accounts to the tax year
end (or to 31 March).
These figures and associated potential year end
change will need to be considered in detail and we
will be happy to talk you through which options
are likely to be best for you.
CHECK YOUR TAX CALCULATION
I
ndividuals who are taxed under PAYE and who do not
complete an annual tax return may receive a tax calculation
(on form P800) from HMRC covering the previous tax year.
If you have received such a tax calculation, please
check it carefully and send a copy to us to check it for
you. HMRC does make mistakes and the computer
generated calculation may contain structural errors.
A common error is where the taxpayer
has significant savings or dividend
income in addition to some salary or
pensions income. In this case the savings
rate band (0% tax on up to £5,000 of
savings) and the savings allowance (0%
tax on up to £1,000) may both come into
play.
The law allows the taxpayer to set their personal
allowance against their income in any order, as best
suits the individual, and to take advantage of these
two reliefs for savings. However the PAYE computer
has been programmed to allocate the personal
allowance in this order:
- non-savings income (employment, profits and
pensions);
- savings income;
- dividends.
It may be better for you to set your
personal allowance first against nonsavings income and then against
dividends, before savings income, to
leave the maximum amount of savings
to be covered by the savings allowance.
We will be able to check whether the
HMRC calculation is in your favour.
Such an error may have existed for some years, so
if it applies to you we will help you review your tax
position back to 2015-16.
The law allows
the taxpayer to
set their personal
allowance against
their income in
the best order
MONEY BACK FOR WORKING FROM HOME
If an employer has asked an employee to work from their own home, it can pay a
tax-free allowance of £6 per week to compensate for any additional costs incurred.
These costs may include additional electricity, gas or water consumed while at home in working hours. If the
employee is using their own telephone, the employer can also reimburse for the cost of business calls made.
Where the employer does not pay a working from home allowance and the employee does not have a choice
about working from home for some of the working time, the employee can claim the working from home
deduction of £6 per week from HMRC (see: www.gov.uk/tax-relief-for-employees/working-at-home).
Anyone who made a claim for the working from home allowance for the tax year 2020-21, if they are still working
from home, can make another claim now for the tax year 2021-22.
The working from home deduction is worth £1.20 per week in cash terms for basic rate taxpayers and £2.40 per
week for higher rate taxpayers.
HOW TO GET AN INCOME TAX REFUND FROM LOSSES
Many businesses have made large losses in the tax year 2020 -21 which have
eclipsed the profits made in the previous year and even the year before that.
Those pandemic trading losses can be used to
generate a tax refund by setting them against profits
made from the same trade up to three years earlier.
To calculate the trading loss to carry back you need
to include any Covid-19-related grants received,
such as SEISS, CJRS, or business support grants. The
SEISS grants are treated as part of your income for
the tax year in which they were
received. The first three SEISS grants were paid in
2020-21 so must be set-off against the trading loss
from that year.
You can make a standalone claim to carry back losses
as soon as your accounting year has
finished and we can help you with that. You do not have
to wait until you have all the other details
required for your 2020-21 tax return to
claim the loss.
The claim can set the loss against profits
in all three tax years: 2019-20 to 2017-18
but the set-off must start with 2019-20
with only unused losses being carried
back further.
There are some additional conditions to
meet in certain sectors. All businesses
need to show that losses arose from a
commercial trade which was carried on
with a view to making a profit. Losses
from letting property cannot be carried
back at all.
Carrying back the loss does not actually
change the figures on your tax returns for
the earlier years. Instead the loss set-off
creates a standalone tax credit for you to
use in the current year.
You do not
have to wait
until you have all
the other details
required for your
2020-21 tax return
to claim the loss
HOW TO CARRY BACK CORPORATE LOSSES
If your company suffered badly under the Covid-19 pandemic
you can at least claim a tax repayment where the accounts
show a loss and the company made profits in earlier years.
Where the loss exceeds the profit made in the previous year, the excess loss can be carried back to set against
profits from the two preceding years. This extended loss carry-back only applies to losses arising in accounting
periods that end between 1 April 2020 and 31 March 2022. The amount of losses that can be carried back is
capped at £2m per year of loss.
In certain situations you do not have to wait until the corporation tax return is finalised for the loss period to
make a claim. Claims for the two earliest years exceeding £200,000 must be made in the corporation tax return.
HMRC has opened an online portal to claim those corporate losses and we can help you make that claim. Ideally
the finalised and approved company accounts would be submitted with the loss claim but if final accounts are
not available management accounts for the loss period will do.
Where the company is part of a group a nominated group company must submit a written loss carry-back
allocation statement showing which companies in the group are claiming the allowable losses.
SUPER CAPITAL ALLOWANCES
Companies can now claim 'super' capital allowances on the purchase of new
machinery and plant and to a lesser extent on certain new fixtures and fittings.
These super allowances give the company
a deduction of 130% of the cost in the year
of purchase for plant and machinery and
a 50% deduction for the cost of qualifying
fixtures and fittings within commercial
buildings. We can help you to determine
which fixtures will qualify.
If your company is about to purchase a
new delivery van for £50,000 it will be able to claim
a deduction against profits of £65,000 in the year of
purchase. But beware; the super allowance cannot be
claimed in the year the business stops trading.
There are strict conditions for these new allowances;
the main one being that the item acquired must be
brand new (not second-hand) and cars do not qualify.
Also, the equipment must not have been acquired in
order to be hired-out.
The super capital allowances only apply
to expenditure incurred by companies
between 1 April 2021 and 31 March 2023.
The main corporation tax rate is due to
increase to 25% on 1 April 2023 and this
allowance is an incentive to invest before
that date.
Unincorporated businesses cannot claim
the super capital allowances but they can claim the
100% annual investment allowance on most items of
plant and equipment, including on the purchase of
second-hand equipment.
You need to be able to identify separately each item
which was subject to a super capital allowance claim
as if it is sold later
These super
allowances give
the company a
deduction of 130%
of the cost in the
year of purchase
WHAT TO INCLUDE ON YOUR VAT INVOICE
H MRC will block recovery of VAT on invoices that do not
clearly state what goods or services were supplied.
We have heard that HMRC officers are using this
power to query the validity of invoices, particularly
in the construction sector and from employment
agencies.
Where your business supplies labour or staff your
customers will be rightly annoyed if HMRC says
that they cannot reclaim VAT because your invoice
description was not detailed enough.
An invoice for labour should, as a minimum, state
the number of workers; the number of hours (or
days) worked; the dates of the work; and the site
address where the workers were supplied. HMRC
would also like the invoice to include details of
the nature of the work undertaken but this can be
provided by way of a
cross reference to other
documents such as
timesheets that show
the workers' names or
supporting schedules
detailing what was
done.
To avoid HMRC
raising questions
about your sales
invoices, populate
your invoices with
a little more detail
VAT CHANGES FOR HOSPITALITY SECTOR
The hospitality and tourism sector has been enjoying
a reduced rate of VAT (5%) since 15 July 2020.
This rate applies to most supplies made by hotels, tourist attractions, members'
clubs and most events venues. It also applies to the food and drink served in
those premises and hot takeaway food and non-alcoholic drinks.
From 1 October 2021 the 5% VAT rate will increase to 12.5% and on 1 April
2022 it will revert to the normal standard rate of 20%. These rate rises provide
hoteliers and event organisers with two opportunities to promote advance
payment for events, hotel rooms and even meals.
HMRC has confirmed that any advance payments or non-returned deposits
must carry VAT at the rate applicable when the payment is taken and not the rate applicable when the
event occurs or the room is actually used.
If a hotel sells tickets to its Christmas event at £180 per head (including 12.5% VAT of £20). It could
offer a £12 discount to those who pay in full for their tickets before 1 October 2021 as the ticket price
including 5% VAT is £168.
If a guest cancels their Christmas booking the hotel should give them a credit note based on the VAT
rate originally charged, or a full refund.
From 1 October
2021 the 5% VAT
rate will increase
to 12.5% and on 1
April 2022 it will
revert to the normal
standard rate of 20%
