Business tax in 2023/24

 Like personal taxes, the planned business tax changes for 23/24 have been revised on several occasions and we could still see further alterations in the forthcoming budget. Fortunately we are only dealing with UK wide taxes for the most part which makes it a bit easier. Here's where we seem to be today.

The rate of Corporation tax for 23/24 will rise to 25% for companies earning over £250,000. Companies earning up to £50,000 pay 19% and a marginal rate will apply between £50,000 and £250,000. The effective rate of tax within this band is 26.5%.

The secondary threshold for National Insurance, like the primary threshold, has been frozen for the foreseeable future. This will result in significant real increases in NI payments from employers. Fortunately the primary threshold has been re-aligned with the income tax personal allowance which may allow for some increase in salaries for owner-directors. Sadly the amount of dividend these individuals can take tax free is dropping significantly.

Careful consideration of the remuneration packages for owner-directors will be needed especially for those companies close to, or within, the marginal rate of corporation tax where capital allowances may also be important to assist the maximisation of tax allowances and the minimisation of effective tax rates.

Personal tax in 2023/24

 You may well be confused about the likely tax changes which will have an effect in the new tax year - you are not alone. In the following paragraphs we'll try to summarise the main changes which are likely to occur - not with absolute certainty because we still have another UK budget to come and a Scottish budget to be confirmed!

Income tax bands and allowances have mostly been frozen for the foreseeable future in both Scotland and the UK. The only major change is the reduction in the amount of income you can earn before paying the top rate of tax - 45% in the UK and 47% in Scotland. This rate will come into play for taxable income above £125,140. Looks like a silly number but it has been set to coincide with the point at which the personal allowance has disappeared. No change in the main UK rates of tax but the Scottish higher rate should rise from 41% to 42% and the top rate from 46% to 47%.

Allowances and rate bands have also been frozen for National Insurance and for Inheritance tax but the annual allowances for dividends and capital gains will be cut. The CGT allowance drops in April from £12,300 to £6,000 then to £3,000 in April 2024. The dividend allowance drops from £2,000 to £1,000 in April then to £500 the following year. Don't be surprised if the tax free allowances for interest and others fall in April 2024 as well. The changes in CGT are likely to prove expensive and it may be beneficial to trigger some gains in the current tax year to utilise the current level of allowance.

Emergency Financial Statement

The Chancellor made a statement to Parliament containing a number of tax measures some of which were almost immediately effective with others planned for future dates. Subsequently he abandoned some of the future plans. Many of the proposals would, in any event, have had no immediate impact on the position in Scotland.

Income tax

The basic rate of income tax in will be reduced to 19% from April 2023. This will not affect Scotland where the starting rate is already 19% although the Scottish rates will be set later in the year and may also be altered. The proposal to abolish the 45% highest rate of tax has been abandoned for the moment. Again, this would not, of itself, have had any effect in Scotland.

Corporation tax

The proposal made by the previous Chancellor to increase the main rate of corporation tax to 25% has been abandoned. CT rates are set UK wide.

National Insurance

The increase of 1.25% in the NI rates for employees and employers which came into effect in April will be eliminated from 6 November 2022. The position regarding the rates to apply at various dates in the year along with the relevant thresholds are complicated. An average rate will be applied for directors who are subject to an annual basis of charge to NI and a similar proportionate rate applied for Class 4 NI.

Annual Investment Allowance

The AIA will, contrary to previous announcements, remain at £1m from April 2023 to April 2024.

SDLT

The threshold for SDLT has been doubled. This only applies to transactions in England and Wales. No changes have yet been announced for Scotland.

Dividends

The rate of tax on dividends was increased by 1.25% in April 2022. This will be removed from April 2023. It may be beneficial, where possible, to delay payment of dividends to avoid the additional rate.

Capital allowances

The Annual Investment Allowance (AIA) of 100% has now been retained until at least 31 March 2023. Up to £1m per year of capital expenditure can benefit from the allowance. This figure could well fall again in 2023 but much will depend on the economic growth in the coming year. At least we are no longer constrained by EU rules which prevented the AIA from being sustained at this high level of expenditure for a long period.

It is worth noting the the current "Super Deduction" of 130% is also available until March 2023 on main rate assets (plant and machinery, commercial vehicles etc) and a 50% deduction available for special rate assets. Do keep in mind that expenditure on cars does not qualify for any of these allowances.

Losses

Extended carry back

If your business has been adversely affected by the Covid-19 pandemic resulting in a loss, you may be able to benefit from the extended carry-back provisions to generate a tax repayment.

For income tax purposes, losses for 2020/21 and 2021/22 can be carried back for up to three years (to the extent that the loss has not been relieved against other income of the same or the previous accounting period).

For corporation tax purposes, a loss for accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back three years, rather than the usual one.

We can help ensure that you obtain the best possible relief for any losses that you have incurred.

Covid 19 Support

Late in 2021 both the UK and Scottish governments announced additional support for certain business sectors to counteract the impact of the latest coronavirus restrictions. Full details of much of the support has yet to be clarified but should be available mainly to businesses in the hospitality related sectors. Many small businesses will also, once again, be able to take advantage of the SSP refunds available during much of last year.

Budget 2022

In many areas of taxation it was very much "as you were" after the Budget announcements. In UK terms there were no changes to any of the main tax rates or allowances although in Scotland starter and basic rate bands are due to increase in line with inflation. The changes to national insurance and dividend taxes to fund the social care levy had already been announced and these will result in the a substantial tax increase over the coming year. On the positive side, the Annual Investment Allowance which should have been reduced to £250,000 from 1 January 2022 has been maintained at its current level of £1m until at least 31 March 2023.

Making Tax Digital

Extension of MTD for VAT

VAT-registered traders whose vatable turnover is over the VAT registration threshold of £85,000 must comply with the requirements of Making Tax Digital (MTD) for VAT. This means that they must keep digital records and file their VAT returns using MTD-compatible software.

Currently, VAT-registered businesses whose turnover is below the VAT registration threshold do not have to comply with MTD for VAT, but can do so if they wish. However, this will change from April 2022 as MTD for VAT is being extended to all VAT-registered businesses.

VAT-registered businesses whose turnover is below the VAT registration threshold and who have not joined MTD for VAT voluntarily, will need to join MTD for VAT from the start of their first VAT accounting period beginning on or after 1 April 2022.

MTD for income tax delayed

Self-employed businesses and landlords with annual business or property income of more than £10,000 were due to be brought within MTD for income tax from April 2023. To give businesses more time to recover from the pandemic and to prepare for MTD for income tax, this will now not come into effect until April 2024.

Under MTD for income tax, landlords and self-employed businesses within its scope will need to keep digital records. They will also be required to send quarterly summaries of income and expenditure to HMRC using MTD-compatible software and will receive an estimated tax calculation after each submission. The quarterly submissions will be followed by a final end of year submission to take account of necessary adjustments, and a final declaration. This will replace the annual self-assessment tax return.

Basis period reform

In preparation for the introduction of MTD for income tax, HMRC have consulted on proposals to reform the basis period rules. This entails replacing the current year basis, under which businesses are assessed for a tax year on the profits for the accounting period ending in that tax year, with a tax year basis, whereby profits for the tax year are assessed in that year.

It was originally proposed that the tax year basis would apply from 2023/24, with 2022/23 being a transitional year. However, the start date has now been delayed, and the reforms will apply no earlier than 2024/25, with transitional rules applying no earlier than 2023/24.

Capital allowances

End of AIA transitional limit

The Annual Investment Allowance (AIA) provides a deduction of 100% of the expenditure in the period in which it was incurred, up to the level of the available AIA limit. The AIA limit was increased from its permanent level of £200,000 to £1 million for a temporary period of three years, from 1 January 2019 to 31 December 2021. The limit reverts to £200,000 from 1 January 2022.

If you are planning capital expenditure in excess of £200,000, if funds permit, you may wish to incur the expenditure before 31 December 2021 to take advantage of the higher AIA limit.

It should be noted that transitional provisions apply where the accounting period spans 31 December 2021 – the AIA limit for the period reflects the proportion falling before 1 January 2022 for which the limit is £1,000,000 and the proportion falling after this date, for which the limit is £200,000. However, there is a trap in that an additional cap applies to limit the amount for which the AIA can be claimed in respect of expenditure incurred on or after 1 January 2022. This means that relief may not be available in full for post-31 December 2021 expenditure, even if the expenditure is less than the total AIA limit for the accounting period.

Super-deduction and new first-year allowance

Companies are able to benefit from two additional first-year allowances for qualifying expenditure incurred in the period from 1 April 2021 to 31 March 2023.

The first is a super-deduction available for most expenditure that would otherwise benefit from main rate writing down allowances at the rate of 18%, although cars are excluded. Where the expenditure qualifies for the super-deduction, the first-year allowance is given at the rate of 130% of the qualifying expenditure. A balancing charge may apply on the disposal of the asset.

Where available, the super-deduction is advantageous and will provide a better rate of relief than that given by the AIA.

The second temporary allowance is a 50% first-year allowance for qualifying expenditure that would otherwise qualify for a writing down allowance at the special rate of 6%. The first-year allowance is given at the rate of 50% of the qualifying expenditure. It is not available for expenditure on cars. As with the super-deduction, a balancing charge may apply on the disposal of the asset.

SSP & Self-isolation

Close to the start of the pandemic the rules regarding the payment of SSP were relaxed in relation to coronavirus absences and a rebate scheme introduced to help small employers recoup some of the costs of SSP. A "coronavirus absence" does not mean that the employee must be infected with coronavirus and includes periods of self-isolation resulting from contact with someone who has tested positive or prior to surgery. Note that self-isolation resulting from returning from another country does not count as eligible. The usual 3 waiting days are ignored but a period of incapacity for work (PIW) must still exist to be eligible.

An employer (with less than 250 employees) can claim up to 2 weeks SSP per employee in respect of coronavirus absences. At current rates this amounts to a maximum of £192.70 per employee. The 2 week limit applies for the duration of the scheme not for each tax year that it covers.

Note that the scheme has been closed on 30 September 2021. Only claims for absences between 13 March 2020 and 30 September 2021 will be eligible.

Health & Social Care Levy

Earlier this week the Government announced the introduction of a 1.25% levy for health and social care. This will be collected via an increase in National Insurance rates for 2022/23 and thereafter through a separately identified levy alongside NI. This increase will be applied to both employees and employers so is effectively a 2.5% increase in the overall NI charge. It is not yet known over what precise band of income the rates will be applied but, based on current rates, it would apply to earnings above £184 per week for employees and over £170 per week for employers.

No announcement has been made regarding Class 2 NI for the self employed but Class 4 will increase by 1.25%. There will also be an increase in the tax on dividends of the same amount bringing the basic rate charge up from 7.5% to 8.75% with higher rates also increasing. These changes will also apply from April 2022 onwards, not to the current tax year.

SEISS - Final grant

The Self-Employment Income Support Scheme has now reached the stage of the fifth, and final, grant. Whilst the eligibility criteria remains the same as for previous grants there are now two levels of grant depending on a turnover test. Where turnover has fallen by 30% or more a grant of 80% of three months average trading profits up to a cap of £7,500 is payable. Where turnover has fallen by less than 30% the grant is restricted to 30% of average profits capped at £2,850.

For all businesses, other than those who started trading in 2019/20, it is necessary to compare the turnover for the pandemic period with the reference period. The pandemic period is the period of twelve months from April 2020. The reference period is usually the turnover for the tax year 2019/20. In exceptional cases it may be possible to use the 2018/19 figures where the 2019/20 figures are not representative.

For those who started trading in 2019/20 no turnover test is necessary and 80% of average profits for three months (capped at £7,500) will be paid. Be aware that the start date is not taken into account so the average may be rather lower than expected.

Self-employment Income Support Scheme

During April you should be contacted by HMRC to let you know that you are eligible for the fourth instalment of the SEISS grant covering the period from 1 February to 30 April 2021. Eligibility criteria for this is different from the first three tranches but the amount due is similar.

To be eligible you must be self-employed or a member of a partnership and have traded in both 2019/20 and 2020/21. Your 2019/20 tax return must have been submitted by 2 March 2021. You may currently be trading but your demand has been reduced due to coronavirus or you may be temporarily closed due to coronavirus. You must declare that you intend to continue trading and your trading profits will be significantly reduced.

To be eligible for the grant your trading profits must be less than £50,000 and at least equal to your non-trading income. HMRC will look at the figures on the latest return but will also consider previous years if necessary to assess eligibility.

The grant will be calculated at 80% of 3 months' average trading profits, capped at £7,500 in total. HMRC will use up to 4 years of submitted tax returns to calculate average trading profits.

As with the previous grants you will need to make the claim yourself through the appropriate portal. Guidance is provided on the gov.uk website if you are in doubt. If you are not contacted by HMRC in the coming weeks but think you should be eligible please get in touch with our office.

Capital Allowances - "Super Deduction"

In an effort to boost corporate capital expenditure in the coming months, the Chancellor announced a new "super deduction" for certain types of asset acquisitions. Expenditure on new assets incurred between 1 April 2021 and 31 March 2023 which would usually qualify for the writing-down allowance of 18% (up to 100% if under the Annual Investment Allowance) will be eligible for a first-year allowance of 130%. Certain types of assets are excluded from the allowance, including cars, but expenditure on computers, office furniture, commercial vehicles, and machinery will qualify. Unlike the AIA there is no limit to the amount of expenditure which can be claimed. Contrary to some initial reports, the allowance appears to only be available to companies subject to corporation tax not to unincorporated businesses.

The effect of the allowance is to provide tax relief at a rate of 24.7% which perhaps provides us with a clue as to why the allowance has been introduced and why it only applies to companies. The rate of corporation tax for larger companies rises to 25% on 1 April 2023 and, without this allowance, it might have been in the interests of such organisations to delay capital expenditure until they could obtain a 25% tax deduction rather than 19% - or am I a cynic?

There are complex rules for accounting periods which straddle 1 April 2023 and special provisions for balancing charges on assets which benefit from the allowance and are then sold before 1 April 2023 or during a period which straddles that date. Careful thought and expert advice are needed.

In conjunction with the super allowance a new 50% first-year allowance has been introduced, for the same period, applying to assets which would normally be eligible for the special allowance rate of 6%. This applies to items such as long-life assets, thermal insulation, and integral fixtures. This also looks generous but it may be more attractive to use the AIA of 100% where this is available.

The Budget - CJRS & SEISS

Coronavirus Job Retention Scheme

This scheme has been further extended until 30 September 2021. There will be no change to the amount payable to furloughed staff (80% up to a cap of £2,500 per month) but, from July, employers will be asked to make a contribution to the cost. This will amount to 10% in July and 20% in August and September.

Self-employment Income Support Scheme

It was announced in November that a fourth grant would be forthcoming under this scheme and this has now been confirmed. Eligibility for this grant (and the 5th instalment) will be based on the submission of the tax return for 2019/20 but otherwise on similar criteria to the previous tranches. The fourth grant will be 80% of average trading profits for 3 months up to a maximum of £7,500 - broadly in line with the payments under CJRS.

There will be a fifth grant, probably payable in July, covering the period from May to September. Not all the details are available but it appears that the maximum grant will be the same as before ie 80% of 3 months profits up to a maximum of £7,500. However this will only be payable to those businesses whose turnover has reduced by more than 30% between April 2020 and April 2021. If the reduction is less than 30% the payment will only be 30% of 3 months profits capped at £2,850. This seems, on the face of it, to be far less generous than the CJRS given that it only covers 3 months for a 5 month period and could be a much lower percentage.

The Budget - Personal & Business Tax

Here are a few highlights from the Chancellor's statement, we'll cover some of these in more detail once fuller information is available.

Personal tax

The personal allowance is determined for all of the UK and rises to £12,570 for 2021/22. The basic rate of tax for the UK remains at 20% with the higher rate of 40% kicking in at £50,270. Scottish rates start at 19% rising to 21% then up to 41% on income over £43,662. The difference is becoming quite noticeable.

The personal allowance will now be frozen until April 2026 as will the annual exempt amount for Capital Gains Tax (£12,300), Inheritance Tax thresholds, and pension allowances. Any inflation will erode the real value of these allowances probably by around 8-10% over the period.

Business tax

Corporation tax is to be increased to 25% from April 2023. This will not apply to companies with profits of less than £50,000 who will continue to pay 19%. There will be transitional relief for profits between £50,000 and £250,000.

There is a temporary adjustment to the rules for utilising trading losses incurred between 1 April 2020 and 31 March 2022. It will, in most cases, be possible to carry back these losses against profits of the previous 3 years, rather than the usual 1 year. This will apply to both incorporated and unincorporated businesses.

Purchases of new plant and machinery between 1 April 2021 and 31 March 2023 will qualify for capital allowances at a "super" rate of 130% instead of the usual 18% (or 100% if eligible for AIA). Items which would usually only qualify for a 6% WDA will get 50% instead.

The VAT threshold for registration is frozen at £85,000 until 31 March 2024. The current temporary rate of 5% for hospitality and tourism will stay until 30 September 2021 and will then rise to 12.5% until 31 March 2022.

Penalties for late returns

At the last minute it has been decided that HMRC will not impose penalties on late submission of self-assessment returns until 28 February. Taxpayers therefore have been given an extra month to complete and submit their returns and pay any outstanding tax. This will come as good news to some, hopefully not very many, of our clients. Interest will still accrue on any payments after the normal due date of 31 January.

Grants for taxis

The Scottish Government announced this week that funding had been made available through local authorities to provide grants of £1,500 to those who have registered taxis or private hire vehicles. The plan is that local authorities will contact those eligible to invite them to apply for the grant. I think, if it was me, I'd be getting in touch with my council to make sure I'm on the list.

Business Interruption Insurance

The ruling by the Supreme Court broadly in favour of the appeal brought by the FCA on behalf of a group of SME's may provide some small businesses with an unexpected financial lifeline. If you have tried to claim on your business interruption insurance as a result of the impact of Covid-19, but been rejected, now may be the time to try again.

It appears that a number of insurers were taking the view that many of these policies did not cover this unprecedented situation and it does seem that some did not. However, the court ruling does give hope that many policies will be valid and the insurers will have to pay out. If you have already made a claim the insurer should be getting back in touch with you but you may wish to make contact now and make sure you are in the queue.

Tax return records

As you know, from Boxing Day we will all be moving into Tier 4 of the Covid restrictions regime. This means that we will have to completely close our office once again and operate entirely from our various homes. This is not a massive change for most of our staff although we have relied on occasional office access to stock up on stationery, swap around client files, and collect/return client paper records. Any such access will be severely curtailed in at least the early part of January and this will make the completion of tax returns especially challenging.

Gathering the information from clients for the returns will be the biggest problem. If you can provide details in an electronic form that would be ideal. If you have records on paper then you may be able to scan or photograph the important stuff and send it attached to an email. If you can only provide the information on paper then it will have to be posted or delivered directly to one of us (hopefully someone will live in the same council area). Should you be in any doubt please give us a call and we'll try to find a practical solution.

We will be stopping work as usual over the festive period from Wednesday 23rd at lunchtime until Monday 4th January.