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.

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.

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.

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.

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 - 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.