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.