The Tax Round: Spring edition 2023

Rayner Essex welcomes you to the Spring edition of the Tax Round, where we bring you the latest tax news, insights and updates, that we hope you’ll find interesting. We have also included some important key diary dates to be aware of, over the next month or so.

In this Spring edition:

Our tax articles include the following:

• Director remuneration takes a hit: planning era starts now
• Making Tax Digital the major rethink
• What can HMRC’s app do?
• A change that could mean higher tax bills for sole traders and partnerships
• Mistake on VAT return? What to do next
• Autumn Statement see-saw for Research and Development tax relief
• Year end Tax Planning Guide
• How do tax codes work and what do they mean?
• How to pay tax as a sole trader: everything you need to know

Should you require any further guidance on any of the topics covered in this newsletter, or for any other questions relating to tax and accounting matters, do get in touch with Mark Moore or Marina Trinchese who will be happy to assist you. 

We are looking forward to also informing you of the upcoming Spring Budget news on the 15th of March so stay tuned!
Happy reading!

Director remuneration takes a hit: planning era starts now

Changes announced in the Autumn Statement will be keenly felt by many company directors, especially where profit extraction has traditionally relied on a strategy of low salary and higher dividend payment.

The freezing of the income tax personal allowance is one major factor. This is now set at £12,570 until 5 April 2028. The UK higher rate threshold is also frozen at £37,700 for the same period. From 6 April 2023, the income tax additional rate threshold falls from £150,000 to £125,140. These are measures which will push many directors into higher rates of tax. The position is different in Scotland, where the higher and top rates increase to 42% and 47% from 6 April 2023; the starter, basic, intermediate and higher (£31,093) rate thresholds are frozen, and the top rate threshold falls to £125,140. 

Of particular importance in a company remuneration context, the Dividend Allowance is being significantly reduced. From 6 April 2023, it falls to £1,000, from the current £2,000. From 6 April 2024,the axe falls again, with a drop to £500. All these developments fundamentally reshape the outlook for tax, and are likely to require a review of remuneration strategy.

This is the more so, given the impact of other recent tax measures, notably the increase in the tax rate on dividends. Originally part of the Health and Social Care Levy (HSCL) package, the higher tax rate remains, though the HSCL has been dropped. This means that the increased dividend rates (8.75% basic rate; 33.75% higher rate; and 39.35% additional rate) continue to apply after 5 April 2023. The rates apply across the UK, including Welsh and Scottish taxpayers. The increase in corporation tax to 25% from 1 April 2023 may need to be factored into calculations – though this is not something that will necessarily mean change for smaller companies. Companies with profits of £50,000 or less will pay the small profits rate of 19%. Those with profits between £50,000 and £250,000 will pay at the main rate of 25%, reduced by a marginal relief. Where there are associated companies, however, these thresholds may be reached sooner. In this period of change, advice on remuneration planning is strongly recommended. Strategies include last-chance use of rates and allowances before 5 April 2023, and assessment of the relative merits of dividend and bonus payments. There may also be the possibility of what is called ‘leapfrogging’ – varying profit extraction year on year in order to access lower tax bands. We are always available to help you review your options.

Making Tax Digital major rethink

Making Tax Digital for income tax (MTD ITSA) has been postponed again. It will not now be mandated for any taxpayer until April 2026. An announcement on 19 December 2022 set out a revised timetable, along with other changes. The logic is that this gives all parties longer to prepare in challenging economic conditions.

Self-employed businesses and landlords with qualifying annual income over £10,000 were expected to enter MTD ITSA in April 2024; with most partnerships entering in April 2025. This will not now happen. Landlords and businesses instead enter MTD ITSA, and a new points-based penalty regime, in stages, according to income. HMRC has reconsidered the income thresholds involved, which are now as follows:

• April 2026 entry for self-employed individuals and landlords with income over £50,000
• April 2027 entry for self-employed individuals and landlords with income over £30,000.

HMRC will review whether MTD ITSA can be designed to work appropriately for those under the £30,000 threshold. This is a first indication that such businesses may perhaps not be required to enter MTD ITSA in its current format. Partnerships are still expected to join ‘at a later date’ but no further detail has been given. We will continue to update you as information becomes available.

What can HMRC’s app do?

HMRC’s app has been revamped in a move to push traffic online. Improved functionality lets you see, for example, your tax code, National Insurance number and, for those in self assessment, the Unique Taxpayer Reference. You can use it to update your postal address; renew tax credits or report changes; and keep track of any correspondence with HMRC. You can also see HMRC’s estimates of the tax you owe under self assessment or PAYE; register for self assessment and make self assessment payments.

For PAYE taxpayers, the app gives access to HMRC’s figures for your income from employment for the current and previous five years. Details can be printed or downloaded: for employers working on pre-employment checks with a new member of staff, that’s potentially far more efficient than phoning HMRC and waiting for information by post.

The app can be downloaded from the App Store for iOS and from Google Play Store for Android. For first-time access, Government Gateway (GG) user ID and password are needed to sign in. After the first sign-in, access requires only a 6-digit PIN, fingerprint or facial recognition.

A change that could mean higher tax bills for sole traders and partnerships

The procedure for assessing when trading profits are taxed is changing radically. The change means a major overhaul for unincorporated businesses using anything other than 31 March or 5 April as their accounting date. Businesses with year ends between 31 March and 5 April, however, will not be affected.

The procedure for assessing when trading profits are taxed is changing radically.

The change means a major overhaul for unincorporated businesses using anything other than 31 March or 5 April as their accounting date. Businesses with year ends between 31 March and 5 April, however, will not be affected.

Underlying period of assessment changes

The change is called basis period reform. Essentially, it means there’s a different time period underpinning the tax assessment. Using the new tax year basis, tax calculations will apportion accounting profits to the tax year (unless the accounting year ends between 31 March and 5 April). They will have no direct link to a business’ accounting year end.

Bringing profits into tax faster

Change starts in the new tax year, 6 April 2023. 2023/24 is a transition year, in which a longer period of profits falls to be taxed. Rather than assessing to tax just the profits for the 12 months of the usual accounting year, profits for the period to 5 April 2024 are also included. In other words, the timescale for taxing those particular business profits is accelerated. Many businesses will benefit from the automatic application of what is called spreading relief, which means that 20% of the ‘additional’ transitional profit will be taxed in 2023/24, with the balance spread over the following four years. Provisions exist to minimise the impact on benefits and allowances, such as liability for High Income Child Benefit Charge, and we can advise on the likely impact in your circumstances.

How it works

Telemachus Takeaway uses 31 December as its year end. To enter the new tax year basis, in the transition year 2023/24, it’s assessed on these profits (assuming use of spreading relief):

In calculating the transition part, businesses will be allowed to deduct any overlap relief for historic profits taxed twice on commencement of trade, or change of accounting date under the current basis period rules. Although the default is to spread the transition part over five years from 2023/24 (as in the example above), it will be possible to elect to bring profits into charge sooner. This calculation can be complex, particularly in situations where there is a loss.

Permanent change

Quite apart from the issue of potentially higher tax bills in the shorter term for businesses whose year ends do not fall between 31 March and 5 April, the new basis of assessment brings permanent change to procedure.

With effect from 2023/24, taxable profits for such businesses will have to be calculated by apportioning profits for the accounting periods either side of the tax year. To do so, accounts preparation will need to follow swiftly at the end of the accounting period. The use of provisional figures, followed by the filing of amendments, will be required where year ends do not permit accounts to be finalised before tax returns are submitted. The issue will be most acute for businesses with year ends later in the calendar year, such as those with accounting dates after 30 September.

Meeting the challenge

The change is likely to add considerably to the admin burden for unincorporated businesses without a year end between 31 March and 5 April. Changing the accounting year end to align with the tax year may be advantageous in some circumstances. Many businesses may also benefit from planning around cash flow to meet higher tax bills. We should be pleased to discuss the new system with you, and help you plan how best to meet the challenge.

Mistake on a VAT return? What to do next

The basic divide is between errors that need to be reported to HMRC in their own right, and errors that can simply be corrected by making adjustments to the next VAT return. Time is always of the essence with VAT. Put right anything that’s amiss as soon as it comes to light in order to keep out of the penalty regime.

For errors that need to be reported, HMRC has a new online VAT Error Correction Notice (VAT652) online form. It doesn’t replace the print and post form, which is still available. The online form, however, is now HMRC’s preferred route.

It can be used by signing in through Government Gateway or email address. If using the email option, a security code is sent to the email address given. Having signed in, details of the error can be provided, and HMRC will acknowledge receipt with a notification and unique reference number. New features include the ability to upload supporting documents, such as calculations or explanatory letters, and the ability to save and complete the form later.

But not every error needs to be notified in this way. Non-deliberate errors can be corrected on the next VAT return if either:

Be aware though, that for penalty mitigation purposes, a correction on the VAT return is not sufficient disclosure. This means that there may also still be a need to inform HMRC separately of the error.

Autumn Statement see-saw for Research and Development tax relief

Tax relief for Research and Development (R&D) expenditure changes from 1 April 2023.

Relief under the hitherto particularly generous, small and medium- sized enterprises (SME) scheme goes down. Relief for the Research and Development Expenditure Credit (RDEC) goes up.

The deduction rate for qualifying expenditure under the SME scheme drops to 86% from 130%. The SME cash repayment credit, which can be claimed for surrenderable losses, falls to 10% from 14.5%. On the other hand, RDEC, used mainly by larger companies, rises to 20% from 13%.

The rebalancing is driven by government fears around abuse and fraud under the SME scheme, and starts to close the gap between the two schemes. It means that from next year, an R&D-qualifying spend of £100 will generate £15 tax saving under the RDEC scheme, and £21.50 under the SME scheme (assuming a 25% corporation tax rate). This contrasts with the current regime: with corporation tax at 19%, the saving would be £10.53 under RDEC at the current rates, and £24.70 under the SME scheme. The government has stated that this ‘improves the competitiveness of the RDEC scheme, and is a step towards a simplified, single RDEC-like scheme for all.’

Despite these developments, appropriate use of R&D tax relief can still contribute significantly to business cash flow and liquidity. We should be pleased to help you explore its potential for your company.

Year-end Tax Planning Guide

If you haven’t already reviewed our tax planning guide, take a look now to gain new strategies that can help you to take advantage of quick-win opportunities with current tax allowances, reliefs and tax bands prior to the changes in the new tax year. Take a deep dive and download the complete year-end tax planning guide now.

How do tax codes work and what do they mean?

Tax codes are confusing enough at the best of times, but they are an important part of your payslip. Being on the wrong tax code could see you paying far too much tax or not enough, meaning you’ll owe HMRC further down the line. So, it’s very important to understand your tax codes.

What are tax codes?

A tax code is a series of numbers and letters that are printed on your payslip. Your tax code tells your employer how much income tax and National Insurance to deduct from your salary. Your tax code also includes your personal allowance (PA), which is the tax-free portion of your income. Find out all about tax codes and what to do should you have the wrong tax code. Find out more.

How to pay a sole trader: everything you need to know

If you’re a sole trader, then you’re not employed by an employer, which means you don’t receive a traditional salary, instead you pay yourself from your earnings. As a result, your tax isn’t automatically deducted, which means you need to register and pay tax on your earnings. 

How do I register for tax as a sole trader?

To register as a sole trader, you need to tell HMRC that you pay taxes through self-assessment and file a tax return every year. You can register for self-assessment on the GOV.UK website, the form is easy to fill in and can either be done online or by post. Once you’ve completed the registration process, HMRC will send you a 10-digit Unique Taxpayer Reference and an activation code for your online account. You can now log into your online account and complete your annual self-assessment tax return in order to calculate how much tax you owe. Find out more.

Key dates to be aware of:

15 March 2023
The budget statement by Chancellor Hunt. 

6 April 2023
The start of the new 2023/24 tax year.

30 April 2023 
The deadline for submitting 2023/24 ATED returns to HMRC and pay any tax due.

Guest Authors for our Spring Tax Round

Should any of our associates , clients or contacts be interested in writing content for our next Summer edition of the Tax Round, get in touch with Jenny Tryfonos and we will be happy to discuss your contribution as a guest author. Or if you’re interested in gaining more information on any of the above matters, or want to discuss your personal situation, please contact our tax team, where we will be happy to assist you.