Capital Allowance Super-Deduction: Explained

Capital Allowance Super-Deduction explained

 

The Treasury announced on 3 March 2021 the introduction of a 130% Capital Allowance super-deduction as well as 50% first-year allowance (FYA) on special rate (SR) assets. These are just one of many incentives the UK government has used to improve business investment, so let’s take a comprehensive look at how businesses can take advantage of this.

 

What’s the rundown?

The new allowances, active from 1 April 2021 to 31 March 2023, are of immense benefit to businesses investing in qualifying equipment by giving them a high tax deduction in the tax year of purchase. They can also be used alongside the Annual Investment Allowance (AIA), which provides 100% relief on qualifying plant and machinery costs – which can go as high as £1m per business for the 2021 calendar year.

As this is an incentive to help companies reduce corporation tax bills, the super-deduction and SR are only available to companies paying corporation tax, so individuals, LLPs and partnerships cannot expect to benefit. It is also important to note that the contract for qualifying capital assets was entered after 3 March 2021, and the expenditure was made after 1 April 2021.

 

What are the qualifying investments?
  • Super-deduction includes all new plant and machinery that would otherwise qualify for the 18% main pool WDAs
  • SR allowances cover new plant and machinery that qualify for the 6% special rate pool (inc. long-life assets and integral building features)

Assets that have their own capital allowance rates (such as cars) or second-hand assets will not qualify for inclusion in the main or special rate pool. Leased plant and machinery are excluded from the capital allowance, as well as services that arise from the provision of the leased plant and machinery, such as operators.

It could be expected then that property groups or landlords who lease plant and machinery as part of property lease would be excluded from the capital allowance relief. The installation of integral features in a let building was of a particular point of interest. The May 2021 Finance Bill rectified these concerns by ensuring that property lessors were eligible to claim the super-deduction or SR on leased plant and machinery for a building. Allowances can be claimed if property lessors lease background plant and machinery which is essential to the function of a building (e.g. heating, ventilation, electrical systems).

 

How much relief can I claim?

There is no cap on the amount of capital investment that qualifies for both new allowances. In most cases, the super-deduction will be more beneficial for companies instead of claiming AIA for main pool assets. However, there may be an exception for small companies who may find that AIA is preferable over SR, but only if the total expenditure on special rate pool assets does not exceed £1m.

The table below details the effective relief rates for the capital allowance claims:

Class Capital Allowance claim Capital Allowance rate Asset type Effective relief cost (Y1)
Main plant and machinery Super-deduction 130% New 24.7%
AIA 100% All 19%
Main pool 18% Second-hand 3.4%
Special Rate AIA 100% All 19%
SR deduction 50% New 9.5%
Special Rate Pool 6% Second-hand 1.1%

 

What impact is there on disposals?

Expenditure and disposal valuation on plant and machinery is calculated in the usual manner, with the main difference being that the amount incurred on assets claimed as super-deduction or SR allowances acts as a balancing charge. As the FYA disposal values do not affect the main and special rate pools, a 25% corporation tax (as opposed to the normal 19%) is imposed on the charge if the disposal was made after 1 April 2023.

If the disposal was made before 1 April 2023, a calculation must be made for assets under which the super-deduction was previously claimed for. This means that the disposal value is equal to 130% of the asset sale. The main takeaway is that assets claimed as super-deduction or SR allowance must be continuously tracked until disposal, even if they are excluded from the main or special rate pool.

 

Can I set deductions against my losses?

The usual capital allowance rules still apply with the super-deduction and SR, so it is still possible to carry backwards (maximum of three years) or forwards in the interests of tax efficiency.

 

If you’re planning to make use of the super-deduction or SR allowances, get in touch with our team for all help and advice on capital allowance claims.

Health and Social Care Levy: Why are National Insurance rates increasing?

Health and Social Care Levy: Why are National Insurance rates increasing?

 WIM Accountants summarises the tax increases brought with the Health and Social Care Levy Bill

 

9 September was a day that shocked the nation, particularly lower-earning taxpayers when the Prime Minister announced a tax increase. National Insurance rates are set to rise along with dividend tax rates following the start of the 2022/23 tax year. Boris Johnson stated that the change would:

“[…] create a new UK-wide 1.25% health and social care levy on earned income, hypothecated in law to health and social care, with dividends rates increasing by the same amount. This will raise almost £36 billion over the next three years, with money going directly to health and social care across the whole of our United Kingdom.”

You can read more details about this legislation here.

 

From 6 April 2022

Class 1 and 4 National Insurance will go up by 1.25% as shown in the table below. Income Tax rates on dividends will also increase by the same amount to 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate). Class 2 and 3 NI are unchanged.

Class 1 Employee 13.25% Above £9,568 primary threshold
Class 1 Employee 3.25% Above £50,270 upper earnings limit
Class 1 Employer 15.05% Above £8,840
Class 4 Self-employed 10.25% Above £9,568 lower profits limit
Class 4 Self-employed 3.25% Above £50,270 upper earnings limit

 

From 6 April 2023

The National Insurance rates increase will be withdrawn but will be replaced by a Health and Social Care levy of 1.25%. This levy will be payable by employed and self-employed persons, including those above the state pension age.

The NI threshold of £9,568 and £8,840 (for individuals and employers respectively) are also liable to the levy and will be collected via PAYE or self-assessment.

 

Why have the government done this?

The government aims to raise approximately £11.4 billion over the tax year through the introduction of the increased NI rates, as well as an additional £600 million from increased income tax on dividends. These funds will be used to compensate departments working under the NHS, or other public sector Health and Social Care employers due to the increased workload resulting from the COVID-19 pandemic. More detailed figures will be published at the next Budget review.

What impact will this have?

Citing an HMRC policy paper published on 9 September, it is almost certain that the new changes will result in significant repercussions for earnings, inflation and company profits, to name a few. Employers should also expect to make key decisions regarding incorporation, wage bills and recruitment to mitigate damages brought by the tax rate increase.

Individuals with earnings in the basic rate band will see increased annual NICs of approx. £180, whilst higher rate taxpayers should expect a figure close to £715 added to their usual annual NICs. Actual losses will obviously vary, but this change will undoubtedly bring consequences to lower-earning families.

Businesses should prepare for one-off costs to updating systems to implement the 1.25% increase, but the customer experience should stay the same as the employer-HMRC interaction is mostly unaffected.

 

Will existing NIC reliefs still apply?

Employers can let out a sigh of relief as existing NIC reliefs will still apply after the levy has been implemented:

  • Companies employing apprentices under the age of 25, all individuals under the age of 21 and veterans are exempt from paying the levy on the above employees – provided their yearly gross earnings are lower than £50,270.
  • Freeport employers do not need to pay the levy if they employ freeport workers with less than £25,000 yearly gross earnings.
  • Employment Allowance also applies to the levy.

Wrap your head around PAYE

Wrap your head around PAYE

 

We’ve all seen the words PAYE pop up on our payslips, but how many actually know what PAYE means and how it works? Introduced in 1944, the ‘Pay As You Earn’ system is a method used to pay income tax and National Insurance Contributions (NICs) to HMRC from your employment income. Setting up PAYE for your company is relatively straightforward, you just need your PAYE reference number (which is sent to you by HMRC) and your 13-digit accounts office reference number.

Sounds simple so far, but there are a few more things to digest.

 

What’s included in PAYE?

On top of your income tax calculation and NICs, your deductions via PAYE may include:

  • Class 1A NI on termination awards and sport testimonials
  • Student Loan repayment
  • Construction Industry Scheme (CIS) deductions
  • Apprenticeship Levy (if you or your employer has an annual pay bill exceeding £3m)
  • Other money owed to HMRC, such as overpaid tax credits or tax debts

Employers can also register with HMRC for the inclusion of taxable benefits in an employee’s payroll.

PAYE is also used on pension income. As income from pension earnings is paid net, the tax owed will be collected by your pension provider to be sent to HMRC. In the event you have multiple pension providers (such as a workplace and private pension), you will be given the option to choose one provider from which HMRC will take out tax from.

 

How does PAYE operate?

The basis of PAYE relies upon reporting Real Time Information (RTI). Essentially this system works by requiring employers to report to HMRC every time they pay employees. In comparison to the old system, where reporting was done on an annual basis, RTI ensures that employees have their tax details logged regularly to HMRC. As a result, HMRC’s records are always up-to-date and the frequency of which a taxpayer is found to have overpaid or underpaid taxes reduced.

The RTI submission system is made up of the following processes:

  • Reporting: PAYE income and deduction details must be reported in the Full Payment Submission (FPS) on or before the payment date.
  • Payment: PAYE is due no more than 17 days after the end of the tax month. There is an exception in the case where total tax and NIC is less than £1,500/month, in which case PAYE is allowed to be paid quarterly. Large employers (with at least 250 employees) are required to make this payment electronically.
  • Forms: Every employee is entitled to receive a P60 (must be given by 31 May) and a P11D (must be given by 6 July) which detail their total pay and taxable benefits not included in the payroll respectively. In the event a taxable benefit is included in the payroll, you must notify them with a description of the benefits and their associated cash equivalent by 31 May.

 

What if an employee leaves?

In the event an employee leaves you must complete the P45 form, which will include information relating to the employee start and end date, as well as the date on which they were first paid. The employee leave date should also be logged on the FPS.

 

Are there any penalties if I paid PAYE late?

There are penalties imposed on employers for any of the following three reasons:

Late payment: The amount of payment due is dependant on the number of defaults in the tax year.

Number of defaults
Percentage of Tax and NIC paid late

1

1%

2

3

4

2%

5

6

7

3%

8

9

10+

4%

An additional 5% is also charged if the amount is more than 6 months late and doubles if the lateness period extends past 12 months.

 

Late filing: If the FPS is submitted late without a reasonable excuse a late filing penalty is given which is determined by the number of employees in the PAYE scheme.

Number of employees
Penalty

1 – 9

£100

10 – 49

£200

50 – 249

£300

250+

£400

An additional 5% of the tax and NIC due is charged on a return that is 3 months late.

Late P11Ds incur a £300 penalty per form, with a further £60 fine added per day for continued failure to file.

 

Incorrect forms: Incorrect FPS will incur a penalty of up to 100% of the extra tax due, depending on the level of inaccuracy and disclosure.

Behaviour
Max. penalty
Min. penalty with unprompted disclosure
Min. penalty with prompted disclosure

Deliberate and concealed

100%

30%

50%

Deliberate but not concealed

70%

20%

35%

Carelessness

30%

0%

15%

If an incorrect P11D is found to have been filed under the intention of fraud or negligence, you could be fined up to £3,000 per form.

 

More information on this is available in the HMRC manual at GOV.UK

For more enquiries and professional advice on this matter, feel free to contact us.

 

SME vs RDEC: What should you claim under?

SME vs RDEC: What should you claim under?

If you’re planning on making an application for Research and Development (R&D) Tax Credits, you need to know the differences between the two schemes available:

  • The Small-Medium Enterprise (SME) scheme
  • The Research and Development Enhanced Credit (RDEC) scheme

Depending on the size of your company the nature of the incentive you are qualified for could change, so it is important you understand the basics first.

 

What’s the deal with R&D?

Introduced during the turn of the millennia, the UK government announced its R&D tax credits scheme to encourage innovation and growth in UK businesses. It was also a good sign that support for companies, that would have otherwise struggled to keep up with R&D expenditure, was present.

So, if you’ve made a scientific advancement that has either innovated or refined a new/existing technology or product, you can claim back your R&D expenditure as tax relief which can be used to keep your business going and active within its sector.

The three most important tax benefits that can arise from successfully applying for R&D tax credits are:

  • Corporation Tax rebate
  • Payable tax credit
  • Enhanced deductions which can be carried forward

As mentioned above R&D work is considered to be a scientific advancement or refinement, but what HMRC consider to be R&D and what business owners think it is seemed to be two different things. To tackle this HMRC have made it very clear what they consider to be R&D work for tax purposes:

  • Attempting to overcome scientific or technological uncertainty
  • Making progress that is not easily achievable by industry professionals
  • Creating or modifying new/existing products or services

This of course also means tax relief is only available on expenses towards the R&D work such as staffing costs, consumables, subcontractor costs, robotic machinery costs and even software. As long as the expenditure was on a component that directly impacted the R&D project, you can claim for it.

It doesn’t matter if your R&D project failed either, as you still could make claims if you took some risk in making a scientific or technological advancement. HMRC consider if R&D activity was carried out, not just the outcome of the project.

What scheme do I qualify for?

To qualify as an SME your company headcount should be less than 500 and your turnover and balance sheet less than €100 million and €86 million respectively. But not all companies fit this mould, after all, you may have over 500 employees, but your turnover could be less than €100 million. Don’t get your head in a twist though, we’ve simplified it for you:

The SME scheme

As its name suggests, this R&D scheme is aimed towards SMEs and proposes incentives of great benefit to qualifying businesses.

Perhaps the most significant advantage of claiming under this scheme is that it allows profit-making companies to deduct 130% of eligible R&D expenditure from taxable profits – meaning that when added on top of their existing 100% deduction there is a massive 230% total tax deduction!

Loss-making companies don’t lose out either, as they can make claims worth up to 14.5% of their surrenderable loss to use as an immediate cash injection or set against future losses.

 

The RDEC scheme

Large companies with no Corporation Tax liability can also benefit from R&D tax credits, in the form of cash payments or tax reductions. Companies qualified for RDEC can claim back 13% of eligible R&D expenses, which is often big money when you consider the fact that the average RDEC claim is more than £500,000.

RDEC is also an option if your company has already received state aid, such as grants. You may remember recently during the G7 summit in Cornwall, the Prime Minister announced a multimillion-pound incentive for innovators involved with green energy solutions. Even if a small company were to benefit from this grant, they can also claim further tax relief – but only through the RDEC.

 

Get in touch with WIM Accountants today to help you with your R&D tax claim.

Kickstart Scheme – What’s the fuss?

Kickstart Scheme – What’s the fuss?

The consequences of COVID-19 and the subsequent lockdown that was put into place in March 2020 were massive for Britain (and indeed the rest of the world), but no demographic may have felt harder done by this event than those aged 16-24. With the real GDP reduction achieving heights rarely seen before, it is no surprise then to see figures published by the Office for National Statistics suggesting that unemployment rates were at 4.6% and economic inactivity rates higher than what was pre-pandemic.

Thankfully it’s not all doom and gloom as a very handy lifeline is available in the form of the Kickstart Scheme, which seeks to provide funding to employers to help them offer jobs to young adults at risk of long-term unemployment. So far the scheme’s proves itself to be the real deal, with unemployment rates falling each successive quarter. 

An incentive that benefits both employer and employee, it seems that there is indeed light at the end of the tunnel.

 

What the employer needs to know

Perhaps the most important thing employers need to know when considering their inclusion in the Kickstart Scheme is that regardless of the company size, all employers can apply for funding. Regardless of if the business is a small company with 2 employees or a medium-sized enterprise, they can expect themselves to be eligible for the scheme.

Sole Traders and Partnerships are also included within the scope for the Kickstart scheme.

The new jobs cannot be a replacement for current employment contracts, be used as a means to reduce existing employees working hours or make them unemployed. The job role must also include basic training only.

The funding distributed to employers is another prospect to take interest in, which covers:

  • 100% of the National Minimum Wage or National Living Wage depending on the age of the employee, covering 25 hours a week for 6 months
  • Relevant employer National Insurance Contributions
  • Automatic pension enrolment contributions

That’s a sum of £1,500 per employee available!

Employers are also given the privilege of having flexibility when deciding on employee start dates. They are allowed to spread the start date up until 31 December 2021 and will continue to receive funding until 30 June 2022 for an employee that begins work on 31 December 2021. Additional funding is also available should an employer wish to provide support to a participant in securing them a future job. Note that if you wish to pay a kickstart employee higher wages or have them do longer hours, the surplus will not be funded via the scheme.

 

Sounds good, how do I apply?

The process is straightforward and can be done in two ways. Employers can apply directly via GOV.UK to receive the funding and once successful can add further job placements to the kickstart agreement.

The second method requires the employer to apply via a Kickstart “Gateway” – an organisation that has existing grant agreements with the Department of Work and Pensions (DWP). The gateway will process the application to DWP on behalf of the employer and add new placements to the agreement. This essentially follows the standard hiring process format. Once the grant payment is accepted, the employer must produce job descriptions to share with DWP for use at JobCentre Plus. From there, the work coaches will identify and select candidates for interviews. The employer of course makes the final decision on the preferred candidate. There are benefits to using a gateway, namely:

  • The gateway will gather information about the jobs that could be on offer;
  • Sharing the above information with DWP on your behalf and;
  • Pay the funding directly to you

 

How long does the scheme run for?

The Kickstart Scheme commenced 2 September 2020 and is expected to cease 31 December 2021, but it would not be surprising to see the scheme extended given the positive impact it has had on employment rates of the target demographic.

 

Let’s get started

WIM Accountants are a registered Kickstart gateway with an established list of clients utilising our gateway services. If you are interested in joining the Kickstart Scheme, we can help you.

Tax Reducers – Fact or Fiction?

Tax Reducers – Fact or Fiction?

I wish I was paying less tax” is probably a thought that has crossed the minds of many of us at least once in our lifetimes, and it would not be a surprise at all if many were resigned to that thought. It may come as a welcome surprise for those same taxpayers to learn that something that is designed to reduce your tax is in fact not a mythical concept, but rather something very real and claimable. Enter ‘tax reducers’, forms of reliefs that are designed to lower income tax through the means of deductions.

But before we get into the intricacies of tax reducers, let us quickly skim through the process of income tax calculation. So:

How is my Income Tax calculated?

The entire income tax calculation can be summed up well in 7 distinct steps:

  1. Identifying the amount of component income that is liable to tax in the relevant tax year. This is mainly income from employment, self-employment, dividends, and savings.
  2. Deductions are made from the component income or the total income. Unless underlying reliefs apply; typically arising for trading losses, business property losses and qualifying loan interests.
  3. Personal Allowances are deducted.
  4. Tax bands and rates are applied to the taxpaying individual’s income for the tax year.
  5. These amounts are then totalled to produce the total tax liability for the year.
  6. To find the total amount of tax payable in the tax year, tax reducers are deducted – which we will focus on shortly.
  7. Any additional tax charges (say, annual allowance) are added, and tax already paid in relation to the relevant tax year is deducted.

More detailed information on the income tax calculations can be found in ITA 2007, s.23.

 

Types of Tax Reducers

If we go back to the income tax calculation above, you may notice deductions being made during Step 2. Interestingly, tax reducers approach deductions differently by reducing the total tax liability directly instead of being deducted from the component or total income at source.

The following tax reliefs are the main ‘tax reducers’ you should be aware of:

  • Married Couple’s Allowance (MCA) and Marriage Allowance (MA) – Excess MCA relief can be transferred to the partner at tax year-end in the interests of preventing the tax reducers from going to waste. Claims can also be made to give at least half the min. MCA tax reducer (calculate at 10% x £3,450 = £345) to partner at tax year-end.
  • Enterprise Investment Scheme (EIS) – If a taxpayer subscribes to EIS shares (ie. their employer offers them new shares prior to the date of official issue) a tax reducer is awarded which is based on a percentage (currently 30%) on the lower of the amount invested or £1 million. The latter option actually doubles to £2 million if subscribed shares are for “knowledge intensive companies”.
  • Seed Enterprise Investment Scheme (SEIS) – The tax reducer here works roughly similar to the EIS with key differences being that the tax reducer percentage is 50% and applies to the lower of the amount invested or £100,000. Note that “Seed Enterprises” often relate to smaller and younger companies than those qualifying for EIS and must have traded for a short period of time.
  • Social Investment (SI) – If a taxpayer subscribes for shares or makes a qualifying debt investment in a social enterprise, a tax reducer of 30% is given on the lower of the investment amount or £1 million. In this instance, qualifying debt investments must be in the form of a debenture that offers no return other than at the commercial rate and carries no charge over assets. It must also rank equally amongst other shares.
  • Venture Capital Trust (VCT) – A taxpayer subscribing to VCT shares is given a reducer of 30% on the lower of the invested amount or £200,000.

 

Order of application

In the event of more than one reducer being applicable (which is not a rare occurrence), there is a prescribed order to which the tax reducers must be deducted. The general rule of thumb is that the tax reducers be structured in order of favourability to the taxpayer. Favourability in this context being whichever order allows for the lowest tax due.

The order is as follows:

  • VCT
  • EIS
  • SEIS
  • SI
  • Maintenance payments
  • MCA/ MA

 

How much tax can I reduce?

There is a limit to the total tax reduction applied during Step 6 of the income tax calculation to prevent the deductions from creating a tax repayment. In layman terms, the total amount of reductions is limited to the tax liability incurred. HMRC also stress that where a taxpayer has EIS, SEIS, SI and/or VCT and has made donations to a charity via gift aid, the tax liability cannot be reduced to a zero figure. Income tax must be due which covers the basic rate tax relief at source for gift aid donations. ‘Wasted’ tax reducers (unused tax reducers in the tax year as a result of insufficient income) are determined in accordance with the order described above and may be taken into consideration when discussing the possibility of carrying back or forward tax reducers.

Consider a taxpaying individual who has a tax liability of £35,000 at Step 5 of the income tax calculation. They also have EIS relief of £26,000, SEIS relief of £9,000 and have made net donations of £1,200 to a charity using gift aid. The amount of income tax due from this individual is:

  £

Tax liability (Step 5)

35,000
Less: Step 6 tax reducers  

EIS relief

(24,000)

SEIS relief (limited)

(8,700)

Total

300

 

The individual in this scenario would otherwise have their tax reduced to nil if it were not for the gift aid donations. Therefore, the total amount of tax reducers is limited to the amount of basic rate tax at source. As the basic rate is at 20%, the amount of tax payable is calculated by multiplying the donation total by 20 and then dividing by 80 (ie. £1,200 x 20/80). In this case, SEIS is limited as EIS relief is deducted first under the prescribed rules of ordering (ITA 2007, s.27). The unused SEIS income tax relief can be recovered by claiming it on a previous year.

Your guide to EMIs

Your guide to EMIs

Enterprise Management Incentive (EMI) schemes are great for keeping and encouraging employees by awarding significant tax benefits to both company and worker. Typically, you may see EMIs being used as a tax-efficient tool to aid with a company’s internal growth (such as bringing up key workers to have a stake in the business).

The scheme itself is quite flexible in that it can be fashioned to suit the targets of a company, such as allowing companies to allow options to qualifying employees on an efficient tax basis (for example, the right to subscribe to shares). Private or small companies can take great advantage of this to gain access to select grants for selected employees or even their entire workforce.

EMIs can only be awarded to companies with a permanent establishment in the UK, but if your company has overseas shares, you can rest assured as EMI options are still available to you. There are a few other requirements to qualify for an EMI, namely the company itself must:

  • Have gross assets less than £30m
  • Operate in a qualifying trade, which does not include financial & legal activities, leasing, farming, and property development

The options available through EMI also have conditions attached:

  • Ordinary shares issued must be fully paid and not redeemable
  • EMI treatment is only applied to shares not exceeding £250,000 per individual
  • Options can be awarded at discount (even nil price) at the risk of tax consequences
  • These options must be exercised within 10 years

Employees are also subject to eligibility requirements, namely:

  • EMI options are only available to employees working more than 25 hours a week, or who spend 75% or more of their time working for the company
  • The employee must not have more than 30% of the company share capital before options are awarded to them

 

What are the benefits?

EMIs can be tailored to help a company achieve their commercial objectives, and have benefits for both employer and employee alike:

For employers:

  • No tax cost
  • No employer NIC on grant or options exercised
  • Corporation Tax Relief on the difference between the market value of shares at the time of acquisition and the price paid
  • HMRC validation of share valuation, allowing for tax certainty in the interest of the company and workers.

For employees:

  • Only tax payable is CGT arising when shares are sold
  • Lower tax costs compared to non-EMI schemes or even cash
  • No Income Tax or NIC payable on grant or options exercised
  • Reduced CGT rate – EMIs will cause a 12-month holding period for Entrepreneurs Relief to accrue, resulting in a reduced 10% CGT rate. This rate can be achieved even with minority holdings in Growth Shares

 

Disqualifying events

There are several changes or developments within a company that could lead to disqualification from EMI. Also known as “disqualifying events”, they include the following:

  • Loss of independence – Namely when a company becomes a 51% subsidiary of another company
  • No longer meeting the trading requirements – When the company’s activities become primarily focused on a non-eligible trade. It could also occur when the intent to carry out a qualifying trade was never realised.
  • Employees are no longer eligible – Usually, if they no longer work at the company or meet the required hours
  • Share capital is altered
  • If Company Share Option Plans (CSOPs) are granted – This means the amount of unexercised options exceed £250,000

You may want to heed caution to this as if your company is subject to a disqualifying event, you may be liable to a tax charge. This is usually imposed when the EMI option is exercised after 90 days of a disqualifying event, causing income tax and NICs to become payable on the increase in share value from when the disqualifying event occurred and when the option was exercised.

 

How can I register for EMI?

You can report your options to HMRC electronically within 92 days of receiving the grant. It is advised that you agree upon the share market value in advance with HMRC.

WIM Accountants can also help you in dealing with all aspects of your EMI plan and will endeavour to make sure it truly reflects the commercial objectives of your business.

Get in touch with us to find out more.

Tax-Exempt Benefits: What are they and how do they work?

Tax-Exempt Benefits: What are they and how do they work?

 

A significant number of employees will find that they receive non-cash benefits as a part of their remuneration often in the form of company cars, loans, mobile phones, private medical insurance, or contributions to a pension scheme. For the most part, an employee will pay tax on these benefits as these are benefits that were provided to them or “a member of their family or household” – meaning that if the employee managed to get their employer to provide the benefit to his/her spouse or children, they would still have to pay taxes.

 

The actual list of tax-exempt benefits is long, but here we will take a look at the ones which may be more familiar to our eyes:

Employer contributions to pension: Tax exemption is dependent on the pension scheme being registered. So, if the employer pays into the employees personal or occupational pension scheme, no taxable benefit arises irrespective of the employer’s level of contribution.

Company issued phones and calls.

Reimbursement of removal expenses: If, for example, an employee is transferred to another site with the employer covering expenses, no taxable benefit is incurred so long that the expense does not exceed £8,000. This exemption is actually well-defined by HMRC and can be read in further depth here. (ITEPA 2003, ss.277-285)

Workplace parking: Note that this provision also includes the cost of a ‘season ticket’ to a public car park within reasonable proximity to the workplace. Bicycle and motorcycle spaces also operate in this provision.

Subsidised staff canteens: Tax-exempt only if the canteen facilities are available to all employees and if the provision did not arise out of a salary sacrifice or other related arrangement.

Incidental expenses: Employees working away from home are exempt up to a daily limit. Currently, they are £5/night if working in the UK and £10/night abroad.

Work-related training.

Christmas (or other annual seasonal events) parties where the cost per head does not exceed £150. Note that if the cost per head exceeds this amount, the individual is taxed on the full amount and not just the excess over £150. For example, a cost per head of £250 will result in the employee being taxed on the entire £250.

Awards from a staff suggestion scheme provided the award is no more than £5,000.

Rewards for loyalty or service: Up to £50 per year of service given an employee has served at least 20 years with the employer. Gifts given to a long-serving employee on retirement is also exempt.

Reasonable additional costs incurred from working at home (ITEPA 2003, s.316A). Employers should note that no records are required to be kept if expenses do not exceed £6/week or £312/year. This is actually a hugely relevant exemption in the current climate and has warranted a more in-depth discussion.

Other tax-free benefits can be found in HMRC’s online manual (ITEPA 2003, s237-324).

 

Trivial Benefits

Trivial benefits are a bit different to the tax-exempt benefits listed above in the sense that they come with a few strings attached to them. HMRC are very rigid in their definition of a trivial benefit, meaning you (the employer) don’t pay tax on a benefit provided all the following criteria are met:

  • The cost of the benefit is £50 or less
  • It is not cash or a cash voucher
  • It is not a performance-based reward
  • It is not an incentive included in the employee’s contract terms

Trivial benefits don’t need to be reported to HMRC via annual P11D/(b) forms and are exempt from taxable income and Class 1 NICs. So, if you’ve made plans to take employees for dinner (or to celebrate an occasion) you won’t need to worry about tax – as long as you make sure the total is £50 or less.

Generally speaking, there is no limit to the number of trivial benefits that can be provided in a tax year (6 April – 5 April) unless in the case of an individual in a close company where a £300 annual cap is enforced. For reference, a close company is a limited company of 5 or fewer shareholders who are all directors.

It is becoming increasingly common to find companies that offer a range of optional benefits to employees as part of their remuneration package, often at the cost of utilising the salary sacrifice. The reasoning behind such a method was that the amount of tax imposed on the benefit would be lower than the taxable amount on the salary given up, which would obviously be extremely favourable if the benefit was tax-free. This results in less income tax and NICs being paid.

Trivial benefits arising from a salary sacrifice are not eligible for exemption, and the employer will have to pay income tax, National Insurance, and report to HMRC on employee P11D.

HMRC introduced the Optional Remuneration Arrangement (OpRA) which reduces tax-saving using the salary sacrifice. The OpRA applies to two arrangements:

  • Type A: Where the employee gives up the right to receive earnings in return for a benefit.
  • Type B: Where the employee opts to receive a benefit in place of salary.

The amount declared is also the higher of either the salary sacrificed or how much was paid for the trivial benefit.

 

For more information, or if you’d like to have a chat about our services feel free to contact us.

 

 

 

Stamp Duty Land Tax: Understanding the new rates and extensions

Stamp Duty Land Tax: Understanding the new rates and extensions

The Stamp Duty Land Tax (SDLT) holiday was launched to stimulate the property market and encourage growth in first-time buyers as a response to the drastic downfall in property transactions following the first lockdown period due to the pandemic. There have however been calls to amend this holiday to see tax benefit on contract exchange, rather than the current completion model following concerns over rising house prices trapping people into not being able to buy or even complete sales. Over 13,500 people signed a petition to push for this to change but were met with a firm stance of no change from the government quoting SDLTM07950 FA03/S44(5)(b), where a contract is considered substantially performed when the purchaser takes possession of property or at least 90%. Instead, the government’s solution was that as part of the Budget 2021 announcement, the Chancellor revealed that the current duration of the SDLT holiday was to be extended until 30 June 2021. After this period the nil-rate band (NRB) will be at a decreased rate until 1 October 2021 where it will then operate at its usual threshold.

 

What is SDLT?

SDLT is the tax that must be paid when you buy property or land, provided the value of the sale exceeds a certain amount in England or Northern Ireland. Scotland and Wales have different rates but will not be included in this article. There also exists some exemptions from paying SDLT, such as being a first-time buyer of a property or in situations where the property is changing ownership without payment. Generally, SDLT will be applicable to you if you buy: a freehold property, a new or existing lease, a shared ownership property or receive property for money. Regardless of whether a mortgage is taken out or cash payment is made SDLT may still apply.

 

The SDLT Holiday

Under the SDLT ‘holiday,’ the NRB for residential properties was increased from £125,000 to £500,000 and will end on 30 June 2021 after being extended from 31 March 2021 as part of the Budget 2021 announcements. After this date, the NRB will fall to £250,000 until 1 October 2021 whereupon the usual rate will then apply.

This could be seen as a breath of fresh air for those buying property first-time or otherwise, with reported savings up to £15,000 which would then tail off to £2,500 by September. Larger investors in real estate could also find some benefit from this as relief can be claimed on Property Redress Schemes (PRS), student accommodation and retirement homes; suggesting that the extension may have a positive effect on the property market as a whole.

Non-UK residents however should bear in mind that from 1 April 2021 a surcharge of 2% is to be imposed on all residential bands. This includes companies and other overseas entities.

The usual rates

The typical rates for SDLT on residential property is as follows:

Consideration (£) Rate (%)
0 – 125,000 0
125,001 – 250,000 2
250,001 – 925,000 5
925,001 – 1,500,000 10
1,500,001 and above 12

Note that these rates will resume from 1 October 2021. An extra 3% is also added for each threshold where additional properties of cost exceeding £40,000 are purchased.

Until 30 June 2021, the following temporary rates will apply:

Consideration (£) Rate (%)
0 – 500,000 0
500,001 – 925,000 5
925,001 – 1,500,000 10
1,500,001 and above 12

 

The following rates will apply in the period 1 July 2021 to 30 September 2021:

Consideration (£) Rate (%)
0 – 250,000 0
250,001 – 925,000 5
925,001 – 1,500,000 10
1,500,001 and above 12

 

First-time Buyer Relief is disapplied until 1 July 2021 where the current SDLT extension ends. This relief only applies on thresholds within the £500,000 NRB.

SDLT is usually handled by specialist agents or advisors, so you the buyer don’t need to worry about anything but what you owe for the purchase of the property. If you are unsure if you qualify for these reliefs or are a landlord seeking advice on taxes involved, feel free to contact us at info@wimaccountants.com or call us for a free consultation.

May 2021: Updated HMRC guidance on COVID support

May 2021: Updated HMRC guidance on COVID support

Agent Update: Issue 84 provided useful insight into the latest guidance and changes HMRC have implemented over the recent months to help mitigate the financial damage caused by the pandemic to businesses. Below is a summary of the points which caught our eye and may have usefulness to agents and advisors.

CJRS

Currently, the UK Government is paying 80% of furlough employees wages for unworked hours, capped at £2,500 per month. However, by July 2021 this rate will decrease to 70% to a cap of £2,187.50. This rate will again fall to 60% in August and September 2021 to a cap of £1,875. 

Please note that with the introduction of the 70% rate, employers will have to pay the difference of at least 80% on unworked hours, capped at £2,500.

The deadline for CJRS claims for May is 14 June 2021, and can be claimed before, during or after a client’s payroll had been processed. Knowing the exact number of hours the employees work is important to avoid further processing and amendments. Clients should also ensure to pay employee tax and NIC, else they will have to repay the entirety of the CJRS grant they claimed back to HMRC.

HMRC also have a handy tool to help calculate how much you can claim from the CJRS, which can be found here.

SSP

The Statutory Sick Pay Rebate scheme is continuing to provide financial support to SMEs. Businesses (with employee numbers less than 250) who have paid SSP to employees for COVID-19 related sickness may be entitled to support. The rebate covers a maximum of 2 weeks of the appropriate SSP rate.

VAT deferral payment scheme

A new VAT deferral payment scheme is now available to all businesses that deferred VAT from 20 March 2020 to 30 June 2020, they must also have not been able to pay in full by 31 March 2021. Luckily, these payments can be made in instalments. Note that the later a business signs up to this scheme, the fewer instalments they can make:

  • Join by 19 May 2021 – 9 instalments
  • Join by 21 June 2021 – 8 instalments

Businesses must also have a VAT registration number, a Government Gateway account, submitted outstanding VAT returns in the last 4 years, be aware of what is exactly owed and correct errors on VAT returns (if any).

A 5% penalty and interest will be imposed on businesses that fail to pay or sign up by 21 June 2021, so encouraging your client to sign up is highly recommended.

WFH Tax Relief

The golden rule when claiming expenditure set by HMRC is that the expense must have been incurred “wholly, exclusively and necessarily”, and for those working from home expenses claimed are not exempt from this rule. Employees working from home can claim tax relief on additional costs, such as metered water, heating bills or business calls but the employee must prove that this expenditure satisfies the aforementioned rule. Note that costs that would remain the same had the employee worked in the office are not eligible. Relief for these claims is open until the end of the current tax year, 5 April 2022.

Tax Investigation 101: What you need to know

Tax Investigation 101: What you need to know

A recent tax investigation case that we assisted with prompted us to consider what exactly business owners know about HMRC tax investigations. Those involved in the tax industry are well familiar with how HMRC investigate, but it became apparent that a sizeable portion of our clients are understandably hung out to dry when HMRC come knocking.

An unfortunate truth is that HMRC do not need a specific reason to launch a tax investigation into your company affairs, and with the events of the pandemic impacting the daily lives of many it may be possible that you have inadvertently overstepped some crucial tax laws. The Tax Investigation process itself can be complex and daunting, but this blog will aim to serve as a useful insight into how these investigations work and why they may be carried out.

 

Typically HMRC tends to flag activity that they deem as suspicious, such as:

  • Dealing with companies who have been guilty of tax offences
  • Mistakes made on tax returns
  • Irregular trends in your annual accounts
  • Discrepancies between management and employee pay
  • Any tipoffs from a third party

These are just a few of the large number of reasons HMRC can cite to put you under investigation. They can even initiate an investigation randomly which may feel unfair, but you must know how to respond correctly and prevent collecting penalties and other consequences.

 

Investigations will always follow the same formula:

  • The taxpayer will be notified. HMRC will always provide written notice before they carry out the tax investigation into your affairs. A deadline for your response will also be specified in the notice and tends to be within 30 – 35 days of the notice.
  • Request for records and supporting documents. Records such as bank statements, payslips, company accounts, VAT returns and other relevant financial papers will be requested. The scope of the volume of documents required tends to vary based on the type of investigation launched, which we will outline later on. What is otherwise known as ‘enquiry periods’, HMRC has the power to ask for old records that are no more than 4 years old at the time of discovery. However, should you be deemed to have caused a tax offence carelessly the window is increased to 6 years, with deliberate offences giving HMRC a leeway of 20 years. Matters related to offshore transactions are limited to 12 years.
  • Investigation period. The type of investigation is a contributing factor to the duration of a tax investigation. Furthermore, the nature of the company/ business trading accounts also decides on the period in which HMRC can keep the investigation open. This can be anywhere between a few months to as long as 16 months.

 

Compliance with HMRC during the investigation does go a long way, as it quickens the process and also could lead to reduced penalties should you be found guilty of tax offences. As mentioned beforehand, investigations can come in the form of three distinct formats:

  • Random Tax Investigation. As the name suggests, this is an investigation performed randomly on the tax return of an individual or company. HMRC use this as a method to ‘spot-check’ businesses in high-risk sectors to discourage tax avoidance and abuse. As a Small to Medium-sized Enterprise (SME), you may be a likely target from these random checks.
  • “Aspect” Tax Investigation. HMRC can narrow their scope onto a particular ‘aspect’ of your business’ returns. These types of investigations tend to focus on non-malicious mistakes or misunderstandings, rather than deliberate tax evasion. As the investigation itself is not very broad, the process is cheaper and as a result, tends to be quicker. Though, bear in mind that this does not mean HMRC will not hesitate to open a full investigation should they have reason to believe other aspects of your business is worthy of review.
  • Full Tax Investigation. An expensive, comprehensive and potentially lengthy process where HMRC will look into all business and financial records, for the relevant years of enquiry under the suspicion of tax evasion.

 

Failure to comply and/or provide appropriate documents can lead to damaging penalties. HMRC will penalise you using the following reasons:

  • Mistakes in your financial accounts
  • Deliberate understatements and concealments
  • Failure to take reasonable care.

 

Late filing of your tax returns will incur a flat-rate penalty of £100, which increases substantially for successive months of late payment. You want to avoid this as this will affect your cash flow, especially if you have a significant turnover. HMRC can also threaten with criminal proceedings against you or your business. If you feel that an imposed penalty is unfair, you have 30 days to file an appeal to contest the charge with a reasonable excuse. This is not something to be relied upon, given the government’s history with strict guidelines on what classifies as a qualifying excuse.

 

You must take these enquiries seriously and seek the assistance of a certified tax advisor immediately. At WIM Accountants we have the expertise and accreditations to make sure your tax investigation does not damage you or your business. We will ensure that your case is represented correctly and accurately; that HMRC will receive the documents they asked for promptly to quicken the process and mitigate any possible penalties; and that you can relax knowing your tax affairs are in the hands of individuals with a combined 25 years of experience in the tax sector. Feel free to contact us if you have any questions or would like more information on how tax investigations work.

 

R&D Tax Credits 2021: What’s new?

R&D Tax Credits 2021: What’s new?

Did you know that your R&D tax credit claim could be capped?

The Budget 2021 released on 3 March 2021 brought good news for those working with data and cloud-based computing, as it now looks increasingly likely that this will be included in the new scope of tax reliefs. However, what may come as a disappointment for those qualified under the SME or R&D expenditure credit (RDEC) schemes is that there was no increase to the available R&D tax relief. Instead, what SMEs did receive was confirmation that the planned SME cap will come into effect. Businesses that particularly rely on subcontractors to assist with R&D will want to know what changes the new rules will make on their funding.

 

Who will this affect?

You should be aware of these changes if you are:

  • An SME with no or low payroll expenses
  • Planning to claim an R&D tax credit exceeding £20,000
  • Subcontracting R&D work
  • Managing international Intellectual Property (IP)
  • Recharging personnel costs between group parties

 

Why are there changes?

The tax relief is a useful support for companies operating at a loss, with a tax credit worth up to 14.5% of the R&D element of surrendered losses available to claim. Unfortunately, increasing signs of the tax credit being used for fraud and abuse has prompted HMRC to put this measure in place. Perhaps a high-profile example of such fraud is the £29.5m R&D tax relief claim put forward by Convergica (Clinical Information Systems) Ltd, which subsequently prompted a HMRC investigation which jailed three men after 2 years of investigation. This is a sophisticated matter and sadly legitimate businesses can get caught in the anti-fraud net HMRC have cast, so it is important that as an SME, you understand the new rules put in place.

 

The new SME Cap

From 1 April 2021 the SME cap on available credit was set at £20,000 plus 300% of the total PAYE and NIC liability of the company in the interests of preventing abuse. HMRC have also introduced amendments to this legislation in order to ease its introduction:

 

“Where a company has an accounting period that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date.”

 

Therefore, a current accounting period is not subject to the new SME cap.

Exemptions for your claim do exist provided that your company meets both of the following criteria:

  • Your employees are creating, preparing to create or managing Intellectual Property (IP). IP refers to intangible creations, such as copyrights, trademarks, trade secrets and patents.
  • Your company does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPW) by, connected persons.

 

How will this affect my business?

As a business with an R&D venture you may want to receive tax credit funding in order to improve your cash flow, as you may receive trading profits and funding is typically reinvested for future projects that also meet the criteria for an R&D tax claim. The idea is that your one innovation paves the way for more future innovations, yet the cap instead risks disrupting cash flow by introducing uncertainty and obstacles for your business.

Fresh businesses looking to explore R&D further will need the tax credit as a way to secure essential cash injection to help them power through the use of external resources and tax losses when they start out. R&D is high cost and high risk, but the cap has the potential to delay this cash injection.

 

How does a subcontractor affect my claim?

As an SME involved in R&D activities, you can claim 65% of the costs paid to a subcontractor for qualifying activities. Similarly, companies under the RDEC scheme can claim the same amount provided that the subcontractor is an individual, a partnership of individuals or a qualifying body. The finer details on what qualifies as subcontracted work is quite broad, as your subcontractor does not need to be UK resident, nor does the work they carry out need to be done in the UK. Furthermore, there is no issue if the work your subcontractor carries it is not inherently R&D if viewed at in a vacuum so long as it contributes to your own R&D work.

 

But what if my subcontractor and I are connected parties?

If you are connected to the subcontractor, for example having a mutual shareholder, your claim for R&D tax credit is different. The amount you can claim can actually be more or less than the 65% available for non-connected parties, but the actual amount itself tends to be reliant on the actual costs involved with the claim and R&D project. The claim will also be for the lesser of the R&D payment and expenditure made to the subcontractor.

 

I think I am affected, what do I do now?

HMRC are strict and resolute in their application of rules and regulations, so if you are affected by the cap you need to take appropriate steps to make sure you aren’t unfairly caught out.

You should review any previous claims and see if the new cap would apply in those circumstances. If you have: subcontracted work domestically or internationally; have staff on low or no salaries; or if your business is new, you will likely qualify under the new cap. We’ve seen how strict HMRC can be and issued enquiries and penalties can be hard to recover from, so you need to have effective planning to mitigate the potential impact of the cap, which is what we can help you with.

HMRC are holding an open consultation which will run until 2 June 2021, with stakeholders being a primary target for thoughts.

WIM Accountants have a thorough understanding and great experience in dealing with R&D tax credit schemes. We offer top class advice and an R&D tax relief service, so you can relax knowing that we will make sure your claim is properly done and will get you the maximum claim you can get. If you have are still unsure about how this change affects you, or want to know more, get in touch at info@wimaccountants.com.

WIM Accountants are here to help businesses with their accounting and taxation needs.

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