EMI Share Options Scheme

What is an EMI Scheme?

  • EMI Share Options Scheme is an initiative HMRC implemented to allow UK businesses to give share options to their employees with significant tax benefits.
  • The scheme is intended to help smaller independent businesses realise their potential by attracting and retaining the best employees for long-term success.
  • The key difference between EMI and unapproved schemes is that HMRC will approve a valuation and fix a certain strike price. And of course, there are other conditions for businesses and employees to meet.
  • The EMI valuation is something that you propose to HMRC via the VAL231 Form. You’ll need to calculate two key numbers for this proposal: the Unrestricted Market Value (what the shares are worth), and the Actual Market Value (what the shares are worth, discounted for restrictions, e.g., the fact that the shares are vesting over time). Remember, you’ll want a low valuation because the profit will then be greater for your employees when the value of the shares increases over time.

 

The Benefits of an EMI Share Options Scheme

What are the benefits of Share Options for employees?

  • Options don’t attract tax until they’re exercised – no Income Tax or National Insurance. This lack of upfront payment generally makes them an appealing way to secure equity in the business they work for.
  • The holder is subject to Capital Gains Tax (CGT) on their disposal, but EMI option holders can claim Entrepreneurs’ Relief – reducing the rate to just 10%.

What are the benefits of Share Options for business?

  • Financially – enjoy a Corporation Tax (CT) deduction equal to the difference between the market value of the shares at exercise and what your employee pays for them
  • Attract Talent – Offering a rewarding option scheme will attract the best talent in the jobs market, which is especially important for start-ups and early-stage businesses battling to grow in competitive industries. Indeed, options are fast becoming a must-have and expected “perk” in the tech start-up world.
  • Retain Talent – keeps your employees focused on medium-to-long-term growth and sustainable success. The options must be exercisable within 10 years, and most businesses allow exercise far sooner. Making it exercisable after a time delay keeps staff within a company and motivates them in the long run as they would like to increase their shares worth by working harder for the company.
  • Rewarding Employees – EMI options can be offered as a reward for meeting certain individual or company targets. This provides an incentive for staff to go the extra mile.

Example:

EMI Options Scheme:

John is offered the same equity for the same value within a different EMI-qualified business, and he also acquires his shares worth £10,000. However, exercising his options incurs no tax bills whatsoever, and when he later sells his shares for £125,000, he is entitled to Entrepreneurs’ Relief; the reduced rate of 10% on Capital Gains Tax. This means that John will now pay CGT on the £115,000 value increase between what he paid for the shares and what she sold them for 10% = £11,500.

So, John will pay £11,500 total tax (when he has the cash), while Sarah pays £41,000. The EMI Share Options Scheme would therefore save more than 112% for the employee in this circumstance. This shows why EMI is so popular, and why it is a must-do for growing start-ups and small businesses.

Important note: As we mentioned earlier, John would also benefit from an HMRC valuation which is as low as possible. This allows her to get the options at a lower strike price, thus maximising his profit when the company shares are eventually sold.

Eligibility conditions for EMI

Employer:

  • The business must be actively trading and have a permanent establishment in the UK
  • The business must have fewer than 250 employees when the EMI options are granted
  • The business’s total assets must not be worth more than £30 million
  • The business must have allocated less than £3 million in EMI shares
  • The business mustn’t be a subsidiary or be externally controlled
  • The business must notify HMRC within 92 days of granting the options

Employee:

  • The person must be a legal employee of the business
  • The person must use a minimum of 25 hours per week or 75% of their time as an employee or director of the company
  • The person cannot hold more than 30% of all company shares

Options:

  • The market value of the options mustn’t exceed £250,000 per employee
  • The options must be granted within 90 days of HMRC’s valuation
  • The options must be able to be exercised within 10 years of being granted
  • The options must be non-transferrable

All terms and conditions for your options scheme must be placed in writing. Aside from the HMRC rules, all other terms are flexible and can be designed by your company. These include vesting periods – i.e. when the options can be exercised (events, achievements, or timescales within 10 years).

 

If you need assistance in applying for the EMI share scheme, please contact us at 02082271700 or info@wimaccountants.com

Enterprise Investment Scheme (EIS)

Enterprise Investment Scheme (EIS)

What is EIS?

EIS uses tax reliefs to incentivise private investors who recognise that significant returns are achievable if they are willing to risk their funds by investing in early-stage businesses. Early-stage businesses often struggle to raise equity finance, so EIS has established itself as a trusted and crucial source of equity funding. The schemes, therefore, play an important role in facilitating the smooth flow of risk equity capital from private individuals to early-stage businesses.

The Enterprise Investment Scheme (“EIS”) is a Government scheme that provides a range of tax reliefs for investors who subscribe to qualifying shares in qualifying companies.

How the scheme works

EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.

Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale.

You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules at least 3 years after the investment is made.

Are you eligible for EIS?

both the company and investor must fulfil certain additional conditions to benefit from any of the tax reliefs under EIS. EIS is one of the more complex tax benefit options available. Before you think about applying, check that you meet the requirements, either as a company looking to attract an investor under the EIS scheme or as an investor hoping to profit from tax benefits.

Investor

If you are an investor, you must satisfy the following requirements to qualify for EIS:

  • Your interest in the company must be no more than 30%
  • You must not be an employee, partner or ‘paid director’ of the company
  • No partner or associate of yours may have interests in the company (including your spouse, relatives, or previous business contacts)
  • You must not have any form of preferential shares
  • You must not have any form of controlling interest in the company
  • You must not be using the scheme as a form of tax avoidance.

There is one exemption to the rule disqualifying connected persons employed in the company. This exemption aims to encourage investment from business angels in the scheme, despite their roles as directors of the company. Business angels may still qualify for tax relief despite being paid for their services, provided that the angel director was not connected to the company at the time of issue of the shares. The rules for business angels are strict, however, so its advisable to seek advice from HMRC.

Company

For an investor to be able to claim EIS, the company they are investing in must meet the EIS eligibility requirements and maintain their EIS eligible status for the duration of the shareholding. To be considered an EIS eligible company, the following conditions must be met:

  • the company must have a permanent establishment in the UK
  • the company must not be listed on a recognised stock exchange, or plan to be listed, at the time of issuing shares
  • the company must not have control over another company, except any qualifying subsidiaries
  • no other company may have control of the qualifying company or have 50% or more of its shares
  • the company does not expect to close
  • the qualifying company and any of its subsidiaries must not have gross assets which exceed more than £15 million in value before any shares are issued, and not more than £16 million immediately after
  • the company must have less than 250 full-time employees at the date of issue of the shares.

In addition to these conditions, the investment must be used for a qualifying trade. Most business activities are acceptable, but some of the excluded trades are listed below. Should these excluded trades represent over 20% of the business’ daily activities, this would render the company ineligible for the scheme. Examples of excluded activities are:

  • Coal or steel production
  • Farming or market gardening
  • Forestry
  • Legal or financial services, including banking and insurance
  • Property development or leasing
  • Production of fuel
  • Energy generation
  • Exporting electricity
  • Operating hotels or care homes
  • Providing services to a non-qualifying business
  • Dealing in futures or securities.

HMRC will evaluate your daily business activities to determine whether your company fulfils the qualifying trade requirement. If your company deals in any of the excluded trades above, you should consider seeking advice from HMRC on your eligibility for the scheme. You can do this by seeking ‘advance assurance’.

Enterprise Investment Scheme

  • In 2020 to 2021, 3,755 companies raised a total of £1,658 million of funds under the EIS scheme. Funding has decreased by 12% from 2019 to 2020 when 4,165 companies raised £1,890 million.
  • As the Covid-19 pandemic impacted the UK economy, EIS investment across the first 3 quarters of 2020 to 2021 remained below the level seen across the same quarters of 2019 to 2020. However, in the last quarter of 2020 to 2021 EIS investment rebounded above the last quarter of 2019 to 2020.
  • Around £358 million of investment was raised by 1,370 new EIS companies in 2020 to 2021.
  • In 2020 to 2021, companies from the Information and Communication sector accounted for £571 million of investment (34% of all EIS investments).
  • Companies registered in London and the Southeast accounted for the largest proportion of investment, raising £1,078 million (65% of all EIS investment) in 2020 to 2021.

If you need assistance in applying EIS, please contact us at 02082271700 or info@wimaccountants.com.

PILON (Payment in Lieu of Notice) and Termination Payments

PILON (Payment in Lieu of Notice) and Termination Payments

 

Employees with more than one month’s service are entitled to a minimum statutory notice period upon termination of their employment contract.

The statutory notice provides that an employee must receive a minimum of one week’s notice for every full year that their employer has employed them for up to 12 weeks.

If they have been employed for less than one year but more than four weeks, they are statutorily entitled to one week’s notice.

In many cases, employers will extend the length of the notice period from the statutory minimum under the employee’s employment contract terms. Contractual notice cannot be shorter than the employee’s relevant statutory entitlement.

An employer may wish to terminate an employee’s employment immediately, irrespective of the notice period they are entitled to. This may be because the employee has requested it or has access to sensitive or confidential information. The employer is concerned that the employee may disrupt the rest of the workforce or not carry out their job properly if they work their notice period. Pay in lieu of notice (or PILON) is one way to achieve this.

PILON or payment in lieu of notice allows an individual’s employment to be terminated immediately without completing or working their notice period. Instead, the employer pays the exiting employee the amount they would have earned had they worked their full notice period.

PILON and different types of dismissal

If the employment contract makes the PILON, the contract will usually set out the payment terms, including what will be considered in calculating the payment. Benefits and other payments may not be included.

The contractual term should stipulate when PILON takes effect, e.g., whether it is on the date notice of termination is given, the date the PILON is made, or the end of what would have been the notice period. The contract should also stipulate the amount that will be paid, which could, for example, cover basic pay but not benefits, bonuses, or commissions during the notice period. Payment in lieu of notice does not have to include holidays that would have accrued during the notice period, i.e., beyond the termination date, unless the contract provides otherwise.

If the employment contract does not provide for PILON, the employer would generally not be able to terminate the contract with immediate effect without the notice period. They may be in breach of contract for dismissal with pay in lieu of notice. This also means any post-employment restrictive covenants would no longer be legally binding on the employee.

Suppose the payment is in breach of the employment contract. The employer will usually need to pay an amount equivalent to any benefits or other payments that the employee would have received had they worked their notice period and the salary they would have been entitled to. In the case of a breach, the payment is, essentially, an advance damages payment or compensation to the employee for the breach. The employer may also include an amount for holidays accrued during the notice period.

How does PILON apply in relation to redundancy?

Payment in lieu of notice is often made in redundancy situations.

If the employee has worked for the employer for more than one month, they will have a statutory right to be given a certain amount of notice. This has to be the minimum notice period by law:

  • At least one week’s notice if employed between one month and two years
  • One week’s notice for each year if employed between 2 and 12 years
  • 12 weeks’ notice if employed for 12 years or more

They may be entitled to more notice if the employment contract provides this.

In the case of redundancy, employers can terminate the contracts of employees being made redundant immediately, meaning the employees do not have to work their notice period. In such cases, the employees should still, by law, be paid for the notice period. This should be communicated to the employees as part of the redundancy consultation process.

Payment in lieu of notice would be in addition to the employee’s statutory redundancy pay entitlement. Payment may be wrapped up with any redundancy or termination payments made by the employer to the employee. However, it is important to be clear as to what constitutes the PILON and what is a termination payment for tax reasons.

How does PILON differ from garden leave?

PILON is not to be confused with garden leave which is a separate concept. Where PILON applies, the employee’s employment is terminated immediately, and the employee is paid the amount they would have earned had they worked their notice period. Because the employment has terminated, the relationship between the employer and employee has ended, the employment contract terms are no longer binding, and the employee is free, for example, to find work elsewhere.

If an employee is placed on garden leave, their employment contract will remain effective for the duration of the period of leave until the date the contract is terminated. This means they are still employed by their employer for the garden leave period but are not required to go into their place of work. They will continue to be paid and accrue their rights and benefits in the usual way during the garden leave period, and technically, they could be required by their employer to undertake work.

Is PILON taxable?

PILON is taxable, and this is the case regardless of whether the payment is made by the employment contract or otherwise. The rules and calculations are, however, complex.  Essentially, an employee will pay income tax and Class 1 National Insurance Contributions (NICs) on the basic pay they would have been paid had they continued to be employed during their notice period. This amount is known as PENP or post-employment notice pay. Any amount paid to PENP will be classified as termination payment and taxed accordingly.

Termination payments

Typical termination payments will include compensation for loss of office, redundancy payments, damages for dismissal, payments in lieu of notice (PILONs) and certain payments made on retirement.

Termination payments will be fully taxable, partially taxable, or fully exempt, depending on the nature of the payment.

If a termination payment is given to the employee in return for services performed under the employment contract, the termination payment will be earnings and taxable in full. However, a termination payment will generally compensate the employee for loss of office rather than being rewarded for service performed.

Most termination payments are not earnings from the employment and are taxed differently than other payments such as salaries and bonuses.

National insurance implications

Class 1 NICs are paid on earnings from employment.  As far as termination payments are concerned, where a payment is made to an employee under a contractual obligation, this payment will be regarded as earnings for Class 1 NICs purposes.

PENP is also treated as earnings for Class 1 NICs purposes.

Class 1 NICs are levied on both employees and employers.  Employees have an upper earnings limit for Class 1 primary NICs which is currently £50,270 per annum. Suppose a termination payment is made to an employee who earns above this upper earnings limit. If the termination payment is chargeable to Class 1 NICs, there will only be a 2% additional charge on the employee.  However, secondary NICs will be levied on employers in full.

Payments from an EFRBS will generally be subject to Class 1 NICs.

Where an ex-gratia payment is made – i.e., where there is no contractual obligation, and the payment is not PENP – the payment will not be regarded as earnings and will not be charged to Class 1 NICs.  Therefore, where a termination payment is made such that the £30,000 exemption rule applies or income tax, Class 1 NICs are not due, even on any payment over £30,000.

However, where a termination payment is not regarded as earnings (and therefore not subject to Class 1 NICs), a Class 1A NICs charge will be levied on the amount of the payment subject to income tax.  This means that the employer will be subject to Class 1A NICs at a rate of 15.05% (13.8%-2021/2022) on the amount of the payment over the £30,000 exemption. However, the full payment will continue to be free of NICs for the employee as Class 1A NICs are only payable by the employer. Where a termination payment is regarded as earnings, it is subject to Class 1 primary and secondary NICs as usual.

If you need assistance in employment taxes, please contact us at 02082271700 or info@wimaccountants.com

The most common mistakes made in R&D tax claims

The most common mistakes made in R&D tax claims

  1. Typical R&D claim

Not all R&D projects occur in laboratories, and your R&D team doesn’t need to wear white coats. Any company in any industry may be eligible to claim R&D tax credits, so long as the company is undertaking development activities that seek to achieve an advance in science and technology. If the project contained a level of technical uncertainty for the competent professionals involved- if there were moments where you and your team weren’t sure how to proceed, or you weren’t confident if your technological goal was achievable – that’s a good indication that qualifying R&D activities were taking place.

  1. Not claiming under the right scheme

The R&D Tax Credits scheme is subdivided into two branches: the SME scheme (or small/medium-sized businesses) and the Research and Development Expenditure Credit (RDEC) scheme for larger companies.

Before making a claim, it’s essential to understand which of these branches your business comes under. Legally, HMRC considers a larger company to have over 500 employees and a yearly turnover of more than €100 million OR a balance sheet above €86 million. A company falling below these criteria is considered an SME and should typically use the SME branch of the scheme.

  1. Non – qualifying expenditure

Everyone wants to maximise the qualifying R&D expenditure in their claims, including the costs of consumable items; for example, the components of a prototype used in testing and the scrapped have always been intended to qualify.

Likewise, an apportionment of water, fuel and power to the R&D activities will be accepted by HMRC.

However, where a company sells or otherwise transfers ownership of items produced in its R&D activity as part of its ordinary business, then the cost of consumable items that form part of those products is excluded from expenditure qualifying for relief.

Using the example above, if the prototype was sold to a customer, even at a discount or gifted to someone else as a goodwill gesture, the costs of the parts could not be claimed as qualifying R&D expenditure. This is the point that other firms often miss, and HMRC could successfully challenge their claims.

  1. Inaccurately accounting for workers outside of the company

Some companies undergo all their R&D projects internally using their employees, but others require work from external parties. When making an R&D Tax Credits claim, accounting for this is complex, but you must get it right. Something as innocuous as IP ownership and clauses around the future use of any IP can potentially kill off an entire R&D claim. It is also incredibly important to understand the differences between subcontracted R&D and work done by Externally Provided Workers (EPWs). Addressing this properly in the early stages of a claim can ensure R&D claims are maximised, particularly under RDEC, where subcontractor restrictions exist.

  1. Not claiming all qualifying costs

There are several areas of R&D expenditure that you can include in your R&D tax credits claim, including costs for staff (salary, employer’s National Insurance and pension contributions, and reimbursed expenses), agency workers, subcontractors, software licenses, and consumable items (light, heat, power, and materials or equipment used or transformed by the R&D process). You don’t want to leave any money on the table, so to make sure your claim includes all qualifying costs, work with your specialist R&D tax credits firm.

  1. Not consulting R&D Tax Specialist

The best way to make a successful R&D tax credits claim is to work with a tax consultancy specialising in R&D tax credit claims. Many companies with specialist knowledge and experience throughout the UK, such as WIM. If you’re not sure if your company was undertaking qualifying R&D activities or which of your activities qualify, it’s best to ask an expert in R&D tax credits. The experts will guide you through the claims process, ensuring that your claim is maximised and meets HMRC’s guidelines. Although it is possible to make an R&D tax credits claim through your accountant (or even on your own), your best chance of making a successful claim is through a specialist R&D tax credits firm.

To learn more about R&D tax credits and whether you should make a claim, please feel free to contact us via email: at info@wimaccountants.com or call us at 02082271700, and we’ll call you back to discuss your project. Our advisors are knowledgeable, professional, and friendly and will help you determine your eligibility at no cost.

What do you know about Corporate Intangibles Tax Treatment

What do you know about Corporate Intangibles Tax Treatment

 

Corporate intangibles tax treatment

The corporate tax treatment essentially follows the treatment of intangibles in the accounts. There are, however, restrictions on the deductibility of debts about goodwill and other customer-related intangible assets depending on the date of acquisition or creation.

The corporate intangibles regime has gone through several iterations since its introduction in April 2002, most recently in July 2020, mainly about goodwill and other customer-related intangible assets.

The regime is complex and requires detailed recording keeping by companies and their advisers, particularly about acquisition dates, relationships between companies, and the asset’s market value at the time of the first acquisition under the new rules. Therefore, advisers need to confirm the history of an intangible fixed asset when it is being acquired from a related party.

Corporate intangible regime

Most intangible assets are within the corporate intangible’s regime, but some types of expenditure are excluded completely or excluded apart from royalties derived from the intangible asset. The corporate intangible regime also interacts with other corporate tax regimes where the same expenditure qualifies for both regimes.

Debits and credits on intangible assets are generally treated for tax in the same way as they are included in the accounts. Still, tax adjustments follow similar rules for other expenditure items. Alternatively, a company can write down an intangible asset at a fixed rate instead of following the accounts.

What is an intangible fixed asset?

Intangible assets include operational assets that lack physical substance. For example, goodwill is a fixed asset, patents, copyrights, trademarks, and franchises. A company’s intangible assets are often not reported on its financial statements, or they may be reported significantly less than their actual value. This is because assets are accounted for at their historical cost.

Unlike tangible fixed assets such as a building or machinery, intangibles are often developed internally without any direct, measurable cost that can be capitalised. When an intangible is purchased, however, or when costs can be directly traced to the development of the asset, the cost is recorded as an intangible asset on the balance sheet.

Date of acquisition or creation

Generally, an asset is treated as created or acquired on or after 1 April 2002 when expenditure on its creation or acquisition is incurred on or after that date. Where expenditure is incurred partly before and after this date, it is possible to apportion the expenditure on a just and reasonable basis.

This general rule is amended if the asset:

  • Was acquired from a related party
  • Is internally generated goodwill

For assets acquired from related parties before 1 July 2020, the relevant date to consider is the first date a related party acquired the asset from an unrelated party. For acquisitions made on or after 1 July 2020, the relevant date is simply the date of acquisition, unless the related party is a company within the same capital gains group (in which case, the pre-1 July 2020 rules still apply). If the relevant date is on or after 1 April 2002, the asset will fall within the corporate intangible’s regime.

Which assets fall within the corporate intangible’s regime?

After determining the date of acquisition or creation, broadly, an intangible fixed asset is within the corporate intangibles regime if it was:

  • Created by the company on or after 1 April 2002
  • Acquired by the company on or after 1st April 2002 from a person who is not a related party
  • Acquired by the company between 1st April and 30th June 2020 from a related party but only where:
  • the party is a company, and the asset was already within the corporate intangible’s regime for the related party.
  • That related party acquired the asset from a third party on or after 1st April 2002, and the third party is sufficiently unrelated
  • The asset was created (by any person) on or after 1st April 2002
  • Acquired on or after 1st July 2020 from a related party (but not from the same capital gains group company)
  • Owned immediately before 1st July 2020 by a company that was not within the charge to UK corporation tax in respect of that asset.

Which assets do not fall within the corporate intangible’s regime?

  • Created by a company before 1st April 2002 (and ownership has not changed since)
  • Acquired by a company before 1st April 2002
  • Acquired by a company between 1st April 2002 and 30th June 2020 from a related person where that related person created or acquired the asset before 1st April 2002
  • Acquired by a company on or after 1st April 2002 from a company where both companies are in the same group and the related company disposing of the asset created before 1st April 2002.

Assets that fall outside the corporate intangible’s regime require different tax analyses depending upon the type of asset in question. However, most will be treated as capital assets under the chargeable gain’s legislation.

Intangible fixed assets – common mistakes

HMRC highlighted five of the most common mistakes around the intangible’s regime:

  • Asset identification – it is important that companies and their advisers undertake a detailed analysis to support any asset identification
  • No business acquisition – where a company has not acquired a business, relief for goodwill is not available under the intangible fixed asset regime
  • Date of acquisition – any IFAs acquired should be correctly identified so that the correct tax treatment can be applied – especially when the acquisition falls close to the date of one of the regime legislative changes. Companies should keep contemporaneous documents to evidence the date of acquisition.
  • Valuation – companies must obtain at least one professional independent valuation of all assets to ensure that the correct assets are valued on the proper basis, mainly if the acquisition is from a related party.
  • Documentary evidence – related parties are expected to document transactions and agreements as if they were with an unrelated third party. Records should be kept for six years from the end of the financial year to which they relate.

How we can help

We can advise on the impact of the IFA rules ahead of any significant acquisition or disposal or about the purchase or sale of a business. We can also advise you on the potential benefits of making one of the claims or the interaction between accounting treatment and tax implications.

For more information, please contact us at WIM Accountants at info@wimaccountants.com or call us on 02082271700.

New VAT Penalties regime

New VAT Penalties regime

 

Penalties for late payment and interest harmonisation

  • For VAT taxpayers from periods starting on or after 1 January 2023.
  • For taxpayers in Income Tax Self-Assessment (ITSA), from the tax year beginning 6 April 2024 for taxpayers with business or property income over £10,000 per year (that is, taxpayers must submit digital quarterly updates through Making Tax Digital for ITSA).
  • For all other ITSA taxpayers, from the tax year beginning 6 April 2025.

First penalty:

The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. The taxpayer incurs the first penalty if the tax remains unpaid after day 15. This penalty is set at 2% of the tax outstanding after day 15. If any of this tax is still unpaid after day 30, the penalty will be calculated as 2% of the tax due after day 15 plus 2% of the tax outstanding on day 30. In most instances, this will amount to a 4% charge at day 30.

Second penalty:

If the tax remains unpaid on day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues daily, at 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the due tax.

Time-to-Pay arrangements:

HMRC will offer taxpayers the option of requesting a Time-to-Pay (TTP) arrangement. This enables a taxpayer to stop a penalty from accruing further by approaching HMRC and agreeing on a schedule for paying their outstanding tax. A TTP arrangement, if agreed, has the same effect of paying the tax and stops penalties accruing from the day the taxpayer approaches HMRC to agree on it, as long as the taxpayer continues to honour the terms of the TTP agreement. The examples below illustrate how TTP work and the effect of a TTP is shown in this chart:

Days after payment due date Action by customer Penalty
0-15 Payments made or TTP is proposed by day 15 and then agreed No penalty is payable
16-30 Payments made or TTP is proposed by day 30 and then agreed The penalty will be calculated at half the total percentage rate (2%)
Day 30 Some tax is still unpaid; no TTP agreed. The penalty will be calculated at the total percentage rate (4%)

If tax is still unpaid on day 31 a second, an additional penalty will start to accrue at 4% per annum.

Where HMRC might not assess a late payment penalty

HMRC has discretionary power to reduce or not charge a penalty for late payment if it considers that appropriate in the circumstances. This will include special circumstances that cause a taxpayer to pay their tax late.

HMRC recognises that moving to the new system of late payment penalties is a significant change for some customers, especially those who might have more difficulty getting in contact with HMRC within 15 days of missing a payment to begin agreeing on a Time-to-Pay arrangement. HMRC will therefore take a light-touch approach to the initial 2% late payment penalty for customers in the first year of operation of the new system under both VAT and ITSA.

A taxpayer is doing their best to comply; HMRC will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC in the first year before HMRC charges a penalty. However, if a taxpayer has not approached HMRC by the end of day 30 and there is still an amount of tax outstanding, the first penalty will be charged 2% of the amount outstanding at day 15 plus 2% of what is still outstanding at day 30. In most instances, this will amount to a 4% penalty.

Additionally, there is no penalty if the taxpayer has a reasonable excuse for late payment. If HMRC is satisfied, a taxpayer has a reasonable excuse, HMRC will agree not to assess. This will prevent the taxpayer from unnecessarily having to appeal.

How the new late payment and repayment interest charges work

HMRC will charge late payment interest on tax outstanding after the due date, irrespective of whether any late payment penalties have also been charged. The late payment interest will apply from the date the payment was due until the date on which HMRC receives it. Late payment interest will be calculated as simple interest at a rate of 2.5% plus the Bank of England base rate.

Where a taxpayer has overpaid tax, HMRC will pay Repayment Interest (RPI) on any tax due to be repaid (the difference between the amount owing and the amount paid) either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. RPI will be paid at the Bank of England base rate of less than 1% (with a minimum rate of 0.5%).

Late payment interest and Time-to Pay arrangements

Late payment interest is charged when tax is paid late. HMRC will always try to help taxpayers in temporary financial difficulty manage payment of their debt. Late payment interest will continue to accrue on amounts not paid on time, even if those amounts are included in the Time-to-Pay arrangement.

If you need any advice on the late payment changes by HMRC, please get in touch with us by calling 02082271700 or email info@wimaccountants.com

 

Can I get Tax Relief on Pension Payments?

Can I get Tax Relief on Pension Payments?

What is a pension, and how does it work?

A pension is a financial product that lets you save up to fund your retirement. Technically, it’s a kind of tax wrapper with specific rules around what you can save and when you can access your cash.

There are broadly three types of pensions – defined contribution, defined benefit and the state pension.

Defined contribution:

Most workplace pensions are the defined contribution type. Private pensions, including Self-Invested Personal Pensions (SIPPs), are too. With this kind of saving, the amount you get when you retire depends on how much you contributed to your pension fund during your working life, your investment returns, and the charges you’ve paid.

Whatever you save attracts tax relief, which means the government boosts your contributions. If you have a workplace scheme, your employer usually has to contribute.

Your employer sets up workplace pensions, and you won’t get a choice over the provider. You should be automatically enrolled if you earn over a certain amount a year with one company. Those who haven’t enrolled automatically can usually register voluntarily because they don’t make enough or are under 21.

Defined benefit:

These are also sometimes known as final salary or career-average salary schemes. How much you get at retirement depends on your salary when you work and your length of service. You get a guaranteed income for life and don’t have to worry about investment returns.

State pension:

The state pension is a qualifying benefit paid by the government. To get the full amount, you need to have 35 years’ worth of National Insurance contributions. You can also get NI credits in some cases if you are out of work – for instance, if you’re looking after small children and have applied for child benefit.

Why pay into a pension?

Even though retirement can feel like a million miles away, saving early is generally a good idea. Most people want to retire at some stage, and you need enough money to keep you going, often for more than 30 years.  That means the cash you save while you’re working needs to last decades.

The more you put away when you’re younger, the more your investments will grow, and the more comfortable your retirement will be. Burying your head in the sand could mean you have to keep working past the point at which you’d like to slow down. The state pension only works out at £179.60 per week, which is less than most people need to live on.

While there are many ways to save and invest for your retirement, a pension is often the most attractive because you can get:

  • Tax relief (free government money). When you contribute to your pension, you get tax relief. In simplistic terms, this means that the government gives you free cash to top up your savings. Depending on how much income tax you pay, you’ll usually get added between 20% and 45%. There’s a limit, though; you can only save £40,000 a year or your total salary – whichever is lower.
  • Employer contributions (free money from your bosses). A workplace pension legally requires employers to contribute on your behalf. Not only do you receive contributions from the government in the form of tax relief, but you also get free cash from your boss. The minimum employers have to pay is 3%, but many will pay more if you increase your contributions. Ask your employer if they offer contribution matching.

Pension investments are free from the capital gains tax, so that you won’t pay tax on any profits made from the investments within your pension pots.

Pension 2028

  • Clarity is required for people who reach the new normal minimum pension age in 2028.
  • Real estate investment trust regime broadened.
  • Higher rates of tax relief for new theatrical and orchestral productions.
  • Reporting deadline for residential capital gains extended from 30 to 60 days.
  • Cross-border group relief inequalities removed.
  • Dormant asset scheme amended, so a tax charge arises only when the investor claims the asset.

Annual allowance charge:

You can only get tax relief up to your current annual allowance, made up of the current year’s allowance (currently £40,000) and any unused allowance from the previous three tax years.

Since April 2016, anyone whose total income, pension contributions and employer pension contributions are over £150,000 in a year will get a reduced allowance. However, it was announced in the Budget in March 2020 that the annual allowance will only begin to taper for those who have an income above £240,000 – the £200,000 allowance plus the £40,000 you can save into a pension.

It means that for every £2 of ‘adjusted income’ that goes over £240,000, the annual allowance for that year reduces by £1. Meaning anyone earning a total income of £300,000 or more will only get £4,000 tax relief annually.

This example shows how the annual limits can be used and carried over…

Current annual allowance = £40,000 (NB reduces to £4,000 if you’ve started taking money from your pension). You can top up your allowance for the current tax year with any allowance you didn’t use from the previous three tax years.

Say you have been investing £10,000 a year in a pension in recent years. You would then be able to carry forward three lots of £30,000 – a total of £90,000 on top of the standard £40,000 annual allowance. That’s £130,000 overall.

Normal pension age:

You are eligible for the state pension provided that you have at least ten qualifying years on your National Insurance (NI) record. A qualifying year means a year in which you earn over the Lower Earnings Limit as salary (dividends don’t count). How much you receive will also depend on how many qualifying years you have. You need at least 35 qualifying years to qualify for the full amount.

Do I need to pay NICs to qualify for the state pension?

You don’t need to have paid National Insurance Contributions (NICs) to qualify for the state pension, though usually, you will. To build up qualifying years, your salary must be at or over the Lower Earnings Limit (currently £6,136). However, you don’t start paying NICs until you take a salary over the NIC Primary Threshold (now £8,632). So if your salary falls between these two figures, you’ll build up qualifying years without paying any NI. For this reason, some company directors deliberately set their salaries at this low level and take the rest of their income as dividends.

How much is the state pension?

If you qualify for the full amount of the new state pension, you will receive £175.20 per week, or £9,110.40 a year (the tax year 2020/21). This amount rises each year, at least in line with inflation, and often more. If you have fewer than 35 qualifying years, the amount you receive will be reduced proportionally.

If you reached state pension age before 6 April 2016, you would receive the old state pension instead, a different amount.

How much can I earn while taking the state pension?

You can earn as much as you like and continue to qualify for the state pension. However, you will pay tax on any income above the personal allowance.

Here’s an example. The full new state pension gives you an annual income of £9,110.40. The personal allowance is £12,500, so you could earn up to £3,389.60 a year on top of the state pension before having to pay any tax at all. If you were to earn (for example) £10,000 a year while drawing the state pension, your taxable income would be £6,610.40, and you’d have a tax bill of £1,322.08 However, you wouldn’t pay any NI contributions.

If you’re still earning and drawing the state pension, talk to us at WIM accountants for financial advice to ensure you’re not wasting too much of your state pension in tax. It may make sense to scale back your hours or find another solution.

Does HMRC have too` much power or not enough?

Does HMRC have too` much power or not enough?

The taxes collected by HMRC – £584.5bn in 2020-21 – run the UK and, as such, the right amounts must be managed.

To this end, HMRC has myriad powers to review returns and check taxes have been correctly calculated and paid. For civil cases, these powers include the ability to:

  • open and close enquiries.
  • request information and documentation.
  • inspect business premises; and
  • raise assessments for up to 20 years.

Most people will agree that the powers are not ‘bad’, but how they are used affects how they and HMRC are perceived. Unfortunately, many tax investigations practitioners have experienced HMRC misapplying its powers or abusing them.

Legal interpretation

For the past few years, HMRC has been pushing a narrative that ‘anyone who completes a tax return incorrectly is deliberately depriving the general public of essential services to further its agenda. Increasingly the department uses the phrase ‘tax avoidance and evasion’ in various marketing and other initiatives, with avoidance and evasion being grouped. Speaking to the man on the street, it is common to see that individuals do not understand the difference between avoidance and evasion (let alone ‘aggressive tax avoidance). HMRC is partly to blame for propagating the idea that they are the same.

Further highlighting this is HMRC’s interpretation of the ‘tax gap’. HMRC says: ‘The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is paid.’ The causes of the tax gap, other than taxpayers making errors on their returns, are stated as ‘legal interpretation, evasion, avoidance and criminal attacks on the tax system’ as per the most recent tax gap estimates for 2019-20. Technically, tax avoidance is legal (let’s not go into ‘morality’ just now), and tax legally avoided should not be paid to HMRC. Therefore, it should not form part of the tax gap. However, lumping avoidance and evasion together and saying that they both contribute to a tax loss is misleading at best.

‘Legal interpretation’ is the tax due should taxpayers interpret the legislation differently from HMRC. If there is any disparity until the courts have defined the interpretation, I would argue that the tax gap resulting from legal interpretation should not exist. After all, if HMRC loses at the tribunal, the tax gap disappears.

Erosion of taxpayer safeguards

The reduction of safeguards for taxpayers indirectly contributes to HMRC’s powers and directly increases the perception of the department being omnipotent when it comes to tax affairs. Since the loan charge, we have seen more retro action in HMRC’s arsenal.

When HMRC becomes aware through losses at the tribunal that its interpretation of tax legislation is incorrect, it changes the legislation with retrospective effect. This has the dual effect of preventing people with open inquiries from having their day in court concerning the legislation in force when the potential tax loss arose and without any recourse to claiming back costs sunk in legal fees.

Examples include the legislation on:

  • TMA 1970, s 8 notices and penalties issued by computers – any open appeals against automated penalties or appeals on the basis that notices to file were invalid because they were automated is now subject to debate; and
  • HMRC’s new policy that the high-income child benefit charge is (and has now permanently been) assessable as income (unless the taxpayer appealed HMRC’s assessment on or before 30 June 2021). This will be legislated for in the next Finance Bill.

Does HMRC need more powers?

Unsurprisingly, our answer to this question is ‘no’ – because of how the current powers are being used. We would suggest better training for the enquiry staff in the first instance.

The people at the top of HMRC management and the Treasury also need to be selected independently of the government. For example, the financial secretary to the Treasury should not be an MP as well. HMRC can then request powers, and if independent of government, the lens through which these requests are made may be more objective.

If taxpayers could rely on HMRC, particularly those on a budget, their finances would not limit the quality of the advice. If we look at those caught by the loan charge, many individuals say they spoke to HMRC, which told them the arrangements were not subject to the disclosure of tax avoidance schemes regime. Raising standards of advice given by HMRC would significantly reduce the tax lost due to taxpayers being duped into using schemes. We would respectfully suggest that before accusing tax advisers of poor-quality work, HMRC should perhaps consider the quality of customer service it provides.

WIM Accountants

What can be claimed as an expense for a Limited company?

What can be claimed as an expense for a Limited company?

What is a Limited Company?

A Limited Liability Company is an “incorporated” business structure that means that to bring the company into existence, it must first be formally registered with Companies House.

Once registered, the limited company is an entirely distinct “legal entity”, separate from the owners of the business.

A limited company is ‘limited by shares’ or ‘limited by guarantee.

Limited by shares

Limited by shares, companies are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

Limited by guarantee

Limited by guarantee companies are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount.’
  • invests profits it makes back into the company

Choosing company name

You must choose a name for your business if you’re setting up a private limited company.

There are different rules for sole traders and business partnerships.

Your name cannot be the same as another registered company’s name. If your name is too similar to another company’s name or trademark, you may change it if someone makes a complaint.

Your name must usually end in ‘Limited’ or ‘Ltd’. You can include the Welsh equivalents ‘Cyfyngedig’ and ‘Cyf’ instead if you registered the company in Wales.

‘Same as’ names

‘Same as’ names include those where the only difference to an existing name is:

  • certain punctuation
  • certain special characters, for example, the ‘plus’ sign
  • a word or character that’s similar in appearance or meaning to another from the existing name
  • a word or character used commonly in UK company names

Advantages of limited company:

  • Limited liability to owners.
  • Low set-up costs.
  • Easy to incorporate.
  • Simple succession and business transfer.
  • Tax advantage

Disadvantages of a limited company:

  • Complex administration
  • Obtaining finance
  • Public record of your finances and filing history

Limited Company expenses

Here are some of the core business expenses you can set off against Corporation Tax (unless otherwise stated, plus maybe others not listed here specific to your business):

  • Wages / Salary for third parties on payroll inc;
    • Director salaries
    • Pension contributions (via an approved scheme).
    • Employers’ national insurance contributions (NICs).
  • Subcontractor costsanyone you bring in to do some work for you.
  • Food and Drink – See below for further clarification on this
  • Accommodation costs when away from the usual place of business (although you must not exceed 24 months at a ‘temporary workplace’). If you need to pay for accommodation, you can claim the expenses as tax-deductible if they are exclusively for your work. If you use the capacity for a mix of business and personal use, you must calculate the proportion of business use and claim for this proportion only. HMRC advise that if a period of continuous work lasts more than 24 months at a single workplace (i.e. client site), then that work is not temporary, and you cannot claim expenses, subsistence and tax relief. A period of continuous work means 40% or more of your time. So, if you spend more than 40% of your time at a client’s site, you can only claim expenses, subsistence and tax relief for 24 months. After 24 months, or when you become aware you will be spending more than 24 months at a client’s site, your workplace is permanent, and you cannot claim expenses.
  • Incidental overnight expenses of £5/night (£10/ night if overseas) can be claimed as a flat rate if you work away from home.
  • Travel / Transport
  • If using your vehicle- mileage allowance of 45p/ mile for the first 10,000 miles, and 25p/ mile after that 20p/ mile for bicycles.
  • Alternatively, you can claim for ‘actual’- A percentage according to usage for the business of:
  • Vehicle purchase cost
  • Insurance
  • Road tax
  • Fuel
  • Maintenance and servicing
  • Parking for business
  • Any other travel costs which are incurred while running your business
  • Training course fees if the skills are relevant to the business and are for ‘upskilling’. Qualifications for a new skill (e.g. initial electrician training) are allowable only as a capital cost.
  • Tools and Equipment and safety equipment (inc first aid kits),
  • PPE (personal protective equipment) – work boots, Hi-Vis workwear, gloves, waterproofs, overalls, etc
  • Computer/Software and similar equipment for use in the business, e.g. laptop, pc, printer, scanner, chargers etc.
  • PPS (post, printing and stationery) Stationery, postage, and printing costs.
  • Insurance – Business insurance, such as professional indemnity insurance.
  • Memberships & Subscriptions Any memberships to professional or trade bodies and subscriptions to professional or trade publications. Also business magazines and books.
  • Professional fees, such as accountant or solicitor.
  • Telephone and broadband packages (if the contract is in the company name).
  • Mobile and Smartphones (if the contract is in the company name). The cost of business calls can be reclaimed on a residential phone bill.
  • Home office costs (a flat £4/week without receipts is allowed by HMRC or work out a proportion of the household bills).
  • Advertising and marketing – Costs of advertising and marketing your business inc standard costs, e.g. Business cards and online advertising, e.g. google ads
  • Business gifts up to £50 per individual are allowable before more complex rules apply. HMRC states, ‘ A gift of alcoholic drink, tobacco, food, or an exchangeable voucher is not tax-deductible unless it is a trade sample. Gifts which carry advertising – such as stickers, mugs, diaries, tax cards, keyrings, are generally allowable as advertising and promotion costs
  • Bank charges – authorised bank charges are allowable
  • Entertaining clients, customers, or third parties You should include this as a business expense, but this is not allowed. If you hire a venue for an event, then tax relief may be claimed on the cost of the venue
  • Staff –

        o  Entertaining staff – this is allowable for tax purposes as staff welfare. This only applies to official employees, not freelancers/subcontractors. There is also a Christmas party exemption for employees of £150 per person per year.

         o An eye test for employees who use computer equipment.

         o An annual private health check for employees.

  • Capital allowances (depreciation of assets)
  • Hire purchase agreements (in the business name).
  • Company car expenses (although there is a benefit in kind charge for private use).

Food/ Subsistence

HMRC rules say, “everyone must eat to live, and such costs are normal costs of living incurred by all and not incurred for trading” this means that because you derive some personal benefit (you eat to stay alive). You’re not eating to do your job; the cost of food and drink is not wholly and exclusively for your business and cant be included as an allowable business cost.

See common expenses claimed for incorrectly include:

  • Working out of your local coffee shop. You buy coffees and food/snacks. Your food and drink cost is not allowable for tax but should be included in the accounts as it is a business expense. Just be aware you will NOT get tax relief on the cost.
  • You spend the day working at a client’s site close to home but pop out to buy coffee and/or lunch. Your food and drink cost is not allowable for tax but should be included in the accounts as it is a business expense. Just be aware you will NOT get tax relief on the cost.
  • You attend a local networking event, and the entrance fee doesn’t include refreshments, so you pay for your coffee when you get there. The networking fee is allowable, but the cost of your drink is NOT.
  • You work from home and order food because you’re got a deadline to meet and no time to cook. The cost is not allowable.

Some allowable food/subsistence costs:

Be warned about claiming subsistence for locations too close to your base of work as these may not be allowed.

  • If you are staying away from your usual base overnight on business.
  • For example, you live and work in and around Winchester but must travel to Birmingham for a 2-day conference. You would be allowed to claim “reasonable” costs for the evening meal and breakfast (please note alcohol is not subsistence unless it is purchased with a meal, and even then, it must be reasonable, e.g. one drink or half a bottle of wine).
  • If you make a journey that is outside your normal pattern of business activity
  • For example, you run a coaching and mentoring business from your home in Bolton. If you had to embark on a 3-hour drive to attend a CPD course and stopped off at an M&S en-route to buy lunch – the cost of lunch would be an allowable deduction.
  • If you are running a business that is by nature itinerant
  • This would involve running a company where you did temporary work at various locations without visiting the same client regularly. Examples include a party entertainer or a jobbing gardener.

Unfortunately, HMRC doesn’t give precise guidance as to what constitutes “itinerant” or “reasonable” regarding costs. If your circumstances aren’t straightforward, talk to WIM Accountants about what you can and cannot claim. And don’t forget to keep all your receipts.

 

If you would like any further information on anything covered in this blog, please feel free to contact us

 

 

VAT implications for businesses supplying goods or services to EU/Non-EU

VAT implications for businesses supplying goods or services to EU/Non-EU

Place of supply

For VAT on services, the general ‘place of supply’ principle still applies. This rule determines whether the service is within the scope of UK VAT.

For B2B services, the place of supply is where the customer is resident. This means that where your business customer is resident in the EU, the supply of the service is outside the scope of VAT, so zero-rated. Your non-UK based customer then uses the revered charge to the VAT in their return. However, you will need to account for the transaction as zero-rated on your VAT return. For this, you need evidence of your customer being out of the UK (typically a valid VAT or tax ID number).

For B2C services, the place of supply is where the supplier (i.e., your business) belongs. This means, just like before Brexit, you will need to charge VAT to your EU and non-EU customers, although some important exceptions apply.

Special rules

Under existing rules, certain services, such as supplies about UK land, transport, restaurant and catering services, hiring goods situated in the UK, broadcasting, and admission to events, conferences, and meetings in the UK, are treated as made in the UK. They are currently liable to UK VAT even where the customer is in the EU.

Do UK businesses have to pay VAT on services provided to the EU?

The VAT treatment of services is subject to the rules relating to the supply of taxable services. After Brexit, the general place of supply rules has not changed.

For supplies to businesses outside the UK, the place of supply is outside the UK; therefore, there is no UK VAT chargeable. As a result, a UK business supplying services to an EU business is not required to charge VAT. This is no change from the situation pre-Brexit.

What is the difference between EU VAT and non-EU VAT?

If the customer is situated outside the UK, no VAT is chargeable. Following the transition, the UK is not part of the EU, and therefore the distinction between EU and non-EU customers does not apply. Whether the customer for such services is in the EU or outside the EU, no VAT is chargeable.

Buying services from EU countries

UK businesses buying services from EU countries previously used the reverse charge mechanism, accounting for both input VAT and output VAT on such supplies. This procedure will not change.

Key points

  • Businesses in Great Britain cannot take advantage of triangulation when selling goods to the EU.
  • It may be necessary to register for VAT in the country where goods are sold.
  • An export declaration is necessary when moving goods out of GB to an EU country.
  • Customs duty does not usually arise when exporting to the EU because of the Brexit trade deal.

 

 

Income Tax MTD: What it means for Sole Traders in 2024

Income Tax MTD : What it means for sole traders in 2024

Making Tax Digital (MTD) is the UK governments flagship programme to make tax accounting easier for businesses and individuals such as sole traders. As you might guess from the name, it does this by legislating the digitalisation of tax data and submission.

Making Tax Digital for Income Tax

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6th April 2024.

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. Suppose you are a self-employed business or landlord. In that case, you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self-Assessment tax return.

Helping businesses, self-employed people and landlords get it the right first time.

Most customers want to get their tax right, but the latest tax gap figures show that too many find this challenging, with avoidable mistakes costing the Exchequer £8.5 billion from 2018 to 2019. The improved accuracy that digital records provide, the help built into many software products and the fact that information is sent directly to HMRC from the digital records, avoiding transposition errors, will reduce the amount of tax lost to these avoidable errors.

As businesses become increasingly digital, the use of digital record-keeping tools helps prevent businesses from making errors. This addresses the part of the tax gap attributable to error and failure to take reasonable care by significantly reducing the opportunity to make some types of mistakes in tax returns, principally simple arithmetical and transposition errors.

The latest published tax gap figures showed that avoidable mistakes made by taxpayers cost the Exchequer more than £9.9 billion in lost revenue 2017-2018. By supporting businesses to get their tax right, MTD is designed to prevent these types of errors, reducing the tax gap, supporting public services, and levelling the playing field for businesses.

Exchequer impact (£m)

2020 to 2021 2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026
+20 +55 +210 +400

 

Transitional one-off costs could include some or all of the following:

  • time spent in familiarisation with the new MTD obligations (digital record keeping and quarterly submission of information)
  • in-house training
  • the purchase of new hardware or upgrading of existing hardware (expected to affect a small minority)
  • additional accountancy or agents’ costs

Alongside the costs of making the transition to MTD, significant, more comprehensive benefits and cost efficiencies are available for many businesses as part of going digital, once they have moved to digital record keeping, such as productivity and efficiency. Some, but not all, of these are measurable in cost terms. For businesses, these benefits may offset wholly, or in part, any costs of complying with MTD.

HMRC has been working with the software industry to ensure that businesses needing to update their accounting systems will access affordable software products. The government has committed to free software products for the smallest businesses with straightforward affairs.

MTD requirements for sole traders

  • Rental income from property you own contributes to this £10,000 threshold, too.
  • If you owned and operated four businesses, each with an income of £3,000, for example, you’d need to register for MTD for Income Tax and then follow its rules for all of them.
  • Similarly, if you received £5,000 income from your sole trader business and £6,000 from rental income on the property you own, you’ll need to use MTD for Income Tax.

For taxpayers who submit details via the MTD for Income Tax route and report all their income and allowable expenses, there will no longer be any need to send a Self-Assessment tax return

What are the MTD for Income Tax rules for sole traders?

The majority of sole traders whose business income is above £10,000 will be required to use compatible software for their income tax accounting for the first entire accounting period starting on or after 6th April 2024.

For taxpayers who submit details via MTD for the Income Tax route and report all their income and allowable expenses, there will no longer be any need to send a self-assessment tax return (outside of a minority of circumstances where other types of income or deductions need to be declared, in which case a self-assessment return may be required in addition the following MTD for the Income Tax rules).

Which sole traders are affected by MTD for Income Tax?

MTD impacts any sole trader with a taxable income of over £10,000 for Income Tax. This can be from any businesses they own or rent on property they own (or a combination of them).

Those whose business income is below this threshold or those who complete Self-Assessment for other reasons, such as for state benefits, pension income or saving interest- will probably see no changes.

Will a sole trader still be able to file paper Self-Assessment returns under MTD for Income Tax?

If your income is below £10,000, the MTD for Income Tax regulations won’t apply to you. You will likely be able to continue filing your Self-Assessment return in the same way as usual. While most businesses required to follow the MTD for Income Tax rules will have to use compatible software, some can apply to be digitally excluded. This is allowed because it’s either impossible or impractical for them to use technology in the way MTD requires.

Can a sole trader still handwrite or print invoices under MTD for Income Tax?

There’s no issue with creating paperwork in your business under MTD for Income Tax’s rules. The proviso is that the data will either have to already be in your digital accounting records (e.g., you’re printing an invoice for posting out from within your accounting software), or you’ll need to transfer the details to your digital accounting records soon as possible.

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

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