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.

UK R&D geared up for a tech-driven future

UK R&D geared up for a tech-driven future

Significant changes are coming to R&D tax incentives from April 2023. Find out what these changes could mean for your future R&D claims.

HMRC have provided more details on the forthcoming changes to the research and development (R&D) tax incentive with effect from April 2023. To summarise, the changes announced the government’s aim to modernise the regime by expanding the relief to cloud and computing costs, refocusing the incentives on UK based R&D, improving compliance by deterring fraud and error, and finally resolving some flaws of the current rules.

What are the changes?

The proposals are to extend the R&D incentives to acquire datasets used in R&D via a licence payment. However, this is restricted to datasets used only for R&D purposes. If the claimant can sell the dataset or use/commercialise data beyond the R&D project, these costs wouldn’t be eligible.

In addition, could computing costs be eligible if they directly relate to R&D, which would include the computation, analysis, and processing of data for R&D. However, some enormous fees linked to servers and storage would be excluded from the R&D incentives claims?

HMRC also clarifies that staff costs for employees engaged in collecting, cleansing, and analysing data for R&D purposes may be included in the claims.

Refocusing R&D incentives on UK activities

The proposed changes will severely restrict UK R&D tax incentives for overseas R&D. The fundamental changes proposed are as follows:

  • Subcontracted out R&D will only qualify for R&D incentives where the third party undertakes the R&D in the UK.
  • Payment to externally provided workers (workers provided by third party staff providers) will only qualify where the workers’ salaries are paid through UK payroll.

HMRC has asked for feedback on any unreasonable expectations potentially to the application of these wide-ranging rules that could severely restrict R&D claims for international groups and all businesses that undertake R&D activities overseas.

Tackling abuse and compliance

In 2019, UK businesses claimed R&D tax relief of £47.5 billion. The national statistics office estimates businesses only carried on R&D costing £25.9 billion privately financed in the UK by private businesses. Some but not all this perceived gap may be explained by overseas R&D, but clearly, HMRC has concerns over the cost-driven by spurious or excessive R&D claims. The changes aiming to tackle this are:

  • All claims will have to be made digitally.
  • Digital claims will require more details to substantiate the claims (unclear precisely what this means and in what format).
  • Each claim will be endorsed by a named senior officer of the company.
  • Companies will need to inform HMRC in advance that they plan to make a claim (unclear if this is at a project or company level, or what the time frames will be).
  • Claims will need to include details of any agent who has advised the company on compiling the claim.

Changes to address anomalies in the R&D Legislation

Several changes are being introduced, including ensuring the time limits for R&D claims are two years after the end of the claim period, that companies do not fail the going concern test for technical reasons (i.e. there is a transfer of trade) and that R&D tax relief can be claimed provided the expenditure will be paid within two years of the claim period.

 

 

 

 

Is the VAT Flat Rate Scheme right for your business?

Is the VAT Flat Rate Scheme right for your business?

FRS (Flat rate scheme)

An optional VAT scheme is available to all small businesses with a VAT exclusive annual taxable turnover of up to £150,000. This requirement applies at the point of entry into the scheme. Companies should check their turnover on each anniversary of joining the scheme, and if the turnover exceeds £230,000 (VAT inclusive), they must usually leave the scheme.

A business that joins the scheme avoids accounting internally for input VAT on all purchases and supplies. Instead, it calculates its net liability by applying a flat rate percentage to the VAT inclusive turnover. The flat rate percentage depends on the trade sector a business falls for the scheme. Overall applicable percentages range from 4% to 14.5%.

Under the FRS, businesses can:

  • Continue to charge their customers the standard rate of 20% for the supplies (i.e. not the flat rate percentage) on all taxable supplies of goods or services.
  • Businesses do not have to record all the sale details and purchase invoices received to calculate the amount of VAT they must pay to HMRC.

Scheme rules

The basic principle of the FRS is that the business applies a fixed percentage to its gross income, and that is the VAT payable at the end of each quarter. The rate of percentage depends on the relevant FRS business category. A business claims input tax only if it buys capital goods ( Such as computer equipment, plant and machinery etc.) costing more than £2000, including VAT.

The applicable percentage is also applied to zero-rated and exempt sales, including VAT. The relevant percentage is also used to zero-rated and exempt sales and those subject to 5% or 20% VAT. But income outside the VAT scope, for example, most services provided to overseas business customers, are excluded. The scheme can be used by any business with annual taxable sales of £150,000 or less, excluding VAT.

Who can and cannot join the scheme?

You will be eligible to join the VAT FRS if:

  • You’re eligible to be registered for VAT
  • Your taxable turnover (excluding VAT) in the next year will be £150,000 or less
  • Your business is not ‘associated’ with another business that cannot join the FRS

 

You are ineligible to join the VAT Flat Rate Scheme if:

  • You’ve been in the scheme before and left it less than 12 months ago (you need to wait until a year has gone by before you can re-join)
  • You’ve been guilty of a VAT offence or charged a penalty for evading VAT within the last 12 months
  • You use a second-hand margin scheme
  • You are or have been within the last 24 months, a member or potential member of a VAT group, or registered for VAT as a division of a more significant business
  • Your business is closely associated with another business

When to consider avoiding the VAT Flat Rate Scheme?

Because flat rate taxable sales include VAT-exempt sales, it’s probably not a good idea to join the scheme if you make a lot of exempt sales, as you might end up paying more in VAT.

If you make a lot of zero-rated sales or buy standard-rated goods and services, joining the scheme will likely cost you more in VAT. Businesses not on the Flat Rate Scheme would usually get repayment from HMRC each quarter which they would lose if they joined the scheme.

The flat rate you use depends on the business sector that you belong to. The correct sector is the one that most closely describes what your business will be doing in the coming year. The flat rate has changed since 1 April 2017 if you’re a limited cost business.

 

What is limited cost business:

Your business will be classed as a ‘limited cost business’ if your goods/services cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and determine which goods count as costs.

If you are not a limited cost business, you use your business type to work out your flat rate.

For example, if your turnover is £150,000, you need a minimum of £3,000 direct cost to use the trade rate suggested by HMRC.

 

Steps to consider:

Step What you need to do Please remember
1 See if your business will be a limited cost business.  If you’re a limited cost business, your flat rate percentage will be 16.5% regardless of your sector.
2 If you’re not a limited cost business, a list of businesses is available The descriptions of the sectors are not technical and use ordinary English. They are what HMRC reasonably believes relate to business types. So if there is a match or a close fit, you can use that sector.
3 Check to make sure your business is not mentioned in a composite sector Some of the sectors refer to more than one business type.
4 If there is not a sector that mentions your business, look at the sectors for ‘Businesses not mentioned elsewhere There’s one for retail, one for business services and one for manufacturing.
5 If you still have not found a sector, you can use ‘Any other activity not listed elsewhere Only use this sector if your business does not fit with anything else.

Get your website taxes right

Get your website taxes right

 

Tax and Accounting Treatment for Website Development Costs

Before you can start determining the tax treatment for your website development cost, you need to assess the use of the website. You need to decide if your website is more of a brochure that publicises your brand or if the website’s purpose is to sell goods.

Is the purpose of your website to publicise your brand?

If your website isn’t for the direct purchasing of goods, and more about publishing your business, then the answer is simple. The entire website development goes on your profit and loss statement.

For those of you who are unsure about a profit and loss statement, it’s a document that shows a company’s financial progress over a certain period. To display this progress, you need to add up all the sources of revenue and subtract all the expenses related to that revenue.

If the purpose of your website is for customers to buy things through it and make a profit on those items, then the tax treatment of your website development gets a little bit more complicated. You can no longer stick your website product under profit and loss. Now at least part of it needs to go on the balance sheet.

Is the purpose of your website to sell goods?

According to the International Accounting Standards Board (via IAS 38 and SIC32), there are different stages of the website builder that should have another accounting treatment. The cost of maintaining the initial planning stage is expensive. The building of a website profits as an asset on the balance sheet, any updates made on the website or changes are treated as an expense and subjected to profit and loss statement.

What is a balance sheet, and how does it differ from P&L?

Although the balance sheet and the P&L statement contain some of the same financial information, including revenues, expenses, and profits, they are essential differences. Here’s the main one: The balance sheet reports the assets, liabilities, and shareholder equity at a specific point in time, while a P&L statement summarises a company’s revenues, costs, and expenses during a particular period.

What is the tax treatment of website cost?

The tax treatment mirrors the tax position for website costs. The main feature of the intangible asset’s regime is that the tax treatment follows the accounting treatment. As there may be more assets classes as intangible fixed assets, the tax treatment will be easier to follow from the accounts.

 The corporation tax regime includes specific rules regarding the tax treatment of intangible assets, referred to as the ‘intangible assets regime’, which can be found in Part 8 of CTA 2009.   This means that the tax treatment of digital expenses can be more complicated for companies than unincorporated businesses (which do not have an equivalent to the intangible assets regime).

For companies, there are broadly three possible scenarios depending on whether expenditure is revenue or capital for tax purposes and, if capital, how it is treated for accounts purposes:

  • The expenditure is revenue in nature – generally deductible in full when it is recognised in the accounts.
  • The expenditure is capital in nature and accounted for as a tangible asset – capital allowances may be available if the asset functions as a plant or is software (as set out above for unincorporated businesses).
  • The expenditure is capital in nature and accounted for as an intangible asset – the intangible assets regime may apply.

Licences and rights over software, website development costs and domain names will often be considered intangible assets. Therefore, they will fall within the intangible assets regime provided they are created or acquired from an unrelated party on or after 1 April 2002.  Where this is the case, the tax relief will follow the accounting treatment with amortisation or impairment of the asset, usually deductible for tax purposes as and when recognised in the accounts.

However, if intangible assets were:

  • created or acquired before 1 April 2002, or
  • acquired from a connected party (or parties) who created/acquired them before 1 April 2002

then the intangible assets regime will not apply.

It should also be noted that software is excluded from the intangible assets regime2 if:

  • it is treated for accounting purposes as part of the related hardware; or
  • the company makes an election under s815 CTA 2009 to exclude it from the regime.

An asset that will also be excluded entirely from the intangible asset regime is treated as an intangible asset in the company’s accounts but treated as a tangible asset in a previous accounting period on which capital allowances were claimed (for example, on a change of accounting standards).

Any of the above applies to exclude an asset from the intangible assets regime; it may qualify for capital allowances instead.

It may be beneficial to make an election under s815 CTA 2009 if claiming capital allowances would give relief faster than deducting the amortisation or impairment costs recognised in the accounts (for example, because the Annual Investment Allowance (AIA) will cover the expenditure in full or the intangible asset will be amortised over a long period).

What is the intangible assets regime, and how does it work?

The Intangible Fixed Assets regime (IFA regime), introduced on 1 April 2002, fundamentally changed how the UK corporation tax system treats intangible fixed assets (such as copyrights, patents, and trademarks) and goodwill.

Qualifying intangible assets include the following but are not limited to;

– Intellectual property includes patents, trademarks and copyrights.

– Royalties 

– Goodwill

– Player registrations (sports clubs),

These are defined in an accounting standard, and although the assets are not required to be capitalised in the company’s account, rules still do apply.

Assets that exclude in the legislation include and are not limited to; 

– IFAs created or acquired before 1 April 2002

– Financial assets and assets held for non-commercial purposes

– Assets acquired from related parties, such as IFAs created by related parties before 1 April 2002 or goodwill created on the incorporation of a business.

Intangible tax rules contain a wise rollover relief. Although there is no interaction between the two forms of rollover relief, this is like capital gains relief, so the tangible asset’s gain cannot be rolled over into an intangible asset. By acquiring other IFAs directly, a company can only defer gains on realisations.

Tax Treatment

For intangible assets obtained on or after 1 April 2019, the tax treatment of goodwill and other customer-related intangibles, i.e., customer lists, attract relief of 6.5% of the cost per annum. This is subjected to a cap six the value of any qualifying property.

From 1 July 2020, all intangible assets acquired, whether from an unrelated party or not, come within the scope of the corporate intangible’s regime (other than those acquired from a company is the same capital gains group). This means that any profit or loss on a subsequent disposal of such assets will be dealt with under the corporate intangible’s regime. The tax treatment will depend on whether the assets are restricted assets, such as goodwill and intangible assets.

Rollover relief cannot be claimed on the following.

– Deemed realisations on intangible assets.

– An asset is partly realised, and the related party acquires an interest in that asset or some other asset deriving value from the part-realised asset.

 

 

 

 

 

Insights: Non-domiciled UK residents and Remittance

Insights: Non-domiciled UK residents and Remittance

 

On 20th August 2021, HMRC confirmed that it would be writing to non-domiciled taxpayers who have lived in the UK for either seven years out of the previous nine tax years, or 12 out of the last 14, who have filed their 2019-20 tax returns but who subsequently may still need to the remittance basis charge (RBC) or move to the arising basis.

 

UK non-domicile remittance regime

The non-domicile rules allow those individuals resident in the UK with an overseas domicile to access the alternative remittance regime whereby their UK tax position is limited to UK source income and gains and any overseas income and gains that are remitted to the UK.

HMRC statistical information issued on 27th July 2021 confirmed 75,700 non-domiciled individuals are claiming the remittance basis. Of the 75,700 that statistical information estimated that some 1900 individuals were liable to pay RBC, 1400 would be liable to pay the £30,000 amount, and only 500 liable to pay the higher £60,000.

However, from time to time, non-domicile individuals will forget the need to pay the charge. They will continue to file, claiming the remittance basis, unaware of the requirement to pay the RBC. It has also been the case that some (a small minority) will deliberately not pay the charge. The default risk position in those cases is that the individual should be taxed.

 

Action on receipt of the letter

HMRC has confirmed that where it is aware that an agent is acting, it will also write to the agent. Given that most non-domicile clients will engage a tax adviser to file their return, the chances are high that the agent will become aware of the HMRC letter.

On receipt of a letter, it is always advisable to take some time to consider the wider risks and issues. As stated, the letters provide helpful examples of common errors which are in themselves a useful guide to some of the things that the tax adviser should be thinking about.

 

If you are planning on moving to the UK, you need the best advice and specialists. The UK tax system is strict, and you must plan your lifestyle funding well in advance. WIM Accountants can help you make your claim and will endeavour to guide you every step of the way. This blog post aims to serve as a basic introduction to non-domicile status in the UK, but if you have more queries or would like to have a chat about our services feel free to contact us.

Tax implications from loans to participators made by close companies

Tax implications from loans to participators made by close companies

 

The Autumn Budget 2021 confirmed that the increased dividend upper rate will apply on tax charged under Corporation Tax Act 2010, s.455, which details new anti-avoidance measures in addition to those already in place for loans to participators in close companies. Let’s take a look at what this all really means.

 

First things first, what are close companies?

A company that is owned and controlled by no more than 5 individual participators (or controlled by any number of directors only). Key terms to note here are:

  • Participator: A person who has the right to be a company shareholder or ‘loan creditor’.
  • Control An individual has control if they own (or have the right to) more than 50% of company shares or voting powers.
  • Loan Creditor: A person who has lent the company money but does not include a normal trade creditor.

These definitions are interesting because it allows participators to enjoy tax-free funds which can be taken out of the company as loans. These loans can also remain for an indefinite amount of time, which is precisely why anti-avoidance rules were put into place under CTA s.455

 

Who do these rules apply to?

The rules apply to:

  • Loans to participators who are individuals or trustees, but not companies
  • Loans to associates of participators
  • Loans to partnerships (including limited partnerships, LLPs)
  • Companies that lend to an employee’s benefit trust

If a loan qualifies under these rules, the close company must pay tax equal to 25% (of loan made before 6 April 2016), or tax equal to 32.5%* (of loan made on or after 6 April 2016) directly to HMRC. The close company is exempt if the loan was repaid within nine months and one day from the end of the accounting period where the loan was made. The close company can also claim to recover the tax paid to HMRC when the loan is waived by the company.

It is important to note that this tax is classed as a liability under CTA s.419, so it should be included in the company CT self-assessment. Additionally, the individual who received the loan is liable to income tax on it.

*From April 2022 this rate will increase to 33.75%.

 

What about indirect loans?

Suppose two or more close companies arranged to transfer a loan via a third party (say, a bank), are they also affected by these anti-avoidance rules?

The same rules still apply provided that:

  • A close company makes a loan that does not result in tax under participator provisions
  • An individual (other than the close company) makes a payment, property transfer, or releases or fulfils a liability of a participator or associate in the company

Interestingly, this rule seems to work against arrangements made by any person. However, it does not apply to arrangements made in what would otherwise be considered ‘ordinary’ business and does not apply if the relevant recipient has the loan included in their total income. ‘Ordinary business’ implies that a company must make loans as part of its day-to-day trading.

HMRC illustrates this example very well:

Company H is a close company. Instead of making a loan directly to Mr A (an individual participator), they make a loan to an associated company, Company J. Company J then loans the money to Mr A.

In this case, the loan by one company to the other is treated as if it had been made direct to Mr A.

 

Loan aggregation

It is not too uncommon to see companies opt to have separate loan accounts for the same participator in the interests of admin work or commercial ease. HMRC hold the position that the close company liability on loans follows each of the loan accounts – hence it cannot be aggregated.

Any account showing a debit balance will incur liability under the rules. HMRC advise that credit balance can be used to repay the debit, but book entries have to be made for relief to be awarded. A company can also choose to have a singular loan account for all participators given that they are all separately recorded in the account, meaning that the close company loan charge and repayment relief would apply to each separate account.

 

Have any more questions?

Feel free to contact us for professional advice and guidance on how these rules can affect the cash flow of your company.

HMRC ramping up anti-abuse measures for R&D claims

HMRC ramping up anti-abuse measures for R&D claims

 

If you have been following the Autumn Budget announcement you may have noticed that the government highly values UK Research and Development (R&D) . After all, the UK surpasses its international peers in R&D investment at 1.1% of GDP. R&D spending is also set to rise to £22 billion in the next decade, a clear indicator of the UK commitment to cultivating and promoting homegrown innovation. But at the same time adding more incentives will inevitably bring about the increased risk of abuse which HMRC has recognised.

We take a look at the measures HMRC will be enforcing, why they’re needed in the first place and what repercussions can be expected.

 

What’s going to happen?

HMRC have announced that they have hired 100 R&D compliance officers to help tackle the abuse present within the system. It is a welcome action and an indication of firmness from HMRC to ensure that R&D tax credits are available to those who actually have an eligible claim for it.

 

Why are these measures being put into place?

Unfortunately, R&D service providers are unregulated and it comes as no surprise to see many businesses being promised money for an R&D claim but never actually see it because their claim was not eligible. From our own industry experience and reviews, we found that there was an alarming number of submissions made which completely misunderstood the scope of eligibility for an R&D claim. As a result, businesses are losing crucial money paying niche providers for a service that doesn’t exist or simply has no hope in qualifying for an R&D claim. Trust and competency are key elements here, and there are many R&D businesses that do not live up to the bill.

The current state of the R&D market is in need of proper structuring, which HMRC hopes to solve through increased scrutiny.

 

What consequences are there for R&D abuse?

Potential penalties arising from abuse of the incentive will be damaging, financially and legally. HMRC enquiries can last a long time, and they have full right to open enquiries going back 20 years for R&D submissions in that period. Businesses will face high legal costs from defending themselves, and in the event the claim is found to be inauthentic (at best) businesses can expect to have to pay the full claim back, on top of up-front penalties and interest.

Just to give an idea of the scale of the financial damage these penalties could incur, the average R&D claim in the UK is around £60,000 – so a company making fraudulent claims for over 10 years would be penalised for a staggering amount.

 

WIM Accountants are here to help you

We have a thorough understanding of the processes and standards required to stay compliant with HMRC, as well as ensuring our clients are always provided with the best technical knowledge to help them make the most of their R&D claim.

With over 10 years working with R&D tax credit claims, our team of qualified and trained tax specialists are amongst the most reputable to handle your research and development tax affairs.

Autumn Budget 2021: Big changes incoming for R&D

Autumn Budget 2021: Big changes incoming for R&D

 

The Chancellor announced a number of changes, policies and reforms as part of the Autumn Budget – most notable among these for us were the incoming changes to the R&D Tax Credit structure.

 

The Chancellor made sure it was well known that the underlying theme of the announcement was the cultivation of a highly skilled and productive UK economy, so it was almost no surprise to see a vow to increase UK R&D spending to £20 billion annually from 2024/25. Those following the government R&D plan may notice that this is lower than the £22 billion promised last year. Instead, the £22 billion target will be hit by 2026/27, two years later than originally planned. In any case, this is an encouraging sign of growth in the UK innovation and technology sector with the current R&D investment sitting at 1.1% of GDP and forecasted to grow by 1.3% by 2027. In this regard, the UK has shown to be far ahead of its international competition, namely France, Germany and the United States.

The current R&D tax credit scheme is also set to see a shakeup in its qualifying criteria. As expected, cloud computing and data costs were added to the scope of qualifying expenditure for R&D relief. Although more guidance is required from the government on the items defined under the above costs for example, how HMRC defines cloud computing which in itself is a broad concept. The changes are set to be implemented at the start of the 2023/24 tax year, but we can expect further guidance in late autumn.

Brexit meant that the UK was no longer bound by EU non-discrimination requirements, a fact the Chancellor alluded to:

“The second problem is this, companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the UK.”.

Whilst the exact intricacies of the proposal are unknown, it is reasonable to assume that most (if not all) R&D expenditure will have to be domestic in order for it to qualify for the tax relief incentive. There is a clear correlation between this proposal and the government vision for ‘high-skill, high-productivity’ individuals to propel the UK above its international peers. A very optimistic outlook from Mr Sunak, but immediate concerns are to be raised over the feasibility of such a proposal. Consider core science sectors (e.g. life sciences) that often carry out R&D activity outside the UK, especially when conducting clinical trials which may not be able to gain the needed licencing approvals in the UK. Limiting the industry pool will no doubt result in an increase in R&D activity costs.

A review of the R&D tax relief incentive was launched in Spring 2021 with the goal of ensuring that the UK continues to compete as a location for cutting-edge research and evolving into a “science and technology superpower”. The government is expected to respond to the consultation paper published after the review in the following months.

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.

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

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