Capital Allowance Super-Deduction: Explained

Capital Allowance Super-Deduction explained

 

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

 

What’s the rundown?

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

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

 

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

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

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

 

How much relief can I claim?

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

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

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

 

What impact is there on disposals?

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

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

 

Can I set deductions against my losses?

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

 

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

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

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

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

 

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

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

You can read more details about this legislation here.

 

From 6 April 2022

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

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

 

From 6 April 2023

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

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

 

Why have the government done this?

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

What impact will this have?

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

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

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

 

Will existing NIC reliefs still apply?

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

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

Wrap your head around PAYE

Wrap your head around PAYE

 

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

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

 

What’s included in PAYE?

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

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

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

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

 

How does PAYE operate?

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

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

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

 

What if an employee leaves?

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

 

Are there any penalties if I paid PAYE late?

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

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

Number of defaults
Percentage of Tax and NIC paid late

1

1%

2

3

4

2%

5

6

7

3%

8

9

10+

4%

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

 

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

Number of employees
Penalty

1 – 9

£100

10 – 49

£200

50 – 249

£300

250+

£400

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

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

 

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

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

Deliberate and concealed

100%

30%

50%

Deliberate but not concealed

70%

20%

35%

Carelessness

30%

0%

15%

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

 

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

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

 

SME vs RDEC: What should you claim under?

SME vs RDEC: What should you claim under?

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

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

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

 

What’s the deal with R&D?

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

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

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

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

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

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

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

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

What scheme do I qualify for?

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

The SME scheme

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

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

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

 

The RDEC scheme

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

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

 

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

Insights: The Construction Industry Scheme

Insights: The Construction Industry Scheme

Our accounts and bookkeeping assistant, Ashleigh, takes a look into what exactly the Construction Industry Scheme (CIS) is, who needs it, and how qualifying individuals can register.

 

What is CIS?

The Construction Industry Scheme (CIS) is a government scheme that requires contractors to deduct money from a subcontractor’s pay and pass it to HM Revenue and Customs (HMRC) as an advance payment towards the subcontractor’s income tax and National Insurance.

CIS includes most construction work such as site preparation, alterations, dismantling, repairs, decorating and demolition to name a few.

On the contrary, under the CIS scheme, work such as architecture, surveying, scaffolding hire (with no labour), carpet fitting, making materials used in construction including plant and machinery and delivering materials are not considered work under the CIS scheme therefore you will not need to register as a Contractor if these activities apply.

 

Who needs to do it?

Under CIS, all contractors must register under the scheme but not all subcontractors have to register however it is more beneficial if they do. This is because a registered subcontractor only receives a reduced payment of 20% whereas an unregistered subcontractor will receive a 30% reduction. It is possible for subcontractors to have a 0% reduction in their pay if they apply for a ‘gross payment’ status, but certain guidelines must be met to qualify. These deductions should not include the cost of materials or tools incurred by the subcontractor.

Under the HMRC CIS scheme, you qualify as a contractor if either you pay subcontractors for construction work, or your business does not do construction work, but you have spent more than £3 million on construction in the 12 months since making your first payment.

You qualify as a subcontractor if you are self-employed, the owner of a limited company or, a partner in a partnership or trust but do construction work for a contractor.

It is important to distinguish between subcontractors and employees as there may be serious penalties for false classifications. Subcontractors are not employees under the contractor but hired staff to help with certain jobs. For a worker to be qualified under the scheme, they must be self-employed under the terms of their contract and not subject to Pay As You Earn (PAYE) under an employment contract.

You must register as both if you fall under both categories as a contractor and subcontractor and file returns accordingly to the role you played.

 

When must it be done?

It is important you register for CIS before you take on your first subcontractor. During this process, you will need to verify all subcontractors with HMRC and they will tell you whether they’re registered for CIS and what rate of deduction to use. You must also verify any subcontractors you’ve used before if you have not included them on a CIS return in the current or last 2 tax years.

As a contractor, as you make deductions, you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month. Additionally, you must tell HMRC each month about payments you’ve made to subcontractors within the scheme through a monthly return. Your monthly return should include details of the subcontractors, the payments made, and any deductions withheld, a declaration of their employment status and a declaration confirming that all subcontractors have been verified.

Monthly returns and deduction payments must be sent to HMRC by the 19th of every month following the last tax month. For example, for the month 6th May to 5th June, the return must be sent by the 19th June. This can be extended to the 22nd of the tax month if the return is completed electronically. You do not have to file a return for the months when you made no payments to subcontractors, but you must inform HMRC that no return is due

As a subcontractor, there is no specific time you need to register for CIS however it is more beneficial if you do. If you are a sole trader or partnership subcontractor, your CIS will be recorded at the end of the tax year via your Self Assessment tax return or Partnership return. HMRC will calculate how much income tax and NI will need to be paid for that tax year and minus the amount of deductibles already contributed, giving you the tax liability or tax refund to be paid.

However, if you are a limited company subcontractor, your CIS deductions must be claimed back through your company’s monthly payroll scheme. You will send an EPS statement with your CIS deductions on it, as well as the usual FPS statements. HMRC will then take your CIS deductions off what you owe in PAYE tax and National Insurance, and you shall pay the balance by the 19th of every month following the last tax month.

If your business is based outside the UK, but the construction work as a contractor or subcontractor is in the UK you will still have to file a return.

 

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

You can also find out more about tax refunds claimed under CIS here.

 

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

Kickstart Scheme – What’s the fuss?

Kickstart Scheme – What’s the fuss?

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

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

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

 

What the employer needs to know

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

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

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

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

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

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

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

 

Sounds good, how do I apply?

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

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

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

 

How long does the scheme run for?

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

 

Let’s get started

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

Do Dentists need Accountants?

Do Dentists need Accountants?

The short (and unbiased) answer is yes. The more detailed answer is based on the premise that dentists need an accountant that understands the intricacies behind dental funding, pensions, and general practice.

Associate dentists tend to find themselves in a unique spot when it comes to accounting. The majority are in fact self-employed dentists who make payments to practices (or providers) in return for use of the premise, equipment, materials and staff. In this case, there may be a question mark over whether IR35 rules apply to associate dentists.

To summarise, the IR35 changes brought about in April 2021 meant that larger NHS dental practices pay extra tax if they engage with someone treated as an employee through a limited company. These rules apply to larger practices. They might apply to your practice if two of the following conditions are met

  1. Annual turnover exceeding £10.2 million
  2. The balance sheet total exceeds £5.1 million
  3. More than 50 employees

It isn’t all doom and gloom though, as associate dentists are at little risk from the effects of these changes – so long as the associate is not working in a manner that is consistent with being an actual employee of the provider. To be considered self-employed you must:

  • Have clinical freedom – You can choose your own hours
  • Can be involved in complaints lodged against you
  • Are able to affect your own income, such as providing private services
  • Are able to arrange a locum to do some work for you
  • Can decide on your own fees

The employment status of being an associate dentist also means the National Insurance class is different to a full-time employed dentist. As income is considered to arise from the trade of services, associates will be subject to Class 2/4 NICs. This means NI rates of £3.05 per week for Class 2, or 2/9% Class 4 NIC depending on your yearly profits.

Will I save if I incorporate?

You can make large tax savings if you incorporate to operate as a limited company. However, this process can actually result in huge pitfalls for you and your financial status, most notably loss of your membership to the NHS pension scheme. Providers are also affected by this loss too, as they can only make pension contributions equivalent to the salary and dividend payments, as opposed to the conventional 43.9% of the NHS contract value. So, in some instances, you could be left with tax losses. In this case, we recommend that you take expert advice and carry out thorough tax planning with a credited accountant to decide on incorporation.

What do I do next?

You, the dentist, should go to an accountant who can answer the following questions:

  • Has my ARR form been completed and filed correctly?
  • Is my lab bill percentage reasonable? Should my associates be expected to contribute to these fees?
  • What would happen if I incorporated my practice?
  • How do I pay off my VDP?

At WIM Accountants we can assist you, and we are confident in advising clients about incorporation. We only advocate incorporation when there are clear benefits to the client. If you would like accurate and up to date advice about incorporation, then please contact us.

 

 

 

Tax Reducers – Fact or Fiction?

Tax Reducers – Fact or Fiction?

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

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

How is my Income Tax calculated?

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

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

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

 

Types of Tax Reducers

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

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

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

 

Order of application

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

The order is as follows:

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

 

How much tax can I reduce?

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

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

  £

Tax liability (Step 5)

35,000
Less: Step 6 tax reducers  

EIS relief

(24,000)

SEIS relief (limited)

(8,700)

Total

300

 

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

Your guide to EMIs

Your guide to EMIs

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

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

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

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

The options available through EMI also have conditions attached:

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

Employees are also subject to eligibility requirements, namely:

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

 

What are the benefits?

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

For employers:

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

For employees:

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

 

Disqualifying events

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

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

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

 

How can I register for EMI?

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

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

Get in touch with us to find out more.

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

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

 

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

 

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

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

Company issued phones and calls.

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

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

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

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

Work-related training.

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

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

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

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

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

 

Trivial Benefits

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

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

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

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

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

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

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

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

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

 

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

 

 

 

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

I’m a Sole Trader and I’ve made a loss in opening years; can I claim relief?

 

A sole trader or an individual in a partnership making a loss has zero taxable profit for the year. Keeping in mind that losses are calculated in the same way as profits, loss relief is an option for businesses that are run on a commercial basis and have the means of realising their profits. As a result, the relief claims available depend on the length of time the trade has been active; if it has started within the last four years, is a continuing trade or if the trade is no longer operational. This blog will focus on the opening years of the trade (ie. trading losses in the last four years).

 

Carrying back losses

Losses incurred within the opening four years of trade, in the interests of continuing trade or profession, can be relieved against other sources of income of the three tax years which precede the year of loss. For example, if trade starts 18 February 2021 (so in the 2020/21 tax year) the loss relief will be available off losses incurred in 2021/22, 2022/23, 2023/24, as well as the tax year trade commenced. Trading losses in each of these tax years can be carried back up to 3 years.

But keep in mind that the relief is not administered automatically, instead, a claim is required to be made on the first anniversary of 31 January succeeding the year in which the loss arose (ie. if a loss was incurred in the 2021/22 tax year the claim must be made by 31 January 2023).

What is HMRC’s view?

HMRC hold the stance that, when carrying back losses to earlier years the past tax returns are not amended. Rather relief is provided by calculating the tax adjustment and Class 4 NIC liability if relevant for the previous years. This figure is then included in the tax return for the year of loss.

To illustrate this case, consider a loss arising in the tax year 2020/21 which is then carried back to 2019/20 to produce a repayment of £1,500. This figure of £1,500 is entered into box 15; page TC2 of the tax return 2020/21.

A partial claim is not allowed. If a claim is desired then the carried bac loss is offset against earlier years first, which provides relief on all income for each year until the loss is exhausted. Take care as this could lead to waste of Personal Allowances or losses being offset at lower rates than usual.

 

Can I carry forward losses?

Absolutely. Trade losses incurred early on qualifies for a relief claim. Remaining losses after an opening year loss relief are permitted to be relieved in alternative methods, namely, losses carried forward.

 

For example, Serena began her trade in 2020/21 and realised a loss of £45,000. If her total income for each of the previous tax years was £10,000 Serena can make a loss relief claim. She also does not need to worry about the income tax relief cap as her total amount of tax reliefs does not exceed £50,000.

This also means that her net income for the previous three tax years is zero and her remaining loss is (£45,000 – (3 * £10,000)) = £15,000 which is permitted to be carried forward to offset future profits.

Suppose Serena then made a £50,000 profit in 2021/22 and other income of £5,000. Her net income would then be ((£50,000 – £15,000 = £35,000) + £5,000) = £40,000.

 

Are there any restrictions on claiming loss relief?

There are restrictions that may be applicable when claiming opening year loss relief, so it is imperative to be aware of such restrictions before beginning a new trade, more so if there are high upfront costs expected. The loss must arise from a trade, which is an important factor to consider as the business has only just started operation.

 

  • Commerciality test: Loss relief is only available if the business is run on a commercial basis and profits can be reasonably expected in the period or appropriate time afterwards. Holding evidence of business plans that could support the claim of profit expectation is essential, even if losses are big and can be relieved at high tax rates. This also applies to instances where a partner leaves and then rejoins a partnership at a later time.
  • Simplified cash basis: Not available for trades operating with the simplified cash basis. If losses can be utilised it is advised to not opt into this scheme.
  • Cap on unlimited tax reliefs
  • Non-active traders
  • Tax-generated losses
  • Farming or gardening businesses

 

How can I plan for the relief?

When planning for loss relief it is important to consider the following factors:

  • Personal Allowances and Annual Exempt Amount: Aim to maintain these allowances
  • Marginal tax rates: Prioritise offsetting losses against income taxed at higher rates for maximum savings
  • Cash flow: Consider if it is worthwhile to claim relief for earlier tax years for cash repayment, or to claim relief at the highest marginal rate
  • Income tax relief caps: Consider if reliefs will be lost if not claimed in the following year which they may arise

 

Class 4 NICs

HMRC consider losses as ‘negative earnings’ for Class 4 NIC purposes, so trading losses can only be set against trading profits. If otherwise (ie. set against non-trading income common in early trade loss relief), in the interests of Class 4 NIC this section of the loss is carried forward and will be set against future profits.

 

Overlapping losses

In the event the trader chooses to not end the year on the regular Financial or Tax year (31 March and 5 April respectively), trading profits could be taxed twice according to basis period rules. This amount is known as the ‘overlap profit’ and is only relieved if the accounting date changes or trade terminates. However, a loss is only identified on the earliest period so a double relief cannot be claimed.

 

For more information or if you’d like to discuss our Sole Trader services, feel free to contact us.

Car Benefits: Your 2021/22 Tax Guide

Car Benefits: Your 2021/22 Tax Guide

 

Car benefits are a topic which is often brought up in enquiries with our clients, so this article will go over some concepts in the interest of tax planning for the acquiring cars through businesses.

 

Generally, when a business owner uses their own car in the interests of their business, they can be reimbursed by their own company and will not incur tax liability – as long as they are classed as a qualifying expense by HMRC.

If they were to use a company car instead, they would have to pay income tax on the benefit received. This varies on the CO2 emissions and listing price of the car. The company would also then be liable to Class 1A NIC on the benefit.

The company will, in most scenarios, pay for the ownership (or lease) of the car and its concurrent costs provided it satisfies HMRCs golden rule when it comes to expenses, that it must be done “wholly and exclusively” for the purpose of paying the business owner. These costs will allow deductions for Corporation Tax purposes. Car depreciation also enables corporation tax relief in the form of capital allowances.

As a result, when deciding between the acquisition of a car via lease or buying it outright, one must consider the effect of the capital contributions, company contributions, business mileage, capital allowances and the factors listed beforehand amongst others.

 

What are the charges?

Car Benefit:

Car benefit charges are calculated from the product of the listing price of the car and the current percentage rate set by the Chancellor, which can be found on our tax rates page. The rates are determined by car CO2 emissions which are measured in grams per kilometre (g/km).

Fully electric cars are subject to this tax, currently at 1% and are set to rise to 2% for the successive tax years. This percentage varies with the range at which an electric car can cover. A pure electric range above 130 miles will also be subject to the benefit in kind rate.

2021/22 1%
2022/23 – 2024/25 2%

Fully electric cars have low benefits in kind, qualify for 100% capital allowances and the anti-avoidance rule for salary sacrifice is applicable. Therefore, businesses may want to consider exploring electric cars as a tax-efficient option for a company car in the future as corporation tax rates are set to increase to 25% by 2023.

Fuel Benefit:

Fuel benefits can be calculated by multiplying the same percentage rate used for the car benefit and the current set figure for the tax year:

Year Fuel Benefit
2019/20 £24,100
2020/21 £24,500
2021/22 £24,600

In an instance where an employee has to reimburse the entire expense incurred by their employer for the provision of private fuel, no fuel benefit will arise. If the employee makes a partial reimbursement, then the benefit will be calculated to the method described above.

 

Business Mileage

Employees can be reimbursed for business mileage carried out in their own cars (i.e., miles travelled wholly and exclusively for the business) at 45p per mile for the first 10,000 miles and 25p for every subsequent mile. If a fellow employee is also carried in the same car a further 5p per mile is added to the reimbursement if and only if the travel is a work journey.

This rate also applies to fully electric cars.

A director that does not receive fuel benefit but drives a company car can claim an allowance for the business mileage at a lower rate than if they were to use a car in their ownership.

 

Capital Allowances

Eco-friendly cars are encouraged by HMRC, indicated by the numerous associated incentives which have a considerable positive impact on the cash flow of a business.

  • Writing down allowances (WDAs). Cars emitting less than 50g/km of CO2 in the 2021/22 tax year are included in the Plant and Machinery pool at an 18% WDA. Cars emitting more than the aforementioned amount is in the Special pool with 6% WDA. Hence, there is no balancing allowance on the disposal of these vehicles.
  • 100% first-year allowances (FYA) on expenditure for new low emission electric cars. The car must be purchased between 16 April 2002 and 1 April 2025 and have zero CO2 emissions.
  • 100% FYAs on brand new equipment installed for the purpose of electrically charging vehicles.
  • 100% FYAs on new goods vehicles with no CO2 emissions.

Note that the FYAs are not available to businesses in “difficulty” or are deemed to be recovering.

15% of the leasing costs of a car are also available to claim as a reimbursement provided its emissions are less than 50g/km from 6 April 2021.

 

HMRC also has a company car and car fuel benefit calculator which is a useful tool to help with tax planning.

 

If you have any further queries or are interested in our services, feel free to contact us and have a quick chat.

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

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