Your Pension Obligations as an Employer

Your Pension Obligations as an Employer

 

Pensions are an essential resource for individuals as a reliable source of income to live on when they retire from working. A recent investigation found that the average pension pot savings across the UK are £61,897 which tends to also come with an extra £12,000 annually in retirement income. This is a significant amount to allow an individual to have a basic retirement lifestyle, but this money doesn’t appear out of thin air. As an employer, it is your duty to attend to an employee’s enrolment in a pension scheme to help facilitate this lifestyle post-retirement, which will be the focus of this piece.

What do I need to contribute?

Before we delve into what your obligations are, let’s run through the actual rates an employer and employee need to contribute to the pension pot.

The amount contributed to the pension depends on the type of workplace pension scheme the employee is enrolled in, or whether the employee has opted into a scheme or has been automatically enrolled. Make note of the auto-enrolment, as this is an important system every employer should be aware of and will be discussed in depth further on. Additionally, it is common for the government to apply a tax relief to a pension provided that the person pays income tax and pays into a personal or workplace pension.

If an employee is auto-enrolled, you as an employer must contribute at least 3% of an employee’s earnings towards the pension scheme. The employee then makes up the reminder to make the total minimum contribution of 8%. These rates only apply if the person earns between £6,240 and £50,270 a year pre-tax (also known as “qualifying earnings”) and may also be influenced by the type of private pension scheme they are enrolled in.

What is auto-enrolment?

Auto-enrolment moves away from the archaic method workplace pensions used to operate. In the old system, a burden was placed on the employee to enrol into a pension scheme but now the process is automatic provided the employee earns above £10,000 per year and is over the age of 22. This pension pot can only be accessed once the employee is 55 years old, otherwise, it is held by the company.

The reason for this change is to increase the number of people saving for retirement, which has produced positive results with 78% of UK employees enrolled in a workplace pension – up from less than 50% in 2012 when auto-enrolment came into effect.

You must also let them know when they’ve been auto-enrolled as well as:

  • The date they were added to the scheme
  • The type of pension scheme and who runs it
  • Employer and employee contributions
  • How to leave the scheme. Note that you must refund money if the employee opts out within a month
  • How tax reliefs apply

You must notify them in writing of their right to join the pension scheme and of its associated details. They also have a right to rejoin a scheme at least once a year and you must auto-enrol them every 3 years if they’re still eligible and have previously opted out. It is your duty to inform an employee of these details and you cannot refuse a request to join a pension scheme. An exemption lies if, and only if, your employee earns less than the following amounts:

  • £520/month
  • £120/week
  • £480 over 4 weeks

But you don’t always have to auto-enrol your staff if they don’t meet any of the above criteria or the following conditions:

  • They have already provided notice to leave, or you have provided notice
  • They have evidence of “lifetime allowance protection”
  • They are already on an arranged pension with you
  • They have taken a lump sum payment from a closed pension scheme, and have left and rejoined the same company within 12 months of payment received
  • They opted out of an arranged pension scheme more than 12 months before the auto-enrolment start
  • They are from an EU member state and in an EU cross-border pension scheme
  • They are in a Limited Liability Partnership (LLP)
  • They are a director without an employment contract and employ at least one person

Do I have to enrol immediately?

You are not actually required to auto-enrol your employee as soon as they are eligible. A 3-month delay period is allowed but you must inform your employee of the delay. 

You can also delay the first 3 months of pension contributions, and instead pay it as a lump sum on the 22nd of the fourth month from the start of enrolment.

There are also tax saving incentives via usage of the ‘salary sacrifice’. Also known as a ‘SMART Scheme’ the salary sacrifice works by paying a portion of the salary an employee gives up directly to the pension pot. This may be desirable as it means you and your employee pay less tax and NI.

What happens if I don’t auto-enrol?

To keep things simple, you will be penalised, and in some cases heavily. The typical process involves fines being noticed, which must be paid online. In the event you are late in payment, missed contributions are expected to be paid to staff and may include the need to backdate contributions. You may also be expected to pay your staffs own contributions on top of your own. Further action involves court proceedings to recover debts which could end with a maximum of 2 years imprisonment.

Fines tend to range between £400 for non-compliance with notices to as much as £10,000 daily depending on the size of your company and staff numbers. 

If you have further questions regarding your obligations as an employer towards pensions feel free to give us a call and have a chat. Find our contact details here.

 

Remittance Basis for Non-Domiciles in the UK

Remittance Basis for Non-Doms in the UK

 

What does the term ‘Remittance Basis’ mean to you? If you are a domiciled UK resident it probably won’t mean much, but if you are non-domiciled (or non-dom) this is a concept which you should familiarise yourself with as it could be a huge advantage in your favour. In short, if you are eligible for Remittance Basis you are only taxed on your non-UK income and Capital Gains if they were brought into the UK.

So if you do not have UK income and Capital Gains, as well as having no need to bring in non-UK income to sustain your living, you can be deemed as a UK tax resident and pay no tax. This is a huge prospect that many overseas individuals living in the UK are unaware of.

 

What is meant by tax residence?

Tax residence is defined by how many days an individual spends in the UK. For an individual to be considered a UK resident for tax purposes, the must have spent a minimum of 183 days in the UK during any tax year.

Certain factors can actually affect how many days spent in the UK qualify you as a tax resident, such as having family living in the UK. As the number of factors connecting you to UK stay increases, the fewer days you can spend in the UK without gaining tax residency status.

 

What is meant by domicile?

Domicile is a concept of common law, and an individual can only ever hold one domicile at any point in their life. In this regard it is very distinct from residency, as you cannot be domiciled in more than one country at a time, nor can you be domiciled nowhere. In most cases, you are domiciled in the country you have permanent residence in.

A non-dom has limited exposure to the UK tax rules due to the fact they have less of a connection to the UK than say someone who was born and domiciled in the UK. As a result, a non-dom has thrice the tax advantage of an average taxpayer:

  • Being able to benefit from the Remittance Basis of tax
  • Restricted Inheritance Tax to UK assets
  • The ability to create a non-resident trust where the individual can benefit. The individual is exempt from IHT, CGT, Income Tax and anti-avoidance rules being placed on the trust’s assets

 

 

What is ‘Remittance Basis’?

If you are a UK resident but non-domiciled (ie. you are living in the UK but plan to return to your homeland in the future) your foreign income is taxed on an arising basis. This means your worldwide income is taxed whether or not it is brought and spent in the UK, however you can apply for a claim under the Remittance Basis.

This claim is not automatic, as you must apply for the Remittance Basis via your UK tax return and it can only be claimed in some tax years.

The number of years you have resided in the UK also determine the Remittance Basis Charge (RBC) you pay when you bring foreign income to the UK:

  • In the first 7 tax years of residency in the UK, the Remittance Basis is free of charge, at the downside of losing some minor CGT and income tax allowances.
  • When at least 7 of the previous 9 tax years have been spent as a UK resident (ie. you are in your 8th year of continuous UK residency), the annual RBC payable is £30,000.
  • If you have been a UK resident for at least 12 of the previous 14 tax years, the RBC rises to £60,000 per annum.
  • From the 15th tax year onwards no RBC is imposed on you as you will be deemed domicile in the UK, and you will no longer be able to benefit from the Remittance Basis.

It is also worth noting that an individual considered a minor during the duration of a tax year is exempt from RBC.

 

Pre-Arrival advice

Funds that you bring into the UK before gaining tax residency is considered to be ‘clean capital’ – which is exempt from income tax and CGT. This also includes:

  • Income/gains which were taxable on an arising basis (income was from a UK source or gains were attributed to a UK asset)
  • Gifts or inheritances
  • Income/gains received during relief from a ‘split year’ treatment under the scope of the statutory residence test
  • Income/gains received from dual residency under a double taxation treaty

 

If you are planning on moving to the UK, you need the best advice and specialists. The UK tax system is strict, and it is important that you 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.

Stamp Duty Land Tax: Understanding the new rates and extensions

Stamp Duty Land Tax: Understanding the new rates and extensions

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

 

What is SDLT?

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

 

The SDLT Holiday

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

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

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

The usual rates

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

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

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

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

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

 

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

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

 

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

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

What is the Film Tax Relief and can I claim it?

What is the Film Tax Relief and can I claim it?

Filming is an expensive trade which probably does not come as a surprise to those involved with the creative industries. But there is a lifeline for those in the business via the government Film Tax Relief (FTR). No matter how small your business may be, this is something that will be of interest to you.

 

What is the FTR?

The FTR was introduced in January 2007 as a means to promote the British film industry. To date, there have been over 1,000 films that have benefitted from the FTR with total claims exceeded £1bn. As a result, this relief has been recognised as one of the main reasons many large film production companies choose to film in the UK.

This relief provides additional tax deductions for companies making profit and payable tax credit to those making losses. The FTR aims to mitigate the filming and other core costs that productions companies may incur in the interests of attracting British consumers.

 

So how does this tax credit work?

The main rundown is that you, as an independent or co-production, must provide evidence that your final work will be a British (very important condition) film by passing the BFI Cultural Test. More on this shortly.

When you apply for the FTR, the production company has to prove that the film in production meets the following criteria:

  • The film passes the Cultural Test, and thus qualifies as a British film. This test examines four key areas of the film: cultural content, contribution, hubs and practitioners. A film is required to score at least 18 out of 35 points to pass. For more information on the scope of this test and additional information, read the summary on the BFI website here
  • The film must be intended for public theatrical release in the UK. If the final film is released in any country but the UK, or is for private viewing only, it will be disqualified from the Tax Credit.
  • At least 10% of the core expenses of the film must be UK expenditure. In this scenario, core expenditure refers to what is spent on core processes, such as pre-production, principal photography and post-production. Development, distribution and non-production activities are not considered to make up the core expenses.

 

Unfortunately, if you have employees on furlough their expenses incurred will not count towards the qualifying conditions for the FTR, as HMRC considers a furloughed employee to have not worked in their furlough period.

 

What can I claim?

You can claim a cash rebate of up to 25% of the expenditure incurred within the UK.

The total tax relief you are awarded is limited to 80% of your total core expenditure. So if you spend £1,000 on your film you will have a payable tax relief up to £800. The cherry on top is that there is no cap on your budget and the amount of tax relief you can claim.

Additional deductions can also be claimed if you would like to reduce profits or increase your losses for a tax year in the interests of reducing Corporation Tax payable. Your losses can be carried back up to three years (if the trading period in question is between 1 April 2020 and 31 March 2022), but only for losses no larger than £2m. If a loss is made, part or all of your loss can be claimed for at the 25% rate (Core expenditure x 80% x 25%) and the additional relief is the lower of either:

  • 80% of the total core expenditure or;
  • The actual UK core expenditure incurred.

For example, your film incurs a core expenditure of £5m. If the entire expense was incurred in the UK, your claim would be for £4m. However, if only 20% of the expenses were in the UK the claim would be for (20% x £5m = £1m x 80%) £800,000.

 

How can I claim the Film Tax Relief?

You can claim the FTR using the Company Tax Return, where you must calculate the additional deduction and your payable credit due. You also need to provide the BFI Culture Certificate, the core UK and non-UK expenditure statements as well as a categorical breakdown of your expenditure.

Keep in mind that you cannot actually claim the relief until the culture test has been passed and you receive a certificate confirming this. In the event the film is still in production at the time of the test, an interim certificate is issued, with the final certificate awarded upon project completion.

 

This post only serves to provide a brief overview of the Film Tax Relief. If you are still not completely sure about the amount you can claim for your production, we would love to speak to you and provide our advice on this area of interest. Contact us here or call our Tax Specialist Naveed at 0741 4880 884 or mail naveed.ikhlaq@wimaccountants.com

Are you missing out on potential tax reliefs?

Are you missing out on potential tax reliefs?

What is tax relief?

Tax relief enables you to deduct the amount you pay to the government during a tax year from your tax payable to HMRC. Essentially meaning there is less tax for you to pay and we also call them tax reducers.

Tax reliefs can be claimed alongside any additional personal tax allowances you may be entitled to, allowing you to reduce your overall tax liability. There is a range of tax reliefs available which you can claim, subject to eligibility. This article will explore the reliefs that can be claimed through pensions and marriage allowances.

Typically, you can make arrangements with your employer to make payment before tax is deducted from your salary, so you save on tax as there is a reduced salary to be taxed on. You can also claim tax back from HMRC, usually in the case of charitable donations where you can also opt for Gift Aid.

You can also view the tax rates and allowances for the current and recent tax years here.

 

Tax relief on Marriage Allowances for basic-rate taxpayers

Married couples and/or civil partners can take advantage of the Marriage Allowance (MA). The MA allows individuals who are married or in a civil partnership to transfer a fixed percentage of their personal allowance to their significant other, by means of an election.

The amount that can be transferred to the receiving party is 10% of the personal allowance. Note that rounded up to the nearest £10. For example, 10% of the personal allowance of £12,570 is £1,2570 which will be rounded up to £1,260.

This is of particular benefit to a couple where one party has no taxable income, or their income is not enough to use their personal allowance. For example, an individual whose income falls entirely within the starting rate band.

If the MA is claimed by election, the relinquishing party has their own personal allowance reduced by the amount they transfer to the recipient.

The recipient on the other hand does not have their personal allowance increased and will remain at £12,570 for the 2021/22 tax year. However, the recipient does instead get a reduced tax liability imposed on them (or a “tax reducer”) equalling 20% of the transferred amount. For the tax year ending 5 April 2022, this tax reducer is computed at £1,260 x 20% = £252.

There are qualifying factors to determine whether the marriage/ civil partners can claim the MA, as follows:

  • The individual who is relinquishing their personal allowance and the individual receiving must be married or in a registered civil partnership for all or part of the tax year when the election is being made. The couple does not need to be living together.
  • The couple must not have claimed the Married Couples Allowance (an important distinction, find out more information on the MCA here. If the individuals qualify for MCA it is advised that they claim the MCA rather than the MA.
  • The individuals must have been married or in a civil partnership during the tax year in which they are making the election for and at the time the election is made. Claims can also be made after the death of one individual by the surviving party, provided that marriage/partnership was active at the time of death.
  • Importantly, neither individual is taxed above the basic rate bands. If any individual is taxed at higher or additional rates, they are not eligible.
  • The election must happen no more than four years after the end of the tax year which corresponds to the claim. The election does apply to all subsequent years until conditions are no longer valid or withdrawn. You can go back up to 3 years to use the MA and save up to £1,000.

 

Consider the case of Samantha and Ali, who are a married couple. Samantha has an income of £35,000 per year through employment, and Ali has an income of £9,500 per year.

Ali decides to make a MA election. His personal allowance for the 2021/22 tax year is:

£
Personal allowance
12,570
Less: MA transferred to spouse (max.)
(1,260)
Remaining personal allowance for Samantha
11,310

 

As we can see, Ali’s personal allowance after transferring MA exceeds his income by £1,810 which is wasted as personal allowances are not carried over to the next tax year.

 

On the other hand, Samantha will have the following tax liability on her income:

£
Employment income
35,000
Less: Personal allowance
(12,570)
Taxable income
22,430
Tax
Tax reducer: (£22,430 x 20%)
4,486
Less: MA (1,260 x 20%)
252
Tax liability
4,234

 

Tax relief on Pensions

Tax reliefs on pension contributions are available for up to 100% of the annual earnings. This means if you earn £30,000 annually, you can get a relief of £30,000 paid to your pensions in the same tax year.

This is however capped at £40,000, which is the designated annual allowance for pension savings. You may like to avoid exceeding this limit, as any amount over this cap will be taxed as income and will be taxed at the highest rate applicable to you.

Super high earners, such as individuals earning more than £150,000 are exempt from this pension annual allowance. Instead, the maximum that an individual can contribute is reduced by £1 for every £2 earned over the limit, capped at £10,000. This applies to you if you earn at least £210,000 per year.

Keep in mind that you can also carry forward any unused allowances from the three previous tax years, given that you were part of the pension scheme in those years.

Tax relief is also provided based on the type of pension you have:

  • Employer pension scheme
    • If you are part of a pension scheme provided by your employer, in the majority of cases your contribution to the pension is deducted from your salary pre-tax.
    • You are then subject to full tax relief on contributions at your highest tax rate immediately.
  • Personal/ Stakeholder pension scheme
    • The relief claim for this scheme operates different, as your premium is paid as a net of your basic rate tax. Your pension provider instead claims the balance from HMRC.
    • Non-taxpayers can still contribute to pension and get a tax relief of 20% on the first £2,880 set aside for pension. The remaining £720 is contributed by the government giving a total of £3,600 net gross contribution.

 

Claiming tax relief

There are two main methods of claiming tax relief, as the claim is dependent on the type of pension the contributions are being saved into:

  • Relief at source

Typically applies to private or self-employed personal pensions (SIPP). If the pension is paid through the employer, the employer takes 80% of the contribution from salary, with an extra 20% being provided by HMRC.

In this system, higher and additional rate taxpayers must complete a Self-Assessment for extra relief.

  • Relief from “net pay”

In this case, the tax relief is claimed automatically and considered to be relief from “net pay”.

Contact us for more information on how you can claim tax relief as a basic-rate taxpayer.

May 2021: Updated HMRC guidance on COVID support

May 2021: Updated HMRC guidance on COVID support

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

CJRS

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

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

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

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

SSP

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

VAT deferral payment scheme

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

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

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

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

WFH Tax Relief

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

R&D Tax Credits in the Food and Drinks Industry

R&D Tax Credits in the Food and Drinks Industry

We all love food and beverages, even more so when there’s something new on the block. Luckily for those of us in the UK, the food and beverage industry is one of the largest (approximately £29bn contributing to the UK economy) so there is a huge investment in research and development to make products taste better, preserve for longer and have better nutritional content. The development process is not limited to just food and drink only, as advancements in manufacturing technology, marketing and even sourcing contribute to R&D activities in the food industry. 

What can I claim tax relief for?

There is a multitude of work done that may qualify for an R&D Tax Credits claim, such as:

  • Creating or developing new flavours or ingredients
  • Enhancing nutritional content
  • Improving taste or texture
  • Making new samples
  • Creating healthier alternatives
  • Developing more sustainable packaging and logistics
  • Thinking up of methods to reduce costs

Unfortunately, despite this list only listing a few of the large number of possible reasons to claim an R&D tax rebate in the food & drink industry, many business owners and individuals are not claiming and are missing out on crucial funding to improve their cash flow. An owner of an SME may want to take particular notice of this.

What types of expenditure qualifies for R&D Tax Credits?

Companies tend to spend a sizeable amount on improving existing/prospective products, refining processes and product lines, as well as additional expenses for packaging, marketing, salaries, ingredients etc. R&D Tax Credits can aid in mitigating these costs by up to 25% and help you continually develop your products further. 

How can I make a claim?

Claiming R&D Tax Credits isn’t easy with many areas of uncertainty. Don’t worry, our team of R&D tax advisors will assist you in constructing high quality, accurate claim that stands up to HMRC interrogation.

As long as a technological or scientific variable is being investigated during your project, usually involving financial risk, R&D Tax Credits are certain to follow. Firstly, we can help you identify all the relevant costs, and to adjust them correctly. We can then put together a detailed, appropriate case, and work on your behalf with HMRC as well.

Why not have a look at our R&D Tax Credits page for more information about how this highly valuable tax incentive could boost your food and beverage company. When you’re ready to make a claim, get in touch with us to get the process started.

Claiming a Tax Refund under the Construction Industry Scheme

Claiming a Tax Refund under the Construction Industry Scheme

What is CIS?

The Construction Industry Scheme (CIS) is a government scheme that obliges contractors to deduct money from a subcontractors payment as advance payments for subcontractors tax and National Insurance Contributions (NIC). Contractors are required to register for the scheme, but subcontractors have the flexibility of choice and may want to register for the CIS themselves as registered workers receive payments at a 20% tax rate, whereas unregistered subcontractors will be taxed at 30%. It is also possible to apply for gross payment status.

The scheme covers a broad range of what is usually considered building or engineering work. Work covering demolition, repairs, decorating, and installations are just a few examples of what qualifies towards the CIS. You may want to keep in mind that services carried out directly to a homeowner will not qualify for CIS.

 

Claiming a tax refund

You can claim a refund if you are on a low income and you have had a deductible under CIS, as a result of the trade expenses and available personal allowances. However, do note that HMRC requires evidence to prove your claim. You must make sure that your expenses were done wholly and exclusively for your business as those are the qualifying aspects that decide whether your incurred expenses can be subject to a tax refund.

If you are working under the CIS you need to file a Self-Assessment tax return, which will need to include your total income from sales. This is not your payment after deductibles but how much you were invoiced from your contractor. This includes the cost of materials and tools. The amount of tax deducted under CIS should also be included in your tax return so that when your NIC and tax is calculated, so CIS deductions will already be taken into account. Consider this example:

 

A registered CIS subcontractor, Matt, was invoiced the following during the 2021/22 tax year:

Description
Amount (£)
Labour 20,000
Materials 1,500
Tools 1,000

 

Matt was then paid the following amount in the same tax year:

Description
Amount (£)
Labour 16,000
Materials 1,500
Tools 1,000

 

As Matt is registered, he is taxed at the 20% rate of his gross income meaning his contractor is obliged to hold (£20,000 x 20% = £4,000). So he is paid £16,000 for his Labour but cannot have deductibles applied on the cost of his materials and tools.

There is one instance where you do not need to file a Self-Assessment; if you are eligible for full trading allowance relief (i.e., your total trading income before any employment/casual/miscellaneous income is less than £1,000 in a tax year) and you did not claim a SEISS grant.

Money received from a SEISS grant must be recorded in your tax return as taxable income. SEISS grants are paid in gross, thus will not have a tax deduction applied on it upon receiving even if you are registered for CIS. Continuing the example used earlier, we can see that Matt will include the following information in his tax return if he has a SEISS grant:

 

Description
Amount (£)
Turnover (fees, sales, money earnt) 22,500 (20,000 + 1,500 + 1,000)
Total allowable expenses (Assume Matt has other expenses of £4,000 as well as expense for tools & materials) 6,500 (4,000 + 1,500 + 1,000)
Net profit 16,000 (22,500 – 6,500)
SEISS grant 2,500
Deductions on payment and from contractors 4,000

 

As a result, Matts tax and NIC is calculated automatically for 2021/22 tax year:

Description
Amount (£)
Profit from SEISS and self-employment 18,500 (16,000 + 2,500)
Less Personal Allowance (for 2021/22) {12,570}
Total Income 5,930
Total income (20%) 1,186
National Insurance Contributions (NIC)
Class 2 (£3.05 x 52 weeks) 159
Class 4 ((£17,800 – £9,500) x 9%) 747
Total tax and NIC due 2,092
Less tax deducted (CIS) {4,000}

Income tax overpaid

1,908

From this example, we can see that Matt is eligible for a refund as he has overpaid on tax and NIC and is something relatively common amongst CIS registered subcontractors that do not receive gross payment. This occurs as CIS deductions consider sales income and not your personal allowance and business expenses. Other contributing factors such as class 2 and 4 NIC liabilities and SEISS also play a part in your refund being less than expected.

 

If you have ceased work in the construction industry and your tax records are up to date, you can still claim a refund. 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.

 

Tax Investigation 101: What you need to know

Tax Investigation 101: What you need to know

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

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

 

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

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

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

 

Investigations will always follow the same formula:

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

 

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

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

 

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

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

 

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

 

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

 

R&D Tax Credits 2021: What’s new?

R&D Tax Credits 2021: What’s new?

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

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

 

Who will this affect?

You should be aware of these changes if you are:

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

 

Why are there changes?

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

 

The new SME Cap

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

 

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

 

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

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

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

 

How will this affect my business?

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

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

 

How does a subcontractor affect my claim?

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

 

But what if my subcontractor and I are connected parties?

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

 

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

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

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

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

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

New Guidance for CGT on House Sales

New Guidance for CGT on House Sales

Selling property is not as simple as it used to be. With tighter rules being enforced by HMRC over the last few decades sellers need to be aware of these changes and how they are affected, particularly when concerning the disposal of UK residential property.

A UK residential property refers to land which included occupation or dwelling at any given time such as a freehold property. Most of the time residential property gains can be found in the disposal of an investment property, for example a house you rent out. To the relief of a number of homeowners, not all property disposals are chargeable for CGT. Typically this tends to be properties which have been the main residence of the owner during ownership or properties which were bought with the intention of development and resale. In the case of the latter, this transaction is seen as one which is trading in nature as profits are subject to Income Tax. Otherwise CGT rules apply. It should be noted that all your capital gains in a year are added together, however there exists an annual exemption of £12,300.00 of which capital gains below this amount are not taxed.

On 6 April 2020 the deadlines for filing and paying CGT off the disposal of a UK property changed. This affected both UK residents and non-UK residents who own residential property in the UK. Under new rules, residents must take no longer than 30 calendar days to inform and pay HMRC for the disposal of property. Disposals of other CGT chargeable assets are unchanged and must follow the standard Self-Assessment deadlines. Furthermore, disposals represented by charities, pension scheme investments and lease granted for commercial purposes.

For UK Residents, disposal of property making gain which is liable to CGT must be informed of to HMRC as well as the payment of owed CGT. This must be done within 30 days of property disposal using the new online service, which can be found here:
UK residents with property abroad do not need to worry about this notice period, as rules on this matter are unchanged.

Preventing abuse of R&D Tax Relief for SMEs

Preventing abuse of R&D Tax Relief for SMEs

What are the R&D Tax Credit measures due to come in for accounting periods starting from 1st April 2021?

The proposal in the Finance bill is:

A company claim for payable credit (R&D Tax Credits are only available under the SME scheme to claimants making a loss after the R&D deduction/relief is applied) below £20,000 will not be affected by the cap. The cap will be 300% of the company PAYE/NIC (excluding statutory deductions) and £20,000.

A company will include connected party R&D qualifying PAYE and NIC liabilities when calculating the cap, and the total will be increased by 300%. Connected parties are connected through shared control. These can be subcontractors or externally provided workers.

A company’s claim of any size will be uncapped if it meets two tests. These tests require that a company’s employees create or prepare to create or actively manage intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a connected party is less than 15% of its overall R&D expenditure.

My views on this change?

It is good that the cap has increased from the 2018 proposal. It is now £20,000 plus 3x NIC/PAYE. A company with no PAYE/NIC can still get a cash benefit for a claim up to £20,000. If the claim were more extensive than this, it would generate a £20,000 cash benefit and increase losses to carry forward. £20,000 is significant to a lot of small firms.

A company is exempt from the cap if:

it’s employees are creating, preparing to create or managing Intellectual Property (IP), and

it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D, or the provision of externally provided workers (EPWs) by, connected persons

How would I solve this problem?

Remove the test on IP and on connected party expenditure.

In the case of preventing the abuse, the simple question arises “what would have stopped them faking the IP consideration or even applying for it outside the UK where the fake subcontract work was supposed to be done?” The IP test does not deal with the problem the legislation attempts to solve.

What did defeat an attempted abuse is security/money laundering checks by HMRC. It seems this would defeat fraud, not subjective judgments about applying for IP. HMRC have a lot of information to make those judgments on. Why not make that process better and focused on claims that are impacted by the cap?

No measure will be perfect, but it seems odd to bring back IP considerations into R&D claims which were removed from the SME scheme in 2012 because of the highly subjective nature of such judgments. IP is a relatively complicated legal area.

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

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