Category: Taxation


To defer or not to defer your tax bill

As part of their response to the Covid-19 pandemic, HMRC are letting businesses defer VAT payments due between 20th March and 30th June this year. 

Businesses will only be able to defer payments made quarterly and monthly for the period ending in February, March and April. Deferral is automatic, so you need not apply if you think that your business would benefit. 

In addition, HMRC are letting taxpayers who owe a self-assessment payment on account from the 2019-2020 tax year defer until 31st January, 2021. The original payment date would have been 31st July this year. It’s worth noting that 31st January is the same due date as your January self-assessment tax liability, so you could end up making a rather large payment on this day. 

Businesses and self employed workers can also apply for a ‘Time to Pay’ arrangement. This entails a pre-agreed debt repayment plan over a period of 6-12 months.

The VAT deferral scheme is designed to keep some businesses alive in the short term. However, there could be financial implications for delaying a payment which could become more significant in an uncertain business environment, especially if there is a second outbreak of Covid-19.

 With the risk of a second outbreak of the pandemic remaining a possibility, it’s worth getting a grasp of the impacts of delaying your payment before you defer. It could be a wise idea to speak to an accountant if you’re unsure.

If you defer, you will have to pay by 31st March 2021. It’s worth noting that this could leave you with a larger bill than usual and there is a chance that it could see you facing cash flow challenges in the new year, during what could be a period of fragile recovery.

To avoid increased costs next year, you can choose to pay your tax bill as you normally would. HMRC are actively encouraging businesses and the self-employed to behave as ‘good citizens’ and pay any tax they owe on time, helping the government at a time where it is busy taking on emergency loans to fund its response to the crisis.

Some businesses are opting for monthly VAT repayments, due to fears of not being able to cover a single colossal tax bill in January. By repaying in instalments over the next few months, these businesses will avoid the catch-up payment hitting in one go.


5 key takeaways from the new chancellor’s Budget

As Europe faces its greatest public health challenge in recent history, Chancellor Rishi Sunak released his first Budget. 

As you would expect, much of the Budget focused on mitigating the effects of the coronavirus outbreak. However, there were several important measures released alongside the headline grabbing coronavirus controls. Of £30 billion in extra spending, £12 billion will be specifically targeted at the outbreak. 

Coronavirus and public services

All those advised to self-isolate are to receive statutory sick pay if eligible. This will be paid from the first day off work, not the fourth. This sick pay is paid by the employer but businesses with fewer than 250 employees can reclaim the cost of paying sick pay for the isolation period.

Self-employed workers who do not get sick pay will be able to claim Employment and Support Allowance from day one of a period taken off work rather than day eight. 

The Chancellor also set aside £500 million as a hardship fund to help local councils support vulnerable people during the outbreak.

Cuts to entrepreneurs’ relief

Tax breaks available to those selling their businesses have been capped to £1 million over a lifetime. This relief, which formerly stood at £10 million, allows business owners of two years or more to pay less capital gains tax when they sell – 10% rather than 20%. The move is expected to save the Treasury £6 billion over the next five years. 

The Chancellor said that these extra earnings will be channelled into raising the R&D expenditure credit from 12% to 13% and a rise of employment allowance by a third to £4,000.

A freeze in income tax thresholds

The Budget confirmed that, from April, the amount earned before paying 20% tax will be frozen at £12,500, and £50,000 will remain the threshold at which people start to pay the higher 40% rate of tax. This means that anyone who gets a pay rise in the coming year is likely to pay more tax as extra wages push them over these thresholds. 

Of course, if you are a Scottish taxpayer, you have different rates to the rest of the UK. These were announced in the recent Scottish Budget.

Increase in tax-free savings for children

The Chancellor announced an increase in the allowances for Junior ISAs and Child Trust Funds. Both will rise from £4,368 to £9,000 in April. Money locked away in these tax-free savings accounts is kept until a child’s 18th birthday when it is converted into a standard ISA which the child can spend as they want.

Changes to pension taxes for higher earners

The notoriously complicated system for higher earners’ pension taxes is set to change.

Two key thresholds at which tax thresholds kick in for higher earners are set to change. The level at which a saver’s annual allowance starts ‘tapering’ down from £40,000 to £10,000 will rise from £110,000 to £200,000. However, under the new rules, the minimum annual allowance (formerly £10,000) will continue to fall for those who earn more than £300,000. In short, the new rules are less favourable to extremely high earners but more favourable for those who earn between £110,000 and £200,000.


Sole trader vs limited company?

When people are setting up a business, one of the first questions they have to grapple with is what legal structure they are going to trade under – sole trader, limited company or partnership.

If you’re one of our clients, you will already have made this decision but we thought it would be useful to give a quick outline of the differences.  

Sole trader

Being a sole trader is the most popular legal structure. Approximately 3.4 million sole proprietorships were created in 2017 and they accounted for 60% of small businesses in the UK. 

On the plus side, there are no set up costs and it’s very simple to get up and running. The only requirement is to inform HMRC by 5th Oct of your business’ second tax year. There is very little paperwork and you don’t have to have any dealings with Companies House. None of your information is held on the public record.    

As a sole trader, however, you are completely responsible for your business and its finances. You need to be aware that if your business goes bust or you have any business debts, your personal finances and assets could be in danger. Legally, your liability is unlimited.

It’s advisable, therefore, to take out small business insurance policies. This way you can avoid getting sued personally should there be any legal disputes. Remember, the buck stops with you! 

You and your business are treated as a single entity, which is also significant for tax purposes. You will have to pay tax on the profits that are above your personal tax allowance (£12,500 for the 2019/20 tax year). This is calculated through the self-assessment system and you will also pay Class 2 and Class 4 NICs.

Being a sole trader is thought to be less tax efficient than being a limited company as there is less opportunity for tax planning via the self-assessment system. 

Limited company

The second most popular legal structure is a limited company of which there were 1.9 million in 2017. There is a certain amount of paperwork required and you need to deal with Companies House but it is relatively straightforward. Note that your company details will be on public record.   

The main advantage of having a limited company is that you have limited personal liability should something go wrong. The business is treated as a separate entity from its owners so your own assets are protected.    

Despite the higher dividend taxes that were introduced in 2016, a limited company is still  considered to be more tax efficient. The company will pay corporation tax and dividend tax and employer’s Class 1 NICs on salaries, while staff pay employees’ Class 1 NICs on salaries. Under the limited company structure, there are more possibilities for tax planning by delaying dividends, for example, until a future tax year to minimise the tax liability. 

One of the disadvantages, though, is that you are obliged to prepare annual accounts which need to be filed with Companies House. You also need to file a full set of corporate tax accounts for HMRC. As a limited company, it’s advisable to use an accountant to make sure the accounts are done thoroughly.


Own a second property? Here’s some changes you need to be aware of

There have been several changes relating to Capital Gains Tax (CGT) over the past few years. The coming years are set to bring more. Here’s our summary of some of the more important changes coming that might be coming into effect from April 2020. 

If you are thinking about selling a residential property in the next year or two, you need to know about proposed changes to the capital gains tax rules for disposals from April 6th 2020. 

If you only own one property and have always lived there, you should not be affected. However, if you own more than one property or you moved out of your only property for a period of time, you might face a capital gains tax bill. 

The two main changes you should be aware of are: 

Final period exemption 

The last period of ownership counting towards private residence relief will be reduced from 18 months to just nine. Currently, the final period exemption allows individuals a period of grace to sell their home after they have moved out. However, the government feels that individuals with multiple residences have been taking advantage, hence the reduction.   

Lettings relief

Lettings relief is set to be removed, unless you live in the property with the tenant. For UK property, HMRC must be notified and tax paid 30 days after completion rather than the January following the end of the tax year in which the disposal took place. Failure to pay on time will result in HMRC imposing interest and potential penalties. 

With no transitional measures in place, this means that higher-rate taxpayers previously expecting to benefit from the maximum potential relief of £40,000 could be lumped with £11,200 extra tax overnight. 

Here’s an example of how the new taxes could influence a sale:

Steve, a higher rate taxpayer, bought a flat in April 2009 for £100,000. He lived there for 6 years until April 2015 before moving out to live with his partner. He let the flat until 2020 when he sold it for £300,000. The sale was completed on 4th June 2020. 

If the contracts were to be exchanged before the April 2020 changes, a CGT of £6,618 would be due. However, after the deadline a CGT of £21,636 would be due, payable seven months earlier – this is due to there being a lower period of private residence relief and a lack of lettings relief. 

The next steps

The two above changes are set to be enacted as part of the 2020 Finance Act and at the moment are not definite. The consultation to these steps closed on 5th September 2019. Assuming that draft provisions reach the Finance Bill 2019-20, we will have to see if any changes are made to either after it is debated in Parliament. 


over 60s are jumping off the property ladder. Here’s why….

In 2007, there were 254,000 older people living in private rented accomodation. According to research by the Centre for Ageing Better, over the last decade that figure has skyrocketed to 414,000. If things continue the way they’re going, they estimate that over a third of those over 60 will be privately renting by 2040.

So why the shift? Renting comes with some clear benefits. Having to pay stamp duty becomes a thing of the past, as does worrying about managing property maintenance. A certain sense of freedom comes with renting too, particularly in terms of location. It’s a great opportunity to finally live on the coastline or in the city centre that you’ve always wanted to, but have not been able to afford to.

For example, one couple had previously owned a retirement flat in Torquay which they subsequently sold for £55,000. They dreamed of moving to Bournemouth, where a modest one bed apartment would have set them back closer to £150,000 and so was out of their reach. They found a home to let on an assured tenancy, allowing them to remain in the property for life for a fee of £775 a month including service charges. Selling to rent has allowed them to liquidate their biggest asset, and free up their capital to spend on travel.

Renting needn’t be forever, and for some people it’s a great opportunity to stop and think about your next move. It can give you time to really look at the options out there if you intend to get back on the housing ladder. Your requirements will change as you grow older and downsizing can be a great idea for some. Before you find the perfect property which will suit your needs going forward, renting gives you the chance to release some capital and decide what to do with it.

It’s worth bearing in mind, though, that by selling up and moving into private rented accommodation, your estate could receive a higher IHT bill. The inheritance tax exemption introduced in 2017 allows parents and grandparents an additional IHT allowance when their children or grandchildren inherit their main home, and so selling your home could remove your eligibility for the exemption.

be aware: HMRC payroll investigations on the rise

Recent figures released through a Freedom of Information Request have revealed that payroll investigations last year led to HMRC collecting £819 million of additional tax, a figure that represents a year-on-year jump of 16%.

It has been suggested that the increase is due to a ‘grey area’ over whether a taxpayer is considered to be ‘employed’ or ‘self-employed’, with this area being targeted by HMRC in order to eradicate any ambiguity and categorise as many people as possible as being employed. Doing so means that tax can be deducted at source and reduces the scope for claiming expenses. However, HMRC have denied this interpretation, stating that a taxpayer’s status as either employed or self-employed is ‘never a matter of choice; it is always dictated by the facts and when the wrong tax is being paid we put things right.’

The ambiguity over employment status has arisen thanks to the gig economy, which has recently created political anxieties for the government. Following the Taylor Report, which investigated the gig economy and made recommendations for reforms needed, the government has indicated that the ‘worker’ category will change to ‘dependent contractor’ in the near future. Dependent contractors will have worker rights that self-employed workers do not, but they won’t be considered employees, thereby straddling the current divide between the two.

Whilst this is likely to go some way to removing the grey area which is causing the controversy, introducing dependent contractor status will remove the advantages businesses currently get from using a contractor. It’s likely that a test will be implemented for dependent contractors, which will place much greater emphasis upon control. It has been suggested that such a test will ultimately place limitations on the number of self-employed people, which has grown considerably in recent years.

Whatever the reason for HMRC’s increased payroll investigations, businesses need to take extra care to ensure that their payroll is completely accurate to avoid incurring any unnecessary penalties. Communicating with whoever handles your accounts and acting on their advice wherever necessary is vital to make sure the taxman has no reason to claim additional tax from your business.


HMRC reveal the UK’s tax landscape

At the beginning of March 2018, HMRC published figures on personal taxation and income throughout the UK for the 2015/16 tax year. The full report offers some interesting insights into the nation’s finances.

According to the report by HMRC, the UK population collectively earned moreincome in 2015/16 than ever before. Total UK income broke the £1 trillion mark for the first time, reaching £1.040 trillion. The total income tax paid on this staggering amount was £178 billion, which is £11 billion more than the £167 billion paid in 2014/15. Perhaps unsurprisingly, therefore, income tax made up the greatest proportion of the government’s total revenue during that year. The total amount collected was enough to pay for the government’s combined investment in education, defence, policing, transport and welfare benefits, not including pensions.

Considering the hefty total income tax bill, you might be surprised to learn that 53% of the UK population (34.6 billion people) paid no income tax at all in 2015/16. Of the remaining 31 million tax payers, 25.3 million paid the basic rate of tax, 4.5 million taxpayers were liable at the higher rate and 800,000 were taxed at the “savers” rate. Only 400,000, less than 1% of all taxpayers, were taxed at the additional rate. Even though they made up just 7% of the total UK population, higher and additional rate taxpayers brought in £120.5 billion of the £178 billion collected – just over two thirds (67%) of the total income tax paid in 2015/16. The 400,000 people earning enough to be taxed at the additional rate paid 30% of the total UK tax bill.

“Income tax is critical to public spending. It represents £1 in every £4 that the government raises in tax,” said Alistair McQueen, Head of Savings & Retirement at Aviva plc. “The latest figures show that our total income rose by 6% over the latest year. At the same time, our total tax bill also rose by 6%.”