In recognition of the challenges to many businesses due to the pandemic, the government has delayed the introduction of Making Tax Digital (MTD) for income tax self-assessment (ITSA) by a further year.
MTD will not be mandatory for self-employed individuals and landlords until accounting periods commencing on or after 6 April 2024. The start date for general partnerships (those with only individuals as partners) will now be from April 2025, with the date for other types of partnerships still to be confirmed. The planned April 2026 commencement date for MTD for corporation tax now also seems uncertain.
The one-year delay means that:
Although the delay will be welcomed by the majority of businesses, a delay is all it is. There is no change to the entry point (taxable turnover from self-employment and/or income from property over £10,000), nor to the requirement to keep digital records and provide quarterly returns using third-party software to HMRC.
HMRC has estimated the average transitional cost of becoming digital as £330, with an annual cost of £35 per business, although that assumes no new hardware will be required.
The delay will mean that more software packages are available before MTD for ITSA comes in, and there will be more opportunity to join the pilot scheme. If you are self-employed or a landlord, you should make the most of the extra time to ensure your business is ready come April 2024.
Making Tax Digital for income tax self-assessment may still be 18 months away, but if you are self-employed or a landlord, it is time to get ready for digital record keeping, ahead of the deadline.
MTD ITSA (as it’s known) is set to begin on 6 April 2023, and it looks like businesses will need to enter the new regime from the first accounting period commencing on or after 1 April 2023; the proposed basis period rules deem an accounting period ending on 31 March as ending on 5 April.
More than four million taxpayers are set to start MTD ITSA from 6 April 2023, and the current timetable has met fierce opposition. The limited nature of the pilot scheme has not helped.
How MTD ITSA will work
MTD ITSA will initially apply to the self-employed and landlords with total annual turnover exceeding £10,000. There is no exclusion if you have, say, £6,000 of trading income and £6,000 of rental income.
If you are thinking of moving to a software package, be warned there are currently only seven providers of suitable software. HMRC has issued guidance on MTD ITSA and of course we’re here to help.
After playing a crucial part in managing the impact of Covid-19, the Coronavirus Job Retention Scheme (CJRS) is set to end on 30 September. Although some business sectors, such as hospitality, are currently seeing severe staff shortages, other employers may struggle when furlough is phased out.
For September, the CJRS only covers 60% of an employee’s wages, up to a cap of £1,875, with the employer having to top this up to at least 80%. All claims must be made by 14 October.
If you find you do need to restructure your staffing levels, any furloughed staff who are to be made redundant have the same legal rights as any other employees. So any decisions need to be mindful of unlawful discrimination or unfair dismissal.
A business may select staff for redundancy based purely on the fact that they were the ones to be furloughed. The level of risk to this approach will depend on the reasons why staff were chosen for furlough, the selection process used to do this, and whether these were fair. Large groups of 20 or more redundancies will require collective as well as individual consultation.
There are a few alternatives to redundancies to consider:
Payments and support
If you do have to make employees redundant then they are entitled to statutory redundancy payment (after two years of employment) and untaken holiday pay. There may also be notice pay depending on circumstances.
the main form of support for most employees until they find alternative employment will be universal credit. This is a very different animal to furlough, and for many there will be a big drop in income.
This will certainly be the case for higher earners because universal credit doesn’t take account of previous income levels. Anyone with a high earning partner or significant savings may not be entitled to universal credit at all.
Guidance to making staff redundant can be found here.
The Government’s third attempt at revamping the cost of obtaining grant of probate in England and Wales is much more modest in scope than the previous two. The introduction of the new fee structure is planned for early 2022.
There is a two-tier fee structure under the current system. The cost is £215 for an application from an individual, and £155 if the application is from a solicitor. Fees were last amended seven years ago, and at that time the cost differential reflected some of the additional administrative work required by the probate service to process applications made by individuals.
Many estates do not need to go through probate. In some cases the value of the deceased’s assets is low. The cut-off point can be anything between £10,000 and £50,000. Each bank and financial organisation has its own rules on how much money it will release before seeing a grant of probate. If all assets are jointly owned, they automatically pass to the surviving owners.
Even when probate is required, you can save the high fees charged by probate specialists if the estate is uncomplicated; approximately 40% of applications for probate are made by individuals in such circumstances. The Death Notification Service lets you notify a number of financial institutions of a person's death at the same time, and My Lost Account will help trace lost bank and building society accounts, and also NS&I products. It is worth obtaining multiple copies of a death certificate from the beginning as the cost of requesting these later can go up.
Because of Covid-19, probate applications are taking up to eight weeks to process.
If you are involved in a probate application, the government’s guide is a good starting point.
Although it looks like the next Budget will be pushed back to spring 2022, several tax changes are already on the cards, some more certain than others. The government’s fast progress with reform of the basis period rules for unincorporated businesses has taken some by surprise.
Basis period rules
The basis of taxation for sole traders and partnerships looks like it will change to a tax year basis from 2023/24 onwards. The government’s plan is to simplify the rules by the time MTD for income tax becomes mandatory.
This will not impact on you if you already draw up accounts to 5 April (or 31 March), but for others 2022/23 will be the transition year.
A partnership prepares accounts to 30 June. The profits assessed for 2022/23 will be those from 1 July 2021 to 5 April 2023 (or 31 March 2023), less any unused overlap profits. For 2023/24, profits assessed will be from 6 April 2023 to 5 April 2024 (or 1 April 2023 to 31 March 2024). Profits for the years ended 30 June 2023 and 2024 will have to be apportioned.
Any unused overlap profits can be offset in 2022/23, although some will find themselves taxed on up to 23 months of profits with little overlap profits to offset. In this case, an election will be possible so that the additional profits are spread over five tax years.
The need to apportion profits in future will mean having to estimate figures (with a subsequent amendment) where the second set of accounts is not prepared in time for the 31 January self- assessment deadline.
The simplest solution will be to change to a 5 April (or 31 March) accounting date. Making that change in 2021/22 could be a good option if current profits are low due to Covid-19.
Another change already on the cards is the increase to the normal retirement age for registered pensions from 55 to 57 in April 2028, which will be legislated in the Finance Act 2021/22. Less certain is a proposed 1% increase in NICs for the employed and self-employed to fund social care.
The Government’s policy paper on basis period reform can be found here.
The pilot scheme for Making Tax Digital (MTD) for income tax is now open for self-employed workers and landlords. The scheme becomes mandatory for accounting periods commencing on or after 6 April 2023, so those who join now will get ahead of the game.
The first phase of MTD for income tax will be mandatory if your taxable turnover from self-employment or income from property is above £10,000. If you want to be one of the early adopters in the pilot scheme, there are various conditions that you will need to meet.
Who can join?
You can only join if you are a sole trader with income from just one business, a landlord renting out UK property, or both. If you need to report income from other sources, such as employment, pensions, or capital gains, then you cannot currently join. The other conditions should not be a problem for most:
McManus Hall chartered accountants can sign you up if you make a request.
To join the pilot, you will need to use software that is compatible with MTD for income tax. Be warned that only five fully compatible products covering both self-employment and property are currently listed by HMRC, although this includes two with free versions.
You’ll need to keep digital records of all your business income and expenses, starting from the beginning of the accounting period you sign up for, and send updates to HMRC. At the end of the period, you will submit a final declaration instead of a self-assessment tax return.
If you’re already using software to keep records, you should almost certainly wait for your provider to update their product to be compatible with MTD for income tax rather than switching providers just to join the pilot scheme. HMRC’s list of software compatible with MTD for income tax can be found here.
The bounce back loan scheme (BBLS) has kept many businesses afloat over the past year, but, with the first repayments now starting to become due, many of the 1.5 million businesses that borrowed money could fall into difficulty.
The BBLS was launched in May 2020, with no interest charged or repayments required for the first twelve months. Bounce back loans are repayable over five years, so 1/60th of the capital is repaid each month, plus the interest accrued for that month, at a fixed annual interest rate of 2.5%. Repayments will therefore reduce over the term of loan as capital is repaid. The first repayment on a £20,000 loan, for example, will be £375.00 (£333.33 capital plus £41.67 interest).
Although loans are guaranteed by the government, banks will be under pressure to recover cash without triggering guarantees. However, since lenders were not permitted to require personal guarantees, even unincorporated businesses are not at risk of having their home or car seized.
There are various measures that you can take if repaying a BBL is going to cause difficulty:
There are various tax advantages to a rental property being treated as a furnished holiday letting, but inheritance tax (IHT) business relief is generally not one of them. Even though the law supports HMRC’s view, property owners regularly appeal against their refusal to give relief.
The tax advantages
The most immediate benefit is full tax relief for finance costs. For normal rentals, relief is restricted to the basic rate, so a higher-rate taxpayer with a £250,000 mortgage at an interest rate of 2.5% will receive extra tax relief of £1,250 annually.
When it comes to disposing of a property, business asset disposal relief and holdover relief will be available.
Some £225,000 in IHT was at stake in the recent appeal by the executors appointed by Sheriff Graham Loudon Cox against business relief being denied. Although the late taxpayer worked hard to ensure guests enjoyed their stay in his three furnished holiday flats, the First Tier Tribunal dismissed the appeal, finding that there was nothing exceptional about the business to elevate it beyond being one of mainly investment.
And that is the essential problem. The level of additional services provided must be sufficient that the activity is considered as non-investment. This needs to be more than just:
Details about the reliefs available for furnished holiday lettings, and the qualifying conditions, can be found here.
New government proposals target the promoters of national insurance contribution (NIC) avoidance schemes, while plans are in place to introduce a zero rate of employer contributions in Freeports. Both measures are included in the National Insurance Contributions Bill 2021.
Crackdown on avoidance
NIC avoidance is already within the scope of the Disclosure of Tax Avoidance Schemes (DOTAS) regime, but these measures will strengthen HMRC’s ability to clamp down on the market for NIC avoidance. HMRC will be able to act quickly and decisively where promoters fail to provide information on their NIC avoidance schemes.
One area which has received considerable publicity is the use of mini-umbrella companies, where a temporary workforce is split into hundreds of small, limited companies. Each company benefits from the £4,000 employment allowance, avoiding the annual employer NICs on this amount.
HMRC is on the lookout for particular actions. The new measures target promoters that:
From 6 April 2022, employers with business premises in a Freeport tax site will be able to benefit from a zero rate of employer NICs (visit www.britishports.org.uk/Freeports to find out more about Freeports). Eligible employees will be those who spend at least 60% of their working time at the site. However, only new hires will qualify, and then only on annual earnings up to £25,000. Relief will apply for 36 months per employee. At current rates, a Freeport employer will save a potential £6,690 in NICs per employee over 36 months.
Relief is available until at least 5 April 2026, although it might run for a further five years. Regardless of whether relief is extended, new hires employed by 5 April 2026 will qualify for 36 months of relief.
A recently released report on capital gains tax (CGT) by the Office of Tax Simplification (OTS) has made several recommendations on the future of a tax, about which it says many people have limited awareness or understanding. The 30-day reporting and payment deadline for residential property disposals comes in for particular criticism.
Although around half a million people need to report disposals each tax year, the majority will only be affected on a one-off basis. Reporting may be via self-assessment, 30-day reporting or the real time CGT service, so the OTS has suggested integration into a single customer account.
The OTS considers 30 days to be a challenging requirement and has therefore recommended the reporting deadline is increased to 60 days. An alternative proposal suggests estate agents and conveyancers could be more involved.
However, HMRC may well resist extending the deadline given that over £1.3 million was raised in late filing penalties for the last six months of 2020.
Private residence relief nominations
The OTS found a lack of awareness of the nomination procedure for second homes, and recommends:
Divorce and separation
Divorced and separated couples do not incur any CGT on transfers between themselves for the tax year of separation, but very few are able to come to an agreement and transfer assets during this timeframe unless separation occurs near the start of the year.
The OTS therefore suggests relief be extended until the later of: