The outcome from the Making Tax Digital (MTD) small business review is that MTD for income tax self-assessment (ITSA) will not be extended to those earning under £30,000 for the foreseeable future.
MTD ITSA for the self-employed and landlords is to be introduced from April 2026, with the initial mandate applying to those with income over £50,000. Those with income between £30,000 and £50,000 are set to join from April 2027. The government said it would review the needs of smaller businesses – those with income under the £30,000 threshold – before extending MTD further. The latest announcement means there will be no extension, although the decision will be kept under review. There is no set mandation date for general partnerships (those with individuals), non-general partnerships (those with a corporate partner) and limited liability partnerships. An important point to note is that the £30,000 and £50,000 limits apply to total self-employment and property income, and not to the profits actually made. Reporting Some reporting changes have also been announced: · Year-end reporting was originally going to consist of two separate steps – an end of period statement and a final declaration. This would have caused considerable confusion, so there will now be just the one final declaration; and · Quarterly reports are now to be cumulative, so any errors will simply be corrected on the next report – rather than the previous requirement to resubmit past quarters. Ongoing concerns Despite the latest attempt to simplify the MTD process, there are still concerns that HMRC has simply lost sight of the needs of taxpayers. A recent House of Commons committee report criticised the project’s spiralling costs, design flaws and missed deadlines. The report recommends HMRC research what business taxpayers would actually find most helpful, and to take into account the substantial costs of implementing MTD. HMRC’s guide to using MTD ITSA can be found here. If enacted in its current form, the recently published Leasehold and Freehold Reform Bill will affect landlords in England and Wales who own a leasehold property.
Extending a lease The government’s intention is that the standard term given when extending a lease will be 990 years. The extension term for flats and apartments is currently 90 years. The initial lease term for leasehold property could be just 99 years. For a new landlord, this might seem fine, but it is generally not a good idea to let a lease run down until there is less than 80 years remaining. Not only will it (currently) be more expensive to extend, but such a property could be difficult to sell or remortgage. There are various other changes, with two of the more important being: · The reduction of ground rent to a peppercorn (virtually zero) upon payment of a premium. · The removal of the ‘marriage value’, which can make it more expensive to extend a lease where the lease term has run down. The marriage value reflects the additional market value of having a longer lease. Currently, there is only certainty of avoiding marriage value if a lease has more than 80 years to run. Ground rent is of particular concern if it doubles every ten years or at more frequent intervals. Advertising More detail will now be required when advertising property, regardless of whether it is let privately or via an agent. Many landlords and agents will already provide much of the mandatory information, but landlords letting privately might overlook such items as: · Details of the property’s utilities, or lack of; · Available parking; · Issues with mobile coverage; · Flood risk; and · Accessibility facilities. These new measures will now give prospective tenants as much information as possible prior to viewing. A quick guide for landlords advertising a property can be found here. Changes to individual savings account (ISA) rules coming into effect from 6 April 2024 will make ISAs more user friendly, most notably the move to allow multiple subscriptions of same-type ISAs in a tax year.
Multiple subscriptions It is currently only possible to pay into just one ISA of each type in a tax year. Multiple subscriptions will mean: · Cash savers will be able to open new cash ISAs if better deals become available. Greater flexibility will mean some funds could go into a fixed-rate deal, with a reserve held in an easy-access cash ISA. · Investors will be able to spread their investments over several different providers. For example, one stocks and shares ISA might be used for longer-term investments, with another – offering low dealing costs – used where regular trades are made. For 2024/25, the annual £20,000 ISA contribution limit will not see any change, with the £9,000 Junior ISA and £4,000 Lifetime ISA limits also frozen. Other changes Although details are still to be announced, the government’s intention is that in future it will be possible to hold fractional share contracts within a stocks and shares ISA. Under existing rules, at least one full share must be held, even though the shares of some US tech companies can cost hundreds. Other changes to be introduced from April 2024 include: · Partial transfers between ISA providers will be possible during the tax year. For example, if £15,000 has been paid into a cash ISA since 6 April, £5,000 could be moved to a different provider. Currently, the whole £15,000 would have to be moved. · The minimum account-opening age for cash ISAs is to be harmonised at 18. It will therefore no longer be possible for 16- and 17-year-olds to open a cash ISA – just a Junior cash ISA where the investment limit is somewhat lower. Any 16- and 17-year-olds without a cash ISA might want to open one while they still can – by 5 April 2024 at the latest. Although not yet updated to the 2024/25 tax year, HMRC’s basic guide to ISAs can be found here. November’s Autumn Statement included a package of measures to help alleviate the burden of business rates in England and on the Scottish islands, but Wales won’t be so fortunate.
75% relief rules Retail, hospitality and leisure properties that do not qualify for small business rates relief currently receive a 75% business rates discount, subject to a cap of £110,000 for each business. This relief is to continue throughout 2024/25. Property will typically qualify for relief if the business is mainly being used as a: · Shop; · Restaurant, café, bar or pub; · Cinema or music venue; or · Gym, spa or hotel. There is an equivalent scheme for Welsh retail, hospitality and leisure property, but for 2024/25 the discount has been reduced to 40%. There is no equivalent relief for Scottish or Northern Irish business property. However, Scotland has announced a new 100% relief for hospitality businesses situated on the Scottish islands. Multipliers A business rates bill consists of a property’s rateable value multiplied by a multiplier (or poundage). For 2024/25, the small business multiplier (rateable value below £51,000) is again frozen at 49.9p. However, the standard multiplier (rateable value over £51,000 or more) is being uprated by 6.7% to 54.6p. Given inflation has now dropped to 3.9% (November 2023), the 6.7% increase for the standard multiplier is not going to be favourably received. · Scotland: The basic multiplier has been frozen, but higher value properties will see poundage increased by 6.7%. · Wales: The multiplier will see an across-the-board increase of 5%. This will be painful for smaller businesses, especially as the Welsh multiplier at 56.2p is the highest in the UK. · Northern Ireland: No announcement as yet, and, in any case, rate poundage varies across council areas. A survey of 6,000 people, aged 18 to 80, revealed starkly different views on retirement across the generations.
According to the Office for National Statistics, the median age of the UK population in mid-2021 was 40.7 years, up from 39.6 in mid-2011. Perhaps that gradual ageing and the impact of Covid-19 on working patterns explains why there is a steady flow of research reports on attitudes to, and experiences of, retirement. The latest to emerge is Standard Life’s Retirement Voice, now in its third annual edition. One of the more interesting topics covered is the extent and benefit of planning ahead of retirement. The bad news is that only 29% of those questioned said they were doing “a great deal of planning for retirement.” Predictably, households with income of more than £100,000 and those who took professional financial advice were the most likely to fall into this category, but even in those instances the proportion was no more than half. Just over one in five members of Generation X (born between 1965 and 1980, so in their 40s and 50s) said they had done a great deal of planning, a smaller share than either of the two subsequent and thus younger generations (Millennials and Gen Z). The reluctant Gen Xers would do well to consider that over half of today’s retirees wish that they had thought about retirement finances at a younger age or started saving earlier. However, Gen X may not be completely head-in-sand, as on average they confessed to a six-year gap between their aspirational retirement age (62) and what they expected to be the reality (68). The benefits of planning were evident in responses to another survey question: “How do you feel about your current financial situation?” Those who had done the most planning were nearly three times more likely to feel positive about their finances than the non-planners (61% vs. 21%). The group that had done “only a little planning” fell in the middle (40%). The survey found that on average, age 36 is when people start to take a keener interest in their retirement planning. That average figure hides a big generational difference – the Baby Boomers trigger age was 49, while for Gen Z (currently 18–25) it was 20. In this instance, Gen Z looks the wiser generation… Find out more about retirement attitudes here. Minimum wage rates will see substantial increases from 1 April 2024 – welcome news for younger workers and apprentices, but not so much for those employers struggling in the current economic climate.
Eligibility for the National Living Wage is to be extended by reducing the age threshold so that 21 and 22-year-olds are included. Current and future rates of National Living/Minimum Wage are: Current 23 and over £10.42 21 to 22 £10.18 18 to 20 £7.49 Under 18 and apprentices £5.28 From 1 April 2024 21 and over £11.44 18 to 20 £8.60 Under 18 and apprentices £6.40 Employers can only pay the apprentice rate if the apprentice is aged under 19 or, if older, is in the first year of their apprenticeship. Apprentices over 19 who have completed the first year of their apprenticeship must be paid the rate for their age. The provision of accommodation is the only benefit counting towards the National Living/Minimum Wage, with the maximum offset from 1 April 2024 set at £9.99 a day (£69.93 a week). Real Living Wage Some 14,000 employers – covering over 460,000 employees – now pay the Real Living Wage. This is on a voluntary basis, with the Real Living Wage independently calculated based on actual living costs. · The current hourly rate of Real Living Wage outside of London is £12, so – with the latest increase – the National Living Wage is not far off parity. · Where the government’s rate falls down, however, is for London-based employees where a Real Living Wage of £13.15 is deemed necessary due to the higher costs of working and living in the capital. Also, the National Living Wage covers employees aged 21 and over, but the Real Living Wage applies from age 18. HMRC’s National Living and Minimum Wage calculator for employers can be found here. From 2024/25, restrictions to the cash basis will be removed, making it the default method for calculating trading profit for the self-employed and most partnerships.
The accruals basis is currently the default, with a business having to opt in to use the cash basis. In future, a business will need to opt out of the cash basis if it wants to use the accruals basis. Restrictions removed A business, regardless of size, will be able to use the cash basis once the £150,000 turnover restriction has been removed. The removal of two other restrictions will mean there are no longer any obstacles to – otherwise qualifying – businesses choosing to use the cash basis: · Interest costs will in future be fully deductible. Currently, there is a maximum deduction of £500. · Losses incurred under the cash basis will be relievable in the same way as accruals basis losses. Currently, a cash basis loss cannot be relieved against other income or carried back. When moving from the accruals basis to the cash basis, a number of adjustments may be necessary to avoid double counting or items being omitted. Pros and cons The cash basis removes complexities such as accruals and most capital allowances, though it will be unsuitable for some businesses, especially larger ones. · The cash basis does mean it is quite easy to calculate trading profit by, for example, extracting information from easily accessible documents, such as bank statements – so there may be less need for a bookkeeper. · It is also easier to legally manipulate a period’s trading profit. For example, paying suppliers early towards the end of a period will reduce profit. The accruals basis, however, is a more accurate reflection of a period’s trading profit, so banks and other financial institutions may insist on this basis being used. HMRC’s guide to calculating trading profits, notably section 3 on moving to the cash basis, can be found here. The two existing research and development (R&D) tax relief schemes are set to merge, although the newly created scheme will be similar to the R&D expenditure credit currently claimed mainly by large companies.
Although the merger will remove the complexities when companies move between schemes, there will invariably be some who significantly lose out as a result of the changes. The merged scheme and other changes will apply in relation to accounting periods beginning on or after 1 April 2024. R&D expenditure credit (RDEC) Along with a deduction for the R&D expenditure itself, the RDEC provides for a 20% standalone credit. Since the credit is taxable, it is worth £15,000 for every £100,000 spent on R&D assuming the main rate of corporation tax applies. · For loss-making companies, the expenditure credit can lead to a repayment. · When calculating the repayment, the notional tax rate applied will in future be the profit rate of corporation tax of 19%. If not used to reduce the current year’s corporation tax liability, the expenditure credit – before any alternative use – is capped according to the amount of PAYE and national insurance contributions paid in respect of R&D workers. In future, the more generous cap from the SME scheme will be used. R&D-intensive SMEs Despite the merger, loss-making R&D-intensive small or medium-sized enterprises (SMEs) will still be able to claim a 14.5% repayable credit under the existing SME scheme. · Given there is an 86% uplift, this works out to a cash repayment of £26,970 for every £100,000 of qualifying R&D expenditure. · R&D intensity is calculated as the proportion of an SME’s qualifying R&D expenditure compared to total spending. The intensity threshold is to be reduced from 40% to 30%. Also, a one-year grace period will be introduced for companies that fall below the 30% threshold. HMRC’s guide to the RDEC as it currently applies can be found here. National insurance contribution (NIC) changes for the self-employed announced in the Autumn Statement come in from 6 April 2024 and will be welcome news. But the reforms don’t go far enough to offset the continuing cost of frozen tax thresholds.
NICs classes The self-employed currently pay two classes of NICs: · Class 2 NICs are at a flat weekly rate, and it is these contributions that give entitlement to contributory benefits, such as the state pension (35 qualifying years being required to receive a full pension). Class 2 NICs are deemed to be paid if profits are between £6,725 and £12,570, and can be paid voluntarily if profits are lower. · Class 4 NICs are earnings related. The main rate of 9% is paid on profits between £12,570 and £50,270, with an additional rate of 2% on profits in excess of £50,270. Class 2 voluntary only From 6 April 2024, any self-employed person with profits of £6,725 or more will be entitled to contributory benefits without having to pay class 2 NICs – an annual saving of £179 for those who would otherwise have had to pay. However, those with profits below £6,725, will still have to pay voluntarily if they wish to maintain access to contributory benefits. Anyone with profits just below £6,725 might decide to forego claiming sufficient expenses to meet the income limit, although the overall tax impact of doing so must be considered. Class 4 reduced From the same date, the main rate of class 4 NICs will be reduced from 9% to 8%, representing a maximum annual saving of £377. The additional rate of 2% is unchanged. There are also no changes to the thresholds of £12,570 and £50,270, although this will be beneficial for anyone with profits in excess of £50,270 – it means no increase to the amount of profits charged at the main rate rather than at the lower additional rate. HMRC’s guide to voluntary national insurance can be found here. The number of trusts filing self-assessment tax returns for 2021/22 was 37% lower than for 2003/04. The decline comes as no real surprise given the eroding advantages of using a trust and the recent requirement to register trusts with HMRC.
Interest in possession trusts Interest in possession trusts have seen the sharpest decline since 2003/04, with their number falling from over 100,000 down to just 44,000. · HMRC figures show that the decline in interest in possession trusts is mainly at the lower end of the scale where trust income is less than £10,000. · The inheritance tax (IHT) regime for interest in possession trusts from 2006 removed much of their favourable tax treatment. Such trusts are now subject to IHT on a similar basis to discretionary trusts, so, for example, a 20% tax charge can arise on a lifetime gift into an interest in possession trust. However, interest in possession trusts are still commonly used in wills. Typically, a spouse or partner will be given rights during their lifetime (such as being able to stay in a marital home), with the capital subsequently passing to children – which is particularly important if there are children from a previous relationship. Such arrangements still enjoy a favourable IHT treatment. Going forward Trusts are more than ever becoming a specialist method of tax planning, and this trend is only likely to increase over the coming years. Trust planning is still popular for those with a high net worth. Trusts allow wealth to be passed down the generations, protecting against marital breakdown, bankruptcy and family disputes. There are reports that a future Labour Government would scrap business relief and agricultural property relief, and such a move would further limit the use of trusts. Trusts holding assets currently qualifying for relief could find themselves facing periodic IHT charges. HMRC’s latest information on trusts for October 2023 can be found here. |
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