Some key tax changes for 2021/22 and how to plan ahead
Here at TAG Accountants, we like to provide a proactive service to our clients in advance of changes in legislation coming into effect. In this article, firstly we consider 3 areas where advance planning may reap dividends which are:
- Extension of Making Tax Digital (MTD)
- New corporation tax rates and impact of associated companies
- Checking availability of business asset disposal relief
In addition, we look at something called a mini-Umbrella company fraud and recent CJRS (furlough) grant updates.
As always, please contact us if we can be of assistance in any of these areas.
Extension to making tax digital (MTD)
Currently, only VAT registered businesses making taxable supplies in excess of the £85,000 VAT registration threshold are mandated to comply with Making Tax Digital (MTD) rules. Under these rules, a business is required to keep digital business records and send VAT returns using MTD-compatible software.
MTD for VAT is now being rolled out to all VAT registered businesses from April 2022 which may cause some traders who are VAT registered, but below the threshold, to consider deregistering to avoid having to comply. Those deregistering must complete Form VAT7 and account for output VAT on the market value of stock and assets still owned at the date of deregistration (as input VAT has originally been reclaimed on them). There is however a £1,000 de-minimis which means that output VAT does not need to be accounted for where the combined market value of the assets is less than £6,000.
Please note that deregistering for VAT will not necessarily sidestep MTD as a further requirement will be introduced from April 2023 to keep business records digitally for income tax purposes. From then, MTD for income tax will apply to businesses with gross income in excess of £10,000 a year which will, by way of example, include property landlords as well as traders and professionals.
Associated companies impact on new corporation tax rates
Whilst from 1 April 2023, the 19% rate will continue for company profits below £50,000, a 25% rate of corporation tax will now be levied on profits more than £250,000, with a marginal rate of 26.5% applying between those limits.
In any accounting period, these upper and lower limits need to be divided by the number of “associated companies”. These are not merely companies in the same 51% group but also includes companies under common control, for example where the same individual controls two standalone companies.
So, by way of example, if Del Trotter controls Trotters Independent Traders Ltd and Trotters Lettings Ltd, the limits become £125,000 and £25,000. This means that if Trotters Independent Traders Ltd has profits of £200,000 in the year ended 31 March 2024, then the 25% rate will apply to all that company’s profits as it breaches the £125,000 limit.
Groups may wish to consider a transfer of trades to a single operating company, leaving the other companies dormant; this is because dormant companies are not normally to be counted as associates. Although there is plenty of time to plan for this, please bear in mind that restructuring exercises can take time to implement.
Check your shares qualify for business asset disposal relief
In a recent case before the tax tribunal, it was confirmed that all of a company’s shares are designated as ordinary shares, except those that carry a fixed rate of return.
This is crucial as CGT business asset disposal relief (or ‘BADR’) requires a shareholder to be an officer or employee of the company entitled to at least 5% of a company’s ordinary share capital, and, for the company to be a trading company or the holding company of a trading group.
These conditions must be satisfied throughout the 24 months prior to the disposal of the shares. This two-year rule is important if you are considering transferring some of your shares to other family members now that only the first £1 million qualifies for CGT BADR.
There are several further conditions that need to be satisfied by the shareholding in addition to the 5% ordinary share capital test. The shareholder must have 5% or more voting control and be entitled to 5% or more of the company’s distributable profits, and of its assets should be company be wound up. Those final two conditions do not need to be satisfied where the shareholder would be entitled to receive at least 5% of the proceeds on the hypothetical sale of the whole company.
This tends to be a problem area where a company has several different classes of shares. If that is the case, please contact us so that we can check the eligibility of different shareholders in advance of any sale of shares.
Watch out for a mini-Umbrella company fraud!
HMRC is urging business owners when paying contractors to keep a look out for any mini-umbrella companies (MUCs) that may be operated by some agencies and other intermediaries. MUCs carry financial and reputational risks and businesses should investigate their labour supply chain and carry out due diligence where appropriate.
A recent BBC File on Four radio programme highlighted the abuse of the £4,000 employment allowance by 48,000 companies set up to take advantage of the allowance to save employers’ national insurance. These structures, which are also being used to avoid VAT, are currently being marketed as a means of side-stepping the “off payroll” working rules.
According to HMRC, criminals create a series of MUCs that appear unconnected and then claim the NIC employment allowance of £4,000 for each one. These companies are then struck off after about 18 months leading to thousands of pounds of employers’ NICs payments being avoided.
The risks, accidental or otherwise, to end-user organisations, include becoming liable for any unpaid taxes and national insurance contributions including any overclaimed employment allowance.
Also, if the trader should have known their transactions related to VAT fraud, the business may also be denied the right to claim input tax. It may also be penalised for criminal offences relating to the national minimum wage and national living wage, as well as potentially facing fines for failure to prevent the criminal facilitation of tax evasion.
With all that in mind, if you would like us to assist you with the due diligence on your labour supply chain, please contact our office.
Update on latest CJRS (furlough) grants
The 4th CJRS “furlough” grant scheme runs from 1 May 2021 until 30 September 2021 with affected employees entitled to be paid at least 80% of their “usual pay” subject to a limit of £2,500 a month for hours not worked. The government, via HMRC, will continue to provide support up to this 80% figure for the months of May and June. The government support then reduces to 70% for July and then 60% for August and September with the employer being required to make up the difference. Note that the employer is still required to pay national insurance contributions and pension contributions on the full amount that is paid to the employee.
To be included in a “furlough” grant claim for periods after 1 May 2021, an employee must have i) been on the payroll and ii) be the subject of an RTI (or real-time information) submission between 20 March 2020 and 2 March 2021.
The claim calculation remains complex. By way of example, care should be taken when calculating employee’s “usual pay” and “usual hours” particularly where the hours and pay varies. Furloughed hours in any claim period represent the difference between the employee’s usual hours and actual hours worked.
To qualify for the 1st and 2nd “furlough” support grants, an employee had to have been included in an RTI submission for 2019/20 by 19 March. Those who had failed the original eligibility test but were on the payroll and subject to an RTI submission before 30 October 2020 were eligible for the 3rd version of furlough which commenced on 1 November 2020. Note that where an employee was in continuous employment, their “usual pay” for the next version of CJRS remained the same again even where they had benefited from a pay rise.
For employees on fixed pay who were first reported through RTI between 31 October 2020 and 2 March 2021, the “usual pay” is calculated using the last pay period ending on or before 2 March 2021. For those on variable pay, employers should calculate 80% of average wages payable between 6 April 2020 (or, if later, the date the employment started) and the date before the employee was first furloughed on or after 1 May 2021.
In short, these grant calculations can be complex and given that the HMRC has imposed penalties on employers that have overclaimed (even for careless errors), please let us know if we can help.
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We believe that forward tax planning can result in significant savings for you and your business.
With all that in mind, book a confidential appointment with one of our experts here at your Wolverhampton Accountants TAG Accountants by calling 01902 783172. Alternatively, just click HERE to contact us via our website enquiry form and we will be in touch with you as soon as possible.
In the meantime, we very much look forward to hearing from you.