Author Archive: Muhammad Zia

What could Budget 2021 have in store?

The UK Government’s budget deficit is expected to reach a peacetime high of around £400 billion this year as a result of the cost of economic support measures during the Coronavirus crisis as well as the impact of the crisis on the economy and, in turn, tax receipts. That is around seven times higher than the £55 billion deficit forecast by the Office for Budget Responsibility (OBR) in March 2020.

Meanwhile, the OBR forecasts that Government debt will increase from around 80 per cent of GDP at the start of the crisis to around 105 per cent of GDP at the end of 2020-21, with the potential to rise about 120 per cent of GDP during the first half of the decade.

As a result, speculation has been mounting in recent months that the Chancellor, Rishi Sunak, will announce significant tax rises at the Budget on Wednesday 3 March 2021.

How big could tax rises be?

The widely-respected Institute for Fiscal Studies (IFS) warned back in October that just to bring borrowing down to £80 billion a year and debt down to 100 per cent of GDP would require tax rises of around £40 billion a year by the mid-2020s. That is equivalent to more than three-quarters of the Government’s entire receipts from Corporation Tax last year or 20 per cent of receipts from Income Tax.

The IFS figures are also based on the assumption that 75 per cent of the cost of the crisis will fall in the 2020-21 tax year. If that proves not to be correct, the required tax rises could be significantly higher.

When can we expect tax rises?

In its October report, the IFS says that neither tax rises nor cuts to public services should be considered in the next 18 months, arguing that the priority should be supporting the economy.

However, politically, it may be appealing to the Chancellor to begin raising some taxes sooner rather than later to reduce the headline figures for tax rises at future Budgets.

As a result, there is significant uncertainty about whether the 2021 Budget will contain significant tax rises, but a high level of certainty that tax rises will be announced in the coming years.

Additionally, The Financial Times reports that a second Budget is expected in the autumn and it is possible that key decisions will be left until then.

What tax rises could we see at the March Budget?

There are a lot of options open to the Chancellor – some of which more likely than others – as he considers what to do in March, including any combinations of:

  • Keep things as they are;
  • Increase tax rates on any combination of taxes;
  • Reduce tax rates on any combination of taxes;
  • Introduce new tax bands;
  • Remove existing tax bands;
  • Increase tax thresholds;
  • Reduce tax thresholds;
  • Extend tax reliefs and allowances;
  • Limit tax reliefs and allowances;
  • Increase the value of tax reliefs and allowances;
  • Reduce the value of tax reliefs and allowances;
  • Restructure or redesign existing taxes;
  • Introduce new taxes.

Complicating matters further still, any tax changes could be announced with immediate effect or to take effect at some point in the future.

The sheer number of options open to the Chancellor mean that predicting what will be in the Budget is hugely uncertain. However, we can get an idea of which might be more likely than others from press reports based on information from well-informed sources.

Capital Gains Tax

In November 2020, the Office for Tax Simplification (OTS) published a report into Capital Gains Tax (CGT), which recommended that the ministers consider bringing it into line with Income Tax in a move that would approximately double the amount owed on any given transaction.

It is also possible there could be changes to the annual exemption or Entrepreneurs Relief, with the possibility that Entrepreneurs Relief could be scrapped or modified significantly.

However, few national papers have trailed changes to CGT as a possibility in recent weeks.

Corporation Tax

The Times reported on 18 January 2021 that the Chancellor is considering increasing Corporation Tax. Corporation Tax is currently at historically low levels, having fallen from 28 per cent in 2010 to 19 per cent now.

Whether such an increase comes to pass may depend on the continued success of the vaccine programme and how long the current lockdown lasts.

https://www.thetimes.co.uk/article/sunak-wants-corporation-tax-rise-to-control-debt-pnqjx2cq0

Replacing Council Tax and Stamp Duty with a new Property Levy

The Mail on Sunday reported on 17 January 2021 that the Chancellor is considering a plan to replace Council Tax and Stamp Duty Land Tax (SDLT) with a new national property levy, based on current values.

However, the report says that such a change would not be imminent.

https://www.dailymail.co.uk/news/article-9156747/Ministers-consider-replacing-council-tax-property-levy.html

Extension of Stamp Duty Holiday

The Sunday Times reported on 17 January 2021 that the current increase in the SDLT threshold to £500,000 will be extended. However, reports elsewhere say this will not be the case.

https://www.thetimes.co.uk/article/rishi-sunak-eyes-tax-rises-in-march-budget-gmd3qpmkb

Reduce Tax Relief on Pension Contributions

The Daily Express reported on 7 January 2021 that tax relief on pension contributions could be limited at the Budget.

https://www.express.co.uk/finance/personalfinance/1379042/rishi-sunak-tax-relief-pension-contributions-march-budget

Introduce a Wealth Tax

An independent commission established last spring by the London School of Economics, the University of Warwick and the Economic and Social Research Council to analyse proposals for a wealth tax has rejected an annual tax but has advocated a one-off charge, saying:

“A well-designed one-off wealth tax would raise a total of £260 billion at a rate of five per cent over £500,000 per individual or £80 billion at a rate of five per cent of £2 million per individual, payable at one per cent per year over five years.”

While the Chancellor has rejected a wealth tax, the potential revenue could tempt him into a u-turn. Any such tax would likely be implemented immediately and without warning to prevent planning.

Planning now

The content of the 3 March 2021 Budget is amongst the most uncertain for years and it is important to take account of your whole tax position in preparing for the possibility of tax rises this year or in future years.

Please contact us today to find out how we can help you plan for tax rises in the Budget.

HM Revenue & Customs increases the threshold for Self-Assessment online payment plan service to £30,000

HM Revenue & Customs (HMRC) has increased the threshold for Self-Assessment taxpayers to use its online self-service Time to Pay payment plan service from £10,000 in tax liabilities to £30,000.

The move means that more taxpayers will be able to spread the cost of their tax bills by paying in monthly instalments, without having to call HMRC.

The Chancellor announced in his Winter Economy Plan that taxpayers will be able to arrange a payment plan of up to 12 monthly instalments to cover tax payments deferred from July 2020.

HMRC now says that this also covers outstanding tax owed for 2019-20 and the first payment on account for the current tax year.

Taxpayers must set up a payment plan no later than 60 days after the due date of the tax debt to qualify for the payment plan, which, for tax payments due on 31 January 2021 is 1 April 2021.

However, setting up a payment plan more than 30 days after the due date of the tax debt will lead to late payment penalties. This means payment plans in respect of tax due on 31 January 2021 would need to be set up by 2 March 2021.

Unlike the previous Self-Assessment deferral of the second payment on account that was due on 31 July 2020, the new payment plans will be subject to interest from 1 February 2021.

To qualify for a payment plan using the online self-service Time-to-Pay system, taxpayers must:

  • Have no outstanding tax returns;
  • Have no other tax debts;
  • Have no other HMRC payment plans set up; and
  • Have a debt of between £32 and £30,000.

HMRC has also warned taxpayers against scammers claiming to be from HMRC and offering to set up payment plans. Currently, payment plans can only be set up by individual taxpayers.

HMRC says that taxpayers may have the option of using the online self-serve Time to Pay facility on GOV.UK once they have completed their 2019-20 Self-Assessment tax return.

Those with Self-Assessment debts of more than £30,000 or who need more than 12 months to pay the tax they owe may be able to set up a Time to Pay arrangement via the Self-Assessment Payment Helpline on 0300 200 3822.

Link: If you cannot pay your tax bill on time

Independent commission argues against annual wealth tax but advocates a one-off charge

An independent commission established last spring by the London School of Economics, the University of Warwick and the Economic and Social Research Council to analyse proposals for a wealth tax has rejected an annual tax but has advocated a one-off charge.

The commission comprises senior academics from the universities involved as well as tax barrister, Emma Chamberlain.

While Chancellor, Rishi Sunak, has previously rejected the idea of a wealth tax, the commission’s independence means that the idea may gain traction in the coming years.

In rejecting the idea of an annual wealth tax, the commission argues that such a levy would “have higher administrative costs relative to revenue than a one-off tax, which means that it is currently not feasible” considering the lower tax thresholds.

It goes on to note that “at very high levels of wealth, the extent of these responses remains uncertain. Some responses could be mitigated by careful design, but others would be more difficult to resolve.”

Instead, the commission argues for substantial reforms of existing taxes on wealth instead of “minor tinkering”. They suggest this approach would be more efficient economically and less costly to administer.

In contrast, the commission advocated a one-off charge to help repair the public finances following the pandemic, arguing:

A well-designed one-off wealth tax would raise a total of £260 billion at a rate of five per cent over £500,000 per individual or £80 billion at a rate of five per cent of £2 million per individual, payable at one per cent per year over five years.

The report goes on to say that such a measure should not be pre-announced in order to prevent forestalling but that deferrals should be permitted where taxpayers are constrained in their liquidity.

The commission says that such a charge would be preferable to increasing taxes on work or spending.

Link: The Wealth Tax Commission

Could the Government be about to launch a new permanent state-backed small business loan scheme?

According to reports in the Financial Times, the Government is considering launching a new loan scheme, where businesses could borrow anything up to £10 million through an 80 per cent state-guaranteed bank loan.

The new scheme, which could be a successor to the existing Coronavirus Business Interruption Loan Scheme (CBILS), would provide a permanent state-backed small business loan to eligible companies.

Under the plans, the Government would guarantee loans to small businesses ranging from a few thousand pounds up to £10 million over a six-year lending period.

This would effectively extend the CBILS, but with a lower threshold once applications for the existing loan scheme ends on 31 March this year.

The Financial Times reports that participating banks could set their own interest rate for their loans, capped at around 15 per cent. Research by GrowthBusiness found that lenders are charging anything between three per cent and 15 per cent for current CBILS loans.

As yet, no official announcement has been made on such a scheme, but it is understood that the Chancellor is looking to announce a range of options to support jobs and businesses in his upcoming Budget on 3 March 2021.

Douglas Grant, Director of CBILS lender Conister, said: “We fully support the UK Government’s plans to launch a permanent replacement for the £65 billion Covid loans programme to support SMEs.

“This more permanent financial support from the Government will be welcome news to those resilient SMEs that have already shown extraordinary levels of adaptability and strength in the face of changing consumer behaviour.”

Link: Government plans permanent state-backed small business loan scheme

HMRC issues new warning over lockdown fraudsters

Within hours of the Prime Minister announcing a new national lockdown in England, HM Revenue & Customs (HMRC) has issued new warnings after it received reports that fraudsters were attempting to dupe taxpayers by pretending to be the tax authority.

Throughout the last year, criminals attempted to scam businesses and individuals out of money by sending fake HMRC correspondences related to COVID-19.

According to the latest reports, a number of scam text messages are now being sent out, informing people they are entitled to receive a grant from the Government as a result of the latest national lockdown.

One such scam message reads: “HMRC: The third lockdown has been announced. Our records show you have been issued a grant of £240 to help during this period.”

Taxpayers who receive the text are then redirected to a website designed to mimic GOV.UK, which asks them to enter the personal and financial details to receive a grant.

As part of the scam, individuals are asked to provide their card details, information it states is necessary “to confirm and deposit the calculated amount”.

Although the Government has announced £4.6 billion of grant funding for businesses during the latest lockdown, this funding is not applied for online in this way.

In response to the latest reports, HMRC has said it will never send any texts to people regarding a tax refund, rebate or grant. People can, therefore, safely assume such correspondence is a scam.

Instead, those who think they may be eligible for grant funding or other COVID-19 financial support should seek professional advice so that they can make the necessary applications.

Link: Avoid and report internet scams and phishing

FSB proposes move to turn Covid emergency debt into shared ownership schemes

The Federation of Small Businesses (FSB) is calling on the Government to introduce new measures to help companies struggling with COVID-related debt, including employee shared ownership.

The FSB has said that businesses are facing “unmanageable” levels of Coronavirus debt – with four out of 10 small businesses describing their indebtedness in this way.

Already nearly half of those surveyed in the FSB’s latest study had used personal finance products, such as personal credit cards, overdrafts and loans, to keep their businesses going.

Instead, the small business organisation is suggesting that a system of shared ownership is introduced under which emergency debt could be assigned to an employee ownership trust in return for the trust getting preference shares in the business of the same value, plus an option to acquire 10 per cent of the business when there is a future change of control.

Preference shares, also referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued.

This move would take the debt off the company’s balance sheet, according to the FSB and help businesses manage their debts.

As well as suggesting the new system of ownership, the FSB has also called for the Government to turn Coronavirus emergency loan repayments into tax owing – effectively nationalising a portion of small business debt.

Another proposal is to extend the existing Bounce Back Loan Scheme Pay As You Grow model – which allows borrowers to extend the length of the loans, make interest-only payments and request repayment holidays – to all commercial small business lending.

Martin McTeague, National Vice-Chair of the FSB, said: “Implementing a model whereby firms start repaying debt when they’re making a profit again could mark a positive way forward, as could getting employees more involved in the ownership and running of firms.

“Hundreds of thousands of viable small businesses have taken on sizeable debts to see them through to the other side of the COVID crisis. With emergency loan repayments fast approaching, and festive trade hugely disrupted, we need the Government to intervene swiftly to avoid a small business credit crunch in the spring.”

Link: Turn Covid emergency debt into shared ownership, urges small business

VAT – Post-Brexit arrangements

The latest guidance on VAT on imports and services to and from the EU is complex and businesses need to account for this in their trading.

To help we have provided a brief summary below, but we highly recommend you seek additional advice.

Import VAT 

Goods that move into the UK from the EU from 1 January 2021 onwards will be considered imports, meaning import VAT will be payable and customs declarations will need to be made.

Businesses must account for VAT on all goods imported using a postponed accounting system. This means that import VAT is accounted for and paid via the usual VAT return, which will lead to an improved cash flow position for many businesses.

This applies to all goods imported by VAT registered importers to the UK, including those from the EU. In most cases, import VAT should be recoverable by businesses.

Accounting for import VAT on your VAT return

Businesses have to account for import VAT via their VAT return under the postponed accounting system if the goods they import are for use in their business.

A business must include its EORI number starting with ‘GB’ on its customs declaration and its VAT registration number if it is needed.

It can then account for import VAT on its VAT return when it submits a declaration that releases those goods into free circulation from one of the following special customs procedures:

  • customs warehousing
  • inward processing
  • temporary admission
  • end use
  • outward processing
  • duty suspension.

A business can only account for import VAT on their VAT return once they release excise goods for use in the UK – also known as ‘released for home consumption’.

If the business imports goods that are not controlled into Great Britain from the EU, between 1 January and 30 June 2021, they must also account for import VAT on their VAT return, even if they delay the customs declaration or use a simplified customs declaration to make a declaration in their records.

Deferring VAT

New rules for VAT deferment apply in Great Britain, which allow businesses that import goods regularly, to apply for a deferment account to delay paying most customs charges, including import VAT.

Through this account, a business can make a single payment each month via direct debit instead of paying for each consignment separately.

The scheme is open to importers or customs agents and freight handlers that work for importers and have an approved deferment guarantee or waiver in place.

Regardless of the method of accounting for VAT on imported goods, checks to ensure that the data on the customs declarations is accurate will continue to be highly important for VAT purposes, for all imports.

Consignments of value below £135 

Imported goods in a consignment not exceeding a value of £135 (€150), excluding specific excise goods and gifts, will not be subject to import VAT at the border and will be subject to sales (supply) VAT instead.

This will end the £15 VAT exemption thresholds previously known as low-value consignment relief and VAT will now be charged on the goods as if they were supplied in the UK and accounted to HM Revenue & Customs on the UK VAT return.

This means that businesses selling goods to be imported into the UK with a value not exceeding £135 will be required to charge and collect any VAT due at the time of sale.

For UK VAT registered businesses importing goods in a consignment not exceeding £135 in value that has not been charged VAT at the time of purchase they can account for this VAT on their VAT return under the usual reverse charge method.

Place of supply

Businesses must determine the country where a supply takes place for VAT purposes so that they know where VAT due is payable.

Businesses should be aware that they may continue to create VAT liabilities in other EU Member States. This may mean that businesses in the UK require multiple EU VAT registrations within each member state that they trade within.

Reclaiming VAT in the EU

Currently, UK firms incurring VAT in EU countries can claim VAT back (subject to national rules) via HM Revenue & Custom’s dedicated refund portal.

That arrangement will remain in place until 31 March 2021, after which time, there is currently no provision in place to claim for VAT incurred in 2020, under the terms of the Withdrawal Agreement.

Impact on services

Post-Brexit there should be minimal impact on the supply of services. Business to business services are treated as though they are supplied where the customer belongs and that customer must account for the local VAT.

This will mean that for UK service suppliers they will continue to not charge UK VAT. For business to consumer supplies, UK VAT generally applies and this will also remain the same.

When receiving services, UK businesses may still have to apply a reverse charge to the receipt of services from non-UK suppliers. This ensures that there is no competitive advantage from sourcing services via non-UK suppliers.