Time to prepare for Corporation Tax changes

From April 2023, the Corporation Tax rate will rise for companies with profits of more than £50,000, following the Chancellor’s announcement at his Spring 2021 Budget.

However, the new higher rate of Corporation Tax will not be the same for all companies and will instead be tied to their profits.

Companies generating profits of £250,000 or more will see their Corporation Tax rates rise from the current 19 per cent to 25 per cent.

Meanwhile, those with profits between the £50,000 and £250,000 thresholds will receive marginal relief, which means that their effective rate of Corporation Tax will increase with their profits to a maximum of 25 per cent.

The marginal relief fraction is set at 3/200. The amount of marginal relief is found by multiplying the fraction by the difference between the company’s profits and the upper profits limit of £250,000.

For example, if a company has taxable profits of £100,000, they would be entitled to marginal relief of £2,250 (3/200 x (£250,000 – £100,000)). This means that in this example, marginal relief gives an effective rate of Corporation Tax of 22.75 per cent.

The new Corporation Tax thresholds are adjusted for companies with accounting periods that are shorter than 12 months and where a company has associated companies.

Companies with profits of less than £50,000 will continue to pay Corporation Tax at 19 per cent under the new small profits rate (SPR).

The reforms are complex and require careful calculations based on various criteria.

Given that the rate of tax a business pays will be based on their profits, there may be new opportunities to minimise liabilities through careful tax planning, but it is important that strategies are put in place well in advance of the new rates being launched.

Link: Corporation Tax charge and rates from 1 April 2022 and Small Profits Rate and Marginal Relief from 1 April 2023

Making Tax Digital for Income Tax – Get ready now!

The next big step in the Government’s Making Tax Digital (MTD) initiative is rapidly approaching.

From 6 April 2023, MTD is expanding to include businesses and landlords with a combined total gross income over £10,000 per annum, from the following sources:

  • self-employment
  • partnerships
  • UK property
  • overseas property.

The changes mean affected taxpayers will have to keep digital business records of all their business income and expenses, including their earnings from self-employment or property.

They must then use MTD compatible software to send updates to HMRC every quarter. This will mean that there will now effectively be five tax updates a year sent to the tax authority, instead of just one self-assessment tax return.

The deadline for this quarterly summary information is one month following the quarter-end.

At the end of the tax year, there will then be a final declaration made to HMRC to include details of all other income and any accounting adjustments.

Taxpayers will still be required to submit their final declaration by 31 January.

There are some exemptions to this next key stage of MTD, including:

  • Trusts, estates, trustees of registered pension schemes and non-resident companies; and
  • Partnerships that have corporate partners and Limited Liability Partnerships are not required to join MTD for Income Tax in April 2023 but will be required to join MTD at a future date.

As with the existing MTD for VAT rules, taxpayers will need to use HMRC compliant online accounting software to make these regular submissions.

It is important that those affected by these new rules take action sooner rather than later to get the correct systems and processes in place by seeking professional guidance and support.

Link: Follow the rules for Making Tax Digital for Income Tax

Points-based system for HMRC late payment penalties

Penalties for late submission and late tax payments will be determined by a new points system to make them fairer and more consistent, HM Revenue & Customs (HMRC) has announced.

Under the new system, penalties will be points-based rather than automatic. This means that those who consistently miss deadlines will accrue more points – and pay a larger fine than the penalty currently in force.

It is designed to penalise only the small minority of businesses and taxpayers who persistently miss their submission obligations rather than those who make occasional mistakes. The changes only initially apply to VAT and Income Tax Self-Assessment (ITSA).

The changes apply to VAT for accounting periods beginning on or after 1 April 2022 and to ITSA taxpayers with business or property income over £10,000 per year (who will be required to submit digital quarterly updates through Making Tax Digital (MTD) for Income Tax) for accounting periods beginning on or after 6 April 2023, and to all other ITSA taxpayers for accounting periods beginning on or after for 6 April 2024.

Instead of getting an automatic fine, under the new system, you will get a penalty point.

The more deadlines you miss, the more points you get until you reach your penalty threshold. Then you get a £200 fine (and another £200 fine for every subsequent deadline you miss).

Your penalty threshold depends on how often you have to submit tax information:

  • annually – two points
  • quarterly (e.g., VAT and Making Tax Digital for Self-Assessment) – four points
  • monthly – five points

There are separate points totals for each obligation you have. This means that if you fail to meet one obligation but successfully meet others, you will only accrue one set of points.

But if you fail to meet multiple obligations, points will accrue for each – even if they have the same submission frequency. This could result in heavy fines if you consistently miss deadlines across all of your responsibilities.

HMRC has a time limit to apply points, for example, it cannot apply a point after 48 weeks from the day of a missed annual submission. It also has discretionary powers not to issue points and penalties under particular circumstances.

You can appeal an HMRC point or penalty as long as you have a reasonable excuse. If you have concerns about the new system, you should seek professional advice to avoid financial penalties.

Link: New points-based penalties for late tax reporting submissions

Take account of your year-end tax liabilities

Payments on account are advance payments towards your tax liability for the year, if you complete a UK Self-Assessment tax return and is a way of settling tax owed.

The two deadlines for the self-employed to pay their tax bills are 31 January and 31 July of each year.

These two payments are made during the year, calculated on the previous year’s tax bill and are designed to avoid building up debt to the taxman.

If the tax liability is greater than the previous year, a further balancing payment may also be required.

Normally this is not a problem, as you are only ever expected to make a half-payment.

However, if this is your first year filing a return then you may be required to pay tax for the year plus an additional 50 per cent of what is owed.

That can catch people out unless they have put sufficient money aside to pay the tax that they owe.

Given the challenges of the last year, many taxpayers may also find that the estimates for tax owed are inaccurate as their income has been smaller than predicted.

How do payments on account work?

Your bill for the 2019 to 2020 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2021 is £2,700. This includes:

  • Your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)
  • The first payment on account of £1,500 (half your 2019 to 2020 tax bill) towards your 2020 to 2021 tax bill
  • You then make a second payment on account of £1,500 on 31 July 2021.

If your tax bill for the 2020 to 2021 tax year is more than £3,000 (the total of your two payments on account), you will need to make a ‘balancing payment’ by 31 January 2022.

Payments on account do not include anything you owe for capital gains or student loans (if you are self-employed) – you will pay those in your ‘balancing payment’.

You have to make a payment on account if your tax during the previous financial year was more than £1,000.

However, that is not the case if more than 80 per cent of that year’s tax was taken off at source, for example, through PAYE.

Link: Understand your Self-Assessment tax bill – payments on account

Director’s ban is a warning to others to keep proper company records

A payroll services boss has been banned for orchestrating a multi-million-pound tax avoidance scheme.

The case puts a spotlight on company owners and should serve as a reminder that they are subject to strict conditions over keeping records.

The High Court issued a disqualification order lasting 11 years to the sole director of Magnetic Push Ltd.

The company was purportedly operating as a payroll services company and entered voluntary liquidation within a year of being formed.

However, the liquidator found the director completely uncooperative when requesting the company’s statutory records.

This was reported to the Insolvency Service, which investigated and found that the company was acting as an umbrella company in part of a tax avoidance scheme.

He had declared a VAT liability of just £609 but the tax authorities claimed more than £4 million from Magnetic Push in the liquidation.

Failure to keep accounting records can lead to a £3,000 fine and/or disqualification from acting as a director, as this case indicates.

If you haven’t reviewed your record keeping in a while, now is a great opportunity to do so.

Key points for company and accounting records

You must keep:

  • Records about the company itself
  • Financial and accounting records
  • HM Revenue & Customs (HMRC) may check your records to make sure you are paying the right amount of tax.

You must also keep details of:

  • Directors, shareholders and company secretaries
  • The results of any shareholder votes and resolutions
  • Promises for the company to repay loans at a specific date
  • Promises for payments if something goes wrong and it is the company’s fault
  • Transactions when someone buys shares in the company
  • Loans or mortgages secured against the company’s assets.

Limited companies have to keep a register of ‘people with significant control’ (PSC), which must include details of anyone who:

  • Has more than 25 per cent shares or voting rights in your company
  • Can appoint or remove a majority of directors
  • Can influence or control your company or trust.

When it comes to accounting records you must be able to evidence:

  • All money received and spent by the company, including grants and payments from Coronavirus support schemes
  • Details of assets owned by the company
  • Debts the company owes or is owed
  • Stock the company owns at the end of the financial year
  • The stocktaking you used to work out the stock figure
  • All goods bought and sold
  • Who you bought and sold them to and from (unless you run a retail business).

Link: Running a limited company – Company and accounting records

Don’t miss the deadline for renewing tax credits

Unlike other benefits, tax credits usually have to be renewed each year by 31 July to continue receiving payments from HM Revenue & Customs (HMRC).

If you are claiming tax credits, it is really important to look carefully at the information you receive.

Even if you have stopped getting tax credits, you still need to check that all your details are correct and respond if required to do so.

Each year you will be sent a renewal pack that tells you how to renew. If it has a red line across the first page and says ‘reply now’ you will need to renew.

If it has a black line and says ‘check now’, you will need to check your details are correct and if they are, you do not need to do anything and your tax credits will be automatically renewed.

If you miss the deadline your tax credits payments will stop. You will be sent a statement and will have to pay back the credits you have received since 6 April 2021.

From 6 April, you will get estimated (‘provisional’) payments from HMRC until you renew. Your payments may have changed based on information from your employer or pension provider.

If you miss the deadline for renewing, you will be sent a statement (TC607). If you contact HMRC within 30 days of the date on the statement your tax credit claim may be restored, and you will not have to pay anything back.

However, if you contact HMRC later than 30 days of the date on the statement, they will ask you to explain the reasons for the delay – known as ‘good cause’ – before they consider restoring your claim.

If HMRC stops your payments, you cannot make a new claim for tax credits.

How to renew

You can renew tax credits online or renew tax credits by phone or post.

You will need:

Link: How to renew tax credits