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

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

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

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