Basic rate taxpayers could face ‘high income’ child benefit charge

Due to a mismatch of earnings thresholds, basic rate taxpayers may unexpectedly come under the scope of the High Income Child Benefit Charge in April.

The Low Incomes Tax Reform Group (LITRG) has issued a warning to families that they may be subject to a tax charge when claiming Child Benefit due to a discrepancy between two earnings thresholds used by the Government.

This is because the High Income Child Benefit Charge (HICBC), which begins to be levied where either parent earns £50,000 or more, will no longer align with the thresholds for higher rate taxpayers later this year, which means those paying the lowest rate of tax may now face new charges.

The higher rate tax threshold continues to rise each year, and while it currently stands at £50,000, this figure will rise to £50,270 from 6 April 2021.

The HICBC, however, has remained unchanged since 2013. Those found within the charge will see one per cent of the child benefit they receive effectively withdrawn via the charge for every £100 earned above £50,000. This means that those earning £60,000 or more lose all the benefit through tax.

The Low Incomes Tax Reform Group, part of the Chartered Institute of Taxation (CIOT), has said that the policy “no longer meet its original intent to only target higher rate taxpayers”.

It has suggested that the Government should compensate for inflation and rising wages by raising the £50,000 income threshold to at least £60,000. It also believes that the point at which Child Benefit is fully recovered should increase from £60,000 to £75,000.

LITRG believes that the structure of the charge encourages those liable for the tax charge not to claim Child Benefit, which may affect a claimant’s state pension record, as they potentially miss out on National Insurance credits.

It may also mean that children of those who aren’t claiming may not automatically get a National Insurance number when they turn 16.

Link: Concern as high income child benefit charge hits basic rate taxpayers

The VAT Reverse Charge for the Construction Industry Scheme – Are you ready?

From 1 March 2021, businesses within the Construction Industry Scheme (CIS) must record, report and pay VAT under the new VAT domestic reverse charge rules.

This change affects both contractors and subcontractors and the supply of certain kinds of construction services in the UK.

Under the new rules, VAT registered subcontractors who provide a service and any related goods to a VAT-registered contractor who is CIS-registered no longer need to account for the VAT.

Instead, it is the contractor or developer who will account for the VAT as an input tax, as if they made the supply to themselves.

For reverse charge purposes, consumers and final customers are called end users. They are businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.

The reverse charge does not apply to supplies to end users where the end user informs a supplier or building contractor that they are an end user. This should be done in writing to maintain accurate records.

HM Revenue & Customs (HMRC) has defined a list of construction services that the new reverse charge rules apply to, which can be found here.

Where a mixed supply is made containing a reverse charge and ‘normal element’ then you should apply the reverse charge to the entire supply.

You will need to make changes to your invoicing and accounting procedures to take the reverse charge into account, but this may differ depending on whether you are a contractor or subcontractor.

You should also consider the cash flow implications on your business of moving to the new regime, as there may be ways to mitigate the impact.

The reverse charge will apply to all jobs completed on or after 1 March 2021, but it may also apply to work that was commenced before this date but completed afterwards.

Determining when the switch to the new VAT regime takes place depends on the tax point i.e. the date of issue of the VAT invoice or the receipt of payment.

Where the tax point is on or after 1 March 2021 then the reverse charge should be applied even for work commenced before this date. Otherwise, the existing VAT rules apply.

These new rules are mandatory – you cannot opt-in or opt-out, or only apply it to certain invoices – which is why you should seek help now if you believe you are likely to be affected.

Link: The VAT Reverse Charge

Large and medium-sized businesses need to be ready for IR35

Large and medium-sized businesses now just have a couple of months left to prepare for the changes to the off-payroll working rules (IR35).

From 6 April 2021, in most cases, the engager (employer) will be responsible for deciding whether to deduct tax and National Insurance Contribution (NICs) from freelancers and contractors, operating via a Personal Service Company (PSC), as if they were employees.

The new IR35 rules do not affect small businesses, as defined by the Companies Act 2006, where they meet two or more of these criteria:

  • Annual turnover is no more than £10.2 million;
  • A total of fixed and current assets (before deducting current liabilities, long-term liabilities and deferred tax provisions) over £5.1 million; or
  • No more than 50 employees.

When a business grows from a small to a medium or large-sized business there is a two-year transition period before the IR35 regulations fully apply to that business.

Engagers are required to undertake this IR35 determination for every contract they agree with a worker. The official guidelines are as follows:

  • Pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
  • Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
  • Have processes in place to deal with any disagreements that arise from your determination.

The Government has created an assessment tool, CEST, which can be found here. This can be used to assess whether the engagement is classed as employment or self-employment and a report can be printed out as a record of your assessment if challenged by HMRC.

If the determination results in a contractor being within the IR35 rules, you will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.

Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions (NICs) become their responsibility.

Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct and pay tax and NICs via PAYE on the contractor’s remuneration.

It is estimated that almost a quarter of the UK’s workforce now works on a contingent basis, either in the public or private sector, and so businesses must be prepared for the changes ahead.

Here are some basic steps that all businesses can take to help them prepare:

Conduct an audit of freelancers and contractors

As it will be the responsibility of the person engaging the services of a contractor to determine whether their work falls inside the new rules, you should carry out an audit of all employees and contractors currently working within your business to determine who may be affected.

Determine who falls under the rules

Last year, many businesses were considering a blanket approach to freelancers, but recent research suggests that more companies are taking a measured approach to ensure they aren’t disadvantaging contractors. You will need to determine whether each contractor falls “inside” or “outside” of the new rules.

This should be done on a case-by-case basis, as you could face serious repercussions for failing to demonstrate reasonable care to correctly classify such roles for employment tax purposes.

If the engager fails to correctly determine status, they will be held liable for any tax charges or NICs and could face a penalty from HMRC.

Communicate all changes 

Once you have determined whether a person falls within the rules or not you should communicate any changes to them. It is important to demonstrate that you are taking reasonable care to assess their status.

If you determine that a person should be within the new rules and you switch them to the PAYE system, as required, they could see their take-home pay reduced considerably. You should take the time to discuss these changes with them.

There is a disagreement procedure created by the Government to be used by the contractor and the organisation paying the fees if all parties do not agree with the determination.

Create an agreement policy

Businesses should prepare an agreement policy for any new contractors they take on from April 2021, which clearly outlines the contractor’s employment status.

Existing contractors might also need their agreements adjusted in light of the IR35 changes if they run into the new financial year.

Consider the costs

Many contractors have indicated that they intend to increase their daily or hourly rate to compensate for their income tax and NICs being deducted by employers.

You should discuss this with contractors as soon as possible so you can factor any additional costs into your employment budget.

If you rely on the services of contractors or freelancers it is important that you prepare your payroll systems and process for these changes.

Link: Understanding off-payroll working (IR35)

Don’t forget to claim home working tax relief

Due to the ongoing restrictions of the Government’s Coronavirus response, millions of UK workers continue to work from home.

Many may not be aware that they can claim tax relief for additional household costs if they are required to work from home regularly, either for all or part of the week.

This tax relief is not available to those who choose to work from home, only those that must do so.

This tax relief has been designed to cover additional costs, such as heating, metered water bills, home contents insurance, business calls or a new broadband connection.

A worker may also be able to claim tax relief on equipment used in their role, such as a laptop or mobile phone. Details of this can be found here.

However, the tax relief available does not cover costs that would stay the same whether a person was working at home or in an office, such as mortgage interest, rent or council tax.

Workers can either claim tax relief at a rate of:

  • £6 a week from 6 April 2020 (for previous tax years the rate was £4 a week) – no evidence is required to make this claim.
  • the exact amount of extra costs incurred above this weekly amount – this will need to be evidenced with receipts, bills or contracts.

Taxpayers get tax relief based on the rate at which they pay tax. For basic rate taxpayers (taxed at 20 per cent), for example, claiming £6 a week would mean they receive £1.20 per week in tax relief.

Employees can claim this relief by clicking here. They will need to use or set up a Government Gateway ID using their National Insurance number and information from their P60 form.

 Link: Claim tax relief for your job expenses

Voluntary and compulsory strike-off processes paused in response to national lockdown

Companies House will pause both the voluntary and compulsory strike-off processes for one month from 21 January until 21 February to support businesses affected by COVID-19, it has been announced.

The extended measure comes in response to delays to the system caused by the third national lockdown.

In a notice to customers, Companies House said reduced resources have led to delays in processing correspondence, documents and forms, which could potentially disadvantage companies during this period.

The regulator said it will continue to publish first Gazette notices for voluntary strike-off applications, but to give business owners more time to update their records, the second Gazette notice will not be published and companies will not be removed from the register during the pause.

Both the first and second Gazette notices for compulsory strike-off applications will not be published, however, and companies will not be compulsorily removed during this period.

Commenting on the changes, Companies House said: “Pausing our strike-off processes will provide companies with more time to update their records and help them avoid being struck off the register. It’ll also protect creditors and other interested parties who might have had difficulties in receiving notices or registering an objection, or whose objections have not yet been processed.

“We’ll continue to remind customers about their filing responsibilities during this period. Our digital services are available as normal, and we encourage all customers to file online if you’re able to.”

The Companies House strike-off process was also paused during the first and second national lockdown.

What is the Companies House strike-off process?

Registered businesses are removed from the official register of companies after a period of inactivity.

You can choose to close down your own limited company by getting it “struck off” voluntarily, providing it meets a strict set of requirements.

A company can also be forcibly struck off if company documents are outstanding and the regulator has received no response, or if the company has no registered directors.

Link: Companies House pauses voluntary and compulsory strike off processes

Consultations on future of Companies House could see filing deadlines slashed

A set of consultations on the future of Companies House published in December 2020, include proposals for mandatory digital filing, requirements to tag accountants digitally with IXBRL and shortening filing deadlines to three months for public companies and six months for private companies.

The Department for Business and Industrial Strategy (BEIS) is also seeking feedback on extending the powers of Companies House to allow it to undertake further checks on filings before they are added to the register, with the authority to reject them where necessary.

Finally, BEIS is consulting on banning corporate directors, meaning only individuals could hold the position of a company director. At the moment, companies are only required to have a single individual director.

There is no guarantee that any of the proposals being discussed will be implemented and, if they are, it is likely to take some time.

Lord Callanan, the Minister for Corporate Responsibility, said: “Today’s proposals set out further detail on our far-reaching reforms to ensure the Companies House register is fit for the 21st century – allowing us to crack down on fraud and money laundering while providing businesses with greater confidence in their transactions.”

Link: Companies House reforms could cut filing deadlines

The advantages of electric vehicle salary sacrifice schemes

Businesses looking to reward and retain staff members may wish to consider offering an electric vehicle (EV) salary sacrifice scheme.

Not only are many EVs better for the environment, but they could also offer businesses considerable savings.

Businesses can use employee salary sacrifice – similar to schemes offered for pension contributions, cycle to work schemes and childcare vouchers – to fund the purchase of new EVs in a tax-efficient manner.

In principle, salary sacrifice is simple, the employee ‘sacrifices’ part of their salary and the employer invests this in a benefit – in this case, an EV. Using salary sacrifice saves the employee National Insurance Contributions (NICs) and Income Tax.

However, in recent years HM Revenue & Customs (HMRC) has taken a tougher approach to many salary sacrifice schemes, which has often made them less effective.

Thankfully, a special exemption was put in place for ultra-low emission vehicles to encourage motorists to swap their petrol and diesel cars for electric and hybrid models.

When this was confirmed it was made clear that the provision of an EV via salary sacrifice would be considered a benefit-in-kind.

Initially, the benefit-in-kind, or BiK rate, on a pure electric car was 16 per cent, which in many cases meant that there was little or no benefit.

However, following changes in April last year, all pure electric cars now have a zero BiK rate and salary sacrifice benefits can be felt in full.

The zero per cent rate also applies to hybrid vehicles that are first registered from 6 April 2020 that produce between one and 50g/km of CO2 and are capable of at least 130 miles on battery power alone.

The change in rates coincided with more complex rules regarding emission and economy tests, which determine rates for vehicles including hybrids, which may have an impact on existing hybrids acquired via salary sacrifice.

The Treasury has recognised that the older tests may unfairly disadvantage some company hybrid car users and so to achieve fairness it has reduced the BiK rates used for older car models.

This reduction will fall to one per cent in the 2021/22 financial year and will disappear altogether in the following year. This means that there will be no reduction in its BiK rate for these vehicles from April 2022.

People looking to purchase a new company car in the next year should review the Government’s latest rates, which can be found here. Be aware though that these rates change annually and may differ after April 2021.

There are several other tax incentives for both company car users and the businesses that offer this benefit, especially where it is used for business purposes, including:

  • Corporation Tax relief
  • Reclaiming VAT on a vehicle purchase
  • Lower vehicle excise duty
  • Plug-in grants
  • Tax-efficient electric car charging points

It is not surprising, as technology advances, that more businesses are considering EV salary sacrifice or the purchasing of a fully electric or hybrid fleet.

Beyond the immediate tax benefits for a company, the employer should also look at the advantages that offering a company car can have on retaining staff.

Offering EV salary sacrifice is an excellent way of rewarding employees in a tax-efficient manner that doesn’t incur significant costs for the business or the employee.

Looking further ahead, the Government is now committed to a ban on the sale of new purely petrol and diesel vehicles by 2030, which is now less than a decade away.

Link: Electric Car Tax Benefits

Business insurance rates are on the rise

The impact of the pandemic has been felt in many different ways. Some of the effects have been quite immediate, but now many businesses are starting to see how the events of the last year are affecting their annual business insurance rates as well.

Before COVID-19 struck, there were already a number of factors adversely impacting the insurance industry and the market has steadily deteriorated during the last year. Beyond the pandemic, the industry has also been affected by:

  • Changes in legislation
  • A sharp rise in UK property rates
  • Flood and storm damage claims
  • Rising reinsurance rates and reducing capacity
  • Lower interest rates

The combined effect of these issues and COVID-19 has meant that many insurers are now looking to increase business insurance premiums in the year to come.

With many businesses already struggling with cost and cash flow management issues, a sudden increase in insurance rates could damage their ability to recover later in the year.

To combat some of the issues listed above, the insurance industry is reacting. One such area is specialist insurance for those in high flood risk areas, which uses a very practical approach.

If a business has previously been flooded, is at risk of flooding or has flood insurance in place, a new product has been created that is essentially a drain pipe attached to the outside of the premises.

When water levels reach a pre-agreed height on the drainpipe, the insurance policy pays out a pre-agreed sum of money immediately.

This new type of policy is not based on damage costs, like a traditional policy, and can be used as flood insurance or as cover for the excess on existing flood insurance.

This is one of several new insurance products on the market designed to reduce premiums, which is why businesses need to assess their current level of cover and the costs involved.

Link: Property insurance costs to keep rising in 2021

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