Monthly Tax News – August 2022

PRIME MINISTER CANDIDATES AND POSSIBLE TAX CUTS

With the departure of Boris Johnson, the contenders as leader of the Conservative Party and Prime Minister (PM) have now been whittled down to the last two – Rishi Sunak and Liz Truss.

Whoever wins will need to appoint a new chancellor and we await their tax policies with interest.

In the event of Liz Truss becoming PM, we are expecting her Chancellor to call an emergency Budget, with a flurry of tax reductions being announced.

In her campaign to win support from Tory members, Liz Truss has suggested that she would reverse the 1.25% Health and Social Care Levy. She would also cancel or reduce the scheduled rise in corporation tax to 25% from 1 April 2023 where company profits are in excess of £250,000 a year.

We are not currently expecting an emergency Budget under former chancellor Rishi Sunak. Sunak continues to promise tax cuts in the future, but only when inflation has been brought under control.


NATIONAL INSURANCE THRESHOLD INCREASE

On 6 April 2022, National Insurance (NI) increased by 1.25%, raising the main rate from 12% to 13.25% for employees and from 13.8% to 15.05% for employers. In March, Rishi Sunak announced that the threshold at which NI starts to become payable by employees would rise from £9,880 to £12,570 from 6 July 2022, making it the same as the personal allowance threshold.

This means that from 6 July 2022, anyone earning £12,570 per year or less (£1,047.50 per month) won’t suffer any tax or NI on their salary. Lower earners who saw additional NI contributions being taken from them due to the increase on 6 April 2022 will have increased net pay.

The threshold rise doesn’t apply to employers, their NI threshold remains at £9,100 with NI payable at 15.05% on earnings over this.


EMPLOYMENT ALLOWANCE

This can be claimed by most employers, as long as their Class 1 employer’s NI liabilities were less than £100,000 in the previous tax year. The main exception is companies where there is a single employee who is paid above the employer’s NI threshold and that employee is also a director. The allowance allows eligible employers to reduce their annual NI liability by up to £5,000.

We would also like to remind employers of their pension scheme responsibilities as anyone earnings over £10,000 per year should be automatically enrolled in these.

Please contact us if you would like to review your current salary packages in light of these changes.


BEWARE “ROGUE” R&D CONSULTANTS

In recent years HMRC have identified and successfully challenged a number of spurious claims for Research and Development (R&D) tax credit relief made by purported ‘R&D Consultants’.

Many of these claims have been for projects that did not satisfy the criteria for the tax relief and some included overstated expenditure and consequently have been abusing the scheme.

The R&D rules offer legitimate claims generous tax breaks. For a company that is a Small or Medium-sized Entity (SME), qualifying expenditure attracts a tax deduction of 230% of the amount spent which can then be traded in for a tax refund of 14.5% if the company is loss making. Thus £100,000 of qualifying R&D expenditure would potentially result in a tax refund to a loss-making company of £33,350. Most R&D consultants charge a fee based on the amount of the claim.

To qualify for R&D relief, the expenditure must be incurred as part of a specific project to make an advance in science or technology. The project must relate to the company’s trade – either an existing one, or one that the directors intend to start up, based on the results of the R&D.

Further, the company must be able to explain how a project:

  • looked for an advance in science and technology;
  • had to overcome uncertainty;
  • tried to overcome this uncertainty; and
  • could not be easily worked out by a professional in the field.

In summary, R&D claims are often very worthwhile, but a number of strict requirements must first be met. If you are approached by an R&D Consultant or otherwise believe you may be incurring eligible R&D expenditure, please talk to us.


MAKING TAX DIGITAL – UPDATE

Making Tax Digital (MTD) for VAT has been with us since April 2019, with the extension to all VAT registered businesses from April 2022.

The next roll-out will be the introduction of MTD for income tax which is scheduled to start in April 2024.

The obligation to keep records in a digital format and report information quarterly will apply to unincorporated businesses and property landlords with gross income from all business activities in excess of £10,000 a year.

Businesses operating MTD for VAT may already have ‘functional compatible software’ for income tax purposes but will need to get into a new routine for income tax reporting.

The changes will be more significant for property landlord businesses, most of whom are not VAT registered and so have not already been through MTD for VAT.

If you believe you need a new digital accounting system for your business, there are a number of MTD compliant accounting software packages on offer and we can advise you on the one that is most appropriate for your business.


MORE DETAILS OF MTD FOR INCOME TAX REPORTING

HMRC are currently consulting on the precise details of what needs to be reported each quarter. As expected, it seems the accounting software will need to record and report income and expenditure in the same categories currently used for self-assessment.

The main categories are:

  • Turnover/gross rents
  • Costs of goods sold
  • Materials
  • Wages and salaries of employees
  • Sub-contractor costs
  • Rent, rates, power and insurance
  • Repairs and renewals
  • Professional fees
  • Telephone and other office costs
  • Interest on bank and other loans
  • Motor and travel expenses

HMRC also propose that those businesses with turnover below the £85,000 VAT threshold will only need to report the totals of income and expenditure each quarter which will be a welcome simplification for small businesses.


DIARY OF MAIN TAX EVENTS AUGUST/ 2022

Date What’s Due
01/08/2022 Corporation tax payment for year to 31/10/21 (unless quarterly instalments apply)
19/08/2022 PAYE & NIC deductions, and CIS return and tax, for month to 05/08/22 (due 22/08 if you pay electronically)
01/09/2022 Corporation tax for year to 30/11/21 (unless quarterly instalments apply)
19/09/2022 PAYE & NIC deductions, and CIS return and tax, for month to 05/09/22 (due 22/09 if you pay electronically)

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