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Category: Income Tax

  • 2024 Tax Year End Planning

    1. Frozen Allowances

    With continued frozen tax allowances, more people are getting caught by a 40%, 60% or 45% tax rate and many will have to repay child benefit when they didn’t before.

    As a business owner, you have more options than a regular employee, but it’s worth everyone checking in with what is available and affordable. Some sole traders work less to keep their income under the 40% higher rate band of £50k or an employee may decide to go part time.

    Shareholder-directors should review their mix of dividends and salary to ensure they are optimised. For example, if your company suffers the 26.5% marginal tax rate and some or all of the £5k national insurance employer annual allowance is available to you, you’re likely to find that a salary higher than £12,570 is more tax efficient for you.

    A sole trader could add another person such as a spouse and set up a general partnership to even out the use of their income tax bands, or an employee might make more payments into a pension scheme, as described next.

    2. Pensions

    With higher corporation tax of 25%/26.5% for many company owners, you may wish to re-visit your company pension contributions to ensure you optimise your corporation tax relief.

    With a March year end if your profits might be higher in the year to 31 March 2024 than in the year to 31 March 2025, you may find you’re likely to save more tax from making pension contributions in this earlier year, subject to the £60k annual allowance.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If your income is over £100k, you’ll save an extra 40% from gross pension contributions made to get income down in the range between £100k and £125k. Under £100k, you save an extra 20%, whereas for income over £125k, you save an extra 25%. Your pension pot also receives 20% direct from the government, boosting its value in the background.

    3. State Pension Top Up

    The original deadline to top up your state pension, if needed, has been extended to 6 April 2025, but as time flies, it’s worth a reminder!

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in state pension qualifying years. From 6 April 2025 this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    You should check your Personal Tax Account, which despite its name also shows your state pension years. You can identify any missing years, any errors and check whether it’s worth making the payments.

    State pension credit years can arise from a variety of sources, but if you need to make the most expensive Class 3 national insurance payment, it costs £824 to add on a missing year, which although expensive is often still worth it – but do check!

    4. Spouse Dividends

    Dividend tax is at its highest level and as dividends also form part of your gross income trapped within the frozen allowances mentioned above, you may ask your spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

    From 6 April 2024, the £1k 0% dividend tax is again halved to £500 so the advantage of paying tax free dividends to a spouse is less than it used to be and spreading family tax costs across lower tax bands has become more advantageous.

    5. Annual Investment Allowance and Electric Car First Year Allowance – 100%

    For all businesses, sole traders and limited companies. the Annual Investment Allowance is now permanently at £1m meaning that you can spend up to £1m on plant and equipment or on eligible commercial property refurbishment costs and receive 100% tax relief. Similarly, new electric cars purchased before 6 April 2025 benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 31 March 2024, ensure you meet the conditions for a claim in the earlier year, so you don’t have to wait a year to get the cashflow tax saving.

    For example, investing £100k might save £25k of corporation tax (25%), or £45k of income tax (45%) which is better in your pocket one year earlier than with HMRC.

    Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

    6. Research & Development

    The new merged R&D scheme – for SMEs and large companies – takes effect for accounting periods beginning on or after 1 April 2024, but with the existing SME intensive scheme remaining for now.

    As you’d expect the new merged scheme isn’t as generous and R&D expenditure and claims should be made in earlier accounting periods wherever possible.

    If a major part of your claim is overseas contractors, from 1 April 2024 these will no longer be eligible and you may also wish to bring some of those forward.

    7. Director Small Wins

    Remember to maximise your director treats for the tax year ended 5 April 2024; trivial benefits totalling £300 each, annual parties expenditure up to £300 each with guest or having a private health care check.

    8. Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2024, after which your tax free annual exemption of £6,000 is reduced by a further half to £3,000. For a couple selling a buy-to-let property this might cost tax of up to £1,680 for the sake of a few days.

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. Also, the Budget on 6 March 2024, may affect your optimum position.

  • Looking Forward To Tax Changes In 2024

    HMRC Resources

    Don’t underestimate the impact of limited resources on HMRC’s policy and behaviour. 

    Recent changes include taking all PAYE earners up to £150k, with no other taxable income, out of the tax return system and setting default taxable income for all sole traders and partnerships regardless of size to be based on cash. 

    A few years ago these would have been unthinkable explained mostly as a way of saving HMRC time. 

    How might you react?

    PAYE Income Up to £150k

    – It’s common for payments into employer pension schemes to receive only 20% income tax relief via direct payment by HMRC into your pension scheme. We see many cases where even 40% taxpayers aren’t claiming the additional 20% relief. With earnings over £100k the additional relief is 40% and over £125k it’s 25%, which are often missed. You may be encouraged to claim this through your tax code but they’re hard to understand and we see many errors here too.

    Advice: Continue to prepare a tax return

    Cash Accounting 

    – So much to say! Essentially, this ignores all the good things accountants learn to help you monitor your business. Yes, for many small businesses, there’s not too much difference between cash and the accountants accruals basis, however, if you want to make true comparisons between each year or more often, you should check further.

    For example, if you pay for materials, do the work for a customer and raise invoices not paid before 31 March, you’ll have delayed tax and national insurance on the unpaid invoices. But what about the next year? What if all invoices are paid before 31 March? You’ll be taxed on the previous year’s delayed income and this year’s cash income.

    If your profits are near £50k you may tip over and then start losing child beneft as well as pay 40% income tax instead of 20%.

    How will you know what your actual margins are? Successful businesses track their margins ensuring increased costs are passed on and whether they should do better with suppliers, or change their model.

    Advice: Choose accruals accounting 

    Yes, accountants would say this wouldn’t they? However, we see so many errors and problems which we genuinely want you to avoid and it’s in our DNA to help you run a successful business and keep you as tax efficient as possible.

    Sole Trader/Partnership or Limited Company?

    Increased dividend tax and corporation tax but lower self employed national insurance, together with the temptation of cash accounting makes being a limited company less attractive than it used to be.

    All factors need to be taken into account, not the least of which is the ability with a limited company to control your income tax bill and hang onto all your child benefit or personal tax free allowances!

    Advice: Consult an accountant who lives and breathes these things.

    Pension Contributions

    The increase in the annual gross contributions of £60k together with the removal of the lifetime limit, may be reversed or amended by a Labour government.

    How might you react?

    – You may want to make higher contributions than normal to take advantage of these generous thresholds while you can. In particular if your limited company is likely to pay 25%/26.5% corporation tax, employer pension contributions save more corporation tax than in previous years.

    Advice: Check your personal and company cash and profits to identify whether you can afford and should make pension contributions. Take IFA advice as always, who should also work with your accountant.

    Capital Gains Tax

    The reduction in the tax free annual exemption from £12,300 to £3,000 from April 2024, costs over £5k for residential property jointly owned by higher rate taxpayers.

    If Labour wins the general election you might expect an increase in rates possibly from 10%/20% to the residential property rates of 18%/28% or even higher for all assets. 

    How might you react?

    – The tax free annual exemption is already down to £6k. If you’re about to sell an asset sometime in March you may want to ensure you exchange before 5 April 2024, as one day’s difference might cost you a maximum of £1,680 for a jointly owned residential property.

    Advice: If you consider Labour will form the next government and likely to increase capital gains rates, you may want to consider bringing forward asset disposals. Naturally, never forget commercial considerations such as how much more or less you might receive if the market moves for or against you.

    Inheritance Tax

    Continuing rumours suggest the current government wants to reduce inheritance tax. Perhaps something will be announced in the Budget on 6 March 2024 such as higher tax free thresholds or a reduction in rates. It’s a strange one where it’s more unpopular than it’s impact would suggest, that is, not many people actually pay any inheritance tax.

    How might you react?

    – Rumours and speculation really aren’t a basis for good tax planning and never more so with inheritance tax as often the assets are very valuable! There may be a favourable change under the current government after which a Labour government waters it down. 

    Advice: Ensure any inheritance tax reliefs are as secure as possible such as business property relief, review your Will in conjunction with inheritance tax considerations and consult your accountant/solicitor/IFA, ideally all three! – on whether early gifts are likely to be the best defence against inheritance tax and whether existing reliefs such as expenditure out of normal income could be utilised.

    In Summary: Be wary of being taken out of the tax return system, check the impact of ‘simplifications’ and don’t overreact to speculation. 

    Wishing you all the best for 2024.

  • After lots of Tricks, it’s time for some Treats!

    Please see below for further details. We do hope these prove to be some treats during a time of plenty of tricks.

    • Salary – If you have no other income you should each consider using your £12.5k tax free personal allowance.
    • Trivial Benefits – These are new and are designed to save HMRC’s time dealing with small items. Each benefit must cost less than £50 Incl VAT otherwise the whole amount is taxable.
    • Annual Parties – One of our old favourites. This could be a Halloween party, as well as a Christmas party. Everyone has to be invited and it’s £150 Incl VAT per person plus £150 Incl VAT for a guest. Again, if you spend more than this including on extras such as taxis, the whole amount is taxable.
    • Cycle To Work Scheme – Has to be offered to everyone and the bike used more than 50% of the time for commuting or business journeys. The bike is lent to you and you then buy it from the company at a second hand value a few years later.
    • Private Health Checks – A little known annual exemption regardless of any other taxable private healthcare arrangements you may have.
    • Eye Tests – A more well-known exemption and assumes you need a test because you use a computer monitor, which is most of us!
    • Tax Free Dividends – Whatever other income you earn, everyone gets £1k of dividends tax free. If you have any of your £12.5k tax free personal allowance available, that’s also available for a tax free dividend.
    • Pensions – These need to be Employer Contributions and usually the limit is £60k each but take care on the detail and take IFA advice. The limit might be higher or lower in certain situations.
    • Relevant Life Policies – A death in service policy where neither the premiums paid by the company or the benefits paid out are taxed on you or your beneficiaries. Again, IFA advice is recommended.

     

  • Dear HMRC…Why We Need To Talk

    Dear HMRC

    Why we need to talk to you…..

    As an unrepresented taxpayer with apparently very simple tax affairs, I find myself needing to call you. I really don’t want to. I have better things to do, but I like to know I’m not going to upset you.

    Over the last few years, I’ve needed to talk to you about:

    Incorrect PAYE code – In common with the mightiest Finance Directors, I don’t like surprises. If this code is wrong and you send me a demand after the end of the tax year, it’s a worry. I don’t have spare resources to conjure up extra cash.

    No matter how hard I try, I don’t understand my code. If you change it, I won’t know why and I need to ask you. I need someone to say it’s OK, no need to worry.

    High Income Child Benefit Charge – A couple of times, I’ve earnt over £50,000, and you came back to me a few years later and asked me to repay some child benefit. This is a confusing rule. You saw my income, but child benefit continued to be paid. You told me this is on the website for me to see clearly.

    Sorry, but I don’t hang out on HMRC’s website just in case something applies to me. You know the jargon because you see and hear it every day. I don’t, so occasionally I need a human to explain things to me.

    Pensions – Full Tax Relief – When I earn over £50,270 (different to the £50,000 for child benefit) I’m told I can claim an additional 20% income tax on some of the gross pension payment made to my employer’s pension scheme. I have only the vaguest idea what this means and suspect there are a lot of us missing out on full tax relief.

    I’d quite like you to explain this to me. HMRC’s site assumes a certain level of starter knowledge eg what ‘relief at source’ means.

    Self Employed Class 2 NICs – My side hustle self employed income is sometimes very low and you refunded me the Class 2 NICs I’d asked to pay voluntarily. On enquiry a person explained that voluntary contributions aren’t accepted unless a certain form has been completed.

    For years, I’ve reported a small self employed business on the side. This isn’t enough to earn me a state pension credit should I ever need to pay Class 2 NICs voluntarily. How confusing is that? I couldn’t have worked this out on my own.

    Self Employed Tax Payments Due – In my busier years, no matter how hard I try I don’t understand any statement I see. I pay the figure at the bottom and hope for the best. You tell me the payment on account system is explained online.

    You’re the only organisation I deal with that has a twice a year payment system with half of it in advance and the other half after the end of a period. Unless someone takes me through how that works, I’m not going to understand it.

    It seems the people sitting in rooms talking familiar language make rules that suit their ends. The rest of us get on board as best we can.

    Or are you saying we now all need to pay an accountant?

    Yours confused

    Unrepresented Customer (who can’t choose another ‘supplier’)

  • Budget 2023 – Are we just refilling potholes?

    Corporation Tax

    The increase from 19% to 26.5%/25% remains with all the cost implications to SMEs.

    The pothole being refilled is to then state that a new ‘Full Expensing’ allowance for companies without limit for the next 3 years will help alleviate this increased tax. This isn’t true for most SMEs who already receive 100%, full expensing tax relief for capital investment because they don’t use the existing maximum AIA £1m. They are still stuck with a 26.5% marginal tax rate.

    It’s worth noting that if you do need Full Expensing it doesn’t apply to solar panels or thermal insulation which will only benefit from 50% allowances, not fitting in with the zero carbon agenda. Fortunately, SMEs will largely get 100% under the existing AIA 100% £1m allowance.

    Pensions Allowances

    Happily, companies can save some of their higher 26.5%/25% by investing more into their pension schemes, the annual maximum increasing from £40k to £60k. However, this may not be affordable for many SMEs who therefore don’t need this increase, although more profitable SMEs will welcome it. 

    The lifetime allowance of £1m, frozen alongside income and national insurance thresholds, will now be abolished taking us back to before 2006, but making it ‘out of step’ with the general devaluing of tax allowances. Presumably this abolition is too late for the retiree who is already taking his/her pension so won’t bring back those people to the workplace. 

    Following flexibly withdrawing your pension the money purchase annual allowance was reduced to £4k and is being restored to a previous £10k, making it another pothole refiller.

    Research & Development Tax Relief

    For loss making SMEs investing more than 40% of their expenses, the 14.5% credit that was taken away will return, being another pothole refiller. However, the expenditure will still only be extended by 86% instead of 130%. Meaning that the original 33% now becomes 27% but only if you fulfil the 40% rule. You’ll probably need ChatGPT to help you understand all those percentages! 

    The one year delay to excluding overseas costs to 2024 is very welcome and perhaps will change once further analysis is carried out.

    Reshaping The Workforce

    SMEs should check in with the initiatives that are actually new road surfaces, not refilling something we already had, such as the new investment zones, the over 50s apprenticeships, childcare help for earners under £100k, EMI simplification and encouraging more investment by defined contribution pension schemes.

  • 2023 Tax Year End Planning

    Pensions

    With corporation tax increasing from 19% to 25%/26.5% many company owners may wish to delay some pension contributions to after April 2023, subject to using the £40k annual allowance effectively.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If you’re likely to become an additional 45% taxpayer from April 2023 for the first time because your income is between £125k and £150k, you’ll save an extra 25% instead of 20% by making pension contributions after April 2023.

    Spouse Dividends

    Since 6 April 2022, dividend tax has been at its highest level. If you can take more dividends from your company you might consider asking your spouse to take on some shareholder responsibilities and  receive some dividends, particularly before 5 April 2023 while the £2k 0% tax band remains available.

    From 6 April 2023, the £2k is halved to £1k so this advantage reduces, however, spreading the tax costs across lower tax bands is likely to remain advantageous.

    National Insurance – State Pension Top Up

    From 6 April 2023 the ability to make top up payments for earlier years is significantly reduced.

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in your state pension qualifying years. From this April this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    If you’re not sure, you need to check your Personal Tax Account, which despite its name also shows your state pension.

    Research & Development

    One major change from this April is the reduced cash credit for tax loss-making SMEs. The effective value is currently 33.35% but this is being reduced by nearly a half to 18.6%. (The government is punishing SMEs for the poor practices of non-qualified companies set up to claim cash backs.) You may therefore wish to check whether some costs can be brought forward to access the current higher cashback rate.

    On the other hand, if you’re profitable with over £50k profits your marginal tax rate will be increasing by at least an absolute 6%. The combination of this rate increase and the reduced credit from 230% to 186% is a net value increase from 43.7% to 46.5% for R&D spend from April 2023.

    The increase in the value of a tax credit under the alternative RDEC scheme is a net tax credit of 15%, still lower than the percentages above, meaning it may remain less appropriate for many SMEs. 

    If a major part of your claim is overseas contractors, these will no longer be eligible and you may wish to bring some of those forward if possible. However, if you’re looking forward to claiming data and cloud hosting as an R&D cost, these become eligible from April and a delay might work out depending on the project plans.

    The requirement to provide more details is already fulfilled when On The Spot Accountants make claims. If the advance notice of a claim ends up in the final legislation we’ll be keeping in touch with you to ensure a notification is submitted even if it’s a protective one. Happily, most client tax returns are easily submitted within the 6 month required timeframe which may supersede the need for any advance notification at all!

    Super Deduction 130%

    As this ends on 31 March 2023, bringing forward a large capital spend might be worthwhile saving an effective 24.7% of corporation tax. However, as this was only a way to mimic the 25% increased corporation tax rate from 1 April 2023 and has certain restrictions, if you have profits over £50k, capital spend is likely to save you more, 25%/26.5%, corporation tax by waiting until 1 April 2023.

    Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2023, after which your tax free annual exemption of £12,300 is reduced by more than half to £6,000. For a couple selling a buy-to-let property this might cost tax of up to £3,528 for the sake of a few days.

    Likely, more valuable, is the increase in corporation tax for companies who might save 6% on the whole gain by exchanging before 1 April 2023 and if your year end isn’t 31 March, it might be worth changing it!

    You’ll see there are some twists and turns with these changes, sometimes bringing forward plans is the better answer, sometimes delaying plans is better. Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. In particular, some changes have slightly different effects if your year end is not 31 March.

  • 2022 – Top 8 Tax Queries

    1. Extraction of profits from your limited company 💪

    We had fun with changing national insurance thresholds and rates but got there in the end! Optimum director salaries might be £12,570 or £11,908 with dividends. Other ways to take money from your company include home office rent, pension contributions and interest on loans made to your company. Dividends were difficult for some where sufficient after-tax profits weren’t achieved and these should be repaid to avoid other tax issues. 

    2. Using tax losses to generate a cash refund 👍

    Limited companies, sole trader and partnerships enjoy different rules with some surprisingly helpful results. By definition, when you have tax losses you’re likely to need a cash injection and the tax system can help you. We’ve made many claims, but also found HMRC needed to be chased more than usual to part with your cash! We’re known for never giving up 🙂

    3. Research and development cash refunds 💰

    Along similar lines, if your company also carried out R&D, we made many claims to get you a cash payment from HMRC to encourage you to do more for the good of the economy. We’re not sure the new restrictions will help you much more from April, however!

    4. Capital allowances – 130% super-deduction and electric vehicles 🚘

    We’ve made many 130% capital allowances claims for limited companies for new equipment and 100% tax relief for new electric cars. If cash has been tight, hire purchase was used to further help with cashflow.

    5. Capital gains tax – residential property 🏠

    Taxpayers selling a rented or second home needed advice and real time tax returns prepared. With many also benefitting from principal private residence relief, or for overseas residents, pre and post April 2015 gains, the calculations got a bit interesting! We’ve used the rules to the optimum to help keep these bills down.

    6. VAT – Overseas business to business services 👥

    It’s very easy to get this area wrong. When you provide services to another business and invoice that overseas company, it’s ‘outside the scope’ for VAT. This is a sweet spot where no VAT is charged by your business and your business is still able to reclaim VAT on all costs as normal. This means you may want to voluntarily register for VAT to recover this VAT if it’s worth the administration of preparing VAT returns.

    7. Rewarding staff 🎉

    We’ve advised on ensuring all taxes are considered: corporation tax, VAT, income tax and national insurance. Annual parties up to £150 for each person and gifts up to £50 cost each are the most tax efficient as long as they’re not in recognition of doing a particular piece of work or meeting a target. Pub or restaurant visits are more problematic. EMI share options are more tax efficient but don’t always suit the company culture.

    8. Off-payroll working and IR35 🙄 

    Again, we had a brief time thinking off-payroll working was behind us, but it ended up staying. We’re seeing more customers of our clients happy to confirm they understand a piece of work is outside these rules and therefore more consultants coming back setting up limited companies. It’s essential to get your Status Determiniation Statement or SDS, otherwise you’re at risk of a very high tax bill.

    Here’s to 2023 and making the most of the system we’re presented with! Happy New Year! 🥂 

  • Tax Free Christmas Parties

    What are the tax free limits?

    You can spend a maximum of £150 including VAT per staff member plus another £150 for a guest in total over a tax year. The main condition is that ALL members of staff at that location must be invited. 

    In addition to the £150 annual party limit, you may also send a gift to staff with a value up to £50 including VAT, such as a Turkey, wine or chocolates.

    What is the tax treatment and accounting required?

    The cost is fully tax deductible with no benefit in kind income tax or national insurance to worry about. Your staff will feel appreciated and you save 19% corporation tax. Ensure that the costs are called Staff entertainment or Christmas party in your Profit & Loss Account.

    The £150 includes all costs such as travel and hotels. Divide the total cost of each function by the total number of people, including guests, to arrive at the cost per head.

    The VAT is fully recoverable when paying for staff entertaining. If you make a small charge to your staff’s guests and pay over a small amount of VAT, the VAT on the total cost for the guests is also fully recoverable.

    Similarly, small gifts up to £50 are fully tax deductible and VAT may be recoverable if only one small gift is made during a year. Perhaps these costs could be called Staff welfare to help keep them separate from your £150 calculations!

    NB Ensure you don’t go over the £150 or £50, otherwise the entire amount is taxable.

    I’m a director and don’t have any staff. Can I benefit from this favourable tax treatment?

    As you are the only director/employee you might think you can’t have a Christmas party – wrong! 

    You can avail yourself of the £150 per head exemption as a member of staff (the only one!) and also a guest. You can also have a gift with a value of up to £50, but you’re likely to be restricted to doing this up to a total annual cost of £300 including VAT so check what other company gifts you’ve taken so far. In this case, we would advise that VAT can’t be reclaimed.

    Now you can have a fabulous tax subsidised Christmas party !

  • Frozen! Temperatures, Allowances & Growth

    Frozen

    Income tax, national insurance, inheritance tax thresholds are all frozen for over 5 years until April 2028 and the VAT threshold frozen at £85k until April 2026. The real cost of this is usually large enough, but in a climate of increasing inflation, it’s even greater.

    Small company owners could aim to take fewer dividends, but they too have to pay higher energy bills and mortgage costs. Sole traders and partners who can’t control the income tax band they’re in may be surprised at the additional income tax and national insurance in future tax bills, possibly encouraging them to become limited companies where they can decide what to take as income. Each case will be slightly different.

    Parents should also remember that the real value at which they have to refund child benefit is reduced, again, another reason to be a limited company to help ensure they don’t have to increase their effective ‘tax’ rate further.

    Reduced

    With capital gains tax tax free allowances reduced from £12,300 to £6,000 from next April 2023 and only £3,000 from April 2024, many more taxpayers, including business owners and landlords, will start to pay capital gains tax on modest gains, costing up to £2,600 of additional capital gains tax.

    Similarly, reducing the dividend tax free allowance from £2,000 to £1,000 next April 2023 to only £500 from April 2024, catches many small investors as well as small company owners who even paying only basic rate tax will pay an addtional annual £131 on top of the additonal £446 previously announced due to the 1.25% dividend tax increase, a total of £577 each year.

    Calling it a reduction in the additional rate threshold sounds harmless, but it introduces the 45% income tax rate at income of £125,140 instead of £150,000. For small company shareholders, this means dividend tax will be 39.35% on income over £125,140. This is after paying at least a further 6% of corporation tax, a total of 25%, in their company. That adds up to a lot of tax for a risk-taker living off uncertain, volatile profits. 

    NB HMRC is unlikely to be sufficiently resourced to deal with the increased number of tax returns, affecting service levels going forward.

    Growth?

    How will any of the above help growth?

    It can’t be a way to encourage smaller businesses to grow beyond inflationary price increases. The additional effort offers little personal reward unless you aim to grow and sell quickly, recognising a capital gain paying 10% tax when you sell up! In the meantime, your dividend tax will be 8.75%, 33.75%, 50.62% or 39.35% depending on income levels. 

    Or you could take the view that you’ll save corporation tax through significant investment waiting for a return in the longer term, taking out smaller, affordable salary and dividends or encourage third party investors to help fund you and your company. 

    For those claiming research and development (R&D) allowances or tax credits, the SME scheme is watered down because of the high levels of spurious claims. The additional reduction to tax was 130% and will become 86% from next April 2023, with the cashback rate being reduced from 14.5% to 10% at the same time.

    The combined effect on £100 of R&D for a loss-making company is a reduction to the cashback from £33 to £18. Hardly a sign of encouragement. It’ll be more valuable to carry forward this tax loss to save higher corporation tax of 25% or 26.5%, if you expect to achieve taxable profits in the near term and in the meantime you can manage your short term cashflow accordingly.

    Summary

    This is a Chancellor and ex-Chancellor who seem to have frozen out small businesses and the contribution they bring to the economy. If there’s a good business idea, the general theme seems to be find an investor or other funding to grow enough so that increased tax bills are affordable. We won’t know if this has worked for some time. 

  • Higher Interest Rates – How Might You Respond?

    If you have excess cash, you’re creating a new profit centre!

    1. Move excess cash into the increasing number of company savings accounts

    There’s no need to just look at your usual bank of course. You’re more likely to get a decent credit interest rate elsewhere even when maintaining instant access in case you have a business need. Corporate savings accounts that we’ve come across include Aldermore, Nationwide and Virgin.

    2. Pay HMRC early

    Along similar lines, get your spare working capital working for you and receive interest from HMRC. After today, HMRC’s credit rate should increase to 2% (being 1% below base).

    3. Negotiate reductions with suppliers for paying early

    If your suppliers would appreciate earlier cash, get something in return for early or prompt payment. This is often going to be a price reduction, but might also be a spec change or preference eg agreeing to deliver to more than one address, or adding a feature you’ve needed for a while but the gross margin didn’t work.

    You might instead choose to invest surplus cash in your business for future growth and resilience which could provide greater long term value for your business.

    If, your cash is tight, you’ll need to work at finding the most appropriate, good value sources of finance and working capital:

    4. Review bank borrowings

    Are you paying high interest rates on overdrafts or unsecured finance? Might you get a better rate using security such as your debtors or other assets? If you need more finance, do it in a planned way getting the cash you need at the best price you can. You may have excess cash at certain times during the year, so ensure this works for you to help fund borrowing costs at other times of the year.

    5. Negotiate with customers for early payment and suppliers for late payment

    If you have a decent gross margin, you may be prepared to give some of your margin away for prompt or early payment. At the other end, your suppliers may be happy with delayed payment for simple interest, a higher price or agreeing to consider them for your next contract.

    6. Lease new plant and equipment, sell owned assets

    If you’d planned expanding with new equipment or need replacement equipment, consider leasing or hire purchase. The total costs will be higher and need to be factored into the increased profits your investment is expected to generate. Build in the different tax treatments into your cashflow calculations. With hire purchase you still get to claim the 130% super deduction, where applicable.

    Consider selling any owned assets, perhaps surplus freehold property space, if it helps keep your business on track. 

    7. Borrow from yourself

    If you have personal cash to lend to the company, your company can refund you in the future tax free and in the meantime pay you interest. This saves the company corporation tax and some of it might be tax free for you.

    If you don’t have cash but can borrow at a better interest rate than your company, you could on-lend to your company. The interest you pay on this personal loan is tax deductible against the interest you receive from your company.

    8.  Attract new investors

    At the more structural end, with an expansion plan you could attract third party investors getting a cash injection in return for shares. The SEIS and EIS tax efficient schemes encourage investors to take more risks in smaller companies.

    If you didn’t have it before, you now have a new ‘treasury’ function within your business which needs optimising to help your business survive.