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Category: VAT

  • Tax Free Christmas Activites and 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, so remember to include employees on zero hours contracts.

    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%/25%/26.5% 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 another £150 for your 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. We would advise that VAT can’t be reclaimed.

    Now you can have a fabulous tax subsidised Christmas activity or party !

  • Tax Free Christmas Activites and 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, so remember to include employees on zero hours contracts.

    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%/25%/26.5% 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 activity or party !

  • Tax Under Labour – Top 5 Things To Consider

    1. Pension Income Tax Relief – The temptation to raise several billion from higher earners must be great. Restricting tax relief to 20%, is still 20%, and is the tax rate most people pay during their lifetime and in retirement. The Chancellor, should she feel the need, might particularly blame this one on the ‘unexpected’ poor state of the country’s finances.

    This may encourage you to maximise your pension contributions before Budget Day on 30th October or before 6 April 2025. It would be odd to make a change effective mid tax year, but still possible! 

    Company owner-managers making company pension contributions may still benefit from 25%/26.5% tax relief making this look even more tax efficient in comparison.

    2. Capital Gains Tax Rates (CGT)– Most people don’t pay capital gains tax. If you do it’s a 18%/24% rate on buy-to-let residential/second home properties or 10%/20% on selling a successful business or other assets. It’s easy to argue this should be closer to the 40% rate many of the same people pay in income tax. 

    If you were planning to sell an asset anyway you may decide to sell it soon. Even if you weren’t, it may be a reason to lock in the lower rates, if you believe they will increase.

    In this area, it’s easy for the Chancellor to make the increase effective immediately on Budget Day so you may want to aim to exchange before 30th October rather than before 6 April 2025. 

    3. Pensions Inheritance Tax (IHT) – Wealthier semi/full retirees are often not drawing their pension (above the 25% tax free lump sum) before 75. If you die before 75, there’s no inheritance tax due, leaving ‘only’ the rest of your estate to pay 40% above the threshold.

    Without a lifetime limit on pension pots, and with the increased £60k per year gross contribution limit, you can understand why many are paying maximums into their pension pots, not for a pension but for inheritance tax protection! Even after 75, the beneficiaries pay only their marginal tax rate. This might be 20% if beneficiaries keep their other income low, possibly encouraging older adult children to reduce hours or stop working, which is presumably not what the government wants.

    As you’ll still benefit from tax relief, for now, from paying into a pension pot, it may be worth carrying on as planned, unless you’d rather invest in (currently) other inheritance tax friendly areas such as unquoted shares. If you stopped making payments or started to withdraw your pension earlier than planned, you may end up with that cash in your estate which would anyway suffer inheritance tax. It may therefore be sensible to wait-and-see what’s announced in the Budget.

    4. Furnished Holiday Lets (FHLs) – Although already announced by both the previous and current governments, the changes treating FHLs the same as normal Assured Shorthold Tenancy (AST) lettings aren’t effective until 6 April 2025. 

    Existing FHLs will lose a semi-trading status which essentially enabled:

    • Full tax relief on mortgage interest
    • 10% capital gains tax up to £1m of lifetime gains, 20% above that instead of 18%/24% for other assets
    • Better tax relief on fittings and furnishings
    • Flexible spousal split of profits and losses

    The knock-on effect of the mortgage interest relief change is potentially very expensive. Your income before tax is increased by the mortgage interest, which can take you into unexpected tax bands such as the 40% tax band at £50k, child benefit loss between £60k to £80k, loss of tax free personal allowance after £100k or 45% tax rates from £125k. With only a 20% tax credit after your (higher) tax has been calculated, you pay more tax overall.

    Any FHL tax losses in existence on 5 April 2025, will be available to reduce other property rental profits in later years, which isn’t currently possible. Therefore, if you have a mixed portfolio of FHLs and ASTs, ensure any FHL losses are correctly calculated taking advantage of existing rules such as first time purchases of kitchen equipment, bed linen etc which will can reduce rental profits on your other properties from 6 April 2025. 

    If all this looks too expensive or unattractive compared with future net-of-tax capital growth, you may wish to sell up before 6 April 2025, pay 10% capital gains tax and invest your cash elsewhere. This won’t upset the government too much, as, in theory, these properties are released into the rented or owned sectors for normal homes. If your rental business ceases altogether before 6 April 2025, you may have three years in which to sell and benefit from the 10% rate.

    Alternatively, incorporation of your FHL business to ensure corporation tax relief for mortgage interest and then control over income tax may look more attractive than before.

    5. Non-Doms Abolition – Foreign Income Gains (FIGs) and IHT – A welcome simplification announced by both governments but not so welcome tax liabilities once non-UK domiciled people have been tax resident for 4 years. Enjoy no UK tax on your worldwide income for the first 4 years, whether you bring it into the country or not, after which it’s all subject to UK tax, with a credit (usually) for any tax paid elsewhere. 

    If you’re in your first 4 years of residency, keen to bring in some cash or assets into the UK, you may now be able to do so tax free before your 4 years is up. However, not for any FIGs that arose before 6 April 2025 which will still be taxed in the UK under the Remittance rules.

    This sounds like it could be good for certain areas of the economy in the first 4 years, such as luxury purchases or high end property purchases. But will it encourage people to set up business interests and stay for longer?  For these, Business Investment Relief remains available and may remain attractive.

    If you’re here for 10 years or more, you’ll now also pay IHT, like everyone else, on your UK and worldwide assets. Don’t try to avoid it after 10 years by leaving temporarily, as you’re still caught for the following 10 years after leaving the UK. 

    There are still lots of details to come out, presumably some soon after the summer break, so only take action when you have the full facts or are willing to take a risk. You may take the view that the direction of travel doesn’t suit you and you decide to leave the UK. Others may be attracted to come to the UK to enjoy the four years ‘tax free’ and then leave.

     

    Other – Sign Posting – VAT on school fees may be a great idea to signal an element of levelling up, but, in all likelihood, it won’t be a significant overall net win for the economy. Meals, transport, books and childcare during holiday clubs remain VAT-free, so expect detailed invoicing and allocation of prices to these categories. It’s interesting as to whether private medical services will ultimately suffer the same fate! There seems little difference to me.

    In all decisions referred to above, take appropriate advice such as investment advice, because tax mustn’t be the only consideration in any financial decision.

  • GE2024 – Actions To Take Before 4 July 2024

    Capital Gains Tax – Rate Increases

    Current rates of 10%/18%/20%/24% might increase closer to, but not as high as, income tax rates of 20%/40%/45%.

    For example, if you’re in the process of selling a buy-to-let residential property expecting to pay a 24% capital gains tax rate, you may want to ensure you exchange before 4 July to save an increase to say 30%. The effective date for capital gains tax is exchange, not completion, so if you can only exchange before 4 July this should be sufficient.

    Action: If you agree this is likely to happen you may want to ensure you exchange on sales of chargeable assets, such as second residential properties, before 4 July.

    Pension Contributions – Threshold Decreases

    The current recently introduced more generous thresholds of up to £60k per tax year of total contributions enjoying income tax relief and no maximum on your pension fund pot value, will probably be dialled down by a Labour government.

    We’d expect any contributions paid and pension pot values already enjoying these rules to continue to benefit from them, with conditions. For example, when a pension pot maximum was initially introduced existing pots over the maximum remained tax free as long as no further contributions were made.

    It’s also possible the 40% and 45% tax relief is reduced to 20%, often mentioned, but so far not adopted by any government even during the financial crash.

    Action: Subject to Independent Financial Adviser advice, make further pension payments before 4 July. For example, if so far this tax year you’ve paid say £10k into your pension scheme, you might want to try making a further maximum £50k, whatever is affordable/advisable, before 4 July to obtain maximum tax relief for this tax year.

    Tax Avoidance Clamp Down

    The truth about public bodies trying to demonstrate results is that they end up going for ‘low hanging fruit’. For HMRC this often translates in going to the taxpayers they already know about and digging deep hoping they’ll give in.

    A classic example is the recent campaign against weak research and development – R&D – tax relief claims. HMRC has attacked many genuine claims as part of their sweep up picking on certain easily identifiable claim types, hoping the less financially robust who can’t afford the professional fees or who simply don’t have the time, will give up. The real culprits not necessarily caught within the rigid simple crtieria managing to avoid scrutiny.  

    Action: At the minimum, ensure you retain evidence of tax claims and that your bookkeeping is simple and clear, so when asked it’s easier to respond to queries and you don’t have to give in because it’s hard to reply.

    Preparing a good tax return is a skill. All tax returns should be prepared with possible queries in mind, so provide explanations where needed enabling HMRC to see what is happening; it may make the difference to encourage HMRC not to write to you for clarifications.

    NB The current government has now matched Labour’s anti-avoidance pledge, so there’s more reason to act.

    VAT On School Fees

    This is a definite promise from Labour. The exact increase in cost of school fees is unlikely to be simply 20% because the school will recover VAT on many of its costs and may also decide to absorb some of the potential price increase.

    Action: Much has been said about you can do to reduce your exposure to any increase, the simplest and most robust is to pay school fees in advance before 4 July. However, do consider the possibility of the school failing and therefore losing your fees completely!

    After 4 July 2024

    It’s worth noting that the above actions may turn out not to be needed immediately, but are still worth considering over the next few months. [EDIT: For a later Budget now expected in the Autumn].

    In addition, despite recent assurances that taxes won’t increase, the public finances are fragile which Labour might later declare worse than expected, paving the way for certain other popular increases. 

    Action: Keep in touch with your On The Spot Accountant to ensure you’re kept up to date. 

  • Budget 2024 – Your Country Needs You

    1. Employee & Self Employed NI Reductions – 6 April 2024. VAT Threshold Increase – 1 April 2024

    In time to see several payslip improvements before the election, but not necessarily the self employed unless they prepare an early tax return, this should be encouraging. It could be possibly one reason for someone who hasn’t yet gone back to work since Covid, to think again…. 

    The maximum saving for an employee is 4% of £37,700 = £1,508, and on average pay of about £35k it’s £900, which does start to get more interesting.

    The total self employed Class 4 reduction of 3% is very welcome. Along with the abolition of Class 2 this saves the average self employed person £650. The Press Release refers to an average sole trader profit of £28k which sounds about right. After deducting the Class 4 tax free threshold of £12,570, 3% is worth £463 and add on the Class 2 saving gets to you to about £650.

    Despite the many complaints about thresholds of £50k and £100k, there are lots of people in work and self employment earning less than this who are being targetted.

    Family companies will need to revisit the dividend-salary debate and calculations, lower NI clearly tipping in favour of more salary than you may have taken before.

    A small mention for the VAT threshold increase from £85k to £90k which will prevent some businesses from working less to avoid getting into the VAT system. However, it’s only a 5.8% increase which doesn’t offset inflation. Businesses who don’t want to be VAT registered, are likely to suffer from a lack of real growth. 

    2. Higher Income Child Benefit Charge Improvements – 6 April 2024

    Again, this is in time to be appreciated before an election. The starting threshold increase from £50k to £60k and the reduction in child benefit from that now to £80k rather than £60k means that child benefit is taken away from you more gradually and will feel a lot fairer. 

    After this, from April 2026 – following consultation – it is planned that child benefit will be based on household income, which many commentators wanted from the beginning when it was first brought in. Perhaps IT systems can now cope with this? Or it’s become obvious that it discourages either parent near the threshold to work any harder.

    3. Furnished Holiday Lettings (FHL) – Abolished – 6 April 2025

    Most employees won’t be affected by this apart from potentially benefitting from more properties being sold or moved into the normal rental property pool.

    The tax benefits for FHLs include full tax relief for loans against the property so they may become unaffordable for some landlords to continue. If so, there’s a small encouragement one year earlier to sell up…..

    4. Residential Properties Capital Gains Tax – Small Reduction – 28% to 24% – Exchanges From 6 April 2024

    The normal capital gains tax rate for higher rate taxpayers on other assets, apart from residential property, is 20%, so this 24% is a half-way house. If FHL landlords need to sell they at least save a bit of capital gains tax.

    On the other hand, it might encourage some professional landlords already providing ‘normal’ AST rentals, to stick around to provide rental properties for hard-working people.  

    Remember the tax free Annual Exemption is halving from April from £6k to £3k, so the net saving is reduced slightly. 

    Interestingly, the 24% rate makes owning rental properties in a limited company paying 26.5%/25% corporation tax look less favourable than before. 

    5. Creative Industries 

    Playing to one of the UK’s strengths and therefore likely adding to growth, there was good news for films, orchestras, theatres, museum and galleries. We can at least be entertained after our hard work.

    6. Other Simplifications To Make You Feel Good

    Workers feel aggrieved that others seem to get a better deal, so these may help:

    Abolition of Stamp Duty Mulitple Dwellings Relief – 1 June 2024 – No longer rewarding owners of multiple properties and saves court time arguing about what multiple properties actually mean!

    Abolition of Non-Dom status – April 2025 – This will go, but there’ll be something available for a limited period, looking a lot simpler, short term and fairer.

    Public Sector Productivity Improvements – Lots going on here, which should make our experiences feel more streamlined and efficient – eventually! No-one minds paying tax, if it’s spent wisely.

    It might also have been an election Budget – we shall we see….

  • 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.

  • 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.