HC Tax News Bulletin: February 2022 | HaesCooper – Chartered Accountants & Tax Advisors
In this blog post – we report on the recently published 2020/2021 UK tax take and the ongoing impact of Covid-19, together with recent UK fiscal news as to changes to UK taxation coming soon that are of particular interest to UK SMEs and their owners.
What is the UK tax take and the Covid-19 impact to date?
Taxes are one of the certainties in life but what do they add up to in the UK and what is the impact of Covid-19? To answer these questions, we report the UK 2020/2021 tax receipts as recently published by the House of Commons Library – Tax Statistics, which also clearly show the impact of Covid-19 on the UK economy and the UK tax take. This recent report is particularly relevant given the current publicity to the government’s hike in rates of UK taxation and NIC.
The UK government’s 2020/2021 revenues from all sources including direct & indirect taxation, excise duties, fuel duty and public sector operating surplus/dividends/interest, amounted to £793 billion.
The impact of Covid-19 was to reduce the 2020/2021 UK government revenues by 4.3% (around £35bn) as compared to the 2019/2020 UK government revenue. In short, the Covid-19 impact on the UK economy and the UK government’s public sector receipts quantified to be around £35bn clearly needs to be recouped to include increasing UK taxation.
The Office for Budget Responsibility (OBR) state that the government’s total 2020/2021 revenues from taxes and social contributions amounts to 33% of the UK Gross Domestic Product (GDP). The OBR forecast that due to the combination of increased economic activity and the government’s tax rises (as announced in the last two Chancellor’s Budgets) the government’s tax/social contribution revenues as a percentage of GDP, is forecasted to rise to 36% for 2026/2027 – the highest level since the early 1950s!
The Institute for Fiscal Studies has reported, having analysed the UK government’s annual revenues (from taxation, NICs, VAT, exercise duties and council tax), that 50% of UK households with the largest incomes pay around 78% of these tax revenues. However, when you look at just the UK indirect taxes paid in 2019/2020, the ‘poorest fifth’ of the UK population pay around 30% of their disposable income for indirect taxes, whereas the ‘richest fifth’ of the UK population pay just 11% of their disposal income in indirect taxes. Perhaps the UK indirect taxes system needs to be reviewed going forward.
Plugged In: News & Changes to UK Tax
HMRC extended investigation powers – the 2022 Finance Bill, due to become law in July 2022, includes provisions to allow HMRC to open investigations where they believe a person has not declared a tax liability. They will use their current powers under the so called ‘discovery provisions’ but these powers were curtailed by HMRC due, under the high income child benefit charge (HICBC), for back tax years. The new FB 2022 powers will have retrospective effect as it will enable HMRC to go back to 2013 to claim HIBC not declared. These new HMRC investigation powers will also cover such matters as pension charges and claw back of gift aid relief.
Homeworking Tax Allowance – since Covid-19 hit the UK in March 2020, understandably, homeworking has increased with the requirement of the employee taking on the additional running costs to their homes to accommodate the additional employment hours spent working from home.
By concession (it is not law) HMRC announced that due to Covid-19 their otherwise strict narrow concession for claiming a homeworking allowance will be relaxed and they accepted that where an employer’s premises closed or the employee was self-isolating, all due to Covid-19, then the homeworking allowance could be paid tax free by the employer to the employee, or the employee could claim Income Tax relief the homeworking tax allowance.
The homeworking allowance could be based on the employee’s actual ‘additional’ home running costs as evidenced to and then agreed with HMRC or a much easier system was to agree to the published HMRC Homeworking Flat Allowance of £6pw. Most employers/employees have claimed the flat rate homeworking allowance.
The problem for the Government is that the Homeworking Tax Allowance has cost the Treasury £350m since March 2020 – not the envisaged cost of £25m – and with the Government’s latest announced proposed relaxation of all the Covid-19 restrictions, recent press reports have indicated that the Homeworking Tax Allowance HMRC Covid-19 concession could be scrapped as from April 2022.
It is more likely that as from April 2022 the ‘pre Covid-19’ HMRC concession for the Homeworking Tax Allowance will be re-introduced which has a much stricter and narrower qualification, namely that homeworking must be included in the employee’s contract or there is a separate ‘written home working agreement’ making it ‘necessary’ for the employee to work from home in order to complete their employment duties. If these much stricter and narrower circumstances apply then the Homeworking Tax Allowance of £6pw will still be payable ‘tax free’ by the employer or claimed as a tax expense by the employee.
Given that we are and will be, for the foreseeable future, living with Covid-19 then employers and employees may still agree that the employees can ‘opt’ to work full time or part time from their homes, but it is likely from April 2022 that there will be no Homeworking Tax Allowance available to them.
HMRC Nudge Letters – we have mentioned these HMRC ‘nudge letters’ in previous HaseCooper blogs. The latest nudge letter being sent by HMRC is to sellers of residential properties to advise them to review their property sale and the UK CGT rules applying thereto. This is to ensure that the seller has met with the CGT compliance requirements including the latest requirement to register with HMRC and file an online CGT Return within 60 days of the property sale completion date.
As we have previously advised, these HMRC nudge letters must not be ignored as HMRC will follow-up on any non-compliance. These nudge letters are based on the HMRC use of the property sales information on the UK land registry.
Holiday Lets: changes to business rates – the current position is that holiday lets situated in England are able to register with their local authority to be liable to business rates rather than Council Tax. This has been attractive for the holiday lets as most of them qualify for the small business rates relief (SBRR) which reduces their business rates to below the Council Tax that would have been payable.
In addition, post Covid-19, those holiday lets being liable to business rates qualified for the Government’s Covid-19 financial assistance, including the local authority grants.
From April 2023, the qualification rules for holiday lets to be able to register with their local authority for business rates are to be tightened such that only holiday lets that fulfil the conditions summarised below will be able to register for business rates.
The holiday let must be a self-catering accommodation for short term lets and ‘available’ for letting for 140 days in a year, and for the year prior to the registration for business rates, was ‘let’ for 70 days or more. Evidence of the holiday lets availability and actual letting will be required by the local authority.
The above conditions show fewer qualifying days than the required days of qualifications for the let to be a holiday let for UK tax purposes so they should not be too difficult to satisfy. However, under the new rules it will, therefore, be possible for a second property that is let on short term lets to qualify for the lower cost to business rates but still not be a holiday let for tax purposes.
It should be noted that although the above new business rates rules apply to registrations with local authorities, as from April 2023 it will be necessary for the holiday let owners to start to record the required evidence of availability and letting days as from April 2022.
SME Owners: a retirement planning tip – if you are the owners, perhaps a husband and wife, of a small to medium profitable trading company (SME) and you are also the directors/shareholders that control the generation of the SME’s trading income, then HMRC class you as controlling directors/shareholders.
This HMRC classification of controlling director/shareholder is useful when it comes to planning retirement as it allows the SME to pay its profit directly into personal pension plans set up for the controlling directors/shareholders and to obtain Corporation Tax relief on the cost of the pension contribution; do not forget that the Corporation Tax rates are to be increased as from 1 April 2023, starting with those SMEs with annual taxable profits in excess of £50k, with the current 19% Corporation Tax rate rising to a maximum of 25% on profits above £250k.
In addition, there will be no Income Tax/NIC payable by the controlling directors/shareholders on the increased value to their personal pension funds following the pension contribution from their SME.
If you are ‘not’ a controlling director/shareholder of the SME then the pension contribution can still be made by the SME and Corporation Tax relief obtained by the SME provided that, when the pension contribution is added to any other remuneration/benefit taken from the SME by the non-controlling director/shareholder, the non-controlling director/shareholder’s ‘total reward’ from the SME for the work completed is in line with the market rate for a similar job and is not therefore excessive.
As Chartered Accountants and Chartered Tax Advisers, the team at HaesCooper are professionally qualified to support and advise businesses whether small, medium or large. We specialise in dealing with fiscal and financial business management requirements at competitive fee rates.
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