HC Quarterly News Bulletin: September 2022 | HaesCooper – Chartered Accountants & Chartered Tax Advisers
28/09/2022
Takeaways from recent HMRC Reports | HMRC interest rates rise | South East SME news | Post Brexit CDS | Limited Liability? | Change to the basis of Income Tax
Takeaways from the recent HMRC Annual Report & Accounts
The good news for the country is that the 2021-2022 total tax take was at a record £731.1bn – not so good was that only 45.5% of taxpayer correspondence was dealt with by HMRC within 15 days!
The above total tax take included a record take of £14.3bn Capital Gains Tax (CGT) – up 42% from 2020-2021, along with the number of CGT taxpayers up by 53,000 from 2020-2021. This makes a total of 323,000 CGT taxpayers for the tax year 2021-2022. HMRC suggests these CGT record take and the higher number of CGT taxpayers may have been, in part, a response to the speculation in 2020 that the CGT rates were to be aligned with the Income Tax rates – this is yet to happen.
There’s also been a steep rise in the number of HMRC penalty notices issued in 2021-2022. These will be for mistakes in the Tax Returns filed to HMRC. HMRC issued nearly 90,000 penalty notices in 2021-2022 – an 80% increase as compared to the number of penalty notices issued by HMRC in 2020-2021.
The above penalty notice statistic also runs alongside the HMRC attack on the illegal tax evasion. This is shown in the 11% increase in the number of taxpayers formally charged with tax evasion through the Courts and the Courts giving out increased prison terms for tax evasion – prison years up by 42% compared to 2020-2021.
It’s clear from the above, that HMRC are successfully increasing the total annual UK tax take and will continue with this ‘crack down’ on taxpayers’ errors in filing their Tax Returns and those seeking to evade UK tax.
If you’re the owner of a UK SME and you’ve not already taken professional advice on your UK tax responsibilities, then do so now. If you’re without a professional adviser for your business accountancy and taxation needs, please contact us, don’t wait for HMRC to call on you!
HMRC interest rates increase
As from 23 August 2022, HMRC will charge interest on the late payment of tax at 4.25% pa with the interest rate payable on tax repayment increased to 0.75%.
SME business news from the South East of England
Some positive news: new industrial sites are being acquired and developed in the counties of Kent, Surrey and Sussex with a view to creating leasehold units and jobs for businesses including SMEs.
Kent-Aylesford is the site for Panattoni (the largest industrial property developer in Europe) to continue the commercial building project for the site (started 9 months ago). They are developing the final two parcels of land to provide high spec industrial centres for high-quality logistics and distribution centres for businesses. 80% of this industrial site has already been developed and leased to businesses with occupation starting from later this year.
Surrey-Leatherhead has a site that has been acquired by industrial developer Chancerygate to provide to businesses, including SMEs, Grade A industrial and warehousing space in the form of 13 leasehold units, ranging from 3,000 to 19,000 sq.ft. in size. The development plans are to be put forward to the local council for approval towards the end of this year.
Burgess Hill-Sussex is the location for a new 120acre Science & Technology Park to be built west of Burgess Hill. High quality buildings will be provided to technology or science businesses. The project is being led by property consultants Vail Williams and it is proposed that once completed, the project will create up to 4,500 new jobs.
Post Brexit Customs Declaration Service (CDS)
For those SMEs that make imports and/or exports of goods to or from the UK then they should be aware that the current Custom Handling of Import & Export Freight (CHIEF) is to be replaced by the Customs Declaration Service (CDS).
From 30 September 2022, CDS will be the only system used for import declarations and from 31 March 2023 you will not be able to submit any new export declarations under CHIEF.
The businesses affected by the changes referred to above need to register for CDS by accessing CDS via their existing Government Gateway, or if necessary, register for a Government Gateway Account and then access the CDS in order to register for CDS.
Below are the government’s main links with the information you will need to ensure that you are ready for CDS including deciding how you are to pay HMRC for your custom duty and Vat liabilities.
www.gov.uk/guidance/get-your-postponed-import-vat-statement
www.gov.uk/guidance/paying-vat-and-duties-on-imports
When is trading via a limited liability not providing limited liability?
Many SMEs conduct their businesses through limited liability companies for many reasons – a prime reason being they receive personal liability protection from the creditors of their limited liability company. However, HMRC are able, in specific circumstances, to override that limited liability protection. Those circumstances are well worth being aware of and they are detailed below.
The circumstances referred to above are when a limited liability company is insolvent or is likely to become insolvent, and certain taxes (including payroll taxes (Income Tax (PAYE) & National Insurance Contributions (NIC), and VAT) are underpaid to HMRC by the limited liability company. HMRC have to evidence that the directors of the limited liability company deliberately did not pay to HMRC the relevant taxes unless fraud is involved and then no such HMRC evidence is required.
HMRC will issue a formal Notice to the directors of the limited liability company if they have the above-mentioned evidence and require the directors to be personally liable for the specified tax unpaid by the limited liability company.
It is therefore key that the directors/shareholders of limited liability companies and their professional advisers are fully aware of the HMRC position, with regards to the above-mentioned Notice to collect the limited liability company’s unpaid tax from the directors of that company. The above is particularly relevant if insolvency proceedings are being considered for the limited liability company. Also, so that the evidence supporting an appeal against the HMRC Notice can be formulated by the directors and their professional advisers.
Finally, the liability for Covid-19 government support payments incorrectly claimed or overclaimed by a limited liability company that is insolvent or likely to be insolvent can also be transferred to the directors by HMRC giving such formal notice to the directors. Again, this is provided HMRC have the evidence that the directors were responsible for the management of the company and knew that the company was not entitled to the Covid-19 government support payment. In these circumstances HMRC could also raise a financial penalty on the insolvent company which can also be collected by HMRC from the errant directors of that company.
There is also an appeal procedure against the above HMRC ‘notice to pay’ as issued to the directors and therefore professional advice should be sought if, as a director of an insolvent or likely to be insolvent company, you find yourself in this position with HMRC.
Major change to the basis of Income Tax assessed on unincorporated SMEs
We first reported on this proposal when it was included within the 2021 Budget. The start date is the tax year 2024/2025, but with the tax year 2023/2024 classed as the ‘transitional year’. We therefore thought that this major change in the way annual taxable profits are to be assessed on sole traders (partnerships are not as yet included in the new proposal) should be summarised and act as a reminder to all SMEs trading as sole traders – action may well be required even before 5 April 2023.
Currently, sole traders are assessed to Income Tax as based on the taxable profits arising from their annual business accounts. This is completed to the accounting reference date that falls within the relevant tax year e.g. a sole trader with an accounting reference date of say 31 December 2022, will have business accounts completed for the year to 31 December 2022 the taxable profits from which are assessed to Income Tax on the sole trader for the tax year 2022/2023.
As from the tax year 2023/2024 – the transitional year – all sole traders will have to file their taxable profits for the actual tax year to 5 April 2024 or year to 31 March 2024. As can be seen if a sole trader’s current business annual accounting reference date is not 5 April or 31 March then there will have to be an adjustment made to the sole trader’s taxable profits to include the taxable profits covering the period starting from the sole trader’s business accounting reference date ending in the tax year 2023/2024 and ending on 5 April 2024.
For example, if a sole trader’s accounting reference date is 30 April then the taxable profit to be filed on the 2023/2024 Self-Assessment Tax Return assessed to Income Tax for the ‘transitional’ tax year 2023/2024 will be the ‘aggregate’ of the taxable profits for the year to 30 April 2023 and the taxable profits as calculated for the period from 1 May 2023 to 5 April 2024. This will give a taxable profit basis period of 23 months for the tax year 2023/2024.
These proposed changes to the basis period could lead to a much higher taxable profit and thereby a higher Income Tax liability for the transitional year of 2023/2024. The proposals include a provision to help a sole trader’s cash-flow by allowing the sole trader to claim for the taxable profit for the transitional year 2023/2024 to be spread over 5 years beginning with the transitional year itself. Also, it is proposed that the transition profit being spread over 5 years is treated as a one-off taxable income which is excluded from calculation of the sole trader’s net taxable income for such claims as the high-income child benefit charge and the annual personal allowance.
For those sole traders trading back in 1994 (when self-assessment was introduced) they will be able to claim a deduction from the higher taxable profit for the transitional year 2023/2024 for what is called ‘overlap relief’. The amount of the overlap relief will be available on request from HMRC but will be based on the sole trader’s much lower profitability for 1994. The above-mentioned claim for the ‘5 years spread’ will be based on the taxable profit for the transitional year 2023/2024 less any overlap relief i.e. the net taxable profit for 2023/2024.
So what should sole traders be doing? Nothing, if they have an annual accounting reference date of 31 March or 5 April. Those sole traders with an annual accounting reference date different to that of 31 March or 5 April the obvious time to make the change of their accounting date to 31 March or 5 April is during the transitional year i.e. completing a set of accounts to 31 March 2024 or 5 April 2024.
However, those sole traders should contact their accountant/tax adviser to review their taxable profit position. Albeit that they will need to use projected taxable profit numbers – for the business accounting year ending within the tax years to 5 April 2023 and 2024 to ensure that the timing of the change of their accounting reference date is made in the optimum tax year. For example, if the sole trader’s taxable profits are on the up year on year (perhaps due to coming out from the adverse impact of Covid-19) it may well be beneficial for the sole trader to make the change of accounting date for the current tax year 2022/2023.
If the change of accounting date is not made in the statutory transitional year 2023/2024 but for say 2022/2023, then there is also another consideration namely whether the sole trader has already changed their business accounting reference date in the previous 5 years. If they have, then the proposed change in the accounting date for say the tax year of 2022/2023 needs to be for commercial reasons. It is not clear that HMRC will accept that the change of accounting date early than the statutory transitional year of 2023/2024 is for commercial reasons. Hence the urgency for those sole traders with annual business accounting reference dates different to 31 March and 5 April to review their annual taxable profits projections with their professional adviser.
Finally, what about partnerships? Well as we said they are not included in the above-mentioned changes to the basis period for Income Tax assessment. However, the government says that they will be included sometime in the near future. So perhaps partnerships may also wish to take professional advice as to whether they should look to change their annual accounting reference date to 31 March or 5 April sooner rather than later.
We have talked throughout the above about sole traders/partnerships looking to change their annual accounting reference dates to either 31 March or 5 April but we suggest that changing to 31 March will in most cases be the more commercially acceptable change to make.
As Chartered Accountants and Chartered Tax Advisers, we are professionally qualified to support and advise businesses whether small, medium or large. We specialise in dealing with fiscal and financial business management requirements. We love meeting new clients and offer competitive fee rates.
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