HC News Bulletin: September 2023 | HaesCooper – Chartered Accountants & Chartered Tax Advisers
Latest HMRC newsworthy items: HRMC date change | Sole Traders | MTD | Hidden Economy | Kent Green Energy | SME Debts | IHT Planning
HMRC deadline date change (again): For NI top payments
If your NI contributions record is incomplete you may want to make a voluntary NI top up contribution to fill in the gaps and enhance your state pension. The good news is that the deadline date for making such voluntary NI contributions has been extended yet again. It was originally 5 April 2023, then extended to 31 July 2023, and the latest extension to the deadline date for making voluntary NI contributions to complete your NI contribution record is now 5 April 2025.
If you believe you have gaps in your NI contribution record then you should first check your record – it can be completed online – to find out what are the gaps in your NI contribution record. Then decide what you can afford to pay as a voluntary NI contribution to fill the gap. For the tax year 2023/2024 the cost of voluntary NI is, for most individuals, £17.45 for each week of the gap to be filled. For those with NI contribution gaps that were self-employed the cost will be a bit less. This voluntary NI cost could be higher if paid after 5 April 2024.
Sole Traders: changes to the basis periods for the calculation of the Income Tax
We’ve previously reported on these changes in some detail, so this is just a reminder to all those unincorporated businesses (with accounting year end dates that are not 31 March or 5 April) that have still not addressed this matter. They should do so without further delay as, from 6 April 2024, the existing current year basis rules will be abolished and all individuals trading as sole traders or within a partnership (businesses) will be assessed to Income Tax by reference to their profits for that tax year, thus requiring apportionment of profits for accounting years that do not end on either 5 April or 31 March (HMRC have accepted that a 31 March accounting year end date is treated as co-terminus with the tax year end date of 5 April).
The current tax year 2023/2024 is the transitional year and so those businesses with accounting year ends that are not either 5 April or 31 March need to ‘crunch the numbers’ to establish the Income Tax liabilities that will arise for this change over year. This entails taking the taxable profit for the business’s accounting year ending within the tax year to 5 April 2024 and then adding to it the taxable profit as apportioned on a pro-rated time apportionment for the period from the accounting year end date ending within the tax year 2023/2024 through to 5 April 2024.
This can lead to more than 12 months of taxable profits being assessed to Income Tax for the tax year 2023/2024. In view of this it is possible for those businesses to claim any ‘overlap relief’ that may be available to them (overlap relief goes back to when self assessment was introduced and HMRC should be able to supply the available overlap relief number) and then spread the remaining additional profits over up to 5 tax years.
If the business keeps the existing accounting year end date going forward the above-mentioned apportionment of taxable profits will be required to be completed every tax year to establish the correct profit liable to Income Tax. However, if the accounting year end date is changed to either 5 April or 31 March it will avoid the burden of having to annually apportion profits to establish the business’s annual Income Tax liability.
So the advice to businesses with accounting year ends that are not either 5 April or 31 March is to contact your professional adviser asap to establish the best way forward. Feel free to contact us – we’d be happy to help.
Making Tax Digital for Income Tax (MTD)
Just a quick update as the National Audit Office have recently issued a report severely criticising the proposed introduction of MTD for Income Tax listing a number of issues that should be reconsidered by the Government before finalising the implementation of MTD for Income Tax.
One of the main concerns is the underestimating by the Government of the costs to businesses of transitioning to MTD for Income Tax.
The introduction of MTD for Income Tax has not gone smoothly from its inception but now it seems that the proposal may need a complete rethink by the Government as to its approach to MTD. So watch this space!
Have a read of the National Audit report on MTD – published in June 2023.
The Hidden Economy
One of the reasons given by HMRC for introducing MTD for IncomeTax was so as to increase the tax take and thereby reduce the so called ‘tax gap’, namely the amount of tax collected by HMRC as compared to the expected tax take as calculated by HMRC.
HMRC have recently issued findings from their research into the so called ‘hidden economy’ which shows that an estimated 8.8% of the UK adult population are within the hidden economy and do not pay the correct amount of UK tax. This means higher rates of tax are needed for those UK adults who do pay their correct UK taxes.
HMRC report a number of reasons for the hidden economy including the effect of Covid 19 on employment and the increase in the ‘gig economy’. In addition, HMRC state that the hidden economy main behaviour patterns include 65% being ‘moonlighters’ (people who declare to HMRC some, but not all, of their taxable income) and 35% relate to so called ‘ghosts’ who do not declare any of their taxable income.
The other interesting find by HMRC is that if caught by HMRC, 30% of the ‘moonlighters’ and ‘ghosts’ participating within the hidden economy thought that they would just be given a warning by HMRC. Oh dear ‘what a mistake to make’ as they should study the HMRC financial penalties provisions and HMRC’s criminal legal process; the latter can lead to not only financial penalties but also imprisonment for the ‘moonlighter’ or ‘ghost’ in the more serious tax evasion cases.
Now to report on a couple of non-taxation based newsworthy items of interest to SMEs namely Kent’s New Green Energy Community and help for SMEs to pay their business debts.
New Green Energy Community for businesses based in Kent
It’s proposed that a fully operational 5MW solar farm near Sittingbourne (which is to have the capacity to power more than 1,400 homes) is to be funded by the launch later this year of a share offer. Local small-scale share investments will be welcomed.
The funds raised by the share offer will enable the transfer of the solar farm into community ownership. All shareholders will have a say on how the community company is run with any profits from selling solar power to the National Grid added to a community benefit fund for supporting sustainable and biodiversity projects across the county of Kent.
The plan is for shareholders to own a stake in a community based established green energy asset and to receive a fair return on their share investment. For further information on the above please see the link below.
SMEs: paying their debts
Given the current difficult trading scenario for many SMEs with increased costs due to the current UK inflationary conditions etc… many SMEs have increasing business debts. The easy way is for SME owners to ignore their ever increasing business debts in the hope that trading will improve and the debts disappear. However, as reported in a recent article in The Chartered Institute of Taxation’s professional magazine ‘Tax Adviser’, ignoring the ever rising business debt is the last thing that owners of SMEs should do.
Better that the owners of SMEs should face their business debts and take action to manage their cash flow, maintain updated business financial and operational plans to support securing outside financing.
If the stage has been reached that insolvency looks to be heading towards the SME, then more formal action may be needed in the form of setting up Company Voluntary Arrangements for the SMEs creditors and appointing a licensed insolvency adviser.
As debts owed to HMRC are treated differently from those owed to trade creditors it is necessary to enter into a formal ‘Time to Pay Arrangements’ direct with HMRC. This Time to Pay Arrangements covers all outstanding tax amounts overdue. The link for the full details on Time to Pay Arrangements is as follows:
As indicated above, it’s important that owners of SMEs maintain adequate financial records and business plans so that they can react in a timely manner to the signs of coming insolvency, as this will give the necessary opportunity to gain more time to pay its debts – including those owed to HMRC – remain solvent, and thereby remain in business.
Inheritance Tax (IHT) planning – some reminders
With the tax take for IHT at the significantly higher £7bn for 2022/2023 with a £1bn increase from the £6bn collected for 2021/2022, perhaps it’s time to have a reminder on some of the basic IHT planning points. This is particularly important to the so called ‘baby boomers’ who, it is reported, are looking to transfer a record amount of wealth to the next generations over the next few years.
A reminder that IHT applies to Estates valued at above the nil rate band of £325,000 – this has remained at this amount since 2009! Unused nil rate band threshold can be transferred to a spouse or civil partner. The £325,000 is increased by £175,000 if the Estate includes an interest in a property that is a main residence. In these circumstances this makes the nil rate band £500,000 the unused part of which can be transferred to a spouse or civil partner thus potentially giving the surviving spouse/civil partner a nil rate band of £1m.
The current IHT rate on the estate value as at the date of death above the nil rate band is 40%. The IHT rate on lifetime chargeable transfers is 20%.
So do not forget the basic ways of reducing your estate for IHT purposes namely:
- Lifetime gifts: annual gifts totalling £3,000 made within a tax year are exempt from IHT and the unused £3,000 gift allowance for the previous tax year can be brought forward and used along with the £3,000 gift allowance for the current tax year giving a total £6,000 IHT exempt gift allowance for the current tax year. Plus you can make up to £250 per person per tax year. There are also other gifts within the stated monetary limits that are exempt from IHT e.g. gifts made on special occasions such as weddings.
- Trusts: look to make a trust for the benefit of your grandchildren’s education or for financial support for another relative.
- Wills: make a Will and keep it up to date to ensure that where you are married or in a Civil Partnership you are taking advantage of the surviving spouse/civil partner relief from IHT on the first death.
- Charity: Through your Will bequeath money to a qualifying charity, all UK charities included but international charities may not qualify. If you bequeath at least 10% of your net Estate to qualifying charities then the IHT rate on death reduces from 40% to 36%.
- Life assurance: take professional advice as to the acceptance of life assurance (written under an appropriate trust) to cover the payment of the anticipated IHT payable on your death. This obviously is not an IHT relief but the proceeds from the insurance policy will reduce the amount of IHT payable from assets being passed to your beneficiaries. The cost, of course, is the amount of the life assurance premiums.
- Other IHT reliefs include business or agricultural reliefs. However, professional advice should be sought to ensure that these reliefs are available as there are some ‘pitfalls’ to avoid if HMRC are to agree to the IHT reliefs as claimed.
Some words of caution on lifetime gifts:
In the majority of Estates, the most valuable asset is the property used as the family home. To reduce future IHT, the owner(s) of the home can gift the property to the next generation(s) and provided the donor survives seven years the home property is exempt from IHT on the death of the donor. However, for the gift to work as potentially exempt from IHT it has to be made without reservation so the donor(s) cannot live at the home property unless they pay full market value rent as tenant(s). The full market rent is payable for all of the time the home property is occupied by the donor(s) and not just the seven years to be survived as required to avoid IHT. The rent will need to be reviewed regularly to ensure that it remains at full market value. In addition the rent will be the taxable income for the donee(s).
The above-mentioned gift with reservation can be mitigated if the donee(s) live in the home property with the donor(s) and ownership of the home property is split between the donor(s) and donee(s) under the ‘Tenants in Common’ legal basis which enables the ownership of the home property to be split say 50% to the donor(s) and 50% to the donee(s). Ownership of the property under the usual ‘Joint Tenancy’ legal basis would not work.
As regards the above proposal to avoid IHT on the home property the SDLT position will also need to be reviewed and professional advice taken.
As can be seen assessing the costs and benefits needs to be carefully considered before trying to avoid IHT on the family home. Also, any IHT planning involving the family home relies on a good relationship between the donor(s) and donee(s) not just at the outset but also over the full period of the ownership of the family home.
Lifetime gifts made within seven years of the date of death only work to reduce IHT to the extent that the total lifetime gifts exceeds the IHT nil rate band (NRB) of £325,000 or, if the Estate includes a main residence, the aggregate of the NRB and the residence nil rate band (RNRB) of £175,000 i.e. a total for the NRB & RNRB of £500,000. This is because the lifetime gifts made within seven years of the date of death are firstly set against the NRB or, if there is a main residence involved, the aggregate of the NRB and RNRB.
So by way of an example, if on the date of death the Estate is worth say £2m (including a main residence at £1m) and with a total for the value of the lifetime gifts made say four years ago (within seven years of the date of death) valued at £500,000, then even though the lifetime gift was made more than 3 years ago, there is no taper relief on the value of the lifetime gifts as the value of the total lifetime gift of £500,000 is covered by the £500,000 aggregate of the NRB (£325,000) and RNRB (£175,000). This will leave the Estate of £2m liable to the 40% IHT.
In short, the value of the lifetime gifts made within seven years of the date of death are set against the NRB and RNRB before the 40% IHT liability is calculated on the total value of the Estate as at the date of death. However, if the full seven years is survived as from the date of the lifetime gift through to the date of death then the value of the lifetime gift is ignored for the calculation of the IHT payable on the value of the Estate as at the date of death and so the full NRB and RNRB is claimed against the value of the Estate as at the date of death. Given the above-mentioned example but the lifetime gift of £500,000 was made ‘over seven years before the date of death’ then the Estate of £2m would be reduced by £500,000 for the NRB & RNRB and 40% IHT payable on a net Estate value of £1.5m.
In conclusion, with the continuing freezing of the IHT thresholds until at least 2028, more Estates will become liable to the 40% IHT liability. Along with this, HMRC have set up a specialist team to focus on the collection of IHT. The HMRC team is initially checking the wealthy deceased individuals but it has been reported that since 2019 over 13,000 estates of deceased individuals have been investigated by HMRC. The common mistakes made by bereaved families in reporting IHT to HMRC include the correct application of the NRB & RNRB thresholds to the lifetime gifts made by the deceased within seven years of the date of death, as detailed above.
Please reach out to us if you should need further professional advice on IHT and its complexities.
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