Tax Codes: Can we help increase your net pay?

In these unprecedented times, cash flow is likely to become a hot topic and cause for concern for many. However, there may be a way to increase your post tax monthly Pay As You Earn (PAYE) income. 

If you are in the self-assessment system, have a form of PAYE income (e.g. employment or private pension) and have sources of untaxed income, HM Revenue & Customs (HMRC) may have made adjustments to your tax code.  

This allows HMRC to deduct additional tax each month from gross PAYE income to offset against your tax liability calculated on completion of your annual tax return. These adjustments reduce your net monthly income from PAYE sources but in turn reduce the amount of tax payable by the self-assessment payment deadline in January following the end of the tax year. 

It is possible to amend or remove these adjustments to increase your net PAYE income. 

However, we would like to make you aware that, by removing the adjustments you are only deferring the tax payment to a later date, not reducing your total tax liability. Any reduction in tax taken at source will increase the amount payable through your self-assessment tax return. 

The difference in payment dates is best shown in this example: 

For the upcoming 2020/21 tax year, Mrs A has a private pension paying her £50,000 per year. In 2019/20 she made a gross profit of £10,000 from renting out her buy-to-let property. HMRC have automatically adjusted her tax code to include an estimate for rental profits in 2020/21 of £10,000 and will collect additional tax from her gross pension income each month. 

From April 2020, if no adjustments are made to Mrs A’s tax code she will receive net pension income of £3,209 per month and, provided that her actual rental profits for the year were £10,000, she would have no additional tax to pay in January 2022, following the completion of her tax return. 

However, if we amended her tax code to remove the rental income adjustment Mrs A’s net monthly pension income will increase to £3,542: freeing up £333 of cash each month. Then, when it comes time to complete Mrs A’s 2020/21 tax return, she will pay the additional tax liability, due on her rental profits, in January 2022. Again, assuming the actual profits were £10,000 for the year, her additional tax payable would be £4,000 (plus payments on account where applicable). 

As you can see, by amending the tax code we have increase Mrs A’s monthly net pay from April 2020 by deferring the additional tax payable to January 2022. 

If you would like us to review your tax code for the year 2020/21 or are unsure if changing your code will benefit you please get in touch with our tax team.


Covid-19: Efficient and timely use of VAT deferral and other VAT reliefs

Cash and VAT

We can help you manage your VAT obligations as efficiently as possible and improve your cash position at the same time. The opportunities are all focused on paying and reclaiming the right amount of VAT at the right time.

VAT Deferral

As announced by the Chancellor on 20 March, you can defer the payment of VAT on payments due between 20 March and 30 June 2020. This applies to:

  • Payments for VAT returns ending 29 February; 31 March or 30 April
  • Payments on account for larger businesses between the above dates, and the balancing payment for returns up to and including 31 May
  • Payments on account for annual VAT returns between the above dates

A few important points to bear in mind:

  • The deferred VAT is payable by 31 March 2021
  • You should cancel your direct debit or HMRC will take the payment as normal
  • You should file your return as normal to avoid the risk of a default surcharge

Time to pay

A time to pay arrangement is an instalment plan agreed with HMRC that allows businesses to temporarily bridge financial difficulties in paying their VAT or other tax liabilities on time. Time to pay arrangements allow businesses to spread payment of outstanding tax liabilities over a period of normally 3-6 months and exceptionally may allow up to 12+ months.

We can help you understand how best to approach HMRC. Further details can also be found on the Coronavirus – Guidance and Planning section of our website.

The right rate of VAT

This is important for several reasons:

  • If you are a retailer, there are a variety of reduced or zerorates which may apply to the goods or services you sell to your customers
  • If you are a charity, healthcare provider or educational establishment, there are a variety of VAT reliefs available on the costs you incur
  • For capital transactions, VAT may not be due, for example on the disposal of property.
  • If VAT is charged in error by your supplier, HMRC may not allow you to recover VAT even though you have paid it.

VAT at the right time

Do you have to pay it now? Do you have to pay it at all?

  • Do you have to issue a VAT invoice or VAT receipt?
  • Are you eligible for the Cash Accounting Scheme, which defers VAT until you are paid?
  • If you issue VAT invoices at the start of your VAT period, you may be paid before your VAT return is due
  • If you are in the payment on account regime, are your payments too high?
  • If your sales have declined, do you need to remain registered for VAT?

VAT Schemes

HMRC promotes various VAT schemes designed to reduce your

VAT burden:

  • Cash Accounting
  • Flat Rate
  • Annual Accounting

Cash Accounting defers VAT on income until you are paid, even if you issue VAT invoices to your customers. This is particularly beneficial if you offer extended payment terms or are exposed to unusual levels of bad debt.

The Flat Rate scheme simplifies your VAT compliance by applying a fixed VAT percentage to arrive at the VAT due on your income. In the right circumstances, the set percentage for your business sector may also result in a saving compared to normal VAT accounting.

If you use Annual Accounting, you submit a return once a year and pay VAT periodically on account before the submission deadline.

There are also a variety of more bespoke VAT schemes for travel businesses, charities in relation to membership fees and retailers.

The right VAT returns

If you regularly recover VAT from HMRC, you can submit monthly returns. If your business is in hibernation at present, you can switch to monthly returns for the next few months and recover VAT more quickly from HMRC. You can submit these returns immediately after the period end.

If your business is seasonal, would it help to move your period end to defer the payment of VAT when cash is needed most?

Trapped VAT

If you cannot recover all your VAT, you may be using a partial exemption method or business/non business apportionment based on the ratio of taxable to total income in your organisation. HMRC will approve any method, which they agree results in a fair apportionment of costs. An apportionment based on staff, use of premises or numbers of transactions may produce a better outcome with improved recovery of VAT on your costs.

Motoring and other staff expenses

Are you recovering VAT on motoring and other staff expenses through your expenses system? It may help to review the codes used to classify staff expenses and the requirement to collect and retain VAT receipts. You may be entitled to recover VAT incurred for the last four years.

VAT groups

A VAT group can simplify administration for your organisation. You only submit one return for all entities in a VAT group and VAT is not due on supplies between members of the group. In certain cases, a VAT group can also reduce irrecoverable VAT.

VAT accruals

Do you recover VAT as soon as you receive a purchase invoice? You do not need to wait until the invoice is approved for payment.

Bad Debt Relief

Do you pay VAT when you send an invoice to your customer? You are entitled to claim the VAT back on unpaid debts as ‘bad debt relief’ six months after the due date for payment.

Foreign VAT costs

Have you paid foreign VAT on costs incurred outside the UK? You may be entitled to recover this VAT by submitting a refund claim to the tax authority where the bill was paid.

To view this information in our fact sheet please click here.

For further clarity or help on the above, please do not hesitate to contact Partner, Jonathan Main.

The Coronavirus Business Interruption Loan Scheme (CBILS) will require financial projections and cash flow forecasts. Click here for further information.

Supporting our clients

MHA Moore and Smalley can provide the support and guidance to help review your business, provide advice on accessing support and assist with identifying options for cash flow needs.

A key review is to revisit current forecasts/projections for the year ahead and consider the impact the current business environment may have on these forecasts and more importantly cash flow, the lifeline of any business. We can provide support in preparing forecasts/projections to assist with decision making and applying for financial support where needed.

 

Budget 2020 analysis: Employer taxes

The MHA Moore and Smalley tax specialists have made an analysis of the announcements made by the Chancellor the first Budget of the decade. In this blog we review the changes to employer taxes.

National insurance

The somewhat generous increase in the National Insurance Contribution (NIC) free threshold for employees does not apply to employers. Employees now benefit from a NIC-free amount of £9,500, whilst for employers, the threshold has increased from £8,632 to £8,788.

The rates of NIC remain unchanged.

From 6 April 2020, the Business Employment Allowance will increase from £3,000 to £4,000. The employer’s NIC bill is reduced by this amount. However, this allowance is now available only for employer’s with an NIC bill of £100,000 or less.

Termination Payments

From 6 April 2020, NIC will be payable on termination payments such as golden handshakes and payments in lieu of notice.

National Minimum Wage

The national living wage rate will be increasing to £8.72 for those aged over 25 from 1 April 2020.

Those aged 21 to 24 will be on £8.20, those aged 18 to 20 £6.45, and those aged under 18 £4.55. The minimum wage for apprentices aged under 19 or over 19 but within the first year of the apprenticeship will be £4.15.

Statutory Sick Pay

Statutory sick pay (SSP) has increased from £94.25 to £95.85. It is paid by employers and can be paid for up to 28 weeks.

Normally sick pay begins when the employee has been off work for more than 4 days in a row, including non-working days. However, statutory sick pay will now begin payments from day 1 of leave and will be available to all those who have been advised to self-isolate by a doctor.

Businesses with fewer than 250 employees will be able to reclaim SSP from HMRC.

For advice on the Budget 2020 announcement, please contact a member of our tax team.

Budget 2020 analysis: Capital Gains Tax

MHA Moore and Smalley tax specialists have made an analysis of the statements made by Chancellor Rishi Sunak in his first budget on 12 March 2020. In this blog we review the announcements related to capital gains tax.

The only change to capital gains tax (CGT) for individuals, with the exception to the changes to Entrepreneurs’ Relief, announced in this budget was the increase in the annual exemption from £12,000 to £12,300.

However, the Government has previously announced a number of changes which come into effect from 6 April 2020 in relation to reliefs that can be claimed when residential properties are sold.

The two main changes taking effect from 6 April 2020 are:

  1. The final period exemption for principal private residence (PPR) relief is to be reduced from 18 months to 9 months; and
  2. Lettings relief will be restricted to situations where the owner was in shared occupation with the tenant.

Also, from April 2020 all UK residents must report disposals of UK residential properties to HM Revenue and Customs and also make a payment on account for the CGT due, within 30 days of completion.

The changes do not apply where the gain made is not chargeable to CGT such as where the property has been the individuals only/main residence for the entire period of ownership and therefore covered by the principal private residence relief.  The rules also only apply to residential property currently.

The new rules being brought in are therefore going to mainly affect UK residents with second homes or landlords looking to sell their residential property lets.

Within 30 days of completion UK residents must

  • Calculate the gain made on the property (using estimates if necessary)
  • Report the gain to HM Revenue and Customs (HMRC)
  • Make a payment of CGT to HMRC

For advice on the Budget 2020 announcement, please contact a member of our tax team

Budget 2020 analysis: Tax on pensions

In this blog we review the pension tax changes to income thresholds for the annual allowance and tapered annual allowance from 6 April 2020 following the announcements made in the 2020 Budget.

Annual Allowance

Whilst there are no limits to the level of contributions an individual may wish to make into a registered pension scheme, there is an annual limit on the amount of contributions on which tax relief can be claimed.

This is known as the annual allowance and it currently stands at £40,000. If total pension contributions for the tax year exceed this amount (and any unused allowances from the three previous tax years), the individual may incur the annual allowance charge on the excess.

Tapered Annual Allowance

Once an individual’s ‘adjusted income’ limit and ‘threshold income’ limit are exceeded, their annual allowance will be tapered. The limits are as follows:

  2020/21 2019/20
Threshold Income £200,000 £110,000
Adjusted Income £240,000 £150,000

Both of the above income limits must be exceeded before an individual is affected by the tapered annual allowance. If this applies, for every £2 an individual’s adjusted income goes over the adjusted income limit, their annual allowance for that year reduces by £1.

In the current tax year (2019/20), the minimum reduced annual allowance an individual can have is £10,000. However, from 6 April 2020 this minimum amount is reduced to £4,000. 

For specific advice related to the pension changes the Budget 2020 announcement, please contact a member of our tax team

Budget 2020 analysis: Entrepreneurs’ Relief

MHA Moore and Smalley tax specialists provide an analysis of the announcements made by Chancellor Rishi Sunak in his first budget on 12 March 2020. In this blog we review the sweeping changes made to Entrepreneurs’ Relief.

It was announced in the Chancellors’ Budget that the lifetime limit for Entrepreneurs Relief (ER) will be slashed to £1,000,000 from £10,000,000 which is likely to impact a significant number of business owners.

ER provides for a 10% tax rate on certain capital gains, including the disposal of shares in a trading company. The new limit will apply to disposals on or after 11 March 2020.

The new rules will take into account the value of previous claims to ER, meaning if you have previously realised ER gains of more than £1,000,000 you will have now maximised your lifetime limit and ER will not be available on any future disposals.The £1,000,000 limit will also apply to certain contracts entered before Budget day that were designed to ‘lock-in’ the £10,000,000 limit and certain ‘share for share’ exchanges. Individuals who have made a disposal in the current tax year (2019-20) should take advice as to whether any of these anti-forestalling rules apply.

For any further advice on the Budget 2020 announcement, please contact a member of our tax team

Budget 2020 analysis: VAT and indirect tax

In the aftermath of Budget 2020, MHA Moore and Smalley tax specialists provide an analysis of the announcements made by Chancellor Rishi Sunak in his first budget.  In this blog we review the changes to VAT and other indirect taxes.

Digital publications

After numerous trade body representations and many legal challenges, most recently by News Group Newspapers, we finally have a change to the VAT treatment of digital publications. This is very welcome, as it recognises that the ‘printed word’ has moved substantially beyond paper-based publications. Zero-rating is available for books, booklets, brochures, pamphlets, leaflets, newspapers, journals, periodicals, painting books, music, maps, charts and topographical plans. This list brings to life the scope of very welcome VAT relief across the sector, particularly in the education sector.

Tampon Tax

After years of campaigning and an acceptance by government of a need for change, VAT will no longer be charged on women’s sanitary products from 1 January 2021.

Import VAT

From 1 January 2021, importers will use postponed VAT accounting for all imports of goods, whether from the EU or further afield. This is a welcome cash flow boost for UK manufacturers and distributors and will provide a consequent reduction in the bank guarantee or similar mechanism required for a business’ deferment account.

Red diesel

In the Budget, the Chancellor announced the scrapping of the fuel duty relief for red diesel from April 2022. This was quickly watered down by an announcement that the relief would be maintained for agriculture, (including the fishing industry), rail and for non-commercial, including domestic heating. The government will also consult on other uses including UK inland ferries and public entertainment. As it stands, the construction industry will be hardest hit by this change.

Other changes

  1. Fuel duty frozen for a 10th year in a row
  2. Duties frozen on beer, spirits, wine and cider. This saves a penny on a pint!
  3. Domestic reverse charge for building and construction services, on its way back for a second time from 1 October 2020
  4. A well overdue but still ongoing consultation on the modernisation of VAT rules relating to partial exemption and the capital goods scheme. This will hopefully result in an increase in thresholds, alleviating the need for smaller businesses to deal with these complex VAT rules.

For further information contact Jonathan Main, our VAT and indirect tax partner.

Budget 2020 analysis: Cashflow support for SMEs will be vital

Tony Medcalf, tax partner at MHA Moore and Smalley in Preston, said: “Coronavirus stole the show at this budget, but the short term cashflow support announced for businesses, such as allowing businesses to defer tax payments and access to emergency loans, is a hugely positive step for owner-managed businesses.

“In any other year, the record infrastructure spending would have been the main talking point, but this will take time to trickle through and business owners are rightly more concerned with the short term. Many of our own clients will welcome the action taken to abolish business rates for one year for smaller retail, leisure and hospitality businesses. It will be interesting to see what happens to these business rates once the coronavirus crisis is over.

“Reform of Entrepreneurs’ Relief was widely anticipated, and the chancellor didn’t duck the issue, reducing the lifetime allowance from £10m to £1m. With many other expected changes left out of this budget due to coronavirus, eyes will now turn to the spending review and second budget later this year.”

“Some of the other big action today actually happened outside the budget with the Bank of England’s decision to cut interest rates back to historic lows and make extra money available for the banking sector to lend to businesses and the latter will certainly be welcomed by the SME community.

For further explanation on what the Budget means for you and your business, please contact Tony Medcalf.