Why is it important to get my tax code right?

You should recently have received your 2021/22 PAYE Notice of Coding if you are in receipt of salaried income or pension and tax is deducted at source.

Most people who pay tax are entitled to tax free personal allowances. If you have no other income you can have employment earnings up to the personal allowance without having to pay any tax. There may be other amounts added to your personal allowance such as professional subscriptions or job expenses that increase the amount you can earn before paying tax and therefore reduce the amount of tax you pay.

There may also be items in your tax code that reduce your tax-free amount and so increase the amount you pay in tax such as state pension, benefits such as private medical insurance or estimated rental income.

If you are in receipt of other earnings such as partnership earnings, the personal allowance will more than likely be used up and therefore the code may be incorrect and insufficient tax be deducted on your salaried appointment or pension. This will result in a larger tax bill becoming due via Self-Assessment in the January following the tax year and also have a knock-on effect to payments on account for the following year as HMRC assume earnings and tax deducted will be the same in that year. This may make your net income more difficult to assess for personal budgeting.

MHA Moore and Smalley’s Healthcare Services Team provide a service to check your 2021/22 PAYE Notice of Coding and advise HMRC of any changes required and enable you to budget more accurately for future income and outgoings.

Contact us

If you require any advice regarding the above please get in touch with Lisa Pennington, Healthcare Services Director, or alternatively contact us here.

Making Tax Digital for Income Tax

Making Tax Digital (MTD) was first talked about almost five years ago now by HMRC as they believe avoidable mistakes by the taxpayer is costing the Exchequer billions each year. In fact they have estimated this figure at £8.5 billion in the 2018/19 tax year alone.

MTD was originally meant to be introduced for Income Tax in April 2018 but due to the enormity of the challenge of ensuring there was access to suitable software for the taxpayer and development of HMRC’s back end systems this was indefinitely delayed. HMRC then moved their focus to MTD for VAT as VAT returns were already filed quarterly and a higher proportion of VAT registered business would already use software.

From April 2019 all VAT registered business with turnover greater than the £85,000 VAT threshold have been required comply with the VAT rules by keeping digital records and using software to submit their VAT returns.

Recently HMRC quietly announced the following plans for MTD:

  • To make MTD for Income Tax mandatory from 6April 2023 for businesses and landlords with turnover in excess of £10,000.
  • To mandate those business who are VAT registered but currently have turnover under the £85,000 threshold into the VAT regime from April 2022.

MTD for income tax will apply to the self-employed, partnerships and to those who receive income from property, with gross income from these sources combined above a threshold of £10,000. The draft legislation includes an exemption for the largest partnerships, defined as those with a turnover of more than £10m

Such businesses will be required to maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records will no longer meet the requirements of the tax legislation Information will have to be submitted quarterly to HMRC via the required digital platform and then finalise their tax position after the end of the tax year.

MHA Moore and Smalley offer a wide range of digital accounting solutions and support and training to our clients looking to change their accounting package, get more out of their current system or looking to install a computerised system for the first time.

For GP practices we are able to assist you to tailor your accounting software to ensure that it will be compatible for the MTD requirements and to ensure meaningful figures are available on a monthly or quarterly basis.

Contact us

If you require any advice regarding the above please get in touch with our Healthcare Services team on 01253 404404 | 01159 721050 or alternatively contact us here.

Taking advantage of digital solutions

In this insight post we set out ways to help you get the most out of your current bookkeeping software to help improve accuracy and efficiency.

Receipt Bank

Are you still typing in supplier invoices into your accounting system? Stop! ReceiptBank links with the main cloud accounting software products and can also link in with Sage 50C.

Uploading receipts via ReceiptBank saves time and reduces the risk of making errors on input. In addition, the software can be used to calculate staff/director expenses. Snap each receipt as you get then instead of saving them in your wallet, purse or handbag and delaying the task for a later date.

https://mooreandsmalley.co.uk/insight/knowledge/time-saving-and-benefits-of-receipt-bank/

Sage 50 reporting

If you are creating board reports manually from Sage 50, get in touch as we can set up one click reporting into Excel for you. We can work with you to design a report pack with all the information you need to share with your fellow directors, or whoever needs updates, including information of top customers, geographical sales break down and profitability from month to month.

https://mooreandsmalley.co.uk/insight/knowledge/save-time-by-using-excel-with-sage-50cloud-reporting/

Our top tips for 2021

Review your bookkeeping processes and look into creating “App Stacks”. There are lots of apps linking to Cloud accounting software which will help you enhance your internal processes and the customer experience.  Examples include customer relationship management, inventory systems, people management, project management and credit control.

Make sure all areas of your office are as cloud based as possible to allow for remote working, ensure it works effectively by having the right technology in place for you and your team.

2021 is likely to be very volatile and businesses need to be as up to date as possible with their finances so they can react quickly to deal with whatever hits their sector, business or family as quickly as possible.

Sign up to our MHA digital newsletter so you keep up to date with changes to software and new recommended apps.

Speak to your accountant! We want to help you be as efficient as possible so you can spend more time on what you do best – running your business

What we can expect from digital accounting in 2021?

From a cloud accounting view, I think we will see more advancements within software with regards to reporting and collating of data. There will be more changes to the VAT areas following Brexit and the construction industry domestic reverse charge.

The beauty of the cloud accounting software is that you get all the upgrades for no additionalcost, and without doing anything. The amount of apps linking with Xero and Quickbooks will continue to grow and existing ones will develop. In 2021 the digital links for Making Tax Digital (for VAT) becomes compulsory so businesses need to be review their bookkeeping processes to make sure they are complying with the rules. https://mooreandsmalley.co.uk/insight/knowledge/timeline-for-next-phase-of-mtd-now-published/

Contact us

Please get in touch with Judith Dugdale, Corporate Services Director and Head of Digital Solutions, if you need support, or alternatively contact us here.

Could a one off wealth tax rebuild public finances?

We are all aware that the financial support the Government has given to businesses and individuals over the last nine months will have to be paid for.

Ways of increasing the tax raised to at least mitigate the effect of this spending are restricted by the “triple lock” promise. In the pre-election manifesto it was stated that there would be no increases to Income Tax, VAT or National Insurance during the life of this parliament. The government is no stranger to the U turn, but breaching this promise, even in extraordinary times, would not be easy.

A recent report on a proposed wealth tax aims to create a system for “sharing the burden of paying for the crisis across those with the broadest shoulders”. 

The Wealth Tax Commission issued its report on the rationale for, and design of, a Wealth Tax on 9 December 2020. The Commission is a self-appointed board of academics with no statutory authority or official role, but nonetheless, its report comes at a time when public expenditure is unprecedented during peacetime and cannot be wholly discounted.

However, in July 2020, only six months ago, Rishi Sunak said, quite unequivocally “I do not believe that now is the time, or ever would be the time, for a wealth tax”. He is unlikely to favour a tax which removes disposable income from the economy at a time when it needs as much stimulus as it can find.

The report considers using the tax to raise £250bn, taxing all individuals with wealth above £500,000 at 5% payable over 5 years – it is thought that this would involve 8.2 million individuals, representing about 25% of all taxpayers. Since there are only about 4.6 million who pay tax at higher rates, it would appear that about half those liable for a wealth tax would pay tax at the basic rate or indeed not be taxpayers at all. Whilst the affordability factor would affect everyone, it is likely to be particularly problematic for this cohort who might be ‘asset rich, cash poor’.

There are many anomalies in the design of the tax. In order for it to raise the required amounts, it would need to include pension rights in some way, but this raises a minefield of problems where fairness between occupational and personal pensions are concerned, or where pensions are already in payment.

Internationally wealth taxes have tended to be phased out in recent years since they are difficult to collect encourage avoidance and are deeply unpopular. A one-off wealth tax could ameliorate these concerns to some extent.

There is no current mechanism to assess the tax and it would take some time to make the necessary valuations and return mechanisms. Politically that might mean that implementation of the tax might come in at about the time of the next General Election.

Changing the rules for Capital Gains Tax (CGT) could raise significant amounts in the long term, and it bypasses many of the affordability arguments – in the vast majority of cases a liability for CGT arises precisely because funds have just become available.

CGT also falls outside the “triple lock” and has recently been reviewed by the Office for Tax Simplification, which found it to be in need of reform. We know that there will be a Spring Budget so those considering capital tax planning would do well to implement any planned measures before then. Raising CGT would not go very far in solving Sunak’s problems, but it could be his first step.

Withholding Taxes Post Brexit

From 1 January 2021, multi-national groups will need to consider whether withholding taxes need to be deducted from interest, dividends and royalties, where payments are made across EU borders.

For example, an EU-based company paying interest to a UK group company will now be required to deduct tax at the rate applying in its own jurisdiction. This will vary from country to country, but will typically be around 25%, which is some 6% more than the UK rate of corporation tax. This will represent an additional tax cost, as the additional 6% may not be offset against UK tax.

Withholding tax may be reduced under the relevant Double Tax Treaty. In many cases the required deduction may be reduced to nil, and invariably to less than 19%. But double tax relief is not automatic: the paying company must apply for clearance from its tax authority overseas to claim treaty relief.

Likewise, dividends received are often subject to withholding tax. Since dividends are normally tax-free in the hands of the receiving company in the UK, any deduction of tax at source represents a real tax cost. Again, this can be mitigated by obtaining permission to pay dividends at a reduced rate of tax, but very often there will still be a deduction of some amount.

For outward payments, there is no change from the current position. Companies are required to deduct 20% tax from interest payments to group companies based in the EU unless the paying company applies to HMRC for permission to pay gross. Again, permission is not automatic; it must be applied for. Where tax is required to be deducted, it must be paid over to HMRC and form CT61 must be completed; HMRC may issue assessments for the tax where it has not been accounted for.

In the case of dividends, there is no UK withholding tax, and dividends may continue to be paid without deduction of tax.

Companies making cross border payments of interest, royalties and dividends should therefore check that the optimal withholding tax position will be obtained in advance of such payments being made. More fundamentally, a review of the group’s financing structure may be warranted.

Contact us

If you need further advice on the issues raised here please get in touch with our tax team.

Impact of Brexit on Customs Warehousing and IPR

Customs warehousing and inward processing relief (IPR) allow your business to import goods into the UK, which are intended to be sold to UK, EU or non-EU customers without incurring import duties or import VAT when the goods arrive in the UK.

The EU-UK free trade deal (FTA) allows goods produced in either territory to be shipped to and from the EU without payment of import duty. If the goods do not satisfy the origin criteria in the FTA, a Customs warehouse, or the use of IPR can minimise the duty payable on goods shipped to and from the EU. This will include sales from Great Britain to the Republic of Ireland.

Customs Warehousing

Customs duties only become liable on removal from the warehouse for sale into the UK market.

The following example illustrates the benefit of Customs warehousing. As the goods are purchased from a Chinese supplier, they would not satisfy the rules of origin in the FTA and cannot move to and from the EU without the payment of import duty.

A UK company imports goods from China for onward sale to UK, EU, and non-EU customers. On arrival into the UK the goods are liable to import duty and VAT. The import VAT can be postponed in most cases until the completion of the importer’s next VAT return. With a Customs warehouse, import duties would only be liable on the goods sold to UK customers as the sales to EU and non-EU customers would be exports and therefore not liable to UK import duty.  The use of Customs warehousing in this case would mean import duty is only payable once, rather than on both the import into the UK and later sale to EU and non-EU customers.

Inward Processing Relief (IPR)

IPR is a customs regime which allows companies to import goods from outside the UK for processing.  The “finished” goods must be disposed of in an approved manner, such as re-export outside the UK, transfer to another IPR holder or sale into the UK.

Customs duties only become payable when the finished goods are sold to UK companies who do not have IPR authorisation. Import duty would be paid at the time of sale on the value of non-UK goods originally entered to IPR.

There are many scenarios where IPR would be beneficial, but they vary depending on your supply chain and customer base. We can review your international trade activities and identify how best your business could benefit from using IPR.

Contact us

Please get in touch with Jonathan Main, VAT and Indirect Taxes Partner , if you would like to discuss this further, or alternatively contact us here.

Domestic Reverse Charge for Building and Construction Services

The Domestic Reverse Charge (DRC) is being introduced from 1 March 2021. The new reverse charge is the latest version to combat missing trader or carousel fraud that first appeared in relation to precious metals, computer chips and mobile phones. Due to both the Covid pandemic and preparations relating to Brexit, the introduction has been delayed twice. The DRC will affect businesses that:

  • Buy or sell services that are ‘specified services’ that are reported within the Construction Industry Scheme (CIS)
  • The supplier and the recipient are both registered for VAT in the UK
  • The supply is standard rated or reduced rated.
  • The supply is not to the end user or an intermediary

Supplies of zero rated construction services are not included within DRC. For example, construction services on a new build house will be invoiced as normal under the current regulations.

Contact us

Please get in touch with Jonathan Main, VAT and Indirect Taxes Partner or Carolyn O’Shea, Tax Manager, if you need support, or alternatively contact us here.