TAXANGLES A newsletter for proactive planning... In this edition... End of the AIA transitional limit – Beware of the traps Tax-free help with childcare costs Keeping the Christmas party tax-free Understanding how dividends are taxed Get ready for the next steps of Making Tax Digital Wedding celebrations for Kerry and Ben Tax Diary - October 2021 October 2021 Issue www.compassaccountants.co.uk
PAGE 2 End of the AIA transitional limit – Beware of the traps The annual investment allowance (AIA) allows you to claim an immediate deduction against your profits for qualifying capital expenditure up to the available limit. The AIA limit was temporarily increased from £200,000 to £1 million from 1 January 2019 to 31 December 2021. It will return to its permanent level of £200,000 from 1 January 2022. This means that time is running short to take advantage of the higher limit. But, be warned, there are traps to be avoided. Accounting period falls wholly within period from 1 January 2019 to 31 December 2021 If your accounting period falls wholly within the period for which the higher £1 million limit applies, for example, if you prepare your accounts to 31 December 2021, the position is quite straightforward. If your accounting period is 12 months, the available AIA limit is £1 million; if you accounting period is less than 12 months, the limit is proportionately reduced. If you are planning capital expenditure of more than £200,000, and you have a 31 December year end, it would be advisable to incur the expenditure before 31 December to benefit from £1 million limit. The limit will revert to £200,000 for the year to 31 December 2022. Accounting period spans 31 December 2021 The position is more complicated if your accounting period spans 31 December 2021. Not only do you need to calculate the limit for your accounting period, you also need to calculate the cap that applies to expenditure that is incurred after 31 December 2021. The AIA limit for periods spanning 31 December 2021 is found by applying the formula: (x/12 x £1,000,000) + (y/12 x £200,000) where x is the number of months in the period before 31 December 2021 and y is the number of months in the period on or after 1 January 2022. However, this is not the end of the story as a further cap applies to limit the AIA that is available for expenditure incurred in the period but on or after 1 January 2022. The cap is equal to: y/12 x £200,000 where y is the number of months in the period falling on or after 1 January 2022. Example David is a sole trader. He prepares accounts to 31 March each year. He is planning in investing in new equipment in the year to 31 March 2022 which will cost £300,000. His AIA limit for the year to 31 March 2022 is £800,000 ((9/12 x £1,000,000) + (3/12 x £200,000)). However, a further cap of £50,000 (3/12 x £200,000) applies to expenditure incurred in the period from 1 January 2022 to 31 March 2022. If David buys his equipment before 31 December 2021, he can claim the AIA for the full amount, achieving an immediate deduction in calculating profits for the year to 31 March 2022. However, if he buys the equipment on or after 1 January 2022 but before 31 March 2022, he can only claim the AIA on £50,000 of the expenditure (despite the limit for the period being £800,000). He will be able to claim writing down allowances on the difference. In this case, he may wish to delay the expenditure until on or after 1 April 2022, so that it falls in the year to 31 March 2023, for which the AIA will be available for £200,000 of the expenditure. Companies Companies incurring qualifying expenditure in the period 1 April 2021 to 31 March 2023 may be better claiming the super-deduction than the AIA. The super-deduction is not available to unincorporated businesses.
PAGE 3 Keeping the Christmas party tax-free Last year, the Covid-19 pandemic and national lockdown took Christmas parties (other than virtual ones) off the agenda. This year, they may be a temptation to make up for lost time. How can you celebrate the festive season without triggering a tax liability in the process? Limited tax exemption There is a limited tax exemption for annual parties and functions, which can be used to ensure that no benefit in kind tax charge arises in respect of the provision of the Christmas party. However, as with all exemptions, there are conditions to be met. The exemption applies equally to virtual parties as to ‘real life’ events. Function must be annual The exemption only applies to annual functions. If you hold a Christmas party every year (Covid-19 restrictions aside), the exemption will be available. If, however, you decide to hold a one-off event, the resulting benefit will be taxable. £150 per head limit The exemption only applies if the cost of the function is not more than £150 per head. This is the total cost of the function (including VAT) divided by the number of people attending (guests as well as employees). If the cost per head is more than £150, the full amount is taxable, not just the excess over £150. If the employee brings a guest, the taxable benefit is the cost of the employee’s attendance at the event, and also that of their guest. If you hold more than one annual function each year, you can use the £150 per head limit to achieve the best outcome. Remember that it can only be used to shelter ‘whole’ functions – it is not a tax-free allowance. In working out the best possible use of the exemption, you will need to consider the impact that guests will have on the amount that would be taxable in the absence of the exemption. The exemption is better used to cover an event costing £30 per head where the employee can bring a guest than one costing £40 per head which is for employees only. If the exemption is not available, the taxable amount for the former for attendance by both the employee and their guest is £60 (2 x £30), whereas for the latter, it is only £40. Taxable benefit? Use a PSA If you are not able to benefit from the exemption for your Christmas party, but want to preserve employee goodwill, you may wish to meet the associated tax liability by including the benefit within a PAYE Settlement Agreement.
PAGE 4 Understanding how dividends are taxed Dividends have their own tax rules and their own rates of tax. The rules and the rates apply in the same way regardless of whether the dividends are paid from your personal or family company as part of a profit extraction strategy, or whether they represent investment income on shares. As part of the Government’s health and social care plan, the rates at which dividends are taxed are to increase by 1.25% from 6 April 2022. Dividends have already suffered corporation tax Dividends can only be paid out of retained profits. This means that if you want to pay a dividend from your personal or family company, you can only do so if you have sufficient retained profits from which to pay. 'Retained profits' are post-tax profits which have not yet been paid out. Consequently, they have already suffered corporation tax. The rate of corporation tax is currently 19%, but is due to increase from 1 April 2023 where the company’s profits are more than £50,000. Dividends covered by the dividend allowance are tax-free All taxpayers, regardless of the rate at which they pay tax, are entitled to a dividend allowance. This is available in addition to the personal allowance, and, unlike the personal allowance, is not abated once income reaches £100,000. Although termed a dividend ‘allowance’, it is not an allowance as such; rather it is a nil rate band. Dividends that are covered by the dividend allowance are taxed at zero rate. However, they count as part of band earnings. The dividend allowance is set at £2,000 for 2021/22. Dividends are treated as the top slice of income Dividends are taxable to the extent that they are not sheltered by the dividend allowance or, if not fully used elsewhere, the personal allowance. In determining the appropriate rate of tax, dividends are treated as the top slice of income. Dividend tax rates are lower than income tax rates Dividends have their own tax rates. These are lower than the usual rates of income tax. However, as noted above, dividends are paid from profits which have already suffered corporation tax. Dividends are taxed at the dividend ordinary rate to the extent that they fall within the basic rate band. This is set at 7.5% for 2021/22. It is to increase to 8.75% from 6 April 2022. Dividends are taxed at the dividend upper rate to the extent that they fall in the higher rate band. This is set at 32.5% for 2021/22. It is to increase to 33.75% from 6 April 2022. Dividends are taxed at the dividend additional rate to the extent that they fall in the additional rate band. This is set at 38.1% for 2021/22. It will increase to 39.35% from 6 April 2022.
PAGE 5 Get ready for the next steps of Making Tax Digital Making Tax Digital (MTD) is a government programme to move to a digital tax world. HMRC’s stated ambition is to become one of the most digitally advanced tax administrations in the world. MTD involves fundamental changes in the way in which taxpayers keep records and report information to HMRC. MTD launched with MTD for VAT, which was compulsory for VAT-registered businesses with VATable turnover over the VAT registration threshold (currently £85,000) from the start of their first VAT accounting period on or after 1 April 2019. The next steps in the MTD programme are the extension of MTD for VAT and the launch of MTD for income tax. Extension of MTD for VAT Under MTD for VAT, VAT registered businesses must keep digital records and file their VAT returns using MTD-compatible software. Currently, MTD for VAT is only compulsory for VAT-registered businesses whose VATable turnover is above the VAT registration threshold of £85,000. Where VATable turnover is below this level, MTD is optional. However, once a business has joined MTD for VAT, they must remain in it. This is due to change from 1 April 2022. From that date, MTD for VAT will become compulsory for all VATregistered businesses. Businesses that are not currently within MTD for VAT will be required to comply from the start of their first accounting period beginning on or after 1 April 2022. They will need to sign up, and be ready to keep digital records and file VAT returns using MTDcompatible software. MTD for income tax The start date for MTD for income tax has now been delayed by one year. The next key date in the MTD timetable is 6 April 2024 – one year later than planned. Self-employed businesses and landlords with annual business or property income of more than £10,000 will now come within MTD for Income Tax from 2023/24. In preparation for this, the Government have consulted on rules to reform the basis period rules, moving from a current year basis to a tax year basis. These reforms were due to take effect from 2023/24, with 2022/23 being a transitional year. These too have now been delayed, and will not now come into effect before 2024/25 with a transitional year no earlier than 2023/24. Under MTD for income tax, landlords and self-employed businesses within its scope would need to keep digital records. They will also be required to send quarterly summaries of income and expenditure to HMRC using MTD-compatible software. The taxpayer will receive an estimated tax calculation after each submission. The quarterly submissions would be followed by a final end of year submission to take account of necessary adjustments and a final declaration. This will replace the annual self-assessment tax return. General partnerships will now not be brought within MTD for income tax until April 2025.
PAGE 4 PAGE 6 Wedding celebrations for Kerry and Ben Compass team member, Kerry Sweeney tied the knot last month, marrying Ben Cunningham at Langstone Quay’s Resort in Hayling Island. The couple were blessed with wonderful sunny weather on the day and celebrated their marriage with 20 close friends and family members. Kerry (who works with Compass as a trainee accountant), and her husband Ben had originally planned to have the wedding in Mexico, then renew their vows in a ceremony at Langstone Quay’s Resort when they returned. However, they had to cancel due to Covid restrictions and instead, they changed their booking with the resort, and had the full event in the UK. “It actually worked out really well,” said Kerry- “as our family members were all there to celebrate with us.” “I loved every minute of the day.” said Kerry “As it was a small wedding, it was very relaxed and intimate, which was exactly what we wanted." Kerry and Ben later returned to Crowne Plaza Hotel in Marlow, for a weekend away, where Ben had originally proposed. “We had a lovely time!” said Kerry. “We are also really looking forward to our hotel stay bought as our wedding gift from everyone at Compass!”
PAGE 7 TAX DIARY OCTOBER 2021 1 October 2021– Due date for payment of Corporation Tax for period ended 31 December 2020. 5 October 2021– Capital Gains deadline for non self assessment for 2020/21. CWF1 form to be filled for self employment or SA1 for non self employed income. Form SA401 is available for partners. 7 October 2021– Deadline for VAT returns and payments of Accounting Quarter period ending 31 August 2021. 14 October 2021– Income tax due date for CT61 period to 30 September 2021. 19 October 2021– Monthly deadline for postal payments of CIS, NICs and PAYE to HMRC 22 October 2021– Monthly deadline for electronic remittance of CIS, NICs and PAYE to HMRC 31 October 2021– Deadline for postal/paper submission of Self Assessment tax returns for tax year ended 5 April 2021 to be received by HMRC. For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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