from A newsletter for proactive planning... In this edition... Tax relief for pre-trading expenses Using your annual exempt amount for 2021/22 Tell HMRC that your company is dormant VAT flat rate scheme – is it worthwhile? Electric company cars – are they still tax-efficient? January 2022 Issue www.compassaccountants.co.uk
PAGE 1 There is a lot of preparation involved in setting up a business, and costs will be incurred, which may be substantial. Before it is able to start trading, a business may incur expenditure on items such as: ·travel expenses -- £850; ·advertising -- £3,000 ·shop fittings -- £12,000 ·laptop -- £500. ·acquiring premises; ·recruiting staff; ·buying stock; ·setting up website; ·IT costs; ·advertising and marketing; and ·travel and subsistence. Under the pre-trading rules, the rent, staff costs, travel expenses and advertising costs are treated as if they were incurred on 1 October 2021. They are deducted in calculating her profits for her first accounting period. These costs relate to a business, albeit one which has yet to start. Stock No deduction is given for the cost of stock under the pretrading expenses rules. Stock purchased prior to commencement will form opening stock, and relief against profits will be given for stock sold in the first accounting period. Relief for expenses Once a business is up and running, relief is given for revenue expenses which are incurred wholly and exclusively for the purposes of the business. Where the expenses are incurred in setting the business up, relief is available under the pre-trading expenses rules. These allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses are revenue expenses which are incurred wholly and exclusively for the purposes of the trade. In this way, the pre-trading expenses rules allow relief for expenses which would have been deductible had the expenditure been incurred once the business was up and running. Pre-trading expenses are treated as if they were incurred on the day on the first day of trading, and are deducted in computing the profits for the first period of account. Example Lucy opens a shop selling cards and gifts on 1 October 2021. Prior to opening the shop, she incurred expenses as follows in 2021: ·rent -- £2,000; ·staff costs -- £4,000; ·stock -- £20,000; Capital expenditure A similar rule to the pre-trading expenses rules applies for capital allowance purposes. Items purchased prior to the commencement of trade where the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances – the qualifying expenditure is treated as if it were incurred on the first day of trading.
PAGE 2 All individuals are entitled to an annual exempt amount for capital gains tax purposes. Net gains (chargeable gains less allowable losses) for the tax year are free of capital gain tax to the extent that they are covered by the annual exempt amount. For 2021/22, the annual exempt amount is set at £12,300. Use it or lose it As with the personal allowance for income tax purposes, the capital gains tax annual exempt amount is lost if it is not fully used in the tax year – it is not possible to carry forward any unused part of the 2021/22 annual exempt amount to 2022/23. As the end of the tax year approaches, now is the time to review gains and losses in the tax year, and planned disposals, to assess whether it is beneficial to make further disposals in 2021/22. Losses Losses realised in a tax year must be set against any gains for the same tax year to arrive at net chargeable gains, before applying the annual exempt amount. You cannot preserve the losses by using the exempt amount against the chargeable gains. However, there is no need to use losses brought forward from earlier tax years before utilising the annual exempt amount. For example, if in a tax year you realise a gain of £14,000 and a loss of £6,000, the net gains for the year are £8,000. These are sheltered entirely by the annual exempt amount of £12,300. It is not possible to set the annual exempt amount against the chargeable gain to reduce it to £1,700, then use only £1,700 of the loss, carrying the remaining £4,300 forward. Married couples and civil partners Married couples and civil partners can take advantage of the rule that allows them to transfer assets between them at a value that gives rise to neither a gain nor a loss (i.e. the transferor’s base cost). This effectively allows them to shift some or all of a gain from one spouse or civil partner to the other. This is useful to ensure both partner’s annual exempt amounts are utilised. Year-end planning Case study 1 Mark is planning to sell some shares in Spring 2022 and expects to realise a gain of £10,000. He has not made any disposals so far in 2021/22. If he sell his shares prior to 6 April 2022, the disposal will fall in the 2021/22 tax year. As his annual exempt amount has not been used, this is available to shelter the gain. Making the disposal prior to 6 April 2022 leaves his annual exempt amount for 2022/23 available to set against any disposal in the 2022/23 tax year. Case study 2 Duncan and Anthony are civil partners. Antony sold a painting in May 2021 realising a gain of £15,000. This utilised his annual exempt amount in full. He plans to sell another painting and expects to realise a gain of £10,000. If Anthony sells the painting in 2021/22, he will pay capital gains tax on the gain. However, if he transfers the painting to Duncan prior to sale and Duncan sells the painting, the gain will be Duncan’s rather than Anthony’s and will be sheltered by his annual exempt amount, saving the couple capital gains tax.
PAGE 4 PAGE 3 Tell HMRC that your company is dormant If your company is no longer trading and does not have any other income, you can tell HMRC that it is dormant. This will relieve you of the need to file a company tax return or pay corporation tax. However, while your company still exists, even if it is no longer trading, you will still need to file annual accounts and a confirmation statement with Companies House. Dormant for corporation tax A company will normally be classed as dormant for corporation tax if: ·it has stopped trading and it does not have any other income; ·it is a new limited company which has not yet started to trade; ·it is an unincorporated association or club that owes less than £100; or ·it is a flat management company. A company will not be dormant if it is buying, selling, renting property, advertising, employing anyone or receiving interest. Tell HMRC If you think that your company is dormant for corporation tax, you can use HMRC’s online service on the Gov.uk to inform HMRC of this. To use the service you will need: ·the company name; ·its 10-digit Unique Taxpayer Reference (UTR); and ·the date it stopped trading. HMRC decide your company is dormant You may get a letter from HMRC telling you that they have decided to treat your company as dormant. Implications for corporation tax Once you have told HMRC that your company is dormant (or they have decided to treat it as dormant) you will not need to pay corporation tax or file a company tax returns unless you receive a notice to file. Once you have filed a return showing the company to be dormant, you should not receive a further notice to file. Companies House Registering your company as dormant with HMRC does not relieve you of your Companies House obligations. Your obligations depend on whether the company is ‘dormant’ for Companies House. This is the case if you did not have any significant transactions in the year. Any filing fees paid to Companies House, penalties for late filed accounts or money paid for shares when the company was incorporated do not count as significant financial transactions. If your company is dormant for Companies House and also ‘small’, you can file dormant company accounts. You will need to file a confirmation statement too.
PAGE 4 VAT flat rate scheme – is it worthwhile? The VAT Flat Rate is a simplified scheme that can save work. Instead of working out the VAT that you need to pay over to HMRC by deducting input VAT from output VAT, you pay a fixed percentage of your VAT-inclusive turnover. The percentage depends on the nature of your business. Who can join? To be eligible to join the VAT flat rate scheme you must be a VAT-registered business and expect your VAT taxable turnover to be £150,000 or less. This is the total of everything that you sell that is not exempt from VAT, exclusive of VAT. You cannot re-join the scheme if you have left it in the last 12 months. Once in the scheme, you must leave if your turnover in the last 12 months was more than £230,000 including VAT, or you expect your turnover in the next 30 days alone to be more than £230,000 (including VAT). Working out your VAT The flat rate percentage depends on the nature of your business. The percentages applying to different business sectors can be found on the Gov.uk website. The percentages allow for input VAT recovery and are less than the rate of VAT charged. You receive a discount of 1% from your flat-rate percentage for the first year that you are in the scheme. The VAT that your need to pay to HMRC for a quarter is simply the fixed rate percentage as applied to your VATinclusive turnover. Example Molly runs a beauty business. Her annual turnover (excluding VAT) is £90,000. In a particular VAT quarter, her VAT inclusive turnover is £32,400. The flat rate percentage for her sector – hairdressing and other beauty treatments – is 13%. Consequently, she must pay HMRC VAT of £4,212 for the quarter. She does not need to keep records of her input VAT or work out the difference between VAT charged and VAT suffered in the quarter. Limited cost businesses Special rules apply to business that do not buy many goods – known as limited cost businesses. These are business where goods are less than either 2% of turnover or £1,000 a year. Limited cost businesses must use a higher rate of 16.5% to work out the VAT that they pay over to HMRC, regardless of the sector in which they operate. Is the scheme worthwhile? The scheme will save work, but this may come at a cost if the amount that you would pay using the normal rules is less than the amount determined using the fixed rate percentage. There is no substitute to doing the sums. The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. This may be problematic for a business that spends little on goods but incurs VAT on services and items such as fuel and promotional items, which are excluded from the calculation. Again, to assess whether the scheme is worthwhile, there is no substitute for doing the sums.
PAGE 5 Electric company cars – are they still tax-efficient? Tax policy is used to influence behaviour as well as to collect revenue. One example where this is the case is the company car tax rules which tax high emission cars heavily and reward drivers for choosing electric and low emission models. Why emissions matter for tax? Where an employee has a company car that is available for his or her private use, they are taxed on the benefit that this provide. The taxable amount is a percentage – the appropriate percentage – of the list price of the car and optional accessories. The charge is adjusted to reflect capital contributions made by the employee (capped at £5,000), certain periods when the car was unavailable and any payments for private use. The appropriate percentage depends, in the main, on the CO2 emissions of the vehicle, with a lower charge applying to cars with lower emissions. For 2020/21 and 2021/22, it also depends on whether the car was registered before 6 April 2020 or on or after this date (the way in which emissions were measured changed for cars first registered on or after 6 April 2020). However, the rates are aligned from 6 April 2022. Where the car’s emissions fall in 1—50g/km band, the electric range of the car also has a bearing on the emissions, with a lower percentage applying to cars with a greater electric range. The electric range is the distance that can be covered on a single charge. A supplement of 4% applies to diesel cars which do not meet the RDE2 emissions standard. However, the percentage is capped at 37%. Looking ahead – 2022/23 and beyond For 2022/23 the appropriate percentages range from 2% for cars with zero emissions and those with CO2 emissions in the 1—50g/km band with an electric range of more than 130 miles to 37% for cars with CO2 emissions of 160g/km or more. For diesel cars not meeting the RDE standard, the maximum percentage of 37% applies to cars with emissions of 145g/km and above. While it is no longer possible to enjoy a tax-free electric car (as was the case in 2020/21), the charge remains very low at 2% of the list price. This means that, for example, the taxable amount for an electric company car costing £30,000 is only £600, which will cost a basic rate taxpayer £120 in tax for the year and a higher rate taxpayer £240 in tax for the year. Even with a more expensive car costing £50,000, the taxable amount of £1,000 means that a higher rate taxpayer will only pay tax of £400 for the year. If a fully electric car is not viable, the same result is achieved with a hybrid with an electric range of 130 miles (and emission in the 1—50g/km band). The appropriate percentages applying for 2022/23 remain unchanged for 2023/24 and 2024/25, meaning that electric and low efficient cars remain a tax efficient benefit for the next few years at least.
PAGE 6 TAX DIARY JANUARY 2022 1 January 2022– Due date for payment of Corporation Tax for period ended 31 March 2021 7 January 2022– Deadline for VAT returns and payments of Accounting Quarter period ending 30 November 2021 14 January 2022– Income tax due date for CT61 period to 31 December 2021 19 January 2022– Monthly deadline for postal payments of CIS, NICs and PAYE to HMRC 22 January 2022– Monthly deadline for electronic remittance of CIS, NICs and PAYE to HMRC 31 January 2022– Deadline for filing Self Assessment Tax Returns for tax year ended 5 April 2021 and 2020/21 Capital Gains Tax. Balancing payment of tax due for 2020-21 and first Payment on Account for Income Tax for 2021/22 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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