from A newsletter for proactive planning... In this edition... Gifts – beware capital gains tax may be payable Is it worth making additional pension contributions by 5 April Director’s loan account – timing of loans and order of repayments – increase in section 455 charge Have your claimed the Employment Allowance? Corporation tax rises – accounting period starts are 1 April 2022 Tax Diary March 2022 Issue www.compassaccountants.co.uk
PAGE 2 The nature of a gift is that it is something that is given to some without receiving a payment in return. Consequently, as nothing is received in return it would, at first sight, seem unlikely that making a gift could trigger a capital gains tax liability. However, unfortunately that is not the case and the making of a gift can indeed, in certain circumstances, give rise to a capital gains tax liability. Market value The making of a gift is a disposal for capital gains tax purposes. As the disposal is not by way of an arm’s length bargain (i.e., the price in a free market), the disposal proceeds are the market value at the time the gift was made, rather than the amount received by the person making the gift (i.e. nothing). From a capital gains tax perspective, unless the gift is to a spouse and the no gain/no loss rules apply or is exempt from capital gains tax, rather than the donor making a loss equal to the cost of the gift, a gain may be realised instead. Example Dolly has a painting which her niece has always loved. She purchased the painting many years ago for £100. The artist is currently very popular and the painting is now worth £20,000. On giving the gift to her niece, Dolly is treated as if she had disposed of the painting for its market value of £20,000. Consequently, she makes a capital gain of £19,900. Assuming her annual exemption of £12,300 remains available, she must pay capital gains tax on a gain of £6,800. Gifts to spouses/civil partners Transfers between spouses are deemed to be at a value that gives rise to neither a gain nor a loss. If instead of giving the painting to her niece, Dolly had given it to her husband David, the deemed consideration would be £100 (the value that creates neither a gain nor a loss) and David would be treated as having acquired the painting for £100. In this situation there is no capital gains tax liability on the gift. Gifts to a charity Capital gains tax is not payable on a gift to a charity. Relief for gifts of business assets The relief for gifts of business assets allows the capital gains tax that might arise on the gift of a business asset to be deferred by 'rolling over' the gain so that the recipients base cost is reduced by the deferred gain. However, while this means that there will be no capital gains tax to pay at the time of the gift, the recipient will realise a larger gain when they dispose of the asset. The relief effectively shifts the liability from the donor to the recipient.
PAGE 3 In a personal or family company the director will often borrow money from the company. This can be an easy source of finance, and also one that can be tax efficient as, if you time it correctly, it is possible to borrow up to £10,000 for up to 21 months tax-free. However, there are tax consequences if the loan remains outstanding nine months and one day after the end of the accounting period in which it was made. This is the date on which corporation tax for the period is due and, in addition to any corporation tax due for the period, the company must pay ‘Section 455’ tax on the outstanding director’s loan balance. Rate of ‘Section 455’ tax Section 455 tax is aligned with the dividend upper rate. From 6 April 2016 to 5 April 2022 the rate is 32.5%. As part of a package of measures to raise funds for health and adult social care, the dividend tax rates are increased by 1.25% from 6 April 2022. As a result, the rate of Section 455 tax will rise to 33.75% from that date. Prior to 6 April 2016, the rate of Section 455 tax was 25%. Example Andy is a director of his family company A Ltd. He prepares accounts to 30 April each year. In July 2015 he took a loan £20,000 from A Ltd. The company paid Section 455 tax of £5,000 (25% of £20,000) on 1 February 2016. He took a further loan of £15,000 in May 2018 on which the company paid section 455 tax of £4,875 (£15,000 @ 32.5%) on 1 February 2020. Andy is having building work done in April 2022 and plans to take a further loan of £25,000 on 20 April 2022. If he does not clear the loan by 1 February 2023, the company will have to pay Section 455 tax of £8,437.50 (£25,000 @ 33.75%). He has an endowment policy that will mature in August 2022, the proceeds of which are £50,000. He plans to use this to clear the loans. To make the best use of this money to secure the maximum tax savings/repayments, he should clear the loans as follows: 1.Loan of £25,000 made in April 2022. This will save the company tax of £8,437.50. Unlike other forms of tax, Section 455 tax is a temporary 2.Loan of £15,000 made in May 2018 This will generate tax, which is repaid after the outstanding loan has been cleared. A repayment can be claimed from nine months and a repayment of £4,875 on 1 February 2023. one day after the end of the accounting period in which the 3.£10,000 of the £20,000 loan made in July 2015. This will generate a repayment of £2,500 on 1 February loan balance was cleared. This may be done in various 2023. ways, for example, by introducing funds from outside the company, declaring a dividend or by setting a bonus or Using the £50,000 in this way will save tax/generate salary payment against the loan. repayments of £15,812.50. Which loan to repay? If the director has several loans which are outstanding, it makes sense to clear those loans which attract a higher rate of Section 455 tax first. Had he cleared the loans in chronological order, he would have received a repayment of £5,000 in respect of the 2015 loan and a repayment of £4,875 in respect of the 2018 loan. He would only have been able to clear The optimal repayment order is as follows: 1.Loans made on or after 6 April 2022 (for which the rate of £15,000 of the 2022 loan (saving Section 455 tax of £5,062.50). The total tax savings/repayment would be tax is 33.75%). £14,937.50. He would also need to pay Section 455 tax 2.Loans made between 6 April 2016 and 5 April 2022. of £3,375 on 1 February 2023 (against which the 3.Loans made before 6 April 2016. repayment due to him of £9,475 could be set).
PAGE 4 It is prudent to plan ahead for retirement and tax breaks are available to encourage savings into a registered pension scheme. Contributions into a registered pension scheme attract tax relief as long as the contributions are covered by the available annual allowance and are not more than 100% of earnings (or £3,600 if higher). Tax-relieved lifetime pension savings are capped by the lifetime allowance, currently set at £1,073,100. Where brought forward allowances are utilised, those from an earlier year are used before those of a later year. Year-end planning Any annual allowance brought forward from 2018/19 will be lost if not used before 6 April 2022. However, the annual allowance for 2021/22 must be used in full before the allowances brought forward from 2018/19 can be utilised. Annual allowance The annual allowance places a ceiling on the amount of tax-relieved contributions that can be made to a registered pension scheme each year. Contributions made by an employer count towards the annual allowance. The annual allowance is set at £40,000. However, it is reduced where both adjusted net income is more than £240,000 (broadly income including pension contributions) and the threshold income (broadly income excluding pension contributions). Where this is the case, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £240,000 until the minimum amount of the annual allowance is reached. For 2021/22 this is £4,000. Consequently, where a person has adjusted net income of at least £312,000 and threshold income of at least £200,000, they only receive the minimum annual allowance of £4,000. A lower annual allowance – the money purchase annual allowance (MPAA) – applies where a person has flexibly accessed their pension pot having reached age 55. If contributions are made in excess of the annual allowance, a tax charge applies (the annual allowance charge) which effectively claws back the relief that was not due. If the annual allowance is not used in full in the tax year, the unused amount can be carried forward for up to three years. However, the current year’s allowance must be used up before using allowances from earlier years. Example Richard has earnings of £150,000 for 2021/22. He has an annual allowance of £40,000. He has historically made pension contributions of £25,000 a year and has unused allowances of £15,000 a year for each of the years 2018/19, 2019/20 and 2020/21. He received an inheritance in January 2022 and is considering making additional contributions. To prevent his unused allowances from 2018/19 from being wasted, he can make contributions of £55,000 before 6 April 2022. This will fully utilise the annual allowance for 2021/22 and £15,000 unused allowance from 2018/19. He could also make further contributions of up to £30,000 if he wished to use the available allowances for 2019/20 and 2020/21. He could instead carry these forward. He will have until 5 April 2023 to use the allowances from 2019/20 and until 5 April 2024 to use the allowances from 2020/21. However, to access these allowances he would need to use up his current year annual allowance first. If he makes contributions of £55,000 on or before 5 April 2022, he will prevent the unused 2018/19 allowances from being wasted. Assuming he is a higher rate taxpayer, the contributions of £55,000 will ‘cost’ him £33,000 as he will benefit from tax relief at 40%. He will also need to check that making the contributions does not take the value of his pension pot above the lifetime limit.
PAGE 5 The Employment Allowance is a National Insurance allowance that eligible employers can claim and set against their secondary Class 1 National Insurance liability. The allowance is set at £4,000 for 2021/22 (capped at the employer’s secondary National Insurance liability for the year where this is lower). Can you claim it? Not all employers are able to claim it. At the lower end of the scale, it is not available to companies where the sole employee is also a director. This means that most personal companies cannot benefit. However, a company with more than one employee or one where the sole employee is not a director can benefit from the allowance. It should be noted here that HMRC guidance stipulates that the allowance is not available if there is only one employee ‘paid above the National Insurance secondary threshold’ and that employee is also a director. However, there is no requirement in the legislation for employees to be paid above the secondary threshold to be counted, and the allowance is (in accordance with the legislation) available unless all the payments of earnings in the year are made to the same person and that person is a director. Thus, companies with at least two employees at some point in the tax year should be eligible for the allowance. At the other end of the spectrum, companies whose Class 1 National Insurance liability for the previous tax year is £100,000 or more do not qualify for the allowance. Impact of claim on optimal salary The availability or otherwise of the employment allowance determines the optimal salary level in a family company scenario. Assuming that the personal allowance is not used elsewhere, for 2021/22, the optimal salary where the employment allowance is not available is one equal to the primary threshold of £9,568. However, where the employment allowance is available, the optimal salary for 2021/22 is equal to the personal allowance of £12,570. Not too late to claim The employment allowance has to be claimed through the payroll. If a claim has not yet been made for 2021/22 it is not too late. In a family company scenario where the alternative arrangements are used for National Insurance (such that NIC is assessed each pay period as for other employees, rather than on an annual basis), it may be easier to pay the director a salary equal to the secondary threshold of £737 per month for the first 11 months of the tax year. This prevents the need to pay any National Insurance over to HMRC. CONTINUED ON PAGE 5
PAGE 6 If the company is eligible to claim the employment allowance, they can claim it in March and make a final payment for the tax year of £4,463 to take pay up to £12,570, the level of the personal allowance for 2021/22 (£12,570 – (11 x £737) = £4,463). There will be some primary Class 1 National Insurance on earnings for the year above the primary threshold of £9,568 The primary NIC bill is £360.24 ((£12,570 - £9,568) @12%). However, this is offset by the corporation tax savings on the higher salary at 19%. The allowance can be claimed after the end of the year if a claim is overlooked. In this situation, you can ask HMRC to use it to pay other tax that the company may owe, including VAT and corporation tax if you do not owe any PAYE and National Insurance. If you have no tax to pay, you can ask for a refund. You cannot carry forward any unused amount of the allowance to later tax years. If your secondary NIC bill is less than £4,000, the employment allowance is capped at this level. Corporation tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now. While the changes do not come into effect for a year, applying from the financial year 2023 which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022. Nature of the changes From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have if any. If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax. If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023. If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay. Marginal relief is calculated in accordance with the following formula: F x (U-A) x N/A Where: ·F is the marginal relief fraction (set at 3/200 for the financial year 2023); ·U is the upper limit; ·A is the amount of augmented profits (profits plus dividends from non-group companies); and ·N is the amount of total taxable profits. Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. CONTINUED ON PAGE 6
PAGE 7 A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate. The lower limit is £50,000 and the upper limit is £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000. The limits are time apportioned where the accounting period (or pro rata period) is less than 12 months. Plan ahead Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 will be taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits. Where the company will from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%. Example ABC limited prepares accounts to 30 September each year. It has annual profits of £300,000. Its profits for the year to 30 September 2022 will be taxed at 19%. However, its profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% -- an effective rate of 22%. The company accelerates a profitable contract so that it is completed before 30 September 2023 so that the profit is taxed at 19%.
PAGE 8 TAX DIARY MARCH 2022 7 March 2021 – Deadline for VAT returns and payments of Accounting Quarter period ending January 2022 14 March 2021 – Due date for Corporation Tax quarterly instalment for “very large” companies with year end 31 March 2022 and year end 31 December 2022 19 March 2021 – Monthly deadline for postal payments of CIS, NICs and PAYE to HMRC 22 March 2021 – Monthly deadline for electronic remittance of CIS, NICs and PAYE to HMRC 31 March 2021 – Corporation tax returns filed by companies with 31 March 2021 year end 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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