from A newsletter for proactive planning... In this edition... June 2022 Issue Relief for homeworking expenses post Covid-19 HICBC – not just for higher rate taxpayers Corporation tax – are you ‘associated’? Plan capital expenditure to benefit from time-limited reliefs Should I change my accounting date? CLIENT FOCUS- Martin and Co. www.compassaccountants.co.uk
PAGE 4 2 The Covid-19 pandemic forced large numbers of employees to work from home for the first time. Having made the transition to home working, post pandemic, many employees have continued to work from home some or all of the time. Household expenses Employees who work from home may incur costs as a result, such as increased household bills. The tax legislation allows employers to make a tax-free payment of £6 per week (£26 per month) to employees who work from home at least some of the time to help them meet the costs. The payment can be made tax-free regardless of whether the employee works from home through choice. If the employer does not contribute towards the costs of additional household expenses, the employee may be able to claim tax relief. During the Covid-19 pandemic, the conditions were relaxed and employees who were required to work from home during the pandemic were able to make a claim of £6 per week for 2020/21 and 2021/22 for the full tax year (even if they returned to the office for some of the year). However, the easement came to an end on 5 April 2022, and for 2022/23 onwards relief is only available where the employee is required to work from home (either by the employer or the nature of the work), but not where the employee has the option to work at home or at the employer’s premises but chooses to work from home. Hybrid working arrangements are attractive because of the flexibility that they offer. However, the choice element will limit to ability to claim a deduction for household expenses. Requiring the employee to work from home on, say, one specified day of the week will open the door to a claim. Homeworking equipment Where an employee works from home, depending on the nature of their job, they may need equipment to enable them to do so. Where the employer provides homeworking equipment, no tax liability arises in respect of that equipment. During the Covid-19 pandemic, the rules were relaxed so that where an employee purchased homeworking equipment, the cost of which was later reimbursed by the employer, the reimbursement was not taxed. If the employer did not reimburse the cost, the employee could claim a tax deduction. However, this easement ended on 5 April 2022. The strict statutory rules now apply, and as employees are not able to claim a deduction for capital expenditure (such as the cost of a computer), where this cost is reimbursed by the employer, the reimbursement will be taxable. However, a deduction is allowed for revenue expenses wholly, necessarily and exclusively incurred in undertaking the employment duties, and any reimbursement of those costs can be made tax-free.
PAGE 4 3 High Income Child Benefit Charge – not just for higher rate taxpayers The High Income Child Benefit Charge (HICBC) is a tax charge that claws back payments of child benefit where the recipient or the recipient’s partner has income of at least £50,000 per year. Where both the recipient and their partner have income of this level, the charge is levied on the one with the higher income. The scope of the charge may mean that it falls on someone who did not receive the benefit and who is not a biological or adoptive parent of the child/children in respect of which the benefit was paid. For 2022/23, child benefit is payable at the rate of £21.20 for the eldest child and at the rate of £14.45 per week for subsequent children. The HICBC applies where the recipient of the benefit or their partner has ‘adjusted net income’ of at least £50,000 a year. This is taxable income before personal allowances, but after gift aid and pension payments. The HICB charge claws back 1% of the child benefit paid for every £100 by which adjusted net income exceeds £50,000. Where adjusted net income is £60,000 or above, the HICBC is equal to the child benefit paid for the tax year. Basic rate taxpayers and HICBC Despite its name, a person can be a basic rate taxpayer and still fall within the scope of the HICBC. For 2022/23, a person in receipt of the standard personal allowance of £12,570 with no adjustments will not pay higher rate tax until their income exceeds £50,270. However, the HICBC bites where income exceeds £50,000. A person with income of £50,270 in receipt of child benefit will face a HICBC of 2.7% of their child benefit, despite being a basic rate taxpayer. Pay the charge Where the charge applies, the person liable for the charge must complete a self-assessment tax return and pay the charge, with any other tax and National Insurance due under self-assessment, by 31 January after the end of the tax year to which the charge relates. Stop the benefit Where income is at least equal to £60,000, the HICBC claws back all the child benefit received in the tax year. Consequently, there is no net benefit to receiving the child benefit, and there is the added hassle of completing the relevant section of the self-assessment tax return and paying the tax. As a result, it may be preferable not to receive the child benefit in the first place. The recipient can elect to stop receiving child benefit by completing the online form or contacting the Child Benefit Office by phone or by post. However, child benefit paid for a child under the age of 12 earns National Insurance credits that allow the year to be treated as a qualifying year for state benefit purposes. Consequently, anyone entitled to child benefit should still register for the benefit, even if they elect not to receive it, in order to benefit from the associated National Insurance credits. This is particularly important where the recipient does not pay sufficient National Insurance for the year to be a qualifying year but their partner would be liable for the charge if the child benefit is paid.
PAGE 4 Corporation tax – are you ‘associated’? The corporation tax rules are changing from 1 April 2023, and the amount that a company will pay will depend on the level of its profits, and also whether or not it has any associated companies. Briefly, from 1 April 2023, companies with profits below the lower limit will pay corporation tax at the small profits rate of 19%, while companies whose profits exceed the upper limit will pay corporation tax at the main rate of 25%. Where profits fall between the lower limit and the upper limit, corporation tax will be paid at the rate of 25%, as reduced by marginal relief. For a company with no associated companies, for a 12-month accounting period the lower limit is £50,000 and the upper limit is £250,000. Where a company has associated companies, the limits are divided by the number of associated companies plus one. The limits are also proportionately reduced where the accounting period is less than 12 months. The following table shows the limits for companies with zero to five associated companies: Number of associated Lower limit Upper limit companies 0 1 2 3 4 5 £50,000 £25,000 £16,667 £12,500 £10,000 £8,333 £250,000 £125,000 £83,333 £62,500 £50,000 £41,667 What is an associated company? A new definition applies from 1 April 2023 to determine whether a company is an associated company for the purposes of the new corporation tax rules. For these purposes, a company is an associated company of another at any time when: ·one of the two has control of the other; or ·both are under the control of the same person. However, a company is ignored in determining the number of associates that a company has if it has not carried on a trade or business at any time in the accounting period or if it was an associated company for only part of the accounting period and has not carried on a trade or any business during that part of the accounting period. Meaning of ‘control’ The definition of ‘control’ is that which applies for the purposes of the close companies rules. Under this definition, a person is treated as having control over a company if that person exercises, is able to exercise or is entitled to acquire direct or indirect control of the company’s affairs. In particular, a person is treated as having control of a company if the person possesses or is entitled to acquire: ·the greater part of the share capital or issued share capital of the company; ·the greater part of the voting power in the company; CONTINUED ON PAGE 5
PAGE 5 ·so much of the issued share capital of the company as would, on the assumption that the whole of the income of the company were distributed among participators, entitled that person to receive the greater amount so distributed; or ·such rights as would entitle that person, in the event of the winding up of the company or in any other circumstances, to receive the greater part of the assets of the company which would then be available for distribution among the participators. If two or more persons together satisfy any of the above tests, then they are treated as having control of the company. Rights that the person is entitled, or will be entitled, to acquire at a future date are taken into account. Certain rights and powers may also be attributed to a person in determining whether they have control, including those of companies that the person (alone or with an associate) control and those of their associates. Example Freya has two personal companies, F Ltd and G Ltd. She is the sole shareholder in each. Both companies are under her control and consequently are associated with each other. Plan capital expenditure to benefit from timelimited reliefs Unincorporated businesses and companies planning capital expenditure projects need to be aware of some time-limited reliefs. Timing capital expenditure to benefit from these reliefs can be financially beneficial. Annual investment allowance The annual investment allowance (AIA) is available to both unincorporated business and to companies. It provides immediate 100% relief against profits for qualifying capital expenditure on plant and machinery in the accounting period in which the expenditure is incurred up to the available AIA limit. The limit remains at its temporary limit of £1 million until 31 March 2023, reverting to its permanent level of £200,000 from 1 April 2023. Most items of plant and machinery qualify for the AIA; the main exception being expenditure on cars. Where the accounting period is 12 months in length and falls wholly within the period from 1 January 2019 to 31 March 2023, the AIA limit for the period is £1 million. Where the period spans 31 March 2023, the AIA limit for the period is: x/12 x £1 million + y/12 x £200,000, where x is the number of months in the period prior to 1 April 2023 and y is the number of months in that period on or after that date. Consequently, the AIA limit for the year to 30 September 2023 is £600,000 (6/12 x £1 million + 6/12 x £200,000). However, not all expenditure in a period spanning 31 March 2023 is equal. Where the expenditure is incurred before 1 April 2023, qualifying expenditure up to the limit for the period will be eligible for the AIA. However, a further cap applies if the expenditure is incurred in the period but after 31 March 2023. This is y/12 x £200,000. Only expenditure up to this cap qualifies for the AIA. Relief for expenditure in excess of that qualifying for the AIA is given as writing down allowances. CONTINUED ON PAGE 6
PAGE 6 So, if a business prepares accounts for the year to 30 September 2023, its AIA limit for the year is £600,000. It can claim the AIA for expenditure of up to £600,000 if the expenditure is incurred before 1 April 2023. However, if it incurs the expenditure after 1 April 2023, only £100,000 qualifies for the AIA, whereas, if the business accelerates the expenditure to incur it on or before 30 September 2022 (so that it falls within the year to 30 September 2022), it can benefit from the AIA for expenditure of up to £1 million. Where significant capital projects are planned, undertaking them sooner rather than later will mean maximum advantage can be taken of the temporary AIA limit. Super deduction for companies Companies can also benefit from a super-deduction of 130% of the expenditure when calculating profits. This is available in respect of qualifying expenditure on plant and machinery which would otherwise be eligible for main rate writing down allowance, subject to certain exceptions, the main one being expenditure on cars. To qualify, the expenditure must be incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction is only available to companies; unincorporated businesses do not qualify. Where available, the deduction rate trumps that under the AIA. However, the expenditure must be incurred by 31 March 2023 to qualify. 50% first-year allowance Companies can also benefit from a 50% first-year allowance for qualifying expenditure (excluding cars) that would otherwise benefit from special rate writing down allowances. This allowance can be useful if the AIA limit has been used up. Again, the expenditure must be incurred by 31 March 2023. In preparation of the introduction of MTD for income tax, which comes into effect from 6 April 2024 for unincorporated businesses and landlords with trading and property income of more than £10,000 the basis period rules are being reformed. At present, once an unincorporated business is established, it is taxed on the current year basis. This means that the profits which are taxed for a particular tax year are those for the accounting period that ends in that tax year. For example, if an established business prepares it accounts to 30 June each year, for 2022/23 it will be taxed on the profits for the year to 30 June 2022, as this is the year that ends in the 2022/23 tax year. However, from 2024/25 a business will be taxed on its profits for the tax year, i.e. the profits from 6 April and the start of the tax year to 5 April at the end of the tax year.7 CONTINUED ON PAGE 6 CONTINUED ON PAGE 7
PAGE 7 Where accounts are prepared to 31 March (or to a date between 1 and 4 April), the accounting period is deemed to correspond to the tax year. If the accounts are prepared to a different date, it will be necessary to apportion the profits from two accounting periods to arrive at the profits for the tax year. For example, if accounts are prepared to 30 June each year, the profit for 2024/25 will comprise 3/12th of the profits for the year to 30 June 2024 and 9/12th of the profit for the year to 30 June 2025. This will mean that the business will need the accounts for the year to 30 June 2025 in order to finalise their tax liability for 2024/25. Under the current year basis they only need the accounts to 30 June 2024. To move from the current year basis to the tax year basis, the tax year 2023/24 is a transitional year. In this year, the profits for the year ending in 2023/24 are taxed, together with any profits for the period from the end of that period to 5 April 2024. If there are any overlap profits to be relieved, these will be deducted. This may result in more than 12 months’ profits being taxed in 2023/24. However, spreading relief will tax the additional profits over a five year period, unless the business elects otherwise. Move to a 31 March year end? Going forward, life will be simpler if the business prepares accounts to 31 March (or to 5 April). Where the accounting date is other than 31 March, it may be beneficial to change to a 31 March accounting date ahead of the move to the tax year basis. This could be done in 2022/23 or in the 2023/24 transitional year. Where the move is made in 2022/23, the normal rules on change of accounting date apply. The first accounts to the new date must not be for a period longer than 18 months and the change must be made for commercial reasons. Notice of the change of accounting date must be given in the self-assessment tax return. Depending on how the dates work, any unrelieved overlap profit may be relieved or overlap profits may arise. Any overlap profits created on a change of accounting date will be relieved in the 2023/24 transitional year. Alternatively, the move to a 31 March accounting date could be made in the transitional year (2023/24). Making the change in this year would avoid the creation of overlap profits and provide access to spreading relief. If a change of accounting date is not made prior to 2024/25, it is possible to change the accounting date once the tax year basis is up and running. This will have minimal consequences and remove the need to apportion profits from two periods to arrive at the profits for the tax year.
PAGE 8 Client Focus Martin and Co- Portsmouth In this month’s Client Focus, we chat to Matt Berry- a Compass Client- and the Managing Director of Martin and Co, Portsmouth… In 2012, Matt Berry worked as a Negotiator at the Southampton branch of the estate agency, Martin and Co. It was during this time, that Matt aspired to go out alone, with a view to opening his own branch of the franchise somewhere else in the South. When the opportunity arose to open an office in Chichester, Matt decided to make the jump and teamed up with his dad to invest in their own Martin and Co offices. After two years, Matt and his father branched out further by opening another division, this time in Southsea. Matt explains, “Things had taken off really well, and so we eventually opened the second office. After this we decided to amalgamate the two, and since then we have run both locations from our Southsea headquarters.” Matt now runs both offices, alongside four staff members, but his dad is still very much involved. “My dad has a background in construction and so he deals with the construction consultancy side of things.” Adds Matt. We also meet for Director’s meetings once a week, but generally, he is more of a sleeping director.” As a residential estate agency, Matt’s offices began with lettings only but expanded into sales two years ago. “Since moving into sales, the business has soared to the next level.” Says Matt. “We’ve seen a huge spike in interest in the property market in Southsea. This really started just before the pandemic -but has continued beyond. It has had a lot to do with a rise in the homeworking. We are seeing a trend in people looking to upgrade their property for larger premises, allowing them to work from a home office, or increase their garden size.” “Remote working is here to stay, and as a result, people have decided they no longer want to work in the kitchen, or dining room, or in their child’s bedroom. So, we have also seen a huge increase in Southsea as a popular place to live. CONTINUED ON PAGE 9
PAGE 9 It has become very similar to Brighton, in that it has the beach, and there are lots of independent shops, bars, restaurants, boutiques and cafes, - it’s a lively hub, and has a good reputation as an up-and-coming place to be. Local people in Southsea are also very proud, and with events like the Victorious Festival and the Great South Run, its popularity continues to grow.” Martin and Co now boasts over 200 offices around the UK, and the familiar brand is something that has been useful on Matt’s road to success. “The Martin and Co brand has been an ideal fit for us in terms of our investment as a franchisee. They are, however, quite happy to leave us to independently run our offices, but their support is there if we need any assistance, mentoring, or advice, should we face new challenges or issues.” Meeting Compass After searching for a new accountant, Matt came across Compass and they appeared to be the perfect fit for a new accountancy firm. “I knew Compass were right for us when I met Stuart for the first time.” Said Matt. “He was easy to talk to, very down to earth and there was nothing he was bamboozling me with. He broke everything down into simple layman’s terms.” “Compass are easy to deal with and friendly and speak in plain English -and that immediately appealed to me. People often think of a stereotypical accountant, with bowler hat and briefcase- well Compass are the opposite of that." "They are very forward thinking; they explore new areas, and they offer a level of practical advice we hadn’t had with our previous accountants. We are very pleased we found them.” If you would like to find out more about Martin and Co, Portsmouth, go to www.martinco.com/estate-agents-and-letting-agents/branch/portsmouth Or call 02392 987001.
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