from A newsletter for proactive planning... In this edition... Extended carry back of losses – don’t miss the claim deadlines Capital expenditure planning in light of permanent increase to AIA limit File your tax return by 30 December to pay tax through PAYE The advantages of a flexible profit-sharing ratio Can you benefit from tax-free childcare? December 2022 Issue www.compassaccountants.co.uk
PAGE 2 Extended carry back of losses – don’t miss the claim deadlines To help businesses that suffered losses during the Covid-19 pandemic, temporary measures were introduced to increase the period for which certain losses could be carried back. This is helpful as it enables businesses to obtain relief for those losses earlier, generating a useful tax repayment at times when the business may be suffering from cash flow difficulties. Relief is available to both unincorporated business and companies, although the mechanics of the relief is different. To take advantage of the extended carry back period, the relief must be claimed by the relevant deadline. Unincorporated businesses The extended carry-back rules apply to losses for the 2020/21 and 2021/22 tax years. Under the rules, unrelieved losses can be carried back and set against profits from the same trade for the three years before the tax year of the loss. The extended rules apply where a claim has been made to relieve the loss against the general income of the year of the loss and/or the previous tax year, and the loss has not been fully relieved by that claim. Losses carried back under the extended rules are set against the trading profits of a later tax year before that of an earlier tax year. Losses carried back under the extended rules are capped at £2 million for each loss-making tax year within the scope of the relief. If a business wishes to use the extended carry-back rules in respect of a 2020/21 loss, it must claim by 31 January 2023. The deadline to claim relief for a 2021/22 loss under the extended carry back rules is 31 January 2024. Claims are normally made in a tax return, but a standalone claim can be made where the claim affects more than one tax year. Example A sole trader makes a loss in 2020/21. He has no other income in that year. He makes a claim for sideways relief to carry back the loss against his general income for 2019/20. If he wishes to take advantage of the extended carry-back rules to carry back any unrelieved loss against trading profits of 2018/19 and, where loss is not fully relieved, against trading profits of 2017/18, he must claim by 31 January 2023. It should be noted that the claim cannot be tailored to prevent personal allowances from being wasted. Where this will occur, consideration should be given to whether it would be preferable to carry the loss forward instead and set it against future trading profits. Companies Under normal rules, a company can carry back a loss for an accounting period back one year against the profits of the previous accounting period. Under the extended carryback rules, losses for accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back up to three years. Losses must be set against the profits of a more recent accounting period before those of an earlier accounting period. A cap of £2 million applies to losses for accounting periods ending between 1 April 2020 and 31 March 2021 which can benefit from the extended carryback. A separate £2 million cap applies to losses for the accounting period ending between 1 April 2021 and 31 March 2022. Claims must be made within two years of the end of the accounting period in which the loss arose. Example A company prepares accounts to 31 March each year. It made a loss in the year to 31 March 2021. Under normal rules, the loss can be carried back against profits for the year to 31 March 2020. If the loss is unrelieved, a claim can be made under the extended carry back rules to set the loss first against the profits of the year to 31 March 2019 and, if still not fully relieved, against the profits of the year to 31 March 2018. The claim must be made by 31 March 2023.
PAGE 4 3 Capital expenditure planning in light of permanent increase to AIA limit The Annual Investment Allowance will now remain at alternative claims for qualifying expenditures incurred £1 million permanently rather than reverting to to 31 March 2023. £200,000 from 1 April 2023. This change of plan may in the period from 1 April 2021normally qualify for main Where the expenditure would mean that businesses will want to consider their capital expenditure plans. However, companies wishing to take advantage of the time-limited super-deduction and 50% first-year allowance will need to ensure that they incur the qualifying expenditure by the 31 March 2023 deadline. Annual Investment Allowance The Annual Investment Allowance (AIA) allows 100% relief for qualifying expenditures up to the AIA limit. Both companies and unincorporated businesses can benefit from the allowance. Whilst most expenditure on plant and machinery qualifies, there are exclusions, the main one being cars. The news that the AIA limit will now remain at £1 million is good news. However, businesses that were rushing to meet the 31 March deadline or delaying capital expenditure to avoid being caught under the harsh transitional rules that would have applied had the limit reverted to £200,000 from 1 April 2023 may now wish to revisit their plans. The transitional rules that would have applied where an accounting period spanned 31 March meant that capital expenditure incurred in the period from 1 April 2023 to the end of the accounting period may not have benefitted for the AIA in full, despite being within the AIA limit for the period of a whole. There is now no need to avoid incurring capital expenditure in this period as the cap is no longer relevant. Consequently, expenditure can be delayed beyond 31 March 2023 without losing the AIA. Also, businesses planning significant investment can now benefit from an AIA limit of £1 million a year beyond 31 March 2023. Consequently, where cash flow is tight, the pressure to meet a 31 March 2023 deadline to benefit from the AIA on qualifying expenditure up to £1 million is removed. Companies In addition to the AIA, companies can also benefit from rate writing down allowances of 18%, a super-deduction of 130% of the expenditure can be claimed instead. A lower 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances at 6%. This will be beneficial where the AIA limit has been used and is likely also to be used in future accounting periods, otherwise, the AIA gives relief at a higher rate. Review expenditure and optimise claims Business should review their capital expenditure claims and consider, where possible, how expenditure can be timed to maximise reliefs. Remember, the AIA, superdeduction and 50% first-year allowance do not need to be claimed or claimed for the full amount of the expenditure. Writing down allowances can be claimed for expenditures not relieved under these routes. While the permanent increase in the AIA limit has removed some deadline pressure, companies wanting to take advantage of the super-deduction will need to incur the expenditure on or before 31 March 2023 to benefit from the generous 130% relief that it provides.
PAGE 4 If you need to file a self-assessment tax return for 2021/22, you must do this online by 31 January 2023 if you want to avoid a late filing penalty. However, if you received your notice to file a tax return after 31 October 2022, a later deadline applies; you must file the return within three months of the date of the notice to file. *you owe less £3,000 on your tax bill; *you already pay tax through PAYE (for example, on employment or on a pension); *you submitted your 2021/22 tax return online by 30 December 2022 or you filed a paper tax return by 31 October 2022. You must also pay any remaining tax that you owe for 2021/22 by 31 January 2023. If you are self-employed, this is also the deadline for paying Class 2 and Class 4 National Insurance for 2021/22. Where your tax and Class 4 National Insurance liability for 2021/22 is at least £1,000, you must also make your first payment on account for 2021/22 by the same date, unless at least 80% of your tax liability for the year is collected at source, for example, under PAYE. However, you will not be able to choose this route if: ·your PAYE income is insufficient to collect the tax that you owe (in addition to the tax on that income); ·as a result of the adjustment, you would pay more than 50% of your PAYE income in tax; -collecting self-assessment tax through PAYE would more than double the tax paid in this way; or ·your tax bill was more than £3,000 but was reduced below this amount as a result of payments on account. The need to pay any remaining tax and National Insurance for 2021/22 plus the first payment on account for 2022/23 by 31 January may present something of a financial challenge, particularly given the cost of living crisis. However, if you have a source of income that is taxed under PAYE, there is a way to spread the cost without the need to agree to a Time to Pay arrangement -- by opting to pay your self-assessment bill through PAYE. However, there are certain eligibility conditions to be met, and you must also file your 2021/22 tax return online by the earlier date of 30 December 2022. If you owe more than £3,000, you cannot use this option – it is not possible for £3,000 to be collected under PAYE and the balance to be paid by 31 January. However, if you are struggling to pay, you could consider setting up a Time to Pay arrangement to spread the cost. Am I eligible? You can pay your self-assessment tax bill for 2021/22 through PAYE if: Where you elect to pay your 2021/22 self-assessment tax bill through PAYE, your 2023/24 tax code will be adjusted to collect the tax throughout the 2023/24 tax year. This effectively allows you to spread the cost over 12 months and pay in interest-free instalments. In a climate of rising interest rates, this is an attractive option (although on the downside, it will reduce your take-home pay each month).
PAGE 5 The advantages of a flexible profit sharing ratio In a partnership, profits and losses are shared between the partners in accordance with the profit sharing ratio. This may be fixed, for example, three partners may agree to share profits in the ratio of 40:35:25; but it does not have to be. Instead, the partners can simply agree to share profits and losses in such proportions as is agreed between them. A fixed profit sharing ratio has the advantage of certainty as each partner knows at the outset what their share of the profits will be. It also enables the partners to agree up front on an allocation with which they are happy, and which is transparent. However, this may not be the best option from a tax perspective. By contrast, a flexible profit sharing ratio whereby partners agree on the profit allocation each year according to their personal circumstances will allow them to minimise their combined tax bill. While this is unlikely to be acceptable where the partners only have a professional relationship with each other, where there is a personal relationship, for example, if the partners are married or in a civil partnership, a flexible profit sharing ratio can be advantageous from a tax perspective. Example Anne and Bill are married and in partnership. They agree to share profits and losses in such proportion as is agreed between them. In 2021/22, Anne also has a job from which she earns £35,270. Bill’s only income is from the partnership. The partnership makes a profit of £70,000. Taking account of their personal circumstances, they agree to share the profits in the ratio 2:5, so that Anne receives profits of £20,000 and Bill receives profits of £50,000. Anne pays tax of £4,000 on her profits (£20,000 @ 20%). Bill pays tax of £7,846 (20% (£50,000 - £12,570)). Their combined tax bill is £11,846. If they had shared profits equally, the combined tax bill would have been £14,846 as £15,000 of the profits would have been taxed at 40% rather than 20%. Anne retired from her job on 1 April 2022. In 2022/23 her only income is from the partnership. However, Bill undertakes a consultancy role from which he earns £40,000. The profits from the partnership are £60,000 for 2022/23. As their circumstances are different this year, it is better from a tax perspective to share profits in the ratio of 5:1, so that Anne receives profits of £50,000 on which she pays tax of £7,846 and Bill receives profits of £10,000 on which he pays tax of £2,000 – a combined tax bill of £9,846. Had they continued to share profits in the ratio 2:5, Anne would have received profits of £17,143 on which she would have paid tax of £914.60 and Bill would have received profits of £42,857 on which he would have paid tax of £14,168.80, and their combined tax bill would have been £15,083.40. By adopting a flexible profit sharing ratio, they can reduce their combined tax bill by over £5,000.
PAGE 6 Can you benefit from tax-free childcare? In a climate of rising interest rates and rising inflation, every penny is likely to count. For working parents, help with their childcare costs is welcome. The tax-free childcare system can provide up to £2,000 a year tax-free. Tax-free childcare The Government’s tax-free childcare scheme allows working parents to open an online childcare account to pay for their childcare costs and receive a tax-free top-up from the Government on the amount that they deposit in the account. The top-up is worth 25% of the amount deposited to a maximum of £500 a quarter (£2,000 a year). This means that every £80 deposited by the parent pays for £100 of childcare costs until the cap is reached. A parent paying £667 a month into the account will receive the maximum top up. If the child is disabled, the maximum top-up is doubled to £1,000 a quarter (£4,000 a year). The money in the childcare account can only be used to pay for approved childcare, such as that provided by a childminder, nursery nanny or by an after-school club or play scheme. The childcare provider must be signed up to the scheme. Eligibility To be eligible for the tax-free top-up, a parent must be working, on sick or annual leave or maternity, paternity or adoption leave. A parent may also be eligible if their partner is working and they are on certain benefits and are restarting work within the next 31 days. The parent must also pass an income test. Over the next three months, the parent and their partner if they have one must earn at least: ·£1,967 where they are aged 23 or over; ·£1,909 where they are aged 21 or 22; ·£1,420 where they are aged 18 to 20; or ·£1,000 if they are under 18 or an apprentice. This is equivalent to 16 hours a week at the relevant National Living or Minimum Wage. Dividends, interest, income from property and pension payments are not taken into account. Where a person is not paid regularly, average income over the year can be used. The child The childcare provided with the money from a tax-free childcare account must be for a child aged 11 or under living with the claimant. Eligibility ceases from 1 September following the child’s 11th birthday. Where the child is disabled, they must be under the age of 17. Exclusions The tax-free childcare top-up cannot be claimed at the same time as universal credit, working tax credit or child tax credit. Employees who joined their employer’s childcare voucher or supported childcare scheme on or before 4 October 2018 cannot benefit from both tax relief under the scheme and tax-free childcare. Where more than one source of help is available, it is advisable to do the sums to see which is most beneficial.
PAGE 7 TAX DIARY DECEMBER 2022 1 December 2022 – Due date for payment of Corporation Tax for period ended 28 February 2022 7 December 2022 – Deadline for VAT returns and payments of Accounting Quarter period ending 31 October 2022 14 December 2022 – Due date for Corporation Tax quarterly instalment for “very large” companies with year end 31 March 2022 19 December 2022 – Monthly deadline for postal payments of CIS, NICs, and PAYE to HMRC 22 December 2022 – Monthly deadline for electronic remittance of CIS, NICs, and PAYE to HMRC 30 December 2022 – Deadline for online submission of Self Assessment tax returns for tax year ended 5 April 2021 31 December 2022 – Due date to file Corporation Tax for companies with 31 December 2021 year end Due date to file company accounts with Companies House for limited 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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