BUSINESS NEWS ENGLAND MAY 2023

Extending the “Income tax cash basis” for the self-employed

This HM Revenue & Customs (HMRC) consultation seeks views and feedback on proposals to increase eligibility and use of the income tax cash basis for the self-employed. These proposals aim to increase the number of businesses able to benefit from the simplifications the regime offers, making the rules easier to apply and understand, and to help businesses spend less time filing their tax returns.

What is income tax cash basis?

The cash basis is a simplified regime for calculating taxable profits for businesses with straightforward tax affairs. The regime allows businesses to calculate their taxable profit as the difference between income and expenditure when money is actually received or paid out. This eliminates accounting and tax complexities such as accruals and most capital allowances and simplifies reporting.

There are four policy proposals

The consultation will focus on the four following policy proposals, but welcomes other ideas:

increasing the turnover thresholds for businesses to use the cash basis;
setting the cash basis as the default, with an opt-out for accruals;
increasing the £500 limit on interest deductions in the cash basis; and
relaxing restrictions on using relief for losses made in the cash basis.

Who should respond to this consultation?

HMRC would like to hear from businesses, particularly self-employed businesses that use or would be eligible for the cash basis, their advisers, representative bodies, software providers, and other interested parties.

See: Expanding the cash basis - GOV.UK (www.gov.uk)

Tax

Payroll

UK Employer taxes update – Online P11D reporting

As the new tax year approaches, we highlight some important employer developments and changes to legislation and allowances relating to UK employer taxes, especially about online P11D submissions.

Spring Budget 2023

On the 15 March, the Chancellor of the Exchequer, the Rt Hon Jeremy Hunt MP, made his Spring Budget announcements.

Headline tax measures announced include reforms to capital allowances, changes to the pension allowances and a series of rate changes.

Information on all the measures announced can be found in the Budget Red Book. You can also read an overview of tax legislation and rates announced.

Reporting expenses and benefits for the tax year ending 5 April 2023

For existing employers who already submit the original P11D and P11D(b) returns online, there is no change. For those remaining employers who have submitted paper returns in previous years, from 6 April 2023, they will need to submit their original P11D and P11D(b) returns online.

HMRC is changing legislation to mandate the submission of original P11D and P11D(b) returns online through one of the following:

HMRC will no longer accept paper P11D and P11D(b) forms. This includes lists. For employers who need to submit up to 500 P11D and P11D(b) returns, the free HMRC PAYE online services can be used. For anything more, 3rd party software is required.

HMRC will publish electronic versions of the P11D and P11D(b) forms on GOV.UK, which will enable employers and agents to submit amended forms electronically from 6 April 2023.

No software changes are required, as this electronic form is not part of the current online services.

Paper P11D and P11D(b) (original or amendment) forms submitted from 6 April 2023

If an employer submits a paper P11D or P11D(b) (original or amendment) from 6 April 2023 the form will be rejected on the basis that it has not be submitted to HMRC in the prescribed manner. The employer or agent will be notified of the rejection and sign-posted to the correct process.

Please talk to us about any of these changes to legislation and submitting your returns, we will be delighted to assist!

Payroll

Cash flow forecasting

Managing your cash flow

With increasing supplier prices and economic uncertainty, managing your business’s cash and understanding the flow are now vital tools in maintaining resilience and being able to adopt flexible strategies for success.

Cash flows are a reflection of all the cash that is flowing in and out of a business. Owners can look at the direction of the cash flows for insights about the health of specific products or services and overall market patterns.

Some types of business are more likely to run into cash flow problems, while other types appear to be more resilient. If you are a business owner, you might be wondering which category your business falls into. No matter how inventive or simple your business model is, you can still have problems with cash flow. Here are our thoughts on managing the flow of cash in your business:

The first stage of understanding and predicting how funds flow is to perform a health check on your accounts. Look at your latest profit and loss statement and check that your income is sufficient to cover your expenses. If your profit is falling behind your expenses and cash flow is slowing down, you might need to take action. Prepare a funds flow statement so you know where the money goes.

Next create a yearly budget - look where cash could become tight and months where you can save to cover off the quieter times. Look at those quieter months and think about flexible work scheduling, new products or services, or other activities to tide you over.

Finally make sure you collect your money from those who owe you quickly. Set credit limits and payment terms to ensure customers follow the rules or reward customer loyalty by offering early bird discounts. If you take on new customers, make credit checks. Penalise late payers and request up front deposits or payment.

Talk to us about preparing a funds flow statement and annual budget so that you can work on your business for maximum success!

Rates and thresholds for employers 2023 to 2024

Employers should be aware that from April 2023 several statutory payment rates increase for the 2023-24 financial year.

Statutory Maternity, Paternity, Shared Parental and Adoption Pay

From Sunday 2 April 2023, Statutory Maternity Pay, Statutory Paternity Pay, Statutory Shared Parental Pay, Statutory Adoption Pay and Statutory Bereavement Pay all increased from £156.66 to £172.48 per week.

Statutory Sick Pay

From Thursday 6 April 2023, Statutory Sick Pay increased from £99.35 to £109.40. The lower earnings limit remains at £123.

Statutory Redundancy Payment

From Thursday 6 April 2023, the Statutory Redundancy Payment was limited to £669 a week. The maximum Statutory Redundancy Payment payable is now £20,070.

See: Rates and thresholds for employers 2023 to 2024 - GOV.UK (www.gov.uk)

Cash Flow

Tax

Managing inheritance tax

Like many other taxes, inheritance tax (or IHT) allowances have been frozen. This sounds generous of the chancellor at a time when the government is strapped for cash. But it actually means that we are paying more. Data from HMRC has revealed that Inheritance tax collected between April 2022 and February 2023 totalled £6.4bn, which is £900m higher than the same period last year.

The rise is actually due to the frozen tax-free allowance for inheritance tax (also known as the nil-rate band) – coupled with the rocketing rise of house prices.

It’s estimated 10,000 more families could end up paying IHT, while the Treasury could receive nearly £8 billion a year over the next few years.

How can you reduce your inheritance tax bill?

When you die, your estate is valued, and this value is subject to inheritance tax (IHT). Generally, any excess over the nil-rate band (currently £325,000) is chargeable to inheritance tax at 40%. But there are ways to reduce your inheritance tax bill.

Give it away

The easiest way to pass your wealth onto your loved ones without paying tax is simply to give it to them.

You can give up to £3,000 to loved ones each tax year without it becoming liable for IHT. If you didn’t use the allowance last year, you can combine it and pass on £6,000.
Gifts of £5,000 to children for a wedding are also protected from IHT; grandchildren can have up to £2,500.

If you die within seven years of making a larger gift, IHT will be payable. There’s a sliding scale. Die three to four years after giving, the IHT rate lowers to 32%. At six to seven years it falls to 8%.

There is another way to give. Donate at least 10% of your estate to charity and get a 4% discount on your IHT rate for the rest of your estate, lowering it from 40% to 36%.

Put it in a pension

Your pension, depending on the type of pension plan you hold, if it is kept invested could be used to pass on wealth as it is usually excluded from your estate for IHT purposes. Nominate beneficiaries for your pension should you pass away before you receive it, and IHT isn’t normally payable.

If you die after the age of 75 your beneficiaries will need to pay income tax on the money they take out.

Invest it (carefully)

Making the right kind of investments might help you avoid IHT. An individual savings account (ISA) can’t help. ISAs are exempt from income tax and capital gains tax, but they form part of your estate for IHT.

There could be other solutions such as with Alternative Investment Market (AIM) holdings.

The companies listed on AIM tend to be smaller and more highly speculative in nature, in part due to AIM’s relaxed regulations and listing requirements. However, Investing in AIM companies tends to be high risk investing and is not a route most people should consider. You should seek independent financial advice before considering investing in this market, remembering that, when investing, your capital is at risk and you could lose some or all of your investment.

Put it in trust

Setting up a trust to hold your assets could keep them out of your estate, and out of the taxman’s reach – but the position has become more complicated in recent years, and it might not always be suitable. They may still have their uses. The trustee can control the assets, rather than them being passed onto the beneficiaries right away. This might help if your beneficiaries are not known for financial prudence or are young children. You should seek Independent financial/legal advice before establishing a trust.

Insure it

You can take out a whole of life insurance policy large enough to mitigate some or all of your IHT liability. You may need to regularly review the level of cover if your estate increases in value as the original sum assured may not cover the whole IHT liability. Alternatively, you may choose a plan where the cover increases with inflation. Whichever option is chosen, have it written in trust. Your beneficiaries won’t struggle with a huge inheritance tax bill when you die, but while you are alive you will be paying monthly premiums.

Get some help

Expert advice can be vital to help work out the total value of an estate, calculate how much inheritance tax is likely to charged and understand what options are available to manage that tax bill. Advice on writing up a will to be tax efficient is also essential.

Please talk to us about any tax related questions you may have and if you need a financial adviser see: Choosing a financial adviser | MoneyHelper

Payroll And Corporation tax

Giving Shares to Employees

Where companies give shares to employees in the company or group that they work for they will generally be taxed on the difference between the market value of those shares and the amount paid, if any. The transaction also needs to be reported to HMRC by 7 July following the end of the tax year. HMRC provide a template to enable employers to report the transaction online:

See: Other ERS schemes and arrangements: end of year return template, technical note and guidance notes - GOV.UK (www.gov.uk)

Considerations around whether employers need to operate PAYE and whether national insurance contributions are payable depends upon whether the shares are ‘readily convertible assets’. Broadly, this would be where there are trading arrangements in place to quickly sell the shares.

It is generally more tax efficient for the employee if the company awards them shares under a tax-advantaged share incentive scheme such as under the Enterprise Management Incentive (EMI) scheme or a Share Incentive Plan (SIP).

Corporation Tax relief for Employee Share Acquisitions

Provided certain conditions are satisfied, the employing company will obtain a corporation tax deduction when employees acquire shares in the company or group that they work for, whether they acquire the shares directly or under a share option agreement. The amount of the deduction is the difference between the market value of the shares and the amount paid by the employee and will often mirror the amount taxed on the employee. This is a statutory deduction and will be available irrespective of whether there is a deduction for the transaction in the company’s profit and loss account.

Awarding shares to employees is a complex area so please contact us before you consider such arrangements.

Corporation Tax

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