LHP Year-End Tax Review ❄️
LHP’s Year-End 2021-2022 Tax Review
With the economic uncertainty we are currently seeing, there has never been a more opportune time to look at the financial health of your business. Below we round up tax changes in 2021-2022 with action points you may need to take, from handling rising taxes to maximising on tax reliefs and benefits. It’s important to note that your personal circumstances need assessing when considering whether a relief/plan is suitable or advantageous. So speak to a tax expert, we are here to help at LHP. In this year-end review:
- Rising Taxes and Wages
- Claiming for Company Losses
- Benefits in Kind
- Electric Company Car Benefits
- Preparing for Higher Dividend Tax
- Accelerating Tax Relief
- R&D Tax Breaks
- Letting Properties
- Selling Your Business
- Electing in Good Time
- Risk With Tax Breaks as a Reward
- Making Tax Digital
- Reducing CGT Bills
1. ❄️Taxes and Wages Are Rising
The Autumn Budget saw the announcement on rates of most classes of national insurance contributions (NIC) – specifically how they will temporarily increase by 1.25% for the year starting 6 April 2022 to raise funds for the NHS and social care.
These NIC rate increases will be replaced by the Health and Social Care Levy (HSCL) from 6 April 2023 which will also be set at 1.25% of income. The HSCL will apply to earned income or trading profits of people working beyond state retirement age, unlike Class 1 employees’ NIC and Class 4 that is payable by the self-employed.
To ensure taxpayers who take their income in the form of dividends also pay their fair share of tax, all tax rebates applicable to dividends will also rise by 1.25% from 6 April 2022. The combination of these 2 rate rises will have a significant effect on tax and NIC payable by shareholders of family companies.
All employers need to budget for increases in the rates of National Living Wage and National Minimum Wage from 1 April 2022. Also from 1 April 2022, all VAT registered businesses will be required to submit their VAT returns using MTD-compatible software and to keep their VAT records in a digital format.
HMRC is introducing a new system of penalties to encourage taxpayers to comply with MTD to pay their VAT on time. We recommend you undertake an annual review of your financial affairs, in order to check you are not paying more tax than you need to and whether the structures you set up in the past are still fitting. Between now and the end of the tax year (5 April 2022) is a good time to assess whether you have claimed all relevant allowances and are well defended against high tax charges as you can be.
Of course, the personal circumstances of each individual must be taken into account in deciding whether any particular plan is suitable or advantageous, but these suggestions may give you some ideas. We are happy to discuss them with you in more detail. Let’s Talk.
2. ❄️Claiming for Company Losses
Companies can take advantage of an extended carry back period for trading losses arising in accounting periods that end between 1 April 2020 and 31 March 2022.
The trading losses from these periods can be carried back to set against total profits of accounting periods ending in the previous 3 years. There are £2m caps (one for each financial year in which the loss is generated) for the losses carried back to the 2 earliest years of the 3.
Claims for losses can be submitted as soon as the accounting period has ended as long as the loss can be quantified appropriately and supported with draft accounts or management accounts. Your company does not have to finalise its accounts for the year or submit its corporation tax return before making a claim.
HMRC will accept loss claims for up to £200k for this extended carry back period outside of the corporation tax return. Remember any covid business support grants the company has received form part of its trading income for the accounting period so will reduce any trading loss.
Get in touch to find out if your company can claim extra loss relief to generate repayments of tax. Let’s Talk.
3. ❄️ Benefits in Kind
Many employees were required to work at home in 2021. Their employers may have helped facilitate this by providing equipment or paying to boost their home internet service. Generally these costs are not taxable on the employee if there is no significant private use of the asset or service.
Other benefits, such as company cars remain taxable even if the employee was furloughed. We can help you check which benefits are taxable and which are tax free in 2021/22. In some cases an employee can avoid being taxed on a benefit if they ‘make good’ the value of the benefit by reimbursing their employer. There are strict time limits for doing this.
All reimbursments of taxable non-payrolled benefits for 2021/22 must be made by 6 July 2022, which aligns with the date ofr submitting the P11D forms. the dates for making good on payrolled benefits-in-kind provided in 2021/22 are:
- 1 June 2022 for the value of road fuel used
- 5 April 2022 for all other benefits.
The deadlines for making good do not apply to interest payable on beneficial loans and overdrawn directors’ loan accounts. Where such loans exceed £10,000 at any point in the tax year there is a taxable benefit if insufficient interest is paid. This taxable benefit can be avoided if interest ‘at least equal to’ the official rate is reimbursed, where the borrower is contractually obliged to pay it. The official rate for 2021/22 is 2%. Despite this exclusion for beneficial loans, most people should try to pay any interest due on a loan by 6 July following the tax year to avoid any doubt as to whether a benefit arises at the time the P11D form is being prepared.
Check which benefits are tax-free for 2021/22 and to avoid P11D issues on other benefits, meet the deadline for making good, the benefit. Let’s Talk.
4. ❄️ Electrics Benefits
The taxable benefit for having the private use of an electric company car is currently just 1% of list price. From 6 April 2022, the taxable benefit will rise to 2% of list price. This is great, as the company will cover the capital cost of the car, the insurance and any repairs or servicing.
If you want a hybrid car, those models that can drive at least 130 miles on electric power only also have a taxable benefit of just 2% of list price. Driving an electric van is even more beneficial, as there is zero taxable benefit for the driver!
Where a business buys a new electric car or van, it can claim 100% of the cost as a capital allowance in the year of purchase. For an electric car to qualify for this 100% First Year Allowance it must be acquired brand new (not second-hand) before 1 April 2025.
Companies that acquire brand new vans can claim a super-deduction of 130% of the price, if the van is acquired before 1 April 2023. Where the business installs electric vehicle charging points before 31 March 2023, it can claim 100% of the cost in the year of purchase. There are also government grants available for individuals who install electric vehicle charging points at their home.
Where employees are permitted to freely charge up electric vehicles at work, there is no taxable benefit for the use of that electricity. Drivers of electric company cars who pay for their own charging can claim a tax-free allowance from their employer of 4p per business mile driven.
Drivers who use their own electric cars for business journeys can claim the normal mileage rates of 45p per mile for the first 10,000 miles and 25p for any additional business miles driven in the tax year.
Consider the tax incentives for electric or hybrid company cars, talk to us!
5. ❄️ Preparing for Higher Dividend Tax
To balance the increase in NIC payable on salaries and self-employed profits, the tax you pay on dividends will also increase by 1.255 from 6 April 2022.
The dividend allowance has been frozen at £2,000; you pay zero tax on dividends which fall within that allowance. Any additional dividends are charged to tax at a rate dependent on which tax band they fall into (see table). If you have surplus cash held within your own company, you may wish to consider paying out a higher dividend to the shareholders before 6 April 2022, rather than later. Where different shareholders in your company hold slightly different classes of shares, the dividends paid out can be tailored to the shareholder’s needs.
The company needs to have sufficient retained profits to extract as dividends and you should first check that the cash is not needed for other purposes, such as paying tax bills or investment in plant. We can calculate how much you can extract from your company as dividends in 2021/22, to beat the dividend tax rise that applies from 6 April 2022. However it’s also important that bringing forward dividends into 2021/22 won’t push the recipients into higher tax bands.
|Dividends Falling Within||2022/23||2021/22|
|Basic rate band||8.75%||7.5%|
|Higher rate band||33.75%||32.5%|
|Additional rate band||39.35%||38.1%|
Have you used all your basic rate band and dividend allowance for 2021/22? Talk to us.
6. ❄️ Accelerating Tax Relief
The end of the accounting period for your business is a key point for tax planning. You can save or delay tax by advancing the acquisition of assets to before the end of your accounting period. This permits you to claim the capital allowances associated with those assets earlier.
If you trade through a company, you can claim a super-deduction of 130% of the cost of new plant and machinery purchased before 1 April 2023. This super-deduction only applies to brand new equipment, including vans and trucks, but not cars.
Expenditure on new equipment fixed to buildings, e.g. lifts, air-con and solar panels can qualify for a special 50% deduction if purchased by April 2023. Where the equipment is not brand new or your business is a sole-trader or partnership, the cost of new equipment is likely to fall within the Annual Investment Allowance (AIA). This gives a deduction of 100% of the cost as a capital allowance in the year of purchase. The maximum amount that can be claimed under the AIA per year is £1 million until March 2023.
Complicated transitional rules can apply for these allowances where an accounting period straddles 31 March 2023.
The cost of constructing, renovating or converting a commercial building to be used by your business qualifies for a 3% pa Structures and Buildings Allowance (SBA). Costs connected with residential accommodation don’t qualify for the SBA, nor do the costs of acquiring land or obtaining planning permission. We can advise you about the type of capital allowance or tax relief for which your proposed expenditure will qualify.
Do you need help reviewing the timing of asset acquisitions to maximise capital allowances? Talk to us.
7. ❄️ R&D Tax Breaks
Companies that invest new production methods or products can claim enhanced tax relief for Research and Development (R&D) costs. Small and medium sized companies can claim 230% of qualifiying R&D costs and 14.5% payable tax credit if this extra deduction results in a loss!
This is a very attractive relief and is easy to claim. You can ask HMRC for advance assurance that your company and its R&D projects will meet the requirements. We can help you do this. The main benefit of advance assurance is that HMRC won’t raise further questions about your initial R&D claim or for R&D claims submitted in respect of the next 2 accounting periods.
You need to apply for the R&D tax relief within 2 years from the end of the accounting period in which the R&D costs were incurred. So if your company has been innovative in the recent past, don’t delay your application for R&D tax relief!
Check the R&D expenses for which your company can claim an enhanced deduction. Talk to us.
8. ❄️ Letting Properties
Individual landlords of residential properties can no longer deduct interest or finance costs from their rental income for tax purposes. In place of the blocked interest, the landlord receives a 20% tax credit to set against their income tax bill.
This restriction of interest deductions doesn’t apply to corporate landlords nor to individuals letting furnished holiday accommodation (if qualifying conditions are met). Where you property business is supported by borrowing, the restrictions on interest deductions could push your total income into higher tax bands, leading to the loss of personal allowance or potential clawback of your family’s Child Benefit.
If your residential property business is supported by large borrowings, you should consider how you could restructure that business to reduce your higher tax bills. Your choices may include:
- selling one or more residential properties to reduce borrowings
- selling some residential property and reinvest in commercial buildings where interest restrictions don’t apply
- lettings homes as furnished holiday lets
- transferring the properties into a company
The last option is not easy as the lender will have to agree to transfer your property loans to the company. The transfer of properties is likely to incur land tax charges for the company and may well generate a taxable capital gain in your hands.
Individual landlords with turnovers of no more than £150k per year should use the cash basis to draw up their accounts. This has the effect of taxing income in the year it is received and relieving expenses in the year they are paid. It may benefit you if your tenants tend to pay late. You can opt out of the cash basis if you wish. We can help you model the financial future for your residential property lettings – let’s talk.
9. ❄️ Selling Your Business
If you’re wondering whether or when you should dispose of your business, a sensible first step is to form an outline plan. The sale of a successful trading company will generate a capital gain. This would normally be taxed at 20% after deduction of your annual exemption (£12,300 for 2021/22).
Business Asset Disposal Relief can reduce your tax rate to 10% on gains of up to £1m. However, this is a lifetime limit, so if you have already taken advantage of this relief in the past (it was formerly called Entrepreneur’s Relief) you may not be able to make a further claim on the disposal of your business.
If you want to be sure of benefiting from capital gains reliefs, take advice and plan early.
Be prepared for selling your business, by planning early! If you need help exiting your business, we’ve experts at LHP to handle these matters who can ensure you a good position. Talk to us.
10. ❄️ Electing in Good Time
Events don’t always turn out as expected. For example, you may need to wait for a later profit or loss to arise before you can judge whether it’s right to elect to use losses in an earlier year. This is why the law allows you extra time to submit a tax election or claim. The elections you may need to make by 31 January 2022 for the 2019/20 tax year include:
- to set trading losses against your other income (see below regarding pandemic losses)
- to average the profits made from farming, or as an author or artist
- to treat a property as continuing to qualify as a furnished holiday letting if it qualified as such in 2018/19 but otherwise would not in 2019/20.
You need to wait for a certificate to arrive before making a claim for your investment under the venture capital schemes – EIS, SEIS or SITR – so the claims period for those schemes is five years after the tax return submission date. Corporate tax claims generally need to be made within 2 years of the end of your accounting period in which the transaction occurred.
We can help you check what claims or elections you need to make, let’s talk.
11. ❄️ Risk With Tax Breaks As a Reward
The government encourages individuals to make high-risk investments in small trading companies or charities by providing income tax relief for investors in the following schemes (limits for 2021/22):
- Social Investment Tax Relief (SITR) – 30% relief on up to £1m
- Enterprise Investment Scheme (EIS) – 30% relief on up to £2m
- Seed Enterprise Investment Scheme (SEIS) – 50% relief on up to £100k
- Venture Capital Trust (VCT) – 30% relief on up to £200k
The amounts invested under EIS, SEIS or SITR can be treated as made in the previous tax year if the investment limit for the earlier year has not been reached. When you dispose of shares acquired under these schemes, any capital gains you realise will be free of CGT if you’ve held the investment for at least 3 years (except VCTs, where there is no minimum period).
Tax due on capital gains made from selling other assets can be deferred by reinvesting under the EIS or SITR within 3 years of making the gain. However, the SITR scheme will only be open for investments until 5 April 2023.
Reinvesting the gain in SEIS shares will halve the tax on that gain if the investment limits and conditions are not breached. If you acquire unquoted trading company shares on or after 17 march 2016 in a company for which you do not work and hold them for at least 3 years, any gains made on the disposal can qualify for Investors’ Relief, meaning the rate of CGT due is only 10% on gains up to £10m.
These tax reliefs won’t turn a bad investment into a good one but they will make a good one better and will reduce the risk involved in investing. You should however always take advice from a qualified accountant on where to put your money. If you’re thinking of investing in one of these schemes, you may want to do so before 6 April 2022 to maximise the benefit.
Are tax-favoured investments worth discussing with your advisors, despite the risk? Talk to our experts at LHP to discover the answer. Let’s Talk.
12 ❄️ Making Tax Digital (MTD)
For VAT periods beginning on/after 1 April 2022, it will be compulsory to keep your VAT records in a digital format and file all VAT returns using MTD-compatible software. We can help you with this if you’re not already MTD compliant, but we need to work together to ensure your accounting system is ready. This is a good opportunity to review whether your current processes really meet your business needs. Spreadsheets are counted as digital records but if that is your only means to record transactions, you will need special software like Xero or QuickBooks to submit VAT returns to HMRC.
Retail businesses don’t have to record every single sale digitally. They can instead record just ‘total of the daily takings’. However, for all purchases you need a digital record of the date (tax point), net value and the VAT paid on the item.
Only a very few taxpayers will qualify for an exemption from the MTD regime, on the basis of being digitally excluded. The extra cost of converting to digital won’t be regarded as a reasonable excuse for non-compliance.
If your turnover is way below the VAT deregistration threshold of £83,000 PA, you may want to consider cancelling your VAT registration. However, after that you won’t benefit from claiming back VAT on expenses. Also, MTD for Income Tax will start from 6 April 2024 for all sole traders with turnover that exceeds £10,000 per year. – so it’s probably best to bite the bullet if you do claim back VAT on expenses.
Is your VAT accounting system ready for Making Tax Digital? If not, let’s talk.
13 ❄️ Reducing CGT Bills
Everyone has an annual exemption for capital gains tax (CGT) of £12,300 for 2021/22. This is wasted if you don’t make capital gains in the tax year. You can’t carry forward any unused exemption to a different tax year or transfer exemption to another person.
If you’re planning to dispose of assets that will create capital gains, you can save tax if the disposals are spread over several tax years. This is easy to do if your assets can be split into separate chunks, like shares. Each sale can then be calculated to produce a gain of less than £12,300.
If the asset must be sold in one go, you could reinvest part or all of the gain in Enterprise Investment Scheme (EIS) shares, but you must be prepared to take a risk. This will defer the gain until the EIS shares are sold. You can sell sufficient EIS shares in later years, so that the gains chargeable are covered by your annual exemptions.
Gifts to your spouse or civil partner don’t create immediate taxable gains, as the recipient takes over the transferor’s CGT cost. You can use this transfer between spouse to share the ownership of a property, and hence the gain, and thus use two annual exemptions in one tax year on eventual disposal of the asset.
When you give a valuable asset to another relative, the disposal is treated like a sale at market value and the deemed gain is taxable. However, where certain assets (e.g. family trading company shares or agricultural property) are given to other family members, a capital gain may be avoided if an appropriate ‘gift relief’ claim is jointly made. This will lead to the recipient having a bigger capital gain on eventual disposal of the asset than would otherwise have been the case.
You should always take specific legal advice when giving away land or buildings, or a share in such property. Land Transaction Tax may be payable if the property is mortgaged.
Are you taking full advantage of the capital gains tax exemption? Let’s Talk.
All that remains to say is to get in touch for an informal chat on any of the above if needed.
Nadolig Llawen a Blwyddyn Newydd Dda.