VAT Capital Goods Scheme

Posted on 8th September 2022 by Solutions Accountancy

The VAT Capital Goods Scheme (CGS) is a means of adjusting the initial VAT recovery in respect of certain assets over either 5 or 10 years. The scheme seeks to agree a fair and reasonable attribution of VAT to taxable supplies and non-taxable supplies relating to the use of an asset over its lifetime.

The adjustment period for land and buildings is 10 years and for other CGS assets, 5 years. This adjustment period also considers any non-business use of the asset. The CGS is intended primarily for partly exempt businesses. However, businesses can change direction over the adjustment period and be subject to making CGS adjustments some years after an asset was purchased.

The CGS currently applies to:

Land and building (including extensions, alterations and refurbishments) with a cost (net of VAT) of £250k or more.
Computers, or computer equipment, with a cost (net of VAT) or £50k or more.
Ships and boats with a cost (net of VAT) of £50k or more.
Aircraft with a cost (net of VAT) of £50k or more.

The scheme does not apply if:

the assets are acquired solely for resale;
you spend money on assets which are solely for resale; and
assets are acquired, or you spend money on assets, which are wholly used for non-business purposes.

Accommodation expenses and benefits

Posted on 8th September 2022 by Solutions Accountancy

There are special rules for the provision of living accommodation to employees under certain circumstances. In most cases, employees will pay tax on any living accommodation provided by an employer unless they qualify for an exception. However, where an employee qualifies for an exception, there is no tax to pay on the provision of living accommodation. The definition of living accommodation includes houses, flats, houseboats, holiday homes and apartments. It does not include hotel rooms or board and lodgings.

An exception for living accommodation will usually apply in cases where:

the accommodation is necessary for an employee to do their job properly;
it’s customary to have living accommodation with the job and it means the employee can perform their job better; and
the employee faces a special threat to their security because of their job, and the living accommodation is in place to help protect them.

HMRC publishes a list of some of the main occupations that typically provide living accommodation. This includes agricultural workers living on farms or estates, pub and off-license managers living on premises, police officers and prison governors.

Employees provided with living accommodation can also be provided with other related benefits such as:

heating and lighting the accommodation;
the repair, maintenance and decoration of the interior;
the cost of servants, gardeners etc; and
provision of furniture, domestic appliances and other equipment.

Tackling the cost-of-living crisis

Posted on 8th September 2022 by Solutions Accountancy

The new Prime Minister, Liz Truss has, as promised, sought to tackle the cost-of-living crisis in her first few days in office. She is the fourth Conservative Prime Minister to govern the UK in a little over six years. The government has seen many major changes over this time including Brexit, the corona pandemic and now a cost-of-living crisis exacerbated by Russia’s invasion of Ukraine and volatile energy markets.

One of the Prime Minister’s first moves after her appointment was to appoint her new cabinet. This included the widely expected appointment of Kwasi Kwarteng as her new Chancellor after he previously held the position of Secretary of State for Business, Energy and Industrial Strategy. The previous Chancellor, Nadhim Zahawi, spent only two months in the job.

As expected, the Prime Minister announced to a packed House of Commons that the government will introduce an energy price guarantee from 1 October 2022 to help tackle the continually increasing energy costs. This will see the average household have their energy bills capped at £2,500. The Prime Minister also confirmed that the £400 energy rebate for UK households announced by the former Chancellor and fellow leadership contender, Rishi Sunak, would be rolled out next month as planned.

The new cap will stay in place for two years and should help to offset the previously announced 80% increase to the energy price cap to £3,549 that was set to come into effect from 1 October 2022. This will save the average household at least £1,000 a year before considering further predicted increases. The savings, for all households, will be delivered through a new ‘Energy Price Guarantee’ which limits the price suppliers can charge customers for units of gas. There will also be equivalent support for homes that do not pay direct for mains gas and electricity – such as those living in park homes or on heat networks.

The Prime Minister also announced help for businesses and public sector organisations, many of whom are facing crippling energy costs. Initially this help will be made available for six months with the possibility of further help for vulnerable businesses and industries to be announced at a later date. At the time of writing, no further details had been published.

The new Prime Minister also revealed that the ban on fracking in England will end and that up to 100 licences for drilling and fracking will be issued to help combat the energy crisis and make the UK more energy self-sufficient. This should help to ease future problems with energy supplies. A new commitment for the UK to become a net-energy importer by 2040 was also announced.

There had been calls for the government to introduce a windfall tax on energy firms to help pay for these measures, which will be at an enormous cost to the exchequer. However, there was no announcement of such a windfall tax with the Prime Minister saying such a move ‘would discourage the very investment we need to secure a homegrown energy supply’.

Hopefully these measures will reduce predicted inflation and support families and businesses across the country. It remains to be seen if any further support measures will be announced and, if and when, we will be notified of a date for the forthcoming, September emergency financial statement.

How dividends are taxed

Posted on 1st September 2022 by Solutions Accountancy

The dividend tax allowance was first introduced in 2016 and replaced the old dividend tax credit with an annual £5,000 dividend allowance. Tax was payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018 and remains fixed at that level ever since. The 1.25% increase in NIC contributions that came into effect on 6 April 2022 was mirrored by a similar increase in the tax charge on dividends.

This means that the tax rates for dividends received in 2022-23 (in excess of the dividend tax allowance) are taxed as follows:

8.75% for basic rate taxpayers will pay tax on dividends;
33.75% for higher rate taxpayers will pay tax on dividends; and
39.35% for additional rate taxpayers will pay tax on dividends.

Dividends that fall within your Personal Allowance do not count towards your dividend allowance. Depending on your other income sources and the amount of dividends received, you may pay tax at more than one rate on dividends received.

If you receive up to £10,000 in dividends, you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your Self-Assessment tax return if you already complete a return. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends, you will need to complete a Self-Assessment tax return. If you do not usually send a tax return, you will need to register by 5 October following the tax year in which you received the relevant dividend income.

Working from home

Posted on 1st September 2022 by Solutions Accountancy

If you receive no compensation from your employer, you can still claim tax relief for certain costs that arise when working from home. HMRC will usually allow you to claim tax relief if you use your own money for things that you must buy for your job, and you only use these items for work. You must make a claim within four years of the end of the tax year that you spent the money.

Costs you may be able to claim for include:

if you purchase your own uniforms, work clothing and tools for work;
the cost of repairing or replacing small tools you need to do your job as an employee (for example, scissors or an electric drill); and
cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots).

A claim for valid purchases can be made to recover actual costs or as a 'flat rate deduction'. However, you cannot make a claim for relief on the initial cost of buying small tools or clothing for work.

You may also be able to claim tax relief for using your own vehicle, be it a car, van, motorcycle or bike. As a general rule, there is no tax relief for ordinary commuting to and from your work. The rules are different for temporary workplaces where the expense is usually allowable. You should also be able to claim if you use your own vehicle to undertake other business-related mileage.

Please note, if you have agreed with your employer to work at home voluntarily, or if you choose to work at home, you cannot claim tax relief on the bills you have to pay. If you previously claimed tax relief when you worked from home because of coronavirus (COVID-19), you may no longer be eligible for relief.

Still time to claim super-deduction

Posted on 1st September 2022 by Solutions Accountancy

There is still time to claim the super-deduction allowance that offers 130% first-year tax relief. The deduction is available to companies until March 2023. The super-deduction is designed to help incorporated businesses finance expansion in the wake of the coronavirus pandemic and to help drive growth.

The super-deduction tax break was introduced on 1 April 2021 and allows businesses to deduct 130% of the cost of any qualifying investment on most new plant and equipment investments that would ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 businesses invest they can reduce their tax bill by up to 25p.

In addition, an enhanced first year allowance of 50% on qualifying special rate assets also applies expenditure within the same period. This includes most new plant and machinery investments that would ordinarily qualify for 6% special rate writing down allowances.

Only companies can claim the the super-deduction. This means that self-employed traders are unable to benefit. However, they could benefit from the temporary increase in the Annual Investment Allowance (AIA) cap to £1 million. The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery. The temporary limit of £1 million will also remain in place until 31 March 2023 before reverting to the usual £200,000 limit.

Farming – using the herd basis

Posted on 1st September 2022 by Solutions Accountancy

There are special rules which can apply to farmers and market gardeners that prepare their accounts on accruals basis. This includes special rules for farmers’ averaging relief, dealing with losses and the treatment of compensation for compulsory slaughter.

The special rules also refer to the use of the herd basis. The herd basis is a special method of calculating profits or losses which may be used by farmers who keep production livestock. Usually, farm animals are treated as trading stock. However, under the herd basis a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset.

Any farmer that wishes to use the herd basis must elect to do so. Where a herd basis election is in force, the treatment for calculating farming profits of the herd or herds covered by the election is governed by special rules. The herd basis rule can also apply where animals are jointly owned, for example, in some share-farming arrangements.

From the farmer’s point of view, the main benefits are likely to be that:

the cost of maintaining the herd can be charged against tax; and
any profit on its eventual disposal will be tax-free.

Note, that these special rules do not apply to farmers and market gardeners who calculate their profits using the cash basis.

Overdrawn director’s loan account

Posted on 1st September 2022 by Solutions Accountancy

An overdrawn director's loan account is created when a director (or other close family member) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay for personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the director’s loan account (DLA).

The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create some unwelcome consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 as interest must be charged.

There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company. If this happens, the company must deduct Class 1 National Insurance through the company’s payroll. The director will be required to pay Income Tax on the loan through their Self-Assessment tax return.

Company Share Option Plans

Posted on 1st September 2022 by Solutions Accountancy

There are a number of government approved share schemes which offer tax advantages to employees. One of these schemes is known as the Company Share Option Plans (CSOP). Under a CSOP, employees do not pay Income Tax or NICs provided the qualifying conditions are met. This applies to a qualifying option to buy up to £30,000 worth of shares at a fixed price. However, there may be a CGT liability when the shares are eventually sold.

The rules state you will not be chargeable to Income Tax if you exercise your options at a time when the CSOP scheme remains tax-advantaged and:

The exercise occurs between 3 and 10 years from the date of grant.
Where the plan rules allow, you cease employment within 3 years of the date of grant and you exercise within 6 months of the date you ceased for one of the following reasons:
- injury or disability
- redundancy
- retirement
Where the plan rules allow, and you exercise your option within three years of the date of grant and within six months of the ‘event’ because:
- your employment is transferred under the TUPE regulations;
- your employer has been sold or transferred out of the group; and
- you wish to accept a cash takeover offer for the shares, subject to certain conditions (the scheme organiser will advise you if this applies).
Where the plan rules allow your executors to exercise your options within twelve months of the date of your death.

The exercise of an option in all other circumstances will be chargeable to Income Tax.

Retaining tax return records

Posted on 25th August 2022 by Solutions Accountancy

There are no set rules for the way in which you keep your tax records, but they are usually evidenced on paper, digitally or as part of a software program.

If you are keeping records used to complete a personal (non-business) self-assessment tax return, you must keep records for 22 months from the end of the tax year to which they relate. This means that you should keep all records for the tax year ended 5th April 2022 until at least the end of January 2024. If you file a late self-assessment return, then you will need to keep your records for at least 15 months after the date you filed the tax return.

The types of records you should keep include those relating to:

Income from employment e.g., P60, P45 or form P11D forms.
Expense records if you have been required to pay for items such as tools, travel or specialist clothing for work.
Income from employee share schemes or share-related benefits.
Savings, investments and pensions e.g., statements of interest and income from your savings and investments.
Pension income e.g., details of pensions (including State Pension) and the tax deducted from it.
Rental income e.g., rent received and details of allowable expenses.
Any income which is open to Capital Gains Tax.
Foreign income.
State benefits.

Please note, this is not a complete list. You should retain any other important records that were used in preparing your self-assessment return.

If you need to keep records for other reasons, there are different time limits to consider. For example, self-employed individuals must keep business records for at least five years from the 31 January submission deadline for the relevant tax year. This means that for the 2020-21 tax year – when online filing was due by 31 January 2022 – you must keep your records until at least the end of January 2027. There are penalties for failing to keep proper records or for keeping inaccurate records.