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Health and Social Care Levy
Rumours of an imminent rise in NI rates started to circulate at the beginning of September, and were confirmed on 7 September with the publication of the government policy paper Build Back Better: Our Plan for Health and Social Care. The increase will initially take the form of a 1.25% increase on certain classes of National Insurance from April 2022, before becoming a separate ring-fenced charge from April 2023. The affected classes are:
- Primary and secondary Class 1
- Class 1A and 1B
- Class 4
Classes 2 and 3 remain unaffected.
The policy paper states that once the levy is formally separated from NI in 2023, it will be chargeable on earnings for those above State Pension age (but not pension income).
The levy will be able to be offset using the employment allowance. Additionally, companies will not have to pay the levy for certain classes of employee:
" Existing NICs reliefs to support employers will apply to the Levy. Companies employing apprentices under the age of 25, all people under the age of 21, veterans and employers in Freeports will not pay the Levy for these employees as long as their yearly gross earnings are less than £50,270, or £25,000 for new Freeport employees."
Subject to parliamentary approval, the increase will apply to both the lower and higher rates of NI, so for 2022/23 the rates for employed individuals will be 13.25% and 3.25%. For self-employed individuals, the rates will be 10.25% and 3.25%. Both of these will be subject to the usual NI thresholds, e.g. the Primary Threshold, and the policy document confirms that these thresholds will continue to apply once the levy is formally separated from NI in 2023.
At the time of writing, the NI thresholds have not yet been confirmed for 2022/23, although the examples in the document suggest that the Primary Threshold for employees will be £9,700 - e.g. "A typical basic rate taxpayer earning £24,100 will contribute £180 in 2022-23" suggests that (£24,100 - £9,700) x 1.25% = £180, but of course this is purely speculation until the thresholds are confirmed.
Employers will also be affected, with the secondary Class 1 rate increasing to 15.05% for earnings exceeding the Secondary Threshold. Class 1A and 1B will also be set at 15.05%. The government says it is important that both employers and employees contribute, but critics say that employers are likely to absorb the additional cost by restricting pay increases.
In terms of how much the increase will affect people on various levels of salary, its impossible to give a precise calculation until the NI thresholds are published. However, if we assume the £9,700 is going to be the Primary Threshold, this can simply be deducted from the earnings with the difference multiplied by 1.25% to give an estimate.
|Gross salary||Subject to NI*||Additional NI at 1.25%|
In order to prevent the avoidance of contribution by company owner managers, dividend tax rates will also increase from April 2022. The proposed rates for 2022/23 are:
- dividends falling into the dividend allowance of £2,000 - 0%
- dividends falling into the basic rate band - 8.75%
- dividends falling into the higher rate band - 33.75%
- dividends falling into the additional rate band - 39.35%
This is yet another blow for small company owners, particularly those with a single director shareholder.
The policy document confirms that the levy will apply to the whole of the UK, not just England, and claims that Wales, Scotland and Northern Ireland will be net beneficiaries, i.e. the devolved administrations will receive more in additional funding than is raised by the residents in those countries.
Key measures delayed
Earlier this year, the government announced that the basis period system would be reformed so that all unincorporated businesses would be required to adopt a tax year basis period, irrespective of their accounting period. One of the cited reasons is to bring the payment date for income tax closer to the date the underlying profits are earned. On the current year basis (and assuming the opening years rules don't apply), a sole trader with an accounting period ending on 30 April won't need to account for tax on their profits for 21 months (excluding payments on account) following the end of their accounting year. A tax year basis would cut this to nine months. When first announced, it was intended that 2022/23 would be a transition year whereby all affected businesses' basis period for the year would be extended to 5 April 2023, with any overlap relief deducted. The first year of the new tax year basis would then be 2023/24 accordingly.
On 23 September, a ministerial statement confirmed that the implementation would be delayed by at least one year, and the transition year will now be 2023/24 at the earliest. This followed the launch of a Finance Bill sub-committee inquiry into the proposals in the previous week. It is expected that a further announcement will be forthcoming at the Autumn Budget on 27 October.
The Income Tax (Digital Requirements) Regulations 2021 were also published on 23 September, and confirmed that Making Tax Digital for Income Tax (MTD ITSA) will be implemented from April 2024, one year later than initially announced. The reason for this latest postponement is to give people enough time to prepare for the changes in the wake of the COVID-19 pandemic.
Subject to any further delays, sole traders (regardless of their accounting date) and landlords with annual turnover exceeding £10,000 will now be mandated into MTD ITSA from 6 April 2024. General partnerships will follow in 2025, with other types of partnerships (e.g. mixed partnerships, LLPs etc.) to be allocated start dates later on.
Once mandated, the business will be required to keep digital records and send quarterly summaries of income and expenses to HMRC using compatible software. There will be no change to the current system of payments (at least initially), i.e. the tax will be due on 31 January following the end of the relevant tax year, with two balancing payments due where the circumstances warrant them.
The entry threshold of £10,000 will now be measured against the profits for 2022/23. It is hoped that this will remove any temporary effect of the pandemic on the benchmark results.
There is a useful HMRC webinar on MTD ITSA available by signing up here.
Additionally, the new penalty system that was scheduled to be introduced alongside MTD ITSA has also been postponed until 2024/25.
The furlough scheme ended on 30 September. The final claims need to be made by 14 October, with any amendments made by 28 October.
A qualifying furnished holiday let (FHL) enjoys a number of favourable tax breaks - including business asset disposal relief, and the ability to claim capital allowances and rollover relief - when compared with non-qualifying properties.
FHL status is subject to occupancy conditions. The main two rules are that the property must be available for occupation as furnished holiday accommodation letting for at least 210 days in the year, and that it must actually be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. There are further rules regarding longer-term lettings, but we are not considering those here. The tests generally apply for the tax year but can be applied to a different 12-month period for new lets, or ones that cease part-way through a tax year.
In 2020/21, owners of holiday accommodation were hit by COVID-19 lockdown restrictions, meaning that many will not meet the occupancy tests. This could cause a loss of FHL status. An averaging election is unlikely to help, as the restrictions will have affected all properties. However, a period of grace election could preserve the status.
The election simply treats a non-qualifying year as a qualifying year, preserving the entitlement to the various tax breaks. It can be made if there was a genuine intent to meet the conditions. However, an election cannot be made if there has never been a year where the conditions were met - so it won't help new FHL landlords. Once a period of grace of election is made, a further election can be made for the subsequent year, but after that the property must meet the conditions or it will lose its FHL status.
The election can be made on the tax return for the relevant year, or it can be made by writing to HMRC, e.g. where the return has already been filed.
Eight new Freeports were announced earlier this year, with each offering operators within the sites a number of tax incentives. The sites are:
- East Midlands Airport
- Felixstowe & Harwich
- Humber Region
- Liverpool City Region
- Plymouth & South Devon
A Freeport requires a primary customs site located near an air, sea or rail port. A number of special customs rules apply within the zones, including duty deferral, inversion, and exemption, as well as simplified declaration requirements. In order to take advantage of the tax incentive, a "tax site" must be designated within the Freeport. The reliefs cannot apply until the designation date.
Enhanced capital allowances
There are enhanced allowances for plant and machinery and structures and buildings for use within the freeport tax sites. A First-Year Allowance of 100%, with no upper limit, is available for expenditure on plant and machinery primarily for use within a Freeport tax site as long as it is incurred before 30 September 2026 (though this date may be extended).
There is also an enhanced straight-line 10% Structures and Buildings Allowance for expenditure incurred on constructing, renovating or acquiring new buildings/structures within the tax site.
Stamp Duty Land Tax (SDLT)
If land within a designated tax site is acquired after the designation date and before 30 September 2026, SDLT relief may be available depending on the extent to which the land acquired is "qualifying". Land will be qualifying if it is purchased with the intention to use it in a qualifying manner. In turn, this means that the land must be used, developed or exploited in the course of a commercial trade or profession, either by the purchaser or a connected person. The amount of relief depends on how much of the consideration is attributable to the qualifying Freeport land as follows:
- 90% or more - full relief
- less than 90% but at least 10% - full relief on the qualifying proportion
- less than 10% - no relief.
A number of examples are available on GOV.UK.
Relief does not apply if the land will be:
- used as residential property
- developed or redeveloped to become residential property
- held as stock of the business to be resold without having been developed or redeveloped.
Once claimed, the qualifying land is subject to a control period of three years (or until the land is sold), whereby relief may be clawed back if the land is not used in a qualifying manner.
Once the tax sites are designated, eligible businesses located within them will be able to claim full relief from business rates for five years (from the point relief is first granted). This will be administered by Local Authorities. More information is available here.
From April 2022, employers of new qualifying employees will enjoy an enhanced Freeport Upper Secondary Threshold, meaning they will pay no Secondary Class 1 NI on the employees' earnings up to the Upper Secondary Threshold for up to three years. The employer must have a physical premises within the tax site, and the employee must spend at least 60% of their employed time working within a single freeport tax site. At the time the policy was published, it was stated that the Freeport Upper Secondary Threshold will be £25,000 per annum.
When buying a commercial building, the price may include VAT if the vendor has opted to tax the property. If the buyer is VAT registered and will be using the building wholly for the purposes of the trade it will be able to reclaim this input tax. However, this can mean that a large amount of money needs to be lodged with HMRC temporarily, which can affect working capital in the short term. In addition, the claim for input tax could be restricted if the business is partially exempt.
As a minimum, the buyer needs to obtain a copy of the letter HMRC will have sent the vendor confirming the option was valid. If it transpires that the vendor should not have charged VAT, the input tax claim will be refused. Obtaining a copy of the letter if the original has been misplaced can take time, and lead to delays in completing the purchase. But it may be possible to sidestep the problem altogether.
Revoking the option
It would be worth asking the vendor when the option was made, as it can be revoked if more than 20 years has elapsed. To do this, the vendor would need to complete Form 1614J and submit it before the date the sale price becomes legally binding. On the face of it this is straightforward, but the vendor may be reluctant if there is a knock-on effect on their own VAT returns, but it is certainly worth the buyer asking the question.
As a bonus, the buyer may also save some SDLT - which is charged on the VAT inclusive price.
Q1. I have been on the VAT flat rate scheme for several years. I have two business activities that fall into different categories with differing FRS percentages. I have apportioned VAT between the rates, but a chance conversation with an old colleague leads me to believe this is incorrect. What do I need to do?
A: Under the FRS, you should not apportion VAT where you have multiple activities. Instead, you should use the FRS percentage that corresponds to the activity with the greater percentage of turnover. As an example, suppose an IT consultant (FRS percentage 14.5%) also offered computer repairs (FRS percentage 10.5%). If the turnover from repairs exceeded the turnover from consultancy work, they would use 10.5%. You will need to go back and correct your calculations for the last four years. This might result in an additional liability or a refund depending on the circumstances. If the net error is less than £10,000 you can include it on your next VAT return, otherwise you will need to make a standalone disclosure to HMRC using form VAT 652.
Q2. I am preparing my tax return for 2020/21 using software. I have £10,000 of employer pension contributions as part of my remuneration annually. However, after realising some gains on investments in the year I also paid approximately £32,000 into a plan in the year. The return is showing an annual allowance charge of £4,000, but this looks excessive to me as I've only exceeded the allowance by £2,000! What's going on?
A: Don't forget that the £40,000 annual allowance refers to the amount of gross contributions that can be made with tax relief. Your personal contributions will have attracted basic rate tax relief, as your provider will have received an additional £8,000 from HMRC. This means your total gross contributions, including the employer payments, were £50,000 not £42,000. The charge is therefore based on £10,000, not £2,000.
If your contributions in previous years were lower, e.g. if it were just the employer contributions that were made, you can claim to carry forward the unused amount for up to three years - there should be an option somewhere in your software to add this information in. Hopefully this will get rid of the charge for you.
Q3. I am buying some land in Shropshire. I am trying to understand the SDLT position, which is complicated due to the fact that some of the fields lie across the Welsh border. Most of the land is on the English side, so do I just file a return to the English authorities?
A: No, this is known as a cross-border transaction and will require the consideration to be apportioned on a "just and reasonable" basis. A return with the apportioned amounts will then need to be made to each tax authority. HMRC may challenge an apportionment if it appears unreasonable, and so it is probably best to speak to a conveyancing solicitor with experience in cross-border transactions.
1 - Due date for payment of Corporation Tax for accounting periods ending 31 December 2020
5 - Deadline to notify HMRC of tax liability where not already in self-assessment
7 - Electronic VAT return and payment due for quarter ended 31 August 2021
14 - Claim deadline for employers for furlough days in September
14 - Quarterly CT61 form due
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/10/2021
22 - Payment deadline for Class 1B NI on PAYE settlement agreements for 2020/21
31 - Paper self-assessment return filing deadline