Shenward Archives

Taxes are a fact of life. No-one likes paying them but if we didn’t there would be no NHS, no welfare state and no public services.

As the saying goes ‘Money Makes the World Go Around’ and without people paying taxes the world would stop turning. Not literally, but you know what we mean!

Given that tax is intrinsically unpopular, it’s no surprise that the Government prefers them to be…less obvious. We won’t say “hidden” because that suggests skulduggery but if they are not quite so blatant, all the better.

So what are these, ahem, “less obvious” taxes and how can we spot them?

National Insurance – it’s just another tax

National Insurance – or “paying your stamp” – comes off your wages. It’s right there, it’s a big chunk and it doesn’t make happy reading on your pay slip. The impression given is that it’s going towards your pension. It actually isn’t. It’s paying for today’s pensions.

So NI isn’t hidden. Or at least YOUR part of it isn’t hidden. What’s not so obvious is that your employer also pays a contribution on your wage. So your boss pays for the privilege of employing you! Critics would call it a tax on jobs. In total NI can be more than the Income Tax on your wage.

Excise Duty – it’s a tax on a tax!

The tax we pay on petrol has become more obvious in recent years but we’ve still come to accept high prices at the pumps.

You only have to fill up a hire car abroad or do a double-take at the prices at the filling stations to see a huge discrepancy in fuel prices in the UK and Europe, for example. Oil is oil. The difference is tax.

The UK has excise duty on fuel and we see the Chancellor often tinker with it at Budget time. The oil company and the retailer calculate their costs and then add the excise duty. Then they add VAT on top. So we end up paying a tax on a tax. I’ll leave you to digest that one…

Air Passenger Duty – a holiday tax

When you’re all packed and ready to go on holiday the last thing you want to think about is tax. But in 1994 the UK Government introduced Air Passenger Duty and it costs up to £176 per flight from UK airports. It was brought in as a revenue raiser and had little to do with cutting the environmental impact of flying.

Insurance Premium Tax – a tax on something else we don’t like to pay out for

This was another tax introduced in the 1990s when the Government decided the insurance industry was “under-taxed” because it wasn’t subject to VAT. Car insurance, home insurance and pet insurance are taxed at 12% while travel insurance, electrical appliance insurance and some vehicle insurance is 20%.

Tariffs – don’t mention Brexit!

Consumers may be blissfully unaware of import tariffs and excise duty on goods coming in from overseas. With negotiations over a Brexit deal underway these are the kind of issues that prove very thorny indeed and we all have to pay.

You can’t avoid most of these taxes if you want to live a “normal” life and we all do need to pay our fair share to help society and protect those less fortunate. So what can we do minimise our tax burden?

Five simple ways to reduce your tax bill and not feel guilty about it

1. Salary Sacrifice

Take a portion of your gross salary and put it into a pension, childcare vouchers or a bike-to-work scheme. The cost comes off your gross salary before the taxman takes his cut, meaning you pay less tax.

2. If you’re self-employed pay into a pension and claim all your allowable expenses

Paying into a pension is a great way to save for the future. For every £100 invested by a basic rate taxpayer the Government adds another £25. Every business can claim expenses against its tax liability but those allowance expenses will be different for each business. Claim what you are entitled to. If you’re not sure, take advice.

3. Marriage Tax Allowance

The marriage allowance lets you transfer £1,250 of your Personal Allowance to your husband, wife or civil partner, reducing their tax by up to £250 in the tax year. It can also be back-dated to 2016. Marriage has a financial perk but you must have tied the knot!

4. Working From Home Tax Relief

If your employer requires you to work from home you’ve always been able to claim for extra costs. That’s become a big issue in 2020 with most people told to work from home during the pandemic. Even if you’ve worked from home for just one day you can claim a whole year’s tax relief. You can claim £1.20 a week if you’re a basic-rate (20%) taxpayer, £2.40 a week if you’re a higher-rate (40%) taxpayer or £2.70/week if you’re an additional-rate taxpayer (45%). So over the year, that’s £62.40 for basic-rate taxpayers, £124.80 for higher-rate taxpayers, and £140.40 for additional-rate taxpayers.

5. Work Clothes Allowance

From hair nets for catering to steel toe-capped boots for builders, if your employer requires you to wear protective clothing at work you can claim an allowance, even if your employer provides the gear for you. It’s not a fortune but every little helps. Basic rate taxpayers can claim back £12 a year, higher-rate taxpayers twice that.

There’s no getting away from tax but you shouldn’t have to pay more than your fair share. It pays to be tax savvy.

Financial Support Available During the Second Lockdown

Last week, just days after the Chancellor Rishi Sunak announced amendments to the Job Support Scheme, we were notified as a nation that a second national lockdown would be enforced and therefore changes would be made to the proposed financial support packages.

Whilst this brings good news to many, the endless changes and amendments to the various schemes is causing widespread confusion. So where do we stand in terms of the financial support available as we head into lockdown?

Let’s explore!

Furlough scheme extended

In a shock turn of events, Chancellor Rishi Sunak announced that the Furlough Scheme would be extended until March 2021, despite originally announcing it would only be available until some point in December.

Whilst the majority of the criteria and rules remain the same as when it was first introduced, there are some significant elements which are worth noting.

As before, the government will pay 80% of employees’ wages up to a cap of £2,500. This grant must be paid to the employee in full.
Neither the employer nor employee needs previously to have used the JRS, however, to be eligible under this extension, employees must be on an employer’s PAYE payroll by 23:59 30th October 2020. This means a Real Time Information (RTI) submission notifying payment for that employee to HMRC must have been made on or before 30th October 2020. This is a significant change from the JRS in recent months, employees could only be furloughed if they had been prior to 30 June 2020.
Employers should continue to pay the employee for hours worked in the normal way.
Employers will only be required to cover National Insurance and employer pension contributions for employees on furlough.
There’s no change to the level of the scheme available in August i.e. employers can claim a grant of 80% of hours not worked however they are required to settle employers’ national insurance contributions and pensions contributions.
The Job Support Scheme (JSS) which was due to replace the furlough scheme has been postponed until the furlough scheme ends.
Flexible furloughing will continue to be available, as well as full-time furloughing.

The government has announced they will soon be confirming when claims can first be made, but as far as we know, there will be no gap in support between 31 October when the scheme was originally due to end.

Financial help for the self-employed

The Self-Employed Income Support Grant is being extended from 40% to 80% for the period of the lockdown and up to March at the latest.

The government is providing a total of £4.5 billion worth of grants between November and January.
Maximum grants increase to £5,160.
You must have qualified for the first and second grants earlier this year to be eligible for the new grant, which is the third round of grant funding for the self-employed. However, you do not need to have claimed these earlier grants to be eligible for this new grant.
The grants are available to the self-employed and those in partnerships, but not for limited company directors.
To qualify, you must declare an intention to continue trading.
You will need to be experiencing reduced demand due to Covid-19 or have been previously trading but unable to do so now because of the pandemic.
The grant claim will be based on your trading profits in the 2018/19 tax year, or average profits in 2018/19, 2017/18 and 2016/17.

Despite this extension, there are still thousands of self-employed who will be excluded from any form of financial support, raising cause for concern as the pandemic continues to disrupt their ability to earn.

New Style Jobseeker’s Allowance (JSA) and Universal Credit

The new style jobseeker’s allowance has been introduced for those who are unable to work due to the pandemic and do not qualify for other forms of support.

You could get this if:

you usually work less than 16 hours a week
you are under State Pension age
you have made enough National Insurance contributions over the last 2 to 3 years

It’s worth noting that your savings and partner’s income will not affect how much you can claim.

Depending on your circumstances, you may also be able to claim Universal Credit at the same time as JSA. This can include additional amounts for things like rent or the costs of raising children.

The criteria for Universal Credit states:

you must have less than £16,000 in savings
you or your partner must be under State Pension age

As always, if you require support or have any questions in relation to the updated schemes, please get in touch with Sherad Dewedi via sherad@shenward.com.

How can R&D Tax Credits benefit your business?

‘What are R&D Tax Credits?’ It’s a question that should be asked more often in the world of business, especially since it’s an incentive to encourage innovation in UK businesses – a cash injection for any research and development that a business has completed.

Sadly, however, unless you’re a business supported by a team of accountants or business advisors, you’re unlikely to know just how much of a cash injection you could be receiving.

If you’re an active scroller on social media, or you like to keep up with the news, you’ll likely be aware that a recent report found manufacturers especially could unknowingly be missing out on this cash injection – and we’re talking thousands of pounds!

But it’s not just manufactures, and we’re here to take a look at how all businesses can take advantage of the rewards for research and development and continue their innovative work.

R&D Tax Credits defined

Research and Development Tax Credits are an incentive developed by the government in a bid to encourage and reward UK businesses for continuing innovation – a vital factor in the strength of the economy.

Whilst they’re available to businesses of all sizes who actively participate in research and development, there is certain criteria which any claimant must meet.

To make a claim under the R&D SME Regime

The finance tests must be met:

Employ less than 500 employees, and
Have a turnover of less than £100m, or
Have an £86m balance sheet.

If the above criteria are met, the project for which businesses are claiming for will then need to be considered. Some of the most popular projects include:

Development of processing and handling techniques.
The design, testing and trialling of prototypes and demonstration plant.
Scaling up of production processes
Adaption to include new or alternative materials – driven by legislation, environmental aims or operational efficiency.
Integration of new technology with old systems.

In summary, for an activity to qualify it must be technological or scientific in nature to qualify.

It’s important to note that if the project in question has received state aid, subsidies or grants, then that project won’t be considered via the SME Regime scheme.

To make a claim under the RDEC Regime

If you’re a business who doesn’t meet the criteria above, don’t worry. It doesn’t necessarily mean you’ll miss out. It’s a little more complicated, and a little less beneficial, but you could still claim 9.7% cash back under the RDEC Regime.

Again, you’ll need to discuss the project itself if you’re looking to claim via this regime.

How do R&D Tax Credits work?

As we mentioned, the whole point of R&D Tax Credits is to reward those businesses innovating to help the economy and individuals thrive, so it’s no surprise that the schemes are centred around financial gains.

Let’s explore.

Small and medium sized enterprises (SME) R&D Relief

SME R&D relief allows companies to:

Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction: and/or
Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

For example, let’s assume a company has incurred £100k of R&D qualifying expenditure:

	£’000
The net profit before tax is	250
The tax due is (see below for info)	22.8
The profit after tax would be	227.2

The corporation tax computation would therefore be:

	£’000
Net profit before tax	250
Less R&D relief	130 (130% in addition to what has been claimed)
Adjusted profit before tax	120
Corporation tax at 19%	22.8

Research and Development Expenditure Credit

This replaces the relief previously available under the large company scheme.

Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects, and it can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.

The RDEC is a tax credit which used to be 11% of your qualifying R&D expenditure up to 31 December 2017, but in 2018 it was increased to:

12% from 1 January 2018 to 31 March 2020, and
13% from 1 April 2020

Looking at a typical scenario then, let’s assume that £100k of R&D qualifying expenditure has been incurred.

	£’000
The Net profit before tax would be	250
13% RDEC on expenditure would be	13
The adjusted profit before tax would be	263

The corporation tax computation would therefore be:

	£’000
Net profit before tax	263
Corporation tax at 19%	50

And the tax payable:

	£’000
Corporation tax due	50
Less tax credit	(13)
Corporation tax payable	37

More information on R&D Tax Credits can be found here https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief, but if you’d prefer a friendly chat with one of our experts, please get in touch.

Author: Rajeev Dewedi

How much do you know about quarterly Corporation Tax payments?

Written by Michael Gough, Senior Accountant at Shenward, Leeds.

For small companies, corporation tax is payable by nine months and one day after the end of your accounting period. For example, if your company’s year-end is 31 December 2019, the corporation tax, if you are a small company, would be due by 1 October 2020.

You might not be aware but ‘large’ companies as defined by HMRC are required to make quarterly Corporation Tax payments. It is noteworthy that HMRC’s definition of a ‘large’ company is not the same as the definition set out in the Companies Act 2006.

Put simply, if you’re classed as a large company by HMRC – your company’s profits for an accounting period are expected to top £1.5 million a year – you must pay the tax due electronically and in four instalments.

Confused? Let’s explore.

HMRC characterise a large business as one with an annual profit of between £1.5 million and £20 million.

Under Corporation Tax self-assessment large companies must pay in quarterly instalments if they expect their annual profits to be above the £1.5 million threshold. This threshold is known as the Upper Relevant Maximum Amount (URMA) and the current rate of Corporation Tax is 19%.

Most companies won’t fall within the quarterly payment regime, but the directors of fast-growing businesses need to be aware of their obligations as their companies expand and profits rise.

There are exceptions, of course, and that is where taking specialist advice from your accountant is important – and can save you time and money. Tax rules can be complex, every business is unique, and it pays to have an expert on your side.

To help get you started, we’ve answered some of the most frequently asked questions regarding quarterly Corporation Tax.

What are the quarterly Corporation Tax exceptions for growing companies?

A company doesn’t have to pay by instalments for an accounting period even if profits go above £1.5 million if:

The amount of its total liability for the accounting period is less than £10,000, or where the accounting period is less than 12 months;
Its profits for the accounting period do not exceed £10 million and at any time in the previous 12 months it did not exist or did not have an accounting period; or for any accounting period in the previous 12 months either its annual rate of profit did not exceed £1.5 million or its annual rate of tax liability did not exceed £10,000.

How does having a group of companies apply to paying quarterly Corporation Tax?

Where a company owns at least 51% of other companies in a group the URMA is calculated by dividing £1.5 million by the number of companies in the group. This includes the parent company so if a company has another three in the group then the URMA is divided by four.

Group companies can choose to offset an amount overpaid by one company against an amount unpaid by another company in the group.

HMRC also offers Group Payment Arrangements, which allow groups to make instalment payments on a group-wide basis. You can nominate one company in the group to pay the instalments on behalf of the group, rather than company by company.

When do quarterly payments have to be made?

Four equal instalments should be paid for a 12-month accounting period, two within the 12 months and two afterwards.

The dates are:

Six months and 13 days after the first day of the accounting period
Three months after the first instalment
Three months after the second instalment (14 days after the last day of the accounting period)
Three months and 14 days after the last day of the accounting period.

For example, using the same example as earlier, a company with a year-end of 31 December 2019:

14 July 2020
14 October 2020
14 January 2021
14 April 2021

How are quarterly payments worked out?

A company must estimate its current tax year liability, taking into account net reliefs and set offs, and make payments based on that assessment. The estimate is just that, an estimate, and will vary over time.

Companies are allowed to top-up payments at any time. It may also be possible to claim back over-payments if they shouldn’t have been made or were shown to be excessive. Alternatively, HMRC will set any over-payment against future liabilities.

What should growing companies be aware of?

If a growing company is defined as a large company for two consecutive years, the quarterly instalments payments regime will apply for the second of those years. If for example, a company’s accounting period ending on 31 December 2019 is the first accounting period where profits exceed the URMA, it will be required to make payments on account for the accounting period 31 December 2020. Its tax payments will be as follows:

First payment on account (2020): 14 July 2020
Corporation tax liability (2019): 1 October 2020
Second payment on account (2020): 14 October 2020
Third payment on account (2020): 14 January 2021
Fourth payment on account (2021): 14 April 2021

By 14 October 2020, the company will have paid its corporation tax liability for 2019 and potentially up to 50% of its upcoming tax liability for 2020. Therefore, it is absolutely essential that companies plan ahead when budgeting for cash flow.

How should payments be made?

All payments must be made electronically. This can be by direct debit, debit card, credit card, company credit card or your own bank or building society’s internet banking service.

Alternatively, you can use BACS direct credit, your own bank or building society’s telephone banking service, CHAPS or Bank Giro.

What are the penalties for failing to pay Corporation Tax?

HMRC may charge penalties if a company deliberately fails to pay quarterly instalments or doesn’t pay enough. The amount will vary. Interest can also be charged on overdue or under-paid instalments.

Tax can be complex so if you need help with Corporation Tax please speak to one of our experts here Shenward – your leading independent firm of accountants and business advisors. Email michael@shenward.com

Accounting for government grants: What your accountant needs to know

Across the industry, accountants are beginning to prepare year-end financial statements for clients whose accounting periods end on or after 31 March 2020.

Resulting from the various government support made available due to the COVID-19 pandemic, businesses are likely to have received grants, whether from the local authority/self-employed grants and/or in respect of furlough claims.

The accounting and tax treatment of such receipts may become an afterthought, but it is worth considering at the earliest opportunity in case budgeting needs to reflect increased tax liabilities.

We’ve prepared some useful tips that will help sole traders, partnerships and limited companies understand the accounting and tax treatment when preparing financial statements.

Local Authority Grants

Like thousands of people across the UK, you may have received local authority grants, whether that be a Small Business Grant, a Retail Leisure & Hospitality Grant or a Discretionary Grants.

Whichever grant you received; accountants will need to report this in your financial statements, ordinarily as other income which would then be taxed in the year in which received.

However a fundamental accounting concept is the matching basis therefore it is possible, if your year-end was shortly after the grant receipt in your bank account, that you have not yet had the opportunity to reflect how the funds will be utilised in your business.

It would therefore prudent to report the grant in your statement of financial position as a deferred income/long term liability. This means that the grant has been reported in the financial statements but as it has not yet been spent, it is deferred to the next accounting period. It then enables the grant receipt and the related costs to be matched thus having a negligible/nil tax impact, smoothing cash flow requirements during the ongoing pandemic.

For your accountant to correctly account for the grant, you’ll need to provide evidence of what the additional funding was used for. If you use a cloud-based accounting system such as KashFlow, this should be a smoother process. But if not, preparing a list to send to your accountant will help them offset the expenses against the grant.

Self Employed Income Support Grant

As at today, 3 August, accountants have not yet received confirmation from HMRC as to when the SEIS grants will be taxable. However, here at Shenward, we fully expect any SEIS grant received to be taxable during the 2020/21 financial year.

If you were in receipt of the SEIS grant, you’ll need to provide your accountant with exactly how much was received, bearing in mind that there are 2 grants, the second window opening from Monday 17 August 2020.

Job Retention Scheme (CJRS) Grants

The coronavirus job retention scheme is one of the most complex schemes within the government support packages provided throughout the COVID-19 pandemic. With flexible furlough and short-term furlough being part of the equation, payroll records will look a lot different to the ones you provided to your accountant in the last financial year.

No matter how complex they are, one thing is for sure; any furlough claims will need to be reported as other income within your financial statements and will be subject to tax and national insurance (for sole traders and partners).

Eat Out to Help Out Grants

Eat Out to Help Out will operate on Mondays to Wednesdays through the month of August 2020. Its purpose is to incentivise customers to eat in restaurants or other eating establishments by giving them a discount which businesses can then claim back from the government.

The scheme is UK wide and customers will be able to see who is taking part on GOV.UK. The scheme will drum up custom on quieter days of the week.

HMRC has issued extensive guidance on various examples how to calculate the 50% voucher, capped at £10 per head. However, we draw registered businesses of the scheme to the following accounting and tax points:

Claims made will form part of sales and ultimately profit and will be subject to tax and national insurance (for sole traders and partners) as normal
Where restaurants or other eating establishments are registered for VAT, this will be payable on the undiscounted bill, albeit at 5% for food and non-alcoholic drinks

Example

A group of six diners (4 adults and 2 children) spend £90, including £18 on alcoholic beverages.

Bill before discount £90

Amount spent on alcohol £18

Amount discount can be applied to £72

Discount (50%, capped at £10 per head) £36

Bill after discount is applied £54

Total amount the business can claim £36

VAT will be due at 20% of the alcohol amount of £18, being £3.

VAT will be due at 5% on the full undiscounted amount of £72 for the rest of the meal, being £3.43.

Total VAT due being £6.43. As a comparison, if VAT was maintained at 20%, the VAT due would have been £15.

Businesses will be required to retain sufficient evidence to support any claims made e.g. daily gross takings reports (e.g. Z reads and individual meal receipts).

Further information is available below: https://www.gov.uk/government/publications/get-more-information-about-the-eat-out-to-help-out-scheme/get-more-information-about-the-eat-out-to-help-out-scheme

We appreciate the complexity of this year’s financial statement preparation, so please do get in touch with one of our friendly experts if you’d like to discuss your businesses’ position.

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