A significant overhaul of the VAT penalty system came into effect on 1 January 2023, with new changes to how penalties are applied and how to calculate and pay interest. 

Let us break down what you need to know about the changes.

What is changing in the VAT penalty system? 

The main change for businesses is a replacement of default surcharges with new penalties for late submissions and late payments. 

The objective is to reward businesses that comply with their VAT obligations on time. Additionally, the calculation and payment of VAT interest have changed.

Who is affected by the VAT changes? 

Every business submitting their VAT returns on or after 1 January 2023 is affected. Companies must note that these changes may affect their tax planning strategy and potential savings from earlier payment dates.

How do the new VAT penalties work? 

HM Revenue & Customs (HMRC) has outlined a points-based system for late submission penalties intended to incentivise businesses to comply with their reporting obligations:

Up to 15 days overdue

You will not get charged a penalty if you pay the VAT you owe in full or agree on a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty of 2% on the VAT you owe on day 15 if you pay in full or agree to a payment plan on or between days 16 and 30.

31 days or more overdue

You will receive a first penalty calculated at 2% on the VAT you owe on day 15 plus 2% on the VAT you owe on day 30.

You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance, calculated when the outstanding balance is fully paid or a payment plan is agreed upon.

The frequency-dependent thresholds for penalty points mean that systematic non-compliance results in higher penalties. However, should a business meet its obligations within the given timeframe, all penalty points are reset back to zero, and no further action will occur.
Businesses should also take note of the benefits associated with paying their VAT sooner rather than later. Paying early means fewer late payment fees and interest due.

Business owners who pay late but manage to file their returns ahead of the deadline can reduce their overall financial burden by paying any outstanding taxes before incurring interest charges or late payment fees.

With the new year upon us, businesses must be aware of the possible consequences of late returns and payments. Our VAT experts are on hand to help you meet your obligations, please contact us with your questions.

Keeping up-to-date with your organisation’s financial health is critical to its success. A great place to start is by understanding what a balance sheet is and what it can tell you about the health of your business. 

Let us explore what a balance sheet is and how you can improve yours.

What is a balance sheet? 

A balance sheet is a vital financial document that provides an overall view of the financial position of your business. It shows how much money you have in assets (e.g., cash, accounts receivable) and liabilities (e.g., loans, accounts payable). When these two sides are balanced (i.e., when assets equal liabilities), the balance sheet reveals whether or not your business is operating at a profit or loss.

Why is it important? 

Your balance sheet tells you if you have enough money to pay for current expenses and future projects or investments. This information helps you decide when to invest in capital and whether or not to take on additional debt to finance growth opportunities. The more informed decisions you make, the better off your business will be in the long run!

How can I improve my balance sheet? 

The first step in improving your balance sheet is understanding exactly where your money is going each month – which means accurate and consistent tracking of all income sources and expenses. 

Additionally, any debt on the books must be managed, meaning making timely payments so that you don’t accrue late fees or interest charges which can hurt your bottom line in the long run.

Finally, consider investing in new technology or resources that help streamline processes within your business and allow faster transactions to help increase efficiency and save money over time.

Understanding and improving your business’s balance sheet are critical to achieving financial success.

By accurately tracking income sources and expenses, managing debt responsibly, and investing in new technology or resources, small businesses in the UK can ensure they remain solvent while also creating an environment for growth opportunities down the road.

Our experts are on hand to help you navigate your balance sheets and advise technology and processes that will help your business grow. Arrange a consultation today.

If you own a small business and are also a shareholder director, you may wonder whether to take a salary or dividends.

When it comes to paying yourself, there are both advantages and disadvantages to each option, including potential tax savings.

We’ll explore how taking salaries versus dividends for shareholder directors of small businesses in the UK may affect the money you take home.

How can you remunerate directors? 

The UK tax system allows company shareholders to draw money from their companies in two ways.

You can take a PAYE salary, which is subject to Income Tax and National Insurance Contributions (NICs), or by taking dividends, which are instead subject to dividend tax rates and free of NICs.

Why consider taking a salary?

There are two primary reasons, beyond the earnings, for drawing at least part of your remuneration as salary from your business.

First and foremost, you will likely want to continue to accrue qualifying years towards your state pension. To obtain the National Insurance credits to receive this benefit, the salary will need to be over the current Lower Earnings Limit (£6,396 in the 2022/23 tax year).

When setting your salary, many directors choose a level between the Lower Earnings Limit and the Primary Threshold (£11,908 per annum for directors), as this will ensure you receive National Insurance credits but will avoid having to make regular National Insurance Contributions.

Secondly, taking a salary counts as an allowable business expense, which you can offset against your profits to reduce the amount of Corporation Tax your company is liable for.

How should you set a salary?

If you intend on drawing money from your business but want to maintain contributions towards state pensions and other benefits, then taking salary instead of dividends might be right for you. 

Your salary may affect your income tax position. Every UK taxpayer enjoys a personal tax allowance of £12,570 per annum (frozen until 2028).

Any earnings above this amount, including income from a salary, will be taxed at your marginal rate (basic, higher and additional).

If your salary exceeds these tax bands thresholds, you will pay a higher tax rate alongside other earnings outside your salary could carry you over into higher tax rates.

Be wary that this is particularly precarious from April 2023, when the additional income tax rate threshold (45%) falls from £150,000 to £125,140.

Why take dividends instead of a salary? 

Dividends, unlike salary payments, do not attract NICs, and the tax rates on dividends are lower than on salaries.

However, you must ensure shareholders vote correctly for dividends and that the company has sufficient distributable reserves.

However, if your annual dividend payments exceed £2,000 per year (based on the current dividend allowance), you will need to pay some tax.

This dividend tax allowance will be reduced from April 2023 to £1,000 and halved again to just £500 in the following tax year. Dividend tax rates remain lower than income tax rates and may offer a tax advantage to some directors.

For 2022/23 and into the new tax year, the dividend tax rates are:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

How to balance dividends and salary 

You must consider both options carefully before deciding which works best for you based on your current financial situation and plans.

Usually, directors will choose a combination of both dividends and salary to manage their tax position and that of their company without reducing their access to benefits, such as a state pension. With tax rates and allowances changing yearly, you must review your position regularly.

It is essential to weigh all these factors carefully before deciding on a remuneration approach for you and any other directors of the business. Seeking regular professional advice can be particularly beneficial as your circumstances may change from one year to the next. Our tax team can help, arrange a free consultation.

For many individuals in the UK, gifting to grandchildren is an opportunity to reduce their tax burden. But before entering into any gifting arrangement, it is crucial to understand the various tax considerations that come with it. 

We discuss some of the tax implications of gifting to grandchildren in the UK.

Inheritance Tax implications

UK Inheritance Tax (IHT) applies when an individual passes away and leaves assets or property worth more than £325,000 (known as their “nil-rate band”). If you exceed this limit, IHT will be due at 40% on anything above this threshold. One way individuals can reduce their liability for inheritance tax is by gifting some of their assets or property to grandchildren during their lifetime; this could help them stay within the nil-rate band. However, there are a few things that need to be taken into account when considering making these gifts:

Gift exemptions 

The first thing to consider is whether any gifts qualify for one of the gift exemptions available under UK law. These exemptions include gifts made out of income (up to £3,000 per year), small gifts up to £250 per person per year, and wedding or civil partnership gifts up to certain thresholds depending on the relationship. 

You must understand if exemptions apply before making any gifts as this could significantly reduce your IHT liability.

Lifetime gifts

Another consideration is that your gifts must be irreversible and absolute. You can not reclaim them afterwards or give them with conditions or strings attached.   

Even if something qualifies for a gift exemption, you must report them on your annual self-assessment form. You should check all relevant rules and regulations before proceeding with large-scale gift arrangements.

Gifts with reservation of benefit rules

Finally, it’s important to note that certain types of lifetime gifting may fall under gifts with reservation of benefit rules, meaning they are not exempt from IHT and may still need to be declared on your self-assessment form each year. 

For example, if you gift a property but continue living in it as your primary residence, this would likely fall under these rules. Despite giving the property away, you would still encounter an IHT liability for any value over the nil rate band. 

Therefore, you must take professional advice before entering into any complex gifting agreements, as there could be significant tax implications if not done correctly.

Gifting assets or property during your lifetime can offer significant advantages when reducing your Inheritance Tax burden in the UK – but only if done correctly and within all applicable laws and regulations. Therefore, anyone considering such arrangements must take professional advice beforehand to understand all relevant tax considerations and remain compliant. 

If you are looking for advice on inheritance tax, our tax team handles complex IHT matters for our clients. Get in touch for a free consultation with our senior team.

Every business needs sound financial planning and oversight to thrive. With the new tax year approaching, now is the perfect time to start thinking about ways to improve your business’s finances in 2023. 

Read on to learn some tips to guarantee your business’s finances are healthy and secure.

Develop a financial plan

The best way to ensure that your business is financially secure is by developing a detailed financial plan for the coming year. This plan should include projected revenue and expenses, as well as goals for sales, profits, cash flow, investments, debt reduction, and other areas of your business. Setting these targets will help keep you motivated and on track towards achieving them by providing a roadmap of where you want to be at each point in the year.

Analyse your cash flow 

You must monitor your cash flow closely throughout the year. Doing so will help you identify potential issues before they become substantial problems. To make this easier, create a spreadsheet that tracks all incoming and outgoing funds from your business over time so you can see if any patterns or trends emerge. If there are any discrepancies between expected income/expenses and actual figures, investigate why this is happening so that it doesn’t become a recurring issue.

Review your finances before making big decisions 

Before making big decisions about investing or expanding your business, you must carefully review your current financial situation. You will gather an accurate financial picture of where your business stands so that you can make informed decisions about how best to proceed without putting yourself at risk of overextending yourself or taking on too much debt. 

It is also good practice to run through “what-if” scenarios when making big decisions like hiring new staff or buying expensive equipment. What would happen if something unexpected occurred? Having contingency plans in place will help protect against possible future losses.                                             

Taking control of your small business’ finances requires careful planning and regular review – but it is worth it! 

Developing a detailed and precise financial plan for 2023 and beyond can help keep your business running effectively, while allowing room for growth and expansion without overextending yourself financially. As long as you analyse your cash flow regularly and think carefully before making big decisions related to investments or expansion plans, you are well on your way towards improving your company finances this year.

Contact us if you want to discuss your financial goals for your business and let us help you achieve your goals.

Businesses are running out of time to take advantage of the Corporation Tax super-deduction capital allowance scheme, which allows companies to claim back 130% on investments made in plant or machinery.

The scheme runs until 31 March 2023. With Corporation Tax rates set to rise in April 2023 for more profitable businesses, there’s not much time left to take advantage of this generous scheme.

The scheme was an incentive to invest in new assets to aid the recovery of companies after the pandemic.

The measure allows organisations to claim a super-deduction providing an allowance of 130% on most new plant and machinery investments that ordinarily qualify for main rate writing down allowances.

They can also use the first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for special rate writing-down allowances.

What classes as plant and machinery?

There are many forms of ‘tangible’ assets used in the day-to-day running of a business. Some examples include:

• Ladders, drills, cranes
• Office furniture
• Refrigeration units
• Electric Vehicle charge points
• Compressors

Certain expenditure is excluded, for example, the acquisition of company cars. To benefit from the relief, the assets must be new purchases, not second-hand or refurbished equipment.

How does the super-deduction capital allowance scheme work?

A company incurring £1 million of qualifying investments decides to claim the super-deduction.

Spending £1 million will mean the company can deduct £1.3 million (130% of the initial investment) in working out its taxable profits.

Deducting £1.3 million from its taxable profits will save the company up to 19% of that – or £247,000 on its Corporation Tax bill.

What about unincorporated businesses?

The relief is only available to limited companies. Unincorporated businesses can continue to benefit from the Annual Investment Allowance (AIA), which permits a deduction of 100% for qualifying plant or machinery expenditure up to the threshold of £1 million.

Our tax experts are always on hand to give tax-planning advice, so set up a consultation with us today.

The Government announced a two-year delay and changes to the rollout of its Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) initiative. 

MTD for ITSA will now look to begin from April 2026 for a small group of taxpayers rather than launching in April 2024.

The move will give self-employed workers, sole traders and landlords more time to prepare for the upcoming changes.

What is changing with MTD for ITSA? 

From the new start date, instead of MTD for ITSA applying to all self-employed workers and landlords with property or business income of more than £10,000, it will now only apply to those with income exceeding £50,000.

They will have to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software.

Those with an income of between £30,000 and £50,000 will also need to comply with this from April 2027. However, all taxpayers can join voluntarily beforehand if they wish to eliminate common errors and save time managing their tax affairs.

What about smaller businesses?

Originally due in 2024, the Government also announced a review into the needs of smaller businesses, particularly those under the £30,000 income threshold.

The review will consider how the Government can shape MTD for ITSA to meet their requirements and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further rollout of Making Tax Digital for ITSA after April 2027.

MTD for ITSA will no longer extend to general partnerships in 2025. However, the Government says it “remains committed to introducing MTD for ITSA to partnerships in line with its vision outlined in the Tax Administration Strategy”.

Under the original plans, MTD would also extend to Corporation Tax, but the Government is yet to confirm when this final phase will begin.

If your business is looking for further advice on Making Tax Digital and how you can make your processes more efficient, arrange a chat with our team today.

You could see your Income Tax bill increase significantly in 2022-23 because of an Income Tax thresholds freeze announced by the Chancellor in the Autumn Statement.

While the basic (20%) and higher (40%) thresholds are remaining at their current levels until 2028, rising wages will see people dragged across these thresholds over the coming years.

At the same time, inflation means that the buying power of income at these thresholds will be significantly less than it would have been only a year ago.

Furthermore, the additional rate (45%) threshold will fall from £150,000 to £125,140 from 6 April 2023. People with income already above the additional rate threshold will pay the 45p rate of tax on a larger proportion of their income. At the same time, thousands of taxpayers will be subject to the additional rate for the first time.

Fortunately, there are many tax-efficient ways of reducing your income tax liabilities.

Pension top up

You can reduce your income tax by topping your pension using your annual tax-free allowance.

Personal pension contributions within the annual £40,000 pension allowance lower your ‘adjusted net income’.

This is because tax relief is available at an individual’s highest marginal rate on contributions up to 100% of relevant earnings (RE) or £3,600 if higher.

RE includes most earned income but excludes items such as pension income and dividends.

If your pension scheme operates under relief at source, the tax relief is obtained in either one or two stages (depending on your marginal tax rate).

Under schemes operating via relief at source (RAS), the relief is obtained in one or two stages depending on your tax rate.

If you receive basic rate tax relief the pension provider reclaims this from HMRC automatically. However, higher and additional rate taxpayers get relief either via a one-off claim or via a self-assessment tax return.

The rates of relief are obtained as a taxpayer’s basic and higher rate bands are increased in tandem with the amount of the grossed-up contribution. This, in effect, moves the income from higher tax brackets into lower ones.

ISA allowances

ISAs are a tax-efficient way of saving. You don’t pay income tax or Capital Gains Tax (CGT) on investments inside an ISA, and you can withdraw money whenever you like, tax-free. You can currently invest up to £20,000 in ISAs per annum.

Maximise your tax allowance

If you’re married or in a civil partnership, your tax allowances can, in some cases, be combined to increase your household’s income tax allowance. For example, the Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner if they haven’t used it.

If you are unsure of the tax-saving opportunities available to you, you should seek professional advice.

Planning for the future is essential when running a business and you should have a perspective of where you want to be in three to five years.

Goals or targets provide a sense of direction, focus, and motivation. However, how do you set aims effectively?

You could try the SMART method. This relies on five key criteria – Specific, Measurable, Achievable, Realistic, and Time-Based – that allow you to create a clear target for success.

What is the plan to get you there?

It may be that small steps are needed before achieving the ultimate goals and could include:

• Establishing your Unique Selling Point (USP). What can you offer that the competition cannot?
• Identifying your ideal customer, do you need to pivot the business to attract new clients?
• Maximising talent. Your staff are your most important asset.

How you can build SMART goals into your business plan:

Specific

A specific goal clearly defines what needs to be achieved, by whom, where and when it is to be achieved (and sometimes why).

Measurable

Measuring draws your focus, and the latest tracking software can measure this accurately.

When you measure, you need to ask certain questions:

• How much?
• How often?
• How many?

Achievable

When you set goals, ensure they’re achievable. It’s a mistake to set unreachable goals because you’re setting yourself up for failure from the beginning.

Realistic

Make sure the goal that you set has long-term importance in what you want to achieve as an individual or an organisation.

Time-based

It sounds obvious but set up a timeframe. A deadline can be an excellent motivator.

Struggle to set goals? Need help monitoring your Key Performance Indicators (KPIs)? It makes the most sense to seek professional support so you can create a SMARTer approach to working.

Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax credit regime, including a cut to the deduction and credit rates for the SME scheme.

The R&D SME scheme enhanced deduction rate will be cut to 86 per cent from the current 130 per cent, and the payable tax credit rate cut to 10 per cent from 14.5 per cent.

However, the rate of the separate R&D expenditure credit – also known as RDEC – will increase significantly, from 13 per cent to 20 per cent.

The changes to the SME scheme mean that if you are a loss-making company, you will now only receive £18.60 for every £100 spent from April next year, compared to £33.35 per £100.

These changes are intended to reduce abuse in the R&D tax system, particularly claims for SMEs, which have been the spotlight of several investigations by HM Revenue & Customs (HMRC).

They are scheduled to take effect from 6 April 2023, so there is still time to plan, and it may make sense to bring forward R&D expenditure, where possible, to benefit from more favourable deductions and credits.

April 2023 also sees changes to the review and approval process for R&D claims. For any claim commencing on or after 1st April 2023, companies will need to notify HMRC within six months of the end of the accounting period that they intend to make a claim for R&D tax relief. If you have claimed R&D tax relief within the last three years you are not required to pre-notify HMRC.

Companies House has gone fully digital after the announcement of the closure of its office in London and all filing being transferred online.

It has also permanently shut the public counters in Cardiff, Belfast and Edinburgh.

Online services will be available 24 hours a day, seven days a week.

Changes have taken place with improved security features, which include:

• Multi-factor authentication
• The ability to link your company to your WebFiling account to give you more control over your filings
• Being able to digitally authorise people to file on your behalf on WebFiling, and to remove authorisation
• To view who’s digitally authorised to file for your company
• An option to sign up for emails to help you with the running of your company

WebFiling is an online service that Companies House provides, designed to make the submission of official paperwork easier and paper-free.

Once you’ve linked your company to your account, you will not need to enter your authentication code every time you file online.

Key changes, which form part of the 2020 to 2025 strategy and part two of the Economic Crime Bill, are expected to go through Parliament this spring and will include:

• Filing deadlines will not be shortened at the moment, but legislation will be introduced to facilitate future changes.
• Small companies will no longer have the option to prepare and file abridged accounts and will be required to file both their profit and loss account and directors’ report.
• Micro-entities will also be required to file their profit and loss accounts but will continue to have the option to not prepare or file a directors’ report.
• Dormant companies will be required to file an eligibility statement.
• All companies will be required to file accounts digitally, with full tagging.