2021/22 Tax and Financial Strategies Reply

Forward planning is essential if you want to ensure that you are on course to achieve your business and personal financial goals, and this is even more the case in times of ongoing economic uncertainty.

Using strategic planning tools, we can suggest methods to maximise both your business and your personal wealth, while also helping to keep your tax liabilities to a minimum.

With this in mind, here is our 26 page 2021/22 Tax and Financial Strategies Brochure, which explores some of the key planning opportunities that could help to protect and make the most of your finances.

Click here to download a free copy

steve@bicknells.net

Hospitality VAT rates – what is going on? Can I use Flat Rate and pay No VAT? Reply

Serviced Accommodation/Furnished Holiday Lets (FHL) are currently enjoying special rates of VAT

The government made an announcement on 8 July 2020 allowing VAT registered businesses to apply a temporary 5% reduced rate of VAT to certain supplies relating to:

  • hospitality
  • hotel and holiday accommodation
  • admissions to certain attractions

The temporary reduced rate will apply to supplies that are made between 15 July 2020 and 31 March 2021.

These changes are being brought in as an urgent response to the coronavirus (COVID-19) pandemic to support businesses severely affected by forced closures and social distancing measures.

That rate is set to change to a new rate of 12.5% from 1 October 2021 to 31 March 2022

What is the Flat Rate scheme?

The Flat Rate Scheme is designed to simplify VAT because the Flat Rate % is applied to your turnover including VAT.

It doesn’t change the VAT rate charged to the client it just helps to calculate the VAT to be paid to HMRC.

You can join the Flat Rate Scheme if:

  • you’re a VAT-registered business
  • you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
  • you get a 1% discount on the flat rate if you’re in your first year as a VAT-registered business.

You must leave the scheme if:

  • you’re no longer eligible to be in it
  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

What are the Flat Rates?

Hotel or accommodation before 15 July 202010.5
Hotel or accommodation from 15 July 2020 to 30 September 20210
Hotel or accommodation from 1 October 2021 to 31 March 20225.5

Why would Flat Rate VAT help?

Example You bill a client for £1,200 including VAT, so thats £1,000 plus 20% VAT.

You’re a Holiday Let, so the VAT flat rate for your business is 0%.

Your flat rate payment will be 0% of £1,200, so nothing to pay

This is great news for Furnished Holiday Lets especially if they are just crossing the £85,000 VAT Threshold

Most Holiday Lets can’t increase their prices to incorporate VAT when they cross the VAT threshold because they would be uncompetitive so VAT is direct hit to their profits.

On the basis that the accommodation fee is unchanged but now includes a VAT element, if Flat Rate is used and the rate is 0% then no VAT is paid to HMRC.

That may not work for every business, it depends on whether you have a high level of VAT expenses which would offset the VAT and could result in a refund for example when you first register you may be able to reclaim VAT on pre-registration costs. Flat Rate restricts the recovery of expenses, you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000

Its also a problem if you’re classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher flat rate of 16.5%.

steve@bicknells.net

When can’t property investors use Micro Entity Accounts? Reply

Most property investors love Micro Entity Accounts:

  1. No property revaluation – property is shown at historic cost (Mortgage lenders are not affected by this as they always require a property valuation for lending purposes)
  2. Minimal disclosure and no notes
  3. No deferred tax
  4. Most property investors fit within the size criteria
  5. No Directors Report

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

  • Turnover: Not more than £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

The FRC (Financial Reporting Council) aren’t big fans of Micro Entity reporting due to concerns about the minimal accounts giving a ‘true and fair’ view but the whole reason for FRS105 and Micro Entity Accounts was to simplify reporting for SME’s and they definitely do that.

FRS105 allows Investment Property – see FRS105 Section 12

There are certain companies which can not qualify as micro entities regardless of their size

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

Investment Undertakings

Article 2 of the Accounting Directive – 2013/34/EU as follows:

2(13) ‧associated undertaking‧ means an undertaking in which another undertaking has a participating interest, and over whose operating and financial policies that other undertaking exercises significant influence. An undertaking is presumed to exercise a significant influence over another undertaking where it has 20 % or more of the shareholders’ or members’ voting rights in that other undertaking;

2(14)‧investment undertakings‧ means: a)undertakings the sole object of which is to invest their funds in various securities, real property and other assets, with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, (b) undertakings associated with investment undertakings with fixed capital, if the sole object of those associated undertakings is to acquire fully paid shares issued by those investment undertakings without prejudice to point (h) of Article 22(1) of Directive 2012/30/EU;

2(15) ‧financial holding undertakings‧ means undertakings the sole object of which is to acquire holdings in other undertakings and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, without prejudice to their rights as shareholders

Is this a problem for Property Investment Companies?

No, most property investment companies are not Investment Undertakings!

I know that sounds odd as it is a property investment and the investment makes it sound like an Investment Undertaking so lets look at this in more detail

  1. Are there multiple shareholders? generally not its often owned by a husband and wife (or civil partners) – if you have lots of passive investors that could make it an Investment Undertaking, we would need to look at the primary purpose of why the passive investors invested
  2. Are there shareholders with no involvement in the operation or management of the business? if their primary purpose was investment then it could be an Investment Undertaking – generally that’s not the case because normally property is funded by loans not shares (if you do use external investors you could fall within FCA regulations)
  3. Are there multiple properties in the same company? This could be seen as spreading the risk which might be an Investment Undertaking but most portfolio investors are seen by HMRC and others as running a property business and they are active in running it, many new investors have multiple companies with a single property in each Company – its better for lenders (charge on property and debenture over company), its better when you sell GCT is based on the share value (net worth) and the purchaser gets very low SDLT 0.5% and may not need to refinance
  4. Is a small property portfolio a risk management strategy? No, the assets are all of the same class so how can it be a risk management strategy!
  5. What about a company with one property used by a related party or member of a group? there is no management or spreading of risk so its not an Investment Undertaking

steve@bicknells.net

How do you pay interest to a director or individual lender? CT61 Reply

A few basics first:

  1. CT61 does not apply when a company in the UK pays interest to another company in the UK
  2. If you are seeking loans or investment make sure you check the FCA rules as it could be a regulated activity
  3. CT61 payments are quarterly and based on when payment is made
  4. The rules are not optional
  5. Its a deduction of Income Tax paid directly to HMRC
  6. The lender may be able to get the tax back on their self assessment return
  7. The borrower should give the lender a statement showing the Gross, 20% Tax and Net payment – HMRC R185 Certificate of deduction of interest

What does CT61 apply to and what form do you need?

If your company or organisation pays interest, royalties, alternative finance payments, manufactured payments, relevant distributions or any similar recurring payment, you must generally make these payments after deducting Income Tax at the basic rate – currently 20%. You need to tell HMRC about these payments and pay the Income Tax that you’ve collected. Use form CT61 for companies.

If you are an LLP you must send a letter and clearly state that you are a LLP and quote your Unique Taxpayer reference with details of the payment made and the tax deducted to:

Self Assessment
HM Revenue and Customs
BX9 1AS

How do apply for CT61?

To get a CT61 you have to complete the e mail template

HMRC: Structured Email (tax.service.gov.uk)

Nil Returns

Unlike other taxes you don’t need to file Nil Returns (see ‘When must I send a CT61’ section of CT61 notes)

But if you do need submit a return you need to do it within 14 days of the return period

Penalties

The CT makes this a Corporation Tax return so penalties should be inline with Corporation Tax penalties

Time after your deadlinePenalty
1 day£100
3 monthsAnother £100
6 monthsHM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of 10% the unpaid tax
12 monthsAnother 10% of any unpaid tax

steve@bicknells.net

When you get married does your Buy to Let become jointly owned? Reply

If a married couple or civil partners buy an investment property HMRC the rules are

TSEM9812 – Property held jointly by married couples or civil partners: Overview: two main rules

There are two rules about property held jointly by married couples and civil partners:

  • the ‘50/50 rule’ (ITA/S836) whereby most income from jointly held property is treated as split equally between the two spouses or civil partners for income tax purposes; the 50/50 rule applies unless there is a valid declaration on form 17; sections TSEM9814-9840 contain the details;
  • the ‘form 17 rule’, whereby, if the true income split is different from 50/50, the couple can opt to be taxed on that basis for income tax purposes (ITA/S837); sections TSEM9842-9878 contain the details.

When you get married there are tax changes

Marriage Allowance

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.

This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).

Capital Gains Tax

If you and your spouse or civil partner are living together, any transfer of an asset between you is treated as giving rise to neither a gain nor a loss to the person transferring it. Any amount actually paid is ignored. If the person receiving the asset later disposes of it, they will be treated as if they had paid an amount equal to the total of your costs.

Inheritance Tax

In addition to the CGT exemption for gifts between spouses, a similar relief exists for inheritance tax (“IHT”) purposes in most cases, so that assets can be gifted from one spouse to another without triggering an IHT charge.

Plus unused Nil Rate bands can be transferred on death.

What about Investment Property?

The short answer is that it does not automatically become jointly owned on marriage, but at least you can transfer part of the ownership without incurring capital gains tax.

steve@bicknells.net

Do you need a certificate from the client to zero rate or reduce rate construction VAT? Reply

Dwellings

The rules are in the VAT Notice 708 and in section 17.1 it states

There’s no requirement to hold a certificate for zero-rated or reduced-rated supplies in connection with buildings that will be used as one of the types of dwelling described at paragraphs 14.2 to 14.5.

Zero Rating – an example would be building a new house

Reduced Rating – this applies to converting a non-residential building to a dwelling or multiple dwellings

If your builder needs further details just point them at VAT Notice 708.

Don’t accept invoices which have the wrong VAT rate on them, even if you can claim the VAT back because HMRC will only accept the recovery of VAT when its charged at the correct rate

When do you need a Certificate?

You need to hold, within your business records, a valid certificate when you make any zero-rated:

  • or reduced-rated supply in connection with a building that will be used solely for a ‘relevant residential purpose’ – see paragraph 14.6
  • supply in connection with a building that will be used solely for a ‘relevant charitable purpose’ – see paragraph 14.7

Possession of a valid certificate does not mean that you can automatically zero rate or reduce rate your charge. The certificate merely confirms that the building is intended to be used solely for a qualifying purpose. You must meet all of the conditions explained in the relevant sections of notice 708 to zero rate or reduce rate your supply.

The customer for the zero-rated or reduced-rated work issues the certificate. The certificates at section 18 of VAT Notice 708 can be used, or the issuer can create their own certificate provided it contains the same information and declaration.

The 2 available certificates confirm that you’re either eligible to receive:

  • zero-rated or reduced-rated building work (the certificate can be found at paragraph 18.1)
  • a zero-rated sale or long lease (the certificate can be found at paragraph 18.2)

What if you get it wrong?

If you issue an incorrect certificate, you may be liable to a penalty equivalent to the amount of VAT not charged. A penalty is not VAT and, if you’re registered for VAT, you will not be able to recover it as input tax.

A penalty will not be issued, or will be withdrawn, if you can demonstrate that there’s a reasonable excuse for issuing the incorrect certificate.

What if the use changes?

If you have obtained zero rating for the construction or acquisition of a building (or part of a building) because you certified that it would be used solely for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, HMRC expect that the building will be used solely for either or both of those qualifying purposes for a period of, at least, 10 years following completion of the building.

If the building ceases to used solely for either or both of those qualifying purposes within that 10-year period, if that use decreases or if the building is disposed of, a taxable charge comes about, on which you must account for VAT.

What about Materials?

Retailers and builders merchants charge VAT at the standard rate on most items they sell.

Builders charge VAT on ‘building materials’ that they supply and incorporate in a building (or its site) at the same rate as for their work. Therefore, if their work is zero-rated or reduced-rated, then so are the ‘building materials’. But some items are not ‘building materials’ and remain standard-rated.

steve@bicknells.net

That’s Entertainment! but can I claim a tax deduction or VAT refund? Reply

What is Business Entertainment

Entertainment is defined as hospitality of any kind, the following are examples:

  • provision of food and drink
  • provision of accommodation (such as in hotels)
  • provision of theatre and concert tickets
  • entry to sporting events and facilities
  • entry to clubs and nightclubs
  • use of capital assets such as yachts and aircraft for the purpose of entertaining
  • Gifts BIM45065

Is it tax deductible?

No its not, Entertainment is not tax deductible

Hospitality by definition is giving something for free.

So if its a ‘Quid pro quo’ where you have to give something in exchange its not hospitality its a trade and would therefore be tax deductible. This also applies if you are contractually obliged to provide the entertainment for example Celtic Football Club were contractually obliged to pay the visiting opponents board and lodging under UEFA rules. Another similar case was Kilroy Television Co Ltd who provided food and train travel to participants in their programs.

Also of interest is the case of Merlin Scientific LLP v HMRC [2015] TC04441 they supplied corporate meeting facilities but the supply was considered a minimal amount of a composite supply.

What about staff entertainment?

Staff entertainment is allowable BIM45033

Staff entertaining is allowable, so long as it is wholly and exclusively for the purposes of the trade and is not merely incidental to entertainment which is provided for customers (see BIM45034). For more information on how to establish the purpose of expenditure, see BIM37050.

Where an employer provides a staff Christmas party, or a sporting event which is open only to employees, the expenditure is not disallowed by the legislation. However, it is still necessary to establish that the expenditure is wholly and exclusively for the purpose of the business.

In practice, the definition of ‘employees’ is extended to include retired members of staff and the partners of existing and past employees. 

You might find these blogs helpful

Let’s have a Virtual Tax Free Party « Steve J Bicknell Tel 01202 025252

Will the Christmas Party be tax free? « Steve J Bicknell Tel 01202 025252

It’s time for a Tax and NI free Trivial Benefit « Steve J Bicknell Tel 01202 025252

Will I be taxed on Christmas gifts recieved at work? « Steve J Bicknell Tel 01202 025252

How to have a tax free Christmas « Steve J Bicknell Tel 01202 025252

Can I have a Tax Free Lunch? « Steve J Bicknell Tel 01202 025252

What about VAT?

You cannot recover input tax incurred on the provision of business entertainment expenses. VAT Notice 700/65

2.5 Subsistence expenses for employees working away from their normal place of business

These are not covered by the business entertainment rules because they are not business entertainment.

Meetings

If normal basic food and refreshments such as sandwiches and soft drinks are provided in your office during a meeting to enable the meeting to proceed without interruption, then a private use charge will not apply.

If there is no other alternative than to hold a meeting outside the office, only similar basic provisions would be allowable. Hospitality provided following a meeting will not meet the strict business purpose test and neither will hospitality involving the provision of alcohol. Taking a customer to a restaurant is very likely to lead to a private use charge.

Corporate hospitality events

Many businesses offer their customers or potential customers general entertainment and hospitality. Examples include:

  • golf days
  • track days
  • trips to sporting events
  • evening meals
  • trips to nightclubs

Where the related expenditure is incurred for the purpose of the business, and recovered, an output tax charge will be due. This is because such events are unlikely to have a strict business purpose or are necessary for the business to make its supplies.

3. Employee entertainment

3.1 Overview of employee entertainment

Where an employer provides entertainment for the benefit of employees for example to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes.

Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.

However, there are two exceptions to the general rule. These are where:

  • entertainment is provided to directors, partners or sole proprietors of the business
  • employees act as hosts to non-employees

steve@bicknells.net

Choosing the Optimum Salary for 2021-22 Reply

Its a new tax year, small business owners will be deciding how extract their income, lets look at the choices.

Business Expenses

If you personally incur costs for you business, make sure you reclaim them, for example

Business Mileage (keep records of your trips)

Working from Home Costs

Business Travel Costs

If you incur any cost wholly and exclusively for your business you can reclaim it and it tax free to you and tax deductible to the company.

Pensions

Pensions are extremely tax efficient, contributions are normally tax deductible for the company (they can by up to £40k per year), the money grows in the pension tax free and when you reach 55 your can tax up to 25% out tax free.

Electric Company Cars

There are a range of incentives including the Government Plug In Allowance of up to £2,500, very low rates of Benefit in Kind and 100% First Year Capital Allowances.

Interest on Loans

If you have lent money to your company and you borrowed that money and pay interest on it you can claim the interest on your self assessment return for qualifying interest relief.

You company can also pay you interest on the loan but it will need to deduct interest at source at 20% under the CT61 rules.

You can reclaim tax paid on your interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year. Further details at Tax on savings interest – GOV.UK (www.gov.uk)

Salary Options

The tax free allowance is £12,570 (£1,047.50 per month) but National Insurance is the main driver for salary levels

Class 1 National Insurance thresholds2021 to 2022
Lower earnings limit£120 per week
£520 per month
£6,240 per year
Primary threshold£184 per week
£797 per month
£9,568 per year
Secondary threshold£170 per week
£737 per month
£8,840 per year

Most business owning directors who can take dividends will choose either £737 per month or £797 per month, the £797 qualifies you for state pension, you can check your qualifying years with HMRC

There are special rules for applying National Insurance to Directors

Furlough

If you are on Furlough (CJRS) you should leave you pay at it previous level and then review it when you return to work.

National Minimum Wage

The national minimum wage does not apply to company directors unless they have contracts that make them workers as defined in section 54(3) of the act.

Dividends and the Dividend Allowance

Dividends are a great choice provided you company has made a profit or has profit reserves (if doesn’t its illegal to pay dividends)

Tax yearDividend allowance
6 April 2021 to 5 April 2022£2,000
6 April 2020 to 5 April 2021£2,000
Tax bandTax rate on dividends over the allowance
Basic rate7.5%
Higher rate32.5%
Additional rate38.1%

steve@bicknells.net

What is a Specified Construction Activity? Reply

VAT reverse charge started on 1st March 2021 if you buy or sell building and construction services, but what are construction services?

The CIS rules for reverse charge were set out in statutory notice 2019/892 (The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019)

Specified services

4.  The services referred to in article 3(1) are construction services as defined in articles 5 to 7 together with any goods supplied with those services which fall to be treated as part of a single supply of services.

5.  “Construction services” comprise—

(a)construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;

(b)construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;

(c)installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;

(d)internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;

(e)painting or decorating the internal or external surfaces of any building or structure;

(f)services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in paragraphs (a) to (e), including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

6.  “Construction services” do not include

(a)drilling for, or extraction of, oil or natural gas;

(b)extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose;

(c)manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;

(d)manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;

(e)the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape;

(f)the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature;

(g)signwriting and erecting, installing and repairing signboards and advertisements;

(h)the installation of seating, blinds and shutters;

(i)the installation of security systems, including burglar alarms, closed circuit television and public address systems.

But the more detailed definitions are in Construction Industry Scheme: CIS 340 Appendix A, B, C

Under the new Construction Industry Domestic Reverse Charge identifying whether the activity is a construction activity is the first test you need to apply.

VAT Reverse Charge has a wider scope than CIS in that it covers Mixed Supplies, these are supplied where part of the supply is a construction activity and part is not but the whole contract is treated as within VAT Reverse Charge.

Services with reverse charge and normal VAT charging

Supplies where the reverse charge element is a minor part

Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will also be subject to it. However, if the reverse charge part of the supply is 5% or less of the value of the whole supply this can be disregarded (this is referred to the ‘5% disregard’) and normal VAT rules will apply if the customer makes an end user or intermediary supplier notification.

Supply and fix works will be subject to the reverse charge because the services and goods are part of one supply for VAT purposes. For example, a joiner constructing a staircase offsite then installing it onsite, will be making a reverse charge service even if the charge for installation is only a small (subject to the 5% disregard) element of the overall charge.

In addition, if 2 parties have already had a reverse charge service between them on a construction site, for convenience they can both agree that any subsequent construction supplies on that site can be treated as reverse charge services.

steve@bicknells.net

How do you account payments received under Off Payroll (IR35)? Reply

If you are a contractor working for the Public Sector or a Large Business you will be assessed against the Off Payroll rules that took effect in 6th April 2021 its a shift in the way the existing IR35 rules are applied.

Who is likely to be affected and what is it

  1. Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
  2. Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
  3. Recruitment agencies and other intermediaries supplying staff through PSCs.

Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses.

A 5% allowance is currently available to those who apply the off-payroll working rules to reflect the costs of administering them. Because responsibility is shifting from the PSC to the engager, this allowance will be removed for those engagements with medium and large-sized organisations. It will continue to be available for engagements with small organisations.

The deemed employer is the person who is responsible for:

  • deducting Income Tax and employee National Insurance contributions and paying these to HMRC
  • paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC

How is the money taxed when the contractor’s company gets it?

ESM10030 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how the worker accounts for and reports monies drawn from their intermediary

Remuneration

Remuneration (i.e. such as a salary) drawn by the worker from their PSC will be free of PAYE tax and NICs up to the level of the deemed direct payment, where that remuneration can reasonably be taken to be for services of that worker to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation (see ESM10024).

This how its processed in Moneysoft IR35 – deemed payments – how to include in RTI to HMRC | Moneysoft

Dividends

If the worker is remunerated via a dividend from their PSC, this will also be tax free up to the level of the deemed direct payment, where the dividend can reasonably be taken to be for the services of the worker to a public authority or medium or large-sized organisation not in the public sector. This only applies to dividends paid to the worker who performed the services subject to the off-payroll working rules. This dividend does not need to be returned on the worker’s self-assessment return.

ESM10035 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: CT accounting

Example – Corporation Tax

A worker offering their services through a PSC performs services for Major Retail Ltd, a large-sized business. The engagement is within scope of the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the twelve-month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a payroll payment (like a salary) each month without deducting anything further and submits this through payroll on a Full Payment Submission. The PSC has no other income during the year.

Turnover                                            (12 x £1,000)   =   £12,000                    (credit income)

Less Tax and NICs expense      (12 x £400)      =   £4,800                     (debit in profit and loss)

Less Payroll expense                    (12 x £600)      =   £7,200                     (debit in profit and loss)

Profit                                                                                       =   £0

If the worker instead of receiving payroll payments, takes the net amount as dividends there would be taxable profit at the end of the year:

Turnover                                            (12 x £1,000)   =   £12,000                 (credit income)

Less Tax and NICs expense      (12 x £400)      =   £4,800                  (debit in profit and loss)

Profit                                                                                   =   £7,200                  

The PSC also gets relief, this time for corporation tax, to avoid double taxation. This relief is given by s141A Corporation Tax Act 2009. This relief is used when calculating the company’s taxable profit. A deduction equal to net amount received by the PSC, here £7,200, would be made to leave taxable profit of £0. The £7,200 can then be taken as tax free dividends.

If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10, Part 2 ITEPA 2003 applied, and tax and NICs are refunded, the necessary corrections to the accounts and tax computations must be made to reflect the new position, as the relief would no longer be due.

steve@bicknells.net