Unincorporated businesses, including sole traders, the self-employed and trading partnerships, will be taxed on profits generated in the 12 months to 5 April each year from 2024/25.

This is a significant change to taxation, which removes the basis period rules and prevents the creation of further overlap relief in a new system known as the ‘tax year basis’.

These changes were meant to be brought in a year earlier but were delayed by the Government in September 2021 to give those businesses affected more time to prepare.

Now the clock is ticking once again on these changes and unincorporated businesses must start preparing now.

The basis period system

Unincorporated businesses are not required by law to produce accounts by a particular date, meaning they can choose any accounting date they like.

Instead, they are currently taxed on profits or losses arising in the accounting period for the 12 months ending with the accounting date which falls in the tax year, known as the ‘current year basis’.

For example, an accounting period ending on 31 December 2022 would be taxed on profits arising in the 2022 calendar year, rather than the 2022/23 tax year.

As a result of this, an unincorporated business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’.

However, specific rules do determine the basis period during the early years of trading.

Where the accounting end date is not 5 April or 31 March, which is the equivalent of 5 April for the first three years of trade, the rules can create overlapping basis periods.

This creates a tax charge on profits twice and generates ‘overlap relief’, which is received when the unincorporated business eventually ceases trading.

The new tax year basis

The latest reforms will change the basis period for all unincorporated businesses to the end of the tax year (5 April) from 2024/25, regardless of their current accounting period.

This will create the need for interim arrangements for businesses that do not currently have year-ends falling between 31 March and 5 April each year.

These businesses will potentially face a single, higher tax bill from their profits arising in the year-end falling in the 2023/24 tax year to 5 April 2024.

According to HM Revenue & Customs (HMRC), businesses with a different accounting period end date to the end of the tax year:

• Will need to apportion profits/losses
• May need to use provisional figures in their tax returns
• The statutory rule that deems 31 March to be the 5 April in the first three years of a trade would be extended to apply to all years.

Despite the changeover, reliefs, allowances and tax band thresholds will remain unchanged and will not be pro-rated.

As a result, some taxpayers could move into higher tax bands, while also reducing their ability to benefit from various annual reliefs and allowances during the transition year.

Businesses with year ends not aligned with the tax year will also have a much shorter time between when they generate profits and when tax is due, which could have cash flow implications.

What help is available? 

HMRC is still considering an election to allow businesses with higher profits, due to the change, to spread those additional profits equally over five years. The tax authority will also provide ‘Time to Pay’ arrangements for those needing to spread the costs further.

Businesses can also use all overlap relief accrued when they began trading during the transition year (2023/24) to soften the blow. This would mean that businesses in this position will only have tax to pay on 12 months’ profits.

However, overlap relief dates back to the first year a business traded, when it is likely to have been much less profitable.

Due to the introduction of these rules, new businesses will not generate overlap relief from 2024/25 and there will be no special rules required for starting or ceasing trading or for a change in the accounting period end date.

For the many unincorporated businesses that already have year-ends aligning with the tax year, nothing will change.

However, for those with year-ends that are not synchronised with the tax year, there are several considerations and careful tax planning may be necessary.

Link: Basis period reform

A new survey on Making Tax Digital (MTD) shows taxpayers have an alarming lack of readiness and enthusiasm for the changeover and a lack of awareness that MTD for Income Tax begins in less than two years.

HM Revenue & Customs (HMRC) commissioned pollsters Ipsos to undertake new research to explore the preparedness of Income Tax Self-Assessment (ITSA) customers, in the lead-up to the MTD switch in April 2024.

Lack of understanding of a big problem

The latest survey came after earlier research found half of the businesses did not understand their reporting obligations under the extension of Making Tax Digital for VAT, even in January of this year.

Understanding of the specific requirements of Making Tax Digital was lower than general awareness.

In fact, only over half of those surveyed (51 per cent) were aware of MTD and knew of at least one requirement, but alarmingly, 12 per cent provided no correct responses on requirements and nearly four in 10 (37 per cent) could not identify any requirements at all.

The survey had some surprising findings. It found:

• Around four in 10 said they would find it difficult to start reporting quarterly income tax when the rules come in.
• Using compatible software was a problem for 35 per cent of respondents.
• 40 per cent said the switch would be easy and they recognised the benefits of the change.

The lack of experience with MTD software was highlighted as a big problem.

A big majority (86 per cent) of those facing MTD for ITSA had turnover, property income or combined turnover and property income below the VAT threshold, therefore, they had no previous experience of using the software.

How will landlords be affected?

Unincorporated businesses and landlords with annual turnover or gross income above £10,000 will need to follow the rules for MTD for Income Tax Self-Assessment (ITSA) from their next accounting period starting on or after 6 April 2024.

But according to the survey, landlords, particularly those with one or two properties, spent minimal time and effort on their obligations and felt MTD would result in more time and higher costs.

The report also showed that because it is a new system, taxpayers were looking for leniency when submitting their first returns, particularly if previously they had a long history of submitting correct and punctual annual tax returns.

More clarity is needed from HMRC

Andrew Jackson, Vice-Chair of the joint CIOT and ATT digitalisation and agent services committee, said: “We have encouraged HMRC to publish more detailed guidance about the Making Tax Digital process, as there are seemingly more questions than answers at the moment. HMRC must spell out what they are going to do to improve awareness and bring out all the necessary guidance they can urgently.”

Link: Landlords not aware of Making Tax Digital for income tax

With the current labour shortage affecting pretty much all areas of the economy, taking on an apprentice could reap rewards for many businesses.

There are many reasons why hiring an apprentice can benefit your business, but for hard-pressed employers, with a limited budget, the financial incentives offered by the Government are a major reason to take the plunge.

Why take on an apprentice?

Benefits include:

• Plugging the skills gap: It is obvious that if a business has a skills shortage, training an apprentice in that area will reap rewards.
• Gaining a new perspective on technology: This will allow businesses to equip their workforce with specialist skills and the latest techniques.
• Enhance reputation as an employer: Giving young or underskilled workers an opportunity in this way can only enhance a firm’s reputation and give something back to the community.
• Generating a boost in productivity: Training helps staff become more proficient, but an apprentice can also free up time for more senior staff to focus on key areas of their work.

However, perhaps the best part of apprenticeships is the financial assistance available from the Government, which will provide funding to pay for an apprentice’s training and assessment.

Where you get the funding from depends on where you are in the UK. The amount you get also depends on whether you pay the Apprenticeship Levy or not.

Who needs to pay Apprenticeship Levy?

The Apprenticeship Levy is an amount paid at a rate of 0.5 per cent of an employer’s annual pay bill.

As an employer, you have to pay Apprenticeship Levy each month if you have an annual pay bill of more than £3 million or are connected to any companies or charities, for Employment Allowance purposes, that have a combined annual pay bill of more than £3 million.

How is the funding distributed?

For those who do not pay the levy, you will have to pay five per cent towards training fees and you need to agree on a payment schedule with the training provider.

The Government will then pay the other 95 per cent up to a maximum funding band and deliver it directly to the training provider.

What else is available?

You can get £1,000 to support your apprentice in the workplace if they are one of the following:

• 16 to 18 years old
• 19 to 25 years old with an education, health and care plan
• 19 to 25 years old and they used to be in care

The training provider will present the payment over two instalments of £500 each, with the first payment after 90 days and the second after a year on the scheme.

The current National Minimum Wage rate for an apprentice is £4.81 per hour if they are aged:

• 16 to 19
• 19 or over and in their first year

If an apprentice is aged 19 or over and has completed their first year, they must be paid the National Minimum Wage or National Living Wage rate relevant to their age.

Link: Apprenticeship Funding

There seems little doubt now that the working from home phenomenon has become established.

With a laptop, a phone and an internet connection, many tasks can be performed as adequately at home or elsewhere, as in an office.

While returning to the office is a must for many, the recent rail strikes and surge in fuel prices have shown that this kind of flexibility can keep the wheels of industry in the UK turning when businesses and their staff are disrupted.

Usually, this takes a hybrid form with a few days in the office and a couple working from home, or vice versa.

Although many businesses are already implementing this new way of working, there are things that business owners themselves should consider, especially where they intend to operate a business out of their home.

Get advice before taking the plunge

If you decide to run your business from home, some rules and regulations need to be followed.

• You may need permission from the local council, a landlord or a mortgage provider to run your business
• Health and safety issues will also have to be properly managed
• You may need separate insurance.

Planning permission

If you are planning on making alterations to accommodate your business, you may need permission from the council.

You may also need a licence if your business is likely to cause disruption with deliveries and visitors, or if you want to advertise outside your home.

What tax allowances can you claim?

You can include your business costs in your Self-Assessment tax return if you’re a sole trader or part of a business partnership and you can also claim a proportion of the cost of things like council tax, heating, lighting, phone calls and broadband.

Capital Gains Tax

You may have to pay this on the part of your property you used for your business if you sell your home in future, so be aware.

Business rates

You may have to pay business rates on the part of your property that you use for your business, while you’ll still have to pay Council Tax on the rest of your property.

But you may qualify for small business rate relief if your property has a rateable value of £12,000 or less.

Supporting employees in their own homes

Many employees are also enjoying the benefits of WFH, either full-time or under a hybrid system.

As an employer, you must support them as well. For employees, the work-from-home relief, which many claimed during the pandemic, is still available.

However, from 6 April 2022 onwards it is only open to employees where an employer specifically requires a staff member to work from home – for example, to stop the spread of Covid or because the job had been ‘relocated’ and was now contractually regarded 100 per cent as a home-working role.

For basic-rate taxpayers, the relief is worth 20 per cent of the £6 allowance –  £1.20 a week – while for higher-rate taxpayers they could claim 40 per cent of the £6 – £2.40 a week.

Over the year, this means that employees can reduce their tax bill by between £62.40 and £124.80 respectively.

For some employees, relief may also be available on:

• Reimbursement by employers for additional household expenses
• Provision of office equipment by employers
• Provision of computers for private use by employers
• Travel for necessary attendance.

If you need help and advice on managing your business as it makes further moves to work from home, please seek advice.

Link: Working From Home

More and more people are being drawn into paying Inheritance Tax (IHT), as the price of property soars.

This is because former Chancellor Rishi Sunak froze the nil rate thresholds for paying the tax at £325,000 until 2026, while the value of homes has rocketed, potentially drawing more people into paying the tax.

There are some exceptions, which are listed below, but generally, people are then faced with paying 40 per cent IHT on anything gained over the £325,000 figure.

How much do I have to pay?

IHT is levied at 40 per cent on everything in an individual’s estate at their death above the Nil Rate Band of £325,000.

However, many taxpayers also benefit from the Residence Nil Rate Band, which adds an additional allowance of £175,000 for their main property if it is passed to direct descendants.

If you are married or in a civil partnership these allowances can be passed to a spouse or partner once the other person dies.

According to the Office for National Statistics (ONS), in 2009, the average price of a home in the UK was £227,000. In 2021 that had rocketed to £327,000, £2,000 above the initial Nil-Rate band.

In high-value areas, such as the South East and London, this figure is even higher and it means that more and more taxpayers – and not just the wealthiest members of society – are facing IHT bills on their estates after death.

What is IHT?

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

As mentioned, there is normally no Inheritance Tax to pay if:

• The value of your estate is below the £325,000 threshold
• You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
• If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000
• If you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

This means their threshold can be as much as £1 million!

What are the rates for IHT?

The standard IHT rate is 40 per cent. However, this is only charged on the part of your estate that is above the threshold.

So, if your estate is worth £600,000 and your tax-free threshold is £500,000. The Inheritance Tax charged will be 40 per cent of £100,000 or £40,000.

The estate can pay IHT at a reduced rate of 36 per cent on some assets if you leave 10 per cent or more of the ‘net value’ to charity in your Will.

Are there any ways to save on IHT?

Here are some of the ways that you can cut your IHT bill with careful planning:

Gifting

There’s usually no IHT to pay on small gifts you make out of your normal income, such as Christmas or birthday presents, which are commonly referred to as ‘exempted gifts’.

There is also no IHT to pay on gifts between spouses or civil partners and you can transfer as you like during your lifetime, as long as they live in the UK permanently.

However, other gifts count towards the value of your estate, and you could be charged IHT if you give away more than £325,000 in the seven years before your death.

Gifts include anything that has value, or anything transferred at a loss to a family member, such as the sale of a home to a descendant for less than it is worth.

However, you can give away £3,000 worth of gifts each tax year without them being added to the value of your estate thanks to the ‘annual exemption’.

If you have any unused annual exemption, you can carry it forward to the next year – but only for one year.

Each tax year, you can also give away additional gifts if they relate to special events such as weddings, birthdays or Christmas, or if they support the living costs of another person, such as an elderly relative or a child under 18.

You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

If there is IHT to pay, it’s charged at 40 per cent on gifts given in the three years before you die. Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’. After seven years the gift will be IHT-free.

Business Property Relief or Agricultural Property Relief

Certain assets receive relief from IHT, these include Business Property, Agricultural Property and Heritage Assets.

These reliefs can reduce or eliminate the value of an asset being included within an estate, but they often rely on certain conditions being met.

However, not every interest in a business will qualify for these specialist reliefs so it is worth seeking specialist professional advice when managing your estate.

Charity

Anything left to charity in your Will won’t count towards the total taxable value of your estate. Known as a ‘charitable legacy’, this will also reduce the IHT rate on the rest of your estate from 40 per cent to 36 per cent, as long as you leave at least 10 per cent to charity.

Trusts

Trusts can play a role in reducing a family’s exposure to IHT so that more can be passed on to future generations, but they say they can also help look after family assets and provide for family members who are too young or vulnerable to deal with financial matters.

A trust is a legal arrangement where you gift cash, property or investments to a separate entity (the trust). One who gifts assets is the Settlor, the trustees then oversee the management of the assets for the benefit of a third party or parties.

One of the main benefits of a trust is that, should you elect to act as the trustee, you would continue to maintain control over the assets gifted whilst your estate’s exposure to IHT is reduced as, after seven years, the gift is out of the Settlor’s estate completely.

Assets transferred into a trust are no longer considered as belonging to the Settlor, so they are taxed according to the rules governing the trustee.

Many people would prefer to provide for a beneficiary through a trust as opposed to passing assets to them outright. This could involve a source of income for a beneficiary for life, or providing education for children but not allowing them to access funds until they are older.

A company has lost an £11 million dispute with the taxman over whether contract construction workers were entitled to claim travel costs tax-free.

As many as 600,000 temporary workers in the UK are thought to be employed by umbrella companies, used by recruitment agencies and companies to cut temporary payroll costs.

Exchequer Solutions Limited (ESL) is an umbrella company that supplies workers to the building trade and the dispute with HM Revenue & Customs (HMRC) was over whether their workplace was permanent or temporary.

The dispute

The issue revolved around whether ESL employed the workers under the umbrella contract of employment continuously while working on various projects, or whether there was a series of separate contracts, with gaps between the employment, where a worker might be temporarily employed elsewhere.

The appeal against HMRC at the First-Tier Tribunal raised the question of whether workers should be reimbursed for travel and subsistence expenses, without being subject to tax or National Insurance contributions (NIC).

What is an overarching contract?

If there is an overarching or umbrella contract of employment, each place of work is a temporary workplace, and the expenses can be paid tax-free.

However, if there is a separate employment contract for each assignment, the workplace is a permanent workplace, and any payments came within the scope of tax and possibly NIC.

HMRC argued that there was no overarching contract of employment so the payments relating to expenses were subject to PAYE income tax and NIC.

The relevant tax years were 2013/14 through to 2016/17 and HMRC issued determinations amounting to a total of £11 million in unpaid taxes and NICs.

ESL claimed there was an overarching or umbrella contract and appealed against the Regulation 80 Determinations and the NIC Notice of Decision.

Following detailed arguments from both, the judge ruled against ESL’s argument.

In conclusion, the Judge determined that the two parties, ESL and HMRC, should agree on the amount of any liability to income tax and NIC based on the amount of the travel and subsistence expenses paid by ESL to its employees.

Deadline set for full hearing

A deadline of 30 November 2022 was set for agreement to be reached at which time a hearing would be organised to finalise the amount of any liabilities.

Link: Umbrella company loses £11m tax dispute over expenses

Thousands of Britons facing a cost-of-living crunch have been withdrawing funds from their Lifetime ISA (LISA) accounts and getting hit with significant penalty charges.

According to HM Revenue & Customs (HMRC), a record 77,500 LISA savers were issued over £33 million worth of early withdrawal charges in 2021/22.

Early withdrawal from LISAs attracts a 25 per cent penalty. During the pandemic, the Treasury cut the early withdrawal charge from 25 per cent to 20 per cent to ensure those accessing their LISA, while facing serious hardship, were not unfairly penalised. However, this has now ended.

What are LISAs?

• You can use a LISA to buy your first home or save for later life. You must be 18 or over but under 40 to open one.
• You can put in up to £4,000 each year until you’re 50. You must make your first payment into your ISA before you’re 40.
• The Government will add a 25 per cent bonus to your savings, up to a maximum of £1,000 per year.
• The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2022/23 tax year.
• You can hold cash or stocks and shares in your Lifetime ISA or have a combination of both.

Although the benefits of leaving LISAs untouched are considerable, they can be accessed in an emergency.

As inflation approached double figures in April, around 9,000 savers decided to accept the penalties to take their money out early.

In total, LISA savers made unauthorised withdrawals worth over £14 million, the highest figures for the year.

If you’re a first-time buyer or think you might be in the future or want to save for retirement, a LISA isn’t a straightforward savings account, and may not be right for everyone.