HMRC sets its sights on SMEs over UK tax gap

The tax gap in the UK – the difference between the amount of tax owed and the amount that has been paid – remains wider than anticipated due to SMEs, according to HM Revenue & Customs (HMRC).

The tax authority’s figures for 2021/22 show that small and medium-sized enterprises (SMEs) contribute significantly to the national tax gap, with 56 per cent (£20.2 billion) of the total gap (£36 billion) accounted for by underpayments or non-payments by these businesses.

HMRC attributes much of this gap to careless errors made by SMEs, which is why ensuring compliance can help to narrow this gap and prevent SMEs from being hit by easily avoidable tax penalties and investigations.

Understanding tax obligations

Businesses need to have expert knowledge of the different taxes they are liable for. These include Corporation Tax, VAT, Income Tax and National Insurance Contributions via PAYE.

According to HMRC, Corporation Tax, Income Tax, National Insurance Contributions and Capital Gains Tax together account for 65 per cent of the total tax gap.

Organisation and meeting deadlines

SMEs need to remain organised and keep meticulous records of all financial transactions. A lack of sufficient care was responsible for almost a third (30 per cent) of all underpayments of tax.

It seems an obvious observation but ensuring that all tax returns and payments are submitted by the relevant deadlines will mean SMEs avoid penalties for late submission.

Delays in payment or submission can also increase the chances of errors as a last-minute rush often leads to carelessness.

Stay up to date with tax laws and changes

Tax laws are subject to change and being unfamiliar with any updates could lead to errors in your tax reporting that result in penalties, fines and investigations.

SMEs should ensure that they are up to date with the latest changes in tax laws, rates, and deadlines.

Maintain good communication with HMRC

If SMEs do find themselves to be in a position where they’re unable to pay their taxes on time, they should reach out to HMRC and explain the situation. They might be able to offer a payment plan or provide other solutions.

With HMRC intensifying its focus on non-compliance by small businesses, SMEs must pay close attention to their tax obligations.

If you are an SME business owner and would like assistance with your tax obligations, our expert team of tax professionals are here to help.

Inflation and increased interest rates – What does it mean for businesses?

Office for National Statistics (ONS) data revealed that the Consumer Price Index (CPI) – the official measure of inflation – only fell to 8.7 per cent in the 12 months to May 2023.

While the rate of inflation is not as high compared to previous months, where it peaked at 10.4 per cent in February, many economists had predicted a significantly lower rate of inflation.

As inflation is falling at a slower rate, the Bank of England (BoE) has attempted to curb this by increasing the base interest rate further to five per cent.

High inflation and the ever-increasing base rate are having a significant impact on many businesses in a number of different ways including:

Increased costs

Higher prices and costs are feeding the current rate of inflation. As the cost of raw materials, labour, and operational expenses rise, businesses are squeezing their profit margins.

While larger businesses may have the capacity to deal with these increased costs, small and medium-sized enterprises (SMEs), often operating on tighter budgets can find this situation particularly challenging.

Some businesses facing increased costs are mitigating this by raising the prices of their products or services.

This move needs to be handled carefully, however, as if prices are increased too much then it could drive customers away and cause a loss in revenue, while also feeding into inflation.

Equally, SMEs need to explore how they can drive existing costs down where possible by reviewing arrangements with suppliers and service providers.

Difficulty borrowing

Interest rate increases naturally mean that taking out loans will be more costly for businesses looking to borrow and will also affect any existing loans that are not on a fixed rate.

Increased interest rates can be a significant worry for businesses carrying a substantial amount of variable-rate debt, as higher interest rates ultimately mean higher borrowing costs.

While the current five per cent base rate is the highest it has been since 2008, economists predict that interest rates could peak at six per cent by the end of 2023 – something businesses should consider as they plan their budgets for the next 12 months.

The higher rates of interest have also affected access to finance, as lenders adjust their approach to lending due to concerns about businesses servicing their debts. Many are, therefore, applying more stringent credit and affordability checks.

HMRC debts 

Tax debts to HM Revenue & Customs (HMRC) track the BoE base rate. In its simplest form, this means that the rate of interest for the late payment of taxes is calculated as the base rate plus 2.5 per cent.

The rate of interest paid by HMRC on the overpayment of tax is also calculated as the base rate minus one.

There are various other rates of interest charged by HMRC, which can be found here. As the rate of interest increases, so does the cost of late tax payments.

Although inflation rates are currently higher than predicted, the BoE has stated that the increase in interest rates will see the inflation rates fall in the coming months, as they attempt to push it down to the two per cent national target.

If you are a business owner who would like assistance navigating the current economic climate, please contact our expert team today.

Strutting our stuff for Scottish Huntington’s Association

On 14 May, our team smashed the Dance 100 challenge by dancing their hearts out in aid of our charity of the year Scottish Huntington’s Association (SHA).

Not only did the team dance along to an impressive 100 songs back-to-back but we were also the proud sponsors of the event, which brought together more than 200 team SHA members.

The team had a great time showcasing their dance moves and raising awareness for such an important cause.

In just over 2 months, we have raised a fantastic £697 for Scottish Huntington’s Association, and we don’t plan to stop there!

We have plenty of other fundraising plans up our sleeve, including a long-distance challenge walk around the Speyside Way and an office charity day which includes the hilarious ‘Pie a Director’ challenge.

The team can’t wait until our next charity adventure.

If you would like to join us in raising funds for Scottish Huntington’s Association, make a donation today by clicking here.

What else have we been up to?

While Scottish Huntington’s Association is our main charity focus this year, we are also passionate about supporting other local causes.

On 6 May, 10 team members participated in the St Andrew’s Hospice “It’s a Knockout” competition, which saw teams of 10 take on a series of fun challenges and tasks, all while raising money for the charity.

Our team gave it their all and had a fantastic day raising awareness for St Andrew’s Hospice, which has a special place in our team member’s hearts.

The team has raised an incredible £1080 in donations so far, great work everyone!

The ins and outs of pre-notification of R&D claims

The UK Government has long encouraged businesses to invest in Research & Development (R&D) projects, believing it to be at the forefront of economic growth.

R&D tax reliefs are, therefore, lucrative and aimed at both Small and Medium Sized Enterprises (SMEs) and larger organisations.

However, before organisations plan to claim R&D tax relief or expenditure credit, they must now notify HM Revenue & Customs (HMRC) of their plans to do so.

HMRC reforms to R&D pre-notification claims came about in April 2023 in an attempt to crack down on abuse of the R&D tax relief scheme.

Who should notify HMRC?

Companies who are planning to claim R&D tax relief must now notify HMRC if they:

  • Are claiming for the first time.
  • Have claimed for the previous tax year but did not submit that claim until after the last date of the claim notification period (the claim notification period ends six months after the end of the period of account)
  • Have a claim that was made more than three years before the last date of the claim notification period

Notification deadlines 

The deadline for submitting claim notification forms is six months after the end of the period of account that the claim relates to.

Any submission after this deadline will not be valid.

What information will you need to complete the claim notification form?

The claim notification form requires thorough checking before being submitted as any missing details could lead to claims being rejected outright.

All claim notification forms need the following details:

  • The company’s Unique Taxpayer Reference (UTR)
  • The name of the senior R&D contact who is responsible for the claim
  • Contact details of any agent involved
  • The accounting period start and end date for which you’re claiming the tax relief
  • The period of account start and end date
  • A summary of the high-level planned activities and evidence the project meets the standard definition of R&D

Once a claim notification form has been submitted online, an email will be sent which will contain a reference number that will need to be kept on record to discuss the claim notification form with HMRC.

Submitting the claim notification form allows organisations to continue with their claim, they will just need to put an ‘X’ in box 656 of the Company Tax Return to inform HMRC that the claim notification form has been submitted.

From 1 August 2023, an additional information form must be submitted to support all claims for R&D tax relief. This form will allow you to explain in detail about your project to evidence its R&D properties.

This additional information form needs to be submitted or else HMRC will not be able to process your claim.

For more information about the R&D relief changes and what to include on your notification forms, please contact us for expert advice.

Constantly asked for pay rises? Here is what you need to know about pay in the UK

As an employer, you will likely face the delicate situation of employees asking for pay rises.

With the cost-of-living crisis and rise in inflation, these requests will have become more frequent as people look to keep up with spiralling living costs.

Each month, the Office for National Statistics (ONS) surveys collect the salaries of 12.8 million workers to produce the median salary for the UK.

The latest data from the ONS indicates that the median average salary is estimated to be £31,772.

However, how much a person earns often depends on their age, skill and where they live.

When it comes to pay rise requests, employers need to tread a thin line between granting requests and retaining talented staff you cannot afford to lose, while keeping an eye on employment costs in what is still a tough financial climate.

Handling these situations correctly and professionally is crucial to keeping employee morale high and your business running smoothly.

Encourage open communication

Asking for a pay rise can be an awkward, uncomfortable experience for employees, so it is important to make employees feel comfortable discussing their salary expectations.

Encourage open and honest discussions about pay and make it a regular part of performance reviews.

This helps to prevent surprises and ensures that both parties have a clear understanding of the expectations.

Align pay with performance and evaluate requests objectively

Regularly evaluate your employees’ performances, acknowledge their accomplishments, and align their pay accordingly.

This approach encourages productivity and gives employees a clear understanding of how they can increase their earnings.

When requests for pay rises are made, objectively evaluate the requests based on performance and the last time the employee was given a pay rise. Try and avoid an instant response that may not be in line with objective thinking.

Consider the business’s financial position

While it is important to reward deserving employees, you must also consider your business’s financial situation.

Can your business afford the requested pay rise? If not, it’s important to communicate this openly to the employee while also discussing potential prospects.

It is better to delay a pay rise than to overstretch your finances and potentially jeopardise your business.

Consider alternatives

If a pay rise is not feasible, consider other alternatives. This could include additional benefits such as more flexible working hours, opportunities for training and development, or an enhanced bonus scheme.

Sometimes, non-monetary rewards can be just as effective in demonstrating that you value your employees.

Communicate your decision clearly

Once you have made your decision, communicate it clearly and respectfully. If you approve the pay rise, be sure to highlight the employee’s achievements and contributions. If you decline, explain your reasons, and provide constructive feedback on what the employee can do to improve their chances of a pay rise in the future.

All pay rise requests should be dealt with fairly and consistently. Inconsistent treatment can lead to discontent within the workforce and possible breaches of UK employment laws.

Are you unsure about how to deal with a pay rise request, or have other remuneration questions? Contact us today.

Changes to free childcare, but higher earners will still miss out

In the Spring 2023 Budget, the Government laid out plans to shake up the current free childcare system – but many higher earners will be disappointed to find that the changes keep them excluded from the scheme.

The existing childcare rules mean that parents are eligible for up to 30 hours of free childcare if their children are aged three to four.

Eligibility also depends on if you are employed or self-employed, the number of hours you work, and your income.

If you or your partner have an expected adjusted net income of over £100,000 in the current tax year, you will not be eligible.

The changes, which will be staggered over the next couple of years, will see many families in the UK benefit from free childcare at an earlier age, however, the £100,000 annual income cap will remain.

Timeline of changes

  • April 2024 – Working parents of two-year-olds will be able to access 15 hours of free childcare per week.
  • September 2024 – Children from the age of nine months will be eligible for 15 hours per week of free childcare.
  • September 2025 – Working parents of children under the age of five will be entitled to 30 hours of free childcare per week.

The changes will be welcomed by many adults in the UK who will be able to return to work at a much earlier date.

However, higher earners will not see this benefit due to the income restrictions, which have not changed.

If you’d like more advice on the current childcare rules or want more information on the upcoming changes, please contact us.

Trivial benefits in kind and the advantages they give to employers

It is important for employees to feel valued in the workplace. A lot of the time, it is the little things that employers can provide to their staff that have the most substantial impact.

One such ‘little thing’ is the concept of trivial benefits in kind. Trivial benefits are best described as small ‘token gifts’ that are given to staff by their employers.

Trivial benefits include such things as chocolates, wine, gift vouchers, tickets to the theatre, or a team outing for lunch or dinner.

These gifts meet the trivial benefit criteria as long as:

  • The gift is worth £50 or less
  • The gift is not cash
  • It isn’t a reward for work or performance
  • It isn’t in the terms of an employee’s contract

The main distinction of trivial benefits in kind is that they should not add value to an employee’s salary. They can also not be given in lieu of payment.

Advantages of trivial benefits in kind

As well as the boost to employee wellness and morale, trivial benefits in kind also provide tax advantages for employers.

Below are the benefits and reasons for employers to consider adding trivial benefits in kind to their working culture.

Improved employee morale and engagement 

Regular trivial benefits serve as consistent reminders to employees that they are appreciated. These small gestures can significantly boost morale, leading to increased job satisfaction and productivity.

When employees feel valued, they are more likely to engage with their work actively and maintain a positive attitude towards their employers and the business in general.

Enhancing employer’s reputation

Providing trivial benefits can positively impact an organisation’s reputation, helping it to stand out as an employer that cares about its employees’ well-being.

This increased employer branding can be instrumental in attracting and retaining top talent in the competitive job market.

Tax benefits

From a purely financial perspective, trivial benefits in kind are exempt from tax, National Insurance, and reporting to HMRC. This tax efficiency makes trivial benefits a cost-effective way for employers to reward their staff.

However, if benefits are part of a salary sacrifice arrangement, then they won’t be exempt from tax and will need to be reported on a P11D form.

Employee wellness

Trivial benefits can also contribute to the overall wellness of employees. For instance, offering a yoga class or a fitness tracker can encourage employees to take care of their physical health. Similarly, gifting a book or sponsoring a hobby class can contribute to mental wellness.

A healthy employee, both physically and mentally, is likely to be more productive and less prone to taking sick leave.

The cost to the business is relatively small and is tax-exempt, so it is well worth considering if you haven’t already done so.

For more information on trivial benefits in kind, contact us today.

Late interest penalties hit 1.4 million taxpayers – and it could get worse

The 2020/21 tax year saw 1.4 million people charged interest on overdue tax payments – a 15 per cent increase on pre-pandemic figures.

The data was released after a Freedom of Information request by investment platform, AJ Bell, but this did not disclose how much money HM Revenue & Customs (HMRC) raised from these late payment penalties.

The increase came despite a drop in how much money many would have owed HMRC due to furlough during the pandemic and corporate dividend cuts.

Number of taxpayers facing penalties is predicted to increase

The overall amount of people paying late payment charges on missed tax deadlines is predicted to rise.

By the 2024/25 tax year, the number of people HMRC estimate to be paying dividend tax and Capital Gains Tax will increase to 2 million.

This increase means there is a far greater chance that hundreds of thousands more taxpayers could face late payment charges, based on the current proportion of those missing the deadlines.

Late payment interest rate increases

With more and more people having to pay penalties for overdue tax payments, it will not be of great comfort for many to learn that the interest rates on these charges have increased.

As of 31 May 2023, the interest rates on late tax payments rose from 6.75 per cent to 7 per cent.

It is important to note that HMRC will align future hikes to these interest rates with the base rate set by the Bank of England.

This base rate has rocketed in the past 12 months as the Government attempts to stem inflation, and it is predicted that it will continue to rise in the coming months.

This will in turn mean that late tax payment interest rates will increase. This should stand as a warning to UK taxpayers to ensure that their taxes are filed and paid on time.

If you’d like advice on how to submit your tax returns on time, please contact us.

Roadside charging – How to account for credit card payments

With a growing number of company car owners using electric vehicles, many are deciding or being permitted to use company credit cards to pay for roadside charging.

However, what are the implications of this for the employee and business alike?

While the answer is fairly technical, the short simple answer is there will be no taxable benefit on the employee and no National Insurance Contribution (NIC) charge.

This is because a credit card is a credit token, not a specific means or facility for providing the electricity to charge the vehicle, and it is, therefore, exempt under Section 269 of ITEPA (Income Tax (Earnings and Pension) Act) 2003.

At the moment, electricity is not a fuel for fuel benefit purposes either, this further prevents there being a benefit under ITEPA.

To make matters more complex, this should not be confused with the provision of electricity by an employer via a workplace charging point, which is also exempt from a Benefit in Kind charge under a different section of the same Act, which accounts for the facilitation of electric charging under the fuel benefit rules.

When it comes to the NIC, a liability for Class 1 contributions exists where the credit card is paying liabilities for the benefit of the earner.

However, this is counteracted by other legislation that ensures that no Class 1 NIC arises on business expenses or where “a strange pre-purchase performance is given by the employee whereby the employee informs the seller that they are purchasing the goods or services on behalf of their employer.”

Confusing and seemingly contradictory, this has been established in prior case law, which found that when informing the seller that the fuel is being acquired on behalf of the employer, implies a shift in the purchasing dynamic.

Instead of personally buying the fuel, the employee assumes the role of an agent for the employer.

By procuring the electricity on the company’s behalf, they are no longer utilising the corporate credit card to settle a personal responsibility. Rather, they are being supplied with fuel by their employer.

This area of tax and National Insurance legislation is constantly changing and so if you have any queries about the potential charges related to company cars or their “refuelling” it is best to seek professional advice. To find out how we can support you with this, please contact us.