Income Tax changes (MTD and YE)
Making Tax Digital for Income Tax
From 6 April 2023 unincorporated businesses (sole trades, landlords, partnerships) with annual income in excess of £10,000 will need to:
Keep records electronically;
Make quarterly submissions to HMRC; and
Produce an ‘end of period’ report for each income source.
Whilst April 2023 seems a long way off it is worth starting to think about your current record-keeping procedures and what changes may need to be made in the next year to make the transition to digital run smoothly.
Changing Tax Year End
The Office of Tax Simplification (OTS) has announced that it will be reviewing the benefits, costs and wider implications of changing tax year end for individuals from 5 April to either 31 March or 31 December.
The main focus will be on the implications of moving it to 31 March as this is the nearest month end date to the end of the current tax year, the end of a calendar quarter, the UK financial year end date, and the date with reference to which corporation tax rates apply.
The OTS will also outline the main issues, costs and benefits that would need to be considered if the end of the tax year were moved to 31 December.
The OTS will report back over the summer with detailed analysis of the impact of such a change and the potential benefits for individual and company taxpayers as well as any advantages in terms of tax collection and closing the tax gap.
Extended loss carry-back
One of the announcements in Sunak’s latest Budget was the extension of current loss carry-back rules to the past three years for trading losses arising in 2020/21 and 2021/22.
Losses will be required to be set against profits of most recent years first before carrying back to earlier years. Relief in the earlier two years is capped at £2,000,000 and can only be set against trading profits.
The proposed change is temporary and only applies to trade losses (including UK furnished holiday lets) for tax years 2020/21 and 2021/22.
The claim for relief must be made in the relevant tax returns within the normal time limits i.e. from the first anniversary of the filing deadline.
The government has confirmed that it will proceed with plans to increase the age at which individuals can access their pensions without incurring an unauthorised payments charge. It is going to rise to from age 55 to 57 in 2028.
The change will be introduced in Finance Bill 2021-22 and the draft legislation will introduce a period within which individuals have an opportunity to join a pension scheme by 5 April 2023 where the scheme rules on 11 February 2021 already confer an unqualified right to take pension benefits below age 57.
The government has also proposed some changes to the transfer rules for members to retain their protected pension age where they transfer their pension to another provider.
HMRC has issued guidance for taxpayers affected by the loan charge and who are now being contacted by third parties demanding repayment, in most cases because the original provider sold the outstanding amount to a third party
It may be that the third party is not aware that income tax on the loans has been, or will be, paid (either by agreeing settlement or via the loan charge). In either case the individual will be of the firm opinion that the loan repayments are no longer due and it is important for the taxpayer to check that the loan is repayable by checking the loan agreement and subsequent correspondence, and contacting the original provider. Where there is no evidence that payments were ever intended to be made there may be a case to contact the Financial Ombudsman.
HMRC have stated that ‘The government is unable to intervene in a dispute between two private parties over loan contracts. Any such dispute should be resolved through the courts in the normal way without government interference.’
HMRC have also warned that schemes purportedly circumventing the loan charge are continuing to be promoted and has reiterated their stance that these schemes do not work.
Research and Development (R&D)
Historically HMRC have taken a haphazard approach towards error and fraud in R&D claims, however they have started to challenge a number of claims for customer-led R&D, on the basis that the underlying activities are being subsidised by the claiming company’s customers.
While some companies will undertake R&D work with the future hope of being able to sell these profitably, it is more likely that most will seek to engage with customers as early as possible in order to manage cash flow and commercial risk. Unfortunately, it appears that this may cause problems with HMRC’s interpretation of the legislation and any subsequent R&D claims.
Should HMRC’s revised approach be applied more broadly, it would not only significantly narrow the scope of R&D tax relief, but also create unintended policy outcomes.
We would therefore advise any businesses that entered into an R&D contract review their claim(s) as soon as possible to ensure they are robust in the event of challenge by HMRC once updated guidance is published.