HMRC & TAX Update March 2023

I think it’s worth mentioning that I am not an accountant or a tax advisor, I am just a small business owner and property investor that is navigating his way through the various traps that the government likes to set out as a way to get more money out of our pockets and in to theirs, so I thought it would be good to share some of these things as I understand them.

A frustration that is sometimes levelled at accountants is that they are not very forthcoming with ideas or advice on how to save tax, which I have to say, I have been known to voice. However, in their defence, the implications of tax on individuals is exactly that – individual to the persons circumstances, so I would encourage everyone to arm themselves with as much knowledge as they can and reach out to a good tax accountant to have a discussion around how they can plan to legally minimise the amount of tax that they pay.

Corporation Tax

Currently the rate of corporation tax (the tax that limited company pays on its profits) is currently 19% but from April 1st 2023 it is due to change.

The main rate of Corporation Tax will be 25% for companies with profits of £250k or more.

The 19% rate will remain for companies with profits of £50k or less and will be know as the ‘Small Profits Rate’.

A tapered rate will then be used for companies who make profits of between £50k – £250k as the table below shows:

Associated Companies

As if this wasn’t complicated enough, HMRC are now taking in to consideration if companies are ‘associated’ – so, what’s the definition of an associated company?

An associated company is a company that has more than 50% ownership by other companies or individuals.

So for example:

If Mrs Smith owns 100% of Limited Company ‘A’ and 100% of Limited Company ‘B’ then these would be classed as associated companies.

If Mr Jones owns 100% of Limited Company ‘C’ and 80% of Limited Company ‘D’ then these would also be associated companies

If Mr Smith owns 100% of Limited Company ‘E’ and 20% of Limited Company ‘F’ then these would NOT be associated.

The general rule of thumb is if an individual or other company owns more than 51% of the shares of 2 companies, then they could be classed as associated.

Also, companies could be classed as being associated if the ownership is by ‘connected’ family members, so Husband/Wife or Mother/Daughter.

Why should you be bothered about associated companies?

The £50k rate and the £250k Corporation rate are apportioned to the associated companies, so in the case of the Small Company Rate the level at which the 19% rate changes could move from £50k, down to £25k as there are now 2 companies ‘sharing’ the rate, see below:

So if you have multiple companies set up then reviewing them is important as you may end up paying more tax than you expected and if you have any companies that are only making a small profit, then it might be worth considering if you can close them and move the operations across to another company to consolidate the profits.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. The amount of CGT you pay depends on a variety of factors, including the type of asset you’re selling, how long you’ve owned it, and your income tax bracket. In the UK, the rates for CGT for non-property assets are currently 10% for basic rate taxpayers and 20% for higher rate taxpayers, with some exceptions and reliefs available.

The rates for residential property are 18% for basic rate tax payers and 28% for higher rate tax payers.

The limit at which CGT becomes payable is being reduced, so up until the period to April 2023 you would not pay CGT on the first £12500. For the period to April 2024 this is being reduced to £6000 and then for the period to April 2025 it will be just £3000.

Income Tax Fixed Until 2028 – Sound like good news? – think again….

In the autumn budget the Government announced that it was to extend the period that income tax would be fixed for until April 2028 – which sounds like a positive in principle, however, they also fixed the thresholds of the when the rates become payable. The problem with this is that it does not allow for inflation, so when we are in exceptionally high inflationary times (such as now) the amount of money that you can earn (in real terms) before paying income tax reduces and as your income increases to cover the rising costs of living, you may well get dragged in to a higher tax band – this is know as ‘Fiscal Drag’

So for those that are currently earning £12,500 or less, with inflation currently at around 10%, in order to maintain their current level of purchasing power, they would need to increase their income to £13,750, however this would push them over the ‘fixed’ lower earnings rate of £12,500 by £1,250, meaning they would pay £250 in tax, so in real terms they would be £250 a year worse off, even though they have increased their income at the same rate of inflation.

The more concerning thing for landlords and property investors that hold properties in their own name is the effects of Section 24 that prevents the mortgage interest being deducted as an allowable expense, effectively tax is calculated on turnover, not profit (I know, it makes no sense!).

If you are lower rate tax payer (20%) then you will see little change as landlords can claim a tax credit of 20% based on their loan and mortgage interest. However, combine this with the fiscal drag phenomenon mentioned above and you may accidentally get dragged in to the higher tax bracket if your income is close to the higher tax threshold, (currently £50,270) and you may end up making a loss by paying HMRC tax!

Companies House – The End of Abridged Accounts?

With plans for Companies House to become a fully digital organisation, alongside moves to combat money laundering, abridged accounts may soon be phased out. This means that all companies – regardless of size – will have to file a full profit and loss account, along with a balance sheet.

The move towards digital filing will make it simpler to compare accounts with information held by HMRC, potentially making it easier to spot irregularities.

On the plus side, because directors will now need a verified identity with Companies House, identity theft should become much harder. Furthermore, credit rating agencies will have access to more detailed financial information about businesses – and this could make it easier for them to obtain credit.

Unfortunately though, these changes mean smaller businesses must sacrifice some privacy as more detailed accounts will now be publicly available – including to competitors.

At the moment there’s no set deadline for when filleted and abridged accounts will be abolished, but if your business currently uses them you should bear in mind that they won’t be around forever.