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If your accounting period for 2022/23 ended between 31 March and 5 April 2023 (inclusive) you aren’t affected by the transitional changes and can therefore complete your tax return as usual.

Reporting profits. There are two versions of the self-employment and partnership pages which can be used to report your business profits. The short versions are SA103S and SA104S respectively for sole traders and partnerships, and the full versions SA103F and SA104F . If the transitional rule applies to your business, you must use the full version even if you’ve used the short version previously.

Additional information. When completing the SA103F or SA104F you need to enter details of the transitional profit and how you want it to be taxed (it can be spread over five years). Also, if you changed the end date of your accounting period in 2023/24 you’ll need to enter the details of this and may need to complete a second SA103F or SA104F depending on your new accounting date.

July payment. The second self-assessment payment on account (POA) is due on 31 July 2024. The standard amount payable is equal to 50% of your 2022/23 self-assessment tax. If your 2023/24 tax is greater, the POA due on 31 July won’t change. However, if it’s lower you can ask HMRC to reduce your POA. If you’ve already done so you should review whether the reduced amount is now sufficient taking account of the tax on your transitional profits.

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New penalty rules recap. The new regime for penalties for late tax payments will be phased in from April 2022 starting with VAT, followed a year later by some self-assessment tax bills. The new rules mean you won’t be charged a penalty if you pay your tax bill in full within the 15 days after the date it was due. If you pay later there’s an initial penalty equal to 2% of the tax owing. After 30 days from the due date a further penalty applies at 2% of the tax owing beyond day 15, plus another 2% of the tax owing as at day 30. Details of further penalties are set out in HMRC’s policy papers updated on 20 August 2021.

A soft landing. HMRC’s updated guidance says that it realises the new penalty regime will be difficult for some people especially in view of the relatively short time between the due date and when penalties are triggered. It will therefore “take a light-touch approach to the initial 2% late payment penalty for customers in the first year it applies” to VAT and income tax.

What does HMRC mean by a “light touch”? When the new regime begins, if you cannot pay on time HMRC will allow you 30 days from the tax due date to get in touch with it and make arrangements to pay. It will then not usually charge the initial penalty. Tip. If you expect not to be able to settle your full tax bill on time it’s better to approach HMRC as soon as you realise this. If you agree a timetable for settling the bill and stick to it HMRC won’t charge a late payment penalty . This will apply even after the light touch period has ended.

Reasonable excuse. As is the case under the current rules, the new regime allows for penalties to be cancelled where you have a reasonable excuse for paying late, e.g. a significant illness. If you want to claim a reasonable excuse you must make send an appeal (by post or electronically) to HMRC.

HMRC will take a “light-touch approach” for the first year of the new penalty regime starting in April 2022 for VAT and 2023 for income tax. It won’t charge a penalty if you agree terms of payment within 30 days.

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Firstly, NI rates will increase by 1.25% from April 2022. This will apply to both primary and secondary Class 1 contributions, which will increase to 13.25% and 3.25% for earnings up to, and above, the upper earnings limit respectively. Class 4 rates will also increase to 10.25% and 3.25%. The additional 1.25% will be carved out as a separate levy from April 2023 – essentially it will be a new tax.

To illustrate what this will mean for employees, the following table is a useful reference, assuming the current NI thresholds apply:

Secondly, the dividend tax rates will also increase by 1.25%, i.e. to 8.75%, 33.75% and 39.35% for basic, higher and additional rate taxpayers respectively.

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A major aim of MTD is to bring the payment date for all taxes closer to when business profits are earned. On the face of it, this makes sense. However, the move has numerous implications for smaller businesses, including additional software and compliance costs. However, an announcement in the latest Finance Bill that all unincorporated businesses will be forced to report taxable profits on a tax year basis may mean that some businesses have seen the additional costs associated with MTD unexpectedly accelerated by twelve months.

Currently, the draft regulations for MTD for income tax stipulate that an unincorporated business must adhere to MTD from the first basis period that begins on or after 6 April 2023. This would mean a sole trader or partnership with a year end of 31 March would be mandated into MTD from 1 April 2024, leaving plenty of time to prepare. However, due to the way the Finance Bill is worded, the new rules will automatically create a new basis period from 6 April 2023, which may bring the MTD compliance date forward by almost twelve months!

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Incorporating your business

Despite anti-avoidance measures sole traders and partnerships can save tax and NI by transferring their businesses to a company. An unincorporated business that’s transferred to a company is treated as if it permanently ceased. This means that special tax rules for calculating taxable profits apply. One of these says that the equipment owned by the business is treated as if it were sold at market value and acquired by the company at the same price. This usually results in adjustments to the tax deductions, i.e. capital allowances (CAs) previously claimed by the old business. The hassle of valuing equipment and making adjustments to CAs can be avoided if the sole trader/partnership and the company jointly elect to treat the equipment as sold and acquired at the tax value instead of the market value.

Another special rule applies when a business is incorporated. It says that a business is not entitled to the AIA on assets transferred to it. This means the business can’t claim CAs for the whole £90,000 expenditure on the vans all at once. Instead, it gets a CAs “writing down allowance”. This spreads the tax deduction over many years.

£90,000 CAs received by the unincorporated business), for the transfer of the vans to the new business. For relatively little effort the CAs trap, which substantially delays tax relief for the vans, has been avoided.

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New conditions. The government will introduce rules to tighten the conditions for holiday accommodation. They will focus on ensuring relief is only given for genuine holiday lets, perhaps by making checks on the number of days the properties are actually let. We’ll keep you informed as more details of the proposals are published.

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Wider application. While the same general conditions which apply to the first three payments also apply to the fourth and fifth grants, you can only claim the latter two if you submitted your 2019/20 self-assessment return by midnight on 2 March 2021. The good news is that you can claim the new SEISS payments if you started self-employment or became a business partner between 6 April 2019 and 5 April 2020.

Taxing SEISS. Existing legislation says that regardless of which accounting period you include your SEISS payments, they are taxable for 2020/21. This legislation is being amended because of the timing of the fourth and fifth grants, so that apart from payments received after a business has ceased, all SEISS payments are taxable for the year of receipt.

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Remuneration tactics

As a general rule, for director shareholders a small salary topped up by dividends out of company profits is the way to go for maximum tax efficiency. Your salary should be pitched below the level at which NI contributions begin, but at least equal to the NI lower earnings limit (LEL). This is a key target figure for tax efficiency even if your company’s profits have been hit by the pandemic.

Salary, NI and state benefits

When considering how much salary to take there are two limits to watch. The first is the LEL. Up to that point neither you nor your company pay NI, but you get the NI credits that count towards your state pension and other benefits. The second is the primary earnings threshold (PET), which is the point at which you start paying NI. In between these two limits is the secondary earnings threshold (SET) which is the starting point for your company to pay NI.

If you only have one source of earnings, or you aren’t paying NI on other earnings you have, the optimum level of salary to take from your company is between the LEL – which for 2021/22 (and 2020/21) is £6,240 – and the PET – which is £9,568 for 2021/22 (£9,504 for 2020/21). If you haven’t paid yourself a salary in 2020/21, or it’s less than the SET, you have until midnight on 5 April 2021 to do so to ensure you get NI credits for the whole year.

Dividends

If your company’s profits have fallen or it’s registered a loss you need to take care when deciding whether and how much to pay in dividends. You need to consider both the tax year and your company’s financial year. Remember that your company can only declare and pay you dividends if it has accumulated profits. This means if it has little or no profits, whether to pay dividends or not to maximise tax efficiency is academic as your company must have enough profits to cover the dividend you want to pay. If its income has fallen off there are increased tax and other risks to paying dividends.

If dividends are paid in excess of your company’s profits, the excess is unlawful, and you and the other shareholder’s may have to repay some or all of what was received. Until they are repaid HMRC will treat the excess dividends as a loan to the director shareholders which potentially triggers a corporation tax charge.

Profits available

If your company has sufficient accumulated profits to more than cover any losses in the current year, you can think about how much dividend to pay in addition to your salary in order to achieve maximum tax efficiency . This can be a tricky balancing act if there are two or more director shareholders whose taxable income differs significantly. Notwithstanding that, the target is to pay a dividend that brings your total taxable income for 2020/21 up to the basic rate threshold of £50,000. Up to this level you’ll only pay 7.5% tax on dividends. At this stage it’s too early to worry about dividend levels for 2021/22.

Generally, for 2020/21 set a salary at least equal to the NI lower limit of £6,240 but no more than the primary earnings threshold of £9,504. You have until 5 April to bring your salary up to this level. When considering salary, dividends and other income together, £50,000 is the most tax efficient.

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Court ruling. On 18 January 2021 the Supreme Court ruled that insurance companies must pay out on business interruption insurance policies which included clauses for loss of income resulting from notifiable diseases (coronavirus) and enforced closure of business premises. This raises questions about the tax treatment of the payouts and how they interact with government support grants.

Taxable or not? We’ve seen reports suggesting that only if a business received tax relief for the policy premiums would it be taxed on any payouts. Whilst this is true for some types of insurance, it’s not the case for business interruption insurance where the payout is for loss of profits or turnover. The money received should be treated for income and corporation tax purposes in the same way as trading income.

Tax timing. Insurance proceeds are taxable income for the accounts in which they are recorded. In turn, this depends on whether accounts are prepared using generally accepted accounting principles. If so, the insurance proceeds should be included in the accounting period for which the profit/turnover was lost. However, if a payout wasn’t “virtually certain” it ought to be reported in the accounts covering the date when it became so. As the right to coronavirus-related payouts was contested by insurance companies it’s reasonable, in most cases, to include them in your accounts which cover the date of the Supreme Court ruling. Check this with your accountant.

Government grants. Most insurers gave an undertaking in September 2020 that they would not deduct government coronavirus support grants from business interruption payouts. Further, payouts don’t count as income for the purpose of working out entitlement to government grants.

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