ETC Tax- Spring Newsletter 2023 | Tax Matters That Matter

Up and coming ETC Tax online events

Tax considerations for property developers

29TH JUNE 10.00AM - 11.00AM

SPEAKERS Angela Wood Managing Director ETC Tax Keith Miller Associate VAT Director

• Book early to secure your place and don’t miss our early bird offers!

• Free ticket for Tax Partner

Pro Members

• Follow us on Eventbrite

Should we be going nuts for QNUPS?

A guide to Qualifying Non-UK Pension Schemes (“QNUPS”)

14TH SEPTEMBER 10.00AM - 11.00AM

SPEAKER Andy Wood Director ETC Tax

To view our next up and coming events, and to purchase your tickets click here

Making the complex simple

Contents Features

04

Review of the changes to R&D tax relief

– Since the spring budget announcement. 08

Selling a business

– Guest article from Intelligent Business Partners.

12 Happy? New Tax Year

– Highlighting the important changes for the new tax year. 14

The UK’s VAT system isn’t like everyone else’s

– Who'd have thought?

16

Case of the Month

– Favourable tax treatment... Do you qualify for the remittance basis?

Spring

the time of plans and projects.

As we enter a new tax year the dream of long summer evenings look more realistic, we also hope you are making the most of the lighter nights, that’s if the rain holds off long enough!

Tax Matters, That Matter is here once again so enjoy reading our spring edition. Don’t forget our e-Newsletter will arrive via your inbox each month so you won’t miss out on any tax news and updates from our expert tax advisers!

This quarter we bring you…

Arjan Singh talks us through the changes to R&D tax relief as a result of the spring budget announcement.

The UK’s VAT system isn’t like everyone else’s – Keith Miller reviews the UK tax system.

Happy ? New Tax Year – Clive Howarth highlights the important changes for the new tax year.

Selling your business? – Feature guest article from Mark Fitzgerald Cooke of Intelligent looks at The five questions every business owner asks when selling their business…..and the one they don’t!

Case of the month – Amie Manchester discusses favourable tax treatment for UK non-domicile individuals asking; do you qualify for the remittance basis?

Don’t forget to reserve your place on our next live webinar “Tax Considerations for Property Developers” on 29th June at 10am click here for more information

Many thanks to Sarah Aston and all the contributors who made this edition happen.

If you have any queries, comments, or observations, then please let us know. We’d love to hear from you.

Best wishes, Angela

Angela Wood Managing Director angela.wood@etctax.co.uk

First word

– Leo Tolstoy

“

is

”

R&D CHANGES SPRING 2023

Changes to R&D tax relief were confirmed in the Spring Budget which took place on 15 March 2023. The changes relate to both the SME scheme and the RDEC scheme which apply to smaller (SME) and larger (RDEC) companies respectively.

Whilst some of the changes will come into force from 1 April 2023; many will follow later on.

We have set out below a summary of all the changes you need to be aware of should you be eligible to make a claim for R&D both in terms of a reminder of those changes previously announced and the most recent changes.

Changes to rates of relief for R&D

For expenditure from 1st April 2023, the additional deduction for SMEs will decrease from 130% to 86% and the SME credit rate will reduce from 14.5% to 10%, except for loss-making SMEs that are R&D intensive, in respect of which an increase has been confirmed.

A company is R&D intensive if it spends at least 40% of it’s total expenditure on R&D. For these companies the rate of tax credit will be 14.5% in comparison to 10% which applies to all other claimant companies. This new rate will apply to expenditure incurred on or after 1 April 2023. However, we are yet to see the legislation to support this change.

This therefore means that if your company is R&D intensive, you will need to either:

a. Claim at the 10% rate and amend the company tax return once legislation is in place, or

b. Wait to submit claims

The government has published a technical note setting out how this measure works in greater detail.

Draft legislation will be published for technical consultation in Summer 2023.

For expenditure from 1st April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.

Arjan Singh Assistant Tax Manager arjan.singh@etctax.co.uk

A reminder of other changes announced in last year’s Autumn Budget.

In last year’s Autumn Budget, HMRC announced a number of changes designed to combat R&D fraud and ensure that there are less errors in R&D claims generally. These are highlighted below.

1) Claims to be submitted digitally

Companies will have to submit their R&D claims online using HMRC’s digital service, which is designed to make it easier for HMRC to review information and conduct risk assessments. A Government gateway or agent services account will be required to log in to and access the service.

2) Claims must include additional information

All claims must include additional information to support claims, such as a breakdown of the types of R&D expenditure – see below.

3) Claims must be supported by a named officer of the company

All claims will need to be supported by a named officer of the company. This is designed to protect against unauthorised claims being taken in the business’s name.

4) Claims must include details of any agents

Each R&D claim will need to include details of any agents associated with the submission. This will include ‘main’ agents and ‘secondary’ agents where more than one agent acts for the client. This could pose a practical problem where more than one agent is involved in the ‘chain’ and we are yet to fully understand how this will work. The point here is that HMRC will be able to more easily spot agents with a track record of submitting spurious claims.

5) Some claimants must submit a pre-notification of their claim

New rules require those claiming R&D relief for the first-time or those who have not claimed in the last three accounting periods to submit a pre-notification of their claim to HMRC online. This gives HMRC the opportunity to take proactive steps to educate companies on R&D processes.

The latest date that a claim notification form must be submitted is 6 months after the end of the period of account that the claim relates to.

If the form is not submitted by this deadline, the claim will not be valid.

To complete the claim notification form companies will need the following details:

• the company’s Unique Taxpayer Reference (UTR), this must match the one shown in your Company Tax Return

• details of the main (senior) internal R&D contact in the company who is responsible for the R&D claim, for example a company director

• the contact details of any agent involved in the R&D claim

• the accounting period start and end date for which you’re claiming the tax relief or expenditure credit, this must match the one shown in your Company Tax Return

• the period of account start and end date

It will be critical to keep evidence of R&D claims going forward

To discuss how ETC can help with your tax questions call the team on 0161 711 1320 or email enquiries@etctax.co.uk

• a summary of the high-level planned activities, for example if software has been developed details of what that software will be used for to show that the project meets the standard definition of R&D — you do not need to include evidence on the form, but you will need to provide further information on the additional information form

6) Expanded categories of qualifying expenditure

Qualifying expenditure is also being reformed to include licence payments for datasets and data analytics and cloud computing costs. Further information form

Whilst we already knew that additional information in support of R&D claims would be required as this was announced in 2022 it has now been confirmed that this will be required for all claims submitted on or after 1st August 2023 and not after 1st April 2023 as originally expected.

This was perhaps one of the largest changes to emerge and one which will impact thousands of claims.

Companies will need to send HMRC an additional information form before submitting their Corporation Tax Return. If this is not done, HMRC will write to confirm that they have removed the claim for R&D tax relief from the company tax return.

For claims submitted before 1 August 2023 companies can choose to give HMRC more information which may reduce enquiries about claims.

In order to submit this form, further details will be needed, such as but not limited to:

• Company details

• Contact details of the main R&D contact e.g. company director and any agent involved

• Qualifying expenditure details

• Project details

Again, we are yet to see further legislation to support this and again this is expected to be published in the Summer of 2023.

Overseas expenditure rules

Planned restrictions to overseas expenditure qualifying for R&D will prevent companies from claiming overseas R&D costs.

Quite surprisingly, however, these restrictions have been delayed until 1 April 2024. This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief which has been consulted on recently.

Time limit for R&D claims

The legislation sets out a requirement for companies to make their R&D tax relief claims within two years of the end of the period of account on which the return is based unless the period of account is longer than 18 months, in which case the time limit is 42 months from the start of the period.

This has changed from 12 months from the statutory filing date. The change here arises from companies who did not receive a notice to file, either because they failed to register or notify HMRC that they are dormant, who then benefitted by having more time to make a claim.

Merging of the RDEC and SME schemes

The government’s consultation on merging the RDEC and SME schemes closed on 13 March 2023. They are currently considering responses to this, and no decision has yet been made. The option of a merged scheme is still open to implementation from April 2024.

Should it be agreed, the government will publish draft legislation on a merged scheme for technical consultation in Summer 2023, with a summary of responses to the consultation. Any final decision on whether to merge the RDEC and SME schemes will be announced at a future fiscal event.

Other changes

Where the current and new legislation produces any anomalous results, we can be sure to see further changes to the R&D regime as legislation will be corrected. In that event, ETC Tax will provide further updates.

Next steps

If you have any questions with regards to the changes to the R&D rules, or R&D in general, please do not hesitate to get in touch with our tax experts today. We would be happy to assist with your claim.

SELLING A BUSINESS

Guest article

Ispeak to hundreds of business owners every month who always want to know

What’s my business worth?

How long will it take to sell?

How much will it cost?

Why should I work with Intelligent?

What happens next?

The short answers are depends, depends, depends, depends and ‘we make a plan’!

The variables in valuing and selling a business are many,  from the obvious – sustainable performance, trading history, future opportunity and company structure to the personal – reason for sale, retirement plans, desired timeframe, acceptable deal structure, extenuating circumstances the list goes on…. and this is before we factor in the buyer’s circumstances.

The seller’s business structure and industry, personal circumstances and future plans will all play a part in the type of deal they accept and of course, the tax due on a successful sale.

I set out some of the common questions I’m asked.

Q. I am receiving an initial payment followed by deferred payments over a number of years. Do I pay tax on each instalment received?

A. Unfortunately not. For capital gains tax purposes the initial contract date is the date of disposal. So if the contract date is 31 March 2023 with an initial payment of £100,000 paid initially and 5 payments of £100,000, the whole £600,000 is taxable in the 2022/23 tax year.

Q. When is the best time to think about selling a business?

A. The short answer is ‘when you start it’! A business can take 6-24 months to sell so early planning is essential so that the best price is obtained and the tax position mitigated as far as possible. Often sellers don’t think about tax implications until they’ve accepted an offer, when it may be too late to implement a successful tax planning strategy and can cause the sale to fall through.

Over 1,000+ Businesses Sold. Rated Excellent on Trustpilot. Experienced Business Sales Team.

If you’re considering buying or selling a business, get in touch with myself or one of the team at Intelligent for no-obligation advice.

At Intelligent Business Partners, we are experts in the entire business sales process. We know the reason for a business sale varies.

Our experienced director-led team will take the time to fully understand you and your business, to build a bespoke and thorough plan to deliver a successful timely sale, whatever your motivation.

As part of our approach, our expert team will provide support and guidance throughout the sales process, from enquiry to completion. With access to our board of trusted partners, including wealth management, tax advisors and other professional services.

No matter the sector or size of your business, our proven approach, paired with our dedicated expert team, delivers a seamless transaction with confidential support 24/7.

Five questions every business owner asks when selling their business... and the one they don’t!

Author Mark Fitzgerald-Cooke Managing Director Intelligent

0113 487 9478

07399 158 143

mark.fc@intelligent. co.uk

www.intelligent.co.uk

Q. How do I set the sale price?

A. How much do you need from your business sale? Does the performance of the business now support a valuation to achieve your target sale price? If not, can you achieve growth through operational efficiencies or is a top line increase required? Is it time for an acquisition, recruitment or to speak to a business growth specialist?

Q. Should I sell the shares in the company or the assets?

A. Selling the shares in the company will usually be most tax efficient but the buyer will want guarantees that there are no undisclosed liabilities in the company. This is all usually taken care of in a legally binding Share Purchase Agreement prepared by lawyers.

SOLD SALE SOLD

What you think the business is worth and what someone will pay for it are usually different figures and will be the subject of negotiation. The seller will need to understand what taxes will be payable, and when.

If you are selling the assets of the company you will pay corporation tax on any capital gains and the shareholders will pay capital gains tax when the company is wound up, so there is a double layer of taxation.

Editor’s comment:

As can be seen many of the questions that business owners ask themselves when considering selling their business have tax consequences. Indeed, tax is often one of the drivers when considering how to structure a sale (although clearly should not outweigh any commercial considerations).

ETC Tax have significant experience in assisting clients planning for a sale. Please do contact us for help.

Further information can be found here

Q. And what tax do I pay when I sell the shares or wind up the company after selling the assets?

A. In most cases the proceeds from the sale of shares (on a sale or winding up) will qualify for Business Assets Disposal Relief (formerly Entrepreneurs’ Relief) so the first £1m of gain is taxed at 10% (20% on gains above that). It is important that the seller meets the qualifying conditions.

For married couples/civil partnerships consider splitting the shareholdings between two, if not already done, to maximise allowances/tax rates.

SALE SOLD SALE SOLD SALE

Q. I have considerable personal wealth. What about Inheritance Tax?

A. For Inheritance Tax purposes, shares in a private trading company are effectively exempt from IHT and this is lost when the shares are converted to cash. Gifting some shares into trust pre-sale can also be an effective way of passing on wealth to the next generation, as there will be no capital gains tax or IHT implications on the gift.

As can be seen, there are many aspects to consider when planning to sell a business and early planning is essential to achieve the best sale price and maximise the tax savings. Tax is a major consideration as it is, after all, the after-tax amount that the seller will ultimately enjoy.

HAPPY (?) NEW YEAR

The new tax year is now upon us.

Frozen tax thresholds will see more taxpayers pay higher rate tax of 40% tax this year, whilst dividend allowance and capital gains tax allowances are reduced.

Clive Haworth Senior Manager clive.haworth@etctax.co.uk

Personal tax rates

Personal allowances and higher rate thresholds are frozen until 2028 at £12,570 and £50,271 respectively.

The additional rate threshold will be lowered from £150,000 to £125,140 from 6 April and this is the income level at which an individual will not have any personal allowance, because £1 of the personal allowance is withdrawn for every £2 of income above £100,000.

Dividend tax

The dividend allowance is reduced from £2,000 to £1,000 from 6 April 2023 (and then to £500 from next year).

This reduction will mean many retired people having to engage with HMRC for the first time to notify investment income.

Capital gains tax

A cut in the capital gains tax allowance mean that taxpayers will start paying tax on gains in excess of £6,000 (down from £12,300). This allowance will be reduced further to £3,000 in 2024-25.

The rates of capital gains tax remain unchanged at 10% basic rate and 20% higher rate, but on residential property, apart from primary residences, the rates are 18% and 28% depending on earnings bracket.

Tax returns – filing deadlines and some key dates

Now the 2022/23 tax year is behind us, tax returns for that year can start to be completed and filed with HMRC. In practice it is likely to be several weeks before all the relevant information is available to enable the tax return to be completed.

The deadline for filing tax returns are set out. However, the enquiry window (during which HMRC can routinely enquire into a tax return) runs from 12 months from the date of filing, not from the latest filing dates.

31 July 2023

Also from 6 April 2023, there are significant changes to the rules that apply to transfers of assets between spouses and civil partners who are in the process of divorcing or separating. The changes will take effect for disposals made on or after 6 April 2023.

Spouses or civil partners will be given up to three years, after the year they cease to live together, to make no gain or no loss transfers of assets, and unlimited time when the assets are the subject of a formal divorce agreement. Prior to 6 April the time limit was the year of separation.

A spouse or civil partner who retains an interest in the former matrimonial home will also be given an option to claim private residence relief when it is sold.

Pensions

As widely reported, the Lifetime Allowance has been abolished so there is now no cap on the value of a pension fund before a tax charge arises.

The annual amount that can be paid into pension is also increased from £40,000 to £60,000.

The money purchase annual allowance (MPAA) limit has been increased from £4,000 to £10,000. This means that anyone who has drawn from their pension but is still working will be able to contribute more into their pension.

Second payment on account due for the 2022/23 tax year. If your tax return is already prepared you may have less tax to pay on this date so it may be worth submitting your tax return before 31 July to avoid overpaying tax to HMRC

5 October 2023

If you need to complete a tax return for the first time for 2022/23 (for example you have commenced self employment) you need to notify HMRC, and penalties may apply for late notification.

31 October 2023

31 January 2024

5 April 2024

Deadline for submitting a paper tax return to HMRC. This is also the deadline to amend the previous year’s tax return online if you need to.

Deadline for submitting an online tax return to HMRC.

If you have an ISA ensure you have maximised the amount you can put into your ISA by this date.

If you have any queries or question please get in touch, our experienced team of tax advisers will be happy to assist.

The UK’s VAT system isn’t like everyone else’s – who’d have thought?

When the subject of tax appears in the media, its normally direct tax that’s discussed, mainly income tax, otherwise its national insurance, capital gains tax, inheritance tax, etc that the spotlight falls on.

Keith Miller Associate VAT Director keith.miller@etctax.co.uk

Value Added Tax (‘VAT’ to most people) hardly ever gets a mention unless there’s a major change, which there hardly ever is.

VAT turned 50 this year, too, and in ‘celebrating’ its 50th anniversary, most commentators focused on its quirkiness (ha, ha, Jaffa Cakes, ha, ha) rather than considering its merits.

One of the reasons for this is that most people don’t truly understand VAT, especially the UK version.

increase efficiency, increase tax neutrality, and reduce pressure to cut more productive public spending.

VAT was introduced in the UK in 1973 as a condition of joining the European Economic Community (now the ‘EU’). The standard rate was originally 10%, then fell to 8% before gradually rising to its current 20% peak.

Now that the UK has left the EU, we are no longer tied to the EU VAT model, so the government could decide to reform the VAT system in ways that have never before been contemplated, or even abolish it, but there appears to be no appetite to any of this.

The main reason is that VAT appears to be a very efficient tax raiser. This year it is expected to raise £150bn, with the Office For Budget Responsibility expecting this to rise to £180bn by 2027/28.

This is currently equivalent to £5,500 per household and roughly 20% of all tax receipts. 70% of VAT receipts are derived from household spending.

In short, VAT appears to be a relatively easy way of collecting large sums of money from taxpayers.

Given all of that, it is interesting to read a recent report written by Heather McCauley, an experienced former Civil Servant who has worked with the UK, Scottish and New Zealand governments. Her report (“Fit For Consumption? Examining the case for devolution of VAT & sales taxes”) is primarily focused on the arguments for Scotland being able to retain its own VAT revenue, but it also contains lots of fascinating (yes, fascinating) information on the UK VAT system and how it compares to other countries.

It also looks at arguments for reform of the UK VAT system. For example, the Organisation for Economic Co-operation and Development (‘OECD’) has called for a comprehensive review of the UK’s VAT reliefs (the zero-rates, reduced-rates, and exemptions), whereas the International Monetery Fund (‘IMF’) has recommended that some UK VAT reliefs were removed to “increase efficiency, increase tax neutrality, and reduce pressure to cut more productive public spending.”

It is the last quote from the IMF that is particularly interesting, as it hints at one of the ways that the UK is different from other countries, who often manage their VAT systems quite differently.

To start with, the UK has more complex VAT reliefs than most other countries, who tend to have fewer, less complex reliefs and a much broader VAT base and, despite the UK’s VAT take appearing to be significant, most other countries see VAT as a much bigger revenue raiser than the UK does.

The VAT Revenue Ratio (‘VRR’) is a measure that the OECD use to calculate how much VAT is actually collected by each country compared to the amount that could be collected if standard-rate VAT was collected on all consumer goods and services.

The UK’s VRR is 45%, compared to the OECD average of 56%.

It has been calculated that the ‘lost’ 55% is largely made up from VAT zero-rates applied to food (£20bn) and the construction and sale of new dwellings (£17bn), with the 5% reduced rate of VAT on domestic fuel and power accounting for a further £4.5bn ‘lost’ revenue each year.

It is argued (and is evidenced) that having a lower VAT standard-rate, but a broader VAT base can enable a government to collect more VAT revenue, and in the words of the IMF “reduce pressure to cut more productive public spending”. New Zealand is cited as a good example of this in an OECD report that uses data from 2015. Although New Zealand’s VAT standard-rate (15%) was significantly lower than the OECD average (20%), VAT revenue as a percentage of GDP (10%) was the highest of all OECD countries.

The UK’s VAT revenue was closer to 7% of GDP, despite a much higher standard-rate of VAT. One of the main reasons, as suggested above, was the UK’s widespread VAT reliefs. Although some of these are simple, many are not, and the complexity of the UK’s VAT reliefs is a long-standing joke that just isn’t very funny anymore.

The UK’s overly complex VAT rules are perhaps another reason to follow the lead of other more progressive countries, and simplify our VAT rules to increase overall VAT revenue.

So, although there may be a strong temptation to reduce VAT on ‘essential’ goods and services, in response to a cost-of-living crisis for example, there appears to be strong evidence that reducing VAT on such items only benefits lower income households in the short term whilst disproportionately benefitting those on higher incomes. Rather than hand out cost savings to those who don’t need them, the evidence points to the better solutions being those where the VAT base is broader, VAT revenues are higher, and additional revenues are targeted at those most in need of support.

McCauley expands this argument to suggest that the zero-rate that applies to books favours consumers with higher income because they are more likely to buy books than those on lower incomes.

A real-life example of a UK political party adopting this approach is Labour’s commitment to removing the VAT exemption that applies to private education in order to increase state education provision.

It’s also worth mentioning another feature of the UK VAT system that goes against the grain, the VAT registration threshold, which at £85,000 is by far the highest in Europe; the average being around £20,000.

There are a number of issues with the UK’s high threshold, but I think this perhaps warrants an article of its own, so watch this space.

To conclude, perhaps it’s appropriate to remember Lord Justice Sedley’s words as he oversaw a complex VAT case a few years ago: “Beyond the everyday world lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”

Funny though this comment is, I think that it’s about time we moved away from having to echo Lord Justice Sedley’s frustration when describing our VAT system, or having to explain why an oversized Jaffa cake was baked to help confirm its VAT treatment, to a simpler, more effective system that ultimately helps place the burden of the tax where it belongs.

If you have any questions regarding VAT please get in touch.

FAVOURABLE TAX TREATMENT

… Do you qualify for the remittance basis?

Reviewing an individual’s domicile status can be complex as there are many different personal variables to take into consideration when undertaking the analysis. Domicile has a massive impact on the way in which an individual is taxed in the UK, and so it is crucial to ensure that this is correctly reviewed.

Issue

A client of ours had a large amount of overseas personal income and was looking to understand his domicile status, to determine whether he will qualify for the remittance basis. The remittance basis is an extremely favourable tax treatment for nondomiciled individuals living in the UK. An individual’s domicile status is also relevant when looking at inheritance tax and estate planning.

Amie Manchester Tax Manager amie.manchester@etctax.co.uk

How we solved it

We were able to provide an advice report reviewing the client’s domicile status and planning advice in relation to claiming the remittance basis. This gave the client a clear opinion on their domicile status and meant they could confidently claim the remittance basis and had a clear understanding of the types and levels of his earnings which would be taxable in the UK.

Case of the month

Case of the month

The outcome

The client was able to benefit from claiming the remittance basis and clearly understood from the outset the UK tax saving this would allow him.

Wondering if you qualify for the remittance basis, please get in touch.

The latest news round-up from the ETC team

Challenge Angela!

Throughout the month of May, you could possibly see Angela swapping her high heels for a pair of walking boots as she challenges herself to walk 100 miles during May to raise funds for Cancer Research in memory of her Mum, Janet, who was diagnosed with small bowel cancer after a routine operation, and died on 28th March 2023.

Angela says “during Mum’s very short battle with cancer we received a lot of wonderful support from both St Giles Hospice, where she spent her final few days, and MacMillan, but I feel if we can really invest in cancer research the work of those wonderful charities will hopefully become less needed”.  For those that know Angela well you will know that she spends the majority of time sat behind her computer screen and so walking 100 miles (equivalent 3.2 miles a day) will certainly not be easy for her.  The team here at ETC Tax and all her friends wish her luck and hopefully will be able to join her for some of her miles along the way!

If anyone would like to sponsor Angela you can do so here –https://www.facebook.com/donate/1383659139149187/.

The Report

Up and Events

Live Tax consideration for property developers – June 29th

Should we be going nuts for QNUPS?

Recording Tax issues relating to residence and domicile.

Our monthly case review and activity report

• EIS relief

• Registration of overseas entity

• Employee benefit trusts

• IHT and CGT tax advice

• Selling a property - trusts/CGT

• VAT advice on property purchasing

• Employee share and valuation

14th September

Ladies that Launch Ladies Networking Evening – Altrincham – June 29th

It’s a girl

Congratulations to Phoebe our Team Administrator on the early arrival of beautiful Poppy.

Recording Self assessment –The devil is in the detail.

Ladies Night