by Abdul Wahab | Dec 17, 2021 | Articles, News
Contents
- Foreign Tax Credit Relief
- Capital Allowances
- How Capital Allowance Works
- Annual Investment Allowance
- Other Corporate tax reliefs
- Research and Development Tax Relief
- Patent box
- Creative Industries Tax Relief
- Trading Losses
- Business Rates
- Conclusion
The concept of tax reduction is intriguing. While responsible businesses want to pay their dues, they also don’t want to pay any more than is essential. The UK tax system is complex, but there are several reasonable ways to reduce your corporate tax burden. All you need is a basic awareness of how the UK tax system operates and what tax credits and incentives are available.
Limited companies, international corporations with local branches, and other profit-making unincorporated firms pay corporation tax (CT) on trading profits, investments, and gains from asset sales. The company tax bill is now 19 per cent, but the chancellor announced on 3rd March 2021 that starting in April 2023, the headline rate will be raised to 25 per cent.
For the current tax year, the Corporation Tax rate on company earnings is 19 per cent, which means that an organisation with a profit of £100,000 pays £19,000 in Corporation Tax. However, claiming every allowable cost and relief and providing a more realistic picture of the firm’s earnings is the key to ensuring your company pays no more Corporation Tax than it has to.
Let’s take a look at some of the government tax reliefs and incentives that our specialist accountants have prepared to assist you to decrease your corporation’s tax bill while staying tax effective.
If you have previously paid foreign tax on income typically taxed in the UK, you can claim Foreign Tax Credit Relief.
It’s possible that your earnings and gains will be taxed in more than one country. For example, if you live in the UK and earn money from a job overseas, your foreign earnings may be taxed in the UK and the nation from which you earned them. Credit relief reduces the amount of UK corporation tax owed on the same profits if a firm has paid foreign tax on those profits. In situations where the foreign tax on those profits exceeds the UK corporation tax on such gains, the unutilised foreign tax can be carried back one year or carried forward in specific circumstances.
There are three ways in which the UK ensures that no one bears a double burden:
- Tax treaties may decrease or eliminate double taxation.
- If no treaty exists, a person can seek ‘partial’ relief by deducting foreign tax from their UK tax.
- The individual can deduct the foreign tax as an expense from their income (a practice known as relief by deduction). However, this is often inefficient.
When you disclose your foreign income on your Self Assessment tax return, you can claim Foreign Tax Credit Relief. You must register for Self Assessment by 5th October of each year and pay by 31st January of the year following the tax year for which you are paying.
If all of the following apply, however, you do not require to file a tax return:
- Dividends are your only source of overseas revenue.
- You have less than the £2,000 dividend allowed in total dividends (including UK dividends).
- You don’t have any additional sources of income to declare.
The amount of relief you receive is determined by the UK’s ‘double-taxation agreement’ with the country from where your income originates. Even if there is no agreement, you will normally obtain relief unless the foreign tax does not correlate to UK Income Tax or Capital Gains Tax.
A corporation can deduct certain expenditures and costs from its profits to reduce the amount of tax it pays. Business entertainment expenses and capital expenditures are not included in these expenses. A company’s capital expenditure is the money it spends on land, buildings, and equipment.
Capital expenditures on certain types of business assets and business premises can be claimed as capital allowances by a company. Capital allowances provide substantial tax relief in the United Kingdom for “capital” investments in facilities and equipment for businesses. Capital expenditure provides an asset or a competitive advantage that lasts for a few years or longer. It is often recognised as a tangible fixed asset on a company’s balance sheet.
The net cost of the company asset or premises is used to determine capital allowances. There are different rates available depending on the type of asset. A company can claim capital allowances on:
- plant and machinery
- motor vehicles
- industrial buildings
- transmission capacity rights
- computer software
- specified intangible assets.
Once the value of the assets has been determined, the difference can be deducted from the profits before tax is calculated. Capital allowances can be claimed for the following items in addition to equipment and machinery:
- renovating business properties in disadvantaged areas of the UK
- mineral extraction and dredging
- research and development (R&D)
- Patents and “expertise” (intellectual property relating to industrial practices)
- Buildings and structures (i.e. construction costs)
The two most commonly claimed forms of capital allowances are “plant & machinery allowances” (PMAs) and “structures & buildings allowances” (SBAs).
Capital allowances are calculated by multiplying the amount of expenditure that qualifies for capital allowances by the business’s effective tax rate. For example, A firm subject to the 19 per cent corporation tax rate invests £100,000 in assets qualifying for capital allowances. By claiming capital allowances, the corporation may that £100,000 in tax from its profits. This saves £19,000 in corporate tax (£100,000 multiplied by 19%).
So, every £1 spent on equipment qualifying for capital allowances is worth a tax saving of 19p at the 19% corporation tax rate applying until April 2023. Or 25p at the 25% rate coming into force after April 2023. For income taxpayers, the savings are typically higher because the basic rate of income tax is 20%, the higher rate is 40%, and the additional rate is 45% (the marginal rate for a slice of certain taxpayers’ income can be as high as 60% Because the basic tax-free personal allowance is gradually reduced by £1 for every £2 of income exceeding £100,000)
However, the computation is frequently more difficult due to the several types of capital allowances available, each with a distinct amount and rate of tax relief. As a result, the time it takes to receive tax relief might vary.
The expenditure must be spent on a particular type of asset. In most cases, you must own the asset for which you are claiming capital allowances. In other words, if you rented or leased the asset, you won’t be able to claim capital allowances, but you could be able to get tax relief on the rental charges as revenue expenditure.
Assets bought through hire purchase, or financing leases are subject to special rules. Even though legal ownership may not pass until the conclusion of the contract term, these assets are often viewed as belonging to the person who is utilising them. These assets must have been put to use to claim capital allowances. Any interest paid on hire purchase items is considered a revenue (trading) expense rather than capital expenditure. When an established firm has plant and machinery or other assets, capital allowances must be addressed in business planning.
Annual Investment Allowance (AIA) is a type of capital allowance. Capital allowances can be claimed for most purchases of plant and machinery and business vehicles. Different types of expenditure qualify for different capital allowances.
Most plants and machinery are eligible for AIA. This implies that before calculating your tax, you can deduct the whole cost of the item from your profits. Each time you start a new accounting period, a new AIA allowance rolls in, and if you spend more than the AIA amount, you can claim writing down allowances on that additional expenditure.
Claiming for automobiles, items you possessed for a different reason before starting to use them in your business, or items donated to you or your firm, must be done by writing down allowances rather than AIA.
In the first year, you can generally claim the whole amount as a capital allowance if your total capital expenditure is less than a specified annual investment allowance (AIA). From 1st January 2019 to 31st December 2021, the AIA will be set at £1 million before returning to its normal level of £200,000. This is limited to a single allowance for groups of companies or associated businesses. From 1st January 2019, the increased yearly investment allowance will be accessible for a three-year period.
Suppose your company purchases equipment that qualifies for the Annual Investment Allowance. In that case, you can deduct 100 per cent of that item’s cost from your profit before calculating how much tax you owe. If your company is VAT registered, you can claim the Annual Investment Allowance based on the entire cost of the asset less any VAT you can recover. If your company isn’t VAT-registered, you can claim the Annual Investment Allowance on the asset’s whole cost.
Several other corporation tax reliefs can help reduce your corporation tax liability.
Relief for research and development (R&D) is intended to assist companies working on breakthrough science and technology initiatives. To qualify for R&D tax credits, businesses must be working on a specific project.
If your company is developing new products, processes or software, it may be eligible for this tax relief. This can equate to additional tax relief of up to £ 24,700 for every £100,000 spent on research. You can opt to claim an R&D tax credit of up to 14.5 per cent if you invest in R&D and your firm makes a loss, in addition to tax relief. In this case, the government provides you with a cash payment.
Loss-making businesses can take advantage of this corporate tax relief to grow their losses, which they can then offset against past or future earnings or claim as a cash tax credit.
Depending on the size of your organisation and whether or not the project has been subcontracted to you, there are numerous forms of R&D relief.
Small and medium-sized enterprises (SME) R&D Relief
To be eligible for R&D tax reliefs, your company must employ less than 500 people and have a turnover of less than €100 million or a balance sheet total of less than €86 million. You’ll need to offer numbers indicating the voting rights of related or partner firms if your company has external investors because you raised venture funding.
Research and development (R&D) expense qualify for corporation tax exemption. To claim for R&D relief, you do not have to develop or create cutting-edge technology. This R&D tax relief allows you to deduct these expenditures from your trading earnings while also claiming up to an extra 130 per cent (a total of 230 per cent) in corporation tax relief.
Research and Development Expenditure Credit (RDEC)
For large corporations, the regulations are slightly different. This takes the place of the large company relief that was previously offered. Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. A Research and Development Expenditure Credit can be claimed by large corporations working on R&D projects (or by companies that have been subcontracted to conduct R&D work by a large company). This is essentially a tax credit equal to 13% of a company’s eligible R&D expenditures.
Costs you can claim include:
- Employee costs. Salaries, wages, Class 1 NICs and pension contributions for staff directly working on your project.
- Subcontractor costs. 65% of relevant costs for subcontractors used in your project.
- Software. Software licence fees and a ‘reasonable share’ of software partly used in your project.
- Consumables. A proportionate amount of materials and utilities were used in your project.
If you match the requirements, you’ll be able to claim lower tax payments on your project from the time it begins until the time you produce or discover the advance or until the project is completed. Relief can be requested for up to two years after the relevant accounting period has ended.
Fill out the increased expenditure section of your complete Company Tax Return form to submit a claim for R&D tax reliefs. GOV.UK also offers an online service that provides information and guidance on how to support your claim, including what information you should provide about your project.
HMRC administers this scheme, intended to recognise and reward innovative UK businesses. According to the Patent Box scheme, profits made from any of a company’s patented ideas can be taxed at a reduced rate. Qualifying businesses who successfully elect to the Patent Box can effectively cut their Corporation Tax from the standard rate to the reduced rate. The rate for 2021/22 is ten per cent.
Companies with income related to eligible patents that they either own or have an exclusive license to commercialise pay just 10% corporate tax under the ‘Patent Box’ scheme. Profits can include a significant portion of the trading profit from the sale of a patent-protected product, not just royalties from the patent.
Sales revenue from patents or patent-protected items is the most important category. For all of a product’s income to fall under the regime, it needs one patented component. Patent rights you sell or licence, sales of patented items or products containing a patented innovation, intellectual property infringement money, or damages or compensation related to your patent rights must all contribute to your earnings.
To be qualified for the Patent Box system, you must first be a UK limited business that pays UK corporate tax. Second, you must have created an original product or procedure and applied for a patent. Finally, income from the patented innovation must have been generated.
To qualify for Patent Box, a company liable to UK corporation tax must profit from exploiting qualifying patented inventions (or certain medicinal or botanic innovation rights). Although there are specific exclusions, such as business procedures and mathematical methods, patents can be sought in practically every technology field. However, if the idea is technical, it stands a possibility of getting patented. The company must possess qualifying patents or have exclusive licences to those patents from the UK Intellectual Property Office, the European Patent Office, or certain European patent offices.
The revised patent box scheme went into effect on 1st July 2016 for new applications to the programme and is pretty similar to the original, except that it employs the globally recognised ‘Nexus’ approach to benefit calculations. As a result of this strategy, the advantages of the patent box are reduced by an ‘R&D fraction,’ which is based on the proportion of research and development incurred by the firm (in-house or contracted to third parties) as opposed to that outsourced to related parties (e.g., other businesses in a group). As a result, some organisations may need to rearrange their R&D operations to recoup equivalent advantages as under the previous model. Similarly, the R&D percentage considers the part of research and development represented by any acquired intellectual property (e.g., licenced in). The way R&D expenses are tracked and linked to the IP right or covered product has also changed.
To make a claim, you must first enrol in the Patent Box scheme and have a patent that has been granted. This must be completed within two years after the end of the accounting period in which the relevant profits and income were generated. You can make your choice either in the calculations that accompany your Corporation tax return or separately in writing. You can accumulate patented earnings for patents applied for but not granted while under the Patent Box system. If the patent is granted, these cumulative earnings might be included in the Patent Box claim. This election does not have a particular wording or a box on the Corporation Tax return.
There are eight different types of Corporation Tax reliefs available to qualified companies in the creative industries, each of which allows them to raise the amount of permissible spending, lowering their overall Corporation Tax bill.
Companies that benefit from films, ‘high-end’ television, children’s television, animation television, video games, theatrical plays, orchestral concerts, museum or gallery exhibitions, and other creative industries can claim tax relief. It is made up of the following eight corporation tax reliefs:
- Film Tax Relief
- Animation Tax Relief
- High-end Television Tax Relief
- Video Games Tax Relief
- Children’s Television Tax Relief
- Theatre Tax Relief
- Orchestra Tax Relief
- Museums and Galleries Exhibition Tax Relief
All films, animation, television shows, and video games must be certified as “British.” Alternatively, they must pass a cultural test or meet the requirements of an international co-production pact. The British Film Institute is in the authority of this procedure on behalf of the Department for Digital, Culture, Media and Sport.
For computing Corporation Tax, trading losses can be used to seek tax relief. Companies’ trading losses are calculated in the same way as their trading gains. To receive tax relief, the loss is adjusted against other business earnings or profits in the same accounting period.
Capital allowances (which raise the loss) and balancing charges (which lessen the loss) should both be included when calculating a trading loss. Any losses or earnings resulting from the sale or disposal of assets should be excluded. Set-off against other gains might provide relief from the loss. This can be done by filing a claim to offset the loss against the same accounting period’s total profits or, if the loss exceeds those earnings, against the prior twelve months’ total profits.
Alternatively, the loss, or the balance of the loss, might be carried forward to future accounting periods and deducted from future earnings. If the company is part of a group, a loss might be surrendered to another company in the group to be offset against earnings, either in the same period or later.
Businesses that use non-domestic premises must pay business rates equivalent to council tax. These are often seen as a business expense that is tax-deductible. A ratepayer may be eligible for rate relief depending on their specific circumstances (i.e., a reduction in their business rates bill). A variety of reliefs are offered. More info is accessible at www.gov.uk/introduction-to-business-rates, your local authority’s website (which is usually included on your rates statement), or by calling your local authority.
Many businesses might also qualify for business rate relief, which reduces the standard rate. Businesses in England’s retail, hotel and recreation sectors are free from business rates during the tax year 2020-2021 due to the Coronavirus pandemic.
Tax is a challenging, ever-changing field, and each firm has a unique position for it. As a result, specific allowances or deductions may be available based on the nature of their operation. Therefore, it is usually a prudent option to obtain expert advice from an accountant before applying any company deduction strategies. The government’s recommendations and reliefs for lowering corporation tax in certain areas are complicated and require professional assistance. Businesses that want to decrease their Corporate Tax burden must be diligent in tracking and claiming all of their costs.
Businesses should be constantly adaptable to new tax regimes, as well as the amendments and updates of sectors from government-funded tax reliefs, to ensure that they do not miss out on valuable tax relief opportunities. Our London-based accountants help businesses all over the UK save money on taxes by utilising innovative solutions and industry knowledge. Don’t hesitate to get in touch with us, and the Bloom Financials staff would be pleased to assist you.
by Abdul Wahab | Dec 10, 2021 | Articles, News
Contents
- Foreign Tax Credit Relief
- Capital Allowances
- How Capital Allowance Works
- Annual Investment Allowance
- Other Corporate tax reliefs
- Research and Development Tax Relief
- Patent box
- Creative Industries Tax Relief
- Trading Losses
- Business Rates
- Conclusion
The concept of tax reduction is intriguing. While responsible businesses want to pay their dues, they also don’t want to pay any more than is essential. The UK tax system is complex, but there are several reasonable ways to reduce your corporate tax burden. All you need is a basic awareness of how the UK tax system operates and what tax credits and incentives are available.
Limited companies, international corporations with local branches, and other profit-making unincorporated firms pay corporation tax (CT) on trading profits, investments, and gains from asset sales. The company tax bill is now 19 per cent, but the chancellor announced on 3rd March 2021 that starting in April 2023, the headline rate will be raised to 25 per cent.
For the current tax year, the Corporation Tax rate on company earnings is 19 per cent, which means that an organisation with a profit of £100,000 pays £19,000 in Corporation Tax. However, claiming every allowable cost and relief and providing a more realistic picture of the firm’s earnings is the key to ensuring your company pays no more Corporation Tax than it has to.
Let’s take a look at some of the government tax reliefs and incentives that our specialist accountants have prepared to assist you to decrease your corporation’s tax bill while staying tax effective.
If you have previously paid foreign tax on income typically taxed in the UK, you can claim Foreign Tax Credit Relief.
It’s possible that your earnings and gains will be taxed in more than one country. For example, if you live in the UK and earn money from a job overseas, your foreign earnings may be taxed in the UK and the nation from which you earned them. Credit relief reduces the amount of UK corporation tax owed on the same profits if a firm has paid foreign tax on those profits. In situations where the foreign tax on those profits exceeds the UK corporation tax on such gains, the unutilised foreign tax can be carried back one year or carried forward in specific circumstances.
There are three ways in which the UK ensures that no one bears a double burden:
- Tax treaties may decrease or eliminate double taxation.
- If no treaty exists, a person can seek ‘partial’ relief by deducting foreign tax from their UK tax.
- The individual can deduct the foreign tax as an expense from their income (a practice known as relief by deduction). However, this is often inefficient.
When you disclose your foreign income on your Self Assessment tax return, you can claim Foreign Tax Credit Relief. You must register for Self Assessment by 5th October of each year and pay by 31st January of the year following the tax year for which you are paying.
If all of the following apply, however, you do not require to file a tax return:
- Dividends are your only source of overseas revenue.
- You have less than the £2,000 dividend allowed in total dividends (including UK dividends).
- You don’t have any additional sources of income to declare.
The amount of relief you receive is determined by the UK’s ‘double-taxation agreement’ with the country from where your income originates. Even if there is no agreement, you will normally obtain relief unless the foreign tax does not correlate to UK Income Tax or Capital Gains Tax.
A corporation can deduct certain expenditures and costs from its profits to reduce the amount of tax it pays. Business entertainment expenses and capital expenditures are not included in these expenses. A company’s capital expenditure is the money it spends on land, buildings, and equipment.
Capital expenditures on certain types of business assets and business premises can be claimed as capital allowances by a company. Capital allowances provide substantial tax relief in the United Kingdom for “capital” investments in facilities and equipment for businesses. Capital expenditure provides an asset or a competitive advantage that lasts for a few years or longer. It is often recognised as a tangible fixed asset on a company’s balance sheet.
The net cost of the company asset or premises is used to determine capital allowances. There are different rates available depending on the type of asset. A company can claim capital allowances on:
- plant and machinery
- motor vehicles
- industrial buildings
- transmission capacity rights
- computer software
- specified intangible assets.
Once the value of the assets has been determined, the difference can be deducted from the profits before tax is calculated. Capital allowances can be claimed for the following items in addition to equipment and machinery:
- renovating business properties in disadvantaged areas of the UK
- mineral extraction and dredging
- research and development (R&D)
- Patents and “expertise” (intellectual property relating to industrial practices)
- Buildings and structures (i.e. construction costs)
The two most commonly claimed forms of capital allowances are “plant & machinery allowances” (PMAs) and “structures & buildings allowances” (SBAs).
Capital allowances are calculated by multiplying the amount of expenditure that qualifies for capital allowances by the business’s effective tax rate. For example, A firm subject to the 19 per cent corporation tax rate invests £100,000 in assets qualifying for capital allowances. By claiming capital allowances, the corporation may that £100,000 in tax from its profits. This saves £19,000 in corporate tax (£100,000 multiplied by 19%).
So, every £1 spent on equipment qualifying for capital allowances is worth a tax saving of 19p at the 19% corporation tax rate applying until April 2023. Or 25p at the 25% rate coming into force after April 2023. For income taxpayers, the savings are typically higher because the basic rate of income tax is 20%, the higher rate is 40%, and the additional rate is 45% (the marginal rate for a slice of certain taxpayers’ income can be as high as 60% Because the basic tax-free personal allowance is gradually reduced by £1 for every £2 of income exceeding £100,000)
However, the computation is frequently more difficult due to the several types of capital allowances available, each with a distinct amount and rate of tax relief. As a result, the time it takes to receive tax relief might vary.
The expenditure must be spent on a particular type of asset. In most cases, you must own the asset for which you are claiming capital allowances. In other words, if you rented or leased the asset, you won’t be able to claim capital allowances, but you could be able to get tax relief on the rental charges as revenue expenditure.
Assets bought through hire purchase, or financing leases are subject to special rules. Even though legal ownership may not pass until the conclusion of the contract term, these assets are often viewed as belonging to the person who is utilising them. These assets must have been put to use to claim capital allowances. Any interest paid on hire purchase items is considered a revenue (trading) expense rather than capital expenditure. When an established firm has plant and machinery or other assets, capital allowances must be addressed in business planning.
Annual Investment Allowance (AIA) is a type of capital allowance. Capital allowances can be claimed for most purchases of plant and machinery and business vehicles. Different types of expenditure qualify for different capital allowances.
Most plants and machinery are eligible for AIA. This implies that before calculating your tax, you can deduct the whole cost of the item from your profits. Each time you start a new accounting period, a new AIA allowance rolls in, and if you spend more than the AIA amount, you can claim writing down allowances on that additional expenditure.
Claiming for automobiles, items you possessed for a different reason before starting to use them in your business, or items donated to you or your firm, must be done by writing down allowances rather than AIA.
In the first year, you can generally claim the whole amount as a capital allowance if your total capital expenditure is less than a specified annual investment allowance (AIA). From 1st January 2019 to 31st December 2021, the AIA will be set at £1 million before returning to its normal level of £200,000. This is limited to a single allowance for groups of companies or associated businesses. From 1st January 2019, the increased yearly investment allowance will be accessible for a three-year period.
Suppose your company purchases equipment that qualifies for the Annual Investment Allowance. In that case, you can deduct 100 per cent of that item’s cost from your profit before calculating how much tax you owe. If your company is VAT registered, you can claim the Annual Investment Allowance based on the entire cost of the asset less any VAT you can recover. If your company isn’t VAT-registered, you can claim the Annual Investment Allowance on the asset’s whole cost.
Several other corporation tax reliefs can help reduce your corporation tax liability.
Relief for research and development (R&D) is intended to assist companies working on breakthrough science and technology initiatives. To qualify for R&D tax credits, businesses must be working on a specific project.
If your company is developing new products, processes or software, it may be eligible for this tax relief. This can equate to additional tax relief of up to £ 24,700 for every £100,000 spent on research. You can opt to claim an R&D tax credit of up to 14.5 per cent if you invest in R&D and your firm makes a loss, in addition to tax relief. In this case, the government provides you with a cash payment.
Loss-making businesses can take advantage of this corporate tax relief to grow their losses, which they can then offset against past or future earnings or claim as a cash tax credit.
Depending on the size of your organisation and whether or not the project has been subcontracted to you, there are numerous forms of R&D relief.
Small and medium-sized enterprises (SME) R&D Relief
To be eligible for R&D tax reliefs, your company must employ less than 500 people and have a turnover of less than €100 million or a balance sheet total of less than €86 million. You’ll need to offer numbers indicating the voting rights of related or partner firms if your company has external investors because you raised venture funding.
Research and development (R&D) expense qualify for corporation tax exemption. To claim for R&D relief, you do not have to develop or create cutting-edge technology. This R&D tax relief allows you to deduct these expenditures from your trading earnings while also claiming up to an extra 130 per cent (a total of 230 per cent) in corporation tax relief.
Research and Development Expenditure Credit (RDEC)
For large corporations, the regulations are slightly different. This takes the place of the large company relief that was previously offered. Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. A Research and Development Expenditure Credit can be claimed by large corporations working on R&D projects (or by companies that have been subcontracted to conduct R&D work by a large company). This is essentially a tax credit equal to 13% of a company’s eligible R&D expenditures.
Costs you can claim include:
- Employee costs. Salaries, wages, Class 1 NICs and pension contributions for staff directly working on your project.
- Subcontractor costs. 65% of relevant costs for subcontractors used in your project.
- Software. Software licence fees and a ‘reasonable share’ of software partly used in your project.
- Consumables. A proportionate amount of materials and utilities were used in your project.
If you match the requirements, you’ll be able to claim lower tax payments on your project from the time it begins until the time you produce or discover the advance or until the project is completed. Relief can be requested for up to two years after the relevant accounting period has ended.
Fill out the increased expenditure section of your complete Company Tax Return form to submit a claim for R&D tax reliefs. GOV.UK also offers an online service that provides information and guidance on how to support your claim, including what information you should provide about your project.
HMRC administers this scheme, intended to recognise and reward innovative UK businesses. According to the Patent Box scheme, profits made from any of a company’s patented ideas can be taxed at a reduced rate. Qualifying businesses who successfully elect to the Patent Box can effectively cut their Corporation Tax from the standard rate to the reduced rate. The rate for 2021/22 is ten per cent.
Companies with income related to eligible patents that they either own or have an exclusive license to commercialise pay just 10% corporate tax under the ‘Patent Box’ scheme. Profits can include a significant portion of the trading profit from the sale of a patent-protected product, not just royalties from the patent.
Sales revenue from patents or patent-protected items is the most important category. For all of a product’s income to fall under the regime, it needs one patented component. Patent rights you sell or licence, sales of patented items or products containing a patented innovation, intellectual property infringement money, or damages or compensation related to your patent rights must all contribute to your earnings.
To be qualified for the Patent Box system, you must first be a UK limited business that pays UK corporate tax. Second, you must have created an original product or procedure and applied for a patent. Finally, income from the patented innovation must have been generated.
To qualify for Patent Box, a company liable to UK corporation tax must profit from exploiting qualifying patented inventions (or certain medicinal or botanic innovation rights). Although there are specific exclusions, such as business procedures and mathematical methods, patents can be sought in practically every technology field. However, if the idea is technical, it stands a possibility of getting patented. The company must possess qualifying patents or have exclusive licences to those patents from the UK Intellectual Property Office, the European Patent Office, or certain European patent offices.
The revised patent box scheme went into effect on 1st July 2016 for new applications to the programme and is pretty similar to the original, except that it employs the globally recognised ‘Nexus’ approach to benefit calculations. As a result of this strategy, the advantages of the patent box are reduced by an ‘R&D fraction,’ which is based on the proportion of research and development incurred by the firm (in-house or contracted to third parties) as opposed to that outsourced to related parties (e.g., other businesses in a group). As a result, some organisations may need to rearrange their R&D operations to recoup equivalent advantages as under the previous model. Similarly, the R&D percentage considers the part of research and development represented by any acquired intellectual property (e.g., licenced in). The way R&D expenses are tracked and linked to the IP right or covered product has also changed.
To make a claim, you must first enrol in the Patent Box scheme and have a patent that has been granted. This must be completed within two years after the end of the accounting period in which the relevant profits and income were generated. You can make your choice either in the calculations that accompany your Corporation tax return or separately in writing. You can accumulate patented earnings for patents applied for but not granted while under the Patent Box system. If the patent is granted, these cumulative earnings might be included in the Patent Box claim. This election does not have a particular wording or a box on the Corporation Tax return.
There are eight different types of Corporation Tax reliefs available to qualified companies in the creative industries, each of which allows them to raise the amount of permissible spending, lowering their overall Corporation Tax bill.
Companies that benefit from films, ‘high-end’ television, children’s television, animation television, video games, theatrical plays, orchestral concerts, museum or gallery exhibitions, and other creative industries can claim tax relief. It is made up of the following eight corporation tax reliefs:
- Film Tax Relief
- Animation Tax Relief
- High-end Television Tax Relief
- Video Games Tax Relief
- Children’s Television Tax Relief
- Theatre Tax Relief
- Orchestra Tax Relief
- Museums and Galleries Exhibition Tax Relief
All films, animation, television shows, and video games must be certified as “British.” Alternatively, they must pass a cultural test or meet the requirements of an international co-production pact. The British Film Institute is in the authority of this procedure on behalf of the Department for Digital, Culture, Media and Sport.
For computing Corporation Tax, trading losses can be used to seek tax relief. Companies’ trading losses are calculated in the same way as their trading gains. To receive tax relief, the loss is adjusted against other business earnings or profits in the same accounting period.
Capital allowances (which raise the loss) and balancing charges (which lessen the loss) should both be included when calculating a trading loss. Any losses or earnings resulting from the sale or disposal of assets should be excluded. Set-off against other gains might provide relief from the loss. This can be done by filing a claim to offset the loss against the same accounting period’s total profits or, if the loss exceeds those earnings, against the prior twelve months’ total profits.
Alternatively, the loss, or the balance of the loss, might be carried forward to future accounting periods and deducted from future earnings. If the company is part of a group, a loss might be surrendered to another company in the group to be offset against earnings, either in the same period or later.
Businesses that use non-domestic premises must pay business rates equivalent to council tax. These are often seen as a business expense that is tax-deductible. A ratepayer may be eligible for rate relief depending on their specific circumstances (i.e., a reduction in their business rates bill). A variety of reliefs are offered. More info is accessible at www.gov.uk/introduction-to-business-rates, your local authority’s website (which is usually included on your rates statement), or by calling your local authority.
Many businesses might also qualify for business rate relief, which reduces the standard rate. Businesses in England’s retail, hotel and recreation sectors are free from business rates during the tax year 2020-2021 due to the Coronavirus pandemic.
Tax is a challenging, ever-changing field, and each firm has a unique position for it. As a result, specific allowances or deductions may be available based on the nature of their operation. Therefore, it is usually a prudent option to obtain expert advice from an accountant before applying any company deduction strategies. The government’s recommendations and reliefs for lowering corporation tax in certain areas are complicated and require professional assistance. Businesses that want to decrease their Corporate Tax burden must be diligent in tracking and claiming all of their costs.
Businesses should be constantly adaptable to new tax regimes, as well as the amendments and updates of sectors from government-funded tax reliefs, to ensure that they do not miss out on valuable tax relief opportunities. Our London-based accountants help businesses all over the UK save money on taxes by utilising innovative solutions and industry knowledge. Don’t hesitate to get in touch with us, and the Bloom Financials staff would be pleased to assist you.
by Abdul Wahab | Dec 7, 2021 | Uncategorized
What are Tax Credits and How They Work?
Contents
- What are Tax Credits
- What is Universal Credit?
- Difference between tax credits and benefits?
- Tax credits’ impact on other benefits?
- How much Tax Credit you will get?
- What is Child Tax Credit?
- Child Tax Credit – Eligibility and Elements
- How does the child tax credit work?
- Child Tax Credits – Income Thresholds
- What is Working Tax Credit
- Working Tax Credits – Eligibility and Elements
- How much you can get on tax credit
- Child Tax and Working Tax Credits
- Am I eligible?
- How to claim tax credits?
- When do tax credits get paid?
- Renewing your tax credit
- Universal Credit Replacement
Tax credits are government payments that provide extra money to individuals who need it, such as parents who need help caring for their children, disabled employees, and low-income persons. Tax credits can be worth thousands of pounds each year, but they must be renewed yearly, unlike many other benefits. If your family or job situation changes, your tax credits may increase, decrease, even stop.
For many people, Universal Credit has recently replaced tax credits. Because Working Tax Credit and Child Tax Credit are being phased out in favour of Universal Credit, you may not be able to file a new claim.
Universal Credit is a government benefit payment that supports those who require additional financial assistance. It’s for low-income individuals, and it may be claimed by those who work full-time, part-time, or are jobless.
Universal Credit was created to take the role of several benefits and credits, such as Working Tax Credit and Child Tax Credit. These are the benefits that will be phased out in favour of Universal Credit:
- Income-based Jobseeker’s Allowance
- Income-related Employment and Support Allowance
- Income Support
- Working Tax Credit
- Child Tax Credit
- Housing Benefit – for rent only
If your circumstances change while receiving one of these benefits or Tax Credits, you must notify the change as quickly as possible. Changes in your circumstances may necessitate a switch to Universal Credit, which will result in the loss of your existing benefits.
Unless you’ve had a change in circumstances that the Department of Works and Pensions (DWP) should be aware of, there’s nothing you need to do if you haven’t heard from the DWP. The Severe Disability Premium is the only benefit not yet replaced by Universal Credit. You will not be eligible for Universal Credit if you already get this benefit.
Depending on your household’s circumstances, you can claim one or both. HM Revenue & Customs (HMRC) is in handling tax credit claims. The credit’s nature determines a tax credit’s value; many tax credits are only available to people or companies in specified localities, categories, or industries.
There are two types of tax credits:
You may be eligible for a child tax credit if you are responsible for the care of a child.
It is dependent on your earnings and the number of hours you work. Work that is done for free or for no money does not count.
Tax credits are often seen as a benefit; however, unlike other social security benefits, they are calculated annually and given in weekly or monthly instalments during the tax year (6 April in one year until 5 April the following year). HMRC also handles them, but the Department for Work and Pensions (DWP) deals with most other benefits, including universal credit.
Tax credits will not change the amount of child benefit you receive, but they may influence the amount of other benefits you receive. Signing up for tax credits may result in a reduction in:
- Housing Benefit
- Income Support
- Jobseeker’s Allowance depending on your income
- ESA (Employment Support Allowance) based on your income
- Pensions Credit
If you sign up for Tax-Free Childcare, you will also be unable to claim tax credits. This is a government programme that gives parents and guardians £500 every three months for each child to help with licensed childcare costs.
However, claiming tax credits may make you eligible for extra money from the government in the form of other benefits. Claiming tax credits may entitle you to handle a lot of daily routine expenses and events.
The amount of tax credits you’re likely to get is determined by the following factors:
- The more money you make, the less money you’ll get. However, there is no predetermined income cap because your (and your partner’s, if you have one) circumstances determine how much you earn.
- Marital Status. Couples must file joint claims based on their combined income.
- The birth dates of your children impact how much help you may get for them.
- Working hours. To be eligible, you must work at least a certain number of hours every week. Overtime is only considered if you work the hours on a regular basis.
- Disability. Those receiving disability or illness benefits have more options.
A child tax credit is for people who look after any children who are entitled to child benefit (up to 31 August when they reach 16, or up to the age of 20 if they are in full-time education or enrolled with the careers service). Importantly, you are not required to do the job.
To claim the child tax credit, you don’t have to work; instead, you must be responsible for at least one child or eligible young person. You do not have to be the child’s biological parent, but you must be their primary caretaker. If you work, however, you may be eligible to claim both the working tax credit and child tax credit at the same time.
The tax credit is made up of a number of different payments called ‘elements’. Depending on your family circumstances, you may be eligible for either the family element and kid element or a few other elements. How much you can get depends on your income, the number of children you have, and whether any of your children are disabled.
Child tax credit – maximum per element (the more you earn, the less you get)
- Family element – the basic element for families with one or more children:
£545 (Max Annual Amount for 2021/22)
- Child element: Per child:
£2,845 (Max Annual Amount for 2021/22)
- Disabled child element: For each disabled kid who receives disability living allowance (DLA) who is registered blind or has been registered blind in the last 28 weeks:
£3,435 (Max Annual Amount for 2021/22)
- Severely disabled child element: Each child is eligible for DLA’s highest rate care component. This is in addition to the child and disability elements:
£1,390 (Max Annual Amount for 2021/22)
The child tax credit will be paid until your child turns 16 in September of the following year. If your child turned 16 on 1 June 2021, for example, your child tax credit would end on 1 September 2021.
The only option to keep getting child tax credits after this is if your child is between the ages of 16 and 20 and is enrolled in full-time study or authorised training for which they are not paid. If they don’t have a job of 24 hours or more per week and have registered with their local careers service or Connexions service, 16 to 17-year-olds who aren’t in further education or training can also claim the child tax credit. However, you will be unable to claim if the young person is already receiving income support, disability benefit, employment support allowance, or tax credits.
The highest amount of child tax credit is £16,480, depending on your income. The amount of tax credit you will receive drops by 41p for every £1 of income earned beyond this level every year. If you make more than this, the amount of child tax credit you get reduces.
Working tax credit is a government subsidy that assists low-income workers with day-to-day expenditures. WTC is a payment made by HM Revenue and Customs to complement the earnings of low-wage workers who live in low-income households, whether or not they have children.
If you work a specific number of hours per week and earn less than a certain amount, you might get up to £2,005 in working tax credit in 2021-22, plus an additional one-time £500 payment as part of the government’s plans to mitigate the financial impact of the coronavirus pandemic.
You get whichever aspects apply to you, and the amount of WTC you get once your income is taken into account may be decreased. If you earn more than £6,565, the amount of WTC you may receive will be reduced. Your maximum tax credit claim will be lowered by a percentage of your income beyond the threshold. From April 2021, the following factors and annual amounts will be used:
- Basic payment £2,005 a year (plus there is a £500 one-off coronavirus support payment available)
- A couple applying together Up to £2,060 a year
- A single parent Up to £2,060 a year
- Work at least 30 hours a week Up to £830 a year
- Disability Up to £3,240 a year
- Severe disability Up to £1,400 a year
- Approved childcare Up to £175 a week for one child; up to £300 a week for two or more children
Working tax credit is available for periods when you are not working, such as while you are on maternity leave, unwell, or between jobs. Working tax credit is available for the first 39 weeks of maternity leave. To be eligible, you must have been employed and worked the required number of hours prior to taking leave.
If you have any children or young people under the age of 16 born before 6 April 2017, you can collect up to £3,900 in child tax credits each year for your first child and up to £2,845 for each of your additional children until they turn 16. If they stay in authorised school or training, you can continue to claim until they are 20.
If you have a kid after 6 April 2017, you can only get child tax credits if it is your first or second child. There are several exceptions, such as if you’re expecting twins or triplets. Each youngster might get £2,845 per year.
You don’t have to work to earn child tax credits, but your circumstances determine the amount you get. HMRC considers the following factors when determining your claim:
- your prior tax year’s income (what you earned for the 12 months up to 5 April)
- How many children or young people in authorised education or training do you have in your household
- when each of your children was born
- If any of these children or young people have a disability
The amount of child tax credit you’ll get is determined by your income, how many children you have at home, and how much money you spend on childcare. If you have a disabled kid, you may be eligible for a higher child tax credit. You don’t have to work to get the child tax credit.
In 2021-22, the basic amount of working tax credit is £2,005, although you may receive more or less. Your payouts are based on your earnings and the number of hours you work. If you have children, you may be able to get additional money since you’ll be eligible for the working tax credit’s childcare element. You may be eligible for the disability element working tax credit if you are a disabled worker.
A tax credits calculator[1] on the GOV.UK website can give you a very basic approximation of what you could get. There are also third-party calculators that may help you figure out if you are eligible for tax credits and other advantages.
If you qualify for the child tax credit and in a job, you may be entitled to claim the working tax credit. You’ll be notified if you are eligible for a Working Tax Credit when you apply for a Child Tax Credit. You do not need to submit separate applications for them. Like a child tax credit, a working tax credit comprises numerous distinct components for which you may be qualified based on your circumstances. The childcare element of the working tax credit may be very beneficial to parents with children. This payment assists in defraying the costs of having someone look after your kid while you are at work.
If you’re eligible, you might be able to claim both the working tax credit and the child tax credit at the same time. You won’t know for sure what you’ll be eligible to claim until you’ve submitted a claim form to HMRC, but in general, the following conditions must apply to your situation.
You may be eligible for a one-off payment of £500 if you’re part of a working household that gets tax credits. When the temporary increase in working tax credit expires on 5 April 2021, the new payment will be issued to give additional support. If you were receiving either the working tax credit or the child tax credit on 2 March 2021 but did not get a payment because your income was too high, you may be eligible.
However, the majority of people are no longer eligible for tax credits. You must apply for universal credit if you require income assistance for the first time or a new claim following a period when you were not claiming tax credits.
If you’re still getting tax credits, you can continue to receive them until your claim is transferred to the universal credit system. You can still lodge a new child tax credit claim if you get the severe disability premium or obtained it in the last month and are still eligible. However, you can no longer file a new claim for working tax credits.
Tax credits, however, cannot be claimed online. You must fill out a paper claim form, which is available from the tax credit helpdesk, in order to claim tax credits. You must also file a joint claim if you live with someone else. If you believe you may be eligible for any or both credits, you should file a claim as soon as possible. You might lose a lot of money if you don’t file your claim immediately.
Working Tax Credit is only available if you are already receiving it or if you are receiving Child Tax Credit. Universal Credit has taken its place for persons who have never claimed a tax credit.
HM Revenue & Customs is in charge of tax credits. Call the helpdesk on 0345 300 3900 or text phone 0345 300 3909 to submit a claim or report a change of circumstances. Lines are open from 8 a.m. to 8 p.m. every day. If you haven’t already claimed tax credits, your claim may only be backdated one month.
You can apply for Working Tax Credit if you have accepted a job offer, and the position is scheduled to start within the following seven days. The work must be expected to last at least four weeks from the moment the claim is filed.
In order to claim, self-employed Working Tax Credit applicants must first register with HMRC for Self-Assessment and give a Unique Tax Reference number. Those with income less than the equivalent of working 24 hours a week at the National Minimum Wage will have to prove to HMRC that the employment they are doing is legitimate and effective.
You have the option of receiving your tax credits once a week or every four weeks. If you’ve submitted a new claim, it might take up to five weeks to be processed. While you wait, you’ll get an ‘award notification’ letter in the mail informing you of the day your first payment will be made. When there is a bank holiday, you will generally get paid early.
Every year, you’ll need to renew your tax credit. Between April and June, you’ll receive a renewal pack in the mail, which you must either fill out and return or phone the Tax Credit Office by 31 July. Tax credits, unlike other benefits, usually need to be renewed by 31 July each year to continue receiving payments from HMRC. You’ll get a renewal pack in the mail between April and July if you already claim tax credits. The dates for the year are determined by the tax year, which runs from 6 April to 5 April the following year. As a result, your pay in 2021-22 will be determined by your earnings in 2020-21.
If you currently receive tax credits, you may also be liable to a retrospective adjustment from past years. You must ensure that all of your information is accurate and current. If you don’t, you may be responsible for any overpayments you get as a result of HMRC holding incorrect information about you. Not everyone is required to renew their tax credits every year; HMRC will notify you. The renewal process is essential because your previous year’s earnings determine the amount of money you’ll receive.
If you have changes and miss the deadline, you risk overpayments or underpayments. If something changes that impact your tax credits, you must notify the tax credit office as soon as possible; otherwise, you may find yourself owing money to the tax credit office – at the very earliest, you should notify the tax office when you get your annual renewal pack. The tax credit office may contact you from time to time to see if your circumstances have changed.
Because payments are anticipated from last year’s income, yet cover this year’s working hours. So, if circumstances change, for example, your income may have altered due to the coronavirus, and you don’t inform them, you may be underpaid or overpaid.
Universal Credit is a new benefit model that will gradually replace the working tax credit and the child tax credit, as well as several other means-tested benefits. Because Universal Credit is being phased across the country, you may have already been shifted to it or will be shortly. Your claim for Tax Credits will expire when you apply for Universal Credit, and your identification is validated.
Everyone on tax credits will be moved to universal credit in the future when HM Revenue & Customs tells you that you need to file a universal credit claim. If your universal credit award is less than your tax credits, you’ll get top-up payments once you’ve made the switch. The top-ups will continue until your circumstances change and you file a new claim.
Depending on where you live, it will happen eventually. If you already get Universal Credit, you won’t be able to apply for working tax credit since the payments you’d get would be included in your Universal Credit payment. Before you get your first Universal Credit payment, your Tax Credits can stop being issued. If this happens, you can request a cash advance to help you get by until your first payment arrives. The only exceptions to Universal Credit are if you have three or more children or if you or your spouse has reached pension credit eligibility age.
You can also find out more about tax credits on GOV.UK. If you have further questions, please use the contact form to contact our advisory team or phone us for professional help at Bloom financials.
[1] http://www.hmrc.gov.uk/taxcredits/payments-entitlement/entitlement/question-how-much.htm
by Abdul Wahab | Dec 3, 2021 | Uncategorized
Inheritance Tax (IHT) is a tax imposed on a deceased person’s estate, including all of their property, assets, and money. Even if you don’t have any Inheritance Tax to pay, you must still notify HMRC. IHT is a section of the UK tax system, which is exceedingly extensive, complex, and intricate. There are different exemptions and laws concerning gifts that, with the correct knowledge and assistance, can help you lower the size of your estate and minimise your tax burden.
What is Inheritance Tax?
IHT is a tax that may be imposed if you intend to leave assets to your heirs after you die. Your estate is made up of your property, goods, and money, and it may be gifted to your spouse or civil partner tax-free. Depending on your circumstances, you may be able to pass on some, most, or all of your assets tax-free to other family members or people.
IHT in the UK?
IHT is calculated at 40% of the value of your estate. However, a £325,000 tax-free allowance is known as the nil-rate band (NRB). The value of an individual’s estate beyond the nil rate band is subject to IHT at 40% unless it is handed directly to a spouse or registered civil partner when they die. The worth of your estate includes everything you possess, including your home.
The value of your estate for inheritance tax includes:
- your savings
- possessions including property
- money for pensions (certain payments from payment funds may be subject to Inheritance Tax)
- the value of any money or property you gave away in the seven years leading up to death, subject to certain exceptions
Regardless of who you leave it to, the nil-rate band ensures that no tax is levied on the first £325,000 of your estate. When a married couple or registered civil partners dies, the unused portion of their IHT-free allowance can be transferred to their living spouse. There are also a number of different techniques that may be used, depending on your specific financial status, to either reduce the amount of your estate or boost your NRB, thereby lowering your tax liability. These are discussed in greater depth later in this article.
What’s exempt from Inheritance Tax?
The amount you pay is determined by the value of the deceased’s estate, which is calculated by their assets (cash in the bank, investments, property or company, cars, life insurance payouts), less any debts.
- There will be no Inheritance Tax if you leave your whole estate to your spouse, wife, or civil partner.
- Any unused portion of a husband, wife, or civil partner’s £325,000 tax-free threshold can be handed to their surviving partner.
- Anything you give to charity is exempt from Inheritance Tax. If you leave 10% or more of your estate to charity, the remainder of your estate may be taxed at a reduced rate of 36 per cent. However, there are certain restrictions, so get legal counsel if you want to do so.
- Inheritance Tax exemptions apply to gifts of up to £3,000 each tax year, as well as small gifts to individuals and some wedding or civil partnership gifts. However, depending on how much you gave and when you gave it, gifts made while you were alive may be subject to Inheritance Tax.
- If you give away your home to your children or grandchildren, your threshold can increase to £500,000.
How to calculate the size of your estate?
On estates valued more than £325,000, IHT is usually applied. Of course, there are exceptions to this rule. You must value your estate in order to determine whether the profits of your will would be subject to IHT. You can list everything you possess, including your assets, and calculate their value:
- Properties
- Investments
- Savings (including ISAs)
- Debtors (money you’re owed)
Pension funds and life insurance policies, for example, are often excluded from your estate. After establishing your total value, you’ll need to tally up all of your debts and liabilities. This is most likely to include:
- Borrowing on a mortgage
- Loans for individuals
- Debt on a credit card
- Tax liabilities
- Bills that have not been paid
- Expenses for the funeral
Then you deduct all you owe from everything you own to get at your estate’s net current worth. You’ll be able to see if your estate is worth more than the NRB of £325,000 or £500,000 if you own your property.
The NRB for couples can be as high as £650,000, or even £1 million in the case of property ownership, depending on your financial circumstances. The value of your estate is likely to rise over time, and you should be aware that this might result in increased tax liability.
Transfer of nil rate band or IHT Allowance
Every person has their own NRB. Even if some or all of the NRB remains unused when the individual dies, it is often impossible to transfer the NRB to someone else. There is an exemption in married couples and members of a civil partnership, which allows the first spouse’s or civil partner’s unused portion of the NRB to be passed to the survivor. This implies that any part of the NRB that isn’t utilised when the first spouse or civil partner dies can be transferred to the surviving spouse or civil partner for use after the first spouse or civil partner’s death.
The special rules for married couples or those in civil partnerships are:
- When you die, assets left to your spouse or registered civil partner are excluded from inheritance tax if they live in the UK.
- Furthermore, your partner’s inheritance tax allowance is increased by the amount of your allowance you did not spend, allowing a couple to leave £1 million tax-free (2 x £325,000 tax-free allowance + 2 x £175,000 main residence allowance).
Family Home Inheritance TaxHH
In the tax year 2021/22, there is no inheritance tax on the first £325,000 of an estate, with a 40% rate applied to anything beyond that. However, you will be taxed less if you leave your house to your direct descendants, such as children or grandchildren.
If you’re passing your family home to a lineal descendant or a spouse/civil partner of a lineal descendant, it’s considered slightly differently for IHT purposes. Direct descendants do not include nieces, nephews, or friends. This implies that you must leave your home to your children, grandchildren, or their spouse/civil partner.
You’ll be assigned a primary residence band phased between 2017 and 2020. This might increase your NRB by £175,000 to £500,000, as long as your family home generates at least £175,000 of the value of your estate.
Only one house may qualify for the primary residence nil-rate band or RNRB, and it must be included in your estate. A trust cannot be used to hold your house. To qualify it as your home, you must also have lived in it at some point throughout your life, but not necessarily at the time of your death. If you own more than one house that qualifies for the RNRB, your estate executor can choose which one to utilise.
Couples who own their own house essentially obtain a combined allowance, allowing the RNRB to grow to £1 million, where £350,000 of that value comes from their home.
- The £175,000 main residence allowance only applies if your estate is worth less than £2 million.
- On estates worth £2 million or more, the main residence allowance will decrease by £1 for every £2 above £2 million that the deceased’s estate is worth.
Techniques to cut your IHT tax bill
Some gifts are free from IHT regardless of whether they are given during your lifetime or after your death, while others are exempt only if given during your lifetime. If a gift is exempt from IHT, it will not be considered to determine whether IHT is due.
Unless you live for another seven years or more after making the gift, the money given away before you die is usually regarded as part of your estate. If you give away more than £325,000 in the seven years before your death, those you give gifts to will be charged inheritance tax (on a sliding scale up to a maximum of 40%) – therefore, it’s critical to prepare ahead of time how to pass on your assets.
Other methods to save money on your tax bill
There are several other tax exemptions to consider in order to reduce your tax bill:
Gifts to your spouse or civil partner
If you give a gift to your spouse or civil partner during your lifetime or after your death, it is free from IHT if they are UK-domiciled or deemed domiciled. If you have any doubts about your domicile status, we highly advise you to seek expert guidance. These lifetime transfers to individuals are called Potentially Exempt Transfers (PETs).
If you live for seven years from the day you made the gift, it will be entirely free of IHT. If you pass away within seven years, the gift may be subject to IHT. However, you will have to pay IHT only if the amount of your taxable estate on death, together with the value of PETs made during the past seven years, exceeds the nil rate band at the time of death.
When you make a PET, you do not need to tell HMRC, and there will be no tax to pay at the time of the gift. You should keep track of all the PETs you create throughout time, in date order, until the seventh anniversary of each gift, when you should remove them from your list.
Values up to the current nil rate band limit (currently £325,000) may be transferred to a non-domiciled spouse or civil partner as of April 6, 2013. If the transfer is made on death, any additional cash transferred is subject to IHT. PETs are lifelong transfers to a non-domiciled spouse or civil partner. Gifts to unmarried partners or partners with whom you are not in a registered civil partnership are not covered by this exemption for gifts to spouses or civil partners.
Gifts to charities
Most UK charities and registered community amateur sports clubs are eligible for IHT exempt gifts, which can be made during your lifetime or after your death. This exemption also applies to qualified charities based in the European Union and a few other countries.
Gifts to political parties
You can give an IHT-free gift to any UK political party if at least two MPs in the House of Commons or one MP and received at least 150,000 votes in the last general election.
Inheritance tax-free yearly gifts
You may give significant gifts up to £3,000 per tax year, and if you don’t spend it, you can carry it over to the next tax year. You can also make as many smaller gifts as you choose, up to £250 each. These are referred to as “lifetime gifts.”
You may give gifts for a number of occasions. Some options include:
- The expense of your grandchildren’s schooling
- Junior ISAs for children
- Deposits throughout a lifetime ISA to assist the family with a first-time buyer’s deposit
- Wedding Costs
- Contribute to the funding of further education.
Wedding gifts
If your children get married, you can give them presents without paying inheritance tax on them. However, there are certain limitations: A present from a parent is worth £5,000, a gift from a grandparent is worth £2,500, and a gift from anybody else is worth £1,000. This gift must be given on or shortly before the wedding or civil partnership ceremony.
It’s worth noting that while IHT may not be due on some lifetime gifts but some may result in a chargeable gain, resulting in a capital gains tax bill. This is why you should get tax guidance that considers all of your affairs not to receive any unexpected tax bills.
IHT and your pension
Private pensions can be a valuable tool for avoiding IHT. This is because any unused pension funds can be passed on to your heirs. This isn’t the case with defined-benefit pensions, however. There is no tax to pay if you die before reaching the age of 75. If you die beyond that age, your beneficiaries will have to pay income tax on the money you leave them.
Pension savings are often excluded from estate planning and, as a result, from IHT. This is why pensions should be considered when saving for later life. It would help if you kept in mind the annual pension limit of £40,000 per year, as well as the lifetime allowance, which is now £1,073,100.
What pushing up the IHT receipts
You may not have to pay taxes right away when you inherit anything, but you may have to pay taxes later. This is because you may be required to pay income tax on earnings earned by the asset you inherit, as well as capital gains tax if you later sell the item. Consider the revenue from dividends on stocks or the rental income from inherited property.
If IHT is due on gifts you got before the person who gave them to you dies away, you will almost likely have to pay the tax. The charge will be transferred to your estate if you cannot pay the debt. Any income tax or capital gains tax due to assets you inherit must be reported on your tax return.
Due to the number of unexpected fatalities, the Office for Budget Responsibility anticipated that the COVID-19 pandemic would result in a 20% rise in the number of households with IHT obligations. If they come as a shock, they’re less likely to be factored into the estate and tax planning. HMRC’s receipts from inheritance tax (IHT) between April and July 2021 jumped to GBP2.1 billion, a third higher than in the same period in 2020. The extra GBP0.5 billion received in the period is believed to be due to higher volumes of wealth transfers during the COVID-19 pandemic. Receipts in the 2020/21 tax year were 4 per cent higher than the previous tax year.[1]
As a consequence of the freeze, the Treasury expects to raise an additional £1 billion in IHT over the following five years. This emphasises the importance of following the guidelines in this article and seeking expert assistance so that planning may be tailored to your specific situations to ensure that your liability to IHT is as minimal as feasible.
With this in mind, make sure you grasp the current rules and budget for your retirement and inheritance in accordance with them. Because tax treatment is dependent on your particular circumstances, you should get professional advice from a certified tax adviser before acting on this information. Any tax exemptions or thresholds listed are subject to change based on specific circumstances and current legislation. Please do not hesitate to contact Bloom Financials’ highly skilled tax consultants for more assistance and guidance.
[1] https://www.step.org/about-step/covid-19-technical-hub
by Abdul Wahab | Dec 2, 2021 | Uncategorized
The Construction Industry Scheme (CIS) in the United Kingdom is a nationwide tax-deduction scheme for British contractors and subcontractors. Contractors deduct money from subcontractor payments and submit it to HM Revenue & Customs (HMRC) under the Construction Industry Scheme (CIS).
The initiative attempts to address unethical industry practices such as hiring people on a “cash-in-hand” basis and failing to comply with tax requirements. This article provides a simplified insight to look at the scheme, including instructions on how to register with HMRC, file monthly returns, and define who and what type of work is included.
How Construction Industry Scheme (CIS) Works
If you work as a contractor in the construction sector, you should be aware of your obligations under the Construction Industry Scheme (CIS). It is essentially a PAYE-like scheme that demands that the contractor is usually obliged to withhold tax on its payments to the subcontractor and pay the deduction to HMRC.
Contractors are businesses that work in the construction sector and hire subcontractors to do the actual job. According to UK law, contractors can be any legal business entity, including companies, sole traders, and partnerships, which can include real estate developers, construction companies, and even labour agencies.
CIS covers the following types of work:
- Alterations
- General works related to buildings
- Decorating
- Dismantling or demolition
- Heating, lights, electricity, water, and ventilation works
- Repairs
- Groundworks and preparation of site
If a business that isn’t in the construction sector spends $1 million or more on construction work in three years, it may be considered a contractor. Housing associations registered in the United Kingdom or operating in the United Kingdom are examples of this. The scheme does not cover construction work done outside of the UK. A company headquartered outside the UK that performs construction work in the UK, on the other hand, is subject to the rules and must register and pay tax.
If you meet the following criteria, you must register with the CIS as a contractor:
- you pay subcontractors to do construction work.
- Your company does not conduct construction work, yet you spend more than £1 million on it every year.
Before you hire your first subcontractor, you must first register with CIS. Check HMRC’s status guidelines. You should also consider if the subcontractor should be treated as an employee.
Contractors that perform certain types of construction work must comply with CIS and:
- Register with the scheme before hiring their first subcontractor
- Always check if they should hire individuals instead of subcontracting the work
- Verify with HMRC that subcontractors are registered with CIS
- make necessary deductions from subcontractor payments
- pay the money to HMRC
- give subcontractors with deduction statements
- all CIS deductions must be reported to HMRC on a monthly basis
- maintain complete CIS records
- notify HMRC of any changes to their business
Subcontractors should register for CIS as well. If they are eligible, subcontractors who do not want any CIS deductions might apply for “gross payment status”. Failure to comply with the CIS programme might result in penalties for contractors.
Subcontractor Verification
Verify if your subcontractor has registered with CIS and what their payment status is. The method for verifying that a subcontractor is genuinely self-employed and should not be classified as an employee of your company for taxation purposes is a critical component of the scheme. It is important to understand that even though a contractor withholds tax on payments made to you and may receive paperwork that looks similar to payslips, you are not being considered an employee and hence will not be entitled to any of the employment rights that come with being an employee.
You should also establish that the subcontractor is self-employed in the contract between your company and the subcontractor. However, if the contract is for employment, you must regard them as employees for tax purposes and pay PAYE instead of registering them for CIS.
Who pays the tax under the CIS Scheme?
After properly verifying a subcontractor under CIS and based on HMRC’s response, the contractor is obligated by law to withhold the following taxes from any payment owed to a subcontractor (they will be listed in the subcontractor’s Self-Assessment tax return):
- If they are not registered as sub-contractor – 30% from non-CIS-registered subcontractors, excluding the equivalent of VAT and the cost of plant hire or supplies.
- If sub-contractors are registered at the standard/ net rate – 20% from CIS-registered subcontractors who are eligible to receive gross payments, excluding the equivalent of VAT and the cost of plant hire or supplies.
- If the sub-contractor is registered with gross payment status, there are no deductions if a subcontractor qualifies for gross payments.
The contactors will not deduct amounts from invoices (sent by the subcontractors) for direct expenses such as material costs. The contractor’s deductions are subsequently remitted to HMRC, who regards these as advance payments of the subcontractor’s income tax and national insurance contributions.
The contractor must provide a PDS (Payment Deduction Statement) to the subcontractor within 14 days of the end of the current tax month for any deductions made. The subcontractor should keep these statements since they will be helpful in completing a Self-Assessment tax return.
A subcontractor may seek a duplicate copy of a PDS document that has been lost or misplaced. The contractor must furnish it, but it must be properly labelled as duplicate.
You can utilise the CIS online service to submit monthly returns, as well as to verify your list of subcontractors, view previously filed returns, and alter any data that need to be changed.
CIS Compliance
There should be no outstanding HMRC payments or tax returns. While HMRC frequently overlooks minor compliance errors, having many failures recorded might result in your gross payment status being revoked (which is reviewed once per year). HMRC laws require subcontractors to notify any company changes, including:
- Change in company type, address (private or registered)
- Changing your business name
- Changing the business structure (which necessitates a new gross payment status review)
- Addition of any new shareholders (in the case of companies)
- The core trade has come to an end
A contractor accountant can assist you in staying on top of intricate compliance rules, claiming overpayment CIS, and ensuring that you are paying the smallest amount possible.
Support from Bloom Financials
This is a brief overview of the processes you’ll need to follow to verify subcontractors and stay in compliance with CIS.
If you have any questions about the scheme or require assistance with the verification procedure or tax deductions, our team of experienced professionals would be happy to assist you. Don’t hesitate to get in touch with us for more information.
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