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What are Tax Credits and How They Work?

What are Tax Credits and How They Work?

What are Tax Credits and How They Work?


  • What are Tax Credits
    • What is Universal Credit?
    • Types of Tax Credits:
    • Child Tax Credit
    • Working Tax 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

What are Tax Credits

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.

What is Universal Credit?

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.

Types of Tax Credits

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:

Child Tax Credit:

You may be eligible for a child tax credit if you are responsible for the care of a child.

Working Tax Credit:

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.

Difference between tax credits and benefits?

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’ impact on other benefits?

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.

How much Tax Credit you will get?

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.

What is Child Tax Credit?

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.

Child Tax Credit – Eligibility and Elements

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)

How does the child tax credit work?

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.

Child Tax Credits – Income Thresholds

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.

What is Working Tax Credit

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.

Working Tax Credits – Eligibility and Elements

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.

How much you can get on tax credit

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.

Child Tax and Working Tax Credits

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.

Am I eligible?

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.

How to claim 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.

When do tax credits get paid?

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.

Renewing your tax credit

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 Replacement

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.


Inheritance Tax Guide and Updates

Inheritance Tax Guide and Updates

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.


What is Construction Industry Scheme? – CIS Tax Simplified

What is Construction Industry Scheme? – CIS Tax Simplified

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.

Substantial Shareholding Exemption (SSE) Guide and Updates

Substantial Shareholding Exemption (SSE) Guide and Updates

The Substantial Shareholding Exemption (SSE) was legislated as part of the UK Finance Act of 2002. The substantial shareholding exemption applies to companies and exempts certain gains from UK corporation tax following the disposal of shares. It can also be used to structure pre-transaction deals. This exemption, however, only applies to corporations selling shares, not to partnerships or individuals.

The SSE provisions exclude from UK tax any gains realised by trading companies and groups on the disposal of qualifying substantial shareholdings while disallowing relief for any losses. If certain precise conditions are met, the legislation takes effect automatically, subject to anti-avoidance clauses meant to prevent the legislation from being used solely to obtain a tax benefit. Gains or losses on shares held on a trading account, and the Act does not cover assets held under loan arrangements or derivatives provisions.

How SSE works

The substantial shareholding exemption legislation is pretty complicated, and several requirements must be met for the exemption to apply. When determining whether or not the exception applies, a review of the statute is highly recommended.

The rules, which were first implemented in 2002, were significantly changed and modified on April 1, 2017, making them far more -friendly. The significant change is the elimination of the requirement that the selling firm (or group) be in trade. One effect of these changes is that, with proper preparation, SSE may now be utilised effectively in the typical OMB/SME environment.

  • The investing company (the seller)
  • The shareholding held in the company being invested in (the target)

The company being sold (the investee company) does not need to be traded before or after the disposal, which is significantly different from the general new substantial shareholding exemption rules. It is also not necessary for the investment firm to trade before or after the disposal.

The SSE might apply whenever there is a disposal of shares, and it does not have to be on an outright sale since this guide refers to a “seller”. Liquidation of a subsidiary firm, for example, would often result in the sale of shares in that company, which the SSE may apply to.

Conditions Relating to The Target

The target must be a “qualifying company” from the beginning of the most recent 12-month period considered to determine whether the shareholding condition applies.

If the target is a trading firm or the holding company of a trading group, it is a qualified company. A trading company engages in trade operations and does not engage in non-trading activities “to a substantial extent.” HMRC defines’ substantial’ for these purposes as more than 20%. However, it has stated that it would evaluate the facts and circumstances of each case when evaluating whether a corporation engages in non-trading activities to a substantial extent.

On the other hand, a trading group is a group in which one or more members engage in trading activities, and the actions of all members of the group, when added together, yield a profit.

New Updates in UK Substantial Shareholdings Exemption (SSE) Regulations

The rules are extensive, and anything beyond a brief overview to establish the introduction is beyond the scope of this article:

  • The legislation distinguishes between the investing company, which makes the disposal, and the investee company, whose stock is being sold.
  • A substantial shareholding is defined as owning at least 10% of the ordinary share capital, 10% of the earnings for distribution to equity holders, or being entitled to 10% of the assets in the event of a liquidation.
  • For a period of 12-month, the investment company must have the applicable qualifying shareholding.
  • Even though the12 months of ownership are usually the most important, changes made in 2017 increased the actual holding time from any 12 months period in the two years leading up to the date of sale to six years. This is especially useful when there is a time limit on the amount of money you may earn.
  • In 2017, a further amendment removed the requirement that the investment business be a trading company
  • A reform made in 2017 abolished the need that the investee firm be a trading company immediately after disposal, which may present complications if the purchaser promptly completely cut up the trade the off. Where the disposal is to a linked person or the trade has been transferred within the last 12 months, the requirement still applies.
  • The investing company’s 12-month holding term is extended to encompass any time within the group company’s final 12-month asset holding period.
  • Other factors, such as the seller’s holding term, may be significant in some cases. For example, the seller’s holding period may be able to be extended if:
  • The target is carrying on a trade that was previously carried out by the seller or another member of the seller’s group.

Other exemptions:

There is tax relief if the main exemption requirements are met and a sale of assets is “connected” to shares. An asset is “related” to a company’s shares if it is one of the following:

  • Option to purchase or sell that company’s stock. Or
  • A security that enables the holder to purchase or sell shares in a firm.
  • When the primary exemption criteria were previously met but not satisfied at the time of sale, both shares and related assets are sold. The exemption applies if a sale that qualified for the primary exemption occurred during the preceding two years.

As a result, when the business has one or more trading operations, preparing for the pre-sale packaging of the trading activities utilising newco (s) as a clean (and hence more appealing) vehicle to enable them to be sold without the seller company incurring a tax charge is conceivable.

SSE and degrouping charges

A degrouping fee may be triggered if a corporation leaves a capital gains group with an asset transferred to another group member within the preceding six years. The degrouping charge increases the seller’s selling consideration for the subsidiary. As a result, any capital gains degrouping charge will also be exempted if the sale of a trade subsidiary firm qualifies for SSE.

These amendments and updates are unlikely to be of much use. It might be helpful in a circumstance when there is an earnout (say, over three years) with unknown consideration. Any value obtained above and beyond the initially valued entitlement to the unascertainable consideration would not qualify for SSE in normal circumstances.

Using the amendments above, it should be viable to keep a portion of the firm being sold, with a put option to sell it at a specific price in three years. The additional consideration received in three years would now be considered SSE since the seller would have satisfied the SSE requirements during the previous six years. However, a larger exemption will be available for companies owned by qualified institutional investors. Many clients are unlikely to be affected also.

Bloom Financials and SSE

This change is positive and should help the government achieve its goal to boost the UK’s competitiveness as a hub for holding companies. It should make the investment in Intellectual Property firms and other comparable investment companies more appealing, as they would not have previously gotten a tax exemption on disposal.

SSE does not have a claim mechanism, and the exemption is automatic if the prerequisites are met. There is no way to refuse the exemption. Nonetheless, it will be critical for businesses to ensure that the SSE’s requirements are followed in order to optimise their company tax profile and reduce the possibility of unanticipated corporation tax payments. Don’t hesitate to contact us at Bloom Financials for further information, guidance, and advice concerning tax planning, reliefs and SSE.

Capital Gains Tax (CGT) – Investors’ Relief Allowances & Exemptions

Capital Gains Tax (CGT) – Investors’ Relief Allowances & Exemptions

Wealth in the form of money or property utilised to produce additional wealth is referred to as capital. A rise in the worth of that wealth is referred to as a gain. When you sell or give away an asset, you must pay capital gains tax (CGT). Making disposal is the term for this. CGT applies to various assets, including real estate (though not generally your primary residence, stocks and shares, and other artworks).

Capital Gains Tax

If you sell, give away, swap, or otherwise dispose of an asset and make a profit or ‘gain,’ you must pay capital gains tax (CGT). It is the gain you earn on the asset that is taxed, not the amount of money you get for it. To calculate the gain, you compare the selling profits (or the asset’s worth at the time it was disposed of) to the asset’s initial cost (or value when it was acquired).

As stated earlier, an asset might be sold or given away for less than its market worth, but the market value takes the place of any actual consideration paid. You must pay CGT on your net gain in order to deduct your costs from your gains. The components listed below help in reducing the amount of charged gain:

  • Ancillary cost of acquisition (e.g. legal fees)
  • Expenditure to increase the asset’s value (e.g. building an extension)
  • Ancillary costs of disposal (e.g. agents fees)
  • Allowances and tax relief

CGT Application

  • When you sell, give away, trade, or otherwise dispose of an asset, you must pay capital gains tax (CGT), though some gains are explicitly excluded from CGT.
  • If you live in the UK, you may be subject to CGT on the disposal of assets situated anywhere globally, not only in the UK.
  • Non-residents who carry on a business in the UK are subject to CGT. You may be subject to CGT on UK land and property disposal if you are a non-resident (including during the overseas portion of a split-year) (private residence relief may apply).
  • Individuals who are typically resident in the UK but temporarily live outside the UK are subject to specific CGT regulations (non-resident in the UK for less than five years). 
  • CGT is applicable when you give someone an asset as a gift.  There are various requirements based on who you donate the gift to and special reliefs for commercial assets. 
  • CGT may also apply if you transfer assets as a result of a civil partnership dissolution, divorce, or separation.

You may be viewed as though you have disposed of an asset in specific circumstances. This may happen, for example, if a personal item, such as an antique, was damaged and you were compensated with a capital sum, such as an insurance payout.

Individuals are subject to CGT when they sell assets; businesses, on the other hand, are subject to Corporation Tax on any gains. The CGT rate is determined by the type of asset sold and the amount of personal income earned in the year the asset was sold. The rates are 18% or 28%, respectively. The basic capital gains tax rate was cut to 10% in April 2016, while the higher rate was dropped to 20%. The increased tariffs, however, do not apply to residential property sales.

Non-UK residents will be subject to capital gains tax on gains accrued on the sale of UK residential property after April 2015. On gains above the yearly exempt level, non-resident individuals will be taxed at the same rates as UK taxpayers (28 per cent or 18 per cent).

Capital gains that are exempt

The sale of your primary or only residence but may be partially taxable in specific instances, such as if you have rented or utilised part of the property for commercial purposes.

  • Transfers of property between spouses or civil partners. These transfers are classified as no-gain/no-loss transactions.
  • The majority of items whose value depreciates over time.
  • Non-wasting and commercial possessions with a disposal value of less than £6,000.
  • Private and vintage automobiles
  • Donations to charity and membership in certain sports clubs.
  • Some financial instruments like SAYE contracts, savings certificates, and premium bonds
  • Life insurance policies entitle to the original owner or beneficiaries.
  • Prizes and wins from sports betting, as well as the lottery.
  • Compensation for personal or professional injury or damages.
  • Some compensation payments for pensions that were mis-sold.
  • Foreign currency held for your own use.

Capital Gains Tax Reliefs

The government have introduced several CGT reliefs that you may be able to take advantage over time. Here are a few examples:

  • Investors’ Relief
  • Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief
  • Principal Private Residence
  • Rollover Relief
  • Holdover Relief for gifts

However, we will discuss Investors’ Relief here.

Investors’ Relief

Investors’ Relief is a capital gains tax (CGT) relief on the disposal of qualified shares in an unlisted firm. Investors’ Relief (IR) is a kind of extension of entrepreneurs’ Relief that allows investors to benefit from the same tax reduction under slightly different qualifying criteria. Despite being a separate relief, the rules for investors’ Relief were designed to complement and mimic the rules for Business Asset Disposal Relief (BADR – formerly Entrepreneurs’ Relief) to some extent. Investors’ Relief combines BADR and Enterprise Investment Scheme (EIS) legislation elements. It is designed to encourage entrepreneurial investors to bring new capital into uncited trading companies where the BADR or EIS/Seed EIS (SEIS) reliefs do not apply.

Investors’ Relief Highlights

  • Individual investors are eligible for Investor’s Relief (IR), a Capital Gains Tax exemption.
  • It decreases the Capital Gains Tax on the disposal of ordinary shares investments to 10% if the investments were made on or after March 17, 2016, and the sale is made after April 6, 2019, and the shares were held for at least three years.
  • Investor’s Relief has a lifetime limit of £10 million.
  • Investor’s Relief differs from Entrepreneur’s Relief in that it is meant for passive investors who are not actively participating in the firm. There is also no minimum proportion of shares that you must hold to qualify for this Relief.

Investors’ Relief is intended to encourage external investment. The investor can be an individual or a partnership, but not a limited liability partnership (LLP). Individuals whose natural source of capital gains relief on a disposal would be business asset disposal relief are not eligible for it. As a result, the majority of employees and directors will not be eligible for investor relief. Individual investors can get a CGT reduction on their ordinary share investments if they dispose of them.

Term Relevant Employee

Anyone who is an official of the issuing company, such as a director or company secretary, or anyone who is an employee of the issuing company is considered a “relevant employee.” The same applies to any associated company’s officials or workers.

CGT and Investor’s Relief

Any financial gain from selling a portion or all of a company or any commercial asset is subject to CGT in the corporate world. This involves the sale of shares and other securities. Entrepreneurs’ Relief is a tax relief that reduces a qualifying person’s CGT to a flat rate of 10% if they qualify.

Like Entrepreneur’s Relief, Investors’ Relief operates by reducing the amount of Capital Gains Tax that must be paid on the gain of the sale of qualifying shares. Those who meet the investors’ Relief requirements will only have to pay 10% CGT on any gains they get from the sale of shares. Dispositions must be made after April 6, 2019, and investments must be kept for three years and made on or after March 17, 2016. Furthermore, unlike enterprise asset disposal relief, no minimum number of shares in the company is required.

Investors’ Relief is still available if the investor’s shareholding comprises of both qualifying and non-qualifying shares. On the other hand, the shareholder can only claim investors’ Relief on the percentage of gain earned from qualified shares.

The Relief has a lifetime limit of £10 million, which is in addition to the amount payable through business asset disposal relief. The subscriber should not be an employee or official of the firm throughout the time of ownership, with two exceptions. The rules are complex and should be considered prior to the investment and monitored in the years following the acquisition.

Investors’ relief Exceptions

Although IR isn’t as generous as the more well-known Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) schemes, it includes businesses and trades that aren’t eligible for EIS, such as farming, hotels and real estate development. A few other exceptions are:

  • The individual becomes an employee of the firm after a period of at least 180 days following subscription unless there was no reasonable chance of their becoming an employee at the time of subscription.
  • After subscribing, the individual assumes the function of an unpaid (dividend-free) director, although having no prior ties to the firm.

Investors can benefit from Investors’ Relief since it is one of the most attractive tax relief alternatives available. However, high gain rewards aren’t easy to accomplish; double-check that you meet all of the requirements before submitting your claim.

Capital Gains Tax Payment

Capital Gains Tax is paid via the self-assessment system, and gains and losses must be reported on your tax return. The tax must be paid by January 31, following the year in which the gain occurred. If you do not qualify for any of the reliefs mentioned above, your tax rate will be applied to the gain after deducting your yearly exemption.

How Can Bloom Financials Help

It’s vital to think about how these taxes interact with others, as it is with many taxes. Stamp Duty, VAT, Income Tax, and Inheritance Tax are frequently combined in CGT tax planning, so don’t treat it as an individual matter. Bloom Financials has ample expertise assisting private clients on their business matters. When considering an investment, we can help you determine the applicability of IR and other potential reliefs to structure the most suitable transaction to meet the legal and eligibility requirements. If you have any questions concerning IR or any other venture capital tax reliefs, please feel free to contact us.

VAT Charging and Reclaiming: How to Deal with VAT Matters

VAT Charging and Reclaiming: How to Deal with VAT Matters

If you have a business, there are several decisions to be made. For example, if you are setting up a new business or expanding, one of the decisions is whether to register for VAT. If your turnover has reached £85,000, the decision is out of your hands – you have reached the VAT threshold and must register. If your turnover is below the threshold, you can choose whether to register or not.

Generally, once you’ve registered for VAT, you must put the corresponding rate on your invoices and make quarterly VAT returns and HMRC payments. If you are not VAT registered, or your customer is not, VAT becomes complicated.

You’ll need to make a decision on how to deal with a customer who doesn’t have a VAT number if you provide discounts, refunds, or return policies for non-VAT registered customers in your terms and conditions. The prices at which the products are supplied for such customers should take into account any such discounts etc.

This article explains the different ways VAT can be charged and outlines what you need to do to become VAT registered. We also highlight the penalties HMRC might charge if you get the process wrong. Make sure to get professional advice if you are unsure how to handle VAT since some aspects can be complicated.

Why you should register for VAT?

VAT, or value-added tax, is a consumption tax imposed on goods and services at each stage of production. It’s often only applied to the value-added at every step. The advantage of being VAT registered is that it simplifies tax returns and reduces the administrative burden for small business owners.

You can reclaim any VAT that you are charged for around 15 EU countries around you. When this happens, your input tax will be more than the output tax. If your input tax is more than the output tax, you can collect the difference back from HMRC, saving you some money. It’s important to remember that the figure of £85,000 must represent taxable turnover – that is, for the supply of goods or services that are VAT-rated. Any goods or services, not VAT-rated must not be included in the figure.

How to register for VAT

Any firm in the UK that sells products or services to other EU nations must register for VAT. The first stage is to register with the HMRC as a company within 30 days of launching a business. If you’ve already registered as a Sole Trader, the next step is to register for VAT in the United Kingdom with HMRC. In most situations, if you already have a company and want to register for VAT, you can do so online (or by using paper form VAT1). You’ll need the following information before you can log on and start your registration:

  • Your Unique Tax Reference. This is a ten-digit number you’ll have been sent when registering to pay Corporation Tax.
  • Your business’ bank account details.
  • Your company number and registered address.
  • Details of any associated businesses from the past two years.

If necessary, you may also require information about any businesses that are being transferred or purchased.

You should receive a VAT registration certificate when you apply for VAT (VAT4). This will state:

  • your VAT registration number
  • the date you need to submit your first VAT Return and payment by
  • your ‘effective date of registration’

You will quote your VAT registration number on any receipt or invoice in which VAT is applied to goods and services.

Charging VAT

You’ll be provided with a unique VAT number when you register for VAT, and you’ll have to start issuing VAT invoices instead of routine invoices. VAT invoices should include information such as the tax rate(s) imposed and the total amount of tax payable, as well as your VAT number. When you purchase VAT-rated supplies from a VAT-registered business, you’ll get a VAT invoice containing the supplier’s VAT number and the amount of VAT included in the total invoice. You must pay the full amount due to the supplier.

To charge or reclaim VAT on whatever you buy or sell, you must first be registered for VAT. If you’re registered for VAT, your VAT number must appear on practically every invoice you send out. There are a few exceptions (for example, if you sell secondhand items on a discount programme or sell zero-rated products), but VAT-registered companies must always include their VAT numbers on their invoices as a general rule. Businesses who aren’t registered for VAT are unable to reclaim any of the VAT they pay.

If you are VAT registered, you can get a refund from HMRC for the VAT you paid. You obtain a refund by reporting this as input tax on your VAT return. Even if the items are VAT-rated, if you buy supplies from a non-registered company, you should not receive a VAT invoice, and you must not pay any VAT stated wrongly on the invoice. If you pay VAT in error, HMRC will levy you a penalty fee.

Surcharges and penalties levied by HMRC for VAT violations

HMRC has a range of penalties regarding registration and payments. You must be familiar with the critical registration dates in order to comply with their criteria. Your Effective Date of Registration (EDR) is determined by whether you applied to register before or after crossing the threshold. If you do not apply on time, you may face fines for late registration.

It’s risky to charge VAT if you’re not registered. It’s also unwise to ignore your VAT bills.

You are also responsible for sending your VAT return on time when registered for VAT. A default will occur when HMRC does not receive a return on all VAT payable by a certain deadline. In certain circumstances, such as the COVID-19 pandemic, HMRC may prolong this deadline, allowing entitled businesses to withhold VAT payments.

VAT is also penalised if it is charged too early. You can’t legally charge VAT to your consumers unless you’ve registered for VAT. The penalty for charging VAT on an invoice without being registered is up to 100% of the VAT on the invoice. There’s also a ten per cent penalty for charging VAT before the deadline. Even if you notify HMRC that you made a mistake, you will be subject to this penalty.

VAT Returns are normally completed online for every 3-month VAT period. These returns must be delivered to HMRC within 1 month and 7 days after the end of the VAT period. If it’s within your budget, it may be beneficial to appoint an accountant to prepare and submit VAT returns and handle VAT affairs on your behalf. This is a brief overview of the rules on VAT registration and administration.

Bloom Financials Can Help

When you aren’t registered, charging VAT would almost certainly result in further penalties and charges from HMRC. However, not charging VAT according to your VAT plan, or the VAT scheme you choose for your business is problematic. Understanding the VAT threshold and how to register will enable you in avoiding penalties and claim money back on purchases. Our team of experienced tax accountants would be happy to assist you if you require professional guidance on any aspect of VAT or confirmation that you are fully complying with HMRC’s VAT requirements.

Reach Us

Please let us know if you have any queries. Wish to leave a comment on Bloom Financials Private Limited, or want further information, don’t hesitate, go ahead.

We offer tailored solutions for your business, regardless of your requirements. Our friendly team is ready to help you, so please feel free to contact us.

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