Personal Tax Newsletter – June 2021

Can you reduce your July tax payment?
Making Tax Digital for Income Tax
Self Employed Income Support Scheme (SEISS)

Can you reduce your July tax payment?

For taxpayers who make payments on account, the second payment on account for 2020/21, is due by 31 July and if your income for 2020/21 is lower than the previous year it may be possible to reduce this payment.  This is particularly relevant this July as for many their income from investments and businesses has been impacted by Coronavirus in the last year.

The payment is an estimate of your Income Tax and Class 4 NIC (if you are self-employed/in a partnership) due for the year based on your tax liability for the previous year. If coronavirus impacted your business and your profits for 2020/21 were lower than the previous year, the payments on account may be too high.

By providing your tax return information to your accountant in early July, the tax liability for 2020/21 can be calculated or at least estimated to see if it is possible to reduce the July payment.

Whether you are able to reduce the second payment on account or not, please ensure you still make the applicable payment to HMRC by 31 July to avoid late payment interest accruing. The payment instructions should have been provided to you by your accountant or they can also be found on the HMRC website.

If you have any questions regarding your July tax payment, please do not hesitate to get in touch with our Personal Tax team.

Making Tax Digital for Income Tax

HMRC have been introducing Making Tax Digital (MTD) gradually, with the initial ‘phased’ roll out starting with VAT on 1 April 2019 – following the end of the VAT ‘Phase 1 soft landing period’ on 1 April 2021, most VAT registered businesses in the UK are now required to file VAT returns in a ‘digitally linked’ format, with the final stage of the MTD for VAT roll out scheduled to commence from 1 April 2022. From this date, nearly all VAT registered businesses will be required to adopt MTD, as the current £85k ‘taxable turnover’ de-minimis (for MTD registration) will be removed.

Following this successful rollout for VAT (and as part of the 10-year strategy for digitisation), HMRC are now extending the requirement to other taxes, and from April 2023, Self Assessment taxpayers will need to comply with MTD for Income Tax.

Below are the main questions we get asked about MTD and which we will provide an update on.

Why is HMRC making tax digital?  

HMRC says that MTD is how they are delivering on making it “easier for individuals and businesses to get their tax right and keep on top of their affairs.”  The intention is that it will become a real time system letting you keep track of how much Income Tax you owe as you go through the year rather than waiting until the tax year has ended.  The eventual aim is that the whole process will become paperless.

It is important to note here that this will not change the timing of when the payments are due.  Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is currently expected to remain in place.

Who does it apply to?

MTD for Income Tax will apply to both unincorporated business (sole traders and partnerships) and landlords who make over £10,000 annually. In partnerships, the rules will only apply where all partners are individuals. All other partnerships (e.g. those that have corporate partners and Limited Liability Partnerships) are not required to join MTD for Income Tax in April 2023, but will be required to join MTD at a future date (to be confirmed). Trusts, estates, trustees of registered pension schemes and non-resident companies will not be required to join MTD for Income Tax under the current proposals but again could be brought in at a later date.

When does it start?

On 21 July 2020, HMRC confirmed that MTD for Income tax will be introduced from April 2023.  While it will not be compulsory until April 2023, there is currently a pilot scheme operating where if you fill in a Self Assessment tax return, you can sign up for a voluntary basis.  The pilot lets you keep records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return. The government estimates that so far, around 30 per cent of businesses and landlords have signed up voluntarily to get used to the system before it becomes compulsory in 2023.  Others are taking a more cautious approach and are waiting for the inevitable teething problems to be resolved and it is expected there will be a large uptake from the start of the next tax year in April 2022.  

How does it work?

Under the requirements of MTD for Income Tax, individuals who are subject to Income Tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically (either using suitable software or on spreadsheets) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final end of period statement will then be submitted after the tax year to complete the individual’s tax affairs. The final end of year statement will include any personal details such as dividends, interest, pensions, etc and will be sent along with any reliefs that apply. The final tax position will be calculated and as mentioned above the tax will remain payable at the usual dates. 

What can you do to prepare?

To prepare for MTD, it is worth starting to keep all records electronically or look into ways that this can be done.  Once enrolled in MTD for Income Tax, you’ll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. There is compatible software already available and many others currently in development.  For those already using software such as xero and other bookkeeping and accounting packages, these should all become compatible if they are not already.  If you have questions about how to keep your records, please do get in touch. 

While MTD for Income Tax is over a year away from becoming compulsory, it is worth starting now to consider what changes you might need to make to become compatible and we are happy to have those conversations with you.  If you have any questions, please do not hesitate to ask us.

Self Employed Income Support Scheme (SEISS)

The SEISS grants are payments made to eligible businesses which have been adversely affected by the coronavirus pandemic.

While these are grants rather than loans so do not need to be repaid, the grants are taxable income.  As such, the grants are subject to Income Tax and self-employed National Insurance contributions (NIC) and need to be included in your self-assessment tax return.

Grants are included on a tax year basis for sole-traders and should be included as follows: 

  • First three grants should be included in the 2020/21 tax return.
  • Fourth and fifth grants should be included in the 2021/22 tax return.

This will depend on when you received the relevant grants but for most, the payments received should mean the position above will apply.

In a partnership, for those who have claimed the grants, the treatment for tax purposes will be determined based on who received the grants.

If the grants are received into a partner’s personal bank account, and not recorded as partnership income in the partnership accounts, then the grants will be included in the partners self-assessment tax returns in the same way as sole traders noted above.

However, if the grants were treated as partnership income and included in the partnership accounts and distributed to all partners according to the partnership agreement, depending on the partnership’s accounting period the grants may be taxed differently as the income will be included with the partnership profits and taxed accordingly. For example, the first three grants would normally be taxed in the 2020/21 tax year but if a partnership has a 31 July year-end, then the basis period for the 2020/21 tax year would be the partnership profit for the year ended 31 July 2020 and only the first grant would be included in this accounting period. This would mean that the second and third grants (and potentially the fourth grant, if claimed) would be taxed in the 2021/22 tax year, as they would be included in the partnership profit for the year ended 31 July 2021. The fifth grant, if claimed, would be taxed in the 2022/23 tax year as the payment is likely to be made after 31 July 2021.

The Fifth SEISS Grant

Claims will open from late July 2021 and will cover the period May 2021 to September 2021.

The amount that can be claimed will be determined by how much the business turnover has reduced in the 2020/21 tax year.  The other conditions for claiming are as for the earlier grants and those who have already claimed should receive an email to let them know when the fifth grant is open for claims. More guidance on claiming the fifth grant is expected by the end of June.

Trading Allowance and SEISS Grants

Where self-employment income is £1,000 or less and entitlement to the trading allowance relief up to £1,000 would be available, there would be no requirement to complete an annual tax return. However, if SEISS grants have been received, then you must complete a tax return. The first three grants must be included in the 2020/21 tax return, even if there is no Income Tax or self-employed NIC’s to pay.

The trading allowance cannot be claimed against SEISS grants, but if you have other trading income, you may be able to claim the trading allowances against your other trading income.

Repayment of SEISS Grants

It may be that the SEISS grants are required to be partially or fully repaid. This can happen for a number of reasons such as:

  • The trade was not adversely affected by coronavirus in the relevant period
  • The individual ceased to trade (or incorporated their business)
  • At the time of making the claim, the individual did not intend to continue to trade
  • The grants were incorrectly claimed or inadvertently overpaid

In some cases, the grants may be voluntarily repaid.

If this is the case, only the amount of SEISS grants that have not been paid back or already been assessed to pay back to HMRC should be included in the tax return.

If SEISS grants have been claimed incorrectly and HMRC have yet to be informed this can be done through the self-assessment tax returns. Any SEISS grants that HMRC already know should not have been claimed should not be included.

If you would like to discuss any aspect of the SEISS grants further, please do not hesitate to get in contact as we will be happy to help.

Get in touch

If you have any questions, please get in touch by filling in the form below. We look forward to chatting with you.