Personal Tax Newsletter – September 2021

Basis Period reform
Increased powers for HMRC
Electric Cars provided by employer

As speculation mounts as to whether there will be an Autumn statement in 2021 or if it will be pushed back to the spring of 2022, there are several consultations going on in the background.  Some of these consultations already have draft legislation and expected dates in place and seem likely to be announced in the next budget.  We have looked at the one most likely to affect income tax below along with considering items from this years Finance Act giving HMRC increased powers. 

Finally, with the increasing concern for the environment and the advances in technology, electric vehicles are becoming ever more popular so we look at the impact of this on company cars.  

Basis Period reform

This will affect all sole trade businesses, partnerships and trusts.  The consultation was launched in July 2021 and closed on 31 August 2021.  Draft legislation was released alongside the consultation and should this be brought in, the proposed date is that this would start from April 2022. 

The proposal changes the basis period on which profits are taxed from a ‘current year basis’ to a ‘tax year basis’, meaning that business profits will be calculated for the tax year rather than for the period of account ending in the tax year. Where a business currently has an accounting date of 31 March or 5 April, they will be unaffected but for all other accounting dates, these will be moved under these proposals to the tax year which would align the treatment of trading income with non-trading income.

Based on the wording of the consultation and the fact that draft legislation was released at the same time, it is likely this is “less of an if this will be brought in” but rather “how and when” and what the impact will be.

The tax year of transition is due to be 6 April 2022 to 5 April 2023 so less than a year away!

In 2022/23, businesses will be taxable on their profits on the current year basis (ie for the 12 months to their accounting date in 2022/23, plus the period up to the end of the tax year.  Depending on the accounting date of the business, this could bring almost up to two year’s profits into charge for the year: businesses with 30 April year ends would be particularly affected.

Given this could lead to a significantly increased tax bill, the proposals provide for the excess profit to be spread over a period of five tax years to mitigate the cashflow impacts (although individuals can elect to be taxed on the full amount in the transition year). In addition to the possible spreading of the increased profits, those with overlap relief (created by the opening year rules when they started their business) will be able to use these up to reduce the amount taxable.

If you have a business either a sole trade or a partnership and your accounting year end is not 31 March or 5 April, we would be happy to look at this with you and what your estimated tax payments might be over the period of transition. 

In the consultation period, there has been a call from the CIOT and ATT to delay such a major change to how trading profits are assessed to allow more time to prepare.  We will have to wait and see after the consultation closed on 31 August what impact the responses to consultation have had and we will be keeping an eye out for any news and keep you updated.

Increased powers for HMRC

Under the new rules introduced in the most recent Finance Act, HMRC have been given additional powers which allow them to request information directly from financial institutions. This is for the purpose of checking on taxpayers to ensure income and gains are being properly reported and taxed and moves further towards automation of completing personal tax returns. We are also seeing this result in an increase in HMRC checks and enquiries into returns. 

Early preparation of tax returns to ensure time to make sure all sources are included is important and it can also be worth revisiting the tax fee protection insurance in the event an enquiry results from the increased information available to HMRC. 

Electric cars provided by employer

With electric cars becoming more common many of our clients have been asking about the impacts of introducing an electric car fleet. Here we show the personal tax implications for the employee along with how to report the car to HMRC and some VAT aspects.

1. Income tax payable by employee

The income tax position for employees if they are provided with a pure electric car by their employer is set out below.

For the 2021/22 tax year, to 5 April 2022, an electric car benefit-in-kind is calculated at 1% of the list price and this figure is then subject to the employee’s income tax rate with the tax collected via PAYE.  See an example in the table below.

From 2022/23 the benefit in kind charge will increase to 2% of the car’s list price.

NB: When applying the 1% and 2% benefit in kind charges, there is currently no upper limit on the list price of the car which can be provided by the employer

Where the employer provides charging points and pays for the electricity for the electric company car, no taxable benefit arises on the employee in respect of this cost.

2. Employee contribution towards the cost of the car

If an employee wishes to choose a company car in a higher cost range, they can make a capital contribution towards this. The capital contribution by the employee will reduce the list price of the car (up to a maximum contribution of £5,000) when calculating the benefit in kind and therefore reduce the income tax the employee will pay.

Using the example from the tables above for 2021/22, if an employee pays a capital contribution of £4,000 towards the car shown in the table above, this will reduce the list price to £31,655 (£35,655-£4,000). The benefit would then be £316.55 (1% x £31,655), and the income tax paid per annum would be £66.48 for a 21% taxpayer (compared to £74.88 per annum tax payable where no capital contribution).

3. Reporting

In terms of informing HMRC about the electric cars – the P46 (car) – now online – has the option to provide details of an electric car.  Under “type of fuel or power used” electric cars will come under type “A – all other cars” and you can put the other details in as normal.

4. VAT aspects

VAT is due at 20% for electric vehicle charging through charging points in public places (the 5% reduced rate can only apply at homes).

Recovery of input tax for charging company electric vehicles is only available if employees charge an employer’s electric vehicle (for both business and private use) at the employer’s premises. Records need to be kept for employee business and private mileage so that you can work out the amounts of business use and private use for the vehicle.

You can recover the full amount of VAT for the supply of electricity used to charge the electric vehicle. This includes the electricity for private use. However, you will be liable for an output tax charge on the amount for private use. Alternatively, you can recover input VAT on only the business element.

Where an electric car is purchased and includes private use by an employee, input VAT on that purchase is blocked in the same way as petrol or diesel cars where there is an element of private use. 

NOTE: Based on Tax Regulations at August 2021.

If you have any income tax or VAT questions regarding electric cars please get in touch.

Get in touch

Barbara McQuillan

Barbara McQuillan

I have worked in taxation and specialised in the owner-managed business sector for over 30 years. During that time, I have dealt with a wide range of clients in a variety of sectors ranging from…
Lucy Crow

Lucy Crow

I am Chartered Tax Advisor qualified and have worked in tax for over 12 years, specialising in personal tax.  I work with a wide range of personal tax clients, from small sole traders to high…