17th November 2022: The day the tax allowance stood still!
What does it all mean for SMEs (and their accountants)? Well the one thing it doesn’t mean is business as usual! Every SME earning more than £50K in taxable profits needs to reassess its remuneration policy.
A small salary and the rest in dividends is unlikely to be the best policy (in tax terms) from now on.
It may feel like it has yet to happen, but tax is going up for us SMEs, but not just up a bit. For a reasonably profitable SME (between £50K and £350K), the marginal (decision-making) tax rate is jumping by almost 40%.
From 19% to a marginal rate of 26.5%.
The Government is also keeping its increase to dividend tax, which was brought in to match the NI increase, even though the NI increase is still being scrapped.
A major consequence of making the business tax system more complicated is that decisions that were tax neutral before, could be very costly in future.
What can you do now to help yourself?
- Make sure you reward yourself correctly in 2023/24. With the changes to the rules, you should likely be taking salary rather than dividend, to take your taxable profits down to £50K.
- Think about how you use historic losses. If you have losses from previous years, it might be better to use them in 2023 and beyond and save at higher rates (26.5% or 25%) rather than 19% now.
- Tidy up your business structures. Many businesses have minor trading subsidiaries or other companies they own on the side. Under the new rules (assuming it doesn’t change again), the limits are spread across the number of companies you own, so you could find yourself paying 26.5% tax instead of 19%.
In addition to the corporation tax changes, SMEs are being hit with….
R&D tax credit reduced for small and medium-sized enterprises (SMEs) from 1st April 2023
The definition of an SME is different from what you’d expect, it’s actually quite large companies, the limits being less than 500 staff and less than 100m Euro turnover.
If you look into the detail, there are a number of percentages and rates, but in practice, what does it mean in the real world?
For a pre-profit company spending £1,000 on R&D before the changes, they could obtain a tax refund of £333 which from 1st April 2023 drops to £186, a 44% reduction.
For profitable companies, it’s actually a slight improvement to £465, compared to £437, but that’s because the rate of tax has increased dramatically too.
What does that mean in the real world? The difference between cashing in R&D before starting to make profits and waiting has gone from a return of 31%, to a dramatic 150% (from 1st April 2023).
What can you do now?
- Accelerate any R&D (if you can afford to) and are not yet generating profits.
- Consider very carefully whether to carry forward the tax credits against the higher rate of relief in future, foregoing the cash benefit of the smaller amount of relief now.
- If you are behind claiming R&D relief, make sure you process your claims asap, more people will be claiming early, HMRC are looking closer at submissions, and the times for repayments are increasing all the time.
VAT Penalty Regime is changing
From 1st January 2023, there is a new penalty regime coming in for late VAT returns and payments.
The current system
Currently, HMRC can charge a surcharge penalty if you’re late with your VAT return or payment. First and second-time offences will not usually result in a fine, but rather, a ‘suspended sentence’. If you are late for a third time, the fine will stand.
The new system
The new system will have a more stringent structure in place. This new systematic approach introduces a 2% penalty for VAT payments not settled within 15 days of the due date, and a further 2% after 30 days. Additionally, an annual penalty rate of 4% will be applied to unpaid VAT.
Interest charges have also been introduced at a rate of 2.5% above the Bank of England base rate.
What do if you can’t pay your VAT?
If you know you are going to be late, then you should set up a payment plan with HMRC, which in most cases will suspend the penalties, and give you breathing space to rearrange your finances to be able to pay.
At long last, HMRC have added the facility to pay your monthly/quarterly PAYE by direct debit. If you wish to set this up, login to your PAYE portal to set it up for your business.
Capital Gains Tax Important Reminder
The deadlines for paying capital gains tax (CGT) after selling (or otherwise disposing of) a residential property are different from other Capital Gains, please report any sales to us within 30 days, if you would like us to help out.