Making Tax Digital for VAT

Making Tax Digital (MTD) is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.

VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are currently required to follow the MTD rules by keeping digital records and using software to submit their VAT returns. This is voluntary if you are below the VAT threshold.

However, from 1 April 2022 ALL VAT-registered businesses will be required to follow MTD rules for their first VAT return, starting on or after April 2022. This includes businesses with rental income.

What does this mean for you?

You will be required to digitally record your bookkeeping and submit VAT returns using MTD compatible software, so your VAT returns can be filed directly with HMRC via APIs (Application Program Interfaces) rather than through existing portals.

“Digital” records can include use of spreadsheets, but these will need to contain a digital link. Alternatively, you can use ‘bridging software’ to connect to HMRC systems from your current system.

If you do not currently have compatible software, you may wish to upgrade at your account’s year end, to avoid switching during an accounting year.

If you are VAT registered but not yet signed up to MTD, you will need to sign up to MTD for VAT – you will not automatically be transferred to MTD. More information can be found here: Making Tax Digital for VAT.

How can we help?

Let us help you take this opportunity to review your existing processes and embrace technology. This will provide better information recording and therefore better insight into your business, as well as freeing up more of your time to do what you do best.

We can assist you with your digital bookkeeping and VAT compliance using MTD fully compatible software such as Xero, where your VAT returns can be submitted at the press of a button.

We can also help you find a solution using simple to use bridging software, which creates a link from your current bookkeeping system to HMRC.

We can do all of this for you, or we are equally happy to help you set it up yourself – whatever works best for you. For more information, please contact Julia Wigram.

Over the past few years, there has been an increase in customers buying goods and services using digital platforms and this has accelerated during the pandemic. This article will cover exactly what cryptoassets are and the tax treatment of crypto for both individuals and businesses.

What are Cryptoassets?

Cryptoassets, also known as ‘tokens’ or ‘cryptocurrencies’ or’crypto’, are cryptographically secured digital representations of value or contractual rights that can be:

• Transferred
• Stored
• Traded electronically

There are numerous types of cryptoassets and they each work in different ways. The main 4 types of cryptoasset that you may encounter are as follows:

• Exchange tokens – Intended to be used as a means of payment and this includes the most well know token, the bitcoin.
• Utility tokens – This provides the holder with access to particular goods or services on a platform. This is usually where a business will issue tokens and commit to accepting the tokens as payment for particular goods or services.
• Security tokens – This provides the holder with particular rights or interests in a business, such as ownership or entitlement to a share in future profits.
• Stable coins – These tokens minimise volatility as they are aligned to something that is considered to have a stable value, such as precious metals.

How HMRC Treats Cryptoassets

The tax treatment of all types of tokens is dependent on the nature and use of the tokens. It is not based on the definition of the token. HMRC does not consider the cryptoasset to be currency or money.

Tax Treatment of Cryptoassets for Individuals

Income Tax Treatment

The cryptoasset activity must be recognised as a trading activity for income tax rules to apply. To determine if a trading activity has taken place, HMRC will apply a series of tests known as ‘The Badges of Trade’. Any profits from this activity will be subject to income tax at an individual’s marginal rates (20%, 40% and 45%). There will also be Class 2 and 4 National Insurance due at the current rates applicable.

Capital Gains Tax Treatment

Where the transactions in cryptoassets are regarded as a personal investment, then they should be treated as a chargeable asset for Capital Gains Tax (‘CGT’) purposes. Any gain realised on a cryptoasset bought and subsequently sold, is subject to CGT at the current rate of 10% for a basic rate taxpayer and 20% for a higher rate taxpayer. Losses realised in the same way, can only be relieved against capital gains chargeable to CGT.

Non-Domiciled Individuals

The nature of cryptoassets is that they are decentralised, digital in nature, and do not have a physical location. Thus, determining the location or ‘situs’ of an asset is important for UK resident, non-domiciled individuals as it can change the tax consequences.

HMRC guidance has stated that the location of a cryptoasset is wherever the beneficial owner is resident. If the cryptoasset owner is resident in the UK, then the cryptoasset may also be located in the UK.

There is a need to watch out for the circumstances in which a UK resident, non-UK domiciled individual purchases cryptoassets using their untaxed foreign income or gains. They may have remitted those funds into the UK and triggered a tax liability on acquisition. If the individual then disposes of the cryptoasset and makes a gain, then the gain may also be taxable in the UK, without the benefit of the remittance basis of taxation.

Tax Treatment of Cryptoassets for Companies

Numerous transactions in cryptoassets by a company will invariably be regarded as trading for tax purposes. These profits will be subject to corporation tax at the current rate applicable (currently 19% for 2021 financial year). Any losses arising from cryptoassets are dealt with in the same manner as a trading loss.

However, if a business is not trading in cryptoassets, any profits will be treated as a chargeable gain for companies. The calculation of the gain would follow the pooling rules which also apply to shares and securities.

How We Can Help Crypto Investors

We are aware that HMRC are showing an increasing interest in Cryptoassets and their latest ‘nudge letter’ campaign will reportedly target UK taxpayers who may have failed to properly pay tax on their cryptoassets. 

HMRC are now armed with data gathered from cryptoasset exchanges and other sources, meaning that investigations into the UK tax affairs of crypto investors are likely to be imminent. 

Any taxpayers who receive a nudge letter, or who may be generally concerned about their tax position in respect of cryptoassets, should contact us as soon as possible to discuss the position. Please get in touch with Karen Dyerson, for more information.

Prime Minister Boris Johnson announced on 7^th September 2021 a new UK wide ‘health and social care levy’ to address the funding crisis in this sector.

The new tax will begin as a 1.25% rise in National Insurance from April 2022:

• The current 12% rate on earnings between £9,564 and £50,268 will rise to 13.25%.
• The current 2% rate on earnings over £50,268 will rise to 3.25%.
• Workers above state-pension age will also contribute to the new levy.
• Employers will also need to contribute an additional 1.25% (employer national insurance is currently 13.8%).
• Anyone earning just under £10,000 will still be exempt.
• From 2023 this will become a separate tax on earned income and the National Insurance increase will appear on payslips as a “Health & Social Care levy”.
• From April 2022 a typical basic rate taxpayer earning £24,100 will contribute £180 which equates to £3.46 per week.

From April 2022 a typical higher rate taxpayer earning £67,100 will contribute £720 which equates to £13.85 per week.

Tax Increase on Dividend Tax Rates

From April 2022 there will also be an increase in tax of 1.25% on income received from share dividends, which will include company directors in receipt of dividend income from a company shareholding.

A basic rate tax payer is currently paying tax at a rate of 7.5% on dividend income and from April 2022 this will increase to 8.75%. A higher rate tax payer is currently paying tax at a rate of 32.5% and from April 2022 this will increase to 33.75%. An additional rate tax payer is currently paying tax at a rate of 38.1% and from April 2022 this will increase to 39.35%.

Background

Once it has been decided that the UK is the correct location to establish a business, the next key decision is how this should be structured. One of the most popular structures is a limited company.

Recruiting high quality staff is also a priority and the availability and tax efficient nature of UK share option schemes can help achieve this objective.

Situations Where a Limited Company is Most Appropriate

Limited companies can offer a number of advantages.

They can be of particular benefit where:

• The business is being set-up with other people;
• There is a wish to incentivise staff though share schemes;
• The company will be receiving external funding;
• The company will be claiming Research and Development tax relief (R&D).

Forming a Company in England & Wales

The company formation process is relatively quick and easy.

All you need to start a company is an address within England & Wales for the registered office, at least one shareholder and at least one director (these two may be the same person). There is no minimum initial cash investment and the company can be formed in a matter of hours.

Why Use a Limited Company?

The main benefit of a limited company is the limited liability of the company’s officers and shareholders. This means that unlike the situation of a ‘sole trader’ or ‘partnership’ personal assets are not at risk in the event of a failure of the business.

Other considerations are:

• The company has a legal existence separate from its management and its members (the shareholders).
• The company’s name is protected.
• The company continues despite the death, resignation or bankruptcy of the management and/or members.
• The interests and obligations of management are defined.
• Appointment, retirement or removal of directors is straightforward.
• It is an easy process to gain new shareholders and investors.
• Employees can acquire shares.
• Companies are often perceived as more robust and more business-like than sole traders.
• Companies can provide tax advantages such as lower tax rates, R&D incentives, extraction of profits via dividends, etc.

Recruiting and/or Incentivising Employees Using Share Schemes

Finding the right calibre of staff is vital to the success of a business, wherever it is located.

Employers in the UK often use share schemes to recruit important members of staff and as a way of incentivising employees to work hard and remain with the business for the medium to long term.

There are a number of ways to do this, as detailed below. The most popular is the Enterprise Management Incentive (EMI) share option scheme as it is particularly tax efficient:

Enterprise Management Incentive (EMI)

Eligible companies frequently use an EMI share scheme, because the tax advantages are attractive. The EMI share option scheme is Government approved, tax beneficial and a very flexible way of incentivising staff.

Under the EMI scheme, options are issued over an agreed number of shares. No tax is paid when the option is granted. When the option is exercised, which means converted into shares, there is no tax to pay provided that the agreed exercise price is no lower than the market value of the shares on the day that the option was granted.

When the shares are sold, the capital gain is usually taxed at 10% in situations where ‘Business Asset Disposal Relief’ (previously known as Entrepreneurs Relief) is available.

Growth Share Scheme

Where companies cannot use EMI, a growth share scheme is often used instead. This type of scheme is not appropriate for a start-up, it is only relevant to an established company.

Under this share scheme, on the sale of a company employees benefit only from the growth in the value of the shares, not the historic value built up until the date of the share issue. This is achieved by valuing the company and then issuing shares of a different class, which only benefit from value generated above an agreed threshold.

For example, if the company is worth £10m, a growth share scheme may allow holders to share in the proceeds, only if they exceed £12m. The value of the growth share, on issue, would be low because it would not have the ‘right’ to any of the value built up previously. Income tax charged on acquisition of the shares would consequently be low.

Phantom Share Scheme

A phantom share scheme is essentially a cash bonus scheme.

This arrangement allows an individual to receive a cash payment equal to the value of shares, or the increase in value of shares, above a notional exercise price. No actual shares or share options are issued. The idea is that individuals are incentivised because the level of any payment is linked to an increase in the value of the company’s shares.

Additional Information

If you would like additional information regarding setting up a company in the UK and using a share scheme to recruit or incentivise staff, please speak to Paul Webb or Sarah Gardner at the Dixcart office in the UK: advice.uk@dixcart.com

The Dixcart office in the UK has extensive expertise in forming UK companies, establishing the most appropriate corporate structure and meeting all relevant compliance obligations. Dixcart UK is also experienced in building EMI schemes to meet specific needs and liaising with the UK tax authorities (HMRC), to gain advance approval and for the drafting of relevant share option agreements.

We are seeing an increasing number of cases where individuals are unaware of the new reporting regime for capital gains on property disposals as it seems that estate agents and solicitors are failing to alert them to the new requirement.

What has changed?

The change came in on 6 April 2020 and means that where the disposal of a residential property results in a gain, this must be reported to HMRC within 30 days following the date of completion and the tax due must be paid over by the same date.

This is purely a timing difference, as the gain would otherwise have been reported on an annual tax return and the tax paid over to HMRC by 31 January following the tax year in which the disposal occurred. The law has not changed any of the rules in relation to which gains are taxable or the rate of tax that is payable. The only difference is that the deadline has been brought closer.

However, if the deadline for filing the capital gains tax UK property disposals return is missed, an automatic £100 penalty will be charged. Further penalties of £10 per day are applied if the return is still outstanding after three months.

What disposals are caught?

The new reporting regime catches any disposals of UK residential properties that result in a gain. Therefore, disposals of overseas residential properties are not caught (although there may be requirements in the overseas jurisdiction) and neither are UK residential property disposals that result in a loss. Instead, these disposals are to be reported on an annual tax return as normal.

This also means that if the gain is fully covered by a capital gains tax relief, it is not caught. An example of this might be a disposal of an individual’s main home, which is fully covered by principal private residence relief.

However, it would apply to the disposal of a UK second home or a UK-let property, whether or not an individual lived in that property at some point.

It is important to understand that the rules do not just apply to sales of property, they apply equally if someone were to gift a property (e.g. to an adult child) even though no money may have been received in exchange.

What should you do?

If you have disposed of a property which is caught by these rules and have not submitted the necessary filings to HMRC, please contact us immediately so we can help resolve this matter for you.

If you are in the process of disposing of a property or considering this, then as the deadline is tight, please do let us know so that we can ensure that all of the information can be gathered in time to ensure that any reporting requirements are met.

Please see a PDF regarding the new capital allowances which were announced at the Budget.

From 1 March 2021 HMRC will finally introduce the domestic reverse charge. The charge may be relevant for businesses supplying or purchasing building and construction services.

If supplying services, you will need to apply the reverse charge if the following statements are true:

• your customer is registered for VAT in the UK,
• payment for the supply is reported within the Construction Industry Scheme (CIS),
• the services you supply are standard or reduced rated,
• you are not an employment business, supplying either staff or workers, or both,
• your customer has not given written confirmation that they are an end user or intermediary supplier.

If purchasing building and construction services, you will need to apply the reverse charge if the following statements are true:

• payment for the supply is reported within the Construction Industry Scheme (CIS),
• the supply is standard or reduced rated,
• you are not hiring either staff or workers, or both,
• you are not using the end user or intermediary exclusions.

HMRC have confirmed that they will apply a “light touch” in dealing with any errors made in the first 6 months of the new legislation, to allow for difficulties faced while implementing the scheme.

For additional information, please contact Paul Webb: hello@dixcartuk.com.