My take on the three main points of the budget.
Reduction in NIC rates – 1% for self-employed, 2% for employees
I am a big proponent of this. NIC is effectively a tax on ‘active’ work. If you are sitting with a big rental portfolio, investment income, or living off a fat pension you don’t pay NIC. If you undertake a trade or you are an employee you do. Arguably, this is the wrong way round. I would like to see NIC merged with income tax to simplify the system, but then basic rate employees would realise they have a marginal rate of 32%/30% and not 20%, which is politically unpalatable.
As a result of these changes higher/additional rate employees will save £754 a year.
Full expensing of plant and machinery
Full expensing allows companies to deem plant and machinery an expense for tax purposes, even if it is capitalised on the balance sheet. E.g if a company bought a digger for £200,000, it can take £200,000 off its taxable profits. Make no mistake, the change announced is a tax cut for large businesses. All companies already get a £1m full expensing allowance. It is rare for SMEs to breach this, whereas multi-nationals will often breach this many times over.
R&D scheme merging
It was announced by Hunt that the two R&D schemes are now going to be merged. This is after a huge amount of messing around with the administration and rules relating R&D in the past couple of years, which included hiring inexperienced HMRC officers to challenge claims which were clearly compliant.
Two points – it comes in for accounting periods starting 1 April 2024, so doesn’t give companies much time to prepare. Secondly, R&D isn’t actually being merged into one scheme as Hunt suggested. There will still be two schemes – the merged scheme and the SME intensive scheme (see link in comments).
Let’s hope this can be the final change to what has been a tumultuous couple of years in R&D.
Futher cuts to NIC and what it means for you
Lots of interesting tax changes in the #springbudget2024 just now. The one that will affect the populace the most is a further 2% cut in National Insurance Contributions from next month.
By way of example, if you are an employee on £50,270 or more, you will see an extra £63 a month in your pocket in your April pay packet. If you earn £35,000 a year you will see an extra £37 a month. On £25,000 you will see an extra £21 a month.
What makes a competent professional for R&D purposes?
HMRC are still focussing in on ‘qualifications’ of key competent professionals in an R&D enquiry we’re dealing with, as if that’s what makes them competent. Many (especially in the IT sector) are qualified by experience.
Erling Haaland has no qualifications I’m aware of, but no one would argue that’s he’s not a competent professional.
American exceptionalism in regards to tax
A global minimum tax of 15% was introduced for large multi-national enterprises on 1st January, with almost no media fanfare. At the time of writing, around 55 countries have implemented this, including the UK and the EU bloc.
USA has not. Should we be surprised? No.
Below are some examples of the USA going against international tax norms.
1. USA taxes its citizens rather than those who are resident in the USA. This means that if you were born in the US but have lived in the UK for your entire life, USA’s Inland Revenue Service will still – potentially – want a chunk of your income. The only other country in the world to attempt to do this (badly*) is Eritrea.
2. Double Tax Treaties between countries override domestic law in (almost) every circumstance. They must have this status to allow for proper functioning of the treaty. The US, uniquely in international tax, in Internal Revenue Code §7852(d) effectively gave itself the right under their domestic law to override a treaty.
3. As far as I’m aware, all OECD countries use the OECD Model Tax Treaty as the basis for their treaties. Developing countries will generally use the UN Model Tax Treaty. About 90% of the world’s treaties are based on these two models. However, the US again decides to be different, and bases its treaties on the US Model Tax Treaty.
4. The US implemented FATCA in 2010, which essentially placed a massive compliance burden on any financial institution in the world that serves US citizens. It forces them to report detailed information on their US citizen account holders or have account holders face penal measures. Arguably, only the US with its massive economic and political strength could have implemented such a measure. In 2014 the OECD implemented the Common Reporting Standard (“CRS”), which allows for information on taxpayers to flow between signatories, with over 120 jurisdictions who have now signed. The US has never been a signatory to the CRS.
5. Double Tax Treaties often contain words or phrases which need interpreting. As an example, in the case of Macklin V HMRC (2015), the word ‘established’ in a Double Tax Treaty in regards to a pension fund needed to be clarified. Rules on treaty interpretation are found in the Vienna Convention on the Law of Treaties, coming into force in 1980. There are now 116 jurisdictions who are signatories. USA has never become a party to the convention.
6. The Multi-Lateral Instrument (“MLI”) allowed for some the recommendations of the OECD’s Base Erosion and Profit Shifting action points to be implemented into tax treaties without needing to renegotiate the entire treaty. It’s why if you search for many tax treaties you’ll find what appear to be two versions; the original treaty and the treaty containing the changes made by the MLI (e.g search UK/France double tax treaty). At the time of writing, 102 states have signed this. Guess what? The US has never signed up for the MLI.
NIC Cut and what it means for you
When most of us get paid in 9 days time, we’ll see more go into our bank accounts than normal. If you earn £50,270 or more, you’ll see an extra £63. If you earn less than this, you can see how much extra you’ll take home using the BBC calculator (link in comments).
This is due to Jeremy Hunt’s National Insurance Contribution (“NIC”) cut from 12% to 10% for employees. Without getting political, this is a major U-turn given that Sunak increased NIC to 13.25% in April 2022, which was reversed back to 12% by Kwateng in November of that same year. It’s been a busy couple of years for payroll software providers.
I’ve said this before, but NIC is effectively a tax on ‘active’ work. If you are sitting with a big rental portfolio, investment income, or living off a fat pension you don’t pay NIC. If you undertake a trade or you are an employee you do. Arguably, it should be the other way round, with the tax system incentivising people do ‘active’ work. There is a strong argument to merge NIC and income tax.
NIC is widely seen as a gentler and fairer tax, in that you pay money in and ultimately receive benefits out. In research by King’s College London in 2023 it was found the most common misconception was that “each person’s National Insurance contributions are kept in a personal pot to be accessed when they reach state pension age”. This is not the case at all. The link between paying NIC and receiving benefits is now vanishingly weak.
Indeed, if you have a limited company and pay yourself a salary of £12,570 and take the rest in dividends you pay no NIC at all, yet are still awarded a ‘qualifying year’. The same goes for someone on Jobseeker’s Allowance. Both give an identical state pension entitlement as someone who has paid £millions in NIC over their lifetime.
An individual needs 35 qualifying years by state pension age to receive full state pension entitlement. You can check if you are on track to do this (link in the comments). If you are missing years, you can make Class 3 voluntary contributions to fill gaps in your record.
Ebay Tax/Airbnb tax
There is a lot of misinformation about the changes re tax in regards to eBay, Airbnb, Vinted etc that came into force on 1st January. That includes the below Tweet, with 16,000 likes and 1.6 million views. I have no qualms in criticising the government’s tax policy or HMRC (see some of my previous posts) but in this case it is unwarranted.
All that has changed is that some sites will be sharing information with HMRC to identify those who have been ‘trading’/renting on these sites and not declaring it for tax purposes. There have been no changes at all to the underlying tax laws.
If you sell your unwanted goods you will not be taxed on them. HMRC will only tax those who are ‘trading’, i.e on a commercial basis with a view to profits. For example, if you have a garage sale to sell your old clothes, you’re not taxed on the proceeds. If you set up a second hand clothing shop which buys and sells clothes you are taxed on the profits, as you are ‘trading’. There can be some grey areas; whether or not you are actually ‘trading’ comes down to the application of rules (largely) brought in 70 years ago called the Badges of Trade.
Note that even if you are ‘trading’ you can gross up to £1000 per tax year without notifying HMRC. In addition, £1000 of property income can also be received each year without notifying HMRC.
Becoming STEP Qualified
My dad was a psychiatrist, my mum was an orthodontist. It was therefore clear from the beginning I would always end up of one of three D’s:
1. A Doctor
2. A Dentist
3. A Disappointment
Nevertheless, yesterday I passed my final STEP exam becoming a qualified Trust and Estate Practioner, with a distinction overall.
As far as I am aware (and I have checked with a few sources), I am now the most qualified tax advisor/accountant in the UK.
It comes at a time 13 years almost to the day since my first accounting exam.
Loan Charge – addressing MPs in Westminster
Yesterday I was invited to address MPs on the Loan Charge tax in Westminster.
As it broadly related to the 18/19 tax year, the Loan Charge has received little media attention recently, and many outside of tax have never heard of it.
However, many individuals are still facing ruinous tax bills because of it. By way of example, one of my clients has a time-to-pay arrangement because of this tax whereby he will be paying half his disposable income to HMRC for the next 19 years.
Rishi Sunak’s Tax Return
Rishi Sunak has just released his tax returns. In the 21/22 tax year Rishi earned £1,970,992, on which he paid £446,430, an effective tax rate of 22.7%. This was largely due to c. £1.6m of capital gains being taxed at 20%.
If you were on PAYE and you earned £80,000 you would have paid tax of £19,432 for that tax year (not including the £5,749 of employees NIC also due). This gives an effective tax rate of 24.3%, which is higher than Rishi’s, despite earning just 4% of what Rishi earned in that year.
It now seems more understandable why Rishi didn’t raise CGT rates in his budgets, as we expected in the tax profession!
False claims of fraud within R&D
A number of our clients have received the following communication from HMRC regarding R&D relief. HMRC are not opening a compliance check, nor informally asking some additional questions, but making outright baseless accusations of fraudulent activity.
When challenged by the ICAEW on this matter, HMRC stated in July 2022 “Where evidence leads us to believe that fraudulent claims may have been made, we will issue these letters which ask for more information to help verify the claims. We have not written to R&D claimants accusing them of fraud.” This is clearly not the case.
The letter states that the alert on their systems cause HMRC “to believe that your have fraudulently claimed money to which you are not entitled.” That is an accusation and contradicts HMRC statement in July 2022. The tone of these letters is unnecessarily threatening, with criminal prosecution mentioned on page 2.
Further, they ask for information already contained within the R&D report submitted with the tax computation itself. Needless to say, none of our clients have fraudulently claimed R&D relief. HMRC really needs to get their act together.
