Month: November 2022

The introduction of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) is set to commence from April 2024. This means that clients who have not yet prepared for the change have less than 18 months to choose and begin using approved software.

MTD for ITSA will fundamentally change the way businesses, the self-employed and landlords, interact with HMRC. The regime will require businesses and individuals to register, file, pay and update their information using an online tax account. The rules will initially apply to taxpayers who file Income Tax Self-Assessment tax returns with business or property income over £10,000 annually.

General partnerships will not be required to join MTD for ITSA until a year later, in April 2025. The date other types of partnerships will be required to join will be confirmed in the future. A new system of penalties for the late filing and late payment of tax for ITSA will be aligned with the introduction of MTD for ITSA.

The MTD regime started in April 2019 for VAT purposes when businesses with a turnover above the VAT threshold were mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software. Since April 2022, MTD has been extended to all VAT registered businesses with turnover below the VAT threshold of £85,000.

Chancellor Jeremy Hunt announced as part of the Autumn Statement measures that the Income Tax thresholds will be maintained at their current levels for a further two years until April 2028. This will see the personal tax allowance frozen at £12,570 through to April 2028. The existing thresholds for the basic rate and higher rates of tax have also been frozen.

In addition, the Income Tax additional rate threshold will be reduced from £150,000 to £125,140 with effect from 6 April 2023. This means that from April 2023, the higher rate 40% Income Tax will apply to those with taxable income between £37,701 to £125,140 and the additional rate 45% Income Tax will apply to those with taxable income over £125,140.

Taken together this means that more taxpayers will be pushed into paying higher taxes as income increases at a far faster rate than the frozen tax bands. This phenomenon is known as fiscal drag. The freezing of most of the Income Tax allowance and rates at current levels until 2028 means that many taxpayers will pay more Income Tax as their income increases with no corresponding increases in their allowances.

This change could also see more taxpayers having their taxable income boosted into the 40%, or 45%, Income Tax bands. It has been estimated that 250,000 taxpayers will be paying the additional rate of Income Tax of 45% from next April.

In order to reduce the impact of these changes’ taxpayers may be advised to consider taking future increases in earnings in a tax-free format, for example as additional pension contributions.

Regional variations to Income Tax rates currently apply in Scotland and the 2023-24 Scottish Budget is set to be published on 15 December 2022.

Businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.

An online payment plan for Self-Assessment tax bills can be used to set up instalment arrangements for paying tax liabilities up to £30,000. Taxpayers that qualify for a Time to Pay arrangement using the self-serve Time to Pay facility online, can do so without speaking to an HMRC adviser. The service will create a bespoke monthly payment plan based on how much tax is owed and the length of time needed to pay. The service was used by over 142,000 taxpayers for the 2021-22 tax year to spread the cost of over £475m in tax.

Taxpayers that want to use the online option for their 2021-22 tax return must meet the following requirements:

• have filed their tax return for the 2021-22 tax year;
• owe less than £30,000;
• plan to pay their debt off within the next 12 months or less.

Taxpayers with Self-Assessment tax payments that do not meet the above requirements need to contact HMRC to request a Time To Pay arrangement. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.

HMRC will usually offer taxpayers the option of extra time to pay if they think they genuinely cannot pay in full now but will be able to pay in the near future. If HMRC do not think that more time will help, then they can require immediate payment of a tax bill and start enforcement action if payment is not forthcoming.

HMRC is reminding Self-Assessment taxpayers that they must declare COVID-19 grant and support payments in their tax return for the 2021-22 tax year.

Most COVID support scheme grants are treated as taxable income in the same way as other taxable receipts and need to be reported to HMRC. This means that if you received a taxable support payment during the 2021-22 this needs to be reported on your tax return. This applies to self-employed, partnerships and businesses.

Many of the grants fell into the previous tax year but more than 2.9 million people claimed at least one Self-Employment Income Support Scheme (SEISS) payment in the 2021-22. These grants are taxable and should be declared on tax returns for the 2021-22 tax year before the deadline on 31 January 2023.

The SEISS application and payment windows during the 2021-22 tax year were:

• SEISS 4: 22 April 2021 to 1 June 2021
• SEISS 5: 29 July 2021 to 30 September 2021

HMRC’s guidance is clear that whether or not any tax is paid will depend on the business profits of the grant recipient (taking into account the grant and other business income and expenditure under normal tax rules), any other taxable income they may have and their personal and any other allowances to which they are entitled.

HMRC also has the power to recover payments and charge penalties where claimants have made support grant claims to which they were not entitled. There is no requirement to report COVID welfare payments made by a council such as those that were made to help with council tax payments and housing benefit.

HMRC may be able to help those who are unable to pay their tax bill in full by arranging an affordable payment plan, known as a Time to Pay arrangement. Most taxpayers can apply online to make this arrangement.