General Election: Tax Advice

General Election: Tax Advice

As the general election is just around the corner, the battle lines are being drawn with taxes at the forefront of the debate. Both the Conservative and Labour parties are unveiling their tax strategies, aiming to sway voters before 4th July.  

With the two set to battle it out until the very end, let’s break down how each party plans to tackle the taxes for individuals and businesses.  

Overall Fiscal Approach 

The Institute for Fiscal Studies (IFS) suggests that the next government faces tough choices: implementing spending cuts, raising taxes beyond current levels, or increasing borrowing, which would conflict with promises to stabilise debt as a share of national income. These options highlight the difficult fiscal realities the UK will face post-election. 

Both parties claim that they will not be increasing taxes, but it’s hard to see how this can be reconciled with their spending plans. The probable explanation is that both parties are hoping for the economy to grow, and relying on the resulting revenue to finance spending. 

It may also be that they are talking only about tax as it applies to normal people – PAYE, National Insurance, and VAT – and that more niche taxes, like Inheritance Tax, Capital Gains Tax, and indirect taxes, are still fair game.  

Either way, specific areas within the main taxes may also be targeted, especially where they relate to unpopular taxpayers like banks, oil companies, and landlords. 

Income Tax and National Insurance 

Both the Conservatives and Labour have pledged not to increase income tax or National Insurance rates. However, by keeping income tax thresholds frozen until 2028, as both parties are proposing, they effectively increase the tax burden due to pay inflation, leading to higher taxes for many as salaries rise. 

The Conservatives have gone further on National Insurance, and are proposing to get rid of it altogether. This appears to refer only to employee contributions, and to cutting them for the self-employed, so NI would still be an issue for employers.  This would be a significant change to the overall shape of the tax system, and would cost large sums, so is likely to be done later in a Conservative Parliament rather than earlier.  

Other parties are suggesting some tax rises, and the degree of support for those parties may influence the new Government’s view on how willing voters are to accept additional taxes later in the Parliament.  

Non-Dom Tax 

The government announced changes to non-UK domiciled individuals’ tax rules in the 2024 Spring Budget, set to take effect from April 2025. These changes mean that individuals who are tax residents in the UK for more than four years would pay UK tax on foreign income and gains. However, the reforms are uncertain due to the election.  

Labour doesn’t oppose the plan – they had been calling for something similar, after all – but they aim to close perceived loopholes, including removing transitional rules that allow non-doms to pay UK tax on only 50% of their foreign income in the 2025/26 tax year and preventing non-doms from sheltering offshore assets from inheritance tax (IHT) by transferring them to excluded property trusts. 

Inheritance Tax (IHT) 

Both parties have given little indication of changes to IHT. Chancellor Jeremy Hunt has described IHT as “profoundly anti-Conservative,” suggesting potential reform under a Conservative government. Labour leader Sir Keir Starmer, however, opposes reducing or abolishing IHT. IHT doesn’t raise much tax revenue, and significant changes to IHT are unlikely, but on the other hand it is a high-profile tax so Labour may look to do something eye-catching – ‘abolishing unfair reliefs’, perhaps – even if the revenue raised is small. 

Business Taxes 

Labour plans to cap corporation tax at 25% and publish a roadmap for business taxation during the next parliament. The Conservatives aim to support businesses by keeping taxes low. However, details will be crucial, as changes to existing reliefs could impact the overall tax burden on businesses – particularly large businesses in unpopular sectors, with potential windfall taxes on banks and oil companies. 

Pensions 

The Conservatives promise a ‘Triple Lock Plus,’ increasing the tax-free pension allowance by the higher of 2.5%, average earnings, or inflation. Labour supports the state pension triple lock but won’t match the Conservatives’ additional pledge. The status of pensions as inheritance tax-efficient vehicles could change, depending on future reforms. 

Capital Gains Tax (CGT) 

Both parties have ruled out increasing CGT rates. However, as with IHT, this is a relatively high-profile tax despite the small amounts collected, so existing reliefs may be targeted to raise a little revenue and to satisfy voters. 

A concern for many entrepreneurs is Business Asset Disposal Relief, which halves the tax payable on the first £1m of gains when selling a business.  The relief was cut from £10m a few years ago, and it seems unlikely that it will be cut further, as that would look too much like an attack on small business.  If any changes are made, they are unlikely to take effect before the post-election Budget, and would probably be no earlier than April 2025. 

There has been a suggestion recently that CGT rates should be increased to match income tax.  A recent Treasury review of the options for CGT gave some support to the proposal, but only if indexation was reintroduced to ensure that the tax only falls on gains in excess of inflation. This would reduce the impact of higher rates significantly for long-term investments, and in many cases actually reduce the tax charge, and so even if the new Government were to adopt it (perhaps saying ‘we’re not increasing CGT rates, we’re just redefining gains as income’) the impact on investors may not be significant. 

VAT 

Neither party plans to raise VAT. However, Labour intends to end tax breaks for private schools, making them subject to VAT and business rates. 

VAT is a complex tax that is ripe for simplification, but that is a herculean task that no party is likely to want to take on soon.  There may however be some tinkering with higher-profile items, either to reduce the tax (as the Conservatives did with sanitary products) or increase it (as above) in order to make political points. 

Avoidance and administration 

Tax avoidance is a priority for every party, with predicted recoveries of £5bn to £7bn from cracking down on it.  Interestingly, HMRC’s figures for the Tax Gap suggest that this is the whole amount lost through avoidance and evasion, with most of it lost to error, mistakes, or inability to pay.  Politicians seem to be either very confident in HMRC’s ability to make the system watertight, pessimistic about the accuracy of the Tax Gap calculations, or perhaps – and this is only a possibility – a little confused about what the numbers mean. 

HMRC are more focused on the ‘error and mistake’ elements of the Tax Gap than politicians seem to be, and so the new Government will almost certainly be presented with proposals for new programmes to digitalise and automate the tax system.   

Increased activity in these areas could have short-term costs and disruption for businesses and individuals, but if HMRC can get the resources to improve its systems and to make life easier and more certain for taxpayers, the medium to long term prospects could be greatly improved. 

Concluding Statement  

Both parties currently avoid commitment to direct tax rate increases, instead relying on fiscal drag and potential adjustments to reliefs to increase tax revenue. This approach allows them to maintain headline commitments while subtly increasing the overall tax burden. As policies may evolve, particularly with pending manifestos, staying informed will help you navigate and prepare for potential changes in the tax landscape. 

Please don’t hesitate to get in touch with your dedicated Adviser if you have any queries about the information above or regarding the General Election.  

Basis Period Reform: Key accounting dates and Making Tax Digital

Basis Period Reform: Key accounting dates and Making Tax Digital

Welcome to the final part of our series discussing all things basis period reform. In part 1, we outlined the changes involved and how they affect a business’ chosen accounting date along with their tax obligations. Part 2 delved into overlap relief and how best to utilise it during the transition.  

Now, in this final part, we investigate the finer details of basis period reform coming into force in 2023/24, with information on practicalities and interacting with Making Tax Digital, as well as some important considerations for businesses. 

Practicalities 

Can I change my accounting date to avoid basis period reform? 

Changing accounting date to 31 March or 5 April (or any date in between) will reduce ongoing administrative burdens from April 2024 onwards. In particular, it will remove the need to apportion figures from more than one set of accounts, and the possibility of having to file and correct provisional figures (see pt1).  

However, it will not remove the need to apply the transitional rules in 2023/24, or prevent additional profits being brought into account. 

If the change in accounting date takes effect in 2023/24, the business may however be able to access spreading (see pt2). 

The usual restrictions on changing accounting date are also disapplied from 2023/24. This means that, if it wishes, a business can draw up a set of accounts exceeding 18 months in length to effect the change. For example, if a business has a year-end of 30 April, they could change this by drawing up a single 23-month set of accounts for the period from 1 May 2022 to 31 March 2024. There is also no need to worry about having a commercial reason for the change where there has been a previous change in the last five years. 

However, whether a change in accounting date is suitable or possible is also a commercial decision, and businesses will need to consider the wider pros and cons beyond tax. 

How will basis period reform interact with Making Tax Digital? 

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will be introduced from April 2026 for businesses with turnover of £50,000 or more, and from April 2027 for those turning over at least £30,000. 

Taxpayers in scope of MTD ITSA will have to submit quarterly updates of their income and expenses to HMRC. These quarterly updates will align with the tax year, and not the accounting period of the business. 

The introduction of the tax year basis from April 2024 may make alignment with MTD for ITSA quarters easier. However, it should be remembered that, if the business does not have a 31 March or 5 April year-end, then under the tax year basis it is not the transactions actually taking place in the tax year which are subject to tax, but rather the apportioned profits of the relevant accounting periods. 

It is not yet clear exactly how software will handle the transition from quarterly updates to the taxable profit for the year, where a business does not have a 31 March or 5 April year-end. 

And that concludes our three-part series on basis period reform! If you missed any previous installations, please refer to the blog section on our website or the links within the article.  

If you would like to discuss any part with one of our advisors or need help with the transition, please contact our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk.  

Basis Period Reform: Overlap Relief

Basis Period Reform: Overlap Relief

Welcome back to our three-part series discussing basis period reform, where we are dissecting all aspects of the change. In part 1, we outlined the relationship between a business’ chosen accounting date and its tax obligations. 

This week, we will discuss overlap relief and how it can be utilised during the transition to the new tax year basis.  

Overlap relief 

What overlap relief can I offset? 

Businesses must offset all the overlap relief they are entitled to in 2023/24. If they do not, they will not have a further opportunity to do so in the future, and all entitlement to overlap relief will be lost. 

Overlap relief may have arisen when the business started to trade (when the current year basis meant they may have been taxed twice on the same profits) or from a past change in accounting date. If the business is old enough, it may also have transitional overlap relief available from the switch over to the current year basis in 1996/97. 

The amount that can be deducted in 2023/24 is the amount that would have been deductible had the business ceased that year. Relief can also be claimed for any overlap relief which could have been deducted in a previous year, when there was a change in accounting period but it was not claimed for any reason. 

How can I find out my overlap relief figure? 

If a business does not know what overlap relief they are entitled to, they can request this information from HMRC. The easiest way to do this is to use the dedicated online g-form. Businesses will need to sign in with the Government Gateway user ID and password they use for self-assessment. They will also need to provide certain details, including their UTR, the date or tax year in which they started to trade, and details of any previous changes in accounting period. 

Once the g-form has been completed, HMRC should be in touch within 15 working days (though this may be longer for complex cases). If the overlap relief figure was previously reported on a tax return, HMRC will provide the figure reported. Otherwise, they will provide the relevant tax return figures to enable the business to calculate the overlap relief themselves.  

If a business is unable to use the g-form, overlap relief details can also be requested over the telephone. However, the g-form will be the quickest route to receiving an answer and should therefore be used wherever possible. 

In all events, the amounts entered onto the 2023-24 tax return in respect of overlap relief are a self-assessment. Businesses should therefore be comfortable that the amount of relief they claim is reasonable, and as accurate as possible. 

Spreading 

When can I spread excess profits? 

Spreading is a method of alleviating the tax impact of additional profits being brought into account as a result of the basis period reform transitional rules. 

As mentioned previously, overlap relief should be deducted from any transition part profits in 2023/24. Any remaining additional profits after this are referred to as transition profits and can be spread over upcoming periods for up to five tax years. 

How does spreading work? 

The default is that 20% of the transition profits should be brought into account in 2023/24, and a further 20% in each of the following four tax years. 

However, it is possible to accelerate the amount of transition profits considered in any one tax year. The business can choose any additional amount to consider. Any remaining transition profits will then be spread equally over the remaining spreading period (subject to any further election in one of those years). 

This ability to accelerate the amount of transition profits brought into account may be particularly useful if a taxpayer is subject to a lower level of tax than usual in any tax year (for example because they have a large expense or lower income that year). 

This election must be made on the self-assessment return, and the deadline is one year after the filing date for that return. 

 How can we help?  

Offset relief is quite a complex topic and it may be difficult to decide on how best to utilise it. For support with this, please don’t hesitate to get in touch our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk 

Join us next week for the final part of our series on basis period reform! 

 

Basis Period Reform: Understanding the Changes & Implications

Basis Period Reform: Understanding the Changes & Implications

Basis period reform represents a major change in how the trading profits of unincorporated businesses (such as sole traders and members of partnerships) are calculated for income tax purposes.  

In this three-part series, we look to breakdown the changes involved with basis period reform. Kicking off with part one, where we shed light on the change and how it represents a fundamental conversion in the relationship between a business’ chosen accounting date and its tax obligations. 

What’s changed? 

Since 6 April 2024, a new ‘tax year basis’ of assessment has applied to the trading profits of unincorporated businesses, such as sole traders and partners subject to income tax.  Under the tax year basis, such businesses will be taxed on the profits arising in each tax year (6 April to the following 5 April), regardless of their accounting period end date. 

This will replace the ‘current year’ basis, under which the tax for any one tax year is calculated using the profits of the accounting period ending in that year. Basis period reform therefore effectively breaks the link between the accounting date chosen by your business and when you are taxed on your profits. 

The tax year 2023/24 represents a transitional year, in which we switch over from the current year basis of assessment to this new tax year basis. 

 Who is affected? 

  • Self-employed traders  
  • Partners in trading partnerships  
  • Trusts and estates  
  • Non-resident companies with trading income charged to income tax 

Any business already drawing their accounts up to 31 March or 5 April (or any date in between) will also be unaffected.  

 How will the tax year basis work? 

Under the tax year basis, businesses will be subject to tax on their profits arising in the tax year (i.e. from 6 April to the following 5 April). As noted above, if a business already draws accounts up to 31 March or 5 April (or any date in between), then this will be treated as the same as the tax year. 

If your business has a year-end other than 31 March or 5 April (or any date in between), you will need to apportion amounts from two sets of accounts to calculate your profits for every tax year from 2024/25 onwards. 

Calculating profits under the tax year basis 

How is apportionment carried out? 

Under the tax year basis, if a business does not draw their accounts to 31 March or 5 April (or a date in between), you will need to time apportion amounts from two sets of accounts to calculate your taxable profits each year. 

The default is that this apportionment is carried out on a daily basis.  For example, for the tax year 2024/25, a business with a 31 December year-end will need to apportion: 

  • 270 days from the year ended 31 December 2024; and 
  • 95 days from the year ended 31 December 2025. 

 However, a different time-apportionment (for example weeks or months) can be used, provided it is reasonable and applied consistently. 

The Transitional Year (2023/24) 

Which profits are taxed in 2023/24? 

Tax year 2023/24 is a transitional year, in which we swap over from the current year basis to the new tax year basis. Specific rules apply in the transitional year, which may result in more than 12 months’ worth of profit being taxed. 

 To summarise, in 2023/24, businesses will be taxed on the profits of: 

  • The 12 months starting with the end of the basis period for 2022/23 (the ‘standard part’); and 
  • The period from the end of the standard part to 5 April 2024 (the ‘transition part’) 

For most businesses, the standard part will effectively be the profits they would have brought into account under the current year basis. The transition part will then bring them from the end of that period up to 5 April 2024. 

 For example, a business with a 31 December year-end will be taxed on the profits of: 

  • the year ended 31 December 2023 (the ‘standard part profits’); and 
  • the period from 1 January to 5 April 2024 (the ‘transition part profits’). 

To calculate the transition part profits, the results of the year ending 31 December 2024 will need to be time apportioned. 

How can we help?  

We understand that every business is different, and deciding whether to align accounting periods with the tax year must be considered on a case-by-case basis.  

For more detailed guidance and support with the basis period reform, please don’t hesitate to get in touch our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk 

Join us next week for part two of our series on basis period reform! 

Abolition of FHL regime

Abolition of FHL regime

If you own property classed as a furnished holiday let (FHL) for tax purposes, then it’s vital that you’re aware of the planned abolition of its favourable tax treatment from 6th April 2025 (1 April 2025 for companies).  

Although new legislation is yet to be drafted, we can expect short-term and long-term residential lets to receive the same tax treatment, meaning that it will no longer be tax-advantaged to commercially let your property for a series of short periods. This comes as the government plans to ‘level the playing field’ between ownership of short-term and long-term lets, with the overall goal of helping people to live in their local area. 

Reminder of the current regime 

At the moment, your FHL benefits from the following tax treatment: 

  • Being able to fully deduct interest incurred on mortgage borrowings from taxable profits. 
  • The availability of a number of capital gains tax reliefs, including business asset disposal relief, rollover relief and business asset holdover relief.  
  • Capital allowances for items such as furniture, equipment and fixtures. 
  • Classing profits as earnings for pension purposes, allowing tax-advantaged contributions.

Uncertainties regarding the new regime 

Without any legislation regarding the changes, right now we have more questions than answers. Some of the key areas of uncertainty are as follows: 

  • Will there be any transitional provisions regarding capital allowances? Without such provisions there would be a balancing charge giving rise to a tax liability when the current regime ends. 
  • What will happen to existing FHL losses, which under current legislation, can only be used against future FHL profits? 
  • Will HMRC give a clear definition of ‘trading’? Getting rid of FHLs means there’s much more of a gulf between a rental property and a B&B. 
  • In the budget it was announced that anti forestalling rules in relation to capital gains tax relief would apply from 6 March 2024. We do not know yet if this will apply to all or just some of the existing capital gains tax reliefs. 
  • Will the current regime regarding business rates and FHLs remain, or will all FHLs become liable to pay council tax instead? This would have an adverse effect on owners currently liable to business rates but qualify for small business relief.

How can you prepare for the changes? 

Firstly, the key preparation for the abolition of the FHL tax regime, is to understand how owning and letting the property will impact your personal finances without the tax-advantaged rules. Secondly, it would be valuable to consider what options are available to you, for example it may be beneficial to incorporate or perhaps accelerate expenditure on items such as furniture, fixtures or equipment to the 2024/25 tax year. Although when considering any planning it would be necessary to wait for draft legislation before any action is taken. 

How can we support? 

If you own a furnished holiday letting, we want to help you navigate the changes that will arise when the tax regime is abolished on 6th April 2025. In the meantime, as the new legislation is announced, we can help you to weigh up available options and consider the most tax efficient routes to take.

Please don’t hesitate to get in touch for further assistance.