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The recent budget and new tax year had some interesting areas to be aware of for the third sector, who could be affected indirectly by changes in employment incentives, pension reforms, and potential shifts in funding related to economic growth. There are also some corporation tax and VAT issues to be aware of.
We have split this update into a General section, followed by sections specifically for VAT, SDLT, Corporation Tax and Employment Taxes.
The purpose of the update is to highlight the tax changes for this new financial year. It should not be considered as specific tax advice for your organisation. If you have any concerns about the impact of these changes, please contact S3TAX for specific advice.
General
Abolition of the Office for Tax Simplification
As announced on 23 September 2022, the government is legislating to abolish the Office of Tax Simplification. The legislation will have effect from the date of Royal Assent of Spring Finance Bill 2023. HMRC and the Treasury are now responsible for incorporating tax simplification into their practices.
Over the next 24 months, HMRC will systematically review tax guidance and forms for small businesses. The government aims to ensure clarity, simplicity, and comprehensibility in guidance, supporting small business growth and enhancing the customer experience.
The Budget introduced several measures aimed at simplifying the tax system.
Key measures include the aforementioned reviews of HMRC guidance and forms for small businesses, modernising income tax services, expanding the ‘cash basis’ accounting system, and changing investment allowances for businesses and pensions tax relief.
The government will also scrutinise new policies and existing tax rules to ensure easier administration. The commitment to simplification is welcomed, as the UK’s tax system has become overly complicated for taxpayers and challenging for digitalisation and effective administration by HMRC.
Investment Zones
The Spring Budget 2023 announced the establishment of 12 Investment Zones across the UK, with each zone receiving £80 million over five years.
Subject to government approval, special tax sites will be designated in or connected with these Investment Zones. These special tax sites will benefit from tax reliefs, including SLDT relief, enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and secondary Class 1 National Insurance contributions relief. The reliefs are time-limited, with the end date to be confirmed later.
In England, SDLT relief will be available for commercial land or building purchases, with a control period of up to three years. Particular arrangements for capital allowances and Secondary Class 1 NICs relief will exist.
Tax Avoidance
As has been the case with previous budgets, the government announced some measures to deal with tax avoidance. The government will double the maximum sentences for the most serious cases of tax fraud from seven to 14 years and will consult shortly on the introduction of a new criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. The government is also investing a further £47.2 million to improve HMRC’s capability to collect tax debts, including supporting those who are temporarily unable to pay. Government takes fraud in any sector seriously and would not hesitate to use the relevant powers for public bodies.
Tax Administration Framework Review: Modernising income tax services
In a move that will be of interest to employers and individual taxpayers alike, the government is publishing a discussion document on modernising HMRC’s income tax services to support better digital communication with taxpayers and reduce administrative burdens. This seeks views on how to integrate and modernise income tax Self-Assessment and Pay As You Earn processes so taxpayers can quickly and easily manage their own tax affairs online, reducing the need to contact HMRC. Again, this will affect the third sector and its employees, as well as other sectors.
VAT, indirect taxes, and duties in the new tax year
As we have seen with previous “post-Brexit” budgets, the Government continues to use its new unfettered flexibility over VAT rules by introducing new reliefs and extending VAT exemptions. This Budget included announcements extending the VAT exemption for medical services under the supervision of registered pharmacists. There is also further consultation on the zero rating for the installation of Energy Saving Materials.
Consultation on the zero rating for the installation of Energy Saving Materials.
The government has published a call for evidence on options to reform VAT relief for the installation of energy-saving materials. The call for evidence will consider making additional technologies eligible for relief and extending the relief to include energy-saving materials installed in buildings used solely for a relevant charitable purpose. Responses should be sent to the VAT Reliefs Team by 31 May 2023, if you would like to contribute to the consultation, the link below provides all the details. Alternatively, you can send your comments to S3TAX to add to our own response to the consultation.
It is worth mentioning here the current position regarding the zero-rated relief and highlighting some of the issues for the third sector; apportionment and purchase of goods without installation services being supplied.
Apportionment:
The supply and installation of certain energy efficiency works on residential property may qualify for VAT relief – currently at the zero-rate until 31 March 2027. However, where the supply and installation of energy-saving materials/works form part of a wider single supply of works, then the VAT treatment should follow the main supply, often this will be the standard rated refurbishment works, or in the case of qualifying conversion works the reduced rate of 5%. There is no mechanism in legislation to apportion the energy-saving materials installation.
Goods:
The legislation only supports zero-rating where certain specified energy-saving materials are supplied and installed. If you purchase energy-saving materials the cost of these goods is standard-rated, for example, an in-house maintenance team buys in eligible goods but then carries out the installation work themselves.
VAT registration threshold
There are no changes to the registration and deregistration thresholds, which remain at:
– VAT registration £85,000
– VAT deregistration £83,000
Significant delays with the VAT registration process remain.
On a related point, please be aware that if you wish to create a VAT group from a single VAT registration or change your VAT group registration to a single registration, there are also significant delays. You should be aware in detail of the easements that HMRC have introduced because depending on your exact circumstances, they may prove ineffective and cause significant disruption to your VAT accounting.
VAT – Deposit Return Schemes
In readiness for the introduction of Deposit Return Schemes (DRS) in the UK, the UK government has announced new VAT accounting rules for businesses that make DRS supplies. The DRS requires a deposit to be charged at each stage of the supply chain, which is refunded when the container is returned after consumption. Existing VAT accounting rules would require VAT to be charged on the price payable for goods and services, including any deposit added to the price. However, the new measure removes the need to account for VAT on the value of the deposit when the drink is sold at each stage in the supply chain. Instead, the manufacturer or importer who first sells the product in the UK will be required to account for VAT on the value of the deposits for DRS containers that have not been returned, which a periodic VAT accounting adjustment will achieve.
The measure’s objective is to ensure that the correct amount of VAT is accounted for on DRS drinks and simplify the VAT accounting rules for businesses selling such drinks. The primary legislation will be introduced in the Spring Finance Bill 2023.
The DRS may impact those third-sector bodies with catering and retail outlets.
Late Return/Payment Penalties and Repayment Interest
Changes were made from January 2023 to introduce a new penalty and interest regime. The Budget has made minor technical changes to the January 2023 legislation, which had not achieved the intended result. They ensure that where HMRC assess to recover an overpayment it makes, the calculation of any interest for late payment of that assessment starts from the date of the overpayment rather than the due date for payment of the assessment.
If HMRC assesses your organisation at a time when your VAT returns would require you to make a payment or the assessment exceeds the value of your VAT return, you should ensure that an actual payment is made by the due date.
Landfill tax
As announced in the Autumn Budget 2021, the Government will legislate to increase the standard and lower rates of Landfill Tax in line with RPI, rounded to the nearest five pence. The change will take effect from 1 April 2023.
Corporation Tax
Corporate interest restriction (CIR)
The CIR restricts the ability of large businesses to reduce their taxable profits through excessive UK interest expense. UK companies and groups that incur more than £2m of net interest expense and other financing costs per annum may be denied deductions for such expenses under the CIR rules. Technical changes to this regime will be introduced to avoid unfair outcomes and ensure the rules are operating as intended.
The revisions will mostly take effect for accounting periods commencing on or after 1 April 2023, and will include (amongst others) amendments to:
– ensure that groups can carry forward interest allowance where a new holding company is inserted in the group part-way through a period of account;
– remove an anomaly that can arise in relation to income or expenses deriving from a money debt that is not a loan relationship;
– extend the time limit for HMRC to appoint a reporting company by 12 months; and
– require groups to submit a revised interest restriction return where the underlying figures have changed, and give HMRC the power to issue penalties if such a return is not submitted.
– clarify that companies which are charities cannot benefit from tax relief for financing costs incurred in respect of their tax-exempt activities and, as a result, avoid the need for these amounts to be included in CIR calculations (section 457 CTA 2009, section 382 TIOPA)
The full list of amendments – Corporate Interest Restriction amendments – GOV.UK (www.gov.uk)
It is likely that with high inflation in the economy and the cost of debt rising, many more UK companies and third-sector organisations will be pulled into the CIR regime and, consequently, potentially affected by these changes.
Employment Taxes and related measures
Although not in the same league as the Mr Kwarteng Budget of last year, the March 2023 announcements were interesting and potentially significant in a few areas. In particular, there was a surprising change regarding pension thresholds in addition to a few announcements that will affect Employment Taxes and related issues immediately or soon.
Pension thresholds
Whilst changes to the Annual Allowance (AA) and Lifetime Allowance (LTA) for pensions were expected, it was a surprise that the LTA charge will be removed from 6 April 2023 and abolished in April 2024.
The AA is the amount an employee’s pension pot can increase in a year without triggering any tax charge. The LTA is the maximum value of an employee’s lifetime pension pot before a tax charge arises.
As a backdrop to the announcement, the Chancellor explained that employees should not be persuaded out of work by punitive tax charges arising on pensions and cited doctors as a group substantially impacted by this problem. Instead of dealing with the doctors in isolation, sweeping changes to the pensions tax system have been proposed, benefiting many highly paid employees.. Many will argue that this measure goes much further than could be justified, based on (defined benefits) pension issues, with potentially huge tax benefits arising for those in money purchase schemes unaffected by the AA charge. For this reason, we expect harsh media coverage and resistance from opposition MPs, which may lead to changes in the proposals as set out below.
Under current rules, lump sums can be paid tax-free up to the threshold of £268,275 (25% of the LTA of £1,073,100) but are subject to a charge of 55% after that. The changes taking effect from 6 April 2023 mean that this threshold will be frozen and that the excess lump sums are instead taxed at an individual’s marginal income tax rate. With effect from April 2024, the LTA will be abolished altogether, reversing the trend of the previous ten years, during which the LTA has significantly reduced – in real terms by well over 50% – disincentivising pension provision.
Because of this, you can expect to hear from some employees retiring before 6 April 2023, requesting that their retirement be delayed.
The AA remains in place but will increase significantly from £40,000 to £60,000 annually.
These changes will be welcome news for higher-paid employees, who would have sought to reduce their working hours or leave employment altogether due to the potential tax charges. Whether they will be tempted back to work by the prospect of a bigger and more tax-efficient pension pot remains to be seen.
Notwithstanding the AA uplift, these rules will continue to affect some individuals and may still lead to considerations of reduced working hours or early retirement. Employers are urged to carefully consider their options regarding staff who may continue to be affected. Even after these changes, pension recycling may still be an attractive option for employers wishing to retain experienced staff.
Flexible working
The Budget press release commits to a new statutory framework for flexible working, including a ‘day one’ right to request flexible working for all employees. There is also a commitment to work with employers to demonstrate its benefits, using initiatives called ‘employer pledges’ and flexible working in job adverts.
The changing landscape may ultimately result in updating the tax and National Insurance rules regarding travel expenses, which have remained unchanged for 25 years. However, there are no concrete proposals at this stage. The Office of Tax Simplification undertook a consultation on this last year, so it is reasonable to expect some reforms will happen in due course.
In addition to the statutory changes, the government will carry out what is referenced as a ‘call for evidence’ in Summer 2023 to aid a greater understanding of the requirements for informal flexible working. The potential measures are intended to address the need for flexible working by sections of the workforce, such as parents, carers, and those affected by ill health.
The above measures will be highly relevant to third sector, many of whom have significantly changed their working arrangements following the pandemic.
Consultation on occupational health tax incentives
The government will consult on options to increase investment in occupational health services by UK employers through the tax system. The occupational health subsidy pilot previously announced is set to be expanded, providing support for the cost of occupational health services to small and medium enterprises. The tax incentives are likely to be in the form of Corporation Tax relief, and there is no mention of any widening of the benefit-in-kind rules beyond what currently exists.
Certain exemptions are available, including helping employees return to work with medical treatment up to £500, providing free annual medical screenings and check-ups, and helping with the cost of eye tests. There is also a tax exemption for providing Employee Assistance Programmes (“EAPs”). However, this has been the subject of recent criticism from suppliers and public bodies due to its failure to cover employee family members and volunteers. There is no suggestion that this anomaly will be addressed within the forthcoming consultation.
The government has also announced that it will consult on ways to boost UK occupational health coverage, which may include regulations that require employers to provide occupational health services. The consultation will also consider a process of kitemarking and professional accreditation to ensure the quality of occupational health services.
Childcare
As expected, the announcements on childcare were about direct tax-free support from the government rather than specifically through employment. This will mean that in households where all adults work at least 16 hours, every child from nine months old to school age will get 30 hours of free childcare per week by September 2025. The tax reliefs available through employment, including childcare vouchers for those already in a scheme in October 2018, continue to apply despite speculation that this relief could be removed. By way of reminder, employees may receive childcare vouchers (or employer-contracted childcare) free of tax/NIC up to £243 per month for a basic rate taxpayer and £124 per month for a higher rate taxpayer.
Also, employer-provided nurseries remain an attractive option with no limits on the tax/NIC reliefs due on these, where they are funded by salary sacrifice. Although some in the third sector make use of this exemption through salary sacrifice, many others should be considering its application.
Payrolling Benefits in Kind
Payrolling of benefits is becoming increasingly popular partly because it gives employees more certainty regarding the tax position at the time the benefit is provided. It is likely to be the primary (possibly only) way benefits in kind are subject to a tax charge in the future. Recent announcements on limiting paper P11D submissions may also hasten that change. Therefore, as part of the government’s long-term strategy to simplify the tax system, it announced that it would deliver IT systems to enable tax agents to payroll Benefits in Kind on behalf of employers. This will help reduce employers’ burdens and allow agents to support their clients more effectively. We await further details and will provide updates as and when available.
Strengthening employment rights
Whilst not specifically a tax measure, it was announced that the government is supporting Private Member’s Bills that would provide an immediate right to request flexible working (as covered under ‘Flexible Working’ above). This would grant specific groups protections or leave entitlements, including enhanced redundancy protection for pregnancy, family leave, carer’s leave, and neonatal care leave. In addition, the government supports bills to ensure that all customer tips go to the staff and provides workers with the right to request a contract with more predictable hours. Although the latter measure is aimed at the hospitality sector, the general changes will affect employers in all sectors.
