Tax – Debonair Management Services Limited

From 1 January 2023, you’ll get penalty points if you submit a VAT Return late (including nil payment returns). Find out how points work and how to avoid a £200 penalty.

For VAT accounting periods starting on or after 1 January 2023, late submission penalties apply if you submit your VAT Return late.

The VAT default surcharge is being replaced by new penalties for returns that are submitted late and VAT which is paid late. The way interest is charged is also changing.

These changes affect everyone who submits VAT Returns, including a nil or repayment return.

How late submission penalties work

You must send a VAT Return by the deadline for your accounting period. Your accounting period is when you need to send a return to HMRC, for example, quarterly.

Late submission penalties work on a points-based system.

For each return you submit late you will receive a penalty point.

Once you’ve reached a penalty point threshold, you’ll receive a £200 penalty and a further £200 penalty for each subsequent late submission while you’re at the threshold.

The penalty point threshold for your accounting period

The penalty point threshold is set by your accounting period. The threshold is the maximum points you can receive.

Accounting period	Penalty points threshold
Annually	2
Quarterly	4
Monthly	5

Penalty example for a business making quarterly returns

A company submits their VAT Return quarterly. This means their penalty point threshold is 4.

They already have 3 penalty points because they submitted 3 previous returns late.

They submit their next return late and get a fourth penalty point. Because they’ve reached the penalty point threshold, they receive a £200 penalty.

The company submits their next return on time. They stay at threshold of 4 penalty points but do not get a £200 penalty.

The company submits their next return late. As they’re still at the penalty point threshold of 4 points, they receive another £200 penalty.

If you use a non-standard accounting period

If you have agreement from HMRC to use non-standard accounting periods, different rules apply.

Accounting period	Penalty points threshold	Rules that apply
Over 20 weeks	2	Annual
Over 8 weeks and no more than 20 weeks	4	Quarterly
8 weeks or less	5	Monthly

How changes to your business affect penalty points

Changing your accounting period

If you’ve agreed with HMRC to change how often you submit returns, we will adjust your threshold and penalty points.

This is how we will adjust your penalty points threshold:

Previous accounting period	Previous penalty point threshold	New accounting period	New penalty point threshold
Annual	2	Quarterly	4
Annual	2	Monthly	5
Quarterly	4	Annual	2
Quarterly	4	Monthly	5
Monthly	5	Annual	2
Monthly	5	Quarterly	4

If you have existing penalty points, this is how we will adjust your penalty points:

Previous accounting period	New accounting period	Penalty points adjustment
Annual	Quarterly	+ 2 points
Annual	Monthly	+ 3 points
Quarterly	Annual	– 2 points
Quarterly	Monthly	+ 1 point
Monthly	Annual	– 3 points
Monthly	Quarterly	-1 point

When you change your accounting period:

we’ll set your penalty points to zero if the adjustment gives you a minus figure
we will not make an adjustment if you have zero points

You cannot appeal adjustments to your penalty points.

When you change from a non-standard accounting period to the equivalent standard period, your points will not change.

Non-standard accounting period	Equivalent standard accounting period
Over 20 weeks	Annual
Over 8 weeks and no more than 20 weeks	Quarterly
8 weeks or less	Monthly

Taking over a business

If you take over a VAT-registered business as a ‘going concern’ any penalty points built-up by the business will not be transferred to your VAT registration number. This will be the case even if the VAT registration number is transferred from the previous owner to yourself.

Find out more about what ‘going concern’ for VAT means in paragraphs 1.3 and 1.4 of VAT Notice 700/9.

VAT groups and penalty points

If the representative member of a VAT group changes, any penalty points they’ve built-up are transferred to the new representative member.

The VAT groups’ penalty points total does not change if a person:

joins the group, even if the joining member had penalty points
leaves the group (the leaving member does not take points with them)

VAT Returns not affected

The late submission penalty rules do not apply to your:

first VAT return if you’re newly VAT registered
final VAT return after you cancel your VAT registration
one-off returns that cover a period other than a month, quarter or year

For example, you might make a one-off return covering a four-month period because you changed from submitting quarterly to annually.

Budget, PAYE, Tax

NIC Changes

March 29, 2022 Debonair Management Services Limted

Employers’ class 1 NIC

The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022.

For 2022/23 the various secondary class 1 NIC thresholds are:

Secondary class 1 NIC	Thresholds
For most employees the employer pays at 15.05% on wages:
Per week:	£175
Per month:	£758
Per year:	£9,100
If the employee is an apprentice or aged under 21 employer pays class 1 NIC at 15.05% on wages above:
Per week:	£967
Per month:	£4,189
Per year:	£50,270
For new employees working at least 60% of their time in a Freeport site the employer can claim relief from class 1 NIC on wages up to:
Per week:	£481
Per month:	£2,083
Per year:	£25,000

Employees’ class 1 NIC

The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.

The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.

The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.35% for 2022/23.

The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.

Class 1 NIC primary thresholds	6 April to 5 July 2022	6 July 2022 to 5 April 2023
Per week	£190	£242
Per month	£823	£1048
Per year	£9,880	£12,570

As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.

Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.

Self-employed class 4

The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.

Tax Year	Main rate	Additional rate	LPL	Upper profits limit
2022/23	10.25%	3.25%	£11,908	£50,270
2023/24	10.25%*	3.25%*	£12,570	£50,270

* Including Health and Social Care levy

For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.

Self-employed class 2 NIC

The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax.

The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.

Tax year	Flat rate per week	Small profits threshold	Lower profits limit
2022/23	£3.15	£6,725	£11,908
2023/24	TBA	TBA	£12,570

New class 2 NI credit

Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit.

In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay.

The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.

DMS Posts, PAYE, Tax

Sunak aligns NIC and income tax in Spring Statement

March 24, 2022 Debonair Management Services Limted

The Chancellor is

aligning the class 1 national insurance contributions primary threshold with the personal allowance of £12,570.

As I predicted it is impossible to implement this change in payrolls run for April 2022, as it takes time to rewrite payroll software, but it will come into force from 6 July 2022.

Note that the secondary class 1 NIC threshold, where employers start paying class 1 NIC, will not be raised to align with the primary threshold. Employers will pay class 1 NIC at 15.05% on most employees’ salaries above £9,100 from 6 April 2022. Different secondary class 1 NIC thresholds apply for apprentices and freelance employees.

Self-employed NICs

The Chancellor has gone further than I expected, with plans to align the thresholds where the self-employed start paying class 2 NIC and class 4 NIC, with the personal allowance, but not immediately.

The class 4 NIC lower profits limit will rise to £11,908 for 2022/23 and then be aligned with the personal allowance of £12,570 from 6 April 2023. This two-step increase is presumably implemented to shadow the delayed rise in class 1 NIC from 6 July 2022.

Class 2 NIC is currently payable once the individual’s profits for the year exceed the small profits threshold of £6,515. This relatively low payment threshold exists to allow self-employed individuals with small profits to build up a contribution record for the state pension and other benefits.

From 2022/23 the threshold for paying class 2 NIC will be aligned with that for paying Class 4 NIC: £11,908 for 2022/23, then £12,570 for 2023/24. However, this large step up could leave many low-profit traders with no national insurance contributions for many tax years.

To solve this problem from 6 April 2022 self-employed traders with profits below the lower profits limit will be treated as if they had paid class 2 NIC, but in fact they will make no actual NICs payment.

The Government has already published a draft National Insurance (Increase of Thresholds) Bill 2022, which will bring these changes into effect. This Bill will be fast-tracked through Parliament.

Employment allowance

In a sop to small businesses the employment allowance will rise from £4,000 to £5,000 from 6 April 2022. This allowance can only be claimed by employers that had a class 1 NIC liability of no more than £100,000 in the previous tax year. The increase will allow an eligible employer to pay one extra person on the national minimum wage without having to pay employer’s class 1 NIC.

The detail in the Spring Statement also confirmed that the employment allowance will cover the employers’ liability for the Health and Social Care levy.

Basic rate cut

The promised cut in the basic rate of income tax from 20% to 19%, is slated to apply from 6 April 2024, but that is a long way off. As the past month has shown, the world can change significantly in a few weeks, and I wouldn’t like to predict where we will be in the spring of 2024.

In his Mais lecture last month Chancellor Rishi Sunak set out the principles that underpin his tax policy. At the core is a desire to cut taxes, but only where those cuts can be funded, and he restated that belief in his Spring Statement.

To find out how much the tax cuts are all going to cost you need to dig into the Spring Statement 2022 policy costings document. For example, the increases in NIC thresholds to align with the personal allowance will cost £26.345bn over five years to 2026/27.

The costings document sets out three additional sources of income for the Treasury:

HMRC compliance (tax enquiries): £3.156bn
DWP compliance (benefit fraud and error): £2.24bn
Student loans (frozen thresholds increased interest): £35.215bn

The conclusion must be that the next generation will be funding today’s tax cuts by paying handsomely in increased student loan repayments.

Autumn plans

Perhaps further detail on how the tax and NIC cuts will be funded will be revealed in the Autumn Budget. In Sunak’s 12-page Tax Plan was a vague reference to reforming tax reliefs and allowances and an aspiration to make the tax system “simpler, fairer and more efficient”.

DMS Posts

MTD ITSA: Your questions answered – part 2

August 25, 2021 Debonair Management Services Limted

by Rebecca Cave

What are the basic requirements for MTD ITSA?

There are four requirements for MTD ITSA (draft reg 3):

record business transactions in a digital manner
preserve those records for the defined period
provide a quarterly update to HMRC
provide an end of period statement (EOPS) to HMRC

The records in 1) and 2) comprise data needed to populate the reports required for points 3) and 4), which in turn must be submitted using MTD-compatible software.

The digital means for recording the data does not have to be the same software that submits the data. However, there should be a digital link between the recording software and the submission software.

What exactly must be recorded?

Each transaction must have these data points recorded digitally:

the date of the transaction – the exact time is not required
for expenses – the category out of the specified list of expenses (see below)
for income – the trade or property business the income relates to
the amount or value.

Retail businesses will be able to elect to record daily gross takings rather than every single transaction (draft reg 17), but only if it would be unreasonable for the business to keep digital records of every individual sale.

In addition, the business will have to record the following permanent information as part of its digital records:

∙ the business name

∙ the address of the principal place of business

∙ whether it uses cash accounting or accruals accounting

Can the client give their accountant paper records to enter into software?

The taxpayer does not have to record the business data digitally themselves. They can pass this task over to a bookkeeper or to their accountant to make the entries into accounting software, or a spreadsheet.

Although the aim of MTD is to encourage businesses to record their business transactions in real-time, as they occur, there is nothing in the draft regulations that stipulates exactly when the data must be committed into the digital record. As long as the data for the quarter is recorded before the quarterly submission is compiled and sent to HMRC, there is nothing to prevent a bulk recording of transactions every few weeks or months.

However, the longer the delay between the transaction and being recorded digitally, the greater the risk of loss or corruption of data – which is the whole point of MTD (as HMRC would argue).

Can a spreadsheet be the first entry for digital records?

A spreadsheet can be the entry point for transactional data into the accounting system. However, once that data has been recorded, the MTD regulations stipulate that there should be “digital links” that move the data around the accounting system. This means the data should not be retyped or copied by human hand once it has entered the system.

Think about where the accounting system starts. That is the point the transaction (sale or purchase) is recorded. It may be convenient to capture transactions using optical character readers, or bank feeds, but that doesn’t have to be the entry point of all the data.

A business can still issue paper invoices if the information from that invoice is digitally recorded in the accounting system.

What information is required to be submitted quarterly?

The quarterly submissions will be the totals for the quarter of:

sales income for each trade
purchases/expenses for each category

The categories of expenses are expected to be the same as those currently required in the self-employment section (form SA105) and property section (form SA103F) of the self-assessment tax return. More detail will be set out in the final MTD ITSA regulations.

In essence, the quarterly submission is a rough profit and loss account, no balance sheet figures are required. The data for individual transactions are not required.

Can the accountant make changes in the final submission?

This quarterly data dump does not have to be accurate, any misallocation between expense categories can be adjusted at the end of the period statement (EOPS).

It is in the EOPS that the accountant can make any adjustments for capital allowances, losses, reliefs, disallowable expenses, transactions that have been missed or double-counted.

One EOPS will be required of each trade or property business by 31 January following the end of the tax year.

Can the taxpayer submit estimated figures on the quarterly submissions?

Yes, if the taxpayer wishes to submit estimated expense figures, or even only the income amounts, in the quarterly submissions, that would be acceptable within the current draft MTD regulations.

To avoid the risk of a penalty for late filing some form of data needs to be submitted each quarter.

The quarterly submissions do not contain an accuracy statement. The taxpayer (or accountant) is not required to declare that the quarterly submission is a complete or correct reflection of the net or gross income of the business.

The taxpayer must make a declaration of accuracy on the EOPS, once all the adjustments for the four quarters have been made.

What will HMRC do with the quarterly data?

The quarterly submission will be used by HMRC to calculate an estimate of the business’s tax liability throughout the year, and that figure will be reflected back to the taxpayer. This is likely to confuse rather than assist the taxpayer as the current timing of tax payments will not be changed (for now).

Will tax payments change to quarterly?

Earlier this year there was a Call for evidence: timely payment, which asked for ideas on how the payment of income tax under self assessment, and corporation tax for small companies, could move to more frequent payment dates based on in-year calculations.

DMS Posts, Tax

MTD for ITSA: Your questions answered

August 11, 2021 Debonair Management Services Limted

by Rebecca Cave

These answers are based on the guidance produced so far by the professional bodies and HMRC, the draft legislation and consultation documents. The final regulations for MTD for income tax (MTD ITSA) will be published in the Autumn (probably in October), so we can’t be confident of how the rules will work exactly until we see those regs.

When must a business join MTD?

It is now apparent that there will be a big bang joining date for MTD ITSA on 6 April 2023 for all unincorporated businesses, whatever their current accounting period end.

Changing to a tax year basis from 2023/24 will mean that all businesses will have to report income and expenses that fall exactly into the tax year. Also, the draft legislation to bring about this change deems an accounting period ending on 31 March to be treated as ending on 5 April for tax purposes.

This combination of basis period and deeming provision means that unincorporated businesses will need to enter the MTD ITSA regime from the next accounting period starting on or after 1 April 2023. Thus businesses which draw up accounts to 31 March 2023 will join MTD ISA from 1 April 2023 not 1 April 2024.

It is possible that Treasury Ministers will be persuaded that having all unincorporated businesses joining MTD ITSA at exactly the same time, and reporting to the same quarterly deadlines, will put an impossible strain on HMRC’s systems and resources. We will have to wait and see what the final MTD regulations say when they are released.

Will the turnover threshold change?

We do not expect the turnover threshold to change in the final MTD ITSA regulations. HMRC has made it clear that all unincorporated businesses with an annual turnover exceeding £10,000 will be required to report income and expenses under MTD ITSA.

This turnover threshold takes into account income from all businesses, trades and property. A person with £6,000 of trading income and £6,000 of rental income will be required to report under MTD ITSA as their total turnover exceeds £10,000.

Will there be any deferral of start date?

Partnerships which only have individuals as partners will have to join MTD ITSA from April 2023.

However, there will be a deferral (for an undefined period) for MTD ITSA mandation for the following categories of partnership:

Partnerships containing a corporate partner
LLPs
Limited partnerships

Will there be any exemptions?

The latest MTD ITSA policy update indicates that the following taxpayers will have full exemption from MTD ITSA:

Trusts (including trusts with property income)
Estates of deceased persons
Trustees of registered pension schemes
Non-resident companies

In addition, some individuals may be able to claim exemption from MTD ITSA on the basis that they are digitally excluded.

We do not have the HMRC guidance for MTD ITSA at this point yet, but VAT Notice 700/22 indicates that if the taxpayer can get any internet access at their home, business or to another location they will not be exempt on the basis of digital exclusion. This takes no account of the speed or reliability of the internet access.

Any easement?

HMRC has confirmed that there will be no easement for taxpayers attempting to comply with the MTD ITSA regulations in the first year, but a late filing penalty will not apply until four quarterly submissions have been filed late.

There is no information yet on whether penalties will apply for inaccurate quarterly submissions under MTD ITSA.

The whole system of penalties for late filing and late payment of income tax and VAT is to be revised as set out in FA 2021 ss116-118, schs 24, 25, 26. The changes impose a complex system of points that build up to a financial penalty. It is expected that this new system will be brought in alongside MTD ITSA.

What are the filing deadlines?

HMRC has confirmed that the quarterly filing deadlines for all unincorporated businesses filing under MTD ITSA will be: 5 August, 5 November, 5 February, and 5 May. Those businesses with accounting dates of 31 March or 1, 2, 3, 4 April, will also file by these deadlines, so a business with a 31 March accounting date will have 5 extra days to file.

The first mandated MTD submission for the first quarter to 5 July 2023 will have to reach HMRC by 5 August 2023, which is a Saturday in the Summer Bank Holiday weekend in Scotland.

What exactly will be submitted?

The quarterly MTD ITSA submission will consist of total sales income in the period and totals of expenses in defined categories. It is expected that those categories will be aligned with expense totals currently required for the self-employed section of the self-assessment tax return. Quarterly balance sheet statements will not be required.

Any accounting adjustments, for say capital allowances or losses, will be made on the final submission for the year – known as the end of period statement (EOPS).

How will the tax position be finalised?

The EOPS will have to be submitted by 31 January following the end of the tax year. HMRC hope that tax software providers will incorporate the EOPS into the tax software which also compiles and submits the finalisation statement.

It is the finalisation statement, that calculates the tax liability for the year, which effectively replaces the SA tax return. Any sources of income which have not been reported on the quarterly MTD submissions or EOPS is included in the finalisation statement.

Taxpayers who are not within MTD ITSA, but are currently required to submit an SA return (eg to report gains or taxable interest) will continue to submit a SA tax return.

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