With businesses facing significant uncertainty following the latest tax changes and the adverse market response, this month I consider how businesses can and should respond to this situation.

Before I look at my tips for navigating these times, it’s worth reminding ourselves of the basic principle that for any tax system to operate effectively it must be:

• In other words, tax should be paid in proportion to the amount of income earned.
• Taxpayers must have certainty as to the amount of tax to be paid and when it must be paid.
• Convenient (i.e. easy) to pay tax; and
• Not too costly for a government to administer.

(The Wealth of Nations, Adam Smith)

Generally these principles, in one form or another, have always underpinned the UK tax system.  The mini budget on 23 September 2022 has been widely judged to have failed to adhere to these principles.  The announcements overlooked the fact that citizens need to plan for the taxes they are required to pay. It ignored the fact that investors make their investing decisions based on certainty and a stable investing environment, where a degree of predictability is a good thing. And it certainly discounted completely the reaction of the markets to unfunded announcements.

However, overall, business came out of the mini-budget well.  Planned increases to national insurance and corporation tax were scrapped; the health and social levy was also scrapped; IR35 was reversed to the pre-2017 position; incentive zones were announced; investment incentives and option plans were expanded.  A raft of pro-business measures designed, say the government, to stimulate growth.  A growth agenda is a welcome strategy and, certainly, our business bodies have been calling for this for some time.  But some of the changes announced must bring frustration to business too, if only for the sheer amount of time and effort spent complying with the soon-to-be-repealed measures.  For example, IR35 for the private sector was delayed by a year to give medium and large businesses more time to prepare for the changes and significant work was undertaken to ensure compliance.

The cost of these new pro-business measures is yet to be disclosed, as is the detail of how they will be funded. This brings substantial uncertainty to the business environment as the cost of borrowing goes up and interest rates start to tick upwards.

There is no doubt that the current business landscape feels unsettled. So, how can business leaders navigate this time? The below are not necessarily answers but are some considerations to bear in mind as you navigate the period ahead:

• Be prudent. If you can, consider whether you should keep more cash on hand than you would normally.
• If you trade overseas, is now the time to be thinking about currency hedging if you don’t already do it?
• Talk to your trade and industry bodies to get their advice and insight. Many will be lobbying Government to ensure a stable, sustainable trading environment, and arguing that the competitiveness of the British business environment depends on this message getting across.
• Do pay attention to what the opposition political parties are saying they would do if the win the next general election. Usually, new governments make tax changes and hopefully the opposition will be learning the lessons from this week and headlining any tax changes well in advance of making them.
• Look out for the OBR forecasts. We know that it will be made available to the Government on the 7^th October, but only publicised on 23 November 2022.

It looks like we are in for a bumpy ride over coming months, and while we wait for a clearer picture to emerge, the best advice I can share with business leaders is to maintain some semblance of equilibrium. And hang on in there!

Read more:
The certainty of uncertainty: Business finds itself on the wobbly board following mini-budget

In line with the current focus on sustainability, the Government introduced a new tax on plastic packaging (“PPT”) from 1 April 2022.

In a clear attempt to incentivise businesses to import and manufacture recycled plastics, PPT will apply at a rate of £200/tonne on plastic packaging with less than 30% recycled plastic.  The tax kicks in at a threshold of 10 tonnes per annum: if you manufacture or import plastic packaging or pack goods into plastic in the UK, then your business will be within the scope of the tax if it does not meet the above criteria.

‘Plastic’ is defined widely and includes biodegradable, compostable and oxo-degradable plastics.

What do businesses need to do?

Establish whether your plastic packaging is within scope

In the vast majority of cases, it will be clear whether or not an item is plastic packaging, but remember that the definition is broad and so it is helpful to check the HMRC flowchart and guidance to assist with this – see: https://www.fdf.org.uk/globalassets/resources/public/general/ptf-060-21-a1.pdf.

For example, packaging that is integral to the goods is exempt from the tax because the packaging is necessary to enable the customer to use the goods.  Items such as water cartridge filters or tea bags fall into this category.

There are several other situations where exemptions are granted. Some of these are available as tax credits if they can be proved later (e.g. the plastic is exported or converted into a new component). As a result, import/export and logistics companies, in particular, may be able to significantly reduce their exposure with the right recording processes.

Register for PPT

Businesses that have imported or manufactured 10 tonnes or more of finished plastic packaging since 1 April 2022 or that expect to import or manufacture 10 tonnes or more of finished plastic packaging in the next 30 days must register for PPT at the earliest date possible.

If you do not meet the threshold on either of these tests, you should, in any event, record the amount of plastic imported or manufactured to demonstrate that you are outside of the scope of PPT.  This is because other businesses in your supply chain will want evidence of your status in relation to PPT for their own record-keeping requirements.

Record plastic usage

The reporting aspects of the tax will need to be considered by the operations/logistics functions and finance teams of businesses. Robust evidence is required to prove a 30% recycled content, and companies are expected to keep records evidencing:

• the origin and content of the recycled material;
• the date the plastic was manufactured;
• the proportion of the recycled plastic contained in the output materials of the recycling process.

Supply agreements should require such evidence to be provided where appropriate and seek to secure the necessary indemnities.

These requirements may initially be onerous for some businesses, but creating a clear framework for auditing the usage of recycled plastic should also enable those companies seeking to minimise their use of ‘virgin plastic’ to publicise that fact. Outside of the obvious self-reporting opportunities, the sustainable sourcing and recycling of materials such as plastic are key performance indicators in the Loan Markets Associations’ Sustainability-Linked Loan Principles. Sustainable plastic use is also factored into the impact assessments of companies applying for B Corp certification, a growing movement of businesses that give equal weighting to people, the planet and profit.

As a tax introduced to incentivise sustainable and environmentally friendly practices, the more the tax increases consumer knowledge and competitive pressure on businesses to improve their sustainability credentials, the more likely it is to be considered a success.

Other considerations

Businesses are permitted to pass on the cost of PPT to customers.  Any price increase, though, will have VAT and corporation tax implications. Therefore, companies should consider these projections in advance of passing the cost on, particularly if there are questions about whether the company will be claiming PPT tax credits and/or whether the company will be able to reclaim any additional VAT.

Take advice

If it is not clear what the implications of PPT will be on your business, or you are considering updating your materials to cover your new reporting responsibilities in relation to PPT, it’s worth taking professional advice. This is particularly important because as the tax beds in, the approach that HMRC is likely to take to applying and treating the tax is not yet clear.

Read more:
Time to get serious about reducing, reusing and recycling

“Net Zero” is set to become the phrase of the day. It may even eclipse some of the Covid jargon that has become part of our lexicon over the last two years!

The climate – and how our way of living has impacted climate sustainability – has been centre stage over the last month, with the COP26 summit in Glasgow.

The pledges and promises have been made, and now governments around the world must deliver. So what role does the tax system play in helping achieve Net Zero, particularly how can the UK government drive policies through clever use of tax policy?

Governments use the tax system to influence our behaviours all the time, whether it is to inhibit behaviour (hence the duties on alcohol and tobacco) or to incentivise particular activity (research and development is an obvious example).

Achieving Net Zero will not be cheap. However, businesses are already focussing on what actions they need to take to achieve Net Zero, and implementation has begun. Support for these activities can come from the government in the form of a comprehensive tax policy that drives the green economy.

There are already several green taxes:

• Climate change levy – a tax collected by energy suppliers and paid by businesses and the public sector to encourage reduced greenhouse emissions;
• Carbon price support – aims to drive electricity generators to invest in low-carbon electricity by increasing the cost of the fossil fuels they use;
• Landfill tax – a tax on landfill operators to divert waste from landfill to other less harmful methods of waste management; and
• Aggregates levy – a tax to encourage the use of recycled materials over the extraction of rock, sand and gravel, which can damage the environment.

However, the tax take for the fiscus from these so-called green taxes has dropped and, in fact, accounted for just 6% of taxes raised in the 2019/20 tax year. So what needs to happen to incentivise businesses more and at the same time inhibit the behaviours of the polluters?

In their policy paper on “Greening the Tax System” the CBI says that the approach should be a holistic one. The right mix of incentivisation and disincentivisation must be reached – within the context of the overarching imperative to achieve net-zero – so that a set of rules can be devised which penalise polluters but reward pro-climate behaviour. Incentives that reward good climate behaviour will go some way to easing the burden and cost of compliance that businesses are already dealing with in becoming net zero.

Setting tax policy for the environment and the climate is trickier because this issue is also a global one. As we saw at COP26, the competing interests of countries and the disparity between the developed and developing nations when discussing carbon reduction targets will lead to uneven playing fields unless there is a common approach to tackling climate change. This is true for the tax policy too. For example, if the UK government over-punishes businesses in levying carbon taxes, those businesses may very well take their business elsewhere. That’s why tax policy must be coordinated so that companies can expect to be treated in the same way wherever they go.

It is a founding principle of tax systems that they are certain and predictable such that businesses know what to expect and can plan accordingly. However the government chooses to develop its tax policy in relation to the climate, it must be balanced, it must consider the international context, and it needs to provide a clear road map for business. No small task this.

Read more:
The issue of Net Zero and Taxation

On 7 September 2021, the UK Government announced an increase of 1.25% in national insurance contributions and a 1.25% increase in dividend tax.  These are the highlights:

• Both taxes are effective from April 2022;
• With effect from April 2023, the national insurance increase will be replaced by a separate tax (also in income and to be called the “health and social care levy”) calculated in the same way as national insurance and shown as a separate line item on payslips;
• the UK Government hopes to raise about £12 billion from the increase to national insurance and a further £600 million from the increase to the dividend rates;
• In England, revenue raised from these two tax increases is to be used to fund social care to support NHS England to catch up on its backlog in care caused by the Covid-19 pandemic.

The impact of this increase for Wales is that the Welsh Government will receive an additional £700 million.  The Welsh Government has not yet indicated how it will use the increase in revenue.

Businesses and business owners will be digesting this news and considering the impact.  An increase in the rate of national insurance pushes up the cost of employing people.  Businesses looking to re-employ staff, possibly expand or even just keep afloat after the Covid-19 pandemic are now faced with profit-reducing costs.  Does this mean that businesses will again look to the freelancing community to find the skills they need?  And does the gig economy now expand further with more reliance being placed on zero-hours contracts?

But will a freelancer or contractor take on this work if they are working through their own personal services company?  Likely only if the off-payroll rules under IR35 do not apply.  Because why would a freelancer want to pay the increased national insurance rate (if their contract falls into deemed employment) as well as the increased dividend tax when it comes to taking the profit out of their company?

There can be no dispute that taxes have to increase.  Government spending during the pandemic means that the country’s coffers must be replenished.  Businesses, though, will be forgiven for thinking that they are once again at the sharp end of the stick in taking a lot of the pain. Companies once again find themselves stuck in the middle of an old tension between securing skills at a reasonable rate and running a profitable business.  Remember too that this comes hot on the heels, for some businesses, of a time where no help was available during the pandemic.  I am thinking here of sole traders and the self-employed.

It is also unlikely that these are the last of the tax rises to come this year.  The Autumn Budget has been set for 27 October 2021, and the Treasury has requested representations to be made before 30 September.  The big question is whether now is the time to start recouping the Covid-19 spending or should the focus be on recovery? The Autumn Budget will give us the answer.

Read more:
Stuck in the middle – Is this where businesses find themselves following the NI & dividend tax increases?

The Covid-19 pandemic has brought many changes to our lives.  One of those has been home working.

We have become used to working at the kitchen or coffee table and, where there has been more than one person working from home, any flat surface has sufficed. We have upgraded broadband connections, garden sheds have become offices, and some people have moved home to secure additional space.

It would appear that home working is here to stay, at least in some form.  Employers and employees are having conversations around agile or smart working, and getting ready for the day when working from home is no longer mandated but, rather, a choice.  Because in the last 16 months, we have discovered a different way of working and managing our lives in a way that gives us greater flexibility.

Employers have also discovered that productivity does not necessarily decrease as a result of home working, and some have downsized their office space with the full expectation that homeworking (or smart working) will now be the norm rather than the exception.  So, for those of us still sitting at the kitchen table, it would appear that a more permanent solution may be required, or at least one that allows us to work from home more often comfortably.

Factor into this conversation the end, in April 2022, of the temporary Covid-19 exemption in relation to home working expenses. The exemption currently covers circumstances where an employee is reimbursed after having bought home office equipment: a table, chair or a monitor, for example. Normally, reimbursement to an employee of these expenses would be taxable, and income tax and national insurance would be recoverable.  The exemption applies when:

• equipment is obtained solely to enable the employee to work from home because of the pandemic
• it would have been exempt from income tax if provided directly to the employee, either by the employer or on their behalf
• such arrangements are available to all employees generally on similar terms.

In the absence of the exemption, the general rules will apply.  These are:

• Equipment, services and supplies provided to an employee who works from home can be fully expensed if they are provided only for business purposes, and the personal use is insignificant.
• For household expenses in addition to the above to be allowable, employees need to work from home, either because the equipment they need is not available at the employer’s workplace, or their work means they live too far away from their workplace to travel there every day. In other words, it is not a choice to work from home.  The amounts that can be claimed back are quite limited (for example, £26 a month for monthly paid employees).  The employer can choose to reimburse actual costs in the alternative, but this would require employees to keep records of the expenses incurred.

Employers setting up smart working policies need to carefully consider the following issues now before the Covid-19 exemption comes to an end:

• Employees must be able to show a regular home working pattern. The days per week worked at home can vary, but there must at least be an arrangement that requires the employee to work, for example, two days a week at home.  Ensuring this is in writing would be good practice.
• Whether to reimburse costs or to ask employees to claim the tax relief themselves and this decision should also be communicated in good time to employees.
• How much will the employer reimburse: the full cost incurred by employees or the fixed costs?  Employees will need to know if they should be keeping records and how these must be kept.

As with all changes in the workplace, it’s worth considering how you will consult with your team and involve them in any decisions about changes to working practices and the resulting tax implications.

Read more:
Beyond Covid-19: Homeworking Expenses and the tax rules you need to know about

The G7 finance ministers, at a meeting in London last weekend, have agreed to support a minimum global corporate tax rate of at least 15%.

In addition, there are proposals to bring forward taxing measures that will see multinationals pay tax in the countries in which profits are booked or in which the company’s headquarters are based.

These moves are not surprising. Both are aimed at reducing tax arbitrage across jurisdictions with low corporate tax rates. The G7 countries have been in talks about these policies for years, and the OECD has been looking at similar proposals. But the impetus for an agreement being reached on these moves now is interesting.

The global tax environment has been shifting quickly in the last 12 months as countries get to grip with how to pay for Covid, the support measures and the ongoing cost of vaccine programmes.

Corporate tax rates are increasing, but not uniformly: the UK corporate tax rate will rise to 25% on 1 April 2023, France is 32%, Germany 30%, Italy 28% and the US 26%. The Republic of Ireland is at 12.5%. Without an agreement on a minimum global tax rate, countries would continue to move their profits to jurisdictions with low corporate tax rates. The global corporate tax rate allows governments to tax the overseas profits of companies resident in their country at 15%.

The other driver for change is the shifting mood regarding aggressive tax planning. There has always been a loud argument that companies should be allowed to use the legal loopholes in the global tax system.

Considerations of fairness and good corporate responsibility are starting to push back at that idea. Easing the pressure on the over-taxed middle-class and making sure that big corporates pay the correct tax in the right place feeds into the growing view that tax transparency is as important as environmental and social factors when thinking about corporate responsibility. Do not underestimate that Covid has had an impact on these decisions. Billions of tax pounds will be raised by ensuring that tax is collected in the country where a large corporation makes its sales.

What does this mean for you in your business? How does this global zeitgeist translate into your thinking about future growth strategies and possible future exits?

Consider how the tax profile of your business looks to multinationals in your supply chain.

With ethical investing focussing on tax in the same way it does on other ESG factors, large companies are doing due diligence exercises on their supply chains to identify risk areas, both financially and from a reputational point of view. Future investors are also interested in a healthy tax profile.

More and more, investors and buyers are taking a hard line on tax strategies undertaken to reduce tax, regardless of the legality of the loophole. In these circumstances, investors look for tax indemnities and possibly also price chips to ensure they are cocooned against any repercussions.

If you are on the acquisition trail, have you fully factored in the future known tax rises and the risks of those you may not have anticipated? Business is now, locally and globally, operating in an environment where taxes are rising, so the probable risks are to your disadvantage. Aside from price, there is the reputational risk that aggressive tax planning carries and depending on the circumstances, walking away from a deal may be the only response.

For many reasons, higher taxes are here to stay. Understanding how to operate in that environment successfully will be critical to a healthy business.

Read more:
Thinking about tax in a high tax environment

Read more:
The tax implications of remote working abroad: What employers need to know

Chancellor Rishi Sunak has clearly turned his mind to how the economy starts to trade its way out of the mountain of debt accrued to support businesses during the Coronavirus pandemic.

Whilst we will all be paying more tax, some sooner than others, the Chancellor has embarked on the balancing act of paying down the debt while helping businesses to recover. There is a lot in the Budget for small businesses to be pleased about. Here is what you need to know.

Seeing out Coronavirus

At the end of March 2021, many government-backed coronavirus loan schemes come to an end.

In an effort to stop the gap, the Recovery Loan Scheme comes into effect from 6 April 2021. It enables lenders to provide finance to UK businesses with a government-backed guarantee of 80% on loans between £25,000 and £10 million.

To help businesses with the task of reopening, Restart Grants will be available with effect from April 2021.

£18,000 is available on a per premises basis for hospitality, accommodation, leisure, personal care and gym businesses. Non-essential retail businesses are eligible for £6,000.

Business rates relief has been extended in Scotland and Wales until March 2022, whilst in England, 100% business rates relief has been extended until 30 June 2021. From 1 July 2021, businesses in England will be entitled to 66% business rates relief until March 2022.

The temporary 5% reduced VAT rate for the hospitality and tourism sectors has been extended until 30 September 2021. From that date until 31 March 2022, the rate of VAT for those businesses will be 12.5%.

The Coronavirus Job Retention Scheme (furlough scheme) will continue until September 2021. However, from 1 July 2021, employers will be required to contribute 10% to the cost of employees’ wages and 20% in August and September. Flexible furloughing will still be allowed, as will the topping up of wages.

Eligibility for the Self-Employment Income Support Scheme (SEIS) has been widened for the fourth and fifth grants. Self-employed people who submitted a tax return by midnight on 2 March 2021 are eligible for the scheme. The fourth grant (covering February to April 2021) pays up to 80% of average trading profits for three months up to a cap of £7,500. The fifth grant covers May to July 2021 and pays 80% of average trading profits if turnover has dropped by 30% or more.

Looking to the future

Corporation tax is going up but not until April 2023 when it increases to 25% for companies with profits in excess of £250,000. A small profits rate of 19% will apply to companies with profits of £50,000 or less. For those companies that fall between £50,000 and £250,000, marginal relief will be available so that the increase in corporation tax between the upper and lower limit is gradual.

Further relief is available in trading loss carry-back rules which will be temporarily extended from one year to three years. This means that businesses can carry trading losses arising over the pandemic back to relieve profits in earlier years. This relief has effect for accounting periods ending in the period 1 April 2020 to 31 March 2022.

In an effort to encourage investment and promote growth, companies investing in new plant and machinery will be entitled to a “super-deduction”. These come in the form of capital allowances which enable a company to claim:

• A super deduction of 130% on new plant and machinery that would ordinarily qualify for the 18% main rate; and
• A 50% allowance on new plant and machinery that would ordinarily be eligible for the 6% special rate

The new Help to Grow scheme will make £520 million available to small businesses in an effort to improve productivity. The scheme will provide access to management training, technology advice and access to software.

Read more:
The budget 2021: Looking beyond coronavirus

IR35, intermediaries’ legislation, off-payroll rules, agency rules.  So much jargon! And so many ways in which a contractor/consultant can engage with your business.

With the change to the way in which contractors who work with you will be taxed almost upon us (and the corresponding obligation on business regarding payroll) it is worth taking 10 minutes to wrap your head around which regime applies and what your obligations may be when you are looking for talent to support your business.

IR35 and Off-payroll Rules

The contractor is providing their services to you through their own company or partnership.

IR35 and the off-payroll rules form part of the intermediaries’ legislation.  It applies where a contractor engages with your organisation through an intermediary.  The intermediary must be owned or controlled by the contractor and is typically a limited company (personal services company) or a partnership.  When making the determination as to whether the intermediaries’ legislation applies, the question is always: “would the person who is supplying the services be considered to be an employee of the business were it not for the fact they are doing so through the intermediary?”  Until April 2021, the intermediary is obliged to ask and answer the question and, where required to do so, deduct and pay over the necessary income tax and NICs to HMRC (This is IR35 in its usual form).  With effect from 6 April 2021 the off-payroll rules shifts that obligation to ask the question to your business and, if the answer to the question is “yes” then your business must deduct income tax and NICs from the VAT exclusive amount of the fees and account to HMRC for the amount so deducted as well as employer’s NICs (and possibly apprenticeship levy).

There are some exemptions to who will be affected by the change, the most important of which is the small company exemption.  If you are a small company you will have an annual turnover of less than £10.2m, a balance sheet total of less than £5.1m and/or fewer than 50 employees (you need two of these).  If you fall into this category then the intermediary through which your contractor provides their services retains the obligation to ask the question.  This is indeed good news for small businesses saving them the burden of compliance.  Be mindful though, if you are fortunate to be able to claim this exemption, that you assess annually whether the exemption still applies.  If the exemption no longer applies because your business has exceeded the metrics of the test, then in the off-payroll rules are applicable from the start of the tax year which follows the year in which your businesses ceased qualifying for the exemption.

Agency Rules

The contractor is supplied to you through an agency and there is no personal services company or partnership involved

For the purposes of tax, where an agency supplies a contractor to your business and that contractor is subject to supervision, direction and control by any person, then the contractor is taxed as the employee of the agency.  The agency has the obligation to assess whether any party is able to supervise, control or give direction to the contractor.  For example, you contract with an agency for the supply of an IT consultant for 3 months to support your help desk.  That person works under the day-to-day control of the head of IT in your business and timesheets are supplied to the agency.  In these circumstances, the agency must deduct income tax and NICs and the agency will have to account for employer NICs.

What if the agency supplies a contractor who has their own personal services company?  Off-payroll rules will apply because the contractor is working through an intermediary.  So, unless you can claim the small company exemption, you will need to make an assessment regarding the tax status of the individual and operate payroll if required.

How to work out what action you need to take?

The key question is: “does the contractor provide their services through their own company or partnership?”  If they do, you know you are dealing with the off-payroll rules.  Your next step is to consider whether there is an exemption available to you.  Failing an exemption, you will need to comply with the off-payroll rules.  Knowing an understanding the various regimes in play when hiring contractors will enable you to make your business ready to secure contracting talent quickly and when you need it most.

Read more:
Know your contractor – all you need to know about IR35 and Off-payroll rules