Tax relief for charitable donations

Many of us have chosen to donate to relief organisations in the past week as the plight of displaced persons in Ukraine continues to dominate the news.

The following notes explain how you can claim for tax relief on these, and any other charitable donations made this tax year.

Giving from your personal funds

Donations made personally generally qualify for Gift Aid. This is of great benefit to the charities and means they can claim an extra 25p for every £1 you give. It will not cost you any extra.

So that the donations you have made qualify for Gift Aid you will need to make a Gift Aid declaration. You usually do this by filling in a form or checking the appropriate box if donating online. You must give a declaration to each charity you want to donate to through Gift Aid.

Paying enough tax to qualify for Gift Aid

Your donations will qualify as long as they are not more than four times what you have paid in tax in the relevant tax year. The tax could have been paid on income or capital gains. You must tell the charities you support if you stop paying enough tax.

Paying tax at higher rates?

If you pay income tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your donation. It’s the same if you live in Scotland. Do this either:

  • through your Self-Assessment tax return
  • or by asking HMRC to amend your tax code.

 

For example, if you donate £100 to charity – they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%).

 

Getting tax relief sooner

On your Self-Assessment tax return, you normally only report things from the previous tax year, but for Gift Aid, you can also claim tax relief on donations you make in the current tax year (up to the date you send your return) against earnings in the previous tax year.

This is a useful way to speed up tax relief or reduce liability in a previous year when your income – and therefore tax paid – was higher than the current tax year.

You cannot do this if you miss the filing deadline (31 January if you file online) or if your donations do not qualify for Gift Aid. Also, your donations from both tax years together must not be more than four times what you paid in tax in the previous year.

 

Giving through your limited company

Companies cannot donate using Gift Aid. Any charitable donations made are treated as a business expense and will reduce profits subject to corporation tax.

Online Sales Tax – a step closer?

High street retailers will be interested in the recent publication of an early-stage consultation that explores the argument for and against an Online Sales Tax. It is argued by the retail sector that business rates discriminate against the high street. The idea is to use any revenue from this tax to fund reductions in business rates for retailers with properties in England and to fund the block grants of the devolved administration so they can also fund rates reductions.

Addressing this issue, a recent Treasury news story states:

“As part of the three-month consultation stakeholders will be asked for their views on the challenges on the design of an Online Sales Tax, including which products and services would be in scope and whether it would be a flat-fee tax based on the number of transactions or deliveries, or a revenue-based tax.

“The consultation delves into what effect an Online Sales Tax would have on consumers and businesses alike, which will also be a key determining factor in policy decisions.”

Offer your point of view

Business owners of shop outlets or online sales facilities can offer their point of view by making a formal submission to the consultation. To access an online response form Google ‘Online Sales Tax: Policy Consultation’.

You could also submit your views on this issue by email to: OSTconsultation@hmtreasury.gov.uk or by post to:

Corporate Tax Team,

1 Yellow, HM Treasury,

1 Horse Guards Road,

London, SW1A 2HQ.

In an attempt to provide a rounded approach to the issue the government acknowledges:

“…that an array of business models operates in UK retail – a mark of the vibrant and innovative sector – and this will lead to a diverse range of opinions. Some retailers with a stronger bricks and mortar presence consider that their sector is overburdened by business rates relative to online competitors. Others view the growing market share of online retail as a signal of consumer choice and innovation which should not be subject to an increased tax burden. Many businesses operate both in-store and online. The government wants to review the evidence in the round.”

Tax Diary March/April 2022

1 March 2022 – Due date for Corporation Tax due for the year ended 31 May 2021.

2 March 2022 – Normally Self-Assessment tax for 2020-21 would need to be paid by 2 March or a 5% surcharge would be incurred. This year HMRC is giving taxpayers more time to pay and no surcharge will be incurred if liabilities are cleared by 1 April 2022, or an agreement has been reached with HMRC under their time to pay facility by the same date.

19 March 2022 – PAYE and NIC deductions due for month ended 5 March 2022 (If you pay your tax electronically the due date is 22 March 2022).

19 March 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 March 2022.

19 March 2022 – CIS tax deducted for the month ended 5 March 2022 is payable by today.

1 April 2022 – Due date for corporation tax due for the year ended 30 June 2021.

19 April 2022 – PAYE and NIC deductions due for month ended 5 April 2022. (If you pay your tax electronically the due date is 22 April 2022).

19 April 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2022.

19 April 2022 – CIS tax deducted for the month ended 5 April 2022 is payable by today.

30 April 2022 – 2020-21 tax returns filed after this date may be subject to an additional £10 per day late filing penalty for a maximum of 90 days.

Closing a limited company

You usually need the agreement of your company’s directors and shareholders to close a limited company. The way you close the company depends on whether or not it can pay its bills.

If the company can pay its bills (it is ‘solvent’)

You can either:

  • apply to get the company struck off the Register of Companies
  • start a members’ voluntary liquidation

Striking off the company is usually the cheapest way to close it.

The company can’t pay its bills (it is ‘insolvent’)

When your company is insolvent, the interests of the people your company owes money to (its creditors) legally come before those of the directors or shareholders.

You must arrange the liquidation of your company.

Your company might be forced into compulsory liquidation if you don’t pay creditors.

You may be able to avoid liquidation by applying for a Company Voluntary Arrangement.

If the company doesn’t have a director

You must appoint a new director if your company doesn’t have one, for example if a sole director has died.

Companies House will eventually strike off a company that doesn’t have a director, but this can make it more difficult to manage any company assets.

Shareholders must agree to appoint a new director and may need to vote on it.
If a sole director has died and there aren’t any shareholders the executor of the estate can appoint a new director, as long as the company’s articles allow it.

The new director can close the company.

Your company still needs to pay corporation tax and file a tax return even if there’s no director.

Let the company become dormant

You don’t have to close your company if it’s no longer trading. You can let it become ‘dormant’ for tax as long as it’s not:

  • carrying on business activity
  • trading
  • receiving income

Your company will still be registered at Companies House. You must still send your annual accounts and confirmation statement (previously annual return) to Companies House.

You can keep a limited company dormant for as long as you want.

Have you used your tax-free capital gains allowance?

You and each member of your family is entitled to make tax-free capital gains of up to £12,300 in the 2021-22 tax year. If you have made no disposals that would trigger a capital gain in 2021-22, consider the following:

If you have assets, shares for example, that you are thinking of selling, you may want to realise enough to produce gains up to the £12,300 limit.

Transfers of assets between married couples or civil partners can be made free of Capital Gains Tax (CGT). In which case, if you have used your £12,300 allowance and still have assets that you want to sell, then transfer enough of these remaining assets to your spouse or civil partner for them to sell and utilise their separate CGT tax-free allowance.

Please note that you may have to pay CGT if you sell a personal possession for £6,000 or more. For example, a sale of:

  • jewellery
  • paintings
  • antiques
  • coins and stamps, or
  • sets of things, e.g., matching vases or chessmen

You will not have to pay CGT if you dispose of your private car or any personal possession with a limited lifespan, e.g., clocks. The only exception is if a car or other limited lifespan asset was used in a business. Disposals of business assets may create a tax charge.

Back to normal?

Now that the majority of COVID-19 restrictions are being eased, or removed completely, can we assume that normality can return in place of the unremitting uncertainty of the past two years?

Whilst this may seem to be a welcome prospect, business owners badly affected by this disruption will have two issues holding them back:

  • A depleted balance sheet – reserves used to survive extended periods of shut-down or reduced trading.
  • The repayment of loans taken out to fund overheads and other fixed costs during lockdown.

Both of these issues will inhibit a sudden rush of activity unless sales are made on a cash basis.

To minimise any downside risks we recommend pausing to create a realistic business plan for at least the next twelve months. This will identify any dips in cash resources and reveal the level of profitability that can be achieved.

Please, pick up the phone if you would like to discuss the best way to build a plan for your business.

Do you qualify for this allowance?

HMRC recently published a reminder targeted at married couples with an unused personal tax allowance. They said:

Marriage Allowance allows married couples or those in civil partnerships to share their personal tax allowances if one partner earns an income under their Personal Allowance threshold of £12,570, and the other is a basic rate taxpayer.

Eligible couples can transfer 10% of their tax-free allowance to their partner, which is £1,260 in the 2021-22 tax year. It means couples can reduce the tax they pay by up to £252 a year. Couples can apply any time, backdate their claims for any of the 4 previous tax years and receive a payment of up to £1,220 at a time when they need it most.

Married couples may have experienced a change in their circumstances which could now mean they are eligible for Marriage Allowance, including:

  • a recent marriage or civil partnership
  • one partner has retired and the other remains working
  • a change in employment due to COVID-19
  • a reduction in working hours which means their earnings fall below their Personal Allowance
  • unpaid leave or a career break, or
  • one partner is studying or in education and not earning above their Personal Allowance

If a spouse or civil partner has died since 5 April 2017, the surviving person can still claim by contacting the Income Tax helpline.

Marriage Allowance claims are automatically renewed every year.

Dynamic planning

More challenges to our financial plans last week as the Russian incursion into Ukraine has boosted the price of oil and gas and adds a new layer of uncertainty to global economic activity in the coming year.

How will this affect our current business plans?

There is a tendency to see a business plan as fixed in stone; something that you have to aspire to come what may. Of course, this is completely unrealistic. Consider, for example, the plight of business owners in the entertainment and hospitality sectors during the past two years.

What business owners may benefit from is a flexible budgeting approach.

Why flexible budgets?

To be of use to your business, plans need to be flexible. And there are sound commercial reasons for this approach. For example, by reconsidering your plans as external challenges arise, you may decrease or perhaps eliminate the down-side risks to:

  • Cashflow
  • Overhead cost increases
  • Sales volume
  • Sales price sensitivity
  • Staffing issues
  • Investment decisions
  • Tax planning
  • Solvency
  • Business exit plans

Part of monthly management accounts review process

Experience of the past two years, more recent challenges to global trade, rising inflation and forthcoming company tax increases all point to the need to adopt a more dynamic approach to monitoring our financial plans.

We now recommend consideration of a walk-through review of critical aspects of your business plans on a monthly or quarterly basis to ensure that remedial changes can be made before any effects on cashflow, profitability or solvency become critical.

It may well be that this short review will endorse a ‘steady as you go’ approach. But this is not wasted effort. As recent disruption has revealed, setting aside time to consider the wider context of challenges to your business plans will catch those downside risks before they become terminal events.

Please call if you would like to discuss the adoption of this strategy for your business.

Company share schemes

EMI Scheme

Most share option schemes, with an eye to tax benefits, use the Enterprise Management Incentive (EMI) scheme.

For qualifying arrangements, there are tax incentives for the employer and employee.

The point to emphasise with EMI arrangements is that they can only be made by employers with their employees.

Unapproved option scheme

Unapproved share option schemes can be organised but there is no tax advantage for the recipient, who would be liable for income tax on the difference between the exercise price and the market value of options when exercised.

Employees may also be liable to pay NIC if the shares are readily convertible ta cash – for example, if a company is being sold.

However, unlike EMI arrangements, unapproved schemes can be offered to contractors, advisors, consultants and employees.

Growth shares

Growth shares provide the recipient with a share in the growth of the company from the date at which they were issued.

Recipients pay no tax on exercise of these arrangements but will pay capital gains tax when shares are sold.

Growth shares are useful if involving non-employees. They also minimise any dilution of value for existing shareholders.

Consider your options…

If you are considering an option or share scheme with key employees or other individuals, we can help. Please call so we can discuss the first steps.

Company share schemes

EMI Scheme

Most share option schemes, with an eye to tax benefits, use the Enterprise Management Incentive (EMI) scheme.

For qualifying arrangements, there are tax incentives for the employer and employee.

The point to emphasise with EMI arrangements is that they can only be made by employers with their employees.

Unapproved option scheme

Unapproved share option schemes can be organised but there is no tax advantage for the recipient, who would be liable for income tax on the difference between the exercise price and the market value of options when exercised.

Employees may also be liable to pay NIC if the shares are readily convertible ta cash – for example, if a company is being sold.

However, unlike EMI arrangements, unapproved schemes can be offered to contractors, advisors, consultants and employees.

Growth shares

Growth shares provide the recipient with a share in the growth of the company from the date at which they were issued.

Recipients pay no tax on exercise of these arrangements but will pay capital gains tax when shares are sold.

Growth shares are useful if involving non-employees. They also minimise any dilution of value for existing shareholders.

Consider your options…

If you are considering an option or share scheme with key employees or other individuals, we can help. Please call so we can discuss the first steps.