HMRC has revised interest rates with late payment bills charged 7.75% from 22 August, the highest rate since 2001
The late payment and repayment interest rates follow the rise in the Bank of England base rate to 5.25% on 3 August and are applied to the main taxes and duties that HMRC currently charges and pays interest. The rates will rise to:
- late payment interest rate — 7.75% from 22 August 2023
- repayment interest rate — 4.25% from 22 August 2023
This means that the late payment interest rate will increase by 0.25% to 7.75% from 22 August. The last rate increase was on 11 July. Rates were last this high in August 2007.
Late payment interest is payable on late tax bills covering income tax, National Insurance contributions, capital gain tax, corporation tax pay and file, stamp duty land tax, stamp duty and stamp duty reserve tax. The corporation tax pay and file rate also increases to 7.75%.
Repayment interest will also be increased from the current 4% rate to 4.25%.
Corporation tax self assessment interest rates relating to interest charged on underpaid quarterly instalment payments rises to 6.25% from 6% for the earlier date of 14 August.
With late payment interest now 2.5% above the Bank of England base rate, HMRC continues to pay lower interest to taxpayers affected by overpayments of tax at 4.25%, up from 4%.
The interest paid on overpaid quarterly instalment payments and on early payments of corporation tax not due by instalments rises to 5% from 4.75% from 14 August.
The UK private rental sector has lost approximately 400,000 rental homes since 2016, as landlords face increasing costs and higher mortgage rates
According to a report by CBRE, changes to policy in the past decade have increased the amount of tax payable on both purchasing a buy-to-let property and its rental income, leaving many landlords leaving the market due to growing cost pressures.
This has resulted in the loss of approximately 400,000 rental homes in the past seven years, aligned with the additional rate of stamp duty for second properties, which increased the upfront cost of buying a rental property.
On top of this, the rise of the Bank of England’s base rate, which started in 2022 and has gone from 0.25% to 5.25%, has ultimately led to higher mortgage costs.
CBRE has warned that if the trend continues, the UK will lose almost 10% of its private rented households by the end of 2023.
Scott Cabot, head of residential research at CBRE, said: ‘Changes to policy in the past decade have increased the amount of tax payable on both purchasing a buy-to-let property and its rental income and ultimately have reduced the viability of a buy-to-let investment.
‘More recently this has been compounded by high inflation which has driven a rapid rise in interest rates and increased other costs associated with owning and managing a property.
‘Higher mortgage costs could mean that buy-to-let borrowers may start to struggle to meet banks’ lending criteria. As interest rates rise and mortgage rates increase, the rent needed to satisfy these conditions moves in tandem.’
Landlords who plan to incorporate their portfolios as limited companies, which can offer no charges on capital gains tax (CGT) or stamp duty land tax (SDLT) at the time of transfer, must beware of the strict eligibility rules and unintended consequences.
According to Rick Schofield, a tax expert at accountancy firm Azets, scores of portfolio landlords are incorporating their property portfolio through incorporation relief.
Owning property through a limited company offers a series of tax benefits, with profits and gains being subject to 19% corporation tax rather than income tax at up to 45% or CGT of 28%.
For example, a landlord with five rental properties at a total value of £1m, purchased for a total of £800,000, could save £56,000 on CGT alone.
In Q1 2023, over six in 10 landlords planning to buy a new rental property said they would do so within a limited company structure, according to research by Paragon Bank, a specialist buy-to-let lender.
This followed a 5% increase compared to Q4 last year and a year-on-year rise of 12% to make a return to the high reported in Q2 2022. Landlords who intend to buy as an individual has fallen by 5% since last year, now standing at 24%.
Schofield said: ‘The first thing a landlord should consider when thinking about incorporating is whether they need their rental income to live off. Individuals can’t benefit from incorporation relief, but in a limited company structure, the company pays tax.
‘If you then need the cash, you must take it by way of dividend and you pay tax again. Where a landlord is building a portfolio and doesn’t need the cash immediately, incorporating as a limited company makes absolute sense, but it isn’t straightforward and there are lots of ways to get it wrong.
‘To qualify for incorporation relief on CGT, the limited company needs to be a commercial business. This typically requires five or more properties that the landlord has owned for at least two years and can evidence managing agent hours and activities – for example, collecting rent, managing repairs, and vetting tenants.
‘SDLT is more complex and there is a divergence of opinion around eligibility. Usually, landlords need to incorporate as a limited liability partnership, which then needs to conduct the business for a period of time. This is a grey area, and while most stamp duty lawyers accept two years, landlords must seek appropriate tax advice’
Claiming tax relief for research and development is set to get harder as HMRC seeks to clamp down on the estimated £1.13bn of fraud and error in claims
From 8 August 2023, all businesses – or their R&D advisers – will have to fill in an Additional Information Form before they submit their company’s corporation tax return when submitting claims for R&D tax relief. There is a new HMRC online portal to submit claims.
The new process is designed to allow HMRC to quickly assess the validity of the claim.
Importantly, it will give the tax authority details of the R&D agent used by the business. This is to enable HMRC to assess the likely level of expertise involved in preparing the claim.
BDO warned that HMRC will use the data from this report to risk profile claims by size of claim and by business sector.
The new rules are also designed to address high levels of fraud and error in R&D claims where an estimated 17% of claims are fraudulent, HMRC reported in July. This was significantly higher than HMRC’s previously published estimate of 3.6%.
Carrie Rutland, innovation incentives partner at BDO said: ‘For the many businesses that are genuinely carrying out groundbreaking R&D, the changes being introduced may seem overly bureaucratic, particularly for large groups submitting multiple claims. However, given the high estimated levels of error and fraud associated with R&D claims, it’s no great surprise that HMRC is keen to clamp down on non-compliance.
‘Businesses involved in R&D will need to ensure they are clearly demonstrating their qualifying activities to HMRC. Failure to do so may mean they run the risk of an HMRC enquiry. The department has recently added 300 new officers to its R&D team which suggests it’s getting serious about stamping out error and fraud.’
Andrew Tall, corporate tax partner at accountancy firm HW Fisher, explained what needs to be included in the additional information form and how businesses can improve their chances of making a successful claim.
‘The additional information form requires extra measurements, thorough checks, and meticulous record keeping. Given the extra amount of information that firms will need to submit, we recommend that firms start preparing for their claim as far in advance as possible to allow themselves enough time to gather all the documents needed, and to avoid any costly, timely mistakes.’
The new requirements will be challenging for SMEs who do not usually need to provide this level of detail.
Stephanie Hurst, director at Monahans, said: ‘Many smaller enterprises who prepare their own R&D claims may not currently submit the level of information required by the additional information form, so these businesses are likely to be significantly impacted by the introduction of the new requirements.
‘It isn’t always cost effective for very small businesses to engage with an R&D adviser and quite often they will be preparing and submitting their own claims. Whilst they can continue to do this, we expect smaller businesses to be heavily impacted by the new requirements and the level of detail that will need to accompany their claims.’
What needs to be included in the additional information form?
Each additional information form will need to be signed by a named senior officer of the claimant company and must contain detailed information on the R&D project – including the name of the agent who has advised the company on compiling the claim.
The form must also include a breakdown of the costs across categories, the number of R&D projects carried out and describe some or all of the projects depending on the number of projects being submitted.
• for 1-3 projects, companies need to describe all the projects that are being submitted to the claim.
• for 4-10 projects, they need to describe sufficient projects to cover 50% or more of the qualifying expenditure with a minimum of three projects described.
• for more than 10 projects, they need to describe sufficient projects to cover 50% or more of the qualifying expenditure with a minimum of three projects described. If this would require details of more than 10 projects, then only 10 need be described.
Plan to merge separate R&D reliefs
The latest requirements are a prelude to further reforms to the UK R&D regime. Last month, the government unveiled draft legislation which proposes to merge the two current schemes – the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief.
The aim of the single R&D relief scheme is to achieve tax simplification, including having a single set of qualifying rules as well as control the overall cost to the Exchequer.
Rutland added: ‘Further reforms to merge the two current schemes into one from April 2024 may be the right approach, but there is a danger of going ‘too far too fast’. This could create more uncertainty and result in the UK becoming less attractive to inward investors.’
Rising interest rates and frozen tax thresholds will push over one million taxpayers into paying tax on their savings this tax year
In the 2023-24 tax year it is estimated that over 2.7 million individuals will pay tax on cash interest, up by a million in a single year, revealed analysis of HMRC figures by investment platform AJ Bell. In 2020-21 only 800,000 people paid tax on savings.
This year’s predicted total includes nearly 1.4m basic rate taxpayers, a figure which has quadrupled in just four years.
The figures underline the case for increasing the threshold for taxing savings income. AJ Bell estimated that around one in 20 basic rate payers will be paying tax on cash interest, rising to one in six higher rate payers and around half of additional rate payers.
Individuals pay tax on interest they earn on cash savings that exceeds the personal savings allowance, which currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers get no exemption and pay tax on all cash interest they receive.
In total, taxpayers are expected to hand £6.6bn to the Treasury this year from tax on the interest they earn.
AJ Bell is calling on the Chancellor to end the freeze on the personal savings allowance, which has been set at the same level since 2016.
Doubling the personal savings allowance would ensure households are not taxed on cash savings up to £20,000, with the top easy access account now paying 5%. Although, with some savings accounts offering 6%, a basic rate taxpayer could hit the personal savings allowance with around £16,700 in savings, or £8,400 for a higher rate taxpayer.
AJ Bell head of personal finance, Laura Suter, said: ‘These figures highlight just how many taxpayers are facing a tax bill for their savings interest this year – a huge leap when compared to last year. The combination of higher interest rates and people having shunned ISA accounts in recent years means that the number paying tax on their savings has more than tripled in the past four years.
‘Rising rates and a frozen Personal Savings Allowance means some individuals are being taxed despite having relatively modest pots of cash set aside for a rainy day. To add insult to injury, because inflation is so high, they aren’t even making a real return on their money – yet they are still being taxed.
‘The tax threshold is also contradictory to government policy in other areas. Interest rates have risen, in part to encourage people to save money rather than spend it and reduce demand in the economy to bring down inflation. So it doesn’t make much sense to tax people at the same time.’
Tax bills are paid either through self assessment, or deducted from income through a tax code adjustment. Many will not be aware that they owe the tax until HMRC sends them a letter informing them about a change to their tax code which means the money will be deducted through PAYE earnings.
‘Until a brown letter lands on their doormat some people won’t even realise they owe tax on cash interest’ warned Suter. ‘Those filling out a self assessment tax return will declare any savings interest, and subsequent tax due.’
‘For those taxed under PAYE, HMRC will calculate any tax due based on information sent to them by banks and building societies. It means many taxpayers will find there is a deduction made from their payslip each month, often before they’ve even realised they owe any money to the taxman.’