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Finance Bill 2022-23 at a glance: What you need to know

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The government published draft legislation this week for the Finance Bill 2022-23, with consultations on changes to capital gains tax, R&D tax relief, pensions and much more. Rebecca Cave highlights the key points coming out of legislation day

21st Jul 2022
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At the end of the Parliamentary term the civil service tends to clear the desks by publishing all the pending consultations, and any draft tax legislation that has already completed the consultation stage. This summer we have a bumper crop of proposals for the next Finance Bill to fret over until the government gets back to some real work, with a new Prime Minister in the autumn.   

Welcome tweaks

Tax law often needs some minor adjustment to correct unfairness introduced by an earlier change or has developed over time. There are two capital gains and two pension proposals that fall under this heading.

Capital gains

The divorce of a married couple requires assets to be distributed between the two individuals, often including a share in the value of the family home. Currently such transfers are only free of CGT if they occur within the same tax year of separation. Between that date and the decree nisi the couple are connected persons but not living together, so the CGT no gain/no loss treatment for transfers between married couple/civil partners does not apply.

The proposals will stretch this CGT exempt period to three years for separating couples, and allow any assets which are the subject of a divorce agreement to be transferred on a no gain/no loss basis without time limit.

This will apply for all disposals that occur on and after 6 April 2023, and has been brought about following a recommendation by the Office of Tax Simplification (OTS).

A second CGT simplification applies to land and homes exchanged by LLPs or Scottish partnerships to allow roll-over relief and private residence relief to apply to any gains arising. This change is back-dated to 23 March 2022, when it was first announced.     

Pensions

Having pension contributions deducted from net pay is not a problem if the individual is a taxpayer because they get the same tax relief as if the employer operates a relief at a source scheme. But under auto-enrolment, many low paid employees pay pension contributions although they don’t earn enough to pay income tax, so they miss out on the tax relief.

For the tax year 2024/25 onwards, those employees on net-pay schemes will be able to claim a rebate from the government on the tax relief they are due. Why this hasn’t been sorted out earlier is a mystery.

The treatment of regular income paid out of collective money purchase pension schemes which are being wound up will also be clarified. This will ensure those payments are taxed as pensions and not as unauthorised payments. This change will take effect from 6 April 2023.

R&D tax relief

There have been several consultations on strengthening the R&D tax relief scheme to make it less vulnerable to fraud. The Finance Bill proposals go further and suggests that small companies who want to claim R&D tax relief will have to inform HMRC in advance of their intention to claim within six months of the end of the first period the claim will relate to. A senior officer of the company and the tax adviser will also both have to be named on the claim.    

International tax

Large multinational companies will have to pay a minimum of 15% tax in each jurisdiction they operate in under the OECD Pillar 2 proposals. The Finance Bill will include a new multinational top-up tax to ensure that this minimum level of tax applies in the UK with effect from 31 December 2023.

UK businesses will also be required to keep evidence of transfer pricing decisions in a prescribed and standardised format, as set out in the OECD transfer pricing guidelines.

Amended levies

When the government wants to tax something without announcing a new tax they call it a ‘levy’ or a ‘duty’, rather than a tax. Three of these sundry taxes need adjustment to make them work more effectively:

  • Four aggregates levy exemptions will be streamlined into one more general exemption, and one other exemption for construction sites will be restricted.
  • Soft drinks levy will be extended to drinks dispensed from fountain machines.   
  • The bands for air passenger duty will be reformed to reduce the domestic band and add a higher band for ultra long-haul flights.

Clarifications

Two areas of tax treatment are clarified:    

Consultations

Two new consultations were announced concerning new powers for HMRC to collect data from businesses, and to digitalise business rates including linking that data to the wider tax system. We will cover those consultations in greater detail in the next few days.

Replies (16)

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By Hugo Fair
21st Jul 2022 23:02

A useful round-up ... but I must correct the opening para of the Pensions section:
"Having pension contributions deducted from net pay is not a problem if the individual is a taxpayer because they get the same tax relief as if the employer operates a relief at source scheme."

Maybe 'correct' is too strong a term, but that sentence is mis-leading (in the same way that HMRC often portrays it).

EE contributions deducted under an NPA scheme get full tax relief at the employee's marginal rate (by taking the deduction from gross pay before the tax calcs) - so for instance it may only 'cost' a higher rate employee £300 to make a contribution of £500 into the scheme.
The problem with this type of scheme is if the EE doesn't earn enough to pay tax - so for instance it 'costs' them £50 to make a £50 contribution.

Whereas EE contributions deducted under a RAS scheme get no tax relief within payroll (as the deduction is taken from net pay) - so for instance it 'costs' the employee £80 to make an £80 contribution to the scheme (irrespective of the employee's tax rate).
- The good news with this type of scheme is that the Fund reclaims the notional BR tax (direct from HMRC) and adds this amount into the member's pot ... so that £80 EE deduction becomes a total £100 in the fund - and this happens even if in reality the EE didn't suffer any tax on their gross pay.
- The less good news is that any higher rate taxpayer is now 'out of pocket' unless/until a claim for the extra tax relief is made (this time by the taxpayer not the pension scheme) to HMRC - meaning that the extra 'saving' ends up in the taxpayer's pocket but not in their pension fund.

So there's a double error in that opening sentence:
1. "contributions deducted from net pay (only) get the same tax relief as if the employer operates a relief at source scheme" because deductions from net pay *are* a RAS scheme!
2. And if that was corrected to suggest that deductions from net pay get the same tax relief as an NPA scheme, then that patently isn't true (except for those who are BR taxpayers and where the deductions don't touch their PA).

Until TPR and DWP and HMRC can jointly agree new (less confusing) terminology to replace NPA & RAS - a saga that has unsuccessfully been attempted for years - it's important that articles like this don't muddy the waters further.

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Replying to Hugo Fair:
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By unclejoe
22nd Jul 2022 11:52

"- The less good news is that any higher rate taxpayer is now 'out of pocket' unless/until a claim for the extra tax relief is made (this time by the taxpayer not the pension scheme) to HMRC - meaning that the extra 'saving' ends up in the taxpayer's pocket but not in their pension fund."

Yes, but is it not true that if the taxpayer makes a claim and pays the same amount as the "saving" back into the pension he will get tax relief on the tax relief, if you see what I mean?

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Replying to unclejoe:
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By Not Anonymous
22nd Jul 2022 11:57

unclejoe wrote:

"- The less good news is that any higher rate taxpayer is now 'out of pocket' unless/until a claim for the extra tax relief is made (this time by the taxpayer not the pension scheme) to HMRC - meaning that the extra 'saving' ends up in the taxpayer's pocket but not in their pension fund."

Yes, but is it not true that if the taxpayer makes a claim and pays the same amount as the "saving" back into the pension he will get tax relief on the tax relief, if you see what I mean?

Yes, just in the same way the person contributing under net pay could use the £200 saving (in Hugo's example) to pay more.

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Replying to Hugo Fair:
Old fat furry cat-puss
By bagpuss1968
25th Jul 2022 11:16

I noticed the inaccurate terminology used also, although to be fair, the first sentence could be made correct if the words "from net pay" were to be replaced with "under a Net Pay Arrangement Scheme"?

The general confusion caused by the terms NPA and RAS is a distinct issue currently outside of the control of the author of the post (but which very clearly do need to be amended by HMRC/the pension industry as a whole).

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By Not Anonymous
22nd Jul 2022 09:55

I may be missing something obvious but having looked at the draft legislation for the low earners pension change it seems that some people will be able to benefit from double tax relief.

The legislation specifically references employment income so for example an NHS employee earning £8,000 and contributing 5.6% (£448) to the NHS pension scheme under net pay arrangement would benefit from one of the new top up payments from HMRC to the tune of £89.60 (£448 x 20%).

But a colleague who also earns £8,000 and contributes the same 5.6% and has pension income of say £6,000 would have automatically received £89.60 in tax relief by virtue of their taxable income being reduced by £448.

But my interpretation of the legislation is that they would also be entitled to the top up of £89.60 from HMRC. Which seems bonkers.

A second thing I'm struggling to follow the logic for is that the £89.60 is then classed as taxable income so the person with the pension has to pay a bit of extra tax, 20% on the £89.60, but they are still getting nearly double the benefit of the person I thought the new system was meant to help???

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Replying to Not Anonymous:
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By Hugo Fair
22nd Jul 2022 14:00

The degree of bonkersism will of course depend on the, as yet unspecified, methodology invented by HMRC to implement the changes.

According to https://www.gov.uk/government/publications/pension-schemes-newsletter-14... (which provides a better synopsis than my earlier attempt above):

"Those in schemes using relief at source receive a 20% top-up on their pension savings (even if they pay no income tax) whilst those in schemes using net pay arrangements receive tax relief at their marginal tax rate, i.e. 0%.
The effect is that low earners in schemes using net pay arrangements have less take-home pay than they would if they were saving into a scheme that uses relief at source."

"This measure places a duty on HRMC to make top-up payments directly to eligible individuals.
HMRC will determine eligibility based on whether individuals have contributed to a net pay pension scheme and if their total taxable income is below the personal allowance in the same tax year.
The measure will come into force for the tax year 2024 to 2025, with payments to be made as soon as possible after the tax year in which the contribution is paid."

So some reasonable logic ... but proof and pudding spring to mind.

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Replying to Hugo Fair:
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By Not Anonymous
22nd Jul 2022 14:03

Hugo Fair wrote:

The degree of bonkersism will of course depend on the, as yet unspecified, methodology invented by HMRC to implement the changes.

According to https://www.gov.uk/government/publications/pension-schemes-newsletter-14... (which provides a better synopsis than my earlier attempt above):

"Those in schemes using relief at source receive a 20% top-up on their pension savings (even if they pay no income tax) whilst those in schemes using net pay arrangements receive tax relief at their marginal tax rate, i.e. 0%.
The effect is that low earners in schemes using net pay arrangements have less take-home pay than they would if they were saving into a scheme that uses relief at source."

"This measure places a duty on HRMC to make top-up payments directly to eligible individuals.
HMRC will determine eligibility based on whether individuals have contributed to a net pay pension scheme and if their total taxable income is below the personal allowance in the same tax year.
The measure will come into force for the tax year 2024 to 2025, with payments to be made as soon as possible after the tax year in which the contribution is paid."

So some reasonable logic ... but proof and pudding spring to mind.

But that doesn't seem to me to be what the legislation specifies.

And I've read enough posts on here to know legislation always trumps other guidance/publications/gov.uk etc etc

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Replying to Not Anonymous:
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By Hugo Fair
22nd Jul 2022 14:09

Hence my closing reference to 'proof and puddings' going boing-boing down my mental road!

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By Ian McTernan CTA
22nd Jul 2022 13:03

Someone explain to me how forcing companies to decide they are going to make an R&D claim 3 months before the accounts are due (and finalised...) and name a director and a tax consultant when informing HMRC will be anything than another pointless waste of everyone's time?

HMRC can't even process claims in any sort of reasonable time frame now- how many staff will be needed to monitor compliance with this new rules?

I've recently had a R&D claim refused by a compliance officer during an open enquiry window who clearly isn't an R&D expert, after waiting many many months for the R&D section to do anything at all...and they want to add complexity to the process?

So to be on the safe side we'll need to notify for every single company before 6 months after the year end, whether they actually make a claim or not, just in case when we're actually doing the accounts it turns out a claim might be applicable.

I've no idea who comes up with these ideas, but clearly they don't exist in the real world.

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Replying to Ian McTernan CTA:
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By Hugo Fair
22nd Jul 2022 13:21

Whilst I fully agree with your comment on the likely impact at HMRC (resource levels and near-invisible levels of competence), I'm puzzled by your premise that in general clients aren't aware of the viability of an R&D claim until after the event.

I know that such post-hoc 'discoveries' are made (like sticking your hand down the back of the sofa and finding an old £10 note), but in my experience the likely availability of the claim forms part of the decision process as to whether or not to undertake that piece of R&D activity (i.e. before the event).

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Replying to Hugo Fair:
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By Jdopus
22nd Jul 2022 14:34

I find that's true for only a minority of companies and usually only ones we've been doing R&D claims work for years on.

I'd say that perhaps 20% of the R&D claims I do, (and they're all claims I'm completely confident in), are done by companies who were already aware of the R&D regime before we became their accountants. The sad truth is that the vast majority of business engaging in valid R&D work have still never heard of R&D tax credits.

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Replying to Jdopus:
By ireallyshouldknowthisbut
22nd Jul 2022 16:18

Jdopus wrote:

I find that's true for only a minority of companies and usually only ones we've been doing R&D claims work for years on.

I'd say that perhaps 20% of the R&D claims I do, (and they're all claims I'm completely confident in), are done by companies who were already aware of the R&D regime before we became their accountants. The sad truth is that the vast majority of business engaging in valid R&D work have still never heard of R&D tax credits.

Your post would confirm my view that most R&D would have happened without the credits and is poorly targeted. The point of these things is supposed to be to encourage R&D. By definition if 80% of people didn't know it was there, then 80% of the claims are failing in the objective of this relief.

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Replying to Jdopus:
By ireallyshouldknowthisbut
22nd Jul 2022 16:18

. double .

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Replying to ireallyshouldknowthisbut:
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By dwgw
24th Jul 2022 13:08

My experience would be that it's not necessarily that 80% weren't aware of the relief, but that a substantial proportion of the 80% were at least vaguely aware of the relief but didn't think it might apply to their own project(s).
The fact that they undertook those activities anyway is beside the point. The tax relief rewards the fact that they were so engaged and, more importantly, encourages them to continue doing so in future.
For the avoidance of doubt, I'm talking about properly substantiated, qualifying claims here, not give-it-a-go chancers.

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Replying to ireallyshouldknowthisbut:
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By Jdopus
25th Jul 2022 13:14

I do take your point but I would suggest as a counter to that, in my experience once clients know the scheme exists they do genuinely embrace the idea of trying to engage in more R&D work because they see the advantages of the tax credits. As an incentive I find it speaks to clients more than most other government policies designed to encourage certain activities.

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Replying to Jdopus:
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By dwgw
26th Jul 2022 13:55

I think we're in agreement then. The scheme, notwithstanding some apparent abuses, is serving its purpose by encouraging companies to engage in R&D activity.

Without the tax incentive, a project might not be considered viable, but I've never come across a case where a company undertook a project purely to obtain the tax relief or credit. There's still a net cost!

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