Ways of coping with an inflationary environment
Tax revenue is rising to levels not seen since the 1950s.
High and increasing inflation will enhance the tax take and will have unexpected consequences on both after tax returns and company approach to tax risk.
Along-side this, HMRC is increasingly focused on risk-based reviews of tax affairs.
Accelerating inflation means that businesses need to be aware of thresholds that require them to take action that in less inflationary times would have seen less relevant. Inflation will run at a higher rate than 7 per cent by spring 2022, according to the Bank of England: not far short of four times the Bank of England’s target and well in excess of the 5 per cent predicted in late October at the time of the Spring Budget.
An inflation rate of 7 per cent halves the value of money in 10 years, which impacts the real value of commercial as well as government debts.
It is vital that businesses are aware of the impact of an inflationary environment on their tax position and make sure they plan appropriately. The potential impacts are broad and far-reaching. The Personal Allowance of £12,570 is frozen as is the Basic Rate Tax Band of £50,270.
From 1 April 2023, company tax rate on profits above £250,000 are to increase from 19 per cent to 25 per cent; a 31 per cent increase in the rate. If company profits remain flat, companies can expect a decrease in post-tax returns; that’s without any inflationary pressures coming through the supply chain.
The small profits rate of 19 per cent remains in place for profits up to £50,000 with taper relief up to £250,000. By 2023 these limits will be worth less in real terms than when the legislation was passed pulling more companies into the higher tax rate.
Employers will have to pay an additional 1.25 per cent on payroll; an above inflation 9 per cent increase. While NICS are tax deductible, this represents a further increase to the business.
The National Minimum Wage (NMW) is to increase to £8.91 per hour. When the chancellor announced this, the rise was well above the rate of inflation, but on current predictions it seems unlikely to match the rate.
Further increases are to be expected. The VAT threshold remains fixed at the 2017 level of £85,000. Businesses that make taxable supplies above this level need to be registered for VAT.
Once registered, a business needs to make regular filings and deal with more administration. Inflation reduces the real terms value of the threshold to just under £79,500 after a year.
This has a knock-on effect on the value of the thresholds for registering for the flat rate scheme.
Cash accounting and annual accounting schemes for companies also require assessment. The super deduction for capital spend on new plant and machinery will start to fall away from 1 April 2023.
The enhanced 130 per cent deduction is due to be phased out on 1 April, 2023. However due to the way the tax legislation was drafted, companies with accounting periods starting after 1 April 2022 will find the tax benefit is reduced through time apportionment.
This little – noted effect means that taxable income may be higher than anticipated in future years, especially with the increase in tax to 25 per cent.
Companies should carefully plan their capital spend to ensure they get the maximum benefit of the enhanced allowances available. Good records will be required to cover the always contentious issues of cut-off between the different regimes.
For further information, telephone 028 8224 1515.