UK Tax Changes for 2023 with Tim Charles

Greg Wilkes (00:00):

The construction industry can be a tough business to crack from cash flow problems, struggling to find skilled labour and not making enough money for your efforts, leaves many business owners feeling frustrated and burnt out. But when you get the business strategy right, it’s an industry that can be highly satisfying and financially rewarding. I’m here to give you the resources to be able to create a construction business that gives you more time, more freedom, and more money. This is the Develop your Construction Business podcast and I’m your host, Greg Wilkes.

Greg Wilkes (00:38):

Welcome back to the podcast everyone. Great to invite a special guest today who’s been on the podcast before. He’s been in a couple of episodes that have gone down really well, so I thought it’d be important to invite back Tim Charles, who is an accountant in West London. He’s got a chartered accountancy and been practicing that for over 20 years, so highly experienced and he’s got a lot to tell us today. Tim, really good to have you back on the show.

 

Tim Charles (01:03):

Great. Thanks for inviting me. Great to be here.

 

Greg Wilkes (01:05):

Great to have you and really appreciate you coming on and giving us your time. I know I wanted to get you on, Tim, because we’ve been speaking about this together recently about the turmoil that’s been going on politically and economically, and it’s left a lot of business owners at the moment in a real mess, trying to understand what is actually going on. We don’t quite know what are the new tax implications etc. We’ve had a multitude of chancellors over the last few months, so now is a good time for you to come on and give us your expert advice and clear up for us what’s happening and what does 2023 potentially hold for construction business owners?

 

Tim Charles (01:47):

Yes because we had, unprecedented in the history of the country, 4 chancellors in the space of 4 months. At one point it felt like they were doing the hokey cokey because we had things in, things out and things out again. For example, they were going to increase the corporation tax rate to 25%. That was Rishi initially (Rishi Sunak) and then Kwasi Kwarteng and Liz Truss, they came along and said, “No, let’s go back to 19%”. Then Jeremy Hunt comes in after the 4th chancellor and says, “No, it’s back in again (25%)”. The same applied to this higher rate of tax, which you start paying the higher rate and the higher rate tax rate. We’ve had things in and out and some things did go in and out and some things stayed in. It’d be a good opportunity to go through what some of these tax changes are. The new tax year starts in April 2023, only 4 or 5 months away.

 

Greg Wilkes (02:40):

Yes it’s coming around really fast. I think the problem is, even myself, I’ve tried to keep abreast of all this, but if I hadn’t had spoken to you I’d be a little bit clueless as to what some of these changes are. I think there’s going to be plenty listening to this that haven’t had that chat with their accountants yet and don’t really know what’s around the corner in April. Hopefully this podcast will just educate them a little bit as to what to expect. I really appreciate you running through this, Tim. So where should we start?

 

Tim Charles (03:11):

Shall I share my screen?

 

Greg Wilkes (03:13):

Yes, please.

 

Tim Charles (03:14):

I’ve got a pretty basic spreadsheet, there’s nothing too fancy here.

 

Greg Wilkes (03:17):

If your listening to this on the podcast, we’re going to try and talk you through this spreadsheet as best we can. If you’ve got a pen and paper, maybe write some of this down to follow along. We’ll also have this uploaded to YouTube. Obviously if you’re watching this on YouTube, you’re going to get to see exactly what we’re looking at. Let’s go through it.

 

Tim Charles (03:35):

Greg, is that sharing? Okay.

 

Greg Wilkes (03:36):

Yes, I can see that.

 

Tim Charles (03:37):

Right. Great. So the 2 words beginning with ‘F’ I thought we’d start with, and the first word is ‘Fiscal Drag’, and the second word is ‘Frozen’. The reason why I want to mention these 2 words is because the UK government haven’t increased the basic rate. It’s still 20% income tax and 40% at the high rate. They haven’t increased those tax rates, but what they have done is they’ve frozen the allowances. You’ve got the allowance of £12,570: the tax free allowance. Then you’ve got the basic rate band, which is £50,000. That is when you start paying the high rate. They’ve frozen that and they’ve extended (initially it was frozen until 25k), but they’ve now extended it and they said it’s going to be frozen to £27/28k. We were just talking, weren’t we, about the UK inflation? Depending on what report you read, some reports say UK inflation is 11%, there’s some reports of that its going to be 14%. If you can imagine year on year, say you had £50,000 income, quite a few years ago initially when the high rate tax came in, the high rate tax was meant to be paid by the rich people. Say you’ve got £50,000 worth of income in next year, the year after that, year after that, and all these years ahead, you can see that £50,000 is not going to buy you the same shopping basket of goods that £50,000 can buy you today.

 

Greg Wilkes (05:10):

Sure, yes. That’s a significant hit, isn’t it? Just to clarify what you mean about the frozen personal allowance; currently £12,570 is tax free. You can earn that much without paying any tax. Historically, year on year, they used to raise that incrementally

 

Tim Charles (05:29):

That’s it, yes. So you’ve got the allowance there of £12,570 and you got the allowance of £50,270 for when you become a high rate taxpayer. Traditionally all these thresholds used to increase each year in line with inflation.

 

Greg Wilkes (05:44):

Yes, that’s it. By them (the Government) freezing it and not doing it in line with inflation, it’s actually….exactly what you said there. If someone’s earning £50,000 or a £100,000, let’s just say a £100,000 (because it’s easier for me to work out) if I’m earning £100,000 and spending £100,000, then I’m actually now going to spend £114,000 potentially with 14% inflation.

 

Tim Charles (06:11):

If you want to maintain your same lifestyle and buy the same amount of things that you bought the year before, you are going to need to earn that to keep up with inflation, just to maintain the same level of standard of living.

 

Greg Wilkes (06:29):

Yes, that makes complete sense. By them freezing these allowances, it’s another way of doing a bit of a tax increase.

 

Tim Charles (06:40):

It is massively, because then that’s why I’ve used that word ‘Fiscal Drag’ because you’re dragging more and more people into becoming higher rate taxpayers. By the time we get to £50,270, even if you’re a construction company of a husband and wife, as 50/50 shareholders and you’ve got £50,000 each and you had a £100,000 income as a family; if that’s what you were living on in 2020, by 2028, that’s going to be vastly diminished with what you can get with your £100,000 income.

 

Greg Wilkes (07:15):

Yes that could be quite significant. We don’t know what inflation’s going to do in the years to come, but if that inflation compounded year on year, that’s going to be awful, isn’t it? That’s quite interesting, Tim.The spreadsheet that I’m looking at here, it shows that the 40% tax threshold is currently £50,000, basically £50,270. Do you find a lot of your clients deliberately try and keep under that threshold? I often speak to people and they always say to me, “Oh, I don’t want to go above the 40% tax threshold.”

 

Tim Charles (07:53):

Yes I think that’s quite a good point to bring to the table. I have had it said to me that, “Oh, if I earned £60,000, I’d have to pay 40% tax.” That, in their mind, they think that they have to pay 40% tax on all of the £60,000 or on everything above £12,570. Let’s say that you did have a £60,000 income, you still pay no tax up to the £12,000 and you still pay 20% up to the £50,000 and it’s only on the extra £10k that you pay the extra 20%, the 40% is only on that bit from £50k to £60k. I’d like to encourage everyone not to have a mindset of restricting themselves and a mindset of thinking, “Oh, I don’t want to pay too much tax.” But I guess the point of our conversation today is to try and make people aware of what they will be paying. Also the point is as well, that because of inflation, you do need to earn more just to maintain the same standard of living, but let’s just be aware that we will be paying more in tax. I think with a mindset of abundance, we want to be trying to earn as much as possible.

 

Greg Wilkes (09:07):

Yes, sure. I see that all the time. Another example, there might be some listeners here that are just starting out as tradespeople and they might not be VAT registered. I hear this all the time as well. “I just don’t want to hit the VAT limit, I don’t want to go over that VAT limit of £85,000”. What they’re really doing is, they’re capping their progress in business because I see it all the time. Once people actually do become VAT registered and they push past that limit, they’ve released the cap, and all of a sudden (it doesn’t matter what they earn) they can really go for it and they make tremendous progress. I think it’s the same thing with your tax, that limit in mindset and your thinking, “Oh, I don’t want to earn over £50,000, I’m going to pay too much tax.” You want to be paying, if you are paying a lot of tax, it means you’re earning a lot of money <laugh>, which is a good thing.

 

Tim Charles (09:57):

Yes. <laugh>. It’s good to bear in mind that it’s only on income over £50,000 that you pay the extra 20% to make it 40%. While we’re on the subject of VAT, that £85,000 limit has been £85,000 for quite a few years now. They’ve announced that’s frozen as well. More and more tradesmen and businesses will be earning over that £85,000 limit. It is good as well, to keep track of your income, because sometimes if you are quite small (company), they don’t regularly do their accounts. I had a client recently that went over the VAT threshold quite a few months ago, he didn’t know, only sent me his spreadsheets and then I found out because he’s a sole trader, and then he was shocked and he didn’t know. He said, “Oh, if I’d have known, I’d have done things differently.” So just a little heads up, that if you could keep on top of some basic sets of accounts to at least know how much money you are earning for a 12 month period.

 

Greg Wilkes (11:01):

Yes, a hundred percent. You don’t want to get caught out by the VAT man, that’s for sure (if you’re well over it and not declaring it). That’s important. You’ve got an example here, Tim, in this spreadsheet about potentially someone earning a £100,000 and this could be split into 2. Where would this apply? What sort of examples of where people could earn £100,000 and have it split? Does that make sense?

 

Tim Charles (11:29):

No, I didn’t get your question, sorry.

 

Greg Wilkes (11:31):

That’s all right. In this example here, you’ve got someone could earn a £100,000 and they might not go over the 40% tax threshold. And that would be (because I don’t think we touched on this, did we?) If there was a husband and wife.

 

Tim Charles (11:47):

Yes, sorry. Many construction owners, they’re family owned, and they might have the husband and wife as 50/50 shareholders each. Many would might set their goal of earning £50,000 each. Another thing to mention here, is the child benefit charge. If, when your income goes over £50,000, you start to lose your child benefit if you’ve got children and when it gets to £60,000, you’ve lost it completely. Many couples, they might set a goal if their business is starting to grow, of earning £50,000 each. You’ve got a £50,000 household income and then everyone’s just paying the 20% tax rate and you still get the child benefit. Obviously as we’ve said, if you’re capping yourself at a £100,000, that £100,000 might not be enough to maintain a family as inflation grows.

 

Greg Wilkes (12:47):

That makes complete sense. Now it’s interesting actually, I’ve done a few webinars on this recently about people setting goals for 2023 and trying to work out what your earnings are. Now, as you know, most people I work with are generally construction companies that might be doing a million pound plus in turnover. So when the business is doing a million pounds in turnover, we’re generally aiming for about £150,000 in net profit, which is a nice target to go for, for business owners. Funny enough, £150,000 is actually the additional tax rate, of not just 40%, but it goes up to 45%. There’s also been some changes in the additional tax rate too, isn’t there?

 

Tim Charles (13:32):

That’s it. It’s been £150,000 for quite a long time. Let’s not forget that Kwasi Kwarteng and Liz Trust, they abolished the 45% rate and then, Jeremy Hunt came in and put it back in again. That was in and out very quickly. Jeremy Hunt has now gone on to an announce (and this was a surprise to me) that he’s lowered it from £150,000 to £125,140. If you’ve got a limited company and you’ve only got one director and one shareholder, and he’s getting £150,000 income, he’ll now have to pay on the bit from £125K to £150K that he’s earning, he’d have to pay 45% on that bracket there. If you are in a situation where, you’re a married couple or have some other family members, then obviously splitting the income between you would have a combined family tax lower tax rate.

 

Greg Wilkes (14:40):

Yes, that makes complete sense. That’s well worth mentioning and I didn’t even know, that was a surprise to me that that has been lowered. That’s going to be painful for a lot of high earners there when that comes in, and that starts in April as well, does it?

 

Tim Charles (14:53):

Yes. The new tax year, April 20th 2023, this is when all of these things are kicking in that we’re talking about. Just a bit of a caveat, who knows what’s going to happen because there’s another budget statement in March 2023 <laugh> I would’ve thought it’s too late to change it again, but who knows what’s going to happen. But as things stand, this is what we’re looking at.

 

Greg Wilkes (15:14):

Right. We might have to have you on for another podcast then Tim <laugh> depending on how that one goes.

 

Greg Wilkes (15:19):

Alright, so that makes complete sense Tim, about the tax thresholds, the Fiscal Drag, and how people are going to be affected by that. What does that look like, in real terms, if we’ve got business owners, a lot of them are going to be limited companies if they’re running or they should be limited companies, if they’re running a million pound construction businesses. Most people will be taking dividends rather than the salary. There’s been some changes in dividends, hasn’t there?

 

Tim Charles (15:47):

Yes, that’s it. Traditionally if you are director, you might take a fairly low director’s salary and you’ll take the rest of the balance of the money that you need through dividends, because dividends are the most tax efficient way of taking money from a company. They’re a lower tax rate and they don’t attract any national insurance contributions. But this has again been up and down. With dividends – on top of the £12,570 tax-free personal allowance, you get an additional tax-free allowance for dividends. That’s another £2000. From April 23, they’re halving that to £1000 and then the following year they’re halving it again to £500. Then the tax rate at the basic rate is 7.5% and at the higher rate, 32.5%. They’re both going up to 1.25%. It’s going to be 8.75% and 33.75%. To make things easier, if someone’s got a £100,000 of income, it’s going to be around a £1000 extra in tax to pay because of this increase in tax.

 

Greg Wilkes (16:58):

Yes, okay. That’s not insignificant, is it? That’s another thing we need to bear in mind there with dividends. But we are still saying that dividends are the way forward if you’re a big company, dividends is what you should be considering rather than going on PAYE or as a salary?

 

Tim Charles (17:16):

Yes, for sure. Also to clarify, the dividends are distribution of profits, so you need to have the profits there in the first place to be able to distribute them as dividends. Otherwise you get involved in overdrawn directors loan accounts and we don’t want to go down that road.

 

Greg Wilkes (17:30):

<laugh>. Yes, that’s a really good point. What we often find is, sometimes people take too much on dividends and then it gets a little bit awkward then, doesn’t it? We won’t go into that now….

 

Tim Charles (17:44):

I guess that’s another shout out for having regular management accounts and things like that, so that you know how much profit you’re making. A lot of business owners, they’ve got a good idea of their sales figure, they know what their turnover is, and you might be setting them goals, right? We’re going to have a million pound turnover, but what are your profits? That’s why ideally why you need to have regular management accounts.

 

Greg Wilkes (18:06):

Yes a hundred percent, without a doubt that’s so important. Okay, dividends make sense. Anything else on that or is dividends wrapped up?

 

Tim Charles (18:15):

Yes, a small increase there but as we said, it remains the best tax efficient way of taking money out of an company. It’d be good to now go onto, for the company owners, the corporation tax rates.

 

Greg Wilkes (18:29):

Yes, this is maybe one of the more complex things that I hadn’t really got my head around until you went through this with me. Let’s talk about that. We know what it’s been historically, it’s always been (well it’s been for a long time) 19% corporation tax on profits.

 

Tim Charles (18:47):

That’s it. It’s been 19% as well for everyone across the board for quite a long time. You’ve got your big multinational companies, they’re paying 19% and a small startup construction firm with tiny amounts of profits, they’re also paying 19%. It’s been flat across the board for everyone.

 

Greg Wilkes (19:08):

Yes, that’s it. Now there’s a change based on profits, isn’t there? What have they introduced?

 

Tim Charles (19:16):

This is starting from April 2023. Profits up to £50,000 are taxed at 19%. Then between £50k and £250 you have what they call a marginal rate. Then over £250,000 in profit you’re paying 25%. Here’s an example we quickly knocked out. Say you had a limited company which had £150,000 in profits at the moment, they would pay a flat rate of 19%, which would be £28,500. But under the new system you pay £50,000 at 19% and then a £100,000 for your £150,000, you’ve got a marginal rate, which is 26.5%. You would pay £36,000 in corporation tax, whereas before you’d pay £28,500. We’re looking in that scenario, £7,500 increase in corporation tax.

 

Greg Wilkes (20:16):

Wow. To understand that marginal rate, because we’ve got here that it only goes up to 25%, but you’ve got 26.5% as a marginal rate. Does it go over that amount, it can go over the 25%?

 

Tim Charles (20:33):

Basically it’s a way of working it out. On your income over £250,000, you pay 25%. Under 15% you pay 19%. As a way to work out the calculation, you need to have a marginal rate for this. That 26.5%, I’m not putting that whole thing of the £150,000….

 

Greg Wilkes (21:03):

Just on the £100k.

 

Tim Charles (21:04):

Yes, It’s just on the £100k. Between £50k and £250k you’ve got this increased amount and that’s a marginal rate just for that margin – from £50k to £250k.

 

Greg Wilkes (21:19):

Okay. Right.

 

Tim Charles (21:20):

Like I said, it was much easier to work all this out when everything was at 19%. As a marginal rate, it’s 26.5%.

 

Greg Wilkes (21:31):

The long and short of it is without getting too bogged down into the numbers; a business that has £150,000 profit – now this will capture a load of my clients – if they’re earning £150,000 in profit, they are going to be £7,500 worse off with these corporation tax rises. Is that right?

 

Tim Charles (21:58):

That’s it. I guess we’ve got to add this up with, you’ve got the corporation tax rises, we discussed the dividend tax rises and the Fiscal Drag in terms of paying more tax at the higher rate. When you put everything together, it’s compounded to paying significantly more tax for next year.

 

Greg Wilkes (22:20):

That’s very big, that’s quite a lot when you look over the whole situation. That’s really interesting. How would someone find out, because the bit I still don’t get fully is this marginal rate, how would someone find out what that is? Do they need to talk to their accountants to work it out, if they’re sitting somewhere in between £50k and £250k how would they be able to work that out?

 

Tim Charles (22:44):

This figure here (on the spreadsheet), £50,000 that’s fixed at19%. But if this figure here, say you had £200,000 of profits in your limited company, you would then do £150,000 at 26.5%.

 

Greg Wilkes (23:01):

So it’s always at 26.5%?

 

Tim Charles (23:04):

Yes, when your profits are over £50,000.

 

Greg Wilkes (23:08):

Okay, I get that. That’s straightforward then and useful to know.

Greg Wilkes (23:16):

That’s something really significant there with corporation tax. I know what I’ve been doing with my companies and my accounts, is at the end of our profit and loss balance sheet, we always put a 19% figure in there (corporation tax) so we know how much we put in and saving. I know a lot of businesses don’t do that, but we’ve always found that really useful to add that in each month. Then that sits on a balance sheet telling me how much I have saved for corporation tax. Now I guess it gets a little bit more complicated to do that each month.

 

Tim Charles (23:49):

Yes, It’s going to be 10 times more complicated <laugh> because what what you’re doing there is excellent. There’s no point coming to the end of the year and having a big surprise tax bill. We work on XERO and you can put through a journal to estimate what your corporation tax bill is going to be each month and have it at the bottom, your P&L in every month and then you can prepare for it. I agree it’s going to be significantly more complicated to work out what that looks like.

 

Greg Wilkes (24:21):

I guess either people need to be going on the safe side and putting 26.5% away or somewhere in between 19% and 26.5%, they have to talk to their account and work out what that figure should be on average, based on previous years.

 

Tim Charles (24:40):

I probably should have mentioned this a minute ago, but there’s an effective rate of 22.75%. You can use that instead just to work out.

 

Greg Wilkes (24:49):

Okay, that’s good to know. If they use 22.75% each month off of their profits, if they made £10,000 profit at the end of December, deduct 22.75% off of that and that’s the retained earnings.

 

Tim Charles (25:04):

Yes, if your profits are going to be over £50,000 and hopefully they are, then you can use what we call an effective rate. To clarify the effective rate, we’d need to apply it on the whole lot of £150,000. I’ll use the marginal rate to try and emphasise the point of, you’ve got £50,000 at 19% and then anything above £50,000 you pay at the marginal rate. You could use this effective rate and apply that to the whole lot if you want to do your journal in XERO or QuickBooks etc.

 

Greg Wilkes (25:35):

Yes, that makes sense. Anyone that’s not looking at this spreadsheet is probably confused now <laugh> if your just listening to it on the podcast, you’re going to have to tune into the YouTube and watch this. That all makes sense to me, Tim. What’s the next section?

 

Tim Charles (25:52):

Someone could have the bright idea of, “why didn’t I just open 10 different companies, spread my money over 10 different companies and earn £50,000 in each one and then I don’t have to pay in the higher rate of more than 19%?”

 

Greg Wilkes (26:08):

You’re reading my mind <laugh>.

 

Tim Charles (26:11):

So I want to introduce you to a word that you might not have come across or discussed; ‘associated companies’. Associated companies is basically a company that has common owners and directors. Let’s go back to our husband and wife traditional setup. Let’s say they had their construction company, but they also had a window cleaning company. Two completely different brands. They’ve got two completely different names, but let’s say that over the years, for the window cleaning company, they didn’t have enough time to invest in building it up and it was just ticking over. Their main construction company has a £100,000 in in profits and their window cleaning company is just ticking over and it makes a couple of grand in profits and they don’t spend any time dealing with it. As things stand now, they’d have the flat rate of 19%. But to stop (I guess this is like an anti-avoidance measure) to stop people doing this and spreading the £50,000 across numerous companies, now (if you’ve got an associated company, so common owners) you would have to split that £50k across 2. So now £25,000 would be given to company one and £25,000 would be given to company two. For that 19% band, you can see for this small company that they haven’t really been spending a lot of time with, it hasn’t been causing any issues, but they’re wasting £23,000 at the 19%. Company one is suffering by paying the marginal rate so much quicker.

 

Greg Wilkes (27:56):

Basically you get your allowance reduced if you’ve got a second company, your £50,000 allowance is now reduced to £25,000 if you’ve got two companies.

 

Tim Charles (28:06):

Yes. If you had four companies, it would be split four ways and five companies that split five. If you had five limited companies, you would have £10,000 pounds allocated to each one. In this scenario we see that this company, the window cleaning company is wasting so much at the 19% band. What I would recommend in this scenario is they look at deciding what they’re gonna do with this window cleaning company and they need to make some decisions. They might say, “Well, we’re not bothered about the window cleaning business.” It might be a good opportunity to sell it. You could sell the goodwill, make a bit of money there. Another option is to turn the second limited company into an LLP partnership, or what you could just do is fold in the second limited company (the window cleaning one) fold it in to company number one. You could still have a trading name e.g. if you’re called ABC limited and this was the window cleaning company, you could still trade as the window cleaning company but it’s all taxed under the ABC Limited.

 

Greg Wilkes (29:19):

I think that’s a really good idea. I’ve been guilty of this myself over the years, coming up with companies and doing it for a bit and then not focusing on it because something else was much more successful. We hear this all the time where people, they want to branch off, maybe an electrician then wants to get into solar so he is got a little solar company and that’s a completely separate brand. But actually having a trade in as name can be really beneficial can’t it? You’ve only ever got one set of accounts. You’re paying the account at once to do that. I think what’s also really good now is when you are using software like XERO, it’s actually quite easy to have separate branding and you can itemise it out easily in there, the different trading companies.

 

Tim Charles (30:06):

Yes, in XERO. You’ve got different invoice settings. You can still send out the invoices from your ABC limited, but the invoices can be branded completely different. You can use things like tracking categories so that when you’ve got your profit and loss account, you can still see what is the profit and loss for your main company and what is your profit and loss for the other company that you’re tracking. You can see things differently between, in this scenario, the construction business and the window cleaning business. In terms of reporting to Company’s House and in terms of not wasting your £5000k/ 19% band, you’ll be making things easier and not wasting any tax potential.

 

Greg Wilkes (30:54):

The more you think about that, especially if you’ve got multiple companies, that is really significant. To clarify what you’ve said, is that it’s an ‘associated company’ by the directors or the owners rather than it being the same or related, it doesn’t have to be two construction companies. It could be a construction company and an accountancy firm like you’ve got.

 

Tim Charles (31:19):

Exactly, yes. It’s regardless of what they’re doing, it’s whoever owns it that the test for the ‘associated companies’.

 

Greg Wilkes (31:28):

Wow. My brain’s just ticking over now thinking about all the people that’s going to affect. How that affects people with property, we’ve got buy to let companies and all sorts. There’s quite a lot involved in that, isn’t there?

 

Tim Charles (31:45):

Have a chat with your accountant on that!

Tim Charles (31:47):

One thing I also wanted to point out is, if you had a dormant company then a dormant company wouldn’t be affected. Example: if you had company one and company two was dormant, then company one would still get all its £5000k at 19%. I want to emphasise something for dormant companies, because I’ve got lots of clients in their mind, they think that company number two is dormant. But when I actually get the bank statements for company number two for this so-called dormant company, I can see transactions going through and if there’s transactions going through, it’s not a dormant company, right? Make sure that you have the chat with your accountant to make sure that any extra companies you’ve got are genuinely dormant. Otherwise, in your mind you might think, “Oh yes, I’m not doing anything, that is dormant.” The accountant, he might not even have had the conversation with you, because it wasn’t worth having the conversation, but it’s not been filed as dormant accounts. We’ve got until April 23. It’s not long, but we still got four or five months to tidy this up.

 

Greg Wilkes (32:55):

Yes, that isn’t long at all! People need to think about getting their affairs in order if they’ve got multiple companies and that is going to affect so many people. I’m thinking of all the different people I’ve worked with and I’ve spoken to, the amount of people that have more than one limited business. It’s really significant. Thanks for bringing that up. This is the first time I’ve heard of this, Tim (we’re talking April 2023 that this is coming into play) so is this common knowledge amongst <laugh>

 

Tim Charles (33:26):

Funny enough, I was at an accountancy conference last week and I brought it up and not a lot of accountants were on the ball with this. I think it’s going to be a much bigger thing than many accountants are thinking because, as you just said, so many of my clients have multiple limited companies and sometimes they even open limited companies without telling me because it’s just an idea they have. I brought it up as a topic to discuss with a tax technician who was giving the talk, and they ran through this example (company one and two) with me, but many accountants in the room hadn’t really switched onto this. It’s great that we’re highlighting it here.

 

Greg Wilkes (34:06):

It is really, really important. If you’re listening to this and you’ve got multiple limited companies, have an urgent chat with your account and bring this to his attention about these associated companies because you don’t want to come unstuck from April onwards. Thanks for that, Tim. That’s useful.

Greg Wilkes (34:25):

Let’s talk about something positive <laugh>

 

Tim Charles (34:27):

Yes, I feel like we’ve gone through a lot of doom and gloom <laugh> so far in our conversation! Let’s at least finish on a positive. We’ve got something called super deduction. We’ve only got three and a half months left of this as we are here in December at the moment. From the 1st of April 2021 to the 31st of March 2023, ‘super deduction’ was introduced. This is to try and encourage investment. It only applies to new assets that you’re buying. For example, if you buy a new van, a new computer, or any new equipment, new tools, new machinery etc, you can uplift whatever you buy by 130%. I thought I’d run through a couple of examples with you. If you want to buy a new van, you walk into the showroom and it’s £24,000, obviously you can reclaim the VAT of £4,000. That actually cost you £20,000 net. With ‘super deduction’ wee uplift that by 130%, so that takes it to £26,000. That £26,000 is used to reduce your corporation tax bill. As things stand, we’re still working on the 19% in this example. Your corporation tax is 19%, that’s £4,940, so the cost to you of that £24,000 van is £15,060.

 

Greg Wilkes (35:51):

Yes, that’s, that’s massive isn’t it? If you’re thinking about getting a new van or some new plant etc, and there is a significant investment to make, that investment needs to be made before the 1st of March 2023 to benefit from this.

 

Tim Charles (36:06):

…To get the super deduction, yes

 

Greg Wilkes (36:08):

Have they said that that’s going to be removed from the next tax year or have they not mentioned dates?

 

Tim Charles (36:13):

As far as I know, that’s when it finishes (April 2023)

 

Greg Wilkes (36:19):

So we’ll watch this space on that one (‘super deduction) that might go….

 

Tim Charles (36:22):

I thought it’d be good for another example. You and I are big iPhone fans, and this applies to iPads and all computers, but having a really good iPad and iPhone, they’re great for boosting productivity and helping you work faster and smarter. Example: If someone rocks up to the Apple shop, let’s say you had to pay £1200 for an iPhone and that person had to pay that £1200 pound out of their taxed income. Whereas if you’ve got a limited company, you pay £1200 on your next VAT return, you reclaim the £200’s that cost you a £1,000, then we are going to uplift it by 130% for the ‘super deduction’. The corporation tax deduction reduces your corporation taxes (£247). So that £1200 iPhone actually cost you £753. That’s also boosting your productivity and helping you work smarter and faster. I think that represents a good investment for business owners to make.

 

Greg Wilkes (37:23):

I think so. You’ve just given me an excuse now, Tim to go and get a new iPad <laugh> You know I’ve got to keep up with the latest model!

Greg Wilkes (37:30):

That’s a good example. That’s really useful and that is positive because there’s a significant tax deduction you can get there and you want to make the most of that if you are looking at investing. Now, just a bit of a caveat to that Tim, again we hear sometimes people getting the wrong advice from accountants where they’re saying, “Look, let’s get your tax bill down. Let’s go out and spend some money and get a van etc so you can benefit from that” What’s your thoughts on that, buying things just to get tax bills down. Is that the right to do it?

 

Tim Charles (38:10):

There’s an expression that I’ve always loved and thats “The dog must always wag the tail”. You must never let the tail wag the dog and your tax is the tail and you are the business. You always must make a business decision first. There’s no point doing things for the sake of tax because tax is only a small element. It’s only the tail. The tax rate is 19% (now we’ve got increases there) but the tax is only a percentage. First of all, what is a good business decision to make? Do I need a new van? Is the van going to help us increase our productivity? Is it going to help us work faster and better? Is it going to be a good impression for customers? You must always think about return on investment. If you spend £24,000 on a van, you can reclaim that and the ‘super deduction’, but it’s still £15,000 that’s going to cost the company. There’s got to be a return on investment on that. Same with the iPhone and all these things. There’s no point just doing things for the sake of reducing your tax bills, first of all its got to be a great business decision.

 

Greg Wilkes (39:17):

Yes, I think that’s really important to say that because again, it’s sometimes a false belief that a lot because they get some wrong advice from accountants. I think that’s really sound advice there, Tim. That’s really useful. I really appreciate you running through that. Is there anything else you need to through on this screen?

 

Tim Charles (39:38):

I don’t want to bring any more doom and gloom to <laugh> to your listeners!

 

Greg Wilkes (39:42):

No, that was brilliant. What I might do, Tim, to make it easier for my listeners on the YouTube channel, I might put a link to that spreadsheet. Could send me that after and we’ll put that in the link notes?

 

Tim Charles (39:57):

Yes, sure.

 

Greg Wilkes (39:57):

I know you are in my Facebook group, aren’t you, Tim? If anyone’s not joined that on Facebook, it’s called the ‘Construction Trades Accelerator’. Search for that and you’ll be able to get into that group. There’s lots of free videos, advice and tips on how to run and grow your business. You are also a member of that group, Tim. You kindly jump in there and help out now and again with any tax tips. You sort of made an offer before you came on the podcast…

 

Tim Charles (40:27):

Yes, if anyone’s got any questions on (we brought up a whole bunch of different topics here, some of them a bit technical) but generally speaking, if anyone’s got any questions, put them in the Facebook group and if you tag me then I’ll try and try my best to answer any questions in that Facebook group. No doubt the questions you’ve got are the same questions that other members of your Facebook group have got. It’d be helping everyone to answer those questions.

 

Greg Wilkes (40:55):

Yes, it really will. I appreciate that Tim, and thanks for offering so much value. Just to let you know, your previous podcasts are one of the highest listened to!

 

Tim Charles (41:05):

Oh, fantastic. Thats good to know!

 

Greg Wilkes (41:06):

You’re up, you’re up with some good company there. I hope this one is of value. I know it will be because it might go over our heads a little bit. It might be one of those ones that you just want to listen to again, get that spreadsheet in front of you and really try and get it right in your minds. If you don’t get it, have a chat with your accountant, but at least you’re a little bit more aware of what’s happening. As we say, these changes are coming around fast. April is going to be here before you know it.

 

Tim Charles (41:33):

It’s just three months away, isn’t it?

 

Greg Wilkes (41:35):

That’s right. Thanks a lot Tim, appreciate your time and we’ll catch up soon.

 

Tim Charles (41:40):

Thanks Greg. Cheers. Thanks for having me on.

 

Greg Wilkes (41:48):

If you’d like to work with me to fast track your construction business growth, then reach out on www.developcoaching.co.uk.