Panellists

• Lindsey Wicks, Senior Technical Manager, Tax Policy, ICAEW
• Stephen Relf, Technical Manager, Tax, ICAEW
• Ed Saltmarsh, Technical Manager, VAT and Customs, ICAEW

Producer

Ed Adams

Transcript

Lindsey Wicks: Hello, and welcome to The Tax Track, the new podcast series from ICAEW where we explore the latest from the tax world and what it means for our members and tax professionals alike. In this episode we’ll be looking at the tax changes that are being introduced for the new tax year…

Stephen Relf: More people will have to engage in the kind of nastier areas of self-assessment…

LW: …and getting our teeth into yet another food-related VAT case.

Ed Saltmarsh: Some of the arguments in their case were maybe not so brilliant but certainly entertaining.

LW: I’m Lindsey Wicks, Senior Technical Manager for Tax Policy at ICAEW. I’m joined this month by two colleagues who love to talk all things tax: Stephen Relf, Technical Manager, Tax and Ed Saltmarsh, Technical Manager, VAT and Customs. Welcome to you both.

SR: Thank you, Lindsey. Good to be here.

ES: Hiya, yes, great to be here.

LW: First off today: with the new financial year for companies beginning on 1 April 2024, and a new tax year for individuals on 6 April 2024, now is a good time to catch up with the forthcoming changes to the tax rules. Stephen, what’s coming up?

SR: Thanks, Lindsey. I thought I’d pick out some of the key changes today across the three main categories of taxpayer. So we’ve got individuals, companies and then the self-employed. If we start with individuals, there are reductions to two quite important tax-free allowances. The tax-free allowance for dividend income is being cut from £1,000 to £500, and the capital gains tax annual exempt amount is being cut, again by half, from £6,000 to £3,000. So they are quite significant changes that will obviously increase tax bills for people, but also will mean that more people have to engage with the self-assessment system.

Now those two changes apply to taxpayers wherever you are resident in the UK. There are also significant changes for taxpayers who are resident in Scotland in terms of their non-savings, non-dividend income. Higher earners are going to suffer quite a significant increase in their tax bill. We have a new advanced rate of 45%, which applies to income over £75,000. And we have an increase in the top rate of tax, which was 47% and will increase to 48%. So again, more tax to pay for high earners, but also importantly it just widens that gap even further between tax in England, Wales and Northern Ireland and income tax in Scotland.

LW: It begs the question whether we’ll see a bit of migration south?

SR: Yes, it’s going to be interesting to see, first of all, if these changes in Scotland bring in the revenue they expect, because we may obviously have some behavioral change, maybe not just moving from one country to another but also maybe working fewer hours – different choices, I think, made by people.

LW: What about companies?

SR: The significant change for companies this year is going to be around R&D tax relief. For accounting periods beginning on or after 1 April 2024, we think, the new merged scheme of R&D will come in. I won’t say too much more about that one here, one because the whole R&D thing is quite depressing, but also it’s a significant topic and it probably merits its own podcast. So we’ll probably leave that one there for now.

Also on companies, one to watch out for is an increase in the amount of the ATED – the annual tax on envelope dwellings. That applies to companies who hold high value residential property, and essentially, unless a relief applies, they need to pay an amount of ATED by reference to the value of that property. A new chargeable period starts on 1 April and companies will have to get their returns in and pay any tax due by 30 April. So again, 30 April 2024 is an important deadline for ATED.

LW: Over time the rates have obviously changed. Originally ATED only applied to properties over £2m but that reduced to £1m, and it’s now at £500,000. And that hits mainly London and the south-east, doesn’t it?

SR: That’s right, yes. HMRC does publish statistics every year. They do give a breakdown by geographical location, and certainly most ATED taxpayers are in London and the south-east.

LW: And what are the changes for the self-employed?

SR: We have got some significant changes here, quite positive changes as well. We have the cuts in national insurance. Self-employed people pay class 4 NICs on their profits. That rate, the main rate, will come down from 9% to 8% from 6 April. Also they pay class 2 – at least they did play class 2, because that’s abolished for the next tax year. So quite a significant saving there for a self-employed business.

In addition, we do also have some simplification measures. In the last podcast, my colleague Richard talked us through the changes to the cash basis, so I won’t go into too much detail. But just to point out that that has now been extended, so the turnover restrictions have gone, and it’s also going to be made the default option. And probably more importantly, some of the restrictions around how much relief you can claim for interest, and how you claim relief for losses have been removed as well. So quite a significant simplification there.

Also, we’ve got the changes to basis periods. So 24/25 is the first tax year when the person will be taxed by reference to their profits for the tax year, as opposed to their basis period. So a good simplification. But there is a sting in the tail in that if you prepare your accounts to a date other than 31 March or 5 April, then you may have a catch-up tax charge. So one to watch out for there.

LW: And Ed, are there any changes on the indirect tax side?

ES: Not really, nothing major on indirect tax taking place in April. There are a few rate changes for some of the environmental taxes, for example, the rates for plastic packaging tax, landfill tax, aggregates levy, they will all increase in line with inflation. But that’s about it on indirect tax, which I suppose is a good thing – people want stability – but actually there’s areas of indirect tax that could be changed, so a bit disappointing in that respect.

LW: Stephen, why are so many of the changes focused on the self-employed this year?

SR: That’s a good question. It was quite surprising, the changes that were announced at the Autumn Statement. Not just the changes, but some of the language that the chancellor used about self-employed businesses. If we go back to March 2020, just on the cusp of the pandemic, Rishi Sunak had just introduced the Self-employed Income Support Scheme and at the time his language was fairly negative towards self-employed businesses. Essentially, it put them on watch. It said that if everyone expects to benefit from state support, then everyone must pay equally in the future. I think we all took that as a warning to self-employed businesses that maybe if anything rates of NIC would increase. But if we contrast that now with the warm wording from the chancellor in the Autumn Statement, he was very positive about self-employed businesses. He identified these as “the people who literally kept our country running during the pandemic. The plumbers who fixed our boilers in lockdowns. The delivery drivers who brought us our shopping.” And he closed that section of the Statement with these words: “Small businesses work so hard for us, so this government is working hard for them.” I think that’s a huge change in approach to the self-employed from the government. And that’s not just in words, but it’s also coming through in the practical measures too.

LW: But there is a slight narrowing, isn’t there, because they’ve only had a 1% decrease in the class 4 national insurance rate compared to a 2% in the class 1. So there is a small narrowing of the gap there, albeit that class 2 is going for the majority.

SR: That’s right. It’ll be interesting to see if we have any more changes coming out as well, again targeting the self-employed.

LW: Equally important, we talked about all the changes. But what’s not changing?

SR: Quite a lot. I think we could probably fill the next hour talking about all the things aren’t changing. But particularly important is the fact that the income tax personal allowance and the income tax thresholds aren’t changing. So they are set at the same level they were in April 2021. Clearly we’ve had high levels of inflation since then and so an awful lot of people will have moved up the tax bands, and will suffer a tax increase as a result. Also, it’ll bring more people into self-assessment. And it means more people will have to engage in the kind of nastier areas of self-assessment. Things like the high income child benefit charge, the tapering of the annual allowance when income exceeds £100,000. So again, I think, just more engagement with those more complex areas.

LW: Ed, the same really applies to VAT, doesn’t it? And it’s been frozen for a lot longer.

ES: Yes. The VAT registration threshold has been frozen since 2017 at £85,000. It was frozen then so that the Office for Tax Simplification could carry out a review of what should be done about the threshold, and there hasn’t really been an answer, so it’s just remained frozen for years. And it’s dragging smaller and smaller businesses into VAT. There’s quite a lot of evidence that businesses bunch below that VAT registration threshold, so they might deliberately stop trading so they don’t go over that threshold to stop themselves from being brought into VAT, which is a problem for growth in the UK. People don’t know what the right answer is about the threshold, about whether it should be higher or lower.

LW: So there’s really a lack of consensus about which way it should go?

ES: Yes. I think intuitively people might think that you should raise it. It’s a simplification for small business and by raising it you’re stopping those small businesses from being brought into the VAT net. But I think that’s not really the answer, because then you’re just moving the problem. And I think the higher the threshold is, the more incentive there is for businesses to stop trading and trade below that threshold.

There’s plenty of anecdotal and statistical evidence that businesses are doing this. For example, cafes might close one day a week, or for a whole month a year, to make sure they don’t cross that threshold, and that might stop them from taking on more employees. So it is a problem and something needs to be done about it. But I think, certainly in the near future, I think it’s just going to remain frozen.

LW: Because at the end of the day, it is another administrative burden for smaller businesses, isn’t it? Getting to grips with having to do your quarterly VAT returns and things like that…

ES: Exactly. It’s something else that a business has to do. I suppose, what you could say is that some of these small businesses, the self-employed people certainly, they’re going to be brought in to Making Tax Digital for income tax self-assessment. So maybe you could say, actually, it’s not that much more of an administrative step to also do VAT. Whether there’s some alignment that could happen there – that’d be something interesting to consider.

LW: Let’s just go back to April – why is this time of year so busy?

SR: Obviously, as you mentioned, we have the start of the new tax year for income tax purposes. It kicks off on 6 April. I think that always surprises people, because why on earth would it be 6 April? You would never pick that day really. And it’s quite an odd story historically.

Traditionally, the year had begun on 25 March. This fell on Lady Day, which is one of the four quarter days, all of which fell on religious festivals. Those quarter days were the four dates on each year on which important business was done. Things like rents were paid, school term started and servants were hired. Throughout that period, that very long period, we had been using the Julian calendar; we moved to the Gregorian calendar in 1752. Unfortunately, that was roughly 150 years after most of Europe. So by 1752 we had a problem. As the two calendars gain on the solar calendar at a different rate, then by that year the British calendar was 11 days behind the rest of Europe. To fix this, they came up with a simple but ingenious solution. People went to bed on 2 September 1752 and when they woke up the next morning it was 14 September 1752.

Clearly that fixed the calendar issue, but it also caused a possible headache for the Treasury, as it would miss out on 11 days of revenue. So it was decided that the tax year, which had started on 25 March 1752, would be the usual length of 365 days, and so would end on 4 April 1753. This meant that the following, and subsequent, tax years began on 5 April.

But that’s not the end of it. We did hit another problem in 1800 – 1800 was not a leap year in the new Gregorian calendar but it would have been in the old Julian system, so another day was lost. To address that, the start of the UK tax year moved from 5 April to 6 April, and it has remained there ever since.

LW: Okay, well, thanks for that history lesson. Back in 2021, again in the middle of the pandemic, we did have quite a look at whether that should change, and the Office of Tax Simplification then took up the idea of reviewing whether the tax year should change. They looked at two possibilities: whether it should be 31 March or 31 December.

In the middle of that review, the Tax Faculty hosted the Wyman Symposium remotely – online as it was back in 2021. We had a lively debate about whether it should change. We had people talking about the Irish experience – they changed back in 2002 before joining the euro. We also heard about the challenges if you’ve got people who have to file UK tax returns but also have a filing requirement overseas, and the fact that most overseas jurisdictions have a calendar year. But we also thought about practitioners and the fact that they’re already moving towards Making Tax Digital. A change before Making Tax Digital would maybe be too big. And we also looked at the government finances, what impact that would have on the public finances if we moved. But when the OTS reported on the outcome of their review, they thought there was a clear benefit of moving to either a month end or possibly the calendar year end, and for those with an international dimension to their affairs, then there’s definitely a benefit to a calendar year basis and also for information sharing. One of the things that the OTS said was that this was something that really the government should have a long-term plan to look to move towards, after Making Tax Digital and probably after we’ve had single customer account as well.

Ed, would there be any VAT implications if we change to a calendar year basis?

ES: Well, I think it would help most businesses if we changed to a calendar year basis. Most VAT registered businesses will be on quarterly VAT returns, and the most common stagger is one that ties in with the calendar year – quarters ending in December or March. That would bring that in line with VAT. Whereas now, if you have someone who is self-employed and VAT registered, their tax years don’t line up and they have to reconcile their VAT returns with their self-assessment return and it will be five days out. So yes, I think that would help for VAT.

One argument in favour of 6 April is that I am actually getting married on that date this year, so if we keep it as that I will never forget my wedding anniversary. Or the start of the tax year, depending on how you look at it.

LW: That’s a good one. Going back to all of the tax changes, there is a Taxline article on the website that has a great chart that highlights all of the changes that are coming up. Please do take a look at that.

Now, it seems like every month there’s a new and interesting case coming out of the tax tribunals. Last month, we talked about capital allowances on camping pods, and you can listen back if you missed it. This month it’s all about VAT. On the Taxline hub now is a piece by Ed about the ride hailing service Bolt and how the First-tier Tribunal found that its services fell within the Tour Operators Margin Scheme, or TOMS, for VAT purposes. Today we’re discussing VAT on foodstuffs. Ed, tell us more about this case.

ES: Thanks, Lindsey. So here we are, yet again, another VAT case on food. This time it’s Walkers, who everyone will know. Obviously they make crisps, and also Sensations Poppadoms. Now Walker’s argued in the tribunal that their poppadoms should be zero-rated as food for human consumption. But HMRC argued that Walkers’ poppadoms are products similar to potato crisps, made from potato; they’re packaged for human consumption without further preparation, and so they should be standard-rated. Now, before I talk about the case, I just thought I’d get your thoughts. What do you think: poppadoms, are they similar to potato crisps?

SR: Personally, I would have said no. Obviously, you read the decision, you go through all the arguments, you understand why the FTT came to the conclusion it did, and that looks like the correct conclusion. But yes, from the outside, it is fairly surprising, because I think we’re all fooled to take the name on the packaging, Poppadom, and go with that.

LW: When you looked at the amount of potato content, it was quite clearly more like a crisp.

ES: Exactly. And Walkers was saying that poppadoms are not like crisps, and one of the things they used as an example of that is that they are called poppadoms and not crisps. And the tribunal judge Anne Fairpo, she gave a great quote, probably one of the greatest tribunal quotes of all time: “Nominative determinism is not a characteristic of snack foods: calling a snack food Hula Hoops does not mean that one could twirl that product around one’s midriff, nor is Monster Munch generally reserved as a food for monsters.” Though I think probably a few parents might disagree with that point. It’s a great point about names, though, isn’t it?

SR: Yes, it comes up… Obviously it’s quite amusing in this context, but in so many tax cases it comes up because a taxpayer will call something by a certain word and they’ll expect everything to follow that treatment. And that whole kind of substance over form is lost sometimes, I think. So it’s just a great reminder of that – that you just can’t go with first appearances.

ES: Yes, exactly. And I think a name can be a factor, it can play a part in the decision. We won’t talk about Jaffa Cakes today, but the way I always remember the outcome of that case is that Jaffa Cakes are called ‘cakes’. So it’s a really important factor, but it’s not the be-all-and-end-all, I suppose.

But some of the other arguments in the case were just… maybe not so brilliant but certainly entertaining. Walkers made five main arguments and some of those had several sub-arguments. The first was quite an interesting one. They said that the poppadoms are “not ready for human consumption”.

LW: I’d certainly hope that was the case when I was buying them in the shop.

ES: It’s not the greatest marketing strategy, to go to court and say these are not ready for human consumption. What they actually meant was, you were supposed to dip the poppadoms in mango chutney before you eat them, and so they’re not ready for human consumption before you’ve dipped them. But they dropped that argument quite quickly, not surprisingly. And they also dropped the argument quite quickly that they’re not a potato product when it was discovered that they are about 40% potato.

SR: As you said as well, it’s quite surprising that there were so many lines of argument pursued by Walkers, but also that this decision only runs to about nine pages.

ES: I think you have to give credit to the tribunal judges on this case. They really took this argument to pieces as concisely as you could imagine really. Just to pick out a couple of other arguments that Walkers tried: again, “they don’t taste like a potato product”, which is a bit of an odd one. Walkers argued they tasted like gram flour. And also, do potato crisps taste like potato?

SR: That’s a very good point. Yes, it’s all the flavouring that’s added, I guess, isn’t it.

ES: Exactly. Another argument: “they’re not like crisps because they don’t work like crisps”, a fascinating concept. I’ve never really thought of crisps or poppadoms working before. It comes back to the chutney point – they said that poppadoms are designed to convey chutney. And again, another great quote from the judges: “There is a practical limit to the amount of chutney that most people are likely to want to combine with the crunch of the conveyor product.” And besides, you can use crisps. So I think that’s a… you have to give some credit to Walkers’ lawyers for the creativity of the argument.

SR: Yes. I do wonder, though, because this case has received so much publicity. I mean, there’s not a newspaper in the UK that hasn’t covered it. Loads of international papers have covered it too. And not all the publicity can be good for Walkers. Because as you say, some of those arguments put forward aren’t ideal for marketing purposes. So I think there’s a publicity issue, not just for Walkers, but perhaps also a wider issue for engagement in the tax system, because it does make it look quite silly. And I do wonder, although it’s a positive in that people are talking about the tax system, whether people will lose respect for it a little bit as well when they see that we’re having these… what look like crazy arguments from the outside?

ES: Yes. I think on the Walkers point, I do wonder whether this is a case of there’s no such thing as bad publicity. I’m sure a few people who read about this case, saw them in the supermarket and thought, I’ll grab a bag of those.

LW: I did say to you, I think I need to need a trip to the supermarket tonight.

SR: That’s an interesting point. If we can get the statistics for if there’s a spike of sales of Walkers Poppadom crisps, that’d be fantastic.

ES: They’ve probably got their costs back on the boost to sales. But on the perception of the UK tax system, yes, I completely agree, it’s another example of how ridiculous some VAT legislation is, particularly on food. I do think it’s great, though, that this case has got so many people interested in VAT. It’s got people interested in tax in general. And it’s got people interested in how tax might be reformed. And actually what you might do to reform VAT, particularly on food.

LW: Stepping back to the policy, why do we have different VAT rates for foodstuff?

ES: It goes back to purchase tax, which we had in the UK before VAT was introduced in 1973. And most food was exempt from purchase tax. So when we introduced VAT in the UK, we had to get special permission from the EU to do this, but we introduced the zero rate for most food. Quickly exceptions to that zero rate were introduced for confectionery, ice cream, soft drinks, that kind of thing, but also items overriding those exceptions. And this is another great example of complexity in the VAT on food legislation: frozen yogurt is excepted from the zero rate for VAT and its standard rated, but that exception is overridden for yogurt that is frozen but not meant to be consumed frozen, which is zero rated.

SR: I did see it. When I was looking at the publicity around this, I saw a really interesting quote from a senior lecturer in one of the UK universities. She said something along the lines of: this is all really silly, but that’s where we are. I think that sums up this issue with VAT, but it also takes us back to why we have 6 April. And there’s probably loads of other issues we could just have that quote for really. So I think that sums up a lot of the UK tax system.

ES: Once you’ve had something for so long in the tax system, it just becomes harder and harder to change it. Countries that introduce VAT from scratch don’t have these problems, because they know… they’ve learned the lessons from the UK and the rest of the EU.

LW: At the end of the day, do the different rates of VAT translate into the pricing when you go to the supermarket?

ES: In theory, yes. And if Walkers had been treating these as zero-rated before the case and were told they’re standard rated, you might expect that the price would go up and they would pass that on to customers. But Nestlé took a case to the tribunals in 2016 about the flavours of milkshake powder, because their chocolate milkshake powder is zero-rated and they were arguing that their strawberry and banana flavours should also be zero-rated and they lost that case. So there are different VAT rates on chocolate Nesquik compared to strawberry and banana Nesquik, but the last time I checked in my local supermarket they were all exactly the same price.

LW: And I have checked when I was doing my online shopping the other week. I bought both, I bought a strawberry and a chocolate – both the same price.

ES: Yes, so those of you buying chocolate Nesquik, you are handing over more money to Nestlé than if you’re buying strawberry or banana.

SR: You’ve mentioned quite a few of these cases already and there do seem to be a lot of them. Even this year we’ve had one, I think, on sports nutrition bars and whether or not they were cakes. We do see a lot of these disputes – is it that there are more of them these days, or are HMRC putting more effort into protecting the borders in VAT?

ES: Every year the food legislation gets a year older and companies bring out new food products that don’t fit neatly into that legislation. So quite possibly, we are seeing more of them. And they just take up so much time for HMRC, for the businesses, for the tribunal judges. Let’s not forget that the tribunals are mostly funded by taxpayers, so it can’t be good for the tax system.

I actually spoke to a tribunal judge recently and he commented that VAT on food does seem to be the thing that comes up most often. I suspect Walkers knew they were going to lose that case but they probably thought, even if we have a 10% chance of winning, the values involved, it’s worth the risk. But smaller companies can’t take that chance. They just have to accept, well, we think we’re right, but it’s not worth the cost to go and fight this in the courts.

LW: So is there a way forward, do you think?

ES: Food is a really difficult one to simplify. It’s the area that’s most ripe for simplification, but it’s also the most politically sensitive because you don’t want to be seen to be increasing prices of food, particularly at the moment with the cost-of-living crisis. Whether there’s a way that it could be simplified by introducing one rate for all food that’s lower, so you have a single 10% rate on all food. You don’t have these arguments then – is it a cake or a biscuit? Is it a normal marshmallow or a giant marshmallow?

There are options, but it needs serious thought. And I think the problem is, too many people don’t understand VAT to have that serious debate about what could be changed.

LW: And in some ways these cases do hit the press and possibly spark that debate a little bit more, and possibly could go some way to changing that public perception.

ES: Let’s hope so. Get a few more of these and I think the public will be all over VAT. It will be everyone’s favourite tax, if it isn’t already.

LW: Well, we know it’s yours, Ed.

Tax simplification is something that ICAEW would like to see a lot more of going forward. And it’s also one of the points raised in ICAEW’s manifesto for whatever the next government would be. So if people are interested in hearing more about ICAEW’s ideas, then please do visit the website.

That’s it for this episode. Many thanks to Stephen and Ed for your contributions.

SR: Thanks, Lindsey.

ES: Thank you for having us.

LW: And thanks for listening. If you’ve missed anything, we’ve included some links for further reading in the show notes. And if you found it useful, then don’t forget to subscribe so you don’t miss an episode.

We’ll be back next month with The Tax Track. In the meantime, why not check out the sister podcasts from ICAEW. Insights provides business, finance and accountancy analysis, while each episode of In Focus offers a deep-dive into a selected topic.

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