The Fizz! Blog

NFTs and Tax

One of the hottest financial topics at the moment is NFTs - Non Fungible Tokens.  Leaving aside questions of the degree to which they could be considered a bubble or environmentally wasteful, we’re starting to get questions about how trade in them might be taxed.

The good news is, there’s not really anything special about them in that regard.  If you’re in business making and selling NFTs, then that’s a trade and you’re going to pay tax on the profits.  You’ll have identical considerations around structure and tax planning to any other business (one interesting one might be - if your main business is VAT registered, might you want to keep this sideline out of the VAT net by keeping it separate?).

One thing that might be a bit different is that you’re probably much more likely than most businesses to get paid in cryptocurrency.  That’s fine - as with any other business, that’s just taxed the same as if you’d been paid in real money.  If you get paid one ETH (say) today, that’s about £1,200.  That’s your income, whatever you're going to do with the ETH subsequently - you can't defer the tax by keeping the revenue in crypto. 

If you convert the ETH into real money at that point, we’re done.  If you don’t, and hang on to it, then you need to retain an awareness of the potential Capital Gains Tax consequences of buying and selling crypto.  That’s taxed in more or less the same way as buying and selling shares.  We wrote more about the traps people might not realise they’re falling into here.

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When might directors pause their employer pension contributions?

Imagine your company has a 31 March year-end.

Are you going to make an employer pension contribution in March 2023?  Probably not.  If you make the contribution in March 2023, it’s going to save corporation tax at 19%.  If you wait one month (one day, even) until April 2023, it’ll save corporation tax at the new rate of 25% (albeit 12 months later, but it’s still a guaranteed 6% return).

Are you going to cancel a planned contribution this month, and wait until April 2023 and the greater tax saving?  Probably not - on average, 25 months of tax-free investment growth would be likely to outstrip the 6% tax difference.

Are you going to make an employer pension contribution in February 2023?  Probably not. If you wait two months until April 2023, it’ll save corporation tax at the new rate of 25% rather than 19%.

Are you going to cancel a planned contribution next month, and wait until April 2023 and the greater tax saving?  Probably not, it’s fair to think that 24 months of tax-free investment growth will still have a fair chance of outweighing the 6% tax difference.

There’s a point somewhere in between where might choose to pause contributions, though.  Over the long term, the profits in your company above and beyond what you pay yourself are going to be split in some fashion between pension contributions and building up reserves in the company.  Mathematically, you'd ideally do the former when the corporation tax rate is 25% and the latter when it’s 19%.

Of course, this interesting dilemma presupposes that there will be no changes to the other rules and limits on pension contributions between now and 2023-24.  Historically, that's often been a reckless assumption!

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The extended Coronavirus Job Retention Scheme and a trap to look out for

In the Budget, the JRS was extended until 30 September 2021, from its previously scheduled end date of 30 April 2021.  Hopefully by the autumn relatively few employers will still need to use it, but it's there if they do.

In the first version of the scheme, claims could be made in respect of furloughed employees who'd been reported to HMRC prior to 19 February 2020 as being on the employer's payroll.  In the second phase, they had to have been reported to HMRC prior to 30 October 2020.  For this (fingers crossed) final stage, they need to have been reported to HMRC prior to 2 March 2021 as being on payroll.

So, that means that anyone who was on your February 2021 payroll can now be furloughed (if necessary) and a claim made from the government towards their wages, right?  Not so fast.  For a staff member who didn't meet the conditions for the first two phases, a claim can only be made for pay periods beginning 1 May 2021 onwards.  For March and April, the final two months of the current/second phase of the scheme, they're still excluded.  It seems quite likely a bunch of employers could miss that condition if they're not careful, and furlough recent starters in the mistaken expectation of being able to claim from the government towards their wages - this wrinkle has not been highly publicised.

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IR35 isn't relevant to sole traders!

Next month, an important aspect of IR35 changes.  For big companies engaging with a contractor via the contractor's own limited company, the responsibility and risk of deciding whether it's an employment-like relationship and employment taxes should therefore be paid falls upon the customer, not on the contractor.  That's it.  That's the change.

 

For a sole trader, IR35 is objectively of no relevance of any sort, as it relates specifically to that situation where someone is working and billing via an entity that sits between them and the end user.  But what's becoming very clear is that agents, recruiters and employers are often attempting to deal with the IR35 change without having a basic understanding of what IR35 even is!

 

In particular, we're seeing multiple instances of sole trader freelancers being told that they need to go on PAYE or via an umbrella company (also PAYE) because of IR35.  It's often going to be the case that those people should indeed go on to PAYE.  It hasn't got anything to do with IR35, though.  It's just basic employment tax rules that have been in place for decades.  People were always at risk by engaging sole trader permalancers - an HMRC PAYE inspection would give them a massive and expensive problem if it emerged that they were failing to put people who were really employees on PAYE.  It's for the best that they're addressing that issue - but they're doing the right thing for the wrong reason!

 

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