Atif Butt looks at recent changes to tax regulations that affect community pharmacies and locums and what you can do in response...
We’ve all seen how the Covid-19 pandemic has changed our lives in ways that would have been unimaginable at the start of last year.
With measures introduced to keep the economy afloat costing hundreds of billions of pounds, the government now needs to find ways of increasing its revenue while continuing to support an economic recovery. The budget in March saw a number of changes to the tax regime with that aim in mind that will affect community pharmacy businesses.
The Chancellor announced an increase in the main corporation tax rate from 19 to 25 per cent with effect from 1 April 2023. However, the 19 per cent rate will continue to apply to companies with profits of less than £50,000, with marginal relief on businesses with profits of up to £250,000.
The budget also saw the introduction of a new super-deduction of 130 per cent for qualifying capital expenditure. This new measure is being temporarily introduced for two years from 1 April 2021 to 31 March 2023 and will allow a 130 per cent deduction for certain investments. The new rules also allow for a first-year allowance of 50 per cent on special rate pool expenditure (which normally only attracts a 6 per cent annual allowance).
There has been an extension of loss relief carry-back to three years from the previous one-year limit. This applies to both limited companies and unincorporated businesses, so includes sole traders or partnerships.
For pharmacy businesses that operate as limited companies and are considering a store refit or acquiring new equipment in the future, it’s advisable to consider the timing and purchase method to see if there is an opportunity to reduce your corporation tax liability and maybe even get a corporation tax refund.
In 2017 HMRC announced major changes to the IR35 regulations affecting the use of self-employed and freelance workers in the public sector. These were extended to the private sector from April 2021.
Whereas previously it was for the contractor to decide their employment status and tax arrangements, it is now the responsibility of the client to determine this and deduct the appropriate taxes (unless they qualify as a small company). This will affect locums and those pharmacy businesses who use them and don’t qualify as small companies.
If this applies to you it’s a good idea to confirm that tax and National Insurance is being accounted for correctly and take specialist advice where necessary.
More changes in the pipeline?
With the global economy continuing to face an unprecedented challenge we are also likely to see further changes in tax rates and reliefs coming in the near future.
The US President Joe Biden last week announced his plan to increase capital gains tax from 20 per cent to 39.6 per cent for households earning over $1 million per year, which is the first major tax hike in the US in almost 30 years.
Here in the UK, the Chancellor Rishi Sunak has already commissioned a review on capital gains tax. While there were no changes announced in the last budget, this is a prime candidate for an upcoming increase as it is currently charged at a much lower rate than income tax. Any change in capital gains tax rates and reliefs would affect pharmacy owners who are considering selling their business in the future.
Currently pharmacy owners who sell can benefit from a capital gains tax rate of 20 per cent, with Business Asset Disposal Relief (formerly known as Entrepreneurs Relief) available that can reduce this to 10 per cent if certain conditions are met.
Over the past few years, though, the government has successively tightened up the qualifying conditions of this relief and significantly scaled it back by reducing the lifetime limit from £10 million to £1 million.
It is possible that the government will introduce further changes to the relief, or they may abolish it completely, which could cause your tax bill to soar.
So if you are thinking of selling your pharmacy but haven’t decided when, it’s worth bearing in mind that the current relief may not be around forever, and your tax bill could be double without it.
Atif Butt is a senior accountant at Hutchings Accountants.