Tax Data

Help & Advice

Useful information

Self-Assessment Tax Return

Do you need to complete a return? In certain circumstances it can be unclear whether an individual is self-employed, an employee or the transactions are of a capital nature. It is important to get this right as there are considerable differences in the tax treatment of each activity. https://www.gov.uk/check-if-you-need-tax-return

Record keeping

These must be kept until the end of the fifth anniversary of 31 January next following the tax year. Effectively 2 months short of 6 years.

 

The type of records required will depend on your personal circumstances but will generally include:

  • Bank or Building Society statements
  • Details of any State Benefits received
  • Dividend vouchers
  • Forms P60 and P11D
  • Details of any acquisition and disposals of capital assets

For those in business or letting property you must keep detailed records in respect of the activities of the business and rental. This includes full bookkeeping records with supporting documentation (receipts, invoices, contracts business mileage records).

Where there is insufficient support for the HMRC can refuse to give relief for expenses and can impose penalties (up to £3,000 per year).

Deadlines And Penalties - Self-assessment

You will be charged £100 for missing the initial deadline, Further penalties will be applied if your tax return is more than 6 months late.

You will also be charged interest and penalties for late payment.

https://www.gov.uk/estimate-self-assessment-penalties

You can appeal against penalties providing you have a reasonable excuse.

Tax Rates& Thresholds

https://www.gov.uk/income-tax-rates

Higher rate taxpayers

Gift Aid – If the donation is made by an individual tax relief is available at the taxpayer’s highest rate. The individual pays the net amount to the charity and claims the higher rate relief on their tax return. The charity claims the basic rate deduction. If the individual does not have a tax liability to cover the amount claimed by the charity this will be clawed back by HMRC from the individual.

Withdrawal of Child Benefit – If you or your partner claim Child Benefit and your income is between £50,000 and £60,000 some/all of the benefit is clawed back.

Withdrawal of Personal Allowances. For every £2 you earn over £100,000 your personal Allowance is reduced by £1.If you anticipate this happening in future years you may wish to consider rearranging your tax affairs by:

  • reducing or delaying income,
  • bringing forward income (so you avoid this the following year),
  • diverting income to your wife or,
  • making some form of tax-deductible investment i.e. a personal pension contribution.

Personal Pensions

Personal Pensions can be extremely tax efficient especially if you are paying higher rate tax and approaching 55.Tax relief is usually available on contributions.Funds in your pension pot grow tax free and can be outside your estate for inheritance tax (IHT) purposes.You can contribute up to your “relevant earnings”. If you have no “relevant earnings” then up to £3,600. There are also annual and lifetime contribution limits. If these limits are exceeded there will be a tax charge. The annual limit (called the Annual Allowance) for 2022/23 is £40,000. This can be tapered down to £4,000 where your “adjusted income” is over £240,000.Employers can also contribute and again there are annual and lifetime limits. The contributions do not count as a benefit in kind for the employee and there is no NIC charge. There is now a Pension Advice Allowance. An employer can pay for up to £500 of retirement financial advice for an employee tax free.You can have a personal pension over which you have personal control. This will allow you to alter your contributions, suspend them, or stop them completely.On reaching 55 you can choose how much to withdraw (without limit) from your defined contribution (DC), or ‘money purchase’ pension savings. You have a range of options when you decide to take benefits such as purchasing an annuity or electing for capped or flexible drawdown. You do not have to buy an annuity.Up to 25% of the pension can be taken tax free. The remainder is taxed at your highest rate.The lifetime pension saving allowance for 2022/23 is £1,073,100.A good strategy is to make contributions while you are paying higher rate tax and then draw down when you retire and are perhaps only liable to basic rate tax. Pensions are long-term investments. You may get back less than you put in. They are also subject to tax and regulatory change.

We only deal with the tax aspects. If you wish to look at this in greater detail, you should contact your pension adviser.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise?source=pw

Pensions and tax – The Pensions Advisory Service.

Tax on your private pension contributions – Gov.uk

How to avoid a pension scam – Gov.uk

Marriage Allowance

If you are married or in a civil partnership and have insufficient income to fully use your personal allowance, then you can elect to transfer 10% of your allowance to your partner if they are a basic rate taxpayer. A claim can now be made on behalf of a deceased person and back dated 4 year

https://www.gov.uk/apply-marriage-allowance

Companies

Deadlines

Penalties Companies House

HMRC

Tax Rates

If you use a company, the profits will be liable to Corporation Tax at 19% (marginal rates will apply from 1 April 2023). Companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

https://www.gov.uk/government/publications/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023

Taking money from your company

For shareholders and directors of limited companies the main ways of taking funds from the company are:

  • Dividends
  • Tax efficient benefits.​
  • Loans to directors.
  • Salary

Dividends

Owners of smaller private companies are usually the shareholders and directors. They can then choose how to withdraw funds. Currently dividends are the most tax efficient method.

For 2022/23 the first £2,000 is tax-free. The rates are then:

  • 8.75% if part of the basic rate income tax band.
  • 33.75% if part of the higher rate income tax band, and
  • 39.3 % on the excess.

Tax efficient benefits

Consider:

  • Employer pensions.
  • Employer supplied pensions advice.
  • Workplace nurseries.
  • Cycle to work schemes
  • The provision of an ultra-low emission vehicle emitting 75g CO2/km or less.
  • Meals in a staff canteen.
  • Hot drinks and water at work.
  • A mobile phone.
  • Workplace parking.
  • Christmas parties up to £150 per head.

Financial benefit awards from an employer. Where employees come up with ideas that can make the employer money. The amount that can be claimed is the greater of 50% of the financial benefit in the first year, or 10% of the financial benefit in the first five years. In both cases this is subject to an over-riding cap of £5,000.

  • In-house sports facilities.
  • Counselling for redundant staff.
  • Use of works buses.
  • Equipment and facilities for employees to help with their job.
  • A long service awards.
  • A trivial benefits exemption of up to £50 per benefit. This cannot be cash or a cash voucher. Limited to £300 for directors and connected persons.

Salary

For directors with no other income and if there is more than one employee and the Employer’s Allowance is available then a salary equal to the Personal Allowance (£12,570 for 2022/23) will be more tax efficient.

Directors’ overdrawn current or loan accounts

If a director borrows money from their company but they must comply with the 2006 Companies Act. A shareholder approval (by ordinary resolution, subject also to the provisions in the articles) is required for loans in excess of £10,000 (£50,000 if the loan is to meet expenditure on company business). Also, the company should agree loan terms and have supporting documents.

Where there is an overdrawn director’s account there is potentially a S455 charge on the company and a taxable benefit on the director in respect interest-free loan.

S455 CTA 2010 – company tax charge

If a director (or any other participator in a close company) leaves a loan account outstanding for more than 9 months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010. This is payable at 32.5% of the outstanding loan balance and becomes due 9 months after the end of the accounting period. When the loan is repaid in full or in part s.455 tax is wholly or partly repayable 9 months after the end of the accounting period in which the repayment is made. The Revenue’s online form to reclaim

Taxable benefit on the director

If the overdraft on a director’s account with the company exceeds £10,000 it is treated as a loan. A taxable benefit will arise on the loan when the employee does not pay interest to the employer at HMRC’s official rate of interest. The cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid. The taxable benefit of interest calculated is required to be reported on form P11D. This will also be liable to Class 1A NICs

https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates

Write off an overdrawn director’s loan

When a company writes off a loan made to a director the amount is treated as a dividend and as earnings for NICs purposes. In addition, it is an unallowable expense for Corporation Tax purposes.

Consider declaring a dividend to clear the loan as this will avoid the NICs charges.

Drawings For Directors

Beware directors who continue to draw down more money than their salaries or dividends allow.

The real sting is not so immediately obvious, but it will affect those directors who continue to draw down more money from their company each month than the RTI-reported salary, expenses and available declared dividends provide for. Continuing to do this against good tax planning advice is just going to precipitate a higher tax bill when the year-end accounts are prepared.

The company will face a 32.5% surcharge to Corporation Tax for any loans made to a director in the year if the amount has not been fully repaid within nine months of the tax reporting date. The extra tax paid can be reclaimed back from the HMRC when the director’s loan has been repaid, but as it can take over a year to receive the refund, such surcharges can often be a disaster as far as business cash flow is concerned.

The need to consider the tax implications of a director’s loan often only materialises when the year-end accounts are prepared, and it is discovered there is insufficient distributable profits to cover the withdrawals made. To make matters worse, we often find the company cannot afford to pay the extra tax on an overdrawn director’s loan account, nor can they afford to pass the required bonus as a salary after the event and before the expiry of the nine months’ limit to clear it. The only other remaining option available is the director to repay the overdrawn amount back to the company from private funds.

The new and worrying dimension to the director’s loan question will arise where a director has created the loan by regularly making a series of withdrawals each month from the company’s bank account for private expenditure that cannot be supported by the salary and legitimate dividends declared. The Companies Act now allows companies to vote through a loan to a director and a properly convened meeting that is duly minuted and recorded in the company’s records. That is not the same as a situation where the director just uses the company’s bank account as an extension of his own private bank.
HMRC will want to charge tax and NI on private payments.
The issue here is that the HMRC will be fully justified in viewing these private payments as distributions subject to PAYE/NI. There is nothing new in that treatment, but the profession is waiting to see how the HMRC will apply the penalties to what will be false accounting by the employer under the RTI rules if there are grounds the employer should have realised that the salary and dividends, they were presumably voting through were insufficient to cover the actual withdrawals being made.

The point we hope directors of small companies take on board is they can no longer declare monthly dividends on a wing and a prayer to cover the money they withdraw from the company each month. Every dividend declared must be covered by a signed minute approving the dividend with due regard to making sure the company has the distributable reserves to support it. If companies and directors do not take enough care over how they extract their profits from their company, then RTI may just come back and give them one hell of a headache over the next few years.

Expenses for directors

Travel

There is no relief available on the cost of home-to-work travel unless it is to a temporary workplace, or home is a workplace. Directors perform many different duties so whether a home qualifies as a workplace in relation to an individual director will depend on the facts of each case.

When a director has to travel between different sites or appointments etc the cost of travel and incidental costs (subsistence, accommodation and incidental overnight costs) will also qualify for tax relief.

The cost of some triangular travel where the journey is from home via a temporary workplace may be allowable.

Car benefit

Where an employer provides a higher paid employee, or a director with a company car, a taxable benefit arises. The amount of the benefit is determined by the cost, CO2 emissions and power supply. The benefit is reduced when a vehicle is not made available for part of the tax year. Pooled cars can be provided tax-free while the charge on low emission vehicles can be very low.A further benefit arises if fuel is supplied for private use. It is unlikely to be tax efficient to supply private fuel.

Car benefit is calculated as a percentage of the manufacturer’s list price of the car plus accessories, based on the carbon dioxide (CO2) emissions of the car as follows:

• Take the list price of the car.

• Add the price of any accessories

Deduct any capital contributions made by the employee toward the cost of the car or accessories. This is the “interim sum”.

• Multiply the interim sum by theappropriate percentage (this is worked out according to the car’s CO2 emissions with adjustments for fuel type).

• Reduce for periods when the car is unavailable or shared

• Deduct payments made* by the employee for private use of the car.

Note

• If the car is a classic car with a market value of more than £15,000 the rules are changed.

• There are special rules for cars that have very low emissions/run on dual/alternative fuels.

• The appropriate percentage changes each year.

• The employer pays Class 1A NICs too, but this along with all the running costs and capital allowances, are tax deductible.

The Revenue’s company car and fuel benefit calculator can be accessed here.
https://www.gov.uk/expenses-and-benefits-electric-company-cars

Buying or leasing

For a cash purchase the company can claim capital allowances based on CO2 emissions. If HP is used a similar deduction is available and the finance costs can be claimed. For an operating lease the rental payments can be claimed subject to a possible restriction depending on CO2. For some qualifying cars 50% of the VAT can be claimed.

Closing a trading company

On closing a trading company, the net asset will be released back to the shareholders. This can be done through an informal striking off or a full liquidation. The Revenue’s notes on this can be found here.https://www.gov.uk/topic/company-registration-filing/closing-company

Striking off is very simple and requires the submission of a form (DS01) to Companies House with £10.https://www.gov.uk/government/publications/strike-off-a-company-from-the-register-ds01

Capital distributions on winding up

From 6 April 2016 there are restrictions on treating the final distribution as capital.

• The shareholder must have held at least a 5% interest in the company before the winding up.

• The company has to be a close company.

• In the following two years, the shareholder must not be involved, directly or indirectly, in a similar trade or activity.

• The distribution must not be part of arrangement to avoid tax.

• Where the capital distributed following the striking off exceeds £25,000 it is all treated as income.

• While a formal liquidation is more expensive, all of the distributions are deemed to be capital and potentially qualifies for ER.

Non-trade income

A company’s trading status is considered by looking at all its activities and circumstances.

Investment businesses, such as property rental businesses are often unlikely to meet HMRC’s conditions. A company or business is not regarded as trading if it has substantial non-trading activities. HMRC will look at income from non-trading activities, asset held and how they are used, expenses incurred by employees and the company’s history.

Where investment or non-trading activities are more than about 20% of all activities then a company is “not wholly” trading. Ex-trading premises and rental income may also cause problems.

Cash Surplus on balance sheet and effect on trading status

Where a company has built up a large cash surplus HMRC believe this to be a non-trading asset. It is necessary to demonstrate that this is required for working capital. Even if the cash is held passively within a bank account HMRC consider this to be a non-trading activity and will seek to deny ER.

Trading company – definition

This is a company carrying on trading activities which does not include ‘to a substantial extent activities other than trading activities.’

Non-trading activities may include investment in property, share portfolios, bonds etc.

Excess cash deposits may point to a non-trading activity. Where cash is being accumulated for future use in the trade then the company will be classed as trading.

HMRC use the phrase ‘substantial extent’ by which they mean more than 20%. They apply the 20% test to:

Turnover – does investment income exceed 20% of total turnover?

Balance sheet – are more than 20% of the assets of the company held as investments?

Expenses – do more than 20% of the expenses relate to non-trading expenses?

Directors’ time – do the directors spent more than 20% of the time managing non trading activities.

Cash held on deposit may not involve much ‘activity’ in managing it and this can also indicate trading.

Where the cash surplus arises from the sale of a trade or business assets prior to liquidation then ER can still be claimed but the distributions must be made within 3 years of the sale of the assets. .

Company losses

If your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income, then you may be able to claim relief from Corporation Tax.

You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back, if you do not it will be carried forward to another accounting period.

https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss

Share structure

Share capital is the total nominal value of the shares in the company, such that a company with 100 ordinary £1 shares will have a nominal share capital of £100. This is not the same as what the shares are worth, which will depend on the value of the company. The company can issue different types of shares. Normally, a small company will issue ordinary shares and may choose to have different classes of ordinary shares (such as A ordinary shares, B ordinary shares, etc.). This structure, known as an alphabet share structure, is a popular structure, as it allows for different dividends to be declared in respect of different classes of shares, which can be very useful from a tax planning perspective. The company can also choose to give different rights to different classes of shares too. For example, the parents may have full voting rights, whereas children may be given shares with an entitlement to dividends only. However, where shares have restricted rights, this may compromise the availability of business asset disposal relief if the company is sold.

Practical tip Consider what share structure will work best for your family company, what rights you want individual family members to have and what flexibilities you wish to retain. Setting up an alphabet share structure at the outset preserves flexibility. However, when assigning rights and shareholdings, be mindful of the qualifying conditions for business asset disposal relief. The company could also issue preference shares, which have a fixed right to dividends and no voting rights, although these are less common in a simple family company. As well as deciding on the type of shares, the family needs to decide how many shares to issue and to whom. The authorised share capital places a limit on the number of shares that can be issued. The company does not need to issue all the shares that can potentially be issued – the shares that are issued form the issued share capital. The company can decide how many shares to issue, as long as this is within the authorised share capital. In a simple family company where there are only two shareholders, such as a husband and wife or civil partners, the company could simply issue one share each. This approach could be adopted whether they simply have one class of ordinary share or adopt an alphabet share structure. Alternatively, the company could issue 100 shares of each class, as this provides for an element of flexibility in holdings of a particular type of share, and this approach is often adopted by small companies. It should be noted that the shareholders must pay for their shares and, in doing so, introduce capital into the company. The amount of capital that the family wish to introduce will have a bearing on the number, class, and nominal value of the shares that are issued

Selling assets to the new company

Assets are items or property of an enduring nature that are not consumed within a year and usually cost over £100. They include computer equipment, furniture, tools, vehicles, etc.

Sell personal assets to the new company at market value. At the outset, the company will probably not have the funds available to pay the sole trader for the assets. However, assuming that the sole trader becomes a director of the company, this can be overcome by creating a debt from the company to the sole trader (in the form of a balance on the director’s account), which can be cleared when the company has the funds to do so. For capital gains tax purposes, the assets will be treated as being disposed of by the sole trader at market value, and this may give rise to a capital gains tax liability. Where the assets are transferred to the new company in exchange for shares, incorporation relief may be available.

Super-deduction

For expenditure incurred in a limited window, companies are able to benefit from a super-deduction. The super-deduction is available for new qualifying plant and machinery that would otherwise benefit from a writing down allowance at the main rate of 18%. However, cars do not qualify for the superdeduction. Further, the super-deduction is only available for investment in new assets; investment in second-hand assets does not qualify. The super-deduction is given as a first-year allowance at the rate of 130%. This means that where the super-deduction is claimed, the company is able to deduct a first-year capital allowance of £130 for every £100 of qualifying expenditure in calculating the taxable profits for the accounting period in which the expenditure was incurred. This will save corporation tax of £24.70 for every £100 invested in new qualifying assets (19% x £100 x 130%). To qualify for the super-deduction, the company must incur the expenditure on qualifying new plant and machinery between 1 April 2021 and 31 March 2023. A balancing charge may arise on the disposal of an asset that has benefited from the super-deduction. The calculation of the balancing charge will depend on when the disposal takes place.

Payroll

Penalties

What you pay depends on how many employees you have.

Number of employees

Monthly penalty

1 to 9

£100

10 to 49

£200

50 to 249

£300

250 or more

£400

The Contract Employment Status Tool (CEST)

HMRC have now produced a “Contract employment status tool” which gives their view on whether an engagement falls within IR35.

HMRC have stated that they will stand by the result you get from this tool provided:

• the information you have given is accurate and

• the results are not achieved through contrived arrangements, designed to get a particular outcome from the service.

If the information is checked and found to be inaccurate or contrived, they will be treated as deliberate non-compliance, and may attract penalties.

The Employment Status Indicator (ESI)

This is another step in the right direction taken by the HMRC to help taxpayers. According to the HMRC web site, completing the ESI tool will provide an indication of your employment status. Click here to try out the ESI tool.

The answer can be relied upon as evidence to support your position, provided your answers to the ESI questions accurately reflect the terms and conditions (not just the written contract) under which you provide your service and the ESI has been completed by your engager. If you just complete the ESI tool the result is only indicative.

https://www.gov.uk/guidance/check-employment-status-for-tax

Benefit in Kind

The provision of benefits-in-kind can form part of a tax-efficient profit extraction strategy. Providing benefits to employees who are not family members can be useful to generate goodwill, and where an exemption is available can be particularly tax efficient. However, the provision of benefits-in-kind imposes a number of compliance obligations on the family company. Where the benefit is taxable, unless the benefit is living accommodation or an employment-related loan, the employer can opt to deal with the tax on the benefit through the payroll (‘payrolling’). However, this is only an option if the employer signs up to payroll the benefit before the start of the tax year, as HMRC does not accept requests to payroll in the year. Once a benefit has been registered for payrolling, it remains registered unless cancelled by the employer. Again, this must be done before the start of the tax year for which the cancellation is to have effect. Employees must be given details of their payrolled benefits for a tax year no later than 31 May following the end of the tax year.

If taxable benefits are provided to employees and these are not payrolled (or included within a PAYE Settlement Agreement), the employer must report the taxable benefits provided to each employee to HMRC on form P11D by 6 July following the end of the tax year for which the benefits were provided (so, by 6 July 2022 for taxable benefits provided in the 2021/22 tax year). The employee must be given details of the benefits returned on their P11D or a copy of their P11D by the same date. A Class 1A National Insurance liability arises in respect of most taxable benefits provided to employees, which are not dealt with by means of a PAYE Settlement Agreement. The Class 1A liability is an employer-only liability payable at the Class 1A rate of 13.8%. Employers who have provided taxable benefits to employees must file a P11D(b) by 6 July after the end of the tax year. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A National Insurance return. A P11D(b) is required even if there are no P11Ds to submit because all taxable benefits have been payrolled.

The general rule is that benefits are valued based on the cost to the employer. There are also specific rules for certain types of expenses.
https://www.gov.uk/guidance/payrolling-tax-employees-benefits-and-expenses-through-your-payroll

Cars – The benefit on company cars is dependent CO2 emissions and the list price. Where private fuel is paid for there is a fuel benefit. If the employee’s own car is used for employment purposes (not commuting) then they can be reimbursed at the Revenue’s suggested rates.

Where the reimbursement is greater than these rates a benefit will arise. If less then the employee can claim the difference as an expense.

https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances

Trivial Benefits – Where benefits meet the definition of ‘trivial’ they can be excluded from the P11D, however, there is an annual cap of £300 on this exemption for directors their family and their household.
To be trivial the benefit must cost less than £50 to provide, it cannot be cash or a cash voucher, this does not include store gift cards.

https://www.gov.uk/expenses-and-benefits-trivial-benefits

Staff Parties- There is an exemption for staff events that do not exceed a total of £150 per year.

https://www.gov.uk/expenses-benefits-social-functions-parties

Construction Industry Scheme (CIS)

Under CIS contractors deduct money from a subcontractor’s pay and pass it to HMRC. A contractor must complete a monthly CIS certificates (even when it is a nil return). Failure to submit the certificate by the monthly deadline can result in a £100 fine.

Contractor – A contractor is a business or other concern that pays subcontractors for construction work.
Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’.
Some businesses or other concerns are counted as contractors if their average annual expenditure on construction operations over a period of 3 years is £1 million or more.
Private householders aren’t counted as contractors so aren’t covered by the scheme.
When you’re about to take on and pay your first subcontractor, regardless of whether that subcontractor is likely to be paid gross or under deduction.

Subcontractor – A subcontractor is a business that carries out construction work for a contractor.
Subcontractors can apply to be paid gross – with no tax deductions taken from their payments. To do this, subcontractors will need to show us that they meet certain qualifying conditions.

A subcontractor must complete a tax return including the CIS which has been deducted from them that tax year to reclaim it.

VAT

If your VATable turnover is more than £85,000 in a 12 month rolling period you will need to register for VAT https://www.gov.uk/vat-registration Most landlords letting domestic property are exempt.

If the existing business is VAT-registered, the VAT registration can be transferred to the new company so that the existing VAT number is retained. This can be done online via the trader’s VAT online account or by post on form VAT68. HMRC will normally transfer the VAT number within three weeks. The threshold for VAT registration is £85,000. Where all or most of your customers are VAT registered consider voluntary registration as your customers can reclaim the VAT you charge and you can reclaim the VAT on your expenses.

If you are not already using bookkeeping software now is a good time to update your bookkeeping system. We can train you up on QBO or VT or do the bookkeeping here for you.

Consider using “cash basis”. Also, have a look at the Flat Rate Scheme which may allow you to save some money on charging VAT.

Deadlines

Penalties

Defaults within 12 months

Surcharge if annual turnover is less than £150,000

Surcharge if annual turnover is £150,000 or more

2nd

No surcharge

2% (no surcharge if this is less than £400)

3rd

2% (no surcharge if this is less than £400)

5% (no surcharge if this is less than £400)

4th

5% (no surcharge if this is less than £400)

10% or £30 (whichever is more)

5th

10% or £30 (whichever is more)

15% or £30 (whichever is more)

6 or more

15% or £30 (whichever is more)

15% or £30 (whichever is more)

Deductible expenditure

As a general rule, a company can deduct expenses that are incurred wholly and exclusively for the purposes of the business and which are revenue in nature, in arriving at its taxable profits. However, there are some items for which a deduction is expressly prohibited for corporation tax purposes, and the accounting profit may need to be adjusted to take account of disallowable items.

Examples of expenditure include the costs of sales which are deducted to arrive at a gross profit. This will include stock movements, purchases, packaging, and distribution. Expenses are deducted from gross profits to arrive at net profit. Examples of allowable expenditure include:

• wages and salary costs;

• employer’s National Insurance;

• advertising;

• accountancy costs;

• office administration costs;

• travelling expenses;

• rent;

• business rates;

• insurance;

• benefits provided to employees;

• staff entertaining;

• interest and finance costs;

• repairs;

• legal fees;

• postage;

• printing;

• stationery; and

• utilities.

The above list is not exhaustive, and the deductible expenses will vary depending on the nature of the business. However, the key tests are whether the expense is revenue in nature and whether the expense is incurred wholly and exclusively for the purposes of the business.

Disallowable expenditure

Some categories of expenditure are specifically disallowed in calculating profits for corporation tax purposes. However, they may be deducted in working out the accounting profit. As accounting and corporation tax rules are not identical, it is necessary to adjust the accounting profit to add back the disallowable items to arrive at the taxable profit for corporation tax purposes.

One of the main disallowable items is depreciation, which is an accounting concept that must be added back in the corporation tax computation. The tax equivalent of depreciation is capital allowances, which provide relief for capital expenditure. Entertaining, other than staff entertaining, is also disallowed in the corporation tax computation and must be added back. A deduction is also denied for non-trade loans that are written off (such as a director’s loan), illegal payments (such as bribes), and fines for law-breaking, such as for breaching tax or health and safety legislation. However, motoring fines incurred by an employee while on company business can be deducted, but no deduction is allowed for fines received by a director, regardless of if they were received while the director was on company business. Items such as dividends (which are paid from post-tax profits) and the corporation tax paid by the company are not deducted in calculating taxable profits.

Pre-commencement expenses

The company may incur some expenses before it is active for corporation tax purposes in preparing to trade. This may include the buying of initial stock, advertising, hiring staff, preparing the premises, setting up a website, and suchlike. Where expenses are incurred in the seven years prior to the start of trading, relief is given for expenses to the extent that relief would be available if the expenses were incurred while the company was trading, i.e. to the extent that the expenses are revenue in nature and incurred wholly and exclusively for the purposes of the business. The expenses are treated as if they were incurred on the first day of trading, and relief is given in calculating the profits of the first accounting period.

What is Making Tax Digital (MTD)l?

MTD will affect every individual who is a taxpayer and every business in the UK. It will change the way that businesses keep their accounting records and report their income to HMRC, and the services that they need from their accountant or tax agent. The new regime will also offer the opportunity for self-employed taxpayers to pay their tax through optional “pay as you go” instalments, based on the data filed with HMRC under MTD.

Taxpayers will have to to adopt digital record keeping and make submissions to HMRC on a regular basis. HMRC’s ambition is to become one of the most digitally advanced tax administration in the world. MTD is a key part of this plan.

To be MTD compliant you must do two things; complete bookkeeping digitally and submit information to HMRC using appropriate software. We offer training in QuickBooks Online. You decide how much or how little you want to do; we do the rest.

VAT – Private tuition exemption -Once your turnover exceeds the VAT threshold (£85,000 pa from 1 April 2019) you will have to register for VAT and charge VAT on all your invoices. As your customers will not usually be VAT registered this effectively increases you charges to them by 20%.

There is a very important VAT break known as the “Private tuition exemption”. To qualify two conditions must be satisfied to exempt the supply:

The supply must be of a subject ordinarily taught in a school or university. If there is any doubt get evidence.

The service must be provided by an individual or partnership, independently of an employer. Limited companies will not qualify as the individuals working for the business are not independent of an employer.https://www.gov.uk/guidance/vat-on-education-and-vocational-training-notice-70130
Building and construction reverse

charge – From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:

• for individuals or businesses who are registered for VAT in the UK

• reported within the Construction Industry Scheme
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse
https://www.youtube.com/watch?v=-FcmZlFcu6w

These new rules will apply to you if:

• You are VAT registered builder.

• You subcontract work out to other builders. For example, where a subcontractor invoices you and you (as the main contractor) then invoice the client.

• You invoice other builders for your services.

These new rules are being introduced to reduce fraud

The change is for VAT registered builder to VAT register builder transactions.
If you are the builder supplying the end customer, the builders sub-contracting to you will invoice you without charging VAT. You then invoice the end customer and charge VAT. The net effect is the same. For example, your subcontractor completes £1,000 of work for your and you add £1,000 of your work and invoice the customer.

The change is for VAT registered builder to VAT register builder transactions.

If you are the builder supplying the end customer, the builders sub-contracting to you will invoice you without charging VAT. You then invoice the end customer and charge VAT.

The net effect is the same. For example, your subcontractor completes £1,000 of work for you and you add £1,000 of your work and invoice the customer.

Pre 1 October 2020 procedure.

On your VAT Return:

Box 1 VAT on sales                                               £400

Box 4 VAT on purchases                                     £200

Box 5 VAT to be paid                                           £200

Box 6 net sales                                                  £2,000

Box 7 net purchases                                         £1,000

Your net receipt                                                 £1,000

From 1 March 2021 the new procedure is:

Subcontractor invoices you £1,000

You invoice your customer £2,000 plus £400 VAT

On your VAT Return:

Box 1 VAT on sales                                                 £400

Box 4 VAT on purchases                                          £nil

Box 5 VAT to be paid                                              £400

Box 6 net sales                                                     £2,000

Box 7 net purchases                                            £1,000

Your net receipt                                                    £1,000

This type of procedure is referred to by HMRC as “reverse charge”.

Where you are the builder supplying another VAT registered builder you do so without charging VAT.

 

Transactions caught by the new rules.

 

Services and goods supplied to construction customers.

Supplies chargeable at 5% or 20%.

 

Transactions not caught by the new rules.

 

Supplies to non-construction customers.

Supplies to non-VAT registered customers.

Supplies of staff or workers.

Exempt and Zero-rated sales.

Businesses that are connected, e.g. a landlord and his tenant, two companies in the same group.

 

Other responsibilities – Subcontractor to main contractor.

 

You must ensure that the main contractor you are invoicing has a valid VAT number and is registered for the CIS (Construction Industry Scheme).

For further information see Section 9 of HMRC VAT Notice 735: Domestic reverse charge procedure 

On your invoice you must include the wording “Customer to pay VAT under reverse charge procedure” and show whether the rate the main contractor must recharge is 5% or 20%.

 

Other responsibilities – Main contractor (who invoices end user customer).

 

You must make your VAT registered subcontractors aware the you are an “intermediary supplier” and that they should not charge you VAT under these new reverse charge rules. If you pay VAT incorrectly to your subcontractor HMRC may pursue you for the VAT.

You must identify the status of your end user customers. We recommend you ask your end user customers to sign a statement for each contract or include this in your terms of business. Contact Tax Data Ltd for the wording.

 

What else do you need to look at.

 

Consider if you can continue or if it is still tax efficient to use The Flat Rate Scheme and Cash accountancy, if you currently use these.

Are you/your staff up to identifying relevant contracts and end users affected by this?

Can your current bookkeeping system cope with the new invoicing and reporting requirements?

For subcontractors are the start of the supply chain you will still be claiming VAT on your expenses but not charging VAT on sales to main contractors. This may put you in a VAT repayment position. For cashflow purposes it may be beneficial to switch to monthly Returns.  

Place of supply: goods

The place of supply of goods (POS) will decide the VAT treatment. Are they:

• UK based supplies

• Imports

• Exports

• EU dispatches, or

• EU acquisitions.

Generally, goods leaving the UK will have a UK place of supply, goods arriving in the UK will not have a UK place of supply. Exports leaving the EU, are zero rated. Imports, goods arriving from outside the EU become VATable for the purchaser.

EU supplies to other EC member states are Zero rated for customers with an EU VAT registration number or VAT is charged at the normal rate for customers with no EU VAT registration.

EU acquisitions from EC states are Zero rated by the supplier if you provide them with your VAT number. You then account for VAT on the acquisition using box 2 on your VAT return. If you are not VAT registered, VAT is charged at the supplier’s local VAT rate.

Accounts

Cash basis

The business results are based on cash receipts less business payments.

You do not have to include stock, work in progress or bad debts.

Adjustment are required where you change from one basis to the other.

There are some restrictions on what expenses can be claimed.

There are special rules for claiming capital expenses.

These maximums are the total of your combined business’ receipts calculated on a cash basis.

Losses cannot be carried backwards or sideways.
Loan interest paid for any reason can be claimed, up to £500 pa.

If your accounts are simple and you have a personal mortgage or other non-business loan it may be worth opting for cash basis to claim the loan interest deduction which will not otherwise be due.

Accruals basis

This is the basis most accountants will use to prepare your business accounts.

The business results are based on invoice dates less bill dates.

Adjustments are required for stock, work in progress or bad debts.
Adjustment are required where you change from one basis to the other.

Losses can be carried forwards, backwards or sideways.

Loan interest paid must relate wholly or partly for business purposes. You can claim that proportion relating to the business.

Expenses you can claim Entertaining And Gifts To Employees\Directors

The following seasonal gifts as “trivial” benefits and HMRC do not seek to tax them as employment income or benefits:

• A turkey (but not a hamper).

• A box of chocolates.

• A bottle of ordinary wine or two (not a case)
From 6 April 2016 there is a statutory exemption for trivial benefits with a cost not exceeding £50.

• Trivial benefits – HMRC

• Employment Income Manual – HMRC

Entertaining whether staff or customers is not usually allowable for tax purposes. By concession however you are allowed £150 per person (£300 for an employee and their partner) per annum for staff events.

If you provide your employees with gifts at an annual party, the cost of the gifts could be added to the cost of the function by HMRC. Make sure you give out the gifts separately from event, as the cost of the gifts could take you over the £150 per head limit. Treat trivial gifts as “staff welfare” in the accounts, the expense is fully tax deductible.

VAT.

Input VAT is reclaimable by the employer on the cost of trivial benefits made to staff. If input VAT is reclaimed by a one-man owner-manager or for the cost of an event open only to the directors (so other staff are excluded), HMRC will disallow a VAT recovery on the grounds that the motive behind incurring the cost was a personal one. It is difficult to try and disprove that this is not actually the case.

Entertaining

The cost of entertaining yourself, clients, customers or third parties for business purposes is specifically disallowed.

Gifts over £50 to staff

These are taxable as an employee’s earnings. If you wish to avoid the employee having an additional tax/NI liability the employer can pay this using a “settlement agreement”.

Gifts to customers and suppliers

The tax treatment depends on nature of the gift. If entertaining, then they are not tax-deductible. A gift of a product sample is generally treated as product promotion/advertising. A gift of alcoholic drink or tobacco is not usually tax-deductible. You can claim for gifts which carry advertising ie mugs, diaries, keyrings, are generally allowable as advertising. Input VAT can also be reclaimed on the cost of business gifts, but output VAT is accounted for where the gifts are not trivial

Free food and drink

Input tax is recoverable on entertaining overseas customers and your own staff but not on entertaining customers in the UK.

Staff meetings and training

Where you have staff training sessions during a lunch break and you provide food etc. it is difficult for HMRC to say there is social aspect. The “wholly exclusively and necessarily” condition is therefore met and the expenses is allowable.

Motor Expenses

There are two ways of claiming for motor expenses if you are below the VAT threshold, one based on business mileage and the second on actual expenses. Mileage is usually more tax efficient and is much simpler to track. If you wish to compare the claims details on how to calculate the deduction using both methods are below. In addition, you can also claim for business parking, congestion charges, tolls and the interest on loans used to purchase the vehicle. Motoring fines for parking, speeding etc are not allowable.

Interest on car loans

To calculate the deduction you apply the business percentage by the interest paid. We recommend preparing a full reconciliation and for this you will need:

• The date the loan was taken out.

• The amount borrowed

• The charges for arranging the loan.

• The payment schedule (ie first payment £250 then 34 monthly payments of £200 with a final payment of £150).

• The business use percentage.

Most of this information will be on the loan agreement documentation.

Mileage

You can claim 45p for the first 10,000 business miles and 25p thereafter together with an extra 5p per mile for each extra business passenger per trip. The detailed instructions on this can be found here.

You must keep a detailed log of business mileage for each business trip in support of the claim. A spreadsheet for this can be downloaded by click this download – Mileage and a video explaining how it works is here.

For employees claiming mileage the employer can also reclaim the VAT on petrol and maintenance but you will have to retain receipts in support of this.

Actual costs - running expenses

To make a claim for actual costs you add up all your outgoings for:

• insurance

• fuel

• road tax

• maintenance

• service

• subscriptions.

You then apply the business percentage to the total.

Capital costs. – The claim for the actual cost of the vehicle (known as capital allowances) is now based on the list price and the level of carbon emission. You should be able to get this information from the manufacturer’s website. The Revenue’s directions on how to claim can be found here. For vans you can usually claim 100% in the first year.

Buying or leasing

For tax purposes there are two types of contract. Firstly, where the business owns or will own the car by the end of the contract or where your business rents/leases the car without ever owning it.

A tax deduction for 85% of the rental payments can be claimed. If the car has CO2 emissions of 130g/km CO2 or less, you can claim the full cost of the charges. The tax relief for leasing or buying is much the same in the long run. Consider your cash flow circumstances and choose the deal that best suits you.

Ownership

If you buy a car or sign a contract, e.g. hire purchase, which ends in ownership, you can claim capital allowances, see above. Capital allowances take the actual cost and an annual deduction usually between 8% and 18%. This is then given over a number of years. The percentage is dependent on the CO2 emissions; the lower the emissions the higher the percentage.

Vans

A business can claim 100% of the input tax on the purchase of the van and up to 100% of the cost in the year of purchase through Capital Allowances. A company can supply the van to a director or employee tax free if the private use is “insignificant”. Where there is significant private use a benefit in kind arises. If the company pays for fuel there is also a fuel benefit). The company then claims all the running expenses. The interest on a loan used finance the purchase can also be claimed. For a partner or sole trader the capital allowances, interest and running expenses are adjusted for private use.

Travel

Expenses must be incurred wholly and exclusively for the purposes of the business. You can claim for vehicle expenses, train, bus car and air fares, the cost of hotels and other overnight accommodation and the cost of meals. You cannot claim for non-business driving or travel costs, fines (such as parking fines) or for travel between home and work. Be careful of expenses which could be said to be duel purpose.

Business travel and related subsistence and accommodation expenses are usually allowable for tax purposes. Consider the type of journey, the trades and where the business is run. Where a journey is both business and private then claim the business element only. Travel from home can be claimed where you are based from home. HMRC may resist a claim if there is another operational base or bases (site, hospital, office, shop, yard, sales area etc).

For subcontractors, HMRC may insist that the operational base is the site where work is undertaken. Ensure contracts/paperwork are undertaken made from home and tools are stored there. In the case of Notion v Young (1971) 47 TC 60, a bricklayer worked on a number of sites within a certain radius of his home for a few weeks at a time. It was held that his home was the base of his operations.

Accommodation

Accommodation expenses must wholly and exclusively incurred for the purposes of the trade or profession. Where there is some private use a deduction cannot be claimed unless the business element can be clearly identified.

Subsistence (food and drink)

This can be claimed with business travel where the destination is outside the normal pattern. The claim must be reasonable and supported by receipts. HMRC will seek to disallow expenses where there is no evidence that the expense has been incurred.

In Prior v Saunders [1993] 66 TC 210, the subsistence costs of a subcontractor whose work was carried out for several years in an area of the country away from ‘his home base’ were disallowed as there was a regular work pattern.

What Can I Claim For “Use Of Home”

Where you undertake most of your company work from your home there are three methods of reclaiming expenses.

Method 1

You can either simply claim the HMRC’s approved Homeworking allowance of £6 per week. Easy to calculate and claim but you may be able to claim more using the other methods.

Method 2

You can make a claim based on actual costs. The business proportion of costs which can be included are:

Light and heat.
Home telephone calls.
Insurance, where business equipment insured under that policy.
Repairs of business equipment.
Broadband costs.
Cleaning costs of your workspace.

As an employee you cannot reclaim the costs of:
Mortgage interest
Rent.
Water rates.
Expenses that do not have receipts i.e., cash wages of a cleaner.

Detailed records and receipts are required however not all of household expenses can be claimed.

Method 3

Creating a licence agreement with your company to allow it to occupy part of your property. It then pays you rent and you then claim all your expenses under Self-Assessment Return.

You may claim a proportion of your home expenses although there is a higher rate restriction on mortgage interest. Check with your mortgage provider or landlord whether you can create this type of licence. Again, detailed records are required and you must also complete the land and property section of your tax return. Let me know if you want a draft licence agreement.

If you provide your own business equipment you may claim capital allowances on your costs.

An employer can supply an employee with one mobile phone if the phone remains the employer’s property. The contract must therefore be in the employer’s name. In these circumstance the employer can claim all of the costs while a taxable benefit in kind will not arise on the employee.
As there is a ‘use of asset’ tax benefit charge if an employer lends you an asset that is used privately, it is advised that the employer sets strict written usage restrictions. This may not be possible for items of furniture, which are likely to be used privately unless the home office is closed off from the main home.
Your company may be able to reclaim VAT on certain building works it does to your property, but as any claim will be blocked if you benefit in your personal capacity, it may be unwise to do so.

Gifts And Donations

For sole traders and partnerships charitable subscriptions or donations are not allowable as a deduction for tax purpose unless, exceptional, they are incurred wholly and exclusively for the purpose of the trade (charitable sponsorship).

Rental &Holiday Lettings

Trading And Property Allowances

To reduce Self-Assessment compliance for individuals who have a of small amounts of trading or property income two new annual tax allowances of £1,000 for “Trading” and “Property” income are available. These allowances can be claimed from 6 April 2017. If receipts are less than £1,000 no declaration is required. You will not have to register for Self-Assessment or, if you already receive a Self-Assessment Return, you can deregester. Where the source exceeds £1,000 the individual must register for Self-Assessment and can either claim expenses in the normal way or elect for £1,000 to be deducted from that income rather than claiming actual expenses. The property allowance will not apply to income on which rent-a-room relief is given or where there is a restriction on mortgage interest.

What is a Furnished Holiday Letting (FHL)?

The accommodation must be furnished, in the UK or European Economic Area (EEA) and commercially let for certain periods. From April 2012 the minimum period it is available for rental is 210 days and it must be actually let for 105 days in a tax year.

FHL profits are deemed to be investment income on which NIC’s are not payable.

For more information check the Revenue’s website here.

Property Ownership

The usual position is that the same person may be both the legal owner and the beneficial owner however the legal owner can be different from the beneficial owner – a trustee is the legal owner while a beneficiary of the trust may be the beneficial owner.

There are two forms of joint ownership:
Tenants in common. Each person owns their own share of the property and are taxed on that share for both income tax and capital gains tax. On death that share is decided by their will or under the rules of intestacy.

Joint tenants. Each person has an interest in the property. On death the property passes directly to the remaining joint tenant(s).

Unmarried owners

The general rule is that each owner’s share is in according to their ownership of the property. However, the owners don’t have to accept this. If income is shared between owners in a different split to ownership, other than for tax evasion purposes, the tax liability will be the same.

Married couples and civil partners - Joint ownership

Legal ownership. This is effectively the paper title to the property and will be shown at the Land Registry. If the legal ownership of the property is in the name of both spouses, then for income tax purposes any rental income is automatically split 50:50 irrespective of the underlying beneficial ownership percentages. On sale any capital gain is split according to the beneficial ownership ratios.

Beneficial ownership. This is the right of use of the property (i.e. the right to live in it, or to let it out and receive the rental income). The beneficial ownership split can be shown at the Land Registry (but does not have to be). The taxation of rents will normally be 50:50 unless a ‘Declaration of beneficial interests in joint property income’ election, form 17, is filed with HMRC.

Form 17. This allows a married couple to say how the rental income is to be split but any split of such income must be follow the underlying beneficial ownership split. This must be lodged with HMRC within 60 days of its completion to be valid. It must be signed by both husband and wife. Evidence of the beneficial ownership split must also be supplied. Changes must be notified immediately to HMRC.

This declaration is irrelevant where the legal ownership is in the name of one spouse only or where the co-ownership of the property is by any two or more persons who are not married.

Partnership

If a property rental business is operated through a genuine partnership, HMRC will tax each partner on the amount of income as shown in the partnership’s accounts. This means that the split of income can be changed each year if required.

On the eventual disposal of your property you will have to consider the capital gain tax (CGT) consequences. This tax will be levied on the difference between the proceeds/market value and your capital costs. It is therefore prudent to keep a contemporaneous record of these capital transactions. If you can let us have the following details, we will include a memorandum on your annual rental accounts.

1. The dates the property was purchased and cost or the date the property was inherited and the probate value.

2. The expenses of acquisition.

3. Particulars of any capital costs (new kitchen. Bathroom, etc).

4. The dates the property was your principle private residence, if applicable.

Keeping records

It will help you and save our time (and therefore reduce our charges) if you keep good bookkeeping records. The figures to be completed on the property supplement of your Return are usually:

Income – the amount of rent and any income for services provided to tenant.

Expenses

Rent paid, repairs, insurance and costs of services provided.

Loan interest and other financial costs.

Legal, management and other professional fees.

Other allowable property expenses.

Capital outgoings and recent changes

It is important that you understand the difference between repairs and capital improvements. There is now a restriction on the tax relief available for mortgage interest and the way relief is granted on “domestic items”.

Capital Gains

Keep details of the cost of the property, expenses of purchase and capital outgoings as you may need this information for CGT purposes when the property is disposed of. If we prepare your rental accounts we track this for you.

On the eventual disposal of your property you will have to consider the capital gain tax (CGT) consequences. This tax will be levied on the difference between the proceeds/market value and your capital costs. It is therefore prudent to keep a contemporaneous record of these capital transactions. If you can let us have the following details, we will include a memorandum on your annual rental accounts.

1. The dates the property was purchased and cost or the date the property was inherited and the probate value.

2. The expenses of acquisition.

3. Particulars of any capital costs (new kitchen. Bathroom, etc).

4. The dates the property was your principle private residence, if applicable.

How interest relief is given in your tax calculation.

For 2017/18 the relief is given partly by deduction, 75%, while the balance of 25% is granted by tax credit. This may cause confusion so an example is given below.

Rental accounts.

Rents receivable                                        20,000

Rates/insurance                                              500

Maintenance                                                 2,000

Interest                                                          6,000

Professional costs                                        1,000

Other expenses                                               500

Total expenses                                            10,000

Net profit                                                   £10,000

On your tax calculation the figure for “Profit from UK land and property” will be increased by 25% of the interest figure – £10,000 plus (£6,000 x 25%) £1,500 = £11,500 and this will form part of your “Total income received” on which tax is calculated. After arriving at a figure for “Income Tax charged” the 25% adjusted for above is then relieved by tax credit at the basic rate band – £1,500 x 20% = £300.

This method of calculation restricts interest relief for higher rate taxpayers.

 

Replacements Of Domestic Items Relief (RDI).

With effect from 5 April 2016 the old rules on claims for expenditure on expensive items of a long-lasting nature such as household appliances etc. used by their tenants is being replace by “Replacements of Domestic Items Relief” (RDI). All landlords of residential property can claim this (previously the property had to be furnished). The relief is given for the like-for-like replacement cost of domestic items (not the initial cost).  You can also continue to claim tax relief for the repairs and renewal of fixed items.

Domestic items are:

  • Moveable furniture (beds, free-standing wardrobes, etc.).
  • Furnishings (carpets, curtains, linen, etc.).
  • Household appliances (televisions, fridges, freezers, etc.).
  • Kitchenware (crockery, cutlery, etc.)

You cannot claim RDI for expenditure integral to the property that is not normally removed by the landlord when the property is sold but you can claim for repairs.

  • Capital items which becomes part of the house, such as fitted bathroom furniture, baths, toilets, boilers and fitted kitchen units and appliances.
  • New Integral features such as a *boiler or radiator which is part of the heating system (again we can still claim of this type of expenditure against any eventual capital gain when the property is sold, so keep full details). Landlords will continue to receive tax relief for the replacement of these items as repairs.

*There is some debate on whether a new boiler or radiator is capital or is a repair to the overall heating system.

The HMRC notes on this can be found here.

Repairs/Capital improvements

It is important to distinguish correctly between repairs, which are deductible from rental income and capital improvement which are treated as part of the base cost for capital gains tax purposes.

The broad difference is that repairs involve placing as asset into the condition that it originally was, whereas capital expenditure involves improving it in some way. Having said that, a cost normally remains revenue where any improvement merely arises because you are using modern materials broadly equivalent to the old ones. For example, replacing wooden single glazed windows with modern UPVC double glazed windows can be classed as revenue. The Revenue accept that expenditure to rectify dilapidations that occurred in a previous ownership is allowable so long as the property was in a usable state when acquired.

Capital gain

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

The Capital Gains tax-free allowance is:

£12,300

£6,150 for trusts

https://www.gov.uk/capital-gains-tax/allowancesEntrepreneurs’ Relief (ER)

Pay Capital Gains Tax in 30 days

CGT has normally been payable by 31 January after the end of the tax year in which the contracts are exchanged but for residential sales exchanged on or after 6 April 2020 any CGT due will be payable within 30 days of the completion date.

CGT arising on the disposal of assets other than homes will continue to be payable on 31 January where the seller is a UK resident individual or trustee. There are different rules for individuals who live overseas and for corporate sellers.

As well as paying the CGT due you will have to complete a new online CGT return to report the sale within 30 days. We can submit this on your behalf. This is required in addition to your self-assessment tax return which will have to be completed as normal by 31 January for the previous tax year.

If no CGT is payable on the disposal (for example because the gain is fully covered by the private residence exemption or losses or the annual CGT exemption) then you do not have to file the online CGT return.

In effect you will have to report gains from the sale of residential property twice; first on the online CGT return and then on your self-assessment tax return unless, unusually, the self-assessment return for the period is submitted first. There will be penalties for failing to complete either tax return on time so please tell us as soon as you have agreed to sell a residential property.

Here are some terms you should be aware of

• Testator- a person who has made a will or has given a legacy

• Executor/Executrix/Personal representative (PR) – a person or institution appointed by a testator to carry out the terms of their will.

• Period of administration – This starts the day after the individual dies to the date the residue of the estate is established.

• Residue of the estate – what property of yours is left over after the deduction of specific gifts, debts, legacies, tax and the expenses of administration.

• Probate/Grant of representation – the legal process whereby a will is “proved” in a court and accepted as a valid public document that is the true last testament of the deceased.

• Estate assets – These will usually be the property and investments of the deceased.

• Probate value – The value at the date of death usually established for Inheritance Tax (IHT) purposes.

• Appointment of assets – The transfer of assets from the Personal representatives to the beneficiary. The is no Capital Gain at this point, the beneficiary is deemed to take over the probate value of the asset.

• Beneficiary – person who derives advantage from the will.

• Specific legacy – a gift in a will of a certain article or property to a certain person or persons. Where this is an income producing asset the income is taxed on the beneficiary from the date of death.

• Pecuniary legacy – A gift of money in a will.

• Residuary legacy – it is the legacy that consists of all the money and property that remains after other amounts of money or property is given to others.

Entrepreneurs’ Relief (ER)

This is a Capital Gains Tax (CGT) relief which can be claimed on qualifying business disposals by individuals (not companies). It reduces the rate of CGT on the disposal of assets to 10%. There are anti avoidance rules which apply to the repayment of share capital.

ER can be claimed for disposals of

all or part of your business as a sole trader or business partner – including the business’s assets after it closed,
shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’),
shares you got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013,
assets you lent to your business or personal company.
There are anti avoidance restrictions if within two years the individual (or an associate) starts up a similar trade or activity. In these circumstances, the distribution is treated as income.

If you’re selling all or part of your business

Both the following must apply:
you’re a sole trader or business partner,
you’ve owned the business for at least one year before the date you sell it.
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.

If you’re selling shares or securities

Both the following must apply for at least one year before you sell your shares:
you’re an employee of the company,
the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group.
Either of the following must also apply for at least one year before you sell your shares:
you have at least 5% of shares and voting rights in the company,
you were given the option to buy them at least one year before you’re selling them – if they’re EMI shares.
If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.

If you’re selling assets you lent to the business.

Both the following must apply:
you’ve sold at least 5% of your part of a business partnership or your shares in a personal company,
you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed.

Separation

For tax purposes, it is the date of separation which is important. You are treated as together unless you are:

• Separated under an order of a court or competent jurisdiction

• Separated by deed of separation, or

• Separated in circumstances in which the separation is likely to be permanent.

For capital gains tax (CGT) the tax-free exemption for transfers between spouses remains for the year of separation. Nil gain/nil loss treatment will cease to apply in the year following separation. Transfers between husband and wife after the year of separation are made at market value.

A married couple can only have one exemption for their “principle private residence”. From the date of separation, they have one each and may need to make an election to show which property is their main residence.

Any maintenance payments made under the divorce settlement are free from tax in the hands of the recipient. No tax relief is available for the payor.

Stamp duty/stamp duty land tax is not normally charged on the transfer of assets between spouses or on divorce.

Self-Assessment Tax Return

Do you need to complete a return?

In certain circumstances it can be unclear whether an individual is self-employed, an employee or the transactions are of a capital nature. It is important to get this right as there are considerable differences in the tax treatment of each activity.

https://www.gov.uk/check-if-you-need-tax-return

Record keeping

These must be kept until the end of the fifth anniversary of 31 January next following the tax year. Effectively 2 months short of 6 years.

The type of records required will depend on your personal circumstances but will generally include:

  • Bank or Building Society statements
  • Details of any State Benefits received
  • Dividend vouchers
  • Forms P60 and P11D
  • Details of any acquisition and disposals of capital assets

For those in business or letting property you must keep detailed records in respect of the activities of the business and rental. This includes full bookkeeping records with supporting documentation (receipts, invoices, contracts business mileage records).

Where there is insufficient support for the HMRC can refuse to give relief for expenses and can impose penalties (up to £3,000 per year).

Deadlines And Penalties -Self-assessment

You will be charged £100 for missing the initial deadline, Further penalties will be applied if your tax return is more than 6 months late.

You will also be charged interest and penalties for late payment.

https://www.gov.uk/estimate-self-assessment-penalties

You can appeal against penalties providing you have a reasonable excuse.

Tax Rates& Thresholds

https://www.gov.uk/income-tax-rates

Higher rate taxpayers

Gift Aid – If the donation is made by an individual tax relief is available at the taxpayer’s highest rate. The individual pays the net amount to the charity and claims the higher rate relief on their tax return. The charity claims the basic rate deduction. If the individual does not have a tax liability to cover the amount claimed by the charity this will be clawed back by HMRC from the individual.

Withdrawal of Child Benefit -If you or your partner claim Child Benefit and your income is between £50,000 and £60,000 some/all of the benefit is clawed back.

Withdrawal of Personal Allowances.For every £2 you earn over £100,000 your personal Allowance is reduced by £1.If you anticipate this happening in future years you may wish to consider rearranging your tax affairs by:

  • reducing or delaying income,
  • bringing forward income (so you avoid this the following year),
  • diverting income to your wife or,
  • making some form of tax-deductible investment i.e. a personal pension contribution.

Personal Pensions

Personal Pensions can be extremely tax efficient especially if you are paying higher rate tax and approaching 55.Tax relief is usually available on contributions.Funds in your pension pot grow tax free and can be outside your estate for inheritance tax (IHT) purposes.You can contribute up to your “relevant earnings”. If you have no “relevant earnings” then up to £3,600. There are also annual and lifetime contribution limits. If these limits are exceeded there will be a tax charge. The annual limit (called the Annual Allowance) for 2022/23 is £40,000. This can be tapered down to £4,000 where your “adjusted income” is over £240,000.Employers can also contribute and again there are annual and lifetime limits. The contributions do not count as a benefit in kind for the employee and there is no NIC charge. There is now a Pension Advice Allowance. An employer can pay for up to £500 of retirement financial advice for an employee tax free.You can have a personal pension over which you have personal control. This will allow you to alter your contributions, suspend them, or stop them completely.On reaching 55 you can choose how much to withdraw (without limit) from your defined contribution (DC), or ‘money purchase’ pension savings. You have a range of options when you decide to take benefits such as purchasing an annuity or electing for capped or flexible drawdown. You do not have to buy an annuity.Up to 25% of the pension can be taken tax free. The remainder is taxed at your highest rate.The lifetime pension saving allowance for 2022/23 is £1,073,100.A good strategy is to make contributions while you are paying higher rate tax and then draw down when you retire and are perhaps only liable to basic rate tax. Pensions are long-term investments. You may get back less than you put in. They are also subject to tax and regulatory change.

We only deal with the tax aspects. If you wish to look at this in greater detail, you should contact your pension adviser.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise?source=pw

·         Pensions and tax – The Pensions Advisory Service.

·         Tax on your private pension contributions – Gov.uk

·         How to avoid a pension scam – Gov.uk

Marriage allowance

If you are married or in a civil partnership and have insufficient income to fully use your personal allowance, then you can elect to transfer 10% of your allowance to your partner if they are a basic rate taxpayer. A claim can now be made on behalf of a deceased person and back dated 4 year

https://www.gov.uk/apply-marriage-allowance

Companies

Deadlines

Penalties

Companies House

HMRC

Tax Rates

If you use a company, the profits will be liable to Corporation Tax at 19% (marginal rates will apply from 1 April 2023). Companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

https://www.gov.uk/government/publications/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023

Taking money from your company.

For shareholders and directors of limited companies the main ways of taking funds from the company are:

  • Dividends
  • Tax efficient benefits.​
  • Loans to directors.
  • Salary

Dividends.

Owners of smaller private companies are usually the shareholders and directors. They can then choose how to withdraw funds. Currently dividends are the most tax efficient method.

For 2022/23 the first £2,000 is tax-free. The rates are then:

  • 8.75% if part of the basic rate income tax band.
  • 33.75% if part of the higher rate income tax band, and
  • 39.3 % on the excess.

Tax efficient benefits.

Consider:

  • Employer pensions.
  • Employer supplied pensions advice.
  • Workplace nurseries.
  • Cycle to work schemes
  • The provision of an ultra-low emission vehicle emitting 75g CO2/km or less.
  • Meals in a staff canteen.
  • Hot drinks and water at work.
  • A mobile phone.
  • Workplace parking.
  • Christmas parties up to £150 per head.

Financial benefit awards from an employer. Where employees come up with ideas that can make the employer money. The amount that can be claimed is the greater of 50% of the financial benefit in the first year, or 10% of the financial benefit in the first five years. In both cases this is subject to an over-riding cap of £5,000.

  • In-house sports facilities.
  • Counselling for redundant staff.
  • Use of works buses.
  • Equipment and facilities for employees to help with their job.
  • A long service awards.
  • A trivial benefits exemption of up to £50 per benefit. This cannot be cash or a cash voucher. Limited to £300 for directors and connected persons.

Salary.

For directors with no other income and if there is more than one employee and the Employer’s Allowance is available then a salary equal to the Personal Allowance (£12,570 for 2022/23) will be more tax efficient.

Directors’ overdrawn current or loan accounts

If a director borrows money from their company but they must comply with the 2006 Companies Act. A shareholder approval (by ordinary resolution, subject also to the provisions in the articles) is required for loans in excess of £10,000 (£50,000 if the loan is to meet expenditure on company business). Also, the company should agree loan terms and have supporting documents.

Where there is an overdrawn director’s account there is potentially a S455 charge on the company and a taxable benefit on the director in respect interest-free loan.

S455 CTA 2010 – company tax charge

If a director (or any other participator in a close company) leaves a loan account outstanding for more than 9 months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010. This is payable at 32.5% of the outstanding loan balance and becomes due 9 months after the end of the accounting period. When the loan is repaid in full or in part s.455 tax is wholly or partly repayable 9 months after the end of the accounting period in which the repayment is made. The Revenue’s online form to reclaim

Taxable benefit on the director

If the overdraft on a director’s account with the company exceeds £10,000 it is treated as a loan. A taxable benefit will arise on the loan when the employee does not pay interest to the employer at HMRC’s official rate of interest. The cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid. The taxable benefit of interest calculated is required to be reported on form P11D. This will also be liable to Class 1A NICs

https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates

Write off an overdrawn director’s loan

When a company writes off a loan made to a director the amount is treated as a dividend and as earnings for NICs purposes. In addition, it is an unallowable expense for Corporation Tax purposes.

Consider declaring a dividend to clear the loan as this will avoid the NICs charges.

Drawings For Directors

Beware directors who continue to draw down more money than their salaries or dividends allow.

The real sting is not so immediately obvious, but it will affect those directors who continue to draw down more money from their company each month than the RTI-reported salary, expenses and available declared dividends provide for. Continuing to do this against good tax planning advice is just going to precipitate a higher tax bill when the year-end accounts are prepared.

The company will face a 32.5% surcharge to Corporation Tax for any loans made to a director in the year if the amount has not been fully repaid within nine months of the tax reporting date. The extra tax paid can be reclaimed back from the HMRC when the director’s loan has been repaid, but as it can take over a year to receive the refund, such surcharges can often be a disaster as far as business cash flow is concerned.

The need to consider the tax implications of a director’s loan often only materialises when the year-end accounts are prepared, and it is discovered there is insufficient distributable profits to cover the withdrawals made. To make matters worse, we often find the company cannot afford to pay the extra tax on an overdrawn director’s loan account, nor can they afford to pass the required bonus as a salary after the event and before the expiry of the nine months’ limit to clear it. The only other remaining option available is the director to repay the overdrawn amount back to the company from private funds.

The new and worrying dimension to the director’s loan question will arise where a director has created the loan by regularly making a series of withdrawals each month from the company’s bank account for private expenditure that cannot be supported by the salary and legitimate dividends declared. The Companies Act now allows companies to vote through a loan to a director and a properly convened meeting that is duly minuted and recorded in the company’s records. That is not the same as a situation where the director just uses the company’s bank account as an extension of his own private bank.

HMRC will want to charge tax and NI on private payments.

The issue here is that the HMRC will be fully justified in viewing these private payments as distributions subject to PAYE/NI. There is nothing new in that treatment, but the profession is waiting to see how the HMRC will apply the penalties to what will be false accounting by the employer under the RTI rules if there are grounds the employer should have realised that the salary and dividends, they were presumably voting through were insufficient to cover the actual withdrawals being made.

The point we hope directors of small companies take on board is they can no longer declare monthly dividends on a wing and a prayer to cover the money they withdraw from the company each month. Every dividend declared must be covered by a signed minute approving the dividend with due regard to making sure the company has the distributable reserves to support it. If companies and directors do not take enough care over how they extract their profits from their company, then RTI may just come back and give them one hell of a headache over the next few years.

Expenses for directors

Travel

There is no relief available on the cost of home-to-work travel unless it is to a temporary workplace, or home is a workplace. Directors perform many different duties so whether a home qualifies as a workplace in relation to an individual director will depend on the facts of each case.

When a director has to travel between different sites or appointments etc the cost of travel and incidental costs (subsistence, accommodation and incidental overnight costs) will also qualify for tax relief

The cost of some triangular travel where the journey is from home via a temporary workplace may be allowable.

Car benefit

Where an employer provides a higher paid employee, or a director with a company car, a taxable benefit arises. The amount of the benefit is determined by the cost, CO2 emissions and power supply. The benefit is reduced when a vehicle is not made available for part of the tax year. Pooled cars can be provided tax-free while the charge on low emission vehicles can be very low.A further benefit arises if fuel is supplied for private use. It is unlikely to be tax efficient to supply private fuel.

Car benefit is calculated as a percentage of the manufacturer’s list price of the car plus accessories, based on the carbon dioxide (CO2) emissions of the car as follows:

  • Take the list price of the car.
  • Add the price of any accessories.

o    Deduct any capital contributions made by the employee toward the cost of the car or accessories. This is the “interim sum”.

  • Multiply the interim sum by theappropriate percentage (this is worked out according to the car’s CO2 emissions with adjustments for fuel type).
  • Reduce for periods when the car is unavailable or shared
  • Deduct payments made* by the employee for private use of the car.

Note

  • If the car is a classic car with a market value of more than £15,000 the rules are changed.
  • There are special rules for cars that have very low emissions/run on dual/alternative fuels.
  • The appropriate percentage changes each year.
  • The employer pays Class 1A NICs too, but this along with all the running costs and capital allowances, are tax deductible.

The Revenue’s company car and fuel benefit calculator can be accessed here.

https://www.gov.uk/expenses-and-benefits-electric-company-cars

Buying or leasing

For a cash purchase the company can claim capital allowances based on CO2 emissions. If HP is used a similar deduction is available and the finance costs can be claimed. For an operating lease the rental payments can be claimed subject to a possible restriction depending on CO2. For some qualifying cars 50% of the VAT can be claimed.

Closing a trading company

On closing a trading company, the net asset will be released back to the shareholders. This can be done through an informal striking off or a full liquidation. The Revenue’s notes on this can be found here.https://www.gov.uk/topic/company-registration-filing/closing-company
Striking off is very simple and requires the submission of a form (DS01) to Companies House with £10.https://www.gov.uk/government/publications/strike-off-a-company-from-the-register-ds01

Capital distributions on winding up.

From 6 April 2016 there are restrictions on treating the final distribution as capital.

• The shareholder must have held at least a 5% interest in the company before the winding up.

• The company has to be a close company.

• In the following two years, the shareholder must not be involved, directly or indirectly, in a similar trade or activity.

• The distribution must not be part of arrangement to avoid tax.

• Where the capital distributed following the striking off exceeds £25,000 it is all treated as income.

•While a formal liquidation is more expensive, all of the distributions are deemed to be capital and potentially qualifies for ER.

Non-trade income.

A company’s trading status is considered by looking at all its activities and circumstances.

Investment businesses, such as property rental businesses are often unlikely to meet HMRC’s conditions. A company or business is not regarded as trading if it has substantial non-trading activities. HMRC will look at income from non-trading activities, asset held and how they are used, expenses incurred by employees and the company’s history.
Where investment or non-trading activities are more than about 20% of all activities then a company is “not wholly” trading. Ex-trading premises and rental income may also cause problems.

Cash Surplus on balance sheet and effect on trading status

Where a company has built up a large cash surplus HMRC believe this to be a non-trading asset. It is necessary to demonstrate that this is required for working capital. Even if the cash is held passively within a bank account HMRC consider this to be a non-trading activity and will seek to deny ER.

Trading company – definition

This is a company carrying on trading activities which does not include ‘to a substantial extent activities other than trading activities.’
Non-trading activities may include investment in property, share portfolios, bonds etc.
Excess cash deposits may point to a non-trading activity. Where cash is being accumulated for future use in the trade then the company will be classed as trading.
HMRC use the phrase ‘substantial extent’ by which they mean more than 20%. They apply the 20% test to:
Turnover – does investment income exceed 20% of total turnover?
Balance sheet – are more than 20% of the assets of the company held as investments?
Expenses – do more than 20% of the expenses relate to non-trading expenses?
Directors’ time – do the directors spent more than 20% of the time managing non trading activities.
Cash held on deposit may not involve much ‘activity’ in managing it and this can also indicate trading.
Where the cash surplus arises from the sale of a trade or business assets prior to liquidation then ER can still be claimed but the distributions must be made within 3 years of the sale of the assets. .

Company losses.

If your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income, then you may be able to claim relief from Corporation Tax.

You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back, if you do not it will be carried forward to another accounting period.

https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss

Share structure 

Share capital is the total nominal value of the shares in the company, such that a company with 100 ordinary £1 shares will have a nominal share capital of £100. This is not the same as what the shares are worth, which will depend on the value of the company. The company can issue different types of shares. Normally, a small company will issue ordinary shares and may choose to have different classes of ordinary shares (such as A ordinary shares, B ordinary shares, etc.). This structure, known as an alphabet share structure, is a popular structure, as it allows for different dividends to be declared in respect of different classes of shares, which can be very useful from a tax planning perspective. The company can also choose to give different rights to different classes of shares too. For example, the parents may have full voting rights, whereas children may be given shares with an entitlement to dividends only. However, where shares have restricted rights, this may compromise the availability of business asset disposal relief if the company is sold.

Practical tip Consider what share structure will work best for your family company, what rights you want individual family members to have and what flexibilities you wish to retain. Setting up an alphabet share structure at the outset preserves flexibility. However, when assigning rights and shareholdings, be mindful of the qualifying conditions for business asset disposal relief. The company could also issue preference shares, which have a fixed right to dividends and no voting rights, although these are less common in a simple family company. As well as deciding on the type of shares, the family needs to decide how many shares to issue and to whom. The authorised share capital places a limit on the number of shares that can be issued. The company does not need to issue all the shares that can potentially be issued – the shares that are issued form the issued share capital. The company can decide how many shares to issue, as long as this is within the authorised share capital. In a simple family company where there are only two shareholders, such as a husband and wife or civil partners, the company could simply issue one share each. This approach could be adopted whether they simply have one class of ordinary share or adopt an alphabet share structure. Alternatively, the company could issue 100 shares of each class, as this provides for an element of flexibility in holdings of a particular type of share, and this approach is often adopted by small companies. It should be noted that the shareholders must pay for their shares and, in doing so, introduce capital into the company. The amount of capital that the family wish to introduce will have a bearing on the number, class, and nominal value of the shares that are issued

Selling assets to the new company 

Assets are items or property of an enduring nature that are not consumed within a year and usually cost over £100. They include computer equipment, furniture, tools, vehicles, etc.   

Sell personal assets to the new company at market value. At the outset, the company will probably not have the funds available to pay the sole trader for the assets. However, assuming that the sole trader becomes a director of the company, this can be overcome by creating a debt from the company to the sole trader (in the form of a balance on the director’s account), which can be cleared when the company has the funds to do so. For capital gains tax purposes, the assets will be treated as being disposed of by the sole trader at market value, and this may give rise to a capital gains tax liability. Where the assets are transferred to the new company in exchange for shares, incorporation relief may be available.

Super-deduction   

For expenditure incurred in a limited window, companies are able to benefit from a super-deduction. The super-deduction is available for new qualifying plant and machinery that would otherwise benefit from a writing down allowance at the main rate of 18%. However, cars do not qualify for the superdeduction. Further, the super-deduction is only available for investment in new assets; investment in second-hand assets does not qualify. The super-deduction is given as a first-year allowance at the rate of 130%. This means that where the super-deduction is claimed, the company is able to deduct a first-year capital allowance of £130 for every £100 of qualifying expenditure in calculating the taxable profits for the accounting period in which the expenditure was incurred. This will save corporation tax of £24.70 for every £100 invested in new qualifying assets (19% x £100 x 130%). To qualify for the super-deduction, the company must incur the expenditure on qualifying new plant and machinery between 1 April 2021 and 31 March 2023. A balancing charge may arise on the disposal of an asset that has benefited from the super-deduction. The calculation of the balancing charge will depend on when the disposal takes place.

Payroll

Penalties

What you pay depends on how many employees you have.

Number of employees

Monthly penalty

1 to 9

£100

10 to 49

£200

50 to 249

£300

250 or more

£400

The Contract Employment Status Tool (CEST).

HMRC have now produced a “Contract employment status tool” which gives their view on whether an engagement falls within IR35.

HMRC have stated that they will stand by the result you get from this tool provided:

• the information you have given is accurate and,
• the results are not achieved through contrived arrangements, designed to get a particular outcome from the service.
If the information is checked and found to be inaccurate or contrived, they will be treated as deliberate non-compliance, and may attract penalties.

The Employment Status Indicator (ESI).

This is another step in the right direction taken by the HMRC to help taxpayers. According to the HMRC web site, completing the ESI tool will provide an indication of your employment status. Click here to try out the ESI tool.

The answer can be relied upon as evidence to support your position, provided your answers to the ESI questions accurately reflect the terms and conditions (not just the written contract) under which you provide your service and the ESI has been completed by your engager. If you just complete the ESI tool the result is only indicative.

https://www.gov.uk/guidance/check-employment-status-for-tax

Benefit in Kind

The provision of benefits-in-kind can form part of a tax-efficient profit extraction strategy. Providing benefits to employees who are not family members can be useful to generate goodwill, and where an exemption is available can be particularly tax efficient. However, the provision of benefits-in-kind imposes a number of compliance obligations on the family company. Where the benefit is taxable, unless the benefit is living accommodation or an employment-related loan, the employer can opt to deal with the tax on the benefit through the payroll (‘payrolling’). However, this is only an option if the employer signs up to payroll the benefit before the start of the tax year, as HMRC does not accept requests to payroll in the year. Once a benefit has been registered for payrolling, it remains registered unless cancelled by the employer. Again, this must be done before the start of the tax year for which the cancellation is to have effect. Employees must be given details of their payrolled benefits for a tax year no later than 31 May following the end of the tax year.   

If taxable benefits are provided to employees and these are not payrolled (or included within a PAYE Settlement Agreement), the employer must report the taxable benefits provided to each employee to HMRC on form P11D by 6 July following the end of the tax year for which the benefits were provided (so, by 6 July 2022 for taxable benefits provided in the 2021/22 tax year). The employee must be given details of the benefits returned on their P11D or a copy of their P11D by the same date. A Class 1A National Insurance liability arises in respect of most taxable benefits provided to employees, which are not dealt with by means of a PAYE Settlement Agreement. The Class 1A liability is an employer-only liability payable at the Class 1A rate of 13.8%. Employers who have provided taxable benefits to employees must file a P11D(b) by 6 July after the end of the tax year. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A National Insurance return. A P11D(b) is required even if there are no P11Ds to submit because all taxable benefits have been payrolled.  

The general rule is that benefits are valued based on the cost to the employer. There are also specific rules for certain types of expenses.

https://www.gov.uk/guidance/payrolling-tax-employees-benefits-and-expenses-through-your-payroll

Cars –The benefit  on company cars is dependent CO2 emissions and the list price. Where private fuel is paid for there is a fuel benefit. If the employee’s own car is used for employment purposes (not commuting) then they can be reimbursed at the Revenue’s suggested rates.

Where the reimbursement is greater than these rates a benefit will arise. If less then the employee can claim the difference as an expense.

https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances

Trivial Benefits – Where benefits meet the definition of ‘trivial’ they can be excluded from the P11D, however, there is an annual cap of £300 on this exemption for directors their family and their household.

To be trivial the benefit must cost less than £50 to provide, it cannot be cash or a cash voucher, this does not include store gift cards.

https://www.gov.uk/expenses-and-benefits-trivial-benefits

Staff Parties– There is an exemption for staff events that do not exceed a total of £150 per year.

https://www.gov.uk/expenses-benefits-social-functions-parties

Construction Industry Scheme (CIS)            

Under CIS contractors deduct money from a subcontractor’s pay and pass it to HMRC. A contractor must complete a monthly CIS certificates (even when it is a nil return). Failure to submit the certificate by the monthly deadline can result in a £100 fine.              

Contractor –A contractor is a business or other concern that pays subcontractors for construction work. 

Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’.     

Some businesses or other concerns are counted as contractors if their average annual expenditure on construction operations over a period of 3 years is £1 million or more.  

Private householders aren’t counted as contractors so aren’t covered by the scheme.             

When you’re about to take on and pay your first subcontractor, regardless of whether that subcontractor is likely to be paid gross or under deduction.

Subcontractor – A subcontractor is a business that carries out construction work for a contractor.           

Subcontractors can apply to be paid gross – with no tax deductions taken from their payments. To do this, subcontractors will need to show us that they meet certain qualifying conditions.        

A subcontractor must complete a tax return including the CIS which has been deducted from them that tax year to reclaim it.  

VAT

If your VATable turnover is more than £85,000 in a 12 month rolling period you will need to register for VAT https://www.gov.uk/vat-registration Most landlords letting domestic property are exempt.

If the existing business is VAT-registered, the VAT registration can be transferred to the new company so that the existing VAT number is retained. This can be done online via the trader’s VAT online account or by post on form VAT68. HMRC will normally transfer the VAT number within three weeks. The threshold for VAT registration is £85,000. Where all or most of your customers are VAT registered consider voluntary registration as your customers can reclaim the VAT you charge and you can reclaim the VAT on your expenses.

If you are not already using bookkeeping software now is a good time to update your bookkeeping system. We can train you up on QBO or VT or do the bookkeeping here for you.

Consider using “cash basis”. Also, have a look at the Flat Rate Scheme which may allow you to save some money on charging VAT.

Deadlines

Penalties

Defaults within 12 months

Surcharge if annual turnover is less than £150,000

Surcharge if annual turnover is £150,000 or more

2nd

No surcharge

2% (no surcharge if this is less than £400)

3rd

2% (no surcharge if this is less than £400)

5% (no surcharge if this is less than £400)

4th

5% (no surcharge if this is less than £400)

10% or £30 (whichever is more)

5th

10% or £30 (whichever is more)

15% or £30 (whichever is more)

6 or more

15% or £30 (whichever is more)

15% or £30 (whichever is more)

Deductible expenditure   

As a general rule, a company can deduct expenses that are incurred wholly and exclusively for the purposes of the business and which are revenue in nature, in arriving at its taxable profits. However, there are some items for which a deduction is expressly prohibited for corporation tax purposes, and the accounting profit may need to be adjusted to take account of disallowable items.      

Examples of expenditure include the costs of sales which are deducted to arrive at a gross profit. This will include stock movements, purchases, packaging, and distribution. Expenses are deducted from gross profits to arrive at net profit. Examples of allowable expenditure include:      

  • wages and salary costs;   
  • employer’s National Insurance;   
  • advertising;   
  • accountancy costs;   
  • office administration costs;   
  • travelling expenses;   
  • rent;   
  • business rates;   
  • insurance;   
  • benefits provided to employees;   
  • staff entertaining;   
  • interest and finance costs;   
  • repairs;   
  • legal fees;   
  • postage;   
  • printing;   
  • stationery; and   
  • utilities.   

The above list is not exhaustive, and the deductible expenses will vary depending on the nature of the business. However, the key tests are whether the expense is revenue in nature and whether the expense is incurred wholly and exclusively for the purposes of the business.  

Disallowable expenditure   

Some categories of expenditure are specifically disallowed in calculating profits for corporation tax purposes. However, they may be deducted in working out the accounting profit. As accounting and corporation tax rules are not identical, it is necessary to adjust the accounting profit to add back the disallowable items to arrive at the taxable profit for corporation tax purposes.  

One of the main disallowable items is depreciation, which is an accounting concept that must be added back in the corporation tax computation. The tax equivalent of depreciation is capital allowances, which provide relief for capital expenditure. Entertaining, other than staff entertaining, is also disallowed in the corporation tax computation and must be added back. A deduction is also denied for non-trade loans that are written off (such as a director’s loan), illegal payments (such as bribes), and fines for law-breaking, such as for breaching tax or health and safety legislation. However, motoring fines incurred by an employee while on company business can be deducted, but no deduction is allowed for fines received by a director, regardless of if they were received while the director was on company business. Items such as dividends (which are paid from post-tax profits) and the corporation tax paid by the company are not deducted in calculating taxable profits.  

Pre-commencement expenses   

The company may incur some expenses before it is active for corporation tax purposes in preparing to trade. This may include the buying of initial stock, advertising, hiring staff, preparing the premises, setting up a website, and suchlike. Where expenses are incurred in the seven years prior to the start of trading, relief is given for expenses to the extent that relief would be available if the expenses were incurred while the company was trading, i.e. to the extent that the expenses are revenue in nature and incurred wholly and exclusively for the purposes of the business. The expenses are treated as if they were incurred on the first day of trading, and relief is given in calculating the profits of the first accounting period.   

What is Making Tax Digital (MTD)l?

MTD will affect every individual who is a taxpayer and every business in the UK. It will change the way that businesses keep their accounting records and report their income to HMRC, and the services that they need from their accountant or tax agent. The new regime will also offer the opportunity for self-employed taxpayers to pay their tax through optional “pay as you go” instalments, based on the data filed with HMRC under MTD.           

Taxpayers will have to to adopt digital record keeping and make submissions to HMRC on a regular basis. HMRC’s ambition is to become one of the most digitally advanced tax administration in the world. MTD is a key part of this plan.        

To be MTD compliant you must do two things; complete bookkeeping digitally and submit information to HMRC using appropriate software. We offer training in QuickBooks Online. You decide how much or how little you want to do; we do the rest.

VAT – Private tuition exemption –Once your turnover exceeds the VAT threshold (£85,000 pa from 1 April 2019) you will have to register for VAT and charge VAT on all your invoices. As your customers will not usually be VAT registered this effectively increases you charges to them by  20%.

There is a very important VAT break known as the “Private tuition exemption”. To qualify two conditions must be satisfied to exempt the supply:

The supply must be of a subject ordinarily taught in a school or university. If there is any doubt get evidence.

The service must be provided by an individual or partnership, independently of an employer. Limited companies will not qualify as the individuals working for the business are not independent of an employer.https://www.gov.uk/guidance/vat-on-education-and-vocational-training-notice-70130

Building and construction reverse charge From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.

The charge applies to standard and reduced-rate VAT services:

  • for individuals or businesses who are registered for VAT in the UK
  • reported within the Construction Industry Scheme

https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse

https://www.youtube.com/watch?v=-FcmZlFcu6w

These new rules will apply to you if:

  • You are VAT registered builder.
  • You subcontract work out to other builders. For example, where a subcontractor invoices you and you (as the main contractor) then invoice the client.
  • You invoice other builders for your services.

These new rules are being introduced to reduce fraud

The change is for VAT registered builder to VAT register builder transactions.

If you are the builder supplying the end customer, the builders sub-contracting to you will invoice you without charging VAT. You then invoice the end customer and charge VAT. The net effect is the same. For example, your subcontractor completes £1,000 of work for your and you add £1,000 of your work and invoice the customer.

The change is for VAT registered builder to VAT register builder transactions.

If you are the builder supplying the end customer, the builders sub-contracting to you will invoice you without charging VAT. You then invoice the end customer and charge VAT. The net effect is the same. For example, your subcontractor completes £1,000 of work for you and you add £1,000 of your work and invoice the customer.

Pre 1 October 2020 procedure.

Subcontractor invoices you £1,000 plus £200 VAT

You invoice your customer £2,000 plus £400 VAT

On your VAT Return:

Box 1 VAT on sales                                               £400

Box 4 VAT on purchases                                     £200

Box 5 VAT to be paid                                          £200

Box 6 net sales                                                 £2,000

Box 7 net purchases                                        £1,000

Your net receipt                                               £1,000

From 1 March 2021 the new procedure is:

Subcontractor invoices you £1,000

You invoice your customer £2,000 plus £400 VAT

On your VAT Return:

Box 1 VAT on sales                                                 £400

Box 4 VAT on purchases                                         £nil

Box 5 VAT to be paid                                             £400

Box 6 net sales                                                     £2,000

Box 7 net purchases                                             £1,000

Your net receipt                                                   £1,000

This type of procedure is referred to by HMRC as “reverse charge”.

Where you are the builder supplying another VAT registered builder you do so without charging VAT.

Transactions caught by the new rules.

Services and goods supplied to construction customers.

Supplies chargeable at 5% or 20%.

Transactions not caught by the new rules.

Supplies to non-construction customers.

Supplies to non-VAT registered customers.

Supplies of staff or workers.

Exempt and Zero-rated sales.

Businesses that are connected, e.g. a landlord and his tenant, two companies in the same group.

Other responsibilities – Subcontractor to main contractor.

You must ensure that the main contractor you are invoicing has a valid VAT number and is registered for the CIS (Construction Industry Scheme).

For further information see Section 9 of HMRC VAT Notice 735: Domestic reverse charge procedure 

On your invoice you must include the wording “Customer to pay VAT under reverse charge procedure” and show whether the rate the main contractor must recharge is 5% or 20%.

Other responsibilities – Main contractor (who invoices end user customer).

You must make your VAT registered subcontractors aware the you are an “intermediary supplier” and that they should not charge you VAT under these new reverse charge rules. If you pay VAT incorrectly to your subcontractor HMRC may pursue you for the VAT.

You must identify the status of your end user customers. We recommend you ask your end user customers to sign a statement for each contract or include this in your terms of business. Contact Tax Data Ltd for the wording.

What else do you need to look at.

Consider if you can continue or if it is still tax efficient to use The Flat Rate Scheme and Cash accountancy, if you currently use these.

Are you/your staff up to identifying relevant contracts and end users affected by this?

Can your current bookkeeping system cope with the new invoicing and reporting requirements?

For subcontractors are the start of the supply chain you will still be claiming VAT on your expenses but not charging VAT on sales to main contractors. This may put you in a VAT repayment position. For cashflow purposes it may be beneficial to switch to monthly Returns.  

 Place of supply: goods

The place of supply of goods (POS) will decide the VAT treatment. Are they:

  • UK based supplies
  • Imports
  • Exports
  • EU dispatches, or
  • EU acquisitions.

Generally, goods leaving the UK will have a UK place of supply, goods arriving in the UK will not have a UK place of supply. Exports leaving the EU, are zero rated. Imports, goods arriving from outside the EU become VATable for the purchaser.

EU supplies to other EC member states are Zero rated for customers with an EU VAT registration number or VAT is charged at the normal rate for customers with no EU VAT registration.

EU acquisitions from EC states are Zero rated by the supplier if you provide them with your VAT number. You then account for VAT on the acquisition using box 2 on your VAT return. If you are not VAT registered, VAT is charged at the supplier’s local VAT rate.

Accounts

Cash basis

The business results are based on cash receipts less business payments.                    

You do not have to include stock, work in progress or bad debts.            

Adjustment are required where you change from one basis to the other.            

There are some restrictions on what expenses can be claimed.              

There are special rules for claiming capital expenses.             

These maximums are the total of your combined business’ receipts calculated on a cash basis.                    

Losses cannot be carried backwards or sideways.            

Loan interest paid for any reason can be claimed, up to £500 pa.            

If your accounts are simple and you have a personal mortgage or other non-business loan it may be worth opting for cash basis to claim the loan interest deduction which will not otherwise be due.                               

Accruals basis.       

This is the basis most accountants will use to prepare your business accounts.                       

The business results are based on invoice dates less bill dates.             

Adjustments are required for stock, work in progress or bad debts.                    

Adjustment are required where you change from one basis to the other.            

Losses can be carried forwards, backwards or sideways.             

Loan interest paid must relate wholly or partly for business purposes. You can claim that proportion relating to the business.

Expenses you can claim

Entertaining And Gifts To Employees\Directors  

The following seasonal gifts as “trivial” benefits and HMRC do not seek to tax them as employment income or benefits:         

  • A turkey (but not a hamper).
  • A box of chocolates.
  • A bottle of ordinary wine or two (not a case)

From 6 April 2016 there is a statutory exemption for trivial benefits with a cost not exceeding £50.    

  • Trivial benefits – HMRC
  • Employment Income Manual – HMRC

Entertaining whether staff or customers is not usually allowable for tax purposes. By concession however you are allowed £150 per person (£300 for an employee and their partner) per annum for staff events.      

If you provide your employees with gifts at an annual party, the cost of the gifts could be added to the cost of the function by HMRC. Make sure you give out the gifts separately from event, as the cost of the gifts could take you over the £150 per head limit. Treat trivial gifts as “staff welfare” in the accounts, the expense is fully tax deductible.           

VAT.            

Input VAT is reclaimable by the employer on the cost of trivial benefits made to staff. If input VAT is reclaimed by a one-man owner-manager or for the cost of an event open only to the directors (so other staff are excluded), HMRC will disallow a VAT recovery on the grounds that the motive behind incurring the cost was a personal one. It is difficult to try and disprove that this is not actually the case.  

Entertaining.     

The cost of entertaining yourself, clients, customers or third parties for business purposes is specifically disallowed.  

Gifts over £50 to staff.    

These are taxable as an employee’s earnings. If you wish to avoid the employee having an additional tax/NI liability the employer can pay this using a “settlement agreement”.     

Gifts to customers and suppliers.      

The tax treatment depends on nature of the gift. If entertaining, then they are not tax-deductible. A gift of a product sample is generally treated as product promotion/advertising. A gift of alcoholic drink or tobacco is not usually tax-deductible. You can claim for gifts which carry advertising ie mugs, diaries, keyrings, are generally allowable as advertising. Input VAT can also be reclaimed on the cost of business gifts, but output VAT is accounted for where the gifts are not trivial   

Free food and drink.   

Input tax is recoverable on entertaining overseas customers and your own staff but not on entertaining customers in the UK.

Staff meetings and training.   

Where you have staff training sessions during a lunch break and you provide food etc. it is difficult for HMRC to say there is social aspect.  The “wholly exclusively and necessarily” condition is therefore met and the expenses is allowable.  

Motor Expenses.  

There are two ways of claiming for motor expenses if you are below the VAT threshold, one based on business mileage and the second on actual expenses. Mileage is usually more tax efficient and is much simpler to track. If you wish to compare the claims details on how to calculate the deduction using both methods are below. In addition, you can also claim for business parking, congestion charges, tolls and the interest on loans used to purchase the vehicle. Motoring fines for parking, speeding etc are not allowable.    

Interest on car loans.   

To calculate the deduction you apply the business percentage by the interest paid. We recommend preparing a full reconciliation and for this you will need:          

  • The date the loan was taken out.
  • The amount borrowed
  • The charges for arranging the loan.
  • The payment schedule (ie first payment £250 then 34 monthly payments of £200 with a final payment of £150).
  • The business use percentage.

Most of this information will be on the loan agreement documentation.

Mileage.       

You can claim 45p for the first 10,000 business miles and 25p thereafter together with an extra 5p per mile for each extra business passenger per trip. The detailed instructions on this can be found here.   

You must keep a detailed log of business mileage for each business trip in support of the claim. A spreadsheet for this can be downloaded by click this download – Mileage and a video explaining how it works is here.    

For employees  claiming mileage the employer  can also reclaim the VAT on petrol and maintenance but you will have to retain receipts in support of this.        

Actual costs –  running expenses.        

To make a claim for actual costs you add up all your outgoings for:       

  • insurance
  • fuel
  • road tax
  • maintenance
  • service
  • subscriptions.

You then apply the business percentage to the total. 

Capital costs. – The claim for the actual cost of the vehicle (known as capital allowances) is now based on the list price and  the level of carbon emission.  You should be able to get this information from the manufacturer’s website. The Revenue’s directions on how to claim can be found here. For vans you can usually claim 100% in the first year.      

Buying or leasing.

For tax purposes there are two types of contract. Firstly, where the business owns or will own the car by the end of the contract or where your business rents/leases the car without ever owning it.     

A tax deduction for 85% of the rental payments can be claimed. If the car has CO2 emissions of 130g/km CO2 or less, you can claim the full cost of the charges. The tax relief for leasing or buying is much the same in the long run. Consider your cash flow circumstances and choose the deal that best suits you.           

Ownership.   

If you buy a car or sign a contract, e.g. hire purchase, which ends in ownership, you can claim capital allowances, see above. Capital allowances take the actual cost and an annual deduction usually between 8% and 18%. This is then given over a number of years. The percentage is dependent on the CO2 emissions; the lower the emissions the higher the percentage.       

Vans 

A business can claim 100% of the input tax on the purchase of the van and up to 100% of the cost in the year of purchase through Capital Allowances. A company can supply the van to a director or employee tax free if the private use is “insignificant”. Where there is significant private use a benefit in kind arises. If the company pays for fuel there is also a fuel benefit). The company then claims all the running expenses. The interest on a loan used finance the purchase can also be claimed. For a partner or sole trader the capital allowances, interest and running expenses are adjusted for private use. 

Travel

Expenses must be incurred wholly and exclusively for the purposes of the business. You can claim for vehicle expenses, train, bus car and air fares, the cost of hotels and other overnight accommodation and the cost of meals. You cannot claim for non-business driving or travel costs, fines (such as parking fines) or for travel between home and work. Be careful of expenses which could be said to be duel purpose.        

Business travel and related subsistence  and accommodation expenses are usually allowable for tax purposes. Consider the type of journey, the  trades and where the business is run. Where a journey is both business and private then claim the business element only. Travel from home can be claimed where you are based from home. HMRC may resist a claim if there is another operational base or bases (site, hospital, office, shop, yard, sales area etc).         

For subcontractors, HMRC may insist that the operational base is the site where work is undertaken. Ensure contracts/paperwork are undertaken made from home and tools are stored there. In the case of Notion v Young (1971) 47 TC 60, a bricklayer worked on a number of sites within a certain radius of his home for a few weeks at a time. It was held that his home was the base of his operations. 

Accommodation.      

Accommodation expenses must wholly and exclusively incurred for the purposes of the trade or profession. Where there is some private use a deduction cannot be claimed unless the business element can be clearly identified.

Subsistence (food and drink). 

This can be claimed with business travel where the destination is outside the normal pattern. The claim must be reasonable and supported by receipts. HMRC will seek to disallow expenses where there is no evidence that the expense has been incurred.  

In Prior v Saunders [1993] 66 TC 210, the subsistence costs of a subcontractor whose work was carried out for several years in an area of the country away from ‘his home base’ were disallowed as there was a regular work pattern.

What Can I Claim For “Use Of Home”.

Where you undertake most of your company work from your home there are three methods of reclaiming expenses.   

Method 1   

You can either simply claim the HMRC’s approved Homeworking allowance of £6 per week. Easy to calculate and claim but you may be able to claim more using the other methods.    

Method 2   

You can make a claim based on actual costs. The business proportion of costs which can be included are:   

Light and heat. 

Home telephone calls. 

Insurance, where business equipment insured under that policy. 

Repairs of business equipment. 

Broadband costs. 

Cleaning costs of your workspace.   

As an employee you cannot reclaim the costs of: 

Mortgage interest  

Rent. 

Water rates. 

Expenses that do not have receipts i.e., cash wages of a cleaner.  

Detailed records and receipts are required however not all of household expenses can be claimed. 

Method 3   

Creating a licence agreement with your company to allow it to occupy part of your property. It then pays you rent and you then claim all your expenses under Self-Assessment Return.   

You may claim a proportion of your home expenses although there is a higher rate restriction on mortgage interest. Check with your mortgage provider or landlord whether you can create this type of licence. Again, detailed records are required and you must also complete the land and property section of your tax return. Let me know if you want a draft licence agreement. 

If you provide your own business equipment you may claim capital allowances on your costs. 

An employer can supply an employee with one mobile phone if the phone remains the employer’s property. The contract must therefore be in the employer’s name. In these circumstance the employer can claim all of the costs while a taxable benefit in kind will not arise on the employee. 

As there is a ‘use of asset’ tax benefit charge if an employer lends you an asset that is used privately, it is advised that the employer sets strict written usage restrictions. This may not be possible for items of furniture, which are likely to be used privately unless the home office is closed off from the main home. 

Your company may be able to reclaim VAT on certain building works it does to your property, but as any claim will be blocked if you benefit in your personal capacity, it may be unwise to do so. 

Gifts And Donations      

For sole traders and partnerships charitable subscriptions or donations are not allowable as a deduction for tax purpose unless, exceptional, they are incurred wholly and exclusively for the purpose of the trade (charitable sponsorship).

Rental &Holiday Lettings

Trading And Property Allowances     

To reduce Self-Assessment compliance for individuals who have a of small amounts of trading or property income two new annual tax allowances of £1,000 for “Trading” and “Property” income are available. These allowances can be claimed from 6 April 2017.                  

If receipts are less than £1,000 no declaration is required. You will not have to register for Self-Assessment or, if you already receive a Self-Assessment Return, you can deregester. Where the source exceeds £1,000 the individual must register for Self-Assessment and can either claim expenses in the normal way or elect for £1,000 to be deducted from that income rather than claiming actual expenses.                                                 

The property allowance will not apply to income on which rent-a-room relief is given or where there is a restriction on mortgage interest.                 


What is a Furnished Holiday Letting (FHL)?

The accommodation must be furnished, in the UK or European Economic Area (EEA) and commercially let for certain periods. From April 2012 the minimum period it is available for rental is 210 days and it must be actually let for 105 days in a tax year.

FHL profits are deemed to be investment income on which NIC’s are not payable.

For more information check the Revenue’s website here.  

Property Ownership 

The usual position is that the same person may be both the legal owner and the beneficial owner however the legal owner can be different from the beneficial owner –  a trustee is the legal owner while a beneficiary of the trust may be the beneficial owner.                    

There are two forms of joint ownership:                

Tenants in common. Each person owns their own share of the property and are taxed on that share for both income tax and capital gains tax. On death that share is decided by their will or under the rules of intestacy. 

Joint tenants. Each person has an interest in the property. On death the property passes directly to the remaining joint tenant(s).

Unmarried owners.           

The general rule is that each owner’s share is in according to their ownership of the property. However, the owners don’t have to accept this. If income is shared between owners in a different split to ownership, other than for tax evasion purposes, the tax liability will be the same.                  

Married couples and civil partners – Joint ownership.               

Legal ownership. This is effectively the paper title to the property and will be shown at the Land Registry. If the legal ownership of the property is in the name of both spouses, then for income tax purposes any rental income is automatically split 50:50 irrespective of the underlying beneficial ownership percentages. On sale any capital gain is split according to the beneficial ownership ratios.                       

Beneficial ownership. This is the right of use of the property (i.e. the right to live in it, or to let it out and receive the rental income). The beneficial ownership split can be shown at the Land Registry (but does not have to be). The taxation of rents will normally be 50:50 unless a ‘Declaration of beneficial interests in joint property income’ election, form 17, is filed with HMRC.                       

Form 17. This allows a married couple to say how the rental income is to be split but any split of such income must be follow the underlying beneficial ownership split. This must be lodged with HMRC within 60 days of its completion to be valid. It must be signed by both husband and wife. Evidence of the beneficial ownership split must also be supplied. Changes must be notified immediately to HMRC.                        

This declaration is irrelevant where the legal ownership is in the name of one spouse only or where the co-ownership of the property is by any two or more persons who are not married.                

Partnership.                     

If a property rental business is operated through a genuine partnership, HMRC will tax each partner on the amount of income as shown in the partnership’s accounts. This means that the split of income can be changed each year if required.                                                    

On the eventual disposal of your property you will have to consider the capital gain tax (CGT) consequences. This tax will be levied on the difference between the proceeds/market value and your capital costs. It is therefore prudent to keep a contemporaneous record of these capital transactions. If you can let us have the following details, we will include a memorandum on your annual rental accounts.                                                        

  1. The dates the property was purchased and cost or the date the property was inherited and the probate value.
  2. The expenses of acquisition.
  3. Particulars of any capital costs (new kitchen. Bathroom, etc).
  4. The dates the property was your principle private residence, if applicable.     

Keeping records.              

It will help you and save our time (and therefore reduce our charges) if you keep good bookkeeping records.  The figures to be completed on the property supplement of your Return are usually:                                                 

Income – the amount of rent and any income for services provided to tenant.                  

Expenses                 

Rent paid, repairs, insurance and costs of services provided.                                                       

Loan interest and other financial costs.                                                      

Legal, management and other professional fees.                                                   

Other allowable property expenses.                                

Capital outgoings and recent changes  

It is important that you understand the difference between repairs and capital improvements. There is now a restriction on the tax relief available for mortgage interest  and the way relief is granted on  “domestic items”.

Capital Gains.

Keep details of the cost of the property, expenses of purchase and capital outgoings as you may need this information for CGT purposes when the property is disposed of. If we prepare your rental accounts we track this for you.       

On the eventual disposal of your property you will have to consider the capital gain tax (CGT) consequences. This tax will be levied on the difference between the proceeds/market value and your capital costs. It is therefore prudent to keep a contemporaneous record of these capital transactions. If you can let us have the following details, we will include a memorandum on your annual rental accounts.  

  1. The dates the property was purchased and cost or the date the property was inherited and the probate value.
  2. The expenses of acquisition.
  3. Particulars of any capital costs (new kitchen. Bathroom, etc).
  4. The dates the property was your principle private residence, if applicable.             

How interest relief is given in your tax calculation.              

For 2017/18 the relief is given partly by deduction, 75%, while the balance of 25% is granted by tax credit. This may cause confusion so an example is given below.                                                        

Rental accounts.                                                       

Rents receivable                                           20,000                                                

Rates/insurance                                            500                                                          

Maintenance                                                  2,000                                                          

Interest                                                            6,000                                                         

Professional costs                                         1,000                                                       

Other expenses                                             500                                                          

Total expenses                                              10,000                                                   

Net profit                                                      £10,000                                                   

On your tax calculation the figure for “Profit from UK land and property” will be increased by 25% of the interest figure – £10,000 plus (£6,000 x 25%) £1,500 = £11,500 and this will form part of your “Total income received” on which tax is calculated. After arriving at a figure for “Income Tax charged” the 25% adjusted for above is then relieved by tax credit at the basic rate band – £1,500 x 20% = £300.    

This method of calculation restricts interest relief for higher rate taxpayers.              

Replacements Of Domestic Items Relief (RDI).                  

With effect from 5 April 2016 the old rules on claims for expenditure on expensive items of a long-lasting nature such as household appliances etc. used by their tenants is being replace by “Replacements of Domestic Items Relief” (RDI). All landlords of residential property can claim this (previously the property had to be furnished). The relief is given for the like-for-like replacement cost of domestic items (not the initial cost).  You can also continue to claim tax relief for the repairs and renewal of fixed items.   

Domestic items are:      

  • Moveable furniture (beds, free-standing wardrobes, etc.).
  • Furnishings (carpets, curtains, linen, etc.).
  • Household appliances (televisions, fridges, freezers, etc.).
  • Kitchenware (crockery, cutlery, etc.)

You cannot claim RDI for expenditure integral to the property that is not normally removed by the landlord when the property is sold but you can claim for repairs.                                                 

  • Capital items which becomes part of the house, such as fitted bathroom furniture, baths, toilets, boilers and fitted kitchen units and appliances.
  • New Integral features such as a *boiler or radiator which is part of the heating system (again we can still claim of this type of expenditure against any eventual capital gain when the property is sold, so keep full details). Landlords will continue to receive tax relief for the replacement of these items as repairs.                                    

*There is some debate on whether a new boiler or radiator is capital or is a repair to the overall heating system.     

The HMRC notes on this can be found here.

Repairs/Capital improvements.

It is important to distinguish correctly between repairs, which are deductible from rental income and capital improvement which are treated as part of the base cost for capital gains tax purposes.                                                           

The broad difference is that repairs involve placing as asset into the condition that it originally was, whereas capital expenditure involves improving it in some way. Having said that, a cost normally remains revenue where any improvement merely arises because you are using modern materials broadly equivalent to the old ones. For example, replacing wooden single glazed windows with modern UPVC double glazed windows can be classed as revenue. The Revenue accept that expenditure to rectify dilapidations that occurred in a previous ownership is allowable so long as the property was in a usable state when acquired.         

Capital gain

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

The Capital Gains tax-free allowance is:

£12,300

£6,150 for trusts

https://www.gov.uk/capital-gains-tax/allowancesEntrepreneurs’ Relief (ER)

Pay Capital Gains Tax in 30 days

CGT has normally been payable by 31 January after the end of the tax year in which the contracts are exchanged but for residential sales exchanged on or after 6 April 2020 any CGT due will be payable within 30 days of the completion date.

CGT arising on the disposal of assets other than homes will continue to be payable on 31 January where the seller is a UK resident individual or trustee. There are different rules for individuals who live overseas and for corporate sellers.

As well as paying the CGT due you will have to complete a new online CGT return to report the sale within 30 days. We can submit this on your behalf. This is required in addition to your self-assessment tax return which will have to be completed as normal by 31 January for the previous tax year.

If no CGT is payable on the disposal (for example because the gain is fully covered by the private residence exemption or losses or the annual CGT exemption) then you do not have to file the online CGT return. 

In effect you will have to report gains from the sale of residential property twice; first on the online CGT return and then on your self-assessment tax return unless, unusually, the self-assessment return for the period is submitted first. There will be penalties for failing to complete either tax return on time so please tell us as soon as you have agreed to sell a residential property.

Here are some terms you should be aware of.

  • Testator- a person who has made a will or has given a legacy
  • Executor/Executrix/Personal representative (PR) – a person or institution appointed by a testator to carry out the terms of their will.
  • Period of administration – This starts the day after the individual dies to the date the residue of the estate is established.
  • Residue of the estate – what property of yours is left over after the deduction of specific gifts, debts, legacies, tax and the expenses of administration.
  • Probate/Grant of representation – the legal process whereby a will is “proved” in a court and accepted as a valid public document that is the true last testament of the deceased.
  • Estate assets – These will usually be the property and investments of the deceased.
  • Probate value – The value at the date of death usually established for Inheritance Tax (IHT) purposes.
  • Appointment of assets – The transfer of assets from the Personal representatives to the beneficiary. The is no Capital Gain at this point, the beneficiary is deemed to take over the probate value of the asset.
  • Beneficiary – person who derives advantage from the will.
  • Specific legacy – a gift in a will of a certain article or property to a certain person or persons. Where this is an income producing asset the income is taxed on the beneficiary from the date of death.
  • Pecuniary legacy – A gift of money in a will.
  • Residuary legacy – it is the legacy that consists of all the money and property that remains after other amounts of money or property is given to others.

Entrepreneurs’ Relief (ER)

This is a Capital Gains Tax (CGT) relief which can be claimed on qualifying business disposals by individuals (not companies). It reduces the rate of CGT on the disposal of assets to 10%. There are anti avoidance rules which apply to the repayment of share capital.

ER can be claimed for disposals of  

all or part of your business as a sole trader or business partner – including the business’s assets after it closed,

shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’),

shares you got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013,

assets you lent to your business or personal company.

There are anti avoidance restrictions if within two years the individual (or an associate) starts up a similar trade or activity. In these circumstances, the distribution is treated as income.

If you’re selling all or part of your business

Both the following must apply:

you’re a sole trader or business partner,

you’ve owned the business for at least one year before the date you sell it.

The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.

If you’re selling shares or securities

Both the following must apply for at least one year before you sell your shares:

you’re an employee of the company,

the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group.

Either of the following must also apply for at least one year before you sell your shares:

you have at least 5% of shares and voting rights in the company,

you were given the option to buy them at least one year before you’re selling them – if they’re EMI shares.

If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.

If you’re selling assets you lent to the business.

Both the following must apply:

you’ve sold at least 5% of your part of a business partnership or your shares in a personal company,

you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed.

Separation.

For tax purposes, it is the date of separation which is important. You are treated as together unless you are:

  • Separated under an order of a court or competent jurisdiction
  • Separated by deed of separation, or
  • Separated in circumstances in which the separation is likely to be permanent.

For capital gains tax (CGT) the tax-free exemption for transfers between spouses remains for the year of separation. Nil gain/nil loss treatment will cease to apply in the year following separation. Transfers between husband and wife after the year of separation are made at market value.

A married couple can only have one exemption for their “principle private residence”. From the date of separation, they have one each and may need to make an election to show which property is their main residence.

Any maintenance payments made under the divorce settlement are free from tax in the hands of the recipient. No tax relief is available for the payor.

Stamp duty/stamp duty land tax is not normally charged on the transfer of assets between spouses or on divorce.