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a friendly service covering audit, tax, accounts, self assessment,
We offer a personal service and welcome new clients.
We are a firm of Chartered Certified Accountants
and tax advisors in Derby helping businesses
From start-up to exit & everything in-between.
Whether you’re struggling with company formation,
annual accounts and taxation, payroll or VAT you can
count on us at every step of your business’s journey. For
VAT & payroll please contact us.
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If you are looking for a Derby accountant please contact us.
We offer cloud-based accounting solutions. Using good technology saves time. With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button software can make a real difference to the way you run your business.
02/12/2015
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If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can support you through business registration and provide advice on all aspects of tax including:
◦ Accounts for HMRC ◦ Self assessment ◦ VAT returns ◦
◦ Payroll services ◦ Tax planning ◦
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
Services include:
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time.
Self assessment: Taking
away the hassles of tax
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is tax efficient. We will advise you on how to structure your contract to minimise IR35 risk. We will ensure you claim all the expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns and provide you with clarity over your tax payments.
Included in the service • IRIS KashFlow + Snap • Annual accounts • Corporate tax return • Personal tax return • Payroll • Dividend administration • VAT returns • Contract reviews • Dealing with HMRC
VAT • is one of the most complex tax regimes imposed on business. We provide a cost effective service including assistance with registration & completing your returns.
Payroll • Administering your payroll can be time consuming. We provide a comprehensive payroll service.
Your Payroll Solution
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Provision of management accounts
For more about these services please contact us.
Keeping the Books
Assurance
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Audit
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax, accounts preparation & tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively.
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
Continuous improvement
We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.
Build a relationship
Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.
Confirm your expectations
Our aim is to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.
Actively communicate
Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.
Understand your needs
Confirm your expectations
Actively communicate
Build a relationship
Continuous improvement
Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time. Eddie Morris
Call us on 01332 202660
Making a loan from a personal company to a family member
There are many possible situations in which a person may make a loan to a family member, for example, a parent may lend money to an adult child to provide them with a deposit for a property. Where the parent has a personal or family company and there are unextracted profits in the company, it may seem sensible for the company to lend the money rather than for the parent to do so personally. However, this may have tax consequences which can be easily overlooked.
Loans to participators
Where the company is a close company (broadly one under the control of five or fewer people) as most personal and family companies are, the loans to participators rules need to be considered. Under these rules, a tax charge will arise on the company on any amount of the loan which remains outstanding nine months and one day after the end of the accounting period in which the loan was taken out.
The charge (known as the ‘section 455 charge’) is payable at the rate of 33.75% of the outstanding loan balance. This is the same rate as the upper dividend tax rate.
Associates
The reach of the loans to participators rules is wide. The recipient of the loan does not need to be a participator (broadly a shareholder) for the charge to apply – it also applies where the loan is made to an associate of the participator. This includes a relative of the participator, which for these purposes means a spouse or civil partner, a parent, grandparent or remoter forebear a child, grandchild or remoter issues or a sibling. It also applies where a loan is made to a partner of a participator.
Example
Louise is the director and sole shareholder of her personal company, L Ltd. The company makes a loan of £100,000 to Louise’s daughter Sophie to help her get on the property ladder. The loan is interest free. It is made on 1 January 2025.
The company prepares accounts to 31 March each year. If the loan remains outstanding on 1 January 2026 (as is the expectation), despite the fact that Sophie is not a participator in L Ltd, the company will need to pay section 455 tax of £33,750 on 1 January 2026.
The tax will become repayable nine months and one day after the end of the accounting period in which the loan is repaid, so in that way it is a temporary tax. However, it may be a significant cost to the company in the interim.
Benefit in kind charge
If the loan balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will also arise as the loan is made to a member of the director’s family or household. The charge will be based on the difference between the interest payable at the official rate and that actually paid, if any. The company will also pay Class 1A National Insurance on the taxable amount.
Planning issues
While it is possible to make a loan from a personal or family company of up to £10,000 for up to 21 months tax-free, tax consequences will arise where the loan is for a higher amount and/or is made for a longer period.
This does not mean it will never be beneficial to make a loan to a family member – it is a question of weighing up the cost of paying the section 455 tax and tying up the associated funds until after the loan has been repaid against the interest that the family member may pay if they were to borrow the money elsewhere. The section 455 tax will be repaid if the loan is repaid, while any interest paid on a third-party loan will not. The cost of the benefit in kind charge should also be factored in
Dividend waivers for inheritance tax purposes
Dividend waivers for inheritance tax purposes
It is not uncommon for shareholders in family and owner-managed companies to waive their rights to receive dividends. In broad terms, a waiver is where a shareholder forgoes (or ‘waives’) their right to be paid a dividend. Dividend waivers are often used as part of a tax planning exercise by spouses (or civil partners), such as where, in the absence of a waiver, a dividend would push one of the spouses into a higher income tax bracket.
However, the inheritance tax (IHT) implications of dividend waivers in income tax planning should not be overlooked.
Waivers and IHT
Dividend waivers can also play a significant role in IHT planning. For example, an elderly shareholder in a family company may prefer to waive their entitlement to a dividend so that their estate (and the IHT liability thereon) is not enhanced by the funds that would otherwise be received. This could also help to sustain the company’s funds for future business use. If a person (i.e., an individual or a company) waives a dividend within 12 months before they become entitled to it, the waiver does not of itself constitute a transfer of value for IHT purposes (IHTA 1984, s 15). The relief applies only to a waiver of dividends on shares; it does not extend to a waiver of (say) rent, or interest on loans to the company
Attention to detail
Of course, dividends must satisfy company law requirements to be valid. Furthermore, the 12-month timeframe for dividend waivers means that it is necessary to establish the timing of the shareholder’s entitlement to a dividend in terms of ensuring that the dividend is not waived too late. In particular, it is important to distinguish between ‘interim’ and ‘final’ dividends:
• Interim dividends are due and payable when paid. A resolution to pay an interim dividend does not create a debt until the dividend is paid (see Potel v CIR (1970) 46 TC 658).
• Final dividends are legally due when declared by the company in general meeting (unless a later date for payment is specified, in which case they are due on that payment date).
For example, a person who waives a right to a final dividend would, in the absence of the IHT relief, dispose of a right, the value of which would generally be that of the dividend. The 12-month period for a waiver to be effective for IHT purposes should therefore be measured carefully.
The relief from IHT only applies ‘by reason of the waiver’. In other words, it does not necessarily apply if the waiver is part of a series of operations aimed at achieving a transfer of value for IHT purposes not related solely to the dividend waived (see HM Revenue and Customs’ Inheritance Tax Manual at IHTM04220). In addition, the waiver should be affected by deed, which cannot be backdated.
Practical tip
It is always better to ensure that a company’s shareholdings are properly structured in the first place, so that dividend waivers are unnecessary. However, where dividend waivers are unavoidable, they should be approached with caution, as anti-avoidance rules exist for other tax purposes in certain circumstances (e.g., the ‘settlements’ income tax provisions). HMRC may particularly seek to challenge waivers used on a regular or long-term basis, so consider other tax planning options instead (e.g., different classes of shares in the company). Professional advice should be sought, if necessary.
Reclaiming VAT on a car – notoriously difficult to claim
The VAT tax rules are clear - input tax cannot be claimed on the purchase of a new or used car that is made available for any private use. However, input tax can usually be claimed on cars used as a tool of a trade such as by a driving school, taxi firm or private car hire business, even if there is minor private use.
This strict rule was tested in a recent tax case of Maddison and Ben Firth T/A Church Farm v HMRC 2002. This case also underlines the importance of documents when submitting a claim to HMRC.
Mr and Mrs Firth were in business registered for VAT as 'subcontracting glam/camping, weddings and events' - mainly organising weddings and other events. The business claimed input tax on the purchase of two new cars, on the basis that they were used exclusively for business purposes and not available for private use. However, the Tribunal agreed with HMRC that there was insufficient evidence to prove a business-only intention. Importantly they came to this conclusion based on the insurance policy which included insurance for 'Social, Domestic and Pleasure' (SDP). Although Mr Firth explained that it was very difficult to obtain insurance without SDP the option was still available and that was enough to refuse the claim. The Tribunal stated that fact that the insurance policies did not cover the carrying of passengers on a commercial charge basis was an important point and refused the claim. Relevant factors quoted in the case were 'who has access to the car and when; what is the likelihood that the car will never be used for mixed business and private journeys; what is the availability of the car; whether the user keeps a log of journeys; whether the car is insured for private use; and whether the vehicle has any peculiar feature or adaptations for a particular kind of business use?'
In addition, although there was a valid council issued private operator licence, private hire was not covered by the policy. It also did not help Mr Firth's case that although an Audi TT has five seats it is, in effect, a two-seat car and as such not a practical car for private hire (one of the exceptions to the VAT rules).
Finally, HMRC refused a claim for the VAT input on a personalised number plate fixed to a motorcycle, finding that it was personalised to include Mr Firth’s first name. The claim was for business advertising but HMRC disagreed and refused the claim as the number plate (BS70 BEN) did not refer to the business named 'Church Farm'.
As ever in such cases, looking at the facts, this case should probably not have reached as far as a Tribunal Hearing. However, this case underlines the importance of 'intention' and of documents in supporting any claim for input VAT.
Looking ahead to MTD for landlords
The way that many landlords will report details of their income and expenses to HMRC is changing from April 2026 onwards. This is when Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) comes into effect. Landlords who fall within the scope of MTD for ITSA will need to keep digital records, use MTD-compatible software and send quarterly updates to HMRC. This will impose new compliance obligations on them and change the way in which they interact with HMRC.
Start date 1: 6 April 2026
MTD for ITSA will apply to unincorporated landlords and sole traders with trading and/or property income of £50,000 or more from 6 April 2026. When determining a landlord’s MTD start date, it is important to take account of both rental income from unincorporated property businesses and also trading income from unincorporated businesses (such as those operated as a sole trader). However, any rental income from property companies can be ignored. The key figure is the total of both rental and trading income, so a landlord with rental income of £10,000 and trading income of £45,000 will be within MTD for ITSA from 6 April 2026 while a landlord with rental income of £49,000 who has no trading income will have a later start date. The relevant income will be that for 2024/25, as reported on the Self Assessment tax return which must be filed by 31 January 2026.
It is important that landlords with an April 2026 start date make sure that they know how MTD for ITSA will affect them, and that they are ready to comply from 6 April 2026 onwards.
Once within MTD for ITSA a landlord remains within it, even if their income falls to below the trigger threshold, unless it remains below the trigger threshold for three successive tax years.
Start date 2: 6 April 2027
Landlords running unincorporated property businesses will be brought within MTD for ITSA from 6 April 2027 if they have rental income and/or trading income from an unincorporated business of £30,000 or more.
Other landlords
The Government plan to bring unincorporated landlords and unincorporated businesses with rental and/or trading income of £20,000 or more into MTD for ITSA by the end of the current Parliament. As of yet, no date has been set for those whose income is below this level.
Obligations
Currently, where rental income is more than £1,000 (and the landlord is not within the rent-a-room scheme), they must report their taxable profits to HMRC on the property pages of their Self Assessment tax return by 31 January following the end of the tax year to which it relates. They must keep records of their income and expenses, but can do so in a way that suits them.
Under MTD for ITSA this all changes. The landlord will need to keep digital records and use software that is compatible with MTD for ITSA to report simple summaries of income and expenses to HMRC on a quarterly basis. The quarters run to 5 July, 5 October, 5 January and 5 April, although taxpayers can report to calendar quarters instead (30 June, 30 September, 31 December and 31 March). HMRC publish details of commercial software that fits the bill. They have also said that they will make free software available for those with the most straightforward affairs.
After the final quarterly update for the year has been submitted, the landlord will need to make a final declaration to finalise their income tax position for the tax year. This is like the current tax return and it is at this stage that the taxpayer will claim reliefs and allowances, and also reflect other income that they may have which is not within the MTD process, such as savings and investment income and income from employment. The landlord will also need to make a declaration that the information is complete and correct, as is currently the case on the Self Assessment tax return.
There is no change to the way in which tax is paid under MTD for ITSA, only the way in which income is reported.
The benefits or otherwise of voluntary VAT registration
The benefits or otherwise of voluntary VAT registration
Many businesses strive to keep their turnover under the VAT registration limit (currently £90,000) because not only are they wary of the additional administrative costs but also because they believe that adding VAT to the invoice will make their business uncompetitive. However, even if a business has not reached the limit, voluntary VAT registration can offer significant benefits, not least including creating a more professional image and enhancing credibility, signalling to customers and potential business partners that the business has reached the VAT threshold, a significant milestone in the growth of any business.
Claiming pre-registration VAT
One of the main benefits of voluntary VAT registration is the financial benefit that can be gained. Input VAT paid on goods or services before registration can be reclaimed, subject to certain conditions. This can result in a much-needed cash lump sum during challenging initial phases for a start-up. VAT on goods (e.g. stock and equipment) can be reclaimed if purchased within four years of registration. The goods must be in stock on the registration date or used to make taxable supplies after registration and not fully used. However, the company must have been in operation for those four years in order to be eligible to make this claim. Additionally, VAT invoices and records must be available from that time.
VAT on services can also be reclaimed but in a shorter window of up to six months before registration (e.g. a typical cost being for website design paid for five months before registration). The services must have been used to establish the business and the VAT must not have been passed on to customers. Valid VAT invoices are required to support any input claim.
Improved cash flow
Reclaiming input VAT on purchases can improve cash flow, especially if the business needs to purchase a lot of stock, equipment or services from VAT-registered suppliers. The business can use the reclaimed VAT to invest in other areas of the business, rather than tying up cash in VAT payments.
Improved business opportunities
Many other VAT-registered businesses prefer to work with other VAT-registered suppliers since they can reclaim VAT on purchases.
Ensure registration is on time
Registering the business from the start can help avoid fines or penalties for late registration if the business accidentally exceeds the threshold. This proactive approach ensures that the business is compliant and prepared for any potential growth that might push it over the threshold.
Downsides of voluntary registration
The most evident downside to becoming VAT registered is the requirement of the business to charge customers VAT and thereby increasing prices (unless the business makes zero-rated supplies). If customers are VAT-registered businesses themselves, the fact that there is additional VAT to pay will not be an issue for them as they will be able to reclaim on their own VAT return. However, if the customers are the general public, they will not be able to reclaim, and the higher price may mean they look elsewhere for their purchase (possibly a non-VAT-registered business) – it will depend on what is being sold. Of course, just because a business is VAT registered does not mean the full 20% uplift needs to be passed on to the customer.
Another downside to being VAT registered is the additional administration required, including compliance with Making Tax Digital for VAT.
Practical point
HMRC allows businesses to register as ‘intending traders’. An intending trader is an individual or entity that, on the date of the registration request, is engaged in business activities, has not yet begun making taxable supplies, but intends to do so in the future. Registration is therefore possible even if the business is still in the planning stage. This allows businesses to reclaim VAT on costs incurred during this time, preventing some claims, especially for services, from falling outside the pre-registration time limits.
When do you need to register for VAT and how do you do it?
If you are running a business, regardless of whether you operate as a sole trader, in partnership or the business is run as a limited company, you will need to register for VAT if your total taxable turnover in the previous 12 months exceeds the VAT registration threshold of £90,000 or if you expect your taxable turnover to be more than £90,000 in the next 30 days.
If both you and your business are based outside the UK and you supply goods or services to the UK (or expect to do so in the next 30 days), you must register for VAT regardless of your taxable turnover.
Taxable turnover
The trigger for registration for a UK-based business is its taxable turnover. For VAT purposes, this is everything that is not exempt from VAT or outside the scope of VAT. It includes zero-rated goods; reduced rate goods and goods charged at the standard rate. In working out your taxable turnover, you must also take into account:
Registration deadline
Where taxable turnover in the previous 12 months exceeded £90,000, the business must register for VAT within 30 days of the end of the month in which the threshold was exceeded. The registration is effective from the first day of the second month after which the threshold is exceeded.
Example
Bella is a sole trader. On 7 July 2025 her VAT taxable turnover in the previous 12 months exceeded £90,000 for the first time. Bella must register for VAT by 30 August 2025. Her registration is effective from 1 September 2025.
Where taxable turnover will exceed the VAT registration threshold in the next 30 days, the business must register for VAT by the end of that 30-day period. The registration is effective from the date that the business realised that the threshold would be exceeded.
Example
Cameron signs a contract to deliver goods worth £102,000 on 17 July 2025. He must register for VAT by 16 August 2025. His registration is effective from 17 July. He must therefore charge VAT on those goods.
Where a business registers late, it must pay VAT on taxable goods and services supplied after the date by which it should have registered. A late registration penalty may also be charged.
Businesses which exceed the threshold temporarily can apply for a registration exception.
Registration process
A business can register for VAT online (see www.gov.uk/register-for-vat/how-register-for-vat). The information required will depend on whether the business is run by an individual or as a partnership, or by a company.
To register as an individual or partnership, you will need your National Insurance Number, an identity document (such as a passport), bank account details, your unique taxpayer reference (UTR), details of your annual turnover and an estimate of your taxable turnover for the next 12 months. For a company registration, the company registration number, bank account details, UTR, annual turnover and estimated turnover for the next 12 months will be required.
In certain circumstances it is not possible to register online and registration must be done by post, such as if you are applying to join the agricultural flat rate scheme.
Voluntary registration
A business whose taxable turnover is below the VAT registration threshold can register for VAT voluntarily. If you do this, you will need to charge VAT on taxable supplies that you make, but you can claim back VAT on things that you buy for your business. Voluntary registration is worthwhile if you make zero-rated supplies but incur VAT on items that you buy.
Dealing with a Simple Assessment letter
Simple Assessment is used by HMRC to collect tax underpayments from taxpayers with straightforward tax affairs. It removes the need for the taxpayer to complete a Self Assessment tax return.
HMRC will issue a Simple Assessment where there is an underpayment of tax which cannot be collected through PAYE. Each year HMRC undertake a PAYE reconciliation process and issue a P800 calculation. Where this shows that tax is owing which cannot be recovered through PAYE, they may issue a Simple Assessment. A Simple Assessment letter will be sent by post or issued to the taxpayer’s personal tax account if they have one. The letter will show the taxpayer’s taxable income, tax that has been paid and the amount that is owed.
Check if it is correct
It is important to check that the figures in the Simple Assessment are correct – HMRC can, and do, make mistakes. You should check the amounts shown in the Simple Assessment against your P60, bank statements, letters from the Department for Work and Pensions, and similar. If you do not understand the figures, it is prudent to take advice.
If you think the calculation is wrong, you should tell HMRC, either by writing to them or by calling them. You must do this within 60 days of the date on the letter. You should tell HMRC which figures you think are wrong and what you think they should be. If HMRC agree with you, they will send you a new Simple Assessment with the revised figures. If they think their figures are correct, they will send you a decision letter explaining why. If you still do not agree with them, you can appeal. This must be done within 30 days of the date on which the decision letter was issued.
Payment must still be made on time while the appeal is dealt with unless HMRC instruct otherwise.
Paying your Simple Assessment
Tax owed under Simple Assessment can be paid online, by bank transfer or by cheque. The date by which payment must be made depends on the date on which the Simple Assessment letter was received. Where the letter for the 2024/25 tax year is received before 31 October 2025, payment must be made by 31 January 2026. Where the letter for 2024/25 is not received until after 31 October 2025, payment must be made no later than three months from the date on the Simple Assessment letter.
Interest will be charged on payments made late.
Obtaining relief for replacement domestic items - Part 1
The mechanism by which landlords letting furnished residential property can secure relief for the cost of domestic items.
Landlords letting residential property cannot claim capital allowances for the fixtures and fittings that they provide. Since 6 April 2025, this applies equally to landlords letting furnished holiday accommodation; prior to this date, capital allowances were available under the former regime for furnished holiday lettings. However, it is not available where a landlord lets one or more furnished rooms in their own home and claims rent-a-room relief.
The lack of capital allowances does not mean that landlords are not entitled to any tax relief for the cost of domestic items provided to tenants. While they are not able to deduct the cost of the original item, a dedicated relief is available for the cost of replacement domestic items. The relief applies equally to individual and corporate landlords.
Meaning of ‘domestic items’
A domestic item is defined in the legislation as ‘an item for domestic use (such as furniture, furnishings, household appliances and kitchenware)’. However, fixtures are expressly excluded from the definition. A ‘fixture’ is an item of plant and machinery that is installed so as to become part of the property. This includes boilers and radiators installed as part of a heating system.
Domestic items that commonly fall within the scope of the relief include movable furniture (e.g., sofas, beds, tables and chairs), furnishings (e.g., curtains, carpets and rugs), household appliances (e.g., fridges, freezers and washing machines) and kitchenware (e.g., crockery and utensils).
However, the relief does not apply to items such as baths, toilets, washbasins and fitted furniture, such as a fitted kitchen. These count as fixtures.
When does the relief apply?
The availability of the relief is contingent on four conditions being met.
The first condition is that the individual or company looking to claim the relief is carrying on a property business that includes the letting of one or more dwelling houses. This now includes landlords letting furnished holiday accommodation.
The second condition is that an old domestic item that has been provided for use in the dwelling house is replaced with the purchase of a new domestic item. Further, the old item must no longer be available for use by the tenants and the new item must be available for their exclusive use.
The third condition is that the expenditure on the new item must be incurred wholly and exclusively for the purposes of the property business. Further, the landlord must not otherwise be able to claim a deduction for the capital expenditure.
Landlords preparing their accounts using the accruals basis are not able to deduct capital expenditure in calculating their profits. However, landlords who use the cash basis (which is the default basis of accounts preparation where annual rental income is £150,000 or less) can deduct capital expenditure unless it is of a type for which such a deduction is not permitted. Landlords within the cash basis can only claim relief for replacement domestic items if the expenditure is not deductible in the computation of profits under the cash basis expenditure rule. As the cost of most domestic items can be deducted by landlords using the cash basis to prepare their accounts, the relief for replacement domestic items is predominantly of relevance to landlords using the accruals basis.
The final condition is that capital allowances must not have been claimed on the new domestic item. Prior to 6 April 2025, landlords letting furnished holiday lettings were able to claim capital allowances.
Obtaining relief for replacement domestic items - Part 2
Nature of the relief
Relief for expenditure on replacement domestic items is given as a deduction in computing the profits of the property rental business. However, the deduction is capped at the cost of a like-forlike item, plus any costs of acquisition and disposal.
HMRC will accept that an item is a like-for-like replacement if it is of broadly the same quality and standard as the old item. The fact that the item is new does not in itself make it an improvement over the old item. For example, if a mid-range washing machine is replaced with a similar midrange washing machine for broadly the same price allowing for inflation, the replacement will count as a like-for-like replacement.
However, where the replacement item is not of the same quality and standard as the original, the deduction is capped at the lesser of the cost of the new item and the cost that would have been incurred had the new item been a like-for-like replacement of the old item. A deduction is denied for any enhancement element.
Example 1: Partial deduction on upgrade Ali is a landlord letting furnished residential flats. One of the flats needs a new washing machine. The old washing machine was a budget model. Ali replaces it with a washer-dryer costing £550. Had he chosen an equivalent budget model, the cost would have been £210.
Although Ali spent £550 on the new washer-dryer, he is only able to deduct £210 in respect of the replacement item in calculating his taxable rental profits.
Where a landlord upgrades a domestic item, a deduction for the enhancement element is not available at the time of the upgrade. However, when the upgraded item is replaced, the landlord will be able to deduct the cost of an equivalent item. So, in Example 1, while Ali is unable to deduct £340 of the cost of the washer-dryer when he purchases it, if in a few years’ time he replaces the washer-dryer with an equivalent model, which due to inflation costs £600 at that time, he will be able to deduct the full £600 when calculating his taxable rental profits.
If the replacement item is inferior to the original item, the full cost can be deducted.
Incidental expenditure
It is likely that when replacing a domestic item, the landlord will incur related costs, such as the cost of the delivery and installation and the cost of disposing of the old item. These costs can also be deducted in addition to the cost of the replacement like-for-like item.
Example 2: Relief for delivery, installation and disposal costs Bella lets out her holiday home as furnished holiday accommodation. She replaces the oven with a like-for-like replacement costing £700. She also pays £50 for delivery and £100 for the oven to be installed. She pays a further £75 for the disposal of the old oven.
Bella is able to claim a deduction for the cost of the replacement oven, and also for the cost of delivery, installation and disposal – a total deduction of £925.
Part exchange
The old item may be given in part-exchange for the new item, reducing the amount that the landlord pays for the new item. Here, the deduction is the amount that the landlord pays on top of the tradein value (assuming the replacement is equivalent to the old item).
For example, if a landlord trades in an old fridge for an equivalent new model costing £300 and receives £30 for the old fridge, the landlord would be able to deduct £270.
If the replacement is superior to the original item, the deduction is capped at the cost of a like-forlike replacement less the trade-in allowance.
Sale proceeds from the old item
The landlord may be able to sell the old item. Where this is the case, any proceeds are deducted from the cost of the new items in working out the amount of the relief.
For example, if a landlord buys a replacement washing machine for £400 and sells the old one for £50, assuming the replacement is a like-for-likereplacement, the landlord will be able to deduct £350 (i.e., the cost of the replacement less the proceeds from the sale of the old washing machine). If the replacement is superior to the original item, the deduction is capped at the cost of a like-forlike replacement less the sale proceeds.
Practical tip
When replacing domestic items in a residential or holiday let, remember to claim relief for the cost of a like-for-like replacement where a deduction is not otherwise available for the cost of the item.
Useful Links
How will Making Tax Digital affect landlords?
Landlords will be impacted by Making Tax Digital when it comes into effect in April 2026.
Making Tax Digital (MTD) is going to mean big changes for the majority of landlords who submit self assessments.
You’ll need to use software to keep track of your income and expenses and to make quarterly MTD submissions.
This applies to income from rental properties or self-employment is over £50,000 a year from April 2026 and over £30,000 from April 2027.
Instead of submitting a yearly Self Assessment you’ll need to update HMRC every quarter.
Will all landlords be affected by MTD?
MTD impacts all landlords with personally owned properties earning more than £50,000 a year from rental properties or self-employment from 2026, and those earning £30,000 or more from 2027.
Property income in scope for MTD includes:
This is £50,000 of rental income, so gross profit before deducting your expenses, rather than net profit.
I own rental property in a partnership. Will MTD affect me? - HMRC has said it will announce dates for other types of partnerships, including LLPs and those with corporate partners, at a later date.
I’m a landlord that’s registered as a limited company. Will MTD affect me? - lf You own your properties in a limited company, you don’t need to worry about MTD for Income Tax yet.
Does MTD mean you need to pay tax four times a year? - No, how you pay self-assessed income tax is not changing.
How does Making Tax Digital work for joint landlords? - If the rental income is from a jointly owned property, this is based on the share of ownership - i.e. 50% if both parties have equal shares in the property. If your share of the rental income is over £50,000, then you'll be in scope for MTD from April 2026.
To conclude - if you currently complete a Self Assessment for your property income, and you earn over £50,000 from property or self-employment, you’re going to need to switch to use software to make quarterly MTD submissions from April 2026.
Making tax digital: Where are we now? - Part 1
Latest developments in making tax digital.
We are now little more than a year away from the phased introduction of making tax digital (MTD) for income tax self assessment (MTD ITSA), as follows:
Annual aggregate turnover (all sources) Implementation date
More than £50,000 5 April 2026
More than £30,000 and up to £50,000 5 April 2027
More than £20,000 and up to £30,000 Before this Parliament ends (2029)
This last new, lowest band was announced as part of the Autumn Statement 2024 on 30 October 2024:
‘The government will expand the rollout of MTD to those with incomes over £20,000 by the end of this Parliament, and will set out the precise timing for this at a future fiscal event.’
Up to that point, many advisers were daring to hope that MTD might perhaps baulk at going lower than the initial £50,000 per annum threshold.
Key points It is perhaps worth emphasising:
• The thresholds are measured across one’s annual gross income across all business sources (i.e., rents are broadly lumped in alongside all trading receipts – but see also below).
• The measurement year for testing whether one is caught for April 2026 (being the start date for those individuals in the vanguard) will be 2024/25, the actual numbers for which may only just have been finalised and filed by 31 January 2026.
• Thus, do the results for 2024/25 (now) dictate the MTD status for 2026/27?
• Likewise, the measurement year for whether MTD for ITSA will apply for the lower £30,000 annual threshold from April 2027 (i.e., 2027/28) will be the actual results for 2025/26.
• But each separate trade and property business* will still need its own set of quarterly returns ‘updates’.
• Once a taxpayer is caught by MTD ITSA, that annual aggregated business turnover will need to fall below the threshold for three successive years in order to break free of its clutches.
*Generally, all property sources are rolled into a single property business; however, one might have separate UK and offshore rental businesses or lettings in different ‘capacities’, such as sole or joint tenancies, as against a full property partnership.
Given that the annual threshold is intended to have fallen to just £20,000 by 2029, one will presumably have to hope for another means of escape, such as business cessation (see also below).
Income boxes and joint property details
HMRC will monitor taxpayers’ incomes and corresponding MTD obligations by reference to specific boxes on their submitted tax returns – the gross trading income and rental receipts sections. This should be reasonably straightforward, but a quirk has arisen in relation to joint lettings.
Landlords holding only a proportion of joint property are, of course, reliant on whoever prepares that property’s accounts for their income and expenditure details. They are also allowed to choose to include only the net income figure from joint lettings in their current-format tax returns (whether as part of a larger portfolio or not).
In July/August 2024, HMRC confirmed that this easement would continue under MTD, despite the risk of the landlord understating their ‘true’ gross annual income by potentially including only the net amounts for co-owned property letting income.
Making tax digital: Where are we now? - Part 2
Audit trail abandoned When the quarterly ‘update’ regime was originally devised, it was intended that each return would report only that quarter’s results, and that any amendments to previous quarters in the tax year would have to be reported in the next available return but flagged separately so that HMRC could track any changes made.
HMRC has since walked back from this approach and announced in November 2023 that each quarterly return will now hold simply ‘year-so-far’ amounts without further analysis into separate quarters, etc.
Quarterly update deadlines On 22 February 2024, the latest regulations then published included that the quarterly updates’ filing deadlines would be extended by two days, to 7 August/November/February/May, thereby aligning with the usual VAT stagger group filing deadline for calendar quarters.
End of the ‘end of period statement’ Did anyone realise that, when the Chancellor announced ‘the end of the annual tax return’ back in July 2015, what he actually planned instead was a ‘final declaration’, plus four quarterly returns (‘updates’) for each separate business of theirs, plus an annual end of period statement for each business to cover all of the usual annual tax adjustments for disallowed expenses, capital allowances, etc?
But never mind because, ever keen to cut down on taxpayers’ administrative burdens, the government has magnanimously decided to remove the proposed end of period statement and just include all those tax adjustments in the final declaration, instead.
Presumably, the government is banking on nobody spotting that the updated final declaration will now function almost exactly like the tax return whose demise was promised almost a decade ago, just now with a load of extra form-filling obligations that nobody outside of HMRC ever asked for.
Exemptions and exclusions The list of specific exemptions from MTD ITSA has grown slightly:
• Trustees;
• Personal representatives of someone who has died;
• Lloyd’s members;
• Individuals without a National Insurance number (announced Autumn Statement 2023); and
• Foster carers (announced Autumn Statement 2023).
However, just because someone is a Lloyd’s name or foster carer does not mean that they are entirely exempt from MTD; if they have ordinary non-exempt sources, they can be ‘caught’ for those. Likewise, the National Insurance Number exemption will, for most people, last only until they receive their notification – usually just before their 16th birthday.
A wider exemption may be accepted where the taxpayer can show that they are unable to comply with the requirements of MTD, such as by reason of:
• old age or infirmity;
• remoteness of location (poor Internet access); or
• religion.
It seems that, so far, HMRC has resisted the temptation to hide the ‘digital exclusion’ application process behind an online application form.
Conclusion The greatest menace in MTD is not the digital filing and reporting, but the digital record-keeping; having to set up and maintain financial records in a manner tailored more to HMRC’s wants than your own business needs. This is the other, as-yet-unseen nine-tenths of the MTD iceberg.
But in promising to drop the entry threshold to as low as £20,000 per annum, the government has signalled to taxpayers (and to software companies) how firmly it has committed us to this project. For now, there are no precise dates on when MTD for ITSA will be extended to partnerships or to companies (‘avoiding’ MTD might soon be one of the few remaining tax-based incentives to incorporate) but, again, keep in mind that partners will not automatically be safe from MTD if they also have non-partnership business interests.
Budget 2024
Overview
Implemented immediately
From January 2025
From April 2025
From April 2026
No change, or later
Reporting residential property gains and tax payments - Part 1
When and how it is necessary to report a gain on the disposal of a residential property and pay the associated tax.
Not all residential property is equal when it comes to the tax treatment of capital gains.
Setting the scene
Where a property is sold or otherwise disposed of (e.g., given to a family member other than a spouse or civil partner) and a gain arises, there will be no capital gains tax (CGT) to pay if the property has been the owner’s only or main residence throughout the full period of ownership (or for all but the last nine months). If this is the case, the private residence exemption will shelter the gain from CGT.
However, for properties such as investment properties and second homes which have not been occupied throughout as a main home, there may well be CGT to pay if a gain arises on the disposal of the property.
The end of the favourable tax rules for furnished holiday lettings and the increase in tenants’ rights in the Renters Reform Bill, together with the fear that the freeze in the higher residential rate of CGT at 24% may be a limited time offer, may lead many landlords to the decision that it is time to exit the market. Those looking to sell second homes may also opt to do this sooner rather than later to ensure that any gain is taxed at 24%, in case the rate is increased.
Residential property gains have their own rules when it comes to CGT, with a limited window in which to report the gain to HMRC and pay the associated tax. Taxpayers who fail to comply with the rules will face interest and penalties, with ignorance of the rules offering no defence.
Reporting the gain
When a chargeable gain arises on the disposal of a residential property, that gain must be reported to HMRC within 60 days of the completion date. HMRC has a dedicated online service for doing this, and taxpayers will need to set up a ‘Capital Gains Tax on UK Property’ account to report their gain online. Guidance on how to do this can be found on the Gov.uk website at: www.gov.uk/taxsell-property.
To report the gain, the following information is required, and it is sensible to ensure that it is all to hand before starting the reporting process:
• address and postcode of the property;
• the date that the property was acquired;
• the date of exchange of contracts on the sale of the property;
• the completion date of the sale;
• the amount paid for the property or, where relevant (e.g., if a gift from a connected person or if the property was inherited) its market value or probate value;
• the sale proceeds (or, where relevant, the market value at the date of disposal);
• the cost of any capital improvements;
• the costs associated with buying the property, such as stamp duty land tax (or equivalent), legal fees, etc.);
• the costs of selling the property (such as estate agents’ fees and legal fees); and
• details of any available reliefs and exemptions (e.g., private residence relief for periods occupied as a main home).
Where the property in question is jointly owned, each co-owner should report their share of the gain.
Once set up, taxpayers can log into their Capital Gains Tax on UK Property account to view and, where necessary, amend previous returns.
Taxpayers who are unable to report a property gain online can do so using a paper form. However, the taxpayer will need to contact HMRC to request a copy of the form.
Reporting the gain online does not remove the need to complete the CGT pages of the self-assessment tax return. These still need to be completed to enable the taxpayer’s CGT position for the year to be finalised. Once the taxpayer has submitted their self-assessment return for the tax year, they will no longer be able to amend returns made through their Capital Gains Tax on UK property account.
If an investment property or second home is sold at a loss, the loss does not need to be reported to HMRC online within 60 days. However, it should be reported on the taxpayer’s self-assessment return to preserve the loss for set-off against future capital gains.
Reporting residential property gains and tax payments - Part 2
Working out the tax on the gain
The CGT on residential property gains must be paid within 60 days of the completion date. This will be the best estimate of the tax due at that time.
However, the amount paid at this time may not be the final figure. The taxpayer’s CGT position for the year is finalised after the end of the tax year when their self-assessment return is filed. There may be additional tax to pay after the year end (e.g., if the taxpayer expected to be a basic-rate taxpayer and was actually a higher-rate taxpayer or if they realised non-residential gains on which CGT is due by the usual date of 31 January after the end of the tax year).
Alternatively, the taxpayer may be due a refund if losses were realised later in the tax year after the sale of the residential property completed, or if tax was actually due at a lower rate than used when calculating the payment on account.
The gain on the property is computed in the usual way, taking into consideration the acquisition cost, any enhancement expenditure, the sale proceeds and the costs of buying and selling the property.
Any reliefs to which the taxpayer is entitled should also be taken into account. If the property had been the taxpayer’s main residence at some point, private residence relief may be due for the periods it was occupied as such, any qualifying periods of absence and the final nine months of ownership. Likewise, if the taxpayer shared property with a lodger, lettings relief may be in point.
Taxpayers are entitled to an annual exempt amount for CGT, which for 2024/25 is set at £3,000 and is to remain at this level for 2025/26. If this has not already been used, it can be taken into consideration in calculating the tax due on the chargeable residential property gain. Capital losses brought forward, and any losses realised earlier in the tax year, can also be taken into account in working out the CGT bill.
However, losses realised after the completion date cannot be taken into account, even if they are realised within the 60-day reporting and payment window before the tax is paid. Instead, these will be taken into account when finalising the taxpayer’s CGT position for the year once they have filed their self-assessment tax return.
The tax due on the gain is calculated at the CGT rates for residential property gains. This is 18% where income and gains do not exceed the basic rate band and 24% once the basic rate band has been used up. Despite speculation before the Autumn Budget on 30 October 2024 that these rates would increase, the Chancellor opted instead to raise standard CGT rates, leaving the residential rates unchanged. They are to remain at 18% and 24% for 2025/26.
The tax due on the residential property gain can be paid online through the online account using a debit or corporate credit card or by approving a payment through an online account. Payments can also be made by bank transfer or by cheque. The 14-character CGT payment reference should be quoted.
Any further tax due when the taxpayer’s CGT position for the year is finalised should be paid through the self-assessment system by 31 January after the end of the tax year. If the taxpayer is due a refund (e.g., as a result of losses realised after the completion of the residential property gain, this can be claimed once the position for the year has been finalised).
Practical tip
When selling an investment property or second home, remember to report any chargeable gain to HMRC within 60 days of the completion date and pay the CGT due on the gain in the same timeframe.
PPR relief: Getting it right - Part 1
The possible ways in which principal private residence relief claims might sometimes be incorrect.
For most individuals selling their main home, the expectation is that any capital gains will be largely or fully tax-exempt because of principal private residence (PPR) relief.
However, tax cases have demonstrated the potential for costly mistakes, with incorrect claims leading to substantial capital gains tax (CGT) bills.
To qualify for a PPR relief claim, two conditions need to be fulfilled:
1. The property must not have been purchased solely for the purpose of making a profit.
2. It must be the individual’s only or main residence throughout the period of ownership.
Periods of absence from the property may be permitted, depending on the circumstances.
Making a (trade) profit?
A common strategy for tax-free property portfolio sales is to nominate each property as a PPR in turn, prior to the sale. However, whilst HMRC may initially accept PPR relief claims for the first couple of sales, their ‘Connect’ system may flag these transactions when checking Land Registry records. This could lead to a challenge of the PPR relief claims on the basis that the reason for nominating the properties was to avoid paying tax, which may indicate a trading activity.
HMRC may also pursue taxpayers who frequently buy and sell properties within a relatively short period, arguing that those engaged in such activities are operating as a business and are therefore liable for tax and National Insurance contributions. Similar observations apply to property developers who purchase properties for development, move in after completion, and then resell them shortly afterwards for a profit.
What is ‘permanence’?
Although many tax cases have affirmed the need for a degree of permanence or continuity in residence, the quality of occupation and the expectations regarding residency are more critical factors than the length of time spent living there. Generally, a property should serve as the permanent residence for at least 12 months to strengthen a PPR relief claim, although claims have been successful for shorter periods in some cases.
Evidence is key – there needs to be “some evidence of permanence, some degree of continuity or expectation of continuity” for the claim to be valid even if, in the end, the claimant does not live in the property for as long as originally intended. HMRC will apply this standard at the outset of any HMRC enquiry challenging a PPR relief claim.
It is a matter of fact whether a property is the individual’s PPR or not, but to demonstrate the fact, suggestions include ensuring that utility bills are in the owner’s name at the property address. Other documentary evidence could include receipts for home insurance, telephone bills and DVLA records showing the address as the main residence during the PPR relief claim period. Information considered in evidence by HMRC in the past has included fuel bills indicating that a property was unoccupied for part of a winter when the taxpayer claimed it was being used as their PPR.
Excessive PPR relief claims may arise if the property is not occupied as the individual’s main or only residence throughout their ownership period. While there is no minimum occupancy requirement for a PPR relief claim, many fail because the property needs to be occupied both before and after any period of absence (unless the absence is due to work away from home, in which case returning is not required). If the reason for the absence is work abroad, then any period of absence, no matter how long, is allowable. ... continued ..
PPR relief: Getting it right - Part 2
Absences can be cumulative so long as one or more of certain conditions apply:
• Absences of up to three years (or two or more periods of absence which together do not exceed three years) may be treated as a period of residence.
• Absences of up to four years can be allowed if the distance from the place of work prevents residence at home or the employer requires the taxpayer to work away from home.
Unfortunately, it is often the case that for unavoidable reasons, the individual is unable to move back into the property after an absence. In such cases, even if the previous conditions have been met, the absence will not count, resulting in a potentially substantial portion of a gain being taxable. It does not matter whether the property remains empty or is rented during the absence.
Some relief is available, as the first year and the last nine months of ownership are always treated as periods of occupation, regardless of whether actual occupation occurs. This exemption can be valuable in situations where it takes a long time to sell the property and find alternative accommodation.
Getting ‘flipping’ right An often overlooked tax relief opportunity is the ability to ‘flip’ ownership, which broadly allows PPR relief to be retained even when the owner is not residing in the property. The tax law permits the owner of more than one property to elect which is their main residence. The owner must have lived in the property at some point, but there is no specific duration for these purposes.
Having made the initial election, it can then be varied (flipped) as many times as required by giving a further notice to HMRC. There is no prescribed form or wording for the election, but the rules state that it must be made within two years of acquiring a second (or subsequent) residence unless there is a delay in occupation, in which case the date of moving into the residence is the trigger event.
If no election is made, HMRC will make its own determination on sale. Should the two-year time limit be missed altogether, there needs to be a ‘trigger’ event which will change what is termed the ‘combination of residences’ and reset the election date.
Examples of ‘events’ include:
• getting married;
• renting out one of the properties for a short period; when that let period ends, the owner can take up residence as the ‘combination of residences’ will have changed; or
• selling half the house to a joint owner, such that the seller is no longer in full ownership but is still in residence.
Every owner of two or more properties should elect which residence is to be treated as their PPR. An election should ideally be made as soon as possible following the purchase of the second property. Then, having made the election, the situation can be reviewed at any time up to the two-year anniversary date, thereby keeping all options open. Having made an initial election, there is no statutory limit to the number of times that the address of the property declared on the election can be changed.
Impact of renting a room
Letting a room or rooms in a main residence can be beneficial from an income tax perspective under the rent-a-room relief rules. However, the letting can have CGT implications as letting part of the property removes that part of the property from the cover of PPR relief while it is so let. This may or may not be problematic, depending on whether lettings relief is available to shelter any gain attributable to the let period and, where the gain is not fully sheltered, whether the CGT annual exempt amount is sufficient to cover any chargeable gain remaining.
Lettings relief shelters any gain not covered by PPR relief, such that the gain is only chargeable to CGT to the extent that it exceeds the lower of:
• the amount of the gain sheltered by PPR relief; and
• £40,000.
Practical tip
Spouses and civil partners can take advantage of the no gain, no loss provisions and transfer the property into joint names before any property sale where this is beneficial (e.g., to benefit from a second CGT annual exempt amount).
Mileage allowance payments
To save work, employers can pay employees a mileage allowance if they use their own car for business journeys. The Government have recently cleared up confusion as to what can be paid tax-free, confirming the maximum tax-free amount.
Mileage allowance payments - The approved mileage allowance payments system is a simplified system that allows employers to pay tax-free mileage allowance payments to employees who use their cars for business travel. Under the system, payments can be made tax-free up to the ‘approved amount’.
A similar, but not identical, system applies for National Insurance purposes.
The approved amount - The approved amount for tax is calculated for the tax year as a whole and is simply the reimbursed business mileage for the tax year multiplied by the tax-free mileage rates for the type of vehicle used by the employee. Rates are set for cars and vans, motor cycles and cycles and are as shown in the table below. They have been unchanged since 2011/12.
Example - Mo uses his own car for business and drives 12,350 miles in the tax year. The approved amount is £5,087.50 (10,000 miles @ 45p per mile + 2,350 miles @ 25p per mile).
Any payments made in excess of the approved amount are taxable and must be reported to HMRC on the employee’s P11D. If, on the other hand, the employer does not pay a mileage allowance or pays less than the approved amount, the employee can claim a deduction for the difference between the approved amount and the amount actually paid, if any.
Confusion - Earlier in the year, a petition went before Parliament calling for an increase in the advisory rate from 45 pence per mile to 60 pence per mile to reflect the increases in fuel prices since 2011. Parliament rejected the petition stating that the rates remained adequate as they covered all running costs and the fuel element was only a small part. However, in their response, they pointed out that employers could pay higher amounts tax-free where this represented the amount of actual expenditure and could be substantiated:
‘The AMAP rate is advisory. Organisations can choose to reimburse more than the advisory rate, without the recipient being liable for a tax charge, provided that evidence of expenditure is provided.’
The Government subsequently backtracked on this, stating in a written Parliamentary statement that:
‘The response [to the petition] stated that actual expenditure in relation to business mileage could be reimbursed free of Income Tax and National Insurance contributions. This is in fact only possible for volunteer drivers. Where an employer reimburses more than the AMAP rate, Income Tax and National Insurance are due on the difference. The AMAP rate exists to reduce the administrative burden on employers.’
Maximum tax-free amount - The maximum amount that can therefore be paid tax-free to employees using their own car for work is the approved amount, regardless of the car that they drive or the actual costs incurred. However, if the employer wishes to pay more, car sharing could be encouraged and the employer could also pay passenger payments (of 5 pence per mile) for each colleague that the driver gives a lift to (providing the journey is also a business journey for them).
For company car drivers, the maximum tax-free amount that can be paid is governed by the prevailing advisory fuel rates published by HMRC.
Capital allowances for cars
Cars are a special case when it comes to capital allowances. While capital allowances may be claimed on cars used in a business, partners and sole traders have the option of using the simplified expenses system instead.
Where the cash basis is used, it is not possible to deduct the full cost of the car in the year of purchase – such a deduction is prohibited under the cash basis capital expenditure rules.
No annual investment allowance
The annual investment allowance (AIA) allows immediate write-off for the full purchase cost in the year of acquisition, as long as enough of the £1 million AIA allowance for the year remains available. Unlike vans, cars do not qualify for the AIA, and unless the car is eligible for a first-year allowance, it is not possible to obtain 100% relief immediately.
Full expensing and 50% first-year allowance not available
Similarly, companies are unable to benefit from full expensing or the 50% first-year allowance for new cars that are not eligible for the 100% first-year allowance.
100% first-year allowance for electric cars
While the AIA and full expensing are unavailable, a 100% first-year allowance is available for expenditure on new electric cars. This provides immediate relief for the full cost of a new electric car in the year of purchase. The 100% first-year allowance is only available in respect of expenditure on a new electric car; it is not available on the purchase of a second-hand electric car. Writing down allowances are available instead.
Writing down allowances
If the first-year allowance is not available and simplified expenses have not been claimed, relief for expenditure on a car used for business purposes is given by means of writing down allowances. The rate of the allowance depends on the car’s CO2 emissions.
Main rate writing down allowances at the rate of 18% are available for new and second-hand cars whose CO2 emissions are 50g/km or less (including second-hand electric cars). New or second-hand cars with CO2 emissions of more than 50g/km qualify for special rate capital allowances at the rate of 6%.
Private use adjustment
If a car is used for both personal and business use, capital allowances are only available in respect of the business use. For example, if a sole trader uses their car for both business and private use and estimates that business use accounts for 60% of the total use, an adjustment would be needed to account for the private use. To do this, the writing down allowance would be reduced by 40%.
Consider simplified expenses instead
Sole traders and partnerships can take advantage of the simplified expenses system and deduct an amount based on the business mileage in the tax year when calculating their taxable profit. The deduction is given at a rate of 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business mileage. Where simplified expenses are used, capital allowances cannot be claimed as well. Likewise, if capital allowances have been claimed, the simplified expenses system cannot then be used.
Companies are not able to claim simplified expenses and instead obtain relief for expenditure on cars in the form of capital allowances.
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