Adrian Mooy & Co - Accountants Derby

Under the minimum wage legislation, workers must be paid at least the statutory minimum wage for their age. There are two types of minimum wage – the National Living Wage (NLW) and the National Minimum Wage (NMW). From 1 April 2021, as well as the usual annual increases, the age threshold for the National Living Wage is reduced.

National Living Wage - The NLW is a higher statutory minimum wage payable to workers whose age is above NLW age threshold. Prior to 1 April 2021, it was payable to workers age 25 and above. From 1 April 2021, the NLW age threshold is reduced; from that date it must be paid to workers aged 23 and above.

National Minimum Wage - The NMW is payable to workers who are below the age of entitlement to the NLW. Prior to 1 April 2021, the NMW applied to workers above compulsory school leaving age and under the age of 25; from 1 April 2021, the NMW must be paid to workers under the age of 23 and over the school leaving age.

There are three NMW age bands:

Workers aged 21 and 22 (prior to 1 April 2021, workers aged 21 to 24).

Workers aged 18 to 20.

Workers aged 16 and 17.

Apprentices - There is also a separate NMW rate for apprentices. It is payable to apprentices under the age of 19 and also to those who are over the age of 19 and in the first year of their apprenticeship.

Accommodation offset - Employers who provide their workers with accommodation are able to pay a lower minimum wage to allow for the cost of the accommodation provided. The amount that you are obliged to pay is found by deducting the ‘accommodation offset’ from the appropriate minimum wage for the worker’s age. The daily accommodation offset rate can be deducted for each full day for which accommodation is provided. For these purposes, a day runs from midnight to midnight. The weekly accommodation offset rate is seven times the daily rate.

Rates from 1 April 2021

NLW: Workers aged 23 and above £8.91 per hour

NMW: Workers aged 21 and 22 £8.36 per hour

NMW: Workers aged 18 to 20 £6.56 per hour

NMW: Workers aged 16 and 17 £4.62 per hour

NMW: Apprentice rate £4.30 per hour

Accommodation offset £8.36 per day £58.52 per week

Check you are paying the correct rates

Employers should ensure that the amounts that they pay workers on the NLW or NMW from 1 April 2021 are in line with the new rates. They should also ensure that they have processes in place to identify when a worker moves into a new age bracket. From 1 April 2021, this will include workers aged 23 and 24 who will be entitled to the NLW from that date.

If you commenced self-employment after 5th April 2019

If you started your self-employment after 5 April 2019, you were denied support under this scheme from the first three quarterly payouts to 31 January 2021.

The good news is that due to lobbying by tax professionals and self-employed support groups the SEISS is being opened to traders who commenced after 5 April 2019. However, there is an additional hurdle to jump before you can make a claim; your tax return for 2019-20 needs to have been filed by midnight 2 March 2021.

Additionally, your business must be adversely affected by the pandemic and your profits from self-employment must be at least 50% of your income and less than £50,000.

If you commenced self-employment on or before 5th April 2019

If you qualified for the first three grants, you should qualify for the further grants due this year unless your circumstances have changed, for example, if you are no longer adversely affected by COVID disruption.

For those of you who may be claiming for the first time, you will need to claim using your online tax account. HMRC should advise you when the claims process is open for business.

If claiming the fourth grant – 1 February 2021 to 30 April 2021

The fourth grant under the scheme covers February to April 2021. It is worth three months’ average profits capped at £7,500 and can be claimed from late April.

If claiming the fifth and final grant – 1 May 2021 to 30 September 2021

The fifth and final grant covers the period from May to September 2021. The amount of the grant will depend on the impact that Covid-19 disruption has had on your profits.

• If your turnover has fallen by 30% or more because of Covid-19, you will be able to claim agrant equal to 80% of your average profits for three months, capped at £7,500.
• However, if your turnover has dropped by less than 30%, you will be entitled to a reducedgrant of 30% of three months’ average profits, capped at £2,850.

The final grant can be claimed from late July.

There is a potential misfit in this fifth grant. Although it covers a five-month period (May – September 2021) the actual payout for this period is based on three months. What about the other two months?

Under real time information (RTI), employers are required to report pay and deductions information to HMRC ‘at or before’ the time that the payment is made to the employee. This is done by means of the full payment submission (FPS).

Penalties are charged if the FPS is filed late or if HMRC did not receive the expected number of FPSs or an Employer Payment Summary in a tax month in which no payments were made to employees. However, a penalty is not charged for the first default in the year.

Period of grace

HMRC operates a risk-based approach to penalties and historically have allowed a three day period of grace, not charging a penalty if the FPS is received within three days of the date on which the payment was made to the employee. They are continuing this approach for the 2021/22 tax year and will not charge a penalty where the FPS is received in this three-day window as long as there is no pattern of persistent late filing by the employer.

However, it should be noted that this is a concession, not an extension to the filing deadline. Employers should treat the concession as an occasional ‘get out of jail free card’ and continue to file the FPS at or before the time that they make the payment, unless one of the limited circumstances in which the FPS can be filed after the payday applies. These are listed in the ‘Running payroll’ guidance on the Gov.uk website.

HMRC will monitor employers who persistently file after the statutory deadline and may be contacted or considered for a penalty as part of HMRC’s risk-based approach.

Amount of the penalty

Where a penalty is charged for late filing, the amount of the penalty depends on the number of employees that the employer has.

If an employer has more than one PAYE scheme, penalties are assessed and charged separately for each scheme.

Where penalties arise, these are charged in-year on a quarterly basis.

The new extended tax loss relief seems straightforward but a closer look reveals an opportunity for sole traders and business partners to save more tax than first appeared. Is this something you can take advantage of?

Tax relief for trading losses - Trading losses can be used to reduce tax payable on income of the current year, the previous year or both. The trouble is this can mean losing at least some or all of your personal tax-free allowance.

Example 1 - existing rules. In 2020/21 you made a loss of £30,000 and had other taxable income, a salary of £20,000 on which the tax payable is £1,500 ((£20,000-£12,500 personal allowances) x 20% £1,500). The rules say that losses are deducted from your income before personal allowances. Therefore, to get the £1,500 tax refunded you must use £20,000 of the loss relief. This means the £12,500 personal allowance is wasted.

New extended loss relief - The new loss relief rules are different in that you can’t use them to reduce tax payable on your other income. Instead, the loss relief can only be used against profits from the same trade. Ironically it’s this limitation that produces an opportunity for extra tax savings. The following example illustrates this. Bear in mind that to access the new loss relief you must either have no taxable income in the same and previous year as the loss, or have reduced it to nil for at least one of them by making a claim for relief under the existing rules.

Example 2 - existing rules. Jimmy’s sole-trader business shows the following results:

Year 2020/21 2019/20 2018/19

Trading profit/(loss) (£45,000) £26,000 £20,000

Other income £5,000 £12,000 £10,000

If he claims loss relief (under the existing rules)against his other income for both 2020/21 and 2019/20 he’ll have no taxable income in either year. He will have used all the loss but wasted his personal allowance for both years.

Example 3 - new rules. To access the new loss relief Jimmy must make a claim to use the loss in 2020/21 or 2019/20 under the existing rules. While the obvious choice is the year with the highest income, i.e. 2019/20, this would result in only £5,000 of the loss remaining to carry back to 2018/19 under the new extended loss relief rule. A better result is achieved if Jimmy instead claims loss relief against other income for the year of the loss (2020/21).

This seems counter intuitive because Jimmy’s income for 2020/21 is only £5,000 meaning that the claim results in no tax saving for 2020/21 as his income is already covered by his personal allowances. However, by claiming the loss relief for 2020/21 Jimmy uses just £5,000 of it. This leaves £40,000 (£45,000 - £5,000) which can be carried back under the new rules, first against 2019/20 and then 2018/19. The relief can only be used against trade profits and so will cover those for 2019/20, but will leave his personal allowance intact to cover his other income for that year.

Another angle. The “limitation to trade profits” rule can be used to increase loss relief carried forward. Say you made a loss in 2020/21 of £20,000 and had £1,000 other income. In 2019/20 your profits were £10,000 and you had other income of £10,000. Using the existing rules you could carry the £20,000 loss relief and so reduce your taxable income to nil. But if instead you claimed relief against the current year’s income, apparently wasting £1,000, you will limit the loss carried back under the new rules to £10,000 leaving £9,000 of it to carry forward.

Because the new extended loss relief is only set against trading income it can, unlike the existing loss relief, avoid wasting all or part of your tax-free personal allowance. This is done by claiming relief under the existing rules for the tax year in which your other income is lowest.

Rent-a-room relief aims to encourage those with spare rooms in their homes to let them out to increase the supply of furnished rental accommodation. Under the scheme, a person can earn up to £7,500 each tax year tax-free from letting out furnished accommodation in their own home. The limit is halved where the income is shared by two or more people, each person being able to earn £3,750 tax-free a year.

Automatic exemption

Where rental income is less than the rent-a-room limit of £7,500 (or £3,750 where income is shared), the tax exemption is automatic. There is no need to tell HMRC about the rental income, or claim the relief.

Rental income of more than the tax-free limit

If the rental income that a taxpayer receives from letting a room in their house exceeds the rent-a-room limit of £7,500 (or £3,750 where income is shared), the taxpayer has the option of claiming rent-a-room relief or working out the associated rental profit in the usual way. Where rent-a-room relief is claimed, the taxpayer simply deducts the rent-a-room tax-free limit from their rental income to arrive at their taxable rental profit.

Where rental profit exceeds the tax-free rent-a-room limit, the taxpayer must complete a self-assessment tax return. If the relief is to be claimed, the claim can be made in the tax return. Whether a claim is worthwhile or not will depend on whether actual expenses are more than the rent-a-room tax-free limit.

Example

Maisie lives alone and lets out a furnished room in her home, receiving rental income of £10,000 for the tax year. Her associated expenses are £2,000. If she claims rent-a-room relief, she will pay tax on rental profits of £2,500 (£10,000 - £7,500). However, if she does not claim the relief, she will pay tax on the excess of her rental income over her actual expenses, a taxable rental profit of £8,000 (£10,000 - £2,000). Opting into the scheme is clearly beneficial as this reduces her taxable rental profits by £5,500. If Maisie is a higher rate taxpayer, this will save her tax of £2,200 (£5,500 @ 40%).

Mathew also lives alone renting out a furnished room in his home. His rental income is also £10,000, but his associated expenses are £9,000. In Matthew’s case, opting into the rent-a-room scheme is not beneficial as doing so will increase his taxable profit from £1,000 (£10,000 - £9,000) to £2,500 (£10,000 - £7,500).

Preserving losses

The rent-a-room scheme cannot be used to create a loss, and where actual expenses exceed rental income, it will generally be better not to opt into the scheme in order to preserve the loss so that it can be carried forward and set against future rental profits. However, if the likelihood of being able to use the loss is small, it may be preferable to take advantage of the rent-a-room exemption to save work.

Example

Maud lets a furnished room in her own home, receiving rental income of £3,000. The associated expenses are £4,000. If she chooses to use the rent-a-room scheme (which may be attractive due its simplicity) she does not need to report the income to HMRC. However, if she wishes to preserve the loss of £1,000 (£3,000 - £4,000), she will need to complete the property pages of the self-assessment tax return.

No one size fits all

The extent to which it is beneficial to claim rent-a-room relief will depend on personal circumstances.

You’ve come into some money and want to invest in a tax-advantaged scheme, either an enterprise investment scheme (EIS) or a venture capital trust (VCT). The tax breaks for these are similar but with important differences. What are they?

Riskier investments

Investing in companies always carries a risk and in enterprise investment scheme (EIS) companies or venture capital trusts (VCT) even more so. If you’re new to these types of investment or are unsure about putting money into higher risk schemes, we recommend that before you take the plunge you speak to a financial advisor. It’s worth comparing the different tax breaks for EISs and VCTs as they might help you decide where to put your money.

Income tax relief

Both EISs and VCTs offer the same rate of income tax relief which is given in the same way. The tax relief is equal to 30% of the amount you invest (this can be proportionately reduced if the company or fund you invest in uses some of the money for a non-qualifying purpose). The tax relief is given as a reduction of your tax bill. This means it doesn’t matter what rate of income tax you pay the amount of tax relief you’ll get is the same. For example, if you invest £20,000 in an EIS or VCT your tax bill is reduced by £6,000 (£20,000 x 30%).

The main differences in EIS and VCT income tax relief are:

you can carry back EIS tax relief from the year of investment to the previous one. Among other advantages this accelerates the tax saving

the tax relief is clawed back if you sell or transfer an EIS investment (unless it’s to your spouse or civil partner) within three years of making it. The claw-back period is five years for VCTs

dividends (distributions of income) from VCTs are tax exempt but those from EIS companies aren’t; they are taxable under the normal rules for dividends.

Capital gains tax deferral

If you have a capital gains tax (CGT) bill for the year of investment, or the year before, EIS investments offer an incentive VCTs don’t. You can claim deferral of the capital gain until you sell or transfer (to someone other than your spouse or civil partner) the investment. For example, if you made a taxable capital gain in 2020/21, you could defer when it’s taxed by investing in an EIS company on or before 5 April 2022 and using the carry-back rule we mentioned earlier to claim the tax relief for 2020/21.

Investment gains and losses

If you sell an EIS or VCT investment for more than you paid for it the gain is tax exempt. For EIS, you must own the investment for at least three years before the exemption applies. If you make a loss from the sale of an EIS investment you can use it to reduce the taxable gains made from other sales or transfers of the same or later years, e.g. from selling an investment property. Conversely, you cannot claim tax relief for losses made from the sale or transfer of a VCT investment.

As a rule of thumb, EIS investments tend to be riskier than those in VCTs but successful EIS investments usually produce greater income or gains. However, there’s no certainty of success.

Take your pick . EIS investments have the added incentive of CGT deferral relief. However, if you’re looking for a tax-free income stream VCTs provide it whereas EISs don’t.

While the rate of income tax relief is the same, EIS relief can also be used to reduce your tax bill for the year of investment or the previous year. EIS investments also allow you to indefinitely defer capital gains tax liabilities. All income and capital gains from VCT investments are tax exempt whereas income from EIS investments is taxable.

Debt collection. Over the last 16 months the government has created schemes to help businesses and individuals spread their tax bills. HMRC has also taken a relaxed approach to demanding and collecting tax. However, in a recent policy paper it says that this is coming to an end shortly as the UK emerges from the pandemic. The document says that HMRC is restarting its debt collection work and will contact everyone who has fallen behind with their tax. It says it will take enforcement action to collect what’s owed but it will take an understanding approach, including allowing more time to pay. It can only do this if you contact it in response to its demands. Regardless of temptation, don’t just file demands in the bin.

HMRC is restarting its more aggressive approach to collecting tax debts. If you receive a demand, don’t ignore it. If you’re struggling to pay, contact HMRC which says it will take an understanding approach.

Tax relief for buying equipment used in your business is given as capital allowances. You or your company can claim the capital allowances depending on who buys and owns the equipment. But which is the most tax efficient option?

Capital allowances basics

A tax deduction for the cost of equipment used in a business isn’t calculated in the same way as day-to-day expenses. Because equipment tends to last for more than a year the tax deduction, capital allowance (CA), is spread over a number of years.

For some purchases CAs aren’t spread but given in full for the financial period in which the purchase is made, i.e. like day-to-day expenses. However, this article focuses on tax efficiency ignoring the timing issue. Specifically, whether it’s more tax efficient for you or your company to purchase equipment and claim the CAs .

Equipment used by business in general

The CAs rules for equipment are complex but broadly apply in the same way to purchases made by a director who uses it to do their job or the company.

A director isn’t entitled to CAs for equipment that’s not used directly for doing their job. For example, if a director bought an item of equipment that’s only used by other employees in the company’s business, the director can’t legitimately claim CAs for its cost.

In the circumstances described above, the company should purchase the equipment so it can claim the CAs. If it can’t afford to, but the director can, they should lend or give the money to the company to buy the equipment.

Equipment used by director

Where equipment is used by a director in the course of doing their job, there are two ways to obtain CAs. Assuming the company has the funds to buy the equipment:

it could buy and own the equipment itself and let the director use it; or

the director can buy and own it using money supplied by the company.

Generally, the CAs available to a company and a director will be the same. However, be aware that there are exclusions for some types of equipment, e.g. cars and vans. A director isn’t entitled to CAs for these.

Tax efficiency ratings

Assuming that the company funds the purchase of equipment, the tax advantage for a company purchase compared to one made by the director varies considerably depending on how the company provides the funds to the director. It could pay a dividend (if they are a shareholder), extra salary or make a gift of the equipment (which would count as a taxable benefit in kind). We’ve crunched the numbers to test the tax efficiency of each of these methods.

Our calculations show that as a rule it’s always more tax efficient for a company to purchase and own the equipment. For example, on a purchase of £1,000 the saving could be up to £373. The tax efficiency is greater if the company can reclaim the VAT paid (if any) on the purchase.

The degree of tax efficiency varies widely but as a rule it’s greatest if your company purchases and owns the equipment, and claims the capital allowances. If your company doesn’t have the funds to make the purchase, you should lend it the money rather than make the purchase yourself.

Dividends have their own tax rules and their own rates of tax. The rules and the rates apply in the same way regardless of whether the dividends are paid from your personal or family company as part of a profit extraction strategy, or whether they represent investment income on shares. As part of the Government’s health and social care plan, the rates at which dividends are taxed are to increase by 1.25% from 6 April 2022.

Dividends have already suffered corporation tax

Dividends can only be paid out of retained profits. This means that if you want to pay a dividend from your personal or family company, you can only do so if you have sufficient retained profits from which to pay. 'Retained profits' are post-tax profits which have not yet been paid out. Consequently, they have already suffered corporation tax. The rate of corporation tax is currently 19%, but is due to increase from 1 April 2023 where the company’s profits are more than £50,000.

Dividends covered by the dividend allowance are tax-free

All taxpayers, regardless of the rate at which they pay tax, are entitled to a dividend allowance. This is available in addition to the personal allowance, and, unlike the personal allowance, is not abated once income reaches £100,000.

Although termed a dividend ‘allowance’, it is not an allowance as such; rather it is a nil rate band. Dividends that are covered by the dividend allowance are taxed at zero rate. However, they count as part of band earnings. The dividend allowance is set at £2,000 for 2021/22.

Dividends are treated as the top slice of income

Dividends are taxable to the extent that they are not sheltered by the dividend allowance or, if not fully used elsewhere, the personal allowance. In determining the appropriate rate of tax, dividends are treated as the top slice of income.

Dividend tax rates are lower than income tax rates

Dividends have their own tax rates. These are lower than the usual rates of income tax. However, as noted above, dividends are paid from profits which have already suffered corporation tax.

Dividends are taxed at the dividend ordinary rate to the extent that they fall within the basic rate band. This is set at 7.5% for 2021/22. It is to increase to 8.75% from 6 April 2022.

Dividends are taxed at the dividend upper rate to the extent that they fall in the higher rate band. This is set at 32.5% for 2021/22. It is to increase to 33.75% from 6 April 2022.

Dividends are taxed at the dividend additional rate to the extent that they fall in the additional rate band. This is set at 38.1% for 2021/22. It will increase to 39.35% from 6 April 2022.

Making Tax Digital (MTD) is a government programme to move to a digital tax world. HMRC’s stated ambition is to become one of the most digitally advanced tax administrations in the world. MTD involves fundamental changes in the way in which taxpayers keep records and report information to HMRC. MTD launched with MTD for VAT, which was compulsory for VAT-registered businesses with VATable turnover over the VAT registration threshold (currently £85,000) from the start of their first VAT accounting period on or after 1 April 2019.

The next steps in the MTD programme are the extension of MTD for VAT and the launch of MTD for income tax.

Extension of MTD for VAT

Under MTD for VAT, VAT registered businesses must keep digital records and file their VAT returns using MTD-compatible software. Currently, MTD for VAT is only compulsory for VAT-registered businesses whose VATable turnover is above the VAT registration threshold of £85,000. Where VATable turnover is below this level, MTD is optional. However, once a business has joined MTD for VAT, they must remain in it.

This is due to change from 1 April 2022. From that date, MTD for VAT will become compulsory for all VAT-registered businesses. Businesses that are not currently within MTD for VAT will be required to comply from the start of their first accounting period beginning on or after 1 April 2022. They will need to sign up, and be ready to keep digital records and file VAT returns using MTD-compatible software.

MTD for income tax

The start date for MTD for income tax has now been delayed by one year. The next key date in the MTD timetable is 6 April 2024 – one year later than planned.

Self-employed businesses and landlords with annual business or property income of more than £10,000 will now come within MTD for Income Tax from 2023/24. In preparation for this, the Government have consulted on rules to reform the basis period rules, moving from a current year basis to a tax year basis. These reforms were due to take effect from 2023/24, with 2022/23 being a transitional year. These too have now been delayed, and will not now come into effect before 2024/25 with a transitional year no earlier than 2023/24.

Under MTD for income tax, landlords and self-employed businesses within its scope would need to keep digital records. They will also be required to send quarterly summaries of income and expenditure to HMRC using MTD-compatible software. The taxpayer will receive an estimated tax calculation after each submission. The quarterly submissions would be followed by a final end of year submission to take account of necessary adjustments and a final declaration. This will replace the annual self-assessment tax return.

General partnerships will now not be brought within MTD for income tax until April 2025.

Last year, the Covid-19 pandemic and national lockdown took Christmas parties (other than virtual ones) off the agenda. This year, they may be a temptation to make up for lost time. How can you celebrate the festive season without triggering a tax liability in the process?

Limited tax exemption

There is a limited tax exemption for annual parties and functions, which can be used to ensure that no benefit in kind tax charge arises in respect of the provision of the Christmas party. However, as with all exemptions, there are conditions to be met. The exemption applies equally to virtual parties as to ‘real life’ events.

Function must be annual

The exemption only applies to annual functions. If you hold a Christmas party every year (Covid-19 restrictions aside), the exemption will be available. If, however, you decide to hold a one-off event, the resulting benefit will be taxable.

£150 per head limit

The exemption only applies if the cost of the function is not more than £150 per head. This is the total cost of the function (including VAT) divided by the number of people attending (guests as well as employees). If the cost per head is more than £150, the full amount is taxable, not just the excess over £150. If the employee brings a guest, the taxable benefit is the cost of the employee’s attendance at the event, and also that of their guest.

If you hold more than one annual function each year, you can use the £150 per head limit to achieve the best outcome. Remember that it can only be used to shelter ‘whole’ functions – it is not a tax-free allowance. In working out the best possible use of the exemption, you will need to consider the impact that guests will have on the amount that would be taxable in the absence of the exemption. The exemption is better used to cover an event costing £30 per head where the employee can bring a guest than one costing £40 per head which is for employees only. If the exemption is not available, the taxable amount for the former for attendance by both the employee and their guest is £60 (2 x £30), whereas for the latter, it is only £40.

Taxable benefit? Use a PSA

If you are not able to benefit from the exemption for your Christmas party, but want to preserve employee goodwill, you may wish to meet the associated tax liability by including the benefit within a PAYE Settlement Agreement.

The annual investment allowance (AIA) allows you to claim an immediate deduction against your profits for qualifying capital expenditure up to the available limit. The AIA limit was temporarily increased from £200,000 to £1 million from 1 January 2019 to 31 December 2021. It will return to its permanent level of £200,000 from 1 January 2022. This means that time is running short to take advantage of the higher limit. But, be warned, there are traps to be avoided.

Accounting period falls wholly within period from 1 January 2019 to 31 December 2021

If your accounting period falls wholly within the period for which the higher £1 million limit applies, for example, if you prepare your accounts to 31 December 2021, the position is quite straightforward. If your accounting period is 12 months, the available AIA limit is £1 million; if you accounting period is less than 12 months, the limit is proportionately reduced.

If you are planning capital expenditure of more than £200,000, and you have a 31 December year end, it would be advisable to incur the expenditure before 31 December to benefit from £1 million limit. The limit will revert to £200,000 for the year to 31 December 2022.

Accounting period spans 31 December 2021

The position is more complicated if your accounting period spans 31 December 2021. Not only do you need to calculate the limit for your accounting period, you also need to calculate the cap that applies to expenditure that is incurred after 31 December 2021.

The AIA limit for periods spanning 31 December 2021 is found by applying the formula:

(x/12 x £1,000,000) + (y/12 x £200,000) where x is the number of months in the period before 31 December 2021 and y is the number of months in the period on or after 1 January 2022.

However, this is not the end of the story as a further cap applies to limit the AIA that is available for expenditure incurred in the period but on or after 1 January 2022. The cap is equal to:

y/12 x £200,000

where y is the number of months in the period falling on or after 1 January 2022.

Example - David is a sole trader. He prepares accounts to 31 March each year. He is planning in investing in new equipment in the year to 31 March 2022 which will cost £300,000.

His AIA limit for the year to 31 March 2022 is £800,000 ((9/12 x £1,000,000) + (3/12 x £200,000)).

However, a further cap of £50,000 (3/12 x £200,000) applies to expenditure incurred in the period from 1 January 2022 to 31 March 2022.

If David buys his equipment before 31 December 2021, he can claim the AIA for the full amount, achieving an immediate deduction in calculating profits for the year to 31 March 2022. However, if he buys the equipment on or after 1 January 2022 but before 31 March 2022, he can only claim the AIA on £50,000 of the expenditure (despite the limit for the period being £800,000). He will be able to claim writing down allowances on the difference. In this case, he may wish to delay the expenditure until on or after 1 April 2022, so that it falls in the year to 31 March 2023, for which the AIA will be available for £200,000 of the expenditure.

Companies - Companies incurring qualifying expenditure in the period 1 April 2021 to 31 March 2023 may be better claiming the super-deduction than the AIA. The super-deduction is not available to unincorporated businesses.

You must register your business for VAT if your VAT taxable turnover exceeds the registration threshold. This is currently £85,000.

You must register if:

at the end of any month, the value of your VAT taxable supplies in the previous 12 months or less is more than £85,000; or

at any time if you expect the value of your taxable supplies in the next 30 day period alone to exceed £85,000.

Different thresholds apply to businesses based in Northern Ireland for buying from and selling to EU countries.

VAT taxable turnover

The VAT taxable turnover is the total value of sales that are not exempt from VAT. Thus, you should include sales that would attract VAT at the standard rate, the reduced rate or which are zero rated, but not sales that are exempt from VAT.

Exception from registration

If you exceed the VAT registration threshold but believe that your VAT taxable turnover will not exceed the deregistration threshold, currently £83,000, in the next 12 months, you can apply to HMRC for an exception from registration. This can be done on form VAT1. This may be case if you have a one-off sale that is particularly large,

Voluntary registration

Registration is compulsory if your VAT taxable turnover exceeds the registration threshold (unless an exception applies). However, if your VAT taxable turnover is below this level, you may choose to register for VAT voluntarily. This can be advantageous, particularly if you supply goods that are zero rated (such as food) as it will enable you to reclaim any VAT that you pay on purchases.

How to register

Most businesses are able to register online on the Gov.uk website. In certain cases, registration must be done by post, for example, if you apply to join the agricultural flat rate scheme.

You will receive a VAT registration number once you have been registered for VAT. You should receive a VAT registration certificate within 30 days.

Implications of being VAT-registered

Once you have registered for VAT, you will need to charge VAT at the appropriate rate on any sales that you make. You will also be able to reclaim any input tax that you suffer on purchases.

You may choose to join one of the schemes to simplify the process and reduce the associated VAT return, for example, the flat rate scheme for small business.

You must also file VAT returns each quarter and pay any VAT owing over to HMRC and comply with Making Tax Digital for VAT. You can appoint an agent, such as an accountant, to file your VAT returns on your behalf.

As the country emerges from the Covid-19 pandemic, business travel is once again on the agenda. Where employees undertake business travel, they will usually be able to claim the associated expenses from their employer. If the journey is by car, the easiest way to do this is for the employer to pay a mileage allowance for the business miles undertaken.

Where a mileage allowance is paid, there may be tax consequences depending on the amount that is paid. The rules differ depending on whether the employee uses their own car for business travel or has a company car.

Employee uses their own car

The Approved Mileage Allowance Payments (AMAP) scheme allows employers to make tax-free mileage payments up to an ‘approved amount’ where the employee undertakes a business journey in their own car. The approved amount for the tax year is found by multiply the number of business miles driven by the employee in their own vehicle in that year by the approved mileage rate for that particular vehicle. The approved mileage rates are set out in the table below:

So, if an employee drives 12,000 business miles in the tax year in their own car, the approved amount is £5,000 ((10,000 miles @ 45p per mile) + (2,000 miles @ 25p per mile).

If the employer pays mileage at a higher rate, the excess over the approved amount is taxable, and must either be taxed through the payroll or reported to HMRC on the employee’s P11D. If the employer pays less than the approved amount (or does not pay an allowance), the employee can claim tax relief for the difference between the approved amount and the amount that they receive, if any.

The employer can also pay the employee a tax-free passenger rate of 5p per mile for each passenger for whom the journey is also a business journey. However, there is no tax relief available if the employer does not pay passenger payments, or pays them at a rate of less than 5p per mile.

For National Insurance purposes, similar rules apply, except that the calculation is performed for each pay period. For cars and vans, an ‘approved’ rate of 45p per mile is used for all business mileage, even if this exceeds 10,000 miles in the tax year. If the amount paid in the pay period is more than the ‘approved’ amount, the excess is included in gross pay. National Insurance purposes only.

Company cars

If the employee has a company car and the employer does not pay for the fuel, a different set of mileage rates – the advisory fuel rates – apply to determine the amount that can be paid tax-free. These are lower than the AMAP rates, which include an element to reflect the running costs and the depreciation of the employee’s own car.

The advisory rates are set quarterly. The rates applying from 1 June 2021 are as follows:

Payments of 4p per mile can be made for business travel in an electric company car.

Any amounts paid in excess of the advisory rate are taxable and liable to Class 1 National Insurance.

If the employer pays for all fuel, including that for private journeys, a fuel benefit tax charge will arise unless the car is an electric car.

Childcare costs can be very expensive and any help is welcomed, particularly where you can benefit from that help tax-free. There are various routes by which this is possible.

Government tax-free top-up scheme

Under the Government scheme, you can open an online account and deposit money which is used to pay for your childcare. For every £8 that you deposit in the account, the Government will add a further £2, to a maximum of £2,000 per child per year. The maximum top-up is doubled to £4,000 for disabled children. This top-up is tax-free.

The money in the account can only be used to pay for approved childcare, such as childminders, nurseries, nannies, after-school clubs and play schemes. The childcare provider must be signed up to the scheme.

To benefit from the scheme, you (and your partner if you have one) must be working or on statutory leave, and you must expect to earn at least the National Living or Minimum Wage for your age for 16 hours a week on average over the next three months. At the current NLW, this is £1,853.28. You can also use the scheme if you are self-employed.

You cannot benefit from the top-up scheme if you, or your partner, earn more than £100,000 a year.

Workplace nurseries

If your employer provides you with a place in a workplace nursery, you can enjoy the benefit of this tax-free, as long as conditions governing the tax exemption for workplace nurseries are met. There is no financial limit on the tax-free benefit.

The exemption remains available if the benefit of a place in a workplace nursery is made available under a salary sacrifice scheme.

Employer-supported care

Employer-supported care is childcare provided by someone where the contract is between the employer and the childcare provider, and the employer meets the costs. The benefit is tax-free up to your exempt amount.

You have one exempt amount, which applies to both employer-supported care and employer-provided childcare vouchers. This is £55 per week if you joined the scheme before 6 April 2011. If you joined the scheme after this date but on or before 4 October 2018, the exempt amount depends on your marginal rate of tax. It is £55 per week if you are a basic rate taxpayer, £28 per week if you are a higher rate taxpayer and £25 per week if you are an additional rate taxpayer.

If you joined such a scheme on or before 4 October 2018, you can continue benefitting from the exemption as long as your employer continues to provide the care. However, the exemption is lost if you sign up for the Government tax-free scheme.

The exemption remains available if the care is provided under a salary sacrifice scheme.

Employer-provided childcare vouchers

The tax exemption for employer-provided childcare vouchers operates in a similar way to that for employer supported childcare and shares the same tax-exempt amount. To benefit, you must have joined the scheme on or before 4 October 2018. However, you cannot benefit from the exemption and also the Government tax-free scheme.

The exemption remains available if the care is provided under a salary sacrifice scheme.

HMRC has published new guidance which explains when you might need to amend your self-assessment tax return if you claimed Self-Employment Income Support Scheme (SEISS) payments.

HMRC’s notice published on 2 July advises anyone who has claimed and received one or more coronavirus support payments under the Self-Employment Income Support Scheme (SEISS) to check their 2020/21 tax returns. The notice is part of HMRC’s clampdown on incorrect and false claims; it’s currently investigating around 12,000 such cases. However, the latest guidance is to ensure that the correct tax is paid on genuine claims.

Disparities. The new guidance follows HMRC’s discovery that many of the self-assessment tax returns submitted for 2020/21 include entries which don’t match the figures it already has on record. Either SEISS payments haven’t been reported at all or the figures differ from those HMRC has on record.

What to report. Payments from the first, second or third SEISS grants (received on or before 5 April 2021) should be included on your 2020/21 return in the “Self-Employment Income Support Scheme grant” box. If you haven’t yet submitted your tax return remember this.

If you have submitted your 2020/21 return, check you’ve reported the SEISS payments in the right box. If you put them in the wrong place, you must send an amendment to your tax return otherwise HMRC will assume you haven’t reported the payments and will automatically amend your return. This will result in you being taxed twice on the same income.

Mismatched figures. HMRC will also automatically amend your tax return if the amount of SEISS payments you reported doesn’t match its records. It will send you a revised tax calculation which you should check. HMRC explains how to do this in its latest guidance. It also explains what to do if you don’t agree with the amendment made by HMRC.

Make sure you entered any SEISS payments in the right place. If you haven’t you must amend your tax return to show them correctly or you will be taxed twice.

CGT reporting. Since April 2020 if you make a gain from the sale or transfer of your home or other residential property on which capital gains tax (CGT) is payable, you must report it to HMRC and pay an estimate of the tax due within 30 days of the transaction. After the end of the tax year you must report the transaction on your self-assessment return. It’s not uncommon that the original estimate of the tax due might be over or understated. A problem arises where it was overstated.

HMRC’s self-assessment system ignores the overpayment so that overpaid tax is neither refunded nor set against other tax you owe. HMRC is aware of this problem and following pressure from tax and accountancy bodies has a temporary solution while it works on a permanent one.

If you have overpaid CGT because of the 30-day reporting which cannot or has not been amended using this service, call HMRC on 0300 200 330 to explain that an overpayment has been made. It will then make a manual adjustment to credit or refund the tax.

A PAYE Settlement Agreement (PSA) enables an employer to meet the tax on certain benefits and expenses on the employee’s behalf. This can be useful to preserve the goodwill nature of a benefit.

Not all benefits are suitable for inclusion within a PSA. To qualify a benefit must fall into one of the following categories:

the benefit is minor;

the benefit is provided irregularly; or

the benefit is provided in circumstances where it is impractical to apply PAYE or to apportion the value of a shared benefit.

A PSA can be used, for example, to meet the tax liability on the provision of an annual party that falls outside the associated tax exemption. Benefits that are exempt from tax do not need to be included.

The tax and National Insurance payable on items included within a PSA for 2020/21 must be paid by 22 October 2021 where payment is made electronically, and by 19 October 2021 otherwise.

An enduring agreement - Once as PSA has been set up, it remains in place until cancelled or amended by the employer or by HMRC. Existing PSAs should be reviewed each year to ensure that they remain valid.

Amending the PSA

If a PSA needs to be altered, this must be done by 6 July following the end of the tax year to which it relates.

The Covid-19 pandemic changed the way in which employees worked and may have changed the mix of benefits that were provided. Where a PSA needs to be amended in light to take account of Coronavirus-related benefits provided in the 2020/21 tax year, this must be done by 6 July 2021.

Normally, HMRC would issue a new P626 (the PSA) when a PSA is amended. However, where amendments to the PSA relate solely to Covid-19 changes, rather than issuing a new P626, they will instead issue an appendix to the existing PSA.

Covid-19 exemptions - To remove the tax charge that would otherwise arise, a number of limited-time exemptions have been introduced in respect of Coronavirus-related benefits. These include an exemption for the provision of Coronavirus antigen tests, and also any reimbursement of the cost of the test where this is initially met by the employee.

Where employees have worked at home during the Covid-19 pandemic and have bought equipment to enable them to do so, any reimbursement by the employer is also tax-free, as long as the provision would fall within the exemption for accommodation, services and supplies if provided directly by the employer.

Coronavirus-related benefits that fall within the time-limited exemptions do not need to be included within a PSA. However, consideration may be given to adding any non-exempt benefits made available to employees during the pandemic to the PSA (for example, antibody tests), as long as they meet the qualifying conditions for inclusion.

A new PSA - If a PSA is not already in place, should an employer wish to set one up to deal with taxable benefits provided as a result of the Covid-19 pandemic, if the PSA is to have effect for 2020/21, it must be agreed with HMRC by 6 July 2021.

Running a property business through a limited company rather than as an unincorporated business may be an attractive proposition; at 19% the rate of corporation tax is lower than the basic rate of income tax and interest and financing costs are fully deductible in computing taxable profits. However, the tax bill on the company is not the end of the story – if profits are required outside the company, they will need to be extracted, and this may come at a further tax cost.

Take a salary

If your personal allowance has not been utilised elsewhere, it can be tax efficient to take a small salary. As long as the salary is at least equal to the lower earnings limit (set at £6,240 for 2021/22), paying a salary will ensure that the year is a qualifying year for state pension and contributory benefits purposes.

The optimal salary will depend on whether the employment allowance is available to shelter employer’s National Insurance contributions. Where the allowance is not available, as will be the case if the company has one only one employee who is also a director, the optimal salary is equal to the primary threshold of £9,568. If the employment allowance is available, it is tax efficient to pay a higher salary equal to the personal allowance of £12,570.

Declare dividends

Once a salary at the optimal level has been paid, it is more tax efficient to take further profits as dividends, than to pay a higher salary. The dividends will be tax-free to the extent that they are covered by any unused personal allowance and the dividend allowance, which is set at £2,000 for 2021/22. Once the allowances have been used up, dividends are taxed at 7.5%, 32.5% and 38.1% where they fall, respectively, in the basic rate, higher rate and additional rate bands.

There are some rules which govern the payment of dividends. They can only be paid out of retained profits (on which corporation tax has already been paid) and must be paid in accordance with shareholdings (although the use of an alphabet share structure allows for flexibility).

Other options

Other options for extracting profits from the property company include the provision of benefits in kind, which can be tax efficient where the benefit is exempt from tax and National Insurance, the payment of rent if the business is run from home and making pension contributions on the director’s behalf.