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02/12/2015

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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.

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Helpsheets

  • Cycle to work tax-free

    As the cost-of-living crisis deepens, many employees are looking to save money. One option is to cut the cost of the commute by cycling to work. There can be tax benefits for this too.

    Exemption for employer-provided cycles

    Employees can enjoy the use of employer-provided cycles and cyclists’ safety equipment without having to pay tax on the associated benefit as long as the following conditions are met:

    1. There is no transfer of property in the cycle or equipment – it remains the property of the employer.

    2. The employer uses the cycle and/or equipment mainly for qualifying journeys. These are journeys between home and work and business journeys.

    3. The cycles and/or equipment are made available to the employees who want to make use of them. It is not necessary for each employee to have their own dedicated bike; the employer can operate a pool system where employees who want to borrow a bike can do so from a pool.

    Salary sacrifice

    A Cycle to Work scheme combines a salary sacrifice arrangement with hire agreement. There are a number of commercial providers offering such schemes, which are popular.

    Under the scheme, the employee enters into a salary sacrifice scheme and gives up part of his or her salary in return for the provision of a cycle. The employee enters into a hire agreement, under which they hire the cycle from either the employer or a third party. The hire is paid for by the sacrificed salary.

    As long as the above conditions are met, the provision of the cycle is exempt from tax. It is important to stress here that ownership of the cycle must not at this point pass to the employee. As employer provided cycles are protected from the operation of the alternative valuation rules, the exemption is not lost by using a salary sacrifice scheme. The arrangement allows the employee to save tax on the salary given up, and both the employer and employee to save Class 1 National Insurance.

    Cycle to work schemes typically run for three years. At the end of the period, the employee has three options:

    1. Extend the hire agreement.

    2. Return the cycle and equipment.

    3. Buy the cycle and equipment.

    There are no tax consequences if the employee chooses option 1 or 2. If the employee decides to buy the bike, as long the amount paid is at least equal to the market value of the bike at the time of the transfer, there is no tax to pay. However, if the amount paid is less than the market value, the shortfall is a taxable benefit.

    HMRC recognise that it can be difficult to establish the market value of a second-hand bike. Consequently, a simplified approach can be used under which no tax charge will arise as long as the employee pays at least the percentage of the original value for the age and original cost of the bike as shown in the table below.

    Age of cycle   Acceptable disposal value (% of original price)

                          Original price < £500  Original price £500 or more

    1 year                      18%                           25%

    18 months               16%                           21%

    2 years                    13%                           17%

    3 years                      8%                           12%

    4 years                      3%                             7%

    5 years                     Negligible                   2%

    6 years & over         Negligible                   Negligible

    So, for example, if an employee pays at least £24 for a cycle costing £300 (8% of £300) at the end of a 3-year hire period there will be no tax to pay on the transfer.

  • The tax implication of renting accommodation to your business

    Many director-owners of companies own the commercial property from which their company trades. The reasons for this vary and could be historic e.g. the business was initially run as a sole trader and is now trading as a company. However, most company owners hold their business premises personally so that if the company should become insolvent, a property owned by the director will usually be safe from the liquidator and any creditors (unless fraud or negligence is involved).

    Usually the original reason for personal ownership has nothing to do with income tax but charging the company may prove to be more or as tax efficient than withdrawing money in the form of a dividend depending on the individual's marginal income tax rate. Whether charging rent is tax-efficient needs to be looked by taking into account the immediate tax position of both the director and the company, but also the future capital gains tax (CGT) position when the property or the company is sold.

    Benefit to the director

    The main benefit for the director is that, unlike dividends, there is no legal requirement for the company to have sufficient distributable profits for the payment to be made. In addition, as the payment is not in the form of salary or a bonus no NIC charges will be due for either the director or the company. Further, tax relief can be obtained against rental income from the commercial property should there be a mortgage on the property. The 'downside' is that the director will be liable for income tax on rent received less rental expenses at his or her marginal tax rate. Benefit to the company

    The company is allowed full corporation tax relief on payments made and there is no employer NIC cost (as not salary or a bonus).

    On sale of the company

    If the company owns the property problems could arise should the company be sold. Many buyers may not also want to buy the premises as they may have their own. However, by holding the premises personally outside of the company, the advantage is that the purchaser can buy just the trade, without also buying the premises.

    If there is a qualifying disposal of shares and an 'associated asset' is also sold at a gain, it may be possible to claim Business Asset Disposal Relief (BADR). The asset needs to have been owned by a shareholder and be in use by their 'personal company' at the time the business has ceased or part or all has been sold, BADR is available on disposals of business assets, reducing the rate of CGT on qualifying gains to 10%, subject to a £1 million lifetime limit. However, by charging full market rent all relief is lost as the property will count as an investment asset. If the company pays rent lower than the market rent or has paid rent since 6 April 2008 (when the rules changed) the proportion of gain on which BADR can be claimed is restricted in proportion to the amount of rent paid.

  • Family Investment companies - how do they work?

    Although Family Investment Company's (FIC) have been around for several years, awareness of the flexibility that such a vehicle affords has been growing in recent years. The use of such companies is particularly attractive to director-owners of family businesses who have children, enabling parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.

    What is a FIC?

    A FIC is a bespoke vehicle which can be used as an alternative (or in addition) to a family trust. It is a private company that invests rather than trades (the investments typically being equity portfolios or property). The shareholders are family members taking advantage of the use of Alphabet shares enabling each direct descendent family member to be allocated a different class of share.

    Usually a FIC is set up with a founder share held by the individual(s) providing the capital, being either a cash loan or assets where no chargeable gain has yet to accrue. If a cash loan, the FIC uses the money to acquire assets (e.g. property), which generate a return. Such income is either re-invested within the FIC or can be used to repay the original loan tax-free.

    'Alphabet shares' enables family members to have different levels of control over company decisions, rights to receive dividends and entitlements to the company's capital value. In the incorporation of a FIC, the individual setting up the company could still be a Director and preferential Shareholder holding 'A' shares. Such a shareholder will have the right to appoint a director and vote at general meetings (and therefore hold control of the company), however, they must have no entitlement to dividends or to any return of capital. Other family members and often family trusts are then brought in as shareholders, each holding one ‘B’ share each. These ‘B’ shares have no voting or control rights but full entitlement to any dividends and/or return on capital. The shares can be held in trust if the child is a minor.

    Benefits of a FIC

    should assets rather than a cash loan by transferred into the FIC, after seven years the value of the money or property transferred falls outside the transferors' estate for IHT purposes. However, it is important that no beneficial interest in the company is held.

    there is no upper limit in the value of assets that can be placed into a FIC whereas there is a limit of £325,000 in placing capital into a Lifetime Discretionary Trust before any IHT is charged. Any value transferred into a trust above this amount is taxed at 20%.

    being a company a FIC is subject to corporation tax on the income received which (currently) is at a lower rate than income tax. Where the property is residential mortgage interest is fully reclaimable and not restricted to the basic rate tax credit as applied to personally held buy-to-let property holdings.

    the company shareholders will be liable to tax when profits are extracted. However, a FIC offers the possibility of allocating dividend payments, which could potentially be spread amongst family members tax-efficiently;

    the company's article of association can be set up to include specific clauses that protect the shares in specified circumstances (e.g. by preventing shares from being transferred outside of the family.)

    Tax trap

    Transferring assets (as opposed to cash) into a FIC can have CGT consequences for the donor and/or Stamp Duty Land Tax in the case of property used to subscribe for shares in the company. As such these costs can render the use of the FIC structure prohibitive.

  • Is it still worth incorporating?

    For many years, working out whether tax savings could be achieved by incorporation was relatively straightforward. Once profits reached a particular level, transferring the trade to a limited company and using profit extraction strategies would save a lot of money; the larger the profits, the bigger the saving. This all changed in 2016 with notional tax credits for dividends being abolished such that the question of whether to incorporate depended on a combination of factors. Now with the increase in dividend tax rates as from April 2022 the question as to whether to incorporate (or disincorporate) has even more relevance as in certain instances it is more tax efficient to operate as a sole trader or in a partnership. However, tax savings can still be achieved particularly if there is more than one director-owner and if not all profits are withdrawn. As ever it all depends on the calculations.

    Tax savings on incorporation - When you are looking to work out whether incorporation is financially worthwhile, you are looking at the income tax situation for the individual director-owner and the corporation tax liability to give a total tax saving figure. The table below shows the savings per level of income. The calculation assumes that all profit is withdrawn.

    Example 1 – Income gains on incorporation

    2022/23

    Profit.     Sole trader net         Company owner net.      Extra

                 after tax and NIC.        after tax and NIC       received

                            £                                   £                              £

    £20,000       17,520                        17,810                        290

    £30,000       24,495                        25,201                        706

    £40,000       31,470                        32,592                     1,122

    £50,000       38,445                        39,983                     1,538

    £60,000       44,156                        47,312                     3,156

    £70,000       49,830                        52,678                     2,848

    £80,000       55,505                        58,045                     2,540

    £90,000       61,180                        63,411                     2,231

    £100,000     66,856                        68,777                     1,921

    £125,000     76,043                        81,554                     5,511

    £150,000     90,203                        90,413                       210

    £200,000   116,078                       116,078                         nil

    The table shows that as a 'rule of thumb' if all profits are to be withdrawn and the Employment Allowance is not available (as would usually be the case with a sole director-employee) then for 2022/23 incorporation is generally not worthwhile for profits under £40,000 (bearing in mind the additional work and cost involved in preparing more detailed accounts, running a payroll and submitting additional returns to both Companies House and HMRC). However, once profit exceeds £60,000, the situation changes in favour of incorporation. The savings figure then drops at £70,000 profit, becoming exactly level at £200,000, due to the large 'jump' in the higher dividend rate of 33.75% in comparison with the basic rate of 8.75% and, importantly, the abatement of the personal allowance on income over £100,000. The tax savings reaches highest if the profit is £125,000 because at this profit, all the personal allowance of £12,570 for a self-employed taxpayer is cancelled. In contrast, a company profit of £125,000 means a dividend and salary available of £103,170 – allowing £10,985 personal allowances to be deducted.

    Other considerations - There are various reasons why the above figures should be used as a guide only. The main one being that they assume all the profit is withdrawn which is not the case with many companies. Pension contributions can be a valuable method of extracting profits with no personal tax implications for the director-owner and tax relief for the company.

    In addition, the calculations assume a sole director-shareholder but if the company could be set up with a spouse or civil partner then including two personal allowances, two basic rate bands and two dividend allowances in the mix could still yield large savings.

    When deciding whether to incorporate it should not be forgotten that there are other vehicles of operation that may produce higher tax savings in comparison. A partnership could be a more tax-efficient option for those who are married or civil partners because of the availability of double personal allowance and double basic rate band (assuming that there is no other income). However, bearing in mind the protections offered as a company may lead the owner to look at setting up a limited liability partnership.

    Finally, it must be said that the above figures could all change in the next few weeks as whoever is the new incumbent of Number 10 may reduce tax rates or National Insurance contributions in the next 'emergency budget'.

  • How gifting can save you tax

    Gifting assets during one’s lifetime is never an easy proposition even though by doing so inheritance tax (IHT) may be reduced in the long run. The dilemma is well-known, namely, that to reduce IHT you have to draw capital out of your estate but if you do - once it's gone, it's gone. Further, any capital that remains in the estate will usually increase in value thereby increasing the final IHT bill assuming that the monies are not needed to be otherwise spent (e.g. care home fees).

    Gifts out of income - Arguably the cost-effective way to make IHT-free gifts and prevent unused income accumulating as capital liable to IHT is to make the gifts out of income. Such transfers are considered exempt transfer if the following conditions apply:

    the payment is shown as part of the transferor’s normal expenditure (i.e. regular or habitual payments)

    Gifts must be made out of regular income (i.e. out of disposable income or surplus income after paying taxes and all other living expenses).

    The transferor must retain normal income to maintain his/her normal standard of living.

    The smaller exemptions - Advantage should be taken of the smaller reliefs available e.g. the annual exemption of £3,000 potentially saves £1,200 IHT each year, and any number of smaller £250 gifts can also be made in any one year free of IHT. There are other exemptions, although these are aimed at specific events and are of relatively restricted benefit in tax saving terms. For example, £5,000 can be gifted by a parent on the marriage or civil partnership of a child, £2,500 where the transferor is either a remoter ancestor than a parent or is one of the parties to the intended marriage or civil partnership, or £1,000 in respect of any other transferor.

    Gifting monies above such amounts can be made IHT-free as long as the donor lives for more than seven years (a 'potentially exempt transfer'). However, should the donor die within that period, HMRC will treat the money as part of the death estate and charge IHT accordingly. Gifts given in the 3 years before death are taxed at the full rate of 40% however, gifts given between three and seven years before death are taxed on a sliding scale known as ‘taper relief’.

    Transfers to UK spouses are exempt (for CGT as well as IHT) and transfers to non-UK spouses are exempt up to £325,000.

    Trusts - Trusts can be an effective method of taking capital out of the estate so IHT is reduced but again the amount that can be transferred tax-free is limited. Should the trust be created during the settlor’s lifetime, IHT is due at 20% of the transfer value more than the Nil Rate Band (NRB) amount (£325,000 for 2022/23 - frozen until 5 April 2026). Therefore, placing an asset valued at less than the NRB will not produce a tax charge if the full NRB is available. PETs are aggregated with the transfer to determine the amount remaining of the NRB and if this total figure is higher, then the tax charge is on the excess amount only.

    Insurance products - The insurance industry offers products that can ensure no or minimal IHT is paid in the form of discounted gift trusts, or investment funds. However, these products are inflexible and costly to set up and run. Under such trusts the amount gifted is invested into a life insurance investment bond and transferred/gifted to a Discounted Gift Trust established at the same time. The transfer constitutes a PET for IHT purposes. A regular income for the settlor can be achieved by permitting regular withdrawals determined at the outset and paid at a pre-determined frequency during the settlor's lifetime -- these payments cannot be subsequently altered.

    Open ended loans - As an alternative to insurance products or making a straight gift to the intended beneficiary, the donor could gift an interest-free, open-ended loan, which the beneficiary could use to buy investments. The value of such planning is that the income generated by the investment forms part of the donee's estate for IHT purposes rather than the donors. A loan can also be used in conjunction with the annual exempt gifts allowance whereby up to £3,000 is written off each year as this counts as a gift and reduces the amount to be repaid.

    Otherwise leave everything to charity or a political party. Gifts, during lifetime or on death, to most UK charities or registered community amateur sports clubs are IHT exempt, as are gifts to any UK political party (as long as at the last election it had either at least two MPs in the House of Commons or one MP and received at least 150,000 votes).

  • Can you be penalised for submitting a return too early?

    The supposed reason why HMRC issue penalties is to deter future late payment of tax and/or late submission of tax returns. There are set dates for self assessment returns, payment, VAT and corporation tax etc., but submissions for payroll under the real time information (RTI) system do not have deadlines on set dates. Instead, the law states that submission must be “on or before making a relevant payment.” HMRC can impose a penalty where an employer does not file “on or before.” The penalty increases depending on the number of employees in the PAYE scheme. The penalty starts at £100 a month for late filing where there are one to nine employees and rises to £400 a month for 250 or more employees. Further penalties are charged for those filing over three months late. However, there is an exception for the first failure in the tax year.

    Late filing penalties are not supposed to be levied if returns are submitted early. However, recently a company named Quayviews Ltd found that this is not always the case. Quayviews had been late in submission previously, therefore, to ensure that this would not happen again they 'batch filed' submissions for the tax months 7, 8, 9 and 12, submitting all in tax month 5. HMRC’s Basic PAYE Tools software allowed early filing, and Quayviews thought nothing was wrong as they received an acknowledgement of submission. However, HMRC issued a late filing penalty for tax months 7, 8 and 9 (why none was issued for month 12 was not explained). The company appealed and the case ended up at the First Tier Tribunal.

    Although it was acknowledged that the returns had been received, HMRC’s National Insurance and PAYE Service (NPS) was unable to process the returns and allocate any FPS to a specific tax month. HMRC confirmed that it had issued penalties because in their view the company had no 'reasonable excuse' for the returns not being filed within the relevant tax month. The Tribunal disagreed and found for the company stating that the company did have a reasonable excuse for a number of reasons not least that HMRC's guidance states that a FPS must be filed “on or before.”  In addition, HMRC’s Basic PAYE Tools allows files to be submitted early without indicating that 'early' could mean 'too early'.

    Based on this case employers need to be aware that in HMRC's view a late filing occurs when a FPS is submitted late, that is, not on or before payday or HMRC does not receive the FPSs that they expected to receive. Non-filing is where HMRC does not receive the FPS within the tax month, between the 6th of one calendar month and the 5th of the next.

    Therefore, although it would appear that HMRC's systems do not comply with what is stated in law, to ensure no penalties are levied, RTI returns should not be made before the beginning of the relevant tax month; rather wait until the relevant month has begun before submitting each return. Also be aware that if a 'success' messaged is received whichever payroll software is used, it means that the submission has been received and not that it is correct.

  • What are determinations and can they be cancelled?

    HMRC can issue a determination when a taxpayer has failed to submit a tax return. The determination is HMRC's formal calculation of tax that it calculates as being due. In arriving at the amount HMRC will consider any information it has available (e.g. on a P60 submitted by an employer).

    There is no right of appeal against a determination and unless the submission of a return supersedes it, the determination will stand, and the tax shown as due must be paid. A determination does, in effect, stand in the place of an actual return for the amount of tax payments due and the calculation of any interest on unpaid tax. Therefore the due date for tax payment is the date which would have applied if the return had been delivered by the filing date.

    A tax return displacing a determination, must be made/filed within three years from the due filing date for the tax return or if later, within 12 months of the determination date. If the return is not filed within this period, the tax charge created by the determination stands. Any related interest, surcharge and payment on account calculations will be automatically amended to reflect the figures declared on the replacement tax return. Importantly, the issue of a determination enables HMRC to commence formal proceedings to recover any late paid tax.

    With regard to any underpayment of PAYE, a determination will be issued against an employer for a failure to operate PAYE correctly and require any under payment of tax and NIC to be restored by the employer; any underpayment not being sought from the employee.

    It should be noted that determinations are usually only issued when informal requests for payment of the underpaid tax have been ignored.

    Once a Revenue Determination has been raised HMRC's Manual confirms that the taxpayer is given 30 days to file the return before any enforcement action is taken, such as Distraint or County Court action. Allowing the taxpayer 30 days to send in the return is the Debt Management Department policy, not a legislative requirement.

    'Special overpayment relief'

    Where HMRC makes a determination, but the tax charged is excessive, a special overpayment relief is available if certain conditions are satisfied. Unlike normal overpayment relief claims, there is no time limit for claiming this special relief. However, HMRC detail three conditions under which compliance may be difficult to achieve as follows:

     Condition A - it would be “unconscionable” for HMRC to seek to recover the amount which has been charged by the determination (or refuse to repay it, if it has already been paid);

    Condition B - The person’s tax affairs are otherwise up to date, or arrangements have been made to HMRC’s satisfaction to bring them up to date as far as possible; and

    Condition C - The person has not previously claimed special relief or if previously claimed are exceptional circumstances for a further claim to be made.

    Condition A is the one more likely to be difficult to fulfil. HMRC defines ‘unconscionable’ as “completely unreasonable” or “unreasonably excessive.” Circumstances in which the unconscionable requirement in Condition A above may be satisfied include where a person is suffering from an illness which makes tax compliance difficult or has not received HMRC notices for reasons outside their control or is insolvent (and where pursuing the determination would be detrimental to other creditors).

  • Five tax-efficient ways to extract profits

    If you operate your business as a personal or family company, you will need to extract some or all of the profits if you wish to use them personally. When it comes to tax, not all profit extraction methods are equal. While personal circumstances will dictate the most efficient way for you to extract profits, the following five extraction methods should be considered as part of a tax-efficient profit extraction strategy.

    Method 1: salary - Paying a small salary can be tax-efficient where the recipient has not used their personal allowance elsewhere. Paying a salary that is at least equal to the lower earnings limit for National Insurance purposes (£6,396 for 2022/23), will ensure that the tax year is a qualifying year for state pension purposes; this can be useful where the recipient does not already have the 35 qualifying years needed for a full state pension.

    For 2022/23, the optimal salary will depend on whether the National Insurance Employment Allowance is available to shelter any employer’s National Insurance on the salary. Assuming the personal allowance remains available in full, the optimal salary where the Employment Allowance is not available (as is the case in a personal company where the sole employee is also a director), is one equal to the primary threshold for 2022/23 of £11,908. If the Employment Allowance is available (or one the higher secondary Class 1 National Insurance thresholds applies), the optimal salary is one equal to the personal allowance, set at £12,570 for 2022/23.

    Method 2: dividends - Dividends are paid from post-tax profits, and the profits from which they are paid have already suffered corporation tax. As all taxpayers benefit from a dividend allowance (set at £2,000 for 2022/23), where this remains available, paying a dividend up to this amount allows profits to be extracted free of any further tax. Once the optimal salary has been paid and the dividend allowance has been used, if further profits are needed outside the company, it is generally preferable to take dividends rather than additional salary as the dividend tax rates are lower and there is no National Insurance to pay on dividends.

    Remember, dividends must be paid in proportion to shareholdings. However, using an alphabet share structure preserves flexibility. Remember, dividends can only be paid if you have sufficient retained profits from which to pay them.

    Method 3: rent - Many personal or family companies are based at home. The company can rent a room from the director and pay rent for the privilege. This can be tax efficient, as the company will benefit from a deduction for the rent paid when calculating its profits for corporation tax purposes. While the rent is taxable in the hands of the director, if the director does not have other rental income, he or she may be able to benefit from the property income allowance to receive £1,000 of rent tax-free. Paying rent has the added advantage that there is no National Insurance to pay.

    Method 4: pension contributions - The company can also make pension contributions on behalf of the director (and/or his or her family). The company will usually be able to deduct the pension contributions in full when calculating its profits. Providing the contributions do not exceed the available annual allowance or take total tax relieved contributions above the level of the lifetime allowance, there will be no tax charges on the recipient.

    Method 5: benefits-in-kind - It can be particularly tax-efficient to provide directors and family employees with exempt benefits in kind, such as a mobile phone or workplace parking, as the recipient will enjoy the benefit tax-free, while the company can deduct the cost in calculating its taxable profit. Where an exemption applies, there is no Class 1A National Insurance for the company, and most benefits in kind are free of employee National Insurance.

    Benefits-in-kind can still be tax efficient even if a tax charge applies; for example, it may be beneficial for the employee to have an electric company car rather than be given more salary from which to fund the car. Providing a benefit rather than additional salary will also save employee’s National Insurance as most benefits-in-kind are liable to Class 1A (employer-only) rather than Class 1.

  • Is it worth registering for VAT voluntarily?

    You must register for VAT if your VAT taxable turnover for the last 12 months exceeded the VAT registration threshold of £85,000, or if you expect your turnover in the next 30 days to exceed this amount. However, while you are not obliged to register for VAT if your turnover is below this level, you can choose to do so voluntarily.

    Is this beneficial?

    Need to charge VAT

    If you are VAT registered, you will need to charge VAT on taxable supplies that you make. Unless you make zero-rated supplies (for example, zero-rated foods), this will make your products more expensive to the purchaser. If predominantly you supply to VAT-registered businesses, this may not be an issue as they will be able to recover the VAT charged. However, if you supply to individuals, charging VAT may make you less competitive against businesses that are not VAT-registered. If you supply standard-rated goods, you will need to add on 20%.

    Ability to recover input VAT

    One of the main advantages of registering for VAT voluntarily is that you will be able to recover the VAT associated with making taxable supplies (including those that are zero-rated). However, if you make exempt supplies, you cannot recover the associated input tax.

    Businesses that make zero-rated supplies only or mainly should consider registering for VAT voluntarily if their turnover is below the VAT registration threshold as they will be able to recover any associated input tax, but the imposition of VAT at the zero rate will not make their supplies more expensive.

    Compliance obligations

    Registering for VAT comes with an associated compliance burden. All VAT-registered traders are now within Making Tax Digital (MTD) for VAT. Consequently, they must maintain digital records and file VAT returns using software that is compatible with MTD for VAT. This will involve both time and costs, which may outweigh any VAT recovered.

    Do the sums

    To assess whether it is worthwhile registering for VAT voluntarily, there is no substitute for doing the sums to see whether what you could potentially recover is worthwhile.

  • Covid-19 helpsheets

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  • Recent SDLT changes

    In his recent mini-Budget, the then Chancellor announced a number of stamp duty land tax (SDLT) changes. What are the changes and how will they affect the SDLT that you will pay on your property purchase?

    Residential property

    SDLT on residential property is payable at the residential rates where the consideration exceeds the residential threshold. A supplement of 3% applies where the purchase is of a second or subsequent residential property costing £40,000 or more which is not an exchange of your main residence.

    The SDLT residential duty threshold was doubled from £125,000 to £250,000 with effect for completions on or after 23 September. The rates and thresholds applying from that date are as shown in the table below. SDLT is calculated on each slice of the consideration at the rate applying to that band.

    From 1 October 2021 to 22 September 2022, the residential threshold was £125,000 and SDLT was payable at the rate of 2% (5% for additional properties) on consideration between £125,001 and £250,000. The increase in the SDLT residential threshold reduces the SDLT payable on a property costing at least £250,000 by £2,500 (£125,000 @ 2%).

    First-time buyers

    First-time buyers benefit from a higher residential SDLT threshold. This was increased from £300,000 to £425,000 with effect from 23 September 2022. The first-time buyer threshold only applies if the property costs £625,000 or less (£500,000 prior to 23 September 2022).

    Consequently, from 23 September 2022, a first-time buyer will pay no SDLT if they purchase a residential property for £425,000 or less. If the purchase price is between £425,000 and £625,000, they will pay no SDLT on the first £425,000 and SDLT at 5% on the excess over £425,000. For example, a first-time buyer purchasing a property costing £500,000 will pay SDLT of £3,750 ((£500,000 - £425,000) @ 5%). The increase in the threshold will mean that a purchaser who is eligible for the first-time buyer threshold will pay £6,250 less in SDLT than previously on a residential property costing at least £425,000 (£125,000 @ 5%) and less than the first-time buyer ceiling.

    If the first-time buyer pays more than £625,000 for their property, the first-time buyer threshold does not apply; the normal residential threshold of £250,000 applies instead. SDLT is calculated at the normal residential rates as shown in the above table.

  • Holiday lettings – beware of longer lets

    Furnished holiday lettings enjoy favourable tax treatment as long as certain conditions are met, allowing landlords of holiday lets to access certain valuable reliefs, such as business asset disposal relief and business asset rollover relief. The landlord can also claim capital allowances for items such as fixtures, furniture and equipment.

    As winter approaches and bookings start to dwindle, longer lets can be appealing. But is this wise from a tax perspective?

    Conditions

    To qualify as a furnished holiday let, the property must be furnished and must meet the following three occupancy conditions:

    The availability condition – the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding days when the landlord stays in the property).

    The letting condition – the property must be let commercially as furnished holiday accommodation for at least 105 days in the tax year. Lets of 31 days or more and lets to family or friends free of charge or at a reduced rate are ignored.

    The pattern of availability conditions – lets exceeding 31 days must total 155 days or less in the tax year.

    Consequences of longer lets

    The nature of holiday letting is that it comprises numerous short stays by different people. Lets of 31 days or more are not regarded by HMRC as holiday stays and are ignored in working out whether the conditions set out above for a property to qualify as a holiday let are met. The exception to this is where the property was initially let for a period of less than 31 days, but due to unforeseen circumstances the guests were unable to leave on the planned date and remained in the property for 31 days or more. This may be the case, for example, if the guest becomes ill and is unable to travel home or if their flight is cancelled or delayed.

    If the property is let for longer lets of 31 days for 155 days in total, it will not be possible for the availability condition to be met as this requires the property to be available as a furnished holiday let for at least 210 days in the tax year. A single let of five months or more will mean that the property will, for that tax year, not meet this condition. Where long lets are mixed with shorter lets, it will also make it more difficult to meet the letting conditions as this requires the property to be let as holiday accommodation for at least 105 days during the tax year ignoring lets of 31 days or more.

    So what you should you do if you get the option of a longer let during the closed season? If the let will not take the total number of days for which the property is let for periods of 31 days or more to 155 or above, this may not be a problem as long as the availability condition will still be  met. However you will still need to meet the letting condition.

    If the longer lets breach the availability condition, all is not lost. If you have other holiday lets, the property may qualify on the basis of an averaging condition. If this does not work and the property has previously qualified as a furnished holiday let, a period of grace election may save the day.

    Depending on the circumstances, it may be possible to ‘have your cake and eat it’ and enjoy the rental income from a long let while the property may otherwise be empty, whilst still qualifying as a furnished holiday let.

  • 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.

  • NIC implications of being both self-employed and employed

    With the cost-of-living crisis upon us more people are considering self-employment as well as employment to bring in extra money. This can lead to overpayments of National Insurance Contributions (NIC) as although tax is paid on aggregate income, NIC's are different, being charged on each source. Class 1 NIC will be paid on the employed earnings with class 2 and/or class 4 NIC being levied on the self-employed earnings. There is a maximum amount of NIC payment for any tax year but you could find that you have overpaid by the end of the year.

    Maximum amount

    There are two annual maxima for those who are both employed and self-employed. One is in respect of Class 1 and Class 2 NIC's payable, the other refers to the maximum amount of Class 4 NIC's payable by a contributor liable to Class 1, 2 and Class 4 NICs. For the tax year 2022/23 the calculation of the annual maximum has been complicated by the multiple changes in the year to include first the increase in the main and additional rates of Class 1 and Class 4 NIC from 6 April 2022, then the increase in the Class 1 primary threshold and Class 4 lower profits limit introduced in July 2022 and finally the repeal of the changes as contained in the Health and Social Care (repeal) bill.

    The regulations provide three different sets of calculations in order to calculate the maximum amount payable for each of the two annual maxima.  Depending upon the level of a contributor’s profits and the amount of Class 1 and 2 NIC's paid, the maximum amount of Class 4 NICs due will vary. Different calculations are necessary because of the need to ensure that all contributors pay at least 3.25% (2022 to 2023 tax year) of profits in Class 4 NICs. Detailed worked examples can be found in the HMRC National Insurance Manual.

    Reclaiming overpaid NIC

    When and how any refund is calculated and claimed will depend on type of NIC overpaid:

    Where having more than one employment has resulted in an overpayment the refund claim needs to be in writing within six years of the end of the affected tax year, (although where a reasonable excuse exists, HMRC may allow a later claim)

    there is no time limit to the claim where excess contributions have arisen due to the taxpayer being both employed and self-employed. HMRC states that they will calculate the amount due from the information submitted on the tax return and employers' payroll submissions. Taxpayers will then be advised as to any over payment. However, many taxpayers may prefer to calculate the correct Class 2/4 NICs themselves and include those figures on their tax return.

    Refunds of overpaid NIC will be made in the following order:

    1. Class 4.

    2. Class 1 at reduced rate.

    3. Class 2.

    4. Class 1 at standard rate.

    Deferment of NIC

    Some contributors may be aware of the likelihood of NIC overpayment in the coming tax year (where there is more than one employment or the taxpayer earns £967 or more per week from one job over the tax year or £1,157 or more per week from 2 jobs over the tax year) and can apply for deferment of Class 1 NIC. Under deferment the contributor continues to make full contributions for one employment whilst paying a reduced rate of 3.25% on weekly earnings between £190 and £967 on the other (instead of the standard rate of 13.25%). Once a year the Contributions office calculates the final NIC bill issuing a demand for any balance thereby preventing overpayments. Deferment of Class 2/4 is no longer possible. Although HMRC supply a ‘breakdown of each class payment’ in their calculations, the schedule is not in sufficient detail that taxpayers who are employed and self-employed can be certain that the correct amount is being charged. Therefore such information will need to be requested.

  • Dividend ‘traps’ to avoid

    Where the plan is to pay a dividend the director/shareholder must ensure that set procedures are in place. This article describes some traps for the unwary and what can be done to reduce the likelihood of HMRC enquiries into dividend payments made.

    Trap 1- Timing

    The relevant date for an interim dividend is either the actual date of payment (because a dividend resolution is not needed to confirm payment) or the date the payment is placed at the directors/shareholder's disposal. However, unless a resolution is signed and dated, HMRC will consider the payment date to be the date that the payment is entered into the company’s books. This could be a problem should the year of declaration be a year when the shareholder is a basic rate taxpayer but through slack record keeping the dividend is taxed in the next year when the shareholder may be a higher rate taxpayer. This ‘trap’ is more likely to occur in respect of an interim dividend because a final dividend only becomes an enforceable debt when approved by resolution at a general meeting of shareholders. Therefore the relevant date for a final dividend is the date of declaration, the date for which can be planned.

    Trap 2 - PHI Insurance

    Drawings in the form of dividends together with a low or nil salary could cause problems should the director claim under a Permanent Health Insurance policy. Such policies invariably pay out only on a percentage of earnings when the policyholder cannot work through illness or accident. Therefore it is recommended that the policy be reviewed to check that account is taken of dividend income as well.

    Trap 3 - Correct paperwork

    HMRC has been known to investigate disparities between dividends declared on a personal tax return with shareholdings declared at Companies House, raising penalties for incorrect returns. Proof in the form of a paper trail of dividends declared and share certificated can be vital as the recent tax case of Terence Raine v HMRC 2016 UKFTT 0448 (TC) showed..

    The company, of which Mr Raine and his colleague were directors, was set up by an agent. They were under the impression that each was holding one share and one would be appointed as the director and the other the company secretary. However, the paperwork was completed such that, technically, one share remained in the agent's name. For 10 years, Annual Returns (now 'Confirmation statements') were submitted to Companies House which showed that Mr Raine held all the shares and the accounts confirmed this.. Every year, dividends were declared and paid with supporting counterfoils showing an equal split of share ownership. Eventually, HMRC checked the dividends declared against those shareholdings shown on the Annual Return and saw that they differed. The tax tribunal concluded that Raine must have been aware of the discrepancy, as he was the director who had signed the accounts. Therefore the tax demand and penalties that would have been paid as per the paperwork (namely, all taxable on Raine) were valid.

  • Five ways to save inheritance tax

    Inheritance tax is often described as a voluntary tax. While most of us do not know in advance when we are going to die, there are steps that you can take to reduce the amount of inheritance tax on your estate. Here are five suggestions.

    Leave everything to your spouse or civil partner

    The inter-spouse exemption means that there is no inheritance tax to pay on anything that you leave to your spouse or civil partner. On their death, their estate can claim the unused portion of your nil rate band and your residence nil rate band, meaning that these are not wasted. The allowances allow a married couple or civil partners to, between them, leave £1 million free of inheritance tax.

    Alternatively, you can leave assets to the value of your nil rate band, and a main residence or share in a main residence to your children or direct descendants, and anything in excess of this to your spouse or civil partner. This too will ensure that there is no inheritance tax to pay on your estate.

    Give away cash and assets early

    Gifts made more than seven years before your death fall out of charge for inheritance tax purposes. Also, taper relief means that the rate of tax payable  on assets gifted made more than three years before your death is reduced on a sliding scale. Lifetime gifts are known as potentially exempt transfers and remain exempt if you survive for at least seven years after making the gift. However, if you do die within seven years, lifetime gifts come into charge. This may give rise to an unintended problem in that the nil rate band is applied chronologically, meaning that it may shelter a lifetime gift which would, if taxable, benefit from generous taper relief, rather than a death bequest which is chargeable at 40%.

    The earlier gifts are made, the greater the likelihood that they will fall out of charge.

    Make gifts out of income

    An inheritance tax exemption means that it is possible to make lifetime gifts which are not treated as potentially exempt transfers by making them out of your income. To benefit from the exemption, the gift must be made as part of the normal expenditure from the income of the donor and, after making the gift, the donor must be able to maintain their standard of living. This exemption could be used, for example, to pay for your grandchildren’s school fees or your child’s rent  or to set up a regular standing order to help meet your children’s living costs.

    Use the annual and gifts exemptions

    There are a number of specific inheritance tax exemptions that allow you to make small gifts that fall outside the scope of inheritance tax. These exemptions can be used in addition to the gifts from income exemption outlined above. Further, they apply if the gifts are made from capital.

    The annual exemption allows you to give away £3,000 of gifts each year. You can use the allowance to make a single gift to one person, or several gifts totalling not more than £3,000. If you do not use all of the exemption for a tax year, you can carry the unused portion forward to the following tax year. However, if it is not used by the end of that tax year, it is lost.

    The small gifts allowance allows you to make as many gifts as possible of up to £250 per person each tax year. However, the recipient cannot benefit from more than one allowance (so you cannot give £3,250 to one person using the annual allowance and the small gift allowance). You do not need to count birthday and Christmas gifts, which are exempt.

    You can also make tax free gifts on the occasion of a wedding or civil partnership. The exempt amount depends on your relationship to the recipient – £5,000 for a child, £2,500 for a grandchild or great-grandchild and £1,000 for any other person.

    Make a charitable bequest

    Your estate can benefit from a reduced rate of inheritance tax of 36% if you leave at least 10% of your estate to charity. Gifts to charities are themselves exempt from inheritance tax.

  • Are you able to claim small business rate relief for your FHL?

    Holiday homes and holiday lets are treated differently – holiday lets are liable for business rates while holiday home owners must pay council tax. This can work to the landlord’s advantage, particularly if small business rate relief is available. However, owners of holiday properties should be warned – new rules are coming into effect from April 2023 to ensure only those properties that are actually let as holiday accommodation will be within business rates rather than council tax.

    Nature of business rates

    Business rates are charged instead of council tax on non-domestic properties. This includes residential properties let as furnished holiday lettings on a commercial basis.

    The rates are worked out by multiplying the rateable value by the multiplier for the year.

    The standard multiplier applies to properties with a rateable value of £51,000 or more. For 2022/23 this is 51.2 pence in the pound (52.4 pence in the pound in London). The small business multiplier applies to properties with a rateable value of less than £51,000. For 2022/23 this is set at 49.9 pence in the pound (51.1 pence in the pound in London).

    Properties with a rateable value of £15,000 or less may qualify for small business rate relief. This may mean that you do not need to pay any business rates on your holiday let.

    Small business rate relief

    Small business rate relief is available on business properties with a rateable value of less than £15,000. However, you will usually only benefit if you only have one business property.

    Business with only one property that has a rateable value of £12,000 or less benefit from 100% business rate relief. This means that if you have a single furnished holiday let, you will not pay any business rates as long as the rateable value is not more than £12,000.

    If the rateable value falls between £12,000 and £15,000, the relief tapers from 100% for properties with a rateable value of £12,000 to nil for properties with a rateable value of £15,000. So, if your property has a rateable value of £13,500 you will receive a 50% discount on your business rates bill.

    If you have more than one holiday let, you may still be able to benefit from small business rate relief on main property as long as the rateable value of any other holiday lets or other business properties that you have is not more than £2,899 and the properties have a total rateable value not exceeding £20,000 (£28,000 in London). If you acquire a second business property, you will be able to keep the relief for 12 months.

    If you are eligible for small business rate relief, you will need to claim it. It is not given automatically. You can do this by writing to your local authority. If you are not getting the relief, check your bills, as you may be able to claim retrospectively for previous years.

    Future changes

    From April 2023, you will only be eligible for business rates on a holiday let if it is let commercially for at least 70 days. As this is less stringent that the letting condition for tax purposes (which requires the property to be let for 105 days in the tax year), holiday lets that qualify as furnished holiday lettings will meet the business rates test.

  • Paying PAYE by recurring direct debit

    Employers must act as a tax collector for HMRC, deducting tax, National Insurance and, if applicable, student loan deductions, from their employees’ pay and pay these over to HMRC with their employer’s National Insurance contributions. The payments must reach HMRC by 22nd of the following tax month where payment is made electronically, and by the earlier date of 19th of the following tax month where payment is made by cheque.

    As penalties are charged if the payments are made late for more than one month in the tax year, it is important that these deadlines are not missed. A new recurring direct debit facility may help employers to meet the payment deadlines and avoid penalties.

    Payment options

    There are currently a range of payment options available to employers to pay their PAYE. Payment methods include online banking, using a debit card or a corporate credit card or at a bank or building society. Cheques can also be sent in the post, but an earlier payment deadline applies.

    It has been possible to pay by direct debit, but only as a one off. However, this is changing, and from 19 September 2022, employers will be able to set up a recurring direct debit to pay their PAYE.

    Payment via variable direct debit

    Employers wishing to pay by direct debit each month will need to set this up through their business tax account and the Employer’s PAYE Online service.

    A new option will be added to the employers’ liabilities and payments screens, which will feature the option to ‘set up a direct debit’. This will provide HMRC with authorisation to collect the PAYE and NIC that they owe, as shown on their RTI payroll submission, direct from the employer’s bank account.

    Once the employer has set up a recurring direct debit facility, the link will change to ‘Manage your direct debit’. This will allow the employer to view, change or cancel their direct debit online.

    It should be noted that only the employer can set up, amend and cancel the direct debit; this is not something that can be done by their agent on their behalf.

  • CGT on residential property gains – aware of the 60-day limit?

    Statistics published by HMRC in August 2022 revealed that in the 2021/22 tax year, 129,000 taxpayers reported residential property disposal using HMRC’s online service, filing 137,000 returns in respect of 141,000 disposal and paying £1.7 billion in tax. However, an estimated 26,500 returns (20%) were filed late, suggesting some ignorance around the rules and the filing deadlines.

    What do you need to know?

    Need to report residential property gains

    Where a chargeable gain is made on the sale of a residential property, the gain must be reported to HMRC within 60 days of completion of the sale.

    A reportable gain will arise if you sell a residential property that has not been your only or main residence throughout the period you owned it (or the whole period bar the final nine months). This may be the case because the property has been let out or is a second home. Where the property is owned jointly, each co-owner must report their own share of the gain.

    The gain must be reported to HMRC using the online service (see www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020). You will need the property details to hand, including the address and post code, acquisition and completion dates, the cost of the property, the disposal proceeds, details of any enhancement expenditure and details of any reliefs or allowances that you wish to claim.

    Need to pay associated tax

    You will also need to pay the capital gains tax on the gain within the same 60-day window. This is the best estimate of the tax due at the time that the gain was made. You can make use of the annual exempt amount (unless it has been used on a residential property gain earlier in the tax year), and any losses already realised in the year, or brought forward.

    Payments can be made by debit or corporate credit card, via online banking or by cheque,

    You will need to finalise your capital gains tax position on your self-assessment return for the tax year in which the completion took place to take account of other disposals in the tax year. There may be further tax to pay if you have made chargeable gains on other assets. You may also be eligible for a refund if you realised a capital loss later in the tax year after the completion date of the property.

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61 Friar Gate Derby, Derbyshire DE1 1DJ
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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd.  Registered in England No. 05770414.

Registered to carry out audit work in the UK by The Association of Chartered Certified Accountants.

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Registered office: 61 Friar Gate, Derby, Derbyshire, DE1 1DJ   T: 01332 202660