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.

Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. It is therefore necessary to understand what constitutes trading, and when a trade commenced or ceased.

Indicators of trade

To determine whether a trade exists, historically the courts have looked for the presence of absence of certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists.

Badge Interpretation

Profit-seeking motive

An intention to make a profit supports trading, but by itself is not conclusive.

The number of transactions

Systematic and repeated transactions suggest a ‘trade’

Existence of similar trading transactions or interests

Transactions that are similar to those of an existing trade may themselves be trading

Change to the assets

Repairs, modifications or improvements to make the assets more easily saleable or saleable at a greater price may suggest trading

The way in which the sale was carried out

The sale of an asset in a way which is typical of trading organisations may suggest trading, whereas a sale to raise emergency cash is less likely to indicate trading

The source of finance

Where money has been borrowed to purchase the asset and the funds can only be repaid by selling the asset, this may suggest trading – money may be borrowed to facilitate the purchase of an asset at a profit

Interval between sale and purchase

Assets that are the subject of trade will normally be sold quickly; an intention to sell an asset shortly after purchase will support trading, whereas an asset that is held indefinitely is less likely to be the subject of a trade

Method of acquisition

Assets that are inherited or acquired as a gift are less likely to be the subject of a trade.

Overall impression

It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.

In a furnished let, wear and tear of domestic items is inevitable and there will come a time when the landlord will need to provide replacements. From a tax perspective, special rules apply to provide relief for the cost of replacement domestic items. The rules only apply to residential lets, not to furnished holiday lettings.

No relief for initial cost

A feature of the relief is that relief is given for the cost of the replacement, not for the initial cost of providing the item.

Conditions

Tax relief for the cost of replacing a domestic item is contingent on the following conditions being met:

1. The individual or company carries on a property business which includes the letting of at least one dwelling house.

2. An old domestic item provided for use in the property is replaced by a new domestic item which is provided for the exclusive use of the tenants. The old item is no longer available for their use.

3. A deduction for the new item would not be prohibited by the wholly and exclusively rule, but a deduction for the cost is denied, either under the accruals basis because the expenditure is capital not revenue or under the cash basis where the capital expenditure rules prohibit a deduction on the provision, alteration or disposal of a capital item for use in an ordinary residential property.

4. Capital allowances have not been claimed in respect of the new item.

Conditions 3 and 4 ensure that relief is not given twice for the same expenditure, and relief is only available under the replacement of domestic items rules where relief is not otherwise available.

Domestic items

A domestic item is an item for domestic use. HMRC provide the following illustrative list of items that would be classed as domestic items:

• moveable furniture such as sofas, tables and bed frames;

• furnishings such as curtains, carpets and rugs;

• household appliances such as fridges, freezers and washing machines; and

• kitchenware such as utensils, crockery and cutlery.

A distinction is drawn between domestic items, which qualify for relief, and fixtures which do not. Fixtures are things like plant that is fixed to the property such that it becomes part of it, and boilers or water-filled radiators installed as part of a space heating system.

Like-for-like replacement

Relief is given, as a deduction in computing the taxable profits of the property income business, for the cost of a like-for-like replacement, and also any costs of disposing of the old item and acquiring the new item (for example, delivery costs). The deduction claimed must be reduced by any sale proceeds received in respect of the old item.

Where the replacement is superior to the original, the deduction is limited to the cost of a replacement equivalent to the old item. For example, if a fridge is replaced by a fridge-freezer, the landlord would be allowed a deduction for the cost of an equivalent fridge if this is less than the cost of the new item.

Last year apart, the number of tax enquiries is on the increase; the reason is not because more taxpayers are seeking to defraud the tax system but because advances in digital technology and data exploitation are enabling more efficiently targeted enquiries. For example, although HMRC undertook fewer stamp duty land tax investigations last year, the same amount of unpaid tax was achieved by targeting higher-value sales.

The more common type of enquiry for individuals or trustees focuses on entries made on a specific tax return. Such an enquiry must be opened within 12 months of the return’s submission, unless submitted late. HMRC will request information and documents to enable it to check any aspect of the return, comparing with information already held to ensure the return is complete. In some cases, HMRC’s Fraud Investigations Service may open a Code of Practice (COP) 8 or 9 investigation. COP9 is used for suspected fraud or deliberate errors cases whereas COP8 tends to be used for cases where fraud is not suspected so the problem is more likely to be a technical issue (e.g. whether a source of income is taxable in the UK or not).

How investigations are triggered

Although many investigations are undertaken as a result of advice from a member of the public, over 90 per cent of cases are triggered by information and analysis generated by HMRC's sophisticated data matching and risking tool named 'Connect', designed to process and analyse large volumes of data. The system incorporates many analytical tools and methods including predicting trends and individual behaviour patterns. Data is collated from government databases including Land Registry, local government planning consents, the Border Agency, the DVLA, Companies House, Council Tax, Business Rates, PAYE/corporation tax/VAT/CIS returns, import and export records and private sector financial information from credit card issuers and companies such as eBay, PayPal and Airbnb.

All credit and debit card payments made to UK businesses via the companies that process card payment transactions can be accessed to ascertain the value of transactions completed by a specific trader, the information is then used to compare card sales made by a business each month with the taxes paid. Any inconsistencies may be queried. The system also indicates where more in-depth investigations might be required, identifying “hidden” relationships between people, organisations and data that could not previously be identified.

The department dealing with the collation of data is the 'Risk and Intelligence Service' and by using 'Connect' it can automatically:

• Obtain third party information from sixteen business categories including employers, banks, insurance companies, financial institutions, brokers, auctioneers, estate agents and charities

• Review employment records, which can also assist in profiling a business as well as identify those operating by using persons who may be termed as 'self employed' but may really be employed

• Connect taxpayers to companies/entities

• Connect bank accounts

• Collate social media information

• Compare taxpayer/business profiles to identify those that are similar

Patterns in behaviour

Most importantly the computer programme can uncover patterns in taxpayer behaviour, cross matching the data with information already held (or declared on the tax return with such third party items). HMRC can use the data pattern to seek anomalies between bank interest, property income and other lifestyle indicators. It risk assesses business sectors in local and geographical areas, comparing similar businesses within the sector, cases for enquiry being identified as a compliance risk and sent to the appropriate local office for possible enquiry.

Post pandemic, HMRC is restarting tax investigations that had been paused and already over 100,000 compliance investigations have been opened in the first quarter of 2021, a 36 per cent increase from 75,000 compliance investigations in the last quarter of 2020. The number will only increase the more sophisticated the 'Connect' programme becomes.

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.

Furnished holiday lettings have a number of tax advantages compared to standard residential lets, and one of the key ones is the availability of business asset rollover relief. This enables a landlord of a furnished holiday let to sell one property and invest in another without immediately crystallising any associated capital gain. This can be a big plus.

Nature of business asset rollover relief

Business asset rollover relief enables any capital gains tax arising on the disposal of an eligible asset to be deferred where another asset is acquired from the proceeds of the sale of the old asset. The capital gain is ‘rolled over’ and does not become chargeable until the new asset is sold.

Where the cost of the new asset is at least equal to the full amount received from the sale of the old asset, relief is available in full. Effect is given to the relief by reducing the base cost of the new asset by the amount of the rolled-over gain.

If the new asset costs less than the amount received from the sale of the old asset partial relief may be available.

The new asset must be acquired in the period that runs from 12 months before to three years after the date of the disposal of the old asset.

Example

Maria has a number of properties that she lets as furnished holiday lettings.

She sells a holiday cottage which she acquired for £140,000 for £270,000, realising a gain of £130,000. She reinvests the proceeds in a new holiday cottage, which costs £320,000.

She claims business asset rollover relief.

As a result, she defers paying capital gains tax on the gain of £130,000. Instead, the base cost of the new property is reduced by £130,000, from £320,000 to £190,000.

Had Maria not claimed the relief, assuming that she is a higher rate taxpayer, she would have had to pay capital gains tax of £36,400 within 30 days of completion of the sale of the cottage. Instead, she has this money available to reinvest in the new property.

Childcare is expensive; however, the tax system can provide a helping hand. In recent years, there has been a shift from tax relief for employer-supported childcare and vouchers to a Government top-up scheme.

Government scheme

The Government operate a tax-free childcare scheme whereby parents deposit money into an account which can be used to meet childcare costs and the Government provide a tax-free top up.

To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expect to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top up.

Eligible parents can access the tax-free top up by setting up an online childcare account for their child. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled). The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11th birthday (or up to the child’s 17th birthday if the child is disabled).

The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care.

Employer-supported childcare and childcare vouchers

Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies for National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers, regardless of the number of children that they have.

It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules.

Workplace nurseries

No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for exemption to be forthcoming.

Which is best?

Where a parent could potentially benefit from more than one scheme, they should evaluate the options and can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds.

For many the lure of a renovation project is strong and for those looking to generate rental income, doing up a dilapidated property to let out may make commercial sense.

When buying an investment property, the addition of the 3% SDLT supplement means that the SDLT hit may be significant. However, as this only applies to residential dwellings, buying a derelict property that does not meet the definition of a ‘dwelling’ can deliver substantial SDLT savings. Not only is the purchase price on which SDLT payable low as the renovation costs are incurred post sale and SDLT-free, SDLT is charged at the non-residential rates and the 3% supplement does not apply.

The Bewley case

In 2019, the First Tier Tribunal ruled in the case of Bewley v HMRC that a bungalow and plot of land, which had planning permission for the demolition of the existing building and the construction of a new dwelling was not suitable for residential use at the effective date of the transaction. As a result, SDLT was payable at the non-residential rates rather than the residential rates, and consequently the 3% SDLT supplement did not apply.

Use or suitable for use as a dwelling

The legislation defines a ‘dwelling’ as a building that is used or suitable for use as a single dwelling or which is in the process of being constructed or adapted for such use.

In the Bewley case, the property was not used as a dwelling on the effective date of the transaction; the question therefore was whether it was ‘suitable’ for use at that date.

The radiators and heating pipes had been removed from the bungalow and the presence of asbestos prevented repairs and alterations being carried out without posing risks. As a result, the tribunal found that the property was not suitable for use as a dwelling. Consequently, SDLT was payable at the lower non-residential rates, in respect of which the 3% supplement does not apply.

Effective date

The test as to whether the property is a dwelling is undertaken at the effective date of the transaction – the completion date. All that matters is whether it is used as or is suitable for use as a dwelling at that date or in the process of being constructed or adapted at that date – it is irrelevant whether it has previously been used as a dwelling, or may be used as one in the future.

More than modernisation

The test of whether a property is uninhabitable is a strict one and an uninhabitable property will lack basic facilities necessary to live in it, such as a functioning bathroom and kitchen and heating. A property which is in need of modernisation and redecoration may still be habitable and count as a dwelling – the fact that a property is a renovation project will not in itself mean that non-residential rates apply.

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.

When a company closes down, it may have accumulated monies or assets that need to be distributed to shareholders. If the asset is in the form of cash then any distributions would typically be as dividends (or possibly additional contributions to a pension scheme). A dividend will be the route to take should the amounts be small, particularly given the £2,000 'Dividend Allowance' (DA) limit and if the total income is less than the 'basic rate' (£50,270 for 2021/22). However, dividends can only be paid out of 'accumulated, realised profits' and therefore the company needs to have set aside sufficient profits to cover the amount withdrawn as dividend as at the date of payment. Having a credit balance in the bank account is not enough - profits must have been earned but not withdrawn. If the cessation has been planned and sufficient accumulated profits are available, the monies could be taken over a period before cessation at the shareholders’ marginal tax rates to efficiently spread any tax liability efficiently over two or more tax years.

After dividends

Even after dividends have been paid to the amount of accumulated profits, there may still be capital assets to distribute (cash or otherwise). Such distributions are treated as capital should certain conditions apply. The two conditions are first that the company has collected, or intends to collect, its debts and has paid off or intends to pay of its creditors at the date when the distribution is made. Second, there is a statutory withdrawal limit of £25,000 whether taken as a single distribution or in separate amounts. Any distribution exceeding this amount is taxed as income, unless the company goes down the route of a formal liquidation. If Business Assets Disposal Relief (BADR) is available the percentage tax levied for capital gains tax purposes (CGT) is 10 per cent rather than the usual 20 per cent for higher rate taxpayers. Where the distribution is of assets other than cash, the valuation of those assets could assume significance in determining whether the £25,000 threshold is breached.

Therefore, depending upon the amount of accumulated profits, it will be preferable for the capital treatment to be used if the tax rate is lower which is will be should BADR be available and the withdrawal as dividends would by taxed at higher rates.

BADR not available

Where BADR is not available it may be preferable for at least some of the withdrawals to be taxed as dividends. For example, should the shareholder be a 'basic rate' taxpayer, and the withdrawal amounts be greater than the £25,000 limit, the amount will be taxed as a dividend chargeable to income tax at 7.5% (the 'DA' may also be available). The £25,000 will be treated as capital (with the annual exemption deducted if not otherwise used), taxed at 10 per cent. However, should the company then apply for dissolution, HMRC could argue that the intention was always to make an application to close the company and deem the whole amount withdrawn to be income. Furthermore, there may be penalties due if it is considered that reasonable care has not been taken.

Any company needing to make a distribution greater than £25,000 or which cannot fulfil the two conditions above or where shareholders prefer a CGT to income tax treatment must enter into formal liquidation. Once a liquidator is appointed, all distributions made during the winding up process are generally treated as capital subject to CGT. Tax planning in such a situation could be the timing of distribution payments on either side of a tax year so as to attract the individual’s CGT annual exemption for more than one tax year. A BADR claim may also be possible to reduce any CGT payable.

When a company is struck off

If a company has applied to be ‘struck off’ but after two years of making a distribution the company has still not been dissolved, or the company has either failed to collect all its debts or pay all its creditors, then the distribution is automatically treated as an income dividend.

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.

Capital allowances are the tax equivalent of depreciation, and the mechanism of providing tax relief for certain items of capital expenditure. However, with the exception of cars, capital allowances are not available where accounts are prepared under the cash basis; instead relief may be available as a deduction in computing profits under the cash basis capital expenditure rules.

Plant and machinery capital allowances - Plant and machinery capital allowances are available for items such as machinery, fixture and fittings, tools, computer equipment, plant and vehicles. Capital allowances may be given at different rates.

100% allowances - The annual investment allowance (AIA) is given at the rate of 100% on qualifying expenditure up to the AIA limit. This is set at £1 million until 31 December 2021, reverting to £200,000 from 1 January 2022. Special rules apply where the accounting period spans 31 December 2021.

100% first-year allowances are also available in limited cases, such as for expenditure on new zero emission cars and goods vehicles

18% writing down allowances - Writing down allowances on main rate expenditure is given at the rate of 18% on a reducing balance basis. Main rate capital allowances are available for most plant and machinery.

6% writing down allowances - Some items, such as high emission cars and long life assets are allocated to the special pool and attract writing down allowances at the lower rate of 6%.

Enhanced capital allowances - For a limited period companies are able to claim enhanced capital allowances in respect of qualifying expenditure that is incurred between 1 April 2021 and 31 March 2023. A super deduction of 130% is available where the expenditure would otherwise qualify for main rate capital allowances at 18%, and a 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances of 6%.

Balancing charges and allowances - The capital allowance system provides tax relief for the net capital expenditure (cost less sale proceeds) over the life of the asset. Consequently, when an asset is sold, is it necessary to take account of the disposal proceeds. If the capital allowances that have been claimed over the life of the asset exceed the cost less disposal proceeds, it may be necessary to claw back some of the allowances. This is done by means of a balancing charge.

Let’s assume a van is purchased for £10,000 and the AIA allowance is claimed, providing immediate tax relief for the full £10,000 of expenditure. If the van is sold three years later for £5,000, the net cost to the business is £5,000 (cost of £10,000 less proceeds of £5,000). However, without adjustment, the company would have received tax relief of £10,000. The position is corrected by means of a balancing charge of £5,000. The balancing charge effectively increases the profits that are charged to tax. Where the AIA or a 100% first year allowance has been claimed, the balancing charge will be equal to the sale proceeds.

There will not always be a balancing charge on disposal – it depends on whether the tax written down value is more or less than the sale proceeds. If it is more, there will be a balancing charge and if it is less, there will be a balancing allowance.

Example - A car is purchased for £15,000 on which main rate capital allowances are claimed at the rate of 18%. In year 1, the writing down allowance is £2,700, in year 2, it is £2,214 and in year 3 it is £1815. At the end of year 3, the written down value is £8,271.

If the car is sold for £8,000, balancing allowances of £271 will be available; however, if the car is sold for £10,000, a balancing charge of £1,729 will arise. The net allowances equal the cost less the disposal proceeds.

The balancing allowance increases taxable profits in the year of sale, while a balancing allowance will reduce the taxable profits.

Add proceeds to the pool - Unless the item is in a single asset pool, balancing charges and allowances are calculated globally for the ‘pool’ rather than on an individual asset-by-asset basis. Thus, when an asset is sold, it is not necessary to calculate the balancing charge individually for that asset – instead, the sale proceeds are simply added to the pool.

Super-deduction and balancing charges

Special rules apply where an asset has benefited from the super deduction of 130% and depending when the asset is disposed of, it may be necessary to inflate the sale proceeds when working out the balancing charge.

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.

For tax purposes, furnished holiday lettings are something of a special case and benefit from a number of advantages not available to standard residential lets. One of these advantages is in relation to the treatment of interest and finance costs.

Residential landlord – Restriction of relief

Residential landlords can now only obtain relief for interest and finance costs, such as mortgage interest, as a basic rate tax reduction, regardless of the rate at which the residential landlord pays tax. The interest and finance costs are not deducted when working out the taxable profit, and the tax is initially worked out on the profit without taking account of the interest and finance costs. The resulting tax liability is then reduced by 20% of the interest and finance costs, capped at the lower of 20% of the taxable profit or the amount that reduces the tax liability to nil. Any unrelieved interest and finance costs can be carried forward for relief as an income tax deduction in calculating the tax liability of the same property business in a later tax year, with the costs being relieved at the first available opportunity.

This approach has a number of downsides – relief is only given at 20% even if the landlord is a higher or additional rate taxpayer and relief may not be given in full in the tax year in which the costs are incurred.

Furnished holidays lettings – Deduction in full

The changes to interest rate relief do not apply to furnished holiday lettings, and where a let qualifies as furnished holiday let, interest and finance costs can be deducted in full when working out the taxable profit. The deduction is not capped, and can give rise to a loss which may be carried forward and set against future profits from the same furnished holiday business. Also, as relief is by deduction, relief is given at the landlord’s marginal rate of tax not at 20% where the landlord is a higher or additional rate taxpayer.

Example

Toby is a residential landlord. For 2021/22 his taxable profit before taking account of interest costs on the associated mortgage is £30,000. Mortgage interest paid in the year is £8,000.

Toby has other income from his photography business and pays tax at the higher rate of 40%.

Before applying the basic rate tax reduction, the tax on the property income is £12,000 (£30,000 @ 40%). The basic rate tax reduction in respect of the mortgage interest reduces this by £1,600 (£8,000 @ 20%) to £10,400.

Tom has a furnished holiday let on which profit before deduction of interest costs is also £30,000. He too pays mortgage interest of £8,000 and, like Toby, has other income and is a higher rate taxpayer.

However, unlike Toby, he can deduct the full amount of the mortgage interest, reducing the taxable profit to £22,000, on which tax of £8,800 (£22,000 @ 40%) is payable.

Despite identical profit and interest, Tom pays £1,600 less in tax than Toby as he is able to obtain relief for his interest costs at his marginal rate of 40%.

Where inheritance tax is payable on an estate, it must normally be paid by the end of the sixth month after that in which the death occurred. For example, if the deceased died on 22 August 2021, inheritance tax on the estate would be due by 28 February 2022.

The six-month deadline does not leave very long if the executors need to sell assets in order to realise funds from which to pay the inheritance tax on the estate. HMRC recognise this, and allow inheritance tax to be paid in instalments in some circumstances. Where the executors wish to pay the inheritance tax in instalments, they must indicate this on the inheritance tax account (IHT400).

When payment can be made in instalments

The instalment option is only available in respect circumstances and in respect of certain assets:

• Houses – where the estate includes one or more houses, inheritance tax can be paid in instalments where the beneficiaries keep the house/houses to live in.

• Shares and securities – an instalment option is available if the shares or securities allow the deceased to control more than 50% of a company.

• Unlisted shares and securities – payment can be made in instalment if the shares are worth more than £20,000 and they represent at least 10% of the total value of the shares in the company at the price at which they were first sold (their ‘nominal’ value) or 10% of the total value of ordinary shares held in the company, at the price at which they were first sold.

It is also possible to pay the inheritance tax due on the whole estate (including that on assets which do not fall into the above categories) if at least 20% of the inheritance tax owed by the estate relates to assets that qualify for payment by instalment, or where paying the inheritance tax in a single lump sum would cause financial difficulty.

Interest

Interest is charged from the normal due date at the end of the sixth month following that in which the deceased died to the date of payment. Interest is not charged on the first instalment unless it is paid late.

Payment over 10 years

Where the instalment option is available, payment can be made over 10 years. The first payment must be made by the normal due date of the end of the sixth month following that in which the deceased died. Payment must then be made annually on that date. The amount payable each year is 10% of the tax payable in instalments, plus the associated interest.

Asset sold

If the asset in respect of which the tax is being paid in instalments is sold, the remaining tax owing must be paid in full.

Clearing the balance

Where the option to pay in instalments is taken, the outstanding balance can be cleared at any time.

All business must start at some point, and a furnished holiday lettings (FHLs) business is no exception. Unlike other rental properties, furnished holiday lettings enjoy special tax rules. As a result, they are able to benefit from capital gains tax reliefs for traders and claim capital allowances for furniture, fixtures and fittings. The profits from a furnished holiday lettings business also count as earnings for pension purposes.

However, to access these reliefs, the let must meet several tests for it to be considered a FHL.

The tests

The property must be let furnished and must be in the UK or the EEA. It must also pass all three of the following occupancy conditions:

Condition 1 – The pattern of occupation condition

Continuous lets of more than 31 days must not exceed 155 days in total in the year.

Condition 2 – The availability condition

The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year. Days when the landlord stays in the property are not counted.

Condition 3 – The letting condition

The property must actually be let as furnished holiday accommodation for at least 105 days in the tax year. Longer-term lets of 31 days are excluded, as are periods when the property is let to family or friends for free or at a reduced rate.

Period for which the tests are applied

For a continuing holiday let, these tests are applied on a tax year basis to determine whether the property qualifies as a furnished holiday letting for the tax year.

However, different rules apply for the first year and the tests are applied over the 12-month period from the date that the holiday letting began. This means that some periods will be taken into account twice in working out whether the property qualifies.

Example

Rueben buys a cottage in Devon, which he plans to let as a furnished holiday let. The sale is completed in August 2021. He spends a couple of months refurbishing the property and it is let as a holiday let for the first time on 14 October 2021. Letting commences in the 2021/22 tax year.

For year one, the tests are applied for the first 12 months, from 14 October 2021 to 13 October 2022.

Thereafter, the tests are applied on a tax year basis.