Adrian Mooy & Co - Accountants Derby

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The Employment Allowance is a National Insurance allowance that eligible employers can claim and set against their secondary Class 1 National Insurance liability.

The allowance is set at £4,000 for 2021/22 (capped at the employer’s secondary National Insurance liability for the year where this is lower).

Can you claim it? - Not all employers are able to claim it. At the lower end of the scale, it is not available to companies where the sole employee is also a director. This means that most personal companies cannot benefit. However, a company with more than one employee or one where the sole employee is not a director can benefit from the allowance.

It should be noted here that HMRC guidance stipulates that the allowance is not available if there is only one employee ‘paid above the National Insurance secondary threshold’ and that employee is also a director. However, there is no requirement in the legislation for employees to be paid above the secondary threshold to be counted, and the allowance is (in accordance with the legislation) available unless all the payments of earnings in the year are made to the same person and that person is a director. Thus, companies with at least two employees at some point in the tax year should be eligible for the allowance.

At the other end of the spectrum, companies whose Class 1 National Insurance liability for the previous tax year is £100,000 or more do not qualify for the allowance.

Impact of claim on optimal salary - The availability or otherwise of the employment allowance determines the optimal salary level in a family company scenario. Assuming that the personal allowance is not used elsewhere, for 2021/22, the optimal salary where the employment allowance is not available is one equal to the primary threshold of £9,568. However, where the employment allowance is available, the optimal salary for 2021/22 is equal to the personal allowance of £12,570.

Not too late to claim - The employment allowance has to be claimed through the payroll. If a claim has not yet been made for 2021/22 it is not too late.

In a family company scenario where the alternative arrangements are used for National Insurance (such that NIC is assessed each pay period as for other employees, rather than on an annual basis), it may be easier to pay the director a salary equal to the secondary threshold of £737 per month for the first 11 months of the tax year. This prevents the need to pay any National Insurance over to HMRC. If the company is eligible to claim the employment allowance, they can claim it in March and make a final payment for the tax year of £4,463 to take pay up to £12,570, the level of the personal allowance for 2021/22 (£12,570 – (11 x £737) = £4,463). There will be some primary Class 1 National Insurance on earnings for the year above the primary threshold of £9,568 The primary NIC bill is £360.24 ((£12,570 - £9,568) @12%). However, this is offset by the corporation tax savings on the higher salary at 19%.

The allowance can be claimed after the end of the year if a claim is overlooked. In this situation, you can ask HMRC to use it to pay other tax that the company may owe, including VAT and corporation tax if you do not owe any PAYE and National Insurance. If you have no tax to pay, you can ask for a refund.

You cannot carry forward any unused amount of the allowance to later tax years. If your secondary NIC bill is less than £4,000, the employment allowance is capped at this level.

Employers who provided their employees with taxable expenses and benefits  in 2021/22 need to report these to HMRC by 6 July 2022, unless they have been payrolled or included within a PAYE Settlement Agreement.

Taxable expenses and benefits should be reported to HMRC on form P11D. A P11D is needed for each employee for whom benefits and expenses need to be notified to HMRC. A P11D(b) is also needed. This is the employer’s declaration that all required P11Ds have been filed, and also the Class 1A National Insurance return. A P11D(b) must be filed even if all benefits have been payrolled as payrolled benefits must be taken into account when working out the Class 1A National Insurance liability.

Filing options

Employers can file their P11Ds and P11D(b) returns electronically or in paper format. HMRC encourage electronic filing and for most employers this will be the preferred option. However, the electronic filing options are reduced this year as HMRC have decommissioned their Online End of Year Expenses and Benefits Service and consequently it cannot be used to file 2021/22 returns. However, employers can instead use HMRC’s PAYE Online Service, or file using commercial software package.

PAYE Online

HMRC’s PAYE Online service can be used by employers to undertake a number of tasks, such as accessing tax codes and notices about employees, checking what they owe HMRC, paying bills, checking their payment history and appealing a penalty. It can also be used to file expenses and benefits returns. However, it can only be used to file returns for up to 500 employees. Employers who need to make more than 500 submissions will need to file using a commercial software package.

To use the PAYE Online service to file expenses and benefits returns, employers must be registered to use the service and will need to log on via their Government Gateway account. Employers who are not yet registered and who wish to use the service to file their 2021/22 expenses and benefits returns should allow sufficient time to register and submit their returns by the 6 July 2022 deadline.

HMRC stress that the service should be straightforward to use; however, employers who encounter problems can either use the help function or contact HMRC’s Online Services Helpdesk,  via the webchat facility or by phone on 0300 200 3600.

Commercial software packages

Employers can also file online via their expenses and benefits software package. Where they need to make more than 500 submissions, they must use a commercial software package to file online. Employers needing assistance should contact their software provider.

Paper returns

It is not mandatory to file P11Ds and the P11D(b) online; paper returns can still be filed. However, this is only likely to be an option for employers who only have a few returns to file.

Nothing to file this year?

Employers who have no returns to file this year but who have been sent a P11D(b) of a notification to one file will need to make a nil declaration online on the Gov.uk website. This is important as a penalty may be charged otherwise.

If you are an employee and you personally incur expenses in carrying out your job, you may be able to claim tax relief for those expenses. Relief is only available for expenses that you must incur, rather than those that you choose to incur, and the expenses must be incurred wholly, necessarily and exclusively in performing the duties of your job. Relief is not available for expenses that you incur to enable you to be able to do your job, such as childcare costs, nor it is available for private costs. Separate tests apply to travel expenses – relief is available for business travel but not private travel, which includes the ordinary commute.

Typical expenses - Although the expenses that an employee may incur will vary depending on the nature of their job, popular expenses for which claims may be made include travel costs, additional costs of working from home, professional fees and subscriptions, work clothing and tools and equipment.

Travel expenses - If you have to travel for your job and your employer does not meet the cost of the associated travel expenses, you may be able to claim a deduction. Typical travel expenses include public transport costs, parking fees, congestion charges and tolls and, where you travel by car, mileage costs. For most expenses the deduction is the amount that you spent. If you use your own car, you can claim a mileage allowance of 45p per mile for the first 10,000 business miles in the tax year, and 25p per mile thereafter. If your employees pays you an allowance, but it less than the approved rates, you can claim a deduction for the difference. If you have a company car, you can claim a deduction for fuel based on HMRC’s advisory fuel costs. If you do not want to use the flat rates, you can instead claim a deduction based on the actual costs, but this will involve more work.

In the event that you have to stay away overnight, you can claim the cost of any overnight accommodation and food and drink.

Working from home - If you are required to work from home, you can claim a fixed rate deduction of £6 per week (£26 per month) for additional household costs incurred as a result of working from home. If preferred, you can claim the actual amount of extra costs that you have incurred from working from home, but you will need bills and receipts to support your claim.

Professional fees and subscriptions - If you have to pay a professional fee to be able to do your job and you meet the cost yourself, you can claim a deduction. You can also claim a deduction for any subscriptions that you pay to approved professional bodies or learned societies that are on HMRC’s list.

Work clothing and tools - If you are required to wear specialist clothing to do your job, you may be able to claim the cost of cleaning, repairing or replacing that clothing. However, you are not allowed a deduction for the initial cost.

Similarly, you can claim a deduction for the cost of replacing or repairing any small tools that you need to do your job and which you provide yourself, but not the initial cost of those tools.

Making the claim - If you need to complete a self-assessment tax return (which may be the case if you also have income from employment or investment income), you can make the claim in your tax return.

If you do not need to complete a tax return, you can either make the claim online or by post on form P87.

Online claims can be made using the online service on the Gov.uk website. You will need to sign in using your Government ID and password. You can make a claim for multiple tax years, and also for up to five different jobs. It is advisable to make sure that you have all the information that you need before starting the claim. Once you have made the claim, you will be given a reference number which you can use to track the progress of the claim.

You can also make a claim by post on form P87, which is available on the Gov.uk website. Again claims can be made for multiple tax years and also for up to five jobs. From 7 May 2022, HMRC will only accept postal claims on form P87; previously claims could be made by letter.

HMRC is busily issuing PAYE codes for 2022/23, which starts in just a few weeks. With that in mind a recent ruling by a First-tier Tribunal (FTT) is a reminder of what HMRC can and can’t include in your tax code. What were the key points in the ruling?

The case - Richard Thomas (T) had been a tribunal judge before retiring in 2020 and so had a good understanding of tax. He took exception to HMRC amending his tax code in late 2020, in respect of his civil service pension. It did so to collect further tax it estimated was due on a payment T received from the civil service after he had ceased employment and for which a P45 had been issued. Basic rate tax had been deducted from the payment but HMRC believed T would be liable to the higher rate. T appealed to the First-tier Tribunal (FTT) on the grounds that HMRC could not be sure how the tax it would collect from the revised code would the right amount.

A pyrrhic victory

After an exchange of correspondence HMRC reinstated T’s PAYE code (more or less) and withdrew its argument from the FTT. However, on a point of principle T pushed ahead with his appeal. In its decision the FTT accepted it had the right, but was not obliged, to decide what the correct code was. On the face of it might look like a win for the taxpayer. However, HMRC had already reinstated the code T asked for so he didn’t gain anything. Plus, on the key points the FTT agreed with HMRC that it was entitled to make the original adjustment to T’s code even though it later backtracked.

Despite the rather pointless hearing it’s a useful reminder that you have the right to appeal against a code number, if necessary all the way to the FTT. There are rules which HMRC is bound by when calculating your code, which increasingly it tends to ride roughshod over.

Getting your code right - As a general rule, HMRC only has a right to reduce your tax code to collect tax on PAYE income, e.g. state and private pensions, benefits in kind. It can also adjust your code to collect tax you have underpaid, or that it estimates you will have underpaid for the current tax year. In spite of the rules, HMRC officers often take a more cavalier approach to calculating codes and attempt to use them to collect tax on all sorts of income. While it’s allowed to do this, subject to restriction, you do not have to accept what amounts to collecting tax sooner than it is due. Below is a list of items HMRC often includes in tax codes for which you have the right to ask it to remove:

• property rental income
• profits from self-employment
• taxed investment income or dividends
• untaxed investment income, e.g. bank interest.

If you have income that falls into the list above, but is no more than, say, £500 per year, it’s probably more convenient to pay the tax through your code.

Remember that while your tax code determines the amount of PAYE tax that will be deducted from your employment income or private pension, your correct tax liability is determined by your self-assessment or HMRC review. Nevertheless, there is no reason to accept a tax code which results in you paying tax sooner than you need to.

Cryptocurrencies, such as Bitcoin, are a type of electronic cash; designed to stand apart from any government or bank they work through a computer network. Records confirming Individual ownership of the 'coins' are stored in a digital ledger with secure transaction records. Coins can be bought or sold with other currencies, used to purchase goods from sellers who are willing to accept cryptocurrencies as payment, make investments in various assets and as investments themselves. However, the 'downside' is that the system is unregulated with no central bank or government to support the currency should something go wrong.

It has taken a long time to be accepted as a currency in its own right but in April 2022 HMRC announced moves to recognise one type of cryptocurrency ('Stablecoins') as a valid form of payment. Such tokens are intended to maintain a 'stable' value typically pegged to a currency.

Tax charge - Published in March 2021, HMRC’s Cryptoassets Manual outlines HMRC's view of the tax position confirming that in the majority of circumstances the investment will be subject to Capital Gains Tax (CGT) on disposal. However, Income Tax and National Insurance contributions will be charged on cryptoassets received from:

• an employer as a form of non-cash payment;
• mining, transaction confirmation or airdrops; or
• where the individual runs a business carrying on a financial trade in cryptoassets - this will be deemed as taxable trading profits.

Therefore CGT will be relevant on disposals as follows:

• Selling for any other currency - crypto or not.
• Exchanging tokens for a different type of token.
• Paying for goods and services.
• Gifting unless to a spouse or civil partner.

There will be transactions where there will be no CGT disposal e.g. if an owner moves tokens between “wallets” such that no transaction takes place as the owner retains beneficial ownership.

Allowable expenditure

Certain costs on disposal can be deducted:

• transaction fees paid for having the transaction included on the distributed ledger;
• advertising for a purchaser or a vendor;
• professional costs to draw up a contract for the acquisition or disposal of the tokens; and
• costs of making a valuation or apportionment.

Calculation of cost - HMRC has precise guidance for crypto cost basis methods. Unless the token can be identified with the sale of particular tokens then HMRC requires the 'pooling method' to be used. Such a method already applies to shares and securities with the TCGT Act 1992 stating that it also applies to ‘any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired - hence the use for any trading in cryptocurrencies.

The three possible methods of calculation are:

• Same-Day: matching purchases and sales of the same day .
• Bed and Breakfast: matching sales within 30 days of purchase ('first in first out' basis),
• 'Pooling': if the two rules above are not relevant, the cost of any coin is calculated by adding up the total amount paid for all assets and dividing it by the total amount of tokens held to find the value per token. The pool is an aggregate of all the acquisitions which are not sold within the subsequent 30 days. Therefore, an average cost for the cryptoassets in the pool is maintained and a pro-rata cost is deducted from disposals using the matching rules.

Practical Point - Proof that HMRC is taking an increased interest in such transactions was confirmed when, in August 2019, crypto exchanges that have business in the UK, such as eToro, Coinbase and CEX.IO, received letters from HRMC requesting customer data and transaction history. Following which, in November 2021, HMRC issued letters reminding those who have traded in cryptoassets of their responsibilities to report gains through a self-assessment tax return.

To help meet the costs of health and adult social care, a new levy, the Health and Social Care Levy, is introduced from 6 April 2023. Payment of the levy, which is set at the rate of 1.25% of qualifying earnings, is linked to the payment of National Insurance contributions.

Prior to the introduction of the levy and in order to start raising ring-fenced funds for health and adult social care from 6 April 2022 onwards, the rates of ‘qualifying’ National Insurance contributions are to increase by 1.25% for 2022/23 only. Qualifying National Insurance contributions are Class 1, Class 1A, Class 1B and Class 4. Thus, employees, employers and the self-employed will be hit by the rises for 2022/23, and by the levy from 6 April 2023.

The National Insurance rates are due to revert to their 2021/22 levels from 6 April 2023 when the Health and Social Care Levy comes into effect.

Impact on employees - For 2022/23, employees will pay primary National Insurance contributions at the main rate of 13.25% on earnings between the primary threshold (set at £190 per week for 2022/23) and the upper earnings limit (set at £967 per week for 2022/23), and at the additional rate of 3.25% on earnings in excess of the upper earnings limit.

For 2021/22, the main rate is 12% (payable on earnings between £184 per week and £967 per week) and the additional rate is 2% (payable on earnings in excess of £967 per week).

The following case studies demonstrate the impact of the rate rises, which will depend to the extent to which they are offset by the increase in the primary threshold.

Case study 1 - Karen is paid £185 per week. For 2021/22, she pays primary contributions of 12p per week. However, for 2022/23, she will not pay any contributions (but will be treated for state pension purposes as having made notional contributions) as her earnings are below the primary threshold of £190 per week.

She is unaffected by the rate rises, and benefits from the increase in the primary threshold.

Case study 2 - Clive is paid a salary of £24,000, paid monthly at the rate of £2,000 per month. His pay remains the same in 2022/23 as in 2021/22.

The monthly primary threshold is £833 for 2022/23 and the monthly upper earnings limit is £4,189. For 2021/22, the monthly primary threshold is £797 and the monthly upper earnings limit is £4,189.

For 2021/22, Clive pays primary National Insurance contributions of £144.36 (12% (£2,000 - £797)).

For 2022/23, Clive pays primary National Insurance contributions of £154.63 ((13.25% (£2,000 - £833).

The combined impact of the rate rise and the increase in the primary threshold will mean that Clive will pay an additional £10.27 each month in National Insurance contributions.

Case study 3 - Rebecca is a company director with a salary of £150,000 a year.

The annual primary threshold is £9,880 for 2022/23 and £9,568 for 2021/22. The annual upper earnings limit is £50,270 for both years.

For 2021/22, Rebecca pays primary Class 1 National Insurance of £6,878.84 ((12% (£50,270 - £9,568)) + 2% (£150,000 - £50,270))).

For 2022/23, Rebecca pays primary Class 1 National Insurance of £8,592.91 ((13.25% (£50,270 - £9,880)) + (3.25% (£150,000 - £50,270))).

As a result of the rate increases, Rebecca will pay £1,713.07 more in National Insurance contributions in 2022/23 than in 2021/22.

The usual method of incorporation is via Companies House WebFiling or Company Formation Agent (although paper submissions are still accepted). If incorporating via WebFiling there is the added benefit of HMRC automatically being notified by Companies House when a new company has been formed. HMRC will then usually issue a 'Notice to deliver a tax return' confirming the reporting date of the first accounts. In most cases, the notice period coincides with an accounting period of the company and a return is then submitted for a matching period.

The first accounting period usually covers more than 12 months because the starting date is the date that the company was incorporated ending on the ‘accounting reference date’, i.e. the last day of the month the company was set up. In the following years, the accounting reference date will normally cover the company’s financial year.

Example - If a company is incorporated on 11 May 2022, its accounting reference date will be 31 May 2023, so the first accounts cover 12 months and 3 weeks. The accounts will be from 1 June to 31 May in the following years.

Although Companies House sets the accounting period dates, the dates covering the first tax return will depend on whether or not the company started trading on the same day that it was incorporated. This because a company usually first comes within the charge to corporation tax when the company commences a trading activity. However, an accounting period will also be deemed to have commenced as soon as the company acquires a source of income (which could be the opening of an interest-bearing bank account).

Shortening the accounting period - The period covered by a tax return (the ‘accounting period’ for Corporation Tax) cannot be longer than 12 months. So to cover the first accounting period two tax returns may have to be filed (in the above example one for the year ended 10 May 2023 and another for the period 11 May 2023 to 31 May 2023); if so, there will also be two payment deadlines. Only one return will be required in the following years -- usually covering the same financial year as the accounts. The submission of two tax returns for just a few weeks (sometimes days) can be made more accessible by applying to shorten the accounting period to the end of the month before. Therefore, in the example above by applying to shorten so that the end date is the last day of the month before, only one set of accounts is required for the period 11 May 2023 to 30 April 2024 and also only one tax return and one tax payment.

Late submission of accounts to Companies House results in an automatic penalty of £150. Successful appeals against such penalties are rare. Of course the way to avoid a penalty is to submit the accounts on time. However, if you can see that you will not be able to make the deadline for whatever reason there is a way to avoid any penalty by shortening the accounting reference date, gaining an additional three months to submit.

When the accounting reference date is shortened the new deadline for filing accounts at Companies House becomes the longer of:

 nine months from the new accounting reference date; or

 three months from the date of receipt of the application form AA01 (change the accounting reference date).

Therefore if the accounting reference date is shortened by just one day that gains an additional three months in which to submit the accounts. In addition, the rules allow accounts to be made up to seven days on either side of the accounting reference date so these accounts can be submitted as prepared with no alterations required.

Importantly, the change to AA01 form must be received by Companies House before the date that the accounts are due initially and therefore, this method cannot be used if the filing deadline has passed.

Example - A company's year-end (Accounting Reference Date) is 31st March 2022.

The deadline for submission to Companies House is 31 December 2022.

However, the directors confirm that the accounts cannot be submitted by that date and wish to apply to shorten the accounting period.

An application is made to Companies House on Application form AA01 to shorten the accounting reference date by one day to 30 March 2022.

Accounts can be made up to seven days either side of the original accounting date and therefore the accounting reference date remains as 31 March 2022.

The revised submission deadline will be three months from the date that the AA01 is filed. Therefore, in this scenario, if form AA01 was submitted on 23 December 2022 the revised filing date will be 22 March 2023.

The next set of accounts to the year ended 31 March 2023 would need to be filed by 30 December 2023.

Corporation tax is being reformed and companies with profits of more than £50,000 will pay corporation tax at a higher rate than they do now. While the changes do not come into effect for a year, applying from the financial year 2023 which starts on 1 April 2023, their impact will be felt sooner where accounting periods span 1 April 2023. Consequently, they will be relevant to accounting periods of 12 months starting after 1 April 2022.

Nature of the changes - From 1 April 2023, the rate of corporation tax that you pay will depend on the level of your profits and the number of associated companies that you have if any.

If your profits are below the lower limit, from 1 April 2023, you will pay corporation tax at the small profits rate. At 19%, this is the same as the current rate of corporation tax.

If your profits are above the lower limit, you will pay corporation tax at the main rate. This has been set at 25% for the financial year 2023.

If your profits fall between the lower limit and the upper limit, you will pay corporation tax at the main rate, but you will receive marginal relief which will reduce the amount that you pay. Marginal relief is calculated in accordance with the following formula:

F x (U-A) x N/A

Where:

F is the marginal relief fraction (set at 3/200 for the financial year 2023);

U is the upper limit;

A is the amount of augmented profits (profits plus dividends from non-group companies); and

N is the amount of total taxable profits.

Where a company benefits from marginal relief, the effective rate of corporation tax will be between 19% and 25%. A company with profits nearer the lower limit will receive more marginal relief than a company with profits nearer the upper limit and pay tax at a lower rate.

The lower limit is £50,000 and the upper limit is £250,000 for a company with no associated companies. Where a company has one or more associated companies, the limits are divided by the number of associated companies plus 1, so that, for example, the lower limit for a company with one associated company will be £25,000 and the upper limit will be £125,000.

The limits are time apportioned where the accounting period (or pro rata period) is less than 12 months.

Plan ahead - Where the accounting period spans 1 April 2023 the profits for the period are apportioned and those relating to the period prior to 1 April 2023 will be taxed at the financial year 2022 corporation tax rate of 19%, while those relating to the period from 1 April 2023 to the end of the accounting period are taxed at the relevant rate for the financial year 2023 depending on the company’s profits.

Where the company will from April 2023 pay corporation tax at a rate above 19%, now is the time to plan ahead and, where possible, accelerate profits so that they fall in the current accounting period rather than one spanning 1 April 2023. On the other side of the coin, delaying costs so that they fall in a period spanning 1 April 2023 rather than the current period will also reduce the tax that is payable at a rate above 19%.

Example - ABC limit prepares accounts to 30 September each year. It has annual profits of £300,000.

Its profits for the year to 30 September 2022 will be taxed at 19%.

However, its profits for the year to 30 September 2023 will be time apportioned and six months’ worth will be taxed at 19% and the remaining six months’ worth at 25% -- an effective rate of 22%.

The company accelerates a profitable contract so that it is completed before 30 September 2023 so that the profit is taxed at 19%.

Businesses become companies for a variety of reasons. Not so long ago it was mainly as a tax planning tool but increasingly the differences in tax rates between the self-employed and a company mean that unless the profit is in excess of approximately £50,000 the increased administration involved with a company may not make it worthwhile to incorporate purely for tax savings.

Where the decision has been made to incorporate, the transfer is subject to Capital Gains Tax (CGT) as it involves the disposal by the sole trader or partnership owner of chargeable business assets to the company (e.g. goodwill, land/buildings). However, the charge can be deferred using Incorporation Relief (IR). To take advantage of this relief the business must be transferred as a going concern, all the assets must be transferred (apart from cash) and consideration for the transfer must consist wholly (or partly) of shares in the company issued to the sole trader. Ownership of any land or buildings is transferred into the name of the company (something that might not be possible should the property be subject to a mortgage and therefore a remortgage may have to take place).

 The disposal is usually treated as taking place at ‘market value’ on the basis that the parties are ‘connected persons’. ‘Market value’ is the amount that the property might reasonably expect to fetch if placed on the open market. A company is 'connected' to another person is if that person has control of the company or if persons connected with them have control. As a 'connected person' the disposal is at 'market value' even if there is no monetary consideration.

Under an IR claim the CGT charge is postponed ('rolled over') until the person transferring the business disposes of their company shares. The 'rolled over' gain is then deducted from the cost of the shares such that the gain on sale comprises the amount of gain 'rolled over' and the gain made on the increase (if any) of the final sale price over the market value at the time of incorporation. If part of the consideration for the transfer is in cash, then the amount of gain 'rolled over' is reduced proportionately.

Importantly the relief applies automatically if the conditions are met, although an election can be made to disapply. A claim may not be possible because not all of the business assets are to be transferred, for example or because the exchange for shares means that the value can only be withdrawn by the sale of those shares and, being a private limited company, the market for those shares will be restricted. IR may also wish to be disapplied should the gain be covered by the annual exemption or there are losses brought forward available to offset.

One area that could result in an IR claim being refused is where the sole trader or partnership has a loan intended to also to be transferred to the company. Legislation requires that IR only applies to the extent that the consideration is shares but the taking-on or settlement of a debt is strictly consideration for the transfer. Although HMRC has no problem with this by concession (ESC D32), difficulties could arise with the lender where the loan moves from private client into corporate hands, with different borrowing criteria. If the company were to take out a loan and used that to repay the owner’s personal loan, such consideration is not covered by ESC D32 and the IR would be restricted. In practice, the lender and borrower agree to new refinancing terms on the understanding that the loan will be taken over by the company shortly thereafter. The owner uses the advance to repay their existing debt, enabling the loan to fall within the concession, such that IR is then fully available.

Practical Point - If it is intended not to transfer some assets, other CGT reliefs should be considered e.g. Business Asset Disposal Relief or Gift Relief. If another relief is preferred, either incorporation relief must be disapplied or ensure that the requirements for incorporation relief are broken.

The property income allowance allows you to earn a small amount of rental income tax-free each year. It is useful where the rent-a-room scheme does not apply (which is limited to the letting of furnished accommodation in your own home), and removes the need to report small amounts of rental income to HMRC.

The allowance

The property allowance is set at £1,000 per tax year.

Rental income of less than £1,000

Where the rental income received in the tax year is less than £1,000, the income is not charged to tax (unless you elect otherwise). The income does not need to be reported to HMRC and can simply be ignored for tax purposes.

Example

Ceri lives near a popular concert venue and lets out a parking space on her drive. She earns rental income for the tax year of £640. As this is less than the property allowance, it is not charged to income tax and she does not need to report it to HMRC.

Rental income of more than £1,000

Where rental income exceeds £1,000, you can choose how you want to be taxed. You can deduct either your actual expenses or the £1,000 allowance from your rental income to arrive at your taxable profit.

If you decide to deduct the allowance, you must elect for this treatment to apply; otherwise you should deduct actual expenses when calculating your profit. You can choose which gives the best result.

Example

David is an artist and sometimes lets out space in his studio to other artists. In the tax year in question, he receives rental income from letting the studio of £2,000. His actual expenses are £500.

Calculating his profit in the usual way by deducting expenses would result in a taxable profit of £1,500. However, if he elects instead to deduct the property allowance, his taxable profit is reduced to £1,000. In this case an election is worthwhile.

Where the allowance is deducted, it is deducted from the total receipts for the property rental business, rather than on a property-by-property basis.

However, if actual expenses exceed your rental receipts, it is better not to claim the allowance and preserve the loss, which you can carry forward to set against future profits.

Splitting the allowance

If you have more than one relevant property business and want to claim the allowance, you can choose how it is split between your different property rental businesses.

VAT paid on the cost of business entertainment can’t be reclaimed. However, what counts as entertainment and what is a general business staff-related expense isn’t always clear. How and why will it benefit you to identify the difference?

VAT versus direct tax

Tax rules block deductions or relief for most types of business entertaining expenses. The block covers income and corporation tax as well as VAT. But unlike the rules for the first two taxes those for VAT differ. VAT rules allow you to apportion any expense and reclaim the VAT you’ve paid on the business element. By comparison, the income and corporation tax rules only allow this where the business expense is clearly a separate and identifiable amount.

Entertainment or staff cost

HMRC’s interpretation of the direct tax rules is that a business can’t claim a deduction for any part of the cost of an employee taking a customer for lunch even though had the employee dined alone the cost would be deductible as subsistence (subject to the usual conditions). In contrast, for VAT purposes HMRC accepts that the rules permit you to divide a bill and reclaim that relating to the employee.

Where the only reason for the expense is entertainment, VAT can’t be reclaimed even where part of the cost relates to an employee. This rule applies, for example, where the employee is acting as host for the purpose of the entertainment.

This doesn’t apply if the reason the employee is present when the customer etc. is being entertained is as a benefit in kind specifically for the employee, say to improve staff morale or as a reward for especially good work. In that situation it counts as an expense of employment and so VAT can be reclaimed on the related costs. For the same reasons HMRC also accepts that you are entitled to a direct tax deduction.

Apportioning the cost

If, for example, an employee buys a meal for a customer etc. and themself, you’ll need to apportion the bill to work out what you can reclaim. The rules say this must be done in a “fair and reasonable” way.

In most cases splitting the bill equally according to the number of persons involved will be fine. For example, if your employee takes the MD and sales manager of one of your customers for a meal, a third of the VAT can be reclaimed. HMRC doesn’t expect you to identify who ate and drank what. However, if there are clear and easily definable costs relating to the employee or the customer etc. you should apportion the VAT accordingly.

Make sure that your employees know to identify on their expenses claims the cost of any expense where entertainment is involved and how much of it is attributable to them and how much to the customer etc.

If you haven’t apportioned your employees’ entertainment expenses in the past, remember, that you can look back up to four years prior to the start of the current VAT return period and reclaim the VAT on your next return. If the previously unclaimed VAT comes to less than £10,000 you don’t need to tell HMRC about it.

If an employee is present at an entertainment event as a host you can’t reclaim any VAT relating to the costs relating to them. Conversely, you can reclaim VAT paid if the employee incurred the cost in the course of doing their job, e.g. they pay for lunch for a customer while on a routine visit.

When it comes to letting property, not all are equal when it comes to tax – lettings that qualify as ‘furnished holiday lettings’ (FHLs) benefit from special tax rules. The operation of a FHL is deemed to be a business rather than a property income investment and therefore the usual business income and expenditure accounts are prepared. This treatment creates a number of tax benefits for the FHL owner including tax relief for pension contributions, relief for loans to traders and of various capital gains tax reliefs (e.g. Rollover relief, Gift relief, Business Asset Disposal Relief).

Conditions

There are specific conditions required for a let to qualify as a FHL, not least that the property must be fully furnished such that anyone moving into the property must be able to live there without having to buy any additional furniture/furnishings.

In addition, the accommodation must be 'available' for short-term letting for 210 days in any one tax year and be let for 105 days of the year. Long-term lets should not exceed 155 days ('occupation' condition) in any one tax year and the property should not normally be let for a continuous period of 31 days in any period of 155 days.

'Averaging'

As a result of the various lockdown measures implemented by the government due to the pandemic, some holiday let businesses may not have met the various occupancy levels required to qualify as a FHL. If that was the case then there is the option to make an averaging election where a landlord has more than one holiday let and the letting condition is met by some but not all of the properties in the portfolio. The test is applied by reference to the average occupancy rate for all properties, rather than individually for each.

'Period of grace'

If the landlord has one holiday let only or an averaging election does not help there is a potential solution in the form of a 'Period of Grace' election. Under this election should a property qualify for FHL in one accounting period or tax year out of every three but does not qualify in the next or next two years then the election treats the year that does not qualify as being included in the calculation.

Making an election

Either or both of the FHL income tax elections are made on the property income pages of the self-assessment tax return (or separately in writing) up to one year after 31 January following the end of the tax year. That gives the landlord until 31 January 2024 to claim for the 2021/22 year.

Conditions not met

If the conditions are not satisfied, the property is taxed under the normal rental accounting rules rather than the more beneficial FHL business rules. A landlord will not be able to benefit from pension contribution reliefs (apart from the £3,600 net of tax relief permitted to all taxpayers), certain capital gains tax reliefs or be able to claim capital allowances for such items as furniture, fixtures and equipment.

Should a landlord find him or herself in a situation where there is a danger of the FHL conditions not being satisfied then there is always the possibility of asking another member of the family to stay for the prerequisite number of days but they will have to pay market rent for the occupancy rules to apply. Stays by the owner do not count towards the occupancy limit.

Losses

FHL losses cannot be offset in any year against any other type of income, instead such losses are carried forward to be offset against any future profit.

As a final point - Neither Class 2 nor Class 4 NIC's are due on profits from FHL's as the property business is treated as an investment and not a trade.

Property that is jointly-owned may be let out. As people are taxed individually, the income must be allocated in order to work out the tax that each joint owner is liable to pay. The ways in which income from jointly-owned property is taxed depends on the relationship between the owners.

Joint owners are not married or in a civil partnership - Assuming there is no property partnership, where property is jointly-owned by persons who are not married or in a civil partnership, the income arising from the property will normally be allocated in accordance with each person’s share in the property. Each person is taxed on the income that they receive.

Example - Andrew, Alison and Anthony are siblings who own a property together which is let out. Andrew owns 50% of the property, Alison owns 30% and Anthony owns the remaining 20%.

The property generates rental income of £10,000. The income is allocated as follows in accordance with the ownership shares:

• Andrew: £5,000;
• Alison: £3,000; and
• Anthony: £2,000.

Each is taxed on the share that they receive.

The joint owners do not have to share profits in accordance with their ownership shares – they can agree a different split. If they do, they are taxed on what they actually receive.

Spouses and civil partners - Where property is owned jointly by spouses and civil partners, the default position is that the income is treated as being allocated 50:50 for tax purposes, regardless of the amounts that they actually receive. This can be useful from a tax planning perspective where spouses or civil partners have different marginal rates of tax. The no gain/no loss capital gains tax rules can be used to transfer a small share in a property to a spouse or civil partner paying tax at a lower rate, transferring 50% of the income for tax purposes in the process.

Example - Frank is a higher rate taxpayer. He owns a property generating rental income of £20,000 a year. He transfers a 5% stake in the property to his wife Felicity, whose only income is a salary of £15,000. Frank and Felicity are each taxed on £10,000 of the rental income. Felicity pays tax at 20% on her share. Had the property remained in Frank’s sole name, he would have paid tax at 40% on the full amount of the rental income. Taking advantage of the rules saves them tax of £2,000 a year.

This rule does not apply to income from furnished holiday lettings.

Form 17 - Where spouses or civil partners own a property jointly in unequal shares, they can elect for the income to be taxed by reference to their underlying ownership shares. However, this is only possible where they own the property as tenants in common (and each own their own share); where the property is owned as joint tenants (and as such the owners have equal rights over the whole property), the income split remains 50:50.

The election is made on Form 17. It must be made by both spouses/civil partners jointly and they must declare that they own the property in the shares stated on the form. The income split takes effect from the date of the latest signature, and to be effective must reach HMRC within 60 days of the signature.

The ability to elect for income to be taxed in accordance with ownership shares opens up tax planning opportunities, particularly as use can be made of the capital gains tax no gain/no loss rules for transfers between spouses and civil partners to change the ownership slip without triggering a chargeable gain.

The rent-a-room scheme allows people to earn rental income tax-free when they let out a furnished room in their own home. You do not have to own the property – rooms sub-let in rented properties also count (but check that sub-letting is allowed under the terms of the tenancy agreement). You can also benefit from the scheme if you run a bed-and-breakfast or guest house.

Automatic exemption for rental income of £7,500 or less

If the rental income that you receive from letting a furnished room in your own home is £7,500 a year or less, the exemption applies automatically. You do not need to tell HMRC about the income or complete a tax return.

If more than one person receives the rental income, the limit is halved to £3,750 per person. This limit applies regardless of the number of people receiving the income, even if the total comes to more than £7,500.

Example 1

Sisters Abigail, Anna and Anita live in a property that they own together. They let out two furnished rooms, receiving rental income for the tax year of £9,000. Each sister receives £3,000, which is less than their individual rent-a-room limit of £3,750. All the rental income is tax-free and does not need to be returned to HMRC. It does not matter that the total  is more than £7,500, as each person’s share is within their individual limit.

Rental income of more than £7,500

If the rental income is more than £7,500 (or more than £3,750 per person where more than one person receives the income), you can still benefit from the scheme. However, you will need to complete a tax return and choose to opt in. If you do this, you simply pay tax on the excess over your rent-a-room limit.

Example 2

Benny lets three furnished rooms in his home receiving rental income of £9,000 for the tax year. He opts into the rent-a-room scheme and is taxed on a rental profit of £1,500 – the amount by which his rental income exceeds his rent-a-room limit of £7,500.

Using the rent-a-room scheme is beneficial if the limit is more than your expenses as it will reduce your taxable profit.

Losses

You cannot create a loss by deducting the rent-a-room limit rather than actual expenses. If your rental income is less than the limit, the relief applies automatically and there is no tax to pay or anything to report.

If your rental income is below £7,500/£3,750 as relevant and less than your expenses, it is not worthwhile using the scheme.

If you make a loss, it is better to opt out of the scheme and preserve the loss, which you can then carry forward and set against any future profits. To do this, you will need to complete a tax return and opt out of the scheme.

When letting property, the aim is to make a profit. However, as recent years have shown, life is unpredictable and things do not always work out as planned. Where losses are made, it may be possible to obtain tax relief for those losses.

General rule - The general rule for losses incurred in a property rental business is that they can only be carried forward and set against future profits from the same property rental business.

Loss relief is only available if the business is run on a commercial basis.

Calculating the loss - As with profits, the loss for a property rental business or for a furnished holiday business is calculated for the business as a whole, rather for each individual property. The effect of this is that a loss on one property is automatically set against the profits from other properties within the same property rental business. A loss only arises if there is a loss for the property rental business as a whole.

Example 1 - Evan runs a property rental business comprising three properties. For the tax year in question he incurs the following income and expenses in relation to each of the properties, plus general expenses of £3,200.

Property                 Rental Income    Expenses     Profit/(loss)

       1                            £10,000             £1,000            £9,000

       2                              £2,000             £4,000           (£2,000)

       3                            £12,000             £2,100            £9,900

General expenses                                  £3,200           (£3,200)

Total                             £24,000            £10,300          £13,700

Although he makes a loss on property 2, this is automatically relieved in calculating the profits of the business as a whole, Evan is taxed on the overall profits of £13,700.

Same business - Property losses can only be relieved against profits from the same business.

It is important to note that a UK property business and an overseas property business are treated as different property businesses, and losses from one cannot be set against profits from another. Likewise, losses from furnished holiday lettings can only be set against profits of the same furnished holiday letting.

Example 2 - Freddie runs a furnished holiday letting business. He made a loss in 2020/21 of £12,000. In 2021/22, he made a profit of £30,000. The 2021/22 loss is carried forward and set against the profit of £30,000 for 2021/22, reducing the taxable profit to £18,000.

However, if one business ceases and a new one is commenced, any loss from the old business cannot be set against profits of the new business. If there is a gap it will be a question of fact whether the business has ceased. For example, where there was a gap in holiday lettings during the Covid-19 pandemic, a holiday letting business would not be treated as having ceased if the properties continued to be let as furnished holiday lettings once restrictions had been lifted. Any pre-pandemic losses could be set against post-pandemic profits.

Example 3 - Grace had a holiday let. She sold the property in June 2021. She had unused losses of £12,000. In October 2021 she purchased a buy to let property, making a profit of £4,000 in 2021/22. She cannot use the losses from the holiday let business against the profits from the buy-to-let.

Losses related to capital allowances - Special rules apply to losses that relate to capital allowances. Where these arise, these can be set against general income of the year in which the loss arises. Claims must be made by the first anniversary of 31 January following the end of the tax year in which the loss arose (so by 31 January 2024 for a 2021/22 loss).

Capital losses - A capital loss on the sale of the property is automatically set against any capital gains of the same tax year, of whatever type. Where the loss is not relieved in this way, it is carried forward under the capital gains tax rules for relief against future capital gains. Relief for capital losses in relation to properties is not restricted to property gains as for income tax losses.

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%.

With fuel prices hitting new highs, your employees are saying that HMRC’s mileage rates for business use of their cars are no longer enough. You’re willing to pay more but what tax and NI costs might this trigger and can you mitigate them?

Business use of private vehicles

Employees who use their private vehicles for business journeys are entitled to claim a tax deduction, at an HMRC-approved amount, according to the number of miles travelled. Alternatively, employers can pay their employees an equivalent tax-exempt mileage allowance.

There’s an advantage to the employer-paid allowance. It’s free of NI contributions whereas the tax deduction does not reduce the NI liability for employee or employer.

Rising pump prices

HMRC’s approved mileage rates haven’t changed in over a decade. (Car or van 45p per mile for the first 10,000 business miles, then 25p per mile) To be fair, motoring costs haven’t increased hugely in that time, but they have increased. Now, fuel prices are surging and employers are under pressure from their workers to pay higher mileage rates.

Tax and NI consequences

As an employer if you pay more than the tax-free amount, the excess must be reported on Form P11D as a benefit in kind. For NI purposes you must add the excess to the employee’s salary and charge it to Class 1 NI as you would salary.

Mitigating tax and NI

You might be able to mitigate the tax and NI cost on excess mileage payments with other tax and NI-free travel-related payments.

The following allowances are tax and NI exempt:

benchmark subsistence payments

incidental overnight expenses

working rule agreement allowances

If your policy is not to pay employees’ subsistence when they travel on business (apart from overnight stops) or reimburse at a rate less than HMRC’s tax and NI exempt allowances, you could pay these to top up the tax and NI-free mileage allowance to partly compensate your employee for any shortfall.

Example. Ravi, a higher rate taxpayer, is employed by Acom Associates at their head office. On average he makes six journeys and drives 500 business miles per month in his own car. On average each trip lasts ten hours. Acom agrees that 60p per mile is reasonable but in a year that would cost Ravi £389 in tax and NI and Acom £135 in NI. When on a business journey Ravi usually buys a sandwich and a drink at lunchtime for £5 which Acom reimburses tax and NI free. However, it could pay him HMRC’s £10 benchmark subsistence rate. This would give Ravi an extra £360 per year tax and NI free. That’s equivalent of paying Ravi an extra 15p per mile for 2,400 of the 6,000 miles he travels.

The excess over HMRC’s approved mileage allowance is taxable as a benefit in kind and liable to Class 1 NI contributions as extra salary. Where currently you do not pay your employees a subsistence or other travel-related allowance, paying one at HMRC approved rates can provide employees with extra tax and NI-free cash as a top up to the mileage allowance.

Despite the increase in National Insurance Contributions (NIC) in the April 2022 Spring Statement (the increase being replaced by the Health and Social Care Levy in July 2022) there remains a significant financial advantage for individuals working as self-employed rather than as employees. However, complications can arise where an individual is both employed and self-employed as they may find themselves paying too much NIC for no extra benefit. With different rates for the 2022/23 year, individuals who are both employed and self-employed could easily find themselves in this situation unless aware of the rules.

Following changes to the employees primary threshold (PT) the lower profits limit for Class 4 contributions was increased to £11,908 for 2022/23, maintaining alignment with the annual PT. However, the rate of Class 4 NICs for the self-employed remains lower than the rate paid by employees (10.25% v 13.25%), and the self-employed face no equivalent to employer NICs (15.05%). The Class 2 Small Profits Threshold remains unchanged for 2022/23 at £6,725.

Calculation difficulties can arise where there is a mix of earnings such that the Class 1 limit is not exceeded separately but by paying NIC based on total earnings (whether that be for an additional second job or self-employment) the maximum amount is exceeded and a refund due. The annual maximum is equal to 53 primary Class 1 contributions at the upper earnings limit (£967 per week x 53 weeks = £50,270 per tax year).

To ensure that such overpayments were not made in the past, an application had to be made to HMRC for deferment. Currently HMRC state that they will automatically carry out this calculation on receipt of the self-assessment tax return. However, this assumes that the individual’s NIC record is complete and correct. Deferment will be accepted by 14 February for a 2022/23 year claim with any application after that date being considered but only with agreement with the respective employers.

Deferment

Neither Class 2 nor Class 4 NIC can be deferred; deferment only applies for Class 1 NIC and only if any of the following are relevant:

• Class 1 NIC with more than one employer;
• earn £967 or more per week from one job over the tax year;
• earn £1,157 or more per week from 2 jobs (combined income) over the tax year.

The formula for the calculation is:

Upper earnings limit = (X-1) x PT

where X is number of jobs

In practice a reduced rate of 3.25% on weekly earnings between £190 and £967 in one job (not both) instead of the standard rate of 13.25 % for the tax year 2022/23.

Practical Point

Each individual employed in more than one employment or employed and self-employed will have an individualised maximum liability for either Class 1 contributions or Class 1 and Class 2 contributions based on the earnings received. HMRC's National Insurance Manual provides examples for calculating the Class 1 and 2 annual maximum for various earners with differing employment patterns.