Adrian Mooy & Co - Accountants Derby

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Although the National Insurance rates and thresholds for 2022/23 had already been set, at the time of the Spring Statement in March 2022, the Chancellor announced increases in the primary threshold which would align the starting point for National Insurance with the personal allowance from 6 July 2022. However, as the increase does not take effect until part way through the 2022/23 tax year, the two not fully aligned until 2023/24. The lower profit limit for Class 4 contributions was also increased.

Employees

Employees pay primary Class 1 National Insurance contributions on their earnings to the extent that these exceed the primary threshold. For 2022/23, contributions are payable at the main rate of 13.25% on earnings between the primary threshold and the upper earnings limit, and at the additional rate of 3.25% on earnings in excess of the upper earnings limit. Employees are treated as having paid contributions at a notional zero rate on earnings between the lower earnings limit and the primary threshold. This has the effect of ensuring that the year is a qualifying year for state pension purpose if the employee has earnings at least equal to 52 times the weekly lower earnings limit.

The lower earnings limit is £123 per week (£533 per month; £6,396 per year) and the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year) for 2022/23.

The primary threshold was initially set at £190 per week (£823 per month; £9,880 per year). These thresholds now only apply from 6 April 2022 to 5 July 2022. From 6 July 2022, the primary threshold is aligned with the personal allowance, and from 6 July 2022 to 5 April 2023 is set at £242 per week (£1,048 per month; £12,570 per year). As the increase takes effect three months after the start of the 2022/23 tax year, the annual primary threshold for 2022/23 is £11,908. This will be of relevance to directors with an annual earnings period. The increase in the thresholds does not affect any liability for primary contributions for any tax week commencing before 6 July 2022.

As a result of the increase in the primary threshold, employees will pay less National Insurance from July onwards. There is no change to the secondary thresholds.

Case study

Imogen is paid £2,000 per month.

For April to June 2022 inclusive, she pays primary contributions of £155.95 per month (13.25% (£2,000 - £823)).

However, from July 2022, her monthly primary contributions fall to £126.14 (13.25% (£2,000 - £1,048)).

The increase in the primary threshold means that from July she is £29.81 better off each month.

Employment allowance

The employment allowance reduces the secondary contributions payable by the employer. The allowance is set at £5,000 for 2022/23, having been increased by £1,000 following the Spring Statement. Eligible employers should remember to claim the allowance.

The self-employed

The starting point for Class 4 contributions is aligned with the primary threshold for Class 1 purposes. To keep the alignment in light of the increase to the primary threshold from July 2022, the lower profits limit for 2022/23 has been increased from £9,880 to £11,908. The increase applies from 6 April 2022.

First-time buyer relief may reduce the stamp duty land tax (SDLT) that a first-time buyer pays when they buy their first home in England or Northern Ireland. A similar scheme applies in Scotland for Land and Buildings Transaction Tax (LBTT), but there is no first-time buyer relief from Land Transaction Tax in Wales. This articles focuses only on the SDLT relief.

Higher residential threshold

The SDLT relief for first-time buyers takes the form of a higher residential threshold. The normal residential threshold is £125,000. However, this is increased to £300,000 for first-time buyers buying their first home costing £500,000 or less.

Where the relief applies, no SDLT is charged on the first £300,000 of the purchase consideration, with the balance of the consideration (up to £500,000) liable to SDLT at 5%. Where the consideration is more than £500,000, the relief does not apply; first-time buyers pay SDLT as for other buyers to the extent that the consideration exceeds £125,000.

Example 1

Betty is a first-time buyer. She buys her first property, a 2-bed house, in June 2022 for £280,000, which she will live in as her main home. As the consideration is less than £500,000, first-time buyer relief applies. The consideration is below the SDLT first-time buyer threshold of £300,000, so Betty does not have to pay any SDLT.

Example 2

Libby also buys her first home in June 2022. The property costs £350,000. She too benefits from SDLT relief. No SDLT is payable on the first £300,000, but SDLT at 5% is payable on the remaining £50,000. She therefor pays SDLT of £2,500.

Example 3

Eliza buys her first home, a flat in London, in June 2022. The flat costs £700,000. As the consideration is more than £500,000, she is unable to benefit from first-time buyer relief. Consequently, she must pay SDLT of £25,000 ((£125,000 @ 0%) + (£125,000 @ 2%) = (£450,000 @ 5%)).

Buying an investment property

In areas such as London, where property prices are high, many would-be first-time buyers are unable to afford a property. Further, where the price is more than £500,000, first-time buyer relief is not available.

To overcome some of these difficulties and to get onto the first rung of the ladder, an option may be to buy an investment property in a cheaper area. However, for first-time buyers wishing to take advantage of first-time buyer relief to cut their SDLT bill, there is a sting in the tail – the relief is not available unless the first-time buyer intends to occupy the property as their only or main residence. Consequently, first-time buyers buying an investment property to enable them to get on the property ladder must pay SDLT at the usual rates where the consideration exceeds £125,000.

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.

Legislation surrounding 'Trivial Benefits' was introduced to save employers from having to report relatively small amounts given to employees as taxable on a form P11D.

Under the rules there are no tax or NIC consequences for the employee receiving the benefit of the gift:

•  costs less than £50 (HMRC consider this amount to be the VAT inclusive amount)
•  is not a cash or a voucher convertible into cash (a gift voucher is allowed)
•  is not a reward for the employee doing their job. However should that employee undertake duties outside of their employment, e.g. staying after work voluntarily to serve drinks and snacks at a board meeting and receiving a bunch of flowers as a 'thank you', then the exemption will apply.
•  not be part of a salary sacrifice arrangement where an employee gives up part of their future pay in exchange for any benefit, however small the amount.

The exemption can apply to as many times a year as required however, if there is a specific exemption for a benefit then that takes precedence over the trivial benefits exemption e.g. the exemption for the cost of a firm’s Christmas party.

As an anti-avoidance measure there is an additional monetary cap provided to directors and their families. The total cost to the company must not exceed £300 per tax year, e.g. six benefits of up to £50 each or any other combination so that the individual cost is less than £50 and the annual cost less than £300.

At first reading the conditions are relatively straightforward but look deeper and there are some situations where an employer may unwittingly fall foul of the rules. For example, HMRC has confirmed that while providing a gift card of £10 would initially fall within the exempt rules, topping up the same card with £10 more than four more times in the tax year will take the total of the benefit over the £50 limit. In this situation, the whole series of gifts will be considered a single benefit that fails to meet the trivial benefit conditions so both the original gift and the top-ups will be taxable.

One way to circumvent the £50 rule is to lend the item to the employee rather than gift. A typical example of this is when an employer provides a work outfit. If the clothing counts as protective or uniform, there are no tax or NIC implications anyway. However, where this is not the case consideration should be made to either provide each clothing item as a separate gift or lending the item to the employee. The benefit in kind for lending the item will be 20% of the item’s value when first provided to the employee, plus any maintenance costs, e.g. dry cleaning, per year. As long as these amounts total less than £50 the trivial exemption can apply.

HMRC has finally set out its new timetable and criteria for joining its Making Tax Digital pilot. When will you be able to sign up and should you bother?

Overdue update

At the end of 2021 HMRC said that early in 2022 it would widen the availability of its Making Tax Digital for Income Tax Self Assessment ( MTD ITSA ) pilot for businesses. However, it’s taken it until half way through the year to do so and importantly well past the start of the 2022/23 tax year.

MTD ITSA becomes obligatory in April 2024 and will initially be for landlords, sole traders and self-employed individuals, not partnerships or companies. The latter need not concern themselves with the pilot.

Catching up

One of the main features of MTD ITSA is online quarterly reporting of business income and outgoings to HMRC. The trouble is that businesses able to join the pilot under the new criteria won’t be able to do so until July after the first quarterly reporting period has ended. If you join you’ll have little time (especially as the holiday season is upon us) to ensure that your records for the past quarter meet the MTD ITSA requirements in time to submit the first report due on 5 August 2022.

During the pilot period there are no penalties for submitting late quarterly reports. So, if you’re keen to join the pilot during 2022/23, while you must submit all four reports for the year you’ll be able to catch up for any quarter you’ve missed without the risk of being penalised.

Software trouble

Possibly a bigger stumbling block if you want to join the pilot is the very limited range of software available. MTD ITSA reports can only be made using compatible software. There are currently only three HMRC-approved providers. The big names such as Xero, Sage, Intuit Quickbooks and many others are still working on their products. If your provider is not on the short approved list for MTD ITSA software, we recommend waiting to join the pilot until it is rather than changing software at this stage.

The new criteria apply from July 2022. You can join the pilot if your bookkeeping software is compatible but currently there are only three such providers. You can join later but you’ll need to submit retrospective reports

A lot of time and paperwork can be saved by claiming expenses using the simplified rates, rather than recording and deducting actual costs. However, if the deduction is considerably higher using actual costs, the additional time investment may be worthwhile. Given current high cost of fuel, where mileage is high, a deduction based on actual costs may be preferable.

Use of the simplified rates is optional and is available to sole traders and partnerships that do not have any corporate partners.

Motor vehicles

Businesses can claim a fixed rate per business mile deduction for the vehicle expenses. The fixed rate deduction covers the cost of buying, running and maintaining the vehicle (including the cost of fuel, oil, servicing, repairs, insurance, VED and MOT). The fixed rates per mile are as follows:

Once a business elects to use the flat rates, they must continue to do so while the vehicle remains in the business. Capital allowances cannot be claimed where the simplified rates are used and if capital allowances have been claimed in respect of the vehicle in question, it is not possible to use the flat rates.

Use of home

It is also possible to claim a fixed rate deduction for the use of home for the purposes of the business. The flat rate provides an allowance for additional household running incurred as a result,  and covers the additional costs of cleaning, heat, light, power, telephone, broadband etc.

The deduction is based on the total number of business hours spent working in the home on core business activities in the month and is as follows:

Core business activities are providing goods or services, maintaining business records, marketing and obtaining new business.

Case study

Betty is a dog groomer. She provides a mobile service and also works from home. In 2022/23 she spent 60 hours a month working in her home on core business activities and she drove 15,000 business miles.

To save the work involved in determining the actual additional costs, she claims flat rate deductions in respect of the use of her car and her business use of home.

For the car she claims a deduction of £5,750 being 10,000 miles at 45p per mile (£4,500) plus 5,000 miles at 25p per mile (£1,250).

For use of her home she claims a deduction of £18 per month – an annual deduction of £216.

Claiming fixed rate deductions saves the time and effort of keeping records of actual costs and calculating the deductible amount.

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%.

HMRC recently published its latest guidance regarding the reporting of employee benefits and expenses for 2021/22.

You’re probably aware of the approaching deadline for reporting details of benefits and expenses provided to employees in 2021/22. But in case it’s slipped your mind, the information must be provided on Forms P11D (or electronic equivalent) to HMRC by no later than 6 July 2022, along with a covering declaration Form P11D(b) . Any Class 1A NI contributions payable in respect of the benefits must be paid to HMRC by 19 July or 22 July if you pay electronically.

There’s been a change this year to the process for completing and submitting Forms P11D and P11D(b) . One of the options previously available, HMRC’s interactive PDF, known as the “Online End of Year Expenses and Benefits service” has been scrapped. Instead, you must submit the information and declaration via your HMRC “PAYE Online service” or by using P11D software.

HMRC has working sheets to help you calculate the amounts that need to be reported for the benefits with more complex rules such those for company cars, cheap rate loans and employer-provided accommodation. All the worksheets have been updated for 2021/22.

HMRC is also reminding employers that some employee benefits and expenses that would normally be reportable were exempt for 2021/22. The temporary exemptions relate to payments and costs related to coronavirus and the lockdowns. The precise terms of the exemptions often aren’t as straightforward as they seem at first sight, especially those relating to homeworking. To avoid HMRC enquiries and possible penalties, if you’ve provided benefits you think might be exempt it’s advisable to check that all the conditions are met before omitting them from your Forms P11D .

HMRC’s interactive PDF Form P11D is no longer available. Instead, use your HMRC PAYE Online account or software to submit the information. Don’t overlook the temporary exemptions relating to coronavirus-related benefits.

The First-tier Tribunal (FTT) recently considered a firm’s VAT claim for the purchase of two cars, a personalised number plate and clothing. Its ruling neatly sums up the conditions that must be met for such claims to be successful. What was the outcome? - Mr B and Mrs M Firth’s (BF and MF) business traded as Church Farm (CF). It reclaimed the VAT paid on two new cars, a personalised number plate and for clothing intended for use by MF in a new trade. HMRC rejected the first two claims and reduced the latter by 50% to account for personal use. Following an unsuccessful HMRC review, CF appealed to the First-tier Tribunal (FTT).

The cars - Before the hearing CF’s accountant told MF that reclaiming VAT was not permitted except for cars used mainly as taxis and similar trades, or where the intention is to use the car exclusively for business. CF relied on the latter reason to justify its claim. The FTT rightly identified the correct test for reclaiming VAT is the intended use at the time of purchase. Whether there is actually non-business use is not relevant, other than as a possible indicator of the original intention.

Intended use - HMRC trotted out its usual argument that insurance policies that cover “social, domestic and pleasure” (SDP) use indicate an intention for non-business use. CF’s counter argument was that the SDP clause was included in the policies by default (this is generally true) and referred HMRC to policies it had for a digger and a paver. Obviously, there was never an intention to use either for SDP purposes and so the SDP clauses proved nothing. To further its argument CF later had the policies for the cars amended to exclude SDP use.  While HMRC’s SDP-clause argument isn’t solid proof of intended use, some judges find it persuasive. To counter this argument, for cars you intend to use solely for business ask your insurer to issue a policy without the SDP clause.

FTT’s decision - The FTT ruled in favour of HMRC. This might seem harsh but we suspect the real reason for FTT’s decision was not the SDP issue but simply that CF’s claim that the cars (an Audi TT and Audi Q8) were intended exclusively for business use (solely for visiting customers etc.) was not believable in the context of its trades (subcontracting glamping, weddings and events). The ruling includes details of the conditions HMRC expects to see in support of a claim relating to VAT and cars.

The number plate and clothing claims - VAT on the cost a personalised number plate can be reclaimed if the number is clearly identifiable with and promotes awareness of a business. However, the FTT decided that “BS70BEN”, while referencing BF’s name, didn’t meet these requirements and so none of the VAT was reclaimable.

The clothing was sportswear to be worn by MF in running Pilates classes. HMRC accepted there would be business use but that the clothing was not sufficiently specialised, i.e. it was neither protective gear nor a uniform, to permit 100% of the VAT to be reclaimed. It would accept a claim for 50% of the VAT as an arbitrary estimate of business use. As there was no evidence to support a greater claim the FTT agreed with HMRC.

The FTT said that unless a car was for use as a taxi etc. VAT can only be reclaimed if the “intended” use was wholly business. This was not proved by the claimant and so the ruling went in favour of HMRC. The FTT also decided that there was no business motive for the personalised number plate and refused that claim too

Working out the tax relief that you’re entitled to for interest you pay on your buy-to-let-related loans isn’t simple. How is it calculated and why is it so important to keep track of it?

No tax deduction - For 2020/21 and later tax years landlords of residential properties aren’t entitled to a tax deduction for interest and other finance costs used for their rental businesses. Instead they receive a 20% tax credit. Calculating this can be far from straightforward; the following examples illustrate the basic principles and some of the wrinkles to watch out for.

Tax credit for finance cost - Example 1. Sangita has been a landlord for several years. She makes a profit each year and has no losses or unused finance costs from earlier years. In 2022/23 her rental income is £20,000 and her tax-deductible expenses, £7,000. She also paid interest on two loans used to purchase and improve her let properties on which she paid interest of £14,000 in 2022/23. As a higher rate taxpayer she owes tax of £5,200 on her £13,000 net rental profits. She is also entitled to a tax credit for the loan interest equal to the lesser of 20% of:

• the finance costs (interest), i.e. £2,800 (£14,000 x 20%)
• the rental profit, i.e. £2,600 (£13,000 x 20%)
• her adjusted total income £30,000 (her adjusted income is £85,000)

In this example the second calculation applies. Sangita has not used the tax credit in respect of £1,000 of the loan interest. She can carry forward the unused finance costs to the following year and make the same calculation to work out how much tax credit she’s entitled to for that year.

Losses and unused finance costs - The position gets trickier when the rental business makes a loss.

Example 2 - part 1. In 2021/22 Alice began a property letting business. The rental income for the year was £4,800 (the property was vacant for some months between tenants) less expenses of £6,000 and mortgage interest of £7,000. She can deduct the £6,000 expenses but none of the mortgage interest to arrive at a loss of £1,200. This can be used against later rental profits. The unused interest of £7,000 can also be carried forward as explained earlier.

It’s important to keep a record of losses and unused finance costs separate from each other. These figures are needed for your self-assessment return if you complete one. The record is even more important if you don’t complete annual self-assessment returns.

Example 2 - part 2. In 2022/23 Alice received rent of £11,000. Her expenses are £3,000, plus mortgage interest of £9,500. Alice’s rental income profit is therefore £8,000 but this is then reduced to £6,800 by the £1,200 loss brought forward before the tax credit for interest is worked out. For this example we’ve assumed it is 20% of the rental profit of £6,800. This means Alice can carry forward unused finance cost to the next tax year of £9,700 (£7,000 brought forward plus £2,700 unused for 2022/23 (£9,500 - £6,800)).

Record keeping. The figures can soon get messy and keeping a tight rein on them is important and will become more so when Making Tax Digital begins for landlords in April 2024.

Tax relief for interest is allowed as a basic rate tax credit equal to the lower of three limits. If, for any year, not all the interest can be used this way it’s carried forward to use for later years. This record of unused interest must be kept separate from that for rental business losses as both figures are required for self-assessment

In common with other types of business, expenses are unavoidable when running a property business. However, subject to certain conditions, it is possible to obtain tax relief for the expenses of running a property business.

Allowable expenses - The general rule is that a landlord can deduct revenue expenses which are incurred wholly and exclusively for the purposes of renting out the property.

Examples of typical expenses incurred by a landlord running a property business for which a deduction may be available include:

• advertising costs;
• accountancy costs;
• cleaning costs;
• letting agency fees;
• gardening costs;
• repairs and maintenance;
• cost of utilities where met by the landlord;
• council tax where met by the landlord;
• legal fees;
• travel costs.

No relief is available for costs met by the tenant. Typically, a tenant in a buy-to-let would pay the utility bills and the council tax. However, where a landlord lets furnished holiday accommodation, the utility bills and any business rates may be paid by the landlord. These can be deducted.

Interest and finance costs - Landlords running a property business cannot deduct interest and finance costs, such as mortgage interest, when calculating their taxable profit. Instead, they can deduct 20% of those costs from the tax that they owe. The deduction is capped at the amount of tax – it cannot generate a repayment. However, any unrelieved interest and finance costs can be carried forward.

These rules do not apply to furnished holiday lettings, in respect of which interest and finance costs can be deducted in full in calculating profits.

Private and business expenses - Relief is only available for business expenses, and where an expense is incurred for both private and business purposes, relief is only available if the business element can be separately identified. If a car is, for example, used both privately and for the business, relief is available for business mileage costs, but not private journeys. Approved mileage rates can be used.

Domestic items - Separate rules also apply to domestic items, such as furniture, furnishings and white goods, in a residential let. No relief is available for the initial cost of the item, but where the item is replaced, the cost of a like-for-like replacement can be deducted in calculating profits.

These rules do not apply to furnished holiday lettings.

Capital expenditure - The treatment of capital expenditure depends on the way in which the accounts are prepared. The cash basis is the default basis where rental receipts do not exceed £150,000. Where this is used, capital expenditure can be deducted in calculating profits unless such as deduction is expressly prohibited. The main exclusions are land and buildings and cars.

Under the accruals basis, relief is available either in the form of capital allowances (which are limited in a residential let) or when computing the gain on the eventual sale.

Keep records - It is important to keep good records of expenses so nothing is overlooked.

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.

In preparation of the introduction of MTD for income tax, which comes into effect from 6 April 2024 for unincorporated businesses and landlords with trading and property income of more than £10,000 the basis period rules are being reformed.

At present, once an unincorporated business is established, it is taxed on the current year basis. This means that the profits which are taxed for a particular tax year are those for the accounting period that ends in that tax year. For example, if an established business prepares it accounts to 30 June each year, for 2022/23 it will be taxed on the profits for the year to 30 June 2022, as this is the year that ends in the 2022/23 tax year.

However, from 2024/25 a business will be taxed on its profits for the tax year, i.e. the profits from 6 April and the start of the tax year to 5 April at the end of the tax year. Where accounts are prepared to 31 March (or to a date between 1 and 4 April), the accounting period is deemed to correspond to the tax year. If the accounts are prepared to a different date, it will be necessary to apportion the profits from two accounting periods to arrive at the profits for the tax year. For example, if accounts are prepared to 30 June each year, the profit for 2024/25 will comprise 3/12th of the profits for the year to 30 June 2024 and 9/12th of the profit for the year to 30 June 2025. This will mean that the business will need the accounts for the year to 30 June 2025 in order to finalise their tax liability for 2024/25. Under the current year basis they only need the accounts to 30 June 2024.

To move from the current year basis to the tax year basis, the tax year 2023/24 is a transitional year. In this year, the profits for the year ending in 2023/24 are taxed, together with any profits for the period from the end of that period to 5 April 2024. If there are any overlap profits to be relieved, these will be deducted. This may result in more than 12 months’ profits being taxed in 2023/24. However, spreading relief will tax the additional profits over a five year period, unless the business elects otherwise.

Move to a 31 March year end?

Going forward, life will be simpler if the business prepares accounts to 31 March (or to 5 April). Where the accounting date is other than 31 March, it may be beneficial to change to a 31 March accounting date ahead of the move to the tax year basis. This could be done in 2022/23 or in the 2023/24 transitional year.

Where the move is made in 2022/23, the normal rules on change of accounting date apply. The first accounts to the new date must not be for a period longer than 18 months and the change must be made for commercial reasons. Notice of the change of accounting date must be given in the self-assessment tax return. Depending on how the dates work, any unrelieved overlap profit may be relieved or overlap profits may arise. Any overlap profits created on a change of accounting date will be relieved in the 2023/24 transitional year.

Alternatively, the move to a 31 March accounting date could be made in the transitional year (2023/24). Making the change in this year would avoid the creation of overlap profits and provide access to spreading relief.

If a change of accounting date is not made prior to 2024/25, it is possible to change the accounting date once the tax year basis is up and running. This will have minimal consequences and remove the need to apportion profits from two periods to arrive at the profits for the tax year.

Companies cease for various reasons, some closing for the personal reasons of their directors or shareholders, rather than being forced to close by creditors.  Many companies will have accumulated monies or assets that need to be distributed to shareholders on cessation (after all creditors' liabilities have been settled). The method of distribution needs careful planning to ensure that the minimum amount of tax is paid.

When a company ceases trading it can either:

• apply to be ‘struck off’ from the Register of Companies; or
•  be wound-up under liquidation; or
•  become dormant.

Whichever route is taken, dividends may already have been made to the fullest extent possible from accumulated profits but there may still be capital to distribute. ‘Striking off’ is not a formal winding up procedure, and as such any distribution of surplus assets (including the repayment of its share capital represented by those assets) is legally an income distribution. However, treatment of a distribution can be as capital where the company's total assets are less than £25,000. Such a distribution is subject to CGT, taxed at either 10% or 20% depending upon the shareholder's total income but after deducting the shareholder's annual allowance and offset of any capital losses.

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

If the £25,000 limit is exceeded, the whole distribution is treated as a dividend with no reliefs being available, making the extraction of the final shareholders’ funds expensive, depending on the shareholders' tax situation. In addition, 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.

Any company needing to make a distribution above £25,000 or where the shareholders would prefer the CGT to income tax treatment, will effectively be forced down the formal liquidation route with the additional costs that will be incurred (usually approximately £1,500 - £2,000 for a small company in straightforward circumstances). Apart from the more beneficial CGT rates, Business Asset Disposal Relief may be available if the relevant conditions apply. BATR reduces the rate of CGT to 10% rather than 20% where the shareholder is taxed at higher rates.

Once a liquidator is appointed, all distributions made during the winding up process are normally treated as capital subject to CGT which could produce a tax planning situation. For example, if the company has a mixture of cash and goods, the liquidator could be asked to release the cash first. If this could be planned to be at the end of the tax year then the annual exemption for that year can be used. The annual exemption for the next year can be used against any gain when the assets are sold.

Should the shareholder be a basic rate taxpayer, consideration may be given to extracting the excess over £25,000 as a dividend chargeable to income tax before cessation, leaving an amount equal to £25,000 to be extracted as capital. However, should the company then apply for dissolution, HMRC could argue that the intention was always to apply to strike off the company for tax reasons, and tax the whole amount as income. Intent is likely to be inferred should the company dispose of any remaining assets, leaving only cash before the application.

In a private limited company, it is usual for a director to also be a shareholder. Payments made to shareholders are deemed to be income distributions and taxed accordingly. However, payments made to shareholders where the company is being liquidated can be taxed as capital distributions under the Capital Gains Tax (CGT) rules being a disposal of an interest in shares. Broadly, the treatment of distribution as capital is only available on the closure of the company if the total amount paid to all shareholders is less than £25,000. This will be the case so long as the company has been liquidated for genuine commercial reasons (e.g. cessation of the business or following the sale of the trade and assets to another entity under substantially different control), particularly where the liquidation is not motivated for tax reasons.

A capital distribution will be subject to the potentially more beneficial CGT rates of 10% or 20%, depending on the level of other income and availability of any tax reliefs.

Pre-2016, this CGT treatment led to increase use of tax-driven 'phoenix' arrangements whereby a company is liquidated, shareholders withdraw profits receiving a capital distribution (often enabling a claim to CGT Business Asset Disposal Relief (BADR) relief reducing the tax rate to 10%) and then the shareholder sets up another company in a similar field, and the process is repeated.

The Targeted Anti Avoidance Rules (TAAR) counter this practice and tax the distribution as income rather than a capital gain should all of these four conditions apply:

 Condition A: the shareholder holds at least 5% of the shares in the company immediately before the liquidation;

 Condition B: the company was a close company at some point during the two years ending with the liquidation;

 Condition C: the individual receiving the distribution continues to carry on, or be involved with, the same or similar trade or activity as that of the distributing company at any time within two years of the distribution

 Condition D: it is reasonable to assume that the main purpose (or one of the main purposes) of the winding up was the avoidance or reduction of income tax.

The onus is on the taxpayer to interpret the rules and decide whether the TAAR rules apply in their particular situation. Conditions A and B should be relatively straightforward but conditions C and D may make the situation harder to define. Under Condition C the terms 'same or similar'; 'carry on', 'involved with' are not defined in the legislation but it should be noted that the conditions extend beyond the traditional 'phoenixing', and can include where the trade is carried on personally, by a connected party, or through a partnership or company. Condition D is subjective, requiring the purpose behind the winding up to be considered.

Many taxpayers may unwittingly fall into a trap unaware of the tax implications. Although it is up to the company's owner to interpret the rules, should HMRC issue an enquiry the onus would be on HMRC to prove that the company was liquidated to avoid income tax. Some situations will be relatively straightforward e.g. if the business owner has no intention of working and retires after the company has been liquidated, then condition C will not apply. On the other hand, a business owner who after one year following liquidation contacts some of his old clients and starts in business perhaps only in a small scale way as a sole trader, may find themselves caught by condition C.

If an enquiry is undertaken and HMRC is successful in their contention, they will review the capital distributions in the liquidation, and re-tax at the higher income tax distribution rates.

The Covid-19 pandemic forced large numbers of employees to work from home for the first time. Having made the transition to home working, post pandemic, many employees have continued to work from home some or all of the time.

Household expenses

Employees who work from home may incur costs as a result, such as increased household bills. The tax legislation allows employers to make a tax-free payment of £6 per week (£26 per month) to employees who work from home at least some of the time to help them meet the costs. The payment can be made tax-free regardless of whether the employee works from home through choice.

If the employer does not contribute towards the costs of additional household expenses, the employee may be able to claim tax relief. During the Covid-19 pandemic, the conditions were relaxed and employees who were required to work from home during the pandemic were able to make a claim of £6 per week for 2020/21 and 2021/22 for the full tax year (even if they returned to the office for some of the year). However, the easement came to an end on 5 April 2022, and for 2022/23 onwards relief is only available where the employee is required to work from home (either by the employer or the nature of the work), but not where the employee has the option to work at home or at the employer’s premises but chooses to work from home.

Hybrid working arrangements are attractive because of the flexibility that they offer. However, the choice element will limit to ability to claim a deduction for household expenses. Requiring the employee to work from home on, say, one specified day of the week will open the door to a claim.

Homeworking equipment

Where an employee works from home, depending on the nature of their job, they may need equipment to enable them to do so. Where the employer provides homeworking equipment, no tax liability arises in respect of that equipment.

During the Covid-19 pandemic, the rules were relaxed so that where an employee purchased homeworking equipment, the cost of which was later reimbursed by the employer, the reimbursement was not taxed. If the employer did not reimburse the cost, the employee could claim a tax deduction.

However, this easement ended on 5 April 2022. The strict statutory rules now apply, and as employees are not able to claim a deduction for capital expenditure (such as the cost of a computer), where this cost is reimbursed by the employer, the reimbursement will be taxable.

However, a deduction is allowed for revenue expenses wholly, necessarily and exclusively incurred in undertaking the employment duties, and any reimbursement of those costs can be made tax-free.

The First-tier Tribunal (FTT) recently considered whether money from property sales was trading income or capital gains, and if private residence relief was due. The FTT ruling provides useful guidance on both issues

Serial property sales - Mr Campbell (C) bought and sold four properties in little over five years. He made a substantial profit from the transactions which he declared as capital gains. He claimed private residence relief (PRR) against each gain, meaning that in his view there was no tax to pay. HMRC disputed that the profits were capital gains, arguing instead that C was trading as a property developer and so any profits were liable to income tax to which, of course, PRR cannot apply. HMRC also argued that even if the profits were capital gains PRR wasn’t due as C hadn’t lived in the properties.

Trading or not? - For HMRC to succeed at the First-tier Tribunal (FTT) it had to show that one or more of the generally accepted tests established by case law, known as the “badges of trade”, applied to C’s buying and selling of properties. While some of these applied, e.g. there were multiple transactions and C had spent money improving the properties to varying degrees, the FTT decided that on balance the money made by C wasn’t trading income.

Mitigating factors - In arriving at this decision it took account of the fact that C was employed full time in work not related to property development and had not been engaged in such activities elsewhere. We’re not so sure the FTT’s decision was right. However, it is a reminder that where there’s doubt tribunals will usually come down in favour of the taxpayer.

While the existence of one badge of trade can be enough to confirm an activity as trading it doesn’t automatically do so despite HMRC’s assertion. As in this case it’s possible for more than one badge of trade to apply without an activity counting as trading.

Private residence relief - Having dodged the “trading” bullet C’s claim for PRR was now in the line of fire. Here his luck ran out. C had argued that although he had not lived in the properties PRR applied because it was his intention to but he was prevented because he lived in job-related accommodation. This is one of the exceptions that allows PRR for periods of absence from your home but the FTT decided the alleged job-related accommodation was actually C’s home. Several factors indicated this, not least was that in his evidence C referred to the accommodation as his home. The property was his parents’ home and C lived there not because of his work but to look after his father with dementia.

It’s worth noting that had C’s claim for PRR not failed for the reasons we’ve explained, HMRC had a further argument in reserve. Legislation specifically precludes PRR for gains made from properties specifically purchased for the purpose of making a gain. If this argument had been needed we think it would have had a better than 50/50 chance of succeeding.

HMRC failed to show that buying, improving and selling properties for a profit was trading. The FTT said the tests for trading activity were not met. However, HMRC won its argument that private residence relief didn’t apply. The taxpayer’s argument that he didn’t live in the properties as he was in job-related accommodation wasn’t believable.